RadNet, Inc. - Quarter Report: 2022 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-33307
RadNet, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 13-3326724 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| 1510 Cotner Avenue | ||||||||
| Los Angeles, | California | 90025 | ||||||
| (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 | ||||||||||||
| Common Stock | RDNT | NASDAQ | ||||||||||||
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.
| Large accelerated filer | ☒ | 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 May 5, 2022 was 56,219,473 shares.
RADNET, INC.
TABLE OF CONTENTS
| Page | |||||
ITEM 6. Exhibits | |||||
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PART I - FINANCIAL INFORMATION
Item 1 – Financial Statements
RADNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
| March 31, 2022 | December 31, 2021 | ||||||||||
| (unaudited) | |||||||||||
| ASSETS | |||||||||||
| CURRENT ASSETS | |||||||||||
| Cash and cash equivalents | $ | 70,713 | $ | 134,606 | |||||||
| Accounts receivable | 159,725 | 135,062 | |||||||||
| Due from affiliates | 5,783 | 5,384 | |||||||||
| Prepaid expenses and other current assets | 52,475 | 49,212 | |||||||||
| Total current assets | 288,696 | 324,264 | |||||||||
| PROPERTY, EQUIPMENT AND RIGHT-OF-USE ASSETS | |||||||||||
| Property and equipment, net | 488,958 | 484,247 | |||||||||
| Operating lease right-of-use assets | 595,792 | 584,291 | |||||||||
| Total property, equipment and right-of-use assets | 1,084,750 | 1,068,538 | |||||||||
| OTHER ASSETS | |||||||||||
| Goodwill | 570,188 | 513,820 | |||||||||
| Other intangible assets | 99,339 | 56,603 | |||||||||
| Deferred financing costs | 2,009 | 2,135 | |||||||||
| Investment in joint ventures | 44,746 | 42,229 | |||||||||
| Deferred tax assets | 12,800 | 14,853 | |||||||||
| Deposits and other | 38,993 | 36,032 | |||||||||
| Total assets | $ | 2,141,521 | $ | 2,058,474 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| CURRENT LIABILITIES | |||||||||||
| Accounts payable, accrued expenses and other | $ | 276,313 | $ | 263,937 | |||||||
| Due to affiliates | 21,985 | 23,530 | |||||||||
| Deferred revenue | 6,930 | 10,701 | |||||||||
| Current operating lease liability | 64,906 | 65,452 | |||||||||
| Current portion of notes payable | 11,164 | 11,164 | |||||||||
| Total current liabilities | 381,298 | 374,784 | |||||||||
| LONG-TERM LIABILITIES | |||||||||||
| Long-term operating lease liability | 590,665 | 577,675 | |||||||||
| Notes payable, net of current portion | 740,707 | 743,498 | |||||||||
| Other non-current liabilities | 7,401 | 16,360 | |||||||||
| Total liabilities | 1,720,071 | 1,712,317 | |||||||||
| EQUITY | |||||||||||
Common stock - $0.0001 par value, 200,000,000 shares authorized; 56,197,826 and 53,548,227 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | 5 | 5 | |||||||||
| Additional paid-in-capital | 409,863 | 342,592 | |||||||||
| Accumulated other comprehensive loss | (20,761) | (20,421) | |||||||||
| Accumulated deficit | (90,260) | (93,272) | |||||||||
| Total RadNet, Inc.'s stockholders' equity | 298,847 | 228,904 | |||||||||
| Noncontrolling interests | 122,603 | 117,253 | |||||||||
| Total equity | 421,450 | 346,157 | |||||||||
| Total liabilities and equity | $ | 2,141,521 | $ | 2,058,474 | |||||||
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 March 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| REVENUE | ||||||||||||||
| Service fee revenue | $ | 303,276 | $ | 279,577 | ||||||||||
| Revenue under capitation arrangements | 38,491 | 35,742 | ||||||||||||
| Total service revenue | 341,767 | 315,319 | ||||||||||||
| Provider relief funding | — | 6,248 | ||||||||||||
| OPERATING EXPENSES | ||||||||||||||
| Cost of operations, excluding depreciation and amortization | 315,039 | 282,280 | ||||||||||||
| Depreciation and amortization | 27,118 | 22,656 | ||||||||||||
| Loss (gain) on sale and disposal of equipment and other | 1,128 | (1,307) | ||||||||||||
| Severance costs | 201 | 285 | ||||||||||||
| Total operating expenses | 343,486 | 303,914 | ||||||||||||
| (LOSS) INCOME FROM OPERATIONS | (1,719) | 17,653 | ||||||||||||
| OTHER INCOME AND EXPENSES | ||||||||||||||
| Interest expense | 11,593 | 12,826 | ||||||||||||
| Equity in earnings of joint ventures | (2,517) | (2,285) | ||||||||||||
| Non-cash change in fair value of interest rate hedge | (20,819) | (11,245) | ||||||||||||
| Other expenses | 165 | 206 | ||||||||||||
| Total other income | (11,578) | (498) | ||||||||||||
| INCOME BEFORE INCOME TAXES | 9,859 | 18,151 | ||||||||||||
| Provision for income taxes | (1,496) | (4,376) | ||||||||||||
| NET INCOME | 8,363 | 13,775 | ||||||||||||
| Net income attributable to noncontrolling interests | 5,350 | 4,317 | ||||||||||||
| NET INCOME ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS | $ | 3,013 | $ | 9,458 | ||||||||||
| BASIC NET INCOME PER SHARE ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS | $ | 0.05 | $ | 0.18 | ||||||||||
| DILUTED NET INCOME PER SHARE ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS | $ | 0.05 | $ | 0.18 | ||||||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING | ||||||||||||||
| Basic | 55,303,007 | 51,951,506 | ||||||||||||
| Diluted | 56,362,193 | 52,828,941 | ||||||||||||
The accompanying notes are an integral part of these financial statements.
