NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – NATURE OF BUSINESS
We are a national provider of freestanding, fixed-site outpatient diagnostic imaging services in the United States. At
December 31, 2018
, we operated directly or indirectly through joint ventures with hospitals,
344
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. In addition to our imaging services, we have two other subsidiaries, eRAD, Inc and Imaging On Call LLC. eRAD, Inc., develops and sells computerized systems for the imaging industry. Imaging On Call LLC, provides teleradiology services for remote interpretation of images. The capabilities of both eRAD and Imaging On Call are designed to make the RadNet imaging center operations more efficient and cost effective. As such, our operations comprise a single segment for financial reporting purposes.
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.
Financial Accounting Standards Board (FASB) 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 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
$132.9 million
,
$134.6 million
, and
$135.7 million
of revenue, net of management services fees to RadNet, for the years ended
December 31, 2018
,
2017
, and
2016
, respectively and $
132.9 million
,
$134.6 million
, and
$135.7 million
of operating expenses for the years ended
December 31, 2018
,
2017
, and
2016
, respectively. RadNet, Inc. recognized
$505.2 million
,
$435.5 million
, and
$430.4 million
of total billed net service fee revenue for the years ended
December 31, 2018
,
2017
, and
2016
, 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, 2018
and
December 31, 2017
, we have included approximately
$88.9 million
and
$96.3 million
, respectively, of accounts receivable and approximately
$5.6 million
and
$7.4 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.
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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION – The operating activities of subsidiaries are included in the accompanying consolidated financial statements (“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. Additionally, we determined that our unconsolidated joint venture, ScriptSender, LLC, is also a VIE as it is dependent on our operational funding but we are not a primary beneficiary since RadNet does not have the power to direct the activities of the entity that most significantly impact the entity’s economic performance. See Investment in Joint Ventures section of Note 2 for further explanation.
USE OF ESTIMATES - The financial statements were prepared in accordance with U.S. generally accepted accounting principles (GAAP), which requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and assumptions affect various matters, including our reported amounts of assets and liabilities in our consolidated balance sheets at the dates of the financial statements; our disclosure of contingent assets and liabilities at the dates of the financial statements; and our reported amounts of revenues and expenses in our consolidated statements of operations during the reporting periods. These estimates involve judgments with
respect to numerous factors that are difficult to predict and are beyond management’s control. As a result, actual amounts could materially differ from these estimates.
RECLASSIFICATION – We have reclassified certain amounts within net service fee revenue for 2017 and 2016 to conform to our 2018 presentation.
REVENUES – 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.
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 are 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. At December 31, 2017 we had recorded approximately $
34.6 million
of allowance for doubtful accounts. As part of the adoption of ASC 606 this amount was reclassified to be a component of net patient accounts receivable. Other than these changes in presentation on the consolidated statement of operations and consolidated balance sheet, the adoption of ASC 606 did not have a material impact on the consolidated results of operations for the twelve months ended December 31, 2018.
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 for the years ended December 31, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Commercial insurance
|
$
|
542,011
|
|
|
$
|
534,224
|
|
|
$
|
515,150
|
|
Medicare
|
192,881
|
|
|
179,678
|
|
|
173,262
|
|
Medicaid
|
25,615
|
|
|
24,133
|
|
|
23,272
|
|
Workers' compensation/personal injury
|
34,193
|
|
|
32,969
|
|
|
31,791
|
|
Other patient revenue
|
25,117
|
|
|
29,882
|
|
|
28,815
|
|
Management fee revenue
|
13,882
|
|
|
13,127
|
|
|
11,868
|
|
Imaging on call and software
|
16,261
|
|
|
18,116
|
|
|
19,462
|
|
Other
|
18,781
|
|
|
25,049
|
|
|
17,967
|
|
Service fee revenue, net of contractual allowances and discounts
|
868,741
|
|
|
857,178
|
|
|
821,587
|
|
Provision for bad debts
|
–
|
|
|
(46,555
|
)
|
|
(45,387
|
)
|
Net service fee revenue
|
868,741
|
|
|
810,623
|
|
|
776,200
|
|
Revenue under capitation arrangements
|
106,405
|
|
|
111,563
|
|
|
108,335
|
|
Total net revenue
|
$
|
975,146
|
|
|
$
|
922,186
|
|
|
$
|
884,535
|
|
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. We continuously monitor collections from our payors and record an estimated price concession based upon specific payor collection issues that we have identified and our historical experience.
We have entered into factoring agreements with various institutions and sold certain accounts receivable under non-recourse agreements. These transactions are accounted for as a reduction in accounts receivable as the agreements transfer effective control over and risk related to the receivables to the buyers. The aggregate gross amount factored under these facilities was
$20.5
million for the year ended December 31, 2018 and the cost of factoring such accounts receivable for the year ended December 31, 2018 was
$440,000
. Proceeds will be received as a combination of cash and payments on notes receivable 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. At December 31, 2018 we have
$18.6
million remaining to be collected on these agreements. We do not utilize factoring arrangements as an integral part of our financing for working capital.
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 developed 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 accounted for this meaningful use incentive under the Gain Contingency Model outlined in ASC 450-30, and recorded the meaningful use incentive within non-operating income only after Medicare accepts an attestation from the qualified eligible professional demonstrating meaningful use. The program ended in 2017 and we recorded approximately
$250,000
and
$2.8 million
during the twelve months ended December 31,
2017
and
2016
, 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 and generally include hardware, software, 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. These transactions are accounted for under ASC 606,
Revenue from contracts with customers
. Under this method, revenue is recognized when a performance obligation is satisfied by transferring a promised good or service to a customer.
For the years ended
December 31, 2018
,
2017
and
2016
, we recorded approximately
$6.8
million,
$6.1 million
, and
$6.2 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, 2018
we had a deferred revenue liability of approximately
$2.3
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 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, 2018
and
December 31, 2017
, we received approximately
$248,000
and
$492,000
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.
As a result of the combination of amortization and sales under multiple license agreements, as of December 31, 2018, our Software Development Costs are fully amortized.
