RADNET, INC. 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 endedDecember 31, 2021 included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 filed with theU.S. Securities and Exchange Commission (SEC) onMarch 1, 2022 . . 27
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Forward-Looking Statements
This quarterly report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements reflect current views about future events and are based on our currently available financial, economic and competitive data and on current business plans. Actual events or results may differ materially depending on risks and uncertainties that may affect our operations, markets, services, prices and other factors. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "intend," "plan," "anticipate," "believe," "estimate," "predict," "potential," "continue," "assumption" or the negative of these terms or other comparable terminology. Forward-looking statements in this quarterly report include, among others, statements we make regarding:
•anticipated trends in our revenues, operating expenses or capital expenditures, and our financial guidance;
•expected future market acceptance for our products or services, and the anticipated protection afforded by our competitive strengths in the markets we serve;
•potential timing and impact of changes in regulations impacting our business;
•the ongoing impact on our business, suppliers, payors, customers, referral sources, partners, patients and employees of the COVID-19 pandemic;
•the anticipated effect of the measures we are taking to respond to the COVID-19 pandemic
•our ability to successfully acquire and integrate new imaging operations;
•cost savings, efficiencies and improvements anticipated from our investments in artificial intelligence and machine learning products and services; and
•our future liquidity and our continuing ability to service and remain in compliance with applicable debt covenants or refinance our current indebtedness.
Forward-looking statements are neither historical facts nor assurances of future performance. Because forward-looking statements relate to the future, they are inherently subject to known and unknown risks, uncertainties and other factors that are difficult to predict and our of our control. Our actual results, level of activity, performance or achievements may be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forwards-looking statements. Important factors that could cause our actual results to differ materially from those indicated or implied in our forward-looking statements include the factors included in "Risk Factors," in our annual report on Form 10-K for the fiscal year endedDecember 31, 2021 or supplemented by the information in Part II- Item 1A below. You should consider the inherent limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of predictions contained in such forward-looking statements. Any forward-looking statement in this quarterly report is based on information currently available to us and speaks only as of the date of this report. We do not undertake any responsibility to release publicly any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this quarterly report or any unanticipated events which may cause actual results to differ from those expressed or implied by the forward-looking statements contained in this quarterly report, except as required by law. Overview We are a leading national provider of freestanding, fixed-site outpatient diagnostic imaging services inthe United States based on number of locations and annual imaging revenue. AtSeptember 30, 2022 , we operated, directly or indirectly through joint ventures with hospitals, 349 centers located inArizona ,California ,Delaware ,Florida ,Maryland ,New Jersey , andNew York . Our operations comprise two segments for financial reporting purposes for this reporting period, Imaging Centers and Artificial Intelligence 28 -------------------------------------------------------------------------------- Table of Contents Our Imaging Center segment provides physicians with imaging capabilities to facilitate the diagnosis and treatment of diseases and disorders. Services include magnetic resonance imaging (MRI), computed tomography (CT), positron emission tomography (PET), nuclear medicine, mammography, ultrasound, diagnostic radiology (X-ray), fluoroscopy and other related procedures. The vast majority of our centers offer multi-modality imaging services, a strategy that diversifies revenue streams, reduces exposure to reimbursement changes and provides patients and referring physicians one location to serve the needs of multiple procedures. Included in the segment is our eRad subsidiary, which designs the underlying critical scheduling, data storage and retrieval systems necessary for imaging center operation. Our Artificial Intelligence ("AI") segment that has been established through our acquisitions