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, 2023 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the U.S. Securities and Exchange Commission (SEC) on February 29, 2024. Forward-Looking Statements 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. 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 25 Table of Contents terms or other comparable terminology. Forward-looking statements in this report include, among others, statements we make regarding: • expectations concerning domestic and global economic conditions, rates of inflation, or changes in interest rates; • anticipated trends in our revenues, operating expenses or capital expenditures, and our financial guidance; • expected timing and potential impact of regulatory changes affecting our business; • expected future market acceptance for our products or services, and our competitive strengths in the markets we serve; • our ability to successfully acquire and integrate new businesses, and achieve expected benefits, synergies or operating results from those acquisitions; and • economics and cost savings anticipated to be derived from our investments in artificial intelligence and machine learning products and solutions. 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, 2023 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. 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. Overview We are a national provider of diagnostic imaging services in the United States. At March 31, 2024, we operated directly or indirectly through joint ventures with hospitals, 375 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. 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. In addition to our imaging business, we have established a Digital Health business segment for our 2024 fiscal year, which combines our former Artificial Intelligence (“AI”) business segment with our eRad, Inc. business. Prior period amounts have been adjusted retrospectively to reflect the change in reportable segment. 26 Table of Contents RadNet’s digital health segment develops and delivers AI-powered health informatics solutions to drive quality, efficiency, and outcomes in imaging and radiology. The portfolio of software solutions are anchored by eRad, Inc.'s RIS/PACS, informatics designed specifically for outpatient radiology and DeepHealth OS, a cloud-native operating system that helps operate all aspects of the radiology service line. DeepHealth OS addresses challenges across the entire value chain from scheduling and patient preparation to technologist workflow to interpretation and referral management. Our current AI focus for clinical workflows is to develop solutions that employ machine learning to assist radiologists and other clinicians in interpreting images and improving radiologist efficiency and patient care, initially in the fields of screening for breast, prostate, lung and colon cancers. Our DeepHealth, Inc. subsidiary has received FDA clearance for use of its SaigeQ ”triage”/workflow product, SaigeDX advanced diagnostic product and Saige-Density breast density assessment software for screening breast mammography, which we have begun to roll out in certain markets as an Enhanced Breast Cancer Detection solution. Our Aidence subsidiary is focused on developing solutions for interpretation of chest and lung CT scans for lung cancer screening. It has received the CE mark for its solution and has existing customers in seven European countries, with its largest concentration in the United Kingdom, and plans to submit an application for FDA clearance to sell in the United States. Our Quantib subsidiary is primarily focused on interpretation of prostate MRI for widespread prostate cancer screening. Quantib’s prostate MRI post-processing software has both FDA clearances and European CE marking. The digital health segment provides these solutions to RadNet and to over 400 customers in the United States, Europe, and Israel. Our operations comprise two segments for financial reporting purposes for this reporting period, Imaging Centers and Digital Health. For further financial information about these segments, see Note 5, Segment Reporting, in the notes accompanying our financial statements included in this report. Recent Developments The following table shows our imaging centers in operation and revenues for the three months ended March 31, 2024 and 2023: Three Months Ended March 31, 2024 2023 Centers in operation 375 363 Net revenues (millions) $ 432 $ 391 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 three months ended March 31, 2024 and 2023 is summarized in the following table (in thousands): Three Months Ended March 31, Payor 2024 2023 Commercial insurance $ 240,628 $ 213,061 Medicare 93,525 84,970 Medicaid 10,887 9,959 Workers' compensation/personal injury 11,794 12,433 Other patient revenue 11,470 9,559 Management fee revenue 5,908 4,248 Heart and lung 3,921 1,813 Other 4,395 5,300 Revenue under capitation arrangements 34,518 38,144 