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. We continuously monitor collections 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 using the effective interest rate method. Deferred financing costs are solely related to our Revolving Credit Facilities. In connection with our assumption of operational control of the New Jersey Imaging Networks as of October 1, 2018, the Company currently has two separate revolving lines of credit from different lending institutions, Barlays and SunTrust. However, only the Barclays revolving line of credit has deferred financing costs associated with the lending agreement. Deferred financing costs, net of accumulated amortization, were
$1.4
million and
$1.9 million
for the twelve months ended December 31,2018 and 2017, respectively. In
conjunction with our Fourth Amendment and Fifth Amendment to our First Lien Credit Agreement from Barclays, a net addition of approximately
$371,000
was added to deferred financing costs for the twelve months ended December 31, 2017.
See Note 8, Revolving Credit Facility, Notes Payable, and Capital Leases for more information on our Revolving Lines of Credit.
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. We first evaluate all purchases under this framework.
Once the purchase has been determined to be the acquisition of a business, we are required to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill 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, 2018
totaled
$418.1
million and
$256.8 million
at December 31, 2017. Indefinite lived intangible assets at
December 31, 2018
were
$9.8
million and at
December 31, 2017
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. When we determine the carrying value of goodwill exceeds its fair value an impairment charge would be recognized and should not exceed the total amount of goodwill allocated to that reporting unit. We determined fair values for each of the reporting units using the market approach, when available and appropriate, or the income approach, or a combination of both. We assess the valuation methodology based upon the relevance and availability of the data at the time we perform the valuation. If multiple valuation methodologies are used, the results are weighted appropriately.Our Teleradiology unit, Imaging On Call, (IOC), experienced a reduction of professional medical group clients and a loss of a contract with a major local health provider during 2018. This affected its estimated fair value and resulted in impairment charges to our reporting unit of
$3.9
million for the twelve months ended
December 31, 2018
, with goodwill representing
$3.8
million of the total and the remainder being its trade name of approximately
$100,000
. The estimated fair value of IOC reporting unit was determined by using the discounted cash flow method.
LONG-LIVED ASSETS – We evaluate our long-lived assets (property and equipment) and intangibles, other than goodwill, for impairment when events or changes indicate the carrying amount of an asset may not be recoverable. U.S. 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. We determined that there were no events or changes in circumstances that indicated our long-lived assets were impaired during any periods presented.
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 10.
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
$2.8 million
for each of the years ending
December 31, 2018
and
December 31, 2017
, 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 for the years ending
December 31, 2018
and
December 31, 2017
, respectively.
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, 2018
, 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, 2018
and
2017
of
$4.8 million
and
$4.5 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, which ends in 2031. As of
December 31, 2018
and
2017
, the remaining accrual balance is
$4.6
million and
$5.0 million
, respectively.
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, 2018 and 2017, the unfavorable contract liability on these leases is
$2.2
million and
$1.4 million
respectively.
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 11 Stock-Based Compensation for more information.
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 (loss). Foreign currency transaction gains and losses are included in the determination of net income.
COMPREHENSIVE INCOME (LOSS) – ASC 220,
Comprehensive Income,
establishes rules for reporting and displaying comprehensive income (loss) and its components. Our unrealized gains or losses on foreign currency translation adjustments and our interest rate cap agreement are included in comprehensive income (loss). The components of comprehensive income (loss) for the three years in the period ended
December 31, 2018
are included in the consolidated statements of comprehensive income (loss).
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 our variable rate bank debt. Under these arrangements, we 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 2016 Caps.
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
December 31, 2018
.
A tabular presentation of the effect of derivative instruments on our consolidated statement of comprehensive income (loss), net of taxes is as follows (amounts in thousands):
|
|
|
|
For the twelve months ended December 31, 2018
|
|
|
|
Effective Interest Rate Cap
|
Amount of Gain Recognized on Derivative
|
Location of Gain Recognized
in Income on Derivative
|
Interest rate contracts
|
$2,876
|
Other Comprehensive Income
|
|
|
|
|
For the twelve months ended December 31, 2017
|
|
|
|
Effective Interest Rate Cap
|
Amount of Loss Recognized on Derivative
|
Location of Loss Recognized
in Income on Derivative
|
Interest rate contracts
|
(880)
|
Other Comprehensive Loss
|
|
|
|
|
|
|
For the twelve months ended December 31, 2016
|
Effective Interest Rate Cap
|
|
Amount of Gain Recognized on Derivative
|
|
Location of Gain Recognized
in Income on Derivative
|
Interest rate contracts
|
|
$508
|
|
Other 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 in our consolidated balance sheets, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Contracts
|
$
|
—
|
|
|
$
|
3,316
|
|
|
$
|
—
|
|
|
$
|
3,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
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 SunTrust (Term Loan Agreement) and Barclays (First Lien Term Loans) long-term debt as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Fair Value
|
|
Total Face Value
|
Term Loan Agreement and First Lien Term Loans
|
$
|
—
|
|
|
$
|
633,229
|
|
|
$
|
—
|
|
|
$
|
633,229
|
|
|
$
|
646,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Total Face Value
|
First Lien Term Loans
|
$
|
—
|
|
|
$
|
628,801
|
|
|
$
|
—
|
|
|
$
|
628,801
|
|
|
$
|
620,272
|
|
Our Barclays revolving credit facility had an aggregate principal amount outstanding as of
December 31, 2018
of
$28.0
million and
no
principal amount outstanding as of
December 31, 2017
. Our SunTrust revolving credit facility had no aggregate principal amount outstanding as of
December 31, 2018
.
The estimated fair values of our long-term debt, which is discussed in Note 8, was determined using Level 2 inputs for the Barclays and SunTrust term loans. 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,
|
|
2018
|
|
2017
|
|
2016
|
Net income attributable to RadNet, Inc. common stockholders
|
$
|
32,243
|
|
|
$
|
53
|
|
|
$
|
7,230
|
|
|
|
|
|
|
|
BASIC NET INCOME PER SHARE ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS
|
|
|
|
|
|
Weighted average number of common shares outstanding during the period
|
48,114,275
|
|
|
46,880,775
|
|
|
46,244,188
|
|
Basic net income per share attributable to RadNet, Inc. common stockholders
|
$
|
0.67
|
|
|
$
|
—
|
|
|
$
|
0.16
|
|
DILUTED NET INCOME PER SHARE ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS
|
|
|
|
|
|
Weighted average number of common shares outstanding during the period
|
48,114,275
|
|
|
46,880,775
|
|
|
46,244,188
|
|
Add nonvested restricted stock subject only to service vesting
|
180,631
|
|
|
274,940
|
|
|
220,416
|
|
Add additional shares issuable upon exercise of stock options and warrants
|
384,093
|
|
|
246,206
|
|
|
190,428
|
|
Weighted average number of common shares used in calculating diluted net income per share
|
48,678,999
|
|
|
47,401,921
|
|
|
46,655,032
|
|
Diluted net income per share attributable to RadNet, Inc. common stockholders
|
$
|
0.66
|
|
|
$
|
—
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
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
|
6,250
|
|
|
175,037
|
|
|
245,313
|
|
EQUITY INVESTMENTS AT FAIR VALUE- As of
December 31, 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. In accordance with ASC 325,
Investments - Other,
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.
