The accompanying notes are an integral part
of these financial statements.
The following table summarizes changes in
the Company’s consolidated stockholder’s equity, including noncontrolling interest, during the nine months ended September
30, 2018.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 – NATURE OF BUSINESS
AND BASIS OF PRESENTATION
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 September 30, 2018, we operated directly or indirectly through joint ventures with
hospitals, 305 centers located in California, Delaware, Florida, Maryland, New Jersey, and New York. Our centers provide physicians
with imaging capabilities to facilitate the diagnosis and treatment of diseases and disorders. Our services include magnetic resonance
imaging (MRI), computed tomography (CT), positron emission tomography (PET), nuclear medicine, mammography, ultrasound, diagnostic
radiology (X-ray), fluoroscopy and other related procedures. The vast majority of our centers offer multi-modality imaging services.
Our multi-modality strategy diversifies revenue streams, reduces exposure to reimbursement changes and provides patients and referring
physicians 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.,
Beverly Radiology Medical Group, Inc. and Breastlink Medical Group, Inc. (formerly known as Westchester 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., 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 six medical groups which provide professional medical services at all of our facilities in Manhattan and Brooklyn, New York
(“the NY Groups”). These contracts are similar to our contract with BRMG. Four of the NY 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 the NY Groups which provide professional medical services at one of our Manhattan facilities.
RadNet provides
non-medical, technical and administrative services to BRMG and the 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 VIEs, 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 $33.2 million and $32.4 million of revenue,
net of management service fees to RadNet, for the three months ended September 30, 2018 and 2017, respectively, and $33.2 million
and $32.4 million of operating expenses for the three months ended September 30, 2018 and 2017, respectively. RadNet recognized
in its condensed consolidated statement of operations $126.8 million and $107.1 million of net revenues for the three months ended
September 30, 2018, and 2017 respectively, for management services provided to BRMG and the NY Groups relating primarily to the
technical portion of total billed revenue.
BRMG and
the NY Groups on a combined basis recognized $100.7 million and $101.4 million of revenue, net of management service fees to RadNet,
for the nine months ended September 30, 2018 and 2017, respectively, and $100.7 million and $101.4 million of operating expenses
for the nine months ended September 30, 2018 and 2017, respectively. RadNet recognized in its condensed consolidated statement
of operations $378.7 million and $328.6 million of net revenues for the nine months ended September 30, 2018, and 2017 respectively,
for management services provided to BRMG and the NY Groups relating primarily to the technical portion of total 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 September 30, 2018 and December
31, 2017, we have included approximately $100.6 million and $96.3 million, respectively, of accounts receivable and approximately
$14.8 million and $7.4 million of accounts payable and accrued liabilities related to BRMG and the NY Groups.
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.
We also own
a 49% economic interest in ScriptSender, LLC, which provides secure data transmission services of medical information. Through
a management agreement, RadNet provides management and accounting services and receives an agreed upon fee. ScriptSender LLC is
dependent on the Company to finance its own activities, and as such we determined that it is a VIE but we are not a primary beneficiary
since we do not have the power to direct the activities of the entity that most significantly impact the entity’s economic
performance.
At all of
our centers 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.
The accompanying
unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X and, therefore, do not include all information and footnotes necessary for conformity with U.S. generally
accepted accounting principles for complete financial statements; however, in the opinion of our management, all adjustments consisting
of normal recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flows
for the interim periods ended September 30, 2018 and 2017 have been made. The results of operations for any interim period are
not necessarily indicative of the results for a full year. These interim condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and related notes thereto contained in our annual report on Form
10-K for the year ended December 31, 2017.
NOTE 2 - SIGNIFICANT ACCOUNTING
POLICIES
During the
period covered in this report, there have been no material changes to the significant accounting policies we use and have explained,
in our annual report on Form 10-K for the fiscal year ended December 31, 2017. The information below is intended only to supplement
the disclosure in our annual report on Form 10-K for the fiscal year ended December 31, 2017.
On January 1,
2018, the Company adopted the new revenue recognition accounting standard issued by the Financial Accounting Standards Board (“FASB”)
and codified in the ASC as topic 606 (“ASC 606”). The revenue recognition standard in ASC 606 outlines a single comprehensive
model for recognizing revenue as performance obligations, defined in a contract with a customer as goods or services transferred
to the customer in exchange for consideration, are satisfied. The standard also requires expanded disclosures regarding the Company’s
revenue recognition policies and significant judgments employed in the determination of revenue.
REVENUES
- The Company applied the modified retrospective approach to all contracts when adopting ASC 606. As a result, at the adoption
of ASC 606 the majority of what was previously classified as the provision for bad debts in the statement of operations is now
reflected as implicit price concessions (as defined in ASC 606) and therefore included as a reduction to net operating revenues
in 2018. For changes in credit issues not assessed at the date of service, the Company will prospectively recognize those amounts
in other operating expenses on the statement of operations. For periods prior to the adoption of ASC 606, the provision for bad
debts has been presented consistent with the previous revenue recognition standards that required it to be presented separately
as a component of net operating revenues. Additionally, upon adoption of ASC 606 the allowance for doubtful accounts of approximately
$13.6 million as of January 1, 2018 was reclassified as a component of net patient accounts receivable. Other than these
changes in presentation on the condensed consolidated statement of operations and condensed consolidated balance sheet, the adoption
of ASC 606 did not have a material impact on the consolidated results of operations for the three and nine months ended September
30, 2018, and the Company does not expect it to have a material impact on its consolidated results of operations for the remainder
of 2018 and on a prospective basis.
Our revenues
generally relate to net patient fees received from various payers and patients themselves under contracts in which our performance
obligations are to provide diagnostic services to the patients. Revenues are recorded during the period our obligations to provide
diagnostic services are satisfied. Our performance obligations for diagnostic services are generally satisfied over a period of
less than one day. The contractual relationships with patients, in most cases, also involve a third-party payer (Medicare, Medicaid,
managed care health plans and commercial insurance companies, including plans offered through the health insurance exchanges)
and the transaction prices for the services provided are dependent upon the terms provided by (Medicare and Medicaid) or negotiated
with (managed care health plans and commercial insurance companies) the third-party payers. The payment arrangements with third-party
payers for the services we provide to the related patients typically specify payments at amounts less than our standard charges
and generally provide for payments based upon predetermined rates per diagnostic services or discounted fee-for-service rates.
Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations
and the frequent changes in managed care contractual terms resulting from contract renegotiations and renewals.
