Mark Stolper - EVP & CFO Dr. Howard Berger - President & CEO.

Brian Tanquilut - Jefferies Per Ostlund - Craig-Hallum Capital Juan Molta - B. Riley & Company Mitra Ramgopal - Sidoti & Company Alan Weber - Robotti Advisors.

Good day and welcome to the RadNet Inc. Second Quarter 2016 Financial Results Conference 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 & Chief Financial Officer of RadNet Inc. 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 2016 financial results. Before we begin today, we'd 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, RadNet's ability to continue to grow the business by generating patient referrals and contracts of radiology practices, recruiting and retaining technologists, 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, 2015 and RadNet’s quarterly report on Form 10-Q to be filed shortly.

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'd 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 2016 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'd 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. Overall, I'm encouraged by the improvement in our metrics and financial performance compared with last year's same quarter and the first quarter of this year.

Our adjusted revenue increased 10% and our adjusted EBITDA increased 4.7% over last year's second quarter. Procedural volumes increased 9.6% on an aggregate basis, and 0.4% on a same-center basis relative to the second quarter of last year.

This was the ninth quarter in a row that we've experienced positive same-center procedural growth, which is a major factor in driving long-term profitability and margin enhancement. Adjusted earnings and earnings per share also increased quarter-over-same quarter.

Sequentially the quarter was a significant improvement over the first quarter of this year. Our adjusted revenue increased 3.8% and our adjusted EBITDA increased almost 30% as compared with the first quarter of 2016. We turned net loss of 1.7 million in the first quarter of 2016 into a net profit of 4.4 million in the second quarter.

Also encouraging was that our operating expense ratio dropped from 91% of revenue in the first quarter of this year to 86.4% in the second quarter, which is the function of operating leverage from increased business and continued focus on cost containment opportunities.

As a result, our EBITDA margin increased from 12.5% in the first quarter of 2016 to 15.6% in the second quarter. Our business continues to improve on both coasts.

On the West Coast we continue to work through some of the capacity issues we faced last year with the unprecedented growth in our Capitation business and the unique utilization characteristics experienced with the incremental patient populations for which we assume responsibility, particularly those in expanded managed Medicaid programs.

We also commenced operations at our first significant health system partnership in Glendale, California with Dignity Health, one of the largest companies in the western part of the United States. We're encouraged by the opportunities we're seeing to establish additional partnerships in the west with other prominent health systems.

We believe this is the result of our continuing growth and visibility in the communities in which we serve, as well as other capabilities we've built, including oncology and breast disease management. I'm hopeful that before year-end we'll be in a position to announce additional partnerships like we now have with Dignity Health.

In the East, the continuing focus in accomplishments have been surrounding the successful integration of recently acquired entities in the Tri-State, New York particularly the assets acquired on the Diagnostic Imaging Group, New York Radiology Partners and Lenox Hill Radiology.

The significant presence we've created in the New York, Tri-State area has placed us in a position where we're negotiating rate increases from certain private payors and health plans and have sparked conversations with some of the larger medical groups in this region regarding network contracting and capitation arrangements.

We're hopeful that we'll be in a position to announce one or more unique contracting arrangements by year-end, whereby we would bring full risk-based contract into East Coast operations in a meaningful way for the first time in the Company's history.

During the quarter, we had several financial adjustments related to these acquired New York entities, which Mark will discuss in more detail during his prepared remarks. These adjustments include those made to adjust for a settlement gain related to the return of common stock we issued in conjunction with the Diagnostic Imaging acquisition.

Out of period depreciation expenses related to the finalization of purchase accounting also related to Diagnostic Imaging Group and working capital modifications related to the acquired New York assets. After making these adjustments, we're comfortable that these acquired assets are poised for growth and positive improvement.

We're also working in our East Coast operations on opportunities to bring our Breast Oncology business to our New York marketplace. BreastLink up to this point has been exclusively expanding in Southern California. However, the opportunities and benefits that it brings to breast disease management and patient care, is universal.

We seek by year-end to establish a platform for this type of operation in one of our larger East Coast core markets. Another focus of ours is to profitably expand the Barnabas Health joint venture in New Jersey. Our relationship with Barnabas is stronger than ever.

We're evaluating expansion opportunities for the joint venture to include tuck-in acquisitions, building one or more facilities and exploring additional opportunities with existing Barnabas hospitals and outpatient operations. Another area of potential growth for us is regarding inpatient radiology with existing and new hospital partners.

In the past, we've worked with our contracted and affiliated radiology groups to staff the professional component utilized in hospitals with whom we have partnerships on outpatient imaging centers.

