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, 2021 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the U.S. Securities and Exchange Commission (SEC) on March 1, 2022. . Forward-Looking Statements This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements reflect current views about future events and are based on our currently available financial, economic and competitive data and on current business plans. Actual events or results may differ materially depending on risks and uncertainties that may affect our operations, markets, services, prices and other factors. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” “assumption” or the negative of these terms or other comparable terminology. Forward-looking statements in this quarterly report include, among others, statements we make regarding: • anticipated trends in our revenues, operating expenses or capital expenditures, and our financial guidance; • expected future market acceptance for our products or services, and the anticipated protection afforded by our competitive strengths in the markets we serve; • potential timing and impact of changes in regulations impacting our business; • the ongoing impact on our business, suppliers, payors, customers, referral sources, partners, patients and employees of the COVID-19 pandemic; • the anticipated effect of the measures we are taking to respond to the COVID-19 pandemic • our ability to successfully acquire and integrate new imaging operations; • cost savings, efficiencies and improvements anticipated from our investments in artificial intelligence and machine learning products and services; and • our future liquidity and our continuing ability to service and remain in compliance with applicable debt covenants or refinance our current indebtedness. 28 Table of Contents Forward-looking statements are neither historical facts nor assurances of future performance. Because forward-looking statements relate to the future, they are inherently subject to known and unknown risks, uncertainties and other factors that are difficult to predict and our of our control. Our actual results, level of activity, performance or achievements may be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forwards-looking statements. Important factors that could cause our actual results to differ materially from those indicated or implied in our forward-looking statements include the factors included in “Risk Factors,” in our annual report on Form 10-K for the fiscal year ended December 31, 2021 or supplemented by the information in Part II– Item 1A below. You should consider the inherent limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of predictions contained in such forward-looking statements. Any forward-looking statement in this quarterly report is based on information currently available to us and speaks only as of the date of this report. We do not undertake any responsibility to release publicly any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this quarterly report or any unanticipated events which may cause actual results to differ from those expressed or implied by the forward-looking statements contained in this quarterly report, except as required by law. Overview We are a leading national provider of freestanding, fixed-site outpatient diagnostic imaging services in the United States based on number of locations and annual imaging revenue. At June 30, 2022, we operated, directly or indirectly through joint ventures with hospitals, 353 centers located in Arizona, California, Delaware, Florida, Maryland, New Jersey, and New York. Our operations comprise two segments for financial reporting purposes for this reporting period, Imaging Centers and Artificial Intelligence Our Imaging Center segment provides physicians with imaging capabilities to facilitate the diagnosis and treatment of diseases and disorders. Services include magnetic resonance imaging (MRI), computed tomography (CT), positron emission tomography (PET), nuclear medicine, mammography, ultrasound, diagnostic radiology (X-ray), fluoroscopy and other related procedures. The vast majority of our centers offer multi-modality imaging services, a strategy that diversifies revenue streams, reduces exposure to reimbursement changes and provides patients and referring physicians one location to serve the needs of multiple procedures. Included in the segment is our eRad subsidiary, which designs the underlying critical scheduling, data storage and retrieval systems necessary for imaging center operation. Our Artificial Intelligence ("AI") segment that has been established through our acquisitions of DeepHealth, Nulogix Aidence Holding B.V. and Quantib B.V.. Our current AI focus is to develop solutions that employ machine learning to assist radiologists and other clinicians in interpreting images and improving patient care, initially in the fields of brain, breast, prostate, and pulmonary diagnostics. We derive substantially all of our revenue, directly or indirectly, from fees charged for the diagnostic imaging services performed at our centers. The following table shows our centers in operation and revenues for the six months ended June 30, 2022 and June 30, 2021: Six Months Ended June 30, 2022 2021 Centers in operation 353 353 Net revenues (millions) $ 696 $ 649 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. 