Quarterly Report (10-q)

Date : 05/08/2019 @ 8:47PM
Source : Edgar (US Regulatory)
Stock : Digirad Corporation (DRAD)
Quote : 3.57  0.0 (0.00%) @ 8:59AM

Quarterly Report (10-q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549  
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM              TO             
Commission file number: 001-35947
DRADLOGO.JPG
Digirad Corporation
(Exact name of registrant as specified in its charter)
Delaware
 
33-0145723
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
1048 Industrial Court, Suwanee, GA
 
30024
(Address of Principal Executive Offices)
 
(Zip Code)
(858) 726-1600
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.0001 per share
DRAD
NASDAQ Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes   x     No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
o
 
 
 
 
Non-accelerated filer
x
Smaller reporting company
x
 
 
 
 
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o  Yes No  x
As of April 29, 2019 the registrant had 20,309,908 shares of Common Stock ($0.0001 par value) outstanding.




DIGIRAD CORPORATION
TABLE OF CONTENTS
 


2



Important Information Regarding Forward-Looking Statements
Portions of this Quarterly Report on Form 10-Q (including information incorporated by reference) include “forward-looking statements” based on our current beliefs, expectations, and projections regarding our business strategies, market potential, future financial performance, industry, and other matters. This includes, in particular, “Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q, as well as other portions of this Quarterly Report on Form 10-Q. The words “believe,” “expect,” “anticipate,” “project,” “could,” “would,” and similar expressions, among others, generally identify “forward-looking statements,” which speak only as of the date the statements were made. The matters discussed in these forward-looking statements are subject to risks, uncertainties, and other factors that could cause our actual results to differ materially from those projected, anticipated, or implied in the forward-looking statements. The most significant of these risks, uncertainties, and other factors are described in “Item 1A — Risk Factors” of this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the U.S. Securities and Exchange Commission on March 1, 2019. Except to the limited extent required by applicable law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

3



PART I. FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
DIGIRAD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands, except for per share amounts)
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Revenues:
 
 
 
 
Services
 
$
21,389

 
$
22,623

Product and product-related
 
2,523

 
2,842

Total revenues
 
23,912

 
25,465

 
 
 
 
 
Cost of revenues:
 
 
 
 
Services
 
18,194

 
19,261

Product and product-related
 
1,737

 
1,597

Total cost of revenues
 
19,931

 
20,858

 
 
 
 
 
Gross profit
 
3,981

 
4,607

 
 
 
 
 
Operating expenses:
 
 
 
 
Marketing and sales
 
1,143

 
1,467

General and administrative
 
3,690

 
4,392

Amortization of intangible assets
 
283

 
357

Total operating expenses
 
5,116

 
6,216

 
 
 
 
 
Loss from operations
 
(1,135
)
 
(1,609
)
 
 
 
 
 
Other expense:
 
 
 
 
Other expense, net
 
(198
)
 
(17
)
Interest expense, net
 
(181
)
 
(217
)
Loss on extinguishment of debt
 
(151
)
 

Total other expense
 
(530
)
 
(234
)
 
 
 
 
 
Loss before income taxes
 
(1,665
)
 
(1,843
)
Income tax benefit
 
8

 
455

Net loss from continuing operations
 
(1,657
)
 
(1,388
)
Net income from discontinued operations
 

 
5,494

Net (loss) income
 
$
(1,657
)
 
$
4,106

 
 
 
 
 
Net (loss) income per share—basic and diluted
 
 
 
 
Continuing operations
 
$
(0.08
)
 
$
(0.07
)
Discontinued operations
 

 
0.27

Net (loss) income per share—basic and diluted
 
$
(0.08
)
 
$
0.20

 
 
 
 
 
Dividends declared per common share
 
$

 
$
0.055

 
 
 
 
 
Net (loss) income
 
$
(1,657
)
 
$
4,106

Other comprehensive (loss) income:
 
 
 
 
Reclassification of tax provision impact
 
22

 

Reclassification of unrealized gains on equity securities to retained earnings
 

 
(17
)
Total other comprehensive income (loss)
 
22

 
(17
)
Comprehensive (loss) income
 
$
(1,635
)
 
$
4,089

See accompanying notes to the unaudited condensed consolidated financial statements.

4



DIGIRAD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
 
 
March 31,
2019
 
December 31,
2018
Assets
 

 

Current assets:
 
 
 
 
Cash and cash equivalents
 
$
797

 
$
1,545

Equity securities
 
17

 
153

Accounts receivable, net
 
13,361

 
12,642

Inventories, net
 
5,483

 
5,402

Restricted cash
 
168

 
167

Other current assets
 
1,522

 
1,285

Total current assets
 
21,348

 
21,194

Property and equipment, net
 
20,575

 
21,645

Operating lease right-of-use assets, net
 
3,681

 

Intangible assets, net
 
4,944

 
5,228

Goodwill
 
1,745

 
1,745

Restricted cash
 
101

 
101

Deferred tax assets
 
16

 

Other assets
 
2,183

 
681

Total assets
 
$
54,593

 
$
50,594

 
 
 
 
 
Liabilities and stockholders’ equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
4,808

 
$
5,206

Accrued compensation
 
3,246

 
3,862

Accrued warranty
 
230

 
197

Deferred revenue
 
1,414

 
1,687

Operating lease liabilities
 
1,251

 

Other current liabilities
 
2,474

 
2,265

Total current liabilities
 
13,423

 
13,217

Long-term debt
 
12,517

 
9,500

Deferred tax liabilities
 
121

 
121

Operating lease liabilities, net of current portion
 
2,564

 

Other liabilities
 
1,715

 
1,956

Total liabilities
 
30,340

 
24,794

 
 
 
 
 
Commitments and contingencies (Note 9)
 

 

 
 
 
 
 
Stockholders’ equity:
 
 
 
 
Preferred stock, $0.0001 par value: 10,000,000 shares authorized; no shares issued or outstanding
 

 

Common stock, $0.0001 par value: 80,000,000 shares authorized; 20,309,908 and 20,249,786 shares issued and outstanding (net of treasury shares) at March 31, 2019 and December 31, 2018, respectively
 
2

 
2

Treasury stock, at cost; 2,588,484 shares at March 31, 2019 and December 31, 2018
 
(5,728
)
 
(5,728
)
Additional paid-in capital
 
145,516

 
145,428

Accumulated other comprehensive loss
 

 
(22
)
Accumulated deficit
 
(115,537
)
 
(113,880
)
Total stockholders’ equity
 
24,253

 
25,800

Total liabilities and stockholders’ equity
 
$
54,593

 
$
50,594

See accompanying notes to the unaudited condensed consolidated financial statements.

5



DIGIRAD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Operating activities
 
 
 
 
Net (loss) income
 
$
(1,657
)
 
$
4,106

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation
 
1,526

 
1,910

Amortization of intangible assets
 
283

 
370

Amortization of operating lease right-of-use assets
 
276

 

Provision for bad debt
 
75

 
13

Gain on disposal of discontinued operations
 

 
(6,261
)
Stock-based compensation
 
112

 
200

Amortization of loan issuance costs
 
8

 
54

Debt issuance costs write-off
 
151

 

(Gain) loss on sale of assets
 
(42
)
 
5

Deferred income taxes
 
(16
)
 
107

Other, net
 
(28
)
 
17

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(794
)
 
3,119

Inventories
 
8

 
(177
)
Other assets
 
(454
)
 
185

Accounts payable
 
(664
)
 
21

Accrued compensation
 
(616
)
 
(2,299
)
Deferred revenue
 
(273
)
 
(568
)
Operating lease liabilities
 
(287
)
 

Other liabilities
 
207

 
(382
)
Net cash (used in) provided by operating activities
 
(2,185
)
 
420

 
 
 
 
 
Investing activities
 
 
 
 
Purchases of property and equipment
 
(387
)
 
(201
)
Proceeds from sale of property and equipment
 
257

 
40

Purchases of equity securities
 

 
(14
)
Proceeds from sales of equity securities
 
140

 

Proceeds from sale of discontinued operations
 

 
6,844

Payments to acquire interest in joint ventures
 
(1,000
)
 

Net cash (used in) provided by investing activities
 
(990
)
 
6,669

 
 
 
 
 
Financing activities
 
 
 
 
Proceeds from long-term borrowings
 
23,517

 
7,758

Repayment of long-term debt
 
(20,500
)
 
(14,257
)
Loan issuance costs
 
(381
)
 
(4
)
Dividends paid
 

 
(1,105
)
Taxes paid related to net share settlement of equity awards
 
(24
)
 
(70
)
Repayment of obligations under finance leases
 
(184
)
 
(254
)
Net cash provided by (used in) financing activities
 
2,428

 
(7,932
)
Net decrease in cash and cash equivalents and restricted cash
 
(747
)
 
(843
)
Cash, cash equivalents, and restricted cash at beginning of period
 
1,813

 
2,220

Cash, cash equivalents, and restricted cash at end of period
 
$
1,066

 
$
1,377

See accompanying notes to the unaudited condensed consolidated financial statements.

