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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 12 Months Ended
Dec. 31, 2013
Accounting Policies [Abstract]  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION - The operating activities of subsidiaries are included in the accompanying consolidated financial statements from the date of acquisition. Investments in companies in which the Company has the ability to exercise significant influence, but not control, are accounted for by the equity method. All intercompany transactions and balances, including the unsettled amount of intercompany transactions with our equity method investees, have been eliminated in consolidation.

 

USE OF ESTIMATES - The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and assumptions affect various matters, including our reported amounts of assets and liabilities in our consolidated balance sheets at the dates of the financial statements; our disclosure of contingent assets and liabilities at the dates of the financial statements; and our reported amounts of revenues and expenses in our consolidated statements of operations during the reporting periods. These estimates involve judgments with respect to numerous factors that are difficult to predict and are beyond management’s control. As a result, actual amounts could materially differ from these estimates.

 

REVENUES - Service fee revenue, net of contractual allowances and discounts, consists of net patient fees received from various payors and patients themselves based mainly upon established contractual billing rates, less allowances for contractual adjustments and discounts. As it relates to BRMG and the Crues Entity centers, this service fee revenue includes payments for both the professional medical interpretation revenue recognized by BRMG and the Crues Entities as well as the payment for all other aspects related to our providing the imaging services, for which we earn management fees from BRMG and the Crues Entities. As it relates to non-BRMG and Crues Entity centers, this service fee revenue is earned through providing the use of our diagnostic imaging equipment and the provision of technical services as well as providing administration services such as clerical and administrative personnel, bookkeeping and accounting services, billing and collection, provision of medical and office supplies, secretarial, reception and transcription services, maintenance of medical records, and advertising, marketing and promotional activities.

 

Service fee revenues are recorded during the period the services are provided based upon the estimated amounts due from the patients and third-party payers. Third-party payers include federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies and employers. Estimates of contractual allowances under managed care health plans are based upon the payment terms specified in the related contractual agreements. Contractual payment terms in managed care agreements are generally based upon predetermined rates per discounted fee-for-service rates. We also record a provision for doubtful accounts (based primarily on historical collection experience) related to patients and copayment and deductible amounts for patients who have health care coverage under one of our third-party payers.

 

Under capitation arrangements with various health plans, we earn a per-enrollee amount each month for making available diagnostic imaging services to all plan enrollees under the capitation arrangement. Revenue under capitation arrangements is recognized in the period which we are obligated to provide services to plan enrollees under contracts with various health plans.

 

 

Our service fee revenue, net of contractual allowances and discounts, the provision for bad debts, and revenue under capitation arrangements for the years ended December 31, are summarized in the following table (in thousands):

 

   Years Ended December 31, 
   2013   2012   2011 
             
Commercial insurance  $432,608   $409,114   $376,107 
Medicare   139,220    122,971    107,613 
Medicaid   21,351    20,101    17,756 
Workers' compensation/personal injury   30,819    26,604    23,137 
Other   41,309    39,192    30,367 
Service fee revenue, net of contractual allowances and discounts   665,307    617,982    554,979 
Provision for bad debts   (27,911)   (25,904)   (22,339)
Net service fee revenue   637,396    592,078    532,640 
Revenue under capitation arrangements   65,590    55,075    52,481 
Total net revenue  $702,986   $647,153   $585,121 

 

PROVISION FOR BAD DEBTS - We provide for an allowance against accounts receivable that could become uncollectible to reduce the carrying value of such receivables to their estimated net realizable value. We estimate this allowance based on the aging of our accounts receivable by each type of payer over an 18-month look-back period and other relevant factors. A significant portion of our provision for bad debt relates to co-payments and deductibles owed to us from patients with insurance. Although we attempt to collect deductibles and co-payments due from patients with insurance at the time of service, this attempt to collect at the time of service is not an assessment of the patient’s ability to pay nor are revenues recognized based on an assessment of the patient’s ability to pay. There are various factors that can impact collection trends, such as changes in the economy, which in turn have an impact on the increased burden of co-payments and deductibles to be made by patients with insurance. These factors continuously change and can have an impact on collection trends and our estimation process. Our allowance for bad debts at December 31, 2013 and 2012 were $12.7 million and $16.7 million, respectively.

