RadNet, Inc. - Quarter Report: 2023 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, 2023
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 4, 2023 was 58,345,891 shares.
RADNET, INC.
TABLE OF CONTENTS
| Page | |||||
ITEM 6. Exhibits | |||||
i
PART I - FINANCIAL INFORMATION
Item 1 – Financial Statements
RADNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
| March 31, 2023 | December 31, 2022 | ||||||||||
| (unaudited) | |||||||||||
| ASSETS | |||||||||||
| CURRENT ASSETS | |||||||||||
| Cash and cash equivalents | $ | 90,844 | $ | 127,834 | |||||||
| Accounts receivable | 176,354 | 166,357 | |||||||||
| Due from affiliates | 20,387 | 18,971 | |||||||||
| Prepaid expenses and other current assets | 55,100 | 54,022 | |||||||||
| Total current assets | 342,685 | 367,184 | |||||||||
| PROPERTY, EQUIPMENT AND RIGHT-OF-USE ASSETS | |||||||||||
| Property and equipment, net | 545,492 | 565,961 | |||||||||
| Operating lease right-of-use assets | 623,309 | 603,524 | |||||||||
| Total property, equipment and right-of-use assets | 1,168,801 | 1,169,485 | |||||||||
| OTHER ASSETS | |||||||||||
| Goodwill | 687,085 | 677,665 | |||||||||
| Other intangible assets | 103,003 | 106,228 | |||||||||
| Deferred financing costs | 2,122 | 2,280 | |||||||||
| Investment in joint ventures | 59,321 | 57,893 | |||||||||
| Deposits and other | 51,052 | 53,172 | |||||||||
| Total assets | $ | 2,414,069 | $ | 2,433,907 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| CURRENT LIABILITIES | |||||||||||
| Accounts payable, accrued expenses and other | $ | 296,727 | $ | 369,595 | |||||||
| Due to affiliates | 31,548 | 23,100 | |||||||||
| Deferred revenue | 4,343 | 4,021 | |||||||||
| Current operating lease liability | 58,590 | 57,607 | |||||||||
| Current portion of notes payable | 15,935 | 12,400 | |||||||||
| Total current liabilities | 407,143 | 466,723 | |||||||||
| LONG-TERM LIABILITIES | |||||||||||
| Long-term operating lease liability | 623,538 | 604,117 | |||||||||
| Notes payable, net of current portion | 852,354 | 839,344 | |||||||||
| Deferred tax liability, net | 10,410 | 9,256 | |||||||||
| Other non-current liabilities | 27,523 | 23,015 | |||||||||
| Total liabilities | 1,920,968 | 1,942,455 | |||||||||
| EQUITY | |||||||||||
Common stock - $0.0001 par value, 200,000,000 shares authorized; 58,270,290 and 57,723,125 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively | 6 | 6 | |||||||||
| Additional paid-in-capital | 448,522 | 436,288 | |||||||||
| Accumulated other comprehensive loss | (16,978) | (20,677) | |||||||||
| Accumulated deficit | (103,628) | (82,622) | |||||||||
| Total RadNet, Inc.'s stockholders' equity | 327,922 | 332,995 | |||||||||
| Noncontrolling interests | 165,179 | 158,457 | |||||||||
| Total equity | 493,101 | 491,452 | |||||||||
| Total liabilities and equity | $ | 2,414,069 | $ | 2,433,907 | |||||||
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, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| REVENUE | ||||||||||||||
| Service fee revenue | $ | 352,420 | $ | 303,276 | ||||||||||
| Revenue under capitation arrangements | 38,144 | 38,491 | ||||||||||||
| Total service revenue | 390,564 | 341,767 | ||||||||||||
| OPERATING EXPENSES | ||||||||||||||
| Cost of operations, excluding depreciation and amortization | 351,865 | 315,039 | ||||||||||||
| Depreciation and amortization | 31,315 | 27,118 | ||||||||||||
| Loss on sale and disposal of equipment and other | 579 | 1,128 | ||||||||||||
| Severance costs | 134 | 201 | ||||||||||||
| Total operating expenses | 383,893 | 343,486 | ||||||||||||
| INCOME (LOSS) FROM OPERATIONS | 6,671 | (1,719) | ||||||||||||
| OTHER INCOME AND EXPENSES | ||||||||||||||
| Interest expense | 15,722 | 11,593 | ||||||||||||
| Equity in earnings of joint ventures | (1,428) | (2,517) | ||||||||||||
| Non-cash change in fair value of interest rate hedge | 4,093 | (20,819) | ||||||||||||
| Other expenses | 1,432 | 165 | ||||||||||||
| Total other expense (income) | 19,819 | (11,578) | ||||||||||||
| (LOSS) INCOME BEFORE INCOME TAXES | (13,148) | 9,859 | ||||||||||||
| Provision for income taxes | (1,135) | (1,496) | ||||||||||||
| NET (LOSS) INCOME | (14,283) | 8,363 | ||||||||||||
| Net income attributable to noncontrolling interests | 6,722 | 5,350 | ||||||||||||
| NET (LOSS) INCOME ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS | $ | (21,005) | $ | 3,013 | ||||||||||
| BASIC NET (LOSS) INCOME PER SHARE ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS | $ | (0.36) | $ | 0.05 | ||||||||||
| DILUTED NET (LOSS) INCOME PER SHARE ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS | $ | (0.36) | $ | 0.05 | ||||||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING | ||||||||||||||
| Basic | 57,701,439 | 55,303,007 | ||||||||||||
| Diluted | 57,701,439 | 56,362,193 | ||||||||||||
The accompanying notes are an integral part of these financial statements.
2
RADNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(IN THOUSANDS)
(unaudited)
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| NET (LOSS) INCOME | $ | (14,283) | $ | 8,363 | |||||||
| Foreign currency translation adjustments | 2,777 | (1,264) | |||||||||
| Change in fair value of cash flow hedge from prior periods reclassified to earnings, net of taxes | 922 | 923 | |||||||||
| COMPREHENSIVE (LOSS) INCOME | (10,584) | 8,022 | |||||||||
| Less comprehensive income attributable to noncontrolling interests | 6,722 | 5,350 | |||||||||
| COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO | |||||||||||
| RADNET, INC. COMMON STOCKHOLDERS | $ | (17,306) | $ | 2,672 | |||||||
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, 2023 and March 31, 2022.
| 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, 2023 | 57,723,125 | $ | 6 | $ | 436,288 | $ | (20,677) | $ | (82,622) | $ | 332,995 | $ | 158,457 | $ | 491,452 | ||||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of options | 5,000 | — | 51 | — | — | 51 | — | 51 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under the equity compensation plan | 527,692 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under the DeepHealth equity compensation plan | 14,473 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 12,185 | — | — | 12,185 | — | 12,185 | |||||||||||||||||||||||||||||||||||||||
| Change in cumulative foreign currency translation adjustment | — | — | — | 2,777 | — | 2,777 | — | 2,777 | |||||||||||||||||||||||||||||||||||||||
| Change in fair value of cash flow hedge from prior periods reclassified to earnings, net of taxes | — | — | — | 922 | — | 922 | — | 922 | |||||||||||||||||||||||||||||||||||||||
| Other | — | — | (2) | — | (1) | (3) | — | (3) | |||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | (21,005) | (21,005) | 6,722 | (14,283) | |||||||||||||||||||||||||||||||||||||||
| BALANCE-MARCH 31, 2023 | 58,270,290 | $ | 6 | $ | 448,522 | $ | (16,978) | $ | (103,628) | $ | 327,922 | $ | 165,179 | $ | 493,101 | ||||||||||||||||||||||||||||||||
| 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 for 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 | — | — | — | 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 | ||||||||||||||||||||||||||||||||
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, | |||||||||||
| 2023 | 2022 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net (loss) income | $ | (14,283) | $ | 8,363 | |||||||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 31,315 | 27,118 | |||||||||
| Amortization of operating lease right-of-use assets | 15,699 | 16,802 | |||||||||
| Equity in earnings of joint ventures, net of dividends | (1,835) | (2,517) | |||||||||
| Amortization of deferred financing costs and loan discount | 746 | 648 | |||||||||
| Loss on sale and disposal of equipment and other | 579 | 1,128 | |||||||||
| Amortization of cash flow hedge, net of taxes | 922 | 923 | |||||||||
| Non-cash change in fair value of interest rate hedge | 4,093 | (20,819) | |||||||||
| Stock-based compensation | 12,185 | 11,102 | |||||||||
Change in fair value of contingent consideration | 2,335 | (501) | |||||||||
Changes in operating assets and liabilities, net of assets acquired and liabilities assumed in purchase transactions: | |||||||||||
| Accounts receivable | (9,997) | (23,904) | |||||||||
| Other current assets | (1,691) | (4,065) | |||||||||
| Other assets | (2,726) | (1,417) | |||||||||
| Deferred taxes | 942 | 1,387 | |||||||||
| Operating lease liability | (15,080) | (15,859) | |||||||||
| Deferred revenue | 335 | (4,519) | |||||||||
| Accounts payable, accrued expenses and other | 9,077 | 7,031 | |||||||||
| Net cash provided by operating activities | 32,616 | 901 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Purchase of imaging centers and other acquisitions | (9,644) | (25,123) | |||||||||
| Purchase of property and equipment | (55,915) | (36,558) | |||||||||
| Proceeds from sale of equipment | 3 | 117 | |||||||||
| Net cash used in investing activities | (65,556) | (61,564) | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Principal payments on notes and leases payable | (184) | — | |||||||||
| Payments on term loan debt | (3,688) | (3,313) | |||||||||
| Proceeds from issuance of common stock upon exercise of options | 51 | — | |||||||||
| Net cash used in financing activities | (3,821) | (3,313) | |||||||||
| EFFECT OF EXCHANGE RATE CHANGES ON CASH | (229) | 83 | |||||||||
| NET DECREASE IN CASH AND CASH EQUIVALENTS | (36,990) | (63,893) | |||||||||
| CASH AND CASH EQUIVALENTS, beginning of period | 127,834 | 134,606 | |||||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 90,844 | $ | 70,713 | |||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | |||||||||||
| Cash paid during the period for interest | $ | 21,471 | $ | 7,448 | |||||||
| Cash paid during the period for income taxes | $ | 40 | $ | 34 | |||||||
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 $40.8 million and $42.2 million during the three months ended March 31, 2023 and 2022, respectively, which were not paid for as of March 31, 2023 and 2022, respectively. The offsetting amounts due were recorded in our condensed consolidated balance sheet under accounts payable, accrued expenses and other.
