RadNet, Inc. 10-K

Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of RadNet Inc. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes included in this annual report on Form 10-K. 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. 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. We have developed our medical imaging business through a combination of organic growth, acquisitions and joint venture formations, and derive substantially all of our revenue from fees charged for the diagnostic imaging services performed at our facilities. During 2020, facing the novel strain of the coronavirus ("COVID-19"), we began experiencing reduced procedure volumes at the end of the first quarter which intensified through mid year but did return to 90% of pre-COVID-19 pace in the third quarter and remained consistent throughout the fourth quarter. To respond to the pandemic during the year we adjusted our business operations, inclusive of concentrating patient traffic to larger imaging centers, negotiating payment terms with vendors and landlords, initiating employee furloughs, compensation reductions, and telecommuting. The arrival of the mRNA vaccine to protect against the virus is a welcome development. As inoculations ramp up across the country and other mitigation procedures continue, we can begin to look forward to a return of normal business operations. Despite the impact of COVID, we continued to invest and position for future growth. We continued to grow through acquisition, being a new entrant in Arizona marketplace and on the east coast adding to our presence in New Jersey and the New York city area. In our related businesses we increased our focus on Artificial Intelligence with our acquisition of DeepHealth Inc. while exiting our Imaging on Call teleradiology operations. The following table shows our facilities in operation at year end and revenues for the years ended December 31, 2020, 2019 and 2018: Years Ended December 31, 2020 2019 2018 Facilities in operation 331 335 344 Total revenue (millions) $ 1,072 $ 1,154 $ 975 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. Our service fee revenue, net of contractual allowances and discounts, implicit price concessions, and revenue under capitation arrangements for the years ended December 31, are summarized in the following table (in thousands): 36 Years Ended December 31, 2020 2019 2018 Commercial insurance $ 584,035 $ 642,341 $ 542,011 Medicare 217,928 237,427 192,881 Medicaid 25,619 28,283 25,615 Workers' compensation/personal injury 33,478 42,792 34,193 Other patient revenue 25,314 23,862 25,117 Management fee revenue 11,253 11,659 13,882 Imaging on call and software 10,798 17,317 16,261 Other 23,297 24,555 18,781 Service fee revenue 931,722 1,028,236 868,741 Revenue under capitation arrangements 140,118 125,943 106,405 Total revenue $ 1,071,840 $ 1,154,179 $ 975,146 We typically experience some seasonality to our business. 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. This is primarily the result of two factors. First, our volumes and revenue are typically impacted by winter weather conditions in our northeastern operations. It is common for snowstorms and other 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. Our services include magnetic resonance imaging (MRI), computed tomography (CT), positron emission tomography (PET), nuclear medicine, mammography, ultrasound, diagnostic radiology (X-ray), fluoroscopy and other related procedures. The following table shows the number of systems that we had in operation as of the years ended December 31, 2020, 2019 and 2018: Years Ended December 31, 2020 2019 2018 MRI 293 288 273 CT 175 168 162 PET/CT 67 62 59 Mammography 315 303 289 Ultrasound 689 662 632 X-ray 376 343 308 Nuclear Medicine 57 50 53 Fluoroscopy 117 120 117 Total equipment 2,089 1,996 1,893 Facility Acquisitions, Dispositions, Equity Investments and Formation of Joint Ventures The following discussion summarizes certain details concerning our acquisition or disposition of facilities, our equity investment and our joint venture transaction. See Note 4, Facility Acquisitions and Dispositions to our consolidated financial statements included in this annual report on Form 10-K for further information. Facility acquisitions In October and November 2020, we completed our acquisition of certain assets of ZP Atlantic LLC, and ZP Elmhurst LLC. We made a fair value determination of the acquired assets and assumed liabilities and the following were recorded (in thousands): 37 ZP Atlantic ZP Elmhurst Property and Equipment $ 7,931 $ 10,681 Right of Use Assets 6,181 12,571 Other Assets 62 75 Intangible Assets 50 50 Right of Use Liabilities (6,181) (12,571) Goodwill 828 1,463 TOTAL $ 8,871 $ 12,269 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 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 development ("IPR&D'), and $23.3 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 cash 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 cash 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. On August 1, 2019 we completed a step-up acquisition upon the dissolution of our former 49% owned joint venture, Garden State Radiology LLC ("GSRN"). GSRN consisted of two multi-modality centers operating in New Jersey. GSRN became our wholly owned subsidiary with the withdrawal of the 51% majority partner for the full ownership of one center with no other consideration. We made a fair value determination of our original 49% interest which resulted in a step-up gain of approximately $1.3 million. We determined a fair value of the remaining acquired imaging center of $3.1 million in assets and $0.4 million in liabilities were recognized. We recorded $1.0 thousand in other assets, $0.7 million in fixed assets, $0.4 million in right-of-use assets, $0.4 million in operating lease liabilities, and $2.0 million in goodwill. 