We're now exploring opportunities where we would assume full operating responsibility for both the technical operations of the inpatient facility, as well as the professional radiology interpretation.

We're excited about this as it represents an expansion opportunity for us, with both existing hospital relationships in our core markets, as well as hospitals outside of our existing operating geographies. Finally on the cost savings front, we continue to work on initiatives to capitalize on our scale by making our business more efficient.

For instance, we're in the process of centralizing our insurance preauthorization function for all of our operations, East and West. We're also beginning tests for online appointment scheduling. Automating these functions will reduce the cost that we currently spend on call centers and patient service coordinators.

We are also continuing to work with suppliers and vendors on programs to lower the cost of disposables such as contrast agents. Lastly, we are continuing to design programs to lower our cost of equipment repairs and maintenance.

At this time, I’d like to turn the call back to Mark to discuss some of the highlights of our second quarter 2016 performance. When he is finished I’ll make some closing remarks..

Thank you, Howard. I’m now going to briefly review our second quarter 2016 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 the second quarter performance.

Lastly I will update 2016 financial guidance levels. 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, each from continuing operations and excludes losses or gains on the disposal of equipment, other income or loss, loss on debt extinguishments, bargain purchase gains and non-cash equity compensation.

Adjusted EBITDA includes equity earnings in unconsolidated operations and subtracts allocations of earnings to non-controlling interest in subsidiaries and is adjusted for non-cash or extraordinary and one-time events taking place during the period.

A full quantitative reconciliation of adjusted EBITDA to net income or a loss attributable to RadNet Inc. common shareholders is included in our earnings release. With that said, I’d now like to review our second quarter 2016 results.

For the three months ended June 30, 2016, RadNet reported adjusted revenue and adjusted EBITDA of $224.6 million and $35.1 million, respectively. Adjusted revenue increased $20.3 million or 10% over the prior year same quarter and adjusted EBITDA increased $1.6 million or 4.5% over the prior year’s same quarter.

During the quarter, we booked several non-cash and fees related to adjustments pertaining to acquisitions we made in New York. Specifically, we recognized a $5 million settlement gain related to the return of common stock, pertaining to our acquisition of Diagnostic Imaging Group.

As some of you may recall, we issued to the seller in connection with the acquisition of DIG 1.5 million RadNet shares. The return of $5 million worth of these shares relates to a billing issue, which we identified subsequent to DIG’s purchase.

Also as it relates to DIG and other acquired New York entities, we made a working capital adjustment of $6.1 million, which from an accounting perspective was charged against revenue in the current period, effectively reducing our revenue in the quarter by $6.1 million.

And finally as it relates to out of period non-cash charges pertaining to New York operations, we made a $221,000 catch-up of depreciation entry in the second quarter, which resulted from the finalization of our purchase price allocation completed by our outside valuation firm, which resulted in a write-up of the acquired assets and therefore an increase to depreciation resulting since the acquisition date of October 01, 2015.

Thus in order to evaluate our true operating performance during the quarter we've adjusted our revenue in EBITDA and earnings metrics to exclude these accounting entries. For the second quarter of 2016 as compared to the prior year's second quarter MRI volume increased 7.5%, CT volume increased 8.9% and PET/CT volume increased 4.8%.

Overall volume, taking into account routine imaging exams inclusive of X-ray, ultrasound, mammography and all other exams increased 9.6% over the prior year’s second quarter. In the second quarter of 2016, we performed 1,567,115 million total procedures.

The procedures were consistent with our multi-modality approach whereby 77.9% of all the work we did by volume was from routine imaging. Our procedures in the second quarter of 2016 were as follows.

Please note that starting in the third quarter of last year 2015 and including this second quarter we standardized our procedure volume categorization among according to our internal KBI or key business indicator’s dashboard.

So the volumes I'll be quoting for last year's comparison period will be slightly different than those I reported at this time last year.

Because the restated procedure volumes for last year's period are calculated under the same methodology as the current period, the comparisons between the two periods are accurate as are the conclusions that can be drawn. Here are the numbers, 193,423 MRIs as compared to 179,973 MRIs in the second quarter of 2015.

146,947 CTs as compared with 134,974 CTs in the second quarter of 2015. 6,568 PET/CTs as compared with 6,267 PET/CTs in the second quarter of 2015 and 1,220,177 million routine imaging exams versus 1,109,082 million of all these exams in the second quarter of 2015.

