The accompanying notes are an integral part
of these financial statements.
We acquired equipment and
certain leasehold improvements for approximately $28.8 million, $32.4 million, and $19.4 million during the years ended December
31, 2016, 2015 and 2014, respectively, that we had not paid for as of December 31, 2016, 2015 and 2014, respectively. The offsetting
amount due was recorded in our consolidated balance sheets under “accounts payable, accrued expenses and other.”
During the twelve months ended
December 31, 2016, we added capital lease debt of approximately $1.3 million relating to radiology equipment.
We recognized a non-cash gain
on return of common stock of $5.0 million in June 2016. See Note 2, Gain on Return of Common Stock.
We transferred $2.7 million in
fixed assets in June 2016 to our new joint venture, Glendale Advanced Imaging LLC, see Note 2, Investment in Joint Ventures.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1 – NATURE OF BUSINESS
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 December 31, 2016, we operated directly or indirectly through joint ventures with hospitals, 305 centers located in California,
Delaware, Florida, Maryland, New Jersey, New York, and Rhode Island. 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 one location to serve the needs of multiple procedures.
The consolidated financial statements include
the accounts of Radnet Management, Inc. (or “Radnet Management”) and Beverly Radiology Medical Group III, a professional
partnership (“BRMG”). BRMG is a partnership of ProNet Imaging Medical Group, Inc., Breastlink Medical Group, Inc. and
Beverly Radiology Medical Group, Inc. The consolidated financial statements also include Radnet Management I, Inc., Radnet Management
II, Inc., Radiologix, Inc., Radnet Managed Imaging Services, Inc., Delaware Imaging Partners, Inc., New Jersey Imaging Partners,
Inc. and Diagnostic Imaging Services, Inc. (“DIS”), all wholly owned subsidiaries of Radnet Management. All of these
affiliated entities are referred to collectively as “RadNet”, “we”, “us”, “our”
or the “Company” in this report.
Accounting Standards Codification (“ASC”)
810-10-15-14,
Consolidation
, stipulates 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
specified in the ASC which evidence a controlling financial interest, is considered a Variable 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.
Howard G. Berger, M.D., is our President
and Chief Executive Officer, a member of our Board of Directors, and also owns, indirectly, 99% of the equity interests in BRMG.
BRMG is responsible for all of the professional medical services at nearly all of our facilities located in California under a
management agreement with us, and employs physicians or contracts with various other independent physicians and physician groups
to provide the professional medical services at most of our California facilities. We generally obtain professional medical services
from BRMG in California, rather than provide such services directly or through subsidiaries, in order to comply with California’s
prohibition against the corporate practice of medicine. However, as a result of our close relationship with Dr. Berger and BRMG,
we believe that we are able to better ensure that medical service is provided at our California facilities in a manner consistent
with our needs and expectations and those of our referring physicians, patients and payors than if we obtained these services from
unaffiliated physician groups.
We contract with nine medical groups which
provide professional medical services at all of our facilities in Manhattan and Brooklyn, New York. These contracts are similar
to our contract with BRMG. Six of these groups are owned by John V. Crues, III, M.D., RadNet’s Medical Director, a member
of our Board of Directors, and a 1% owner of BRMG. Dr. Berger owns a controlling interest in two of these medical groups which
provide professional medical services at one of our Manhattan facilities.
RadNet provides non-medical, technical and
administrative services to BRMG and the nine medical groups mentioned above (“NY Groups”) 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 of BRMG and the NY Groups and we determine the annual budget of BRMG
and the NY Groups. BRMG and the NY Groups both have insignificant operating assets and liabilities, and de minimis equity. Through
management agreements with us, substantially all cash flows of BRMG and the NY Groups after expenses including professional salaries,
are transferred to us.
We have determined that BRMG and the NY
Groups are variable interest entities, that we are the primary beneficiary, and consequently, we consolidate the revenue and expenses,
assets and liabilities of each. BRMG and the NY Groups on a combined basis recognized $135.7 million, $113.1 million and $89.3
million of revenue, net of management services fees to RadNet, for the years ended December 31 2016, 2015, and 2014, respectively
and $135.7 million, $113.1 million and $89.3 million of operating expenses for the years ended December 31 2016, 2015, and 2014,
respectively. RadNet, Inc. recognized $430.4 million, $343.9 million and $287.4 million of total billed net service fee revenue
for the years ended December 31, 2016, 2015 and 2014, respectively, for management services provided to BRMG and the NY Groups
relating primarily to the technical portion of billed revenue.
The cash flows of BRMG and the NY Groups
are included in the accompanying consolidated statements of cash flows. All intercompany balances and transactions have been eliminated
in consolidation. In our consolidated balance sheets at December 31, 2016 and December 31, 2015, we have included approximately
$100.0 million and $89.8 million, respectively, of accounts receivable and approximately $9.0 million and $8.5 million of accounts
payable and accrued liabilities related to BRMG and the NY Groups, respectively.
The creditors of BRMG and the NY Groups
do not have recourse to our general credit and there are no other arrangements that could expose us to losses on behalf of BRMG
and the NY Groups. However, RadNet may be required to provide financial support to cover any operating expenses in excess of operating
revenues.
At all of our centers we have entered into
long-term contracts with radiology groups in the area to provide physician services at those facilities. 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. In these facilities we enter
into long-term agreements with radiology practice groups (typically 40 years). 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. Except in New York City, the fee is based on the practice
group’s professional revenue, including revenue derived outside of our diagnostic imaging centers. In New York City
we are paid a fixed fee set in advance for our services. 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 financial controlling
interest in the radiology practices. Because of the controlling relationship of Dr. Berger and Dr. Crues in the California and
New York City practices as stated in detail above, we consolidate the revenue and expenses.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The operating
activities of subsidiaries are included in the accompanying consolidated financial statements from the date of acquisition. Investments
in companies in which we have the ability to exercise significant influence, but not control, are accounted for by the equity method.
All intercompany transactions and balances, with our consolidated entities and the unsettled amount of intercompany transactions
with our equity method investees, have been eliminated in consolidation. As stated in Note 1 above, the BRMG and NY Groups are
variable interest entities and we consolidate the operating activities and balance sheets of each.
USE OF ESTIMATES - The preparation of the
financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and assumptions
affect various matters, including our reported amounts of assets and liabilities in our consolidated balance sheets at the dates
of the financial statements; our disclosure of contingent assets and liabilities at the dates of the financial statements; and
our reported amounts of revenues and expenses in our consolidated statements of operations during the reporting periods. These
estimates involve judgments with respect to numerous factors that are difficult to predict and are beyond management’s control.
As a result, actual amounts could materially differ from these estimates.
REVENUES - Service fee revenue, net
of contractual allowances and discounts, consists of net patient fees received from various payors and patients themselves
based mainly upon established contractual billing rates, less allowances for contractual adjustments and discounts. As it relates
to BRMG and the NY Groups centers, this service fee revenue includes payments for both the professional medical interpretation
revenue recognized by BRMG and the NY Groups as well as the payment for all other aspects related to our providing the imaging
services, for which we earn management fees from BRMG and the NY Groups. As it relates to non-BRMG and NY Groups centers, namely
the affiliated physician groups, this service fee revenue is earned through providing the use of our diagnostic imaging equipment
and the provision of technical services as well as providing administration services such as clerical and administrative personnel,
bookkeeping and accounting services, billing and collection, provision of medical and office supplies, secretarial, reception and
transcription services, maintenance of medical records, and advertising, marketing and promotional activities.
Service fee revenues are recorded
during the period the services are provided based upon the estimated amounts due from the patients and third-party payors.
Third-party payors include federal and state agencies (under the Medicare and Medicaid programs), managed care health plans,
commercial insurance companies and employers. Estimates of contractual allowances are based on historical collection rates of
payor reimbursement contract agreements. We also record a provision for doubtful accounts based primarily on historical
collection rates related to patient copayments and deductible amounts for patients who have health care coverage under one of
our third-party payors.
Under capitation arrangements with various
health plans, we earn a per-enrollee amount each month for making available diagnostic imaging services to all plan enrollees under
the capitation arrangement. Revenue under capitation arrangements is recognized in the period in which we are obligated to provide
services to plan enrollees under contracts with various health plans.
Our service fee revenue, net of contractual
allowances and discounts, the provision for bad debts, and revenue under capitation arrangements for the years ended December 31,
are summarized in the following table (in thousands) :
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Commercial insurance (1)
|
|
$
|
539,793
|
|
|
$
|
486,489
|
|
|
$
|
437,525
|
|
Medicare
|
|
|
187,941
|
|
|
|
168,545
|
|
|
|
159,562
|
|
Medicaid
|
|
|
28,170
|
|
|
|
23,948
|
|
|
|
24,499
|
|
Workers' compensation/personal injury
|
|
|
36,548
|
|
|
|
32,728
|
|
|
|
30,543
|
|
Other (2)
|
|
|
29,135
|
|
|
|
35,046
|
|
|
|
18,007
|
|
Service fee revenue, net of contractual allowances and discounts
|
|
|
821,587
|
|
|
|
746,756
|
|
|
|
670,136
|
|
Provision for bad debts
|
|
|
(45,387
|
)
|
|
|
(36,033
|
)
|
|
|
(29,807
|
)
|
Net service fee revenue
|
|
|
776,200
|
|
|
|
710,723
|
|
|
|
640,329
|
|
Revenue under capitation arrangements
|
|
|
108,335
|
|
|
|
98,905
|
|
|
|
77,240
|
|
Total net revenue
|
|
$
|
884,535
|
|
|
$
|
809,628
|
|
|
$
|
717,569
|
|
_________________
(1)
21% of our net service fees revenue for the year
ended December 31, 2016 and 20% for the years ended December 31, 2015 and 2014 were earned from a single payor.
(2)
Other consists of revenue from teleradiology
services, consulting fees and software revenue.
PROVISION FOR BAD DEBTS - We provide for
an allowance against accounts receivable that could become uncollectible to reduce the carrying value of such receivables to their
estimated net realizable value. We estimate this allowance based on the aging of our accounts receivable by the historical payment
patterns of each type of payor, write-off trends, and other relevant factors. A significant portion of our provision for bad debt
relates to co-payments and deductibles owed to us from patients with insurance. Although we attempt to collect deductibles and
co-payments due from patients with insurance at the time of service, this attempt to collect at the time of service is not an assessment
of the patient’s ability to pay nor are revenues recognized based on an assessment of the patient’s ability to pay.
There are various factors that can impact collection trends, such as changes in the economy, which in turn have an impact on the
increased burden of co-payments and deductibles to be made by patients with insurance. These factors continuously change and can
have an impact on collection trends and our estimation process. Our allowance for bad debts at December 31, 2016 and 2015 was $20.7
million and $20.8 million, respectively.