As it relates
to BRMG centers, this service fee revenue includes payments for both the professional medical interpretation revenue recognized
by BRMG as well as the payment for all other aspects related to our providing the imaging services, for which we earn management
fees from BRMG. As it relates to non-BRMG centers, this service fee revenue is earned through providing the use of our diagnostic
imaging equipment and the provision of technical services as well as providing administration services such as clerical and administrative
personnel, bookkeeping and accounting services, billing and collection, provision of medical and office supplies, secretarial,
reception and transcription services, maintenance of medical records, and advertising, marketing and promotional activities.
Our revenues
are based upon the estimated amounts we expect to be entitled to receive from patients and third-party payers. Estimates of contractual
allowances under managed care and commercial insurance plans are based upon the payment terms specified in the related contractual
agreements. Revenues related to uninsured patients and uninsured copayment and deductible amounts for patients who have health
care coverage may have discounts applied (uninsured discounts and contractual discounts). We also record estimated implicit price
concessions (based primarily on historical collection experience) related to uninsured accounts to record self-pay revenues at
the estimated amounts we expect to collect.
As part of
the adoption of ASC 606, the Company elected two of the available practical expedients provided for in the standard. First, the
Company did not adjust the transaction price for any financing components as those were deemed to be insignificant. Additionally,
the Company expensed all incremental customer contract acquisition costs as incurred as such costs are not material and would
be amortized over a period less than one year.
Under capitation
arrangements with various health plans, we earn a per-enrollee amount each month for making available diagnostic imaging services
to all plan enrollees under the capitation arrangement. Revenue under capitation arrangements is recognized in the period in which
we are obligated to provide services to plan enrollees under contracts with various health plans.
The Company’s
total net revenues during the three and nine months ended September 30, 2018 and 2017 are presented in the table below based on
an allocation of the estimated transaction price with the patient between the primary patient classification of insurance coverage
(in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial insurance
|
|
$
|
144,731
|
|
|
$
|
140,956
|
|
|
$
|
426,710
|
|
|
$
|
424,639
|
|
Medicare
|
|
|
49,292
|
|
|
|
47,941
|
|
|
|
145,158
|
|
|
|
143,234
|
|
Medicaid
|
|
|
6,461
|
|
|
|
6,233
|
|
|
|
19,645
|
|
|
|
19,491
|
|
Workers' compensation/personal injury
|
|
|
9,002
|
|
|
|
8,626
|
|
|
|
26,407
|
|
|
|
26,550
|
|
Other
(1)
|
|
|
8,066
|
|
|
|
7,557
|
|
|
|
23,216
|
|
|
|
24,205
|
|
Service fee revenue, net of contractual allowances and discounts
|
|
|
217,552
|
|
|
|
211,313
|
|
|
|
641,136
|
|
|
|
638,119
|
|
Provision for bad debts
|
|
|
–
|
|
|
|
(11,687
|
)
|
|
|
–
|
|
|
|
(35,187
|
)
|
Net service fee revenue
|
|
|
217,552
|
|
|
|
199,626
|
|
|
|
641,136
|
|
|
|
602,932
|
|
Revenue under capitation arrangements
|
|
|
24,596
|
|
|
|
27,981
|
|
|
|
76,799
|
|
|
|
83,702
|
|
Total net revenue
|
|
$
|
242,148
|
|
|
$
|
227,607
|
|
|
$
|
717,935
|
|
|
$
|
686,634
|
|
___________________
|
(1)
|
Other consists of revenue from teleradiology
services, consulting fees and software revenue.
|
The collection
of outstanding receivables for Medicare, Medicaid, managed care payers, other third-party payers and patients is our primary source
of cash and is critical to our operating performance. The primary collection risks relate to uninsured patient accounts, including
patient accounts for which the primary insurance carrier has paid the amounts covered by the applicable agreement, but patient
responsibility amounts (deductibles and copayments) remain outstanding. Implicit price concessions relate primarily to amounts
due directly from patients. Estimated implicit price concessions are recorded for all uninsured accounts, regardless of the aging
of those accounts. Accounts are written off when all reasonable internal and external collection efforts have been performed.
The estimates
for implicit price concessions are based upon management’s assessment of historical write offs and expected net collections,
business and economic conditions, trends in federal, state and private employer health care coverage and other collection indicators.
Management relies on the results of detailed reviews of historical write offs and collections at facilities that represent a majority
of our revenues and accounts receivable (the “hindsight analysis”) as a primary source of information in estimating
the collectability of our accounts receivable. We perform the hindsight analysis quarterly and believe our quarterly updates to
the estimated implicit price concession amounts provide reasonable estimates of our revenues and valuations of our accounts receivable.
These routine, quarterly changes in estimates have not resulted in material adjustments to the valuations of our accounts receivable
or period-to-period comparisons of our results of operations.
RECLASSIFICATION
– We have reclassified certain amounts within other income and expenses for 2017 to conform to our 2018 presentation.
ACCOUNTS
RECEIVABLE - Substantially all of our accounts receivable are due under fee-for-service contracts from third party payors, such
as insurance companies and government-sponsored healthcare programs, or directly from patients. Services are generally provided
pursuant to one-year contracts with healthcare providers. We continuously monitor collections from our payors and maintain an
allowance for bad debts based upon specific payor collection issues that we have identified and our historical experience.
On June 30,
2018, we entered into a factoring arrangement with a third party and sold certain accounts receivable under a non-recourse agreement.
The amount factored under this agreement was $10.5 million and the cost of factoring was approximately $440,000. Proceeds will
be received as a combination of cash and payments on a note receivable through August of 2020 bearing an annual rate of 4%, and
will be reflected as operating activities on our statement of cash flows and on our balance sheet as prepaid expenses and other
current assets for the current portion and deposits and other for the long term portion. We do not utilize factoring arrangements
as an integral part of our financing for working capital.
DEFERRED
FINANCING COSTS - Costs of financing are deferred and amortized on a straight-line basis over the life of the associated loan,
which approximates the effective interest rate method. Deferred financing costs, net of accumulated amortization, were $1.5 million
and $1.9 million, as of September 30, 2018 and December 31, 2017, respectively and related to the Company’s line of credit.
See Note 5, Revolving Credit Facility, Notes Payable, and Capital Leases for more information.
INVENTORIES
- Inventories, consisting mainly of medical supplies, are stated at the lower of cost or net realizable value with cost determined
by the first-in, first-out method.
PROPERTY
AND EQUIPMENT - Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization
of property and equipment are provided using the straight-line method over the estimated useful lives, which range from 3 to 15
years. Leasehold improvements are amortized at the lesser of lease term or their estimated useful lives, which range from 3 to
30 years. Maintenance and repairs are charged to expense as incurred.