On February 1, 2023, we issued a promissory note in the amount of $19.8 million to acquire radiology equipment previously leased under operating leases.
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.
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, 2023, we operated directly or indirectly through joint ventures with hospitals, 363 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 $48.8 million and $45.7 million of revenue, net of management services fees to RadNet, for the three months ended March 31, 2023 and 2022, respectively and $48.8 million and $45.7 million of operating expenses for the three months ended March 31, 2023 and 2022, respectively. RadNet recognized $207.4 million and $191.0 million of total billed net service fee revenue for the three months ended March 31, 2023, and 2022, 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, 2023 and December 31, 2022, we have included approximately $103.1 million and $100.4 million, respectively, of accounts receivable and approximately $18.8 million and $16.9 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 $3.1 million, which represents our receivable balance from the entity. Maximum exposure to loss is the loss that we would absorb in the event that all of the assets of ScriptSender are deemed worthless. We paid operating expenses for the venture of $0.5 million and $0.4 million for the three months ended March 31, 2023, and March 31, 2022, 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, 2023 and 2022 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, 2022.
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, 2022. 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, 2022.
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
8
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, 2023 and 2022 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, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Commercial insurance | $ | 217,209 | $ | 188,465 | ||||||||||
| Medicare | 86,624 | 70,999 | ||||||||||||
| Medicaid | 10,153 | 9,087 | ||||||||||||
| Workers' compensation/personal injury | 12,675 | 12,449 | ||||||||||||
| Other patient revenue | 9,745 | 7,123 | ||||||||||||
| Management fee revenue | 4,248 | 5,508 | ||||||||||||
| Teleradiology and Software revenue | 4,333 | 3,399 | ||||||||||||
| Other | 5,300 | 5,647 | ||||||||||||
| Revenue under capitation arrangements | 38,144 | 38,491 | ||||||||||||
| Imaging Center Segment Revenue | 388,431 | 341,168 | ||||||||||||
| AI Segment Revenue | 2,133 | 599 | ||||||||||||
| Total service revenue | $ | 390,564 | $ | 341,767 | ||||||||||
GOVERNMENT ASSISTANCE: 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. As part of the CARES act, we received $39.6 million total of accelerated Medicare payments which were recorded to deferred revenue in our consolidated balance sheet and are being applied to revenue as services are performed. Through the three months ended March 31, 2023, $38.6 million of the accelerated Medicare payments have been applied to revenue.
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 agreements were $15.4 million and $15.4 million at March 31, 2023 and December 31, 2022, 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 and are related to our revolving credit facilities. Deferred financing costs, net of accumulated amortization, were $2.1 million and $2.3 million, as of March 31, 2023 and December 31, 2022, respectively. See Note 6, Credit Facilities and Notes Payable for more information.
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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 - Goodwill at March 31, 2023 totaled $687.1 million. Goodwill is 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, 2022, noting no impairment. Activity in goodwill for the three months ended March 31, 2023 is provided below (in thousands):
| Imaging Center | Artificial Intelligence | Total | |||||||||||||||
| Balance as of December 31, 2022 | 606,483 | $ | 71,182 | $ | 677,665 | ||||||||||||
| Goodwill from acquisitions | 6,174 | — | 6,174 | ||||||||||||||
| Valuation adjustment | 1,603 | — | 1,603 | ||||||||||||||
| Currency translation | 576 | 1,067 | 1,643 | ||||||||||||||
| Balance as of March 31, 2023 | $ | 614,836 | $ | 72,249 | $ | 687,085 | |||||||||||
INTANGIBLE ASSETS - The components of intangible assets, both finite and indefinite, along with annual amortization expense that will be recorded over the next five years at March 31, 2023 and December 31, 2022 are as follows (in thousands):
As of March 31, 2023:
2023* | 2024 | 2025 | 2026 | 2027 | Thereafter | Total | Weighted average amortization period remaining in years | ||||||||||||||||||||||||||||||||||||||||
| Management Service Contracts | $ | 1,717 | $ | 2,287 | $ | 2,287 | $ | 2,287 | $ | 2,287 | $ | 8,959 | $ | 19,824 | 8.7 | ||||||||||||||||||||||||||||||||
| Covenant not to compete and other contracts | 1,013 | 941 | 692 | 406 | 122 | 41 | 3,215 | 3.7 | |||||||||||||||||||||||||||||||||||||||
| Customer Relationships | 924 | 1,219 | 1,088 | 966 | 767 | 10,984 | 15,948 | 18.1 | |||||||||||||||||||||||||||||||||||||||
| Patent and Trademarks | 280 | 313 | 313 | 313 | 313 | 399 | 1,931 | 6.3 | |||||||||||||||||||||||||||||||||||||||
| Developed Technology & Software | 5,810 | 6,657 | 6,657 | 6,617 | 6,083 | 5,392 | 37,216 | 6.5 | |||||||||||||||||||||||||||||||||||||||
| Trade Names amortized | 208 | 77 | 77 | 77 | 77 | 89 | 605 | 4.6 | |||||||||||||||||||||||||||||||||||||||
| Trade Names indefinite life | — | — | — | — | — | 7,100 | 7,100 | — | |||||||||||||||||||||||||||||||||||||||
| IPR&D | — | — | — | — | — | 17,164 | 17,164 | — | |||||||||||||||||||||||||||||||||||||||
| Total Annual Amortization | $ | 9,952 | $ | 11,494 | $ | 11,114 | $ | 10,666 | $ | 9,649 | $ | 50,128 | $ | 103,003 | |||||||||||||||||||||||||||||||||
*Excluding the three months ended March 31, 2023
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As of December 31, 2022:
| 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | Total | Weighted average amortization period remaining in years | ||||||||||||||||||||||||||||||||||||||||
| Management Service Contracts | $ | 2,287 | $ | 2,287 | $ | 2,287 | $ | 2,287 | $ | 2,287 | $ | 8,958 | $ | 20,393 | 8.9 | ||||||||||||||||||||||||||||||||
| Covenant not to compete and other contracts | 1,319 | 891 | 642 | 356 | 72 | 40 | 3,320 | 3.1 | |||||||||||||||||||||||||||||||||||||||
| Customer Relationships | 1,244 | 1,244 | 1,112 | 991 | 816 | 12,396 | 17,803 | 18.6 | |||||||||||||||||||||||||||||||||||||||
| Patent and Trademarks | 298 | 298 | 298 | 298 | 298 | 322 | 1,812 | 6.4 | |||||||||||||||||||||||||||||||||||||||
| Developed Technology & Software | 6,297 | 6,297 | 6,297 | 6,257 | 5,722 | 7,196 | 38,066 | 6.7 | |||||||||||||||||||||||||||||||||||||||
| Trade Names amortized | 305 | 77 | 77 | 77 | 77 | 89 | 702 | 4.5 | |||||||||||||||||||||||||||||||||||||||
| Trade Names indefinite life | — | — | — | — | — | 7,100 | 7,100 | — | |||||||||||||||||||||||||||||||||||||||
| IPR&D | — | — | — | — | — | 17,032 | 17,032 | — | |||||||||||||||||||||||||||||||||||||||
| Total Annual Amortization | $ | 11,750 | $ | 11,094 | $ | 10,713 | $ | 10,266 | $ | 9,272 | $ | 53,133 | $ | 106,228 | |||||||||||||||||||||||||||||||||
Total intangible asset amortization expense was $3.0 million and $2.1 million for the three months ended March 31, 2023 and March 31, 2022, respectively. Intangible assets are amortized using the straight-line method over their useful life determined at acquisition. Management service agreements are amortized over 25 years using the straight line method. Software development is capitalized and amortized over the useful life of the software when placed into service. Trade names are reviewed annually for impairment.
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 a provision to income taxes of $1.1 million, or an effective tax rate of (8.6)%, for the three months ended March 31, 2023 and $1.5 million, or an effective tax rate of 15.2% for the three months ended March 31, 2022. The income tax rates for the three months ended March 31, 2023 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, 2023. 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.
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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 (LOSS) INCOME - Accounting guidance establishes rules for reporting and displaying other comprehensive (loss) income and its components. Our foreign currency translation adjustments, changes in the fair value of cash flow hedges, and the amortization of balances associated with derivatives previously classified as cash flow hedges are included in other comprehensive (loss) income. The components of other comprehensive (loss) income for the twelve month periods ended March 31, 2023 and March 31, 2022 are included in the consolidated statements of comprehensive (loss) income.