ACCOUNTS RECEIVABLE - Substantially all
of our accounts receivable are due under fee-for-service contracts from third party payors, such as insurance companies and government-sponsored
healthcare programs, or directly from patients. Services are generally provided pursuant to one-year contracts with healthcare
providers. We continuously monitor collections from our payors and maintain an allowance for bad debts based upon specific payor
collection issues that we have identified and our historical experience.
MEANINGFUL USE INCENTIVE - Under the American
Recovery and Reinvestment Act of 2009, a program was enacted that provides financial incentives for providers that successfully
implement and utilize electronic health record technology to improve patient care. Our software development team in Canada established
an objective to build a Radiology Information System (RIS) software platform that has been awarded Meaningful Use certification.
As this certified RIS system is implemented throughout our imaging centers, the radiologists that utilize this software can be
eligible for the available financial incentives. In order to receive such incentive payments providers must attest that they have
demonstrated meaningful use of the certified RIS in each stage of the program. We account for this meaningful use incentive under
the Gain Contingency Model outlined in ASC 450-30. Under this model, we record within non-operating income, meaningful use incentive
only after Medicare accepts an attestation from the qualified eligible professional demonstrating meaningful use. We recorded approximately
$2.8 million, $3.3 million and $2.0 million during the twelve months ended December 31, 2016, 2015 and 2014, respectively, relating
to this incentive.
GAIN ON RETURN OF COMMON STOCK - In the
second quarter of 2016, we determined that certain pre-acquisition financial information of Diagnostic Imaging Group (“DIG”)
provided to us by the sellers contained errors. As a result of this, we negotiated and reached a settlement with the sellers of
DIG in June 2016 for the return of 958,536 shares of common stock which had a fair value of $5.0 million on the date of return.
Such return has been recognized as a gain on return of common stock in our statement of operations.
SOFTWARE REVENUE RECOGNITION – Our
subsidiary, eRAD, Inc., sells Picture Archiving Communications Systems (“PACS”) and related services, primarily in
the United States. The PACS systems sold by eRAD are primarily composed of certain elements: hardware, software, installation and
training, and support. Sales are made primarily through eRAD’s sales force. These sales are multiple-element arrangements
that generally include hardware, software, software installation, configuration, system installation, training and first-year warranty
support. Hardware, which is not unique or special purpose, is purchased from a third-party and resold to eRAD’s customers
with a small mark-up.
We have determined that our core software
products, such as PACS, are essential to most of our arrangements as hardware, software and related services are sold as an integrated
package. Therefore, these transactions are accounted for under ASC 605-25,
Multiple-Element Arrangements
(as modified by
ASU 2009-13). Non-essential software and related services, and essential software sold on a stand-alone basis without hardware,
would continue to be accounted for under ASC 985-605,
Software.
For the years ended December 31, 2016, 2015
and 2014, we recorded approximately $6.2 million, $6.1 million and $5.5 million, respectively, in revenue related to our eRAD business
which is included in net service fee revenue in our consolidated statement of operations. At December 31, 2016 we had a deferred
revenue liability of approximately $1.5 million associated with eRAD sales which we expect to recognize into revenue over the next
12 months.
SOFTWARE DEVELOPMENT COSTS - Costs related
to the research and development of new software products and enhancements to existing software products all for resale to our customers
are expensed as incurred.
We utilize a variety of computerized information
systems in the day to day operation of our diagnostic imaging facilities. One such system is our front desk patient tracking system
or Radiology Information System (“RIS”). We have historically utilized third party RIS software solutions and pay monthly
fees to outside third party software vendors for the use of this software. We have developed our own RIS solution from the ground
up through our wholly owned subsidiary, Radnet Management Information Systems (“RMIS”) and began utilizing this system
beginning in the first quarter of 2015.
In accordance with ASC 350-40,
Accounting
for the Costs of Computer Software Developed for Internal Use,
the costs incurred by RMIS toward the development of our RIS
system, which began in August, 2010 and continued until December 2014, were capitalized and are being amortized over its useful
life which we determined to be 5 years. Total costs capitalized were approximately $6.4 million. We began recording amortization
of $107,000 per month for our use of this software in January 2015.
We have entered into multiple agreements
to license our RIS system to outside customers. For the twelve months December 31, 2016 and December 31, 2015, we received approximately
$301,000 and $443,000 with respect to this licensing agreement, respectively. In accordance with ASC 350-40, we recorded the receipt
of these funds against the capitalized software costs explained above. We intend to record any future proceeds in the same manner
until the carrying value of our capitalized software costs are brought to zero. As of December 31, 2016, the net carrying value
of our capitalized software costs was approximately $3.1 million.
CONCENTRATION OF CREDIT RISKS - Financial
instruments that potentially subject us to credit risk are primarily cash equivalents and accounts receivable. We have placed our
cash and cash equivalents with one major financial institution. At times, the cash in the financial institution is temporarily
in excess of the amount insured by the Federal Deposit Insurance Corporation, or FDIC. 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 clients and maintain an allowance for bad debts based upon our historical collection
experience.
CASH AND CASH EQUIVALENTS - We consider
all highly liquid investments that mature in three months or less when purchased to be cash equivalents. The carrying amount of
cash and cash equivalents approximates their fair market value.
DEFERRED FINANCING COSTS - Costs of financing
are deferred and amortized on a straight-line basis over the life of the associated loan, which approximates the effective interest
rate method. Deferred financing costs, net of accumulated amortization, were $2.0 million and $4.9 million, as of December 31,
2016 and 2015, respectively. In conjunction with our Restatement Amendment, a net addition of approximately
$237,000 was added to deferred financing costs, consisting of $946,000 new additional costs from the amendment and a write off
of $709,000 due to a change in lender mix. See Note 8, Notes Payable, Line of Credit, and Capital Leases for more information.
INVENTORIES - Inventories,
consisting mainly of medical supplies, are stated at the lower of cost or net realizable value with cost determined by the
first-in, first-out method.
PROPERTY AND EQUIPMENT - Property and equipment
are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization of property and equipment are
provided using the straight-line method over the estimated useful lives, which range from 3 to 15 years. Leasehold improvements
are amortized at the lesser of lease term or their estimated useful lives, which range from 3 to 30 years. Maintenance and repairs
are charged to expense as incurred.
BUSINESS COMBINATION -
Accounting
for acquisitions requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition
date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the
acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions
to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and
subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record
adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the
measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent
adjustments are recorded to our consolidated statements of operations.
GOODWILL AND INDEFINITE LIVED INTANGIBLES
- Goodwill at December 31, 2016 totaled $239.6 million. Indefinite lived intangible assets at December 31, 2016 totaled $7.9
million and are associated with the value of certain trade name intangibles. Goodwill and trade name intangibles are recorded as
a result of business combinations. Management evaluates goodwill and trade name intangibles, at a minimum, on an annual basis and
whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. Impairment of goodwill is
tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value
of the reporting unit. The fair value of a reporting unit is estimated using a combination of the income or discounted cash flows
approach and the market approach, which uses comparable market data. If the carrying amount of the reporting unit exceeds its fair
value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any. Impairment
of trade name intangibles is tested at the subsidiary level by comparing the subsidiary’s trade name carrying amount to its
respective fair value. We tested both goodwill and trade name intangibles for impairment on October 1, 2016, noting no impairment,
and have not identified any indicators of impairment through December 31, 2016.
LONG-LIVED ASSETS - We evaluate our long-lived
assets (property and equipment) and intangibles, other than goodwill, for impairment whenever indicators of impairment exist. Generally
accepted accounting principles (GAAP) requires 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 December 31, 2016.
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. Income taxes are further explained in Note 11.
UNINSURED RISKS - On November 1, 2008
we obtained a fully funded and insured workers’ compensation policy, thereby eliminating any uninsured risks for employee
injuries occurring on or after that date. This fully funded policy remained in effect through November 1, 2013 and continues to
cover any claims incurred through this date.
On November 1, 2013 we entered into a high-deductible
workers’ compensation insurance policy. We have recorded liabilities of $2.9 million for the year ending December 31, 2016
and $2.2 million for the year ended December 31, 2015, respectively, for the estimated future cash obligations associated
with the unpaid portion of the workers compensation claims incurred.
We and our affiliated physicians
carry an annual medical malpractice insurance policy that protects us for claims that are filed during the policy year and that
fall within policy limits. The policy has a deductible for which is $10,000 per incidence at December 31, 2016 and was $24,000
per incidence at December 31, 2015.
In December 2008, in order to
eliminate the exposure for claims not reported during the regular malpractice policy period, we purchased a medical malpractice
tail policy, which provides coverage for any claims reported in the event that our medical malpractice policy expires. As of December 31,
2016, this policy remains in effect.
We have entered into an arrangement with
Blue Shield to administer and process claims under a self-insured plan that provides health insurance coverage for our employees
and dependents. We have recorded liabilities as of December 31, 2016 and 2015 of $2.4 million and $1.8 million, respectively,
for the estimated future cash obligations associated with the unpaid portion of the medical and dental claims incurred by our
participants. Additionally, we entered into an agreement with Blue Shield for a stop loss policy that provides coverage for any
claims that exceed $250,000 up to a maximum of $1.0 million in order for us to limit our exposure for unusual or catastrophic
claims.
LOSS AND OTHER UNFAVORABLE CONTRACTS –
We assess the profitability of our contracts to provide management services to our contracted physician groups and identify those
contracts where current operating results or forecasts indicate probable future losses. Anticipated future revenue is compared
to anticipated costs. If the anticipated future cost exceeds the revenue, a loss contract accrual is recorded. In connection with
the acquisition of Radiologix in November 2006, we acquired certain management service agreements for which forecasted costs
exceeds forecasted revenue. As such, an $8.9 million loss contract accrual was established in purchase accounting, and is included
in other non-current liabilities. The recorded loss contract accrual is being accreted into operations over the remaining term
of the acquired management service agreements. As of December 31, 2016 and 2015, the remaining accrual balance is $5.6 million,
and $5.7 million, respectively.
As part of our ongoing acquisition activities,
we have certain operating lease commitments for facilities that are not in use. Accordingly, we have recorded a loss contract accrual
related to the remaining payments under these lease commitments. As of December 31, 2015, the remaining loss contract accrual for
these leases was $85,000 and was completely amortized during the 2016 fiscal year with no balance remaining as of December 31,
2016.
In addition and related to acquisition activity,
we have certain operating lease commitments for facilities where the fair market rent differs from the lease contract rate. We
have recorded an unfavorable contract liability representing the difference between the total value of the fair market rent and
the contract rent over the current term of the lease applicable from the date of acquisition. As of December 31, 2016 and 2015,
the unfavorable contract liability on these leases is $1.6 million and $581,000, respectively.
