The accompanying notes are an integral part
of these financial statements.
We acquired equipment and certain leasehold
improvements for approximately $14.4 million and $14.7 million during the nine months ended September 30, 2017 and 2016, respectively,
which were not paid for as of September 30, 2017 and 2016
,
respectively. The offsetting amounts due were recorded in our
condensed consolidated balance sheets under accounts payable, accrued expenses and other.
During the nine months ended September 30,
2017 and 2016, we added capital lease debt of approximately $5.4 million and $1.3 million, respectively.
During the nine months ended September 30,
2017, we recorded an investment in joint venture of $3.0 million to ScriptSender LLC representing our capital contribution to the
venture. The offsetting amount was recorded on the due to affiliates account of ScriptSender, LLC. See Note 4, Facility Acquisitions
and Dispositions to the condensed consolidated financial statements contain herein for further information.
We transferred approximately $2.5 million
in net assets in April 2017 to our new joint venture, Santa Monica Imaging Group LLC. See Note 4, Facility Acquisitions and Dispositions,
to the condensed consolidated financial statements contain herein for further information.
We transferred approximately $4.6 million
in net assets in July 2017 to a new majority owned subsidiary, Advanced Imaging at Timonium Crossing, LLC. See Note 4, Facility
Acquisitions and Dispositions, to the condensed consolidated financial statements contain herein for further information.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
NOTE 1 – NATURE OF BUSINESS AND BASIS OF PRESENTATION
We are a leading national provider of freestanding,
fixed-site outpatient diagnostic imaging services in the United States based on number of locations and annual imaging revenue.
At September 30, 2017, we operated directly or indirectly through joint ventures with hospitals, 298 centers located in California,
Delaware, Florida, Maryland, New Jersey, and New York. Our centers provide physicians with imaging capabilities to facilitate the
diagnosis and treatment of diseases and disorders. Our services include magnetic resonance imaging (MRI), computed tomography (CT),
positron emission tomography (PET), nuclear medicine, mammography, ultrasound, diagnostic radiology (X-ray), fluoroscopy and other
related procedures. The vast majority of our centers offer multi-modality imaging services. Our multi-modality strategy diversifies
revenue streams, reduces exposure to reimbursement changes and provides patients and referring physicians one location to serve
the needs of multiple procedures.
The consolidated financial statements include
the accounts of Radnet Management, Inc. (or “Radnet Management”) and Beverly Radiology Medical Group III, a professional
partnership (“BRMG”). BRMG is a partnership of ProNet Imaging Medical Group, Inc. and Beverly Radiology Medical Group,
Inc. The consolidated financial statements also include Radnet Management I, Inc., Radnet Management II, Inc., Radiologix, Inc.,
Radnet Managed Imaging Services, Inc., Delaware Imaging Partners, Inc., New Jersey Imaging Partners, Inc. and Diagnostic Imaging
Services, Inc. (“DIS”), all wholly owned subsidiaries of Radnet Management. All of these affiliated entities are referred
to collectively as “RadNet”, “we”, “us”, “our” or the “Company” in
this report.
Accounting Standards Codification (“ASC”)
810-10-15-14,
Consolidation
, stipulates that generally any entity with a) insufficient equity to finance its activities
without additional subordinated financial support provided by any parties, or b) equity holders that, as a group, lack the characteristics
specified in the ASC which evidence a controlling financial interest, is considered a Variable Interest Entity (“VIE”).
We consolidate all VIEs for 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 provides 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 other California facilities. We generally obtain professional medical services
from BRMG in California, rather than provide such services directly or through subsidiaries, in order to comply with California’s
prohibition against the corporate practice of medicine. However, as a result of our close relationship with Dr. Berger and BRMG,
we believe that we are able to better ensure that medical service is provided at our California facilities in a manner consistent
with our needs and expectations and those of our referring physicians, patients and payors than if we obtained these services from
unaffiliated physician groups.
We contract with nine medical groups which
provide professional medical services at all of our facilities in Manhattan and Brooklyn, New York (the “NY Groups”).
These contracts are similar to our contract with BRMG. Six of these groups are owned by John V. Crues, III, M.D., RadNet’s
Medical Director, a member of our Board of Directors, and a 1% owner of BRMG. Dr Berger owns a controlling interest in two of these
medical groups which provide professional medical services at one of our Manhattan facilities.
RadNet provides non-medical, technical and
administrative services to BRMG and the 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 the management agreement with us, all cash
flows of BRMG and the NY Groups are transferred to us.
We have determined that BRMG and the NY
Groups are VIE’s, and 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 $32.4 million and $34.2 million of revenue, net
of management service fees to RadNet, for the three months ended September 30, 2017 and 2016, respectively, and $32.4 million and
$34.2 million of operating expenses for the three months ended September 30, 2017 and 2016, respectively. RadNet recognized in
its condensed consolidated statement of operations $107.1 million and $113.1 million of net revenues for the three months ended
September 30, 2017, and 2016 respectively, for management services provided to BRMG and the NY Groups relating primarily to the
technical portion of total billed revenue.
