RDNT

Radnet, Inc. 10-Q Summary: Quarter Ended September 30, 2008

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2008, for Radnet, Inc., a Delaware corporation operating 165 diagnostic imaging facilities across seven states. The company provides MRI, CT, PET, and other imaging services. Operations are consolidated with Beverly Radiology Medical Group III (BRMG), a partnership indirectly owned by CEO Howard G. Berger, M.D., to comply with California's corporate practice of medicine laws.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net revenue increased 19.5% ($21.5 million) for the quarter and 15.7% ($50.8 million) for the nine months compared to 2007. Organic growth (same-store basis) was 5.6% for the quarter and 4.9% for the nine months, driven by increased procedure volumes. The remainder of the growth is attributed to acquisitions.
• Profitability: The company reported a net income of $138,000 for the quarter, a significant improvement from a net loss of $2.1 million in the same period in 2007. However, the nine-month period resulted in a net loss of $7.5 million, widening from a $6.4 million loss in 2007.
• Expenses: Operating expenses rose 19.5% to $121.4 million for the quarter, primarily due to salaries and professional reading fees increasing 20.3% to support volume growth and new centers. Interest expense increased 4.6% to $11.6 million due to higher debt levels and increased borrowing on the line of credit.
• Liquidity: Cash and cash equivalents dropped to zero from $18,000 at year-end 2007. Working capital decreased from $23.2 million to $9.1 million.

Guidance, Outlook, and Risks

Management Commentary: Management believes it will obtain sufficient cash to satisfy obligations for the next twelve months through strategic plans and debt restructuring. The company continues to focus on maximizing facility performance, profitable contracting, and expanding MRI, CT, and PET applications.

Capital Resources: On February 22, 2008, the company secured a second incremental $35 million facility. Due to a drop in LIBOR, the Applicable LIBOR Margin was increased to 4.25% for the revolving credit facility and 9.0% for the second lien term loan.

Risks and Contingencies:

• Internal Controls: Management concluded that disclosure controls and procedures were not effective as of September 30, 2008, due to material weaknesses in the financial statement close process and entity-level controls.
• Legal Proceedings: The company is a defendant in In Re DVI, Inc. Securities Litigation. A stipulation to dismiss the company from the case was executed, subject to court approval.
• Debt Covenants: The company operates in a capital-intensive industry and relies on financing to fund operations and acquisitions. Compliance with debt covenants is a critical risk factor.

Investor Verification Checklist

• Cash Position: Verify the sustainability of operations with zero cash on hand and a $9.1 million working capital balance against significant debt obligations.
• Internal Controls: Review the specific remediation plan for the material weaknesses in financial reporting controls disclosed in Item 4.
• Debt Structure: Analyze the impact of the increased LIBOR margins (up to 9.0%) on future interest expense and cash flow.
• Acquisition Integration: Assess the financial performance of the numerous facilities acquired in 2008 (e.g., Papastavros Associates, Rolling Oaks Imaging) to ensure they are meeting revenue projections.
• Legal Resolution: Confirm the final court approval of the dismissal in the DVI securities litigation.