| 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, 2016, 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, 2016, as amended. RESTATEMENT DUE TO ADOPTION OF ACCOUNTING PRONOUNCEMENT
- In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-09 (“ASU 2016-09”), Compensation—Stock Compensation
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
In thousands except per share data As previously reported Impact of adoption As currently reported
Benefit from income taxes $ 1,180 $ 326 $ 1,506
Net loss (1,433 ) 326 (1,107 )
Net loss attributable to Radnet Inc. common shareholders (1,723 ) 326 (1,397 )
Basic and diluted loss per share (0.04 ) 0.01 (0.03 )
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands As previously reported Impact of adoption As currently reported
Net loss $ (1,433 ) $ 326 $ (1,107 )
Deferred taxes (1,286 ) (326 ) (1,612 )
Others 2,683 – 2,683
Net decrease in cash and cash equivalents $ (36 ) $ – $ (36 )
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
In thousands As previously reported Impact of adoption As currently reported
Net loss $ (1,433 ) $ 326 $ (1,107 )
Foreign currency translation adjustments 4 – 4
Comprehensive loss (1,429 ) 326 (1,103 )
Less comprehensive income attributible to non-controlling interests 290 – 290
Comprehensive loss attributable to Radnet Inc. common shareholders $ (1,719 ) $ 326 $ (1,393 ) 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 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 in 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 March 31,
2017 2016
Commercial insurance $ 140,995 $ 131,491
Medicare 47,678 45,820
Medicaid 6,733 7,023
Workers' compensation/personal injury 9,057 9,514
Other (1) 8,287 6,994
Service fee revenue, net of contractual allowances and discounts 212,750 200,842
Provision for bad debts (11,646 ) (10,304 )
Net service fee revenue 201,104 190,538
Revenue under capitation arrangements 27,909 25,850
Total net revenue $ 229,013 $ 216,388 _____________________ (1) 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. 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. 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
$250,000 and $2.8 million during the three months ended March 31, 2017 and 2016, respectively, relating to this incentive. 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 $1.9 million and $2.0 million, as of March 31, 2017
and December 31, 2016, respectively and related to the Company’s line of credit. In conjunction with our Fourth
Amendment, a net addition of approximately $27,000 was added to deferred financing costs. See Note 5, Revolving Credit Facility,
Notes Payable, and Capital Leases for more information. INVENTORIES - Inventories, consisting mainly
of medical supplies, are stated at the lower of cost or net realizable value 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, 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- Goodwill at March 31, 2017 totaled
$240.0 million. Goodwill is recorded as a result of business combinations. Management evaluates goodwill at a minimum, on an annual
basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. We tested both
goodwill for impairment on October 1, 2016, noting no impairment, and have not identified any indicators of impairment through
March 31, 2017. Activity in goodwill for the three months ended March 31, 2017 is provided below (in thousands):
Balance as of December 31, 2016 $ 239,553
Goodwill acquired through the acquisition of Resolution Imaging Medical Corp 1,901
Goodwill acquired through the acquisition of MRI Centers of Torrance 401
Goodwill included in assets held for sale (1,901 )
Balance as of March 31, 2017 $ 239,954 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. 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 March
31, 2017, 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
three to five years and expire five to ten years from date of grant. 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. See Note 6 Stock-Based Compensation for more information. COMPREHENSIVE INCOME - ASC 220, Comprehensive
Income, DERIVATIVE INSTRUMENTS -
In the fourth quarter of 2016, the Company entered into two forward interest rate cap agreements ("2016 Caps"). The 2016
Caps will mature in September and October 2020. The 2016 Caps had notional amounts of $150,000,000 and $350,000,000, respectively,
which were designated at inception as cash flow hedges of future cash interest payments associated with portions of the Company’s
variable rate bank debt. Under these arrangements, the Company purchased a cap on 3 month LIBOR at 2.0%. The Company is liable
for a $5.3 million premium to enter into the caps which is being accrued over the life of the agreements. At inception, we designated
our interest rate cap agreements as cash flow hedges of floating-rate borrowings. In accordance with ASC Topic 815,
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 initially reported as a component of accumulated other comprehensive
income in the consolidated statement of equity. The remaining gain or loss, if any, is recognized currently in earnings.