6



DIGIRAD CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
 
 
Common stock
 
Treasury Stock
 
Additional
paid-in
capital
 
Accumulated
other
comprehensive
income (loss)
 
Accumulated
deficit
 
Total
stockholders’
equity
 
 
Shares
 
Amount
 
 
Balance at December 31, 2018
 
20,250

 
$
2

 
$
(5,728
)
 
$
145,428

 
$
(22
)
 
$
(113,880
)
 
$
25,800

Stock-based compensation
 

 

 

 
112

 

 

 
112

Shares issued under stock incentive plans, net of shares withheld for employee taxes
 
60

 

 

 
(24
)
 

 

 
(24
)
Net loss
 

 

 

 

 

 
(1,657
)
 
(1,657
)
Reclassification of tax provision impact
 

 

 

 

 
22

 

 
22

Balance at March 31, 2019
 
20,310

 
$
2

 
$
(5,728
)
 
$
145,516

 
$

 
$
(115,537
)
 
$
24,253


 
 
Common stock
 
Treasury Stock
 
Additional
paid-in
capital
 
Accumulated
other
comprehensive
income (loss)
 
Accumulated
deficit
 
Total
stockholders’
equity
 
 
Shares
 
Amount
 
 
Balance at December 31, 2017
 
20,060

 
$
2

 
$
(5,728
)
 
$
148,163

 
$
(5
)
 
$
(114,633
)
 
$
27,799

Stock-based compensation
 

 

 

 
200

 

 

 
200

Shares issued under stock incentive plans, net of shares withheld for employee taxes
 
59

 

 

 
(69
)
 

 

 
(69
)
Dividends paid
 

 

 

 
(1,105
)
 

 

 
(1,105
)
Net income
 

 

 

 

 

 
4,106

 
4,106

Unrealized loss on securities available-for-sale
 

 

 

 

 
(17
)
 
17

 

Balance at March 31, 2018
 
20,119

 
$
2

 
$
(5,728
)
 
$
147,189

 
$
(22
)
 
$
(110,510
)
 
$
30,931

See accompanying notes to consolidated financial statements.

7



DIGIRAD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
Basis of Presentation
The unaudited condensed consolidated financial statements included in this Form 10-Q have been prepared in accordance with the U.S. Securities and Exchange Commission (“SEC”) instructions for Quarterly Reports on Form 10-Q. Accordingly, the condensed consolidated financial statements are unaudited and do not contain all the information required by U.S. generally accepted accounting principles (“GAAP”) to be included in a full set of financial statements. The unaudited condensed consolidated balance sheet at December 31, 2018 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for a complete set of financial statements. The audited consolidated financial statements for our fiscal year ended December 31, 2018 , filed with the SEC on Form 10-K on March 1, 2019 , include a summary of our significant accounting policies and should be read in conjunction with this Form 10-Q. In the opinion of management, all material adjustments necessary to present fairly the results of operations, cash flows, and balance sheets for such periods have been included in this Form 10-Q. All such adjustments are of a normal recurring nature. The results of operations for interim periods are not necessarily indicative of the results of operations for the entire year.
Discontinued Operations
On February 1, 2018, the Company completed the sale of its customer contracts relating to the Medical Device Sales and Service (“MDSS”) post-warranty service business to Philips North America LLC (“Philips”) pursuant to an Asset Purchase Agreement, dated as of December 22, 2017 for  $8.0 million . For all periods presented in our condensed consolidated statements of operations, all sales, costs, expenses, and income taxes attributable to MDSS, except as related to the impact of the decrease in the federal statutory tax rate (see Note 10  Income Taxes ), have been aggregated under the caption “earnings from discontinued operations, net of income taxes.” Cash flows used in or provided by MDSS operations as part of discontinued operations are disclosed in Note 2  Discontinued Operations . Unless otherwise noted, amounts and disclosures throughout these notes to condensed consolidated financial statements relate to our continuing operations.
Sale of Telerhythmics, LLC
On October 31, 2018, the Company entered into a membership interest purchase agreement (the “Telerhythmics Purchase Agreement”) with G Medical Innovations USA, Inc. (“G Medical”), pursuant to which we sold all the outstanding membership interests in Telerhythmics (“Telerhythmics”) to G Medical. The total consideration related to the Telerhythmics Purchase Agreement was  $1.95 million  in cash, which was paid at the closing on October 31, 2018. In connection with the transaction, the Company agreed to make partial monthly rent payments aggregating  $0.2 million  through January 2021. The Telerhythmics Purchase Agreement includes customary representations, warranties, covenants and indemnification obligations of the parties, including a non-competition covenant by the Company. The gain on the sale of Telerhythmics, LLC was approximately  $19 thousand .
Use of Estimates
Preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ from management’s estimates.
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities, and operating lease liabilities, net of current portion in our condensed consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our condensed consolidated balance sheets.  
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We use the implicit discount rate when readily determinable; however, as most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease valuation may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

8



The Company elected to not separate lease and non-lease components of its operating leases in which it is the lessee and lessor. Additionally, The Company elected not to recognize right-of use assets and leases liabilities that arise from short-term leases of twelve months or less.
Recently Adopted Accounting Standards
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which amended the existing accounting standards for the accounting for leases. Most significant among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under current U.S. GAAP. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted ASC 842 beginning January 1, 2019, using the modified-retrospective method, which will result in a cumulative effect adjustment to accumulated deficit at the beginning of 2019, rather than adjustments to the comparative prior periods presented in the financial statements. In connection with the adoption, the Company has elected to utilize the package of practical expedients, including: (1) not reassess the lease classification for any expired or existing leases, (2) not reassess the treatment of initial direct costs as they related to existing leases, and (3) not reassess whether expired or existing contracts are or contain leases. Upon adoption, the Company recorded right-of-use assets and lease liabilities on its condensed consolidated balance sheet $3.8 million  and   $3.9 million , respectively, primarily related to real estate and vehicle leases. See Note 6 Leases for further detail.
In August 2018, the FASB issued ASU 2018-15,  Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract , which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The Company early adopted ASU 2018-15 beginning January 1, 2019, and applied the guidance prospectively to the implementation costs incurred in the Net-Suite ERP implementation. As of March 31, 2019 , the Company has capitalized $29 thousand of implementation costs.
Note 2. Discontinued Operations
On February 1, 2018 , the Company completed the sale of its customer contracts relating to our MDSS post-warranty service business to Philips pursuant to an Asset Purchase Agreement, dated as of December 22, 2017, for $8.0 million . The total cash proceeds were adjusted for deferred revenue liabilities assigned to Philips at the closing date, as well as $0.5 million of proceeds held in escrow, subject to claims for breaches of general representation and warranties, which was recorded in other current assets at the date of sale. All claims were settled as of December 31, 2018 .
Prior to the contemplation of the transaction entered into above, on September 28, 2017 , we received notification from Philips that our distribution agreement to sell Philips imaging systems on a commission basis would be terminated, effective December 31, 2017 . As a result, our product sales activities within our MDSS reportable segment were also discontinued effective in the first quarter of 2018 .
The Company deemed the disposition of our MDSS reportable segment in the first quarter of 2018 to represent a strategic shift that will have a major effect on our operations and financial results, in accordance with the provisions of FASB authoritative guidance on the presentation of financial statements, we have classified the results of our MDSS segment as discontinued operations in our condensed consolidated statement of operations for all periods presented.
The Company has allocated a portion of interest expense to discontinued operations since the proceeds received from the sale were required to be used to pay down outstanding borrowings under our previous revolving credit facility with Comerica Bank, a Texas banking association (“Comerica Bank”) under that certain Revolving Credit Agreement, dated June 21, 2017, by and between the Company and Comerica Bank (the “Comerica Credit Agreement”). The allocation was based on the ratio of proceeds received in the sale to total borrowings for the period. In addition, certain general and administrative costs related to corporate and shared service functions previously allocated to the MDSS reportable segment are not included in discontinued operations.

9



The following table presents financial results of the MDSS business (in thousands):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Total revenues
 
$

 
$
624

Total cost of revenues
 

 
516

Gross profit
 

 
108

Operating expenses:
 
 
 
 
Marketing and sales
 

 
85

General and administrative
 

 
172

Amortization of intangible assets
 

 
13

Gain on sale of discontinued operations
 

 
(6,261
)
Total operating expenses
 

 
(5,991
)
Income from discontinued operations
 

 
6,099

Interest expense
 

 
(26
)
Income from discontinuing operations before income taxes
 

 
6,073

Income tax expense
 

 
(579
)
Income from discontinuing operations
 
$

 
$
5,494

The following table presents supplemental cash flow information of discontinued operations (in thousands):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Operating activities:
 
 
 
 
Depreciation
 
$

 
$
2

Amortization of intangible assets
 
$

 
$
13

Gain on sale of discontinued operations
 
$

 
$
(6,261
)
Stock-based compensation
 
$

 
$
(1
)
Investing activities:
 
 
 
 
Proceeds from the sale of discontinued operations
 
$

 
$
6,844


10



Note 3. Revenue
Product and Product-Related Revenues and Services Revenue
Product and product-related revenue are generated from the sale of gamma cameras and post-warranty maintenance service contracts within our Diagnostic Imaging reportable segment.
Services revenue are generated from providing diagnostic imaging and cardiac monitoring services to customers within our Diagnostic Services and Mobile Healthcare reportable segments. Services revenue also includes lease income generated from interim rentals of imaging systems to our customers.
Revenue Recognition
Revenue is recognized when a customer obtains control of promised goods or services. The Company records the amount of revenue that reflects the consideration that it expects to receive in exchange for those goods or services. The Company applies the following five-step model in order to determine this amount: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. Taxes collected from customers, which are subsequently remitted to governmental authorities, are excluded from revenue.
The majority of our contracts have a single performance obligation as we provide a series of distinct services that are substantially the same and are transferred with the same pattern to the customer. For contracts with multiple performance obligations, we allocate the total transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. We use an observable price to determine the stand-alone selling price for separate performance obligations or a cost plus margin approach when one is not available.
Our products are generally not sold with a right of return and the Company does not provide significant credits or incentives, which may be required for as variable consideration when estimating the amount of revenue to be recognized.
Disaggregation of Revenue
The following tables present our revenues for the three months ended March 31, 2019 and 2018 , disaggregated by major source (in thousands):
 
 
Three Months Ended March 31, 2019
 
 
Diagnostic Services
 
Diagnostic Imaging
 
Mobile Healthcare
 
Total
Major Goods/Service Lines
 
 
 
 
 
 
 
 
Mobile Imaging and Cardiac Monitoring
 
$
11,585

 
$

 
$
7,494

 
$
19,079

Camera
 

 
804

 

 
804

Camera Support
 

 
1,719

 

