Quarterly Report for Quarter Ending SEPTEMBER 30, 2025 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in Part I, item 1 of the Quarterly Report on Form 10-Q and with our audited consolidated financial statements and notes thereto for the year ended June 30, 2024 included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2025 filed with the U.S. Securities and Exchange Commission ("SEC") on September 22, 2025.

Forward Looking Statements

We make statements in this Quarterly Report on Form 10-Q regarding our assumptions, projections, expectations, targets, intentions or beliefs about future events. All statements, other than statements of historical facts, included or incorporated by reference herein relating to management's current expectations of future financial performance, continued growth and changes in economic conditions or capital markets are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

Forward-looking statements involve risks and uncertainties which could cause actual results to differ materially from those expressed. We caution that while we make such statements in good faith and we believe such statements are based on reasonable assumptions, including without limitation, management's examination of historical operating trends, data contained in records and other data available from third parties, we cannot assure you that our projections will be accurate. Factors that may cause such differences include: economic conditions generally and in each of the markets in which we are located, the amount of sales contributed by new and existing locations, labor costs for our personnel, and the level of competition from existing or new competitors.

While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of unknown factors, and it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this report in the context of the factors that could cause outcomes to differ materially from our expectations.

The forward-looking statements included in this report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law.

FONAR CORPORATION AND SUBSIDIARIES

Critical Accounting Estimates

There have been no material changes in our Critical Accounting Estimates from the information provided in the "Critical Accounting Estimates" section of "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended June 30, 2025.

Recent Developments

On July 7, 2025, the Board of Directors received a non-binding proposal from a group led by Timothy Damadian, the Company's Chief Executive Officer, and Luciano Bonanni, the Company's Chief Operating Officer, pursuant to which proposal the group would acquire all of the outstanding common stock and other securities of the Company not currently owned by the members of the group. Members of the group have voting control of the Company's equity securities and the group advised the Company that it was unwilling to support any alternative transaction. As proposed, the transaction, if completed, would result in the Company no longer being a publicly held company, and its Common Stock would be de-listed from the NASDAQ Stock

Market. The Board of Directors has established a Special Committee of independent and disinterested directors to consider the proposal and negotiate on behalf of the Company and its stockholders. The Special Committee has retained Marshall and Stevens, Inc. to act as its financial advisor. Meister, Seelig & Fein PLLC is serving as legal counsel to the Special Committee. The group and the Special Committee are engaged in negotiations related to the proposed going private transaction. No definitive agreements or terms have been executed by the parties and there is no assurance that the transaction will be completed. Any definitive agreement and transaction will require approval by the Company's common stock holders and will require the filing of definitive proxy materials in accordance with the SEC's proxy rules to obtain such approval.

Results of Operations

We operate in two reportable segments: the manufacture and servicing of medical ("MRI") equipment, which is conducted by FONAR and diagnostic facilities management services, which is conducted through HMCA.

For the three month period ended September 30, 2025, we reported net income of $2.7 million on revenues of $26.0 million as compared to net income of $4.0 million on revenues of $25.0 million for the three month period ended September 30, 2024. Operating income decreased from $4.6 million for the three month period ended September 30, 2024 to $3.2 million for the three month period ended September 30, 2025. Revenues from product sales and service and repair fees increased from $2.2 million for the first three months of fiscal 2025 as compared to $2.5 million for the first three months of fiscal 2026.

The revenue increase, from $25.0 million for the three months of fiscal 2025 to $26.0 million for the three months of fiscal 2026, was due to increases in management and other fees of $612,000, from $15.3 million for the three months of fiscal 2025 to $16.0 million for the three months of fiscal 2026 along with increases in product sales and service and repair fees of $386,000, from $2.2 million for the three months of fiscal 2025 to $2.5 million for the three months of fiscal 2026. This was in addition to an increase of approximately $85,000 in patient fee revenue from $7.5 million for the first three months of fiscal 2025 to $7.6 million for the first three months of fiscal 2026.