Imaging Center Segment Revenue 417,046 379,487 Digital Health Segment Revenue 14,661 11,077 Total service revenue 431,707 $ 390,564 27 Table of Contents Acquisitions and Joint Venture Activity The following discussion summarizes certain details concerning our acquisition or disposition of imaging centers, and our joint venture transaction. See Note 4, Business Combinations and Related Activity and Note 2, Summary of Significant Accounting Policies to our financial statements included in this report for further information. Acquisitions During the three months ended March 31, 2024, 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 market. These acquisitions are reported as part of our Imaging Center segment. We made a fair value determination of the acquired assets and assumed liabilities and the following were recorded (in thousands): Entity Date Acquired Total Consideration Property & Equipment Right of Use Assets Goodwill Intangible Assets Other Assets Right of Use Liabilities Grossman Imaging Center of CMH, LLC* 3/31/2024 10,500 1,178 6,404 9,016 250 56 (6,404) Providence Health System - Southern California* 3/31/2024 7,096 643 3,441 6,453 — — (3,441) Antelope Valley Outpatient Imaging* 2/1/2024 3,530 2,794 563 687 50 — (563) Total 21,126 4,614 10,408 16,156 300 56 (10,408) Joint Venture Activity At March 31, 2024, 36% of our centers were operating as joint ventures with large health care providers. We have 24 joint ventures with hospital and health system partners. Notable joint venture relationships include MemorialCare (25 centers), RWJ Barnabas (33 Centers), Cedars Sinai (15 centers), Dignity Health (25 centers), and MedStar Health System (5 centers). We manage the day to day operations for these joint ventures and perform most management services in exchange for a management fee. The following table summarizes our investment in joint ventures as of March 31, 2024 (in thousands): Balance as of December 31, 2023 $ 92,710 Equity in earnings in these joint ventures 4,324 Distribution of earnings — Equity contributions in existing joint ventures — Balance as of March 31, 2024 $ 97,034 We charged management service fees from the centers underlying these joint ventures of approximately $5.9 million and $4.2 million for the three months ended March 31, 2024 and 2023, respectively. 28 Table of Contents The following table summarizes key balance sheet data for these joint ventures as of March 31, 2024 and December 31, 2023 and income statement data for the three months ended March 31, 2024 and 2023 (in thousands): Balance Sheet Data: March 31, 2024 December 31, 2023 Current assets $ 51,292 $ 39,819 Noncurrent assets 227,812 224,936 Current liabilities (49,464) (46,587) Noncurrent liabilities (74,075) (70,834) Total net assets $ 155,565 $ 147,334 Income statement data for the three months ended March 31, 2024 2023 Net revenue $ 61,208 $ 42,086 Net income $ 5,810 $ 2,909 Critical Accounting Policies The Securities and Exchange Commission defines critical accounting estimates as those that (a) are most important to the portrayal of a company’s financial condition and results of operations and (b) 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 financial statements included in this report and in our annual report on Form 10-K for the year ended December 31, 2023, 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 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. 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 29 Table of Contents office supplies, secretarial, reception and transcription services, maintenance of medical records, and advertising, marketing and promotional activities. Our revenues are based upon our management's estimate of amounts we expect to be entitled to receive from patients and third-party payors. Estimates of contractual allowances under Medicare, Medicaid, managed care and commercial insurance plans are based upon historical collection experience of the payments received from such payors in accordance with the underlying contractual agreements. Revenues related to uninsured patients and uninsured copayment and deductible amounts for patients who have health care coverage may have price concessions applied. We also record estimated implicit price concessions (based primarily on historical collection experience) related to uninsured accounts to record self-pay revenues at the estimated amounts we expect to collect. Under capitation arrangements with various health plans, we earn a per-enrollee amount each month for making available diagnostic imaging services to all plan enrollees under the capitation arrangement. Revenue under capitation arrangements is recognized in the period in which we are obligated to provide services to plan enrollees under contracts with various health plans. Our estimates and assumptions related to revenue recognition did not change materially for the quarter ended March 31, 2024. Accounts Receivable Substantially all of our accounts receivable are due under fee-for-service contracts from third party payors, such as insurance companies and government-sponsored healthcare programs, or directly from patients. Services are generally provided pursuant to one-year contracts with healthcare providers. Receivables generally are collected within industry norms for third-party payors. We continuously monitor collections from our payors and maintain an allowance for bad debts based upon specific payor collection issues that we have identified and our historical experience. Our estimates and assumptions for allowances on our account receivable did not change materially during the quarter ended March 31, 2024. 