What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-09 compared with 2023-08-09 · 180 added, 142 removed, 355 unchanged (48% of the section changed)

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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.

This report 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.

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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:

Forward-looking statements in this 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;

• anticipated benefits or synergies to be derived from our acquisitions and joint ventures;

• expections concerning the timing of regulatory approval, expected benefits or market acceptance of our new AI solutions;

• cost savings, efficiencies and improvements anticipated from our investments in AI and machine learning products and services;

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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 report, except as required by law.

Any forward-looking statement in this 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 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.

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.

At September 30, 2023, we operated directly or indirectly through joint ventures with hospitals, 366 centers located in Arizona, California, Delaware, Florida, Maryland, New Jersey, and New York.

Our centers provide physicians with imaging capabilities to facilitate the diagnosis and treatment of diseases and disorders and may reduce unnecessary invasive procedures, often reducing the cost and amount of care for patients.

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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.

We have also established an Artificial Intelligence ("AI") business, 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,

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 financial statements included in this report.

The following table shows our imaging centers in operation and revenues for the nine months ended September 30, 2023 and September 30, 2022:

Nine Months Ended September 30,

Centers in operation 366 349

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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,

Our total service fee revenue, net of contractual allowances and discounts, and implicit price concessions for the three and nine months ended September 30, 2023 and 2022 is summarized in the following table (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

In Thousands 2023 2022 2023 2022

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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.

We have continued to advance both of our core businesses through the period ended September 30, 2023 and completed a significant capital transaction in the second quarter of 2023.

For the year to date ended September 30, 2023 we added a net of 11 additional imaging centers.

For the nine months ended September 30, 2023 compared to the same period in 2022, revenue increased 14.3% and also witnessed a 7.5% and 4.2% rise in same center revenue and procedure volumes, respectively.

Our AI segment continues to commercialize its solutions.

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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.

The service is now fully rolled-out to all of our mammography centers on the east coast, where it is experiencing close to a 35% adoption rate.

This is expected to grow as we continue to educate patients and referring physicians about its significant advantages over current practices.

Additionally 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.

These events have resulted in revenues from our AI segment increasing 142.1% for the nine month period ended September 30, 2023, over the same period in 2022.

In June 2023, we completed a secondary public offering of our common stock.

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The offering resulted in net proceeds of $245.8 million, after underwriting discounts.

We intend to use the net proceeds from the proposed offering for working capital and general corporate purposes.

We intend to use the net proceeds from the secondary public offering for working capital and general corporate purposes.

Acquisitions, Equity Investments and Joint Venture Activity

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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.

During the nine months ended September 30, 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, Delaware and New York markets.

These acquisitions are reported as part of our Imaging Center segment.

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4/1/2023 250 100 — 150 — — —

Delaware Diagnostic Imaging, P.A.

8/1/2023 600 401 337 149 50 — (337)

Total 10,765 3,942 8,173 6,473 300 50 (8,173)

Formation of majority owned subsidiary

Los Angeles Imaging Group, LLC

On September 1, 2023 we formed a wholly-owned subsidiary, Los Angeles Imaging Group, LLC ("LAIG").

The operation offers multi-modality imaging services out of three locations in Los Angeles, California.

We contributed the operations of 3 centers to the subsidiary.

Cedars-Sinai Medical Center ("CSMC") purchased from us a 35% noncontrolling economic interest in LAIG for cash payment of $5.9 million.

As a result of the transaction, we retain a 65% controlling economic interest in LAIG.

Joint venture Investment Contribution

Santa Monica Imaging Group, LLC

On April 1, 2017, we formed in conjunction with CSMC, the Santa Monica Imaging Group, LLC ("SMIG"), consisting of two multi-modality imaging centers located in Santa Monica, CA with RadNet holding a 40% economic interest and CSMC holding a 60% economic interest.

RadNet accounts for our share of the venture under the equity method.

On January 1, 2019, CSMC purchased from us an additional 5% economic interest in SMIG and as a result our economic interest in SMIG was reduced to 35%.

On September 1, 2023, RadNet contributed an additional multi-modality imaging center and a newly constructed imaging center located in Beverly Hills, CA valued at $27.2 million and purchased an additional 6% interest economic interest in SMIG for cash payment of $5.2 million.

