RadNet, Inc 10-Q for FY2022 Q3
RadNet, Inc. (RDNT)
10-Q
2022-11-09
For: 2022-09-30
View Original
Added on
April 09, 2026
About this 10-Q
RadNet, Inc filed this 10-Q on November 9, 2022, covering the quarter ended September 30, 2022 (FY2022 Q3).
Headline figures
Quarter ended September 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $350.04M
- up 5.2% from $332.69M a year earlier
- Net income
- $668K
- down 95.9% from net income of $16.22M a year earlier
- Diluted EPS
- $0.01
- down 96.7% from $0.30 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended September 30, 2022
or
For the transition period from to
Commission File Number 001-33307
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
(310 ) 478-7808
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Class Title | Trading Symbol | Registered Exchange | ||||||||||||
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 and 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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Emerging growth company | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒
The number of shares of the registrant’s common stock outstanding on November 4, 2022 was 57,360,850 shares.
RADNET, INC.
TABLE OF CONTENTS
| Page | |||||
ITEM 6. Exhibits | |||||
i
PART I - FINANCIAL INFORMATION
Item 1 – Financial Statements
RADNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
| September 30, 2022 | December 31, 2021 | ||||||||||
| (unaudited) | |||||||||||
| ASSETS | |||||||||||
| CURRENT ASSETS | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable | |||||||||||
| Due from affiliates | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| PROPERTY, EQUIPMENT AND RIGHT-OF-USE ASSETS | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Total property, equipment and right-of-use assets | |||||||||||
| OTHER ASSETS | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets | |||||||||||
| Deferred financing costs | |||||||||||
| Investment in joint ventures | |||||||||||
| Deferred tax assets | |||||||||||
| Deposits and other | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND EQUITY | |||||||||||
| CURRENT LIABILITIES | |||||||||||
| Accounts payable, accrued expenses and other | $ | $ | |||||||||
| Due to affiliates | |||||||||||
| Deferred revenue | |||||||||||
| Current operating lease liability | |||||||||||
| Current portion of notes payable | |||||||||||
| Total current liabilities | |||||||||||
| LONG-TERM LIABILITIES | |||||||||||
| Long-term operating lease liability | |||||||||||
| Notes payable, net of current portion | |||||||||||
| Other non-current liabilities | |||||||||||
| Total liabilities | |||||||||||
| EQUITY | |||||||||||
Common stock - $ | |||||||||||
| Additional paid-in-capital | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total RadNet, Inc.'s stockholders' equity | |||||||||||
| Noncontrolling interests | |||||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
The accompanying notes are an integral part of these financial statements.
1
RADNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| REVENUE | |||||||||||||||||||||||
| Service fee revenue | $ | $ | $ | $ | |||||||||||||||||||
| Revenue under capitation arrangements | |||||||||||||||||||||||
| Total service revenue | |||||||||||||||||||||||
| Provider relief funding | |||||||||||||||||||||||
| OPERATING EXPENSES | |||||||||||||||||||||||
| Cost of operations, excluding depreciation and amortization | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| (Gain) loss on sale and disposal of equipment and other | ( | ( | |||||||||||||||||||||
| Severance costs | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| INCOME FROM OPERATIONS | |||||||||||||||||||||||
| OTHER INCOME AND EXPENSES | |||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Equity in earnings of joint ventures | ( | ( | ( | ( | |||||||||||||||||||
| Non-cash change in fair value of interest rate swaps | ( | ( | ( | ( | |||||||||||||||||||
| Debt restructuring and extinguishment expenses | |||||||||||||||||||||||
| Other expenses (income) | ( | ||||||||||||||||||||||
| Total other (income) expenses | ( | ( | |||||||||||||||||||||
| INCOME BEFORE INCOME TAXES | |||||||||||||||||||||||
| Provision for income taxes | ( | ( | ( | ( | |||||||||||||||||||
| NET INCOME | |||||||||||||||||||||||
| Net income attributable to noncontrolling interests | |||||||||||||||||||||||
| NET INCOME ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS | $ | $ | $ | $ | |||||||||||||||||||
| BASIC NET INCOME PER SHARE ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS | $ | $ | $ | $ | |||||||||||||||||||
| DILUTED NET INCOME PER SHARE ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS | $ | $ | $ | $ | |||||||||||||||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
2
RADNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(IN THOUSANDS)
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| NET INCOME | $ | $ | $ | $ | |||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | ( | ( | |||||||||||||||||||
| Change in fair value of cash flow hedge from prior periods reclassified to earnings, net of taxes | |||||||||||||||||||||||
| COMPREHENSIVE INCOME | |||||||||||||||||||||||
| Less comprehensive income attributable to noncontrolling interests | |||||||||||||||||||||||
| COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO | |||||||||||||||||||||||
| RADNET, INC. COMMON STOCKHOLDERS | $ | ( | $ | $ | $ | ||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
3
RADNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE DATA)
(unaudited)
The following table summarizes changes in the Company’s consolidated stockholders' equity, including noncontrolling interest, during the three months ended September 30, 2022 and September 30, 2021.
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Radnet, Inc.'s Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE - JUNE 30, 2022 | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under the equity compensation plan | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under the DeepHealth equity compensation plan | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Adjustment for shares returned/forfeited | ( | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Sale of economic interests in majority owned subsidiary, net of taxes | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Contribution from noncontrolling partner | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Change in cumulative foreign currency translation adjustment | — | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Change in fair value of cash flow hedge from prior periods reclassified to earnings, net of taxes | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| BALANCE-SEPTEMBER 30, 2022 | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
| BALANCE - JUNE 30, 2021 | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under the equity compensation plan | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under the DeepHealth equity compensation plan | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for sale of unregistered securities for acquisition | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Forfeiture of restricted stock | ( | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Sale of noncontrolling interests, net of taxes | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Change in cumulative foreign currency translation adjustment | — | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Change in fair value of cash flow hedge from prior periods reclassified to earnings | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| BALANCE-SEPTEMBER 30, 2021 | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
4
RADNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE DATA)
(unaudited)
The following table summarizes changes in the Company’s consolidated stockholders' equity, including noncontrolling interest, during the nine months ended September 30, 2022 and September 30, 2021
The accompanying notes are an integral part of these financial statements.
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Radnet, Inc.'s Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE - DECEMBER 31, 2021 | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under the equity compensation plan | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under the DeepHealth equity compensation plan | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for sale of unregistered securities for acquisition | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Adjustment for shares returned/forfeited | ( | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Contribution from noncontrolling partner | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Sale of economic interests in majority owned subsidiary, net of taxes | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Change in cumulative foreign currency translation adjustment | — | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Change in fair value of cash flow hedge from prior periods reclassified to earnings, net of taxes | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| BALANCE-SEPTEMBER 30, 2022 | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
| BALANCE - DECEMBER 31, 2020 | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of options | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under the equity compensation plan | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under the DeepHealth equity compensation plan | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for sale of unregistered securities for acquisition | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Adjustment for shares returned/forfeited | ( | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Sale of noncontrolling interests, net of taxes | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Purchase of noncontrolling interests | — | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Contribution from noncontrolling partner | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Change in cumulative foreign currency translation adjustment | — | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Change in fair value of cash flow hedge from prior periods reclassified to earnings, net of taxes | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | ( | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| BALANCE-SEPTEMBER 30, 2021 | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
5
RADNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Amortization of operating lease right-of-use assets | |||||||||||
| Equity in earnings of joint ventures, net of dividends | ( | ( | |||||||||
| Amortization of deferred financing costs and loan discount | |||||||||||
| Loss (gain) on sale and disposal of equipment and other | ( | ||||||||||
| Loss on extinguishment of debt | |||||||||||
| Amortization of cash flow hedge, net of taxes | |||||||||||
| Non-cash change in fair value of interest rate swaps | ( | ( | |||||||||
| Stock-based compensation | |||||||||||
Change in fair value of contingent consideration | ( | ||||||||||
Changes in operating assets and liabilities, net of assets acquired and liabilities assumed in purchase transactions: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Other current assets | ( | ||||||||||
| Other assets | ( | ||||||||||
| Deferred taxes | |||||||||||
| Operating lease liability | ( | ( | |||||||||
| Deferred revenue | ( | ( | |||||||||
| Accounts payable, accrued expenses and other | |||||||||||
| Net cash provided by operating activities | |||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Purchase of imaging centers and other acquisitions | ( | ( | |||||||||
| Purchase of property and equipment | ( | ( | |||||||||
| Proceeds from sale of equipment | |||||||||||
| Equity contributions in existing and purchase of interest in joint ventures | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Principal payments on notes and leases payable | ( | ||||||||||
| Payments on term loan debt | ( | ( | |||||||||
| Proceeds from debt refinancing, net of issuing costs | |||||||||||
| Proceeds from sale of economic interest in majority owned subsidiary, net of taxes | |||||||||||
| Proceeds from revolving credit facility | |||||||||||
| Payments on revolving credit facility | ( | ||||||||||
| Proceeds from issuance of common stock upon exercise of options | |||||||||||
| Net cash (used in) provided by financing activities | ( | ||||||||||
| EFFECT OF EXCHANGE RATE CHANGES ON CASH | ( | ||||||||||
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | ( | ||||||||||
| CASH AND CASH EQUIVALENTS, beginning of period | |||||||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | $ | |||||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | |||||||||||
| Cash paid during the period for interest | $ | $ | |||||||||
| Cash paid during the period for income taxes | $ | $ | |||||||||
The accompanying notes are an integral part of these financial statements.
6
RADNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(unaudited)
Supplemental Schedule of Non-Cash Investing and Financing Activities
We acquired equipment and certain leasehold improvements for approximately $61.0 million and $50.5 million during the nine months ended September 30, 2022 and 2021, respectively, which were not paid for as of September 30, 2022 and 2021, respectively. The offsetting amounts due were recorded in our condensed consolidated balance sheet under accounts payable, accrued expenses and other.
On April 1, 2022 we received $8.4 million in fixed assets and equipment from our partner in Frederick County Radiology, LLC. See Note 4, Facility Acquisitions contained herein.
On January 20, 2022, we issued 1,141,234 shares of our common stock to complete our purchase of Aidence Holding B.V. The shares were ascribed a value of $30.6 million.
On January 20, 2022, we issued 965,058 shares to complete our purchase of Quantib B.V. The shares were ascribed a value of $25.9 million.
On August 24, 2021, we completed our stock purchase of Tangent Associates LLC by issuing 67,658 shares of our common stock to complete the transaction. The shares were ascribed a value of $2.0 million.
On January 1, 2021 we entered into the Simi Valley Imaging Group, LLC, partnership agreement with Simi Valley Hospital and Health Services ("Simi Adventist"). Of the total combined assets of $0.4 million, RadNet transferred $0.3 million and Simi Adventist contributed the remaining $0.1 million.
7
RADNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 – NATURE OF BUSINESS AND BASIS OF PRESENTATION
We are a national provider of freestanding, fixed-site outpatient diagnostic imaging services in the United States. At September 30, 2022, we operated directly or indirectly through joint ventures with hospitals, 349 centers located in Arizona, California, Delaware, Florida, Maryland, New Jersey, and New York. Our centers provide physicians with imaging capabilities to facilitate the diagnosis and treatment of diseases and disorders. Our services include magnetic resonance imaging (MRI), computed tomography (CT), positron emission tomography (PET), nuclear medicine, mammography, ultrasound, diagnostic radiology (X-ray), fluoroscopy and other related procedures. The vast majority of our centers offer multi-modality imaging services. Our multi-modality strategy diversifies revenue streams, reduces exposure to reimbursement changes and provides patients and referring physicians one location to serve the needs of multiple procedures. In addition to our center operations, we have certain other subsidiaries that develop Artificial Intelligence ("AI") products and solutions that are designed to enhance interpretation of radiographic images. Our operations comprise two segments for financial reporting purposes for this reporting period, Imaging Centers and Artificial Intelligence. For further financial information about these segments, see Note 5, Segment Reporting.
The consolidated financial statements include the accounts of RadNet, Inc as well as its subsidiaries in which RadNet has a controlling financial interest. The consolidated financial statements also include certain variable interest entities in which we are the primary beneficiary (as described in more detail below). All material intercompany transactions and balances have been eliminated upon consolidation. All of these affiliated entities are referred to collectively as “RadNet”, “we”, “us”, “our” or the “Company” in this report
Accounting regulations stipulate that generally any entity with a) insufficient equity to finance its activities without additional subordinated financial support provided by any parties, or b) equity holders that, as a group, lack the characteristics which evidence a controlling financial interest, is considered a Variable Interest Entity (“VIE”). We consolidate all VIEs in which we are the primary beneficiary. We determine whether we are the primary beneficiary of a VIE through a qualitative analysis that identifies which variable interest holder has the controlling financial interest in the VIE. The variable interest holder who has both of the following has the controlling financial interest and is the primary beneficiary: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. In performing our analysis, we consider all relevant facts and circumstances, including: the design and activities of the VIE, the terms of the contracts the VIE has entered into, the nature of the VIE’s variable interests issued and how they were negotiated with or marketed to potential investors, and which parties participated significantly in the design or redesign of the entity.
VIEs that we consolidate as the primary beneficiary consist of professional corporations which are owned or controlled by individuals within our senior management and provide professional medical services for centers in Arizona, California, Delaware, Maryland, New Jersey and New York. These VIEs are collectively referred to as the Group. RadNet provides non-medical, technical and administrative services to the Group for which it receives a management fee, pursuant to the related management agreements. Through the management agreements we have exclusive authority over all non-medical decision making related to the ongoing business operations and we determine the annual budget. The Group has insignificant operating assets and liabilities, and de minimis equity. Substantially all cash flows of the Group after expenses, including professional salaries, are transferred to us. We consolidate the revenue and expenses, assets and liabilities of the Group. The creditors of the Group do not have recourse to our general credit and there are no other arrangements that could expose us to losses on behalf of the Group. However, RadNet may be required to provide financial support to cover any operating expenses in excess of operating revenues.
The Group on a combined basis recognized $48.9 million and $43.8 million of revenue, net of management services fees to RadNet, for the three months ended September 30, 2022 and 2021, respectively and $48.9 million and $43.8 million of operating expenses for the three months ended September 30, 2022 and 2021, respectively. RadNet recognized $190.6 million and $186.8 million of total billed net service fee revenue for the three months ended September 30, 2022, and 2021, respectively, for management services provided to the Group relating primarily to the technical portion of billed revenue.
The Group on a combined basis recognized $141.4 million and $135.0 million of revenue, net of management services fees to RadNet, for the nine months ended September 30, 2022 and 2021, respectively and $141.4 million and $135.0 million of operating expenses for the nine months ended September 30, 2022 and 2021, respectively. RadNet recognized $584.0 million and $556.4 million of total billed net service fee revenue for the nine months ended September 30, 2022, and 2021, respectively, for management services provided to the Group relating primarily to the technical portion of billed revenue.
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The cash flows of the Group are included in the accompanying condensed consolidated statements of cash flows. All intercompany balances and transactions have been eliminated in consolidation. In our condensed consolidated balance sheets at September 30, 2022 and December 31, 2021, we have included approximately $102.1 million and $89.2 million, respectively, of accounts receivable and approximately $14.8 million and $14.4 million of accounts payable and accrued liabilities related to the Group, respectively.
