DIGIRAD CORP
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
Form
10-K
FOR
ANNUAL AND TRANSITION REPORTS
PURSUANT
TO SECTIONS 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
(Mark
One)
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x
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2009
or
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¨
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from
to
Commission
file number: 000-50789
Digirad
Corporation
(Exact Name of
Registrant as
Specified in its Charter)
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Delaware
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33-0145723
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(State
or Other Jurisdiction of Incorporation or Organization)
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(I.R.S.
Employer Identification No.)
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13950
Stowe Drive, Poway, CA
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92064
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(Address
of Principal Executive Offices)
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(Zip
Code)
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(858)
726-1600
(Registrant’s
Telephone Number, Including Area Code)
Securities registered pursuant to
Section
12(b) of the Act:
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Title
of Each Class
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Name
of Each Exchange on Which Registered
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Common
Stock, par value $0.0001 per share
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Nasdaq
Stock Market
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Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, par value $0.0001 per share
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
ý
No
o
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
o
No
o
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.
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Large
accelerated filer
o
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Accelerated
filer
o
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Non-accelerated
filer
ý
(Do not check if
a smaller reporting company)
|
Smaller
reporting company
o
|
Indicate
by check mark whether registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
o
Yes
ý
No
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
¨
No
ý
.
The
aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing stock price of the Common Stock reported on
the NASDAQ National Market on June 30, 2009 was approximately $35.4 million.
Shares of Common Stock held by each officer and director and by each person who
owns 10% or more of the outstanding Common Stock of the registrant have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
The
number of outstanding shares of the registrant’s common stock, par value $0.0001
per share, as of January 27, 2010 was 19,024,205.
DOCUMENTS
INCORPORATED BY REFERENCE
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 end
December 31, 2009 are incorporated by reference into Part III of this
report.
DIG
IRAD CORPORATION
FORM
10-K—ANNUAL REPORT
For
the Fiscal Year Ended December 31, 2009
Table
of Contents
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Page
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PART I
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1
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Item
1
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1
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Item 1A
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9
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Item
1B
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12
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Item
2
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12
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Item
3
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13
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Item
4
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13
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PART II
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14
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Item
5
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14
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Item
6
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17
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Item
7
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17
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Item
7A
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25
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Item
8
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25
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Item
9
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25
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Item
9A
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25
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Item
9B
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26
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PART III
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27
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Item
10
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27
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Item
11
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27
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Item
12
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27
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Item
13
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27
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Item
14
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27
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PART IV
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27
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Item
15
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27
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32
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Forward-Looking
Statements
This
report contains various forward-looking statements regarding our business,
financial condition, results of operations and future plans and projects.
Forward-looking statements discuss matters that are not historical facts and can
be identified by the use of words such as “believes,” “expects,” “anticipates,”
“intends,” “estimates,” “projects,” “can,” “could,” “may,” “will,” “would” or
similar expressions. In this report, for example, we make forward-looking
statements regarding, among other things, our expectations about the rate of
revenue growth in specific business segments and the reasons for that growth and
our profitability, our expectations regarding an increase in sales, strategic
traction and marketing and sales spending, uncertainties relating to our ability
to compete, uncertainties relating to our ability to increase our market share,
changes in coverage and reimbursement policies of third-party payors and the
effect on our ability to sell our products and services, the existence and
likelihood of strategic acquisitions and our ability to timely develop new
products or services that will be accepted by the market.
Although
these forward-looking statements reflect the good faith judgment of our
management, such statements can only be based upon facts and factors currently
known to us. Forward-looking statements are inherently subject to risks and
uncertainties, many of which are beyond our control. As a result, our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth below under
the caption “Risk Factors.” For these statements, we claim the protection of the
safe harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995. You should not unduly rely on these
forward-looking statements, which speak only as of the date on which they were
made. They give our expectations regarding the future but are not guarantees. We
undertake no obligation to update publicly or revise any forward-looking
statements, whether as a result of new information, future events or otherwise,
unless required by law.
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.
and Digirad Ultrascan Solutions, Inc. and their predecessors.
Overview
We are a
leading provider of diagnostic imaging products and personnel and equipment
leasing services that improve patient care while driving positive healthcare
economics. 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 a portable or a fixed configuration, and provide
enhanced operability, improved patient comfort and, in the case of our
triple-headed Cardius® 3 XPO system and Cardius® X-ACT System, provide shorter
image acquisition time when compared to traditional vacuum tube cameras. 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.
We
generate revenues within two primary operating segments: our personnel and
equipment leasing service business (Digirad Imaging Solutions, or “DIS”) and our
Product segment. Through DIS, we offer a comprehensive personnel and equipment
leasing services program as an alternative to purchasing a gamma camera or
ultrasound machine for physicians who wish to perform nuclear imaging,
echocardiography, vascular ultrasound, or any combination of these procedures in
their offices by leasing the imaging system, certified personnel and other
support required to perform imaging in the physician’s office. The flexibility
of our products and our DIS leasing service allows physicians more control over
the diagnosis of their patients in their offices and to earn revenue from
procedures they would otherwise refer elsewhere. DIS leasing services are
provided primarily to cardiologists and internists who enter into annual
contracts for personnel and equipment services delivered on a per-day basis. Our
typical lease contracts provide service coverage ranging from once per month to
three times per week. We experience some seasonality in our DIS business related
to summer vacations, holidays and inclement weather, which historically has most
negatively affected our third quarter. Our Product revenue results
primarily from selling solid-state gamma cameras and from servicing cameras. We
sell our imaging systems to physician offices, hospitals, and imaging centers
primarily in the United States. We have sold a small number of
imaging systems internationally.
During
2009, we achieved our goals in attaining profitability and positive cash flow
despite a downturn in the economy, declines in reimbursement rates from federal
healthcare programs, and a shortage of radiopharmaceuticals used in the leasing
of equipment. Our consolidated operating profit, after adding back
restructuring losses, increased by $7.7 million to $0.1 million in 2009, and we
increased our cash by $3.5 million to $31.8 million. Our achievements
were the direct result of greater efficiencies created by selling or closing
underperforming DIS hub locations, flattening the management structure, and
continuing our focus on creating more leverage from our Centers of Influence
(COI) strategy, which pairs DIS and leading academic or regional medical centers
with community-based physicians in locations with high potential for
growth. Our consolidated revenues were $69.6 million during 2009,
which represented a 13% decrease compared to the prior year, primarily driven by
the sale or closure of underperforming hub locations and a decrease in gamma
camera sales.
