RADNET, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition
and results of operations in conjunction with our unaudited condensed
consolidated financial statements and notes thereto included in Part I, Item 1
of this Quarterly Report on Form 10-Q and with our audited consolidated
financial statements and notes thereto for the year ended December 31, 2020
included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2020 filed with the U.S. Securities and Exchange Commission (SEC) on March
15, 2021.
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Forward-Looking Statements
This quarterly report on Form 10-Q contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-looking statements reflect current views about future events
and are based on our currently available financial, economic and competitive
data and on current business plans. Actual events or results may differ
materially depending on risks and uncertainties that may affect our operations,
markets, services, prices and other factors.
In some cases, you can identify forward-looking statements by terminology such
as "may," "will," "should," "expect," "intend," "plan," "anticipate," "believe,"
"estimate," "predict," "potential," "continue," "assumption" or the negative of
these terms or other comparable terminology. Forward-looking statements in this
current report include, among others, statements we make regarding
• our ability to successfully integrate new operations, to our business and the
anticipated benefits to be derived from our investments, acquisitions, and joint
ventures;
•anticipated trends in our revenues, operating expenses and liquidity and cash
flows, including our financial guidance and anticipated effects of cost-savings
efforts;

•the ongoing impact of the COVID-19 pandemic on our business, suppliers, payors,
customers, referral sources, partners, patients and employees, including (i)
government's unprecedented action regarding existing and potential restrictions
and/or obligations related to citizen and business activity to contain the
virus; (ii) the consequences of an economic downturn resulting from the impacts
of COVID-19 and the possibility of a global economic recession; (iii) the impact
of the volume of canceled or rescheduled procedures, whether as a result of
government action or patient choice; (iv) measures we are taking to respond to
the COVID-19 pandemic, including changes to business practices; (v) the impact
of government and administrative regulation, guidance and appropriations; (vi)
changes in our revenues due to declining patient procedure volumes, changes in
payor mix; (vii) potential increased expenses or workforce disruptions related
to our employees that could lead to unavailability of key personnel; (viii)
workforce disruptions related to our key partners, suppliers, vendors and others
we do business with; (ix) the impact of return to work orders in certain states
in which we operate; and (x) increased credit and collectability risks; and
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•our future liquidity and our continuing ability to service and remain in
compliance with applicable debt covenants or refinance our current indebtedness.
Forward-looking statements are not guarantees of future performance and our
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such differences include,
but are not limited to, the factors included in "Risk Factors," in our annual
report on Form 10-K for the fiscal year ended December 31, 2020 or supplemented
by the information in Part II- Item 1A below. You should consider the inherent
limitations on, and risks associated with, forward-looking statements and not
unduly rely on the accuracy of predictions contained in such forward-looking
statements.
These forward-looking statements speak only as of the date when they are made.
We assume no obligation to revise or update any forward-looking statements for
any reason, except as required by law.

Overview

We are a leading national provider of freestanding, fixed-site outpatient
diagnostic imaging services in the United States based on number of locations
and annual imaging revenue. At September 30, 2021, we operated, directly or
indirectly through joint ventures with hospitals, 350 centers located in
Arizona, California, Delaware, Florida, Maryland, New Jersey, and New York. Our
centers provide physicians with imaging capabilities to facilitate the diagnosis
and treatment of diseases and disorders and may reduce unnecessary invasive
procedures, often reducing the cost and amount of care for patients. Our
services include magnetic resonance imaging (MRI), computed tomography (CT),
positron emission tomography (PET), nuclear medicine, mammography, ultrasound,
diagnostic radiology (X-ray), fluoroscopy and other related procedures.

In addition to our imaging services, we own and operate a number of technology
businesses that are complementary to our imaging business. Our subsidiary eRAD,
Inc., develops and sells computerized systems for the diagnostic imaging
industry, which provide the technology to distribute, display, store and
retrieve digital images. We have made a number of investments in Artificial
Intelligence (AI) with our purchases of Nulogix and DeepHealth, combined with
our investment in Whiterabbit.ai and our collaborative arrangement with Hologic.
Our current AI focus is to develop solutions in machine learning to assist
radiologists and other clinicians in interpreting images and improving patient
care, initially in the field of mammography.