At all of our centers not serviced by the Group we have entered into long-term contracts with medical groups to provide professional services at those centers, including supervision and interpretation of diagnostic imaging procedures. The medical groups maintain full control over the physicians they employ. Through our management agreements, we make available to the medical groups the imaging centers, including all furniture, fixtures and medical equipment therein. The medical groups are compensated for their services from the professional component of the global net service fee revenue and after deducting management service fees paid to us, we have no economic controlling interest in these medical groups. As such, the financial results of these groups are not consolidated in our financial statements.
We also own a 49 % economic interest in ScriptSender, LLC, which provides secure data transmission services of medical information. Through a management agreement, RadNet provides management and accounting services and receives an agreed upon fee. ScriptSender, LLC is dependent on RadNet to finance its own activities, and as such we determined that it is a VIE but we are not a primary beneficiary since we do not have the power to direct the activities of the entity that most significantly impact the entity’s economic performance. We have continued to finance ScriptSender during it's development phase and our maximum exposure to loss is $3.5 million, which represents our receivable balance from the entity. Maximum exposure to loss is the loss that we would absorb in the event that all of the assets of ScriptSender are deemed worthless. We paid operating expenses for the venture of $0.5 million and $0.6 million for the three months ended September 30, 2022 and September 30, 2021, respectively and $1.5 million and $1.8 million for the nine months ended September 30, 2022 and September 30, 2021, respectively.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and, therefore, do not include all information and footnotes necessary for conformity with U.S. generally accepted accounting principles for complete financial statements; however, in the opinion of management, all adjustments consisting of normal recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods ended September 30, 2022 and 2021 have been made. The results of operations for any interim period are not necessarily indicative of the results for a full year. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto contained in our annual report on Form 10-K for the year ended December 31, 2021.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
During the period covered in this report, there have been no material changes to the significant accounting policies we use and have explained, in our annual report on Form 10-K for the fiscal year ended December 31, 2021. The information below is intended only to supplement the disclosure in our annual report on Form 10-K for the fiscal year ended December 31, 2021.
REVENUES - Our revenues generally relate to net patient fees received from various payors and patients themselves under contracts in which our performance obligations are to provide diagnostic services to the patients. Revenues are recorded during the period when our obligations to provide diagnostic services are satisfied. Our performance obligations for diagnostic services are generally satisfied over a period of less than one day. The contractual relationships with patients, in most cases, also involve a third-party payor (Medicare, Medicaid, managed care health plans and commercial insurance companies, including plans offered through the health insurance exchanges) and the transaction prices for the services provided are dependent upon the terms provided by Medicare and Medicaid, or negotiated with managed care health plans and commercial insurance companies. The payment arrangements with third-party payors for the services we provide to the related patients typically specify payments at amounts less than our standard charges and generally provide for payments based upon predetermined rates per diagnostic services or discounted fee-for-service rates. Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms resulting from contract renegotiations and renewals.
As it relates to the Group, this service fee revenue includes payments for both the professional medical interpretation revenue recognized by them as well as the payment for all other aspects related to our providing the imaging services, for which we earn management fees. As it relates to other centers, this service fee revenue is earned through providing the use of our diagnostic imaging equipment and the provision of technical services as well as providing administration services such as
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clerical and administrative personnel, bookkeeping and accounting services, billing and collection, provision of medical and office supplies, secretarial, reception and transcription services, maintenance of medical records, and advertising, marketing and promotional activities.
Our revenues are based upon the estimated amounts we expect to be entitled to receive from patients and third-party payors. Estimates of contractual allowances under managed care and commercial insurance plans are based upon the payment terms specified in the related contractual agreements. Revenues related to uninsured patients and copayment and deductible amounts for patients who have health care coverage may have discounts applied (uninsured discounts and contractual discounts). We also record estimated implicit price concessions (based primarily on historical collection experience) related to uninsured accounts to record self-pay revenues at the estimated amounts we expect to collect.
Under capitation arrangements with various health plans, we earn a per-enrollee amount each month for making available diagnostic imaging services to all plan enrollees under the capitation arrangement. Revenue under capitation arrangements is recognized in the period in which we are obligated to provide services to plan enrollees under contracts with various health plans.
Our total service fee revenues during the three and nine months ended September 30, 2022 and 2021 are presented in the table below. Our imaging center revenue is displayed as the estimated service fee, broken down by classification of insurance coverage type. Additional revenues are earned from our management services provided to joint ventures and our software and AI subsidiaries.
| In Thousands | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Commercial insurance | $ | $ | $ | $ | |||||||||||||||||||
| Medicare | |||||||||||||||||||||||
| Medicaid | |||||||||||||||||||||||
| Workers' compensation/personal injury | |||||||||||||||||||||||
| Other patient revenue | |||||||||||||||||||||||
| Management fee revenue | |||||||||||||||||||||||
| Software revenue | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Revenue under capitation arrangements | |||||||||||||||||||||||
| Imaging Center Segment Revenue | |||||||||||||||||||||||
| AI Segment Revenue | |||||||||||||||||||||||
| Total service revenue | $ | $ | $ | $ | |||||||||||||||||||
COVID-19 PANDEMIC AND CARES ACT FUNDING - On March 11, 2020 the World Health Organization (WHO) designated COVID-19 as a global pandemic. To aid businesses and stimulate the national economy, Congress passed The Coronavirus Aid, Relief, and Economic Security ("CARES") Act, which was signed in to law on March 27, 2020.
Beginning in the second quarter of 2020, we received funding from the various programs established by the CARES Act as follows:
•$39.6 million total of accelerated Medicare payments received, $39.5 million in the twelve months ended December 31, 2020 and $0.1 million in the twelve months ended December 31, 2021.
•$4.0 million from the Paycheck Protection Program through the twelve months ended December 31, 2020.
•$35.4 million total Provider Relief Funding, $26.3 million received for the twelve months ended December 31, 2020 and $9.1 million received for the twelve months ended December 31, 2021, with no funds received for the three months ended September 30, 2021 and $6.3 million received during the nine months ended September 30, 2021.
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The accelerated Medicare payments were recorded to Deferred Revenue in our consolidated balance sheet and are being applied to revenue as services are performed beginning in 2021. Through September 30, 2022, $38.6 million of the accelerated Medicare payments has been applied to revenue.
The $4.0 million secured from the Paycheck Protection Program was accounted for as debt and in December 2020 we met the eligibility requirements under the government guidelines for forgiveness and the loans were written off to gain on extinguishment of debt.
The Provider Relief Funding from 2021 is displayed as such on our condensed consolidated statements of operations.
The CARES Act also provides for the deferral of the employer-paid portion of the social security payroll tax with 50 % due by December 31, 2021 and 50 % due December 31, 2022. We elected to defer $16.3 million of this tax through December 31, 2020. Additionally, The CARES Act provided a refundable employer tax credit equal to 50 % of qualified wages, including certain health insurance costs, that can be used to offset payroll tax liabilities. In 2021 we qualified for a portion of the credit and recorded a benefit of $7.7 million through a reduction of payroll tax expense. Our remaining deferred payroll tax liability balance of approximately $8.1 million at September 30, 2022, will be paid by December 31, 2022.
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| Balance as of December 31, 2021 | $ | ||||
| Goodwill from acquisitions | |||||
| Valuation adjustment | ( | ||||
| Currency translation | ( | ||||
| Balance as of September 30, 2022 | $ | ||||
Goodwill balances at September 30, 2022 reflect additional goodwill arising from deferred tax liabilities recorded on our acquisitions of Aidence Holding B.V. and Quantib B.V. of $7.3 million. See Note 4, Business Combinations and Related Activity for more information.
We recorded income tax expense of $2.2 million, or an effective tax rate of 25.3 %, for the three months ended September 30, 2022 compared to income tax expense of $5.3 million, or an effective tax rate of 20.0 % for the three months ended September 30, 2021. We recorded income tax expense of $7.1 million, or an effective tax rate of 19.8 %, for the nine months ended September 30, 2022 compared to income tax expense of $12.5 million or an effective tax rate of 22.6 % for the nine months ended September 31, 2021.
The income tax rates for the three and nine months ended September 30, 2022 diverge from the federal statutory rate due to (i) noncontrolling interests due to the controlled partnerships; (ii) effects of state income taxes (iii) effects of foreign income taxes; and (iv) excess tax benefits attributable to share-based compensation. We believe no significant changes in the unrecognized tax benefits will occur within the next 12 months.
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| For the three months ended September 30, 2022 | ||||||||||||||||||||||||||||||||
| Account | June 30, 2022 Balance | Amount of comprehensive loss recognized on derivative net of taxes | Amount of loss reclassified out of accumulated OCI into income (prior period effective portion), net of taxes | September 30, 2022 Balance | Location | |||||||||||||||||||||||||||
| Accumulated Other Comprehensive Loss, net of taxes | $ | ( | $ | $ | $ | ( | Equity | |||||||||||||||||||||||||
| For the nine months ended September 30, 2022 | ||||||||||||||||||||||||||||||||
| Account | December 31, 2021 Balance | Amount of comprehensive loss recognized on derivative net of taxes | Amount of loss reclassified out of accumulated OCI into income (prior period effective portion), net of taxes | September 30, 2022 Balance | Location | |||||||||||||||||||||||||||
| Accumulated Other Comprehensive Loss, net of taxes | $ | ( | $ | $ | $ | ( | Equity | |||||||||||||||||||||||||
A tabular presentation of the effect of derivative instruments on our statement of operations of the 2019 Swaps which remain ineffective is as follows (amounts in thousands):
| For the three months ended September 30, 2022 | ||||||||||||||||||||||||||
| Ineffective interest rate swap | Amount of gain recognized in income on derivative (current period ineffective portion) | Location of gain recognized in Income on derivative (current period ineffective portion) | Gross amount of loss reclassified from accumulated OCI into income (prior period effective portion) | Location of loss reclassified from accumulated OCI into income (prior period effective portion) | ||||||||||||||||||||||
| Interest rate contracts | $ | Non-cash change in fair value of interest rate swaps | $ | ( | Interest Expense | |||||||||||||||||||||
| For the nine months ended September 30, 2022 | ||||||||||||||||||||||||||
| Ineffective interest rate swap | Amount of gain recognized in income on derivative (current period ineffective portion) | Location of gain recognized in Income on derivative (current period ineffective portion) | Gross amount of loss reclassified from accumulated OCI into income (prior period effective portion) | Location of loss reclassified from accumulated OCI into income (prior period effective portion) | ||||||||||||||||||||||
| Interest rate contracts | $ | Non-cash change in fair value of interest rate swaps | $ | ( | Interest Expense | |||||||||||||||||||||
See Fair Value Measurements section below for the fair value of the 2019 Swaps at September 30, 2022.
CONTINGENT CONSIDERATION -
Aidence Holding B.V.
On January 20, 2022, we completed our acquisition of all the equity interests of Aidence Holding B.V. ("Aidence") an artificial intelligence enterprise centered on lung cancer screening. As part of the purchase agreement, we will pay up to $10.0 million consideration upon the completion of two identified milestones in RadNet common shares. This contingency had a value of approximately $7.9 million on September 30, 2022. The amount is reviewed quarterly and adjusted to fair value based
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on the yield rate of S&P B-rated corporate bonds and the probability of FDA approval, which has been currently determined by management to be 90 % for milestone one and 80 % for milestone two.
Quantib B.V.
On January 20, 2022, we completed our acquisition of all the equity interests of Quantib B.V. ("Quantib") an artificial intelligence enterprise centered on prostate cancer screening. As part of the purchase agreement, we will issue 18 months after acquisition, 113,303 shares with an initial fair value at the date of close of $3.0 million subject to adjustment for any indemnification claims and will be marked to market in subsequent periods. See Note 4, Business Combinations and Related Activity for more information on the Quantib acquisition.
A tabular presentation of the effect of the combined Aidence and Quantib contingent consideration on our condensed consolidated balance sheet is as follows (amounts in thousands):
| For the three months ended September 30, 2022 | ||||||||||||||||||||||||||
| Account | June 30, 2022 Balance | Amount of other non operating income recognized on contingent consideration | Currency Translation | September 30, 2022 Balance | Location | |||||||||||||||||||||
| Other Long Term Liabilities | $ | $ | $ | $ | Liabilities and Non Operating Income | |||||||||||||||||||||
| For the nine months ended September 30, 2022 | ||||||||||||||||||||||||||||||||
| Account | January 1, 2022 Balance | Issuance of contingent consideration | Amount of other non operating income recognized on contingent consideration | Currency Translation | September 30, 2022 Balance | Location | ||||||||||||||||||||||||||
| Other Long Term Liabilities | $ | $ | $ | ( | $ | $ | Liabilities and Non Operating Income | |||||||||||||||||||||||||
See Fair Value Measurements section below for the fair value of contingent consideration at September 30, 2022.
FAIR VALUE MEASUREMENTS – Assets and liabilities subject to fair value measurements are required to be disclosed within a fair value hierarchy. The fair value hierarchy ranks the quality and reliability of inputs used to determine fair value. Accordingly, assets and liabilities carried at, or permitted to be carried at, fair value are classified within the fair value hierarchy in one of the following categories based on the lowest level input that is significant to a fair value measurement:
Level 1—Fair value is determined by using unadjusted quoted prices that are available in active markets for identical assets and liabilities.
Level 2—Fair value is determined by using inputs other than Level 1 quoted prices that are directly or indirectly observable. Inputs can include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in inactive markets. Related inputs can also include those used in valuation or other pricing models such as interest rates and yield curves that can be corroborated by observable market data.
Level 3—Fair value is determined by using inputs that are unobservable and not corroborated by market data. Use of these inputs involves significant and subjective judgment.
Derivatives:
The tables below summarize the estimated fair values of certain of our financial assets that are subject to fair value measurements, and the classification of these assets on our condensed consolidated balance sheets, as follows (in thousands):
| As of September 30, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Current and long term assets | |||||||||||||||||||||||
| 2019 Swaps - Interest Rate Contracts | $ | $ | $ | $ | |||||||||||||||||||
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| As of December 31, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Current and long term liabilities | |||||||||||||||||||||||
| 2019 Swaps - Interest Rate Contracts | $ | $ | $ | $ | |||||||||||||||||||
Contingent Consideration:
The table below summarizes the estimated fair values of contingencies and holdback relating to our Aidence Holding B.V. and Quantib B.V. acquisitions on January 20, 2022, that are subject to fair value measurements and the classification of these liabilities on our condensed consolidated balance sheets, as follows (in thousands):
| As of September 30, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Long term liabilities | |||||||||||||||||||||||
| Aidence Holding B.V. milestone consideration | $ | $ | $ | $ | |||||||||||||||||||
Quantib B.V. holdback of | $ | $ | $ | $ | |||||||||||||||||||
The estimated fair value of these liabilities was determined using Level 3 inputs. For Aidence Holding B.V., the milestone contingent liability was adjusted to fair value based on the yield rate of S&P B-rated corporate bonds and the probability of FDA approval. For the Quantib B.V holdback shares, the fair value was determined by calculating the value estimated shares issuable as of the reporting date (which was $20.35 ) translated at the current exchange rate at September 30, 2022, the time period related to the contractual settlement term, and the probability of issuing the shares. As all the inputs for the contingent consideration of both Aidence Holding B.V and Quantib B.V. are not observable (excluding our closing share price) and cannot be corroborated by observable market data, we employ a Level 3 category.