BUSINESS
COMBINATION - In January 2017, the FASB issued ASU No. 2017-01 (“ASU 2017-01”),
Clarifying the Definition of a
Business
. The update provides a framework for evaluating whether a transaction should be accounted for as an acquisition and/or
disposal of a business versus assets. In order for a purchase to be considered an acquisition of a business, and receive business
combination accounting treatment, the set of transferred assets and activities must include, at a minimum, an input and a substantive
process that together significantly contribute to the ability to create outputs. If substantially all of the fair value of the
gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, then the set of
transferred assets and activities is not a business. The adoption of this standard requires future purchases to be evaluated under
the new framework. The impact on our financial statements as a result of this adoption was immaterial.
When the
qualifications for business combination accounting treatment are met, it requires us to recognize separately from goodwill the
assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured
as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities
assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition
date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may
be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding
offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities
assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.
GOODWILL-
Goodwill at September 30, 2018 totaled $274.4 million. Goodwill is recorded as a result of business combinations. Management evaluates
goodwill at a minimum, on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may
not be recoverable. We tested goodwill for impairment on October 1, 2017, noting no impairment, and have not identified any
indicators of impairment through September 30, 2018. Activity in goodwill for the nine months ended September 30, 2018 is provided
below (in thousands):
Balance as of December 31, 2017
|
|
$
|
256,776
|
|
Goodwill acquired through the acquisition of Imaging Services Company of New York, LLC
|
|
|
2,692
|
|
Goodwill acquired through the acquisition of certain assets of MemorialCare Medical Foundation
|
|
|
10,158
|
|
Goodwill transferred to assets held for sale
|
|
|
(1,059
|
)
|
Goodwill acquired through the acquisition of Women's Imaging Specialists in Healthcare
|
|
|
4,089
|
|
Goodwill acquired through the acquisition of Valley Metabolic Imaging
|
|
|
1,469
|
|
Goodwill acquired through the acquisition of Sierra Imaging Associates
|
|
|
1,147
|
|
Adjustment to our preliminary allocation of the purchase price of Women's Imaging Specilists in Healthcare
|
|
|
179
|
|
Adjustment to our preliminary allocation of purchase price of MemorialCare Medical Foundation
|
|
|
(3,313
|
)
|
Goodwill disposed through the sale of plastic surgery unit
|
|
|
(80
|
)
|
Goodwill acquired through the acquisition of Washington Heights Medical Management
|
|
|
2,303
|
|
Balance as of September 30, 2018
|
|
$
|
274,361
|
|
INCOME TAXES
- Income tax expense is computed using an asset and liability method and using expected annual effective tax rates. Under this
method, deferred income tax assets and liabilities result from temporary differences in the financial reporting bases and the
income tax reporting bases of assets and liabilities. The measurement of deferred tax assets is reduced, if necessary, by the
amount of any tax benefit that, based on available evidence, is not expected to be realized. When it appears more likely than
not that deferred taxes will not be realized, a valuation allowance is recorded to reduce the deferred tax asset to its estimated
realizable value. For net deferred tax assets we consider estimates of future taxable income in determining whether our net deferred
tax assets are more likely than not to be realized.
The Company
recorded an income tax expense of $2.8 million, or an effective tax rate of 32.9%, for the three months ended September 30, 2018
compared to income tax expense for the three months ended September 30, 2017 of $1.1 million, or an effective tax rate of 22.4%.
The Company recorded an income tax expense of $2.8 million, or an effective tax rate of 29.5% for the nine months ended September
30, 2018 compared to income tax expense for the nine months ended September 30, 2017 of $4.2 million, or an effective tax rate
of 32.7%. The income tax rates for the three and nine months ended September 30, 2018 diverge from the federal statutory rate
primarily due to (i) noncontrolling interests due to the controlled partnerships; (ii) effects of state income taxes; (iii) excess
tax benefits attributable to share-based compensation; and adjustments associated with uncertain tax positions.
U.S. GAAP
requires that the impact of tax legislation be recognized in the period in which the law was enacted. As a result, the Company
recorded provisional amounts due to the revaluation of deferred tax assets and liabilities and the transition tax on deemed repatriation
of accumulated foreign income during the year ended December 31, 2017. Both of these tax charges represent provisional amounts
and the Company’s current best estimates. Any adjustments recorded to the provisional amounts will be included as an adjustment
to tax expense. The provisional amounts incorporate assumptions made based upon the Company’s current interpretation of
the Tax Reform Act and may change as the Company receives additional clarification and implementation guidance.
The Company
is not under examination in any jurisdiction and the years ended December 31, 2017, 2016, and 2015 remain subject to examination.
The Company believes no significant changes in the unrecognized tax benefits will occur within the next 12 months.
EQUITY BASED
COMPENSATION – We have one long-term incentive plan that we adopted in 2006 and which we first amended and restated as of
April 20, 2015, and again on March 9, 2017 (the “Restated Plan”). The Restated Plan was approved by our stockholders
at our annual stockholders meeting on June 8, 2017. We have reserved for issuance under the Restated Plan 14,000,000 shares of
common stock. We can issue options, stock awards, stock appreciation rights, stock units and cash awards under the Restated Plan.
Certain options granted under the Restated Plan to employees are intended to qualify as incentive stock options under existing
tax regulations. Stock options and warrants generally vest over three to five years and expire five to ten years from date of
grant. The compensation expense recognized for all equity-based awards is recognized over the awards’ service periods. Equity-based
compensation is classified in operating expenses within the same line item as the majority of the cash compensation paid to employees.
See Note 6 Stock-Based Compensation for more information.
COMPREHENSIVE
INCOME - ASC 220,
Comprehensive Income,
establishes rules for reporting and displaying comprehensive income and its components.
Our unrealized gains or losses on foreign currency translation adjustments and our interest rate cap agreement are included in
comprehensive income. The components of comprehensive income for the three and nine months in the period ended September 30, 2018
are included in the consolidated statements of comprehensive income.
DERIVATIVE
INSTRUMENTS - In the fourth quarter of 2016, we entered into two forward interest rate cap agreements ("2016 Caps").
The 2016 Caps will mature in September and October 2020. The 2016 Caps had notional amounts of $150,000,000 and $350,000,000,
respectively, which were designated at inception as cash flow hedges of future cash interest payments associated with portions
of the our variable rate bank debt. Under these arrangements, the Company purchased a cap on 3 month LIBOR at 2.0%. We are liable
for a $5.3 million premium to enter into the caps which is being accrued over the life of the agreements.
