| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | PRINCIPLES
OF CONSOLIDATION - The operating activities of subsidiaries are included in the accompanying consolidated financial statements
from the date of acquisition. Investments in companies in which the Company has the ability to exercise significant influence,
but not control, are accounted for by the equity method. All intercompany transactions and balances, with our consolidated entities
and the unsettled amount of intercompany transactions with our equity method investees, have been eliminated in consolidation.
As stated in Note 1 above, the BRMG and NY Groups are variable interest entities and we consolidate the operating activities and
balance sheets of each. USE OF ESTIMATES
- The preparation of the financial statements in conformity with U.S. generally accepted accounting principles 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 managementÂ’s control.
As a result, actual amounts could materially differ from these estimates. REVENUES - Service fee revenue, net
of contractual allowances and discounts, consists of net patient fees received from various payors and patients themselves
based mainly upon established contractual billing rates, less allowances for contractual adjustments and discounts. As it relates
to BRMG and the NY Groups centers, this service fee revenue includes payments for both the professional medical interpretation
revenue recognized by BRMG and the NY Groups as well as the payment for all other aspects related to our providing the imaging
services, for which we earn management fees from BRMG and the NY Groups. As it relates to non-BRMG and NY Groups centers, namely
the affiliated physician groups, 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. Service fee revenues are recorded during
the period the services are provided based upon the estimated amounts due from the patients and third-party payors. Third-party
payors include federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance
companies and employers. Estimates of contractual allowances are based on historical collection rates of payor reimbursement contract
agreements. We also record a provision for doubtful accounts based primarily on historical collection rates from related to patient
copayments and deductible amounts for patients who have health care coverage under one of our third-party payors. 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 which we are obligated to provide
services to plan enrollees under contracts with various health plans. Our service fee revenue, net of contractual
allowances and discounts, the provision for bad debts, and revenue under capitation arrangements for the years ended December 31,
are summarized in the following table (in thousands) :
Years Ended December 31,
2015 2014 2013
Commercial insurance (1) $ 486,489 $ 437,525 $ 430,735
Medicare 168,545 159,562 156,066
Medicaid 23,948 24,499 24,017
Workers' compensation/personal injury 32,728 30,543 34,821
Other (2) 35,046 18,007 19,668
Service fee revenue, net of contractual allowances and discounts 746,756 670,136 665,307
Provision for bad debts (36,033 ) (29,807 ) (27,911 )
Net service fee revenue 710,723 640,329 637,396
Revenue under capitation arrangements 98,905 77,240 65,590
Total net revenue $ 809,628 $ 717,569 $ 702,986 _________________ (1) (2) PROVISION
FOR BAD DEBTS - We provide for an allowance against accounts receivable that could become uncollectible to reduce the carrying
value of such receivables to their estimated net realizable value. We estimate this allowance based on the aging of our accounts
receivable by the historical payment pattern of each type of payor, write-off trends, and other relevant factors. A significant
portion of our provision for bad debt relates to co-payments and deductibles owed to us from patients with insurance. Although
we attempt to collect deductibles and co-payments due from patients with insurance at the time of service, this attempt to collect
at the time of service is not an assessment of the patientÂ’s ability to pay nor are revenues recognized based on an assessment
of the patientÂ’s ability to pay. There are various factors that can impact collection trends, such as changes in the economy,
which in turn have an impact on the increased burden of co-payments and deductibles to be made by patients with insurance. These
factors continuously change and can have an impact on collection trends and our estimation process. Our allowance for bad debts
at December 31, 2015 and 2014 was $20.8 million and $15.1 million, respectively. MEANINGFUL
USE INCENTIVE - Under the American Recovery and Reinvestment Act of 2009, a program was enacted that provides financial incentives
for providers that successfully implement and utilize electronic health record technology to improve patient care. Our software
development team in Canada established an objective to build a Radiology Information System (RIS) software platform that has been
awarded Meaningful Use certification. As this certified RIS system is implemented throughout our imaging centers, the radiologists
