RadNet Annual Report 2016

Plain-text annual report

(cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) 1510 Cotner Avenue Los Angeles, CA 90025 (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) 2016(cid:2)ANNUAL(cid:2)REPORT (cid:2) UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington D.C. 20549FORM 10-KANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2016Commission File Number 001-33307RadNet, Inc.(Exact name of registrant as specified in its charter)Delaware13-3326724(State or other jurisdiction ofincorporation or organization)(I.R.S. EmployerIdentification No.)1510 Cotner AvenueLos Angeles, California90025(Address of principal executive offices)(Zip Code)Registrant’s telephone number, including area code: (310) 478-7808Securities registered pursuant to Section 12(b) of the Act:Title of Each ClassName of each exchange on which registeredCommon Stock, $.0001 par valueNASDAQ Global MarketSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No xIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for suchshorter period that the registrant was required to submit and post such files). Yes x No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein,and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K. xIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.Large Accelerated Filer ¨Accelerated Filer xNon-Accelerated Filer ¨ (Do not check if a smaller reporting company)Smaller Reporting Company ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ¨ No xThe aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $224,518,331 on June 30,2016 (the last business day of the registrant’s most recently completed second quarter) based on the closing price for the common stock on theNASDAQ Global Market on June 30, 2016.The number of shares of the registrant’s common stock outstanding on March 9, 2017, was 47,198,596DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s definitive proxy statement for the 2017 Annual Meeting of Stockholders are incorporated herein by reference in Part IIIof this annual report on Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commissionpursuant to Regulation 14A not later than 120 days after the close of the registrant’s fiscal year.RADNET, INC.TABLE OF CONTENTSFORM 10-K ITEMPAGEPART I.Item 1.Business1Item 1A.Risk Factors19Item 1B.Unresolved Staff Comments30Item 2.Properties30Item 3.Legal Proceedings30Item 4.Mine Safety Disclosures.30PART II.Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities31Item 6.Selected Consolidated Financial Data32Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations34Item 7A.Quantitative and Qualitative Disclosures About Market Risk50Item 8.Financial Statements and Supplementary Data50Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure82Item 9A.Controls and Procedures82Item 9B.Other Information85PART III.Item 10.Directors, Executive Officers and Corporate Governance85Item 11.Executive Compensation85Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters85Item 13.Certain Relationships and Related Transactions, and Director Independence85Item 14.Principal Accountant Fees and Services85PART IV.Item 15.Exhibits and Financial Statement Schedules86ii[This page intentionally left blank] Cautionary Note Regarding Forward-Looking Statements This annual report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements reflect current views about future events and are based on ourcurrently available financial, economic and competitive data and on current business plans. Actual events or results may differ materiallydepending on risks and uncertainties that may affect our operations, markets, services, prices and other factors. Statements in this annual report concerning our ability to successfully acquire and integrate new operations, to grow our contract managementbusiness, our financial guidance, our future cost saving efforts, our increased business from new equipment or operations and our ability to financeour operations are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,”“should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” “assumption” or the negative of theseterms or other comparable terminology. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity,performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or impliedby these forward-looking statements. These risks include those factors listed in Item 1 — “Business,” Item 1A— “Risk Factors,” Item 3— “LegalProceedings,” Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this annualreport and in other reports that we file with the Securities and Exchange Commission. We do not undertake any responsibility to release publicly any revisions to these forward-looking statements to take into account events orcircumstances that occur after the date of this annual report or any unanticipated events which may cause actual results to differ from thoseexpressed or implied by the forward-looking statements contained in this annual report, except to the extent required by law. iii PART IItem 1.BusinessBusiness OverviewWe are a leading national provider of freestanding, fixed-site outpatient diagnostic imaging services in the United States based on numberof locations and annual imaging revenue. At December 31, 2016, we operated directly or indirectly through joint ventures with hospitals, 305centers located in California, Delaware, Florida, Maryland, New Jersey, New York, and Rhode Island. Our centers provide physicians with imagingcapabilities to facilitate the diagnosis and treatment of diseases and disorders and may reduce unnecessary invasive procedures, often reducingthe cost and amount of care for patients. Our services include magnetic resonance imaging (MRI), computed tomography (CT), positron emissiontomography (PET), nuclear medicine, mammography, ultrasound, diagnostic radiology (X-ray), fluoroscopy and other related procedures. The vastmajority of our centers offer multi-modality imaging services, a key point of differentiation from our competitors. Our multi-modality strategydiversifies revenue streams, reduces exposure to reimbursement changes and provides patients and referring physicians one location to serve theneeds of multiple procedures.We seek to develop leading positions in regional markets in order to leverage operational efficiencies. Our scale and density withinselected geographies provide close, long-term relationships with key payors, radiology groups and referring physicians. Each of our center-leveland regional operations teams is responsible for managing relationships with local physicians and payors, meeting our standards of patient serviceand maintaining profitability. We provide training programs, standardized policies and procedures and sharing of best practices among thephysicians in our regional networks.In addition to our imaging services, one of our subsidiaries, eRAD, Inc., develops and sells computerized systems for the imagingindustry, including Picture Archiving Communications Systems (“PACS”). Another one of our subsidiaries, Imaging On Call LLC, providesteleradiology services for remote interpretation of images on behalf of radiology groups, hospitals and imaging center customers. Teleradiology isthe process of transmitting radiological patient images, such as X-rays, CTs, and MRIs, from one location to another for the purposes ofinterpretation and/or consultation. Teleradiology allows radiologists to provide services without actually having to be at the location of the patientand allows trained specialists to be available 24/7. In addition to providing alternative revenue sources for us, the capabilities of both eRAD andImaging On Call are designed to make the RadNet imaging center operations more efficient and cost effective.In December 2015 we entered into a multi-year strategic relationship with Imaging Advantage LLC. In the first quarter of 2016, BRMGtransferred 75 physicians to Imaging Advantage LLC, and we now contract with those physicians through Imaging Advantage LLC. We continueto collaborate with Imaging Advantage LLC in developing business models for radiology services. In addition, our relationship with the State ofQatar to help direct Screen for Life, a public-private partnership with the Qatari government to provide screening services, is on-going.We derive substantially all of our revenue from fees charged for the diagnostic imaging services performed at our facilities. For the yearsended December 31, 2016, 2015 and 2014, we performed 6,109,622, 5,638,979, and 4,828,488 diagnostic imaging procedures and generated netrevenue of $884.5 million, $809.6 million, and $717.6 million, respectively. Additional information concerning RadNet, Inc., including ourconsolidated subsidiaries, for each of the years ended December 31, 2016, 2015 and 2014 is included in the consolidated financial statements andnotes thereto in this annual report.We typically experience some seasonality to our business. During the first quarter of each year we generally experience the lowestvolumes of procedures and the lowest level of revenue for any quarter during the year. This is primarily the result of two factors. First, our volumesand revenue are typically impacted by winter weather conditions in our northeastern operations. It is common for snowstorms and other inclementweather to result in patient appointment cancellations and, in some cases, imaging center closures. Second, in recent years, we have provided careto an increased number of patients participating in high deductible health plans. The patient deductible amount resets each January resulting ininitially greater patient out of pocket expenditures until deductible limits are met. During this initial period of typically two to three months patientsmay defer medical service.History of our BusinessWe became incorporated in Delaware in 2008 and have been in business since 1985.We develop our medical imaging business through a combination of organic growth and acquisitions. For a discussion of acquisitions,see Item 7 - “Management’s Discussion and Analysis and Results of Operations—Recent Developments and Facility Acquisitions” below.1 In addition to our imaging business, our eRAD, Inc. subsidiary is a provider of PACS and related workflow solutions to the radiologyindustry. Over 250 hospitals, teleradiology businesses, imaging centers and specialty physician groups use eRAD’s technology to distribute,display, store and retrieve digital images taken from all diagnostic imaging modalities. eRAD has approximately 67 employees, including a researchand development team of 21 software engineers in Budapest, Hungary. We have also assembled an industry leading team of software developers, based out of Prince Edward Island, Canada, to create aworkflow solution known as Radiology Information Systems (“RIS”) focused exclusively on RadNet’s internal use. All 22 members of this Canadianbased team have significant software development expertise in radiology, and together with eRAD and its PACS technology, are creating fullyintegrated solutions to manage all aspects of RadNet’s internal information needs. Through our teleradiology business, Imaging On Call, LLC, located in Poughkeepsie, New York, we provide interpretation services toapproximately 55 hospitals and hospital-based radiology groups. References to “RadNet,” “we,” “us,” “our” or the “Company” in this report refer to RadNet, Inc., its subsidiaries and affiliated entities. See“Management’s Discussion and Analysis and Results of Operations—Overview.” Available Information All reports we file with the Securities and Exchange Commission are available free of charge via EDGAR through the SEC website atwww.sec.gov. In addition you may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE.,Washington, DC 20549, and may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We alsomaintain a website at www.radnet.com. where we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and all amendments to those reports as soon as is reasonably practicable after the material is electronically filed withthe Securities and Exchange Commission. References to our website in this report are provided as a convenience and the information contained on,or otherwise accessible through, the website is not incorporated by reference into, nor does it form a part of this annual report on Form 10-K or anyother document that we file with the Securities and Exchange Commission. Industry Overview Diagnostic imaging involves the use of non-invasive procedures to generate representations of internal anatomy and function that can berecorded on film or digitized for display on a video monitor. Diagnostic imaging procedures facilitate the early diagnosis and treatment of diseasesand disorders and may reduce unnecessary invasive procedures, often minimizing the cost and amount of care for patients. Diagnostic imagingprocedures include MRI, CT, PET, nuclear medicine, ultrasound, mammography, X-ray and fluoroscopy. While X-ray remains the most commonly performed diagnostic imaging procedure, the fastest growing and higher margin procedures areMRI, CT and PET. The rapid growth in PET scans is attributable to the increasing recognition of the efficacy of PET scans in the diagnosis andmonitoring of cancer. The number of MRI and CT scans performed annually in the United States continues to grow due to their wider acceptanceby physicians and payors, an increasing number of applications for their use and a general increase in demand due to the aging population. Diagnostic Imaging Settings Diagnostic imaging services are typically provided in one of the following settings: Fixed-site, freestanding outpatient diagnostic facilities These facilities range from single-modality to multi-modality facilities and are generally not owned by hospitals or clinics. These facilitiesdepend upon physician referrals for their patients and generally do not maintain dedicated, contractual relationships with hospitals or clinics. Infact, these facilities may compete with hospitals or clinics that have their own imaging systems to provide services to these patients. Thesefacilities bill third-party payors, such as managed care organizations, insurance companies, Medicare or Medicaid. All of our facilities are in thiscategory. Hospitals Many hospitals provide both inpatient and outpatient diagnostic imaging services, typically on site. These inpatient and outpatientcenters are owned and operated by the hospital or clinic, or jointly by both, and are primarily used by patients of the hospital or clinic. The hospitalor clinic bills third-party payors, such as managed care organizations, insurance companies, Medicare or Medicaid. 2 Mobile Imaging While many hospitals own or lease their own equipment, certain hospitals provide diagnostic imaging services by contracting withproviders of mobile imaging services. Using specially designed trailers, mobile imaging service providers transport imaging equipment and provideservices to hospitals and clinics on a part-time or full-time basis, thus allowing small to mid-size hospitals and clinics that do not have the patientdemand to justify fixed on-site access to advanced diagnostic imaging technology. Diagnostic imaging providers contract directly with the hospitalor clinic and are typically reimbursed directly by them. Diagnostic Imaging Modalities The principal diagnostic imaging modalities we use at our facilities are: MRI MRI has become widely accepted as the standard diagnostic tool for a wide and fast-growing variety of clinical applications for soft tissueanatomy, such as those found in the brain, spinal cord, abdomen, heart and interior ligaments of body joints such as the knee. MRI uses a strongmagnetic field in conjunction with low energy electromagnetic waves that are processed by a computer to produce high-resolution, three-dimensional, cross-sectional images of body tissue. A typical MRI examination takes from 20 to 45 minutes. MRI systems are designed as eitheropen or closed and have magnetic field strength of 0.2 Tesla to 3.0 Tesla and are priced in the range of $0.6 million to $2.5 million. As of December31, 2016, we had 257 MRI systems in operation. CT CT provides higher resolution images than conventional X-rays, but generally not as well defined as those produced by MRI. CT uses acomputer to direct the movement of an X-ray tube to produce multiple cross-sectional images of a particular organ or area of the body. CT is usedto detect tumors and other conditions affecting bones and internal organs. It is also used to detect the occurrence of strokes, hemorrhages andinfections. A typical CT examination takes from 15 to 45 minutes. CT systems are priced in the range of $0.3 million to $1.2 million. As of December31, 2016, we had 157 CT systems in operation. PET PET scanning involves the administration of a radiopharmaceutical agent with a positron-emitting isotope and the measurement of thedistribution of that isotope to create images for diagnostic purposes. PET scans provide the capability to determine how metabolic activity impactsother aspects of physiology in the disease process by correlating the reading for the PET with other tools such as CT or MRI. PET technology hasbeen found highly effective and appropriate in certain clinical circumstances for the detection and assessment of tumors throughout the body, theevaluation of some cardiac conditions and the assessment of epilepsy seizure sites. The information provided by PET technology often obviatesthe need to perform further highly invasive or diagnostic surgical procedures. PET systems are priced in the range of $0.8 million to $2.5 million. Inaddition, we employ combined PET/CT systems that blend the PET and CT imaging modalities into one scanner. These combined systems arepriced in the range of $1.1 million to $2.8 million. As of December 31, 2016, we had 47 PET or combination PET/CT systems in operation. Nuclear Medicine Nuclear medicine uses short-lived radioactive isotopes that release small amounts of radiation that can be recorded by a gamma cameraand processed by a computer to produce an image of various anatomical structures or to assess the function of various organs such as the heart,kidneys, thyroid and bones. Nuclear medicine is used primarily to study anatomic and metabolic functions. Nuclear medicine systems are priced inthe range of $300,000 to $400,000. As of December 31, 2016, we had 48 nuclear medicine systems in operation. X-ray X-rays use roentgen rays to penetrate the body and record images of organs and structures on film. Digital X-ray systems add computerimage processing capability to traditional X-ray images, which provides faster transmission of images with a higher resolution and the capability tostore images more cost-effectively. X-ray systems are priced in the range of $95,000 to $440,000. As of December 31, 2016, we had 479 X-raysystems in operation. 3 Ultrasound Ultrasound imaging uses sound waves and their echoes to visualize and locate internal organs. It is particularly useful in viewing softtissues that do not X-ray well. Ultrasound is used in pregnancy to avoid X-ray exposure as well as in gynecological, urologic, vascular, cardiac andbreast applications. Ultrasound systems are priced in the range of $90,000 to $250,000. As of December 31, 2016, we had 551 ultrasound systems inoperation. Mammography Mammography is a specialized form of radiology using low dosage X-rays to visualize breast tissue and is the primary screening tool forbreast cancer. Mammography procedures and related services assist in the diagnosis of and treatment planning for breast cancer. Analogmammography systems are priced in the range of $70,000 to $100,000, and digital mammography systems are priced in the range of $250,000 to$400,000. As of December 31, 2016, we had 279 mammography systems in operation. Fluoroscopy Fluoroscopy uses ionizing radiation combined with a video viewing system for real time monitoring of organs. Fluoroscopy systems arepriced in the range of $100,000 to $400,000. As of December 31, 2016, we had 104 fluoroscopy systems in operation. Industry Trends We believe the diagnostic imaging services industry will continue to grow as a result of a number of factors, including the following: Escalating Demand for Healthcare Services from an Aging Population Persons over the age of 65 comprise one of the fastest growing segments of the population in the United States. According to the UnitedStates Census Bureau, this group is expected to increase as much as 39% from 2010 to 2020. Because diagnostic imaging use tends to increase as aperson ages, we believe the aging population will generate more demand for diagnostic imaging procedures. New Effective Applications for Diagnostic Imaging Technology New technological developments are expected to extend the clinical uses of diagnostic imaging technology and increase the number ofscans performed. Recent technological advancements include: ·MRI spectroscopy, which can differentiate malignant from benign lesions; ·MRI angiography, which can produce three-dimensional images of body parts and assess the status of blood vessels; ·enhancements in teleradiology systems, which permit the digital transmission of radiological images from one location to another forinterpretation by radiologists at remote locations; and ·the development of combined PET/CT scanners, which combine the technology from PET and CT to create a powerful diagnosticimaging system. Additional improvements in imaging technologies, contrast agents and scan capabilities are leading to new non-invasive diagnosticimaging application, including methods of diagnosing blockages in the heart’s vital coronary arteries, liver metastases, pelvic diseases and vascularabnormalities without exploratory surgery. We believe that the use of the diagnostic capabilities of MRI and other imaging services will continue toincrease because they are cost-effective, time-efficient and non-invasive, as compared to alternative procedures, including surgery, and that newertechnologies and future technological advancements will further increase the use of imaging services. At the same time, the industry hasincreasingly used upgrades to existing equipment to expand applications, extend the useful life of existing equipment, improve image quality, reduceimage acquisition time and increase the volume of scans that can be performed. We believe the use of equipment upgrades rather than equipmentreplacements will continue, as we do not foresee new imaging technologies on the near-term horizon that will displace MRI, CT or PET as theprincipal advanced diagnostic imaging modalities. 4 Wider Physician and Payor Acceptance of the Use of Imaging During the last 30 years, there has been a major effort undertaken by the medical and scientific communities to develop higher quality,cost-effective diagnostic imaging technologies and to minimize the risks associated with the application of these technologies. The thrust ofproduct development during this period has largely been to reduce the hazards associated with conventional X-ray and nuclear medicinetechniques and to develop new, less harmful imaging technologies. As a result, the use of advanced diagnostic imaging modalities, such as MRI,CT and PET, which provide superior image quality compared to other diagnostic imaging technologies, has increased rapidly in recent years. Theseadvanced modalities allow physicians to diagnose a wide variety of diseases and injuries quickly and accurately without exploratory surgery orother surgical or invasive procedures, which are usually more expensive, involve greater risk to patients and result in longer rehabilitation time.Because advanced imaging systems are increasingly seen as a tool for reducing long-term healthcare costs, they are gaining wider acceptanceamong payors. Greater Consumer Awareness of and Demand for Preventive Diagnostic Screening Diagnostic imaging, such as elective full-body scans, is increasingly being used as a screening tool for preventive care procedures.Consumer awareness of diagnostic imaging as a less invasive and preventive screening method has added to the growth in diagnostic imagingprocedures. We believe that further technological advancements allowing for early diagnosis of diseases and disorders using less invasiveprocedures will create additional demand for diagnostic imaging. Expansion of Teleradiology Services As hiring radiologists has become more difficult, the use of teleradiology is expected to continue to expand to provide patients better,more specialized care and 24/7 services. Our Competitive Strengths Our Scale and Position as the Largest Provider of Freestanding, Fixed-site Outpatient Diagnostic Imaging Services in the UnitedStates, Based on Number of Centers and Revenue As of December 31, 2016, we operated 305 centers in California, Delaware, Florida, Maryland, New Jersey, New York and Rhode Island. Oursize and scale allow us to achieve operating, sourcing and administrative efficiencies, including equipment and medical supply sourcing savingsand favorable maintenance contracts from equipment manufacturers and other suppliers. Our specific knowledge of our geographic markets drivesstrong relationships with key payors, radiology groups and referring physicians within our markets. Our Comprehensive "Multi-Modality" Diagnostic Imaging Offering The vast majority of our centers offer multiple types of imaging procedures, driving strong relationships with referring physicians andpayors in our markets and a diversified revenue base. At each of our multi-modality facilities, we offer patients and referring physicians onelocation to serve their needs for multiple procedures. This prevents multiple patient visits or unnecessary travel between facilities, therebyincreasing patient throughput and decreasing costs and time delays. Our revenue is generated by a broad mix of modalities. We believe our multi-modality strategy lessens our exposure to reimbursement changes in any specific modality. Our Competitive Pricing We believe our fees are generally lower than hospital fees for the services we provide. Our Facility Density in Many Highly Populated Areas of the United States The strategic organization of our diagnostic imaging facilities into regional networks concentrated in major population centers in sevenstates offers unique benefits to our patients, our referring physicians, our payors and us. We are able to increase the convenience of our servicesto patients by implementing scheduling systems within geographic regions, where practical. For example, many of our diagnostic imaging facilitieswithin a particular region can access the patient appointment calendars of other facilities within the same regional network to efficiently allocatetime available and to meet a patient's appointment, date, time, or location preferences. The grouping of our facilities within regional networksenables us to easily move technologists and other personnel, as well as equipment, from under-utilized to over-utilized facilities on an as-neededbasis, and drive referrals. Our organization of referral networks results in increased patient throughput, greater operating efficiencies, betterequipment utilization rates and improved response time for our patients. We believe our networks of facilities and tailored service offerings forgeographic areas drives local physician referrals, makes us an attractive candidate for selection as a preferred provider by third-party payors,creates economies of scale and provides barriers to entry by competitors in our markets. 5 Our Strong Relationships with Payors and Diversified Payor Mix Our revenue is derived from a diverse mix of payors, including private payors, managed care capitated payors and government payors,which should mitigate our exposure to possible unfavorable reimbursement trends within any one payor class. In addition, our experience withcapitation arrangements has provided us with the expertise to manage utilization and pricing effectively, resulting in a predictable and recurringstream of revenue. We believe that third-party payors representing large groups of patients often prefer to enter into managed care contracts withproviders that offer a broad array of diagnostic imaging services at convenient locations throughout a geographic area. In 2016, we receivedapproximately 58% of our net service revenue before provision for bad debt from commercial insurance payors, 12% from managed care capitatedpayors, 20% from Medicare and 3% from Medicaid. With the exception of Blue Cross/Blue Shield, which are managed by different entities in each ofthe states in which we operate, and Medicare, no single payor accounted for more than 5% of our net revenue for the twelve months endedDecember 31, 2016. Our Strong Relationships with Experienced and Highly Regarded Radiologists Our contracted radiologists have outstanding credentials, strong relationships with referring physicians, and a broad mix of sub-specialties. The collective experience and expertise of these radiologists translates into more accurate and efficient service to patients. Our closerelationship with Howard G. Berger, M.D., our President and Chief Executive Officer, and Beverly Radiology Medical Group (“BRMG”) in Californiaand our long-term arrangements with radiologists outside of California enable us to better ensure that medical service provided at our facilities isconsistent with the needs and expectations of our referring physicians, patients and payors. Our Experienced and Committed Management Team Our senior management group has more than 100 years of combined healthcare management experience. Our executive management teamhas created our differentiated approach based on their comprehensive understanding of the diagnostic imaging industry and the dynamics of ourregional markets. We have a track record of successful acquisitions and integration of acquired businesses into RadNet, and have managed thebusiness through a variety of economic and reimbursement cycles. Our Technologically Advanced Imaging Systems Our eRad subsidiary develops and sells computerized imaging systems for the industry and Imaging On Call provides teleradiologyservices for interpretation of images for radiology groups, hospitals and other medical groups. In addition, we have assembled an industry leadingteam of software developers to create radiology workflow solutions for our internal use. Business Strategy Maximize Performance at Our Existing Facilities We intend to enhance our operations and increase scan volume and revenue at our existing facilities by expanding physician relationshipsand increasing the procedure offerings. Expansion Into Related Businesses With our acquisition of eRad we entered the business of the development and sale of software systems essential to the imaging industry.Similarly, with our acquisition of Imaging On Call, we entered the teleradiology business. We intend to regularly evaluate potential acquisitions ofother businesses to the extent they complement our imaging business. Focus on Profitable Contracting We regularly evaluate our contracts with third-party payors, industry vendors and radiology groups, as well as our equipment and realproperty leases, to determine how we may improve the terms to increase our revenues and reduce our expenses. Because many of our contractswith third party payors are short-term in nature, we can regularly renegotiate these contracts, if necessary. We believe our position as a leadingprovider of diagnostic imaging services and our long-term relationships with physician groups in our markets enable us to obtain more favorablecontract terms than would be available to smaller or less experienced imaging services providers. Optimize Operating Efficiencies We try to maximize our equipment utilization by adding, upgrading and re-deploying equipment where we experience excess demand. Wewill continue to trim excess operating and general and administrative costs where it is feasible to do so. We may also continue to use, whereappropriate, highly trained radiology physician assistants to perform, under appropriate supervision of radiologists, basic services traditionallyperformed by radiologists. We will continue to upgrade our advanced information technology system to create cost reductions for our facilities inareas such as image storage, support personnel and financial management. 6Expand Our NetworksWe intend to continue to expand the number of our facilities both organically and through targeted acquisitions, using a disciplinedapproach for evaluating and entering new areas, including consideration of whether we have adequate financial resources to expand. Our currentplans are to strengthen our market presence in geographic areas where we currently have existing operations and to expand into neighboring andother areas where we believe we can compete effectively. We perform extensive due diligence before developing a new facility or acquiring anexisting facility or entering into a joint venture with a hospital to manage a facility, including surveying local referral sources and radiologists, aswell as examining the demographics, reimbursement environment, competitive landscape and intrinsic demand of the geographic market. Wegenerally will only enter new markets where:·there is sufficient patient demand for outpatient diagnostic imaging services;·we believe we can gain significant market share;·we can build key referral relationships or we have already established such relationships; and·payors are receptive to our entry into the market.Our ServicesWe offer a comprehensive set of imaging services including MRI, CT, PET, nuclear medicine, X-ray, ultrasound, mammography,fluoroscopy and other related procedures. We focus on providing standardized high quality imaging services, regardless of location, to ensurepatients, physicians and payors consistency in service and quality. To ensure the high quality of our services, we monitor patient satisfaction,timeliness of services to patients and reports to physicians.The key features of our services include:·patient-friendly, non-clinical environments;·a 24-hour turnaround on routine examinations;·interpretations within one to two hours, if needed;·flexible patient scheduling, including same-day appointments;·extended operating hours, including weekends;·reports delivered by courier, facsimile or email;·availability of second opinions and consultations;·availability of sub-specialty interpretations at no additional charge; and·standardized fee schedules by region.Radiology ProfessionalsIn the states in which we provide services (except Florida), a lay person or any entity other than a professional corporation or similarprofessional organization is not allowed to practice medicine, including by employing professional persons or by having any ownership interest orprofit participation in or control over any medical professional practice. This doctrine is commonly referred to as the prohibition on the “corporatepractice” of medicine. In order to comply with this prohibition, we contract with radiologists to provide professional medical services in ourfacilities, including the supervision and interpretation of diagnostic imaging procedures. The radiology practice maintains full control over thephysicians it employs. Pursuant to each management contract, we make available the imaging facility and all of the furniture and medical equipmentat the facility for use by the radiology practice, and the practice is responsible for staffing the facility with qualified professional medical personnel.In addition, we provide management services and administration of the non-medical functions relating to the professional medical practice at thefacility, including among other functions, provision of clerical and administrative personnel, bookkeeping and accounting services, billing andcollection, provision of medical and office supplies, secretarial, reception and transcription services, maintenance of medical records, andadvertising, marketing and promotional activities. As compensation for the services furnished under contracts with radiologists, we generallyreceive an agreed percentage of the medical practice billings for, or collections from, services provided at the facility, typically 75% of global netservice fee revenue or collections after deduction of the professional component of the medical practice billings.7At all but 5 of our California facilities, we contract for the provision of professional medical services directly with BRMG, or indirectlythrough BRMG with other radiology groups.Many states have also enacted laws prohibiting a licensed professional from splitting fees derived from the practice of medicine with anunlicensed person or business entity. We do not believe that the management, administrative, technical and other non-medical services we provideto each of our contracted radiology groups violate the corporate practice of medicine prohibition or that the fees we charge for such servicesviolate the fee splitting prohibition. However, the enforcement and interpretation of these laws by regulatory authorities and state courts vary fromstate to state. If our arrangements with our independent contractor radiology groups are found to violate state laws prohibiting the practice ofmedicine by general business corporations or fee splitting, our business, financial condition and ability to operate in those states could beadversely affected.BRMG and New York GroupsHoward G. Berger, M.D., is our President and Chief Executive Officer, a member of our Board of Directors, and also owns, indirectly, 99% ofthe equity interests in BRMG. BRMG is responsible for all of the professional medical services at nearly all of our facilities located in Californiaunder a management agreement with us, and employs physicians or contracts with various other independent physicians and physician groups toprovide the professional medical services at most of our California facilities. We generally obtain professional medical services from BRMG inCalifornia, rather than provide such services directly or through subsidiaries, in order to comply with California’s prohibition against the corporatepractice of medicine. However, as a result of our close relationship with Dr. Berger and BRMG, we believe that we are able to better ensure thatmedical service is provided at our California facilities in a manner consistent with our needs and expectations and those of our referring physicians,patients and payors than if we obtained these services from unaffiliated physician groups.We believe that physicians are drawn to BRMG and the other radiologist groups with whom we contract by the opportunity to work withthe state-of-the-art equipment we make available to them, as well as the opportunity to receive specialized training through our fellowshipprograms, and engage in clinical research programs, which generally are available only in university settings and major hospitals.As of December 31, 2016, BRMG employed or contracted for 137 full-time and 24 part-time radiologists. In addition to our BRMG staff, wecontract 75 full-time physicians through our strategic relationship with Imaging Advantage LLC. Under our management agreement with BRMG, weare paid a percentage of the amounts collected for the professional services BRMG physicians render as compensation for our services and for theuse of our facilities and equipment. For the year ended December 31, 2016, this percentage was 78%. The percentage may be adjusted, if necessary,to ensure that the parties receive the fair value for the services they render. The following are the other principal terms of our managementagreement with BRMG:·The agreement expires on January 1, 2024. The agreement automatically renews for consecutive 10-year periods, unless either partydelivers a notice of non-renewal to the other party no later than six months prior to the scheduled expiration date. Either party mayterminate the agreement if the other party defaults under its obligations, after notice and an opportunity to cure. We may terminatethe agreement if Dr. Berger no longer owns at least 60% of the equity of BRMG; as of December 31, 2016, he owned indirectly 99% ofthe equity interests of BRMG.·At its expense, BRMG employs or contracts with an adequate number of physicians necessary to provide all professional medicalservices at all of our California facilities, except for 5 facilities for which we contract with separate medical groups.·At our expense, we provide all furniture, furnishings and medical equipment located at the facilities and we manage and administer allnon-medical functions at, and provide all nurses and other non-physician personnel required for the operation of, the facilities.·If BRMG wants to open a new facility, we have the right of first refusal to provide the space and services for the facility under thesame terms and conditions set forth in the management agreement.·If we want to open a new facility in California, BRMG must use its best efforts to provide medical personnel under the same termsand conditions set forth in the management agreement. If BRMG cannot provide such personnel, we have the right to contract withother physicians to provide services at the facility.·BRMG must maintain medical malpractice insurance for each of its physicians with coverage limits not less than $1 million perincident and $3 million in the aggregate per year. BRMG also has agreed to indemnify us for any losses we suffer that arise out of theacts or omissions of BRMG and its employees, contractors and agents.8 We contract with nine medical groups which provide professional medical services at all of our facilities in Manhattan and Brooklyn, NewYork. These contracts are similar to our contract with BRMG. Six of these groups are owned by John V. Crues, III, M.D., RadNet’s Medical Director,a member of our Board of Directors, and a 1% owner of BRMG. Dr. Berger owns a controlling interest in two of these medical groups which provideprofessional medical services at one of our Manhattan facilities. Non-BRMG and New York Groups entity locations At the 5 centers in California where BRMG does not provide professional medical services, and at all of the centers which are locatedoutside of California, with the exception of centers located in the New York, New York area, we have entered into long-term contracts withprominent third-party radiology groups in the area to provide physician services at those facilities. These arrangements also allow us to complywith the prohibition against the “corporate practice” of medicine in other states in which we operate (except in Florida which does not have anequivalent statute prohibiting the corporate practice of medicine). These third-party radiology practice groups provide professional services, including supervision and interpretation of diagnostic imagingprocedures, in our diagnostic imaging centers. The radiology practices maintain full control over the provision of professional services. Thecontracted radiology practices have outstanding physician and practice credentials and reputations; strong competitive market positions; a broadsub-specialty mix of physicians; a history of growth and potential for continued growth. In these facilities we have entered into long-termagreements (typically 10-40 years in length) under which, in addition to obtaining technical fees for the use of our diagnostic imaging equipmentand the provision of technical services, we provide management services and receive a fee based on the practice group’s professional revenue. Wetypically receive 100% of the technical reimbursements associated with imaging procedures plus certain fees paid to us for providing additionalmanagement services. The radiology practice groups retain the professional reimbursements associated with imaging procedures after deductingmanagement service fees paid to us. Additionally, we perform certain management services for a portion of the professional groups with whom we contract who provideprofessional radiology services at local hospitals. For performing these management services, which include billing, collecting, transcription andmedical coding, we receive management fees. Payors The fees charged for diagnostic imaging services performed at our facilities are paid by a diverse mix of payors, as illustrated for thefollowing periods presented in the table below: %of Net Revenue Before Bad Debt Provision Year Ended December 31, 2016 Year Ended December 31, 2015 Year Ended December 31, 2014 Commercial Insurance (1)(2) 58% 57% 56% Managed Care Capitated Payors 12% 12% 13% Medicare& Medicaid 23% 23% 24% (1) Includes Blue Cross/Blue Shield plans, which represented 21% of our net service fee revenue before provision for bad debt for theyears ended December 31, 2016, and 20% for the years ended December 31 2015 and 2014. (2) Includes co-payments, direct patient payments and payments through contracts with physician groups and other non-insurancecompany payors.We have described below the types of reimbursement arrangements we have with third-party payors. Commercial Insurance Generally, insurance companies reimburse us, directly or indirectly, including through BRMG in California or through the contractedradiology groups elsewhere, on the basis of agreed upon rates. These rates are negotiated and may differ materially with rates set forth in theMedicare Physician Fee Schedule for the particular service. The patients may be responsible for certain co-payments or deductibles. 9 Managed Care Capitation Agreements Under these agreements, which are generally between BRMG in California and outside of California between the contracted radiologygroup (typically an independent physician group or other medical group) and the payor (which in most cases are large medical groups orIndependent Practice Associations), the payor pays a pre-determined amount per-member per-month in exchange for the radiology group providingall necessary covered services to the managed care members included in the agreement. These contracts pass much of the financial risk ofproviding outpatient diagnostic imaging services, including the risk of over-use, from the payor to the radiology group and, as a result of ourmanagement agreement with the radiology group, to us. We believe that through our comprehensive utilization management, or UM, program we have become highly skilled at assessing andmoderating the risks associated with the capitation agreements, so that these agreements are profitable for us. Our UM program is managed by ourUM department, which consists of administrative and nursing staff as well as BRMG medical staff who are actively involved with the referringphysicians and payor management in both prospective and retrospective review programs. Our UM program includes the following features, all ofwhich are designed to manage our costs while ensuring that patients receive appropriate care: ·Physician Education At the inception of a new capitation agreement, we provide the new referring physicians with binders of educational materialcomprised of proprietary information that we have prepared and third-party information we have compiled, which are designed toaddress diagnostic strategies for common diseases. We distribute additional material according to the referral practices of thegroup as determined in the retrospective analysis described below. ·Prospective Review Referring physicians are required to submit authorization requests for non-emergency high-intensity services: MRI, CT, specialprocedures and nuclear medicine studies. The UM medical staff, according to accepted practice guidelines, considers thenecessity and appropriateness of each request. Notification is then sent to the imaging facility, referring physician and medicalgroup. Appeals for cases not approved are directed to us. The capitated payor has the final authority to uphold or deny ourrecommendation. ·Retrospective Review We collect and sort encounter activity by payor, place of service, referring physician, exam type and date of service. The data isthen presented in quantitative and analytical form to facilitate understanding of utilization activity and to provide a comparisonbetween fee-for-service and Medicare equivalents. Our Medical Director prepares a quarterly report for each payor and referringphysician. When we find that a referring physician is over utilizing services, we work with the physician to modify referralpatterns. Medicare/Medicaid Medicare is the federal health insurance program for people age 65 or older and people under age 65 with certain disabilities. Medicaid,funded by both the federal government and states, is a state-administered health insurance program for qualifying low-income and medically needypersons. For services for which we bill Medicare directly or indirectly, including through contracted radiologists, we are paid under the MedicarePhysician Fee Schedule. Under the Protecting Access to Medicare Act of 2014, Congress introduced a new quality incentive program that, effectiveJanuary 1, 2016, reduces Medicare payments for certain CT services reimbursed through the Medicare Physician Fee Schedule that are furnishedusing equipment that does not meet certain dose optimization and management standards. Medicare patients usually pay a 20% co-payment unlessthey have secondary insurance. Medicaid rates are set by the individual states for each state program and Medicaid patients may be responsiblefor a modest co-payment. Contracts with Physician Groups and Other Non-Insurance Company Payors For some of our contracts with physician groups and other providers, we do not bill payors, but instead accept agreed upon rates for ourradiology services. These rates are typically at or below the rates set forth in the current Medicare Fee Schedule for the particular service. However,we often agree to a specified rate for MRI and CT procedures that is not tied to the Medicare Fee Schedule. 