 
1,719

Revenue from Contracts with Customers
 
11,585

 
2,523

 
7,494

 
21,602

Lease Income
 
141

 

 
2,169

 
2,310

Total Revenues
 
$
11,726

 
$
2,523

 
$
9,663

 
$
23,912

 
 
 
 
 
 
 
 
 
Timing of Revenue Recognition
 
 
 
 
 
 
 
 
Services and goods transferred over time
 
$
11,726

 
$
1,551

 
$
9,525

 
$
22,802

Services and goods transferred at a point in time
 

 
972

 
138

 
1,110

Total Revenues
 
$
11,726

 
$
2,523

 
$
9,663

 
$
23,912


11



 
 
Three Months Ended March 31, 2018
 
 
Diagnostic Services
 
Diagnostic Imaging
 
Mobile Healthcare
 
Total
Major Goods/Service Lines
 
 
 
 
 
 
 
 
Mobile Imaging and Cardiac Monitoring
 
$
11,898

 
$

 
$
8,079

 
$
19,977

Camera
 

 
1,070

 

 
1,070

Camera Support
 

 
1,744

 

 
1,744

Revenue from Contracts with Customers
 
11,898

 
2,814

 
8,079

 
22,791

Lease Income
 
127

 
28

 
2,519

 
2,674

Total Revenues
 
$
12,025

 
$
2,842

 
$
10,598

 
$
25,465

 
 
 
 
 
 
 
 
 
Timing of Revenue Recognition
 
 
 
 
 
 
 
 
Services and goods transferred over time
 
$
10,964

 
$
1,720

 
$
10,491

 
$
23,175

Services and goods transferred at a point in time
 
1,061

 
1,122

 
107

 
2,290

Total Revenues
 
$
12,025

 
$
2,842

 
$
10,598

 
$
25,465

Nature of Goods and Services
Mobile Imaging
Within our Diagnostic Services and Mobile Healthcare reportable segments, our sales are derived from providing services and materials to our customers, primarily physician practices and hospitals, that allow them to perform diagnostic imaging services at their site. We typically bundle our services in providing staffing, our imaging systems, licensing, radiopharmaceuticals, and supplies depending on our customers’ needs. Our contracts with customers are typically entered into annually and are billed on a fixed rate per-day or per-scan basis, depending on terms of the contract. For the majority of these contracts, the Company has the right to invoice the customer in an amount that directly corresponds with the value to the customer of the Company’s performance to date. The Company uses the practical expedient to recognize revenue corresponding with amounts we have the right to invoice for services performed.
Camera
Within our Diagnostic Imaging segment, camera revenues are generated from the sale of internally developed solid-state gamma camera imaging systems. We recognize revenue upon transfer of control to the customer, which is generally upon delivery and acceptance. We also provide installation services and training on cameras we sell, primarily in the United States. Installation and initial training is generally performed shortly after delivery. The Company recognizes revenues for installation and training over time as the customer receives and consumes benefits provided as the Company performs the installation services.
Our sale of imaging systems includes a one -year warranty that we account for as an assurance-type warranty. The expected costs associated with our standard warranties and field service actions continue to be recognized as expense when cameras are sold. Maintenance service contracts sold beyond the term of our standard warranties are accounted for as a service-type warranty and revenue is deferred and recognized ratably over the period of the obligation.
Camera Support
Within our Diagnostic Imaging segment, camera support revenue is derived from the sale of separately-priced extended maintenance contracts to camera owners, training, and the sale of parts to customers that do not have an extended warranty. Our separately priced service contracts range from 12 to 48 months. Service contracts are usually billed at the beginning of the contract period or at periodic intervals (e.g., monthly or quarterly) and revenue is recognized ratably over the term of the agreement.
Services and training revenues are recognized in the period the services and training are performed. Revenue for sales of parts are recognized when the parts are delivered to the customer and control is transferred.
Lease Income
Within primarily our Mobile Healthcare segment, we also generate income from interim rentals of our imaging systems to customers that are in the midst of new construction or refurbishing their current facilities. Rental contracts are structured as either a weekly or monthly payment arrangement and are accounted for as operating leases. Revenues are recognized on a straight-line basis over the term of the rental.

12



Deferred Revenues
We record deferred revenues when cash payments are received or due in advance of our performance, including amounts that are refundable. We have determined our contracts do not include a significant financing component. The majority of our deferred revenue relates to payments received on camera support post-warranty service contracts, which are billed at the beginning of the annual contract period or at periodic intervals (e.g., monthly or quarterly).
Changes in the deferred revenues for three months ended March 31, 2019 , is as follows (in thousands):
Balance at December 31, 2018
 
$
1,713

Revenue recognized that was included in balance at beginning of the year
 
(541
)
Deferred revenue, net, related to contracts entered into during the year
 
262

Balance at March 31, 2019
 
$
1,434

Included in the balances above as of March 31, 2019 and December 31, 2018 is non-current deferred revenue of $20 thousand and $26 thousand , respectively.
The Company has elected to use the practical expedient under ASC 606 to exclude disclosures of unsatisfied remaining performance obligations for (i) contracts having an original expected length of one year or less or (ii) contracts for which the practical expedient has been applied to recognize revenue at the amount for which it has a right to invoice.
Contract Costs
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. The Company applies a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period would have been one year or less. These costs mainly include the Company’s internal sales commissions; under the terms of these programs these are generally earned and the costs are recognized at the time the revenue is recognized.
Note 4. Basic and Diluted Net Income (Loss) Per Share
For the three months ended March 31, 2019 and 2018 , basic net income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income per common share is calculated to give effect to all dilutive securities, if applicable, using the treasury stock method. In periods for which there is a net loss, diluted loss per common share is equal to basic loss per common share, since the effect of including any common stock equivalents would be antidilutive.
The following table sets forth the reconciliation of shares used to compute basic and diluted net (loss) income per share for the periods indicated (in thousands):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Loss from continuing operations
 
$
(1,657
)
 
$
(1,388
)
Income from discontinued operations
 

 
5,494

Net (loss) income
 
$
(1,657
)
 
$
4,106

 
 
 
 
 
Weighted-average shares outstanding—basic and diluted
 
20,278

 
20,092

 
 
 
 
 
(Loss) income per common share—basic and diluted
 
 
 
 
Continuing operations
 
$
(0.08
)
 
$
(0.07
)
Discontinued operations
 

 
0.27

Net (loss)income per common share—basic and diluted
 
$
(0.08
)
 
$
0.20

The computation of diluted earnings per share excludes stock options and stock units that are anti-dilutive. The following common stock equivalents were anti-dilutive (in thousands):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Stock options
 
1,000

 
207

Restricted stock units
 
287

 
129

Total
 
1,287

 
336

Note 5. Supplementary Balance Sheet Information
The components of inventories are as follows (in thousands):
 
 
March 31,
2019
 
December 31,
2018
Inventories:
 
 
 
 
Raw materials
 
$
2,425

 
$
2,419

Work-in-process
 
2,285

 
2,307

Finished goods
 
1,154

 
1,056

Total inventories
 
5,864

 
5,782

Less reserve for excess and obsolete inventories
 
(381
)
 
(380
)
Total inventories, net
 
$
5,483

 
$
5,402

Property and equipment consist of the following (in thousands):
 
 
March 31,
2019
 
December 31, 2018
Property and equipment:
 

 

Land
 
$
550

 
$
550

Buildings and leasehold improvements
 
1,989

 
1,989

Machinery and equipment
 
52,138

 
52,409

Computer hardware and software
 
4,489

 
4,490

Total property and equipment
 
59,166

 
59,438

Less accumulated depreciation
 
(38,591
)
 
(37,793
)
Total property and equipment, net
 
$
20,575

 
$
21,645

Note 6. Leases
We have operating and finance leases for corporate offices, vehicles, and certain equipment. Our leases have remaining lease terms of 1 year to 6 years , some of which include options to extend the leases and some of which include options to terminate the leases within 1 year . Operating leases are included separately in the condensed consolidated balance sheets and finance leases are included in other current liabilities and other liabilities in the condensed consolidated balance sheets.
The components of lease expense are as follows (in thousands):
 
 
Three Months Ended
March 31, 2019
Operating lease cost
 
$
326

 
 
 
Finance lease cost:
 
 
Amortization of finance lease assets
 
$
53

Interest on finance lease liabilities
 
33

Total finance lease cost
 
$
86


13



Supplemental cash flow information related to leases was as follows (in thousands):
 
 
Three Months Ended
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
 
Operating cash flows from operating leases
 
$
287

Operating cash flows from finance leases
 
$
33

Financing cash flows from finance leases
 
$
184

 
 
 
Right-of-use assets obtained in exchange for lease obligations
 
 
Operating leases
 
$
323

Finance leases
 
$
145

Supplemental balance sheet information related to leases was as follows (in thousands):
 
 
March 31,
2019
Operating lease right-of-use assets, net
 
$
3,681

 
 
 
Operating lease liabilities
 
$
1,251

Operating lease liabilities, net of current
 
2,564

Total operating lease liabilities
 
$
3,815

 
 
 
Finance lease assets
 
$
3,702

Finance lease accumulated amortization
 
(1,100
)
Finance lease assets, net
 
$
2,602

 
 
 
Finance lease liabilities
 
$
809

Finance lease liabilities, net of current
 
1,607

Total finance lease liabilities
 
$
2,416

 
 
 
Weighted-Average Remaining Lease Term (in years)
 
 
Operating leases
 
3.4

Finance leases
 
2.9

 
 
 
Weighted-Average Discount Rate
 
 
Operating leases
 
5.00
%
Finance leases
 
6.00
%

14



We are committed to making future cash payments on non-cancelable operating leases and finance leases (including interest). The future minimum lease payments due under both non-cancelable operating leases and finance leases having initial or remaining lease terms in excess of one year as of March 31, 2019 were as follows (in thousands):
 
 
Operating
Leases
 
Finance
Leases
2019 (excludes the three-months ended March 31, 2019)
 
$
1,066

 
$
696

2020
 
1,317

 
842

2021
 
953

 
817

2022
 
552

 
258

2023
 
259

 
10

Thereafter
 
4

 

Total future minimum lease payments
 
$
4,151

 
$
2,623

Less amounts representing interest
 
336

 
207

Present value of lease obligations
 
$
3,815

 
$
2,416

Note 7. Financial Instruments
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents information about our financial assets that are measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques we utilize to determine such fair value at March 31, 2019 and December 31, 2018 (in thousands).
 