that utilize this software can be eligible for the available financial incentives. In order to receive such incentive payments
providers must attest that they have demonstrated meaningful use of the certified RIS in each stage of the program. We account
for this meaningful use incentive under the Gain Contingency Model outlined in ASC 450-30. Under this model, we record within
non-operating income, meaningful use incentive only after Medicare accepts an attestation from the qualified eligible professional
demonstrating meaningful use. We recorded approximately $3.3 million and $2.0 million during the twelve months ended December
31, 2015 and 2014 relating to this incentive. 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. SOFTWARE REVENUE
RECOGNITION – Our subsidiary, eRAD, Inc., sells Picture Archiving Communications Systems (“PACS”) and related
services, primarily in the United States. The PACS systems sold by eRAD are primarily composed of certain elements: hardware,
software, installation and training, and support. Sales are made primarily through eRADÂ’s sales force. These sales are multiple-element
arrangements that generally include hardware, software, software installation, configuration, system installation, training and
first-year warranty support. Hardware, which is not unique or special purpose, is purchased from a third-party and resold to eRADÂ’s
customers with a small mark-up. We have determined
that our core software products, such as PACS, are essential to most of our arrangements as hardware, software and related services
are sold as an integrated package. Therefore, these transactions are accounted for under ASC 605-25, Multiple-Element Arrangements
Software. We recognize
revenue for four units of accounting, hardware, software, installation (including manufacturing and configuration, training, implementation
and project management) and post-contract support (“ PCS”)
· Hardware
o The hardware has standalone value as it is sold separately by
other vendors and the customer could resell the hardware on a standalone basis; and
o Delivery or performance of the undelivered items is probable
and substantially within our control.
· Software
· Installation
· Post-Contract Support Our transactions
do not generally contain refund provisions. We allocate the transaction price to each unit of accounting using relative
selling price. We consider historical pricing, list price and market considerations in determining estimated selling price in
the allocation. For the years
ended December 31, 2015, 2014 and 2013, we recorded approximately $6.1 million, $5.5 million and $4.9 million, respectively, in
revenue related to our eRAD business which is included in net service fee revenue in our consolidated statement of operations.
At December 31, 2015 we had a deferred revenue liability of approximately $1.5 million associated with eRAD sales which we expect
to recognize into revenue over the next 12 months. SOFTWARE DEVELOPMENT
COSTS - Costs related to the research and development of new software products and enhancements to existing software products
all for resale to our customers are expensed as incurred. We utilize
a variety of computerized information systems in the day to day operation of our diagnostic imaging facilities. One such system
is our front desk patient tracking system or Radiology Information System (“RIS”). We have historically utilized third
party RIS software solutions and pay monthly fees to outside third party software vendors for the use of this software. We have
developed our own RIS solution from the ground up through our wholly owned subsidiary, Radnet Management Information Systems (“RMIS”)
and began utilizing this system beginning in the first quarter of 2015. In accordance
with ASC 350-40, Accounting for the Costs of Computer Software Developed for Internal Use, During the
twelve months ended December 31, 2015, we entered into an agreement to license our RIS system to an outside customer. As of December
31, 2015, we received approximately $443,000 with respect to this licensing agreement. In accordance with ASC 350-40, we recorded
the receipt of these funds against the capitalized software costs explained above. We intend to record any future proceeds in
the same manner until the carrying value of our capitalized software costs are brought to zero. As of December 31, 2015, the net
carrying value of our capitalized software costs was approximately $4.7 million. CONCENTRATION
OF CREDIT RISKS - Financial instruments that potentially subject us to credit risk are primarily cash equivalents and accounts
receivable. We have placed our cash and cash equivalents with one major financial institution. At times, the cash in the financial
institution is temporarily in excess of the amount insured by the Federal Deposit Insurance Corporation, or FDIC. 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 clients and maintain an allowance for bad debts based
upon our historical collection experience. CASH AND CASH
EQUIVALENTS - We consider all highly liquid investments that mature in three months or less when purchased to be cash equivalents.