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 March 31, 2024 totaled $694.3 million. Indefinite Lived Intangible Assets at March 31, 2024 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. 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 noted no impairment as of October 1, 2023, and we have not identified any other indicators of impairment through March 31, 2024. Recent Accounting Standards See Note 3, Recent Accounting and Reporting Standards to the financial statements included in this report for further information. 30 Table of Contents Results of Operations Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023 Imaging Center Segment We have developed our medical imaging centers segment through a combination of organic growth, equity investments, acquisitions and joint venture formations. In the discussion below same center metrics are based on imaging centers that were in operation throughout the period of January 1, 2024 through March 31, 2024. Excluded amounts relate to imaging centers that were acquired or divested between January 1, 2024 through March 31, 2024. Total Revenue In Thousands Three Months Ended March 31, Revenue 2024 2023 $ Increase/(Decrease) % Change Total Revenue $417,046 $379,487 $37,559 9.9% Same Center Revenue $376,655 $348,240 $28,415 8.2% Excluded $40,391 $31,247 — — Our 8.2% increase in same center revenue over the same period last year was driven by same center total procedure volume growth of 1.6% which was comprised of a 0.5% increase in routine imaging and a 5.1% increase in advanced modality imaging procedures. The balance of increase related to product mix, as advanced imaging was a greater portion of overall procedures, as well as increases in rates charged for imaging procedures. Operating Expenses Total operating expenses for the three months ended March 31, 2024 increased approximately $32.4 million, or 8.7%, from $370.3 million for the three months ended March 31, 2023 to $402.7 million for the three months ended March 31, 2024. The following table sets forth a breakdown of our cost of operations and total operating expenses for the three months ended March 31, 2024 and 2023 (in thousands): Three Months Ended March 31, 2024 2023 Salaries and professional reading fees, excluding stock-based compensation $ 244,716 $ 214,656 Stock-based compensation 11,070 11,529 Building and equipment rental 28,827 28,887 Medical supplies 21,955 20,134 Other operating expenses * 65,737 64,945 Cost of operations 372,305 340,151 Depreciation and amortization 29,974 29,448 Loss on sale and disposal of equipment 188 577 Severance costs 225 122 Total operating expenses $ 402,692 $ 370,298 * Includes billing fees, office supplies, repairs and maintenance, insurance, business tax and license, outside services, telecom, utilities, marketing, travel and other expenses. The discussion below provides additional information and analysis on changes in our various operating expenses for the three months ended March 31, 2024 and 2023 (in thousands): Salaries and professional reading fees, excluding stock-based compensation and severance 31 Table of Contents In Thousands Three Months Ended March 31, Salaries and Professional Fees 2024 2023 $ Increase/(Decrease) % Change Total Salaries $244,716 $214,656 $30,060 14.0% Same Center Salaries $228,105 $201,280 $26,825 13.3% Excluded $16,611 $13,376 — — Consistent with the higher procedure volumes noted above, our staffing levels were adjusted to support the influx of patients seeking radiology procedures. We are continuing to face inflation in employee wage rates as we compete for talent in a tight labor market. Stock-based compensation Stock-based compensation for the three months ended March 31, 2024 decreased approximately $0.5 million, or 4.0%, from $11.5 million for the three months ended March 31, 2023 to $11.1 million for the three months ended March 31, 2024. The decrease is primarily a result of a smaller number of shares granted in the first quarter of 2024, partially offset by higher fair value of stock awards granted and vested in the first quarter of 2024. Building and equipment rental In Thousands Three Months Ended March 31, Building & Equipment Rental 2024 2023 $ Increase/(Decrease) % Change Total $28,827 $28,887 $(60) (0.2)% Same Center $25,200 $25,377 $(177) (0.7)% Excluded