of DeepHealth,Nulogix Aidence Holding B.V. andQuantib B.V. . Our current AI focus is to develop solutions that employ machine learning to assist radiologists and other clinicians in interpreting images and improving patient care, initially in the fields of brain, breast, prostate, and pulmonary diagnostics. We derive substantially all of our revenue, directly or indirectly, from fees charged for the diagnostic imaging services performed at our imaging centers. The following table shows our centers in operation and revenues for the nine months endedSeptember 30, 2022 andSeptember 30, 2021 : Nine Months Ended September 30, 2022 2021 Centers in operation 349 353 Net revenues (millions) $ 1,046$ 982 Our revenue is derived from a diverse mix of payors, including private, managed care capitated and government payors. We believe our payor diversity mitigates our exposure to possible unfavorable reimbursement trends within any one payor class. In addition, our experience with capitation arrangements over the last several years has provided us with the expertise to manage utilization and pricing effectively, resulting in a predictable stream of revenue. Our total service fee revenues during the three and nine months endedSeptember 30, 2022 and 2021 are presented in the table below. Our imaging center revenue is displayed as the estimated service fee, broken down by classification of insurance coverage type. Additional revenues are earned from our management services provided to joint ventures and our software and AI subsidiaries. Three Months Ended Nine Months Ended September 30, September 30, In Thousands 2022 2021 2022 2021 Commercial insurance$ 189,634 $ 185,723 $ 573,259 $ 555,355 Medicare 78,034 73,163 226,827 207,977 Medicaid 9,669 8,707 28,456 26,198 Workers' compensation/personal injury 13,200 11,554 38,785 32,507 Other patient revenue 7,646 4,800 22,334 14,766 Management fee revenue 6,099 5,255 17,199 16,007 Software revenue 3,430 2,068 9,849 7,115 Other 3,431 3,641 12,054 10,058 Revenue under capitation arrangements 38,001 37,283 114,366 111,449 Imaging Center Segment Revenue 349,144 332,194 1,043,129 981,432 AI Segment Revenue 900 496 3,056 496 Total service revenue$ 350,044 $ 332,690 $ 1,046,185 $ 981,928 Recent Developments Through the third quarter endedSeptember 30, 2022 our imaging business continued to expand, with procedure volumes returning to levels experienced before the COVID-19 pandemic, with year to date same center procedure volumes increasing 3.1% and overall procedure volumes increasing 6.0% over the same period in 2021. We continued to pursue our strategy of expansion within geographic regions, with a concentration on adding new facilities inMaryland . While imaging 29 -------------------------------------------------------------------------------- Table of Contents volumes returned to pre-pandemic levels, our operations have experienced effects from the pandemic and related macroeconomic issues. We are experiencing tighter labor markets, resulting in increased salaries as we seek to retain our skilled workforce. Our acquisitions ofAidence Holding B.V. andQuantib B.V. have expanded our AI initiatives to encompass imaging diagnostics solutions for the most prevalent cancers. Efforts in AI are largely in the product development stage at this time and we expect that the segment will continue to experience operating losses for the foreseeable future as we seek to secure both regulatory approvals and market acceptance for our products.
Equity Investments, Acquisitions and Dispositions, and Joint Venture Activity
We have developed our medical imaging business through a combination of organic growth, equity investments, acquisitions and joint venture formations. The information below updates our activity of such matters contained in our annual report on Form 10-K for the year endedDecember 31, 2021 .
Equity Investments
As of
Medic Vision Imaging Solutions Ltd. , based inIsrael , specializes in software packages that provide compliant radiation dose structured reporting and enhanced images from reduced dose CT scans. Our investment of$1.2 million represents a 14.21% equity interest in the company. No observable price changes or impairment in our investment was identified during the three and nine months endedSeptember 30, 2022 . Turner Imaging Systems, based inUtah , 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. OnFebruary 1, 2018 , we purchased 2.1 million preferred shares in Turner Imaging Systems for$2.0 million . OnJanuary 1, 2019 we funded a convertible promissory note in the amount of$0.1 million that converted into an additional 80,000 shares effectiveDecember 21, 2019 . No observable price changes or impairment in our investment was identified during the three and nine months endedSeptember 30, 2022 . WhiteRabbit.ai Inc., based inCalifornia , is currently developing an artificial intelligence suite which aims