We derive substantially all of our revenue, directly or indirectly, from fees
charged for the diagnostic imaging services performed at our facilities. The
following table shows our facilities in operation and revenues for the nine
months ended September 30, 2021 and September 30, 2020:
                                    Nine Months Ended September 30,
                                            2021                       2020
Facilities in operation                                        350      334
Net revenues (millions)   $             982                           $ 764


Our revenue is derived from a diverse mix of payors, including private, managed
care capitated and government payors. We believe our payor diversity mitigates
our exposure to possible unfavorable reimbursement trends within any one payor
class. In addition, our experience with capitation arrangements over the last
several years has provided us with the expertise to manage utilization and
pricing effectively, resulting in a predictable stream of revenue.
Our total service revenue during the nine months ended September 30, 2021 and
2020 are presented in the table below based on an allocation of the estimated
transaction price with the patient between the primary patient classification of
insurance coverage (in thousands):
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                                                              Three Months Ended September 30,       Nine Months Ended September 30,
                                                                  2021                2020               2021                2020
Commercial insurance                                          $  185,723          $ 160,524          $  555,355          $ 412,415
Medicare                                                          73,163             62,704             207,977            154,847
Medicaid                                                           8,707              7,098              26,198             18,072
Workers' compensation/personal injury                             11,554              7,183              32,507             25,705
Other patient revenue                                              4,800              8,328              14,766             17,211
Management fee revenue                                             5,255              2,675              16,007              8,574
Teleradiology and Software revenue                                 2,564              2,349               7,611              8,319
Other                                                              3,641              5,869              10,058             15,617
Service fee revenue                                              295,407            256,730             870,479            660,760
Revenue under capitation arrangements                             37,283             35,046             111,449            103,145
Total service revenue                                         $  332,690          $ 291,776          $  981,928          $ 763,905


Recent Developments

The discussion of our results below centers on our performance through the third
quarter ended September 30, 2021. During the same period in 2020, with the onset
of the novel strain of the coronavirus ("COVID-19"), we began experiencing
reduced procedure volumes at the end of the first quarter which intensified
through mid year. In response to the pandemic, we adjusted our business
operations, inclusive of concentrating patient traffic to larger imaging
centers, negotiating payment terms with vendors and landlords, initiating
employee furloughs, compensation reductions, and telecommuting.

As 2021 comes to a close, our procedure volume has returned to pre-COVID-19
levels and our business has resumed normal operations. We expect that the cost
saving measures implemented in 2020 will continue to be beneficial to our
financial position in 2021. In addition, we have continued to invest and
position for future growth. Year to date, we have acquired 19 new radiology
centers in California, New Jersey and New York.

Equity Investments, Acquisitions and Dispositions, and Joint Venture Activity
We have developed our medical imaging business through a combination of organic
growth, equity investments, acquisitions and joint venture formations. The
information below updates our activity of such matters contained in our annual
report on Form 10-K for the year ended December 31, 2020.
Equity Investments
As of September 30, 2021, we have three equity investments for which a fair
value is not readily determinable and therefore the total amounts invested are
recognized at cost as follows:
Medic Vision Imaging Solutions Ltd., based in Israel, specializes in software
packages that provide compliant radiation dose structured reporting and enhanced
images from reduced dose CT scans. Our investment of $1.2 million represents a
14.21% equity interest in the company. No observable price changes or impairment
in our investment was identified as of September 30, 2021.
Turner Imaging Systems, based in Utah, develops and markets portable X-ray
imaging systems that provide a user the ability to acquire X-ray images wherever
and whenever they are needed. On February 1, 2018, we purchased 2.1 million
preferred shares in Turner Imaging Systems for $2.0 million. On January 1, 2019
we funded a convertible promissory note in the amount of $0.1 million that
converted into an additional 80,000 shares effective December 21, 2019. No
observable price changes or impairment in our investment was identified as of
September 30, 2021.

