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, 2020 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the U.S. Securities and Exchange Commission (SEC) on March 15, 2021. Forward-Looking Statements This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements reflect current views about future events and are based on our currently available financial, economic and competitive data and on current business plans. Actual events or results may differ materially depending on risks and uncertainties that may affect our operations, markets, services, prices and other factors. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” “assumption” or the negative of these terms or other comparable terminology. Forward-looking statements in this current report include, among others, statements we make regarding • our ability to successfully integrate new operations, to our business and the anticipated benefits to be derived from our investments, acquisitions, and joint ventures; • anticipated trends in our revenues, operating expenses and liquidity and cash flows, including our financial guidance and anticipated effects of cost-savings efforts; • the ongoing impact of the COVID-19 pandemic on our business, suppliers, payors, customers, referral sources, partners, patients and employees, including (i) government’s unprecedented action regarding existing 22 Table of Contents 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, 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 March 31, 2021, we operated, directly or indirectly through joint ventures with hospitals, 346 centers located in Arizona, California, Delaware, Florida, Maryland, New Jersey, and New York. Our centers provide physicians with imaging capabilities to facilitate the diagnosis and treatment of diseases and disorders and may reduce unnecessary invasive procedures, often reducing the cost and amount of care for patients. Our services include magnetic resonance imaging (MRI), computed tomography (CT), positron emission tomography (PET), nuclear medicine, mammography, ultrasound, diagnostic radiology (X-ray), fluoroscopy and other related procedures. In addition to our imaging services, we own and operate a number of technology businesses that are complementary to our imaging business. Our subsidiary eRAD, Inc., develops and sells computerized systems for the diagnostic imaging industry, which provide the technology to distribute, display, store and retrieve digital images. We have made a number of investments in Artificial Intelligence (AI) with our purchases of Nulogix and DeepHealth, combined with our investment in Whiterabbit.ai and our collaborative arrangement with Hologic. Our current AI focus is to develop solutions in machine learning to assist radiologists and other clinicians in interpreting images and improving patient care, initially in the field of mammography. We derive substantially all of our revenue, directly or indirectly, from fees charged for the diagnostic imaging services performed at our facilities. The following table shows our facilities in operation and revenues for the three months ended March 31, 2021 and March 31, 2020: Three Months Ended March 31, 2021 2020 Facilities in operation 346 335 Net revenues (millions) $ 315 $ 282 Our revenue is derived from a diverse mix of payors, including private, managed care capitated and government payors. We believe our payor diversity mitigates our exposure to possible unfavorable reimbursement trends within any one payor class. In addition, our experience with capitation arrangements over the last several years has provided us with the expertise to manage utilization and pricing effectively, resulting in a predictable stream of revenue. 23 Table of Contents Our total service revenue during the three months ended March 31, 2021 and 2020 are presented in the table below based on an allocation of the estimated transaction price with the patient between the primary patient classification of insurance coverage (in thousands): Three Months Ended March 31, 2021 2020 Commercial insurance $ 182,096 $ 155,461 Medicare 63,589 57,749 Medicaid 8,451 6,628 Workers' compensation/personal injury 10,399 10,274 Other patient revenue 4,775 5,662 Management fee revenue 5,219 2,567 Teleradiology and Software revenue 2,426 3,770 Other 2,622 6,222 Service fee revenue 279,577 248,333 Revenue under capitation arrangements 35,742 33,231 Total service revenue $ 315,319 $ 281,564 We typically experience some seasonality to our revenue stream. Although we had a resurgence in procedure volumes for the first quarter ended March 31, 2021, it is in this time period that 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. Also, 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 of our results below centers on our performance in the first quarter ending March 31, 2021. During 2020, with the onset of the novel strain of the coronavirus ("COVID-19") and related responses, we began experiencing reduced procedure volumes at the end of the first quarter which intensified through mid year. Procedure volumes returned to 90% of pre-COVID-19 pace in the third quarter and remained consistent at that level through the fourth quarter. During 2020, in response to the pandemic, we adjusted our business operations, inclusive of concentrating patient traffic to larger imaging centers, negotiating