10-Q

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended MARCH 31, 2016

Commission file number 0-10248

FONAR CORPORATION

(Exact name of registrant as specified in its charter)

DELAWARE	11-2464137
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
110 Marcus Drive  Melville, New York	11747
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code: (631) 694-2929

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 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 (232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files. YES X NO ___

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of accelerated filer, large accelerated filer or smaller reporting company in Rule 12b-2 of the Exchange Act.(Check one): Large accelerated filer___ Accelerated filer X Non-accelerated filer ___ 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__

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the latest practicable date.

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the latest practicable date.

Class	Outstanding at April 30, 2016
Common Stock, par value $.0001	6,050,840
Class B Common Stock, par value $.0001	146
Class C Common Stock, par value $.0001	382,513
Class A Preferred Stock, par value $.0001	313,438

FONAR CORPORATION AND SUBSIDIARIES

INDEX

PART I - FINANCIAL INFORMATION	Page No.
Item 1.  Financial Statements
Condensed Consolidated Balance Sheets - March 31, 2016 (Unaudited) and June 30, 2015	3
Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2016 and March 31, 2015 (Unaudited)	6
Condensed Consolidated Statements of Income for the Nine Months Ended  March 31, 2016 and March 31, 2015 (Unaudited)	7
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2016 and March 31, 2015 (Unaudited)	8
Notes to Condensed Consolidated Financial Statements (Unaudited)	9
Item 2. Management's Discussion and Analysis of Financial Condition and  Results of Operations	21
Item 3. Quantitative and Qualitative Disclosures About Market Risk	29
Item 4. Controls and Procedures	29
PART II - OTHER INFORMATION	29
Item 1. Legal Proceedings	29
Item 1A. Risk Factors	29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3. Defaults Upon Senior Securities	31
Item 4. Mine Safety Disclosures	31
Item 5. Other Information	32
Item 6. Exhibits	32
Signatures	32

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FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

ASSETS

	March 31, 2016		June 30,  2015 *
Cash and cash equivalents	$	13,147	$	9,449
Accounts receivable – net		4,326		3,791
Accounts receivable - related party		30		—
Medical receivable – net		10,097		9,082
Management and other fees receivable – net		15,901		14,058
Management and other fees receivable – related medical practices – net		4,059		3,507
Costs and estimated earnings in excess of billing on uncompleted contracts		279		682
Inventories		2,234		2,192
Prepaid expenses and other current assets		834		860
Total Current Assets		50,907		43,621
Deferred income tax asset		8,423		8,423
Property and equipment – net		11,877		12,901
Goodwill		1,767		1,767
Other intangible assets – net		8,066		8,950
Other assets		972		830
Total Assets	$	82,012	$	76,492

*Condensed from audited financial statements.

See accompanying notes to condensed consolidated financial statements.

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FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

LIABILITIES AND STOCKHOLDERS' EQUITY

	March 31, 2016		June 30, 2015 *
Current Liabilities:
Current portion of long-term debt and capital leases	$	2,455	$	2,490
Accounts payable		1,345		1,783
Other current liabilities		8,638		8,253
Unearned revenue on service contracts		4,350		4,187
Unearned revenue on service contracts - related party		28		—
Customer advances		1,511		1,938
Billings in excess of costs and estimated earnings on uncompleted contracts		255		142
Total Current Liabilities		18,582		18,793
Long-Term Liabilities:
Deferred income tax liability		510		510
Due to related medical practices		237		237
Long-term debt and capital leases, less current portion		3,863		5,699
Other liabilities		718		469
Total Long-Term Liabilities		5,328		6,915
Total Liabilities		23,910		25,708

*Condensed from audited financial statements.

See accompanying notes to condensed consolidated financial statements.

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FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

LIABILITIES AND STOCKHOLDERS' EQUITY (Continued)

	March 31, 2016			June 30, 2015 *
STOCKHOLDERS' EQUITY:
Class A non-voting preferred stock $.0001 par value; 453 shares authorized at March 31, 2016 and June 30, 2015, 313 issued and outstanding at March 31, 2016 and June 30, 2015	$	—		$	—
Preferred stock $.001 par value; 567 shares authorized at March 31, 2016 and June 30, 2015, issued and outstanding – none		—			—
Common Stock $.0001 par value; 8,500 shares authorized at March 31, 2016 and June 30, 2015, 6,062 issued at March 31, 2016 and June 30, 2015; 6,051 outstanding at March 31, 2016 and June 30, 2015		1			1
Class B Common Stock (10 votes per share) $ .0001 par value; 227 shares authorized at March 31, 2016 and June 30, 2015, .146 issued and outstanding at March 31, 2016 and June 30, 2015		—			—
Class C Common Stock (25 votes per share) $.0001 par value; 567 shares authorized at March 31, 2016 and June 30, 2015, 383 issued and outstanding at March 31, 2016 and June 30, 2015		—			—
Paid-in capital in excess of par value		175,448			175,448
Accumulated deficit		(126,989	)		(136,349	)
Notes receivable from employee stockholders		(26	)		(32	)
Treasury stock, at cost - 12 shares of common stock at March 31, 2016 and June 30, 2015		(675	)		(675	)
Total Fonar Corporation Stockholder Equity		47,759			38,393
Noncontrolling interests		10,343			12,391
Total Stockholders' Equity		58,102			50,784
Total Liabilities and Stockholders' Equity	$	82,012		$	76,492

*Condensed from audited financial statements.

See accompanying notes to condensed consolidated financial statements.

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FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts and shares in thousands, except per share amounts)

 (UNAUDITED)

	FOR THE THREE MONTHS ENDED MARCH 31
REVENUES	2016			2015
Product sales – net	$	20		$	160
Service and repair fees – net		2,406			2,299
Service and repair fees – related parties - net		27			27
Patient fee revenue, net of contractual allowances and discounts		8,695			7,284
Provision for bad debts for patient fee		(3,830	)		(3,201	)
Management and other fees – net		9,394			8,653
Management and other fees – related medical practices – net		1,907			1,874
Total Revenues – Net		18,619			17,096
COSTS AND EXPENSES
Costs related to product sales		263			352
Costs related to service and repair fees		552			630
Costs related to service and repair fees – related parties		6			7
Costs related to patient fee revenue		2,549			2,044
Costs related to management and other fees		5,649			5,285
Costs related to management and other fees – related medical practices		1,045			1,284
Research and development		395			360
Selling, general and administrative		4,533			3,706
Provision for bad debts		(470	)		762
Total Costs and Expenses		14,522			14,430
Income From Operations		4,097			2,666
Interest Expense		(127	)		(169	)
Investment Income		56			52
Income Before Provision for Income Taxes and Noncontrolling Interests		4,026			2,549
Provision for Income Taxes		145			30
Net Income		3,881			2,519
Net Income - Noncontrolling Interests		(876	)		(500	)
Net Income - Controlling Interests	$	3,005		$	2,019
Net Income Available to Common Stockholders	$	2,810		$	1,888
Net Income Available to Class A Non-Voting Preferred Stockholders	$	145		$	98
Net Income Available to Class C Common Stockholders	$	50		$	33
Basic Net Income Per Common Share Available to Common Stockholders	$	0.46		$	0.31
Diluted Net Income Per Common Share Available to Common Stockholders	$	0.45		$	0.31
Basic and Diluted Income Per Share-Class C Common	$	0.13		$	0.09
Weighted Average Basic Shares Outstanding-Common Stockholders		6,050			6,050
Weighted Average Diluted Shares Outstanding – Common Stockholders		6,178			6,178
Weighted Average Basic Shares Outstanding – Class C Common		383			383
Weighted Average Diluted Shares Outstanding – Class C Common		383			383

See accompanying notes to condensed consolidated financial statements.

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FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

	FOR THE NINE MONTHS ENDED MARCH 31,
REVENUES	2016			2015
Product sales – net	$	780		$	1,806
Service and repair fees – net		6,970			7,288
Service and repair fees – related parties - net		83			83
Patient fee revenue, net of contractual allowances and discounts		24,596			20,700
Provision for bad debts for patient fee		(10,608	)		(9,244	)
Management and other fees – net		27,180			26,004
Management and other fees – related medical practices – net		5,598			5,536
Total Revenues – Net		54,599			52,173
COSTS AND EXPENSES
Costs related to product sales		939			1,674
Costs related to service and repair fees		1,542			1,611
Costs related to service and repair fees - related parties		18			18
Costs related to patient fee revenue		7,015			5,845
Costs related to management and other fees		16,664			15,665
Costs related to management and other fees –  related medical practices		3,116			3,893
Research and development		1,243			1,116
Selling, general and administrative		12,425			11,108
Provision for bad debts		(300	)		1,540
Total Costs and Expenses		42,662			42,470
Income From Operations		11,937			9,703
Interest Expense		(416	)		(545	)
Investment Income		164			173
Other Income (Expense)		1			(2	)
Income Before Provision for Income Taxes and Noncontrolling Interests		11,686			9,329
Provision for Income Taxes		235			99
Net Income		11,451			9,230
Net Income - Noncontrolling Interests		(2,091	)		(2,018	)
Net Income - Controlling Interests	$	9,360		$	7,212
Net Income Available to Common Stockholders	$	8,752		$	6,743
Net Income Available to Class A Non-voting Preferred Stockholders	$	453		$	350
Net Income Available to Class C Common Stockholders	$	155		$	119
Basic Net Income Per Common Share Available to Common Stockholders	$	1.45		$	1.11
Diluted Net Income Per Common Share Available to Common Stockholders	$	1.42		$	1.09
Basic and Diluted Income Per Share-Class C Common	$	0.40		$	0.31
Weighted Average Basic Shares Outstanding – Common Stockholders		6,050			6,050
Weighted Average Diluted Shares Outstanding – Common Stockholders		6,178			6,178
Weighted Average Basic Shares Outstanding – Class C Common		383			383
Weighted Average Diluted Shares Outstanding – Class C Common		383			383

See accompanying notes to condensed consolidated financial statements.

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FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

	FOR THE NINE MONTHS ENDED MARCH 31,
	2016			2015
Cash Flows from Operating Activities:
Net income	$	11,451		$	9,230
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,507			2,665
Provision for bad debts		(300	)		1,540
Stock issued for costs and expenses		—			76
Compensatory element of stock issuances		—			53
(Increase) decrease in operating assets, net:
Accounts, medical and management fee receivable(s)		(3,674	)		(4,310	)
Notes receivable		17			118
Costs and estimated earnings in excess of billings on uncompleted contracts		403			79
Inventories		(43	)		158
Prepaid expenses and other current assets		9			89
Other assets		(143	)		18
Increase (decrease) in operating liabilities, net:
Accounts payable		(437	)		(178	)
Other current liabilities		576			(501	)
Customer advances		(427	)		(259	)
Billings in excess of costs and estimated earnings on uncompleted contracts		112			—
Other liabilities		249			(230	)
Due to related medical practices		—			(2	)
Net cash provided by operating activities		10,300			8,546
Cash Flows from Investing Activities:
Purchases of property and equipment		(534	)		(125	)
Cost of patents		(65	)		(108	)
Net cash used in investing activities		(599	)		(233	)
Cash Flows from Financing Activities:
Repayment of borrowings and capital lease obligations		(1,871	)		(2,166	)
Distributions to noncontrolling interests		(4,138	)		(3,306	)
Buyout of noncontrolling interests		—			(4,971	)
Repayment of notes receivable from employee stockholders		6			6
Net cash used in financing activities		(6,003	)		(10,437	)
Net Increase (Decrease) in Cash and Cash Equivalents		3,698			(2,124	)
Cash and Cash Equivalents – Beginning of Period		9,449			9,952
Cash and Cash Equivalents - End of Period	$	13,147		$	7,828

See accompanying notes to condensed consolidated financial statements.

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016 and 2015

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

Effective July 1, 2015, the Company restructured the corporate organization of the management of diagnostic imaging centers segment of our business. The reorganization was structured to more completely integrate the operations of Health Management Corporation of America and HDM. Imperial contributed all of its assets (which were utilized in the business of Health Management Corporation of America) to HDM and received a 24.2% interest in HDM. Health Management Corporation of America retained a direct ownership interest of 45.8% in HDM, and the original investors in HDM retained a 30.0% ownership interest in the newly expanded HDM. The entire management of diagnostic imaging centers business segment is now being conducted by HDM, operating under the name “Health Management Company of America”.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended March 31, 2016, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2016. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K filed on September 29, 2015 for the fiscal year ended June 30, 2015.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of FONAR Corporation, its majority and wholly-owned subsidiaries and partnerships (collectively the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation.

Earnings Per Share

Basic earnings per share (“EPS”) is computed based on weighted average number of shares 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 three and nine months ended March 31, 2016 and March 31, 2015.

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016 and 2015

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

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 the three and nine months ended March 31, 2016 and March 31, 2015, diluted EPS for common shareholders includes 128 shares upon conversion of Class C Common. 

