Quarterly Report for Quarter Ending DECEMBER 31, 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 are often identified by words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "might," "outlook," "plan," "predict," "project," "should," "target," "will," "would," and similar expressions, although not all forward-looking statements contain these words.

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, but are not limited to: 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. Other factors, many of which are beyond our control, may also impact our forward-looking statements. We caution our stockholders that any forward-looking statements are not guarantees of future performance and may involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements.

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. 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

FONAR CORPORATION AND SUBSIDIARIES

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. All forward-looking statements are expressly qualified in their entirety by these cautionary statements.

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.

Proposed Going-Private Transaction

On December 23, 2025, the Company entered into the Merger Agreement with Parent, and Merger Sub. The Merger Agreement provides that, subject to the terms and conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation and a subsidiary of Parent following such Merger. Parent and Merger Sub are each affiliated with and owned and controlled, by Timothy Damadian, the Company's Chief Executive Officer and Chairman of our Board of Directors. Timothy Damadian and other members of a group of 57 total (including Parent and Merger Sub) individuals, trusts, corporations and limited liability companies (we refer to this group, collectively, as the "Acquisition Group") have proposed to acquire the Company pursuant to and on the terms and conditions set forth in the Merger Agreement.. Under the Merger Agreement, at the Effective Time, each share of our capital stock issued and outstanding immediately prior to the Effective Time (other than Excluded Shares, defined below) will be converted into the right to receive cash, without interest and subject to deduction for any required withholding tax, in an amount equal to the applicable Per Share Price of: (i) $19.00 per share of Common Stock, (ii) $19.00 per share of Class B Common Stock, (iii) $6.34 per share of Class C Common Stock, and (iv) $10.50 per share of Class A Non-voting Preferred Stock. Excluded Shares (including shares held by Parent, by the Company or any of their respective subsidiaries, and treasury shares) will not receive any Merger consideration. Pursuant to the terms of the Equity Commitment Agreements, the members of the Acquisition Group who are FONAR stockholders will, immediately prior to the Merger, cause all of their shares of Company Capital Stock and Class A Non-voting Preferred Stock to be contributed (or, alternatively, may elect to contribute an amount of cash equal to the aggregate Per Share Price for all of their FONAR shares) to Parent in exchange for membership units of Parent. All of such shares contributed to Parent are Excluded Shares that at the Effective Time will not receive any Merger consideration.

Consummation of the Merger is subject to the satisfaction or waiver (to the extent permitted by applicable law) of the conditions set forth in the Merger Agreement, including: (1) the approval by the Requisite Company Vote of the Company's stockholders at the Special Meeting, in favor of the adoption of the Merger Agreement providing for the Merger; (2) the expiration or termination of any applicable waiting periods; (3) the consummation of the Merger not being restrained, enjoined, rendered illegal or otherwise prohibited by any law or order of any governmental authority of competent jurisdiction; (4) the receipt of all consents, approvals and other authorizations of any governmental entity required to consummate the Merger and the other transactions contemplated by the Merger Agreement, free of any condition that would reasonably be expected to have a Company Material Adverse Effect or a material adverse effect on Parent's and Merger Sub's ability to consummate the transactions contemplated by the Merger Agreement; (5) the accuracy of the parties' representations and warranties, subject to certain qualifiers; and (6) the parties' compliance in all material respects with their respective pre-closing covenants, subject to the terms of the Merger Agreement.

We are subject to customary restrictions on our ability to solicit alternative acquisition proposals from third parties and to provide non-public information to, and participate in discussions and engage in negotiations with, third parties regarding alternative acquisition proposals, subject to customary exceptions.

FONAR CORPORATION AND SUBSIDIARIES

For a summary of the transaction, see our Form 8-K filed with the SEC on December 30, 2025

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 six month period ended December 31, 2025, we reported net income of $5.2 million on revenues of $51.6 million as compared to net income of $6.2 million on revenues of $50.0 million for the six month period ended December 31, 2024. Operating income decreased from $7.0 million for the six month period ended December 31, 2024 to $6.2 million for the six month period ended December 31, 2025. Revenues from product sales and service and repair fees increased from $4.0 million for the first six months of fiscal 2025 as compared to $4.9 million for the first six months of fiscal 2026.

For the three month period ended December 31, 2025, we reported a net income of $2.5 on revenues of $25.5 as compared to net income of $2.2 million on revenues of $25.0 for the three month period ended December 31, 2024.