BRMG and the NY Groups on a combined basis
recognized $101.4 million and $101.2 million of revenue, net of management service fees to RadNet, for the nine months ended September
30, 2017 and 2016, respectively, and $101.4 million and $101.2 million of operating expenses for the nine months ended September
30, 2017 and 2016, respectively. RadNet recognized in its condensed consolidated statement of operations $328.6 million and $321.1
million of net revenues for the nine months ended September 30, 2017, and 2016 respectively, for management services provided to
BRMG and the NY Groups relating primarily to the technical portion of total billed revenue.
The cash flows of BRMG and the NY Groups
are included in the accompanying consolidated statements of cash flows. All intercompany balances and transactions have been eliminated
in consolidation. In our consolidated balance sheets at September 30, 2017 and December 31, 2016, we have included approximately
$107.4 million and $100.0 million, respectively, of accounts receivable and approximately $15.3 million and $9.0 million of accounts
payable and accrued liabilities related to BRMG and the NY Groups.
The creditors of BRMG and the NY Groups
do not have recourse to our general credit and there are no other arrangements that could expose us to losses on behalf of BRMG
and the NY Groups. However, both BRMG and the NY Groups are managed to recognize no net income or net loss and, therefore, RadNet
may be required to provide financial support to cover any operating expenses in excess of operating revenues.
At all of our centers we have entered into
long-term contracts with radiology groups in the area to provide physician services at those facilities. These radiology practices
provide professional services, including supervision and interpretation of diagnostic imaging procedures, in our diagnostic imaging
centers. The radiology practices maintain full control over the provision of professional services. In these facilities, we enter
into long-term agreements with radiology practice groups (typically 40 years). Under these arrangements, in addition to obtaining
technical fees for the use of our diagnostic imaging equipment and the provision of technical services, we provide management services
and receive a fee based on the value of the services we provide. Except in New York City, the fee is based on the practice group’s
professional revenue, including revenue derived outside of our diagnostic imaging centers. In New York City we are paid a fixed
fee set in advance for our services. We own the diagnostic imaging equipment and, therefore, receive 100% of the technical reimbursements
associated with imaging procedures. The radiology practice groups retain the professional reimbursements associated with imaging
procedures after deducting management service fees paid to us and we have no financial controlling interest in the radiology practices.
Because of the controlling relationship of Dr. Berger and Dr. Crues in the California and New York City practices as stated in
detail above, we consolidate the revenue and expenses.
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and,
therefore, do not include all information and footnotes necessary for conformity with U.S. generally accepted accounting principles
for complete financial statements; however, in the opinion of our management, all adjustments consisting of normal recurring adjustments
necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods ended
September 30, 2017 and 2016 have been made. The results of operations for any interim period are not necessarily indicative of
the results for a full year. These interim condensed consolidated financial statements should be read in conjunction with the consolidated
financial statements and related notes thereto contained in our annual report on Form 10-K for the year ended December 31, 2016,
as amended.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
During the period covered in this report,
there have been no material changes to the significant accounting policies we use and have explained, in our annual report on Form
10-K for the fiscal year ended December 31, 2016, as amended. The information below is intended only to supplement the disclosure
in our annual report on Form 10-K for the fiscal year ended December 31, 2016, as amended.
ADOPTION OF ASU 2016-09 – Compensation
– Stock Compensation - In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”) No. 2016-09,
Compensation—Stock Compensation
, (Topic 718):
Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 requires excess tax benefits and tax deficiencies, which arise
due to differences between the measure of compensation expense and the amount deductible for tax purposes, to be recorded directly
through the statement of operations when awards vest or are settled. We elected to early adopt the new guidance for the year ended
December 31, 2016. Upon adoption using the modified retrospective transition method, we recorded a cumulative effect adjustment
to recognize previously unrecognized excess tax benefits which increased deferred tax assets and reduced accumulated deficit by
$7.1 million. The net tax benefit for 2016 resulting from adoption of the new guidance was approximately $400,000 and was reflected
in our tax provision at December 31, 2016. The impact on our quarterly financial result for the three months ended September 30,
2016 was additional income tax expense of approximately $3,000. The impact on our financial statements for the nine months ended
September 30, 2016 was as follows:
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
In thousands except per share data
|
|
As previously reported
|
|
|
Impact of adoption
|
|
|
As currently reported
|
|
Provision for income taxes