For the second quarter of 2016, RadNet reported adjusted net income of $4.4 million which is modified by removing the tax effected non-cash items that I already discussed included $6.1 million of the working capital adjustments, $5 million settlement gain on the return of the common stock associated with the Diagnostic Imaging Group acquisition and the $221,000 one-time adjustment to depreciation in conjunction with the finalization of the purchase price allocation related to the Diagnostic Imaging Group acquisition.

Adjusted net income increased $987,000 over the second quarter of 2015.

Per share adjusted net income for the second quarter was $0.09 per share, compared to adjusted net income in the second quarter of 2015 of $0.08 per share, based upon weighted average number of diluted shares outstanding of 46.9 million and 44.7 million shares for these periods in 2016 and 2015, respectively.

Affecting net income in the second quarter of 2016 were certain non-cash expenses and non-recurring items including the $5 million settlement gain related to the DIG acquisition, the $6.1 million charge to revenue related to the working capital adjustments pertaining to the New York acquisitions, the $221,000 depreciation expense catch-up recorded in the period, $1 million of non-cash employee stock compensation expense resulting from the vesting of certain options and restricted stock, $173,000 of severance paid in connection with headcount reductions related to cost savings initiatives, $441,000 loss on the sale of certain capital equipment and $1.4 million of non-cash amortization of deferred financing costs and discount on debt issuances.

Overall GAAP interest expense for the second quarter of 2016 was $10.7 million, this compares with GAAP interest expense in the second quarter of 2015 of $10.4 million.

At June 30, 2016, after giving effect to bond and term loan discounts, we had $636.6 million of net debt, which is total debt less our cash balance and we have withdrawn $13.8 million on our revolving credit facility, which has a capacity of $117.5 million.

During the quarter, we repaid $9.3 million of notes and leases payable and term loan debt and had cash capital expenditures net of asset dispositions of $17.7 million.

Since December 31, 2015, accounts receivable increased approximately $2.2 million and our net days sales outstanding or DSOs were 63.15 days, a decrease of approximately 2.8 days since year-end 2015.

At this time, I’d like to reaffirm our 2016 financial guidance levels, which we released in conjunction with our fourth quarter and year-end 2015 results. For total net revenue, our guidance range is between $870 million and $910 million. Our adjusted EBITDA range is between $130 million and $140 million.

Our capital expenditure range is between $50 million and $55 million. Our cash interest expense range is between $37 million and $40 million and our free cash flow generation range, which we define as our adjusted EBITDA less total capital expenditures, less cash paid for interest, the range is $40 million to $50 million.

We are on track to meet our guidance ranges for the year. All ranges remained unchanged from what we announced earlier in the year with the exception of increasing our targeted capital expenditure range by $5 million.

This increase is to fund a replacement program for our computed radiography or CT x-ray scanners to provide them with digital wireless transmitting capabilities. This will improve quality, lower labor cost and comply with the new CMS ruling which would otherwise lower our x-ray reimbursement from traditional CR systems beginning in 2018.

I'll now take a few minutes to give you an update on 2017 reimbursement and discuss what we know with regards to 2017 anticipated Medicare rates.

With respect to 2017 Medicare reimbursement, we recently received a metrics for proposed rates by CPT code which is typically part of the physician fee schedule proposal as it released about this time every year. We've completed an initial analysis and compared those rates to 2016 rates.

We volume weighted our analysis using expected 2017 procedural volumes. Our initial analysis shows that the Medicare for 2017 are essentially neutral relative to 2016 rates. There're few material changes proposed for 2017 and we estimate no material impact to RadNet's revenue for 2017.

We're obviously very pleased with this as this is only the second year since the advent of the Deficit Reduction Act in 2007 where CMS is proposing to leave rates essentially unchanged. Our industry has been significantly impacted by rate cuts and we have consistently had to improve our business, in some cases dramatically, just to stay in place.

Of course the proposed rates for the physician fee schedule are subject to comment from lobbying and industry groups and there's assurance the final rule to be released in November 2016 timeframe will reflect these same proposed rates. Whether or not the final rule in the November timeframe is consistent with the proposed rates, as Dr.

Berger discussed earlier in his comments we'll continue to focus on lowering our cost structure through using our scale and ability to drive efficiencies in our organization.

We'll continue to seek pricing increases in regions where we're essential healthcare delivery system, recognizing that our prices remain significantly discounted as compared to hospital settings.

We'll also continue to pursue partnership opportunities with local hospitals and health systems where we think these arrangements could result in increased volumes and long-term stable pricing from private payors.