At inception,
we designated our 2016 Caps as cash flow hedges of floating-rate borrowings. In accordance with ASC Topic 815, derivatives that
have been designated and qualify as cash flow hedging instruments are reported at fair value. The gain or loss of the hedge (i.e.
change in fair value) is reported as a component of accumulated other comprehensive income in the consolidated statement of equity.
See Fair Value Measurements section below for the fair value of the 2016 Caps at September 30, 2018.
A tabular
presentation of the effect of derivative instruments on our consolidated statement of comprehensive loss is as follows (amounts
in thousands):
For the three months ended September 30, 2018
|
|
Account
|
|
July 1, 2018 Balance
|
|
|
Amount of gain recognized
on derivative
|
|
|
September 30, 2018
Balance
|
|
|
Location
|
Other Comprehensive Income
|
|
|
3,924
|
|
|
|
595
|
|
|
|
4,519
|
|
|
Current Assets & Equity
|
For the nine months ended September 30, 2018
|
|
Account
|
|
|
Jan
1, 2018 Balance
|
|
|
|
Amount
of gain recognized on derivative
|
|
|
|
September
30, 2018 Balance
|
|
|
Location
|
Other Comprehensive Income
|
|
|
(370
|
)
|
|
|
4,889
|
|
|
|
4,519
|
|
|
Current Assets & Equity
|
FAIR VALUE
MEASUREMENTS – Assets and liabilities subject to fair value measurements are required to be disclosed within a fair value
hierarchy. The fair value hierarchy ranks the quality and reliability of inputs used to determine fair value. Accordingly, assets
and liabilities carried at, or permitted to be carried at, fair value are classified within the fair value hierarchy in one of
the following categories based on the lowest level input that is significant to a fair value measurement:
Level 1—Fair
value is determined by using unadjusted quoted prices that are available in active markets for identical assets and liabilities.
Level 2—Fair
value is determined by using inputs other than Level 1 quoted prices that are directly or indirectly observable. Inputs can
include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities
in inactive markets. Related inputs can also include those used in valuation or other pricing models such as interest rates and
yield curves that can be corroborated by observable market data.
Level 3—Fair
value is determined by using inputs that are unobservable and not corroborated by market data. Use of these inputs involves significant
and subjective judgment.
The table
below summarizes the estimated fair values of certain of our financial assets that are subject to fair value measurements, and
the classification of these assets on our consolidated balance sheets, as follows (in thousands):
|
|
As of September 30, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Contracts
|
|
$
|
–
|
|
|
$
|
5,954
|
|
|
$
|
–
|
|
|
$
|
5,954
|
|
|
|
As of December 31, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Contracts
|
|
$
|
–
|
|
|
$
|
(595
|
)
|
|
$
|
–
|
|
|
$
|
(595
|
)
|
The estimated
fair value of these contracts was determined using Level 2 inputs. More specifically, the fair value was determined by calculating
the value of the difference between the fixed interest rate of the interest rate swaps and the counterparty’s forward LIBOR
curve. The forward LIBOR curve is readily available in the public markets or can be derived from information available in the
public markets.
The table
below summarizes the estimated fair value and carrying amount of our long-term debt as follows (in thousands):
|
|
As of September 30, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Fair Value
|
|
|
Total Face Value
|
|
First Lien Term Loans
|
|
$
|
–
|
|
|
$
|
599,927
|
|
|
$
|
–
|
|
|
$
|
599,927
|
|
|
$
|
595,461
|
|
|
|
|
As of December 31, 2017
|
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
Total
|
|
|
|
Total Face Value
|
|
First Lien Term Loans
|
|
$
|
–
|
|
|
$
|
628,801
|
|
|
$
|
–
|
|
|
$
|
628,801
|
|
|
$
|
620,272
|
|
As
of December 31, 2017 and September 30, 2018, our revolving credit facility had no aggregate principal amount outstanding.
The estimated
fair value of our long-term debt, which is discussed in Note 5, was determined using Level 2 inputs primarily related to comparable
market prices.
We consider
the carrying amounts of cash and cash equivalents, receivables, other current assets, current liabilities and other notes payables
to approximate their fair value because of the relatively short period of time between the origination of these instruments and
their expected realization or payment. Additionally, we consider the carrying amount of our capital lease obligations to approximate
their fair value because the weighted average interest rate used to formulate the carrying amounts approximates current market
rates.
EARNINGS
PER SHARE - Earnings per share is based upon the weighted average number of shares of common stock and common stock equivalents
outstanding, net of common stock held in treasury, as follows (in thousands except share and per share data):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to RadNet, Inc.'s common stockholders
|
|
$
|
5,039
|
|
|
$
|
3,226
|
|
|
$
|
3,107
|
|
|
$
|
7,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO RADNET, INC.'S COMMON STOCKHOLDERS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding during the period
|
|
|
48,010,726
|
|
|
|
46,953,705
|
|
|
|
47,937,215
|
|
|
|
46,760,583
|
|
Basic net income (loss) per share attributable to RadNet, Inc.'s common stockholders
|
|
$
|
0.10
|
|
|
$
|
0.07
|
|
|
$
|
0.06
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO RADNET, INC.'S COMMON STOCKHOLDERS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding during the period
|
|
|
48,010,726
|
|
|
|
46,953,705
|
|
|
|
47,937,215
|
|
|
|
46,760,583
|
|
Add nonvested restricted stock subject only to service vesting
|
|
|
424,397
|
|
|
|
315,830
|
|
|
|
372,462
|
|
|
|
237,595
|
|
Add additional shares issuable upon exercise of stock options and warrants
|
|
|
180,269
|
|
|
|
308,216
|
|
|
|
171,627
|
|
|
|
241,183
|
|
Weighted average number of common shares used in calculating diluted net income per share
|
|
|
48,615,392
|
|
|
|
47,577,750
|
|
|
|
48,481,305
|
|
|
|
47,239,360
|
|
Diluted net income (loss) per share attributable to RadNet, Inc.'s common stockholders
|
|
$
|
0.10
|
|
|
$
|
0.07
|
|
|
$
|
0.06
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options excluded from the computation of diluted per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares for which the exercise price
exceeds average market price of common stock
|
|
|
–
|
|
|
|
–
|
|
|
|
8,333
|
|
|
|
225,050
|
|
EQUITY INVESTMENTS
AT FAIR VALUE– In January 2016, the FASB issued ASU 2016-01, which amends the measurement, presentation and disclosure requirements
for equity investments, other than those accounted for under the equity method or that require consolidation of the investee.