2
RADNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(unaudited)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| NET INCOME | $ | 8,363 | $ | 13,775 | |||||||
| Foreign currency translation adjustments | (1,264) | (12) | |||||||||
| Change in fair value of cash flow hedge from prior periods reclassified to earnings, net of taxes | 923 | 925 | |||||||||
| COMPREHENSIVE INCOME | 8,022 | 14,688 | |||||||||
| Less comprehensive income attributable to noncontrolling interests | 5,350 | 4,317 | |||||||||
| COMPREHENSIVE INCOME ATTRIBUTABLE TO | |||||||||||
| RADNET, INC. COMMON STOCKHOLDERS | $ | 2,672 | $ | 10,371 | |||||||
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 March 31, 2022 and March 31, 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 - JANUARY 1, 2022 | 53,548,227 | $ | 5 | $ | 342,592 | $ | (20,421) | $ | (93,272) | $ | 228,904 | $ | 117,253 | $ | 346,157 | ||||||||||||||||||||||||||||||||
| Issuance of common stock under the equity compensation plan | 530,188 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under the DeepHealth equity compensation plan | 13,119 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 10,801 | — | — | 10,801 | — | 10,801 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with acquisitions | 2,106,292 | — | 56,470 | — | — | 56,470 | — | 56,470 | |||||||||||||||||||||||||||||||||||||||
| Change in cumulative foreign currency translation adjustment | — | — | — | (1,264) | — | (1,264) | — | (1,264) | |||||||||||||||||||||||||||||||||||||||
| Change in fair value of cash flow hedge from prior periods reclassified to earnings, net of taxes | — | — | — | 923 | — | 923 | — | 923 | |||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | 1 | (1) | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 3,013 | 3,013 | 5,350 | 8,363 | |||||||||||||||||||||||||||||||||||||||
| BALANCE-MARCH 31, 2022 | 56,197,826 | $ | 5 | $ | 409,863 | $ | (20,761) | $ | (90,260) | $ | 298,847 | $ | 122,603 | $ | 421,450 | ||||||||||||||||||||||||||||||||
| BALANCE - JANUARY 1, 2021 | 51,640,537 | $ | 5 | $ | 307,788 | $ | (24,051) | $ | (117,999) | $ | 165,743 | $ | 92,560 | $ | 258,303 | ||||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of options | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under the equity compensation plan | 699,825 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under the DeepHealth equity compensation plan | 494 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 8,248 | — | — | 8,248 | — | 8,248 | |||||||||||||||||||||||||||||||||||||||
| Purchase of noncontorlling interests | — | — | (4) | — | — | (4) | — | (4) | |||||||||||||||||||||||||||||||||||||||
| Contributions from noncontrolling partner | — | — | — | — | — | — | 123 | 123 | |||||||||||||||||||||||||||||||||||||||
| Change in cumulative foreign currency translation adjustment | — | — | — | (12) | — | (12) | — | (12) | |||||||||||||||||||||||||||||||||||||||
| Change in fair value of cash flow hedge from prior periods reclassified to earnings | — | — | — | 925 | — | 925 | — | 925 | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 9,458 | 9,458 | 4,317 | 13,775 | |||||||||||||||||||||||||||||||||||||||
| BALANCE-MARCH 31, 2021 | 52,340,856 | $ | 5 | $ | 316,032 | $ | (23,138) | $ | (108,541) | $ | 184,358 | $ | 97,000 | $ | 281,358 | ||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
4
RADNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net income | $ | 8,363 | $ | 13,775 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 27,118 | 22,656 | |||||||||
| Amortization of operating lease right-of-use assets | 16,802 | 17,863 | |||||||||
| Equity in earnings of joint ventures, net of dividends | (2,517) | (2,285) | |||||||||
| Amortization of deferred financing costs and loan discount | 648 | 1,147 | |||||||||
| Loss (gain) on sale and disposal of equipment and other | 1,128 | (1,307) | |||||||||
| Amortization of cash flow hedge, net of taxes | 923 | 925 | |||||||||
| Non-cash change in fair value of interest rate hedge | (20,819) | (11,245) | |||||||||
| Stock-based compensation | 11,102 | 8,248 | |||||||||
Change in fair value of contingent consideration | (501) | 200 | |||||||||
Changes in operating assets and liabilities, net of assets acquired and liabilities assumed in purchase transactions: | |||||||||||
| Accounts receivable | (23,904) | (17,493) | |||||||||
| Other current assets | (4,065) | (4,308) | |||||||||
| Other assets | (1,417) | (3,507) | |||||||||
| Deferred taxes | 1,387 | 3,133 | |||||||||
| Operating lease liability | (15,859) | (18,291) | |||||||||
| Deferred revenue | (4,519) | 1,416 | |||||||||
| Accounts payable, accrued expenses and other | 7,031 | 17,157 | |||||||||
| Net cash (used in) provided by operating activities | 901 | 28,084 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Purchase of imaging centers and other acquisitions | (25,123) | (57,075) | |||||||||
| Purchase of property and equipment | (36,558) | (30,424) | |||||||||
| Proceeds from sale of equipment | 117 | 151 | |||||||||
| Net cash used in investing activities | (61,564) | (87,348) | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Principal payments on notes and leases payable | — | (827) | |||||||||
| Payments on term loan debt | (3,313) | (10,824) | |||||||||
| Proceeds from revolving credit facility | — | 87,100 | |||||||||
| Payments on revolving credit facility | — | (87,100) | |||||||||
| Net cash used in financing activities | (3,313) | (11,651) | |||||||||
| EFFECT OF EXCHANGE RATE CHANGES ON CASH | 83 | (12) | |||||||||
| NET DECREASE IN CASH AND CASH EQUIVALENTS | (63,893) | (70,927) | |||||||||
| CASH AND CASH EQUIVALENTS, beginning of period | 134,606 | 102,018 | |||||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 70,713 | $ | 31,091 | |||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | |||||||||||
| Cash paid during the period for interest | $ | 7,448 | $ | 8,267 | |||||||
| Cash paid during the period for income taxes | $ | 34 | $ | 24 | |||||||
The accompanying notes are an integral part of these financial statements.
5
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 $42.2 million and $28.8 million during the three months ended March 31, 2022 and 2021, respectively, which were not paid for as of March 31, 2022 and 2021, respectively. The offsetting amounts due were recorded in our condensed consolidated balance sheet under accounts payable, accrued expenses and other.
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 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.
6
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 March 31, 2022, we operated directly or indirectly through joint ventures with hospitals, 351 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 consolidated medical group ("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 $45.7 million and $46.1 million of revenue, net of management services fees to RadNet, for the three months ended March 31, 2022 and 2021, respectively and $45.7 million and $46.1 million of operating expenses for the three months ended March 31, 2022 and 2021, respectively. RadNet recognized $191.0 million and $179.0 million of total billed net service fee revenue for the three months ended March 31, 2022, and 2021, respectively, for management services provided to the Group relating primarily to the technical portion of billed revenue.
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 March 31, 2022 and December 31, 2021, we have included approximately $100.4 million and $89.2 million, respectively, of accounts receivable and approximately $16.9 million and $14.4 million of accounts payable and accrued liabilities related to the Group, respectively.
7
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 $3.9 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 $0.4 million and $0.6 million for the three months ended March 31, 2022, and March 31, 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 March 31, 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 others 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 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
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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 revenues during the three months ended March 31, 2022 and 2021 are presented in the table below based on an allocation of the estimated transaction price with the patient between the primary patient classification of insurance coverage (in thousands):
| Three Months Ended March 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Commercial insurance | $ | 188,465 | $ | 182,096 | ||||||||||
| Medicare | 70,999 | 63,589 | ||||||||||||
| Medicaid | 9,087 | 8,451 | ||||||||||||
| Workers' compensation/personal injury | 12,449 | 10,399 | ||||||||||||
| Other patient revenue | 7,123 | 4,775 | ||||||||||||
| Management fee revenue | 5,508 | 5,219 | ||||||||||||
| Software revenue | 3,399 | 2,426 | ||||||||||||
| AI revenue | 599 | — | ||||||||||||
| Other | 5,647 | 2,622 | ||||||||||||
| Service fee revenue | 303,276 | 279,577 | ||||||||||||
| Revenue under capitation arrangements | 38,491 | 35,742 | ||||||||||||
| Total service revenue | $ | 341,767 | $ | 315,319 | ||||||||||
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 and through the three months ended March 31, 2022, 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 for the twelve months ended December 31, 2020 and $0.1 million for 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 $6.2 million of it received during the three months ended March 31, 2021. No Provider Relief Funding was received for the three months ended March 31, 2022.
The accelerated Medicare and Blue Shield 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 the three months ended March 31, 2022, $36.0 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
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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 tax liability balance of approximately $8.1 million at March 31, 2022, will be paid by December 31, 2022.
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. We continuously monitor collections from our payors and maintain an allowance for bad debts based upon specific payor collection issues that we have identified and our historical experience.
We have entered into factoring agreements with various institutions and sold certain accounts receivable under non-recourse agreements in exchange for notes receivables from the buyers. 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. Proceeds on notes receivables are 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. Amounts remaining to be collected on these agreement were $17.0 million and $17.7 million at March 31, 2022 and December 31, 2021, respectively. We do not utilize factoring arrangements as an integral part of our financing for working capital and assess the party's ability to pay upfront at the inception of the notes receivable and subsequently by reviewing their financial statements annually and reassessing any insolvency risk on a periodic basis.
DEFERRED FINANCING COSTS - Costs of financing are deferred and amortized using the effective interest rate method. Deferred financing costs, net of accumulated amortization, were $2.0 million and $2.1 million, as of March 31, 2022 and December 31, 2021, respectively and related to our Barclays Revolving Credit Facility. See Note 5, Credit Facilities and Notes Payable for more information.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation of property and equipment is performed using the straight-line method over the estimated useful lives of the assets acquired, which range from 3 to 15 years. Leasehold improvements are amortized at the lesser of lease term or their estimated useful lives, which range from 3 to 15 years. Maintenance and repairs are charged to expense as incurred.
