The accompanying notes are an integral part of these financial statements.
RADNET, INC. AND SUBSIDIARIES
The accompanying notes are an integral part of these financial statements.
RADNET, INC. AND SUBSIDIARIES
The following table summarizes changes in the Company’s consolidated stockholders' equity, including noncontrolling interest, during the three months ended June 30, 20202021 and June 30, 2019.2020.
The accompanying notes are an integral part of these financial statements.
RADNET, INC. AND SUBSIDIARIES
The accompanying notes are an integral part of these financial statements.
RADNET, INC. AND SUBSIDIARIES
The accompanying notes are an integral part of these financial statements.
RADNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(unaudited)
Supplemental Schedule of Non-Cash Investing and Financing Activities
We acquired equipment and certain leasehold improvements for approximately $31.8$42.1 million and $14.0$31.8 million during the six months ended June 30, 20202021 and 2019,2020, respectively, which were not paid for as of June 30, 20202021 and 20192020, respectively. The offsetting amounts due were recorded in our condensed consolidated balance sheet under accounts payable, accrued expenses and other.
On January 1, 2021 we entered into the Simi Valley Imaging Group, LLC, partnership agreement with Simi Valley Hospital and Health Services ("Simi Adventist"). Of the total combined assets of $0.4 million, RadNet transferred $0.3 million and Simi Adventist contributed the remaining $0.1 million.
On June 1, 2020, we completed our stock purchase of DeepHealth, Inc. by issuing 823,615 shares of our common stock to purchase all of Deep Health's shares and share equivalents. The shares were ascribed a value of $13.9 million.
We recorded under accrued expenses an accrual of equity interest distribution to noncontrolling interests of $1.8 million at June 30, 2019, which was paid in July 2019.
We transferred approximately $4.3 million in net assets to our new joint venture, Ventura County Imaging Group, LLC in March 2019.
On February 27, 2019, we issued
RADNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 – NATURE OF BUSINESS AND BASIS OF PRESENTATION
We are a national provider of freestanding, fixed-site outpatient diagnostic imaging services with operations in six7 U.S. states. At June 30, 2020,2021, we operated, directly or indirectly through joint ventures with hospitals, 332353 centers located in Arizona, California, Delaware, Florida, Maryland, New Jersey, and New York. Our centers provide physicians with imaging capabilities to facilitate the diagnosis and treatment of diseases and disorders. 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. The vast majority of our centers offer multi-modality imaging services. Our multi-modality strategy diversifies revenue streams, reduces exposure to reimbursement changes and provides patients and referring physicians the convenience of a single location to serve the needs of multiple procedures. In addition to our imaging services, we design and develop software applications, Artificial Intelligenceartificial intelligence tools and other computerized systems for the diagnostic imaging industry. Our operations comprise a single segment for financial reporting purposes.
The consolidated financial statements include the accounts of RadNet, Inc as well as its subsidiaries in which RadNet has a controlling financial interest. The consolidated financial statements also include certain variable interest entities in which we are the primary beneficiary (as described in more detail below). All material intercompany transactions and balances have been eliminated upon consolidation. All of these affiliated entities are referred to collectively as “RadNet”, “we”, “us”, “our” or the “Company” in this report.
Accounting regulations stipulate that generally any entity with a) insufficient equity to finance its activities without additional subordinated financial support provided by any parties, or b) equity holders that, as a group, lack the characteristics which evidence a controlling financial interest, is considered a Variable Interest Entityvariable interest entity (“VIE”). We consolidate all VIEs in which we are the primary beneficiary. We determine whether we are the primary beneficiary of a VIE through a qualitative analysis that identifies which variable interest holder has the controlling financial interest in the VIE. The variable interest holder who has both of the following has the controlling financial interest and is the primary beneficiary: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. In performing our analysis, we consider all relevant facts and circumstances, including: the design and activities of the VIE, the terms of the contracts the VIE has entered into, the nature of the VIE’s variable interests issued and how they were negotiated with or marketed to potential investors, and which parties participated significantly in the design or redesign of the entity.
VIEs that we consolidate as the primary beneficiary consist of professional corporations which are owned or controlled by individuals within our senior management, namely Howard G. Berger, M.D., our President and Chief Executive Officer and a member of our Board of Directors, and John V. Crues, III, M.D., RadNet's Medical Director, both of whom are members of our Board of Directors.Director. Dr. Berger owns, indirectly, 99% of the equity interests in Beverly Radiology Medical Group III (BRMG) and a controlling interest in two professional corporations in New York City. BRMG is responsible for the professional medical services at nearly all of our facilities located in California. Dr. Crues owns six professional corporations which provide medical services in Delaware, Maryland, New Jersey and New York. Additionally, Dr. Crues is a 1% owner of BRMG. These VIEs are collectively referred to as the consolidated medical group ("the Group").Group.
RadNet provides non-medical, technical and administrative services to the Group for which it receives a management fee, pursuant to the related management agreements. Through the management agreements we have exclusive authority over all non-medical decision making related to the ongoing business operations and we determine the annual budget. The Group has insignificant operating assets and liabilities, and de minimis equity. Through management agreements with us, substantially all cash flows of the Group after expenses, including professional salaries, are transferred to us. We consolidate the revenue and expenses, assets and liabilities of the Group.
The Group on a combined basis recognized $26.9$45.1 million and $38.9$26.9 million of revenue, net of management services fees to RadNet, for the three months ended June 30, 20202021 and 2019,2020, respectively and $26.9$45.1 million and $38.9$26.9 million of operating expenses for the three months ended June 30, 20202021 and 2019,2020, respectively. RadNet recognized $116.4$190.6 million and $159.2$116.4 million of total billed net service fee revenue for the three months ended June 30, 2020,2021, and 2019,2020, respectively, for management services provided to the Group relating primarily to the technical portion of billed revenue.
The Group on a combined basis recognized $66.4$91.2 million and $76.3$66.4 million of revenue, net of management services fees to RadNet, for the six months ended June 30, 20202021 and 2019,2020, respectively and $66.4$91.2 million and $76.3$66.4 million of operating expenses for the six months ended June 30, 20202021 and 2019,2020, respectively. RadNet recognized $264.3$369.5 million and $301.6$264.3 million
of total billed net service fee revenue for the six months ended June 30, 2020,2021, and 2019,2020, respectively, for management services provided to the Group relating primarily to the technical portion of billed revenue.
The cash flows of the Group are included in the accompanying condensed consolidated statements of cash flows. All intercompany balances and transactions have been eliminated in consolidation. In our condensed consolidated balance sheets at June 30, 20202021 and December 31, 2019,2020, we have included approximately $76.6$102.4 million and $100.3$82.3 million, respectively, of accounts receivable and approximately $12.5$21.8 million and $7.0$15.2 million of accounts payable and accrued liabilities related to the Group, respectively.
The creditors of the Group do not have recourse to our general credit and there are no other arrangements that could expose us to losses on their behalf. However, RadNetwe may be required to provide financial support to cover any operating expenses in excess of operating revenues.
We also own a 49% economic interest in ScriptSender, LLC, which provides secure data transmission services of medical information. Through a management agreement, RadNet provides management and accounting services and receives an agreed upon fee. ScriptSender, LLC is dependent on the CompanyRadNet to finance its own activities, and as such we determined that it is a VIE but we are not a primary beneficiary since we do not have the power to direct the activities of the entity that most significantly impact the entity’s economic performance.
At all of our centers not serviced by the Group we have entered into long-term contracts (typically up to 40 years) with independent radiology groups to provide physician services at those centers. These radiology practices provide professional services, including supervision and interpretation of diagnostic imaging procedures, in our diagnostic imaging centers. The radiology practices maintain full control over the provision of professional services. Under these arrangements, in addition to obtaining technical fees for the use of our diagnostic imaging equipment and the provision of technical services, we provide management services and receive a fee based on the value of the services we provide. We own the diagnostic imaging equipment and, therefore, receive 100% of the technical reimbursements associated with imaging procedures. The radiology practice groups retain the professional reimbursements associated with imaging procedures after deducting management service fees paid to us and we have no economic controlling interest in these radiology practices as such, the financial results of these practices are not consolidated in our financial statements.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and, therefore, do not include all information and footnotes necessary for conformity with U.S. generally accepted accounting principles for complete financial statements; however, in the opinion of our management, all adjustments consisting of normal recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods ended June 30, 20202021 and 20192020 have been made. The results of operations for any interim period are not necessarily indicative of the results for a full year. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto contained in our annual report on Form 10-K for the year ended December 31, 2019.2020.
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, 2019.2020. 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, 2019.2020.
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 when 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 and the frequent changes in managed care contractual terms resulting from contract renegotiations and renewals.
As it relates to the consolidated medical group,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 the estimated amounts we expect to be entitled to receive from patients and third-party payors. 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 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.
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.
We typically experience some seasonality to our revenue stream. During the first quarter of each year we generally experience the lowest volumes of procedures and the lowest level of revenue for any quarter during the year. It is common for inclement weather to result in patient appointment cancellations and, in some cases, imaging center closures. Second, in recent years, we have observed greater participation in high deductible health plans by patients. As these high deductibles reset in January for most of these patients, we have observed that patients utilize medical services less during the first quarter, when securing medical care will result in significant out-of-pocket expenditures.
Our total service revenues during the three and six months ended June 30, 2020 2021 and 20192020 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
June 30, | | Six Months Ended
June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Commercial insurance | $ | 187,354 | | | $ | 96,349 | | | $ | 369,566 | | | $ | 251,711 | |
| Medicare | 71,407 | | | 35,082 | | | 134,877 | | | 92,587 | |
| Medicaid | 9,039 | | | 4,300 | | | 17,486 | | | 10,980 | |
| Workers' compensation/personal injury | 10,556 | | | 7,359 | | | 20,966 | | | 17,916 | |
| Other patient revenue | 5,189 | | | 3,549 | | | 9,961 | | | 9,218 | |
| Management fee revenue | 5,533 | | | 3,332 | | | 10,752 | | | 5,899 | |
| Teleradiology and Software revenue | 2,621 | | | 2,200 | | | 5,047 | | | 5,970 | |
| Other | 3,795 | | | 3,527 | | | 6,416 | | | 9,750 | |
| Service fee revenue | 295,494 | | | 155,698 | | | 575,071 | | | 404,031 | |
| Revenue under capitation arrangements | 38,424 | | | 34,868 | | | 74,166 | | | 68,099 | |
| Total service revenue | $ | 333,918 | | | $ | 190,566 | | | $ | 649,237 | | | $ | 472,130 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| Commercial insurance | $ | 96,349 |
| | $ | 160,185 |
| | $ | 251,711 |
| | $ | 311,899 |
|
| Medicare | 35,082 |
| | 60,151 |
| | 92,587 |
| | 114,280 |
|
| Medicaid | 4,300 |
| | 7,295 |
| | 10,980 |
| | 14,423 |
|
| Workers' compensation/personal injury | 7,359 |
| | 11,014 |
| | 17,916 |
| | 22,062 |
|
| Other patient revenue | 3,549 |
| | 6,017 |
| | 9,217 |
| | 11,858 |
|
| Management fee revenue | 3,332 |
| | 1,753 |
| | 5,899 |
| | 3,870 |
|
| Teleradiology and Software revenue | 2,200 |
| | 4,063 |
| | 5,971 |
| | 8,449 |
|
| Other | 3,527 |
| | 7,693 |
| | 9,750 |
| | 14,003 |
|
| Service fee revenue | 155,698 |
| | 258,171 |
| | 404,031 |
| | 500,844 |
|
| Revenue under capitation arrangements | 34,868 |
| | 30,926 |
| | 68,099 |
| | 59,803 |
|
| Total revenue | $ | 190,566 |
| | $ | 289,097 |
| | $ | 472,130 |
| | $ | 560,647 |
|
PROVIDER RELIEFCOVID-19 PANDEMIC AND CARES ACT FUNDING - InOn March 11, 2020 the World Health Organization (WHO) designated COVID-19 as a global pandemic. To aid businesses and stimulate the national economy, Congress passed The Coronavirus Aid, Relief, and Economic Security ("CARES") Act, which was signed in to law on March 27, 2020.
Beginning in the second quarter of 2020 and through the six months ended June 30, 2021, we received approximately $25.5funding from the various programs established by the CARES Act as follows:
•$39.5 million of accelerated Medicare payments through the twelve months ended December 31, 2020
•$4.0 million from the Paycheck Protection Program through the twelve months ended December 31, 2020
•$32.6 million total Provider Relief Funding, $26.3 million received for the 12 months ended December 31, 2020 and $6.3 million for the 6 months ended June 30, 2021
In addition, we have received for the 12 months ended December 31, 2020, $5.0 million in fundingadvance payments from insurer Blue Shield.
The accelerated Medicare and Blue Shield payments are recorded to Deferred Revenue in our condensed consolidated balance sheet and are being applied to revenue as services are performed beginning in 2021. For the six months ended June 30, 2021, $10.3 million of the accelerated Medicare and $3.8 million of the Blue Shield funds have been applied to revenue.
The $4.0 million secured from the Paycheck Protection Program was accounted for as debt and in December 2020 we met the eligibility requirements under the government guidelines for forgiveness and the loans were written off to gain on extinguishment of debt.
The Provider Relief FundFunding is displayed as such on our condensed consolidated statements of operations.
that offered government assistance
The CARES Act also provides for a payment deferral of the employer portion of Social Security tax incurred during the pandemic, allowing half of such payroll taxes to eligible providers throughoutbe deferred until December 2021 and the healthcare systemremaining half until December 2022. At December 31, 2020 and at June 30, 2021, the Company had in supporttotal $16.3 million of certaindeferred Social Security taxes. The current portion of payment deferrals are recorded as payroll tax liability under the caption “Accounts payable, accrued expenses or lost revenue attributableand other”, while the long term portion is recorded to the coronavirus pandemic. Generally, the department of Health 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 audit Relief Fund recipientsOther Long Term Liabilities in the future to ensure that this requirement is met and collect any Relief 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.
RECLASSIFICATION –We have reclassified certain amounts previously classified as held for sale related to property and equipment and goodwill to conform to our 2020 presentation.
condensed consolidated balance sheet.
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. In regards to the credit loss standard, we
We have concluded that the historical credit loss experienced across our receivable portfolio is materially similar to any current expected credit losses estimated under the Current Expected Credit Loss ("CECL") model.
In 2018 and 2019 we entered into factoring agreements with various institutions and sold certain accounts receivable under non-recourse agreements.agreements in exchange for notes receivables from the buyers. These transactions are accounted for as a reduction in accounts receivable as the agreements transfer effective control over and risk related to the receivables to the buyers. Proceeds on notes receivables are 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. At June 30, 2020 we have $22.5 million, net of discount,Amounts remaining to be collected on these agreements.agreement were $19.8 million and $20.5 million at June 30, 2021 and December 31, 2020, respectively. We do not utilize factoring arrangements as an integral part of our financing for working capital. To employ the CECL model for the notes receivable, wecapital and assess the party's ability to pay upfront at the inception of the notes receivable and subsequently by reviewing their financial statements annually and reassessing any insolvency risk on a periodic basis. In the event of a significant past due balance, as the sold receivables were already revalued and recorded at net realizable value, we can mitigate the expected credit loss by offsetting any collections from the underlying factored receivables and not remitting that to the counter party.
DEFERRED REVENUE - Deferred revenue represents liability for payments received for performance obligations which have yet to be satisfied and is offen associated with sales of our eRad subsidiary. In April of 2020, we received approximately $39.4 million in advanced Medicare payments from the Centers for Medicare and Medicaid Services ("CMS") as part of the expanded Accelerated and Advance Payment Program under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. As these payments are required to be repaid to CMS beginning 120 days after their receipt through offsets from new Medicare claims over a three month period, we have recorded amounts received to deferred revenue which will be amortized as Medicare reimbursements are earned. In addition, in May of 2020 we received $5.0 million in advance payments from an insurance carrier with similar repayment terms as the CMS.
DEFERRED FINANCING COSTS - Costs of financing are deferred and amortized using the effective interest rate method. Deferred financing costs, net of accumulated amortization, were $1.3$2.4 million and $1.6$1.8 million, as of June 30, 20202021 and December 31, 2019,2020, respectively and related to our line of credit. In conjunction with our Sixth and Seventh Amendments to our First LienBarclays Revolving Credit Agreement (as defined below), a net addition of approximately $0.7 million was added to deferred financing costs in the second quarter of 2019.Facility. See Note 5, Credit Facilities and Notes Payable for more information.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation of property and equipment is performed using the straight-line method over the estimated useful lives of the assets acquired, 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 15 years. Maintenance and repairs are charged to expense as incurred.
BUSINESS COMBINATION - 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 AND INDEFINITE LIVED INTANGIBLES - Goodwill at June 30, 20202021 totaled $467.8$502.3 million. Indefinite lived intangible assets at June 30, 20202021 were $11.3$7.1 million. Goodwill and Indefinite Lived Intangibles are recorded as a result of business combinations. When we determine the carrying value of 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. We tested goodwill and indefinite lived intangibles for impairment on October 1, 2019,2020, noting no impairment. However, during 2020 we ceased employing certain indefinite lived trade names with a total value of $4.2 million and they were written off in full. In addition to the annual impairment test, we regularly assess if an event has occurred which would require interim impairment
testing. We considered the current and expected future economic and market conditions surrounding the novel strain of coronavirus ("COVID-19")COVID-19 pandemic and did not identify an indication of goodwill impairment being more likely than not through June 30, 2020.2021. Activity in goodwill for the six months ended June 30, 20202021 is provided below (in thousands):
|
| | | |
| Balance as of December 31, 2019 | $ | 441,973 |
|
| Goodwill acquired through the acquisition of Olney Open MRI, LLC | 601 |
|
| Goodwill acquired through the acquisition of MRI at Woodbridge, LLC | 1,833 |
|
| Goodwill acquired through the acquisition of DeepHealth, Inc. | 23,396 |
|
| Balance as of June 30, 2020 | $ | 467,803 |
|
| | | | | |
| Balance as of December 31, 2020 | $ | 472,879 | |
| Goodwill acquired through acquisitions | 29,375 | |
| Goodwill attributable to formation of Simi Valley Imaging Group LLC | 105 | |
| Other Adjustments | (28) | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| Balance as of June 30, 2021 | $ | 502,331 | |
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.
We recorded an income tax expense of $2.9 million, or an effective tax rate of 26.2%, for the three months ended June 30, 2021 compared to a benefit from income taxes of $4.5 million, or an effective tax rate of 33.3%, for the three months ended June 30, 2020 compared to an2020. We recorded income tax expense of $3.0$7.2 million, or an effective tax rate of 28.1%24.9%, for the threesix months ended June 30, 2019. We recorded an2021 compared to a benefit from income tax benefittaxes of $8.9 million, or an effective tax rate of 27.8%, for the six months ended June 30, 2020 compared to an income tax expense of $1.7 million , or an effective tax rate of 23.5% for the six months ended June 30, 2019.The2020. The income tax rates for the three and six months ended June 30, 20202021 diverge from the federal statutory rate due to (i) noncontrolling interests due to the controlled partnerships; (ii) effects of state income taxes; and (iii) excess tax benefits attributable to share-based compensation.
We believe no significant changes in the unrecognized tax benefits will occur within the next 12 months.
On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief, and Economic SecurityCARES Act, ("CARES Act"). The CARES Act,which among other things, includes certain income tax provisions for individuals and corporations; however, these benefits do not impact the Company’s current tax provision.
LEASES - We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities, and long term operating lease liability in our consolidated balance sheets. Finance leases are included in property and equipment, current finance lease liability, and long-term finance lease liability in our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. We include options to extend a lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. For a contract in which we are a lessee that contains fixed payments for both lease and non-lease components, we have elected to account for the components as a single lease component, as permitted. For finance leases, interest expense on the lease liability is recognized using the effective interest method and amortization of the right-of-useROU asset is recognized on a straight-line basis over the shorter of the estimated useful life of the asset or the lease term. ROU assets are tested for impairment if circumstances suggest that the carrying amount may not be recoverable. Our ROU assets consist of facility and equipment assets on operating leases. No events have occurred such as fire, flood, or other acts which have impaired the integrity of our ROU assets in 2020.as of June 30, 2021. Our facility leases require us to maintain insurance policies which would cover major damage to our facilities. We maintain business interruption insurance to cover loss of business due to a facility becoming non-operational under certain circumstances. Our equipment leases are covered by warranty and service contracts which cover repairs and provide regular maintenance to keep the equipment in functioning order.