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 are 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 gain or 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):
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| For the three months ended March 31, 2023 | ||||||||||||||||||||||||||||||||
| Account | December 31, 2022 Balance | Amount of comprehensive loss recognized on derivative net of taxes | Amount of loss reclassified out of accumulated OCI into income (prior period effective portion), net of taxes | March 31, 2023 Balance | Location | |||||||||||||||||||||||||||
| Accumulated Other Comprehensive Loss, net of taxes | $(15,201) | $— | $922 | $(14,279) | Equity | |||||||||||||||||||||||||||
| 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 | $(18,887) | $— | $924 | $(17,963) | Equity | |||||||||||||||||||||||||||
A tabular presentation of the effect of derivative instruments on our statement of operations of the 2019 Swaps which remain ineffective is as follows (amounts in thousands):
| For the three months ended March 31, 2023 | ||||||||||||||||||||||||||
| Ineffective interest rate swap | Amount of loss recognized in income on derivative (current period ineffective portion) | Location of loss recognized in Income on derivative (current period ineffective portion) | 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 | $ | (4,093) | $ | (922) | Interest Expense | |||||||||||||||||||||
| 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) | 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 | $ | (923) | Interest Expense | |||||||||||||||||||||
See Fair Value Measurements section below for the fair value of the 2019 Swaps at March 31, 2023.
CONTINGENT CONSIDERATION -
Aidence Holding B.V.
On January 20, 2022, we completed our acquisition of all the equity interests of Aidence Holding B.V. ("Aidence") an artificial intelligence enterprise centered on lung cancer screening. As part of the purchase agreement, we will pay up to $10.0 million consideration upon the completion of two identified milestones in RadNet common shares or cash at our election. This
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contingency had a value of approximately $7.3 million on March 31, 2023. The amount is reviewed quarterly and adjusted to fair value based on the yield rate of S&P B-rated corporate bonds and the probability of FDA approval, which has been currently determined by management to be 80% for milestone one and 70% for milestone two. In addition, there is a remaining general holdback of $4.0 million to be issued in shares of our common stock subject to adjustment for any indemnification claims.
Quantib B.V.
On January 20, 2022, we completed our acquisition of all the equity interests of Quantib B.V. ("Quantib") an artificial intelligence enterprise centered on prostate cancer screening. As part of the purchase agreement, we will issue 18 months after acquisition, 113,303 shares of our common stock with an initial fair value at the date of close of $3.0 million subject to adjustment for any indemnification claims and will be adjusted to fair value in subsequent periods. This contingency had a value of approximately $2.8 million as of March 31, 2023. In addition, there is a general holdback of $1.6 million to be issued in cash subject to adjustment for any indemnification claims.
Montclair
On October 1, 2022, we completed our acquisition of Montclair Radiological Associates. As part of the purchase agreement, we recorded $1.2 million in contingent consideration to be determined by obtaining specific EBITDA targets within a defined time frame.
Heart and Lung Imaging Limited
On November 1, 2022, we completed our acquisition of 75% of the equity interests of Heart and Lung Imaging Limited. The purchase included $10.2 million in contingent milestone consideration and cash holdback of $0.6 million to be issued 24 months after acquisition subject to adjustment for any indemnification claims, which will be adjusted to fair value in subsequent periods. The milestone contingency had a value of approximately $13.1 million as of March 31, 2023. The contingent consideration is determined by the achievement of a specific number of physician reads.
A tabular rollforward of contingent consideration is as follows (amounts in thousands):
| For the three months ended March 31, 2023 | |||||||||||||||||||||||||||||||||||||||||
| Entity | Account | January 1, 2023 Balance | Issuance of contingent consideration | Change in valuation of Contingent Consideration | Currency Translation | March 31, 2023 Balance | |||||||||||||||||||||||||||||||||||
| Aidence | Other Long Term Liabilities | $ | 11,158 | $ | — | $ | 158 | $ | — | $ | 11,316 | ||||||||||||||||||||||||||||||
| Quantib | Accrued Expenses & Other Long Term Liabilities | $ | 3,709 | $ | — | $ | 702 | $ | — | $ | 4,411 | ||||||||||||||||||||||||||||||
| Montclair | Accrued Expenses | $ | 1,200 | $ | — | $ | — | $ | — | $ | 1,200 | ||||||||||||||||||||||||||||||
| Heart and Lung Limited | Accrued Expenses & Other Long Term Liabilities | $ | 11,656 | $ | — | $ | 1,124 | $ | 350 | $ | 13,130 | ||||||||||||||||||||||||||||||
See Fair Value Measurements section below for the fair value of contingent consideration at March 31, 2023.
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
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value. Accordingly, assets and liabilities carried at, or permitted to be carried at, fair value are classified within the fair value hierarchy in one of the following categories based on the lowest level input that is significant to a fair value measurement:
Level 1—Fair value is determined by using unadjusted quoted prices that are available in active markets for identical assets and liabilities.
Level 2—Fair value is determined by using inputs other than Level 1 quoted prices that are directly or indirectly observable. Inputs can include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in inactive markets. Related inputs can also include those used in valuation or other pricing models such as interest rates and yield curves that can be corroborated by observable market data.
Level 3—Fair value is determined by using inputs that are unobservable and not corroborated by market data. Use of these inputs involves significant and subjective judgment.
Derivatives:
The tables below summarize the estimated fair values of certain of our financial assets that are subject to fair value measurements, and the classification of these assets on our condensed consolidated balance sheets, as follows (in thousands):
| As of March 31, 2023 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Current and long term assets | |||||||||||||||||||||||
| 2019 Swaps - Interest Rate Contracts | $ | — | $ | 19,209 | $ | — | $ | 19,209 | |||||||||||||||
| As of December 31, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Current and long term assets | |||||||||||||||||||||||
| 2019 Swaps - Interest Rate Contracts | $ | — | $ | 23,302 | $ | — | $ | 23,302 | |||||||||||||||
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 summarizes the estimated fair values of contingencies and holdback relating to our Aidence Holding B.V. and Quantib B.V. acquisitions on January 20, 2022, the Montclair Radiological Associates acquisition on October 1, 2022 and the Heart and Lung Imaging Limited acquisition on November 1, 2022 that are subject to fair value measurements and the classification of these liabilities on our consolidated balance sheets, as follows (in thousands):
| As of March 31, 2023 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Accrued expenses and other non-current liabilities | |||||||||||||||||||||||
| Aidence Holding B.V. milestone consideration | $ | — | $ | — | $ | 11,316 | $ | 11,316 | |||||||||||||||
Quantib B.V. holdback of 113,303 shares of RadNet common stock | $ | — | $ | — | $ | 4,411 | $ | 4,411 | |||||||||||||||
| Montclair Radiological Associates | $ | — | $ | — | $ | 1,200 | $ | 1,200 | |||||||||||||||
| Heart and Lung Imaging Limited | $ | — | $ | — | $ | 13,130 | $ | 13,130 | |||||||||||||||
The estimated fair value of these liabilities was determined using Level 3 inputs. For Aidence Holding B.V., the milestone contingent liability was adjusted to fair value based on the yield rate of S&P B-rated corporate bonds and the probability of FDA approval. For the Quantib B.V holdback shares, the fair value was determined by calculating the value of estimated shares issuable as of the reporting date (which was $25.03) at March 31, 2023, the time period related to the contractual settlement term, and the probability of issuing the shares. For Montclair Radiological Associates the contingent consideration is determined by obtaining specific EBITDA targets within a defined time frame. For Heart Lung Imaging Limited the contingent consideration is determined by the achievement of a specific number of physician reads. As significant
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inputs for the contingent consideration of Aidence B.V., Quantib B.V., Montclair Radiological Associates and Heart Lung Imaging Limited are not observable and cannot be corroborated by observable market data they are classified as Level 3.
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, 2023 | |||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total Fair Value | Total Face Value | |||||||||||||||||||||||||
| First Lien Term Loans and Truist Term Loan | $ | — | $ | 856,876 | $ | — | $ | 856,876 | $ | 860,438 | |||||||||||||||||||
| As of December 31, 2022 | |||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total Fair Value | Total Face Value | |||||||||||||||||||||||||
| First Lien Term Loans and Truist Term Loan | $ | — | $ | 843,594 | $ | — | $ | 843,594 | $ | 864,125 | |||||||||||||||||||
At March 31, 2023 and at December 31, 2022 our Barclays revolving credit facility had no balance outstanding. Our Truist revolving credit facility relating to our consolidated subsidiary The New Jersey Imaging Network ("NJIN"), had no principal amount outstanding at March 31, 2023 and at December 31, 2022.
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.