payment terms with vendors and landlords, initiating employee furloughs, compensation reductions, and telecommuting. As we enter 2021, 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. We expect that the cost saving measures implemented in 2020 will be beneficial to our financial position in 2021, provided that procedure volumes continue to ramp back up to historic levels. Despite the impact of COVID-19, we continued to invest and position for future growth. We acquired 10 new centers in the New York City area during the quarter ended March 31, 2021. Equity Investments, Acquisitions and Dispositions, and Joint Venture Activity We have developed our medical imaging business through a combination of organic growth, equity investments, acquisitions and joint venture formations. The information below updates our activity of such matters contained in our annual report on Form 10-K for the year ended December 31, 2020. Equity Investments As of March 31, 2021, we have three equity investments for which a fair value is not readily determinable and therefore the total amounts invested are recognized at cost as follows: 24 Table of Contents Medic Vision Imaging Solutions Ltd., based in Israel, specializes in software packages that provide compliant radiation dose structured reporting and enhanced images from reduced dose CT scans. Our investment of $1.2 million represents a 14.21% equity interest in the company. No observable price changes or impairment in our investment was identified as of March 31, 2021. Turner Imaging Systems, based in Utah, develops and markets portable X-ray imaging systems that provide a user the ability to acquire X-ray images wherever and whenever they are needed. On February 1, 2018, we purchased 2.1 million preferred shares in Turner Imaging Systems for $2.0 million. On January 1, 2019 we funded a convertible promissory note in the amount of $0.1 million that converted to additional 80,000 shares December 21, 2019. No observable price changes or impairment in our investment was identified as of March 31, 2021. WhiteRabbit.ai Inc., based in California, is currently developing an artificial intelligence suite which aims to improve the speed and accuracy of cancer detection in radiology and improve patient care. On November 5, 2019 we acquired an equity interest in the company for $1.0 million and also loaned the company $2.5 million in support of it operations. No observable price changes, impairment in our investment or impairment of the loan receivable was identified as of March 31, 2021. Facility acquisitions During the first quarter of 2021, we completed the acquisition of certain assets of the following entities, all located in the New York city area. We made a preliminary fair value determination of the acquired assets and assumed liabilities and the following were recorded (in thousands): Entity Acquired Total Purchase Consideration Property & Equipment Right of Use Assets Goodwill Intangible Assets Other Assets Right of Use Liabilities Personal Health Imaging PLLC $ 2,995 $ 576 $ 608 $ 2,355 $ 50 $ 14 $ (608) ZP Elmont LLC 2,194 1,112 1,695 1,005 50 27 (1,695) ZP Freeport LLC 6,065 3,968 2,361 2,018 50 29 (2,361) Broadway Medical Imaging LLC 1,155 1,076 1,791 6 50 23 (1,791) 3235 Hempstead LLC 9,386 4,304 10,115 5,032 50 — (10,115) SLZM Realty LLC 13,671 3,862 7,715 9,759 50 — (7,715) 2012 Sunrise Merrick LLC 11,428 2,363 5,919 9,015 50 — (5,919) ZP Bayside LLC 3,545 3,385 9,393 40 50 70 (9,393) ZP Laurelton LLC 2,658 2,530 5,157 32 50 46 (5,157) ZP Smith LLC 3,978 3,581 10,558 347 50 — (10,558) Total $ 57,075 $ 26,757 $ 55,312 $ 29,609 $ 500 $ 209 $ (55,312) Formation of majority owned subsidiary On January 1, 2021 we entered into the Simi Valley Imaging Group, LLC, a partnership with Simi Valley Hospital and Health Services ("Simi Adventist"). The operation will offer multi-modality imaging services out of two locations in Ventura County, California. Total investment in the venture is $0.4 million. RadNet contributed $0.3 million in assets for a 60% economic interest and Simi Adventist contributed assets totaling $0.1 million for a 40% economic interest. Joint Venture Activity 25 Table of Contents The following table is a summary of our investment in joint ventures during the three months ended March 31, 2021 (in thousands): Balance as of December 31, 2020 $ 34,528 Equity in earnings in these joint ventures 2,285 Balance as of March 31, 2021 $ 36,813 We charged management service fees from the centers underlying these joint ventures of approximately $5.2 million and $2.6 million for the three months ended March 31, 2021 and 2020, respectively. The following table is a summary of key balance sheet data for these joint ventures as of March 31, 2021 and December 31, 2020 and income statement data for the three months ended March 31, 2021 and 2020 (in thousands): Balance Sheet Data: March 31, 2021 December 31, 2020 Current assets $ 33,265 $ 27,085 Noncurrent assets 68,493 68,686 Current liabilities (13,929) (12,545) Noncurrent liabilities (21,371) (21,582) Total net assets $ 66,458 $ 61,644 Book value of RadNet joint venture interests $ 30,351 $ 28,079 Cost in excess of book value of acquired joint venture interests 6,462 6,449 Total value of RadNet joint venture interests $ 36,813 $ 34,528 Income statement data for the three months ended March 31, 2021 2021 2020 