BUSINESS COMBINATION - When the qualifications for business combination accounting treatment are met, it requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the 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 March 31, 2022 totaled $570.2 million. Indefinite lived intangible assets at March 31, 2022 were $13.2 million. Goodwill and Indefinite Lived Intangibles are recorded as a result of business combinations. When we determine the carrying value of 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. We tested goodwill and indefinite lived intangibles for impairment on October 1, 2021, noting no impairment. We considered the current and expected future economic and market conditions surrounding COVID-19 pandemic and did not identify an indication of goodwill impairment being more likely than not through March 31, 2022. Activity in goodwill for the three months ended March 31, 2022 is provided below (in thousands):
| Balance as of December 31, 2021 | $ | 513,820 | |||
| Goodwill from acquisitions | 57,215 | ||||
| Valuation adjustment | (296) | ||||
| Currency translation | (551) | ||||
| Balance as of March 31, 2022 | $ | 570,188 | |||
Goodwill balances at March 31, 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.
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INCOME TAXES - Income tax expense is computed using an asset and liability method and using expected annual effective tax rates. Under this method, deferred income tax assets and liabilities result from temporary differences in the financial reporting bases and the income tax reporting bases of assets and liabilities. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefit that, based on available evidence, is not expected to be realized. When it appears more likely than not that deferred taxes will not be realized, a valuation allowance is recorded to reduce the deferred tax asset to its estimated realizable value. For net deferred tax assets we consider estimates of future taxable income in determining whether our net deferred tax assets are more likely than not to be realized.
We recorded income tax expense of $1.5 million, or an effective tax rate of 15.2%, for the three months ended March 31, 2022 compared to income tax expense of $4.4 million, or an effective tax rate of 24.1% for the three months ended March 31, 2021. The income tax rates for the three months ended March 31, 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.
LEASES - We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities, and long term operating lease liability in our consolidated balance sheets. Finance leases are included in property and equipment, current finance lease liability, and long-term finance lease liability in our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. We include options to extend a lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. For a contract in which we are a lessee that contains fixed payments for both lease and non-lease components, we have elected to account for the components as a single lease component, as permitted. For finance leases, interest expense on the lease liability is recognized using the effective interest method and amortization of the ROU asset is recognized on a straight-line basis over the shorter of the estimated useful life of the asset or the lease term. ROU assets are tested for impairment if circumstances suggest that the carrying amount may not be recoverable. Our ROU assets consist of facility and equipment assets on operating leases. No events have occurred such as fire, flood, or other acts which have impaired the integrity of our ROU assets as of March 31, 2022. Our facility leases require us to maintain insurance policies which would cover major damage to our facilities. We maintain business interruption insurance to cover loss of business due to a facility becoming non-operational under certain circumstances. Our equipment leases are covered by warranty and service contracts which cover repairs and provide regular maintenance to keep the equipment in functioning order.
EQUITY BASED COMPENSATION – We have one long-term incentive plan that we adopted in 2006 and which we have amended and restated at various points in time: first on April 20, 2015, second on March 9, 2017, and currently as of April 15, 2021 (the “Restated Plan”). The Restated Plan was approved by our stockholders at our annual stockholders meeting on June 10, 2021. We have reserved 16,500,000 shares of common stock for issuance under the Restated Plan which can be issued in the form of incentive and/or nonstatutory stock options, restricted and/or unrestricted stock, stock units, and stock appreciation rights. Terms and conditions of awards can be direct grants or based on achieving a performance metric. We evaluate performance-based awards to determine if it is probable that the vesting conditions will be met. We also consider probability of achievement of performance conditions when determining expense recognition. For the awards where vesting is probable, equity-based compensation is recognized over the related vesting period. Stock options generally vest over three years to five years and expire five years to ten years from date of grant. We determine the compensation expense for each stock option award using the Black Scholes, or similar valuation model. Those models require that our management make certain estimates concerning risk free interest rates and volatility in the trading price of our common stock. The compensation expense recognized for all equity-based awards is recognized over the awards’ service periods. Equity-based compensation is classified in operating expenses within the same line item as the majority of the cash compensation paid to employees. In connection with our acquisition of DeepHealth Inc. on June 1, 2020, we assumed the DeepHealth, Inc. 2017 Equity Incentive Plan, including outstanding options awards that can be exercised for our common stock. No additional awards will be granted under the DeepHealth, Inc. 2017 Equity Incentive Plan. See Note 7, Stock-Based Compensation, for more information.
COMPREHENSIVE INCOME (LOSS) - Accounting guidance establishes rules for reporting and displaying comprehensive income or loss and its components. Our unrealized gains or losses on foreign currency translation adjustments, interest rate cap and swap agreements are included in comprehensive loss and are included in the consolidated statements of comprehensive income (loss) for the three months ended March 31, 2022 and 2021.
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COMMITMENTS AND CONTINGENCIES - We are party to various legal proceedings, claims, and regulatory, tax or government inquiries and investigations that arise in the ordinary course of business. With respect to these matters, we evaluate the developments on a regular basis and accrue a liability when we believe a loss is probable and the amount can be reasonably estimated. Based on current information, we do not believe that reasonably possible or probable losses associated with pending legal proceedings would either individually or in the aggregate, have a material adverse effect on our business and consolidated financial statements. However, the outcome of these matters is inherently uncertain. Therefore, if one or more of these matters were resolved against us for amounts in excess of management's expectations, our results of operations and financial condition, including in a particular reporting period in which any such outcome becomes probable and estimable, could be materially adversely affected.
DERIVATIVE INSTRUMENTS - 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 interest payments if rates are above the arranged rates.
At inception, we designated our 2019 Swaps as cash flow hedges of floating-rate borrowings. In accordance with accounting guidance, derivatives that have been designated and qualify as cash flow hedging instruments are reported at fair value. The gain or loss on the effective portion of the hedge (i.e. change in fair value) is reported as a component of comprehensive loss in the consolidated statement of equity. The remaining gain or loss, if any, is recognized currently in earnings. The cash flows for both our $400,000,000 notional interest rate swap contract locked in at 2.05% due October 2025 and our $100,000,000 notional interest rate swap contract locked in at 1.96% do not match the cash flows for our First Lien Term Loans and so we have determined that they are not currently effective as cash flow hedges. Accordingly, all changes in their fair value after April 1, 2020 for the $400,000,000 notional and after July 1, 2020 for the $100,000,000 notional are being recognized in earnings. As of July 1, 2020, the total change in fair value relating to swaps included in other comprehensive income was approximately $24.4 million, net of taxes. This amount will be amortized to interest expense through October 2023 at approximately $0.4 million per month and continuing at approximately $0.3 million through October 2025.
A tabular presentation of the effect of derivative instruments on our consolidated statement of comprehensive loss of the 2019 Swaps which remain ineffective is as follows (amounts in thousands):
| For the three months ended March 31, 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 | March 31, 2022 Balance | Location | |||||||||||||||||||||||||||
| Accumulated Other Comprehensive Loss, net of taxes | $ | (18,886) | $ | — | $ | 923 | $ | (17,963) | Equity | |||||||||||||||||||||||
| For the twelve months ended December 31, 2021 | ||||||||||||||||||||||||||||||||
| Account | December 31, 2020 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 | December 31, 2021 Balance | Location | |||||||||||||||||||||||||||
| Accumulated Other Comprehensive Loss, net of taxes | $ | (22,581) | $ | — | $ | 3,695 | $ | (18,886) | Equity | |||||||||||||||||||||||
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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 March 31, 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 | $ | 20,819 | Other income (expense) | $ | (923) | Interest Expense | ||||||||||||||||||||
See Fair Value Measurements section below for the fair value of the 2019 Swaps at March 31, 2022.