EQUITY BASED COMPENSATION – We have
one long-term incentive plan which we refer to as the 2006 Plan, which we amended and restated as of April 20, 2015 (the “Restated
Plan”). The Restated Plan was approved by our stockholders at our annual stockholders meeting on June 11, 2015. As of December
31, 2016, we have reserved for issuance under the Restated Plan 12,000,000 shares of common stock. We can issue options, stock
awards, stock appreciation rights and cash awards under the Restated Plan. Certain options granted under the Restated Plan to employees
are intended to qualify as incentive stock options under existing tax regulations. Stock options and warrants generally vest over
three to five years and expire five to ten years from date of grant.
The compensation expense recognized for
all equity-based awards is recognized over the awards’ service periods. Equity-based compensation is classified in operating
expenses within the same line item as the majority of the cash compensation paid to employees.
FOREIGN CURRENCY TRANSLATION - The functional
currency of our foreign subsidiaries is the local currency. In accordance with ASC 830,
Foreign Currency Matters
, assets
and liabilities denominated in foreign currencies are translated using the exchange rate at the balance sheet dates. Revenues and
expenses are translated using average exchange rates prevailing during the reporting period. Any translation adjustments resulting
from this process are shown separately as a component of accumulated other comprehensive income. Foreign currency transaction gains
and losses are included in the determination of net income.
COMPREHENSIVE INCOME - ASC 220,
Comprehensive
Income,
establishes rules for reporting and displaying comprehensive income and its components. Our unrealized gains or losses
on foreign currency translation adjustments are included in comprehensive income. For the year ended December 31, 2016, we entered
into an interest rate cap agreement, as discussed in Note 10, Derivative Instruments. Assuming perfect effectiveness, any unrealized
gains or losses related to the cap agreement that qualify for cash flow hedge accounting are classified as a component of income.
Any ineffectiveness is recognized in earnings. The components of comprehensive income for the three years in the period ended December
31, 2016 are included in the consolidated statements of comprehensive income.
FAIR VALUE MEASUREMENTS – Assets and
liabilities subject to fair value measurements are required to be disclosed within a fair value hierarchy. The fair value hierarchy
ranks the quality and reliability of inputs used to determine fair value. Accordingly, assets and liabilities carried at, or permitted
to be carried at, fair value are classified within the fair value hierarchy in one of the following categories based on the lowest
level input that is significant to a fair value measurement:
Level 1—Fair value is determined
by using unadjusted quoted prices that are available in active markets for identical assets and liabilities.
Level 2—Fair value is determined
by using inputs other than Level 1 quoted prices that are directly or indirectly observable. Inputs can include quoted prices
for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in inactive markets.
Related inputs can also include those used in valuation or other pricing models such as interest rates and yield curves that can
be corroborated by observable market data.
Level 3—Fair value is determined
by using inputs that are unobservable and not corroborated by market data. Use of these inputs involves significant and subjective
judgment.
The table below summarizes the estimated
fair values of certain of our financial assets that are subject to fair value measurements, and the classification of these assets
on our consolidated balance sheets, as follows (in thousands):
|
|
As of December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Contracts
|
|
$
|
–
|
|
|
$
|
818
|
|
|
$
|
–
|
|
|
$
|
818
|
|
The estimated fair value of these contracts,
which are discussed in Note 10, was determined using Level 2 inputs. More specifically, the fair value was determined
by calculating the value of the difference between the fixed interest rate of the interest rate swaps and the counterparty’s
forward LIBOR curve. The forward LIBOR curve is readily available in the public markets or can be derived from information
available in the public markets.
The table below summarizes the estimated
fair value and carrying amount of our long-term debt as follows (in thousands):
|
|
As of December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Fair Value
|
|
|
Total Face Value
|
|
First Lien Term Loans
|
|
$
|
–
|
|
|
$
|
483,129
|
|
|
$
|
–
|
|
|
$
|
483,129
|
|
|
$
|
478,938
|
|
Second Lien Term Loans
|
|
$
|
–
|
|
|
$
|
167,580
|
|
|
$
|
–
|
|
|
$
|
167,580
|
|
|
$
|
168,000
|
|
|
|
As of December 31, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Total Face Value
|
|
First Lien Term Loans
|
|
$
|
–
|
|
|
$
|
444,258
|
|
|
$
|
–
|
|
|
$
|
444,258
|
|
|
$
|
451,023
|
|
Second Lien Term Loans
|
|
|
–
|
|
|
|
173,700
|
|
|
|
–
|
|
|
|
173,700
|
|
|
|
180,000
|
|
Our revolving credit facility had no aggregate
principal amount outstanding as of December 31, 2016.
The estimated fair value of our long-term
debt, which is discussed in Note 8, was determined using Level 2 inputs primarily related to comparable market prices.
We consider the carrying amounts of cash
and cash equivalents, receivables, other current assets, current liabilities and other notes payables to approximate their fair
value because of the relatively short period of time between the origination of these instruments and their expected realization
or payment. Additionally, we consider the carrying amount of our capital lease obligations to approximate their fair value because
the weighted average interest rate used to formulate the carrying amounts approximates current market rates.
EARNINGS PER SHARE - Earnings per share
is based upon the weighted average number of shares of common stock and common stock equivalents outstanding, net of common stock
held in treasury, as follows (in thousands except share and per share data):
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to RadNet, Inc. common stockholders
|
|
$
|
7,230
|
|
|
$
|
7,709
|
|
|
$
|
1,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC NET INCOME PER SHARE ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding during the period
|
|
|
46,244,188
|
|
|
|
43,805,794
|
|
|
|
41,070,077
|
|
Basic net income per share attributable to RadNet, Inc. common stockholders
|
|
$
|
0.16
|
|
|
$
|
0.18
|
|
|
$
|
0.03
|
|
DILUTED NET INCOME PER SHARE ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding during the period
|
|
|
46,244,188
|
|
|
|
43,805,794
|
|
|
|
41,070,077
|
|
Add nonvested restricted stock subject only to service vesting
|
|
|
220,416
|
|
|
|
865,326
|
|
|
|
994,610
|
|
Add additional shares issuable upon exercise of stock options and warrants
|
|
|
190,428
|
|
|
|
500,252
|
|
|
|
1,084,509
|
|
Weighted average number of common shares used in calculating diluted net income per share
|
|
|
46,655,032
|
|
|
|
45,171,372
|
|
|
|
43,149,196
|
|
Diluted net income per share attributable to RadNet, Inc. common stockholders
|
|
$
|
0.15
|
|
|
$
|
0.17
|
|
|
$
|
0.03
|
|
For the years ended December 31,
2016, 2015 and 2014 we excluded 165,000, 265,000, and 245,000, respectively, outstanding options, in the calculation of diluted
earnings per share because their effect would be antidilutive.
INVESTMENT IN JOINT VENTURES – We
have twelve 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 December 31, 2016.
Acquisition of new facilities
On August 15, 2016
our joint venture, Franklin Imaging, LLC, acquired a single multi-modality imaging center located in Rosedale, Maryland for cash
consideration of $1.0 million and the assumption of capital lease debt of $241,000. Franklin Imaging, LLC made a fair value determination
of the acquired assets and approximately $600,000 of fixed assets, $30,000 of other assets and goodwill of $648,000 was recorded
in respect to the transaction.
Formation of new joint ventures
On April 1, 2016, Community Imaging Partners
Inc., a wholly owned subsidiary of RadNet, entered into a joint venture with Mt. Airy Health Services, LLC, a partnership of Frederick
Memorial Hospital and Carroll Hospital Center. On August 31, 2016, Community Imaging Partners Inc. contributed $200,000 for a 40%
economic interest in the partnership and funded an additional $440,000 in relation to a capital call. Mt. Airy Health Services,
LLC, contributed $300,000 for a 60% economic interest and an additional $660,000 in relation to the capital call.
On May 9, 2016, RadNet, through a newly
formed subsidiary, Glendale Advanced Imaging LLC, entered into a joint venture with Dignity Health, a California nonprofit public
benefit corporation. On June 1, 2016, RadNet contributed net assets of $2.2 million for a 55% economic interest and Dignity
Health contributed net assets of $1.8 million for a 45% economic interest.
Joint venture investment and financial information
The following table is a summary of our
investment in joint ventures during the years ended December 31, 2016 and December 31, 2015 (in thousands):
Balance as of December 31, 2014
|
|
$
|
32,123
|
|
Equity contributions in existing joint ventures
|
|
|
265
|
|
Equity in earnings in these joint ventures
|
|
|
8,927
|
|
Distribution of earnings
|
|
|
(7,731
|
)
|
Balance as of December 31, 2015
|
|
$
|
33,584
|
|
Equity contributions in existing joint ventures
|
|
|
3,084
|
|
Equity in earnings in these joint ventures
|
|
|
9,767
|
|
Distribution of earnings
|
|
|
(2,926
|
)
|
Balance as of December 31, 2016
|
|
$
|
43,509
|
|
We received management service fees from
the centers underlying these joint ventures of approximately $11.9 million for the year ended December 31, 2016 and $9.3 million
per year for the years ended December 31, 2015 and 2014, respectively. We eliminate any unrealized portion of our management service
fees with our equity in earnings of joint ventures.
The following table is a summary of key
financial data for these joint ventures as of December 31, 2016 and 2015, respectively, and for the years ended December 31, 2016,
2015 and 2014, respectively, (in thousands):
|
|
December 31,
|
|
Balance Sheet Data:
|
|
|
2016
|
|
|
|
2015
|
|
Current assets
|
|
$
|
40,093
|
|
|
$
|
28,186
|
|
Noncurrent assets
|
|
|
100,146
|
|
|
|
91,660
|
|
Current liabilities
|
|
|
(14,077
|
)
|
|
|
(15,258
|
)
|
Noncurrent liabilities
|
|
|
(44,405
|
)
|
|
|
(44,059
|
)
|
Total net assets
|
|
$
|
81,757
|
|
|
$
|
60,529
|
|
|
|
|
|
|
|
|
|
|
Book value of RadNet joint venture interests
|
|
$
|
38,538
|
|
|
$
|
28,397
|
|
Cost in excess of book value of acquired joint venture interests
|
|
|
4,970
|
|
|
|
4,970
|
|
Elimination of intercompany profit remaining on Radnet's consolidated balance sheet
|
|
|
–
|
|
|
|
217
|
|
Total value of Radnet joint venture interests
|
|
$
|
43,509
|
|
|
$
|
33,584
|
|
|
|
|
|
|
|
|
|
|
Total book value of other joint venture partner interests
|
|
$
|
43,219
|
|
|
$
|
32,132
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
160,134
|
|
|
$
|
125,544
|
|
|
$
|
101,189
|
|
Net income
|
|
$
|
21,933
|
|
|
$
|
19,485
|
|
|
$
|
14,854
|
|
NOTE 3 – RECENT ACCOUNTING STANDARDS
Accounting standards adopted
In March 2016, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.
