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 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 (the "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. 27 Table of Contents 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 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 June 30, 2024, we operated directly or indirectly through joint ventures with hospitals, 398 centers located in Arizona, California, Delaware, Florida, Maryland, New Jersey, New York and Texas. 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. Our 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 from scheduling and patient preparation to technologist workflow to interpretation and referral management. 28 Table of Contents In addition we are using AI 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 Holding B.V. subsidiary is 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 B.V. 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. Our 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. Prior period amounts in the financial statements included in this report have been adjusted retrospectively to reflect the change in reportable segment. Recent Developments During the second quarter of 2024 we continued to expand our imaging business entering the Houston, Texas with the completion of two acquisitions for an aggregate of 13 imaging centers. With a population of approximately 7.3 million people, Houston is the fourth largest city in the United States. The following table shows our imaging centers in operation and revenues for the six months ended June 30, 2024 and 2023: Six Months Ended June 30, 2024 2023 Centers in operation 398 363 Net revenues (millions) $ 891 $ 794 29 Table of Contents Our imaging services include magnetic resonance imaging (MRI), computed tomography (CT), positron emission tomography (PET), nuclear medicine, mammography, ultrasound, diagnostic radiology (X-ray), fluoroscopy and other related procedures. The vast majority of our centers offer multi-modality imaging services, a key point of differentiation from our competitors. The multi-modality offering provides a “one-stop” solution for our customers and referral sources. It also diversifies our revenue base, and reduces our exposure to changes in reimbursement rates for certain imaging modalities. The following charts summarize our procedure volumes for various imaging modalities for the three months ended June 30, 2024 and 2023: 30 Table of Contents 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 and six months ended June 30, 2024 and 2023 received from our various payors is summarized in the following table (in thousands): Three Months Ended June 30, Six Months Ended June 30, Payor 2024 2023 2024 2023 Commercial insurance $ 256,517 $ 220,618 $ 497,145 $ 433,673 Medicare 101,719 87,787 195,186 172,757 Medicaid 11,001 9,798 21,906 19,763 Workers' compensation/personal injury 10,997 12,580 22,837 25,017 Other patient revenue 12,432 10,196 23,897 19,751 Management fee revenue 6,106 4,033 12,014 8,281 Heart and lung 3,936 2,123 7,857 3,936 Other 4,209 5,180 8,604 10,480 Revenue under capitation arrangements 36,969 39,797 71,487 77,941 Imaging Center Segment Revenue 443,886 392,112 860,933 771,599 Digital Health Segment Revenue 15,828 11,603 30,488 22,680 Total service revenue 459,714 $ 403,715 $ 891,421 $ 794,279 Acquisitions and Joint Venture Activity We have developed our imaging business through a combination or organic growth, acquisitions and joint ventures. 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, Significant Accounting Policies to our financial statements included in this report for further information. Acquisitions During the six months ended June 30, 2024, we completed the acquisition of certain assets of the following entities, which engage directly in the practice of radiology or in associated businesses. The acquisitions were to expand our imaging business into Houston, Texas a new market, and 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 U.S. Imaging, Inc. 6/1/2024 4,200 4,025 5,597 — 175 — (5,597) Houston Medical Imaging, LLC 4/1/2024 22,703 13,267 5,461 15,394 250 90 (5,461) Grossman Imaging Center of CMH, LLC 3/31/2024 10,500 1,717 6,194 8,657 280 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 48,029 22,445 21,256 31,191 755 146 (21,466) *The valuation of assets acquired and liabilities assumed has not yet been finalized as of June 30, 2024, fair value determination is preliminary and subject to change. 