2015 ANNUAL REPORT
Dear Fellow Shareholders,
I am very excited to be writing to you at the conclusion of a very successful year at Digirad – 2015
was the most profitable year in Digirad’s history!
We have been working hard over the last few years, building a stronger, more profitable company for
all of you, and returning exceptional value along the way. In the last year we have seen great stock
price appreciation and we continue to return value with our consistent and sustained dividend.
Further, we completed two compelling acquisitions that broadened our company scope and markets.
The first, MD Office Solutions, which closed in March of 2015, opened up markets in Northern and
Central California to us. And the second, DMS Health Technologies, opened up several new services
and expanded our market access across the entire United States, and further, we effectively doubled
the size of our company. We are now more than just a diagnostic imaging company – we are a
healthcare solutions company that sees abundant opportunities as we move forward to broaden and
expand our reach into the healthcare industry.
As I have stated over the last few years 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 our potential
for growth. 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 will continue to execute on our three tier growth strategy at Digirad:
1. Acquisitions. Our goal is to acquire companies that fit within our business model of
healthcare solutions 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 to our extensive service distribution
channels.
3. Organic Growth. Within our existing core business service lines and products.
The entire Executive Team at Digirad is dedicated to this growth plan strategy, and we are working
hard to ensure its continued deployment and continued value to YOU, our shareholder.
Finally, I would like to thank all our employees; both employees that have been with Digirad for years
and employees that have just joined. Your hard work and dedication is an integral part of what we are
accomplishing at Digirad. The Executive Team truly appreciates your hard work.
Sincerely,
Matthew G. Molchan
President and Chief Executive Officer
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, 2015
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, 2015, was $78,643,552. 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 17, 2016 was 19,445,429.
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, 2015 are incorporated by reference into Part III of this report.
DOCUMENTS INCORPORATED BY REFERENCE
DIGIRAD CORPORATION
FORM 10-K—ANNUAL REPORT
For the Fiscal Year Ended December 31, 2015
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. 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.,
Telerhythmics®, LLC, and MD Office Solutions®.
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 services, and also provide cardiac
event monitoring services. These services are provided to physician practices, hospitals, and imaging centers through our Diagnostic
Services reportable 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 reportable 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).
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 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. 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 our physician customers 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 and other legislation
has 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 (Telerhythmics) on March 13, 2014, we broadened our suite of service offerings
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 directly subject to reimbursements from
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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 healthcare 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
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 the
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 plan to continue
selling and servicing 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 into the future. 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.
Our main strategic focus is 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 number of customers through territory expansion and acquisition of other health care solutions companies.
Recently, these acquisitions have included the acquisition of Telerhythmics on March 13, 2014; our acquisition of MD Office
Solutions on March 5, 2015, a provider of in-office nuclear cardiology imaging in the northern and central California regions; and
most recently, on January 1, 2016, DMS Health Technologies (DMS Health), a provider of mobile healthcare solutions and a seller
of medical equipment and services to small and regional hospitals throughout the United States, with a concentration in the upper
Midwest region. The scope of our operational footprint within the United States on a basis of states served is expected to
approximately double in 2016 compared to 2015 as a result of the DMS Health acquisition, and will significantly impact financial
results going forward. In the future, we expect to continue to evaluate additional acquisition opportunities related to complementary
healthcare solutions to diversify and expand our current offerings.
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
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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.
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 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 benefits 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 Accreditation
Commission (IAC) 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 compliance 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.
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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 2 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.
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 our streamlined and cost efficient approach to providing medical services to our
customers at the point of need, as well as our proprietary solid-state technology in general nuclear medicine and cardiology.
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
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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.
• 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 32 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 the market will be pushed
more toward a “market efficient model,” similar to the model provided by our Diagnostic Services business. Our model takes the
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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 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. Our pattern of acquisitions over the last three years, including the acquisition of DMS Health on January
1, 2016, illustrates the available acquisition opportunities within the healthcare services market and our intent to capitalize on
those opportunities.
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 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 diversify our offerings beyond cardiac specific cameras, we have increased 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, 2015, we had one customer, Emory Healthcare, that exceeded 10% of our consolidated revenues. For 2015, Emory Healthcare
represented 10.2% of our consolidated revenues and 13.4% of our Diagnostic Services 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 contract manufacturers. 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 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 final assembly 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 contract 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
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We, as well as our contract 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
uncertainty in overall healthcare and changes in healthcare, such as the Affordable Care Act. These concepts 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 healthcare laws 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 services, 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 whichever 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
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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 have been 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 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 in
both 2015 and 2014, and $1.0 million in 2013.
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
8
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.
• 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 32 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 October 13, 2015 and August 27, 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). 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, 2015, we hold trademark registrations in the United States for the following marks: 2020tc IMAGER®,
Digirad®, DigiServ®, Cardius®, SPECTour®, SPECTpak Plus®, Solidium®, DigiTech®, Telerhythmics® and MD Office Solutions®.
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
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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, 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
typically seek reimbursement by Medicare for outpatient services under the Medicare Hospital Outpatient Prospective Payment
System.
Employees
As of December 31, 2015, we had a total of 323 full time employees, of which 224 were employed in clinical related positions,
41 in operational roles, 42 in general and administrative functions, and 16 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 (the 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
(Exchange Act). The public may read and copy any materials filed by us with the SEC at the SEC's Public Reference Room at
100 F Street, NW, Washington, D.C. 20549. The public may obtain information on the operation of the SEC's Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (www.sec.gov), that contains reports, proxy
and information statements, and other information regarding issuers that file electronically with the SEC.
The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments
to those reports are available free of charge on our website at www.digirad.com as soon as reasonably practicable after such material
is electronically filed with, or furnished to, the SEC. Such reports will remain available on our website for at least 12 months and
are also available free of charge by written request or by contacting the Investor Relations Department at 858-726-1600.
The contents of our website or any other website are not incorporated by reference into this Annual Report on Form 10-K.
ITEM 1A.
RISK FACTORS
Risks Related to Our Business and Industry
We may not be able to achieve the anticipated synergies and benefits from business acquisitions, including our recent
acquisition of DMS Health Technologies, Inc.
Part of our business strategy is to acquire businesses that we believe can complement our current business activities, both
financially and strategically. On January 1, 2016, we acquired Project Rendezvous Holding Corporation (“PRHC”) and its
subsidiaries, including DMS Health Technologies, Inc., with these synergistic benefits in mind. Previously we acquired MD Office
Solutions on March 5, 2015, and Telerhythmics, LLC, on March 13, 2014. Acquisitions involve many complexities, including,
but 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,
general under performance of the business under Digirad control versus the prior owners, unanticipated expenses and liabilities,
and the impact on our internal controls and compliance with the regulatory requirements under the Sarbanes-Oxley Act of 2002.
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. As a result, the realization of anticipated synergies
or benefits from acquisitions may be delayed or substantially reduced.
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
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reimbursements for diagnostic services. We are directly and indirectly impacted by changes in reimbursements. In 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.
Unexpected changes in our relationship with Emory Healthcare could result in a significant reduction in our sales and
profits.
Emory Healthcare (Emory) has contributed a high percentage of our consolidated revenue. For 2015, Emory represented 10.2%
of our consolidated revenues and 13.4% of our Diagnostic Services revenues. For 2014, 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. Although we expect that Emory will continue to be one of our most
important customers, and we do not anticipate any near term changes in our relationship, 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.
We outsource 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.
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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
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 is a limited number of major nuclear reactors supplying medical radiopharmaceuticals worldwide and there is no guarantee
that the reactors will remain in good repair or that 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
healthcare 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,
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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 fully 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
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. Although compliance programs can mitigate the risk of investigation and prosecution for
violations of these laws, regulations, rules, and policies, the risks cannot be entirely eliminated. Moreover, achieving and sustaining
compliance with applicable federal and state privacy, security, and fraud laws may prove costly.
Healthcare policy changes could have a material adverse effect on our business.
In response to perceived increases in healthcare 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. healthcare 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 incur expenses and pay damages that may not be covered by our insurance.
13
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
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 make financial investments 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 Indebtedness
On January 1, 2016, we entered into a Credit Agreement (the “Credit Agreement”) by and among Digirad and certain subsidiaries
of Digirad, the lenders party thereto, and Wells Fargo Bank, National Association as administrative agent and as sole lead arranger
and sole book runner. The Credit Agreement is a five-year credit facility (maturing in January 2021) with a maximum credit amount
of $40.0 million (the “Credit Facility”). On January 4, 2016, we drew down $33.6 million against the Credit Facility to fund the
acquisition of DMS Health Technologies, Inc.
Our indebtedness could restrict our operations and make us more vulnerable to adverse economic conditions.
Our indebtedness could have important consequences for us and our stockholders. For example, the Credit Agreement requires
us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital expenditures, and acquisitions, and for other general corporate
purposes. In addition, our indebtedness could:
•
•
•
•
increase our vulnerability to adverse economic and competitive pressures in our industry;
place us at a competitive disadvantage compared to our competitors that have less debt;
limit our flexibility in planning for, or reacting to, changes in our business and our industry; and
limit our ability to borrow additional funds on terms that are acceptable to us or at all.
The Credit Agreement governing our indebtedness contains restrictive covenants that will restrict our operational flexibility
and require that we maintain specified financial ratios. If we cannot comply with these covenants, we may be in default
under the Credit Agreement.
The Credit Agreement governing our indebtedness contains restrictions and limitations on our ability to engage in activities
that may be in our long-term best interests. The Credit Agreement contains affirmative and negative covenants that limit and
restrict, among other things, our ability to:
incur additional debt;
sell assets;
incur liens or other encumbrances;
•
•
•
• make certain restricted payments and investments;
•
• merge or consolidate.
acquire other businesses; and
14
In addition, the Credit Agreement limits, but does not eliminate, our ability to pay dividends. The Company expects to continue
to pay its quarterly dividend consistent with past practice, however there is no assurance that the Company will be able to do so
under the Credit Agreement.
Our Credit Agreement contains a minimum liquidity covenant, fixed charge coverage ratio covenant and a leverage ratio
covenant. Events beyond our control could affect our ability to meet these and other covenants under the Credit Agreement. Our
failure to comply with our covenants and other obligations under the Credit Agreement may result in an event of default thereunder.
A default, if not cured or waived, may permit acceleration of our indebtedness. If our indebtedness is accelerated, we cannot be
certain that we will have sufficient funds available to pay the accelerated indebtedness (together with accrued interest and fees),
or that we will have the ability to refinance the accelerated indebtedness on terms favorable to us or at all. This could have serious
consequences to our financial condition, operating results, and business, and could cause us to become insolvent or enter bankruptcy
proceedings, and shareholders may lose all or a portion of their investment because of the priority of the claims of our creditors
on our assets.
If we are unable to generate or borrow sufficient cash to make payments on our indebtedness, our financial condition
would be materially harmed, our business could fail, and shareholders may lose all of their investment.