 
Fair Value as of March 31, 2019
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Equity securities
 
$
17

 
$
31

 
$

 
$
48

 
 
Fair Value as of December 31, 2018
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Equity securities
 
$
153

 
$
6

 
$

 
$
159

The investment in equity securities consists of common stock of publicly traded companies. The level 2 securities are included in other assets on the Company’s condensed consolidated balance sheet. The fair value of these securities is based on the closing prices observed on  March 31, 2019 . During the three months ended March 31, 2019 the Company recorded in the condensed consolidated statement of operations an unrealized gain of $28 thousand and immaterial unrealized losses.
We did not reclassify any investments between levels in the fair value hierarchy during the three months ended March 31, 2019 .
The fair values of the Company’s revolving credit facility approximate carrying value due to the variable rate nature of these borrowings.

15



Note 8. Debt
A summary of long-term debt is as follows (in thousands):
 
 
March 31, 2019
 
December 31, 2018
 
 
Amount
 
Weighted-Average Interest Rate
 
Amount
 
Weighted-Average Interest Rate
Revolving Credit Facility - SNB
 
$
12,517

 
5.00%
 
$

 
—%
Revolving Credit Facility - Comerica
 
$

 
—%
 
$
9,500

 
4.87%
On March 29, 2019, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) by and among certain subsidiaries of the Company, as borrowers (collectively, the “Borrowers”); the Company, as guarantor; and Sterling National Bank, a national banking association, as lender (“SNB”).
The Loan Agreement is a five -year credit facility maturing in March 2024, with a maximum credit amount of $20.0 million for both revolving loans and outstanding letter of credit obligations (the “SNB Credit Facility”). Under the SNB Credit Facility, Borrowers can request the issuance of letters of credit in an aggregate amount not to exceed $0.5 million at any one time outstanding. As of  March 31, 2019 , the Company had  $0.1 million  of letters of credit outstanding and had additional borrowing capacity of  $7.5 million .
At the Borrowers’ option, the SNB Credit Facility will bear interest at either (i) a Floating LIBOR Rate, as defined in the Loan Agreement, plus a margin of 2.50% per annum; or (ii) a Fixed LIBOR Rate, as defined in the Loan Agreement, plus a margin of 2.25% per annum.
The Company used a portion of the financing made available under the SNB Credit Facility to refinance and terminate, effective as of March 29, 2019, its previous credit facility under the Comerica Credit Agreement.
The Loan Agreement includes certain representations, warranties of Borrowers, as well as events of default and certain affirmative and negative covenants by the Borrowers that are customary for loan agreements of this type. These covenants include restrictions on borrowings, investments and dispositions by Borrowers, as well as limitations on the Borrowers’ ability to make certain distributions. Upon the occurrence and during the continuation of an event of default under the Loan Agreement, SNB may, among other things, declare the loans and all other obligations under the Loan Agreement immediately due and payable and increase the interest rate at which loans and obligations under the Loan Agreement bear interest. The SNB Credit Facility is secured by a first-priority security interest in substantially all of the assets of the Company and the Borrowers and a pledge of all shares of the Borrowers.
On March 29, 2019, in connection with the Company’s entry into the SNB Loan Agreement, Mr. Eberwein, the Chairman of the Company’s board of directors, entered into Limited Guaranty Agreement (the “Limited Guaranty”) with SNB pursuant to which he guaranteed to SNB the prompt performance of all the Borrowers’ obligations to SNB under the SNB Loan Agreement, including the full payment of all indebtedness owing by Borrowers to SNB under or in connection with the Loan Agreement and related SNB Credit Facility documents. Mr. Eberwein’s obligations under the Limited Guaranty are limited in the aggregate to the amount of (a) $1.5 million , plus (b) reasonable costs and expenses of SNB incurred in connection with the Limited Guaranty. Mr. Eberwein’s obligations under the Limited Guaranty terminate upon the Company and Borrowers achieving certain milestones set forth therein. 
In connection with the SNB Credit Facility, in the three months ended March 31, 2019 , the Company recognized a $0.2 million loss on extinguishment due to the write off of unamortized deferred financing costs associated with the Comerica Credit Agreement.
At March 31, 2019 , the Company was in compliance with all covenants.
Note 9. Commitments and Contingencies
Other Matters
In the normal course of business, we have been, and will likely continue to be, subject to litigation or administrative proceedings incidental to our business, such as claims related to customer disputes, employment practices, wage and hour disputes, product liability, professional liability, commercial disputes, licensure restrictions or denials, and warranty or patent infringement. Responding to litigation or administrative proceedings, regardless of whether they have merit, can be expensive and disruptive to normal business operations. We are not able to predict the timing or outcome of these matters.

16



Note 10. Income Taxes
We provide for income taxes under the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of differences between the tax basis of assets or liabilities and their carrying amounts in the financial statements. We provide a valuation allowance for deferred tax assets if it is more likely than not that these items will expire before we are able to realize their benefit. We calculate the valuation allowance in accordance with the authoritative guidance relating to income taxes, which requires an assessment of both positive and negative evidence regarding the realizability of these deferred tax assets, when measuring the need for a valuation allowance. Significant judgment is required in determining any valuation allowance against deferred tax assets. As of December 31, 2017, as a result of a three-year cumulative loss and recent events, such as the unanticipated termination of the Philips distribution agreement and its effect on our forecasted income, we concluded that a full valuation allowance was necessary to offset our deferred tax assets. We continue to record a full valuation allowance against our deferred tax assets and intend to maintain a valuation allowance until sufficient positive evidence exists to support its reversal.
Intraperiod tax allocation rules require us to allocate our provision for income taxes between continuing operations and other categories of comprehensive income, such as discontinued operations. In periods in which we have a year-to-date pre-tax loss from continuing operations and pre-tax income in other categories of comprehensive income, such as discontinued operations, we must consider that income in determining the amount of tax benefit that results from a loss in continuing operations and that shall be allocated to continuing operations.
For the three months ended March 31, 2019 , the Company recorded an income tax benefit of $8 thousand within continuing operations. As a result of the intraperiod tax allocation rules, for the three months ended March 31, 2018 , the Company recorded an income tax benefit of $0.5 million and $0.6 million of income tax expense within continuing operations and discontinued operations, respectively.
As of March 31, 2019 , we had unrecognized tax benefits of approximately $3.6 million related to uncertain tax positions. Included in the unrecognized tax benefits were $3.2 million of tax benefits that, if recognized, would reduce our annual effective tax rate, subject to the valuation allowance.
We file income tax returns in the U.S. and in various state jurisdictions with varying statutes of limitations. We are no longer subject to income tax examination by tax authorities for years prior to 2014; however, our net operating loss carryforwards and research credit carryforwards arising prior to that year are subject to adjustment. Our policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense.

17



Note 11. Segments
Our reporting segments have been determined based on the nature of the products and services offered to customers or the nature of their function in the organization. We evaluate performance based on the gross profit and operating income (loss). The Company does not identify or allocate its assets by operating segments.
Segment information is as follows (in thousands):

 
Three Months Ended March 31,

 
2019
 
2018
Revenue by segment:
 
 
 
 
Diagnostic Services
 
$
11,726

 
$
12,025

Diagnostic Imaging
 
2,523

 
2,842

Mobile Healthcare
 
9,663

 
10,598

Condensed consolidated revenue
 
$
23,912

 
$
25,465

 
 
 
 
 
Gross profit by segment:
 
 
 
 
Diagnostic Services
 
$
2,581

 
$
2,247

Diagnostic Imaging
 
786

 
1,245

Mobile Healthcare
 
614

 
1,115

Condensed consolidated gross profit
 
$
3,981

 
$
4,607

 
 
 
 
 
Loss from continuing operations by segment:
 
 
 
 
Diagnostic Services
 
$
1,736

 
$
993

Diagnostic Imaging
 
343

 
619

Mobile Healthcare
 
(623
)
 
(51
)
Unallocated corporate and other expenses
 
(2,591
)
 
(3,170
)
Condensed consolidated loss from continuing operations
 
$
(1,135
)
 
$
(1,609
)
 
 
 
 
 
Depreciation and amortization by segment:
 
 
 
 
Diagnostic Services
 
$
304

 
$
596

Diagnostic Imaging
 
78

 
74

Mobile Healthcare
 
1,427

 
1,592

Total depreciation and amortization
 
$
1,809

 
$
2,262

Note 12. Related Party Transactions
Perma-Fix
Mr. John Climaco currently serves as a Director of the Company and a member of the Corporate Governance and Strategic Advisory committees of the Board. Until July 11, 2017, Mr. Climaco also served as a Director of Perma-Fix Environmental Services, Inc. (NASDAQ: PESI). Further, from June 2, 2015 until July 11, 2017, Mr. Climaco served as the Executive Vice President of Perma-Fix Medical S.A., a majority-owned Polish subsidiary of Perma-Fix Environmental Services, Inc. On July 27, 2015, we entered into a Stock Subscription Agreement (the “Subscription Agreement”) and Tc-99m Supplier Agreement (the “Supply Agreement”) with Perma-Fix Medical. Under the terms of the Subscription Agreement, we invested  $1.0 million  USD in exchange for  71,429 shares of Perma-Fix Medical. Pursuant to the Supply Agreement, should Perma-Fix Medical successfully complete development of the new Tc-99m resin, Perma-Fix Medical will supply us or our preferred nuclear pharmacy supplier with Tc-99m at a preferred rate and we will purchase agreed upon quantities of such Tc-99m for our nuclear imaging operations, either directly or in conjunction with our preferred nuclear pharmacy supplier. In addition, in connection with the Subscription Agreement, the Company’s President and CEO was appointed to the Supervisory Board of Perma-Fix Medical. The investment in Perma-Fix is included in other assets in the condensed consolidated balance sheets.

