| 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. ADOPTION OF ASU
2016-09 – Compensation – Stock Compensation - 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
Impact
of As
currently
Provision for income taxes $ (1,073 ) $ 323 $ (750 )
Net income 1,949 323 2,272
Net income attributable
to Radnet Inc. common shareholders 1,902 323 2,225
Basic and diluted income per share 0.04 0.01 0.05 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands As
Impact
of As
currently
Net income $ 1,949 $ 323 $ 2,272
Deferred taxes 333 (323 ) 10
Others (2,295 ) – (2,295 )
Net
decrease in cash and cash equivalents $ (13 ) $ – $ (13 ) CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
In thousands As
Impact
of As
currently
Net income $ 1,949 $ 323 $ 2,272
Foreign currency translation adjustments (16 ) – (16 )
Comprehensive income 1,933 323 2,256
Less comprehensive income attributable to non-controlling
interests 47 – 47
Comprehensive
income attributable to Radnet Inc. common shareholders $ 1,886 $ 323 $ 2,209 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 Six Months Ended
June 30, June 30,
2017 2016 2017 2016
Commercial insurance $ 142,691 $ 134,962 $ 283,683 $ 266,439
Medicare 47,611 45,558 95,291 91,385
Medicaid 6,525 6,890 13,259 13,915
Workers' compensation/personal injury 8,867 8,966 17,925 18,485
Other (1) 8,362 7,383 16,648 14,377
Service fee revenue, net of contractual allowances and discounts 214,056 203,759 426,806 404,601
Provision for bad debts (11,854 ) (12,326 ) (23,500 ) (22,630 )
Net service fee revenue 202,202 191,433 403,306 381,971
Revenue under capitation arrangements 27,812 27,132 55,721 52,982
Total net revenue $ 230,014 $ 218,565 $ 459,027 $ 434,953 ___________________ (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 six months ended June 30, 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 $1.8 million and $2.0 million,
as of June 30, 2017 and December 31, 2016, respectively and related to the Company’s line of credit. In conjunction with
our Fourth Amendment to our First Lien Credit Agreement (as defined below), 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 June 30, 2017 totaled $244.5 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 goodwill for impairment on October 1, 2016, noting no impairment, and have not identified any indicators
of impairment through June 30, 2017. Activity in goodwill for the six months ended June 30, 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 disposed through
the transfer to Santa Monica Imaging Group JV (1,901 )
Goodwill acquired through
the acquisition of D&D Diagnostics, Inc. 1,519
Goodwill acquired through
the acquisition of Stockton MRI, Inc. 3,101
Goodwill
disposed through the sale of Hematology Oncology (110 )
Balance as of June
30, 2017 $ 244,464 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 that we adopted in 2006 and which we first amended and restated as of April 20, 2015,
and again on March 9, 2017 (the “Restated Plan”). The Restated Plan was approved by our stockholders at our annual
stockholders meeting on June 8, 2017. As of June 30, 2017, we have reserved for issuance under the Restated Plan 14,000,000 shares
of common stock. We can issue options, stock awards, stock appreciation rights, stock units 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, we 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 our variable rate bank debt. Under these arrangements, we purchased a cap on 3 month LIBOR at 2.0%. We are liable for a $5.3
million premium to enter into the caps which is being accrued over the life of the 2016 Caps. 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 June 30, 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 June 30, 2017 the fair value of our 2016 Caps and loss recognized: The
fair value of derivative instruments as of June 30, 2017 is as follows (amounts in thousands):
Derivatives Balance Sheet Location Fair Value –
Liabilities
Interest rate contracts Current and other non-current liabilities $(1,970) A tabular presentation
of the effect of derivative instruments on our consolidated statement of comprehensive loss is as follows (amounts in thousands):
For
the three months ended June 30, 2017
Effective
Interest Rate Cap Amount
of Loss Recognized on Derivative Location
of Loss Recognized in
Interest rate contracts ($944) Other Comprehensive Loss
For
the six months ended June 30, 2017
Effective Interest
Rate Cap Amount of Loss
Recognized on Derivative Location of
Loss Recognized in
Interest rate contracts ($1,722) 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 June 30,
2017
Level
1 Level
2 Level
3 Total
Current and other non-current liabilities
Interest Rate Contracts $ – $ (1,970 ) $ – $ (1,970 )
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 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 June 30, 2017
Level
1 Level
2 Level
3 Total
Fair Value Total
Face Value
First Lien Term Loans $ – $ 468,564 $ – $ 468,564 $ 466,813
Second Lien Term Loans $ – $ 169,260 $ – 169,260 $ 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 June 30, 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 Six Months Ended
June
30, June
30,
2017 2016 2017 2016
Net income attributable
to RadNet, Inc.'s common stockholders $ 5,310 $ 3,622 $ 4,100 $ 2,225
BASIC NET INCOME PER SHARE
ATTRIBUTABLE TO RADNET, INC.'S COMMON STOCKHOLDERS
Weighted
average number of common shares outstanding during the period 46,756,276 46,558,944 46,662,420 46,576,631
Basic
net income per share attributable to RadNet, Inc.'s common stockholders $ 0.11 $ 0.08 $ 0.09 $ 0.05
DILUTED NET INCOME PER
SHARE ATTRIBUTABLE TO RADNET, INC.'S COMMON STOCKHOLDERS
Weighted average number
of common shares outstanding during the period 46,756,276 46,558,944 46,662,420 46,576,631
Add nonvested restricted
stock subject only to service vesting 250,153 77,162 198,477 155,447
Add
additional shares issuable upon exercise of stock options and warrants 189,469 246,277 207,666 228,148
Weighted
average number of common shares used in calculating diluted net income per share 47,195,898 46,882,383 47,068,563 46,960,226
Diluted
net income per share attributable to RadNet, Inc.'s common stockholders $ 0.11 $ 0.08 $ 0.09 $ 0.05
Stock options excluded from
the computation of diluted per share amounts:
Weighted average shares
for which the exercise price exceeds average market price of common stock 165,000 325,626 337,575 325,626 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 14 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 June 30, 2017. Joint venture investment and
financial information The following
table is a summary of our investment in joint ventures during the quarter ended June 30, 2017 (in thousands):
Balance as of December 31, 2016 $ 43,509
Equity in earnings in these joint ventures 4,922
Distribution of earnings (3,993 )
Equity contributions in
existing joint ventures 4,062
Balance as of June 30, 2016 $ 48,500 We received management
service fees from the centers underlying these joint ventures of approximately $3.5 million and $3.0 million for the quarters
ended June 30, 2017 and 2016, respectively and $6.6 million and $5.9 million for the six months ended June 30, 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 June 30, 2017 and December 31, 2016 and income statement
data for the six months ended June 2017 and 2016 (in thousands):
Balance Sheet Data: June
30, 2017 December
31, 2016
Current assets $ 41,059 $ 40,093
Noncurrent assets 106,421 100,146
Current liabilities (16,342 ) (14,077 )
Noncurrent liabilities (42,680 ) (44,405 )
Total net assets $ 88,458 $ 81,757
Book value of RadNet joint venture interests $ 42,012 $ 38,538
Cost in excess of book
value of acquired joint venture interests 6,488 4,970
Total value of Radnet
joint venture interests $ 48,500 $ 43,509
Total book value of other
joint venture partner interests $ 46,446 $ 43,219
Income statement data for the six months ended June
30, 2017 2016
Net revenue $ 86,981 $ 80,917
Net income $ 10,285 $ 13,044 |