Simultaneously, CSMC contributed five additional multi-modality imaging centers located in Santa Monica, CA.

As a result of the transaction, our economic interest in SMIG has been increased to 49%.

We recorded a gain of $16.8 million, within (Gain) on contribution of imaging centers into joint venture in our Consolidated Statements of Operations.

The related gain on disposal of business was calculated as the difference between the sales price and carrying value of such imaging centers which included equipment, other assets, accrued liabilities, and an allocation of goodwill to such imaging centers.

Concurrently, we made additional capital contributions of $8.5 million to the joint venture in the form of construction-in-progress.

We accounted for the transaction as an adjustment to our equity investment for the value of the assets contributed.

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:

As of September 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.

No observable price changes or impairment in our investment was identified as of September 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.

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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.

No observable price changes or impairment in our investment was identified as of September 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.

No observable price changes, impairment in our investment or impairment of the loan receivable was identified as of September 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):

The following table is a summary of our investment in joint ventures during the nine months ended September 30, 2023 (in thousands):

Balance as of December 31, 2022 $ 57,893

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Equity contributions in existing joint ventures 41,184

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 as of September 30, 2023 $ 94,472

We charged management service fees from the centers underlying these joint ventures of approximately $3.9 million and $6.1 million for the three months ended September 30, 2023 and 2022 and $12.2 million and $17.2 million for the nine months ended September 30, 2023 and 2022, respectively.

The following table is a summary of key balance sheet data for these joint ventures as of September 30, 2023 and December 31, 2022 and income statement data for the nine months ended September 30, 2023 and 2022 (in thousands):

Balance Sheet Data:

September 30,

2023 December 31,

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Total net assets $ 104,876 $ 106,458

Income statement data for the six months ended June 30,

Income statement data for the nine months ended September 30,

Net revenue $ 129,020 $ 107,241

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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, 2022, we discuss our significant accounting policies, including those that do not require management to make difficult, subjective or complex judgments or estimates.

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Use of Estimates

The financial statements were prepared in accordance with U.S.

The financial statements included in this report 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.

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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.

Our estimates and assumptions related to revenue recognition did not change materially for the quarter ended September 30, 2023.

Accounts Receivable

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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, 2023.

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 September 30, 2023.

Business Combination

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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 at September 30, 2023 totaled $676.4 million.

Indefinite Lived Intangible Assets at September 30, 2023 were $20.2 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.

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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.

Our annual test of goodwill, trade name noted no impairment as of October 1, 2022, and we have not identified any other indicators of impairment through September 30, 2023.

On September 30, 2023, we determined that an In-process Research and Development ("IPR&D") nonamortized intangible related to Aidence's Ai Veye Lung Nodule and Veye Clinic would not receive FDA approval for sale in the US without a new submission and additional expenditures for rework in the original projected timeline.

The additional expenditures, delay and reduction of US sales affected the estimated fair value of the related IPR&D intangible asset and resulted in impairment charges of $3.9 million within Cost of operations in our Consolidated Statements of Operations.

The estimated fair value of the IPR&D Intangible was determined using the multi-period excess earnings method under the income approach, which estimates the present value of the free cash flows associated with the asset and tax amortization benefit to arrive at the fair value of the asset.

We have not identified any other indicators of impairment through September 30, 2023.

Recent Accounting Standards

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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.

The following table sets forth, for the three and nine months ended September 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.

AND SUBSIDIARIES

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 2023 2022

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Depreciation and amortization 8.0 % 8.4 % 8.0 % 8.1 %

Loss on sale and disposal of equipment and other — % — % 0.1 % 0.2 %

(Gain) on contribution of imaging centers into joint venture (4.2) % — % (1.4) % — %

Loss (gain) on sale and disposal of equipment and other 0.1 % (0.1) % 0.1 % 0.1 %

Severance costs 0.3 % 0.1 % 0.3 % 0.0 %

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Non-cash change in fair value of interest rate hedge 0.3 % (3.6) % 0.1 % (3.8) %

Other expenses (income) — % — % 0.2 % — %

Other (income) expenses (1.0) % 0.4 % (0.2) % 0.1 %

Total other expense (income) 3.0 % (0.5) % 3.5 % (1.0) %

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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

The discussion below shows a breakdown and analysis of revenue and expenses for the three and nine months ended September 30, 2023 and 2022.

Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022

Total Revenue

In Thousands Three Months Ended June 30,

In Thousands Three Months Ended September 30,

Revenue 2023 2022 $ Increase/(Decrease) % Change

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Excluded $33,465 $9,610 — —

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.

Our 7.7% increase in same center revenue over the same period last year was driven by same center total procedure volume growth of 3.4% inclusive of rises in routine and advanced modality imaging procedures of 2.8% and 5.1%, respectively.

Excluded amounts refer to revenue contributions for the three month periods ending September 30, 2023 and September 30, 2022, respectively, from centers that were acquired or divested between July 1, 2022 through September 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):

Total operating expenses for the three months ended September 30, 2023 increased approximately $18.9 million, or 5.6%, from $335.4 million for the three months ended September 30, 2022 to $354.3 million for the three months ended September 30, 2023.

The following table sets forth a breakdown of our cost of operations and total operating expenses for the three months ended September 30, 2023 and 2022 (in thousands):

Three Months Ended

September 30,

Salaries and professional reading fees, excluding stock-based compensation $ 212,127 $ 195,878

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Depreciation and amortization 30,379 27,590

(Gain) Loss on contribution of imaging centers into joint venture (16,808) —

Loss on sale and disposal of equipment 524 (253)

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* 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):

The discussion below provides additional information and analysis on changes in our various operating expenses for the three months ended September 30, 2023 and 2022 (in thousands):

Salaries and professional reading fees, excluding stock-based compensation and severance

In Thousands Three Months Ended June 30,

In Thousands Three Months Ended September 30,

Salaries and Professional Fees 2023 2022 $ Increase/(Decrease) % Change

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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.

Excluded amounts refer to salaries and professional reading fees for the three month periods ending September 30, 2023 and September 30, 2022, respectively, from centers that were acquired or divested between July 1, 2022 through September 30, 2023.

Stock-based compensation

Stock-based compensation was unchanged at $4.0 million for the three months ended June 30, 2023 and 2022.

Stock-based compensation for the three months ended September 30, 2023 increased approximately $1.3 million, or 51.2%, from $2.6 million for the three months ended September 30, 2022 to $3.9 million for the three months ended September 30, 2023.

This increase was driven by the higher fair value of RSA’s, additional and higher probability adjusted Performance Stock Options ("PSO") and Performance Stock Units ("PSU") granted and vested in the nine months of 2023 as compared the prior year’s same period.

Building and equipment rental

In Thousands Three Months Ended June 30,

In Thousands Three Months Ended September 30,

Building & Equipment Rental 2023 2022 $ Increase/(Decrease) % Change

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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.

Excluded amounts refer to building and equipment rental for the three month periods ending September 30, 2023 and September 30, 2022, respectively, from centers that were acquired or divested between July 1, 2022 through September 30, 2023.

Medical supplies

In Thousands Three Months Ended June 30,

In Thousands Three Months Ended September 30,

Medical Supplies Expense 2023 2022 $ Increase/(Decrease) % Change

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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.

Excluded amounts refer to medical supplies expense for the three month periods ending September 30, 2023 and September 30, 2022, respectively, from centers that were acquired or divested between July 1, 2022 through September 30, 2023.

Other operating expenses

In Thousands Three Months Ended June 30,

In Thousands Three Months Ended September 30,

Other Operating Expenses 2023 2022 $ Increase/(Decrease) % Change

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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.

Excluded amounts refer to other operating expenses for the three month periods ending September 30, 2023 and September 30, 2022, respectively, from centers that were acquired or divested between July 1, 2022 through September 30, 2023.

Additional segment operating and non operating expenses:

In Thousands Three Months Ended June 30,

In Thousands Three Months Ended September 30,

2023 2022 $ Increase/(Decrease) % Change

Depreciation and amortization $30,379 $27,590 $2,789 10.1%

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

(Gain) Loss on contribution of imaging centers into joint venture ($16,808) $— (16,808) nm

Loss on disposal of equipment and other $524 ($253) $777 (307.1)%

Non-cash change in fair value of interest rate hedge $1,014 ($12,451) 13,465 (108.1)%

Other expenses (income) ($3,920) $447 (4,367) (977.0)%

Severance $1,141 $187 954 510.2%

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Interest expense

In Thousands Three Months Ended June 30,

In Thousands Three Months Ended September 30,

Interest Expense 2023 2022 $ Increase/(Decrease) % Change

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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.