	Three months ended March 31, 2016						Three months ended March 31, 2015
	Total		Common Stock		Class C Common Stock		Total		Common Stock		Class C Common Stock
Basic Numerator:
Net income available to common stockholders	$	3,005	$	2,810	$	50	$	2,019	$	1,888	$	33
Denominator:
Weighted average shares outstanding		6,050		6,050		383		6,050		6,050		383
Basic income per common share	$	0.50	$	0.46	$	0.13	$	0.33	$	0.31	$	0.09
Diluted Denominator:
Weighted average shares outstanding				6,050		383				6,050		383
Convertible Class C Stock				128		—				128		—
Total denominator for diluted earnings per share				6,178		383				6,178		383
Diluted income per common share			$	0.45	$	0.13			$	0.31	$	0.09

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016 and 2015

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Earnings Per Share (Continued)

	Nine months ended March 31, 2016						Nine months ended March 31, 2015
	Total		Common Stock		Class C Common Stock		Total		Common Stock		Class C Common Stock
Basic Numerator:
Net income available to common stockholders	$	9,360	$	8,752	$	155	$	7,212	$	6,743	$	119
Denominator:
Weighted average shares outstanding		6,050		6,050		383		6,050		6,050		383
Basic income per common share	$	1.55	$	1.45	$	0.40	$	1.19	$	1.11	$	0.31
Diluted Denominator:
Weighted average shares outstanding				6,050		383				6,050		383
Convertible Class C Stock				128		—				128		—
Total denominator for diluted earnings per share				6,178		383				6,178		383
Diluted income per common share			$	1.42	$	0.40			$	1.09	$	0.31

Recent Accounting Pronouncements

In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. This update includes provisions intended to simplify various aspects of accounting for share-based compensation. ASU No. 2016-09 will take effect for public companies for the annual periods beginning after December 15, 2016. The Company is currently assessing the potential impact of ASU No. 2016-09 on the Company’s consolidated condensed financial statements.

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016 and 2015

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (Continued)

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which will require entities to present deferred tax assets and deferred tax liabilities as non-current in a classified balance sheet. The ASU simplified the current guidance, which requires entities to separately present deferred tax assets and deferred tax liabilities as current and non-current in a classified balance sheet. This standard is effective for annual periods and interim periods within those fiscal years, beginning after December 15, 2016 but permits entities to early adopt at the beginning of any interim or annual period. During the quarter ended December 31, 2015, the Company elected to early adopt ASU 2015-17 and applied the change retrospectively to all periods present. As a result, the Company presented all deferred assets and liabilities as non-current in its consolidated balance sheet. The adoption of this ASU did not result in a reclassification of the Company’s net deferred tax assets and liabilities as of June 30, 2015. As of March 31, 2016, there was no impact on the Company’s results of operations as a result of the adoption of ASU No. 2015-17

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 for annual reporting periods beginning after December 15, 2017, as deferred including interim periods within the reporting period 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 Company is currently evaluating the effect that this ASU will have on its condensed consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on it ongoing financial reporting.

In July 2015, the FASB issued Accounting Standards Update No. 2015-11, “Simplifying the Measurement of Inventory” (“ASU 2015-11”). ASU 2015-11 requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using last-in, first-out (“LIFO”) or the retail inventory method. It is effective for annual reporting periods beginning after December 15, 2016. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period.

FASB, the Emerging Issues Task Force and the SEC have issued certain other accounting standards, updates, and regulations as of March 31, 2016 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 2016 or 2015, and it does not believe that any of those pronouncements will have a significant impact on our condensed 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 consolidated net income for any periods presented.

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016 and 2015

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE

Receivables, net is comprised of the following at March 31, 2016:

	Gross Receivable		Allowance for doubtful accounts		Net
Accounts receivable	$	4,614	$	288	$	4,326
Accounts receivable - related party	$	30		—	$	30
Medical receivable	$	36,164	$	26,067	$	10,097
Management and other fees receivable	$	28,873	$	12,972	$	15,901
Management and other fees receivable - related medical practices ("PC’s")	$	4,462	$	403	$	4,059

Receivables, net is comprised of the following at June 30, 2015:

	Gross Receivable		Allowance for doubtful accounts		Net
Accounts receivable	$	4,153	$	362	$	3,791
Accounts receivable - related party	$	—		—	$	—
Medical receivable	$	24,541	$	15,459	$	9,082
Management and other fees receivable	$	27,330	$	13,272	$	14,058
Management and other fees receivable -  related medical practices ("PC’s")	$	3,910	$	403	$	3,507

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.

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016 and 2015

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE (Continued)

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 (PC's) substantially consist of fees outstanding under management agreements. Payment of the outstanding fees is dependent on collection by the PC's 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 59% and 55% of the PCs’ net revenues for the three months ended March 31, 2016 and 2015, respectively, were derived from no-fault and personal injury protection claims. Approximately 60% and 54% of the PCs’ net revenues for the nine months ended March 31, 2016 and 2015, respectively, 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 condensed consolidated financial statements and have historically been within management's expectations.

Net revenues from management and other fees charged to the related PCs accounted for approximately 10.2% and 11% of the consolidated net revenues for the three months ended March 31, 2016 and 2015, respectively. Net revenues from management and other fees charged to the related PCs accounted for approximately 10.3% and 10.6% of the consolidated net revenues for the nine months ended March 31, 2016 and 2015, 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.

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016 and 2015

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE (Continued)

The Company’s patient fee revenue, net of contractual allowances and discounts less the provision for bad debts for the three and nine months ended March 31, 2016 and 2015 are summarized in the following tables.

	For the Three Months Ended March 31,
	2016			2015
Commercial Insurance/ Managed Care	$	1,245		$	1,091
Medicare/Medicaid		332			292
Workers' Compensation/Personal Injury		5,453			4,513
Other		1,665			1,388
Patient Fee Revenue, net of contractual allowances and discounts		8,695			7,284
Provision for Bad Debts		(3,830	)		(3,201	)
Net Patient Fee for Revenue	$	4,865		$	4,083

	For the Nine Months Ended March 31,
	2016			2015
Commercial Insurance/ Managed Care	$	3,438		$	3,245
Medicare/Medicaid		874			896
Workers' Compensation/Personal Injury		15,649			11,354
Other		4,635			5,205
Patient Fee Revenue, net of contractual allowances and discounts		24,596			20,700
Provision for Bad Debts		(10,608	)		(9,244	)
Net Patient Fee for Revenue	$	13,988		$	11,456

NOTE 4 - INVENTORIES

Inventories included in the accompanying condensed consolidated balance sheet consist of the following:

	March 31, 2016		June 30, 2015
Purchased parts, components and supplies	$	2,033	$	2,043
Work-in-process		201		149
Total Inventories	$	2,234	$	2,192

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016 and 2015

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

NOTE 5 – COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

Information relating to uncompleted contracts is as follows:

	March 31, 2016		June 30, 2015
Costs incurred on uncompleted contracts	$	2,310	$	1,862
Estimated earnings		1,622		1,371
Subtotal		3,932		3,233
Less: Billings to date		3,908		2,693
Total Costs and estimated earnings in excess of billings on uncompleted contracts	$	24	$	540

Included in the accompanying condensed consolidated balance sheets under the following captions:

	March 31, 2016		June 30, 2015
Costs and estimated earnings in excess of billings on uncompleted contracts	$	279	$	682
Less: Billings in excess of costs and estimated earnings on uncompleted contracts		255		142
Total Costs and estimated earnings in excess of billings on uncompleted contracts	$	24		540

NOTE 6 – OTHER INTANGIBLE ASSETS

Other intangible assets, net of accumulated amortization, in the accompanying condensed consolidated balance sheet consist of the following:

	March 31, 2016		June 30, 2015
Capitalized software development costs	$	7,005	$	7,005
Patents and copyrights		4,612		4,547
Non-compete		4,100		4,100
Customer relationships		3,800		3,800
Gross Other intangible assets		19,517		19,452
Less: Accumulated amortization		11,451		10,502
Other Intangible Assets	$	8,066	$	8,950

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016 and 2015

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

NOTE 6 – OTHER INTANGIBLE ASSETS (Continued)

Amortization of patents and copyrights for the three months ended March 31, 2016 and 2015 amounted to $47 and $46, respectively.

Amortization of capitalized software development costs for the three months ended March 31, 2016 and 2015 amounted to $65 and $81, respectively.

Amortization of non-compete for the three months ended March 31, 2016 and 2015 amounted to $146 and $146, respectively.

Amortization of customer relationships for the three months ended March 31, 2016 and 2015 amounted to $47 and $47, respectively.

Amortization of patents and copyrights for the nine months ended March 31, 2016 and 2015 amounted to $141 and $137, respectively.

Amortization of capitalized software development costs for the nine months ended March 31, 2016 and 2015 amounted to $227 and $246, respectively.

Amortization of non-compete for the nine months ended March 31, 2016 and 2015 amounted to $439 and $439, respectively.

Amortization of customer relationships for the nine months ended March 31, 2016 and 2015 amounted to $142 and $142, respectively.

 NOTE 7 – OTHER CURRENT LIABILITIES

Other current liabilities in the accompanying condensed consolidated balance sheet consist of the following: 

	March 31, 2016		June 30, 2015
Accrued salaries, commissions and payroll taxes	$	903	$	992
Accrued interest		117		117
Litigation accruals		493		521
Sales tax payable		2,565		2,539
Legal and other professional fees		307		344
Accounting fees		193		235
Self-funded health insurance reserve		434		510
Interest and penalty - sales tax		2,644		2,509
Other		982		486
Total Other Current Liabilities	$	8,638	$	8,253

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016 and 2015

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

NOTE 8 - SEGMENT 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 as disclosed in the Company’s 10-K as of June 30, 2015. All inter-segment 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:

		Medical Equipment			Management of Diagnostic Imaging Centers		Totals
For the three months ended March 31, 2016
Net revenues from external customers	$	2,454		$	16,165	$	18,619
Inter-segment net revenues	$	546		$	—	$	546
(Loss) income from operations	$	(207	)	$	4,304	$	4,097
Depreciation and amortization	$	79		$	751	$	830
Capital expenditures	$	31		$	117	$	148
For the three months ended March 31, 2015
Net revenues from external customers	$	2,486		$	14,610	$	17,096
Inter-segment net revenues	$	502		$	—	$	502
(Loss) income from operations	$	(367	)	$	3,033	$	2,666
Depreciation and amortization	$	78		$	811	$	889
Capital expenditures	$	111		$	—	$	111
For the nine months ended March 31, 2016
Net revenues from external customers	$	7,833		$	46,766	$	54,599
Inter-segment net revenues	$	1,594		$	—	$	1,594
Income from operations	$	18		$	11,919	$	11,937
Depreciation and amortization	$	242		$	2,265	$	2,507
Capital expenditures	$	390		$	209	$	599
For the nine months ended March 31, 2015
Net revenues from external customers	$	9,177		$	42,996	$	52,173
Inter-segment net revenues	$	1,504		$	—	$	1,504
Income from operations	$	457		$	9,246	$	9,703
Depreciation and amortization	$	229		$	2,436	$	2,665
Capital expenditures	$	178		$	55	$	233

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016 and 2015

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

NOTE 9– SUPPLEMENTAL CASH FLOW INFORMATION

During the nine months ended March 31, 2016 and March 31, 2015, the Company paid $280 and $406 for interest, respectively.

During the nine months ended March 31, 2016 and March 31, 2015, the Company paid $235 and $99 for income taxes, respectively.

NOTE 10 – COMMITMENTS AND CONTINGENCIES

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.

There were no material changes in litigation from that reported in our Form 10-K for the fiscal year ended June 30, 2015 with the exception of the case with Dr. Shapiro. The case was settled for $258,400 plus interest on February 18. 2016.

Other Matters

The Company is also delinquent in filing sales tax returns for certain states, for which the Company has transacted business. As of March 31, 2016, the Company has recorded tax obligations of approximately $2,565 plus interest and penalties of approximately $2,644. The Company is in the process of determining the regulatory requirements in order to become compliant.

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 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 March 31, 2016 and June 30, 2015, the Company had approximately $434 and $510, respectively, in reserve for its self-funded health insurance programs. The reserves are included in “Other current liabilities” in the condensed 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.

In March 2016, the Company signed a 2nd amendment with Signature Bank to extend the terms of the revolving loan to September 2018. As of March 31, 2016, the Company has not been advanced any money under this revolving loan.

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016 and 2015

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

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 recorded a deferred tax asset of $8,423 and a deferred tax liability of $510 as of March 31, 2016, primarily relating to net operating loss carryforwards of approximately $122,926 available to offset future taxable income through 2034. The net operating losses begin to expire in 2019 for federal tax purposes and in 2015 for state income tax purposes.

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.

NOTE 12- SUBSEQUENT EVENTS

On May 2, 2016, the Company repaid the balance of the Class A Stockholders capital contribution in the amount of $1,125. As a result, the Company’s subsidiary, HMCA, owns a 100% interest in Imperial Management Services.