EQUITY BASED COMPENSATION – We have one long-term incentive plan that we adopted in 2006 and which we firsthave amended and restated as ofat various points in time: first on April 20, 2015, and againsecond on March 9, 2017, and currently as of April 15, 2021 (the “Restated Plan”). The Restated Plan was approved by our stockholders at our annual stockholders meeting on June 8, 2017.10, 2021. We have reserved 16,500,000 shares of common stock for issuance under the Restated Plan 14,000,000 shareswhich can be issued in the form of common stock. We can issueincentive and/or nonstatutory stock options, restricted and/or unrestricted 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.appreciation rights. Stock options and warrants generally vest over three years to five years and expire five years to ten years from date of grant. We determine the compensation expense for each stock option award using the Black Scholes, or similar valuation model. Those models require that our management make certain estimates concerning risk free interest rates and volatility in the trading price of our common stock. 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. In connection with our acquisition of DeepHealth Inc. on June 1, 2020, we assumed the DeepHealth, Inc. 2017 Stock Incentive Plan, including outstanding options awards that can be exercised for our common stock. No additional awards will be granted under the DeepHealth, Inc. 2017 Equity Incentive Plan. See Note 4, Facility Acquisitions and Note 6, Stock-Based Compensation, for more information.
COMPREHENSIVE LOSSINCOME (LOSS) - ASC 220Accounting guidance establishes rules for reporting and displaying comprehensive lossincome or incomeloss and its components. Our unrealized gains or losses on foreign currency translation adjustments, interest rate cap and swap agreements are included in comprehensive loss and are included in the consolidated statements of comprehensive lossincome (loss) for the three and six months ended June 30, 20202021 and 2019.2020.
COMMITMENTS AND CONTINGENCIES - We are party to various legal proceedings, claims, and regulatory, tax or government inquiries and investigations that arise in the ordinary course of business. With respect to these matters, we evaluate the developments on a regular basis and accrue a liability when we believe a loss is probable and the amount can be reasonably estimated. Based on current information, we do not believe that reasonably possible or probable losses associated with pending legal proceedings would either individually or in the aggregate, have a material adverse effect on our business and consolidated financial statements. However, the outcome of these matters is inherently uncertain. Therefore, if one or more of these matters were resolved against us for amounts in excess of management's expectations, our results of operations and financial condition, including in a particular reporting period in which any such outcome becomes probable and estimable, could be materially adversely affected.
DERIVATIVE INSTRUMENTS
2016 CAPS
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. Under these arrangements, the Company purchased a cap on 3 month LIBOR at 2.0%. We incurred a $5.3 million premium to enter into the 2016 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 accounting guidance, 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 comprehensive loss in the consolidated statement of equity since such hedge has been determined to be effective. See Fair Value Measurements section below for the fair value of the 2016 Caps at June 30, 2020.
A tabular presentation of the effect of derivative instruments on our consolidated statement of comprehensive loss of the 2016 Caps is as follows (amounts in thousands):
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| | | | | | | | | | | |
| For the three months ended June 30, 2020 |
| Account | | April 1, 2020 Balance | | Amount of comprehensive gain recognized on derivative net of taxes | | June 30, 2020 Balance | | Location |
| Accumulated Other Comprehensive Loss, net of taxes | | (1,597 | ) | | 188 |
| | (1,409 | ) | | Liabilities and Equity |
|
| | | | | | | | | | | |
| For the six months ended June 30, 2020 |
| Account | | January 1, 2020 Balance | | Amount of comprehensive gain recognized on derivative net of taxes | | June 30, 2020 Balance | | Location |
| Accumulated Other Comprehensive Loss, net of taxes | | (1,877 | ) | | 468 |
| | (1,409 | ) | | Liabilities and Equity |
2019 SWAPS
- In the second quarter of 2019, we entered into four4 forward interest rate agreements ("2019 Swaps"). The 2019 Swaps have total notional amounts of $500,000,000, consisting of two2 agreements of $50,000,000 each and two2 agreements of $200,000,000 each. The 2019 Swaps will secure a constant interest rate associated with portions of our variable rate bank debt and have an effective date of October 13, 2020. They will mature in October 2023 for the smaller notional and October 2025 for the larger notional. Under these arrangements, we arranged the 2019 Swaps with locked in 1 month LIBOR rates at 1.96% for the $100,000,000$100,000,000 notional and at 2.05% for the $400,000,000$400,000,000 notional. As of the effective date, we will be liable for premium payments if interest rates decline below arranged rates, but will receive interest payments if rates remainare above the arranged rates.
At inception, we designated our 2019 Swaps as cash flow hedges of floating-rate borrowings. In accordance with accounting guidance, 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 reported as a component of comprehensive loss in the consolidated statement of equity. The remaining gain or loss, if any, is recognized currently in earnings. As a result of the economic impact of the coronavirus pandemic, which precipitated a reduction in interest rates , theThe cash flows for both our $400,000,000$400,000,000 notional interest rate swap contract locked in at 2.05% due October 2025 doesand our $100,000,000 notional interest rate swap contract locked in at 1.96% do not match the cash flows for our First Lien Term Loans and so we have determined that they are not currently effective as cash flow hedges. Accordingly, all changes in their fair value after April 1, 2020 will befor the $400,000,000 notional and after July 1, 2020 for the $100,000,000 notional are being recognized in earnings. As of AprilJuly 1, 2020, the total change in fair value relating to swap due October 2025swaps included in other comprehensive income was approximately $21.4$24.4 million, net of taxes. This amount will be amortized to interest expense through October 20252023 at approximately $0.4 million per month and continuing at approximately $0.3 million per month.through October 2025.
A tabular presentation of the effect of derivative instruments on our consolidated statement of comprehensive loss of the 2019 swapsSwaps which remain effectiveineffective is as follows (amounts in thousands):
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| | | | | | | | | | | | | | | | | | |
| For the three months ended June 30, 2020 |
| Account | | April 1, 2020 Balance | | Amount of comprehensive loss recognized on derivative net of taxes | | Amount of loss reclassified out of accumulated OCI into income (prior period effective portion) | | June 30, 2020 Balance | | Location |
| Accumulated Other Comprehensive Loss, net of taxes | | $ | (24,699 | ) | | $ | (599 | ) | | $ | 892 |
| | $ | (24,406 | ) | | Liabilities and Equity |
13
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended June 30, 2021 |
| Account | | March 31, 2021 Balance | | Amount of comprehensive loss recognized on derivative net of taxes | | Amount of loss reclassified out of accumulated OCI into income (prior period effective portion), net of taxes | | June 30, 2021 Balance | | Location |
| Accumulated Other Comprehensive Loss, net of taxes | | $ | (21,656) | | | $ | 0 | | | $ | 920 | | | $ | (20,736) | | | Equity |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the six months ended June 30, 2021 |
| Account | | December 31, 2020 Balance | | Amount of comprehensive loss recognized on derivative net of taxes | | Amount of loss reclassified out of accumulated OCI into income (prior period effective portion), net of taxes | | June 30, 2021 Balance | | Location |
| Accumulated Other Comprehensive Loss, net of taxes | | $ | (22,581) | | | $ | 0 | | | $ | 1,845 | | | $ | (20,736) | | | Equity |
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| | | | | | | | | | | | | | | | | | |
| For the six months ended June 30, 2020 |
| Account | | January 1, 2020 Balance | | Amount of comprehensive loss recognized on derivative net of taxes | | Amount of loss reclassified out of accumulated OCI into income (prior period effective portion) | | June 30, 2020 Balance | | Location |
| Accumulated Other Comprehensive Loss, net of taxes | | $ | (5,870 | ) | | $ | (19,428 | ) | | $ | 892 |
| | $ | (24,406 | ) | | Liabilities and Equity |
A tabular presentation of the effect of derivative instruments on our statement of operations of the 2019 Swaps for the Swaps that becamewhich remain ineffective during the second quarter is as follows (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended June 30, 2021 |
| Ineffective interest rate swap | | Amount of gain recognized in income on derivative (current period ineffective portion) | | Location of gain recognized in Income on derivative (current period ineffective portion) | | Gross amount of loss reclassified from accumulated OCI into income (prior period effective portion) | | Location of loss reclassified from accumulated OCI into income (prior period effective portion) |
| Interest rate contracts | | $ | 35 | | | Other income (expense) | | $ | (1,245) | | | Interest Expense |
|
| | | | | | | | | | | | |
| For the three months ended June 30, 2020 |
| Ineffective interest rate swap | | Amount of loss recognized in income on derivative (current period ineffective portion) | | Location of loss recognized in Income on derivative (current period ineffective portion) | | Amount of loss reclassified from accumulated OCI into income (prior period effective portion) | | Location of gain (Loss) reclassified from accumulated OCI into income (prior period effective portion) |
| Interest rate contracts | | $ | (3,843 | ) | | Other income (expense) | | $ | (892 | ) | | Interest income (expense) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the six months ended June 30, 2021 |
| Ineffective interest rate swap | | Amount of gain recognized in income on derivative (current period ineffective portion) | | Location of gain recognized in Income on derivative (current period ineffective portion) | | Gross amount of loss reclassified from accumulated OCI into income (prior period effective portion) | | Location of loss reclassified from accumulated OCI into income (prior period effective portion) |
| Interest rate contracts | | $ | 11,280 | | | Other income (expense) | | $ | (2,169) | | | Interest Expense |
See Fair Value Measurements section below for the fair value of the 2016 caps and 2019 swapsSwaps at June 30, 2020.2021.
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.
Derivatives:
The tables below summarize 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 condensed consolidated balance sheets, as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of June 30, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Current and long term liabilities | | | | | | | |
| | | | | | | |
| 2019 Swaps - Interest Rate Contracts | $ | 0 | | | $ | 26,709 | | | $ | 0 | | | $ | 26,709 | |
|
| | | | | | | | | | | | | | | |
| | As of June 30, 2020 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Current and long term liabilities | |
| | |
| | |
| | |
|
| 2016 caps - Interest Rate Contracts | $ | — |
| | $ | 446 |
| | $ | — |
| | $ | 446 |
|
| 2019 swaps - Interest Rate Contracts | $ | — |
| | $ | 39,304 |
| | $ | — |
| | $ | 39,304 |
|
|
| | | | | | | | | | | | | | | |
| | As of December 31, 2019 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Current and long term liabilities | |
| | |
| | |
| | |
|
| 2016 caps - Interest Rate Contracts | $ | — |
| | $ | 1,081 |
| | $ | — |
| | $ | 1,081 |
|
| 2019 swaps - Interest Rate Contracts | $ | — |
| | $ | 9,477 |
| | $ | — |
| | $ | 9,477 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2020 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Current and long term liabilities | | | | | | | |
| | | | | | | |
| 2019 Swaps - Interest Rate Contracts | $ | 0 | | | $ | 37,989 | | | $ | 0 | | | $ | 37,989 | |
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.
Long Term Debt:
The table below summarizes the estimated fair value compared to our face value of our long-term debt as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of June 30, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total Fair Value | | Total Face Value |
| First Lien Term Loans and SunTrust Term Loan | $ | 0 | | | $ | 772,313 | | | $ | 0 | | | $ | 772,313 | | | $ | 774,125 | |
|
| | | | | | | | | | | | | | | | | | | |
| | As of June 30, 2020 |
| Level 1 | | Level 2 | | Level 3 | | Total Fair Value | | Total Face Value |
| First Lien Term Loans and SunTrust Term Loan | $ | — |
| | $ | 650,954 |
| | $ | — |
| | $ | 650,954 |
| | $ | 684,051 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2019 |
| Level 1 | | Level 2 | | Level 3 | | Total | | Total Face Value |
| First Lien Term Loans and SunTrust Term Loan | $ | — |
| | $ | 708,948 |
| | $ | — |
| | $ | 708,948 |
| | $ | 705,699 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2020 |
| Level 1 | | Level 2 | | Level 3 | | Total Fair Value | | Total Face Value |
| First Lien Term Loans and SunTrust Term Loan | $ | 0 | | | $ | 661,640 | | | $ | 0 | | | $ | 661,640 | | | $ | 662,403 | |
As of June 30, 20202021 and at December 31, 20192020 our Barclays revolving credit facility had 0 balance outstanding. Our SunTrust revolving credit facility relating to our consolidated subsidiary NJIN,The New Jersey Imaging Network ("NJIN"), had 0 principal amount outstanding at June 30, 20202021 and at December 31, 2019.2020.
The estimated fair value of our long-term debt, which is discussed in Note 5, Credit Facilities and Notes Payable, 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 finance 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 June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| Net loss (income) attributable to RadNet, Inc.'s common stockholders | $ | (10,594 | ) | | $ | 4,899 |
| | $ | (26,952 | ) | | $ | 1,165 |
|
| | | | | | | | |
| BASIC AND DILUTED NET (LOSS) INCOME PER SHARE ATTRIBUTABLE TO RADNET, INC.'S COMMON STOCKHOLDERS | | | | | | | |
| Weighted average number of common shares outstanding during the period | 50,672,219 |
| | 49,702,869 |
| | 50,483,274 |
| | 49,490,234 |
|
| Basic and diluted net (loss) income per share attributable to RadNet, Inc.'s common stockholders | $ | (0.21 | ) | | $ | 0.10 |
| | $ | (0.53 | ) | | $ | 0.02 |
|
| | | | | | | | |
| DILUTED NET INCOME PER SHARE ATTRIBUTABLE TO RADNET, INC.'S COMMON STOCKHOLDERS | | | | | | | |
| Weighted average number of common shares outstanding during the period | 50,672,219 |
| | 49,702,869 |
| | 50,483,274 |
| | 49,490,234 |
|
| Add nonvested restricted stock subject only to service vesting | — |
| | 134,260 |
| | — |
| | 186,779 |
|
| Add additional shares issuable upon exercise of stock options and warrants | — |
| | 307,411 |
| | — |
| | 311,023 |
|
| Weighted average number of common shares used in calculating diluted net income per share | 50,672,219 |
| | 50,144,540 |
| | 50,483,274 |
| | 49,988,036 |
|
| Diluted net income per share attributable to RadNet, Inc.'s common stockholders | $ | (0.21 | ) | | $ | 0.10 |
| | $ | (0.53 | ) | | $ | 0.02 |
|
15
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Net income (loss) attributable to RadNet, Inc.'s common stockholders | $ | 2,873 | | | $ | (10,594) | | | $ | 12,331 | | | $ | (26,952) | |
| | | | | | | |
| BASIC NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO RADNET, INC.'S COMMON STOCKHOLDERS | | | | | | | |
| Weighted average number of common shares outstanding during the period | 52,238,709 | | | 50,672,219 | | | 52,004,653 | | | 50,483,274 | |
| Basic net income (loss) per share attributable to RadNet, Inc.'s common stockholders | $ | 0.05 | | | $ | (0.21) | | | $ | 0.24 | | | $ | (0.53) | |
| | | | | | | |
| DILUTED NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO RADNET, INC.'S COMMON STOCKHOLDERS | | | | | | | |
| Weighted average number of common shares outstanding during the period | 52,238,709 | | | 50,672,219 | | | 52,004,653 | | | 50,483,274 | |
| Add nonvested restricted stock subject only to service vesting | 202,341 | | | 0 | | | 227,803 | | | 0 | |
| Add additional shares issuable upon exercise of stock options and warrants | 692,041 | | | 0 | | | 658,105 | | | 0 | |
| Weighted average number of common shares used in calculating diluted net income per share | 53,133,091 | | | 50,672,219 | | | 52,890,561 | | | 50,483,274 | |
| Diluted net income (loss) per share attributable to RadNet, Inc.'s common stockholders | $ | 0.05 | | | $ | (0.21) | | | $ | 0.23 | | | $ | (0.53) | |
| | | | | | | |
| Stock options and non vested restricted awards excluded from the computation of diluted per share amounts as their effect would be antidilutive: | | | | | | | |
| Nonvested restricted stock subject to service vesting | 0 | | | 319,659 | | | 0 | | | 319,659 | |
| Shares issuable upon the exercise of stock options: | 0 | | | 604,257 | | | 0 | | | 604,257 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
For the three and six months ended June 30, 2020 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–Accounting guidance 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.adjusted for observable price changes and impairments, with changes recognized in net income.
As of June 30, 2020,2021, we have three3 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 Imaging Solutions Ltd., 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% Our investment of $1.2 million represents a 14.21% equity interest in Medic Vision 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 $0.2 million. Our initial equity interest has been diluted to 12.25% and our total equity investment stands at 14.21%.
In accordance with accounting guidance, as we exercise no significant influence over Medic Vision’s operations, the investment is recorded at its cost of $1.2 million, given that the fair value is not readily determinable.company. No observable price changes or impairment in our investment was identified as of June 30, 2020.
Turner Imaging:2021.
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. On February 1, 2018, we purchased 2.1 million preferred shares in Turner Imaging Systems for $2.0 million. On January 1, 2019 we funded a convertible promissory note in the amount of $0.1 million that converted to additional 80,000 shares December 21, 2019. No observable price changes or impairment in our investment was identified as of June 30, 2020.2021.
WhiteRabbit.ai Inc:
WhiteRabbit.ai Inc., based in California, is currently developing an artificial intelligence suite which aims to improve the speed and accuracy of cancer detection in radiology and improve patient care. On November 5, 2019 we acquired an equity interest in the company for $1.0 million and also loaned the company $2.5 million the principalin support of which is due November 2022.
To leverage their artificial intelligence expertise, we entered into a software subscription service contract to assist our radiology work flow and advanced them $4.0 million for future software subscription fees that is recorded as a prepaid expense in Prepaid and Other Current assets in our consolidated balance sheets.its operations. No observable price changes, impairment in our investment or impairment of the loan receivable was identified as of June 30, 2020.2021.
INVESTMENT IN JOINT VENTURES – We have 1213 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, 2020.2021.
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, 20202021 (in thousands):
|
| | | |
| Balance as of December 31, 2019 | $ | 34,470 |
|
| Equity in earnings in these joint ventures | 2,900 |
|
| Balance as of June 30, 2020 | $ | 37,370 |
|
| | | | | |
| Balance as of December 31, 2020 | $ | 34,528 | |
| Equity in earnings in these joint ventures | 5,406 | |
| |
| |
| |
| |
| Equity contributions in existing joint ventures | 1,441 | |
| Balance as of June 30, 2021 | $ | 41,375 | |
We charged management service fees from the centers underlying these joint ventures of approximately $3.3$5.5 million and $1.8$3.3 million for the three months ended June 30, 20202021 and 2019, respectively.2020 and $5.9$10.8 million and $3.9$5.9 million for the six months ended June 30, 2021 and 2020, and 2019, respectively. We eliminate any unrealized portion
On June 23, 2021, we made an additional equity contribution to our joint venture in Arizona of our management service fees with our$1.4 million. Our equity ownership interest percentage in earnings of joint ventures.the venture did not change.
