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2. SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Jun. 30, 2017

During the period covered in this report, there have been no material changes to the significant accounting policies we use and have explained, in our annual report on Form 10-K for the fiscal year ended December 31, 2016, as amended. The information below is intended only to supplement the disclosure in our annual report on Form 10-K for the fiscal year ended December 31, 2016, as amended.

ADOPTION OF ASU 2016-09 – Compensation – Stock Compensation - In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09 (“ASU 2016-09”), Compensation—Stock Compensation, (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 requires excess tax benefits and tax deficiencies, which arise due to differences between the measure of compensation expense and the amount deductible for tax purposes, to be recorded directly through the statement of operations when awards vest or are settled. We elected to early adopt the new guidance for the year ended December 31, 2016. Upon adoption using the modified retrospective transition method, we recorded a cumulative effect adjustment to recognize previously unrecognized excess tax benefits which increased deferred tax assets and reduced accumulated deficit by $7.1 million. The current net tax benefit for 2016 resulting from adoption of the new guidance is approximately $400,000 and was reflected in our tax provision at December 31, 2016. The impact on our quarterly financial result for the three months ended June 30, 2016 was additional income tax expense of approximately $3,000. The impact on our financial statements for the six months ended June 30, 2016 is as follows:

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

In thousands except per share data	As previously reported			Impact of adoption		As currently reported
Provision for income taxes	$	(1,073	)	$	323	$	(750	)
Net income		1,949			323		2,272
Net income attributable to Radnet Inc. common shareholders		1,902			323		2,225
Basic and diluted income per share		0.04			0.01		0.05

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

In thousands	As previously reported			Impact of adoption			As currently reported
Net income	$	1,949		$	323		$	2,272
Deferred taxes		333			(323	)		10
Others		(2,295	)		–			(2,295	)
Net decrease in cash and cash equivalents	$	(13	)	$	–		$	(13	)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

In thousands	As previously reported			Impact of adoption		As currently reported
Net income	$	1,949		$	323	$	2,272
Foreign currency translation adjustments		(16	)		–		(16	)
Comprehensive income		1,933			323		2,256
Less comprehensive income attributable to non-controlling interests		47			–		47
Comprehensive income attributable to Radnet Inc. common shareholders	$	1,886		$	323	$	2,209

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 NY Groups centers, this service fee revenue includes payments for both the professional medical interpretation revenue recognized by BRMG and the NY Groups 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 NY Groups. As it relates to non-BRMG and NY Groups centers, namely the affiliated physician groups, 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 payors. Third-party payors include federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies and employers. Estimates of contractual allowances are based on historical collection rates of payor reimbursement contract agreements. We also record a provision for doubtful accounts based primarily on historical collection rates related to patient copayments and deductible amounts for patients who have health care coverage under one of our third-party payors.

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

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016

Commercial insurance	$	142,691		$	134,962		$	283,683		$	266,439
Medicare		47,611			45,558			95,291			91,385
Medicaid		6,525			6,890			13,259			13,915
Workers' compensation/personal injury		8,867			8,966			17,925			18,485
Other⁽¹⁾		8,362			7,383			16,648			14,377
Service fee revenue, net of contractual allowances and discounts		214,056			203,759			426,806			404,601
Provision for bad debts		(11,854	)		(12,326	)		(23,500	)		(22,630	)
Net service fee revenue		202,202			191,433			403,306			381,971
Revenue under capitation arrangements		27,812			27,132			55,721			52,982
Total net revenue	$	230,014		$	218,565		$	459,027		$	434,953

___________________

⁽¹⁾ Other consists of revenue from teleradiology services, consulting fees and software revenue.

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 the historical payment patterns of each type of payor, write-off trends, 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.

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. 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.

MEANINGFUL USE INCENTIVE - Under the American Recovery and Reinvestment Act of 2009, a program was enacted that provides financial incentives for providers that successfully implement and utilize electronic health record technology to improve patient care. Our software development team in Canada established an objective to build a Radiology Information System (RIS) software platform that has been awarded Meaningful Use certification. As this certified RIS system is implemented throughout our imaging centers, the radiologists that utilize this software can be eligible for the available financial incentives. In order to receive such incentive payments providers must attest that they have demonstrated meaningful use of the certified RIS in each stage of the program. We account for this meaningful use incentive under the Gain Contingency Model outlined in ASC 450-30. Under this model, we record within non-operating income, meaningful use incentive only after Medicare accepts an attestation from the qualified eligible professional demonstrating meaningful use. We recorded approximately $250,000 and $2.8 million during the six months ended June 30, 2017 and 2016, respectively, relating to this incentive.

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, were $1.8 million and $2.0 million, as of June 30, 2017 and December 31, 2016, respectively and related to the Company’s line of credit. In conjunction with our Fourth Amendment to our First Lien Credit Agreement (as defined below), a net addition of approximately $27,000 was added to deferred financing costs. See Note 5, Revolving Credit Facility, Notes Payable, and Capital Leases for more information.