The ASU eliminates the classification of equity investments as available-for-sale with any changes in fair value of such investments
recognized in other comprehensive income, and requires entities to measure equity investments at fair value, with any changes
in fair value recognized in net income. If there is no readily determinable fair value, the guidance allows entities the ability
to measure investments at cost less impairment, whereby impairment is based on a qualitative assessment. We adopted this ASU on
January 1, 2018, and there was no cumulative effect of adoption.
As of September
30, 2018, we have two equity investments for which a fair value is not readily determinable and therefore the total amounts invested
are recognized at cost as follows:
Medic Vision:
Medic Vision,
based in Israel, specializes in software packages that provide compliant radiation dose structured reporting and enhanced images
from reduced dose CT scans.
On March
24, 2017, we acquired an initial 12.5% equity interest in Medic Vision – Imaging Solutions Ltd for $1.0 million. We also
received an option to exercise warrants to acquire up to an additional 12.5% equity interest for $1.4 million within one year
from the initial share purchase date, if exercised in full. On March 1, 2018 we exercised our warrant in part and acquired an
additional 1.96% for $200,000. Our initial equity interest has been diluted to 12.25% and our total equity investment stands at
14.21%.
In accordance
with accounting guidance
,
as we exercise no significant influence over Medic Vision’s operations, the investment
is recorded at its cost of $1.2 million, given that the fair value is not readily determinable. No impairment in our investment
was noted as of the nine months ended September 30, 2018.
Turner Imaging:
Turner
Imaging Systems, based in Utah, develops and markets portable X-ray imaging systems that provide a user the ability to acquire
X-ray images wherever and whenever they are needed.
On February 1, 2018, we purchased 2.1
million preferred shares in Turner Imaging Systems for $2.0 million. No impairment in our investment was noted for the nine months
ended September 30, 2018.
INVESTMENT
IN JOINT VENTURES – We have 15 unconsolidated joint ventures with ownership interests ranging from 25% to 55%. These joint
ventures represent partnerships with hospitals, health systems or radiology practices and were formed for the purpose of owning
and operating diagnostic imaging centers. Professional services at the joint venture diagnostic imaging centers are performed
by contracted radiology practices or a radiology practice that participates in the joint venture. Our investment in these
joint ventures is accounted for under the equity method, since RadNet does not have a controlling financial interest in such ventures.
We evaluate our investment in joint ventures, including cost in excess of book value (equity method goodwill) for impairment whenever
indicators of impairment exist. No indicators of impairment existed as of September 30, 2018.
Formation of a joint venture:
On April
12, 2018 we acquired a 25% economic interest in Nulogix, Inc. for $2.0 million. The Company and Nulogix will collaborate on projects
to improve practices in the imaging industry. As we do not have a controlling economic interest in Nulogix, the investment is
accounted for under the equity method.
Joint venture investment
and financial information
The following
table is a summary of our investment in joint ventures during the nine months ended September 30, 2018 (in thousands):
Balance as of December 31, 2017
|
|
$
|
52,435
|
|
Equity in earnings in these joint ventures
|
|
|
9,547
|
|
Distribution of earnings
|
|
|
(21,783
|
)
|
Equity contributions in existing and purchase of interest in joint ventures
|
|
|
2,000
|
|
Balance as of September 30, 2018
|
|
$
|
42,199
|
|
We charged
management service fees from the centers underlying these joint ventures of approximately $3.5 million and $3.3 million for the
quarters ended September 30, 2018 and 2017, respectively and $10.6 million and $9.9 million for the nine months ended September
30, 2018 and 2017 respectively. We eliminate any unrealized portion of our management service fees with our equity in earnings
of joint ventures.
The following
table is a summary of key balance sheet data for these joint ventures as of September 30, 2018 and December 31, 2017 and income
statement data for the nine months ended September 2018 and 2017 (in thousands):
Balance Sheet Data:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Current assets
|
|
$
|
45,345
|
|
|
$
|
47,813
|
|
Noncurrent assets
|
|
|
107,228
|
|
|
|
107,481
|
|
Current liabilities
|
|
|
(13,220
|
)
|
|
|
(16,655
|
)
|
Noncurrent liabilities
|
|
|
(65,686
|
)
|
|
|
(42,072
|
)
|
Total net assets
|
|
$
|
73,667
|
|
|
$
|
96,567
|
|
|
|
|
|
|
|
|
|
|
Book value of RadNet joint venture interests
|
|
$
|
34,210
|
|
|
$
|
45,935
|
|
Cost in excess of book value of acquired joint venture interests
|
|
|
7,989
|
|
|
|
6,500
|
|
Total value of Radnet joint venture interests
|
|
$
|
42,199
|
|
|
$
|
52,435
|
|
|
|
|
|
|
|
|
|
|
Total book value of other joint venture partner interests
|
|
$
|
39,457
|
|
|
$
|
50,632
|
|
Income statement data for the nine months ended September 30,
|
|
|
2018
|
|
|
|
2017
|
|
Net revenue
|
|
$
|
136,413
|
|
|
$
|
133,108
|
|
Net income
|
|
$
|
20,271
|
|
|
$
|
16,034
|
|
NOTE 3 – RECENT ACCOUNTING
AND REPORTING STANDARDS
Accounting standards not
yet adopted
In February 2016, the FASB issued Accounting
Standards Update (“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. Subsequently, in July 2018, the FASB issued ASU No. 2018-10,
Codification Improvements
to Topic 842, Leases,
and ASU No. 2018-11,
Targeted Improvement,
to clarify and amend the guidance in ASU No. 2016-02.
The amendments in this update are effective for fiscal years (and interim reporting periods within fiscal years) beginning after
December 15, 2018, with early adoption permitted for all entities. We will adopt the ASU on January 1, 2019. Because
of the number of leases we use to support our operations, the adoption of this ASU is expected to have a significant impact on
the Company’s consolidated financial statements. Management is currently evaluating the extent of this anticipated impact
on our consolidated financial position and results of operations, and the quantitative and qualitative factors that will impact
the Company as part of the adoption of this ASU, as well as any changes to its leasing strategy that may occur because of the changes
to the accounting and recognition of leases.
In October 2018, the FASB issued ASU No.
2018-16 (“ASU 2018-16”),
Derivatives and Hedging.
ASU 2018-16 expands the permissible benchmark interest rates
to include the Secured Overnight Financing Rate (SOFR) to be eligible as a U.S. benchmark interest rate for purposes of applying
hedge accounting under Topic 815, Derivatives and Hedging. This ASU is effective for fiscal years beginning after December 15,
2018 and interim periods within those fiscal years. Early adoption is permitted if an entity already has adopted Update 2017-12.
