Edgar Filing: FONAR CORP

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 SEPTEMBER 30, 2012

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission file number 0-10248

FONAR CORPORATION

(Exact name of registrant as specified in its charter)

DELAWARE		11-2464137
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		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, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.(Check one): Large accelerated filer___ Accelerated filer___ Non-accelerated filer___ Smaller reporting company _X_

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.

Class	Outstanding at October 31, 2012
Common Stock, par value $.0001	5,931,262
Class B Common Stock, par value $.0001	158
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
Item 1. Financial Statements		3
Condensed Consolidated Balance Sheets - September 30, 2012 (Unaudited) and June 30, 2012		3
Condensed Consolidated Statements of Income for the Three Months Ended September 30, 2012 and September 30, 2011 (Unaudited)		6
Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended September 30, 2012 and September 30, 2011 (Unaudited)		7
Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2012 and September 30, 2011 (Unaudited)		8
Notes to Condensed Consolidated Financial Statements (Unaudited)		9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3. Quantitative and Qualitative Disclosures About Market Risk		27
Item 4. Controls and Procedures		27
PART II - OTHER INFORMATION		27
Item 1. Legal Proceedings		27
Item 1A. Risk Factors		28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		28
Item 3. Defaults Upon Senior Securities		28
Item 4. Mine Safety Disclosures		28
Item 5. Other Information		28
Item 6. Exhibits		28
Signatures		28

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FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(000's OMITTED)

ASSETS

	September 30, 2012 (UNAUDITED)		June 30, 2012
Current Assets:
Cash and cash equivalents	$	12,905	$	12,032
Accounts receivable – net		4,910		5,095
Accounts receivable - related party		90		—
Management and other fees receivable - net		4,282		3,782
Management and other fees receivable – related medical practices - net		1,709		1,311
Costs and estimated earnings in excess of billings on uncompleted contracts		1,159		1,129
Inventories		2,517		2,195
Current portion of notes receivable - net		117		116
Prepaid expenses and other current assets		202		206
Total Current Assets		27,891		25,866
Property and equipment – net		3,123		3,173
Notes receivable		242		276
Other intangible assets – net		3,716		3,835
Other assets		490		465
Total Assets	$	35,462	$	33,615

See accompanying notes to condensed consolidated financial statements (unaudited).

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FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(000's OMITTED, except share data)

LIABILITIES AND STOCKHOLDERS’ EQUITY

	September 30, 2012 (UNAUDITED)		June 30, 2012
Current Liabilities:
Current portion of long-term debt and capital leases		1,658		1,854
Accounts payable		2,212		2,077
Other current liabilities		8,001		7,693
Unearned revenue on service contracts		5,620		5,475
Unearned revenue on service contracts – related party		82		—
Customer advances		3,898		3,881
Income tax payable		25		100
Total Current Liabilities		21,496		21,080
Long-Term Liabilities:
Accounts payable, non current		25		47
Due to related medical practices		231		229
Long-term debt and capital leases, less current portion		706		777
Other liabilities		390		401
Total Long-Term Liabilities		1,352		1,454
Total Liabilities		22,848		22,534

See accompanying notes to condensed consolidated financial statements (unaudited).

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FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(000’s OMITTED, except per share data)

LIABILITIES AND STOCKHOLDERS’ EQUITY(Continued)

STOCKHOLDERS' EQUITY:	September 30, 2012 (UNAUDITED)			June 30, 2012
Class A non-voting preferred stock $.0001 par value; 453,000 shares authorized at September 30, 2012 and June 30, 2012, 313,438 issued and outstanding at September 30, 2012 and June 30, 2012		—			—
Preferred stock $.001 par value; 567,000 shares authorized at September 30, 2012 and June 30, 2012, issued and outstanding – none		—			—
Common Stock $.0001 par value; 8,500,000 shares authorized at September 30, 2012 and June 30, 2012, 5,912,905 issued at September 30, 2012 and June 30, 2012; 5,901,262 outstanding at September 30, 2012 and June 30, 2012		1			1
Class B Common Stock (10 votes per share) $.0001 par value; 227,000 shares authorized at September 30, 2012 and June 30, 2012; 158 issued and outstanding at September 30, 2012 and June 30, 2012		—			—
Class C Common Stock (25 votes per share) $.0001 par value; 567,000 shares authorized at September 30, 2012 and June 30, 2012, 382,513 issued and outstanding at September 30, 2012 and June 30, 2012		—			—
Paid-in capital in excess of par value		174,084			174,084
Accumulated other comprehensive loss		(19	)		(20	)
Accumulated deficit		(166,882	)		(168,334	)
Notes receivable from employee stockholders		(69	)		(71	)
Treasury stock, at cost - 11,643 shares of common stock at September 30, 2012 and June 30, 2012		(675	)		(675	)
Non controlling interests		6,174			6,096
Total Stockholders' Equity		12,614			11,081
Total Liabilities and Stockholders' Equity	$	35,462		$	33,615

See accompanying notes to condensed consolidated financial statements (unaudited).