 

ACCOUNTS RECEIVABLE - Substantially all of our accounts receivable are due under fee-for-service contracts from third party payors, such as insurance companies and government-sponsored healthcare programs, or directly from patients.  Services are generally provided pursuant to one-year contracts with healthcare providers.  Receivables generally are collected within industry norms for third-party payors.  We continuously monitor collections from our payors and maintain an allowance for bad debts based upon specific payor collection issues that we have identified and our historical experience.

 

SOFTWARE REVENUE RECOGNITION - On October 1, 2010, we completed our acquisition of Image Medical Corporation, the parent of eRAD, Inc. eRAD sells Picture Archiving Communications Systems (“PACS”) and related services, primarily in the United States.  The PACS systems sold by eRAD are primarily composed of certain elements: hardware, software, installation and training, and support.  Sales are made primarily through eRAD’s sales force. These sales are multiple-element arrangements that generally include hardware, software, software installation, configuration, system installation, training and first-year warranty support.  Hardware, which is not unique or special purpose, is purchased from a third-party and resold to eRAD’s customers with a small mark-up.

  

We have determined that our core software products, such as PACS, are essential to most of our arrangements as hardware, software and related services are sold as an integrated package.  Therefore, these transactions are accounted for under ASC 605-25, Multiple-Element Arrangements (as modified by ASU 2009-13).  Non-essential software and related services, and essential software sold on a stand-alone basis without hardware, would continue to be accounted for under ASC 985-605, Software.

 

We recognize revenue for four units of accounting, hardware, software, installation (including manufacturing and configuration, training, implementation and project management) and post-contract support (“PCS”), as follows:

 

• Hardware – Revenue is recognized when the hardware is shipped.  The hardware qualifies as a separate unit of accounting under ASC 605-25-25-5, as it meets the following criteria:

 

  o The hardware has standalone value as it is sold separately by other vendors and the customer could resell the hardware on a standalone basis; and
  o Delivery or performance of the undelivered items is probable and substantially within our control.

 

• Software– We sell essential software. This software revenue is recognized along with the related hardware revenue.  
   
• Installation – Installation revenue related to essential software that is sold with hardware, is recognized when the installation is completed, as it qualifies as a separate unit of accounting once delivered as it can be provided by a third party.  
   
• Post-Contract Support – Revenue is recognized over the term of the agreement, usually one year.

 

Our transactions do not generally contain refund provisions.   We allocate the transaction price to each unit of accounting using relative selling price.  We consider historical pricing, list price and market considerations in determining estimated selling price in the allocation.

 

For the years ended December 31, 2013, 2012 and 2011, we recorded approximately $4.9 million, $4.9 million and $4.8 million, respectively, in revenue related to our eRAD business which is included in net service fee revenue in our consolidated statement of operations. At December 31, 2013 we had a deferred revenue liability of approximately $1.3 million associated with eRAD sales which we expect to recognize into revenue over the next 12 months.

 

SOFTWARE DEVELOPMENT COSTS - Costs related to the research and development of new software products and enhancements to existing software products all for resale to our customers are expensed as incurred.

 

We utilize a variety of computerized information systems in the day to day operation of our 250 diagnostic imaging facilities. One such system is our front desk patient tracking system or Radiology Information System (“RIS”). We currently utilize third party RIS software solutions and pay monthly fees to outside third party software vendors for the use of this software. We are currently developing our own RIS solution from the ground up through our wholly owned subsidiary, Radnet Management Information Systems (“RMIS”). Aside from its efforts towards developing and enhancing software products for sale to outside customers, RMIS also directly employs a team of software development engineers currently devoted to developing a RIS system specifically tailored for RadNet, Inc.

