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 created a multi-pronged plan to impact major expenses and cash flow categories.

Specifically, we focused on reducing salaries and professional fees and lowering our facilities' rental payments. We investigated every local market in which we operate to identify centers we could temporarily close and where we felt, with a high degree of confidence, we could direct patient volume in to facilities that would remain open.

We also evaluated our large categories of cash spend and identified vendors that would work with us to lower our costs or defer payments. Our objective was to act quickly and to institute these programs beginning April.

First, we analyzed all of our 332 locations and identified sites in our clustered approach that could be temporarily closed and whose business could be consolidated into nearby facilities. During the stay at home orders, we close 102 of our locations.

By temporarily closing facilities and redirecting their patient flow to other RadNet sites, we were able to substantially reduce employee costs, utilities, repairs and maintenance and other center level operating costs, all while preserving the revenue we would have otherwise recognized at the closed sites.

Our geographically concentrated approach and central scheduling departments were instrumental in making this happen. Temporarily closing these facilities enabled us to furlough about 3,600 employees of our roughly 8,600 team members.

While furloughed, we continued to fund the benefit plans of these employees, but are able to suspend paying their salaries and corresponding employee taxes. We assisted these employees in seeking unemployment benefits including employment subsidies from federal and state budget programs.

In addition to the furloughs, we cut the salaries of the vast majority of non-center level employees who remain working. These cuts were led by our executive management team who remained at 50% of their normal salaries. Our landlords also greatly contributed to our cash conservation measures.

Most of our landlords agreed to three to six month full or partial deferrals of rent payments and most are providing us six to 12 months to repay these deferrals. In certain cases, we elected to extend the terms of leases in exchange for the deferrals and other rent concession.

As a result, our cash expenditures for rent payments in the second quarter were reduced by almost 70% though through GAAP accounting required us to expense all rents, whether or not they were paid.

Additionally, all of our lessors with whom we have operating leases on equipment, including the OEMs and third-party finance companies agreed to restructure rental agreements to allow us starting with the payment we would have made in April to defer up to six months and add these amounts to the backend buyout of the leased equipment.

We also suspended new capital projects. The vast majority of capital expenditures we made during the first half of the year were for projects of commitments that were put in place prior to the onset of the COVID pandemic. In addition, our variable expenses substantially decreased during the second quarter with the lower procedural volume.

The most significant of these variable outflows are payments that we make to our third-party contracted radiology groups, which generally are a function of revenue.

Other variable expenses that adjusted with the revenue and procedural volumes include medical and pharmacy supplies, utilities, equipment repair and maintenance and certain employee-related expenses such as travel, meals and other employee expense reimbursement items.

All these expenses and cash outflows adjusted more than proportionate to our lower procedural volume levels. I am extremely proud to say that these costs and liquidity saving measures resulted in an $84.6 million cash balance at quarter-end and are being undrawn on our $137.5 million revolving credit facility.

Despite our revenue declining approximately $125 million since the beginning of the COVID-19 pandemic, our aggressive actions allowed us to achieve positive and no cash burn. This is pretty remarkable in a business that has a higher component of fixed cost.

Our cash balance was enhanced by payments we received in April and June from two separate appropriations under the CARES Act and advances we received from Medicare and one private payor. Specifically, we received $25.5 million under the $50 billion appropriation of Coronavirus Aid, Relief and Economic Security Act or CARES Act.

This allocation to RadNet was calculated based on our share of overall Medicare billings relative to all Medicare providers during 2019. We do not anticipate being required to repay this money. In addition to the school money, we received $39.4 million in accelerated Medicare advance payment.

This money is to be repaid to CMS over a 90-day period beginning later this month and shall be repaid through the adjudication of future Medicare services we provide. Furthermore, one California insurance company provided us $5 million advance to be repaid against future collections.

As I mentioned in last quarter's financial results call, our procedural volumes hit a trough during mid-April, whereby our procedural volume declined to about 28% on a blended basis nationwide of the pre-COVID per day volumes. We began to see a steady recovery in early May which has continued to the present day.

