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, 2022 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the U.S. Securities and Exchange Commission (SEC) on March 1, 2023. 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 anticipated impact on our business of the COVID-19 pandemic and similar events and the expected efficacy of any remediation measures that we take in response to such events; • our ability to successfully acquire and integrate new imaging operations; • cost savings, efficiencies and improvements anticipated from our investments in AI and machine learning products and services; and • our future liquidity and our continuing ability to service and remain in compliance with applicable debt covenants or refinance our current indebtedness. Forward-looking statements are neither historical facts nor assurances of future performance. Because forward-looking statements relate to the future, they are inherently subject to known and unknown risks, uncertainties and other factors that are difficult to predict and out 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 forward-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, 2022 as 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. 31 Table of Contents 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 report, except as required by law. Overview We are a national provider of diagnostic imaging services in the United States. At June 30, 2023, we operated directly or indirectly through joint ventures with hospitals, 363 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. For further financial information about these segments, see Note 5, Segment Reporting, in the notes accompanying our condensed consolidated financial statements included in this report. 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. Integral to the imaging center business is our software arm headed by eRAD, Inc., which sells computerized systems that distribute, display, store and retrieve digital images. Internationally, our subsidiary Heart and Lung Imaging LLC, provides teleradiology services for remote interpretation of images on behalf of providers within the framework of the United Kingdom's National Health Service. We have also established an Artificial Intelligence ("AI") division, that develops and deploys AI suites to enhance radiologist interpretations of breast, lung and prostate images. The division is led by DeepHealth, and includes our acquisitions of Aidence Holding B.V. and Quantib B.V., both based in The Netherlands. The following table shows our centers in operation and revenues for the six months ended June 30, 2023 and June 30, 2022: Six Months Ended June 30, 2023 2022 Centers in operation 363 353 Net revenues (millions) $ 794 $ 696 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. Our total service fee revenue, net of contractual allowances and discounts, and implicit price concessions for the six months ended June 30, 2023 and 2022 is summarized in the following table (in thousands): Three Months Ended June 30, Six Months Ended June 30, In Thousands 2023 2022 2023 2022 Commercial insurance $ 224,842 $ 195,066 $ 442,044 $ 383,615 Medicare 89,469 77,879 176,093 148,800 Medicaid 9,985 9,704 20,145 18,788 Workers' compensation/personal injury 12,821 13,138 25,500 25,586 Other patient revenue 10,391 7,567 20,132 14,689 Management fee revenue 3,998 5,592 8,246 11,100 Teleradiology and Software revenue 4,819 2,421 9,152 6,419 Other 5,215 3,577 10,515 8,623 Revenue under capitation arrangements 39,797 37,874 77,941 76,365 Imaging Center Segment Revenue 401,337 352,818 789,768 693,985 AI Segment Revenue 2,378 1,557 4,511 2,156 Total service revenue 403,715 $ 354,375 $ 794,279 $ 696,141 32 Table of Contents Recent Developments We have continued to advance both of our core businesses in the first half of 2023 and completed a significant capital transaction in the second quarter of 2023. Our imaging center business saw continued growth coming out of the pandemic. During the first and second quarter of 2023 we added a net of 10 additional imaging centers. Overall revenue for the six months ended June 30, 2023 increased 13.8% over six month period ended June 30, 2022. Our same center revenue increased 7.4% and same center procedure volumes increased 7.6% during the six month period ended June 30, 2023, over the same period in 2022. Our