WhiteRabbit.ai Inc., based in California, is currently developing an artificial
intelligence suite which aims to improve the speed and accuracy of cancer
detection in radiology and improve patient care. On November 5, 2019 we acquired
an equity interest in the company for $1.0 million and also loaned the company
$2.5 million in support of it operations. No observable price changes,
impairment in our investment or impairment of the loan receivable was identified
as of September 30, 2021.
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Facility acquisitions

During 2021, we completed the acquisition of certain assets of the following
entities, which either engage directly in the practice of radiology or
associated businesses. The primary reason for these acquisitions was to
strengthen our presence in the New York City, New Jersey and California markets.
We made a fair value determination of the acquired assets and assumed
liabilities and the following were recorded (in thousands):
          Entity                 Date Acquired    Total Consideration       

Property & Equipment Right of Use Assets Goodwill Intangible Assets Other Assets Right of Use Liabilities

   Personal Health Imaging
                     PLLC*            2/1/2021                      2,995                       576                       608          2,355                    50              14                       (608)
            ZP Elmont LLC*            2/1/2021                      2,194                     1,112                         -          1,005                    50              27                           -
          ZP Freeport LLC*            2/1/2021                      6,065                     4,668                         -          1,328                    40              29                           -
  Broadway Medical Imaging
                      LLC*            2/1/2021                      1,155                     1,076                       446              6                    50              23                       (446)
       3235 Hempstead LLC*            2/1/2021                      9,386                     5,667                         -          3,649                    70               -                           -
          SLZM Realty LLC*            2/1/2021                     13,671                     4,617                         -          8,974                    80               -                           -
 2012 Sunrise Merrick LLC*            2/1/2021                     11,428                     2,741                       335          8,617                    70               -                       (335)
           ZP Bayside LLC*            3/1/2021                      3,545                     3,385                     2,191             40                    50              70                     (2,191)
         ZP Laurelton LLC*            3/1/2021                      2,658                     2,530                     1,418             32                    50              46                     (1,418)
             ZP Smith LLC*            3/1/2021                      3,978                     3,581                     2,214            347                    50               -                     (2,214)
       ZP 907 Northern LLC            4/1/2021                        562                       507                     1,817              5                    50               -                     (1,817)
 William M. Kelly MD, Inc.            5/1/2021                      3,750                       990                     1,379          2,710                    50               -                     (1,379)
      60th Street MRI, LLC            5/1/2021                        400                        85                         -            290                    25               -                           -
        ZP Parkchester LLC            5/1/2021                        263                       213                       311              -                    50               -                       (311)
            ZP Eastern LLC            6/1/2021                      2,868                     2,801                     1,951             17                    50               -                     (1,951)
  Tangent Associates LLC**           8/24/2021                      2,025                        10                         -            379                 1,636               -                           -
                     Total                                         66,943                    34,559                    12,670         29,754                 2,421             209                    (12,670)


*Fair Value Determination is Final
** All stock purchase through issuing 67,658 shares of our common stock
Formation of majority owned subsidiary
On January 1, 2021 we entered into the Simi Valley Imaging Group, LLC, a
partnership with Simi Valley Hospital and Health Services ("Simi Adventist").
The operation will offer multi-modality imaging services out of two locations in
Ventura County, California. Total investment in the venture is $0.4 million.
RadNet contributed $0.3 million in assets for a 60% economic interest and Simi
Adventist contributed assets totaling $0.1 million for a 40% economic interest.
Sale of ownership interest in a majority owned subsidiary
Effective September 1, 2021 we completed the sale of a 24.9% ownership interest
in our majority owned subsidiary West Valley Imaging Group, LLC for $13.1
million to Tarzana Medical Center, LLC. After the sale, our ownership interest
in the subsidiary has reduced from 75.0% to 50.1% and we retain a controlling
financial interest in the subsidiary. We recognized in additional paid in
capital on our condensed consolidated balance sheets, $4.2 million excess in
consideration over the carrying value of the sold economic interest. Post the
sale of our ownership interest we acquired from Tarzana Medical Center, LLC,
certain intangible business assets for purchase consideration of approximately
$5.2 million.
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Joint Venture Activity
The following table is a summary of our investment in joint ventures during the
nine months ended September 30, 2021 (in thousands):
Balance as of December 31, 2020                    $ 34,528
Equity in earnings in these joint ventures            8,259

Equity contributions in existing joint ventures 1,441
Balance as of September 30, 2021

