RADNET, INC. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and notes thereto for the year endedDecember 31, 2020 included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 filed with theU.S. Securities and Exchange Commission (SEC) onMarch 15, 2021 . . Forward-Looking Statements This quarterly report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements reflect current views about future events and are based on our currently available financial, economic and competitive data and on current business plans. Actual events or results may differ materially depending on risks and uncertainties that may affect our operations, markets, services, prices and other factors. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "intend," "plan," "anticipate," "believe," "estimate," "predict," "potential," "continue," "assumption" or the negative of these terms or other comparable terminology. Forward-looking statements in this current report include, among others, statements we make regarding • our ability to successfully integrate new operations, to our business and the anticipated benefits to be derived from our investments, acquisitions, and joint ventures; •anticipated trends in our revenues, operating expenses and liquidity and cash flows, including our financial guidance and anticipated effects of cost-savings efforts; •the ongoing impact of the COVID-19 pandemic on our business, suppliers, payors, customers, referral sources, partners, patients and employees, including (i) government's unprecedented action regarding existing and potential restrictions and/or obligations related to citizen and business activity to contain the virus; (ii) the consequences of an economic downturn resulting from the impacts of COVID-19 and the possibility of a global economic recession; (iii) the impact of the volume of canceled or rescheduled procedures, whether as a result of government action or patient choice; (iv) measures we are taking to respond to the COVID-19 pandemic, including changes to business practices; (v) the impact of government and administrative regulation, guidance and appropriations; (vi) changes in our revenues due to declining patient procedure volumes, changes in payor mix; (vii) potential increased expenses or workforce disruptions related to our employees that could lead to unavailability of key personnel; (viii) workforce disruptions related to our key partners, suppliers, vendors and others we do business with; (ix) the impact of return to work orders in certain states in which we operate; and (x) increased credit and collectability risks; and 26
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•our future liquidity and our continuing ability to service and remain in compliance with applicable debt covenants or refinance our current indebtedness. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, the factors included in "Risk Factors," in our annual report on Form 10-K for the fiscal year endedDecember 31, 2020 or supplemented by the information in Part II- Item 1A below. You should consider the inherent limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of predictions contained in such forward-looking statements. These forward-looking statements speak only as of the date when they are made. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Overview
We are a leading national provider of freestanding, fixed-site outpatient diagnostic imaging services inthe United States based on number of locations and annual imaging revenue. AtSeptember 30, 2021 , we operated, directly or indirectly through joint ventures with hospitals, 350 centers located inArizona ,California ,Delaware ,Florida ,Maryland ,New Jersey , andNew York . Our centers provide physicians with imaging capabilities to facilitate the diagnosis and treatment of diseases and disorders and may reduce unnecessary invasive procedures, often reducing the cost and amount of care for patients. Our services include magnetic resonance imaging (MRI), computed tomography (CT), positron emission tomography (PET), nuclear medicine, mammography, ultrasound, diagnostic radiology (X-ray), fluoroscopy and other related procedures. In addition to our imaging services, we own and operate a number of technology businesses that are complementary to our imaging business. Our subsidiary eRAD, Inc., develops and sells computerized systems for the diagnostic imaging industry, which provide the technology to distribute, display, store and retrieve digital images. We have made a number of investments in Artificial Intelligence (AI) with our purchases of Nulogix and DeepHealth, combined with our investment in Whiterabbit.ai and our collaborative arrangement with Hologic. Our current AI focus is to develop solutions in machine learning to assist radiologists and other clinicians in interpreting images and improving patient care, initially in the field of mammography. We derive substantially all of our revenue, directly or indirectly, from fees charged for the diagnostic imaging services performed at our facilities. The following table shows our facilities in operation and revenues for the nine months endedSeptember 30, 2021 andSeptember 30, 2020 : Nine Months Ended September 30, 2021 2020 Facilities in operation 350 334 Net revenues (millions) $ 982$ 764 Our revenue is derived from a diverse mix of payors, including private, managed care capitated and government payors. We believe our payor diversity mitigates our exposure to possible unfavorable reimbursement trends within any one payor class. In addition, our experience with capitation arrangements over the last several years has provided us with the expertise to manage utilization and pricing effectively, resulting in a predictable stream of revenue. Our total service revenue during the nine months endedSeptember 30, 2021 and 2020 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): 27
