| SIGNIFICANT ACCOUNTING POLICIES | NOTE 2 - 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, 2017. 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, 2017. On January 1, 2018, the Company adopted
the new revenue recognition accounting standard issued by the Financial Accounting Standards Board (“FASB”) and codified
in the ASC as topic 606 (“ASC 606”). The revenue recognition standard in ASC 606 outlines a single comprehensive model
for recognizing revenue as performance obligations, defined in a contract with a customer as goods or services transferred to the
customer in exchange for consideration, are satisfied. The standard also requires expanded disclosures regarding the Company’s
revenue recognition policies and significant judgments employed in the determination of revenue. REVENUES - The Company applied the modified retrospective
approach to all contracts when adopting ASC 606. As a result, at the adoption of ASC 606 the majority of what was previously classified
as the provision for bad debts in the statement of operations is now reflected as implicit price concessions (as defined in ASC
606) and therefore included as a reduction to net operating revenues in 2018. For changes in credit issues not assessed at the
date of service, the Company will prospectively recognize those amounts in other operating expenses on the statement of operations.
For periods prior to the adoption of ASC 606, the provision for bad debts has been presented consistent with the previous revenue
recognition standards that required it to be presented separately as a component of net operating revenues. Additionally, upon
adoption of ASC 606 the allowance for doubtful accounts of approximately $13.6 million as of January 1, 2018 was reclassified
as a component of net patient accounts receivable. Other than these changes in presentation on the condensed consolidated statement
of operations and condensed consolidated balance sheet, the adoption of ASC 606 did not have a material impact on the consolidated
results of operations for the three and six months ended June 30, 2018, and the Company does not expect it to have a material impact
on its consolidated results of operations for the remainder of 2018 and on a prospective basis. Our revenues generally relate to net patient
fees received from various payers 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 payer (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 payers. The payment arrangements with third-party payers 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 and the frequent changes in managed
care contractual terms resulting from contract renegotiations and renewals. As it relates to BRMG centers, this service fee
revenue includes payments for both the professional medical interpretation revenue recognized by BRMG as well as the payment for
all other aspects related to our providing the imaging services, for which we earn management fees from BRMG. As it relates to
non-BRMG 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 the estimated amounts
we expect to be entitled to receive from patients and third-party payers. Estimates of contractual allowances under managed care
and commercial insurance plans are based upon the payment terms specified in the related contractual agreements. Revenues related
to uninsured patients and uninsured copayment and deductible amounts for patients who have health care coverage may have discounts
applied (uninsured discounts and contractual discounts). 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. As part of the adoption of ASC 606, the Company
elected two of the available practical expedients provided for in the standard. First, the Company did not adjust the transaction
price for any financing components as those were deemed to be insignificant. Additionally, the Company expensed all incremental
customer contract acquisition costs as incurred as such costs are not material and would be amortized over a period less than one
year. 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. The Company’s total net revenues during
the three and six months ended June 30, 2018 and 2017 are presented in the table below based on an allocation of the estimated
transaction price with the patient between the primary patient classification of insurance coverage (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2018 2017 2018 2017
Commercial insurance $ 145,538 $ 142,691 $ 281,981 $ 283,683
Medicare 50,302 47,611 95,867 95,291
Medicaid 6,928 6,525 13,179 13,259
Workers' compensation/personal injury 8,660 8,867 17,407 17,925
Other (1) 7,988 8,362 15,150 16,648
Service fee revenue, net of contractual allowances and discounts 219,416 214,056 423,584 426,806
Provision for bad debts – (11,854 ) – (23,500 )
Net service fee revenue 219,416 202,202 423,584 403,306
Revenue under capitation arrangements 24,979 27,812 52,203 55,721
Total net revenue $ 244,395 $ 230,014 $ 475,787 $ 459,027 ___________________
(1) Other consists of revenue from teleradiology services, consulting fees and software revenue. The collection of outstanding receivables for
Medicare, Medicaid, managed care payers, other third-party payers and patients is our primary source of cash and is critical to
our operating performance. The primary collection risks relate to uninsured patient accounts, including patient accounts for which
the primary insurance carrier has paid the amounts covered by the applicable agreement, but patient responsibility amounts (deductibles
and copayments) remain outstanding. Implicit price concessions relate primarily to amounts due directly from patients. Estimated
implicit price concessions are recorded for all uninsured accounts, regardless of the aging of those accounts. Accounts are written
off when all reasonable internal and external collection efforts have been performed. The estimates for implicit price concessions
are based upon management’s assessment of historical write offs and expected net collections, business and economic conditions,