31 Table of Contents Joint Venture Activity At June 30, 2024, 37% of our imaging centers were operating as joint ventures with large health care providers. We have joint venture arrangements with 24 hospital and health system partners (inclusive of consolidated and unconsolidated joint ventures), including MemorialCare (24 centers), RWJ Barnabas (35 Centers), Cedars Sinai (17 centers), Dignity Health (28 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. We charged management service fees from the centers underlying these joint ventures of approximately $6.1 million and $4.0 million for the three months ended June 30, 2024 and 2023, respectively. The following table summarizes our investment in unconsolidated joint ventures as of June 30, 2024 (in thousands): Balance as of December 31, 2023 $ 92,710 Equity in earnings in these joint ventures 7,713 Distribution of earnings (1,000) Equity contributions in existing joint ventures 1,421 Balance as of June 30, 2024 $ 100,844 The following table summarizes key balance sheet data for these unconsolidated joint ventures as of June 30, 2024 and December 31, 2023 and income statement data for the six months ended June 30, 2024 and 2023 (in thousands): Balance Sheet Data: June 30, 2024 December 31, 2023 Current assets $ 55,812 $ 39,819 Noncurrent assets 221,521 224,936 Current liabilities (50,151) (46,587) Noncurrent liabilities (74,074) (70,834) Total net assets $ 153,108 $ 147,334 Income statement data for the six months ended June 30, 2024 2023 Net revenue $ 130,546 $ 84,699 Net income $ 14,657 $ 5,827 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 32 Table of Contents Our revenues generally relate to net patient fees received from various payors and patients themselves under contracts in which our performance obligations are to provide diagnostic services to the patients. Revenues are recorded during the period our obligations to provide diagnostic services are satisfied. Our performance obligations for diagnostic services are generally satisfied over a period of less than one day. The contractual relationships with patients, in most cases, also involve a third-party payor (Medicare, Medicaid, managed care health plans and commercial insurance companies, including plans offered through the health insurance exchanges) and the transaction prices for the services provided are dependent upon the terms provided by (Medicare and Medicaid) or negotiated with (managed care health plans and commercial insurance companies) the third-party payors. The payment arrangements with third-party payors for the services we provide to the related patients typically specify payments at amounts less than our standard charges and generally provide for payments based upon predetermined rates per diagnostic services or discounted fee-for-service rates. Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations, changes in business and economic conditions, and the frequent changes in managed care contractual terms resulting from contract re-negotiations and renewals. As it relates to the Group, this service fee revenue includes payments for both the professional medical interpretation revenue recognized by them as well as the payment for all other aspects related to our providing the imaging services, for which we earn management fees. As it relates to others centers, this service fee revenue is earned through providing the use of our diagnostic imaging equipment and the provision of technical services as well as providing administration services such as clerical and administrative personnel, bookkeeping and accounting services, billing and collection, provision of medical and office supplies, secretarial, reception and transcription services, maintenance of medical records, and advertising, marketing and promotional activities. Our revenues are based upon our management's estimate of amounts we expect to be entitled to receive from patients and third-party payors. Estimates of contractual allowances under Medicare, Medicaid, managed care and commercial insurance plans are based upon historical collection experience of the payments received from such payors in accordance with the underlying contractual agreements. Revenues related to uninsured patients and uninsured copayment and deductible amounts for patients who have health care coverage may have price concessions applied. We also record estimated implicit price concessions (based primarily on historical collection experience) related to uninsured accounts to record self-pay revenues at the estimated amounts we expect to collect. Under capitation arrangements with various health plans, we earn a per-enrollee amount each month for making available diagnostic imaging services to all plan enrollees under the capitation arrangement. Revenue under capitation arrangements is recognized in the