Long Term Debt:
The table below summarizes the estimated fair value compared to our face value of our long-term debt as follows (in thousands):
| As of September 30, 2022 | |||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total Fair Value | Total Face Value | |||||||||||||||||||||||||
| First Lien Term Loans and SunTrust Term Loan | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| As of December 31, 2021 | |||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total Fair Value | Total Face Value | |||||||||||||||||||||||||
| First Lien Term Loans and SunTrust Term Loan | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
At September 30, 2022 and at December 31, 2021 our Barclays revolving credit facility had no no
The estimated fair value of our long-term debt, which is discussed in Note 6, Credit Facilities and Notes Payable, was determined using Level 2 inputs primarily related to comparable market prices.
We consider the carrying amounts of cash and cash equivalents, receivables, other current assets, current liabilities and other notes payables to approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization or payment.
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| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net income attributable to RadNet, Inc.'s common stockholders | $ | $ | $ | $ | |||||||||||||||||||
| BASIC NET INCOME PER SHARE ATTRIBUTABLE TO RADNET, INC.'S COMMON STOCKHOLDERS | |||||||||||||||||||||||
| Weighted average number of common shares outstanding during the period | |||||||||||||||||||||||
| Basic net income per share attributable to RadNet, Inc.'s common stockholders | $ | $ | $ | $ | |||||||||||||||||||
| DILUTED NET INCOME PER SHARE ATTRIBUTABLE TO RADNET, INC.'S COMMON STOCKHOLDERS | |||||||||||||||||||||||
| Weighted average number of common shares outstanding during the period | |||||||||||||||||||||||
| Add nonvested restricted stock subject only to service vesting | |||||||||||||||||||||||
| Add additional shares issuable upon exercise of stock options and contingently issuable shares | |||||||||||||||||||||||
| Weighted average number of common shares used in calculating diluted net income per share | |||||||||||||||||||||||
| Changes in FV associated with contingently issuable shares | $ | $ | $ | ( | $ | ||||||||||||||||||
| Net income attributable to RadNet, Inc's common stockholders for diluted share calculation | $ | $ | $ | $ | |||||||||||||||||||
| Diluted net income per share attributable to RadNet, Inc.'s common stockholders | $ | $ | $ | $ | |||||||||||||||||||
| Fair value change for contingently available shares excluded from the computation of diluted per share amounts as its effect would be antidilutive | $ | $ | $ | $ | |||||||||||||||||||
| Stock options and other non vested shares excluded from the computation of diluted per share amounts as their effect would be antidilutive: | |||||||||||||||||||||||
Shares issuable subject to satisfaction of certain contingencies | |||||||||||||||||||||||
| Shares issuable upon the exercise of stock options: | |||||||||||||||||||||||
| Weighted average shares for which the exercise price exceeds average market price of common stock | |||||||||||||||||||||||
As of September 30, 2022, we have three equity investments for which a fair value is not readily determinable and therefore the total amounts invested are recognized at cost as follows:
Medic Vision Imaging Solutions Ltd., based in Israel, specializes in software packages that provide compliant radiation dose structured reporting and enhanced images from reduced dose CT scans. Our investment of $1.2 million
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represents a 14.21 % equity interest in the company. No observable price changes or impairment in our investment was identified during the three and nine months ended September 30, 2022.
Turner Imaging Systems, based in Utah, develops and markets portable X-ray imaging systems that provide a user the ability to acquire X-ray images wherever and whenever they are needed. On February 1, 2018, we purchased 2.1 million preferred shares in Turner Imaging Systems for $2.0 million. On January 1, 2019 we funded a convertible promissory note in the amount of $0.1 million that converted into an additional 80,000 shares effective December 21, 2019. No observable price changes or impairment in our investment was identified during the three and nine months ended September 30, 2022.
WhiteRabbit.ai Inc., based in California, is currently developing an artificial intelligence suite which aims to improve the speed and accuracy of cancer detection in radiology and improve patient care. On November 5, 2019 we acquired an equity interest in the company for $1.0 million and also loaned the company $2.5 million in support of its operations. No observable price changes, impairment in our investment or impairment of the loan receivable was identified during the three and nine months ended September 30, 2022.
Acquisition by Equity Method Investee
During the first quarter of 2022, our joint venture with Calvert Medical Imaging Center, LLC, completed the acquisition of certain assets to strengthen its presence in the Maryland market. We made a fair value determination of the acquired assets and assumed liabilities and the following were recorded (in thousands):
| Entity | Date Acquired | Total Consideration | Property & Equipment | Right of Use Assets | Goodwill | Right of Use Liabilities | ||||||||||||||||||||
| IFRC LLC *^ | 1/1/2022 | ( | ||||||||||||||||||||||||
*Fair Value Determination is Final
^ IFRC LLC acquisitions consisted of three subsidiaries of IFRC, two of which were purchased separately by wholly owned RadNet subsidiaries.
Joint venture investment and financial information
The following table is a summary of our investment in joint ventures during the nine months ended September 30, 2022 (in thousands):
| Balance as of December 31, 2021 | $ | ||||
| Equity in earnings in these joint ventures | |||||
| Equity contributions in existing joint ventures | |||||
| Balance as of September 30, 2022 | $ | ||||
We charged management service fees from the centers underlying these joint ventures of approximately $6.1 million and $5.3 million for the three months ended September 30, 2022 and 2021 and $17.2 million and $16.0 million for the nine months ended September 30, 2022 and 2021, respectively.
On June 24, 2022, we made an additional equity contribution to our joint venture in Arizona of $1.4 million. Our equity ownership interest percentage in the venture did not change.
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The following table is a summary of key balance sheet data for these joint ventures as of September 30, 2022 and December 31, 2021 and income statement data for the nine months ended September 30, 2022 and 2021 (in thousands):
| Balance Sheet Data: | September 30, 2022 | December 31, 2021 | |||||||||
| Current assets | $ | $ | |||||||||
| Noncurrent assets | |||||||||||
| Current liabilities | ( | ( | |||||||||
| Noncurrent liabilities | ( | ( | |||||||||
| Total net assets | $ | $ | |||||||||
| Book value of RadNet joint venture interests | $ | $ | |||||||||
| Cost in excess of book value of acquired joint venture interests and other | |||||||||||
| Total value of RadNet joint venture interests | $ | $ | |||||||||
Income statement data for the nine months ended September 30, | 2022 | 2021 | |||||||||
| Net revenue | $ | $ | |||||||||
| Net income | $ | $ | |||||||||
NOTE 3 – RECENT ACCOUNTING AND REPORTING STANDARD
Accounting standards adopted
In November 2021, the FASB issued ASU 2021-10 ("ASU 2021-10"), Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance. ASU 2021-10 requires entities to provide disclosures on material government assistance transactions for annual reporting periods. The disclosures include information around the nature of the assistance, the related accounting policies used to account for government assistance, the effect of government assistance on the entity’s financial statements, and any significant terms and conditions of the agreements, including commitments and contingencies. The new standard was effective for financial statements issued for annual reporting periods beginning after December 15, 2021. As ASU 2021-10 only impacts annual financial statement footnote disclosures, the adoption will not have a material effect on our consolidated financial statements.
In January 2021, the FASB issued ASU 2021-01 ("ASU 2021-01"), Reference Rate Reform (Topic 848), Scope. ASU 2021-01 clarifies the scope of Topic 848 so that derivatives affected by the discounting transition are explicitly eligible for certain option expedients and exceptions in Topic 848. The guidance is effective upon issuance and generally can be applied through December 31, 2022. The adoption did not have a material effect on our consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04 ("ASU 2020-04"), Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients and exceptions for applying generally accepted accounting principles to certain contract modifications and hedging relationships that reference London Inter-bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. The guidance is effective upon issuance and generally can be applied through December 31, 2022. The adoption did not have a material effect on our consolidated financial statements.
Accounting standards not yet adopted
In October 2021, the FASB issued ASU 2021-08 ("ASU 2021-08), Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. ASU 2021-08 requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities in accordance with Accounting Standards Codification Topic 606. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022 and early adoption is permitted. We do not expect ASU 2021-08 to have a material effect, if any, on our consolidated financial statements.
NOTE 4 – BUSINESS COMBINATIONS AND RELATED ACTIVITY
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Acquisitions
Imaging Center
During the first quarter of 2022, we completed the acquisition of certain assets of the following entities, which either engage directly in the practice of radiology or associated businesses. The primary reason for these acquisitions was to strengthen our presence in the Maryland market. These acquisitions are reported as part of our Imaging Center segment. We made a fair value determination of the acquired assets and assumed liabilities and the following were recorded (in thousands):
| Entity | Date Acquired | Total Consideration | Property & Equipment | Right of Use Assets | Goodwill | Other Assets | Right of Use Liabilities | |||||||||||||||||||
| IFRC LLC*^ | 1/1/2022 | ( | ||||||||||||||||||||||||
| IFRC LLC*^ | 1/1/2022 | ( | ||||||||||||||||||||||||
| Total | ( | |||||||||||||||||||||||||
*Fair Value Determination is Final
^ IFRC LLC acquisitions consisted of three subsidiaries of IFRC, one of which was purchased separately by a joint venture with Calvert Medical Imaging Centers, LLC.
Artificial Intelligence
Aidence Holding B.V.
On January 20, 2022, we completed our acquisition of all the equity interests of Aidence Holding B.V. ("Aidence") an artificial intelligence enterprise centered on lung cancer screening, in an combination stock and cash purchase. Aidence is reported as part of our artificial intelligence segment and was acquired to enhance our AI capabilities. The transaction was accounted for as an acquisition of a business and total purchase consideration was determined to be approximately $45.2 million including i) 1,117,872 shares issued at $26.80 30.0 million ii) cash of $1.8 million and iii) assuming liabilities of $11.9 million, $7.4 million in milestone contingent consideration and cash holdback of $4.5 million and iv) a settlement of a loan from RadNet of $1.5 million. In addition we paid certain seller closing costs through the issuance of 23,362 shares at a fair value of $0.6 million. We recorded $1.0 million in current assets, $0.2 million in property plant and equipment, $27.7 million in intangible assets, $3.2 million in liabilities and $19.0 million in goodwill.
Quantib B.V.
On January 20, 2022, we completed our acquisition of all the equity interests of Quantib B.V. ("Quantib") an artificial intelligence enterprise centered on prostate cancer screening, in a combination stock and cash purchase. Quantib is reported as part of our artificial intelligence segment, and was acquired to enhance our AI capabilities. The transaction was accounted for as an acquisition of a business and total purchase consideration was determined to be approximately $42.3 million including i) 965,058 shares issued at $26.80 25.9 million ii) cash of $11.8 million and iii) 113,303 shares with a fair value at the date of close of $3.0 million and cash holdback of $1.6 million to be released 18 months after acquisition subject to adjustment for any indemnification claims and will be marked to market in subsequent periods. We recorded $2.4 million in current assets, $0.1 million in property plant and equipment, $21.3 million in intangible assets, $3.7 million in liabilities and $22.2 million in goodwill.
Formation of majority owned subsidiary
Frederick County Radiology, LLC
On April 1, 2022 we formed Frederick County Radiology, LLC ("FCR"), a partnership with Frederick Health Hospital, Inc. ("Hospital"). The operation offers multi-modality services out of six locations in Frederick, Maryland. We contributed the operations of 4 centers to the enterprise and Hospital contributed $5.4 million in fixed assets, $3.0 million in equipment, and $10.8 million in goodwill. As a result of the the transaction, we retain a 65 % controlling economic interest in FCR and Hospital retains a preliminary $11.1 million or 35 % noncontrolling economic interest in FCR. The initial accounting is preliminary as of September 30, 2022 for the acquired assets and liabilities as we are currently in the process of completing the assessment of valuation inputs and assumptions as well as completing the assessment of the tax attributes of the business
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combination.
Advanced Radiology at Capital Region, LLC
On June 15, 2022 we entered into Advanced Radiology at Capital Region, LLC, a partnership with Dimension Health Corporation. ("Dimension"), an affiliate of the University of Maryland. The operation will provide multi-modality services out of two yet to be determined locations in the Largo, Maryland area. The venture was initially capitalized with nominal amounts of $5.1 thousand for a 51 % economic interest from us and $4.9 thousand from Dimension for a 49 % economic interest.
NOTE 5 – SEGMENT REPORTING
Our reportable segments are described below:
Imaging Center
Our Imaging Center segment provides physicians with imaging capabilities to facilitate the diagnosis and treatment of diseases and disorders. Services include magnetic resonance imaging (MRI), computed tomography (CT), positron emission tomography (PET), nuclear medicine, mammography, ultrasound, diagnostic radiology (X-ray), fluoroscopy and other related procedures. The vast majority of our centers offer multi-modality imaging services, a strategy that diversifies revenue streams, reduces exposure to reimbursement changes and provides patients and referring physicians one location to serve the needs of multiple procedures. Included in the segment is our eRad subsidiary, which designs the underlying critical scheduling, data storage and retrieval systems necessary for imaging center operation.
Artificial Intelligence ("AI")
Our AI segment develops and deploys clinical applications to enhance interpretation of medical images and improve patient outcomes with an emphasis on brain, breast, prostate, and pulmonary diagnostics.
Our chief operating decision maker ("CODM"), who is also our CEO, evaluates the financial performance of our segments based upon their respective revenue and segmented internal profit and loss statements prepared on a basis not consistent with GAAP. We do not report balance sheet information by segment since it is not reviewed by our CODM.
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| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Imaging Centers | $ | $ | $ | $ | |||||||||||||||||||
| AI | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
| Cost of Operations | |||||||||||||||||||||||
| Imaging Centers | $ | $ | $ | $ | |||||||||||||||||||
| AI | |||||||||||||||||||||||
| Total cost of operations | $ | $ | $ | $ | |||||||||||||||||||
| Depreciation and Amortization | |||||||||||||||||||||||
| Imaging Centers | $ | $ | $ | $ | |||||||||||||||||||
| AI | |||||||||||||||||||||||
| Total depreciation and amortization | $ | $ | $ | $ | |||||||||||||||||||
| Loss (Gain) on Disposal of Equipment | |||||||||||||||||||||||
| Imaging Centers | $ | ( | $ | $ | $ | ( | |||||||||||||||||
| AI | |||||||||||||||||||||||
| Total loss (gain) | $ | ( | $ | $ | $ | ( | |||||||||||||||||
| Severance | |||||||||||||||||||||||
| Imaging Centers | $ | $ | $ | $ | |||||||||||||||||||
| AI | |||||||||||||||||||||||
| Total severance | $ | $ | $ | $ | |||||||||||||||||||
| Income from Operations | |||||||||||||||||||||||
| Imaging Centers | $ | $ | $ | $ | |||||||||||||||||||
| AI | ( | ( | ( | ( | |||||||||||||||||||
| Total income from operations | $ | $ | $ | $ | |||||||||||||||||||
For proper comparative purposes, Imaging Center segment revenue in 2021 excludes Provider Relief Funding of $6.3 million for the nine months ended September 30, 2021, as it represents a form of direct Government stimulus. No such funds were received for the three months ended September 30, 2021.