INVENTORIES - Inventories, consisting mainly of medical supplies, are stated at the lower of cost or net realizable value with cost determined by the first-in, first-out method.

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, which range from 3 to 30 years. Maintenance and repairs are charged to expense as incurred.

BUSINESS COMBINATION - Accounting for acquisitions requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.

GOODWILL- Goodwill at June 30, 2017 totaled $244.5 million. Goodwill is recorded as a result of business combinations. Management evaluates goodwill at a minimum, on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. We tested goodwill for impairment on October 1, 2016, noting no impairment, and have not identified any indicators of impairment through June 30, 2017. Activity in goodwill for the six months ended June 30, 2017 is provided below (in thousands):

Balance as of December 31, 2016		239,553
Goodwill acquired through the acquisition of Resolution Imaging Medical Corp		1,901
Goodwill acquired through the acquisition of MRI Centers of Torrance		401
Goodwill disposed through the transfer to Santa Monica Imaging Group JV		(1,901	)
Goodwill acquired through the acquisition of D&D Diagnostics, Inc.		1,519
Goodwill acquired through the acquisition of Stockton MRI, Inc.		3,101
Goodwill disposed through the sale of Hematology Oncology		(110	)
Balance as of June 30, 2017	$	244,464

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 in determining whether our net deferred tax assets are more likely than not to be realized.

EQUITY BASED COMPENSATION – We have one long-term incentive plan that we adopted in 2006 and which we first amended and restated as of April 20, 2015, and again on March 9, 2017 (the “Restated Plan”). The Restated Plan was approved by our stockholders at our annual stockholders meeting on June 8, 2017. As of June 30, 2017, we have reserved for issuance under the Restated Plan 14,000,000 shares of common stock. We can issue options, stock awards, stock appreciation rights, stock units and cash awards under the Restated Plan. Certain options granted under the Restated Plan to employees are intended to qualify as incentive stock options under existing tax regulations. Stock options and warrants generally vest over three to five years and expire five to ten years from date of grant. The compensation expense recognized for all equity-based awards 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. See Note 6 Stock-Based Compensation for more information.

COMPREHENSIVE INCOME - ASC 220, Comprehensive Income, establishes rules for reporting and displaying comprehensive income and its components. Our unrealized gains or losses on foreign currency translation adjustments are included in comprehensive income. For the quarter ended December 31, 2016, we entered into an interest rate cap agreement. Assuming perfect effectiveness, any unrealized gains or losses related to the cap agreement that qualify for cash flow hedge accounting are classified as a component of comprehensive income. Any ineffectiveness is recognized in earnings. The components of comprehensive income for the three and six months in the period ended June 30, 2017 are included in the condensed consolidated statements of comprehensive income.

DERIVATIVE INSTRUMENTS - In the fourth quarter of 2016, we entered into two forward interest rate cap agreements ("2016 Caps"). The 2016 Caps will mature in September and October 2020. The 2016 Caps had notional amounts of $150,000,000 and $350,000,000, respectively, which were designated at inception as cash flow hedges of future cash interest payments associated with portions of our variable rate bank debt. Under these arrangements, we purchased a cap on 3 month LIBOR at 2.0%. We are liable for a $5.3 million premium to enter into the caps which is being accrued over the life of the 2016 Caps.

At inception, we designated our interest rate cap agreements as cash flow hedges of floating-rate borrowings. In accordance with ASC Topic 815, derivatives that have been designated and qualify as cash flow hedging instruments are reported at fair value. The gain or loss on the effective portion of the hedge (i.e., change in fair value) is initially reported as a component of accumulated other comprehensive income in the consolidated statement of equity. The remaining gain or loss, if any, is recognized currently in earnings. As of June 30, 2017, the cash flow hedges were deemed to be effective. No amount is expected to be reclassified into earnings in the next twelve months.

Below represents as of June 30, 2017 the fair value of our 2016 Caps and loss recognized:

The fair value of derivative instruments as of June 30, 2017 is as follows (amounts in thousands):

Derivatives	Balance Sheet Location	Fair Value – Liabilities
Interest rate contracts	Current and other non-current liabilities	$(1,970)

A tabular presentation of the effect of derivative instruments on our consolidated statement of comprehensive loss is as follows (amounts in thousands):

For the three months ended June 30, 2017
Effective Interest Rate Cap	Amount of Loss Recognized on Derivative	Location of Loss Recognized in Income on Derivative
Interest rate contracts	($944)	Other Comprehensive Loss


For the six months ended June 30, 2017
Effective Interest Rate Cap	Amount of Loss Recognized on Derivative	Location of Loss Recognized in Income on Derivative
Interest rate contracts	($1,722)	Other Comprehensive Loss

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 values of certain of our financial assets that are subject to fair value measurements, and the classification of these assets on our consolidated balance sheets, as follows (in thousands):

	As of June 30, 2017
	Level 1		Level 2			Level 3		Total
Current and other non-current liabilities
Interest Rate Contracts	$	–	$	(1,970	)	$	–	$	(1,970	)

	As of December 31, 2016
	Level 1		Level 2		Level 3		Total
Current assets
Interest Rate Contracts	$	–	$	818	$	–	$	818

The estimated fair value of these contracts was determined using Level 2 inputs. More specifically, the fair value was determined by calculating the value of the difference between the fixed interest rate of the interest rate swaps and the counterparty’s forward LIBOR curve. The forward LIBOR curve is readily available in the public markets or can be derived from information available in the public markets.