10 Facilities We operate 138 fixed-site, freestanding outpatient diagnostic imaging facilities in California, 9 in Delaware, 3 in Florida, 59 in Maryland, 19in New Jersey, 19 in the Rochester and Hudson Valley areas of New York, 53 in New York City as well as 5 in Rhode Island. We lease the premises atwhich these facilities are located. Our facilities are primarily located in geographic networks that we refer to as regions. The majority of our facilities are multi-modality sites,offering various combinations of MRI, CT, PET, nuclear medicine, ultrasound, X-ray, fluoroscopy services and other related procedures. A portionof our facilities are single-modality sites, offering either X-ray or MRI services. Consistent with our regional network strategy, we locate our single-modality facilities near multi-modality facilities, to help accommodate overflow in targeted demographic areas. The following table sets forth the number of our facilities for each year during the five-year period ended December 31, 2016: Year Ended December 31, 2012 2013 2014 2015 2016 Total facilities owned or managed (at beginning of the year) 233 246 250 259 300 Facilities added by: Acquisition 25 12 22 43 10 Internal development – – – 1 8 Facilities closed or sold -12 -8 -13 -3 -13 Total facilities owned (at year end) 246 250 259 300 305 Diagnostic Imaging Equipment The following table indicates, as of December 31, 2016, the quantity of principal diagnostic equipment available at our facilities, by state: MRI Open/MRI CT PET/CT Mammo Ultrasound X-ray NucMed Fluoroscopy Total California 71 25 56 19 99 243 177 18 52 760 Florida 2 1 2 1 4 5 4 3 3 25 Delaware 6 – 6 – 5 11 23 2 2 55 New Jersey 20 3 16 3 21 29 34 2 9 137 New York 50 10 37 9 80 139 115 8 14 462 Maryland 61 5 37 15 67 120 119 15 24 463 Rhode Island 3 – 3 – 3 4 7 – – 20 Total 213 44 157 47 279 551 479 48 104 1,922 The average age of our MRI and CT units is less than five years, and the average age of our PET units is less than four years. The usefullife of our MRI, CT and PET units is typically ten years. Facility Acquisitions Information regarding our facility acquisitions can be found within Item 7 - “Management’s Discussion and Analysis of FinancialCondition and Results of Operations”, as well as Note 4 to our consolidated financial statements included in this annual report on Form 10-K. Information Technology Our corporate headquarters and many of our facilities are interconnected through a state-of-the-art information technology system. Thissystem, which is compliant with the Health Insurance Portability and Accountability Act of 1996, is comprised of a number of integratedapplications and provides a single operating platform for billing and collections, electronic medical records, practice management and imagemanagement. 11 This technology has created cost reductions for our facilities in areas such as image storage, support personnel and financial managementand has further allowed us to optimize the productivity of all aspects of our business by enabling us to: ·capture patient demographic, history and billing information at point-of-service; ·automatically generate bills and electronically file claims with third-party payors; ·record and store diagnostic report images in digital format; ·digitally transmit in real-time diagnostic images from one location to another, thus enabling networked radiologists to cover largergeographic markets by using the specialized training of other networked radiologists; ·perform claims, rejection and collection analysis; and ·perform sophisticated financial analysis, such as analyzing cost and profitability, volume, charges, current activity and patient casemix, with respect to each of our managed care contracts. Diagnostic reports and images are currently accessible via the Internet by our California referring providers. We have worked with some ofthe larger medical groups in California with whom we have contracts to provide access to this content through their web portals. We are in theprocess of making such services available outside of California. We have historically utilized third-party software for our front desk patient tracking system, which we refer to as a Radiology InformationSystem, or RIS. We have developed our own RIS through our team of software development engineers and began running this internally developedsystem in the first quarter of 2015. Personnel At December 31, 2016, we had a total of 5,059 full-time, 618 part-time and 1,608 per diem employees, including those employed by BRMG.These numbers include 137 full-time and 24 part-time physicians and 1,641 full-time, 418 part-time and 1,050 per-diem technologists. In addition toour company personnel, we contract 75 full-time physicians through our strategic relationship with Imaging Advantage LLC. We employ site managers who are responsible for overseeing day-to-day and routine operations at each of our facilities, includingstaffing, modality and schedule coordination, referring physician and patient relations and purchasing of materials. These site managers report toregional managers and directors, who are responsible for oversight of the operations of all facilities within their region, including sales, marketingand contracting. The regional managers and directors, along with our directors of contracting, marketing, facilities, management/purchasing andhuman resources all report to our chief operating officers. These officers, our chief financial officer, our director of information services and ourmedical director report to our chief executive officer. None of our employees is subject to a collective bargaining agreement nor have we experienced any work stoppages. We believe ourrelationship with our employees is good. Sales and Marketing At December 31, 2016, our California sales and marketing team consisted of two directors of marketing and 48 customer servicerepresentatives, while our eastern marketing team consisted of two directors of marketing and 115 customer sales representatives. Our sales andmarketing team employs a multi-pronged approach to marketing, including physician, payor and sports marketing programs. Physician Marketing Each customer service representative on our physician marketing team is responsible for marketing activity on behalf of one or morefacilities. The representatives act as a liaison between the facility and referring physicians, holding meetings periodically and on an as-needed basiswith them and their staff to present educational programs on new applications and uses of our systems and to address particular patient serviceissues that have arisen. In our experience, consistent hands-on contact with a referring physician and his or her staff generates goodwill andincreases referrals to our facilities. The representatives also continually seek to establish referral relationships with new physicians and physiciangroups. In addition to a base salary, each representative receives a bonus based upon success. Payor Marketing Our marketing team regularly meets with managed care organizations and insurance companies to solicit contracts and meet with existingcontracting payors to solidify those relationships. The comprehensiveness of our services, the geographic location of our facilities and thereputation of the physicians with whom we contract all serve as tools for obtaining new or repeat business from payors. 12 Sports Marketing Program RadNet Inc. has a sports marketing division. We provide diagnostic digital X-ray services for the Los Angeles Lakers, Clippers, Kings andSparks at the Staples Center. X-ray is performed at the Coliseum for the University of Southern California and the Los Angeles Rams football teams.In exchange for these services, each team provides RadNet with season tickets, parking and advertising space in the program book. RadNet alsoprovides radiology services at many of our imaging centers for the Los Angeles Angels, Anaheim Ducks, Oakland Athletics and Los Angeles KissArena Football. In December 2013 we entered into a three year sponsorship agreement with the Baltimore Ravens of the National Football League whichpermits us to state “Proud Imaging Provider of the Baltimore Ravens”. The sponsorship agreement has been extended through 2019. Suppliers Historically, we have acquired our diagnostic imaging equipment from large suppliers such as Carestream, GE Medical Systems, Inc.,Hologic, Hitachi, Phillips, Siemens and others, and we purchase medical supplies from various national vendors. We believe that we have excellentworking relationships with all of our major vendors. There are several comparable vendors for our supplies that would be available to us if one ofour current vendors becomes unavailable. We primarily acquire our equipment with cash or through various financing arrangements with equipment vendors and third partyequipment finance companies involving the use of capital leases with purchase options at minimal prices at the end of the lease term. At December31, 2016, capital lease obligations, excluding interest, totaled approximately $7.3 million through 2022, including current installments totalingapproximately $4.5 million. If we open or acquire additional imaging facilities, we may have to incur material capital lease obligations. Timely, effective maintenance is essential for achieving high utilization rates of our imaging equipment. We have an arrangement with GEMedical Systems, Inc. under which it has agreed to be responsible for the maintenance and repair of a majority of our equipment for a fee that isbased upon a percentage of our revenue, subject to a minimum payment. Competition The market for outpatient diagnostic imaging services is highly competitive. We compete locally for patients with groups of radiologists,established hospitals, clinics and other independent organizations that own and operate imaging equipment. Our competitors include AllianceHealthcare Services, Inc., to the extent it sells diagnostic services directly to outpatients, Diagnostic Imaging Group and several smaller regionalcompetitors. In addition, some physician practices have established their own diagnostic imaging facilities within their group practices to competewith us. We experience additional competition as a result of those activities. We compete principally on the basis of our reputation, our ability to provide multiple modalities at many of our facilities, the location ofour facilities, the quality of our diagnostic imaging services and technologists and the ability to establish and maintain relationships with healthcareproviders and referring physicians. See “Competitive Strengths” above. Some of our competitors may now or in the future have access to greaterfinancial resources than we do and may have access to newer, more advanced equipment Each of the non-BRMG contracted radiology practices has entered into agreements with its physician shareholders and full-time employedradiologists that generally prohibit those shareholders and radiologists from competing for a period of two years within defined geographic regionsafter they cease to be owners or employees, as applicable. In certain states, like California, a covenant not to compete is enforced in limitedcircumstances involving the sale of a business. In other states, a covenant not to compete will be enforced only: ·to the extent it is necessary to protect a legitimate business interest of the party seeking enforcement; ·if it does not unreasonably restrain the party against whom enforcement is sought; and ·if it is not contrary to public interest. Enforceability of a non-compete covenant is determined by a court based on all of the facts and circumstances of the specific case at thetime enforcement is sought. For this reason, it is not possible to predict whether or to what extent a court will enforce the contracted radiologypractices’ covenants. The inability of the contracted radiology practices or us to enforce radiologist’s non-compete covenants could result inincreased competition from individuals who are knowledgeable about our business strategies and operations. 13 Liability Insurance We maintain insurance policies with coverage we believe is appropriate in light of the risks attendant to our business and consistent withindustry practice. However, adequate liability insurance may not be available to us in the future at acceptable costs or at all. We maintain generalliability insurance and professional liability insurance in commercially reasonable amounts. Additionally, we maintain workers’ compensationinsurance on all of our employees. Coverage is placed on a statutory basis and corresponds to individual state’s requirements. Pursuant to our agreements with physician groups with whom we contract, including BRMG, each group must maintain medicalmalpractice insurance for each physician in the group, having coverage limits of not less than $1.0 million per incident and $3.0 million in theaggregate per year. California’s medical malpractice cap further reduces our exposure. California places a $250,000 limit on non-economic damages for medicalmalpractice cases. Non-economic damages are defined as compensation for pain, suffering, inconvenience, physical impairment, disfigurement andother non-pecuniary injury. The cap applies whether the case is for injury or death, and it allows only one $250,000 recovery in a wrongful deathcase. No cap applies to economic damages. Other states in which we now operate do not have similar limitations and in those states we believe ourinsurance coverage to be sufficient. Regulation General The healthcare industry is highly regulated, and we can give no assurance that the regulatory environment in which we operate will notchange significantly in the future. Our ability to operate profitably will depend in part upon us, and the contracted radiology practices and theiraffiliated physicians obtaining and maintaining all necessary licenses and other approvals, and operating in compliance with applicable healthcareregulations. We believe that healthcare regulations will continue to change. Therefore, we monitor developments in healthcare law and modify ouroperations from time to time as the business and regulatory environment changes. Licensing and Certification Laws Ownership, construction, operation, expansion and acquisition of diagnostic imaging facilities are subject to various federal and statelaws, regulations and approvals concerning licensing of facilities and personnel. In addition, free-standing diagnostic imaging facilities that provideservices not performed as part of a physician office must meet Medicare requirements to be certified as an independent diagnostic testing facilitybefore it can be authorized to bill the Medicare program. We have experienced a slowdown in the credentialing of our physicians over the lastseveral years which has lengthened our billing and collection cycle. Corporate Practice of Medicine In the states in which we operate, other than Florida, a lay person or any entity other than a professional corporation or other similarprofessional organization is not allowed to practice medicine, including by employing professional persons or by having any ownership interest orprofit participation in or control over any medical professional practice. The laws of such states also prohibit a lay person or a non-professionalentity from exercising control over the medical judgments or decisions of physicians and from engaging in certain financial arrangements, such assplitting professional fees with physicians. We structure our relationships with the radiology practices, including the purchase of diagnosticimaging facilities, in a manner that we believe keeps us from engaging in the practice of medicine, exercising control over the medical judgments ordecisions of the radiology practices or their physicians, or violating the prohibitions against fee-splitting. Medicare and Medicaid Fraud and Abuse – Federal Anti-kickback Statute During the year ended December 31, 2016, approximately 20% of our revenue before provision for bad debt generated at our diagnosticimaging centers was derived from federal government sponsored healthcare programs (Medicare) and 3% from state sponsored programs(Medicaid). Federal law known as the Anti-kickback Statute prohibits the knowing and willful offer, payment, solicitation or receipt of any form ofremuneration in return for, or to induce, (i) the referral of a person, (ii) the furnishing or arranging for the furnishing of items or services reimbursableunder the Medicare, Medicaid or other governmental programs or (iii) the purchase, lease or order or arranging or recommending purchasing,leasing or ordering of any item or service reimbursable under the Medicare, Medicaid or other governmental programs. Enforcement of this anti-kickback law is a high priority for the federal government, which has substantially increased enforcement resources and is scheduled to continueincreasing such resources. Noncompliance with the federal Anti-kickback Statute can result in exclusion from the Medicare, Medicaid or othergovernmental programs and civil and criminal penalties. 14 The Anti-kickback Statute is broad, and it prohibits many arrangements and practices that are lawful in businesses outside of thehealthcare industry. Recognizing that the Anti-kickback Statute is broad and may technically prohibit many innocuous or beneficial arrangementswithin the healthcare industry, the Office of the Inspector General of the U.S. Department of Health and Human Services issued regulations in Julyof 1991, which the Department has referred to as “safe harbors.” These safe harbor regulations set forth certain provisions which, if met in form andsubstance, will assure healthcare providers and other parties that they will not be prosecuted under the federal Anti-kickback Statute. Additionalsafe harbor provisions providing similar protections have been published intermittently since 1991. Our arrangements with physicians, physicianpractice groups, hospitals and other persons or entities who are in a position to refer may not fully meet the stringent criteria specified in thevarious safe harbors. Although full compliance with these provisions ensures against prosecution under the federal Anti-kickback Statute, thefailure of a transaction or arrangement to fit within a specific safe harbor does not necessarily mean that the transaction or arrangement is illegal orthat prosecution under the federal Anti-kickback Statute will be pursued. Although some of our arrangements may not fall within a safe harbor, we believe that such business arrangements do not violate the Anti-kickback Statute because we are careful to structure them to reflect fair value and ensure that the reasons underlying our decision to enter into abusiness arrangement comport with reasonable interpretations of the Anti-kickback Statute. However, even though we continuously strive tocomply with the requirements of the Anti-kickback Statute, liability under the Anti-kickback Statute may still arise because of the intentions oractions of the parties with whom we do business. While we are not aware of any such intentions or actions, we have only limited knowledgeregarding the intentions or actions underlying those arrangements. Conduct and business arrangements that do not fully satisfy one of these safeharbor provisions may result in increased scrutiny by government enforcement authorities such as the Office of the Inspector General. Medicare and Medicaid Fraud and Abuse – Stark Law Congress has placed significant legal prohibitions against physician referrals including the Ethics in Patient Referral Act of 1989 which iscommonly known as the Stark Law. The Stark Law prohibits a physician from referring Medicare patients to an entity providing designated healthservices, as defined under the Stark Law, including, without limitation, radiology services, in which the physician (or immediate family member) hasan ownership or investment interest or with which the physician (or immediate family member) has entered into a compensation arrangement. TheStark Law also prohibits the entity from billing for any such prohibited referral. The penalties for violating the Stark Law include a prohibition onpayment by these governmental programs and civil penalties of as much as $15,000 for each violation referral and $100,000 for participation in acircumvention scheme. We believe that, although we receive fees under our service agreements for management and administrative services, we arenot in a position to make or influence referrals of patients. Under the Stark Law, radiology and certain other imaging services and radiation therapy services and supplies are services included in thedesignated health services subject to the self-referral prohibition. Such services include the professional and technical components of anydiagnostic test or procedure using X-rays, ultrasound or other imaging services, CT, MRI, radiation therapy and diagnostic mammography services(but not screening mammography services). PET and nuclear medicine procedures are also included as designated health services under the StarkLaw. The Stark Law, however, excludes from designated health services: (i) X-ray, fluoroscopy or ultrasound procedures that require the insertion ofa needle, catheter, tube or probe through the skin or into a body orifice; (ii) radiology procedures that are integral to the performance of, andperformed during, non-radiological medical procedures; and (iii) invasive or interventional radiology, because the radiology services in theseprocedures are merely incidental or secondary to another procedure that the physician has ordered. The Stark Law provides that a request by a radiologist for diagnostic radiology services or a request by a radiation oncologist for radiationtherapy, if such services are furnished by or under the supervision of such radiologist or radiation oncologist pursuant to a consultation requestedby another physician, does not constitute a referral by a referring physician. If such requirements are met, the Stark Law self-referral prohibitionwould not apply to such services. The effect of the Stark Law on the radiology practices, therefore, will depend on the precise scope of servicesfurnished by each such practice’s radiologists and whether such services derive from consultations or are self-generated. We believe that, other than self-referred patients, all of the services covered by the Stark Law provided by the contracted radiologypractices derive from requests for consultation by non-affiliated physicians. Therefore, we believe that the Stark Law is not implicated by thefinancial relationships between our operations and the contracted radiology practices. In addition, we believe that we have structured ouracquisitions of the assets of existing practices, and we intend to structure any future acquisitions, so as not to violate the Anti-kickback Statuteand Stark Law and regulations. Specifically, we believe the consideration paid by us to physicians to acquire the tangible and intangible assetsassociated with their practices is consistent with fair value in arms’ length transactions and is not intended to induce the referral of patients or otherbusiness generated by such physicians. Should any such practice be deemed to constitute an arrangement designed to induce the referral ofMedicare or Medicaid patients, then our acquisitions could be viewed as possibly violating anti-kickback and anti-referral laws and regulations. Adetermination of liability under any such laws could have a material adverse effect on our business, financial condition and results of operations. 15 Medicare and Medicaid Fraud and Abuse – General The federal government embarked on an initiative to audit all Medicare carriers, which are the companies that adjudicate and pay Medicareclaims. These audits are expected to intensify governmental scrutiny of individual providers. An unsatisfactory audit of any of our diagnosticimaging facilities or contracted radiology practices could result in any or all of the following: significant repayment obligations, exclusion from theMedicare, Medicaid or other governmental programs, and civil and criminal penalties. Federal regulatory and law enforcement authorities have increased enforcement activities with respect to Medicare, Medicaid fraud andabuse regulations and other reimbursement laws and rules, including laws and regulations that govern our activities and the activities of theradiology practices. The federal government also has increased funding to fight healthcare fraud and is coordinating its enforcement efforts amongvarious agencies, such as the U.S. Department of Justice, the U.S. Department of Health and Human Services Office of Inspector General, and stateMedicaid fraud control units. The government may investigate our or the radiology practices’ activities, claims may be made against us or theradiology practices and these increased enforcement activities may directly or indirectly have an adverse effect on our business, financial conditionand results of operations. State Anti-kickback and Physician Self-referral Laws Many states have adopted laws similar to the federal Anti-kickback Statute. Some of these state prohibitions apply to referral of patientsfor healthcare services reimbursed by any source, not only the Medicare and Medicaid programs. Although we believe that we comply with bothfederal and state Anti-kickback laws, any finding of a violation of these laws could subject us to criminal and civil penalties or possible exclusionfrom federal or state healthcare programs. Such penalties would adversely affect our financial performance and our ability to operate our business. Federal False Claims Act The federal False Claims Act provides, in part, that the federal government may bring a lawsuit against any person who it believes hasknowingly presented, or caused to be presented, a false or fraudulent request for payment from the federal government, or who has made a falsestatement or used a false record to get a claim approved. The federal False Claims Act further provides that a lawsuit thereunder may be initiated inthe name of the United States by an individual, a “whistleblower,” who is an original source of the allegations. The government has taken theposition that claims presented in violation of the federal anti-kickback law or Stark Law may be considered a violation of the federal False ClaimsAct. Penalties include civil penalties of not less than $5,500 and not more than $11,000 for each false claim, plus three times the amount of damagesthat the federal government sustained because of the act of that person. Further, on May 20, 2009, President Obama signed into law the Fraud Enforcement and Recovery Act of 2009 (FERA), which greatlyexpanded the types of entities and conduct subject to the False Claims Act. Also, various states are considering or have enacted laws modeledafter the federal False Claims Act. Under the Deficit Reduction Act of 2005, or DRA, states are being encouraged to adopt false claims acts similarto the federal False Claims Act, which establish liability for submission of fraudulent claims to the State Medicaid program and containwhistleblower provisions. Even in instances when a whistleblower action is dismissed with no judgment or settlement, we may incur substantiallegal fees and other costs relating to an investigation. Future actions under the False Claims Act may result in significant fines and legal fees, whichwould adversely affect our financial performance and our ability to operate our business. We believe that we are in compliance with the rules and regulations that apply to the federal False Claims Act as well as its statecounterparts. Healthcare Reform Legislation Healthcare reform legislation enacted in the first quarter of 2010 by the Patient Protection and Affordable Care Act or PPACA, specificallyrequires the U.S. Department of Health and Human Services, in computing physician practice expense relative value units, to increase theequipment utilization factor for advanced diagnostic imaging services (such as MRI, CT and PET) from a presumed utilization rate of 50% to 65%for 2010 through 2012, 70% in 2013, and 75% thereafter. Excluded from the adjustment are low-technology imaging modalities such as ultrasound, X-ray and fluoroscopy. The Health Care and Education Reconciliation Act of 2010 (H.R. 4872) or Reconciliation Act, which was passed by the Senateand approved by the President on March 30, 2010, amends the provision for higher presumed utilization of advanced diagnostic imaging services toa presumed rate of 75%. The higher utilization rate was fully implemented in the beginning of 2011 and replaced the phase-in approach provided inthe PPACA. This utilization rate was further increased to 90% by the American Taxpayer Relief Act of 2012 (“ATRA”), effective as of January 1,2014. 16 The aim of increased utilization of diagnostic imaging services is to spread the cost of the equipment and services over a greater numberof scans, resulting in a lower cost per scan. These changes have precipitated reductions in federal reimbursement for medical imaging and result indecreased revenue for the scans we perform for Medicare beneficiaries. Other changes in reimbursement for services rendered by MedicareAdvantage plans may also reduce the revenues we receive for services rendered to Medicare Advantage enrollees. Following the 2016 U.S. general election, one party currently holds majorities in both Houses of Congress and the executive branch, whichpresents the possibility for further healthcare reform legislation to be enacted into law, including changes to, or the repeal of, the PPACA. Thesepotential changes could affect reimbursement, coverage, and utilization of diagnostic imaging services in ways that are currently unpredictable. Health Insurance Portability and Accountability Act of 1996 Congress enacted the Health Insurance Portability and Accountability Act of 1996, or HIPAA, in part, to combat healthcare fraud and toprotect the privacy and security of patients’ individually identifiable healthcare information. HIPAA, among other things, amends existing crimesand criminal penalties for Medicare fraud and enacts new federal healthcare fraud crimes, including actions affecting non-government healthcarebenefit programs. Under HIPAA, a healthcare benefit program includes any private plan or contract affecting interstate commerce under which anymedical benefit, item or service is provided. A person or entity that knowingly and willfully obtains the money or property of any healthcare benefitprogram by means of false or fraudulent representations in connection with the delivery of healthcare services is subject to a fine or imprisonment,or potentially both. In addition, HIPAA authorizes the imposition of civil money penalties against entities that employ or enter into contracts withexcluded Medicare or Medicaid program participants if such entities provide services to federal health program beneficiaries. A finding of liabilityunder HIPAA could have a material adverse effect on our business, financial condition and results of operations. Further, HIPAA requires healthcare providers and their business associates to maintain the privacy and security of individually identifiableprotected health information (“PHI”). HIPAA imposes federal standards for electronic transactions, for the security of electronic health informationand for protecting the privacy of PHI. The Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH”), signed intolaw on February 17, 2009, dramatically expanded, among other things, (1) the scope of HIPAA to now apply directly to “business associates,” orindependent contractors who receive or obtain PHI in connection with providing a service to a covered entity, (2) substantive security and privacyobligations, including new federal security breach notification requirements to affected individuals, DHHS and prominent media outlets, of certainbreaches of unsecured PHI, (3) restrictions on marketing communications and a prohibition on covered entities or business associates fromreceiving remuneration in exchange for PHI, and (4) the civil and criminal penalties that may be imposed for HIPAA violations, increasing the annualcap in penalties from $25,000 to $1.5 million per year. In addition, many states have enacted comparable privacy and security statutes or regulations that, in some cases, are more stringent thanHIPAA requirements. In those cases it may be necessary to modify our operations and procedures to comply with the more stringent state laws,which may entail significant and costly changes for us. We believe that we are in compliance with such state laws and regulations. However, if wefail to comply with applicable state laws and regulations, we could be subject to additional sanctions. We believe that we are in compliance with the current HIPAA requirements, as amended by HITECH, and comparable state laws, but weanticipate that we may encounter certain costs associated with future compliance. Moreover, we cannot guarantee that enforcement agencies orcourts will not make interpretations of the HIPAA standards that are inconsistent with ours, or the interpretations of our contracted radiologypractices or their affiliated physicians. A finding of liability under the HIPAA standards may result in significant criminal and civil penalties.Noncompliance also may result in exclusion from participation in government programs, including Medicare and Medicaid. These actions couldhave a material adverse effect on our business, financial condition, and results of operations. U.S. Food and Drug Administration or FDA The FDA has issued the requisite pre-market approval for all of the MRI and CT systems we use. We do not believe that any further FDAapproval is required in connection with the majority of equipment currently in operation or proposed to be operated, except under regulationsissued by the FDA pursuant to the Mammography Quality Standards Act of 1992, as amended by the Mammography Quality StandardsReauthorization Acts of 1998 and 2004 (collectively, the MQSA). All mammography facilities are required to meet the applicable MQSArequirements, including quality standards, be accredited by an approved accreditation body or state agency and certified by the FDA or an FDA-approved certifying state agency. Pursuant to the accreditation process, each facility providing mammography services must comply with certainstandards that include, among other things, annual inspection of the facility's equipment, personnel (interpreting physicians, technologists andmedical physicists) and practices. 17 Compliance with these MQSA requirements and standards is required to obtain Medicare payment for services provided to beneficiariesand to avoid various sanctions, including monetary penalties, or suspension of certification. Although the Mammography Accreditation Programof the American College of Radiology is an approved accreditation body and currently accredits all of our facilities which provide mammographyservices, and although we anticipate continuing to meet the requirements for accreditation, if we lose such accreditation, the FDA could revoke ourcertification. Congress has extended Medicare benefits to include coverage of screening mammography but coverage is subject to the facilityperforming the mammography meeting prescribed quality standards described above. The Medicare requirements to meet the standards apply todiagnostic mammography and image quality examination as well as screening mammography. Radiologist Licensing The radiologists providing professional medical services at our facilities are subject to licensing and related regulations by the states inwhich they provide services. As a result, we require BRMG and the other radiology groups with which we contract to require those radiologists tohave and maintain appropriate licensure. We do not believe that such laws and regulations will either prohibit or require licensure approval of ourbusiness operations, although no assurances can be made that such laws and regulations will not be interpreted to extend such prohibitions orrequirements to our operations. Insurance Laws and Regulation States in which we operate have adopted certain laws and regulations affecting risk assumption in the healthcare industry, including thosethat subject any physician or physician network engaged in risk-based managed care to applicable insurance laws and regulations. These laws andregulations may require physicians and physician networks to meet minimum capital requirements and other safety and soundness requirements.Implementing additional regulations or compliance requirements could result in substantial costs to the contracted radiology practices, limiting theirability to enter into capitated or other risk-sharing managed care arrangements and indirectly affecting our revenue from the contracted practices. U.S. Federal Budget and Sequestration We derive a substantial portion of our revenue from direct billings to governmental healthcare programs, such as Medicare and Medicaid,and private health insurance companies and/or health plans, including but not limited to those participating in the Medicare Advantage program.As a result, any negative changes in governmental capitation or fee-for-service rates or methods of reimbursement for the services we providecould have a significant adverse impact on our revenue and financial results. Congress has a strong interest in reducing the federal debt, which may lead to new proposals designed to achieve savings by alteringpayment policies. The Budget Control Act of 2011 (“BCA”) established a Joint Select Committee on Deficit Reduction, which had the goal ofachieving a reduction in the federal debt level of at least $1.2 trillion. As a result of the Joint Select Committee’s failure to draft a proposal by theBCA’s deadline, automatic cuts in various federal programs (excluding cuts to Medicaid but including cuts to Medicare provider reimbursement inan amount not to exceed 2%) were scheduled to commence on January 1, 2013. However, as a result of the enactment of the American TaxpayerRelief Act of 2012, on January 2, 2013, any such cuts were delayed until March 1, 2013 so as to allow the Congress sworn in on January 3, 2013 toconsider whether to allow sequestration to take place or replace it with other cuts in federal spending and/or higher taxes. On March 1, 2013, the new Congress did not replace automatic cuts and a 2% cut to Medicare payments began April 1, 2013, which hasnegatively impacted our revenues. In addition, certain Congressional members have stated that the automatic federal spending cuts under the BCAare insufficient to achieve the BCA’s goals of reducing federal spending and, in turn, the federal deficit. Such members suggested additional cuts tofederal entitlement programs, such as Medicare, to achieve the targeted deficit reductions. Therefore it is not possible at this time to estimate whatfurther impact, if any, other federal Medicare provider reimbursement cuts will have on our integrated care business or results of operations. Because governmental healthcare programs generally reimburse on a fee schedule basis rather than on a charge-related basis, we generallycannot increase our revenues from these programs by increasing the amount of charges for services. Moreover, if our costs increase, we may notbe able to recover our increased costs from these programs. Government and private payors have taken and may continue to take steps to controlthe cost, eligibility for, use, and delivery of healthcare services as a result of budgetary constraints, cost containment pressures and other reasons.We believe that these trends in cost containment will continue. These cost containment measures, and other market changes in non-governmentalinsurance plans have generally restricted our ability to recover, or shift to non-governmental payors, any increased costs that we experience. Ourintegrated care business and financial operations may be materially affected by these developments. 18 Environmental Matters The facilities we operate or manage generate hazardous and medical waste subject to federal and state requirements regarding handlingand disposal. We believe that the facilities that we operate and manage are currently in compliance in all material respects with applicable federal,state and local statutes and ordinances regulating the handling and disposal of such materials. We do not believe that we will be required to expendany material additional amounts in order to remain in compliance with these laws and regulations or that compliance will materially affect our capitalexpenditures, earnings or competitive position. Compliance Program We maintain a program to monitor compliance with federal and state laws and regulations applicable to healthcare entities. We have acompliance officer who is charged with implementing and supervising our compliance program, which includes the adoption of (i) Standards ofConduct for our employees and affiliates and (ii) a process that specifies how employees, affiliates and others may report regulatory or ethicalconcerns to our compliance officer. We believe that our compliance program meets the relevant standards provided by the Office of InspectorGeneral of the Department of Health and Human Services. An important part of our compliance program consists of conducting periodic audits of various aspects of our operations and that of thecontracted radiology practices. We also conduct mandatory educational programs designed to familiarize our employees with the regulatoryrequirements and specific elements of our compliance program. Item 1A.Risk Factors If BRMG or any of our other contracted radiology practices terminate their agreements with us, our business could substantially diminish. Our relationship with BRMG is an integral part of our business. Through our management agreement, BRMG provides all of theprofessional medical services at 133 of our 138 California facilities. Professional medical services are provided at our other facilities throughmanagement contracts with other radiology groups. BRMG and these other radiology groups contract with various other independent physiciansand physician groups to provide all of the professional medical services at most of our facilities, and they must use their best efforts to provide theprofessional medical services at any new facilities that we open or acquire in their areas of operation. In addition, BRMG and the other radiologygroups’ strong relationships with referring physicians are largely responsible for the revenue generated at the facilities they service. Although ourmanagement agreement with BRMG runs until 2024, with automatic renewals for 10-year periods, and our management agreements with othergroups are also for multiple years, BRMG and the other radiology groups have the right to terminate the agreements if we default on our obligationsand fail to cure the default. Also, the various radiology groups’ ability to continue performing under the management agreements may be curtailedor eliminated due to the groups’ financial difficulties, loss of physicians or other circumstances. If the radiology groups cannot perform theirobligations to us, we would need to contract with one or more other radiology groups to provide the professional medical services at the facilitiesserviced by the group. We may not be able to locate radiology groups willing to provide those services on terms acceptable to us, if at all. Even ifwe were able to do so, any replacement radiology group’s relationships with referring physicians may not be as extensive as those of the terminatedgroup. In any such event, our business could be seriously harmed. In addition, the radiology groups are party to substantially all of the managedcare contracts from which we derive revenue. If we were unable to readily replace these contracts, our revenue would be negatively affected. We may experience risks associated with the new strategic partnership with Imaging Advantage LLC In December 2015, we entered into a multi-year strategic relationship with Imaging Advantage LLC. Under the terms of such agreement, wehave agreed to collaborate to deploy innovative models of delivering radiology services. While we expect this strategic relationship to increase ourprofitability and expand our operations, we may never realize the anticipated benefits of such relationship. 