The week before last, our procedural volumes returned to about 90% of the pre-COVID per day procedures. While we were impacted by the tropical storm that hit the Mid-Atlantic and Northeast last week, we expect to recover quickly from this.

I also very happy to report that we have brought back approximately 2,500 of the 3,600 employees who were furloughed and we have been able to return a portion of our corporate staff who took salary cuts to their normal base pay. Throughout the COVID period, our capitation business has remained strong.

While our aggregate fee-for-service revenue, excluding capitation, decreased 39.7% from last year's second quarter, our capitation revenue actually increased 12.7% from the second quarter of 2019.

Because we get paid a fixed capitated amount per enrollee managed by the medical groups with whom we contract, our capitation revenue and the associated cash flow have remained strong throughout the COVID period.

Enrollment for these HMO patients and our contracted medical groups has remained intact as patients and their employers, even for those who have been furloughed, have continued to pay healthcare premiums. Before I turn the call over to Mark to discuss financials, I would again like to take this moment to recognize our workforce.

Our center-level employees and their managers continue to come to work each day to service our medical communities with the essential services provided by the RadNet centers and patients in need despite the associated risk which we done everything in our power to mitigate.

I am sincerely grateful that these employees and RadNet as a company can play an important role in an unprecedented time. At this time, I would like to turn the call back over to Mark to discuss some of the highlights of our second quarter 2020 performance. When he is finished, I will make some closing remarks..

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 into account routine imaging exams inclusive of X-ray, ultrasound, mammography and all other exams, decreased 43.7% over the prior year second quarter.

In the second quarter of 2020, we performed 1,137,287 total procedures. The procedures were consistent with our multimodality approach, whereby 73.8% of all the work we did by volume was from routine imaging. Our procedures in the second quarter 2020 were as follows.

Note that the CT volumes for last year have been restated to account for a change we made as of January 1 of this year and how we account for one of our CT CPT codes. The comparative numbers that follow are on an apples-to-apples basis. 171,047 MRIs as compared with 283,717 MRIs in the second quarter 2019.

117,732 CT as compared with 172,076 CTs in the second quarter of 2019. 8,935 PET/CTs as compared with 10,840 PET/CTs in the second quarter 2019. And 839,567 routine imaging exams, compared with 1,554,869 of these exams in the second quarter of 2019. For the second quarter, RadNet reported net loss attributable to RadNet, Inc.

common shareholders of $10.6 million, a decline of approximately $15.5 million from the second quarter of 2019.

Adjusting for the impact of the non-cash change in the fair value of an interest rate hedge during the quarter on a tax effected basis of $2.6 million, adjusted net loss was $8 million in the second quarter, a decline of $12.9 million from the second quarter of 2019.

Per share diluted net loss for the second quarter was negative $0.21 per share compared to diluted net income per share of $0.10 in the second quarter of 2019, based upon a weighted average number of diluted shares outstanding of 50.7 million shares in 2020 and 50.1 million shares in 2019.

Adjusting for the impact of the non-cash change in the fair value of the interest rate hedge, per share diluted adjusted net loss was negative $0.16 in the second quarter compared to per share diluted net income of $0.10 in the second quarter of 2019.

Affecting net loss in the second quarter of 2020 were certain non-cash expenses or gain and nonrecurring items, including the following.

$3.8 million of non-cash expense from the change in the fair value of an interest rate hedge, $1.5 million of non-cash employee stock compensation expense resulting from the vesting of certain options and restricted stock, $859,000 of severance paid in connection with headcount reductions related to cost savings initiatives, $569,000 gain on the sale of certain capital equipment and $1.1 million of non-cash amortization of deferred financing costs and loan discount on debt issuances.

Overall, GAAP interest expense for the second quarter of 2020 was $10.8 million. This compares with GAAP interest expense in the second quarter of 2019 of $12.4 million.