AI segment continues to commercialize its solutions. In December of 2022, our subsidiary DeepHealth, Inc, received FDA clearance of its mammography density assessment software that assists radiologists in interpreting visual images. In February of 2023, we launched our Enhanced Breast Cancer Detection service, powered by DeepHealth AI, which provides patients an advanced screening mammography service along with a life time risk assessment for breast cancer and post mammography support. Initial locations for this service are in Florida, New Jersey and New York. In May of 2023, our subsidiary Quantib B.V., received FDA clearance of its third generation prostate reading and reporting tool that improves the workflow and output for radiologists and urologists. In June 2023, we completed a secondary public offering of our common stock. After exercise in full of the underwriter's overallotment option, we sold an aggregate of 8,711,250 shares of our common stock to the public at a price of $29.75 per share. The offering resulted in net proceeds of $246.2 million, after underwriting discounts. We intend to use the net proceeds from the proposed offering for working capital and general corporate purposes. Acquisitions, Equity Investments and Joint Venture Activity The following discussion summarizes certain details concerning our acquisition or disposition of centers, our equity investment and our joint venture transaction. See Note 4, Business Combinations and Related Activity and Note 2, Summary of Significant Accounting Policies to our consolidated financial statements included in this quarterly report on Form 10-Q for further information. The information below updates our activity of such matters contained in our annual report on Form 10-K for the year ended December 31, 2022. Acquisitions Imaging Center During the first and second quarter of 2023, 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 California and New York markets. 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 Intangible Assets Other Assets Right of Use Liabilities C.C.D.G.L.R. & S Services Inc. 1/1/2023 3,500 435 1,689 3,015 50 — (1,689) Southern California Diagnostic Imaging, Inc. 1/1/2023 1,815 466 1,184 1,272 50 27 (1,184) Inglewood Imaging Center, LLC 2/1/2023 2,600 877 1,188 1,658 50 15 (1,188) Ramapo Radiology Associates, P.C. 2/1/2023 2,000 1,663 3,775 229 100 8 (3,775) Madison Radiology Medical Group, Inc. 4/1/2023 250 100 — 150 — — — Total 10,165 3,541 7,836 6,324 250 50 (7,836) 33 Table of Contents Equity Investments As of June 30, 2023, 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 as of June 30, 2023. Turner Imaging Systems, based in Utah, develops and markets portable X-ray imaging systems that provide a user the ability to acquire X-ray images wherever and whenever they are needed. On February 1, 2018, we purchased 2.1 million preferred shares in Turner Imaging Systems for $2.0 million. On January 1, 2019 we funded a convertible promissory note in the amount of $0.1 million that converted into an additional 80,000 shares effective December 21, 2019. No observable price changes or impairment in our investment was identified as of June 30, 2023. 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 June 30, 2023. Joint Venture Activity The following table is a summary of our investment in joint ventures during the six months ended June 30, 2023 (in thousands): Balance as of December 31, 2022 $ 57,893 Equity in earnings in these joint ventures 2,851 Distribution of earnings (8,540) Equity contributions in existing joint ventures 288 Balance as of June 30, 2023 $ 52,492 We charged management service fees from the centers underlying these joint ventures of approximately $4.0 million and $5.6 million for the three months ended June 30, 2023 and 2022 and $8.2 million and $11.1 million for the six months ended June 30, 2023 and 2022, respectively. The following table is a summary of key balance sheet data for these joint ventures as of June 30, 2023 and December 31, 2022 and income statement data for the six months ended June 30, 2023 and 2022 (in thousands): Balance Sheet Data: June 30, 2023 December 31, 2022 Current assets $ 38,334 $ 39,304 Noncurrent assets 139,776 134,694 Current liabilities (35,664) (29,588) Noncurrent liabilities (48,172) (37,952) Total net assets $ 94,274 $ 106,458 Income statement data for the six months ended June 30, 2023 2022 Net revenue $ 84,699 $ 69,757 Net income $ 5,827 $ 10,497 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 34 Table of Contents 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, 2022, 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. 