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
12.50%
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
12.50%
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 year ended
December 31, 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 year ended
December 31, 2018
.
INVESTMENT IN JOINT VENTURES – We have
fourteen
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
December 31, 2018
.
Formation of new joint ventures
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.
On April 1, 2017, we formed in conjuncture with Cedars Sinai Medical Center (“CSMC”) the Santa Monica Imaging Group, LLC (“SMIG”), consisting of two multi-modality imaging centers located in Santa Monica, CA. Total agreed contribution was
$2.7 million
of cash and assets with RadNet contributing
$1.1 million
for a
40%
economic interest and CSMC contributing
$1.6 million
for a
60%
economic interest. For its contribution, RadNet transferred
$80,000
in cash and the net assets acquired in the acquisition of Resolution Imaging of
$2.5 million
. CSMC contributed
$120,000
in cash and paid RadNet
$1.5 million
for the Resolution Imaging assets transferred to the venture. RadNet does not have controlling economic interest in SMIG and the investment is accounted for under the equity method.
On January 6, 2017, Image Medical Inc. (“Image Medical”), a wholly owned subsidiary of RadNet, acquired a
49%
economic interest ScriptSender, LLC, a partnership held by two individuals 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. Image Medical will contribute
$3.0 million
to the partnership for its
49%
ownership stake over a three year period representing the maximum risk in the venture. ScriptSender LLC is dependent on this contribution 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. As of
December 31, 2018
, the carrying amount of the investment is
$2.5 million
.
Change in control of existing joint ventures
On October 1, 2018, we obtained control over the operations of NJIN through an agreement with the other equity interest holder for no cash consideration. As such, we consolidated the financial statements of NJIN effective that date. The economic interest of each party remained the same after consolidation. See Note 4, Facility Acquisitions and Dispositions, to the consolidated financial statements contain herein for further information.
Joint venture investment and financial information
The following table is a summary of our investment in joint ventures during the years ended
December 31, 2018
and
December 31, 2017
(in thousands):
|
|
|
|
|
Balance as of December 31, 2016
|
$
|
43,509
|
|
Equity contributions in existing and purchase of interest in joint ventures
|
4,062
|
|
Equity in earnings in these joint ventures
|
13,554
|
|
Distribution of earnings
|
(8,690
|
)
|
Balance as of December 31, 2017
|
$
|
52,435
|
|
Equity contributions in existing and purchase of interest in joint ventures
|
2,000
|
|
Equity in earnings in these joint ventures
|
11,377
|
|
Disposition of equity method interest upon acquisition of control in NJIN
|
(2,993
|
)
|
Distribution of earnings
|
(24,846
|
)
|
Balance as of December 31, 2018
|
$
|
37,973
|
|
We charged management service fees from the centers underlying these joint ventures of approximately
$13.8
million,
$13.1 million
and
$11.9 million
for the years ended December 31, 2018, 2017 and 2016, 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 unaudited financial data for these joint ventures as of
December 31, 2018
and
2017
, respectively, and for the years ended
December 31, 2018
,
2017
and
2016
, respectively, (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
Balance Sheet Data:
|
2018
|
|
2017
|
Current assets
|
$
|
28,317
|
|
|
$
|
47,813
|
|
Noncurrent assets
|
45,912
|
|
|
107,481
|
|
Current liabilities
|
(4,300
|
)
|
|
(16,655
|
)
|
Noncurrent liabilities
|
(4,898
|
)
|
|
(42,072
|
)
|
Total net assets
|
$
|
65,031
|
|
|
$
|
96,567
|
|
Book value of RadNet joint venture interests
|
$
|
30,030
|
|
|
$
|
45,935
|
|
Cost in excess of book value of acquired joint venture interests accounted for as equity method goodwill
|
7,943
|
|
|
6,500
|
|
Total value of RadNet joint venture interests
|
$
|
37,973
|
|
|
$
|
52,435
|
|
Total book value of other joint venture partner interests
|
$
|
35,001
|
|
|
$
|
50,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Net revenue
|
$
|
155,820
|
|
|
$
|
188,849
|
|
|
$
|
160,134
|
|
Net income
|
$
|
24,596
|
|
|
$
|
28,644
|
|
|
$
|
21,933
|
|
NOTE 3 – RECENT ACCOUNTING STANDARDS
Accounting standards adopted
In January 2017, the FASB issued Accounting Standards Update (“ASU”) No. 2017-04,
Intangibles - Goodwill and Other
. ASU 2017-04 modifies the concept of impairment from the condition that exists when the carrying value of goodwill exceeds its fair value to the condition that exists when the carrying value of a reporting unit exceeds its fair value. Under the amendment an entity performs its impairment test by comparing a reporting Unit’s fair value to its carrying value. An impairment charge would be recognized when the carrying value of the Revenue Per User exceeds the fair value and that impairment charge should not exceed the total amount of goodwill allocated to that reporting unit. We elected to early adopt the new guidance for the year ended December 31, 2018. Upon adoption using a prospective transition method, we recorded an impairment charge on our Imaging On Call reporting unit of
$3,800,000
.