19 Our ability to generate revenue depends in large part on referrals from physicians. We derive substantially all of our net revenue, directly or indirectly, from fees charged for the diagnostic imaging services performed at ourfacilities. We depend on referrals of patients from unaffiliated physicians and other third parties who have no contractual obligations to referpatients to us for a substantial portion of the services we perform. If a sufficiently large number of these physicians and other third parties were todiscontinue referring patients to us, our scan volume could decrease, which would reduce our net revenue and operating margins. Further,commercial third-party payors have implemented programs that could limit the ability of physicians to refer patients to us. For example, prepaidhealthcare plans, such as health maintenance organizations, sometimes contract directly with providers and require their enrollees to obtain theseservices exclusively from those providers. Some insurance companies and self-insured employers also limit these services to contracted providers.These “closed panel” systems are now common in the managed care environment. Other systems create an economic disincentive for referrals toproviders outside the system’s designated panel of providers. If we are unable to compete successfully for these managed care contracts, ourresults and prospects for growth could be adversely affected. If our contracted radiology practices, including BRMG, lose a significant number of their radiologists, our financial results could be adverselyaffected. At times, there has been a shortage of qualified radiologists in some of the regional markets we serve. In addition, competition in recruitingradiologists may make it difficult for our contracted radiology practices to maintain adequate levels of radiologists. If a significant number ofradiologists terminate their relationships with our contracted radiology practices and those radiology practices cannot recruit sufficient qualifiedradiologists to fulfill their obligations under our agreements with them, our ability to maximize the use of our diagnostic imaging facilities and ourfinancial results could be adversely affected. Increased expenses to BRMG will impact our financial results because the management fee we receivefrom BRMG, which is based on a percentage of BRMG’s collections, is adjusted annually to take into account the expenses of BRMG. Neither we,nor our contracted radiology practices, maintain insurance on the lives of any affiliated physicians. We may become subject to professional malpractice liability, which could be costly and negatively impact our business. The physicians employed by our contracted radiology practices are from time to time subject to malpractice claims. We structure ourrelationships with the practices under our management agreements in a manner that we believe does not constitute the practice of medicine by usor subject us to professional malpractice claims for acts or omissions of physicians employed by the contracted radiology practices. Nevertheless,claims, suits or complaints relating to services provided by the contracted radiology practices have been asserted against us in the past and may beasserted against us in the future. In addition, we may be subject to professional liability claims, including, without limitation, for improper use ormalfunction of our diagnostic imaging equipment or for accidental contamination or injury from exposure to radiation. We may not be able tomaintain adequate liability insurance to protect us against those claims at acceptable costs or at all. Any claim made against us that is not fully covered by insurance could be costly to defend, result in a substantial damage award againstus and divert the attention of our management from our operations, all of which could have an adverse effect on our financial performance. Inaddition, successful claims against us may adversely affect our business or reputation. Although California places a $250,000 limit on non-economic damages for medical malpractice cases, no limit applies to economic damages and no such limits exist in the other states in which weprovide services. We may not receive payment from some of our healthcare provider customers because of their financial circumstances. Some of our healthcare provider customers do not have significant financial resources, liquidity or access to capital. If these customersexperience financial difficulties they may be unable to pay us for the equipment and services that we provide. A significant deterioration in generalor local economic conditions could have a material adverse effect on the financial health of certain of our healthcare provider customers. As aresult, we may have to increase the amounts of accounts receivables that we write-off, which would adversely affect our financial condition andresults of operations. Capitation fee arrangements could reduce our operating margins. For the year ended December 31, 2016, we derived approximately 11.6% of our net service fee revenue before provision from bad debt fromcapitation arrangements, and we intend to increase the revenue we derive from capitation arrangements in the future. Under capitationarrangements, the payor pays a pre-determined amount per-patient per-month in exchange for us providing all necessary covered services to thepatients covered under the arrangement. These contracts pass much of the financial risk of providing diagnostic imaging services, including therisk of over-use, from the payor to the provider. Our success depends in part on our ability to negotiate effectively, on behalf of the contractedradiology practices and our diagnostic imaging facilities, contracts with health maintenance organizations, employer groups and other third-partypayors for services to be provided on a capitated basis and to efficiently manage the utilization of those services. If we are not successful inmanaging the utilization of services under these capitation arrangements or if patients or enrollees covered by these contracts require morefrequent or extensive care than anticipated, we would incur unanticipated costs not offset by additional revenue, which would reduce operatingmargins. 20 Changes in the method or rates of third-party reimbursement could have a negative impact on our results From time to time, changes designed to contain healthcare costs have been implemented, some of which have resulted in decreasedreimbursement rates for diagnostic imaging services that impact our business. For services for which we bill Medicare directly, we are paid underthe Medicare Physician Fee Schedule, which is updated on an annual basis. Under the Medicare statutory formula, payments under the PhysicianFee Schedule would have decreased for the past several years if Congress failed to intervene. Medicare program reimbursements for physician services as well as other services to Medicare beneficiaries who are not enrolled inMedicare Advantage plans are based upon the fee-for-service rates set forth in the Medicare Physician Fee Schedule, which relies, in part, on atarget-setting formula system called the SGR. Each year, on January 1st, the Medicare program updates the Medicare Physician Fee Schedulereimbursement rates. Many private payors use the Medicare Physician Fee Schedule to determine their own reimbursement rates. On April 16, 2015, President Obama signed into law the Medicare Access and CHIP Reauthorization Act (H.R. 2), which provides forsweeping changes to how Medicare pays physicians, as well as averts the 21% reduction to Medicare payments under the Medicare Physician FeeSchedule that was scheduled to take effect on April 1, 2016. H.R. 2, among other things, repealed the Sustainable Growth Rate (“SGR”) formula. TheSGR formula was enacted in 1997 and was linked to the growth in the U.S. gross domestic product, which led Congress to repeatedly intervene tomitigate the negative reimbursement impact associated with it. H.R. 2 provides that for services paid under the physician fee schedule andfurnished during calendar years 2016 through 2019, Medicare’s payment rates will increase by 0.5% per year over calendar year 2015. Fees willremain at the 2019 level through 2025, but high performing providers participating in alternative payment models will have the opportunity foradditional payments. Such payments will be based upon quality, resource use, clinical practice improvement activities and meaningful use ofelectronic health record technology. Given that the value-based payment mechanisms have yet to take effect, we cannot determine the impact ofsuch payments models on our business at this time. However, in general, shifting to value-based care may decrease our revenue and require us toinvest heavily in new IT infrastructure and analytic tools. In 2013, Congress adjusted Medicare payment rates for physician imaging services in an attempt to better reflect actual usage, by revisingupward the assumed usage rate for diagnostic imaging equipment costing more than $1 million to 90% effective January, 1, 2014. Additionally,under the Protecting Access to Medicare Act of 2014 (“PAMA”), Congress introduced a new quality incentive program that, effective January 1,2016, reduces Medicare payment for certain CT services reimbursed through the Medicare Physician Fee Schedule that are furnished usingequipment that does not meet certain dose optimization and management standards. Other changes in reimbursement for services rendered byMedicare Advantage plans may reduce the revenues we receive for services rendered to Medicare Advantage enrollees. Pressure to control healthcare costs could have a negative impact on our results. One of the principal objectives of health maintenance organizations and preferred provider organizations is to control the cost ofhealthcare services. Healthcare providers participating in managed care plans may be required to refer diagnostic imaging tests to certain providersdepending on the plan in which a covered patient is enrolled. In addition, managed care contracting has become very competitive, andreimbursement schedules are at or below Medicare reimbursement levels. The expansion of health maintenance organizations, preferred providerorganizations and other managed care organizations within the geographic areas covered by our network could have a negative impact on theutilization and pricing of our services, because these organizations will exert greater control over patients’ access to diagnostic imaging services,the selections of the provider of such services and reimbursement rates for those services. We experience competition from other diagnostic imaging companies and hospitals, and this competition could adversely affect our revenueand business. The market for diagnostic imaging services is highly competitive. We compete principally for patients on the basis of our reputation, ourability to provide multiple modalities at many of our facilities, the location of our facilities and the quality of our diagnostic imaging services. Wecompete locally with groups of radiologists, established hospitals, clinics and other independent organizations that own and operate imagingequipment. Our competitors include Alliance Healthcare Services, Inc., to the extent it sells diagnostic imaging services directly to outpatients andseveral smaller regional competitors. Some of our competitors may now or in the future have access to greater financial resources than we do andmay have access to newer, more advanced equipment. In addition, some physician practices have established their own diagnostic imagingfacilities within their group practices and compete with us. We are experiencing increased competition as a result of such activities, and if we areunable to successfully compete, our business and financial condition would be adversely affected. 21Our success depends in part on our key personnel and loss of key executives could adversely affect our operations. In addition, formeremployees and radiology practices we have previously contracted with could use the experience and relationships developed while employedor under contract with us to compete with us.Our success depends in part on our ability to attract and retain qualified senior and executive management, and managerial and technicalpersonnel. Competition in recruiting these personnel may make it difficult for us to continue our growth and success. The loss of their services orour inability in the future to attract and retain management and other key personnel could hinder the implementation of our business strategy. Theloss of the services of Dr. Howard G. Berger, our President and Chief Executive Officer, and Norman R. Hames or Stephen M. Forthuber, our ChiefOperating Officers, West Coast and East Coast, respectively, could have a significant negative impact on our operations. We believe that theycould not easily be replaced with executives of equal experience and capabilities. We do not maintain key person insurance on the life of any of ourexecutive officers. Additionally, if we lose the services of Dr. Berger, our relationship with BRMG could deteriorate, which would materiallyadversely affect our business.Many of the states in which we operate do not enforce agreements that prohibit a former employee from competing with a former employer.As a result, many of our employees whose employment is terminated are free to compete with us, subject to prohibitions on the use of trade secretinformation and, depending on the terms of the employee’s employment agreement, on solicitation of existing employees and customers (ifenforceable). A former executive, manager or other key employee who joins one of our competitors could use the relationships he or sheestablished with third party payors, radiologists or referring physicians while our employee and the industry knowledge he or she acquired duringthat tenure to enhance the new employer’s ability to compete with us.The agreements with most of our radiology practices contain non-compete provisions; however the enforceability of these provisions isdetermined by a court based on all the facts and circumstances of the specific case at the time enforcement is sought. Our inability to enforceradiologists’ non-compete provisions could result in increased competition from individuals who are knowledgeable about our business strategiesand operations.Our failure to successfully, and in a timely manner, integrate similar businesses and/or new lines of businesses we acquire could reduce ourprofitability.We may never realize expected synergies, business opportunities and growth prospects in connection with our acquisitions.. We may notbe able to capitalize on expected business opportunities, assumptions underlying estimates of expected cost savings may be inaccurate, or generalindustry and business conditions may deteriorate. In addition, integrating operations will require significant efforts and expenses on our part.Personnel may leave or be terminated because of an acquisition. Our management may have its attention diverted while trying to integrate anacquisition. If these factors limit our ability to integrate the operations of an acquisition successfully or on a timely basis, our expectations of futureresults of operations, including certain cost savings and synergies as a result of the acquisition, may not be met. In addition, our growth andoperating strategies for a target’s business may be different from the strategies that the target company pursued prior to our acquisition. If ourstrategies are not the proper strategies, they could have a material adverse effect on our business, financial condition and results of operations.In the past we have acquired, and may again in the future acquire, companies that create a new line of business. The process of integratingthe acquired business, technology, service and research and development component into our business and operations and entry into a new line ofbusiness in which we are inexperienced may result in unforeseen operating difficulties and expenditures. In developing a new line of business wemay invest significant time and resources that take away the attention of management that would otherwise be available for ongoing developmentof our business which may affect our results of operations and we may not be able to take full advantage of the business opportunities available tous as we expand a new lines of business. In addition, there can be no assurance that our new lines of business will ultimately be successful. Thefailure to successfully manage these risks in the development and implementation of new lines of business could have a material, adverse effect onthe Company’s business, financial condition, and results of operations.22 We may not be able to successfully grow our business, which would adversely affect our financial condition and results of operations. Historically, we have experienced substantial growth through acquisitions that have increased our size, scope and geographic distribution.During the past two fiscal years, we have completed 9 acquisitions. These acquisitions have added 39 centers to our fixed-site outpatientdiagnostic imaging services. Our ability to successfully expand through acquiring facilities, developing new facilities, adding equipment at existingfacilities, and directly or indirectly entering into contractual relationships with high-quality radiology practices depends upon many factors,including our ability to: ·identify attractive and willing candidates for acquisitions; ·identify locations in existing or new markets for development of new facilities; ·comply with legal requirements affecting our arrangements with contracted radiology practices, including state prohibitions onfee-splitting, corporate practice of medicine and self-referrals; ·obtain regulatory approvals where necessary and comply with licensing and certification requirements applicable to ourdiagnostic imaging facilities, the contracted radiology practices and the physicians associated with the contracted radiologypractices; ·recruit a sufficient number of qualified radiology technologists and other non-medical personnel; ·expand our infrastructure and management; and ·compete for opportunities. We may not be able to compete effectively for the acquisition of diagnostic imaging facilities. Ourcompetitors may have more established operating histories and greater resources than we do. Competition may also make anyacquisitions more expensive. Managing our recent acquisitions, as well as any other future acquisitions, will entail numerous operational and financial risks, including: ·inability to obtain adequate financing; ·failure to achieve our targeted operating results; ·diversion of management’s attention and resources; ·failure to retain key personnel; ·difficulties in integrating new operations into our existing infrastructure; and ·amortization or write-offs of acquired intangible assets, including goodwill. If we are unable to successfully grow our business through acquisitions it could have an adverse effect on our financial condition andresults of operations. Further we cannot ensure we will be able to receive the required regulatory approvals for any future acquisitions, expansionsor replacements, and the failure to obtain these approvals could limit the market for our services and have an adverse effect on our financialcondition and results of operations. We have experienced operating losses in the past. If we are unable to continue to generate sufficient income, we may be unable to pay ourobligations. We had net income attributable to RadNet common stockholders of $7.2 million, $7.7 million, and $1.4 million for the years ended December31, 2016, 2015, and 2014 respectively. As of December 31, 2016, our equity was $52.1 million. As a whole, results have shown improvement over thepast three years. However, if we cannot continue to generate income in sufficient amounts, we will not be able to pay our obligations as theybecome due, which could adversely impact our business, financial condition and results of operations. 23 Our substantial debt could adversely affect our financial condition and prevent us from fulfilling our obligations under our outstandingindebtedness. Our current substantial indebtedness and any future indebtedness we incur could adversely affect our financial condition. We are highlyleveraged. As of December 31, 2016, our total indebtedness excluding discount on term loan debt was $655.5 million, $646.9 million of whichconstituted guaranty indebtedness. Our substantial indebtedness could also: ·make it difficult for us to satisfy our payment obligations with respect to our outstanding indebtedness; ·require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, reducing the availability of ourcash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes; ·expose us to the risk of interest rate increases on our variable rate borrowings, including borrowings under our new senior securedcredit facilities; ·increase our vulnerability to adverse general economic and industry conditions; ·limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; ·place us at a competitive disadvantage compared to our competitors that have less debt; and ·limit our ability to borrow additional funds on terms that are satisfactory to us or at all. Increases in interest rates could increase the amount of our debt payments and reduce out operating cash flows. We have incurred significant indebtedness that accrues interest at variable rate borrowing and we may incur additional debt in the future.Increases in interest rates on our current outstanding debt or any other debt we may incur will reduce our operating cash flows and if we need torepay any of our variable rate borrowing during period of high interest rates, we could be required to forgo other opportunities in order to repay thedebt which may not permit us to realize future earnings of those forgone opportunities. To mitigate this risk, we have entered into an interest ratecap contract on our term loan debt facilities. See note 10 in the notes to financial statements contained herein. We may not be able to finance future needs or adapt our business plan to changes because of restrictions placed on us by our credit facilitiesand instruments governing our other indebtedness. Our credit facilities contain affirmative and negative covenants which restrict, among other things, our ability to: ·pay dividends or make certain other restricted payments or investments; ·incur additional indebtedness and certain disqualified equity interests; ·create liens (other than permitted liens) securing indebtedness or trade payables; ·sell certain assets or merge with or into other companies or otherwise dispose of all or substantially all of our assets; ·enter into certain transactions with affiliates; ·create restrictions on dividends or other payments by our restricted subsidiaries; and ·create guarantees of indebtedness by restricted subsidiaries. All of these restrictions could affect our ability to operate our business and may limit our ability to take advantage of potential businessopportunities as they arise. A failure to comply with these covenants and restrictions would permit the relevant creditors to declare all amountsborrowed under the applicable agreement governing such indebtedness, together with accrued interest and fees, to be immediately due andpayable. If the indebtedness under our credit facilities is accelerated, we may not have sufficient assets to repay amounts due under the creditfacilities or on other indebtedness then outstanding. A restriction in our ability to make capital expenditures would restrict our growth and could adversely affect our business. We operate in a capital intensive, high fixed-cost industry that requires significant amounts of capital to fund operations, particularly theinitial start-up and development expenses of new diagnostic imaging facilities and the acquisition of additional facilities and new diagnosticimaging equipment. We incur capital expenditures to, among other things, upgrade and replace equipment for existing facilities and expand withinour existing markets and enter new markets. If we open or acquire additional imaging facilities, we may have to incur material capital leaseobligations. To the extent we are unable to generate sufficient cash from our operations, funds are not available from our lenders or we are unable tostructure or obtain financing through operating leases, long-term installment notes or capital leases, we may be unable to meet our capitalexpenditure requirements to support the maintenance and continued growth of our operations. 24 We may be impacted by eligibility changes to government and private insurance programs Due to potential decreased availability of healthcare through private employers, the number of patients who are uninsured or participate ingovernmental programs may increase. Healthcare reform legislation will increase the participation of individuals in the Medicaid program in statesthat elect to participate in the expanded Medicaid coverage. A shift in payor mix from managed care and other private payors to government payorsas well as an increase in the number of uninsured patients may result in a reduction in the rates of reimbursement or an increase in uncollectiblereceivables or uncompensated care, with a corresponding decrease in net revenue. Changes in the eligibility requirements for governmentalprograms such as the Medicaid program and state decisions on whether to participate in the expansion of such programs also could increase thenumber of patients who participate in such programs and the number of uninsured patients. Even for those patients who remain in privateinsurance plans, changes to those plans could increase patient financial responsibility, resulting in a greater risk of uncollectible receivables.Furthermore, changes to, or repeal of, the PPACA under the 115th Congress and new Administration may also affect reimbursement and coverage inways that are currently unpredictable. These factors and events could have a material adverse effect on our business, financial condition, andresults of operations. Our business could be adversely impacted if there are deficiencies in our disclosure controls and procedures or internal control over financialreporting The design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent allerrors, misstatements or misrepresentations. While management will review the effectiveness of our disclosure controls and procedures and internalcontrol over financial reporting, there can be no guarantee that our disclosure controls and procedures or our internal control over financialreporting will be effective in accomplishing all control objectives all of the time. Deficiencies, including any material weakness, in our internalcontrol over financial reporting that may occur in the future could result in misstatements of our results of operations, restatements of our financialstatements, or otherwise adversely impact our financial condition, results of operations, cash flows, and our ability to satisfy our debt serviceobligations. As of December 31, 2016, we have identified a material weakness in internal controls with respect to our processes surrounding theoccurrence and measurement of revenue and valuation of accounts receivable. See Item 9 for further information. The regulatory framework in which we operate is uncertain and evolving. Although we believe that we are operating in compliance with applicable federal and state laws, neither our current or anticipated businessoperations nor the operations of the contracted radiology practices have been the subject of judicial or regulatory interpretation. We cannot assureyou that a review of our business by courts or regulatory authorities will not result in a determination that could adversely affect our operations orthat the healthcare regulatory environment will not change in a way that restricts our operations. In addition, healthcare laws and regulations maychange significantly in the future. We continuously monitor these developments and modify our operations from time to time as the regulatoryenvironment changes. We cannot assure you however, that we will be able to adapt our operations to address new regulations or that newregulations will not adversely affect our business. Certain states have enacted statutes or adopted regulations affecting risk assumption in the healthcare industry, including statutes andregulations that subject any physician or physician network engaged in risk-based managed care contracting to applicable insurance laws andregulations. These laws and regulations, if adopted in the states in which we operate, may require physicians and physician networks to meetminimum capital requirements and other safety and soundness requirements. Implementing additional regulations or compliance requirements couldresult in substantial costs to us and the contracted radiology practices and limit our ability to enter into capitation or other risk-sharing managedcare arrangements. State and federal anti-kickback and anti-self-referral laws may adversely affect income. Various federal and state laws govern financial arrangements among healthcare providers. The federal Anti-Kickback Law prohibits theknowing and willful offer, payment, solicitation or receipt of any form of remuneration in return for, or to induce, the referral of Medicare, Medicaid,or other federal healthcare program patients, or in return for, or to induce, the purchase, lease or order of items or services that are covered byMedicare, Medicaid, or other federal healthcare programs. Similarly, many state laws prohibit the solicitation, payment or receipt of remuneration inreturn for, or to induce the referral of patients in private as well as government programs. Violation of these Anti-Kickback Laws may result insubstantial civil or criminal penalties for individuals or entities and/or exclusion from federal or state healthcare programs. We believe we areoperating in compliance with applicable law and believe that our arrangements with providers would not be found to violate the Anti-KickbackLaws. However, these laws could be interpreted in a manner inconsistent with our operations. Federal law prohibiting physician self-referrals, known as the Stark Law, prohibits a physician from referring Medicare or Medicaid patientsto an entity for certain “designated health services” if the physician has a prohibited financial relationship with that entity, unless an exceptionapplies. Certain radiology services are considered “designated health services” under the Stark Law. Although we believe our operations do notviolate the Stark Law, our activities may be challenged. If a challenge to our activities is successful, it could have an adverse effect on ouroperations. In addition, legislation may be enacted in the future that further addresses Medicare and Medicaid fraud and abuse or that imposesadditional requirements or burdens on us. 25 In addition, under the DRA, states enacting false claims statutes similar to the federal False Claims Act, which establish liability forsubmission of fraudulent claims to the State Medicaid program and contain qui tam or whistleblower provisions, receive an increased percentage ofany recovery from a State Medicaid judgment or settlement. Adoption of new false claims statutes in states where we operate may imposeadditional requirements or burdens on us. Federal and state privacy and information security laws are complex, and if we fail to comply with applicable laws, regulations and standards,or if we fail to properly maintain the integrity of our data, protect our proprietary rights to our systems, or defend against cybersecurityattacks, we may be subject to government or private actions due to privacy and security breaches, and our business, reputation, results ofoperations, financial position and cash flows could be materially and adversely affected. We must comply with numerous federal and state laws and regulations governing the collection, dissemination, access, use, security andprivacy of PHI, including HIPAA and its implementing privacy and security regulations, as amended by the federal HITECH Act and collectivelyreferred to as HIPAA. If we fail to comply with applicable privacy and security laws, regulations and standards, properly maintain the integrity ofour data, protect our proprietary rights to our systems, or defend against cybersecurity attacks, our business, reputation, results of operations,financial position and cash flows could be materially and adversely affected. Information security risks have significantly increased in recent years in part because of the proliferation of new technologies, the use ofthe internet and telecommunications technologies to conduct our operations, and the increased sophistication and activities of organized crime,hackers, terrorists and other external parties, including foreign state agents. Our operations rely on the secure processing, transmission and storageof confidential, proprietary and other information in our computer systems and networks. We are continuously implementing multiple layers of security measures through technology, processes, and our people; utilize currentsecurity technologies; and our defenses are monitored and routinely tested internally and by external parties. Despite these efforts, our facilitiesand systems may be vulnerable to privacy and security incidents; security attacks and breaches; acts of vandalism or theft; computer viruses;coordinated attacks by activist entities; emerging cybersecurity risks; misplaced or lost data; programming and/or human errors; or other similarevents. Emerging and advanced security threats, including coordinated attacks, require additional layers of security which may disrupt or impactefficiency of operations. Any security breach involving the misappropriation, loss or other unauthorized disclosure or use of confidential information, includingprotected health information, financial data, competitively sensitive information, or other proprietary data, whether by us or a third party, couldhave a material adverse effect on our business, reputation, financial condition, cash flows, or results of operations. The occurrence of any of theseevents could result in interruptions, delays, the loss or corruption of data, cessations in the availability of systems or liability under privacy andsecurity laws, all of which could have a material adverse effect on our financial position and results of operations and harm our business reputation.If we are unable to protect the physical and electronic security and privacy of our databases and transactions, we could be subject to potentialliability and regulatory action, our reputation and relationships with our patients and vendors would be harmed, and our business, operations, andfinancial results may be materially adversely affected. Failure to adequately protect and maintain the integrity of our information systems (includingour networks) and data, or to defend against cybersecurity attacks, could subject us to monetary fines, civil suits, civil penalties or criminalsanctions and requirements to disclose the breach publicly, and may further result in a material adverse effect on our results of operations, financialposition, and cash flows. Complying with federal and state regulations is an expensive and time-consuming process, and any failure to comply could result insubstantial penalties. We are directly or indirectly, through the radiology practices with which we contract, subject to extensive regulation by both the federalgovernment and the state governments in which we provide services, including: ·the federal False Claims Act; ·the federal Medicare and Medicaid Anti-Kickback Laws, and state anti-kickback prohibitions; ·federal and state billing and claims submission laws and regulations; ·the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology forEconomic and Clinical Health Act of 2009, and comparable state laws; ·the federal physician self-referral prohibition commonly known as the Stark Law and the state equivalent of the Stark Law; ·state laws that prohibit the practice of medicine by non-physicians and prohibit fee-splitting arrangements involving physicians; ·federal and state laws governing the diagnostic imaging and therapeutic equipment we use in our business concerning patientsafety, equipment operating specifications and radiation exposure levels; and ·state laws governing reimbursement for diagnostic services related to services compensable under workers compensation rules. 26 If our operations are found to be in violation of any of the laws and regulations to which we or the radiology practices with which wecontract are subject, we may be subject to the applicable penalty associated with the violation, including civil and criminal penalties, damages, finesand the curtailment of our operations. Any penalties, damages, fines or curtailment of our operations, individually or in the aggregate, couldadversely affect our ability to operate our business and our financial results. The risks of our being found in violation of these laws and regulationsis increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are opento a variety of interpretations. Any action brought against us for violation of these laws or regulations, even if we successfully defend against it,could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. If we fail to comply with various licensure, certification and accreditation standards, we may be subject to loss of licensure, certification oraccreditation, which would adversely affect our operations. Ownership, construction, operation, expansion and acquisition of our diagnostic imaging facilities are subject to various federal and statelaws, regulations and approvals concerning licensing of personnel, other required certificates for certain types of healthcare facilities and certainmedical equipment. In addition, freestanding diagnostic imaging facilities that provide services independent of a physician’s office must be enrolledby Medicare as an independent diagnostic treatment facility, or IDTF, to bill the Medicare program. Medicare carriers have discretion in applyingthe IDTF requirements and therefore the application of these requirements may vary from jurisdiction to jurisdiction. In addition, federal legislationrequires all suppliers that provide the technical component of diagnostic MRI, PET/CT, CT, and nuclear medicine to be accredited by anaccreditation organization designated by CMS (which currently include the American College of Radiology (ACR), the Intersocietal AccreditationCommission (IAC) and the Joint Commission) by January 1, 2012. Our MRI, CT, nuclear medicine, ultrasound and mammography facilities arecurrently accredited by the American College of Radiology. We may not be able to receive the required regulatory approvals or accreditation forany future acquisitions, expansions or replacements, and the failure to obtain these approvals could limit the opportunity to expand our services. Our facilities are subject to periodic inspection by governmental and other authorities to assure continued compliance with the variousstandards necessary for licensure and certification. If any facility loses its certification under the Medicare program, then the facility will beineligible to receive reimbursement from the Medicare and Medicaid programs. For the year ended December 31, 2016, approximately 23% of our netservice fee revenue before provision for bad debt came from the Medicare and Medicaid programs. A change in the applicable certification status ofone of our facilities could adversely affect our other facilities and in turn us as a whole. Credentialing of physicians is required by our payors priorto commencing payment. We have experienced a slowdown in the credentialing of our physicians over the last several years which has lengthenedour billing and collection cycle, and could negatively impact our ability to collect revenue from patients covered by Medicare. Our agreements with the contracted radiology practices must be structured to avoid the corporate practice of medicine and fee-splitting. State law prohibits us from exercising control over the medical judgments or decisions of physicians and from engaging in certain financialarrangements, such as splitting professional fees with physicians. These laws are enforced by state courts and regulatory authorities, each withbroad discretion. A component of our business has been to enter into management agreements with radiology practices. We provide management,administrative, technical and other non-medical services to the radiology practices in exchange for a service fee typically based on a percentage ofthe practice’s revenue. We structure our relationships with the radiology practices, including the purchase of diagnostic imaging facilities, in amanner that we believe keeps us from engaging in the practice of medicine or exercising control over the medical judgments or decisions of theradiology practices or their physicians, or violating the prohibitions against fee-splitting. There can be no assurance that our present arrangementswith BRMG or the physicians providing medical services and medical supervision at our imaging facilities will not be challenged, and, if challenged,that they will not be found to violate the corporate practice of medicine or fee splitting prohibitions, thus subjecting us to potential damages,injunction and/or civil and criminal penalties or require us to restructure our arrangements in a way that would affect the control or quality of ourservices and/or change the amounts we receive under our management agreements. Any of these results could jeopardize our business. 27 Some of our imaging modalities use radioactive materials, which generate regulated waste and could subject us to liabilities for injuries orviolations of environmental and health and safety laws. Some of our imaging procedures use radioactive materials, which generate medical and other regulated wastes. For example, patients areinjected with a radioactive substance before undergoing a PET scan. Storage, use and disposal of these materials and waste products present therisk of accidental environmental contamination and physical injury. We are subject to federal, state and local regulations governing storage,handling and disposal of these materials. We could incur significant costs and the diversion of our management’s attention in order to comply withcurrent or future environmental and health and safety laws and regulations. Also, we cannot completely eliminate the risk of accidentalcontamination or injury from these hazardous materials. Although we maintain professional liability insurance coverage in amounts we believe isconsistent with industry practice in the event of an accident, we could be held liable for any resulting damages, and any liability could exceed thelimits of or fall outside the coverage of our professional liability insurance. Technological change in our industry could reduce the demand for our services and require us to incur significant costs to upgrade ourequipment. The development of new technologies or refinements of existing modalities may require us to upgrade and enhance our existing equipmentbefore we may otherwise intend. Many companies currently manufacture diagnostic imaging equipment. Competition among manufacturers for agreater share of the diagnostic imaging equipment market may result in technological advances in the speed and imaging capacity of newequipment. This may accelerate the obsolescence of our equipment, and we may not have the financial ability to acquire the new or improvedequipment and may not be able to maintain a competitive equipment base. In addition, advances in technology may enable physicians and othersto perform diagnostic imaging procedures without us. If we are unable to deliver our services in the efficient and effective manner that payors,physicians and patients expect our revenue could substantially decrease. Because we have high fixed costs, lower scan volumes per system could adversely affect our business. The principal components of our expenses, excluding depreciation, consist of debt service, capital lease payments, compensation paid totechnologists, salaries, real estate lease expenses and equipment maintenance costs. Because a majority of these expenses are fixed, a relativelysmall change in our revenue could have a disproportionate effect on our operating and financial results depending on the source of our revenue.Thus, decreased revenue as a result of lower scan volumes per system could result in lower margins, which could materially adversely affect ourbusiness. We may be unable to effectively maintain our equipment or generate revenue when our equipment is not operational. Timely, effective service is essential to maintaining our reputation and high use rates on our imaging equipment. Although we have anagreement with GE Medical Systems pursuant to which it maintains and repairs the majority of our imaging equipment, this agreement does notcompensate us for loss of revenue when our systems are not fully operational and our business interruption insurance may not provide sufficientcoverage for the loss of revenue. Also, GE Medical Systems may not be able to perform repairs or supply needed parts in a timely manner, whichcould result in a loss of revenue. Therefore, if we experience more equipment malfunctions than anticipated or if we are unable to promptly obtainthe service necessary to keep our equipment functioning effectively, our ability to provide services would be adversely affected and our revenuecould decline. Disruption or malfunction in our information systems could adversely affect our business. Our information technology system is vulnerable to damage or interruption from: ·earthquakes, fires, floods and other natural disasters; ·power losses, computer systems failures, internet and telecommunications or data network failures, operator negligence, improperoperation by or supervision of employees, physical and electronic losses of data and similar events; and ·computer viruses, penetration by hackers seeking to disrupt operations or misappropriate information and other breaches ofsecurity. 28 We rely on our information systems to perform functions critical to our ability to operate, including patient scheduling, billing, collections,image storage and image transmission. We could face attempts by others to gain unauthorized access through the Internet or to introducemalicious software to our information technology systems. If a malicious hacker gained unauthorized access to our systems and network, it couldhave a material adverse impact on our business or operations. Such incidents, whether or not successful, could result in our incurring significantcosts related to, for example, rebuilding internal systems, defending against litigation, responding to regulatory inquiries or actions, payingdamages, or taking other remedial steps with respect to third parties. In addition, these threats are constantly changing, thereby increasing thedifficulty of successfully defending against them or implementing adequate preventive measures. Accordingly, an extended interruption in ourinformation technology system’s function could significantly curtail, directly and indirectly, our ability to conduct our business and generaterevenue. Adverse changes in general domestic and worldwide economic conditions and instability and disruption of credit markets could adverselyaffect our operating results, financial condition, or liquidity. We are subject to risk arising from adverse changes in general domestic and global economic conditions, including recession or economicslowdown and disruption of credit markets. Continued concerns about the systemic impact of potential long-term and wide-spread recession,inflation, energy costs, geopolitical issues, the availability and cost of credit have contributed to increased market volatility and diminishedexpectations for the United States economy. The United States, and other western countries have responded to this economic situation byexercising monetary policy to keep interest rates low. Any significant change in economic conditions or change in fiscal monetary policy couldresult in material changes in interest rates. Continued turbulence in domestic and international markets and economies may adversely affect our liquidity and financial condition, andthe liquidity and financial condition of our patients. If these market conditions continue, they may increase expenses associated with borrowing,limit our ability, and the ability of our patients, to timely replace maturing liabilities, and access the capital markets to meet liquidity needs, resultingin adverse effects on our financial condition and results of operations. Budget decisions by the California State Legislature could have an impact on our revenue. 