18



Limited Guaranty
On March 29, 2019, in connection with the Company’s entry into the Loan Agreement, Mr. Eberwein, the Chairman of the Company’s board of directors, entered into Limited Guaranty Agreement (the “Limited Guaranty”) with SNB pursuant to which he guaranteed to SNB the prompt performance of all the Borrowers’ obligations to SNB under the Loan Agreement, including the full payment of all indebtedness owing by Borrowers to SNB under or in connection with the Loan Agreement and related SNB Credit Facility documents. Mr. Eberwein’s obligations under the Limited Guaranty are limited in the aggregate to the amount of (a) $1.5 million , plus (b) reasonable costs and expenses of SNB incurred in connection with the Limited Guaranty. Mr. Eberwein’s obligations under the Limited Guaranty terminate upon the Company and Borrowers achieving certain milestones set forth therein.
ATRM
Jeffrey E. Eberwein, the Chairman of our board of directors and the Chairman of the board of directors of ATRM Holdings, Inc., (“ATRM”), owns approximately 17.4% of the outstanding common stock of ATRM. Mr. Eberwein is also the Chief Executive Officer of Lone Star Value Management, LLC, which is the investment manager of Lone Star Value Investors, LP (“LSVI”). LSVI owns 222,577 shares of ATRM’s 10.0% Series B Cumulative Preferred Stock (the “Series B Stock”) and another 374,562 shares of Series B Stock are owned directly by Lone Star Value Co-Invest I, LP (“LSV Co-Invest I”). Through these relationships and other relationships with affiliated entities, Mr. Eberwein may be deemed the beneficial owner of the securities owned by LSVI and LSV Co-Invest I. Mr. Eberwein disclaims beneficial ownership of Series B Stock, except to the extent of his pecuniary interest therein.
Joint Venture
On December 14, 2018, Digirad and ATRM, entered into a joint venture and formed Star Procurement, LLC (“Star Procurement”), with Digirad and ATRM each holding a 50% interest. The purpose of the joint venture is to provide the service of purchasing and selling building materials and related goods to KBS Builders, Inc., a wholly-owned subsidiary of ATRM with which Star Procurement entered into a Services Agreement on January 2, 2019. In accordance with the terms of the Star Procurement Limited Liability Company Agreement, Digirad made a $1.0 million capital contribution to the joint venture, which was made in January 2019. The investment in Star Procurement is included in other assets in the condensed consolidated balance sheets.
Note Receivable
On December 14, 2018, the Company received an unsecured promissory note from ATRM in the principal amount of $0.3 million (the “ATRM Note”) in exchange for a loan to ATRM in the same amount. The ATRM Note bears interest at 10% per annum for the first 12 months of its term, and at 12% per annum for the remaining 12 months. All unpaid principal and interest is due on December 14, 2020. ATRM may prepay the note at any time after a specified amount of advance notice to the Company. The ATRM Note provides for customary events of default, the occurrence of any of which may result in the principal and unpaid interest then outstanding becoming immediately due and payable. The ATRM Note is included in other assets in the condensed consolidated balance sheets.
Note 13. Subsequent Events
Acquisitions and Leases of Maine Facilities
As part of the Company’s previously announced conversion into a diversified holding company (the “HoldCo Conversion”), we formed a real estate subsidiary named Star Real Estate Holdings USA, Inc. (“SRE”). SRE will hold any significant real estate assets we acquire. We expect SRE to be substantially self-funded over time by raising its own capital in the form of commercial mortgages on the properties it owns or by raising other forms of external capital. As an initial transaction to create our real estate division under SRE and launch that aspect of the HoldCo Conversion, we purchased three plants in Maine that manufacture modular buildings and leased these three properties, as further described below.
Oxford  
On March 27, 2019, 56 Mechanic Falls Road, LLC (“56 Mechanic”), a wholly-owned subsidiary of SRE, entered into a Purchase and Sale Agreement (the “Oxford Purchase Agreement”) with RJF - Keiser Real Estate, LLC (“RJF”), pursuant to which 56 Mechanic will purchase certain real property and related improvements and personal property (including buildings, fixtures, and other improvements on the land, and all machinery and equipment and other personal property, if any, owned by RJF and located on the property) located in Oxford, Maine (the “Oxford Facility”) from RJF (the “Oxford Transaction”). The Oxford Transaction was closed on April 25, 2019. The purchase price of the Oxford Facility was $1.2 million (the “Oxford Purchase Price”), subject to adjustment for taxes and other charges and assessments.

19



Waterford
On April 3, 2019, 947 Waterford Road, LLC (“947 Waterford”), a wholly-owned subsidiary of SRE, entered into a Purchase and Sale Agreement (the “Waterford Purchase Agreement”) with KBS Builders, Inc. (“KBS”), a wholly-owned subsidiary of ATRM, pursuant to which 947 Waterford closed on the purchase of certain real property and related improvements (including buildings) located in Waterford, Maine (the “Waterford Facility”) from KBS, and acquired the Waterford Facility. The purchase price of the Waterford Facility was $1.0 million , subject to adjustment for taxes and other charges and assessments.
Paris
On April 3, 2019, 300 Park Street, LLC (“300 Park”), a wholly-owned subsidiary of SRE, entered into a Purchase and Sale Agreement (the “Park Purchase Agreement”) with KBS, pursuant to which 300 Park closed on the purchase of certain real property and related improvements and personal property (including buildings, machinery and equipment) located in Paris, Maine (the “Park Facility”) from KBS, and acquired the Park Facility. The purchase price of the Park Facility was $2.9 million , subject to adjustment for taxes and other charges and assessments.
Lease of Maine Facilities
On April 3, 2019, KBS entered into a separate lease agreement with each of 947 Waterford (the “Waterford Lease”) and 300 Park (the “Park Lease”). The Waterford Lease has an initial term of 120 months , which is subject to extension. The base rental payments associated with the initial term under the Waterford Lease are estimated to be between $1.2 million and $1.3 million in the aggregate. The Park Lease has an initial term of 120 months , which is subject to extension. The base rental payments associated with the initial term under the Park Lease are estimated to be between $3.3 million and $3.6 million in the aggregate. ATRM has unconditionally guaranteed the performance of all obligations under the Waterford Lease and Park Lease to be performed by KBS under each lease, including, without limitation, the payment of all required rent.
On April 3rd and 18th of 2019, KBS signed a lease and an amendment, respectively, with 56 Mechanic (the “Oxford Lease”), which became effective upon the closing of the Oxford Transaction. The initial term under the Oxford Lease will commence upon delivery of the Oxford Facility to KBS. The Oxford Lease has an initial term of 120 months , which is subject to extension. The base rental payments associated with the initial term under the Oxford Lease are estimated to be between $1.4 million and $1.5 million in the aggregate. ATRM has unconditionally guaranteed the performance of all obligations under the Oxford Lease to be performed by KBS, including, without limitation, the payment of all required rent.
Series A Preferred Stock Offering
The Company has filed a registration statement on Form S-1 and Form S-1/A with the SEC for a potential offering (the “Preferred Offering”) of nonconvertible Series A Cumulative Term Preferred Stock (the “Series A Preferred Stock”) on March 12, 2019 and April 09, 2019, respectively. However, it is unlikely that the Company will proceed with its proposed offering of nonconvertible preferred stock on substantially the terms described in the registration statement.
Fargo Building Sale
The Company completed the sale on the remaining Fargo building for $0.8 million on May 1, 2019. On the same day, we entered into an agreement with JS2L Partners, LLP, to lease this property for a term of 12 months . The base rental payments associated with the lease are $0.1 million in aggregate.

20



ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This management’s discussion and analysis of financial condition and results of operations (“MD&A”), contains forward-looking statements that involve risks and uncertainties. Please see “Important Information Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks, and assumptions that may cause our actual results to differ materially from those discussed in the forward-looking statements. This discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q, and the audited consolidated financial statements and related notes thereto for the fiscal year ended December 31, 2018 , which were included in our Form 10-K, filed with the SEC on March 1, 2019 .
The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods.
Overview
Digirad delivers convenient, effective, and efficient healthcare solutions on an as needed, when needed, and where needed basis. Digirad’s diverse portfolio of mobile healthcare solutions and diagnostic imaging equipment and services provides hospitals, physician practices, and imaging centers throughout the United States access to technology and services necessary to provide patient care in the rapidly changing healthcare environment.
In February of 2018, we completed the sale of our customer contracts relating to our MDSS post-warranty service business to Philips. On October 31, 2018, we sold our Telerhythmics business to G Medical Innovations USA, Inc., for $1.95 million cash. Our business is organized into three reportable segments: Diagnostic Services, Mobile Healthcare, and Diagnostic Imaging.
On September 10, 2018, we announced that our board of directors approved the conversion of Digirad into a diversified holding company, and the potential acquisition of ATRM as an initial “kick-off” transaction (the “ATRM Acquisition”). ATRM is a modular building company consisting of two divisions, KBS Builders and EdgeBuilder. The KBS division manufactures and distributes modular housing units. EdgeBuilder manufactures engineered wood products used in modular construction, as well as distributes building materials through its Glenbrook unit. Both divisions serve the residential and commercial segments of the market.
Strategy
Our main strategic focus is to continue to grow our business into an integrated healthcare services company while simultaneously converting into a diversified holding company through the acquisition of businesses that meet our internally developed financially disciplined approach for acquisitions. Within the healthcare industry, we believe that there are many opportunities to provide outsourced and mobile healthcare services and solutions in the current healthcare environment. We believe that our strategy within the healthcare industry will be accomplished by:
Focused organic growth from our core businesses.
Introducing of new service offerings through our existing businesses or through acquisitions; and
Acquiring complementary companies.
Discontinued Operations
On February 1, 2018, the Company completed the sale of its customer contracts relating to our MDSS post-warranty service business to Philips pursuant to an Asset Purchase Agreement, dated as of December 22, 2017 for $8.0 million. The Company deemed the disposition of our MDSS reportable segment in the first quarter of 2018 to represent a strategic shift that will have a major effect on our operations and financial results. In accordance with the provisions of FASB authoritative guidance on the presentation of financial statements we have classified the results of our MDSS segment as discontinued operations in our condensed consolidated statement of operations for all periods presented.
Business Segments
As of December 31, 2018 , our business is organized into three reportable segments:
Diagnostic Services
Mobile Healthcare
Diagnostic Imaging