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):
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| Three Months Ended March 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Net income attributable to RadNet, Inc.'s common stockholders | $ | (21,005) | $ | 3,013 | ||||||||||
| BASIC NET INCOME PER SHARE ATTRIBUTABLE TO RADNET, INC.'S COMMON STOCKHOLDERS | ||||||||||||||
| Weighted average number of common shares outstanding during the period | 57,701,439 | 55,303,007 | ||||||||||||
| Basic net income per share attributable to RadNet, Inc.'s common stockholders | $ | (0.36) | $ | 0.05 | ||||||||||
| DILUTED NET INCOME PER SHARE ATTRIBUTABLE TO RADNET, INC.'S COMMON STOCKHOLDERS | ||||||||||||||
| Weighted average number of common shares outstanding during the period | 57,701,439 | 55,303,007 | ||||||||||||
| Add nonvested restricted stock subject only to service vesting | — | 197,911 | ||||||||||||
| Add additional shares issuable upon exercise of stock options and contingently issuable shares | — | 861,275 | ||||||||||||
| Weighted average number of common shares used in calculating diluted net income per share | 57,701,439 | 56,362,193 | ||||||||||||
| Diluted net income per share attributable to RadNet, Inc.'s common stockholders | $ | (0.36) | $ | 0.05 | ||||||||||
| Fair value change for contingently issuable shares excluded from the computation of diluted per share amounts as its effect would be antidilutive | $ | 769 | $ | — | ||||||||||
| Stock options and non vested restricted awards excluded from the computation of diluted per share amounts as their effect would be antidilutive: | ||||||||||||||
| Nonvested restricted stock subject to service vesting | 594,758 | — | ||||||||||||
| Shares issuable upon the exercise of stock options | 750,075 | 46,912 | ||||||||||||
| Contingently issuable shares | 273,111 | — | ||||||||||||
For the three months ended March 31, 2023 we excluded all outstanding options, restricted stock awards and other requisite shares in the calculation of diluted earnings per share because their effect would be antidilutive.
INVESTMENTS IN EQUITY SECURITIES–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, 2023, 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, 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, 2023.
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
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the amount of $0.1 million that converted to an additional 80,000 preferred shares on October 11, 2019.No observable price changes or impairment in our investment was identified as of March 31, 2023.
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, 2023.
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, 2023.
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, 2023 (in thousands):
| Balance as of December 31, 2022 | $ | 57,893 | |||
| Equity in earnings in these joint ventures | 1,428 | ||||
| Balance as of March 31, 2023 | $ | 59,321 | |||
We charged management service fees from the centers underlying these joint ventures of approximately $4.2 million and $5.5 million for the three months ended March 31, 2023 and 2022, respectively.
The following table is a summary of key balance sheet data for these joint ventures as of March 31, 2023 and December 31, 2022 and income statement data for the three months ended March 31, 2023 and 2022 (in thousands):
| Balance Sheet Data: | March 31, 2023 | December 31, 2022 | |||||||||
| Current assets | $ | 49,091 | $ | 39,304 | |||||||
| Noncurrent assets | 142,144 | 134,694 | |||||||||
| Current liabilities | (32,995) | (29,588) | |||||||||
| Noncurrent liabilities | (48,872) | (37,952) | |||||||||
| Total net assets | $ | 109,368 | $ | 106,458 | |||||||
| Book value of RadNet joint venture interests | $ | 50,754 | $ | 49,564 | |||||||
| Cost in excess of book value of acquired joint venture interests and other | 8,567 | 8,329 | |||||||||
| Total value of RadNet joint venture interests | $ | 59,321 | $ | 57,893 | |||||||
Income statement data for the three months ended March 31, | 2023 | 2022 | |||||||||
| Net revenue | $ | 42,086 | $ | 34,411 | |||||||
| Net income | $ | 2,909 | $ | 5,035 | |||||||
NOTE 3 – RECENT ACCOUNTING AND REPORTING STANDARDS
Recently Issued Accounting Pronouncements
We monitor new accounting pronouncements issued by the FASB and do not believe any accounting pronouncements issued through the date of this report will have a material impact on our financial statements.
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NOTE 4 – BUSINESS COMBINATIONS AND RELATED ACTIVITY
Acquisitions
Imaging Center Segment
During the first quarter of 2023, 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 California and New York markets. 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 | Intangible Assets | Other Assets | Right of Use Liabilities | ||||||||||||||||||
| C.C.D.G.L.R. & S Services Inc. | 1/1/2023 | 3,500 | 435 | 1,689 | 3,015 | 50 | — | (1,689) | ||||||||||||||||||
| Southern California Diagnostic Imaging, Inc. | 1/1/2023 | $ | 1,815 | 466 | 1,184 | 1,272 | 50 | 27 | (1,184) | |||||||||||||||||
| Inglewood Imaging Center, LLC | 2/1/2023 | 2,600 | 877 | 1,188 | 1,658 | 50 | 15 | (1,188) | ||||||||||||||||||
| Ramapo Radiology Associates, P.C. | 2/1/2023 | $ | 2,000 | 1,663 | 3,775 | 229 | 100 | 8 | (3,775) | |||||||||||||||||
| Total | 9,915 | 3,441 | 7,836 | 6,174 | 250 | 50 | (7,836) | |||||||||||||||||||
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 presents 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, | |||||||||||
| 2023 | 2022 | ||||||||||
| Revenue: | |||||||||||
| Imaging Centers | $ | 388,431 | $ | 341,168 | |||||||
| AI | 2,133 | 599 | |||||||||
| Total revenue | $ | 390,564 | $ | 341,767 | |||||||
| Cost of Operations | |||||||||||
| Imaging Centers | $ | 344,580 | $ | 310,110 | |||||||
| AI | 7,285 | 4,929 | |||||||||
| Total cost of operations | $ | 351,865 | $ | 315,039 | |||||||
| Depreciation and Amortization: | |||||||||||
| Imaging Centers | $ | 29,591 | $ | 25,805 | |||||||
| AI | 1,724 | 1,313 | |||||||||
| Total depreciation and amortization | $ | 31,315 | $ | 27,118 | |||||||
| Loss on Disposal of Equipment: | |||||||||||
| Imaging Centers | $ | 577 | $ | 1,154 | |||||||
| AI | 2 | (26) | |||||||||
| Total loss on disposal of equipment | $ | 579 | $ | 1,128 | |||||||
| Severance | |||||||||||
| Imaging Centers | $ | 122 | $ | 201 | |||||||
| AI | 12 | — | |||||||||
| Total severance | $ | 134 | $ | 201 | |||||||
| Income (Loss) from Operations | |||||||||||
| Imaging Centers | $ | 13,561 | $ | 3,898 | |||||||
| AI | (6,890) | (5,617) | |||||||||
| Total income (loss) from operations | $ | 6,671 | $ | (1,719) | |||||||
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NOTE 6 – CREDIT FACILITIES AND NOTES PAYABLE
As of March 31, 2023 and December 31, 2022 our term loan debt and other obligations are as follows (in thousands):
| March 31, 2023 | December 31, 2022 | ||||||||||
| First Lien Term Loans collateralized by RadNet's tangible and intangible assets | $ | 712,313 | $ | 714,125 | |||||||
| Discount on First Lien Term Loans | (10,606) | (11,127) | |||||||||
| Term Loan Agreement collateralized by NJIN's tangible and intangible assets | 148,125 | 150,000 | |||||||||
| Discount on NJIN Term Loan Agreement | (1,188) | (1,254) | |||||||||
Equipment notes payable at 6.0%, due 2028, collateralized by medical equipment | 19,645 | — | |||||||||
| Total debt obligations | 868,289 | 851,744 | |||||||||
| Less: current portion | (15,935) | (12,400) | |||||||||
| Long term portion debt obligations | $ | 852,354 | $ | 839,344 | |||||||
We had no outstanding balance under our $195.0 million Barclays Revolving Credit Facility at March 31, 2023 and have reserved $7.6 million for certain letters of credit. The remaining $187.4 million of our Barclays Revolving Credit Facility was available to draw upon as of March 31, 2023. We also had no balance under our $50.0 million Truist Revolving Credit Facility related to our consolidated subsidiary NJIN at March 31, 2023, and with no letters of credit reserved against the facility, the full amount was available to draw upon. At March 31, 2023, we were in compliance with all covenants under our credit facilities. On February 1, 2023, we issued a promissory note in the amount of $19.8 million to acquire radiology equipment previously leased under operating leases.
Amendments to Credit Facilities
Barclays: First Amendment to Second Amended and Restated First Lien Credit and Guaranty Agreement
On March 27, 2023, we entered into the First Amendment to Second Amended and Restated First Lien Credit and Guaranty Agreement (the “Amendment”). The Amendment replaces the interest rate benchmark, from the London Interbank Offered Rate (“LIBOR”) to the Secured Overnight Financing Rate (“SOFR”) and includes applicable credit spread adjustments of 0.11448%, 0.26161%, and 0.42826% for interest periods of one month, three months, and six months, respectively. The replacement of LIBOR with SOFR and the credit spread adjustments shall be effective as of March 31, 2023, which is the last day of the last-ending existing interest period of currently outstanding loans bearing interest at LIBOR. Other than the foregoing, the material terms of the Credit Agreement remain unchanged.
Barclays: 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.
Truist: Second Amended and Restated Revolving Credit and Term Loan Agreement
On October 7, 2022, we entered into the Second Amended and Restated Revolving Credit and Term Loan Agreement (the "Restated Credit and Term Loan Agreement") which provides for a $150.0 million of a secured term loan (the "Truist Term Loan") and a $50.0 million secured revolving credit facility (the "Truist Revolving Credit Facility"). Both loans were secured by our simultaneous entry into the Second Amended and Restated Guaranty and Security Agreement on the same date. The proceeds were were used to refinance the outstanding balance under our prior term loan agreement and provide funding for current and future operations. Total costs of the Restated Credit and Term Loan Agreement amounted to approximately $2.7 million segregated as follows: $2.0 million capitalized to discount and deferred finance cost and $0.7 million expensed to loss
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on extinguishment of debt and related expenses in other expense. Amounts capitalized will be amortized over the remaining terms of the respective credit facilities under the Restated Credit and Term Loan Agreement.