138 of our 305 facilities are located in California and one to one-and-one-half percent (1% to 1.5%) of our revenues come from theCalifornia Medicaid program. To the extent California is unable to provide these payments on a timely basis, or at all, our revenues will benegatively impacted. We are vulnerable to earthquakes, harsh weather and other natural disasters. Our corporate headquarters and 138 of our facilities are located in California, an area prone to earthquakes and other natural disasters.Several of our facilities are located in areas of Florida and the east coast that have suffered from hurricanes and other harsh weather, includingwinter snow storms that have in the past caused us to close our facilities. An earthquake, harsh weather conditions or other natural disaster coulddecrease scan volume during affected periods and seriously impair our operations. Damage to our equipment or interruption of our business wouldadversely affect our financial condition and results of operations. Possible volatility in our stock price could negatively affect us and our stockholders. The trading price of our common stock on the NASDAQ Global Market has fluctuated significantly in the past. During the period fromJanuary 1, 2015 through December 31, 2016, the trading price of our common stock fluctuated from a high of $9.40 per share to a low of $4.66 pershare. In the past, we have experienced a drop in stock price following an announcement of disappointing earnings or earnings guidance. Any suchannouncement in the future could lead to a similar drop in stock price. The price of our common stock could also be subject to wide fluctuations inthe future as a result of a number of other factors, including the following: ·changes in expectations as to future financial performance or buy/sell recommendations of securities analysts; ·our, or a competitor’s, announcement of new services, or significant acquisitions, strategic partnerships, joint ventures or capitalcommitments; and ·the operating and stock price performance of other comparable companies. In addition, the U.S. securities markets have experienced significant price and volume fluctuations. These fluctuations often have beenunrelated to the operating performance of companies in these markets. Broad market and industry factors may lead to volatility in the price of ourcommon stock, regardless of our operating performance. Moreover, our stock has limited trading volume, and this illiquidity may increase thevolatility of our stock price. In the past, following periods of volatility in the market price of an individual company’s securities, securities class action litigation oftenhas been instituted against that company. The institution of similar litigation against us could result in substantial costs and a diversion ofmanagement’s attention and resources, which could negatively affect our business, results of operations or financial condition. 29 Provisions of the Delaware General Corporation Law and our organizational documents may discourage an acquisition of us. In the future, we could become the subject of an unsolicited attempted takeover of our company. Although an unsolicited takeover couldbe in the best interests of our stockholders, our organizational documents and the General Corporation Law of the State of Delaware both containprovisions that will impede the removal of directors and may discourage a third-party from making a proposal to acquire us. For example, theprovisions: ·permit the board of directors to increase its own size, within the maximum limitations set forth in the bylaws, and fill the resultingvacancies; ·authorize the issuance of shares of preferred stock in one or more series without a stockholder vote; ·establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of our stockholders,including proposed nominations of persons for election to the board of directors; and ·prohibit transfers and/or acquisitions of stock (without consent of the Board of Directors ) that would result in any stockholderowning greater than 5% of the currently outstanding stock resulting in a limitation on net operating loss carryovers, capital losscarryovers, general business credit carryovers, alternative minimum tax credit carryovers and foreign tax credit carryovers, as well asany loss or deduction attributable to a “net unrealized built-in loss” within the meaning of Section 382 of the internal revenue codeof 1986, as amended. We are subject to Section 203 of the Delaware General Corporation Law, which could have the effect of delaying or preventing a change incontrol. Item 1B.Unresolved Staff Comments None. Item 2.Properties Our corporate headquarters is located in adjoining premises at 1508, 1510 and 1516 Cotner Avenue, Los Angeles, California 90025, andapproximately 21,500 square feet is occupied under these leases, which expire (with options to extend) on June 30, 2017. We also have a regionaloffice of approximately 39,000 square feet in Baltimore, Maryland under a lease, which expires September 30, 2023. In addition, we leaseapproximately 62,000 square feet of warehouse space under leases nationwide, which expire at various dates, including options, through August2031. As of December 31, 2016, total square footage under lease, including medical office, administrative and storage locations was approximately2.3 million square feet. We operate 138 fixed-site, freestanding outpatient diagnostic imaging facilities in California, 9 in Delaware, 3 in Florida, 59 in Maryland, 19in New Jersey, 19 in the Rochester and Hudson Valley areas of New York, 53 in New York City as well as 5 in Rhode Island. We lease the premises atwhich these facilities are located. Our most common initial term varies in length from 5 to 15 years. Including renewal options negotiated with thelandlord, we can have a total span of 10 to 25 years at the facilities we lease. We also lease smaller satellite X-Ray locations on mutually renewableterms, usually lasting one year. Rental increases can range from 1% to 7% on an annual basis, depending on the location and market conditionswhere we do business. We do not have options to purchase the facilities we rent. Item 3.Legal Proceedings We are engaged from time to time in the defense of lawsuits arising out of the ordinary course and conduct of our business. We believethat the outcome of our current litigation will not have a material adverse impact on our business, financial condition and results of operations.However, we could be subsequently named as a defendant in other lawsuits that could adversely affect us. Item 4.Mine Safety Disclosures Not applicable. 30 PART II Item 5.Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock is quoted on the NASDAQ Global Market under the symbol “RDNT”. The following table indicates the high and lowprices for our common stock for the periods indicated based upon information supplied by the NASDAQ Global Market. Low High Quarter Ended December 31, 2016 $5.35 $7.98 September 30, 2016 5.28 7.42 June 30, 2016 4.66 5.55 March 31, 2016 4.73 6.33 December 31, 2015 $5.19 $7.50 September 30, 2015 5.25 7.85 June 30, 2015 6.18 9.30 March 31, 2015 7.15 9.40 The last low and high prices for our common stock on the NASDAQ Global Market for the period from January 1 to March 9, 2017 were$5.35 and $6.77, respectively. Holders As of March 9, 2017, the number of holders of record of our common stock was 835. However, Cede & Co., the nominee for TheDepository Trust Company, the clearing agency for most broker-dealers, owned a substantial number of our outstanding shares of common stockof record on that date. Our management believes that the number of beneficial owners of our common stock is approximately 4,000. Dividends We have never declared or paid cash dividends on our capital stock and we do not expect to pay any dividends in the foreseeable future.We currently intend to retain future earnings, if any, to finance the growth and development of our business. Our current credit facilities placerestrictions on our ability to issue dividends. See discussion under “Liquidity and Capital Resources” regarding our current credit facilities.Payment of future dividends, if any, will be at the discretion of our board of directors and will depend on our financial condition, results ofoperations, capital requirements and such other factors as the board of directors deems relevant. Equity Compensation Plans Information The information required by this item will be contained in our definitive proxy statement, to be filed with the SEC in connection with our2017 annual meeting of stockholders, which is expected to be filed not later than 120 days after the end of our fiscal year ended December 31, 2016,and is incorporated in this report by reference. Stock Performance Graph The following graph compares the yearly percentage change in cumulative total stockholder return of our common stock during the periodfrom 2011 to 2016 with (i) the cumulative total return of the S&P 500 index and (ii) the cumulative total return of the S&P 500 – Healthcare Sectorindex. The comparison assumes $100 was invested on December 31, 2011 in our common stock and in each of the foregoing indices and thereinvestment of dividends through December 31, 2016. The stock price performance on the following graph is not necessarily indicative of futurestock price performance. 31 This graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Form 10-K into anyfiling under the Securities Act or under the Exchange Act, except to the extent that RadNet specifically incorporates this information by reference,and shall not otherwise be deemed filed under the Securities Act or the Exchange Act. ANNUAL RETURN PERCENTAGE Years Ending Company / Index 12/30/12 12/31/13 12/31/14 12/31/15 12/31/16 RadNet, Inc. 18.78 -33.99 411.38 -27.63 4.37 S&P 500 Index 16.00 32.39 13.69 1.38 11.96 S&P Health Care Sector 17.89 41.46 25.34 6.89 -2.69 Base INDEXED RETURNS Period Years Ending Company / Index 12/31/11 12/30/12 12/31/13 12/31/14 12/31/15 12/31/16 RadNet, Inc. 100 118.78 78.40 400.94 290.14 302.82 S&P 500 Index 100 116.00 153.57 174.60 177.01 198.18 S&P Health Care Sector 100 117.89 166.76 209.02 223.42 217.41 Recent Sales of Unregistered Securities None. Item 6.Selected Consolidated Financial Data The following table sets forth our selected historical consolidated financial data. The selected consolidated statements of operations dataset forth below for the years ended December 31, 2016, 2015 and 2014, and the consolidated balance sheet data as of December 31, 2016 and 2015,are derived from our audited consolidated financial statements and notes thereto included elsewhere herein. The selected historical consolidatedstatements of operations data set forth below for the years ended December 31, 2013 and 2012, and the consolidated balance sheet data set forthbelow as of December 31, 2014, 2013 and 2012, are derived from our audited consolidated financial statements not included herein. This data shouldbe read in conjunction with and is qualified in its entirety by reference to the audited consolidated financial statements and the related notesincluded elsewhere in this annual report and Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 32 The financial data set forth below and discussed in this annual report are derived from the consolidated financial statements of RadNet, itssubsidiaries and certain affiliates. As a result of the contractual and operational relationship among BRMG, Dr. Berger, the New York Groups, Dr.Crues and the Company, we are considered to have a controlling financial interest in BRMG and the New York Groups (collectively, the“Professional Entities”) pursuant to applicable accounting guidance. Due to the deemed controlling financial interest, we are required to include theProfessional Entities as consolidated entities in our consolidated financial statements. This means, for example, that revenue generated by theProfessional Entities from the provision of professional medical services to our patients, as well as the Professional Entities costs of providingthose services, are included as net revenue and cost of operations in our consolidated statement of operations, whereas the management fee thatthe Professional Entities’ pay to us under our management agreement with the Professional Entities is eliminated as a result of the consolidation ofour results with those of the Professional Entities. Also, because the Professional Entities are consolidated in our financial statements, anyborrowings or advances we have received from or made to the Professional Entities have been eliminated in our consolidated balance sheet. If theProfessional Entities were not treated as consolidated entities in our consolidated financial statements, the presentation of certain items in ourincome statement, such as net service fee revenue and costs and expenses, would change but our net income would not, because in operation andhistorically, the annual revenue of the Professional Entities from all sources closely approximates its expenses, including Dr. Berger’s and Dr Crues’compensation, fees payable to us and amounts payable to third parties. Years Ended December 31, 2016 2015 2014 2013 2012 (in thousands, except per share data) Statement of Operations Data: Net revenue $884,535 $809,628 $717,569 $702,986 $647,153 Operating expenses: Cost of operations, excluding depreciation andamortization 775,801 708,289 602,652 598,655 542,993 Depreciation and amortization 66,610 60,611 59,258 58,890 57,740 Loss on sale and disposal of equipment, net 767 866 1,113 1,032 456 Gain on sale of imaging center and de-consolidationof joint venture – (5,434) – (2,108) (2,777)Gain on return of common stock (5,032) – – – – Meaningful use incentive (2,808) (3,270) (2,034) – – Loss on extinguishment of debt – – 15,927 – – Net income attributable to RadNet commonstockholders 7,230 7,709 1,376 2,120 59,834 Basic income per share attributable to RadNetcommon stockholders 0.16 0.18 0.03 0.05 1.58 Diluted income per share attributable to RadNetcommon stockholders 0.15 0.17 0.03 0.05 1.52 Balance Sheet Data: Cash and cash equivalents $20,638 $446 $307 $8,412 $362 Total assets 849,476 836,427 740,680 722,576 710,864 Total long-term liabilities 642,082 643,007 599,708 601,977 598,507 Total liabilities 797,423 799,966 732,982 720,366 717,548 Working capital 62,573 72,410 58,746 57,955 36,859 Equity (deficit) 52,053 36,461 7,698 2,210 (6,684) 33 Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview We are a leading national provider of freestanding, fixed-site outpatient diagnostic imaging services in the United States based on numberof locations and annual imaging revenue. At December 31, 2016, we operated directly or indirectly through joint ventures, 305 centers located inCalifornia, Delaware, Florida, Maryland, New Jersey, New York and Rhode Island. Our centers provide physicians with imaging capabilities tofacilitate the diagnosis and treatment of diseases and disorders and may reduce unnecessary invasive procedures, often reducing the cost andamount of care for patients. Our services include magnetic resonance imaging (MRI), computed tomography (CT), positron emission tomography(PET), nuclear medicine, mammography, ultrasound, diagnostic radiology (X-ray), fluoroscopy and other related procedures. As of December 31,2016, we had in operation 257 MRI systems, 157 CT systems, 47 PET or combination PET/CT systems, 48 nuclear medicine systems, 479 X-raysystems, 279 mammography systems, 551 ultrasound systems, and 104 fluoroscopy systems. We derive substantially all of our revenue from fees charged for the diagnostic imaging services performed at our facilities. For the yearsended December 31, 2016, 2015 and 2014, we performed 6,109,622, 5,638,979, and 4,828,488 diagnostic imaging procedures and generated netrevenue of $884.5 million, $809.6 million, and $717.6 million, respectively. Additional information concerning RadNet, Inc., including ourconsolidated subsidiaries, for each of the years ended December 31, 2016, 2015 and 2014 is included in the consolidated financial statements andnotes thereto in this annual report. Our revenue is derived from a diverse mix of payors, including private payors, managed care capitated payors and government payors. Webelieve our payor diversity mitigates our exposure to possible unfavorable reimbursement trends within any one payor class. In addition, ourexperience with capitation arrangements over the last several years has provided us with the expertise to manage utilization and pricing effectively,resulting in a predictable stream of revenue. For the year ended December 31, 2016, we received net service fee revenue before provision for baddebt of approximately 70% of our payments from commercial insurance payors and from managed care capitated payors, 20% from Medicare, 3%from Medicaid, 4% from Workers Compensation programs and 3% from other sources. With the exception of Blue Cross/Blue Shield, whichrepresents approximately 21% and government payors amounting to approximately 23% of revenues respectively, no single payor accounted formore than 5% of our net revenue for the twelve months ended December 31, 2016. We have developed our medical imaging business through a combination of organic growth and acquisitions. For a discussion ofacquisitions and dispositions of facilities, see “Recent Developments and Facility Acquisitions and Dispositions” below. We typically experience some seasonality to our business. During the first quarter of each year we generally experience the lowestvolumes of procedures and the lowest level of revenue for any quarter during the year. This is primarily the result of two factors. First, our volumesand revenue are typically impacted by winter weather conditions in our northeastern operations. It is common for snowstorms and other inclementweather to result in patient appointment cancellations and, in some cases, imaging center closures. Second, in recent years, we have observedgreater participation in high deductible health plans by patients. As these high deductibles reset in January for most of these patients, we haveobserved that patients utilize medical services less during the first quarter, when securing medical care will result in significant out-of-pocketexpenditures. During 2016 we focused on strengthening our positions in the key markets of California and New York through small scale acquisitionsand consolidation of facilities. In addition, we formed two new joint ventures with major hospitals to leverage our proven ability to providemanagement, technical, and accounting services. We finished the year with cash and cash equivalents of $20.6 million in cash and accounts receivable of $164.2 million. Through arefinance of first lien our term loan debt, we also received a new revolving credit facility, which increased our borrowing capacity from $101.25 to$117.5 million. At December 31, 2016 we had no aggregate balance on the revolving credit line and the total borrowing capacity is available. The consolidated financial statements in this annual report include the accounts of Radnet Management, BRMG and the New YorkGroups. The consolidated financial statements also include Radnet Management I, Inc., Radnet Management II, Inc., Radiologix, Inc., RadnetManagement Imaging Services, Inc., Delaware Imaging Partners, Inc., New Jersey Imaging Partners, Inc. and Diagnostic Imaging Services, Inc.(DIS), all wholly owned subsidiaries of Radnet Management. 34 Accounting Standards Codification (ASC) 810-10-15-14, Consolidation, stipulates that generally any entity with a) insufficient equity tofinance its activities without additional subordinated financial support provided by any parties, or b) equity holders that, as a group, lack thecharacteristics specified in the Codification which evidence a controlling financial interest, is considered a Variable Interest Entity (“VIE”). Weconsolidate all variable interest entities in which we own a majority voting interest and all VIEs for which we are the primary beneficiary. Wedetermine whether we are the primary beneficiary of a VIE through a qualitative analysis that identifies which variable interest holder has thecontrolling financial interest in the VIE. The variable interest holder that has both of the following has the controlling financial interest and is theprimary beneficiary: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) theobligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. In performing ouranalysis, we consider all relevant facts and circumstances, including: the design and activities of the VIE, the terms of the contracts the VIE hasentered into, the nature of the VIE’s variable interests issued and how they were negotiated with or marketed to potential investors, and whichparties participated significantly in the design or redesign of the entity. Facility Acquisitions and Assets Held for Sale Facility acquisitions In separate purchases occurring on July 1 and October 1 2016, we acquired for approximately $1.2 million the remaining non-controllinginterest of 47.6% in the Park West joint venture, thus increasing our ownership percentage from 52.4% to 100%. The difference between theconsideration paid and the carrying value of the non-controlling interest purchased was recorded as additional paid-in capital. On March 1, 2016 we completed our acquisition of certain assets of Advanced Radiological Imaging – Astoria P.C. consisting of two multi-modality imaging centers located in Astoria, NY for cash consideration of $5.0 million. The facility provides MRI, PET/CT, Ultrasound and X-rayservices. We have made a fair value determination of the acquired assets and approximately $3.6 million of fixed assets, $47,000 of prepaid assets,$100,000 covenant not to compete, and $1.3 million of goodwill were recorded. On October 1, 2015 we completed our acquisition of certain assets of DIG consisting of seventeen multi-modality imaging centers locatedin the boroughs of Brooklyn and Queens, New York, for $62.9 million detailed as follows: cash consideration of $54.6 million ($49.6 million paid atexecution, $5 million to be paid 18 months after acquisition or earlier if certain conditions are met), the assumption of $2.1 million in equipment debt,and issuance of 1.5 million RadNet common shares valued at $8.3 million on the acquisition date. The transaction also includes contingentconsideration payable equal to five times the amount by which collections on the sellers’ historical revenue exceeds a defined threshold. During2016, based on fair value determination of the assets and liabilities by a third party, we recorded certain measurement period adjustments associatedwith our acquisition. In the second quarter of 2016, these adjustments resulted in an increase to fixed assets acquired by $1.1 million and therecognition of a net unfavorable lease contract liability of $1.0 million. In the third quarter of 2016, we recorded a decrease to our intangible andfixed assets of approximately $121,000. Also, amounts previously owed to DIG of $5.0 million were reduced to $3.4 million on June 15, 2016 when weremitted a payment of $1.6 million to a payor on behalf of DIG. Assets held for sale On November 4, 2016, the Board of Directors resolved to sell the ownership interest in all five of its Rhode Island imaging centersoperating under the name The Imaging Institute within the upcoming 12 months. The following table summarizes the major categories of assetsclassified as held for sale in the accompanying Consolidated Balance Sheets at December 31, 2016 (in thousands): Property and equipment, net $1,056 Other assets 21 Goodwill 1,126 Total assets held for sale $2,203 As the sale of these assets does not represent a strategic shift that will have a major effect on the Company’s operations and financial results, it isnot classified as a discontinued operation. 35 Results of Operations The following table sets forth, for the periods indicated, the percentage that certain items in the statements of operations bears to netrevenue before provision for bad debts. Years Ended December 31, 2016 2015 2014 NET REVENUE Service fee revenue, net of contractual allowances and discounts 88.4% 88.3% 89.7% Provision for bad debts -4.9% -4.3% -4.0% Net service fee revenue 83.5% 84.0% 85.7% Revenue under capitation arrangements 11.6% 11.7% 10.3% Total net revenue 95.1% 95.7% 96.0% OPERATING EXPENSES Cost of operations, excluding depreciation and amortization 83.4%&bbsp; 83.8% 80.6% Depreciation and amortization 7.2% 7.2% 7.9% Loss on sale and disposal of equipment 0.1% 0.1% 0.1% Severance costs 0.3% 0.1% 0.2% Total operating expenses 91.0% 91.1% 88.8% INCOME FROM OPERATIONS 4.1% 4.6% 7.2% OTHER INCOME AND EXPENSES Interest expense 4.6% 4.9% 5.7% Meaningful use incentive -0.3% -0.4% -0.3% Equity in earnings of joint ventures -1.1% -1.1% -0.9% Gain on sale of imaging centers 0.0% -0.6% 0.0% Gain on return of common stock -0.5% 0.0% 0.0% Loss on early extinguishment of senior notes 0.0% 0.0% 2.1% Other expenses 0.0% 0.0% 0.0% Total other expenses 2.7% 2.8% $6.6% INCOME BEFORE INCOME TAXES 1.4% 1.8% 0.6% Provision for income taxes -0.5% -0.7% -0.3% NET INCOME 0.9% 1.1% 0.3% Net income attributable to noncontrolling interests 0.1% 0.1% 0.0% NET INCOME ATTRIBUTABLE TO RADNET, INC. COMMONSTOCKHOLDERS 0.8% 1.0% 0.3% Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015 Service Fee Revenue, net of contractual allowances and discounts Service fee revenue, net of contractual allowances and discounts for the year ended December 31, 2016 was $821.6 million comparedto $746.8 million for the year ended December 31, 2015, an increase of $74.8 million, or 10.0%. Service fee revenue, net of contractual allowances and discounts, for only those centers in operation throughout the full fiscal yearsof both 2016 and 2015, increased $17.6 million, or 2.6%. This comparison excludes revenue contributions from centers that were acquiredsubsequent to January 1, 2015. For the year ended December 31, 2016, service fee revenue, net of contractual allowances and discounts, fromcenters that were acquired subsequent to January 1, 2015 and excluded from the above comparison was $122.1 million. For the year endedDecember 31, 2015, net revenue from centers that were acquired subsequent to January 1, 2015 and excluded from the above comparison was$64.9 million. 36 Provision for bad debts Provision for bad debts increased $9.4 million, or 26.0%, to $45.4 million, or 4.9% of net revenue, for the year ended December 31, 2016compared to $36.0 million, or 4.3% of net revenue, for the year ended December 31, 2015. The 26% increase was related to service fee revenuegrowth from our 2015 acquisition activity combined with additional reserves based on management determination that collection efforts for certainaccounts appear to have been exhausted. We review our provision by the application of judgment based on factors such as contractualreimbursement rates, payor mix, the age of receivables, historical cash collection experience and other relevant information. Revenue under capitation arrangements Revenue under capitation arrangements for the year ended December 31, 2016 was $108.3 million compared to $98.9 million for the yearended December 31, 2015, an increase of $9.4 million, or 9.5%. Revenue under capitation arrangements, including only those centers which were in operation throughout the full fiscal years of both2016 and 2015, increased $1.7 million, or 1.7%. This comparison excludes revenue contributions from centers that were acquired subsequent toJanuary 1, 2015. For the year ended December 31, 2016, revenue under capitation arrangements from centers that were acquired subsequent toJanuary 1, 2015 and excluded from the above comparison was $9.0 million. For the year ended December 31, 2015, net revenue from centers thatwere acquired subsequent to January 1, 2015 and excluded from the above comparison was $1.3 million. Operating expenses Cost of operations for the year ended December 31, 2016 increased approximately $67.5 million, or 9.5%, from $708.3 million for the yearended December 31, 2015 to $775.8 million for the year ended December 31, 2016. The following table sets forth our operating expenses for the yearsended December 31, 2016 and 2015 (in thousands): Years Ended December 31, 2016 2015 Salaries and professional reading fees, excluding stock-basedcompensation $407,571 $376,407 Stock-based compensation 5,826 7,647 Building and equipment rental 74,214 71,666 Medical supplies 51,735 49,417 Other operating expenses * 236,455 203,152 Cost of operations 775,801 708,289 Depreciation and amortization 66,610 60,611 Loss on sale and disposal of equipment 767 866 Severance costs 2,877 745 Total operating expenses $846,055 $770,511 * Includes billing fees, office supplies, repairs and maintenance, insurance, business tax and license, outside services, utilities, marketing,travel and other expenses. ·Salaries and professional reading fees, excluding stock-based compensation and severance Salaries and professional reading fees increased $31.2 million, or 8.3%, to $407.6 million for the year ended December 31, 2016, compared to$376.4 million for the year ended December 31, 2015. Salaries and professional reading fees for only those centers in operation throughout the full fiscal years of both 2016 and 2015, increased$4.2 million, or 1.2%. This comparison excludes contributions from centers that were acquired subsequent to January 1, 2015. For the yearended December 31, 2016, salaries and professional reading fees from centers that were acquired subsequent to January 1, 2015 andexcluded from the above comparison was $48.0 million. For the year ended December 31, 2015, salaries and professional reading fees fromcenters that were acquired subsequent to January 1, 2015, and excluded from the above comparison was $21.0 million. ·Stock-based compensation Stock-based compensation decreased $1.8 million, or 23.8%, to $5.8 million for the year ended December 31, 2016 compared to $7.6 millionfor the year ended December 31, 2015. This decrease was driven by the lower fair value of stock based compensation awarded and vestedin the year 2016 as compared to 2015. 37 ·Building and equipment rental Building and equipment rental expenses increased $2.5 million, or 3.6%, to $74.2 million for the year ended December 31, 2016, compared to$71.7 million for the year ended December 31, 2015. Building and equipment rental expenses, including only those centers which were in operation throughout the full fiscal years of both 2016and 2015, decreased $3.3 million, or 5.2%, mainly due to favorable lease negotiations at existing facilities. This comparison excludescontributions from centers that were acquired subsequent to January 1, 2016. For the year ended December 31, 2016, building andequipment rental expenses from centers that were acquired subsequent to January 1, 2015, and excluded from the above comparison, was$12.9 million. For the year ended December 31, 2015, building and equipment rental expenses from centers that were acquired subsequentto January 1, 2015, and excluded from the above comparison, was $7.1 million. ·Medical supplies Medical supplies expense increased $2.3 million, or 4.7%, to $51.7 million for the year ended December 31, 2016, compared to $49.4 millionfor the year ended December 31, 2015. Medical supplies expense, including only those centers which were in operation throughout the full fiscal years of both 2016 and 2015,decreased $2.2 million, or 4.6%. This 4.6% decrease is primarily due to renegotiation of our medical supplier contracts. This comparisonexcludes contributions from centers that were acquired or divested subsequent to January 1, 2016. For the year ended December 31, 2016,medical supplies expense from centers that were acquired subsequent to January 1, 2015, and excluded from the above comparison was$7.1 million. For the year ended December 31, 2015, medical supplies expense from centers that were acquired subsequent to January 1,2015, and excluded from the above comparison was $2.6 million. ·Other operating expenses Other operating expenses increased $33.3 million, or 16.4%, to $236.5 million for the year ended December 31, 2016 compared to $203.2million for the year ended December 31, 2015. Other operating expenses, including only those centers which were in operation throughout the full fiscal years of both 2016 and 2015,increased $9.5 million or 5.1%. The 5.1% increase was primarily related to insurance, temporary labor and legal expenses. This comparisonexcludes contributions from centers that were acquired or divested subsequent to January 1, 2015. For the year ended December 31, 2016,other operating expenses from centers that were acquired subsequent to January 1, 2015, and excluded from the above comparison were$43.5 million. For the year ended December 31, 2015, other operating expenses from centers that were acquired subsequent to January 1,2015, and excluded from the above comparison were $19.7 million. ·Depreciation and amortization expense Depreciation and amortization expense increased $6.0 million, or 9.9%, to $66.6 million for the year ended December 31, 2016 whencompared $60.6 million for the year ended December 31, 2015. Depreciation and amortization expense at those centers which were in operation throughout the full fiscal years of both 2016 and 2015,increased $793,000 or 1.4%. This comparison excludes contributions from centers that were acquired or divested subsequent to January 1,2015. For the year ended December 31, 2016, depreciation and amortization from centers that were acquired or divested subsequent toJanuary 1, 2015 and excluded from the above comparison was $10.0 million. For the year ended December 31, 2015, depreciation andamortization from centers that were acquired subsequent to January 1, 2015, and excluded from the above comparison was $4.8 million. ·Loss on sale and disposal of equipment Loss on sale of equipment was $767,000 and $866,000 for the years ended December 31, 2016 and 2015, respectively, and primarily relatedto the difference between the net book value of certain equipment sold and proceeds we received from the sale. 38 ·Severance costs During the year ended December 31, 2016, we had severance costs of $2.9 million compared to $745,000 recorded during the year endedDecember 31, 2015. In the third quarter of 2016, we incurred severance expenses of $2.2 million specifically related to the integration ofacquisitions in the state of New York. Interest expense Interest expense increased approximately $1.8 million, or 4.3%, to $43.5 million for the year ended December 31, 2016 compared to $41.7million for the year ended December 31, 2015. Interest expense for the year ended December 31, 2016 included $4.3 million of amortization ofdeferred financing and discount on issuance of debt, as well as a write off of $709,000 of deferred financing costs in relation to the RestatementAmendment and $93,000 of other non cash interest. Interest expense for the year ended December 31, 2015 included $5.4 million of amortizationof deferred financing costs and discount on issuance of debt as well as $61,000 in other non cash interest. Excluding these adjustments to interest expense for each period, interest expense increased approximately $2.1 million for the yearended December 31, 2016 compared to the year ended December 31, 2015. The increase was primarily due to higher interest rates on our termloan debt stemming from the Restatement Amendment and First Lien Credit Agreement. See “Liquidity and Capital Resources” below for moredetails on our financing activity during 2016. Meaningful use incentive For the year ended December 31, 2016, we recognized other income from meaningful use incentive in the amount of $2.8 million. Thisamount was earned under a Medicare program to promote the use of electronic health record technology. See Note 2 to our consolidatedfinancial statements contained herein for more detail regarding this meaningful use incentive. Equity in earnings from unconsolidated joint ventures Equity in earnings from our unconsolidated joint ventures increased $840,000 or 9.4% to $9.8 million for the year ended December 31, 2016compared to $8.9 million for the year ended December 31, 2015. The increase relates mainly to equity in earnings stemming from the September 30,2015 sale of 10 wholly owned centers from our subsidiary New Jersey Imaging Partners to New Jersey Imaging Networks, a joint venture where wehold a 49% non-controlling interest. See Note 4 to our consolidated financial statements contained herein for more details. Gain on Sale of Imaging Center On September 30, 2015, we recognized a gain on the sale of 10 wholly owned imaging centers to the New Jersey Imaging Networks in theamount of $5.4 million. See Note 4 to our consolidated financial statements contained herein for more details. Gain on return of common stock We recorded a gain on return of common stock of $5.0 million. See Note 2 to our consolidated financial statements contained herein formore details. Other expenses / income For the year ended December 31, 2016 we recorded approximately $196,000 of other expenses. For the year ended December 31, 2014,we recorded $419,000 of other expenses mainly related to acquisition activity. Provision for income tax expense For the years ended December 31, 2016 and December 31, 2015, we recorded income tax expense of $4.4 million and $6.0 million,respectively. See Note 11 to our consolidated financial statements contained herein for more details. 39 Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014 Service Fee Revenue, net of contractual allowances and discounts Service fee revenue, net of contractual allowances and discounts for the year ended December 31, 2015 was $746.8 million comparedto $670.1 million for the year ended December 31, 2014, an increase of $76.6 million, or 11.4%. Service fee revenue, net of contractual allowances and discounts, including only those centers which were in operation throughoutthe full fiscal years of both 2015 and 2014, increased $10.6 million, or 1.7%. This comparison excludes revenue contributions from centers thatwere acquired subsequent to January 1, 2014. For the year ended December 31, 2015, service fee revenue, net of contractual allowances anddiscounts, from centers that were acquired subsequent to January 1, 2014 and excluded from the above comparison was $113.8 million. For theyear ended December 31, 2014, net revenue from centers that were acquired subsequent to January 1, 2014 and excluded from the abovecomparison was $47.7 million. Provision for bad debts Provision for bad debts increased $6.2 million, or 20.9%, to $36.0 million, or 4.3% of net revenue, for the year ended December 31, 2015compared to $29.8 million, or 4.0% of net revenue, for the year ended December 31, 2014. Revenue under capitation arrangements Revenue under capitation arrangements for the year ended December 31, 2015 was $98.9 million compared to $77.2 million for the yearended December 31, 2014, an increase of $21.7 million, or 28.0%. Revenue under capitation arrangements, including only those centers which were in operation throughout the full fiscal years of both2015 and 2014, increased $16.6 million, or 22.2%. This 22.2% increase is due to additional capitation contracts entered into during 2015 over2014. This comparison excludes revenue contributions from centers that were acquired subsequent to January 1, 2014. For the year endedDecember 31, 2015, revenue under capitation arrangements from centers that were acquired subsequent to January 1, 2014 and excluded fromthe above comparison was $7.3 million. For the year ended December 31, 2014, net revenue from centers that were acquired subsequent toJanuary 1, 2014 and excluded from the above comparison was $2.2 million. Operating expenses Cost of operations for the year ended December 31, 2015 increased approximately $105.6 million, or 17.5%, from $602.7 million for the yearended December 31, 2014 to $708.3 million for the year ended December 31, 2015. The following table sets forth our operating expenses for the yearsended December 31, 2015 and 2014 (in thousands): Years Ended December 31, 2015 2014 Salaries and professional reading fees, excluding stock-basedcompensation $376,407 $329,394 Stock-based compensation 7,647 2,500 Building and equipment rental 71,666 64,492 Medical supplies 49,417 41,348 Other operating expenses * 203,152 164,918 Cost of operations 708,289 602,652 Depreciation and amortization 60,611 59,258 Loss on sale and disposal of equipment 866 1,113 Severance costs 745 1,241 Total operating expenses $770,511 $664,264 * Includes billing fees, office supplies, repairs and maintenance, insurance, business tax and license, outside services, utilities, marketing,travel and other expenses. 40·Salaries and professional reading fees, excluding stock-based compensation and severanceSalaries and professional reading fees increased $47.0 million, or 14.3%, to $376.4 million for the year ended December 31, 2015, comparedto $329.4 million for the year ended December 31, 2014.Salaries and professional reading fees, including only those centers which were in operation throughout the full fiscal years of both 2015and 2014, increased $13.4 million, or 4.3%. This 4.3% increase driven by increases in volume resulting in staffing needs to serviceincreased procedures. This comparison excludes contributions from centers that were acquired subsequent to January 1, 2014. For theyear ended December 31, 2015, salaries and professional reading fees from centers that were acquired subsequent to January 1, 2014 andexcluded from the above comparison was $51.3 million. For the year ended December 31, 2014, salaries and professional reading fees fromcenters that were acquired subsequent to January 1, 2014, and excluded from the above comparison was $17.7 million.·Stock-based compensationStock-based compensation increased $5.1 million, or 205.9%, to $7.6 million for the year ended December 31, 2015 compared to $2.5 millionfor the year ended December 31, 2014. This increase was driven by the higher fair value of stock based compensation awarded and vestedin the year 2015 as compared to 2014.·Building and equipment rentalBuilding and equipment rental expenses increased $7.2 million, or 11.1%, to $71.7 million for the year ended December 31, 2015, comparedto $64.5 million for the year ended December 31, 2014.Building and equipment rental expenses, including only those centers which were in operation throughout the full fiscal years of both 2015and 2014, decreased $149,000, or 0.2%. This comparison excludes contributions from centers that were acquired subsequent to January 1,2014. For the year ended December 31, 2015, building and equipment rental expenses from centers that were acquired subsequent toJanuary 1, 2014, and excluded from the above comparison, was $11.2 million. For the year ended December 31, 2014, building andequipment rental expenses from centers that were acquired subsequent to January 1, 2014, and excluded from the above comparison, was$3.9 million.·Medical suppliesMedical supplies expense increased $8.1 million, or 19.5%, to $49.4 million for the year ended December 31, 2015, compared to $41.3 millionfor the year ended December 31, 2014.Medical supplies expense, including only those centers which were in operation throughout the full fiscal years of both 2015 and 2014,increased $3.4 million, or 8.7%. This 8.7% increase is primarily due to the increased procedure volumes of advanced imaging proceduressuch as MRIs, PET, and CT scans. This comparison excludes contributions from centers that were acquired or divested subsequent toJanuary 1, 2014. For the year ended December 31, 2015, medical supplies expense from centers that were acquired subsequent to January 1,2014, and excluded from the above comparison was $6.7 million. For the year ended December 31, 2014, medical supplies expense fromcenters that were acquired subsequent to January 1, 2014, and excluded from the above comparison was $2.0 million.·Other operating expensesOther operating expenses increased $38.2 million, or 23.2%, to $203.2 million for the year ended December 31, 2015 compared to $164.9million for the year ended December 31, 2014.Other operating expenses, including only those centers which were in operation throughout the full fiscal years of both 2015 and 2014,increased $22.7 million or 14.7%. The 14.7% increase relates to additional outside services to support the sub-contracting of imagingoperations in areas where we do not have centers, repairs and maintenance of equipment post the initial warranty period, and additionaladministration expenses in support of the rollout of the RIS system.. This comparison excludes contributions from centers that wereacquired or divested subsequent to January 1, 2014. For the year ended December 31, 2015, other operating expenses from centers thatwere acquired subsequent to January 1, 2014, and excluded from the above comparison were $25.7 million. For the year ended December31, 2014, other operating expenses from centers that were acquired subsequent to January 1, 2014, and excluded from the abovecomparison were $10.1 million.41 ·Depreciation and amortization expense Depreciation and amortization expense increased $1.4 million, or 2.3%, to $60.6 million for the year ended December 31, 2015 whencompared to the same period last year. Depreciation and amortization expense at those centers which were in operation throughout the full fiscal years of both 2015 and 2014,decreased $2.2 million or 4.0%. This comparison excludes contributions from centers that were acquired or divested subsequent to January1, 2014. For the year ended December 31, 2015, depreciation and amortization from centers that were acquired or divested subsequent toJanuary 1, 2014 and excluded from the above comparison was $7.9 million. For the year ended December 31, 2014, depreciation andamortization from centers that were acquired subsequent to January 1, 2014, and excluded from the above comparison was $4.4 million. ·Loss on sale and disposal of equipment Loss on sale of equipment was $866,000 and $1.1 million for the years ended December 31, 2015 and 2014, respectively, and primarilyrelated to the difference between the net book value of certain equipment sold and proceeds we received from the sale. ·Severance costs During the year ended December 31, 2015, we recorded severance costs of $745,000 compared to $1.2 million recorded during the yearended December 31,2014. In each period, these costs were primarily associated with the integration of acquired operations and other costsaving measures. Interest expense Interest expense decreased approximately $1.0 million, or 2.4%, to $41.7 million for the year ended December 31, 2015 compared to$42.7 million for the year ended December 31, 2014. Interest expense for the year ended December 31, 2015 included $5.4 million of amortizationof deferred financing costs and discount on issuance of debt. Interest expense for the year ended December 31, 2014 included $5.1 million ofamortization of deferred financing costs and discount on issuance of debt, as well as a write off of $665,000 of deferred financing costs inrelation to the early extinguishment of $200 million in 10 3/8% senior unsecured notes due 2018. Excluding these adjustments to interestexpense for each period, interest expense decreased approximately $680,000 for the year ended December 31, 2015 compared to the year endedDecember 31, 2014. This decrease was primarily due to the 2014 Amendment and the Second Lien Credit Agreement. See “Liquidity and CapitalResources” below for more details on our financing activity during 2015. Meaningful use incentive For the year ended December 31, 2015, we recognized other income from meaningful use incentive in the amount of $3.3 million. Thisamount was earned under a Medicare program to promote the use of electronic health record technology. See Note 2 to our consolidatedfinancial statements contained herein for more detail regarding this meaningful use incentive. Equity in earnings from unconsolidated joint ventures Equity in earnings from our unconsolidated joint ventures increased $2.0 million or 28.1% to $8.9 million for the year ended December31, 2015 compared to $7.0 million for the year ended December 31, 2014. The increase was mainly due to the sale of our imaging centers fromour New Jersey reporting unit, New Jersey Imaging Partners, Inc. to one of our non-consolidated joint ventures for which we hold a 49% non-controlling interest, The New Jersey Imaging Network, L.L.C., during 2015. See Note 4 to our consolidated financial statements containedherein for more details. Gain on sale of imaging center We recognized a gain on the sale of 10 wholly owned imaging centers to The New Jersey Imaging Network, L.L.C.in the amount of $5.4million for the twelve months ended December 31, 2015. See Note 4 to consolidated financial statements contained herein for more details. Other expenses / income For the year ended December 31, 2015 we recorded approximately $419,000 of other expenses, mainly related to acquisition activity.For the year ended December 31, 2015, we recorded $3,000 of other expenses. 