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, 2021included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021filed with the U.S. Securities and Exchange Commission(SEC) on March 1, 2022. . Forward-Looking Statements This quarterly report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements reflect current views about future events and are based on our currently available financial, economic and competitive data and on current business plans. Actual events or results may differ materially depending on risks and uncertainties that may affect our operations, markets, services, prices and other factors. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "intend," "plan," "anticipate," "believe," "estimate," "predict," "potential," "continue," "assumption" or the negative of these terms or other comparable terminology. Forward-looking statements in this quarterly report include, among others, statements we make regarding:
• anticipated trends in our revenues, operating expenses or capital expenditures,
and our financial advice;
• the expected future acceptance of our products or services in the marketplace, and the
early protection offered by our competitive strengths in the markets we
• the potential timing and impact of regulatory changes affecting our business;
• the ongoing impact on our business, suppliers, payers, customers, referrals
sources, partners, patients and employees of the COVID-19 pandemic;
•the anticipated effect of the measures we are taking to respond to COVID-19
•our ability to successfully acquire and integrate new imaging operations;
• the cost savings, efficiencies and improvements expected from our investments in
artificial intelligence and machine learning products and services; and
•our future liquidity and our continued ability to serve and remain in
compliance with applicable debt covenants or refinance our current debt.
Forward-looking statements are neither historical facts nor assurances of future performance. Because forward-looking statements relate to the future, they are inherently subject to known and unknown risks, uncertainties and other factors that are difficult to predict and our of our control. Our actual results, level of activity, performance or achievements may be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forwards-looking statements. Important factors that could cause our actual results to differ materially from those indicated or implied in our forward-looking statements include the factors included in "Risk Factors," in our annual report on Form 10-K for the fiscal year ended
December 31, 2021or supplemented by the information in Part II- Item 1A below. You should consider the inherent limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of predictions contained in such forward-looking statements. Any forward-looking statement in this quarterly report is based on information currently available to us and speaks only as of the date of this report. We do not undertake any responsibility to release publicly any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this quarterly report or any unanticipated events which may cause actual results to differ from those expressed or implied by the forward-looking statements contained in this quarterly report, except as required by law. Overview We are a leading national provider of freestanding, fixed-site outpatient diagnostic imaging services in the United Statesbased on number of locations and annual imaging revenue. At June 30, 2022, we operated, directly or indirectly through joint ventures with hospitals, 353 centers located in Arizona, California, Delaware, Florida, Maryland, New Jersey, and New York. Our operations comprise two segments for financial reporting purposes for this reporting period, Imaging Centers and Artificial Intelligence Our Imaging Center segment provides physicians with imaging capabilities to facilitate the diagnosis and treatment of diseases and disorders. Services include magnetic resonance imaging (MRI), computed tomography (CT), positron emission tomography (PET), nuclear medicine, mammography, ultrasound, diagnostic radiology (X-ray), fluoroscopy and other related procedures. The vast majority of our centers offer multi-modality imaging services, a strategy that diversifies revenue streams, reduces exposure to reimbursement changes and provides patients and referring physicians one location to serve the needs of multiple procedures. Included in the segment is our eRad subsidiary, which designs the underlying critical scheduling, data storage and retrieval systems necessary for imaging center operation. Our Artificial Intelligence ("AI") segment that has been established through our acquisitions of DeepHealth, Nulogix Aidence Holding B.V.and Quantib B.V.. Our current AI focus is to develop solutions that employ machine learning to assist radiologists and other clinicians in interpreting images and improving patient care, initially in the fields of brain, breast, prostate, and