The amendments should be adopted on a prospective basis for qualifying new or redesignated hedging relationship entered into on
or after the date of adoption. As we have previously adopted the amendments in Update 2017-12, and as the benchmark rate on our
term loan debt does not utilize the SOFR, the immediate adoption of this amendment will have no effect on the Company’s results
of operations, financial position and cash flows.
In August
2018, the FASB issued ASU No. 2018-15 (“ASU 2018-15”),
Intangibles-Goodwill and Other-Internal-Use Software.
ASU 2018-15 aligns the requirements for deferring implementation costs incurred in a cloud computing arrangement that is a service
contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This
ASU is effective in the first quarter of 2020 with early adoption permitted and can be applied either retrospectively or prospectively
to all implementation costs incurred after the date of adoption. We are currently assessing the impact of the adoption of this
ASU on the Company’s results of operations, financial position and cash flows.
In February
2018, the FASB issued ASU No. 2018-02 (“ASU 2018-02”),
Reclassification of Certain Tax Effects from Accumulated
Other Comprehensive Income
. ASU 2018-02 allows for the reclassification of certain income tax effects related to the Tax Cuts
and Jobs Act between “Accumulated other comprehensive income” and “Retained earnings.” This ASU relates
to the requirement that adjustments to deferred tax liabilities and assets related to a change in tax laws or rates to be included
in “Income from continuing operations”, even in situations where the related items were originally recognized in “Other
comprehensive income” (rather than in “Income from continuing operations”). Subsequently, in March 2018, the
FASB issued ASU No. 2018-05,
Income Taxes,
to clarify and amend guidance in ASU 2018-02. ASU 2018-02 and ASU 2018-05 are
effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years,
with early adoption permitted. Adoption of this ASU is to be applied either in the period of adoption or retrospectively to each
period in which the effect of the change in the tax laws or rates were recognized. We are evaluating the effect of this guidance.
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.
Other reporting disclosure
topics
In August
2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, that expanded the disclosure
requirements on the analysis of stockholders' equity for interim financial statements. Under the SEC Release, an analysis of changes
in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis
should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive
income is required to be filed. This final rule is effective on November 5, 2018. However, as provided for by the SEC in Q&A
105.09, the Company will defer presenting its analysis of stockholders’ equity in its quarterly report in Form 10-Q until
its quarter ended March 31, 2019.
NOTE 4 – FACILITY ACQUISITIONS
AND ASSETS HELD FOR SALE
Acquisitions
On January
1, 2018 we formed Beach Imaging Group, LLC (“Beach Imaging”) and contributed the operations of 24 imaging facilities
spread across southern Los Angeles and Orange Counties. On the same day, MemorialCare Medical Foundation contributed $22.3 million
in cash, $7.6 million in fixed assets, $7.4 million in equipment, and $6.8 million in goodwill. As a result of the transaction,
the Company will retain a 60% controlling interest in Beach Imaging and MemorialCare Medical Foundation will retain a 40% noncontrolling
interest in Beach Imaging.
On February
22, 2018 we completed our acquisition of certain assets of Imaging Services Company of New York, LLC, consisting of a single multi-modality
center located in New York, New York, for purchase consideration of $5.8 million. We have made a fair value determination of the
acquired assets and approximately $874,000 in fixed assets, $2.1 million in equipment, a $100,000 covenant not to compete, and
$2.7 million in goodwill were recorded.
On
April 1, 2018 we completed our acquisition of certain assets of Women’s Imaging Specialists in Healthcare, consisting of
a single multi-modality center located in the city of Fresno California, for purchase consideration of $5.1 million in cash. We
have made a fair value determination of the acquired assets and approximately $635,800 of fixed assets and equipment, $143,000
in intangible covenants not to compete, $53,000 in intangible trade name, and $4.3 million in goodwill were recorded.
On
April 1, 2018 we completed our acquisition of certain assets of Valley Metabolic Imaging LLC, consisting of a single multi-modality
center located in Fresno, California, for purchase consideration of $1.7 million in cash. We have made a preliminary fair value
determination of the acquired assets and approximately $22,000 of fixed assets and equipment, $183,000 in intangible covenants
not to compete, and $1.5 million in goodwill were recorded.
On
April 1, 2018 we completed our acquisition of certain assets of Sierra Imaging Associates LLC, consisting of a single multi-modality
center located in Clovis, California, for purchase consideration of $1.5 million in cash. We have made a preliminary fair value
determination of the acquired assets and approximately $270,000 of fixed assets and equipment, $83,000 in intangible covenants
not to compete, and $1.1 million in goodwill were recorded.
On
September 1, 2018 we completed our acquisition of certain assets of Washington Heights Medical Management, LLC, consisting of
a multi-modality imaging center located in New York, New York, for $3.3 million in cash. We have made an initial fair value determination
of the acquired assets and approximately $43,000 security deposits, $650,000 of leasehold improvements, $254,000 of equipment,
$50,000 in a covenant not to compete, and $2.3 million of goodwill were recorded.
Assets held for sale:
Effective
January 1, 2018 we agreed to sell certain assets of four women’s imaging centers to MemorialCare Medical Foundation. The
sale is anticipated within the next 12 months. The following table summarizes the major categories of assets which remain classified
as held for sale in the accompanying condensed consolidated balance sheets at September 30, 2018 (in thousands):
Property and equipment, net
|
|
$
|
1,440
|
|
Goodwill
|
|
|
1,059
|
|
Total assets held for sale
|
|
$
|
2,499
|
|
NOTE 5 – REVOLVING CREDIT
FACILITY, NOTES PAYABLE AND CAPITAL LEASES
Revolving credit facility,
notes payable, and capital lease obligations
:
As of the
nine months ended September 30, 2018 our debt obligations consist of the following (in thousands):
Notes payable, long-term debt, line of credit and capital lease obligations consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
December 31,
|
|
|
|
|
2018
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loans
|
|
|
595,461
|
|
|
|
620,272
|
|
|
|
|
|
|
|
|
|
|
Discounts on first lien term loans
|
|
|
(15,951
|
)
|
|
|
(18,470
|
)
|
|
|
|
|
|
|
|
|
|
Promissory note payable to the former owner of a practice acquired at an interest rate of 1.5% due through 2019
|
|
|
298
|
|
|
|
592
|
|
|
|
|
|
|
|
|
|
|
Equipment notes payable at interest rates ranging from 5.2% to 5.6%, due through 2020, collateralized by medical equipment
|
|
|
112
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
Obligations under capital leases at interest rates ranging from 3.7% to 9.3%, due through 2022, collateralized by medical and office equipment
|
|
|
6,420
|
|
|
|
6,538
|
|
Total debt obligations
|
|
|
586,340
|
|
|
|
609,127
|
|
Less: current portion
|
|
|
(33,376
|
)
|
|
|
(34,090
|
)
|
Long term portion debt obligations
|
|
$
|
552,964
|
|
|
$
|
575,037
|
|
Term Loans, Revolving Credit
Facility and Financing Activity Information
:
At September
30, 2018, our credit facilities were comprised of one tranche of term loans (“First Lien Term Loans”) and a revolving
credit facility of $117.5 million (the “Revolving Credit Facility”), both of which are provided pursuant to the Amended
and Restated First Lien Credit and Guaranty Agreement dated as of July 1, 2016 (as amended, the “First Lien Credit Agreement”).
