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.
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.
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
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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
|
|
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
|
%
|
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.
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.
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.
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.
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.
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.