38 On August 1, 2019 we completed a step-up acquisition of our former 25% owned joint venture, Nulogix, via a stock issuance of RadNet common shares valued at $1.5 million to obtain the remaining 75% outstanding Nulogix shares. We made a fair value determination of the acquired assets and approximately $0.2 million in fixed assets, $0.7 million in intangible assets, $0.3 million in deferred tax liability and goodwill of $1.3 million were recorded. We also made a fair value determination of our 25% pre-existing interest in the business and recognized a loss of $0.5 million which is included in operating expenses within the consolidated statements of operations. On April 1, 2019 we completed our acquisition of certain assets of Kern Radiology Imaging Systems Inc., consisting of four multi-modality imaging centers located in Bakersfield, California for purchase consideration of $19.3 million. We made a fair value determination of the acquired assets and assumed liabilities and approximately $10.1 million in property and equipment, $9.7 million in right-of-use assets, $36.0 thousand in other assets, $3.4 million in intangible assets, $14.5 million in operating lease liabilities, and $10.5 million in goodwill were recorded. On April 1, 2019 we completed our acquisition of certain assets of Zilkha Radiology Inc. consisting of two multi-modality centers located in Islip, New York for purchase consideration of $4.5 million. We made a fair value determination of the acquired assets and assumed liabilities and approximately $2.2 million in property and equipment, $5.1 million in right-of-use assets, $0.1 million in intangible assets, $5.1 million in operating lease liabilities, $0.3 million in finance lease liabilities and $2.6 million in goodwill were recorded. On February 28, 2019, one of our Variable Interest Entities (VIEs), Lenox Hill Radiology and Medical Imaging Associates, P.C. ("LHR"), purchased the membership interest of Hudson Valley Radiology Associates, P.L.L.C. ("HVRA") for $6.0 million of RadNet common stock and contingent consideration valued at $0.7 million to guarantee the share value issued for a period of six months post acquisition date. LHR has performed a fair value purchase price allocation and recorded equipment of $10.0 thousand, a covenant not to compete of $50.0 thousand, trade name of $0.4 million, other intangible assets of $0.3 million and goodwill of $3.1 million from the transaction. In connection with the acquisition, RadNet also settled against the purchase consideration, $2.8 million, net of taxes, of an unfavorable vendor contract with HVRA stemming from the previous acquisition of Radiologix, Inc. in November 2006. On February 1, 2019, our majority owned subsidiary, West Valley Imaging Group, LLC ("WVIG") completed its acquisition of certain assets of West Valley Imaging Center, LLC ("West Valley"), consisting of a single multi-modality imaging center located in West Hills, CA for purchase consideration of $3.0 million all of which was initially funded by the Company. We have made a fair value determination of the acquired assets and approximately $0.3 million in equipment and fixed assets, $7.0 thousand in other assets, $0.2 million in intangible assets and $2.5 million in goodwill were recorded. Subsequent to the transaction, our partner in WVIG, Cedars Sinai Medical Center, contributed $0.8 million in cash to maintain its 25% economic interest in the venture. Dispositions On June 1, 2020 we completed our sale of certain assets of our Imaging On Call subsidiary for approximately $1.0 thousand. With this transaction, we have exited the teleradiology business. Equity Investments Medic Vision, based in Israel, specializes in software packages that provide compliant radiation dose structured reporting and enhanced images from reduced dose CT scans. On March 24, 2017, we acquired an initial 12.50% equity interest in Medic Vision - Imaging Solutions Ltd for $1.0 million. We also received an option to exercise warrants to acquire up to an additional 12.50% equity interest for $1.4 million within one year from the initial share purchase date, if exercised in full. On March 1, 2018 we exercised our warrant in part and acquired an additional 1.96% for $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 noted as of the year ended December 31, 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 $143,000 that converted to an additional 80,000 preferred shares on October 11, 2019. No observable price changes or impairment in our investment was noted for the year ended December 31, 2020. 39 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 its operations. No observable price changes or impairment in our investment was noted for the year ended December 31, 2020. Formation of new joint ventures Effective November 1 2020, Arizona Diagnostic Radiology Group LLC ("ADRG"), an entity we formed in conjunction with CHI National Services Inc. ("CHI"), assumed operational and managerial oversight of our Arizona centers. We hold a 49% economic interest and CHI holds 51% economic interest in ADRG and we account for the venture under the equity method. The entity was formed in part to leverage CHI's established presence in the Phoenix, Arizona market as a major health care provider. On February 13, 2019 we formed a wholly owned subsidiary, Ventura County Imaging Group, LLC ("VCIG"). On March 1, 2019, Dignity Health joined as a venture partner. Total agreed contribution of both parties was $10.4 million of cash and assets with RadNet contributing net assets with a book value of $4.3 million for a 60% economic interest and Dignity Health contributing $6.1 million in cash and assets for a 40% economic interest. For its contribution, RadNet transferred net assets of three wholly owned multi-modality imaging centers. Dignity Health contributed approximately $0.8 million in assets to acquire 5% economic interest and paid RadNet $5.3 million for an additional 35% economic interest. We maintain controlling economic interest in VCIG and fully consolidate the results into our