Net revenue $ 31,718 $ 26,341 Net income $ 4,803 $ 4,245 Critical Accounting Policies The Securities and Exchange Commission defines critical accounting estimates as those that are both most important to the portrayal of a company’s financial condition and results of operations and require management’s most difficult, subjective or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. In Note 2 to our consolidated financial statements in this quarterly report and in our annual report on Form 10-K for the year ended December 31, 2020, we discuss our significant accounting policies, including those that do not require management to make difficult, subjective or complex judgments or estimates. The most significant areas involving management’s judgments and estimates are described below. Use of Estimates The financial statements were prepared in accordance with U.S. generally accepted accounting principles (GAAP), which requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and assumptions affect various matters, including our reported amounts of assets and liabilities in our consolidated balance sheets at the dates of the financial statements; our disclosure of contingent assets and liabilities at the dates of the financial statements; and our reported amounts of revenues and expenses in our consolidated statements of operations during the reporting periods. These estimates involve judgments with respect to numerous factors that 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 26 Table of Contents our obligations to provide diagnostic services are satisfied. Our performance obligations for diagnostic services are generally satisfied over a period of less than one day. The contractual relationships with patients, in most cases, also involve a third-party payor (Medicare, Medicaid, managed care health plans and commercial insurance companies, including plans offered through the health insurance exchanges) and the transaction prices for the services provided are dependent upon the terms provided by (Medicare and Medicaid) or negotiated with (managed care health plans and commercial insurance companies) the third-party payors. The payment arrangements with third-party payors for the services we provide to the related patients typically specify payments at amounts less than our standard charges and generally provide for payments based upon predetermined rates per diagnostic services or discounted fee-for-service rates. Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations, changes in business and economic conditions, and the frequent changes in managed care contractual terms resulting from contract re-negotiations and renewals. As it relates to the Group, this service fee revenue includes payments for both the professional medical interpretation revenue recognized by them as well as the payment for all other aspects related to our providing the imaging services, for which we earn management fees. As it relates to others centers, this service fee revenue is earned through providing the use of our diagnostic imaging equipment and the provision of technical services as well as providing administration services such as clerical and administrative personnel, bookkeeping and accounting services, billing and collection, provision of medical and office supplies, secretarial, reception and transcription services, maintenance of medical records, and advertising, marketing and promotional activities. Our revenues are based upon our management's estimate of amounts we expect to be entitled to receive from patients and third-party payors. Estimates of contractual allowances under Medicare, Medicaid, managed care and commercial insurance plans are based upon historical collection experience of the payments received from such payors in accordance with the underlying contractual agreements. Revenues related to uninsured patients and uninsured copayment and deductible amounts for patients who have health care coverage may have price concessions applied. We also record estimated implicit price concessions (based primarily on historical collection experience) related to uninsured accounts to record self-pay revenues at the estimated amounts we expect to collect. Under capitation arrangements with various health plans, we earn a per-enrollee amount each month for making available diagnostic imaging services to all plan enrollees under the capitation arrangement. Revenue under capitation arrangements is recognized in the period in which we are obligated to provide services to plan enrollees under contracts with various health plans. Our estimates and assumptions related to revenue recognition did not change materially for the quarter ended March 31, 2021. Provider Relief Fund (COVID-19 Stimulus Funding) The Provider Relief Fund offers government assistance to eligible providers throughout the healthcare system in support of certain expenses or lost revenue attributable to the coronavirus pandemic. We have recorded provider relief funding in our condensed Consolidated Statements of Operations in the amount of $6.2 million for three months ended March 31, 2021. Generally, the department of Health and Human Services ("HHS") does not intend to recoup funds as long as a provider's lost revenue and increased expenses exceed the amount of provider relief funding one has received. HHS reserves the right to