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, 2023. 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 35 Table of Contents 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, 2023. Business Combination We evaluate all acquisitions under the framework Clarifying the Definition of a Business in the accounting guidance. Once a purchase has been determined to be the acquisition of a business, we are required to recognize the assets acquired and the liabilities assumed at their acquisition date fair values. Any portion of the purchase consideration transferred in excess of the net of the acquisition date fair values of the assets acquired and the liabilities assumed, is allocated to goodwill. The allocation requires our management to make estimates of the value of various assets acquired and liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations. Goodwill and Indefinite Lived Intangibles Goodwill at June 30, 2023 totaled $687.9 million. Indefinite Lived Intangible Assets at June 30, 2023 were $24.3 million and are associated with the value of certain trade name intangibles and in process research and development (IPR&D). Goodwill, trade name intangibles and IPR&D are recorded as a result of business combinations. When we determine the carrying value of goodwill exceeds its fair value, an impairment charge would be recognized which should not exceed the total amount of goodwill allocated to that reporting unit. We determined fair values for each of the reporting units using the market approach, when available and appropriate, or the income approach, or a combination of both. We assess the valuation methodology based upon the relevance and availability of the data at the time we perform the valuation. If multiple valuation methodologies are used, the results are weighted appropriately. Our annual test of goodwill, trade name and IPR&D noted no impairment as of October 1, 2022, and we have not identified any indicators of impairment through June 30, 2023. Recent Accounting Standards See Note 3, Recent Accounting and Reporting Standards to the financial statements included in this report for further information. 36 Table of Contents Results of Operations The following table sets forth, for the three and six months ended June 30, 2023 and 2022, 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, 2023 2022 2023 2022 REVENUE Service fee revenue 90.1 % 89.3 % 90.2 % 89.0 % Revenue under capitation arrangements 9.9 % 10.7 % 9.8 % 11.0 % Total service revenue 100.0 % 100.0 % 100.0 % 100.0 % OPERATING EXPENSES Cost of operations, excluding depreciation and amortization 85.5 % 86.3 % 87.8 % 89.2 % Depreciation and amortization 8.0 % 8.1 % 8.0 % 8.0 % Loss on sale and disposal of equipment and other — % — % 0.1 % 0.2 % Severance costs 0.5 % — % 0.3 % 0.0 % Total operating expenses 93.9 % 94.5 % 96.1 % 97.4 % INCOME (LOSS) FROM OPERATIONS 6.1 % 5.5 % 3.9 % 2.6 % OTHER INCOME AND EXPENSES Interest expense 4.0 % 3.2 % 4.0 % 3.3 % Equity in earnings of joint ventures (0.4) % (0.8) % (0.4) % (0.8) % Non-cash change in fair value of interest rate hedge (1.0) % (1.8) % — % (3.9) % Other expenses (income) — % — % 0.2 % — % Total other expense (income) 2.6 % 0.7 % 3.8 % (1.3) % INCOME (LOSS) BEFORE INCOME TAXES 3.5 % 4.9 % 0.1 % 3.9 % (Provision for) Benefit from income taxes 0.2 % (1.0) % (0.1) % (0.7) % NET INCOME (LOSS) 3.6 % 3.9 % 0.0 % 3.2 % Net income attributable to noncontrolling interests 1.5 % 1.7 % 1.6 % 1.6 % NET INCOME (LOSS) ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS 2.1 % 2.2 % (1.6) % 1.7 % 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, 2023 and 2022. Three Months Ended June 30, 2023 Compared to the Three Months Ended June 30, 2022 Total Revenue 37 Table of Contents In Thousands Three Months Ended June 30, Revenue 2023 2022 $ Increase/(Decrease) % Change Total Revenue $401,336 $352,817 $48,519 13.8% Same Center Revenue $369,609 $343,692 $25,917 7.5% Excluded $31,727 $9,125 — — We experienced an overall same center total procedure volume growth of 6.8% over the same period in the prior year, which resulted