2016-09 (“ASU 2016-09”),
Compensation—Stock Compensation
, (Topic 718): Improvements to Employee
Share-Based Payment Accounting. ASU 2016-09 requires excess tax benefits and tax deficiencies, which arise due to differences
between the measure of compensation expense and the amount deductible for tax purposes, to be recorded directly through the
statement of operations when awards vest or are settled. In addition, cash flows related to excess tax benefits will no
longer be classified separately as a financing activity apart from other tax cash flows. We elected to early adopt the new
guidance for the year ended December 31, 2016. Upon adoption using the modified retrospective transition method, we recorded
a cumulative effect adjustment to recognize previously unrecognized excess tax benefits which increased deferred tax assets
and reduced accumulated deficit by $7.1 million. The current net tax benefit for 2016 resulting from adoption of the new
guidance is approximately $400,000 and is reflected in our tax provision.
In November 2015, the FASB issued ASU No.
2015-17 (“ASU 2015-17”),
Income Taxes
(Topic 740): Balance Sheet Classification of Deferred Taxes. ASU 2015-17
changes the classification of deferred taxes to be a noncurrent asset or liability regardless of the classification of the related
asset or liability for financial reporting. The prospective adoption resulted in a reclassification of $22.3 million from current
deferred tax assets to non-current deferred tax assets in our December 31, 2016 consolidated balance sheet, and had no impact on
our consolidated statement of operations, comprehensive income, stockholders’ equity, and cash flows. Prior periods were
not retrospectively adjusted.
In September 2015, the FASB issued ASU No.
2015-16 (“ASU 2015-16”),
Business Combinations,
(Topic 805): Simplifying the Accounting for Measurement-Period
Adjustments, which we adopted prospectively in 2016. ASU 2015-16 eliminates the requirement to retrospectively apply adjustments
made to provisional amounts recognized in a business combination. An entity will now recognize any adjustments in the reporting
period in which the amounts are determined, calculated as if the accounting had been completed at the acquisition date. Disclosure
is required for the portion of adjustments recorded in current-period earnings that would have been recorded in previous reporting
periods had they been recognized as of the acquisition date. The update has had no material effect on our results of operations
and cash flows.
In August 2015, the FASB issued ASU No.
2015-15 (“ASU 2015-15”),
Interest – Imputation of Interest
, (Subtopic 835-30): Presentation and Subsequent
Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU 2015-15 provides additional guidance to the
presentation of debt issuance costs discussed originally in ASU No. 2015-03, which was issued in April 2015 and described below.
ASU 2015-15 noted that ASU 2015-03 did not address the debt issue costs in regards to line-of-credit arrangements, which by their
nature have fluctuating balances. ASU 2015-15 permits debt issuance costs specifically related to line-of-credit arrangements to
be presented as an asset with subsequent amortization to interest expense ratably over the term of the line-of-credit arrangement,
regardless of whether there are any outstanding borrowings on the arrangement. The update has had no material effect on our results
of operations and cash flows.
In April 2015, the Financial Accounting
Standards Board (the “FASB”) issued ASU No. 2015-03 (“ASU 2015-03”),
Interest – Imputation of
Interest
, (Subtopic 835-30). ASU 2015-03 changes the accounting method for debt issuance costs from a deferred charge (i.e.
an asset) to a contra liability in part because such costs provide no future economic benefit. Debt issue costs related to a recognized
debt liability are to be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent
with the presentation of debt discounts. The update is effective for fiscal years (and interim reporting periods within fiscal
years) beginning after December 15, 2015. As a result of adopting the update $2.0 million was reclassified to debt discount in
the first quarter of 2016. The impact on our December 31, 2015 consolidated balance sheet was as follows:
In thousands
|
|
As previously reported
|
|
|
Impact of adoption
|
|
|
As currently reported
|
|
Prepaid expenses and other current assets
|
|
$
|
40,139
|
|
|
|
(1,153
|
)
|
|
|
38,986
|
|
Deferred financing costs, net of current portion
|
|
|
3,696
|
|
|
|
(855
|
)
|
|
|
2,841
|
|
Others
|
|
|
794,600
|
|
|
|
–
|
|
|
|
794,600
|
|
Total assets
|
|
$
|
838,435
|
|
|
$
|
(2,008
|
)
|
|
$
|
836,427
|
|
Current portion of notes payable
|
|
|
23,076
|
|
|
|
(693
|
)
|
|
|
22,383
|
|
Notes payable, net of current portion
|
|
|
601,229
|
|
|
|
(1,315
|
)
|
|
|
599,914
|
|
Others
|
|
|
177,669
|
|
|
|
–
|
|
|
|
177,669
|
|
Total liabilities
|
|
|
801,974
|
|
|
|
(2,008
|
)
|
|
|
799,966
|
|
Total equity
|
|
|
36,461
|
|
|
|
–
|
|
|
|
36,461
|
|
Total liabilities and equity
|
|
$
|
838,435
|
|
|
$
|
(2,008
|
)
|
|
$
|
836,427
|
|
In February 2015, the FASB issued ASU No.
2015-02 (“ASU 2015-02”),
Consolidation – Amendments to the Consolidation Analysis,
(Topic 810). ASU 2015-02
changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities.
It is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2015. Adoption
of this update in 2016 did not have a material effect on our results of operations and cash flows.
Accounting standards not yet adopted
In January 2017, the FASB issued ASU No.
2017-04 (“ASU 2017-04”),
Simplifying the Test for Goodwill Impairment
. ASU 2017-04 eliminates the requirement
to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwill impairment
charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over
its fair value (i.e., measure the charge based on the current Step 1). ASU 2017-04 is effective for annual and any interim impairment
tests for periods beginning after December 15, 2019, with early adoption permitted. We are evaluating the effect of this guidance.
In January 2017, the FASB issued ASU No.
2017-01 (“ASU 2017-01”),
Clarifying the Definition of a Business
. ASU 2017-01 changes the definition of a business
to assist entities with evaluating when a set of transferred assets and activities is considered a business. ASU 2017-01 is effective
for annual periods beginning after December 31, 2017 including interim periods within those periods. We are evaluating the effect
of this guidance.
In February 2016, the FASB issued ASU No.
2016-02 (“ASU 2016-02”),
Leases,
(Topic 842): Amendments to the FASB Accounting Standards Codification. ASU
2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on
their balance sheets and making targeted changes to lessor accounting. The new standard requires a modified retrospective transition
approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition
relief. The amendments in this update are effective for fiscal years (and interim reporting periods within fiscal years) beginning
after December 15, 2018. Early adoption of the amendments is permitted for all entities. We are currently evaluating the impact
this guidance will have on our consolidated financial statements, but expect this adoption will result in a significant increase
in the assets and liabilities related to our leased properties and equipment.
In May 2014, the FASB issued ASU No. 2014-09
(“ASU 2014-09”),
Revenue from Contracts with Customers
, (Topic 606). ASU 2014-09 requires an entity to recognize
revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the
goods or services. It also requires more detailed disclosures to enable users of the financial statements to understand the nature,
amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance will become effective
for the Company on January 1, 2018. We are continuing to evaluate the effects the adoption of this standard will have on our financial
statements and financial disclosures. We believe the most significant impact will be to the presentation of our statement of operations
where the provision for bad debts will be recorded as a direct reduction to revenues and will not be presented as a separate line
item. We expect to adopt the new standard using the full retrospective application.
NOTE 4 – FACILITY ACQUISITIONS, ASSETS HELD FOR SALE
AND DISPOSITIONS
Acquisitions
In separate purchases occurring on July
1 and October 1 2016, we acquired for approximately $1.2 million the remaining non-controlling interest of 47.6% in the Park West
joint venture, thus increasing our ownership percentage from 52.4% to 100%. The difference between the consideration paid and the
carrying value of the non-controlling interest purchased was recorded as additional paid-in capital.
On March 1, 2016 we completed our acquisition
of certain assets of Advanced Radiological Imaging – Astoria P.C. consisting of two multi-modality imaging centers located
in Astoria, NY for cash consideration of $5.0 million. The facility provides MRI, PET/CT, Ultrasound and X-ray services. We have
made a fair value determination of the acquired assets and approximately $3.6 million of fixed assets, $47,000 of prepaid assets,
$100,000 covenant not to compete, and $1.3 million of goodwill were recorded.
On October 1, 2015
we completed our acquisition of certain assets of DIG consisting of seventeen multi-modality imaging centers located in the boroughs
of Brooklyn and Queens, New York, for $62.9 million detailed as follows: cash consideration of $54.6 million ($49.6 million paid
at execution, $5 million to be paid 18 months after acquisition or earlier if certain conditions are met), the assumption of $2.1
million in equipment debt, and issuance of 1.5 million RadNet common shares valued at $8.3 million on the acquisition date. The
transaction also includes contingent consideration payable equal to five times the amount by which collections on the sellers’
historical revenue exceeds a defined threshold. During 2016, based on fair value determination of the assets and liabilities by
a third party, we recorded certain measurement period adjustments associated with our acquisition. In the second quarter of 2016,
these adjustments resulted in an increase to fixed assets acquired by $1.1 million and the recognition of a net unfavorable lease
contract liability of $1.0 million. In the third quarter of 2016, we recorded a decrease to our intangible and fixed assets of
approximately $121,000. Also, amounts previously owed to DIG of $5.0 million were reduced to $3.4 million on June 15, 2016 when
we remitted a payment of $1.6 million to a payor on behalf of DIG.
On October 1, 2015 we completed our acquisition
of certain assets of Philip L. Chatham, M.D., Inc., an oncology practice with offices in the Los Angeles, CA area, for consideration
of $916,000, paid in shares of equal value of the common stock of RadNet, Inc. and $300,000 in cash. We have made a fair value
determination of the acquired assets and approximately $26,000 of fixed assets, $100,000 covenant not to compete intangible asset,
$300,000 of medical supplies and $790,000 of goodwill were recorded with respect to this transaction.
On September 1, 2015
we completed our acquisition of certain assets of Murray Hill Radiology and Mammography, P.C. and Murray Hill MRI Holding, LLC,
consisting of a single multi-modality imaging center located in Manhattan, New York for a cash consideration of $5.8 million. The
facility provides MRI, CT, Ultrasound and X-ray services. We have made a fair value determination of the acquired assets and approximately
$1.6 million of fixed assets, $95,000 of prepaid assets and $4.1 million of goodwill were recorded.
On August 3, 2015 we
completed our acquisition of certain assets of Hanford Imaging, LP, consisting of a single multi-modality imaging center located
in Hanford, CA for cash consideration of $1.0 million. The facility provides MRI, CT, Ultrasound and X-ray services. We have made
a fair value determination of the acquired assets and approximately $215,000 of fixed asset and $785,000 of goodwill were recorded.