29 Table of Contents Our total service fee revenues during the three and six months ended June 30, 2022 and 2021 are presented in the table below. Our imaging review is based on an allocation of the estimated transaction price with the patient between the primary patient classification of insurance coverage. Additional revenues are earned from our management services provided to joint ventures and our software and AI subsidiaries. In Thousands Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Commercial insurance $ 195,066 $ 187,354 $ 383,615 $ 369,566 Medicare 77,879 71,407 148,800 134,877 Medicaid 9,704 9,039 18,788 17,486 Workers' compensation/personal injury 13,138 10,556 25,586 20,966 Other patient revenue 7,567 5,189 14,689 9,961 Management fee revenue 5,592 5,533 11,100 10,752 Software revenue 2,421 2,628 6,419 5,054 Other 3,577 3,788 8,623 6,409 Revenue under capitation arrangements 37,874 38,424 76,365 74,166 Imaging Center Segment Revenue 352,818 333,918 693,985 649,237 AI Segment Revenue 1,557 — 2,156 — Total service revenue $ 354,375 $ 333,918 $ 696,141 $ 649,237 Recent Developments Through the second quarter ended June 30, 2022 our imaging business continued to expand, with procedure volumes returning to levels experienced before the COVID-19 pandemic, with same center procedure volumes increasing 3.7% and overall procedure volumes increasing 6.2% over the same period in 2021. We opened a net of six imaging centers in the first half of 2022, through a combination of acquisition and internal development. We continued to pursue our strategy of expansion within geographic regions, with a concentration on adding new facilities in Maryland. While imaging volumes returned to pre-pandemic levels, our operations have experienced effects from the pandemic and related macroeconomic issues. We are experiencing tighter labor markets, resulting in increased salaries as we seek to retain our skilled workforce. Our acquisitions of Aidence Holding B.V. and Quantib B.V. have expanded our AI initiatives to encompass imaging diagnostics solutions for the most prevalent cancers. Efforts in AI are largely in the product development stage at this time and we expect that the segment will continue to experience operating losses for the foreseeable future as we seek to secure both regulatory approvals and market acceptance for our products. Equity Investments, Acquisitions and Dispositions, and Joint Venture Activity We have developed our medical imaging business through a combination of organic growth, equity investments, acquisitions and joint venture formations. The information below updates our activity of such matters contained in our annual report on Form 10-K for the year ended December 31, 2021. Equity Investments As of June 30, 2022, we have three equity investments for which a fair value is not readily determinable and therefore the total amounts invested are recognized at cost as follows: Medic Vision Imaging Solutions Ltd., based in Israel, specializes in software packages that provide compliant radiation dose structured reporting and enhanced images from reduced dose CT scans. Our investment of $1.2 million represents a 14.21% equity interest in the company. No observable price changes or impairment in our investment was identified during the three and six months ended June 30,2022. Turner Imaging Systems, based in Utah, develops and markets portable X-ray imaging systems that provide a user the ability to acquire X-ray images wherever and whenever they are needed. On February 1, 2018, we purchased 2.1 million preferred shares in Turner Imaging Systems for $2.0 million. On January 1, 2019 we funded a convertible promissory note in 30 Table of Contents the amount of $0.1 million that converted into an additional 80,000 shares effective December 21, 2019. No observable price changes or impairment in our investment was identified during the three and six months ended June 30,2022. WhiteRabbit.ai Inc., based in California, is currently developing an artificial intelligence suite which aims to improve the speed and accuracy of cancer detection in radiology and improve patient care. On November 5, 2019 we acquired an equity interest in the company for $1.0 million and also loaned the company $2.5 million in support of it operations. No observable price changes, impairment in our investment or impairment of the loan receivable was identified during the three and six months ended June 30,2022. Acquisitions Imaging Center During the first quarter of 2022, we completed the acquisition of certain assets of the following entities, which either engage directly in the practice of radiology or associated businesses. The primary reason for these acquisitions was to strengthen our presence in the Maryland market. These acquisitions are reported as part of our Imaging Center segment. We made a fair value determination of the acquired assets and assumed liabilities and the following were recorded (in thousands): Entity Date Acquired Total Consideration Property & Equipment Right of Use Assets Goodwill Right of Use Liabilities IFRC LLC*^ 1/1/2022 4,800 2,103 857 2,697 (857) IFRC LLC*^ 1/1/2022 8,200 2,910 1,703 5,271 (1,703) Total 13,000 5,013 2,560 7,968 (2,560) *Fair Value Determination is Final ^ IFRC LLC acquisitions consisted of three subsidiaries of IFRC, one of which was purchased separately by a joint venture with Calvert Medical Imaging Centers, LLC. Artificial Intelligence Aidence Holding B.V. On January 20, 2022, we completed our acquisition of all the equity interests of Aidence Holding B.V. ("Aidence") an artificial intelligence enterprise centered on lung cancer screening, in an combination stock and cash purchase. Aidence is reported as part of our artificial intelligence segment and was acquired to enhance our AI capabilities. The transaction was accounted for as an acquisition of a business and total purchase consideration was determined to be approximately $45.2 million including i) 1,117,872 shares issued at $26.80 per share with a fair value of $30.0 million ii) cash of $1.8 million and iii) assuming liabilities of $11.9 million, $7.4 million in milestone contingent consideration and cash holdback of $4.5 million and iv) a settlement of a loan from RadNet of $1.5 million. In addition we paid certain seller closing costs through the issuance of 23,362 shares at a fair value of $0.6 