CONTINGENT CONSIDERATION - 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. 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 contingent consideration on our condensed consolidated balance sheet is as follows (amounts in thousands):
| For the three months ended March 31, 2022 | ||||||||||||||||||||||||||
| Account | January 20, 2022 Balance | Amount of other non operating income recognized on contingent consideration | March 31, 2022 Balance | Location | ||||||||||||||||||||||
| Accrued Expenses | $ | — | $ | (501) | $ | 501 | Liabilities and Non Operating Income | |||||||||||||||||||
See Fair Value Measurements section below for the fair value of contingent consideration at March 31, 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):
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| As of March 31, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Current and long term assets | |||||||||||||||||||||||
| 2019 Swaps - Interest Rate Contracts | $ | — | $ | 4,500 | $ | — | $ | 4,500 | |||||||||||||||
| As of December 31, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Current and long term liabilities | |||||||||||||||||||||||
| 2019 Swaps - Interest Rate Contracts | $ | — | $ | 16,319 | $ | — | $ | 16,319 | |||||||||||||||
The estimated fair value of these contracts was determined using Level 2 inputs. More specifically, the fair value was determined by calculating the value of the difference between the fixed interest rate of the interest rate swaps and the counterparty’s forward LIBOR curve. The forward LIBOR curve is readily available in the public markets or can be derived from information available in the public markets.
Contingent Consideration:
The table below summarize the estimated fair values of certain of our shares of common stock issued in our Quantib B.V. acquisition on January 20, 2022, and held back for indemnification purposes 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 March 31, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Long term liabilities | |||||||||||||||||||||||
113,303 shares of RadNet common stock | $ | — | $ | — | $ | 2,535 | $ | 2,535 | |||||||||||||||
The estimated fair value of these contracts was determined using Level 3 inputs. More specifically, the fair value was determined by calculating the value estimated shares issuable as of the reporting date (which was $22.37), the time period related to the contractual settlement term, and the probability of issuing the shares. As all the inputs 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 March 31, 2022 | |||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total Fair Value | Total Face Value | |||||||||||||||||||||||||
| First Lien Term Loans and SunTrust Term Loan | $ | — | $ | 753,769 | $ | — | $ | 753,769 | $ | 764,563 | |||||||||||||||||||
| 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 | $ | — | $ | 766,973 | $ | — | $ | 766,973 | $ | 767,875 | |||||||||||||||||||
At March 31, 2022 and at December 31, 2021 our Barclays revolving credit facility had no balance outstanding. Our SunTrust revolving credit facility relating to our consolidated subsidiary The New Jersey Imaging Network ("NJIN"), had no principal amount outstanding at March 31, 2022 and at December 31, 2021.
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. Additionally, we consider the carrying amount of our finance lease obligations to approximate their fair value because the weighted average interest rate used to formulate the carrying amounts approximates current market rates.
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EARNINGS PER SHARE - Earnings per share is based upon the weighted average number of shares of common stock and common stock equivalents outstanding, net of common stock held in treasury, as follows (in thousands except share and per share data):
| Three Months Ended March 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Net income attributable to RadNet, Inc.'s common stockholders | $ | 3,013 | $ | 9,458 | ||||||||||
| BASIC NET INCOME PER SHARE ATTRIBUTABLE TO RADNET, INC.'S COMMON STOCKHOLDERS | ||||||||||||||
| Weighted average number of common shares outstanding during the period | 55,303,007 | 51,951,506 | ||||||||||||
| Basic net income per share attributable to RadNet, Inc.'s common stockholders | $ | 0.05 | $ | 0.18 | ||||||||||
| DILUTED NET INCOME PER SHARE ATTRIBUTABLE TO RADNET, INC.'S COMMON STOCKHOLDERS | ||||||||||||||
| Weighted average number of common shares outstanding during the period | 55,303,007 | 51,951,506 | ||||||||||||
| Add nonvested restricted stock subject only to service vesting | 197,911 | 253,265 | ||||||||||||
| Add additional shares issuable upon exercise of stock options and contingently issuable shares | 861,275 | 624,170 | ||||||||||||
| Weighted average number of common shares used in calculating diluted net income per share | 56,362,193 | 52,828,941 | ||||||||||||
| Diluted net income per share attributable to RadNet, Inc.'s common stockholders | $ | 0.05 | $ | 0.18 | ||||||||||
| Stock options and non vested restricted awards excluded from the computation of diluted per share amounts as their effect would be antidilutive: | ||||||||||||||
| Shares issuable upon the exercise of stock options: | 46,912 | 82,595 | ||||||||||||
EQUITY INVESTMENTS AT FAIR VALUE–Accounting guidance requires entities to measure equity investments at fair value, with any changes in fair value recognized in net income. If there is no readily determinable fair value, the guidance allows entities the ability to measure investments at cost, adjusted for observable price changes and impairments, with changes recognized in net income.
As of March 31, 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 as of March 31, 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. No observable price changes or impairment in our investment was identified as of March 31, 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 as of March 31, 2022.
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INVESTMENT IN JOINT VENTURES – We have 13 unconsolidated joint ventures with ownership interests ranging from 35% to 55%. These joint ventures represent partnerships with hospitals, health systems or radiology practices and were formed for the purpose of owning and operating diagnostic imaging centers. Professional services at the joint venture diagnostic imaging centers are performed by contracted radiology practices or a radiology practice that participates in the joint venture. Our investment in these joint ventures is accounted for under the equity method, since RadNet does not have a controlling financial interest in such ventures. We evaluate our investment in joint ventures, including cost in excess of book value (equity method goodwill) for impairment whenever indicators of impairment exist. No indicators of impairment existed as of March 31, 2022.
Acquisition by Equity Method Investments
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.
Joint venture investment and financial information
The following table is a summary of our investment in joint ventures during the three months ended March 31, 2022 (in thousands):
| Balance as of December 31, 2021 | $ | 42,229 | |||
| Equity in earnings in these joint ventures | 2,517 | ||||
| Balance as of March 31, 2022 | $ | 44,746 | |||
We charged management service fees from the centers underlying these joint ventures of approximately $5.5 million and $5.2 million for the three months ended March 31, 2022 and 2021, respectively.
The following table is a summary of key balance sheet data for these joint ventures as of March 31, 2022 and December 31, 2021 and income statement data for the three months ended March 31, 2022 and 2021 (in thousands):
| Balance Sheet Data: | March 31, 2022 | December 31, 2021 | |||||||||
| Current assets | $ | 37,119 | $ | 37,186 | |||||||
| Noncurrent assets | 83,407 | 73,592 | |||||||||
| Current liabilities | (12,722) | (12,919) | |||||||||
| Noncurrent liabilities | (27,298) | (22,370) | |||||||||
| Total net assets | $ | 80,506 | $ | 75,489 | |||||||
| Book value of RadNet joint venture interests | $ | 37,214 | $ | 34,930 | |||||||
| Cost in excess of book value of acquired joint venture interests and other | 7,532 | 7,299 | |||||||||
| Total value of RadNet joint venture interests | $ | 44,746 | $ | 42,229 | |||||||
Income statement data for the three months ended March 31, | 2022 | 2021 | |||||||||
| Net revenue | $ | 34,411 | $ | 31,718 | |||||||
| Net income | $ | 5,035 | $ | 4,803 | |||||||
NOTE 3 – RECENT ACCOUNTING AND REPORTING STANDARD
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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 did 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
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 | 4,800 | 2,103 | 857 | 2,697 | — | (857) | ||||||||||||||||
| IFRC LLC*^ | 1/1/2022 | 8,200 | 2,910 | 1,703 | 5,271 | 19 | (1,703) | ||||||||||||||||
| Total | 13,000 | 5,013 | 2,560 | 7,968 | 19 | (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 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 per share with a fair value of $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 preliminarily recorded $1.0 million in current assets, $0.2 million in property plant and equipment, $27.5 million in intangible assets, $3.2 million in liabilities and $19.2 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 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 and will be marked to market in subsequent periods. We preliminarily 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.