On June 1, 2015 we completed our acquisition
of certain assets of Healthcare Radiology and Diagnostic systems, PLLC, consisting of a single multi-modality imaging center located
in the Bronx, NY area for cash consideration of $425,000. The facility provides MRI, CT, Ultrasound and X-ray services. We have
made a fair value determination of assets acquired and approximately $134,500 of fixed assets and $290,500 of leasehold improvements
were recorded
On May 1, 2015 we completed our acquisition
of certain assets of California Radiology consisting of six multi-modality imaging centers located in Los Angeles, California for
cash consideration of $4.2 million. The facilities provide MRI, PET/CT, Ultrasound and X-ray services. We have made a fair value
determination of the acquired assets and approximately $217,000 of equipment, $1.7 million of leasehold improvements, $34,000 in
other assets, $100,000 of other intangible assets relating to a covenant not to compete contract and $2.1 million of goodwill were
recorded with respect to this transaction.
On April 15, 2015 we completed our acquisition
of certain assets of New York Radiology Partners, consisting of eleven multi-modality imaging centers located in Manhattan, New
York for cash consideration of $29.8 million, a note to seller of $1.5 million, and the assumption of equipment debt of $2.3 million.
The facilities provide a full range of radiology services including MRI, PET/CT, Mammography, Ultrasound, X-ray and other related
services. With the use of an outside valuation expert, we have made a fair value determination of the acquired assets and assumed
liabilities. In total, RadNet acquired assets of $34.5 million and assumed current liabilities of $891,000. Asset amounts acquired
were $6.9 million in equipment, $11.6 million in leasehold improvements, $9.9 million in goodwill, $1.2 million in intangible assets,
and $4.9 million of accounts receivable and other assets. Current liabilities assumed related to accounts payable, payroll and
other related short term obligations.
Assets held for sale
On November 4, 2016,
the Board of Directors resolved to sell the Company’s interest in five of its Rhode Island imaging centers operating under
the name The Imaging Institute within the upcoming 12 months. The following table summarizes the major categories of assets classified
as held for sale in the accompanying consolidated balance sheets at December 31, 2016 (in thousands):
Property and equipment, net
|
|
$
|
1,056
|
|
Other assets
|
|
|
21
|
|
Goodwill
|
|
|
1,126
|
|
Total assets held for sale
|
|
$
|
2,203
|
|
As the sale of these assets does not represent
a strategic shift that will have a major effect on the Company’s operations and financial results, it is not classified as
a discontinued operation.
Dispositions
On September 30, 2015 we completed a sale
of 10 wholly owned imaging centers to one of our non-consolidated joint ventures for which we hold a 49% non-controlling interest,
The New Jersey Imaging Network, L.L.C., for approximately $35.5 million. We recorded a gain of $5.4 million with respect to this
transaction.
On August 3, 2015 we sold a 25% non-controlling
interest in one of our wholly owned entities, Baltimore County Radiology, LLC (“BCR”) to Lifebridge Health for $5.0
million. On the date of sale, the net book value of this 25% interest was $1.3 million. In accordance with ASC 810-10-45-23, the
proceeds in excess of this net book value amounting to $3.7 million was recorded to equity. In addition to the proceeds initially
received, the transaction included an earn out provision in which RadNet had the opportunity to receive approximately $1.2 million
in additional proceeds if certain operating performance targets of BCR were achieved within the 12 months following the transaction.
In the third quarter of 2016, we recorded an increase to additional paid-in capital as a result of $992,000 received as part of
the earn out provision.
NOTE 5 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is recorded as a result of business
combinations. Activity in goodwill for the years ended December 31, 2015 and 2016 is provided below (in thousands):
Balance as of December 31, 2014
|
|
$
|
200,304
|
|
Adjustment to our allocation of goodwill for the acquisition of Liberty Pacific
|
|
|
200
|
|
Goodwill acquired through the acquisition of California Radiology
|
|
|
2,107
|
|
Goodwill acquired through the acquisition of New York Radiology Partners
|
|
|
9,897
|
|
Goodwill disposed through the sale of New Jersey Imaging Partners
|
|
|
(18,833
|
)
|
Goodwill acquired through the acquisition of Hanford Imaging, LP
|
|
|
785
|
|
Goodwill acquired through the acquisition of Murry Hill Radiology and MRI
|
|
|
4,123
|
|
Goodwill acquired through the acquisition of Phillip L Chatam, M.D., Inc.
|
|
|
790
|
|
Goodwill acquired through the acquisition of Diagnostic Imaging Group, LLC
|
|
|
40,035
|
|
Balance as of December 31, 2015
|
|
|
239,408
|
|
Goodwill acquired through the acquisition of Advanced Radiological Imaging
|
|
|
1,280
|
|
Adjustments to our preliminary allocation of the purchase price of Diagnostic Imaging Group, LLC
|
|
|
(47
|
)
|
Goodwill acquired through the acquisition of Landmark Imaging, LLC
|
|
|
38
|
|
Goodwill allocated to assets held for sale
|
|
|
(1,126
|
)
|
Balance as of December 31, 2016
|
|
$
|
239,553
|
|
The amount of goodwill from these acquisitions
that is deductible for tax purposes as of December 31, 2016 is $99.1 million.
Other intangible assets are primarily related
to the value of management service agreements obtained through our acquisition of Radiologix, Inc. in 2006 and are recorded at
a cost of $57.5 million less accumulated amortization of $23.4 million at December 31, 2016. Also included in other intangible
assets is the value of covenant not to compete contracts associated with our facility acquisitions totaling $5.9 million less accumulated
amortization of $5.3 million, as well as the value of trade names associated with acquired imaging facilities totaling $10.2 million
less accumulated amortization of $1.5 million and dispositions of $750,000. In connection with our purchase of eRAD is the $4.0
million value of eRAD’s developed technology and its customer relationships, which have been fully amortized as of December
31, 2016.
Total amortization expense for the years
ended December 31, 2016, 2015 and 2014 was $2.6 million, $3.0 million, and $3.1 million, respectively. Intangible assets are
amortized using the straight-line method. Management service agreements are amortized over 25 years using the straight line method.
Developed technology and customer relationships are amortized over 5 years using the straight line method.
The following table shows annual amortization
expense, by asset classes that will be recorded over the next five years (in thousands):
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Thereafter
|
|
|
Total
|
|
|
Weighted average amortization
period remaining in years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management Service Contracts
|
|
$
|
2,287
|
|
|
$
|
2,287
|
|
|
$
|
2,287
|
|
|
$
|
2,287
|
|
|
$
|
2,287
|
|
|
$
|
22,683
|
|
|
$
|
34,118
|
|
|
|
14.9
|
|
Covenant not to compete contracts
|
|
|
251
|
|
|
|
208
|
|
|
|
122
|
|
|
|
42
|
|
|
|
4
|
|
|
|
–
|
|
|
|
627
|
|
|
|
2.8
|
|
Trade Names*
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
7,937
|
|
|
|
7,937
|
|
|
|
–
|
|
Total Annual Amortization
|
|
$
|
2,538
|
|
|
$
|
2,495
|
|
|
$
|
2,409
|
|
|
$
|
2,329
|
|
|
$
|
2,291
|
|
|
$
|
30,620
|
|
|
$
|
42,682
|
|
|
|
|
|
* These trade name intangibles have an indefinite life
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment and accumulated depreciation
and amortization are as follows (in thousands):
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Land
|
|
$
|
250
|
|
|
$
|
250
|
|
Medical equipment
|
|
|
393,001
|
|
|
|
352,005
|
|
Computer and office equipment, furniture and fixtures
|
|
|
99,434
|
|
|
|
107,014
|
|
Software development costs
|
|
|
6,391
|
|
|
|
6,391
|
|
Leasehold improvements
|
|
|
252,595
|
|
|
|
232,550
|
|
Equipment under capital lease
|
|
|
26,758
|
|
|
|
29,796
|
|
Total property and equipment cost
|
|
|
778,429
|
|
|
|
728,006
|
|
Accumulated depreciation and amortization
|
|
|
(529,648
|
)
|
|
|
(471,284
|
)
|
Total net property and equipment
|
|
|
248,781
|
|
|
|
256,722
|
|
Equipment held for sale
|
|
|
(1,056
|
)
|
|
|
–
|
|
Total property and equipment
|
|
$
|
247,725
|
|
|
$
|
256,722
|
|
Depreciation and amortization expense of
property and equipment, including amortization of equipment under capital leases, for the years ended December 31, 2016, 2015
and 2014 was $64.0 million, $57.6 million, and $56.2 million, respectively.
NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses were
comprised of the following (in thousands):
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
40,952
|
|
|
$
|
52,296
|
|
Accrued expenses
|
|
|
42,883
|
|
|
|
32,950
|
|
Accrued payroll and vacation
|
|
|
19,119
|
|
|
|
17,692
|
|
Accrued professional fees
|
|
|
8,212
|
|
|
|
10,875
|
|
Total
|
|
$
|
111,166
|
|
|
$
|
113,813
|
|
NOTE 8 - NOTES PAYABLE, REVOLVING CREDIT FACILITY AND CAPITAL
LEASES
Notes payable, revolving credit facility and capital lease
obligations
:
Our notes payable, line of credit and capital
lease obligations consist of the following (in thousands):
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Revolving lines of credit
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loans
|
|
|
478,938
|
|
|
|
451,023
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loans
|
|
|
168,000
|
|
|
|
180,000
|
|
|
|
|
|
|
|
|
|
|
Discounts on term loans
|
|
|
(16,783
|
)
|
|
|
(9,542
|
)
|
|
|
|
|
|
|
|
|
|
Promissory note payable to the former owner of a practice acquired at an interest rate of 1.5% due through 2019
|
|
|
980
|
|
|
|
1,361
|
|
|
|
|
|
|
|
|
|
|
Promissory note payable to Healthcare Partners for imaging equipment acquired through acquisition at an interest rate of 5.25%
|
|
|
–
|
|
|
|
431
|
|
|
|
|
|
|
|
|
|
|
Equipment notes payable at interest rates ranging from 3.3% to 10.2%, due through 2020, collateralized by medical equipment
|
|
|
341
|
|
|
|
1,032
|
|
|
|
|
|
|
|
|
|
|
Obligations under capital leases at interest rates ranging from 2.5% to 10.8%, due through 2022, collateralized by medical and office equipment
|
|
|
7,256
|
|
|
|
16,423
|
|
Total debt obligations
|
|
|
638,732
|
|
|
|
640,728
|
|
Less: current portion
|
|
|
(26,557
|
)
|
|
|
(33,114
|
)
|
Long term portion debt obligations
|
|
$
|
612,175
|
|
|
$
|
607,614
|
|
The following is a listing of annual principal
maturities of notes payable exclusive of all related discounts, capital leases and repayments on our revolving credit facilities
for years ending December 31 (in thousands):
2017
|
|
$
|
24,784
|
|
2018
|
|
|
24,751
|
|
2019
|
|
|
24,526
|
|
2020
|
|
|
24,261
|
|
2021
|
|
|
192,250
|
|
Thereafter
|
|
|
357,687
|
|
Total notes payable obligations
|
|
$
|
648,259
|
|
We lease equipment under capital lease arrangements.