|
|
$
|
(2,531
|
)
|
|
$
|
320
|
|
|
$
|
(2,211
|
)
|
Net income
|
|
|
3,940
|
|
|
|
320
|
|
|
|
4,260
|
|
Net income attributable to Radnet Inc. common shareholders
|
|
|
3,549
|
|
|
|
320
|
|
|
|
3,869
|
|
Basic and diluted income per share
|
|
|
0.08
|
|
|
|
0.00
|
|
|
|
0.08
|
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
|
As previously reported
|
|
|
|
Impact of adoption
|
|
|
|
As currently reported
|
|
Net income
|
|
$
|
3,940
|
|
|
$
|
320
|
|
|
$
|
4,260
|
|
Deferred taxes
|
|
|
1,746
|
|
|
|
(320
|
)
|
|
|
1,426
|
|
Others
|
|
|
(5,774
|
)
|
|
|
–
|
|
|
|
(5,774
|
)
|
Net decrease in cash and cash equivalents
|
|
$
|
(88
|
)
|
|
$
|
–
|
|
|
$
|
(88
|
)
|
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
|
As previously reported
|
|
|
|
Impact of adoption
|
|
|
|
As currently reported
|
|
Net income
|
|
$
|
3,940
|
|
|
$
|
320
|
|
|
$
|
4,260
|
|
Foreign currency translation adjustments
|
|
|
(166
|
)
|
|
|
–
|
|
|
|
(166
|
)
|
Comprehensive income
|
|
|
3,774
|
|
|
|
320
|
|
|
|
4,094
|
|
Less comprehensive income attributable to noncontrolling interests
|
|
|
391
|
|
|
|
–
|
|
|
|
391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Radnet Inc. common shareholders
|
|
$
|
3,383
|
|
|
$
|
320
|
|
|
$
|
3,703
|
|
REVENUES -Service fee revenue, net of contractual
allowances and discounts, consists of net patient fees received from various payors and patients themselves based mainly upon established
contractual billing rates, less allowances for contractual adjustments and discounts. As it relates to BRMG and the NY Groups centers,
this service fee revenue includes payments for both the professional medical interpretation revenue recognized by BRMG and the
NY Groups as well as the payment for all other aspects related to our providing the imaging services, for which we earn management
fees from BRMG and the NY Groups. As it relates to non-BRMG and NY Groups centers, namely the affiliated physician groups, this
service fee revenue is earned through providing the use of our diagnostic imaging equipment and the provision of technical services
as well as providing administration services such as clerical and administrative personnel, bookkeeping and accounting services,
billing and collection, provision of medical and office supplies, secretarial, reception and transcription services, maintenance
of medical records, and advertising, marketing and promotional activities.
Service fee revenues are recorded during
the period the services are provided based upon the estimated amounts due from the patients and third-party payors. Third-party
payors include federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance
companies and employers. Estimates of contractual allowances are based on historical collection rates of payor reimbursement contract
agreements. We also record a provision for doubtful accounts based primarily on historical collection rates related to patient
copayments and deductible amounts for patients who have health care coverage under one of our third-party payors.
Under capitation arrangements with various
health plans, we earn a per-enrollee amount each month for making available diagnostic imaging services to all plan enrollees under
the capitation arrangement. Revenue under capitation arrangements is recognized in the period in which we are obligated to provide
services to plan enrollees under contracts with various health plans.
Our service fee revenue, net of contractual
allowances and discounts, the provision for bad debts, and revenue under capitation arrangements are summarized in the following
table (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Insurance
|
|
$
|
140,956
|
|
|
$
|
135,299
|
|
|
$
|
424,639
|
|
|
$
|
401,780
|
|
Medicare
|
|
|
47,941
|
|
|
|
48,740
|
|
|
|
143,234
|
|
|
|
140,089
|
|
Medicaid
|
|
|
6,233
|
|
|
|
7,554
|
|
|
|
19,491
|
|
|
|
21,461
|
|
Workers' Compensation/Personal Injury
|
|
|
8,626
|
|
|
|
9,449
|
|
|
|
26,550
|
|
|
|
27,935
|
|
Other
|
|
|
7,557
|
|
|
|
7,388
|
|
|
|
24,205
|
|
|
|
21,766
|
|
Service fee revenue, net of contractual allowances and discounts
|
|
|
211,313
|
|
|
|
208,430
|
|
|
|
638,119
|
|
|
|
613,031
|
|
Provision for bad debts
|
|
|
(11,687
|
)
|
|
|
(11,253
|
)
|
|
|
(35,187
|
)
|
|
|
(33,883
|
)
|
Net service fee revenue
|
|
|
199,626
|
|
|
|
197,177
|
|
|
|
602,932
|
|
|
|
579,148
|
|
Revenue under capitation arrangements
|
|
|
27,981
|
|
|
|
27,466
|
|
|
|
83,702
|
|
|
|
80,448
|
|
Total net revenue
|
|
$
|
227,607
|
|
|
$
|
224,643
|
|
|
$
|
686,634
|
|
|
$
|
659,596
|
|
(1)
Other consists of revenue from teleradiology
services, consulting fees and software revenue.
PROVISION FOR BAD DEBTS - We provide for
an allowance against accounts receivable that could become uncollectible to reduce the carrying value of such receivables to their
estimated net realizable value. We estimate this allowance based on the aging of our accounts receivable by the historical payment
patterns of each type of payor, write-off trends, and other relevant factors. A significant portion of our provision for bad debt
relates to co-payments and deductibles owed to us from patients with insurance. Although we attempt to collect deductibles and
co-payments due from patients with insurance at the time of service, this attempt to collect at the time of service is not an assessment
of the patient’s ability to pay nor are revenues recognized based on an assessment of the patient’s ability to pay.
There are various factors that can impact collection trends, such as changes in the economy, which in turn have an impact on the
increased burden of co-payments and deductibles to be made by patients with insurance. These factors continuously change and can
have an impact on collection trends and our estimation process.