As of September 30, 2018, we were in compliance with all covenants under our credit facilities.
The balance
of our First Lien Term Loans at September 30, 2018, net of unamortized discounts of $15.9 million, was $579.5 million.
Deferred
financing costs at September 30, 2018, net of accumulated amortization, was $1.5 million and is specifically related to our Revolving
Credit Facility.
We had no
balance on our Revolving Credit Facility at September 30, 2018 but had reserved $6.3 million for certain letters of credit. The
remaining $111.2 million of our revolving credit facility was available to draw upon as of September 30, 2018.
The following
describes our recent financing activities:
Amendment
No. 5, Consent and Incremental Joinder Agreement to Credit and Guaranty Agreement
On
August 22, 2017, we entered into Amendment No. 5, Consent and Incremental Joinder Agreement to Credit and Guaranty Agreement (the
“Fifth Amendment”) with respect to our First Lien Credit Agreement. Pursuant to the Fifth Amendment, we issued $170.0
million in incremental First Lien Term Loans, the proceeds of which were used to repay in full all outstanding Second Lien Term
Loans and all other obligations under the Second Lien Credit Agreement (as defined below).
Pursuant
to the Fifth Amendment, we also changed the interest rate margin applicable to borrowings under the First Lien Credit Agreement.
While borrowings under the First Lien Credit Agreement continue to bear interest at either an Adjusted Eurodollar Rate or a Base
Rate (in each case, as more fully defined in the First Lien Credit Agreement) or a combination of both, at the election of the
Company, plus an applicable margin. The applicable margin for Adjusted Eurodollar Rate borrowings and Base Rate borrowings was
changed from 3.25% and 2.25%, respectively, to 3.75% and 2.75%, respectively, through an initial period which ended when financial
reporting was delivered for the period ended September 30, 2017. Thereafter, the rates of the applicable margin for borrowing
under the First Lien Credit Agreement adjust depending on our leverage ratio, according to the following schedule:
First
Lien Leverage Ratio
|
Eurodollar
Rate Spread
|
Base
Rate Spread
|
>
5.50x
|
4.50%
|
3.50%
|
>
4.00x but ≤ 5.50x
|
3.75%
|
2.75%
|
>3.50x
but ≤ 4.00x
|
3.50%
|
2.50%
|
≤
3.50x
|
3.25%
|
2.25%
|
At
September 30, 2018 the effective Adjusted Eurodollar Rate and the Base Rate for the First Lien Term Loans was 2.35% and 5.0%,
respectively and the applicable margin for Adjusted Eurodollar Rate and Base Rate borrowings was 3.75% and 2.75%, respectively.
Pursuant
to the Fifth Amendment, the First Lien Credit Agreement was amended so that 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 and
additions does not exceed (a) $100.0 million and (b) as long as the First Lien Leverage Ratio (as defined in the First Lien Credit
Agreement) would not exceed 4.00:1.00 after giving effect to such incremental facilities, an uncapped amount of incremental facilities,
in each case subject to the conditions and limitations set forth in the First Lien Credit Agreement. Each lender approached to
provide all or a portion of any incremental facility may elect or decline, in its sole discretion, to provide an incremental commitment
or loan.
Pursuant
to the Fifth Amendment, the First Lien Credit Agreement was also amended to (i) provide for quarterly payments of principal of
the First Lien Term Loans in the amount of approximately $8.3 million, as compared to approximately $6.1 million prior to the
Fifth Amendment, (ii) extend the call protection provided to the holders of the First Lien Term Loans for a period of twelve months
following the date of the Fifth Amendment and (iii) provide us with additional operating flexibility, including the ability to
incur certain additional debt and to make certain additional restricted payments, investments and dispositions, in each case as
more fully set forth in the Fifth Amendment. Total issue costs for the Fifth Amendment aggregated to approximately $4.7 million.
Of this amount, $4.1 million was identified and capitalized as discount on debt, $350,000 was capitalized as deferred financing
costs and the remaining $235,000 was expensed. Amounts capitalized will be amortized over the remaining term of the agreement.
Fourth
Amendment to First Lien Credit Agreement
On
February 2, 2017, we entered into Amendment No. 4 to Credit and Guaranty Agreement (the “Fourth Amendment”) with respect
to our First Lien Credit Agreement. Pursuant to the Fourth Amendment, the interest rate margin per annum on the First Lien Term
Loans and the Revolving Credit Facility was reduced by 50 basis points, from 3.75% to 3.25%. Except for such reduction in the
interest rate on credit extensions, the Fourth Amendment did not result in any other material modifications to the First Lien
Credit Agreement. RadNet incurred expenses for the transaction in the amount of $543,000, which was recorded to discount on debt
and will be amortized over the remaining term of the agreement.
The
following describes our applicable financing prior to giving effect to the Fourth Amendment and Fifth Amendment discussed above.
First
Lien Credit Agreement
On
July 1, 2016, we entered into the First Lien Credit Agreement pursuant to which we amended and restated our then existing first
lien credit facilities. Pursuant to the First Lien Credit Agreement, we originally issued $485 million of First Lien Term Loans
and established the $117.5 million Revolving Credit Facility. Proceeds from the First Lien Credit Agreement were used to repay
the previously outstanding first lien loans under the 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.
Prior to the Fourth Amendment and Fifth Amendment, the interest rates payable on the First Lien Term Loans were (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%.
Payments.
Prior to the Fourth Amendment and Fifth Amendment, the scheduled quarterly principal payment of the First Lien Term Loans
was approximately $6.1 million, with the balance due at maturity.
