RadNet, Inc. 10-Q

ITEM 2. 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, 2019 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the U.S. Securities and Exchange Commission (SEC) on March 11, 2020. 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 27 Table of Contents • 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 • 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, 2019 and quarterly report on form 10Q for the quarters ended March 31, and June 30, 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, 2020, we operated, directly or indirectly through joint ventures with hospitals, 334 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. Over 2019 and 2020 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, 2020 and September 30, 2019: 28 Table of Contents Nine Months Ended September 30, 2020 2019 Facilities in operation 334 340 Net revenues (millions) $ 763.9 $ 853.3 Our revenue is derived from a diverse mix of payors, including private payors, managed care capitated payors 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. The Company’s total service revenue during the three and nine months ended September 30, 2020 and 2019 are presented in the table below based on an allocation of the estimated transaction price with the patient between the primary patient classification of insurance coverage (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Commercial insurance $ 160,524 $ 163,152 $ 412,415 $ 475,064 Medicare 62,704 61,599 154,847 175,825 Medicaid 7,098 7,128 18,072 21,564 Workers' compensation/personal injury 7,183 10,865 25,705 32,950 Other patient revenue 8,328 6,085 17,211 17,947 Management fee revenue 2,675 1,792 8,574 5,662 Teleradiology and Software revenue 2,349 4,412 8,319 12,861 Other 5,869 6,875 15,617 20,878 Service fee revenue 256,730 261,908 660,760 762,751 Revenue under capitation arrangements 35,046 30,784 103,145 90,587 Total service revenue $ 291,776 $ 292,692 $ 763,905 $ 853,338 We typically experience some seasonality to our revenue stream. During the first quarter of each year we generally experience the lowest volumes of procedures and the lowest level of revenue for any quarter during the year. It is common for inclement weather to result in patient appointment cancellations and, in some cases, imaging center closures. Second, in recent years, we have observed greater participation in high deductible health plans by patients. As these high deductibles reset in January for most of these patients, we have observed that patients utilize medical services less during the first quarter, when securing medical care will result in significant out-of-pocket expenditures. Recent Developments The discussion below of our results centers on our performance in the third quarter ending September 30, 2020. As discussed in our Form 8-K filed on April 3, 2020, the overall impact of the coronavirus pandemic on RadNet’s business has had and could continue to have a material impact on our operating results, cash flows and financial position. The magnitude of the impact will ultimately depend on the duration and extent of the COVID-19 pandemic and the impact of governmental actions and patient behavior in response to the pandemic, which remains ongoing. As as result of the pandemic we began experiencing reduced procedure volumes in mid-March which intensified through the early part of the second quarter of 2020. As economic activity has begun to ramp-up, our procedure volumes have returned to our pre-COVID-19 pace, from a low of 28% pre-COVID-19 volumes experienced in April 2020. Our experience has shown that lost imaging slots in one quarter are not made up within that period or in subsequent quarters. We continue to adapt our operations in response to the pandemic where needed and implemented several cost-saving measures such as concentrating patient traffic to larger imaging centers, negotiating payment terms with vendors and landlords, adjusting staff levels and telecommuting. 29 Table of Contents 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, 2019. Equity Investments As of September 30, 2020, 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. On March 24, 2017, we acquired an initial 12.5% equity interest in Medic Vision for $1.0 million. We also received an option to exercise warrants to acquire up to an additional 12.5% equity interest for $1.4 million within one year from the initial share purchase date, if exercised in full. On March 1, 2018 we exercised our warrant in part and acquired an additional 1.96% for $0.2 million. Our initial equity interest has been diluted to 12.25% and our total equity investment stands at 14.21%. In accordance with accounting guidance , as we exercise no significant influence over Medic Vision’s operations, the investment is recorded at its cost of $1.2 million, given that the fair value is not readily determinable. No observable price changes or impairment in our investment was identified as of September 30, 2020. 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 to additional 80,000 shares December 21, 2019. No observable price changes or impairment in our investment was identified as of September 30, 2020. 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, the principal of which is due November 2022. To leverage their artificial intelligence expertise, we entered into a software subscription service contract to assist our radiology work flow and advanced them $4.0 million for future software subscription fees that is recorded as a prepaid expense in Prepaid and Other Current assets in our consolidated balance sheets. No observable price changes or impairment in our investment or the loan receivable was identified as of September 30, 2020. Facility acquisitions On August 31, 2020 we completed our acquisition of certain assets of AZ-Tech Radiology & Open MRI, LLC, consisting of eight multi-modality imaging centers located in the Phoenix, Arizona area for purchase consideration of $5.5 million. We made a preliminary fair value determination of the acquired assets and assumed liabilities and approximately $2.5 million in property and equipment, $7.6 million in right-of-use assets, $0.1 million in other assets, $7.6 million in operating lease liabilities, and $2.9 million in goodwill were recorded. On June 1, 2020, we completed our acquisition of all the equity interests of DeepHealth Inc., ("DeepHealth") an artificial intelligence and machine learning company in an all stock purchase. As initial purchase consideration, we issued 915,132 shares at $16.93 per share (823,615 issued at execution, with up to 91,517 shares to be issued 18 months after acquisition subject to adjustment for any indemnification claims). The transaction was accounted for as an acquisition of a business and total purchase consideration determined to be approximately $34.6 million including i) 823,615 shares issued