pulmonary diagnostics. We derive substantially all of our revenue, directly or indirectly, from fees charged for the diagnostic imaging services performed at our centers. The following table shows our centers in operation and revenues for the six months ended June 30, 2022and June 30, 2021: Six Months Ended June 30, 2022 2021 Centers in operation 353 353 Net revenues (millions) $ 696 $ 649Our revenue is derived from a diverse mix of payors, including private, managed care capitated and government payors. We believe our payor diversity mitigates our exposure to possible unfavorable reimbursement trends within any one payor class. In addition, our experience with capitation arrangements over the last several years has provided us with the expertise to manage utilization and pricing effectively, resulting in a predictable stream of revenue. 29
Our total service fee revenues during the three and six months ended
June 30, 2022and 2021 are presented in the table below. Our imaging review is based on an allocation of the estimated transaction price with the patient between the primary patient classification of insurance coverage. Additional revenues are earned from our management services provided to joint ventures and our software and AI subsidiaries. Three Months Ended Six Months Ended June 30, June 30, In Thousands 2022 2021 2022 2021 Commercial insurance $ 195,066 $ 187,354 $ 383,615 $ 369,566Medicare 77,879 71,407 148,800 134,877 Medicaid 9,704 9,039 18,788 17,486 Workers' compensation/personal injury 13,138 10,556 25,586 20,966 Other patient revenue 7,567 5,189 14,689 9,961 Management fee revenue 5,592 5,533 11,100 10,752 Software revenue 2,421 2,628 6,419 5,054 Other 3,577 3,788 8,623 6,409 Revenue under capitation arrangements 37,874 38,424 76,365 74,166 Imaging Center Segment Revenue 352,818 333,918 693,985 649,237 AI Segment Revenue 1,557 - 2,156 - Total service revenue $ 354,375 $ 333,918 $ 696,141 $ 649,237Recent Developments Through the second quarter ended June 30, 2022our imaging business continued to expand, with procedure volumes returning to levels experienced before the COVID-19 pandemic, with same center procedure volumes increasing 3.7% and overall procedure volumes increasing 6.2% over the same period in 2021. We opened a net of six imaging centers in the first half of 2022, through a combination of acquisition and internal development. We continued to pursue our strategy of expansion within geographic regions, with a concentration on adding new facilities in Maryland. While imaging volumes returned to pre-pandemic levels, our operations have experienced effects from the pandemic and related macroeconomic issues. We are experiencing tighter labor markets, resulting in increased salaries as we seek to retain our skilled workforce. Our acquisitions of Aidence Holding B.V.and Quantib B.V.have expanded our AI initiatives to encompass imaging diagnostics solutions for the most prevalent cancers. Efforts in AI are largely in the product development stage at this time and we expect that the segment will continue to experience operating losses for the foreseeable future as we seek to secure both regulatory approvals and market acceptance for our products.
Equity investments, acquisitions and disposals and joint venture activity
We have developed our medical imaging business through a combination of organic growth, equity investments, acquisitions and joint venture formations. The information below updates our activity of such matters contained in our annual report on Form 10-K for the year ended
December 31, 2021.
June 30, 2022, we have three equity investments for which a fair value is not readily determinable and therefore the total amounts invested are recognized at cost as follows: Medic Vision Imaging Solutions Ltd., based in Israel, specializes in software packages that provide compliant radiation dose structured reporting and enhanced images from reduced dose CT scans. Our investment of $1.2 millionrepresents a 14.21% equity interest in the company. No observable price changes or impairment in our investment was identified during the three and six months ended June 30,2022. Turner Imaging Systems, based in Utah, develops and markets portable X-ray imaging systems that provide a user the ability to acquire X-ray images wherever and whenever they are needed. On February 1, 2018, we purchased 2.1 million preferred shares in Turner Imaging Systems for $2.0 million. On January 1, 2019we funded a convertible promissory note in 30
The quantity of
investment has been identified during the three and six months ended
WhiteRabbit.ai Inc., based in
