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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 OR 15(d) of The Securities Exchange Act of 1934
Date
of Report (Date of earliest event reported) November 13, 2023 (November
8, 2023)
_______________________________________________
RadNet,
Inc.
(Exact
name of registrant as specified in its charter)
Delaware |
|
001-33307 |
|
13-3326724 |
(State or other jurisdiction
of incorporation) |
|
(Commission File Number) |
|
(IRS Employer Identification No.) |
1510 Cotner Avenue |
|
|
Los
Angeles, California |
|
90025 |
(Address of Principal Executive Offices) |
|
(Zip Code) |
Registrant’s
Telephone Number, Including Area Code: (310) 478-7808
N/A
(Former name or former
address, if changed since last report.)
Check
the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under
any of the following provisions:
| ☐ | Written
communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ☐ | Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ☐ | Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ | Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class |
Trading
Symbol(s) |
Name
of each exchange on which registered |
Common
Stock, $0.0001 par value |
RDNT |
NASDAQ
Global Market |
Indicate
by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405
of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging
growth company ☐
If an emerging
growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
| Item 2.02 | RESULTS OF OPERATIONS AND FINANCIAL CONDITION |
On November 8, 2023, RadNet,
Inc. (“RadNet”) issued a press release regarding its 2023 financial results for the third quarter ended September 30, 2023.
On November 9, 2023, RadNet held a conference call regarding such financial results. A copy of the press release is furnished as Exhibit
99.1 and a copy of the transcript of the conference call is furnished as Exhibit 99.2 to this Current Report.
The information in this Current
Report, including Exhibit 99.1 and Exhibit 99.2 is being furnished and shall not be deemed “filed” for purposes of Section
18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section. The information in this Current Report,
including Exhibit 99.1 and Exhibit 99.2 shall not be incorporated by reference into any registration statement or other document filed
with the Commission.
| Item 9.01 | FINANCIAL STATEMENTS AND EXHIBITS. |
(d) Exhibits
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: November 13, 2023 |
RADNET, INC. |
|
|
|
|
|
|
|
|
|
By: |
/s/ Mark D. Stolper |
|
|
Name: |
Mark D. Stolper |
|
|
Title: |
Chief Financial Officer |
|
EXHIBIT INDEX
Exhibit 99.1
FOR IMMEDIATE RELEASE
RadNet Reports Third Quarter Financial Results
and Revises Upwards 2023 Financial Guidance Range for Adjusted EBITDA(1)
| · | Consolidated Revenue increased 14.8% to $402.0 million in the third quarter
of 2023 from $350.0 million in the third quarter of 2022; Excluding Revenue from our Artificial Intelligence (“AI”) reporting
segment, Revenue from the Imaging Centers reporting segment in the third quarter of 2023 was $399.1 million, an increase of 14.3% from
last year’s third quarter of $349.1 million |
| · | Excluding losses from our AI reporting segment, Adjusted EBITDA(1)
from the Imaging Centers reporting segment was $60.4 million in the third quarter of 2023 as compared with $50.2 million in the third
quarter of 2022, an increase of 20.3% |
| · | After adjusting for certain unusual or one-time items impacting the quarters
and AI pre-tax losses, Adjusted Earnings(3) was $9.9 million and diluted Adjusted Earnings Per Share(3) was $0.14
for the third quarter of 2023 as compared with Adjusted Earnings(3) of $5.3 million and Adjusted Earnings Per Share(3)of
$0.09 for the third quarter of 2022 |
| · | Aggregate procedural volumes increased 8.6%; Same-center procedural volumes
increased 4.2% compared to the third quarter of 2022 |
| · | AI Revenue increased 220.8% from the third quarter of 2022 and sequentially
increased 21.4% from the second quarter of 2023 |
| · | During the third quarter, we expanded our relationship with Cedars-Sinai
by creating a new joint venture in Los Angeles and materially increasing the size of an existing joint venture |
| · | RadNet further revises full-year 2023 guidance levels, increasing the
Adjusted EBITDA(1) guidance range |
LOS ANGELES, California, November 8, 2023 –
RadNet, Inc. (NASDAQ: RDNT), a national leader in providing high-quality, cost-effective, fixed-site outpatient diagnostic imaging
services through a network of 366 owned and operated outpatient imaging centers, today reported financial results for its third quarter
of 2023.
Dr. Howard Berger, President and Chief Executive
Officer of RadNet, commented, “I am very pleased with our performance in the third quarter. We continue to experience strong procedural
volumes, contributing to the highest third quarter Revenue in our Company’s history. Compared with last year’s third quarter,
our Imaging Center segment Revenue increased 14.3%, driven by 8.6% aggregate and 4.2% same center procedural volume growth. Additionally,
taking into account one less work day in the third quarter of 2023 as compared with the second quarter of this year, our Revenue per work
day increased sequentially, a trend which has continued thus far into this year’s fourth quarter.”
Dr. Berger continued, “Despite a challenging
labor market and other inflationary pressures, we were effective in managing expenses during the quarter. Our Imaging Center segment Adjusted
EBITDA(1) increased 20.3% as compared with last year’s third quarter, which resulted in Imaging Center margin expansion
from 14.4% in last year’s third quarter to 15.1% in this year’s same quarter. As a result of the strong operating performance
and our confident outlook for the fourth quarter, we have elected to increase our 2023 guidance range for Adjusted EBITDA(1)
for the third time this year.”
“Our AI segment continues to steadily grow,
increasing by 221% from last year’s third quarter. This was driven by the launch of our Enhanced Breast Cancer Detection (“EBCD”)
mammography offering. We are now fully rolled-out with this service to all of our mammography centers on the east coast, and we have begun
program implementation in California, which we anticipate will be completed by the end of the first quarter of 2024. We are experiencing
close to a 35% adoption rate on the east coast, a metric we expect to increase as we continue to educate patients and referring physicians
about the significant advantages of electing EBCD. We are on target to meet our AI segment guidance for 2023 and continue to work towards
break-even Adjusted EBITDA(1) from the AI segment by the end of next year,” continued Dr. Berger.
Dr. Berger added, “I am very pleased to
announce that during the quarter, we expanded our outpatient radiology partnership with Cedars-Sinai. This includes establishing a new
joint venture called Los Angeles Imaging Group, initially with three locations, as well as broadening our existing three-center joint
venture, Santa Monica Imaging Group, to include the contribution of seven additional centers -- five of which were contributed by Cedars-Sinai.
The expanded relationship with Cedars-Sinai is designed to increase patient access to outpatient radiology by broadening the ambulatory
network of imaging centers throughout Los Angeles, including certain underserved communities. The ventures will streamline and improve
patient care by improving workflow, providing better access to records and producing more timely and accurate results for patients and
referring physicians. After giving effect to the expanded Cedars-Sinai relationship, we now have almost 36% of our imaging centers held
within health system partnerships.”
Dr. Berger concluded, “We are well-positioned
with low financial leverage and strong liquidity to continue to accelerating growth. We ended the third quarter with a cash balance of
$338 million, a ratio of Net Debt to Adjusted EBITDA(1) slightly above two and an undrawn $195 million revolving credit facility.
While we will continue to execute on a de novo strategy we began almost two years ago, we are being presented with acquisition opportunities
and health system partnerships with greater frequency. We look forward to being in a position to discuss some of these opportunities in
the coming quarters.”
Third Quarter Financial Results
For the third quarter of 2023, RadNet reported
Revenue from its Imaging Centers reporting segment of $399.1 million and Adjusted EBITDA(1) of $60.4 million, which excludes
Revenue and Adjusted EBITDA(1) losses from the AI reporting segment. As compared with last year’s third quarter, Revenue
increased $49.9 million (or 14.3%) and Adjusted EBITDA(1) increased $10.2 million (or 20.3%).
Including our AI reporting segment, Revenue was
$402.0 million in the third quarter of 2023, an increase of 14.8% from $350.0 million in last year’s third quarter. Including the
Adjusted EBITDA(1) losses of the AI reporting segment, Adjusted EBITDA(1) was $57.9 million in the third quarter
of 2023 and $45.8 million in the third quarter of 2022, an increase of 26.5%.
For the third quarter of 2023, RadNet reported
Net Income of $17.5 million as compared with $668,000 for the third quarter of 2022. Diluted Net Income Per Share for the third quarter
of 2023 was $0.25, compared with a Diluted Net Income per share of $0.01 in the third quarter of 2022, based upon a weighted average number
of diluted shares outstanding of 68.8 million shares in 2023 and 57.7 million shares in 2022.
There were a number of unusual or one-time items
impacting the third quarter including: $2.3 million of non-cash loss from interest rate swaps (net of the amortization of the accumulation
of the changes in fair value from Other Comprehensive Income); $1.2 million of severance paid in connection with headcount reductions
related to cost savings initiatives; $16.8 million gain on the contribution of imaging centers into the Santa Monica Imaging Group joint
venture with Cedars-Sinai; $1.0 million expense related to leases for our de novo facilities under construction that have yet to open
their operations; $1.3 million of pre-tax losses related to our AI reporting segment (net of non-cash adjustments to contingent consideration
and intangible AI assets); and $915,000 loss from revaluation of certain acquisition contingent consideration. Adjusting for the above
items, Adjusted Earnings(3) from the Imaging Centers reporting segment was $9.9 million and diluted Adjusted Earnings Per Share(3)
was $0.14 during the third quarter of 2023.
Also, affecting Net Income in the third quarter
of 2023 were certain non-cash expenses and unusual items, including $4.3 million of non-cash employee stock compensation expense resulting
from the vesting of certain options and restricted stock and $746,000 of non-cash amortization of deferred financing costs and loan discounts
related to financing fees paid as part of our existing credit facilities.
For the third quarter of 2023, as compared with
the prior year’s third quarter, MRI volume increased 11.7%, CT volume increased 10.9% and PET/CT volume increased 17.7%. Overall
volume, taking into account routine imaging exams, inclusive of x-ray, ultrasound, mammography and other exams, increased 8.6% over the
prior year’s third quarter. On a same-center basis, including only those centers which were part of RadNet for both the third quarters
of 2023 and 2022, MRI volume increased 6.9%, CT volume increased 6.0% and PET/CT volume increased 15.2%. Overall same-center volume, taking
into account routine imaging exams, inclusive of x-ray, ultrasound, mammography and other exams, increased 4.2% over the prior year’s
same quarter.
Nine Month Financial Results
For the nine month period of 2023, RadNet reported
Revenue from its Imaging Centers reporting segment of $1,189 million and Adjusted EBITDA(1) of $176.8 million. Revenue increased
$145.7 million (or 14.0%) and Adjusted EBITDA(1) increased $29.3 million (or 19.9%). Including our AI reporting segment Revenue
of $7.4 million, Revenue was $1,196 million in the nine months of 2023, an increase of 14.3% from $1,046.2 million in last year’s
nine month period. Including the AI reporting segment Adjusted EBITDA(1) losses, Adjusted EBITDA(1) for the nine
month period of 2023 was $166.5 million as compared with $135.2 million in the same nine month period of 2022.
For the nine month period in 2023, RadNet reported
Net Income of $4.9 million as compared with $11.6 million over the first nine months of 2022. Per share diluted Net Income for the first
nine months of 2023 was $0.08, compared to a diluted Net Income per share of $0.19 in the same nine month period of 2022 (based upon a
weighted average number of diluted shares outstanding of 63.2 million in 2023 and 57.0 million in 2022).
Affecting Net Income in the nine months of 2023
were certain non-cash expenses and unusual items including:
$3.2 million of severance paid in connection with
headcount reductions related to cost savings initiatives; $2.7 million expense related to leases for our de novo facilities under construction
that have yet to open their operations; $17.6 million of pre-tax losses related to our AI reporting segment (net of non-cash adjustments
related to contingent consideration and intangible AI assets); $915,000 loss from revaluation of certain acquisition contingent consideration;
$21.4 million of non-cash employee stock compensation expense resulting from the vesting of certain options and restricted stock; $16.8
million gain on the contribution of imaging centers into the Santa Monica Imaging Group joint venture with Cedars-Sinai; and $746,000
of non-cash amortization of deferred financing costs and loan discounts related to financing fees paid as part of our existing credit
facilities.