21



Diagnostic Services. Through Diagnostic Services, we offer a convenient and economically efficient imaging and monitoring services program as an alternative to purchasing equipment or outsourcing the procedures to another physician or imaging center. For physicians who wish to perform nuclear imaging, echocardiography, vascular or general ultrasound tests, we provide imaging systems, qualified personnel, radiopharmaceuticals, licensing services, and the logistics required to perform imaging in their own offices, and thereby the ability to bill Medicare, Medicaid, or one of the third-party healthcare insurers directly for those services, which are primarily cardiac in nature. We provide imaging services primarily to cardiologists, internal medicine physicians, and family practice doctors who typically enter annual contracts for a set number of days ranging from once per month to five times per week.
Mobile Healthcare. Through Mobile Healthcare, we provide contract diagnostic imaging, including computerized tomography (“CT”), magnetic resonance imaging (“MRI”), positron emission tomography (“PET”), PET/CT, and nuclear medicine and healthcare expertise to hospitals, integrated delivery networks (“IDNs”), and federal institutions on a long-term contract basis, as well as provisional (short-term) services to institutions that are in transition. These services are provided primarily when there is a cost, ease, and efficiency component of providing the services directly rather than owning and operating the related services and equipment directly by our customers.
Diagnostic Imaging. Through Diagnostic Imaging, we sell our internally developed solid-state gamma cameras, imaging systems and camera maintenance contracts. Our imaging systems include nuclear cardiac imaging systems, as well as general purpose nuclear imaging systems. We sell our imaging systems to physician offices and hospitals primarily in the United States, although we have sold a small number of imaging systems internationally.
Our Market
The target market for our products and services is comprised of cardiologists, internal medicine physicians, family practice physicians, hospitals, IDNs, and federal institutions in the United States that perform or could perform a diagnostic imaging procedure, have a need for cardiac event monitoring, or have interest in purchasing a diagnostic imaging product. During the year ended December 31, 2018, through Diagnostic Services and Mobile Healthcare, we provided imaging services to 992 physicians, physician groups, hospitals, IDNs and federal institutions. Our Diagnostic Services and Mobile Healthcare businesses currently operate in approximately 40 states. In the past, our market has been negatively affected by lower reimbursements from the Center for Medicare and Medicaid Services (“CMS”) and third-party insurance providers for the codes under which our customers bill for our services, although reimbursements have stabilized in the last several years. We have addressed, and will continue to address, these market pressures by modifying our Diagnostic Services and Mobile Healthcare business models, and by assisting our healthcare customers in complying with new regulations and requirements.
Trends and Drivers
The market for diagnostic services and products is highly competitive. Our business, which is focused primarily on the private practice and hospital sectors, continues to face uncertainty in the demand for diagnostic services and imaging equipment, which we believe is due in part to the impact of the Deficit Reduction Act on the reimbursement environment and the 2010 Healthcare Reform laws, as well as general uncertainty in overall healthcare and legislative changes in healthcare, such as the Affordable Care Act. These challenges have impacted, and will likely continue to impact, our operations. We believe that the principal competitive factors in our market include budget availability for our capital equipment, qualifications for reimbursement, pricing, ease-of-use, reliability, and mobility.
Diagnostic Services.  In providing Diagnostic Services imaging services, we compete against many smaller local and regional nuclear and ultrasound providers that may have lower operating costs. The fixed-installation operators often utilize older, used equipment, and the mobile operators may use older Digirad single-head cameras or newer dual-head cameras. We are the only mobile provider with our own exclusive source of triple-head mobile systems. Some competing operators place new or used cameras into physician offices and then provide the staffing, supplies, and other support as an alternative to a Diagnostic Services service contract. In addition, we compete against imaging centers that install fixed nuclear gamma cameras and make them available to referring physicians in their geographic vicinity. In these cases, the physician sends their patients to the imaging center.
Diagnostic Imaging.  In selling our imaging systems, we compete against several large medical device manufacturers who offer a full line of imaging cameras for each diagnostic imaging technology, including x-ray, MRI, CT, ultrasound, nuclear medicine, or SPECT/CT and PET/CT hybrid imagers. The existing nuclear imaging systems sold by these competitors have been in use for a longer period of time than our internally developed nuclear gamma cameras, and are more widely recognized and used by physicians and hospitals; however, they are generally not solid-state, light-weight, as flexible, or portable. Additionally, certain medical device companies have developed a version of solid-state gamma cameras that may directly compete with our product offerings. Many of the larger multi-modality competitors enjoy significant competitive advantages over us, including greater brand recognition, greater financial and technical resources, established relationships with healthcare professionals, broader distribution networks, more resources for product development and marketing and sales, and the ability to bundle products to offer discounts.

22



Mobile Healthcare.  The market for selling, servicing, and operating diagnostic imaging services, and imaging systems is highly competitive. In addition to direct competition from other providers of services similar to those offered by us, we compete with freestanding imaging centers and healthcare providers that have their own diagnostic imaging systems, as well as with equipment manufacturers that sell imaging equipment directly to healthcare providers for permanent installation. Some of the direct competitors, which provide contract MRI and PET/CT services, have access to greater financial resources than we do. In addition, some of our customers are capable of providing the same services we provide to their patients directly, subject only to their decision to acquire a high-cost diagnostic imaging system, assume the financial and technology risk, and employ the necessary technologists, rather than obtain equipment and services from us. We may also experience greater competition in states that currently have certificate of need laws if such laws were repealed, thereby reducing barriers to entry and competition in those states. We also compete against other similar providers in quality of services, quality of imaging systems, relationships with healthcare providers, knowledge and service quality of technologists, price, availability, and reliability.
Proposed Acquisition of ATRM Holdings, Inc.
As described above, on September 10, 2018, we announced a potential acquisition of ATRM. As currently contemplated by the non-binding letter of intent with ATRM (the “LOI”), ATRM stockholders would receive consideration consisting of 0.4 shares of Digirad common stock for each share of outstanding ATRM common stock we acquire in the ATRM Acquisition. The issuance of Digirad common stock in connection with the ATRM Acquisition is expected to increase the number of shares of outstanding Digirad common stock by less than 5%. Proceeding with the ATRM Acquisition is subject to, among other things, ATRM becoming current with its filings with the SEC and the negotiation and execution of definitive documentation. The ATRM Acquisition has been approved by a special committee of independent directors of ATRM. The final terms of the ATRM Acquisition are subject to change depending on the outcome of our due diligence investigation and may differ from those reflected in the LOI, and there can be no assurance that we will complete the ATRM Acquisition or the HoldCo Conversion.
On December 14, 2018, Digirad and ATRM, entered into a joint venture and formed Star Procurement, LLC (“Star Procurement”), with Digirad and ATRM each holding a 50% interest. The purpose of the joint venture is to provide the service of purchasing and selling building materials and related goods to KBS Builders, Inc., a wholly-owned subsidiary of ATRM with which Star Procurement entered into a Services Agreement on January 2, 2019. In accordance with the terms of the Star Procurement Limited Liability Company Agreement, Digirad made a $1.0 million capital contribution to the joint venture, which was made in January 2019.
On December 14, 2018, the Company received an unsecured promissory note from ATRM in the principal amount of $0.3 million (the “ATRM Note”) in exchange for a loan to ATRM in the same amount. The ATRM Note bears interest at 10% per annum for the first 12 months of its term, and at 12% per annum for the remaining 12 months. All unpaid principal and interest is due on December 14, 2020. ATRM may prepay the note at any time after a specified amount of advance notice to the Company. The ATRM Note provides for customary events of default, the occurrence of any of which may result in the principal and unpaid interest then outstanding becoming immediately due and payable.
Jeffrey E. Eberwein, the Chairman of our board of directors and the Chairman of the board of directors of ATRM, owns approximately 17.4% of the outstanding common stock of ATRM. Mr. Eberwein is also the Chief Executive Officer of Lone Star Value Management, LLC, which is the investment manager of Lone Star Value Investors, LP (“LSVI”). LSVI owns 222,577 shares of ATRM’s 10.0% Series B Cumulative Preferred Stock (the “Series B Stock”) and another 374,562 shares of Series B Stock are owned directly by Lone Star Value Co-Invest I, LP (“LSV Co-Invest I”). Through these relationships and other relationships with affiliated entities, Mr. Eberwein may be deemed the beneficial owner of the securities owned by LSVI and LSV Co-Invest I. Mr. Eberwein disclaims beneficial ownership of Series B Stock, except to the extent of his pecuniary interest therein.
Series A Preferred Stock Offering
The Company has filed a registration statement on Form S-1 with the SEC for a potential offering of nonconvertible Series A Preferred Stock. However, it is unlikely that the Company will proceed with its proposed offering of nonconvertible preferred stock on substantially the terms described in the registration statement.
Acquisitions and Leases of Maine Facilities
As part of the HoldCo Conversion, we formed a real estate subsidiary named Star Real Estate Holdings USA, Inc. (“SRE”). SRE will hold any significant real estate assets we acquire. We expect SRE to be substantially self-funded over time by raising its own capital in the form of commercial mortgages on the properties it owns or by raising other forms of external capital. As an initial transaction to create our real estate division under SRE and launch that aspect of the HoldCo Conversion, we purchased three plants in Maine that manufacture modular buildings and leased these three properties, as further described below.