in revenue growth of 7.5%, a 6.8% rise in same center routine imaging procedures and same center advanced radiology procedures of CT, MRI, PET and Nuclear Medicine expanding by 6.7%. Excluded amounts refer to revenue contributions for the three month periods ending June 30, 2023 and June 30, 2022, respectively, from centers that were acquired or divested between April 1, 2022 through June 30, 2023. Operating Expenses Total operating expenses for the three months ended June 30, 2023 increased approximately $42.5 million, or 13.0%, from $326.6 million for the three months ended June 30, 2022 to $369.1 million for the three months ended June 30, 2023. The following table sets forth a breakdown of our cost of operations and total operating expenses for the three months ended June 30, 2023 and 2022 (in thousands): Three Months Ended June 30, 2023 2022 Salaries and professional reading fees, excluding stock-based compensation $ 211,797 $ 191,240 Stock-based compensation 4,017 4,032 Building and equipment rental 30,049 31,207 Medical supplies 22,411 14,523 Other operating expenses * 70,356 58,348 Cost of operations 338,630 299,350 Depreciation and amortization 30,234 27,100 Loss on sale and disposal of equipment 84 36 Severance costs 153 99 Total operating expenses $ 369,101 $ 326,585 * 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, 2023 and 2022 (in thousands): Salaries and professional reading fees, excluding stock-based compensation and severance In Thousands Three Months Ended June 30, Salaries and Professional Fees 2023 2022 $ Increase/(Decrease) % Change Total Salaries $211,797 $191,240 $20,557 10.7% Same Center Salaries $197,764 $186,531 $11,233 6.0% Excluded $14,033 $4,709 — — Stemming from the higher procedure volumes noted above, our staffing levels were adjusted to support the influx of patients seeking radiology procedures. Similar to other businesses, we still face inflation in employee cost as we compete for talent in the marketplace. Excluded amounts refer to salaries and professional reading fees for the three month periods ending June 30, 2023 and June 30, 2022, respectively, from centers that were acquired or divested between April 1, 2022 through June 30, 2023. 38 Table of Contents Stock-based compensation Stock-based compensation was unchanged at $4.0 million for the three months ended June 30, 2023 and 2022. Building and equipment rental In Thousands Three Months Ended June 30, Building & Equipment Rental 2023 2022 $ Increase/(Decrease) % Change Total $30,049 $31,207 $(1,158) (3.7)% Same Center $26,763 $29,088 $(2,325) (8.0)% Excluded Sites $3,286 $2,119 — — The decrease in building and equipment rental expense relates to reduced equipment rental relating to operating lease contracts which ended or were bought out during 2022. Excluded amounts refer to building and equipment rental for the three month periods ending June 30, 2023 and June 30, 2022, respectively, from centers that were acquired or divested between April 1, 2022 through June 30, 2023. Medical supplies In Thousands Three Months Ended June 30, Medical Supplies Expense 2023 2022 $ Increase/(Decrease) % Change Total $22,411 $14,523 $7,888 54.3% Same Center $20,766 $13,800 $6,966 50.5% Excluded Sites $1,645 $723 — — The increase in medical supplies expense was driven by higher patient volume combined with price increases for contrasting agents used in advanced radiology procedures. In addition, we had a high utilization rate of a specialty isotope PYLARIFY which is used in our PSMA study of prostate cancer, for which we are ultimately reimbursed on a cost plus margin basis that exceeds our initial expense outlay. Excluded amounts refer to medical supplies expense for the three month periods ending June 30, 2023 and June 30, 2022, respectively, from centers that were acquired or divested between April 1, 2022 through June 30, 2023. Other operating expenses In Thousands Three Months Ended June 30, Other Operating Expenses 2023 2022 $ Increase/(Decrease) % Change Total $70,356 $58,348 $12,008 20.6% Same Center $65,094 $56,126 $8,968 16.0% Excluded Sites $5,262 $2,222 — — The rise in other operating expenses was experienced across all of our major categories to support the increase in volumes at inflated prices compared to the same period in the prior year. Excluded amounts refer to other operating expenses for the three month periods ending June 30, 2023 and June 30, 2022, respectively, from centers that were acquired or divested between April 1, 2022 through June 30, 2023. 