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NOTE 6 – CREDIT FACILITIES AND NOTES PAYABLE
As of September 30, 2022 and December 31, 2021 our term loan debt obligations are as follows (in thousands):
| September 30, 2022 | December 31, 2021 | ||||||||||
| First Lien Term Loans collateralized by RadNet's tangible and intangible assets | $ | $ | |||||||||
| Discount on First Lien Term Loans | ( | ( | |||||||||
| SunTrust Term Loan collateralized by NJIN's tangible and intangible assets | |||||||||||
| Total debt obligations | |||||||||||
| Less: current portion | ( | ( | |||||||||
| Long term portion debt obligations | $ | $ | |||||||||
We had no 195.0 million Barclays Revolving Credit Facility at September 30, 2022 and have reserved $7.6 million for certain letters of credit. The remaining $187.4 million of our Barclays Revolving Credit Facility was available to draw upon as of September 30, 2022. We had no outstanding balance under our $30.0 million SunTrust Revolving Credit Facility at September 30, 2022. As of September 30, 2022, we were in compliance with all covenants under our credit facilities.
Second Amended and Restated First Lien Credit and Guaranty Agreement
On April 23, 2021, we entered into the Second Amended and Restated First Lien Credit and Guaranty Agreement (the "Restated Credit Agreement") which provides for $725.0 million of senior secured first lien term loans (the "First Lien Term Loans") and a $195.0 million senior secured revolving credit facility (the "Barclays Revolving Credit Facility"). The proceeds of the First Lien Term Loans were used to refinance loans outstanding under our prior first lien credit agreement and provide funding for current and future operations. Total costs of the Restated Credit Agreement amounted to approximately $14.9 million segregated as follows: $8.8 million capitalized to discount and deferred finance cost, $4.5 million expensed to debt restructuring costs, $1.5 million charged to loss on early extinguishment of debt and $0.1 million written off to interest expense. Amounts capitalized will be amortized over the remaining terms of the respective credit facilities under the Restated Credit Agreement.
Senior Secured Credit Facilities
First Lien Term Loans:
The First Lien Term Loans under the Restated Credit Agreement bear interest at either a Eurodollar Rate or an Alternate Base Rate (in each case, as defined in the Restated Credit Agreement), plus an applicable margin. The applicable margin for Eurodollar Rate term loans under the Restated Credit Agreement is 3.25 % per annum, with a reduction to 3.00 % per annum upon delivery by us of financial statements for the period ending March 31, 2021 evidencing a first lien net leverage ratio of 3.50 to 1.00 or less. Such statements were delivered by us on May 27, 2021. At September 30, 2022 the effective Eurodollar Rate and the Alternate Base Rate for the First Lien Term Loans under the Restated Credit Agreement was 2.49 % and 6.25 %, respectively and the applicable margin for the Eurodollar Rate and Alternate Base Rate First Lien Term Loans under the Restated Credit Agreement was 3.00 % and 2.00 %, respectively.
The Restated Credit Agreement provides for quarterly payments of principal for the First Lien Term Loan in the amount of approximately $1.8 million. The First Lien Term Loan will mature on April 23, 2028 unless otherwise accelerated under the terms of the Restated Credit Agreement.
SunTrust Credit Facilities:
At September 30, 2022, our SunTrust credit facilities, which relate to our consolidated subsidiary The New Jersey Imaging Network, L.L.C.("NJIN"), were comprised of one term loan in the principal amount described in the table above (the "SunTrust Term Loan") and a revolving credit facility of $30.0 million (the "SunTrust Revolving Credit Facility") both of which are provided pursuant to the Amended and Restated Revolving Credit and Term Loan Agreement dated August 31, 2018, among NJIN, as borrower, with SunTrust Bank, as administrative agent, and the lenders identified therein (as amended, the "SunTrust Credit Agreement"). Our SunTrust Term Loan bears interest at either an Adjusted LIBOR or a Base Rate (each as defined in the SunTrust Credit Agreement), plus an applicable margin according to the following schedule:
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| Pricing Level | Leverage Ratio | Applicable Margin for Eurodollar Loans | Applicable Margin for Base Rate Loans | Applicable Margin for Letter of Credit Fees | Applicable Percentage for Commitment Fee | ||||||||||||
| I | Greater than or equal to | per annum | per annum | per annum | per annum | ||||||||||||
| II | Less than | per annum | per annum | per annum | per annum | ||||||||||||
| III | Less than | per annum | per annum | per annum | per annum | ||||||||||||
| IV | Less than | per annum | per annum | per annum | per annum | ||||||||||||
| V | Less than | per annum | per annum | per annum | per annum | ||||||||||||
The loans and other obligations outstanding under the SunTrust Credit Agreement currently bear interest at a three month LIBOR election at 2.88 % plus an applicable margin and fees based on Pricing Level V described above.
The scheduled amortization of the SunTrust Term Loan began December 31, 2018 with quarterly payments of $0.8 million, representing annual amortization equal to 5.0 % of the original principal amount of the SunTrust Term Loan. At scheduled intervals, the quarterly amortization increases by $0.4 million, with the remaining balance to be paid at maturity. The SunTrust Term Loan will mature on August 31, 2023 unless otherwise accelerated under the terms of the SunTrust Credit Agreement.
Revolving Credit Facilities
Barclays Revolving Credit Facility
The Barclays Revolving Credit Facility under the Restated Credit Agreement is a $195.0 million senior secured revolving credit facility. Associated with the Barclays Revolving Credit Facility are deferred financing costs, net of accumulated amortization, of $1.8 million at September 30, 2022.
| First Lien Net Leverage Ratio | Eurodollar Rate Spread | Alternate Base Rate Spread | ||||||
> | ||||||||
> | ||||||||
≤ | ||||||||
As of September 30, 2022, the effective interest rate payable on revolving loans under the Barclays Revolving Credit Facility was 8.25 %.
For letters of credit issued under the Barclays Revolving Credit Facility, letter of credit fees accrue at the applicable margin for Eurodollar rate revolving loans which is currently 3.00 % and fronting fees accrue at 0.125 % per annum, in each case on the average aggregate daily maximum amount available to be drawn under all letters of credit issued under the Restated Credit Agreement. In addition, a commitment fee of 0.50 % per annum accrues on the unused revolver commitments under the Barclays Revolving Credit Facility.
The Barclays Revolving Credit Facility will terminate on April 23, 2026 unless otherwise accelerated in accordance with the terms of the Restated Credit Agreement.
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SunTrust Revolving Credit Facility
The SunTrust Credit Agreement established a $30.0 million revolving credit facility available to NJIN for funding requirements. The SunTrust Revolving Credit Facility terminates on the earliest of (i) August 31, 2023, (ii) the voluntary termination thereof by NJIN pursuant to Section 2.8 of the SunTrust Credit Agreement, or (iii) the date on which all amounts outstanding under the SunTrust Credit Agreement have been declared or have automatically become due and payable (whether by acceleration or otherwise). As of September 30, 2022, NJIN had no borrowings under the SunTrust Revolving Credit Facility.
NOTE 7 – STOCK-BASED COMPENSATION
Stock Incentive Plans
We have one long-term equity incentive plan, the RadNet, Inc. Equity Incentive Plan, which we first amended and restated April 20, 2015, again on March 9, 2017 and currently as of April 15, 2021 (the "Restated Plan”). The Restated Plan was most recently approved by our stockholders at our annual stockholders meeting on June 10, 2021. We have reserved for issuance under the Restated Plan 16,500,000 shares of common stock. We can issue options (incentive and nonstatutory), performance based options, stock awards (restricted or unrestricted), stock units, performance based stock units, and stock appreciation rights under the Restated Plan.
Options
Stock option grants, whether incentive or nonstatutory, generally vest over 3 to 5 years and expire 5 to 10 years from the date of grant. Under the Restated Plan, stock options may not be granted at a per share exercise price below the fair market value of a share of our common stock on the date of grant, may not be repriced or exchanged without stockholder approval, and the maximum exercisable term of the option may not exceed 10 years.
As of September 30, 2022, we had outstanding options to acquire 703,914 shares of our common stock, of which options to acquire 508,969 shares were exercisable. The following summarizes all of our option transactions for the nine months ended September 30, 2022:
| Outstanding Options Under the 2006 Plan | Shares | Weighted Average Exercise price Per Common Share | Weighted Average Remaining Contractual Life (in years) | Aggregate Intrinsic Value | ||||||||||||||||||||||
| Balance, December 31, 2021 | $ | |||||||||||||||||||||||||
| Granted | ||||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | |||||||||||||||||||||||||
| Exercisable at September 30, 2022 | ||||||||||||||||||||||||||
Aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between our closing stock price on September 30, 2022 and the exercise price, multiplied by the number of in-the-money options as applicable) that would have been received by the holder had all holders exercised their options on September 30, 2022. As of September 30, 2022, total unrecognized stock-based compensation expense related to non-vested employee awards was $1.4 million, which is expected to be recognized over a weighted average period of approximately 2.20 years.
DeepHealth Options
During the second quarter of fiscal 2020, in connection with the completion of the DeepHealth acquisition, we granted options to acquire 412,434 shares at a grant date fair value of $16.93 per share unit to DeepHealth employees in replacement of their stock options that were outstanding as of the closing date. As of September 30, 2022, total unrecognized stock based compensation expense related to non-vested DeepHealth options was approximately $0.9 million, which is expected to be recognized over a weighted average period of approximately 0.89 years
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| Outstanding Options Under the Deep Health Plan | Shares | Weighted Average Exercise price Per Common Share | Weighted Average Remaining Contractual Life (in years) | Aggregate Intrinsic Value | ||||||||||||||||||||||
| Balance December 31, 2021 | $ | — | ||||||||||||||||||||||||
| Exercised | ( | — | ||||||||||||||||||||||||
| Balance, September 30, 2022 | — | $ | ||||||||||||||||||||||||
| Exercisable at September 30, 2022 | — | |||||||||||||||||||||||||
Options issued in replacement of original DeepHealth options as a result of our acquisition are not included in the share count under the Restated Plan.
Restricted Stock Awards
The Restated Plan permits the award of restricted stock awards (“RSA’s”). As of September 30, 2022, we have issued a total of 7,892,930 RSA’s of which 554,476 were unvested at September 30, 2022. The following summarizes all unvested RSA’s activities during the nine months ended September 30, 2022:
| RSA's | Weighted-Average Remaining Contractual Term (Years) | Weighted-Average Fair Value | |||||||||||||||
| RSA's unvested at December 31, 2021 | $ | ||||||||||||||||
| Changes during the period | |||||||||||||||||
| Granted | $ | ||||||||||||||||
| Vested | ( | $ | |||||||||||||||
| Forfeited or Canceled | ( | $ | |||||||||||||||
| RSA's unvested at September 30, 2022 | $ | ||||||||||||||||
We determine the fair value of all RSA’s based on the closing price of our common stock on the award date.
Other stock bonus awards
The Restated Plan also permits share awards not subject to any future service period. These are valued and expensed based on the closing price of our common stock on the date of award. During the nine months ended September 30, 2022, awards totaling 1,000 shares with a value of approximately $19.0 thousand were granted.
Performance based stock units ("PSUs")
In January 2022, we granted certain employees PSUs with a target award of 25,683 shares of our common stock. The PSUs will vest in two equal parts, starting three years from the grant date based on continuous service, with the number of shares earned (0 % to 200 % of the target award) depending upon the extent to which we achieve a performance condition as determined by the board of directors over the period from January 1, 2022 through December 31, 2022.
Performance based stock options ("PSOs")
In January 2022, we granted certain employees PSOs to purchase a maximum of 111,925 shares of our common stock. The PSOs will vest in three equal parts, starting three years from the grant date based on continuous service, with the number of shares earned (0 shares to 111,925 shares) depending upon the extent to which we achieve a performance condition as determined by the board of directors over the period from January 1, 2022 through December 31, 2022.
Long Term Incentive Plan shares ("LTIPs")
In addition, we issue stock-based compensation to certain employees in our AI segment in the form of Stock Units and Restricted Stock Awards, subject to certain restrictions. The awards represent a form of long term incentive and are reflective of a general practice within the software industry. The units and shares vest ratably over a 2 to 4 year period, conditioned on continued employment through the vesting periods. We determine the fair value of all LTIPs based on the closing price of our
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common stock on the award date. The following summarizes all unvested LTIPs activities during the nine months ended September 30, 2022:
| LTIPs | Weighted-Average Remaining Contractual Term (Years) | Weighted-Average Fair Value | ||||||||||||||||||
| RSA's unvested at December 31, 2021 | $ | |||||||||||||||||||
| Changes during the period | ||||||||||||||||||||
| Granted | $ | |||||||||||||||||||
| Forfeited or Canceled | ( | $ | ||||||||||||||||||
| RSA's unvested at September 30, 2022 | $ | |||||||||||||||||||
Restated Plan summary
In summary, of the 16,500,000 shares of common stock reserved for issuance under the Restated Plan, at September 30, 2022, there remain 2,037,463 shares available under the Restated Plan for future issuance.
NOTE 8 – SUBSEQUENT EVENTS
Refinancing of SunTrust (Now Truist) Credit Facilities:
On October 7, 2022, our subsidiary, NJIN, entered into a Second Amended and Restated Credit and Term Loan Agreement which provides for a single term loan of $150.0 million and a $50.0 million revolving credit facility. The proceeds of the term loan were used to partially fund the acquisition of Montclair Radiological Associates, refinance the outstanding $42.0 million term loan and pay fees and expenses associated with the refinancing transaction. The key terms of the Restated Credit and Term Loan Agreement are:
• Interest Rates: Borrowings bear interest at either the SOFR or Base Rate as defined in the agreement, plus an applicable margin.
• Maturity Dates: The maturity date for both the term loan and revolving loans is October 7, 2027, unless accelerated in accordance with the terms of the agreement.
• Payments: Beginning March 31, 2023, we will be required to make quarterly principal amortization payments on the term loan in the amount of $1.9 million, which will increase to $3.8 million, with the balance paid at maturity.
Acquisitions:
On October 1, 2022, through our NJIN subsidiary, we acquired Montclair Radiological Associates for purchase consideration of approximately $112.6 million. Montclair consists of six multi modality radiology centers located in New Jersey.
On November 1, 2022, we acquired a 75 % controlling share interest in London-based Heart & Lung Imaging Limited ("HLH"). HLH was founded to improve lung cancer outcomes through early detection and accurate diagnosis. HLH will be integrated into our AI operations. Total combined purchase consideration, including contingencies, consists of RadNet common stock and cash up to a potential $27.6 million.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and notes thereto for the year ended December 31, 2021 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the U.S. Securities and Exchange Commission (SEC) on March 1, 2022.
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Forward-Looking Statements
This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements reflect current views about future events and are based on our currently available financial, economic and competitive data and on current business plans. Actual events or results may differ materially depending on risks and uncertainties that may affect our operations, markets, services, prices and other factors.