All obligations under the Second Amended and Restated Credit and Term Loan Agreement bear interest at either a SOFR or a Base Rate (each as defined in the Restated Credit and Term Loan Agreement), plus an applicable margin according to the following schedule:
| Pricing Level | Leverage Ratio | Applicable Margin for SOFR 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 | 2.50% per annum | 1.50% per annum | 2.50% 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 | ||||||||||||
Senior Secured Credit Facilities
First Lien Term Loans:
Through March 31, 2023, the First Lien Term Loans under the Restated Credit Agreement bore 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 and Alternate Base Rate First Lien Term Loans under the Restated Credit Agreement was 3.00% and 2.00%, respectively, with an effective Eurodollar Rate and the Alternate Base Rate of 4.63% and 8.00%, respectively.
Under the Amendment, effective March 31, 2023, the First Lien Term Loans under the Restated Credit Agreement will bear interest either at a SOFR or an Alternate Base Rate (in each case, as defined in the Amendment) plus an applicable margin. The applicable margin for the SOFR and Alternate Base Rate First Lien Term Loans under the Amendment is 3.00% and 2.00%, respectively. At March 31, 2023, we have an effective SOFR of 7.81% ,with an applicable credit spread adjustment of 0.11448%, and an Alternate Base Rate of 10%, 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.
Truist Term Loan:
The Truist Term Loan currently bears interest at a three month SOFR election of 4.69% plus an applicable margin and fees based on Pricing Level III described above.
The scheduled amortization of the Truist Term Loan begins March 31, 2023 with quarterly payments of $1.9 million, representing 1.00% of the original principal balance. At scheduled intervals, the quarterly amortization increases by $0.9 million, with the remaining balance to be paid at maturity. The Truist Term Loan will mature on October 10, 2027 unless otherwise accelerated under the terms of the Credit Agreement.
Revolving Credit Facilities
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Associated with both the Barclays and Truist Revolving Credit Facilities are deferred financing costs, net of accumulated amortization, of $2.1 million at March 31, 2023.
Barclays Revolving Credit Facility
The Barclays Revolving Credit Facility under the Restated Credit Agreement is a $195.0 million senior secured revolving credit facility.
Revolving loans borrowed under the Barclays Revolving Credit Facility bear interest at either a SOFR 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 | Term SOFR Loans | 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, 2023, 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.
Truist Revolving Credit Facility:
Associated with the Truist Revolving Credit Facility of $50.0 million are deferred financing costs, net of accumulated amortization, of $0.6 million at March 31, 2023. As of March 31, 2023, NJIN had no borrowings under the Truist Revolving Credit Facility.
The Truist Revolving Credit Facility bears interest with different margins based on types of borrowings at a Pricing Level III as noted in the pricing grid above. The Truist Revolving Credit Facility terminates on the earliest of (i) October 7, 2027, (ii) the date on which the Revolving Commitments are terminated pursuant to Section 2.8 of the Truist Restated Credit Agreement, or (iii) the date on which all amounts outstanding under the Truist Restated Credit Agreement have been declared or have automatically become due and payable (whether by acceleration or otherwise).
Recent prior amendments to prior credit facilities:
Truist Credit Facilities:
On August 31, 2018, under the Amended and Restated Revolving Credit and Term Loan Agreement, NJIN secured a term loan commitment of $60.0 million and established revolving credit facility of $30.0 million. The agreement had a maturity date of August 31, 2023 and was refinanced on October 10, 2022 by the Second Amended and Restated Revolving Credit and Term Loan Agreement.
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),
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performance based options, stock awards (restricted or unrestricted), stock units, performance based stock units, and stock appreciation rights under the Restated Plan.
Options
Certain options granted under the Restated Plan to employees are intended to qualify as incentive stock options under existing tax regulations. Stock options generally vest over 3 to 5 years and expire 5 to 10 years from the date of grant.
The following summarizes all of our option transactions for the three months ended March 31, 2023:
| 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, 2022 | 678,914 | $ | 15.72 | |||||||||||||||||||||||
| Granted | 261,220 | 18.64 | ||||||||||||||||||||||||
| Exercised | (5,000) | 10.10 | ||||||||||||||||||||||||
| Balance, March 31, 2023 | 935,134 | 16.57 | 6.96 | $ | 8,840,425 | |||||||||||||||||||||
| Exercisable at March 31, 2023 | 672,538 | 14.70 | 5.98 | 7,568,342 | ||||||||||||||||||||||
Aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between our closing stock price on March 31, 2023 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, 2023. As of March 31, 2023, total unrecognized stock-based compensation expense related to non-vested employee awards was $2.5 million, which is expected to be recognized over a weighted average period of approximately 2.11 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, 2023, total unrecognized stock based compensation expense related to non-vested DeepHealth options was approximately $0.3 million, which is expected to be recognized over a weighted average period of approximately 0.60 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, 2022 | 116,982 | $ | — | |||||||||||||||||||||||
| Exercised | (14,473) | — | ||||||||||||||||||||||||
| Balance, March 31, 2023 | 102,509 | — | 6.55 | $ | 2,565,800 | |||||||||||||||||||||
| Exercisable at March 31, 2023 | 77,537 | — | 6.55 | 1,940,758 | ||||||||||||||||||||||
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 ("RSAs")
The Restated Plan permits the award of RSAs and the following summarizes all unvested RSA’s activities during the three months ended March 31, 2023:
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| RSAs | Weighted-Average Remaining Contractual Term (Years) | Weighted-Average Fair Value | |||||||||||||||
| RSAs unvested at December 31, 2022 | 536,767 | $ | 23.84 | ||||||||||||||
| Changes during the period | |||||||||||||||||
| Granted | 694,324 | $ | 19.77 | ||||||||||||||
| Vested | (704,019) | $ | 21.18 | ||||||||||||||
| Forfeited or Canceled | (667) | $ | 22.80 | ||||||||||||||
| RSAs unvested at March 31, 2023 | 526,405 | 1.51 | $ | 20.77 | |||||||||||||
We determine the fair value of all RSAs based on the closing price of our common stock on the award date.
Other stock bonus awards
The Restated Plan also permits share awards not subject to any future service period. These are valued and expensed based on the closing price of our common stock on the date of award. During the three months ended March 31, 2023, 10,765 shares were issued with a value of $0.2 million.
Performance based stock units ("PSUs")
In January 2022, we granted certain employees PSUs with a target award of 25,683 shares of our common stock. The PSUs will vest in two equal parts, starting three years from the grant date based on continuous service, with the number of shares earned (0% to 200% of the target award) depending upon the extent to which we achieve a performance condition as determined by the board of directors over the period from January 1, 2022 through December 31, 2022. In January of 2023, based on the performance condition achieved, the board of directors issued 12,843 units with a fair value of $29.44 per unit.
In January 2023, the we granted certain employees PSUs with a target award of 60,685 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 (—% 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, 2023 through December 31, 2023.
Performance based stock options ("PSOs")
In January 2022, we 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. In January of 2023, based on the performance condition achieved, the board of directors issued 27,981 options with a strike price of $29.44 per share.
In January 2023, we granted certain employees PSOs with a potential to option a maximum of 235,227 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 235,227 shares) depending upon the extent to which we achieve a performance condition as determined the board of directors over the period from January 1, 2023 through December 31, 2023.
Long Term Incentive Plan shares ("LTIPs")
In addition, we issue stock-based compensation to certain employees in our AI segment in the form of Stock Units and Restricted Stock Awards, subject to certain restrictions. The awards represent a form of long term incentive and are reflective of a general practice within the software industry. The units and shares vest ratably over a to four year period, conditioned on continued employment through the vesting periods. We determine the fair value of all LTIPs based on the closing price of our common stock on the award date. The following summarizes all unvested LTIPs activities during the three months ended March 31, 2023:
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| LTIPs | Weighted-Average Remaining Contractual Term (Years) | Weighted-Average Fair Value | |||||||||||||||
| LTIPs unvested at December 31, 2022 | 169,471 | $ | 19.56 | ||||||||||||||
| Changes during the period | |||||||||||||||||
| Granted | 209,643 | $ | 20.03 | ||||||||||||||
| Vested | (48,395) | $ | 19.55 | ||||||||||||||
| Forfeited or Canceled | (13,476) | $ | 19.72 | ||||||||||||||
| LTIPs unvested at March 31, 2023 | 317,243 | 3.43 | $ | 19.87 | |||||||||||||
Restated Plan summary
In summary, of the 16,500,000 shares of common stock reserved for issuance under the Restated Plan, at March 31, 2023, there remain approximately 740,000 shares available under the Restated Plan for future issuance.
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, 2022 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the U.S. Securities and Exchange Commission (SEC) on March 1, 2023.
Forward-Looking Statements
This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements reflect current views about future events and are based on our currently available financial, economic and competitive data and on current business plans. Actual events or results may differ materially depending on risks and uncertainties that may affect our operations, markets, services, prices and other factors.
In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” “assumption” or the negative of these terms or other comparable terminology. Forward-looking statements in this quarterly report include, among others, statements we make regarding:
•anticipated trends in our revenues, operating expenses or capital expenditures, and our financial guidance;
•expected future market acceptance for our products or services, and the anticipated protection afforded by our competitive strengths in the markets we serve;
•potential timing and impact of changes in regulations impacting our business;
•the ongoing impact on our business, suppliers, payors, customers, referral sources, partners, patients and employees of the COVID-19 pandemic;
•the anticipated effect of the measures we are taking to respond to the COVID-19 pandemic;
•our ability to successfully acquire and integrate new imaging operations;
•cost savings, efficiencies and improvements anticipated from our investments in artificial intelligence and machine learning products and services; and
•our future liquidity and our continuing ability to service and remain in compliance with applicable debt covenants or refinance our current indebtedness.