The carrying amount of cash and cash equivalents approximates their fair market value. DEFERRED FINANCING
COSTS - Costs of financing are deferred and amortized on a straight-line basis over the life of the associated loan, which approximates
the effective interest rate method. Deferred financing costs, net of accumulated amortization, were $4.9 million and $6.7 million,
as of December 31, 2015 and 2014, respectively. In conjunction with our 2015 Incremental First Lien Supplemental term loan borrowing,
approximately $531,000 was added to deferred financing costs. As part of our early extinguishment of senior notes during March
and April of 2014, approximately $3.4 million of deferred financing costs were written off. See Note 8, Notes Payable, Line of
Credit, and Capital Leases for more information. INVENTORIES
- Inventories, consisting mainly of medical supplies, are stated at the lower of cost or market with cost determined by the first-in,
first-out method. PROPERTY AND
EQUIPMENT - Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization
of property and equipment are provided using the straight-line method over the estimated useful lives, which range from 3 to 15
years. Leasehold improvements are amortized at the lesser of lease term or their estimated useful lives, whichever is shorter,
which range from 3 to 30 years. Maintenance and repairs are charged to expense as incurred. BUSINESS COMBINATION
- Accounting for acquisitions requires us to recognize separately from
goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition
date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired
and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities
assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement
period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed
with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values
of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated
statements of operations. GOODWILL AND
INDEFINITE LIVED INTANGIBLES - Goodwill at December 31, 2015 totaled $239.4 million. Indefinite lived intangible assets at
December 31, 2015 totaled $7.9 million and are associated with the value of certain trade name intangibles. Goodwill and trade
name intangibles are recorded as a result of business combinations. Management evaluates goodwill and trade name intangibles,
at a minimum, on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be
recoverable. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unitÂ’s carrying amount,
including goodwill, to the fair value of the reporting unit. The fair value of a reporting unit is estimated using a combination
of the income or discounted cash flows approach and the market approach, which uses comparable market data. If the carrying amount
of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount
of impairment loss, if any. Impairment of trade name intangibles is tested at the subsidiary level by comparing the subsidiaryÂ’s
trade name carrying amount to its respective fair value. We tested both goodwill and trade name intangibles for impairment on
October 1, 2015, noting no impairment, and have not identified any indicators of impairment through December 31, 2015. LONG-LIVED
ASSETS - We evaluate our long-lived assets (property and equipment) and intangibles, other than goodwill, for impairment whenever
indicators of impairment exist. Generally accepted accounting principles (GAAP) requires that if the sum of the undiscounted expected
future cash flows from a long-lived asset or definite-lived intangible is less than the carrying value of that asset, an asset
impairment charge must be recognized. The amount of the impairment charge is calculated as the excess of the assetÂ’s carrying
value over its fair value, which generally represents the discounted future cash flows from that asset or in the case of assets
we expect to sell, at fair value less costs to sell. No indicators of impairment were identified with respect to our long-lived
assets as of December 31, 2015. 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. Income taxes are further explained in Note 10. UNINSURED
RISKS - On November 1, 2008 we obtained a fully funded and insured workersÂ’ compensation policy, thereby eliminating
any uninsured risks for employee injuries occurring on or after that date. This fully funded policy remained in effect through
November 1, 2013 and continues to cover any claims incurred through this date. On November
1, 2013 we entered into a high-deductible workersÂ’ compensation insurance policy. We have recorded liabilities as of December 31,
2015, and 2014 of $2.2 million and $1.0 million, respectively for the estimated future cash obligations associated with the unpaid
portion of the workers compensation claims incurred. We