Accounting standards not yet adopted
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
(ASU 2016-02), which amends the existing accounting standards for leases. In September 2017, the FASB issued ASU No. 2017-13 which provides additional clarification and implementation guidance on the previously issued ASU No. 2016-02. 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 were effective for fiscal years (and interim reporting periods within fiscal years) beginning after December 15, 2018, with early adoption permitted for all entities Under the new guidance, a lessee will be required to recognize a lease liability and right-of-use asset for all leases with terms in excess of twelve months. The new guidance also requires additional disclosures to enable users of financial statements to understand the amount, timing, and potential uncertainty of cash flows arising from leases. Consistent with current guidance, a lessee’s recognition, measurement, and presentation of expenses and cash flows arising from a lease will continue to depend primarily on its classification. The accounting standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We have elected the optional transition method to apply the standard as of the effective date and therefore, we will not apply the standard to the comparative periods presented in the consolidated financial statements. We elected the transition package of three practical expedients permitted within the standard, which eliminates the requirements to reassess prior conclusions about lease identification, lease classification, and initial direct costs. We did not elect the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of right-of-use assets. Further, we elected a short-term lease exception policy, permitting the Company to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component for certain classes of assets. While we are finalizing our analysis of certain key
assumptions that will be utilized at the transition date the effect of the new standard will be to record right-of-use assets and obligations for current operating leases which will have a material impact on the balance sheet and significant incremental disclosures in the financial statement footnotes. We are finalizing the impact of the standard to our internal control over financial reporting and have implemented necessary upgrades to our existing lease system. The transition adjustment is not expected to have a material impact on the statement of operations or 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 currently assessing the impact of the adoption of this ASU on the Company’s results of operations, financial position and cash flows.
NOTE 4 – FACILITY ACQUISITIONS, ASSETS HELD FOR SALE AND DISPOSITIONS
Acquisitions
On December 3, 2018 we completed our acquisition of certain assets of Orange County Diagnostics Imaging Center consisting of five multi-modality imaging centers located in Orange County, California for purchase consideration of
$6.6
million. We have made a preliminary
fair valuation determination of the acquired assets and approximately
$23,000
of current assets,
$69,000
of other assets,
$2.8
million of leaseholds and equipment, a
$50,000
of covenant not to compete, and
$3.6
million of goodwill were recorded.
On November 5, 2018 we completed our acquisition of certain assets of Arcadia Radiology Imaging consisting of one multi-modality imaging center and one women’s center located in Arcadia, California for purchase consideration of
$3.8
million. We have made a fair value determination of the acquired assets and approximately
$20,000
of other assets,
$819,000
of leaseholds,
$80,000
equipment,
$300,000
in covenants not to compete, and
$2.6
million of goodwill were recorded.
On November 1, 2018 we completed our acquisition of certain assets of Southern California Diagnostic Imaging consisting of a multi-modality imaging center located in Santa Ana, California for purchase consideration of
$1.4
million. We have made a fair value determination of the acquired assets and approximately
$18,000
of other assets,
$1.2
million of leasehold improvements,
$110,000
of equipment,
$50,000
of covenants not to compete, and
$41,000
of goodwill were recorded.
On October 1, 2018 we obtained control over the operations of New Jersey Imaging Network (NJIN), formerly a joint venture, consisting of eighteen multi-modality imaging centers located throughout the state of New Jersey for no consideration through an agreement with the other equity interest holder. The change in control was effective upon the execution of an Irrevocable Proxy Agreement with the joint venture partner and third amendment of the operating agreement, which provided RadNet with the ability to make unilateral operating decisions. We have made a fair value determination of the acquired net assets and approximately
$11.6
million of net working capital,
$235,000
of other assets,
$34.4
million of property and equipment,
$582,000
of trade name.
$106.1
million of goodwill,
$1.0
million in net unfavorable lease contracts,
$5.2
million of assumed equipment debt, and
$60.0
million of assumed bank debt were recorded. We also made a
fair value determination of our
49%
pre existing interest in the business of approximately
$42.5
million and we recognized fair value of non controlling
interest of
$44.3
million on the date of the transaction. The re-measurement in valuation from an existing equity investment in joint venture resulted in a gain of
$39.5
million which is included in Other Income within the consolidated statements of operations.
On October 1, 2018 we acquired certain assets of Medical Arts Radiology consisting of a 10 multi-modality imaging centers located in Long Island, New York. Total purchase consideration of
$59.6
million consisting of cash in the amount of
$50.9
million, issuance of
531,560
RadNet common shares valued at
$8.0
million on the acquisition date and contingent consideration valued at
$739,000
to guarantee the share value issued for a period of twelve months post acquisition date. We also assumed
$2.7
million in equipment debt. We have made a preliminary value determination of the acquired assets and approximately
$3.4
million of net working capital,
$200,000
of other assets,
$15.9
million of property and equipment,
$24,000
in a covenant not to compete,
$1.4
million for its trade name, unfavorable lease contracts of
$130,000
and
$41.5
million of 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
other assets,
$904,000
of leaseholds and equipment,
$50,000
in a covenant not to compete, and
$2.3
million of 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
$636,000
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 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 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 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
$3.0
million in fixed asset and equipment, a
$100,000
covenant not to compete, and
$2.7
million in goodwill were recorded.
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
$545,000
in goodwill. As part of the formation, the Beach Imaging assumed
$4.0
million in capital lease debt. 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 October 5, 2017 we completed our acquisition of all of the outstanding equity interests in RadSite, LLC, for
$1.0 million
in common stock and
$856,000
in cash. RadSite provides both quality certification and accreditation programs for imaging providers in accordance with standards of private insurance payors and federal regulations under Medicare. We have made a fair value determination of the acquired assets and approximately
$91,000
of current assets,
$25,000
in fixed assets, a
$150,000
covenant not to compete,
$75,000
in liabilities and
$1.7 million
in goodwill were recorded.
On October 1, 2017 we completed our acquisition of certain assets of Remote Diagnostic Imaging P.L.L.C., consisting of a single multi-modality center located in New York, New York, for purchase consideration of
$3.9 million
. We have made a fair value determination of the acquired assets and approximately
$2.6 million
in fixed assets, a
$50,000
covenant not to compete, and
$1.2 million
in goodwill were recorded.
On August 7, 2017 we acquired Diagnostic Imaging Associates (“DIA”) for
$13.0 million
in cash and
$1.5 million
in RadNet common stock. Located in the state of Delaware, DIA operates five multi-modality imaging locations which provide
MRI, CT, Ultrasound, Mammography and X-Ray services. We have made a fair value determination of the acquired assets and approximately
$3.1 million
of fixed assets and equipment,
$1.2 million
in current assets, and
$10.2 million
in goodwill were recorded.
