Good day and welcome to the RadNet Inc. second quarter 2020 financial results call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Mark Stolper, Executive Vice President and Chief Financial Officer of RadNet. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen and thank you for joining Dr. Howard Berger and me today to discuss RadNet's second quarter 2020 financial results. Before we begin today, we would like to remind everyone of the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. This presentation contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Specifically, statements concerning anticipated future financial and operating performance and liquidity, our response to and the expected future impact of COVID-19, our ability to stabilize and continue to grow the business by generating patient referrals and contracts with radiology practices, recruiting and retaining technologists, consummating acquisitions and joint ventures, receiving third-party reimbursement for diagnostic imaging services, successfully integrating acquired operations, generating revenue and adjusted EBITDA for the acquired operations as estimated among others are forward-looking statements within the meaning of the Safe Harbor. Forward-looking statements are based on management's current preliminary expectations and are subject to risks and uncertainties which may cause RadNet's actual results to differ materially from the statements contained herein. These risks and uncertainties include those risks set forth in RadNet's reports filed with the SEC from time to time, including RadNet's Annual Report on Form 10-K for the year ended December 31, 2019 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020. Undue reliance should not be placed on forward-looking statements, especially guidance on future financial performance, which speaks only as of the date it is made. RadNet undertakes no obligation to update publicly any forward-looking statements to reflect new information, events or circumstances after the date they were made or to reflect the occurrence of unanticipated events. And with that, I would like to turn the call over to Dr. Berger.

Thank you Mark. Good morning everyone and thank you for joining us today. On today's call, Mark and I plan to provide you with highlights from our second quarter 2020 results, give you more insight into factors which affected this performance and discuss our future strategy. After our prepared remarks, we will open the call to your questions. I would like to thank all of you for your interest in our company and for dedicating a portion of your day to participate in our conference call this morning. Before we start, I would like to say on behalf of myself and the entire RadNet team, we hope all of you and your loved ones are healthy and staying safe. We are extremely grateful for all of our stakeholders, including our employees, business partners, lenders and shareholders. This morning, Mark and I will pickup where we left off last quarter's financial call by giving you further understanding of what we have been facing under COVID-19, the actions we have taken to reduce costs and conserve cash, our current and projected liquidity position, our business' recovery progress and some discussion around the post-COVID operating opportunity. I would like to start off by giving you a status update on where our business stands and how it has been impacted by COVID-19. As a reminder, after having strong operating results in January and February months of this year that performed ahead of our original internal operating plan, we begin to see our volumes drop dramatically beginning the third week of March. This is when we began to take swift and decisive actions to secure our business from a material drop in the anticipated procedural volumes. We analyzed all aspects of our business and focused on ways to most effectively reduce our cash spend. We…

Thank you Howard. I am now going to briefly review our second quarter 2020 performance and attempt to highlight what I believe to be some material items. I will also give some further explanation of certain items in our financial statements as well as provide some insights into some of the metrics that drove our second quarter 2020 performance. In my discussion, I will use the term adjusted EBITDA, which is a non-GAAP financial measure. The company defines adjusted EBITDA as earnings before interest, taxes, depreciation and amortization and excludes losses or gains on the disposal of equipment, other income or loss, loss on debt extinguishments and non-cash equity compensation. Adjusted EBITDA includes equity earnings in unconsolidated operations and subtracts allocations of earnings to non-controlling interests in subsidiaries and is adjusted for non-cash or extraordinary and one-time events taken place during the period. A full quantitative reconciliation of adjusted EBITDA to net income or loss attributable to RadNet, Inc. common shareholders is included in our earnings release and our current report on Form 8-K filed SEC. With that said, I would now like to review our second quarter results. For the second quarter 2020, RadNet reported revenue of $190.6 million and adjusted EBITDA of $22.6 million. Revenue decreased to $98.5 million or 34.1% as a result of the impact of COVID-19. Adjusted EBIT decreased $20.5 million or 47.6%. We were extremely pleased that our ability to reduce expenses, particularly salaries and professional fees by approximately $45 million relative to last year same quarter. We achieved this through temporarily closing facilities, furloughing workforce and instituting salary cuts were general and administrative staff. For the second quarter 2020, as compared to the prior year second quarter, MRI volume decreased 39.7%, CT volume decreased 13.6% and PET/CT volume decreased 17.6%. Overall volume, taking…

Thank you Mark. During the first part of my prepared remarks, I discussed our performance, the actions we have taken during the COVID period and current status of the business. I would now like to take a few moments to discuss the future. I strongly believe that the COVID pandemic will be catalyst for opportunity. As I mentioned during our first quarter financial results call, COVID has caused us to analyze everything we do as a company and evaluate how we deliver our services. It has necessitated that we closely evaluate how we are spending our money and ways that we can become more efficient. We have learned a lot during this exercise. As Mark mentioned in his discussion or reimbursement and mitigation of the proposed Medicare cuts for next year in a post-COVID environment, we will reduce what we have historically been spending on employee travel and other reimbursed expenses. We will be able to staff our centers in supporting general and administrative functions more efficiently. We will be to procure medical supplies and equipment services and perform general and administrative functions at a lower cost. There are markets where we will consolidate centers thereby eliminating costs permanently. I also believe that the post-COVID environment will provide us with opportunities to accelerate our growth. As difficult as this period has been to RadNet, smaller operators have had even more challenging times. Most of our competitors lack the scale, capital and human resources to emerge from the COVID financial and operating strength. As a result, we expect more M&A activity for us in the post-COVID period at multiples that are consistent with what we have paid in the past. This issue is even going to be more important as the Medicare reimbursement reductions proposed for 2021 are going to be…

[Operator Instructions]. And we will now take our first question from Brian Tanquilut with Jefferies. Please go ahead.

Hi. Good morning guys and congrats for the hard work that you guys did this past quarter [indiscernible]. I guess, Mark, I will just jump right into the Medicare cut. The $11 million revenue hit, as that I think about it, there is a [indiscernible] component in there and then there is a [indiscernible] component, right. So is part of that $11 million passable to the physicians that are in the independent radiology groups that you reimburse on kind of direct pay or pass-through basis?

Yes. So the way the cuts are proposed to be implemented is that the conversion factor in the Medicare fee schedule is set to decline by 10.6%. I think it's a total of $3.83. It's moving from $36 and change to $33 and change. And that then is applied that conversion factors, then multiply to both the technical and professional RVUs. In the case of radiology, what CMS is proposing is that the technical RVUs are actually going up so that the proportion of the technical RVUs to the total RVUs which then incorporates the professional RVUs is higher. And that ratio is used in the formulas that we have with our third-party affiliated medical groups to determine what portion of the revenue and our cash collections that are professional fees get. So our professional groups are going to be absorbing a significant amount of this cut with us. The $11 million that I mentioned is net of the portion of our physician groups that are going to be absorbing a proportion of this cut.

Got you. Okay.

The technical RVUs going up with a function of Medicare reevaluating the cost of equipment, which it does from time to time and they have talked about this along with this E&M code cut really for the last several years. So I think as they introduced the conversion factor decrease, they then readjusted the technical component of the RVUs.

Got you. And then Mark, as I think about just from an EBITDA growth perspective without going into guidance obviously, so you laid out your mitigation efforts. So do you think, apples-to-apples, right, I mean if COVID did not happen and these cost cuts wouldn't have happened, you have had seen a certain level growth in EBITDA already, thinking of an EBITDA level for next year. But with all the cost cuts that you are going through, do you think that 2021 EBITDA that you would have contemplated in January 2020 would still be within the same ballpark as you are accounting for both the Medicare cut and the cost cuts that you go through?

Let me answer it, I think I understand what you are asking. I mean some of these cuts that or mitigants that are going into place in 2021 would have been executed any way just because we constantly are looking for areas of our business that we can improve on. But I would tell you that the exercise that we have gone through during the pandemic which was necessitated by the fact that our revenue was so pressured and our patient volume was pressured also uncovered other areas of the business where we feel we can save money. I will give you one example of that which is employee travel and reimbursement expenses. We have historically had a fair bit of travel as our facilities are across six states and some on the East Coast, some on the West Coast and along with that travel is the cost of airlines and hotels and Ubers and all related expenses. While we been operating just fine over the last few months with almost no travel and very little employee reimbursement expenses. And so that showed us that some of the travel that we have enjoyed over the past several years, we are able to reduce that significantly. So that's one of the things that has come directly out of COVID that perhaps we wouldn't have fully appreciated if we hadn't had the necessity to look at every aspect of our business.

Brian, this is Howard. Let me perhaps amplify, I think the question that you are answering. There are certain aspects of our business that we look at all the time to try to become more efficient in the delivery of our services and that will have happened regardless of COVID. I think what the COVID experience has allowed us to do is reduce the company down to its foundation and reevaluate it. As you are well aware, the company has grown significantly over the past six, seven years primarily through acquisitions. And given our particular strategy of being clustered in specific regional areas, we appear to have had facilities that were legacy facilities. We continued to operate and were reluctant to make any significant changes. This COVID period has allowed us to work at the greater flexibility that patients and referring physicians are willing undergo as to where they can send their patients. And in fact, we have identified a number of our centers where we have been eliminating those centers and consolidate into our more centers of excellence to both handle that volume and probably do it on a more efficient basis. So in a way, we are trying to take this opportunity to really look at the business. And in our unique strategy that I think is unlike almost any other in medical industry or healthcare industry, I should say, look at what we can do to become more efficient in the way that we deliver our services and also the quality, I might add, for that. So I think that that will be a byproduct which will be a significant mitigant to the Medicare reimbursement cuts that we will experience most likely in 2021.

Excellent. That makes sense. And then, I guess Mark or Howard, as I think about the re-ramp of your business, now you are running at 90% on an average basis pre-COVID. How should we be thinking about the re-ramp of expenses? I am trying to think about staffing levels at the centers and then I know you cut compensation by up to 50%. Like, what's the next re-ramp is going to look like over the back half of 2020?

Well, I will answer that in two parts, Brian. First, as on the revenue side of getting above the 90% level that we are currently at. There's two factors there at play here that will very much depends upon the continued COVID experience, namely that some of our MRI volume has been impacted by the lack of sports that have been curtailed virtually at every level. I think excluding professional sports, which is a very limited number of people to begin with relative to the total population, but at very other level, whether you talk about college, high school, union league, pickup clubs, even just routine scrimmages or pickup games that individuals participate in, have been substantially curtailed and sports medicine is a huge driver of imaging, particularly MRIs. So we have seen that a number of our orthopedic surgical referrals and colleagues have been slow to recover more than their normal levels and we think that that's what this is due. It's very likely that the impact of sports medicine from COVID is likely to extend well into next year. So our MRI volume, I believe, will be challenged at least in that regard. In regard to the other area where we are seeing a big lag is in routine X-rays, particularly chest X-rays. As the COVID impact very much curtailed routine physicals and routine annual visits by patients to doctors as well as the substantial decrease in elective surgeries, which almost always require a pre-op chest X-ray to be done has been pretty dramatic impact on the business and which is the biggest lag in modality to return. So I think again while I am very pleased to have the level of 90% we have achieved, we are still very focused on monitoring the rest of that growth…

Got you. And then Howard, I would like to get M&A, right where I mean I am definitely with the furloughs or the drag you saw this quarter on your earnings, I know the government has provided some support. But net net, I mean I can imagine that the smaller guys even the [indiscernible] are struggling with this. Do you think that opens M&A opportunities for your? Or are you more focused right now on capital conservation than doing [indiscernible]?

Well, I think right now, we are now focused on capital conservation and while I think the M&A opportunities will present themselves to us and we will look at them very carefully, I think we need to be very hard as we always been in making certain that those M&A activities primarily occur inside of the regions in which we currently operate. I think as we gain more and more of a presence in those markets, it benefits us throughout the entire organization and makes us a more profitable company, more so than going into new regions. That being said, I believe that the entire healthcare industry is reevaluating the ambulatory strategies, outpatient strategies and there maybe a better opportunity for us to perhaps go into new markets as long as they fit the criteria of having a path forward for us to become a significant player in those markets and partnering with the health system that has always been shown to be a very valuable part of the RadNet strategy. So I don't want to rule anything out. We are comfortable in our current position, both with the highest liquidity that the company has ever experienced and confidence in our future operating results. And perhaps now is the time to look at opportunities that may not have been as obvious in the pre-COVID period.

Howard, last one for me. Hologic, if you can just give me a little more color. I know you have talked about it in your prepared remarks. But where do you see that partnership going? And how does it blend in with the overall RadNet strategy long term with AI as a background?

Thanks Brian. It's a great question. As I said in prior earnings calls and as hopefully everybody has noticed, with the acquisition of an artificial intelligence company called DeepHealth, we felt very strongly that artificial intelligence in general for the healthcare industry, but in particular for radiology imaging will be transformative. Where I think this intersects with the Hologic collaboration is that breast imaging and mammography are the quintessential aspect or example, I should say, of potential population health. It is truly the screening exams. We believe that screening exams such as for prostate, the lung, the colon are opportunities for the future to better manage population health and for which we want to be in the forefront. With the Hologic collaboration, two things are happening. Number one, approximately 95% of our entire mammography fleet of systems are Hologic and everyone of those systems within the next 12 months will be upgraded and/or replaced with the latest Hologic technology, which not only involves high-resolution detectors but also more artificial intelligence to help read the exams faster and more accurately. It will allows us at least about 1.2 million or more mammography exams, which is approximately 4% of all the mammography done in the United States, all the screening of mammography done in the United States and for which Hologic will be getting that data to allow them to further evaluate the clinical efficacy and accuracy of its technology along with our development of artificial intelligence to read and more accurately diagnosed earlier breast cancers. That combined with a robust plan to incorporate other imaging and screening data for patients will, I believe, allow us to be more aggressive than going to the payors and patients and offering up products to advance population health and have different potential reimbursement models maybe like capitation or revenue sharing models which, I think, are very much part of the future. So I think for both Hologic and for RadNet, the implications of this as it relates to certainly breast health in general, as well as our overall appreciation of the benefits of artificial intelligence are going to be extraordinarily consequential.

Awesome, Howard. Thank you so much. I appreciate your thoughts this morning.

Thanks Brian. Stay well.

And we will now take our next question from Mitra Ramgopal with Sidoti. Please go ahead.

Yes. Hi. Good morning. Thanks for taking the questions. First, Howard, I was wondering if you can give us a sense in terms of the geography with the bounce back you are seeing at the volumes. How much of that, I assume most of that is essentially from New York, but then you are seeing a surge of cases in California in terms of COVID, I was wondering how mix has changed from maybe a few months ago?

Hi Mitra. Yes, the growth that we had on the East Coast has been steady growth with many of our markets outside of Metro New York, achieving closer to 100% of the pre-COVID levels. So that has been a very pleasant development for us. As you can imagine, with the stringent procedures and oversight in New York which I am a firm believer as both the results as well as the appropriateness of New York has been slow to return but is now gaining the level of additional momentum which I think would be helped by Governor Cuomo recent announcement of the reopening of the schools. So I would expect that the East Coast will continue to see additional further surges in its growth in its procedural volume growth. California has been challenging. It was ahead of the East Coast initially but as the surge here in California, like many other states, notably Florida, Texas and Arizona has gotten out of control, there has been a bit of a flattening and maybe even a very slight decrease here in California, which we anticipated. Fortunately, as you are aware, a disproportionate amount of revenue in California is from our capitation contracts which brings revenue to the company, has remained unabated and in fact has actually grown slightly as more people, I think, are seeking that form of insurance coverage. So while I believe we are at bit of a good pause here, I expect this will come under control probably within the next 30 to 60 days and will continue here, but at least we have the benefit of stable and reliable capitation contracts to rely on. I also think this represents an opportunity for us to actually do more capitation or alternative reimbursement models as I think many of the payors now have momentum in the shift of business away from hospitals. I believe that effort by the insurance companies to direct it away from the considerably higher costs at hospitals has actually been facilitated by COVID as most patients are reluctant regardless of the efforts that hospitals make to maintain safety. Most patients are reluctant to go to hospitals for elective outpatient services. So I believe over a period of time, we will continue to benefit from that as well. And conversations that I believe we will be stating to have right after the first year with payors in more interest in reimbursement models should accelerate.

Okay. And next I know you just talked about potentially permanently closing some facilities. I was just wondering if you have out of 25 that are still reopen if we should expect any potential closings away from that or maybe from some that have already reopened or a mixture?

Yes. I would expect that the number of facilities that remain closed somewhere in that range could be permanent enclosures. Our model is a hub and spoke model. And so we have a lot of small satellite facilities where we do just X-ray or other routine imaging. And we are really seeing that many of those centers probably can be closed permanently and that volume absorbed in nearby centers. There is also some others where we think because the acquisitions are very close to other centers that we have where we can probably eliminate some of those centers also without losing any of that volume. So I would not be surprised if the number of centers that are currently closed could remain permanently closed as a result of this revisiting operating model that is somewhat unique to RadNet.

Okay. That's great. And then finally, just quick thoughts. I think you mentioned DeepHealth, they have a plan submit their first AI product later this year. Just curious in terms of how meaningful you think that could be for your AI initiative? How meaningful that could be to your AI initiative?

It is very meaningful. Their first product will be what we call a triage product, which will essentially take a mammogram and sort into normal and not normal categories which will then allow the radiologists to prioritize his reading of the mammograms by those that are more likely to have cancers in them or they are highly suspicious of that. And more normal which are probably about 80% of our screening mammography is normal be looked more quickly, given that they will have some indication that that exam is most likely to be normal. So we expect efficiencies for primarily our radiologists and since a lot of our radiology professional fees are fixed, that could have substantial benefit to the company. And that's jus the first of two products, the first two products that certainly we hope to get some time in the early part of 2021, which will actually be a diagnostic interpretation for mammography.

Okay. Thank you guys for taking the questions.

Thank you Mitra.

Thanks Mitra.

There are no further questions at this time. So I would like to turn the conference back to our host for any additional or closing remarks.

Again, I would like to take this opportunity to thank all of our shareholders for their continued support and the employees of RadNet for their dedication and hard work. Management will continue its endeavor to be a market leader that provides great services with an appropriate return on investment for all stakeholders. Thank you for your time today and I look forward to our next call. I wish all of you and your families good health and safety during this unprecedented time.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.