period in which we are obligated to provide services to plan enrollees under contracts with various health plans. Our estimates and assumptions related to revenue recognition did not change materially for the quarter ended June 30, 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 June 30, 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 33 Table of Contents Goodwill at June 30, 2024 totaled $709.0 million. Indefinite Lived Intangible Assets at June 30, 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 June 30, 2024. Recent Accounting Standards See Note 3, Recent Accounting and Reporting Standards to the financial statements included in this report for further information. Results of Operations Three Months Ended June 30, 2024 Compared to the Three Months Ended June 30, 2023 Imaging Center Segment We have developed our medical imaging centers segment through a combination of organic growth, 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 April 1, 2023 through June 30, 2024. Excluded amounts relate to imaging centers that were acquired or divested between April 1, 2023 through June 30, 2024. Total Revenue In Thousands Three Months Ended June 30, Revenue 2024 2023 $ Increase/(Decrease) % Change Total $443,886 $392,112 $51,774 13.2% Same Center $425,532 $382,241 $43,291 11.3% Excluded $18,354 $9,871 — — Our 11.3% increase in same center revenue over the same period last year was driven by an increase in procedures volumes. Same center total procedure volume grew at an overall rate of 4.3% which was comprised of a 2.86% increase in routine imaging and a 8.72% 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 fees charged per imaging procedure. A significant contributor to the change in product mix was the increase in PETHC procedures related to prostate cancer and suspect Alzheimer’s studies, which are included in advanced modality imaging procedures. Operating Expenses Total operating expenses for the three months ended June 30, 2024 increased approximately $41.8 million, or 11.5%, to $406.2 million for the three months ended June 30, 2024 from $364.4 million for the three months ended June 30, 2023. The following table breaks down our cost of operations and total operating expenses for the three months ended June 30, 2024 and 2023 (in thousands): 34 Table of Contents Three Months Ended June 30, 2024 2023 Salaries and professional reading fees, excluding stock-based compensation $ 243,356 $ 210,044 Stock-based compensation 4,349 4,017 Building and equipment rental 29,896 29,984 Medical supplies 26,523 22,411 Other operating expenses * 69,325 67,626 Cost of operations 373,449 334,082 Depreciation and amortization 32,089 30,074 Loss on sale and disposal of equipment 398 84 Severance costs 225 154 Total operating expenses $ 406,161 $ 364,394 * 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, 2024 and 2023 (in thousands): Salaries and professional reading fees, excluding stock-based compensation and severance In Thousands Three Months Ended June 30, Salaries and Professional Fees 2024 2023 $ Increase/(Decrease) % Change Total $243,356 $210,044 $33,312 15.9% Same Center $232,571 $205,971 $26,600 12.9% Excluded $10,785 $4,073 — — 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 June 30, 2024 increased approximately $0.3 million, or 8.3%, to $4.3 million for the three months ended June 30, 2024 from $4.0 million for the three months ended June 30, 2023. The increase is primarily due to higher fair value of stock awards granted in the first quarter of 2024. Building and equipment rental In Thousands Three Months Ended June 30, Building & Equipment Rental 2024 2023 $ Increase/(Decrease) % Change Total $29,896 $29,984 $(88) (0.3)% Same Center $27,050 $27,805 $(755) (2.7)% Excluded $2,846 $2,179 — — 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 35 Table of Contents In Thousands Three Months Ended June 30, Medical Supplies Expense 2024 2023 $ Increase/(Decrease) % Change Total $26,523 $22,411 $4,112 18.3% Same Center $24,483 $20,964 $3,519 16.8% Excluded $2,040 $1,447 — — The increase in medical supplies expense was consistent with our higher patient volume and product shift towards more advanced imaging modalities. The increase in PETHC procedures related to prostate cancer and suspected Alzheimer studies also raised medical supplies expense due to the requirement for high-cost isotope tracers. Other operating expenses In Thousands Three Months Ended June 30, Other Operating Expenses 2024 2023 $ Increase/(Decrease) % Change Total $69,325 $67,626 $1,699 2.5% Same Center $64,605 $65,766 $(1,161) (1.8)% Excluded $4,720 $1,860 — — Other operating expenses was relatively unchanged