FONAR CORPORATION AND SUBSIDIARIES

During the first quarter of fiscal 2026, the aggregate number of scans performed by the sites we own and manage increased to 55,106 scans from 53,054 scans in the first quarter of fiscal 2025. This increase can be attributable to hurricane related closures in the first quarter of 2025. Also we have had improvements in our information technology systems, increased shift coverage, and increased capacity from our recent equipment expansions.

The combination of our small increase in revenues along with our costs and expenses increasing at a larger rate caused our operating income to decrease to $3.2 million for the three months ended September 30, 2025 as compared to $4.6 million for the three months ended September 30, 2024. In terms of percentages, costs and expenses increased 12.2% to $22.8 million for the first three months of fiscal 2026 as compared to $20.4 million for the first three months of fiscal 2026, while revenues increased 4.3% to $26.0 million for the first three months of fiscal 2026 as compared to $25.0 million for the first three months of fiscal 2025.

The increase in costs and expenses is attributable to several factors. The three months ending September 30, 2024 included a one-time expense adjustment of approximately $600,000 for expenses over-accrued over a period of several years. The Company also incurred expenses related to the proposed take private transaction on the form of independent director compensation, legal fees and financial advisor fees. The Company also made several expenditures related to information technology software and cybersecurity improvements in response to deficiencies that were identified during our most recent audit. Further, we took additional credit losses of $100,000 which was mainly due to increase reserves for the outstanding balance of American Transit Insurance Company. American transit Insurance Company has not announced any significant changes in its financial conditions since its announcement of an $815 million net underwriting loss in 2024. Other additional costs incurred were due to the expenses relating to our subsidiary dedicated to the maintenance and repair of non-FONAR equipment and other various costs pertaining to the distribution of SwiftMR™ software. These costs were lower in the prior period.

The combination of our revenues increasing at a smaller percentage as compared to our costs and expenses increasing at a higher rate caused our operating income to decrease from at $4.6 million for the three-month period ended September 30, 2024 as compared to $3.2 million for the three months ended September 30, 2024. In terms of percentages, costs and expenses increased 12.2% to $22.8 million for the three months ended September 30, 2025 as compared to $20.4 million for the three months ended September 30, 2024, while revenues increased 4.3% to $26.0 million for the three months end September 30, 2025 as compared to $25.0 million for the three months ended September 30, 2024.

Management of Diagnostic Imaging Centers

HMCA revenues increased in the first three months of fiscal 2026 by 0.3% to $23.5 million from $22.8 million for the first three months of fiscal 2024. The percentage of our revenues derived from our diagnostic facilities management segment relative to the percentage of our total revenues decreased slightly to 90.2% for the first three months of fiscal 2026, from 91.4% for the first three months of fiscal 2025.

HMCA's operating income for the first three months of fiscal 2026 was $4.4 million compared to operating income of $5.6 million for the first three months of fiscal 2025. The increase in operating revenue was offset by a combination of increased costs and expenses.

HMCA's cost of revenues for the first three months of fiscal 2026 increased to $14.2 million as compared to $13.5 million for the first three months of fiscal 2025. This increase is the result of increased expenses from scanning volume at our HMCA-managed sites, where revenues are fixed pursuant to the management agreements.

FONAR CORPORATION AND SUBSIDIARIES

We now mange or own a total of 44 MRI scanners. Twenty-six (26) MRI scanners are located in New York and eighteen (18) are located in Florida. The ability of HMCA to maintain its profitability 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.

Medicare reimbursement rates for MRI scans continue to see year over year reductions. This also results in a reduction in the reimbursement rates by commercial insurers and government programs which tie their reimbursement rates to the Medicare rates. On October 15, 2025, The Center for Medicare Services ('CMS") initially announced that it would pause payments for services rendered after October 1, 2025 due to the federal government shutdown. CMS subsequently limited that announcement to certain telehealth and other services. However, CMS may change its position in the future if the shutdown continues, and we anticipate slower claims processing time and increased delays in reimbursement while the government remains shutdown. The patient volume of the scanning centers we manage or own has enabled us to maintain healthy operating results in spite of these reductions. We are committed to improving our operating results and dealing with the challenges posed by legislative and regulatory requirements. Factors beyond our control, such as federal government shutdowns, 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.