In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” “assumption” or the negative of these terms or other comparable terminology. Forward-looking statements in this quarterly report include, among others, statements we make regarding:
•anticipated trends in our revenues, operating expenses or capital expenditures, and our financial guidance;
•expected future market acceptance for our products or services, and the anticipated protection afforded by our competitive strengths in the markets we serve;
•potential timing and impact of changes in regulations impacting our business;
•the ongoing impact on our business, suppliers, payors, customers, referral sources, partners, patients and employees of the COVID-19 pandemic;
•the anticipated effect of the measures we are taking to respond to the COVID-19 pandemic
•our ability to successfully acquire and integrate new imaging operations;
•cost savings, efficiencies and improvements anticipated from our investments in artificial intelligence and machine learning products and services; and
•our future liquidity and our continuing ability to service and remain in compliance with applicable debt covenants or refinance our current indebtedness.
Forward-looking statements are neither historical facts nor assurances of future performance. Because forward-looking statements relate to the future, they are inherently subject to known and unknown risks, uncertainties and other factors that are difficult to predict and our of our control. Our actual results, level of activity, performance or achievements may be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forwards-looking statements. Important factors that could cause our actual results to differ materially from those indicated or implied in our forward-looking statements include the factors included in “Risk Factors,” in our annual report on Form 10-K for the fiscal year ended December 31, 2021 or supplemented by the information in Part II– Item 1A below. You should consider the inherent limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of predictions contained in such forward-looking statements.
Any forward-looking statement in this quarterly report is based on information currently available to us and speaks only as of the date of this report. We do not undertake any responsibility to release publicly any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this quarterly report or any unanticipated events which may cause actual results to differ from those expressed or implied by the forward-looking statements contained in this quarterly report, except as required by law.
Overview
We are a leading national provider of freestanding, fixed-site outpatient diagnostic imaging services in the United States based on number of locations and annual imaging revenue. At September 30, 2022, we operated, directly or indirectly through joint ventures with hospitals, 349 centers located in Arizona, California, Delaware, Florida, Maryland, New Jersey, and New York. Our operations comprise two segments for financial reporting purposes for this reporting period, Imaging Centers and Artificial Intelligence
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Our Imaging Center segment provides physicians with imaging capabilities to facilitate the diagnosis and treatment of diseases and disorders. Services include magnetic resonance imaging (MRI), computed tomography (CT), positron emission tomography (PET), nuclear medicine, mammography, ultrasound, diagnostic radiology (X-ray), fluoroscopy and other related procedures. The vast majority of our centers offer multi-modality imaging services, a strategy that diversifies revenue streams, reduces exposure to reimbursement changes and provides patients and referring physicians one location to serve the needs of multiple procedures. Included in the segment is our eRad subsidiary, which designs the underlying critical scheduling, data storage and retrieval systems necessary for imaging center operation.
Our Artificial Intelligence ("AI") segment that has been established through our acquisitions of DeepHealth, Nulogix Aidence Holding B.V. and Quantib B.V.. Our current AI focus is to develop solutions that employ machine learning to assist radiologists and other clinicians in interpreting images and improving patient care, initially in the fields of brain, breast, prostate, and pulmonary diagnostics.
We derive substantially all of our revenue, directly or indirectly, from fees charged for the diagnostic imaging services performed at our imaging centers. The following table shows our centers in operation and revenues for the nine months ended September 30, 2022 and September 30, 2021:
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Centers in operation | 349 | 353 | |||||||||
| Net revenues (millions) | $ | 1,046 | $ | 982 | |||||||
Our revenue is derived from a diverse mix of payors, including private, managed care capitated and government payors. We believe our payor diversity mitigates our exposure to possible unfavorable reimbursement trends within any one payor class. In addition, our experience with capitation arrangements over the last several years has provided us with the expertise to manage utilization and pricing effectively, resulting in a predictable stream of revenue.
Our total service fee revenues during the three and nine months ended September 30, 2022 and 2021 are presented in the table below. Our imaging center revenue is displayed as the estimated service fee, broken down by classification of insurance coverage type. Additional revenues are earned from our management services provided to joint ventures and our software and AI subsidiaries.
| In Thousands | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Commercial insurance | $ | 189,634 | $ | 185,723 | $ | 573,259 | $ | 555,355 | |||||||||||||||
| Medicare | 78,034 | 73,163 | 226,827 | 207,977 | |||||||||||||||||||
| Medicaid | 9,669 | 8,707 | 28,456 | 26,198 | |||||||||||||||||||
| Workers' compensation/personal injury | 13,200 | 11,554 | 38,785 | 32,507 | |||||||||||||||||||
| Other patient revenue | 7,646 | 4,800 | 22,334 | 14,766 | |||||||||||||||||||
| Management fee revenue | 6,099 | 5,255 | 17,199 | 16,007 | |||||||||||||||||||
| Software revenue | 3,430 | 2,068 | 9,849 | 7,115 | |||||||||||||||||||
| Other | 3,431 | 3,641 | 12,054 | 10,058 | |||||||||||||||||||
| Revenue under capitation arrangements | 38,001 | 37,283 | 114,366 | 111,449 | |||||||||||||||||||
| Imaging Center Segment Revenue | 349,144 | 332,194 | 1,043,129 | 981,432 | |||||||||||||||||||
| AI Segment Revenue | 900 | 496 | 3,056 | 496 | |||||||||||||||||||
| Total service revenue | $ | 350,044 | $ | 332,690 | $ | 1,046,185 | $ | 981,928 | |||||||||||||||
Recent Developments
Through the third quarter ended September 30, 2022 our imaging business continued to expand, with procedure volumes returning to levels experienced before the COVID-19 pandemic, with year to date same center procedure volumes increasing 3.1% and overall procedure volumes increasing 6.0% over the same period in 2021. We continued to pursue our strategy of expansion within geographic regions, with a concentration on adding new facilities in Maryland. While imaging
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volumes returned to pre-pandemic levels, our operations have experienced effects from the pandemic and related macroeconomic issues. We are experiencing tighter labor markets, resulting in increased salaries as we seek to retain our skilled workforce. Our acquisitions of Aidence Holding B.V. and Quantib B.V. have expanded our AI initiatives to encompass imaging diagnostics solutions for the most prevalent cancers. Efforts in AI are largely in the product development stage at this time and we expect that the segment will continue to experience operating losses for the foreseeable future as we seek to secure both regulatory approvals and market acceptance for our products.
Equity Investments, Acquisitions and Dispositions, and Joint Venture Activity
We have developed our medical imaging business through a combination of organic growth, equity investments, acquisitions and joint venture formations. The information below updates our activity of such matters contained in our annual report on Form 10-K for the year ended December 31, 2021.
Equity Investments
As of September 30, 2022, we have three equity investments for which a fair value is not readily determinable and therefore the total amounts invested are recognized at cost as follows:
Medic Vision Imaging Solutions Ltd., based in Israel, specializes in software packages that provide compliant radiation dose structured reporting and enhanced images from reduced dose CT scans. Our investment of $1.2 million represents a 14.21% equity interest in the company. No observable price changes or impairment in our investment was identified during the three and nine months ended September 30, 2022.
Turner Imaging Systems, based in Utah, develops and markets portable X-ray imaging systems that provide a user the ability to acquire X-ray images wherever and whenever they are needed. On February 1, 2018, we purchased 2.1 million preferred shares in Turner Imaging Systems for $2.0 million. On January 1, 2019 we funded a convertible promissory note in the amount of $0.1 million that converted into an additional 80,000 shares effective December 21, 2019. No observable price changes or impairment in our investment was identified during the three and nine months ended September 30, 2022.
WhiteRabbit.ai Inc., based in California, is currently developing an artificial intelligence suite which aims to improve the speed and accuracy of cancer detection in radiology and improve patient care. On November 5, 2019 we acquired an equity interest in the company for $1.0 million and also loaned the company $2.5 million in support of it operations. No observable price changes, impairment in our investment or impairment of the loan receivable was identified during the three and nine months ended September 30, 2022.
Acquisitions
Imaging Center
During the first quarter of 2022, we completed the acquisition of certain assets of the following entities, which either engage directly in the practice of radiology or associated businesses. The primary reason for these acquisitions was to strengthen our presence in the Maryland market. These acquisitions are reported as part of our Imaging Center segment. We made a fair value determination of the acquired assets and assumed liabilities and the following were recorded (in thousands):
| Entity | Date Acquired | Total Consideration | Property & Equipment | Right of Use Assets | Goodwill | Right of Use Liabilities | ||||||||||||||||||||
| IFRC LLC*^ | 1/1/2022 | 4,800 | 2,103 | 857 | 2,697 | (857) | ||||||||||||||||||||
| IFRC LLC*^ | 1/1/2022 | 8,200 | 2,910 | 1,703 | 5,271 | (1,703) | ||||||||||||||||||||
| Total | 13,000 | 5,013 | 2,560 | 7,968 | (2,560) | |||||||||||||||||||||
*Fair Value Determination is Final
^ IFRC LLC acquisitions consisted of three subsidiaries of IFRC, one of which was purchased separately by a joint venture with Calvert Medical Imaging Centers, LLC.
Artificial Intelligence
Aidence Holding B.V.
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On January 20, 2022, we completed our acquisition of all the equity interests of Aidence Holding B.V. ("Aidence") an artificial intelligence enterprise centered on lung cancer screening, in an combination stock and cash purchase. Aidence is reported as part of our AI segment and was acquired to enhance our AI capabilities. The transaction was accounted for as an acquisition of a business and total purchase consideration was determined to be approximately $45.2 million including i) 1,117,872 shares issued at $26.80 per share with a fair value of $30.0 million ii) cash of $1.8 million and iii) assumed liabilities of $11.9 million, $7.4 million in milestone contingent consideration and cash holdback of $4.5 million and iv) a settlement of a loan from RadNet of $1.5 million. In addition we paid certain seller closing costs through the issuance of 23,362 shares at a fair value of $0.6 million. We recorded $1.0 million in current assets, $0.2 million in property plant and equipment, $27.7 million in intangible assets, $3.2 million in liabilities and $19.0 million in goodwill.
Quantib B.V.
On January 20, 2022, we completed our acquisition of all the equity interests of Quantib B.V. ("Quantib") an artificial intelligence enterprise centered on prostate cancer screening, in a combination stock and cash purchase. Quantib is reported as part of our AI segment, and was acquired to enhance our AI capabilities. The transaction was accounted for as an acquisition of a business and total purchase consideration was determined to be approximately $42.3 million including i) 965,058 shares issued at $26.80 per share with a fair value of $25.9 million ii) cash of $11.8 million and iii) 113,303 shares with a fair value at the date of close of $3.0 million and cash holdback of $1.6 million to be issued 18 months after acquisition subject to adjustment for any indemnification claims. We recorded $2.4 million million in current assets, $0.1 million in property plant and equipment, $21.3 million in intangible assets, $3.7 million in liabilities and $22.2 million in goodwill.
Formation of majority owned subsidiary
Frederick County Radiology, LLC
On April 1, 2022 we formed Frederick County Radiology, LLC ("FCR"), a partnership with Frederick Health Hospital, Inc. ("Hospital"). The operation offers multi-modality services out of six locations in Frederick, Maryland. We contributed the operations of 4 centers to the enterprise and Hospital contributed $5.4 million in fixed assets, $3.0 million in equipment, and $10.8 million in goodwill. As a result of the the transaction, we retain a 65% controlling economic interest in FCR and Hospital retains a preliminary $11.1 million or 35% noncontrolling economic interest in FCR. The initial accounting is preliminary as of September 30, 2022 for the acquired assets and liabilities as we are currently in the process of completing the assessment of valuation inputs and assumptions as well as completing the assessment of the tax attributes of the business combination.
Advanced Radiology at Capital Region, LLC
On June 15, 2022 we entered into Advanced Radiology at Capital Region, LLC, a partnership with Dimension Health Corporation. ("Dimension"), and affiliate of the University of Maryland. The operation will provide multi-modality services out of two yet to be determined locations in the Largo, Maryland area. The venture was initially capitalized with nominal amounts of $5.1 thousand for a 51% economic interest from us and $4.9 thousand from Dimension for a 49% economic interest.
Joint Venture Activity
Acquisition by equity method investee
During the first quarter of 2022, our joint venture with Calvert Medical Imaging Center, LLC, completed the acquisition of certain assets to strengthen our presence in the Maryland market. We made a fair value determination of the acquired assets and assumed liabilities and the following were recorded (in thousands):
| Entity | Date Acquired | Total Consideration | Property & Equipment | Right of Use Assets | Goodwill | Right of Use Liabilities | ||||||||||||||||||||
| IFRC LLC *^ | 1/1/2022 | 3,922 | 2,121 | 1,295 | 1,801 | (1,295) | ||||||||||||||||||||
*Fair Value Determination is Final
^ IFRC LLC acquisitions consisted of three subsidiaries of IFRC, two of which were purchased separately by wholly owned RadNet subsidiaries.
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The following table is a summary of our investment in joint ventures during the nine months ended September 30, 2022 (in thousands):
| Balance as of December 31, 2021 | $ | 42,229 | |||
| Equity in earnings in these joint ventures | 8,350 | ||||
| Equity contributions in existing joint ventures | 1,441 | ||||
| Balance as of September 30, 2022 | $ | 52,020 | |||
We charged management service fees from the centers underlying these joint ventures of approximately $6.1 million and $5.3 million for the three months ended September 30, 2022 and 2021 and $17.2 million and $16.0 million for the nine months ended September 30, 2022 and 2021, respectively.
On June 24, 2022, we made an additional equity contribution to our joint venture in Arizona of $1.4 million. Our equity ownership interest percentage in the venture did not change.
The following table is a summary of key balance sheet data for these joint ventures as of September 30, 2022 and December 31, 2021 and income statement data for the nine months ended September 30, 2022 and 2021 (in thousands):
| Balance Sheet Data: | September 30, 2022 | December 31, 2021 | |||||||||
| Current assets | $ | 48,154 | $ | 37,186 | |||||||
| Noncurrent assets | 86,123 | 73,592 | |||||||||
| Current liabilities | (12,211) | (12,919) | |||||||||
| Noncurrent liabilities | (26,619) | (22,370) | |||||||||
| Total net assets | $ | 95,447 | $ | 75,489 | |||||||
| Book value of RadNet joint venture interests | $ | 43,947 | $ | 34,930 | |||||||
| Cost in excess of book value of acquired joint venture interests | 8,073 | 7,299 | |||||||||
| Total value of RadNet joint venture interests | $ | 52,020 | $ | 42,229 | |||||||
Income statement data for the nine months ended September 30, | 2022 | 2021 | |||||||||
| Net revenue | $ | 107,241 | $ | 98,193 | |||||||
| Net income | $ | 17,034 | $ | 16,007 | |||||||
Critical Accounting Policies
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 Note 2 to our consolidated financial statements in this quarterly report and in our annual report on Form 10-K for the year ended December 31, 2021, we discuss our significant accounting policies, including those that do not require management to make difficult, subjective or complex judgments or estimates. The most significant areas involving management’s judgments and estimates are described below.
Use of Estimates
The financial statements were prepared in accordance with U.S. generally accepted accounting principles (GAAP), which requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. 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 revenues 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 materially differ from these estimates.