Based on recent increases in global interest 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.

During the three months ended September 30, 2023, we received cash payments from our swap agreements of approximately $4.2 million, which was offset against our overall interest expense.

See the Derivative Instruments section of Note 2, Significant Accounting Policies, to the 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%.

For the three months ended September 30, 2023 we recognized equity in earnings from unconsolidated joint ventures in the amount of $1.1 million and for three months ended September 30, 2022 we recognized equity in earnings from unconsolidated joint ventures of $3.1 million, a decrease of $2.0 million or 64.9%.

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

Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022

Total Revenue

In Thousands Six Months Ended June 30,

In Thousands Nine Months Ended September 30,

Revenue 2023 2022 $ Increase/(Decrease) % Change

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Excluded $97,298 $27,330 — —

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.

Our 7.5% increase in same center revenue over the same period last year was driven by same center total procedure volume growth of 6.1% inclusive of rises in routine and advanced modality imaging procedures of 5.8% and 7.2%, respectively.

Excluded amounts refer to revenue contributions for the nine month period ending September 30, 2023 and September 30, 2022, respectively, from centers that were acquired or divested between January 1, 2022 through September 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,

Total operating expenses for the nine months ended September 30, 2023 increased approximately $99.1 million, or 9.9%, from $999.2 million for the nine months ended September 30, 2022 to $1,098.3 million for the nine months ended September 30, 2023.

The following table sets forth a breakdown of our cost of operations and total operating expenses for the nine months ended September 30, 2023 and 2022 (in thousands):

Nine Months Ended September 30,

Salaries and professional reading fees, excluding stock-based compensation $ 640,459 $ 584,080

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Depreciation and amortization 90,204 80,496

(Gain) loss on contribution of imaging centers into joint venture (16,808) —

(Gain) loss on sale and disposal of equipment 1,185 936

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Salaries and professional reading fees, excluding stock-based compensation and severance

In Thousands Six Months Ended June 30,

In Thousands Nine Months Ended September 30,

Salaries and Professional Fees 2023 2022 $ Increase/(Decrease) % Change

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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.

Excluded amounts refer to salaries and professional reading fees for the nine month period ending September 30, 2023 and September 30, 2022, respectively, from centers that were acquired or divested between January 1, 2022 through September 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.

Stock-based compensation increased $2.5 million, or 14.7% to approximately $19.5 million for the nine months ended September 30, 2023 compared to $17.0 million for nine months ended September 30, 2022.

Building and equipment rental

In Thousands Six Months Ended June 30,

In Thousands Nine Months Ended September 30,

Building & Equipment Rental 2023 2022 $ Increase/(Decrease) % Change

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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.

Excluded amounts refer to building and equipment rental for the nine month period ending September 30, 2023 and September 30, 2022, respectively, from centers that were acquired or divested between January 1, 2022 through September 30, 2023.

Medical supplies

In Thousands Six Months Ended June 30,

In Thousands Nine Months Ended September 30,

Medical Supplies Expense 2023 2022 $ Increase/(Decrease) % Change

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Excluded Sites $4,598 $1,951 — —

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.

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 ultimately reimbursed on a cost plus margin basis that exceeds our initial expense outlay.

Excluded amounts refer to medical supplies for the nine month period ending September 30, 2023 and September 30, 2022, respectively, from centers that were acquired or divested between January 1, 2022 through September 30, 2023.

Other operating expenses

In Thousands Six Months Ended June 30,

In Thousands Nine Months Ended September 30,

Other Operating Expenses 2023 2022 $ Increase/(Decrease) % Change

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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.

Excluded amounts refer to other operating expenses for the nine month period ending September 30, 2023 and September 30, 2022, respectively, from centers that were acquired or divested between January 1, 2022 through September 30, 2023.