2023 Guidance Update
RadNet amends its previously announced guidance
levels as follows:
Imaging Center Segment
|
Original Guidance
Range |
Revised Guidance
Range After Q2 Results |
Revised Guidance
Range After Q3 Results |
Total Net Revenue |
$1,525 - $1,575 million |
$1,575 - $1,610 million |
Unchanged |
Adjusted EBITDA(1) |
$220 - $230 million |
$232 - $242 million |
$235 - $245 million |
Capital Expenditures(a) |
$105 - $115 million |
$110 - $120 million |
$115 - $125 million |
Cash Interest Expense(c) |
$35 - $40 million |
$45 - $50 million |
Unchanged |
Free Cash Flow (b)(2) |
$70 - $80 million |
$65 - $75 million |
Unchanged |
Artificial Intelligence Segment
|
|
Original Guidance
Range |
Revised Guidance
Range After Q2 Results |
Revised Guidance
Range After Q3 Results |
Total Net Revenue |
$16 - $18 million |
$11 - $13 million |
Unchanged |
Adjusted EBITDA(1) |
$(9) - $(11) million |
$(11) - $(13) million |
Unchanged |
|
|
|
|
|
|
|
|
| (a) | Net of proceeds from the sale of equipment, imaging centers and joint venture interests, New Jersey Imaging
Network capital expenditures, a $19.8 million one-time purchase with a promissory note of equipment previously leased under operating
leases and a $5 million purchase of software and other intellectual property from a vender. |
| (b) | Defined by the Company as Adjusted EBITDA(1) less Capital Expenditures and Cash Interest Expense. |
| (c) | Excludes payments to or from counterparties on interest rate swaps and nets interest income from our cash
balance recorded in Other Income. |
Dr. Berger highlighted, “We elected to increase
our guidance level for Adjusted EBITDA(1) to reflect our continued strong operating performance. We have been consistently
outperforming our internal budget, which is a result of strong procedural volumes and Revenue and improved margins through active expense
management. We also raised our capital expenditure guidance range to account for the continued aggressive reinvestment of our cash flow
into expanding capacity, de novo facilities, hospital joint ventures and information technology solutions.”
Financial Results Conference Call
Dr. Howard Berger, President and Chief Executive
Officer, and Mark Stolper, Executive Vice President and Chief Financial Officer, will host a conference call to discuss its third quarter
2023 results on Thursday, November 9th, 2023 at 7:30 a.m. Pacific Time (10:30 a.m. Eastern Time).
Conference Call Details:
Date: Thursday, November 9, 2023
Time: 10:30 a.m. Eastern Time
Dial In-Number: 844-826-3035
International Dial-In Number: 412-317-5195
It is recommended that participants dial
in approximately 5 to 10 minutes prior to the start of the 10:30 a.m. call. There will also be simultaneous and archived webcasts available
at https://viavid.webcasts.com/starthere.jsp?ei=1639730&tp_key=c810ee0866
or http://www.radnet.com under the “Investors” menu section and “News Releases”
sub-menu of the website. An archived replay of the call will also be available and can be accessed by dialing 844-512-2921 from the U.S.,
or 412-317-6671 for international callers, and using the passcode 10183631.
Forward Looking Statements
This press release contains “forward-looking
statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking
statements are expressions of our current beliefs, expectations and assumptions regarding the future of our business, future plans and
strategies, projections, and anticipated future conditions, events and trends. Forward-looking statements can generally be identified
by words such as: “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,”
“project,” “estimate,” “expect,” “strategy,” “future,” “likely,”
“may,” “should,” “will” and similar references to future periods. Forward-looking statements in this
press release include, among others, statements we make regarding response to and the expected future impacts of COVID-19, including statements
about our anticipated business results, balance sheet and liquidity and our future liquidity, burn rate and our continuing ability to
service or refinance our current indebtedness.
Forward-looking statements are neither historical
facts nor assurances of future performance. Because forward-looking statements relate to the future, they are inherently subject to uncertainties,
risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and
financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not place undue
reliance on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to
differ materially from those indicated in the forward-looking statements include, among others, the following:
| · | the availability and terms of capital to fund
our business; |
| · | our ability to service our indebtedness, make
principal and interest payments as those payments become due and remain in compliance with applicable debt covenants, in addition to our
ability to refinance such indebtedness on acceptable terms; |
| · | regulatory changes that increase minimum wage
thresholds; |
| · | changes in general economic conditions nationally
and regionally in the markets in which we operate; |
| · | the availability and terms of capital to fund
the expansion of our business and improvements to our existing facilities; |
| · | our ability to maintain our current credit rating
and the impact on our funding costs and competitive position if we do not do so; |
| · | our ability to acquire, develop, implement and monetize technology, digital health initiatives, artificial
intelligence algorithms and applications; |
| · | volatility in interest and exchange rates, or
credit markets; |
| · | the adequacy of our cash flow and earnings to
fund our current and future operations; |
| · | changes in service mix, revenue mix and procedure
volumes; |
| · | delays in receiving payments for services provided; |
| · | increased bankruptcies among our partner physicians
or joint venture partners; |
| · | the impact of the political environment and related
developments on the current healthcare marketplace and on our business, including with respect to the future of the Affordable Care Act;
|
| · | the extent to which the ongoing implementation
of healthcare reform, or changes in or new legislation, regulations or guidance, enforcement thereof by federal and state regulators or
related litigation result in a reduction in coverage or reimbursement rates for our services, or other material impacts to our business; |
| · | closures or slowdowns and changes in labor costs
and labor difficulties, including stoppages affecting either our operations or our suppliers' abilities to deliver supplies needed in
our facilities; |
| · | the occurrence of hostilities, political instability
or catastrophic events; |
| · | the emergence or reemergence of and effects related
to future pandemics, epidemics and infectious diseases; and |
| · | noncompliance by us with any privacy or security
laws or any cybersecurity incident or other security breach by us or a third party involving the misappropriation, loss or other unauthorized
use or disclosure of confidential information. |
Any forward-looking statement contained in this
current report is based on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation
to publicly update any forward-looking statement, whether written or oral, that we may make from time to time, whether as a result of
changed circumstances, new information, future developments or otherwise, except as required by applicable law.
Regulation G: GAAP and Non-GAAP Financial
Information
This release contains certain financial information
not reported in accordance with GAAP. The Company uses both GAAP and non-GAAP metrics to measure its financial results. The Company believes
that, in addition to GAAP metrics, these non-GAAP metrics assist the Company in measuring its cash-based performance. The Company believes
this information is useful to investors and other interested parties because it removes unusual and nonrecurring charges that occur in
the affected period and provides a basis for measuring the Company's financial condition against other quarters. Such information should
not be considered as a substitute for any measures calculated in accordance with GAAP, and may not be comparable to other similarly titled
measures of other companies. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial
information prepared in accordance with GAAP. Reconciliation of this information to the most comparable GAAP measures is included in this
release in the tables which follow.
About RadNet, Inc.
RadNet, Inc., is the leading national provider
of freestanding, fixed-site diagnostic imaging services and related information technology solutions (including artificial intelligence)
in the United States based on the number of locations and annual imaging revenue. RadNet has a network of 366 owned and/or operated outpatient
imaging centers. RadNet's markets include Arizona, California, Delaware, Florida, Maryland, New Jersey and New York. Together with affiliated
radiologists, inclusive of full-time and per diem employees and technologists, RadNet has a total of over 9,000 employees. For more information,
visit http://www.radnet.com.
CONTACTS:
RadNet, Inc.
Mark Stolper, 310-445-2800
Executive Vice President and Chief Financial
Officer
RADNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
| |
September 30, 2023 | | |
December 31, 2022 | |
| |
(unaudited) | | |
| |
ASSETS | |
| | | |
| | |
CURRENT ASSETS | |
| | | |
| | |
Cash and Cash equivalents | |
$ | 337,884 | | |
$ | 127,834 | |
Accounts receivable | |
| 167,736 | | |
| 166,357 | |
Due from affiliates | |
| 24,848 | | |
| 18,971 | |
Prepaid expenses and other current assets | |
| 48,204 | | |
| 54,022 | |
Total current assets | |
| 578,672 | | |
| 367,184 | |
PROPERTY, EQUIPMENT AND RIGHT-OF-USE ASSETS | |
| | | |
| | |
Property and equipment, net | |
| 577,227 | | |
| 565,961 | |
Operating lease right-of-use assets | |
| 613,164 | | |
| 603,524 | |
Total property, plant, equipment and right-of-use assets | |
| 1,190,391 | | |
| 1,169,485 | |
OTHER ASSETS | |
| | | |
| | |
Goodwill | |
| 676,376 | | |
| 677,665 | |
Other intangible assets | |
| 91,833 | | |
| 106,228 | |
Deferred financing costs | |
| 1,803 | | |
| 2,280 | |
Investment in joint ventures | |
| 94,472 | | |
| 57,893 | |
Deposits and other | |
| 54,478 | | |
| 53,172 | |
Total assets | |
$ | 2,688,025 | | |
$ | 2,433,907 | |
| |
| | | |
| | |
LIABILITIES AND EQUITY | |
| | | |
| | |
CURRENT LIABILITIES | |
| | | |
| | |
Accounts payable, accrued expenses and other | |
$ | 302,086 | | |
$ | 369,595 | |
Due to affiliates | |
| 24,448 | | |
| 23,100 | |
Deferred revenue | |
| 5,176 | | |
| 4,021 | |
Current operating lease liability | |
| 59,324 | | |
| 57,607 | |
Current portion of notes payable | |
| 16,043 | | |
| 12,400 | |
Total current liabilities | |
| 407,077 | | |
| 466,723 | |
LONG-TERM LIABILITIES | |
| | | |
| | |
Long-term operating lease liability | |
| 614,038 | | |
| 604,117 | |
Notes payable, net of current portion | |
| 844,302 | | |
| 839,344 | |
Deferred tax liability, net | |
| 16,645 | | |
| 9,256 | |