The following table is a summary of key balance sheet data for these joint ventures as of June 30, 20202021 and December 31, 20192020 and income statement data for the six months ended June 30, 20202021 and 20192020 (in thousands):
| | | | | | | | | | | |
| Balance Sheet Data: | June 30, 2021 | | December 31, 2020 |
| Current assets | $ | 39,925 | | | $ | 27,085 | |
| Noncurrent assets | 68,699 | | | 68,686 | |
| Current liabilities | (12,165) | | | (12,545) | |
| Noncurrent liabilities | (21,605) | | | (21,582) | |
| Total net assets | $ | 74,854 | | | $ | 61,644 | |
| | | |
| Book value of RadNet joint venture interests | $ | 34,901 | | | $ | 28,079 | |
| Cost in excess of book value of acquired joint venture interests and other | 6,474 | | | 6,449 | |
| Total value of RadNet joint venture interests | $ | 41,375 | | | $ | 34,528 | |
| | | |
| | | | | | | | | | | |
| Income statement data for the six months ended June 30, | 2021 | | 2020 |
| Net revenue | $ | 64,636 | | | $ | 43,849 | |
| Net income | $ | 10,258 | | | $ | 6,001 | |
|
| | | | | | | |
| Balance Sheet Data: | June 30, 2020 | | December 31, 2019 |
| Current assets | $ | 32,318 |
| | $ | 27,427 |
|
| Noncurrent assets | 67,307 |
| | 61,037 |
|
| Current liabilities | (10,677 | ) | | (9,217 | ) |
| Noncurrent liabilities | (22,572 | ) | | (18,872 | ) |
| Total net assets | $ | 66,376 |
| | $ | 60,375 |
|
| | | | |
| Book value of RadNet joint venture interests | $ | 30,894 |
| | $ | 28,001 |
|
| Cost in excess of book value of acquired joint venture interests and other | 6,476 |
| | 6,469 |
|
| Total value of Radnet joint venture interests | $ | 37,370 |
| | $ | 34,470 |
|
| | | | |
| Total book value of other joint venture partner interests | $ | 35,482 |
| | $ | 32,374 |
|
|
| | | | | | | |
| Income statement data for the six months ended June 30, | 2020 | | 2019 |
| Net revenue | $ | 43,849 |
| | $ | 55,624 |
|
| Net income | $ | 6,001 |
| | $ | 8,723 |
|
NOTE 3 – RECENT ACCOUNTING AND REPORTING STANDARDSSTANDARD
Accounting standards adopted
In June 2016,January 2021, the FASB issued ASU No. 2016-132021-01 ("ASU 2016-13), Financial Instruments - Credit Losses. ASU 2016-13 replaces the incurred loss methodology previously utilized for valuing financial instruments with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. We prospectively adopted the standard on January 1, 2020 and the adoption did not have a material impact to the condensed consolidated financial statements, resulting in no adjustments to our prior year earnings. See the Accounts Receivable section to Note 2 for further information on our allowances for credit losses.
In August 2018, the FASB issued ASU No. 2018-15 (“ASU 2018-15”2021-01"), Intangibles-GoodwillReference Rate Reform (Topic 848), Scope. ASU 2021-01 clarifies the scope of Topic 848 so that derivatives affected by the discounting transition are explicitly eligible for certain option expedients and Other-Internal-Use Software. ASU 2018-15 aligns the requirements for deferring implementation costs incurredexceptions in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This ASUTopic 848. The guidance is effective in the first quarter of 2020 with early adoption permittedupon issuance and generally can be applied either retrospectively or prospectively to all implementation costs incurred afterthrough December 31, 2022. We are currently evaluating the datepotential impact of adoption. The adoption of this standard did not have a material impact on our condensed consolidated balance sheet.
In March 2020, the FASB issued ASU 2020-03 ("ASU 2020-03"), Codification Improvements to Financial Instruments. The amendments in this update represent changes to clarify or improve the codification and correct unintended application. ASU 2020-03 was effective immediately upon issuance and its adoption did not have a material impact2021-01 on our financial statements.
In August 2018, the FASB issued ASU No. 2018-13 ("ASU 2018-13"),
Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurements. This standard removes, modifies and adds certain disclosures related to recurring and nonrecurring fair value measurements. We adopted ASC 2018-13 effective January 1, 2020 and it had no effect on our disclosures.
Accounting standards not yet adopted
In December 2019, the FASB issued ASU 2019-12 ("ASU 2019-12"), Income Taxes (Topic 740). ASU 2019-12 removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other areas of the standard. ASU 2019-12 will be effective beginning in the first quarter of 2021. Early adoption is permitted. Certain amendments in this update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. We are currently evaluating the impact this ASU will have on our financial statements and related disclosures as well as the timing of adoption.
In January 2020, the FASB issued ASU 2020-01 ("ASU 2020-01"), Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), clarifying the interaction between accounting standards related to equity securities, equity method investments, and certain derivatives. ASU 2020-01 is effective for fiscal years beginning after December 15, 2020. We do not expect the adoption of this guidance will have a material impact on our financial statements.
In March 2020, the FASB issued ASU 2020-04 ("ASU 2020-04"), Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients and exceptions for applying generally accepted accounting principles to certain contract modifications and hedging relationships that reference London Inter-bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. The guidance is effective upon issuance and generally can be applied through December 31, 2022. We are currently evaluating the potential impact of ASU 2020-04 on our financial statements.
In January 2020, the FASB issued ASU 2020-01 ("ASU 2020-01"), Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), clarifying the interaction between accounting standards related to equity securities, equity method investments, and certain derivatives. ASU 2020-01 is effective for fiscal years beginning after December 15, 2020. The adoption did not have a material impact on our financial statements.
In December 2019, the FASB issued ASU 2019-12 ("ASU 2019-12"), Income Taxes (Topic 740). ASU 2019-12 removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other areas of the standard. ASU 2019-12 is effective beginning in the first quarter of 2021. The adoption did not have a material impact on our financial statements.
NOTE 4 – FACILITY ACQUISITIONS AND DISPOSITIONS
Acquisitions:
On June 1, 2020,
During the first and second quarters of 2021, we completed our acquisition of all the equity interests of DeepHealth Inc., ("DeepHealth") an artificial intelligence and machine learning company in an all stock purchase. As initial purchase consideration, we issued 915,132 shares at $16.93 per share (823,615 issued at execution, with up to 91,517 shares to be issued 18 months after acquisition subject to adjustment for any indemnification claims). The transaction was accounted for as an acquisition of a business and total purchase consideration determined to be approximately $34.6 million including i) 823,615 shares issued on the date of closing with fair value of $13.9 million, ii) a liability of 91,517 shares with a fair value of $1.5 million to be issued 18 months after acquisition subject to adjustment for any indemnification claims and will be marked to market in subsequent periods, iii) replacement awards attributable to pre-combination service issued to DeepHealth option holders with allocated fair value of $2.0 million, iv) acquisition date fair value of contingent consideration of $17.0 million and v) $0.1 million in closing costs reimbursed to the seller. The fair values of replacement awards attributable to pre-combination service and contingent consideration are recorded in additional paid in capital upon closing of the transaction. For the contingent consideration, there are three arrangements that will be settled in a fixed number of shares upon achievement of three individual specific milestones which are mutually exclusive of each other, with 390,789, 586,184, and 195,393 shares, respectively, issuable for each milestone arrangement. The fair value of the contingent consideration was estimated at the date of acquisition based on our share price and estimated probability of the achievement of the respective milestones. We preliminarily recorded $0.1 million in current assets, $3.5 million in deferred tax liabilities, $14.8 million in intangible assets, primarily in-process research and development ("IPR&D'), and $23.4 million in goodwill. The goodwill is primarily attributable to expected post-acquisition synergies from integrating Deep Health’s assembled workforce and IPR&D technologies. The fair values of the identifiable intangible assets related to IPR&D were determined by the income method and the assets will not be amortized until completion.
On March 2, 2020 our consolidated subsidiary New Jersey Imaging Networks ("NJIN") completed the acquisition of certain assets of MRI at Woodbridge, LLC consistingthe following entities, all of a single multi-modality imaging center locatedwhich engage in Avenel,the practice of radiology. The primary reason for these acquisitions was to strengthen our presence in the New York City, New Jersey for cash consideration of $2.6 million. NJINand California markets. We made a fair value determination of the acquired assets and assumed liabilities and approximately $0.5 millionthe following were recorded (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Entity | Date Acquired | Total Cash Consideration | Property & Equipment | Right of Use Assets | Goodwill | Intangible Assets | Other Assets | Right of Use Liabilities |
| 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 | 0 | 1,005 | 50 | 27 | 0 |
| ZP Freeport LLC* | 2/1/2021 | 6,065 | 4,668 | 0 | 1,328 | 40 | 29 | 0 |
| 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 | 0 | 3,649 | 70 | 0 | 0 |
| SLZM Realty LLC* | 2/1/2021 | 13,671 | 4,617 | 0 | 8,974 | 80 | 0 | 0 |
| 2012 Sunrise Merrick LLC* | 2/1/2021 | 11,428 | 2,741 | 335 | 8,617 | 70 | 0 | (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 | 0 | (2,214) |
| ZP 907 Northern LLC | 4/1/2021 | 562 | 507 | 1,817 | 5 | 50 | 0 | (1,817) |
| William M. Kelly MD, Inc. | 5/1/2021 | 3,750 | 990 | 1,379 | 2,710 | 50 | 0 | (1,379) |
| 60th Street MRI, LLC | 5/1/2021 | 400 | 85 | 0 | 290 | 25 | 0 | 0 |
| ZP Parkchester LLC | 5/1/2021 | 263 | 213 | 311 | 0 | 50 | 0 | (311) |
| ZP Eastern LLC | 6/1/2021 | 2,868 | 2,801 | 1,951 | 17 | 50 | 0 | (1,951) |
| Total | | 64,918 | 34,549 | 12,670 | 29,375 | 785 | 209 | (12,670) |
*Fair Value Determination is Final
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 property and equipment, $1.1 millionVentura County, California. Total investment in right-of-use assets,the venture is $0.4 million. RadNet contributed $0.3 million in intangible assets $1.1 million in operating lease liabilities,for a 60% economic interest and Simi Adventist contributed assets totaling $0.1 million in finance lease liabilities, and $1.8 million in goodwill were recorded.for a 40% economic interest.
On January 2, 2020 we completed our acquisition of certain assets of Olney Open MRI, LLC, consisting of a single multi-modality imaging center located in Columbia, Maryland for cash consideration of $1.8 million. We have made a fair value determination of the acquired assets and assumed liabilities and approximately $0.8 million in property and equipment, $1.3 million in right-of-use assets, $0.3 million in intangible assets, $1.3 million in operating lease liabilities and $0.6 million in goodwill were recorded.
Dispositions:
On June 1, 2020 we completed our sale of certain assets of our Imaging On Call subsidiary to RadVantage P.C. (an unrelated corporation) for approximately $1.0 thousand. With this transaction, we have exited the teleradiology business.
NOTE 5 – CREDIT FACILITIES AND NOTES PAYABLE
As of June 30, 20202021 and December 31, 20192020 our term loan debt obligations consisted of the followingare as follows (in thousands):
|
| | | | | | | |
| |
| | June 30,
2020 | | December 31,
2019 |
| First Lien Term Loans collateralized by RadNet's tangible and intangible assets | $ | 630,426 |
| | $ | 649,824 |
|
| Discounts on First Lien Term Loans | (11,639 | ) | | (13,579 | ) |
| Term Loan Agreement collateralized by NJIN's tangible and intangible assets | 53,625 |
| | 55,875 |
|
| Paycheck Protection Program loans at 1% due April 2022 | 4,023 |
| | — |
|
| Equipment notes payable at interest rates ranging from 4.4% to 4.6%, due through 2020, collateralized by medical equipment | 120 |
| | 275 |
|
| Total debt obligations | 676,555 |
| | 692,395 |
|
| Less: current portion | (41,715 | ) | | (39,691 | ) |
| Long term portion debt obligations | $ | 634,840 |
| | $ | 652,704 |
|
| | | | | | | | | | | |
|
| June 30,
2021 | | December 31,
2020 |
| First Lien Term Loans collateralized by RadNet's tangible and intangible assets | $ | 725,000 | | | $ | 611,028 | |
| Discount on First Lien Term Loans | (14,257) | | | (9,699) | |
| SunTrust Term Loan Agreement collateralized by NJIN's tangible and intangible assets | 49,125 | | | 51,375 | |
| | | |
| | | |
| | | |
| Total debt obligations | 759,868 | | | 652,704 | |
| Less: current portion | (10,789) | | | (39,791) | |
| Long term portion debt obligations | $ | 749,079 | | | $ | 612,913 | |
Senior SecuredWe had 0 outstanding balance under our $195.0 million Barclays Revolving Credit Facilities
AtFacility at June 30, 2020,2021 and have reserved $7.8 million for certain letters of credit. The remaining $187.2 million of our Barclays credit facilities were comprised of one tranche of term loans (“First Lien Term Loans”) and a revolving credit facility of $137.5 million (the “Barclays Revolving Credit Facility”), bothFacility was available to draw upon as of which are provided pursuant to theJune 30, 2021. We had 0 outstanding balance under our $30.0 million SunTrust Revolving Credit Facility at June 30, 2021. As of June 30, 2021, we were in compliance with all covenants under our credit facilities.
Second Amended and Restated First Lien Credit and Guaranty Agreement dated as of July 1, 2016 (as amended,
On April 23, 2021, we entered into the “FirstSecond Amended and Restated First Lien Credit Agreement”and Guaranty Agreement (the "Restated Credit Agreement") which provides for $725.0 million of senior secured First Lien Term Loans and a $195.0 million senior secured revolving credit facility (the "Barclays Revolving Credit Facility"). The proceeds of the First Lien Term Loans were used to refinance loans outstanding under our prior first lien credit agreement and provide funding for current and future operations. Total costs of the Restated Credit Agreement amounted to approximately $14.9 million segregated as follows: $8.8 million capitalized to discount and deferred finance cost, $4.5 million expensed to debt restructuring costs, $1.5 million charged to loss on early extinguishment of debt and $0.1 million written off to interest expense. Amounts capitalized will be amortized over the remaining terms of the respective credit facilities under the Restated Credit Agreement.
Senior Secured Credit Facilities
First Lien Term Loans:
The First Lien Term Loans under the Restated Credit Agreement bear interest at either a Eurodollar Rate or an Alternate Base Rate (in each case, as defined in the Restated Credit Agreement), plus an applicable margin. The applicable margin for Eurodollar Rate term loans under the Restated Credit Agreement is 3.25% per annum, which a reduction to 3.00% per annum upon delivery by us of financial statements for the period ending March 31, 2021 evidencing a first lien net leverage ratio of 3.00 to 1.00 or less. Such statements were delivered by us on May 27, 2021. At June 30, 2021 the effective Eurodollar Rate and the Alternate Base Rate for the First Lien Term Loans under the Restated Agreement was 0.75% and 3.25%, respectively and the applicable margin for the Eurodollar Rate and Alternate Base Rate borrowings was 3.00% and 2.00%, respectively.
The Restated Credit Agreement provides for quarterly payments of principal for the First Lien Term Loan in the amount of approximately $1.8 million. The First Lien Term Loan will mature on April 23, 2028 unless otherwise accelerated under the terms of the Restated Credit Agreement.
SunTrust Credit Facilities:
At June 30, 2020,2021, our SunTrust credit facilities, which relate to our consolidated subsidiary NJIN,The New Jersey Imaging Network, L.L.C.("NJIN"), were comprised of one term loan in the principal amount described in the table above (the "SunTrust Term Loan") and a revolving credit facility of $30.0 million (the "SunTrust Revolving Credit Facility") both of which are provided pursuant to the Amended and Restated Revolving Credit and Term Loan Agreement dated August 31, 2018, among NJIN, as borrower, with SunTrust RestatedBank, as administrative agent, and the lenders identified therein (as amended, the "SunTrust Credit Agreement"). Our SunTrust Term Loan bears interest at either an Adjusted LIBOR or a Base Rate (each as defined in the SunTrust Credit Agreement), plus an applicable margin according to the following schedule:
| | | | | | | | | | | | | | | | | |
| Pricing Level | Leverage Ratio | Applicable Margin for Eurodollar Loans | Applicable Margin for Base Rate Loans | Applicable Margin for Letter of Credit Fees | Applicable Percentage for Commitment Fee |
| I | Greater than or equal to 3.00:1.00 | 2.75% per annum | 1.75% per annum | 2.75% per annum | 0.45% per annum |
| II | Less than 3.00:1.00 but greater than or equal to 2.50:1.00 | 2.25% per annum | 1.25% per annum | 2.25% per annum | 0.40% per annum |
| III | Less than 2.50:1.00 but greater than or equal to 2.00:1.00 | 2.00% per annum | 1.00% per annum | 2.00% per annum | 0.35% per annum |
| IV | Less than 2.00:1.00 but greater than or equal to 1.50:1.00 | 1.75% per annum | 0.75% per annum | 1.75% per annum | 0.30% per annum |
| V | Less than 1.50:1.00 | 1.50% per annum | 0.50% per annum | 1.50% per annum | 0.30% per annum |
The loans and other obligations outstanding under the SunTrust Credit Agreement (ascurrently bear interest at a three month LIBOR election at 0.20% plus an applicable margin and fees based on Pricing Level III described below).above.
As
The scheduled amortization of June 30, 2020, we were in compliancethe SunTrust Term Loan began December 31, 2018 with all covenantsquarterly payments of $0.8 million, representing annual amortization equal to 5.0% of the original principal amount of the SunTrust Term Loan. At scheduled intervals, the quarterly amortization increases by $0.4 million, with the remaining balance to be paid at maturity. The SunTrust Term Loan will mature on August 31, 2023 unless otherwise accelerated under our credit facilities. Deferred financing costs at June 30, 2020, netthe terms of accumulated amortization, was $1.3 million and is specifically related to our the SunTrust Credit Agreement.
Revolving Credit Facilities
Barclays Revolving Credit Facility.Facility
Included in our condensed consolidated balance sheets at June 30, 2020 are $630.4 million of First Lien Term Loans and $53.6 million of SunTrust Term Loan debt for a combined total of $684.1 million of total term loan debt (exclusive of unamortized discounts of $11.6 million) in thousands:
|
| | | | | | | | | | | |
| | Face Value | | Discount | | Total Carrying
Value |
| First Lien Term Loans | $ | 630,426 |
| | $ | (11,639 | ) | | $ | 618,787 |
|
| SunTrust Term Loan | 53,625 |
| | — |
| | 53,625 |
|
| Total Term Loans | $ | 684,051 |
| | $ | (11,639 | ) | | $ | 672,412 |
|
We had 0 balance under our $137.5 millionThe Barclays Revolving Credit Facility at June 30, 2020 and have reserved an additional $6.3 million for certain letters of credit. The remaining $131.2 million of our Barclays Revolving Credit Facility was available to draw upon as of June 30, 2020. We had 0 balance under our $30.0 million SunTrust Revolving Credit Facility related to our consolidated subsidiary NJIN at June 30, 2020.
Paycheck Protection Program
The Paycheck Protection Program (PPP) includes funds available for loans to small business and Medicare providers to support operations during the COVID-19 pandemic. The funds are administered by the Small Business Administration (SBA), through approved lenders and do not require collateral or personal guarantees. We received our loans based on being a Medicare
provider. The terms and conditions for participation require entities to certify that economic uncertainty related to the COVID-19 pandemic makes the loan necessary to support their current operations, and that they will use the funds to retain workers (e.g., by paying salaries, providing paid sick/medical leave and health insurance benefits) and pay certain debts (mortgage obligations) and expenses (e.g. rent, utilities, telephone). The loans have a 1.0% fixed interest rate and are due in 2 years. Initial repayments have been deferred for six months. The loans are eligible for forgiveness subject to salary limitations and employee retention levels. Certain of our consolidated subsidiaries received 4 loans totaling $4.0 million. We have accounted for the funds received as debt and recognize a liability for the full amount of proceeds received. Interest will be accrued over the term of the loans. If we meet the eligibility requirements for forgiveness the amounts forgiven will be recognized in the income statement as a gain on loan extinguishment in accordance with accounting guidance.
The following relates to our Barclays financing activities:
2019 Amendments to the First Lien Credit Agreement:
On April 18, 2019 we entered into the following two new amendments to the First Lien Credit Agreement: (i) Amendment No. 6, Consent and Incremental Joinder Agreement to Credit and Guaranty Agreement dated as of April 18, 2019 (the “Sixth Amendment”); and (ii) Amendment No. 7 to Credit and Guaranty Agreement dated as of April 18, 2019 (the “Seventh Amendment”). The Sixth Amendment amended the First LienRestated Credit Agreement to issue $100.0is a $195.0 million in incremental First Lien Term Loans and to add an additional $20.0 million ofsenior secured revolving commitments to the Barclay's Revolving Credit Facility. The Seventh Amendment amends the First Lien Credit Agreement to extend the maturity date ofcredit facility. Associated with the Barclays Revolving Credit Facility by an additional two years to July 1, 2023, unless sooner terminated in accordance with the terms of the First Lien Credit Agreement. Total issue costs added in relation to the amendments in 2019 amounted to approximately $4.4 million. Of this amount, $2.1 million was identified and capitalized as discount on debt, $0.7 million was capitalized asare deferred financing costs, and $1.6net of accumulated amortization, of $2.4 million was expensed. Amounts capitalized will be amortized overat June 30, 2021.