ACCOUNTS RECEIVABLE - Substantially all
of our accounts receivable are due under fee-for-service contracts from third party payors, such as insurance companies and government-sponsored
healthcare programs, or directly from patients. Services are generally provided pursuant to one-year contracts with healthcare
providers. We continuously monitor collections from our payors and maintain an allowance for bad debts based upon specific payor
collection issues that we have identified and our historical experience.
MEANINGFUL USE INCENTIVE - Under the American
Recovery and Reinvestment Act of 2009, a program was enacted that provides financial incentives for providers that successfully
implement and utilize electronic health record technology to improve patient care. Our software development team in Canada 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 account for this meaningful use incentive under the Gain Contingency
Model outlined in ASC 450-30, and record the meaningful use incentive within non-operating income only after Medicare accepts an
attestation from the qualified eligible professional demonstrating meaningful use. We recorded approximately $250,000 and $2.8
million during the nine months ended September 30, 2017 and 2016, respectively, relating to this incentive.
DEFERRED FINANCING COSTS - Costs of financing
are deferred and amortized on a straight-line basis over the life of the associated loan, which approximates the effective interest
rate method. Deferred financing costs, net of accumulated amortization, were $2.0 million for the nine month period ended September
30, 2017 as well as the year ended December 31, 2016 and such costs are solely related to our Revolving Credit Facility (as defined
below). In conjunction with our Fourth Amendment and Fifth Amendment to our First Lien Credit Agreement (as defined below), a net
addition of approximately $376,000 was added to deferred financing costs. See Note 5, Revolving Credit Facility, Notes Payable,
and Capital Leases for more information.
INVENTORIES - Inventories, consisting mainly
of medical supplies, are stated at the lower of cost or net realizable value with cost determined by the first-in, first-out method.
PROPERTY AND EQUIPMENT - Property and equipment
are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization of property and equipment are
provided using the straight-line method over the estimated useful lives, which range from 3 to 15 years. Leasehold improvements
are amortized at the lesser of lease term or their estimated useful lives, which range from 3 to 30 years. Maintenance and repairs
are charged to expense as incurred.
BUSINESS COMBINATION - Accounting for acquisitions
requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair
values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition
date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately
value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement.
As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the
assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period
or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments
are recorded to our consolidated statements of operations.
GOODWILL- Goodwill at September 30, 2017
totaled $253.1 million. Goodwill is recorded as a result of business combinations. Management evaluates goodwill at a minimum,
on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. We
tested goodwill for impairment on October 1, 2016, noting no impairment, and have not identified any indicators of impairment
through September 30, 2017. Activity in goodwill for the nine months ended September 30, 2017 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
|
)
|
Balance as of September 30, 2017
|
|
$
|
253,140
|
|
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.
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. As of June 30, 2017, we have reserved for issuance under the Restated Plan 14,000,000 shares of common
stock. We can issue options, stock awards, stock appreciation rights, stock units and cash awards under the Restated Plan. Certain
options granted under the Restated Plan to employees are intended to qualify as incentive stock options under existing tax regulations.
Stock options and warrants generally vest over three to five years and expire five to ten years from date of grant. The compensation
expense recognized for all equity-based awards is recognized over the awards’ service periods. Equity-based compensation
is classified in operating expenses within the same line item as the majority of the cash compensation paid to employees. See Note
6 Stock-Based Compensation for more information.
COMPREHENSIVE INCOME - ASC 220,
Comprehensive
Income,
establishes rules for reporting and displaying comprehensive income and its components. Our unrealized gains or losses
on foreign currency translation adjustments are included in comprehensive income. For the quarter ended December 31, 2016, we entered
into an interest rate cap agreement. Assuming perfect effectiveness, any unrealized gains or losses related to the cap agreement
that qualify for cash flow hedge accounting are classified as a component of comprehensive income. Any ineffectiveness is recognized
in earnings. The components of comprehensive income for the three and nine months in the period ended September 30, 2017 are included
in the condensed consolidated statements of comprehensive income.
DERIVATIVE INSTRUMENTS - In the fourth quarter
of 2016, we entered into two forward interest rate cap agreements ("2016 Caps"). The 2016 Caps will mature in September
and October 2020. The 2016 Caps had notional amounts of $150,000,000 and $350,000,000, respectively, which were designated at inception
as cash flow hedges of future cash interest payments associated with portions of 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.
ADOPTION of ASU 2017-12 –
Targeted Improvements to Accounting for Hedging Activities - In August 2017, the FASB issued ASU 2017-12,
Targeted
Improvements to Accounting for Hedging Activities
, (Topic 815). ASU 2017-12 is intended to improve the financial
reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its
financial statements. These amendments also make targeted improvements to simplify the application of the hedge accounting
guidance in current GAAP. The amendments are effective beginning on January 1, 2019, although early adoption is permitted.
Upon adoption, entities are required to apply the amendments in this update to hedging relationships existing on the date of
adoption, reflected as of the beginning of the fiscal year. We elected to early adopt the new guidance and the adoption had
no effect on our financial statements, as our 2016 Caps were continuously effective since their inception in the fourth
quarter of 2016.
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.