audit Relief Fund recipients in the future to ensure that this requirement is met and collect any Relief Fund amounts that were made in error or exceed lost revenue or increased expenses due to the pandemic. Failure to comply with the terms and conditions may be grounds for recoupment. In recognizing revenue associated with provider relief funding our management is required to assess whether our operations have meet the applicable requirements for the funding received. During the quarter ended March 31, 2021, we continued to evaluate our operating results in light of the most recent government guidance and based on our assessment, the amount of revenue recognized is appropriate. Accounts Receivable Substantially all of our accounts receivable are due under fee-for-service contracts from third party payors, such as insurance companies and government-sponsored healthcare programs, or directly from patients. Services are generally provided pursuant to one-year contracts with healthcare providers. Receivables generally are collected within industry norms for third-party payors. We continuously monitor collections from our payors and maintain an allowance for bad debts based upon specific payor collection issues that we have identified and our historical experience. Our estimates and assumptions for allowances on our account receivable did not change materially during the quarter ended March 31, 2021. Business Combination 27 Table of Contents We evaluate all acquisitions under the framework Clarifying the Definition of a Business in the accounting guidance.. Once a purchase has been determined to be the acquisition of a business, we are required to recognize the assets acquired and the liabilities assumed at their acquisition date fair values. Any portion of the purchase consideration transferred in excess of the net of the acquisition date fair values of the assets acquired and the liabilities assumed, is allocated to goodwill. The allocation requires our management to make estimates of the value of various assets acquired and liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations. Goodwill and Indefinite Lived Intangibles Goodwill at March 31, 2021 totaled $502.6 million. Indefinite Lived Intangible Assets at March 31, 2021 were $7.1 million and are associated with the value of certain trade name intangibles. Our management reviews the fair value of our reporting units on an annual basis to determine if an event has occurred which suggest that the fair value of a reporting unit may be impaired. When we determine the carrying value of a reporting unit exceeds its fair value, an impairment charge would be recognized and should not exceed the total amount of goodwill allocated to that reporting unit. The review of fair value requires our management to make assessments of the business and financial prospects for a particular reporting unit. We tested goodwill for impairment on October 1, 2020. We also continue at regular intervals to consider the current and expected future economic and market conditions surrounding the COVID-19 pandemic and to date have not had an indication of goodwill impairment being more likely than not through March 31, 2021. Recent Accounting Standards See Note 3, Recent Accounting and Reporting Standards to the financial statements included in this report for further information. 28 Table of Contents Results of Operations The following table sets forth, for the three months ended March 31, 2021 and 2020, 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 March 31, 2021 2020 REVENUE Service fee revenue 88.7 % 88.2 % Revenue under capitation arrangements 11.3 % 11.8 % Total service revenue 100.0 % 100.0 % Provider relief funding 2.0 % — % OPERATING EXPENSES Cost of operations, excluding depreciation and amortization 89.5 % 95.0 % Depreciation and amortization 7.2 % 7.8 % (Gain) loss on sale and disposal of equipment and other (0.4) % 0.3 % Severance costs 0.1 % 0.1 % Total operating expenses 96.4 % 103.1 % INCOME (LOSS) FROM OPERATIONS 5.6 % (3.1) % OTHER INCOME AND EXPENSES Interest expense 4.1 % 4.1 % Equity in earnings of joint ventures (0.7) % (0.7) % Non-cash change in fair value of interest rate hedge (3.6) % — % Other expenses 0.1 % — % Total other (income) expenses (0.2) % 3.4 % INCOME (LOSS) BEFORE INCOME TAXES 5.8 % (6.5) % (Provision for) benefit from income taxes (1.4) % 1.6 % NET INCOME (LOSS) 4.4 % (5.0) % Net income attributable to noncontrolling interests 1.4 % 0.8 % NET INCOME (LOSS) ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS 3.0 % (5.8) % 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 months ended March 31, 2021 and 2020 for our operations at a total company and same center level. Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020 Total Revenue inclusive of Provider Relief funding where applicable for 2021 and 2020 29 Table of Contents In Thousands Three Months Ended March 31, Revenue 2021 2020 $ Increase/(Decrease) % Change Total Revenue $321,567 $281,564 $40,003 14.2% Same Center Revenue $304,696 $277,990 $26,706 9.6% Increased revenue was spurred by an overall same center 5.1% growth in procedure volumes over the same period in the prior year. On a same center basis, Mammography procedures rose 15.1%, followed by advanced radiology procedures of PET and CT, which expanded at a combined 8.7%. The growth in Mammography procedures was precipitated by our investment in the use of artificial intelligence, which is employed to keep track of patient data, catalog findings, and drive patient notification so a regular exam schedule is maintained. Assisting in the revenue increase was $6.2 million received in Provider Relief funding and annual contractual rate increases in capitation and fee for service plans. This same center comparison excludes revenue contributions from centers that were acquired or divested subsequent to January 1, 2020. For the three months ended March 31, 2021, net service fee revenue from centers that were acquired or divested subsequent to January 1, 2020 and excluded from the above comparison was $16.9 million. For the three months ended March 31, 2020, net service fee revenue from centers that were acquired or divested subsequent to January 1, 2020 and excluded from the above comparison was $3.6 million. Operating Expenses Total operating expenses for the three months ended March 31, 2021 increased approximately $13.6 million, or 4.7%, from $290.3 million for the three months ended March 31, 2020 to $303.9 million for the three months ended March 31, 2021. The following table sets forth a breakdown of our cost of operations and total operating expenses for the three months ended March 31, 2021 and 2020 (in thousands): Three Months Ended March 31, 2021 2020 Salaries and professional reading fees, excluding stock-based compensation $ 177,861 $ 167,528 Stock-based compensation 8,248 6,622 Building and equipment rental 28,711 26,896 Medical supplies 13,970 12,748 Other operating expenses * 53,491 53,623 Cost of operations 282,281 267,417 Depreciation and amortization 22,656 21,934 (Gain) loss on sale and disposal of equipment (1,307) 771 Severance costs 285 218 Total operating expenses $ 303,915 $ 290,340 * Includes billing fees, office supplies, repairs and maintenance, insurance, business tax and license, outside services, telecom, utilities, marketing, travel and other expenses. The discussion below provides additional information and analysis on changes in our various operating expenses for the three months ended March 31, 2021 and 2020 (in thousands): Salaries and professional reading fees, excluding stock-based compensation and severance In Thousands Three Months Ended March 31, Salaries and Professional Fees 2021 2020 $ Increase/(Decrease) % Change Total Salaries $177,861 $167,528 $10,334 6.2% Same Center Salaries $168,803 $164,287 $4,516 2.8% The moderate rise in same center salaries expense corresponded to the added professional staff requisite for radiology study interpretation that stemmed from higher procedure volumes. This same center comparison excludes expenses from 30 Table of Contents centers that were acquired or divested subsequent to January 1, 2020. For the three months ended March 31, 2021, salaries and professional reading fees from centers that were acquired or divested subsequent to January 1, 2020 and excluded from the above comparison was $9.1 million. For the three months ended March 31, 2020, salaries and professional reading fees from centers that were acquired or divested subsequent to January 1, 2020 and excluded from the above comparison was approximately $3.2 million. Stock-based compensation Stock-based compensation increased $1.6 million, or 24.6% to approximately $8.2 million for the three months ended March 31, 2021 compared to $6.6 million for three months ended March 31, 2020. This increase was driven by the higher fair value of RSA’s awarded and vested in the first quarter of 2021 as compared to RSA’s awarded and vested in the prior year’s first quarter. Building and equipment rental In Thousands Three Months Ended March 31, Building & Equipment Rental 2021 2020 $ Increase/(Decrease) % Change Total $28,711 $26,896 $1,815 6.8% Same Center $25,685 $25,671 $14 0.1% This same center comparison excludes expenses from centers that were acquired or divested subsequent to January 1, 2020. For the three months ended March 31, 2021, building and equipment rental expenses from centers that were acquired or divested subsequent to January 1, 2020 and excluded from the above comparison was $3.0 million. For the three months ended March 31, 2020, building and equipment rental expenses from centers that were acquired or divested subsequent to January 1, 2020 and excluded from the above comparison was approximately $1.2 million. Medical supplies In Thousands Three Months Ended March 31, Medical Supplies Expense 2021 2020 $ Increase/(Decrease) % Change Total $13,970 $12,748 $1,222 9.6% Same Center $13,370 $12,596 $774 6.2% Higher same center medical supplies expense related to additional consumption of contrast agents in our advanced imaging modalities driven by volume increases of CT and PET procedures and cost of personal protective equipment in support of staff and patient safety. This same center comparison excludes expenses from centers that were acquired or divested subsequent to January 1, 2020. For the three months ended March 31, 2021, medical supplies expenses from centers that were acquired or divested subsequent to January 1, 2020 and excluded from the above comparison was $0.6 million. For the three months ended March 31, 2020, medical supplies expense from centers that were acquired or divested subsequent to January 1, 2020 and excluded from the above