As noted above, our acquisitions of Aidence and Quantib are preliminary. As we finalize our estimation of the fair value of the assets acquired and liabilities assumed, additional adjustments may be recorded during the measurement period (a period not to exceed 12 months). The initial accounting is preliminary as of March 31, 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. The finalization of the acquisition accounting valuation assessment may result in a change in the valuation of the deferred tax assets and liabilities and intangible assets, along with the opening working capital accounts, which could have a material impact on our results of operations and financial position.
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.
The table below present segment information reconciled to our financial results, with segment operating income or loss including revenue less cost of operations, depreciation and amortization, and other operating expenses to the extent specifically identified by segment (in thousands):
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| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenue: | |||||||||||
| Imaging Centers | $ | 341,168 | $ | 315,319 | |||||||
| AI | 599 | — | |||||||||
| Total revenue | $ | 341,767 | $ | 315,319 | |||||||
| Cost of Operations | |||||||||||
| Imaging Centers | $ | 310,110 | $ | 281,013 | |||||||
| AI | 4,929 | 1,267 | |||||||||
| Total cost of operations | $ | 315,039 | $ | 282,280 | |||||||
| Depreciation and Amortization: | |||||||||||
| Imaging Centers | $ | 25,805 | $ | 22,569 | |||||||
| AI | 1,313 | 87 | |||||||||
| Total depreciation and amortization | $ | 27,118 | $ | 22,656 | |||||||
| Loss (Gain) on Disposal of Equipment: | |||||||||||
| Imaging Centers | $ | 1,154 | $ | (1,307) | |||||||
| AI | (26) | — | |||||||||
| Total loss (gain) | $ | 1,128 | $ | (1,307) | |||||||
| Severance | |||||||||||
| Imaging Centers | $ | 201 | $ | 285 | |||||||
| AI | — | — | |||||||||
| Total severance | $ | 201 | $ | 285 | |||||||
| (Loss) Income from Operations | |||||||||||
| Imaging Centers | $ | 3,898 | $ | 12,759 | |||||||
| AI | (5,617) | (1,354) | |||||||||
| Total (loss) income from operations | $ | (1,719) | $ | 11,405 | |||||||
For proper comparative purposes, Imaging Center segment revenue in 2021 excludes $6.2 million in Provider Relief Funding, as it represents a form of direct Government stimulus.
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NOTE 6 – CREDIT FACILITIES AND NOTES PAYABLE
As of March 31, 2022 and December 31, 2021 our term loan debt obligations are as follows (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| First Lien Term Loans collateralized by RadNet's tangible and intangible assets | $ | 719,563 | $ | 721,375 | |||||||
| Discount on First Lien Term Loans | (12,692) | (13,213) | |||||||||
| SunTrust Term Loan collateralized by NJIN's tangible and intangible assets | 45,000 | 46,500 | |||||||||
| Total debt obligations | 751,871 | 754,662 | |||||||||
| Less: current portion | (11,164) | (11,164) | |||||||||
| Long term portion debt obligations | $ | 740,707 | $ | 743,498 | |||||||
We had no outstanding balance under our $195.0 million Barclays Revolving Credit Facility at March 31, 2022 and have reserved $7.8 million for certain letters of credit. The remaining $187.2 million of our Barclays Revolving Credit Facility was available to draw upon as of March 31, 2022. We had no outstanding balance under our $30.0 million SunTrust Revolving Credit Facility at March 31, 2022. As of March 31, 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 March 31, 2022 the effective Eurodollar Rate and the Alternate Base Rate for the First Lien Term Loans under the Restated Credit Agreement was 0.75% and 3.50%, 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 March 31, 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 3.00:1.00 | 2.75% per annum | 1.75% per annum | 2.75% per annum | 0.45% per annum | ||||||||||||
| II | Less than 3.00:1.00 but greater than or equal to 2.50:1.00 | 2.25% per annum | 1.25% per annum | 2.25% per annum | 0.40% per annum | ||||||||||||
| III | Less than 2.50:1.00 but greater than or equal to 2.00:1.00 | 2.00% per annum | 1.00% per annum | 2.00% per annum | 0.35% per annum | ||||||||||||
| IV | Less than 2.00:1.00 but greater than or equal to 1.50:1.00 | 1.75% per annum | 0.75% per annum | 1.75% per annum | 0.30% per annum | ||||||||||||
| V | Less than 1.50:1.00 | 1.50% per annum | 0.50% per annum | 1.50% per annum | 0.30% per annum | ||||||||||||
The loans and other obligations outstanding under the SunTrust Credit Agreement currently bear interest at a three month LIBOR election at 0.22% 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 $2.0 million at March 31, 2022.
Revolving loans borrowed under the Barclays Revolving Credit Facility 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 which adjusts depending on our first lien net leverage ratio, according to the following schedule:
| First Lien Net Leverage Ratio | Eurodollar Rate Spread | Alternate Base Rate Spread | ||||||
> 3.50x | 3.25% | 2.25% | ||||||
> 3.00x but ≤ 3.50x | 3.00% | 2.00% | ||||||
≤ 3.00x | 2.75% | 1.75% | ||||||
As of March 31, 2022, the effective interest rate payable on revolving loans under the Barclays Revolving Credit Facility was 5.25%.
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 2.75% 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 March 31, 2022, NJIN had no borrowings under the SunTrust Revolving Credit Facility.
Recent prior amendments to prior credit facilities:
Barclays Credit Facilities:
On August 28, 2020, RadNet Management, Inc. and RadNet, Inc. entered into Amendment No. 8, Consent and Incremental Joinder Agreement to Credit and Guaranty Agreement (the "Eighth Amendment"). The Eighth Amendment amended the prior first lien credit agreement to add $57.5 million of revolving commitments to the prior Barclays revolving credit facility increasing the maximum borrowing capacity under the prior Barclays revolving credit facility to $195.0 million while leaving the maturity date of July 1, 2023 unchanged.
On April 18, 2019 we entered into the following two amendments to the prior first lien credit agreement: (i) Amendment No. 6, Consent and Incremental Joinder Agreement to Credit and Guaranty Agreement (the “Sixth Amendment”); and (ii) Amendment No. 7 to Credit and Guaranty Agreement (the “Seventh Amendment”). Among other things, the Sixth Amendment amended the prior first lien credit agreement to issue $100.0 million in incremental first lien term loans and to add an additional $20.0 million of revolving commitments to the prior Barclays revolving credit facility. The Seventh Amendment amended the prior first lien credit agreement to extend the maturity date of the prior Barclays revolving credit facility by an additional two years to July 1, 2023, unless sooner terminated in accordance with the terms of the prior first lien credit agreement.
The prior first lien credit agreement was amended and restated by the Restated Credit Agreement described above, and the prior first lien term loans and prior Barclays revolving credit facility under the prior first lien credit agreement were refinanced and replaced by the First Lien Term Loans and the Barclays Revolving Credit Facility provided under the Restated Credit Agreement described above.
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.