Lastly, we'll continue to acquire strategic targets opportunistically at three to four times EBITDA in our core geographies that further our strength in local markets and achieve efficiencies with our existing operations. I'd now like to turn the call back to Dr. Berger who'll make some closing remarks..

Thank you, Mark. Healthcare remains an exciting and dynamic place to be. Our landscape is rapidly changing and is being reshaped by the effects of the Affordable Care Act and from the consolidation it has ensued.

The healthcare industry is transforming from a cottage, mom-and-pop industry to one where scale and vertical integration is becoming requisite for long-term survival and success. Today more than ever the lines have been blurred between payors and providers. Insurance companies continue to purchase providers and medical groups.

Hospitals are aligning with physician practices and ambulatory and outpatient service providers such as surgery centers, physical therapy centers, long-term care facilities and imaging to name a few. Risk-based contracting is becoming more prevalent with physicians hospitals and other providers assuming financial risks for patient care.

Diagnostic Imaging will continue to play an essential role in healthcare. Its effectiveness and widespread acceptance have and will continue to be the reasons why major providers and payors will need access to and desire to partner with, high quality imaging operators.

Imaging along with other diagnostic tests such as those performed by clinical laboratories, are used to front-end of those every injury or disease process in healthcare today.

Imaging interfaces with all disciplines of medicine from general internal medicine, practices to specialty practice such as orthopedics, pediatrics, OB/GYN, cardiology, neurology, nephrology and then list goes on. These trends give me optimism and strong conventions about the future opportunities for RadNet.

The trends are working with us and we intend to capitalize on all opportunities in the changing healthcare landscape. We believe can create significant value for all of our stakeholders. Operator, we are now ready for the question-and-answer portion of the call..

Thank you. [Operator Instructions] We’ll go first to Brian Tanquilut of Jefferies..

Howard just as we think about Capitation.

How should we size the Capitation opportunity in the East Coast and how would that impact your 2016 results?.

I think they’re unlikely to impact the 2017 results, by the way good morning Brian. As we are in the process of evaluating these opportunities and probably a weigh off we can announce anything more definitive.

We would expect that they might influence our 2017 results, which would be reflected in the earnings call and guidance that we would give at the end of the first quarter.

That being said, what is interesting about this is that the opportunities I think on the East Coast come with perhaps greater opportunity for revenue and driving volume into our centers.

More so than the West Coast on a contract-by-contract basis, because we’re dealing with larger payors and medical groups than we traditionally see on the West Coast here, which tends to be the smaller medical groups for the most part. So well I can’t give you any definitive information surrounding those discussions as yet.

The additional component that we’re excited about is that, we also expect the reimbursement for Capitation given probably higher utilization on the East Coast and the West Coast to disproportionally benefit us from a revenue opportunity standpoint..

Howard as you think about that, I mean Barnabas you’ve been with them for a little bit now. What have you learned from that that you can extrapolate to future partnerships? In terms of the differences in operating the business and also how you mind the opportunity as you partner with a large health system like that.

I mean what have you -- I mean what can we think above as the opportunity set or the pitch for future partnerships going forward?.

Well, I think what we've learned is something that we intuitively knew, but have been able now to put into practice and that is that hospitals really are not sophisticated or that deep in their understanding of how to operate the imaging assets.

What we've seen particularly in the Barnabas circumstances that taking over I think at this point three of their on-campus outpatient imaging centers and turning them from money losing operations to significantly contributing profitability has demonstrated to the Barnabas management that their knowledge of imaging is somewhat of a deficit.

And I don't believe that this is unique to the imaging because in the case of Barnabas I think they're recognizing that other ambulatory services such as surgery centers and layup, they're continuing to look at outsourcing of those to people who have those management and expertise.

What I believe this will present to us in which we're in the very early discussions out, is turning as I mentioned in my remarks to looking at the inpatient delivery side of this.

The joint venture that we have gives us an opportunity to bring perhaps the focus of inpatient operations through the joint venture and thereby benefitting both parties from any efficiencies that we can potentially bring to their operations, as well as potentially looking at these assets as another site for us to deliver outpatient imaging and essentially increasing our access in that marketplace.

So, I think the Barnabas example will put us in a very good position for them to be a reference for us to other hospital systems that we're currently in the early stages of discussions as well as now that they themselves are growing rapidly as you may know Brian, they've merged with the Robert Wood Johnson system and so there's 14 hospitals currently in the Barnabas system and I dare to say that's probably going to grow.

So, I think Barnabas will continue more-and-more to look at us as a solution for all of their imaging opportunities which will begin to I think focus not only on the outpatient marketplace, but also perhaps with some unique opportunities on the inpatient side..