California, is currently developing an artificial intelligence suite which aims to improve the speed and accuracy of cancer detection in radiology and improve patient care. On November 5, 2019we acquired an equity interest in the company for $1.0 millionand also loaned the company $2.5 millionin support of it operations. No observable price changes, impairment in our investment or impairment of the loan receivable was identified during the three and six months ended June 30,2022. Acquisitions Imaging Center During the first quarter of 2022, we completed the acquisition of certain assets of the following entities, which either engage directly in the practice of radiology or associated businesses. The primary reason for these acquisitions was to strengthen our presence in the Marylandmarket. These acquisitions are reported as part of our Imaging Center segment. We made a fair value determination of the acquired assets and assumed liabilities and the following were recorded (in thousands): Entity Date Acquired Total Consideration Property & Equipment Right of Use Assets Goodwill Right of Use Liabilities IFRC LLC*^ 1/1/2022 4,800 2,103 857 2,697 (857) IFRC LLC*^ 1/1/2022 8,200 2,910 1,703 5,271 (1,703) Total 13,000 5,013 2,560 7,968 (2,560) *Fair Value Determination is Final ^ IFRC LLCacquisitions consisted of three subsidiaries of IFRC, one of which was purchased separately by a joint venture with Calvert Medical Imaging Centers, LLC. Artificial Intelligence Aidence Holding B.V. On January 20, 2022, we completed our acquisition of all the equity interests of Aidence Holding B.V.("Aidence") an artificial intelligence enterprise centered on lung cancer screening, in an combination stock and cash purchase. Aidence is reported as part of our artificial intelligence segment and was acquired to enhance our AI capabilities. The transaction was accounted for as an acquisition of a business and total purchase consideration was determined to be approximately $45.2 millionincluding i) 1,117,872 shares issued at $26.80per share with a fair value of $30.0 millionii) cash of $1.8 millionand iii) assuming liabilities of $11.9 million, $7.4 millionin milestone contingent consideration and cash holdback of $4.5 millionand iv) a settlement of a loan from RadNetof $1.5 million. In addition we paid certain seller closing costs through the issuance of 23,362 shares at a fair value of $0.6 million. We preliminarily recorded $1.0 millionin current assets, $0.2 millionin property plant and equipment, $27.7 millionin intangible assets, $3.2 millionin liabilities and $19.0 millionin goodwill.
January 20, 2022, we completed our acquisition of all the equity interests of Quantib B.V.("Quantib") an artificial intelligence enterprise centered on prostate cancer screening, in a combination stock and cash purchase. Quantib is reported as part of our artificial intelligence segment, and was acquired to enhance our AI capabilities. The transaction was accounted for as an acquisition of a business and total purchase consideration was determined to be approximately $42.3 millionincluding i) 965,058 shares issued at $26.80per share with a fair value of $25.9 millionii) cash of $11.8 millionand iii) 113,303 shares with a fair value at the date of close of $3.0 millionand cash holdback of $1.6 millionto be issued 18 months after acquisition subject to adjustment for any indemnification claims. We preliminarily recorded $2.4 millionmillion in current assets, $0.1 millionin property plant and equipment, $21.3 millionin intangible assets, $3.7 millionin liabilities and $22.2 millionin goodwill. As we finalize our estimation of the fair value of the assets acquired and liabilities assumed, additional adjustments may be recorded during the measurement period (a period not to exceed 12 months). The initial accounting is incomplete as of June 30, 2022for the acquired assets and liabilities as we are currently in the process of completing the assessment of valuation 31 -------------------------------------------------------------------------------- Table of Contents inputs and assumptions as well as completing the assessment of the tax attributes of the business combination. The finalization of the acquisition accounting valuation assessment may result in a change in the valuation of the deferred tax assets and liabilities and intangible assets, along with the opening working capital accounts, which could have a material impact on our results of operations and financial position.
Creation of a majority-owned subsidiary
April 1, 2022we formed Frederick County Radiology, LLC("FCR"), a partnership with Frederick Health Hospital, Inc.("Hospital"). The operation offers multi-modality services out of six locations in Frederick, Maryland. We contributed the operations of 4 centers to the enterprise and Hospital contributed $5.5 millionin fixed assets, $3.0 millionin equipment, $10.8 millionin goodwill. As a result of the the transaction, we retain a 65% controlling economic interest in FCR and Hospital retains a preliminary $10.7 millionor 35% noncontrolling economic interest in FCR. The initial accounting is preliminary as of June 30, 2022for the acquired assets and liabilities as we are currently in the process of completing the assessment of valuation inputs and assumptions as well as completing the assessment of the tax attributes of the business combination.