trends in federal, state and private employer health care coverage and other collection indicators. Management relies on the results
of detailed reviews of historical write offs and collections at facilities that represent a majority of our revenues and accounts
receivable (the “hindsight analysis”) as a primary source of information in estimating the collectability of our accounts
receivable. We perform the hindsight analysis quarterly and believe our quarterly updates to the estimated implicit price concession
amounts provide reasonable estimates of our revenues and valuations of our accounts receivable. These routine, quarterly changes
in estimates have not resulted in material adjustments to the valuations of our accounts receivable or period-to-period comparisons
of our results of operations. RECLASSIFICATION – We have reclassified
certain amounts within other income and expenses for 2017 to conform to our 2018 presentation. 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. On June 30, 2018, we entered into a factoring
arrangement with a third party and sold certain accounts receivable under a non-recourse agreement. The amount factored under this
agreement was $10.5 million and the cost of factoring was approximately $440,000. Proceeds will be received as a combination of
cash and payments on a note receivable through August of 2020 bearing an annual rate of 4%, and will be reflected as operating
activities on our statement of cash flows and on our balance sheet as prepaid expenses and other current assets for the current
portion and deposits and other for the long term portion. We do not utilize factoring arrangements as an integral part of our financing
for working capital. 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 $1.6 million and $1.9 million, as of June 30, 2018
and December 31, 2017, respectively and related to the Company’s line of credit. 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 - In January 2017, the
FASB issued ASU No. 2017-01 (“ASU 2017-01”), Clarifying the Definition of a Business When the qualifications for business combination
accounting treatment are met, it 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, 2018 totaled $275.3
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, 2017, noting no impairment, and have not identified any indicators of impairment through June 30,
2018. Activity in goodwill for the six months ended June 30, 2018 is provided below (in thousands):
Balance as of December 31, 2017 $ 256,776
Goodwill acquired through the acquisition of Imaging Services Company of New York, LLC 2,692
Goodwill acquired through the acquisition of certain assets of MemorialCare Medical Foundation 10,158
Goodwill transferred to assets held for sale (1,059 )
Goodwill acquired through the acquisition of Women's Imaging Specialists in Healthcare 4,089
Goodwill acquired through the acquisition of Valley Metabolic Imaging 1,469
Goodwill acquired through the acquisition of Sierra Imaging Associates 1,147
Balance as of June 30, 2018 $ 275,272 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. The Company recorded an income tax expense of
$2.5 million, or an effective tax rate of 27.9%, for the three months ended June 30, 2018 compared to income tax expense for the
three months ended June 30, 2017 of $3.5 million, or an effective tax rate of 38.5%. The Company recorded an income tax expense
of $8,000, or an effective tax rate of 0.8% for the six months ended June 30, 2018 compared to income tax expense for the six months
ended June 30, 2017 of $3.1 million, or an effective tax rate of 39.2%. The income tax rates for the three and six months
ended June 30, 2018 diverge from the federal statutory rate primarily due to (i) noncontrolling interests due to the controlled
partnerships; (ii) effects of state income taxes; (iii) excess tax benefits attributable to share-based compensation; and adjustments
associated with uncertain tax positions. U.S. GAAP requires that the impact of tax legislation
be recognized in the period in which the law was enacted. As a result, the Company recorded provisional amounts due to the revaluation
of deferred tax assets and liabilities and the transition tax on deemed repatriation of accumulated foreign income during the
year ended December 31, 2017. Both of these tax charges represent provisional amounts and the Company’s current best estimates.
Any adjustments recorded to the provisional amounts will be included as an adjustment to tax expense. The provisional amounts
incorporate assumptions made based upon the Company’s current interpretation of the Tax Reform Act and may change as the
Company receives additional clarification and implementation guidance. The Company is not under examination in any jurisdiction
and the years ended December 31, 2017, 2016, and 2015 remain subject to examination. The Company believes no significant changes
in the unrecognized tax benefits will occur within the next 12 months. 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. 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 the our variable rate bank debt. Under these arrangements,
the Company 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 agreements. At inception, we designated our 2016 Caps 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 of the hedge (i.e. change in fair value) is reported
as a component of accumulated other comprehensive income in the consolidated statement of equity. See Fair Value Measurements
section below for the fair value of the 2016 Caps at June 30, 2018. 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, 2018
Account April 1, 2018 Balance Amount of gain recognized on derivative June 30, 2018 Balance Location
Other Comprehensive Income 2,725 1,199 3,924 Current Assets & Equity
For the six months ended June 30, 2018
Account Jan 1, 2018 Balance Amount of gain recognized on derivative June 30, 2018 Balance Location
Other Comprehensive Income (370 ) 4,294 3,924 Current Assets & Equity 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, 2018