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As of March 31, 2022, we had outstanding options to acquire 683,914 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 three months ended March 31, 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 | 473,939 | $ | 9.38 | |||||||||||||||||||||||
| Granted | 209,975 | 29.44 | ||||||||||||||||||||||||
| Balance, March 31, 2022 | 683,914 | 15.54 | 6.49 | $ | 6,157,802 | |||||||||||||||||||||
| Exercisable at March 31, 2022 | 508,969 | 11.05 | 5.43 | 6,126,246 | ||||||||||||||||||||||
Aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between our closing stock price on March 31, 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 March 31, 2022. As of March 31, 2022, total unrecognized stock-based compensation expense related to non-vested employee awards was $2.6 million, which is expected to be recognized over a weighted average period of approximately 2.24 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 March 31, 2022, total unrecognized stock based compensation expense related to non-vested DeepHealth options was approximately $1.6 million, which is expected to be recognized over a weighted average period of approximately 1.23 years
| 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 | 320,660 | $ | — | |||||||||||||||||||||||
| Exercised | (12,637) | — | ||||||||||||||||||||||||
| Balance, March 31, 2022 | 308,023 | — | 7.18 | $ | 6,890,475 | |||||||||||||||||||||
| Exercisable at March 31, 2022 | 46,912 | — | 7.18 | 1,049,413 | ||||||||||||||||||||||
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 March 31, 2022, we have issued a total of 7,743,651 RSA’s of which 438,786 were unvested at March 31, 2022. The following summarizes all unvested RSA’s activities during the three months ended March 31, 2022:
| RSA's | Weighted-Average Remaining Contractual Term (Years) | Weighted-Average Fair Value | |||||||||||||||
| RSA's unvested at December 31, 2021 | 456,075 | $ | 20.06 | ||||||||||||||
| Changes during the period | |||||||||||||||||
| Granted | 500,622 | $ | 28.72 | ||||||||||||||
| Vested | (517,911) | $ | 21.63 | ||||||||||||||
| RSA's unvested at March 31, 2022 | 438,786 | 1.16 | $ | 25.96 | |||||||||||||
We determine the fair value of all RSA’s based on the closing price of our common stock on the award date.
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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 three months ended March 31, 2022, no such awards were granted.
Performance based stock units ("PSUs")
In January 2022, the company 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, the company granted certain employees PSOs with a potential to option 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 the board of directors over the period from January 1, 2022 through December 31, 2022.
Restated Plan summary
In summary, of the 16,500,000 shares of common stock reserved for issuance under the Restated Plan, at March 31, 2022, there remain 2,380,364 shares available under the Restated Plan for future issuance.
NOTE 8 – SUBSEQUENT EVENTS
Formation of majority owned subsidiary
On April 1, 2022 we entered into Frederick County Radiology, LLC, a partnership with Frederick Health Hospital, Inc. ("Hospital"). The operation will offer multi-modality services out of six locations in Frederick, Maryland. RadNet will have a 65% economic interest and Hospital will have a 35% economic interest.
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.
.
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;
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•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 March 31, 2022, we operated, directly or indirectly through joint ventures with hospitals, 351 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
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 centers. The following table shows our centers in operation and revenues for the three months ended March 31, 2022 and March 31, 2021:
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| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Centers in operation | 351 | 346 | |||||||||
| Net revenues (millions) | $ | 342 | $ | 315 | |||||||
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 revenue during the three months ended March 31, 2022 and 2021 are presented in the table below based on an allocation of the estimated transaction price with the patient between the primary patient classification of insurance coverage (in thousands):
| Three Months Ended March 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Commercial insurance | $ | 188,465 | $ | 182,096 | ||||||||||
| Medicare | 70,999 | 63,589 | ||||||||||||
| Medicaid | 9,087 | 8,451 | ||||||||||||
| Workers' compensation/personal injury | 12,449 | 10,399 | ||||||||||||
| Other patient revenue | 7,123 | 4,775 | ||||||||||||
| Management fee revenue | 5,508 | 5,219 | ||||||||||||
| Software revenue | 3,399 | 2,426 | ||||||||||||
| AI revenue | 599 | — | ||||||||||||
| Other | 5,647 | 2,622 | ||||||||||||
| Service fee revenue | 303,276 | 279,577 | ||||||||||||
| Revenue under capitation arrangements | 38,491 | 35,742 | ||||||||||||
| Total service revenue | $ | 341,767 | $ | 315,319 | ||||||||||
Recent Developments
As 2022 begins, our procedure volumes remain strong. 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. We have also opened five centers through a combination of acquisition and internal development.
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 March 31, 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 as of March 31, 2022.
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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 as of March 31, 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 as of March 31, 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.
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 per share with a fair value of $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 preliminarily recorded $1.0 million in current assets, $0.2 million in property plant and equipment, $27.5 million in intangible assets, $3.2 million in liabilities and $19.2 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 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 preliminarily 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.
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As we finalize our estimation of the fair value of the assets acquired and liabilities assumed, additional adjustments may be recorded during the measurement period (a period not to exceed 12 months). The initial accounting is incomplete as of March 31, 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. The finalization of the acquisition accounting valuation assessment may result in a change in the valuation of the deferred tax assets and liabilities and intangible assets, along with the opening working capital accounts, which could have a material impact on our results of operations and financial position.
Joint Venture Activity
Acquisition
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.
The following table is a summary of our investment in joint ventures during the three months ended March 31, 2022 (in thousands):
| Balance as of December 31, 2021 | $ | 42,229 | |||
| Equity in earnings in these joint ventures | 2,517 | ||||
| Balance as of March 31, 2022 | $ | 44,746 | |||
We charged management service fees from the centers underlying these joint ventures of approximately $5.5 million and $5.2 million for the three months ended March 31, 2022 and 2021, respectively.
The following table is a summary of key balance sheet data for these joint ventures as of March 31, 2022 and December 31, 2021 and income statement data for the three months ended March 31, 2022 and 2021 (in thousands):
| Balance Sheet Data: | March 31, 2022 | December 31, 2021 | |||||||||
| Current assets | $ | 37,119 | $ | 37,186 | |||||||
| Noncurrent assets | 83,407 | 73,592 | |||||||||
| Current liabilities | (12,722) | (12,919) | |||||||||
| Noncurrent liabilities | (27,298) | (22,370) | |||||||||
| Total net assets | $ | 80,506 | $ | 75,489 | |||||||
| Book value of RadNet joint venture interests | $ | 37,214 | $ | 34,930 | |||||||
| Cost in excess of book value of acquired joint venture interests | 7,532 | 7,299 | |||||||||
| Total value of RadNet joint venture interests | $ | 44,746 | $ | 42,229 | |||||||
Income statement data for the three months ended March 31, | 2022 | 2021 | |||||||||
| Net revenue | $ | 34,411 | $ | 31,718 | |||||||
| Net income | $ | 5,035 | $ | 4,803 | |||||||
Critical Accounting Policies
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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.
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 others 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 March 31, 2022.
Provider Relief Fund (COVID-19 Stimulus Funding)
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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 $6.2 million for the three months ended March 31, 2021. No provider relief funding was received for the three months ended March 31, 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 March 31, 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 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 March 31, 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 March 31, 2022 totaled $570.2 million. Indefinite Lived Intangible Assets at March 31, 2022 were $13.2 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 March 31, 2022.
Recent Accounting Standards
See Note 3, Recent Accounting and Reporting Standards to the financial statements included in this report for further information.
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Results of Operations
The following table sets forth, for the three months ended March 31, 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 March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| REVENUE | |||||||||||
| Service fee revenue | 88.7 | % | 88.7 | % | |||||||
| Revenue under capitation arrangements | 11.3 | % | 11.3 | % | |||||||
| Total service revenue | 100.0 | % | 100.0 | % | |||||||
| Provider relief funding | — | % | 2.0 | % | |||||||
| OPERATING EXPENSES | |||||||||||
| Cost of operations, excluding depreciation and amortization | 92.2 | % | 89.5 | % | |||||||
| Depreciation and amortization | 7.9 | % | 7.2 | % | |||||||
| Loss (gain) on sale and disposal of equipment and other | 0.3 | % | (0.4) | % | |||||||
| Severance costs | 0.1 | % | 0.1 | % | |||||||
| Total operating expenses | 100.5 | % | 96.4 | % | |||||||
| (LOSS) INCOME FROM OPERATIONS | (0.5) | % | 5.6 | % | |||||||
| OTHER INCOME AND EXPENSES | |||||||||||
| Interest expense | 3.4 | % | 4.1 | % | |||||||
| Equity in earnings of joint ventures | (0.7) | % | (0.7) | % | |||||||
| Non-cash change in fair value of interest rate hedge | (6.1) | % | (3.6) | % | |||||||
| Other expenses | — | % | 0.1 | % | |||||||
| Total other income | (3.4) | % | (0.2) | % | |||||||
| INCOME BEFORE INCOME TAXES | 2.9 | % | 5.8 | % | |||||||
| Provision for income taxes | (0.4) | % | (1.4) | % | |||||||
| NET INCOME | 2.4 | % | 4.4 | % | |||||||
| Net income attributable to noncontrolling interests | 1.6 | % | 1.4 | % | |||||||
| NET INCOME ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS | 0.9 | % | 3.0 | % | |||||||
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 months ended March 31, 2022 and 2021.
Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021
Total Revenue inclusive of Provider Relief funding where applicable for 2022 and 2021
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| In Thousands | Three Months Ended March 31, | |||||||||||||
| Revenue | 2022 | 2021 | $ Increase/(Decrease) | % Change | ||||||||||
| Total Revenue | $341,167 | $321,567 | $19,600 | 6.1% | ||||||||||
| Same Center Revenue | $314,705 | $305,892 | $8,813 | 2.9% | ||||||||||
| Excluded | $26,462 | $15,675 | — | — | ||||||||||
Upswing in revenue reflects an overall same center 6.2% growth in total procedure volumes over the same period in the prior year as business continues to return to pre-COVID-19 levels. On a same center basis, with routine imaging procedures rising 5.6%, and advanced radiology procedures of MRI, PET and CT, expanding at a combined 7.9%, revenue increased over the same period in the prior year. Total Provider Relief funding used to offset lost revenue due to the pandemic and included in the above amounts was $6.2 million for the three months ended March 31, 2021. Excluded amounts refer to revenue contributions for the three month periods ending March 31, 2022 and March 31, 2021, respectively, from centers that were acquired or divested between January 1, 2021 through March 31, 2022.
Operating Expenses
Total operating expenses for the three months ended March 31, 2022 increased approximately $34.7 million, or 11.5%, from $302.6 million for the three months ended March 31, 2021 to $337.3 million for the three months ended March 31, 2022. The following table sets forth a breakdown of our cost of operations and total operating expenses for the three months ended March 31, 2022 and 2021 (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Salaries and professional reading fees, excluding stock-based compensation | $ | 196,962 | $ | 177,204 | |||||||
| Stock-based compensation | 10,357 | 7,791 | |||||||||
| Building and equipment rental | 29,623 | 28,711 | |||||||||
| Medical supplies | 15,557 | 13,970 | |||||||||
Other operating expenses * | 57,611 | 53,337 | |||||||||
| Cost of operations | 310,110 | 281,013 | |||||||||
| Depreciation and amortization | 25,806 | 22,569 | |||||||||
| Loss on sale and disposal of equipment | 1,154 | (1,307) | |||||||||
| Severance costs | 201 | 285 | |||||||||
| Total operating expenses | $ | 337,271 | $ | 302,560 | |||||||
*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 March 31, 2022 and 2021 (in thousands):
Salaries and professional reading fees, excluding stock-based compensation and severance
| In Thousands | Three Months Ended March 31, | |||||||||||||
| Salaries and Professional Fees | 2022 | 2021 | $ Increase/(Decrease) | % Change | ||||||||||
| Total Salaries | $196,962 | $177,204 | $19,758 | 11.2% | ||||||||||
| Same Center Salaries | $182,278 | $168,535 | $13,743 | 8.2% | ||||||||||
| Excluded | $14,684 | $8,669 | — | — | ||||||||||
Stemming from the higher procedure volumes noted above, our staffing levels were adjusted to support the influx of patients seeking radiology procedures. In addition, we face inflation in employee cost similar to the general economy as demand returns to pre-Covid levels. Excluded amounts refer to salaries and professional reading fees for the three month
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periods ending March 31, 2022 and March 31, 2021, respectively, from centers that were acquired or divested between January 1, 2021 through March 31, 2022.
Stock-based compensation
Stock-based compensation increased $2.6 million, or 32.9% to approximately $10.4 million for the three months ended March 31, 2022 compared to $7.8 million for three months ended March 31, 2021. This increase was driven by the higher fair value of RSA’s awarded and vested in the first quarter of 2022 as compared to RSA’s awarded and vested in the prior year’s first quarter.
Building and equipment rental
| In Thousands | Three Months Ended March 31, | |||||||||||||
| Building & Equipment Rental | 2022 | 2021 | $ Increase/(Decrease) | % Change | ||||||||||
| Total | $29,623 | $28,711 | $912 | 3.2% | ||||||||||
| Same Center | $24,425 | $25,462 | $(1,037) | (4.1)% | ||||||||||
| Excluded Sites | $5,198 | $3,249 | — | — | ||||||||||
The decrease in building and rental expense relates to reduced equipment rental expenses relating to operating lease contracts which ended or were bought out during 2021. Excluded amounts refer to building and equipment rental for the three month periods ending March 31, 2022 and March 31, 2021, respectively, from centers that were acquired or divested between January 1, 2021 through March 31, 2022.
Medical supplies
| In Thousands | Three Months Ended March 31, | |||||||||||||
| Medical Supplies Expense | 2022 | 2021 | $ Increase/(Decrease) | % Change | ||||||||||
| Total | $15,557 | $13,970 | $1,587 | 11.4% | ||||||||||
| Same Center | $14,505 | $13,229 | $1,276 | 9.7% | ||||||||||
| Excluded Sites | $1,052 | $741 | — | — | ||||||||||
The rise in Medical supplies expense corresponds to higher patient volume combined with price increases for contrasting agents used in advanced radiology procedures. Excluded amounts refer to medical supplies expense for the three month periods ending March 31, 2022 and March 31, 2021, respectively, from centers that were acquired or divested between January 1, 2021 through March 31, 2022. .
Other operating expenses
| In Thousands | Three Months Ended March 31, | |||||||||||||
| Other Operating Expenses | 2022 | 2021 | $ Increase/(Decrease) | % Change | ||||||||||
| Total | $57,611 | $53,337 | $4,274 | 8.0% | ||||||||||
| Same Center | $52,326 | $50,521 | $1,805 | 3.6% | ||||||||||
| Excluded Sites | $5,285 | $2,816 | — | — | ||||||||||
Other operating expenses increase relates to one time settlement charge for telecom contracts being phased out as part of a change in service provider. Excluded amounts refer to other operating expenses for the three month periods ending March 31, 2022 and March 31, 2021, respectively, from centers that were acquired or divested between January 1, 2021 through March 31, 2022.
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Additional segment operating and non operating expenses:
| In Thousands | Three Months Ended March 31, | |||||||||||||
| 2022 | 2021 | $ Increase/(Decrease) | % Change | |||||||||||
| Depreciation and amortization | $25,806 | $22,569 | $3,238 | 14.3% | ||||||||||
| Loss (gain) on disposal of equipment and other | $1,154 | ($1,307) | $2,461 | nm | ||||||||||
| Non-cash change in fair value of interest rate hedge | ($20,819) | ($11,245) | (9,575) | nm | ||||||||||
| Other expenses | $661 | $7 | $654 | nm | ||||||||||
| Severance | $201 | $285 | (84) | (34.6)% | ||||||||||
nm= not meaningful
Interest expense
| In Thousands | Three Months Ended March 31, | |||||||||||||
| Interest Expense | 2022 | 2021 | $ Increase/(Decrease) | % Change | ||||||||||
| Total Interest Expense | $11,601 | $12,826 | $(1,224) | (9.5) | % | |||||||||
| Interest related to derivatives* | $3,671 | $3,650 | ||||||||||||
| Interest related to amortization** | $647 | $1,147 | ||||||||||||
| Adjusted Interest Expense*** | $7,283 | $8,029 | $(745) | (9.3) | % | |||||||||
* 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 March 31, 2022 compared to the three months ended March 31, 2021, interest expense decreased $0.7 million, or 9.3%. The reduction in interest expense is attributable to a lower base rate that that was negotiated as part of an amendment to our senior credit facilities which reduced the effective interest rates on our term loan and revolving credit facilities as compared to the same period last 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.