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FONAR CORPORATION AND SUBSIDIARIES

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

For the nine month period ended March 31, 2016, we reported a net income of $11.5 million on revenues of $54.6 million as compared to net income of $9.2 million on revenues of $52.2 million for the nine month period ended March 31, 2016. Operating income increased 23.0% from $9.7 million for the nine month period ended March 31, 2015 to $11.9 million for the six month period ended March 31, 2016.

For the three month period ended March 31, 2016, we reported net income of $3.9 million on revenues of $18.6 million as compared to net income of $2.5 million of revenues of $17.1 million for the three month period ended December 31, 2015.

The revenue increase of 4.6%, from $52.2 million for the first nine months of fiscal 2015 to $54.6 million for the first nine months of fiscal 2016, was primarily due to an increase in patient fee revenue (net of contractual allowances and discounts) from $11.5 million for the first nine months of fiscal 2015 to $14.0 million for the first nine months of fiscal 2016. There were also increases in net management fees of $1.2 million, from $31.6 million for the first nine months of fiscal 2015 to $32.8 million for the first nine months of fiscal 2016.

Offsetting these increases, however, net product sales decreased by 56.8% to $780,000 for the first nine months of fiscal 2016 from $1.8 million for the first nine months of fiscal 2015. Service and repair fees also decreased by 4.3% to $7.1 million for the first nine months of fiscal 2016 from $7.4 million for the first nine months of fiscal 2015.

The increase in the amount of our revenues was higher than the increase in the amount of our costs and expenses, and as a result, our operating income of $11.9 million for the nine months ended March 31, 2016 was higher than our operating income of $9.7 million for the nine months ended March 31, 2015. In terms of percentages, costs and expenses increased 0.5% from $42.5 million in the first nine months of fiscal 2015 to $42.7 million in the first nine months of fiscal 2016, while revenues increased 4.6%, from $52.2 million in the first nine months of fiscal 2015 to $54.6 million in the first nine months of fiscal 2016.

Fonar’s wholly-owned subsidiary, Health Management Corporation of America (“HMCA”), is the controlling, but not sole owner of two limited liability companies, Imperial Management Services, LLC (“Imperial”) and Health Diagnostics Management, LLC (“HDM”). Effective July 1, 2015, the Company restructured the corporate organization of the management of diagnostic imaging centers segment of the business. The reorganization was structured to more completely integrate the operations of HMCA and HDM. Imperial Management Services LLC contributed all of its assets (which had been utilized in the business of HMCA) to HDM and received a 24.2% interest in HDM. HMCA retained a direct ownership interest of 45.8% in HDM, and the original investors in HDM retained a 30.0% ownership interest in the newly expanded HDM. The entire management of the diagnostic imaging centers business segment is now being conducted by HDM, operating under the name “Health Management Company of America”. For the sake of simplicity, HMCA, Imperial and HDM are referred to as “HMCA”, unless otherwise indicated.

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 FONAR CORPORATION AND SUBSIDIARIES

Forward Looking Statements

Certain statements made in this Quarterly Report on Form 10-Q 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. The forward-looking statements included herein 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. Assumptions relating to the foregoing 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 Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statement included herein, 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.

Results of Operations

We operate in two industry segments: the manufacture and servicing of medical (MRI) equipment, our traditional business, which is conducted directly by Fonar, and diagnostic facilities management services, which is conducted through HMCA and its subsidiaries.

Manufacturing and Service of MRI Equipment

Revenues from MRI product sales decreased 56.8% to $780,000 for the first nine months of fiscal 2016 from $1.8 million for the first nine months of fiscal 2015. Costs related to product sales also decreased, by 43.9%, from $1.7 million for the nine month period ended March 31, 2015 to $939,000 for the nine month period ended March 31, 2016. The decrease in sales revenues, when expressed as a percentage, reflects the volatility resulting from low sales volume. During the first nine months of fiscal 2015 we sold two scanners; during the first nine months of fiscal 2016 we sold one scanner. Continuing tight credit and economic uncertainty, together with lower reimbursement rates for MRI scans, have depressed the market for our MRI scanner products.

Service revenues decreased 4.3% from $7.4 million for the nine month period ended March 31, 2015 to $7.1 million for the nine month period ended March 31, 2016. However, service revenues increased 4.6% from $2.3 million for the three month period ended March 31, 2015 to $2.4 million for the three month period ended March 31, 2016. Continuing lower sales volumes have been a factor ultimately contributing to decreasing service revenues, as the number of older scanners being taken out of service has been greater than the number of new scanners being placed under service agreements following the expiration of their warranties.

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FONAR CORPORATION AND SUBSIDIARIES

Costs relating to providing service for the first nine months of fiscal 2016 decreased by 4.2% from $1.63 million in the first nine months of fiscal 2015 to $1.56 million in the first nine months of fiscal 2016. Costs relating to providing service for the three month period ended March 31, 2016 also decreased, by 12.4% to $558,000 from $637,000 for the three month period ending March 31, 2015. We believe that an important factor in controlling our service costs is our ability to monitor the performance of customers’ scanners from our facilities in Melville, New York on a daily basis, and to detect and repair any irregularities before more serious problems result.

There were approximately $440,000 in foreign revenues for the first nine months of fiscal 2016 as compared to approximately $1.9 million in foreign revenues for the first nine months of fiscal 2015, representing a decrease in foreign revenues of 76.8%. We do not regard this as a material trend, but as part of a normal although sometimes volatile variation resulting from low volumes of foreign sales.

We recognize MRI scanner sales revenues on the “percentage of completion” basis, which means the revenues are recognized as the scanner is manufactured. Revenues recognized in a particular quarter do not necessarily reflect new orders or progress payments made by customers in that quarter. We build the scanner as the customer meets certain benchmarks in its site preparation in order to minimize the time lag between incurring costs of manufacturing and our receipt of the cash progress payments from the customer which are due upon delivery. Consequently, there can be a disparity between the revenues recognized in a fiscal period and the number of product sales. Generally, the revenues from a scanner sale are recognized in a fiscal quarter or quarters following the quarter in which the sale was made.

Revenues for the medical equipment segment as a whole decreased by 14.6% to $7.8 million for the first nine months of fiscal 2016 from $9.2 million for the first nine months of fiscal 2015. Operating results for our medical equipment segment decreased to an operating income of $18,000 for the first nine months of fiscal 2016 as compared to an operating income of $457,000 for the first nine months of fiscal 2015. For the first nine months of fiscal 2016, our medical equipment segment recognized a net loss of $226,000, compared to a net income of $377,000 in the same period of fiscal 2015.

Diagnostic Facilities Management Services

HMCA revenues increased in the first nine months of fiscal 2016 by 8.8% to $46.8 million from $43.0 million for the first nine months of fiscal 2015. The percentage of our revenues derived from our diagnostic facilities management segment relative to the percentage of our revenues derived from our medical equipment segment increased to 85.7% for the first nine months of fiscal 2016, from 82.5% for the first nine months of fiscal 2015).

The increase in HMCA revenues is principally due to HMCA’s success in marketing the scanning services of the facilities managed or owned by HMCA, notwithstanding the decrease in reimbursement rates paid for MRI scans by insurers, Medicare and other government programs. The reductions in reimbursement rates are not unique to HMCA or HMCA’s clients but are being experienced by the industry in general.

HMCA’s efforts are countering the effects of lower reimbursement rates by increasing the scan volume of the facilities it owns or manages.

As a result of our vigorous marketing efforts, the number of scans performed at our centers and at our client’s centers increased from 106,259 in the first nine months of fiscal 2015 to 116,226 in the first nine months of fiscal 2016.

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FONAR CORPORATION AND SUBSIDIARIES

We manage twenty-five sites, twenty-four of which are equipped with Fonar Upright® MRI scanners (our Upright® MRI Scanners are also called Stand-Up® MRI Scanners). HMCA experienced an operating income of $11.9 million for the first nine months of fiscal 2016 compared to operating income of $9.2 million for the first nine months of fiscal 2015.

HMCA’s cost of revenues for the first nine months of fiscal 2016 as compared to the first nine months of fiscal 2015 increased by 5.5% from $25.4 million to $26.8 million.

Consolidated

For the first nine months of fiscal 2016, our consolidated net revenues increased by 4.6% to $54.6 million from $52.2 million for the first nine months of fiscal 2015, and total costs and expenses increased by 0.5% to $42.7 million for the first nine months of fiscal 2016 from $42.5 million for the first nine months of fiscal 2015. As a result, our operating income increased 23.0% to $11.9 million in the first six months of fiscal 2016 from $9.7 million in the first nine months of fiscal 2015.

Selling, general and administrative expenses increased by 11.9% to $12.4 million in the first nine months of fiscal 2016 from $11.1 million in the first nine months of fiscal 2015. The compensatory element of stock issuances, which is included in selling, general and administrative expenses, decreased, by 100%, to $0 for the first nine months of fiscal 2016 from $53,200 for the first nine months of fiscal 2015.

Research and development expenses increased by 11.4% to $1.2 million for the first nine months of fiscal 2016 from $1.1 million for the first nine months of fiscal 2015.

Interest expense in the first nine months of fiscal 2016 decreased by 23.7% to $416,000 from $545,000 in the first nine months of fiscal 2015. The decrease was due to the repayment of debt incurred by Fonar in connection with the acquisition of HDM.

Inventories remained constant at $2.2 million at March 31, 2016 and June 30, 2015. This represents our purchase of raw materials and components in our business operations.

Net Management fee and medical receivables increased by 12.8% to $30.1 million at March 31, 2016 from $26.6 million at June 30, 2015 as a result of slower collections. The slower collections were primarily due to an increase in no-fault and workers’ compensation revenue, which typically takes longer to collect.

The results of operations for the first nine months of fiscal 2016 reflect an increase in revenues from management, patient and other fees, as compared to the first nine months of fiscal 2015 ($46.8 million for the first nine months of fiscal 2016 as compared to $43.0 million for the first nine months of fiscal 2015), and an decrease in MRI equipment segment revenues ($7.8 million as compared to $9.2 million). Revenues were 14.3% from the MRI equipment segment as compared to 85.7% from HMCA, for the first nine months of fiscal 2016, as compared to 17.6% from the MRI equipment segment and 82.4% from HMCA for the first nine months of fiscal 2015.

The implementation of the Patient Protection and Affordable Care Act (PPACA) is having a profound impact on the healthcare industry. We are experiencing some of the impact of the Act on our business in the reduction of reimbursement rates and fewer sales of our MRI equipment, but are unable to predict the ultimate effect of the legislative mandates and regulations on our MRI equipment segment or HMCA segment in the future.

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FONAR CORPORATION AND SUBSIDIARIES

We are committed to improving our operating results and dealing with the challenges posed by legislative and regulatory requirements. Nevertheless, factors beyond our control, such as the timing and rate of market growth, economic conditions, the availability of credit and payor reimbursement rates, or unexpected expenditures and the timing of such expenditures, make it difficult to forecast future operating results.

As mentioned, one of the effects of the PPACA on our business has been the reduction in Medicare reimbursement rates for MRI scans. This also has resulted in a reduction in the reimbursement rates by commercial insurers and government programs which tie their reimbursement rates to the Medicare rates. Nevertheless, the increased patient volume of the scanning centers we manage or own has enabled us to maintain a healthy profitability in spite of these challenges. We believe we are pursuing the correct policies to cope with these problems and to improve the Company’s operating results. However, our future revenues and results of operations may be adversely impacted by future reductions in reimbursement rates.

Our Upright® MRI (also referred to as the Stand-Up® MRI), together with our works-in-progress, are intended to significantly improve our competitive position.

The Upright® MRI scanner, which operates at 6000 gauss (.6 Tesla) field strength, allows patients to be scanned while standing, sitting, reclining and in multiple flexion and extension positions. It is common in visualizing the spine that abnormalities are visualized in some positions and not others. This enables surgical corrections that heretofore would be unaddressable for lack of visualizing the symptom causing the pathology and therefore, in general enables the treating physician to achieve a better treatment outcome for his patient. A floor-recessed elevator brings the patient to the height appropriate for the targeted image region. A custom-built multi-position adjustable bed will allow patients to sit or lie on their backs, sides or stomachs at any angle. This allows the MRI technologist to ask the patient to position himself/herself in the exact position that generates his/her pain so that images of the patient in the position that explicitly generates the patient’s pain can be nailed down. Full-range-of-motion studies of the joints in virtually any direction are possible, a particularly promising feature for sports injuries.