42 Provision for income tax expense For the years ended December 31, 2015 and December 31, 2014, we recorded income tax expense of $6.0 million and $2.0 million,respectively. See Note 11 to our consolidated financial statements contained herein for more details. Adjusted EBITDA We use both GAAP and non-GAAP metrics to measure our financial results. We believe that, in addition to GAAP metrics, these non-GAAP metrics assist us in measuring our cash generated from operations and ability to service our debt obligations. One non-GAAP measure we believe assists us is Adjusted EBITDA. We define Adjusted EBITDA as earnings before interest, taxes,depreciation and amortization, as adjusted to exclude losses or gains on the disposal of equipment, other income or loss, loss on debtextinguishments, bargain purchase gains, loss on de-consolidation of joint ventures and non-cash equity compensation. Adjusted EBITDAincludes equity earnings in unconsolidated operations and subtracts allocations of earnings to non-controlling interests in subsidiaries, and isadjusted for non-cash or one-time events that take place during the period. We believe this information is useful to investory and other interestedparties because we are highly leveraged and our Adjusted EBITDA metric removes non-cash and nonrecurring charges that occur in the affectedperiod and provides a basis for measuring the Company’s financial condition against other quarters. Adjusted EBITDA is a non-GAAP financial measure used as an analytical indicator by us and the healthcare industry to assess businessperformance, and is a measure of leverage capacity and ability to service debt. Adjusted EBITDA should not be considered a measure of financialperformance 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 financialstatements as an indicator of financial performance or liquidity. As Adjusted EBITDA is not a measurement determined in accordance with GAAPand is therefore susceptible to varying methods of calculation, this metric, as presented, may not be comparable to other similarly titled measures ofother companies. The following is a reconciliation of the nearest comparable GAAP financial measure, net income, to Adjusted EBITDA for the years endedDecember 31, 2016, 2015, and 2014, respectively (in thousands): Years Ended December 31, 2016 2015 2014 Net income attributable to RadNet, Inc. common stockholders $7,230 $7,709 $1,376 Plus provision for income taxes 4,432 6,007 1,967 Plus other expenses 196 419 3 Plus loss on early extinguishment of Senior Notes – – 15,927 Plus interest expense 43,455 41,684 42,727 Plus severance costs 2,877 745 1,241 Plus loss on sale and disposal of equipment 767 866 1,113 Plus acquisition related working capital adjustment 6,072 – – Plus legal settlements – 1,425 401 Plus refinancing fees 606 – – Less gain on sale of imaging center – (5,434) – Less gain on return of common stock (5,032) Plus depreciation and amortization 66,610 60,611 59,258 Plus non-cash employee stock-based compensation 5,826 7,647 2,500 Adjusted EBITDA $133,039 $121,679 $126,513 Liquidity and Capital Resources We had net income attributable to RadNet, Inc.’s common stockholders of $7.2 million, $7.7 million and $1.4 million for the years endedDecember 31, 2016, 2015 and 2014, respectively. We had cash and cash equivalents of $20.6 million and accounts receivable of $164.2 million atDecember 31, 2016, compared to cash of $446,000 and accounts receivable of $162.8 million at December 31, 2015. We had a working capital balanceof $62.6 million and $72.4 million at December 31, 2016 and 2015, respectively. We also had total equity of $52.1 million and $36.5 million at December31, 2015 and 2014, respectively. 43 We operate in a capital intensive, high fixed-cost industry that requires significant amounts of capital to fund operations. In addition tooperations, we require a significant amount of capital for the initial start-up and development of new diagnostic imaging facilities, the acquisition ofadditional facilities and new diagnostic imaging equipment. Because our cash flows from operations have been insufficient to fund all of thesecapital requirements, we have depended on the availability of financing under credit arrangements with third parties. Based on our current level of operations, we believe that cash flow from operations and available cash, together with available borrowingsfrom our senior secured credit facilities, will be adequate to meet our short-term liquidity needs. Our future liquidity requirements will be for workingcapital, capital expenditures, debt service and general corporate purposes. Our ability to meet our working capital and debt service requirements,however, is subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. If we are notable to meet such requirements, we may be required to seek additional financing. There can be no assurance that we will be able to obtain financingfrom other sources on the terms acceptable to us, if at all. On a continuing basis, we also consider various transactions to increase stockholder value and enhance our business results, includingacquisitions, divestitures and joint ventures. These types of transactions may result in future cash proceeds or payments but the general timing,size or success of any acquisition, divestiture or joint venture effort and the related potential capital commitments cannot be predicted. We expectto fund any future acquisitions primarily with cash flow from operations and borrowings, including borrowing from amounts available under oursenior secured credit facilities or through new equity or debt issuances. We and our subsidiaries or affiliates may from time to time, in our or their sole discretion, continue to purchase, repay, redeem or retire anyof our outstanding debt or equity securities in privately negotiated or open market transactions, by tender offer or otherwise. However, we have noformal plan of doing so at this time. Sources and Uses of Cash Cash provided by operating activities was $91.6 million, $67.0 million, and $61.0 million, for the years ended December 31, 2016, 2015 and2014, respectively. Cash used in investing activities was $65.4 million, $96.8 million, and $53.6 million, for the years ended December 31, 2016, 2015 and 2014,respectively. For the year ended December 31, 2016, we purchased property and equipment for approximately $59.3 million, acquired the assets andbusinesses of additional imaging facilities for approximately $6.6 million (see Note 4 of the consolidated financial statements of this annual report),and contributed $1.4 million in equity to two of our non-consolidated joint ventures. Offsetting our cash used in investing activities was $994,000 incash received from joint venture partners, $523,000 in proceeds from the sale of imaging equipment and $301,000 in outside sales of imagingsoftware. See Note 4 to the consolidated financial statements of this annual report for more information on the sale to Baltimore County Radiology. Cash used by financing activities was $5.9 million for the year ended December 31, 2016, compared to cash provided by financing activitiesof $29.9 million and cash used in financing activities of $15.4 million for the years ended December 31, 2015 and December 31, 2014, respectively.The cash used by financing for the year ended December 31, 2016 consisted of $476.5 million in new borrowings from the Restatement Amendmentand First Lien Credit Agreement. See financing activity in 2016 below for a further description on this event. Payments on secured debt andrevolver loans amounted to $469.1 million, which included a full payoff of our old First Lien balance in relation to the refinancing, a $12.0 million paydown on the Second Lien Credit and Guaranty Agreement, with contractual payments of equipment notes and capital leases totaled $11.9 million. At December 31, 2016, we had $ 478.9 million aggregate principal amount of first lien term loans and $168.0 million aggregate principalamount of second lien term loan debt outstanding and no principal borrowed under the revolving credit facility. The revolving credit facilityprovides for a maximum borrowing limit of $117.5 million, subject to customary drawing conditions. At December 31, 2016, our credit facilities were comprised of two tranches of term loans and a revolving credit facility. On July 1, 2016 (the“Restatement Effective Date”), we entered into Amendment No. 3 to Credit and Guaranty Agreement (the “Restatement Amendment”) pursuant towhich we amended and restated our then existing first lien credit facilities on the terms set forth in the Amended and Restated First Lien Credit andGuaranty Agreement dated July 1, 2016 (as amended from time to time, the “First Lien Credit Agreement”). Pursuant to the First Lien CreditAgreement, we have issued $485 million of senior secured term loans (the “First Lien Term Loans”) and established a $117.5 million senior securedrevolving credit facility (the “Revolving Credit Facility”). We have also entered into a Second Lien Credit and Guaranty Agreement dated March 25,2014 (as amended from time to time, the “Second Lien Credit Agreement”) pursuant to which we issued $180 million of secured term loans (the“Second Lien Term Loans”). As of December 31, 2016, we were in compliance with all covenants under out credit facilities. 44 The following describes our 2016 financing activities: Restatement Amendment and the First Lien Credit Agreement On July 1, 2016, we entered into the Restatement Amendment pursuant to which we amended and restated our then existing creditfacilities on the terms set forth in the First Lien Credit Agreement. As of the Restatement Effective Date, our first lien credit facilities consistedof a Credit and Guaranty Agreement that we entered into on October 10, 2012 (the “Original First Lien Credit Agreement”), as subsequentlyamended by a first amendment dated April 3, 2013 (the “2013 Amendment”), a second amendment dated March 25, 2014 (the “2014Amendment”), and a joinder agreement dated April 30, 2015 (the “2015 Joinder” and collectively with the Original First Lien Credit Agreement,the 2013 Amendment and the 2014 Amendment, the “Prior First Lien Credit Agreement”). The First Lien Credit Agreement increased theaggregate principal amount of First Lien Term Loans to $485.0 million and increased the Revolving Credit Facility to $117.5 million. Proceedsfrom the First Lien Credit Agreement were used to repay the previously outstanding first lien loans under the Prior First Lien Credit Agreement,make a $12.0 million principal payment of the Second Lien Term Loans, pay costs and expenses related to the First Lien Credit Agreement andprovide approximately $10.0 million for general corporate purposes. Interest. The interest rates payable on the First Lien Term Loans are (a) the Adjusted Eurodollar Rate (as defined in the First LienCredit Agreement) plus 3.75% per annum or (b) the Base Rate (as defined in the First Lien Credit Agreement) plus 2.75% per annum. As appliedto the First Lien Term Loans, the Adjusted Eurodollar Rate has a minimum floor of 1.0%. The three month Adjusted Eurodollar Rate atDecember 31, 2016 was 1.0%. Payments. The scheduled quarterly principal payments of the First Lien Term Loans is approximately $6.1 million, beginning inDecember 2016, with the balance due at maturity. Prior to the Restatement Amendment, the quarterly principal payments on the first lien termloans under the Prior First Lien Credit Agreement were approximately $6.2 million. Maturity Date. The maturity date for the First Lien Term Loans shall be on the earliest to occur of (i) the seventh anniversary of theRestatement Effective Date, (ii) the date on which all First Lien Term Loans shall become due and payable in full under the First Lien CreditAgreement, whether by acceleration or otherwise, and (iii) September 25, 2020 if our indebtedness under the Second Lien Credit Agreement hasnot been repaid, refinanced or extended prior to such date. Incremental Feature: Under the First Lien Credit Agreement, we can elect to request 1) an increase to the existing Revolving CreditFacility and/or 2) additional First Lien Term Loans, provided that the aggregate amount of such increases or additions does not exceed (A) anamount not in excess of $100.0 million minus any incremental loans requested under the similar provisions of the Second Lien CreditAgreement or (B) if the First Lien Leverage Ratio would not exceed 3.50:1.00 after giving effect to such incremental facilities, an uncappedamount, in each case subject to the conditions and limitations set forth in the First Lien Credit Agreement. Each lender approached to provideall or a portion of any incremental facility may elect or decline, in its sole discretion, to provide any incremental commitment or loan. Revolving Credit Facility: The First Lien Credit Agreement provides for a $117.5 million Revolving Credit Facility. The terminationdate of the Revolving Credit Facility is the earliest to occur of: (i) July 1, 2021, (ii) the date the Revolving Credit Facility is permanently reducedto zero pursuant to section 2.13(b) of the First Lien Credit Agreement, which addresses voluntary commitment reductions, (iii) the date of thetermination of the Revolving Credit Facility due to specific events of default pursuant to section 8.01 of the First Lien Credit Agreement, and(iv) September 25, 2020 if our indebtedness under the Second Lien Credit Agreement has not been repaid, refinanced or extended prior to suchdate. Amounts borrowed under the Revolving Credit Facility bear interest based on types of borrowings as follows: (i) unpaid principal onloans under the Revolving Credit Facility at the Adjusted Eurodollar Rate (as defined in the First Lien Credit Agreement) plus 3.75% per annumor the Base Rate (as defined in the First Lien Credit Agreement) plus 2.75% per annum, (ii) letter of credit fees at 3.75% per annum and frontingfees for letters of credit at 0.25% per annum, in each case on the average aggregate daily maximum amount available to be drawn under allletters of credit issued under the First Lien Credit Agreement, and (iii) commitment fee of 0.5% per annum on the unused revolver balance. Second Lien Credit Agreement: On March 25, 2014, we entered into the Second Lien Credit Agreement to provide for, among other things, the borrowing of $180.0million of Second Lien Term Loans. The proceeds from the Second Lien Term Loans were used to redeem our 10 3/8% senior unsecured notes,due 2018, to pay the expenses related to the transaction and for general corporate purposes. On July 1, 2016, in conjunction with theRestatement Amendment, a $12.0 million principal payment was made on the Second Lien Term Loans. 45 The Second Lien Credit Agreement provides for the following: Interest. The interest rates payable on the Second Lien Term Loans are (a) the Adjusted Eurodollar Rate (as defined in the SecondLien Credit Agreement) plus 7.0% or (b) the Base Rate (as defined in the Second Lien Credit Agreement) plus 6.0%. The Adjusted EurodollarRate has a minimum floor of 1.0% on the Second Lien Term Loans. The three month Adjusted Eurodollar Rate at December 31, 2016 was 1.0%.The rate paid on the Second Lien Term Loan at December 31, 2016 was 8%. Payments. There is no scheduled amortization of the principal of the Second Lien Term Loans. Unless otherwise prepaid as a result ofthe occurrence of certain mandatory prepayment events, all principal will be due and payable on the termination date described below. Termination. The maturity date for the Second Lien Term Loans is the earlier to occur of (i) March 25, 2021, and (ii) the date on whichthe Second Lien Term Loans shall otherwise become due and payable in full under the Second Lien Credit Agreement, whether by voluntaryprepayment per section 2.13(a) of the Second Lien Credit Agreement or events of default per section 8.01 of the Second Lien Credit Agreementas described below.The following describes our financing activities on the retired Senior Notes: Senior Notes: On April 6, 2010, we issued and sold $200 million of 10 3/8% senior unsecured notes due 2018 at a price of 98.680% (the “SeniorNotes”). All payments of the Senior Notes, including principal and interest, were guaranteed jointly and severally on a senior securedbasis by RadNet, Inc., and all of Radnet Management’s current and future domestic wholly owned restricted subsidiaries. The SeniorNotes were issued under an indenture dated April 6, 2010 (the “Indenture”), by and among Radnet Management, Inc., as issuer, RadNet,Inc., as parent guarantor, the subsidiary guarantors thereof and U.S. Bank National Association, as trustee. We paid interest on thesenior notes on April 1 and October 1 of each year, commencing October 1, 2010, and they were scheduled to expire on April 1, 2018. OnApril 24, 2014, we completed the retirement of our $200 million in Senior Notes on April 24, 2014 and following such retirement theCompany completed the satisfaction and discharge of the Indenture. As a result of the transaction, we recorded a loss on the earlyextinguishment of debt of $15.9 million. Contractual Commitments Our future obligations for notes payable, equipment under capital leases, lines of credit, equipment and building operating leases andpurchase and other contractual obligations for the next five years and thereafter include (dollars in thousands): 2017 2018 2019 2020 2021 Thereafter Total Notes payable (1) $61,022 $59,810 $58,407 $57,061 $213,301 $382,452 $832,053 Capital leases (2) 4,764 2,163 359 201 81 15 7,583 Operating leases (3) 66,705 57,422 48,887 39,117 30,061 57,340 299,532 Total $132,491 $119,395 $107,653 $96,379 $243,443 $439,807 $1,139,168 (1) Includes variable rate debt for which the contractual obligation was estimated using the applicable rate at December 31, 2016.(2) Includes interest component of capital lease obligations.(3) Includes all operating leases through the end of their main lease term, excluding options on facility leases. We have an arrangement with GE Medical Systems under which it has agreed to be responsible for the maintenance and repair of amajority of our equipment for a fee that is based on the type and age of the equipment. Under this agreement, we are committed to minimumpayments of approximately $26.0 million per year through 2017. 46 Critical Accounting Policies Use of Estimates Our discussion and analysis of financial condition and results of operations are based on our consolidated financial statements that wereprepared in accordance with U.S. generally accepted accounting principles, or GAAP. Management makes estimates and assumptions whenpreparing financial statements. 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 net revenue 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. Asa result, actual amounts could differ materially from these estimates. The SEC defines critical accounting estimates as those that are both most important to the portrayal of a company’s financial conditionand results of operations and require management’s most difficult, subjective or complex judgment, often as a result of the need to make estimatesabout the effect of matters that are inherently uncertain and may change in subsequent periods. In Note 2 to our consolidated financial statements,we discuss our significant accounting policies, including those that do not require management to make difficult, subjective or complex judgmentsor estimates. The most significant areas involving management’s judgments and estimates are described below. Revenues Service fee revenue, net of contractual allowances and discounts, consists of net patient fees received from various payors and patientsthemselves based mainly upon established contractual billing rates, less allowances for contractual adjustments and discounts. As it relates toBRMG and the NY Groups centers, this service fee revenue includes payments for both the professional medical interpretation revenue recognizedby BRMG and the NY Groups as well as the payment for all other aspects related to our providing the imaging services, for which we earnmanagement fees from BRMG and the NY Groups. As it relates to non-BRMG and NY Groups centers, namely the affiliated physician groups, thisservice fee revenue is earned through providing the use of our diagnostic imaging equipment and the provision of technical services as well asproviding 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 patientsand third-party payors. Third-party payors include federal and state agencies (under the Medicare and Medicaid programs), managed care healthplans, commercial insurance companies and employers. Estimates of contractual allowances under managed care health plans are based upon thepayment terms specified in the related contractual agreements. Contractual payment terms in managed care agreements are generally based uponpredetermined rates per discounted fee-for-service rates. We also record a provision for doubtful accounts (based primarily on historical collectionexperience) related to patients and copayment and deductible amounts for patients who have health care coverage under one of our third-partypayors. Under capitation arrangements with various health plans, we earn a per-enrollee amount each month for making available diagnosticimaging services to all plan enrollees under the capitation arrangement. Revenue under capitation arrangements is recognized in the period whichwe are obligated to provide services to plan enrollees under contracts with various health plans. 47Our service fee revenue, net of contractual allowances and discounts, the provision for bad debts, and revenue under capitationarrangements for the years ended December 31, are summarized in the following table (in thousands):Years Ended December 31,201620152014Commercial insurance (1)$539,793 $486,489 $437,525 Medicare187,941 168,545 159,562 Medicaid28,170 23,948 24,499 Workers' compensation/personal injury36,548 32,728 30,543 Other (2)29,135 35,046 18,007 Service fee revenue, net of contractual allowances and discounts821,587 746,756 670,136 Provision for bad debts(45,387)(36,033) (29,807)Net service fee revenue776,200 710,723 640,329 Revenue under capitation arrangements108,335 98,905 77,240 Total net revenue$884,535 $809,628 $717,569 (1)21% of our net service fee revenue before provision for bad debt for the year ended December 31, 2016 and 20% for the years ended 2015 and2014 were earned from a single payor.(2) Other consist of revenue from teleradiology services, consulting fees and software revenue.Provision for Bad DebtsWe provide for an allowance against accounts receivable that could become uncollectible to reduce the carrying value of such receivablesto their estimated net realizable value. We estimate this allowance based on the aging of our accounts receivable by the historical payment patternsof each type of payor, write-off trends, and other relevant factors. A significant portion of our provision for bad debt relates to co-payments anddeductibles owed to us from patients with insurance. Although we attempt to collect deductibles and co-payments due from patients withinsurance 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 revenuesrecognized based on an assessment of the patient’s ability to pay. There are various factors that can impact collection trends, such as changes inthe economy, which in turn have an impact on the increased burden of co-payments and deductibles to be made by patients with insurance. Thesefactors continuously change and can have an impact on collection trends and our estimation process. Our allowance for bad debts at December 31,2016 and 2015 was $20.7 million and $20.8 million, respectively.Depreciation and Amortization of Long-Lived AssetsWe depreciate our long-lived assets over their estimated economic useful lives with the exception of leasehold improvements where weuse the shorter of the assets useful lives or the lease term of the facility for which these assets are associated.Deferred Tax AssetsWe evaluate the realizability of the net deferred tax assets and assess the valuation allowance periodically. If future taxable income or otherfactors are not consistent with our expectations, an adjustment to our allowance for net deferred tax assets may be required. For net deferred taxassets we consider estimates of future taxable income, including tax planning strategies, in determining whether our net deferred tax assets are morelikely than not to be realized.Valuation of Goodwill and Indefinite Lived Intangible AssetsGoodwill at December 31, 2016 totaled $239.5 million. Indefinite lived intangible assets at December 31, 2016 totaled $7.9 million and areassociated with the value of certain trade name intangibles. Goodwill and trade name intangibles are recorded as a result of business combinations.Management evaluates goodwill and trade name intangibles, at a minimum, on an annual basis and whenever events and changes in circumstancessuggest that the carrying amount may not be recoverable. Impairment of goodwill is tested at the reporting unit level by comparing the reportingunit’s carrying amount, including goodwill, to the fair value of the reporting unit. The fair value of a reporting unit is estimated using a combinationof the income or discounted cash flows approach and the market approach, which uses comparable market data. If the carrying amount of thereporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, ifany. Impairment of trade name intangibles is tested at the subsidiary level by comparing the subsidiary’s trade name carrying amount to itsrespective fair value. We tested both goodwill and trade name intangibles for impairment on October 1, 2016, noting no impairment, and have notidentified any indicators of impairment through December 31, 2016.48 We evaluate our long-lived assets (property and equipment) and intangibles, other than goodwill, for impairment whenever indicators ofimpairment exist. Generally accepted accounting principles (GAAP) requires that if the sum of the undiscounted expected future cash flows from along-lived asset or definite-lived intangible is less than the carrying value of that asset, an asset impairment charge must be recognized. Theamount of the impairment charge is calculated as the excess of the asset’s carrying value over its fair value, which generally represents thediscounted 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 impairmentwere identified with respect to our long-lived assets as of December 31, 2016. Recent Accounting Standards During 2016, we adopted six accounting updates for guidance on stock compensation, income taxes, business combinations, imputation ofinterest and consolidation. The descriptions and effects of the adoption of these updates are described fully in Note 3 to our consolidated financialstatements contained herein. Stated below are accounting policies which are under evaluation for their affect on our statement of operations andcash flows. In January 2017, the FASB issued ASU No. 2017-04 (“ASU 2017-04”), Simplifying the Test for Goodwill Impairment. ASU 2017-04eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwillimpairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value(i.e., measure the charge based on the current Step 1). ASU 2017-04 is effective for annual and any interim impairment tests for periods beginningafter December 15, 2019, with early adoption permitted. We are evaluating the effect of this guidance. In January 2017, the FASB issued ASU No. 2017-01 (“ASU 2017-01”), Clarifying the Definition of a Business. ASU 2017-01 changes thedefinition of a business to assist entities with evaluating when a set of transferred assets and activities is considered a business. ASU 2017-01 iseffective for annual periods beginning after December 31, 2017 including interim periods within those periods. We are evaluating the effect of thisguidance. In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), Leases, (Topic 842): Amendments to the FASB AccountingStandards Codification. ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize mostleases on their balance sheets and making targeted changes to lessor accounting. The new standard requires a modified retrospective transitionapproach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The amendmentsin this update are effective for fiscal years (and interim reporting periods within fiscal years) beginning after December 15, 2018. Early adoption ofthe amendments is permitted for all entities. We are currently evaluating the impact this guidance will have on our consolidated financialstatements, but expect this adoption will result in a significant increase in the assets and liabilities related to our leased properties and equipment. In May 2014, the FASB issued ASU No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers, (Topic 606). ASU 2014-09requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects inexchange for the goods or services. It also requires more detailed disclosures to enable users of the financial statements to understand the nature,amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance will become effective for theCompany on January 1, 2018. We are continuing to evaluate the effects the adoption of this standard will have on our financial statements andfinancial disclosures. We believe the most significant impact will be to the presentation of our statement of operations where the provision for baddebts will be recorded as a direct reduction to revenues and will not be presented as a separate line item. We expect to adopt the new standardusing the full retrospective application. Subsequent Events On January 6, 2017, Image Medical Inc., a wholly owned subsidiary of RadNet, entered into a membership purchase agreement withScriptSender, LLC, a partnership held by two individuals which provides secure data transmission services of medical information. Image Medicalwill contribute $3.0 million for a 49% equity interest in the partnership. In a separate management agreement, Image Medical Inc. will providemanagement and accounting services to the operation in return for a set fee. Image Medical Inc. will account for the investment under the equitymethod. On January 13, 2017, we completed our acquisition of certain assets of Resolution Medical Imaging Corporation, consisting of two multimodality imaging center located in Santa Monica, CA for cash consideration of $2.1 million, the assumption of approximately $1.7 million inequipment debt, and payoff of a small business administration loan of $241,000. The facilities provide MRI, CT, Ultrasound, and X-Ray services. On February 1, 2017, we completed our acquisition of certain assets of MRI Centers, Inc., consisting of one single-modality imaging centerlocated in Torrance, CA for cash consideration of $718,000. The facility provides MRI and sports medicine services. On February 2, 2017, we entered into a fourth amendment to our first lien credit agreement and senior secured revolving facility. Pursuantto the fourth amendment, the interest rate charged for the applicable margin on both facilities was reduced by 50 basis points, from 3.75% to 3.25%.The minimum LIBOR rate underlying the senior secured term loans remains at 1.0%. Except for such reduction in the interest rate on creditextensions, this amendment did not result in any other material modifications to the amended and restated credit agreement evidencing the first lienterm loans and the senior secured revolving credit facility. 49 Item 7A.Quantitative and Qualitative Disclosures About Market Risk Foreign Currency Exchange Risk. We receive payment for our services exclusively in United States dollars. As a result, our financialresults are unlikely to be affected by factors such as changes in foreign currency, exchange rates or weak economic conditions in foreign markets. We maintain research and development facilities in Prince Edward Island, Canada and Budapest, Hungary for which expenses are paid inthe local currency. Accordingly, we do have currency risk resulting from fluctuations between such local currency and the United States Dollar. Atthe present time, we do not have any foreign exchange currency contracts to mitigate this risk. A hypothetical 1% increase in the rate of exchangeof foreign currencies against the dollar for 2016 would have resulted in an increase of approximately $31,000 in our operating expenses for the year. Interest Rate Sensitivity We pay interest on various types of debt instruments to our suppliers and lending institutions. The agreementsentail either fixed or variable interest rates. Instruments which have fixed rates are mainly leases on radiology equipment. Variable rate interestobligations relate primarily to amounts borrowed under our outstanding credit facilities. As described in the Liquidity and Capital Resourcessection above, we can elect Eurodollar or Base Rate interest rate options on the Restatement Amendment and the First Lien Credit Agreement andthe Second Lien Credit Agreement. At December 31, 2016, we had $478.9 million outstanding subject to an Adjusted Eurodollar election on all first lien term loans under theCredit Agreement and $168.0 million on the Second Lien Term Loans. With the Restatement Amendment and First Lien Credit Agreement, theCompany has initially selected a 3 month LIBOR election. At December 31, 2016, the Adjusted Eurodollar Rate floor of 1% now equals the currentspot rate of the 3 month Adjusted Eurodollar. Therefore, a hypothetical 1% increase in the borrowing rate would have resulted in an increase of $6.5million of interest expense on an annual basis under our first and second lien term loans. At December 31, 2016, an additional $6.1 million in debtinstruments is tied to the prime rate. A hypothetical 1% increase in the prime rate for 2015-2016 would have resulted in an annual increase in interestexpense of approximately $61,000. To mitigate interest rate risk sensitivity, the Company entered into two forward interest rate cap agreements which are designated atinception as cash flow hedges of future cash interest payments associated with portions of the Company’s variable rate bank debt. Under thesearrangements, the Company purchased a cap on 3 month LIBOR at 2.0%. See Note 10 to the consolidated financial statements contained herein. Item 8.Financial Statements and Supplementary Data The Financial Statements are attached hereto and begin on page 51. 50 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of RadNet, Inc. We have audited the accompanying consolidated balance sheets of RadNet, Inc. and subsidiaries (the “Company”) as of December 31, 2016 and2015, and the related consolidated statements of operations, comprehensive income, equity (deficit), and cash flows for each of the three years inthe period ended December 31, 2016. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financialstatements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financialstatements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of RadNet, Inc.and subsidiaries at December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the three years inthe period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financialstatement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects theinformation set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), RadNet Inc.’s internalcontrol over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 16, 2017, expressed an adverseopinion thereon. /s/ Ernst & Young LLP Los Angeles, CaliforniaMarch 16, 2017 51RADNET, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)As of December 31,20162015ASSETSCURRENT ASSETSCash and cash equivalents$20,638 $446 Accounts receivable, net164,210 162,843 Current portion of deferred tax assets– 22,279 Due from affiliates2,428 4,815 Prepaid expenses and other current assets28,435 38,986 Assets held for sale2,203 – Total current assets217,914 229,369 PROPERTY AND EQUIPMENT, NET247,725 256,722 OTHER ASSETSGoodwill239,553 239,408 Other intangible assets42,682 45,253 Deferred financing costs, net of current portion2,004 2,841 Investment in joint ventures43,509 33,584 Deferred tax assets, net of current portion50,356 24,685 Deposits and other5,733 4,565 Total assets$849,476 $836,427 LIABILITIES AND EQUITYCURRENT LIABILITIESAccounts payable, accrued expenses and other$111,166 $113,813 Due to affiliates13,141 6,564 Deferred revenue1,516 1,598 Current portion of deferred rent2,961 2,563 Current portion of notes payable22,031 22,383 Current portion of obligations under capital leases4,526 10,038 Total current liabilities155,341 156,959 LONG-TERM LIABILITIESDeferred rent, net of current portion24,799 26,865 Notes payable, net of current portion609,445 599,914 Obligations under capital lease, net of current portion2,730 6,385 Other non-current liabilities5,108 9,843 Total liabilities797,423 799,966 EQUITYRadNet, Inc. stockholders' equity:Common stock - $.0001 par value, 200,000,000 shares authorized; 46,574,904 and 46,281,189 sharesissued and outstanding at December 31, 2016 and 2015, respectively44Additional paid-in-capital198,387 197,297 Accumulated other comprehensive gain (loss)306 (153)Accumulated deficit(150,211)(164,571)Total RadNet, Inc.'s stockholders' equity48,486 32,577 Non-controlling interests3,567 3,884 Total equity52,053 36,461 Total liabilities and equity$849,476 $836,427 The accompanying notes are an integral part of these financial statements.52RADNET, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)Years Ended December 31,201620152014NET REVENUEService fee revenue, net of contractual allowances and discounts$821,587 $746,756 $670,136 Provision for bad debts(45,387) (36,033) (29,807)Net service fee revenue776,200 710,723 640,329 Revenue under capitation arrangements108,335 98,905 77,240 Total net revenue884,535 809,628 717,569 OPERATING EXPENSESCost of operations, excluding depreciation and amortization775,801 708,289 602,652 Depreciation and amortization66,610 60,611 59,258 Loss on sale and disposal of equipment767 866 1,113 Severance costs2,877 745 1,241 Total operating expenses846,055 770,511 664,264 INCOME FROM OPERATIONS38,480 39,117 53,305 OTHER INCOME AND EXPENSESInterest expense43,455 41,684 42,727 Meaningful use incentive(2,808) (3,270) (2,034)Equity in earnings of joint ventures(9,767) (8,927) (6,970)Gain on sale of imaging centers– (5,434) – Gain on return of common stock(5,032) – – Loss on early extinguishment of senior notes– – 15,927 Other expenses196 419 3 Total other expenses26,044 24,472 49,653 INCOME BEFORE INCOME TAXES12,436 14,645 3,652 Provision for income taxes(4,432) (6,007) (1,967)NET INCOME8,004 8,638 &sbsp;1,685 Net income attributable to noncontrolling interests774 929 309 NET INCOME ATTRIBUTABLE TO RADNET, INC. COMMONSTOCKHOLDERS$7,230 $7,709 $1,376 BASIC NET INCOME PER SHARE ATTRIBUTABLE TO RADNET,INC. COMMON STOCKHOLDERS$0.16 $0.18 $0.03 DILUTED NET INCOME PER SHARE ATTRIBUTABLE TORADNET, INC. COMMON STOCKHOLDERS$0.15 $0.17 $0.03 WEIGHTED AVERAGE SHARES OUTSTANDINGBasic46,244,188 43,805,794 41,070,077 Diluted46,655,032 45,171,372 43,149,196 The accompanying notes are an integral part of these financial statements.53RADNET, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(IN THOUSANDS)Years Ended December 31,201620152014NET INCOME$8,004 $8,638 $1,685 Foreign currency translation adjustments(49)(41)(62)Change in fair value of cash flow hedge, net of taxes of $310508 – – COMPREHENSIVE INCOME8,463 8,597 1,623 Less comprehensive income attributable to non-controlling interests774 929 309 COMPREHENSIVE INCOME ATTRIBUTABLE TO RADNET, INC.COMMON STOCKHOLDERS$7,689 $7,668 $1,314 The accompanying notes are an integral part of these financial statements.54RADNET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EQUITY (DEFICIT)(IN THOUSANDS EXCEPT SHARE DATA)Common StockAdditionalPaid-inAccumulatedOtherComprehensive Accumulated Radnet, Inc.Stockholders' Noncontrolling TotalSharesAmountCapital(Loss) GainDeficitEquityInterestsEquityBALANCE -JANUARY 1, 2014 40,089,196 $4 $173,622 $(50)$(173,656)$(80)$2,290 $2,210 Issuance of commonstock upon exerciseof options/warrants 1,579,695 – 1,546 – – 1,546 – 1,546 Stock-basedcompensation– – 2,463 – – 2,463 – 2,463 Issuance of restrictedstock and otherawards1,156,785 – – – – – – – Purchase of non-controlling interests – – 119 – – 119 (315)(196)Sale of non-controlling interests – – – – – – 200 200 Dividends paid tononcontrollinginterests– – – – – – (148)(148)Change in cumulativeforeign currencytranslationadjustment– – – (62)– (62)– (62)Net income– – – – 1,376 1,376 309 1,685 BALANCE -DECEMBER 31,201442,825,676 $4 $177,750 $(112)$(172,280)$5,362 $2,336 $7,698 Issuance of commonstock upon exerciseof options/warrants 835,098 – 594 – – 594 – 594 Stock-basedcompensation– – 7,635 – – 7,635 – 7,635 Issuance of restrictedstock and otherawards1,014,423 – – – – – – – Forfeiture ofrestricted stock(59,053)– – – – – – – Issuance of stock foracquisitions1,665,045 9,241 – 9,241 9,241 Sale of non-controlling interests – – 2,077 – – 2,077 1,348 3,425 Distributions paid tononcontrollinginterests– – – – – – (729)(729)Change in cumulativeforeign currencytranslationadjustment– – – (41)– (41)– (41)Net income– – – – 7,709 7,709 929 8,638 BALANCE -DECEMBER 31,201546,281,189 $4 $197,297 $(153)$(164,571)$32,577 $3,884 $36,461 Cumulative effect ofaccounting changedue to adoption ofASU 2016-09– – – – 7,130 7,130 – 7,130 Issuance of commonstock upon exerciseof options/warrants 314,448 – 150 – – 150 – 150 Stock-basedcompensation– – 5,767 – – 5,767 – 5,767 Issuance of restrictedstock and otherawards937,803 – – – – – – – Return of commonstock(958,536)– (5,032)– – (5,032)– (5,032)Purchase ofnoncontrollinginterests– – (495)– – (495)(599)(1,094)Sale of non-controlling interest– – 700 – – 700 – 700 Distributions paid tononcontrollinginterests– – – – – – (492)(492)Change in cumulativeforeign currencytranslationadjustment– – – (49)– (49)– (49)Change in fair valuecash flow hedge, netof taxes508 508 – 508 Net income– – – – 7,230 7,230 774 8,004 BALANCE -DECEMBER 31,201646,574,904 $4 $198,387 $306 $(150,211)$48,486 $3,567 $52,053 The accompanying notes are an integral part of these financial statements.55RADNET, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(IN THOUSANDS)Years Ended December 31,201620152014CASH FLOWS FROM OPERATING ACTIVITIESNet income$8,004 $8,638 $1,685 Adjustments to reconcile net income to net cash provided by operatingactivities:Depreciation and amortization66,610 60,611 59,258 Provision for bad debts45,387 36,033 29,807 Gain on return of common stock(5,032)– – Equity in earnings of joint ventures(9,767)(8,927) (6,970)Distributions from joint ventures2,926 7,731 7,358 Amortization and write off of deferred financing costs and loan discount5,045 5,369 5,732 Loss on sale and disposal of equipment767 866 1,113 Loss on early extinguishment of senior notes– – 15,927 Gain on sale of imaging centers– (5,434) – Stock-based compensation5,826 7,647 2,500 Changes in operating assets and liabilities, net of assets acquired and liabilitiesassumed in purchase transactions:Accounts receivable(47,055)(34,514) (43,973)Other current assets11,038 (14,198) (5,514)Other assets1,267 (3,813) (281)Deferred taxes3,446 4,036 655 Deferred rent(1,668)7,011 2,180 Deferred revenue(82)(366) 620 Accounts payable, accrued expenses and other4,929 (3,653) (9,093)Net cash provided by operating activities91,641 67,037 61,004 CASH FLOWS FROM INVESTING ACTIVITIESPurchase of imaging facilities(6,641)(90,792) (9,428)Purchase of property and equipment(59,251)(42,964) (41,740)Proceeds from sale of equipment481 1,282 1,088 Proceeds from sale of imaging facilities– 35,500 – Proceeds from sale of internal use software301 443 – Cash contribution from partner in JV formation994 – – Equity contributions in existing and purchase of interest in joint ventures(1,374)(265) (3,562)Net cash used in investing activities(65,490)(96,796) (53,642)CASH FLOWS FROM FINANCING ACTIVITIESPrincipal payments on notes and leases payable(11,880)(9,773) (23,913)Proceeds from borrowings476,504 73,869 210,000 Payments on senior notes(469,086)(23,727) (211,344)Deferred financing costs(945)– (6,650)Net (payments) proceeds on revolving credit facility– (15,300) 15,300 Dividends paid to noncontrolling interests(492)(729) (148)Proceeds from the sale of non-controlling interests992 5,005 – Purchase of non-controlling interests(1,153)– (196)Proceeds from issuance of common stock upon exercise of options/warrants150 594 1,546 Net cash (used in) provided by financing activities(5,910)29,939 (15,405)EFFECT OF EXCHANGE RATE CHANGES ON CASH(49)(41) (62)NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS20,192 139 (8,105)CASH AND CASH EQUIVALENTS, beginning of period446 307 8,412 CASH AND CASH EQUIVALENTS, end of period$20,638 $446 $307 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid during the period for interest$37,487 $36,028 $41,584 Cash paid during the period for income taxes$2,798 $1,781 $1,070 The accompanying notes are an integral part of these financial statements.56RADNET, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)Supplemental Schedule of Non-Cash Investing and Financing ActivitiesWe acquired equipment and certain leasehold improvements for approximately $28.8 million, $32.4 million, and $19.4 millionduring the years ended December 31, 2016, 2015 and 2014, respectively, that we had not paid for as of December 31, 2016, 2015 and2014, respectively. The offsetting amount due was recorded in our consolidated balance sheets under “accounts payable, accruedexpenses and other.”During the twelve months ended December 31, 2016, we added capital lease debt of approximately $1.3 million relating to radiologyequipment.We recognized a non-cash gain on return of common stock of $5.0 million in June 2016. See Note 2, Gain on Return of Common Stock.We transferred $2.7 million in fixed assets in June 2016 to our new joint venture, Glendale Advanced Imaging LLC, see Note 2,Investment in Joint Ventures.57RADNET, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 1 – NATURE OF BUSINESSWe are a leading national provider of freestanding, fixed-site outpatient diagnostic imaging services in the United States based on numberof locations and annual imaging revenue. At December 31, 2016, we operated directly or indirectly through joint ventures with hospitals, 305centers located in California, Delaware, Florida, Maryland, New Jersey, New York, and Rhode Island. Our centers provide physicians with imagingcapabilities to facilitate the diagnosis and treatment of diseases and disorders. Our services include magnetic resonance imaging (MRI), computedtomography (CT), positron emission tomography (PET), nuclear medicine, mammography, ultrasound, diagnostic radiology (X-ray), fluoroscopyand other related procedures. The vast majority of our centers offer multi-modality imaging services. Our multi-modality strategy diversifies revenuestreams, reduces exposure to reimbursement changes and provides patients and referring physicians one location to serve