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 March 31, 2022 we recognized equity in earnings from unconsolidated joint ventures in the amount of $2.5 million and for three months ended March 31, 2021 we recognized equity in earnings from unconsolidated joint ventures of $2.3 million, an increase of $0.2 million or 10.2%. The increase was mainly related to the equity in earnings received from our venture operations in Maryland.
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AI Segment
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. We are developing our AI segment initially through acquisition activity. Our acquisitions of Nulogix and Deephealth comprise the results for 2021. Our 2022 results now 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 months ended March 31, 2022 and 2021 are as follows:
| In Thousands | Three Months Ended March 31, | ||||||||||
| 2022 | 2021 | $ Increase/(Decrease) | |||||||||
| Revenue | $599 | $— | $599 | ||||||||
| Loss from Operations | ($5,617) | ($1,354) | ($4,263) | ||||||||
| Other | ($504) | $200 | (704) | ||||||||
| Segment loss | ($5,113) | ($1,554) | ($3,559) | ||||||||
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 $6.2 million for the three months ended March 31, 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.
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Adjusted EBITDA is most comparable to the GAAP financial measure, net income attributable to RadNet, Inc. common stockholders. The following is a reconciliation of GAAP net income attributable to RadNet, Inc. common stockholders to Adjusted EBITDA for the three months ended March 31, 2022 and 2021, respectively.
| Three Months Ended March 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Net income attributable to RadNet, Inc. common stockholders | $ | 3,013 | $ | 9,458 | ||||||||||
| Provision for income taxes | 1,496 | 4,376 | ||||||||||||
| Interest expense | 11,593 | 12,826 | ||||||||||||
| Severance costs | 201 | 285 | ||||||||||||
| Depreciation and amortization | 27,118 | 22,656 | ||||||||||||
| Non-cash employee stock-based compensation | 11,102 | 8,248 | ||||||||||||
| Loss (gain) on sale and disposal of equipment and other | 1,128 | (1,307) | ||||||||||||
| Non-cash change in fair value of interest rate hedge | (20,819) | (11,245) | ||||||||||||
| Other expenses | 165 | 206 | ||||||||||||
| Legal settlements | 2,197 | — | ||||||||||||
| Non operational rent expenses | 938 | — | ||||||||||||
| Gain on sale of equipment attributable to noncontrolling interest | ||||||||||||||
| Adjusted EBITDA including losses from AI Segment & Provider Relief Funding | $ | 38,132 | $ | 45,503 | ||||||||||
| Provider relief funding | — | (6,248) | ||||||||||||
| Adjusted EBITDA including losses from AI Segment and excluding benefit from Provider Relief Funding | $ | 38,132 | $ | 39,255 | ||||||||||
| Losses from AI Segment | 3,585 | 811 | ||||||||||||
| Adjusted EBITDA excluding losses from AI Segment & Provider Relief Funding | $ | 41,717 | $ | 40,066 | ||||||||||
Liquidity and Capital Resources
The following table summarizes key balance sheet data related to our liquidity as of March 31, 2022 and December 31, 2021 and income statement data for the three months ended March 31, 2022 and 2021 (in thousands):
| Balance Sheet Data: | March 31, 2022 | December 31, 2021 | |||||||||
| Cash and cash equivalents | $ | 70,713 | $ | 134,606 | |||||||
| Accounts receivable | 159,725 | 135,062 | |||||||||
| Working capital (exclusive of current operating lease liabilities) | (27,696) | 14,932 | |||||||||
| Stockholders' equity | 421,450 | 346,157 | |||||||||
Income statement data for the three months ended March 31, | 2022 | 2021 | |||||||||
| Total net revenue | $ | 341,767 | $ | 315,319 | |||||||
| Net income attributable to RadNet common stockholders | 3,013 | 9,458 | |||||||||
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
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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 three months ended:
| Cash Flow Data | March 31, 2022 | March 31, 2021 | |||||||||
| Cash provided by operating activities | $ | 901 | $ | 28,084 | |||||||
| Cash used in investing activities | (61,564) | (87,348) | |||||||||
| Cash used in financing activities | (3,313) | (11,651) | |||||||||
Cash used in operating activities for the three months ended March 31, 2022 was $0.9 million and cash provided by operation activities was $28.1 million for the three months ended March 31, 2021. Our cash provided by operating activities for the three months ended March 31, 2022 was affected by the non-cash change in fair value of our interest rate hedge of $20.8 million. Our cash provided by operating activities for the period ended March 31, 2021 was benefited by the receipt of $39.6 million in CMS advances recorded as deferred revenue.
Cash used in investing activities for the three months ended March 31, 2022, included purchases of property and equipment for approximately $36.6 million and the acquisition of imaging business and other assets for $25.1 million. As part of our business operations we continually evaluate investment opportunities.
Cash used in financing activities of $3.3 million for the three months ended March 31, 2022, was due to payment on our term loan obligations. 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 March 31, 2022 we have $17.0 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 March 31, 2022, we were in compliance with all covenants under our credit facilities. Deferred financing costs at March 31, 2022, net of accumulated amortization, was $2.0 million and is specifically related to our Barclays revolving credit facility.
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Included in our condensed consolidated balance sheets at March 31, 2022 are $764.6 million of total term loan debt (exclusive of unamortized discounts of $12.7 million) in thousands:
| Face Value | Discount | Total Carrying Value | |||||||||||||||
| First Lien Term Loans | $ | 719,563 | $ | (12,692) | $ | 706,871 | |||||||||||
| SunTrust Term Loan | 45,000 | — | 45,000 | ||||||||||||||
| Total Term Loans | $ | 764,563 | $ | (12,692) | $ | 751,871 | |||||||||||
At March 31, 2022, we had no borrowings under our Barclays or SunTrust revolving credit facilities. After reserves for outstanding letters of credit of $7.8 million on our Barclays Revolving Credit Facility, we have $187.2 million available for borrowing and $30.0 million available under our SunTrust Revolving Credit Facility.
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 and refinancing activity of April 23, 2021.
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 March 31, 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.
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 caps, 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 March 31, 2022, we had $719.6 million outstanding subject to a Eurodollar election on First Lien Term Loans and our effective 3 month LIBOR rate plus applicable margin was 3.75%. 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 March 31, 2022, we had $1.8 million loan amount principal outstanding subject to an alternate base rate election on First Lien Term Loans with an effective rate of 5.50%. A hypothetical 1% increase in the alternative base rate under the First Lien Credit Agreement over the current alternative base rate would result in an increase of $18.1 thousand in annual interest expense and a corresponding decrease in income before taxes.
At March 31, 2022, we had $45.0 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 March 31, 2022, our effective LIBOR rate plus applicable margin was 2.51%. A hypothetical 1% increase in the adjusted Eurodollar rates under the SunTrust Restated Credit Agreement would result in an increase of approximately $0.5 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
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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 March 31, 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 and Form 10-Q 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
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.
Also on January 20, 2022, we issued 965,058 shares of our common stock to complete our purchase of Quantib B.V.. These shares were ascribed a value of $25.7 million.
All shares were issued pursuant to the private placement exemption contained in Section 4(a)(2) of the Securities Act.
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 | |||||||
| 10.1 | ||||||||
| 10.2 | ||||||||
| 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 March 31, 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: May 10, 2022 | By: | /s/ Howard G. Berger, M.D. | ||||||
| Howard G. Berger, M.D., President and Chief Executive Officer (Principal Executive Officer) | ||||||||
| Date: May 10, 2022 | By: | /s/ Mark D. Stolper | ||||||
| Mark D. Stolper, Chief Financial Officer (Principal Financial and Accounting Officer) | ||||||||
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