RDNT

Business Context and Reporting Period

Company: Radnet, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: Radnet operates a network of 164 diagnostic imaging facilities across seven states, primarily in California, the Mid-Atlantic, Florida, Kansas, and New York. Services include MRI, CT, PET, nuclear medicine, mammography, and ultrasound. The company operates as a single segment.

Key Financial Metrics

Note: Total debt includes current and long-term notes payable and obligations under capital leases. Cash balance at June 30, 2008, was effectively zero.

Material Changes vs. Prior Period

• Revenue Growth: Net revenue increased 19.1% ($20.4 million) for the quarter and 13.8% ($29.3 million) for the six months compared to the prior year periods. Organic growth (same centers) was 3.8% for the quarter and 3.5% for the six months, driven by increased procedure volumes. The remainder of the growth is attributed to acquisitions.
• Profitability: The company reported a net loss of $2.1 million for the quarter and $7.6 million for the six months, compared to net income of $1.2 million and a net loss of $4.3 million in the respective prior year periods. Operating income declined slightly for the quarter ($8.4M vs $10.2M) but increased for the six months ($15.2M vs $14.6M).
• Expenses: Operating expenses rose 23.6% for the quarter and 15.6% for the six months, primarily due to increased salaries, professional reading fees, and depreciation from new acquisitions. Interest expense increased 28.0% for the quarter due to higher term loan balances and increased borrowing on the line of credit.
• Liquidity: Working capital decreased from $23.2 million at year-end 2007 to $9.9 million at June 30, 2008. Cash and cash equivalents dropped to zero from $18,000.

Guidance, Outlook, and Risks

• Capital Resources: On February 22, 2008, the company secured a second incremental $35 million facility. However, interest margins were increased (LIBOR margin to 4.25% for revolving/term loans and 9.0% for second lien term loans) due to market conditions. Management believes it will obtain sufficient cash to satisfy obligations for the next twelve months through strategic plans and debt restructuring.
• Acquisitions: Significant acquisition activity occurred in the first half of 2008, including centers in Los Angeles, Delaware, and California, totaling approximately $23.5 million in cash and assumed debt. A subsequent acquisition of NeuroSciences Imaging Center was completed in July 2008.
• Internal Controls: Management concluded that disclosure controls and procedures were not effective as of June 30, 2008, due to material weaknesses in the financial statement close process and entity-level controls. Remediation efforts include forming a Revenue Committee and assigning additional resources to fixed asset recording.
• Risks: The company operates in a capital-intensive industry with high fixed costs. Future performance depends on reimbursement rates, regulatory changes, and the ability to service significant debt obligations. Legal proceedings regarding a former lender (DVI, Inc.) remain pending, though a stipulation to dismiss Radnet is under consideration.

Investor Verification Checklist

• Cash Position: Verify the sustainability of operations with a $0 cash balance and a stockholders' deficit of $76.7 million.
• Debt Service: Confirm the impact of increased interest margins (up to 9.0% on second lien debt) on future cash flows and covenant compliance.
• Internal Controls: Monitor the progress of remediation for the identified material weaknesses in financial reporting controls.
• Acquisition Integration: Assess the financial performance and integration costs of the multiple facilities acquired in the first half of 2008.
• Legal Exposure: Track the status of the DVI, Inc. securities litigation and the potential for dismissal.