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FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(000'S OMITTED, except per share data

	FOR THE THREE MONTHS ENDED SEPTEMBER 30,
		2012		2011
REVENUES
Product sales – net	$	1,041		$	1,776
Service and repair fees – net		2,709			2,905
Service and repair fees - related parties - net		27			27
Management and other fees – net		3,769			3,329
Management and other fees - related medical practices – net		1,965			1,571
Total Revenues – Net		9,511			9,608
COSTS AND EXPENSES
Costs related to product sales		1,056			1,475
Costs related to service and repair fees		865			813
Costs related to service and repair fees - related parties		9			8
Costs related to management and other fees		2,171			2,185
Costs related to management and other fees – related medical practices		817			819
Research and development		330			329
Selling, general and administrative		2,212			2,043
Provision for bad debts		175			175
Total Costs and Expenses		7,635			7,847
Income From Operations		1,876			1,761
Interest Expense		(76	)		(107	)
Investment Income		59			62
Other (Expense) Income		(9	)		56
Income Before Provision for Income Taxes and Non Controlling Interests		1,850			1,772
Provision for Income Taxes		72			—
Net Income		1,778			1,772
Net Income - Non Controlling Interests		(326	)		(259	)
Net Income - Controlling Interests	$	1,452		$	1,513
Net Income Available to Common Stockholders	$	1,355		$	1,409
Net Income Available to Class A Non-Voting Preferred Stockholders	$	72		$	78
Net Income Available to Class C Common Stockholders	$	25		$	27
Basic Net Income Per Common Share Available to Common Stockholders	$	0.23		$	0.25
Diluted Net Income Per Common Share Available to Common Stockholders	$	0.22		$	0.24
Basic and Diluted Income Per Share - Common C	$	0.06		$	0.07
Weighted Average Basic Shares Outstanding		5,901,262			5,668,762
Weighted Average Diluted Shares Outstanding		6,028,766			5,796,266
Weighted Average Basic Shares Outstanding – Class C Common		382,513			382,513
Weighted Average Diluted Shares Outstanding – Class C Common		382,513			382,513

See accompanying notes to condensed consolidated financial statements (unaudited).

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FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(000'S OMITTED)

	FOR THE THREE MONTHS ENDED SEPTEMBER 30,
	2012			2011
Net income	$	1,778		$	1,772
Other comprehensive income, net of tax: Unrealized losses on marketable securities net of tax		(1	)		(5	)
Total comprehensive income	$	1,777		$	1,767
Comprehensive income – non controlling interests		326			259
Comprehensive income – controlling interests	$	1,451		$	1,508

See accompanying notes to condensed consolidated financial statements (unaudited).

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FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(000'S OMITTED)

	FOR THE THREE MONTHS ENDED
	SEPTEMBER 30,
	2012			2011
Cash Flows from Operating Activities:
Net income	$	1,778		$	1,772
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		415			525
Provision for bad debts		175			175
Stock issued for costs and expenses		—			104
(Increase) decrease in operating assets, net:
Accounts, management fee and medical receivable(s)		(979	)		66
Notes receivable		33			14
Costs and estimated earnings in excess of billings on uncompleted contracts		(30	)		(387	)
Inventories		(322	)		(1,417	)
Prepaid expenses and other current assets		6			(73	)
Other assets		(24	)		(14	)
Increase (decrease) in operating liabilities,net:
Accounts payable		112			(67	)
Other current liabilities		536			727
Customer advances		16			(1,208	)
Billings in excess of costs and estimated earnings on uncompleted contracts		—			813
Other liabilities		(10	)		(4	)
Due to related medical practices		2			2
Income tax payable		(75	)		—
Net cash provided by operating activities		1,633			1,028
Cash Flows from Investing Activities:
Purchases of property and equipment		(211	)		(116	)
Cost of patents		(36	)		(39	)
Net cash used in investing activities		(247	)		(155	)
Cash Flows from Financing Activities:
Repayment of borrowings and capital lease obligations		(266	)		(326	)
Distributions to non controlling interests		(249	)		(288	)
Repayment of notes receivable from employee stockholders		2			2
Net cash used in financing activities		(513	)		(612	)
Net Increase in Cash and Cash Equivalents		873			261
Cash and Cash Equivalents - Beginning of Period		12,032			9,251
Cash and Cash Equivalents - End of Period	$	12,905		$	9,512

See accompanying notes to condensed consolidated financial statements (unaudited).

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012 and 2011

(UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION & LIQUIDITY & CAPITAL RESOURCES

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 months ended September 30, 2012, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2013. 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 28, 2012 for the fiscal year ended June 30, 2012.

Liquidity

At September 30, 2012, the Company had working capital of $6.4 million as compared to working capital of $4.8 million at June 30, 2012, and stockholders’ equity of $12.6 million at September 30, 2012 as compared to stockholders’ equity of $11.1 million at June 30, 2012. For the three months ended September 30, 2012, we realized a net income of $1.8 million.

The Company believes that its business plan has been responsible for the past two consecutive fiscal years of profitability (fiscal 2012 and fiscal 2011) and that its capital resources will be adequate to support operations at current levels through June 30, 2013. In fiscal 2010 and prior years, however, the Company also experienced losses and periods of working capital deficits. The future effects on our business of healthcare reform legislation, the Deficit Reduction Act, the tax on sales of medical equipment 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.

In order to promote sales, the Company is continuing to focus on marketing campaigns to strengthen the demand for our products and services. Management anticipates that the Company’s capital resources will continue to improve if the Company’s MRI scanner products gain wider market recognition and acceptance resulting in both increased product sales and scan volumes. If the Company is not successful with our marketing efforts to increase sales, the Company will experience a shortfall in cash, and it will be necessary to reduce operating expenses or obtain funds through equity or debt financing.