In 2010,
we will continue our focus on profitability and positive cash
flow. In the first quarter of 2010, we restructured our DIS
organization into nine territories to provide greater autonomy and control over
local sales and operations activities. We expect this structure will
offer greater efficiencies and adaptability to local market needs and
conditions. To offset expected reimbursement declines for
cardiovascular imaging procedures in 2010, we intend to implement new types of
services, including ultrasound equipment that will expand our available product
offerings in many of our service areas and increase the potential maximum daily
patient volume. We expect to provide greater value in our services channel via
strategic and technological initiatives. In our Product segment, we expect to
introduce our products for sale and expand our market share by leveraging our
growing installed base of satisfied Cardius® X-ACT customers and introducing a
new general imaging product.
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, five major types of non-invasive
diagnostic imaging technologies are available: x-ray, magnetic resonance
imaging, computerized tomography, ultrasound, 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 gamma cameras employ SPECT methodology.
According
to industry sources, (despite the improving image quality and increasing
utilization rates of competing modalities such as computed tomography (CT),
positron emission tomography (PET), and magnetic resonance imaging (MRI), and
diagnostic procedures such as CT angiography), SPECT procedures performed with
gamma cameras will continue to be used for a substantial number of
cardiac-specific nuclear imaging procedures. We believe continued
utilization 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.
Clinical
Applications for Nuclear Imaging
Nuclear
imaging is used primarily in cardiovascular, oncological and neurological
applications. Nuclear imaging involves the introduction of very low-level
radiopharmaceuticals into the patient’s bloodstream. The radiopharmaceuticals
are specially formulated to concentrate temporarily in the specific part of the
body to be studied. The radiation signals emitted by the materials are then
converted into an image of the body part or organ. Nuclear imaging has several
advantages over other diagnostic imaging modalities, showing not only the
anatomy or structure of an organ or body part, but also its function including
blood flow, organ function, metabolic activity and biochemical
activity. Cardiologists and an increasing number of internists and
other physicians purchase our cameras or subscribe to our services for in-office
cardiac imaging for these advantages.
Ultrasound
Imaging
Ultrasound
is a form of diagnostic imaging in which depictions of the internal anatomy or
physiology 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 with over
125,000 installations and more than 90 million procedures performed annually.
Ultrasound imaging is used primarily in obstetrics, internal medicine,
cardiovascular and vascular 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 or
physiological information—including blood flow, wall motion and organ function.
Our ultrasound services are used by an increasing number of cardiologists,
internists and other physicians for in-office echocardiography and vascular
imaging.
Our
Equipment and Personnel Leasing Services
DIS
offers portable nuclear and ultrasound imaging equipment services and personnel
leasing services. We have obtained Intersocietal Commission for Nuclear
Cardiology Labs (ICANL) accreditation for our service, composed of an imaging
system, a certified nuclear medicine technologist and a certified stress
technician or registered nurse, the supply of radiopharmaceuticals, and required
licensure for the performance of nuclear imaging procedures under the
supervision of physicians. Our service infrastructure provides radioactive
materials licensing policies and procedures, quality assurance, a staff of
radiation safety officers, coordinated billing services, and a compliance plan
to help ensure adherence to applicable state and federal regulations. A separate
leasing program called DigiTech Professional Services allows physicians who have
purchased a Digirad camera to lease all of these components with the exception
of the camera. DIS’ customers are cardiologists, primary care physicians,
multi-practice groups and, on a more limited basis, hospitals and clinics. We
provide our physicians with more control over their patients’ diagnosis and
treatment, as well as incremental revenue opportunities and speed of response
from services they would otherwise refer to a hospital or imaging center.
Physicians can tailor their nuclear imaging expenses to their practice needs and
patient volumes. The ultrasound imaging service is similar in that we provide
the ultrasound equipment and one technologist. We have obtained accreditation
for our ultrasound division by the Intersocietal Commission for Echocardiography
Labs (ICAEL).
Our
portable leasing operations use a “hub and spoke” model in which centrally
located regional hubs anchor multiple van routes in the surrounding metropolitan
areas. At our DIS hubs, clinical personnel load the equipment,
radiopharmaceuticals and other supplies onto specially equipped vans for
transport to the physician’s office, 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. Our technologists furnish the physician with applicable paperwork and
billing information for all patients.
We
provide leasing services under annual 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 lease days during
the lease term, which runs for at least one year. 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.
Our
Products
We sell a
line of solid-state gamma cameras and accessories for general nuclear imaging
and specific clinical-application imaging. One of the unique aspects of our
camera is its upright design, which allows our patients to be seated comfortably
throughout the procedure. Instead of the conventional camera that rotates around
a patient while the patient is lying down, our chairs slowly rotate the patient
while the patient is comfortably seated. This ensures that the camera is always
positioned at the center of the heart. Image acquisition begins with the patient
slowly rotating in front of the camera’s detector head. The duration of the
acquisition is a function of the patient’s body mass, whether the test is
performed with the heart at rest or under stress, the amount of the
radiopharmaceutical injected and the number of camera detectors on the
system.
Our
Cardius® XPO family of cardiac SPECT imagers feature modern solid-state
technology that delivers high clinical performance and makes it possible to
image patients weighing up to 500 pounds in compact, lightweight and portable
designs. The Cardius® XPO single, dual and triple-head imaging systems (namely,
the Cardius
®
1 XPO,
Cardius
®
2 XPO
and Cardius
®
3 XPO)
can be installed in rooms as small as seven feet by eight feet, and the systems
generally do not require expensive room modifications or electrical changes. The
XPO systems are available with optional nSPEED rapid image acquisition packages
which offer up to two times greater acquisition efficiency for cardiac SPECT
imaging, the ability to improve clinical quality, or the ability to reduce the
radiation dosage to patients in half for a typical procedure. In the case of the
Cardius®
3
XPO
imager, image
acquisition speed is 38% faster than that of a competing dual head camera. We
currently offer both portable and stationary configurations.
This
year, we began to offer a new product: the Cardius® X-ACT camera. This camera
uses the Cardius® 3 XPO solid-state detectors with an x-ray tube, and is setting
a new clinical standard for cardiac SPECT with attenuation correction. The X-ACT
approach exploits the high-count rate capabilities of solid-state detectors and
takes advantage of the full 24-inch wide triple-head detector geometry to
eliminate truncation in the attenuation scan. The imaging system offers the
benefits of high precision, faster speed and ultra-low patient
dose. X-ACT systems have already been sold to a number of leading
hospitals.
Our
2020tc
imager is a
portable, single-head gamma camera that is compact and lightweight. The camera
is used for general purpose planar imaging procedures including static bone
scans, liver scans, renal scans, lung scans, gastric emptying, multi-gated
cardiac studies (MUGA), brain flow, and thyroid imaging. We sell this camera to
hospitals as a secondary camera to increase the capacity of the general nuclear
medicine department, or to perform portable studies bedside in CCU, ICU, ER,
surgery, pediatrics or regular patient floors. The system provides the
flexibility to image within multiple departments using a single
asset.