Additional segment operating and non operating expenses:

In Thousands Six Months Ended June 30,

In Thousands Nine Months Ended September 30,

2023 2022 $ Increase/(Decrease) % Change

Depreciation and amortization $90,204 $80,496 $9,708 12.1%

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

(Gain) Loss on contribution of imaging centers into joint venture $(16,808) — $(16,808) nm

Loss on disposal of equipment and other $1,185 $936 $249 26.6%

Non-cash change in fair value of interest rate hedge $949 $(39,576) $40,525 (102.4)%

Other expenses (income) $(4,011) $1,892 $(5,903) (312.0)%

Severance $1,417 $488 $929 190.4%

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Interest expense

In Thousands Six Months Ended June 30,

In Thousands Nine Months Ended September 30,

Interest Expense 2023 2022 $ Increase/(Decrease) % Change

Total Interest Expense $47,876 $35,398 $12,478 35.3 %

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.

Cash Paid for Interest $59,421 $30,251 $29,170 96.4 %

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 interest 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 nine months ended September 30, 2023, we received cash payments from our swap agreements of approximately $10.9 million, which was offset against our overall interest expense.

See the Derivative Instruments section of Note 2, Significant Accounting Policies, to the financial statements included in this report for more details on our derivative transactions.

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%.

For the nine months ended September 30, 2023 we recognized equity in earnings from unconsolidated joint ventures in the amount of $3.9 million and for the nine months ended September 30, 2022 we recognized equity in earnings from unconsolidated joint ventures of $8.4 million, an decrease of $4.4 million or 52.9%.

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.

We recorded a provision for income tax of $7.7 million, or an effective tax rate of 24.1%, for the nine months ended September 30, 2023 compared to a provision for income tax of $7.1 million, or an effective tax rate of 19.8% for the nine months ended September 30, 2022.

The income tax rates for the three and nine months ended September 30, 2023 diverge from the federal statutory rate due to benefits related to (i) noncontrolling interests from controlled partnerships, (ii) foreign tax rate differentials, (iii) reversal of uncertain tax positions due to statute of limitation expiration, and (iv) release of state valuation allowances, offset by (i) effects of state income taxes and related prior year adjustments, (ii) share-based compensation, (iii) officer's compensation limitations, and (v) partial valuation allowance on losses in foreign jurisdictions.

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,

The breakdown of revenue and expenses of the segment for the three and nine months ended September 30, 2023 and 2022 are as follows:

In Thousands Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 $ Change % Change 2023 2022 $ Change % Change

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Other operating 1,174 1,721 -547 (31.8) % 4,383 3,939 444 11.3 %

Non-cash change to contingent consideration -7,191 — -7,191 — % -7,191 — -7,191 — %

Acquisition related to non-cash intangible adjustment 3,950 — 3,950 — % 3,950 — 3,950 — %

Depreciation & Amort.

8 unchanged sentences

Segment net loss $3,162 ($6,500) $9,662 (148.6) % ($11,717) ($16,047) $4,330 (27.0) %

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.

The service is now fully rolled-out to all of our mammography centers on the east coast, where it is experiencing close to a 35% adoption rate.

This is expected to grow as we continue to educate patients and referring physicians about its significant advantages over current practices.

These events have resulted in revenues from our AI segment increasing 142.1% for the nine month period ended September 30, 2023, over the same period in 2022.

However, we anticipate that our AI segment will continue to generate losses in the near term as we pursue the continued commercialization of our AI products and expansion of our various cancer detection programs.

Adjusted EBITDA

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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 includes equity earnings in unconsolidated operations and subtracts allocations of earnings to noncontrolling 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.

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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,

common stockholders to Adjusted EBITDA for the three and nine months ended September 30, 2023 and 2022, respectively.

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Net income (loss) attributable to RadNet, Inc.