financial statements. Sale of joint venture interest: On April 1, 2017, we formed in conjunction with Cedars Sinai Medical Center (“CSMC”) the Santa Monica Imaging Group, LLC (“SMIG”), consisting of two multi-modality imaging centers located in Santa Monica, CA. Upon formation, RadNet held a 40% economic interest and CSMC held a 60% economic interest. RadNet accounts for our share of the venture under the equity method. On January 1, 2019, CSMC purchased from us an additional 5% percent economic interest in SMIG valued at $0.1 million. As a result of the transaction, our economic interest in SMIG has been reduced to 35%. We recorded a loss of $2.0 thousand on the transaction. Change in control of existing joint ventures On October 6, 2014, we acquired a 49% equity interest in Garden State Radiology Network, LLC ("GSRN") for cash consideration of $2.2 million. The venture consisted of two imaging centers located in New Jersey. On August 1, 2019, the entity was dissolved by transferring ownership of the assets of the centers to the partners for no consideration, with each partner receiving full ownership of one center. On April 12, 2018 we acquired 25% share capital in Nulogix, Inc. for cash consideration of $2.0 million. On August 1, 2019 we completed via the issuance of RadNet common stock valued at $1.5 million, the acquisition of the remaining 75% economic interest and we now consolidate the financial statements of Nulogix as a wholly owned subsidiary. Results of Operations The following table sets forth, for the periods indicated, the percentage that certain items in the statements of operations bears to net revenue for the years 2020, 2019 and 2018. 40 Years Ended December 31, 2020 2019 2018 REVENUE Service fee revenue 86.9 % 89.1 % 89.1 % Revenue under capitation arrangements 13.1 % 10.9 % 10.9 % Total Revenue 100.0 % 100.0 % 100.0 % Provider relief funding 2.5 % — % — % OPERATING EXPENSES Cost of operations, excluding depreciation and amortization 90.1 % 86.6 % 89.0 % Depreciation and amortization 8.1 % 7.0 % 7.5 % Loss (gain) on sale and disposal of equipment 0.1 % 0.2 % (0.2) % Loss on impairment 0.4 % — % 0.4 % Severance costs 0.4 % 0.1 % 0.2 % Total operating expenses 99.1 % 93.9 % 96.8 % INCOME FROM OPERATIONS 3.3 % 6.1 % 3.2 % OTHER INCOME AND EXPENSES Interest expense 4.3 % 4.2 % 4.5 % Equity in earnings of joint ventures (0.7) % (0.7) % (1.2) % Gain on re-measurement of pre-existing interest — % (0.1) % (4.1) % Gain on extinguishment of debt (0.4) % — % — % Other expenses — % 0.1 % — % Total other expenses (income) 3.4 % 3.5 % (0.8) % INCOME BEFORE INCOME TAXES (0.1) % 2.6 % 4.0 % Benefit from (provision for) income taxes (0.1) % (0.5) % — % NET INCOME (0.2) % 2.0 % 3.9 % Net income attributable to noncontrolling interests 1.2 % 0.8 % 0.6 % NET (LOSS) INCOME ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS (1.4) % 1.3 % 3.3 % Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019 We grow through a combination of organic growth as well as acquisitions and joint ventures. We have segregated some of our information to demonstrate which is attributable to centers that were in operation throughout the entirety of the comparison period, and which is attributable to centers that were acquired or disposed of during the period. For the discussion below, same centers are those that were in continuous operation from January 1, 2019 through December 31, 2020. Total Revenue inclusive of Provider Relief Funding for 2020 In Thousands Year Ended December 31, Revenue 2020 2019 $ Increase/(Decrease) % Change Total Revenue $1,098,104 $1,154,179 ($56,075) (4.9)% Same Center Revenue $1,038,780 $1,093,317 ($54,537) (5.0)% Our procedure volumes for the year ended December 31, 2020 were affected by the COVID-19 pandemic, which precipitated an approximate 12.3% decrease in same center procedural volumes year over year. Mitigating the income decline is $26.3 million received in Provider Relief funding, which, per the official designation of the program, was used to offset lost revenues and incremental expenses. This comparison excludes revenue contributions from centers that were acquired or divested subsequent to January 1, 2019. For the twelve months ended December 31, 2020, net service fee revenue from centers 41 that were acquired or divested subsequent to January 1, 2019 and excluded from the above comparison was $59.3 million. For the twelve months ended December 31, 2019, net service fee revenue from centers that were acquired or divested subsequent to January 1, 2019 and excluded from the above comparison was $60.9 million. Operating Expenses Total operating expenses for the twelve months ended December 31, 2020 decreased approximately $21.9 million, or 2.0%, from $1.08 billion for the twelve months ended December 31, 2019 to $1.06 billion for the twelve months ended December 31, 2020. The following table sets forth our cost of operations and total operating expenses for the twelve months ended December 31, 2020 and 2019 (in thousands): Years Ended December 31, 2020 2019 Salaries and professional reading fees, excluding stock-based compensation $ 591,338 $ 634,179 Stock-based compensation 12,405 8,731 Building and equipment rental 108,202 106,495 Medical supplies 44,964 45,955 Other operating expenses * 208,993 204,332 Cost of operations 965,902 999,692 Depreciation and amortization 86,795 80,607 Loss on sale and disposal of equipment 1,200 2,383 Loss on impairment 4,170 — Severance costs 4,353 1,619 Total operating expenses $ 1,062,420 $ 1,084,301 * Includes billing fees, office supplies, repairs and maintenance, insurance, business tax and license, outside services, telecommunications, utilities, marketing, travel and other expenses. Salaries and professional reading fees, excluding stock-based compensation and severance In Thousands Year Ended December 31, Salaries and Professional Fees 2020 2019 $ Increase/(Decrease) % Change Total $591,338 $634,179 ($42,841) (6.8)% Same Center $561,720 $602,448 ($40,728) (6.8)% The decrease in salaries expense was a result of staff furloughs and payroll reductions initiated in response to the COVID-19 crisis and later sustained by the implementation of efficiencies garnered from a review of operational workflows. This comparison excludes expenses from centers that were acquired or divested subsequent to January 1, 2019. For the twelve months ended December 31, 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 $29.6 million. For the twelve months ended December 31, 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 $31.7 million. Stock-based compensation Stock-based compensation increased $3.7 million, or 42.1%, to approximately $12.4 million for the twelve months ended December 31, 2020 compared to $8.7 million for the twelve months ended December 31, 2019. This increase 42 was driven by the higher fair value of RSA’s awarded and vested in the year ended December 31, 2020 as compared to RSA’s awarded and vested in the same period in 2019. Building and equipment rental In Thousands Year Ended December 31, Building & Equipment Rental 2020 2019 $ Increase/(Decrease) % Change Total $108,202 $106,495 $1,707 1.6% Same Center $99,483 $98,482 $1,001 1.0% This comparison excludes expenses from centers that were acquired or divested subsequent to January 1, 2019. For the twelve months ended December 31, 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 $8.7 million. For the twelve months ended December 31, 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 also $8.0 million. Medical supplies In Thousands Year Ended December 31, Medical Supplies Expense 2020 2019 $ Increase/(Decrease) % Change Total $44,964 $45,955 ($991) (2.2)% Same Center $40,894 $42,384 $(1,490) (3.5)% The drop in medical supplies expense was related to decreased use of contrast agents driven by volume reduction in our advanced imaging modalities of CT and PET, which were reduced a combined 10% year over year due to COVID-19. This comparison excludes expenses from centers that were acquired or divested subsequent to January 1, 2019. For the twelve months ended December 31, 2020, medical supplies expenses from centers that were acquired or divested subsequent to January 1, 2019 and excluded from the above comparison was $4.1 million. For the twelve months ended December 31, 2019, medical supplies expense from centers that were acquired or divested subsequent to January 1, 2019 and excluded from the above comparison was $3.6 million. Other operating expenses In Thousands Year Ended December 31, Other Operating Expenses 2020 2019 $ Increase/(Decrease) % Change Total $208,993 $204,332 $4,661 2.3% Same Center $196,484 $190,398 $6,086 3.2% The increase in other operating expenses relates to higher billing fees and charges for outside services. This comparison excludes expenses from centers that were acquired or divested subsequent to January 1, 2019. For the twelve months ended December 31, 2020, other operating expense from centers that were acquired or divested subsequent to January 1, 2019 and excluded from the above comparison was $12.5 million. For the twelve months ended December 31, 2019, other operating expense from centers that were acquired or divested subsequent to January 1, 2019 was $13.9 million. Depreciation and amortization In Thousands Year Ended December 31, Depreciation & Amortization 2020 2019 $ Increase/(Decrease) % Change Total $86,795 $80,607 $6,188 7.7% Same Center $81,337 $75,190 $6,147 8.2% The increase in same center depreciation and amortization is primarily due to additional equipment and leasehold improvements placed in service in the twelve months ending December 31, 2020 compared to the same period in 2019. 43 This comparison excludes expenses from centers that were acquired or divested subsequent to January 1, 2019. For the twelve months ended December 31, 2020, depreciation expense from centers that were acquired or divested subsequent to January 1, 2019 and excluded from the above comparison was $5.5 million. For the twelve months ended December 31, 2019, depreciation and amortization from centers that were acquired or divested subsequent to January 1, 2019 and excluded from the above comparison was $5.4 million. Loss on sale and disposal of equipment We recorded a loss on the sale of equipment of approximately $1.2 million and $2.4 million for each of the twelve months ended December 31, 2020 and 2019, respectively. Severance Costs We incurred total severance expense of $4.4 million and $1.6 million for each of the twelve months ended December 31, 2020 and 2019, respectively, an increase of $2.7 million or 168.9%, which was related to payroll reduction charges. Impairment Charges During the current year of 2020, we ceased employing certain indefinite lived trade names with a total value of $4.2 million and they were written off in full. We recorded impairment charges to our Imaging On Call reporting unit of $3.9 million for the twelve months ended December 31, 2018, with goodwill representing $3.8 million of the total and the remainder being a write off the Imaging On Call trade name of approximately $100,000. Interest expense In Thousands Year Ended December 31, Interest Expense 2020 2019 $ Increase/(Decrease) % Change Total Interest Expense $45,882 $48,044 ($2,162) (4.5)% Interest related to derivatives* $6,206 $(1,125) Interest related to amortization** $4,413 $4,184 Adjusted Interest Expense*** $35,263 $44,985 $(9,722) (21.6)% *Includes interest on 2016 caps and 2019 swaps. **Includes combined noncash amortization of deferred loan coasts and discount on issuance of debt ***Includes interest related to our term loans, revolving credit line,notes, finance leases and other The reduction in interest expense solely paid on our debt and lease obligations 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. To mitigate our future interest expense exposure the Company has entered into a forward interest rate agreements. See the Derivative