In addition FONAR has announced the publication of a new book “THE CRANIOCERVICAL SYNDROME and MRI” that highlights the unique attributes of FONAR UPRIGHT® MRI Imaging (S. Karger, A.G. based in Basel, Switzerland- www.karger.com/Book/Home/261956) which has been published by S. Karger, a 125 year old company and an academic publisher of scientific and medical journals and books. The seven chapter monograph examines the rapid advances in MRI made possible by the FONAR UPRIGHT® Multi-Position MRI that are transforming the treatment of patients suffering from the craniocervical syndrome (CCS). It is written by leading international experts in the field to 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 its potential role in generating the devastating impairments of the neurodegenerative diseases: Alzheimer’s (5.1 million patients in the United States), childhood and adult Autism (3.0 million), Parkinson’s (1.0 million), Multiple Sclerosis (250,000-350,000) and Amyotrophic Lateral Sclerosis (ALS) (30,000). It calls attention to the revolutionary importance of FONAR’s new UPRIGHT® MRI imaging technology and the prospect of significantly relieving the suffering of the above totaled 9.38 million patients afflicted with these disorders.

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FONAR CORPORATION AND SUBSIDIARIES

Fonar also announced a major diagnostic breakthrough in multiple sclerosis achieved with advanced Upright® MRI. Medical researchers at FONAR published a paper reporting a diagnostic breakthrough in multiple sclerosis (MS), based on observations made possible by the Company’s unique Upright® Multi-Position™ MRI scanner. The findings reveal that the cause of multiple sclerosis may be biomechanical and related to earlier trauma to the neck, which can result in obstruction of the flow of cerebrospinal fluid (CSF), which is produced and stored 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), the obstruction can result in a build up of pressure within the ventricles, resulting in leakage of the CSF and the antigenic polypeptides it contains into the surrounding brain tissue. This leakage could be responsible for generating the brain lesions of multiple sclerosis.

The paper, titled “The Possible Role of Cranio-Cervical Trauma and Abnormal CSF Hydrodynamics in the Genesis of Multiple Sclerosis," appears in the the Journal of Physiological Chemistry and Physics and Medical NMR (Sept. 20, 2011).

This capability of the Fonar Upright® technology has demonstrated its key value on patients with the Arnold-Chiari syndrome [Cerebellar Tonsil Extopia (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, because the brain stem descends and is compressed 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. Conventional lie-down MRI scanners cannot make an adequate evaluation of this pathology since the patient's pathology is most visible and the symptoms most acute when the patient is scanned in the upright fully weight-bearing position.

A combined study of 1,200 neck pain patients published in “Brain Injury” (July 2010) by eight university medical centers reported that cerebellar tonsil ectopia (CTE) of 1mm or greater was found and visualized 2.5 times (250%) more frequently when patients who had sustained automobile whiplash injuries were scanned upright rather than lying down.

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 a complete evaluation of the extent of the patient’s scoliosis, 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 an 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. The Upright® MRI examination of scoliosis enables the needed imaging evaluation of the degree of spine scoliosis without exposing the patient to the risk of breast cancer from x-radiation. Currently scoliosis affects more than 3,000,000 American women.

In addition, the University of California, Los Angeles (UCLA) reported their results of their study of 1,302 patients utilizing the Fonar Upright® MRI at the 22nd Annual Meeting of the North American Spine Society on October 23, 2007. The UCLA study showed the superior ability of the Fonar Upright® MRI to detect spine pathology, including spondylolisthesis, disc herniations and disc degeneration, as compared to visualizations of the spine produced by traditional single position static MRIs.

Page 26

FONAR CORPORATION AND SUBSIDIARIES

The UCLA study by MRI of 1,302 back pain patients when they were in the Fonar Upright® MRI and examined in a full range of flexion and extension positions made possible by Fonar’s new Upright® technology established that significant “misses” of pathology were occurring with static single position MRI imaging. At L4-5, the vertebral level responsible for 49.8% of lumbar disc herniations, 35.1% of the spondylolistheses (vertebral instabilities) visualized by the Upright® MRI, were being missed by static single position MRI (510 patients). Since this vertebral segment is responsible for the majority of all disc herniations, the finding may reveal a significant cause of failed back surgeries. The UCLA study further showed the “miss-rate” of vertebral instabilities by static only MRI was even higher, 38.7%, at the L3-4 vertebral segment. Additionally, the UCLA study showed that MRI examinations of the cervical spine that did not perform extension images of the neck “missed” disc bulges 23.75% of the time (163 patients).

The UCLA study further reported that they were able to quantitatively measure the dimensions of the central spinal canal with the “highest accuracy” using the FONAR Upright® MRI thereby enabling the extent of spinal canal stenosis that existed in patients to be measured. Spinal canal stenosis gives rise to the symptom complex intermittent neurogenic claudication manifest as debilitating pain in the back and lower extremities, weakness and difficulties in ambulation and leg paresthesias. Spinal canal stenosis is a spinal compression syndrome separate and distinct from the more common nerve compression syndrome of the spinal nerves as they exit the vertebral column through the bony neural foramen.

The Fonar Upright® MRI can also be useful for MRI directed emergency neuro-surgical procedures as the surgeon would have unhindered access to the patient’s head when the patient is supine with no restrictions in the vertical direction. This easy-entry, mid-field-strength scanner could prove ideal for trauma centers where a quick MRI-screening within the first critical hour of treatment will greatly improve patients’ chances for survival and optimize the extent of recovery.

Liquidity and Capital Resources

Cash and cash equivalents increased by 39.1% from $9.4 million at June 30, 2015 to $13.1 million at March 31, 2016, primarily as a result of the increased profitability of HMCA.

Cash provided by operating activities for the first nine months of fiscal 2016 was $10.3 million. Cash provided by operating activities was attributable principally to net income of $11.5 million, an increase in other current liabilities of $576,000, and depreciation and amortization of $2.5 million, offset by an increase in accounts, management fees and medical receivables of $3.7 million.

Cash used in investing activities for the first nine months of fiscal 2016 was $599,000. The principal uses of cash used in investing activities during the first nine months of fiscal 2016 consisted of patent costs of $65,000 and the purchase of property and equipment of $534,000.

Cash used in financing activities for the first nine months of fiscal 2016 was $6.0 million. The principal uses of cash in financing activities during the first six months of fiscal 2016 were the repayment of principal on long-term debt and capital lease obligations of $1.9 million and distributions to non-controlling interests of $4.1 million.

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FONAR CORPORATION AND SUBSIDIARIES

Total liabilities decreased by 7.0% to $23.9 million at March 31, 2016 from $25.7 million at June 30, 2015. “Other” current liabilities increased by 4.7% to $8.6 million at March 31, 2016 from $8.3 million at June 30, 2015, offset by a decrease in long-term debt and capital lease obligations from $5.7 million to $3.9 million. The current portion of our unearned revenue on service contracts increased from $4.2 million to $4.4 million. Customer deposits decreased from $1.9 million at June 30, 2015 to $1.5 million at March 31, 2016 as a result of reduced sales.

As of March 31, 2016, the total of $8.8 million in “other” current liabilities included accrued salaries and payroll taxes of $903,000, and sales taxes of $2.6 million plus accrued interest and penalties of $2.6 million.

Our working capital increased to $32.3 million at March 31, 2016 from $24.8 million at June 30, 2015. This resulted from an increase in current assets ($43.6 million at June 30, 2015 as compared to $50.9 million at March 31, 2016), and a smaller decrease in current liabilities from $18.8 million at June 30, 2015 to $18.6 million at March 31, 2016.

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. A valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of any portion or all of the valuation allowance. Should the Company continue to remain profitable in the future periods with supportable trends, the valuation allowance will be reversed accordingly.

Fonar has not committed to making any significant capital expenditures for the remainder of the 2016 fiscal year.

Critical to our business plan are the improvement and expansion of the MRI facilities managed or owned by HMCA, and increasing the number of scans performed at those facilities. In addition, our business plan calls for a continuing commitment to providing our customers with enhanced equipment service and maintenance capabilities and delivering state-of-the-art, innovative and high quality equipment and upgrades at competitive prices.

In furtherance of our business plan, HMCA began managing a twenty-fifth MRI scanning facility located in Great Neck, New York, in the last week of December, 2015.

Management is seeking to promote wider market recognition of Fonar’s scanner products, and to increase demand for Upright® scanning at the facilities HMCA owns or manages. Given the liquidity and credit constraints in the markets, and the uncertainty resulting for the Patient Protection and Affordable Care Act, the sale of medical equipment has and may continue to suffer.

The Company believes that its business plan has been responsible for the past four consecutive fiscal years and past three fiscal quarters of profitability (fiscal 2012, fiscal 2013, fiscal 2014, fiscal 2015 and the first nine months of fiscal 2016) and that its capital resources will be adequate to support operations at current levels through at least March 31, 2017. In the past, the Company experienced periods of working capital deficits and prior to fiscal 2011, losses. The future effects on our business of healthcare reform legislation, the Deficit Reduction Act, the 2.3% excise tax on sales of medical equipment, reimbursement rates and the general economic and business climate are not known at the present time. Nevertheless, there is a possibility of adverse consequences to our business operations from these causes.

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FONAR CORPORATION AND SUBSIDIARIES

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company maintains its funds in liquid accounts. None of our investments are in fixed rate instruments.

All of our revenue, expense and capital purchasing activities are transacted in United States dollars.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains “disclosure controls and procedures,” as such term is defined under Rule 13a-15(e) of the Exchange Act, that are designed to provide reasonable assurance that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Principal Executive Officer and Acting Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any control and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective.

As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Principal Executive Officer and Acting Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of March 31, 2016. Based on this evaluation, the Company’s Principal Executive Officer and Acting Principal Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2016 because of the material weakness in our internal control over financial reporting described in our Annual Report on Form 10-K. The Company’s plan is to implement changes in information technology general controls in order to improve controls over segregation of duties, restricted access to programs and data, and to change management activities in order to address the previously reported internal control deficiencies in our Form 10-K. The Company is engaging the services of independent consultants to assist in addressing and reviewing its internal controls, including information technology general controls.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting, during the fiscal quarter ended March 31, 2016, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings: There were no material changes in litigation from that reported in our Form 10-K for the fiscal year ended June 30, 2015 and our Form 10-Q for the six months ended December 31, 2015.

Item 1A – Risk Factors: An investment in the securities of the Company is subject to various risks, the most significant of which are summarized below.

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FONAR CORPORATION AND SUBSIDIARIES

1. Reduced Reimbursement Rates. Most of our revenues are derived from our scanning center business conducted by HMCA. Our scanning center clients and the Florida facilities owned by HMCA are experiencing lower reimbursement rates from Medicare, other government programs and private insurance companies. To date, the impact of these reductions has been countered by increasing scanning volume, thereby maintaining profitability in this business segment. There is, however, no assurance that we will be able to continue to do so.

2. Demand for MRI Scanners. The reduced reimbursement rates also affects our sales of MRI scanners negatively. With lower revenue projections, fewer prospective customers will be able to operate and demand lower prices for scanners. Although the reduced reimbursements may not affect foreign demand, a lower number of sales in the aggregate could reduce economies of scale and consequently, profit margins.

3. Manufacturing Competition. Many if not most of our competing scanner manufacturers have significantly greater financial resources, production capacity, and other resources than we do. Such competitors would include General Electric, Siemens, Hitachi and Phillips. Although Fonar is the only company which can manufacture and sell the unique Stand-Up® (Upright®) MRI scanner, potential customers must be convinced that the purchase of a Fonar scanner is their best choice. We believe that with time, that objective will be reached, particularly with customers scanning patients having neck, back, knee and various orthopedic issues who would benefit from being scanned in weight-bearing positions.

4. Dependence on Referrals. HMCA derives substantially all of its revenue, directly or indirectly, from fees charged for the diagnostic imaging services performed at the facilities. We depend on referrals of patients from unaffiliated physicians and other third parties to the facilities we manage or own for the MRI scanning services performed. If these physicians and other third parties were to reduce the number of patients they refer or discontinue referring patients, scan volumes could decrease, which would have the effect of reducing our net revenue, from both management and scanning fees, and operating margins.

5. Pressure to Control Healthcare Costs. One of the principal objectives of health maintenance organizations and preferred provider organizations is to control the cost of healthcare services. Healthcare providers participating in managed care plans may be required to refer diagnostic imaging tests to certain providers depending on the plan in which a covered patient is enrolled. In addition, managed care contracting has become very competitive. The expansion of health maintenance organizations, preferred provider organizations and other managed care organizations within New York or Florida could have a negative impact on the utilization and pricing of services performed at the facilities HMCA manages or owns to the extent these organizations exert control over patients’ access to diagnostic imaging services, selections of the provider of such services and reimbursement rates for those services.

6. Scanning Facility Competition. The market for diagnostic imaging services is highly competitive. The facilities we manage or own compete for patients on the basis of reputation, location and the quality of diagnostic imaging services. Groups of radiologists, established hospitals, clinics and other independent organizations that own and operate imaging equipment are the principal competitors.

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FONAR CORPORATION AND SUBSIDIARIES

7. Changes to Insurance Programs. Changes in the eligibility requirements for governmental programs such as the Medicaid program and state decisions on whether to participate in the expansion of such programs could increase the number of patients who participate in such programs. A shift in payor mix from managed care and other private payors to government payors could result in a reduction in the rates of reimbursement with a corresponding decrease in our clients’ and HMCA’s revenues. Even for patients in private insurance plans, changes to their plans could increase patient financial responsibility, resulting in a greater risk of uncollectible receivables for the scanning centers we manage or own. These factors could have a material adverse effect on our business.