23



Oxford  
On March 27, 2019, 56 Mechanic Falls Road, LLC (“56 Mechanic”), a wholly-owned subsidiary of SRE, entered into a Purchase and Sale Agreement (the “Oxford Purchase Agreement”) with RJF - Keiser Real Estate, LLC (“RJF”), pursuant to which 56 Mechanic will purchase certain real property and related improvements and personal property (including buildings, fixtures, and other improvements on the land, and all machinery and equipment and other personal property, if any, owned by RJF and located on the property) located in Oxford, Maine (the “Oxford Facility”) from RJF (the “Oxford Transaction”). The Oxford Transaction was closed on April 25, 2019. The purchase price of the Oxford Facility was $1.2 million (the “Oxford Purchase Price”), subject to adjustment for taxes and other charges and assessments.
Waterford
On April 3, 2019, 947 Waterford Road, LLC (“947 Waterford”), a wholly-owned subsidiary of SRE, entered into a Purchase and Sale Agreement (the “Waterford Purchase Agreement”) with KBS Builders, Inc. (“KBS”), a wholly-owned subsidiary of ATRM, pursuant to which 947 Waterford closed on the purchase of certain real property and related improvements (including buildings) located in Waterford, Maine (the “Waterford Facility”) from KBS, and acquired the Waterford Facility. The purchase price of the Waterford Facility was $1.0 million , subject to adjustment for taxes and other charges and assessments.
Paris
On April 3, 2019, 300 Park Street, LLC (“300 Park”), a wholly-owned subsidiary of SRE, entered into a Purchase and Sale Agreement (the “Park Purchase Agreement”) with KBS, pursuant to which 300 Park closed on the purchase of certain real property and related improvements and personal property (including buildings, machinery and equipment) located in Paris, Maine (the “Park Facility”) from KBS, and acquired the Park Facility. The purchase price of the Park Facility was $2.9 million , subject to adjustment for taxes and other charges and assessments.
Lease of Maine Facilities
On April 3, 2019, KBS entered into a separate lease agreement with each of 947 Waterford (the “Waterford Lease”) and 300 Park (the “Park Lease”). The Waterford Lease has an initial term of 120 months, which is subject to extension. The base rental payments associated with the initial term under the Waterford Lease are estimated to be between $1.2 million and $1.3 million in the aggregate. The Park Lease has an initial term of 120 months, which is subject to extension. The base rental payments associated with the initial term under the Park Lease are estimated to be between $3.3 million and $3.6 million in the aggregate. ATRM has unconditionally guaranteed the performance of all obligations under the Waterford Lease and Park Lease to be performed by KBS under each lease, including, without limitation, the payment of all required rent.
On April 3rd and 18th of 2019, KBS signed a lease and an amendment, respectively, with 56 Mechanic (the “Oxford Lease”), which became effective upon the closing of the Oxford Transaction. The initial term under the Oxford Lease will commence upon delivery of the Oxford Facility to KBS. The Oxford Lease has an initial term of 120 months, which is subject to extension. The base rental payments associated with the initial term under the Oxford Lease are estimated to be between $1.4 million and $1.5 million in the aggregate. ATRM has unconditionally guaranteed the performance of all obligations under the Oxford Lease to be performed by KBS, including, without limitation, the payment of all required rent.
Critical Accounting Policies and Estimates
In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our revenue and net income or loss, as well as on the value of certain assets and liabilities on our balance sheet. We believe that the estimates, assumptions, and judgments involved in the accounting policies described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates.

24



Results of Operations
Comparison of the Three Months Ended March 31, 2019 and 2018
The following table summarizes our results for the three months ended March 31, 2019 and 2018 (in thousands):  

 
Three Months Ended March 31,

 
2019

Percent of 
Revenues

2018

Percent of 
Revenues

Change from Prior Year

 
Dollars

Percent
Total revenues
 
$
23,912


100.0
 %

$
25,465


100.0
 %

$
(1,553
)

(6.1
)%
Total cost of revenues
 
19,931


83.4
 %

20,858


81.9
 %

(927
)

(4.4
)%
Gross profit
 
3,981


16.6
 %

4,607


18.1
 %

(626
)

(13.6
)%
Total operating expenses
 
5,116


21.4
 %

6,216


24.4
 %

(1,100
)

(17.7
)%
Loss from operations
 
(1,135
)

(4.7
)%

(1,609
)

(6.3
)%

474


(29.5
)%
Total other expense
 
(530
)
 
(2.2
)%
 
(234
)
 
(0.9
)%
 
(296
)
 
126.5
 %
Loss before income taxes
 
(1,665
)
 
(7.0
)%
 
(1,843
)
 
(7.2
)%
 
178

 
(9.7
)%
Income tax benefit
 
8

 
 %
 
455

 
1.8
 %
 
(447
)
 
(98.2
)%
Net loss from continuing operations
 
(1,657
)

(6.9
)%

(1,388
)

(5.5
)%

(269
)

19.4
 %
Net income from discontinued operations
 

 
 %
 
5,494

 
21.6
 %
 
(5,494
)
 
(100.0
)%
Net (loss) income
 
$
(1,657
)
 
(6.9
)%
 
$
4,106

 
16.1
 %
 
$
(5,763
)
 
(140.4
)%
Revenues
Services Revenue
Services revenue by segment is summarized as follows (in thousands):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
 
Change
 
% Change
Diagnostic Services
 
$
11,726

 
$
12,025

 
$
(299
)
 
(2.5
)%
Mobile Healthcare
 
9,663

 
10,598

 
(935
)
 
(8.8
)%
Total Services Revenue
 
$
21,389

 
$
22,623

 
$
(1,234
)
 
(5.5
)%
The decrease in Diagnostic Services revenue compared to the prior year quarter was due to the sale of our Telerhythmics business as of October 31, 2018 resulting in a loss of revenues of $1.1 million, partially offset by a higher volume of days ran and studies performed and an increase in the average mobile imaging rate per day .
The decrease in Mobile Healthcare revenue compared to the prior year quarter was primarily due to an increase in cancellations, resulting in a $0.6 million decrease in scan volumes, as well as a $0.3 million decrease in interim rentals due to lower utilization of owned units. The utilization of our interim rentals can vary in each period based on customers that are in the midst of new construction or refurbishing their current facilities.
Product and Product-Related Revenue
Product and product-related revenue by segment is summarized as follows (in thousands):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
 
Change
 
% Change
Diagnostic Imaging
 
$
2,523

 
$
2,842

 
$
(319
)
 
(11.2
)%
The decrease in Diagnostic Imaging revenue was due to a lower volume and less favorable mix of cameras sold.

25



Gross Profit
Services Gross Profit
Services gross profit and gross margin by segment is summarized as follows (in thousands):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
 
% Change
Diagnostic Services gross profit
 
$
2,581

 
$
2,247

 
14.9
 %
Diagnostic Services gross margin
 
22.0
%
 
18.7
%
 
 
 
 
 
 
 
 
 
Mobile Healthcare gross profit
 
$
614

 
$
1,115

 
(44.9
)%
Mobile Healthcare gross margin
 
6.4
%
 
10.5
%
 
 
 
 
 
 
 
 
 
Total Services gross profit
 
$
3,195

 
$
3,362

 
(5.0
)%
Total Services gross margin
 
14.9
%
 
14.9
%
 
 
Diagnostic Services gross profit increased $0.3 million , or 14.9% , to $2.6 million compared to $2.2 million in the prior year quarter, and the gross margin percentage was 22.0% in the current quarter compared to 18.7% in the prior year quarter. The increase in gross margin percentage was mainly due to lower equipment repair costs and professional services fees, as well as the sale of our Telerhythmics business which typically had narrow or negative gross margins .
Mobile Healthcare gross profit decreased $0.5 million , or 44.9% , to $0.6 million in the current year quarter compared to $1.1 million in the prior year quarter, and gross margin percentage was 6.4% in the current quarter compared to 10.5% in the prior year quarter. The decrease in gross margin percentage was primarily due to an unfavorable mix of services provided, as well as higher equipment and vehicle leasing costs of $0.3 million compared to the prior year quarter.
Product and Product-Related Gross Profit
Product and product-related gross profit and margin by segment is summarized as follows (in thousands):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
 
% Change
Diagnostic Imaging gross profit
 
$
786

 
$
1,245

 
(36.9
)%
Diagnostic Imaging gross margin
 
31.2
%
 
43.8
%
 
 
The decrease in Diagnostic Imaging gross margin percentage was primarily due to lower revenue, a less favorable mix of cameras sold during the period, and higher service and camera part costs of approximately $0.2 million compared to the prior year quarter.
Operating Expenses
Operating expenses are summarized as follows (in thousands):
 
 
Three Months Ended March 31,
 
Percent of Revenues
 
 
2019
 
2018
 
Change
 
2019
 
2018
 
 
 
Dollars
 
Percent
 
Marketing and sales
 
$
1,143

 
$
1,467

 
$
(324
)
 
(22.1
)%
 
4.8
%
 
5.8
%
General and administrative
 
3,690

 
4,392

 
(702
)
 
(16.0
)%
 
15.4
%
 
17.2
%
Amortization of intangible assets
 
283

 
357

 
(74
)
 
(20.7
)%
 
1.2
%
 
1.4
%
Total operating expenses
 
$
5,116

 
$
6,216

 
$
(1,100
)
 
(17.7
)%
 
21.4
%
 
24.4
%
The decrease in marketing and sales expenses was primarily due to lower headcount, as well as the sale of our Telerhythmics which resulted in approximately $0.1 million in savings .
The decrease in general and administrative expenses of $0.7 million was primarily due to lower employee related costs of $0.6 million due to lower headcount and $0.1 million of non-recurring restructuring costs incurred in the prior year quarter related to the sale of our MDSS reportable segment on February 1, 2018.
The decrease in amortization of intangible assets was due to the sale of Telerhythmics.