Other non-current liabilities | |
| 9,805 | | |
| 23,015 | |
Total liabilities | |
| 1,891,867 | | |
| 1,942,455 | |
EQUITY | |
| | | |
| | |
RadNet, Inc. stockholders' equity: | |
| | | |
| | |
Common stock - $.0001 par value, 200,000,000 shares authorized; 67,848,209 and 57,723,125 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively | |
| 7 | | |
| 6 | |
Additional paid-in-capital | |
| 714,910 | | |
| 436,288 | |
Accumulated other comprehensive loss | |
| (18,297 | ) | |
| (20,677 | ) |
Accumulated deficit | |
| (77,719 | ) | |
| (82,622 | ) |
Total RadNet, Inc.'s stockholders equity | |
| 618,901 | | |
| 332,995 | |
Noncontrolling interests | |
| 177,257 | | |
| 158,457 | |
Total equity | |
| 796,158 | | |
| 491,452 | |
Total liabilities and equity | |
$ | 2,688,025 | | |
$ | 2,433,907 | |
RADNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
(unaudited)
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
| | |
| | |
| | |
| |
REVENUE | |
| | | |
| | | |
| | | |
| | |
Service fee revenue | |
$ | 361,927 | | |
$ | 312,043 | | |
$ | 1,078,265 | | |
$ | 931,819 | |
Revenue under capitation arrangements | |
| 40,041 | | |
| 38,001 | | |
| 117,982 | | |
| 114,366 | |
Total service revenue | |
| 401,968 | | |
| 350,044 | | |
| 1,196,247 | | |
| 1,046,185 | |
OPERATING EXPENSES | |
| | | |
| | | |
| | | |
| | |
Cost of operations, excluding depreciation and amortization | |
| 341,635 | | |
| 313,943 | | |
| 1,038,647 | | |
| 934,757 | |
Depreciation and amortization | |
| 32,210 | | |
| 29,229 | | |
| 95,705 | | |
| 85,209 | |
Loss (gain) on sale and disposal of equipment and other | |
| 527 | | |
| (247 | ) | |
| 1,183 | | |
| 962 | |
Gain on contribution of imaging centers into joint venture | |
| (16,808 | ) | |
$ | – | | |
| (16,808 | ) | |
$ | – | |
Severance costs | |
| 1,153 | | |
| 195 | | |
| 3,157 | | |
| 496 | |
Total operating expenses | |
| 358,717 | | |
| 343,120 | | |
| 1,121,884 | | |
| 1,021,424 | |
INCOME (LOSS) FROM OPERATIONS | |
| 43,251 | | |
| 6,924 | | |
| 74,363 | | |
| 24,761 | |
OTHER INCOME AND EXPENSES | |
| | | |
| | | |
| | | |
| | |
Interest expense | |
| 16,115 | | |
| 12,420 | | |
| 47,876 | | |
| 35,398 | |
Equity in earnings of joint ventures | |
| (1,084 | ) | |
| (3,085 | ) | |
| (3,935 | ) | |
| (8,350 | ) |
Non-cash change in fair value of interest rate hedge | |
| 1,015 | | |
| (12,451 | ) | |
| 949 | | |
| (39,576 | ) |
Other expenses (income) | |
| (4,081 | ) | |
| 1,405 | | |
| (2,609 | ) | |
| 1,562 | |
Total other expense (income) | |
| 11,965 | | |
| (1,711 | ) | |
| 42,281 | | |
| (10,966 | ) |
INCOME (LOSS) BEFORE INCOME TAXES | |
| 31,286 | | |
| 8,635 | | |
| 32,082 | | |
| 35,727 | |
Provision for income taxes | |
| (7,220 | ) | |
| (2,188 | ) | |
| (7,741 | ) | |
| (7,087 | ) |
NET INCOME (LOSS) | |
| 24,066 | | |
| 6,447 | | |
| 24,341 | | |
| 28,640 | |
Net income (loss) attributable to noncontrolling interests | |
| 6,526 | | |
| 5,779 | | |
| 19,437 | | |
| 17,055 | |
NET INCOME (LOSS) ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS | |
$ | 17,540 | | |
$ | 668 | | |
$ | 4,904 | | |
$ | 11,585 | |
| |
| | | |
| | | |
| | | |
| | |
BASIC NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS | |
$ | 0.26 | | |
$ | 0.01 | | |
$ | 0.08 | | |
$ | 0.21 | |
| |
| | | |
| | | |
| | | |
| | |
DILUTED NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS | |
$ | 0.25 | | |
$ | 0.01 | | |
$ | 0.08 | | |
$ | 0.19 | |
WEIGHTED AVERAGE SHARES OUTSTANDING | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 67,793,404 | | |
| 56,744,419 | | |
| 62,113,707 | | |
| 56,041,017 | |
Diluted | |
| 68,809,818 | | |
| 57,651,761 | | |
| 63,221,251 | | |
| 57,036,417 | |
RADNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS
(IN THOUSANDS)
(unaudited)
| |
Nine Months Ended September 30, | |
| |
2023 | | |
2022 | |
CASH FLOWS FROM OPERATING ACTIVITIES | |
| | | |
| | |
Net income | |
$ | 24,341 | | |
$ | 28,640 | |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 95,705 | | |
| 85,209 | |
Amortization of operating lease assets | |
| 47,542 | | |
| 51,573 | |
Equity in earnings of joint ventures | |
| (3,935 | ) | |
| (8,350 | ) |
Distributions from joint ventures | |
| 8,947 | | |
| – | |
Amortization deferred financing costs and loan discount | |
| 2,240 | | |
| 1,943 | |
Loss (Gain) non sale and disposal of equipment | |
| 1,183 | | |
| 962 | |
Gain on contribution of imaging centers into joint venture | |
| (16,808 | ) | |
| – | |
Amortization of cash flow hedge | |
| 2,765 | | |
| 2,771 | |
Non-cash change in fair value of interest rate hedge | |
| 948 | | |
| (39,576 | ) |
Stock-based compensation | |
| 21,380 | | |
| 19,112 | |
Other noncash item included in cost of operations | |
| 3,949 | | |
| – | |
Change in fair value of contingent consideration | |
| (4,112 | ) | |
| (329 | ) |
Changes in operating assets and liabilities, net of assets acquired and liabilities assumed in purchase transactions: | |
| | | |
| | |
Accounts receivable | |
| (1,379 | ) | |
| (36,686 | ) |
Other current assets | |
| 5,754 | | |
| (4,934 | ) |
Other assets | |
| (16,641 | ) | |
| 3,738 | |
Deferred taxes | |
| 7,389 | | |
| 8,955 | |
Operating lease liability | |
| (43,390 | ) | |
| (49,597 | ) |
Deferred revenue | |
| 1,155 | | |
| (7,809 | ) |
Accounts payable, accrued expenses and other | |
| (5,090 | ) | |
| 37,148 | |
Net cash provided by operating activities | |
| 131,943 | | |
| 92,770 | |
CASH FLOWS FROM INVESTING ACTIVITIES | |
| | | |
| | |
Purchase of imaging facilities and other acquisitions | |
| (10,915 | ) | |
| (26,009 | ) |
Purchase of property and equipment and other | |
| (136,537 | ) | |
| (98,606 | ) |
Proceeds from sale of equipment | |
| 82 | | |
| 3,008 | |
Equity contributions in existing and purchase of interest in joint ventures | |
| (5,453 | ) | |
| (1,441 | ) |
Net cash used in investing activities | |
| (152,823 | ) | |
| (123,048 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES | |
| | | |
| | |
Principal payments on notes and leases payable | |
| (1,929 | ) | |
| – | |
Payments on Term Loan Debt | |
| (11,062 | ) | |
| (9,938 | ) |
Purchase of noncontrolling interests by third party | |
| 5,102 | | |
| – | |
Payments on contingent consideration | |
| (3,390 | ) | |
| – | |
Distributions paid to noncontrolling interests | |
| (3,523 | ) | |
| – | |
Proceeds from issuance of common stock | |
| 245,831 | | |
| – | |
Proceeds from issuance of common stock upon exercise of options | |
| 72 | | |
| – | |
Net cash used in financing activities | |
| 231,101 | | |
| (9,938 | ) |
EFFECT OF EXCHANGE RATE CHANGES ON CASH | |
| (171 | ) | |
| 616 | |
NET DECREASE IN CASH AND CASH EQUIVALENTS | |
| 210,050 | | |
| (39,600 | ) |
CASH AND CASH EQUIVALENTS, beginning of period | |
| 127,834 | | |
| 134,606 | |
CASH AND CASH EQUIVALENTS, end of period | |
$ | 337,884 | | |
$ | 95,006 | |
| |
| | | |
| | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | |
| | | |
| | |
Cash paid during the period for interest | |
$ | 58,825 | | |
$ | 30,251 | |
Cash paid during the period for income taxes | |
$ | 225 | | |
$ | 560 | |
RADNET, INC. AND SUBSIDIARIES
RECONCILIATION OF GAAP
NET INCOME (LOSS) ATTRIBUTABLE TO RADNET, INC.
COMMON SHAREHOLDERS TO ADJUSTED EBITDA(1)
(IN THOUSANDS)
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
| | |
| | |
| | |
| |
Net income (loss) attributable to Radnet, Inc. common stockholders | |
$ | 17,540 | | |
$ | 668 | | |
$ | 4,904 | | |
$ | 11,585 | |
Income taxes | |
| 7,220 | | |
| 2,188 | | |
| 7,741 | | |
| 7,087 | |
Interest expense | |
| 16,115 | | |
| 12,420 | | |
| 47,876 | | |
| 35,398 | |
Severance costs | |
| 1,153 | | |
| 195 | | |
| 3,157 | | |
| 496 | |
Depreciation and amortization | |
| 32,210 | | |
| 29,229 | | |
| 95,705 | | |
| 85,209 | |
Non-cash employee stock-based compensation | |
| 4,325 | | |
| 3,317 | | |
| 21,381 | | |
| 19,112 | |
Loss (gain) on sale and disposal of equipment and other | |
| 527 | | |
| (247 | ) | |
| 1,183 | | |
| 962 | |
Non-cash change in fair value of interest rate hedge | |
| 1,015 | | |
| (12,451 | ) | |
| 949 | | |
| (39,576 | ) |
Other expenses | |
| (4,081 | ) | |
| 1,405 | | |
| (2,609 | ) | |
| 1,562 | |
Legal settlements | |
| – | | |
| – | | |
| – | | |
| 2,197 | |
Change in estimate related to refund liability | |
| – | | |
| 8,089 | | |
| – | | |
| 8,089 | |
Gain on contribution of imaging centers into joint venture | |
| (16,808 | ) | |
| – | | |
| (16,808 | ) | |
| – | |
Non-cash change to contingent consideration | |
| (6,276 | ) | |
| – | | |
| (3,646 | ) | |
| – | |
Acquisition related non-cash intangible adjustment | |
| 3,950 | | |
| – | | |
| 3,950 | | |
| – | |
Non-operational rent expenses | |
| 1,030 | | |
| 959 | | |
| 2,748 | | |
| 3,120 | |
| |
| | | |
| | | |
| | | |
| | |
Adjusted EBITDA Including EBITDA Losses from AI Segment | |
$ | 57,920 | | |
$ | 45,772 | | |
$ | 166,531 | | |
$ | 135,241 | |
| |
| | | |
| | | |
| | | |
| | |
EBITDA Losses from AI Segment | |
| 2,499 | | |
| 4,462 | | |
| 10,283 | | |
| 12,253 | |
| |
| | | |
| | | |
| | | |
| | |
Adjusted EBITDA excluding EBITDA Losses from AI Segment | |
$ | 60,419 | | |
$ | 50,234 | | |
$ | 176,814 | | |
$ | 147,494 | |
PAYOR CLASS BREAKDOWN
| |
Third Quarter | |
| |
2023 | |
| |
| |
Commercial Insurance | |
| 58.3% | |
Medicare | |
| 22.9% | |
Capitation | |
| 10.0% | |
Medicaid | |
| 2.7% | |
Workers Compensation/Personal Injury | |
| 2.5% | |
Other | |
| 3.8% | |
Total | |
| 100.0% | |
RADNET PAYMENTS BY
MODALITY
| |
Third Quarter | | |
Full Year | | |
Full Year | | |
Full Year | |
| |
2023 | | |
2022 | | |
2021 | | |
2020 | |
| |
| | |
| | |
| | |
| |
MRI | |
| 37.2% | | |
| 36.8% | | |
| 36.0% | | |
| 35.4% | |
CT | |
| 16.6% | | |
| 17.5% | | |
| 17.2% | | |
| 17.6% | |
PET/CT | |
| 6.5% | | |
| 5.8% | | |
| 5.5% | | |
| 6.0% | |
X-ray | |
| 6.5% | | |
| 6.7% | | |
| 3.9% | | |
| 7.3% | |
Ultrasound | |
| 12.9% | | |
| 12.6% | | |
| 12.7% | | |
| 12.3% | |
Mammography | |
| 15.7% | | |
| 15.3% | | |
| 16.1% | | |
| 15.7% | |
Nuclear Medicine | |
| 0.8% | | |
| 0.9% | | |
| 1.0% | | |
| 1.0% | |
Other | |
| 3.8% | | |
| 4.5% | | |
| 4.6% | | |
| 4.7% | |
| |
| 100.0% | | |
| 100.0% | | |
| 100.0% | | |
| 100.0% | |
PROCEDURES BY MODALITY*
| |
Third Quarter | | |
Third Quarter | |
| |
2023 | | |
2022 | |
| |
| | |
| |
MRI | |
| 389,566 | | |
| 348,912 | |
CT | |
| 230,276 | | |
| 207,554 | |
PET/CT | |
| 15,216 | | |
| 12,932 | |
Nuclear Medicine | |
| 8,533 | | |
| 9,387 | |
Ultrasound | |
| 607,995 | | |
| 554,782 | |
Mammography | |
| 452,756 | | |
| 418,335 | |
X-ray and Other | |
| 806,677 | | |
| 759,546 | |
| |
| | | |
| | |
Total | |
| 2,511,019 | | |
| 2,311,448 | |
|
|
|
|
|
|
* Volumes include wholy owned and joint venture centers. |
Footnotes
(1) The Company defines Adjusted EBITDA
as earnings before interest, taxes, depreciation and amortization, each from continuing operations and adjusted for losses or gains on
the sale of equipment, other income or loss, debt extinguishments 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 extraordinary and one-time events taken place during the period.