Camera Maintenance Contracts.
We service our domestic customers’ cameras remotely through high-speed Internet
access and dial-up connections that facilitate system diagnosis from our
facilities. When physical repair is required, our modular designs and part
replacement capability allow our field service engineers to perform field
repairs that minimize customer downtime. We also employ applications specialists
to train our customers and provide technical support on the use of our
products.
Competitive
Strengths
We
believe that our position as a market leader in the nuclear cardiac imaging
market is a product of the following competitive strengths:
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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 have continued to
introduce faster and more versatile products, selling them to our
customers and leasing them through our DIS service
business.
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Portable Applications through
Reduced Size and
Weight
. Digirad’s
cameras, depending on the model, weigh anywhere from 450 to 900
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. Our portable cameras are ideal for mobile
operators or practices desiring to service multiple office locations or
imaging facilities, and for use in our DIS in-office service
business.
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Speed and Image
Quality.
We believe our Cardius® 3 XPO and X-ACT rapid imaging
dedicated cardiac cameras can acquire images up to 38% faster than
conventional fixed 90 dual-head vacuum tube camera designs, while
maintaining the same image quality. Increased imaging speed
optimizes workflow and resource utilization. Customers that
purchase nSPEED rapid image acquisition software may increase the
acquisition speed by a factor of two, improve clinical quality or reduce
the patient radiation dose by half. Use of rapid imaging
systems, combined with nSPEED, gives Digirad an efficiency advantage over
other mobile service providers.
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Fully-Integrated low dose
SPECT/VCT Technology.
The interest in our new low dose
volume CT attenuation correction X-ACT system has increased significantly
since its release in mid-2009. With demonstrated performance
and high customer satisfaction at eight luminary sites in the USA during
2009, we have seen the level of interest and number of sales opportunities
increase.
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Improved Patient Comfort and
Utilization.
We believe the upright and open architecture of our
patient chair can reduce patient claustrophobia and increase 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 lie on their backs. Our
Cardius® XPO camera series allows for the imaging of patients weighing up
to 500 pounds.
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Broad Portfolio of
Cardiovascular Imaging Services.
We have the ability to
offer nuclear cardiology, echocardiography and vascular imaging
services. Our ability to offer multiple services strengthens
our competitive position and expands our revenue potential. The
depth of services offered varies depending on the local market
opportunity, availability of personnel and credentialing requirements in
the individual markets.
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Unique Dual Sales and Leasing
Service Offering.
We sell imaging systems to physicians
who wish to perform nuclear imaging in their facilities and manage the
related service logistics. Through DIS, we offer both nuclear and
ultrasound services in which we lease 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.
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Intellectual Property
Portfolio.
We have developed an intellectual property portfolio
that includes product, component and process patents covering various
aspects of our imaging systems. As of December 31, 2009, we had 31 issued
U.S. patents and an additional 12 pending U.S. patent applications. In
addition to our patent portfolio, we have developed proprietary
manufacturing, business know-how, and trade secrets that provide us with a
competitive advantage.
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Business
Strategy
We intend
to achieve and maintain profitability and generate consistent positive cash flow
via the following:
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During
2010, we expect to make changes to our DIS business model and to our
physician-customer partnerships in order to stabilize our DIS business and
absorb the impact of the 2010 reimbursement declines in cardiac nuclear
imaging (36% reduction) and cardiac ultrasound (10% reduction). We expect
to provide greater value in our service channel via strategic and
technological initiatives design to increase revenue per day for the
physician.
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Increased Market Share in
Camera Sales.
Although the overall market for sales of
cardiac-specific gamma cameras has declined, we intend to increase our
market share of the cardiac-specific nuclear market, particularly in
hospitals and large physician practices. We anticipate that our growing
installed base of our Cardius® X-ACT product, introduced in 2009, will
allow us to make inroads into the larger physician practices and expand
our market share in 2010 and
beyond.
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Manufacturing
We
manufacture our gamma cameras and employ a strategy that combines our internal
design expertise and proprietary process technology with strategic
outsourcing. Outsourcing the manufacturing of certain components of
our cameras has resulted in cost efficiencies. We perform subassembly
and final system performance tests at our facility. In addition,
suppliers of our critical materials, components and subassemblies undergo
ongoing quality audits by us.
During
2009, we achieved additional cost efficiencies by implementing Lean Six Sigma
projects on key processes to reduce manufacturing variances. We use
enterprise resource planning and collaborative software to increase efficiency
in the handling and security of inventory, purchasing, and
billing. In 2009, new forecasting software was implemented allowing
separate planning for service demand and product demand with improved
accuracy.
We and
our third-party manufacturers are subject to FDA Quality System Regulations,
state regulations such as those promulgated by the California Department of
Health Services, and standards set by the International Organization for
Standardization, or ISO. We are currently certified to the ISO
13485:2003 quality standard. In 2009, we received certification
authorizing CE Marking of our Cardius® XPO and 2020tc family of gamma
cameras. The CE Mark is a requirement for realizing sales in many
international markets.
Competition
The
medical device industry, including the market for nuclear and ultrasound imaging
systems and services, is highly competitive. Our business in the private
practice sector continues to face the challenge of a decline in demand for
nuclear imaging equipment and services, which we believe reflects the impact of
the Deficit Reduction Act on the reimbursement environment and proposed 2010
Healthcare Reform proposals, as well as competition from new nuclear gamma
camera products and competing imaging modalities, such as CT angiography,
positron emission tomography and hybrid technologies. We believe that the
principal competitive factors in our market include acceptance by physicians,
qualification for reimbursement, pricing, ease of use, reliability and
mobility. In addition, we must maintain the technical leadership of
our gamma cameras and must have an effective marketing and distribution
strategy.
In
providing DIS lease services, we compete against many smaller local and regional
nuclear and/or ultrasound providers, often owner-operators with lower cost
operations. The fixed-installation operators often utilize used equipment and
the mobile operators may use older Digirad single-head cameras or newer
dual-head cameras. Digirad is the only mobile provider equipped with
triple-head mobile systems. Competing operators place new or used
cameras into physician offices and then provide the staffing, supplies and other
support as an alternative to a DIS lease. In addition, we compete against
imaging centers that install nuclear gamma cameras and make them available to
referring physicians in their geographic vicinity.
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 and nuclear medicine,
or SPECT/CT and PET/CT hybrid imaging. 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. Additionally, certain medical device companies are developing
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 name recognition, greater
financial and technical resources, established relationships with healthcare
professionals, more elaborate distribution networks, additional lines of
products and the ability to bundle products to offer discounts, and greater
resources for product development and marketing and sales.