And then Mark, bad debt was up quarter-to-quarter, anything to cause there? And then second question for you, given the expectation for flat Medicare rates next year, is it safe to assume that we should be expecting some margin expansion next year?.

We certainly hope for the margin expansion. Obviously, having flat rates with -- for CMS, which is about 20% of our business, allows us an opportunity to where we're starting up neutral.

Next year as opposed to starting up on a whole and we're working on some payor increases on the East Coast in the New York Metropolitan area where we've in the last 12 to 18 months built significant scale.

So we think that there is a possibility for some net-net reimbursement increase next year and then also we have a payor, we have capitation increases that will kick in as well next year as contracts reach their annual renewal.

So we are hopeful that with some reimbursement increases on a net basis as well as the contingent cost savings initiatives that we have here with respect to online scheduling and working with some of our vendors, again using our scale to procure disposables and contrast materials at lower price.

We think that there really is some opportunity next year for some margin expansion. Also we’re still integrating the Diagnostic Imaging Group acquisition with our other New York assets that we purchased in the last couple of few years and think that there is some upside opportunity there.

So we are hopeful that we can see some modest margin expansion next year..

And Mark from bad debt?.

Yes. Bad debt, I wouldn’t draw any conclusions from the second quarter here, there was a little bit of write-down associated with some AR associated with the Diagnostic Imaging Group acquisition and has to do with a payor, which was also tied in into the return of purchase consideration associated with that acquisition.

And that has just from a statistical standpoint created a little blip in the way we calculate bad debt, but I expect that to normalize over the coming quarters..

Thank you. We’ll take our next question from Per Ostlund of Craig-Hallum Capital Group..

Actually I want to follow-up on the most recent comments there on the New York properties with DIG and the New York Radiology Partners acquisitions.

Just curious, if we can kind of characterize, I guess the performance of those facilities since acquisition, I think those have kind of been in the system anywhere from what two to four, five quarters now. How are they performing from a top-line standpoint and maybe where are they at in the integration process.

Are they approaching RadNet kind of company margins yet or do we still have aways to go. And then I guess related to that is, were any of the adjustments announced today were any of those gating factors that may be kept, that maybe healthy integration back at all? Thanks..

I’ll take that Per. Well, I think on the first point here as far as the integration is concerned.

It’s proceeding reasonably well and as we anticipated the number of centers that we rule in the New York marketplace over the period now of about 15 months, was a very substantial undertaking and one that took us awhile to rationalize the assets as well as make certain that we integrated them in a very prudent manner and avoided any disruption to the operation.

We have the opportunity and have worked on consolidating some centers that we felt were not necessarily important in terms of the access in that marketplace and with that those closures, there are some costs that we absorbed relative to personnel and equipment and spaces that, do effect the performance but much of this was anticipated when we acquired these assets.

In a realistic sense it takes us nine months to 12 months of runway to really get these assets performing. All of them need to transition over onto our IT systems which are not only the eRAD systems but also our payroll systems, HR systems, accounting systems, etcetera.

And given the size and the magnitude of these acquisitions, it was something that we had to approach carefully here to make certain we didn't do anything untoward to the operation.

So, given the scale and the opportunities that were presented to us in that New York marketplace, I don't think we've really seen anything that we didn't expect and we are being a little bit judicious in the integrating of those assets here. I believe that they will all not only perform but exceed performance expectations.

We've had some very positive conversations with the payors in the New York marketplace about setting new rates and I think we'll substantially impact the Company more in 2017 than they are going to here in the second half of the year.

But the strategy and the rationale for acquiring these assets have never been more apparent and opportunistic to us then they are at the present time. I think New York is a unique marketplace, not only from a financial standpoint or the financial world but from a business standpoint.

And with opportunities that we have not only in the imaging but in the oncology space particularly with BreastLink in breast disease management which is resonating very well with the payors and other providers in that marketplace.

I think will allow us to have some exciting news that we'll be unfolding here perhaps later this year and beginning of next year.

As a result of the integration, I think both see opportunity to further enhance the performance of the operation and it will come not only with improvements I think in margin, but also in revenue both in terms of new contracts as I talked about before with Capitation opportunities as well as improving revenue.

It's very clear to us that the conversations that we're having today would have only been possible or are only possible because of the size and position that we've grown very rapidly in that marketplace. We've gone from virtually no centers in the five boroughs of New York to about 55 centers in that marketplace now in about 3.5 years.