Our ability to make scheduled payments on or to refinance our obligations will depend on our financial and operating
performance, which will be affected by economic, financial, competitive, business, and other factors, some of which are beyond
our control. We cannot assure you that our business will generate sufficient cash flow from operations to service our indebtedness
or to fund our other liquidity needs. If we are unable to meet our debt obligations or fund our other liquidity needs, we may need
to restructure or refinance all or a portion of our indebtedness on or before maturity or sell certain of our assets. We cannot assure
you that we will be able to restructure or refinance any of our indebtedness on commercially reasonable terms, if at all, which
could cause us to default on our debt obligations and impair our liquidity. Any refinancing of our indebtedness could be at higher
interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations.
Increases in interest rates could adversely affect our results from operations and financial condition.
An increase in prevailing interest rates would have an effect on the interest rates charged on our variable rate debt, which rise
and fall upon changes in interest rates. If prevailing interest rates or other factors result in higher interest rates, the increased
interest expense would adversely affect our cash flow and our ability to service our indebtedness.
Risks Related to our Common Stock
The market price of our common stock may be volatile, and the value of your investment could decline significantly.
The trading price of our common stock has been, and we expect it to continue to be, volatile. The price at which our common
stock trades depends upon a number of factors, including our historical and anticipated operating results, our financial situation,
announcements of new products by us or our competitors, our ability or inability to raise the additional capital we may need and
the terms on which we raise it, and general market and economic conditions. Some of these factors are beyond our control. Broad
market fluctuations may lower the market price of our common stock and affect the volume of trading in our stock, regardless of
our financial condition, results of operations, business, or prospects. It is impossible to assure you that the market price of our
shares of common stock will not fall in the future.
Our common stock has a low trading volume and shares available under our shelf registration statement 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 shelf registration statement, 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 benefit 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 benefit 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
15
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 amended 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.
16
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 28 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.
17
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,
2015
2014
High
Low
High
Low
$
$
5.48
4.81
4.49
6.92
$
3.86
3.68
3.50
3.74
$
3.88
3.73
4.19
4.49
3.03
3.03
3.11
3.50
As of February 17, 2016 there were approximately 168 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, 2015. 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 1, 2016, we announced a dividend of $0.05 per
common share payable on February 29, 2016 to shareholders of record as of February 16, 2016.
Our ability to pay dividends could be affected by future business performance, liquidity, capital needs, and financial covenants
under our Credit Agreement with Wells Fargo. The Credit Agreement limits, but does not eliminate, our ability to pay dividends.
We presently intend to continue the payment of regular quarterly cash dividends on our common stock, however there
is no assurance that the Company will be able to do so under the Credit Agreement.
Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
There were no issuer purchases of equity securities during the fiscal year 2015.
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, 2015 – October 31, 2015
November 1, 2015 – November 30, 2015
December 1, 2015 – December 31, 2015
As of December 31, 2015
Stock Performance Graph
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
18
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.
The graph below compares the cumulative total stockholder return on our common stock with the cumulative total return on
the NASDAQ Stock Market Index, the NASDAQ Medical Equipment Index, and the NASDAQ Healthcare Index. The period
shown commences on December 31, 2010 and ends on December 31, 2015, the end of our most recent fiscal year. The graph
assumes an investment of $100 on December 31, 2010, 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
NASDAQ Healthcare
12/31/2010
12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015
$
$
$
$
100.00 $
93.33 $
97.62 $
178.64 $
223.10 $
100.00 $
100.51 $
118.87 $
165.68 $
191.04 $
100.00 $
114.89 $
127.90 $
149.90 $
173.89 $
100.00 $
104.51 $
132.98 $
208.83 $
268.28 $
309.63
205.76
204.97
286.68
19
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.
Consolidated Statements of Operations Data:
Revenues:
2015 (1)
Year Ended December 31,
2013 (3)
2012
2014 (2)(3)
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 (expense)
Income (loss) before income taxes
Income tax benefit (expense)
Net income (loss)
Net income (loss) per share:
Basic
Diluted
Shares used in per share calculations:
Basic
Diluted
Dividends declared per common share
Consolidated Balance Sheets Data:
Cash and cash equivalents
Working capital
Total assets
Capital lease obligations
Total stockholders’ equity
2011
37,794
15,951
53,745
29,672
9,315
38,987
14,758
2,738
7,622
7,741
331
(164)
—
18,268
(3,510)
250
(3,260)
(82)
(3,342)
$
36,064
14,449
50,513
27,293
10,128
37,421
13,092
3,716
6,402
7,839
233
—
—
18,190
(5,098)
97
(5,001)
77
(4,924) $
(0.26) $
(0.26) $
(0.18)
(0.18)
19,274
19,274
— $
19,052
19,052
—
37,171
12,205
49,376
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
$
$
$
$
$
$
46,407
14,419
60,826
$ 42,170
13,438
55,608
$
35,968
6,949
42,917
17,909
—
4,741
9,888
506
—
—
15,135
2,774
(257)
2,517
19,123
21,640
1.13
1.10
19,210
19,690
0.20
$
$
$
$
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
$
$
$
$
$
$
$
$
$
2015
2014
2013
2012
2011
December 31,
15,868
23,041
64,113
1,567
54,155
$ 14,051
24,659
41,901
767
32,645
$
18,744
29,044
41,451
488
33,386
$
19,514
31,103
44,909
96
36,449
$
24,039
35,585
50,027
51
41,487
(1) On March 5, 2015, we acquired MD Office Solutions (MD Office). The results of MD Office are included in Diagnostic
Services since the acquisition date. See Note 3 to the audited consolidated financial statements.
(2) On March 13, 2014, we acquired 100% of the membership interest of Telerhythmics, LLC. See Note 3 to the audited
consolidated financial statements.
20
(3) 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.
21
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 reportable 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 reportable 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 reportable 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. 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 our physician customers 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 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 healthcare 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,
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
22
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 plan to continue
selling and servicing 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 into the future.
Our main strategic focus is 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 number of customers through territory expansion and acquisition of other healthcare solutions companies.
Recently, these acquisitions have included the acquisition of Telerhythmics on March 13, 2014; our acquisition of MD Office
Solutions on March 5, 2015, a provider of in-office nuclear cardiology imaging in the northern and central California regions; and
most recently, on January 1, 2016, DMS Health, a provider of mobile healthcare solutions and seller of medical equipment and
services to small and regional hospitals throughout the United States, with a concentration in the upper Midwest region. The scope
of our operational footprint within the United States on a basis of states served is expected to approximately double in 2016
compared to 2015 as a result of the DMS Health acquisition, and will significantly impact financial results going forward. In the
future, we expect to continue to evaluate additional acquisition opportunities related to complementary healthcare solutions to
diversify and expand our current offerings.
The financial and operational discussion that follows does not include the impact of the acquisition of DMS Health, which was
completed on January 1, 2016.
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, 2015, through Diagnostic Services we provided
imaging services to 663 physicians and physician groups and cardiac event monitoring services to 390 physicians and physician
groups. Our Diagnostic Services business currently operates in 25 states. 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, although reimbursements have stabilized in the last few
years. 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.
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, although 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 and other doctors breaking away from hospital and healthcare systems, which affects both
positively and negatively the volume of our service on a year by year basis. As a result, we are continuing to modify our offerings
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 modifications
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.
2015 Financial Highlights
23
Our consolidated revenues were $60.8 million for the year ended December 31, 2015. This is an increase of $5.2 million, or
9.4%, compared to the prior year period driven by a $4.2 million, or 10.0%, increase in our Diagnostic Services revenue year over
year. The increase in Diagnostic Services revenue is primarily due to $2.6 million of incremental revenue associated with the MD
Office acquisition, which occurred on March 5, 2015, as well as $1.6 million of incremental cardiac event monitoring revenue
resulting from the Telerhythmics acquisition, which occurred on March 13, 2014. Excluding the impact of acquisitions, revenue
in the Diagnostic Services business increased slightly compared to the prior year driven by an increase in the number of days our
physician customers utilized our imaging services, partially offset by a decrease in our average mobile imaging rate per day and
a decrease in ancillary revenue from short-term equipment rentals. Diagnostic Imaging segment revenues for the year ended
December 31, 2015 increased by $1.0 million, or 7.3%, compared to the prior year, primarily due to an increase in the volume of
cameras sold. The number of cameras sold increased to 31 from 27 during the years ended December 31, 2015 and 2014,
respectively. The increase in Diagnostic Imaging revenue was also due to a more favorable product mix sold during the year ended
December 31, 2015 as compared to the prior year which led to a higher blended average selling price per camera year over year,
partially offset by attrition in the number of camera maintenance contracts. Consolidated gross profit increased $1.3 million, or
7.6%, 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 a more favorable mix of cameras sold during the year ended December 31, 2015 compared to
the prior year, as well as the release of excess inventory reserves due to the sale of previously reserved inventory. Diagnostic
Services gross profit decreased for the year ended December 31, 2015 compared to the prior year driven by a decrease in gross
profit as a percentage of revenue, offset partially by increased revenue. Our total operating expenses increased $1.0 million for
the year ended December 31, 2015 compared to the prior year, driven by a $1.5 million increase in general and administrative
expenses primarily as a result of $1.3 million in legal and professional services costs related to the DMS Health acquisition
completed on January 1, 2016, partially offset by the non-recurrence of $0.7 million in restructuring costs which occurred during
the year ended December 31, 2014. Our consolidated net income for the year ended December 31, 2015 was $21.6 million, which
is an increase of $19.2 million compared to our net income of $2.5 million during the prior year, primarily due to an income tax
benefit of $19.1 million recognized during the year ended December 31, 2015, as we concluded that it was more likely than not
that a portion of our deferred tax assets would be realized through future taxable income and therefore we released the associated
valuation allowance related to those tax assets.
For the year ended December 31, 2015, Diagnostic Services operated 86 nuclear gamma cameras and 61 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 decreased to 62% for the year ended December 31, 2015,
compared to 66% in the prior year, due to an increase in the number of mobile cameras and ultrasound machines in operation,
partially offset by 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, reserves for contractual allowances and doubtful accounts, inventory valuation, and income taxes. 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. Imaging
24
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
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.
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 healthcare 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 as general and administrative expense (income), in our consolidated statements
of comprehensive income. 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
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.
25
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 to be held and used during the years ended December 31, 2015, 2014, or 2013. During the year ended December 31,
2015, an impairment loss of $56,000 was recorded related to the excess of the carrying amount above fair value of certain assets
held for sale. No impairment losses were recorded on long-lived assets held for sale during the years ended December 31, 2014,
or 2013.
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 to the carrying value of the
reporting unit, including goodwill. If the carrying value of the reporting unit 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, 2015, 2014, or 2013.
Restructuring
Restructuring costs are included in income from operations within the consolidated statements of comprehensive income.
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.
26
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 estimate the forfeiture
rate based on historical data for forfeitures and we are recognizing compensation costs only for those equity awards expected to
vest.
Income Taxes
We provide for income taxes under the liability method. This approach requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of differences between the tax basis of assets or liabilities and their carrying
amounts in the financial statements. We provide a valuation allowance for deferred tax assets if it is more likely than not that these
items will expire before we are able to realize their benefit. We calculate the valuation allowance in accordance with the authoritative
guidance relating to income taxes, which requires an assessment of both positive and negative evidence regarding the realizability
of these deferred tax assets when measuring the need for a valuation allowance. Significant judgment is required in determining
any valuation allowance against deferred tax assets. As of December 31, 2014, due to a history of operating losses and other key
operating factors, we concluded that a full valuation allowance was necessary to offset all of our deferred tax assets. A significant
piece of objective negative evidence evaluated as of December 31, 2014, was the cumulative pretax loss incurred over the three-
year period ended December 31, 2014. During the year ended December 31, 2015, we concluded that it was more likely than not
that a portion of our deferred tax assets would be realized through future taxable income. This conclusion was based on our
restructuring efforts in 2013 and 2014 and resulting sustained profitability for the second half of 2013, 2014, and 2015, as well as
our projections of positive future earnings and other key operating factors. As of September 30, 2015, we had generated cumulative
pretax income over the preceding twelve quarter period, and therefore the objective negative evidence of a history of operating
losses was no longer present. The partial release of the valuation allowance associated with our deferred tax assets was the primary
driver of the income tax benefit of $19.1 million for the year ended December 31, 2015. The release of the valuation allowance
will not affect the amount of cash paid for income taxes.
We will reassess the ability to realize the deferred tax assets on a quarterly basis. If it is more likely than not that we will not
realize the recognized deferred tax assets, then all or a portion of the valuation allowance may need to be re-established, which
would result in a charge to tax expense. Conversely, if new events indicate that it is more likely than not that we will realize
additional deferred tax assets, then all or a portion of the remaining valuation allowance may be released, which would result in
a tax benefit.
27
Results of Operations
The following table sets forth our results from operations for the years ended December 31, 2015, 2014, and 2013 (in thousands,
except percentages):
Revenues:
Diagnostic Services
Diagnostic Imaging
Total revenues
Total cost of revenues
Gross profit
Operating expenses:
Marketing and sales
General and administrative
Amortization of intangible assets
Restructuring charges
Total operating expenses
Income from operations
Total other income (expense)
Income before income taxes
Income tax benefit (expense)
Net income
Year ended December 31,
Change from Prior Year
2015
% of 2015
Revenues
2014
% of 2014
Revenues
Dollars
Percent
$ 46,407
76.3 % $ 42,170
75.8 % $
4,237
14,419
60,826
42,917
17,909
4,741
9,888
506
—
15,135
2,774
(257)
2,517
23.7 %
100.0 %
70.6 %
29.4 %
7.8 %
16.3 %
0.8 %
— %
24.9 %
4.6 %
(0.4)%
4.1 %
$ 19,123
$ 21,640
31.4 % $
35.6 % $
13,438
55,608
38,968
16,640
4,730
8,344
356
692
14,122
2,518
19
2,537
(62)
2,475
24.2 %
100.0 %
70.1 %
29.9 %
8.5 %
15.0 %
0.6 %
1.2 %
25.4 %
4.5 %
— %
4.6 %
(0.1)%
981
5,218
3,949
1,269
11
1,544
150
(692)
1,013
256
(276)
(20)
19,185
10.0 %
7.3 %
9.4 %
10.1 %
7.6 %
0.2 %
18.5 %
42.1 %
(100.0)%
7.2 %
10.2 %
(1,452.6)%
(0.8)%
(30,943.5)%
4.5 % $ 19,165
774.3 %
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 benefit (expense)
Net income
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 % $
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 % $
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 % $
28
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 %
Comparison of Years Ended December 31, 2015 and 2014
Revenues
Consolidated. Consolidated revenue was $60.8 million for the year ended December 31, 2015, an increase of $5.2 million, or
9.4%, from the prior year, driven by a $4.2 million, or 10.0%, increase in our Diagnostic Services revenue year over year. The
increase in Diagnostic Services revenue is primarily due to $2.6 million of incremental revenue associated with the MD Office
acquisition, which occurred on March 5, 2015, as well as $1.6 million of incremental cardiac event monitoring revenue resulting
from the Telerhythmics acquisition, which occurred on March 13, 2014. Diagnostic Imaging segment revenues for the year ended
December 31, 2015 increased by $1.0 million, or 7.3%, compared to the prior year, primarily due to an increase in the volume of
cameras sold, as well as a more favorable product mix during the year ended December 31, 2015 as compared to the prior year,
which led to a higher blended average selling price per camera year over year. Diagnostic Services revenue accounted for 76.3%
of total revenues for the year ended December 31, 2015, compared to 75.8% for the prior year. We expect consolidated revenue
to increase significantly in 2016 compared to 2015 as a result of the DMS Health acquisition.
Diagnostic Services. Our Diagnostic Services revenue was $46.4 million for the year ended December 31, 2015, an increase
of $4.2 million, or 10.0%, from the prior year. The increase in Diagnostic Services revenue is primarily due to $2.6 million of
incremental revenue associated with the MD Office acquisition, which occurred on March 5, 2015, as well as $1.6 million of
incremental cardiac event monitoring revenue resulting from the Telerhythmics acquisition, which occurred on March 13, 2014.
Excluding the impact of acquisitions, revenue in the Diagnostic Services business increased slightly compared to the prior year
driven by an increase in the number of days our physician customers utilized our imaging services, partially offset by a decrease
in our average mobile imaging rate per day and a decrease in ancillary revenue from short-term equipment rentals.
Diagnostic Imaging. Our Diagnostic Imaging revenue was $14.4 million for the year ended December 31, 2015, an increase
of $1.0 million, or 7.3%, compared to the prior year, primarily due to an increase in the volume of cameras sold, as well as a more
favorable product mix sold during the year ended December 31, 2015 as compared to the prior year which led to a higher blended
average selling price per camera period over period, partially offset by attrition in the number of camera maintenance contracts.
The number of cameras sold increased to 31 from 27 during the years ended December 31, 2015 and 2014, respectively, as a result
of overall improved market conditions.
Cost of Revenue and Gross Profit
Consolidated. Consolidated gross profit was $17.9 million for the year ended December 31, 2015, an increase of $1.3 million,
or 7.6%, 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 a more favorable mix of cameras sold during the year ended December 31, 2015 compared to
the prior year, as well as a release of excess inventory reserves due to the sale of previously reserved inventory. Diagnostic Services
gross profit decreased slightly for the year ended December 31, 2015 driven by a decrease in gross profit as a percentage of revenue,
offset partially by increased revenue. Consolidated gross profit as a percentage of revenue decreased to 29.4% for the year ended
December 31, 2015 from 29.9% for the prior year, driven by unfavorability in our Diagnostic Services business offset partially
by favorability in our Diagnostic Imaging business. We expect consolidated cost of revenue and gross profit to increase significantly
in 2016 compared to 2015 as a result of the DMS Health acquisition.
Diagnostic Services. Cost of Diagnostic Services revenue consists of labor, radiopharmaceuticals, equipment depreciation, and
other costs associated with providing our services. Cost of Diagnostic Services revenue was $36.0 million for the year ended
December 31, 2015, an increase of $4.2 million, or 13.4%, 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,
and an increased amount of imaging days provided, driven in part by the MD Office acquisition. Diagnostic Services gross profit
was $10.4 million for the year ended December 31, 2015, a decrease of $10 thousand, or 0.1%, as compared to the prior year
primarily as a result of decreased gross profit percentage of revenue offset partially by increased revenue volume. Diagnostic
Services gross profit as a percentage of Diagnostic Services revenue decreased to 22.5% for the year ended December 31, 2015
from 24.8% 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 decreased revenue and
gross profit contribution from short-term equipment rentals and ancillary services.
Diagnostic Imaging. Cost of Diagnostic Imaging revenue primarily consists of materials, labor, and overhead costs associated
with the manufacturing, warranty, and service contracts associated with our products. Cost of Diagnostic Imaging revenues was
$6.9 million for the year ended December 31, 2015, a decrease of $0.3 million, or 4.1%, over the prior year, primarily as a result
of a $0.3 million increase in the release of excess inventory reserves due to the sale of previously reserved inventory during the
year ended December 31, 2015 compared to the prior year. Diagnostic Imaging gross profit was $7.5 million for the year ended
December 31, 2015, an increase of $1.3 million, or 20.7%, as compared to the prior year due to a greater volume and more favorable
mix of camera sales, as well as the release of excess inventory reserves due to the sale of previously reserved inventory. Diagnostic
29
Imaging gross profit as a percentage of Diagnostic Imaging revenue increased to 51.8% for the year ended December 31, 2015
from 46.1% for the prior year primarily due to a more favorable mix of camera sales and the release of excess inventory reserves
related to the sale of previously reserved inventory. During 2015, we recognized a benefit within cost of sales for Diagnostic
Imaging of $1.0 million associated with the release of excess inventory reserves related to the sale of previously reserved inventory.
Though the accrual and release of inventory reserves is part of a normal manufacturing operation, we believe that the releases
benefiting cost of sales will largely not occur in future years, impacting our margin in Diagnostic Imaging in future years compared
to 2015.
Operating Expenses
Marketing and Sales. Marketing and sales expenses consist primarily of salaries, commissions, bonuses, recruiting costs, travel,
marketing materials, and trade show costs. Marketing and sales expenses were $4.7 million for the year ended December 31, 2015,
an increase of $11 thousand, or 0.2%, compared to the prior year, primarily as a result of increased investment in sales and marketing
resources associated with the Telerhythmics business, offset partially by decreased variable compensation. Marketing and sales
expenses as a percentage of total revenues were 7.8% and 8.5% for the years ended December 31, 2015 and 2014, respectively.
We expect marketing and sales expenses to increase significantly in 2016 compared to 2015 as a result of the DMS Health
acquisition.
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 $9.9 million for the year
ended December 31, 2015, an increase of $1.5 million, or 18.5%, compared to the prior year, primarily as a result of $1.3 million
of legal and professional services costs related to the DMS Health acquisition and increased costs related to the administration of
the Telerhythmics business, partially offset by decreased variable compensation. General and administrative expenses were 16.3%
of total revenue for the year ended December 31, 2015 compared to 15.0% for the prior year. We expect general and administrative
expenses to increase significantly in 2016 compared to 2015 as a result of the DMS Health acquisition.
Restructuring. 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. No restructuring initiatives were
instituted in fiscal year 2015.
Other Income (Expense), Net
Consolidated. Other income (expense) consists primarily of interest income and expense and other non-operating expenses.
Other expense was $0.3 million for the year ended December 31, 2015, an increase of $0.3 million compared to the prior year.
The increase was due to an impairment loss of $0.2 million recognized in the year ended December 31, 2015 on our investment
in Perma-Fix Medical, S.A. (Perma-Fix Medical). See note 12 to the consolidated financial statements for further information.
Income Tax Benefit (Expense)
Consolidated. Income tax benefit was $19.1 million for the year ended December 31, 2015, an increase of $19.2 million
compared to the prior year due to the release of the valuation allowance associated with a portion of our deferred tax assets. During
the year ended December 31, 2015, we concluded that it was more likely than not that a portion of our deferred tax assets would
be realized through future taxable income. This conclusion was based on our restructuring efforts in 2013 and 2014 and resulting
sustained profitability for the second half of 2013, 2014, and 2015, as well as our projections of positive future earnings and other
key operating factors. As of September 30, 2015, we had generated cumulative pretax income over the preceding twelve quarter
period, and therefore the objective negative evidence of a history of operating losses was no longer present.
Further, during the year ended December 31, 2015, we recorded an income tax benefit of approximately $0.5 million related
to the release of the valuation allowance associated with the acquisition of MD Office. The valuation allowance occurred when
we recorded an increase to our deferred tax liability balance as a result of book and tax basis differences in acquired fixed, intangible,
and other assets of MD Office.
We will reassess our ability to realize the deferred tax assets on a quarterly basis. If it is more likely than not that we will not
realize the recognized deferred tax assets, then all or a portion of the valuation allowance may need to be re-established, which
would result in a charge to income tax expense. Conversely if new events indicate that it is more likely than not that we will realize
additional deferred tax assets, then all or a portion of the remaining valuation allowance may be released, which would result in
30
a tax benefit. An acquisition that occurs in future periods will cause our conclusions to be reassessed in the period of the acquisition
depending on the size and scope of the acquisition.
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 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 the 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.
Diagnostic Imaging. 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.
31
Operating Expenses
Research and Development. Research and development expenses were the costs associated with the design, development, and
expansion of our existing technology, and consist of salaries, developmental 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 focused 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% and 8.4% of Diagnostic
Imaging revenue for the years ended December 31, 2014 and 2013, respectively.
Marketing and Sales. 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.
General and Administrative. 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 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.
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 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.
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.
Liquidity and Capital Resources
Overview
We generated $3.7 million of positive cash flow from operations during the year ended December 31, 2015, 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.
32
Our principal sources of liquidity are our existing cash and cash equivalents, short-term investments, and cash generated from
operations. As of December 31, 2015, we had cash and cash equivalents of $15.9 million. We generally invest our cash reserves
in money market funds, U.S. treasury, and corporate debt securities. In regards to additional sources of financing, we currently
have available a shelf registration statement on Form S-3 that provides us with increased capital flexibility to pursue corporate
objectives by allowing us to offer and sell up to $20.0 million of securities.
In connection with the acquisition of DMS Health, which occurred on January 1, 2016, we entered into a five year credit facility
(maturing in January 2021) with Wells Fargo pursuant to which Wells Fargo provided the Company with a senior secured credit
facility in the aggregate amount of up to $40 million. On January 4, 2016, we drew down $33.6 million against the Credit Facility
to fund the acquisition of DMS Health. Beginning in 2016, the Credit Facility will require both principal and interest payments
on a monthly basis, which we expect to fund from our operating cash flow.
We require capital principally for capital expenditures, acquisition activity, dividend payments, and to finance accounts
receivable and inventory. In 2016, we will be required to make both principal and interest payments on the Wells Fargo Credit
Facility. 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 and cash
requirements, 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, 2015, 2014, and 2013 (in thousands):
Year Ended December 31,
2015
2014
2013
Net cash provided by operating activities
Net cash provided by (used in) investing activities
Net cash used in financing activities
Operating Activities
$
3,720
$
$
4,280
$ (5,079) $
2,201
2,199
$
766
$ (4,102) $ (3,894) $ (3,737)
Net cash provided by operating activities decreased by $0.6 million for the year ended December 31, 2015 compared to the
prior year. The decrease is attributable to unfavorable changes in working capital primarily related to increases in accounts receivable
and inventory and decreases in accounts payable and accrued compensation, with income before income taxes remaining relatively
consistent for the year ended December 31, 2015 compared to the prior year.
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 was 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.
Investing Activities
Net cash provided by investing activities increased by $7.3 million for the year ended December 31, 2015 compared to net
cash used in the prior year. This increase was primarily attributable to increased cash provided by maturities of available-for-sale
securities in the year ended December 31, 2015, compared to the outlay of $3.4 million of cash to acquire Telerhythmics in the
year ended December 31, 2014, as well as $2.6 million in purchases of available-for-securities in the year ended December 31,
2014.
Net cash used in investing activities increased by $5.8 million for the year ended December 31, 2014 compared to the prior
year. The 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.
Financing Activities
Net cash used in financing activities increased by $0.2 million for the year ended December 31, 2015 compared to the prior
year. This increase was primarily attributable to $0.3 million in loan issuance costs related to the acquisition of DMS Health
completed on January 1, 2016, as well as $3.8 million of dividend payments during the year ended December 31, 2015, compared
to $3.7 million during the year ended December 31, 2014, and increased repayments of capital lease obligations. The increase in
33
cash used was partially offset by increased cash received during the year ended December 31, 2015 related to stock option exercises
compared to the prior year.
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.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities
or financial partnerships, such as entities often referred to as structured finance or special purpose entities, or SPEs, which would
have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited
purposes. As of December 31, 2015, we were not involved in any unconsolidated SPE transactions.
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, 2015
(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
$
$
3,849
1,657
5,506
$
$
1,125
780
1,905
$
$
1,389
829
2,218
$
$
1,171
48
1,219
$
$
164
—
164
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk - Debt Securities. 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 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.
Equity Price Risk. We own common shares of Perma-Fix Medical, a publicly traded company listed on the NewConnect
market of the Warsaw Stock Exchange, that are subject to equity price risk. A 10% decrease in the market price of these equity
securities would have caused a decrease in the carrying amount of these securities of $49,000. At December 31, 2015, the gross
unrealized loss related to these equity securities was $230,000. Although we consider the unrealized loss to be temporary, there
is a risk that we may incur other-than-temporary impairment charges or realized losses on the value of these securities if they do
not recover in value within a reasonable period.
34
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Digirad Corporation
We have audited the accompanying consolidated balance sheet of Digirad Corporation (“Company”) as of December 31, 2015
and the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for the year then ended.
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 audit.
We conducted our audit 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. An audit 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, as well as
evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Digirad Corporation at December 31, 2015, and the results of its operations and its cash flows for the year then ended,
in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Digirad Corporation's internal control over financial reporting as of December 31, 2015, based on criteria established in Internal
Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated March 1, 2016 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
La Jolla, California
March 1, 2016
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Digirad Corporation
We have audited the accompanying consolidated balance sheet of Digirad Corporation as of December 31, 2014, and the related
consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the two 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 the consolidated results of its operations and its cash flows for each
of the two 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
36
DIGIRAD CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(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 from operations
Other income (expense):
Interest and other income, net
Interest and other expense, net
Total other income (expense)
Income before income taxes
Income tax benefit (expense)
Net income
Net income 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
Other comprehensive loss:
Unrealized loss on marketable securities
Total other comprehensive loss
Comprehensive income
Year ended December 31,
2015
2014
2013
$
46,407
14,419
60,826
$ 42,170
13,438
55,608
$
35,968
6,949
42,917
17,909
—
4,741
9,888
506
—
—
15,135
31,721
7,247
38,968
16,640
—
4,730
8,344
356
692
—
14,122
37,171
12,205
49,376
27,828
7,432
35,260
14,116
1,025
4,411
8,118
231
1,728
(1,568)
13,945
2,774
2,518
171
39
(296)
(257)
2,517
19,123
21,640
1.13
1.10
19,210
19,690
0.20
21,640
(221)
(221)
21,419
$
$
$
$
$
$
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
$
$
$
$
$
$
See accompanying notes to audited consolidated financial statements.
37
DIGIRAD CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
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
Long-term deferred tax assets
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; 19,416,070 and 18,615,945
shares issued and outstanding (net of treasury shares) at December 31, 2015 and 2014,
respectively
Treasury stock, at cost; 2,588,484 shares at December 31, 2015 and 2014
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.
38
December 31,
2015
2014
$
15,868
$
14,051
3,227
7,274
4,381
764
233
7,935
5,989
3,644
856
477
31,747
32,952
6,252
3,079
2,897
18,578
1,560
4,766
2,577
1,337
—
269
$
64,113
$
41,901
$
1,369
$
2,453
213
1,673
2,998
8,706
1,252
9,958
1,423
3,261
176
1,644
1,789
8,293
963
9,256
—
—
2
(5,728)
153,860
(240)
(93,739)
54,155
2
(5,728)
153,769
(19)
(115,379)
32,645
$
64,113
$
41,901
DIGIRAD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Operating activities
Net income
Adjustments to reconcile net income to cash provided by operating activities:
Year ended December 31,
2015
2014
2013
$
21,640
$
2,475
$
264
Depreciation
Amortization of intangible assets
Provision for bad debts
Stock-based compensation
Loss (gain) on sale of assets
Amortization of premium on investments
Deferred income taxes
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 operating activities
Investing activities
Purchases of property and equipment
Net proceeds from sale of assets
Purchases of securities available-for-sale
Maturities of securities available-for-sale
Investment in stock
Net cash received from (paid for) acquisition
Net cash provided by (used in) investing activities
Financing activities
Issuances of common stock
Repurchases of common stock
Loan issuance costs
Dividends paid
Repayment of long term debt
Repayment of obligations under capital leases
Net cash used in financing activities
Net increase (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
Issuances of common stock for acquisitions
$
$
$
$
1,935
506
266
616
67
115
(18,599)
(1,246)
(811)
430
(203)
(889)
29
(380)
244
3,720
(1,424)
18
—
4,602
(1,000)
3
2,199
624
—
(300)
(3,833)
—
(593)
(4,102)
1,579
356
311
326
(77)
198
21
(614)
300
(302)
776
(380)
13
(469)
(233)
4,280
(1,258)
103
(2,617)
2,140
—
(3,447)
(5,079)
188
—
—
(3,713)
(131)
(238)
(3,894)
1,682
231
(150)
340
(1,621)
192
—
1,049
1,136
(90)
(935)
1,108
(218)
(787)
—
2,201
(726)
1,697
(4,679)
4,474
—
—
766
919
(3,642)
—
(925)
—
(89)
(3,737)
1,817
14,051
15,868
(4,693)
18,744
14,051
$
(770)
19,514
18,744
$
1,393
$
— $
$
2,684
$
521
212
$
— $
490
—
—
See accompanying notes to audited consolidated financial statements.
39
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, 2013
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
Stock-based compensation
Issuances of common stock for
acquisition
Shares issued under stock
incentive plans
Dividends paid
Net income
Unrealized loss on securities
available-for-sale
—
610
190
—
—
—
Balance December 31, 2015
19,416
$
2
—
—
—
—
—
—
2
—
—
—
—
—
2
—
—
—
—
—
—
2
$
(2,086) $ 156,634
340
—
$
—
(3,642)
—
—
—
(5,728)
—
—
—
—
919
—
(925)
—
—
156,968
326
188
(3,713)
—
—
(5,728)
—
—
153,769
616
—
—
—
—
2,684
624
(3,833)
—
17
—
—
—
—
—
(19)
(2)
—
—
—
—
(17)
(19)
—
—
—
—
—
Accumulated
deficit
Total
stockholders’
equity
$ (118,118) $
36,449
—
—
—
—
264
—
(117,854)
—
—
—
2,475
—
(115,379)
—
—
—
—
21,640
340
919
(3,642)
(925)
264
(19)
33,386
326
188
(3,713)
2,475
(17)
32,645
616
2,684
624
(3,833)
21,640
—
—
(5,728) $ 153,860
$
$
(221)
(240) $
—
(93,739) $
(221)
54,155
See accompanying notes to audited consolidated financial statements.
40
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 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 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. Certain reclassifications have been made to the prior period financial statements to conform to the current period
presentation.
The financial results for the year ended December 31, 2015 include the financial results of MD Office Solutions and
Telerhythmics, LLC. See Note 3 to the audited consolidated financial statements for more information related to the acquisitions
of MD Office Solutions and 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. 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
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.
41
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, reserves for doubtful accounts and contractual allowances, inventory valuation, and income taxes. 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,
investments, and accounts receivable. We limit our exposure to credit loss by generally 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 the years ended December 31, 2015 and 2014, Emory Healthcare represented 10.2% and 10.9% of our consolidated revenues,
respectively, and 13.4% an 14.3% of our Diagnostic Services revenues, respectively. 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. In addition, we own shares of
common stock issued by Perma-Fix Medical, S.A. (Perma-Fix Medical), a publicly traded company listed on the NewConnect
market of the Warsaw Stock Exchange. We classify all debt 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. The Perma-Fix Medical equity securities are
classified as an other asset (non-current), as the investment is strategic in nature and our current intent is to hold the investment
over a several year period. Securities available-for-sale 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. We recognized a loss of $233,000 related
42
to available-for-sale securities for the year ended December 31, 2015 due to the initial excess of the transaction price over fair
value for the Perma-Fix Medical investment. The realized gains and losses related to securities available-for-sale were minimal
for the years ended December 31, 2014 and 2013.
The following table sets forth the composition of securities available-for-sale as of December 31, 2015 and 2014 (in thousands):
As of December 31, 2015
Corporate debt securities
Corporate debt securities
Equity securities
As of December 31, 2014
Corporate debt securities
Corporate debt securities
Maturity in
Years
Cost
Unrealized
Fair Value
Gains
Losses
Less than 1 year
$
2,311
$ — $
1-3 years
-
926
721
—
—
(5) $
(5)
(230)
2,306
921
491
$
3,958
$ — $ (240) $
3,718
Maturity in
Years
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
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, 2015, 2014, and 2013 (in thousands):
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
Provision adjustment
Write-offs and recoveries, net
Balance at December 31, 2015
Allowance for Doubtful
Accounts (1)
Reserve for Billing
Adjustments (2)
Reserve for Contractual
Allowances (2)
$
$
513
(150)
(93)
270
571
(577)
264
483
(303)
444
$
$
81
29
(102)
8
99
(100)
7
105
(102)
10
$
$
—
—
—
—
18,675
(17,968)
707
22,256
(22,373)
590
(1) The provision was charged against general and administrative expenses.
(2) The provision was charged against Diagnostic Services revenue.
Inventory
43
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
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.
The following table summarizes our reserves for excess and obsolete inventory as of and for the years ended December 31,
2015, 2014, and 2013 (in thousands):
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
Provision adjustment
Write-offs and scrap
Balance at December 31, 2015
Reserve for Excess and
Obsolete Inventories (1)
$
$
2,565
210
(232)
2,543
(630)
—
1,913
(967)
(227)
719
(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 for customer relationships, 5 to 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 to be held and used during
the years ended December 31, 2015, 2014, and 2013. During the year ended December 31, 2015, an impairment loss of $56,000
was recorded related to the excess of the carrying amount above fair value of certain assets held for sale. No impairment losses
were recorded on long-lived assets held for sale during the years ended December 31, 2014, or 2013.
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 to the carrying value of the reporting
unit, including goodwill. 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 goodwill impairment losses were recorded during the years ended December 31, 2015, 2014, and 2013.
Restricted Cash
As of December 31, 2015, we held $0.2 million of money market funds that are restricted from withdrawal as they are held as
collateral for a letter of credit related to the building lease for the Poway, CA facility.
44
Restructuring
Restructuring costs are included in income from operations within the consolidated statements of comprehensive income.
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 $0.6 million, $0.5 million, and $0.2 million for the years ended December 31,
2015, 2014, and 2013, respectively.
Share-Based Compensation
We account for share-based awards exchanged for employee 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, 2015, 2014, and 2013 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,
2015
2014
2013
$
$
176
331
(294)
213
$
$
137
286
(247)
176
$
$
326
149
(338)
137
Advertising costs are expensed as incurred. Total advertising costs for each of the years ended December 31, 2015, 2014, and
2013 were $0.3 million, $0.2 million, and $0.3 million respectively.
Basic and Diluted Net Income Per Share
Basic earnings per share (EPS) is calculated by dividing net income by the weighted average number of common shares and
vested restricted stock units outstanding. Diluted EPS is computed by dividing net income 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 per share include 5,063, and 44,522 vested restricted stock units for the years ended December 31, 2014, and
2013, respectively. There were no vested restricted stock units included in the shares used to compute basic net income per share
for the year ended December 31, 2015.
The following table sets forth the computation of basic and diluted net income per share for the periods indicated (in thousands,
except per share amounts):
45
Net income
Shares used to compute basic net income per share
Dilutive potential common shares:
Stock options
Restricted stock units
Shares used to compute diluted net income per share
Basic net income per share
Diluted net income per share
Year Ended December 31,
2015
21,640
2014
$ 2,475
$
2013
$
264
19,210
18,571
18,789
449
31
19,690
307
—
18,878
359
11
19,159
$
$
1.13
1.10
$
$
0.13
0.13
$
$
0.01
0.01
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 were 984, 66,917, and 177,891 for the years ended December
31, 2015, 2014, and 2013, respectively.
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 provide for income taxes under the liability method. This approach requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of differences between the tax basis of assets or liabilities and their carrying
amounts in the financial statements. We provide a valuation allowance for deferred tax assets if it is more likely than not that these
items will expire before we are able to realize their benefit. We calculate the valuation allowance in accordance with the authoritative
guidance relating to income taxes, which requires an assessment of both positive and negative evidence regarding the realizability
of these deferred tax assets when measuring the need for a valuation allowance. Significant judgment is required in determining
any valuation allowance against deferred tax assets. As of December 31, 2014, due to a history of operating losses and other key
operating factors, we concluded that a full valuation allowance was necessary to offset all of our deferred tax assets. A significant
piece of objective negative evidence evaluated as of December 31, 2014, was the cumulative pretax loss incurred over the three-
year period ended December 31, 2014. During the year ended December 31, 2015, we concluded that it was more likely than not
that a portion of our deferred tax assets would be realized through future taxable income. This conclusion was based on our
restructuring efforts in 2013 and 2014 and resulting sustained profitability for the second half of 2013, 2014, and 2015, as well as
our projections of positive future earnings and other key operating factors. As of September 30, 2015, we had generated cumulative
pretax income over the preceding twelve quarter period, and therefore the objective negative evidence of a history of operating
losses was no longer present.
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 5, 2015, we acquired MD Office Solutions. On March 13, 2014, we acquired 100% of the membership interest of
Telerhythmics, LLC. Both acquisitions were accounted for as business combinations. We measure all assets acquired and liabilities
assumed, including contingent considerations, at fair value as of the acquisition date. Contingent purchase considerations to be
settled in cash are remeasured to estimated fair value at each reporting period with the change in fair value recorded in general
46
and administrative expense, a component of operating expenses. See Note 3 to the audited consolidated financial statements for
further information.
Accounting Standards Updates
In February 2016, the FASB amended the existing accounting standards for the accounting for leases. The amendments are
based on the principle that assets and liabilities arising from leases should be recognized within the financial statements. The
Company is required to adopt the amendments beginning in 2019. Early adoption is permitted. The amendments must be applied
using a modified retrospective transition approach and the FASB decided not to permit a full retrospective transition approach.
The Company is currently evaluating the impact these amendments will have on its consolidated financial statements.
In January 2016, the FASB amended the existing accounting standards for the accounting for financial instruments. The
amendments require equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized
in net income. The new standard is effective prospectively for fiscal years beginning after December 15, 2017. We are currently
evaluating the impact, if any, of adopting this guidance on our financial statements.
In November 2015, the FASB issued guidance which requires classification of all deferred tax assets and liabilities as
noncurrent. The new standard is effective for fiscal years beginning after December 15, 2016, including interim periods within
those fiscal years, with early adoption permitted. We have early adopted the guidance on a prospective basis for the year ended
December 31, 2015. Therefore, the classification of deferred tax assets and liabilities in periods prior to the year ended December
31, 2015 have not been changed from their original presentation.
In September 2015, the FASB issued guidance which eliminates the requirement for an acquirer to retrospectively adjust
provisional amounts recorded in a business combination to reflect new information about the facts and circumstances that existed
as of the acquisition date and that, if known, would have affected measurement or recognition of amounts initially recognized. As
an alternative, the amendment requires that an acquirer recognize adjustments to provisional amounts that are identified during
the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that
the acquirer record, in the financial statements of the period in which adjustments to provisional amounts are determined, the
effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional
amounts, calculated as if the accounting had been completed at the acquisition date. The new standard is effective prospectively
for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. We are currently evaluating
the impact, if any, of adopting this guidance on our financial statements.
In July 2015, the FASB issued guidance that amends the guidelines for the measurement of inventory from lower of cost or
market to the lower of cost and net realizable value (NRV). NRV is defined as the estimated selling prices in the ordinary course
of business less reasonably predictable costs of completion, disposal, and transportation. Under existing standards, inventory is
measured at lower of cost or market, which requires the consideration of replacement cost, NRV, and NRV less an amount that
approximates a normal profit margin. This ASU eliminates the requirement to determine and consider replacement cost or NRV
less an approximately normal profit margin for inventory measurement. The new standard is effective prospectively for fiscal
years beginning after December 15, 2016. We are currently evaluating the impact, if any, of adopting this guidance on our financial
statements.