the needs of multipleprocedures.The consolidated financial statements include the accounts of Radnet Management, Inc. (or “Radnet Management”) and BeverlyRadiology Medical Group III, a professional partnership (“BRMG”). BRMG is a partnership of ProNet Imaging Medical Group, Inc., BreastlinkMedical Group, Inc. and Beverly Radiology Medical Group, Inc. The consolidated financial statements also include Radnet Management I, Inc.,Radnet Management II, Inc., Radiologix, Inc., Radnet Managed Imaging Services, Inc., Delaware Imaging Partners, Inc., New Jersey ImagingPartners, Inc. and Diagnostic Imaging Services, Inc. (“DIS”), all wholly owned subsidiaries of Radnet Management. All of these affiliated entitiesare referred to collectively as “RadNet”, “we”, “us”, “our” or the “Company” in this report.Accounting Standards Codification (“ASC”) 810-10-15-14, Consolidation, stipulates that generally any entity with a) insufficient equity tofinance its activities without additional subordinated financial support provided by any parties, or b) equity holders that, as a group, lack thecharacteristics specified in the ASC which evidence a controlling financial interest, is considered a Variable Interest Entity (“VIE”). We consolidateall VIEs in which we are the primary beneficiary. We determine whether we are the primary beneficiary of a VIE through a qualitative analysis thatidentifies which variable interest holder has the controlling financial interest in the VIE. The variable interest holder who has both of the followinghas the controlling financial interest and is the primary beneficiary: (1) the power to direct the activities of the VIE that most significantly impact theVIE’s economic performance and (2) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially besignificant to the VIE. In performing our analysis, we consider all relevant facts and circumstances, including: the design and activities of the VIE,the terms of the contracts the VIE has entered into, the nature of the VIE’s variable interests issued and how they were negotiated with or marketedto potential investors, and which parties participated significantly in the design or redesign of the entity.Howard G. Berger, M.D., is our President and Chief Executive Officer, a member of our Board of Directors, and also owns, indirectly, 99% ofthe equity interests in BRMG. BRMG is responsible for all of the professional medical services at nearly all of our facilities located in Californiaunder a management agreement with us, and employs physicians or contracts with various other independent physicians and physician groups toprovide the professional medical services at most of our California facilities. We generally obtain professional medical services from BRMG inCalifornia, rather than provide such services directly or through subsidiaries, in order to comply with California’s prohibition against the corporatepractice of medicine. However, as a result of our close relationship with Dr. Berger and BRMG, we believe that we are able to better ensure thatmedical service is provided at our California facilities in a manner consistent with our needs and expectations and those of our referring physicians,patients and payors than if we obtained these services from unaffiliated physician groups.We contract with nine medical groups which provide professional medical services at all of our facilities in Manhattan and Brooklyn, NewYork. These contracts are similar to our contract with BRMG. Six of these groups are owned by John V. Crues, III, M.D., RadNet’s Medical Director,a member of our Board of Directors, and a 1% owner of BRMG. Dr. Berger owns a controlling interest in two of these medical groups which provideprofessional medical services at one of our Manhattan facilities.RadNet provides non-medical, technical and administrative services to BRMG and the nine medical groups mentioned above (“NYGroups”) for which it receives a management fee, pursuant to the related management agreements. Through the management agreements we haveexclusive authority over all non-medical decision making related to the ongoing business operations of BRMG and the NY Groups and wedetermine the annual budget of BRMG and the NY Groups. BRMG and the NY Groups both have insignificant operating assets and liabilities, andde minimis equity. Through management agreements with us, substantially all cash flows of BRMG and the NY Groups after expenses includingprofessional salaries, are transferred to us.58We have determined that BRMG and the NY Groups are variable interest entities, that we are the primary beneficiary, and consequently, weconsolidate the revenue and expenses, assets and liabilities of each. BRMG and the NY Groups on a combined basis recognized $135.7 million,$113.1 million and $89.3 million of revenue, net of management services fees to RadNet, for the years ended December 31 2016, 2015, and 2014,respectively and $135.7 million, $113.1 million and $89.3 million of operating expenses for the years ended December 31 2016, 2015, and 2014,respectively. RadNet, Inc. recognized $430.4 million, $343.9 million and $287.4 million of total billed net service fee revenue for the years endedDecember 31, 2016, 2015 and 2014, respectively, for management services provided to BRMG and the NY Groups relating primarily to the technicalportion of billed revenue.The cash flows of BRMG and the NY Groups are included in the accompanying consolidated statements of cash flows. All intercompanybalances and transactions have been eliminated in consolidation. In our consolidated balance sheets at December 31, 2016 and December 31, 2015,we have included approximately $100.0 million and $89.8 million, respectively, of accounts receivable and approximately $9.0 million and $8.5 millionof accounts payable and accrued liabilities related to BRMG and the NY Groups, respectively.The creditors of BRMG and the NY Groups do not have recourse to our general credit and there are no other arrangements that couldexpose us to losses on behalf of BRMG and the NY Groups. However, RadNet may be required to provide financial support to cover any operatingexpenses in excess of operating revenues.At all of our centers we have entered into long-term contracts with radiology groups in the area to provide physician services at thosefacilities. These radiology practices provide professional services, including supervision and interpretation of diagnostic imaging procedures, inour diagnostic imaging centers. The radiology practices maintain full control over the provision of professional services. In these facilities we enterinto long-term agreements with radiology practice groups (typically 40 years). Under these arrangements, in addition to obtaining technical fees forthe use of our diagnostic imaging equipment and the provision of technical services, we provide management services and receive a fee based onthe value of the services we provide. Except in New York City, the fee is based on the practice group’s professional revenue, including revenuederived outside of our diagnostic imaging centers. In New York City we are paid a fixed fee set in advance for our services. We own the diagnosticimaging equipment and, therefore, receive 100% of the technical reimbursements associated with imaging procedures. The radiology practicegroups retain the professional reimbursements associated with imaging procedures after deducting management service fees paid to us and wehave no financial controlling interest in the radiology practices. Because of the controlling relationship of Dr. Berger and Dr. Crues in the Californiaand New York City practices as stated in detail above, we consolidate the revenue and expenses.NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESPRINCIPLES OF CONSOLIDATION - The operating activities of subsidiaries are included in the accompanying consolidated financialstatements from the date of acquisition. Investments in companies in which we have the ability to exercise significant influence, but not control, areaccounted for by the equity method. All intercompany transactions and balances, with our consolidated entities and the unsettled amount ofintercompany transactions with our equity method investees, have been eliminated in consolidation. As stated in Note 1 above, the BRMG and NYGroups are variable interest entities and we consolidate the operating activities and balance sheets of each.USE OF ESTIMATES - The preparation of the financial statements in conformity with U.S. generally accepted accounting principlesrequires 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 sheetsat the dates of the financial statements; our disclosure of contingent assets and liabilities at the dates of the financial statements; and our reportedamounts of revenues and expenses in our consolidated statements of operations during the reporting periods. These estimates involve judgmentswith respect to numerous factors that are difficult to predict and are beyond management’s control. As a result, actual amounts could materiallydiffer from these estimates.REVENUES - Service fee revenue, net of contractual allowances and discounts, consists of net patient fees received from various payorsand patients themselves based mainly upon established contractual billing rates, less allowances for contractual adjustments and discounts. As itrelates to BRMG and the NY Groups centers, this service fee revenue includes payments for both the professional medical interpretation revenuerecognized by BRMG and the NY Groups as well as the payment for all other aspects related to our providing the imaging services, for which weearn 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 asproviding 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.59Service fee revenues are recorded during the period the services are provided based upon the estimated amounts due from the patientsand third-party payors. Third-party payors include federal and state agencies (under the Medicare and Medicaid programs), managed care healthplans, commercial insurance companies and employers. Estimates of contractual allowances are based on historical collection rates of payorreimbursement contract agreements. We also record a provision for doubtful accounts based primarily on historical collection rates related topatient 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 diagnosticimaging services to all plan enrollees under the capitation arrangement. Revenue under capitation arrangements is recognized in the period in whichwe 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 capitationarrangements for the years ended December 31, are summarized in the following table (in thousands) :Years Ended December 31,201620152014Commercial insurance (1)$539,793 $486,489 $437,525 Medicare187,941 168,545 159,562 Medicaid28,170 23,948 24,499 Workers' compensation/personal injury36,548 32,728 30,543 Other (2)29,135 35,046 18,007 Service fee revenue, net of contractual allowances and discounts821,587 746,756 670,136 Provision for bad debts(45,387)(36,033) (29,807)Net service fee revenue776,200 710,723 640,329 Revenue under capitation arrangements108,335 98,905 77,240 Total net revenue$884,535 $809,628 $717,569 _________________(1)21% of our net service fees revenue for the year ended December 31, 2016 and 20% for the years ended December 31, 2015 and 2014 were earnedfrom a single payor.(2)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 thecarrying value of such receivables to their estimated net realizable value. We estimate this allowance based on the aging of our accounts receivableby the historical payment patterns of each type of payor, write-off trends, and other relevant factors. A significant portion of our provision for baddebt relates to co-payments and deductibles owed to us from patients with insurance. Although we attempt to collect deductibles and co-paymentsdue 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 topay 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 patientswith insurance. These factors continuously change and can have an impact on collection trends and our estimation process. Our allowance for baddebts at December 31, 2016 and 2015 was $20.7 million and $20.8 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 pursuantto one-year contracts with healthcare providers. We continuously monitor collections from our payors and maintain an allowance for bad debtsbased 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 providesfinancial incentives for providers that successfully implement and utilize electronic health record technology to improve patient care. Our softwaredevelopment team in Canada established an objective to build a Radiology Information System (RIS) software platform that has been awardedMeaningful Use certification. As this certified RIS system is implemented throughout our imaging centers, the radiologists that utilize this softwarecan be eligible for the available financial incentives. In order to receive such incentive payments providers must attest that they have demonstratedmeaningful use of the certified RIS in each stage of the program. We account for this meaningful use incentive under the Gain Contingency Modeloutlined in ASC 450-30. Under this model, we record within non-operating income, meaningful use incentive only after Medicare accepts anattestation from the qualified eligible professional demonstrating meaningful use. We recorded approximately $2.8 million, $3.3 million and $2.0million during the twelve months ended December 31, 2016, 2015 and 2014, respectively, relating to this incentive.60GAIN ON RETURN OF COMMON STOCK - In the second quarter of 2016, we determined that certain pre-acquisition financial informationof Diagnostic Imaging Group (“DIG”) provided to us by the sellers contained errors. As a result of this, we negotiated and reached a settlementwith the sellers of DIG in June 2016 for the return of 958,536 shares of common stock which had a fair value of $5.0 million on the date of return.Such return has been recognized as a gain on return of common stock in our statement of operations.SOFTWARE REVENUE RECOGNITION – Our subsidiary, eRAD, Inc., sells Picture Archiving Communications Systems (“PACS”) andrelated 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 thatgenerally 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 andrelated services are sold as an integrated package. Therefore, these transactions are accounted for under ASC 605-25, Multiple-ElementArrangements (as modified by ASU 2009-13). Non-essential software and related services, and essential software sold on a stand-alone basiswithout hardware, would continue to be accounted for under ASC 985-605, Software.For the years ended December 31, 2016, 2015 and 2014, we recorded approximately $6.2 million, $6.1 million and $5.5 million, respectively, inrevenue related to our eRAD business which is included in net service fee revenue in our consolidated statement of operations. At December 31,2016 we had a deferred revenue liability of approximately $1.5 million associated with eRAD sales which we expect to recognize into revenue overthe next 12 months.SOFTWARE DEVELOPMENT COSTS - Costs related to the research and development of new software products and enhancements toexisting 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 diagnostic imaging facilities. One such systemis our front desk patient tracking system or Radiology Information System (“RIS”). We have historically utilized third party RIS software solutionsand pay monthly fees to outside third party software vendors for the use of this software. We have developed our own RIS solution from theground up through our wholly owned subsidiary, Radnet Management Information Systems (“RMIS”) and began utilizing this system beginning inthe first quarter of 2015.In accordance with ASC 350-40, Accounting for the Costs of Computer Software Developed for Internal Use, the costs incurred by RMIStoward the development of our RIS system, which began in August, 2010 and continued until December 2014, were capitalized and are beingamortized over its useful life which we determined to be 5 years. Total costs capitalized were approximately $6.4 million. We began recordingamortization of $107,000 per month for our use of this software in January 2015.61We have entered into multiple agreements to license our RIS system to outside customers. For the twelve months December 31, 2016 andDecember 31, 2015, we received approximately $301,000 and $443,000 with respect to this licensing agreement, respectively. In accordance with ASC350-40, we recorded the receipt of these funds against the capitalized software costs explained above. We intend to record any future proceeds inthe same manner until the carrying value of our capitalized software costs are brought to zero. As of December 31, 2016, the net carrying value ofour capitalized software costs was approximately $3.1 million.CONCENTRATION OF CREDIT RISKS - Financial instruments that potentially subject us to credit risk are primarily cash equivalents andaccounts receivable. We have placed our cash and cash equivalents with one major financial institution. At times, the cash in the financialinstitution is temporarily in excess of the amount insured by the Federal Deposit Insurance Corporation, or FDIC. Substantially all of our accountsreceivable are due under fee-for-service contracts from third party payors, such as insurance companies and government-sponsored healthcareprograms, or directly from patients. Services are generally provided pursuant to one-year contracts with healthcare providers. We continuouslymonitor 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 becash 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 associatedloan, which approximates the effective interest rate method. Deferred financing costs, net of accumulated amortization, were $2.0 million and $4.9million, as of December 31, 2016 and 2015, respectively. In conjunction with our Restatement Amendment, a net addition of approximately $237,000was added to deferred financing costs, consisting of $946,000 new additional costs from the amendment and a write off of $709,000 due to a changein lender mix. See Note 8, Notes Payable, Line of Credit, 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 costdetermined by the first-in, first-out method.PROPERTY AND EQUIPMENT - Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciationand amortization of property and equipment are provided using the straight-line method over the estimated useful lives, which range from 3 to 15years. Leasehold improvements are amortized at the lesser of lease term or their estimated useful lives, which range from 3 to 30 years. Maintenanceand repairs are charged to expense as incurred.BUSINESS COMBINATION - Accounting for acquisitions requires us to recognize separately from goodwill the assets acquired and theliabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferredover the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptionsto 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 acquiredand liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of thevalues of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements ofoperations.GOODWILL AND INDEFINITE LIVED INTANGIBLES - Goodwill at December 31, 2016 totaled $239.6 million. Indefinite lived intangibleassets at December 31, 2016 totaled $7.9 million and are associated with the value of certain trade name intangibles. Goodwill and trade nameintangibles are recorded as a result of business combinations. Management evaluates goodwill and trade name intangibles, at a minimum, on anannual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. Impairment of goodwillis tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. Thefair value of a reporting unit is estimated using a combination of the income or discounted cash flows approach and the market approach, whichuses comparable market data. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second stepis performed to measure the amount of impairment loss, if any. Impairment of trade name intangibles is tested at the subsidiary level by comparingthe subsidiary’s trade name carrying amount to its respective fair value. We tested both goodwill and trade name intangibles for impairment onOctober 1, 2016, noting no impairment, and have not identified any indicators of impairment through December 31, 2016.LONG-LIVED ASSETS - We evaluate our long-lived assets (property and equipment) and intangibles, other than goodwill, for impairmentwhenever indicators of impairment exist. Generally accepted accounting principles (GAAP) requires that if the sum of the undiscounted expectedfuture cash flows from a long-lived asset or definite-lived intangible is less than the carrying value of that asset, an asset impairment charge mustbe recognized. The amount of the impairment charge is calculated as the excess of the asset’s carrying value over its fair value, which generallyrepresents 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 ofimpairment were identified with respect to our long-lived assets as of December 31, 2016.62INCOME 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 taxreporting 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 valuationallowance is recorded to reduce the deferred tax asset to its estimated realizable value. For net deferred tax assets we consider estimates of futuretaxable income in determining whether our net deferred tax assets are more likely than not to be realized. Income taxes are further explained in Note11.UNINSURED RISKS - On November 1, 2008 we obtained a fully funded and insured workers’ compensation policy, thereby eliminating anyuninsured risks for employee injuries occurring on or after that date. This fully funded policy remained in effect through November 1, 2013 andcontinues to cover any claims incurred through this date.On November 1, 2013 we entered into a high-deductible workers’ compensation insurance policy. We have recorded liabilities of $2.9million for the year ending December 31, 2016 and $2.2 million for the year ended December 31, 2015, respectively, for the estimated future cashobligations associated with the unpaid portion of the workers compensation claims incurred.We and our affiliated physicians carry an annual medical malpractice insurance policy that protects us for claims that are filedduring the policy year and that fall within policy limits. The policy has a deductible for which is $10,000 per incidence at December 31, 2016and was $24,000 per incidence at December 31, 2015.In December 2008, in order to eliminate the exposure for claims not reported during the regular malpractice policy period, wepurchased a medical malpractice tail policy, which provides coverage for any claims reported in the event that our medical malpracticepolicy expires. As of December 31, 2016, this policy remains in effect.We have entered into an arrangement with Blue Shield to administer and process claims under a self-insured plan that provides healthinsurance coverage for our employees and dependents. We have recorded liabilities as of December 31, 2016 and 2015 of $2.4 million and $1.8million, respectively, for the estimated future cash obligations associated with the unpaid portion of the medical and dental claims incurred by ourparticipants. Additionally, we entered into an agreement with Blue Shield for a stop loss policy that provides coverage for any claims that exceed$250,000 up to a maximum of $1.0 million in order for us to limit our exposure for unusual or catastrophic claims.LOSS AND OTHER UNFAVORABLE CONTRACTS – We assess the profitability of our contracts to provide management services to ourcontracted physician groups and identify those contracts where current operating results or forecasts indicate probable future losses. Anticipatedfuture revenue is compared to anticipated costs. If the anticipated future cost exceeds the revenue, a loss contract accrual is recorded. Inconnection with the acquisition of Radiologix in November 2006, we acquired certain management service agreements for which forecasted costsexceeds 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 serviceagreements. As of December 31, 2016 and 2015, the remaining accrual balance is $5.6 million, and $5.7 million, respectively.As part of our ongoing acquisition activities, 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, 2015, the remainingloss contract accrual for these leases was $85,000 and was completely amortized during the 2016 fiscal year with no balance remaining as ofDecember 31, 2016.In addition and related to acquisition activity, we have certain operating lease commitments for facilities where the fair market rent differsfrom the lease contract rate. We have recorded an unfavorable contract liability representing the difference between the total value of the fair marketrent and the contract rent over the current term of the lease applicable from the date of acquisition. As of December 31, 2016 and 2015, theunfavorable contract liability on these leases is $1.6 million and $581,000, respectively.EQUITY BASED COMPENSATION – We have one long-term incentive plan which we refer to as the 2006 Plan, which we amended andrestated as of April 20, 2015 (the “Restated Plan”). The Restated Plan was approved by our stockholders at our annual stockholders meeting onJune 11, 2015. As of December 31, 2016, we have reserved for issuance under the Restated Plan 12,000,000 shares of common stock. We can issueoptions, stock awards, stock appreciation rights and cash awards under the Restated Plan. Certain options granted under the Restated Plan toemployees are intended to qualify as incentive stock options under existing tax regulations. Stock options and warrants generally vest over three tofive years and expire five to ten years from date of grant.63The compensation expense recognized for all equity-based awards is recognized over the awards’ service periods. Equity-basedcompensation 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 ASC830, Foreign Currency Matters, assets and liabilities denominated in foreign currencies are translated using the exchange rate at the balance sheetdates. Revenues and expenses are translated using average exchange rates prevailing during the reporting period. Any translation adjustmentsresulting from this process are shown separately as a component of accumulated other comprehensive income. Foreign currency transaction gainsand losses are included in the determination of net income.COMPREHENSIVE INCOME - ASC 220, Comprehensive Income, establishes rules for reporting and displaying comprehensive income andits components. Our unrealized gains or losses on foreign currency translation adjustments are included in comprehensive income. For the yearended December 31, 2016, we entered into an interest rate cap agreement, as discussed in Note 10, Derivative Instruments. Assuming perfecteffectiveness, any unrealized gains or losses related to the cap agreement that qualify for cash flow hedge accounting are classified as a componentof income. Any ineffectiveness is recognized in earnings. The components of comprehensive income for the three years in the period endedDecember 31, 2016 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 valuehierarchy. The fair value hierarchy ranks the quality and reliability of inputs used to determine fair value. Accordingly, assets and liabilities carriedat, 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 levelinput 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 caninclude 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 byobservable market data.Level 3—Fair value is determined by using inputs that are unobservable and not corroborated by market data. Use of these inputsinvolves 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 theclassification of these assets on our consolidated balance sheets, as follows (in thousands):As of December 31, 2016Level 1Level 2Level 3TotalCurrent assetsInterest Rate Contracts$– $818 $– $818 The estimated fair value of these contracts, which are discussed in Note 10, was determined using Level 2 inputs. More specifically, thefair value was determined by calculating the value of the difference between the fixed interest rate of the interest rate swaps and the counterparty’sforward LIBOR curve. The forward LIBOR curve is readily available in the public markets or can be derived from information available in the publicmarkets.64The table below summarizes the estimated fair value and carrying amount of our long-term debt as follows (in thousands):As of December 31, 2016Level 1Level 2Level 3Total Fair Value Total Face Value First Lien Term Loans$– $483,129 $– $483,129 $478,938 Second Lien Term Loans$– $167,580 $– $167,580 $168,000 As of December 31, 2015Level 1Level 2Level 3TotalTotal Face Value First Lien Term Loans$– $444,258 $– $444,258 $451,023 Second Lien Term Loans– 173,700 – 173,700 180,000 Our revolving credit facility had no aggregate principal amount outstanding as of December 31, 2016.The estimated fair value of our long-term debt, which is discussed in Note 8, was determined using Level 2 inputs primarily related tocomparable market prices.We consider the carrying amounts of cash and cash equivalents, receivables, other current assets, current liabilities and other notespayables to approximate their fair value because of the relatively short period of time between the origination of these instruments and theirexpected realization or payment. Additionally, we consider the carrying amount of our capital lease obligations to approximate their fair valuebecause 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 stockequivalents outstanding, net of common stock held in treasury, as follows (in thousands except share and per share data):Years Ended December 31,201620152014Net income attributable to RadNet, Inc. common stockholders$7,230 $7,709 $1,376 BASIC NET INCOME PER SHARE ATTRIBUTABLE TO RADNET, INC.COMMON STOCKHOLDERSWeighted average number of common shares outstanding during the period46,244,188 43,805,794 41,070,077 Basic net income per share attributable to RadNet, Inc. common stockholders$0.16 $0.18 $0.03 DILUTED NET INCOME PER SHARE ATTRIBUTABLE TO RADNET, INC.COMMON STOCKHOLDERSWeighted average number of common shares outstanding during the period46,244,188 43,805,794 41,070,077 Add nonvested restricted stock subject only to service vesting220,416 865,326 994,610 Add additional shares issuable upon exercise of stock options and warrants190,428 500,252 1,084,509 Weighted average number of common shares used in calculating diluted netincome per share46,655,032 45,171,372 43,149,196 Diluted net income per share attributable to RadNet, Inc. common stockholders$0.15 $0.17 $0.03 For the years ended December 31, 2016, 2015 and 2014 we excluded 165,000, 265,000, and 245,000, respectively, outstanding options, in thecalculation of diluted earnings per share because their effect would be antidilutive.INVESTMENT IN JOINT VENTURES – We have twelve 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 andoperating diagnostic imaging centers. Professional services at the joint venture diagnostic imaging centers are performed by contracted radiologypractices or a radiology practice that participates in the joint venture. Our investment in these joint ventures is accounted for under the equitymethod, since RadNet does not have a controlling financial interest in such ventures. We evaluate our investment in joint ventures, including costin excess of book value (equity method goodwill) for impairment whenever indicators of impairment exist. No indicators of impairment existed as ofDecember 31, 2016.65Acquisition of new facilitiesOn August 15, 2016 our joint venture, Franklin Imaging, LLC, acquired a single multi-modality imaging center located in Rosedale,Maryland for cash consideration of $1.0 million and the assumption of capital lease debt of $241,000. Franklin Imaging, LLC made a fair valuedetermination of the acquired assets and approximately $600,000 of fixed assets, $30,000 of other assets and goodwill of $648,000 was recorded inrespect to the transaction.Formation of new joint venturesOn April 1, 2016, Community Imaging Partners Inc., a wholly owned subsidiary of RadNet, entered into a joint venture with Mt. AiryHealth Services, LLC, a partnership of Frederick Memorial Hospital and Carroll Hospital Center. On August 31, 2016, Community Imaging PartnersInc. contributed $200,000 for a 40% economic interest in the partnership and funded an additional $440,000 in relation to a capital call. Mt. AiryHealth Services, LLC, contributed $300,000 for a 60% economic interest and an additional $660,000 in relation to the capital call.On May 9, 2016, RadNet, through a newly formed subsidiary, Glendale Advanced Imaging LLC, entered into a joint venture with DignityHealth, a California nonprofit public benefit corporation. On June 1, 2016, RadNet contributed net assets of $2.2 million for a 55% economic interestand Dignity Health contributed net assets of $1.8 million for a 45% economic interest.Joint venture investment and financial informationThe following table is a summary of our investment in joint ventures during the years ended December 31, 2016 and December 31, 2015 (inthousands):Balance as of December 31, 2014$32,123 Equity contributions in existing joint ventures265 Equity in earnings in these joint ventures8,927 Distribution of earnings(7,731)Balance as of December 31, 2015$33,584 Equity contributions in existing joint ventures3,084 Equity in earnings in these joint ventures9,767 Distribution of earnings(2,926)Balance as of December 31, 2016$43,509 We received management service fees from the centers underlying these joint ventures of approximately $11.9 million for the year endedDecember 31, 2016 and $9.3 million per year for the years ended December 31, 2015 and 2014, respectively. We eliminate any unrealized portion ofour management service fees with our equity in earnings of joint ventures.66The following table is a summary of key financial data for these joint ventures as of December 31, 2016 and 2015, respectively, and for theyears ended December 31, 2016, 2015 and 2014, respectively, (in thousands):December 31,Balance Sheet Data:20162015Current assets$40,093 $28,186 Noncurrent assets100,146 91,660 Current liabilities(14,077)(15,258)Noncurrent liabilities(44,405)(44,059)Total net assets$81,757 $60,529 Book value of RadNet joint venture interests$38,538 $28,397 Cost in excess of book value of acquired joint venture interests4,970 4,970 Elimination of intercompany profit remaining on Radnet's consolidated balance sheet– 217 Total value of Radnet joint venture interests$43,509 $33,584 Total book value of other joint venture partner interests$43,219 $32,132 201620152014Net revenue$160,134 $125,544 $101,189 Net income$21,933 $19,485 $14,854 NOTE 3 – RECENT ACCOUNTING STANDARDSAccounting standards adoptedIn March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09 (“ASU2016-09”), Compensation—Stock Compensation, (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 requiresexcess tax benefits and tax deficiencies, which arise due to differences between the measure of compensation expense and the amount deductiblefor tax purposes, to be recorded directly through the statement of operations when awards vest or are settled. In addition, cash flows related toexcess tax benefits will no longer be classified separately as a financing activity apart from other tax cash flows. We elected to early adopt the newguidance for the year ended December 31, 2016. Upon adoption using the modified retrospective transition method, we recorded a cumulative effectadjustment to recognize previously unrecognized excess tax benefits which increased deferred tax assets and reduced accumulated deficit by $7.1million. The current net tax benefit for 2016 resulting from adoption of the new guidance is approximately $400,000 and is reflected in our taxprovision.In November 2015, the FASB issued ASU No. 2015-17 (“ASU 2015-17”), Income Taxes (Topic 740): Balance Sheet Classification of DeferredTaxes. ASU 2015-17 changes the classification of deferred taxes to be a noncurrent asset or liability regardless of the classification of the relatedasset or liability for financial reporting. The prospective adoption resulted in a reclassification of $22.3 million from current deferred tax assets tonon-current deferred tax assets in our December 31, 2016 consolidated balance sheet, and had no impact on our consolidated statement ofoperations, comprehensive income, stockholders’ equity, and cash flows. Prior periods were not retrospectively adjusted.In September 2015, the FASB issued ASU No. 2015-16 (“ASU 2015-16”), Business Combinations, (Topic 805): Simplifying the Accountingfor Measurement-Period Adjustments, which we adopted prospectively in 2016. ASU 2015-16 eliminates the requirement to retrospectively applyadjustments made to provisional amounts recognized in a business combination. An entity will now recognize any adjustments in the reportingperiod in which the amounts are determined, calculated as if the accounting had been completed at the acquisition date. Disclosure is required forthe portion of adjustments recorded in current-period earnings that would have been recorded in previous reporting periods had they beenrecognized as of the acquisition date. The update has had no material effect on our results of operations and cash flows.In August 2015, the FASB issued ASU No. 2015-15 (“ASU 2015-15”), Interest – Imputation of Interest, (Subtopic 835-30): Presentation andSubsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU 2015-15 provides additional guidance to thepresentation of debt issuance costs discussed originally in ASU No. 2015-03, which was issued in April 2015 and described below. ASU 2015-15noted that ASU 2015-03 did not address the debt issue costs in regards to line-of-credit arrangements, which by their nature have fluctuatingbalances. ASU 2015-15 permits debt issuance costs specifically related to line-of-credit arrangements to be presented as an asset with subsequentamortization to interest expense ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowingson the arrangement. The update has had no material effect on our results of operations and cash flows.67In April 2015, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2015-03 (“ASU 2015-03”), Interest – Imputation ofInterest, (Subtopic 835-30). ASU 2015-03 changes the accounting method for debt issuance costs from a deferred charge (i.e. an asset) to a contraliability in part because such costs provide no future economic benefit. Debt issue costs related to a recognized debt liability are to be presented inthe balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with the presentation of debt discounts. Theupdate is effective for fiscal years (and interim reporting periods within fiscal years) beginning after December 15, 2015. As a result of adopting theupdate $2.0 million was reclassified to debt discount in the first quarter of 2016. The impact on our December 31, 2015 consolidated balance sheetwas as follows:In thousandsAs previouslyreportedImpact ofadoptionAs currentlyreportedPrepaid expenses and other current assets$40,139 (1,153) 38,986 Deferred financing costs, net of current portion3,696 (855) 2,841 Others794,600 – 794,600 Total assets$838,435 $(2,008) $836,427 Current portion of notes payable23,076 (693) 22,383 Notes payable, net of current portion601,229 (1,315) 599,914 Others177,669 – 177,669 Total liabilities801,974 (2,008) 799,966 Total equity36,461 – 36,461 Total liabilities and equity$838,435 $(2,008) $836,427 In February 2015, the FASB issued ASU No. 2015-02 (“ASU 2015-02”), Consolidation – Amendments to the Consolidation Analysis,(Topic 810). ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types oflegal entities. It is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2015. Adoption ofthis update in 2016 did not have a material effect on our results of operations and cash flows.Accounting standards not yet adoptedIn January 2017, the FASB issued ASU No. 2017-04 (“ASU 2017-04”), Simplifying the Test for Goodwill Impairment. ASU 2017-04eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwillimpairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value(i.e., measure the charge based on the current Step 1). ASU 2017-04 is effective for annual and any interim impairment tests for periods beginningafter December 15, 2019, with early adoption permitted. We are evaluating the effect of this guidance.In January 2017, the FASB issued ASU No. 2017-01 (“ASU 2017-01”), Clarifying the Definition of a Business. ASU 2017-01 changes thedefinition of a business to assist entities with evaluating when a set of transferred assets and activities is considered a business. ASU 2017-01 iseffective for annual periods beginning after December 31, 2017 including interim periods within those periods. We are evaluating the effect of thisguidance.In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), Leases, (Topic 842): Amendments to the FASB AccountingStandards Codification. ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize mostleases on their balance sheets and making targeted changes to lessor accounting. The new standard requires a modified retrospective transitionapproach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The amendmentsin this update are effective for fiscal years (and interim reporting periods within fiscal years) beginning after December 15, 2018. Early adoption ofthe amendments is permitted for all entities. We are currently evaluating the impact this guidance will have on our consolidated financialstatements, but expect this adoption will result in a significant increase in the assets and liabilities related to our leased properties and equipment.In May 2014, the FASB issued ASU No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers, (Topic 606). ASU 2014-09requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects inexchange for the goods or services. It also requires more detailed disclosures to enable users of the financial statements to understand the nature,amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance will become effective for theCompany on January 1, 2018. We are continuing to evaluate the effects the adoption of this standard will have on our financial statements andfinancial disclosures. We believe the most significant impact will be to the presentation of our statement of operations where the provision for baddebts will be recorded as a direct reduction to revenues and will not be presented as a separate line item. We expect to adopt the new standardusing the full retrospective application.NOTE 4 – FACILITY ACQUISITIONS, ASSETS HELD FOR SALE AND DISPOSITIONSAcquisitionsIn separate purchases occurring on July 1 and October 1 2016, we acquired for approximately $1.2 million the remaining non-controllinginterest of 47.6% in the Park West joint venture, thus increasing our ownership percentage from 52.4% to 100%. The difference between theconsideration paid and the carrying value of the non-controlling interest purchased was recorded as additional paid-in capital.68On March 1, 2016 we completed our acquisition of certain assets of Advanced Radiological Imaging – Astoria P.C. consisting of two multi-modality imaging centers located in Astoria, NY for cash consideration of $5.0 million. The facility provides MRI, PET/CT, Ultrasound and X-rayservices. We have made a fair value determination of the acquired assets and approximately $3.6 million of fixed assets, $47,000 of prepaid assets,$100,000 covenant not to compete, and $1.3 million of goodwill were recorded.On October 1, 2015 we completed our acquisition of certain assets of DIG consisting of seventeen multi-modality imaging centers locatedin the boroughs of Brooklyn and Queens, New York, for $62.9 million detailed as follows: cash consideration of $54.6 million ($49.6 million paid atexecution, $5 million to be paid 18 months after acquisition or earlier if certain conditions are met), the assumption of $2.1 million in equipment debt,and issuance of 1.5 million RadNet common shares valued at $8.3 million on the acquisition date. The transaction also includes contingentconsideration payable equal to five times the amount by which collections on the sellers’ historical revenue exceeds a defined threshold. During2016, based on fair value determination of the assets and liabilities by a third party, we recorded certain measurement period adjustments associatedwith our acquisition. In the second quarter of 2016, these adjustments resulted in an increase to fixed assets acquired by $1.1 million and therecognition of a net unfavorable lease contract liability of $1.0 million. In the third quarter of 2016, we recorded a decrease to our intangible andfixed assets of approximately $121,000. Also, amounts previously owed to DIG of $5.0 million were reduced to $3.4 million on June 15, 2016 when weremitted a payment of $1.6 million to a payor on behalf of DIG.On October 1, 2015 we completed our acquisition of certain assets of Philip L. Chatham, M.D., Inc., an oncology practice with offices in theLos Angeles, CA area, for consideration of $916,000, paid in shares of equal value of the common stock of RadNet, Inc. and $300,000 in cash. Wehave made a fair value determination of the acquired assets and approximately $26,000 of fixed assets, $100,000 covenant not to compete intangibleasset, $300,000 of medical supplies and $790,000 of goodwill were recorded with respect to this transaction.On September 1, 2015 we completed our acquisition of certain assets of Murray Hill Radiology and Mammography, P.C. and Murray HillMRI Holding, LLC, consisting of a single multi-modality imaging center located in Manhattan, New York for a cash consideration of $5.8 million.The facility provides MRI, CT, Ultrasound and X-ray services. We have made a fair value determination of the acquired assets and approximately$1.6 million of fixed assets, $95,000 of prepaid assets and $4.1 million of goodwill were recorded.On August 3, 2015 we completed our acquisition of certain assets of Hanford Imaging, LP, consisting of a single multi-modality imagingcenter located in Hanford, CA for cash consideration of $1.0 million. The facility provides MRI, CT, Ultrasound and X-ray services. We have made afair value determination of the acquired assets and approximately $215,000 of fixed asset and $785,000 of goodwill were recorded.On June 1, 2015 we completed our acquisition of certain assets of Healthcare Radiology and Diagnostic systems, PLLC, consisting of asingle multi-modality imaging center located in the Bronx, NY area for cash consideration of $425,000. The facility provides MRI, CT, Ultrasoundand X-ray services. We have made a fair value determination of assets acquired and approximately $134,500 of fixed assets and $290,500 ofleasehold improvements were recordedOn May 1, 2015 we completed our acquisition of certain assets of California Radiology consisting of six multi-modality imaging centerslocated in Los Angeles, California for cash consideration of $4.2 million. The facilities provide MRI, PET/CT, Ultrasound and X-ray services. Wehave made a fair value determination of the acquired assets and approximately $217,000 of equipment, $1.7 million of leasehold improvements,$34,000 in other assets, $100,000 of other intangible assets relating to a covenant not to compete contract and $2.1 million of goodwill were recordedwith respect to this transaction.On April 15, 2015 we completed our acquisition of certain assets of New York Radiology Partners, consisting of eleven multi-modalityimaging centers located in Manhattan, New York for cash consideration of $29.8 million, a note to seller of $1.5 million, and the assumption ofequipment debt of $2.3 million. The facilities provide a full range of radiology services including MRI, PET/CT, Mammography, Ultrasound, X-rayand other related services. With the use of an outside valuation expert, we have made a fair value determination of the acquired assets and assumedliabilities. In total, RadNet acquired assets of $34.5 million and assumed current liabilities of $891,000. Asset amounts acquired were $6.9 million inequipment, $11.6 million in leasehold improvements, $9.9 million in goodwill, $1.2 million in intangible assets, and $4.9 million of accounts receivableand other assets. Current liabilities assumed related to accounts payable, payroll and other related short term obligations.69Assets held for saleOn November 4, 2016, the Board of Directors resolved to sell the Company’s interest in five of its Rhode Island imaging centers operating under thename The Imaging Institute within the upcoming 12 months. The following table summarizes the major categories of assets classified as held forsale in the accompanying consolidated balance sheets at December 31, 2016 (in thousands):Property and equipment, net$1,056 Other assets21 Goodwill1,126 Total assets held for sale$2,203 As the sale of these assets does not represent a strategic shift that will have a major effect on the Company’s operations and financial results, it isnot classified as a discontinued operation.DispositionsOn September 30, 2015 we completed a sale of 10 wholly owned imaging centers to one of our non-consolidated joint ventures for whichwe hold a 49% non-controlling interest, The New Jersey Imaging Network, L.L.C., for approximately $35.5 million. We recorded a gain of $5.4 millionwith respect to this transaction.On August 3, 2015 we sold a 25% non-controlling interest in one of our wholly owned entities, Baltimore County Radiology, LLC (“BCR”)to Lifebridge Health for $5.0 million. On the date of sale, the net book value of this 25% interest was $1.3 million. In accordance with ASC 810-10-45-23, the proceeds in excess of this net book value amounting to $3.7 million was recorded to equity. In addition to the proceeds initially received, thetransaction included an earn out provision in which RadNet had the opportunity to receive approximately $1.2 million in additional proceeds ifcertain operating performance targets of BCR were achieved within the 12 months following the transaction. In the third quarter of 2016, werecorded an increase to additional paid-in capital as a result of $992,000 received as part of the earn out provision.NOTE 5 – GOODWILL AND OTHER INTANGIBLE ASSETSGoodwill is recorded as a result of business combinations. Activity in goodwill for the years ended December 31, 2015 and 2016 isprovided below (in thousands):Balance as of December 31, 2014$200,304 Adjustment to our allocation of goodwill for the acquisition of Liberty Pacific200 Goodwill acquired through the acquisition of California Radiology2,107 Goodwill acquired through the acquisition of New York Radiology Partners9,897 Goodwill disposed through the sale of New Jersey Imaging Partners(18,833)Goodwill acquired through the acquisition of Hanford Imaging, LP785 Goodwill acquired through the acquisition of Murry Hill Radiology and MRI4,123 Goodwill acquired through the acquisition of Phillip L Chatam, M.D., Inc.790 Goodwill acquired through the acquisition of Diagnostic Imaging Group, LLC40,035 Balance as of December 31, 2015239,408 Goodwill acquired through the acquisition of Advanced Radiological Imaging1,280 Adjustments to our preliminary allocation of the purchase price of Diagnostic Imaging Group, LLC(47)Goodwill acquired through the acquisition of Landmark Imaging, LLC38 Goodwill allocated to assets held for sale(1,126)Balance as of December 31, 2016$239,553 The amount of goodwill from these acquisitions that is deductible for tax purposes as of December 31, 2016 is $99.1 million.Other intangible assets are primarily related to the value of management service agreements obtained through our acquisition ofRadiologix, Inc. in 2006 and are recorded at a cost of $57.5 million less accumulated amortization of $23.4 million at December 31, 2016. Also includedin other intangible assets is the value of covenant not to compete contracts associated with our facility acquisitions totaling $5.9 million lessaccumulated amortization of $5.3 million, as well as the value of trade names associated with acquired imaging facilities totaling $10.2 million lessaccumulated amortization of $1.5 million and dispositions of $750,000. In connection with our purchase of eRAD is the $4.0 million value of eRAD’sdeveloped technology and its customer relationships, which have been fully amortized as of December 31, 2016.70Total amortization expense for the years ended December 31, 2016, 2015 and 2014 was $2.6 million, $3.0 million, and $3.1 million,respectively. Intangible assets are amortized using the straight-line method. Management service agreements are amortized over 25 years using thestraight line method. Developed technology and customer relationships are amortized over 5 years using the straight line method.The following table shows annual amortization expense, by asset classes that will be recorded over the next five years (in thousands):20172018201920202021ThereafterTotalWeightedaverageamortizationperiodremaining inyearsManagement Service Contracts$2,287 $2,287 $2,287 $2,287 $2,287 $22,683 $34,118 14.9 Covenant not to compete contracts 251 208 122 42 4 – 627 2.8 Trade Names*– – – – – 7,937 7,937 – Total Annual Amortization$2,538 $2,495 $2,409 $2,329 $2,291 $30,620 $42,682 *These trade name intangibles have an indefinite lifeNOTE 6 - PROPERTY AND EQUIPMENTProperty and equipment and accumulated depreciation and amortization are as follows (in thousands):December 31,20162015Land$250 $250 Medical equipment393,001 352,005 Computer and office equipment, furniture and fixtures99,434 107,014 Software development costs6,391 6,391 Leasehold improvements252,595 232,550 Equipment under capital lease26,758 29,796 Total property and equipment cost778,429 728,006 Accumulated depreciation and amortization(529,648) (471,284)Total net property and equipment248,781 256,722 Equipment held for sale(1,056) – Total property and equipment$247,725 $256,722 Depreciation and amortization expense of property and equipment, including amortization of equipment under capital leases, for the yearsended December 31, 2016, 2015 and 2014 was $64.0 million, $57.6 million, and $56.2 million, respectively.NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSESAccounts payable and accrued expenses were comprised of the following (in thousands):December 31,20162015Accounts payable$40,952 $52,296 Accrued expenses42,883 32,950 Accrued payroll and vacation19,119 17,692 Accrued professional fees8,212 10,875 Total$111,166 $113,813 71NOTE 8 - NOTES PAYABLE, REVOLVING CREDIT FACILITY AND CAPITAL LEASESNotes payable, revolving credit facility and capital lease obligations:Our notes payable, line of credit and capital lease obligations consist of the following (in thousands):December 31,20162015Revolving lines of credit$– $– First Lien Term Loans478,938 451,023 Second Lien Term Loans168,000 180,000 Discounts on term loans(16,783)(9,542)Promissory note payable to the former owner of a practice acquired at an interest rate of 1.5% duethrough 2019980 1,361 Promissory note payable to Healthcare Partners for imaging equipment acquired through acquisition atan interest rate of 5.25%– 431 Equipment notes payable at interest rates ranging from 3.3% to 10.2%, due through 2020, collateralized bymedical equipment341 1,032 Obligations under capital leases at interest rates ranging from 2.5% to 10.8%, due through 2022,collateralized by medical and office equipment7,256 16,423 Total debt obligations638,732 640,728 Less: current portion(26,557)(33,114)Long term portion debt obligations$612,175 $607,614 The following is a listing of annual principal maturities of notes payable exclusive of all related discounts, capital leases and repaymentson our revolving credit facilities for years ending December 31 (in thousands):2017$24,784 201824,751 201924,526 202024,261 2021192,250 Thereafter357,687 Total notes payable obligations$648,259 We lease equipment under capital lease arrangements. Future minimum lease payments under capital leases for years ending December 31(in thousands) is as follows:2017$4,764 20182,163 2019359 2020201 202181 Thereafter15 Total minimum payments7,583 Amount representing interest(327)Present value of net minimum lease payments7,256 Less current portion(4,526)Long-term portion lease obligations$2,730 72Term Loans and Financing Activity Information:Included in our consolidated balance sheet at December 31, 2016 are $630.2 million of senior secured term loan debt (net of unamortizeddiscounts of $16.8 million), broken down by loan agreement as follows (in thousands):As of December 31, 2016Face ValueDiscountTotal CarryingValueFirst Lien Term Loans$478,938 $(14,712)$464,226 Second Lien Term Loans$168,000 $(2,071)$165,929 Total$646,938 $(16,783)$630,155 Our revolving credit facility had no aggregate principal amount outstanding as of December 31, 2016.At December 31, 2016, our credit facilities were comprised of two tranches of term loans and a revolving credit facility. On July 1, 2016 (the“Restatement Effective Date”), we entered into Amendment No. 3 to Credit and Guaranty Agreement (the “Restatement Amendment”) pursuant towhich we amended and restated our then existing first lien credit facilities on the terms set forth in the Amended and Restated First Lien Credit andGuaranty Agreement dated July 1, 2016 (as amended from time to time, the “First Lien Credit Agreement”). Pursuant to the First Lien CreditAgreement, we have issued $485 million of senior secured term loans (the “First Lien Term Loans”) and established a $117.5 million senior securedrevolving credit facility (the “Revolving Credit Facility”). We have also entered into a Second Lien Credit and Guaranty Agreement dated March 25,2014 (as amended from time to time, the “Second Lien Credit Agreement”) pursuant to which we issued $180 million of secured term loans (the“Second Lien Term Loans”).As of December 31, 2016, we were in compliance with all covenants under out credit facilities.The following describes our 2016 financing activities:Restatement Amendment and the First Lien Credit AgreementOn July 1, 2016, we entered into the Restatement Amendment pursuant to which we amended and restated our then existing first liencredit facilities on the terms set forth in the First Lien Credit Agreement. As of the Restatement Effective Date, our first lien credit facilitiesconsisted of a Credit and Guaranty Agreement that we entered into on October 10, 2012 (the “Original First Lien Credit Agreement”), assubsequently amended by a first amendment dated April 3, 2013 (the “2013 Amendment”), a second amendment dated March 25, 2014 (the“2014 Amendment”), and a joinder agreement dated April 30, 2015 (the “2015 Joinder” and collectively with the Original First Lien CreditAgreement, the 2013 Amendment and the 2014 Amendment, the “Prior First Lien Credit Agreement”). The First Lien Credit Agreementincreased the aggregate principal amount of First Lien Term Loans to $485.0 million and increased the Revolving Credit Facility to $117.5million. Proceeds from the First Lien Credit Agreement were used to repay the previously outstanding first lien loans under the Prior First LienCredit Agreement, make a $12.0 million principal payment of the Second Lien Term Loans, pay costs and expenses related to the First LienCredit Agreement and provide approximately $10.0 million for general corporate purposes.Interest. The interest rates payable on the First Lien Term Loans are (a) the Adjusted Eurodollar Rate (as defined in the First LienCredit Agreement) plus 3.75% per annum or (b) the Base Rate (as defined in the First Lien Credit Agreement) plus 2.75% per annum. As appliedto the First Lien Term Loans, the Adjusted Eurodollar Rate has a minimum floor of 1.0%. The three month Adjusted Eurodollar Rate atDecember 31, 2016 was 1.0%.73Payments. The scheduled quarterly principal payments of the First Lien Term Loans is approximately $6.1 million, beginning inDecember 2016, with the balance due at maturity. Prior to the Restatement Amendment, the quarterly principal payments on the first lien termloans under the Prior First Lien Credit Agreement were approximately $6.2 million.Maturity Date. The maturity date for the First Lien Term Loans shall be on the earliest to occur of (i) the seventh anniversary of theRestatement Effective Date, (ii) the date on which all First Lien Term Loans shall become due and payable in full under the First Lien CreditAgreement, whether by acceleration or otherwise, and (iii) September 25, 2020 if our indebtedness under the Second Lien Credit Agreement hasnot been repaid, refinanced or extended prior to such date.Incremental Feature: Under the First Lien Credit Agreement, we can elect to request 1) an increase to the existing Revolving CreditFacility and/or 2) additional First Lien Term Loans, provided that the aggregate amount of such increases or additions does not exceed (A) anamount not in excess of $100.0 million minus any incremental loans requested under the similar provisions of the Second Lien CreditAgreement or (B) if the First Lien Leverage Ratio would not exceed 3.50:1.00 after giving effect to such incremental facilities, an uncappedamount, in each case subject to the conditions and limitations set forth in the First Lien Credit Agreement. Each lender approached to provideall or a portion of any incremental facility may elect or decline, in its sole discretion, to provide any incremental commitment or loan.Revolving Credit Facility: The First Lien Credit Agreement provides for a $117.5 million Revolving Credit Facility. The terminationdate of the Revolving Credit Facility is the earliest to occur of: (i) July 1, 2021, (ii) the date the Revolving Credit Facility is permanently reducedto zero pursuant to section 2.13(b) of the First Lien Credit Agreement, which addresses voluntary commitment reductions, (iii) the date of thetermination of the Revolving Credit Facility due to specific events of default pursuant to section 8.01 of the First Lien Credit Agreement, and(iv)September 25, 2020 if our indebtedness under the Second Lien Credit Agreement has not been repaid, refinanced or extended prior to suchdate. Amounts borrowed under the Revolving Credit Facility bear interest based on types of borrowings as follows: (i) unpaid principal onloans under the Revolving Credit Facility at the Adjusted Eurodollar Rate (as defined in the First Lien Credit Agreement) plus 3.75% per annumor the Base Rate (as defined in the First Lien Credit Agreement) plus 2.75% per annum, (ii) letter of credit fees at 3.75% per annum and frontingfees for letters of credit at 0.25% per annum, in each case on the average aggregate daily maximum amount available to be drawn under allletters of credit issued under the First Lien Credit Agreement, and (iii) commitment fee of 0.5% per annum on the unused revolver balance.Second Lien Credit Agreement:On March 25, 2014, we entered into the Second Lien Credit Agreement to provide for, among other things, the borrowing of $180.0million of Second Lien Term Loans. The proceeds from the Second Lien Term Loans were used to redeem our 10 3/8% senior unsecured notes,due 2018, to pay the expenses related to the transaction and for general corporate purposes. On July 1, 2016, in conjunction with theRestatement Amendment, a $12.0 million principal payment was made on the Second Lien Term Loans.The Second Lien Credit Agreement provides for the following:Interest. The interest rates payable on the Second Lien Term Loans are (a) the Adjusted Eurodollar Rate (as defined in the SecondLien Credit Agreement) plus 7.0% or (b) the Base Rate (as defined in the Second Lien Credit Agreement) plus 6.0%. The Adjusted EurodollarRate has a minimum floor of 1.0% on the Second Lien Term Loans. The three month Adjusted Eurodollar Rate at December 31, 2016 was 1.0%.The rate paid on the Second Lien Term Loan at December 31, 2016 was 8%.Payments. There is no scheduled amortization of the principal of the Second Lien Term Loans. Unless otherwise prepaid as a result ofthe occurrence of certain mandatory prepayment events, all principal will be due and payable on the termination date described below.Termination. The maturity date for the Second Lien Term Loans is the earlier to occur of (i) March 25, 2021, and (ii) the date on whichthe Second Lien Term Loans shall otherwise become due and payable in full under the Second Lien Credit Agreement, whether by voluntaryprepayment per section 2.13(a) of the Second Lien Credit Agreement or events of default per section 8.01 of the Second Lien Credit Agreementas described below.74 The following describes our financing activities on the retired Senior Notes: Senior Notes:On April 6, 2010, we issued and sold $200 million of 10 3/8% senior unsecured notes due 2018 at a price of 98.680% (the “SeniorNotes”). All payments of the Senior Notes, including principal and interest, were guaranteed jointly and severally on a senior securedbasis by RadNet, Inc., and all of Radnet Management’s current and future domestic wholly owned restricted subsidiaries. The SeniorNotes were issued under an indenture dated April 6, 2010 (the “Indenture”), by and among Radnet Management, Inc., as issuer, RadNet,Inc., as parent guarantor, the subsidiary guarantors thereof and U.S. Bank National Association, as trustee. We paid interest on thesenior notes on April 1 and October 1 of each year, commencing October 1, 2010, and they were scheduled to expire on April 1, 2018. OnApril 24, 2014, we completed the retirement of our $200 million in Senior Notes on April 24, 2014 and following such retirement theCompany completed the satisfaction and discharge of the Indenture. As a result of the transaction, we recorded a loss on the earlyextinguishment of debt of $15.9 million. NOTE 9 – COMMITMENTS AND CONTINGENCIES Leases – We lease various operating facilities and certain medical equipment under operating leases with renewal options expiring through 2041.Certain leases contain renewal options from two to ten years and escalation based either on the consumer price index or fixed rent escalators.Leases with fixed rent escalators are recorded on a straight-line basis. We record deferred rent for tenant leasehold improvement allowancesreceived from certain lessors and amortize the deferred rent expense over the term of the lease agreement. Minimum annual payments underoperating leases for future years ending December 31 are as follows (in thousands): Facilities Equipment Total 2017 $58,368 $8,337 $66,705 2018 49,638 7,784 57,422 2019 43,192 5,695 48,887 2020 35,276 3,841 39,117 2021 28,062 1,999 30,061 Thereafter 56,008 1,332 57,340 $270,544 $28,988 $299,532 Total rent expense, including equipment rentals, for the years ended December 31, 2016, 2015 and 2014 was $74.2 million, $71.7 million and$64.5 million, respectively. Litigation – We are engaged from time to time in the defense of lawsuits arising out of the ordinary course and conduct of our business.We believe that the outcome of our current litigation will not have a material adverse impact on our business, financial condition and results ofoperations. However, we could be subsequently named as a defendant in other lawsuits that could adversely affect us. NOTE 10 – DERIVATIVE INSTRUMENTS We are exposed to certain risks relating to our ongoing business operations. The primary risk managed by us using derivative instrumentsis interest rate risk. Our credit facilities are comprised of two tranches of term loans. On July 1, 2016, we issued $485 million of the First Lien Term Loans. Wealso previously entered into a Second Lien Credit Agreement pursuant to which we issued $180 million of Second Lien Term Loans. Proceeds fromthe First Lien Term Loans were used in part to make a $12 million principal payment of the Second Lien Term Loans to reduce the outstandingbalance due to $168 million. Both tranches of term loans have a LIBOR floor of 1% which serves as an interest rate floor based on our three monthLIBOR rate election. See Note 8, Notes Payable, Revolving Credit Facility and Capital Leases for more information. In the fourth quarter of 2016, the Company entered into two forward interest rate cap agreements ("2016 Caps"). The 2016 Caps will maturein September and October 2020. The 2016 Caps had notional amounts of $150,000,000 and $350,000,000, respectively, which were designated atinception as cash flow hedges of future cash interest payments associated with portions of the Company’s variable rate bank debt. Under thesearrangements, the Company purchased a cap on 3 month LIBOR at 2.0%. The Company is liable for a $5.3 million premium to enter into the capswhich is being accrued over the life of the agreements. At inception, we designated our interest rate cap agreements as cash flow hedges of floating-rate borrowings. In accordance with ASCTopic 815, derivatives that have been designated and qualify as cash flow hedging instruments are reported at fair value. The gain or loss on theeffective portion of the hedge (i.e., change in fair value) is initially reported as a component of accumulated other comprehensive income in theconsolidated statement of equity (deficit). The remaining gain or loss, if any, is recognized currently in earnings. As of December 31, 2016, the cashflow hedges were deemed to be effective. No amount is expected to be reclassified into earnings in the next twelve months. 75Below represents as of December 31, 2016 the fair value of our interest rate caps and gain recognized:The fair value of derivative instruments as of December 31, 2016 is as follows (amounts in thousands):DerivativesBalance Sheet LocationFair Value – Asset DerivativesInterest rate contractsCurrent assets$818A tabular presentation of the effect of derivative instruments on our statement of comprehensive income is as follows (amounts inthousands):Effective Interest Rate CapAmount of Gain Recognized onDerivativeLocation of Gain Recognized inIncome on DerivativeInterest rate contracts$818Other Comprehensive IncomeNOTE 11 – INCOME TAXESFor the years ended December 31, 2016, 2015 and 2014, we recognized income tax expense comprised of the following (in thousands):2016 2015 2014Federal current tax$88 $237 $– State current tax914 1,705 1,283 Other current tax28 28 29 Federal deferred tax2,539 3,625 869 State deferred tax863 412 (214)Income tax expense$4,432 $6,007 $1,967 76A reconciliation of the statutory U.S. federal rate and effective rates is as follows:201620152014Federal tax34.00% 34.00% 34.00% State franchise tax, net of federal benefit1.80% 8.50% -3.64%Other Non deductible expenses-0.09%-0.01%0.00% Meals and entertainment2.10% 1.75% 4.85% Noncontrolling Interest in Partnerships-2.11%-2.16%-2.88%Equity compensation-4.05%-1.74%-8.72%Changes in valuation allowance4.70% -17.32%24.52% Return-to-provision0.22% 3.29% -9.57%Deferred true-ups and other-25.25%13.41% 16.34% Uncertain tax positions22.44% 0.01% -3.67%Expiring net operating losses1.88% 1.28% 2.62% Income tax expense35.64% 41.01% 53.85% Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financialand income tax reporting purposes and operating loss carryforwards.Our deferred tax assets and liabilities comprise the following (in thousands):At December 31,Deferred tax assets:20162015Net operating losses$84,509 $78,912 Accrued expenses4,400 4,125 Straight-Line Rent Adjustment10,750 11,263 Unfavorable contract liability2,114 2,142 Equity compensation950 846 Allowance for doubtful accounts6,033 4,341 Other1,357 1,092 Valuation Allowance(4,428)(3,841)Total Deferred Tax Assets$105,685 $98,880 Deferred tax liabilities:Property Plant & Equipment(6,994)(8,582)Goodwill(23,350)(18,617)Intangibles(12,066)(12,088)Non accrual experience method reserve(8,483)(7,882)Other(4,436)(4,747)Total Deferred Tax Liabilities$(55,329)$(51,916)Net Deferred Tax Asset$50,356 $46,964 As of December 31, 2016, the Company had federal net operating loss carryforwards of approximately $ 231.6 million, which expire atvarious intervals from the years 2017 to 2036. The Company also had state net operating loss carryforwards of approximately $ 160.5 million, whichexpire at various intervals from the years 2017 through 2036. As of December 31, 2016, $ 23.5 million of our federal net operating loss carryforwardsacquired in connection with the 2011 acquisition of Raven Holdings U.S., Inc. are subject to limitations related to their utilization under Section 382of the Internal Revenue Code. Future ownership changes as determined under Section 382 of the Internal Revenue Code could further limit theutilization of net operating loss carryforwards.We considered all evidence available when determining whether deferred tax assets are more likely-than-not to be realized, includingprojected future taxable income, scheduled reversals of deferred tax liabilities, prudent tax planning strategies, and recent financial operations. Theevaluation of this evidence requires significant judgment about the forecasts of future taxable income, based on the plans and estimates we areusing to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years ofcumulative operating income. As of December 31, 2016, we have determined that deferred tax assets of $105.7 million are more likely-than-not to berealized. We have also determined that deferred tax liabilities of $ 23.4 million are required related to book basis in goodwill that has an indefinite life.77For the next five years, and thereafter, federal net operating loss carryforwards expire as follows (in thousands):Year EndedTotal NetOperating LossCarryforwardsAmount Subjectto 382 limitation 20171,501 1,501 201810,968 – 20197,178 – 2020– – 202124,257 – Thereafter187,725 40,632 $231,629 $42,133 For the next five years, and thereafter, California net operating loss carryforwards expire as follows (in thousands):Year EndedTotal Net OperatingLoss Carryforwards 20174,520 2018– 2019– 2020– 2021– Thereafter17,773 $22,293 We file consolidated income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. We continue toreinvest earnings of the non-US entities for the foreseeable future and therefore have not recognized any U.S. tax expense on these earnings. Withlimited exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before2012. We do not anticipate the results of any open examinations would result in a material change to its financial position.At December 31 2016, the Company has unrecognized tax benefits of $3.9 million of which $2.8 million will affect the effective tax rate ifrecognized.A reconciliation of the total gross amounts of unrecognized tax benefits for the years ended as follows (in thousands):December 31,201620152014Balance at beginning of year$94 $3,761 $3,970 Increases (Decreases) related to prior year tax positions3,861 (3,667) (209)Expiration of the statute of limitations for the assessment of taxes(94)– – Balance at end of year$3,861 $94 $3,761 78The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the year endedDecember 31, 2016 the Company accrued an insignificant amount of interest expense. As of December 31, 2016, accrued interest and penalties wereinsignificant.NOTE 12 – STOCK-BASED COMPENSATIONStock Incentive PlansOptionsWe have one long-term equity incentive plan which we refer to as the 2006 Equity Incentive Plan, which we amended and restated as ofApril 20, 2015 (the “Restated Plan”). The Restated Plan was approved by our stockholders at our annual stockholders meeting on June 11, 2015. Asof December 31, 2016, we have reserved for issuance under the Restated Plan 12,000,000 shares of common stock. We can issue options, stockawards, stock appreciation rights and cash awards under the Restated Plan. Certain options granted under the Restated Plan to employees areintended to qualify as incentive stock options under existing tax regulations. Stock options generally vest over three to five years and expire five toten years from the date of grant.As of December 31, 2016, we had outstanding options to acquire 375,626 shares of our Common Stock, of which options to acquire 205,000shares were exercisable. During the twelve months ended December 31, 2016, we granted options to acquire 170,626 shares under our Restated Plan.The following summarizes all of our option transactions during the year ended December 31, 2016:Outstanding Options Under the 2006 PlanSharesWeighted AverageExercise price PerCommon Share WeightedRemainingContractual Life(in years)AggregateIntrinsic ValueBalance, December 31, 2015931,667 $4.69 Granted170,626 6.01 Exercised(576,667)2.96 Canceled, forfeited or expired(150,000)7.51 Balance, December 31, 2016375,626 6.82 4.45$252,238 Exercisable at December 31, 2016205,000 7.51 0.92176,400 Aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between our closing stock price onDecember 31, 2016 and the exercise price, multiplied by the number of in-the-money options as applicable) that would have been received by theholder had all holders exercised their options on December 31, 2016. Total intrinsic value of options exercised during the years ended December 31,2016 and 2015 was approximately $1.7 million and $6.2 million, respectively. As of December 31, 2016, total unrecognized stock-based compensationexpense related to non-vested employee awards was $438,998, which is expected to be recognized over a weighted average period of approximately3.0 years.Restricted Stock Awards (“RSA’s”)The Restated Plan permits the award of restricted stock awards (“RSA’s”). As of December 31, 2016, we have issued a total of 4,264,011RSA’s of which 573,145 were unvested at December 31, 2016.79The following summarizes all unvested RSA’s activities during the year ended December 31, 2016:RSA’sWeighted-AverageRemainingContractual Term(Years)Weighted-AverageFair ValueRSA’s unvested at December 31, 2015771,342 $5.17Changes during the periodGranted802,803 $6.16Vested(1,000,999) $5.13Forfeited– $0.00RSA’s unvested at December 31, 2016573,145 0.57$6.18We determine the fair value of all RSA’s based of the closing price of our common stock on award date.Other stock bonus awardsThe Restated Plan also permits the award of stock bonuses not subject to any future service period. These awards are valued andexpensed based on the closing price of our common stock on the date of award. During the year ended December 31, 2016 we issued 35,000 sharesrelating to these awardsIn sum, of the 12,000,000 shares of common stock reserved for issuance under the Restated Plan, at December 31, 2016, we had issued12,168,387 total shares between options, RSA’s and other stock awards. With options cancelled and RSA’s forfeited amounting to 2,975,009 and59,053 shares, respectively, there remain 2,865,675 shares available under the Restated Plan for future issuance.NOTE 13 – EMPLOYEE BENEFIT PLANWe adopted a profit-sharing/savings plan pursuant to Section 401(k) of the Internal Revenue Code that covers substantially all non-professional employees. Eligible employees may contribute on a tax-deferred basis a percentage of compensation, up to the maximum allowableunder tax law. Employee contributions vest immediately. The plan does not require a matching contribution by us through December 31, 2016.NOTE 14 – QUARTERLY RESULTS OF OPERATIONS (unaudited)The following table sets forth a summary of our unaudited quarterly operating results for each of the last eight quarters in the years endedDecember 31, 2016 and 2015. This quarterly data has been derived from our unaudited consolidated interim financial statements which, in ouropinion, have been prepared on substantially the same basis as the audited financial statements contained elsewhere in this report and include allnormal recurring adjustments necessary for a fair presentation of the financial information for the periods presented. These unaudited quarterlyresults should be read in conjunction with our financial statements and notes thereto, included elsewhere in this report. The operating results inany quarter are not necessarily indicative of the results that may be expected for any future period (in thousands except per share data).802016 Quarter Ended2015 Quarter EndedMar 31June 30Sept 30Dec 31Mar 31June 30Sept 30Dec 31Statement of OperationsData:Net revenue$216,388 $218,565 $224,643 $224,939 $181,267 $204,289 $208,366 $215,706 Total operating expenses213,405 210,487 212,192 209,971 183,213 190,905 191,137 205,256 Total other expenses7,875 5,717 11,578 10,641 6,723 10,836 5,731 10,109 Equity in earnings of jointventures(2,279)(3,274)(2,576)(1,638)(1,102)(3,207)(1,992) (2,626)Benefit from (provision for)income taxes1,180 (2,253)(1,458)(1,901)3,091 (2,192)(5,199) (1,707)Net (loss) income(1,433)3,382 1,991 4,064 (4,476)3,563 8,291 1,260 Net income (loss) attributable tononcontrolling interests290 (243)344 383 78 168 304 379 Net (loss) income attributable toRadnet, Inc. commonstockholders$(1,723)$3,625 $1,647 $3,681 $(4,554)$3,395 $7,987 $881 Basic net (loss) incomeattributable to Radnet, Inc.common stockholders (loss)earnings per share:$(0.04)$0.08 $0.04 $0.08 $(0.11)$0.08 $0.18 $0.02 Diluted net (loss) incomeattributable to Radnet, Inc.common stockholders (loss)earnings per share:$(0.04)$0.08 $0.04 $0.08 $(0.11)$0.08 $0.18 $0.02 Weighted average sharesoutstandingBasic46,581 46,559 45,869 45,967 42,747 43,370 43,637 45,454 Diluted46,581 46,882 46,334 46,389 42,747 44,686 44,752 46,545 NOTE 15 – RELATED PARTY TRANSACTIONSWe use World Wide Express, a package delivery company owned by our western operations chief operating officer, to provide deliveryservices for us. For the years ended December 31, 2016, 2015 and 2014, we paid approximately $670,000, $693,000 and $833,000, respectively, toWorld Wide Express for those services. At December 31, 2016 and 2015, we had outstanding amounts due to World Wide Express of $273,000 and$161,000, respectively.NOTE 16 – SUBSEQUENT EVENTSOn January 6, 2017, Image Medical Inc., a wholly owned subsidiary of RadNet, entered into a membership purchase agreement withScriptSender, LLC, a partnership held by two individuals which provides secure data transmission services of medical information. Image Medicalwill contribute $3.0 million for a 49% equity interest in the partnership. In a separate management agreement, Image Medical Inc. will providemanagement and accounting services to the operation in return for a set fee.On January 13, 2017, we completed our acquisition of certain assets of Resolution Medical Imaging Corporation, consisting of two multimodality imaging center located in Santa Monica, CA for cash consideration of $2.1 million, the assumption of approximately $1.7 million inequipment debt, and payoff of a small business administration loan of $241,000. The facilities provide MRI, CT, Ultrasound, and X-Ray services.On February 1, 2017, we completed our acquisition of certain assets of MRI Centers, Inc., consisting of one single-modality imaging centerlocated in Torrance, CA for cash consideration of $718,000. The facility provides MRI and sports medicine services.On February 2, 2017, we entered into a fourth amendment to our first lien credit agreement and senior secured revolving facility. Pursuantto the fourth amendment, the interest rate charged for the applicable margin on both facilities was reduced by 50 basis points, from 3.75% to 3.25%.The minimum LIBOR rate underlying the senior secured term loans remains at 1.0%. Except for such reduction in the interest rate on creditextensions, this amendment did not result in any other material modifications to the amended and restated credit agreement evidencing the first lienterm loans and the senior secured revolving credit facility. 81 Item 9.Changes In and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9AControls and Procedures Evaluation of Disclosure Controls and Procedures Under the supervision of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation ofthe effectiveness of the design and operation of our disclosure controls and procedures under Rules 13a-15(e) and 15d-15(e) of the SecuritiesExchange Act of 1934, as amended, as of December 31, 2016. Based on this evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were not effective as of December 31, 2016 because deficiencies in the design and operatingeffectiveness of several information technology dependent manual controls and certain information technology general controls (“ITGC’s”) relatedto the revenue and accounts receivable process caused a material weakness in our internal control over financial reporting as described in moredetail below. Management's Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control overfinancial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with U.S. generally accepted accounting principles (“GAAP”). Internal control overfinancial reporting includes policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the Company, (ii) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company aretransacted in accordance with authorizations of management and directors of the Company, and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on thefinancial statements. Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, conducted an assessment of theeffectiveness of its internal control over financial reporting as of December 31, 2016 based on the criteria established in Internal Control - IntegratedFramework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment,management concluded that our internal control over financial reporting was not effective as of December 31, 2016 because of the materialweakness described below. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or thatthe degree of compliance with existing policies or procedures may deteriorate. A material weakness is defined as “a deficiency, or a combination ofdeficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’sannual or interim financial statements will not be prevented or detected on a timely basis.” Based upon this assessment, management concluded that, as of December 31, 2016, the following control deficiencies related to theCompany’s revenue and accounts receivable process aggregate to a material weakness in the Company’s internal control over financial reporting: ·Certain information technology dependent manual controls which are (i) designed to ensure the completeness of revenue transactionprocessing, and (ii) designed to ensure a reasonable valuation of the Company’s accounts receivable balance were not performed timely,accurately or reviewed with sufficient precision ·Certain user access, program change and operations control components of ITGCs pertaining to multiple systems which capture and billrevenue transactions were not operating effectively The ineffective design and operation of these information technology dependent manual controls and ITGCs impacts a material portion of ourrevenue transactions. Ernst & Young LLP, the Company’s independent registered public accounting firm, has audited the Company’s internal control over financialreporting as of December 31, 2016, as stated in their report, which is included in this Annual Report on Form 10-K. 82Remediation Plan for Material WeaknessOur management, with oversight of our Audit Committee, has been actively engaged in developing and executing a remediation plan toaddress the material weakness reported as of December 31, 2016. The remediation efforts which are ongoing include the following:·Ensure that all revenue-related IT dependent manual controls are performed on a timely basis with a sufficient level of precision.·Continue our plan to streamline the number of systems with enhanced quality and functionality utilized by the Company for the captureand billing of revenue transactions·Implement effective user access controls across all revenue related systems to ensure proper user access and timely removal of terminatedusers, and improve documentation surrounding program change and information technology operations controls.If the remedial measures described above are insufficient to address the material weakness described above, or are not implemented timely, oradditional deficiencies arise in the future, material misstatements in our interim or annual financial statements may occur in the future and couldhave the effects described in “Item 1A. Risk Factors” in Part I of this Form 10-K.Changes in Internal Control over Financial ReportingExcept as described above, management did not identify any change in internal control over financial reporting occurring during the fourthquarter that materially affected, or was reasonably likely to materially affect, the Company’s internal control over financial reporting.83Report of Independent Registered Public Accounting FirmBoard of Directors and Stockholders of RadNet, Inc.We have audited RadNet, Inc. and subsidiaries’ (the “Company’s”) internal control over financial reporting as of December 31, 2016, based oncriteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission(2013 framework) (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting,and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report onInternal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reportingbased on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk thata material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, andperforming such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for ouropinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition ofthe company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonablepossibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.The following material weakness has been identified and included in management’s assessment. Management has identified a material weakness inthe design and operating effectiveness of information technology general controls and certain information technology dependent manual controlsrelated to the Company’s revenue and accounts receivables process. We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the consolidated balance sheets of RadNet, Inc. and subsidiaries as of December 31, 2016and 2015 and the related consolidated statements of operations, comprehensive income, equity (deficit), and cash flows for each of the three yearsin the period ended December 31, 2016. This material weakness was considered in determining the nature, timing and extent of audit tests applied inour audit of the 2016 financial statements, and this report does not affect our report dated March 16, 2017, which expressed an unqualified opinionon those financial statements.In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, RadNet,Inc. and subsidiaries has not maintained effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria./s/ Ernst & Young LLPLos Angeles, CaliforniaMarch 16, 201784 Item 9B.Other Information. None PART III Item 10.Directors, Executive Officers and Corporate Governance The information required by this Item 10 will be included under the captions “Election of Directors,” “Executive Officers,” “Board of Directorsand Corporate Governance,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement for the 2016 AnnualMeeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year (the “Proxy Statement”) and is incorporated hereinby reference. We have adopted a code of financial ethics applicable to our directors, officers and employees which is designed to deter wrongdoing and topromote: ·honest and ethical conduct; ·full, fair, accurate, timely and understandable disclosure in reports and documents that we file with the SEC and in our other publiccommunications; ·compliance with applicable laws, rules and regulations, including insider trading compliance; and ·accountability for adherence to the code and prompt internal reporting of violations of the code, including illegal or unethical behaviorregarding accounting or auditing practices. You may obtain a copy of our Code of Financial Ethics on our website at www.radnet.com under Investor Relations — Corporate Governance.The Audit Committee is responsible for reviewing the Code of Financial Ethics and amending as necessary. Any amendments will be disclosed onour website. Item 11.Executive Compensation The information required by this Item 11 will be included under the captions “Compensation of Directors,” “Compensation of ExecutiveOfficers,” “Compensation Discussion and Analysis,” “Compensation Committee Interlocks and Insider Participation,” and “CompensationCommittee Report “in the Proxy Statement and is incorporated herein by reference. Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this Item 12 will be included under the captions “Security Ownership of Certain Beneficial Owners andManagement” and “Equity Compensation Plan Information” in the Proxy Statement and is incorporated herein by reference. Item 13.Certain Relationships and Related Transactions, and Director Independence The information required by this Item 13 will be included under the captions “Certain Relationships and Related Party Transactions” and“Board of Directors and Corporate Governance” in the Proxy Statement and is incorporated herein by reference. Item 14.Principal Accountant Fees and Services The information required by this Item 14 will be included under the caption “ Independent Registered Public Accounting Firm Fees” in theProxy Statement and is incorporated herein by reference. 85PART IVItem 15.Exhibits and Financial Statements Schedule(a) Documents filed as part of this annual report on Form 10-K(1) Financial StatementsPage No.The following financial statements are included in this reportReport of Independent Registered Public Accounting Firm51Consolidated Balance Sheets52Consolidated Statements of Operations53Consolidated Statements of Comprehensive Income54Consolidated Statements of Equity (Deficit)55Consolidated Statements of Cash Flows56Notes to Consolidated Financial Statements58 to 81(2) Financial Statement SchedulesThe following financial statement schedules are filed herewith:SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTSRADNET, INC. AND SUBSIDIARIESBalance atBeginning ofYearAdditionalCharges AgainstIncomeDeductions fromReserveBalance at End ofYearYear Ended December 31, 2016Accounts Receivable-Allowance for Bad Debts$20,794 $45,387 $(45,507) $20,674 Year Ended December 31, 2015Accounts Receivable-Allowance for Bad Debts$15,109 $36,033 $(30,348) $20,794 Year Ended December 31, 2014Accounts Receivable-Allowance for Bad Debts$12,735 $29,807 $(27,433) $15,109 All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements ornotes thereto.86 The following exhibits are filed herewith or incorporated by reference herein: ExhibitNo. Description of Exhibit 2.1 Asset Purchase Agreement dated October 1, 2015 by and among Mid Rockland Imaging Partners, Inc., a Delaware corporation anda subsidiary of the registrant, Diagnostic Imaging Group LLC, a Delaware limited liability company, Diagnostic Imaging GroupHoldings, LLC,, a Delaware limited liability company, New Primecare LLC, a Delaware limited liability company, and FlushingMedical Arts Building, Inc. (incorporated by reference to exhibit filed with Form 8-K on October 20, 2015). 3.1 Certificate of Incorporation of RadNet, Inc., a Delaware corporation (incorporated by reference to exhibit filed with Form 8-K onSeptember 4, 2008). 3.2 Certificate of Amendment to Certificate of Incorporation of RadNet, Inc., a Delaware corporation, dated September 2, 2008(incorporated by reference to exhibit filed with Form 8-K on September 4, 2008). 3.3 Bylaws of RadNet, Inc., a Delaware corporation (incorporated by reference to exhibit filed with Form 8-K on September 4, 2008). 10.1 Credit and Guaranty Agreement, dated October 10, 2012, by and among Radnet Management, Inc., RadNet, Inc., the guarantorsthereunder, General Electric Capital Corporation, Deutsche Bank Securities, Inc., RBC Capital Markets and Barclays Bank PLC(incorporated by reference to exhibit filed with Form 8-K on October 12, 2012). 