Advanced radiology at
June 15, 2022we entered into Advanced Radiology at Capital Region, LLC, a partnership with Dimension Health Corporation. ("Dimension"), and affiliate of the University of Maryland. The operation will provide multi-modality services out of two yet to be determined locations in the Largo, Marylandarea. The venture was initially capitalized with nominal amounts of $5.1 thousandfor a 51% economic interest from us and $4.9 thousandfrom Dimension for a 49% economic interest.
joint venture activity
Acquisition by equity method
During the first quarter of 2022, our joint venture with
presence in the
assets acquired and liabilities assumed and the following have been recognized (in
Entity Date Acquired Total Consideration Property & Equipment Right of Use Assets Goodwill Right of Use Liabilities IFRC LLC *^ 1/1/2022 3,922 2,121 1,295 1,801 (1,295) *Fair Value Determination is Final ^
IFRC LLCacquisitions consisted of three subsidiaries of IFRC, two of which were purchased separately by wholly owned RadNetsubsidiaries.
The following table is a summary of our investment in joint ventures during
six months completed
Balance as of
December 31, 2021 $ 42,229Equity in earnings in these joint ventures 5,266
Equity contributions in existing joint ventures 1,441
$ 48,936We charged management service fees from the centers underlying these joint ventures of approximately $5.6 millionand $5.5 millionfor the three months ended June 30, 2022and 2021 and $11.1 millionand $10.8 millionfor the six months ended June 30, 2022and 2021, respectively.
the business has not changed.
The following table is a summary of key balance sheet data for these joint ventures
the six months have ended
June 30, December 31, Balance Sheet Data: 2022 2021 Current assets
$ 39,840 $ 37,186Noncurrent assets 88,754 73,592 Current liabilities (12,322) (12,919) Noncurrent liabilities (27,363) (22,370) Total net assets $ 88,909
Book value of RadNet joint venture interests
Cost greater than book value of joint venture acquired
7,837 7,299 Total value of RadNet joint venture interests
Income statement data for the six months ended
2021 Net revenue
$ 69,757 $ 64,636Net income $ 10,497 $ 10,258
Critical accounting policies
The Securities and Exchange Commissiondefines critical accounting estimates as those that are both most important to the portrayal of a company's financial condition and results of operations and require management's most difficult, subjective or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. In Note 2 to our consolidated financial statements in this quarterly report and in our annual report on Form 10-K for the year ended December 31, 2021, we discuss our significant accounting policies, including those that do not require management to make difficult, subjective or complex judgments or estimates. The most significant areas involving management's judgments and estimates are described below.
Use of estimates
The financial statements were prepared in accordance with
U.S.generally accepted accounting principles (GAAP), which requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and assumptions affect various matters, including our reported amounts of assets and liabilities in our consolidated balance sheets at the dates of the financial statements; our disclosure of contingent assets and liabilities at the dates of the financial statements; and our reported amounts of revenues and expenses in our consolidated statements of operations during the reporting periods. These estimates involve judgments with respect to numerous factors that are difficult to predict and are beyond management's control. As a result, actual amounts could materially differ from these estimates.