And I think the -- even greater disparity between hospital reimbursement versus freestanding outpatient facilities is no more evident than it is in that marketplace. So we have the attention of, I think a number of players in that marketplace and more excited about the opportunity probably than when we initially embarked on this 3.5 years ago..

Dr. Berger you also referenced some of the cost and revenue opportunities in your prepared remarks. I think coming out of the first quarter, you’d sort of articulated a $7 million to $10 million target for those opportunities for this year.

Does that sort of range kind of still hold, and it sounds based on your commentary like it probably does, but just thought I would revisit that?.

Yes. It does. Remember that was a combination of both East Coast and West Coast opportunities. And the West Coast opportunities have now been pretty much fully realized as of the second quarter. So that the remainder of this year and obviously for the 12 months after July 1st.

A substantial portion at least half of that will come from the West Coast initiatives. And the additional portion of that 7 million to 10 million will come from East Coast opportunities that are impressively implemented here in the third and fourth quarters.

So that initiative is well underway and one that we’re very comfortable will come to full fruition for us..

On that point, I think one of the revenue opportunities and I think this was largely geared to the East Coast was the breast tomography side of things. And I’m just kind of wondering looking to get maybe a little bit of an update there, I think coming out of the last quarter, you’ve maybe placed 50-55 systems, but most of those on the East Coast.

Curious to get sort of an update there, I think there is the reimbursement benefit that’s clear and I’m sure there is ample demand for the service. Curious to your thoughts as how you go to market there, because you’ve got with the clustered centers, you probably don’t have to put it everywhere.

But just looking to get your thoughts on that?.

Thank you for the opportunity to expand on that. That has been a tremendous success and adoption of it by the marketplace. And in particular of the approximately 55 systems that we have in place right now, 47 of them are on the East Coast.

We have scheduled another perhaps 10 or so systems that we hope to get in place before the end of the year and principally perhaps by the October timeframe given breast cancer awareness month is October.

And what we are surprised and delighted with is how rapid the adoption of that has unfolded, particularly and interestingly in the Maryland marketplace where the majority of the 47 systems on the East Coast have been allocated. In some of our centers, we have converted up to 60% of our patients to the 3D tomography capability.

Both as a result of marketing to our physician referrers that we now have this capability as well as more direct marketing to the women whose annual or biannual visits are coming up. Maryland uniquely in our centers in the states that we operate in has adopted more reimbursement for 3D mammography than in the other states.

We expect other states, particularly on the East Coast to follow shortly with that, but if we do the 3D mammogram, we either get the reimbursement from the payor or we get a surcharge from the patient that elect to have it.

With 60% of our women electing it, we're actually outstripping some of the capacity that we have in some of our centers and therefore may need to add additional systems in centers where we have multiple mammography systems. So, that has been a huge success for us.

I think the success is also for our female patients that are benefitting from what I believe is a superior technology and I think the benefits of that will continue to inert to the company here in the latter part of this year and going into next year.

We're as I've stated before very committed to women’s health particularly with breast disease and our next big effort to really roll that out on a larger scale will be in the New York marketplace that could come in combination with the BreastLink initiative that we're very excited about..

Thank you. We'll take our next question from Juan Molta of B. Riley. Mr. Molta, please go ahead your line is open..

Could you provide -- you already mentioned you bought back a little bit of debt and paid off some capital lease obligations.

And would you mind providing any update as to what plans are for deleveraging? I know it comes up often but maybe you could touch on that a little please?.

Sure, so during the quarter we paid off about $90.8 million of our debt which is the combination of the amortization that we're reaping each quarter on our senior term loan which will total a little bit over $6 million a quarter.

And then additional amortization on our capital leases which adds another, a couple of million dollars a quarter given today's -- where we're in the amortization schedules of those pieces of debt. So, we'll continue to do that each quarter and then in addition as we've discussed throughout the year we've not been extremely acquisitive this year.

We will look at opportunistic situations to buy small mom-and-pop's and at the three to four times EBITDA range in our existing core markets, but we don't have any real significant acquisitions in the pipeline and so we see more of our free cash flow accumulating and we expect to have a cash balance at the end of the year which at that point we can chose to electively repay some of our first lien with no prepayment penalties.

So, I would suspect this year for the remaining part of the year that in the second and third quarters, we’ll pay down in the neighborhood of $18 million to $20 million of debt..

Okay. Thank you for that. And next question is more high level, but since you’ve mentioned that here in the prepared remarks regarding the Capitation model and this model going into the post-Affordable Care Act era.

And could you provide what your position is on that, you’ve obviously at least partially benefited with the volumes from government funded exchanges and it seems like some payors don’t want to continue with that program.