comparison was $0.2 million. Other operating expenses In Thousands Three Months Ended March 31, Other Operating Expenses 2021 2020 $ Increase/(Decrease) % Change Total $53,491 $53,623 $(133) (0.3)% Same Center $49,900 $52,594 $(2,694) (5.1)% Savings in same center other operating expenses reflects the cumulative effect of successful contract re-negotiations aimed to reduce charges across a range of vendors from repair and maintenance to professional services. This same center comparison excludes expenses from centers that were acquired or divested subsequent to January 1, 2020. For the three months ended March 31, 2021, other operating expense from centers that were acquired or divested subsequent January 1, 2020 and excluded from the above comparison was $3.6 million. For the three months ended March 31, 2020, other operating expense from centers that were acquired or divested subsequent to January 1, 2020 was $1.0 million. Depreciation and amortization 31 Table of Contents In Thousands Three Months Ended March 31, Depreciation & Amortization 2021 2020 $ Increase/(Decrease) % Change Total $22,656 $21,934 $723 3.3% Same Center $20,952 $21,470 $(518) (2.4)% This same center comparison excludes expenses from centers that were acquired or divested subsequent to January 1, 2020. For the three months ended March 31, 2021, depreciation expense from centers that were acquired or divested subsequent to January 1, 2020 and excluded from the above comparison was $1.7 million. For the three months ended March 31, 2020, depreciation and amortization from centers that were acquired or divested subsequent to January 1, 2020 and excluded from the above comparison was $0.5 million. Gain on sale and disposal of equipment and other We recorded gains on the disposal of equipment and other items of approximately $1.3 million for the three months ended March 31, 2021 and a loss on sale and disposal of equipment of approximately $0.8 million for the three months ended March 31, 2020. Non-cash change in fair value of interest rate hedge We recorded a gain of $11.2 million for the ineffective portion of our 2019 Swaps for the three months ended March 31, 2021. Other (income) expenses We recorded other expenses of approximately $0.2 million for the three months ended March 31, 2021. Amounts for the corresponding period ending March 31, 2020 were immaterial. Severance Costs We incurred severance expenses of $0.3 million for the three months ended March 31, 2021 and $0.2 million for the three months ended March 31, 2020. Interest expense In Thousands Three Months Ended March 31, Interest Expense 2021 2020 $ Increase/(Decrease) % Change Total Interest Expense $12,826 $11,552 $1,274 11.0 % Interest related to derivatives* $3,650 $362 Interest related to amortization** $1,147 $1,081 Adjusted Interest Expense*** $8,029 $10,109 $(2,080) (20.6) % * Includes interest on current and prior derivative instruments not related to debt obligations. ** Includes combined noncash amortization of deferred loan costs and discount on issuance of debt. ***Includes interest related to our term loans, revolving credit line,notes, finance leases and other. Excluding the effect of interest expense related to derivatives and amortization for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, interest expense decreased $2.1 million, or 20.6%. The reduction in interest expense corresponds to lowered variable LIBOR and Prime interest rates paid on our term loan and revolving debt based on market conditions. See “Liquidity and Capital Resources” below for more details on our credit facilities. To mitigate our future interest expense exposure we have entered into certain interest rate swap agreements. See the Derivative Instruments section of Note 2, Significant Accounting Policies, to the condensed consolidated financial statements included in this report for more details on our derivative transactions. Equity in earnings from unconsolidated joint ventures 32 Table of Contents For the three months ended March 31, 2021 we recognized equity in earnings from unconsolidated joint ventures in the amount of $2.3 million and for three months ended March 31, 2020 we recognized equity in earnings from unconsolidated joint ventures of $2.0 million, an increase of $0.3 million or 16.9%. The increase was mainly related to the equity in earnings received from our interest in the Arizona Diagnostic Radiology Group joint venture, which was formed in the fourth quarter of 2020. Income tax provision We recorded income tax expense of $4.4 million, or an effective tax rate of 24.1%, for the three months ended March 31, 2021 compared to a benefit from income taxes of $4.4 million, or an effective tax rate of 23.8% for the three months ended March 31, 2020. The income tax rates for the three months ended March 31, 2021 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, certain non-GAAP metrics, such as Adjusted EBITDA assist us in measuring our business performance, cash generated from operations, leverage capacity 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. 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 $6.2 million in other revenue received under the Provider Relief Fund. 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 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. 