Medical Equipment - Manufacturing and Service of MRI Equipment

Revenues from MRI product sales increased to $316 for the first three months of fiscal 2026 from $120 for the first three months of fiscal 2025. Costs related to product sales increased from $221 for the three month period ended September 30, 2024 to $324 for the three month period ended September 30, 2025. Economic uncertainty and lower reimbursement rates for MRI scans, have depressed the market for our MRI scanner products, notwithstanding our scanners' unique technological capabilities (e.g., multi-positional scanning). Due to the low sales volumes of our MRI product, period to period comparisons are not necessarily indicative of any trends.

Service revenues increased to $2.5 million for the three month period ended September 30, 2025 from $2.2 million for the three month period ended September 30, 2024.

Costs relating to providing service decreased to $1.1 million in the first three months of fiscal 2026 as compared to $1.2 million for the first three months of fiscal 2025. These costs are attributable to spending on our subsidiary dedicated to the maintenance and repair of non-FONAR MRI equipment, and various costs related to the marketing and distribution of SwiftMR™ software. Because of 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 and costly problems develop, we have been able to contain our costs of providing service.

There were approximately $212 in foreign revenues for the first three months of fiscal 2026 as compared to $159 for the first three months of fiscal 2025. 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.

FONAR CORPORATION AND SUBSIDIARIES

Consolidated

For the first three months of fiscal 2026, our consolidated net revenues increased by 4.3% to $26.0 million from $25.0 million for the first three months of fiscal 2025, and total costs and expenses increased by 12.2% to $22.8 million from the first three months of fiscal 2026 as compared to $20.4 million for the first three months of fiscal 2025, respectively. As a result, our operating income decreased to $3.2 million in the first three months of fiscal 2026 as compared to $4.6 million in the first three months of fiscal 2025. An increase in selling, general and other administrative costs and costs related to management and other fees in particular resulted in cost and expenses increase at a much higher percentage as compared to the increase in net revenues.

Selling, general and administrative expenses increased to $6.8 million in the first three months of fiscal 2026 from $5.1 million in the first three months of fiscal 2025. As detailed above, several factors contributed to this increase, including expenses related to the proposed take private transaction, spending associated with information technology and cybersecurity infrastructure improvement, and the fiscal 2025 adjustment of expense accrual.

Research and development expenses increased by 4.3% to $440,000 for the first three months of fiscal 2026 from $307,000 for the first three months of fiscal 2025.

Interest expense (both related and unrelated) in the first three months of fiscal 2026 decreased by 25.0% to $12 from $15 in the first three months of fiscal 2025.

The results of operations for the first three months of fiscal 2026 reflect an increase in revenues from management, patient and other fees, as compared to the first three months of fiscal 2025 ($23.5 million for the first three months of fiscal 2026 as compared to $22.8 million for the first three months of fiscal 2025), coupled with an increase in the total cost and expenses ($22.8 million for the first three months of fiscal 2026 as compared to $20.4 million for the first three months of fiscal 2025). Revenues were 9.8% from the MRI equipment segment and 90.2% from HMCA, for the first three months of fiscal 2026, as compared to 8.6% from the MRI equipment segment and 91.4% from HMCA for the first three months of fiscal 2025.

Liquidity and Capital Resources

FONAR's wholly-owned subsidiary, Health Management Corporation of America ("HMCA"), has the controlling interest in Health Diagnostics Management, LLC ("HDM"). HMCA presently has a direct ownership interest of 70.6% in HDM, and the investors in HDM have a 29.4% ownership interest. The management of the diagnostic imaging centers business segment is being conducted by HDM, operating under the name "Health Management Company of America". For the sake of simplicity, HMCA, and HDM are referred to as "HMCA", unless otherwise indicated.

Cash and cash equivalents, and short-term investments decreased from $56.3 million at June 30, 2025 to $54.3 million at September 30, 2025.