 

By following the accounting guidance under ASC 350-40, Accounting for the Costs of Computer Software Developed for Internal Use, the costs incurred by RMIS toward the development of this RIS system, which began on August 1, 2010, will be capitalized and amortized over its useful life which we determined to be 5 years. The development stage will run for approximately 48 months ending on or around August 1, 2014. We have estimated total costs to be capitalized to construction in progress will be approximately $6.4 million and will start to be amortized in August of 2014 at approximately $107,000 per month.

 

As of December 31, 2013, we have capitalized approximately $5.1 million of software development costs.

 

CONCENTRATION OF CREDIT RISKS - Financial instruments that potentially subject us to credit risk are primarily cash equivalents and accounts receivable. We have placed our cash and cash equivalents with one major financial institution. At times, the cash in the financial institution is temporarily in excess of the amount insured by the Federal Deposit Insurance Corporation, or FDIC.  Substantially all of our accounts receivable are due under fee-for-service contracts from third party payors, such as insurance companies and government-sponsored healthcare programs, or directly from patients.  Services are generally provided pursuant to one-year contracts with healthcare providers.  Receivables generally are collected within industry norms for third-party payors.  We continuously monitor collections from our clients and maintain an allowance for bad debts based upon our historical collection experience.  

 

CASH AND CASH EQUIVALENTS - We consider all highly liquid investments that mature in three months or less when purchased to be cash equivalents. The carrying amount of cash and cash equivalents approximates their fair market value.

 

DEFERRED FINANCING COSTS - Costs of financing are deferred and amortized on a straight-line basis over the life of the associated loan, which approximates the effective interest rate method. Deferred financing costs, net of accumulated amortization, was $10.0 million and $12.0 million, for the years ended December 31, 2013 and 2012, respectively.

 

INVENTORIES - Inventories, consisting of mainly medical supplies, are stated at the lower of cost or market with cost determined by the first-in, first-out method. Reserves for slow-moving and obsolete inventories are provided based on historical experience and product demand. We evaluate the adequacy of these reserves periodically.

 

PROPERTY AND EQUIPMENT - Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization of property and equipment are provided using the straight-line method over the estimated useful lives, which range from 3 to 15 years. Leasehold improvements are amortized at the lesser of lease term or their estimated useful lives, whichever is lower, which range from 3 to 30 years. Only a few leasehold improvements are deemed to have a life greater than 15 to 20 years. Maintenance and repairs are charged to expense as incurred.

 

GOODWILL AND INDEFINITE LIVED INTANGIBLES - Goodwill at December 31, 2013 totaled $196.4 million. Indefinite Lived Intangible Assets at December 31, 2013 totaled $7.5 million and are associated with the value of certain trade name intangibles. Goodwill and trade name intangibles are recorded as a result of business combinations. Management evaluates goodwill trade name intangibles, at a minimum, on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable.  Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. The fair value of a reporting unit is estimated using a combination of the income or discounted cash flows approach and the market approach, which uses comparable market data. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any.  Impairment of trade name intangibles is tested at the subsidiary level by comparing the subsidiaries trade name carrying amount to its respective fair value. The fair value of each subsidiary’s trade name is estimated Using the Relief-from-Royalty-Method which estimates what a market participant would be willing to pay a royalty to a third party for the use of that asset. We tested both goodwill and trade name intangibles for impairment on October 1, 2013. Based on our test, we noted no impairment related to goodwill or trade name intangibles as of October 1, 2013 as the estimated fair value exceeded its carrying value.

 

LONG-LIVED ASSETS - We evaluate our long-lived assets (property and equipment) and intangibles, other than goodwill, for impairment whenever indicators of impairment exist. The accounting standards require that if the sum of the undiscounted expected future cash flows from a long-lived asset or definite-lived intangible is less than the carrying value of that asset, an asset impairment charge must be recognized. The amount of the impairment charge is calculated as the excess of the asset’s carrying value over its fair value, which generally represents the discounted future cash flows from that asset or in the case of assets we expect to sell, at fair value less costs to sell. No indicators of impairment were identified with respect to our long-lived assets as of December 31, 2013.