and our affiliated physicians carry an annual medical malpractice insurance policy that protects us for claims that are filed
during the policy year and that fall within policy limits. The policy has a deductible for which we have recorded liabilities
and included it in our consolidated balance sheets at December 31, 2015 and December 31, 2014 of approximately $24,000
and $88,000, respectively. In
December 2008, in order to eliminate the exposure for claims not reported during the regular malpractice policy period, we purchased
a medical malpractice tail policy, which provides coverage for any claims reported in the event that our medical malpractice policy
expires. As of December 31, 2015, this policy remains in effect. We have entered
into an arrangement with Blue Shield to administer and process claims under a self-insured plan that provides health insurance
coverage for our employees and dependents. We have recorded liabilities as of December 31, 2015 and 2014 of $1.8 million
and $2.0 million, respectively, for the estimated future cash obligations associated with the unpaid portion of the medical and
dental claims incurred by our participants. Additionally, we entered into an agreement with Blue Shield for a stop loss policy
that provides coverage for any claims that exceed $250,000 up to a maximum of $1.0 million in order for us to limit our exposure
for unusual or catastrophic claims. LOSS AND OTHER
UNFAVORABLE CONTRACTS – We assess the profitability of our contracts to provide management services to our contracted physician
groups and identify those contracts where current operating results or forecasts indicate probable future losses. Anticipated
future revenue is compared to anticipated costs. If the anticipated future cost exceeds the revenue, a loss contract accrual is
recorded. In connection with the acquisition of Radiologix in November 2006, we acquired certain management service agreements
for which forecasted costs exceeds forecasted revenue. As such, an $8.9 million loss contract accrual was established in purchase
accounting, and is included in other non-current liabilities. The recorded loss contract accrual is being accreted into operations
over the remaining term of the acquired management service agreements. As of December 31, 2015 and 2014, the remaining accrual
balance is $5.7 million, and $6.1 million, respectively. As part of
our ongoing acquisition activities, we have certain operating lease commitments for facilities that are not in use. Accordingly,
we have recorded a loss contract accrual related to the remaining payments under these lease commitments. As of December 31, 2015
and 2014, the remaining loss contract accrual for these leases is $85,000 and $218,000, respectively. In addition
and related to acquisition activity, we have certain operating lease commitments for facilities where the fair market rent differs
from the lease contract rate. We have recorded an unfavorable contract liability representing the difference between the total
value of the fair market rent and the contract rent over the current term of the lease applicable from the date of acquisition.
As of December 31, 2015 and 2014, the unfavorable contract liability on these leases is $581,000 and $1.2 million, respectively. EQUITY BASED
COMPENSATION – We have one long-term incentive plan which we refer to as the 2006 Plan, which we amended and restated as
of April 20, 2015 (the “Restated Plan”). The Restated Plan was approved by our stockholders at our annual stockholders
meeting on June 11, 2015. As of December 31, 2015, we have reserved for issuance under the Restated Plan 12,000,000 shares of
common stock. We can issue options, stock awards, stock appreciation rights and cash awards under the Restated Plan. Certain options
granted under the Restated Plan to employees are intended to qualify as incentive stock options under existing tax regulations.
Stock options and warrants generally vest over two to five years and expire five to ten years from date of grant. The compensation
expense recognized for all equity-based awards is net of estimated forfeitures and is recognized over the awardsÂ’ 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. FOREIGN CURRENCY
TRANSLATION - The functional currency of our foreign subsidiaries is the local currency. In accordance with ASC 830, Foreign
Currency Matters COMPREHENSIVE
INCOME - ASC 220, Comprehensive Income, FAIR VALUE
MEASUREMENTS – Assets and liabilities subject to fair value measurements are required to be disclosed within a fair value
hierarchy. The fair value hierarchy ranks the quality and reliability of inputs used to determine fair value. Accordingly, assets
and liabilities carried at, or permitted to be carried at, fair value are classified within the fair value hierarchy in one of