Sales
We
maintain two sales organizations, Product sales and DIS sales, which operate
independently. The sales teams work together to ensure that our
customers make the right decisions in purchasing a gamma camera or leasing
personnel and equipment. DIS sales teams were aligned with the three geographic
regions we have established, which were then split into nine territories
beginning in the first quarter of 2010 in order to better serve local market
needs. Our nuclear and ultrasound imaging business currently has fourteen
dedicated Territory Managers led by the Vice President of Sales. DIS expects to
increase market penetration by executing new quantitative profiling approaches
to identifying suitable physician practices and by expanding the breadth of
available imaging services in select markets to include nuclear medicine,
echocardiography, and vascular. The Product team is divided into nine
territories, each managed by a Regional Sales Specialist. The
specialists sell directly and work closely with distributors in many of the
regions. They focus on hospitals, cardiology practices and large primary care
multi-specialty groups.
Research
and Development
As of
December 31, 2009, our research and development staff consisted of 16 employees.
We have a long and extensive commitment to research and development, including
an established history in developing innovative solid-state gamma
cameras. We have an established core competency in the development of
silicon photodiodes and related scintillator assemblies, signaling processing
electronics and image processing software, which are the core technologies of
our gamma cameras. In March 2009, we announced that we had received
U.S. Food and Drug Administration (FDA) 510(k) clearance for our new Cardius®
X-ACT camera. The X-ACT camera utilizes a patent pending x-ray technology to
provide attenuation correction information for the SPECT
reconstruction.
Our
research and development efforts are primarily focused in the near term on
developing further enhancements to our existing products as well as developing
our next generation products. Our objective is to increase the image quality,
sensitivity and reliability of our imaging systems. Our research and development
expense was $3.4 million, $2.8 million, and $3.1 million in 2009, 2008, and
2007, respectively.
Government
Regulation
We must
comply with a mosaic 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, imprisonment and
exclusion from participation in healthcare programs such as Medicare and
Medicaid. Federal and state governmental agencies are continuing heightened
enforcement efforts in the healthcare industry, and whistleblower cases are
becoming more common. Accordingly, we maintain a vigorous compliance program and
a hotline that permits our personnel to report violations anonymously, if they
wish. Our compliance committee, consisting of senior management and our staff
attorney, meets regularly to provide oversight of our compliance initiatives. We
also conduct periodic audits to help ensure compliance with applicable
laws.
The
following is a summary of some of the laws and regulations governing our
business:
(1)
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 for up to five years 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.
(2)
Physician Self-Referral Laws.
Federal regulations commonly referred to as the Stark Laws 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 an exception
applies. We believe that referrals made by our physician customers generally
should be eligible to qualify for the “in-office ancillary services” exception
to the Stark Laws, 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 Stark Laws, the services are performed in the same building in which
the physicians regularly practice medicine, and the services are billed by or
for the “Group Practice.” Violations of the Stark Laws 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.
(3)
Federal False Claims Act.
The
federal False Claims Act imposes civil and criminal liability on individuals or
entities for the submission of false or fraudulent claims for payment to the
government. Violations of the federal False Claims Act may result in civil
penalties and exclusion from participation in federal healthcare programs. The
federal False Claims Act also allows a private individual to bring a qui tam
suit on behalf of the government against an individual or entity for violations
of the False Claims Act. In a qui tam suit, a private plaintiff initiates a
lawsuit for money of which the government was defrauded. If successful, the
private plaintiff is entitled to receive up to 30% of the recovered amount plus
reasonable expenses and attorney’s fees. A number of states have enacted laws
modeled after the False Claims Act.
(4)
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
regulation. Effective February 17, 2010, we are regulated directly
under all of the HIPAA rules protecting the security of electronic individually
identifiable health information and many of the rules governing the privacy of
such information. In addition, the statute significantly increases
and strengthens the penalties and enforcement of the HIPAA privacy and security
rules.
(5)
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, or devices deemed not substantially
equivalent to a previously cleared 510(k) device, 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. After a device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness or that would constitute a
major change in its intended use requires a new 510(k) clearance. The FDA
requires each device manufacturer to determine whether a modification requires a
new clearance or approval, but the FDA can disagree with a manufacturer’s
determination. If so, the FDA can require the manufacturer to cease marketing
and/or recall the modified device until 510(k) clearance or approval is
obtained. We are also subject to post-market regulatory requirements relating to
our manufacturing process, marketing and sales activities, product performance
and medical device reports related to deaths and serious injuries associated
with our products.
(6)
Pharmaceutical Regulation.
Federal and state agencies, including the FDA and state pharmacy boards,
regulate the radiopharmaceuticals used in our DIS business. These agencies
administer laws governing the manufacturing, sale, distribution, use,
administration, prescribing, and dispensing of drugs. Some of our activities may
be deemed by relevant agencies to require permits or licensure that we currently
do not possess.
(7)
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. In
our case, the authorized user must be a physician with training and expertise in
the use of radioactive materials for diagnostic purposes. We have entered into
contracts with qualified physicians in each of our regions to serve as
authorized users. Because our physician customers in our lease services business
are not licensees, and in most cases are not qualified to serve as authorized
users, they perform nuclear medicine procedures as “supervised
persons.”
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. As of December 31, 2009, we had 31 issued U.S. patents and 12 pending
U.S. patent applications. The issued and pending patents cover, among other
things, aspects of solid-state radiation detectors including our photodiodes,
signal processing, and system configuration. Our issued patents expire between
December 23, 2014 and October 20, 2029. We have multiple patents covering
unique aspects and improvements for many of our products. We have entered into a
royalty-bearing license for one U.S. patent with a third party, where we are the
licensee, for exclusive use in nuclear imaging (subject to certain reservation
of rights by the U.S. Government). In addition to our solid-state detector
and photodiode technology patents, we hold specific patents for an alternative
solid-state method using Cadmium Zinc Telluride that we previously pursued for
use in gamma cameras. While each of our patents applies to nuclear medicine,
many also apply to the construction of area detectors for other types of medical
imagers and imaging methods.
Trademarks
As of
December 31, 2009, we hold trademark registrations in the United States for the
following marks: 2020
tc
IMAGER
®
,
AcqSmart
®
,
CardiusSST
®
,
Digirad
®
,
Digirad Imaging Solutions
®
,
DigiServ
®
,
FlexImaging
®
,
Cardius
®
,
nSPEED
®
,
SPECTour
®
,
SPECTpak Plus
®
,
Solidium
®
,
DigiServ
®
,
and DigiTech
®
, We
have trademark applications pending in the United States for the following
marks: SeeQuanta
™
,
Stasys
™
,
Cardius
®
X-ACT, and TruAcq CountBased Imaging
™
. We
have obtained and sought trademark protection for some of these listed marks in
the European Community 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 is
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. 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. For instance, the final Medicare
physician fee schedule payment rule for 2010 will implement, over a four-year
period, a reduction in the practice expense portion of reimbursement for
radiology services, resulting in a relative reduction in payment for radiology
services.
In
addition, Congress is now debating various healthcare reform proposals that are
intended to expand the availability of healthcare coverage and reduce the growth
in healthcare spending in the U.S. The House of Representatives has
already passed a healthcare reform bill. Many of those proposals
would impact the services that our customers provide. For instance,
many reform proposals would change the reimbursement calculations for radiology
by increasing the assumptions regarding radiology utilization, resulting in a
cut in radiology reimbursement We are unable to predict the
full impact of health care reform on the diagnostic radiology services that our
customers provide.
Medicare reimbursement rules impose many standards and
policies on the payment of services that our customers provide. For
instance, the Medicare prohibition on the “mark-up” of diagnostic tests can
restrict what a physician may charge Medicare for diagnostic
tests. Medicare also imposes medical necessity and other standards on
physician and facilities that bill Medicare for services.
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 Outpatient Prospective Payment
System.
Employees
As of
December 31, 2009, we had a total of 413 employees, of which 273 were employed
in clinical and regulatory positions, 64 in operations roles, 33 in general and
administrative functions, 27 in marketing and sales and 16 in research and
development. We had a total of 292 employees in our DIS subsidiary. None of our
employees are represented by a labor union. We have not experienced any work
stoppages and consider our employee relations to be good.
Available
Information
We file
electronically with the Securities and Exchange Commission, or SEC, our annual
reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on
Form 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934. The public may read or copy any materials we file with the SEC at the
SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC. The address
of that site is
http://www.sec.gov.
You may
obtain a free copy of our annual reports on Form 10-K, quarterly reports on Form
10-Q, and current reports on Form 8-K and amendments to those reports on the day
of filing with the SEC on our website at
http://www.digirad.com
, by
contacting the Investor Relations Department at our corporate offices by calling
858-726-1600 or through our investor relations consultants at Allen & Caron,
Inc. by calling 949-474-4300.
Ite
m 1A. Risk Factors
We are subject to changing health care regulatory rules
which could adversely affect
us.
Various
potential changes to health care regulatory rules could
require us to change our operations significantly and could harm us
financially. Nucle
ar 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 an exception applies. DIS’
physician customers may be able to meet the “in-office ancillary services”
exception to the Stark Law if they meet the definition of a “Group Practice”
under Stark,
appropriately
supervise the individuals performing the nuclear
imaging services and bill for them, and if the services are performed in the
same building in which the physicians regularly practice medicine. From time to
time, the Centers for Medicare & Medicaid Services (CMS) and Congress have
proposed to modify the Stark regulations in a manner that may restrict
physicians in some business arrangements from utilizing the in-office ancillary
services exception to the Stark Law.
The competing healthcare reform/availability proposals
under consideration by the Legislative and Administrative branches of the
federal government could have a positive or negative impact on our business
depending on which plan and provisions are adopted with respect to how medical
providers are reimbursed, services are authorized and diagnostic services and
investments are addressed. The potential adoption of healthcare
reform proposals on a state-by-state basis could require us to develop
state-specific marketing and sales approaches and adversely affect the results
of operations.
Our
revenues may decline due to reductions in Medicare reimbursement rates and/or
increased third-party payor certification requirements.
The
success of our DIS business is largely dependent on our customers’ ability to
build a financially viable imaging business utilizing leased DIS personnel and
equipment and radiopharmaceuticals. Our customers have been faced with the
downward trend in Medicare reimbursement rates, as well as the continuing
efforts by some third-party payors to reduce health care expenditures by
requiring physicians to obtain specific accreditations or certifications, and
their efforts to restrict the use of mobile or leased cameras.
Various
proposals have been introduced in Congress to reduce reimbursement rates for the
diagnostic tests performed by our purchase and lease customers. If
passed as written, there will be a significant reduction in imaging
reimbursement that will require us to quickly adapt our business model. If we
are not able to quickly adapt, such as where change requires the submission of
applications to government entities or third-party payors, there could be a
detrimental impact on our revenue.
The
American Recovery and Reinvestment Act of 2009 (the stimulus bill) adopted in
early 2009 contains provisions for federal use of radiology benefit managers
(RBM) whose main goal is to limit the use of diagnostic imaging services,
especially those not performed by radiologists. Private carriers are similarly
adopting the services of these RBMs that may require pre-certification,
pre-authorization and other pre-service requirements or denials of the
diagnostic imaging performed by our customers. These developments could have a
detrimental impact on our revenues by either reducing the number of potential
customers for our products or leasing services or leading to delays in new
business activity.
We may incur
losses due to the downturn in the U.S. economy
.
Our
revenues have been impacted, and may be significantly further impacted, by the
downturn in the U.S. economy which may drive greater pricing pressures from our
competition, further decrease the number of cameras that we are able to sell, or
lead to disruptions in our supply chain, any or all of which could result in
operating losses or negative cash flows. Further, we cannot assure
that an improvement in economic conditions would result in an immediate
improvement in our operating results or cash flows.
Our
business is not widely diversified.
We sell
products and lease our imaging systems and personnel primarily in the cardiac
nuclear and ultrasound imaging markets. We may not be able to leverage our
assets to diversify our products and services in order to generate revenue
beyond the cardiac nuclear and ultrasound imaging markets in a timely manner. If
we are unable to diversify our product and service offerings, our financial
condition may suffer.
We
compete against businesses that have significantly greater resources than
us.
The
market for cardiac nuclear imaging cameras continues to decrease, thereby making
competition a greater challenge. Our competition has negatively impacted our
sales prices and volume. Some of our competitors enjoy significant advantages
over us, including greater name recognition, greater financial and technical
resources, established relationships with healthcare professionals, larger
distribution networks, and greater resources for product development as well as
marketing and sales. Additionally, certain medical device companies have
developed alternative portable cameras that directly compete with our product
offerings. If we are unable to expand our current market share, our revenues
could decline.
In
addition, our DIS customers may switch to other service providers. Our DIS
segment competes against small local, owner-operated or regional businesses,
some of whom have the advantage of a lower cost structure, and 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
operations are highly dependent upon the availability of certain
radiopharmaceuticals and third-party suppliers, thereby making us vulnerable to
supply problems and price fluctuations, which could harm our
business.