Net income attributable to RadNet, Inc.

common stockholders $ 17,540 $ 668 $ 4,904 $ 11,585

Provision for income taxes (614) 3,403 521 4,900

Income taxes 7,220 2,188 7,741 7,087

Interest expense 16,115 12,420 47,876 35,398

2 unchanged sentences

Non-cash employee stock-based compensation 4,325 3,317 21,381 19,112

Loss on sale and disposal of equipment and other 77 81 656 1,209

(Gain) loss on sale and disposal of equipment and other 527 (247) 1,183 962

Non-cash change in fair value of interest rate hedge 1,015 (12,451) 949 (39,576)

Gain on contribution of imaging centers into joint venture (16,808) — (16,808) —

Other expenses (4,081) 1,405 (2,609) 1,562

Legal settlements — — — 2,197

Contingent Consideration 1,014 — 2,630

Non-cash change to contingent consideration (6,276) — (3,646)

Change in estimate related to refund liability — 8,089 — 8,089

Acquisition related non-cash intangible adjustment 3,950 — 3,950 —

Non operational rent expenses 1,030 959 2,748 3,120

Adjusted EBITDA including losses from AI Segment $ 60,445 $ 51,337 $ 108,611 $ 89,470

Adjusted EBITDA including EBITDA losses from AI Segment $ 57,920 $ 45,772 $ 166,531 $ 135,241

EBITDA Losses from AI Segment 2,499 4,462 10,283 12,253

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,

Adjusted EBITDA excluding EBITDA losses from AI Segment $ 60,419 $ 50,234 $ 176,814 $ 147,494

The following table is a reconciliation of GAAP net income for our AI Segment to Adjusted EBITDA for the three and nine months ended September 30, 2023 and 2022, respectively.

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

5 unchanged sentences

Severance 12 8 1,740 8

Interest — 8 — —

Income taxes (4,492) (1,286) (5,862) (2,743)

Adjusted EBITDA including losses from AI Segment $ (3,285) $ (4,207) $ (7,779) $ (7,792)

Non-cash change to contingent consideration (7,191) — (7,191) —

Acquisition related to non-cash intangible adjustment 3,950 — 3,950 —

Adjusted EBITDA from AI Segment $ (2,499) $ (4,462) $ (10,283) $ (12,253)

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):

The following table summarizes key balance sheet data related to our liquidity as of September 30, 2023 and December 31, 2022 and income statement data for the nine months ended September 30, 2023 and 2022 (in thousands):

Balance Sheet Data:

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Cash and cash equivalents $ 337,884 $ 127,834

2 unchanged sentences

Stockholders' equity 796,158 491,452

Income statement data for the six months ended June 30,

Income statement data for the nine months ended September 30,

Total net revenue $ 1,196,247 $ 1,046,185

11 unchanged sentences

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

The following table summarizes key components of our sources and uses of cash (in thousands) for the nine months ended:

Cash Flow Data September 30, 2023 September 30, 2022

Cash provided by (used in) operating activities $ 131,943 $ 92,770

1 unchanged sentence

Cash provided by (used in) financing activities 231,101 (9,938)

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.

Our cash provided by operating activities for the nine months ended September 30, 2022 was affected by the non-cash change in fair value of our interest rate hedge of $39.6 million.

Cash used in investing activities for the nine months ended September 30, 2023, included purchases of property and equipment for approximately $136.5 million and the acquisition of imaging business and other assets for $10.9 million.

As part of our business operations we continually evaluate investment opportunities.

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.

Cash provided by financing activities of $231.1 million for the nine months ended September 30, 2023, was due to net proceeds of the $245.8 million received from the issuance of 8,711,250 shares of common stock and offset by payments on our term loan obligations and equipment notes.

Please see Note 6, Credit Facilities and Notes Payable in the notes to consolidated financial statements included in this report for more information.

Senior Secured Credit Facilities

2 unchanged sentences

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:

As of September 30, 2023, we were in compliance with all covenants under our credit facilities.

Deferred financing costs at September 30, 2023, net of accumulated amortization, were $1.8 million and are specifically related to our revolving credit facilities.

Included in our condensed consolidated balance sheets at September 30, 2023 are $853.1 million of total term loan debt (exclusive of unamortized discounts of $10.6 million) in thousands:

Face Value Discount Total Carrying

2 unchanged sentences

Total Term Loans $ 853,063 $ (10,619) $ 842,444

At June 30, 2023, we had no borrowings under our Barclays or Truist revolving credit facilities.

At September 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.

Please see Note 6, Credit Facilities and Notes Payable in the notes to consolidated financial statements included in this report for more information on our secured credit facilities.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis