2014 ANNUAL REPORT
“Page Intentionally Left Blank”
Dear Fellow Shareholders,
I am very excited to be writing to you at the conclusion of a very successful year at Digirad; 2014
has proven to be the most profitable year in Digirad’s history! Not only am I excited about what we
achieved in this past year, but more importantly, I am excited about what our future brings.
As you may recall, we initiated an aggressive restructuring plan in February 2013 for the purpose of
creating and returning shareholder value. Our plan in 2013 included such changes as right sizing our
manufacturing efforts and stripping excess costs out of our business, as well as focusing our major
market efforts on the Diagnostic Services side of our business. Also, financially, we focused on
generating cash from our businesses, for which we began a quarterly cash dividend in November
2013 to return some of that cash to our shareholders, a program we have kept going strong every
quarter since then. The result of our actions set Digirad on a pathway to profitability and future
successes.
In 2014, we further streamlined our business and focused on future growth efforts. To name a few
accomplishments, we completed the outsourcing of the majority of our manufacturing processes as
well as the remaining tasks from our February 2013 restructuring plan, we cut our facility footprint
in California by half, and we acquired a very complimentary business with our Telerhythmics
cardiac event monitoring business acquisition in March 2014.
As I have stated over the last year and will continue to state, we are not done yet. As we look at our
business and market moving forward, we are very excited about our prospects and potential for
growth. With the Affordable Care Act and all the efficiencies Congress appears focused on as part
of the overall healthcare environment, I believe more business will move toward our highly efficient
business model. Of course, our main priorities are running our underlying businesses in a
sustainable manner to generate cash and profit, and continued payment of our quarterly cash
dividend. However, looking to the future, we have a three tier growth strategy at Digirad, one I am
sharing with our shareholders often:
1. Acquisitions. Our goal is to acquire companies that fit within our business model of
providing diagnostic services on an as needed, when needed and where needed basis in a
very financially disciplined manner.
2. New Services. Adding new services that we can provide from our extensive service
distribution channels.
3. Organic Growth. Within our existing core business service lines and products.
Even as I write this letter, we continue to move forward with our three tier growth plan, having just
acquired MD Office Solutions in March 2015, a very well-run diagnostic imaging services business
based in Northern California. We are not going to stop; the entire Executive Team and I are fighting
to grow the business and to return value to you, and we appreciate all your support.
Finally, I would like to thank all our employees; both employees that have been with Digirad for
years and employees that may have just joined from one of our recent acquisitions. We value YOU
at Digirad – everything that we are accomplishing is from your hard work and dedication, and the
Executive Team truly appreciates your hard work.
Sincerely,
Matthew G. Molchan
President and Chief Executive Officer
Table Of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
or
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: 000-50789
Digirad Corporation
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
1048 Industrial Court, Suwanee, GA
(Address of Principal Executive Offices)
33-0145723
(I.R.S. Employer
Identification No.)
30024
(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
Common Stock, par value $0.0001 per share
Name of Each Exchange on Which Registered
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
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
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted 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 and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of the voting common stock held by non-affiliates based on the closing stock price on June 30, 2014, was $58,692,296. For
purposes of this computation only, all executive officers and directors have been deemed affiliates.
The number of outstanding shares of the registrant’s common stock, par value $0.0001 per share, as of February 24, 2015 was 18,630,945.
Portions of the registrant’s definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after registrant’s fiscal year
ended December 31, 2014 are incorporated by reference into Part III of this report.
DOCUMENTS INCORPORATED BY REFERENCE
Table Of Contents
DIGIRAD CORPORATION
FORM 10-K—ANNUAL REPORT
For the Fiscal Year Ended December 31, 2014
Table of Contents
Business
PART I
Item 1
Item 1A Risk Factors
Item 1B Unresolved Staff Comments
Item 2
Item 3
Item 4
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 6
Item 7
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Item 8
Item 9
Item 9A Controls and Procedures
Item 9B Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosures
PART III
Item 10 Directors, Executive Officers and Corporate Governance
Item 11
Item 12
Item 13
Item 14
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
PART IV
Item 15
Exhibits, Financial Statement Schedules
Signatures
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Cautionary Statement Regarding Forward-Looking Statements
PART I
Portions of this Annual Report on Form 10-K (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 7 — Management’s Discussion and Analysis
of Financial Condition and Results of Operations” of this Annual Report on Form 10-K, as well as other portions of this Annual
Report on Form 10-K. 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 Annual Report on
Form 10-K. 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.
Corporate Information
Digirad Corporation was incorporated in Delaware in 1997 as a subchapter C corporation. Unless the context requires otherwise,
in this report the terms “we,” “us,” and “our” refer to Digirad® Corporation and our wholly-owned subsidiaries, Digirad Imaging
Solutions®, Inc. and Telerhythmics®, LLC.
ITEM 1.
BUSINESS
Overview
Digirad delivers convenient, effective, and efficient diagnostic solutions on an as needed, when needed, and where needed
basis. We are one of the largest national providers of in-office nuclear cardiology and ultrasound imaging services, and also provide
cardiac event monitoring services. These services are provided to physician practices, hospitals, and imaging centers through our
Diagnostic Services business segment. We also sell medical diagnostic imaging systems, including solid-state gamma cameras,
for nuclear cardiology and general nuclear medicine applications, as well as provide service on the products we sell through our
Diagnostic Imaging business segment.
We were the first to commercialize solid-state nuclear gamma cameras for the detection of cardiovascular disease and other
medical conditions. Our imaging systems are sold in both portable (i.e., movable) and fixed (i.e., stationary) configurations, and
provide enhanced operability, improved patient comfort, and can result in lower healthcare costs. Our triple-head Cardius® 3 XPO
system provides significantly shorter image acquisition time when compared to traditional vacuum tube cameras. Our ergoTM
portable imaging system is a large field-of-view general purpose imager featuring a sleek ergonomic design that offers clinical
versatility and high performance. The ergoTM expands our reach beyond nuclear cardiology into general nuclear medicine with
applicability to various disease states. The ergoTM can be used in the intensive and critical care units, pediatrics, trauma units,
patient floors, emergency and operating rooms, women’s health, or research areas. Our nuclear cameras fit easily into floor spaces
as small as seven feet by eight feet and facilitate the delivery of nuclear medicine procedures in a physician’s office or an outpatient
hospital setting.
Through Diagnostic Services, we offer a convenient and economically efficient imaging services program as an alternative to
purchasing a gamma camera or ultrasound equipment, or as an alternative to outsourcing the procedures to another physician or
imaging center. For physicians who wish to perform nuclear imaging, echocardiography, vascular or general ultrasound tests, or
any combination of these procedures in their offices, we provide the ability for them to engage our services, which includes the
use of our imaging system, qualified personnel, and related items required to perform imaging in the their own offices and bill
Medicare, Medicaid, or one of the third-party healthcare insurers directly for those services. Diagnostic Services segment's services
are also used by large and small hospitals, multi-practice physician groups, and imaging centers. The flexibility of our products
and our Diagnostic Services segment's services allow physicians to ensure continuity of care and convenience for their patients
and allows them to retain revenue from procedures they would otherwise refer to imaging centers and hospitals. Diagnostic Services
segment's services are primarily provided to cardiologists, internal medicine physicians, and family practice doctors who enter
into contracts for a set number of service days ranging from once per month to five times per week. We experience some seasonality
in our Diagnostic Services business related to vacations, holidays, and inclement weather. Most of the Diagnostic Services business
focuses on cardiac care. Many of the physicians who use Diagnostic Services segment's services are reliant on reimbursements
from Medicare, Medicaid, and third-party insurers where, in the past, there has been downward price pressure and uncertainty of
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reimbursement rates due to factors outside the physicians’ control. The uncertainty created by the 2010 healthcare reform laws,
Congress’ continued deferred action on the Sustainable Growth Rate reimbursement factor (which is part of the Relative Value
Unit calculation of reimbursements for all medical codes associated with the physician fee schedule), and other legislation has
also impacted our business in the past, and will likely have some impact on our business in the future. Future changes and impacts
may require modifications to our current business model in order for our physician customers and us to maintain a viable economic
model.
Through Diagnostic Services, we also offer an outsourced cardiac event monitoring service through our Telerhythmics business.
Providing these services offers flexibility and convenience to our customers who do not have to incur the costs of staffing, equipment,
and logistics to monitor patients as part of their standard of care. Our cardiac event monitoring services are provided primarily
through an independent diagnostic testing facility model which allows us to bill Medicare, Medicaid, or one of the third-party
healthcare insurers directly for services provided. As such, our cardiac event monitoring services are subject to reimbursements
from Medicare, Medicaid, and third-party insurers which are subject to change on a periodic basis. Our cardiac event monitoring
services are mainly provided to physician practices and hospitals.
Our Diagnostic Imaging segment's revenue is derived primarily from selling solid-state gamma cameras and post-warranty
camera support contracts. We sell our imaging systems to physician offices, hospitals, and imaging centers primarily in the United
States, although we have sold some imaging systems internationally. We have relationships and agreements with distributors
around the world and believe over time we will continue to develop these relationships to the point where we can eventually grow
our sales outside the United States.
On February 28, 2013, we announced a plan to restructure our Diagnostic Imaging business to significantly reduce costs and
focus on maximizing cash flow from our Diagnostic Services business. This restructuring effort also included a reduction in force.
Our restructuring efforts were complete as of December 31, 2014. Going forward, we believe this restructuring plan will allow
us to increase the overall profitability and operating cash flow of the Company. However, many other market, regulatory, and
competitive factors could impact the effectiveness of our restructuring plan. See Note 11 to the audited consolidated financial
statements for further information.
Market Opportunity
Nuclear Imaging
Nuclear imaging is a form of diagnostic imaging in which depictions of the internal anatomy or physiology are generated
primarily through non-invasive means. Diagnostic imaging facilitates the early diagnosis of diseases and disorders, often
minimizing the scope, cost, and amount of care required and reducing the need for more invasive procedures. Currently, the major
types of non-invasive diagnostic imaging technologies available are: x-ray, magnetic resonance imaging (MRI), computerized
tomography (CT), ultrasound, positron emission tomography (PET, which is a form of nuclear imaging), and nuclear imaging.
The most widely used imaging acquisition technology utilizing gamma cameras is single photon emission computed tomography,
or SPECT. All of our current cardiac gamma cameras employ SPECT technology.
Though the utilization rates of competing modalities such as CT, PET, and MRI, and diagnostic procedures such as CT
angiography are high, SPECT procedures performed with gamma cameras are expected to continue to be used for a substantial
number of cardiac-specific imaging procedures. We believe continued utilization of SPECT technology will be driven by patients
having easier access to nuclear medicine services at physicians’ offices, lower purchase and maintenance costs, a smaller physical
footprint, and easier service logistics of gamma cameras.
Clinical Applications for Nuclear Imaging
Nuclear imaging is used primarily in cardiovascular, oncology, and neurological applications. Nuclear imaging involves the
introduction of very low-level radiopharmaceuticals into the patient’s bloodstream, which are specially formulated to concentrate
temporarily in the specific part of the body to be studied. The radiation signals emitted by the radiopharmaceutical materials are
then converted into an image of the body part or organ. Nuclear imaging has several advantages over other diagnostic imaging
modalities, showing not only the anatomy or structure of an organ or body part, but also its function including blood flow, organ
function, metabolic activity, and biochemical activity. Cardiologists as well as a number of internists and other physicians either
purchase our nuclear cameras or subscribe to our Diagnostic Services services for in-office cardiac imaging for these advantages.
Ultrasound Imaging
Ultrasound imaging is a form of diagnostic imaging in which depictions of the internal anatomy are generated primarily through
non-invasive means. Ultrasound imagers use sonar techniques to generate diagnostic images that facilitate the early diagnosis of
diseases and disorders, often minimizing the scope and cost of care required and reducing the need for invasive procedures.
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Clinical Applications for Ultrasound Imaging
Ultrasound is one of the most widely used imaging techniques in the United States. Ultrasound imaging is used primarily in
obstetrics, internal medicine, cardiovascular care, and vascular health applications. Ultrasound imaging involves the transmission
and detection of sound waves into and from a patient’s body. The sound waves transmitted by the ultrasound system are then
converted into an image of the body part or organ. Ultrasound imaging also shows the anatomy or structure of many internal organs
or body parts, as well as key functional information-including blood flow, wall motion, and organ function. Our ultrasound services
are used by cardiologists, internists, and other physicians for in-office echocardiography and general ultrasound imaging.
Cardiac Event Monitoring
Cardiac event monitoring is a form of diagnostic test that allows physicians to see the electrocardiogram (ECG) of a patient’s
heart rhythm over a period of time or related to a specific event. The test includes a small monitor that is worn on the patient’s
waist and is connected to lead wires affixed to the patient’s chest. The purpose of this test is to capture infrequent heart conditions
that may only be experienced outside a physician’s office, as well as to observe the state of the heart in various resting and active
situations.
Clinical Applications for Cardiac Event Monitoring
Cardiac event monitoring is a widely utilized cardiac test that provides clinical benefit in situations where the patient’s symptoms
occur erratically or infrequently. Often symptoms can occur infrequently, but still be related to life-threatening cardiac conditions
that need to be corrected. The use of a cardiac event monitor allows these symptoms to be captured and diagnosed, and ultimately
corrected via prescription medications or use of invasive procedures, if required.
Our Imaging Services
Diagnostic Services offers portable nuclear and ultrasound imaging services. We have obtained Intersocietal Commission for
Nuclear Cardiology Laboratories (ICANL) and Intersocietal Commission for Echocardiography Laboratories (ICAEL)
accreditation for our services. Our nuclear modality services include an imaging system, a certified nuclear medicine technologist
and a cardiac stress technician (often a certified or trained nurse or paramedic), the supply of radiopharmaceuticals, and required
licensing services for the performance of nuclear imaging procedures under the supervision of physicians. Our licensing
infrastructure provides the radioactive materials license, radiation safety officer services, radiation safety training, monitoring and
compliant policies and procedures, and the quality assurance function to ensure adherence to applicable state and federal nuclear
regulations. The ultrasound imaging service is similar, in that we provide the ultrasound equipment and an experienced ultrasound
technologist to perform the service.
Our portable nuclear imaging operations use a “hub and spoke” model in which centrally located regional hubs anchor multiple
van routes in the surrounding metropolitan areas. At our Diagnostic Services hubs, clinical personnel load the equipment,
radiopharmaceuticals, and other supplies onto specially equipped vans for transport to the physician’s office or other customer
locations, where they set up the equipment for the day. After quality assurance testing, a technologist under the physician’s
supervision will gather patient information, inject the patient with a radiopharmaceutical, and then acquire the images for
interpretation by the physician.
We provide nuclear and ultrasound services primarily under contracts for services delivered on a per-day basis. Under these
agreements, physicians pay us a fixed amount for each day and they commit to the scheduling of a minimum number of service
days during the contract term, which typically runs for one year, as well as a variable cost associated with the associated volume
of patients utilizing our services and radiopharmaceuticals. The same fixed payment amount is due for each day regardless of the
number of patients seen or the reimbursement or payment obtained by the physician, practice, hospital, or imaging center.
Our Cardiac Event Monitoring Services
Diagnostic Services also offers remote cardiac event monitoring services. These services include provision of a monitor, remote
monitoring by registered nurses, and 24 hours a day, 7 days a week monitoring support for our patients and physician customers.
We offer modalities of: mobile cardiac telemetry (MCT), mobile cardiac event monitoring (both in wireless and analog versions),
holter monitoring, and pacemaker analysis.
Our monitoring service operates out of a centralized monitoring center located near Memphis, Tennessee. From this location,
the majority of monitoring equipment is shipped directly to patient homes once they are enrolled in our service. Patients hook up
the equipment with easy to follow instructions, as well as assistance from our monitoring center. Once they are hooked up to the
monitoring device, patients are monitored for a period of time ranging from 7 to 30 days. At the conclusion of the monitoring
period, the equipment is packaged up and sent back to our monitoring center, after which the equipment is redeployed to the next
patient.
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We provide our services under contracts with our customers that typically allow for direct billing to Medicare, Medicaid, or
third-party private payors once the monitoring cycle is complete. Typically, our contracts can be canceled at any time, and are
generally present to create understanding on billing responsibilities.
Our Products
Digirad sells a line of nuclear imaging cameras for nuclear cardiology and general nuclear medicine applications. Our cameras
are used in hospitals, imaging centers, physician offices, and by mobile service providers. The central component of a nuclear
camera is the detector, and it ultimately determines the overall clinical quality of the image a camera produces. Our nuclear cameras
feature detectors based on advanced proprietary solid-state technology developed by us. Solid-state systems have a number of
benefits over conventional photomultiplier tube-based camera designs typically offered by our competitors. Our solid-state
technology systems are typically 2 - 5 times lighter and considerably more compact than most traditional nuclear systems, making
them far easier and less costly to build, very reliable, and able to be utilized for mobile applications. We are a market leader in the
mobile solid-state nuclear camera segment.
Our Cardius® family of dedicated cardiac SPECT solid-state imagers are noted for their compactness, portability, and unique
upright imaging capabilities that make it possible to image patients up to 500 pounds in a sitting position. Upright imaging makes
it possible to image large bariatric, chronic obstructive pulmonary disease (COPD), or claustrophobic patients that typically could
not be imaged lying down on competitive systems. We offer fixed dual-head and triple-head cardiac camera models for dedicated
use within a facility and portable configurations that make it possible to move the system to provide service to multiple rooms or
sites. Our Cardius® XACT SPECT/CT system features a triple-head design and a low dose volume CT attenuation correction
methodology, making it possible to perform studies faster with greater interpretation diagnostic confidence. Our XACT camera
is sought by departments seeking to improve productivity, increase clinical accuracy, or employ new low dose clinical protocols.
Our ergoTM large-field-of-view imaging system is targeted to hospitals with multi-camera general nuclear medicine departments,
academic centers, pediatric hospitals, regional trauma centers, women’s health centers, and cancer centers. Most general nuclear
medicine departments have the need for a single-head planar portable camera for imaging patients more conveniently on hospital
stretchers, for imaging patients that can not be moved, and for imaging patient’s at their bedside (pediatrics, intensive care units,
critical care units, emergency rooms, surgical suites, women’s health clinics, or on regular patient floors). A single-head planar
camera provides a more economical and convenient way to perform approximately 25% or more of all studies commonly performed
in general nuclear medicine. It also opens the door to perform studies on critically ill patients in the patient’s room and the ability
to perform molecular breast imaging protocols that offer new revenue generation potential while improving the standard of patient
care.
Competitive Strengths
We believe that our competitive strength is based on our proprietary solid-state technology in general nuclear medicine and
cardiology, as well as our streamlined approach to providing diagnostic services to our customers at the point of need.
Imaging Services and Products
• Broad Portfolio of Cardiovascular Imaging Services. One of our main competitive advantages is our ability to offer
nuclear cardiology imaging, echocardiography imaging, and vascular imaging services. Our ability to offer multiple
services strengthens our competitive position at each customer location. The depth of imaging services offered varies
depending on the local market opportunity, availability of personnel, and credentialing requirements in the individual
markets.
• Unique Dual Sales and Service Offering. We sell imaging systems to physicians who wish to perform nuclear imaging
in their facilities and manage the related service logistics. Through Diagnostic Services, we offer both nuclear and
ultrasound services in which we provide our systems and certified personnel to physicians on an annual basis in flexible
increments, ranging from one day per month to several days per week without requiring them to make a capital investment,
hire personnel, obtain licensure, or manage other logistics associated with operating a nuclear imaging site. Our ability
to service our customers in a variety of capacities from selling the capital equipment directly at the point of need or being
more flexible in a service-oriented model allows us to serve our customers exactly according to their needs.
•
Leading Solid-State Technology. Our solid-state gamma cameras utilize proprietary photo-detector modules which enable
us to build smaller and lighter cameras that are portable, with a degree of ruggedness that can withstand the vibration
associated with transportation. We offer a more geometric-efficient design for cardiology and with our ergoTM imaging
system, the first large field-of-view solid-state detector system for use in general nuclear medicine, pediatrics, women’s
health, and surgery.
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• Portable Applications through Reduced Size and Weight. Our cameras, depending on the model, weigh anywhere from
600 to 1,000 pounds. Competitive anger photomultiplier tube-based technology cameras generally weigh 2 to 5 times as
much. Our dedicated cardiac imagers require a floor space of as little as seven feet by eight feet and generally can be
installed without facility renovations and use standard power. Our portable cameras are ideal for mobile operators or
practices desiring to service multiple office locations or imaging facilities, and for use in our Diagnostic Services in-
office service business. We bring nuclear technology to the patient.
•
•
•
Speed and Image Quality. We believe our Cardius® 3 XPO and X-ACT rapid imaging dedicated cardiac cameras, equipped
with our proprietary nSPEED 3DOSEM software, can acquire images up to four times faster than conventional fixed 90
or variable dual-head photomultiplier vacuum tube camera designs with equivalent image quality. Increased imaging
speed optimizes workflow and resource utilization and allows for reduction of the administered dose of radiation to
patients or the use of low dose imaging protocols, which we believe is increasingly of interest to our physician customers.
Improved Patient Comfort and Utilization. We believe the upright and open architecture of our patient chair on our
imaging cameras reduces patient claustrophobia and increases patient comfort when compared to traditional vacuum
tube-based imaging systems, the majority of which require the patient to lie flat and have detector heads rotate around
the patient. Upright imaging positioning also reduces false indications that can result from organs pushing-up against the
heart while patients are on their backs. Our Cardius® XPO camera series allows for the imaging of patients weighing up
to 500 pounds.
Intellectual Property Portfolio. We have developed an intellectual property portfolio that includes product, component,
and process patents covering various aspects of our imaging systems. We have 38 issued U.S. patents. We also license
patents from third parties to enhance our product offering. In addition to our patent portfolio, we have developed proprietary
manufacturing, business know-how, and trade secrets. This portfolio of intellectual property provides us with a distinct
competitive advantage.
Cardiac Event Monitoring Services
• Consistent and Relevant Portfolio of Services. In addition to our imaging services, many of our customers require cardiac
event monitoring services, and prefer to deal with one service provider to ensure continuity of services and ease of
communication. With this new service offering since our acquisition of Telerhythmics, we strengthen our position at
each customer location.
• Excellent Customer Service. We operate our cardiac event monitoring services utilizing equipment that meets our
customers’ needs. We do not manufacture any cardiac event monitors ourselves, and are therefore not tethered to any
particular device or product unlike many of our competitors; we utilize the best technology for our customers’ application
and to meet their needs.
• Utilization of Highly Trained Staff. We staff our monitoring center only with registered nurses, which provides a much
higher level of experience, analysis, and assistance to our customers. Many of our competitors staff their monitoring
centers with lesser trained technicians that are not registered nurses, which can lead to poor customer service and poor
clinical outcomes.
Business Strategy
Our goals are to achieve and maintain consistent profitability and operating cash flow generation, and grow our business over
time via the following:
Diagnostic Services. As a result of our Diagnostic Imaging restructuring announced in February 2013, we have refocused our
efforts to drive profitability and cash flow generation in our Diagnostic Services business, with efforts to help it grow over time.
Since 2013, we believe the market has shown signs of stabilization in relation to healthcare reform and reimbursement uncertainties
and we believe the market has been, and will be, more stable going forward. In addition, we believe that market will be pushed
more toward a “market efficient model”, similar to the model provided by our Diagnostic Services business. Our model takes the
inefficiencies often associated with medical practices owning their own capital equipment and providing their own staffing and
moves it into a streamlined and efficient operation, exactly where we believe healthcare of the future is moving to.
Further, we believe that we have the opportunity to focus our sales approach within our current operating markets to drive
density of operations, which will allow us to take advantage of economies of scale and achieve better utilization of our capital
equipment and personnel. Finally, we also believe there are a variety of smaller mobile imaging and health care services businesses
within the United States, both inside and outside our current operating markets, that we may be able to acquire and further increase
our growth rate and density of operations. As we have done in the past, we expect to continue supporting our physician customers
by working with them to adjust our Diagnostic Services business model for changes in the market, as well as continuing to focus
on aligning our labor and other costs with the variable nature of our revenue streams. Going forward, we continue to see value
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in our service channel via strategic and technological initiatives designed to increase revenue per day for us and our physician
customers, as well as expand our service model offerings.