Sites $3,627 $3,510 — — 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 2023. Medical supplies In Thousands Three Months Ended March 31, Medical Supplies Expense 2024 2023 $ Increase/(Decrease) % Change Total $21,955 $20,134 $1,821 9.0% Same Center $20,172 $18,520 $1,652 8.9% Excluded Sites $1,783 $1,614 — — The increase in medical supplies expense was consistent with our higher patient volume and product shift towards more advanced imaging modalities. Other operating expenses In Thousands Three Months Ended March 31, Other Operating Expenses 2024 2023 $ Increase/(Decrease) % Change Total $65,737 $64,945 $792 1.2% Same Center $59,133 $59,756 $(623) (1.0)% Excluded Sites $6,604 $5,189 — — Other operating expenses was relatively unchanged compared to the same period in the prior year and lower as a percentage of overall revenues. 32 Table of Contents Additional segment operating and non-operating expenses In Thousands Three Months Ended March 31, 2024 2023 $ Increase/(Decrease) % Change Depreciation and amortization $29,974 $29,448 $526 1.8% Loss on disposal of equipment and other $188 $577 $(389) (67.4)% Non-cash change in fair value of interest rate hedge ($1,216) $4,093 (5,309) (129.7)% Other expenses (income) ($4,434) $17 (4,451) (26182.4)% Severance $225 $122 103 84.2% The fair value of the 2019 swaps at March 31, 2024 was a net asset of $16.3 million compared to a net asset of $15.1 million December 31, 2023, resulting in a gain of $1.2 million during the three months ended March 31, 2024, which increased the Company’s tax provision by $0.2 million. The change in fair value related to reduced expectations that market interest rates would decrease during the remaining term of the 2019 swaps. Other income for the three months ended March 31, 2024 included money market interest income of $4.4 million. Interest expense In Thousands Three Months Ended March 31, Interest Expense 2024 2023 $ Increase/(Decrease) % Change Total Interest Expense $ 16,267 $ 15,722 $545 3.5 % Interest related to derivatives* (2,435) (1,735) Interest related to amortization** 748 746 Adjusted Interest Expense*** 17,954 16,711 1,243 7.4 % *Includes payments from 2019 swaps **Includes noncash amortization of deferred loan costs and discount on issuance of debt ***Includes interest related to our term loans, revolving credit line, notes, and other The increase in interest expense was the result in the general increase in interest rates compared to the same period in the prior year, partially offset by payments from our 2019 swaps. To mitigate our future floating rate interest expense exposure we entered into the 2019 swaps with locked in interest rates for one-month Term SOFR of 1.89% for $100 million of notional value and 1.98% for $400 million of notional value. We are liable for premium payments to the 2019 swap counterparties if interests rates are below the arranged rates, and receive payments from the 2019 swap counterparties if interest rates exceed the arranged rates. If interest rates were to theoretically reduce to 0%, our maximum premium payment would be the difference between the two swapped rates and 0% then multiplied by the notional value of the swaps, or $1.89 million per year for the $100 million swap and $8.0 million per year for the $400 million swap. Payments under the 2019 swaps are settled in cash on a monthly basis. During the three months ended March 31, 2024, interest rates were above the arranged rates for most of the year and we received payment of $3.4 million in cash payments from our 2019 swap counterparties, which was reported a component of interest expense. See the Derivative Instruments section of Note 2, Summary of Significant Accounting Policies, in the notes accompanying in our annual report on Form 10-K for the fiscal year ended December 31, 2023 and Part 1, Item 3 — "Quantitative and Qualitative Disclosure About Market Risk" below for more details on our derivative transactions. Equity in earnings from unconsolidated joint ventures For the three months ended March 31, 2024 and 2023 we recognized equity in earnings from unconsolidated joint ventures in the amount of $4.3 million and $1.4 million, respectively, an increase of $2.9 million or 202.8%. The increase was mainly due to the additional contribution made to SMIG in September 2023. SMIG operated at a net income for the three 33 Table of Contents months ended March 31, 2024, which positively impacted our equity in earnings from unconsolidated joint ventures during the period. Net income attributable to noncontrolling interests At March 31, 2024, our consolidated subsidiaries operated 323 imaging centers of which 85 were not wholly-owned and thus a portion of their operating results were attributable to noncontrolling interests. At March 31, 2023, our consolidated subsidiaries included 324 centers of which 83 were not wholly-owned. For the three months ended March 31, 2024, we recognized net income attributable to noncontrolling interests