Instruments section of Note 2 to the consolidated financial statements included in this annual report on Form 10-K and ITEM 7a, Quantitative and Qualitative Disclosure About Market Risk below for more details on our derivative transactions. Equity in earnings from unconsolidated joint ventures For the twelve months ended December 31, 2020 we recognized equity in earnings from unconsolidated joint ventures of $7.9 million versus $8.3 million for the twelve months ended December 31, 2019, a decrease of $0.4 million or 4.9%, related to market conditions stemming from the COVID-19 pandemic. Non-cash change in fair value of interest rate hedge 44 We recorded expense of approximately $2.5 million for the ineffective portion of our 2019 swaps for the year ended December 31, 2020. See the Derivative Instruments section of Note 2 to the consolidated financial statements included in this annual report on Form 10-K. Gain on re-measurement valuation of pre-existing interest In August of 2019 we completed step-up acquisitions of two of our then equity method joint ventures, Garden State Radiology and Nulogix. Upon the fair value determination of our interests in both ventures, we recognized a step-up gain of $0.8 million for the year ended December 31, 2019. Gain on extinguishment of debt In December 2020, we met the eligibility requirements for forgiveness of loans received under The Paycheck Protection Program and recorded a gain on extinguishment of debt of approximately $4.0 million. See Note 8 Credit Facilities and Notes Payable included in this annual report on Form 10-K. Other expenses For the years ended ended December 31, 2020 and December 31, 2019 we recorded approximately $0.1 million and $1.3 million of other expenses respectively. Provision for income taxes We had a provision for income tax for the twelve months ended December 31, 2020 of $0.9 million or 104.8% of income before income taxes, compared to a tax provision for the twelve months ended December 31, 2019 of $6.2 million or 21.0% of income before income taxes. Income tax decreased in 2020 primarily due to the economic effects of the COVID-19 pandemic on our operations. The income tax rates for the twelve months ended December 31, 2020 diverge from the federal statutory rate due to adjustments for leasehold improvements, equity method investments, and other liabilities. Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018 For the comparison of results of operations for the year ended December 31, 2019 to the year ended December 31, 2018, please see Item 7, Management's Discussion and Analysis of Financial Condition and Operations in our Form 10-K for the year ended December 31, 2019, filed with the SEC on March 16, 2020. Non-GAAP Financial Measures We use both GAAP and non-GAAP metrics to measure our financial results. We believe that, in addition to GAAP metrics, non-GAAP metrics such as Adjusted EBITDA and Free Cash Flow assist us in measuring our core operations from period to period as well as our cash generated from operations and ability to service our debt obligations. Adjusted EBITDA Our Adjusted EBITDA metric removes non-cash and non-recurring charges that occur in the affected period and provides a basis for measuring the Company’s core financial performance against other periods. We define Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, as adjusted to exclude losses or gains on the disposal of equipment, other income or loss, loss on debt extinguishment, bargain purchase gains, loss on de-consolidation of joint ventures and non-cash equity compensation. Adjusted EBITDA includes equity earnings in unconsolidated operations and subtracts allocations of earnings to non-controlling interests in subsidiaries, and is adjusted for non-cash or one-time events that take place during the period. 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 Adjusted EBITDA should not be considered in isolation or as alternatives to net income, cash flows generated by operating, investing or financing activities or other financial statement data presented in the consolidated financial statements as an indicator of financial performance or liquidity. Adjusted EBITDA is not a measurement determined in accordance with GAAP and is therefore susceptible to varying methods of calculation and this metric, as presented, may not be comparable to other similarly titled measures of other companies. 45 The following is a reconciliation of the nearest comparable GAAP financial measure, net income, to Adjusted EBITDA for the years ended December 31, 2020, 2019, and 2018, respectively (in thousands): Years Ended December 31, 2020 2019 2018 Net (loss) income attributable to RadNet, Inc. common stockholders $ (14,840) $ 14,756 $ 32,243 Plus provision for income taxes 895 6,229 394 Plus interest expense 45,882 48,044 43,456 Plus severance costs 4,353 1,619 1,931 Plus depreciation and amortization 86,795 80,607 72,899 Plus non-cash employee stock-based compensation 12,405 8,730 7,662 Plus loss on sale and disposal of equipment 1,200 2,383 — Plus other expenses 120 1,283 — Plus non-cash change in swap valuation 2,528 — — Plus legal settlement and related expenses — 1,248 — Plus gain on sale of equipment attributable to noncontroling interest — — 440 Plus transaction costs EmblemHealth/ACP — — 681 Plus one time legal settlement — — 786 Plus changes in the organization of east coast and international operations — — 19,101 Plus loss on impairment 4,170 — 3,937 Less gain on extinguishment of debt (4,047) — — Less gain on sale and disposal of equipment — — (2,054) Less other income — — (181) Less gain on re-measurement of pre-existing interest — (768) (39,539) Adjusted EBITDA $139,461 $164,131 $141,756 Free Cash Flow Another non-GAAP measure that we use is “Free Cash Flow”. We use free cash flow as an additional way of viewing our liquidity that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our cash flows, and consequently our ability to service