Revolving loans borrowed under the remaining term of the agreement.
Terms of Barclays Revolving Credit Facilities:
First Lien Term Loans:
Interest: First Lien Term LoansFacility bear interest at either an Adjusteda Eurodollar Rate or aan Alternate Base Rate (in each case, as defined in the Restated Credit Agreement) plus an applicable margin. Rates of the applicable margin for borrowing under the First Lien Credit Agreement will alterwhich adjusts depending on our first lien net leverage ratio, according to the following schedule:
|
| | |
| First Lien Leverage Ratio | Eurodollar Rate Spread | Base Rate Spread |
| > 5.50x | 4.50% | 3.50% |
| > 4.00x but ≤ 5.50x | 3.75% | 2.75% |
| >3.50x but ≤ 4.00x | 3.50% | 2.50% |
| ≤ 3.50x | 3.25% | 2.25% |
At June 30, 2020 the effective Adjusted Eurodollar Rate and the Base Rate for the First Lien Term Loans was 1.00% and 3.25%, respectively and the applicable margin for Adjusted Eurodollar Rate and Base Rate borrowings was 3.75% and 2.75%, respectively.
| | | | | | | | |
| First Lien Net Leverage Ratio | Eurodollar Rate Spread | Alternate Base Rate Spread |
| > 3.50x | 3.25% | 2.25% |
| > 3.00x but ≤ 3.50x | 3.00% | 2.00% |
| ≤ 3.00x | 2.75% | 1.75% |
| | |
Payments. The First Lien Credit Agreement provides for quarterly payments of principal under the First Lien Term Loans in the amount of approximately $9.7 million.
Maturity Date. The maturity date for the First Lien Term Loans shall be on the earliest to occur of (i) July 1, 2023, and (ii) the date on which all First Lien Term Loans shall become due and payable in full under the First Lien Credit Agreement, whether by acceleration or otherwise.
Additional Borrowing. Under the First Lien Credit Agreement, we can elect to request (i) an increase to the existing Barclays Revolving Credit Facility and/or (ii) issue additional First Lien Term Loans, provided that the aggregate amount of such increases and additions does not exceed (a) $100.0 million and (b) as long as the First Lien Leverage Ratio (as defined in the First Lien Credit Agreement) would not exceed 4.00:1.00 after giving effect to such incremental facilities, an uncapped amount of incremental facilities, in each case subject to the conditions and limitations set forth in the First Lien Credit Agreement. Each lender approached to provide all or a portion of any incremental facility may elect or decline, in its sole discretion, to provide an incremental commitment or loan.
Barclays Revolving Credit Facility:
Interest: Revolving loans borrowed under the Revolving Credit Facility bear interest at either an Adjusted Eurodollar Rate or a Base Rate plus an applicable margin. Rates of the applicable margin for borrowing under the Revolving Credit Facility also change depending on our leverage ratio and are the same rates as noted in the schedule above for First Lien Term Loans. As of June 30, 2020,2021, the effective interest rate payable on revolving loans under the Barclays Revolving Credit Facility was 6.00%5.25%.
Letters of Credit: For letters of credit issued under the Barclays Revolving Credit Facility, letter of credit fees accrue at the applicable margin of Adjustedthe Eurodollar Rate, currently 3.75% 3.00%, and fronting fees accrue at 0.25%0.125% per annum, in each case on the average aggregate daily maximum amount available to be drawn under all letters of credit issued under the First LienRestated Credit Agreement. In addition, a commitment fee of 0.50% per annum accrues on the unused revolver commitments under the Barclays Revolving Credit Facility.
Maturity Date: The Barclays Revolving Credit Facility will terminate on April 23, 2026 unless otherwise accelerated in accordance with the earliest to occurterms of (i) July 1, 2023, (ii) the date we voluntarily agree to permanently reduce theRestated Credit Agreement.
SunTrust Revolving Credit Facility to zero pursuant to section 2.13(b) of the First Lien
The SunTrust Credit Agreement and (iii) the date the Revolving Credit Facility is terminated due to specific events of default pursuant to section 8.01 of the First Lien Credit Agreement.
The following relates to our SunTrust financing activities:
Amended and Restated Revolving Credit and Term Loan Agreement
On August 31, 2018, our subsidiary, NJIN, entered into the Amended and Restated Revolving Credit and Term Loan Agreement (as amended, the "SunTrust Restated Credit Agreement") as borrower with SunTrust Bank and other financial institutions as lenders and to provide NJIN aggregate credit facilities of $90.0 million as categorized below:
SunTrust Term Loan: Pursuant to the SunTrust Restated Credit Agreement, the lenders thereunder made a term loan to NJIN in the amount of $60.0 million. The SunTrust Term Loan is repayable in scheduled quarterly amounts (as described below) and has a maturity date of the earlier of (i) August 31, 2023 and (ii) the date on which the principal amount of the SunTrust Term Loan has been declared or automatically has become due and payable (whether by acceleration or otherwise).
SunTrust Revolving Credit Facility: The SunTrust Restated Credit Agreement establishesestablished a $30.0 million revolving credit facility available to NJIN for funding requirements. The SunTrust Revolving Credit Facility terminates on the earliest of (i) August 31, 2023, (ii) the voluntary termination thereof by NJIN pursuant to Section 2.8 of the SunTrust Restated Credit Agreement, or (iii) the date on which all amounts outstanding under the SunTrust Restated Credit Agreement have been declared or have automatically become due and payable (whether by acceleration or otherwise). As of June 30, 2021, NJIN has not borrowed against the revolving credit line.
Interest: Interest rates and fees of the applicable margin for borrowinghad no borrowings under the SunTrust Revolving Credit Facility.
Recent prior amendments to prior credit facilities:
Barclays Credit Facilities:
On August 28, 2020, RadNet Management, Inc. and RadNet, Inc. entered into Amendment No. 8, Consent and Incremental Joinder Agreement to Credit and Guaranty Agreement (the "Eighth Amendment"). The Eighth Amendment amended the prior first lien credit agreement to add $57.5 million of revolving commitments to the prior Barclays revolving credit facility increasing the maximum borrowing capacity under the prior Barclays revolving credit facility to $195.0 million while leaving the maturity date of July 1, 2023 unchanged.
On April 18, 2019 we entered into the following two amendments to the prior first lien credit agreement: (i) Amendment No. 6, Consent and Incremental Joinder Agreement to Credit and Guaranty Agreement (the “Sixth Amendment”); and (ii) Amendment No. 7 to Credit and Guaranty Agreement (the “Seventh Amendment”). Among other things, the Sixth Amendment amended the prior first lien credit agreement to issue $100.0 million in incremental first lien term loans and to add an additional $20.0 million of revolving commitments to the prior Barclays revolving credit facility. The Seventh Amendment amended the prior first lien credit agreement to extend the maturity date of the prior Barclays revolving credit facility by an additional two years to July 1, 2023, unless sooner terminated in accordance with the terms of the prior first lien credit agreement.
The prior first lien credit agreement was amended and restated by the Restated Credit Agreement adjust depending on our leverage ratio, according todescribed above, and the following table:
|
| | | | | |
Pricing Level | Leverage Ratio | Applicable Margin for Eurodollar Loans | Applicable Margin for Base Rate Loans | Applicable Margin for Letter of Credit Fees | Applicable Percentage for Commitment Fee |
I | Greater than or equal to 3.00:1.00 | 2.75%
per annum
| 1.75%
per annum
| 2.75%
per annum
| 0.45%
per annum
|
II | Less than 3.00:1.00 but greater than or equal to 2.50:1.00 | 2.25%
per annum
| 1.25%
per annum
| 2.25%
per annum
| 0.40%
per annum
|
III | Less than 2.50:1.00 but greater than or equal to
2.00:1.00
| 2.00%
per annum
| 1.00%
per annum
| 2.00%
per annum
| 0.35%
per annum
|
IV | Less than 2.00:1.00 but greater than or equal to 1.50:1.00 | 1.75%
per annum
| 0.75%
per annum
| 1.75%
per annum
| 0.30%
per annum
|
V | Less than 1.50:1.00 | 1.50%
per annum
| 0.50%
per annum
| 1.50%
per annum
| 0.30%
per annum
|
Theprior first lien term loans and other obligations outstandingprior Barclays revolving credit facility under the SunTrustprior first lien credit agreement were refinanced and replaced by the First Lien Term Loans and the Barclays Revolving Credit Facility provided under the Restated Credit Agreement currently bear applicable margin and fees based on Pricing Level III described above. The loans outstanding under the SunTrust Restated Credit Agreement currently bear interest based on a three month Eurodollar election of 1.45%, plus the applicable margin.
Payments: The scheduled amortization of the SunTrust Term Loan began December 31, 2018 with quarterly payments of $0.8 million, representing annual amortization equal to 5.00% of the original principal amount of the SunTrust Term Loan. At scheduled intervals, the quarterly amortization increases by $0.4 million, with the remaining balance to be paid at maturity.
NOTE 6 – STOCK-BASED COMPENSATION
Stock Incentive Plans
We have one long-term equity incentive plan, which we refer to as the 2006RadNet, Inc. Equity Incentive Plan, which we first amended and restated as of April 20, 2015, and again on March 9, 2017 and currently as of April 15, 2021 (the "Restated Plan”). The Restated Plan was approved by our stockholders at our annual stockholders meeting on June 8, 2017.10, 2021. We have reserved for issuance under the Restated Plan 14,000,00016,500,000 shares of common stock. We can issue options (incentive and non-qualified)nonstatutory), stock awards stock appreciation rights,(restricted or unrestricted), stock units, and cash awardsstock appreciation rights under the Restated Plan.
Options
Certain options granted under the Restated Plan to employees are intended to qualify asStock option grants, whether incentive stock options under existing tax regulations. Stock optionsor nonstatutory, generally vest over 3 to 5 years and expire 5 to 10 years from the date of grant. Under the Restated Plan, stock options may not be granted at a per share exercise price below the fair market value of a share of our common stock on the date of grant, may not be repriced or exchanged without stockholder approval, and the maximum exercisable term of the option may not exceed ten years.
As of June 30, 2020,2021, we had outstanding options to acquire 527,899525,399 shares of our common stock, of which options to acquire 298,863430,702 shares were exercisable. The following summarizes all of our option transactions for the six months ended June 30, 2020:2021:
|
| | | | | | | | | | | | | |
Outstanding Options Under the 2006 Plan | | Shares | | Weighted Average Exercise price Per Common Share | | Weighted Average Remaining Contractual Life (in years) | | Aggregate Intrinsic Value |
| Balance, December 31, 2019 | | 478,951 |
| | $ | 8.21 |
| | | | |
| Granted | | 48,948 |
| | 20.43 |
| | | | |
| Balance, June 30, 2020 | | 527,899 |
| | 9.34 |
| | 6.75 | | $ | 3,669,010 |
|
| Exercisable at June 30, 2020 | | 298,863 |
| | 7.48 |
| | 5.99 | | 2,508,847 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding Options
Under the 2006 Plan | | Shares | | Weighted Average
Exercise price
Per Common Share | | Weighted Average
Remaining
Contractual Life
(in years) | | Aggregate
Intrinsic
Value |
| Balance, December 31, 2020 | | 527,899 | | | $ | 9.34 | | | | | |
| | | | | | | | |
| Exercised | | (2,500) | | | 10.10 | | | | | |
| | | | | | | | |
| Balance, June 30, 2021 | | 525,399 | | | 9.34 | | | 5.86 | | $ | 12,793,992 | |
| Exercisable at June 30, 2021 | | 430,702 | | | 8.34 | | | 5.50 | | 10,920,256 | |
Aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between our closing stock price on June 30, 20202021 and the exercise price, multiplied by the number of in-the-money options as applicable) that would have been received by the holder had all holders exercised their options on June 30, 2020. NaN options2021. Options for 2,500 shares of our common stock were exercised during the six months ended June 30, 2020.2021. As of June 30, 2020,2021, total unrecognized stock-based compensation expense related to non-vested employee awards was $0.9$0.4 million, which is expected to be recognized over a weighted average period of approximately 1.851.11 years.
DeepHealth Options
During the second quarter of fiscal 2020, in connection with the completion of the DeepHealth acquisition, we granted options to acquire 412,434 optionsshares at a grant date fair value of $16.93 per share unit to DeepHealth employees in replacement of their stock options that were outstanding as of the closing date. As of June 30, 2020,2021, total unrecognized stock based compensation expense related to non-vested DeepHealth options was approximately $5.0$3.0 million, which is expected to be recognized over a weighted average period of approximately 2.821.84 years.
|
| | | | | | | | | | | | | |
Outstanding Options
Under the Deep Health Plan | | Shares | | Weighted Average
Exercise price
Per Common Share | | Weighted Average
Remaining
Contractual Life
(in years) | | Aggregate
Intrinsic
Value |
| Balance, December 31, 2019 | | — |
| | | | | | |
| Granted, June 1, 2020 | | 412,434 |
| | $ | — |
| | | | |
| Balance, June 30, 2020 | | 412,434 |
| | — |
| | 8.89 | | $ | 6,545,328 |
|
| Exercisable at June 30, 2020 | | 25,453 |
| | — |
| | 8.89 | | 403,935 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding Options
Under the Deep Health Plan | | Shares | | Weighted Average
Exercise price
Per Common Share | | Weighted Average
Remaining
Contractual Life
(in years) | | Aggregate
Intrinsic
Value |
| Balance December 31, 2020 | | 400,539 | | | $ | — | | | | | |
| Exercised | | (1,141) | | | — | | | | | |
| Balance, June 30, 2021 | | 399,398 | | | — | | | 7.91 | | $ | 13,455,719 | |
| Exercisable at June 30, 2021 | | 37,713 | | | — | | | 7.91 | | 1,270,551 | |
Restricted Stock Awards
The Restated Plan permits the award of restricted stock awards (“RSA’s”). As of June 30, 2020,2021, we have issued a total of 6,539,3937,699,439 RSA’s of which 319,659427,688 were unvested at June 30, 2020.2021. The following summarizes all unvested RSA’s activities during the six months ended June 30, 2020:2021:
|
| | | | | | | | |
| | RSA's | | Weighted-Average Remaining Contractual Term (Years) | | Weighted-Average Fair Value |
| RSA's unvested at December 31, 2019 | 387,934 |
| | | | $ | 11.61 |
|
| Changes during the period | | | | | |
| Granted | 426,117 |
| | | | $ | 21.11 |
|
| Vested | (494,392 | ) | | | | $ | 15.73 |
|
| RSA's unvested at June 30, 2020 | 319,659 |
| | 1.37 | | $ | 16.74 |
|
| | | | | | | | | | | | | | | | | |
| | RSA's | | Weighted-Average
Remaining
Contractual
Term (Years) | | Weighted-Average
Fair Value |
| RSA's unvested at December 31, 2020 | 329,159 | | | | | $ | 16.69 | |
| Changes during the period | | | | | |
| Granted | 640,546 | | | | | $ | 19.37 | |
| Vested | (542,017) | | | | | $ | 17.57 | |
| | | | | |
| RSA's unvested at June 30, 2021 | 427,688 | | | 1.12 | | $ | 18.75 | |
We determine the fair value of all RSA’s based on the closing price of our common stock on the award date.
Other stock bonus awards
The Restated Plan also permits the award of stock bonusesshare awards not subject to any future service period. These awards are valued and expensed based on the closing price of our common stock on the date of award. During the six months ended June 30, 20202021, awards totaling 1,078amounting to 294,048 shares valued at $6.5 million in compensation expense were granted.issued in employee COVID-19 related bonuses.
Plan summary
In summary, of the 14,000,00016,500,000 shares of common stock reserved for issuance under the Restated Plan, at June 30, 2020,2021, we had issued 15,359,31616,419,296 total shares between options, RSA’s and other stock awards. With options canceled and RSA’s forfeited amounting to 3,281,040 and 61,703 shares, respectively, there remain 1,983,4273,423,447 shares available under the Restated Plan for future issuance.
TheOptions issued in replacement of original DeepHealth options were issued outside of the Restated Plan and areas a direct result of our acquisition andare not included in the share count ofunder the Restated Plan.
NOTE 7 – SUBSEQUENT EVENTS
Acquisitions:Business Combinations/Dispositions:
On May 15,2020 ,July 30, 2021, we agreed to acquirecompleted the sale of a 24.9% portion of our 75.0% ownership interest in one of our majority owned subsidiaries for $13.1 million. After the sale, we retain a 50.1% ownership interest in this subsidiary.
On July 30, 2021, we acquired certain business assets of AZ-Tech Radiology & Open MRI, LLC, consisting of 8 multi-modality imaging centers located in the Phoenix, Arizona area for purchase consideration of $4.0approximately $5.2 million. We expect the transaction to close August 31, 2020. The assets will be acquired from Whiterabbit.ai Inc., a company in which we hold an equity investment.
Collaborative Agreement:
On August 6, 2020, RadNet and Hologic, Inc. announced a comprehensive collaboration to improve breast cancer care, including the co-development of Artificial Intelligence tools, data-sharing and an upgrade of RadNet’s fleet of Hologic mammography units to cutting-edge technology. Hologic, Inc. is a medical technology company primarily focused on improving women’s health and well-being through early detection and treatment.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 ended December 31, 20192020 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 20192020 filed with the U.S. Securities and Exchange Commission (SEC) on March 11, 2020.15, 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. Statements in this quarterly report concerning our ability to successfully acquire and integrate new operations, to grow our contract management business, our financial guidance, our future cost saving efforts, our ability to increase business from new equipment or operations and our ability to finance our operations and repay our outstanding indebtedness, are forward-looking statements.
Forward–lookingForward-looking statements in this current report include, among others, statements we make regarding:regarding
•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
•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 ended December 31, 2019 and quarterly report on form 10Q for the quarter ended March 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 in the United States based on number of locations and annual imaging revenue. At June 30, 2020,2021, we operated, directly or indirectly through joint ventures with hospitals, 332353 centers located in Arizona, California, Delaware, Florida, Maryland, New Jersey, and New 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. Over 2019 and 2020 weWe 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.
The discussion below of our results centers on our performance in the second quarter ending June 30, 2020. As discussed in our Form 8-K filed on April 3, 2020, the overall impact of the coronavirus pandemic on RadNet’s business could be material to our operating results, cash flows and financial position. The magnitude of the impact will ultimately depend on the duration and extent of the COVID-19 pandemic and the impact of governmental actions and patient behavior in response to the pandemic, which remains ongoing.
As as result of the pandemic we began experiencing reduced procedure volumes in mid March which intensified through the early part of the second quarter. As economic activity has begun to ramp-up, our procedure volumes have returned to approximately 90% of our pre-COVID-19 pace, from a low of 28% pre-COVID-19 volumes experienced in April 2020. Our experience has shown that lost imaging slots in one quarter are not made up within that period or in subsequent quarters. We continue to adapt our operations in response to the pandemic where needed and were successful in implementing such measures as concentration of patient traffic to larger imaging centers, negotiating payment terms with vendors and landlords, adjusting staff levels and telecommuting.
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 six months ended June 30, 20202021 and June 30, 2019:2020: | | | | Six Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2021 | | 2020 |
| Facilities in operation | 332 | | 340 |
| Facilities in operation | 353 | | 335 | |
| Net revenues (millions) | $ | 190.6 |
| | $ | 289.1 |
| Net revenues (millions) | $ | 649 | | | $ | 472 | |
Our revenue is derived from a diverse mix of payors, including private, payors, managed care capitated payors 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.
We typically experience some seasonality to ourOur total service revenue stream. During the first quarter of each year we generally experience the lowest volumes of procedures and the lowest level of revenue for any quarter during the year. It is common for inclement weather to result in patient appointment cancellations and, in some cases, imaging center closures. Second, in recent years, we have observed greater participation in high deductible health plans by patients. As these high deductibles reset in January for most of these patients, we have observed that patients utilize medical services less during the first quarter, when securing medical care will result in significant out-of-pocket expenditures.