Diagnostic Imaging. In order to overcome the past market decline of cardiac specific cameras, we have focused our efforts on
markets beyond the cardiac-specific nuclear market. Our Cardius® XACT camera is particularly geared toward hospitals and large
physician practices. Our ergoTM imaging system also addresses the larger market of general nuclear imaging and provides us with
an enhanced market opportunity within the hospital. Our ergoTM imaging system is not just part of a hospital nuclear suite, it is a
camera that enables the imaging to be performed wherever the patient is located, and has great promise in areas of the hospital
where previously no nuclear imaging has been performed, such as the emergency room and the surgical suite. Further, as a result
of our Diagnostic Imaging restructuring announced in February 2013, we have, and believe we can continue to maintain, the
overall profitability and cash flow from our Diagnostic Imaging business, primarily from reduced but focused research and
development efforts, reduced overhead and manufacturing costs, as well as our outsourced manufacturing operations. Further,
we have developed relationships with distributors outside the United States that we believe may, over time, enhance our ability
to increase sales of our nuclear imaging cameras outside the United States. See Note 11 to the audited consolidated financial
statements for further information regarding our Diagnostic Imaging restructuring.
Business Segments
Our business is organized into two reportable segments: Diagnostic Services and Diagnostic Imaging. See Note 15 to the
audited consolidated financial statements for certain segment financial data relating to our business. For the year ended December
31, 2014, we had one customer, Emory Healthcare, that exceeded 10% of our consolidated revenues. For 2014, Emory Healthcare
represented 10.9% of our consolidated revenues and 14.3% of our Diagnostic Services revenues. Prior to 2014, no single customer
exceeded 10% of our consolidated revenues. We believe we have good relations with Emory Healthcare, however, if we were to
lose Emory Healthcare as a customer, it would likely have a material adverse affect on our operations.
Manufacturing
We manufacture our advanced, solid-state nuclear imaging cameras by employing a strategy that combines our internal design
expertise and proprietary process technology with highly-qualified outsourced manufacturing providers. Prior to 2013, we
manufactured the majority of the component parts associated with our cameras, along with selective outsourcing. In September
2013, we announced an agreement to move much of this process to a qualified, third party manufacturer, with the transition
essentially complete at the end of 2014. We believe that our outsourcing efforts resulted in increased efficiencies, flexibility to
meet customer demand, and cost reductions. We will continue to perform some final assembly services and final system performance
tests at our facility. All of our outsourced suppliers of critical materials, components, and subassemblies undergo ongoing quality
audits by us.
We and our third-party manufacturers are subject to FDA Quality System Regulations, state regulations, such as those
promulgated by the California Department of Health Services, and standards set by the International Organization for
Standardization, or ISO. We are currently certified to the EN ISO 13485:2012 quality standard. We have received certification
authorizing CE Marking of our Cardius® XPO, Cardius® X-ACT, and ergoTM gamma cameras, as well as U.S. Food and Drug
Administration (FDA) 510(k) clearance for our complete nuclear imaging camera product line. The CE Mark is a requirement
for selling in many international markets. In addition, the X-ACT camera utilizes an x-ray technology to provide attenuation
correction information for the SPECT reconstruction. We also have received FDA Indications for Use for our ergoTM LFOV General
Purpose Imager for molecular breast imaging.
Raw Materials
We, as well our outsource manufacturers, use a wide variety of materials, metals, and mechanical and electrical components
for production of our products. In addition, our operations involve the use of radiopharmaceuticals. These materials are primarily
purchased from external suppliers, some of which are single-source suppliers. Materials are purchased from selected suppliers
based on quality assurance, cost effectiveness, and constraints resulting from regulatory requirements, and we work closely with
our suppliers to assure continuity of supply while maintaining high quality and reliability. Global commodity supply and demand
can ultimately affect pricing of certain of these raw materials. Though we believe we have adequate available sources of raw
materials, there can be no guarantee that we will be able to access the quantity of raw material needed to sustain operations as
well as at a cost effective price.
Competition
The market for diagnostic services and nuclear imaging systems is highly competitive. Our business in the private practice and
hospital sectors continues to face the challenges of demand for nuclear imaging equipment and diagnostic services, which we
believe reflects in part, the impact of the Deficit Reduction Act on the reimbursement environment and the 2010 Healthcare Reform
laws, competition from competing imaging modalities, such as CT angiography, PET, and hybrid technologies, as well as general
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uncertainty in overall healthcare and changes in healthcare, such as the Affordable Care Act. These concepts, along with, until
recently, an overall depressed economy, have impacted our operations. We believe that the principal competitive factors in our
market include acceptance by physicians, including relationships that we develop with our customers, budget availability for our
capital equipment, qualification for reimbursement, pricing, ease-of-use, reliability, and mobility.
In providing Diagnostic Services imaging services, we compete against many smaller local and regional nuclear and/or
ultrasound providers, often owner-operators that may or may not follow all relevant health care law and procedures, reducing their
overall 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.
In providing cardiac event monitoring services, we compete against many smaller local and regional service providers, as well
as against a few larger, well established medical device companies that provide devices and also provide a service model similar
to ours. We believe our advantage in providing our services is the ability to utilize any cardiac event device on the market, and
not being constrained by using any particular device. However, our larger competitors have larger sales forces and deeper financial
resources that may allow them to have higher cost efficiencies. Further, larger competitors may develop devices that may make
our owned devices obsolete, causing us to suffer financial losses as we attempt to change our technology and service model to
adapt.
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 products and are more widely recognized and used by physicians and hospitals for nuclear imaging; 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 which 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.
Sales
We maintain two sales organizations, which operate independently but in cooperation with each other: Diagnostic Imaging
sales, which sells our nuclear gamma cameras and support, and our Diagnostic Services sales, which sells our mobile nuclear and
ultrasound imaging, as well as our cardiac event monitoring services. Relative to nuclear imaging, these sales teams work together
to ensure that our customers make the right decisions in either utilizing our mobile imaging services or purchasing a nuclear
imaging camera for which ever situation best suits their needs, volume, and overall impact to their business. Diagnostic Services
sales teams are aligned across geographic areas we have established in order to better serve local market needs. Our Diagnostic
Services business is segregated into twelve areas, each area is led by a local or regional business director who is responsible for
the needs of our customers in that area and who has local operational responsibility. We expect to increase Diagnostic Services
market penetration by focusing on those hospitals and practices that are already within an existing Diagnostic Services operational
area in order to increase the density of our current operations and increase the efficiency of our overall cost structure, as well as
cross selling our cardiac event monitoring services to our current nuclear and ultrasound imaging customers. We also plan, over
time, to utilize the customers and relationships that we have to offer other emerging services that have clinical need and can be
provided while at that customer site.
The Diagnostic Imaging business sells imaging systems directly to physicians, primary care multi-specialty groups, clinics,
and hospital customers in the United States. Diagnostic Imaging also has distribution agreements with third parties throughout
the world and we believe, over time, these relationships can be developed to increase presence and sales to countries outside the
United States.
Research and Development
In the past, we have committed a significant amount of resources to research and development activities, primarily surrounding
developing new nuclear imaging cameras and alternative applications of that technology. In February 2013, we made a decision
to change our strategic direction and focus efforts on expanding our Diagnostic Services business, as well as limiting our nuclear
imaging system sales through Diagnostic Imaging to those cameras that already have a proven track record of quality, reliability,
and customer need. Based on the new strategic direction, we will be focusing significantly less effort on developing new diagnostic
imaging systems. We believe our current systems, with their state of the art technology and robust underlying patents, will be
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very relevant systems for many years into the future. We will continue to enhance and adjust our existing systems for the changing
nuclear imaging market, including software updates and smaller enhancements. However, to accomplish any changes and
enhancements, we will utilize what we believe is a deep available pool of contract engineers on a flexible, as needed basis. We
have eliminated the fixed costs of a fully staffed research and development department, and as a result, we expect our research
and development costs to be minimal going into the future.
As mentioned previously, prior to early 2013, our research and development efforts have been primarily focused on developing
our next generation products and alternative applications of our technology. Our research and development expense were zero,
$1.0 million, and $3.7 million in 2014, 2013, and 2012, respectively.
Government Regulation
We and our medical professional customers must comply with an array of federal and state laws and regulations. Violations of
such laws and regulations can be punishable by criminal, civil, and/or administrative sanctions, including, in some instances,
exclusion from participation in healthcare programs such as Medicare and Medicaid. Accordingly, we maintain a vigorous
compliance program and a hotline that permits our personnel to report violations while remaining anonymous if they wish.
The following is a summary of some of the laws and regulations applicable to our business:
• Anti-Kickback Laws. The Medicare/Medicaid Patient Protection Act of 1987, as amended, which is commonly referred
to as the Anti-Kickback Statute, prohibits us from knowingly and willingly offering, paying, soliciting, or receiving any
form of remuneration in return for the referral of items or services, or to purchase, lease, order, or arrange for or recommend
purchasing, leasing, or ordering any good, facility service, or item, for which payment may be made under a federal
healthcare program. Violation of the federal anti-kickback law is a felony, punishable by criminal fines and imprisonment,
or both, and can result in civil penalties and exclusion from participation in healthcare programs such as Medicare and
Medicaid. Many states have adopted similar statutes prohibiting payments intended to induce referrals of products or
services paid by Medicaid or other nongovernmental third-party payors.
• Physician Self-Referral Laws. Federal regulations commonly referred to as the “Stark Law” prohibit physician referrals
of Medicare or Medicaid patients to an entity for certain designated health services if the physician or an immediate
family member has an indirect or direct financial relationship with the entity, unless a statutory exception applies. We
believe that referrals made by our physician customers are eligible to qualify for the “in-office ancillary services” exception
to the Stark Law, provided that the services are provided or supervised by the physician or a member of his or her “Group
Practice,” as that term is defined under the law, the services are performed in the same building in which the physician
regularly practices medicine, and the services are billed by or for the supervising physician or Group Practice. Violations
of the Stark Law may lead to the imposition of penalties and fines, the exclusion from participation in federal healthcare
programs, and liability under the federal False Claims Act and its whistleblower provisions. Many states have adopted
similar statutes prohibiting self-referral arrangements that cover all patients and not just Medicare and Medicaid patients.
• HIPAA. The Health Insurance Portability and Accountability Act of 1996, or HIPAA, prohibits schemes to defraud
healthcare benefit programs and fraudulent conduct in connection with the delivery of, or payment for, healthcare benefits,
items, or services. HIPAA also establishes standards governing electronic healthcare transactions and protecting the
security and privacy of individually identifiable health information. Some states have also enacted privacy and security
statutes or regulations that, in some cases, are more stringent than those issued under HIPAA.
The American Recovery and Reinvestment Act of 2009, enacted February 17, 2009 made significant changes to HIPAA
privacy and security regulations. Effective February 17, 2010, we are regulated directly under all of the HIPAA rules
protecting the security of electronic individually identifiable health information and many of the rules governing the
privacy of such information.
• Medical Device Regulation. The FDA classifies medical devices, such as our cameras, into one of three classes, depending
on the degree of risk associated with the device and the extent of control needed to ensure safety and effectiveness.
Devices deemed to pose lower risk are placed in either class I or II, which generally requires the manufacturer to submit
to the FDA a pre-market notification requesting permission for commercial distribution. This process is known as 510
(k) clearance. Devices deemed to pose the greatest risk, such as life-sustaining, life-supporting, or implantable devices,
are placed in Class III, requiring an approved Premarket Approval Application (PMA). Our cameras are Class II medical
devices which have been cleared for marketing by the FDA. We are also subject to post-market regulatory requirements
relating to our manufacturing process, marketing and sales activities, product performance, and medical device reports
should there be deaths and serious injuries associated with our products.
• Pharmaceutical Regulation. Federal and state agencies, including the FDA and state pharmacy boards, regulate the
radiopharmaceuticals used in our Diagnostic Services business.
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• Radioactive Materials Laws. We must maintain licensure under, and comply with, federal and state radioactive materials
laws, or RAM laws. RAM laws require, among other things, that radioactive materials are used by, or that their use be
supervised by, individuals with specified training, expertise, and credentials and include specific provisions applicable
to the medical use of radioactive materials.
Intellectual Property
We rely on a combination of patent, trademark, copyright, trade secret, and other intellectual property laws, nondisclosure
agreements, and other measures to protect our intellectual property. We require our employees, consultants, and advisors to execute
confidentiality agreements and to agree to disclose and assign to us all inventions conceived during the work day, using our
property, or which relate to our business. Despite any measures taken to protect our intellectual property, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary.
Patents
We have developed a patent portfolio that covers our overall products, components, and processes. We have 38 issued U.S.
patents. The patents cover, among other things, aspects of solid-state radiation detectors, including our photodiodes, signal
processing, and system configuration. Our issued patents expire between August 9, 2016 and April 20, 2030. We have multiple
patents covering unique aspects and improvements for many of our products. We have entered into royalty-bearing licenses for
several U.S. patents with third parties, where we are the licensee, for exclusive or non-exclusive use in nuclear imaging (subject
to certain reservation of rights by the U.S. Government). In addition to our solid-state detector and photodiode technology patents,
we hold specific patents for an alternative solid-state method using Cadmium Zinc Telluride that we previously pursued for use
in gamma cameras. While each of our patents applies to nuclear medicine, many also apply to the construction of area detectors
for other types of medical and non-medical imagers and imaging methods.
Trademarks
As of December 31, 2014, we hold trademark registrations in the United States for the following marks: 2020tc IMAGER®,
Digirad®, DigiServ®, Cardius®, SPECTour®, SPECTpak Plus®, Solidium®, DigiTech®, and Telerhythmics®. We have obtained
trademark protection for some of these listed marks in the European Union and Japan.
Reimbursement
Our customers typically rely primarily on the Medicare and Medicaid programs and private payors for reimbursement. As a
result, demand for our products and services are dependent in part on the coverage and reimbursement policies of these payors.
Third party coverage and reimbursement is subject to extensive federal, state, local, and foreign regulation, and private payor rules
and policies. In many instances, the applicable regulations, policies, and rules have not been definitively interpreted by the regulatory
authorities or the courts, and are open to a variety of interpretations and are subject to change without notice.
The scopes of coverage and payment policies vary among third-party private payors. For example, some payors will not
reimburse a provider unless the provider has a contract with the payor, and in many instances such payors will not enter into such
contracts without the approval of a third party “radiology benefit manager” that the payor compensates based on reducing the
payor’s imaging expense. Other payors prohibit reimbursement unless physicians own or lease our cameras on a full-time basis,
or meet certain accreditation or privileging standards. Such payor requirements and limitations can significantly restrict the types
of business models we can successfully utilize.
Medicare reimbursement rules are subject to annual changes that may affect payment for services that our customers provide.
In addition, Congress has passed healthcare reform proposals that are intended to expand the availability of healthcare coverage
and reduce the growth in healthcare spending in the U.S. Many of these laws impact the services that our customers provide, and
could change further over time.
Medicare reimbursement rules impose many standards and policies on the payment of services that our customers provide. For
instance, starting in 2012, physicians billing for the technical component of nuclear imaging tests must be accredited by a
government-approved independent accreditation body and many private payors are adopting similar requirements. We have made
available to our customers a service to assist them in obtaining and maintaining the required accreditation. We believe we have
structured our contracts in a manner that allows our customers to seek reimbursement from third-party payors in compliance with
the law. Our physician customers typically bill for both the technical and professional components of the tests. Assuming they
meet certain requirements including, but not limited to, performing and documenting bona fide interpretations and providing the
requisite supervision of the non-physician personnel performing the tests, they may bill and be paid by Medicare. If the failure to
comply is deemed to be “knowing” or “willful,” the government could seek to impose fines or penalties, and we may be required
to restructure our agreements and/or respond to any resultant claims by such customers or the government. Our hospital customers
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typically seek reimbursement by Medicare for outpatient services under the Medicare Hospital Outpatient Prospective Payment
System.
Employees
As of December 31, 2014, we had a total of 297 full time employees, of which 200 were employed in clinical related positions,
38 in operational roles, 40 in general and administrative functions, and 19 in marketing and sales. We also utilize varying amounts
of temporary workers as necessary to fulfill customer requirements. We have not experienced any work stoppages and consider
our employee relations to be good.
Availability of Public Reports
We file electronically with the Securities and Exchange Commission, or SEC, our annual reports on Form 10-K, quarterly
reports on Form 10-Q, and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
The public may read or copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room
1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov.
You may obtain a copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-
K, and amendments to those reports on the day of filing with the SEC on our website at www.digirad.com, or by contacting the
Investor Relations Department at 858-726-1600.
ITEM 1A.
RISK FACTORS
Risks Related to Our Business and Industry
We may not be able to achieve the benefits of our restructuring efforts.
On February 28, 2013, we announced a plan to restructure our Diagnostic Imaging business to significantly reduce costs and
focus on maximizing cash flow from our Diagnostic Services business. Restructuring efforts include many complexities, which
include but are not limited to changing the way a business conducts operations, changing of key personnel, changing the process
in how we manufacture and sell our products, modifying contracts, severing employees, and working with less resources. There
is no guarantee that our restructuring efforts will increase profitability and cash flow in our Diagnostic Imaging business, and our
efforts could cause unforeseen complexities and additional cash outflows.
Our revenues may decline due to reductions in Medicare and Medicare reimbursement rates.
The success of our business is largely dependent upon our medical professional customers' ability to provide diagnostic care
to their patients in an economically sustainable manner, either through the purchase of our imaging systems or using our diagnostic
services, or both. Our customers are directly impacted by changes (decreases and increases) in governmental and private payor
reimbursements for diagnostic services. We are directly and indirectly impacted by changes in reimbursements. For our businesses
where we are indirectly affected by reimbursement changes, we make every effort to act as business partners with our physician
customers. For example, in 2010, we proactively adjusted our diagnostic imaging services rates down due to the dramatic
reimbursement declines that our customers experienced from the Centers for Medicare & Medicaid Services. Reimbursements
remain a source of concern for our customers and downward pressure on reimbursements causes greater pricing pressure on our
services and influences the buying decisions of our customers. Although the gap is closing, hospital reimbursements remain higher
than in-office reimbursements. Our Diagnostic Imaging segment's products are targeted to serve the hospital market. A smaller
portion of our Diagnostic Services business segment operates in the hospital market.
Reductions in reimbursements could significantly impact the viability of in-office imaging performed by independent
physicians, as well as the viability of our cardiac event monitoring services business. The historical decline in reimbursements in
diagnostic imaging has resulted in cancellations of imaging days in our Diagnostic Services business and the delay of purchase
and service decisions by our existing and prospective customers in our Diagnostic Imaging business. Declines in Medicare and
Medicaid reimbursement for our relevant diagnostic services modalities are possible due to many factors, including but not limited
to, the potential implementation of the federal sustainable growth factor (SGR). The SGR is part of the relative value unit (RVU),
a formula that was enacted by Congress as part of the Balanced Budget Act of 1997 to control the cost of the Medicare program.
It applies to all health services paid for by Medicare, not just diagnostic services. The application of the SGR has been delayed
by Congress for many years, with annual delays of implementation each year. Adoption of SGR could result in Medicare cost
reimbursements being reduced over 20% and would impact our business dramatically. There is no assurance that concepts
surrounding SGR will be timely or favorably resolved, and if not favorably resolved, it could have a material adverse impact on
our business.
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Unexpected changes in our relationship with Emory Healthcare could result in a significant reduction in our sales and
profits.
Emory Healthcare has contributed a high percentage of our our consolidated revenue. For 2014, Emory Healthcare (Emory)
represented 10.9% of our consolidated revenues and 14.3% of our Diagnostic Services revenues. Prior to 2014, Emory did not
exceed 10% of our consolidated revenues, however, they were still a significant customer.
We expect that Emory will continue to be one of our most important customers, and it is possible our relationship could expand
or contract in the future. Though we do not anticipate any near term changes in our relationship and believe we do have excellent
relations with Emory, our business could be materially adversely affected if Emory terminates its arrangement with us, negotiates
lower prices, or otherwise alters the nature of its relationship with us.
Our Diagnostic Services revenues may decline due to changes in diagnostic imaging regulations and the use of third party
benefit managers by states and private payors to drive down diagnostic imaging volumes.
Nuclear medicine is a “designated health service” under the federal physician self-referral prohibition law known as the “Stark
Law,” which states that a physician may not refer designated health services to an entity with which the physician or an immediate
family member has a financial relationship, unless a statutory exception applies. Our business model and service agreements are
structured to enable our physician customers to meet the statutory in-office ancillary services (IOAS) exception to the Stark Law,
allowing them to perform nuclear diagnostic imaging services on their patients in the convenience of their own office. From time-
to-time, the Centers for Medicare and Medicaid Services and Congress have proposed to modify the IOAS to further limit or
eliminate this exception. Various lobbying organizations are pushing for, and the Medicare Payment Advisory Commission
(MedPAC) is actively discussing, recommending that Congress limit the availability of the IOAS exception in order to reduce
federal healthcare costs. Legislation has been introduced in prior Congresses to modify or eliminate the exception, but has not
been enacted. The outcome of these efforts is uncertain at this time; however, the limitation or elimination of the IOAS exception
could significantly impact our Diagnostic Services business segment as currently structured.
Our customers who perform imaging services in their office also experience the continuing efforts by some private insurance
companies to reduce healthcare expenditures by hiring radiology benefit managers to help them manage and limit imaging. The
federal government has also set aside monies in the 2009 recession recovery acts to hire radiology benefit managers to provide
image management services to Medicare/Medicaid and MedPAC has recommended and the Centers for Medicare & Medicaid
Services has, in the past, proposed legislation requiring Medicare physicians who engage in a relatively high volume of medical
imaging be required to obtain pre-authorization through a radiology benefit manager. A radiology benefit manager is an unregulated
entity that performs various functions for private payors and managed care organizations. Radiology benefit manager activities
can include pre-authorization for imaging procedures, setting and enforcing standards, approving which contracted physicians can
perform the services, such as requiring even the most experienced and highly qualified cardiologists to obtain additional board
certifications, or interfering with the financial decision of the private practitioner by requiring them to own their own imaging
system and not allowing them to lease the system. The radiology benefit managers often do not provide written documentation of
their decisions or an appeals process, leaving leasing physicians unable to challenge their decisions with the carrier or the state
insurance department. Unregulated radiology benefit manager activities have and could continue to adversely affect our physician
customers' ability to receive reimbursement, therefore impacting our customers' decision to utilize our Diagnostic Services imaging
services.
Recently, we outsourced the manufacturing of the majority of the components associated with our nuclear gamma cameras
to streamline operations and reduce costs. Outsourcing our manufacturing process may be difficult, could result in business
disruptions caused by the outsource partner, and may not result in significant cost savings.
In September 2013, we announced an agreement to outsource the majority of our nuclear gamma camera production processes
to a third party. We are now reliant on our third party manufacturer, which could expose us to any disruptions in their supply chain,
processes, employees, and other underlying activities associated with their manufacturing process. Should we experience a
disruption in their supplying of cameras, we may not be able to find a suitable alternative solution in a reasonable period of time
which may cause a disruption in camera sales.
Manufacturing and providing service for our nuclear imaging cameras is highly dependent upon the availability of certain
suppliers, thereby making us vulnerable to supply problems that could harm our business.
Our manufacturing process, even through an outsource manufacturer, and our after sale camera support business, relies on a
limited number of third parties to supply certain key components of our products. Alternative sources of production and supply
may not be readily available or may take several months to scale-up and develop effective production processes. If a disruption
in the availability of parts or in the operations of our suppliers were to occur, our ability to have gamma cameras built as well as
our ability to provide support could be materially adversely affected. We have developed backup plans and have alternative
procedures should we experience a disruption. However, if these plans are unsuccessful, delays in the production and support of
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our gamma cameras for an extended period of time could cause a loss of revenue and/or higher production and support costs,
which could significantly harm our business and results of operations.
Our Diagnostic Services operations are highly dependent upon the availability of certain radiopharmaceuticals, thereby
making us vulnerable to supply problems and price fluctuations that could harm our business.
Our Diagnostic Service business involves the use of radiopharmaceuticals. There were significant disruptions in the international
supply of these radiopharmaceuticals in 2010, which caused us to cancel services that would have otherwise been provided and
this adversely affected our customers, as well as our financial condition in 2010. Since this event, we generally have had sufficient
supply, but do experience short-term shortages from time to time. There are limited major nuclear reactors supplying medical
radiopharmaceuticals worldwide; however, there is no guarantee that the reactors will remain in good repair and our supplier will
have continuing access to ample supply of our radiopharmaceutical product. If we are unable to obtain an adequate supply of the
necessary radiopharmaceuticals, we may be unable to utilize our personnel and equipment through our in-office service operations,
or the volume of our services could decline and our business may be adversely affected. Shortages can also cause price increases
that may not be accounted for in third party reimbursement rates, thereby causing us to lose margin or require us to pass increases
on to our physician customers.
Our business is not widely diversified.
We provide our diagnostic services and sell our products primarily into the cardiac nuclear and ultrasound imaging private
practice and in-office markets. We may not be able to leverage our assets and technology to diversify our products and services
in order to generate revenue beyond the cardiac nuclear and ultrasound imaging private practice markets. If we are unable to
diversify our product and service offerings, our financial condition may suffer.
We compete against businesses that have greater resources and different competitive strengths.
The market for cardiac nuclear imaging cameras is limited and has experienced some declines. Some of our competitors have
greater resources and a more diverse product offering than we do. Some of our competitors also enjoy significant advantages over
us, including greater brand recognition, greater financial and technical resources, established relationships with healthcare
professionals, larger distribution networks, and greater resources for product development, as well as more extensive marketing
and sales resources. If we are unable to expand our current market share, our revenues and related financial condition could decline.
In addition, our Diagnostic Services customers may switch to other service providers. Our Diagnostic Services segment, both
in diagnostic imaging and cardiac event monitoring, compete against a variety of competitors, some of whom have the advantage
of a lower cost structure, and in the case of diagnostic imaging, against imaging centers that install nuclear gamma cameras and
make them available to physicians in their geographic vicinity. If these competitors are able to win significant portions of our
business, our sales could decline significantly. Our financial condition could be adversely affected under such circumstances.
Our quarterly and annual financial results are difficult to predict and are likely to fluctuate from period to period.
We have historically experienced seasonality in our Diagnostic Services business, and in the past, volatility due to the changing
health care environment, the variable supply of radiopharmaceuticals, and the downturns based on the changing U.S. economy.
While our physicians are typically obligated to pay us for imaging days to which they have committed, our contracts permit some
flexibility in scheduling when services are to be performed. We cannot predict with certainty the degree to which seasonal
circumstances such as the summer slowdown, winter holiday vacations, and weather conditions may affect the results of our
operations. We have also experienced fluctuations in demand of our cardiac nuclear gamma cameras due to economic conditions,
capital budget availability, and other financial or business reasons. In addition, due to the way that customers in our target markets
acquire our products, a large percentage of our camera orders are booked during the last month of each quarterly accounting period.
As such, a delivery delay of only a few days may significantly impact quarter-to-quarter comparisons of our results of operations.
Moreover, the sales cycle in our Diagnostic Imaging segment for cameras is typically lengthy, particularly in the hospital market,
which may cause us to experience significant revenue fluctuations.
We spend considerable time and money complying with federal and state laws, regulations, and other rules, and if we are
unable to comply with such laws, regulations, and other rules, we could face substantial penalties.
We are directly, or indirectly through our physician customers, subject to extensive regulation by both the federal government
and the states in which we conduct our business, including: the federal Medicare and Medicaid anti-kickback laws and other
Medicare laws, regulations, rules, manual provisions, and policies that prescribe requirements for coverage and payment for
services performed by us and our physician customers; the federal False Claims statutes; the federal Health Insurance Portability
and Accountability Act of 1996, or HIPAA, as amended in 2009 under the HITECH Act that places direct legal obligations and
higher liability on us with respect to the security and handling of personal health information; the Stark Law; the federal Food,
Drug and Cosmetic Act; federal and state radioactive materials laws; state food and drug and pharmacy laws and regulations; state
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laws that prohibit the practice of medicine by non-physicians and fee-splitting arrangements between physicians and non-
physicians; state scope-of-practice laws; and federal rules prohibiting the mark-up of diagnostic tests to Medicare under certain
circumstances. If our physician customers are unable or unwilling to comply with these statutes, regulations, rules, and policies,
rates of our services and products could decline and our business could be harmed. Additionally, new government mandates will
require us to provide a certain baseline of health benefits and premium contribution for our employees and their families or pay
governmental penalties. Some of these costs are not tax deductible. We have opted to provide this coverage to our employee base
in order to maintain retention of qualified medical technicians and other professionals rather than plan to pay penalties to the
government. Either option will result in additional costs to us and could negatively impact our cash reserves.
We maintain a compliance program to identify and correct any compliance issues and remain in compliance with all applicable
laws, to train employees, to audit and monitor our operations, and to achieve other compliance goals. Like most companies with
compliance programs, we occasionally discover compliance concerns. In such cases, we take responsive action, including corrective
measures when necessary. There can be no assurance that our responsive actions will insulate us from liability associated with
any detected compliance concerns.
If our past or present operations are found to be in violation of any of the laws, regulations, rules, or policies described above
or the other laws or regulations to which we or our customers are subject, we may be subject to civil and criminal penalties,
damages, fines, exclusion from federal or state health care programs, or the curtailment or restructuring of our operations. Similarly,
if our physician customers are found to be non-compliant with applicable laws, they may be subject to sanctions which could have
a negative impact on us. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our
ability to operate our business and our financial results. Any action against us for violation of these laws, even if we successfully
defend against it, could cause us to incur significant legal expenses, divert our management's attention from the operation of our
business, and damage our reputation.
Health care policy changes may have a material adverse effect on us.
In response to perceived increases in health care costs in recent years, there have been and continue to be proposals by the
federal government, state governments, regulators, and third-party payers to control these costs and, more generally, to reform the
U.S. health care system. Certain of these proposals could limit the prices we are able to charge for our products or the amounts of
reimbursement available for our products, and could limit the acceptance and availability of our products. The adoption of some
or all of these proposals could have a material adverse effect on our financial position and results of operations.
A portion of our operations are located in a facility that may be at risk from fire, earthquakes, or other disasters.
Final assembly in our manufacturing process and significant portions of our inventory are located in a single facility in Poway,
California, near known fire areas and earthquake fault zones. Future natural disasters could cause substantial delays in our operations
and cause us to incur additional expenses. Although we have taken precautions to insure our facilities and continuing operations,
as well as provide for offsite back-up of our information systems, this may not be adequate to cover our losses in any particular
case. A disaster could significantly harm our business and results of operations.
The medical device industry is litigious, which could result in the diversion of our management's time and efforts, and
require us to pay damages which may not be covered by our insurance.
Our operations entail risks of claims or litigation relating to product liability, radioactive contamination, patent infringement,
trade secret disclosure, warranty claims, vendor disputes, product recalls, property damage, misdiagnosis, breach of contract,
personal injury, and death. Any litigation or claims against us, or claims we bring against others, may cause us to incur substantial
costs, could place a significant strain on our financial resources, divert the attention of our management from our core business,
and harm our reputation. We may incur significant liability in the event of any such litigation, regardless of the merit of the action.
If we are unable to obtain insurance, or if our insurance is inadequate to cover claims, our cash reserves and other assets could be
negatively impacted. Additionally, costs associated with maintaining our insurance could become prohibitively expensive, and
our ability to become or remain profitable could be diminished.
Our ability to protect our intellectual property and proprietary technology through patents and other means is uncertain.
Our success depends, in part, on our ability to protect our proprietary rights to the technologies used in our products. Any
patents we have obtained or do obtain may be challenged by re-examination or otherwise invalidated or eventually found
unenforceable. Both the patent application process and the process of managing patent disputes can be time consuming and
expensive. Competitors may attempt to challenge or invalidate our patents, or may be able to design alternative techniques or
devices that avoid infringement of our patents, or develop products with functionalities that are comparable to ours. In the event
a competitor infringes upon our patent or other intellectual property rights, litigation to enforce our intellectual property rights or
to defend our patents against challenge, even if successful, could be expensive and time consuming and could require significant
13
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time and attention from our management. We may not have sufficient resources to enforce our intellectual property rights or to
defend our patents against challenges from others.
We may not be able to achieve the anticipated synergies and benefits from business acquisitions, including our recent
acquisition of Telerhythmics, LLC.
Part of our ongoing business strategy is to acquire businesses that we believe can complement our current business activities,
both financially and strategically. On March 13, 2014, we acquired Telerhythmics, LLC with these synergistic benefits in mind.
Acquisitions include many complexities, which can include, but are not limited to, risks associated with the acquired business'
past activities, loss of customers, regulatory changes that are not anticipated, difficulties in integrating personnel and human
resource programs, integrating ERP systems and other infrastructures, and general under performance of the business under Digirad
control versus the prior owners. There is no guarantee that our acquisitions will increase the profitability and cash flow of Digirad,
and our efforts could cause unforeseen complexities and additional cash outflows, including financial losses.
We may make financial investment in other businesses that may lose value.
As we look for the best ways to deploy our capital and maximize our returns for our businesses and shareholders, we may
make financial investments in other businesses or processes for purposes of enhancing our supply chain, creating financial returns,
strategic developments, or other purposes. These investments may be speculative in nature, and there is no guarantee that we will
experience a financial return and we may lose our entire principal balance if not successful.
Risks Related to Our Common Stock
Our common stock has a low trading volume and our option plan could affect the trading price of our common stock.
Our common stock historically has had a low trading volume. Any significant sales of our common stock may cause volatility
in our stock price. We also have registered shares of common stock that we may issue under our employee benefit plans or from
our treasury stock. Accordingly, these shares can be freely sold in the public market upon issuance, subject to restrictions under
the securities laws. If any of these stockholders, or other selling stockholders, cause a large number of securities to be sold in the
public market without a corresponding demand, the sales could reduce the trading price of our common stock. One or more
stockholders holding a significant amount of our common stock might be able to significantly influence matters requiring approval
by our stockholders, possibly including the election of directors and the approval of mergers or other business combination
transactions.
We adopted a tax benefits preservation plan, designed to preserve the value of certain income tax assets, primarily tax net
operating loss carryforwards (NOLs), which may discourage acquisition and sale of large blocks of our stock and may
result in significant dilution for certain stockholders.
We have adopted a tax benefits preservation plan in the form of a Section 382 Rights Agreement (the 382 Agreement). The
382 Agreement is designed to preserve stockholder value and the value of certain income tax assets primarily associated with
NOLs by acting as a deterrent to any person acquiring beneficial ownership of 4.99% or more of the Company’s outstanding
common stock without the approval of the Board. The 382 Agreement may discourage existing 5% stockholders from selling their
interest in a single block which may impact the liquidity of the Company's common stock, may deter institutional investors from
investing in our stock, and may deter potential acquirers from making premium offers to acquire the Company, factors which may
depress the market price of our stock.
Anti-takeover provisions in our organizational documents and Delaware law may prevent or delay removal of current
management or a change in control.
Our restated certificate of incorporation and restated bylaws contain provisions that may delay or prevent a change in control,
discourage bids at a premium over the market price of our common stock, and adversely affect the market price of our common
stock and the voting and other rights of the holders of our common stock. In addition, as a Delaware corporation, we are subject
to Delaware law, including Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a Delaware
corporation from engaging in any business combination with any interested stockholder for a period of three years following the
date that the stockholder became an interested stockholder unless certain specific requirements are met as set forth in Section 203.
These provisions, alone or together, could have the effect of deterring or delaying changes in incumbent management, proxy
contests, or changes in control.
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Table Of Contents
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
Our principal executive offices are located in an approximately 8,500 square foot facility in Suwanee, Georgia that had been
leased to us on a month to month basis previously. On October 1, 2014, we entered into a long-term lease agreement for the same
facility, extending our lease terms to November 30, 2021. Our former corporate headquarters were located in an approximately
47,000 square foot facility in Poway, California. Consistent with our Facilities restructuring initiative, on January 22, 2014, we
entered into a termination agreement to end the lease on the 47,000 square foot Poway, California facility as of April 30, 2014.
The original term of the lease would have continued through February 29, 2016. Concurrently with the termination of the lease
for the 47,000 square foot Poway, California facility, we entered into a new lease agreement on January 23, 2014 for a separate
21,300 square foot facility in Poway, California to house our Diagnostic Imaging operations. The new lease agreement is for the
term from March 1, 2014 through February 28, 2021. See Note 11 to the audited consolidated financial statements for further
information. In addition to the aforementioned properties, Diagnostic Services leases approximately 25 additional small hub
locations in the various states in which we operate, which primarily house our fleet of cameras and vans. The hub location lease
terms typically range between one and five years. Diagnostic Services also operates a cardiac event monitoring center which is
located in an approximately 8,078 square foot facility in Collierville, Tennessee. The lease will expire on March 12, 2021.
ITEM 3.
LEGAL PROCEEDINGS
See Note 7 to the audited consolidated financial statements for a summary of legal proceedings.
ITEM 4.
MINE SAFETY DISCLOSURES
Not Applicable.
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PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is traded on the NASDAQ Global Market under the symbol “DRAD”. The following table presents the
high and low per share sale prices of our common stock during the periods indicated, as reported on NASDAQ.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year ended December 31,
2014
2013
High
Low
High
Low
$
$
3.88
3.73
4.19
4.49
$
3.03
3.03
3.11
3.50
$
2.53
2.68
2.84
4.85
1.80
2.16
2.32
2.50
As of February 24, 2015 there were approximately 172 holders of record of our common stock. We believe that the number of
beneficial owners is substantially greater than the number of record holders because a large portion of our common stock is held
of record through brokerage firms in “street name.”
Dividend Policy
We paid four quarterly cash dividends of $0.05 per common share for total dividends paid of $0.20 per common share during
the year ended December 31, 2014. On February 2, 2015, we announced a dividend of $0.05 per common share payable on
February 23, 2015 to shareholders of record as of February 13, 2015.
We presently intend to continue the payment of regular quarterly cash dividends on our common stock. Our ability to pay
dividends could be affected by future business performance, liquidity, and capital needs.
Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
There were no issuer purchases of equity securities during the fiscal year 2014.
On February 27, 2013, our board of directors modified our stock buyback program originally adopted in February 2009 to
increase repurchases to an aggregate of $7.0 million, and subsequently, on March 13, 2013, increased the stock buyback program
again for repurchases of up to an aggregate of $12.0 million. The timing of stock repurchases and the number of shares of common
stock to be repurchased are in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. The timing and extent of
the repurchase depends upon market conditions, applicable legal and contractual requirements, and other factors.
Total Number of
Shares Purchased
During the Period
Average Price
Paid Per Share
for Period
Presented
Total Cumulative
Number of
Shares Purchased
as Part of Publicly
Announced Plan
Maximum Dollar
Value of Shares
that May Yet
Be Purchased
Under the Plan
-
-
-
-
-
-
2,588,484
$
2,588,484
2,588,484
2,588,484
$
6,271,789
6,271,789
6,271,789
6,271,789
October 1, 2014 – October 31, 2014
November 1, 2014 – November 30, 2014
December 1, 2014 – December 31, 2014
As of December 31, 2014
Stock Performance Graph
Notwithstanding any statement to the contrary in any of our previous or future filings with the SEC, the following information
relating to the price performance of our common stock shall not be deemed “filed” with the SEC or “Soliciting Material” under
the Exchange Act, or subject to Regulation 14A or 14C, or to liabilities of Section 18 of the Exchange Act except to the extent we
specifically request that such information be treated as soliciting material or to the extent we specifically incorporate this
information by reference.
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The graph below compares the cumulative total stockholder return on our common stock with the cumulative total return on
the NASDAQ Stock Market Index and the NASDAQ Medical Equipment Index. The period shown commences on December 31,
2009 and ends on December 31, 2014, the end of our most recent fiscal year. The graph assumes an investment of $100 on December
31, 2009, and the reinvestment of any dividends, if any. The comparisons shown in the graph below are based upon historical data.
The comparisons in the graph below are required by the Securities and Exchange Commission and are not intended to forecast
or be indicative of possible future performance of our common stock.
Digirad Corporation
NASDAQ Stock Market (US Companies)
NASDAQ Medical Equipment Index
12/31/2009
12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014
$
$
$
100.00 $
100.00 $
99.33 $
97.62 $
178.64 $
100.00 $
118.37 $
118.98 $
140.70 $
196.11 $
100.00 $
106.64 $
122.52 $
136.39 $
159.86 $
223.10
226.12
185.44
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ITEM 6.
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with our Audited Consolidated Financial
Statements and related disclosures and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” which are included elsewhere in this Form 10-K. Amounts are presented in thousands, except per share amounts.
Year Ended December 31,
2014 (1)(2)
2013 (2)
2012
2011
2010
Consolidated Statements of Operations Data:
Revenues:
Diagnostic Services
Diagnostic Imaging
Total revenues
Cost of revenues:
Diagnostic Services
Diagnostic Imaging
Total cost of revenues
Gross profit
Operating expenses:
Research and development
Marketing and sales
General and administrative
Amortization and impairment of intangible assets
Restructuring loss (gain)
Gain on sale of assets and license agreement
Total operating expenses
Income (loss) from operations
Total other income
Income (loss) before income taxes
Income tax benefit (expense)
Net income (loss)
Net income (loss) per share:
Basic and diluted
Diluted
Shares used in per share calculations:
Basic
Diluted
Dividends declared per common share
Consolidated Balance Sheets Data:
Cash, cash equivalents and securities
Working capital
Total assets
Capital lease obligations
Total stockholders’ equity
$
42,170
13,438
55,608
$ 37,171
12,205
49,376
$
31,721
7,247
38,968
16,640
—
4,730
8,344
356
692
—
14,122
2,518
19
2,537
(62)
2,475
0.13
0.13
18,571
18,878
0.20
$
$
$
$
27,828
7,432
35,260
14,116
1,025
4,411
8,118
231
1,728
(1,568)
13,945
171
48
219
45
264
0.01
0.01
18,789
19,159
0.05
$
$
$
$
$
36,064
14,449
50,513
27,293
10,128
37,421
13,092
$
37,794
15,951
53,745
29,672
9,315
38,987
14,758
3,716
6,402
7,839
233
—
—
18,190
(5,098)
97
(5,001)
77
(4,924) $
2,738
7,622
7,741
331
(164)
—
18,268
(3,510)
250
(3,260)
(82)
(3,342) $
39,542
16,641
56,183
32,561
11,618
44,179
12,004
2,875
5,922
9,007
435
355
—
18,594
(6,590)
439
(6,151)
(63)
(6,214)
(0.26) $
(0.26) $
(0.18) $
(0.18) $
(0.33)
(0.33)
19,274
19,274
19,052
19,052
— $
— $
18,774
18,774
—
2014
2013
2012
2011
2010
December 31,
21,986
24,659
41,901
767
32,645
$ 26,417
29,044
41,451
488
33,386
$
27,193
31,103
44,909
96
36,449
$
30,452
35,585
50,027
51
41,487
$
30,247
35,920
52,244
79
43,959
$
$
$
$
$
(1) On March 13, 2014, we acquired 100% of the membership interest of Telerhythmics, LLC. See Note 3 to the audited
consolidated financial statements.
(2) On January 27, 2014 and February 28, 2013 we entered into the Facilities restructuring initiative and the Diagnostic Imaging
restructuring initiative, respectively. See Note 11 to the audited consolidated financial statements.
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ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion contains forward-looking statements which involve risks and uncertainties. Our actual results could
differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth
previously under the caption “Risk Factors.” This Management’s Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere
in this report.
Overview
We are one of the largest national providers of in-office nuclear cardiology imaging and ultrasound services, and also provide
cardiac event monitoring services. Our services are provided to physician practices, hospitals, and imaging centers through our
Diagnostic Services business segment. We also sell solid-state gamma cameras for nuclear cardiology and general nuclear medicine
applications, as well as provide service on the products we sell through our Diagnostic Imaging business segment. We designed
and commercialized the first solid-state nuclear gamma camera for the detection of cardiovascular disease and other medical
conditions. Our imaging systems are sold in both portable and fixed configurations, and provide enhanced operability and improved
patient comfort. Our nuclear cameras fit easily into floor spaces as small as seven feet by eight feet and facilitate the delivery of
nuclear medicine procedures in a physician’s office, an outpatient hospital setting, or within multiple departments of a hospital,
(e.g., emergency and operating rooms).
We generate revenues within two primary operating segments: Diagnostic Services and Diagnostic Imaging. Our primary
service offering through Diagnostic Services is a convenient and economically efficient imaging services program as an alternative
to purchasing a gamma camera or ultrasound 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, or any combination
of these procedures in their offices, we provide the ability for them to engage our services, which includes the use of our imaging
system, qualified personnel, and related items required to perform imaging in their own offices and bill Medicare, Medicaid, or
one of the third-party healthcare insurers directly for those services. These services are also used by large and small hospitals,
multi-practice physician groups, and imaging centers. The flexibility of our products and our service allows physicians to ensure
continuity of care and convenience for their patients and allows them to retain revenue from procedures they would otherwise
refer to imaging centers and hospitals. The imaging services are primarily provided to cardiologists, internal medicine physicians,
and family practice doctors who enter into annual contracts for a set number of days ranging from once per month to five times
per week. We experience some seasonality related to vacations, holidays, and inclement weather. Most of the imaging services
are focused on cardiac care. Many of the physicians who use Diagnostic Services segment's services are reliant on reimbursements
from Medicare, Medicaid, and third-party insurers where, in the past, there has been downward price pressure and uncertainty of
reimbursement rates due to factors outside the physicians’ control. The uncertainty created by the 2010 healthcare reform laws,
Congress’ continued deferred action on the Sustainable Growth Rate reimbursement factor (which is part of the Relative Value
Unit calculation of reimbursements for all medical codes associated with the physician fee schedule), and other legislation has
also impacted our business in the past, and will likely have some impact on our business in the future. Future changes and related
impacts may require modifications to our current business model in order for our physician customers and us to maintain a viable
economic model.
With the acquisition of Telerhythmics, LLC on March 13, 2014, we broadened our suite of service offerings provided through
the Diagnostic Services segment, enabling the provision of outsourced cardiac event monitoring services. Providing these services
offers flexibility and convenience to our customers who do not have to incur the costs of staffing, equipment, and logistics to
monitor patients as part of their standard of care. Our cardiac event monitoring services are provided primarily through an
independent diagnostic testing facility model which allows us to bill Medicare, Medicaid, or one of the third-party healthcare
insurers directly for services provided. As such, our cardiac event monitoring services are subject to reimbursements from Medicare,
Medicaid, and third-party insurers which are subject to change on a periodic basis. Our cardiac event monitoring services are
mainly provided to physician practices and hospitals.
Our Diagnostic Imaging segment revenue results primarily from selling solid-state gamma cameras and camera maintenance
contracts. 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.
For many years since our Initial Public Offering in 2004, we focused significant efforts on research and development activities
to develop and further enhance our nuclear imaging cameras, primarily for alternative uses within the health care environment.
These efforts, along with a fixed infrastructure that was sized for a much higher volume of manufacturing and sales of our nuclear
imaging cameras than we have experienced, resulted in several years of financial losses. On February 28, 2013, we announced a
plan to restructure our Diagnostic Imaging business to significantly reduce costs and improve profitability (the Diagnostic Imaging
restructuring initiative). The Diagnostic Imaging restructuring initiative involved a reduction in force focused on manufacturing,
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research and development, and administrative personnel. In addition, we entered into an agreement in September 2013 with a third
party to outsource the majority of the manufacturing associated with our cameras. All restructuring efforts associated with this
initiative were complete as of June 30, 2014. Further, on January 27, 2014, we entered into a termination agreement to end the
lease on our 47,000 square foot former headquarters facility in Poway, California (the Facilities restructuring initiative) and moved
our Diagnostic Imaging operations into a separate 21,300 square foot facility. All restructuring efforts associated with the Facilities
restructuring initiative were complete as of December 31, 2014.
With these restructuring initiatives complete, we are primarily focusing our efforts on growing our Diagnostic Services business,
which we plan to accomplish by driving revenue density with our existing customers by providing additional service offerings
such as cardiac event monitoring, as well as by increasing our overall customer relationships through territory expansion and
acquisition of smaller diagnostic services companies. We will also continue to evaluate acquisition opportunities related to
complementary healthcare services and products to diversify and expand our current offerings. We will continue to sell and service
our cameras, but at a more profitable level with our restructured, leaner infrastructure. We believe that our cameras have underlying
technology and related patents that make them relevant for many years into the future, negating the need for a fixed cost research
and development infrastructure.
Our Market
The target market for our products and services is comprised of cardiologists, internal medicine physicians, family practice
physicians, and hospitals in the United States that perform or could perform nuclear and ultrasound diagnostic imaging procedures,
or have a need for cardiac event monitoring. During the year ended December 31, 2014, through Diagnostic Services we provided
imaging services to 617 physicians and physician groups and cardiac event monitoring services to 313 physicians and physician
groups. Our Diagnostic Services business currently operates in 27 states. As discussed earlier, in the past our market has been
negatively affected by lower physician reimbursements from the Center for Medicare and Medicaid Services (CMS) and third
party insurance providers for the codes under which our physician customers bill for our services. We have addressed, and will
continue to address, these market pressures by modifying our Diagnostic Services business model, and by assisting our physician
customers in complying with new regulations and requirements.
Trends and Drivers
The medical device and services industry, including the market for nuclear and ultrasound imaging systems and services and
cardiac event monitoring, is highly competitive. Our business continues to be affected by many factors, including healthcare
reimbursement rates, competition from alternative imaging modalities such as positron emission tomography (PET) and computed
tomography (CT) angiography, competition from small owner-operated mobile nuclear imaging providers as well as from larger
entrenched competitors in the cardiac event monitoring market, and general uncertainty in the healthcare marketplace. We continue
to experience market changes due to the fluctuations in reimbursement rates and the uncertainty of healthcare legislation, though
we have seen reimbursements stabilize in the last few years.
In our Diagnostic Services segment, our physician customers continue to experience uncertainty in reimbursements from CMS
and third party insurance providers for the codes under which our physician customers bill for our services, though, again, we
have seen reimbursements stabilize in the last few years. In addition, there has been a trend of physician customers selling their
practices to hospitals or larger healthcare systems, which may reduce the volume of our service. As a result, we are continuing to
modify our offering and pricing for our services upon contract renewal. The uncertainty over the enactment of future legislation
that may impact reimbursement rates continues to linger and cause concern with our physician customers. We continue to consider
modification to our business model in order to adapt to environmental and regulatory changes in our dynamic healthcare
marketplace.
In our Diagnostic Imaging segment, we continue to focus on single photon emission computed tomography (SPECT) products
targeted specifically at the larger physician practices and hospital marketplace. The most widely used imaging acquisition
technology utilizing gamma cameras is single SPECT, and all of our current cardiac gamma cameras employ SPECT technology.
Despite high utilization rates of competing modalities such as CT, PET, and MRI, and diagnostic procedures such as CT angiography,
SPECT procedures performed with gamma cameras are expected to continue to be used for a substantial number of cardiac-specific
imaging procedures according to industry experts. We believe continued utilization of SPECT technology will be driven by patients
having easier access to nuclear medicine services at physicians’ offices, lower purchase and maintenance costs, a smaller physical
footprint, and easier service logistics of gamma cameras. In an emerging trend in cardiology, SPECT technologies are being
integrated with other imaging modalities, to form hybrid imaging modalities, such as SPECT/CT, resulting in improved clinical
quality and diagnostic certainty.
2014 Financial Highlights
Our consolidated revenues were $55.6 million for the year ended December 31, 2014. This is an increase of $6.2 million, or
12.6%, compared to the prior year period driven by a $5.0 million, or 13.4%, increase in our Diagnostic Services revenue year
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over year. The increase in Diagnostic Services revenue is primarily due to $3.9 million of incremental cardiac event monitoring
revenue resulting from the Telerhythmics acquisition, which occurred on March 13, 2014. We also experienced an increase in the
number of days our physician customers utilized our imaging services, driven by the attainment of new customers, partially offset
by a reduction in our average daily service fee rates. Diagnostic Imaging segment revenues for the year ended December 31, 2014
increased by $1.2 million, or 10.1%, compared to the prior year, primarily due to an increase in the volume of cameras sold. The
number of cameras sold increased to 27 from 20 during the years ended December 31, 2014 and 2013, respectively. Consolidated
gross profit increased $2.5 million, or 17.9%, compared to the prior year. The increase in consolidated gross profit is primarily
the result of increased overall revenue volume as well as improved gross profit as a percentage of revenue in our Diagnostic
Imaging business, with gross profit as a percentage of revenue remaining relatively consistent year over year in our Diagnostic
Services business. Our Diagnostic Imaging business segment benefited from the release of excess inventory reserves due to the
sale of previously reserved inventory, as well as reduced manufacturing and overhead costs for the year ended December 31, 2014,
compared to the prior year. Our total operating expenses remained relatively consistent for the year ended December 31, 2014
compared to the prior year, with decreases in research and development and restructuring costs during the year ended December 31,
2014 offset by the non-recurrence of the $1.6 million one-time gain on the sale of technology to Novadaq which occurred during
the year ended December 31, 2013. Our consolidated net income for the year ended December 31, 2014 was $2.5 million, which
is an increase of $2.2 million compared to our net income of $0.3 million during the prior year.
For the year ended December 31, 2014, Diagnostic Services operated 78 nuclear gamma cameras and 60 ultrasound imaging
systems. We continue to strive to improve our overall profitability through more efficient utilization of our fleet of gamma cameras
and ultrasound equipment. We measure efficiency by tracking system utilization, which is measured based on the percentage of
days that our nuclear gamma cameras and ultrasound equipment are used to deliver services to customers out of the total number
of days that they are available to deliver such services. System utilization increased to 66% for the year ended December 31, 2014,
compared to 63% in the prior year, due to an increase in the number of days our physician customers utilized our imaging services.
Critical Accounting Policies
Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated
financial statements which are prepared in accordance with United States generally accepted accounting principles. The preparation
of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities,
related disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. We evaluate our estimates and judgments, the most critical of which are those related
to revenue recognition, multiple element arrangements, reserves for contractual allowances and doubtful accounts, and inventory
valuation. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under
the circumstances. Materially different results can occur as circumstances change and additional information becomes known.
Revenue Recognition
We derive revenues primarily from providing in-office services related to the performance of cardiac diagnostic imaging
procedures, cardiac event monitoring, and from selling and servicing solid-state digital gamma cameras. We recognize revenue
in accordance with the authoritative guidance for revenue recognition, when all of the following four criteria are met: (i) a contract
or sales arrangement exists; (ii) products have been shipped and title has transferred or services have been rendered; (iii) the price
of the products or services is fixed or determinable; and (iv) collectability is reasonably assured. The timing of revenue recognition
is based upon factors such as passage of title and risk of loss, the need for installation, and customer acceptance. These factors are
based on the specific terms of each contract or sales arrangement.
Diagnostic Services imaging services revenue is derived from our ability to provide our physician customers with our services,
which includes use of our imaging system, qualified personnel, and related items required to perform imaging in their own offices
and bill Medicare, Medicaid, and other payors for in-office nuclear and ultrasound diagnostic imaging procedures. Revenue related
to diagnostic imaging services is recognized at the time services are performed and collection is reasonably assured. Diagnostic
Services segment's imaging services are generally billed on a per-day basis under annual contracts for nuclear diagnostic imaging,
which specifies the number of days of service to be provided, or on a flat rate month-to-month basis for ultrasound imaging.
Our cardiac event monitoring services are provided primarily through an independent diagnostic testing facility model which
allows us to bill Medicare, Medicaid, or one of the third-party healthcare insurers directly for services provided. We also receive
reimbursement directly from patients through co-pays and self-pay arrangements. Billings for services reimbursed by third party
payors, including Medicare, are recorded as revenue net of contractual allowances. Contractual allowances are estimated based
on historical collections by Current Procedural Terminology (CPT) code for specific payors, or class of payors. Adjustments to
the estimated receipts, based on final settlement with the third party payors, are recorded upon settlement.
Diagnostic Imaging product revenues are generated from the sales of gamma cameras and follow-on maintenance service
contracts. We generally recognize revenue upon delivery and acceptance by customers. We also provide installation and training
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for camera sales in the United States. Installation and initial training is generally performed shortly after delivery and represents
a cost which we accrue at the time revenue is recognized. Neither service is essential to the functionality of the product. Maintenance
services are sold beyond the term of the warranty, which is generally one year from the date of purchase. Revenue from these
contracts is deferred and recognized ratably over the period of the obligation and is included in Diagnostic Imaging sales.
Multiple Element Arrangements
In fiscal year 2013, we sold all of our assets specifically related to an uncommercialized surgical imaging system previously
in development, as well as licensed certain existing Company technology. The transaction was accounted for in accordance with
the authoritative guidance for multiple element arrangements. We identified the deliverables at the inception of the agreement and
determined which items had value to the customer on a standalone basis, and were therefore separate units of accounting. Non-
contingent arrangement consideration was allocated at the inception of the agreement to all identified units of accounting based
on their relative selling price. The relative selling price for each unit of accounting was determined using best estimate of selling
price, because neither vendor specific objective evidence (VSOE) of selling price nor third-party evidence of selling price existed
for the units of accounting. The non-contingent amount of arrangement consideration allocated to each unit of account was
recognized upon performance and delivery of the related unit of accounting.
Allowance for Doubtful Accounts and Billing Adjustments
We provide reserves for doubtful accounts and billing adjustments. We review reserves on a quarterly basis and make adjustments
based on our historical experience rate and known collectability issues and disputes. We also consider our bad debt write-off and
billing adjustments history. Our estimates of collectability could be impacted by material amounts due to changed circumstances,
such as a higher number of defaults or material adverse changes in a payor’s ability to meet its obligations. Within Diagnostic
Services, we record adjustments and credit memos that represent billing adjustments subsequent to the performance of service. A
provision for billing adjustments is charged against Diagnostic Services revenues and a provision for doubtful accounts is charged
to general and administrative expenses.
Contractual Allowances
Our cardiac event monitoring services are provided primarily through an independent diagnostic testing facility model which
allows us to bill Medicare, Medicaid, or one of the third-party healthcare insurers directly for services provided. Accounts receivable
for cardiac event monitoring are recorded at the time revenue is recognized, net of contractual allowances. Contractual allowances
are estimated based on historical collections by Current Procedural Terminology (CPT) code for specific payors, or class of payors.
The ultimate collection of accounts receivable may not be known for several months after services have been provided and billed.
Because of continuing changes in the health care industry and third party reimbursement, it is possible that our estimates could
change, which could have a material impact on our operations and cash flows.
Business Combinations
Under the acquisition method of accounting, we allocate the fair value of the total consideration transferred to the tangible and
identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. The
fair values assigned, defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between willing market participants, are based on estimates and assumptions determined by management. We record the excess
consideration over the aggregate fair value of tangible and intangible assets, net of liabilities assumed, as goodwill. These valuations
require us to make significant estimates and assumptions, especially with respect to intangible assets.
In connection with certain of our acquisitions, additional contingent consideration is earned by the sellers upon completion of
certain future performance milestones. In these cases, a liability is recorded on the acquisition date for an estimate of the acquisition
date fair value of the contingent consideration by applying the income approach utilizing variable inputs such as anticipated future
cash flows, risk-free adjusted discount rates, and nonperformance risk. Any change in the fair value of the contingent consideration
subsequent to the acquisition date is recognized in acquisition related (gain) expense, net, a component of operating expenses, in
our consolidated statements of comprehensive income (loss). This method requires significant management judgment, including
the probability of achieving certain future milestones and discount rates. Future changes in our estimates could result in expenses
or gains.
Management typically uses the discounted cash flow method to value our acquired intangible assets. This method requires
significant management judgment to forecast future operating results and establish residual growth rates and discount factors. The
estimates we use to value and amortize intangible assets are consistent with the plans and estimates that we use to manage our
business and are based on available historical information and industry estimates and averages. If the subsequent actual results
and updated projections of the underlying business activity change compared with the assumptions and projections used to develop
these values, we could experience impairment charges. In addition, we have estimated the economic lives of certain acquired
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assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change,
depreciation or amortization expenses could be accelerated or slowed.
Inventory
We state inventories at the lower of cost (first-in, first-out) or market (net realizable value) and review our inventory balances
for excess and obsolete inventory levels on a quarterly basis. Costs include material, labor, and manufacturing overhead and
variance costs. We rely on historical information to support our reserve and utilize management’s business judgment. Per our
policy, we generally reserve 100% of the cost of inventory quantities in excess of a defined period of demand. Once inventory is
reserved, we do not adjust the reserve balance until the inventory is sold or disposed.
Fair-value of Financial Instruments
The authoritative guidance for fair value measurements defines fair value for accounting purposes, establishes a framework
for measuring fair value, and provides disclosure requirements regarding fair value measurements. The guidance defines fair value
as an exit price, which is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly
transaction between market participants at the measurement date. The degree of judgment utilized in measuring the fair value of
assets and liabilities generally correlates to the level of pricing observability. Assets and liabilities with readily available, actively
quoted prices, or for which fair value can be measured from actively quoted prices in active markets, generally have more pricing
observability and require less judgment in measuring fair value. Conversely, assets and liabilities that are rarely traded or not
quoted have less pricing observability, and are generally measured at fair value using valuation models that require more judgment.
These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the
price transparency of the asset, liability, or market, and the nature of the asset or liability. We have categorized our assets and
liabilities measured at fair value into a three-level hierarchy in accordance with this guidance. See Note 5 to the audited consolidated
financial statements for a further discussion regarding our measurement of assets and liabilities at fair value.
Valuation of Long-Lived Assets including Finite Lived Purchased Intangible Assets
Long-lived assets consist of property and equipment and finite lived intangible assets. We record property and equipment at
cost, and record other intangible assets based on their fair values at the date of acquisition. We calculate depreciation on property
and equipment using the straight-line method over the estimated useful life of the assets. Charges related to amortization of assets
recorded under capital leases are included within depreciation expense. We calculate amortization on other intangible assets using
either the accelerated or the straight-line method over the estimated useful life of the assets, based on the nature of when we expect
to receive cash inflows generated by the intangible assets.
Impairment losses on long-lived assets used in operations are recorded when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. If such assets are
considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets
exceeds the estimated fair value of the assets. When indicators of impairment exist, we perform a review of the carrying value of
our long-lived assets to be held and used, including certain identifiable intangible assets. No impairment losses were recorded on
long-lived assets during the years ended December 31, 2014, 2013, or 2012.
Valuation of Goodwill
We review goodwill for impairment on an annual basis during the fourth quarter, as well as when events or changes in
circumstances indicate that the carrying value may not be recoverable. We begin the process by assessing qualitative factors in
determining whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount. After
performing the aforementioned assessment and upon review of the results of such assessment, we may begin performing step one
of the two-step impairment analysis by quantitatively comparing the fair value of the reporting unit with goodwill to the carrying
value of its long-term assets. If the carrying value of the long-term assets exceeds the fair value of the reporting unit, then we must
perform the second step of the impairment test, whereby the carrying value of the reporting unit’s goodwill is compared to its
implied fair value. If the carrying value of the goodwill exceeds the implied fair value, an impairment loss equal to the difference
would be recorded. No impairment losses were recorded on goodwill during the years ended December 31, 2014, 2013, or 2012.
Restructuring
Restructuring costs are included in income (loss) from operations within the consolidated statements of comprehensive income
(loss). Losses on property and equipment are recorded consistent with our accounting policy related to long-lived assets. One-
time termination benefits are recorded at the time they are communicated to the affected employees. Losses on property lease
obligations are recorded when the lease is abandoned or terminated.
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On February 28, 2013, we announced a plan to restructure our Diagnostic Imaging business. In addition, on January 27, 2014,
we announced a plan to exit our 47,000 square foot former headquarters facility in Poway, California. See Note 11 to the audited
consolidated financial statements for further detail.
Share-Based Compensation
We grant options to purchase our common stock and restricted stock units (RSUs) to our employees and directors under our
equity compensation plans. We estimate the fair value of the stock option awards using the Black-Scholes option-pricing model
on the date of grant. The fair value of RSUs is based on the stock price on the date of grant. The fair value of equity instruments
that are expected to vest are recognized using the straight-line method over the requisite service period. We estimated the forfeiture
rate based on historical data for forfeitures and we are recognizing compensation costs only for those equity awards expected to
vest.
Warranty
We generally provide a 12 month warranty on our cameras. We accrue the estimated cost of this warranty at the time revenue
is recorded and charge warranty expense to Diagnostic Imaging cost of revenues. Warranty reserves are established based on
historical experience with failure rates and repair costs and the number of systems covered by warranty. Warranty reserves are
depleted as cameras are repaired. The costs consist principally of materials, personnel, overhead, and transportation. We review
warranty reserves quarterly and, if necessary, make adjustments.
Income Taxes
We account for income taxes in accordance with the related authoritative guidance, which sets forth an asset and liability
approach that requires the recognition of deferred tax assets and deferred tax liabilities for the expected future tax consequences
of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount that is more likely than not expected to be realized. In
making such a determination, a review of all available positive and negative evidence must be considered, including scheduled
reversal of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance.
The authoritative guidance for income taxes defines a recognition threshold and measurement attributes for financial statement
recognition and measurement of a tax provision taken or expected to be taken in a tax return. The guidance also provides direction
on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Under the
guidance, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that
is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be
recognized if it has less than a 50% likelihood of being sustained. We recognize interest and penalties related to uncertain tax
positions as a component of the income tax provision.
Results of Operations
The following table sets forth our results from operations for the years ended December 31, 2014, 2013, and 2012 (in thousands,
except percentages):
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Table Of Contents
Revenues:
Diagnostic Services
Diagnostic Imaging
Total revenues
Total cost of revenues
Gross profit
Operating expenses:
Research and development
Marketing and sales
General and administrative
Amortization of intangible assets
Restructuring charges
Gain on sale of assets and license agreement
Total operating expenses
Income from operations
Total other income
Income before income taxes
Income tax (expense) benefit
Net income
Revenues:
Diagnostic Services
Diagnostic Imaging
Total revenues
Total cost of revenues
Gross profit
Operating expenses:
Research and development
Marketing and sales
General and administrative
Amortization of intangible assets
Restructuring charges
Gain on sale of assets and license agreement
Total operating expenses
Income (loss) from operations
Total other income
Income (loss) before income taxes
Income tax benefit
Net income (loss)
Year ended December 31,
Change from
Prior Year
2014
% of 2014
Revenues
2013
% of 2013
Revenues
Dollars
Percent
$ 42,170
75.8 % $ 37,171
75.3 % $
13,438
55,608
38,968
16,640
—
4,730
8,344
356
692
—
14,122
2,518
19
2,537
24.2 %
100.0 %
70.1 %
29.9 %
— %
8.5 %
15.0 %
0.6 %
1.2 %
— %
25.4 %
4.5 %
— %
4.6 %
(62)
(0.1)%
$
2,475
4.5 % $
12,205
49,376
35,260
14,116
1,025
4,411
8,118
231
1,728
(1,568)
13,945
171
48
219
45
264
24.7 %
100.0 %
71.4 %
28.6 %
2.1 %
8.9 %
16.4 %
0.5 %
3.5 %
(3.2)%
28.2 %
0.3 %
0.1 %
0.4 %
0.1 %
0.5 % $
4,999
1,233
6,232
3,708
2,524
(1,025)
319
226
125
(1,036)
1,568
177
2,347
(29)
2,318
(107)
2,211
13.4 %
10.1 %
12.6 %
10.5 %
17.9 %
(100.0)%
7.2 %
2.8 %
54.1 %
(60.0)%
(100.0)%
1.3 %
1,372.5 %
(60.4)%
1,058.4 %
(237.8)%
837.5 %
Year Ended December 31,
Change from
Prior Year
2013
% of 2013
Revenues
2012
% of 2012
Revenues
Dollars
Percent
$ 37,171
75.3 % $ 36,064
71.4 % $
24.7 %
100.0 %
71.4 %
28.6 %
2.1 %
8.9 %
16.4 %
0.5 %
3.5 %
(3.2)%
14,449
50,513
37,421
13,092
3,716
6,402
7,839
233
—
—
28.2 %
0.3 %
18,190
(5,098)
97
(5,001)
0.1 %
77
0.5 % $ (4,924)
0.1 %
0.4 %
28.6 %
100.0 %
74.1 %
25.9 %
7.4 %
12.7 %
15.5 %
0.5 %
— %
— %
36.0 %
(10.1)%
0.2 %
(9.9)%
0.2 %
(9.7)% $
12,205
49,376
35,260
14,116
1,025
4,411
8,118
231
1,728
(1,568)
13,945
171
48
219
45
264
25
$
1,107
(2,244)
(1,137)
(2,161)
1,024
(2,691)
(1,991)
279
(2)
1,728
(1,568)
(4,245)
5,269
(49)
5,220
(32)
5,188
3.1 %
(15.5)%
(2.3)%
(5.8)%
7.8 %
(72.4)%
(31.1)%
3.6 %
(0.9)%
100.0 %
100.0 %
(23.3)%
(103.4)%
(50.5)%
(104.4)%
(41.6)%
(105.4)%
Table Of Contents
Comparison of Years Ended December 31, 2014 and 2013
Revenues
Consolidated. Consolidated revenue was $55.6 million for the year ended December 31, 2014, an increase of $6.2 million, or
12.6%, from the prior year, driven by a $5.0 million, or 13.4%, increase in our Diagnostic Services revenue year over year. The
increase in Diagnostic Services revenue is primarily due to $3.9 million of incremental cardiac event monitoring revenue resulting
from the Telerhythmics acquisition, which occurred on March 13, 2014. The remaining increase in Diagnostic Services revenue
for the year ended December 31, 2014 compared to the prior year is due to a greater number of imaging days provided, offset
partially by a decrease in the average mobile imaging rate per day. Diagnostic Imaging revenue increased $1.2 million, or 10.1%,
compared to the prior year, as a result of a greater volume of camera units sold during the year ended December 31, 2014 compared
to the prior year. Diagnostic Services revenue accounted for 75.8% of total revenues for the year ended December 31, 2014,
compared to 75.3% for the prior year. We expect Diagnostic Services revenue to continue to represent the larger percentage of
our consolidated revenue.
Diagnostic Services. Our Diagnostic Services revenue was $42.2 million for the year ended December 31, 2014, an increase
of $5.0 million, or 13.4%, from the prior year. The primary driver of the increase is the Telerhythmics acquisition, which occurred
on March 13, 2014, and contributed $3.9 million of incremental cardiac event monitoring revenue during the year ended
December 31, 2014. The remaining increase in Diagnostic Services revenue for the year ended December 31, 2014 compared to
the prior year was due to a greater number of imaging days provided as well as greater ancillary revenue from short term equipment
rentals, offset partially by a decrease in the average mobile imaging rate per day.
Diagnostic Imaging. Our Diagnostic Imaging revenue was $13.4 million for the year ended December 31, 2014, an increase
of $1.2 million, or 10.1%, compared to the prior year, primarily due to an increase in the volume of cameras sold, offset partially
by attrition in the number of associated camera maintenance contracts. The number of cameras sold increased to 27 from 20 during
the years ended December 31, 2014 and 2013, respectively, as a result of additional sales resources and overall improved market
conditions. Further, a more favorable product mix was sold during the year ended December 31, 2014 as compared to the prior
year, which led to a higher blended average selling price per camera year over year.
Cost of Revenue and Gross Profit
Consolidated. Consolidated gross profit was $16.6 million for the year ended December 31, 2014, an increase of $2.5 million,
or 17.9%, compared to the prior year. The increase in consolidated gross profit is primarily the result of increased overall revenue
volume as well as improved gross profit as a percentage of revenue in our Diagnostic Imaging business. Our Diagnostic Imaging
business segment benefited from the release of excess inventory reserves due to the sale of previously reserved inventory, as well
as reduced manufacturing and overhead costs for the year ended December 31, 2014, compared to the prior year. Consolidated
gross profit as a percentage of revenue increased to 29.9% for the year ended December 31, 2014 from 28.6% for the prior year.
Diagnostic Services. Cost of Diagnostic Services revenue consists of labor, radiopharmaceuticals, equipment depreciation, and
other costs associated with the provision of services. Cost of Diagnostic Services revenue was $31.7 million for the year ended
December 31, 2014, an increase of $3.9 million, or 14.0%, from the prior year. The increase in cost of Diagnostic Services revenue
is primarily a result of the provision of incremental cardiac event monitoring services associated with the Telerhythmics acquisition
as well as an increased amount of imaging days provided. Diagnostic Services gross profit was $10.4 million for the year ended
December 31, 2014, an increase of $1.1 million, or 11.8%, as compared to the prior year primarily as a result of increased revenue
year over year. Diagnostic Services gross profit as a percentage of Diagnostic Services revenue decreased to 24.8% for the year
ended December 31, 2014 from 25.1% in the prior year. The decrease in gross profit as a percentage of revenue was attributable
to a decrease in the average mobile imaging rate per day with the associated service costs remaining relatively consistent, as well
as first year integration efforts and costs associated with the Telerhythmics acquisition, partially offset by favorable gross profit
contribution from short term equipment rentals. We expect to continue to have integration costs and some inefficiencies in our
cardiac event monitoring business during the first half of 2015, after which we believe costs will be reduced and efficiencies will
increase.
Diagnostic Imaging. Cost of Diagnostic Imaging segment revenue primarily consists of materials, labor, and overhead costs
associated with the manufacturing and warranty of our products. Cost of Diagnostic Imaging revenues was $7.2 million for the
year ended December 31, 2014, a decrease of $0.2 million, or 2.5%, over the prior year, primarily as a result of a net $0.6 million
release of excess inventory reserves due to the sale of previously reserved inventory during the year ended December 31, 2014,
as well as reduced manufacturing and overhead costs. Diagnostic Imaging gross profit was $6.2 million for the year ended
December 31, 2014, an increase of $1.4 million, or 29.7%, as compared to the prior year due to a greater volume of camera sales,
and the release of excess inventory reserves due to the sale of previously reserved inventory, as well as reduced manufacturing
and overhead costs. Diagnostic Imaging gross profit as a percentage of Diagnostic Imaging revenue increased to 46.1% for the
year ended December 31, 2014 from 39.1% for the prior year primarily due to reduced excess and obsolete inventory costs, reduced
manufacturing and overhead costs, and a more favorable product mix for cameras.
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Table Of Contents
Operating Expenses
Research and Development. Research and development expenses are the costs associated with the design, development, and
expansion of our existing technology and consist of salaries, development material costs, facility and overhead costs, consulting
fees, and non-recurring engineering costs. There were no research and development expenses for the year ended December 31,
2014, representing a decrease of $1.0 million, or 100.0%, compared to the prior year. The decrease is due to our Diagnostic Imaging
restructuring initiative, which focuses on our existing camera product offerings rather than continued development of new product
offerings with alternative applications. We believe our current product line has a technological advantage over competing products
and continued relevance well into the future. On a go forward basis, we plan to primarily utilize outside service providers for
research and development services on an as needed basis for updates and enhancements, with the amount of corresponding
expenditure fluctuating commensurately quarter by quarter. Research and development expenses were 0.0% and 8.4% of Diagnostic
Imaging revenue for the years ended December 31, 2014 and 2013, respectively.
Marketing and Sales. Marketing and sales expenses consist primarily of salaries, commissions, bonuses, recruiting costs, travel,
marketing and collateral materials, and trade show costs. Marketing and sales expenses were $4.7 million for the year ended
December 31, 2014, an increase of $0.3 million, or 7.2%, compared to the prior year, primarily as a result of increased sales
resources associated with the Telerhythmics business, as well as additional investment in Diagnostic Imaging sales resources,
offset partially by reduced marketing costs associated with new and developmental product offerings. Marketing and sales expenses
as a percentage of total revenues were 8.5% and 8.9% for the years ended December 31, 2014 and 2013, respectively. We expect
marketing and sales expense for fiscal year 2015 to be relatively consistent with, or increase marginally compared to, fiscal year
2014.
General and Administrative. General and administrative expenses consist primarily of salaries and other related costs for
accounting, human resources, information technology, and executive personnel, legal related costs, professional fees, outside
services, insurance, and costs related to our board of directors. General and administrative expenses were $8.3 million for the year
ended December 31, 2014, an increase of $0.2 million, or 2.8%, compared to the prior year, primarily as a result of increased costs
related to the administration of the Telerhythmics business, partially offset by less cost associated with our 2014 annual shareholder
meeting compared to the $0.7 million of legal costs incurred in the year ended December 31, 2013 related to the 2013 proxy contest
and subsequent legal proceedings associated with the proxy contest. General and administrative expenses were 15.0% of total
revenue for the year ended December 31, 2014 compared to 16.4% for the prior year. We expect general and administrative expense
to generally approximate the level of expense in the year ended December 31, 2014 notwithstanding any one-time initiatives.
Restructuring. On February 28, 2013, we announced a plan to restructure our Diagnostic Imaging business to significantly
reduce costs, including a reduction in force (the Diagnostic Imaging restructuring initiative). The Diagnostic Imaging restructuring
initiative was completed as of June 30, 2014. A total of $1.8 million of costs were incurred related to the Diagnostic Imaging
restructuring initiative, with $29 thousand incurred in the year ended December 31, 2014 and $1.7 million incurred in the year
ended December 31, 2013.
On January 27, 2014, we announced a plan to exit our 47,000 square foot former headquarters facility in Poway, California
(the Facilities restructuring initiative). This action was undertaken as the facility had excess space and capacity given our current
operating plan. We entered into a termination agreement to end the lease on the facility as of April 30, 2014. The original term of
the lease would have continued through February 29, 2016. Concurrently with the termination of the lease for the 47,000 square
foot Poway, California facility, we entered into a new lease agreement for a separate 21,300 square foot facility to house our
Diagnostic Imaging operations. As a result of the facilities restructuring initiative, we incurred a total of $0.7 million of restructuring
charges, all of which were incurred during the year ended December 31, 2014. All restructuring efforts associated with this
initiative were complete as of December 31, 2014.
We do not expect to incur restructuring charges in fiscal year 2015, although will continue to assess the need to restructure our
business to address market changes and achieve corporate objectives.
Gain on sale of assets and license agreement. On July 31, 2013, we entered into an asset purchase agreement with Novadaq
Technologies Inc. (Novadaq). Under the terms of the asset purchase agreement, we sold Novadaq all of our assets specifically
related to an uncommercialized surgical imaging system previously in development. We also licensed certain existing Company
technology to Novadaq for their use in the peri-operative field. In exchange, we received upfront consideration of $2.0 million,
and could receive up to $1.0 million in deferred contingent payments based on the achievement of specific regulatory and
commercial milestones as well as a royalty on sales, if any. A gain of $1.6 million representing the $2.0 million of upfront
consideration less legal, consulting, and other transaction fees as well as the cost basis of the inventory, was recorded during the
year ended December 31, 2013. The sale of the technology is consistent with our focus on our existing camera product offerings,
rather than development of completely new product offerings.
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Table Of Contents
Comparison of Years Ended December 31, 2013 and 2012
Revenues
Consolidated. Consolidated revenue was $49.4 million for the year ended December 31, 2013, a decrease of $1.1 million, or
2.3%, from the prior year, primarily as a result of lower camera revenue generated from product sales in our Diagnostic Imaging
business segment, partially offset by increased revenue in our Diagnostic Services business segment. Diagnostic Services revenue
accounted for 75.3% of total revenues for the year ended December 31, 2013, compared to 71.4% for the prior year.
Diagnostic Services. Our Diagnostic Services revenue was $37.2 million for the year ended December 31, 2013, an increase
of $1.1 million, or 3.1%, from the prior year. The increase is attributable to growth in the number of days our physician customers
utilized our imaging services driven by the attainment of new customers, partially offset by a decline in our daily service fee.
Diagnostic Imaging. Our Diagnostic Imaging revenue was $12.2 million for the year ended December 31, 2013, a decrease of
$2.2 million, or 15.5%, compared to the prior year, primarily due to a decline in the volume of cameras sold as well as attrition
in the number of associated camera maintenance contracts. The number of cameras sold decreased to 20 from 29 during the year
ended December 31, 2013 and 2012, respectively, as a result of focusing on the profit margin of camera sales in fiscal year 2013
with reduced emphasis on the total volume of sales. The decrease in the volume of camera sales was partially offset by an increase
in the average selling price per camera during the year ended December 31, 2013 as compared to the prior year.
Cost of Revenue and Gross Profit
Consolidated. Consolidated gross profit was $14.1 million for the year ended December 31, 2013, an increase of $1.0 million,
or 7.8%, compared to the prior year. The increase in consolidated gross profit is primarily the result of increased gross profit
generated in our Diagnostic Services business segment, resulting from increased revenue and favorable radiopharmaceutical costs.
Our Diagnostic Imaging business segment benefited from lower excess and obsolete inventory costs for the year
ended December 31, 2013, compared to the prior year. Significant excess and obsolete inventory costs were incurred during the
year ended December 31, 2012 as a result of the Diagnostic Imaging restructuring initiative. Consolidated gross profit as a
percentage of revenue increased to 28.6% for the year ended December 31, 2013 from 25.9% for the prior year.
Diagnostic Services. Cost of Diagnostic Services revenue was $27.8 million for the year ended December 31, 2013, an increase
of $0.5 million, or 2.0%, from the prior year, primarily as a result of increased revenues, partially offset by lower radiopharmaceutical
costs and depreciation expense. Diagnostic Services gross profit was $9.3 million for the year ended December 31, 2013, an
increase of $0.6 million, or 6.5%, as compared to the prior year. Diagnostic Services gross profit as a percentage of Diagnostic
Services revenue increased to 25.1% for the year ended December 31, 2013 from 24.3% for the prior year due to lower
radiopharmaceutical costs, depreciation expense, and an improvement in operational performance primarily associated with the
management of resources.
Diagnostic Imaging. Cost of Diagnostic Imaging revenues was $7.4 million for the year ended December 31, 2013, a decrease
of $2.7 million, or 26.6%, over the prior year primarily as a result of the reduced volume of camera sales and approximately $1.0
million less of excess and obsolete inventory costs year over year. Diagnostic Imaging gross profit was $4.8 million for the year
ended December 31, 2013, an increase of $0.5 million, or 10.5%, as compared to the prior year. Diagnostic Imaging gross profit
as a percentage of Diagnostic Imaging revenue increased to 39.1% for the year ended December 31, 2013 from 29.9% for the
prior year primarily due to reduced excess and obsolete inventory costs and improved average selling prices and product mix for
cameras.
Operating Expenses
Research and Development. Research and development expenses were $1.0 million for the year ended December 31, 2013,
representing a decrease of $2.7 million, or 72.4%, compared to the prior year. The decrease is due to our Diagnostic Imaging
restructuring initiative, which focuses on our existing camera product offerings rather than continued development of new product
offerings with alternative applications. Research and development expenses were 8.4% and 25.7% of Diagnostic Imaging revenue
for the years ended December 31, 2013 and 2012, respectively.
Marketing and Sales. Marketing and sales expenses were $4.4 million for the year ended December 31, 2013, a decrease of
$2.0 million, or 31.1%, compared to the prior year, primarily as a result of the Diagnostic Imaging restructuring initiative. Marketing
and sales expenses as a percentage of total revenues were 8.9% and 12.7% for the years ended December 31, 2013 and 2012,
respectively.
General and Administrative. General and administrative expenses were $8.1 million for the year ended December 31, 2013,
an increase of $0.3 million, or 3.6%, compared to the prior year primarily as a result of costs associated with our 2013 proxy
contest and the subsequent legal proceedings associated with the proxy contest, as well as higher variable compensation expense
associated with Company performance. The aforementioned increases in general and administrative expense for the year
ended December 31, 2013 as compared to the prior year, were offset by decreases in human resources, information technology,
28
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and bad debt expenses. General and administrative expenses were 16.4% of total revenue for the year ended December 31, 2013
compared to 15.5% for the prior year.
Restructuring. On February 28, 2013, we announced a plan to restructure our Diagnostic Imaging business to significantly
reduce costs (the Diagnostic Imaging restructuring initiative). Overall, this restructuring resulted in total charges of $1.7 million in
the year ended December 31, 2013.
On January 27, 2014, we announced a plan to exit our 47,000 square foot former headquarter facility in Poway, California (the
Facilities restructuring initiative). This action was undertaken as the facility had excess space and capacity given our current
operating plan. We entered into a termination agreement to end the lease on the facility as of April 30, 2014. The original term of
the lease would have continued through February 29, 2016. Concurrently with the termination of the lease for the 47,000 square
foot Poway, California facility, we entered into a new lease agreement for a separate 21,300 square foot facility to house our
Diagnostic Imaging operations. As a result of the facilities restructuring initiative, we incurred a total of $0.7 million of restructuring
charges, all of which were incurred during the year ended December 31, 2014. All restructuring efforts associated with this initiative
were completed as of December 31, 2014.
We do not expect to incur restructuring charges in fiscal year 2015, although we will continue to assess the need to restructure
our business to address market changes and achieve corporate objectives.
Gain on sale of assets and license agreement. On July 31, 2013, we entered into an asset purchase agreement with Novadaq
Technologies Inc. (Novadaq). Under the terms of the asset purchase agreement, we sold Novadaq all of our assets specifically
related to an uncommercialized surgical imaging system previously in development. We also licensed certain existing Company
technology to Novadaq for their use in the peri-operative field. A gain of $1.6 million representing the $2.0 million of upfront
consideration less legal, consulting, and other transaction fees, as well as the cost basis of the inventory was recorded during the
year ended December 31, 2013.
Liquidity and Capital Resources
Overview
We generated $4.3 million of positive cash flow from operations during the year ended December 31, 2014, and expect to
continue to generate positive cash flow from operations on an annual basis in the future. Cash flows from operations primarily
represent inflows from net income (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 grow our business, as well as acquisition and divestiture activity. Cash flows from financing activities primarily represent
outflows related to dividend payments and share repurchases, offset by the receipt of cash related to the exercise of stock options.
Our principal sources of liquidity are our existing cash and cash equivalents, short-term investments, and cash generated from
operations. As of December 31, 2014, we had cash, cash equivalents, and securities available-for-sale of $22.0 million. We generally
invest our cash reserves in money market funds, U.S. treasury, and corporate debt securities. In addition, our shelf registration
statement on Form S-3, which was declared effective on January 28, 2015, provides us with increased capital flexibility to pursue
corporate objectives by allowing us to offer and sell up to $20.0 million of securities.
We require capital principally for capital expenditures, acquisition activity, dividend payments, and to finance accounts
receivable and inventory, which we manage closely. 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 nuclear cameras, cardiac monitoring devices, ultrasound machines, vans, and computer 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 years ended December 31, 2014, 2013, and 2012 (in thousands):
Year Ended December 31,
Net cash provided by (used in) operating activities
Net cash (used in) provided by investing activities
Net cash used in financing activities
29
2014
2013
2,201
$
4,280
$
$ (5,079) $
$ (3,894) $ (3,737) $
766
2012
$ (1,082)
$ (2,715)
(728)
Table Of Contents
Operating Activities
Net cash provided by operating activities increased by $2.1 million for the year ended December 31, 2014 compared to the
prior year. The increase is primarily attributable to net income of $2.5 million generated in fiscal year 2014, an increase of $2.2
million compared to net income of $0.3 million for fiscal year 2013 driven by increased revenue, improved gross profit, and
relatively consistent operating expenses.
Net cash provided by operating activities increased by $3.3 million for the year ended December 31, 2013 compared to the
prior year. The increase was primarily attributable to net income of $0.3 million generated in fiscal year 2013, driven by improved
gross profit and vastly reduced operating expenses, compared to the net loss of $4.9 million generated in fiscal year 2012. In
addition, we benefited from favorable changes in operating assets and liabilities in fiscal year 2013 primarily related to decreases
in accounts receivable and inventory, and an increase in accrued compensation.
Investing Activities
Net cash used in investing activities increased by $5.8 million for the year ended December 31, 2014 compared to the prior
year. This increase was primarily attributable to the outlay of $3.4 million of cash to acquire Telerhythmics in the year ended
December 31, 2014, compared to approximately $1.7 million of net proceeds received in the prior year from the sale of assets
related to an uncommercialized surgical imaging system and associated license agreement.
Net cash provided by investing activities increased by $3.5 million for the year ended December 31, 2013 compared to the
prior year. The increase is attributable to $1.7 million of net proceeds received from the sale of assets related to an uncommercialized
surgical imaging system and associated license agreement in fiscal year 2013, as well as reduced net purchases of securities
available-for-sale in fiscal year 2013 compared to fiscal year 2012.
Financing Activities
Net cash used in financing activities increased by $0.2 million for the year ended December 31, 2014 compared to the prior
year. This increase was primarily attributable to $3.7 million of dividend payments during the year ended December 31, 2014,
compared to $0.9 million during the year ended December 31, 2013, as well as less cash received during the year ended
December 31, 2014 related to stock option exercises compared to the prior year. Offsetting the increase in cash used in financing
activities for the year ended December 31, 2014 compared to the prior year were decreased share repurchases, with no share
repurchases during the year ended December 31, 2014, compared to $3.6 million of cash used for share repurchases in the prior
year.
Net cash used in financing activities increased by $3.0 million for the year ended December 31, 2013 compared to the prior
year. This increase was primarily attributable to increased repurchases of common stock and the initiation of a cash dividend on
common stock, partially offset by proceeds from stock option exercises driven by employees that were terminated as a result of
the Diagnostic Imaging restructuring initiative.
Contractual Obligations
We are committed to making future cash payments on capital leases (including interest) and operating leases. We have not
guaranteed the debt of any other party. The following table summarizes our contractual obligations as of December 31, 2014
(amounts in thousands):
Contractual Obligations
Operating lease obligations
Capital lease obligations (1)
Total Contractual Obligations
(1) Capital lease obligations include related interest obligations.
Payments Due by Period
Total
Less than 1
year
1-3 years
3-5 years
More than 5
years
$
$
4,202
819
5,021
$
$
1,108
383
1,491
$
$
1,442
431
1,873
$
$
983
5
988
$
$
669
—
669
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk due to changes in interest rates relates primarily to the increase or decrease in the value of debt
securities in our investment portfolio. Our risk associated with fluctuating interest rates is limited to our investments in interest
rate sensitive financial instruments. Under our current policies, we do not use interest rate derivative instruments to manage
exposure to interest rate changes. We attempt to increase the safety and preservation of our invested principal funds by limiting
default risk, market risk, and reinvestment risk. We mitigate default risk by investing in investment grade securities. A 100 basis
30
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point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of our interest
sensitive financial instruments. Changes in interest rates over time will increase or decrease our interest income.
31
Table Of Contents
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Digirad Corporation
We have audited the accompanying consolidated balance sheets of Digirad Corporation as of December 31, 2014 and 2013,
and the related consolidated statements of comprehensive income (loss), stockholders’ equity and cash flows for each of the three
years in the period ended December 31, 2014. These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial
reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Digirad Corporation at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
San Diego, California
March 6, 2015
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DIGIRAD CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
Revenues:
Diagnostic Services
Diagnostic Imaging
Total revenues
Cost of revenues:
Diagnostic Services
Diagnostic Imaging
Total cost of revenues
Gross profit
Operating expenses:
Research and development
Marketing and sales
General and administrative
Amortization of intangible assets
Restructuring charges
Gain on sale of assets and license agreement
Total operating expenses
Income (loss) from operations
Other income (expense):
Interest and other income, net
Interest expense
Total other income
Income (loss) before income taxes
Income tax benefit (expense)
Net income (loss)
Net income (loss) per share:
Basic
Diluted
Shares used in per share computations:
Weighted average shares outstanding—basic
Weighted average shares outstanding—diluted
Dividends declared per common share
Net income (loss)
Other comprehensive loss:
Unrealized loss on marketable securities
Total other comprehensive loss
Comprehensive income (loss)
Year ended December 31,
2014
2013
2012
$
42,170
13,438
55,608
$ 37,171
12,205
49,376
$
31,721
7,247
38,968
16,640
—
4,730
8,344
356
692
—
14,122
27,828
7,432
35,260
14,116
1,025
4,411
8,118
231
1,728
(1,568)
13,945
36,064
14,449
50,513
27,293
10,128
37,421
13,092
3,716
6,402
7,839
233
—
—
18,190
2,518
171
(5,098)
58
(39)
19
2,537
(62)
2,475
0.13
0.13
18,571
18,878
0.20
2,475
(17)
(17)
2,458
$
$
$
$
$
$
63
(15)
48
219
45
264
0.01
0.01
18,789
19,159
0.05
264
(19)
(19)
245
$
$
$
$
$
$
101
(4)
97
(5,001)
77
(4,924)
(0.26)
(0.26)
19,274
19,274
—
(4,924)
(16)
(16)
(4,940)
$
$
$
$
$
$
See accompanying notes to audited consolidated financial statements.
33
DIGIRAD CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
Table Of Contents
Assets:
Current assets:
Cash and cash equivalents
Securities available-for-sale
Accounts receivable, net
Inventories, net
Other current assets
Restricted cash
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
Other assets
Total assets
Liabilities:
Current liabilities:
Accounts payable
Accrued compensation
Accrued warranty
Deferred revenue
Other current liabilities
Total current liabilities
Other liabilities
Total liabilities
Commitments and contingencies (Note 7)
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; 18,615,945 and 18,504,279
shares issued and outstanding (net of treasury shares) at December 31, 2014 and 2013,
respectively
Treasury stock, at cost; 2,588,484 shares at December 31, 2014 and 2013
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to audited consolidated financial statements.
34
December 31,
2014
2013
$
14,051
$
18,744
7,935
5,989
3,644
856
477
32,952
4,766
2,577
1,337
269
7,673
5,430
3,881
697
244
36,669
4,153
353
184
92
$
41,901
$
41,451
$
1,423
$
3,261
176
1,644
1,789
8,293
963
9,256
611
3,472
137
1,631
1,774
7,625
440
8,065
—
—
2
(5,728)
153,769
(19)
(115,379)
32,645
2
(5,728)
156,968
(2)
(117,854)
33,386
$
41,901
$
41,451
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DIGIRAD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating
activities:
Depreciation
Amortization of intangible assets
Provision for bad debts
Stock-based compensation
Gain on sale of assets and license agreement
Amortization of premium on investments
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Other assets
Accounts payable
Accrued compensation
Deferred revenue
Other liabilities
Restricted cash
Net cash provided by (used in) operating activities
Investing activities
Purchases of property and equipment
Net proceeds from sale of assets and license agreement
Net cash paid for acquisition
Purchases of securities available-for-sale
Sales and maturities of securities available-for-sale
Net cash provided by (used in) investing activities
Financing activities
Issuances of common stock
Repurchases of common stock
Dividends paid
Repayment of long term debt
Repayment of obligations under capital leases
Net cash used in financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Non-Cash Investing Activities
Assets acquired by entering into capital lease
Leasehold improvements paid for by lessor
Year ended December 31,
2014
2013
2012
$
2,475
$
264
$
(4,924)
1,579
356
311
326
(77)
198
(614)
300
(302)
776
(380)
13
(448)
(233)
4,280
(1,258)
103
(3,447)
(2,617)
2,140
(5,079)
188
—
(3,713)
(131)
(238)
(3,894)
(4,693)
18,744
14,051
521
212
$
$
$
1,682
231
(150)
340
(1,621)
192
1,049
1,136
(86)
(935)
1,108
(218)
(791)
—
2,201
(726)
1,697
—
(4,679)
4,474
766
919
(3,642)
(925)
—
(89)
(3,737)
1,898
233
(30)
630
(104)
140
21
1,057
127
216
73
(250)
(119)
(50)
(1,082)
(936)
118
(475)
(4,887)
3,465
(2,715)
300
(1,028)
—
—
—
(728)
(770)
19,514
18,744
$
(4,525)
24,039
19,514
490
$
— $
83
—
$
$
$
See accompanying notes to audited consolidated financial statements.
35
Table Of Contents
DIGIRAD CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
Common stock
Shares
Amount
Treasury
Stock
Additional
paid-in
capital
Accumulated
other
comprehensive
income (loss)
Balance January 1, 2012
18,901
$
Stock-based compensation
Shares issued under stock
incentive plans
Repurchases of common stock
Net loss
Unrealized loss on securities
available-for-sale
—
734
(491)
—
—
Balance December 31, 2012
19,144
Stock-based compensation
Shares issued under stock
incentive plans
—
875
Repurchases of common stock
(1,515)
Dividends paid
Net income
Unrealized loss on securities
available-for-sale
—
—
—
Balance December 31, 2013
18,504
Stock-based compensation
Shares issued under stock
incentive plans
Dividends paid
Net income
Unrealized loss on securities
available-for-sale
—
112
—
—
—
Balance December 31, 2014
18,616
$
2
—
—
—
—
—
2
—
—
—
—
—
—
2
—
—
—
—
—
2
$
(1,058) $ 155,704
630
—
$
—
(1,028)
—
—
(2,086)
—
—
(3,642)
—
—
—
(5,728)
—
—
—
—
300
—
—
—
156,634
340
919
—
(925)
—
—
156,968
326
188
(3,713)
—
33
—
—
—
—
(16)
17
—
—
—
—
—
(19)
(2)
—
—
—
—
Accumulated
deficit
Total
stockholders’
equity
$ (113,194) $
41,487
—
—
—
(4,924)
—
(118,118)
—
—
—
—
264
—
(117,854)
—
—
—
2,475
630
300
(1,028)
(4,924)
(16)
36,449
340
919
(3,642)
(925)
264
(19)
33,386
326
188
(3,713)
2,475
—
—
(5,728) $ 153,769
$
$
(17)
(19) $ (115,379) $
—
(17)
32,645
See accompanying notes to audited consolidated financial statements.
36
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DIGIRAD CORPORATION
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
The Company
Digirad Corporation (Digirad), a Delaware corporation, is one of the largest national providers of in-office nuclear cardiology
imaging and ultrasound imaging services, and also provides cardiac event monitoring services. These services are provided to
physician practices, hospitals, and imaging centers through our Diagnostic Services reportable segment. Digirad also sells medical
diagnostic imaging systems, including solid-state gamma cameras, for nuclear cardiology and general nuclear medicine
applications, as well as provides service on the products sold, through our Diagnostic Imaging reportable segment. These two
reportable segments, Diagnostic Services and Diagnostic Imaging, are collectively referred to herein as the “Company.”
The accompanying consolidated financial statements include the operations of both segments. Intercompany accounts and
transactions are accounted for at cost and have been eliminated in consolidation. All our long-lived assets are located in the United
States and substantially all of our revenues arise from sales activity in the United States.
NOTE 2.
Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The consolidated financial statements are prepared in conformity with United States generally accepted accounting principles
(GAAP) and include the financial statements of the Company and its wholly owned subsidiaries. GAAP 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. All significant intercompany accounts and transactions have
been eliminated.
The financial results for the year ended December 31, 2014 include the financial results of Telerhythmics, LLC for the period
since the acquisition date of March 13, 2014. See Note 3 to the audited consolidated financial statements for more information
related to the acquisition of Telerhythmics, LLC.
Revenue Recognition
We derive revenues primarily from providing in-office services related to the performance of cardiac diagnostic imaging
procedures, cardiac event monitoring, and from selling and servicing solid-state digital gamma cameras. We recognize revenue
in accordance with the authoritative guidance for revenue recognition, when all of the following four criteria are met: (i) a contract
or sales arrangement exists; (ii) products have been shipped and title has transferred or services have been rendered; (iii) the price
of the products or services is fixed or determinable; and (iv) collectability is reasonably assured. The timing of revenue recognition
is based upon factors such as passage of title and risk of loss, the need for installation, and customer acceptance. These factors are
based on the specific terms of each contract or sales arrangement.
Diagnostic Services imaging services revenue is derived from our ability to provide our physician customers with our services,
which includes use of our imaging system, qualified personnel, and related items required to perform imaging in their own offices
and bill Medicare, Medicaid, and other payors for in-office nuclear and ultrasound diagnostic imaging procedures. Revenue related
to Diagnostic Imaging services is recognized at the time services are performed and collection is reasonably assured. Diagnostic
Services imaging services are generally billed on a per-day basis under annual contracts for nuclear diagnostic imaging, which
specify the number of days of service to be provided, or on a flat rate month-to-month basis for ultrasound imaging.
Our cardiac event monitoring services are provided primarily through an independent diagnostic testing facility model which
allows us to bill Medicare, Medicaid, or one of the third-party healthcare insurers directly for services provided. We also receive
reimbursement directly from patients through co-pays and self-pay arrangements. Billings for services reimbursed by third-party
payors, including Medicare, are recorded as revenue net of contractual allowances. Contractual allowances are estimated based
on historical collections by Current Procedural Terminology (CPT) code for specific payors, or class of payors. Adjustments to
the estimated receipts, based on final settlement with the third party payors, are recorded upon settlement.
Diagnostic Imaging product revenues are generated from the sales of gamma cameras and follow-on maintenance service
contracts. We generally recognize revenue upon delivery and acceptance by customers. We also provide installation and training
for camera sales in the United States. Installation and initial training is generally performed shortly after delivery and represents
a cost which we accrue at the time revenue is recognized. Neither service is essential to the functionality of the product. Maintenance
services are sold beyond the term of the warranty, which is generally one year from the date of purchase. Revenue from these
contracts is deferred and recognized ratably over the period of the obligation and is included in Diagnostic Imaging sales.
37
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Multiple Element Arrangements
In fiscal year 2013, we sold all of our assets specifically related to an uncommercialized surgical imaging system previously
in development, as well as licensed certain existing Company technology. The transaction was accounted for in accordance with
the authoritative guidance for multiple element arrangements. We identified the deliverables at the inception of the agreement and
determined which items had value to the customer on a standalone basis, and were therefore separate units of accounting. Non-
contingent arrangement consideration was allocated at the inception of the agreement to all identified units of accounting based
on their relative selling price. The relative selling price for each unit of accounting was determined using best estimate of selling
price, because neither vendor specific objective evidence (VSOE) of selling price nor third-party evidence of selling price existed
for the units of accounting. The non-contingent amount of arrangement consideration allocated to each unit of account was
recognized upon performance and delivery of the related unit of accounting.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and disclosures made
in the accompanying notes to the consolidated financial statements. Significant estimates and judgments include those related to
revenue recognition, multiple element arrangements, reserves for doubtful accounts and contractual allowances, and inventory
valuation. Actual results could differ from those estimates.
Concentration of Credit Risk and Significant Customers
Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of cash and cash equivalents,
short-term investments, and accounts receivable. We limit our exposure to credit loss by placing our cash and investments in high
credit quality financial institutions and investment grade corporate debt securities. Additionally, we have established guidelines
regarding diversification of our investments and their maturities, which are designed to maintain principal and maximize liquidity.
For 2014, Emory Healthcare represented 10.9% of our consolidated revenues and 14.3% of our Diagnostic Services revenues.
Prior to 2014, no single customer exceeded 10% of our consolidated revenues. We believe we have good relations with Emory
Healthcare, however, if we were to lose Emory Healthcare as a customer, it would likely have a material adverse affect on our
operations.
Fair Value of Financial Instruments
The authoritative guidance for fair value measurements defines fair value for accounting purposes, establishes a framework
for measuring fair value, and provides disclosure requirements regarding fair value measurements. The guidance defines fair value
as an exit price, which is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly
transaction between market participants at the measurement date. The degree of judgment utilized in measuring the fair value of
assets and liabilities generally correlates to the level of pricing observability. Our financial instruments primarily consist of cash
equivalents, securities available-for-sale, accounts receivable, other current assets, restricted cash, accounts payable, contingent
consideration, and other current liabilities. The carrying amount of these financial instruments generally approximate fair value
due to their short term nature. Securities available-for-sale are recorded at fair value.
Cash and Cash Equivalents
We consider all investments with a maturity of three months or less when acquired to be cash equivalents.
Securities Available-for-Sale
Securities available-for-sale primarily consist of investment grade corporate debt securities. We classify all securities as
available-for-sale and as current assets, as the sale of such securities may be required prior to maturity to execute management
strategies. These securities are carried at fair value, with the unrealized gains and losses reported as a component of accumulated
other comprehensive loss in stockholders' equity until realized. Realized gains and losses from the sale of available-for-sale
securities, if any, are determined on a specific identification basis. A decline in the market value of any available-for-sale security
below cost that is determined to be other than temporary will result in an impairment charge to earnings and a new cost basis for
the security is established. No such impairment charges were recorded for any period presented. It is not more likely than not that
we will be required to sell investments before recovery of their amortized costs. Premiums and discounts are amortized or accreted
over the life of the related security as an adjustment to yield using the straight-line method and included in interest income. Interest
income is recognized when earned. Realized gains and losses on investments in securities are included in other income (expense)
within the consolidated statements of comprehensive income (loss). The realized gains and losses on these sales were minimal
for the years ended December 31, 2014 and 2013.
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The following table sets forth the composition of securities available-for-sale as of December 31, 2014 and 2013 (in thousands):
As of December 31, 2014
Corporate debt securities
Corporate debt securities
As of December 31, 2013
Corporate debt securities
Corporate debt securities
Maturity in
Years
Amortized Cost
Unrealized
Fair Value
Gains
Losses
Less than 1 year
1-3 years
$
$
4,650
$ — $
3,304
—
7,954
$ — $
(5) $
(14)
(19) $
4,645
3,290
7,935
Maturity in
Years
Amortized Cost
Unrealized
Fair Value
Gains
Losses
Less than 1 year
1-3 years
$
$
2,176
5,499
7,675
$
$
5
—
5
$ — $
2,181
(7)
(7) $
5,492
7,673
$
Allowance for Doubtful Accounts, Billing Adjustments, and Contractual Allowances
Accounts receivable consist principally of trade receivables from customers and government or third-party healthcare insurance
providers, and are generally unsecured and due within 30 days. Expected credit losses related to trade accounts receivable are
recorded as an allowance for doubtful accounts within accounts receivable, net in the consolidated balance sheets. The provision
for doubtful accounts is charged to general and administrative expenses. When internal collection efforts on accounts have been
exhausted, the accounts are written off by reducing the allowance for doubtful accounts.
Within Diagnostic Services, we record adjustments and credit memos that represent billing adjustments subsequent to the
performance of service. A provision for billing adjustments is charged against Diagnostic Services revenues.
Our cardiac event monitoring services are provided primarily through an independent diagnostic testing facility model which
allows us to bill Medicare, Medicaid, or one of the third-party healthcare insurers directly for services provided. Accounts receivable
related to cardiac event monitoring are recorded at the time revenue is recognized, net of contractual allowances. Contractual
allowances are estimated based on historical collections by Current Procedural Terminology (CPT) code for specific payors, or
class of payors. A provision for contractual allowances is charged against Diagnostic Services revenues.
The following table summarizes our allowance for doubtful accounts, billing adjustments and contractual allowances as of and
for the years ended December 31, 2014, 2013, and 2012 (in thousands):
Balance at December 31, 2011
Provision adjustment
Write-offs and recoveries, net
Balance at December 31, 2012
Provision adjustment
Write-offs and recoveries, net
Balance at December 31, 2013
Provision adjustment
Write-offs and recoveries, net
Balance at December 31, 2014
Allowance for Doubtful
Accounts (1)
Reserve for Billing
Adjustments (2)
Reserve for Contractual
Allowances (2)
$
$
748
224
(459)
513
(150)
(93)
270
571
(577)
264
$
$
356
232
(507)
81
29
(102)
8
99
(100)
7
$
$
—
—
—
—
—
—
—
18,675
(17,968)
707
(1) The provision was charged against general and administrative expenses.
(2) The provision was charged against Diagnostic Services revenue.
Inventory
Our inventories are stated at the lower of cost (first-in, first-out) or market (net realizable value) and we review inventory
balances for excess and obsolete inventory levels on a quarterly basis. Costs include material, labor, and manufacturing overhead
costs. We rely on historical information to support our excess and obsolete reserves and utilize our business judgment with respect
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to estimated future demand. Per our policy, we generally reserve 100% of the cost of inventory quantities in excess of a defined
period of demand. Once inventory is reserved, we do not adjust the reserve balance until the inventory is sold or disposed.
As a result of the Diagnostic Imaging restructuring initiative announced in February 2013, we recorded approximately $1.2
million of reserve for excess and obsolete inventory for the year ended December 31, 2012.
The following table summarizes our reserves for excess and obsolete inventory as of and for the years ended December 31,
2014, 2013, and 2012 (in thousands):
Balance at December 31, 2011
Provision adjustment
Write-offs and scrap
Balance at December 31, 2012
Provision adjustment
Write-offs and scrap
Balance at December 31, 2013
Provision adjustment
Write-offs and scrap
Balance at December 31, 2014
Reserve for Excess and
Obsolete Inventories (1)
$
$
1,593
1,164
(192)
2,565
210
(232)
2,543
(630)
—
1,913
(1) The provision was charged against Diagnostic Imaging cost of revenues.
Long-Lived Assets including Finite Lived Purchased Intangible Assets
Long-lived assets consist of property and equipment and finite lived intangible assets. We record property and equipment at
cost, and record other intangible assets based on their fair values at the date of acquisition. We calculate depreciation on property
and equipment using the straight-line method over the estimated useful life of the assets which average 6 years for machinery and
equipment, 3 years for computer hardware and software, and the lower of the lease term or an average of 5 years for leasehold
improvements. Charges related to amortization of assets recorded under capital leases are included within depreciation expense.
We calculate amortization on other intangible assets using either the accelerated or the straight-line method over the estimated
useful life of the assets, based on when we expect to receive cash inflows generated by the intangible assets. Estimated useful
lives for intangibles range from 5 to 9 years years for customer relationships, 9 years for trademarks, 8 to 15 years for patents,
and 5 years for covenants not to compete.
Impairment losses on long-lived assets used in operations are recorded when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. If such assets are
considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets
exceeds the estimated fair value of the assets. No impairment losses were recorded on long-lived assets during the years ended
December 31, 2014, 2013, and 2012.
Valuation of Goodwill
We review goodwill for impairment on an annual basis during the fourth quarter, as well as when events or changes in
circumstances indicate that the carrying value may not be recoverable. We begin the process by assessing qualitative factors in
determining whether it is more likely than not that the fair value of its reporting unit is less than its carrying amount. After performing
the aforementioned assessment and upon review of the results of such assessment, we may begin performing step one of the two-
step impairment analysis by quantitatively comparing the fair value of the reporting unit with goodwill to the carrying value of
its long-term assets. If the carrying value of the long-term assets exceeds the fair value of the reporting unit, then we must perform
the second step of the impairment test, whereby the carrying value of the reporting unit’s goodwill is compared to its implied fair
value. If the carrying value of the goodwill exceeds the implied fair value, an impairment loss equal to the difference would be
recorded.
Restricted Cash
As of December 31, 2014, we held $0.5 million of money market funds that are restricted from withdrawal as they are held as
collateral for letters of credit related to our workers' compensation insurance policy and the building lease for the Poway, CA
facility.
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Restructuring
Restructuring costs are included in income (loss) from operations within the consolidated statements of comprehensive income
(loss). Losses on property and equipment are recorded consistent with our accounting policy related to long-lived assets. One-
time termination benefits are recorded at the time they are communicated to the affected employees. Losses on property lease
obligations are recorded when the lease is abandoned or when the contract is terminated.
In February 2013, we announced a plan to restructure our Diagnostic Imaging business. In addition, we announced a plan in
January 2014 to exit our 47,000 square foot former headquarters facility in Poway, California. Both restructuring initiatives were
complete as of December 31, 2014. See Note 11 to the audited consolidated financial statements for further information.
Shipping and Handling Fees and Costs
We record all shipping and handling billings to customers as revenue earned for the goods provided. Shipping and handling
costs are included in cost of revenues and totaled $0.5 million, $0.2 million, and $0.2 million for the years ended December 31,
2014, 2013, and 2012, respectively.
Share-Based Compensation
We account for share-based awards exchanged for services in accordance with the authoritative guidance for share-based
compensation. Under this guidance, share-based compensation expense is measured at the grant date, based on the estimated fair
value of the award, and is recognized as expense, net of estimated forfeitures, over the requisite service period.
Warranty
We generally provide a 12 month warranty on our gamma cameras. We accrue the estimated cost of this warranty at the time
revenue is recorded and charge warranty expense to Diagnostic Imaging cost of revenues. Warranty reserves are established based
on historical experience with failure rates and repair costs and the number of systems covered by warranty. Warranty reserves are
depleted as gamma cameras are repaired. The costs consist principally of materials, personnel, overhead, and transportation. We
review warranty reserves quarterly and, if necessary, make adjustments.
The activities related to our warranty reserve for the years ended December 31, 2014, 2013, and 2012 are as follows (in
thousands):
Balance at beginning of year
Charges to Diagnostic Imaging cost of revenues
Applied to liability
Balance at end of year
Research and Development
Research and development costs are expensed as incurred.
Advertising Costs
Year Ended December 31,
2014
2013
2012
$
$
137
286
(247)
176
$
$
326
149
(338)
137
$
$
297
453
(424)
326
Advertising costs are expensed as incurred. Total advertising costs for each of the years ended December 31, 2014, 2013, and
2012 were $0.2 million, $0.3 million, and $0.5 million, respectively.
Basic and Diluted Net Income (Loss) Per Share
Basic earnings per share (EPS) is calculated by dividing net income or loss by the weighted average number of common shares
and vested restricted stock units outstanding. Diluted EPS is computed by dividing net income or loss by the weighted average
number of common shares and vested restricted stock units outstanding and the weighted average number of dilutive common
stock equivalents, including stock options and non-vested restricted stock units under the treasury stock method. Common stock
equivalents are only included in the diluted earnings per share calculation when their effect is dilutive. Shares used to compute
basic net income (loss) per share include 5,063, 44,522, and 221,335 vested restricted stock units for the years ended December
31, 2014, 2013, and 2012, respectively.
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The following table sets forth the computation of basic and diluted net income (loss) per share for the periods indicated (in
thousands, except per share amounts):
Net income (loss)
Shares used to compute basic net income (loss) per share
Dilutive potential common shares:
Stock options
Restricted stock units
Shares used to compute diluted net income (loss) per share
Basic net income (loss) per share
Diluted net income (loss) per share
Year Ended December 31,
2014
2013
$
2,475
$
264
$
2012
(4,924)
18,571
18,789
19,274
307
—
18,878
359
11
19,159
—
—
19,274
$
$
0.13
0.13
$
$
0.01
0.01
$
$
(0.26)
(0.26)
Antidilutive common stock equivalents are excluded from the computation of diluted earnings per share. Stock options and
restricted stock units are antidilutive when the assumed proceeds per share are greater than the average market price of the common
shares. In addition, in periods where net losses are incurred, stock options and restricted stock units with assumed proceeds per
share less than the average market price of the common shares become antidilutive as well.
The number of common share equivalents that were antidilutive due to the assumed proceeds per share being greater than the
average market price of the common shares were 66,917, 177,891, and 268,662 for the years ended December 31, 2014, 2013,
and 2012, respectively.
Since we incurred a net loss for the year ended December 31, 2012, an incremental 403,670 common share equivalents were
excluded from the computation of diluted net loss per share for year ended December 31, 2012, as its effect would be antidilutive
due to the net loss position.
Other Comprehensive Loss
Other comprehensive loss is defined as the change in equity during a period from transactions and other events and circumstances
from non-owner sources. Comprehensive loss includes unrealized losses on our marketable securities.
Income Taxes
We account for income taxes in accordance with the related authoritative guidance, which sets forth an asset and liability
approach that requires the recognition of deferred tax assets and deferred tax liabilities for the expected future tax consequences
of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount that is more likely than not expected to be realized. In
making such a determination, a review of all available positive and negative evidence must be considered, including scheduled
reversal of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance.
The authoritative guidance for income taxes defines a recognition threshold and measurement attributes for financial statement
recognition and measurement of a tax provision taken or expected to be taken in a tax return. The guidance also provides direction
on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Under the
guidance, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that
is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be
recognized if it has less than a 50% likelihood of being sustained. We recognize interest and penalties related to uncertain tax
positions as a component of the income tax provision.
Acquisitions
On March 13, 2014, we acquired 100% of the membership interest of Telerhythmics, LLC (Telerhythmics), a provider of 24-
hour cardiac monitoring services. We paid to the sellers of the membership interest (the Sellers) aggregate up-front consideration
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of $3.4 million and assumed approximately $131,000 in debt. In addition, there is an aggregate earn-out opportunity of up to
$501,000 from the period March 14, 2014 through December 31, 2016 based on the Telerhythmics business meeting certain
earnings before interest, taxes, depreciation and amortization (EBITDA) milestones. The acquisition was accounted for as a
business combination. See Note 3 to the audited consolidated financial statements for further information.
On December 31, 2012, we acquired the operating assets of a nuclear and ultrasound imaging business located in the Southeastern
U.S. The total purchase price was $500,000, including forgiveness of a $25,000 note receivable. Of the net purchase price,
$340,000 was allocated to intangible assets and $135,000 to property, plant and equipment. The acquisition was accounted for
as a business combination.
Accounting Standards Updates
In February 2013, the Financial Accounting Standards Board (FASB) issued guidance on disclosure requirements for items
reclassified out of accumulated other comprehensive income. This new guidance requires entities to present (either on the face of
the statement of operations or in the notes to the financial statements) the effects on the line items in the statement of operations
for amounts reclassified out of accumulated other comprehensive income. We adopted this guidance beginning on January 1, 2013.
The adoption did not have an effect on our financial condition or results of operations, and only resulted in a change to financial
statement presentation and disclosure.
In May 2014, the FASB issued guidance that outlines a single comprehensive model for entities to use in accounting for revenue
arising from contracts with customers which supersedes most current revenue recognition guidance, including industry-specific
guidance. The guidance provides that an entity recognize revenue when it transfers promised goods or services to customers in
an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This
guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising
from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to
obtain or fulfill a contract. The guidance allows for either full retrospective or modified retrospective adoption and will become
effective for us in the first quarter of 2017. We are currently evaluating the alternative transition methods and the potential effects
of the adoption of this guidance on our financial statements.
NOTE 3.
Acquisition of Telerhythmics, LLC
On March 13, 2014, we acquired 100% of the membership interest of Telerhythmics, LLC (Telerhythmics), a provider of 24-
hour cardiac monitoring services. Telerhythmics and Digirad each have a very similar customer base, yet with only minor overlaps
in current customers. We believe this similar customer base will allow us to leverage each company’s strengths to grow sales and
also diversify Digirad’s service offerings.
We paid to the sellers of the membership interest (the Sellers) aggregate up-front consideration of $3.4 million and assumed
approximately $131,000 in debt. In addition, there is an aggregate earn-out opportunity of up to $501,000 from the period March
14, 2014 through December 31, 2016 based on the Telerhythmics business meeting certain earnings before interest, taxes,
depreciation and amortization (EBITDA) milestones. The Sellers will receive fifty percent (50%) of the EBITDA generated by
the Telerhythmics business in excess of the EBITDA milestone amounts, which are as follows:
•
•
•
$415,000 of EBITDA for the period from the closing date through December 31, 2014,
$825,000 of EBITDA for the period from January 1, 2015 through December 31, 2015; and
$825,000 of EBITDA for the period from January 1, 2016 through December 31, 2016.
At December 31, 2014, we have estimated the fair value of the contingent earn-out opportunity to be $229,000. The earn-out
opportunity is estimated based on expected performance of the business over the period from January 1, 2015 through December
31, 2016, utilizing an income approach. No earn-out consideration was earned by the Sellers for the period from the closing date
through December 31, 2014. It is reasonably possible that our estimate of the earn-out potential could change in the near term.
Any adjustment in the estimated earn-out opportunity until settled will be recorded as a gain or loss to current operations in the
period the estimate changes.
As of December 31, 2014, the allocation of the purchase price to the assets acquired and liabilities assumed on the acquisition
date was as follows (in thousands):
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Assets
Current assets:
Accounts receivable, net
Other current assets
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
Total assets
Liabilities
Current liabilities:
Accounts payable
Accrued compensation
Other accrued liabilities
Current portion of long-term debt
Total current liabilities
Other liabilities
Total liabilities
Allocation of purchase price
$
$
$
$
256
34
290
290
2,580
1,153
4,313
36
169
356
131
692
174
866
The long-term debt was paid in full on March 28, 2014.
The goodwill recognized as part of the transaction primarily represents synergies between Digirad and Telerhythmics that were
not separately identified as part of the acquisition valuation process. Telerhythmics activities are considered their own operating
segment, which is aggregated into our Diagnostic Services reportable segment (formerly Digirad Imaging Solutions). The resulting
goodwill from the acquisition is expected to be deductible for federal and state tax reporting purposes.
The below tables display estimated pro forma results had the business acquisition been completed as of January 1, 2013. In
deriving the pro forma results, we utilized the historical operating results of Telerhythmics and adjusted for the impact of the
purchase accounting and transaction costs as if the acquisition occurred on January 1, 2013.
(in thousands)
Revenues
Net income
Year Ended December 31,
(unaudited)
2014
2013
$
$
56,763
2,688
$
$
55,494
247
Included within our consolidated operating results for the year ended December 31, 2014 are Telerhythmics operations for the
period March 14, 2014 through December 31, 2014 as follows:
(in thousands)
Revenues
Net loss
Year Ended
December 31, 2014
(unaudited)
$
$
3,926
(777)
Included within the results for Telerhythmics is approximately $155,000 of transaction costs related to the acquisition. These
costs are classified as general and administrative expenses in the consolidated statements of comprehensive income (loss).
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NOTE 4.
Supplementary Balance Sheet Information (in thousands):
Inventories:
Raw materials
Work-in-process
Finished goods
Total inventories
Less reserve for excess and obsolete inventories
Total inventories, net
Property and equipment:
Machinery and equipment
Computer hardware and software
Leasehold improvements
Total property and equipment
Less accumulated depreciation
Total property and equipment, net
Intangible assets with finite useful lives:
Customer relationships
Trademarks
Patents
Covenants not to compete
Total intangible assets, net
Intangible assets with finite useful lives:
Customer relationships
Patents
Total intangible assets, net
December 31,
2014
December 31,
2013
2,439
$
2,560
558
5,557
(1,913)
3,644
$
2,619
3,189
616
6,424
(2,543)
3,881
December 31,
2014
December 31,
2013
23,412
$
2,917
571
26,900
(22,134)
4,766
$
22,596
2,497
861
25,954
(21,801)
4,153
$
$
$
$
December 31, 2014
Weighted Average
Useful Life (years)
Gross
Carrying
Amount
Accumulated
Amortization
Intangible
Assets, Net (1)
8.6
9.0
13.2
5.0
$
4,850
$
600
141
70
$
5,661
$
December 31, 2013
(2,904) $
(53)
(116)
(11)
(3,084) $
1,946
547
25
59
2,577
Weighted Average
Useful Life (years)
Gross
Carrying
Amount
Accumulated
Amortization
Intangible
Assets, Net (1)
5.3
$
12.6
$
2,940
141
3,081
$
$
(2,622) $
(106)
(2,728) $
318
35
353
(1)
Amortization expense for intangible assets, net for the years ended December 31, 2014, 2013, and 2012 was $0.4 million, $0.2 million,
and $0.2 million, respectively. Estimated amortization expense for intangible assets for 2015 is $0.4 million, for 2016 is $0.4 million,
for 2017 is $0.4 million, for 2018 is $0.3 million, for 2019 is $0.3 million, and thereafter is $0.8 million.
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Other current liabilities:
Professional fees
Sales and property taxes payable
Radiopharmaceuticals and consumable medical supplies
Current portion of capital lease obligation
Facilities and related costs
Outside services and consulting
Legal reserve
Other accrued liabilities
Total other current liabilities
NOTE 5.
Fair Value Measurements
December 31,
2014
December 31,
2013
$
$
333
197
177
348
155
151
—
428
367
275
242
174
151
134
50
381
$
1,789
$
1,774
We categorize our assets and liabilities measured at fair value into a three-level hierarchy in accordance with the authoritative
guidance for fair value measurements. Assets and liabilities presented at fair value in our consolidated balance sheets are generally
categorized as follows:
Level 1:
Quoted prices in active markets for identical assets or liabilities.
Level 2:
Level 3:
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices
in markets that are not active, or other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities.
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value
of the assets or liabilities. Such assets and liabilities may have values determined using pricing models, discounted
cash flow methodologies, or similar techniques, and include instruments for which the determination of fair
value requires significant management judgment or estimation.
As required by the authoritative guidance for fair value measurements, financial assets and liabilities are classified in their
entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of
a particular input to the fair value measurement requires judgment, which may affect the valuation of assets and liabilities and
their placement within the fair value hierarchy levels. The following table sets forth by level within the fair value hierarchy our
assets that were recorded at fair value as of December 31, 2014 and 2013 (in thousands):
Assets:
Corporate debt securities
Liabilities:
Acquisition related contingent consideration
Assets:
Corporate debt securities
At Fair Value as of December 31, 2014
Level 1
Level 2
Level 3
Total
$
$
— $ 4,645
$
— $ 4,645
— $
— $
229
$
229
At Fair Value as of December 31, 2013
Level 1
Level 2
Level 3
Total
$
— $ 2,181
$
— $ 2,181
Our investments in corporate debt securities are valued based on quoted market prices for identical securities. Some of the
corporate debt securities we hold do not trade on a daily basis. For investments that do not trade on a daily basis, we utilize a
variety of pricing sources to determine fair value and corroborate the fair value by observing market data prior and subsequent to
the balance sheet date.
The acquisition related contingent consideration is related to our acquisition of Telerhythmics on March 13, 2014. We reassess
the fair value of the contingent consideration to be settled in cash related to our acquisition of Telerhythmics on a quarterly basis
using the income approach, which is a Level 3 measurement. The estimation of the fair value of the contingent consideration
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requires significant management judgment, including estimating future cash flows associated with the Telerhythmics business and
determining the associated discount rate. The maximum possible consideration to be paid is $501,000. No contingent consideration
was earned or paid as of December 31, 2014, and no minimum amount is guaranteed to be paid.
At the acquisition date, the contingent consideration was valued at $220,000. Upon our reassessment at December 31, 2014,
we adjusted the estimated value of the contingent consideration to $229,000. The change in contingent consideration is recorded
as general and administrative expense in the Consolidated Statements of Comprehensive Income (Loss). See Note 3 for further
detail regarding contingent consideration related to our acquisition of Telerhythmics.
NOTE 6.
Goodwill
Goodwill has been recorded related to the acquisition of Ultrascan in 2007 and the acquisition of Telerhythmics in 2014. The
related goodwill has been recorded within two separate reporting units within our Diagnostic Services segment. As a result of our
annual impairment test during the fourth quarter of 2008, we recorded a $2.5 million impairment loss on the goodwill related to
the Ultrascan acquisition, adjusting the related goodwill to its implied carrying value of $0.2 million. During the year ended
December 31, 2014, we recorded $1.2 million of goodwill as a result of acquisition of Telerhythmics, bringing total goodwill to
its current carrying value of $1.3 million. We determined the implied fair value of the goodwill for Telerhythmics utilizing the
discounted cash flow method under the income approach. Under the income approach, we derived the fair value based on the
present value of estimated future cash flows, which were based on historical data and assumptions pertaining to the market.
During the fourth quarter of 2014, we performed our annual goodwill impairment test. We performed a qualitative assessment
of all reporting units to estimate whether it is more likely than not that the fair value of each reporting unit was less than its carrying
amount. In performing this qualitative assessment, we assessed relevant events and circumstances that may impact the fair value
and the carrying amount of each reporting unit. Factors that were considered included, but were not limited to, the following:
(1) macroeconomic conditions; (2) industry and market conditions; (3) overall financial performance and expected financial
performance; (4) other entity specific events. Based on the results of this qualitative assessment, we determined that it is more
likely than not that the carrying value of the Ultrascan related reporting unit is less than its fair value and, thus, the two-step
quantitative analysis was not required. In regards to the Telerhythmics related reporting unit, we performed the first step of the
goodwill impairment test which involves comparing the fair value of the reporting unit with the associated carrying value, including
goodwill. We determined the fair value of the reporting unit using the income valuation approach. The reporting unit’s fair value
exceeded the associated carrying amount of the reporting unit; therefore the second step of the goodwill impairment test was not
necessary. No impairment loss was recorded for the years ended December 31, 2014, 2013, or 2012.
NOTE 7.
Commitments and Contingencies
Leases
We currently lease facilities and certain automotive equipment under non-cancelable operating leases expiring from January 1,
2015 through November 30, 2021. Rent expense is recognized on a straight-line basis over the initial lease term and those renewal
periods that are reasonably assured as determined at lease inception. The difference between rent expense and rent paid is recorded
as deferred rent and is included in other current and long-term liabilities. Rent expense was approximately $1.3 million for the
year ended December 31, 2014, and $1.4 million for the years ended December 31, 2013 and 2012.
As of December 31, 2014, we financed certain information technology and medical equipment and vehicles under capital leases.
These obligations are secured by the specific equipment financed under each lease and will be repaid monthly over the remaining
lease terms through March 31, 2018.
We are committed to making future cash payments on non-cancelable operating leases and capital leases (including interest).
The future minimum lease payments due under both non-cancelable operating leases and capital leases having initial or remaining
lease terms in excess of one year as of December 31, 2014 are as follows (in thousands):
2015
2016
2017
2018
2019
Thereafter
Total minimum lease payments
47
Operating
Leases
Capital
Leases
$
$
1,108
875
567
490
493
669
4,202
$
$
383
308
123
5
—
—
819
Table Of Contents
Radiopharmaceutical litigation. In April 2013, we settled a contractual dispute with our former radiopharmaceutical supplier
who alleged that we, along with another radiopharmaceutical supplier, collaborated and breached our supply commitment contract.
In summary, the settlement releases all parties from all claims associated with the dispute and the Company paid $385,000 which
was recorded in other accrued liabilities as of December 31, 2012. The associated expense was recognized in the consolidated
statement of comprehensive income (loss) for the year ended December 31, 2012.
Annual Meeting Litigation. In May 2013, we were served with a complaint in Delaware Chancery Court by one of our shareholders,
the Red Oak Fund, L.P. (Red Oak). In summary, the complaint alleged that the Annual Meeting of Shareholders election process
(the Election) was improperly conducted. Red Oak sought to have the results of the Election voided and to compel Digirad to
conduct a new Annual Meeting process. On October 23, 2013, the Delaware Chancery Court issued a memorandum opinion in
favor of the Company which upheld the Election as valid.
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 8.
Share-Based Compensation
At December 31, 2014, we have two active equity incentive plans, the 2011 Inducement Stock Incentive Plan (the 2011 Plan)
and the 2014 Equity Incentive Award Plan (the 2014 Plan), (collectively the Plans), under which stock options, restricted stock
units, and other stock based awards may be granted to employees and non-employees, including members of our Board of Directors.
Terms of any equity instruments granted under the Plans are approved by the Board of Directors. Stock options typically vest over
the requisite service period of one to four years and have a contractual term of seven to ten years. Restricted stock units generally
vest over one to four years. Under the Plans, we are authorized to issue an aggregate of 1,856,733 shares of common stock. As of
December 31, 2014, the Plans had 1,131,432 shares available for future issuance. The number of shares reserved for issuance
under the 2014 Plan is subject to increase by any shares under the 2004 Equity Incentive Award Plan (the 2004 Plan) that are
forfeited, expire, or are canceled. As of December 31, 2014, the number of shares provided for issuance under the 2014 Plan due
to forfeited, expired, and canceled shares under the 2004 Plan was 1,500 shares.
Stock Options
The estimated fair value of our stock options is determined using the Black-Scholes model. All stock options were granted with
an exercise price equal to the fair value of the common stock on the grant date. The weighted-average grant date fair value of
employee stock options granted during the years ended December 31, 2014, 2013, and 2012 was $0.70, $1.06, and $1.05 per share,
respectively, which was estimated using the following weighted-average assumptions:
Expected volatility
Expected term (in years)
Risk-free interest rate
Expected dividend yield
Year Ended December 31,
2014
2013
2012
43%
4.1
1.2%
5.7%
56%
4.6
0.9%
—
59%
6.0
1.2%
—
The determination of the fair value of stock options using an option valuation model is affected by our stock price, as well as
assumptions regarding a number of complex and subjective variables. The volatility assumption is based on the historical volatility
of our common stock over a period of time equal to the expected term of the stock options. The expected term of our stock options
is based on historical experience. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield in effect
at the time of grant. The expected dividend yield is based on the current annualized dividend rate per share divided by the historical
average stock price. At the time of the grants, for the years ended December 31, 2013 and 2012, we had no plans to pay a dividend
and no history of paying a dividend previously and as such an expected dividend yield of zero was utilized for purposes of
determining fair value of the associated stock options.
48
Table Of Contents
A summary of our stock option award activity as of and for the year ended December 31, 2014 is as follows (in thousands,
except per share data):
Options outstanding at December 31, 2013
Options exercisable at December 31, 2013
Options granted
Options forfeited
Options expired
Options exercised
Options outstanding at December 31, 2014
Options exercisable at December 31, 2014
Weighted-
Average
Exercise
Price per
Share
Weighted-
Average
Remaining
Contractual
Term (In Years)
Aggregate
Intrinsic
Value
Number of
Shares
856
501
750
(45)
(5)
(98)
1,458
553
$
$
$
$
$
1.93
1.75
3.38
3.21
6.98
1.92
2.62
1.82
5.0
3.4
$
$
2,537
1,403
As share-based compensation expense under the authoritative guidance for share-based payments is based on awards ultimately
expected to vest, it is reduced for estimated forfeitures. The guidance requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
At December 31, 2014, total unrecognized compensation cost related to unvested stock options was $0.5 million, which is
expected to be recognized over a weighted-average period of 1.8 years.
Upon exercise, we issue new shares of common stock. Cash received from stock option exercises was $0.2 million during the
year ended December 31, 2014, $0.9 million during the year ended December 31, 2013, and $0.3 million for the year ended
December 31, 2012. We did not recognize any income tax benefits from stock option exercises as we continue to record a valuation
allowance on our deferred tax assets, as more fully described in Note 9. The total intrinsic value of stock options exercised was
$0.1 million during the year ended December 31, 2014, $0.9 million during the year ended December 31, 2013, and less than
$0.1 million during the year ended 2012.
Restricted Stock Units
Under guidance for share-based payments, the fair value of our restricted stock awards is based on the grant date fair value of
our common stock. All restricted stock units were granted with no purchase price. Vesting of the restricted stock awards is subject
to service conditions, as well as the attainment of additional performance objectives for certain of the awards. The weighted-
average grant date fair value of the restricted stock units was $3.81 and $1.82 per share during the years ended December 31,
2014 and 2012, respectively. There were no restricted stock units granted during the year ended December 31, 2013.
A summary of our restricted stock unit activity as of and for the year ended December 31, 2014 is as follows (in thousands,
except per share data):
Non-vested restricted stock units outstanding at December 31, 2013
Granted
Forfeited
Vested
Non-vested restricted stock units outstanding at December 31, 2014
Number of
Shares
Weighted-
Average
Grant Date
Fair Value
Per Share
— $
88
—
—
88
$
—
3.81
—
—
—
The following table summarizes information about restricted stock units that vested during the years ended December 31, 2014,
2013, and 2012 based on service conditions (in thousands):
Fair value on vesting date of vested restricted stock units
49
Year Ended December 31,
2014
2013
$
— $ 136
2012
$ 350
Table Of Contents
At December 31, 2014, total unrecognized compensation cost related to non-vested restricted stock units was $0.3 million,
which is expected to be recognized over a weighted-average period of 3.5 years.
Allocation of Share-Based Compensation Expense
Total share-based compensation expense related to all of our share-based units for the years ended December 31, 2014, 2013,
and 2012 was allocated as follows (in thousands):
Cost of revenues:
Diagnostic Services
Diagnostic Imaging
Research and development
Marketing and sales
General and administrative
Share-based compensation expense
NOTE 9.
Income Taxes
Year Ended December 31,
2014
2013
2012
$
$
1
26
—
51
248
326
$
$
6
49
9
52
224
340
$
$
7
82
78
127
336
630
Significant components of the provision (benefit) for income taxes are as follows (in thousands):
Current provision (benefit):
Federal
State
Total current provision (benefit)
Deferred provision:
Federal
State
Total deferred provision
Total income tax provision (benefit)
Year Ended December 31,
2014
2013
2012
$ — $
41
41
18
3
21
62
$
$
(49)
4
(45)
—
—
—
(45)
$
$
(128)
51
(77)
—
—
—
(77)
Differences between the provision (benefit) for income taxes and income taxes at the statutory federal income tax rate are as
follows:
Income tax expense (benefit) at statutory federal rate
State income tax expense (benefit), net of federal benefit
Permanent differences and other
Research and development credits, current year
Research and development credits, prior year
Change in effective state tax rates
Expiration of net operating loss carryovers
Stock compensation expense
Reserve for uncertain tax positions and other reserves
Change in valuation allowance
Provision (benefit) for income taxes
Year Ended December 31,
2014
35.0 %
4.8 %
(2.9)%
— %
— %
(3.2)%
1.1 %
0.1 %
— %
(32.5)%
2.4 %
2013
35.0 %
7.2 %
14.8 %
(58.1)%
(39.1)%
(25.6)%
8.2 %
53.7 %
5.4 %
(22.2)%
(20.7)%
2012
(35.0)%
(2.9)%
1.4 %
(2.6)%
— %
2.4 %
36.6 %
— %
(2.4)%
1.0 %
(1.5)%
As of December 31, 2014, we had federal and state income tax net operating loss carryforwards of $93.2 million and $28.0
million, respectively. Federal loss carryforwards will begin to expire in 2018 unless previously utilized. State loss carryforwards
of less than $0.1 million expired in 2014, and approximately $4.1 million is set to expire in 2015 unless previously utilized. We
also have federal and California research and other credit carryforwards of approximately $1.8 million and $2.1 million, as of
December 31, 2014, respectively. The federal credits will begin to expire in 2018. The California research credits have no expiration.
50
Table Of Contents
Pursuant to Internal Revenue Code Sections 382 and 383, use of our net operating loss and credit carryforwards may be limited
because of a cumulative change in ownership greater than 50% which may have occurred or which may occur in the future.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be
generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative
loss incurred over the three-year period ended December 31, 2014. Such objective evidence limits the ability to consider other
subjective evidence such as our projections for future income. On the basis of this evaluation, as of December 31, 2014, a valuation
allowance has been recorded as management cannot conclude that it is more likely than not that the existing deferred tax assets
will be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if objective negative
evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as
our projected future income.
Our net deferred tax assets (liabilities) consisted of the following (in thousands):
Deferred tax assets (liabilities):
Net operating loss carryforwards
Research and development and other credits
Reserves
Intangibles
Other, net
Total deferred tax assets
Deferred tax liabilities—depreciation
Valuation allowance for deferred tax assets
Net deferred tax assets (liabilities)
December 31,
2014
2013
$
$
33,732
1,950
1,417
2,097
1,079
40,275
(237)
(40,059)
$
(21) $
34,727
1,928
1,273
2,425
830
41,183
(300)
(40,883)
—
The following table summarizes the activity related to our unrecognized tax benefits (in thousands):
Balance at beginning of year
Increases related to prior year tax positions
Increases related to current year tax positions
Expiration of the statute of limitations for the assessment of taxes
Change in valuation allowances
Balance at end of year
December 31,
2014
$ 1,553
—
—
—
—
$ 1,553
2013
$ 1,539
5
64
(55)
—
$ 1,553
2012
$ 1,621
25
81
(252)
64
$ 1,539
Included in the unrecognized tax benefits of $1.6 million at December 31, 2014 was $1.3 million of tax benefits that, if recognized,
would reduce our annual effective tax rate, subject to the valuation allowance. We do not expect our unrecognized tax benefits to
change significantly over the next 12 months.
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 2009; however, our net operating loss carryforward 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. There were no accrued interest and penalties as of
December 31, 2014 and 2013 ,and no interest and penalties were recognized during the years ended December 31, 2014, 2013,
and 2012.
NOTE 10.
Employee Retirement Plan
We have 401(k) retirement plans under which employees may contribute up to 100% of their annual salary, within IRS limits.
The Company contributions to the retirement plans totaled $0.2 million for each of the years ended December 31, 2014, 2013,
and 2012.
51
Table Of Contents
NOTE 11.
Restructuring Charges
Facilities restructuring initiative
On January 27, 2014, we announced a plan to exit our 47,000 square foot former headquarters facility in Poway, California
(the Facilities restructuring initiative). This action was undertaken as the facility had excess space and capacity given our current
operating plan. We entered into a termination agreement to end the lease on the facility as of April 30, 2014. The original term of
the lease would have continued through February 29, 2016. Concurrently with the termination of the lease for the 47,000 square
foot Poway, California facility, we entered into a new lease agreement on January 23, 2014 for a separate 21,300 square foot
facility in Poway, California to house our Diagnostic Imaging operations.
As a result of the Facilities restructuring initiative, we incurred a total of $0.7 million of restructuring charges, all of which
were incurred during the year ended December 31, 2014. The charges are comprised of lease termination, moving and other related
costs. All restructuring efforts associated with this initiative were complete as of December 31, 2014.
The following table includes information regarding our Facilities restructuring initiative:
(in thousands)
Accrued at
December 31,
2013
Accrued Costs
Cash Payments
and Other
Reductions
Accrued at
December 31,
2014
Total Facilities restructuring initiative
$
— $
663
$
660
$
3
Accrued Facilities restructuring initiative charges at December 31, 2014 are included in the accounts payable line item in the
consolidated balance sheets. All Facilities restructuring initiative charges for the year ended December 31, 2014 are included in
the Diagnostic Imaging segment.
Diagnostic Imaging restructuring initiative
On February 28, 2013, we announced a plan to restructure our Diagnostic Imaging business to significantly reduce costs and
focus on maximizing cash flow from our Diagnostic Services business (the Diagnostic Imaging restructuring initiative). The
Diagnostic Imaging restructuring initiative included a reduction in force. In addition, as part of the Diagnostic Imaging restructuring
initiative, we entered into an agreement in September 2013 with a third party to outsource the majority of the manufacturing
associated with our cameras. As a result of the Diagnostic Imaging restructuring initiative, we incurred a total of $1.8 million in
restructuring charges, the majority of which were incurred during fiscal year 2013. Included in the total Diagnostic Imaging
restructuring initiative charges are $1.6 million of employee related costs, with the remaining costs consisting of contract termination
costs and other related costs. All restructuring efforts associated with this initiative were complete as of June 30, 2014.
The following table includes information regarding our Diagnostic Imaging restructuring initiative:
(in thousands)
Accrued at
December 31,
2013
Accrued Costs
Cash Payments
and Other
Reductions
Accrued at
December 31,
2014
Total Diagnostic Imaging restructuring initiative
$
489
$
29
$
516
$
2
All accrued Diagnostic Imaging restructuring initiative charges at December 31, 2014 are included in the accrued compensation
line item in the consolidated balance sheets. All the Diagnostic Imaging restructuring initiative charges for the year ended December
31, 2014 are included in the Diagnostic Imaging segment.
NOTE 12.
Surgical Imaging Asset Sale and License Agreement
On July 31, 2013, we entered into an asset purchase agreement with Novadaq Technologies Inc. (Novadaq). Under the terms
of the asset purchase agreement, we sold Novadaq all of our assets specifically related to an uncommercialized surgical imaging
system previously in development. We also licensed certain existing Company technology to Novadaq for their use in the peri-
operative field. In exchange, we received upfront consideration of $2.0 million, and could receive up to $1.0 million in deferred
contingent payments based on the achievement of specific regulatory and commercial milestones. In addition a royalty on sales,
if any, will be paid for a period of five years from the date of the first commercial sale of the related surgical imaging system.
We identified the deliverables at the inception of the agreements and determined that the tangible assets, consisting of inventory
parts, and intangible assets, consisting of the technology license and various patents and know-how, individually represent separate
units of accounting because each deliverable has standalone value. The best estimated selling prices for these units of accounting
were determined using the income method for the intangible assets, and cost plus a reasonable margin basis for the tangible assets.
The arrangement consideration was allocated to the deliverables based on the relative selling price method.
52
Table Of Contents
The amount of allocable arrangement consideration is limited to the amount that is not contingent upon meeting other specified
performance conditions (the non-contingent amount); therefore, the amount allocated to the deliverables was limited to the upfront
cash received of $2.0 million. A gain of $1.6 million representing the $2.0 million of upfront consideration less legal, consulting,
and other transaction fees, as well as the cost basis of the inventory was recorded during the year ended December 31, 2013.
We expect to recognize the regulatory and commercial milestone payments as a gain if and when the milestones are achieved.
We expect to recognize the sales royalty payments as a gain if and when the royalties are earned.
NOTE 13.
Stock Repurchase Program
On February 27, 2013, our board of directors modified our stock buyback program originally adopted in February 2009 to
increase repurchases to an aggregate of $7.0 million, and subsequently, on March 13, 2013, increased the stock buyback program
again for repurchases of up to an aggregate of $12.0 million. During the years ended December 31, 2013 and 2012, we repurchased
1,514,843 and 490,816 shares of our common stock, respectively, under the stock buyback program. During the year ended
December 31, 2014, we did not repurchase any of our common stock. As of December 31, 2014, an aggregate of $6.3 million
remains authorized for stock buyback under the program.
NOTE 14.
Preferred Stock Rights
On May 23, 2013, the Company's Board of Directors adopted a tax benefit preservation plan in the form of a Section 382
Rights Agreement (the 382 Agreement). The 382 Agreement is intended to diminish the risk that our ability to use our net operating
loss carryforwards to reduce future federal income tax obligations may become substantially limited due to an “ownership change,”
as defined in Section 382 of the Internal Revenue Code. The Board authorized and declared a dividend distribution of one right
for each outstanding share of common stock, par value $0.0001 per share, of the Company to stockholders of record as of the
close of business on June 4, 2013. Each right entitles the registered holder to purchase from the Company one one-thousandth of
a share of Series B Participating Preferred Stock, par value $0.0001 per share, of the Company at an exercise price of $20.00 per
one one-thousandth of a Preferred Share, subject to adjustment.
The rights will become exercisable following (i) the 10th business day (or such later date as may be determined by the Board
of Directors) after the public announcement that an acquiring person has acquired beneficial ownership of 4.99% or more of the
common shares of the Company or (ii) the 10th business day (or such later date as may be determined by the Board of Directors)
after a person or group announces a tender or exchange offer that would result in ownership by a person or group of 4.99% or
more of the common shares of the Company.
In addition, upon the occurrence of certain events, the exercise price of the rights would be adjusted and holders of the rights
(other than rights owned by an acquiring person or group) would be entitled to purchase common stock at approximately half of
market value. Given the potential adjustment of the exercise price of the rights, the rights could cause substantial dilution to a
person or group that acquires 4.99% or more of the Company's common stock on terms not approved by the Company's Board of
Directors.
No rights were exercisable at December 31, 2014. There is no impact to the Company's financial results as a result of the
adoption of the rights plan for the years ended December 31, 2014 and 2013.
NOTE 15.
Segments
Our reporting segments have been determined based on the nature of the products and/or services offered to customers or the
nature of their function in the organization. We evaluate performance based on the operating income (loss) contributed by each
segment. Our operating segments include Diagnostic Imaging, Digirad Imaging Solutions, and cardiac event monitoring from our
Telerhythmics acquisition on March 13, 2014 (See Note 3). For financial reporting purposes, we aggregate Digirad Imaging
Solutions and cardiac event monitoring due to their similar economic and operational characteristics. Summarized annual data for
segments are as follows (in thousands):
53
Table Of Contents
Gross profit by segment:
Diagnostic Services
Diagnostic Imaging
Consolidated gross profit
Income (loss) from operations by segment:
Diagnostic Services
Diagnostic Imaging (2)
Consolidated income (loss) from operations
Depreciation and amortization of tangible and intangible assets by segment:
Diagnostic Services
Diagnostic Imaging
Consolidated depreciation and amortization
Identifiable assets by segment:
Diagnostic Services
Diagnostic Imaging
Consolidated assets
Year ended December 31,
2014 (1)
2013
2012
$
$
$
$
$
$
8,771
4,321
13,092
(48)
(5,050)
(5,098)
1,814
317
2,131
$
$
$
$
$
$
$
$
10,449
$
6,191
9,343
4,773
16,640
$ 14,116
220
2,298
2,518
1,672
263
1,935
$
$
$
$
30
141
171
1,436
477
1,913
December 31,
2014 (1)
2013
18,724
$ 11,874
23,177
29,577
41,901
$ 41,451
(1) On March 13, 2014, we acquired 100% of the membership interest of Telerhythmics, LLC. The results of Telerhythmics are included in
Diagnostic Services since the acquisition date (See Note 3).
(2) Included in the Diagnostic Imaging income from operations for the year ended December 31, 2014, are approximately $0.7 million of
charges associated with our Diagnostic Imaging and Facilities restructuring initiatives (See Note 11). Included in the Diagnostic Imaging
income from operations for the year ended December 31, 2013, are approximately $1.7 million of charges associated with our Diagnostic
Imaging restructuring initiative, as well as a gain of approximately $1.6 million associated with the sale of assets and licensing agreement
from an uncommercialized surgical imaging system previously in development (See Note 12).
NOTE 16.
Quarterly Financial Information (Unaudited)
The following financial information reflects all normal recurring adjustments, which are, in the opinion of management,
necessary for a fair statement of the results of the interim periods. Summarized quarterly data for fiscal 2014 and 2013 are as
follows (in thousands, except per share data):
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Table Of Contents
Fiscal 2014 (1)
Revenues
Gross profit
Income (loss) from operations (2)
Net income (loss)
Net income (loss) per common share—basic (3)
Net income (loss) per common share—diluted (3)
Fiscal 2013
Revenues
Gross profit
Income (loss) from operations
Net income (loss)
Net income (loss) per common share—basic (3)
Net income (loss) per common share—diluted (3)
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
$
$
$
$
$
$
$
$
$
$
$
$
12,997
$
14,587
3,442
$
(155) $
(148) $
(0.01) $
(0.01) $
4,505
825
823
0.04
0.04
$
$
$
$
$
$
13,881
4,409
1,032
1,028
0.06
0.05
11,546
$
12,890
$
12,413
2,817
$
(2,409) $
(2,419) $
(0.13) $
(0.13) $
3,793
$
(632) $
(616) $
(0.03) $
(0.03) $
3,818
2,432
2,512
0.14
0.14
$
$
$
$
$
$
$
$
$
$
$
$
14,143
4,284
816
772
0.04
0.04
12,527
3,688
780
787
0.04
0.04
(1) On March 13, 2014, we acquired 100% of the membership interest of Telerhythmics, LLC. The results of Telerhythmics are included in
Diagnostic Services since the acquisition date (See Note 3).
(2)
Included in the income (loss) from operations for the first, second, third, and fourth quarter of 2014, are approximately $0.4 million, $0.1
million, $0.1 million, and less than $0.1 million of charges, respectively, associated with our Diagnostic Imaging and Facilities restructuring
initiatives (See Note 11).
(3) Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly net earnings per share
will not necessarily equal the total for the year.
NOTE 17.
Subsequent Events
Dividend
On February 2, 2015, the Company announced a dividend of $0.05 payable to shareholders of record as of February 13, 2015.
The dividend was paid on February 23, 2015.
MD Office Solutions, Inc. Acquisition
On March 5, 2015, we entered into an Agreement of Merger and Plan of Reorganization (the Merger Agreement) with the
Stockholders party thereto (Sellers), to acquire MD Office Solutions, Inc. (MD Office).
Total consideration related to the Merger Agreement paid to the Sellers was 610,000 shares of common stock of Digirad
Corporation, with a total value at closing of $2,684,000. The Company issued new shares for the consideration. In addition, there
is an earn-out opportunity of up to $400,000 in cash over approximately three years based on the MD Office business meeting
certain earnings before interest, taxes, depreciation and amortization (EBITDA) milestones. The Sellers will receive fifty percent
of the EBITDA generated by the MD Office business in excess of the EBITDA milestone amounts, which is $650,000 for each
of the annual periods ending December 31, 2015, 2016 and 2017, with the target for 2015 being prorated based on the close date.
The Merger Agreement is also subject to a post-closing purchase price adjustment based on the final working capital balance, as
defined in the Merger Agreement, as well as a Registration Rights Agreement related to the common shares provided to the Sellers
as part of the consideration.
We expect to account for the transaction as a business combination and are in the process of determining the allocation of the
purchase price to acquired assets and assumed liabilities, as well as preparing pro forma financial information. A determination
of the acquisition-date fair values of the assets acquired and the liabilities assumed is pending the completion of an independent
appraisal and other evaluations and therefore further disclosures have not been made.
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Table Of Contents
ITEM 9.
None.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
ITEM 9A.
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our
Securities and Exchange Commission Act of 1934 reports is recorded, processed, summarized, and reported within the time periods
specified in the Securities and Exchange Commission’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.
As required by Securities and Exchange Commission Rule 13a-15(e) and 15d-15(e), 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 the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and
procedures were effective at the reasonable assurance level.
In connection with our acquisition of Telerhythmics, certain areas of internal control over financial reporting changed. These
areas are primarily related to integrating corporate functions at Digirad that previously existed at Telerhythmics. The functions
and related internal controls that were affected as a result of the acquisition of Telerhythmics are financial reporting, human
resources, and information technology. Certain control structure items remain in operation at Telerhythmics, primarily related to
the processing and billing of revenues, and collection of those revenues. The control structure at Digirad has been modified to
appropriately oversee and incorporate these activities into the overall control structure.
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.
(b) Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Because of its inherent limitations, internal control over financial
reporting may not prevent or detect all misstatements. Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and presentation.
We conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in
Internal Control—Integrated Framework (1992 Framework) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework, our management
concluded that our internal control over financial reporting was effective as of December 31, 2014.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal
control over financial reporting. Our report was not subject to attestation by our independent registered public accounting firm
pursuant to the rules of the Securities and Exchange Commission that permit us to provide only a management’s report in this
report.
ITEM 9B.
OTHER INFORMATION
Tax Benefit Preservation Plan
On May 23, 2013, we entered into a Tax Benefit Preservation Plan with American Stock Transfer & Trust Company, which
was amended on November 11, 2013, to correct certain ambiguities. The Tax Benefit Preservation Plan is intended to diminish
the risk that our ability to use our net operating loss carryforwards to reduce future federal income tax obligations may become
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substantially limited due to an “ownership change,” as defined in Section 382 of the Internal Revenue Code. In connection with
the adoption of the tax benefit preservation plan, we declared a dividend distribution of one right for each outstanding share of
Digirad common stock to stockholders of record as of the close of business on June 4, 2013. Each right entitles the registered
holder to purchase from Digirad one one-thousandth of a share of Series B Participating Preferred Stock of Digirad at an exercise
price of $20.00 per one one-thousandth of a share of Series B Participating Preferred Stock, subject to adjustment.
As more fully described in the Tax Benefit Preservation Plan, the rights become exercisable following (i) the 10th business day
(or such later date as may be determined by our board of directors) after the public announcement that an acquiring person has
acquired beneficial ownership of 4.99% or more of the common shares of Digirad or (ii) the 10th business day (or such later date
as may be determined by our board of directors) after a person or group announces a tender or exchange offer that would result
in ownership by a person or group of 4.99% or more of the common shares of Digirad.
The Tax Benefit Preservation Plan continues in full force and effect.
Preferred Stock Rights Agreement
Prior to entering into the Tax Benefit Preservation Plan, the Company had a pre-existing Preferred Stock Rights Agreement,
which was designed to deter, among other things, coercive takeover tactics, including an acquisition by an acquiring person of
20% or more of the shares of the Company’s common stock.
In light of the adoption of the Tax Benefit Preservation Plan, on March 5, 2015, we entered into a First Amendment to the
Preferred Stock Rights Agreement with American Stock Transfer & Trust Company pursuant to which the Final Expiration Date
(as defined therein) was amended to be March 15, 2015. As a result of this amendment, the Preferred Stock Rights Agreement
will terminate in accordance with its terms on March 15, 2015.
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PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item regarding directors and corporate governance is incorporated by reference to our definitive
Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Stockholders
to be held in 2015, or the “2015 Proxy Statement,” under the headings “Corporate Governance and Ethics,” “Election of Directors,”
and “Section 16(a) Beneficial Ownership Reporting Compliance.” We have adopted a Code of Business Ethics and Conduct
(“Ethics Code”) that applies to all our officers, directors, employees and contractors. The Ethics Code contains general guidelines
for conducting our business consistent with the highest standards of business ethics and compliance with applicable law, and is
intended to qualify as a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and Item 406 of
Regulation S-K. Day-to-day compliance with the Ethics Code is overseen by the Company compliance officer appointed by our
Board of Directors. If we make any substantive amendments to the Ethics Code or grant any waiver from a provision of the Ethics
Code to any director or executive officer, we will promptly disclose the nature of the amendment or waiver on our website at
www.digirad.com.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the information set forth under the captions “Executive
Compensation” and “Compensation of Directors” in our 2015 Proxy Statement.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by Item 12 is incorporated by reference from the information set forth under the captions “Security
Ownership of Certain Beneficial Owners and Management” and “Securities Authorized for Issuance Under Equity Compensation
Plans” in our 2015 Proxy Statement.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by Item 13 is incorporated by reference from the information set forth under the captions “Corporate
Governance and Ethics—Director Independence” and “Related Person Transactions and Section 16(a) Beneficial Ownership
Reporting Compliance,” in our 2015 Proxy Statement.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 is incorporated by reference from the information set forth under the caption “Proposal
2: Ratification of Appointment of Independent Auditors,” in our 2015 Proxy Statement.
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ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements and Financial Statement Schedules
PART IV
Documents filed as part of this report:
1.
Financial Statements:
The financial statements of Digirad Corporation listed below are set forth in Item 8 of this report for the year ended December 31,
2014:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2014, 2013, and 2012
Consolidated Balance Sheets at December 31, 2014 and 2013
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013, and 2012
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2014, 2013, and 2012
Notes to Audited Consolidated Financial Statements
2.
Financial Statement Schedules:
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial
statements or notes thereto.
(b) Exhibits
Exhibit
Number
2.1
2.2†
2.3
2.4
2.5†
2.6
3.1
Description
EXHIBIT INDEX
Asset Purchase Agreement, by and between Digirad Corporation, Digirad Imaging Solutions, Inc.,
Digirad Ultrascan Solutions, Inc. and Ultrascan, Inc. dated May 1, 2007 (Incorporated by reference to
the exhibits to the Company's quarterly report on Form 10-Q filed with the Commission on May 7,
2007)
Asset Purchase Agreement, dated February 2, 2009, by and among the Company, Digirad Imaging
Solutions, Inc. and MD Office Solutions (Incorporated by reference to the exhibits to the Company's
report on Form 8-K filed with the Commission on February 6, 2009)
Asset Purchase Agreement, dated as of March 2, 2009, by and among Digirad Imaging Solutions, Inc.
Daniel D. Rice, Denise Nelson, Greg Nelson and Antigua Medical Services, LLC (Incorporated by
reference to the exhibits to the Company's report on Form 8-K filed with the Commission on March 4,
2009)
Membership Interest Purchase Agreement, dated March 13, 2014, by and among Digirad Imaging
Solutions, Inc. and the Sellers party thereto (Incorporated by reference to the exhibits to the Company's
report on Form 8-K filed with the Commission on March 14, 2014)
Asset Purchase Agreement by and between Digirad Corporation and Novadaq Technologies Inc., dated
July 31, 2013 (Incorporated by reference to Form 8-K filed with the Commission on August 1, 2013,
and to the exhibits to the amended Form 8-K/A filed with the Commission on September 18, 2013)
Agreement of Merger and Plan of Reorganization, dated March 5, 2015 by and between Digirad
Corporation, Maleah Incorporated, MD Office Solutions, Inc. and the Stockholders party thereto
(Incorporated by reference to the exhibits to the Company's report on Form 8-K filed with the
Commission on March 6, 2015). Schedules and exhibits have been omitted pursuant to Item 601(b)(2)
of Regulation S-K. The Company hereby agrees to furnish supplementary copies of any of the omitted
schedules or exhibits upon request by the Securities and Exchange Commission.
Amended and Restated Certificate of Incorporation of Digirad Corporation (Incorporated by reference
to the exhibits to the Company's report on Form 8-K originally filed with the Commission on May 3,
2006, as amended thereafter)
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Exhibit
Number
3.2
3.3
4.1
4.2
4.3
4.4
4.5
10.1†
10.2†
10.3†
10.4†
10.5#
10.6#
10.7#
10.8#
10.9#
Description
Amended and Restated Bylaws of Digirad Corporation (Incorporated by reference to the exhibits to
the Company's report on Form 8-K originally filed with the Commission on May 9, 2007)
Certificate of Designation of Rights, Preferences and Privileges of Series B Participating Preferred
Stock (Incorporated by reference to the exhibits to the Company's report on Form 8-K originally filed
with the Commission on May 24, 2013)
Form of Specimen Stock Certificate (Incorporated by reference to the exhibits to the Registration
Statement on Form S-1 (File No. 333-113760) originally filed with the Commission on March 19,
2004, as amended thereafter)
Preferred Stock Rights Agreement, by and between Digirad Corporation and American Stock Transfer
and Trust Company, dated November 22, 2005 (Incorporated by reference to the exhibits to the
Registration Statement on the Company's report on Form 8-A originally filed with the Commission on
November 29, 2005)
Tax Benefit Preservation Plan by and between Digirad Corporation and American Stock Transfer &
Trust Company, dated as of May 23, 2013 (Incorporated by reference to the exhibits to the Company's
report on Form 8-K originally filed with the Commission on May 24, 2013)
Tax Benefit Preservation Plan Amendment, dated November 11, 2013, by and between the Company
and American Stock Transfer & Trust Company, LLC (Incorporated by reference to the exhibits to the
Company's report on Form 10-K filed with the Commission on March 20, 2014)
First Amendment to Preferred Stock Rights Agreement, dated as of March 5, 2015, by and between
the Company and American Stock Transfer & Trust Company, LLC.
License Agreement, by and between Digirad Corporation and the Regents of the University of California
dated May 19, 1999, as amended (Incorporated by reference to the exhibits to the Registration Statement
on Form S-1 (File No. 333-113760) originally filed with the Commission on March 19, 2004, as
amended thereafter)
Amendment to License Agreement by and between Digirad Corporation and the Regents of the
University of California, dated July 28, 2004, as amended (Incorporated by reference to the exhibits
to the Registration Statement on Form S-1 (File No. 333-113760) originally filed with the Commission
on March 19, 2004, as amended thereafter)
License Agreement, by and between Digirad Corporation and Cedars-Sinai Health System, dated
May 22, 2001, as amended (Incorporated by reference to the exhibits to the Registration Statement on
Form S-1 (File No. 333-113760) originally filed with the Commission on March 19, 2004, as amended
thereafter)
License Agreement, by and between Digirad Corporation and Cedars-Sinai Health System, dated April
1, 2003, as amended (Incorporated by reference to the exhibits to the Registration Statement on Form
S-1 (File No. 333-113760) originally filed with the Commission on March 19, 2004, as amended
thereafter)
Digirad Corporation 2004 Stock Incentive Plan, as Amended and Restated on August 2, 2007
(Incorporated by reference to the exhibits to the Company's quarterly report on Form 10-Q as filed
with the Commission on August 7, 2007)
Form of Notice of Stock Option Award and Stock Option Award Agreement for 2004 Stock Incentive
Plan (Incorporated by reference to the exhibits to the Company's annual report on Form 10-K filed
with the Commission on March 3, 2005)
2004 Non-Employee Director Option Program (Incorporated by reference to the exhibits to the
Registration Statement on Form S-1 (File No. 333-113760) originally filed with the Commission on
March 19, 2004, as amended thereafter)
Form of Notice of Stock Option Award and Stock Option Award Agreement for 2004 Non-Employee
Director Option Program (Incorporated by reference to the exhibits to the Company's annual report
currently filed on Form 10-K with the Commission on March 3, 2005)
Form of Indemnification Agreement (Incorporated by reference to the exhibits to the Registration
Statement on Form S-1 (File No. 333-113760) originally filed with the Commission on March 19,
2004, as amended thereafter)
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Exhibit
Number
10.10#
10.11#
10.12#
10.13
10.14#
10.15#
10.16#
10.17
Description
Executive Employment Agreement, by and between Digirad Corporation and Jeffry R. Keyes, dated
March 4, 2013 (Incorporated by reference to the exhibits to the Company's report on Form 8-K filed
with the Commission on March 5, 2013)
Employment Agreement, dated as of May 1, 2007, as amended on August 7, 2010, by and between the
Company and Matthew G. Molchan (Incorporated by reference to the exhibits to the Company's report
on Form 8-K filed with the Commission on March 5, 2013)
Severance Agreement, dated December 31, 2010, by and between the Company and Virgil Lott
(Incorporated by reference to the exhibits to the Company's report on Form 8-K filed with the
Commission on January 3, 2011)
Commercial Lease Agreement, dated August 1, 2009, by and between the Company and B. Young
Properties, LLC (Incorporated by reference to the exhibits to the Company's report on Form 8-K filed
with the Commission on September 4, 2009)
Form of 2011 Inducement Stock Incentive Plan (Incorporated by reference to the exhibits to the
Company's report on Form 8-K filed with the Commission on July 29, 2011)
Form of 2011 Inducement Stock Incentive Plan Stock Option Agreement (Incorporated by reference
to the exhibits to the Company's report on Form 8-K filed with the Commission on July 29, 2011)
Form of 2011 Inducement Stock Incentive Plan Restricted Stock Unit Agreement (Incorporated by
reference to the exhibits to the Company's report on Form 8-K filed with the Commission on July 29,
2011)
Termination Agreement, dated as of January 15, 2014, by and between Digirad Corporation and B.
Young Properties, LLC (Incorporated by reference to the exhibits to the Company's report on Form 8-
K filed with the Commission on January 27, 2014)
10.18#
Digirad Corporation 2014 Equity Incentive Award Plan (Incorporated by reference to the exhibits to
the Company's Registration Statement on Form S-8 filed with the Commission on June 6, 2014)
10.19#
Form Indemnification Agreement of the Company for directors and officers
21.1
23.1
24.1
31.1
31.2
32.1**
32.2**
Subsidiaries of Digirad Corporation
Consent of Independent Registered Public Accounting Firm
Power of Attorney (included on the signature page of this Form 10-K)
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document***
101.SCH
XBRL Taxonomy Extension Schema***
101.CAL
XBRL Taxonomy Extension Calculation Linkbase***
101.LAB
XBRL Taxonomy Extension Labels Linkbase***
101.PRE
XBRL Taxonomy Presentation Linkbase***
101.DEF
XBRL Taxonomy Extension Definition Linkbase***
†
#
Digirad Corporation has been granted confidential treatment with respect to certain portions of this exhibit (indicated by
asterisks), which have been filed separately with the Commission.
Indicates management contract or compensatory plan.
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**
The certifications attached as Exhibits 32.1 and 32.2 that accompany this Annual Report on Form 10-K are not deemed
filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Digirad
Corporation under the Securities and Exchange Act of 1933, as amended, or the Securities and Exchange Act of 1934,
as amended, whether made before or after the date of this 10-K, irrespective of any general incorporation language
contained in such filings.
***
Furnished, not filed
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Dated: March 6, 2015
DIGIRAD CORPORATION
By:
Name:
Title:
/S/ MATTHEW G. MOLCHAN
Matthew G. Molchan
President and Chief Executive Officer
(Principal Executive Officer)
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints
Matthew G. Molchan and Jeffry R. Keyes, and each of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, to sign any and all amendments (including post-effective amendments) to this Annual Report on
Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto each of said attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or
she might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-facts and agents, or his substitute
or substitutes, or any of them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates indicated:
Name
Title
Date
/S/ MATTHEW G. MOLCHAN
Matthew G. Molchan
President and Chief Executive Officer
(Principal Executive Officer)
/S/ JEFFRY R. KEYES
Jeffry R. Keyes
Chief Financial Officer
(Principal Financial Officer)
/S/ JEFFREY E. EBERWEIN
Jeffrey E. Eberwein
Director
(Chairman of the Board of Directors)
March 6, 2015
March 6, 2015
March 6, 2015
/S/ JOHN M. CLIMACO
John M. Climaco
/S/ CHARLES M. GILLMAN
Charles M. Gillman
/S/ MICHAEL A. CUNNION
Michael A. Cunnion
/S/ JOHN W. SAYWARD
John W. Sayward
Director
March 6, 2015
Director
March 6, 2015
Director
March 6, 2015
Director
March 6, 2015
63
BOARD OF DIRECTORS
OFFICERS & EXECUTIVES
SHAREOWNERS INFORMATION
Jeffrey E. Eberwein
Chairman of the Board
Matthew G. Molchan
President and
Chief Executive Officer
John M. Climaco
Director
Jeffry R. Keyes
Chief Financial Officer and
Corporate Secretary
Michael A. Cunnion
Director
Virgil J. Lott
President, Diagnostic Imaging
Martin B. Shirley
Senior Vice President
Sales and Marketing,
Digirad Imaging Solutions
Charles M. Gillman
Director
Matthew G. Molchan
Director
John W. Sayward
Director
Headquarters
Digirad Corporation
1048 Industrial Court, Suite E
Suwanee, GA 30024
TEL 770 813 8323
FAX 770 813 0326
EMAIL ir@digirad.com
WEB www.digirad.com
Trading Market
Market: NASDAQ
Symbol: DRAD
Transfer Agent
American Stock Transfer
59 Maiden Lane
New York, NY 10038
TEL 718 921 8206
FAX 718 921 8336
Independent Auditors
Ernst & Young
4370 La Jolla Village Drive
Suite 500
San Diego CA 92122
TEL 858 535 7200
FAX 858 535 7777
Corporate Counsel
Olshan Frome Wolosky, LLP
Park Avenue Tower
65 East 55th Street
New York, NY 10022
TEL 212 451 2300
FAX 212 451 2222
“Page Intentionally Left Blank”
DIGIRAD CORPORATION 1048 INDUSTRIAL COURT SUITE E SUWANEE GA T 770.813.8323 F 770.813.0326 WWW.DIGIRAD.COM