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Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Commercial insurance $ 185,723 $ 160,524 $ 555,355 $ 412,415
Medicare 73,163 62,704 207,977 154,847
Medicaid 8,707 7,098 26,198 18,072
Workers' compensation/personal injury 11,554 7,183 32,507 25,705
Other patient revenue 4,800 8,328 14,766 17,211
Management fee revenue 5,255 2,675 16,007 8,574
Teleradiology and Software revenue 2,564 2,349 7,611 8,319
Other 3,641 5,869 10,058 15,617
Service fee revenue 295,407 256,730 870,479 660,760
Revenue under capitation arrangements 37,283 35,046 111,449 103,145
Total service revenue $ 332,690 $ 291,776 $ 981,928 $ 763,905
Recent Developments
The discussion of our results below centers on our performance through the third
quarter ended September 30, 2021 . During the same period in 2020, with the onset
of the novel strain of the coronavirus ("COVID-19"), we began experiencing
reduced procedure volumes at the end of the first quarter which intensified
through mid year. In response to the pandemic, we adjusted our business
operations, inclusive of concentrating patient traffic to larger imaging
centers, negotiating payment terms with vendors and landlords, initiating
employee furloughs, compensation reductions, and telecommuting.
As 2021 comes to a close, our procedure volume has returned to pre-COVID-19
levels and our business has resumed normal operations. We expect that the cost
saving measures implemented in 2020 will continue to be beneficial to our
financial position in 2021. In addition, we have continued to invest and
position for future growth. Year to date, we have acquired 19 new radiology
centers in
Equity Investments, Acquisitions and Dispositions, and Joint Venture Activity We have developed our medical imaging business through a combination of organic growth, equity investments, acquisitions and joint venture formations. The information below updates our activity of such matters contained in our annual report on Form 10-K for the year endedDecember 31, 2020 . Equity Investments As ofSeptember 30, 2021 , we have three 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 Imaging Solutions Ltd. , based inIsrael , specializes in software packages that provide compliant radiation dose structured reporting and enhanced images from reduced dose CT scans. Our investment of$1.2 million represents a 14.21% equity interest in the company. No observable price changes or impairment in our investment was identified as ofSeptember 30, 2021 . Turner Imaging Systems, based inUtah , 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. OnFebruary 1, 2018 , we purchased 2.1 million preferred shares in Turner Imaging Systems for$2.0 million . OnJanuary 1, 2019 we funded a convertible promissory note in the amount of$0.1 million that converted into an additional 80,000 shares effectiveDecember 21, 2019 . No observable price changes or impairment in our investment was identified as ofSeptember 30, 2021 . WhiteRabbit.ai Inc., based inCalifornia , is currently developing an artificial intelligence suite which aims to improve the speed and accuracy of cancer detection in radiology and improve patient care. OnNovember 5, 2019 we acquired an equity interest in the company for$1.0 million and also loaned the company$2.5 million in support of it operations. No observable price changes, impairment in our investment or impairment of the loan receivable was identified as ofSeptember 30, 2021 . 28 -------------------------------------------------------------------------------- Table of Contents Facility acquisitions During 2021, we completed the acquisition of certain assets of the following entities, which either engage directly in the practice of radiology or associated businesses. The primary reason for these acquisitions was to strengthen our presence in theNew York City ,New Jersey andCalifornia markets. We made a fair value determination of the acquired assets and assumed liabilities and the following were recorded (in thousands): Entity Date Acquired Total Consideration
Property & Equipment Right of Use Assets
Personal Health Imaging
PLLC* 2/1/2021 2,995 576 608 2,355 50 14 (608)
ZP Elmont LLC* 2/1/2021 2,194 1,112 - 1,005 50 27 -
ZP Freeport LLC* 2/1/2021 6,065 4,668 - 1,328 40 29 -
Broadway Medical Imaging
LLC* 2/1/2021 1,155 1,076 446 6 50 23 (446)
3235 Hempstead LLC* 2/1/2021 9,386 5,667 - 3,649 70 - -
SLZM Realty LLC* 2/1/2021 13,671 4,617 - 8,974 80 - -