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Revenues
Our revenues generally relate to net patient fees received from various payors and patients themselves under contracts in which our performance obligations are to provide diagnostic services to the patients. Revenues are recorded during the period our obligations to provide diagnostic services are satisfied. Our performance obligations for diagnostic services are generally satisfied over a period of less than one day. The contractual relationships with patients, in most cases, also involve a third-party payor (Medicare, Medicaid, managed care health plans and commercial insurance companies, including plans offered through the health insurance exchanges) and the transaction prices for the services provided are dependent upon the terms provided by (Medicare and Medicaid) or negotiated with (managed care health plans and commercial insurance companies) the third-party payors. The payment arrangements with third-party payors for the services we provide to the related patients typically specify payments at amounts less than our standard charges and generally provide for payments based upon predetermined rates per diagnostic services or discounted fee-for-service rates. Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations, changes in business and economic conditions, and the frequent changes in managed care contractual terms resulting from contract re-negotiations and renewals.
As it relates to the Group, this service fee revenue includes payments for both the professional medical interpretation revenue recognized by them as well as the payment for all other aspects related to our providing the imaging services, for which we earn management fees. As it relates to other centers, this service fee revenue is earned through providing the use of our diagnostic imaging equipment and the provision of technical services as well as providing administration services such as clerical and administrative personnel, bookkeeping and accounting services, billing and collection, provision of medical and office supplies, secretarial, reception and transcription services, maintenance of medical records, and advertising, marketing and promotional activities.
Our revenues are based upon our management's estimate of amounts we expect to be entitled to receive from patients and third-party payors. Estimates of contractual allowances under Medicare, Medicaid, managed care and commercial insurance plans are based upon historical collection experience of the payments received from such payors in accordance with the underlying contractual agreements. Revenues related to uninsured patients and uninsured copayment and deductible amounts for patients who have health care coverage may have price concessions applied. We also record estimated implicit price concessions (based primarily on historical collection experience) related to uninsured accounts to record self-pay revenues at the estimated amounts we expect to collect.
Under capitation arrangements with various health plans, we earn a per-enrollee amount each month for making available diagnostic imaging services to all plan enrollees under the capitation arrangement. Revenue under capitation arrangements is recognized in the period in which we are obligated to provide services to plan enrollees under contracts with various health plans. Our estimates and assumptions related to revenue recognition did not change materially for the quarter ended September 30, 2022.
Provider Relief Fund (COVID-19 Stimulus Funding)
The Provider Relief Fund offers government assistance to eligible providers throughout the healthcare system in support of certain expenses or lost revenue attributable to the coronavirus pandemic. We have recorded provider relief funding in our condensed Consolidated Statements of Operations in the amount of $6.3 million for the nine months ended September 30, 2021. No provider relief funding was received for the three and nine months ended September 30, 2022. Generally, the department of Health and Human Services ("HHS") does not intend to recoup funds as long as a provider's lost revenue and increased expenses exceed the amount of provider relief funding one has received. HHS reserves the right to audit Relief Fund recipients in the future to ensure that this requirement is met and collect any Relief Fund amounts that were made in error or exceed lost revenue or increased expenses due to the pandemic. Failure to comply with the terms and conditions may be grounds for recoupment. In recognizing revenue associated with provider relief funding our management is required to assess whether our operations have meet the applicable requirements for the funding received. During the quarter ended September 30, 2022, we continued to evaluate our operating results in light of the most recent government guidance and based on our assessment, the amount of revenue recognized is appropriate.
Accounts Receivable
Substantially all of our accounts receivable are due under fee-for-service contracts from third party payors, such as insurance companies and government-sponsored healthcare programs, or directly from patients. Services are generally provided pursuant to one-year contracts with healthcare providers. Receivables generally are collected within industry norms for third-party payors. We continuously monitor collections from our payors and maintain an allowance for bad debts based upon
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specific payor collection issues that we have identified and our historical experience. Our estimates and assumptions for allowances on our account receivable did not change materially during the quarter ended September 30, 2022.
Business Combination
We evaluate all acquisitions under the framework Clarifying the Definition of a Business in the accounting guidance. Once a purchase has been determined to be the acquisition of a business, we are required to recognize the assets acquired and the liabilities assumed at their acquisition date fair values. Any portion of the purchase consideration transferred in excess of the net of the acquisition date fair values of the assets acquired and the liabilities assumed, is allocated to goodwill. The allocation requires our management to make estimates of the value of various assets acquired and liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.
Goodwill and Indefinite Lived Intangibles
Goodwill at September 30, 2022 totaled $575.1 million. Indefinite Lived Intangible Assets at September 30, 2022 were $12.7 million and are associated with the value of certain trade name intangibles. Our management reviews the fair value of our reporting units on an annual basis to determine if an event has occurred which suggest that the fair value of a reporting unit may be impaired. When we determine the carrying value of a reporting unit exceeds its fair value, an impairment charge would be recognized and should not exceed the total amount of goodwill allocated to that reporting unit. The review of fair value requires our management to make assessments of the business and financial prospects for a particular reporting unit. We tested goodwill for impairment on October 1, 2021. We also continue at regular intervals to consider the current and expected future economic and market conditions surrounding the COVID-19 pandemic and to date have not had an indication of goodwill impairment being more likely than not through September 30, 2022.
Recent Accounting Standards
See Note 3, Recent Accounting and Reporting Standards to the financial statements included in this report for further information.
Subsequent Events
Refinancing of SunTrust (Now Truist) Credit Facilities:
On October 7, 2022, our subsidiary, NJIN, entered into a Second Amended and Restated Credit and Term Loan Agreement which provides for a single term loan of $150.0 million and a $50.0 million revolving credit facility. The proceeds of the term loan were used to partially fund the acquisition of Montclair Radiological Associates, refinance the outstanding $42.0 million term loan and pay fees and expenses associated with the refinancing transaction. The key terms of the Restated Credit and Term Loan Agreement are:
• Interest Rates: Borrowings bear interest at either the SOFR or Base Rate as defined in the agreement, plus an applicable margin.
• Maturity Dates: The maturity date for both the term loan and revolving loans is October 7, 2027, unless accelerated in accordance with the terms of the agreement.
• Payments: Beginning March 31, 2023, we will be required to make quarterly principal amortization payments on the term loan in the amount of $1.9 million, which will increase to $3.8 million, with the balance paid at maturity.
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Acquisitions:
On October 1, 2022, through our NJIN subsidiary, we acquired Montclair Radiological Associates for purchase consideration of approximately $112.6 million. Montclair consists of six multi modality radiology centers located in New Jersey.
On November 1, 2022, we acquired a 75% controlling share interest in London-based Heart & Lung Imaging Limited ("HLH"). HLH was founded to improve lung cancer outcomes through early detection and accurate diagnosis. HLH will be integrated into our AI operations. Total combined purchase consideration, including contingencies, consists of RadNet common stock and cash up to a potential $27.6 million.
Results of Operations
The following table sets forth, for the three and nine months ended September 30, 2022 and 2021, the percentage that certain items in the statements of operations bears to total service revenue, inclusive of revenue under capitation contracts.
RADNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE DATA)
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| REVENUE | |||||||||||||||||||||||
| Service fee revenue | 89.1 | % | 88.8 | % | 89.1 | % | 88.6 | % | |||||||||||||||
| Revenue under capitation arrangements | 10.9 | % | 11.2 | % | 10.9 | % | 11.4 | % | |||||||||||||||
| Total service revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||
| Provider relief funding | — | % | — | % | — | % | 0.6 | % | |||||||||||||||
| OPERATING EXPENSES | |||||||||||||||||||||||
| Cost of operations, excluding depreciation and amortization | 89.6 | % | 82.0 | % | 89.3 | % | 85.4 | % | |||||||||||||||
| Depreciation and amortization | 8.4 | % | 7.4 | % | 8.1 | % | 7.3 | % | |||||||||||||||
| (Gain) loss on sale and disposal of equipment and other | (0.1) | % | 0.8 | % | 0.1 | % | — | % | |||||||||||||||
| Severance costs | 0.1 | % | — | % | 0.1 | % | 0.0 | % | |||||||||||||||
| Total operating expenses | 98.0 | % | 90.2 | % | 97.6 | % | 92.7 | % | |||||||||||||||
| INCOME FROM OPERATIONS | 2.0 | % | 9.8 | % | 2.4 | % | 7.9 | % | |||||||||||||||
| OTHER INCOME AND EXPENSES | |||||||||||||||||||||||
| Interest expense | 3.5 | % | 3.6 | % | 3.4 | % | 3.8 | % | |||||||||||||||
| Equity in earnings of joint ventures | (0.9) | % | (0.9) | % | (0.8) | % | (0.8) | % | |||||||||||||||
| Non-cash change in fair value of interest rate swaps | (3.6) | % | (0.9) | % | (3.8) | % | (1.4) | % | |||||||||||||||
Debt restructuring and extinguishment expenses | — | % | — | % | — | % | 0.6 | % | |||||||||||||||
| Other expenses (income) | 0.5 | % | — | % | 0.2 | % | 0.1 | % | |||||||||||||||
| Total other (income) expenses | (0.5) | % | 1.8 | % | (1.0) | % | 2.3 | % | |||||||||||||||
| INCOME BEFORE INCOME TAXES | 2.5 | % | 8.0 | % | 3.4 | % | 5.6 | % | |||||||||||||||
| Provision for income taxes | (0.6) | % | (1.6) | % | (0.6) | % | (1.3) | % | |||||||||||||||
| NET INCOME | 1.8 | % | 6.4 | % | 2.7 | % | 4.3 | % | |||||||||||||||
| Net income attributable to noncontrolling interests | 1.7 | % | 1.5 | % | 1.6 | % | 1.4 | % | |||||||||||||||
| NET INCOME ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS | 0.2 | % | 4.9 | % | 1.1 | % | 2.9 | % | |||||||||||||||
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Results of Operations
Imaging Center Segment
We have developed our medical imaging centers segment through a combination of organic growth, equity investments, acquisitions and joint venture formations. We have segregated some of our information to demonstrate which is attributable to centers that were in operation through the entirety of the comparison period, and which is attributable to those that were acquired or disposed of during the period. The discussion below shows a breakdown and analysis of revenue and expenses for the three and nine months ended September 30, 2022 and 2021.
Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021
In the discussion below same center metrics are based on imaging centers that were in operation throughout the period of July 1, 2021 through September 30, 2022. Excluded amounts relate to imaging centers that were acquired or divested between July 1, 2021 through September 30, 2022.
Total Revenue inclusive of Provider Relief funding where applicable for 2022 and 2021
| In Thousands | Three Months Ended September 30, | |||||||||||||
| Revenue | 2022 | 2021 | $ Increase/(Decrease) | % Change | ||||||||||
| Total Revenue | $349,144 | $332,195 | $16,949 | 5.1% | ||||||||||
| Same Center Revenue | $341,450 | $327,150 | $14,300 | 4.4% | ||||||||||
| Excluded | $7,694 | $5,045 | — | — | ||||||||||
Overall revenue change was driven by procedure volume growth of 3.6% compared to the same period in the prior year. On a same center basis, the increase in revenue was largely attributable to product mix as advanced radiology procedures of MRI, PET, and CT expanded at combined 7.0% to provide the major portion of the revenue growth.
Operating Expenses
Total operating expenses for the three months ended September 30, 2022 increased approximately $36.7 million, or 12.3%, from $298.7 million for the three months ended September 30, 2021 to $335.4 million for the three months ended September 30, 2022. The following table sets forth a breakdown of our cost of operations and total operating expenses for the three months ended September 30, 2022 and 2021 (in thousands):
| Three Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Salaries and professional reading fees, excluding stock-based compensation | $ | 195,878 | $ | 163,756 | |||||||
| Stock-based compensation | 2,604 | 3,978 | |||||||||
| Building and equipment rental | 31,420 | 31,403 | |||||||||
| Medical supplies | 18,121 | 14,008 | |||||||||
Other operating expenses * | 59,845 | 58,364 | |||||||||
| Cost of operations | 307,868 | 271,509 | |||||||||
| Depreciation and amortization | 27,590 | 24,437 | |||||||||
| (Gain) loss on sale and disposal of equipment | (253) | 2,595 | |||||||||
| Severance costs | 187 | 163 | |||||||||
| Total operating expenses | $ | 335,392 | $ | 298,704 | |||||||
*Includes billing fees, office supplies, repairs and maintenance, insurance, business tax and license, outside services, telecom, utilities, marketing, travel and other expenses.
The discussion below provides additional information and analysis on changes in our various operating expenses for the three months ended September 30, 2022 and 2021 (in thousands):
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Salaries and professional reading fees, excluding stock-based compensation and severance
| In Thousands | Three Months Ended September 30, | |||||||||||||
| Salaries and Professional Fees | 2022 | 2021 | $ Increase/(Decrease) | % Change | ||||||||||
| Total Salaries | $195,878 | $163,756 | $32,122 | 19.6% | ||||||||||
| Same Center Salaries | $188,678 | $159,527 | $29,151 | 18.3% | ||||||||||
| Excluded | $7,200 | $4,229 | — | — | ||||||||||
Similar to prior quarters, growth in procedure volumes precipitated increases in salary expenses both to meet additional professional staffing needs and retain our skilled work force in the current tight labor market.
Stock-based compensation
Stock-based compensation decreased $1.4 million, or 34.5% to approximately $2.6 million for the three months ended September 30, 2022 compared to $4.0 million for three months ended September 30, 2021. This decrease is a result of a one time pandemic related stock awards to employees that were granted in the second quarter 2021. There was no similar one time award granted in 2022.
Building and equipment rental
| In Thousands | Three Months Ended September 30, | |||||||||||||
| Building & Equipment Rental | 2022 | 2021 | $ Increase/(Decrease) | % Change | ||||||||||
| Total | $31,420 | $31,403 | $17 | 0.1% | ||||||||||
| Same Center | $28,213 | $29,303 | $(1,090) | (3.7)% | ||||||||||
| Excluded Sites | $3,207 | $2,100 | — | — | ||||||||||
The decrease in same center building and rental relates to a combination of reduced expenses for equipment operating lease contracts which ended or were bought out during 2021 and for radiology centers abandoned in the fourth quarter of 2021 due to reduced patient utilization rates post pandemic.
Medical supplies
| In Thousands | Three Months Ended September 30, | |||||||||||||
| Medical Supplies Expense | 2022 | 2021 | $ Increase/(Decrease) | % Change | ||||||||||
| Total | $18,121 | $14,008 | $4,113 | 29.4% | ||||||||||
| Same Center | $16,930 | $13,460 | $3,470 | 25.8% | ||||||||||
| Excluded Sites | $1,191 | $548 | — | — | ||||||||||
Increased medical supplies expense corresponds to the 7.0% growth in advanced radiology volumes as noted above combined with price increases for the contrasting agents utilized in their administration.
Other operating expenses
| In Thousands | Three Months Ended September 30, | |||||||||||||
| Other Operating Expenses | 2022 | 2021 | $ Increase/(Decrease) | % Change | ||||||||||
| Total | $59,845 | $58,364 | $1,481 | 2.5% | ||||||||||
| Same Center | $56,926 | $56,815 | $111 | 0.2% | ||||||||||
| Excluded Sites | $2,919 | $1,551 | — | — | ||||||||||
The increase in other operating expenses was lower than overall revenue growth and relatively unchanged on a same center basis.