Our revenues generally relate to net patient fees received from various payors and patients themselves under contracts in which our performance obligations are to provide diagnostic services to the patients. Revenues are recorded during the period our obligations to provide diagnostic services are satisfied. Our performance obligations for diagnostic services are generally satisfied over a period of less than one day. The contractual relationships with patients, in most cases, also involve a third-party payor (Medicare, Medicaid, managed care health plans and commercial insurance companies, including plans offered through the health insurance exchanges) and the transaction prices for the services provided are dependent upon the terms provided by (Medicare and Medicaid) or negotiated with (managed care health plans and commercial insurance companies) the third-party payors. The payment arrangements with third-party payors for the services we provide to the related patients typically specify payments at amounts less than our standard charges and generally provide for payments based upon predetermined rates per diagnostic services or discounted fee-for-service rates. Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations, changes in business and economic conditions, and the frequent changes in managed care contractual terms resulting from contract re-negotiations and renewals. 33 -------------------------------------------------------------------------------- Table of Contents As it relates to the Group, this service fee revenue includes payments for both the professional medical interpretation revenue recognized by them as well as the payment for all other aspects related to our providing the imaging services, for which we earn management fees. As it relates to others centers, this service fee revenue is earned through providing the use of our diagnostic imaging equipment and the provision of technical services as well as providing administration services such as clerical and administrative personnel, bookkeeping and accounting services, billing and collection, provision of medical and office supplies, secretarial, reception and transcription services, maintenance of medical records, and advertising, marketing and promotional activities. Our revenues are based upon our management's estimate of amounts we expect to be entitled to receive from patients and third-party payors. Estimates of contractual allowances under Medicare, Medicaid, managed care and commercial insurance plans are based upon historical collection experience of the payments received from such payors in accordance with the underlying contractual agreements. Revenues related to uninsured patients and uninsured copayment and deductible amounts for patients who have health care coverage may have price concessions applied. We also record estimated implicit price concessions (based primarily on historical collection experience) related to uninsured accounts to record self-pay revenues at the estimated amounts we expect to collect. Under capitation arrangements with various health plans, we earn a per-enrollee amount each month for making available diagnostic imaging services to all plan enrollees under the capitation arrangement. Revenue under capitation arrangements is recognized in the period in which we are obligated to provide services to plan enrollees under contracts with various health plans. Our estimates and assumptions related to revenue recognition did not change materially for the quarter ended
June 30, 2022.
The Provider Relief Fundoffers government assistance to eligible providers throughout the healthcare system in support of certain expenses or lost revenue attributable to the coronavirus pandemic. We have recorded provider relief funding in our condensed Consolidated Statements of Operations in the amount of $43.0 thousandfor the three months ended June 30, 2021and $6.3 millionfor the six months ended June 30, 2021. No provider relief funding was received for the three and six months ended June 30,2022. Generally, the department of Health and Human Services("HHS") does not intend to recoup funds as long as a provider's lost revenue and increased expenses exceed the amount of provider relief funding one has received. HHS reserves the right to audit Relief Fundrecipients in the future to ensure that this requirement is met and collect any Relief Fundamounts that were made in error or exceed lost revenue or increased expenses due to the pandemic. Failure to comply with the terms and conditions may be grounds for recoupment. In recognizing revenue associated with provider relief funding our management is required to assess whether our operations have meet the applicable requirements for the funding received. During the quarter ended June 30, 2022, we continued to evaluate our operating results in light of the most recent government guidance and based on our assessment, the amount of revenue recognized is appropriate.
Substantially all of our accounts receivable are due under fee-for-service contracts from third party payors, such as insurance companies and government-sponsored healthcare programs, or directly from patients. Services are generally provided pursuant to one-year contracts with healthcare providers. Receivables generally are collected within industry norms for third-party payors. We continuously monitor collections from our payors and maintain an allowance for bad debts based upon specific payor collection issues that we have identified and our historical experience. Our estimates and assumptions for allowances on our account receivable did not change materially during the quarter ended
June 30, 2022.
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.
Goodwillat June 30, 2022totaled $577.8 million. Indefinite Lived Intangible Assets at June 30, 2022were $12.7 millionand are associated with the value of certain trade name intangibles. Our management reviews the fair value of our reporting units on an annual basis to determine if an event has occurred which suggest that the fair value of a reporting unit may be impaired. When we determine the carrying value of a reporting unit exceeds its fair value, an impairment charge would be recognized and should not exceed the total amount of goodwill allocated to that reporting unit. The review of fair value requires our management to make assessments of the business and financial prospects for a particular reporting unit. We tested goodwill for impairment on October 1, 2021. We also continue at regular intervals to consider the current and expected future economic and market conditions surrounding the COVID-19 pandemic and to date have not had an indication of goodwill impairment being more likely than not through June 30, 2022. Recent Accounting Standards
See Note 3, Recent accounting and reporting standards to the financial statements
statements included in this report for more information.
The following table shows, for the three- and six-month periods ended
and 2021, the percentage that certain income statement items
relative to total service revenue, including revenue from capitation contracts.