debt and make capital expenditures. Free cash flow is used in addition to and in conjunction with results presented in accordance with GAAP and free cash flow should not be relied upon to the exclusion of GAAP financial measures. We define free cash flow as Adjusted EBITDA, less capital expenditures, and less the cash portion of our interest expense. We reconcile free cash flow to “net cash flows provided by operating activities”. We use free cash flow to conduct and evaluate our business because, although it is similar to cash flow from operations, we believe it is a more conservative measure of cash flows since purchases of fixed assets and the cash portion of our interest expense are a necessary component of our ongoing operations. In limited circumstances in which proceeds from sales of fixed assets exceed purchases, free cash flow could exceed cash flow from operations. However, since we do not anticipate being a net seller of fixed assets, we expect free cash flow to be less than operating cash flows. Free cash flow has limitations due to the fact that it does not represent the residual cash flow available for discretionary expenditures. For example, free cash flow does not incorporate payments made on capital lease obligations or cash payments for business acquisitions. Therefore, we believe it is important to view Free Cash Flow as a complement to our entire consolidated statements of cash flows. The following table provides a reconciliation of free cash flow to “net cash flows from operations” the most directly comparable amounts reported in accordance with GAAP for the years ended December 31, 2020, 2019 and 2018 (in thousands): 46 Years Ended December 31, 2020 2019 2018 Adjusted EBITDA $ 139,461 $ 164,131 $ 141,756 Less cash paid for interest (39,521) (46,254) (37,016) Less cash capital purchases (1) (86,758) (71,540) (72,180) Less new finance debt (20) (51) — Plus proceeds from sale of equipment 828 1,160 2,575 Free cash flow $ 13,990 $ 47,446 $ 35,135 Free cash flow as a percent of cash flow from operations 6.0 % 45.5 % 30.1 % (1) Purchase of Property Plant & Equipment is adjusted for capital purchases of NJIN, which is excluded from our debt covenant calculation. Liquidity and Capital Resources The following table is a summary of key balance sheet data as of December 31, 2020 and December 31, 2019 and income statement data for the twelve months ended December 31, 2020, 2019 and 2018 (in thousands): Balance Sheet Data for the period ended December 31, 2020 2019 2018 Cash and cash equivalents $ 102,018 $ 40,165 Accounts receivable 129,585 154,763 Working capital (exclusive of current operating lease liability) (61,896) (25,048) Stockholders' equity 258,303 233,139 Income Statement data for the twelve months ended December 31, Total revenue $ 1,071,840 $ 1,154,179 $ 975,146 Net (loss) income attributable to RadNet common stockholders (14,840) 14,756 32,243 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. The COVID 19 pandemic has resulted in a reduction of procedure volumes and corresponding operating revenues for the year ended December 31, 2020. We are uncertain of the duration and ultimate severity of its effects. Although we took measures to reduce operating expenses and have received government stimulus funding, we may continue to experience decreased procedure volumes during the duration of the pandemic. 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 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. 47 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 twelve months ended December 31, 2020 and 2019: Cash Flow Data December 31, 2020 December 31, 2019 Cash provided by operating activities $ 233,759 $ 104,322 Cash used in investing activities (126,244) (99,465) Cash (used in) provided by financing activities (45,561) 24,951 For cash used in investing activities for the twelve months ended December 31, 2020, we purchased property and equipment for approximately $94.2 million, acquired imaging facilities for $31.3 million, made an equity contributions to joint venture of $1.6 million. We received proceeds from the sale of equipment of $0.8 million. The cash used in financing activities for the twelve months ended December 31, 2020 was mainly due to principal payments on our term loans. 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 December 31, 2020 we have $20.5 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 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 December 31, 2020, we were in compliance with all covenants under our credit facilities. Deferred financing costs at December 31, 2020, net of accumulated amortization, was $1.8 million and is specifically related to our Barclays revolving credit facility. Included in our consolidated balance sheets at December 31, 2020 are $601.3 million of First Lien Term Loans and $51.4 million of SunTrust Term Loan Agreement debt for a combined total of $652.7 million (net of unamortized discounts of $9.7 million) in thousands: Face Value Discount Total Carrying Value Barclays First Lien Term Loans $ 611,028 $ (9,699) $ 601,329 SunTrust Term Loan Agreement 51,375 — 51,375 Total Term Loans $ 662,403 $ (9,699) $ 652,704 We had no outstanding balance under our $195.0 million Barclays Revolving Credit Facility at December 31, 2020 and had reserved an additional $7.3 million for certain letters of credit. The remaining $187.7 million of our Barclays Revolving Credit Facility was available to draw upon as of December 31, 2020. We also had no balance under our $30.0 million SunTrust Revolving Credit Facility related to our consolidated subsidiary NJIN at December 31, 2020, and with no letters of credit reserved against the facility, the full amount was available to draw upon. At December 31, 2020 we were in compliance with all covenants under our credit facilities. For more information on our secured credit facilities see Note 8 to our consolidated financial statements in this annual report. 