 

INCOME TAXES - Income tax expense is computed using an asset and liability method and using expected annual effective tax rates. Under this method, deferred income tax assets and liabilities result from temporary differences in the financial reporting bases and the income tax reporting bases of assets and liabilities. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefit that, based on available evidence, is not expected to be realized. When it appears more likely than not that deferred taxes will not be realized, a valuation allowance is recorded to reduce the deferred tax asset to its estimated realizable value. For net deferred tax assets we consider estimates of future taxable income, including tax planning strategies, in determining whether our net deferred tax assets are more likely than not to be realized. Income taxes are further explained in Note 11.

 

UNINSURED RISKS – Prior to November 1, 2006 we maintained a self-insured workers’ compensation insurance program for which our third party administrator over this program continues to make payments on behalf of the Company for claims incurred from November 1, 2004 through October 31, 2006.  We are required to maintain a cash collateral account with this administrator as guarantee of our submission of full reimbursement of claims paid on our behalf.  We record this collateral deposit as restricted cash and include it as other assets in our consolidated balance sheet which amounted to approximately $529,000 as of both December 31, 2013 and 2012.

 

With respect to the above-mentioned claims incurred from November 1, 2004 through October 31, 2006, the estimated future cash obligation associated with the unpaid portion of those claims that remain open but have not yet been resolved is recorded to accrued expenses in our consolidated balance sheet. This current liability is determined by the administrator’s estimate of loss development of open claims and was approximately $403,000 and $554,000 at December 31, 2013 and 2012, respectively.

 

On November 1, 2008 we obtained a fully funded and insured workers’ compensation policy, thereby eliminating any uninsured risks for employee injuries occurring on or after that date.

 

We and our affiliated physicians carry an annual medical malpractice insurance policy that protects us for claims that are filed during the policy year and that fall within policy limits.  The policy has a deductible for which we have recorded liabilities and included it in our consolidated balance sheets at December 31, 2013 and December 31, 2012 of approximately $479,000 and $457,000, respectively.

 

In December 2008, in order to eliminate the exposure for claims not reported during the regular malpractice policy period, we purchased a medical malpractice tail policy, which provides coverage for any claims reported in the event that our medical malpractice policy expires.  As of December 31, 2013, this policy remains in effect.

 

On January 1, 2008 we entered into an arrangement with Blue Shield to administer and process claims under a new self-insured plan that provides health insurance coverage for our employees and dependents. We have recorded liabilities as of December 31, 2013 and December 31, 2012 of $2.8 million for the estimated future cash obligations associated with the unpaid portion of the medical and dental claims incurred by our participants. Additionally, we entered into an agreement with Blue Shield for a stop loss policy that provides coverage for any claims that exceed $200,000 up to a maximum of $1.0 million in order for us to limit our exposure for unusual or catastrophic claims. 

 

LOSS CONTRACTS – We assess the profitability of our contracts to provide management services to our contracted physician groups and identify those contracts where current operating results or forecasts indicate probable future losses.  Anticipated future revenue is compared to anticipated costs.  If the anticipated future cost exceeds the revenue, a loss contract accrual is recorded.  In connection with the acquisition of Radiologix in November 2006, we acquired certain management service agreements for which forecasted costs exceeds forecasted revenue.  As such, an $8.9 million loss contract accrual was established in purchase accounting, and is included in other non-current liabilities. The recorded loss contract accrual is being accreted into operations over the remaining term of the acquired management service agreements.  As of December 31, 2013 and 2012, the remaining accrual balance is $6.4 million, and $6.8 million, respectively. In addition, we have certain operating lease commitments for facilities that are not in use. Accordingly, we have recorded a loss contract accrual related to the remaining payments under these lease commitments. As of December 31, 2013 and 2012, the remaining loss contract accrual for these leases is $2.4 million and $3.3 million, respectively.