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 is currently
scheduled to become effective for us in the first quarter of 2018. We are currently evaluating the alternative transition methods
and the potential effects of the adoption of this guidance on our financial statements.
NOTE 3.
Acquisitions
MD Office Solutions (2015)
On March 5, 2015, we entered into an Agreement of Merger and Plan of Reorganization (the Merger Agreement) to acquire
MD Office Solutions (MD Office). MD Office is a provider of in-office nuclear cardiology imaging in the northern and central
California regions. The acquisition expands the geographical region in which we are able to provide our in-office nuclear cardiology
imaging services.
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, as well as settlement of a $15,000 accounts receivable balance owed to
the Company. 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,
47
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 are $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.
At December 31, 2015, we have estimated the fair value of the contingent earn-out opportunity to be $153,000. The earn-out
opportunity is estimated based on actual performance for the period from the acquisition date through December 31, 2015, as well
as the expected performance of the business over the period from January 1, 2016, through December 31, 2017, utilizing an income
approach. 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.
The Merger Agreement was 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.
The allocation of the purchase price of $2,699,000 to the assets acquired and liabilities assumed on the acquisition date
was as follows:
(in thousands)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable
Other current assets
Total current assets
Property and equipment
Intangible assets
Goodwill
Other assets
Total assets
Liabilities
Current liabilities:
Accounts payable
Accrued compensation
Other accrued liabilities
Total current liabilities
Deferred tax liability
Other liabilities
Total liabilities
Allocation of purchase price
$
$
$
$
3
457
32
492
481
1,007
1,560
26
3,566
149
81
87
317
544
6
867
The goodwill recognized as part of the transaction primarily represents synergies between Digirad and MD Office that were
not separately identified as part of the acquisition valuation process. MD Office activities are included within the Diagnostic
Services reportable segment. The resulting goodwill from the acquisition is not deductible for federal and state tax reporting
purposes.
The following table summarizes the fair value of acquired identifiable intangible assets as of the acquisition date:
48
(in thousands)
Customer relationships
Trademarks
Covenants not to compete
Total intangible assets acquired, excluding goodwill
Weighted
Average Useful
Lives (in years)
Fair Value
7.0
5.0
5.0
6.3
$
$
639
187
181
1,007
The below tables display estimated proforma results had the business acquisition been completed as of January 1, 2014. In
deriving the proforma results, we utilized the historical operating results of MD Office and adjusted for the impact of the purchase
accounting and transaction costs as if the acquisition occurred on January 1, 2014.
(in thousands)
Revenues
Net income
Year Ended December 31,
(unaudited)
2015
2014
$
$
61,393
21,849
$
$
58,869
2,216
Included within our consolidated operating results for the year ended December 31, 2015 are MD Office operations for the
period March 6, 2015 through December 31, 2015 as follows:
(in thousands)
Revenues
Net income
Year Ended
December 31, 2015
(unaudited)
$
$
2,550
248
Included within the results for MD Office for the year ended December 31, 2015 are approximately $195,000 of transaction
costs related to the acquisition. These costs are classified as general and administrative expenses in the consolidated statements
of comprehensive income.
Telerhythmics, LLC (2014)
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
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, 2015, we have estimated the fair value of the contingent earn-out opportunity to be $22,000. The earn-out
opportunity is estimated based on expected performance of the business over the period from January 1, 2016 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, 2015. 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.
The allocation of the purchase price of $3,447,000 to the assets acquired and liabilities assumed on the acquisition date
was as follows:
49
(in thousands)
Assets
Current assets:
Accounts receivable
Other current assets
Total current assets
Property and equipment
Intangible assets
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. 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
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
50
Year Ended December 31,
(unaudited)
2014
2013
$
$
56,763
2,688
$
$
55,494
247
December 31,
2015
December 31,
2014
$
$
2,600
$
1,649
851
5,100
(719)
4,381
$
2,439
2,560
558
5,557
(1,913)
3,644
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
Trademarks
Patents
Covenants not to compete
Total intangible assets, net
December 31,
2015
December 31,
2014
$
$
25,254
$
3,555
583
29,392
(23,140)
6,252
$
23,412
2,917
571
26,900
(22,134)
4,766
December 31, 2015
Weighted Average
Useful Life (years)
Gross
Carrying
Amount
Accumulated
Amortization
Intangible
Assets, Net (1)
8.2
8.0
14.6
5.0
$
5,489
$
787
141
251
$
6,668
$
December 31, 2014
(3,259) $
(150)
(125)
(55)
(3,589) $
2,230
637
16
196
3,079
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
$
(2,904) $
(53)
(116)
(11)
(3,084) $
1,946
547
25
59
2,577
(1)
Amortization expense for intangible assets, net for the years ended December 31, 2015, 2014, and 2013 was $0.5 million, $0.4 million,
and $0.2 million, respectively. Estimated amortization expense for intangible assets for 2016 is $0.5 million, for 2017 is $0.5 million,
for 2018 is $0.5 million, for 2019 is $0.5 million, for 2020 is $0.4 million, and thereafter is $0.7 million.
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
Other accrued liabilities
Total other current liabilities
NOTE 5.
Fair Value Measurements
51
December 31,
2015
December 31,
2014
$
1,006
$
268
83
724
127
258
532
333
197
177
348
155
151
428
$
2,998
$
1,789
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, 2015 and 2014 (in thousands):
Assets:
Corporate debt securities
Equity securities
Total
Liabilities:
Acquisition related contingent consideration
Assets:
Corporate debt securities
Liabilities:
Acquisition related contingent consideration
At Fair Value as of December 31, 2015
Level 1
Level 2
Level 3
Total
— $ 3,227
—
491
— $ 3,718
$
$
— $ 3,227
—
491
— $ 3,718
— $
— $
175
$
175
At Fair Value as of December 31, 2014
Level 1
Level 2
Level 3
Total
— $ 7,935
$
— $ 7,935
— $
— $
229
$
229
$
$
$
$
$
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.
Equity securities consist of shares of Perma-Fix Medical, a publicly traded company listed on the NewConnect market of the
Warsaw Stock Exchange. Fair value of the Perma-Fix Medical investment is based on the closing price observed on December 31,
2015. Given that there are days in which there are no trades of Perma-Fix Medical's stock, we corroborate the fair value by observing
market data prior and subsequent to the balance sheet date.
The acquisition related contingent consideration is related to the acquisitions of Telerhythmics, on March 13, 2014, and MD
Office Solutions, on March 5, 2015. We reassess the fair value of the contingent consideration on a quarterly basis using the income
approach, which is a Level 3 measurement. The estimation of the fair value of the contingent consideration requires significant
management judgment, including estimating future cash flows associated with the respective businesses and determining the
associated discount rate. The maximum possible consideration to be paid related to Telerhythmics and MD Office Solutions is
$501,000 and $400,000, respectively. No minimum amount of contingent consideration is guaranteed to be paid related to either
Telerhythmics or MD Office Solutions. No earn-out consideration was earned related to Telerhythmics for the period from the
closing date of March 13, 2014 through December 31, 2015. Contingent consideration of $76,000 was earned related to MD Office
Solutions for the period from the closing date of March 5, 2015 through December 31, 2015.
52
Changes in the estimated fair value of contingent consideration liabilities (level 3 measurement) from December 31, 2013
to December 31, 2015 are as follows (in thousands):
Balance at December 31, 2013
Acquisition of Telerhythmics
Change in estimated fair value
Balance at December 31, 2014
Acquisition of MD Office Solutions
Change in estimated fair value
Balance at December 31, 2015
NOTE 6.
Goodwill
Telerhythmics
Contingent
Consideration
MD Office Solutions
Contingent
Consideration
Total Contingent
Consideration
$
$
— $
220
9
229
—
(207)
22
$
— $
—
—
—
6
147
153
$
—
220
9
229
6
(60)
175
Goodwill has been recorded related to the acquisitions of MD Office in 2015, Telerhythmics in 2014, and Ultrascan in 2007.
The related goodwill has been recorded within two separate reporting units within our Diagnostic Services segment. During the
year ended December 31, 2014, we recorded $1.2 million of goodwill as a result of acquisition of Telerhythmics. During the year
ended December 31, 2015, we recorded $1.6 million of goodwill as a result of acquisition of MD Office, bringing total goodwill
to its current carrying value of $2.9 million. We determined the implied fair value of the goodwill for MD Office, Telerhythmics
and Ultrascan 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 second quarter of 2015, based on the quantitative performance of the Telerhythmics business compared to plan, 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.
Subsequently, during the fourth quarter of 2015, we performed our annual goodwill impairment testing. 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 reporting units were not impaired.
Changes in the carrying amount of goodwill from December 31, 2013 to December 31, 2015 by reportable segment are as
follows (in thousands):
Diagnostic Services
Diagnostic Imaging
Balance at December 31, 2013
Acquisition of Telerhythmics
Balance at December 31, 2014
Acquisition of MD Office Solutions
Balance at December 31, 2015
$
$
184
1,153
1,337
1,560
2,897
$
$
—
—
—
—
—
NOTE 7.
Commitments and Contingencies
Leases
We currently lease facilities and certain automotive equipment under non-cancelable operating leases expiring from January
1, 2016 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
53
is recorded as deferred rent and is included in other current and long-term liabilities. Rent expense was approximately $1.3 million
for the years ended December 31, 2015 and 2014 and $1.4 million for the year ended December 31, 2013.
As of December 31, 2015, 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 December 31, 2019.
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, 2015 are as follows (in thousands):
2016
2017
2018
2019
2020
Thereafter
Total future minimum lease payments
Less amounts representing interest
Present value of obligations
Less: current capital lease obligations
Total long-term capital lease obligations
Operating
Leases
Capital
Leases
$
$
1,125
757
632
599
572
164
3,849
$
$
780
595
234
47
1
—
1,657
(90)
1,567
(724)
843
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, 2015, 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, 2015, the Plans had 968,733 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, 2015, the number of shares provided for issuance under the 2014 Plan due to forfeited,
expired, and canceled shares under the 2004 Plan was 10,248 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 and 2013 was $0.70, and $1.06 per share, respectively,
which was estimated using the following weighted-average assumptions. There were no employee stock options granted during
the year ended December 31, 2015.
54
Expected volatility
Expected term (in years)
Risk-free interest rate
Expected dividend yield
Year Ended December 31,
2015
2014
2013
—
—
—
—
43%
4.1
1.2%
5.7%
56%
4.6
0.9%
—
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 year ended December 31, 2013, 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.
A summary of our stock option award activity as of and for the year ended December 31, 2015 is as follows (in thousands,
except per share data):
Options outstanding at December 31, 2014
Options exercisable at December 31, 2014
Options granted
Options forfeited
Options expired
Options exercised
Options outstanding at December 31, 2015
Options exercisable at December 31, 2015
Weighted-
Average
Exercise
Price per
Share
Weighted-
Average
Remaining
Contractual
Term (In Years)
Aggregate
Intrinsic
Value
Number of
Shares
1,458
553
$
$
— $
—
(9)
(190)
1,259
1,028
$
$
2.62
1.82
—
—
5.74
3.28
2.50
2.42
3.9
3.7
$
$
3,920
3,297
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, 2015, total unrecognized compensation cost related to unvested stock options was $0.2 million, which is
expected to be recognized over a weighted-average period of 1.2 years.