on the date of closing with fair value of $13.9 million, ii) a liability of 91,517 shares with a fair value of $1.5 million to be issued 18 months after acquisition subject to adjustment for any indemnification claims and will be marked to market in subsequent periods, iii) replacement awards attributable to pre-combination service issued to DeepHealth option holders with allocated fair value of $2.0 million, iv) acquisition date fair value of contingent consideration of $17.0 million and v) $0.1 million in closing costs reimbursed to the seller. The fair values of replacement awards attributable to pre-combination service and contingent consideration are recorded in additional paid in capital upon closing of the transaction. For the contingent consideration, there are three arrangements that will be settled in a fixed number of shares upon achievement of three individual specific milestones which are mutually exclusive of each other, with 390,789, 586,184, and 195,393 shares, respectively, issuable for each milestone arrangement. The fair value of the contingent consideration was estimated at the date of acquisition based on our share price and estimated probability of the achievement of the respective milestones. We preliminarily recorded $0.1 million in current assets, $3.5 million in deferred tax liabilities, $14.8 million in intangible assets, primarily in-process research and 30 Table of Contents development ("IPR&D'), and $23.4 million in goodwill. The goodwill is primarily attributable to expected post-acquisition synergies from integrating DeepHealth’s assembled workforce and IPR&D technologies. The fair values of the identifiable intangible assets related to IPR&D were determined by the income method and the assets will not be amortized until completion. On March 2, 2020 our consolidated subsidiary New Jersey Imaging Networks ("NJIN") completed the acquisition of certain assets of MRI at Woodbridge, LLC consisting of a single multi-modality imaging center located in Avenel, New Jersey for consideration of $2.6 million. NJIN made a fair value determination of the acquired assets and assumed liabilities and approximately $0.5 million in property and equipment, $1.1 million in right-of-use assets, $0.3 million in intangible assets, $1.1 million in operating lease liabilities, $0.1 million in finance lease liabilities, and $1.8 million in goodwill were recorded. On January 2, 2020 we completed our acquisition of certain assets of Olney Open MRI, LLC, consisting of a single multi-modality imaging center located in Columbia, Maryland for consideration of $1.8 million. We have made a fair value determination of the acquired assets and assumed liabilities and approximately $0.8 million in property and equipment, $1.3 million in right-of-use assets, $0.3 million in intangible assets, $1.3 million in operating lease liabilities and $0.6 million in goodwill were recorded. Dispositions: On June 1, 2020 we completed our sale of certain assets of our Imaging On Call subsidiary to RadVantage P.C. (an unrelated corporation) for approximately $1.0 thousand. With this transaction, we have exited the teleradiology business. Joint venture investment contribution During the month of August 2020, we made additional cash contributions to our Santa Monica Imaging Group, LLC partnership in the amount of $1.6 million in support of its expanded operations. We maintain our 35% economic interest in the partnership. Joint Venture Activity The following table is a summary of our investment in joint ventures during the nine months ended September 30, 2020 (in thousands): Balance as of December 31, 2019 $ 34,470 Equity in earnings in these joint ventures 5,176 Balance as of September 30, 2020 $ 35,571 We charged management service fees from the centers underlying these joint ventures of approximately $2.7 million and $1.8 million for the three months ended September 30, 2020 and 2019, respectively. and $8.6 million and $7.8 million for the nine months ended September 30, 2020 and 2019, respectively. We eliminate any unrealized portion of our management service fees with our equity in earnings of joint ventures. 31 Table of Contents The following table is a summary of key balance sheet data for these joint ventures as of September 30, 2020 and December 31, 2019 and income statement data for the nine months ended September 30, 2020 and 2019 (in thousands): Balance Sheet Data: September 30, 2020 December 31, 2019 Current assets $ 26,618 $ 27,427 Noncurrent assets 70,576 61,037 Current liabilities (10,487) (9,217) Noncurrent liabilities (22,751) (18,872) Total net assets $ 63,956 $ 60,375 Book value of RadNet joint venture interests $ 29,121 $ 28,001 Cost in excess of book value of acquired joint venture interests 6,450 6,469 Total value of Radnet joint venture interests $ 35,571 $ 34,470 Total book value of other joint venture partner interests $ 34,835 $ 32,374 Income statement data for the nine months ended September 30, 2020 2019 Net revenue $ 78,988 $ 80,115 Net income $ 13,651 $ 13,718 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, 2019, 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. 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 when 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 and the frequent changes in managed care contractual terms resulting from contract renegotiations 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. 32 Table of Contents Our revenues are based upon the estimated amounts we expect to be entitled to receive from patients and third-party payors. Estimates of contractual allowances under 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 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. 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. In the third quarter of 2020, we received approximately $0.2 million in funding and for nine months ended September 30, 2020 we have received funding of $25.7 million. 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. During the quarter ended September 30, 2020, we continued to evaluate our operating results and gave consideration to the updated reporting guidelines issued in September by the U.S. Department of Health and Human Services that significantly changed the measurement of Provider Relief Fund distributions providers are able to retain. Based on our assessment recognition of the revenue previously recognized remained 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 specific payor collection issues that we have identified and our historical experience. In regards to the credit loss standard, our expectation is that the historical credit loss experienced across our receivable portfolio is materially similar to any current expected credit losses that would be estimated under the CECL model. 