INTRODUCTION.

Fonar was formed in 1978 to engage in the business of designing, manufacturing and selling MRI scanners. HMCA, a subsidiary of Fonar, provides management services to diagnostic imaging facilities.

Fonar's principal MRI product is its Upright® MRI (also called Stand-Up® MRI) scanner. The Upright® MRI allows patients to be scanned for the first time under weight-bearing conditions. The Stand-Up® MRI is the only MRI capable of producing images in the weight-bearing state.

At 0.6 Tesla field strength, the Upright® MRI is among the highest field open MRI scanners in the industry, offering non-claustrophobic MRI together with high-field image quality. Fonar's open MRI scanners were the first high field strength open MRI scanners in the industry.

HMCA generates revenues from providing comprehensive management services, including development, administration, accounting, billing and collection services, together with office space, medical equipment, supplies and non-medical personnel to its clients. Revenues are in the form of fees which are earned under contracts with HMCA's clients except for its three Florida subsidiaries which engage in the practice of medicine, and bill and collect fees from patients, insurers and other third party payors directly.

The most significant adverse impact on on our Company in fiscal 2020 has been the COVID-19 pandemic. Although it had seemed the worst had passed, events have shown a spike in new cases due primarily to the new Delta strain in the viruses. This is by no means a problem confined to our Company, but regardless of our best efforts, our results of operation and financial condition are potentially volatible and severe.

Since March, 2020 the global pandemic of COVID-19 has caused turbulence and uncertainty in the United States and international economies which have adversely affected our workforce, liquidity, financial conditions, revenues, profitability and business operations. Generally COVID-19 had caused us to require that much of our workforce work from home and has restricted the ability of our personnel to travel for marketing purposes or to service our customers. At the end of fiscal 2020, the Company was able to enact certain decisions to allow the Company to survive during the global pandemic and from further losses or additional decreases in scan volume. The Company also received some government stimulus funds from the Paycheck Protection Program ("PPP) and Medicare advances/stimulus payments. During fiscal 2022, the PPP loan was forgiven in its entirety. During fiscal 2022, the Company had to deal with increased strictness in the enforcement of COVID-19 mandates, such as the requirement that employees in healthcare facilities be vaccinated, along with the newer variants that are more transmissible. As a result, the Company experienced absences due to illness and the loss of unvaccinated employees whose duties required them to be in contact with patients. Due to these conditions, The Company was sometimes unable to keep scanning facilities open for all shifts and as a result there was a slight decrease in scans during the second quarter of fiscal 2022. The Company has been able to navigate through these challenges and avoid any significant disruption of the business and the volume has risen back almost to pre-COVID-19 levels. Although we are unable to predict if there will be additional consequences on our operations from the continuing global pandemic of COVID-19, the Company believes with the positive cash flows, low debt and cash on hand, it will be able to continue operations going forward.





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Critical Accounting Policies

Our discussion and analysis of financial condition and results of operations are based on our consolidated financial statements that were prepared in accordance with U.S. generally accepted accounting principles, or GAAP. Management makes estimates and assumptions when preparing financial statements. These estimates and assumptions affect various matters, including:

our reported amounts of assets and liabilities in our consolidated balance sheets at the dates of the financial statements

our disclosure of contingent assets and liabilities at the dates of the financial statements; and

our reported amounts of net revenue and expenses in our consolidated statements of operations during the reporting periods

These estimates involve judgments with respect to numerous factors that are difficult to predict and are beyond management's control. As a result, actual amounts could differ materially from these estimates.

The Securities and Exchange Commission defines critical accounting estimates as those that are both most important to the portrayal of a company's financial condition and results of operations and require management's most difficult, subjective or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. In the notes to our consolidated financial statements, we discuss our significant accounting policies.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. We recognize revenue and related costs of revenue from sales contracts for our MRI scanners and major upgrades, under the percentage-of-completion method. Under this method, we recognize revenue and related costs of revenue, as each sub-assembly is completed. Amounts received in advance of our commencement of production are recorded as customer advances.