10.2 Pledge and Security Agreement, dated October 10, 2012, by and among Radnet Management, Inc., RadNet, Inc., the guarantorsthereunder, and Barclays Bank PLC (incorporated by reference to exhibit filed with Form 8-K on October 12, 2012). 10.3 Form of Trademark Security Agreement by and among the guarantors thereunder and Barclays Bank PLC (filed as an exhibit to thePledge and Security Agreement, dated October 10, 2012, by among the guarantors thereunder and Barclays Bank PLC, included asExhibit 10.2). 10.4 First Amendment Agreement dated April 3, 2013 to the Credit and Guaranty Agreement dated October 10, 2012, by and amongRadNet Management, Inc., RadNet, Inc., certain subsidiaries and affiliates of RadNet Management, Inc., certain lenders identifiedtherein and Barclays Bank PLC, as administrative agent and collateral agent. (incorporated by reference to Exhibit 99.1 filed withForm 8-K on April 4, 2013). 10.5 Second Amendment Agreement dated March 25, 2014 to the Credit and Guaranty Agreement, dated as of October 10, 2012 (asamended, by the First Amendment Agreement, dated as of April 3, 2013), by and among RadNet, Inc., Radnet Management, Inc.,certain subsidiaries and affiliates of Radnet Management, Inc., certain lenders identified therein, and Barclays Bank PLC, asadministrative agent and collateral agent. (incorporated by reference to Exhibit 99.1 filed with Form 8-K on March 31, 2014). 10.6 Second Lien Credit and Guaranty Agreement, dated as of March 25, 2014, by and among Radnet Management, Inc., RadNet, Inc.,certain subsidiaries and affiliates of Radnet Management, Inc., the lenders party thereto from time to time, certain other financialinstitutions and Barclays Bank PLC, as administrative agent and collateral agent. (incorporated by reference to Exhibit 99.2 filedwith Form 8-K on March 31, 2014). 10.7 Second Lien Pledge and Security Agreement, dated as of March 25, 2014, by and among Radnet Management, Inc., the Grantorsidentified therein, and Barclays Bank PLC, as collateral agent. (incorporated by reference to Exhibit 99.3 filed with Form 8-K onMarch 31, 2014). 10.8 Joinder Agreement, dated as of April 30, 2015, among Barclays Bank Plc, Radnet Management, Inc., a California corporation,Radnet Inc., a Delaware corporation, and certain affiliates and subsidiaries of Radnet Management Inc. (incorporated by referenceto exhibit filed with Form 8-K on May 1, 2015). 10.9 Amendment No. 3 to Credit and Guaranty Agreement, dated as of July 1, 2016 by and among Radnet Management, Inc., Radnet,Inc. certain subsidiaries and affiliates of Radnet Management, Inc., the lenders party thereto from time to time, certain otherfinancial institutions and Barclays Bank PLC, as administrative agent and collateral agent. (incorporated by reference to filed withForm 8-K/A on December 2, 2016). 8710.10Amendment No. 4 to Credit and Guaranty Agreement, dated as of February 2, 2017 by and among Radnet Management, Inc.,Radnet, Inc. certain subsidiaries and affiliates of Radnet Management, Inc., the lenders party thereto from time to time, certain otherfinancial institutions and Barclays Bank PLC, as administrative agent and collateral agent. (incorporated by reference to filed withForm 8-K on February 2, 2017).10.11RadNet, Inc. 2006 Equity Incentive Plan (Amended and Restated as of April 20, 2015) (incorporated by reference to exhibit filed withProxy Statement on April 30, 2015).* 10.12Form of Stock Option Agreement for the 2006 Equity Incentive Plan (incorporated by reference to exhibit filed with Form S-8registration statement on August 12, 2015).*10.13Form of Restricted Stock Award for the 2006 Equity Incentive Plan (incorporated by reference to exhibit filed with Form 10-Q for thequarter ended March 31, 2012).* 10.14Form of Indemnification Agreement between the registrant and each of its officers and directors (incorporated by reference toexhibit filed with Form 10-Q for the quarter ended March 31, 2008).*10.15Employment Agreement dated as of June 12, 1992 with Howard G. Berger, M.D. (incorporated by reference to exhibit filed with anamendment to Form 8-K report for June 12, 1992).*10.16Amendment to Employment Agreement dated January 30, 2004 with Howard G. Berger, M.D. (incorporated by reference to exhibitfiled with Form 10-Q for the quarter ended January 31, 2004).*10.17Second Amendment to Employment Agreement dated November 16, 2015 with Howard G. Berger, M.D. (incorporated by referenceto exhibit filed with Form 10-K on March 15, 2016).10.18Employment Agreement dated as of April 16, 2001 with Jeffrey L. Linden (incorporated by reference to exhibit filed with Form 10-Kfor the year ended October 31, 2001).*10.19Amendment to Employment Agreement dated January 30, 2004 with Jeffrey L. Linden (incorporated by reference to exhibit filedwith Form 10-Q for the quarter ended January 31, 2004).*10.20Second Amendment to Employment Agreement dated November 16, 2015 with Jeffrey L. Linden. (incorporated by reference toexhibit filed with Form 10-K on March 15, 2016).10.21Employment Agreement dated as of May 1, 2001 with Norman R. Hames (incorporated by reference to exhibit filed with Form 10-Kfor the year ended October 31, 2001).*10.22Amendment to Employment Agreement dated January 30, 2004 with Norman R. Hames (incorporated by reference to exhibit filedwith Form 10-Q for the quarter ended January 31, 2004).*10.23Second Amendment to Employment Agreement dated November 16, 2015 with Norman R. Hames. (incorporated by reference toexhibit filed with Form 10-K on March 15, 2016).10.24Employment Agreement with Mark Stolper effective January 1, 2009 (incorporated by reference to exhibit filed with Form 10-K forthe year ended December 31, 2009).*10.25First Amendment to Employment Agreement dated November 16, 2015 with Mark Stolper. (incorporated by reference to exhibit filedwith Form 10-K on March 15, 2016).* 10.26Retention Agreement with Stephen Forthuber dated November 15, 2006 (incorporated by reference to exhibit filed with Form 10-K/Tfor the year ended December 31, 2006).* 10.27First Amendment to Retention Agreement dated November 16, 2015 with Stephen Forthuber. (incorporated by reference to exhibitfiled with Form 10-K on March 15, 2016).*10.28Amended and Restated Management and Service Agreement between Radnet Management, Inc. and Beverly Radiology MedicalGroup III dated January 1, 2004 (incorporated by reference to exhibit filed with Form 10-K for the year ended October 31, 2003).12.1Computation of Ratios of Earnings to Fixed Charges.21.1List of Subsidiaries.23.1Consent of Registered Independent Public Accounting Firm.24.1Power of Attorney (included on signature page attached hereto). 31.1 CEO Certification pursuant to Section 302. 31.2 CFO Certification pursuant to Section 302. 32.1 CEO Certification pursuant to Section 906. 32.2 CFO Certification pursuant to Section 906. 101.INS XBRL Instance Document 101.SCH XBRL Schema Document 101.CAL XBRL Calculation Linkbase Document 101.LAB XBRL Label Linkbase Document 101.PRE XBRL Presentation Linkbase Document 101.DEF XBRL Definition Linkbase Document * Indicates management contract or compensatory plan. †Certain schedules to this exhibit have been omitted in accordance with Regulation S-K Item 601(b)(2). The company agrees to furnishsupplementally a copy of all omitted schedules to the SEC upon its request. SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.RADNET, INC.Date: March 16, 2017/s/ HOWARD G. BERGER, M.D .Howard G. Berger, M.D., President,Chief Executive Officer and DirectorPOWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby severally constitutes andappoints Howard G. Berger, M.D. and Mark D. Stolper, and each of them, his true and lawful attorney-in-fact and agent, with full power ofsubstitution and re-substitution for him and in his name, place and stead, in any and all capacities to sign any and all amendments to this report,and to file the same, with all exhibits thereto, and other documents in connection therewith, with the SEC, granting unto said attorney-in-fact andagents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary fully to all intents andpurposes as he might or could do in person, hereby ratifying and confirming all that each said attorneys-in-fact and agents or any of them or theiror his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalfof registrant in the capacities and on the dates indicated.By/s/ HOWARD G. BERGER, M.D.Howard G. Berger, M.D., Director, Chief Executive Officer and PresidentDate: March 16, 2017By/s/ MARVIN S. CADWELLMarvin S. Cadwell, DirectorDate: March 16, 2017By/s/ JOHN V. CRUES, III, M.D.John V. Crues, III, M.D., DirectorDate: March 16, 2017By/s/ NORMAN R. HAMESNorman R. Hames, DirectorDate: March 16, 2017By/s/ DAVID L. SWARTZDavid L. Swartz, DirectorDate: March 16, 2017By/s/ LAWRENCE L. LEVITTLawrence L. Levitt, DirectorDate: March 16, 2017By/s/ MICHAEL L. SHERMAN, M.D.Michael L. Sherman, M.D., DirectorDate: March 16, 2017By/s/ MARK D. STOLPERMark D. Stolper,Chief Financial Officer (Principal Accounting Officer)Date: March 16, 2017[This page intentionally left blank] UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington D.C. 20549 FORM 10-K/AAMENDMENT NO. 1 (Mark One)þANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2016 OR ¨TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 001-33307 RadNet, Inc.(Exact name of registrant as specified in charter) Delaware13-3326724(State or other jurisdiction ofincorporation or organization)(I.R.S. EmployerIdentification No.) 1510 Cotner Avenue Los Angeles, California90025(Address of principal executive offices)(Zip Code) Registrant’s telephone number, including area code: (310) 478-7808 Securities registered pursuant to Section 12(b) of the Act: Title of Each ClassName of each exchange on which registeredCommon Stock, $.0001 par valueNASDAQ Global Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) or the act. Yes ¨ No x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Actof 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for suchshorter period that the registrant was required to submit and post such files). Yes x No ¨ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer ¨ Accelerated Filer x Non-Accelerated Filer ¨ (Do not check if a smaller reporting company) Smaller Reporting Company ¨ Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2) Yes ¨ No x The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $224,518,331 on June 30,2016 (the last business day of the registrant’s most recently completed second quarter) based on the closing price for the common stock on theNASDAQ Global Market on June 30, 2016. The number of shares of the registrant’s common stock outstanding on March 9, 2017, was 47,198,596. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III of the Form 10-K, to the extent not set forth herein or in the Annual Report on Form 10-K filed on March 16,2017, is incorporated herein by reference from the registrant’s definitive proxy statement for the Annual Meeting of Stockholders, to be filed withthe Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the close of the registrant’s fiscal year.EXPLANATORY NOTEWe are filing this Form 10-K/A (Amendment No. 1) to our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, originally filedwith the U.S. Securities and Exchange Commission on March 16, 2017 (the "Original Filing"), solely for the purpose of including the financialstatements of certain unconsolidated joint ventures in accordance with Rule 3-09 of Regulation S-X. Rule 3-09 requires that we file financialstatements of unconsolidated joint ventures to the extent that the unconsolidated joint ventures are individually significant. Such statements arerequired to be audited only for the years in which such unconsolidated joint ventures met applicable significance tests. Under Rule 3-09 ofRegulation S-X, we are permitted to file the financial statements for these unconsolidated joint ventures within 90 days of the end of our fiscal year.We determined that as of and for the year ended December 31, 2014, four of our unconsolidated joint venture interests, including Franklin ImagingJoint Venture, Carroll County Radiology, LLC, MRI at St. Joseph Medical Center, LLC, and Greater Baltimore Diagnostic Imaging Partnership(collectively, the “Group”), were significant unconsolidated joint ventures under Rule 3-09, and the accompanying financial statements for thatperiod are audited. The Group did not meet the applicable significance test for the years ended December 31, 2016 or 2015; therefore, the Group’saccompanying financial statements are required to be included for those years, but are not required to be audited. We are permitted to file combinedfinancial statements for individually significant joint ventures which are in the same line of business.In our Original Filing, we inadvertently indicated by check mark that no disclosure is being made pursuant to Item 405 of Regulation S-K. We havedetermined that there was a delinquent filer, which we will disclose in the definitive proxy statement and therefore, we have not checked the box inthis Form 10-K/A.Except as described above, this Form 10-K/A does not amend or change any other items or disclosures in the Original Filing. The disclosure in thisForm 10-K/A has not been updated to reflect events occurring after the Original Filing. Accordingly, this Amendment should be read in conjunctionwith the Original Filing and our other filings with the SEC subsequent to the Original Filing.1PART IVItem 15.Exhibits and Financial Statement Schedules(a)(1) Financial StatementsThe following financial statements of RadNet, Inc. and consolidated subsidiaries were filed with the Original Filing on March 16, 2017:Report of Independent Registered Public Accounting Firm51Consolidated Balance Sheets52Consolidated Statements of Operations53Consolidated Statements of Comprehensive Income54Consolidated Statements of Equity (Deficit)55Consolidated Statements of Cash Flows56Notes to Consolidated Financial Statements58 to 81(a)(2) Financial Statements Schedules Schedules – The following financial statement schedules of RadNet, Inc. and consolidated subsidiaries were filed with the Original Filing on March16, 2017:Schedule II – Valuation and Qualifying Accounts(a)(3) Exhibit IndexSee the Exhibit Index immediately preceding the signature page of this Annual Report on Form 10-K/A (Amendment No. 1).(c) Financial Statement SchedulesThe following combined financial statements of the Group are filed herewith pursuant to Rule 3-09 of Regulation S-X:Page NoReport of Independent Registered Public Accounting Firm3Combined Balance Sheets of Certain RadNet, Inc. Affiliates4Combined Statements of Income of Certain RadNet, Inc. Affiliates5Combined Statements of Partners’ Capital of Certain RadNet, Inc. Affiliates6Combined Statements of Cash Flows of Certain RadNet, Inc. Affiliates7Notes to Combined Financial Statements8 to 122Report of Independent Registered Public Accounting FirmTo the partners of:Franklin Imaging Joint Venture;Carroll County Radiology, LLC;MRI at St. Joseph Medical Center, LLC; andGreater Baltimore Diagnostic Imaging PartnershipWe have audited the accompanying combined statements of income, partners’ capital, and cash flows of certain RadNet, Inc. affiliates includingFranklin Imaging Joint Venture, Carroll County Radiology, LLC, MRI at St. Joseph Medical Center, LLC, and Greater Baltimore Diagnostic ImagingPartnership (collectively, the “Group”), for the year ended December 31, 2014. These financial statements are the responsibility of the Group’smanagement. Our responsibility is to express an opinion on these financial statements based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.We were not engaged to perform an audit of the Group’s internal control over financial reporting. Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the Group’s internal control over financial reporting. Accordingly, we express no such opinion. Anaudit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe thatour audit provides a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the combined results of the Group’s operations andtheir cash flows for the year ended December 31, 2014, in conformity with U.S. generally accepted accounting principles./s/ Ernst & Young, LLPMarch 31, 2015Los Angeles, California3CERTAIN RADNET, INC. AFFILIATESCOMBINED BALANCE SHEETS(IN THOUSANDS)December 31,December 31,20162015(unaudited)(unaudited)ASSETSCURRENT ASSETSAccounts receivable, net$10,484 $5,671 Due from affiliates10,022 5,260 Prepaid expenses and other current assets435 538 Total current assets20,941 11,469 PROPERTY AND EQUIPMENT, NET13,017 13,752 OTHER ASSETSGoodwill10,572 9,923 Other intangible assets229 350 Other assets4 – Total assets$44,763 $35,494 LIABILITIES AND PARTNERS' CAPITALCURRENT LIABILITIESAccounts payable and accrued expenses$1,246 $837 Current portion of deferred rent282 274 Current portion of equipment notes payable201 208 Current portion of obligations under capital leases64 – Total current liabilities1,793 1,319 LONG-TERM LIABILITIESDeferred rent, net of current portion752 1,028 Equipment notes payable, net of current portion156 357 Obligations under capital leases, net of current portion157 – Total liabilities2,858 2,704 COMMITMENTS AND CONTINGENCIESPARTNERS' CAPITALRadNet, Inc.19,284 15,123 Other partners22,621 17,667 Total partners' capital41,905 32,790 Total liabilities and partners' capital$44,763 $35,494 The accompanying notes are an integral part of these financial statements.4CERTAIN RADNET, INC. AFFILIATESCOMBINED STATEMENTS OF INCOME(IN THOUSANDS)Years Ended December 31,201620152014(unaudited)(unaudited)NET SERVICE FEE REVENUEService fee revenue, net of contractual allowances and discounts$58,295 $55,008 $55,058 Provision for bad debts(2,796)(2,824) (2,832)Net service fee revenue55,499 52,184 52,226 OPERATING EXPENSESCost of operations37,620 34,802 36,767 Depreciation and amortization4,285 4,139 4,718 Loss on sale and disposal of equipment55 31 19 Severence2 – – Total operating expenses41,962 38,972 41,504 INCOME FROM OPERATIONS13,537 13,212 10,722 Net interest expense21 34 60 NET INCOME$13,516 $13,178 $10,662 The accompanying notes are an integral part of these financial statements.5CERTAIN RADNET, INC. AFFILIATESCOMBINED STATEMENTS OF PARTNERS' CAPITAL(IN THOUSANDS)RadNet, Inc.Other PartnersTotalBALANCE - January 1, 2014$16,833 $18,179 $35,012 Net Income4,949 5,713 10,662 Distributions(6,443)(6,055) (12,498)BALANCE - December 31, 201415,339 17,83733,176 Net Income (unaudited)6,133 7,045 13,178 Distributions (unaudited)(6,349)(7,215) (13,564)BALANCE - December 31, 2015 (unaudited)15,123 17,667 32,790 Net Income (unaudited)6,261 7,255 13,516 Distributions (unaudited)(2,100)(2,301) (4,401)BALANCE - December 31, 2016 (unaudited)$19,284 $22,621 $41,905 The accompanying notes are an integral part of these financial statements.6CERTAIN RADNET, INC. AFFILIATESCOMBINED STATEMENTS OF CASH FLOWS(IN THOUSANDS)Years Ended December 31,201620152014(unaudited)(unaudited)CASH FLOWS FROM OPERATING ACTIVITIESNet income$13,516 $13,178 $10,662 Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization4,285 4,139 4,718 Provision for bad debts2,796 2,824 2,832 Deferred rent amortization(268)(98) (206)Loss on sale and disposal of equipment55 31 19 Changes in operating assets and liabilitiesAccounts receivable(7,609)(1,056) (1,669)Prepaid expenses and other current assets111 (409) 537 Due from affiliates(4,766)247 (2,718)Accounts payable and accrued expenses409 (646) (459)Net cash provided by operating activities8,529 18,210 13,716 CASH FLOWS FROM INVESTING ACTIVITIESPurchase of property and equipment(3,435)(3,958) (669)Purchase of imaging facilities(1,010)– – Proceeds from sale of equipment545 1 1 Net cash used in investing activities(3,900)(3,957) (668)CASH FLOWS FROM FINANCING ACTIVITIESPrincipal payments on notes and leases payable(228)(692) (835)Distributions to partners(4,401)(13,564) (12,498)Net cash used in financing activities(4,629)(14,256) (13,333)NET DECREASE IN CASH AND CASH EQUIVALENTS– (3) (285)CASH AND CASH EQUIVALENTS, beginning of period– 3 288 CASH AND CASH EQUIVALENTS, end of period$– $– $3 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid during the period for interest$21 $34 $60 The accompanying notes are an integral part of these financial statements.7CERTAIN RADNET, INC. AFFILIATESNOTES TO COMBINED FINANCIAL STATEMENTS(Unaudited as of and for the years ended December 31, 2016 and 2015)NOTE 1 – DESCRIPTION OF BUSINESSFranklin Imaging Joint Venture, Carroll County Radiology, LLC, MRI at St. Joseph Medical Center, LLC, and Greater Baltimore DiagnosticImaging Partnership (collectively, the “Group”), are joint ventures between RadNet, Inc. and, as applicable, hospitals, health systems or radiologypractices operating within the state of Maryland and were formed for the purpose of owning and operating diagnostic imaging centers. Professionalservices at the joint venture diagnostic imaging centers are performed by contracted radiology practices or a radiology practice that participates inthe joint venture. Each joint venture within the Group is an affiliate of RadNet, Inc. as follows:% owned by Radnet, Inc.Franklin Imaging Joint Venture49%Carroll County Radiology, LLC40%MRI at St. Joseph Medical Center, LLC49%Greater Baltimore Diagnostic Imaging Partnership ("GBDIP")50%NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESPRINCIPLES OF COMBINATION – Under Rule 3-09 of Regulation S-X, RadNet, Inc. is permitted to file combined financial statements forindividually significant unconsolidated joint ventures which are in the same line of business. The combined financial statements include the assets,liabilities, and operations of each member of the Group. The operating activities of each of these joint ventures are completely separate from oneanother and are in no way affiliated with one another. Accordingly there are no intercompany transactions and balances to be eliminated whencombining each together.USE OF ESTIMATES - The preparation of these financial statements in conformity with U.S. generally accepted accounting principlesrequires 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 the Group’s reported amounts of assets and liabilities in the combined balancesheets at the dates of the financial statements; disclosure of contingent assets and liabilities at the dates of the financial statements; and reportedamounts of revenues and expenses in the combined statements of income during the reporting periods. These estimates involve judgments withrespect to numerous factors that are difficult to predict and are beyond management’s control. As a result, actual amounts could materially differfrom these estimates.REVENUES – Combined service fee revenue, net of contractual allowances and discounts, consists of net patient fees received fromvarious payors and patients themselves based mainly upon established contractual billing rates, less allowances for contractual adjustments anddiscounts. This service fee revenue is earned through providing the use of diagnostic imaging equipment and the provision of technical services aswell as providing administrative services such as clerical and administrative personnel, billing and collection, provision of medical and officesupplies, secretarial, reception and transcription services, maintenance of medical records, and advertising, marketing and promotional activities.The Group's combined service fee revenues are recorded during the period the services are provided based upon the estimated amountsdue from 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 collectionrates of pre-determined payment rates specified in the related contractual agreements. The Group also records a provision for doubtful accounts(based primarily on historical collection experience) related to patient financial responsibility including copayment and deductible amounts forpatients who have health care coverage with third-party payors.The Group’s service fee revenue, net of contractual allowances and discounts less the provision for bad debts for the years endedDecember 31, are summarized in the following table (in thousands):8Years Ended December 31,201620152014(unaduited)(unaduited)Commercial Insurance$39,291 $36,911 $37,384 Medicare13,233 12,322 12,003 Medicaid1,807 1,980 1,872 Workers' Compensation/Personal Injury2,390 2,805 2,643 Other1,574 990 1,156 Service fee revenue, net of contractual allowances anddiscounts58,295 55,008 55,058 Provision for bad debts(2,796) (2,824) (2,832)Net service fee revenue$55,499 $52,184 $52,226 ACCOUNTS RECEIVABLE - Substantially all of the Group’s accounts receivable are due under fee-for-service contracts from third partypayors, such as insurance companies and government-sponsored healthcare programs, or directly from patients. Services are generally providedpursuant to one-year contracts with healthcare providers. The Group continuously monitors collections from payors and maintains an allowancefor bad debts based upon specific payor collection issues that have been identified as well as historical collection experience.PROVISION FOR BAD DEBTS - Although outcomes vary, the Group’s policy is to attempt to collect amounts due from patients, includingco-payments and deductibles due from patients with insurance, at the time of service. The Group provides for an allowance against accountsreceivable that could become uncollectible by establishing an allowance to reduce the carrying value of such receivables to their estimated netrealizable value. The Group estimates this allowance based on the aging of accounts receivable by each type of payor over a minimum 18-monthlook-back period, and other relevant factors. A significant portion of the provision for bad debt relates to co-payments and deductibles owed to theGroup by patients with insurance. There are various factors that can impact collection trends, such as changes in the economy, which in turn havean impact on the increased burden of co-payments and deductibles to be made by patients with insurance. These factors continuously change andcan have an impact on collection trends and the Group’s estimation process. The combined allowance for bad debts at December 31, 2016 and 2015was $548,000 (unaudited) and $365,000 (unaudited), respectively.CONCENTRATION OF CREDIT RISKS - Financial instruments that potentially subject the Group to credit risk are primarily cashequivalents and accounts receivable. Each joint venture places its cash and cash equivalents with a financial institution. At times, the cash in thefinancial institution is temporarily in excess of the amount insured by the Federal Deposit Insurance Corporation, or FDIC. Substantially allaccounts receivable are due under fee-for-service contracts from third party payors, such as insurance companies and government-sponsoredhealthcare programs, or directly from patients. Services are generally provided pursuant to one-year contracts with healthcare providers. The Groupcontinuously monitors collections from its clients and maintains an allowance for bad debts based upon any specific payor collection issues thatare identified and historical experience.CASH AND CASH EQUIVALENTS – The Group considers all highly liquid investments that mature in three months or less whenpurchased to be cash equivalents. The carrying amount of cash and cash equivalents approximates their fair market value.PROPERTY AND EQUIPMENT – Property, furniture and equipment are stated at cost, less accumulated depreciation and amortization.Depreciation and amortization of property, furniture 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 shorter of the related lease term or their estimated useful lives whichrange from 3 to 30 years.GOODWILL – Combined goodwill of the Group at December 31, 2016 totaled $10.6 million (unaudited). Goodwill is recorded by eachmember of the Group as a result of business combinations. Management of each member of the Group evaluates goodwill, at a minimum, on anannual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. Each member of theGroup evaluated its respective share of the combined goodwill at October 1, 2016 for signs of impairment under the provisions of ASU 2011-08. Byutilizing certain qualitative measures outlined in the guidance, each member determined that its respective share of the combined goodwill was notimpaired.9INCOME TAXES - Each member of the Group is treated as a partnership for federal and state income tax purposes where all taxable incomeis allocated to the partners in accordance with the respective partnership agreement and so accordingly federal and state taxes on income are theresponsibility of the joint venture partners individually. Accordingly, no income tax provision is recorded by any joint ventures in the Group.Open tax years are those that are open for examination by taxing authorities, and include all returns for tax years ending on or afterDecember 31, 2013, for federal returns and December 31, 2013, for Maryland returns. The Group has no examinations in process and has not beennotified of any future examinations at this time. Management of each member of the Group has reviewed all open tax years and major jurisdictions,and has not recorded an unrecognized tax benefit relating to uncertain income tax positions taken or expected to be taken in future tax returns. TheGroup has recognized no interest or penalties related to uncertain tax positions taken or expected to be taken.FAIR VALUE MEASUREMENTS –The combined balance sheets include the following financial instruments: cash and cash equivalents,receivables, trade accounts payable, capital leases, equipment notes payable and other liabilities. The Group considers the carrying amounts ofcash and cash equivalents, receivables, other current assets and current liabilities to approximate their fair value because of the relatively shortperiod of time between the origination of these instruments and their expected realization or payment. Additionally, the Group considers thecarrying amount of its equipment notes payable and capital lease obligations to approximate their fair value because the weighted average interestrate used to formulate the carrying amounts approximates current market rates.NOTE 3 – ACQUISITIONSFranklin Imaging, LLC, acquired a single multi-modality imaging center located in Rosedale, Maryland for cash consideration of $1.0 millionand the assumption of capital lease debt of $241,000. The acquisition closed on August 15, 2016. Franklin Imaging, LLC made a fair valuedetermination of the acquired assets and approximately $600,000 of fixed assets, $30,000 of other assets and goodwill of $649,000 was recorded inrespect to the transaction.NOTE 4 – GOODWILL AND OTHER INTANGIBLE ASSETSCombined goodwill of the Group at December 31, 2016 totaled $10.6 million (unaudited). Goodwill is recorded as a result of businesscombinations.Other intangible assets are related to the value of management service contracts on the books of MRI at St. Joseph Medical Center, LLC of$385,400 and a covenant not to compete contract acquired through a GBDIP acquisition that totaled $608,138 on the day the transaction closed.Accumulated amortization of the management service and covenant not to compete contracts through December 31, 2016 was $156,100 (unaudited)and $608,138 (unaudited), respectively. Total amortization expense for the year ended December 31, 2016 was $121,000 (unaudited). Managementservice contracts are amortized over 25 years. The value of the covenant not to compete contract was expensed using the straight-line method overfive years and is now fully amortized as of December 31, 2016.The following table (unaudited) shows annual amortization expense, by asset class that will be recorded over the next five years (inthousands):20172018201920202021Thereafter TotalWeightedaverageamortizationperiodremaining inyearsManagement service contracts$16 $16 $16 $16 $16 $149 $229 16.0 10NOTE 5 - PROPERTY AND EQUIPMENTProperty and equipment and accumulated depreciation and amortization are as follows (in thousands):December 31,20162015(unaudited)(unaudited)Medical equipment$40,306 $39,841 Office equipment, furniture and fixtures3,241 3,280 Leasehold improvements16,257 14,440 Equipment under capital leases221 – 60,025 57,561 Accumulated depreciation and amortization(47,008) (43,809)$13,017 $13,752 Depreciation and amortization expense on property and equipment, including amortization of equipment under capital leases, for the yearsended December 31, 2016, 2015 and 2014 totaled $4.2 million (unaudited), $4.0 million (unaudited) and $4.7 million, respectively.NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED EXPENSESAccounts payable and accrued expenses are as follows (in thousands):December 31,20162015(unaudited)(unaudited)Accounts payable$1 $1 Accrued expenses484 628 Accrued payroll and vacation761 208 Total$1,246 $837 NOTE 7 – EQUIPMENT NOTES PAYABLE AND CAPITAL LEASESOne member of the Group, Greater Baltimore Diagnostic Imaging Partnership is the maker of a promissory note for the purpose of acquiringimaging equipment. The note has an interest rate of 3.5% matures on October 1, 2018 and is collateralized by the acquired equipment. At December31, 2016, there remains a balance of $357,000 (unaudited), payable as follows: $201,000 (unaudited) in 2017 and $156,000 (unaudited) in 2018.As stated in Note 3 above, on August 8, Franklin Imaging LLC assumed capital lease debt as part of its acquisition of a facility inRosedale, MD. Future minimum lease payments under the capital lease for years ending December 31 (in thousands) are as follows:(unaudited)2017$74 201874 201974 202020 2021– Thereafter– Total minimum payments242 Amount representing interest(21)Present value of net minimum lease payments221 Less current portion(64)Long-term portion lease obligations$157 11NOTE 8 – COMMITMENTS AND CONTINGENCIESLeases – The Group leases various imaging facilities with renewal options expiring through 2029. Certain leases contain renewal optionsfrom two to ten years and escalation clauses based either on the consumer price index or fixed rent escalators. Leases with fixed rent escalators arerecorded on a straight-line basis. The Group records deferred rent for tenant leasehold improvement allowances received from a lessor andamortizes the deferred rent expense over the term of the lease agreement. In addition to facility leases, the Group has entered into operating leasesfor radiology and office equipment. Minimum annual payments under operating leases for future years ending December 31 (in thousands) are asfollows:FacilitiesEquipmentTotal(unaudited)(unaudited)(unaudited)2017$1,917 $404 $2,321 20181,475 400 1,875 20191,081 385 1,465 2020593 367 960 2021248 90 339 Thereafter351 – 351 $5,665 $1,646 $7,311 Total rent expense, including equipment rentals, for the years ended December 31, 2016, 2015 and 2014 was $3.1 million (unaudited), $2.7million (unaudited) and $3.5 million, respectively.NOTE 9 – RELATED PARTY TRANSACTIONSRadNet, Inc. contracts with each joint venture within the Group to provide certain administrative services including assistance withaccounting, payroll and employee benefits processing, and billing and collection functions on behalf of these joint ventures. RadNet Inc. remits tothe joint ventures all amounts collected through its administration of the billing and collection functions.RadNet, Inc., as administrator over payroll and employee benefits, pays salary and benefit obligations on behalf of these joint venturesand then bills each joint venture for its respective portion.RadNet, Inc. contracts with certain members of its contracted radiologist groups to perform professional services for the joint ventures.RadNet, Inc. assures that these radiologists are adequately covered under medical malpractice insurance policies. RadNet, Inc., on behalf of itscontracted radiologist groups, bills each joint venture for its respective share of the professional fees incurred through its utilization of thesecontracted radiologists. RadNet, Inc. remits to its contracted radiologist groups all amounts collected from the joint ventures for the billedprofessional fees.Amounts receivable from and payable to RadNet Inc. for the activities listed above are summarized in due from affiliates on the Group’scombined balance sheets and were $10.0 million (unaudited) and $5.3 million (unaudited) at December 31, 2016 and 2015, respectively.NOTE 10 – SUBSEQUENT EVENTSThe members of the Group evaluated subsequent events through March 31, 2017 and concluded that no additional disclosures were required.12Exhibit IndexThe following exhibits are filed, or incorporated by reference into this Annual Report on Form 10-K/A (Amendment No. 1):ExhibitNo.Description of Exhibit2.1Asset Purchase Agreement dated October 1, 2015 by and among Mid Rockland Imaging Partners, Inc., a Delaware corporation anda subsidiary of the registrant, Diagnostic Imaging Group LLC, a Delaware limited liability company, Diagnostic Imaging GroupHoldings, LLC,, a Delaware limited liability company, New Primecare LLC, a Delaware limited liability company, and FlushingMedical Arts Building, Inc. (incorporated by reference to exhibit filed with Form 8-K on October 20, 2015).3.1Certificate of Incorporation of RadNet, Inc., a Delaware corporation (incorporated by reference to exhibit filed with Form 8-K onSeptember 4, 2008).3.2Certificate of Amendment to Certificate of Incorporation of RadNet, Inc., a Delaware corporation, dated September 2, 2008(incorporated by reference to exhibit filed with Form 8-K on September 4, 2008).3.3Bylaws of RadNet, Inc., a Delaware corporation (incorporated by reference to exhibit filed with Form 8-K on September 4, 2008).10.1Credit and Guaranty Agreement, dated October 10, 2012, by and among Radnet Management, Inc., RadNet, Inc., the guarantorsthereunder, General Electric Capital Corporation, Deutsche Bank Securities, Inc., RBC Capital Markets and Barclays Bank PLC(incorporated by reference to exhibit filed with Form 8-K on October 12, 2012).10.2Pledge and Security Agreement, dated October 10, 2012, by and among Radnet Management, Inc., RadNet, Inc., the guarantorsthereunder, and Barclays Bank PLC (incorporated by reference to exhibit filed with Form 8-K on October 12, 2012).10.3Form of Trademark Security Agreement by and among the guarantors thereunder and Barclays Bank PLC (filed as an exhibit to thePledge and Security Agreement, dated October 10, 2012, by among the guarantors thereunder and Barclays Bank PLC, included asExhibit 10.2).10.4First Amendment Agreement dated April 3, 2013 to the Credit and Guaranty Agreement dated October 10, 2012, by and amongRadNet Management, Inc., RadNet, Inc., certain subsidiaries and affiliates of RadNet Management, Inc., certain lenders identifiedtherein and Barclays Bank PLC, as administrative agent and collateral agent. (incorporated by reference to Exhibit 99.1 filed withForm 8-K on April 4, 2013).10.5Second Amendment Agreement dated March 25, 2014 to the Credit and Guaranty Agreement, dated as of October 10, 2012 (asamended, by the First Amendment Agreement, dated as of April 3, 2013), by and among RadNet, Inc., Radnet Management, Inc.,certain subsidiaries and affiliates of Radnet Management, Inc., certain lenders identified therein, and Barclays Bank PLC, asadministrative agent and collateral agent. (incorporated by reference to Exhibit 99.1 filed with Form 8-K on March 31, 2014).10.6Second Lien Credit and Guaranty Agreement, dated as of March 25, 2014, by and among Radnet Management, Inc., RadNet, Inc.,certain subsidiaries and affiliates of Radnet Management, Inc., the lenders party thereto from time to time, certain other financialinstitutions and Barclays Bank PLC, as administrative agent and collateral agent. (incorporated by reference to Exhibit 99.2 filedwith Form 8-K on March 31, 2014).10.7Second Lien Pledge and Security Agreement, dated as of March 25, 2014, by and among Radnet Management, Inc., the Grantorsidentified therein, and Barclays Bank PLC, as collateral agent. (incorporated by reference to Exhibit 99.3 filed with Form 8-K onMarch 31, 2014).10.8Joinder Agreement, dated as of April 30, 2015, among Barclays Bank Plc, Radnet Management, Inc., a California corporation,Radnet Inc., a Delaware corporation, and certain affiliates and subsidiaries of Radnet Management Inc. (incorporated by referenceto exhibit filed with Form 8-K on May 1, 2015).1310.9Amendment No. 3 to Credit and Guaranty Agreement, dated as of July 1, 2016 by and among Radnet Management, Inc., Radnet,Inc. certain subsidiaries and affiliates of Radnet Management, Inc., the lenders party thereto from time to time, certain otherfinancial institutions and Barclays Bank PLC, as administrative agent and collateral agent. (incorporated by reference to filed withForm 8-K/A on December 2, 2016).10.10Amendment No. 4 to Credit and Guaranty Agreement, dated as of February 2, 2017 by and among Radnet Management, Inc.,Radnet, Inc. certain subsidiaries and affiliates of Radnet Management, Inc., the lenders party thereto from time to time, certain otherfinancial institutions and Barclays Bank PLC, as administrative agent and collateral agent. (incorporated by reference to filed withForm 8-K on February 2, 2017).10.11RadNet, Inc. 2006 Equity Incentive Plan (Amended and Restated as of April 20, 2015) (incorporated by reference to exhibit filed withProxy Statement on April 30, 2015).* 10.12Form of Stock Option Agreement for the 2006 Equity Incentive Plan (incorporated by reference to exhibit filed with Form S-8registration statement on August 12, 2015).*10.13Form of Restricted Stock Award for the 2006 Equity Incentive Plan (incorporated by reference to exhibit filed with Form 10-Q for thequarter ended March 31, 2012).* 10.14Form of Indemnification Agreement between the registrant and each of its officers and directors (incorporated by reference toexhibit filed with Form 10-Q for the quarter ended March 31, 2008).*10.15Employment Agreement dated as of June 12, 1992 with Howard G. Berger, M.D. (incorporated by reference to exhibit filed with anamendment to Form 8-K report for June 12, 1992).*10.16Amendment to Employment Agreement dated January 30, 2004 with Howard G. Berger, M.D. (incorporated by reference to exhibitfiled with Form 10-Q for the quarter ended January 31, 2004).*10.17Second Amendment to Employment Agreement dated November 16, 2015 with Howard G. Berger, M.D. (incorporated by referenceto exhibit filed with Form 10-K on March 15, 2016).10.18Employment Agreement dated as of April 16, 2001 with Jeffrey L. Linden (incorporated by reference to exhibit filed with Form 10-Kfor the year ended October 31, 2001).*10.19Amendment to Employment Agreement dated January 30, 2004 with Jeffrey L. Linden (incorporated by reference to exhibit filedwith Form 10-Q for the quarter ended January 31, 2004).*10.20Second Amendment to Employment Agreement dated November 16, 2015 with Jeffrey L. Linden. (incorporated by reference toexhibit filed with Form 10-K on March 15, 2016).10.21Employment Agreement dated as of May 1, 2001 with Norman R. Hames (incorporated by reference to exhibit filed with Form 10-Kfor the year ended October 31, 2001).*10.22Amendment to Employment Agreement dated January 30, 2004 with Norman R. Hames (incorporated by reference to exhibit filedwith Form 10-Q for the quarter ended January 31, 2004).*10.23Second Amendment to Employment Agreement dated November 16, 2015 with Norman R. Hames. (incorporated by reference toexhibit filed with Form 10-K on March 15, 2016).10.24Employment Agreement with Mark Stolper effective January 1, 2009 (incorporated by reference to exhibit filed with Form 10-K forthe year ended December 31, 2009).*10.25First Amendment to Employment Agreement dated November 16, 2015 with Mark Stolper. (incorporated by reference to exhibit filedwith Form 10-K on March 15, 2016).* 10.26Retention Agreement with Stephen Forthuber dated November 15, 2006 (incorporated by reference to exhibit filed with Form 10-K/Tfor the year ended December 31, 2006).* 10.27First Amendment to Retention Agreement dated November 16, 2015 with Stephen Forthuber. (incorporated by reference to exhibitfiled with Form 10-K on March 15, 2016).*1410.28Amended and Restated Management and Service Agreement between Radnet Management, Inc. and Beverly Radiology MedicalGroup III dated January 1, 2004 (incorporated by reference to exhibit filed with Form 10-K for the year ended October 31, 2003).12.1Computation of Ratios of Earnings to Fixed Charges (incorporated by reference to exhibit filed with the Original Filing).21.1List of Subsidiaries (incorporated by reference to exhibit filed with the Original Filing).23.2Consent of Independent Registered Public Accounting Firm.24.1Power of Attorney (included on signature page to the Original Filing).31.1CEO Certification pursuant to Section 302.31.2CFO Certification pursuant to Section 302.32.1CEO Certification pursuant to Section 906.32.2CFO Certification pursuant to Section 906.101.INSXBRL Instance Document101.SCHXBRL Schema Document101.CALXBRL Calculation Linkbase Document101.LABXBRL Label Linkbase Document101.PREXBRL Presentation Linkbase Document101.DEFXBRL Definition Linkbase Document*Indicates management contract or compensatory plan.15SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.RADNET, INC.Date: March 31, 2017/ s/ HOWARD G . BERGER, M.D.Howard G. Berger, M.D., President,Chief Executive Officer and DirectorPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalfof registrant in the capacities and on the dates indicated.By/ s/ HOWARD G . BERGER, M.D.Date: March 31, 2017Howard G. Berger, M.D., Director, Chief ExecutiveOfficer and PresidentBy/s/ MARVIN S. CADWELL *Date: March 31, 2017Marvin S. Cadwell, DirectorBy/s/ JOHN V. CRUES, III, M.D. *Date: March 31, 2017John V. Crues, III, M.D., DirectorBy/s/ NORMAN R. HAMES *Date: March 31, 2017Norman R. Hames, DirectorBy/s/ DAVID L. SWARTZ *Date: March 31, 2017David L. Swartz, DirectorBy/s/ LAWRENCE L. LEVITT *Date: March 31, 2017Lawrence L. Levitt, DirectorBy/s/ MICHAEL L. SHERMAN, M.D. *Date: March 31, 2017Michael L. Sherman, M.D., DirectorBy/s/ MARK D. STOLPERDate: March 31, 2017Mark D. Stolper, Chief Financial Officer (PrincipalAccounting Officer) *By Mark D. Stolper, as attorney- in-fact16 HEADQUARTERS EXECUTIVE OFFICERS BOARD OF DIRECTORS RadNet, Inc. 1510 Cotner Avenue Los Angeles, CA 90025 - (310) 478 COMMON STOCK 7808 The Common Stock of RadNet, Inc. is listed on the NASDAQ Global Market under the symbol "RDNT." TRANSFER AGENT American Stock Transfer & Trust Company, LLC 6201 15th Avenue Brooklyn, NY 11219 (718) 921-8124 (800) 937-5449 INDEPENDENT AUDITORS Ernst & Young LLP Los Angeles, CA Howard G. Berger, M.D. President, CEO and Chairman of the Board RadNet, Inc. Marvin S. Cadwell Retired John V. Crues, III, M.D. Vice President and Medical Director RadNet, Inc. Norman R. Hames Executive Vice President, Secretary and Chief Operating Officer-Western Operations RadNet, Inc. Lawrence L. Levitt President and CFO Canyon Management Company Michael L. Sherman, M.D. Retired David L. Swartz President David L. Swartz Consulting, Inc. Howard G. Berger, M.D. President, CEO and Chairman of the Board Mark D. Stolper Executive Vice President and Chief Financial Officer Jeffrey L. Linden Executive Vice President and General Counsel Norman R. Hames Executive Vice President, Secretary and Chief Operating Officer-Western Operations Stephen M. Forthuber Executive Vice President and Chief Operating Officer-Eastern Operations Michael M. Murdock Executive Vice President and Chief Development Officer Executive Vice President of Mital Patel Financial Planning and Analysis John V. Crues, III, M.D. Vice President and Medical Director (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2)

Continue reading text version or see original annual report in PDF format above