Below represents as of September 30, 2017
the fair value of our 2016 Caps and loss recognized:
The fair value of derivative instruments
as of September 30, 2017 is as follows (amounts in thousands):
Derivatives
|
|
Balance Sheet Location
|
|
Fair Value – Liabilities
|
|
Interest rate contracts
|
|
Current and other non-current liabilities
|
|
$
|
(1,975
|
)
|
A tabular presentation of the effect of
derivative instruments on our consolidated statement of comprehensive loss is as follows (amounts in thousands):
For the three months ended September 30, 2017
|
Effective Interest Rate Cap
|
|
|
Amount of Gain Recognized on Derivative
|
|
|
Location of Gain
Recognized in Income on Derivative
|
Interest rate contracts
|
|
$
|
2
|
|
|
Other Comprehensive Loss
|
For the nine months ended September 30, 2017
|
Effective Interest Rate Cap
|
|
|
Amount of Loss Recognized on Derivative
|
|
|
Location of Loss Recognized in Income on Derivative
|
Interest rate contracts
|
|
$
|
(1,720
|
)
|
|
Other Comprehensive Loss
|
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 instruments that are subject to fair value measurements, and the classification of these assets
on our consolidated balance sheets, as follows (in thousands):
|
|
As of September 30, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Current and other non-current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Contracts
|
|
$
|
–
|
|
|
$
|
(1,975
|
)
|
|
$
|
–
|
|
|
$
|
(1,975
|
)
|
|
|
As of December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Contracts
|
|
$
|
–
|
|
|
$
|
818
|
|
|
$
|
–
|
|
|
$
|
818
|
|
The estimated fair value of these contracts
was determined using Level 2 inputs. More specifically, the fair value was determined by calculating the value of the difference
between the fixed interest rate of the interest rate swaps and the counterparty’s forward LIBOR curve. The forward LIBOR
curve is readily available in the public markets or can be derived from information available in the public markets.
The table below summarizes the estimated
fair value and carrying amount of our long-term debt as follows (in thousands):
|
|
As of September 30, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Fair Value
|
|
|
Total Face Value
|
|
First Lien Term Loans
|
|
$
|
–
|
|
|
$
|
633,256
|
|
|
$
|
–
|
|
|
$
|
633,256
|
|
|
$
|
628,542
|
|
|
|
As of December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Fair
Value
|
|
|
Total Face Value
|
|
First Lien Term Loans
|
|
$
|
–
|
|
|
$
|
483,129
|
|
|
$
|
–
|
|
|
$
|
483,129
|
|
|
$
|
478,938
|
|
Second Lien Term Loans
|
|
$
|
–
|
|
|
$
|
167,580
|
|
|
$
|
–
|
|
|
$
|
167,580
|
|
|
$
|
168,000
|
|
Our revolving credit facility had no aggregate
principal amount outstanding as of September 30, 2017.
The estimated fair value of our long-term
debt, which is discussed in Note 5, was determined using Level 2 inputs primarily related to comparable market prices.
We consider the carrying amounts of cash
and cash equivalents, receivables, other current assets, current liabilities and other notes payables to approximate their fair
value because of the relatively short period of time between the origination of these instruments and their expected realization
or payment. Additionally, we consider the carrying amount of our capital lease obligations to approximate their fair value because
the weighted average interest rate used to formulate the carrying amounts approximates current market rates.
EARNINGS PER SHARE - Earnings per share
is based upon the weighted average number of shares of common stock and common stock equivalents outstanding, net of common stock
held in treasury, as follows (in thousands except share and per share data):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to RadNet, Inc.'s common
stockholders
|
|
$
|
3,226
|
|
|
$
|
1,644
|
|
|
$
|
7,326
|
|
|
$
|
3,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC NET INCOME PER SHARE ATTRIBUTABLE TO RADNET, INC.'S COMMON
STOCKHOLDERS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding during the period
|
|
|
46,953,705
|
|
|
|
45,868,629
|
|
|
|
46,760,583
|
|
|
|
46,337,993
|
|
Basic net income per share attributable
to RadNet, Inc.'s common stockholders
|
|
$
|
0.07
|
|
|
$
|
0.04
|
|
|
$
|
0.16
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED NET INCOME PER
SHARE ATTRIBUTABLE TO RADNET, INC.'S COMMON STOCKHOLDERS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding during the
period
|
|
|
46,953,705
|
|
|
|
45,868,629
|
|
|
|
46,760,583
|
|
|
|
46,337,993
|
|
Add nonvested restricted stock subject only to service vesting
|
|
|
315,830
|
|
|
|
260,389
|
|
|
|
237,595
|
|
|
|
190,428
|
|
Add additional shares issuable upon exercise
of stock options and warrants
|
|
|
308,216
|
|
|
|
204,952
|
|
|
|
241,183
|
|
|
|
220,415
|
|
Weighted average number of common shares
used in calculating diluted net income per share
|
|
|
47,577,750
|
|
|
|
46,333,970
|
|
|
|
47,239,360
|
|
|
|
46,748,836
|
|
Diluted net income per share attributable
to RadNet, Inc.'s common stockholders
|
|
$
|
0.07
|
|
|
$
|
0.04
|
|
|
$
|
0.16
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
–
|
|
|
|
165,000
|
|
|
|
225,050
|
|
|
|
272,084
|
|
INVESTMENT AT COST - On March 24, 2017,
we acquired a 12.5% equity interest in Medic Vision – Imaging Solutions Ltd for $1.0 million. We also have an option to acquire
an additional 12.5% equity interest for $1.4 million exercisable within one year from the initial share purchase date. Medic Vision,
based in Israel, specializes in software packages that provide compliant radiation dose structured reporting and enhanced images
from reduced dose CT scans. In accordance with ASC 325-20,
Cost Method Investments,
the investment is recorded at its cost
of $1.0 million. No impairment in our investment was noted as of the quarter ended September 30, 2017.