The Company’s total net revenues during the three and six months ended June 30, 20202021 and 20192020 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 June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Commercial insurance | $ | 96,349 |
| | $ | 160,185 |
| | $ | 251,711 |
| | $ | 311,899 |
| Commercial insurance | $ | 187,354 | | | $ | 96,349 | | | $ | 369,566 | | | $ | 251,711 | |
| Medicare | 35,082 |
| | 60,151 |
| | 92,587 |
| | 114,280 |
| Medicare | 71,407 | | | 35,082 | | | 134,877 | | | 92,587 | |
| Medicaid | 4,300 |
| | 7,295 |
| | 10,980 |
| | 14,423 |
| Medicaid | 9,039 | | | 4,300 | | | 17,486 | | | 10,980 | |
| Workers' compensation/personal injury | 7,359 |
| | 11,014 |
| | 17,916 |
| | 22,062 |
| Workers' compensation/personal injury | 10,556 | | | 7,359 | | | 20,966 | | | 17,916 | |
| Other patient revenue | 3,549 |
| | 6,017 |
| | 9,217 |
| | 11,858 |
| Other patient revenue | 5,189 | | | 3,549 | | | 9,961 | | | 9,218 | |
| Management fee revenue | 3,332 |
| | 1,753 |
| | 5,899 |
| | 3,870 |
| Management fee revenue | 5,533 | | | 3,332 | | | 10,752 | | | 5,899 | |
| Teleradiology and Software revenue | 2,200 |
| | 4,063 |
| | 5,971 |
| | 8,449 |
| Teleradiology and Software revenue | 2,621 | | | 2,200 | | | 5,047 | | | 5,970 | |
| Other | 3,527 |
| | 7,693 |
| | 9,750 |
| | 14,003 |
| Other | 3,795 | | | 3,527 | | | 6,416 | | | 9,750 | |
| Net service fee revenue | 155,698 |
| | 258,171 |
| | 404,031 |
| | 500,844 |
| |
| Service fee revenue | | Service fee revenue | 295,494 | | | 155,698 | | | 575,071 | | | 404,031 | |
| Revenue under capitation arrangements | 34,868 |
| | 30,926 |
| | 68,099 |
| | 59,803 |
| Revenue under capitation arrangements | 38,424 | | | 34,868 | | | 74,166 | | | 68,099 | |
| Total net revenue | $ | 190,566 |
| | $ | 289,097 |
| | $ | 472,130 |
| | $ | 560,647 |
| |
| Total service revenue | | Total service revenue | $ | 333,918 | | | $ | 190,566 | | | $ | 649,237 | | | $ | 472,130 | |
Investment, Acquisition,The discussion of our results below centers on our performance through the second quarter ended June 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 we enter mid year 2021, 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, while we continued to invest and position for future growth. Year to date, we have acquired 19 new centers in California, New Jersey and New York.
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 ended December 31, 2019.2020.
Equity Investments
As of June 30, 2020,2021, 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:
Medic Vision Imaging Solutions Ltd., 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% Our investment of $1.2 million represents a 14.21% equity interest in Medic Vision 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 $0.2 million. Our initial equity interest has been diluted to 12.25% and our total equity investment stands at 14.21%.
In accordance with accounting guidance, as we exercise no significant influence over Medic Vision’s operations, the investment is recorded at its cost of $1.2 million, given that the fair value is not readily determinable.company. No observable price changes or impairment in our investment was identified as of June 30, 2020.
Turner Imaging:2021.
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. On February 1, 2018, we purchased 2.1 million preferred shares in Turner Imaging Systems for $2.0 million. On January 1, 2019 we funded a convertible promissory note in the amount of $0.1 million that converted to additional 80,000 shares December 21, 2019. No observable price changes or impairment in our investment was identified as of June 30, 2020.2021.
WhiteRabbit.ai Inc:
WhiteRabbit.ai Inc., based in California, is currently developing an artificial intelligence suite which aims to improve the speed and accuracy of cancer detection in radiology and improve patient care. On November 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 its operations, the principal of which is due November 2022.
To leverage their artificial intelligence expertise, we entered into a software subscription service contract to assist our radiology work flow and advanced them $4.0 million for future software subscription fees that is recorded as a prepaid expense in Prepaid and Other Current assets in our consolidated balance sheets.it operations. No observable price changes, impairment in our investment or impairment of the loan receivable was identified as of June 30, 2020.2021.
Facility acquisitions
On June 1, 2020, we completed our acquisition of all the equity interests of DeepHealth Inc., ("DeepHealth") an artificial intelligence and machine learning company in an all stock purchase. As initial purchase consideration, we issued 915,132 shares at $16.93 per share (823,615 issued at execution, with up to 91,517 shares to be issued 18 months after acquisition subject to adjustment for any indemnification claims). The transaction was accounted for as an acquisition of a business and total purchase consideration determined to be approximately $34.6 million including i) 823,615 shares issued on the date of closing with fair value of $13.9 million, ii) a liability of 91,517 shares with a fair value of $1.5 million to be issued 18 months after acquisition subject to adjustment for any indemnification claims and will be marked to market in subsequent periods, iii) replacement awards attributable to pre-combination service issued to DeepHealth option holders with allocated fair value of $2.0 million, iv) acquisition date fair value of contingent consideration of $17.0 million and v) $0.1 million in closing costs reimbursed to the seller. The fair values of replacement awards attributable to pre-combination service and contingent consideration are recorded in additional paid in capital upon closing of the transaction. For the contingent consideration, there are three arrangements that will be settled in a fixed number of shares upon achievement of three individual specific milestones which are mutually exclusive of each other, with 390,789, 586,184, and 195,393 shares, respectively, issuable for each milestone arrangement. The fair value of the contingent consideration was estimated at the date of acquisition based on our share price and estimated probability of the achievement of the respective milestones. We preliminarily recorded $0.1 million in current assets, $3.5 million in deferred tax liabilities, $14.8 million in intangible assets, primarily in-process research and development ("IPR&D'), and $23.4 million in goodwill. The goodwill is primarily attributable to expected post-acquisition synergies from integrating Deep Health’s assembled workforce and IPR&D technologies. The fair values of the identifiable intangible assets related to IPR&D were determined by the income method and the assets will not be amortized until completion.
On March 2, 2020 our consolidated subsidiary New Jersey Imaging Networks ("NJIN")During the first and second quarters of 2021, we completed the acquisition of certain assets of MRI at Woodbridge, LLC consisting of a single multi-modality imaging center locatedthe following entities. The primary reason for these acquisitions was to strengthen our presence in Avenel,the New York City, New Jersey for consideration of $2.6 million. NJINand California 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 Cash Consideration | Property & Equipment | Right of Use Assets | Goodwill | Intangible Assets | Other Assets | Right of Use Liabilities |
| 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) |
| Total | | 64,918 | 34,549 | 12,670 | 29,375 | 785 | 209 | (12,670) |
approximately $0.5 million*Fair Value Determination is Final
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 property and equipment, $1.1 millionVentura County, California. Total investment in right-of-use assets,the venture is $0.4 million. RadNet contributed $0.3 million in intangible assets $1.1 million in operating lease liabilities,for a 60% economic interest and Simi Adventist contributed assets totaling $0.1 million in finance lease liabilities, and $1.8 million in goodwill were recorded.
On January 2, 2020 we completed our acquisition of certain assets of Olney Open MRI, LLC, consisting offor a single multi-modality imaging center located in Columbia, Maryland for consideration of $1.8 million. We have made a fair value determination of the acquired assets and assumed liabilities and approximately $0.8 million in property and equipment, $1.3 million in right-of-use assets, $0.3 million in intangible assets, $1.3 million in operating lease liabilities and $0.6 million in goodwill were recorded.
Dispositions:
On June 1, 2020 we completed our sale of certain assets of our Imaging On Call subsidiary to RadVantage P.C. (an unrelated corporation) for approximately $1.0 thousand. With this transaction, we have exited the teleradiology business.40% economic interest.
Joint venture investment and financial informationVenture Activity
The following table is a summary of our investment in joint ventures during the six months ended June 30, 20202021 (in thousands):
| | | | | |
| Balance as of December 31, 2020 | $ | 34,528 | |
| Equity in earnings in these joint ventures | 5,406 | |
| |
| |
| |
| |
| Equity contributions in existing joint ventures | 1,441 | |
| Balance as of June 30, 2021 | $ | 41,375 | |
|
| | | |
| Balance as of December 31, 2019 | $ | 34,470 |
|
| Equity in earnings in these joint ventures | 2,900 |
|
| Balance as of June 30, 2020 | $ | 37,370 |
|
We charged management service fees from the centers underlying these joint ventures of approximately $3.3$5.5 million and $1.8$3.3 million for the three months ended June 30, 20202021 and 2019, respectively.2020 and $5.9$10.8 million and $3.9$5.9 million for the six months ended June 30, 2021 and 2020, and 2019, respectively. We eliminate any unrealized portion
On June 23, 2021, we made an additional equity contribution to our management service fees with ourjoint venture in Arizona of $1.4 million. Our equity ownership interest percentage in earnings of joint ventures.the venture did not change.
The following table is a summary of key balance sheet data for these joint ventures as of June 30, 20202021 and December 31, 20192020 and income statement data for the six months ended June 30, 20202021 and 20192020 (in thousands):
| | | | | | | | | | | |
| Balance Sheet Data: | June 30,
2021 | | December 31,
2020 |
| Current assets | $ | 39,925 | | | $ | 27,085 | |
| Noncurrent assets | 68,699 | | | 68,686 | |
| Current liabilities | (12,165) | | | (12,545) | |
| Noncurrent liabilities | (21,605) | | | (21,582) | |
| Total net assets | $ | 74,854 | | | $ | 61,644 | |
| | | |
| Book value of RadNet joint venture interests | $ | 34,901 | | | $ | 28,079 | |
| Cost in excess of book value of acquired joint venture interests | 6,474 | | | 6,449 | |
| Total value of RadNet joint venture interests | $ | 41,375 | | | $ | 34,528 | |
| | | |
|
| | | | | | | |
| Balance Sheet Data: | June 30,
2020 | | December 31,
2019 |
| Current assets | $ | 32,318 |
| | $ | 27,427 |
|
| Noncurrent assets | 67,307 |
| | 61,037 |
|
| Current liabilities | (10,677 | ) | | (9,217 | ) |
| Noncurrent liabilities | (22,572 | ) | | (18,872 | ) |
| Total net assets | $ | 66,376 |
| | $ | 60,375 |
|
| | | | |
| Book value of RadNet joint venture interests | $ | 30,894 |
| | $ | 28,001 |
|
| Cost in excess of book value of acquired joint venture interests | 6,476 |
| | 6,469 |
|
| Total value of Radnet joint venture interests | $ | 37,370 |
| | $ | 34,470 |
|
| | | | |
| Total book value of other joint venture partner interests | $ | 35,482 |
| | $ | 32,374 |
|
| | | | | | | | | | | |
| Income statement data for the six months ended June 30, 2021 | 2021 | | 2020 |
| Net revenue | $ | 64,636 | | | $ | 43,849 | |
| Net income | $ | 10,258 | | | $ | 6,001 | |
|
| | | | | | | |
| Income statement data for the six months ended June 30, 2020 | 2020 | | 2019 |
| Net revenue | $ | 43,849 |
| | $ | 55,624 |
|
| Net income | $ | 6,001 |
| | $ | 8,723 |
|
Critical Accounting Policies
The 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 ended December 31, 2019,2020, 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.
RevenuesUse of 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 when 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 renegotiationsre-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 otherothers 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 estimatedour 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 ended June 30, 2021.
Provider Relief Fund (COVID-19 Stimulus Funding)
In the second quarter of 2020, we received approximately $25.5 million in funding from The Provider Relief Fund, that offered 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 six months ended June 30, 2021. Generally, the department of Health 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 audit Relief Fund recipients in the future to ensure that this requirement is met and collect any Relief 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.
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-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. In regards toOur estimates and assumptions for allowances on our account receivable did not change materially during the credit loss standard, our expectation is that the historical credit loss experienced across our receivable portfolio is materially similar to any current expected credit losses that would be estimated under the CECL model.
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, including tax planning strategies, in determining whether our net deferred tax assets are more likely than not to be realized.
Deferred Revenue
DEFERRED REVENUE - Deferred revenue represents liability for payments received for performance obligations which have yet to be satisfied and is offen associated with sales of our eRad subsidiary. In April of 2020, we received approximately $39.4 million in advanced Medicare payments from the Centers for Medicare and Medicaid Services ("CMS") as part of the expanded Accelerated and Advance Payment Program under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. As these payments are required to be repaid to CMS beginning 120 days after their receipt through offsets from new Medicare claims over a three month period, we have recorded amounts received to deferred revenue which will be amortized as Medicare reimbursements are earned. In addition, in May of 2020 we received $5.0 million in advance payments from an insurance carrier with similar repayment terms as the CMS.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation of property and equipment is performed using the straight-line method over the estimated useful lives of the assets acquired, 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 15 years. Maintenance and repairs are charged to expense as incurred.quarter ended June 30, 2021.
Business Combination
In January 2017,We evaluate all acquisitions under the FASB issued ASU No. 2017-01 (“ASU 2017-01”),framework Clarifying the Definition of a Business. The update providesBusiness in the accounting guidance.. Once a framework for evaluating whether a transaction should be accounted for as an acquisition and/or disposal of a business versus assets. In order for a purchase to be considered an acquisition of a business, and receive business combination accounting treatment, the set of transferred assets and activities must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, then the set of transferred assets and activities is not a business. We first evaluate all purchases under this framework.
Once the purchase has been determined to be the acquisition of a business, we are required to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill asAny portion of the acquisition date is measured as thepurchase consideration transferred in excess of consideration transferred over 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 Intangibles
Goodwill at June 30, 20202021 totaled $467.8$502.3 million. Indefinite Lived Intangible Assets at June 30, 20202021 were $11.3$7.1 million and are associated with the value of certain trade name intangibles. Goodwill and trade name intangibles are recorded asOur 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 result of business combinations.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 on October 1, 2019. In addition2020. We also continue at regular intervals to the annual impairment test, we regularly assess if an event has occurred which would require interim impairment testing. We consideredconsider the current and expected future economic and market conditions surrounding the novel strain of coronavirus ("COVID-19")COVID-19 pandemic and didto date have not identifyhad an indication of goodwill impairment being more likely than not through June 30, 2020.2021.
Long-Lived Assets
We evaluate our long-lived assets (property and equipment) and intangibles, other than goodwill, for impairment whenever indicators of impairment exist. To evaluate the long-lived assets our management estimates the undiscounted future cash flows expected to be derived from the asset. The accounting standards require that if the sum of the undiscounted expected future cash flows from a long-lived asset or definite-lived intangible is less than the carrying value of that asset, an asset impairment charge must be recognized. The amount of the impairment charge is calculated as the excess of the asset’s carrying value over its fair value, which generally represents the discounted future cash flows from that asset or in the case of assets we expect to sell, at fair value less costs to sell. No indicators of impairment were identified with respect to our long-lived assets as of June 30, 2020.
Depreciation and Amortization of Long-Lived Assets
We depreciate our long-lived assets over their estimated economic useful lives with the exception of leasehold improvements where we use the shorter of the assets useful lives or the lease term of the facility for which these assets are associated. We estimate the economic useful lives of assets, other than leasehold improvements, to be between 3 and 15 years depending on the type of asset.
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities, and long term operating lease liability in our consolidated balance sheets. Finance leases are included in property and equipment, current finance lease liability, and long-term finance lease liability in our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. We include options to extend a lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. For a contract in which we are a lessee that contains fixed payments for both lease and non-lease components, we have elected to account for the components as a single lease component, as permitted. For finance leases, interest expense on the lease liability is recognized using the effective interest method and amortization of the right-of-use asset is recognized on a straight-line basis over the shorter of the estimated useful life of the asset or the lease term. ROU assets are tested for impairment if circumstances suggest that the carrying amount may not be recoverable. Our ROU assets consist of facility and equipment assets on operating leases. No events have occurred such as fire, flood, or other acts which have impaired the integrity of our ROU assets in 2020. Our facility leases require us to maintain insurance policies which would cover major damage to our facilities. We maintain business interruption insurance to cover loss of business due to a facility becoming non-operational under certain circumstances. Our equipment leases are covered by warranty and service contracts which cover repairs and provide regular maintenance to keep the equipment in functioning order.
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 14,000,000 shares of common stock for issuance under the Restated Plan . 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. In connection with our acquisition of DeepHealth Inc. on June 1, 2020, we assumed the DeepHealth, Inc. 2017 Stock Incentive Plan, including outstanding options awards that can be exercised for our common stock. No additional awards will be granted under the DeepHealth, Inc. 2017 Equity Incentive Plan. See Note 4, Facility Acquisitions and Note 6, Stock-Based Compensation, for more information.
Commitments and Contingencies
We are party to various legal proceedings, claims, and regulatory, tax or government inquiries and investigations that arise in the ordinary course of business. With respect to these matters, we evaluate the developments on a regular basis and accrue a liability when we believe a loss is probable and the amount can be reasonably estimated. Based on current information, we do not believe that reasonably possible or probable losses associated with pending legal proceedings would either individually or in the aggregate, have a material adverse effect on our business and consolidated financial statements. However, the outcome of these matters is inherently uncertain. Therefore, if one or more of these matters were resolved against us for amounts in excess of
management's expectations, our results of operations and financial condition, including in a particular reporting period in which any such outcome becomes probable and estimable, could be materially adversely affected.
Recent Accounting Standards
See Note 3, Recent Accounting and Reporting Standards to the financial statements included in this report orfor further information.
Results of Operations
The following table sets forth, for the three and six months ended June 30, 20202021 and 2019,2020, the percentage that certain items in the statements of operations bears to total service revenue, inclusive of revenue under capitation contracts.
RADNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE DATA)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| REVENUE | | | | | | | |
| Service fee revenue | 88.5 | % | | 81.7 | % | | 88.6 | % | | 85.6 | % |
| Revenue under capitation arrangements | 11.5 | % | | 18.3 | % | | 11.4 | % | | 14.4 | % |
| Total service revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Provider relief funding | — | % | | 13.4 | % | | 1.0 | % | | 5.4 | % |
| OPERATING EXPENSES | | | | | | | |
| Cost of operations, excluding depreciation and amortization | 84.9 | % | | 101.9 | % | | 87.2 | % | | 97.8 | % |
| Depreciation and amortization | 7.2 | % | | 11.2 | % | | 7.2 | % | | 9.2 | % |
| (Gain) loss on sale and disposal of equipment and other | (0.5) | % | | (0.3) | % | | (0.4) | % | | — | % |
| Severance costs | 0.1 | % | | 0.5 | % | | 0.1 | % | | 0.2 | % |
| Total operating expenses | 91.7 | % | | 113.3 | % | | 94.0 | % | | 107.2 | % |
| | | | | | | |
| INCOME (LOSS) FROM OPERATIONS | 8.3 | % | | 0.1 | % | | 7.0 | % | | (1.8) | % |
| | | | | | | |
| OTHER INCOME AND EXPENSES | | | | | | | |
| Interest expense | 3.6 | % | | 5.7 | % | | 3.9 | % | | 4.7 | % |
| Equity in earnings of joint ventures | (0.9) | % | | (0.5) | % | | (0.8) | % | | (0.6) | % |
| Non-cash change in fair value of interest rate hedge | — | % | | 2.0 | % | | (1.7) | % | | 0.8 | % |
| Debt restructuring and extinguishment expenses | 1.8 | % | | — | % | | 0.9 | % | | — | % |
| Other expenses (income) | 0.5 | % | | (0.1) | % | | 0.3 | % | | — | % |
| Total other (income) expenses | 5.0 | % | | 7.1 | % | | 2.5 | % | | 4.9 | % |
| INCOME (LOSS) BEFORE INCOME TAXES | 3.3 | % | | (7.1) | % | | 4.5 | % | | -6.7 | % |
| (Provision for) benefit from income taxes | (0.9) | % | | 2.3 | % | | (1.1) | % | | 1.9 | % |
| NET INCOME (LOSS) | 2.4 | % | | (4.7) | % | | 3.4 | % | | -4.9 | % |
| Net income attributable to noncontrolling interests | 1.6 | % | | 0.9 | % | | 1.5 | % | | 0.8 | % |
| NET INCOME (LOSS) ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS | 0.9 | % | | (5.6) | % | | 1.9 | % | | (5.7) | % |
|
| | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| REVENUE | |
| | |
| | |
| | |
|
| Service fee revenue | 81.7 | % | | 89.3 | % | | 85.6 | % | | 89.3 | % |
| Revenue under capitation arrangements | 18.3 | % | | 10.7 | % | | 14.4 | % | | 10.7 | % |
| Total revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Provider relief funding | 13.4 | % | | — | % | | 5.4 | % | | — | % |
| OPERATING EXPENSES | | | | | |
| | |
|
| Cost of operations, excluding depreciation and amortization | 101.9 | % | | 85.3 | % | | 97.8 | % | | 87.3 | % |
| Depreciation and amortization | 11.2 | % | | 6.9 | % | | 9.2 | % | | 7.1 | % |
| (Gain) loss on sale and disposal of equipment and other | (0.3 | )% | | — | % | | — | % | | 0.2 | % |
| Severance costs | 0.5 | % | | 0.1 | % | | 0.2 | % | | 0.2 | % |
| Total operating expenses | 113.3 | % | | 92.4 | % | | 107.2 | % | | 94.8 | % |
| | | | | | | | |
| INCOME (LOSS) FROM OPERATIONS | 0.1 | % | | 7.6 | % | | (1.8 | )% | | 5.2 | % |
| | | | | | | | |
| OTHER INCOME AND EXPENSES | |
| | |
| | |
| | |
|
| Interest expense | 5.7 | % | | 4.3 | % | | 4.7 | % | | 4.4 | % |
| Equity in earnings of joint ventures | (0.5 | )% | | (0.8 | )% | | (0.6 | )% | | (0.7 | )% |
| Non-cash change in fair value of interest rate hedge | 2.0 | % | | — | % | | 0.8 | % | | — | % |
| Other (income) expenses | (0.1 | )% | | 0.4 | % | | — | % | | 0.2 | % |
| Total other expenses | 7.1 | % | | 4.0 | % | | 4.9 | % | | 3.9 | % |
| (LOSS) INCOME BEFORE INCOME TAXES | (7.1 | )% | | 3.7 | % | | -6.7 | % | | 1.3 | % |
| Benefit from (provision for) income taxes | 2.3 | % | | (1.0 | )% | | 1.9 | % | | (0.3 | )% |
| NET (LOSS) INCOME | (4.7 | )% | | 2.6 | % | | -4.9 | % | | 1.0 | % |
| Net income attributable to noncontrolling interests | 0.9 | % | | 0.9 | % | | 0.8 | % | | 0.8 | % |
| NET (LOSS) INCOME ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS | (5.6 | )% | | 1.7 | % | | -5.6 | % | | 0.2 | % |
We have developed our medical imaging business through a combination of organic growth, equity investments, acquisitions and joint venture formations. We have segregated some of our information to demonstrate which is attributable to
centers that were in operation through the entirety of the comparison period, and which is attributable to those that were acquired or disposed of during the period. The discussion below shows a breakdown and analysis of revenue and expenses for the three and six months ended June 30, 20202021 and 20192020 for our operations at a total company and same center level.
Three Months Ended June 30, 20202021 Compared to the Three Months Ended June 30, 20192020
Total Revenue inclusive of Provider Relief funding where applicable for 2021 and 2020
| | | In Thousands | Three Months Ended June 30, | In Thousands | Three Months Ended June 30, |
| Revenue | 2020 | 2019 | $ Increase/(Decrease) | % Change | Revenue | 2021 | 2020 | $ Increase/(Decrease) | % Change |
| Total Revenue | $216,041 | $289,097 | $(73,056) | (25.3)% | Total Revenue | $333,961 | $216,041 | $117,921 | 54.6% |
| Same Center Revenue | $214,082 | $284,338 | $(70,257) | (24.7)% | Same Center Revenue | $306,740 | $212,548 | $94,192 | 44.3% |
Our nationwide operations were affected by the COVID-19 pandemic starting mid March 2020 which continued into the second quarter and resulted inIncreased revenue reflects an approximate 43% decrease inoverall same center procedural80.5% growth in total procedure volumes compared toover the same period last year. Inclusive in the reported 2020prior year as business returned to pre-COVID-19 levels. On a same center basis, Mammography procedures rose 106.3%, while advanced radiology procedures of MRI, PET and CT, expanded at a combined 154.4%, eventuating the significant revenue is $25.5 million receivedincrease over the same period in Provider Relief funding, which, per the official designation of the program, was used to offset lost revenues.prior year. This same center comparison excludes revenue contributions from centers that were acquired or divested subsequent to April 1, 2019.2020. For the three months ended June 30, 2021, net service fee revenue from centers that were acquired or divested subsequent to April 1, 2020 and excluded from the above comparison was $27.2 million. For the three months ended June 30, 2020, net service fee revenue from centers that were acquired or divested subsequent to April 1, 20192020 and excluded from the above comparison was $2.0 million. For the three months ended June 30, 2019, net service fee revenue from centers that were acquired or divested subsequent to April 1, 2019 and excluded from the above comparison was $4.8$3.5 million.
Operating Expenses
Total operating expenses for the three months ended June 30, 2020 decreased2021 increased approximately $51.3$90.4 million, or 19.2%41.9%, from $267.1 million for the three months ended June 30, 2019 to $215.9 million for the three months ended June 30, 2020.2020 to $306.3 million for the three months ended June 30, 2021. The following table sets forth a breakdown of our cost of operations and total operating expenses for the three months ended June 30, 20202021 and 20192020 (in thousands):
| | | | | | | | | | | |
| | Three Months Ended
June 30, |
| | 2021 | | 2020 |
| Salaries and professional reading fees, excluding stock-based compensation | $ | 172,904 | | | $ | 111,794 | |
| Stock-based compensation | 8,897 | | | 1,456 | |
| Building and equipment rental | 31,139 | | | 26,549 | |
| Medical supplies | 14,268 | | | 8,566 | |
Other operating expenses * | 56,363 | | | 45,852 | |
| Cost of operations | 283,571 | | | 194,217 | |
| | | |
| Depreciation and amortization | 24,011 | | | 21,355 | |
| Gain on sale and disposal of equipment | (1,567) | | | (569) | |
| Severance costs | 268 | | | 859 | |
| Total operating expenses | $ | 306,283 | | | $ | 215,862 | |
*Includes billing fees, office supplies, repairs and maintenance, insurance, business tax and license, outside services, telecom, utilities, marketing, travel and other expenses.
The discussion below provides additional information and analysis on changes in our various operating expenses for the three months ended June 30, 2021 and 2020 (in thousands):
Salaries and professional reading fees, excluding stock-based compensation and severance
| | | | | | | | | | | | | | |
| In Thousands | Three Months Ended June 30, |
| Salaries and Professional Fees | 2021 | 2020 | $ Increase/(Decrease) | % Change |
| Total Salaries | $172,904 | $111,794 | $61,110 | 54.7% |
| Same Center Salaries | $160,092 | $109,799 | $50,293 | 45.8% |
Same center salaries, which are substantially greater than the same period in the prior year, exemplifies the return to a state of normal business. During the same period in the prior year, which was the height of the pandemic, our physician and non physician staff were subject to furloughs, pay reductions, and layoffs. Our staff has now returned to a level to support the influx of patients seeking radiology procedures and combined with restored pay, has resulted in the higher salaries and professional fee expense. This same center comparison excludes expenses from centers that were acquired or divested
|
| | | | | | | |
| | Three Months Ended
June 30, |
| | 2020 | | 2019 |
| Salaries and professional reading fees, excluding stock-based compensation | $ | 111,794 |
| | $ | 156,441 |
|
| Stock-based compensation | 1,456 |
| | 1,044 |
|
| Building and equipment rental | 26,549 |
| | 26,938 |
|
| Medical supplies | 8,566 |
| | 11,562 |
|
Other operating expenses * | 45,852 |
| | 50,573 |
|
| Cost of operations | 194,217 |
| | 246,558 |
|
| | | | |
| Depreciation and amortization | 21,355 |
| | 20,083 |
|
| (Gain) loss on sale and disposal of equipment | (569 | ) | | 101 |
|
| Severance costs | 859 |
| | 371 |
|
| Total operating expenses | $ | 215,862 |
| | $ | 267,113 |
|
Stock-based compensation
Stock-based compensation increased $7.4 million, or 511.1% to approximately $8.9 million for the three months ended June 30, 2021 compared to $1.5 million for three months ended June 30, 2020. This increase was driven by the higher fair value of RSA’s awarded and vested in the first quarter of 2021 as compared to RSA’s awarded and vested in the prior year’s first quarter. In addition, we granted awards valued at $6.5 million in compensation expense in employee COVID-19 related bonuses.
Building and equipment rental
| | | | | | | | | | | | | | |
| In Thousands | Three Months Ended June 30, |
| Building & Equipment Rental | 2021 | 2020 | $ Increase/(Decrease) | % Change |
| Total | $31,139 | $26,549 | $4,590 | 17.3% |
| Same Center | $25,623 | $25,113 | $510 | 2.0% |
The overall increase in building and equipment rental expenses was related to centers acquired through our business combinations, as same center expense remained stable. This same center comparison excludes expenses from centers that were acquired or divested subsequent to April 1, 2020. For the three months ended June 30, 2021, building and equipment rental expenses from centers that were acquired or divested subsequent to April 1, 2020 and excluded from the above comparison was $5.5 million. For the three months ended June 30, 2020, building and equipment rental expenses from centers that were acquired or divested subsequent to April 1, 2020 and excluded from the above comparison was approximately $1.4 million.
Medical supplies
| | | | | | | | | | | | | | |
| In Thousands | Three Months Ended June 30, |
| Medical Supplies Expense | 2021 | 2020 | $ Increase/(Decrease) | % Change |
| Total | $14,268 | $8,566 | $5,702 | 66.6% |
| Same Center | $13,394 | $8,450 | $4,944 | 58.5% |
Medical supplies expense increase stems from the overall procedural volumes noted above compared to the same period in the prior year and is consistent with the percentage increases in revenue and salaries expense. This same center comparison excludes expenses from centers that were acquired or divested subsequent to April 1, 2020. For the three months ended June 30, 2021, medical supplies expenses from centers that were acquired or divested subsequent to April 1, 2020 and excluded from the above comparison was $0.9 million. For the three months ended June 30, 2020, medical supplies expense from centers that were acquired or divested subsequent to April 1, 2020 and excluded from the above comparison was $0.1 million.
Other operating expenses
| | | | | | | | | | | | | | |
| In Thousands | Three Months Ended June 30, |
| Other Operating Expenses | 2021 | 2020 | $ Increase/(Decrease) | % Change |
| Total | $56,363 | $45,852 | $10,511 | 22.9% |
| Same Center | $51,368 | $44,480 | $6,888 | 15.5% |
Increases in same center other expenses is reflective of our improved business conditions, but the rise was less than proportionate with higher revenues due to the cumulative effect of successful contract re-negotiations in the prior year aimed to reduce charges across a range of vendors from repair and maintenance to professional services. This same center comparison excludes expenses from centers that were acquired or divested subsequent to April 1, 2020. For the three months ended June 30, 2021, other operating expense from centers that were acquired or divested subsequent April 1, 2020 and excluded from the above comparison was $5.0 million. For the three months ended June 30, 2020, other operating expense from centers that were acquired or divested subsequent to April 1, 2020 was $1.4 million.
Depreciation and amortization
| | | | | | | | | | | | | | |
| In Thousands | Three Months Ended June 30, |
| Depreciation & Amortization | 2021 | 2020 | $ Increase/(Decrease) | % Change |
| Total | $24,011 | $21,355 | $2,656 | 12.4% |
| Same Center | $21,512 | $20,605 | $907 | 4.4% |
This same center comparison excludes expenses from centers that were acquired or divested subsequent to April 1, 2020. For the three months ended June 30, 2021, depreciation expense from centers that were acquired or divested subsequent to April 1, 2020 and excluded from the above comparison was $2.5 million. For the three months ended June 30, 2020, depreciation and amortization from centers that were acquired or divested subsequent to April 1, 2020 and excluded from the above comparison was $0.7 million.
Gain on sale and disposal of equipment and other
We recorded gains on the disposal of equipment and other items of approximately $1.6 million for the three months ended June 30, 2021 and approximately $0.6 million for the three months ended June 30, 2020.
Non-cash change in fair value of interest rate hedge
We recorded an immaterial gain of $35.0 thousand for the ineffective portion of our 2019 Swaps for the three months ended June 30, 2021 and a expense of $3.8 million for three months ended June 30, 2020.
Other (income) expenses
We recorded other expenses of approximately $7.7 million for the three months ended June 30, 2021 mainly related to our refinancing of our term loan debt and the change in fair value of contingent consideration. Amounts for the corresponding period ending June 30, 2020 were other income of $0.1 million.
Severance Costs
We incurred severance expenses of $0.3 million for the three months ended June 30, 2021 and $0.9 million for the three months ended June 30, 2020.
Interest expense
| | | | | | | | | | | | | | |
| In Thousands | Three Months Ended June 30, |
| Interest Expense | 2021 | 2020 | $ Increase/(Decrease) | % Change |
| Total Interest Expense | $12,171 | $10,831 | $1,340 | 12.4 | % |
| Interest related to derivatives* | $3,684 | $1,187 | | |
| | | | |
| Interest related to amortization** | $931 | $1,081 | | |
| Adjusted Interest Expense*** | $7,556 | $8,563 | $(1,007) | (11.8) | % |
* Includes interest on current and prior derivative instruments not related to debt obligations.
** Includes combined noncash amortization of deferred loan costs and discount on issuance of debt.
***Includes interest related to our term loans, revolving credit line,notes, finance leases and other.
Excluding the effect of interest expense related to derivatives and amortization for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, interest expense decreased $1.0 million, or 11.8%. The reduction in interest expense corresponds to lowered variable LIBOR and Prime interest rates paid on our term loan and revolving debt based on market conditions. See “Liquidity and Capital Resources” below for more details on our credit facilities.
To mitigate our future interest expense exposure we have entered into certain interest rate swap agreements. See the Derivative Instruments section of Note 2, Significant Accounting Policies, to the condensed consolidated financial statements included in this report for more details on our derivative transactions.
Equity in earnings from unconsolidated joint ventures
For the three months ended June 30, 2021 we recognized equity in earnings from unconsolidated joint ventures in the amount of $3.1 million and for three months ended June 30, 2020 we recognized equity in earnings from unconsolidated joint ventures of $0.9 million, an increase of $2.2 million or 230.3%. The increase was mainly related to the equity in earnings received from our interest in the Arizona Diagnostic Radiology Group joint venture, which was formed in the fourth quarter of 2020.
Income tax provision
We recorded income tax expense of $2.9 million, or an effective tax rate of 26.2%, for the three months ended June 30, 2021 compared to a benefit from income taxes of $4.5 million, or an effective tax rate of 33.3% for the three months ended June 30, 2020. The income tax rates for the three and six months ended June 30, 2021 diverge from the federal statutory rate due to (i) noncontrolling interests due to the controlled partnerships; (ii) effects of state income taxes; and (iii) excess tax benefits attributable to share-based compensation.
Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020
Total Revenue inclusive of Provider Relief funding for 2020
| | | | | | | | | | | | | | |
| In Thousands | Six Months Ended June 30, 2021 |
| Revenue | 2021 | 2020 | $ Increase/(Decrease) | % Change |
| Total Revenue | $655,528 | $497,605 | $157,923 | 31.7% |
| Same Center Revenue | $609,580 | $486,458 | $123,122 | 25.3% |
Increased revenue reflects an overall same center 36.1% growth in total procedure volumes over the same period in the prior year as business returned to pre-COVID-19 levels. Total Provider Relief funding used to offset lost revenue due to the pandemic and included in the above amounts was $6.2 million for the six months ended June 30, 2021 and $25.5 million for the six months ended June 30, 2020. This comparison excludes revenue contributions from centers that were acquired or divested subsequent to January 1, 2020. For the six months ended June 30, 2021, net service fee revenue from centers that were acquired or divested subsequent to January 1, 2020 and excluded from the above comparison was $45.9 million. For the six months ended June 30, 2020, net service fee revenue from centers that were acquired or divested subsequent to January 1, 2020 and excluded from the above comparison was $11.1 million.
Operating Expenses
Total operating expenses for the six months ended June 30, 2021 increased approximately $104.0 million, or 20.5%, from $506.2 million for the six months ended June 30, 2021 to $610.2 million for the six months ended June 30, 2020. The following table sets forth a breakdown of our cost of operations and total operating expenses for the six months ended June 30, 2021 and 2020 (in thousands):
| | | | | | | | | | | |
| | Six Months Ended June 30, 2021 |
| | 2021 | | 2020 |
| Salaries and professional reading fees, excluding stock-based compensation | $ | 350,765 | | | $ | 279,322 | |
| Stock-based compensation | 17,145 | | | 8,078 | |
| Building and equipment rental | 59,850 | | | 53,445 | |
| Medical supplies | 28,238 | | | 21,314 | |
Other operating expenses * | 109,852 | | | 99,476 | |
| Cost of operations | 565,850 | | | 461,635 | |
| | | |
| Depreciation and amortization | 46,667 | | | 43,289 | |
| (Gain) Loss on sale and disposal of equipment | (2,874) | | | 202 | |
| Severance costs | 551 | | | 1,076 | |
| Total operating expenses | $ | 610,194 | | | $ | 506,202 | |
*Includes billing fees, office supplies, repairs and maintenance, insurance, business tax and license, outside services, telecom, utilities, marketing, travel and other expenses.
Salaries and professional reading fees, excluding stock-based compensation and severance
| | | | | | | | | | | | | | |
| In Thousands | Six Months Ended June 30, 2021 |
| Salaries and Professional Fees | 2021 | 2020 | $ Increase/(Decrease) | % Change |
| Total Salaries | $350,765 | $279,322 | $71,443 | 25.6% |
| Same Center Salaries | $328,605 | $273,159 | $55,446 | 20.3% |
|
| | | | |
| In Thousands | Three Months Ended June 30, |
| Salaries and Professional Fees | 2020 | 2019 | $ Increase/(Decrease) | % Change |
| Total Salaries | $111,794 | $156,441 | $(44,647) | (28.5)% |
| Same Center Salaries | $110,376 | $153,496 | $(43,120) | (28.1)% |
The decreaseincrease in salaries expense was a result of staff furloughs and salary reductions initiateda return to normal pre-Covid19 levels of business. As noted in responseour quarterly explanation above, staffing levels have been adjusted to support higher patient volumes with the COVID-19 crisis. To support our current operations, certain of our subsidiaries have accepted approximately $4.0 millioncorresponding rise in loans from the Paycheck Protection Program (PPP). We have used the funds to pay program approved payroll expenses to both maintain and rehire furloughed employees. This comparison excludes expenses from centers that were acquired or divested subsequent to April 1, 2019. For the three months ended June 30, 2020, salaries and professional reading fees from centers that were acquired or divested subsequent to April 1, 2019 and excluded from the above comparison was $1.4 million. For the three months ended June 30, 2019, salaries and professional reading fees from centers that were acquired or divested subsequent to April 1, 2019 and excluded from the above comparison was approximately $2.9 million.
Stock-based compensation
Stock-based compensation increased $0.4 million, or 39.4% to approximately $1.5 million for the three months ended June 30, 2020 compared to $1.0 million for three months ended June 30, 2019. This increase was driven by the higher fair value of RSA’s awarded and vested in the first quarter of 2020 as compared to RSA’s awarded and vested in the prior year’s first quarter.
Building and equipment rental
|
| | | | |
| In Thousands | Three Months Ended June 30, |
| Building & Equipment Rental | 2020 | 2019 | $ Increase/(Decrease) | % Change |
| Total | $26,549 | $26,938 | $(390) | (1.5)% |
| Same Center | $25,639 | $26,123 | $(484) | (1.9)% |
This comparison excludes expenses from centers that were acquired or divested subsequent to April 1, 2019. For the three months ended June 30, 2020, building and equipment rental expenses from centers that were acquired or divested subsequent to April 1, 2019 and excluded from the above comparison was $0.9 million. For the three months ended June 30, 2019, building and equipment rental expenses from centers that were acquired or divested subsequent to April 1, 2019 and excluded from the above comparison was approximately $0.8 million.