On June 1, 2017 we completed our acquisition of certain assets of Stockton MRI and Molecular Imaging Medical Center Inc., consisting of a multi-modality center located in Stockton, CA, for consideration of
$4.4 million
. The facility provides MRI, CT, Ultrasound, X-Ray and Nuclear Medicine services. We have made a fair value determination of the acquired assets and approximately
$1.2 million
of fixed assets and equipment, a
$50,000
covenant not to compete, and
$3.1 million
of goodwill were recorded.
On May 3, 2017 we completed our acquisition of certain assets of D&D Diagnostics Inc., consisting of a single multi-modality imaging center located in Silver Spring, Maryland, for total purchase consideration of
$2.4 million
, including cash consideration of
$1.2 million
and settlement of liabilities of
$1.2 million
. We have made a fair value determination of the acquired assets and approximately
$820,000
of fixed assets,
$16,000
of other assets, and
$1.5 million
of goodwill were recorded. The facility provides MRI, CT, X-Ray and related 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 providing MRI and sports medicine services, for cash consideration of
$800,000
and the payoff of
$81,000
in debt. We have made a fair value determination of the acquired assets and approximately
$289,000
of fixed assets,
$9,800
of other assets,
$100,000
covenant not to compete and
$401,000
of goodwill were recorded.
On January 13, 2017, we completed our acquisition of certain assets of Resolution Medical Imaging Corporation for consideration of
$4.0 million
. The purchase of Resolution was enacted to contribute its assets to a joint venture with Cedars Sinai Medical Corporation which was effective April 1, 2017. See the formation of new joint ventures section in Note 2 above for further information.
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 consolidated balance sheets at
December 31, 2018
(in thousands):
|
|
|
|
Property and equipment, net
|
$1,440
|
Goodwill
|
1,059
|
|
Total assets held for sale
|
$2,499
|
Dispositions and Sales of Noncontrolling Interest
On September 1, 2017 we completed the equity sale of a wholly owned breast oncology practice, Breastlink Medical Group, Inc., to Verity Medical Foundation for approximately
$2.8 million
. We recorded a gain of approximately
$845,000
and incurred severance expense of approximately
$1.2 million
on this transaction.
On July 1, 2017 we formed a majority owned subsidiary, Advanced Imaging at Timonium Crossing, LLC, in conjunction with the University of Maryland St. Joseph Medical Center. As part of that transaction, we sold a
25%
noncontrolling interest in an imaging center of our wholly owned subsidiary, Advanced Imaging Partners, Inc., to the University of Maryland St. Joseph Medical Center for
$3.9 million
. On the date of sale, the net book value of the
25%
interest was
$1.1 million
and the proceeds in excess of net book value amounting to
$2.8 million
were recorded to equity.
On April 28, 2017 we completed the sale of five imaging centers operating in Rhode Island to Rhode Island Medical Imaging, Inc. for approximately
$4.5 million
. We recorded a gain of approximately
$1.9 million
in the second quarter with regard to this transaction and have no remaining imaging centers in the state.
On April 1, 2017 we received from Cedars Sinai Medical Center
$5.9 million
in exchange for a
25%
noncontrolling interest in the West Valley Imaging Group, LLC (“WVI”). The determined net book value of the
25%
interest was approximately
$3.0 million
. The proceeds in excess of the net book value, amounting to
$1.8 million
net of taxes, were recorded to equity.
On April 1, 2017 we completed the sale of 2 wholly owned oncology practices to Cedars Sinai Medical Center in connection with the sale of non-controlling interest of the WVI subsidiary described above for approximately
$1.2 million
. We recorded a gain of approximately
$361,000
on this transaction.
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, 2017
and
2018
is provided below (in thousands):
|
|
|
|
Balance as of December 31, 2016
|
$239,553
|
Goodwill acquired through the acquisition of Resolution Imaging Medical Corp
|
1,901
|
|
Goodwill acquired through the acquisition of MRI Centers Inc.
|
401
|
|
Goodwill disposed through the transfer to Santa Monica Imaging Group JV
|
(1,901
|
)
|
Goodwill acquired through the acquisition of D&D Diagnostics, Inc.
|
1,519
|
|
Goodwill acquired through the acquisition of Stockton MRI, Inc.
|
3,101
|
|
Goodwill disposed through the sale of Hematology Oncology
|
(110
|
)
|
Goodwill acquired through the acquisition of DIA, Inc.
|
9,185
|
|
Goodwill disposed through the sale of Breastlink Medical Group, Inc.
|
(509
|
)
|
Goodwill acquired through the acquisition of RDI, Inc.
|
1,202
|
|
Adjustments to our preliminary allocation of the purchase price of DIA, Inc.
|
1,058
|
|
Goodwill acquired through the acquisition of RadSite, LLC
|
1,665
|
|
Goodwill transferred to other assets
|
(289
|
)
|
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
|
545
|
|
Goodwill transferred to assets held for sale
|
(1,059
|
)
|
Goodwill acquired through the acquisition of Women's Imaging Specialists in Healthcare
|
4,268
|
|
Goodwill acquired through the acquisition of Valley Metabolic Imaging
|
1,469
|
|
Goodwill acquired through the acquisition of Sierra Imaging Associates
|
1,147
|
|
Goodwill disposed through the sale of plastic surgery unit
|
(80
|
)
|
Goodwill acquired through the acquisition of Washington Heights Medical Management
|
2,303
|
|
Goodwill acquired through the acquisition of Medical Arts Radiological Group, P.C.
|
41,469
|
|
Goodwill acquired through the acquisition of Arcadia Radiology Imaging Services, LLC
|
2,582
|
|
Goodwill acquired through the acquisition of Southern California Diagnostic Imaging, Inc.
|
41
|
|
Goodwill acquired through the acquisition of Orange County Diagnostics Imaging Center, Inc.
|
3,618
|
|
Goodwill acquired through assuming operational control of New Jersey Imaging Network, LLC
|
106,122
|
|
Goodwill impaired in the Imaging On Call reporting unit
|
(3,800
|
)
|
Balance as of December 31, 2018
|
$418,093
|
The amount of goodwill from these acquisitions that is deductible for tax purposes as of December 31, 2018 is
$160.1
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 $
28.0
million at
December 31, 2018
. Also included in other intangible assets is the value of covenant not to compete contracts associated with our facility acquisitions totaling $
7.7
million less valuation adjustments and accumulated amortization of $
6.4
million, as well as the value of trade names associated with acquired imaging facilities totaling $
12.1
million less accumulated amortization of $
1.5
million and dispositions and impairments totaling $
887,000
.