INVESTMENT IN JOINT VENTURES –
We have 14 unconsolidated joint ventures with ownership interests ranging from 35% to 55%. These joint ventures represent
partnerships with hospitals, health systems or radiology practices and were formed for the purpose of owning and operating
diagnostic imaging centers. Professional services at the joint venture diagnostic imaging centers are performed by contracted
radiology practices or a radiology practice that participates in the joint venture. Our investment in these joint
ventures is accounted for under the equity method, since RadNet does not have a controlling financial interest in such
ventures. We evaluate our investment in joint ventures, including cost in excess of book value (equity method goodwill) for
impairment whenever indicators of impairment exist. No indicators of impairment existed as of September 30, 2017.
Joint venture investment and financial information
The following table is a summary of our
investment in joint ventures during the nine months ended September 30, 2017 (in thousands):
Balance as of December 31, 2016
|
|
$
|
43,509
|
|
Equity in earnings in these joint ventures
|
|
|
8,372
|
|
Distribution of earnings
|
|
|
(6,785
|
)
|
Equity contributions in existing joint ventures
|
|
|
4,062
|
|
Balance as of September 30, 2017
|
|
$
|
49,158
|
|
We received management service fees from
the centers underlying these joint ventures of approximately $3.3 million and $2.9 million for the quarters ended September 30,
2017 and 2016, respectively and $9.9 million and $8.7 million for the nine months ended September 30, 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
balance sheet data for these joint ventures as of September 30, 2017 and December 31, 2016 and income statement data for the nine
months ended September 2017 and 2016 (in thousands):
Balance Sheet Data:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Current assets
|
|
$
|
40,898
|
|
|
$
|
40,093
|
|
Noncurrent assets
|
|
|
107,657
|
|
|
|
100,146
|
|
Current liabilities
|
|
|
(17,383
|
)
|
|
|
(14,077
|
)
|
Noncurrent liabilities
|
|
|
(43,115
|
)
|
|
|
(44,405
|
)
|
Total net assets
|
|
$
|
88,057
|
|
|
$
|
81,757
|
|
|
|
|
|
|
|
|
|
|
Book value of RadNet joint venture interests
|
|
$
|
41,879
|
|
|
$
|
38,538
|
|
Cost in excess of book value of acquired joint venture interests
|
|
|
7,279
|
|
|
|
4,970
|
|
Total value of Radnet joint venture interests
|
|
$
|
49,158
|
|
|
$
|
43,509
|
|
|
|
|
|
|
|
|
|
|
Total book value of other joint venture partner interests
|
|
$
|
46,178
|
|
|
$
|
43,219
|
|
|
|
|
|
|
|
|
|
|
Income statement data for the nine months ended September 30,
|
|
2017
|
|
|
2016
|
|
Net revenue
|
|
$
|
133,108
|
|
|
$
|
119,920
|
|
Net income
|
|
$
|
16,034
|
|
|
$
|
18,001
|
|
NOTE 3 – RECENT ACCOUNTING STANDARDS
In January 2017, the FASB issued ASU No.
2017-04,
Simplifying the Test for Goodwill Impairment
. ASU 2017-04 eliminates the requirement
to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwill impairment
charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over
its fair value (i.e., measure the charge based on the current Step 1). ASU 2017-04 is effective for annual and any interim impairment
tests for periods beginning after December 15, 2019, with early adoption permitted. We are evaluating the effect of this guidance.
In January 2017, the FASB issued ASU No.
2017-01,
Clarifying the Definition of a Business
. ASU 2017-01 changes the definition of a business
to assist entities with evaluating when a set of transferred assets and activities is considered a business. ASU 2017-01 is effective
for annual periods beginning after December 31, 2017 including interim periods within those periods. We are evaluating the effect
of this guidance.
In February 2016, the FASB issued ASU No.
2016-02,
Leases,
(Topic 842): Amendments to the FASB Accounting Standards Codification. ASU
2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on
their balance sheets and making targeted changes to lessor accounting. The new standard requires a modified retrospective transition
approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition
relief. The amendments in this update are effective for fiscal years (and interim reporting periods within fiscal years) beginning
after December 15, 2018. Early adoption of the amendments is permitted for all entities. We are currently evaluating the impact
this guidance will have on our consolidated financial statements, but expect this adoption will result in a significant increase
in the assets and liabilities related to our leased properties and equipment.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
, (Topic 606). ASU 2014-09 requires an entity to recognize
revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the
goods or services. It also requires more detailed disclosures to enable users of the financial statements to understand the nature,
amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance will become effective
for the Company on January 1, 2018. We are continuing to evaluate the effects the adoption of this standard will have on our financial
statements and financial disclosures. We believe the most significant impact will be to the presentation of our statement of operations
where the provision for bad debts will be recorded as a direct reduction to revenues and will not be presented as a separate line
item. We expect to adopt the new standard using the modified retrospective approach.