the following categories based on the lowest level input that is significant to a fair value measurement: Level 1—Fair
value is determined by using unadjusted quoted prices that are available in active markets for identical assets and liabilities. Level 2—Fair
value is determined by using inputs other than Level 1 quoted prices that are directly or indirectly observable. Inputs can
include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities
in inactive markets. Related inputs can also include those used in valuation or other pricing models such as interest rates and
yield curves that can be corroborated by observable market data. Level 3—Fair
value is determined by using inputs that are unobservable and not corroborated by market data. Use of these inputs involves significant
and subjective judgment. The table
below summarizes the estimated fair value and carrying amount of our long-term debt as follows (in thousands):
As
of December 31, 2015
Level
1 Level
2 Level
3 Total
Fair Value Total
Face Value
First Lien Term Loans $ – $ 444,258 $ – $ 444,258 $ 451,023
Second Lien Term Loans $ – $ 173,700 $ – 173,700 $ 180,000
As
of December 31, 2014
Level
1 Level
2 Level
3 Total Total
Face Value
First Lien Term Loans $ – $ 394,753 $ – $ 394,753 $ 399,750
Second Lien Term Loans – 178,200 – 178,200 180,000 Our revolving
credit facility had no aggregate principal amount outstanding as of December 31, 2015. The estimated
fair value of our long-term debt, which is discussed in Note 8, 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 capital 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):
Years
Ended December 31,
2015 2014 2013
Net income
attributable to RadNet, Inc. common stockholders $ 7,709 $ 1,376 $ 2,120
BASIC NET INCOME PER
SHARE ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS
Weighted average number
of common shares outstanding during the period 43,805,794 41,070,077 39,140,480
Basic net income per
share attributable to RadNet, Inc. common stockholders $ 0.18 $ 0.03 $ 0.05
DILUTED NET INCOME PER
SHARE ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS
Weighted average number
of common shares outstanding during the period 43,805,794 41,070,077 39,140,480
Add nonvested restricted
stock subject only to service vesting 865,326 994,610 316,905
Add additional shares
issuable upon exercise of stock options and warrants 500,252 1,084,509 357,150
Weighted average number
of common shares used in calculating diluted net income per share 45,171,372 43,149,196 39,814,535
Diluted net income per
share attributable to RadNet, Inc. common stockholders $ 0.17 $ 0.03 $ 0.05 For the years
ended December 31, 2015, 2014 and 2013 we excluded 265,000, 245,000, and 4,663,750, respectively, outstanding options, in the
calculation of diluted earnings per share because their effect would be antidilutive. INVESTMENT
IN JOINT VENTURES – We have ten unconsolidated joint ventures with ownership interests ranging from 35% to 50%. 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. 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 December 31, 2015. Activity in investment in joint ventures for the years ended December 31, 2014 and 2015, is provided below
(in thousands):
Balance as of December 31, 2013 $ 28,949
Purchase of a 49% interest
in a new joint venture 2,168
Equity contributions
in existing joint ventures 1,394
Equity in earnings in
these joint ventures 6,970
Distribution of earnings (7,358 )
Balance as of December 31, 2014 $ 32,123
Equity contributions
in existing joint ventures 265
Equity in earnings in
these joint ventures 8,927
Distribution of earnings (7,731 )
Balance as of December 31, 2015 $ 33,584 We received
management service fees from the centers underlying these joint ventures of approximately $9.3 million per year for the years
ended December 31, 2015, 2014 and 2013. We eliminate any unrealized portion of our management service fees with our equity in
earnings of joint ventures. The following
table is a summary of key financial data for these joint ventures as of December 31, 2015 and 2014, respectively, and for the
years ended December 31, 2015, 2014 and 2013, respectively, (in thousands):
December 31,
2015 2014
Balance Sheet Data:
Current assets $ 28,186 $ 23,636
Noncurrent assets 91,660 49,347
Current liabilities (15,258 ) (9,534 )
Noncurrent liabilities (44,059 ) (6,386 )
Total net assets $ 60,529 $ 57,063
Book value of RadNet joint
venture interests $ 28,397 $ 26,791
Cost in excess of book value
of acquired joint venture interests 4,970 4,970
Elimination of intercompany
profit remaining on Radnet's consolidated balance sheet 217 362
Total value of Radnet joint
venture interests $ 33,584 $ 32,123
Total book value of other
joint venture partner interests $ 32,132 $ 30,272
2015 2014 2013
Net revenue $ 125,544 $ 101,189 $ 93,134
Net income $ 19,485 $ 14,854 $ 13,633 |