compared to the same period in the prior year and lower as a percentage of overall revenues. Additional segment operating and non-operating expenses In Thousands Three Months Ended June 30, 2024 2023 $ Increase/(Decrease) % Change Depreciation and amortization $32,089 $30,074 $2,015 6.7% Loss on disposal of equipment and other $398 $84 $314 373.8% Non-cash change in fair value of interest rate hedge $1,890 ($4,158) 6,048 (145.5)% Other expenses (income) ($87) ($1,666) 1,579 (94.8)% Severance $225 $154 71 46.1% The increase in depreciation expense was the result of our higher depreciable asset base. The fair value of the 2019 Swaps at June 30, 2024 was a net asset of $14.4 million compared to a net asset of $16.3 million March 31, 2024, resulting in a loss of $1.9 million during the three months ended June 30, 2024. 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 June 30, 2024 included money market interest income of $8.7 million and other income of $0.2 million, substantially offset by debt extinguishment and restructuring charges of $8.8 million, which related to refinancing of our credit facilities with Barclays. See Note 6 Credit Facilities and Notes Payable included in the notes to our condensed consolidated financial statements. Interest expense In Thousands Three Months Ended June 30, Interest Expense 2024 2023 $ Increase/(Decrease) % Change Total Interest Expense $ 26,082 $ 16,039 $10,043 62.6 % Interest related to derivatives* 4,837 (2,490) Interest related to amortization** 793 748 Adjusted Interest Expense*** 20,452 17,781 2,671 15.0 % 36 Table of Contents *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 of refinancing of our Barclays credit facility, which added approximately $196.3 million in additional term loan debt to the facility. The effect of the additional term loan was partially offset by lower interest rates compared to the same period in the prior year. During the three months ended June 30, 2024, interest rates were above the arranged rates in our 2019 Swaps 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. Also, the 2019 Swaps for $100 million of notional value matured in October 2023, so they were in effect for the second quarter of 2023, but not 2024. See the Derivative Instruments section of Note 2, 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 June 30, 2024 and 2023 we recognized equity in earnings from unconsolidated joint ventures in the amount of $3.4 million and $1.4 million, respectively, an increase of $2.0 million or 138.2%. The increase was mainly due to the additional contribution made to Santa Monica Imaging Group, LLC in September 2023. Santa Monica Imaging Group operated at a net income for the three months ended June 30, 2024, which positively impacted our equity in earnings from unconsolidated joint ventures during the period. Net income attributable to noncontrolling interests At June 30, 2024, our consolidated subsidiaries operated 344 imaging centers of which 95 were not wholly-owned and thus a portion of their operating results were attributable to noncontrolling interests. At June 30, 2023, our consolidated subsidiaries included 322 centers of which 82 were not wholly-owned. For the three months ended June 30, 2024, we recognized net income attributable to noncontrolling interests of $9.9 million versus $6.2 million for the three months ended June 30, 2023, an increase of $3.7 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 and Tri Valley Imaging Group, LLC in March 2024. 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 $2.9 million for the three months ended June 30, 2024, we do not expect changes in net income attributable to noncontrolling interests to correlate with changes in consolidated operating income or pretax income. Six Months Ended June 30, 2024 Compared to the Six Months Ended June 30, 2023 In the discussion below same center metrics are based on imaging centers that were in operation throughout the period of January 1, 2023 through June 30, 2024. Excluded amounts relate to imaging centers that were acquired or divested between January 1, 2023 through June 30, 2024. Total Revenue In Thousands Six Months Ended June 30, Revenue 2024 2023 $ Increase/(Decrease) % Change Total $860,933 $771,599 $89,334 11.6% Same Center $817,540 $739,151 $78,389 10.6% Excluded $43,393 $32,448 — — 37 Table of Contents Our 10.6% increase in same center revenue over the same period last year was driven by same center total procedure volume growth of 3.1% inclusive of rises in routine and advanced modality imaging procedures of 1.72% and 7.51%, respectively. The balance of increase related to product mix, as advanced imaging was