So if you could simply provide an overall what your position is there that would be great?.

Sure.

And we’ve seen a major expansion in the last 12 to 18 months some of the state run managed Medicaid programs in California, it’s called Medical, and companies like Molina and Centene and others who have these types of products are taking risk for patient care and therefore are more interested in contracting with providers, who can essentially subcapitate or where they can syndicate some of that risks to the providers.

So we have benefited and that’s what you saw a lot happened in 2015 where our Capitation book of business increased over 25% versus 2014. We’ve also seen an expansion and growth in the enrollment in existing capitated arrangements.

So that more and more of the patients particularly ones that are now able to avail themselves of insurance for the first time are going into these managed products, HMO products where they’ve exchanged a smaller provider network or limited choice for better rates.

And so we’ve seen expansion in the numbers that the medical groups have within re-contract and therefore as they bring us more lives, that brings more capitated dollars to us, they fall under the existing capitated arrangement.

So in the 20 plus million Americans that have now availed themselves of healthcare for the first time over the last couple of years, we’ve seen benefit both on the fee-for-service side particularly here in California, which has been -- where we’ve seen the highest enrollment and highest the percentage growth in that 12 million patient number, but also within the managed programs in our capitation contracts.

So we feel pretty good about continued growth in our capitated enrollments. We’re always talking to new medical groups and espousing the benefits of capitated arrangements versus fee-for-service arrangements.

And so we think, this will continue to be a growth area for us in California and then obviously some of the discussions that we have had this year on the East Coast and bringing that contracting mechanism to the East Coast will have huge benefits for our East Coast operations..

And we have talked about previously, I think Mark said your exposure to Humana​ or to -- and I don’t remember which one was not the high and we’ve seen that some of the commercial payors don't want to continue their exchange program.

Do you have any comments on that on a go-forward?.

Sure. Our exposure to anyone payor is very-very limited. Our largest payors in virtually all the markets that we operate in aside from Medicare, or the Blue's Blue Shield, Blue Cross administrators, many of them are unrelated in the markets in which we operate.

So, Blue Shield is a non-for-profit here in California, Blue Cross is owned by WellPoint, in Maryland its CareFirst.

So, we really have very little national exposure to any one payor and the fact that some of these larger payors like Humana which has a higher concentration frankly in the Southeast and in Florida where we're not a player, but the fact that some of these guys are pulling out of the exchange programs really doesn't affect us at all.

And in fact what will happen is many of these patients will just find alternative care or they'll have fewer choices of health plans to enroll in but we end up seeing those lives whether they're at united in any of the Blue's programs, I mean these patients have to go somewhere and in all of the markets in which we operate we contract with all the major payors.

So, we have not been concerned with any of the headlines we've seen about some of these larger payors pulling out of these exchanges..

Thank you. We'll go next to Mitra Ramgopal of Sidoti..

Just two questions to follow-up on some of the earlier ones, firstly on the quarter when we look at the increase in operation costs and you talked about potential margin expansion.

I was just wondering if there was anything in the quarter here that you probably should not be expecting going forward?.

Yes. The increased operating cost when you're looking at our comparison versus last year's same period really results from the Doshi acquisition. We completed that acquisition in October 01st. So, we've the additional revenue and EBITDA that came from that acquisition, also comes to those costs. We can't really look at it from an aggregate perspective.

Next quarter will be a little bit easier to make that comparison because of the fact that the Doshi acquisition is completed on October 01st which would be -- actually I'm sorry not next quarter but the fourth quarter, the Doshi acquisition will be essentially annualized in our numbers for comparison purposes.

But from the cost savings perspective we're seeing significant benefits from some of the negotiations we're having with respect to supplies particularly around disposables and contrast materials and that is showing up in our numbers and will continue to show up for the rest of the year.

I think Per asked about our $7 million to $10 million estimate of cost savings which we articulated in the first quarter and we're still very confident that we'll get that $7 million to $10 million of cost savings and revenue enhancements for the year.

So, I think one, to your point or to your question, it's going to be hard to actually see that in our comparison numbers really until the fourth quarter..

And then I had a question with coming back in terms of looking at the expansion opportunities. I know you’ve mentioned you’re not going to be looking at acquisitions really later this year. But as we look at 2017 and beyond and as you sort of look in terms of the growth initiatives.

Is the focus going to be more in terms of the joint ventures and partnering with the capitated groups etcetera or do you still feel the need in terms of doing more DIG transactions?.

Well, I think we have to evaluate these on a case-by-case basis. So the opportunity should it come about to enhance our presence in any market that gives us the improved marketing and operating metrics will be seriously considered.