48 Contractual Commitments Our future obligations for notes payable, equipment under finance leases, lines of credit, equipment and building operating leases and other contractual obligations for the next five years and thereafter include (dollars in thousands): 2021 2022 2023 2024 2025 Thereafter Total Notes payable (1) $ 43,670 $ 44,795 $ 573,938 $ — $ — $ — $ 662,403 Finance leases (2) 2,654 719 14 13 4 2 3,406 Operating leases (3) 97,307 91,479 83,648 69,686 59,469 316,112 717,701 Total $ 143,631 $ 136,993 $ 657,600 $ 69,699 $ 59,473 $ 316,114 $ 1,383,510 (1) Includes variable rate debt for which the contractual obligation was estimated using the applicable rate at December 31, 2020. (2) Includes interest component of finance lease obligations. (3) Includes interest component of operating lease obligations. We have service agreements with various vendors under which they have agreed to be responsible for the maintenance and repair of a majority of our equipment for a fee that is based on the type and age of the equipment. Under these agreements, we are committed to minimum payments of approximately $34.0 million in 2021. 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 annual report on Form 10-K we discuss our significant accounting policies, including those that do not require management to make difficult, subjective or complex judgments or estimates. The critical 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. REVENUES – Our revenues generally relate to net patient fees received from various payors and patients themselves under contracts in which our performance obligations are to provide diagnostic services to the patients. Revenues are recorded during the period our obligations to provide diagnostic services are satisfied. Our performance obligations for diagnostic services are generally satisfied over a period of less than one day. The contractual relationships with patients, in most cases, also involve a third-party payor (Medicare, Medicaid, managed care health plans and commercial insurance companies, including plans offered through the health insurance exchanges) and the transaction prices for the services provided are dependent upon the terms provided by (Medicare and Medicaid) or negotiated with (managed care health plans and commercial insurance companies) the third-party payors. The payment arrangements with third-party payors for the services we provide to the related patients typically specify payments at amounts less than our standard charges and generally provide for payments based upon predetermined rates per diagnostic services or discounted fee-for-service rates. Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations, changes in business and economic conditions, and the frequent changes in managed care contractual terms resulting from contract re-negotiations and renewals. As it relates to the Group, this service fee revenue includes payments for both the professional medical interpretation revenue recognized by them as well as the payment for all other aspects related to our providing the imaging services, for which we earn management fees. As it relates to others centers, this service fee revenue is earned through providing the use of our diagnostic imaging equipment and the provision of technical services as well as providing administration services such as 49 clerical and administrative personnel, bookkeeping and accounting services, billing and collection, provision of medical and office supplies, secretarial, reception and transcription services, maintenance of medical records, and advertising, marketing and promotional activities. Our revenues are based upon the estimated amounts we expect to be entitled to receive from patients and third-party 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. 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 fourth quarter of 2020, we received approximately $0.6 million in funding and for twelve months ended December 31, 2020 we have received funding of $26.3 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 year ended December 31, 2020, we continued to evaluate our operating results and gave consideration to the updated reporting guidelines issued in January 2021 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. 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 totaled $472.9 million and $442.0 million million at December 31, 2020 and December 31, 2019, respectively. Indefinite lived intangible assets at December 31, 2020 were $7.1 million and $11.3 million at December 31, 2019 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 test for impairment annually and in addition to that 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 during the year did not identify an indication of goodwill or trade name impairment due that event. During the year we ceased employing certain indefinite lived trade names with a total value of $4.2 million and they were written off in full. Separate from this, our annual impairment 50 test as of October 1, 2020 noted no other impairment, and we have not identified any indicators of impairment through December 31, 2020. Significant Accounting Policies 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. 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. LONG-LIVED ASSETS - We evaluate our long-lived assets (property and equipment) and intangibles, other than goodwill and indefinite lived intangibles, 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 December 31, 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. PROPERTY AND EQUIPMENT – Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization of property and equipment are provided using the straight-line method over the estimated useful lives, which range from 3 to 15 years. Leasehold improvements are amortized at the lesser of lease term or their estimated useful lives, which range from 3 to 15 years. Maintenance and repairs are charged to expense as incurred. 