Adjusted EBITDA is reconciled to its nearest comparable
GAAP financial measure. Adjusted EBITDA is a non-GAAP financial measure used as analytical indicator by RadNet management and the healthcare
industry to assess business performance, and is a measure of leverage capacity and ability to service debt. Adjusted EBITDA should not
be considered a measure of financial performance under GAAP, and the items excluded from Adjusted EBITDA should not be considered in isolation
or as alternatives to net income, cash flows generated by operating, investing or financing activities or other financial statement data
presented in the consolidated financial statements as an indicator of financial performance or liquidity. As Adjusted EBITDA is not a
measurement determined in accordance with GAAP and is therefore susceptible to varying methods of calculation, this metric, as presented,
may not be comparable to other similarly titled measures of other companies.
(2) As noted above, the Company defines
Free Cash Flow as Adjusted EBITDA less total Capital Expenditures (whether completed with cash or financed) and Cash Interest paid. Free
Cash Flow is a non-GAAP financial measure. The Company uses Free Cash Flow because the Company believes it provides useful information
for investors and management because it measures our capacity to generate cash from our operating activities. Free Cash Flow does not
represent total cash flow since it does not include the cash flows generated by or used in financing activities. In addition, our definition
of Free Cash Flow may differ from definitions used by other companies.
Free Cash Flow should not be considered a measure
of financial performance under GAAP, and the items excluded from Adjusted EBITDA should not be considered in isolation or as alternatives
to net income, cash flows generated by operating, investing or financing activities or other financial statement data presented in the
consolidated financial statements as an indicator of financial performance or liquidity. As Adjusted EBITDA is not a measurement determined
in accordance with GAAP and is therefore susceptible to varying methods of calculation, this metric, as presented, may not be comparable
to other similarly titled measures of other companies.
RADNET, INC. AND SUBSIDIARIES
SCHEDULE OF ADJUSTED EARNINGS AND EARNINGS PER SHARE (3)
(IN THOUSANDS EXCEPT SHARE DATA)
(unaudited)
| |
Three Months Ended | |
| |
September 30, | | |
September 30, | |
| |
2023 | | |
2022 | |
| |
| | |
| |
NET INCOME (LOSS) ATTRIBUTABLE TO RADNET, INC. | |
| | | |
| | |
COMMON STOCKHOLDERS | |
$ | 17,540 | | |
$ | 668 | |
| |
| | | |
| | |
| |
| | | |
| | |
Add non-cash impact of cash flow hedges (i) | |
| 2,260 | | |
| (11,206 | ) |
Add increase in reserve for patient refunds | |
| – | | |
| 8,089 | |
Add severance costs | |
| 1,153 | | |
| 195 | |
Subtract gain on contribution of imaging centers into joint venture | |
| (16,808 | ) | |
| – | |
Add non-operational rent expenses (iii) | |
| 1,030 | | |
| 959 | |
AI Segment losses (iv) | |
| 1,331 | | |
| 7,787 | |
Subtract non-cash change to contingent consideration - Heart Lung Health | |
| 915 | | |
| | |
Total adjustments - loss (gain) | |
| (10,119 | ) | |
| 5,824 | |
Subtract tax impact of Adjustments (ii) | |
| 2,439 | | |
| (1,153 | ) |
Tax effected impact of adjustments | |
| (7,680 | ) | |
| 4,671 | |
| |
| | | |
| | |
TOTAL ADJUSTMENT TO NET INCOME ATTRIBUTABLE | |
| | | |
| | |
TO RADNET, INC. COMMON SHAREHOLDERS | |
| (7,680 | ) | |
| 4,671 | |
| |
| | | |
| | |
ADJUSTED NET INCOME (LOSS) ATTRIBUTABLE TO RADNET, INC. | |
| 9,860 | | |
| 5,339 | |
COMMON STOCKHOLDERS | |
| | | |
| | |
| |
| | | |
| | |
WEIGHTED AVERAGE SHARES OUTSTANDING | |
| | | |
| | |
Diluted | |
| 68,809,818 | | |
| 57,651,761 | |
| |
| | | |
| | |
ADJUSTED DILUTED NET INCOME PER SHARE | |
| | | |
| | |
ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS | |
$ | 0.14 | | |
$ | 0.09 | |
(i) Impact is the combination of (a) the loss in fair value of the hedges during the quarter of $1,015 in 2023 and
gain of $12,451 in 2022 and (b) the amortization of the accumulation of the changes in fair value out of Other Comprehensive Income
that existed prior to the hedges becoming ineffective of $1,245 in 2023 and $1,245 in 2022.
(ii) Tax effected using 24.1% blended federal and state effective tax rate for 2023 and 19.8% for 2022.
(iii) Represents rent expense associated with de novo sites under construction prior to them becoming operational.
(iv) Represents pre-tax net income losses before income taxes from Artificial Intelligence reporting segment.
Exhibit 99.2
C O R P O R A
T E P A R T I C I P A N T S
Dr. Howard Berger, President and Chief
Executive Officer
Mark Stolper, Executive Vice President
and Chief Financial Officer
C O N F E R E
N C E C A L L P A R T I C I P A N T S
Jack Slevin, Jefferies
Nathan Malewicki, Raymond James
Larry Solow, CJS Securities
Jim Sidoti, Sidoti & Company
Brandon Carney, B. Riley Securities
Rishi Parekh, JPMorgan
Ed Kressler, TPG Angelo Gordon
P R E S E N T
A T I O N
Operator
Good day, and welcome to the RadNet Third Quarter
2023 Financial Results Conference Call.
All participants will be in a listen-only mode.
(Operator instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator instructions) Please
note this event is being recorded.
I would now like to turn the conference over to
Mark Stolper, Executive Vice President and Chief Financial Officer. Please go ahead.
Mark Stolper
Thank you. Good morning, ladies and gentlemen,
and thank you for joining Dr. Howard Berger and me today to discuss RadNet’s third quarter 2023 financial results.
Before we begin today, we’d like to remind everyone of the
Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. This presentation contains forward-looking
statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Specifically, statements concerning
anticipated future financial and operating performance, RadNet’s ability to continue to grow the business by generating
patient referrals and contracts with radiology practices, recruiting and retaining technologists, receiving third-party
reimbursement for diagnostic imaging services, successfully integrating acquired operations, generating revenue and Adjusted EBITDA
for the acquired operations as estimated, among others, are forward-looking statements within the meaning of the Safe Harbor.
Forward-looking statements are based on Management’s
current preliminary expectations and are subject to risks and uncertainties which may cause RadNet’s actual results to differ materially
from the statements contained herein. These risks and uncertainties include those risks set forth in RadNet’s reports filed with
the SEC from time to time, including RadNet’s Annual Report on Form 10-K for the year ended December 31, 2022.
Undue reliance should not be placed on forward-looking
statements, especially guidance on future financial performance, which speaks only as of the date it is made. RadNet undertakes no obligation
to publicly update any forward-looking statements to reflect new information, events or circumstances after the date they were made, or
to reflect the occurrence of unanticipated events.
With that, I’d like to turn the call over
to Dr. Berger.
Dr. Howard Berger
Thank you Mark. Good morning, everyone, and thank
you for joining us today.
On today’s call, Mark and I plan to provide
you with highlights from our third quarter 2023 results, give you more insight into factors which affected this performance, and discuss
our future strategy. After our prepared remarks, we will open the call to your questions. I’d like to thank all of you for your
interest in our Company and for dedicating a portion of your day to participate in our conference call this morning.
Let’s begin.
I am very pleased with our performance in the
third quarter. Strong procedural volumes primarily contributed to the growth of revenue in the third quarter. As compared with last year’s
third quarter, aggregate procedural volumes increased 8.6% and same-center procedural volumes increased 4.2%. These metrics drove an increase
to consolidated revenue of 14.8% from last year’s third quarter. The consolidated revenue of $402 million was the highest third
quarter revenue in our Company’s history. The revenue in the third quarter was $1.7 million less than that of the second quarter
of this year. We had one less work day in the third quarter, as compared with the second quarter. However, the average revenue per day
in the third quarter exceeded revenue per day in the second quarter, a trend that has continued into the fourth quarter. The challenge
remains servicing the heavy demand we have been experiencing in most of our local markets, many of which have significant scheduling backlogs.
Adjusted EBITDA performance was also very strong
in the third quarter. In concert with strong revenue, this was a result of aggressive and active expense management, despite a challenged
labor market and inflationary pressures. Relative to the third quarter of last year, Adjusted EBITDA from the imaging centre reporting
segment increased 20.3% to $60.4 million for the quarter. The continuation of these trends into the fourth quarter encourages us to raise
2023 Adjusted EBITDA guidance for the third time this year.
The Artificial Intelligence Division continues to gain momentum. AI
revenue has more than tripled from last year’s third quarter, and sequentially, relative to the second quarter, grew over 21% on
roughly the same number of centres offering our Enhanced Breast Cancer Detection, or EBCD, service. This is indicative of wider patient
enthusiasm within our East Coast operations, where adoption rates are approaching 35%. Subsequent to the end of the quarter, we began
implementing EBCD in Southern California, and expect that we will be fully deployed in all centres by the end of the first quarter of
2024.
We continue to receive very positive feedback
from our patients, referring physicians and radiologists. Over 500 cancers have been diagnosed that otherwise would have gone undetected,
while at the same time callback rates have been significantly lower and radiologist productivity and accuracy has been increased. An immense
amount of data has been collected, which we will be sharing with payors in support of eventually receiving third-party reimbursement for
this service.
Aside from the clinical AI tools, we continue
to advance efforts in generative AI, focused on driving efficiency and cost savings in RadNet’s business processes, which will impact
contact centers, patient scheduling, insurance verification and revenue cycle functions. The objective is to place into service some of
these generative AI tools beginning in the second quarter of 2024. Currently, we rely on manual processes to perform functions that can
be more accurately and efficiently completed with artificial intelligence. We see a future where patients and referring physicians will
be able to schedule appointments, be able to verify a patient’s insurance coverage, be able to request radiology reports and images,
receive billing and payment information and pay outstanding balances, amongst other things, with significant reduction in manual intervention.
The process of moving the eRAD radiology information
and imaging management systems to the cloud has begun. A cloud system will provide our centers and other eRAD customers an ecosystem to
host RadNet’s deep.health and third-party AI solutions that can scale the capabilities and functionality of radiology operations.
Additionally, a cloud-based solution will provide customers better third-party support, system updates and improved security.
As we continue to advance the eRAD platform and
the suite of products and migrate them to the cloud, there is a natural convergence between our radiology informatics and AI solutions.