Our
personnel and equipment leasing service involves the use of certain
radiopharmaceuticals. We have experienced disruptions in the supply
of these radiopharmaceuticals which have caused us to cancel services that would
have otherwise been provided. If we are unable to obtain an adequate
supply of the necessary radiopharmaceuticals, we may be unable to lease our
personnel and equipment through our DIS operations and our business may be
harmed.
During
2009, there was a significant reduction in the availability of radioactive
medical isotopes worldwide. For example, a nuclear reactor in Chalk River,
Ontario, which supplies 50% of certain medical isotopes to the United States
market, is currently off-line for repairs and will not return to service before
spring 2010. The lack of production of radiopharmaceuticals in Canada has
exacerbated an already short supply of medical isotopes worldwide.
Continued shortages could affect our DIS business by reducing the number of days
of service or moving physicians toward alternate imaging modalities. Our
financial condition could be adversely affected under such
circumstances.
In
addition, we rely on a limited number of third parties to manufacture and supply
certain key components of our products. Alternative sources of production and
supply may not be readily available. For example, key components of the detector
heads and the processing and control software utilized in our gamma cameras are
manufactured or supplied by a single source. We have also outsourced production
of significant portions of our end product to a single contract manufacturer. If
a disruption in the availability of parts or in the operations of these
suppliers were to occur, our ability to build gamma cameras could be materially
affected. For this reason, we have backup plans in place that are
designed to prevent delays in production. If these plans are
unsuccessful, delays in the production of our gamma cameras for an extended
period of time could cause a loss of revenue, which could significantly harm our
business and results of operations.
Failure
to retain qualified technologists could limit our growth and adversely affect
our business.
Our
future growth and ability to generate profits depends, in part, upon our ability
to identify, hire, and retain nuclear medicine technologists, certified
cardiographic technicians, and ultrasound technologists. The inability to retain
such employees would diminish the knowledge and experience that we, as an
organization, possess and might delay or prevent the achievement of our
objectives. Hiring qualified technical personnel may be difficult due to the
limited number of qualified candidates and the intense competition for these
types of employees. Furthermore, we have historically suffered high employee
turnover in regards to imaging technologists. If we are unable to reduce
employee turnover, our business and financial condition may be adversely
affected.
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 the leasing services offered by our DIS
operations. While our physicians are obligated to pay us for all lease days to
which they have committed, our contracts permit some flexibility in scheduling
when services are to be performed. We cannot predict with certainty the degree
to which seasonal circumstances such as the summer slowdown, winter holiday
vacations and weather conditions may affect the results of our operations. We
have also experienced fluctuations in demand of our cardiac nuclear gamma
cameras due to economic conditions, capital budget availability or 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
our quarter-to-quarter comparisons. Moreover, the sales cycle in our
Product segment for our cameras is typically lengthy, which may cause us to
experience significant revenue fluctuations. For these reasons, quarterly and
annual sales and operating results may vary in the future. Therefore,
period-to-period comparisons of our results of operations are not necessarily
meaningful and should not be relied upon as indicators of future performance.
Because of these and other factors, our operating results in one or more future
reporting periods may fail to meet the expectations of securities analysts or
investors, which could cause our stock price to decline
significantly.
Our
common stock is thinly traded and our options plan could affect the trading
price of our common stock.
Our
common stock is thinly traded and any significant sales of our common stock may
cause volatility in our common stock price. We also have registered shares
of common stock that we may issue under our employee benefit plans or from our
treasury stock. Accordingly, these shares can be freely sold in the public
market upon issuance, subject to restrictions under the securities laws. If any
of these stockholders cause a large number of securities to be sold in the
public market, the sales could reduce the trading price of our common
stock. Stockholders holding a significant amount of our common stock
will 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.
W
e spend considerable time and money complying with
federal and state laws, regulations and other rules, and if we are unable
to comply with
such
laws, regulations and
other rules
, we could face substantial
penalties
.
We
are
directly, or indirectly through our
clients,
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 the requirements for
coverage and payment for services performed by us and our DIS customers; the
federal False Claims statutes; the federal Health Insurance Portability and
Accountability Act of
1996, or HIPAA
; 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 DIS customers are unable or
unwilling to comply with these statutes, regulations, rules and policies,
utilization rates of our services and products could decline and our business
could be harmed.
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 customers are
found to be non-compliant with applicable laws, they may be subject to sanctions
which could have a negative impact on us. If we are excluded from federal or
state health care programs, our customers who participate in those programs
could not do business with 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.
Our
manufacturing operations and executive offices are located at a single facility
that may be at risk from fire, earthquakes or other disasters.
Our
manufacturing operations and executive offices are located in a single facility
in Poway, California, near known fire areas and earthquake fault
zones. Any future natural disaster could cause substantial delays in
our operations, damage to our manufacturing equipment and inventory, and cause
us to incur additional expenses. Although we have taken precautions to insure
our facilities and continuing operations, this may not be adequate to cover our
losses in any particular case. A disaster could significantly harm our business
and results of
operations.
The
medical device
industry is litigious, which could result in the diversion of our management’s
time and efforts, and require us to pay damages which may not be covered by our
insurance.
Our
operations entail risks of claims or litigation relating to product liability,
radioactive contamination, patent infringement, trade secret disclosure,
warranty claims, product recalls, property damage, misdiagnosis, 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 profitable could be
diminished.
Our
ability to protect our intellectual property and proprietary technology through
patents and other means is uncertain.
Our
success depends significantly on our ability to protect our proprietary rights
to the technologies used in our products. Our pending U.S. and foreign patent
applications, which include claims to material aspects of our products and
procedures that are not currently protected by issued patents, may not issue as
patents in a form that will be advantageous to us. 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 may 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.
Anti-takeover
provisions in our organizational documents, our Stockholders Rights Plan and
Delaware law may prevent or delay removal of current management or a change in
control.
Our
restated certificate of incorporation and restated bylaws contain provisions
that may delay or prevent a change in control, discourage bids at a premium over
the market price of our common stock, and adversely affect the market price of
our common stock and the voting and other rights of the holders of our common
stock. The rights issued pursuant to our Stockholder Rights Plan will become
exercisable, subject to certain exceptions, the tenth day after a person or
group announces acquisition of 15% or more of our common stock or announces
commencement of a tender or exchange offer, the consummation of which would
result in ownership by the person or group of 15% or more 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.
Ite
m 1B. Unresolved Staff Comments
None
Ite
m 2. Properties
Our
Product and DIS operations are headquartered in an approximately 47,000 square
foot facility in Poway, California that is leased to us until February 2016. We
believe that our existing facility is adequate for our current needs. In
addition, DIS leases approximately 31 small hub locations in the various states
in which we operate, which primarily house our fleet of cameras and vans. The
lease terms typically range between two and four years.
Ite
m 3. Legal Proceedings
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.