26



Total Other Expense
Total other expense is summarized as follows (in thousands):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Other expense, net
 
$
(198
)
 
$
(17
)
Interest expense, net
 
(181
)
 
(217
)
Loss on extinguishment of debt
 
(151
)
 

Total other expense
 
$
(530
)
 
$
(234
)
Other expense, net for three months ended March 31, 2019 , is predominantly comprised of one-time costs related to the potential acquisition of ATRM, of which $0.2M related to costs paid on behalf of ATRM, and partially offset by unrealized gains on available-for-sale equities.
Interest expense, net, for the three months ended March 31, 2019 and 2018 is predominantly comprised of cash interest costs and related amortization of deferred issuance costs on our debt. A portion of interest costs has been allocated to discontinued operations in 2018 because the proceeds received in the sale were required to be used to reduce our borrowings under our previous revolving credit facility with Comerica Bank.
Loss on extinguishment of debt is related to the write-off of unamortized deferred financing costs related to the termination of the Comerica Credit Agreement on March 29, 2019. See Note 8 Debt to the unaudited consolidated financial statements for further information.
Income Tax Expense
Intraperiod allocation rules require us to allocate our provision for income taxes between continuing operations and other categories or comprehensive income such as discontinued operations. As described in Note 2 Discontinued Operations , of the unaudited consolidated financial statements, the results of our MDSS reportable segment have been reported as discontinued operations for the prior year quarter. As a result of the intraperiod tax allocation rules, for the three months ended March 31, 2019 , the Company recorded an income tax benefit of $8 thousand within continuing operations. For the three months ended March 31, 2018 , the Company recorded an income tax benefit of $0.5 million within continuing operations and $0.6 million of tax expense within discontinued operations.
 See Note 10 Income Taxes to the unaudited condensed consolidated financial statements for further information related to the Company’s income taxes.
Income from Discontinued Operations
As described in Note 2 Discontinued Operations of the unaudited condensed consolidated financial statements, the results of our MDSS reportable segment have been reported as discontinued operations for all periods presented. During the three months ended March 31, 2018 , discontinued operations includes a $6.3 million gain on the sale of our MDSS post-warranty service contracts to Philips that closed on February 1, 2018.

27



Liquidity and Capital Resources
Overview
We used cash of $2.2 million from operations during the three months ended March 31, 2019 . Cash flows from operations primarily represents net loss (adjusted for depreciation, amortization, and other non-cash items), as well as the net effect of changes in working capital. Cash flows from investing activities primarily represent our investment in capital equipment required to maintain and grow our business, as well as acquisitions and dispositions. Cash flows from financing activities primarily represent net proceeds from borrowings and receipt of cash related to the exercise of stock options, offset by outflows related to dividend payments and repayments of long-term borrowings.
Our principal sources of liquidity are our existing cash and cash equivalents, cash generated from operations, and availability on our revolving line of credit from our Sterling Credit Agreement. As of March 31, 2019 , we had $0.8 million of cash and cash equivalents, as well as $7.5 million available under our revolving line of credit.
We require capital principally for capital expenditures, acquisition activity, dividend payments, and to finance accounts receivable and inventory. Our working capital requirements vary from period to period depending on inventory requirements, the timing of deliveries, and the payment cycles of our customers. Our capital expenditures consist primarily of medical imaging and diagnostic devices utilized in the provision of our services, as well as vehicles and information technology hardware and software. Based upon our current level of expenditures, we believe our current working capital, together with cash flows from operating activities, will be more than adequate to meet our anticipated cash requirements for at least the next 12 months.
Cash Flows
The following table shows cash flow information for the three months ended March 31, 2019 and 2018 (in thousands):  
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Net cash (used in) provided by operating activities
 
$
(2,185
)
 
$
420

Net cash (used in) provided by investing activities
 
$
(990
)
 
$
6,669

Net cash provided by (used in) financing activities
 
$
2,428

 
$
(7,932
)
Operating Activities
The decrease in cash compared to the prior year quarter was primarily due to lower net income adjusted for non-cash items as a result of higher accounts receivable and lower accounts payable.
Investing Activities
The decrease in cash provided by investing activities compared to the prior year quarter was primarily attributable to $6.8 million of proceeds received from the sale of our MDSS service contract business to Philips during the prior year quarter.
Financing Activities
The increase in cash flows from financing activities is primarily due to net borrowings of approximately $3.0 million compared to net principal repayments in the prior year quarter of $6.5 million as we used proceeds from the Sterling National Bank credit facility to refinance and terminate the Comerica Credit Agreement (see further discussion below).
Sterling Credit Facility
On March 29, 2019, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) by and among certain subsidiaries of the Company, as borrowers (collectively, the “Borrowers”); the Company, as guarantor; and Sterling National Bank, a national banking association, as lender (“SNB”).
The Loan Agreement is a five-year credit facility maturing in March 2024, with a maximum credit amount of $20.0 million for both revolving loans and outstanding letter of credit obligations (the “SNB Credit Facility”). Under the SNB Credit Facility, Borrowers can request the issuance of letters of credit in an aggregate amount not to exceed $0.5 million at any one time outstanding.
At the Borrowers’ option, the SNB Credit Facility will bear interest at either (i) a Floating LIBOR Rate, as defined in the Loan Agreement, plus a margin of 2.50% per annum; or (ii) a Fixed LIBOR Rate, as defined in the Loan Agreement, plus a margin of 2.25% per annum.
The Company used a portion of the financing made available under the SNB Credit Facility to refinance and terminate, effective as of March 29, 2019, its previous credit facility under the Comerica Credit Agreement.

28



The Loan Agreement includes certain representations, warranties of Borrowers, as well as events of default and certain affirmative and negative covenants by the Borrowers that are customary for loan agreements of this type. These covenants include restrictions on borrowings, investments and dispositions by Borrowers, as well as limitations on the Borrowers’ ability to make certain distributions. Upon the occurrence and during the continuation of an event of default under the Loan Agreement, SNB may, among other things, declare the loans and all other obligations under the Loan Agreement immediately due and payable and increase the interest rate at which loans and obligations under the Loan Agreement bear interest. The SNB Credit Facility is secured by a first-priority security interest in substantially all of the assets of the Company and the Borrowers and a pledge of all shares of the Borrowers.
In connection with the SNB Credit Facility, in the three months ended March 31, 2019 , the Company recognized a $0.2 million loss on extinguishment due to the write off of unamortized deferred financing costs associated with the Comerica Credit Agreement.
At March 31, 2019 , the Company was in compliance with all covenants.
Off-Balance Sheet Arrangements
As of March 31, 2019 , we did not have any off-balance sheet arrangements.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934 (the “Exchange Act”) reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. See Item 5. (Other Information) for a discussion of the security breach that occurred following March 31, 2019.
As required by Rules 13a-15(e) and 15d-15(e) of the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2019 .
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all errors and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 under the Exchange Act that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
See Note 9 Commitments and Contingencies , within the notes to our unaudited condensed consolidated financial statements for a summary of legal proceedings.
ITEM 1A.
RISK FACTORS
In evaluating us and our common stock, we urge you to carefully consider the risks and other information in this Quarterly Report on Form 10-Q, as well as the risk factors disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 , which we filed with the SEC on March 1, 2019 , and in our registration statement on Form S-1/A filed with the SEC for the Preferred Offering on April 9, 2019. Except as noted below, the risks and uncertainties described in “Item 1A - Risk Factors” of our Annual Report on Form 10-K have not materially changed. Any of the risks discussed in this Quarterly Report on Form 10-Q or any of the risks disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 , as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, could materially and adversely affect our results of operations or financial condition.
Risks Related to our Common Stock
Our common stock may be subject to delisting from the Nasdaq Global Market if we do not meet Nasdaq’s Minimum Bid Price Requirement.
On January 8, 2019, we received a deficiency letter from the Nasdaq Listing Qualifications Department notifying us that, for the prior thirty consecutive business days, the closing bid price for our common stock had closed below the minimum $1.00 per share requirement for continued listing on the Nasdaq Global Market pursuant to Nasdaq Listing Rule 5450(a)(1) (the “Minimum Bid Price Requirement”). In accordance with Nasdaq Listing Rules, we have been given 180 calendar days, or until July 8, 2019 to regain compliance with the Minimum Bid Price Requirement. If we do not regain compliance by July 8, 2019, we may transfer from The Nasdaq Global Market to The Nasdaq Capital Market and may be eligible for an additional compliance period of 180 days. To qualify for the additional compliance period, we will have to: (i) submit a transfer application and related application fees; (ii) meet the continued listing requirement for market value of publicly held shares and all other initial listing standards of The Nasdaq Capital Market (except for the bid price requirement); and (iii) provide written notice to Nasdaq of our intention to cure the deficiency during the additional 180-day compliance period by effecting a reverse stock split if necessary. If we do not qualify for an additional compliance period, or should we determine not to submit a transfer application or make the required representation, or if Nasdaq concludes that we will not be able to cure the deficiency, Nasdaq will provide written notice to us that our common stock will be subject to delisting.
On March 8, 2019, our board of directors unanimously approved, subject to stockholder approval, an amendment to our Restated Certificate of Incorporation to effect a reverse stock split of our outstanding common stock by a ratio of not less than 1-for-5 and not more than 1-for-10 at any time within 12 months following the date of stockholder approval of the reverse stock split, with the exact ratio to be set within this range by our board of directors at its sole discretion (the “Reverse Stock Split”), and a reduction of the number of authorized shares of common stock to 30 million shares authorized. Our board of directors may alternatively elect to abandon such proposed amendment and not effect the Reverse Stock Split authorized by stockholders, in its sole discretion. As proposed to our stockholders, our board of directors will have 12 months following stockholder approval to implement