The revenue increase, from $50.0 million for the six months of fiscal 2025 to $51.6 million for the six months of fiscal 2026, was due to increases in management and other fees of $1.3 million, from $30.5 million for the six months of fiscal 2025 to $31.8 million for the six months of fiscal 2026 along with increases in product sales and service and repair fees of $900,000, from $4.0 million for the six months of fiscal 2025 to $4.9 million for the six months of fiscal 2026. This was offset by a decrease of approximately $560,000 in patient fee revenue from $15.4 million for the first six months of fiscal 2025 to $14.9 million for the first six months of fiscal 2026.

The small increase in revenue from $25.0 million for the three month period ended December 31, 2024 to $25.5 for the three month period ended December 31, 2025 can be attributed mainly due and increase in service and repair fees. Services and repair fees for the three month period ended December 31, 2025 was $2.1 million as compared to $1.8 million for the three month December 31, 2024.

During the first half of fiscal 2026, the aggregate number of scans performed by the sites we own and manage increased to 109,952 scans from 106,168 scans in the first half of fiscal 2025. We attribute this increase the absence of hurricane related closures that we experienced in the first quarter of 2025.

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 $6.2 million for the six months ended December 31, 2025 as compared to $7.0 million for the six months ended December 31, 2024. In terms of percentages, costs and expenses increased 5.9% to $45.4 million for the first six months of fiscal 2026 as compared to $42.9 million for the first six months of fiscal 2026, while revenues increased 3.3% to $51.6 million for the first six months of fiscal 2026 as compared to $50.0 million for the first three months of fiscal 2025

In contrast, our operating income increased from $2.4 million for the three months ended December 31, 2024 to $3.0 million for the three months ended December 31, 2025. This is a result of revenues increasing from $25.0 million for the three months ending December 31, 2024 to $25.5 million for the three months ended December 31, 2025 while total costs and expenses remained constant at $22.5 for the three months ended December 31, 2025 and 2024.

FONAR CORPORATION AND SUBSIDIARIES

The increase in costs and expenses is attributable to several factors. The Company also incurred expenses related to the proposed take private transaction in 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 $160,000 which was mainly due to increase reserves for the outstanding balance of American Transit Insurance Company. Other additional costs incurred were due to the expenses relating to our subsidiary dedicated to the maintenance and repair of non-FONAR equipment. These costs were lower in the prior period.

As a result of our costs and expenses increasing at a higher rate than our revenues, our operating income decreased from $7.0 million for the six-month period ended December 31, 2024 to $6.2 million for the six months ended December 31, 2025. In terms of percentages, costs and expenses increased 5.9% to $45.4 million for the six months ended December 31, 2025 as compared to $42.9 million for the six months ended December 31, 2024, while revenues increased 3.3% to $51.6 million for the six months ended December 31, 2025 as compared to $49.9 million for the six months ended December 31, 2024.

Management of Diagnostic Imaging Centers

HMCA revenues increased in the first six months of fiscal 2026 by 1.6% to $46.7 million from $45.9 million for the first six 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 90.5% for the first six months of fiscal 2026, from 92.0% for the first six months of fiscal 2025.

HMCA's revenues remained constant at $23.1 million for the three months ending December 31, 2025 and 2024.

HMCA's operating income for the first six months of fiscal 2026 was $8.9 million compared to operating income of $9.4 million for the first six 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 six months of fiscal 2026 increased to $28.6 million as compared to $27.6 million for the first six months of fiscal 2025. HMCA's cost of revenues also increased from $14.0 million for the three months ended December 31, 2024 to $14.4 million for the three months ended December 31, 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.

We now manage or own a total of 45 MRI scanners. Twenty-seven (27) 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.

FONAR CORPORATION AND SUBSIDIARIES

Medicare reimbursement rates for MRI scans are flat year over year for calendar year 2026. The Medicare rate dictates the reimbursement rates for many commercial insurers and government programs which tie their reimbursement rates to the Medicare rates. In contrast, operational costs, most significantly MRI technologist and radiologist compensation, have been rapidly increasing in recent years. The combination of increasing costs and stagnant reimbursement rates create operational challenges in maintaining our historic performance levels. 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 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 $442,000 for the first six months of fiscal 2026 from $145,000 for the first six months of fiscal 2025. Costs related to product sales increased from $442,000 for the six month period ended December 31, 2024 to $539,000 for the six month period ended December 31, 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 and repair fees revenue increased to $4.5 million for the six month period ended December 31, 2025 from $3.8 million for the six month period ended December 31, 2024. Service and repair fees revenue also increased to $2.2 million for the three month period ending December 31, 2025 from $1.8 million for the three month period ended December 31, 2024.

