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, 2021
included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2021 filed with the U.S. Securities and Exchange Commission (SEC) on March
1, 2022.

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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
quarterly report include, among others, statements we make regarding:

•anticipated trends in our revenues, operating expenses or capital expenditures,
and our financial guidance;

•expected future market acceptance for our products or services, and the
anticipated protection afforded by our competitive strengths in the markets we
serve;

•potential timing and impact of changes in regulations impacting our business;

•the ongoing impact on our business, suppliers, payors, customers, referral
sources, partners, patients and employees of the COVID-19 pandemic;

•the anticipated effect of the measures we are taking to respond to the COVID-19
pandemic

•our ability to successfully acquire and integrate new imaging operations;

•cost savings, efficiencies and improvements anticipated from our investments in
artificial intelligence and machine learning products and services; and

•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 neither historical facts nor assurances of future
performance. Because forward-looking statements relate to the future, they are
inherently subject to known and unknown risks, uncertainties and other factors
that are difficult to predict and our of our control. Our actual results, level
of activity, performance or achievements may be materially different from any
future results, levels of activity, performance or achievements expressed or
implied by these forwards-looking statements. Important factors that could cause
our actual results to differ materially from those indicated or implied in our
forward-looking statements include the factors included in "Risk Factors," in
our annual report on Form 10-K for the fiscal year ended December 31, 2021 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.

Any forward-looking statement in this quarterly report is based on information
currently available to us and speaks only as of the date of this report. We do
not undertake any responsibility to release publicly any revisions to these
forward-looking statements to take into account events or circumstances that
occur after the date of this quarterly report or any unanticipated events which
may cause actual results to differ from those expressed or implied by the
forward-looking statements contained in this quarterly report, 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, 2022, we operated, directly or
indirectly through joint ventures with hospitals, 349 centers located in
Arizona, California, Delaware, Florida, Maryland, New Jersey, and New York. Our
operations comprise two segments for financial reporting purposes for this
reporting period, Imaging Centers and Artificial Intelligence

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Our Imaging Center segment provides physicians with imaging capabilities to
facilitate the diagnosis and treatment of diseases and disorders. 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, a strategy that
diversifies revenue streams, reduces exposure to reimbursement changes and
provides patients and referring physicians one location to serve the needs of
multiple procedures. Included in the segment is our eRad subsidiary, which
designs the underlying critical scheduling, data storage and retrieval systems
necessary for imaging center operation.

Our Artificial Intelligence ("AI") segment that has been established through our
acquisitions of DeepHealth, Nulogix Aidence Holding B.V. and Quantib B.V.. Our
current AI focus is to develop solutions that employ machine learning to assist
radiologists and other clinicians in interpreting images and improving patient
care, initially in the fields of brain, breast, prostate, and pulmonary
diagnostics.

We derive substantially all of our revenue, directly or indirectly, from fees
charged for the diagnostic imaging services performed at our imaging centers.
The following table shows our centers in operation and revenues for the nine
months ended September 30, 2022 and September 30, 2021:

                                    Nine Months Ended September 30,
                                            2022                       2021
Centers in operation                                           349      353
Net revenues (millions)   $             1,046                         $ 982


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 fee revenues during the three and nine months ended
September 30, 2022 and 2021 are presented in the table below. Our imaging center
revenue is displayed as the estimated service fee, broken down by classification
of insurance coverage type. Additional revenues are earned from our management
services provided to joint ventures and our software and AI subsidiaries.

                                              Three Months Ended             Nine Months Ended
                                                September 30,                  September 30,
In Thousands                                 2022           2021            2022            2021
Commercial insurance                      $ 189,634      $ 185,723      $   573,259      $ 555,355
Medicare                                     78,034         73,163          226,827        207,977
Medicaid                                      9,669          8,707           28,456         26,198
Workers' compensation/personal injury        13,200         11,554           38,785         32,507
Other patient revenue                         7,646          4,800           22,334         14,766
Management fee revenue                        6,099          5,255           17,199         16,007
Software revenue                              3,430          2,068            9,849          7,115
Other                                         3,431          3,641           12,054         10,058
Revenue under capitation arrangements        38,001         37,283          114,366        111,449
Imaging Center Segment Revenue              349,144        332,194        1,043,129        981,432
AI Segment Revenue                              900            496            3,056            496
Total service revenue                     $ 350,044      $ 332,690      $ 1,046,185      $ 981,928


Recent Developments

Through the third quarter ended September 30, 2022 our imaging business
continued to expand, with procedure volumes returning to levels experienced
before the COVID-19 pandemic, with year to date same center procedure volumes
increasing 3.1% and overall procedure volumes increasing 6.0% over the same
period in 2021. We continued to pursue our strategy of expansion within
geographic regions, with a concentration on adding new facilities in Maryland.
While imaging
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volumes returned to pre-pandemic levels, our operations have experienced effects
from the pandemic and related macroeconomic issues. We are experiencing tighter
labor markets, resulting in increased salaries as we seek to retain our skilled
workforce. Our acquisitions of Aidence Holding B.V. and Quantib B.V. have
expanded our AI initiatives to encompass imaging diagnostics solutions for the
most prevalent cancers. Efforts in AI are largely in the product development
stage at this time and we expect that the segment will continue to experience
operating losses for the foreseeable future as we seek to secure both regulatory
approvals and market acceptance for our products.

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, 2021.

Equity Investments

As of September 30, 2022, 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 during the three and nine months ended
September 30, 2022.

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 during
the three and nine months ended September 30, 2022.

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
during the three and nine months ended September 30, 2022.

Acquisitions


Imaging Center

During the first quarter of 2022, 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 Maryland market. These acquisitions are
reported as part of our Imaging Center segment. 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               Right of Use Liabilities
           IFRC LLC*^             1/1/2022                      4,800                      2,103                        857           2,697                              (857)
           IFRC LLC*^             1/1/2022                      8,200                      2,910                      1,703           5,271                            (1,703)
                Total                                          13,000                      5,013                      2,560           7,968                            (2,560)


*Fair Value Determination is Final
^ IFRC LLC acquisitions consisted of three subsidiaries of IFRC, one of which
was purchased separately by a joint venture with Calvert Medical Imaging
Centers, LLC.

Artificial Intelligence

Aidence Holding B.V.
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On January 20, 2022, we completed our acquisition of all the equity interests of
Aidence Holding B.V. ("Aidence") an artificial intelligence enterprise centered
on lung cancer screening, in an combination stock and cash purchase. Aidence is
reported as part of our AI segment and was acquired to enhance our AI
capabilities. The transaction was accounted for as an acquisition of a business
and total purchase consideration was determined to be approximately $45.2
million including i) 1,117,872 shares issued at $26.80 per share with a fair
value of $30.0 million ii) cash of $1.8 million and iii) assumed liabilities of
$11.9 million, $7.4 million in milestone contingent consideration and cash
holdback of $4.5 million and iv) a settlement of a loan from RadNet of $1.5
million. In addition we paid certain seller closing costs through the issuance
of 23,362 shares at a fair value of $0.6 million. We recorded $1.0 million in
current assets, $0.2 million in property plant and equipment, $27.7 million in
intangible assets, $3.2 million in liabilities and $19.0 million in goodwill.

Quantib B.V.

On January 20, 2022, we completed our acquisition of all the equity interests of
Quantib B.V. ("Quantib") an artificial intelligence enterprise centered on
prostate cancer screening, in a combination stock and cash purchase. Quantib is
reported as part of our AI segment, and was acquired to enhance our AI
capabilities. The transaction was accounted for as an acquisition of a business
and total purchase consideration was determined to be approximately $42.3
million including i) 965,058 shares issued at $26.80 per share with a fair value
of $25.9 million ii) cash of $11.8 million and iii) 113,303 shares with a fair
value at the date of close of $3.0 million and cash holdback of $1.6 million to
be issued 18 months after acquisition subject to adjustment for any
indemnification claims. We recorded $2.4 million million in current assets, $0.1
million in property plant and equipment, $21.3 million in intangible assets,
$3.7 million in liabilities and $22.2 million in goodwill.

Formation of majority owned subsidiary

Frederick County Radiology, LLC

On April 1, 2022 we formed Frederick County Radiology, LLC ("FCR"), a
partnership with Frederick Health Hospital, Inc. ("Hospital"). The operation
offers multi-modality services out of six locations in Frederick, Maryland. We
contributed the operations of 4 centers to the enterprise and Hospital
contributed $5.4 million in fixed assets, $3.0 million in equipment, and $10.8
million in goodwill. As a result of the the transaction, we retain a 65%
controlling economic interest in FCR and Hospital retains a preliminary $11.1
million or 35% noncontrolling economic interest in FCR. The initial accounting
is preliminary as of September 30, 2022 for the acquired assets and liabilities
as we are currently in the process of completing the assessment of valuation
inputs and assumptions as well as completing the assessment of the tax
attributes of the business combination.

Advanced Radiology at Capital Region, LLC

On June 15, 2022 we entered into Advanced Radiology at Capital Region, LLC, a
partnership with Dimension Health Corporation. ("Dimension"), and affiliate of
the University of Maryland. The operation will provide multi-modality services
out of two yet to be determined locations in the Largo, Maryland area. The
venture was initially capitalized with nominal amounts of $5.1 thousand for a
51% economic interest from us and $4.9 thousand from Dimension for a 49%
economic interest.