Future minimum lease payments under capital leases for years ending December 31 (in thousands) is as follows:
2017
|
|
$
|
4,764
|
|
2018
|
|
|
2,163
|
|
2019
|
|
|
359
|
|
2020
|
|
|
201
|
|
2021
|
|
|
81
|
|
Thereafter
|
|
|
15
|
|
Total minimum payments
|
|
|
7,583
|
|
Amount representing interest
|
|
|
(327
|
)
|
Present value of net minimum lease payments
|
|
|
7,256
|
|
Less current portion
|
|
|
(4,526
|
)
|
Long-term portion lease obligations
|
|
$
|
2,730
|
|
Term Loans and Financing Activity Information
:
Included in our consolidated balance sheet
at December 31, 2016 are $630.2 million of senior secured term loan debt (net of unamortized discounts of $16.8 million), broken
down by loan agreement as follows (in thousands):
|
|
As of December 31, 2016
|
|
|
|
Face Value
|
|
|
Discount
|
|
|
Total Carrying Value
|
|
First Lien Term Loans
|
|
$
|
478,938
|
|
|
$
|
(14,712
|
)
|
|
$
|
464,226
|
|
Second Lien Term Loans
|
|
$
|
168,000
|
|
|
$
|
(2,071
|
)
|
|
$
|
165,929
|
|
Total
|
|
$
|
646,938
|
|
|
$
|
(16,783
|
)
|
|
$
|
630,155
|
|
Our revolving credit facility had no aggregate
principal amount outstanding as of December 31, 2016.
At December
31, 2016, our credit facilities were comprised of two tranches of term loans and a revolving credit facility. On July 1,
2016 (the “Restatement Effective Date”), we entered into Amendment No. 3 to Credit and Guaranty Agreement
(the “Restatement Amendment”) pursuant to which we amended and restated our then existing first lien credit
facilities on the terms set forth in the Amended and Restated First Lien Credit and Guaranty Agreement dated July 1, 2016 (as
amended from time to time, the “First Lien Credit Agreement”). Pursuant to the First Lien Credit Agreement, we
have issued $485 million of senior secured term loans (the “First Lien Term Loans”) and established a $117.5
million senior secured revolving credit facility (the “Revolving Credit Facility”). We have also entered into a
Second Lien Credit and Guaranty Agreement dated March 25, 2014 (as amended from time to time, the “Second Lien
Credit Agreement”) pursuant to which we issued $180 million of secured term loans (the “Second Lien
Term Loans”).
As of December 31, 2016, we were in compliance
with all covenants under out credit facilities.
The following describes our 2016 financing activities:
Restatement Amendment and the First Lien Credit
Agreement
On July
1, 2016, we entered into the Restatement Amendment pursuant to which we amended and restated our then existing first lien
credit facilities on the terms set forth in the First Lien Credit Agreement. As of the Restatement Effective Date, our
first lien credit facilities consisted of a Credit and Guaranty Agreement that we entered into on October 10, 2012
(the “Original First Lien Credit Agreement”), as subsequently amended by a first amendment dated April 3, 2013
(the “2013 Amendment”), a second amendment dated March 25, 2014 (the “2014 Amendment”), and a
joinder agreement dated April 30, 2015 (the “2015 Joinder” and collectively with the Original First Lien
Credit Agreement, the 2013 Amendment and the 2014 Amendment, the “Prior First Lien Credit Agreement”). The First
Lien Credit Agreement increased the aggregate principal amount of First Lien Term Loans to $485.0 million and increased
the Revolving Credit Facility to $117.5 million. Proceeds from the First Lien Credit Agreement were used to repay
the previously outstanding first lien loans under the Prior First Lien Credit Agreement, make a $12.0 million principal
payment of the Second Lien Term Loans, pay costs and expenses related to the First Lien Credit Agreement and provide
approximately $10.0 million for general corporate purposes.
Interest.
The interest
rates payable on the First Lien Term Loans are (a) the Adjusted Eurodollar Rate (as defined in the First Lien Credit Agreement)
plus 3.75% per annum or (b) the Base Rate (as defined in the First Lien Credit Agreement) plus 2.75% per annum. As applied to the
First Lien Term Loans, the Adjusted Eurodollar Rate has a minimum floor of 1.0%. The three month Adjusted Eurodollar Rate at December
31, 2016 was 1.0%.
Payments.
The scheduled
quarterly principal payments of the First Lien Term Loans is approximately $6.1 million, beginning in December 2016, with the balance
due at maturity. Prior to the Restatement Amendment, the quarterly principal payments on the first lien term loans under the Prior
First Lien Credit Agreement were approximately $6.2 million.
Maturity Date.
The maturity
date for the First Lien Term Loans shall be on the earliest to occur of (i) the seventh anniversary of the Restatement Effective
Date, (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, and (iii) September 25, 2020 if our indebtedness under the Second Lien Credit Agreement has
not been repaid, refinanced or extended prior to such date.
Incremental
Feature:
Under the First Lien Credit Agreement, we can elect to request 1) an increase to the existing Revolving Credit Facility
and/or 2) additional First Lien Term Loans, provided that the aggregate amount of such increases or additions does not exceed (A)
an amount not in excess of $100.0 million
minus
any incremental loans requested under the similar provisions of the Second
Lien Credit Agreement or (B) if the First Lien Leverage Ratio would not exceed 3.50:1.00 after giving effect to such incremental
facilities, an uncapped amount, 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 any incremental commitment or loan.
Revolving Credit Facility:
The First Lien Credit Agreement provides for a $117.5 million Revolving Credit Facility. The termination date of the Revolving
Credit Facility is the earliest to occur of: (i) July 1, 2021, (ii) the date the Revolving Credit Facility is permanently reduced
to zero pursuant to section 2.13(b) of the First Lien Credit Agreement, which addresses voluntary commitment reductions, (iii)
the date of the termination of the Revolving Credit Facility due to specific events of default pursuant to section 8.01 of the
First Lien Credit Agreement, and (iv) September 25, 2020 if our indebtedness under the Second Lien Credit Agreement has not been
repaid, refinanced or extended prior to such date. Amounts borrowed under the Revolving Credit Facility bear interest based on
types of borrowings as follows: (i) unpaid principal on loans under the Revolving Credit Facility at the Adjusted Eurodollar Rate
(as defined in the First Lien Credit Agreement) plus 3.75% per annum or the Base Rate (as defined in the First Lien Credit Agreement)
plus 2.75% per annum, (ii) letter of credit fees at 3.75% per annum and fronting fees for letters of credit at 0.25% 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
Lien Credit Agreement, and (iii) commitment fee of 0.5% per annum on the unused revolver balance.
Second Lien Credit Agreement
:
On March 25, 2014, we entered
into the Second Lien Credit Agreement to provide for, among other things, the borrowing of $180.0 million of Second Lien Term Loans.
The proceeds from the Second Lien Term Loans were used to redeem our 10 3/8% senior unsecured notes, due 2018, to pay the expenses
related to the transaction and for general corporate purposes. On July 1, 2016, in conjunction with the Restatement Amendment,
a $12.0 million principal payment was made on the Second Lien Term Loans.
The Second Lien Credit Agreement
provides for the following:
Interest.
The interest
rates payable on the Second Lien Term Loans are (a) the Adjusted Eurodollar Rate (as defined in the Second Lien Credit Agreement)
plus 7.0% or (b) the Base Rate (as defined in the Second Lien Credit Agreement) plus 6.0%. The Adjusted Eurodollar Rate has a minimum
floor of 1.0% on the Second Lien Term Loans. The three month Adjusted Eurodollar Rate at December 31, 2016 was 1.0%. The rate paid
on the Second Lien Term Loan at December 31, 2016 was 8%.
Payments.
There is no
scheduled amortization of the principal of the Second Lien Term Loans. Unless otherwise prepaid as a result of the occurrence of
certain mandatory prepayment events, all principal will be due and payable on the termination date described below.
Termination.
The maturity
date for the Second Lien Term Loans is the earlier to occur of (i) March 25, 2021, and (ii) the date on which the Second Lien Term
Loans shall otherwise become due and payable in full under the Second Lien Credit Agreement, whether by voluntary prepayment per
section 2.13(a) of the Second Lien Credit Agreement or events of default per section 8.01 of the Second Lien Credit Agreement as
described below.
The following describes our financing activities
on the retired Senior Notes:
Senior Notes
:
On April 6, 2010, we issued
and sold $200 million of 10 3/8% senior unsecured notes due 2018 at a price of 98.680% (the “Senior Notes”). All payments
of the Senior Notes, including principal and interest, were guaranteed jointly and severally on a senior secured basis by RadNet,
Inc., and all of Radnet Management’s current and future domestic wholly owned restricted subsidiaries. The Senior Notes were
issued under an indenture dated April 6, 2010 (the “Indenture”), by and among Radnet Management, Inc., as issuer, RadNet,
Inc., as parent guarantor, the subsidiary guarantors thereof and U.S. Bank National Association, as trustee. We paid interest on
the senior notes on April 1
and October 1 of each year, commencing October 1, 2010, and they were scheduled
to expire on April 1, 2018. On April 24, 2014, we completed the retirement of our $200 million in Senior Notes on April 24, 2014
and following such retirement the Company completed the satisfaction and discharge of the Indenture. As a result of the transaction,
we recorded a loss on the early extinguishment of debt of $15.9 million.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Leases
– We lease various operating
facilities and certain medical equipment under operating leases with renewal options expiring through 2041. Certain leases contain
renewal options from two to ten years and escalation based either on the consumer price index or fixed rent escalators. Leases
with fixed rent escalators are recorded on a straight-line basis. We record deferred rent for tenant leasehold improvement allowances
received from certain lessors and amortize the deferred rent expense over the term of the lease agreement. Minimum annual payments
under operating leases for future years ending December 31 are as follows (in thousands):
|
|
Facilities
|
|
|
Equipment
|
|
|
Total
|
|
2017
|
|
$
|
58,368
|
|
|
$
|
8,337
|
|
|
$
|
66,705
|
|
2018
|
|
|
49,638
|
|
|
|
7,784
|
|
|
|
57,422
|
|
2019
|
|
|
43,192
|
|
|
|
5,695
|
|
|
|
48,887
|
|
2020
|
|
|
35,276
|
|
|
|
3,841
|
|
|
|
39,117
|
|
2021
|
|
|
28,062
|
|
|
|
1,999
|
|
|
|
30,061
|
|
Thereafter
|
|
|
56,008
|
|
|
|
1,332
|
|
|
|
57,340
|
|
|
|
$
|
270,544
|
|
|
$
|
28,988
|
|
|
$
|
299,532
|
|
Total rent expense, including equipment
rentals, for the years ended December 31, 2016, 2015 and 2014 was $74.2 million, $71.7 million and $64.5 million, respectively.