million. We preliminarily recorded $1.0 million in current assets, $0.2 million in property plant and equipment, $27.7 million in intangible assets, $3.2 million in liabilities and $19.0 million in goodwill. Quantib B.V. On January 20, 2022, we completed our acquisition of all the equity interests of Quantib B.V. ("Quantib") an artificial intelligence enterprise centered on prostate cancer screening, in a combination stock and cash purchase. Quantib is reported as part of our artificial intelligence segment, and was acquired to enhance our AI capabilities. The transaction was accounted for as an acquisition of a business and total purchase consideration was determined to be approximately $42.3 million including i) 965,058 shares issued at $26.80 per share with a fair value of $25.9 million ii) cash of $11.8 million and iii) 113,303 shares with a fair value at the date of close of $3.0 million and cash holdback of $1.6 million to be issued 18 months after acquisition subject to adjustment for any indemnification claims. We preliminarily recorded $2.4 million million in current assets, $0.1 million in property plant and equipment, $21.3 million in intangible assets, $3.7 million in liabilities and $22.2 million in goodwill. As we finalize our estimation of the fair value of the assets acquired and liabilities assumed, additional adjustments may be recorded during the measurement period (a period not to exceed 12 months). The initial accounting is incomplete as of June 30, 2022 for the acquired assets and liabilities as we are currently in the process of completing the assessment of valuation 31 Table of Contents inputs and assumptions as well as completing the assessment of the tax attributes of the business combination. The finalization of the acquisition accounting valuation assessment may result in a change in the valuation of the deferred tax assets and liabilities and intangible assets, along with the opening working capital accounts, which could have a material impact on our results of operations and financial position. Formation of majority owned subsidiary Frederick County Radiology, LLC On April 1, 2022 we formed Frederick County Radiology, LLC ("FCR"), a partnership with Frederick Health Hospital, Inc. ("Hospital"). The operation offers multi-modality services out of six locations in Frederick, Maryland. We contributed the operations of 4 centers to the enterprise and Hospital contributed $5.5 million in fixed assets, $3.0 million in equipment, $10.8 million in goodwill. As a result of the the transaction, we retain a 65% controlling economic interest in FCR and Hospital retains a preliminary $10.7 million or 35% noncontrolling economic interest in FCR. The initial accounting is preliminary as of June 30, 2022 for the acquired assets and liabilities as we are currently in the process of completing the assessment of valuation inputs and assumptions as well as completing the assessment of the tax attributes of the business combination. Advanced Radiology at Capital Region, LLC On June 15, 2022 we entered into Advanced Radiology at Capital Region, LLC, a partnership with Dimension Health Corporation. ("Dimension"), and affiliate of the University of Maryland. The operation will provide multi-modality services out of two yet to be determined locations in the Largo, Maryland area. The venture was initially capitalized with nominal amounts of $5.1 thousand for a 51% economic interest from us and $4.9 thousand from Dimension for a 49% economic interest. Joint Venture Activity Acquisition by equity method investee During the first quarter of 2022, our joint venture with Calvert Medical Imaging Center, LLC, completed the acquisition of certain assets to strengthen our presence in the Maryland market. We made a fair value determination of the acquired assets and assumed liabilities and the following were recorded (in thousands): Entity Date Acquired Total Consideration Property & Equipment Right of Use Assets Goodwill Right of Use Liabilities IFRC LLC *^ 1/1/2022 3,922 2,121 1,295 1,801 (1,295) *Fair Value Determination is Final ^ IFRC LLC acquisitions consisted of three subsidiaries of IFRC, two of which were purchased separately by wholly owned RadNet subsidiaries. The following table is a summary of our investment in joint ventures during the six months ended June 30, 2022 (in thousands): Balance as of December 31, 2021 $ 42,229 Equity in earnings in these joint ventures 5,266 Equity contributions in existing joint ventures 1,441 Balance as of June 30, 2022 $ 48,936 We charged management service fees from the centers underlying these joint ventures of approximately $5.6 million and $5.5 million for the three months ended June 30, 2022 and 2021 and $11.1 million and $10.8 million for the six months ended June 30, 2022 and 2021, respectively. On June 24, 2022, we made an additional equity contribution to our joint venture in Arizona of $1.4 million. Our equity ownership interest percentage in the venture did not change. 32 Table of Contents The following table is a summary of key balance sheet data for these joint ventures as of June 30, 2022 and December 31, 2021 and income statement data for the six months ended June 30, 2022 and 2021 (in thousands): Balance Sheet Data: June 30, 2022 December 31, 2021 Current assets $ 39,840 $ 37,186 Noncurrent assets 88,754 73,592 Current liabilities (12,322) (12,919) Noncurrent liabilities (27,363) (22,370) Total net assets $ 88,909 $ 75,489 Book value of RadNet joint venture interests $ 41,099 $ 34,930 Cost in excess of book value of acquired joint venture interests 7,837 7,299 Total value of RadNet joint venture interests $ 48,936 $ 42,229 Income statement data for the six months ended June 30, 2022 2021 Net revenue $ 69,757 $ 64,636 Net income $ 10,497 $ 10,258 Critical Accounting Policies The Securities and Exchange Commission defines critical