Medical supplies
|
| | | | |
| In Thousands | Three Months Ended June 30, |
| Medical Supplies Expense | 2020 | 2019 | $ Increase/(Decrease) | % Change |
| Total | $8,566 | $11,562 | $(2,996) | (25.9)% |
| Same Center | $8,513 | $11,393 | $(2,880) | (25.3)% |
The reduced medical supplies expense correlated to lower procedure volumes and enabled medical supplies obtained in anticipation of pre-COVID-19 levels in the first quarter to be used throughout the second quarter. This comparison excludes expenses from centers that were acquired or divested subsequent to April 1, 2019. For the three months ended June 30, 2020, medical supplies expenses from centers that were acquired or divested subsequent to April 1, 2019 and excluded from the above comparison was $0.1 million. For the three months ended June 30, 2019, medical supplies expense from centers that were acquired or divested subsequent to April 1, 2019 and excluded from the above comparison was $0.2 million.
Other operating expenses
|
| | | | |
| In Thousands | Three Months Ended June 30, |
| Other Operating Expenses | 2020 | 2019 | $ Increase/(Decrease) | % Change |
| Total | $45,852 | $50,573 | $(4,721) | (9.3)% |
| Same Center | $45,332 | $49,633 | $(4,301) | (8.7)% |
Other operating expenses decrease was related in part to contract re-negotiations offering improved rates from vendors across a range of services such as equipment repairs and maintenance, janitorial and billing. This comparison excludes expenses from centers that were acquired or divested subsequent to April 1, 2019. For the three months ended June 30, 2020, other operating expense from centers that were acquired or divested subsequent April 1, 2019 and excluded from the above comparison was $0.5 million. For the three months ended June 30, 2019, other operating expense from centers that were acquired or divested subsequent to April 1, 2019 was $0.9 million.
Depreciation and amortization
|
| | | | |
| In Thousands | Three Months Ended June 30, |
| Depreciation & Amortization | 2020 | 2019 | $ Increase/(Decrease) | % Change |
| Total | $21,355 | $20,083 | $1,271 | 6.3% |
| Same Center | $20,784 | $19,622 | $1,162 | 5.9% |
The increase in same center depreciation and amortization is primarily due to additional equipment and leasehold improvements placed in service in the second quarter in 2020 over the second quarter in 2019. This comparison excludes expenses from centers that were acquired or divested subsequent to April 1, 2019. For the three months ended June 30, 2020, depreciation expense from centers that were acquired or divested subsequent to April 1, 2019 and excluded from the above comparison was $0.6 million. For the three months ended June 30, 2019, depreciation and amortization from centers that were acquired or divested subsequent to April 1, 2019 and excluded from the above comparison was $0.5 million.
(Gain) loss on sale and disposal of equipment and other
We recorded a gain on the disposal of equipment and other items of approximately $0.6 million for the three months ended June 30, 2020 and a loss of approximately $0.1 million for the three months ended June 30, 2019.
Non-cash change in fair value of interest rate hedge
We recorded expense of $3.8 million for the ineffective portion of our 2019 Swaps for the three months ended June 30, 2020.
Other (income) expenses
We recorded other income of approximately $0.1 million for the three months ended June 30, 2020 and other expenses of approximately $1.3 million for the three months ended June 30, 2019 related to refinancing of our term loan debt and legal contingency charges.
Severance Costs
We incurred severance expenses of $0.9 million for the three months ended June 30, 2020 and $0.4 million for the three months ended June 30, 2019.
Interest expense
|
| | | | |
| In Thousands | Three Months Ended June 30, |
| Interest Expense | 2020 | 2019 | $ Increase/(Decrease) | % Change |
| Total Interest Expense | $10,831 | $12,399 | $(1,568) | (12.6)% |
| Interest related to amortization* | $1,973 | $1,109 | $864 | 77.9% |
| Adjusted Interest Expense | $8,858 | $11,290 | $(2,432) | (21.5)% |
*Includes combined non cash amortization of deferred loan costs, discount on issuance of debt and accumulated other comprehensive loss.
Excluding the non cash interest amounts for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, interest expense decreased $2.4 million, or 21.5%. The reduction in interest expense corresponds to lowered variable LIBOR and Prime interest rates paid on our term loan and revolving debt in reaction to market conditions surrounding COVID-19. See “Liquidity and Capital Resources” below for more details on our credit facilities.
Equity in earnings from unconsolidated joint ventures
For the three months ended June 30, 2020 we recognized equity in earnings from unconsolidated joint ventures in the amount of $0.9 million and for three months ended June 30, 2019 we recognized equity in earnings from unconsolidated joint ventures of $2.2 million, an decrease of $1.3 million or (57.9)% related to the market conditions stemming from the COVID-19 pandemic.
Income tax benefit
We recorded an income tax benefit of $4.5 million, or an effective tax rate of 33.3%, for the three months ended June 30, 2020 compared to an income tax provision of $3.0 million , or an effective tax rate of 28.1% for the three months ended June 30, 2019. The income tax rates for the three and six months ended June 30, 2020 diverge from the federal statutory rate due to (i) noncontrolling interests due to the controlled partnerships; (ii) effects of state income taxes; and (iii) excess tax benefits attributable to share-based compensation.
Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019
Total Revenue inclusive of Provider Relief funding for 2020
|
| | | | |
| In Thousands | Six Months Ended June 30, 2020 |
| Revenue | 2020 | 2019 | $ Increase/(Decrease) | % Change |
| Total Revenue | $497,605 | $560,646 | $(63,042) | (11.2)% |
| Same Center Revenue | $470,374 | $536,203 | $(65,829) | (12.3)% |
Our procedure volumes were affected by the COVID-19 pandemic, a downward effect that continued into the second quarter and resulted in an approximate 23% decrease in same center procedural volumes year over year. Inclusive in the reported 2020 revenue is $25.5 million received in Provider Relief funding, which, per the official designation of the program, was used to offset lost revenues. This comparison excludes revenue contributions from centers that were acquired or divested subsequent to January 1, 2019. For the six months ended June 30, 2020, net service fee revenue from centers that were acquired or divested subsequent to January 1, 2019 and excluded from the above comparison was $27.2 million. For the six months ended June 30, 2019, net service fee revenue from centers that were acquired or divested subsequent to January 1, 2019 and excluded from the above comparison was $24.4 million.
Operating Expenses
Total operating expenses for the six months ended June 30, 2020 decreased approximately $25.2 million, or 4.7%, from $531.4 million for the six months ended June 30, 2020 to $506.2 million for the three months ended June 30, 2020. The following table sets forth our cost of operations and total operating expenses for the three months ended June 30, 2020 and 2019 (in thousands):
|
| | | | | | | |
| | Six Months Ended June 30, 2020 |
| | 2020 | | 2019 |
| Salaries and professional reading fees, excluding stock-based compensation | $ | 279,322 |
| | $ | 311,036 |
|
| Stock-based compensation | 8,078 |
| | 5,583 |
|
| Building and equipment rental | 53,445 |
| | 52,167 |
|
| Medical supplies | 21,314 |
| | 21,400 |
|
Other operating expenses * | 99,476 |
| | 99,429 |
|
| Cost of operations | 461,635 |
| | 489,615 |
|
| | | | |
| Depreciation and amortization | 43,289 |
| | 39,704 |
|
| Loss on sale and disposal of equipment | 202 |
| | 1,072 |
|
| Severance costs | 1,076 |
| | 1,002 |
|
| Total operating expenses | $ | 506,202 |
| | $ | 531,393 |
|
*Includes billing fees, office supplies, repairs and maintenance, insurance, business tax and license, outside services, telecom, utilities, marketing, travel and other expenses.
Salaries and professional reading fees, excluding stock-based compensation and severance
|
| | | | |
| In Thousands | Six Months Ended June 30, 2020 |
| Salaries and Professional Fees | 2020 | 2019 | $ Increase/(Decrease) | % Change |
| Total Salaries | $279,322 | $311,036 | $(31,714) | (10.2)% |
| Same Center Salaries | $265,517 | $297,343 | $(31,826) | (10.7)% |
The decrease in salaries expense was a result of staff furloughs and salary reductions initiated in response to the COVID-19 crisis. To support our current operations, certain of our subsidiaries have accepted approximately $4.0 million in loans from the Paycheck Protection Program (PPP). We have used the funds to pay program approved payroll expenses to both maintain and rehire furloughed employees.expense. This comparison excludes expenses from centers that were acquired or divested subsequent to January 1, 2019.2020. For the six months ended June 30, 2021, salaries and professional reading fees from centers that were acquired or divested subsequent to January 1, 2020 and excluded from the above comparison was $22.2 million. For the six months ended June 30, 2020, salaries and professional reading fees from centers that were acquired or divested subsequent to January 1, 2019 and excluded from the above comparison was $13.8 million. For the six months ended June 30, 2019, salaries and professional reading fees from centers that were acquired or divested subsequent to January 1, 20192020 and excluded from the above comparison was approximately $13.7$6.2 million.
Stock-based compensation
Stock-based compensation increased $2.5$9.1 million, or 44.7%112.2% to approximately $8.1$17.1 million for the six months ended June 30, 20202021 compared to $5.6$8.1 million for six months ended June 30, 2019.2020. This increase was driven by the higher fair value of RSA’s awarded and vested in the first halfsix months of 20202021 as compared to RSA’s awarded and vested in the prior year’s same period. In addition, we granted awards valued at $6.5 million in compensation expense in employee COVID-19 related bonuses during the first half.six months of 2021.
Building and equipment rental
| | | | | | | | | | | | | | |
| In Thousands | Six Months Ended June 30, 2021 |
| Building & Equipment Rental | 2021 | 2020 | $ Increase/(Decrease) | % Change |
| Total | $59,850 | $53,445 | $6,405 | 12.0% |
| Same Center | $51,108 | $50,401 | $707 | 1.4% |
|
| | | | |
| In Thousands | Six Months Ended June 30, 2020 |
| Building & Equipment Rental | 2020 | 2019 | $ Increase/(Decrease) | % Change |
| Total | $53,445 | $52,167 | $1,278 | 2.5% |
| Same Center | $52,167 | $48,642 | $515 | 1.1% |
The increase in building and equipment rental expenses was related to centers acquired through our business combinations. This comparison excludes expenses from centers that were acquired or divested subsequent to January 1, 2019.2020. For the six months ended June 30, 2021, building and equipment rental expenses from centers that were acquired or divested subsequent to January 1, 2020 and excluded from the above comparison was $8.7 million. For the six months ended June 30, 2020, building and equipment rental expenses from centers that were acquired or divested subsequent to January 1, 2019 and excluded from the above comparison was $4.3 million. For the six months ended June 30, 2019, building and equipment rental expenses from centers that were acquired or divested subsequent to January 1, 20192020 and excluded from the above comparison was approximately $3.5$3.0 million.
Medical supplies
| | | | | | | | | | | | | | |
| In Thousands | Six Months Ended June 30, 2021 |
| Medical Supplies Expense | 2021 | 2020 | $ Increase/(Decrease) | % Change |
| Total | $28,238 | $21,314 | $6,924 | 32.5% |
| Same Center | $26,737 | $20,944 | $5,793 | 27.7% |
|
| | | | |
| In Thousands | Six Months Ended June 30, 2020 |
| Medical Supplies Expense | 2020 | 2019 | $ Increase/(Decrease) | % Change |
| Total | $21,314 | $21,400 | $(86) | (0.4)% |
| Same Center | $19,201 | $19,744 | $(543) | (2.8)% |
Year over year medicalMedical supplies expense remained relatively flat dueincrease stems from the overall procedural volumes noted above compared to varying factors. In the first quarter, we noted a 21% same store increase stemming from securing personal protective equipment and procurement of specialized imaging agents. Whileperiod in the second quarter, a 25% same store expense reduction was correlated to lower procedural volumes. The cumulative effect of these factors has resultedprior year and is consistent with the percentage increase in the year over year stability of medical supplies expense.revenue. This comparison excludes expenses from centers that were acquired or divested subsequent to January 1, 2019.2020. For the six months ended June 30, 2020,2021, medical supplies expenses from centers that were acquired or divested subsequent to April 1, 2018 and excluded from the above comparison was $2.1$1.5 million. For the six months ended June 30, 2019,2020, medical supplies expense from centers that were acquired or divested subsequent to January 1, 20192020 and excluded from the above comparison was $1.7$0.4 million.
Other operating expenses
| | | | | | | | | | | | | | |
| In Thousands | Six Months Ended June 30, 2021 |
| Other Operating Expenses | 2021 | 2020 | $ Increase/(Decrease) | % Change |
| Total | $109,852 | $99,476 | $10,376 | 10.4% |
| Same Center | $100,725 | $96,148 | $4,577 | 4.8% |
|
| | | | |
| In Thousands | Six Months Ended June 30, 2020 |
| Other Operating Expenses | 2020 | 2019 | $ Increase/(Decrease) | % Change |
| Total | $99,476 | $99,429 | $46 | 0.1% |
| Same Center | $95,384 | $95,112 | $272 | 0.3% |
As noted in our quarterly analysis above, increases in other operating expenses were mitigated by the cumulative effect of successful contract re-negotiations in the prior year aimed to reduce charges across a range of vendors. This comparison excludes expenses from centers that were acquired or divested subsequent to January 1, 2019.2020. For the six months ended June 30, 2021, other operating expense from centers that were acquired or divested subsequent January 1, 2020 and excluded from the above comparison was $9.1 million. For the six months ended June 30, 2020, other operating expense from centers that were acquired or divested subsequent January 1, 2019 and excluded from the above comparison was $4.1 million. For the six months ended June 30, 2019, other operating expense from centers that were acquired or divested subsequent to January 1, 20192020 was $4.3$3.3 million.
Depreciation and amortization
| | | | | | | | | | | | | | |
| In Thousands | Six Months Ended June 30, 2021 |
| Depreciation & Amortization | 2021 | 2020 | $ Increase/(Decrease) | % Change |
| Total | $46,667 | $43,289 | $3,378 | 7.8% |
| Same Center | $42,440 | $41,690 | $750 | 1.8% |
|
| | | | |
| In Thousands | Six Months Ended June 30, 2020 |
| Depreciation & Amortization | 2020 | 2019 | $ Increase/(Decrease) | % Change |
| Total | $43,289 | $39,704 | $3,585 | 9.0% |
| Same Center | $40,593 | $37,721 | $2,872 | 7.6% |
The increase in same center depreciation and amortization is primarily due to additional equipment and leasehold improvements placed in service in the first half of 2020 over the first half 2019. This comparison excludes expenses from centers that were acquired or divested subsequent to January 1, 2019.2020. For the six months ended June 30, 2020,2021, depreciation expense from centers that were acquired or divested subsequent to January 1, 20192020 and excluded from the above comparison was $2.7$4.2 million. For the six months ended June 30, 2019,2020, depreciation and amortization from centers that were acquired or divested subsequent to January 1, 20192020 and excluded from the above comparison was $2.0$1.6 million.
(Gain) lossLoss on sale and disposal of equipment and other
We recorded lossesa gain on the disposal of equipment and other items of approximately $2.9 million for the six months ended June 30, 2021 and a loss on the disposal of equipment of approximately $0.2 million for the six months ended June 30, 2020 and approximately $1.1 million for the six months ended June 30, 2019.2020.
Non-cash change in fair value of interest rate hedge
We recorded expense of $3.8$11.3 million for the ineffective portion of our 2019 Swaps for the six months ended June 30, 2020.
2021.
Other (income) expenses
We recorded other expense of approximately $7.9 million for the six months ended June 30, 2021 mainly related to our refinancing of our term loan debt and the change in fair value of contingent consideration. We recorded other income of approximately $0.1 million for the six months ended June 30, 2020 and other
Severance Costs
We incurred severance expenses of approximately $1.3$0.6 million for the six months ended June 30, 2019 related to refinancing of our term loan debt2021 and legal contingency charges.
Severance Costs
We incurred severance expenses of $1.1 million for the six months ended June 30, 20202020.
Interest expense
| | | | | | | | | | | | | | |
| In Thousands | Six Months Ended June 30, 2021 |
| Interest Expense | 2021 | 2020 | $ Increase/(Decrease) | % Change |
| Total Interest Expense | $24,997 | $22,382 | | |
| Interest related to derivatives* | $7,334 | $1,549 | | |
| Interest payable on debt obligations** | $17,663 | $20,833 | $(3,170) | (15.2) | % |
| Interest related to amortization*** | $2,078 | $2,163 | | |
| Adjusted Interest Expense | $15,585 | $18,670 | $(3,085) | (16.5) | % |
* Includes interest on derivatives not related to debt obligations.
** Includes interest related to our term loans, revolving credit line, notes, finance leases, and $1.0 millionother
***Includes combined noncash amortization of deferred loan costs and discount on issuance of debt.
Excluding interest expense for derivatives and amortization for the six months ended June 30, 2019.
Interest expense
|
| | | | |
| In Thousands | Six Months Ended June 30, 2020 |
| Interest Expense | 2020 | 2019 | $ Increase/(Decrease) | % Change |
| Total Interest Expense | $22,382 | $24,694 | $(2,312) | (9.4)% |
| Interest related to amortization* | $3,055 | $2,021 | $1,034 | 51.2% |
| Adjusted Interest Expense | $19,327 | $22,673 | $(3,346) | (14.8)% |
*Includes combined non cash amortization of deferred loan costs, discount on issuance of debt and accumulated other comprehensive loss.
Excluding the non cash interest amounts for the six months ended June 30, 20202021 compared to the six months ended June 30, 2019,2020, interest expense decreased $3.3$3.1 million, or 14.8%16.5%. The reduction in interest expense corresponds to lowered variable LIBOR and Prime interest rates paid on our term loan and revolving debt in reaction to market conditions surrounding COVID-19.debt. See “Liquidity and Capital Resources” below for more details on our credit facilities.
Equity in earnings from unconsolidated joint ventures
For the six months ended June 30, 2021 we recognized equity in earnings from unconsolidated joint ventures in the amount of $5.4 million and for six months ended June 30, 2020 we recognized equity in earnings from unconsolidated joint ventures in the amount of $2.9 million, and for six months ended June 30, 2019 we recognizedan increase of $2.5 million or 86.4%. The increase was mainly related to the equity in earnings received from unconsolidatedour interest in the Arizona Diagnostic Radiology Group joint venturesventure, which was formed in the fourth quarter of $4.1 million, an decrease of $1.2 million or 29.6%, related to the market conditions stemming from COVID-19.2020.
Income tax benefitexpense
We recorded ana provision for income tax benefit of $8.9$7.2 million, or an effective tax rate of 27.8%24.9%, for the six months ended June 30, 20202021 compared to ana benefit for income tax provision of $1.7$8.9 million , or an effective tax rate of 23.5%27.8% for the six months ended June 30, 2019.2020. The income tax rates for the three and six months ended June 30, 20202021 diverge from the federal statutory rate due to (i) noncontrolling interests due to the controlled partnerships; (ii) effects of state income taxes; and (iii) excess tax benefits attributable to share-based compensation.
Adjusted EBITDA
We use both GAAP and non-GAAP metrics to measure our financial results. We believe that, in addition to GAAP metrics, thesecertain non-GAAP metrics, such as Adjusted EBITDA assist us in measuring our business performance, cash generated from operations, leverage capacity and ability to service our debt obligations. We believe this information is useful to investors and other interested parties because we are highly leveraged and our non-GAAP metrics remove non-cash and certain other charges that occur in the affected period and provide a basis for measuring the Company's financial condition against other quarters.
One non-GAAP measure we believe assists us is Adjusted EBITDA. We define Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, each from continuing operations and excluding losses or gains on the disposal of equipment, other income or loss, loss on debt extinguishment, bargain purchase gains and non-cash equity compensation. Adjusted EBITDA includes equity earnings in unconsolidated operations and subtracts allocations of earnings to noncontrolling interests in subsidiaries, and is adjusted for non-cash or
extraordinary and one-time events taking place during the period. We have not made specific adjustments to our calculation of Adjusted EBITDA in response to COVID 19. Our net income (loss) reflected below includes the effect of the $25 million in other revenue received under the Provider Relief Fund. We have treatedFund of $6.2 million and $25.5 million for the PPP loans assix months ended June 30, 2021 and 2020, respectively.
debt, and accordingly will be liable for an interest charge related to those loans which will be included in interest expense, although the loans may ultimately be forgiven.