                   $ 44,228


We charged management service fees from the centers underlying these joint
ventures of approximately $5.3 million and $2.7 million for the three months
ended September 30, 2021 and 2020 and $16.0 million and $8.6 million for the
nine months ended September 30, 2021 and 2020, respectively.
On June 23, 2021, we made an additional equity contribution to our joint venture
in Arizona of $1.4 million. Our equity ownership interest percentage in the
venture did not change.
The following table is a summary of key balance sheet data for these joint
ventures as of September 30, 2021 and December 31, 2020 and income statement
data for the nine months ended September 30, 2021 and 2020 (in thousands):
                                                                  September 30,           December 31,
Balance Sheet Data:                                                   2021                    2020
Current assets                                                  $       46,186          $      27,085
Noncurrent assets                                                       67,514                 68,686
Current liabilities                                                    (12,182)               (12,545)
Noncurrent liabilities                                                 (20,914)               (21,582)
Total net assets                                                $       

80,604 $ 61,644

Book value of RadNet joint venture interests                    $       

36,940 $ 28,079
Cost in excess of book value of acquired joint venture
interests

                                                                7,288                  6,449
Total value of RadNet joint venture interests                   $       

44,228 $ 34,528

Income statement data for the nine months ended September 30, 2021

       2020
Net revenue                                                       $ 98,193      $ 78,988
Net income                                                        $ 16,007      $ 13,651


Critical Accounting Policies
The Securities and Exchange Commission defines critical accounting estimates as
those that are both most important to the portrayal of a company's financial
condition and results of operations and require management's most difficult,
subjective or complex judgment, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in
subsequent periods. In Note 2 to our consolidated financial statements in this
quarterly report and in our annual report on Form 10-K for the year ended
December 31, 2020, we discuss our significant accounting policies, including
those that do not require management to make difficult, subjective or complex
judgments or estimates. The most significant areas involving management's
judgments and estimates are described below.
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
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are difficult to predict and are beyond management's control. As a result,
actual amounts could materially differ from these estimates.
Revenues
Our revenues generally relate to net patient fees received from various payors
and patients themselves under contracts in which our performance obligations are
to provide diagnostic services to the patients. Revenues are recorded during the
period our obligations to provide diagnostic services are satisfied. Our
performance obligations for diagnostic services are generally satisfied over a
period of less than one day. The contractual relationships with patients, in
most cases, also involve a third-party payor (Medicare, Medicaid, managed care
health plans and commercial insurance companies, including plans offered through
the health insurance exchanges) and the transaction prices for the services
provided are dependent upon the terms provided by (Medicare and Medicaid) or
negotiated with (managed care health plans and commercial insurance companies)
the third-party payors. The payment arrangements with third-party payors for the
services we provide to the related patients typically specify payments at
amounts less than our standard charges and generally provide for payments based
upon predetermined rates per diagnostic services or discounted fee-for-service
rates. Management continually reviews the contractual estimation process to
consider and incorporate updates to laws and regulations, changes in business
and economic conditions, and the frequent changes in managed care contractual
terms resulting from contract re-negotiations and renewals.

As it relates to the Group, this service fee revenue includes payments for both
the professional medical interpretation revenue recognized by them as well as
the payment for all other aspects related to our providing the imaging services,
for which we earn management fees. As it relates to others centers, this service
fee revenue is earned through providing the use of our diagnostic imaging
equipment and the provision of technical services as well as providing
administration services such as clerical and administrative personnel,
bookkeeping and accounting services, billing and collection, provision of
medical and office supplies, secretarial, reception and transcription services,
maintenance of medical records, and advertising, marketing and promotional
activities.
Our revenues are based upon our management's estimate of amounts we expect to be
entitled to receive from patients and third-party payors. Estimates of
contractual allowances under Medicare, Medicaid, managed care and commercial
insurance plans are based upon historical collection experience of the payments
received from such payors in accordance with the underlying contractual
agreements. Revenues related to uninsured patients and uninsured copayment and
deductible amounts for patients who have health care coverage may have price
concessions applied. We also record estimated implicit price concessions (based
primarily on historical collection experience) related to uninsured accounts to
record self-pay revenues at the estimated amounts we expect to collect.