to improve the speed and accuracy of cancer detection in radiology and improve patient care. OnNovember 5, 2019 we acquired an equity interest in the company for$1.0 million and also loaned the company$2.5 million in support of it operations. No observable price changes, impairment in our investment or impairment of the loan receivable was identified during the three and nine months endedSeptember 30, 2022 . Acquisitions Imaging Center During the first quarter of 2022, we completed the acquisition of certain assets of the following entities, which either engage directly in the practice of radiology or associated businesses. The primary reason for these acquisitions was to strengthen our presence in theMaryland market. These acquisitions are reported as part of our Imaging Center segment. We made a fair value determination of the acquired assets and assumed liabilities and the following were recorded (in thousands): Entity Date Acquired Total Consideration Property & Equipment Right of Use Assets Goodwill Right of Use Liabilities IFRC LLC*^ 1/1/2022 4,800 2,103 857 2,697 (857) IFRC LLC*^ 1/1/2022 8,200 2,910 1,703 5,271 (1,703) Total 13,000 5,013 2,560 7,968 (2,560) *Fair Value Determination is Final ^IFRC LLC acquisitions consisted of three subsidiaries of IFRC, one of which was purchased separately by a joint venture withCalvert Medical Imaging Centers, LLC . Artificial Intelligence Aidence Holding B.V. 30
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OnJanuary 20, 2022 , we completed our acquisition of all the equity interests ofAidence Holding B.V. ("Aidence") an artificial intelligence enterprise centered on lung cancer screening, in an combination stock and cash purchase. Aidence is reported as part of our AI segment and was acquired to enhance our AI capabilities. The transaction was accounted for as an acquisition of a business and total purchase consideration was determined to be approximately$45.2 million including i) 1,117,872 shares issued at$26.80 per share with a fair value of$30.0 million ii) cash of$1.8 million and iii) assumed liabilities of$11.9 million ,$7.4 million in milestone contingent consideration and cash holdback of$4.5 million and iv) a settlement of a loan fromRadNet of$1.5 million . In addition we paid certain seller closing costs through the issuance of 23,362 shares at a fair value of$0.6 million . We recorded$1.0 million in current assets,$0.2 million in property plant and equipment,$27.7 million in intangible assets,$3.2 million in liabilities and$19.0 million in goodwill.
OnJanuary 20, 2022 , we completed our acquisition of all the equity interests ofQuantib B.V. ("Quantib") an artificial intelligence enterprise centered on prostate cancer screening, in a combination stock and cash purchase. Quantib is reported as part of our AI segment, and was acquired to enhance our AI capabilities. The transaction was accounted for as an acquisition of a business and total purchase consideration was determined to be approximately$42.3 million including i) 965,058 shares issued at$26.80 per share with a fair value of$25.9 million ii) cash of$11.8 million and iii) 113,303 shares with a fair value at the date of close of$3.0 million and cash holdback of$1.6 million to be issued 18 months after acquisition subject to adjustment for any indemnification claims. We recorded$2.4 million million in current assets,$0.1 million in property plant and equipment,$21.3 million in intangible assets,$3.7 million in liabilities and$22.2 million in goodwill.
Formation of majority owned subsidiary
OnApril 1, 2022 we formedFrederick County Radiology, LLC ("FCR"), a partnership withFrederick Health Hospital, Inc. ("Hospital"). The operation offers multi-modality services out of six locations inFrederick, Maryland . We contributed the operations of 4 centers to the enterprise and Hospital contributed$5.4 million in fixed assets,$3.0 million in equipment, and$10.8 million in goodwill. As a result of the the transaction, we retain a 65% controlling economic interest in FCR and Hospital retains a preliminary$11.1 million or 35% noncontrolling economic interest in FCR. The initial accounting is preliminary as ofSeptember 30, 2022 for the acquired assets and liabilities as we are currently in the process of completing the assessment of valuation inputs and assumptions as well as completing the assessment of the tax attributes of the business combination.
Advanced Radiology at
OnJune 15, 2022 we entered into Advanced Radiology atCapital Region, LLC , a partnership withDimension Health Corporation . ("Dimension"), and affiliate of theUniversity of Maryland . The operation will provide multi-modality services out of two yet to be determined locations in theLargo, Maryland area. The venture was initially capitalized with nominal amounts of$5.1 thousand for a 51% economic interest from us and$4.9 thousand from Dimension for a 49% economic interest.