33 Table of Contents 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 months ended March 31, 2021 and 2020, respectively. Three Months Ended March 31, 2021 2020 Net income (loss) attributable to RadNet, Inc. common stockholders $ 9,458 $ (16,358) Provision for (benefit from) income taxes 4,376 (4,381) Interest expense 12,826 11,552 Severance costs 285 218 Depreciation and amortization 22,656 21,934 Non-cash employee stock-based compensation 8,248 6,622 (Gain) loss on sale and disposal of equipment and other (1,307) 771 Non-cash change in fair value of interest rate hedge (11,245) — Other expenses 206 6 Legal settlements — — Adjusted EBITDA $ 45,503 $ 20,364 Liquidity and Capital Resources The following table summarizes of key balance sheet data related to our liquidity as of March 31, 2021 and December 31, 2020 and income statement data for the three months ended March 31, 2021 and 2020 (in thousands): Balance Sheet Data: March 31, 2021 December 31, 2020 Cash and cash equivalents $ 31,091 $ 102,018 Accounts receivable 146,665 129,585 Working capital (exclusive of current operating lease liabilities) (109,730) (61,896) Stockholders' equity 281,358 258,303 Income statement data for the three months ended March 31 2021 2020 Total net revenue $ 315,319 $ 281,564 Net income (loss) attributable to RadNet common stockholders 9,458 (16,358) 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, we are uncertain of the duration and ultimate severity of the effects of the COVID 19 pandemic on our business. Although we have received government stimulus funding and are undertaking measures to reduce operating expenses, we may again experience operating losses as a result of the pandemic which can impact both the consumption and cost of our medical imaging services. 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, and expect that we will continue to do so for the foreseeable future, 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. 34 Table of Contents 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 three months ended March 31, 2021 and 2020: Cash Flow Data March 31, 2021 March 31, 2020 Cash provided by operating activities $ 28,084 $ 40,913 Cash used in investing activities (87,348) (55,059) Cash (used in) provided by financing activities (11,651) 68,262 Cash provided by operating activities for the three months ended March 31, 2021 was $28.1 million and $40.9 million for the three months ended March 31, 2020. Our cash provided by operating activities for the period ended March 31, 2020 was benefited by the receipt of $39.5 million in CMS advances recorded as deferred revenue. Cash used in investing activities for the three months ended March 31, 2021, included purchases of property and equipment for approximately $30.4 million and the acquisition of imaging and software business assets for $57.1 million. As part of our business operations we continually evaluate investment opportunities. As noted in Note 7, Subsequent Events, we have purchase commitments for acquisitions of $5.0 million. Cash used in financing activities for the three months ended March 31, 2021, was due to principal payments on our term loans and equipment debt obligations. We have 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 March 31, 2021 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 Secured Credit Facilities We maintain secured credit facilities with Barclays Bank PLC and with SunTrust Bank. 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 which extended and increased 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 March 31, 2021, we were in compliance with all covenants under our credit facilities. Deferred financing costs at March 31, 2021, net of accumulated amortization, was $1.6 million and is specifically related to our Barclays revolving credit facility. Included in our condensed consolidated balance sheets at March 31, 2021 are $651.6 million of total term loan debt (exclusive of unamortized discounts of $8.7 million) in thousands: 35 Table of Contents Face Value Discount Total Carrying Value First Lien Term Loans $ 601,330 $ (8,730) $ 592,600 SunTrust Term Loan 50,250 — 50,250 Total Term Loans $ 651,580 $ (8,730) $ 642,850 At March 31, 2021, we had no borrowings under our Barclays or SunTrust revolving credit facilities. After reserves for outstanding letters of credit of $7.9 million on our Barclays Revolving Credit Facility, we have $187.1 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. On April 23, 2021, after the period covered by this report, we entered into the Restated Credit Agreement which provides for $725.0 million of senior secured first lien term loans and a $195.0 million senior secured revolving credit facility. The proceeds of the loan were used to refinance the outstanding $611.0 million term and revolving loans, to pay fees and expenses associated with the refinancing transaction, to pay accrued interest on the previously existing facilities through the date of closing and to fund approximately $102.0 million to our balance sheet. In addition, the Restated Credit Agreement lowered our interest rates and reduced our principal payments from $9.7 million to $1.8 million per quarter. We expect our existing capital resources, anticipated cash from operations and our borrowing capacity under our credit facilities will be sufficient to sustain our operations for the next twelve months and the foreseeable future.