a greater portion of overall procedures, as well as increases in fees charged per imaging procedure. A significant contributor to the change in product mix was the increase in PETHC procedures related to prostate cancer and suspected Alzheimer studies, which are included in advanced modality imaging procedures. Operating Expenses Total operating expenses for the six months ended June 30, 2024 increased approximately $74.2 million, or 10.1%, to $808.9 million for the six months ended June 30, 2024 from $734.7 million for the six months ended June 30, 2023. The following table breaks down our cost of operations and total operating expenses for the six months ended June 30, 2024 and 2023 (in thousands): Six Months Ended June 30, 2024 2023 Salaries and professional reading fees, excluding stock-based compensation $ 488,071 $ 424,702 Stock-based compensation 15,418 15,546 Building and equipment rental 58,722 58,871 Medical supplies 48,478 42,544 Other operating expenses * 135,066 132,570 Cost of operations 745,755 674,233 Depreciation and amortization 62,063 59,522 (Gain) loss on contribution of imaging centers into joint venture — — (Gain) loss on sale and disposal of equipment 586 661 Severance costs 450 276 Total operating expenses $ 808,854 $ 734,692 * Includes billing fees, office supplies, repairs and maintenance, insurance, business tax and license, outside services, telecom, utilities, marketing, travel and other expenses. Salaries and professional reading fees, excluding stock-based compensation and severance In Thousands Six Months Ended June 30, Salaries and Professional Fees 2024 2023 $ Increase/(Decrease) % Change Total $488,071 $424,702 $63,369 14.9% Same Center $467,900 $410,523 $57,377 14.0% Excluded $20,171 $14,179 — — Staffing levels have been adjusted to support higher patient volumes with the corresponding rise in salaries and professional fee expense. 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 was relatively unchanged at $15.4 million for the six months ended June 30, 2024 compared to $15.5 million for six months ended June 30, 2023. 38 Table of Contents Building and equipment rental In Thousands Six Months Ended June 30, Building & Equipment Rental 2024 2023 $ Increase/(Decrease) % Change Total $58,722 $58,871 $(149) (0.3)% Same Center $52,918 $53,867 $(949) (1.8)% Excluded $5,804 $5,004 — — 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 Six Months Ended June 30, Medical Supplies Expense 2024 2023 $ Increase/(Decrease) % Change Total $48,478 $42,544 $5,934 13.9% Same Center $45,626 $40,590 $5,036 12.4% Excluded $2,852 $1,954 — — The increase in medical supplies expense was consistent with our higher patient volume and product shift towards more advanced imaging modalities. The increase in PETHC procedures related to prostate cancer and suspected Alzheimer studies also raised medical supplies expense due to the requirement for high-cost isotope tracers. Other operating expenses In Thousands Six Months Ended June 30, Other Operating Expenses 2024 2023 $ Increase/(Decrease) % Change Total $135,066 $132,570 $2,496 1.9% Same Center $127,089 $127,532 $(443) (0.3)% Excluded Sites $7,977 $5,038 — — Other operating expenses was relatively unchanged compared to the same period in the prior year and lower as a percentage of overall revenues. Additional segment operating and non operating expenses: In Thousands Six Months Ended June 30, 2024 2023 $ Increase/(Decrease) % Change Depreciation and amortization $62,063 $59,522 $2,541 4.3% (Gain) Loss on contribution of imaging centers into joint venture $0 $0 $0 nm Loss on disposal of equipment and other $586 $661 $(75) (11.3)% Non-cash change in fair value of interest rate hedge $674 -$66 $740 (1121.2)% Other expenses (income) $(4,520) $(1,650) $(2,870) 173.9% Severance $450 $276 $174 63.0% The increase in depreciation expense was the result of our higher depreciable asset base. Other income for the six months ended June 30, 2024 included money market interest income of $13.1 million, partially offset by debt extinguishment and restructuring charges of $8.8 million, which related to refinancing of our credit facilities with Barclays. See Note 6 Credit Facilities and Notes Payable included in the notes to our condensed consolidated financial statements. 