Litigation
– We
are engaged from time to time in the defense of lawsuits arising out of the ordinary course and conduct of our business. We believe
that the outcome of our current litigation will not 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.
NOTE 10 – DERIVATIVE INSTRUMENTS
We are exposed to certain risks relating
to our ongoing business operations. The primary risk managed by us using derivative instruments is interest rate risk.
Our credit facilities
are comprised of two tranches of term loans. On July 1, 2016, we issued $485 million of the First Lien Term Loans. We also previously
entered into a Second Lien Credit Agreement pursuant to which we issued $180 million of Second Lien Term Loans. Proceeds from the
First Lien Term Loans were used in part to make a $12 million principal payment of the Second Lien Term Loans to reduce the outstanding
balance due to $168 million. Both tranches of term loans have a LIBOR floor of 1% which serves as an interest rate floor based
on our three month LIBOR rate election. See Note 8, Notes Payable, Revolving Credit Facility and Capital Leases for more information.
In the fourth quarter
of 2016, the Company entered into two forward interest rate cap agreements ("2016 Caps"). The 2016 Caps will mature in
September and October 2020. The 2016 Caps had notional amounts of $150,000,000 and $350,000,000, respectively, which were designated
at inception as cash flow hedges of future cash interest payments associated with portions of the Company’s variable rate
bank debt. Under these arrangements, the Company purchased a cap on 3 month LIBOR at 2.0%. The Company is liable for a $5.3 million
premium to enter into the caps which is being accrued over the life of the agreements.
At inception, we
designated our interest rate cap agreements as cash flow hedges of floating-rate borrowings. In accordance with
ASC Topic 815, derivatives that have been designated and qualify as cash flow hedging instruments are reported at fair value.
The gain or loss on the effective portion of the hedge (i.e., change in fair value) is initially reported as a component of
accumulated other comprehensive income in the consolidated statement of equity (deficit). The remaining gain or loss, if any, is
recognized currently in earnings. As of December 31, 2016, the cash flow hedges were deemed to be effective. No amount is
expected to be reclassified into earnings in the next twelve months.
Below represents as
of December 31, 2016 the fair value of our interest rate caps and gain recognized:
The fair value of derivative instruments
as of December 31, 2016 is as follows (amounts in thousands):
Derivatives
|
Balance Sheet Location
|
Fair Value – Asset Derivatives
|
Interest rate contracts
|
Current assets
|
$818
|
A tabular presentation of the effect of
derivative instruments on our statement of comprehensive income is as follows (amounts in thousands):
Effective Interest Rate Cap
|
Amount of Gain Recognized on Derivative
|
Location of Gain Recognized in Income on Derivative
|
Interest rate contracts
|
$818
|
Other Comprehensive Income
|
NOTE 11 – INCOME TAXES
For the years ended December 31,
2016, 2015 and 2014, we recognized income tax expense comprised of the following (in thousands):
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Federal current tax
|
|
$
|
88
|
|
|
$
|
237
|
|
|
$
|
–
|
|
State current tax
|
|
|
914
|
|
|
|
1,705
|
|
|
|
1,283
|
|
Other current tax
|
|
|
28
|
|
|
|
28
|
|
|
|
29
|
|
Federal deferred tax
|
|
|
2,539
|
|
|
|
3,625
|
|
|
|
869
|
|
State deferred tax
|
|
|
863
|
|
|
|
412
|
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
4,432
|
|
|
$
|
6,007
|
|
|
$
|
1,967
|
|
A reconciliation of the statutory U.S. federal rate
and effective rates is as follows:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Federal tax
|
|
|
34.00%
|
|
|
|
34.00%
|
|
|
|
34.00%
|
|
State franchise tax, net of federal benefit
|
|
|
1.80%
|
|
|
|
8.50%
|
|
|
|
-3.64%
|
|
Other Non deductible expenses
|
|
|
-0.09%
|
|
|
|
-0.01%
|
|
|
|
0.00%
|
|
Meals and entertainment
|
|
|
2.10%
|
|
|
|
1.75%
|
|
|
|
4.85%
|
|
Noncontrolling Interest in Partnerships
|
|
|
-2.11%
|
|
|
|
-2.16%
|
|
|
|
-2.88%
|
|
Equity compensation
|
|
|
-4.05%
|
|
|
|
-1.74%
|
|
|
|
-8.72%
|
|
Changes in valuation allowance
|
|
|
4.70%
|
|
|
|
-17.32%
|
|
|
|
24.52%
|
|
Return-to-provision
|
|
|
0.22%
|
|
|
|
3.29%
|
|
|
|
-9.57%
|
|
Deferred true-ups and other
|
|
|
-25.25%
|
|
|
|
13.41%
|
|
|
|
16.34%
|
|
Uncertain tax positions
|
|
|
22.44%
|
|
|
|
0.01%
|
|
|
|
-3.67%
|
|
Expiring net operating losses
|
|
|
1.88%
|
|
|
|
1.28%
|
|
|
|
2.62%
|
|
Income tax expense
|
|
|
35.64%
|
|
|
|
41.01%
|
|
|
|
53.85%
|
|
Deferred income taxes reflect the net tax
effects of temporary differences between carrying amounts of assets and liabilities for financial and income tax reporting purposes
and operating loss carryforwards.
Our deferred tax assets and liabilities
comprise the following (in thousands):
|
|
At December 31,
|
|
Deferred tax assets:
|
|
2016
|
|
|
2015
|
|
Net operating losses
|
|
$
|
84,509
|
|
|
$
|
78,912
|
|
Accrued expenses
|
|
|
4,400
|
|
|
|
4,125
|
|
Straight-Line Rent Adjustment
|
|
|
10,750
|
|
|
|
11,263
|
|
Unfavorable contract liability
|
|
|
2,114
|
|
|
|
2,142
|
|
Equity compensation
|
|
|
950
|
|
|
|
846
|
|
Allowance for doubtful accounts
|
|
|
6,033
|
|
|
|
4,341
|
|
Other
|
|
|
1,357
|
|
|
|
1,092
|
|
Valuation Allowance
|
|
|
(4,428
|
)
|
|
|
(3,841
|
)
|
Total Deferred Tax Assets
|
|
$
|
105,685
|
|
|
$
|
98,880
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property Plant & Equipment
|
|
|
(6,994
|
)
|
|
|
(8,582
|
)
|
Goodwill
|
|
|
(23,350
|
)
|
|
|
(18,617
|
)
|
Intangibles
|
|
|
(12,066
|
)
|
|
|
(12,088
|
)
|
Non accrual experience method reserve
|
|
|
(8,483
|
)
|
|
|
(7,882
|
)
|
Other
|
|
|
(4,436
|
)
|
|
|
(4,747
|
)
|
Total Deferred Tax Liabilities
|
|
$
|
(55,329
|
)
|
|
$
|
(51,916
|
)
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Asset
|
|
$
|
50,356
|
|
|
$
|
46,964
|
|
As of December 31, 2016, the Company had
federal net operating loss carryforwards of approximately $ 231.6 million, which expire at various intervals from the years 2017
to 2036. The Company also had state net operating loss carryforwards of approximately $ 160.5 million, which expire at various
intervals from the years 2017 through 2036. As of December 31, 2016, $ 23.5 million of our federal net operating loss carryforwards
acquired in connection with the 2011 acquisition of Raven Holdings U.S., Inc. are subject to limitations related to their utilization
under Section 382 of the Internal Revenue Code. Future ownership changes as determined under Section 382 of the Internal Revenue
Code could further limit the utilization of net operating loss carryforwards.
We considered all evidence available when
determining whether deferred tax assets are more likely-than-not to be realized, including projected future taxable income, scheduled
reversals of deferred tax liabilities, prudent tax planning strategies, and recent financial operations. The evaluation of this
evidence requires significant judgment about the forecasts of future taxable income, based on the plans and estimates we are using
to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years
of cumulative operating income. As of December 31, 2016, we have determined that deferred tax assets of $105.7 million are more
likely-than-not to be realized. We have also determined that deferred tax liabilities of $ 23.4 million are required related to
book basis in goodwill that has an indefinite life.
For the next five years, and thereafter,
federal net operating loss carryforwards expire as follows (in thousands):
Year Ended
|
|
Total Net Operating Loss Carryforwards
|
|
|
Amount Subject to 382 limitation
|
|
2017
|
|
|
1,501
|
|
|
|
1,501
|
|
2018
|
|
|
10,968
|
|
|
|
–
|
|
2019
|
|
|
7,178
|
|
|
|
–
|
|
2020
|
|
|
–
|
|
|
|
–
|
|
2021
|
|
|
24,257
|
|
|
|
–
|
|
Thereafter
|
|
|
187,725
|
|
|
|
40,632
|
|
|
|
$
|
231,629
|
|
|
$
|
42,133
|
|
For the next five years, and thereafter,
California net operating loss carryforwards expire as follows (in thousands):
Year Ended
|
|
Total Net Operating Loss Carryforwards
|
|
2017
|
|
|
4,520
|
|
2018
|
|
|
–
|
|
2019
|
|
|
–
|
|
2020
|
|
|
–
|
|
2021
|
|
|
–
|
|
Thereafter
|
|
|
17,773
|
|
|
|
$
|
22,293
|
|
We file consolidated income tax returns
in the U.S. federal jurisdiction and various states and foreign jurisdictions. We continue to reinvest earnings of the non-US entities
for the foreseeable future and therefore have not recognized any U.S. tax expense on these earnings. With limited exceptions, we
are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before
2012. We do not anticipate the results of any open examinations would result in a material change to its financial position.
At December 31 2016, the Company has unrecognized
tax benefits of $3.9 million of which $2.8 million will affect the effective tax rate if recognized.
A reconciliation of the total
gross amounts of unrecognized tax benefits for the years ended as follows (in thousands):
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Balance at beginning of year
|
|
$
|
94
|
|
|
$
|
3,761
|
|
|
$
|
3,970
|
|
Increases (Decreases) related to prior year tax positions
|
|
|
3,861
|
|
|
|
(3,667
|
)
|
|
|
(209
|
)
|
Expiration of the statute of limitations for the assessment of taxes
|
|
|
(94
|
)
|
|
|
–
|
|
|
|
–
|
|
Balance at end of year
|
|
$
|
3,861
|
|
|
$
|
94
|
|
|
$
|
3,761
|
|
The Company recognizes accrued interest
and penalties related to unrecognized tax benefits in income tax expense. During the year ended December 31, 2016 the Company accrued
an insignificant amount of interest expense. As of December 31, 2016, accrued interest and penalties were insignificant.