Adjusted EBITDA is a non-GAAP financial measure used as an analytical indicator by us and the healthcare industry to assess business performance, and is a measure of leverage capacity and ability to service debt. Adjusted EBITDA should not be considered a measure of financial performance under GAAP, and the items excluded from Adjusted EBITDA should not be considered in isolation or as alternatives to net income, cash flows generated by operating, investing or financing activities or other financial statement data presented in the consolidated financial statements as an indicator of financial performance or liquidity. As Adjusted EBITDA is not a measurement determined in accordance with GAAP and is therefore susceptible to varying methods of calculation, this metric, as presented, may not be comparable to other similarly titled measures of other companies.
Adjusted EBITDA is most comparable to the GAAP financial measure, net income (loss) attributable to RadNet, Inc. common stockholders. The following is a reconciliation of GAAP net income (loss) attributable to RadNet, Inc. common stockholders to Adjusted EBITDA for the three and six months ended June 30, 20202021 and 2019,2020, respectively.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Net income (loss) attributable to RadNet, Inc. common stockholders | $ | 2,873 | | | $ | (10,594) | | | $ | 12,331 | | | $ | (26,952) | |
| Provision for (benefit from) income taxes | 2,874 | | | (4,475) | | | 7,249 | | | (8,856) | |
| Interest expense | 12,171 | | | 10,831 | | | 24,997 | | | 22,382 | |
| Severance costs | 268 | | | 859 | | | 551 | | | 1,076 | |
| Depreciation and amortization | 24,011 | | | 21,355 | | | 46,667 | | | 43,289 | |
| Non-cash employee stock-based compensation | 8,897 | | | 1,456 | | | 17,145 | | | 8,078 | |
| (Gain) loss on sale and disposal of equipment and other | (1,567) | | | (569) | | | (2,874) | | | 202 | |
| Debt restructuring and loss on extinguishment expenses | 6,044 | | | — | | | 6,044 | | | — | |
| Non-cash change in fair value of interest rate hedge | (35) | | | 3,843 | | | (11,280) | | | 3,843 | |
| Other adjustment to joint venture investment | (565) | | | — | | | (565) | | | — | |
| Other expenses | 1,658 | | | (115) | | | 1,867 | | | (108) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Adjusted EBITDA | $ | 56,629 | | | $ | 22,591 | | | $ | 102,132 | | | $ | 42,954 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Net loss attributable to RadNet, Inc. common stockholders | $ | (10,594 | ) | | $ | 4,899 |
| | $ | (26,952 | ) | | $ | 1,165 |
|
| Benefit from income taxes | (4,475 | ) | | 2,969 |
| | (8,856 | ) | | 1,740 |
|
| Interest expense | 10,831 |
| | 12,399 |
| | 22,382 |
| | 24,694 |
|
| Severance costs | 859 |
| | 371 |
| | 1,076 |
| | 1,002 |
|
| Depreciation and amortization | 21,355 |
| | 20,083 |
| | 43,289 |
| | 39,703 |
|
| Non-cash employee stock-based compensation | 1,456 |
| | 1,044 |
| | 8,078 |
| | 5,583 |
|
| Loss on sale and disposal of equipment and other | (569 | ) | | 101 |
| | 202 |
| | 1,072 |
|
| Non-cash change in fair value of interest rate hedge | 3,843 |
| | — |
| | 3,843 |
| | — |
|
| Other expenses | (115 | ) | | 1,269 |
| | (108 | ) | | 1,269 |
|
| Adjusted EBITDA | $ | 22,591 |
| | $ | 43,135 |
| | $ | 42,954 |
| | $ | 76,228 |
|
Liquidity and Capital Resources
The following table is a summary ofsummarizes key balance sheet data related to our liquidity as of June 30, 20202021 and December 31, 20192020 and income statement data for the six months ended June 30, 20202021 and 20192020 (in thousands): | | | Balance Sheet Data: | June 30, 2020 | | December 31, 2019 | Balance Sheet Data: | June 30, 2021 | | December 31, 2020 |
| Cash and cash equivalents | $ | 84,583 |
| | $ | 40,165 |
| Cash and cash equivalents | $ | 140,852 | | | $ | 102,018 | |
| Accounts receivable | 125,745 |
| | 154,763 |
| Accounts receivable | 157,328 | | | 129,585 | |
| Working capital (exclusive of current operating lease liabilities) | (69,473 | ) | | (25,048 | ) | Working capital (exclusive of current operating lease liabilities) | 25,051 | | | (61,896) | |
| Stockholders' equity | 233,256 |
| | 233,139 |
| Stockholders' equity | 299,279 | | | 258,303 | |
| | | Income statement data for the six months ended June 30, | 2020 | | 2019 | Income statement data for the six months ended June 30, | 2021 | | 2020 |
| Total net revenue | $ | 472,130 |
| | $ | 560,647 |
| Total net revenue | $ | 649,237 | | | $ | 472,130 | |
| Net (loss) income attributable to RadNet common stockholders | (26,952 | ) | | 1,165 |
| |
| Net income (loss) attributable to RadNet common stockholders | | Net income (loss) attributable to RadNet common stockholders | 12,331 | | | (26,952) | |
|
We operate in a capital intensive, high fixed-cost industry that requires significant amounts of capital to fund operations. In addition to operations, we require a significant amount of capital for the initial start-up and development of new diagnostic imaging facilities, the acquisition of additional facilities and new diagnostic imaging equipment. Because our cash flows from operations have been insufficient to fund all of these capital requirements, we have depended on the availability of financing under credit arrangements with third parties.
During the six months ended June 30, 2021 we had a substantial acceleration of procedure volumes compared to the prior year. Net income from the period, together with proceeds from the refinance of our credit facility has resulted in substantial improvement of our working capital position compared to December 31, 2020. However, as noted in our forward looking statements, the COVID 19 pandemic has resulted in a reduction of procedure volumes and corresponding operating revenues. Wewe are uncertain of the duration and ultimate severity of its effects.the effects of the COVID 19 pandemic on our business. Although we have received government stimulus funding and are
undertaking measures to reduce operating expenses, and have received government stimulus funding, we may continue toagain experience operating losses.losses as a result of the pandemic which can impact both the consumption and cost of our medical imaging services. We have credit available from our current credit facilities and borrowing under those facilities is subject to continued compliance with lending covenants. We currently meet those requirements, and expect that we will continue to do so for the foreseeable future, but substantial and sustained operating losses could impact our ability to borrow under those facilities. If we are not able to meet such requirements, we may be required to seek additional financing and there can be no assurance that we will be able to obtain financing from other sources on terms acceptable to us, if at all.
On a continuing basis, we also consider various transactions to increase shareholder value and enhance our business results, including acquisitions, divestitures and joint ventures. These types of transactions may result in future cash proceeds or payments but the general timing, size or success of any acquisition, divestiture or joint venture effort and the related potential capital commitments cannot be predicted. We expect to fund any future acquisitions primarily with cash flow from operations and borrowings, including borrowing from amounts available under our senior secured credit facilities or through new equity or debt issuances.
We and our subsidiaries or affiliates may from time to time, in our sole discretion, purchase, repay, redeem or retire any of our outstanding debt or equity securities in privately negotiated or open market transactions, by tender offer or otherwise.
Sources and Uses of Cash
The following table summarizes key components of our sources and uses of cash for the six months ended June 30, 20202021 and 2019:2020:
| | | | | | | | | | | |
| Cash Flow Data | June 30, 2021 | | June 30, 2020 |
| Cash provided by operating activities | $ | 58,701 | | | $ | 131,465 | |
| Cash used in investing activities | (119,658) | | | (67,602) | |
| Cash provided by (used in) financing activities | 99,812 | | | (19,439) | |
|
| | | | | | | |
| Cash Flow Data | June 30, 2020 | | June 30, 2019 |
| Cash provided by operating activities | $ | 131,465 |
| | $ | 44,535 |
|
| Cash used in investing activities | (67,602 | ) | | (76,845 | ) |
| Cash (used in) provided by financing activities | (19,439 | ) | | 52,430 |
|
Cash provided by operating activities for the six months ended June 30, 20202021 was $131.5$58.7 million and $44.5$131.5 million for the six months ended June 30, 2019.2020. Our cash provided by operating activities for the period ended June 30, 2020 was benefited by the receipt of $39.5 million in CMS advances recorded as deferred revenue.
Cash used in investing activities for the six months ended June 30, 2020,2021, included purchases of property and equipment for approximately $64.2$53.8 million and the acquisition of imaging facilitiesbusiness assets for $4.2$64.9 million. As part of our business operations we continually evaluate investment opportunities.
Cash used inprovided by financing activities of $99.8 million for the six months ended June 30, 2020,2021, was due to principal payments onrefinancing of our term loan obligations with the Second Amended and equipment debt.Restated First Lien Credit Agreement on April 23, 2021. Please see Note 5, Credit Facilities and Notes Payable in the notes to consolidated financials statements for more information.
In 2018 and 2019 weWe have entered into factoring agreements with various institutions and sold certain accounts receivable under non-recourse agreements. These transactions are accounted for as a reduction in accounts receivable as the agreements transfer effective control over and risk related to the receivables to the buyers. Payments on the associated notes receivables 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. At June 30, 20202021 we have $22.5$19.8 million, net of discount, remaining to be collected on these agreements. We do not utilize factoring arrangements as an integral part of our financing for working capital.
Senior Secured Credit Facilities
At June 30, 2020, ourWe maintain secured credit facilities werewith Barclays Bank PLC and with SunTrust Bank. The Barclays credit facilities are comprised of one tranche offirst lien term loans (“First Lien Term Loans”) and a revolving credit facility of $137.5 million (the “Barclays Revolving Credit Facility”), both of which are provided pursuant to the Amended and Restated First Lien Credit and Guaranty Agreement dated as of July 1, 2016 (as amended, the “First Lien Credit Agreement”).
At June 30, 2020, our$195.0 million. The SunTrust credit facilities which relate to our consolidated subsidiary NJIN, wereare comprised of onea term loan (the "SunTrust Term Loan") and a revolving credit facility of $30.0 million (the "SunTrust Revolving Credit Facility") both of which are provided pursuant to the SunTrust Restated Credit Agreement.
million. As of June 30, 2020,2021, we were in compliance with all
covenants under our credit facilities. Deferred financing costs at June 30, 2020,2021, net of accumulated amortization, was $1.3$2.4 million and is specifically related to our Barclays Revolving Credit Facility.
revolving credit facility.
Included in our condensed consolidated balance sheets at June 30, 20202021 are $684.1$774.1 million of total term loan debt (exclusive of unamortized discounts of $11.6$14.3 million) in thousands:
| | | | | | | | | | | | | | | | | |
| | Face Value | | Discount | | Total Carrying
Value |
| First Lien Term Loans | $ | 725,000 | | | $ | (14,257) | | | $ | 710,743 | |
| SunTrust Term Loan | 49,125 | | | — | | | 49,125 | |
| Total Term Loans | $ | 774,125 | | | $ | (14,257) | | | $ | 759,868 | |
|
| | | | | | | | | | | |
| | Face Value | | Discount | | Total Carrying
Value |
| First Lien Term Loans | $ | 630,426 |
| | $ | (11,639 | ) | | $ | 618,787 |
|
| SunTrust Term Loan | 53,625 |
| | — |
| | 53,625 |
|
| Total Term Loans | $ | 684,051 |
| | $ | (11,639 | ) | | $ | 672,412 |
|
WeAt June 30, 2021, we had no balanceborrowings under our $137.5 million Barclays Revolving Credit Facility at June 30, 2020 and have reserved against the borrowing capacity $6.3 millionor SunTrust revolving credit facilities. After reserves for certainoutstanding letters of credit. The remaining $131.2credit of $7.8 million ofon our Barclays Revolving Credit Facility, waswe have $187.2 million available to draw upon as of June 30, 2020. We had no balancefor borrowing and $30.0 million available under our $30.0 million SuntrustSunTrust Revolving Credit Facility at June 30, 2020.
Facility. For more information on our secured credit facilities see Note 5 to our condensed consolidated financial statements in this quarterly report.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Risk: We receive payment for our services exclusively in United States dollars. As a result, our financial results are unlikely to be affected by factors such as changes in foreign currency, exchange rates or weak economic conditions in foreign markets.
We maintain research and development facilities in Prince Edward Island, Canada and Budapest, Hungary for which expenses are paid in the local currency. Accordingly, we do have currency risk resulting from fluctuations between such local currency and the United States Dollar. At the present time, we do not have any foreign currency exchange contracts to mitigate this risk. At June 30, 2020, a hypothetical 1% decline in the currency exchange rates between the U.S. dollar against the Canadian dollar and the Hungarian Forint would have resulted in an annual increase of approximately $28,000 in operating expenses.
Interest Rate Sensitivity: We pay interest on various types of debt instruments to our suppliers and lending institutions. The agreements entail either fixed or variable interest rates. Instruments which have fixed rates are mainly leases on radiology equipment. Variable rate interest obligations relate primarily to amounts borrowed under our outstanding credit facilities. Accordingly, our interest expense and consequently, our earnings, are affected by changes in short term interest rates. However due to our purchase of caps, described below, the effects of interest rate changes are limited.
Interest Rate Sensitivity Barclays First Lien Term Loans
At June 30, 2020, we had $630.4 million outstanding subject to an adjusted Eurodollar election on First Lien Term Loans. We can elect Eurodollar or Base Rate (Prime) interest rate options on amounts outstanding under the First Lien Term Loans.
To mitigate interest rate risk sensitivity, in the fourth quarter of 2016 At June 30, 2021, we entered into two forward interest rate cap agreements (the “2016 Caps”) which were designated at inception as cash flow hedges of future cash interest payments. The 2016 Caps are designedhad $725.0 million outstanding subject to provide a hedge against interest rate increases. Under these arrangements, we purchased a capEurodollar election on First Lien Term Loans and our effective 3 month LIBOR at 2.0%rate plus applicable margin was 3.75%. At June 30, 2020, our effective 6 month LIBOR was 1.00%. The 2016 Caps have a notional amount of $150,000,000 and $350,000,000 and will mature in September and October 2020. We are liable for a $5.3 million premium to enter into the 2016 Caps which is being accrued over the life of the instrument. See Note 2, Significant Accounting Policies, for further information.
A hypothetical 1% increase in the adjusted Eurodollar rates under the First Lien Credit Agreement over the current Eurodollar rate would result in an increase of $6.3$7.3 million in annual interest expense and a corresponding decrease in income before taxes. At June 30, 2021, we had no loan amount principal outstanding subject to an alternate base rate election on First Lien Term Loans.
Interest Rate Sensitivity SunTrust Term Loan
At June 30, 2020,2021, we had $54.8$49.1 million outstanding subject to an adjusted Eurodollar election on the SunTrust Restated Credit Agreement. We can elect Eurodollar or Base Rate (Prime) interest rate options on amounts outstanding under the SunTrust Restated Credit Agreement.
At June 30, 2020,2021, our effective LIBOR rate plus applicable margin was 3.45%2.20%. A hypothetical 1% increase in the adjusted Eurodollar rates under the SunTrust Restated Credit Agreement would result in an increase of approximately $0.5 million in annual interest expense and a corresponding decrease in income before taxes. No
In the second quarter of 2019, we entered into four forward interest rate agreements ("2019 Swaps"). The 2019 Swaps have total notional amounts are tied toof $500,000,000, consisting of two agreements of $50,000,000 each and two agreements of $200,000,000 each. The 2019 Swaps will secure a constant interest rate associated with portions of our variable rate bank debt and have an effective date of October 13, 2020. They will mature in October 2023 for the prime ratesmaller notional and October 2025 for the larger notional. Under these arrangements, we arranged the 2019 Swaps with locked in 1 month LIBOR rates at 1.96% for the $100,000,000 notional and at 2.05% for the $400,000,000 notional. As of the effective date, we will be liable for premium payments if interest rates decline below arranged rates, but will receive payments under the SunTrust Restated Agreement.2019 Swaps if interest rates rise above the arranged rates.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain controls and procedures designed to ensure that we are able to collect the information we are required to disclose in the reports we file with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has conducted an evaluation of the design and operation of our “disclosure controls and procedures” as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report for the purposes set forth above.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during three months ended June 30, 20202021 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. Legal Proceedings
We are engaged from time to time in the defense of lawsuits arising out of the ordinary course and conduct of our business. We do not believe that the outcome of any of our current litigation will have a material adverse impact on our business, financial condition and results of operations. However, we could be subsequently named as a defendant in other lawsuits that could adversely affect us.
ITEM 1A. Risk Factors
For information about the risks and uncertainties related to our business, please see the risk factors described in our annual report on Form 10-K for the year ended December 31, 2019 and our quarterly report on Form 10-Q for the quarter ended March 31, 2020. The risks described in our Form 10-K and Form 10-Q are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
In light of recent developments relating to COVID-19, RadNet is supplementing Item 1A. Risk Factors in the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2020. The following risk factor should be read in conjunction with the risk factors described in the Annual Report on Form 10-K.
We face various risks related to health epidemics and other outbreaks, which may have material adverse effects on our business, financial condition, results of operations and cash flows.
We face various risks related to health epidemics and other outbreaks, including the global outbreak of COVID-19. The COVID-19 pandemic, changes in patient behavior related to illness, pandemic fears and market downturns, and restrictions intended to slow the spread of COVID-19, including quarantines, government-mandated actions, stay-at-home orders and other restrictions, have led to disruption of our business and volatility in the global capital markets. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the COVID-19 pandemic, including the passage of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Additionally, we have received some funding from the U.S. Department of Health & Human Services (“HHS”) under the CARES Act’s Public Health and Social Services Emergency Fund (“PHSSEF”), which is geared towards supporting healthcare-related expenses or lost revenue attributable to COVID-19. Nonetheless, no assurance that such types of measures and funding whether already enacted or to be enacted will be effective or achieve their desired results in a timely fashion, including as it relates to our business operations. Moreover, while we believe we are in compliance with the applicable terms and conditions of funding under PHSSEF, compliance-related guidance for the program remains in process with HHS, and we may face enforcement risk if we are found to have failed to comply with such terms and conditions.
If significant portions of our workforce are unable to work effectively as a result of the COVID-19 pandemic, including because of illness, quarantines, facility closures, ineffective remote work arrangements or technology failures or limitations, our operations would be adversely impacted.
We currently believe our results of operations will be negatively impacted by these developments in addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, could affect us in substantial and unpredictable ways. Given the many uncertainties and far reaching consequences of potential developments, we cannot assure that the COVID-19 outbreak and the many related impacts will not require extended or additional diagnostic center closures and other disruptions to our business or will not materially and adversely affect our business, results of operations and financial condition in fiscal 2020 and beyond.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
On June 1, 2020, we completed our purchase of Deep Health, Inc. by issuing 823,615 shares of our common stock to purchase all of Deep Health's shares and share equivalents. The shares were ascribed a value of $13.9 million and were issued pursuant to the private placement exemption contained in Section 4(a)(2) of the Securities Act.None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 5. Other Information
None.
INDEX TO EXHIBITS
| | | | | | | | |
Exhibit
Number | | Description |
| | |
Exhibit
Number
10.1 | | Description |
| | |
10.17 | | |
| | |
| 31.1 | | |
| | |
| 31.2 | | |
| | |
| 32.1 | | |
| | |
| 32.2 | | |
| | |
| 101 | | The following financial information from RadNet, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 20202021 formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Loss, (iv) the Condensed Consolidated Statements of Changes in Stockholders Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to the Condensed Consolidated Financial Statements. |
| | |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| | |
| | |
| | |
| |
* | This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and is not being filed for purposes of Section 18 of the Exchange Act and is not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing. |
| |
** | Indicates management contract or compensatory plan. | |
* This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and is not being filed for purposes of Section 18 of the Exchange Act and is not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | | | | | |
| RADNET, INC. |
| (Registrant) |
| |
Date: August 10, 20209, 2021 | By: | /s/ Howard G. Berger, M.D. |
| | Howard G. Berger, M.D., President and Chief Executive Officer
(Principal Executive Officer)
|
| |
| |
Date: August 10, 20209, 2021 | By: | /s/ Mark D. Stolper |
| | Mark D. Stolper, Chief Financial Officer
(Principal Financial and Accounting Officer)
|