39 Table of Contents nm= not meaningful Interest expense In Thousands Six Months Ended June 30, Interest Expense 2024 2023 $ Increase/(Decrease) % Change Total Interest Expense $ 42,349 $ 31,761 $10,588 33.3 % Interest related to derivatives* 2,844 (4,225) Interest related to amortization** 1,541 1,494 Adjusted Interest Expense*** 37,964 34,492 3,472 10.1 % *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 term loan debt as a result of refinancing of our Barclays credit facility, partially offset by lower interest rates compared to the same period in the prior year. During the six months ended June 30, 2024, interest rates were above the arranged rates in our 2019 Swaps 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. Also, the 2019 Swaps for $100 million of notional value matured in October 2023, so they were in effect for the second quarter of 2023, but not 2024. See the Derivative Instruments section of Note 2, 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 six months ended June 30, 2024 we recognized equity in earnings from unconsolidated joint ventures in the amount of $7.7 million and for the six months ended June 30, 2023 we recognized equity in earnings from unconsolidated joint ventures of $2.9 million, an increase of $4.9 million or 170.5%. The increase was mainly due to the additional contribution made to SMIG in September 2023. SMIG operated at a net income for the three months ended June 30, 2024, which positively impacted our equity in earnings from unconsolidated joint ventures during the period. Income tax expense We recorded income tax expense of $0.6 million, or an effective tax rate of 4.6%, for the six months ended June 30, 2024 and $0.5 million, or an effective tax rate of 65.5% for the six months ended June 30, 2023. The income tax rates for the six months ended June 30, 2024 diverge from the federal statutory rate due to (i) effects of state income taxes ; (ii) officer's compensation limitations; (iii) partial valuation allowance on losses in foreign jurisdictions, partially offset by (iv) excess tax benefits attributable to share based compensation; and (v) noncontrolling interests from controlled partnerships. 40 Table of Contents Net income attributable to noncontrolling interests At June 30, 2024, our consolidated subsidiaries operated 344 imaging centers of which 95 were not wholly-owned and thus a portion of their operating results were attributable to noncontrolling interests. At June 30, 2023, our consolidated subsidiaries included 322 centers of which 82 were not wholly-owned. For the six months ended June 30, 2024, we recognized net income attributable to noncontrolling interests of $18.1 million versus $12.9 million for the six months ended June 30, 2024, an increase of $5.2 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 and Tri Valley Imaging Group, LLC in March 2024. 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 $5.9 million for the six months ended June 30, 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 and six months ended June 30, 2024 and 2023 are as follows: In Thousands Three Months Ended June 30, Six Months Ended June 30, 2024 2023 $ Change % Change 2024 2023 $ Change % Change Statement of Operations Revenue $ 15,828 $ 11,603 $ 4,225 36.4 % $ 30,488 $ 22,680 $ 7,808 34.4 % Salaries and Wages 6,253 5,705 548 9.6 % 11,512 12,689 (1,177) (9.3) % Stock Compensation 399 852 (453) (53.2) % 1,227 1,509 (282) (18.7) % Other operating 6,306 4,508 1,798 39.9 % 12,187 8,581 3,606 42.0 % Non-Capitalized R&D - DeepHealth Cloud OS & Generative AI 3,317 — 3,317 — 6,632 — 6,632 — Depreciation & Amort. 2,386 2,106 280 13.3 % 4,780 3,973 807 20.3 % Other operating (gain) loss 3 (7) 10 (142.9) % 1 (5) 6 (120.0) % Severance 43 1,716 (1,673) (97.5) % 43 1,728 (1,685) (97.5) % Total operating expenses $ 18,707 $ 14,880 $ 3,827 25.7 % $ 36,382 $ 28,475 $ 7,907 27.8 % Loss from Operations $ (2,879) $ (3,277) $ 398 (12.1) % $ (5,894) $ (5,795) $ (99) 1.7 % Other expense 949 1,706 (757) (44.4) % 2,448 3,122 (674) (21.6) % Loss before taxes (3,828) (4,983) 1,155 (23.2) % (8,342) (8,917) 575 (6.4) % Income taxes $ 518 $ (1,893) $ 2,411 (127.4) % $ (310) $ (1,357) $ 1,047 (77.2) % Segment net loss (4,346) (3,090) (1,256) 40.6 % (8,032) (7,560) (472) 6.2 % 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 and higher non-capitalized research and development expenses with respect to our new DeepHealth cloud OS and generative AI. Our net loss for the segment was consistent with the prior year. We expect that our Digital Healt h segment will continue to generate net losses over the next several years. Non-GAAP Financial Measures 41 Table of Contents 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. 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 and six months ended June 30, 2024 and 2023, respectively. Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Net income attributable to RadNet, Inc. common stockholders $ (2,982) $ 8,369 $ (5,761) $ (12,636) Income taxes 2,456 (614) 592 521 Interest expense 26,082 16,039 42,349 31,761 Severance costs 268 1,870 493 2,004 Depreciation and amortization 34,475 32,180 66,843 63,495 Non-cash employee stock-based compensation 4,749 4,871 16,646 17,056 Loss (gain) on sale and disposal of equipment and other 401 77 587 656 Non-cash change in fair value of interest rate hedge 1,890 (4,159) 674 (66) Other expenses (7,900) 40 (10,834) 1,472 Non-Capitalized R&D - DeepHealth Cloud OS & Generative AI 3,317 — 6,632 — Loss (gain) on extinguishment of debt and related expenses 8,762 — 8,762 — Non-cash change to contingent consideration — 1,014 1,974 2,630 Non-operational rent expenses 809 759 1,832 1,718 Adjusted EBITDA - Total Company $ 72,327 $ 60,446 $ 130,789 $ 108,611 Adjusted EBITDA - Digital Health Segment 3,269 1,390 6,789 1,410 Adjusted EBITDA - Imaging Center $ 69,058 $ 59,056 $ 124,000 $ 107,201 The following table is a reconciliation of GAAP net income for our Digital Health Segment to Adjusted EBITDA for the three months ended June 30, 2024 and 2023, respectively. 42 Table of Contents Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Segment net loss $ (4,346) $ (3,090) $ (8,032) $ (7,560) Stock Compensation 399 852 1,227 1,509 Depreciation & Amortization 2,386 2,106 4,780 3,973 Other operating loss 3 (7) 1 (5) Other (income) expense 949 1,706 2,448 3,122 Severance 43 1,716 43 1,728 Income taxes 518 (1,893) (310) (1,357) Non-Capitalized R&D - DeepHealth Cloud OS & Generative AI 3,317 — 6,632 — Adjusted EBITDA - Digital Health Segment $ 3,269 $ 1,390 $ 6,789 $ 1,410 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 imaging 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 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 June 30, 2024 and December 31, 2023 and income statement data for the six months ended June 30, 2024 and 2023 (in thousands): Balance Sheet Data: June 30, 2024 December 31, 2023 Cash and cash equivalents $ 741,679 $ 342,570 Accounts receivable 195,288 163,707 Working capital (exclusive of current operating lease liabilities) 589,774 197,805 Stockholders' equity 1,092,840 813,359 Income statement data for the six months ended June 30, 2024 2023 Total net revenue $ 891,421 $ 794,279 Net loss attributable to RadNet common stockholders (5,761) (12,636) Sources and Uses of Cash The following table summarizes key components of our sources and uses of cash for the six months ended June 30, 2024 and 2023 (in thousands): 43 Table of Contents Cash Flow Data June 30, 2024 June 30, 2023 Cash provided by (used in) operating activities $ 133,090 $ 100,691 Cash provided by (used in) investing activities (138,278) (105,910) Cash provided by (used in) financing activities 404,404 234,302 Cash provided by operating activities for the six months ended June 30, 2024 increased by $32.4 million compared to June 30, 2023 primarily driven by the a $12.1 million increase in net income and a $24.7 million change in assets and liabilities, primarily related to a pay down of accounts payable and accrued expenses. Cash used in investing activities for the six months ended June 30, 2024 increased from June 30, 2023 by $32.4 million. Purchases of imaging centers during the period was $32.8 million, a $22.5 million increase from the prior period. Capital expenditures for property and equipment during the period was $104.1 million, a $8.7 million increase from the prior period. Cash provided by financing activities for the six months ended June 30, 2024 resulted from a secondary public offering of our common stock and a refinancing of our Barclays credit facility. 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. In April 2024, we refinanced our Barclays credit facility replacing the prior facility with an $875 million term loan. 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. Senior Secured Credit Facilities We maintain secured credit facilities with Barclays Bank PLC and with Truist Bank. On April 18, 2024, we refinanced our Barclays 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 our 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. Our condensed consolidated balance sheets at June 30, 2024 include $1,015.6 million of total term loan debt (exclusive of unamortized discounts of $15.8 million) in thousands: Face Value Discount Total Carrying Value Barclays Term Loan $ 875,000 $ (15,820) $ 859,180 Truist Term Loan 140,625 (858) 139,767 Total Term Loans $ 1,015,625 $ (16,678) $ 998,947 At June 30, 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 $274.4 million available for borrowing under our Barclays revolving credit facility and $50.0 million available under our Truist revolving credit facility. 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.