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, including tax planning strategies, in determining whether our net deferred tax assets are more likely than not to be realized. Deferred Revenue In April of 2020, we received approximately $39.4 million in advanced Medicare payments from the Centers for Medicare and Medicaid Services ("CMS") as part of the expanded Accelerated and Advance Payment Program under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. As these payments are required to be repaid to CMS beginning 120 days after their receipt through offsets from new Medicare claims over a three month period, we have recorded amounts received to deferred revenue which will be amortized as Medicare reimbursements are earned. In addition, in May of 2020 we received $5.0 million in advance payments from an insurance carrier with similar repayment terms as the CMS. Property and Equipment Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation of property and equipment is performed using the straight-line method over the estimated useful lives of the assets acquired, which range 33 Table of Contents 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 15 years. Maintenance and repairs are charged to expense as incurred. Business Combination We evaluate all purchases under the framework in ASU No. 2017-01 (“ASU 2017-01”), Clarifying the Definition of a Business. Once the purchase has been determined to be the acquisition of a business, we are required to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations. Goodwill and Indefinite Lived Intangibles Goodwill at September 30, 2020 totaled $470.7 million. Indefinite Lived Intangible Assets at September 30, 2020 were $11.3 million and are associated with the value of certain trade name intangibles. Goodwill and trade name intangibles are recorded as a result of business combinations. When we determine the carrying value of 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. We tested goodwill for impairment on October 1, 2019. In addition to the annual impairment test, we regularly assess if an event has occurred which would require interim impairment testing. We considered the current and expected future economic and market conditions surrounding the novel strain of coronavirus ("COVID-19") pandemic and did not identify an indication of goodwill impairment being more likely than not through September 30, 2020. Long-Lived Assets We evaluate our long-lived assets (property and equipment) and intangibles, other than goodwill, for impairment whenever indicators of impairment exist. To evaluate the long-lived assets our management estimates the undiscounted future cash flows expected to be derived from the asset. The accounting standards require that if the sum of the undiscounted expected future cash flows from a long-lived asset or definite-lived intangible is less than the carrying value of that asset, an asset impairment charge must be recognized. The amount of the impairment charge is calculated as the excess of the asset’s carrying value over its fair value, which generally represents the discounted future cash flows from that asset or in the case of assets we expect to sell, at fair value less costs to sell. No indicators of impairment were identified with respect to our long-lived assets as of September 30, 2020. Depreciation and Amortization of Long-Lived Assets We depreciate our long-lived assets over their estimated economic useful lives with the exception of leasehold improvements where we use the shorter of the assets useful lives or the lease term of the facility for which these assets are associated. We estimate the economic useful lives of assets, other than leasehold improvements, to be between 3 and 15 years depending on the type of asset. Leases We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities, and long term operating lease liability in our consolidated balance sheets. Finance leases are included in property and equipment, current finance lease liability, and long-term finance lease liability in our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. We include options to extend a lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. For a contract in which we are a lessee that contains fixed payments for both lease and non-lease components, we have elected to account for the components as a single lease component, as permitted. For finance leases, interest expense on the lease liability is recognized using the effective interest method and amortization of the ROU asset is recognized on a straight-line basis over the shorter of the estimated useful life of the asset or the lease term. ROU assets 34 Table of Contents are tested for impairment if circumstances suggest that the carrying amount may not be recoverable. Our ROU assets consist of facility and equipment assets on operating leases. No events have occurred such as fire, flood, or other acts which have impaired the integrity of our ROU assets in 2020. Our facility leases require us to maintain insurance policies which would cover major damage to our facilities. We maintain business interruption insurance to cover loss of business due to a facility becoming non-operational under certain circumstances. Our equipment leases are covered by warranty and service contracts which cover repairs and provide regular maintenance to keep the equipment in functioning order. Equity Based Compensation We have one long-term incentive plan that we adopted in 2006 and which we first amended and restated as of April 20, 2015, and again on March 9, 2017 (the “Restated Plan”). The Restated Plan was approved by our stockholders at our annual stockholders meeting on June 8, 2017. We have reserved 14,000,000 shares of common stock for issuance under the Restated Plan which can be issued in the form of options, stock awards, stock appreciation rights, and cash awards. Stock options generally vest over three to five years and expire five to ten years from date of grant. We determine the compensation expense for each stock option award using the Black Scholes, or similar valuation model. Those models require that our management make certain estimates concerning risk free interest rates and volatility in the trading price of our common stock. 