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Additional segment operating and non operating expenses:
| In Thousands | Three Months Ended June 30, | |||||||||||||
| 2022 | 2021 | $ Increase/(Decrease) | % Change | |||||||||||
| Depreciation and amortization | $27,590 | $24,437 | $3,153 | 12.9% | ||||||||||
| Loss (gain) on disposal of equipment and other | ($253) | $2,595 | ($2,848) | nm | ||||||||||
| Non-cash change in fair value of interest rate swaps | ($12,451) | ($2,870) | (9,581) | nm | ||||||||||
| Other expenses | $447 | $234 | $213 | nm | ||||||||||
| Severance | $187 | $163 | 24 | 14.7% | ||||||||||
nm= not meaningful
Interest expense
| In Thousands | Three Months Ended September 30, | |||||||||||||
| Interest Expense | 2022 | 2021 | $ Increase/(Decrease) | % Change | ||||||||||
| Total Interest Expense | $12,420 | $12,032 | $388 | 3.2 | % | |||||||||
| Interest related to derivatives* | $1,457 | $3,700 | ||||||||||||
| Interest related to amortization** | $647 | $647 | ||||||||||||
| Adjusted Interest Expense*** | $10,316 | $7,685 | $2,631 | 34.2 | % | |||||||||
* Includes interest on current and prior derivative instruments not related to debt obligations.
** Includes combined noncash amortization of deferred loan costs and discount on issuance of debt.
***Includes interest related to our term loans, revolving credit line,notes, finance leases and other.
Excluding the effect of interest expense related to derivatives and amortization for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, adjusted interest expense increased $2.6 million, or 34.2%. The rise in adjusted interest expense is attributable to a higher overall loan balance in combination with increased variable interest rates paid on the balance compared to the same period in the prior year. Based on recent increases in global interests rates, we expect the effective interest rates on our senior credit facilities, and our related interest expense, to continue to rise in the near term. See “Liquidity and Capital Resources” below for more details on our credit facilities.
To mitigate our future interest expense exposure we have entered into certain interest rate swap agreements. See the Derivative Instruments section of Note 2, Significant Accounting Policies, to the condensed consolidated financial statements included in this report for more details on our derivative transactions.
Equity in earnings from unconsolidated joint ventures
For the three months ended September 30, 2022 we recognized equity in earnings from unconsolidated joint ventures in the amount of $3.1 million and for three months ended September 30, 2021 we recognized equity in earnings from unconsolidated joint ventures of $2.9 million, an increase of $0.2 million or 8.1%.
Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021
In the discussion below same center metrics are based on imaging centers that were in operation throughout the period of January 1, 2021 through September 30, 2022. Excluded amounts relate to imaging centers that were acquired or divested between January 1, 2021 through September 30, 2022.
Total Revenue inclusive of Provider Relief funding for 2021
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| In Thousands | Nine Months Ended September 30, | |||||||||||||
| Revenue | 2022 | 2021 | $ Increase/(Decrease) | % Change | ||||||||||
| Total Revenue | $1,043,129 | $987,723 | $55,406 | 5.6% | ||||||||||
| Same Center Revenue | $949,101 | $927,251 | $21,850 | 2.4% | ||||||||||
| Excluded Sites | $94,028 | $60,472 | — | —% | ||||||||||
Increased revenue reflects a 3.1% growth in overall same center procedure volumes compared with the same period in the prior year. On a same center basis, advanced radiology procedures of MRI, PET, and CT increased at combined 5.8% to provide the major portion of the revenue growth. Total Provider Relief funding, used to offset lost revenue due to the pandemic and included in the above amounts, was $6.3 million for the nine months ended September 30, 2021. No Provider Relief funding was received in 2022.
Operating Expenses
Total operating expenses for the nine months ended September 30, 2022 increased approximately $92.9 million, or 10.3%, from $906.3 million for the nine months ended September 30, 2021 to $999.2 million for the nine months ended September 30, 2022. The following table sets forth a breakdown of our cost of operations and total operating expenses for the nine months ended September 30, 2022 and 2021 (in thousands):
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Salaries and professional reading fees, excluding stock-based compensation | $ | 584,080 | $ | 513,239 | |||||||
| Stock-based compensation | 16,993 | 20,214 | |||||||||
| Building and equipment rental | 92,250 | 91,253 | |||||||||
| Medical supplies | 48,200 | 42,246 | |||||||||
Other operating expenses * | 175,806 | 167,992 | |||||||||
| Cost of operations | 917,329 | 834,944 | |||||||||
| Depreciation and amortization | 80,496 | 70,924 | |||||||||
| Loss (gain) on sale and disposal of equipment | 936 | (279) | |||||||||
| Severance costs | 488 | 715 | |||||||||
| Total operating expenses | $ | 999,249 | $ | 906,304 | |||||||
*Includes billing fees, office supplies, repairs and maintenance, insurance, business tax and license, outside services, telecom, utilities, marketing, travel and other expenses.
Salaries and professional reading fees, excluding stock-based compensation and severance
| In Thousands | Nine Months Ended September 30, | |||||||||||||
| Salaries and Professional Fees | 2022 | 2021 | $ Increase/(Decrease) | % Change | ||||||||||
| Total Salaries | $584,080 | $513,239 | $70,841 | 13.8% | ||||||||||
| Same Center Salaries | $536,480 | $481,448 | $55,032 | 11.4% | ||||||||||
| Excluded Sites | $47,600 | $31,791 | — | —% | ||||||||||
Growth in procedure volumes accounted for a portion of the increase in salary expense. However, we are experiencing tight labor markets and higher labor costs as we seek to retain and recruit qualified staff.
Stock-based compensation
Stock-based compensation decreased $3.2 million, or 15.9% to approximately $17.0 million for the nine months ended September 30, 2022 compared to $20.2 million for nine months ended September 30, 2021. The decrease is a result of a one time pandemic related stock awards to employees that were granted in the second quarter 2021. There was no similar one-time award granted in 2022.
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Building and equipment rental
| In Thousands | Nine Months Ended September 30, | |||||||||||||
| Building & Equipment Rental | 2022 | 2021 | $ Increase/(Decrease) | % Change | ||||||||||
| Total | $92,250 | $91,253 | $997 | 1.1% | ||||||||||
| Same Center | $75,159 | $76,843 | $(1,684) | (2.2)% | ||||||||||
| Excluded Sites | $17,091 | $14,410 | — | —% | ||||||||||
The decrease in same center building and rental relates to a combination of reduced expenses for equipment operating lease contracts which ended or were bought out during 2021 and for radiology centers abandoned in the fourth quarter of 2021 due to reduced patient utilization rates post pandemic.
Medical supplies
| In Thousands | Nine Months Ended September 30, | |||||||||||||
| Medical Supplies Expense | 2022 | 2021 | $ Increase/(Decrease) | % Change | ||||||||||
| Total | $48,200 | $42,246 | $5,954 | 14.1% | ||||||||||
| Same Center | $43,604 | $39,563 | $4,041 | 10.2% | ||||||||||
| Excluded Sites | $4,596 | $2,683 | — | —% | ||||||||||
Increased medical supplies expense corresponds to the 5.8% growth in advanced radiology volumes as noted above combined with price increases for the contrasting agents utilized in their administration.
Other operating expenses
| In Thousands | Nine Months Ended September 30, | |||||||||||||
| Other Operating Expenses | 2022 | 2021 | $ Increase/(Decrease) | % Change | ||||||||||
| Total | $175,806 | $167,992 | $7,814 | 4.7% | ||||||||||
| Same Center | $158,789 | $155,593 | $3,196 | 2.1% | ||||||||||
| Excluded Sites | $17,017 | $12,399 | — | —% | ||||||||||
The increase in other operating expenses was lower than the growth in overall revenue for the period.
Additional segment operating and non operating expenses:
| In Thousands | Nine Months Ended September 30, | |||||||||||||
| 2022 | 2021 | $ Increase/(Decrease) | % Change | |||||||||||
| Depreciation and amortization | $80,496 | $70,924 | $9,572 | 13.5% | ||||||||||
| Loss (gain) on disposal of equipment and other | $936 | ($279) | $1,215 | nm | ||||||||||
| Non-cash change in fair value of interest rate swaps | ($39,576) | ($14,149) | (25,427) | nm | ||||||||||
| Other expenses* | $1,892 | $6,852 | ($4,960) | nm | ||||||||||
| Severance | $488 | $715 | (227) | (31.7)% | ||||||||||
nm= not meaningful
*Other expenses for 2021 include $6.0 million of debt extinguishment and restructuring expenses related to to our Barclays Restated Credit Agreement. See Note 6, Credit Facilities and Notes Payable in the notes to consolidated financials statements for more information on our secured credit facilities.
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Interest expense
| In Thousands | Nine Months Ended September 30, | |||||||||||||
| Interest Expense | 2022 | 2021 | $ Increase/(Decrease) | % Change | ||||||||||
| Total Interest Expense | $35,398 | $37,028 | $(1,630) | (4.4) | % | |||||||||
| Interest related to derivatives* | $8,195 | $11,034 | ||||||||||||
| Interest related to amortization** | $1,942 | $2,725 | ||||||||||||
| Adjusted Interest Expense*** | $25,261 | $23,269 | $1,992 | 8.6 | % | |||||||||
* Includes interest on derivatives not related to debt obligations.
** Includes combined noncash amortization of deferred loan costs and discount on issuance of debt.
*** Includes interest related to our term loans, revolving credit line, notes, finance leases, and other.
Excluding interest expense for derivatives and amortization for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, adjusted interest expense increased $2.0 million, or 8.6%. The rise in adjusted interest expense is attributable to a higher overall loan balance in combination with increased variable interest rates paid on the balance compared to the same period in the prior year. Based on recent increases in global interests rates, we expect the effective interest rates on our senior credit facilities, and our related interest expense, to rise in the near term. See “Liquidity and Capital Resources” below for more details on our credit facilities.
Equity in earnings from unconsolidated joint ventures
For the nine months ended September 30, 2022 we recognized equity in earnings from unconsolidated joint ventures in the amount of $8.4 million and for the nine months ended September 30, 2021 we recognized equity in earnings from unconsolidated joint ventures of $8.3 million, a decrease of $0.1 million or 1.1%.
AI Segment
Our AI segment develops and deploys clinical applications to enhance interpretation of medical images and improve patient outcomes with a current emphasis on brain, breast, prostate, and pulmonary diagnostics. We are developing our AI segment initially through acquisition activity. Our acquisitions of Nulogix and Deephealth comprise the results for 2021. Our 2022 results include our recent additions of Aidence Holding B.V and Quantib B.V. The breakdown of revenue and expenses of the segment for the three and nine months ended September 30, 2022 and 2021 are as follows:
| In Thousands | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2022 | 2021 | $ Increase/(Decrease) | % Change | 2022 | 2021 | $ Increase/(Decrease) | % Change | |||||||||||||||||||
| Statement of Operations | ||||||||||||||||||||||||||
| Revenue | $900 | $496 | $404 | nm | $3,056 | $496 | $2,560 | nm | ||||||||||||||||||
| Salaries and Wages | 3,640 | 706 | 2,934 | nm | $11,371 | $1,988 | $9,383 | nm | ||||||||||||||||||
| Stock compensation | 713 | 444 | 269 | nm | 2,119 | 1,353 | 766 | nm | ||||||||||||||||||
| Other operating | 1,722 | 96 | 1,626 | nm | 3,938 | 324 | 3,614 | nm | ||||||||||||||||||
| Depreciation & Amort. | 1,639 | 170 | 1,469 | nm | 4,713 | 348 | 4,365 | nm | ||||||||||||||||||
| Other operating loss | 6 | — | 6 | nm | 26 | — | 26 | nm | ||||||||||||||||||
| Severance | 8 | — | 8 | nm | 8 | — | 8 | nm | ||||||||||||||||||
| Total operating expenses | 7,728 | 1,416 | 6,312 | nm | 22,175 | 4,013 | 18,162 | nm | ||||||||||||||||||
| Loss from Operations | (6,828) | (920) | (5,908) | nm | (19,119) | (3,517) | (15,602) | nm | ||||||||||||||||||
| Other expense (income) | 959 | (401) | 1,360 | nm | (329) | 891 | (1,220) | nm | ||||||||||||||||||
| Income before taxes | (7,787) | (519) | (7,268) | nm | (18,790) | (4,408) | (14,382) | nm | ||||||||||||||||||
| Income taxes | — | — | — | nm | (1,457) | — | (1,457) | nm | ||||||||||||||||||
| Segment net loss | ($7,787) | ($519) | ($7,268) | nm | ($17,333) | ($4,408) | ($12,925) | nm | ||||||||||||||||||
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Adjusted EBITDA
We use both GAAP and non-GAAP metrics to measure our financial results. We believe that, in addition to GAAP metrics, certain non-GAAP metrics, such as Adjusted EBITDA assist us in measuring our business performance, cash generated from operations, leverage capacity and ability to service our debt obligations. We believe this information is useful to investors and other interested parties because we are highly leveraged and our non-GAAP metrics remove non-cash and certain other charges that occur in the affected period and provide a basis for measuring the Company's financial condition against other quarters.
We define Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, each from continuing operations and excluding losses or gains on the disposal of equipment, other income or loss, loss on debt extinguishment, bargain purchase gains and non-cash equity compensation. Adjusted EBITDA includes equity earnings in unconsolidated operations and subtracts allocations of earnings to noncontrolling interests in subsidiaries, and is adjusted for non-cash or extraordinary and one-time events taking place during the period. We have not made specific adjustments to our calculation of Adjusted EBITDA in response to COVID 19. Our net income reflected below includes the effect of revenue received under the Provider Relief Fund of $6.3 million for the nine months ended September 30, 2021.
Adjusted EBITDA should not be considered a measure of financial performance under GAAP, and the items excluded from Adjusted EBITDA should not be considered in isolation or as alternatives to net income, cash flows generated by operating, investing or financing activities or other financial statement data presented in the consolidated financial statements as an indicator of financial performance or liquidity. Adjusted EBITDA is not a measurement determined in accordance with GAAP and is therefore susceptible to varying methods of calculation. This metric, as presented, may not be comparable to other similarly titled measures of other companies. Adjusted EBITDA is most comparable to the GAAP financial measure net income attributable to RadNet, Inc. common stockholders.