Cash paid for interest during the period, which excludes non-cash deferred financing expenses and accrued interest, was $12.9 million as compared with $13 million in the second quarter of last year.

With regards to our balance sheet as of June 30, 2020, unadjusted for bond and term loan discounts, we had $604.5 million of net debt, which is our total debt at par value less our cash balance. This compares with $706.1 million of net debt at June 30, 2019.

Note that this debt balance includes New Jersey Imaging Network's debt of approximately $56.1 million for which RadNet is neither a borrower nor a guarantor. As of June 30, 2020, we were undrawn $137.5 million revolving line of credit and had a cash balance of $84.6 million.

We expect that this cash balance could grow by year-end, absent any acquisitions or a major setback from a second wave of COVID-19. At June 30, 2020, our accounts receivable balance was $125.7 million, a decrease of $29 million from year-end 2019.

The decrease in accounts receivable is mainly the result of the dramatic decline in our procedural volumes and revenues since March and our cash collections on previously existing accounts receivable. Our days sales outstanding or DSO was 49 days at June 30, 2020, higher by approximately 4.3 days as of the year-end of 2019.

The higher DSO was primarily a function of the lower revenue in the second quarter. As revenue normalizes, we expect DSOs to return to the low to mid 40 level. Through June 30, 2020, we had total capital expenditures, net of asset dispositions of $64.2 million.

This includes $5 million of capital expenditures of New Jersey Imaging Network, our joint venture with RWJ Barnabas. Note that each year, we frontload the majority of our capital decisions into the first half of the year.

Most of what we paid for during the first half of this year was for equipment delivered to the company or construction projects that were in process before the start COVID-19. As Dr. Berger mentioned in his remarks, we have suspended all new capital projects for the remainder of the year.

I will now take a few minutes to give you an update on 2021 reimbursement and discuss what we know with regards to 2021 anticipated Medicare rates.

With respect to Medicare reimbursement last week, we received a matrix for proposed rates by CPT codes, which is typically part of the Physician Fee Schedule proposal that is released about this time every year. We have completed an initial analysis and compared those rates to 2020 rates.

We volume weighted our analysis using expected 2021 procedure volumes. In the Proposal, CMS has moved forward with an increased reimbursement for evaluation and management CPT codes which favor certain physician specialties that regularly bill for these types of services, particularly primary care doctors.

CMS has proposed doing so with budget neutrality, meaning that it is proposing to reallocate reimbursement from physicians who rarely go for the E&M codes to physicians who regularly bill for these codes.

In the proposed rule, CMS is initiated a 10.6% decrease in the conversion factor used to calculate Medicare reimbursement for all specialties in 2021. For radiology, CMS has made a material upward adjustment to the technical RVUs in the reimbursement formula. These RVUs are multiplied by now lower conversion factor to determine our reimbursement.

Our initial analysis of these opposing forces show that RadNet will suffer an approximately $11 million revenue in 2021 for Medicare. While we are not pleased with this outcome, we have plans in place to more than fully mitigate this potential cut.

In order to affect the cost and cash savings measures we instituted during this COVID-19 period, which Dr. Berger discussed in his prepared remarks, we had to reevaluate every aspect of our business. [Indiscernible] for this Medicare cut next year come from this exercise directly and come predominantly from four areas.

First, it will be permanent staffing reductions both from regional operations as well as corporate support functions. Second, we have identified significant reduction in future employee travel and reimbursement expenses. Third, we will be consolidating certain sites and modalities in order to lower regional operating costs.

And finally, we have rate increases that will go into effect in 2021 from private payors and capitated medical groups. We are confident that the aggregate of these cost savings will exceed the proposed CMS rate cut.

Of course, the proposed rates for the Physician Fee Schedule are subject to comment from lobbying and industry groups and there is no assurance that the final rule to be released in the November 2020 timeframe will reflect these same proposed rates.