 

EQUITY BASED COMPENSATION – We have two long-term incentive plans which we refer to as the 2000 Plan and the 2006 Plan. The 2000 Plan was terminated as to future grants when the 2006 Plan was approved by the stockholders in 2006. As of December 31, 2013, we have reserved for issuance under the 2006 Plan 11,000,000 shares of common stock. Certain options granted under the 2006 Plan to employees are intended to qualify as incentive stock options under existing tax regulations. In addition, we may issue non-qualified stock options and warrants under the 2006 Plan from time to time to non-employees, in connection with acquisitions and for other purposes and we may also issue restricted stock under the 2006 Plan. Stock options and warrants generally vest over two to five years and expire five to ten years from date of grant.

 

The compensation expense recognized for all equity-based awards is net of estimated forfeitures and is recognized over the awards’ service periods. Equity-based compensation is classified in operating expenses within the same line item as the majority of the cash compensation paid to employees.

 

FOREIGN CURRENCY TRANSLATION - The functional currency of our foreign subsidiaries is the local currency. In accordance with ASC 830, Foreign Currency Matters, assets and liabilities denominated in foreign currencies are translated using the exchange rate at the balance sheet dates. Revenues and expenses are translated using average exchange rates prevailing during the reporting period. Any translation adjustments resulting from this process are shown separately as a component of accumulated other comprehensive income (loss). Foreign currency transaction gains and losses are included in the determination of net income.

 

COMPREHENSIVE INCOME (LOSS) - ASC 220, Comprehensive Income, establishes rules for reporting and displaying comprehensive income and its components.  Unrealized gains or losses on the change in fair value of the Company’s cash flow hedging activities are included in comprehensive income (loss). Also included are foreign currency translation adjustments. The components of comprehensive income for the three years in the period ended December 31, 2013 are included in the consolidated statements of comprehensive income.

 

FAIR VALUE MEASUREMENTS – Assets and liabilities subject to fair value measurements are required to be disclosed within a fair value hierarchy. The fair value hierarchy ranks the quality and reliability of inputs used to determine fair value. Accordingly, assets and liabilities carried at, or permitted to be carried at, fair value are classified within the fair value hierarchy in one of the following categories based on the lowest level input that is significant to a fair value measurement:

 

Level 1—Fair value is determined by using unadjusted quoted prices that are available in active markets for identical assets and liabilities.

 

Level 2—Fair value is determined by using inputs other than Level 1 quoted prices that are directly or indirectly observable. Inputs can include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in inactive markets. Related inputs can also include those used in valuation or other pricing models such as interest rates and yield curves that can be corroborated by observable market data.

 

Level 3—Fair value is determined by using inputs that are unobservable and not corroborated by market data. Use of these inputs involves significant and subjective judgment.

 

The table below summarizes the estimated fair value and carrying amount of our long-term debt as follows (in thousands):

 

   As of December 31, 2013 
   Level 1   Level 2   Level 3  

Total Fair

Value

  

Total Carrying

Value

 
Senior Secured Term Loan  $–   $380,508   $–   $380,508   $385,325 
Senior Notes   –    199,000    –    199,000    200,000 

 

   As of December 31, 2012 
   Level 1   Level 2   Level 3   Total  

Total Carrying

Value

 
Senior Secured Term Loan  $–   $352,180   $–   $352,180   $349,125 
Senior Notes   –    204,500    –    204,500    200,000 

 

The carrying value of our line of credit at December 31, 2012 of $33.0 million approximated its fair value.

 

The estimated fair value of our long-term debt, which is discussed in Note 8, was determined using Level 2 inputs primarily related to comparable market prices.

 

We consider the carrying amounts of cash and cash equivalents, receivables, other current assets and current liabilities to approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization or payment.  Additionally, we consider the carrying amount of our capital lease obligations to approximate their fair value because the weighted average interest rate used to formulate the carrying amounts approximates current market rates.