If the Company is unable to meet expenditures with revenues or financing then it will be necessary to reduce expenses further, or seek other sources of funds through the issuance of debt or equity financing in order to conduct operations as now conducted subsequent to fiscal 2013.

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012 and 2011

(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.

Income Per Share

Basic income per share (“EPS”) is computed based on weighted average shares outstanding and excludes any potential dilution. In accordance with ASC topic 260-10, “Participating Securities and the Two-Class method”, the Company used the Two-Class method for calculating basic income per share and applied the if converted method in calculating diluted income per share for the three months ended September 30, 2012 and 2011.

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 months ended September 30, 2012 and 2011, the number of common shares potentially issuable upon the exercise of certain options of 13,000 and 20,000; respectively, have not been included in the computation of diluted EPS since the effect would be antidilutive.

	Three months ended						Three months ended
	September 30, 2012						September 30, 2011
	(000's omitted, except per share data)
		Total		Common Stock		Class C Common Stock		Total		Common Stock		Class C Common Stock
Basic Numerator:
Net income available to common stockholders	$	1,452	$	1,355	$	25	$	1,513	$	1,409	$	27
Denominator:
Weighted average shares outstanding		5,901		5,901		383		5,669		5,669		383
Basic income per common share	$	0.25	$	0.23	$	0.06	$	0.27	$	0.25	$	0.07
Diluted Denominator:
Weighted average shares outstanding				5,901		383				5,669		383
Stock options				—		—				—		—
Convertible Class C Stock				128		—				128		—
Total Denominator for diluted earnings per share				6,029		383				5,797		383
Diluted income per common share			$	0.22	$	0.06			$	0.24	$	0.07

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012 and 2011

(UNAUDITED)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recent Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05. ASU 2011-12 defers the requirement that companies present reclassification adjustments for each component of Accumulated Other Comprehensive Income in both net income and Other Comprehensive Income on the face of the financial statements. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. The guidance provided by this update becomes effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this standard has not had a material impact on the Company’s condensed consolidated position and results of operations.

In July 2012, the FASB issued ASU No. 2012-02, Intangibles-Goodwill and Other (Topic 350) Testing Indefinite-Lived Intangible Assets for Impairment. This ASU simplifies how entities test indefinite-lived intangible assets for impairment which improve consistency in impairment testing requirements among long-lived asset categories. These amended standards permit an assessment of qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. For assets in which this assessment concludes it is more likely than not that the fair value is more than its carrying value, these amended standards eliminate the requirement to perform quantitative impairment testing as outlined in previously issued standards. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s condensed consolidated financial position and results of operations.

FASB, the Emerging Issues Task Force and the SEC have issued certain other accounting standards, updates, and regulations as of June 30, 2012 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 2012 or 2011, and it does not believe that any of those pronouncements will have a significant impact on our consolidated financial statements at the time they become effective.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation. The reclassifcations 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

SEPTEMBER 30, 2012 and 2011

(UNAUDITED)

NOTE 3 – ACCOUNTS RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE

Accounts Receivable and Management and Other Fees Receivable

Receivables, net is comprised of the following at September 30, 2012:

(000’s Omitted)

	Gross Receivable		Allowance for doubtful accounts		Net
Receivables from equipment sales and service contracts	$	6,763	$	1,853	$	4,910
Receivables from equipment sales and service contracts - related party	$	90		—	$	90
Management and other fees receivables	$	11,915	$	7,633	$	4,282
Management and other fees receivables from related medical practices ("PC’s")	$	2,112	$	403	$	1,709

The Company's customers are concentrated in the healthcare industry.

The Company's receivables from the related and non-related professional corporations (PC's) substantially consists 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 38% and 55% of the PCs’ net revenues for the three months ended September 30, 2012 and 2011, 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 20.7% and 16.4% of the consolidated net revenues for the three months ended September 30, 2012 and 2011, 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

SEPTEMBER 30, 2012 and 2011

(UNAUDITED)

NOTE 4 - INVENTORIES

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

(000's omitted)

	September 30, 2012		June 30, 2012
Purchased parts, components and supplies	$	1,960	$	1,673
Work-in-process		557		522
TOTAL INVENTORIES	$	2,517	$	2,195

NOTE 5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER ADVANCES

1) Information relating to uncompleted contracts as of September 30, 2012 is as follows:

(000's omitted)

Costs incurred on uncompleted contracts	$	2,684
Estimated earnings		2,062
Subtotal		4,746
Less: Billings to date		3,587
Total Costs and estimated earnings in excess of billings on uncompleted contracts	$	1,159

Included in the accompanying condensed consolidated balance sheet at September 30, 2012 under the following captions:

Costs and estimated earnings in excess of billings on uncompleted contracts	$	1,159
Less: Billings in excess of costs and estimated earnings on uncompleted contracts		—
Total Costs and estimated earnings in excess of billings on uncompleted contracts	$	1,159

2) Customer advances consist of the following as of September 30, 2012:

Total advances	$	7,485
Less: Advances on contracts under construction		3,587
Total customer advances	$	3,898

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012 and 2011

(UNAUDITED)

NOTE 6 – OTHER CURRENT LIABILITIES

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

(000’s omitted)