We see a time when customers, including radiology practices, imaging centers and hospitals, will use this platform in a seamless environment
to host the critical AI, generative AI and business tools to manage and further their clinical and operational workflow requirements.
In the new year, we look forward to discussing more on how we plan to position RadNet’s AI and informatics solutions into an industry-leading
digital health platform.
During the third quarter, we expanded our relationship
with the Cedars-Sinai medical system, one of the premiere health systems in Southern California. As part of the expanded relationship,
we established a new joint venture called Los Angeles Imaging Group, initially, with three locations, as well as broadened our existing
two-center joint venture, Santa Monica Imaging Group, to include the contribution of seven additional centers, five of which were contributed
by Cedars-Sinai and two from RadNet. The expanded relationship with Cedars-Sinai is designed to increase patient access to outpatient
radiology by broadening the ambulatory network of imaging centers throughout Los Angeles, including certain underserved communities. The
ventures will streamline and improve patient care by improving workflow, providing better access to records and producing more timely
and accurate results for patients and referring physicians. We now have three joint ventures with Cedars-Sinai encompassing 16 locations
in the West Side, Downtown and San Fernando Valley areas of Los Angeles.
As an increasing amount of patient volumes are being directed away
from expensive hospital-based imaging procedures towards more cost-effective ambulatory outpatient settings, hospitals and health systems
are seeking viable, long-term strategies for outpatient imaging. This is leading to increased interest among hospitals and health systems
to engage with us in partnerships, discussions and outpatient strategies. RadNet’s current partners are some of the largest and
most successful systems in our geographies, including RWJBarnabas, MemorialCare, Dignity Health, LifeBridge, University of Maryland Medical
System, Cedars-Sinai, and others. Our hospital and health system partners have been instrumental in increasing our procedural volumes
through their relationships with physician partners. Additionally, the joint venture partners are helpful in providing support, if needed,
in establishing long-term, equitable outpatient reimbursement rates for our services. After giving effect to the expanded Cedars-Sinai relationship, 130 of our 366 centers, or 36%, are now
held within health system partnerships.
We continue to execute on our de novo development
strategy, which we launched almost two years ago. These development projects are located in markets where we have patient backlogs, require
additional capacity, or where we currently lack access points to service patient populations in need of RadNet services. While these projects
require us to make capital investments above our normal spending, we are confident that these centers will be material contributors to
our long-term performance and growth. Approximately a dozen additional centers are scheduled to open throughout 2024 in various markets.
Finally, I would like to comment on RadNet’s
liquidity position and financial leverage.
On June 16, we completed an equity offering where
we raised $246 million of net proceeds to de-leverage our balance sheet and position us to accelerate growth. This offering, along with
strong operating performance, resulted in a net debt to Adjusted EBITDA ratio of approximately 2 times at the end of the third quarter
end. We currently have the lowest leverage and strongest liquidity position in our Company’s history. As of September 30, we had
$338 million of cash on our balance sheet and were undrawn on our $195 million revolving line of credit.
Our days sales outstanding, DSOs, at June [sic]
2023 was 33.6 days, which we believe to be one of the best in the industry.
While we are committed to growing and expanding
our business, we will also continue to follow a disciplined approach to managing our financial leverage. To this end, on October 30, subsequent
to the third quarter end, we made a $30 million voluntary prepayment of our term loan, demonstrating our commitment to managing our debt
balance and cost of capital within an economic environment that has experienced rising interest rates, inflation, and other macroeconomic
challenges.
The lower leverage and cost of capital and stronger
liquidity, relative to many other industry operators, position us to capitalize on acquisition opportunities and other business opportunities.
We remain patient and disciplined in our approach to acquisition, focused first on our core markets where we bring unique synergies and
cost savings.
At this time, I’d like to turn the call
back over to Mark to discuss some of the highlights of our third quarter 2023 performance. When he is finished, I will make some closing
remarks.
Mark Stolper
Thank you, Howard.
I’m now going to briefly review our third
quarter 2023 performance and attempt to highlight what I believe to be some material items. I will also give some further explanation
of certain items in our financial statements, as well as provide some insights into some of the metrics that drove our third quarter performance.
I will also provide an update to 2023 financial guidance levels, which were released in conjunction with our 2022 year-end results in
March, and which we amended in May upon releasing our first quarter financial results, and again in August upon releasing our second quarter
financial results.
In my discussion, I will use the term “Adjusted EBITDA,”
which is a non-GAAP financial measure. The Company defines Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization,
and excludes losses or gains on the disposal of equipment, other income or loss, loss on debt extinguishments, and non-cash equity compensation.
Adjusted EBITDA includes equity and earnings of unconsolidated operations and subtracts allocations of earnings to non-controlling interest
and subsidiaries, and is adjusted for non-cash or extraordinary and one-time events taking place during the period. A full quantitative
reconciliation of Adjusted EBITDA to net income or loss attributable to RadNet Inc. common shareholders is included in our earnings release.
With that said, I’d now like to review our
third quarter 2023 results.
For the third quarter of 2023, we reported revenue
from our Imaging Centers reporting segment of $399.1 million and Adjusted EBITDA of $60.4 million. As compared with last year’s
third quarter, revenue increased $49.9 million, or 14.3%, and Adjusted EBITDA increased $10.2 million, or 20.3%. Including revenue from
our AI reporting segment of $2.9 million, consolidated revenue was $402 million in the third quarter of 2023, an increase of 14.8% from
$350 million in last year’s third quarter. Including a $2.5 million Adjusted EBITDA loss from the AI reporting segment, consolidated
Adjusted EBITDA was $57.9 million in the third quarter of 2023, and $45.8 million in the third quarter of 2022, an increase of 26.5%.
For the third quarter of 2023, RadNet reported
net income of $17.5 million, as compared with $668,000 for the third quarter of 2022. Diluted net income per share for the third quarter
of 2023 was $0.25, compared with a diluted net income per share of $0.01 in the third quarter of 2022, based upon a weighted average number
of diluted shares outstanding of 68.8 million shares in 2023, and 57.7 million shares in 2022.
There were a number of unusual or one-time items
impacting the third quarter, including the following:
| · | $2.3 million loss of non-cash interest rate swaps,
net of amortization of the accumulation of the changes in fair value in other comprehensive income; |
| · | $1.2 of severance paid in connection with headcount
reductions related to cost savings initiatives; |
| · | $16.8 million gain on the contribution of imaging
centers into the Santa Monica Imaging Group joint venture with Cedars-Sinai; |
| · | $1 million expense related to leases for our
de novo facilities under construction that have yet to open their operations; |
| · | $1.3 million of pre-tax losses related to our
AI reporting segment net of non-cash adjustments to contingent consideration and intangible AI assets; and |
| · | $915,000 loss from the revaluation of certain
acquisition contingent consideration. |
Adjusting for the above items, adjusted earnings
from the Imaging Center reporting segment was $9.9 million and diluted adjusted earnings per share was $0.14 during the third quarter
of 2023.
Also affecting net income in the third quarter
of 2023 were certain non-cash expenses and unusual items, including:
| · | $4.3 million of non-cash employee stock compensation
expense resulting from the vesting of certain options and restricted stock; and |
| · | $746,000 of non-cash amortization of deferred
financing costs and loan discounts related to financing fees paid as part of our existing credit facilities. |
For the third quarter of 2023, as compared with the prior year’s
third quarter, MRI volume increased 11.7%, CT volume increased 10.9%, and PET CT volume increased 17.7%. Overall volume, taking into
account routine imaging exams, inclusive of x-ray, ultrasound, mammography and all other exams, increased 8.6% over the prior year’s
third quarter. On a same-center basis, including only those centers which were part of RadNet for both the third quarters of 2023 and
2022, MRI volume increased 6.9%, CT volume increased 6%, and PET CT volume increased 15.2%. Overall same-center volume, taking into account
all routine imaging exams, increased 4.2% over the prior year’s same quarter.
In the third quarter of 2023, we performed 2,511,019
total procedures. The procedures were consistent with our multi-modality approach, whereby 74.7% of all the work we did by volume was
from routine imaging. Our procedures in the third quarter of 2023 were as follows:
| · | 389,566 MRIs, as compared with 348,912 MRIs in
the third quarter of 2022; |
| · | 230,276 CTs, as compared with 207,554 CTs in
the third quarter of 2022; |
| · | 15,216 PET CTs, as compared with 12,932 PET CTs
in the third quarter of 2022; and |
| · | 1,875,961 routine imaging exams, as compared
with 1,742,050 of all these exams in the third quarter of 2022. |
Overall GAAP interest expense for the third quarter
of 2023 was $16.1 million. This compares with GAAP interest expense in the third quarter of 2022 of $12.4 million. The higher interest
cost is predominantly the result of the upsized New Jersey Imaging Network credit facility completed in October of last year in conjunction
with NJIN’s acquisition of Montclair Radiology, and a higher SOFR rate on our un-swapped floating rate debt.
Cash paid for interest during the period, which
excludes non-cash deferred financing expense and accrued interest, was $19.5 million. Cash paid for interest net of interest earned on
our cash balance and interest rate swap payments received from our swap counterparties was $11.7 million for the three-month period ended
September 30, 2023, and $41.7 million for the first nine months of 2023.
With regards to our balance sheet, as of September
30, unadjusted for bond and term loan discounts, we had $532.7 million of net debt, which is our total debt at par value less our cash
balance. Note that this debt balance includes New Jersey Imaging Network’s debt of $144.4 million, for which RadNet is neither a
borrower nor guarantor. This compares with $662.9 million of net debt at September 30, 2022. Our net debt balance is substantially lower
than last year, primarily as a result of the stock offering we completed in June of this year. As of September 30, 2023, we were undrawn
on our $195 million revolving line of credit and had a cash balance of $338 million.
At September 30, 2023, our accounts receivable
balance was $167.7 million, an increase of $1.4 million from year end 2022. Our days sales outstanding, or DSO, remains near the lowest
levels in our Company’s history at 33.6 days at September 30, 2023. The flat accounts receivable and low DSO, despite our increased
revenue, are the result of improvements in cash collections from patients at the time of service and better performance with respect to
avoiding insurance denials, submitting clean claims and obtaining necessary pre-authorizations and insurance verification.
Through September 30, 2023, we had cash capital
expenditures, net of asset dispositions and sale of imaging center assets and joint venture interests, of $117.9 million. This excludes
$13.6 million of cash capital expenditures at our New Jersey Imaging Network joint venture, $19.8 million of equipment purchased off operating
leases with a promissory note, and a $5 million payment to purchase certain software and intellectual property from a vendor.
At this time, I’d like to update and revise
our 2023 financial guidance levels, which we released in conjunction with our fourth quarter and year end 2022 results and amended after
reporting both our first and second quarter 2023 financial results.
For total net revenue, our revised guidance range
is unchanged at $1.575 billion to $1.610 billion;
For Adjusted EBITDA, we’ve increased our
guidance range by $3 million both at the low end and the high end of the range. Our new guidance range for Adjusted EBITDA is between
$235 million and $245 million.
For capital expenditures, we increased our guidance
range, both at the low end and the high end by $5 million, to $115 million to $125 million to reflect additional capital investments in
our de novo facility openings.
For cash interest expense, our guidance remains
unchanged at between $45 million and $50 million for the year, and our free cash flow guidance range also is unchanged at between $65
million and $75 million.
For our AI segment, our guidance for both revenue
and Adjusted EBITDA remains unchanged. For revenue, we anticipate $11 million to $13 million of revenue for the year, and for Adjusted
EBITDA, our guidance range is between negative $11 million and negative $13 million for the year.
I’ll now take a few minutes to give you
an update on 2024 reimbursement and discuss what we know with regards to 2024 Medicare rates. As a reminder, Medicare represents about
23% of our business mix.