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 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. 51 EQUITY BASED COMPENSATION – We have one long-term incentive plan that we adopted in 2006 and which we first amended and restated as of April 20, 2015, and again on March 9, 2017 (the “Restated Plan”). The Restated Plan was approved by our stockholders at our annual stockholders meeting on June 8, 2017. We have reserved for issuance under the Restated Plan 14,000,000 shares of common stock. We can issue options, stock awards, stock appreciation rights, stock units and cash awards under the Restated Plan. Certain options granted under the Restated Plan to employees are intended to qualify as incentive stock options under existing tax regulations. Stock options and warrants generally vest over three to five years and expire five to ten years from date of grant. The compensation expense associated with option grants is calculated based on a valuation model, typically the Black–Scholes model, which requires certain management assumptions with respect to volatility. 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 11, 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. We believe that the amount or any estimable range of reasonably possible or probable loss will not, 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 Accounting standards adopted In March 2020, the FASB issued ASU 2020-04 ("ASU 2020-04"), Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting . ASU 2020-04 provides optional expedients and exceptions for applying generally accepted accounting principles to certain contract modifications and hedging relationships that reference London Inter-bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. The guidance is effective upon issuance and generally can be applied through December 31, 2022. We are currently evaluating the potential impact of ASU 2020-04 on our financial statements. In June 2016, the FASB issued ASU No. 2016-13 ("ASU 2016-13), Financial Instruments - Credit Losses. ASU 2016-13 replaces the incurred loss methodology previously utilized for valuing financial instruments with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. We adopted the standard on January 1, 2020 using the modified retrospective approach. See the Accounts Receivable section to Note 2 for further information on our allowances for credit losses. In August 2018, the FASB issued ASU No. 2018-15 (“ASU 2018-15”), Intangibles-Goodwill and Other-Internal-Use Software. ASU 2018-15 aligns the requirements for deferring implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This ASU was effective in the first quarter of 2020 with early adoption permitted and can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The adoption of this standard did not have a material impact on our consolidated balance sheet. In March 2020, the FASB issued ASU 2020-03 ("ASU 2020-03"), Codification Improvements to Financial Instruments . The amendments in this update represent changes to clarify or improve the codification and correct unintended application. ASU 2020-03 was effective immediately upon issuance and its adoption did not have a material impact on our financial statements. In August 2018, the FASB issued ASU No. 2018-13 ("ASU 2018-13"), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurements . This standard removes, modifies and adds certain disclosures related to recurring and nonrecurring fair value measurements. We adopted ASC 2018-13 effective January 1, 2020 and it had no effect on our disclosures. Accounting standards not yet adopted 52 In December 2019, the FASB issued ASU 2019-12 ("ASU 2019-12"), Income Taxes (Topic 740). ASU 2019-12 removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other areas of the standard. ASU 2019-12 is effective beginning in the first quarter of 2021. Early adoption is permitted. Certain amendments in this update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. We are currently evaluating the impact this ASU will have on our financial statements and related disclosures. In January 2020, the FASB issued ASU 2020-01 ("ASU 2020-01"), Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), clarifying the interaction between accounting standards related to equity securities, equity method investments, and certain derivatives. ASU 2020-01 is effective for fiscal years beginning after December 15, 2020. We do not expect the adoption of this guidance will have a material impact on our financial statements. In January 2021, the FASB issued ASU 2021-01 ("ASU 2021-01"), Reference Rate Reform (Topic 848), Scope . ASU 2021-01 provides clarifies the scope of Topic 848 so that derivatives affected by the discounting transition are explicitly eligible for certain option expedients and exceptions in Topic 848. The guidance is effective upon issuance and generally can be applied through December 31, 2022. We are currently evaluating the potential impact of ASU 2021-01 on our financial statements. Subsequent Events On January 1, 2021 we entered into the Simi Valley Imaging Group, LLC, a partnership with Simi Valley Hospital and Health Services ("Simi Adventist"). The operation will offer multi-modality imaging services out of two locations in Ventura County, California. Total investment in the venture is $0.5 million. RadNet contributed $0.3 million in assets for a 60% economic interest and Simi Adventist contributed assets totaling $0.2 million for a 40% economic interest. Over January and February 2021, we completed additional acquisitions of ZP companies in the New York City area for total purchase consideration of approximately $53.4 million. In March 2021, we received $6.2 million in general distribution funds under the CARES Act. Additional Information Additional information concerning RadNet, Inc., including our consolidated subsidiaries, for each of the years ended December 31, 2020, 2019 and 2018 is included in the consolidated financial statements and notes thereto in this annual report.