2012 Sunrise Merrick LLC* 2/1/2021 11,428 2,741 335 8,617 70 - (335)
ZP Bayside LLC* 3/1/2021 3,545 3,385 2,191 40 50 70 (2,191)
ZP Laurelton LLC* 3/1/2021 2,658 2,530 1,418 32 50 46 (1,418)
ZP Smith LLC* 3/1/2021 3,978 3,581 2,214 347 50 - (2,214)
ZP 907 Northern LLC 4/1/2021 562 507 1,817 5 50 - (1,817)
William M. Kelly MD, Inc. 5/1/2021 3,750 990 1,379 2,710 50 - (1,379)
60th Street MRI, LLC 5/1/2021 400 85 - 290 25 - -
ZP Parkchester LLC 5/1/2021 263 213 311 - 50 - (311)
ZP Eastern LLC 6/1/2021 2,868 2,801 1,951 17 50 - (1,951)
Tangent Associates LLC** 8/24/2021 2,025 10 - 379 1,636 - -
Total 66,943 34,559 12,670 29,754 2,421 209 (12,670)
*Fair Value Determination is Final
** All stock purchase through issuing 67,658 shares of our common stock
Formation of majority owned subsidiary
On January 1, 2021 we entered into the Simi Valley Imaging Group, LLC , a
partnership with Simi Valley Hospital and Health Services ("Simi Adventist").
The operation will offer multi-modality imaging services out of two locations in
Ventura County, California . Total investment in the venture is $0.4 million .
RadNet contributed $0.3 million in assets for a 60% economic interest and Simi
Adventist contributed assets totaling $0.1 million for a 40% economic interest.
Sale of ownership interest in a majority owned subsidiary
Effective September 1, 2021 we completed the sale of a 24.9% ownership interest
in our majority owned subsidiary West Valley Imaging Group, LLC for $13.1
million to Tarzana Medical Center, LLC . After the sale, our ownership interest
in the subsidiary has reduced from 75.0% to 50.1% and we retain a controlling
financial interest in the subsidiary. We recognized in additional paid in
capital on our condensed consolidated balance sheets, $4.2 million excess in
consideration over the carrying value of the sold economic interest. Post the
sale of our ownership interest we acquired from Tarzana Medical Center, LLC ,
certain intangible business assets for purchase consideration of approximately
$5.2 million .
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Joint Venture Activity
The following table is a summary of our investment in joint ventures during the
nine months ended September 30, 2021 (in thousands):
Balance as of December 31, 2020 $ 34,528
Equity in earnings in these joint ventures 8,259
Equity contributions in existing joint ventures 1,441
Balance as of
$ 44,228 We charged management service fees from the centers underlying these joint ventures of approximately$5.3 million and$2.7 million for the three months endedSeptember 30, 2021 and 2020 and$16.0 million and$8.6 million for the nine months endedSeptember 30, 2021 and 2020, respectively. OnJune 23, 2021 , we made an additional equity contribution to our joint venture inArizona of$1.4 million . Our equity ownership interest percentage in the venture did not change. The following table is a summary of key balance sheet data for these joint ventures as ofSeptember 30, 2021 andDecember 31, 2020 and income statement data for the nine months endedSeptember 30, 2021 and 2020 (in thousands): September 30, December 31, Balance Sheet Data: 2021 2020 Current assets$ 46,186 $ 27,085 Noncurrent assets 67,514 68,686 Current liabilities (12,182) (12,545) Noncurrent liabilities (20,914) (21,582) Total net assets $
80,604
Book value ofRadNet joint venture interests $
36,940
7,288 6,449
Total value of RadNet joint venture interests $
44,228
Income statement data for the nine months ended
2020 Net revenue$ 98,193 $ 78,988 Net income$ 16,007 $ 13,651 Critical Accounting PoliciesThe Securities and Exchange Commission defines critical accounting estimates as those that are both most important to the portrayal of a company's financial condition and results of operations and require management's most difficult, subjective or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. In Note 2 to our consolidated financial statements in this quarterly report and in our annual report on Form 10-K for the year endedDecember 31, 2020 , we discuss our significant accounting policies, including those that do not require management to make difficult, subjective or complex judgments or estimates. The most significant areas involving management's judgments and estimates are described below. Use of Estimates The financial statements were prepared in accordance withU.S. generally accepted accounting principles (GAAP), which 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 30 -------------------------------------------------------------------------------- Table of Contents are difficult to predict and are beyond management's control. As a result, actual amounts could materially differ from these estimates. Revenues Our revenues generally relate to net patient fees received from various payors 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 payor (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 payors. The payment arrangements with third-party payors 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, changes in business and economic conditions, and the frequent changes in managed care contractual terms resulting from contract re-negotiations and