With respect to Medicare reimbursement, in July,
we received a matrix for proposed rates by CPT code, which is typically part of the physician fee schedule proposal that is released about
that time every year. At that time, we completed an initial analysis and compared those rates to 2023 rates. We volume-weighted our analysis
using expected 2024 procedural volumes.
As you may recall, three years ago CMS moved forward
with increased reimbursement for evaluation and management CPT codes which favor certain physician specialties that regularly bill for
these services, particularly primary care doctors. CMS proposed doing so with budget neutrality, meaning that it proposed to reallocate
reimbursement from physicians who rarely bill for these E&M codes to physicians who regularly bill for these codes. As a result, radiology,
and most other specialties, experienced cuts in reimbursement during 2021, 2022 and 2023, cuts meant to be phased in over a several year
period. The cuts we faced in 2023 were substantially mitigated by legislation that was passed at the end of last year as part of the Consolidated
Appropriations Act.
In this year’s proposal in July governing
2024 reimbursement, Medicare appeared to effectively be phasing in the remainder of the E&M code-related cut avoided last year as
a result of the Consolidated Appropriations Act. The cut proposed for 2024 resulted from a decrease in the conversion factor in the Medicare
fee schedule by about 3.4%, along with certain minor changes to the RVUs, the relative value units, of certain radiology CPT codes.
Our initial analysis of the proposal implied that
RadNet, on roughly $1.6 billion in revenue, would face an approximate $7 million to $9 million revenue hit in 2024 from its Medicare business.
Last week, we received the CMS’s final rule governing 2024 reimbursements. Our analysis shows that the final rule is relatively
consistent with the proposal in July, and that our revenue will be impacted by the approximately $7 million to $9 million estimate that
we had back in July.
Because the final rule’s decrease in the
conversion factor affects all physicians, not just radiologists, there are many lobbying groups from the various medical specialties aggressively
opposing the cut. At this time, our experts believe there remains a reasonable likelihood that part of the scheduled cut will be mitigated
through Congressional action that could take place later next month, similar to what happened last year.
While the $7 million to $9 million cut to RadNet’s
revenue next year is not insignificant, we have reimbursement increases completed or scheduled from capitated and commercial payors that
will fully mitigate this Medicare reduction, should it go into effect per CMS’s final rule.
I’d now like to turn the call back over
to Dr. Berger, who will make some closing remarks.
Dr. Howard Berger
Thank you, Mark.
We have a lot to be optimistic about as we move
into 2024. While we might face headwinds from the $7 million to $9 million Medicare cut and from increasing labor rates, we have numerous
growth initiatives that not only should overcome these challenges, but should provide us another year of accelerated growth.
While we will not be issuing formal 2024 guidance
until we announce fourth quarter and full year-end results in February, I’d like to end today’s prepared remarks by discussing
why we are so excited about 2024, and the growth initiatives that will fuel 2024 performance.
First, as Mark mentioned, we have scheduled rate
increases with various commercial and capitated payors that will more than mitigate the anticipated Medicare rate cut. Most payors recognize
that we are their partners in moving imaging out of more expensive hospital settings and realize the importance RadNet provides in their
outpatient network strategy. We are in the fortunate position that we have tremendous demand, which makes us steadfast in working only
with payors that properly value our services.
Second, we anticipate that strong same-center
performance will continue throughout 2024. Projecting low- to mid-single-digit growth on the current base of $1.6 billion of revenue,
we expect $50 million to $60 million of incremental revenue in 2024, which, by itself, thwarts the Medicare and labor headwinds.
Third, we expect to open approximately a dozen
de novo facilities throughout 2024, which are currently in various stages of construction. These new center openings should contribute
significantly to growth and profitability in 2024, and beyond, as they have been focused in markets where we are experiencing patient
backlogs or where there are identified patient populations that we are currently not servicing. While these centers will open throughout
the year, we anticipate each center contributing an average of $3 million to $5 million of additional revenue once mature.
Fourth, we anticipate further progress in the
AI and digital health platform. We remain convinced that these technologies will transform both the clinical and operational aspects of
all of radiology. By the end of 2024, we could see AI revenue on a run rate that is double our current performance, and it is a realistic
objective that we will reach breakeven Adjusted EBITDA for this segment.
Fifth, we anticipate that acquisition activity
will accelerate in 2024. We currently have an active pipeline of opportunities and we believe that the higher interest rates and labor
challenges will create further consolidation. RadNet’s low leverage and strong liquidity favorably position us to be an industry
consolidator.
Lastly, we expect to drive growth through new
and expanded health system joint ventures. As we discussed today in conjunction with the expanded relationship with the Cedars-Sinai medical
system in Los Angeles, joint ventures are an increasingly important and attractive growth aspect of our business. We believe that within
the next two to three years over 50% of our centers could be held within health system partnerships. We are currently in various stages
of development of new and expanded partnerships, which we expect to announce during 2024.
Operator, we are now ready for the question-and-answer
portion of the call.
Operator
We will now begin the question-and-answer session.
(Operator instructions) At this time, we will pause momentarily to assemble our roster.
Our first question comes from Brian Tanquilut
with Jefferies. Please go ahead.
Jack Slevin
Hey, good morning, and thanks for the questions,
and congrats on the quarter. It’s Jack Slevin on for Brian. I wanted to start by digging a little deeper on the AI rollout. I appreciate
the comments around the timing and having it fully rolled by Q4, but is there any color you can give on sort of early findings there or
things you’ve seen as you’ve started to roll it out, you know, what the progress is to date, and maybe performance on adoption,
it looks pretty similar to the (inaudible), or a little better?
Dr. Howard Berger
You’re specifically referring to our EBCD
product?
Jack Slevin
Yes, that’s right.
Dr. Howard Berger
Okay, got it. I’m sorry. You may have said
it, but I’m not certain I heard it. In any event, we’re very enthusiastic about it. We currently, on the East Coast, where
we began implementation of this earlier this year, I believe around the April timeframe, are now getting an enrolment from our patients
in the range of about 35% of the screening mammography which are eligible for the Early Breast Cancer Detection program. The significance
of that is that it is self-pay at this point, so our patients and physicians, both primary care and breast surgeons, realize that the
benefit of early detection, perhaps one to two years earlier than could previously been seen, is an important edge to breast cancer detection.
In fact, as I mentioned in my prepared remarks, to date, we have identified 500 cancers that would have taken another one to two years
before they became clinically evident. So, we’re extremely pleased with that.
I have to admit that the rollout of this program
is perhaps more difficult than we anticipated, given the uncertainty that people have, in general, about artificial intelligence, and
the need to provide appropriate collateral material and information at the time of service, that has altered our approach, which is helping
us gain traction on this. We also began the rollout here in September on the West Coast, which our early results are at least as good
as they are on the East Coast, and has benefited from the experience of the past six or seven months, to provide the collateral material
and instructional information for patients. So, we expect to have that fully rolled out by the end of the first quarter of 2024.
Once fully adopted, and even at the rate that
we’re currently experiencing, which we expect to increase, we probably will be doing at least 500,000 to 600,000 of our screening
mammograms in the EBCD program. I think that gives some magnitude of the potential that we’re expecting, even if the current rate
does not increase, but I believe that is very conservative at this point in time.
Another element of this which we are continuing
to gain information on, and may, in and of itself, prove important, is a decrease in the recall rate of certain breast mammograms where
the suspicion of cancer previously required further diagnostic evaluation, and which, along with the help of our artificial intelligence
and a third-party consultation from our senior mammographer radiologist, has reduced the recall rate, and given both a lower cost for
these services, as well as greater comfort surrounding the potential diagnosis.
So, the increased cancer detection rate and decreased
recall rate data, we are collecting and plan to meet with various payors in order to have them see the importance of this and begin consideration
of reimbursement for all women that would go through their insurance.
Jack Slevin
Got it, really helpful, and then one more for
me. I appreciate some of the commentary around staffing shortages and labor challenges going forward. Can you just give a little bit more
detail on sort of how you think about that labor impact progressing throughout 2024, and any possible mitigation efforts you might have
underway?
Dr. Howard Berger
Good question, thank you. We are actively recruiting.
Part of the challenges that we’re facing, which are unprecedented in our business, like most of them, are the result of, I believe,
the COVID aftereffect, if you will, as well as just an extraordinary demand for our services and fewer people coming into the healthcare
system to be trained for this. In that regard, we believe our salaries, which are going to be reflected in our 2024 budget, increases
will help us, and are helping us, attract more candidates, and that we’re actively pursuing educational programs, which, while they
probably will take some time for us to implement, will allow us to increase the staffing levels that we need in order to expand the hours
of operation and demand that we have.
Along with this, and it shouldn’t go unnoticed,
is our investment in technologies, which, almost on every type of procedure we’re doing, will reduce the scan times and improve
the throughput and workflow, not only for the patients, but our technologists and our radiologists, to make the whole patient journey
that much more effective.
So, a combination of investment, adjustments in
salary raises, and active recruiting and educational programs, we believe will have a material effect on our ability to capture the additional
volumes and demand which we have virtually in every market that we serve.
Jack Slevin
Got it, appreciate, and congrats again on the
quarter.
Dr. Howard Berger
Thank you very much. Give our regards to Brian.
Operator
Our next question comes from Nathan Malewicki
with Raymond James. Please go ahead.
Nathan Malewicki
Hey, good morning, and thanks for the question.
This is Nat Malewicki stepping in for John Ransom. On the back of the announced JVs and new centers, is there anymore color you can provide
us on kind of new center economics and how quick these de novos are to ramp? I know there’s been some color provided on revenue
contribution at maturity, but anything else you can give us?
Dr. Howard Berger
I’m not sure exactly of your question. You
want to know the ramp-up of the de novo centers or …
Nathan Malewicki
Yes, just what …
Mark Stolper
Yes, I think, Nat, you’re asking about what
a typical de novo center might contribute and whether there’s a ramp-up to that contribution once mature, or the maturity process.
Nathan Malewicki
Yes.
Mark Stolper
I think the way you can look at it is—you
know, we’ve said that we have about a dozen de novo centers that should open throughout 2024, and if you think of them as being
similar in size and scope and breadth of capabilities to the existing RadNet centers, you can think about the average center doing about
$3 million to $5 million of revenue, with a contribution pre-corporate of about 20% EBITDA margins and after-corporate kind of in the
mid-teens EBITDA contribution after corporate overhead.
Typically, if we’ve done our job correctly
and been effective in assessing the demand in a particular market, or if we’re at capacity at a particular center that’s in
that market already, or have significant backlog, the ramp-up period of these de novos are pretty short, and we think after a couple of
quarters, we should be at full maturity of these centers.
Like our investors who are listening to this call,
we have a portfolio of these types of opportunities and some will outperform our projections and our initial ramp-up, some will lag behind,
we’re not perfect every time, but we are, as Dr. Berger mentioned, experiencing heavy volumes at virtually all of our local markets
and we’re struggling not with getting patient demand, but actually getting them in the door and servicing them. So, that bodes well
for a faster-then-typical ramp-up for a lot of these de novo facilities.
Nathan Malewicki
Helpful, thank you, and then just a follow-up
on de novos and JVs. I’m just wondering if you could provide some color on kind of the makeup of the remaining pipeline, or those
12 de novos to open next year, are those folks in California or the Mid-Atlantic, and then any color you can provide past 2024 on the
strategy would be helpful?
Dr. Howard Berger
Yes, I think for the sake of this conversation,
about half of the de novos for next year are on the East Coast and the other half on the West Coast. Some of them are in joint ventures,
particularly on the East Coast, where we’re expanding our relationship with RWJBarnabas in our New Jersey Imaging Network Division,
as well as the University of Maryland Medical System, that could lead to state-wide opportunities that we would pursue with the University
of Maryland Medical System. On the West Coast, most of the joint ventures are in areas that are also with some of our joint venture partners,
like in Orange County, with the Memorial health system, and some in more of the rural areas, where the demand continues to grow and where
RadNet currently, and the entire market that we’re looking at, is underserved from the standpoint of imaging services.