Joint Venture Activity

Acquisition by equity method investee

During the first quarter of 2022, our joint venture with Calvert Medical Imaging
Center, LLC, completed the acquisition of certain assets to strengthen our
presence in the Maryland market. 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               Right of Use Liabilities
            IFRC LLC *^             1/1/2022                      3,922                      2,121                      1,295           1,801                            (1,295)


*Fair Value Determination is Final
^ IFRC LLC acquisitions consisted of three subsidiaries of IFRC, two of which
were purchased separately by wholly owned RadNet subsidiaries.
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The following table is a summary of our investment in joint ventures during the
nine months ended September 30, 2022 (in thousands):

Balance as of December 31, 2021                    $ 42,229
Equity in earnings in these joint ventures            8,350

Equity contributions in existing joint ventures 1,441
Balance as of September 30, 2022

                   $ 52,020


We charged management service fees from the centers underlying these joint
ventures of approximately $6.1 million and $5.3 million for the three months
ended September 30, 2022 and 2021 and $17.2 million and $16.0 million for the
nine months ended September 30, 2022 and 2021, respectively.

On June 24, 2022, 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, 2022 and December 31, 2021 and income statement
data for the nine months ended September 30, 2022 and 2021 (in thousands):

                                                                  September 30,           December 31,
Balance Sheet Data:                                                   2022                    2021
Current assets                                                  $       48,154          $      37,186
Noncurrent assets                                                       86,123                 73,592
Current liabilities                                                    (12,211)               (12,919)
Noncurrent liabilities                                                 (26,619)               (22,370)
Total net assets                                                $       

95,447 $ 75,489

Book value of RadNet joint venture interests                    $       

43,947 $ 34,930
Cost in excess of book value of acquired joint venture
interests

                                                                8,073                  7,299
Total value of RadNet joint venture interests                   $       

52,020 $ 42,229

Income statement data for the nine months ended September 30, 2022

           2021
Net revenue                                                     $ 107,241          $  98,193
Net income                                                      $  17,034          $  16,007

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, 2021, 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 are difficult
to predict and are beyond management's control. As a result, actual amounts
could materially differ from these estimates.
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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 other 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, 2022.

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. No provider relief
funding was received for the three and nine months ended September 30, 2022.
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, 2022, 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-party
payors. We continuously monitor collections from our payors and maintain an
allowance for bad debts based upon
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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,
2022.

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, 2022 totaled $575.1 million. Indefinite Lived
Intangible Assets at September 30, 2022 were $12.7 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, 2021. 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, 2022.

Recent Accounting Standards

See Note 3, Recent Accounting and Reporting Standards to the financial
statements included in this report for further information.

Subsequent Events

Refinancing of SunTrust (Now Truist) Credit Facilities:

On October 7, 2022, our subsidiary, NJIN, entered into a Second Amended and
Restated Credit and Term Loan Agreement which provides for a single term loan of
$150.0 million and a $50.0 million revolving credit facility. The proceeds of
the term loan were used to partially fund the acquisition of Montclair
Radiological Associates, refinance the outstanding $42.0 million term loan and
pay fees and expenses associated with the refinancing transaction. The key terms
of the Restated Credit and Term Loan Agreement are:

• Interest Rates: Borrowings bear interest at either the SOFR or Base Rate as
defined in the agreement, plus an applicable margin.

• Maturity Dates: The maturity date for both the term loan and revolving loans
is October 7, 2027, unless accelerated in accordance with the terms of the
agreement.

•  Payments: Beginning March 31, 2023, we will be required to make quarterly
principal amortization payments on the term loan in the amount of $1.9 million,
which will increase to $3.8 million, with the balance paid at maturity.
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Acquisitions:

On October 1, 2022, through our NJIN subsidiary, we acquired Montclair
Radiological Associates for purchase consideration of approximately $112.6
million. Montclair consists of six multi modality radiology centers located in
New Jersey.

On November 1, 2022, we acquired a 75% controlling share interest in
London-based Heart & Lung Imaging Limited ("HLH"). HLH was founded to improve
lung cancer outcomes through early detection and accurate diagnosis. HLH will be
integrated into our AI operations. Total combined purchase consideration,
including contingencies, consists of RadNet common stock and cash up to a
potential $27.6 million.

Results of Operations

The following table sets forth, for the three and nine months ended
September 30, 2022 and 2021, the percentage that certain items in the statements
of operations bears to total service revenue, inclusive of revenue under
capitation contracts.