That being said, I believe the opportunities for the company will be very much along the lines of joint ventures and inpatient radiology opportunities and capitation along with our BreastLink initiatives.

But given the opportunities, I think that are presented to us, we would look at any opportunities to expand or enhance our presence in an existing marketplace very seriously. But as Mark stated and I just want to confirm that.

We’re not looking at any significant acquisition opportunities for the remainder of this year as we really are focused on integrating all of the systems and the acquisitions that we did back in 2015 to make certain that the Company is capable of managing to a new level here with all systems intact..

And just a follow-up on that, as you look to partner with the capitated groups and on the health systems et cetera.

How much capacity you think you have on hand that you feel comfortable handling without having to grow it and maybe add more centers?.

Well, I think the opportunities that we’re talking about wouldn’t necessarily require more centers if they would or if it does, it would be very minimal.

I think the opportunities with the health systems or hospitals are really pretty much with the assets that they currently have right now and that’s being able to help manage them and drive opportunities within their existing framework..

Thank you. We’ll go next to Alan Weber of Robotti Advisors..

Just when you talk about the New York market, Dr. Berger you were speaking about kind of the integration is kind of on its way and not fully implemented I guess.

Can you talk about, if you look at two or three years be kind of a flat environment? What does that incrementally mean to EBITDA or revenue or financially? What does that really mean, how much more is there, is the benefit from the New York integration?.

Well, I think it is a complicated answer, because Alan, I think it will involves revenue enhancement opportunities it involves improving margins, as well as new types of services that we might offer in a marketplace.

For example, we would never have considered bringing BreastLink into the New York marketplace, if we didn’t have a very substantial platforms of existing not only imaging centers, but the amount of mammography and the imaging that we do related to breast disease is very substantial.

So, all of these have to be looked at together and as we implement our eRAD system as we consolidate, as we negotiate better rates with payors. That is a core part of the RadNet strategy regardless of the market that we're in.

I think it happens to be amplified in New York because of the enormous amount volume that we already see and which we could potentially increase. So, I think we have a lot of capacity in that marketplace both in terms of the number of sites and potential for further expansion in a number of different ways.

But as I've said before the ability for us to harvest that really is making certain that we've integrated all of these acquisitions and can focus on growth opportunities rather than just continuing their integration..

Just as a quick follow-on, when you talk about the joint ventures, a lot of it you said the assets kind of in-place at the hospital, New York should improve overtime, is there a sign New York's putting aside any major acquisition, is BreastLink the only significant real investment that you're going to have to make of capital?.

Well, I think we've to make equipment investments….

Right, I mean besides that, right..

Do, you mean invest -- what are the kind of investments are you thinking of there, are you talking about [Multiple Speakers]?.

Well I mean do you have the footprint in terms of the major markets, you've made the big acquisitions, so going forward to grow EBITDA is it going to come from joint ventures, just tuck-in acquisitions which are not as capital intensive, is BreastLink significant in the New York markets, and would that require significant amount of capital?.

Relative to what we spend on equipment, it's a very small investment. You're dealing mainly with a non-capital intensive type of business and one that integrates nicely with existing operations that we have on the imaging side of it.

The BreastLink initiative if you will is primarily a physician driven opportunity rather than putting a lot of the assets in place in order to accommodate that business..

So, I guess when you look out a few years, I mean is capital spending going to be relatively flat or just up a small amount, how do you view that?.

Yes I think it’s going to be relatively flat.

The amount of assets that we have and the continued improvement in technology requires us to continue to invest in our facilities and some of the newer upgrades that we're looking at particularly in the area of MRI that can shorten the amount of time that it takes to do a procedure substantially shorten it as well as make it more convenient and comfortable for patients by noise reduction and other tools that are about to be rolled out, will I think give us additional reason to view our capital investments not just as maintenance but also as growth opportunities and given the fact that we have 250 MRI scanners and almost as many CT scanners, just the turnover on an annual basis and the opportunities that that presents for us, will continue to drive the need for us to invest continually in our centers.

This is a technology business and one that I think will change over a period of time to provide additional opportunities that I think when you look back in hindsight will have proven to be very prudent..

Thank you. That does conclude our question-and-answer session. I’d like to turn the conference back over for any additional or closing remarks..

Thank you, operator. Again, I would like to take the opportunity to thank all of our shareholders for their continued support and the employees of RadNet for their dedication and hard work. The 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. Good day..

Thank you for your participation. That does conclude today’s conference. You may now disconnect..