Costs relating to providing service increased to $2.3 million in the first six months of fiscal 2026 as compared to $2.1 million for the first six months of fiscal 2025. These costs are attributable to spending on our subsidiary dedicated to the maintenance and repair of non-FONAR MRI equipment. Because of our ability to remotely monitor the performance of customers' scanners 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 $314,000 in foreign revenues for the first six months of fiscal 2026 and for the first six months of fiscal 2025.

Consolidated

For the first six months of fiscal 2026, our consolidated net revenues increased by 3.3% to $51.6 million from $50.0 million for the first six months of fiscal 2025, and total costs and expenses increased by 5.9% to $45.4 million from the first six months of fiscal 2026 as compared to $42.9 million for the first six months of fiscal 2025, respectively. As a result, our operating income decreased to $6.2 million in the first six months of fiscal 2026 as compared to $7.0 million in the first six months of fiscal 2025. An increase in selling, general and other administrative costs and costs related to management and other fees resulted in cost and expenses increase at a much higher percentage as compared to the increase in net revenues.

FONAR CORPORATION AND SUBSIDIARIES

Selling, general and administrative expenses increased to $13.1 million in the first six months of fiscal 2026 from $12.1 million in the first six months of fiscal 2025. As detailed above, several factors contributed to this increase, including expenses related to the proposed merger, spending associated with information technology and cybersecurity infrastructure improvement, and the fiscal 2025 adjustment of expense accrual.

Research and development expenses increased by 31.0% to $895,000 for the first six months of fiscal 2026 from $683,000 for the first six months of fiscal 2025.

Interest expense in the first six months of fiscal 2026 decreased by 64.2% to $5 from $14 in the first six months of fiscal 2025.

The results of operations for the first six months of fiscal 2026 reflect an increase in revenues from management, patient and other fees, as compared to the first six months of fiscal 2025 ($46.7 million for the first six months of fiscal 2026 as compared to $45.9 million for the first six months of fiscal 2025), coupled with an increase in the total cost and expenses ($45.4 million for the first six months of fiscal 2026 as compared to $42.9 million for the first six months of fiscal 2025). Revenues were 9.5% from the MRI equipment segment and 90.5% from HMCA, for the first six months of fiscal 2026, as compared to 8.0% from the MRI equipment segment and 92.0% from HMCA for the first six 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 $53.0 million at December 31, 2025.

Cash provided by operating activities for the first six months of fiscal 2026 was $1.9 million. Cash provided by operating activities was attributable principally to net income of $5.2 million, adjusted for depreciation and amortization of $2.3 million, , increase in accounts payable of $609 and an decrease in prepaid expenses and other current assets of $232, offset primarily by an increase in accounts, management fee receivables and medical receivables of $2.3 million, a recovery for credit losses of $337, a decrease of other assets of $415, and a decrease in other current liabilities of $4.2 million.

Cash used in investing activities for the first six months of fiscal 2026 was $2.8 million. Cash used in investing activities during the first six months of fiscal 2026 consisted of a non-compete agreement of $500, and the purchase of property and equipment of $2.3 million.

Cash used in financing activities for the first six months of fiscal 2026 was $2.5 million. The principal uses of cash in financing activities during the first six months of fiscal 2026 was distributions to non-controlling interests of $2.5 million.

FONAR CORPORATION AND SUBSIDIARIES

Total liabilities decreased by 4.3% to $54.4 million at December 31, 2025 from $56.8 million at June 30, 2025. "Other" current liabilities decreased by 52.2% to $3.3 million at December 31, 2025 from $7.0 million at June 30, 2025. Accounts payable increased by 46.2% to $1.9 million at December 31, 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 $35.8 million at December 31, 2025.

As of December 31, 2025, the total of $3.3 million in "other" current liabilities included accrued salaries and payroll taxes of $1.2 million, utilities payable of $127, software licenses of $219, property taxes of $482 and other general and administrative expenses of $579.

Our working capital increased to $129.4 million at December 31, 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 $143.8 million at December 31, 2025), and a larger decrease in current liabilities from $17.1 million at June 30, 2025 to $14.4 million at December 31, 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.

We have committed to making material capital expenditures in the 2026 fiscal year. We intend to open an additional location on Long Island, New York, and we hope to have that center operational before the end of the calendar 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.

FONAR CORPORATION AND SUBSIDIARIES

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 12 months. The Company also believes that its business plan has been responsible for its profitability in the past ten consecutive fiscal years and first six 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.