	September 30, 2012		June 30, 2012
Accrued salaries, commissions and payroll taxes	$	536	$	570
Accrued interest		198		191
Litigation accruals		493		493
Sales tax payable		2,908		2,764
Legal and other professional fees		544		577
Accounting fees		115		345
Insurance premiums		62		13
Interest and penalty - sales tax		2,166		2,116
Penalty - 401k plan		250		250
Purchase scanners		400		—
Rent		178		208
Other		151		166
TOTAL OTHER CURRENT LIABILITIES	$	8,001	$	7,693

NOTE 7 - 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, 2012. 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:

(000's omitted)

	Medical Equipment		Management Of Diagnostic Imaging Centers		Totals
For the three months ended Sept. 30, 2012
Net revenues from external customers	$	3,777	$	5,734	$	9,511
Inter-segment net revenues	$	202	$	—	$	202
Income from operations	$	227	$	1,649	$	1,876
Depreciation and amortization	$	158	$	257	$	415
Capital expenditures	$	71	$	176	$	247
For the three months ended Sept. 30, 2011
Net revenues from external customers	$	4,708	$	4,900	$	9,608
Inter-segment net revenues	$	202	$	—	$	202
Income from operations	$	751	$	1,010	$	1,761
Depreciation and amortization	$	175	$	350	$	525
Capital expenditures	$	39	$	116	$	155

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012 and 2011

NOTE 8 – SUPPLEMENTAL CASH FLOW INFORMATION

During the three months ended September 30, 2012 and September 30, 2011, the Company paid $33,000 and $64,000 for interest, respectively.

During the three months ended September 30, 2012 and September 30, 2011, the Company paid $147,000 and $0 for income taxes, respectively.

NOTE 9 – 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, 2012.

Other Matters

The Company is also delinquent in filing sales tax returns for certain states, for which the Company has transacted business. As of September 30, 2012, the Company has recorded tax obligations of approximately $2,591,000 plus interest and penalties of approximately $2,166,000. The Company is in the process of determining the regulatory requirements in order to become compliant.

The Company has determined they may not be in compliance with the Department of Labor and Internal Revenue Service regulations concerning the requirements to file Form 5500 to report activity of its 401(k) Employee Benefit Plan. The filings do not require the Company to pay tax, however they may be subject to penalty for non-compliance. The Company has recorded provisions for any potential penalties totaling $250,000. The amount was the Company’s best estimate of potential penalties. Management is unable to determine the outcome of this uncertainty. The Company has engaged outside counsel to handle such matters to determine the necessary requirements to ensure compliance. On August 31, 2011, the Company submitted with the Internal Revenue Service a request for a compliance statement and a determination letter for our 401K plan. On December 9, 2011, the Internal Revenue Service issued a favorable determination letter on our 401K plan. The Company is still working with outside counsel to complete and file forms with the US Department of Labor.

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012 and 2011

NOTE 10 - INCOME TAXES

Effective January 1, 2007, the Company adopted the provisions of ASC topic 740 (formerly FASB Interpretation No. 48/FASB Statement No. 109, “Accounting for Uncertainty in 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 2006.

The adoption of the provisions of ASC topic 740 did not have a material impact on the Company’s consolidated financial position and results of operations. Upon the adoption and as of September 30, 2012, no liability for unrecognized tax benefits was required to be recorded. The Company does not expect its unrecognized tax benefit position to change during the next 12 months.

The Company recognized a net deferred tax asset of $461,858 and a deferred tax liability of $461,858 as of September 30, 2012, primarily relating to net operating loss carryforwards of approximately $154,431,000 available to offset future taxable income through 2029. The net operating losses begin to expire in 2012 for federal tax purposes and in 2012 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 not have a sufficient history of income or knowledge of future effects on our business of healthcare reform legislation, the Deficit Reduction Act, the tax on sales of medical equipment and the general economic and business climate to conclude that it is more-likely-than-not that the Company will be able to realize all of its tax benefits in the near future and therefore a valuation allowance was established for the full value of the deferred tax asset.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012 and 2011

NOTE 10 - INCOME TAXES (Continued)

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

NOTE 11 – SUBSEQUENT EVENTS

During the period from October 1, 2012 through October 31, 2012, the Company issued 30,000 shares of common stock to consultants as compensation valued at $146,700 under the 2010 Stock Bonus Plan.

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

For the three month period ended September 30, 2012, we reported a net income of $1.8 million on revenues of $9.5 million as compared to net income of $1.8 million on revenues of $9.6 million for the three month period ended September 30, 2011. We recognized an operating income of $1.9 million for the three month period ended September 30, 2012 compared to an operating income of $1.8 million for the three month period ended September 30, 2011.

Overall, our revenues decreased 1.0% from $9.6 million for the first three months of fiscal 2012 to $9.5 million for the first three months of fiscal 2013. Although management fees increased by 17.0% from $4.9 million for the first three months of fiscal 2012 to $5.7 million for the first three months of fiscal 2013, service and repair fees decreased 6.7% from $2.9 million the first three months of fiscal 2012 to $2.7 million the first three months of fiscal 2013, and revenues from product sales decreased 41.4%, from $1.8 million for the first three months of 2012 to $1.0 million for the first three months of fiscal 2013.

The decrease in our revenues was offset by a larger decrease in our costs and expenses, and consequently we recognized an increased operating income for the three months ended September 30, 2012 of $1.9 million as compared to an operating income of $1.8 million for the three months ended September 30, 2011. The decrease in costs and expenses of 2.7% from $7.8 million in the first three months of fiscal 2012 to $7.6 million in the first three months of fiscal 2013, exceeded the decrease in revenues of 1.0%, from $9.6 million in the first three months of fiscal 2012 to $9.5 million in the first three months of fiscal 2013.