We continuously, qualitatively and quantitatively evaluate the realizability (including both positive and negative evidence) of the net deferred tax assets and assess the valuation allowance periodically. Our evaluation considers the financial condition of the Company and both the business conditions and regulatory environment of the industry. If future taxable income or other factors are not consistent with our expectations, an adjustment to our allowance for net deferred tax assets may be required. For net deferred tax assets we consider estimates of future taxable income, including tax planning strategies, in determining whether our net deferred tax assets are more likely than not to be realized. Our ability to project future taxable income may be significantly affected by our ability to determine the impact of regulatory changes which could adversely affect our future profits. As a result, the benefits of our net operating loss carry forwards could expire before they are utilized.

At June 30, 2021, the net deferred tax asset was valued at $15,958,961. At June 30, 2022, the net deferred tax asset was valued at $12,842,478.





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We depreciate our long-lived assets over their estimated economic useful lives with the exception of leasehold improvements where we use the shorter of the assets useful lives or the lease term of the facility for which these assets are associated.

The Company provides for medical receivables that could become uncollectible by establishing an allowance for doubtful accounts in order to adjust medical receivables to estimated net realizable value. In evaluating the collectability of medical receivables, the Company considers a number of factors, including the age of the account, historical collection experiences, payor type, current economic conditions and other relevant factors. There are various factors that impact collection trends, such as payor mix, changes in the economy, increase burden on copayments to be made by patients with insurance and business practices related to collection efforts. These factors continuously change and can have an impact on collection trends and the estimation process.

We amortize our intangible assets, including patents, and capitalized software development costs, over the shorter of the contractual/legal life or the estimated economic life. Our amortization life for patents and capitalized software development costs is 15 to 17 years and 5 years, respectively. Our amortization of the non-competition agreements entered into with certain individuals in connection with the HDM transaction are depreciated over seven years, and customer relationships are amortized over 20 years.

Goodwill is recorded as a result of business combinations. Management evaluates goodwill, at a minimum, on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. Impairment of goodwill is tested by comparing the reporting unit's carrying amount, including goodwill, to the fair value of the reporting unit. The fair value of a reporting unit is estimated using a combination of the income or discounted cash flows approach and the market approach, which uses comparable market data. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any. Based on our test for goodwill impairment, we noted no impairment related to goodwill. However, if estimates or the related assumptions change in the future, we may be required to record impairment charges to reduce the carrying amount of goodwill.

We periodically assess the recoverability of long-lived assets, including property and equipment, intangibles and management agreements, when there are indications of potential impairment, based on estimates of undiscounted future cash flows. The amount of impairment is calculated by comparing anticipated discounted future cash flows with the carrying value of the related asset. In performing this analysis, management considers such factors as current results, trends, and future prospects, in addition to other economic factors.

RESULTS OF OPERATIONS. FISCAL 2022 COMPARED TO FISCAL 2021

In fiscal 2022, we recognized net income of $17.2 million on revenues of $97.6 million, as compared to net income of $13.7 million on revenues of $89.9 million for fiscal 2021. This represents an increase in revenues of 8.5%. Patient fee revenue net of contractual allowances increased by 26.9%. Total costs and expenses increased by 3.8%. Our consolidated operating results increased by 28.7% to an operating income of $22.0 million for fiscal 2022 as compared to operating income of $17.1 million for fiscal 2021.





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Discussion of Operating Results of Medical Equipment Segment

Fiscal 2022 Compared to Fiscal 2021

Revenues attributable to our medical equipment segment decreased by 9.1% to $8.2 million in fiscal 2022 from $9.0 million in fiscal 2021, with product sales revenues decreasing by 59.8% from $1.3 million in fiscal 2021 to $518,000 in fiscal 2022. Service revenue remained constant from $7.7 million in fiscal 2021 and in fiscal 2022.

The Upright® MRI is unique in that it permits MRI scans to be performed on patients upright in the weight-bearing state and in multiple positions that correlate with symptoms.

Product sales to unrelated parties decreased by 59.8% in fiscal 2022 from $1.3 million in fiscal 2021 to $518,000 in fiscal 2022. There were no product sales to related parties in fiscal 2022 or 2021.

We believe that one of our principal challenges in achieving greater market penetration is attributable to the better name recognition and larger sales forces of our larger competitors such as General Electric, Siemens, Hitachi, Philips and Toshiba and the ability of some of our competitors to offer attractive financing terms through affiliates, such as G.E. Capital.