39 Table of Contents Additional segment operating and non operating expenses: In Thousands Three Months Ended June 30, 2023 2022 $ Increase/(Decrease) % Change Depreciation and amortization $30,234 $27,100 $3,134 11.6% Loss on disposal of equipment and other $84 $36 $48 nm Non-cash change in fair value of interest rate hedge ($4,158) ($6,306) 2,148 nm Other expenses (income) ($821) $784 (1,605) nm Severance $153 $99 55 55.6% nm= not meaningful Interest expense In Thousands Three Months Ended June 30, Interest Expense 2023 2022 $ Increase/(Decrease) % Change Total Interest Expense $16,039 $11,377 $4,662 41.0 % Cash Paid for Interest $39,301 $19,687 $19,614 99.6 % The rise in total interest expense is attributable to a higher overall loan balances in combination with increased variable interest rates paid on those balances compared to the same period in the prior year. The change in cash paid for interest relates to timing of interest rate elections. During 2022 we refinanced our Truist term loan which added an additional $108.0 million in obligations to our balance sheet in the fourth quarter. 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 continue 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. During the three months ended June 30, 2023, we received cash payments from our swap agreements of approximately $6.7 million, which served to reduce our overall interest expense. 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, 2023 we recognized equity in earnings from unconsolidated joint ventures in the amount of $1.4 million and for three months ended June 30, 2022 we recognized equity in earnings from unconsolidated joint ventures of $2.7 million, a decrease of $1.3 million or 48.2%. The decrease was mainly related to the equity in earnings received from our venture operations in Arizona. Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 2022 Total Revenue In Thousands Six Months Ended June 30, Revenue 2023 2022 $ Increase/(Decrease) % Change Total Revenue $789,767 $693,986 $95,781 13.8% Same Center Revenue $727,748 $677,831 $49,917 7.4% Excluded $63,020 $16,155 — — 40 Table of Contents We experienced an overall same center total procedure volume growth of 7.6% over the same period in the prior year, which resulted in revenue growth of 7.4%, a 7.3% rise in same center routine imaging procedures and same center advanced radiology procedures of CT, MRI, PET and Nuclear Medicine expanding by 8.3%. Excluded amounts refer to revenue contributions for the six month period ending June 30, 2023 and June 30, 2022, respectively, from centers that were acquired or divested between January 1, 2022 through June 30, 2023. Operating Expenses Total operating expenses for the six months ended June 30, 2023 increased approximately $80.1 million, or 12.1%, from $663.9 million for the six months ended June 30, 2022 to $744.0 million for the six months ended June 30, 2023. The following table sets forth a breakdown of our cost of operations and total operating expenses for the six months ended June 30, 2023 and 2022 (in thousands): Six Months Ended June 30, 2023 2022 Salaries and professional reading fees, excluding stock-based compensation $ 428,309 $ 388,202 Stock-based compensation 15,546 14,390 Building and equipment rental 59,001 60,829 Medical supplies 42,544 30,080 Other operating expenses * 137,809 115,959 Cost of operations 683,209 609,460 Depreciation and amortization 59,826 52,906 (Gain) loss on sale and disposal of equipment 661 1,190 Severance costs 276 301 Total operating expenses $ 743,972 $ 663,857 * 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 2023 2022 $ Increase/(Decrease) % Change Total Salaries $428,309 $388,202 $40,107 10.3% Same Center Salaries $400,654 $379,545 $21,109 5.6% Excluded $27,655 $8,657 — — Staffing levels have been adjusted to support higher patient volumes with the corresponding rise in salaries and professional fee expense. Excluded amounts refer to salaries and professional reading fees for the six month period ending June 30, 2023 and June 30, 2022, respectively, from centers that were acquired or divested between January 1, 2022 through June 30, 2023. Stock-based compensation Stock-based compensation increased $1.2 million, or 8.0% to approximately $15.5 million for the six months ended June 30, 2023 compared to $14.4 million for six months ended June 30, 2022. This increase was driven by the higher fair value of RSA’s awarded and vested in the six months of 2023 as compared to RSA’s awarded and vested in the prior year’s same period. 