Forward-looking statements are neither historical facts nor assurances of future performance. Because forward-looking statements relate to the future, they are inherently subject to known and unknown risks, uncertainties and other factors
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that are difficult to predict and out 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 forward-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, 2022 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 report, except as required by law.
Overview
We are a national provider of diagnostic imaging services in the United States. At March 31, 2023, we operated directly or indirectly through joint ventures with hospitals, 363 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. For further financial information about these segments, see Note 5, Segment Reporting, in the notes accompanying our consolidated financial statements included in this report.
Our centers provide physicians with imaging capabilities to facilitate the diagnosis and treatment of diseases and disorders and may reduce unnecessary invasive procedures, often reducing the cost and amount of care for patients. Integral to the imaging center business is our software arm headed by eRAD, Inc., which sells computerized systems that distribute, display, store and retrieve digital images. Internationally, our subsidiary Heart and Lung Imaging LLC, provides teleradiology services for remote interpretation of images on behalf of providers within the framework of the United Kingdom's National Health Service.
We have also established an Artificial Intelligence ("AI") division, that develops and deploys AI suites to enhance radiologist interpretations of breast, lung and prostate images. The division is led by DeepHealth, and includes our acquisitions of Aidence Holding B.V. and Quantib B.V., both based in The Netherlands.
The following table shows our centers in operation and revenues for the three months ended March 31, 2023 and March 31, 2022:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Centers in operation | 363 | 346 | |||||||||
| Net revenues (millions) | $ | 391 | $ | 342 | |||||||
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. Our total service fee revenue, net of contractual allowances and discounts, and implicit price concessions for the three months ended March 31, 2023 and 2022 is summarized in the following table (in thousands):
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| Three Months Ended March 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Commercial insurance | $ | 217,209 | $ | 188,465 | ||||||||||
| Medicare | 86,624 | 70,999 | ||||||||||||
| Medicaid | 10,153 | 9,087 | ||||||||||||
| Workers' compensation/personal injury | 12,675 | 12,449 | ||||||||||||
| Other patient revenue | 9,745 | 7,123 | ||||||||||||
| Management fee revenue | 4,248 | 5,508 | ||||||||||||
| Teleradiology and Software revenue | 4,333 | 3,399 | ||||||||||||
| Other | 5,300 | 5,647 | ||||||||||||
| Revenue under capitation arrangements | 38,144 | 38,491 | ||||||||||||
| Imaging Center Segment Revenue | 388,431 | 341,168 | ||||||||||||
| AI Segment Revenue | 2,133 | 599 | ||||||||||||
| Total service revenue | $ | 390,564 | $ | 341,767 | ||||||||||
Recent Developments
As 2023 begins, we continue to have strong growth in our procedure volumes, which have increased 14% in the same period over the prior year on an overall basis, and we have opened 10 new advanced imaging centers. In December of 2022, our subsidiary DeepHealth, Inc, received FDA clearance of its mammography density assessment software that assists radiologists in interpreting visual images. In February of 2023, we launched our Enhanced Breast Cancer Detection service, powered by DeepHealth AI, which provides patients an advanced screening mammography service along with a life time risk assessment for breast cancer and post mammography support. Initial locations for this service are in Florida, New Jersey and New York.
Acquisitions, Equity Investments and Joint Venture Activity
The following discussion summarizes certain details concerning our acquisition or disposition of centers, our equity investment and our joint venture transaction. See Note 4, Business Combinations and Related Activity and Note 2, Summary of Significant Accounting Policies to our consolidated financial statements included in this quarterly report on Form 10-Q for further information. The information below updates our activity of such matters contained in our annual report on Form 10-K for the year ended December 31, 2022.
Acquisitions
Imaging Center
During the first quarter of 2023, 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 California and New York markets. 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):
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| Entity | Date Acquired | Total Consideration | Property & Equipment | Right of Use Assets | Goodwill | Intangible Assets | Other Assets | Right of Use Liabilities | ||||||||||||||||||
| C.C.D.G.L.R. & S Services Inc. | 1/1/2023 | 3,500 | 435 | 1,689 | 3,015 | 50 | — | (1,689) | ||||||||||||||||||
| Southern California Diagnostic Imaging, Inc. | 1/1/2023 | 1,815 | 466 | 1,184 | 1,272 | 50 | 27 | (1,184) | ||||||||||||||||||
| Inglewood Imaging Center, LLC | 2/1/2023 | 2,600 | 877 | 1,188 | 1,658 | 50 | 15 | (1,188) | ||||||||||||||||||
| Ramapo Radiology Associates, P.C. | 2/1/2023 | 2,000 | 1,663 | 3,775 | 229 | 100 | 8 | (3,775) | ||||||||||||||||||
| Total | 9,915 | 3,441 | 7,836 | 6,174 | 250 | 50 | (7,836) | |||||||||||||||||||
Equity Investments
As of March 31, 2023, 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, 2023.
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, 2023.
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, 2023.
Joint Venture Activity
The following table is a summary of our investment in joint ventures during the three months ended March 31, 2023 (in thousands):
| Balance as of December 31, 2022 | $ | 57,893 | |||
| Equity in earnings in these joint ventures | 1,428 | ||||
| Balance as of March 31, 2023 | $ | 59,321 | |||
We charged management service fees from the centers underlying these joint ventures of approximately $4.2 million and $5.5 million for the three months ended March 31, 2023 and 2022, respectively.
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The following table is a summary of key balance sheet data for these joint ventures as of March 31, 2023 and December 31, 2022 and income statement data for the three months ended March 31, 2023 and 2022 (in thousands):
| Balance Sheet Data: | March 31, 2023 | December 31, 2022 | |||||||||
| Current assets | $ | 49,091 | $ | 39,304 | |||||||
| Noncurrent assets | 142,144 | 134,694 | |||||||||
| Current liabilities | (32,995) | (29,588) | |||||||||
| Noncurrent liabilities | (48,872) | (37,952) | |||||||||
| Total net assets | $ | 109,368 | $ | 106,458 | |||||||
| Book value of RadNet joint venture interests | $ | 50,754 | $ | 49,564 | |||||||
| Cost in excess of book value of acquired joint venture interests | 8,567 | 8,329 | |||||||||
| Total value of RadNet joint venture interests | $ | 59,321 | $ | 57,893 | |||||||
Income statement data for the three months ended March 31, | 2023 | 2022 | |||||||||
| Net revenue | $ | 42,086 | $ | 34,411 | |||||||
| Net income | $ | 2,909 | $ | 5,035 | |||||||
Critical Accounting Policies
The Securities and Exchange Commission defines critical accounting estimates as those that are both most important to the portrayal of a company’s financial condition and results of operations and require management’s most difficult, subjective or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. In Note 2 to our consolidated financial statements in this quarterly report and in our annual report on Form 10-K for the year ended December 31, 2022, 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.
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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, 2023.
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, 2023.
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, 2023 totaled $687.1 million. Indefinite Lived Intangible Assets at March 31, 2023 were $24.3 million and are associated with the value of certain trade name intangibles and in process research and development (IPR&D). Goodwill, trade name intangibles and IPR&D are recorded as a result of business combinations. When we determine the carrying value of goodwill exceeds its fair value, an impairment charge would be recognized which should not exceed the total amount of goodwill allocated to that reporting unit. We determined fair values for each of the reporting units using the market approach, when available and appropriate, or the income approach, or a combination of both. We assess the valuation methodology based upon the relevance and availability of the data at the time we perform the valuation. If multiple valuation methodologies are used, the results are weighted appropriately.
Our annual test of goodwill, trade name and IPR&D noted no impairment as of October 1, 2022, and we have not identified any indicators of impairment through March 31, 2023.
Recent Accounting Standards
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See Note 3, Recent Accounting and Reporting Standards to the financial statements included in this report for further information.
Results of Operations
The following table sets forth, for the three months ended March 31, 2023 and 2022, 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, | |||||||||||
| 2023 | 2022 | ||||||||||
| REVENUE | |||||||||||
| Service fee revenue | 90.2 | % | 88.7 | % | |||||||
| Revenue under capitation arrangements | 9.8 | % | 11.3 | % | |||||||
| Total service revenue | 100.0 | % | 100.0 | % | |||||||
| OPERATING EXPENSES | |||||||||||
| Cost of operations, excluding depreciation and amortization | 90.1 | % | 92.2 | % | |||||||
| Depreciation and amortization | 8.0 | % | 7.9 | % | |||||||
| Loss on sale and disposal of equipment and other | 0.1 | % | 0.3 | % | |||||||
| Severance costs | — | % | 0.1 | % | |||||||
| Total operating expenses | 98.3 | % | 100.5 | % | |||||||
| INCOME (LOSS) FROM OPERATIONS | 1.7 | % | (0.5) | % | |||||||
| OTHER INCOME AND EXPENSES | |||||||||||
| Interest expense | 4.0 | % | 3.4 | % | |||||||
| Equity in earnings of joint ventures | (0.4) | % | (0.7) | % | |||||||
| Non-cash change in fair value of interest rate hedge | 1.0 | % | (6.1) | % | |||||||
| Other expenses | 0.4 | % | — | % | |||||||
| Total other expense (income) | 5.1 | % | (3.4) | % | |||||||
| (LOSS) INCOME BEFORE INCOME TAXES | (3.4) | % | 2.9 | % | |||||||
| Provision for income taxes | (0.3) | % | (0.4) | % | |||||||
| NET (LOSS) INCOME | (3.7) | % | 2.4 | % | |||||||
| Net income attributable to noncontrolling interests | 1.7 | % | 1.6 | % | |||||||
| NET (LOSS) INCOME ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS | (5.4) | % | 0.9 | % | |||||||
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, 2023 and 2022.
Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022
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| In Thousands | Three Months Ended March 31, | |||||||||||||
| Revenue | 2023 | 2022 | $ Increase/(Decrease) | % Change | ||||||||||
| Total Revenue | $388,431 | $341,168 | $47,263 | 13.9% | ||||||||||
| Same Center Revenue | $361,273 | $337,157 | $24,116 | 7.2% | ||||||||||
| Excluded | $27,158 | $4,011 | — | — | ||||||||||
We experienced an overall same center total procedure volume growth of 8.4% over the same period in the prior year, which resulted in an upswing in revenue through a combination of increased capitation contract rates, a 7.9% rise in same center routine imaging procedures and same center advanced radiology procedures of CT, MRI, PET and Nuclear Medicine expanding by 10.3%. Excluded amounts refer to revenue contributions for the three month periods ending March 31, 2023 and March 31, 2022, respectively, from centers that were acquired or divested between January 1, 2022 through March 31, 2023.
Operating Expenses
Total operating expenses for the three months ended March 31, 2023 increased approximately $37.6 million, or 11.1%, from $337.3 million for the three months ended March 31, 2022 to $374.9 million for the three months ended March 31, 2023. The following table sets forth a breakdown of our cost of operations and total operating expenses for the three months ended March 31, 2023 and 2022 (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Salaries and professional reading fees, excluding stock-based compensation | $ | 216,512 | $ | 196,962 | |||||||
| Stock-based compensation | 11,529 | 10,357 | |||||||||
| Building and equipment rental | 28,951 | 29,623 | |||||||||
| Medical supplies | 20,134 | 15,557 | |||||||||
Other operating expenses * | 67,454 | 57,611 | |||||||||
| Cost of operations | 344,580 | 310,110 | |||||||||
| Depreciation and amortization | 29,591 | 25,806 | |||||||||
| Loss on sale and disposal of equipment | 577 | 1,154 | |||||||||
| Severance costs | 122 | 201 | |||||||||
| Total operating expenses | $ | 374,870 | $ | 337,271 | |||||||
*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, 2023 and 2022 (in thousands):
Salaries and professional reading fees, excluding stock-based compensation and severance
| In Thousands | Three Months Ended March 31, | |||||||||||||
| Salaries and Professional Fees | 2023 | 2022 | $ Increase/(Decrease) | % Change | ||||||||||
| Total Salaries | $216,512 | $196,962 | $19,550 | 9.9% | ||||||||||
| Same Center Salaries | $203,294 | $193,194 | $10,100 | 5.2% | ||||||||||
| Excluded | $13,218 | $3,768 | — | — | ||||||||||
Stemming from the higher procedure volumes noted above, our staffing levels were adjusted to support the influx of patients seeking radiology procedures. Similar to other businesses, we still face inflation in employee cost as we compete for talent in the marketplace. Excluded amounts refer to salaries and professional reading fees for the three month periods ending March 31, 2023 and March 31, 2022, respectively, from centers that were acquired or divested between January 1, 2022 through March 31, 2023.
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Stock-based compensation
Stock-based compensation rose $1.2 million, or 11.3% to approximately $11.5 million for the three months ended March 31, 2023 compared to $10.4 million for three months ended March 31, 2022. Although the fair value of stock awarded and vested in the first quarter of 2023 was lower as compared to stock awarded and vested in the prior year, the higher amount of shares granted over the same period in the prior year spurred the increase.
Building and equipment rental
| In Thousands | Three Months Ended March 31, | |||||||||||||
| Building & Equipment Rental | 2023 | 2022 | $ Increase/(Decrease) | % Change | ||||||||||
| Total | $28,951 | $29,623 | $(672) | (2.3)% | ||||||||||
| Same Center | $25,793 | $28,263 | $(2,470) | (8.7)% | ||||||||||
| Excluded Sites | $3,158 | $1,360 | — | — | ||||||||||
The decrease in building and equipment rental expense relates to reduced equipment rental relating to operating lease contracts which ended or were bought out during 2022. Excluded amounts refer to building and equipment rental for the three month periods ending March 31, 2023 and March 31, 2022, respectively, from centers that were acquired or divested between January 1, 2022 through March 31, 2023.
Medical supplies
| In Thousands | Three Months Ended March 31, | |||||||||||||
| Medical Supplies Expense | 2023 | 2022 | $ Increase/(Decrease) | % Change | ||||||||||
| Total | $20,134 | $15,557 | $4,577 | 29.4% | ||||||||||
| Same Center | $18,814 | $15,158 | $3,656 | 24.1% | ||||||||||
| Excluded Sites | $1,320 | $399 | — | — | ||||||||||
The increase in medical supplies expense was driven by higher patient volume combined with price increases for contrasting agents used in advanced radiology procedures. In addition, we had a high utilization rate of a specialty isotope PYLARIFY which is used in our PSMA study of prostate cancer, for which we are ultimately reimbursed on a cost plus margin basis that exceeds our initial expense outlay. Excluded amounts refer to medical supplies expense for the three month periods ending March 31, 2023 and March 31, 2022, respectively, from centers that were acquired or divested between January 1, 2022 through March 31, 2023.
Other operating expenses
| In Thousands | Three Months Ended March 31, | |||||||||||||
| Other Operating Expenses | 2023 | 2022 | $ Increase/(Decrease) | % Change | ||||||||||
| Total | $67,454 | $57,611 | $9,843 | 17.1% | ||||||||||
| Same Center | $62,611 | $55,850 | $6,761 | 12.1% | ||||||||||
| Excluded Sites | $4,843 | $1,761 | — | — | ||||||||||
The rise in other operating expenses was experienced across all of our major categories to support the increase in volumes at inflated prices compared to the same period in the prior year. Excluded amounts refer to other operating expenses for the three month periods ending March 31, 2023 and March 31, 2022, respectively, from centers that were acquired or divested between January 1, 2022 through March 31, 2023.
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Additional segment operating and non operating expenses:
| In Thousands | Three Months Ended March 31, | |||||||||||||
| 2023 | 2022 | $ Increase/(Decrease) | % Change | |||||||||||
| Depreciation and amortization | $29,591 | $25,806 | $3,785 | 14.7% | ||||||||||
| Loss on disposal of equipment and other | $577 | $1,154 | $(577) | nm | ||||||||||
| Non-cash change in fair value of interest rate hedge | $4,093 | ($20,819) | 24,912 | nm | ||||||||||
| Other expenses | $730 | $661 | $69 | nm | ||||||||||
| Severance | $122 | $201 | $(79) | 39.3% | ||||||||||
nm= not meaningful
Interest expense
| In Thousands | Three Months Ended March 31, | |||||||||||||
| Interest Expense | 2023 | 2022 | $ Increase/(Decrease) | % Change | ||||||||||
| Total Interest Expense | $15,722 | $11,601 | $4,121 | 35.5 | % | |||||||||
| Cash Paid for Interest | $21,471 | $7,448 | $14,023 | 188.3 | % | |||||||||
The rise in total interest expense is attributable to a higher overall loan balances in combination with increased variable interest rates paid on those balances compared to the same period in the prior year. The change in cash paid for interest relates to timing of interest rate elections, as our interest payment in the first quarter included interest charged to our term loan balances in 2022.
During 2022 we refinanced our Truist term loan which added an additional $108.0 million in obligations to our balance sheet in the fourth quarter. Based on recent increases in global interests rates, we expect the effective interest rates on our senior credit facilities, and our related interest expense, to continue to rise in the near term. See “Liquidity and Capital Resources” below for more details on our credit facilities.
To mitigate our future interest expense exposure we have entered into certain interest rate swap agreements. During the three months ended March 31, 2023, we received cash payments from our swap agreements of approximately $3.0 million, which served to reduce our overall interest expense. 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, 2023 we recognized equity in earnings from unconsolidated joint ventures in the amount of $1.4 million and for three months ended March 31, 2022 we recognized equity in earnings from unconsolidated joint ventures of $2.5 million, an decrease of $1.1 million or 43.3%. The decrease was mainly related to the equity in earnings received from our venture operations in Arizona.
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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. The breakdown of revenue and expenses of the segment for the three months ended March 31, 2023 and 2022 are as follows:
| In Thousands | Three Months Ended March 31, | |||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||
| Statement of Operations | ||||||||||||||
| Revenue | $2,133 | $599 | $1,534 | 256.1 | % | |||||||||
| Salaries and Wages | $5,131 | $3,284 | $1,847 | 56.2 | % | |||||||||
| Stock Compensation | 657 | 745 | (88) | (11.8) | % | |||||||||
| Other operating | 1,497 | 900 | 597 | 66.3 | % | |||||||||
| Depreciation & Amort. | 1,724 | 1,313 | 411 | 31.3 | % | |||||||||
| Other operating loss (gain) | 2 | (26) | 28 | (107.7) | % | |||||||||
| Severance | 12 | — | 12 | — | % | |||||||||
| Total operating expenses | 9,023 | 6,216 | 2,807 | 45.2 | % | |||||||||
| Loss from Operations | (6,890) | (5,617) | (1,273) | 22.7 | % | |||||||||
| Other expense (income) | 703 | (504) | 1,207 | 239.5 | % | |||||||||
| Income before taxes | (7,593) | (5,113) | (2,480) | 48.5 | % | |||||||||
| Income taxes | — | (667) | 667 | (100.0) | % | |||||||||
| Segment net loss | (7,593) | ($4,446) | ($3,147) | 70.8 | % | |||||||||
Revenues for AI segment increased over the prior year as our Enhance Brest Caner Detection program powered by DeepHealth AI has been introduced in the Florida, New Jersey and New York markets. As we ramp up this program and develop additional products for other types of cancers, our expenses have also risen accordingly. Segment growth will seen long term through the commercialization of our AI products and expansion of our various cancer detection programs.