Under capitation arrangements with various health plans, we earn a per-enrollee
amount each month for making available diagnostic imaging services to all plan
enrollees under the capitation arrangement. Revenue under capitation
arrangements is recognized in the period in which we are obligated to provide
services to plan enrollees under contracts with various health plans. Our
estimates and assumptions related to revenue recognition did not change
materially for the quarter ended September 30, 2021.

Provider Relief Fund (COVID-19 Stimulus Funding)
The Provider Relief Fund offers government assistance to eligible providers
throughout the healthcare system in support of certain expenses or lost revenue
attributable to the coronavirus pandemic. We have recorded provider relief
funding in our condensed Consolidated Statements of Operations in the amount of
$6.3 million for the nine months ended September 30, 2021. Generally, the
department of Health and Human Services ("HHS") does not intend to recoup funds
as long as a provider's lost revenue and increased expenses exceed the amount of
provider relief funding one has received. HHS reserves the right to audit Relief
Fund recipients in the future to ensure that this requirement is met and collect
any Relief Fund amounts that were made in error or exceed lost revenue or
increased expenses due to the pandemic. Failure to comply with the terms and
conditions may be grounds for recoupment. In recognizing revenue associated with
provider relief funding our management is required to assess whether our
operations have meet the applicable requirements for the funding received.
During the quarter ended September 30, 2021, we continued to evaluate our
operating results in light of the most recent government guidance and based on
our assessment, the amount of revenue recognized is appropriate.
Accounts Receivable
Substantially all of our accounts receivable are due under fee-for-service
contracts from third party payors, such as insurance companies and
government-sponsored healthcare programs, or directly from patients. Services
are generally provided pursuant to one-year contracts with healthcare providers.
Receivables generally are collected within industry norms for third-
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party payors. We continuously monitor collections from our payors and maintain
an allowance for bad debts based upon specific payor collection issues that we
have identified and our historical experience. Our estimates and assumptions for
allowances on our account receivable did not change materially during the
quarter ended September 30, 2021.
Business Combination
We evaluate all acquisitions under the framework Clarifying the Definition of a
Business in the accounting guidance. Once a purchase has been determined to be
the acquisition of a business, we are required to recognize the assets acquired
and the liabilities assumed at their acquisition date fair values. Any portion
of the purchase consideration transferred in excess of the net of the
acquisition date fair values of the assets acquired and the liabilities assumed,
is allocated to goodwill. The allocation requires our management to make
estimates of the value of various assets acquired and liabilities assumed. While
we use our best estimates and assumptions to accurately value assets acquired
and liabilities assumed at the acquisition date, our estimates are inherently
uncertain and subject to refinement. As a result, during the measurement period,
which may be up to one year from the acquisition date, we record adjustments to
the assets acquired and liabilities assumed with the corresponding offset to
goodwill. Upon the conclusion of the measurement period or final determination
of the values of assets acquired or liabilities assumed, whichever comes first,
any subsequent adjustments are recorded to our consolidated statements of
operations.
Goodwill and Indefinite Lived Intangibles
Goodwill at September 30, 2021 totaled $502.7 million. Indefinite Lived
Intangible Assets at September 30, 2021 were $7.1 million and are associated
with the value of certain trade name intangibles. Our management reviews the
fair value of our reporting units on an annual basis to determine if an event
has occurred which suggest that the fair value of a reporting unit may be
impaired. When we determine the carrying value of a reporting unit exceeds its
fair value, an impairment charge would be recognized and should not exceed the
total amount of goodwill allocated to that reporting unit. The review of fair
value requires our management to make assessments of the business and financial
prospects for a particular reporting unit. We tested goodwill for impairment on
October 1, 2020. We also continue at regular intervals to consider the current
and expected future economic and market conditions surrounding the COVID-19
pandemic and to date have not had an indication of goodwill impairment being
more likely than not through September 30, 2021.
Recent Accounting Standards
See Note 3, Recent Accounting and Reporting Standards to the financial
statements included in this report for further information.
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Results of Operations
The following table sets forth, for the three and nine months ended
September 30, 2021 and 2020, the percentage that certain items in the statements
of operations bears to total service revenue, inclusive of revenue under
capitation contracts.