41 Table of Contents Building and equipment rental In Thousands Six Months Ended June 30, Building & Equipment Rental 2023 2022 $ Increase/(Decrease) % Change Total $59,001 $60,829 $(1,828) (3.0)% Same Center $51,941 $56,664 $(4,723) (8.3)% Excluded Sites $7,060 $4,165 — — The decrease in building and equipment rental expenses was related to a reduction of operating lease contracts that were terminated or bought out during 2022. Excluded amounts refer to building and equipment rental for the six month period ending June 30, 2023 and June 30, 2022, respectively, from centers that were acquired or divested between January 1, 2022 through June 30, 2023. Medical supplies In Thousands Six Months Ended June 30, Medical Supplies Expense 2023 2022 $ Increase/(Decrease) % Change Total $42,544 $30,080 $12,464 41.4% Same Center $39,591 $28,958 $10,633 36.7% Excluded Sites $2,953 $1,122 — — Medical supplies expense increase stems from the overall procedural volumes noted above compared to the same period in the prior year and and from the high utilization rate of a specialty isotope PYLARIFY which is used in our PSMA study of prostate cancer, for which we are utimately reimbursed on a cost plus margin basis that exceeds our initial expense outlay. Excluded amounts refer to medical supplies for the six month period ending June 30, 2023 and June 30, 2022, respectively, from centers that were acquired or divested between January 1, 2022 through June 30, 2023. Other operating expenses In Thousands Six Months Ended June 30, Other Operating Expenses 2023 2022 $ Increase/(Decrease) % Change Total $137,809 $115,959 $21,850 18.8% Same Center $127,537 $112,038 $15,499 13.8% Excluded Sites $10,272 $3,921 — — The increase in other operating expenses is related to increased infrastructure support cost, additional new equipment, and general inflationary cost increases. Excluded amounts refer to other operating expenses for the six month period ending June 30, 2023 and June 30, 2022, respectively, from centers that were acquired or divested between January 1, 2022 through June 30, 2023. Additional segment operating and non operating expenses: In Thousands Six Months Ended June 30, 2023 2022 $ Increase/(Decrease) % Change Depreciation and amortization $59,826 $52,906 $6,920 13.1% Loss on disposal of equipment and other $661 $1,190 $(529) nm Non-cash change in fair value of interest rate hedge $(66) $(27,125) $27,059 nm Other expenses (income) $(91) $1,445 $(1,536) nm Severance $276 $301 $(25) (8.3)% nm= not meaningful 42 Table of Contents Interest expense In Thousands Six Months Ended June 30, Interest Expense 2023 2022 $ Increase/(Decrease) % Change Total Interest Expense $31,761 $22,978 $8,783 38.2 % Interest related to derivatives* $9,205 $6,738 Interest related to amortization*** $1,494 $1,295 Adjusted Interest Expense $21,062 $14,945 $6,117 40.9 % * Includes interest on derivatives not related to debt obligations. ** Includes interest related to our term loans, revolving credit line, notes, finance leases, and other ***Includes combined noncash amortization of deferred loan costs and discount on issuance of debt. Excluding interest expense for derivatives and amortization for the six months ended June 30, 2023 compared to the six months ended June 30, 2022, interest expense increased $6.1 million, or 40.9% and relates to lowered variable SOFR and Prime interest rates paid on our term loan and revolving debt. 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, 2023 we recognized equity in earnings from unconsolidated joint ventures in the amount of $2.9 million and for the six months ended June 30, 2022 we recognized equity in earnings from unconsolidated joint ventures of $5.3 million, an decrease of $2.4 million or 45.9%. The decrease 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 expense We recorded a provision for income tax of $0.5 million, or an effective tax rate of 65.5%, for the six months ended June 30, 2023 compared to a provision for income tax of $4.9 million , or an effective tax rate of 18.1% for the six months ended June 30, 2022. The income tax rates for the three and six months ended June 30, 2023 diverge from the federal statutory rate due to (i) noncontrolling interests due to the controlled partnerships; (ii) effects of state income taxes; (iii) share-based compensation; and (iv) officer's compensation limitations. 