accounting estimates as those that are both most important to the portrayal of a company’s financial condition and results of operations and require management’s most difficult, subjective or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. In Note 2 to our consolidated financial statements in this quarterly report and in our annual report on Form 10-K for the year ended December 31, 2021, we discuss our significant accounting policies, including those that do not require management to make difficult, subjective or complex judgments or estimates. The most significant areas involving management’s judgments and estimates are described below. Use of Estimates The financial statements were prepared in accordance with U.S. generally accepted accounting principles (GAAP), which requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and assumptions affect various matters, including our reported amounts of assets and liabilities in our consolidated balance sheets at the dates of the financial statements; our disclosure of contingent assets and liabilities at the dates of the financial statements; and our reported amounts of revenues and expenses in our consolidated statements of operations during the reporting periods. These estimates involve judgments with respect to numerous factors that are difficult to predict and are beyond management’s control. As a result, actual amounts could materially differ from these estimates. 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. 33 Table of Contents 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 June 30, 2022. Provider Relief Fund (COVID-19 Stimulus Funding) The Provider Relief Fund offers government assistance to eligible providers throughout the healthcare system in support of certain expenses or lost revenue attributable to the coronavirus pandemic. We have recorded provider relief funding in our condensed Consolidated Statements of Operations in the amount of $43.0 thousand for the three months ended June 30, 2021 and $6.3 million for the six months ended June 30, 2021. No provider relief funding was received for the three and six months ended June 30,2022. Generally, the department of Health and Human Services ("HHS") does not intend to recoup funds as long as a provider's lost revenue and increased expenses exceed the amount of provider relief funding one has received. HHS reserves the right to audit Relief Fund recipients in the future to ensure that this requirement is met and collect any Relief Fund amounts that were made in error or exceed lost revenue or increased expenses due to the pandemic. Failure to comply with the terms and conditions may be grounds for recoupment. In recognizing revenue associated with provider relief funding our management is required to assess whether our operations have meet the applicable requirements for the funding received. During the quarter ended June 30, 2022, we continued to evaluate our operating results in light of the most recent government guidance and based on our assessment, the amount of revenue recognized is appropriate. Accounts Receivable Substantially all of our accounts receivable are due under fee-for-service contracts from third party payors, such as insurance companies and government-sponsored healthcare programs, or directly from patients. Services are generally provided pursuant to one-year contracts with healthcare providers. Receivables generally are collected within industry norms for third-party payors. We continuously monitor collections from our payors and maintain an allowance for bad debts based upon 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 June 30, 2022. Business Combination We evaluate all acquisitions under the framework Clarifying the Definition of a Business in the accounting guidance. Once a purchase has been determined to be the acquisition of a business, we are required to recognize the assets acquired and the liabilities assumed at their acquisition date fair values. Any portion of the purchase consideration transferred in excess of the net of the acquisition date fair values of the assets acquired and the liabilities assumed, is allocated to goodwill. The allocation requires our management to make estimates of the value of various assets acquired and liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations. Goodwill and Indefinite Lived Intangibles 34 Table of Contents Goodwill at June 30, 2022 totaled $577.8 million. Indefinite Lived Intangible Assets at June 30, 2022 were $12.7 million and are associated with the value of certain trade name intangibles. Our management reviews the fair value of our reporting units on an annual basis to determine if an event has occurred which suggest that the fair value of a reporting unit may be impaired. When we determine the carrying value of a reporting unit exceeds its fair value, an impairment charge would be recognized and should not exceed the total amount of goodwill allocated to that reporting unit. The review of fair value requires our management to make assessments of the business and financial prospects for a particular reporting unit. We tested goodwill for impairment on October 1, 2021. We also continue at regular intervals to consider the current and expected future economic and market conditions surrounding the COVID-19 pandemic and to date have not had an indication of goodwill impairment being more likely than not through June 30, 2022. Recent Accounting Standards See Note 3, Recent Accounting and Reporting Standards to the financial statements included in this report for further information. 