renewals. As it relates to the Group, this service fee revenue includes payments for both the professional medical interpretation revenue recognized by them as well as the payment for all other aspects related to our providing the imaging services, for which we earn management fees. As it relates to others 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 our management's estimate of amounts we expect to be entitled to receive from patients and third-party payors. Estimates of contractual allowances under Medicare, Medicaid, managed care and commercial insurance plans are based upon historical collection experience of the payments received from such payors in accordance with the underlying contractual agreements. Revenues related to uninsured patients and uninsured copayment and deductible amounts for patients who have health care coverage may have price concessions applied. 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. 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 estimates and assumptions related to revenue recognition did not change materially for the quarter endedSeptember 30, 2021 .Provider Relief Fund (COVID-19 Stimulus Funding)The Provider Relief Fund offers government assistance to eligible providers throughout the healthcare system in support of certain expenses or lost revenue attributable to the coronavirus pandemic. We have recorded provider relief funding in our condensed Consolidated Statements of Operations in the amount of$6.3 million for the nine months endedSeptember 30, 2021 . Generally, the department ofHealth and Human Services ("HHS") does not intend to recoup funds as long as a provider's lost revenue and increased expenses exceed the amount of provider relief funding one has received. HHS reserves the right to auditRelief Fund recipients in the future to ensure that this requirement is met and collect anyRelief Fund amounts that were made in error or exceed lost revenue or increased expenses due to the pandemic. Failure to comply with the terms and conditions may be grounds for recoupment. In recognizing revenue associated with provider relief funding our management is required to assess whether our operations have meet the applicable requirements for the funding received. During the quarter endedSeptember 30, 2021 , we continued to evaluate our operating results in light of the most recent government guidance and based on our assessment, the amount of revenue recognized is appropriate. 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. Receivables generally are collected within industry norms for third- 31 -------------------------------------------------------------------------------- Table of Contents party payors. 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. Our estimates and assumptions for allowances on our account receivable did not change materially during the quarter endedSeptember 30, 2021 . Business Combination We evaluate all acquisitions under the framework Clarifying the Definition of a Business in the accounting guidance. Once a purchase has been determined to be the acquisition of a business, we are required to recognize the assets acquired and the liabilities assumed at their acquisition date fair values. Any portion of the purchase consideration transferred in excess of the net of the acquisition date fair values of the assets acquired and the liabilities assumed, is allocated to goodwill. The allocation requires our management to make estimates of the value of various assets acquired and 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 IntangiblesGoodwill atSeptember 30, 2021 totaled$502.7 million . Indefinite Lived Intangible Assets atSeptember 30, 2021 were$7.1 million and are associated with the value of certain trade name intangibles. Our management reviews the fair value of our reporting units on an annual basis to determine if an event has occurred which suggest that the fair value of a reporting unit may be impaired. When we determine the carrying value of a reporting unit exceeds its fair value, an impairment charge would be recognized and should not exceed the total amount of goodwill allocated to that reporting unit. The review of fair value requires our management to make assessments of the business and financial prospects for a particular reporting unit. We tested goodwill for impairment onOctober 1, 2020 . We also continue at regular intervals to consider the current and expected future economic and market conditions surrounding the COVID-19 pandemic and to date have not had an indication of goodwill impairment being more likely than not throughSeptember 30, 2021 . Recent Accounting Standards See Note 3, Recent Accounting and Reporting Standards to the financial statements included in this report for further information. 32
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Table of Contents Results of Operations The following table sets forth, for the three and nine months endedSeptember 30, 2021 and 2020, the percentage that certain items in the statements of operations bears to total service revenue, inclusive of revenue under capitation contracts.
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