Upon exercise, we issue new shares of common stock. Cash received from stock option exercises was $0.6 million during the
year ended December 31, 2015, $0.2 million during the year ended December 31, 2014, and $0.9 million for the year ended
December 31, 2013. The total intrinsic value of stock options exercised was $0.2 million during the year ended December 31,
2015, $0.1 million during the year ended December 31, 2014, and $0.9 million during the year ended 2013.
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 $4.14 and $3.81 per share during the years ended December 31, 2015
and 2014, 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, 2015 is as follows (in thousands,
except per share data):
55
Non-vested restricted stock units outstanding at December 31, 2014
Granted
Forfeited
Vested
Non-vested restricted stock units outstanding at December 31, 2015
Weighted-
Average
Grant Date
Fair Value
Per Share
Number of
Shares
88
119
(5)
—
202
$
$
3.81
4.14
4.15
—
4.00
The following table summarizes information about restricted stock units that vested during the years ended December 31, 2015,
2014, and 2013 based on service conditions (in thousands):
Fair value on vesting date of vested restricted stock units
Year Ended December 31,
2015
2014
2013
$
— $ — $ 136
At December 31, 2015, total unrecognized compensation cost related to non-vested restricted stock units was $0.5 million,
which is expected to be recognized over a weighted-average period of 1.9 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, 2015, 2014,
and 2013 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,
2015
2014
2013
$
$
18
47
—
98
453
616
$
$
1
26
—
51
248
326
$
$
6
49
9
52
224
340
Significant components of the provision (benefit) for income taxes from continuing operations are as follows (in thousands):
Current provision (benefit):
Federal
State
Total current provision (benefit)
Deferred provision (benefit):
Federal
State
Total deferred provision (benefit)
Total income tax provision (benefit)
Year Ended December 31,
2015
2014
2013
$
— $
23
23
— $
41
41
(17,347)
(1,799)
(19,146)
$ (19,123)
$
18
3
21
62
$
(49)
4
(45)
—
—
—
(45)
56
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, net of federal benefit
Permanent differences and other
Transaction costs
Research and development credits, current year
Research and development credits, prior year
Change in effective federal and state tax rates
Expiration of net operating loss and tax credit carryovers
Stock compensation expense
Reserve for uncertain tax positions and other reserves
Change in valuation allowance
Provision (benefit) for income taxes
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)
Year Ended December 31,
2015
34.0 %
3.4 %
4.4 %
23.1 %
— %
— %
37.6 %
8.4 %
— %
76.8 %
(947.5)%
(759.8)%
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)%
December 31,
2015
2014
$
$
31,598
38
891
1,316
1,300
35,143
(348)
(16,217)
18,578
$
$
33,732
1,950
1,417
2,097
1,079
40,275
(237)
(40,059)
(21)
As of December 31, 2015, we had federal and state income tax net operating loss carryforwards of $90.3 million and $25.0
million, respectively. Federal loss carryforwards will begin to expire in 2018 unless previously utilized. State loss carryforwards
of approximately $3.6 million expired in 2015, and approximately $0.9 million is set to expire in 2016 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, 2015 and 2014, respectively. The federal credits will begin to expire in 2018. The California research credits
have no expiration. 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. A valuation allowance has been recognized to offset the deferred tax assets, as realization of such assets has not met
the "more likely than not" threshold required under the authoritative guidance of accounting for income taxes.
We recognize windfall tax benefits associated with the exercise of share-based compensation directly to stockholders' equity
only when realized. Accordingly, deferred tax assets are not recognized for the net operating loss carryforwards resulting from
windfall tax benefits. At December 31, 2015, deferred tax assets do not include approximately $0.3 million of excess tax benefits
from share-based compensation.
57
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,
2015
2014
2013
$
$
1,553
2,363
—
—
—
3,916
$
$
1,553
—
—
—
—
1,553
$
$
1,539
5
64
(55)
—
1,553
Included in the unrecognized tax benefits of $3.9 million at December 31, 2015 was $3.2 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 2011; however, our net operating loss carryforwards and
research credit carryforwards arising prior to that year are subject to adjustment. Our policy is to recognize interest expense and
penalties related to income tax matters as a component of income tax expense. There were no accrued interest and penalties as of
December 31, 2015 and 2014, and no interest and penalties were recognized during the years ended December 31, 2015, 2014,
and 2013.
NOTE 10.
Employee Retirement Plan
We have 401(k) and Simple IRA 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,
2015, 2014, and 2013.
NOTE 11.
Restructuring Charges
Diagnostic Imaging restructuring initiative
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 during the year ended December 31, 2014, and $1.7 million incurred in the year ended
December 31, 2013.
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 in restructuring charges, all of which
were incurred during the year ended December 31, 2014. The charges were comprised of lease termination, moving and other
related costs. All Facilities restructuring charges were included in the Diagnostic Imaging segment. Restructuring liabilities and
associated charges were measured at fair value as incurred.
NOTE 12.
Perma-Fix Medical Stock Subscription and Supply Agreements
On July 27, 2015, we entered into a Stock Subscription Agreement (the Subscription Agreement) and Tc-99m Supplier
Agreement (the Supply Agreement) with Perma-Fix Medical, S.A. (Perma-Fix Medical), a publicly traded company listed on the
NewConnect market of the Warsaw Stock Exchange. Perma-Fix Medical is a subsidiary of Perma-Fix Environmental Services,
Inc. (NASDAQ: PESI). Perma-Fix Medical is developing a proprietary process to produce Technetium-99m (Tc-99m) resin from
non-enriched uranium sources for purposes of creating nuclear imaging isotopes. Under the terms of the Subscription Agreement,
we invested $1 million USD in exchange for 71,429 shares of Perma-Fix Medical, which constituted approximately 5.4% of the
outstanding common shares of Perma-Fix Medical at the time of investment. Under Polish law, issuance of the shares required
58
approval of the shares by a Polish court which occurred on October 12, 2015. The investment in Perma-Fix Medical is accounted
for as an available-for-sale security. In connection with the Subscription Agreement, the Company's President and CEO was
appointed to the Supervisory Board of Perma-Fix Medical. See Note 13 to the audited consolidated financial statements for further
information regarding Perma-Fix Medical and Perma-Fix Environmental Services, Inc.
Pursuant to the Supply Agreement, should Perma-Fix Medical successfully complete development of the new Tc-99m resin,
Perma-Fix Medical will supply us or our preferred nuclear pharmacy supplier with Tc-99m at a preferred rate and we will purchase
agreed upon quantities of such Tc-99m for our nuclear imaging operations, either directly or in conjunction with our preferred
nuclear pharmacy supplier.
Of the $1 million investment in Perma-Fix Medical, $45,000 of value was allocated to the supply agreement with the remaining
value allocated to the 71,429 Perma-Fix Medical shares. We immediately expensed the $45,000 of value associated with the
supply agreement. In addition, we realized a loss of $233,000 related to the 71,429 Perma-Fix Medical shares due to the initial
excess of the transaction price over fair value.
NOTE 13.
Related Party Transaction
Mr. John Climaco currently serves as a Director of the Company and a member of the Compensation, Corporate Governance
and Strategic Advisory committees of the Board. Mr. Climaco also serves as a Director of Perma-Fix Environmental Services,
Inc. (NASDAQ: PESI). Further, on June 2, 2015, Mr. Climaco was elected as the Executive Vice President of Perma-Fix Medical
S.A., a majority-owned Polish subsidiary of Perma-Fix Environmental Services, Inc. As described in Note 12 to the audited
consolidated financial statements, on July 27, 2015, we entered into a Stock Subscription Agreement (the Subscription Agreement)
and Tc-99m Supplier Agreement (the Supply Agreement) with Perma-Fix Medical. Under the terms of the Subscription Agreement,
we invested $1 million USD in exchange for 71,429 shares of Perma-Fix Medical. Pursuant to the Supply Agreement, should
Perma-Fix Medical successfully complete development of the new Tc-99m resin, Perma-Fix Medical will supply us or our preferred
nuclear pharmacy supplier with Tc-99m at a preferred rate and we will purchase agreed upon quantities of such Tc-99m for our
nuclear imaging operations, either directly or in conjunction with our preferred nuclear pharmacy supplier. In addition, in connection
with the Subscription Agreement, the Company's President and CEO was appointed to the Supervisory Board of Perma-Fix Medical.
NOTE 14.
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.
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 will recognize contingent consideration if and when earned.
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):
59
Year ended December 31,
2014 (2)
2013
2015 (1)
Gross profit by segment:
Diagnostic Services
Diagnostic Imaging
Consolidated gross profit
Income (loss) from operations by segment:
Diagnostic Services
Diagnostic Imaging (3)
Consolidated income 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
$
$
$
$
$
$
9,343
4,773
14,116
30
141
171
1,436
477
1,913
$
$
$
$
$
$
$
$
10,439
$ 10,449
7,470
6,191
17,909
$ 16,640
(506) $
3,280
2,774
$
220
2,298
2,518
2,150
291
2,441
$
$
1,672
263
1,935
December 31,
2015 (1)
2014 (2)
19,478
$ 18,724
44,635
23,177
64,113
$ 41,901
(1) On March 5, 2015, we acquired MD Office Solutions (MD Office). The results of MD Office are included in Diagnostic Services since the
acquisition date (See Note 3).
(2) 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).
(3) 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 14).
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 2015 and 2014 are as
follows (in thousands, except per share data):
60
Fiscal 2015 (1)
Revenues
Gross profit
Income from operations
Net income (3)
Net income per common share—basic (5)
Net income per common share—diluted (5)
Fiscal 2014 (2)
Revenues
Gross profit
Income (loss) from operations (4)
Net income (loss)
Net income (loss) per common share—basic (5)
Net income (loss) per common share—diluted (5)
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
$
$
$
$
$
$
$
$
$
$
$
$
13,839
3,648
165
745
0.04
0.04
$
$
$
$
$
$
15,547
4,767
1,163
1,097
0.06
0.06
12,997
$
14,587
3,442
$
(155) $
(148) $
(0.01) $
(0.01) $
4,505
825
823
0.04
0.04
$
$
$
$
$
$
$
$
$
$
$
$
15,862
4,802
948
19,120
0.99
0.97
13,881
4,409
1,032
1,028
0.06
0.05
$
$
$
$
$
$
$
$
$
$
$
$
15,578
4,692
498
678
0.03
0.03
14,143
4,284
816
772
0.04
0.04
(1) On March 5, 2015, we acquired MD Office Solutions (MD Office). The results of MD Office are included in Diagnostic Services since the
acquisition date (See Note 3).