Joint Venture Activity
Acquisition by equity method investee
During the first quarter of 2022, our joint venture with
Entity Date Acquired Total Consideration Property & Equipment Right of Use Assets Goodwill Right of Use Liabilities
IFRC LLC *^ 1/1/2022 3,922 2,121 1,295 1,801 (1,295)
*Fair Value Determination is Final
^ IFRC LLC acquisitions consisted of three subsidiaries of IFRC, two of which
were purchased separately by wholly owned RadNet subsidiaries.
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The following table is a summary of our investment in joint ventures during the
nine months ended
Balance as ofDecember 31, 2021 $ 42,229 Equity in earnings in these joint ventures 8,350
Equity contributions in existing joint ventures 1,441
Balance as of
$ 52,020 We charged management service fees from the centers underlying these joint ventures of approximately$6.1 million and$5.3 million for the three months endedSeptember 30, 2022 and 2021 and$17.2 million and$16.0 million for the nine months endedSeptember 30, 2022 and 2021, respectively.
On
The following table is a summary of key balance sheet data for these joint
ventures as of
September 30, December 31,
Balance Sheet Data: 2022 2021
Current assets $ 48,154 $ 37,186
Noncurrent assets 86,123 73,592
Current liabilities (12,211) (12,919)
Noncurrent liabilities (26,619) (22,370)
Total net assets $
95,447
Book value ofRadNet joint venture interests $
43,947
8,073 7,299
Total value of RadNet joint venture interests $
52,020
Income statement data for the nine months ended
2021 Net revenue$ 107,241 $ 98,193 Net income$ 17,034 $ 16,007
Critical Accounting Policies
The Securities and Exchange Commission defines critical accounting estimates as those that are both most important to the portrayal of a company's financial condition and results of operations and require management's most difficult, subjective or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. In Note 2 to our consolidated financial statements in this quarterly report and in our annual report on Form 10-K for the year endedDecember 31, 2021 , we discuss our significant accounting policies, including those that do not require management to make difficult, subjective or complex judgments or estimates. The most significant areas involving management's judgments and estimates are described below.
Use of Estimates
The financial statements were prepared in accordance withU.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. 32
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Revenues
Our revenues generally relate to net patient fees received from various payors and patients themselves under contracts in which our performance obligations are to provide diagnostic services to the patients. Revenues are recorded during the period our obligations to provide diagnostic services are satisfied. Our performance obligations for diagnostic services are generally satisfied over a period of less than one day. The contractual relationships with patients, in most cases, also involve a third-party payor (Medicare, Medicaid, managed care health plans and commercial insurance companies, including plans offered through the health insurance exchanges) and the transaction prices for the services provided are dependent upon the terms provided by (Medicare and Medicaid) or negotiated with (managed care health plans and commercial insurance companies) the third-party payors. The payment arrangements with third-party payors for the services we provide to the related patients typically specify payments at amounts less than our standard charges and generally provide for payments based upon predetermined rates per diagnostic services or discounted fee-for-service rates. Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations, changes in business and economic conditions, and the frequent changes in managed care contractual terms resulting from contract re-negotiations and renewals. As it relates to the Group, this service fee revenue includes payments for both the professional medical interpretation revenue recognized by them as well as the payment for all other aspects related to our providing the imaging services, for which we earn management fees. As it relates to other centers, this service fee revenue is earned through providing the use of our diagnostic imaging equipment and the provision of technical services as well as providing administration services such as clerical and administrative personnel, bookkeeping and accounting services, billing and collection, provision of medical and office supplies, secretarial, reception and transcription services, maintenance of medical records, and advertising, marketing and promotional activities. Our revenues are based upon our management's estimate of amounts we expect to be entitled to receive from patients and third-party payors. Estimates of contractual allowances under Medicare, Medicaid, managed care and commercial insurance plans are based upon historical collection experience of the payments received from such payors in accordance with the underlying contractual agreements. Revenues related to uninsured patients and uninsured copayment and deductible amounts for patients who have health care coverage may have price concessions applied. We also record estimated implicit price concessions (based primarily on historical collection experience) related to uninsured accounts to record self-pay revenues at the estimated amounts we expect to collect. Under capitation arrangements with various health plans, we earn a per-enrollee amount each month for making available diagnostic imaging services to all plan enrollees under the capitation arrangement. Revenue under capitation arrangements is recognized in the period in which we are obligated to provide services to plan enrollees under contracts with various health plans. Our estimates and assumptions related to revenue recognition did not change materially for the quarter endedSeptember 30, 2022 .