Our continuing efforts to control costs, combined with our intensive efforts to increase our management fees, the adoption of a new billing and collection contract in fiscal 2011 and the addition of an additional site to the sites we manage, are responsible for our profitability during the three months ended September 30, 2012.

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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 Fonar’s wholly-owned subsidiary, Health Management Corporation of America, which we also refer to as HMCA.

Effective May 2, 2011, HMCA contributed all of its assets, liabilities and business to Imperial Management Services, LLC, which is controlled but not wholly-owned by HMCA. Imperial is continuing the business of HMCA utilizing the same facilities, equipment and personnel as HMCA. This transaction did not result in a change of control or policy, but was solely a means to raise capital. To avoid confusion in making comparisons and to show the continuity of the business, our physician management and diagnostic services segment is sometimes referred to as “HMCA-IMPERIAL” for both periods before and after May 2, 2011.

Trends in the first three months of fiscal 2013 include an increase in management and other fee revenues, and a decline in product sales revenues, and service and repair fees. Also costs related to product sales decreased 28.4% from $1.5 million for the first three months of fiscal 2012 to $1.1 million for the first three months of fiscal 2013, which corresponds to the decrease in product sales. We will continue to focus on our marketing efforts to improve sales performance and increase patient volume at the MRI facilities managed by HMCA-IMPERIAL in fiscal 2013. In addition, we will monitor our cost control program and will continue to reduce costs as necessary.

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For the three month period ended September 30, 2012, as compared to the three month period ended September 30, 2011 overall revenues from MRI product sales decreased 41.4% ($1.0 million compared to $1.8 million). Continuing tight credit and world-wide economic uncertainty have depressed the market for our MRI products, which in the overwhelming majority of cases are purchased on credit.

Service revenues for the three month period ended September 30, 2012 as compared to the three month period ended September 30, 2011 decreased 6.7% ($2.7 million compared to $2.9 million). Unrelated party service and repair fees decreased 6.7% ($2.7 million compared to $2.9 million) and related party service and repair fees remained constant at $27,000 for the three month period ended September 30, 2011 and the three month period ended September 30, 2012. We anticipate that there will be increases in service revenues as warranties on installed scanners expire over time.

There were approximately $265,000 in foreign revenues for the first three months of fiscal 2013 as compared to approximately $279,000 in foreign revenues for the first three months of fiscal 2012, representing a decrease in foreign revenues of 5%. We do not regard this as a material trend, but as part of a normal variation resulting from low volumes of foreign sales.

Overall, for the first three months of fiscal 2013, revenues for the medical equipment segment decreased by 19.8% to $3.8 million from $4.7 million for the first three months of fiscal 2012.

The revenues generated by HMCA-IMPERIAL increased by 17.0%, to $5.7 million for the first three months of fiscal 2013 as compared to $4.9 million for the first three months of fiscal 2012. This trend reflects an increase in the percentage of our revenues derived from our diagnostic facilities management segment relative to our revenues derived from our medical equipment segment (60.3% for the first three months of fiscal 2013 compared to 51.0% for the first three months of fiscal 2012). The increase in HMCA-IMPERIAL revenues was the result of increased marketing efforts for the scanning centers and the opening of a new center.

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 recognized revenue results from revenues from a scanner sale are recognized in a fiscal quarter or quarters following the quarter in which the sale was made.

Costs related to product sales decreased by 28.4% from $1.5 million in the first quarter of fiscal 2012 to $1.1 million in the first quarter of 2013, resulting from a decrease in the manufacturing activity.

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Costs related to providing service for the first quarter increased by 6.5% from $821,000 in the first quarter of fiscal 2012 to $874,000 in fiscal 2013, notwithstanding a decrease in service revenues of only 6.7%, from $2.9 million in the first quarter of fiscal 2012 to $2.7 million in the first quarter of fiscal 2013. Certain of the costs of providing service (employee salaries and overhead, for example) are not directly tied to revenue. Notwithstanding the foregoing, 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.

Overall, the operating results for our medical equipment segment decreased to an operating income of $227,000 for the first quarter of fiscal 2013 as compared to an operating income of $751,000 for the first quarter of 2012.

HMCA-IMPERIAL revenues increased in the first quarter of fiscal 2013 by 17.0% to $5.7 million from $4.9 million for the first quarter of fiscal 2012, primarily due to increased revenues from our New York locations. Contributing to the increase in revenue was the increase in management and other fees resulting from renegotiating our annual management contracts with the professional corporations we manage, the opening of a new facility along with the acquisition of a new billing and collection contract with Health Diagnostics LLC.

We now manage eleven sites, all of which are equipped with FONAR UPRIGHT® MRI scanners. HMCA-IMPERIAL experienced an operating income of $1.6 million for the first three months of fiscal 2013 compared to operating income of $1.0 million for the first three months of fiscal 2012. The greater operating income was due primarily to an increase in management and other fees and the acquisition of a new billing and collection contract.

HMCA-IMPERIAL cost of revenues for the first three months of fiscal 2013 as compared to the first three months of fiscal 2012 remained constant at $3.0 million. HMCA’s cost of revenues include expenditures we have been making to improve HMCA revenues through our marketing efforts, which focus on the unique capability of our Upright® MRI Scanners to scan patients in different positions.