8. Proposed Reduction of New York Workers’ Compensation Benefits. A proposal was published by the New York State Workers’ Compensation Board (“NYSWCB”) to change the fee schedule for Workers’ Compensation payments which would have reduced fees for the most commonly billed radiology procedures. These reductions threatened to have a material adverse impact on the business of the scanning centers we manage or own. After receiving many negative comments, the NYSWCB withdrew the proposal. We are presently waiting for a new proposal to be published, but we do not have an indication as to when the NYSWCB may do so, or what such a proposal may be.

9. Federal and state privacy and information security laws. We must comply with numerous federal and state laws and regulations governing the collection, dissemination, access, use, security and privacy of PHI, including HIPAA and its implementing privacy and security regulations, as amended by the federal HITECH Act and collectively referred to as HIPAA. If we fail to comply with applicable privacy and security laws, regulations and standards, properly maintain the integrity of our data, protect our proprietary rights to our systems, or defend against cybersecurity attacks, our business, reputation, results of operations, financial position and cash flows could be materially and adversely affected.

Information security risks have significantly increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct our operations, and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties, including foreign state agents. Our operations rely on the secure processing, transmission and storage of confidential, proprietary and other information in our computer systems and networks.

10. Changes in Domestic and Worldwide Economic Conditions. We are subject to risk arising from adverse changes in general domestic and global economic conditions, including recession or economic slowdown and disruption of credit markets. Turbulence and uncertainty in the United States and international markets and economies may adversely affect our liquidity, financial condition, revenues, profitability and business operations generally.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds: The Company has not issued any unregistered shares of its Common Stock during the first nine months of fiscal 2016.

Item 3 - Defaults Upon Senior Securities: None

Item 4 - Mine Safety Disclosure: Not Applicable

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FONAR CORPORATION AND SUBSIDIARIES

Item 5 - Other Information: None

Item 6 - Exhibits and Reports on Form 8-K:

a) Exhibit 31.1 Certification. See Exhibits

b) Exhibit 32.1 Certification. See Exhibits

c) Report on Form 8-K filed on January 14, 2016, Item 2.02: Results of Operations and Financial Condition for the fiscal quarter ended December 31, 2015.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

FONAR CORPORATION

(Registrant)

By: /s/ Timothy Damadian

Timothy Damadian

President and Principal Executive Officer

/s/ Raymond V. Damadian

Raymond V. Damadian

Chairman of the Board, Treasurer and Acting Principal Financial Officer

Page 32

EX-31

FONAR CORPORATION AND SUBSIDIARIES

Dated: May 10, 2016

Exhibit 31.1

CERTIFICATION

Timothy Damadian, and Raymond V. Damadian each certify that:

1. I have reviewed this report on Form 10-Q of Fonar Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15d-15(f) for the registrant and have:

a) designed such disclosure controls and procedures or caused such disclosure controls over procedures to be designed under my supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, 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;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May10, 2016

/s/ Timothy Damadian

Timothy Damadian

President and Principal Executive Officer

/s/ Raymond V. Damadian

Raymond V. Damadian

Chairman of the Board, Treasurer and

Acting Principal Financial Officer

EX-32

FONAR CORPORATION AND SUBSIDIARIES

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of FONAR Corporation and Subsidiaries (the “Company”) on Form 10Q for the fiscal quarter ended March 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Timothy Damadian, President and Chief Executive Officer, and I, Raymond V. Damadian, Chairman of the Board, Treasurer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/Timothy Damadian

----------------------------------

Timothy Damadian

President and Chief Executive Officer

/s/ Raymond V. Damadian

-----------------------------------

Raymond V. Damadian

Chairman of the Board, Treasurer and

Chief Financial Officer

May 10, 2016

A signed original of this written statement required by Section 906 has been provided to Fonar Corporation and will be retained by Fonar Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

XML

Document and Entity Information - shares	9 Months Ended
	Mar. 31, 2016	Apr. 30, 2016
Entity Registrant Name	Fonar Corporation
Entity Central Index Key	0000355019
Document Type	10-Q
Document Period End Date	Mar. 31, 2016
Amendment Flag	false
Current Fiscal Year End Date	--06-30
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Accelerated Filer
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2016
Common Stock
Entity Common Stock, Shares Outstanding		6,050,840
Class B Common Stock
Entity Common Stock, Shares Outstanding		146
Class C Common Stock
Entity Common Stock, Shares Outstanding		382,513
Preferred Stock Class A
Entity Common Stock, Shares Outstanding		313,438

XML

Balance Sheets - USD ($) $ in Thousands	Mar. 31, 2016	Jun. 30, 2015
Current Assets:
Cash and cash equivalents	$ 13,147	$ 9,449
Accounts receivable - net	4,326	3,791
Accounts receivable - Related party	30
Medical receivables -net	10,097	9,082
Management and other fees receivable -net	15,901	14,058
Management and other fees receivable - related medical practices -net	4,059	3,507
Costs and estimated earnings in excess of billings on uncompleted contracts	279	682
Inventories	2,234	2,192
Prepaid expenses and other current assets	834	860
Total Current Assets	50,907	43,621
Deferred income tax asset	8,423	8,423
Property and equipment - net	11,877	12,901
Goodwill	1,767	1,767
Other intangible assets - net	8,066	8,950
Other assets	972	830
Total Assets	82,012	76,492
Current Liabilities:
Current portion of long-term debt and capital leases	2,455	2,490
Accounts payable	1,345	1,783
Other current liabilities	8,638	8,253
Unearned revenue on service contracts	4,350	4,187
Unearned revenue on service contracts - related parties	28
Customer advances	1,511	1,938
Billings in excess of costs and estimated earnings on uncompleted contracts	255	142
Total Current Liabilities	18,582	18,793
Long-Term Liabilities:
Deferred income tax liability	510	510
Due to related medical practices	237	237
Long-term debt and capital leases, less current portion	3,863	5,699
Other liabilities	718	469
Total Long-Term Liabilities	5,328	6,915
Total Liabilities	23,910	25,708
STOCKHOLDERS' EQUITY:
Common Stock	1	1
Paid-in capital in excess of par value	175,448	175,448
Accumulated deficit	(126,989)	(136,349)
Notes receivable from employee stockholders	(26)	(32)
Treasury stock, at cost - 12 shares of common stock at March 31, 2016 and June 30, 2015	(675)	(675)
Total Fonar Corporation Stockholders' Equity	47,759	38,393
Non controlling interests	10,343	12,391
Total Stockholders' Equity	58,102	50,784
Total Liabilities and Stockholders' Equity	$ 82,012	$ 76,492

XML

Balance Sheets (Parenthetical) - $ / shares	Mar. 31, 2016	Jun. 30, 2015
Class A NonVoting Preferred Stock
Preferred Stock, Par Value	$ 0.0001	$ 0.0001
Preferred Stock, Authorized	453,000	453,000
Preferred Stock, Issued	313,000	313,000
Preferred Stock, Outstanding	313,000	313,000
Preferred Stock
Preferred Stock, Par Value	$ 0.001	$ 0.001
Preferred Stock, Authorized	567,000	567,000
Preferred Stock, Issued
Preferred Stock, Outstanding
Common Stock
Common Stock, Par Value	$ 0.0001	$ 0.0001
Common Stock, Authorized	8,500,000	8,500,000
Common Stock, Issued	6,062,000	6,062,000
Common Stock, Outstanding	6,051,000	6,051,000
Class B Common Stock
Common Stock, Par Value	$ 0.0001	$ 0.0001
Common Stock, Authorized	227,000	227,000
Common Stock, Issued	146	146
Common Stock, Outstanding	146	146
Class C Common Stock
Common Stock, Par Value	$ 0.0001	$ 0.0001
Common Stock, Authorized	567,000	567,000
Common Stock, Issued	383,000	383,000
Common Stock, Outstanding	383,000	383,000

XML

Consolidated Statements of Income - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Mar. 31, 2016	Mar. 31, 2015
REVENUES
Product sales - net	$ 20	$ 160	$ 780	$ 1,806
Service and repair fees - net	2,406	2,299	6,970	7,288
Service and repair fees - related parties - net	27	27	83	83
Patient fee revenue, net of contractual allowances and discounts	8,695	7,284	24,596	20,700
Provision for bad debts for patient fee	(3,830)	(3,201)	(10,608)	(9,244)
Management and other fees - net	9,394	8,653	27,180	26,004
Management and other fees - related medical practices - net	1,907	1,874	5,598	5,536
Total Revenues - Net	18,619	17,096	54,599	52,173
COSTS AND EXPENSES
Costs related to product sales	263	352	939	1,674
Costs related to service and repair fees	552	630	1,542	1,611
Costs related to service and repair fees - related parties	6	7	18	18
Costs related to patient fee revenue	2,549	2,044	7,015	5,845
Costs related to management and other fees	5,649	5,285	16,664	15,665
Costs related to management and other fees - related medical practices	1,045	1,284	3,116	3,893
Research and development	395	360	1,243	1,116
Selling, general and administrative	4,533	3,706	12,425	11,108
Provision for bad debts	(470)	762	(300)	1,540
Total Costs and Expenses	14,522	14,430	42,662	42,470
INCOME
Income From Operations	4,097	2,666	11,937	9,703
Interest Expense	(127)	(169)	(416)	(545)
Investment Income	56	52	164	173
Other Income (Expense)			1	(2)
Income Before Provision for Income Taxes and Noncontrolling Interests	4,026	2,549	11,686	9,329
Provision for Income Taxes	145	30	235	99
Net Income	3,881	2,519	11,451	9,230
Net Income - Noncontrolling Interests	(876)	(500)	(2,091)	(2,018)
Net Income - Controlling Interests	$ 3,005	$ 2,019	$ 9,360	$ 7,212
Basic Net Income Per Common Share	$ 0.50	$ 0.33	$ 1.55	$ 1.19
Weighted Average Basic Shares Outstanding	6,050,000	6,050,000	6,050,000	6,050,000
Common Stock
INCOME
Net Income - Controlling Interests	$ 2,810	$ 1,888	$ 8,752	$ 6,743
Basic Net Income Per Common Share	$ 0.46	$ 0.31	$ 1.45	$ 1.11
Diluted Net Income Per Common Share	$ 0.45	$ 0.31	$ 1.42	$ 1.09
Weighted Average Basic Shares Outstanding	6,050,000	6,050,000	6,050,000	6,050,000
Weighted Average Diluted Shares Outstanding	6,178,000	6,178,000	6,178,000	6,178,000
Preferred Stock Class A
INCOME
Net Income - Controlling Interests	$ 145	$ 98	$ 453	$ 350
Class C Common Stock
INCOME
Net Income - Controlling Interests	$ 50	$ 33	$ 155	$ 119
Basic Net Income Per Common Share	$ 0.13	$ 0.09	$ 0.40	$ 0.31
Diluted Net Income Per Common Share	$ 0.13	$ 0.09	$ 0.40	$ 0.31
Weighted Average Basic Shares Outstanding	383,000	383,000	383,000	383,000
Weighted Average Diluted Shares Outstanding	383,000	383,000	383,000	383,000

XML

Statements of Cash Flows - USD ($) $ in Thousands	9 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Cash Flows from Operating Activities:
Net income	$ 11,451	$ 9,230
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	2,507	2,665
Provision for bad debts	(300)	1,540
Stock issued for costs and expenses		76
Compensatory element of stock issuances		53
(Increase) decrease in operating assets, net:
Accounts, medical receivable(s) and management fee	(3,674)	(4,310)
Notes receivable	17	118
Costs and estimated earnings in excess of billings on uncompleted contracts	403	79
Inventories	(43)	158
Prepaid expenses and other current assets	9	89
Other assets	(143)	18
Increase (decrease) in operating liabilities, net:
Accounts payable	(437)	(178)
Other current liabilities	576	(501)
Customer advances	(427)	(259)
Billings in excess of costs and estimated earnings on uncompleted contracts	112
Other liabilities	249	(230)
Due to related medical practices		(2)
Net cash provided by operating activities	10,300	8,546
Cash Flows from Investing Activities:
Purchases of property and equipment	(534)	(125)
Cost of patents	(65)	(108)
Net cash used in investing activities	(599)	(233)
Cash Flows from Financing Activities:
Repayment of borrowings and capital lease obligations	(1,871)	(2,166)
Distributions to noncontrolling interests	(4,138)	(3,306)
Buyout of noncontrolling interests		(4,971)
Repayment of notes receivable from employee stockholders	6	6
Net cash used in financing activities	(6,003)	(10,437)
Net Increase in Cash and Cash Equivalents	3,698	(2,124)
Cash and Cash Equivalents - Beginning of Period	9,449	9,952
Cash and Cash Equivalents - End of Period	$ 13,147	$ 7,828

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NOTE 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (USD $)

9 Months Ended

Mar. 31, 2016

Accounting Policies [Abstract]

NOTE 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016 and 2015

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

Effective July 1, 2015, the Company restructured the corporate organization of the management of diagnostic imaging centers segment of our business. The reorganization was structured to more completely integrate the operations of Health Management Corporation of America and HDM. Imperial contributed all of its assets (which were utilized in the business of Health Management Corporation of America) to HDM and received a 24.2% interest in HDM. Health Management Corporation of America retained a direct ownership interest of 45.8% in HDM, and the original investors in HDM retained a 30.0% ownership interest in the newly expanded HDM. The entire management of diagnostic imaging centers business segment is now being conducted by HDM, operating under the name “Health Management Company of America”.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended March 31, 2016, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2016. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K filed on September 29, 2015 for the fiscal year ended June 30, 2015.