35 Table of Contents Results of Operations The following table sets forth, for the three and six months ended June 30, 2022 and 2021, the percentage that certain items in the statements of operations bears to total service revenue, inclusive of revenue under capitation contracts. RADNET, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT SHARE DATA) (unaudited) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 REVENUE Service fee revenue 89.3 % 88.5 % 89.0 % 88.6 % Revenue under capitation arrangements 10.7 % 11.5 % 11.0 % 11.4 % Total service revenue 100.0 % 100.0 % 100.0 % 100.0 % Provider relief funding — % — % — % 1.0 % OPERATING EXPENSES Cost of operations, excluding depreciation and amortization 86.3 % 84.9 % 89.2 % 87.2 % Depreciation and amortization 8.1 % 7.2 % 8.0 % 7.2 % Loss (gain) on sale and disposal of equipment and other — % (0.5) % 0.2 % (0.4) % Severance costs — % 0.1 % 0.0 % 0.1 % Total operating expenses 94.5 % 91.7 % 97.4 % 94.0 % INCOME FROM OPERATIONS 5.5 % 8.3 % 2.6 % 7.0 % OTHER INCOME AND EXPENSES Interest expense 3.2 % 3.6 % 3.3 % 3.9 % Equity in earnings of joint ventures (0.8) % (0.9) % (0.8) % (0.8) % Non-cash change in fair value of interest rate swaps (1.8) % — % (3.9) % (1.7) % Debt restructuring and extinguishment expenses — % 1.8 % — % 0.9 % Other (income) expenses — % 0.5 % — % 0.3 % Total other expenses (income) 0.7 % 5.0 % (1.3) % 2.5 % INCOME BEFORE INCOME TAXES 4.9 % 3.3 % 3.9 % 4.5 % Provision for income taxes (1.0) % (0.9) % (0.7) % (1.1) % NET INCOME 3.9 % 2.4 % 3.2 % 3.4 % Net income attributable to noncontrolling interests 1.7 % 1.6 % 1.6 % 1.5 % NET INCOME ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS 2.2 % 0.9 % 1.6 % 2.0 % Results of Operations Imaging Center Segment We have developed our medical imaging centers segment through a combination of organic growth, equity investments, acquisitions and joint venture formations. We have segregated some of our information to demonstrate which is attributable to centers that were in operation through the entirety of the comparison period, and which is attributable to those that were acquired or disposed of during the period. The discussion below shows a breakdown and analysis of revenue and expenses for the three and six months ended June 30, 2022 and 2021. Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 2021 36 Table of Contents Total Revenue inclusive of Provider Relief funding where applicable for 2022 and 2021 In Thousands Three Months Ended June 30, Revenue 2022 2021 $ Increase/(Decrease) % Change Total Revenue $352,817 $333,961 $18,856 5.7% Same Center Revenue $334,043 $326,586 $7,457 2.3% Excluded $18,774 $7,375 — — Upswing in revenue was driven by an overall total procedure volume growth of 4.1% over the same period in the prior year. On a same center basis, the increase in revenue was largely attributable to product mix as advanced radiology procedures of MRI, PET, and CT expanded at combined 3.4% to provide the major portion of the revenue growth. Excluded amounts refer to revenue contributions for the three month periods ending June 30, 2022 and June 30, 2021, respectively, from centers that were acquired or divested between April 1, 2021 through June 30, 2022. Operating Expenses Total operating expenses for the three months ended June 30, 2022 increased approximately $21.5 million, or 7.1%, from $305.0 million for the three months ended June 30, 2021 to $326.6 million for the three months ended June 30, 2022. The following table sets forth a breakdown of our cost of operations and total operating expenses for the three months ended June 30, 2022 and 2021 (in thousands): Three Months Ended June 30, 2022 2021 Salaries and professional reading fees, excluding stock-based compensation $ 191,240 $ 172,279 Stock-based compensation 4,032 8,445 Building and equipment rental 31,207 31,139 Medical supplies 14,523 14,268 Other operating expenses * 58,348 56,288 Cost of operations 299,350 282,419 Depreciation and amortization 27,100 23,920 Loss on sale and disposal of equipment 36 (1,567) Severance costs 99 268 Total operating expenses $ 326,585 $ 305,040 * 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 June 30, 2022 and 2021 (in thousands): Salaries and professional reading fees, excluding stock-based compensation and severance In Thousands Three Months Ended June 30, Salaries and Professional Fees 2022 2021 $ Increase/(Decrease) % Change Total Salaries $191,240 $172,279 $18,961 11.0% Same Center Salaries $182,661 $167,048 $15,613 9.4% Excluded $8,579 $5,231 — — Increases in salary expenses was partially driven by increased staffing associated with the growth in revenues and procedure volumes. In addition, we have raised salaries for staff in order to retain a skilled work force in the competitive post-pandemic labor market. Excluded amounts refer to salaries and professional reading fees for the three month periods ending 37 Table of Contents June 30, 2022 and June 30, 2021, respectively, from centers that were acquired or divested between April 1, 2021 through June 30, 2022. Stock-based compensation Stock-based compensation decreased $4.4 million, or 52.3% to approximately $4.0 million for the three months ended June 30, 2022 compared to $8.4 million for three months ended June 30, 2021. This decrease is a result of a one time pandemic related stock awards to employees that was granted in the second quarter 2021. There was no similar one time award granted in 2022. Building and equipment rental In Thousands Three Months Ended June 30, Building & Equipment Rental 2022 2021 $ Increase/(Decrease) % Change Total $31,207 $31,139 $68 0.2% Same Center $27,693 $28,685 $(992) (3.5)% Excluded Sites $3,514 $2,454 — — The decrease in same center building and rental relates to reduced equipment rental expenses for operating lease contracts which ended or were bought out during 2021. Excluded amounts refer to building and equipment rental for the three month periods ending June 30, 2022 and June 30, 2021, respectively, from centers that were acquired or divested between April 1, 2021 through June 30, 2022. Medical supplies In Thousands Three Months Ended June 30, Medical Supplies