of $8.2 million versus $6.7 million for the three months ended March 31, 2023, an increase of $1.6 million. The increase in net income attributable to noncontrolling interests was primarily due to the formation of a new majority owned subsidiary, Los Angeles Imaging Group, LLC in September 2023. We contributed the operations of three centers to Los Angeles Group, LLC and Cedars-Sinai Medical Center contributed cash. Additionally, patient volumes for advanced modalities improved in 2024 and we closed two nonperforming centers in a majority owned subsidiary, Beach Imaging Group, LLC in December 2023. As noncontrolling interests only represent a portion of our imaging center business, and excludes our Digital Health Segment which generated losses of $3.0 million for the three months ended March 31, 2024, we do not expect changes in net income attributable to noncontrolling interests to correlate with changes in consolidated operating income or pretax income. Digital Health Segment The breakdown of revenue and expenses of the segment for the three months ended March 31, 2024 and 2023 are as follows: In Thousands Three Months Ended March 31, 2024 2023 $ Change % Change Statement of Operations Revenue $ 14,661 $ 11,078 $ 3,583 32.3 % Salaries and Wages 5,259 6,984 (1,725) (24.7) % Stock Compensation 828 657 171 26.0 % Other operating 5,880 4,076 1,804 44.3 % Non-Capitalized R&D - DeepHealth Cloud OS & Generative AI 3,315 — 3,315 — Depreciation & Amort. 2,394 1,867 527 28.2 % Severance — 12 (12) (100.0) % Total operating expenses $ 17,676 $ 13,596 $ 4,080 30.0 % Loss from Operations $ (3,015) $ (2,518) $ (497) 19.7 % Other expense 1,499 1,416 83 5.9 % Loss before taxes (4,514) (3,934) (580) 14.7 % Income taxes $ (828) $ 536 $ (1,364) (254.5) % Segment net loss (3,686) (4,470) 784 (17.5) % Revenues for the digital health segment increased as a result of core growth in our eRad PICS business, the rollout in 2023 of our Deephealth OS, and continued rollout of our Enhanced Breast Cancer Detection solutions across additional facilities. The increase in operating expenses was primarily related to salary expense as we increased headcount in connection with the commercialization of our initial AI products. Our net loss for the segment was consistent with the prior year. We expect that our Digital Health segment will continue to generate net losses over the next several years. Non-GAAP Financial Measures We use both GAAP and non-GAAP metrics to measure our financial results. We believe that, in addition to GAAP metrics, non-GAAP metrics such as Adjusted EBITDA assist us in measuring our core operations from period to period. 34 Table of Contents Adjusted EBITDA Our Adjusted EBITDA metric removes non-cash and non-recurring charges that occur in the affected period and provides a basis for measuring the Company’s core financial performance against other periods. We define Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, as adjusted to exclude losses or gains on the disposal of equipment, other income or loss, loss on debt extinguishment, bargain purchase gains, loss on de-consolidation of joint ventures, gain on contribution of imaging centers into 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. 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, or other financial statement data presented in the consolidated financial statements as an indicator of financial performance. 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. The following is a reconciliation of the nearest comparable GAAP financial measure, net income, to Adjusted EBITDA for the three months ended March 31, 2024 and 2023, respectively. Three Months Ended March 31, 2024 2023 Net income attributable to RadNet, Inc. common stockholders $ (2,779) $ (21,005) Income taxes (1,864) 1,135 Interest expense 16,267 15,722 Severance costs 225 134 Depreciation and amortization 32,368 31,315 Non-cash employee stock-based compensation 11,897 12,185 (Gain) loss on sale and disposal of equipment and other 186 579 Non-cash change in fair value of interest rate hedge (1,216) 4,093 Other expenses (2,934) 1,432 Non-cash change to contingent consideration 1,974 — Non-Capitalized R&D - DeepHealth Cloud OS & Generative AI 3,315 — Acquisition related non-cash intangible adjustment — 1,616 Non operational rent expenses 1,023 959 Adjusted EBITDA - Total Company $ 58,462 $ 48,165 Adjusted EBITDA - Digital Health Segment 3,520 20 Adjusted EBITDA - Imaging Center $ 54,942 $ 48,145 The following table is a reconciliation of GAAP net income for our Digital Health Segment to Adjusted EBITDA for the three months ended March 31, 2024 and 2023, respectively. 