As litigation and the administrative proceedings are inherently uncertain, we
cannot predict the outcome of such matters. While the ultimate outcome of
litigation is always uncertain, we do not believe that it will have a material
adverse effect on our business or financial results.
It
em 4. Submission of Matters to a Vote of Security
Holders
None
Ite
m 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
Market
Information
Our
common stock has been traded on the NASDAQ National Market since June 10,
2004 under the symbol DRAD. Prior to such time, there was no public market for
our common stock. The following table sets forth the high and low closing sales
prices for our common stock as reported on the NASDAQ National Market for the
periods indicated.
|
High
|
Low
|
|||||||
|
Year
Ended December 31, 2008
|
||||||||
|
First
Quarter
|
$ | 3.63 | $ | 2.59 | ||||
|
Second
Quarter
|
3.00 | 2.11 | ||||||
|
Third
Quarter
|
2.20 | 1.14 | ||||||
|
Fourth
Quarter
|
1.20 | 0.48 | ||||||
|
High
|
Low
|
|||||||
|
Year
Ended December 31, 2009
|
||||||||
|
First
Quarter
|
$ | 1.10 | $ | 0.64 | ||||
|
Second
Quarter
|
1.60 | 1.08 | ||||||
|
Third
Quarter
|
2.99 | 1.18 | ||||||
|
Fourth
Quarter
|
2.81 | 1.88 | ||||||
As of
January 27, 2010, there were approximately 211 holders of record of our common
stock.
Dividend
Policy
We have
never declared or paid cash dividends on our capital stock. We currently intend
to retain all available funds and any future earnings for use in the operation
and expansion of our business and do not anticipate paying any cash dividends in
the foreseeable future.
Sales
of Unregistered Securities
None.
Repurchases
of Equity Securities
On
February 4, 2009, our Board of Directors approved a stock repurchase program
whereby we may, from time to time, purchase up to $2.0 million worth of our
common stock in the open market, in privately negotiated transactions or
otherwise, at prices that we deem appropriate. The plan has no expiration date.
Details of purchases made during 2009 are as follows:
|
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
|
|||||||||||||
|
Period:
|
|
|||||||||||||||
|
February
4, 2009 — February 28, 2009
|
8,700 | $ | 0.98 | 8,700 | $ | 1,991,474 | ||||||||||
|
March
1, 2009 — March 31, 2009
|
2,600 | 0.99 | 11,300 | 1,988,900 | ||||||||||||
|
May
1, 2009 — May 31, 2009
|
183,500 | 1.26 | 194,800 | 1,758,352 | ||||||||||||
|
June
1, 2009 — June 30, 2009
|
14,300 | 1.25 | 209,100 | 1,740,438 | ||||||||||||
|
August
1, 2009 — August 30, 2009
|
226,118 | 2.04 | 435,218 | 1,279,640 | ||||||||||||
|
September
1, 2009 — September 30, 2009
|
14,000 | 2.11 | 449,218 | 1,250,085 | ||||||||||||
|
November
1, 2009 — November 30, 2009
|
93,200 | 2.28 | 542,418 | 1,037,627 | ||||||||||||
|
December
1, 2009 — December 31, 2009
|
5,000 | 2.38 | 547,418 | $ | 1,025,739 | |||||||||||
|
Year
ended December 31, 2009:
|
547,418 | $ | 1.78 | |||||||||||||
In
addition to the above purchases, John Sayward, a member of our board of
directors and an affiliated purchaser as defined in Rule 10b-18(a)(3), purchased
20,000 shares of common stock in the open market at an average price of $1.02
per share in February 2009.
Equity
Compensation Plans Information
The
information required by this item will be contained in our definitive proxy
statement to be filed with the Securities and Exchange Commission in connection
with the Annual Meeting of our Stockholders, which is expected to be filed not
later than 120 days after the end of our fiscal year ended December 31, 2009
(the “Proxy Statement”), and is incorporated in this report by
reference.
Performance
Graph
The
following performance graph illustrates a comparison of total cumulative
stockholder return on our common stock since June 10, 2004, the date of our
initial public offering, to two indices: (i) the Center for Research in Security
Prices or CRSP Total Return Index for the Nasdaq Stock Market; and (ii) a peer
group industry index or Peer Group Index, which is based on the standard
industrial code for surgical medical and dental instruments and
supplies. The graph assumes an initial investment of $100 on June 10,
2004 and that all dividends have been reinvested. No cash dividends
have been declared on our common stock. The comparisons in the graph 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.
15
| 2004 |
2005
|
2006
|
2007
|
2008
|
2009
|
||||||||||||||||||||
|
DIGIRAD
CORP
|
Return
%
|
-54.58 | 2.49 | -11.64 | -84.07 | 262.04 | |||||||||||||||||||
|
Cum
$
|
100.00 | 45.42 | 46.55 | 41.13 | 6.55 | 23.73 | |||||||||||||||||||
|
NASDAQ
Stock Market (US Companies)
|
Return
%
|
2.13 | 9.84 | 8.45 | -51.80 | 35.91 | |||||||||||||||||||
|
Cum
$
|
100.00 | 102.13 | 112.18 | 121.67 | 58.64 | 79.70 | |||||||||||||||||||
|
NASDAQ
Medical Equipment Index
|
Return
%
|
9.81 | 5.39 | 27.16 | -46.14 | 36.89 | |||||||||||||||||||
|
Cum
$
|
100.00 | 109.81 | 115.73 | 147.16 | 79.25 | 108.49 | |||||||||||||||||||
Notes:
|
A:
|
Data
complete through December 31, 2009.
|
|
B:
|
Index
Data: Calculated (or Derived) based from CRSP NASDAQ indexes, Center for
Research in Security Prices (CRSP®), Graduate School of Business, The
University of Chicago. Copyright
2010.
|
Ite
m 6. Selected Consolidated Financial Data
The
following selected financial data should be read in conjunction with our
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.