Cash provided by operating activities for the first three months of fiscal 2026 was $1.7 million. Cash provided by operating activities was attributable principally to net income of $2.7 million, adjusted for depreciation and amortization of $1.2 million, provision for credit losses of $99, increase in accounts payable of $1.2 million and an decrease in prepaid expenses and other current assets of $340, offset primarily by an increase in accounts, management fee receivables and medical receivables of $1.5 million, an decrease of other assets of $378, and a decrease in other current liabilities of $2.1 million.

FONAR CORPORATION AND SUBSIDIARIES

Cash used in investing activities for the first three months of fiscal 2026 was $2.4 million. Cash used in investing activities during the first three months of fiscal 2026 consisted of anon-compete contract of $500, and the purchase of property and equipment of $1.9 million.

Cash used in financing activities for the first three months of fiscal 2026 was $1.4 million. The principal uses of cash in financing activities during the first three months of fiscal 2026 was distributions to non-controlling interests of $1.4 million.

Total liabilities increased by 0.3% to $57.0 million at September 30, 2025 from $56.8 million at June 30, 2025. "Other" current liabilities decreased by 27.1% to $5.1 million at September 30, 2025 from $7.0 million at June 30, 2025. Accounts payable increased by 93.5% to $2.6 million at September 30, 2025 as compared to $1.3 million at June 30, 2025. The long-term portion of operating lease liability increased from $35.1 million at June 30, 2025 to $35.9 million at September 30, 2025.

As of September 30, 2025, the total of $5.1 million in "other" current liabilities included accrued salaries and payroll taxes of $2.1 million, utilities payable of $346, equipment purchases of $551, property taxes of $438 and other general and administrative expenses of $538.

Our working capital decreased to $127.1 million at September 30, 2025 from $127.5 million at June 30, 2025. This resulted from a decrease in current assets ($144.7 million at June 30, 2025 as compared to $143.7 million at September 30, 2025), and a decrease in current liabilities from $17.1 million at June 30, 2025 to $16.7 million at September 30, 2025.

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 or when such net operating losses can be utilized. The Company considers projected future taxable income, the regulatory environment of the industry, and tax planning strategies in making this assessment. At the present, the Company believes that it is more likely than not that the benefits from certain deferred tax asset carryforwards, will not all be fully realized. In recognition of this inherent risk, a valuation allowance was established for separate state net operating losses that are not expected to be fully utilized. A valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of any portion or all of the valuation allowance.

The Company's effective income tax rate is based on expected income, statutory rates and tax planning opportunities available in the various jurisdictions in which it operates. For interim financial reporting, the Company estimates the annual income tax rate based on projected taxable income for the full year and records a quarterly income tax provision or benefit in accordance with the anticipated annual rate. The Company refines the estimates of the year's taxable income on a periodic basis as new information becomes available, including actual year-to-date financial results. This continual estimation process often results in a change to the expected effective income tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected income tax rate. Significant judgment is required in determining the effective tax rate and in evaluating tax positions.

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 preformed 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.

FONAR CORPORATION AND SUBSIDIARIES

We have committed to making material capital expenditures in the 2026 fiscal year. We expect to complete the installation of an additional high field scanner in Lynbrook, New York in the second quarter of fiscal 2026. The capital expenditures for this project will approximate $1.5 million for the purchase of a new scanner. We also intend to open an additional location on Long Island, New York, and we hope to have that center operational before the end of the fiscal year. The expected costs of this project will be approximately $400,000 for the purchase of a new scanner and approximately $500,000 in related buildout costs.

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 high level of competition in the marketplace, the sale of medical equipment has and may continue to suffer.

We are not aware of any other trends or events that would materially affect our capital requirements or liquidity. We believe that our existing cash balances, internal cash generating capabilities and ability to secure additional financing, if necessary, are sufficient to finance our capital expenditures and other operating activities for at least the next twelve months. The Company also believes that its business plan has been responsible for its profitability in the past ten consecutive fiscal years and first three months of fiscal 2026, and that its capital resources will be adequate to support operations through a year from the date of filing. The future effects on our business of healthcare legislation, the tariffs on sales of foreign made medical equipment, reimbursement rates, public health conditions 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 and other causes.