Expense 2022 2021 $ Increase/(Decrease) % Change Total $14,523 $14,268 $255 1.8% Same Center $13,429 $13,801 $(372) (2.7)% Excluded Sites $1,092 $467 — — On an overall basis, increase in medical supplies expense was lower than increase in procedure volumes. This reduction, which is reflected in a decrease to same center supplies expenses, is from optimization of inventory levels for improved efficiency and reduced purchases of contrast agents used in advanced radiology procedures due to varying degrees of available supply. Excluded amounts refer to medical supplies expense for the three month periods ending June 30, 2022 and June 30, 2021, respectively, from centers that were acquired or divested between April 1, 2021 through June 30, 2022. Other operating expenses In Thousands Three Months Ended June 30, Other Operating Expenses 2022 2021 $ Increase/(Decrease) % Change Total $58,348 $56,288 $2,060 3.7% Same Center $54,620 $54,722 $(102) (0.2)% Excluded Sites $3,728 $1,566 — — Excluded amounts refer to other operating expenses for the three month periods ending June 30, 2022 and June 30, 2021, respectively, from centers that were acquired or divested between April 1, 2021 through June 30, 2022. 38 Table of Contents Additional segment operating and non operating expenses: In Thousands Three Months Ended June 30, 2022 2021 $ Increase/(Decrease) % Change Depreciation and amortization $27,100 $23,920 $3,181 13.3% Loss (gain) on disposal of equipment and other $36 ($1,567) $1,602 nm Non-cash change in fair value of interest rate swaps ($6,306) ($35) (6,272) nm Other expenses* $784 $6,610 ($5,826) nm Severance $99 $268 (168) (62.7)% nm= not meaningful *Other expenses for 2021 include $6.0 million of debt extinguishment and restructuring expenses. Interest expense In Thousands Three Months Ended June 30, Interest Expense 2022 2021 $ Increase/(Decrease) % Change Total Interest Expense $11,377 $12,171 $(794) (6.5) % Interest related to derivatives* $3,067 $3,684 Interest related to amortization** $647 $931 Adjusted Interest Expense*** $7,663 $7,556 $107 1.4 % * 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 June 30, 2022 compared to the three months ended June 30, 2021, interest expense increased $0.1 million, or 1.4%. The increase in interest expense is attributable to a slightly higher variable interest rate paid on our debt balance compared to the rate paid over the same period in the prior year. Based on recent increases in global interests rates, we expect the effective interest rates on our senior credit facilities, and our related interest expense, to rise in the near term. 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 For the three months ended June 30, 2022 we recognized equity in earnings from unconsolidated joint ventures in the amount of $2.7 million and for three months ended June 30, 2021 we recognized equity in earnings from unconsolidated joint ventures of $3.1 million, an decrease of $0.4 million or 12.0%. Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021 Total Revenue inclusive of Provider Relief funding for 2021 39 Table of Contents In Thousands Six Months Ended June 30, Revenue 2022 2021 $ Increase/(Decrease) % Change Total Revenue $693,985 $655,528 $38,457 5.9% Same Center Revenue $629,917 $615,951 $13,966 2.3% Excluded Sites $64,068 $39,577 — —% Increased revenue reflects a 3.7% growth in overall same center procedure volumes compared with the same period in the prior year. Total Provider Relief funding, used to offset lost revenue due to the pandemic and included in the above amounts, was $6.3 million for the six months ended June 30, 2021. No Provider Relief funding was received in 2022. Excluded amounts refer to revenue contributions for the six month periods ending June 30, 2022 and June 30, 2021, respectively, from centers that were acquired or divested between January 1, 2021 through June 30, 2022. Operating Expenses Total operating expenses for the six months ended June 30, 2022 increased approximately $56.3 million, or 9.3%, from $607.6 million for the six months ended June 30, 2022 to $663.9 million for the six months ended June 30, 2021. The following table sets forth a breakdown of our cost of operations and total operating expenses for the six months ended June 30, 2022 and 2021 (in thousands): Six Months Ended June 30, 2022 2021 Salaries and professional reading fees, excluding stock-based compensation $ 388,202 $ 349,483 Stock-based compensation 14,390 16,236 Building and equipment rental 60,829 59,850 Medical supplies 30,080 28,238 Other operating expenses * 115,959 109,624 Cost of operations 609,460 563,431 Depreciation and amortization 52,906 46,489 Loss (gain) on sale and disposal of equipment 1,189 (2,874) Severance costs 300 551 Total operating expenses $ 663,855 $ 607,597 * Includes billing fees, office supplies, repairs and maintenance, insurance, business tax and license, outside services, telecom, utilities, marketing, travel and other expenses. Salaries and professional reading fees, excluding stock-based compensation and severance In Thousands Six Months Ended June 30, Salaries and Professional Fees 2022 2021 $ Increase/(Decrease) % Change Total Salaries $388,202 $349,483 $38,719 11.1% Same Center Salaries $357,598 $329,346 $28,252 8.6% Excluded Sites $30,604 $20,137 — —% Increases in salary expenses was partially driven by increased staffing associated with the growth in revenues and procedure volumes. In addition, we have raised salaries for staff in order to retain a skilled work force in the competitive post-pandemic labor market. Excluded amounts refer to salaries and professional reading fees for the six month periods ending June 30, 2022 and June 30, 2021, respectively, from centers that were acquired or divested between January 1, 2021 through June 30, 2022. Stock-based compensation 40 Table of Contents Stock-based