 

EARNINGS PER SHARE - Earnings per share is based upon the weighted average number of shares of common stock and common stock equivalents outstanding, net of common stock held in treasury, as follows (in thousands except share and per share data):

 

   Years Ended December 31, 
   2013   2012   2011 
             
Net income attributable to RadNet, Inc.'s common stockholders  $2,120   $59,834   $7,231 
                
BASIC NET INCOME PER SHARE ATTRIBUTABLE TO RADNET, INC.'S COMMON STOCKHOLDERS               
Weighted average number of common shares outstanding during the period   39,140,480    37,751,170    37,367,736 
Basic net income per share attributable to RadNet, Inc.'s common stockholders  $0.05   $1.58   $0.19 
DILUTED NET INCOME PER SHARE ATTRIBUTABLE TO RADNET, INC.'S COMMON STOCKHOLDERS               
Weighted average number of common shares outstanding during the period   39,140,480    37,751,170    37,367,736 
Add nonvested restricted stock subject only to service vesting   316,905    533,014    – 
Add additional shares issuable upon exercise of stock options and warrants   357,150    960,502    1,417,939 
Weighted average number of common shares used in calculating diluted net income per share   39,814,535    39,244,686    38,785,675 
Diluted net income per share attributable to RadNet, Inc.'s common stockholders  $0.05   $1.52   $0.19 

 

INVESTMENT IN JOINT VENTURES – We have nine unconsolidated joint ventures with ownership interests ranging from 31% to 50%.These joint ventures represent partnerships with hospitals, health systems or radiology practices and were formed for the purpose of owning and operating diagnostic imaging centers. Professional services at the joint venture diagnostic imaging centers are performed by contracted radiology practices or a radiology practice that participates in the joint venture. Our investment in these joint ventures is accounted for under the equity method. We evaluate our investment in joint ventures, including cost in excess of book value (equity method goodwill) for impairment whenever indicators of impairment exist. No indicators of impairment exist as of December 31, 2013. Investment in joint ventures increased approximately $351,000 to $28.9 million at December 31, 2013 compared to $28.6 million at December 31, 2012. This increase is summarized as follows (in thousands):

 

Balance as of December 31, 2012  $28,598 
Acquisition of a controlling interest in a joint venture (see Note 4)   (648)
Purchase of a 40% interest in a new joint venture (see Note 4)   1,000 
Equity contributions in existing joint ventures   1,009 
Equity earnings in these joint ventures   6,194 
Distribution of earnings   (7,204)
Balance as of December 31, 2013  $28,949 

 

We received management service fees from the centers underlying these joint ventures of approximately $9.3 million, $8.5 million and $6.8 million for the years ended December 31, 2013, 2012 and 2011, respectively. We offset the portion of the fees earned from our service revenue associated with our ownership with an increase to our equity earnings.

 

The following table is a summary of key financial data for these joint ventures as of December 31, 2013 and 2012, respectively, and for the years ended December 31, 2013, 2012 and 2011, respectively, (in thousands):

 

   December 31, 
Balance Sheet Data:  2013   2012 
Current assets  $16,203   $17,026 
Noncurrent assets   49,324    49,163 
Current liabilities   (6,158)   (7,419)
Noncurrent liabilities   (6,793)   (8,997)
Total net assets  $52,576   $49,773 
           
Book value of RadNet joint venture interests  $23,705   $24,712 
Cost in excess of book value of acquired joint venture interests   4,922    3,511 
Elimination of intercompany profit remaining on Radnet's consolidated balance sheet   322    375 
Total value of Radnet joint venture interests  $28,949   $28,598 
           
Total book value of other joint venture partner interests  $28,871   $25,061 

 

Income statement data for the years ended December 31,  2013   2012   2011 
             
Net revenue  $93,134   $85,036   $76,076 
Net income  $13,633   $14,031   $11,655