In addition, lower reimbursement rates have reduced the demand for our MRI products, resulting in lower sales volumes. As a result of fewer sales, service revenues have decreased since as older scanners are taken out of service, there are fewer new scanners available to sign service contracts.

The operating loss for the medical equipment segment increased from an operating loss of $3.4 million in fiscal 2021 to an operating loss of $4.6 million in fiscal 2022. The losses are attributable most significantly to the fact that costs increased by a greater amount than revenues. The increase in costs was primarily due to the increase in business activity which resulted in our increased revenues.

We recognized revenues of $62,000 from the sale of our Upright® MRI scanners in fiscal 2022, while in fiscal 2021, we recognized revenues of $733,000 from the sale of Upright® MRI scanners.

Research and development expenses decreased to $1.5 million in fiscal 2022 from $1.6 million in fiscal 2021. Our expenses for fiscal 2021 represented continued research and development of various upgrades for the Upright® MRI scanner. The reason for the decrease in research and development was due mainly to supply chain related delays due to the COVID-19 pandemic.

Discussion of Operating Results of Physician and Diagnostic Services Management Segment.

Fiscal 2022 Compared to Fiscal 2021

Revenues attributable to the Company's physician and diagnostic services management segment, HMCA, increased to $89.4 million in fiscal 2022 as compared to $80.9 million in fiscal 2021. The increase in revenues was due to an increase of $6.3 million of patient fees (net of contractual allowances and discounts less provision for bad debts) from patient and third party payors recognized by five of the facilities in Florida. Also management and other fees increased by $2.2 million due to two additional scanners being installed in existing facilities.





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Cost of revenues as a percentage of the related revenues for our physician and diagnostic services management segment increased from $42.6 million or 52.7% of related revenues for the year ended June 30, 2021 to $47.1 million, or 52.7% of related revenues for the year ended June 30, 2022. The revenues increased more than the costs relating to these revenues.

Operating results of this segment increased from operating income of $20.5 million in fiscal 2021 to operating income of $26.6 million in fiscal 2022. We believe that our efforts to expand and improve the operation of our physician and diagnostic services management segment are directly responsible for the profitability of this segment and our company as a whole.

For the fiscal years ended June 30, 2022 and June 30, 2021 11.8% and 12.2%, respectively, of total revenues were derived from contracts with facilities owned by Dr. Raymond V. Damadian, the Chairman of the Board and principal stockholder of Fonar. The agreements with these MRI facilities are for one-year terms which renew automatically on an annual basis, unless terminated. The fees for these sites, which are located in Florida, are flat monthly fees.

Discussion of Certain Consolidated Results of Operations

Fiscal 2022 Compared to Fiscal 2021

Interest and investment income decreased in 2022 compared to 2021. We recognized interest income of $247,158 in 2022 as compared to $311,931 in fiscal 2021, representing a decrease of 20.8%.

Interest expense of $346,552 was recognized in fiscal 2022, as compared to interest expense of $248,665 in fiscal 2021. The increase in interest expense is attributable to an assessment of additional taxes and interest in connection with a state income tax audit.

The 29.2% noncontrolling interest allocations of $4,793,000 and $3,466,000 for fiscal 2022 and fiscal 2021 respectively, have been calculated by Income from operations, and adding depreciation and amortization net of miscellaneous losses and other income from the Physician and Diagnostic Service Management segment (See Note 17).

While revenue increased by 8.5% selling, general and administrative expenses decreased by 5.0% to $23.5 million in fiscal 2022 from $24.7 million in fiscal 2021. This increase in revenues was almost exclusively due to less reserves placed on service contracts and management fees and other receivables resulting from the COVID-19 pandemic as compared to fiscal 2021. It is too early to know how much of these reserves will be recovered. Also Fonar resolved certain sales tax liabilities during the year and was able to reverse accrued interest and penalties of $119,000 which was recorded under selling, general and administrative expenses.

The compensatory element of stock issuances decreased from $83,277 in fiscal 2021 to $0 in fiscal 2022.

Revenue from service and repair fees remained constant at $7.7 million in fiscal 2021 to and fiscal 2022.