Maturity
Date.
The maturity date for the First Lien Term Loans shall be on the earliest to occur of (i) July 1, 2023, (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 had not been repaid, refinanced
or extended prior to such date.
Revolving
Credit Facility:
The First Lien Credit Agreement provides for a $117.5 million Revolving Credit Facility. Revolving loans
borrowed under the Revolving Credit Facility bear interest at either an Adjusted Eurodollar Rate or a Base Rate (in each case,
as more fully defined in the First Lien Credit Agreement), plus an applicable margin. Pursuant to the Fifth Amendment, the applicable
margin was amended to vary based on our leverage ratio in accordance with the following schedule:
First
Lien Leverage Ratio
|
Eurodollar
Rate Spread
|
Base
Rate Spread
|
>
5.50x
|
4.50%
|
3.50%
|
>
4.00x but ≤ 5.50x
|
3.75%
|
2.75%
|
>3.50x
but ≤ 4.00x
|
3.50%
|
2.50%
|
≤
3.50x
|
3.25%
|
2.25%
|
For
letters of credit issued under the Revolving Credit Facility, letter of credit fees accrue at the applicable margin (see table
above) for Adjusted Eurodollar Rate revolving loans and fronting fees accrue 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. In addition
a commitment fee of 0.5% per annum accrues on the unused revolver commitments under the Revolving Credit Facility. As of September
30, 2018, the interest rate payable on revolving loans was 7.75%. The letters of credit issued under the agreement totaled $6.3
million and the amount available to borrow under the Revolving Credit Facility was $111.2 million.
The
Revolving Credit Facility will terminate on the earliest to occur of (i) July 1, 2021, (ii) the date we voluntarily agree to permanently
reduce the Revolving Credit Facility to zero pursuant to section 2.13(b) of the First Lien Credit Agreement, and (iii) the date
the Revolving Credit Facility is terminated due to specific events of default pursuant to section 8.01 of the First Lien Credit
Agreement.
Second
Lien Credit Agreement
:
On
March 25, 2014, we entered into the Second Lien Credit and Guaranty Agreement (the “Second Lien Credit Agreement”)
pursuant to which we issued $180 million of second lien term loans (the “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 restated First Lien Credit Agreement,
a $12.0 million principal payment was made on the Second Lien Term Loans. On August 22, 2017 the Second Lien Credit Agreement
was repaid in full with the proceeds of First Lien Term Loans issued under the Fifth Amendment, as described above.
NOTE 6 – STOCK-BASED
COMPENSATION
Stock Incentive Plans
We have one
long-term equity incentive plan which we refer to as the 2006 Equity Incentive Plan, which we first amended and restated as of
April 20, 2015 and again on March 9, 2017 (“the Restated Plan”). The Restated Plan was approved by our stockholders
at our annual stockholders meeting on June 8, 2017. We have reserved for issuance under the 2017 Restated Plan 14,000,000 shares
of common stock. We can issue options, stock awards, stock appreciation rights, stock units and cash awards under the 2017 Restated
Plan.
Options
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 September
30, 2018, we had outstanding options to acquire 548,282 shares of our common stock, of which options to acquire 95,211 shares
were exercisable. The following summarizes all of our option transactions for the nine months ended September 30, 2018:
Outstanding Options
Under the 2006 Plan
|
|
Shares
|
|
|
Weighted Average
Exercise price
Per Common Share
|
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance, December 31, 2017
|
|
|
420,149
|
|
|
$
|
6.82
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
133,133
|
|
|
|
10.05
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(5,000
|
)
|
|
|
2.04
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2018
|
|
|
548,282
|
|
|
|
7.10
|
|
|
|
7.52
|
|
|
$
|
4,360,813
|
|
Exercisable at September 30, 2018
|
|
|
95,211
|
|
|
|
4.51
|
|
|
|
4.24
|
|
|
|
1,003,378
|
|
Aggregate
intrinsic value in the table above represents the total pretax intrinsic value (the difference between our closing stock price
on September 30, 2018 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 September 30, 2018. Options exercised amounted to 5,000
shares during the nine months ended September 30, 2018. As of September 30, 2018, total unrecognized stock-based compensation
expense related to non-vested employee awards was $1.1 million which is expected to be recognized over a weighted average period
of approximately 2.5 years.
Restricted Stock Awards
(“RSA’s”)
The Restated
Plan permits the award of restricted stock awards (“RSA’s”). As of September 30, 2018, we have issued a total
of 5,457,620 RSA’s of which 286,754 were unvested at September 30, 2018. The following summarizes all unvested RSA’s
activities during the nine months ended September 30, 2018:
|
|
RSA's
|
|
|
Weighted-Average
Remaining
Contractual
Term
(Years)
|
|
|
Weighted-Average
Fair
Value
|
|
RSA's unvested at December 31, 2017
|
|
|
447,351
|
|
|
|
|
|
|
$
|
6.17
|
|
Changes during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
512,160
|
|
|
|
|
|
|
$
|
10.30
|
|
Vested
|
|
|
(671,607
|
)
|
|
|
|
|
|
$
|
7.92
|
|
Forfeited or Cancelled
|
|
|
(1,150
|
)
|
|
|
|
|
|
$
|
6.00
|
|
RSA's unvested at September 30, 2018
|
|
|
286,754
|
|
|
|
0.64
|
|
|
$
|
9.81
|
|
We determine
the fair value of all RSA’s based on 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 nine months ended September 30, 2018 awards totaling
45,000 shares were granted.
Plan summary
In sum, of
the 14,000,000 shares of common stock reserved for issuance under the Restated Plan, at September 30, 2018, we had issued 13,885,452
total shares between options, RSA’s and other stock awards. With options cancelled and RSA’s forfeited amounting to
3,140,009 and 60,203 shares, respectively, there remain 3,314,760 shares available under the Restated Plan for future issuance.
NOTE 7 – SUBSEQUENT
EVENTS
On
October 1, 2018 we completed our acquisition of certain assets of Medical Arts Radiological Group, P.C. consisting of 10 multi-modality
imaging centers located on Long Island, New York for purchase consideration of $61.6 million.
On
November 1, 2018, we completed our acquisition of certain assets of Southern California Diagnostic Imaging, Inc., consisting of
single multi-modality imaging center located in Santa Anna, CA for purchase consideration of $1.4 million.
On
November 5, 2018, we completed our acquisition of certain assets of Arcadia Radiology Imaging Services, LLC consisting of 2 multi-modality
imaging centers located in Arcadia, CA for purchase consideration of $3.8 million.