Total amortization expense was $
2.7
million for the year ended
December 31, 2018
and
$2.6
million for each of the years ended December 31, 2017 and 2016. Intangible assets are amortized using the straight-line method over their useful life determined at acquisition. Management service agreements are amortized over
25
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
|
Total
|
|
Weighted average amortization period remaining in years
|
Management Service Contracts
|
2,287
|
|
|
2,287
|
|
|
2,287
|
|
|
2,287
|
|
|
2,287
|
|
|
18,108
|
|
|
29,543
|
|
|
12.9
|
|
Covenant not to compete contracts
|
376
|
|
|
301
|
|
|
240
|
|
|
210
|
|
|
98
|
|
|
—
|
|
|
1,225
|
|
|
3.9
|
|
Trade Names amortized
|
11
|
|
|
11
|
|
|
11
|
|
|
11
|
|
|
9
|
|
|
—
|
|
|
53
|
|
|
5.0
|
|
Trade Names indefinite life
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,772
|
|
|
9,772
|
|
|
—
|
|
Total Annual Amortization
|
2,674
|
|
|
2,599
|
|
|
2,538
|
|
|
2,508
|
|
|
2,394
|
|
|
27,880
|
|
|
40,593
|
|
|
|
* 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,
|
|
2018
|
|
2017
|
Land
|
$
|
250
|
|
|
$
|
250
|
|
Medical equipment
|
449,776
|
|
|
380,439
|
|
Computer and office equipment, furniture and fixtures
|
102,798
|
|
|
96,382
|
|
Software development costs
|
6,391
|
|
|
6,391
|
|
Leasehold improvements
|
337,878
|
|
|
273,436
|
|
Equipment under capital lease
|
12,119
|
|
|
17,180
|
|
Total property and equipment cost
|
909,212
|
|
|
774,078
|
|
Accumulated depreciation
|
(563,483
|
)
|
|
(529,511
|
)
|
Total net property and equipment
|
345,729
|
|
|
244,567
|
|
Equipment transferred to other assets
|
—
|
|
|
(266
|
)
|
Total property and equipment
|
$
|
345,729
|
|
|
$
|
244,301
|
|
Depreciation and amortization expense of property and equipment, including amortization of equipment under capital leases, for the years ended
December 31, 2018
,
2017
and
2016
was
$70.2 million
,
$64.2 million
, and
$64.0 million
, respectively.
NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses were comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Accounts payable
|
$
|
68,040
|
|
|
$
|
28,538
|
|
Accrued expenses
|
60,958
|
|
|
67,298
|
|
Accrued salary and benefits
|
37,167
|
|
|
30,670
|
|
Accrued professional fees
|
14,863
|
|
|
9,303
|
|
Total
|
$
|
181,028
|
|
|
$
|
135,809
|
|
NOTE 8 - NOTES PAYABLE, REVOLVING CREDIT FACILITY AND CAPITAL LEASES
Revolving credit facility, notes payable, and capital lease obligations
:
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
First Lien Term Loans collateralized by RadNet's tangible and intangible assets
|
$
|
587,191
|
|
|
$
|
620,272
|
|
|
|
|
|
Discount on First Lien Term Loans
|
(15,112
|
)
|
|
(18,470
|
)
|
|
|
|
|
Term Loan Agreement collateralized by NJIN's tangible and intangible assets
|
59,250
|
|
|
—
|
|
|
|
|
|
Revolving Credit Facility
|
28,000
|
|
|
—
|
|
|
|
|
|
Promissory note payable to the former owner of a practice acquired at an interest rate of 1.5% due through 2019
|
199
|
|
|
592
|
|
|
|
|
|
Equipment notes payable at interest rates ranging from 3.3% to 5.6%, due through 2020, collateralized by medical equipment
|
632
|
|
|
195
|
|
|
|
|
|
Obligations under capital leases at interest rates ranging from 4.3% to 11.2%, due through 2022, collateralized by medical and office equipment
|
12,119
|
|
|
6,538
|
|
Total debt obligations
|
672,279
|
|
|
609,127
|
|
Less current portion
|
(39,267
|
)
|
|
(34,090
|
)
|
Long-term portion debt obligations
|
$
|
633,012
|
|
|
$
|
575,037
|
|
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):
|
|
|
|
|
2019
|
$
|
37,011
|
|
2020
|
37,857
|
|
2021
|
65,956
|
|
2022
|
39,081
|
|
2023
|
495,366
|
|
Total notes payable obligations
|
$
|
675,271
|
|
We lease equipment under capital lease arrangements. Future minimum lease payments under capital leases for years ending December 31 (in thousands) is as follows:
|
|
|
|
|
2019
|
$
|
6,018
|
|
2020
|
3,481
|
|
2021
|
2,614
|
|
2022
|
692
|
|
Total minimum payments
|
12,805
|
|
Amount representing interest
|
(686
|
)
|
Present value of net minimum lease payments
|
12,119
|
|
Less current portion
|
(5,614
|
)
|
Long-term portion lease obligations
|
$
|
6,505
|
|
Term Loans, Revolving Credit Facility and Financing Activity Information
:
At
December 31, 2018
, our Barclays credit facilities were comprised of one tranche of term loans (“First Lien Term Loans”) and a revolving credit facility of
$117.5 million
(the “Barclays Revolving Credit Facility”).
At
December 31, 2018
, our SunTrust credit facilities were comprised of one term loan ("Term Loan Agreement") and a revolving credit facility of
$30.0
million (the "SunTrust Revolving Credit Facility")
As of
December 31, 2018
, we were in compliance with all covenants under our credit facilities.
Deferred financing costs at
December 31, 2018
, net of accumulated amortization, was
$1.4 million
and is specifically related to our Barclays Revolving Credit Facility.
Included in our consolidated balance sheets at
December 31, 2018
are
$631.3 million
of senior secured term loan debt (net of unamortized discounts of
$15.1 million
) in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Face Value
|
|
Discount
|
|
Total Carrying
Value
|
First Lien Term Loans
|
$
|
587,191
|
|
|
$
|
(15,112
|
)
|
|
$
|
572,079
|
|
Term Loan Agreement
|
59,250
|
|
|
—
|
|
|
59,250
|
|
Total Term Loans
|
$
|
646,441
|
|
|
$
|
(15,112
|
)
|
|
$
|
631,329
|
|
We had a balance of
$28.0
million under our
$117.5 million
Barclays Revolving Credit Facility at
December 31, 2018
.