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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (USD $)

9 Months Ended

Mar. 31, 2016

Accounting Policies [Abstract]

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016 and 2015

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of FONAR Corporation, its majority and wholly-owned subsidiaries and partnerships (collectively the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation.

Earnings Per Share

Basic earnings per share (“EPS”) is computed based on weighted average number of shares 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 three and nine months ended March 31, 2016 and March 31, 2015.

Diluted EPS reflects the potential dilution from the exercise or conversion of all dilutive securities into common stock based on the average market price of common shares outstanding during the period. For the three and nine months ended March 31, 2016 and March 31, 2015, diluted EPS for common shareholders includes 128 shares upon conversion of Class C Common. 

	Three months ended March 31, 2016						Three months ended March 31, 2015
	Total		Common Stock		Class C Common Stock		Total		Common Stock		Class C Common Stock
Basic Numerator:
Net income available to common stockholders	$	3,005	$	2,810	$	50	$	2,019	$	1,888	$	33
Denominator:
Weighted average shares outstanding		6,050		6,050		383		6,050		6,050		383
Basic income per common share	$	0.50	$	0.46	$	0.13	$	0.33	$	0.31	$	0.09
Diluted Denominator:
Weighted average shares outstanding				6,050		383				6,050		383
Convertible Class C Stock				128		—				128		—
Total denominator for diluted earnings per share				6,178		383				6,178		383
Diluted income per common share			$	0.45	$	0.13			$	0.31	$	0.09

	Nine months ended March 31, 2016						Nine months ended March 31, 2015
	Total		Common Stock		Class C Common Stock		Total		Common Stock		Class C Common Stock
Basic Numerator:
Net income available to common stockholders	$	9,360	$	8,752	$	155	$	7,212	$	6,743	$	119
Denominator:
Weighted average shares outstanding		6,050		6,050		383		6,050		6,050		383
Basic income per common share	$	1.55	$	1.45	$	0.40	$	1.19	$	1.11	$	0.31
Diluted Denominator:
Weighted average shares outstanding				6,050		383				6,050		383
Convertible Class C Stock				128		—				128		—
Total denominator for diluted earnings per share				6,178		383				6,178		383
Diluted income per common share			$	1.42	$	0.40			$	1.09	$	0.31

Recent Accounting Pronouncements

In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. This update includes provisions intended to simplify various aspects of accounting for share-based compensation. ASU No. 2016-09 will take effect for public companies for the annual periods beginning after December 15, 2016. The Company is currently assessing the potential impact of ASU No. 2016-09 on the Company’s consolidated condensed financial statements.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which will require entities to present deferred tax assets and deferred tax liabilities as non-current in a classified balance sheet. The ASU simplified the current guidance, which requires entities to separately present deferred tax assets and deferred tax liabilities as current and non-current in a classified balance sheet. This standard is effective for annual periods and interim periods within those fiscal years, beginning after December 15, 2016 but permits entities to early adopt at the beginning of any interim or annual period. During the quarter ended December 31, 2015, the Company elected to early adopt ASU 2015-17 and applied the change retrospectively to all periods present. As a result, the Company presented all deferred assets and liabilities as non-current in its consolidated balance sheet. The adoption of this ASU did not result in a reclassification of the Company’s net deferred tax assets and liabilities as of June 30, 2015. As of March 31, 2016, there was no impact on the Company’s results of operations as a result of the adoption of ASU No. 2015-17

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 for annual reporting periods beginning after December 15, 2017, as deferred including interim periods within the reporting period 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 Company is currently evaluating the effect that this ASU will have on its condensed consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on it ongoing financial reporting.

In July 2015, the FASB issued Accounting Standards Update No. 2015-11, “Simplifying the Measurement of Inventory” (“ASU 2015-11”). ASU 2015-11 requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using last-in, first-out (“LIFO”) or the retail inventory method. It is effective for annual reporting periods beginning after December 15, 2016. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period.

FASB, the Emerging Issues Task Force and the SEC have issued certain other accounting standards, updates, and regulations as of March 31, 2016 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 2016 or 2015, and it does not believe that any of those pronouncements will have a significant impact on our condensed 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 consolidated net income for any periods presented.

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NOTE 3 - ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE (USD $)

9 Months Ended

Mar. 31, 2016

Receivables [Abstract]

NOTE 3 - ACCOUNTS RECEIVABLE. MEDICAL RECEIVABLES AND MANAGEMENT AND OTHER FEES RECEIVABLE (USD $)

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016 and 2015

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE

Receivables, net is comprised of the following at March 31, 2016:

	Gross Receivable		Allowance for doubtful accounts		Net
Accounts receivable	$	4,614	$	288	$	4,326
Accounts receivable - related party	$	30		—	$	30
Medical receivable	$	36,164	$	26,067	$	10,097
Management and other fees receivable	$	28,873	$	12,972	$	15,901
Management and other fees receivable - related medical practices ("PC’s")	$	4,462	$	403	$	4,059

Receivables, net is comprised of the following at June 30, 2015:

	Gross Receivable		Allowance for doubtful accounts		Net
Accounts receivable	$	4,153	$	362	$	3,791
Accounts receivable - related party	$	—		—	$	—
Medical receivable	$	24,541	$	15,459	$	9,082
Management and other fees receivable	$	27,330	$	13,272	$	14,058
Management and other fees receivable -  related medical practices ("PC’s")	$	3,910	$	403	$	3,507

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 (PC's) substantially consist of fees outstanding under management agreements. Payment of the outstanding fees is dependent on collection by the PC's 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 59% and 55% of the PCs’ net revenues for the three months ended March 31, 2016 and 2015, respectively, were derived from no-fault and personal injury protection claims. Approximately 60% and 54% of the PCs’ net revenues for the nine months ended March 31, 2016 and 2015, respectively, 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 condensed consolidated financial statements and have historically been within management's expectations.

Net revenues from management and other fees charged to the related PCs accounted for approximately 10.2% and 11% of the consolidated net revenues for the three months ended March 31, 2016 and 2015, respectively. Net revenues from management and other fees charged to the related PCs accounted for approximately 10.3% and 10.6% of the consolidated net revenues for the nine months ended March 31, 2016 and 2015, 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 Company’s patient fee revenue, net of contractual allowances and discounts less the provision for bad debts for the three and nine months ended March 31, 2016 and 2015 are summarized in the following tables.

	For the Three Months Ended March 31,
	2016			2015
Commercial Insurance/ Managed Care	$	1,245		$	1,091
Medicare/Medicaid		332			292
Workers' Compensation/Personal Injury		5,453			4,513
Other		1,665			1,388
Patient Fee Revenue, net of contractual allowances and discounts		8,695			7,284
Provision for Bad Debts		(3,830	)		(3,201	)
Net Patient Fee for Revenue	$	4,865		$	4,083

	For the Nine Months Ended March 31,
	2016			2015
Commercial Insurance/ Managed Care	$	3,438		$	3,245
Medicare/Medicaid		874			896
Workers' Compensation/Personal Injury		15,649			11,354
Other		4,635			5,205
Patient Fee Revenue, net of contractual allowances and discounts		24,596			20,700
Provision for Bad Debts		(10,608	)		(9,244	)
Net Patient Fee for Revenue	$	13,988		$	11,456

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NOTE 4 - INVENTORIES

9 Months Ended

Mar. 31, 2016

Inventory Disclosure [Abstract]

NOTE 4 - INVENTORIES

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016 and 2015

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

NOTE 4 - INVENTORIES

Inventories included in the accompanying condensed consolidated balance sheet consist of the following:

	March 31, 2016		June 30, 2015
Purchased parts, components and supplies	$	2,033	$	2,043
Work-in-process		201		149
Total Inventories	$	2,234	$	2,192

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NOTE 5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

9 Months Ended

Mar. 31, 2016

Notes to Financial Statements

NOTE 5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016 and 2015

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

NOTE 5 – COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

Information relating to uncompleted contracts is as follows:

	March 31, 2016		June 30, 2015
Costs incurred on uncompleted contracts	$	2,310	$	1,862
Estimated earnings		1,622		1,371
Subtotal		3,932		3,233
Less: Billings to date		3,908		2,693
Total Costs and estimated earnings in excess of billings on uncompleted contracts	$	24	$	540

Included in the accompanying condensed consolidated balance sheets under the following captions:

	March 31, 2016		June 30, 2015
Costs and estimated earnings in excess of billings on uncompleted contracts	$	279	$	682
Less: Billings in excess of costs and estimated earnings on uncompleted contracts		255		142
Total Costs and estimated earnings in excess of billings on uncompleted contracts	$	24		540

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NOTE 6 - OTHER INTANGIBLE ASSETS

9 Months Ended

Mar. 31, 2016

Goodwill and Intangible Assets Disclosure [Abstract]

NOTE 6 - OTHER INTANGIBLE ASSETS

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016 and 2015

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

NOTE 6 – OTHER INTANGIBLE ASSETS

Other intangible assets, net of accumulated amortization, in the accompanying condensed consolidated balance sheet consist of the following:

	March 31, 2016		June 30, 2015
Capitalized software development costs	$	7,005	$	7,005
Patents and copyrights		4,612		4,547
Non-compete		4,100		4,100
Customer relationships		3,800		3,800
Gross Other intangible assets		19,517		19,452
Less: Accumulated amortization		11,451		10,502
Other Intangible Assets	$	8,066	$	8,950

Amortization of patents and copyrights for the three months ended March 31, 2016 and 2015 amounted to $47 and $46, respectively.

Amortization of capitalized software development costs for the three months ended March 31, 2016 and 2015 amounted to $65 and $81, respectively.

Amortization of non-compete for the three months ended March 31, 2016 and 2015 amounted to $146 and $146, respectively.

Amortization of customer relationships for the three months ended March 31, 2016 and 2015 amounted to $47 and $47, respectively.

Amortization of patents and copyrights for the nine months ended March 31, 2016 and 2015 amounted to $141 and $137, respectively.

Amortization of capitalized software development costs for the nine months ended March 31, 2016 and 2015 amounted to $227 and $246, respectively.

Amortization of non-compete for the nine months ended March 31, 2016 and 2015 amounted to $439 and $439, respectively.

Amortization of customer relationships for the nine months ended March 31, 2016 and 2015 amounted to $142 and $142, respectively.

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NOTE 7 - OTHER CURRENT LIABILITIES

9 Months Ended

Mar. 31, 2016

Payables and Accruals [Abstract]

NOTE 7 - OTHER CURRENT LIABILITIES

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016 and 2015

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

 NOTE 7 – OTHER CURRENT LIABILITIES

Other current liabilities in the accompanying condensed consolidated balance sheet consist of the following: 

	March 31, 2016		June 30, 2015
Accrued salaries, commissions and payroll taxes	$	903	$	992
Accrued interest		117		117
Litigation accruals		493		521
Sales tax payable		2,565		2,539
Legal and other professional fees		307		344
Accounting fees		193		235
Self-funded health insurance reserve		434		510
Interest and penalty - sales tax		2,644		2,509
Other		982		486
Total Other Current Liabilities	$	8,638	$	8,253

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NOTE 8 - SEGMENT AND RELATED INFORMATION

9 Months Ended

Mar. 31, 2016

Segment Reporting [Abstract]

NOTE 8 - SEGMENT AND RELATED INFORMATION

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016 and 2015

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

NOTE 8 - SEGMENT 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 as disclosed in the Company’s 10-K as of June 30, 2015. All inter-segment 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:

		Medical Equipment			Management of Diagnostic Imaging Centers		Totals
For the three months ended March 31, 2016
Net revenues from external customers	$	2,454		$	16,165	$	18,619
Inter-segment net revenues	$	546		$	—	$	546
(Loss) income from operations	$	(207	)	$	4,304	$	4,097
Depreciation and amortization	$	79		$	751	$	830
Capital expenditures	$	31		$	117	$	148
For the three months ended March 31, 2015
Net revenues from external customers	$	2,486		$	14,610	$	17,096
Inter-segment net revenues	$	502		$	—	$	502
(Loss) income from operations	$	(367	)	$	3,033	$	2,666
Depreciation and amortization	$	78		$	811	$	889
Capital expenditures	$	111		$	—	$	111
For the nine months ended March 31, 2016
Net revenues from external customers	$	7,833		$	46,766	$	54,599
Inter-segment net revenues	$	1,594		$	—	$	1,594
Income from operations	$	18		$	11,919	$	11,937
Depreciation and amortization	$	242		$	2,265	$	2,507
Capital expenditures	$	390		$	209	$	599
For the nine months ended March 31, 2015
Net revenues from external customers	$	9,177		$	42,996	$	52,173
Inter-segment net revenues	$	1,504		$	—	$	1,504
Income from operations	$	457		$	9,246	$	9,703
Depreciation and amortization	$	229		$	2,436	$	2,665
Capital expenditures	$	178		$	55	$	233

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NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION

9 Months Ended

Mar. 31, 2016

Supplemental Cash Flow Elements [Abstract]

NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016 and 2015

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

NOTE 9– SUPPLEMENTAL CASH FLOW INFORMATION

During the nine months ended March 31, 2016 and March 31, 2015, the Company paid $280 and $406 for interest, respectively.