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Continuing our tradition as the originator of MRI, we remain committed to maintaining our position as the leading innovator of the industry through investing in research and development. In fiscal 2022 we continued our investment in the development of various upgrades for the UPRIGHT® MRI, with an investment of $1,494,181 in research and development, none of which was capitalized, as compared to $1,635,979, none of which was capitalized, in fiscal 2021. The research and development expenditures were approximately 18.2% of revenues attributable to our medical equipment segment and 1.5% of total revenues in 2022, and 18.1% of medical equipment segment revenues and 1.8% of total revenues in fiscal 2021. This represented a 8.7% decrease in research and development expenditures in fiscal 2022 as compared to fiscal 2021.

For the physician and diagnostic services management segment, HMCA, revenues increased to $89.3 million in fiscal 2022 as compared to $80.9 million in fiscal 2021. This is primarily attributable to an increase in patient scans resulting from our marketing efforts.

For the fiscal year 2022 the Company recorded an income tax expense of $5.5 million compared with an income tax expense of $4.0 million for 2021. The income tax benefits are attributable to the expected tax benefits associated with the projected realization and utilization of our net operating losses in future periods. The Company has recorded a deferred tax asset of $12.8 million as of June 30, 2022, primarily relating to the tax benefits from the net operating loss carry forwards available to offset future taxable income. The utilization of these tax benefits is dependent on the Company generating future taxable income. Although the Company is expecting to generate taxable income in future periods, they cannot accurately measure the full impact of the adoption of healthcare regulations, including the impact of continuing changes in MRI scanning reimbursement rates, and the severity and the duration of the COVID-19 virus, which could materially impact operations. A partial valuation allowance will be maintained until evidence exists to support that it is no longer needed.

We have been taking steps to improve HMCA revenues by our marketing efforts, which focus on the unique capability of our Upright® MRI scanners to scan patients in different positions. We have also been increasing the number of health insurance plans in which our clients participate. The utilization of these tax benefits is dependent on the Company generating future taxable income and other factors. A partial valuation allowance will be maintained until evidence exists to support that it is no longer needed, (principally related to research and development credits).

Our management fees are dependent on collection by our clients of fees from reimbursements from Medicare, Medicaid, private insurance, no fault and workers' compensation carriers, self-pay and other third-party payors. The health care industry is experiencing the effects of the federal and state governments' trend toward cost containment, as governments and other third-party payors seek to impose lower reimbursement and utilization rates and negotiate reduced payment schedules with providers. The cost-containment measures, consolidated with the increasing influence of managed-care payors and competition for patients, have resulted in reduced rates of reimbursement for services provided by our clients from time to time. Our future revenues and results of operations may be adversely impacted by future reductions in reimbursement rates.





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Certain third-party payors have proposed and implemented changes in the methods and rates of reimbursement that have had the effect of substantially decreasing reimbursement for diagnostic imaging services that HMCA's clients provide. To the extent reimbursement from third-party payors is reduced, it will likely have an adverse impact on the rates they pay us, as they would need to reduce the management fees they pay HMCA to offset such decreased reimbursement rates. Furthermore, many commercial health care insurance arrangements are changing, so that individuals bear greater financial responsibility through high deductible plans, co-insurance and higher co-payments, which may result in patients delaying or foregoing medical procedures. More frequently, however, patients are scanned and we experience difficulty in collecting deductibles and co-payments. We expect that any further changes to the rates or methods of reimbursement for services, which reduce the reimbursement per scan of our clients may partially offset the increases in scan volume we are working to achieve for our clients, and indirectly will result in a decline in our revenues.

On March 23, 2010, President Obama signed into law healthcare reform legislation in the form of the Patient Protection and Affordable Care Act, or PPACA. The ultimate impact of the PPACA is uncertain but to date has reduced our revenues from what they otherwise would have been.

In addition, the use of radiology benefit managers, or RBM's has increased in recent years. It is common practice for health insurance carriers to contract with RBMs to manage utilization of diagnostic imaging procedures for their insureds. In many cases, this leads to lower utilization of imaging procedures based on a determination of medical necessity. The efficacy of RBMs is still a highly controversial topic. We cannot predict whether the healthcare legislation or the use of RBMs will negatively impact our business, but it is possible that our financial position and results of operations could be negatively affected.