We had
no
balance under our
$30.0
million SunTrust Revolving Credit Facility at
December 31, 2018
.
The following describes our Barclays 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.
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 ends when financial reporting is delivered for the period ending September 30, 2017. Thereafter, the rates of the applicable margin for borrowing under the First Lien Credit Agreement will 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
December 31, 2018
the effective Adjusted Eurodollar Rate and the Base Rate for the First Lien Term Loans was
2.44%
and
5.50%
, respectively and the applicable margin for Adjusted Eurodollar Rate and Base Rate borrowings remained at
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.
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.
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
December 31, 2018
, the interest rate payable on revolving loans was
8.25%
and the amount available to borrow under the Revolving Credit Facility was
$83.2 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.
The following describes our SunTrust financing activities:
Amended and Restated Revolving Credit and Term Loan Agreement
On August 31, 2018, NJIN completed the Amended and Restated Revolving Credit and Term Loan Agreement (the "Restated Agreement") as borrower with SunTrust Bank, Santander, California Bank and Trust, and Manufacturers and Traders Trust as lenders for an additional aggregate of
$48.1 million
as categorized below:
Revolving Credit Facility:
The Restated Agreement establishes a
$30.0 million
revolving credit facility available to NJIN for funding requirements with a revolving commitment termination date of September 30, 2023. This represents an increase of
$20.0 million
over the original loan agreement of
$10.0 million
. The revolving credit line bears interest based on types of borrowings as follows: (i) unpaid principal at the Adjusted Eurodollar Rate (as defined in the Restated Agreement) plus
2.75%
per annum or the Base Rate (as defined in the Restated Agreement) plus
1.75%
per annum, (ii) letter of credit and fronting fees at
2.75%
per annum, and (iii) commitment fee of
0.45%
per annum on the unused revolver balance. NJIN has not borrowed against the revolving credit line.
Term Loan:
The Restated Agreement establishes a
$60.0 million
term loan facility with repayment in scheduled quarterly amounts with a maturity date of September 30, 2023. This increases the existing term loan facility by
$28.1 million
and extends the term of the loan from September 30, 2020 to September 30, 2023.
Interest:
The interest rates currently payable are (a) the Eurodollar Rate (as defined in the Restated Agreement) plus and applicable margin of
2.75%
per annum or (b) the Base Rate (as defined in the Restated Agreement) plus an applicable margin of
1.75%
per annum. The applicable margin for both the rates is based on a sliding scale of the current leverage ratio, with
2.75%
per annum down to
1.50%
per annum for Eurodollar loans and
1.75%
per annum down to
0.50%
per annum for Base Rate loans. The current election is a one month Eurodollar election.
Payments:
The scheduled amortization of the term loans under the Restated Agreement begin December 31, 2018 with quarterly payments of
$750,000
, representing
5%
per annum of the total amount owed. At scheduled intervals, the quarterly amortization increases
$375,000
over the prior year, with the remaining balance to be paid at maturity.
Revolving Credit and Term Loan Agreement
On September 30, 2015, the Company completed the Revolving Credit and Term Loan Agreement (the "Agreement") as borrower with SunTrust Bank, California Bank and Trust, and Manufacturers and Traders Trust as lenders for an aggregate of
$50.0 million
as categorized below:
Revolving Credit Facility:
The Agreement establishes a
$10.0 million
revolving credit facility available to the Company for needed funding requirements with a revolving commitment termination date of September 30, 2020. The revolving credit line bears interest based on types of borrowings as follows: (i) unpaid principal at the Adjusted Eurodollar Rate (as defined in the Agreement) plus
3.00%
per annum or the Base Rate (as defined in the Agreement) plus
2.00%
per annum, (ii) letter of credit and fronting fees at
3.00%
per annum, and (iii) commitment fee of
0.45%
per annum on the unused revolver balance.
Term Loan:
The agreement establishes a
$40.0 million
term loan facility with repayment in scheduled quarterly amounts with a maturity date of September 30, 2020.
Interest:
The interest rates currently payable are (a) the Eurodollar Rate (as defined in the Agreement) plus and applicable margin of
3%
per annum or (b) the Base Rate (as defined in the Agreement) plus an applicable margin of
2%
per annum. The applicable margin for both the rates is based on a sliding scale of the current leverage ratio, with
3%
per annum down to
1.75%
per annum for Eurodollar loans and
2%
per annum down to
0.75%
per annum for Base Rate loans.