During the nine months ended March 31, 2016 and March 31, 2015, the Company paid $235 and $99 for income taxes, respectively.

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NOTE 10 - COMMITMENTS AND CONTINGENCIES

9 Months Ended

Mar. 31, 2016

Commitments and Contingencies Disclosure [Abstract]

NOTE 10 - COMMITMENTS AND CONTINGENCIES

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016 and 2015

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

NOTE 10 – COMMITMENTS AND CONTINGENCIES

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.

There were no material changes in litigation from that reported in our Form 10-K for the fiscal year ended June 30, 2015 with the exception of the case with Dr. Shapiro. The case was settled for $258,400 plus interest on February 18. 2016.

Other Matters

The Company is also delinquent in filing sales tax returns for certain states, for which the Company has transacted business. As of March 31, 2016, the Company has recorded tax obligations of approximately $2,565 plus interest and penalties of approximately $2,644. The Company is in the process of determining the regulatory requirements in order to become compliant.

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 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 March 31, 2016 and June 30, 2015, the Company had approximately $434 and $510, respectively, in reserve for its self-funded health insurance programs. The reserves are included in “Other current liabilities” in the condensed 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.

In March 2016, the Company signed a 2nd amendment with Signature Bank to extend the terms of the revolving loan to September 2018. As of March 31, 2016, the Company has not been advanced any money under this revolving loan. 

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NOTE 11 - INCOME TAXES

9 Months Ended

Mar. 31, 2016

Income Tax Disclosure [Abstract]

NOTE 11 - INCOME TAXES

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016 and 2015

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

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 recorded a deferred tax asset of $8,423 and a deferred tax liability of $510 as of March 31, 2016, primarily relating to net operating loss carryforwards of approximately $122,926 available to offset future taxable income through 2034. The net operating losses begin to expire in 2019 for federal tax purposes and in 2015 for state income tax purposes.

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.

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NOTE 12 - SUBSEQUENT EVENTS

9 Months Ended

Mar. 31, 2016

Subsequent Events [Abstract]

NOTE 12 - SUBSEQUENT EVENTS

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016 and 2015

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

NOTE 12- SUBSEQUENT EVENTS

On May 2, 2016, the Company repaid the balance of the Class A Stockholders capital contribution in the amount of $1,125. As a result, the Company’s subsidiary, HMCA, owns a 100% interest in Imperial Management Services.

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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Mar. 31, 2016

Note 2 - Summary Of Significant Accounting Policies Policies

Principles of Consolidation

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of FONAR Corporation, its majority and wholly-owned subsidiaries and partnerships (collectively the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation.

Earnings Per Share

(Amounts and shares in thousands, except per share amounts) (UNAUDITED)

Earnings Per Share

Basic earnings per share (“EPS”) is computed based on weighted average number of shares 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 three and nine months ended March 31, 2016 and March 31, 2015.

Diluted EPS reflects the potential dilution from the exercise or conversion of all dilutive securities into common stock based on the average market price of common shares outstanding during the period. For the three and nine months ended March 31, 2016 and March 31, 2015, diluted EPS for common shareholders includes 128 shares upon conversion of Class C Common. 

	Three months ended March 31, 2016						Three months ended March 31, 2015
	Total		Common Stock		Class C Common Stock		Total		Common Stock		Class C Common Stock
Basic Numerator:
Net income available to common stockholders	$	3,005	$	2,810	$	50	$	2,019	$	1,888	$	33
Denominator:
Weighted average shares outstanding		6,050		6,050		383		6,050		6,050		383
Basic income per common share	$	0.50	$	0.46	$	0.13	$	0.33	$	0.31	$	0.09
Diluted Denominator:
Weighted average shares outstanding				6,050		383				6,050		383
Convertible Class C Stock				128		—				128		—
Total denominator for diluted earnings per share				6,178		383				6,178		383
Diluted income per common share			$	0.45	$	0.13			$	0.31	$	0.09

	Nine months ended March 31, 2016						Nine months ended March 31, 2015
	Total		Common Stock		Class C Common Stock		Total		Common Stock		Class C Common Stock
Basic Numerator:
Net income available to common stockholders	$	9,360	$	8,752	$	155	$	7,212	$	6,743	$	119
Denominator:
Weighted average shares outstanding		6,050		6,050		383		6,050		6,050		383
Basic income per common share	$	1.55	$	1.45	$	0.40	$	1.19	$	1.11	$	0.31
Diluted Denominator:
Weighted average shares outstanding				6,050		383				6,050		383
Convertible Class C Stock				128		—				128		—
Total denominator for diluted earnings per share				6,178		383				6,178		383
Diluted income per common share			$	1.42	$	0.40			$	1.09	$	0.31

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. This update includes provisions intended to simplify various aspects of accounting for share-based compensation. ASU No. 2016-09 will take effect for public companies for the annual periods beginning after December 15, 2016. The Company is currently assessing the potential impact of ASU No. 2016-09 on the Company’s consolidated condensed financial statements.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which will require entities to present deferred tax assets and deferred tax liabilities as non-current in a classified balance sheet. The ASU simplified the current guidance, which requires entities to separately present deferred tax assets and deferred tax liabilities as current and non-current in a classified balance sheet. This standard is effective for annual periods and interim periods within those fiscal years, beginning after December 15, 2016 but permits entities to early adopt at the beginning of any interim or annual period. During the quarter ended December 31, 2015, the Company elected to early adopt ASU 2015-17 and applied the change retrospectively to all periods present. As a result, the Company presented all deferred assets and liabilities as non-current in its consolidated balance sheet. The adoption of this ASU did not result in a reclassification of the Company’s net deferred tax assets and liabilities as of June 30, 2015. As of March 31, 2016, there was no impact on the Company’s results of operations as a result of the adoption of ASU No. 2015-17

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 for annual reporting periods beginning after December 15, 2017, as deferred including interim periods within the reporting period 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 Company is currently evaluating the effect that this ASU will have on its condensed consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on it ongoing financial reporting.

In July 2015, the FASB issued Accounting Standards Update No. 2015-11, “Simplifying the Measurement of Inventory” (“ASU 2015-11”). ASU 2015-11 requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using last-in, first-out (“LIFO”) or the retail inventory method. It is effective for annual reporting periods beginning after December 15, 2016. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period.

FASB, the Emerging Issues Task Force and the SEC have issued certain other accounting standards, updates, and regulations as of March 31, 2016 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 2016 or 2015, and it does not believe that any of those pronouncements will have a significant impact on our condensed consolidated financial statements at the time they become effective.

Reclassifications

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation. The reclassifications did not have any effect on reported consolidated net income for any periods presented.

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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

9 Months Ended

Mar. 31, 2016

Notes to Financial Statements

Earnings Per Share

(Amounts and shares in thousands, except per share amounts) (UNAUDITED)

Earnings Per Share

	Three months ended March 31, 2016						Three months ended March 31, 2015
	Total		Common Stock		Class C Common Stock		Total		Common Stock		Class C Common Stock
Basic Numerator:
Net income available to common stockholders	$	3,005	$	2,810	$	50	$	2,019	$	1,888	$	33
Denominator:
Weighted average shares outstanding		6,050		6,050		383		6,050		6,050		383
Basic income per common share	$	0.50	$	0.46	$	0.13	$	0.33	$	0.31	$	0.09
Diluted Denominator:
Weighted average shares outstanding				6,050		383				6,050		383
Convertible Class C Stock				128		—				128		—
Total denominator for diluted earnings per share				6,178		383				6,178		383
Diluted income per common share			$	0.45	$	0.13			$	0.31	$	0.09

	Nine months ended March 31, 2016						Nine months ended March 31, 2015
	Total		Common Stock		Class C Common Stock		Total		Common Stock		Class C Common Stock
Basic Numerator:
Net income available to common stockholders	$	9,360	$	8,752	$	155	$	7,212	$	6,743	$	119
Denominator:
Weighted average shares outstanding		6,050		6,050		383		6,050		6,050		383
Basic income per common share	$	1.55	$	1.45	$	0.40	$	1.19	$	1.11	$	0.31
Diluted Denominator:
Weighted average shares outstanding				6,050		383				6,050		383
Convertible Class C Stock				128		—				128		—
Total denominator for diluted earnings per share				6,178		383				6,178		383
Diluted income per common share			$	1.42	$	0.40			$	1.09	$	0.31

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NOTE 3 - ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE (USD $) (Tables)

9 Months Ended

Mar. 31, 2016

Receivables [Abstract]

Receivables - net

(Amounts in thousands) (UNAUDITED)

Receivables, net is comprised of the following at March 31, 2016:

	Gross Receivable		Allowance for doubtful accounts		Net
Accounts receivable	$	4,614	$	288	$	4,326
Accounts receivable - related party	$	30		—	$	30
Medical receivable	$	36,164	$	26,067	$	10,097
Management and other fees receivable	$	28,873	$	12,972	$	15,901
Management and other fees receivable - related medical practices ("PC’s")	$	4,462	$	403	$	4,059

Receivables, net is comprised of the following at June 30, 2015:

	Gross Receivable		Allowance for doubtful accounts		Net
Accounts receivable	$	4,153	$	362	$	3,791
Accounts receivable - related party	$	—		—	$	—
Medical receivable	$	24,541	$	15,459	$	9,082
Management and other fees receivable	$	27,330	$	13,272	$	14,058
Management and other fees receivable -  related medical practices ("PC’s")	$	3,910	$	403	$	3,507

Patient fee revenue - net

(Amounts in thousands) (UNAUDITED)

The Company’s patient fee revenue, net of contractual allowances and discounts less the provision for bad debts for the three and nine months ended March 31, 2016 and 2015 are summarized in the following tables.

	For the Three Months Ended March 31,
	2016			2015
Commercial Insurance/ Managed Care	$	1,245		$	1,091
Medicare/Medicaid		332			292
Workers' Compensation/Personal Injury		5,453			4,513
Other		1,665			1,388
Patient Fee Revenue, net of contractual allowances and discounts		8,695			7,284
Provision for Bad Debts		(3,830	)		(3,201	)
Net Patient Fee for Revenue	$	4,865		$	4,083

	For the Nine Months Ended March 31,
	2016			2015
Commercial Insurance/ Managed Care	$	3,438		$	3,245
Medicare/Medicaid		874			896
Workers' Compensation/Personal Injury		15,649			11,354
Other		4,635			5,205
Patient Fee Revenue, net of contractual allowances and discounts		24,596			20,700
Provision for Bad Debts		(10,608	)		(9,244	)
Net Patient Fee for Revenue	$	13,988		$	11,456

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NOTE 4 - INVENTORIES (Tables)

9 Months Ended

Mar. 31, 2016

Inventory Disclosure [Abstract]

Inventories

(Amounts in thousands) (UNAUDITED)

Inventories included in the accompanying condensed consolidated balance sheet consist of the following:

	March 31, 2016		June 30, 2015
Purchased parts, components and supplies	$	2,033	$	2,043
Work-in-process		201		149
Total Inventories	$	2,234	$	2,192

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NOTE 5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS (Tables)

9 Months Ended

Mar. 31, 2016

Notes to Financial Statements

Information relating to uncompleted contracts

(Amounts in thousands) (UNAUDITED)

Information relating to uncompleted contracts is as follows:

	March 31, 2016		June 30, 2015
Costs incurred on uncompleted contracts	$	2,310	$	1,862
Estimated earnings		1,622		1,371
Subtotal		3,932		3,233
Less: Billings to date		3,908		2,693
Total Costs and estimated earnings in excess of billings on uncompleted contracts	$	24	$	540

Included in the accompanying condensed consolidated balance sheets

(Amounts in thousands) (UNAUDITED)

 Included in the accompanying condensed consolidated balance sheets under the following captions:

	March 31, 2016		June 30, 2015
Costs and estimated earnings in excess of billings on uncompleted contracts	$	279	$	682
Less: Billings in excess of costs and estimated earnings on uncompleted contracts		255		142
Total Costs and estimated earnings in excess of billings on uncompleted contracts	$	24		540

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NOTE 6 - OTHER INTANGIBLE ASSETS (Tables)

9 Months Ended

Mar. 31, 2016

Goodwill and Intangible Assets Disclosure [Abstract]

Other intangible assets - net

(Amounts in thousands) (UNAUDITED)

Other intangible assets, net of accumulated amortization, in the accompanying condensed consolidated balance sheet consist of the following:

	March 31, 2016		June 30, 2015
Capitalized software development costs	$	7,005	$	7,005
Patents and copyrights		4,612		4,547
Non-compete		4,100		4,100
Customer relationships		3,800		3,800
Gross Other intangible assets		19,517		19,452
Less: Accumulated amortization		11,451		10,502
Other Intangible Assets	$	8,066	$	8,950

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NOTE 7 - OTHER CURRENT LIABILITIES (Tables)

9 Months Ended

Mar. 31, 2016

Payables and Accruals [Abstract]

Other current liabilities

(Amounts in thousands) (UNAUDITED)

Other current liabilities in the accompanying condensed consolidated balance sheet consist of the following: 

	March 31, 2016		June 30, 2015
Accrued salaries, commissions and payroll taxes	$	903	$	992
Accrued interest		117		117
Litigation accruals		493		521
Sales tax payable		2,565		2,539
Legal and other professional fees		307		344
Accounting fees		193		235
Self-funded health insurance reserve		434		510
Interest and penalty - sales tax		2,644		2,509
Other		982		486
Total Other Current Liabilities	$	8,638	$	8,253

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NOTE 8 - SEGMENT AND RELATED INFORMATION (Tables)

9 Months Ended

Mar. 31, 2016

Segment Reporting [Abstract]

Segment information

(Amounts in thousands) (UNAUDITED)

Summarized financial information concerning the Company's reportable segments is shown in the following table:

		Medical Equipment			Management of Diagnostic Imaging Centers		Totals
For the three months ended March 31, 2016
Net revenues from external customers	$	2,454		$	16,165	$	18,619
Inter-segment net revenues	$	546		$	—	$	546
(Loss) income from operations	$	(207	)	$	4,304	$	4,097
Depreciation and amortization	$	79		$	751	$	830
Capital expenditures	$	31		$	117	$	148
For the three months ended March 31, 2015
Net revenues from external customers	$	2,486		$	14,610	$	17,096
Inter-segment net revenues	$	502		$	—	$	502
(Loss) income from operations	$	(367	)	$	3,033	$	2,666
Depreciation and amortization	$	78		$	811	$	889
Capital expenditures	$	111		$	—	$	111
For the nine months ended March 31, 2016
Net revenues from external customers	$	7,833		$	46,766	$	54,599
Inter-segment net revenues	$	1,594		$	—	$	1,594
Income from operations	$	18		$	11,919	$	11,937
Depreciation and amortization	$	242		$	2,265	$	2,507
Capital expenditures	$	390		$	209	$	599
For the nine months ended March 31, 2015
Net revenues from external customers	$	9,177		$	42,996	$	52,173
Inter-segment net revenues	$	1,504		$	—	$	1,504
Income from operations	$	457		$	9,246	$	9,703
Depreciation and amortization	$	229		$	2,436	$	2,665
Capital expenditures	$	178		$	55	$	233

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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Earnings Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Mar. 31, 2016	Mar. 31, 2015
Basic Numerator: Net income available to common stockholders	$ 3,005	$ 2,019	$ 9,360	$ 7,212
Basic Denominator: Weighted average shares outstanding	6,050,000	6,050,000	6,050,000	6,050,000
Basic Income Per Common Share	$ 0.50	$ 0.33	$ 1.55	$ 1.19
Common Stock
Basic Numerator: Net income available to common stockholders	$ 2,810	$ 1,888	$ 8,752	$ 6,743
Basic Denominator: Weighted average shares outstanding	6,050,000	6,050,000	6,050,000	6,050,000
Basic Income Per Common Share	$ 0.46	$ 0.31	$ 1.45	$ 1.11
Convertible Class C Stock	128,000	128,000	128,000	128,000
Total Denominator for diluted earnings per share	6,178,000	6,178,000	6,178,000	6,178,000
Diluted Income Per Share	$ 0.45	$ 0.31	$ 1.42	$ 1.09
Class C Common Stock
Basic Numerator: Net income available to common stockholders	$ 50	$ 33	$ 155	$ 119
Basic Denominator: Weighted average shares outstanding	383,000	383,000	383,000	383,000
Basic Income Per Common Share	$ 0.13	$ 0.09	$ 0.40	$ 0.31
Total Denominator for diluted earnings per share	383,000	383,000	383,000	383,000
Diluted Income Per Share	$ 0.13	$ 0.09	$ 0.40	$ 0.31

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NOTE 3 - ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE - Receivables, Net - (Details) - USD ($) $ in Thousands	Mar. 31, 2016	Jun. 30, 2015
Accounts receivable	$ 4,326	$ 3,791
Accounts receivable - Related party	30
Medical Receivables	10,097	9,082
Management and other fees receivable	15,901	14,058
Management and other fees receivable from related medical practices ("PC's")	4,059	3,507
Gross Receivabe
Accounts receivable	4,614	4,153
Accounts receivable - Related party	30
Medical Receivables	36,164	24,541
Management and other fees receivable	28,873	27,330
Management and other fees receivable from related medical practices ("PC's")	4,462	3,910
Allowance for Doubtful Accounts
Accounts receivable	288	362
Medical Receivables	26,067	15,459
Management and other fees receivable	12,972	13,272
Management and other fees receivable from related medical practices ("PC's")	$ 403	$ 403

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NOTE 3 - ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE - Patient Fees Revenue - (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Mar. 31, 2016	Mar. 31, 2015
Patient fee revenue, net of contractual allowances and discounts	$ 8,695	$ 7,284	$ 24,596	$ 20,700
Provision for bad debts for patient fee	(3,830)	(3,201)	(10,608)	(9,244)
Net patient fee revenue	4,865	4,083	13,988	11,456
Commercial Insurance / Managed Care
Patient fee revenue, net of contractual allowances and discounts	1,245	1,091	3,438	3,245
Medicare/Medicaid
Patient fee revenue, net of contractual allowances and discounts	332	292	874	896
Workers Compensation/Personal Injury
Patient fee revenue, net of contractual allowances and discounts	5,453	4,513	15,649	11,354
Other
Patient fee revenue, net of contractual allowances and discounts	$ 1,665	$ 1,388	$ 4,635	$ 5,205

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NOTE 4 - INVENTORIES (Details) - USD ($) $ in Thousands	Mar. 31, 2016	Jun. 30, 2015
Inventory Disclosure [Abstract]
Purchased parts, components and supplies	$ 2,033	$ 2,043
Work-in-process	201	149
Total inventories	$ 2,234	$ 2,192

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NOTE 5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS - Information relating to uncompleted contracts - (Details) - USD ($) $ in Thousands	Mar. 31, 2016	Jun. 30, 2015
Notes to Financial Statements
Costs incurred on uncompleted contracts	$ 2,310	$ 1,862
Estimated earnings	1,622	1,371
Subtotal	3,932	3,233
Less: Billings to date	3,908	2,693
Total Costs and estimated earnings in excess of billings on uncompleted contracts	$ 24	$ 540

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NOTE 5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS - Balance Sheet Items - (Details) - USD ($) $ in Thousands	Mar. 31, 2016	Jun. 30, 2015
Notes to Financial Statements
Costs and estimated earnings in excess of billings on uncompleted contracts	$ 279	$ 682
Less: Billings in excess of costs and estimated earnings on uncompleted contracts	255	142
Total Costs and estimated earnings in excess of billings on uncompleted contracts	$ 24	$ 540

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NOTE 6 - OTHER INTANGIBLE ASSETS - (Details) - USD ($) $ in Thousands	Mar. 31, 2016	Jun. 30, 2015
Gross Other intangible assets	$ 19,494	$ 19,452
Accumulated amortization	11,451	10,502
Other Intangible Assets - net	8,066	8,950
Capitalized software development costs
Gross Other intangible assets	7,005	7,005
Patents and copyrights
Gross Other intangible assets	4,612	4,547
Non-compete
Gross Other intangible assets	4,100	4,100
Customer relationships
Gross Other intangible assets	$ 3,800	$ 3,800

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NOTE 7 - OTHER CURRENT LIABILITIES - (Details) - USD ($) $ in Thousands	Mar. 31, 2016	Jun. 30, 2015
Payables and Accruals [Abstract]
Accrued salaries, commissions and payroll taxes	$ 903	$ 992
Accrued interest	117	117
Litigation accruals	493	521
Sales tax payable	2,565	2,539
Legal and other professional fees	307	344
Accounting fees	193	235
Self-funded health insurance reserve	434	510
Interest and penalty - sales tax	2,644	2,509
Other	982	486
Total Other current liabilities	$ 8,638	$ 8,253

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NOTE 8 - SEGMENT AND RELATED INFORMATION - Segment Information - (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Mar. 31, 2016	Mar. 31, 2015
Net revenues from external customers	$ 18,619	$ 17,096	$ 54,599	$ 52,173
Inter-segment net revenues	546	502	1,594	1,504
Income from operations	4,097	2,666	11,937	9,703
Depreciation and amortization	830	889	2,507	2,665
Capital expenditures	148	111	599	233
Medical Equipment
Net revenues from external customers	2,454	2,486	7,833	9,177
Inter-segment net revenues	546	502	1,594	1,504
Income from operations	(207)	(367)	18	457
Depreciation and amortization	79	78	242	229
Capital expenditures	31	111	390	178
Management Of Diagnostic Imaging Centers
Net revenues from external customers	16,165	14,610	46,766	42,996
Income from operations	4,304	3,033	11,919	9,246
Depreciation and amortization	751	$ 811	2,265	2,436
Capital expenditures	$ 117		$ 209	$ 55

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NOTE 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION - (Details Narrative)	Jul. 01, 2015
Note 1 - Description Of Business And Basis Of Presentation - Details Narrative
The ownership interest of Imperial Management Services after reorganization of newly expanded HDM (percent).	24.20%
The ownership interest of Health Management Corporation of America after reorganization of newly expanded HDM (percent).	45.80%
The ownership interest of the original investors of HDM after reorganization of newly expanded HDM (percent).	30.00%

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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Details Narrative) - shares	3 Months Ended		9 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Mar. 31, 2016	Mar. 31, 2015
Common Stock
Shares included upon conversion of Class C Common to calculate a diluted EPS	128,000	128,000	128,000	128,000

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NOTE 3 - ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE - (Details Narrative)	3 Months Ended		9 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Mar. 31, 2016	Mar. 31, 2015
Note 3 - Accounts Receivable Medical Receivable And Management And Other Fees Receivable - Details Narrative
Net revenues derived from no-fault and personal injury protection claims	59.00%	55.00%	60.00%	54.00%
Net revenues from management and other fees charged to related PCs	10.20%	11.00%	10.30%	10.60%

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NOTE 6 - OTHER INTANGIBLE ASSETS - (Details Narrative) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Mar. 31, 2016	Mar. 31, 2015
Patents and copyrights
Amortization of intangible assets	$ 47	$ 46	$ 141	$ 137
Capitalized software development costs
Amortization of intangible assets	65	81	227	246
Non-compete
Amortization of intangible assets	146	146	439	439
Customer relationships
Amortization of intangible assets	$ 47	$ 47	$ 142	$ 142

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NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION ($)- (Details Narrative) - USD ($) $ in Thousands	9 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Note 9 - Supplemental Cash Flow Information - Details Narrative
Interest paid	$ 280	$ 406
Income Taxes Paid	$ 235	$ 99

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NOTE 10 - COMMITMENTS AND CONTINGENCIES - (Details Narrative) - USD ($) $ in Thousands	Mar. 31, 2016	Jun. 30, 2015
Commitments and Contingencies Disclosure [Abstract]
Recorded tax obligations	$ 2,565
Tax interest and penalties	2,644
Maximum limit for individual claims under stop-loss umbrella policy for health insurance	100
Self-funded health insurance reserve	$ 434	$ 510

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NOTE 11 - INCOME TAXES - (Details Narrative) - USD ($) $ in Thousands	Mar. 31, 2016	Jun. 30, 2015
Income Tax Disclosure [Abstract]
Deferred income tax asset	$ 8,423	$ 8,423
Deferred income tax liability	510	$ 510
Net deferred operating loss carryforwards	$ 122,926

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NOTE 12 - SUBSEQUENT EVENTS - (Details Narrative) $ in Thousands	May. 02, 2016 USD ($)
Note 1 - Description Of Business And Basis Of Presentation - Details Narrative
Company's (HMCA) ownership interest of Imperial	100.00%
Repayment of balance of Class A Stockholders capital contribution	$ 1,125