The decrease in our consolidated net revenues of 1.0% from $9.6 million in the first quarter of fiscal 2012 to $9.5 million in the first quarter of fiscal 2013 was coupled with a decrease of 2.7% in total costs and expenses from $7.8 million in the first quarter of fiscal 2012 compared to $7.6 million in the first quarter of fiscal 2013. As a result, our income from operations of $1.8 million in the first quarter of fiscal 2012 increased to $1.9 million in the first quarter of fiscal 2013.

Selling, general and administrative expenses increased by 8.3% to $2.2 million in the first three months of fiscal 2013 from $2.0 million in the first three months of fiscal 2012. The compensatory element of stock issuances, which is included in selling, general and administrative expenses, was $0 for the first three months of fiscal 2013 and for the first three months of fiscal 2012.

Research and development expenses increased by 0.3% to $330,000 for the first three months of fiscal 2013 as compared to $329,000 for the first three months of fiscal 2012.

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Interest expense in the first three months of fiscal 2013 decreased by 29.0% to $76,000 from $107,000 in the first three months of fiscal 2012.

Inventories increased by 14.7% to $2.5 million at September 30, 2012 as compared to $2.2 million at June 30, 2012 representing the purchase of raw materials and components in our inventory to fill orders.

Management fee and medical receivables increased by 17.8% to $6.0 million at September 30, 2012 from $5.1 million at June 30, 2012, primarily due to renegotiated management fee contracts with an unrelated party coupled with decreased collections of outstanding receivables.

The overall trends reflected in the results of operations for the first three months of fiscal 2013 are an increase in revenues from management and other fees, as compared to the first three months of fiscal 2012 ($5.7 million for the first three months of fiscal 2013 as compared to $4.9 million for the first three months of fiscal 2012), and a decrease in MRI equipment segment revenues both absolutely ($3.8 million as compared to $4.7 million) and as compared to HMCA-IMPERIAL revenues. Revenues were $3.8 million or 39.7% from the MRI equipment segment as compared to $5.7 million or 60.3% from HMCA-IMPERIAL, for the first three months of fiscal 2013, as compared to $4.7 million or 49% from the MRI equipment segment and $4.9 million or 51%, from HMCA-IMPERIAL, for the first three months of fiscal 2012.

On March 23, 2010, President Obama signed into law healthcare reform legislation in the form of the Patient Protection and Affordable Care Act (PPACA). The implementation of this law could have a profound impact on the healthcare industry. Many of the most substantive provisions of PPACA will be phased in commencing in January, 2013. Certain of PPACA’s provisions are already in effect. Many provisions will require the federal government and individual state governments to interpret and implement the new requirements and adopt appropriate regulations. Although PPACA remains the subject of significant debate, the Act has been held constitutional by the United States Supreme Court, and there is no indication that the Act will be repealed or substantially modified in the foreseeable future. We are unable to predict how many of the legislative mandates contained in PPACA will be implemented or how they will affect our MRI equipment segment or HMCA-IMPERIAL in practice.

We are committed to improving the operating results we experienced in the first three months in fiscal 2013. Nevertheless, factors beyond our control, such as the timing and rate of market growth which depend on economic conditions, including the availability of credit, payor reimbursement rates and policies, and unexpected expenditures or the timing of such expenditures, make it problematical to forecast future operating results. We believe we are pursuing the correct policies which should prove successful in improving the Company’s operating results.

Our FONAR UPRIGHT® MRI, and Fonar-360™ MRI scanners, together with our works-in-progress, are intended to significantly improve our competitive position.

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Our FONAR 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. A floor-recessed elevator brings the patient to the height appropriate for the targeted image region. A custom-built adjustable bed will allow patients to sit or lie on their backs, sides or stomachs at any angle. Full-range-of-motion studies of the joints in virtually any direction are possible and another promising feature for sports injuries.

Fonar recently announced a major diagnostic breakthrough in multiple sclerosis achieved with advanced UPRIGHT® MRI. In a newly published paper, medical researchers at FONAR report a diagnostic breakthrough in multiple sclerosis (MS), based on observations made possible by the Company’s unique FONAR 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 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 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," has just been published and appears in the latest issue of the journal Physiological Chemistry and Physics and Medical NMR (Sept. 20, 2011, 41: 1-17).

Recently, this capability of the FONAR UPRIGHT® technology has demonstrated its key value on patients with the Arnold-Chiari syndrome, which is believed to affect 200,000 to 500,000 Americans. In this syndrome, brain stem compression and subsequent severe neurological symptoms occur in these patients, when because of weakness in the support tissues within the skull, the brain stem descends and is compressed 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 the pathology since the patient's pathology is most visible and the symptoms most acute when the patient is scanned in the upright weight-bearing position.

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The UPRIGHT® MRI has also demonstrated its value for patients suffering from scoliosis. Scoliosis patients have been typically subjected to routine x-ray exams for years and must be imaged upright for an adequate evaluation of their scoliosis. Because the patient must be standing for the exam, an x-ray machine has been the only modality that could provide that service. The UPRIGHT® MRI is the only MRI scanner which allows the patient to stand during the MRI exam. Fonar has developed a new RF receiver and scanning protocol that for the first time allows scoliosis patients to obtain diagnostic pictures of their spines without the risks of x-rays. A recent 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® Multi-Position™ 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 Dynamic™ FONAR UPRIGHT® MRI to detect spine pathology, including spondylolisthesis, disc herniations and disc degneration, as compared to visualizations of the spine produced by traditional single position static MRIs.