Payments:
The scheduled amortization of the term loans under the Agreement begin December 31, 2015 with quarterly payments of
$500,000
, representing
5%
per annum of the initial amount borrowed. Each December 31 for the years following, the scheduled quarterly amortization increases
$250,000
over the prior year, with the remaining balance to be paid at maturity.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Leases
– We lease various operating facilities and certain medical equipment under operating leases with renewal options expiring through 2052. 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
|
2019
|
$
|
75,588
|
|
|
$
|
14,924
|
|
|
$
|
90,512
|
|
2020
|
66,116
|
|
|
14,385
|
|
|
80,501
|
|
2021
|
57,826
|
|
|
12,966
|
|
|
70,792
|
|
2022
|
48,542
|
|
|
10,264
|
|
|
58,806
|
|
2023
|
38,800
|
|
|
7,095
|
|
|
45,895
|
|
Thereafter
|
160,327
|
|
|
5,144
|
|
|
165,471
|
|
|
$
|
447,199
|
|
|
$
|
64,778
|
|
|
$
|
511,977
|
|
Total rent expense, including equipment rentals, for the years ended
December 31, 2018
,
2017
and
2016
was
$83.0 million
,
$78.6 million
and
$74.2 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 – INCOME TAXES
For the years ended
December 31, 2018
,
2017
and
2016
, we recognized income tax expense comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
|
2016
|
Federal current tax
|
$
|
(765
|
)
|
|
$
|
871
|
|
|
$
|
88
|
|
State current tax
|
7,263
|
|
|
4,906
|
|
|
914
|
|
Other current tax
|
20
|
|
|
23
|
|
|
28
|
|
Federal deferred tax
|
(2,020
|
)
|
|
21,389
|
|
|
2,539
|
|
State deferred tax
|
(4,104
|
)
|
|
(2,879
|
)
|
|
863
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
$
|
394
|
|
|
$
|
24,310
|
|
|
$
|
4,432
|
|
A reconciliation of the statutory U.S. federal rate and effective rates is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Federal tax
|
$
|
8,256
|
|
|
21.00
|
%
|
|
$
|
8,971
|
|
|
34.00
|
%
|
|
$
|
4,229
|
|
|
34.00
|
%
|
State franchise tax, net of federal benefit
|
1,332
|
|
|
3.39
|
%
|
|
1,799
|
|
|
6.82
|
%
|
|
224
|
|
|
1.80
|
%
|
Other Non deductible expenses
|
471
|
|
|
1.20
|
%
|
|
91
|
|
|
0.35
|
%
|
|
(11
|
)
|
|
(0.09
|
)%
|
Changes in valuation allowance
|
1,760
|
|
|
4.48
|
%
|
|
(1,045
|
)
|
|
(3.96
|
)%
|
|
585
|
|
|
4.70
|
%
|
Tax Cuts and Jobs Act
|
—
|
|
|
—
|
%
|
|
13,527
|
|
|
51.27
|
%
|
|
—
|
|
|
—
|
%
|
Gain on change in control
|
(8,303
|
)
|
|
(21.12
|
)%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
Deferred true-ups and other
|
(4,254
|
)
|
|
(10.82
|
)%
|
|
(194
|
)
|
|
(0.74
|
)%
|
|
(3,142
|
)
|
|
(25.25
|
)%
|
Other reconciling items
|
1,132
|
|
|
2.88
|
%
|
|
1,161
|
|
|
4.39
|
%
|
|
2,547
|
|
|
20.47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
$
|
394
|
|
|
1.00
|
%
|
|
$
|
24,310
|
|
|
92.13
|
%
|
|
$
|
4,432
|
|
|
35.64
|
%
|
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):
|
|
|
|
|
|
|
|
|
|
December 31,
|
Deferred tax assets:
|
2018
|
|
2017
|
Net operating losses
|
$
|
46,875
|
|
|
$
|
47,212
|
|
Accrued expenses
|
3,421
|
|
|
3,242
|
|
Straight-Line rent adjustment
|
9,811
|
|
|
7,749
|
|
Unfavorable contract liability
|
1,354
|
|
|
1,288
|
|
Equity compensation
|
1,065
|
|
|
871
|
|
Allowance for doubtful accounts
|
14,850
|
|
|
8,720
|
|
Other
|
2,815
|
|
|
2,504
|
|
Valuation allowance
|
(5,810
|
)
|
|
(4,049
|
)
|
Total Deferred Tax Assets
|
$
|
74,381
|
|
|
$
|
67,537
|
|
Deferred tax liabilities:
|
|
|
|
Property and equipment
|
(6,194
|
)
|
|
(373
|
)
|
Goodwill
|
(19,780
|
)
|
|
(17,568
|
)
|
Intangibles
|
(8,110
|
)
|
|
(7,839
|
)
|
Non accrual experience method reserve
|
(1,446
|
)
|
|
(2,778
|
)
|
Other
|
(7,345
|
)
|
|
(8,127
|
)
|
Total Deferred Tax Liabilities
|
$
|
(42,875
|
)
|
|
$
|
(36,685
|
)
|
|
|
|
|
Net Deferred Tax Asset
|
$
|
31,506
|
|
|
$
|
30,852
|
|
As of
December 31, 2018
, the Company had federal net operating loss carryforwards of approximately
$193.7 million
, which comprise of definite and indefinite net operating losses. We had federal net operating loss carryforwards of approximately
$187.7 million
, which expire at various intervals from the years 2022 to 2037, and had carryforwards of
$6.0
million of net operating losses generated in 2018, which do not expire. Federal net operating losses generated following
December 31, 2017
carryover indefinitely and may generally be used to offset up to 80% of future taxable net income. The Company also had state net operating loss carryforwards of approximately
$101.2 million
, which expire at various intervals from the years 2019 through 2038. As of
December 31, 2018
,
$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, 2018
, we have determined that deferred tax assets of
$74.4
million are more likely-than-not to be realized. We have also determined that deferred tax liabilities of
$19.8
million are related to book basis in goodwill that has an indefinite life.
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 2014. We do not anticipate the results of any open examinations would result in a material change to its financial position.
At
December 31, 2018
, the Company has unrecognized tax benefits of
$4.6 million
of which
$3.7 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,
|
|
2018
|
|
2017
|
|
2016
|
Balance at beginning of year
|
$
|
3,615
|
|
|
$
|
3,861
|
|
|
$
|
94
|
|
Increases related to prior year tax positions
|
896
|
|
|
1
|
|
|
3,861
|
|
Increases related to current year tax positions
|
111
|
|
|
—
|
|
|
—
|
|
Expiration of the statute of limitations for the assessment of taxes
|
—
|
|
|
—
|
|
|
(94
|
)
|
Increase (decrease) related to change in rate
|
7
|
|
|
(247
|
)
|
|
—
|
|
Balance at end of year
|
$
|
4,629
|
|
|
$
|
3,615
|
|
|
$
|
3,861
|
|
We believe it is reasonably possible it will not materially reduce its unrecognized tax benefits within the next twelve months.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the year ended
December 31, 2018
the Company accrued approximately
$280,000
of interest and penalties. As of
December 31, 2018
, accrued interest and penalties amounted to approximately
$300,000
.
Pursuant to the federal tax legislation that was enacted on December 22, 2017 ("Tax Act"), the Company re-measured its existing deferred tax assets and liabilities based on
21%
, the current rate at which they are expected to reverse in the future. In 2017, the Company recorded provisional amounts for certain enactment-date efforts of the Act by applying the guidance in SAB 118 because it had not yet completed our enactment-date effects of the Act. The Company has completed analysis of Tax Act's income tax effects. In total, the Company recorded a non-cash charge of $
13.6
million, which is included as a component of income tax expense from continuing operations in 2017. Upon further analysis of certain aspects of the Tax Act and refinement of the calculations during the 12 months ended
December 31, 2018
, the Company found an immaterial adjustment was necessary.