| 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, 2015, as amended. 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, 2015, as amended. 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 administrative 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. 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 are
summarized in the following table (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2016 2015 2016 2015
Commercial insurance $ 130,036 $ 114,827 $ 386,383 $ 331,670
Medicare 48,740 40,840 140,089 120,039
Medicaid 7,554 6,117 21,461 17,582
Workers' compensation/personal injury 9,449 7,712 27,935 23,287
Other 12,651 23,408 37,163 53,759
Service fee revenue, net of contractual allowances and discounts 208,430 192,904 613,031 546,337
Provision for bad debts (11,253 ) (9,433 ) (33,883 ) (25,295 )
Net service fee revenue 197,177 183,471 579,148 521,042
Revenue under capitation arrangements 27,466 24,895 80,448 72,880
Total net revenue $ 224,643 $ 208,366 $ 659,596 $ 593,922 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
patterns 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 patient’s ability to pay nor are revenues recognized based on an assessment of the patient’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. Deferred Tax Assets 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, including tax planning strategies, in determining whether our net deferred
tax assets are more likely than not to be realized. 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. Presentation of Deferred Financing
Costs In the first quarter
of 2016, we adopted Accounting Standards Update (“ASU”) 2015-03, Simplifying the Presentation of Debt Issuance
Costs
Impact of new
accounting pronouncement
In thousands As
previously Impact
of As
currently
Prepaid expenses and other current assets $ 40,139 (1,153 ) 38,986
Deferred financing costs, net of current portion 3,696 (855 ) 2,841
Others 794,600 – 794,600
Total assets $ 838,435 $ (2,008 ) $ 836,427
Current portion of notes payable 23,076 (693 ) 22,383
Notes payable, net of current portion 601,229 (1,315 ) 599,914
Others 177,669 – 177,669
Total liabilities 801,974 (2,008 ) 799,966
Total equity 36,461 – 36,461
Total liabilities and
equity $ 838,435 $ (2,008 ) $ 836,427 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 developed
a Radiology Information System (RIS) software platform that has been awarded Meaningful Use certification. 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 $2.8 million and $3.3 million during the nine months
ended September 30, 2016, and 2015, respectively, relating to this incentive. Gain from Return of Common Stock In the second
quarter of 2016, we determined that certain pre-acquisition financial information of Diagnostic Imaging Group (“DIG”)
provided to us by the sellers contained errors. As a result of this, we negotiated and reached a settlement with the sellers of
DIG in June 2016 for the return of 958,536 shares of common stock which had a fair value of $5.0 million on the date of return.
Such return has been recognized as a gain from return of common stock in our statement of operations. Liquidity and Capital Resources We had cash and
cash equivalents of $358,000 and accounts receivable of $183.2 million at September 30, 2016, compared to cash and cash equivalents
of $446,000 and accounts receivable of $162.8 million at December 31, 2015. We had a working capital balance of $85.1 million
and $72.4 million at September 30, 2016 and December 31, 2015, respectively. We had net income attributable to RadNet, Inc. common
stockholders for the three months ended September 30, 2016 and 2015 of $1.6 million and $8.0 million, respectively. We had net
income attributable to RadNet, Inc. common stockholders for the nine months ended September 30, 2016 and 2015 of $3.5 million
and $6.8 million, respectively. We also had stockholders’ equity of $36.7 million and $32.6 million at September
30, 2016 and December 31, 2015, respectively. 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 facilities,
the acquisition of additional facilities 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. Based on our current
level of operations, we believe that cash flow from operations and available cash, together with available borrowings from our
senior secured credit facilities, will be adequate to meet our liquidity needs. Our future liquidity requirements will be for
working capital, capital expenditures, debt service and general corporate purposes. Our ability to meet our working capital and
debt service requirements, however, is subject to future economic conditions and to financial, business and other factors, many
of which are beyond our control. If we are not able to meet such requirements, we may be required to seek additional financing.
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 or their 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. At
September 30, 2016, our credit facilities were comprised of two tranches of term loans and a revolving credit facility. On July
1, 2016 (the “Restatement Effective Date”), we entered into Amendment No. 3 to Credit and Guaranty Agreement (the
“Restatement Amendment”) pursuant to which we amended and restated our then existing credit facilities on the terms
set forth in the Amended and Restated First Lien Credit and Guaranty Agreement dated July 1, 2016 (as amended from time to time,
the “First Lien Credit Agreement”). Pursuant to the First Lien Credit Agreement, we have issued $485 million of senior
secured term loans (the “First Lien Term Loans”) and established a $117.5 million senior secured revolving credit
facility (the “Revolving Credit Facility”). We have also entered into a Second Lien Credit and Guaranty Agreement
dated March 25, 2014 (as amended from time to time, the “Second Lien Credit Agreement”) pursuant to which we issued
$180 million of secured term loans (the “Second Lien Term Loans”). Included in our
condensed consolidated balance sheet at September 30, 2016 is $635.5 million of senior secured term loan debt (net of unamortized
discounts of $17.5 million), broken down by loan agreement as follows (in thousands):
As
of September 30, 2016
Face
Value Discount Total
First Lien Term Loans $ 485,000 $ (15,278 ) $ 469,722
Second Lien Term Loans $ 168,000 $ (2,193 ) $ 165,807
Total $ 653,000 $ (17,471 ) $ 635,529 Our $117.5 million
Revolving Credit Facility had a $1.6 million aggregate principal amount outstanding as of September 30, 2016. As of September
30, 2016, we were in compliance with all covenants under our First Lien Credit Agreement and our Second Lien Credit Agreement. Details on the
First Lien Credit Agreement and the Second Lien Credit Agreement follow. Restatement
Amendment and the First Lien Credit Agreement On
July 1, 2016, we entered into the Restatement Amendment pursuant to which we amended and restated our then existing credit facilities
on the terms set forth in the First Lien Credit Agreement. As of the Restatement Effective Date, our first lien credit facilities
consisted of a Credit and Guaranty Agreement that we entered into on October 10, 2012 (the “Original First Lien Credit Agreement”),
as subsequently amended by a first amendment dated April 3, 2013 (the “2013 Amendment”), a second amendment dated
March 25, 2014 (the “2014 Amendment”), and a joinder agreement dated April 30, 2015 (the “2015 Joinder”
and collectively with the Original First Lien Credit Agreement, the 2013 Amendment and the 2014 Amendment, the “Prior First
Lien Credit Agreement”). The First Lien Credit Agreement increased the aggregate principal amount of First Lien Term Loans
to $485.0 million and increased the Revolving Credit Facility to $117.5 million. Proceeds from the First Lien Credit Agreement
were used to repay the previously outstanding first lien loans under the Prior First Lien Credit Agreement, make a $12.0 million
principal payment of the Second Lien Term Loans, pay costs and expenses related to the First Lien Credit Agreement and provide
approximately $10.0 million for general corporate purposes. Interest.
Payments.
Maturity
Date. Incremental
Feature: minus Revolving
Credit Facility: Second Lien Credit Agreement On March
25, 2014, we entered into the Second Lien Credit Agreement to provide for, among other things, the borrowing of $180.0 million
of Second Lien Term Loans. The proceeds from the Second Lien Term Loans were used to redeem our 10 3/8% senior unsecured notes,
due 2018, to pay the expenses related to the transaction and for general corporate purposes. On July 1, 2016, in conjunction with
the Restatement Amendment, a $12.0 million principal payment was made on the Second Lien Term Loans. The
Second Lien Credit Agreement provides for the following: Interest.
Payments.
Termination. |