The UCLA study by MRI of 1,302 back pain patients when they were UPRIGHT® 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 Dynamic™ Multi-Position™ 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® Multi-Position™ 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.

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Most recently a combined study of 1,200 neck pain patients published in “Brain Injury” (July 2010: 24(7-8): 988-944) by 8 university medical centers reported that cerebellar tonsil ectopia (CTE) 1mm or greater was found and visualized 2.5 times (250%) more frequently when patients who had sustained MVA whiplash injuries were scanned upright rather than lying down (recumbent).

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.

The Fonar 360™ is an enlarged room sized magnet in which the floor, ceiling and walls of the scan room are part of the magnet frame. This is made possible by Fonar’s patented Iron-Frame™ technology which allows the Company’s engineers to control, contour and direct the magnet’s lines of flux in the patient gap where wanted and almost none outside of the steel of the magnet where not wanted. Consequently, this scanner allows surgeons and other interventional physicians to walk inside the magnet and achieve 360 degree access to the patient to perform interventional procedures.

The Fonar 360™ is presently marketed as a diagnostic scanner and is sometimes referred to as the Open Sky™ MRI. In its Open Sky™ version, the Fonar 360™ serves as an open patient friendly scanner which allows 360 degree surgical access to the patient on the scanner bed. To optimize the patient-friendly character of the Open Sky™ MRI, the walls, floor, ceiling and magnet poles are decorated with landscape murals. The patient gap is twenty inches and the magnetic field strength, like that of the FONAR UPRIGHT®, is 0.6 Tesla.

In the future, we expect the Fonar 360™ to function as an interventional MRI. The enlarged room sized magnet and 360º access to the patient afforded by the Fonar 360™ permits surgeons to walk into the magnet and perform surgical interventions on the patient under direct MR image guidance. Most importantly the exceptional quality of the MRI image and its capacity to exhibit tissue detail on the image, can then be obtained real time during the procedure to guide the interventionalist. Thus surgical instruments, needles, catheters, endoscopes and the like could be introduced directly into the human body and guided directly to a malignant lesion using the MRI image. The number of inoperable lesions could be significantly reduced by the availability of this new FONAR technology. Most importantly treatment can be carried directly to the target tissue.

The first Fonar 360™ MRI scanner, installed at the Oxford-Nuffield Orthopedic Center in Oxford, United Kingdom, is now carrying a full diagnostic imaging caseload. In addition, development of the work in progress Fonar 360™ MRI image guided interventional technology is actively progressing. Fonar software engineers have completed and installed their 2nd generation tracking software at Oxford-Nuffield which is designed to enable the surgeons to insert needles into the patient and accurately advance them, under direct visual image guidance, to the target tissue, such as a tumor, so that therapeutic agents can be injected.

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The Company expects marked demand for its most commanding MRI products, the FONAR UPRIGHT® MRI and the Fonar 360™ because of their exceptional features in patient diagnosis and treatment. These scanners additionally provide improved image quality and higher imaging speed because of their higher field strength of .6 Tesla. The geometry of the FONAR UPRIGHT® MRI magnet and its transverse magnetic field enables the use of two detector rf coils operating in quadrature which increases the FONAR UPRIGHT® MRI signal to noise ratio by 40%, providing a signal to noise ratio equal to a .84T recumbent only MRI scanner.

Liquidity and Capital Resources

Cash, cash equivalents and marketable securities increased by 7.3% from $12.0 million at June 30, 2012 to $12.9 million at September 30, 2012.

Cash provided by operating activities for the first three months of fiscal 2013 was $1.6 million. Cash provided by operating activities was attributable to net income of $1.8 million, a decrease of other current liabilities of $536,000, offset by an increase in inventories of $322,000, an increase in costs and estimated earnings on uncompleted contracts of $30,000 and with an increase in accounts, management fee and medical receivables of $979,000.

Cash used in investing activities for the first three months of fiscal 2013 was $247,000. The principal uses of cash used in investing activities during the first three months of fiscal 2013 consisted of capitalized software and patent costs of $36,000, and the purchase of property and equipment of $211,000.

Cash used in financing activities for the first three months of fiscal 2013 was $513,000. The uses of cash in financing activities during the first three months of fiscal 2013 were the repayment of principal on long-term debt and capital lease obligations of $266,000, along with distributions to noncontrolling interests of $249,000.

Total liabilities increased by 1.4% to $22.8 million at September 30, 2012 from $22.5 million at June 30, 2012. Other current liabilities increased from $7.7 million at June 30, 2012 to $8.0 million at September 30, 2012 coupled with a decrease in long-term debt and capital leases from $777,000 at June 30, 2012 to $706,000 at September 30, 2012, an increase in accounts payable from $2.1 million at June 30, 2012 to $2.2 million at September 30, 2012. Unearned revenue on service contracts increased to $5.7 million at September 30, 2012 as compared to $5.5 million at June 30, 2012.

As of September 30, 2012, the total of $8.0 million in other current liabilities included accrued salaries and payroll taxes of $536,000, accrued interest and penalties of $2.2 million and sales taxes of $2.9 million.