There are many lobbying groups in the various medical system specialties aggressively opposing the budget neutrality aspect of the E&M code reimbursement changes, including radiology's two main lobbying forces, the Association for Quality Imaging, the AQI and the American College of Radiology, the ACR.

In light of the impact of COVID-19 on all physicians, radiologists included, we remain hopeful that CMS may decide not to move forward with the budget neutrality requirements. In November, during our third quarter financial results call, we hope to have more to update you with on this matter. I would now like to turn the call back to Dr.

Berger who will make some closing remarks..

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 implanted.

Furthermore during the COVID period, much of the outpatient business that has historically been performed within hospitals has shifted to ambulatory providers, such as RadNet. This means that patients and referring physicians will have become accustomed to using outpatient providers, as opposed to the hospital systems.

And we don't believe this business will be recaptured by hospitals once the COVID period ends. This could have a material impact on our volumes in the future and could accelerate the existing trend, mostly because of the differential in cost of hospitals losing outpatient business to ambulatory freestanding providers.

The acceleration of this trend could also drive more hospitals towards joint ventures and partnerships which now represent over 25% of all RadNet facilities. Additionally, during the COVID-19 period, telehealth and telemedicine has flourished. I think this is here to stay.

Because telemedicine does not allow for traditional physical exams, I believe physicians will order more diagnostic tests and rely on their results for diagnosing and treating their patients at a distance.

In particular, I believe this will drive increased utilization of routine imaging, specifically ultrasound and X-ray as tools that will be utilized earlier in the patient diagnosis staging. Furthermore, I believe our artificial intelligence will have an even more important role in healthcare post-COVID.

There will likely more of an emphasis on screening tools and wellness and diagnostic imaging will play an important role in these initiatives. As many of you have seen, last week, we announced a multifaceted collaboration agreement with Hologic focused on improving women's health.

Specifically, Hologic will contribute capabilities and insights behind its market-leading hardware and software and RadNet will share data with Hologic produced by RadNet's fleet of high-resolution mammography systems, the largest in the nation. The data will be used to train and refine current and future products based on artificial intelligence.

RadNet will also provide in-depth knowledge of patient workflow needs to help make a positive impact across the breast care continuum. Both companies will work together to enable new joint market opportunities and further efforts to build clinician confidence and develop and integrate new AI technologies.

The collaboration will also result in the upgrade of RadNet's fleet of Hologic mammography machines to Hologic's leading-edge 3DQuorum and Genius 3D imaging technology. We see this partnership between our two companies as potentially transformative for both organizations and for the future of breast health.

We look forward to keeping you informed as the collaboration progresses. So even in this challenging time, we continue to be very optimistic about the future of RadNet. And we expect to emerge from COVID as the best positioned company in our industry.

Operator, we are now ready for the question-and-answer portion of the call?.

[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 above 90%. We think we will get back to that 100% level, but probably not until maybe the second quarter of next year.

In regards to the expenses, as Mark mentioned in his remarks, about two-thirds of the employees that we furloughed have now been brought back. Many that were furloughed have either chosen not to turn or through some of our consolidation will probably be permanently terminated.

And I think that is something that we are going to continue to benefit from along with the closing, permanent shuttering and closing of centers that will help reduce the overall costs of running any center, which include not only the staffing but equipment, rent and utilities and other expenses that go along with that.

So I think our operating results for the third and fourth quarter of this year assume that we don't have any more serious delays or surges whether you call it a surge of the first wave or spike, just a spike of the first wave or a surge from the second wave, we can get a little bit [indiscernible] stimulus designation but as long as we don't suffer any major setbacks in our markets then I believe we are very comfortable with not only where we are going to be from a operating standpoint, but other important things like our cash liquidity and our covenant for our leverage ratios.

So in short, I think while I believe the senior management will continue through the remainder of this year at the 50% reduction that has been taken, we are anxious to get the rest of the company's employees back who aren't already back at their full base pay back to that as the procedural volumes and performance allows..

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..