NOTE 4 – FACILITY ACQUISITIONS AND DISPOSITIONS
Acquisitions
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 preliminary fair value determination of the acquired assets and approximately $4.5 million of fixed assets and equipment,
$800,000 in current assets, a $50,000 covenant not to compete, and $9.2 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 joint
venture formations section within this footnote for further information.
Dispositions
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 in accordance with accounting regulations.
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 in accordance with accounting
guidance. RadNet exercises controlling financial interest and holds a 75% economic interest in WVI.
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.
Joint venture formations:
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 via the equity method.
On January 6, 2017, Image Medical Inc.,
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. As of September 30, 2017, the carrying
amount of the investment is $2.7 million. We determined that ScriptSender, LLC is a VIE 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.
NOTE 5 – REVOLVING CREDIT FACILITY, NOTES PAYABLE AND
CAPITAL LEASES
Revolving credit facility, notes payable, and capital lease
obligations
:
As of the nine months ended September 30,
2017 our debt obligations consist of the following (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
First Lien Term Loans
|
|
|
628,542
|
|
|
|
478,938
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loans
|
|
|
–
|
|
|
|
168,000
|
|
|
|
|
|
|
|
|
|
|
Discounts on term loans
|
|
|
(19,309
|
)
|
|
|
(16,783
|
)
|
|
|
|
|
|
|
|
|
|
Promissory note payable to the former owner of a practice acquired at an interest rate of 1.5% due through 2019
|
|
|
690
|
|
|
|
980
|
|
|
|
|
|
|
|
|
|
|
Equipment notes payable at interest rates ranging from 3.3% to 5.6%, due through 2020, collateralized by medical equipment
|
|
|
233
|
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
Obligations under capital leases at interest rates ranging from 4.3% to 11.2%, due through 2022, collateralized by medical and office equipment
|
|
|
7,790
|
|
|
|
7,256
|
|
Total debt obligations
|
|
|
617,946
|
|
|
|
638,732
|
|
Less: current portion
|
|
|
(34,852
|
)
|
|
|
(26,557
|
)
|
Long term portion debt obligations
|
|
$
|
583,094
|
|
|
$
|
612,175
|
|
Term Loans, Revolving Credit Facility and Financing Activity
Information
:
At September 30, 2017, our credit facilities
were comprised of one tranche of term loans (“First Lien Term Loans”) and a revolving credit facility of $117.5 million
(the “Revolving Credit Facility”). As of September 30, 2017, we were in compliance with all covenants under our credit
facilities.
Included in our consolidated balance sheets
at September 30, 2017 are $609.2 million of senior secured term loan debt (net of unamortized discounts of $19.3 million) in thousands:
|
|
Face Value
|
|
|
Discount
|
|
|
Total Carrying Value
|
|
Total First Lien Term Loans
|
|
$
|
628,542
|
|
|
$
|
(19,309
|
)
|
|
$
|
609,233
|
|
Our revolving credit facility had no aggregate
principal amount outstanding as of September 30, 2017.
The following describes our 2017 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 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), 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 September 30, 2017 the effective
Adjusted Eurodollar Rate and the Base Rate for the First Lien Term Loans was 1.31% and 4.25%, respectively.
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 (the “Fourth Amendment”) to our First Lien Credit Agreement. Pursuant to the Fourth Amendment,
the interest rate charged for the applicable margin on the First Lien Term Loans and the Revolving Credit Facility was reduced
by 50 basis points, from 3.75% to 3.25%. The minimum LIBOR rate underlying the First Lien Term loans remains at 1.0%. 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 prior credit and guaranty 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 payments 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.
Incremental Feature:
Under
the First Lien Credit Agreement, we can elect to request 1) an increase to the existing Revolving Credit Facility and/or 2) additional
First Lien Term Loans, provided that the aggregate amount of such increases or additions does not exceed (A) an amount not in excess
of $100.0 million
minus
any incremental loans requested under the similar provisions of the Second Lien Credit Agreement
or (B) if the First Lien Leverage Ratio would not exceed 3.50:1.00 after giving effect to such incremental facilities, an uncapped
amount, in each case subject to the conditions and limitations set forth in the First Lien Credit Agreement. Each lender approached
to provide all or a portion of any incremental facility may elect or decline, in its sole discretion, to provide any incremental
commitment or loan.