Our working capital increased to $6.4 million at September 30, 2012 from $4.8 million at June 30, 2012. This resulted from an increase in current assets ($25.9 million at June 30, 2012 as compared to $27.9 million at September 30, 2012), in particular an increase in inventories of $300,000 ($2.2 million at June 30, 2012 as compared to $2.5 million at September 30, 2012), and an increase of accounts, management and other fees receivable of $803,000 ($10.2 million at June 30, 2012 as compared to $11.0 million at September 30, 2012), slightly offset by an increase in current liabilities from $21.1 million at June 30, 2012 to $21.5 million at September 30, 2012.

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Fonar has not committed to making any significant capital expenditures in the remainder of the 2013 fiscal year.

Our business plan calls for a continuing emphasis on providing our customers with enhanced equipment service and maintenance capabilities and delivering state-of-the-art, innovative and high quality equipment and upgrades at competitive prices. Also critical to our business plan are improvement and expansion of the MRI facilities managed by our subsidiary HMCA-IMPERIAL.

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

The Company continues to focus its efforts on increased marketing campaigns to strengthen the demand for its products and services. Management is seeking to promote wider market recognition of Fonar’s scanner products, and increase demand for Upright® scanning at the facilities HMCA-IMPERIAL manages. Given the liquidity and credit constraints in the markets, the sale of medical equipment has and may continue to suffer. There can be no assurance that the Company would be able to secure additional funds in the event such funds were needed on terms and conditions acceptable to the Company. In such case, reduction in operating expenses might need to be implemented in order for the Company to generate positive cash flow to sustain the operations of the Company.

Management anticipates that Fonar’s capital resources will improve if (1) Fonar’s MRI scanner products gain wider market recognition and acceptance resulting in increased product sales, (2) service and maintenance revenues increase as the warranties on scanners expire and (3) HMCA-IMPERIAL revenues can be increased through the Company’s vigorous marketing efforts and the installation of more HMCA-IMPERIAL managed Upright® MRI scanners. If our marketing efforts to increase revenues fail, and we are unable to raise debt or equity capital, we will experience a shortfall in cash, and it will be necessary to reduce operating expenses to attempt to avoid the need to curtail our operations. Current economic, credit and political conditions have contributed to a challenging business environment for our company. The precise impact of these conditions can not be fully predicted. There can be no assurance that we would be able to secure additional funds if needed.

The Company believes that its business plan has been responsible for the past two consecutive fiscal years of profitability (fiscal 2012 and fiscal 2011) and that its capital resources will be adequate to support operations at current levels through September 30, 2013. The Company also has experienced, however, 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 tax on sales of medical equipment, 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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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

Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rule 13(a)-15(e)) are designed to ensure that information required to be disclosed by a public company in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a public company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow for timely decisions regarding required disclosure. Disclosure controls and procedures include many aspects of internal control over financial reporting.

In connection with the preparation of this Quarterly Report on Form 10-Q for the three months ended September 30, 2012, management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act and have determined that such controls and procedures were effective as of September 30, 2012.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal controls or in other factors that could significantly affect these controls, during the quarter ended September 30, 2012, that have materially affected, or are reasonably likely to materially affect, our 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, 2012. In the Golden Triangle Company v. Fonar Corporation et al case (U.S. District Court for the Eastern District of New York CV10-2932), the Company made a motion to dismiss the plaintiff’s amended complaint, which was granted, leaving only the cause of action for breach of contract. The claims against the individual officers and employees were also dismissed. Fonar filed its answer to the complaint, together with a counterclaim alleging the plaintiff, by attempting to overcharge the end customer has damaged Fonar’s reputation and ability to sell in Kuwait. The plaintiff, in turn, has answered our counterclaim. The case is now in discovery, with a deadline of December 31, 2012 to complete discovery.

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FONAR CORPORATION AND SUBSIDIARIES

In the Matt Malek Madison v. Fonar case (U.S. District Court, Northern District of California), Fonar appealed the judgment against it, but the U.S. Court of Appeals for 9th Circuit affirmed the judgment of the District Court on January 31, 2012, awarding the plaintiff the $300,000 deposit with prejudgment interest from July 1, 2006. The $300,000 plus interest of $72,000 has been accrued as of September 30, 2012. Although we asked the Court of Appeals to reconsider its decision in an en banc (larger panel of judges) proceeding, our request was not granted. Notwithstanding the outstanding judgment, the plaintiff has not to our knowledge taken any steps to enforce the judgment against us.

In the Bonutti Research v. Fonar et al case (U.S. District Court, Eastern District of New York), Bonutti Research filed an action on December 2, 2011 alleging that Fonar’s Upright® MRI scanners infringe plaintiff’s patent, which relates to the moving of a patient into the scanner. Fonar believes plaintiff’s claims are without merit and further, that the patent is invalid. The plaintiff served the complaint on the last possible day permitted after filing. The defendants obtained an extension of time to answer to May 18, 2012. Subsequently, on or about July 3, 2012, Bonutti hired new substitute counsel and requested a 60 day extension to answer Fonar’s counterclaims and to postpone the initial conference. Bonutti has answered our counterclaims and discovery commenced. We have now made a motion to dismiss the case. At this point we are unable to assess the amount in controversy as no damages were specified. The patent has expired.

Item 1A – Risk Factors: Not required. We are a smaller reporting company.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds: None

Item 3 - Defaults Upon Senior Securities: None

Item 4 - Mine Safety Disclosure: None

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 October 2, 2012, Item 2.02: Results of Operations and Financial Condition for the fiscal year ended June 30, 2012.

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/ Raymond V. Damadian

Raymond V. Damadian

President & Chairman

Dated: November 14, 2012

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