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The following is a reconciliation of GAAP net income attributable to RadNet, Inc. common stockholders to Adjusted EBITDA for the three and nine months ended September 30, 2022 and 2021, respectively.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net income attributable to RadNet, Inc. common stockholders | $ | 668 | $ | 16,220 | $ | 11,585 | $ | 28,550 | |||||||||||||||
| Provision for income taxes | 2,188 | 5,284 | 7,087 | 12,534 | |||||||||||||||||||
| Interest expense | 12,420 | 12,032 | 35,398 | 37,028 | |||||||||||||||||||
| Severance costs | 195 | 163 | 496 | 715 | |||||||||||||||||||
| Depreciation and amortization | 29,229 | 24,606 | 85,209 | 71,272 | |||||||||||||||||||
| Non-cash employee stock-based compensation | 3,317 | 4,422 | 19,112 | 21,566 | |||||||||||||||||||
| (Gain) loss on sale and disposal of equipment and other | (247) | 2,595 | 962 | (279) | |||||||||||||||||||
| Debt restructuring and loss on extinguishment expenses | — | — | — | 6,044 | |||||||||||||||||||
| Non-cash change in fair value of interest rate swaps | (12,451) | (2,870) | (39,576) | (14,149) | |||||||||||||||||||
| Other adjustment to joint venture investment | — | — | — | (565) | |||||||||||||||||||
| Other expenses | 1,405 | (167) | 1,562 | 1,699 | |||||||||||||||||||
| Legal settlements | — | — | 2,197 | — | |||||||||||||||||||
| Change in estimate relating to refund liability | 8,089 | — | 8,089 | — | |||||||||||||||||||
| Non operational rent expenses | 959 | — | 3,120 | — | |||||||||||||||||||
| Adjusted EBITDA including losses from AI Segment & Provider Relief Funding | $ | 45,772 | $ | 62,285 | $ | 135,241 | $ | 164,415 | |||||||||||||||
| Provider relief funding | — | — | — | (6,291) | |||||||||||||||||||
| Adjusted EBITDA including losses from AI Segment and excluding benefit from Provider Relief Funding | $ | 45,772 | $ | 62,285 | $ | 135,241 | $ | 158,124 | |||||||||||||||
| Adjusted EBITDA losses from AI Segment | 4,462 | 306 | 12,253 | 1,816 | |||||||||||||||||||
| Adjusted EBITDA excluding losses from AI Segment & Provider Relief Funding | $ | 50,234 | $ | 62,591 | $ | 147,494 | $ | 159,940 | |||||||||||||||
The following table is a reconciliation of GAAP net income for our AI Segment to Adjusted EBITDA for the three and nine months ended September 30, 2022 and 2021, respectively.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Segment net loss | $ | (7,787) | $ | (519) | $ | (17,333) | $ | (4,408) | |||||||||||||||
| Stock Compensation | 713 | 444 | 2,119 | 1,353 | |||||||||||||||||||
| Depreciation & Amort | 1,639 | 170 | 4,713 | 348 | |||||||||||||||||||
| Other operating loss | 6 | — | 26 | — | |||||||||||||||||||
| Other expense (income) | 959 | (401) | (329) | 891 | |||||||||||||||||||
| Severance | 8 | — | 8 | — | |||||||||||||||||||
| Income taxes | — | — | (1,457) | — | |||||||||||||||||||
| Adjusted EBITDA AI Segment | $ | (4,462) | $ | (306) | $ | (12,253) | $ | (1,816) | |||||||||||||||
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Liquidity and Capital Resources
The following table summarizes key balance sheet data related to our liquidity as of September 30, 2022 and December 31, 2021 and income statement data for the nine months ended September 30, 2022 and 2021 (in thousands):
| Balance Sheet Data: | September 30, 2022 | December 31, 2021 | |||||||||
| Cash and cash equivalents | $ | 95,006 | $ | 134,606 | |||||||
| Accounts receivable | 172,507 | 135,062 | |||||||||
| Working capital (exclusive of current operating lease liabilities) | (17,846) | 14,932 | |||||||||
| Stockholders' equity | 458,390 | 346,157 | |||||||||
Income statement data for the nine months ended September 30, | 2022 | 2021 | |||||||||
| Total net revenue | $ | 1,046,185 | $ | 981,928 | |||||||
| Net income attributable to RadNet common stockholders | 11,585 | 28,550 | |||||||||
We operate in a capital intensive, high fixed-cost industry that requires significant amounts of capital to fund operations. In addition to operations, we require a significant amount of capital for the initial start-up and development of new diagnostic imaging centers, the acquisition of additional centers and new diagnostic imaging equipment. Because our cash flows from operations have been insufficient to fund all of these capital requirements, we have depended on the availability of financing under credit arrangements with third parties.
We have credit available from our current credit facilities and borrowing under those facilities is subject to continued compliance with lending covenants. We currently meet those requirements, and expect that we will continue to do so for the foreseeable future, but substantial and sustained operating losses could impact our ability to borrow under those facilities. If we are not able to meet such requirements, we may be required to seek additional financing and there can be no assurance that we will be able to obtain financing from other sources on terms acceptable to us, if at all.
On a continuing basis, we also consider various transactions to increase shareholder value and enhance our business results, including acquisitions, divestitures and joint ventures. These types of transactions may result in future cash proceeds or payments but the general timing, size or success of any acquisition, divestiture or joint venture effort and the related potential capital commitments cannot be predicted. We expect to fund any future acquisitions primarily with cash flow from operations and borrowings, including borrowing from amounts available under our senior secured credit facilities or through new equity or debt issuances.
We and our subsidiaries or affiliates may from time to time, in our sole discretion, purchase, repay, redeem or retire any of our outstanding debt or equity securities in privately negotiated or open market transactions, by tender offer or otherwise.
Sources and Uses of Cash
The following table summarizes key components of our sources and uses of cash for the nine months ended:
| Cash Flow Data | September 30, 2022 | September 30, 2021 | |||||||||
| Cash provided by operating activities | $ | 92,770 | $ | 100,295 | |||||||
| Cash used in investing activities | (123,048) | (159,506) | |||||||||
| Cash (used in) provided by financing activities | (9,938) | 108,478 | |||||||||
Cash provided by operating activities was $92.8 million and $100.3 million for the nine months ended September 30, 2022 and September 30, 2021, respectively. Our cash provided by operating activities for the nine months ended September 30, 2022 was affected by the non-cash change in fair value of our interest rate swap of $39.6 million.
Cash used in investing activities for the nine months ended September 30, 2022, included purchases of property and equipment for approximately $98.6 million and the acquisition of imaging business and other assets for $26.0 million. As part of our business operations we continually evaluate investment opportunities.
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Cash used in financing activities of $9.9 million for the nine months ended September 30, 2022, was due to payment on our term loan obligations. Cash provided by financing activities for the nine months ended September 30, 2021 was due to the refinancing of our term loan obligations under our secured credit facilities on April 23, 2021. Please see Note 6, Credit Facilities and Notes Payable in the notes to consolidated financials statements for more information.
We have entered into factoring agreements with various institutions and sold certain accounts receivable under non-recourse agreements. These transactions are accounted for as a reduction in accounts receivable as the agreements transfer effective control over and risk related to the receivables to the buyers. Payments on the associated notes receivables will be reflected as operating activities on our statement of cash flows and on our balance sheet as prepaid expenses and other current assets for the current portion and deposits and other for the long term portion. At September 30, 2022 we have $15.5 million, net of discount, remaining to be collected on these agreements. We do not utilize factoring arrangements as an integral part of our financing for working capital.
Senior Secured Credit Facilities
We maintain secured credit facilities with Barclays Bank PLC and with SunTrust Bank. The Barclays credit facilities are comprised of first lien term loans and a revolving credit facility of $195.0 million. The SunTrust credit facilities are comprised of a term loan and a revolving credit facility of $30.0 million. As of September 30, 2022, we were in compliance with all covenants under our credit facilities. Deferred financing costs at September 30, 2022, net of accumulated amortization, was $1.8 million and is specifically related to our Barclays revolving credit facility.
Included in our condensed consolidated balance sheets at September 30, 2022 are $757.9 million of total term loan debt (exclusive of unamortized discounts of $12.2 million) in thousands:
| Face Value | Discount | Total Carrying Value | |||||||||||||||
| First Lien Term Loans | $ | 715,938 | $ | (11,649) | $ | 704,289 | |||||||||||
| SunTrust Term Loan | 42,000 | — | 42,000 | ||||||||||||||
| Total Term Loans | $ | 757,938 | $ | (11,649) | $ | 746,289 | |||||||||||
At September 30, 2022, we had no borrowings under our Barclays or SunTrust revolving credit facilities. After reserves for outstanding letters of credit of $7.6 million on our Barclays Revolving Credit Facility, we had $187.4 million available for borrowing and $30.0 million available under our SunTrust Revolving Credit Facility.
On October 7, 2022, after the period covered by this report, our consolidated subsidiary NJIN entered into a Second Amended and Restated Credit and Term Loan Agreement which provided for a $150.0 million term loan. The proceeds of the term loan were used to partially fund the $112.6 million purchase of Montclair Radiological Associates, to refinance the outstanding $42 million term loan and to pay fees and expenses associated with refinancing transaction. In connection with the Second Amended and Restated Credit and Term Loan Agreement, the revolving credit facility was increased from $30 million to $50 million.
We expect our existing capital resources, anticipated cash from operations and our borrowing capacity under our credit facilities will be sufficient to sustain our operations for the next twelve months and the foreseeable future. Please see Note 6, Credit Facilities and Notes Payable in the notes to consolidated financials statements for more information on our secured credit facilities.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Risk: We receive payment for our imaging services exclusively in United States dollars. As a result, our financial results are unlikely to be affected by factors such as changes in foreign currency, exchange rates or weak economic conditions in foreign markets.
We are exposed to foreign exchange risk with respect to revenues and expenses denominated in the Euro, Canadian Dollar and Hungarian Forint. We have Artificial Intelligence operations in the Netherlands and maintain research and development centers in Canada and Hungary. At the present time, we do not have any foreign currency exchange contracts to mitigate this risk. At September 30, 2022, a hypothetical 1% decline in the currency exchange rates between the U.S. dollar against these currencies, would have resulted in an annual increase of approximately $0.2 million in operating expenses.
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Interest Rate Sensitivity: We pay interest on various types of debt instruments to our suppliers and lending institutions. The agreements entail either fixed or variable interest rates. Instruments which have fixed rates are mainly leases on radiology equipment. Variable rate interest obligations relate primarily to amounts borrowed under our outstanding credit facilities. Accordingly, our interest expense and consequently, our earnings, are affected by changes in short term interest rates. However due to our purchase of certain swap agreements described below, the effects of interest rate changes are limited.
We can elect Eurodollar or Base Rate (Prime) interest rate options on amounts outstanding under the First Lien Term Loans. At September 30, 2022, we had $715.9 million outstanding subject to a Eurodollar election on First Lien Term Loans and our effective 3 month LIBOR rate plus applicable margin was 5.49%. A hypothetical 1% increase in the adjusted Eurodollar rates under the Restated Credit Agreement over the current Eurodollar rate would result in an increase of $7.2 million in annual interest expense and a corresponding decrease in income before taxes. At September 30, 2022, we had no loan amount principal outstanding subject to an alternate base rate election on First Lien Term Loans.
At September 30, 2022, we had $42.0 million outstanding subject to an adjusted Eurodollar election on the SunTrust Restated Credit Agreement. We can elect Eurodollar or Base Rate (Prime) interest rate options on amounts outstanding under the SunTrust Restated Credit Agreement. At September 30, 2022, our effective LIBOR rate plus applicable margin was 4.38%. A hypothetical 1% increase in the adjusted Eurodollar rates under the SunTrust Restated Credit Agreement would result in an increase of approximately $0.4 million in annual interest expense and a corresponding decrease in income before taxes.
In the second quarter of 2019, we entered into four forward interest rate agreements ("2019 Swaps"). The 2019 Swaps have total notional amounts of $500,000,000, consisting of two agreements of $50,000,000 each and two agreements of $200,000,000 each. The 2019 Swaps will secure a constant interest rate associated with portions of our variable rate bank debt and have an effective date of October 13, 2020. They will mature in October 2023 for the smaller notional and October 2025 for the larger notional. Under these arrangements, we arranged the 2019 Swaps with locked in 1 month LIBOR rates at 1.96% for the $100,000,000 notional and at 2.05% for the $400,000,000 notional. As of the effective date, we will be liable for premium payments if interest rates decline below arranged rates, but will receive payments under the 2019 Swaps if interest rates rise above the arranged rates.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain controls and procedures designed to ensure that we are able to collect the information we are required to disclose in the reports we file with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has conducted an evaluation of the design and operation of our “disclosure controls and procedures” as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report for the purposes set forth above.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during three months ended September 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1. Legal Proceedings
We are engaged from time to time in the defense of lawsuits arising out of the ordinary course and conduct of our business. We do not believe that the outcome of any of our current litigation will have a material adverse impact on our business, financial condition and results of operations. However, we could be subsequently named as a defendant in other lawsuits that could adversely affect us.
ITEM 1A. Risk Factors
For information about the risks and uncertainties related to our business, please see the risk factors described in our annual report on Form 10-K for the year ended December 31, 2021. The risks described in our Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 5. Other Information
None.
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ITEM 6. Exhibits
| Exhibit Number | Description | |||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
| 101 | The following financial information from RadNet, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Loss, (iv) the Condensed Consolidated Statements of Changes in Stockholders Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to the Condensed Consolidated Financial Statements. | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
* This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and is not being filed for purposes of Section 18 of the Exchange Act and is not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
** Indicates management contract or compensatory plan.
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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.
| RADNET, INC. | ||||||||
| (Registrant) | ||||||||
| Date: November 9, 2022 | By: | /s/ Howard G. Berger, M.D. | ||||||
| Howard G. Berger, M.D., President and Chief Executive Officer (Principal Executive Officer) | ||||||||
| Date: November 9, 2022 | By: | /s/ Mark D. Stolper | ||||||
| Mark D. Stolper, Chief Financial Officer (Principal Financial and Accounting Officer) | ||||||||
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EXHIBIT 31.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Howard G. Berger, M.D., certify that:
1. I have reviewed this report on Form 10-Q of RadNet, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
| a. | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |||||||
| b. | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |||||||
| c. | evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |||||||
| d. | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and | |||||||
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
| a. | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |||||||
| b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. | |||||||
Dated: November 9, 2022
| /s/ Howard G. Berger, M.D. | |||||
| Howard G. Berger, M.D. | |||||
| President, Chief Executive Officer and Chairman of the Board of Directors | |||||
EXHIBIT 31.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark D. Stolper, certify that:
1. I have reviewed this report on Form 10-Q of RadNet, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
| a. | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |||||||
| b. | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |||||||
| c. | evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |||||||
| d. | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and | |||||||
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
| a. | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |||||||
| b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. | |||||||
Dated: November 9, 2022
| /s/ Mark D. Stolper | |||||
| Mark D. Stolper | |||||
| Executive Vice President | |||||
| and Chief Financial Officer | |||||
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of RadNet, Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2022, as filed with the Securities and Exchange Commission on November 9, 2022 (the “Report”), I, Howard G. Berger, M.D., Chairman of the Board of Directors and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for the periods presented in the Report.
| /s/ Howard G. Berger, M.D. | |||||
| Howard G. Berger, M.D. | |||||
| Chairman, President and Chief Executive Officer | |||||
| (Principal Executive Officer) | |||||
| November 9, 2022 | |||||
A signed original of this written statement required by Section 906 has been provided to the Company and will be furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of RadNet, Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2022, as filed with the Securities and Exchange Commission on November 9, 2022 (the “Report”), I, Mark D. Stolper, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for the periods presented in the Report.
| /s/ Mark D. Stolper | |||||
| Mark D. Stolper | |||||
| Chief Financial Officer | |||||
| (Principal Financial Officer) | |||||
| November 9, 2022 | |||||
A signed original of this written statement required by Section 906 has been provided to the Company and will be furnished to the Securities and Exchange Commission or its staff upon request.