LIQUIDITY AND CAPITAL RESOURCES

Cash, and cash equivalents increased by 9.6% from $44.5 million at June 30, 2021 to $48.7 million at June 30, 2022.

Cash provided by operating activities for fiscal 2022 approximated $15.3 million. Cash provided by operating activities was attributable to the net income of $17.2 million, depreciation and amortization of $4.5 million, deferred income tax expense benefit of $3.1 million which was offset by the increase in accounts, and medical and management fee receivables of $5.6 million.

Cash used in investing activities for fiscal 2022 approximated $5.2 million. The cash used in investing activities was attributable to purchases of property and equipment of $4.5 million, purchase of noncontrolling interests of $546,000 and costs of patents of $88,000.

Cash used in financing activities for fiscal 2021 approximated $5.9 million. The principal uses of cash used in financing activities included the repayment of borrowings and capital lease obligations of $37,000, and distributions to non-controlling interests of $5.8 million.

Total liabilities decreased slightly by 1.9% during fiscal 2022, from approximately $54.1 million at June 30, 2021 to approximately $53.1 million at June 30, 2022.





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At June 30, 2022, we had working capital of approximately $101.9 million as compared to working capital of $88.5 million at June 30, 2021, and stockholders' equity of $146.2 million at June 30, 2022 as compared to stockholders' equity of $135.4 million at June 30, 2021. For the year ended June 30, 2022, we realized a net income of $17.2 million.

Our principal sources of liquidity are derived from revenues.

Our business plan includes a program for manufacturing and selling our Upright® MRI scanners. In addition, we are enhancing our revenue by participating in the physician and diagnostic services management business through our subsidiary, HMCA and have upgraded the facilities which it manages, most significantly by the replacement of the original MRI scanners with new Upright® MRI scanners. As of June 30, 2022, HMCA manages a total of 41 MRI scanners of which 26 MRI scanners are located in New York and 15 are located in Florida. We have also intensified our marketing activities through the hiring of additional marketers for HMCA's clients.

Our business plan also 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 upgrades at competitive prices. Fees for on-going service and maintenance from our installed base of scanners were $7.7 million for the year ended June 30, 2021 and $7.7 million for the year ended June 30, 2022.

In order to promote profitability and to reduce demands on our cash and other liquid reserves, we maintain an aggressive program of cost cutting. Previously, these measures included consolidating HMCA's office space with Fonar's office space and reducing the size of our workforce, compensation and benefits. We continue to reduce and contain expenses across the board. The cost reductions are intended to enable us to withstand periods of low volumes of MRI scanner sales, by keeping expenditures at levels which can be supported by service revenues and HMCA revenues.

Current economic credit conditions have contributed to a slower than optimal business environment. As a result our business may suffer, should the credit markets not improve in the near future. The direct impact of these conditions is not fully known.

Revenues from HMCA have been the principal reason for our profitability, and we have so far been able to maintain and increase such revenues by increasing the number of scans being performed by the sites we manage and those we own, notwithstanding reductions in reimbursement rates from third party payors. The likelihood and effect of any subsequent reductions is not fully known.

Capital expenditures for fiscal 2022 approximated $4.6 million. Capitalized patent costs were approximately $88,000. Purchases of property and equipment were approximately $4.5 million.

Fonar is committed to making capital expenditures in the 2023 fiscal year, for placing two scanners at facilities located in Florida and New York. The facility in Florida will be a new stand-alone facility and the facility in New York will also be a new stand-alone facility. The current estimated costs of these capital expenditures is approximately $3.1 million.





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The Company believes that its business plan has been responsible for the past five consecutive fiscal years of profitability (fiscal 2022, fiscal 2021, fiscal 2020, fiscal 2019 and fiscal 2018) and that its capital resources will be adequate to support operations at current levels through September 30, 2023.

On September 13, 2022, the Company adopted a stock repurchase plan. The plan has no expiration date and cannot determine the number of shares which will be repurchased. On September 26, 2022, the Board of Directors has approved up to $9 million to be repurchased under the plan which will be purchased on the publicly traded open market at prevailing prices.

During August 2021 the Company renewed their revolving credit agreement. The terms include borrowing limits of up to $10,000,000 and the agreement was extended to August 2022. The interest rate on unpaid principal remains at 4% along with certain financial covenants still applicable.

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