I think de novos really should be taken into consideration
for RadNet not as just a greenfield or a startup, where it may take two to three years to develop kind of significant contribution from
that effort, but, as Mark mentioned here, we expect within two to three quarters, at the most, to ramp up the performance of these centers,
which means that most of the centers that we’re talking about, the dozen centers that we’re talking about, will provide some
EBITDA and significant revenue impact in 2024.
Nathan Malewicki
Awesome. Thanks, guys.
Operator
The next question comes from Larry Solow with
CJS Securities. Please go ahead.
Larry Solow
Great, thanks, guys. Just to follow up on the—it
sounds like—Howard, you mentioned you actually had—your average revenue went up sequentially quarter-over-quarter, and that
kind bucks the normal seasonality, which I think, from most discussions I’ve had with the healthcare companies, I think seasonality
kind of did come back this year. Maybe we didn’t have it for a couple of years with COVID, but pretty impressive to go right through
that. My question is—it sounds like you’re operating more at a supply constraint at some of your centers just because of just
not enough scheduling time in the day. It may be not labor issue, but more just an absolute capacity and just filling in some of these
areas with some of these de novos will alleviate that. Is that kind of fair to say, and that’s really—it sounds like the strategy
on the de novo said.
Dr. Howard Berger
Yes, I think that’s primarily correct, but
I will tell you that the staffing shortage is still substantial enough, where, if we can be more successful in our recruiting efforts,
there is a lot of additional volume that we can push through our imaging centers. We currently don’t operate many of our centers,
particularly for those procedures that are in highest demand. I’m talking about MRI, particularly, and mammography. We can’t
operate those with the current centers, given the fact that we just don’t have enough staffing. We’ve made significant improvement
and progress in that, and I think that is, in large part, due to the success in the third quarter, and which we’re seeing accelerate
even into the fourth quarter. I’d like to be more optimistic here, but it’s a slow process, because not do we have to only
find the staffing, we then have to integrate them into the RadNet system, which can take two, three months sometimes of training on our
equipment and our procedures. So, this is going to be an ongoing process, I think, really, for the long term here, both because there’s
a shortage and, given the shortage, there’s a lot of demand not just by us, but by other providers in our markets. But, I think
our particular business model, and I think with the addition of all of the AI and generative AI tools that we will be implementing, also,
next year, it’ll make the RadNet system an even more attractive place for us to recruit employees both at the professional and the
non-professional level.
Larry Solow
Great, I appreciate all that color, and just in
terms of the expanded partnership or JV with Cedars-Sinai, it looks like—and maybe Mark, you can answer it—it looks like there
was no cash in the deal, it looks like it’s just structured as an asset swap. Can you maybe just give us a little more—or
an asset contribution, you’re both contributing the same amount of assets. Can you maybe just give us a little—walk us through
that (inaudible)?
Mark Stolper
Yes, sure. I think that’s an accurate statement
or premise in your question. We structured it with—when you contribute assets, whether it’s Cedars-Sinai contributing assets
into the joint venture or RadNet contributing assets, we have an outside third-party valuation done to fair market value the assets being
contributed. What we did with Cedars, because we had two different joint ventures, one being expanded and one being created, we were able
to equalize the equity—the resulting equity stakes of each of the partners in terms of their membership interest in these, in order
to, essentially, not have a lot of cash changing hands. In one situation, Cedars was buying up. In the other situation, we were—RadNet
was buying up in another joint venture in such a way where less than $1 million of debt cash actually changed hands between the two parties.
Dr. Howard Berger
Yes, I’d like to amplify on this, because
in the joint ventures, particularly the one with Cedars, which we’re particularly proud of, it’s not just really about how
the joint venture comes together. It’s really about the partnership and the commitment that the health system—in this case
Cedars—is making to RadNet. Cedars has really looked to RadNet as their outpatient partner throughout Southern California, and with
that will come a lot of volume that they’ve currently been doing in the hospital and will be shifted over to the joint venture,
so that they can accommodate more acute care medicine in the hospital and where the outpatient imaging is really done in a much more convenient
and comfortable atmosphere for their patients. While we initially put the partnership together, or expanded it in this case, based on
current activities, it’s really the prospects of moving the outpatient imaging for all of Cedars into the RadNet system, even in
centers where they may not be part of the joint venture, as Cedars looks to cast its shadow way beyond the physical confines of their
hospitals and become a major player in delivery of healthcare throughout Southern California. So, for us, this is a lot more of a strategic
relationship than it was just looking at the current financial relationship.
As I said, we’re extremely proud of this,
given that Cedars was in U.S. news, in World Report, I think it was, this year, anointed as the number two health system in the country,
only behind the Mayo Clinic, and they’re looking to us to develop their outpatient strategy and adoption of artificial intelligence
to be implemented for the screening tools that we have throughout their system and in Southern California. So, I think we have to look
beyond just what the immediate assets that were contributed and look at the fact that the contribution from Cedars will be far beyond
what we are currently doing today.
Larry Solow
Got you, and I appreciate all that color. If I
can slip one more in, just on pricing. It sounds like, commercially, you guys maybe got a little momentum on your side. I know it’s
not like flipping a switch, you got, I guess, go to each payor and negotiate pricing and new contracts, but it sounds like that’s
building, I guess that’s Part A; and then Part B, does the physician fees, the schedule, and their rotation or rebalancing towards
primary care, I think 2025, that’s supposed to be kind of done. Is there any kind of—I know it’s the government, you
never know what’s going to happen there, but is that kind of—may we have one more after ’24, one more year of cuts?
Thanks.
Dr. Howard Berger
When you say “the government,” we
don’t exactly know what the government’s going to do. Are you talking just about healthcare or in general, because I think
…
Larry Solow
Yes, no, well, that’s a whole different
discussion, but I mean just CMS.
Dr. Howard Berger
I was being a little facetious, I apologize.
Larry Solow
Of course. No, no, I get it.
Dr. Howard Berger
Yes. I think—Mark, you can embellish on
this, but I think if they’re true to their word, 2024 may be the last year. However, if they do some mitigation …
Mark Stolper
Correct, it might go into ’25.
Dr. Howard Berger
… go into ’25. This is a question
of, you know, do you want to take the medicine all in one gulp or divide it up into two spoonfuls, but either way, we’re going to
get hit with it. Yes, we’d like to see it pushed down the road, which the government is famous for, but I’m not certain that
that’s going be the case this year given all the other issues and dysfunctionality that currently exists in Washington.
As far as the other part, I think what’s
important to emphasize here is the consolidation that we have assiduously followed here over, really, decades now finally has allowed
us to have a seat at the table in terms of negotiating pricing with our payors, and for years, we have essentially been—like almost
every other physician provider, we have been a price taker, not a price maker. It’s easy for a lot of these payors just to say,
“This is what we’re going to pay, take it or leave it,” and I think we have evolved in every one of our markets where
we’re willing to say, “Leave it, if you don’t recognize and reimburse us at sustainable rates that allow us to continue,
not to make profitability, but to provide the level and quality of service which we have become known for throughout the industry,”
and which ultimately benefits them and, to the extent that they care, their members. So, I believe the discussions that we’re having
is one that we’ve been doing through the years, but the tenor is different today given that the demand is so substantial that the
“leave it” scenario is one that we’re willing to adopt. I don’t want to call it the “nuclear option,”
but there needs to be more of a conversation and not this take-it-or-leave-it attitude, and hopefully RadNet will be able to demonstrate
to the radiology community, and for that matter to the healthcare community, the importance of fair and reasonable reimbursement rates.
Larry Solow
Great, thanks Howard, I appreciate all that color.
Dr. Howard Berger
Thank you, Larry.
Operator
Our next question comes from Jim Sidoti with Sidoti
& Company. Please go ahead.
Jim Sidoti
Hi, good morning, and thanks for taking the call.
A couple quick ones. It sounds like you added a handful of centers in the quarter with this new joint venture, or expanded joint venture.
How many total centers do you have right now?
Mark Stolper
Three hundred and sixty-six.
Jim Sidoti
Okay, and then, Howard, I think you made some
comments about a little debt paydown in the quarter, but you did raise $250 million or so in cash and it doesn’t seem like you’ve
made any big payments to date. Is there more debt paydown coming in the fourth quarter, or are you saving that for acquisitions?
Dr. Howard Berger
Well, we made a $30 million payment, as I mentioned,
at the end of October. We could make more, but I think, based on some of the opportunities that we see facing—not facing us, but
opportunities that we have, that we’re pursuing in 2024, we’ve decided to keep some of our cash on the balance sheet and determine
perhaps later in the fourth quarter, or perhaps even by the end of this year, whether or not we would want to paydown more of that debt.
I think we’re just being, like we have been, prudent in our use of cash here. I wouldn’t rule out paying down more of that
debt. I also wouldn’t rule out the use of it to expand the Company’s footprint not only in our existing markets, but perhaps
in other markets. I’m sure if we elect to paydown more that our lenders would be more than happy to receive the money, so I don’t
think we’ll get any resistance if we choose to do more later. I think, also, our lenders, as well as our shareholders, want us to
put the capital to work if it can be more helpful in growing the Company and improving our overall performance.
Jim Sidoti
All right, thank you.
Dr. Howard Berger
Thank you, Jim.
Operator
Our next question comes from Yuan Zhi with B.
Riley. Please go ahead.
Yuan Zhi
Hi, this is Brandon Carney on for Yuan. Congratulations
on the progress in the quarter, and thanks for hosting us at your flagship New York Imaging Center. Returning to the CMS question, I was
just wondering if you could talk a little bit about that from the patient access point of view, and what kind of arguments, like, patient
and physician advocacy groups will have going into Congress? I think that you already touched a little bit on your thoughts on their chances
for success there, but maybe you can just reiterate that.
Dr. Howard Berger
Well, I liken the advocacy program to the old
parable, if a tree falls in the woods, would anybody hear it. We’ve been to Washington and met with numerous, both House and Senate,
representatives, or their aides, and while we go through the process, I'm not sure, ultimately, if it has any impact. I think what CMS
needs to do is really sit down and revalue primarily the technical component of what we deliver and take into consideration impacts, like
inflation, like salary increases, increasing cost of equipment, and other things that they have not revalued, probably, for close to two
decades. I think that the sustainability of what Medicare and CMS are doing is ultimately going to hurt the healthcare delivery system
and put the Medicare population in jeopardy of not having the access that they need.
As you’ve probably seen, and we see it in
our markets here, that the whole development of a concierge-type of practice, where Medicare, and maybe even other insurance payors, are
not being taken and it all goes to self-pay, is a trend that I think will continue as long as the system does not recognize the need to
make the kind of investments and create a reimbursement atmosphere that will attract the talent and allow for the investment that we,
in the U.S., are so capable of doing, and bending the cost curve for the delivery for healthcare. That disconnect just has to change.
We saw it change dramatically during COVID, so that we know when the pressure is on to deliver better healthcare, that the government
can respond to that, and I think we are in a similar, although less noticeable, crisis right now. Whether we’re that agent of change,
or others are agents of change, that change is coming. It’s got to come with other changes in healthcare, where we move to perhaps
more value-based medicine for reimbursement, population health, and other things, that will require short-term investments, but we’ll
have long-term gains. I think that we’ll always, as a country, suffer through this until the conversation, much as I talked about,
becomes a dialog and not just a monolog based on the government’s desire to try to just rearrange the chairs on the deck of the
Titanic.
Brandon Carney
Great, thanks for that. It sounds like a longer
term view of things. In the near term, do you think the best-case scenario for this year would be that they kick the can down the road
to next year, and just in the near term, do you think that year-after-year kicking the can down the road is likely to continue?