The Provider Relief Fund offers government assistance to eligible providers throughout the healthcare system in support of certain expenses or lost revenue attributable to the coronavirus pandemic. We have recorded provider relief funding in our condensed Consolidated Statements of Operations in the amount of$6.3 million for the nine months endedSeptember 30, 2021 . No provider relief funding was received for the three and nine months endedSeptember 30, 2022 . Generally, the department ofHealth and Human Services ("HHS") does not intend to recoup funds as long as a provider's lost revenue and increased expenses exceed the amount of provider relief funding one has received. HHS reserves the right to auditRelief Fund recipients in the future to ensure that this requirement is met and collect anyRelief Fund amounts that were made in error or exceed lost revenue or increased expenses due to the pandemic. Failure to comply with the terms and conditions may be grounds for recoupment. In recognizing revenue associated with provider relief funding our management is required to assess whether our operations have meet the applicable requirements for the funding received. During the quarter endedSeptember 30, 2022 , we continued to evaluate our operating results in light of the most recent government guidance and based on our assessment, the amount of revenue recognized is appropriate.
Accounts Receivable
Substantially all of our accounts receivable are due under fee-for-service
contracts from third party payors, such as insurance companies and
government-sponsored healthcare programs, or directly from patients. Services
are generally provided pursuant to one-year contracts with healthcare providers.
Receivables generally are collected within industry norms for third-party
payors. We continuously monitor collections from our payors and maintain an
allowance for bad debts based upon
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specific payor collection issues that we have identified and our historical
experience. Our estimates and assumptions for allowances on our account
receivable did not change materially during the quarter ended
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 atSeptember 30, 2022 totaled$575.1 million . Indefinite Lived Intangible Assets atSeptember 30, 2022 were$12.7 million and are associated with the value of certain trade name intangibles. Our management reviews the fair value of our reporting units on an annual basis to determine if an event has occurred which suggest that the fair value of a reporting unit may be impaired. When we determine the carrying value of a reporting unit exceeds its fair value, an impairment charge would be recognized and should not exceed the total amount of goodwill allocated to that reporting unit. The review of fair value requires our management to make assessments of the business and financial prospects for a particular reporting unit. We tested goodwill for impairment onOctober 1, 2021 . We also continue at regular intervals to consider the current and expected future economic and market conditions surrounding the COVID-19 pandemic and to date have not had an indication of goodwill impairment being more likely than not throughSeptember 30, 2022 .
Recent Accounting Standards
See Note 3, Recent Accounting and Reporting Standards to the financial statements included in this report for further information.
Subsequent Events
Refinancing of SunTrust (Now Truist) Credit Facilities:
OnOctober 7, 2022 , our subsidiary, NJIN, entered into a Second Amended and Restated Credit and Term Loan Agreement which provides for a single term loan of$150.0 million and a$50.0 million revolving credit facility. The proceeds of the term loan were used to partially fund the acquisition ofMontclair Radiological Associates , refinance the outstanding$42.0 million term loan and pay fees and expenses associated with the refinancing transaction. The key terms of the Restated Credit and Term Loan Agreement are:
• Interest Rates: Borrowings bear interest at either the SOFR or Base Rate as defined in the agreement, plus an applicable margin.
• Maturity Dates: The maturity date for both the term loan and revolving loans
is
• Payments: BeginningMarch 31, 2023 , we will be required to make quarterly principal amortization payments on the term loan in the amount of$1.9 million , which will increase to$3.8 million , with the balance paid at maturity. 34
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Acquisitions:
On
OnNovember 1, 2022 , we acquired a 75% controlling share interest inLondon -basedHeart & Lung Imaging Limited ("HLH"). HLH was founded to improve lung cancer outcomes through early detection and accurate diagnosis. HLH will be integrated into our AI operations. Total combined purchase consideration, including contingencies, consists ofRadNet common stock and cash up to a potential$27.6 million .
Results of Operations
The following table sets forth, for the three and nine months ended
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