NOTE 12 – STOCK-BASED COMPENSATION
Stock Incentive Plans
Options
We have one long-term equity incentive plan
which we refer to as the 2006 Equity Incentive Plan, which we amended and restated as of April 20, 2015 (the “Restated Plan”).
The Restated Plan was approved by our stockholders at our annual stockholders meeting on June 11, 2015. As of December 31, 2016,
we have reserved for issuance under the Restated Plan 12,000,000 shares of common stock. We can issue options, stock awards, stock
appreciation rights and cash awards under the Restated Plan. Certain options granted under the Restated Plan to employees are intended
to qualify as incentive stock options under existing tax regulations. Stock options generally vest over three to five years and
expire five to ten years from the date of grant.
As of December 31, 2016, we had outstanding
options to acquire 375,626 shares of our Common Stock, of which options to acquire 205,000 shares were exercisable. During
the twelve months ended December 31, 2016, we granted options to acquire 170,626 shares under our Restated Plan.
The following summarizes all of our option
transactions during the year ended December 31, 2016:
Outstanding Options Under the 2006 Plan
|
|
Shares
|
|
|
Weighted Average Exercise price Per Common Share
|
|
Weighted Remaining Contractual Life (in years)
|
|
Aggregate Intrinsic Value
|
|
Balance, December 31, 2015
|
|
|
931,667
|
|
|
$4.69
|
|
|
|
|
|
|
Granted
|
|
|
170,626
|
|
|
6.01
|
|
|
|
|
|
|
Exercised
|
|
|
(576,667
|
)
|
|
2.96
|
|
|
|
|
|
|
Canceled, forfeited or expired
|
|
|
(150,000
|
)
|
|
7.51
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
|
375,626
|
|
|
6.82
|
|
4.45
|
|
$
|
252,238
|
|
Exercisable at December 31, 2016
|
|
|
205,000
|
|
|
7.51
|
|
0.92
|
|
|
176,400
|
|
Aggregate intrinsic value in the table above
represents the total pretax intrinsic value (the difference between our closing stock price on December 31, 2016 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 December 31, 2016. Total intrinsic value of options exercised during the years ended December 31, 2016
and 2015 was approximately $1.7 million and $6.2 million, respectively. As of December 31, 2016, total unrecognized stock-based
compensation expense related to non-vested employee awards was $438,998, which is expected to be recognized over a weighted average
period of approximately 3.0 years.
Restricted Stock Awards (“RSA’s”)
The Restated Plan permits the award of restricted
stock awards (“RSA’s”). As of December 31, 2016, we have issued a total of 4,264,011 RSA’s of which 573,145
were unvested at December 31, 2016.
The following summarizes all unvested RSA’s
activities during the year ended December 31, 2016:
|
|
RSA’s
|
|
|
Weighted-Average Remaining Contractual Term (Years)
|
|
Weighted-Average Fair Value
|
RSA’s unvested at December 31, 2015
|
|
|
771,342
|
|
|
|
|
$5.17
|
Changes during the period
|
|
|
|
|
|
|
|
|
Granted
|
|
|
802,803
|
|
|
|
|
$6.16
|
Vested
|
|
|
(1,000,999
|
)
|
|
|
|
$5.13
|
Forfeited
|
|
|
–
|
|
|
|
|
$0.00
|
RSA’s unvested at December 31, 2016
|
|
|
573,145
|
|
|
0.57
|
|
$6.18
|
We determine the fair value of all RSA’s
based of the closing price of our common stock on award date.
Other stock bonus awards
The Restated Plan also permits the award
of stock bonuses 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 year ended December 31, 2016 we issued 35,000 shares relating to these awards
In sum, of the 12,000,000 shares of common
stock reserved for issuance under the Restated Plan, at December 31, 2016, we had issued 12,168,387 total shares between options,
RSA’s and other stock awards. With options cancelled and RSA’s forfeited amounting to 2,975,009 and 59,053 shares,
respectively, there remain 2,865,675 shares available under the Restated Plan for future issuance.
NOTE 13 – EMPLOYEE BENEFIT PLAN
We adopted a profit-sharing/savings plan
pursuant to Section 401(k) of the Internal Revenue Code that covers substantially all non-professional employees. Eligible employees
may contribute on a tax-deferred basis a percentage of compensation, up to the maximum allowable under tax law. Employee contributions
vest immediately. The plan does not require a matching contribution by us through December 31, 2016.
NOTE 14 – QUARTERLY RESULTS OF OPERATIONS (unaudited)
The following table sets forth a summary
of our unaudited quarterly operating results for each of the last eight quarters in the years ended December 31, 2016 and
2015. This quarterly data has been derived from our unaudited consolidated interim financial statements which, in our opinion,
have been prepared on substantially the same basis as the audited financial statements contained elsewhere in this report and include
all normal recurring adjustments necessary for a fair presentation of the financial information for the periods presented. These
unaudited quarterly results should be read in conjunction with our financial statements and notes thereto, included elsewhere in
this report. The operating results in any quarter are not necessarily indicative of the results that may be expected for any future
period (in thousands except per share data).
|
|
2016
Quarter Ended
|
|
|
2015
Quarter Ended
|
|
|
|
Mar
31
|
|
|
June
30
|
|
|
Sept
30
|
|
|
Dec
31
|
|
|
Mar
31
|
|
|
June
30
|
|
|
Sept
30
|
|
|
Dec
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
216,388
|
|
|
$
|
218,565
|
|
|
$
|
224,643
|
|
|
$
|
224,939
|
|
|
$
|
181,267
|
|
|
$
|
204,289
|
|
|
$
|
208,366
|
|
|
$
|
215,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
213,405
|
|
|
|
210,487
|
|
|
|
212,192
|
|
|
|
209,971
|
|
|
|
183,213
|
|
|
|
190,905
|
|
|
|
191,137
|
|
|
|
205,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
7,875
|
|
|
|
5,717
|
|
|
|
11,578
|
|
|
|
10,641
|
|
|
|
6,723
|
|
|
|
10,836
|
|
|
|
5,731
|
|
|
|
10,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of joint ventures
|
|
|
(2,279
|
)
|
|
|
(3,274
|
)
|
|
|
(2,576
|
)
|
|
|
(1,638
|
)
|
|
|
(1,102
|
)
|
|
|
(3,207
|
)
|
|
|
(1,992
|
)
|
|
|
(2,626
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit from (provision for) income taxes
|
|
|
1,180
|
|
|
|
(2,253
|
)
|
|
|
(1,458
|
)
|
|
|
(1,901
|
)
|
|
|
3,091
|
|
|
|
(2,192
|
)
|
|
|
(5,199
|
)
|
|
|
(1,707
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(1,433
|
)
|
|
|
3,382
|
|
|
|
1,991
|
|
|
|
4,064
|
|
|
|
(4,476
|
)
|
|
|
3,563
|
|
|
|
8,291
|
|
|
|
1,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to noncontrolling interests
|
|
|
290
|
|
|
|
(243
|
)
|
|
|
344
|
|
|
|
383
|
|
|
|
78
|
|
|
|
168
|
|
|
|
304
|
|
|
|
379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Radnet, Inc. common stockholders
|
|
$
|
(1,723
|
)
|
|
$
|
3,625
|
|
|
$
|
1,647
|
|
|
$
|
3,681
|
|
|
$
|
(4,554
|
)
|
|
$
|
3,395
|
|
|
$
|
7,987
|
|
|
$
|
881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income attributable to Radnet, Inc. common stockholders
(loss) earnings per share:
|
|
$
|
(0.04
|
)
|
|
$
|
0.08
|
|
|
$
|
0.04
|
|
|
$
|
0.08
|
|
|
$
|
(0.11
|
)
|
|
$
|
0.08
|
|
|
$
|
0.18
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income attributable to Radnet, Inc. common stockholders
(loss) earnings per share:
|
|
$
|
(0.04
|
)
|
|
$
|
0.08
|
|
|
$
|
0.04
|
|
|
$
|
0.08
|
|
|
$
|
(0.11
|
)
|
|
$
|
0.08
|
|
|
$
|
0.18
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
46,581
|
|
|
|
46,559
|
|
|
|
45,869
|
|
|
|
45,967
|
|
|
|
42,747
|
|
|
|
43,370
|
|
|
|
43,637
|
|
|
|
45,454
|
|
Diluted
|
|
|
46,581
|
|
|
|
46,882
|
|
|
|
46,334
|
|
|
|
46,389
|
|
|
|
42,747
|
|
|
|
44,686
|
|
|
|
44,752
|
|
|
|
46,545
|
|
NOTE 15 – RELATED PARTY TRANSACTIONS
We use World Wide Express, a package delivery
company owned by our western operations chief operating officer, to provide delivery services for us. For the years ended December
31, 2016, 2015 and 2014, we paid approximately $670,000, $693,000 and $833,000, respectively, to World Wide Express for those services.
At December 31, 2016 and 2015, we had outstanding amounts due to World Wide Express of $273,000 and $161,000, respectively.
NOTE 16 – SUBSEQUENT EVENTS
On January 6, 2017, Image Medical Inc.,
a wholly owned subsidiary of RadNet, entered into a membership purchase agreement with ScriptSender, LLC, a partnership held by
two individuals which provides secure data transmission services of medical information. Image Medical will contribute $3.0 million
for a 49% equity interest in the partnership. In a separate management agreement, Image Medical Inc. will provide management and
accounting services to the operation in return for a set fee.
On January 13, 2017, we completed our acquisition
of certain assets of Resolution Medical Imaging Corporation, consisting of two multi modality imaging center located in Santa Monica,
CA for cash consideration of $2.1 million, the assumption of approximately $1.7 million in equipment debt, and payoff of a small
business administration loan of $241,000. The facilities provide MRI, CT, Ultrasound, and X-Ray services.
On February 1, 2017, we completed our acquisition
of certain assets of MRI Centers, Inc., consisting of one single-modality imaging center located in Torrance, CA for cash consideration
of $718,000. The facility provides MRI and sports medicine services.
On February 2, 2017, we entered into a fourth
amendment to our first lien credit agreement and senior secured revolving facility. Pursuant to the fourth amendment, the interest
rate charged for the applicable margin on both facilities was reduced by 50 basis points, from 3.75% to 3.25%. The minimum LIBOR
rate underlying the senior secured term loans remains at 1.0%. Except for such reduction in the interest rate on credit extensions,
this amendment did not result in any other material modifications to the amended and restated credit agreement evidencing the first
lien term loans and the senior secured revolving credit facility.