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

	As of June 30, 2017
	Level 1		Level 2		Level 3		Total Fair Value		Total Face Value
First Lien Term Loans	$	–	$	468,564	$	–	$	468,564	$	466,813
Second Lien Term Loans	$	–	$	169,260	$	–		169,260	$	168,000

	As of December 31, 2016
	Level 1		Level 2		Level 3		Total		Total Face Value
First Lien Term Loans	$	–	$	483,129	$	–	$	483,129	$	478,938
Second Lien Term Loans	$	–	$	167,580	$	–	$	167,580	$	168,000

Our revolving credit facility had no aggregate principal amount outstanding as of June 30, 2017.

The estimated fair value of our long-term debt, which is discussed in Note 5, 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, current liabilities and other notes payables 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):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016

Net income attributable to RadNet, Inc.'s common stockholders	$	5,310	$	3,622	$	4,100	$	2,225

BASIC NET INCOME PER SHARE ATTRIBUTABLE TO RADNET, INC.'S COMMON STOCKHOLDERS
Weighted average number of common shares outstanding during the period		46,756,276		46,558,944		46,662,420		46,576,631
Basic net income per share attributable to RadNet, Inc.'s common stockholders	$	0.11	$	0.08	$	0.09	$	0.05

DILUTED NET INCOME PER SHARE ATTRIBUTABLE TO RADNET, INC.'S COMMON STOCKHOLDERS
Weighted average number of common shares outstanding during the period		46,756,276		46,558,944		46,662,420		46,576,631
Add nonvested restricted stock subject only to service vesting		250,153		77,162		198,477		155,447
Add additional shares issuable upon exercise of stock options and warrants		189,469		246,277		207,666		228,148
Weighted average number of common shares used in calculating diluted net income per share		47,195,898		46,882,383		47,068,563		46,960,226
Diluted net income per share attributable to RadNet, Inc.'s common stockholders	$	0.11	$	0.08	$	0.09	$	0.05

Stock options excluded from the computation of diluted per share amounts:
Weighted average shares for which the exercise price exceeds average market price of common stock		165,000		325,626		337,575		325,626

INVESTMENT AT COST - On March 24, 2017, we acquired a 12.5% equity interest in Medic Vision – Imaging Solutions Ltd for $1.0 million. We also have an option to acquire an additional 12.5% equity interest for $1.4 million exercisable within one year from the initial share purchase date. Medic Vision, based in Israel, specializes in software packages that provide compliant radiation dose structured reporting and enhanced images from reduced dose CT scans. In accordance with ASC 325-20, Cost Method Investments, the investment is recorded at its cost of $1.0 million. No impairment in our investment was noted as of the quarter ended June 30, 2017.

INVESTMENT IN JOINT VENTURES – We have 14 unconsolidated joint ventures with ownership interests ranging from 35% to 55%. 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, since RadNet does not have a controlling financial interest in such ventures. 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 existed as of June 30, 2017.

Joint venture investment and financial information

The following table is a summary of our investment in joint ventures during the quarter ended June 30, 2017 (in thousands):

Balance as of December 31, 2016	$	43,509
Equity in earnings in these joint ventures		4,922
Distribution of earnings		(3,993	)
Equity contributions in existing joint ventures		4,062
Balance as of June 30, 2016	$	48,500

We received management service fees from the centers underlying these joint ventures of approximately $3.5 million and $3.0 million for the quarters ended June 30, 2017 and 2016, respectively and $6.6 million and $5.9 million for the six months ended June 30, 2017 and 2016 respectively. We eliminate any unrealized portion of our management service fees with our equity in earnings of joint ventures.

The following table is a summary of key balance sheet data for these joint ventures as of June 30, 2017 and December 31, 2016 and income statement data for the six months ended June 2017 and 2016 (in thousands):

Balance Sheet Data:	June 30, 2017			December 31, 2016
Current assets	$	41,059		$	40,093
Noncurrent assets		106,421			100,146
Current liabilities		(16,342	)		(14,077	)
Noncurrent liabilities		(42,680	)		(44,405	)
Total net assets	$	88,458		$	81,757

Book value of RadNet joint venture interests	$	42,012		$	38,538
Cost in excess of book value of acquired joint venture interests		6,488			4,970
Total value of Radnet joint venture interests	$	48,500		$	43,509

Total book value of other joint venture partner interests	$	46,446		$	43,219

Income statement data for the six months ended June 30,	2017		2016
Net revenue	$	86,981	$	80,917
Net income	$	10,285	$	13,044