(2) 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).
(3)
(4)
Included in net income for the third quarter of 2015 is an income tax benefit of $18.2 million primarily related to the release of the valuation
allowance associated with a portion of our deferred tax assets.
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).
(5) 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
Credit Facility
On January 1, 2016, Digirad and certain of its subsidiaries entered into a Credit Agreement (the “Credit Agreement”) with
Wells Fargo Bank, National Association (“Wells Fargo”) as administrative agent (“Agent”) and as sole lead arranger and sole book
runner.
The Credit Agreement is a five-year credit facility (maturing in January 2021) with a maximum credit amount of $40,000,000
(the “Credit Facility”). The Credit Facility consists of a term loan of $20,000,000 (“Term Loan A”), a second term loan of $7,500,000
(“Term Loan B”), and a revolving credit facility with a maximum commitment of $12,500,000 (the “Revolver”).
At the Borrower’s option, the Credit Facility will bear interest at either (i) the LIBOR Rate, as defined in the Credit Agreement,
plus 2.5% for Term Loan A, 5.0% for Term Loan B, and 2.0% for the Revolver; or (ii) the Base Rate, as defined below, plus 1.5%
for Term Loan A, 4.0% for Term Loan B, and 1.0% for the Revolver. As further defined in the Credit Agreement, “Base Rate”
means the greatest of (a) the Federal Funds Rate (as defined in the Credit Agreement) plus 0.5%, (b) the LIBOR Rate (which rate
will be calculated based upon an interest period of one month and will be determined on a daily basis), plus 1%, and (c) the rate
of interest announced, from time to time, within Wells Fargo at its principal office in San Francisco as its “prime rate.”
On January 4, 2016, the Company used the financing made available under the Credit Facility to fund a portion of the purchase
price related to the Company’s acquisition of Project Rendezvous Holding Corporation (“PRHC”) described below. The draw on
the Credit Facility on January 4, 2016 was as follows: $20,000,000 on Term Loan A, $7,500,000 on Term Loan B and $6,117,220
on the Revolver.
The Credit Agreement contains certain representations, warranties, events of default, mandatory prepayment requirements, as
well as certain affirmative and negative covenants customary for Credit Agreements of this type. These covenants include
restrictions on borrowings, investments, and divestitures, as well as limitations on the Company’s ability to make certain restricted
61
payments, including payment of dividends. These restrictions do not prevent or prohibit the payment of dividends by the Company
consistent with past practice, subject to satisfaction of certain conditions. Upon the occurrence and during the continuation of an
event of default under the Credit Agreement, the Lenders may, among other things, declare the loans and all other obligations
under the Credit Agreement immediately due and payable and increase the interest rate at which loans and obligations under the
Credit Agreement bear interest. Pursuant to a separate Guaranty and Security Agreement dated January 1, 2016, between the
Company, its subsidiaries and Wells Fargo, the Credit Facility is secured by a first-priority security interest on substantially all of
the assets of the Company and its subsidiaries and a pledge of all shares and membership interests of the Company’s subsidiaries.
Acquisition of Project Rendezvous Holding Corporation / DMS Health
On January 1, 2016 (the “Closing Date”), pursuant to the Stock Purchase Agreement, dated as of October 13, 2015, and as
amended on December 31, 2015 (the “Purchase Agreement”), by and among Digirad, PRHC, the stockholders of PRHC
(collectively, “Stockholders”), and Platinum Equity Advisors, LLC as the Stockholder representative, we completed the acquisition
from the Stockholders, for $36,000,000 in cash (subject to certain adjustments) (the “Purchase Price”), of all the issued and
outstanding common stock of PRHC (the “DMS Transaction”). On January 4, 2016, the Company funded payment of the Purchase
Price with a combination of cash-on-hand and the financing made available under the Credit Facility.
On the Closing Date, PRHC became a wholly owned subsidiary of the Company. PRHC is the ultimate parent of DMS Health
Technologies, Inc., a provider of mobile healthcare solutions and related sales and services to small and regional hospitals throughout
the United States, with a large concentration in the upper Midwest region.
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.
Dividend
On February 1, 2016, the Company announced a dividend of $0.05 payable to shareholders of record as of February 16, 2016.
The dividend was paid on February 29, 2016.
62
ITEM 9.
None.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
ITEM 9A.
CONTROLS AND PROCEDURES
(1) 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 Commissions 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.
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
defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, our chief executive officer and chief
financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2015.
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 internal control system, no matter how well designed and operated, 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.
(2) 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 Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Under the supervision and with the participation of our
management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of
our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Because of its inherent limitations, internal
control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement preparation and presentation. Based on our evaluation under
the framework in Internal Control—Integrated Framework (2013), our management concluded that our internal control over
financial reporting was effective as of December 31, 2015.
The effectiveness of our internal control over financial reporting as of December 31, 2015 has been audited by BDO USA,
LLP, an independent registered public accounting firm, as stated in its report, which we include herein.
(3) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during our fourth quarter ended December 31, 2015 that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
63
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Digirad Corporation
We have audited Digirad Corporation’s internal control over financial reporting as of December 31, 2015, based on criteria
established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Digirad Corporation’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in
the accompanying Item 9A, Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express
an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Digirad Corporation maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2015, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheet of Digirad Corporation as of December 31, 2015, and the related consolidated statements of
comprehensive income, stockholders’ equity, and cash flows for the year then ended and our report dated March 1, 2016 expressed
an unqualified opinion thereon.
/s/ BDO USA, LLP
La Jolla, California
March 1, 2016
64
ITEM 9B.
OTHER INFORMATION
None.
65
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, the information required by Part III (Items 10, 11, 12,
13, and 14) is being incorporated by reference to the applicable information in our definitive proxy statement (or an amendment
to our Annual Report on Form 10-K) to be filed with the SEC within 120 days after the end of the fiscal year ended December 31,
2015 in connection with our Annual Meeting of Stockholders to be held in 2016.
Code of Ethics
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
See Item 10.
ITEM 12.
See Item 10.
ITEM 13.
See Item 10.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
See Item 10.
66
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
(a) 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,
2015:
Reports of Independent Registered Public Accounting Firms
Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014, and 2013
Consolidated Balance Sheets at December 31, 2015 and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014, and 2013
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2015, 2014, and 2013
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.
3.
Exhibits required by Item 601 of Regulation S-K
The information required by this Section (a)(3) of Item 15 is set forth on the exhibit index that follows the Signatures page of
this Form 10-K.
Exhibit
Number
2.1
2.2†
2.3
2.4†
2.5
2.6
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)
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)
Membership Interest Purchase Agreement, dated March 13, 2014, by and among Digirad Imaging Solutions, Inc.
and the members of Telerhythmics, LLC (as Sellers) party thereto and TD Properties, LLC in its capacity as Seller
Representative. (Incorporated by reference to the exhibits to the Company's report on Form 8-K filed with the
Commission on March 14, 2014)
Agreement of Merger and Plan of Reorganization, dated March 5, 2015 by and between Digirad Corporation,
Maleah Incorporated, MD Office Solutions 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.
67
Exhibit
Number
2.7
2.8
3.1
3.2
3.3
3.4
4.1
4.2
4.3
4.4
4.5
10.1†
10.2†
10.3†
10.4†
10.5#
10.6#
Description
Stock Purchase Agreement dated as of October 13, 2015, by and among Digirad Corporation, Project Rendezvous
Holding Corporation, the stockholders of Project Rendezvous Holding Corporation, and Platinum Equity Advisors,
LLC as the stockholder representative. (Incorporated by reference to the exhibits to the report on Form 8-K filed
with the Commission on January 7, 2016). 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.
Amendment to Stock Purchase Agreement dated as of December 31, 2015, by and between Digirad Corporation
and Platinum Equity Advisors, LLC as the stockholder representative. (Incorporated by reference to the exhibits
to the report on Form 8-K filed with the Commission on January 7, 2016).
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)
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)
Certificate of Amendment of the Restated Certificate of Incorporation of Digirad Corporation (Incorporated by
reference to the exhibits to the Company's report on Form 8-K filed with the Commission on May 5, 2015).
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 (Incorporated by reference to the exhibits to the report on
Form 10-K filed with the Commission on March 6, 2015).
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)
68
Exhibit
Number
10.7#
10.8#
10.9#
10.10#
10.11#
10.12#
10.13
10.14#
10.15#
10.16#
10.17
10.18#
10.19#
10.20
10.21
21.1*
23.1*
23.2*
24.1*
31.1*
31.2*
Description
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)
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)
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)
Form Indemnification Agreement of the Company for directors and officers (Incorporated by reference to the
exhibits to the report on Form 10-K filed with the Commission on March 6, 2015).
Registration Rights Agreement, dated March 5, 2015, by and among the Company, Keenan - Thornton Family
Trust, David Keenan and Samia Arram. (Incorporated by reference to the exhibits to the report on Form 10-K filed
with the Commission on May 1, 2015).
Credit Agreement dated January 1, 2016, by and among Digirad Corporation, certain subsidiaries of the Digirad
Corporation identified on the signature pages thereto, the lenders from time to time party thereto, Wells Fargo Bank,
National Association, as agent and as sole lead arranger and sole book runner. (Incorporated by reference to the
exhibits to the report on Form 8-K filed with the Commission on January 7, 2016).
Subsidiaries of Digirad Corporation
Consent of Independent Registered Public Accounting Firm
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
32.1*+
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
69
Exhibit
Number
32.2*+
Description
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.
Filed herewith.
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.
70
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 1, 2016
DIGIRAD CORPORATION
By:
Name:
Title:
/S/ MATTHEW G. MOLCHAN
Matthew G. Molchan
President and Chief Executive Officer
(Principal Executive Officer)
Power of Attorney
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
Director, 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 1, 2016
March 1, 2016
March 1, 2016
/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
/S/ DIMITRIOS J. ANGELIS
Dimitrios J. Angelis
Director
March 1, 2016
Director
March 1, 2016
Director
March 1, 2016
Director
March 1, 2016
Director
March 1, 2016
71
BOARD OF DIRECTORS
OFFICERS & EXECUTIVES
SHAREOWNERS INFORMATION
Jeffrey E. Eberwein
Chairman of the Board
Matthew G. Molchan
President and
Chief Executive Officer
Dimitrios J. Angelis
Director
Jeffry R. Keyes
Chief Financial Officer and
Corporate Secretary
John M. Climaco
Director
Virgil J. Lott
President, Diagnostic Imaging
Michael A. Cunnion
Director
Martin B. Shirley
President,
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
BDO USA, LLP
4250 Executive Square
Suite 600
La Jolla, CA 92037
TEL 858 404 9200
FAX 858 404 9201
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
DIGIRAD CORPORATION 1048 INDUSTRIAL COURT SUITE E SUWANEE GA T 770.813.8323 F 770.813.0326 WWW.DIGIRAD.COM