Dr. Howard Berger
I guess the best thing to do is kick the can down
the road, that’s what the government is famous for, but I think even if you kick that can down the road, it’s a recognition
of the fact that, in many aspects, our healthcare system is broke and the sooner we have more of a conversation which truly looks at the
root causes and not just tries to, you know, lower access—I’ll give you, perhaps, the best example of this that we have.
Right now, there is a clear benefit to screening
for lung cancer, predominantly, obviously, from smokers. Risk assessment tools have demonstrated that, perhaps, in excess of 15 million
Americans are at risk for lung cancer and that there is reimbursement for that, but right now only 6% of the people who are risk-assessed,
or even less, are getting the that, and in the VA system, which is effectively a single-payor system, that number is even less than 6%.
I think it’s appalling that the opportunity to really change the dynamics and impact of lung cancer, which is the greatest—has
the highest mortality rate amongst all cancers, is not something that is aggressively being pursued, and, instead, hurdles are placed
for patients who are risk-assed to be able to easily get a lung scan, just as a woman is capable of getting a mammogram by self-referral.
I know I’m kind of stepping on a little
bit of thin ice here, because there is controversy about this, but the one place there isn’t controversy is earlier diagnosis leads
to better outcomes, and the more that we delay taking the aggressive actions necessary to do earlier diagnosis—and I’m not
just talking about lung cancer, I’m talking about all types of long-term, chronic diseases, cardiac diseases, diabetes, etc., which
imaging has unique opportunities to be the tool—the agent and the tool of change, need to be adopted in a more urgent and aggressive
manner than what any of the payors or the government is currently doing.
Everything is kicking the can down the road, but
at some point this will only cause further stress on the system and it’s time just to have all of us put our big boy pants and tackle
these issues, because we have the technology to do it, and the fact that we don’t is really reprehensible for all of our healthcare
leaders to not take more aggressive action on this.
Brandon Carney
Great, thanks for that. Maybe I can squeeze one
more in on Alzheimer’s. Can you give us any updates on preparations going into providing medical imaging needs for those patients
as more treatment options come online?
Dr. Howard Berger
Yes, that’s a great question. We expect
that there will be a significant increase in imaging as some of the new Alzheimer’s drugs get further adopted. All of us should
be aware, just like everything else in healthcare, it's a slow process, but much like the experience that we've had with prostate cancer
and the adoption of PET CT scanning, which has fundamentally changed the whole diagnostic and therapeutic approach to prostate, is possible
in Alzheimer’s disease. We now have tools to detect it earlier and quantify the benefit of these new drugs, but they come with potential
side effects, which imaging can also help identify earlier and more accurately. I expect that over the next couple of years all of the
forces inside healthcare will start taking advantage of these new drugs, and imaging will be at the forefront to help make this a more
effective tool in diagnosing Alzheimer’s.
Alzheimer’s is probably another underdiagnosed
disease, and while the number I hear of 5 million people that have been diagnosed with Alzheimer’s, I think you could probably double
that number in people that could be diagnosed earlier before the more severe symptomatology makes the diagnosis more accurate, if you
will. While we’re not certain how to build the revenue opportunity into our models at this point in time, I’m confident that
sometime in ’24, and probably more in 2025, it’ll have a substantial impact for our imaging network, which, again, is built
in the most densely populated areas, where the majority of the Alzheimer’s patients reside, so we expect to see substantial benefits
from that, and probably that we can be part of bending that curve in the diagnosis, in the earlier diagnosis and, ultimately, treatment
of Alzheimer’s.
Brandon Carney
Great, thanks for that color, and thanks for taking
our questions.
Dr. Howard Berger
Thank you.
Operator
Our next question comes from Rishi Parekh with
JPMorgan. Please go ahead.
Rishi Parekh
Hey, thanks for taking my questions. I guess I
just have one around your comments that you’re actively looking at acquisitions. There are numerous opportunities, and some of them
include failed ventures or failing ventures. Can you just walk us through the characteristics of the acquisitions that you’re pursuing,
and if you’re looking at more of the challenged assets, what are you seeing in terms of multiples, given their leverage profiles
and given some of the possibility that they’ve either underinvested in their assets or alienated or impaired relationships? Thank
you.
Dr. Howard Berger
Big question. Well, first of all, I think, in
general, and not just in healthcare, but multiples certainly have come down. I think the days of basically almost zero interest rates
created a feeding frenzy, if you will, that allowed certain groups to go out there and be less concerned about how much they were paying
for these assets, given that money was almost free. I think the benefit, if you will, of rising interest rates is bringing a little bit
more of a commonsense approach to this. Because, healthcare, unlike a lot of other industries, is really unpredictable. Things that we’re
looking at today, for example, like labor shortages, continuing deterioration or lowering of reimbursement, are things that we may not
have thought about three years ago. So, I think that the multiples are coming down.
We’ve been disciplined and never really
got into that kind of an arms race, if you will, and so that’s why I think we’re in a very good position with our leverage
really only being about 2 times of our debt, and I think more commonsense, not just from distressed, but all of the assets inside of healthcare,
and particularly imaging, will now be a little bit more rational.
For us, the decision-making is really two parts.
Number one, in markets that we’re currently
in, can acquisitions add to our network access, which allows us operational and conversational improvement for our reimbursements, and
that’s always our first priority. Much like we did last year—yes, it was last year—with Montclair Radiology, which was
a big provider in New Jersey, we stretched and made what I think was a very good acquisition for us long term, in terms of our network
access and delivery, and buying a very high-quality radiology group.
As opposed to new markets, we are looking at new
markets, but there has to be the right dynamic. We’re not interested in going into a market where we buy a single center or two,
even if the pricing looks good. We have to have a good platform acquisition to enter a new market and one where there are growth opportunities
to add to that, that gives us a very substantial presence in that market, for the same reasons that we’ve developed that in all
the other seven markets that we’re in—or seven states, I should say, that we’re in. We’re in multiple markets
beyond just the seven states, but I believe those opportunities will now be more likely because of assets that may be distressed either
because people tried their own consolidation and paid more for those assets than they’re worth or they just couldn’t create
the kind of consolidation synergies that they thought were there, which we’re far more equipped to deal with.
As we mentioned in our remarks, I think our liquidity
position and leverage allows us to look at opportunities to go into other markets or to potentially take on acquisitions that might significantly
bend the curve in terms of RadNet’s presence inside the radiology community.
Operator
Are you done with your questions, Rishi?
Rishi Parekh
Yes, sorry. Thank you.
Operator
You’re welcome. All right, we will move
on to our next question, which is from Ed Kressler with TPG Angelo Gordon. Please go ahead.
Ed Kressler
Good morning, and thank you very much for taking
the questions, and Rishi partially covered this, but just in terms of the recent equity raise and subsequent deleveraging, at least on
a net debt basis, just a little more color on the thought process behind that, please, if you would. Is it related to the de novo opportunity
and kind of associated CapEx that’s required there, or is it more of this M&A-driven opportunity that you just spoke to, and
the opportunity for even a transformational deal? Then, related to the possibility of a transformational deal, do you have a leverage
target that you feel comfortable going to for the right deal? Obviously, we’ve gone through COVID and had some disruption, but kind
of pre-COVID, you were kind of 4 times levered versus kind of the 2 times levered you are now. How do you think about leverage in the
context of a deal like that? Thank you.
Mark Stolper
Sure. Hi, Ed. I think I’ll take this question.
I think, to your question about how we’re looking at our capital structure and deleveraging and how that could potentially change
with acquisitions, we’ve been prudent and disciplined, and it’s not been lost on us that interest rates have gone up about
500 basis points in the last 12 to 18 months, and so, as we’ve seen rates go up, we’ve been more and more—we’ve
had more and more conviction to try to deleverage the balance sheet. We were very fortunate that we entered into interest rate swaps in
2019, that have shielded us from some of the pain that others are feeling as the base rates have increased so rapidly over the last 18
months.
We did do the equity raise, in part, to deleverage
the business and de-risk the capital structure, but we also did that to accelerate growth. As we’ve talked about a lot in our prepared
remarks today and in past calls, we’ve got more than a dozen de novo centers in various stages of development, we’re executing
on hospital joint ventures, we continue to do the smaller tuck-in M&A transactions in our markets, we’re spending aggressively
to increase capacity and improve our technology and our throughput at our centers to meet heavy demand, and we see this as an opportunity
to set ourselves apart from other operators in our industry and competitors that we have in our market, where we can advantage ourselves
by having the capital and having the liquidity to execute on these types of opportunities when others cannot.
Now, in terms of the other part of your question
about our thoughts of levering up again for a substantial acquisition, I guess our answer is it all depends upon what the acquisition
is and what the opportunity is to drive value for our shareholders and for our—all our stakeholders, including our lenders. I think
there would be an opportunity to do something on a larger scale for the right deal. I think our Management Team and the level of infrastructure
that we have can support a much larger platform, and we can grow this business substantially in the future without essentially building
up our corporate infrastructure much larger than it is today. I think we’ve also, over several decades of operating this business,
have come to a model that we think is the model that works and can scale in this industry effectively, so we would be interested in growing
this business, and that capital that we raised in June of this year, I think positions ourselves to do something on a larger scale.
Would we take on a little bit more leverage and
a little bit more capital structure risk to do something like that? I think the answer is, yes, we’re willing to do it, to a point.
I think the days of being 5, 6 times levered, particularly in a capital-intensive business, like the one we’re in, are behind us,
because interest rates today don’t lend themselves to having that type of leverage, but we would potentially take on additional
leverage if we could convince ourselves that in a reasonable time period, meaning 12 to 24 months, we could deleverage the capital structure
through synergies and efficiencies with whatever transaction we were contemplating.
Dr. Howard Berger
(Inaudible)
Ed Kressler
Great, thanks so much for that color. Oh, I’m
sorry, Dr. Berger.
Dr. Howard Berger
Yes, that’s okay. I just want to add a comment.
I think Mark was spot on here. There’s three things that really allow us to potentially look at something transformational.
One is where the synergies coming from. If we
can’t find synergies, then I don’t believe it’s possible to think of a large transformational acquisition, because the
need to leverage down is critical to RadNet’s philosophy. So, synergies become probably the single most important driver. As opposed
to what I’ve seen other people do, when we do due diligence and find synergies, we’re going to have to have an extraordinary
degree of confidence that those can be achieved. That’s number one.
Number two, we have tender now, which we didn’t
have before, in the value of our stock. That would have to be a component of any transaction to avoid leveraging up the Company beyond
levels that we’re comfortable with.
But, the third one that I want to mention is the
fact that we have committed to a substantial investment and transition inside RadNet to artificial intelligence, both on the clinical
and operational side, will allow us, as RadNet performs today and into the future, as well as taking on other expanded relationships,
whether they’re with our joint venture partners, new acquisitions or something transformational, that will allow us to run the Company
in a way that doesn’t burn us, like it does today, with the need for more and more human capital. So, our AI capital becomes really
the driver in our ability to take the almost 400 centers that we’ll have by early next year and create a sizeable business beyond
that.
I want to leave everybody with that commitment
on the part of RadNet to make the investments that will not only make RadNet a bigger and better company, but which will have ultimately
enormous benefit to the most important asset we have, and that’s our customer base, our patients. I think we’re in a much
different place today than we were even a year ago, and I think that the future for RadNet and all of it’s employees and shareholders
is very rosy.
Ed Kressler
Thank you so much for all the color.
Operator
This concludes the question-and-answer session.
I would like to turn the conference back over to Dr. Berger for any closing remarks.
Dr. Howard Berger
Thank you again, and I would like to take the
opportunity to thank all of our shareholders for their continued support, and particularly the employees of RadNet for their dedication
and hard work. Management will continue its endeavor to be a market leader that provides great services with an appropriate return on
investment for all of our stakeholders. Thank you for your time today, and I look forward to our next call. Good day.
Operator
The conference has now concluded. Thank you for
attending today’s presentation. You may now all disconnect.
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