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. In connection with our acquisition of DeepHealth Inc. on June 1, 2020, we assumed the DeepHealth, Inc. 2017 Stock Incentive Plan, including outstanding options awards that can be exercised for our common stock. No additional awards will be granted under the DeepHealth, Inc. 2017 Equity Incentive Plan. See Note 4, Facility Acquisitions and Note 6, Stock-Based Compensation, for more information. Commitments and Contingencies We are party to various legal proceedings, claims, and regulatory, tax or government inquiries and investigations that arise in the ordinary course of business. With respect to these matters, we evaluate the developments on a regular basis and accrue a liability when we believe a loss is probable and the amount can be reasonably estimated. Based on current information, we do not believe that reasonably possible or probable losses associated with pending legal proceedings would either individually or in the aggregate, have a material adverse effect on our business and consolidated financial statements. However, the outcome of these matters is inherently uncertain. Therefore, if one or more of these matters were resolved against us for amounts in excess of management's expectations, our results of operations and financial condition, including in a particular reporting period in which any such outcome becomes probable and estimable, could be materially adversely affected. Recent Accounting Standards See Note 3, Recent Accounting and Reporting Standards to the financial statements included in this report or further information. 35 Table of Contents Results of Operations The following table sets forth, for the three and nine months ended September 30, 2020 and 2019, the percentage that certain items in the statements of operations bears to total service revenue, inclusive of revenue under capitation contracts. RADNET, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT SHARE DATA) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 REVENUE Service fee revenue 88.0 % 89.5 % 86.5 % 89.4 % Revenue under capitation arrangements 12.0 % 10.5 % 13.5 % 10.6 % Total service revenue 100.0 % 100.0 % 100.0 % 100.0 % Provider relief funding 0.1 % — % 3.4 % — % OPERATING EXPENSES Cost of operations, excluding depreciation and amortization 84.5 % 86.9 % 92.7 % 87.2 % Depreciation and amortization 7.3 % 7.0 % 8.4 % 7.1 % Loss on sale and disposal of equipment and other 0.1 % 0.3 % 0.1 % 0.2 % Severance costs 0.2 % — % 0.2 % 0.1 % Total operating expenses 92.1 % 94.2 % 101.4 % 94.6 % INCOME FROM OPERATIONS 8.0 % 5.8 % 1.9 % 5.4 % OTHER INCOME AND EXPENSES Interest expense 3.8 % 4.1 % 4.4 % 4.3 % Equity in earnings of joint ventures (0.8) % (0.7) % (0.7) % (0.7) % Non-cash change in fair value of interest rate hedge 0.2 % — % 0.6 % — % Other (income) expenses — % — % — % 0.1 % Total other expenses 3.2 % 3.4 % 4.3 % 3.7 % INCOME (LOSS) BEFORE INCOME TAXES 4.8 % 2.4 % (2.3) % 1.7 % (Provision for) benefit from income taxes (1.3) % (0.6) % 0.7 % (0.4) % NET INCOME (LOSS) 3.5 % 1.7 % -1.7 % 1.3 % Net income attributable to noncontrolling interests 1.4 % 0.6 % 1.1 % 0.7 % NET INCOME (LOSS) ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS 2.1 % 1.1 % (2.6) % 0.5 % We have developed our medical imaging business through a combination of organic growth, equity investments, acquisitions and joint venture formations. We have segregated some of our information to demonstrate which is attributable to centers that were in operation through the entirety of the comparison period, and which is attributable to those that were acquired or disposed of during the period. The discussion below shows a breakdown and analysis of revenue and expenses for the three and nine months ended September 30, 2020 and 2019 for our operations at a total company and same center level. Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019 Total Revenue inclusive of Provider Relief funding for 2020 36 Table of Contents In Thousands Three Months Ended September 30, Revenue 2020 2019 $ Increase/(Decrease) % Change Total Revenue $291,997 $292,692 $(695) (0.2)% Same Center Revenue $288,919 $288,700 $219 0.1% Our nationwide operations were affected by the COVID-19 pandemic starting mid March 2020 and has resulted in an approximate 5% decrease in same center procedural volumes compared to the same period last year. Same Center Revenue however remained flat due to a 14% rise in revenue under capitation arrangements stemming from a combination of rate increases, plan membership growth and higher copays. This comparison excludes revenue contributions from centers that were acquired or divested subsequent to July 1, 2019. For the three months ended September 30, 2020, net service fee revenue from centers that were acquired or divested subsequent to July 1, 2019 and excluded from the above comparison was $3.1 million. For the three months ended September 30, 2019, net service fee revenue from centers that were acquired or divested subsequent to July 1, 2019 and excluded from the above comparison was $4.0 million. Operating Expenses Total operating expenses for the three months ended September 30, 2020 decreased approximately $7.2 million, or 2.6%, from $275.8 million for the three months ended September 30, 2019 to $268.6 million for the three months ended September 30, 2020. The following table sets forth a breakdown of our cost of operations and total operating expenses for the three months ended September 30, 2020 and 2019 (in thousands): Three Months Ended September 30, 2020 2019 Salaries and professional reading fees, excluding stock-based compensation $ 149,970 $ 160,757 Stock-based compensation 2,067 1,381 Building and equipment rental 26,703 26,850 Medical supplies 12,498 12,313 Other operating expenses * 55,225 53,082 Cost of operations 246,463 254,383 Depreciation and amortization 21,247 20,490 (Gain) loss on sale and disposal of equipment 342 917 Severance costs 571 52 Total operating expenses $ 268,623 $ 275,842 * Includes billing fees, office supplies, repairs and maintenance, insurance, business tax and license, outside services, telecom, utilities, marketing, travel and other expenses. Salaries and professional reading fees, excluding stock-based compensation and severance In Thousands Three Months Ended September 30, Salaries and Professional Fees 2020 2019 $ Increase/(Decrease) % Change Total Salaries $149,970 $160,757 $(10,787) (6.7)% Same Center Salaries $146,698 $158,270 $(11,572) (7.3)% The decrease in salaries expense was a result of staff furloughs and salary reductions initiated in response to the COVID-19 pandemic. During this time, we have reengineered our workflow to improve efficiency and make workforce adjustments as necessary resulting in reductions to payroll overall. This comparison excludes expenses from centers that were acquired or divested subsequent to July 1, 2019. For the three months ended September 30, 2020, salaries and professional reading fees from centers that were acquired or divested subsequent to July 1, 2019 and excluded from the above comparison was $3.3 million. For the three months ended September 30, 2019, salaries and professional reading fees from centers that were acquired or divested subsequent to July 1, 2019 and excluded from the above comparison was approximately $2.5 million. 