Level 1 Level 2 Level 3 Total
Current and other non-current liabilities
Interest Rate Contracts $ – $ 5,159 $ – $ 5,159
As of December 31, 2017
Level 1 Level 2 Level 3 Total
Current assets
Interest Rate Contracts $ – $ (595 ) $ – $ (595 ) 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, 2018
Level 1 Level 2 Level 3 Total Fair Value Total Face Value
First Lien Term Loans $ – $ 605,240 $ – $ 605,240 $ 603,731
As of December 31, 2017
Level 1 Level 2 Level 3 Total Total Face Value
First Lien Term Loans $ – $ 628,801 $ – $ 628,801 $ 620,272
Our revolving credit facility had no aggregate
principal amount outstanding as of June 30, 2018. 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,
2018 2017 2018 2017
Net income (loss) attributable to RadNet, Inc.'s common stockholders $ 5,406 $ 5,310 $ (1,932 ) $ 4,100
BASIC NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO RADNET, INC.'S COMMON STOCKHOLDERS
Weighted average number of common shares outstanding during the period 47,969,003 46,756,276 47,896,216 46,662,420
Basic net income (loss) per share attributable to RadNet, Inc.'s common stockholders $ 0.11 $ 0.11 $ (0.04 ) $ 0.09
DILUTED NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO RADNET, INC.'S COMMON STOCKHOLDERS
Weighted average number of common shares outstanding during the period 47,969,003 46,756,276 47,896,216 46,662,420
Add nonvested restricted stock subject only to service vesting 409,162 250,153 – 198,477
Add additional shares issuable upon exercise of stock options and warrants 147,868 189,469 – 207,666
Weighted average number of common shares used in calculating diluted net income per share 48,526,033 47,195,898 47,896,216 47,068,563
Diluted net income (loss) per share attributable to RadNet, Inc.'s common stockholders $ 0.11 $ 0.11 $ (0.04 ) $ 0.09
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 – 325,575 For the six months ended June 30, 2018 we excluded all outstanding
options and restricted stock awards in the calculation of diluted earnings per share because their effect would be antidilutive. EQUITY INVESTMENTS AT FAIR VALUE– In January
2016, the FASB issued ASU 2016-01, which amends the measurement, presentation and disclosure requirements for equity investments,
other than those accounted for under the equity method or that require consolidation of the investee. The ASU eliminates the classification
of equity investments as available-for-sale with any changes in fair value of such investments recognized in other comprehensive
income, and requires entities to measure equity investments at fair value, with any changes in fair value recognized in net income.
If there is no readily determinable fair value, the guidance allows entities the ability to measure investments at cost less impairment,
whereby impairment is based on a qualitative assessment. We adopted this ASU on January 1, 2018, and there was no cumulative
effect of adoption. As of June 30, 2018, we have two equity investments
for which a fair value is not readily determinable and therefore the total amounts invested are recognized at cost as follows: Medic Vision: Medic Vision, based in Israel, specializes in
software packages that provide compliant radiation dose structured reporting and enhanced images from reduced dose CT scans. On March 24, 2017, we acquired an initial 12.5%
equity interest in Medic Vision – Imaging Solutions Ltd for $1.0 million. We also received an option to exercise warrants
to acquire up to an additional 12.5% equity interest for $1.4 million within one year from the initial share purchase date, if
exercised in full. On March 1, 2018 we exercised our warrant in part and acquired an additional 1.96% for $200,000. Our initial
equity interest has been diluted to 12.25% and our total equity investment stands at 14.21%. In accordance with accounting guidance , Turner Imaging: Turner
Imaging Systems, based in Utah, 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.. INVESTMENT IN JOINT VENTURES – We have
15 unconsolidated joint ventures with ownership interests ranging from 25% 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, 2018. Formation of a joint venture: On April 12, 2018 we acquired a 25% economic
interest in Nulogix, Inc. for $2.0 million. The Company and Nulogix will collaborate on projects to improve practices in the imaging
industry. As we do not have a controlling economic interest in Nulogix, the investment is accounted for under the equity method. Joint venture investment and financial information The following table is a summary of our investment
in joint ventures during the six months ended June 30, 2018 (in thousands):
Balance as of December 31, 2017 $ 52,435
Equity in earnings in these joint ventures 6,725
Distribution of earnings (7,083 )
Equity contributions in existing and purchase of interest in joint ventures 2,000
Balance as of June 30, 2018 $ 54,077 We charged management service fees from the centers
underlying these joint ventures of approximately $3.3 million and $3.5 million for the quarters ended June 30, 2018 and 2017, respectively
and $7.1 million and $6.6 million for the six months ended June 30, 2018 and 2017 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, 2018 and December 31, 2017 and income statement data for the six months ended
June 2018 and 2017 (in thousands):
Balance Sheet Data: June 30, 2018 December 31, 2017
Current assets $ 42,880 $ 47,813
Noncurrent assets 106,758 107,481
Current liabilities (14,324 ) (16,655 )
Noncurrent liabilities (37,745 ) (42,072 )
Total net assets $ 97,569 $ 96,567
Book value of RadNet joint venture interests $ 45,964 $ 45,935
Cost in excess of book value of acquired joint venture interests 8,113 6,500
Total value of Radnet joint venture interests $ 54,077 $ 52,435
Total book value of other joint venture partner interests $ 51,605 $ 50,632
Income statement data for the six months ended June 30, 2018 2017
Net revenue $ 91,559 $ 86,981
Net income $ 14,174 $ 10,285 |