35 Table of Contents Three Months Ended March 31, 2024 2023 Segment net loss $ (3,686) $ (4,470) Stock Compensation 828 657 Depreciation & Amortization 2,394 1,867 Other operating loss 1,499 1,416 Other (income) expense (2) 2 Severance — 12 Income taxes (828) 536 Non-Capitalized R&D - DeepHealth Cloud OS & Generative AI 3,315 — Adjusted EBITDA - Digital Health Segment $ 3,520 $ 20 Liquidity and Capital Resources 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. Our principal capital requirements are for the initial start-up and development of new diagnostic imaging centers, the acquisition of additional centers and the acquisition of new diagnostic imaging equipment. On a continuing basis, we evaluate various transactions to increase shareholder value and enhance our business results, including acquisitions, divestitures and joint ventures. 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. The following table summarizes key balance sheet data related to our liquidity as of March 31, 2024 and December 31, 2023 and income statement data for the three months ended March 31, 2024 and 2023 (in thousands): Balance Sheet Data: March 31, 2024 December 31, 2023 Cash and cash equivalents $ 526,980 $ 342,570 Accounts receivable 189,572 163,707 Working capital (exclusive of current operating lease liabilities) 426,079 197,805 Stockholders' equity 1,077,325 813,359 Income statement data for the three months ended March 31, 2024 2023 Total net revenue $ 431,707 $ 390,564 Net income attributable to RadNet common stockholders (2,779) (21,005) Sources and Uses of Cash The following table summarizes key components of our sources and uses of cash for the three months ended March 31, 2024 and 2023 (in thousands): 36 Table of Contents Cash Flow Data March 31, 2024 March 31, 2023 Cash provided by (used in) operating activities $ 17,085 $ 32,616 Cash provided by (used in) investing activities (60,937) (65,556) Cash provided by (used in) financing activities 228,298 (3,821) Cash provided by operating activities for the three months ended March 31, 2024 decreased by $15.5 million compared to March 31, 2023 primarily driven by the timing of payments, as a $17.8 million increase in net income was offset by a $51.7 million change in assets and liabilities, primarily related to a pay down of accounts receivable and accrued expenses. Cash used in investing activities for the three months ended March 31, 2024 decreased from March 31, 2023 by $4.6 million. Purchases of imaging centers during the period was $3.5 million, a $6.1 million decrease from the prior period. Capital expenditures for property and equipment during the period was $57.4 million, a $1.5 million increase from the prior period. Cash provided by financing activities for the three months ended March 31, 2024 related primarily to a secondary public offering of our common stock, offset by payments including prepayments on our term loan, and payments of contingent consideration on recent acquisition transactions. In March 2024, we completed a public offering of 5,232,500 shares of our common stock, which included 682,500 shares sold pursuant to an underwriters overallotment option, at a price to the public of $44.00 per share, resulting in net proceeds after underwriting discounts, commissions, and expenses of $218.3 million. Additional cash provided by financing activities included $8.7 million received from sale of economic interest in majority owned subsidiary and a $4.2 million contribution from noncontrolling partners. Senior Secured Credit Facilities We maintain secured credit facilities with Barclays Bank PLC and with Truist Bank. Our condensed consolidated balance sheets at March 31, 2024 include $821.2 million of total term loan debt (exclusive of unamortized discounts of $10.6 million) in thousands: Face Value Discount Total Carrying Value Barclays Term Loan $ 678,687 $ (8,519) $ 670,168 Truist Term Loan 142,500 (924) 141,576 Total Term Loans $ 821,187 $ (9,443) $ 811,744 At March 31, 2024, we had no borrowings under our Barclays or Truist revolving credit facilities. After reserves for outstanding letters of credit of $7.6 million, we had $187.4 million available for borrowing under our Barclays revolving credit facility and $50.0 million available under our Truist revolving credit facility. On April 18, 2024, after the period covered by this report, we refinanced our Barclays term loan and credit facility, replacing the prior facility with an $875.0 million term loan and a $282.0 million revolving credit facility. The refinance transaction reduced out interest rates on the Barclays term loan and revolving credit facility and extended the maturity date for the term loan to April 18, 2031 and for the revolving credit facility to April 18, 2029. The new term loan calls for quarterly principal payments of $2.2 million, compared to $1.8 million under the prior credit facility. After paying off the balance on the prior facility, payment of accrued interest through the closing of the refinance transaction, and payment of transaction fees and expenses, we added approximately $167.9 million in cash to the balance sheet. Please see Note 6, Credit Facilities and Notes Payable in the notes to financial statements included in this report for more information on our secured credit facilities.