43 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. The breakdown of revenue and expenses of the segment for the three and six months ended June 30, 2023 and 2022 are as follows: In Thousands Three Months Ended June 30, Six Months Ended June 30, 2023 2022 $ Change % Change 2023 2022 $ Change % Change Statement of Operations Revenue $2,379 $1,557 $822 52.8 % $4,512 $2,156 $2,356 109.2 % Salaries and Wages $3,955 $4,447 ($492) (11.1) % $9,088 $7,731 $1,357 17.5 % Stock Compensation $853 $661 $192 29.0 % $1,510 $1,405 $105 7.5 % Other operating $1,709 $1,317 $392 29.8 % $3,203 $2,217 $986 44.5 % Depreciation & Amort. $1,946 $1,762 $184 10.4 % $3,669 $3,074 $595 19.4 % Other operating loss (gain) ($6) $45 ($51) (113.3) % ($5) $20 ($25) (125.0) % Severance $1,717 — $1,717 — % $1,728 — $1,728 — % Total operating expenses $10,174 $8,232 $1,942 23.6 % $19,193 $14,447 $4,746 32.9 % Loss from Operations ($7,795) ($6,675) ($1,120) 16.8 % ($14,681) ($12,291) ($2,390) 19.4 % Other expense (income) $860 ($783) $1,643 (209.8) % $1,562 ($1,287) $2,849 221.3 % Income before taxes ($8,655) ($5,892) ($2,763) 46.9 % ($16,243) ($11,004) ($5,239) 47.6 % Income taxes ($1,899) ($790) ($1,109) 140.4 % ($1,369) ($1,458) $89 (6.1) % Segment net loss ($6,756) ($5,102) ($1,654) 32.4 % ($14,874) ($9,546) ($5,328) 55.8 % Revenues for AI segment increased over the prior year as our Enhanced Breast Cancer Detection program powered by DeepHealth AI has been introduced in the Florida, New Jersey and New York markets. As we ramp up this program and develop additional products for other types of cancers, our expenses have also risen accordingly. We anticipate that our AI segment will continue to generate losses in the near term as we pursue the commercialization of our AI products and expansion of our various cancer detection programs. 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. Our Adjusted EBITDA metric removes non-cash and non-recurring charges that occur in the affected period and provides a basis for measuring the Company’s core financial performance against other periods. We define Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, as adjusted to exclude losses or gains on the disposal of equipment, other income or loss, loss on debt extinguishment, bargain purchase gains, loss on de-consolidation of joint ventures and non-cash equity compensation. Adjusted EBITDA includes equity earnings in unconsolidated operations and subtracts allocations of earnings to non-controlling interests in subsidiaries, and is adjusted for non-cash or one-time events that take place during the period. Adjusted EBITDA is a non-GAAP financial measure used as an analytical indicator by us and the healthcare industry to assess business performance, and is a measure of leverage capacity and ability to service debt. Adjusted EBITDA should not be considered a measure of financial performance under GAAP, and Adjusted EBITDA should not be considered in isolation or as alternatives to net income, cash flows generated by operating, investing or financing activities or other financial statement data presented in the consolidated financial statements as an indicator of financial performance or liquidity. Adjusted EBITDA is not a measurement determined in accordance with GAAP and is therefore susceptible to varying methods of calculation and this metric, as presented, may not be comparable to other similarly titled measures of other companies. 44 Table of Contents 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, 2023 and 2022, respectively. Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Net income (loss) attributable to RadNet, Inc. common stockholders $ 8,369 $ 7,905 $ (12,636) $ 10,918 Provision for income taxes (614) 3,403 521 4,900 Interest expense 16,039 11,385 31,761 22,978 Severance costs 1,870 99 2,004 300 Depreciation and amortization 32,180 28,862 63,495 55,980 Non-cash employee stock-based compensation 4,870 4,693 17,056 15,795 Loss on sale and disposal of equipment and other 77 81 656 1,209 Non-cash change in fair value of interest rate hedge (4,159) (6,306) (66) (27,125) Other expenses 40 (7) 1,472 158 Legal settlements — — — 2,197 Contingent Consideration 1,014 — 2,630 Non operational rent expenses 759 1,222 1,718 2,160 Adjusted EBITDA including losses from AI Segment $ 60,445 $ 51,337 $ 108,611 $ 89,470 EBITDA Losses from AI Segment 3,285 4,207 7,779 7,792 Adjusted EBITDA excluding losses from AI Segment $ 63,730 $ 55,544 $ 116,390 $ 97,262 The following table is a reconciliation of GAAP net income for our AI Segment to Adjusted EBITDA for the three and six months ended June 30, 2023 and 2022, respectively. Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Segment net loss $ (6,756) $ (5,102) $ (14,874) $ (9,546) Stock Compensation 853 661 1,510 1,405 Depreciation & Amortization 1,946 1,762 3,669 3,074 Other operating loss (6) 45 (5) 20 Other expense (income) 860 (791) 1,562 (1,287) Severance 1,717 — 1,728 — Interest — 8 — — Income taxes (1,899) (790) (1,369) (1,458) Adjusted EBITDA including losses from AI Segment $ (3,285) $ (4,207) $ (7,779) $ (7,792) 45 Table of Contents Liquidity and Capital Resources The following table summarizes key balance sheet data related to our liquidity as of June 30, 2023 and December 31, 2022 and income statement data for the six months ended June 30, 2023 and 2022 (in thousands): Balance Sheet Data: June 30, 2023 December 31, 2022 Cash and cash equivalents $ 356,651 $ 127,834 Accounts receivable 174,481 166,357 Working capital (exclusive of current operating lease liabilities) 227,961 (41,932) Stockholders' equity 761,004 491,452 Income statement data for the six months ended June 30, 2023 2022 Total net revenue $ 794,279 $ 696,141 Net income attributable to RadNet common stockholders (12,636) 10,918 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 to fund our working capital requirements. 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 (in thousands) for the six months ended: Cash Flow Data June 30, 2023 June 30, 2022 Cash provided by (used in) operating activities $ 100,691 $ 65,744 Cash provided by (used in) investing activities (105,910) (95,988) Cash provided by (used in) financing activities 234,302 (6,625) 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 hedge of $20.8 million. Cash used in investing activities for the six months ended June 30, 2023, included purchases of property and equipment for approximately $95.4 million and the acquisition of imaging business and other assets for $10.3 million. As part of our business operations we continually evaluate investment opportunities. 46 Table of Contents Cash provided by financing activities of $234.3 million for the six months ended June 30, 2023, was due to net proceeds from the issuance of 8,711,250 shares of common stock and payments on our term loan obligations and equipment notes. Please see Note 6, Credit Facilities and Notes Payable in the notes to consolidated financials statements included in this report for more information. Senior Secured Credit Facilities We maintain secured credit facilities with Barclays Bank PLC and with Truist Bank. The Barclays credit facilities are comprised of first lien term loans and a revolving credit facility of $195.0 million. The Truist credit facilities are comprised of a term loan and a revolving credit facility of $50.0 million. As of June 30, 2023, we were in compliance with all covenants under our credit facilities. Deferred financing costs at June 30, 2023, net of accumulated amortization, were $2.0 million and are specifically related to our revolving credit facilities. Included in our condensed consolidated balance sheets at June 30, 2023 are $856.8 million of total term loan debt (exclusive of unamortized discounts of $11.8 million) in thousands: Face Value Discount Total Carrying Value First Lien Term Loans $ 710,500 $ (10,084) $ 700,416 Truist Term Loan 146,250 (1,122) 145,128 Total Term Loans $ 856,750 $ (11,206) $ 845,544 At June 30, 2023, we had no borrowings under our Barclays or Truist revolving credit facilities. After reserves for outstanding letters of credit of $7.6 million, we have $187.4 million available for borrowing under our Barclays Credit Facility and $50.0 million available under our Truist 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 included in this report for more information on our secured credit facilities.