compensation decreased $1.8 million, or 11.4% to approximately $14.4 million for the six months ended June 30, 2022 compared to $16.2 million for six months ended June 30, 2021. The decrease is a result of a one time pandemic related stock awards to employees that was granted in the second quarter 2021. There was no similar one-time award granted in 2022. Building and equipment rental In Thousands Six Months Ended June 30, Building & Equipment Rental 2022 2021 $ Increase/(Decrease) % Change Total $60,829 $59,850 $979 1.6% Same Center $49,921 $51,224 $(1,303) (2.5)% Excluded Sites $10,908 $8,626 — —% The decrease in same center building and rental relates to reduced equipment rental expenses for operating lease contracts which ended or were bought out during 2021. Excluded amounts refer to building and equipment rental for the six month periods ending June 30, 2022 and June 30, 2021, respectively, from centers that were acquired or divested between January 1, 2021 through June 30, 2022. Medical supplies In Thousands Six Months Ended June 30, Medical Supplies Expense 2022 2021 $ Increase/(Decrease) % Change Total $30,080 $28,238 $1,842 6.5% Same Center $27,394 $26,589 $805 3.0% Excluded Sites $2,686 $1,649 — —% Medical supplies expense increase stems from the overall procedural volumes noted above compared to the same period in the prior year and is consistent with the percentage increase in revenue. Excluded amounts refer to medical supplies expense for the six month periods ending June 30, 2022 and June 30, 2021, respectively, from centers that were acquired or divested between January 1, 2021 through June 30, 2022. Other operating expenses In Thousands Six Months Ended June 30, Other Operating Expenses 2022 2021 $ Increase/(Decrease) % Change Total $115,959 $109,624 $6,335 5.8% Same Center $104,886 $102,153 $2,733 2.7% Excluded Sites $11,073 $7,471 — —% The rise in other operating expenses is due to service charge increases across many expense categories and is reflective of higher prices noted throughout the general economy. Excluded amounts refer to other operating expenses for the six month periods ending June 30, 2022 and June 30, 2021, respectively, from centers that were acquired or divested between January 1, 2021 through June 30, 2022. 41 Table of Contents Additional segment operating and non operating expenses: In Thousands Six Months Ended June 30, 2022 2021 $ Increase/(Decrease) % Change Depreciation and amortization $52,906 $46,489 $6,417 13.8% Loss (gain) on disposal of equipment and other $1,189 ($2,874) $4,064 nm Non-cash change in fair value of interest rate swaps ($27,125) ($11,279) (15,846) nm Other expenses $1,445 $6,617 ($5,172) nm Severance $300 $551 (251) (45.6)% nm= not meaningful *Other expenses for 2021 include $6.0 million of debt extinguishment and restructuring expenses. Interest expense In Thousands Six Months Ended June 30, Interest Expense 2022 2021 $ Increase/(Decrease) % Change Total Interest Expense $22,978 $24,997 $(2,019) (8.1) % Interest related to derivatives* $6,738 $7,334 Interest related to amortization** $1,295 $2,078 Adjusted Interest Expense*** $14,945 $15,585 $(640) (4.1) % * Includes interest on derivatives 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 interest expense for derivatives and amortization for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, interest expense decreased $0.6 million, or 4.1% and relates to lowered variable LIBOR and Prime interest rates paid on our term and revolving loans stemming from our debt refinance of April 2021. Based on recent increases in global interests rates, we expect the effective interest rates on our senior credit facilities, and our related interest expense, to rise in the near term. See “Liquidity and Capital Resources” below for more details on our credit facilities. Equity in earnings from unconsolidated joint ventures For the six months ended June 30, 2022 we recognized equity in earnings from unconsolidated joint ventures in the amount of $5.3 million and for the six months ended June 30, 2021 we recognized equity in earnings from unconsolidated joint ventures of $5.4 million, a decrease of $0.1 million or 2.6%. 42 Table of Contents AI Segment Our AI segment develops and deploys clinical applications to enhance interpretation of medical images and improve patient outcomes with an emphasis on brain, breast, prostate, and pulmonary diagnostics. We are developing our AI segment initially through acquisition activity. Our acquisitions of Nulogix and Deephealth comprise the results for 2021. Our 2022 results now include our recent additions of Aidence Holding B.V and Quantib B.V. The breakdown of revenue and expenses of the segment for the three and six months ended June 30, 2022 and 2021 are as follows: In Thousands Three Months Ended June 30, Six Months Ended June 30, 2022 2021 $ Increase/(Decrease) % Change 2022 2021 $ Increase/(Decrease) % Change Statement of Operations Revenue $1,558 $— $1,558 nm $2,156 $— $2,156 nm Salaries and Wages $4,447 $624 $3,823 nm $7,731 $1,282 $5,068 nm Stock compensation $661 $452 $208 nm $1,405 $909 $497 nm Other operating $1,318 $75 $1,242 nm $2,218 $230 $1,988 nm Depreciation & Amort. $1,762 $91 $1,670 nm $3,074 $178 $2,896 nm Other operating loss $45 $— $45 nm $20 $— $20 nm Total operating expenses $8,232 $1,243 $6,989 nm $14,447 $2,598 $11,849 nm Loss from Operations ($6,675) ($1,243) ($5,432) nm ($12,291) ($2,598) ($9,693) nm Other (income) loss ($783) $1,093 (1,876) nm ($1,287) $1,292 (2,580) nm Income before taxes ($5,891) ($2,336) ($3,555) nm ($11,004) ($3,890) ($7,114) nm Income taxes ($790) $— ($790) nm ($1,457) $— ($1,457) nm Segment net income ($5,101) ($2,336) ($2,765) nm ($9,547) ($3,890) ($5,657) nm Adjusted EBITDA Segment net income ($5,101) ($2,336) ($9,547) ($3,890) Stock Compensation $661 $452 $1,405 $909 Depreciation & Amort $1,762 $91 $3,074 $178 Other operating loss $45 $— $20 $— Other (income) loss ($783) $1,093 ($1,287) $1,292 Income taxes ($790) $— ($1,457) $— Adjusted EBITDA ($4,207) ($700) ($3,507) nm ($7,792) ($1,511) ($6,282) nm 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 revenue received under the Provider Relief Fund of $6.3 million for the six months ended June 30, 2021. 