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.
Our Adjusted EBITDA metric removes non-cash and non-recurring charges that occur in the affected period and provides a basis for measuring the Company’s core financial performance against other periods.
We define Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, as adjusted to exclude losses or gains on the disposal of equipment, other income or loss, loss on debt extinguishment, bargain purchase gains, loss on de-consolidation of joint ventures and non-cash equity compensation. Adjusted EBITDA includes equity earnings in unconsolidated operations and subtracts allocations of earnings to non-controlling interests in subsidiaries, and is adjusted for non-cash or one-time events that take place during the period.
Adjusted EBITDA is a non-GAAP financial measure used as an analytical indicator by us and the healthcare industry to assess business performance, and is a measure of leverage capacity and ability to service debt. Adjusted EBITDA should not be considered a measure of financial performance under GAAP, and 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 and this metric, as presented, may not be comparable to other similarly titled measures of other companies.
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The following is a reconciliation of GAAP net income attributable to RadNet, Inc. common stockholders to Adjusted EBITDA for the three months ended March 31, 2023 and 2022, respectively.
| Three Months Ended March 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Net (loss) income income attributable to RadNet, Inc. common stockholders | $ | (21,005) | $ | 3,013 | ||||||||||
| Provision for income taxes | 1,135 | 1,496 | ||||||||||||
| Interest expense | 15,722 | 11,593 | ||||||||||||
| Severance costs | 134 | 201 | ||||||||||||
| Depreciation and amortization | 31,315 | 27,118 | ||||||||||||
| Non-cash employee stock-based compensation | 12,185 | 11,102 | ||||||||||||
| Loss on sale and disposal of equipment and other | 579 | 1,128 | ||||||||||||
| Non-cash change in fair value of interest rate hedge | 4,093 | (20,819) | ||||||||||||
| Other adjustment to joint venture investment | — | — | ||||||||||||
| Other expenses | 1,432 | 165 | ||||||||||||
| Legal settlements | — | 2,197 | ||||||||||||
| Contingent Consideration | 1,616 | — | ||||||||||||
| Non operational rent expenses | 959 | 938 | ||||||||||||
| Adjusted EBITDA including losses from AI Segment & Provider Relief Funding | $ | 48,165 | $ | 38,132 | ||||||||||
| Adjusted EBITDA including losses from AI Segment and excluding benefit from Provider Relief Funding | $ | 48,165 | $ | 38,132 | ||||||||||
| EBITDA Losses from AI Segment | 4,496 | 3,585 | ||||||||||||
| Adjusted EBITDA excluding losses from AI Segment & Provider Relief Funding | $ | 52,661 | $ | 41,717 | ||||||||||
The following table is a reconciliation of GAAP net income for our AI Segment to Adjusted EBITDA for the three months ended March 31, 2023 and 2022, respectively.
| Three Months Ended March 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Segment net loss | $ | (7,593) | $ | (4,446) | ||||||||||
| Stock Compensation | 657 | 745 | ||||||||||||
| Depreciation & Amortization | 1,724 | 1,313 | ||||||||||||
| Other operating loss | 2 | (26) | ||||||||||||
| Other expense (income) | 703 | (496) | ||||||||||||
| Severance | 12 | — | ||||||||||||
| Interest | — | (7) | ||||||||||||
| Income taxes | — | (667) | ||||||||||||
| Adjusted EBITDA including losses from AI Segment & Provider Relief Funding | $ | (4,496) | $ | (3,585) | ||||||||||
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Liquidity and Capital Resources
The following table summarizes key balance sheet data related to our liquidity as of March 31, 2023 and December 31, 2022 and income statement data for the three months ended March 31, 2023 and 2022 (in thousands):
| Balance Sheet Data: | March 31, 2023 | December 31, 2022 | |||||||||
| Cash and cash equivalents | $ | 90,844 | $ | 127,834 | |||||||
| Accounts receivable | 176,354 | 166,357 | |||||||||
| Working capital (exclusive of current operating lease liabilities) | (5,868) | (41,932) | |||||||||
| Stockholders' equity | 493,101 | 491,452 | |||||||||
Income statement data for the three months ended March 31, | 2023 | 2022 | |||||||||
| Total net revenue | $ | 390,564 | $ | 341,767 | |||||||
| Net income attributable to RadNet common stockholders | (21,005) | 3,013 | |||||||||
We operate in a capital intensive, high fixed-cost industry that requires significant amounts of capital to fund operations. In addition to operations, we require a significant amount of capital for the initial start-up and development of new diagnostic imaging centers, the acquisition of additional centers and new diagnostic imaging equipment. Because our cash flows from operations have been insufficient to fund all of these capital requirements, we have depended on the availability of financing under credit arrangements with third parties to fund our working capital requirements.
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 (in thousands) for the three months ended:
| Cash Flow Data | March 31, 2023 | March 31, 2022 | |||||||||
| Cash provided by operating activities | $ | 32,616 | $ | 901 | |||||||
| Cash used in investing activities | (65,556) | (61,564) | |||||||||
| Cash used in financing activities | (3,821) | (3,313) | |||||||||
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.
Cash used in investing activities for the three months ended March 31, 2023, included purchases of property and equipment for approximately $55.9 million and the acquisition of imaging business and other assets for $9.6 million. As part of our business operations we continually evaluate investment opportunities.
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Cash used in financing activities of $3.8 million for the three months ended March 31, 2023, was due to payment on our term loan obligations and equipment notes. Please see Note 6, Credit Facilities and Notes Payable in the notes to consolidated financials statements included in this report for more information.
Senior Secured Credit Facilities
We maintain secured credit facilities with Barclays Bank PLC and with Truist Bank. The Barclays credit facilities are comprised of first lien term loans and a revolving credit facility of $195.0 million. The Truist credit facilities are comprised of a term loan and a revolving credit facility of $50.0 million. As of March 31, 2023, we were in compliance with all covenants under our credit facilities. Deferred financing costs at March 31, 2023, net of accumulated amortization, were $2.1 million and are specifically related to our revolving credit facilities.
Included in our condensed consolidated balance sheets at March 31, 2023 are $860.4 million of total term loan debt (exclusive of unamortized discounts of $11.8 million) in thousands:
| Face Value | Discount | Total Carrying Value | |||||||||||||||
| First Lien Term Loans | $ | 712,313 | $ | (10,606) | $ | 701,707 | |||||||||||
| Truist Term Loan | 148,125 | (1,188) | 146,937 | ||||||||||||||
| Total Term Loans | $ | 860,438 | $ | (11,794) | $ | 848,644 | |||||||||||
At March 31, 2023, we had no borrowings under our Barclays or Truist revolving credit facilities. After reserves for outstanding letters of credit of $7.6 million, we have $187.4 million available for borrowing under our Barclays Credit Facility and $50.0 million available under our Truist 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 included in this report for more information on our secured credit facilities.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Risk: We receive payment for our imaging services exclusively in United States dollars. As a result, our financial results are unlikely to be affected by factors such as changes in foreign currency, exchange rates or weak economic conditions in foreign markets.
We are exposed to foreign exchange risk with respect to revenues and expenses denominated in the Euro, Canadian Dollar and Hungarian Forint and Pound Sterling. We have Artificial Intelligence operations in the Netherlands, radiology services in the United Kingdom, 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, 2023, 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 $0.3 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 SOFR or Alternative Base Rate interest options on amounts outstanding under the First Lien Term Loans. At March 31, 2023, we had $712.3 million outstanding subject to a SOFR election on First Lien Term Loans and our effective rate plus applicable margin was 7.92%. A hypothetical 1% increase in the adjusted Eurodollar rates under the Restated Credit Agreement over the current SOFR rate would result in an increase of $2.1 million in annual interest expense and a corresponding decrease in income before taxes, as interest rates are above arranged rates on our 2019 Swaps.
At March 31, 2023, we had $148.1 million outstanding subject to an adjusted SOFR election on the Truist Restated Credit and Agreement. We can elect SOFR or Base Rate interest rate options on amounts outstanding under the Truist Restated Credit and Term Loan Agreement. At March 31, 2023, our effective SOFR rate plus applicable margin was 6.79%. A
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hypothetical 1% increase in the adjusted Eurodollar rates under the Truist Restated Credit Agreement would result in an increase of approximately $1.5 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 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, 2023 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
From time to time we are engaged legal proceedings that arise in the ordinary course of our business. We do not believe that the outcome of any of our current legal proceedings will have a material adverse impact on our business, financial condition and results of operations.
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, 2022. The risks described in our Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 5. Other Information
None.
ITEM 6. Exhibits
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| Exhibit Number | Description | |||||||
| 10.1 | ||||||||
| 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, 2023 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.
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, 2023 | By: | /s/ Howard G. Berger, M.D. | ||||||
| Howard G. Berger, M.D., President and Chief Executive Officer (Principal Executive Officer) | ||||||||
| Date: May 10, 2023 | By: | /s/ Mark D. Stolper | ||||||
| Mark D. Stolper, Chief Financial Officer (Principal Financial and Accounting Officer) | ||||||||
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