Revolving Credit Facility:
The First Lien Credit Agreement provides for a $117.5 million Revolving Credit Facility. The termination date of the Revolving
Credit Facility is the earliest to occur of: (i) July 1, 2021, (ii) the date the Revolving Credit Facility is permanently reduced
to zero pursuant to section 2.13(b) of the First Lien Credit Agreement, which addresses voluntary commitment reductions, (iii)
the date of the termination of the Revolving Credit Facility due to specific events of default pursuant to section 8.01 of the
First Lien Credit Agreement, and (iv) September 25, 2020 if our indebtedness under the Second Lien Credit Agreement had not been
repaid, refinanced or extended prior to such date. Amounts borrowed under the Revolving Credit Facility bear interest based on
types of borrowings as follows: (i) unpaid principal on loans under the Revolving Credit Facility at the Adjusted Eurodollar Rate
(as defined in the First Lien Credit Agreement) plus 3.75% per annum or the Base Rate (as defined in the First Lien Credit Agreement)
plus 2.75% per annum, (ii) letter of credit fees at 3.75% per annum and fronting fees for letters of credit at 0.25% per annum,
in each case on the average aggregate daily maximum amount available to be drawn under all letters of credit issued under the First
Lien Credit Agreement, and (iii) commitment fee of 0.5% per annum on the unused revolver balance.
Second Lien Credit Agreement
:
On March 25, 2014, we entered
into the Second Lien Credit Agreement pursuant to which we issued $180 million of Second Lien Term Loans. The proceeds from the
Second Lien Term Loans were used to redeem our 10 3/8% senior unsecured notes, due 2018, to pay the expenses related to the transaction
and for general corporate purposes. On July 1, 2016, in conjunction with the 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 and refinanced
with the proceeds of First Lien Term Loans issued under the Fifth Amendment, as described above.
NOTE 6 – STOCK-BASED COMPENSATION
Stock Incentive Plans
Options
We have one long-term equity incentive plan
which we refer to as the 2006 Equity Incentive Plan, which we first amended and restated as of April 20, 2015 and again on March
9, 2017 (“the Restated Plan”). The Restated Plan was approved by our stockholders at our annual stockholders meeting
on June 8, 2017. We have reserved for issuance under the 2017 Restated Plan 14,000,000 shares of common stock. We can issue options,
stock awards, stock appreciation rights, stock units and cash awards under the 2017 Restated Plan. Certain options granted under
the Restated Plan to employees are intended to qualify as incentive stock options under existing tax regulations. Stock options
generally vest over three to five years and expire five to ten years from the date of grant.
As of September 30, 2017, we had outstanding
options to acquire 515,149 shares of our common stock, of which options to acquire 160,000 shares were exercisable. The following
summarizes all of our option transactions for the nine months ended September 30, 2017:
Outstanding Options
Under the 2006 Plan
|
|
Shares
|
|
|
Weighted Average
Exercise price
Per Common Share
|
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
|
375,626
|
|
|
$
|
6.82
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
184,523
|
|
|
|
6.30
|
|
|
|
|
|
|
|
|
|
Canceled, forfeited or expired
|
|
|
(45,000
|
)
|
|
|
9.50
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2017
|
|
|
515,149
|
|
|
|
6.40
|
|
|
|
6.04
|
|
|
$
|
2,651,576
|
|
Exercisable at September 30, 2017
|
|
|
160,000
|
|
|
|
6.95
|
|
|
|
0.28
|
|
|
|
736,800
|
|
Aggregate intrinsic value in the table above
represents the total pretax intrinsic value (the difference between our closing stock price on September 30, 2017 and the exercise
price, multiplied by the number of in-the-money options as applicable) that would have been received by the holder had all holders
exercised their options on September 30, 2017. No options were exercised during the nine months ended September 30, 2017. As of
September 30, 2017, total unrecognized stock-based compensation expense related to non-vested employee awards was $843,208 which
is expected to be recognized over a weighted average period of approximately 2.9 years.
Restricted Stock Awards (“RSA’s”)
The Restated Plan permits the award of restricted
stock awards (“RSA’s”). As of September 30, 2017, we have issued a total of 4,945,460 RSA’s of which 449,851
were unvested at September 30, 2017. The following summarizes all unvested RSA’s activities during the nine months ended
September 30, 2017:
|
|
RSA's
|
|
|
Weighted-Average
Remaining
Contractual
Term (Years)
|
|
|
Weighted-Average
Fair Value
|
|
RSA's unvested at December 31, 2016
|
|
|
573,145
|
|
|
|
|
|
|
$
|
6.18
|
|
Changes during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
681,448
|
|
|
|
|
|
|
|
5.98
|
|
Vested
|
|
|
(804,742
|
)
|
|
|
|
|
|
|
6.02
|
|
RSA's unvested at September 30, 2017
|
|
|
449,851
|
|
|
|
0.57
|
|
|
$
|
6.12
|
|
We determine the fair value of all RSA’s
based of the closing price of our common stock on award date.
Other stock bonus awards
The Restated Plan also permits the award
of stock bonuses not subject to any future service period. These awards are valued and expensed based on the closing price of our
common stock on the date of award. During the nine months ended September 30, 2017 we issued 35,800 shares relating to these awards,
amounting to $361,370 of compensation expense.
Plan summary
In sum, of the 14,000,000 shares of common
stock reserved for issuance under the Restated Plan, at September 30, 2017, we had issued 13,070,159 total shares between options,
RSA’s and other stock awards. With options cancelled and RSA’s forfeited amounting to 3,020,009 and 59,053 shares,
respectively, there remain 4,008,903 shares available under the Restated Plan for future issuance.
NOTE 7 – SUBSEQUENT EVENTS
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 $670,000 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.
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.