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 43 Table of Contents 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, this metric, as presented, may not be comparable to other similarly titled measures of other companies. Adjusted EBITDA is most comparable to the GAAP financial measure, net income attributable to RadNet, Inc. common stockholders. The following is a reconciliation of GAAP net income attributable to RadNet, Inc. common stockholders to Adjusted EBITDA for the three and six months ended June 30, 2022 and 2021, respectively. Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net income attributable to RadNet, Inc. common stockholders $ 7,905 $ 2,873 $ 10,918 $ 12,331 Provision for income taxes 3,403 2,874 4,900 7,249 Interest expense 11,385 12,171 22,978 24,997 Severance costs 99 268 300 551 Depreciation and amortization 28,862 24,011 55,980 46,667 Non-cash employee stock-based compensation 4,693 8,897 15,795 17,145 Loss (gain) on sale and disposal of equipment and other 81 (1,567) 1,209 (2,874) Debt restructuring and loss on extinguishment expenses — 6,044 — 6,044 Non-cash change in fair value of interest rate swaps (6,306) (35) (27,125) (11,280) Other adjustment to joint venture investment — (565) — (565) Other expenses (7) 1,658 158 1,867 Legal settlements — — 2,197 — Non operational rent expenses 1,222 — 2,160 — Adjusted EBITDA including losses from AI Segment & Provider Relief Funding $ 51,337 $ 56,629 $ 89,470 $ 102,132 Provider relief funding — (43) — (6,291) Adjusted EBITDA including losses from AI Segment and excluding benefit from Provider Relief Funding $ 51,337 $ 56,586 $ 89,470 $ 95,841 Adjusted EBITDA losses from AI Segment 4,207 700 7,792 1,511 Adjusted EBITDA excluding losses from AI Segment & Provider Relief Funding $ 55,544 $ 57,286 $ 97,262 $ 97,352 44 Table of Contents Liquidity and Capital Resources The following table summarizes key balance sheet data related to our liquidity as of June 30, 2022 and December 31, 2021 and income statement data for the six months ended June 30, 2022 and 2021 (in thousands): Balance Sheet Data: June 30, 2022 December 31, 2021 Cash and cash equivalents $ 99,170 $ 134,606 Accounts receivable 166,387 135,062 Working capital (exclusive of current operating lease liabilities) (18,159) 14,932 Stockholders' equity 451,385 346,157 Income statement data for the six months ended June 30, 2022 2021 Total net revenue $ 696,141 $ 649,237 Net income attributable to RadNet common stockholders 10,918 12,331 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 centers, the acquisition of additional centers 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. 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. 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 six months ended: Cash Flow Data June 30, 2022 June 30, 2021 Cash provided by operating activities $ 65,744 $ 58,701 Cash used in investing activities (95,988) (119,658) Cash used in financing activities (6,625) 99,812 Cash provided by operating activities was $65.7 million and $58.7 million for the six months ended June 30, 2022 and June 30, 2021, respectively. Our cash provided by operating activities for the six months ended June 30, 2022 was affected by the non-cash change in fair value of our interest rate swap of $27.1 million. Cash used in investing activities for the six months ended June 30, 2022, included purchases of property and equipment for approximately $72.7 million and the acquisition of imaging business and other assets for $26.0 million. As part of our business operations we continually evaluate investment opportunities. 45 Table of Contents Cash used in financing activities of $6.6 million for the six months ended June 30, 2022, was due to payment on our term loan obligations. Cash provided by financing activities for the six months ended June 30, 2021 was due to the refinancing of our term loan obligations under our secured credit facilities on April 23, 2021. Please see Note 6, Credit Facilities and Notes Payable in the notes to consolidated financials statements for more information. 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 June 30, 2022 we have $17.0 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 of $195.0 million. The SunTrust credit facilities are comprised of a term loan and a revolving credit facility of $30.0 million. As of June 30, 2022, we were in compliance with all covenants under our credit facilities. Deferred financing costs at June 30, 2022, net of accumulated amortization, was $1.9 million and is specifically related to our Barclays revolving credit facility. Included in our condensed consolidated balance sheets at June 30, 2022 are $761.3 million of total term loan debt (exclusive of unamortized discounts of $12.2 million) in thousands: Face Value Discount Total Carrying Value First Lien Term Loans $ 717,750 $ (12,170) $ 705,580 SunTrust Term Loan 43,500 — 43,500 Total Term Loans $ 761,250 $ (12,170) $ 749,080 At June 30, 2022, we had no borrowings under our Barclays or SunTrust revolving credit facilities. After reserves for outstanding letters of credit of $7.6 million on our Barclays Revolving Credit Facility, we have $187.4 million available for borrowing and $30.0 million available under our SunTrust Revolving Credit Facility. 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. Please see Note 6, Credit Facilities and Notes Payable in the notes to consolidated financials statements for more information on our secured credit facilities.certain