As of March 31, 2017, the cash flow hedges were deemed to be effective. No amount is expected to be reclassified into earnings
in the next twelve months. Below represents as of March
31, 2017 the fair value of our interest rate caps and loss recognized: The fair value of derivative instruments as of
March 31, 2017 is as follows (amounts in thousands):
Derivatives Balance Sheet Location Fair Value – Asset Derivatives
Interest rate contracts Current and other non-current liabilities ($435) A tabular presentation of the effect of derivative
instruments on our consolidated statement of comprehensive loss is as follows (amounts in thousands):
Effective Interest Rate Cap Amount of Loss Recognized on Derivative Location of Loss Recognized in Income on Derivative
Interest rate contracts ($778) Other Comprehensive Loss 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
values of certain of our financial assets that are subject to fair value measurements, and the classification of these assets on
our consolidated balance sheets, as follows (in thousands):
As of March 31, 2017
Level 1 Level 2 Level 3 Total
Current and other non-current liabilities
Interest Rate Contracts $ – $ (435 ) $ – $ (435 )
As of December 31, 2016
Level 1 Level 2 Level 3 Total
Current assets
Interest Rate Contracts $ – $ 818 $ – $ 818 The estimated fair value of these contracts,
which are discussed in Note 2, 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. The table below summarizes the estimated fair
value and carrying amount of our long-term debt as follows (in thousands):
As of March 31, 2017
Level 1 Level 2 Level 3 Total Fair Value Total Face Value
First Lien Term Loans $ – $ 475,830 $ – $ 475,830 $ 472,875
Second Lien Term Loans $ – 168,840 $ – 168,840 $ 168,000
As of December 31, 2016
Level 1 Level 2 Level 3 Total Total Face Value
First Lien Term Loans $ – $ 483,129 $ – $ 483,129 $ 478,938
Second Lien Term Loans – 167,580 – 167,580 168,000 Our revolving credit facility had no aggregate
principal amount outstanding as of March 31, 2017. The estimated fair value of our long-term debt,
which is discussed in Note 5, 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):
Three Months Ended March 31,
2017 2016
Net loss attributable to RadNet, Inc. common stockholders $ (1,210 ) $ (1,397 )
BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS
Weighted average number of common shares outstanding during the period 46,560,017 46,581,491
Basic and diluted net loss per share attributable to RadNet, Inc. common stockholders $ (0.03 ) $ (0.03 ) For the three months ended March 31, 2017 and
2016 we excluded all outstanding options and restricted stock awards in the calculation of diluted earnings per share because their
effect would be antidilutive. INVESTMENT AT COST - On March 24, 2017,
we acquired a 12.5% equity interest in Medic Vision – Imaging Solutions Ltd for $1.0 million. We also have an option to
acquire an additional 12.5% equity interest for $1.4 million exercisable within one year from the initial share purchase date.
Medic Vision, based in Israel, specializes in software packages that provide compliant radiation dose structured reporting and
enhanced images from reduced dose CT scans. In accordance with ASC 325-20, Cost Method Investments, 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, 2017. Joint venture investment and financial information The following table is a summary of our investment
in joint ventures during the quarters ended March 31, 2017 (in thousands):
Balance as of December 31, 2016 $ 43,509
Equity in earnings in these joint ventures 1,928
Distribution of earnings (2,323 )
Contributions in a new joint venture 3,000
Balance as of March 31, 2017 $ 46,114 We received management service fees from the
centers underlying these joint ventures of approximately $3.1 million and $2.9 million for the quarters ended March 31, 2017 and
2016, respectively. 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 balance sheet data for these joint ventures as of March 31, 2017 and December 31, 2016 and income
statement data for the three months ended March 2017 and 2016 (in thousands):
Balance Sheet Data: March 31, 2017 December 31, 2016
Current assets $ 40,737 $ 40,093
Noncurrent assets 101,423 100,146
Current liabilities (16,408 ) (14,077 )
Noncurrent liabilities (42,304 ) (44,405 )
Total net assets $ 83,448 $ 81,757
Book value of RadNet joint venture interests $ 39,741 $ 38,538
Cost in excess of book value of acquired joint venture interests 6,373 4,970
Total value of Radnet joint venture interests $ 46,114 $ 43,509
Total book value of other joint venture partner interests $ 43,707 $ 43,219
Income statement data for the three months ended March 31, 2017 2016
Net revenue $ 41,251 $ 39,220
Net income $ 4,130 $ 5,614 |