37 Table of Contents Stock-based compensation Stock-based compensation increased $0.7 million, or 49.7% to approximately $2.1 million for the three months ended September 30, 2020 compared to $1.4 million for three months ended September 30, 2019. This increase was driven by the higher fair value of RSA’s awarded and vested in the third quarter of 2020 as compared to RSA’s awarded and vested in the prior year’s third quarter. Building and equipment rental In Thousands Three Months Ended September 30, Building & Equipment Rental 2020 2019 $ Increase/(Decrease) % Change Total $26,703 $26,850 $(147) (0.6)% Same Center $25,839 $25,968 $(129) (0.5)% This comparison excludes expenses from centers that were acquired or divested subsequent to July 1, 2019. For the three months ended September 30, 2020, building and equipment rental expenses from centers that were acquired or divested subsequent to July 1, 2019 and excluded from the above comparison was $0.9 million. For the three months ended September 30, 2019, building and equipment rental expenses from centers that were acquired or divested subsequent to July 1, 2019 and excluded from the above comparison was approximately $0.9 million. Medical supplies In Thousands Three Months Ended September 30, Medical Supplies Expense 2020 2019 $ Increase/(Decrease) % Change Total $12,498 $12,313 $185 1.5% Same Center $12,374 $12,143 $231 1.9% Medical supplies expense remained essentially flat compared to the same period in the prior year, with the nominal increase related to securing personal protective equipment for center staff. This comparison excludes expenses from centers that were acquired or divested subsequent to July 1, 2019. For the three months ended September 30, 2020, medical supplies expenses from centers that were acquired or divested subsequent to July 1, 2019 and excluded from the above comparison was $0.1 million. For the three months ended September 30, 2019, medical supplies expense from centers that were acquired or divested subsequent to July 1, 2019 and excluded from the above comparison was $0.2 million. Other operating expenses In Thousands Three Months Ended September 30, Other Operating Expenses 2020 2019 $ Increase/(Decrease) % Change Total $55,225 $53,082 $2,142 4.0% Same Center $54,053 $52,165 $1,888 3.6% The rise in other operating expenses resulted from seasonal utilities usage and outside services, offset by reductions in insurance charges and other expenses. This comparison excludes expenses from centers that were acquired or divested subsequent to July 1, 2019. For the three months ended September 30, 2020, other operating expense from centers that were acquired or divested subsequent July 1, 2019 and excluded from the above comparison was $1.2 million. For the three months ended September 30, 2019, other operating expense from centers that were acquired or divested subsequent to July 1, 2019 was $0.9 million. Depreciation and amortization In Thousands Three Months Ended September 30, Depreciation & Amortization 2020 2019 $ Increase/(Decrease) % Change Total $21,247 $20,490 $758 3.7% Same Center $20,505 $19,912 $593 3.0% 38 Table of Contents The increase in same center depreciation and amortization is primarily due to additional equipment and leasehold improvements placed in service in the third quarter in 2020 over the third quarter in 2019. This comparison excludes expenses from centers that were acquired or divested subsequent to July 1, 2019. For the three months ended September 30, 2020, depreciation expense from centers that were acquired or divested subsequent to July 1, 2019 and excluded from the above comparison was $0.7 million. For the three months ended September 30, 2019, depreciation and amortization from centers that were acquired or divested subsequent to July 1, 2019 and excluded from the above comparison was $0.6 million. Loss on sale and disposal of equipment and other We recorded losses on the disposal of equipment and other items of approximately $0.3 million for the three months ended September 30, 2020 and approximately $0.9 million for the three months ended September 30, 2019. Non-cash change in fair value of interest rate hedge We recorded expense of $0.7 million for the ineffective portion of our 2019 Swaps for the three months ended September 30, 2020. Other (income) expenses We recorded other income of approximately $0.1 million for the three months ended September 30, 2020 and other expenses of approximately $0.0 million for the three months ended September 30, 2019 related to refinancing of our term loan debt and legal contingency charges. Severance Costs We incurred severance expenses of $0.6 million for the three months ended September 30, 2020 and $0.1 million for the three months ended September 30, 2019. Interest expense In Thousands Three Months Ended September 30, Interest Expense 2020 2019 $ Increase/(Decrease) % Change Total Interest Expense $11,061 $11,895 Interest related to derivatives* $1,603 $(288) Interest payable on debt obligations** $9,458 $12,183 $(2,725) (22.4) % Interest related to amortization*** $1,103 $1,081 Adjusted Interest Expense $8,355 $11,102 $(2,747) (24.7) % * Includes interest on 2016 caps and 2019 swaps not related to debt obligations. ** Includes interest related to on our term loans, revolving credit line, notes, finance leases, and other ***Includes combined noncash amortization of deferred loan costs and discount on issuance of debt. Excluding interest expense for derivatives and amortization for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, interest expense decreased $2.7 million, or 24.7%. The reduction in interest expense corresponds to lowered variable LIBOR and Prime interest rates paid on our term loan and revolving debt in reaction to market conditions surrounding COVID-19. See “Liquidity and Capital Resources” below for more details on our credit facilities. Equity in earnings from unconsolidated joint ventures For the three months ended September 30, 2020 we recognized equity in earnings from unconsolidated joint ventures in the amount of $2.3 million and for three months ended September 30, 2019 we recognized equity in earnings from unconsolidated joint ventures of $2.0 million, an increase of $0.3 million or 16.4% and was related to improved procedure volumes specifically at our joint venture sites located within hospital campuses. Income tax provision 39 Table of Contents We recorded an income tax provision of $3.8 million, or an effective tax rate of 27.2%, for the three months ended September 30, 2020 compared to an income tax provision of $1.8 million, or an effective tax rate of 26.3% for the three months ended September 30, 2019. The income tax rates for the three and nine months ended September 30, 2020 diverge from the federal statutory rate due to (i) noncontrolling interests due to the controlled partnerships; (ii) effects of state income taxes; and (iii) excess tax benefits attributable to share-based compensation. Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019 Total Revenue inclusive of Provider Relief funding for 2020 In Thousands Nine Months Ended September 30, 2020 Revenue 2020 2019 $ Increase/(Decrease) % Change Total Revenue $789,601 $853,338 $(63,737) (7.5)% Same Center Revenue $750,358 $817,492 $(67,134) (8.2)% Our procedure volumes were affected by the COVID-19 pandemic, which has precipitated an approximate 17% decrease in same center procedural volumes year over year. Mitigating the income decline is $25.7 million received in Provider Relief funding, which, per the official designation of the program, was used to offset lost revenues. This comparison excludes revenue contributions from centers that were acquired or divested subsequent to January 1, 2019. For the nine months ended September 30, 2020, net service fee revenue from centers that were acquired or divested subsequent to January 1, 2019 and excluded from the above comparison was $39.2 million. For the nine months ended September 30, 2019, net service fee revenue from centers that were acquired or divested subsequent to January 1, 2019 and excluded from the above comparison was $35.8 million. Operating Expenses Total operating expenses for the nine months ended September 30, 2020 decreased approximately $32.4 million, or 4.0%, from $807.2 million for the nine months ended September 30, 2020 to $774.8 million for the nine months ended September 30, 2019. The following table sets forth a breakdown of our cost of operations and total operating expenses for the nine months ended September 30, 2020 and 2019 (in thousands): Nine Months Ended September 30, 2020 2020 2019 Salaries and professional reading fees, excluding stock-based compensation $ 429,292 $ 471,792 Stock-based compensation 10,144 6,964 Building and equipment rental 80,148 79,017 Medical supplies 33,812 33,713 Other operating expenses * 154,700 152,512 Cost of operations 708,096 743,998 Depreciation and amortization 64,536 60,193 Loss on sale and disposal of equipment 543 1,990 Severance costs 1,647 1,054 Total operating expenses $ 774,822 $ 807,235 * Includes billing fees, office supplies, repairs and maintenance, insurance, business tax and license, outside services, telecom, utilities, marketing, travel and other expenses. Salaries and professional reading fees, excluding stock-based compensation and severance 40 Table of Contents In Thousands Nine Months Ended September 30, 2020 Salaries and Professional Fees 2020 2019 $ Increase/(Decrease) % Change Total Salaries $429,292 $471,792 $(42,501) (9.0)% Same Center Salaries $409,010 $451,738 $(42,728) (9.5)% The decrease in salaries expense was a result of staff furloughs and salary reductions initiated in response to the COVID-19 crisis. As noted in our quarterly explanation above, our review of operational workflows has provided greater efficiencies and resulted in payroll reductions. Additionally certain of our subsidiaries have accepted approximately $4.0 million in loans from the Paycheck Protection Program (PPP) and the funds were used to pay program approved payroll expenses to both maintain and rehire furloughed employees. This comparison excludes expenses from centers that were acquired or divested subsequent to January 1, 2019. For the nine months ended September 30, 2020, salaries and professional reading fees from centers that were acquired or divested subsequent to January 1, 2019 and excluded from the above comparison was $20.3 million. For the nine months ended September 30, 2019, salaries and professional reading fees from centers that were acquired or divested subsequent to January 1, 2019 and excluded from the above comparison was approximately $20.1 million. Stock-based compensation Stock-based compensation increased $3.2 million, or 45.7% to approximately $10.1 million for the nine months ended September 30, 2020 compared to $7.0 million for nine months ended September 30, 2019. This increase was driven by the higher fair value of RSA’s awarded and vested in the nine months of 2020 as compared to RSA’s awarded and vested in the prior year’s same period. Building and equipment rental In Thousands Nine Months Ended September 30, 2020 Building & Equipment Rental 2020 2019 $ Increase/(Decrease) % Change Total $80,148 $79,017 $1,131 1.4% Same Center $74,705 $74,485 $219 0.3% This comparison excludes expenses from centers that were acquired or divested subsequent to January 1, 2019. For the nine months ended September 30, 2020, building and equipment rental expenses from centers that were acquired or divested subsequent to January 1, 2019 and excluded from the above comparison was $5.4 million. For the nine months ended September 30, 2019, building and equipment rental expenses from centers that were acquired or divested subsequent to January 1, 2019 and excluded from the above comparison was approximately $4.5 million. Medical supplies In Thousands Nine Months Ended September 30, 2020 Medical Supplies Expense 2020 2019 $ Increase/(Decrease) % Change Total $33,812 $33,713 $99 0.3% Same Center $31,155 $30,971 $184 0.6% Year over year medical supplies expense remained relatively flat due to varying factors. The first quarter noted a 21% same store increase stemming from securing personal protective equipment and procurement of specialized imaging agents, while in the second quarter, a 25% same store expense reduction was correlated to lower procedural volumes. In the third quarter we consumed medical supplies ordered in prior periods to meet patient demands. The cumulative effect of these factors has resulted in the year over year stability of medical supplies expense. This comparison excludes expenses from centers that were acquired or divested subsequent to January 1, 2019. For the nine months ended September 30, 2020, medical supplies expenses from centers that were acquired or divested subsequent to April 1, 2018 and excluded from the above comparison was $2.7 million. For the nine months ended September 30, 2019, medical supplies expense from centers that were acquired or divested subsequent to January 1, 2019 and excluded from the above comparison was $2.7 million. Other operating expenses 41 Table of Contents In Thousands Nine Months Ended September 30, 2020 Other Operating Expenses 2020 2019 $ Increase/(Decrease) % Change Total $154,700 $152,512 $2,188 1.4% Same Center $148,358 $146,397 $1,962 1.3% This comparison excludes expenses from centers that were acquired or divested subsequent to January 1, 2019. For the nine months ended September 30, 2020, other operating expense from centers that were acquired or divested subsequent January 1, 2019 and excluded from the above comparison was $6.3 million. For the nine months ended September 30, 2019, other operating expense from centers that were acquired or divested subsequent to January 1, 2019 was $6.1 million. Depreciation and amortization In Thousands Nine Months Ended September 30, 2020 Depreciation & Amortization 2020 2019 $ Increase/(Decrease) % Change Total $64,536 $60,193 $4,343 7.2% Same Center $60,923 $57,086 $3,837 6.7% The increase in same center depreciation and amortization is primarily due to additional equipment and leasehold improvements placed in service in the nine months of 2020 over the same period in 2019. This comparison excludes expenses from centers that were acquired or divested subsequent to January 1, 2019. For the nine months ended September 30, 2020, depreciation expense from centers that were acquired or divested subsequent to January 1, 2019 and excluded from the above comparison was $3.6 million. For the nine months ended September 30, 2019, depreciation and amortization from centers that were acquired or divested subsequent to January 1, 2019 and excluded from the above comparison was $3.1 million. Loss on sale and disposal of equipment and other We recorded losses on the disposal of equipment and other items of approximately $0.5 million for the nine months ended September 30, 2020 and approximately $2.0 million for the nine months ended September 30, 2019. Non-cash change in fair value of interest rate hedge We recorded expense of $4.5 million for the ineffective portion of our 2019 Swaps for the nine months ended September 30, 2020. Other (income) expenses We recorded other income of approximately $0.2 million for the nine months ended September 30, 2020 and other expenses of approximately $1.3 million for the nine months ended September 30, 2019 related to refinancing of our term loan debt and legal contingency charges. Severance Costs We incurred severance expenses of $1.6 million for the nine months ended September 30, 2020 and $1.1 million for the nine months ended September 30, 2019. 42 Table of Contents Interest expense In Thousands Nine Months Ended September 30, 2020 Interest Expense 2020 2019 $ Increase/(Decrease) % Change Total Interest Expense $33,443 $36,589 Interest related to derivatives* $3,152 $(1,182) Interest payable on debt obligations** $30,291 $37,771 $(7,480) (19.8) % Interest related to amortization*** $3,266 $3,103 Adjusted Interest Expense $27,025 $34,668 $(7,643) (22.0) % * Includes interest on 2016 caps and 2019 swaps not related to debt obligations. ** Includes interest related to our term loans, revolving credit line, notes, finance leases, and other ***Includes combined noncash amortization of deferred loan costs and discount on issuance of debt. Excluding interest expense for derivatives and amortization for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, interest expense decreased $7.6 million, or 22.0%. The reduction in interest expense corresponds to lowered variable LIBOR and Prime interest rates paid on our term loan and revolving debt in reaction to market conditions surrounding COVID-19. See “Liquidity and Capital Resources” below for more details on our credit facilities. Equity in earnings from unconsolidated joint ventures For the nine months ended September 30, 2020 we recognized equity in earnings from unconsolidated joint ventures in the amount of $5.2 million and for nine months ended September 30, 2019 we recognized equity in earnings from unconsolidated joint ventures of $6.1 million, an decrease of $0.9 million or 14.8%, related to market conditions stemming from the COVID-19 pandemic. Income tax benefit We recorded an income tax benefit of $5.0 million, or an effective tax rate of 28.3%, for the nine months ended September 30, 2020 compared to an income tax provision of $3.6 million , or an effective tax rate of 24.8% for the nine months ended September 30, 2019. The income tax rates for the three and nine months ended September 30, 2020 diverge from the federal statutory rate due to (i) noncontrolling interests due to the controlled partnerships; (ii) effects of state income taxes; and (iii) excess tax benefits attributable to share-based compensation. Adjusted EBITDA We use both GAAP and non-GAAP metrics to measure our financial results. We believe that, in addition to GAAP metrics, these non-GAAP metrics assist us in measuring our cash generated from operations and ability to service our debt obligations. We believe this information is useful to investors and other interested parties because we are highly leveraged and our non-GAAP metrics remove non-cash and certain other charges that occur in the affected period and provide a basis for measuring the Company's financial condition against other quarters. One non-GAAP measure we believe assists us is Adjusted EBITDA. We define Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, each from continuing operations and excluding losses or gains on the disposal of equipment, other income or loss, loss on debt extinguishment, bargain purchase gains and non-cash equity compensation. Adjusted EBITDA includes equity earnings in unconsolidated operations and subtracts allocations of earnings to noncontrolling interests in subsidiaries, and is adjusted for non-cash or extraordinary and one-time events taking place during the period. We have not made specific adjustments to our calculation of Adjusted EBITDA in response to COVID 19. Our net income reflected below includes the effect of the $25 million in other revenue received under the Provider Relief Fund. We have treated the PPP loans as debt, and accordingly will be liable for an interest charge related to those loans which will be included in interest expense, although the loans may ultimately be forgiven. Adjusted EBITDA is a non-GAAP financial measure used as an analytical indicator by us and the healthcare industry to assess business performance, and is a measure of leverage capacity and ability to service debt. Adjusted EBITDA should not be considered a measure of financial performance under GAAP, and the items excluded from Adjusted EBITDA should not be considered in isolation or as alternatives to net income, cash flows generated by operating, investing or financing activities or 43 Table of Contents other financial statement data presented in the consolidated financial statements as an indicator of financial performance or liquidity. As Adjusted EBITDA is not a measurement determined in accordance with GAAP and is therefore susceptible to varying methods of calculation, this metric, as presented, may not be comparable to other similarly titled measures of other companies. Adjusted EBITDA is most comparable to the GAAP financial measure, net income (loss) attributable to RadNet, Inc. common stockholders. The following is a reconciliation of GAAP net income (loss) attributable to RadNet, Inc. common stockholders to Adjusted EBITDA for the three and nine months ended September 30, 2020 and 2019, respectively. Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Net income (loss) attributable to RadNet, Inc. common stockholders $ 6,156 $ 3,195 $ (20,797) $ 4,360 Provision for (benefit from) income taxes 3,825 1,816 (5,029) 3,557 Interest expense 11,061 11,895 33,443 36,589 Severance costs 571 52 1,647 1,054 Depreciation and amortization 21,247 20,490 64,536 60,193 Non-cash employee stock-based compensation 2,067 1,381 10,144 6,964 Loss on sale and disposal of equipment and other 342 917 543 1,989 Non-cash change in fair value of interest rate hedge 679 — 4,523 — Other expenses (139) 2 (247) 1,271 Legal settlements — 1,248 — 1,248 Adjusted EBITDA $ 45,809 $ 40,996 $ 88,763 $ 117,225 Liquidity and Capital Resources The following table is a summary of key balance sheet data as of September 30, 2020 and December 31, 2019 and income statement data for the nine months ended September 30, 2020 and 2019 (in thousands): Balance Sheet Data: September 30, 2020 December 31, 2019 Cash and cash equivalents $ 89,739 $ 40,165 Accounts receivable 137,411 154,763 Working capital (exclusive of current operating lease liabilities) (47,282) (25,048) Stockholders' equity 246,121 233,139 Income statement data for the nine months ended September 30, 2020 2019 Total net revenue $ 763,905 $ 853,338 Net (loss) income attributable to RadNet common stockholders (20,797) 4,360 We operate in a capital intensive, high fixed-cost industry that requires significant amounts of capital to fund operations. In addition to operations, we require a significant amount of capital for the initial start-up and development of new diagnostic imaging facilities, the acquisition of additional facilities and new diagnostic imaging equipment. Because our cash flows from operations have been insufficient to fund all of these capital requirements, we have depended on the availability of financing under credit arrangements with third parties. As noted in our forward looking statements, the COVID 19 pandemic has resulted in a reduction of procedure volumes and corresponding operating revenues. We are uncertain of the duration and ultimate severity of its effects. Although we are undertaking measures to reduce operating expenses and have received government stimulus funding, we may continue to experience operating losses. We have credit available from our current credit facilities and borrowing under those facilities is subject to continued compliance with lending covenants. We currently meet those requirements, but substantial and sustained operating losses could impact our ability to borrow under those facilities. If we are not able to meet such requirements, we may 44 Table of Contents be required to seek additional financing and there can be no assurance that we will be able to obtain financing from other sources on terms acceptable to us, if at all. On a continuing basis, we also consider various transactions to increase shareholder value and enhance our business results, including acquisitions, divestitures and joint ventures. These types of transactions may result in future cash proceeds or payments but the general timing, size or success of any acquisition, divestiture or joint venture effort and the related potential capital commitments cannot be predicted. We expect to fund any future acquisitions primarily with cash flow from operations and borrowings, including borrowing from amounts available under our senior secured credit facilities or through new equity or debt issuances. We and our subsidiaries or affiliates may from time to time, in our sole discretion, purchase, repay, redeem or retire any of our outstanding debt or equity securities in privately negotiated or open market transactions, by tender offer or otherwise. Sources and Uses of Cash The following table summarizes key components of our sources and uses of cash for the nine months ended September 30, 2020 and 2019: Cash Flow Data September 30, 2020 September 30, 2019 Cash provided by operating activities $ 170,343 $ 82,603 Cash used in investing activities (88,280) (93,981) Cash (used in) provided by financing activities (32,495) 38,705 Cash provided by operating activities for the nine months ended September 30, 2020 was $170.3 million and $82.6 million for the nine months ended September 30, 2019. Our cash provided by operating activities was benefited by the reciept of $39.4 million in CMS advances recorded as deferred revenue. Cash used in investing activities for the nine months ended September 30, 2020, included purchases of property and equipment for approximately $77.3 million and the acquisition of imaging and software business assets for $10.1 million. Cash used in financing activities for the nine months ended September 30, 2020, was due to principal payments on our term loans and equipment debt obligations. In 2018 and 2019 we entered into factoring agreements with various institutions and sold certain accounts receivable under non-recourse agreements. These transactions are accounted for as a reduction in accounts receivable as the agreements transfer effective control over and risk related to the receivables to the buyers. Payments on the associated notes receivables will be reflected as operating activities on our statement of cash flows and on our balance sheet as prepaid expenses and other current assets for the current portion and deposits and other for the long term portion. At September 30, 2020 we have $20.4 million, net of discount, remaining to be collected on these agreements. We do not utilize factoring arrangements as an integral part of our financing for working capital. Senior Secured Credit Facilities We maintain secured credit facilities with Barclays Bank PLC and with SunTrust. The Barclays credit facilities are comprised of first lien term loans and a revolving credit facility. On August 28, 2020 we amended the Barclays credit facilities to increase the amount available under the revolving line of credit to $195.0 million. The SunTrust credit facilities are comprised of a term loan and a revolving credit facility of $30.0 million. As of September 30, 2020, we were in compliance with all covenants under our credit facilities. Deferred financing costs at September 30, 2020, net of accumulated amortization, was $1.9 million and is specifically related to our Barclays revolving credit facility. Included in our condensed consolidated balance sheets at September 30, 2020 are $673.2 million of total term loan debt (exclusive of unamortized discounts of $10.7 million) in thousands: 45 Table of Contents Face Value Discount Total Carrying Value First Lien Term Loans $ 620,727 $ (10,669) $ 610,058 SunTrust Term Loan 52,500 — 52,500 Total Term Loans $ 673,227 $ (10,669) $ 662,558 At September 30, 2020, we had no borrowings under our Barclays or SunTrust revolving credit facilities. After reserves for outstanding letters of credit of $6.3 million on our Barclays Revolving Credit Facility, we have $188.7 million available for borrowing and $30.0 million available under our SunTrust revolving credit facility. For more information on our secured credit facilities see Note 5 to our condensed consolidated financial statements in this quarterly report.