|
Years Ended
December 31,
|
||||||||||||||||||||
|
Statement
of Operations Data:
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Revenues:
|
||||||||||||||||||||
|
DIS
|
$ | 52,318 | $ | 56,204 | $ | 52,440 | $ | 49,614 | $ | 50,194 | ||||||||||
|
Product
|
17,278 | 24,154 | 21,507 | 22,312 | 17,992 | |||||||||||||||
|
Total
revenues
|
69,596 | 80,358 | 73,947 | 71,926 | 68,186 | |||||||||||||||
|
Cost
of revenues:
|
||||||||||||||||||||
|
DIS
|
38,476 | 44,697 | 39,520 | 37,675 | 37,376 | |||||||||||||||
|
Product
|
10,895 | 15,590 | 13,909 | 15,192 | 15,564 | |||||||||||||||
|
Total
cost of revenues
|
49,371 | 60,287 | 53,429 | 52,867 | 52,940 | |||||||||||||||
|
Gross
profit
|
20,225 | 20,071 | 20,518 | 19,059 | 15,246 | |||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||
|
Research
and development
|
3,360 | 2,764 | 3,072 | 3,894 | 3,747 | |||||||||||||||
|
Marketing
and sales
|
6,977 | 8,554 | 7,670 | 8,827 | 7,420 | |||||||||||||||
|
General
and administrative
|
8,921 | 11,805 | 11,920 | 14,535 | 14,903 | |||||||||||||||
|
Amortization
and impairment of intangible assets
|
590 | 798 | 697 | 27 | 179 | |||||||||||||||
|
Restructuring
loss
|
319 | 1,308 | — | — | — | |||||||||||||||
|
Goodwill
impairment loss
|
— | 2,466 | — | — | — | |||||||||||||||
|
Total
operating expenses
|
20,167 | 27,695 | 23,359 | 27,283 | 26,249 | |||||||||||||||
|
Income
(loss) from operations
|
58 | (7,624 | ) | (2,841 | ) | (8,224 | ) | (11,003 | ) | |||||||||||
|
Other
income (expense), net
|
550 | 759 | 1,465 | 1,934 | 1,384 | |||||||||||||||
|
Net
income (loss)
|
$ | 608 | $ | (6,865 | ) | $ | (1,376 | ) | $ | (6,290 | ) | $ | (9,619 | ) | ||||||
|
Net
income (loss) per share:
|
||||||||||||||||||||
|
Basic
and diluted
|
$ | 0.03 | $ | (0.36 | ) | $ | (0.07 | ) | $ | (0.34 | ) | $ | (0.52 | ) | ||||||
|
Shares
used in per share calculations:
|
||||||||||||||||||||
|
Basic
|
19,073 | 18,955 | 18,845 | 18,761 | 18,468 | |||||||||||||||
|
Diluted
|
19,557 | 18,955 | 18,845 | 18,761 | 18,468 | |||||||||||||||
|
As of December 31,
|
||||||||||||||||||||
|
Balance
Sheet Data:
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Cash,
cash equivalents and securities
|
$ | 31,810 | $ | 28,284 | $ | 31,662 | $ | 44,326 | $ | 49,505 | ||||||||||
|
Working
capital
|
37,826 | 33,650 | 33,905 | 45,788 | 50,660 | |||||||||||||||
|
Total
assets
|
58,689 | 61,195 | 69,015 | 69,277 | 74,504 | |||||||||||||||
|
Total
debt
|
— | 106 | 213 | 368 | 1,134 | |||||||||||||||
|
Total
stockholders’ equity
|
49,389 | 48,959 | 55,247 | 55,445 | 59,988 | |||||||||||||||
Ite
m 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 consolidated financial
statements and related notes included elsewhere in this report.
Overview
We are a
leading provider of diagnostic imaging products and personnel and equipment
leasing services that improve patient care while driving positive healthcare
economics. 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 a portable or a fixed configuration, and provide
enhanced operability, improved patient comfort and, in the case of our
triple-headed Cardius® 3 XPO system, shorter image acquisition time when
compared to traditional vacuum tube cameras. 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.
We
generate revenues within two primary operating segments: our personnel and
equipment leasing service business (Digirad Imaging Solutions, or “DIS”) and our
Product segment. Through DIS, we offer a comprehensive personnel and equipment
leasing services program as an alternative to purchasing a gamma camera or
ultrasound machine for physicians who wish to perform nuclear imaging,
echocardiography, vascular ultrasound, or any combination of these procedures in
their offices by leasing the imaging system, certified personnel and other
support required to perform imaging in the physician’s office. The flexibility
of our products and our DIS leasing service allows physicians more control over
the diagnosis and treatment of their patients in their offices and to retain
revenue from procedures they would otherwise refer elsewhere. DIS leasing
services are primarily provided to cardiologists and internists who enter into
annual contracts for personnel and equipment services delivered on a per-day
basis. Our typical lease contracts provide service coverage ranging from once
per month to three times per week. We experience some seasonality in our DIS
business related to summer vacations, holidays and inclement weather, which
historically has most negatively affected our third quarter. Our
Product revenue results primarily from selling solid-state gamma cameras and
from the sale of camera maintenance contracts. We sell our imaging systems to
physician offices, hospitals, and imaging centers primarily in the United
States, although we have sold a small number of imaging systems
internationally.
Our
Market
The
target market for our products and services is comprised of approximately 26,000
cardiologists, 130,000 internists and family practitioners, and hospitals in the
United States that perform or could perform nuclear cardiac and ultrasound
procedures. As of December 31, 2009, we have provided imaging services through
DIS to almost 1,100 physicians and physician groups and have sold 639 cameras
through our Product segment. We believe our market has been
negatively affected by declining reimbursements from Medicare and Medicaid
programs, pricing pressures, and continuing efforts by some third-party payors
to reduce healthcare expenditures by requiring physicians to obtain specific
accreditations or certifications, or disallowing reimbursement if imaging is
performed with portable or leased cameras. We expect each of these trends to
continue.
Trends
and Drivers
The
medical device industry, including the market for nuclear and ultrasound imaging
systems and services, is highly competitive. Our business continues to be
negatively affected by many factors, including declining healthcare
reimbursement rates for cardiac imaging procedures, competition from alternative
imaging modalities such as CT angiography, and declining average selling prices
for our product offerings. According to industry sources, despite the
improved image quality and increasing utilization rates of competing modalities
such as computed tomography (CT), positron emission tomography (PET), and
magnetic resonance imaging (MRI), and diagnostic procedures such as CT
angiography, SPECT procedures performed with gamma cameras will continue to be
used for a substantial number of cardiac specific nuclear imaging
procedures. We believe continued utilization will be due to 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, such as CT, to
form hybrid imaging modalities, such as SPECT/CT, resulting in improved clinical
quality and diagnostic certainty. We believe that the principal
competitive factors in our market include acceptance by physicians,
qualification for reimbursement, pricing, ease of use, reliability and
mobility. In addition, we must maintain the technical leadership of
our gamma cameras and must have an effective marketing and distribution
strategy.
During
2009, we achieved our goals in attaining profitability and positive cash flow
despite a downturn in the economy, declines in reimbursement rates from federal
healthcare programs, and a shortage of radiopharmaceuticals used in the leasing
of equipment. Our consolidated operating profit increased by $7.7
million to $0.1 million in 2009, and we increased our cash and investments in
securities by $3.5 million to $31.8 million. Our achievements were
the direct result of greater efficiencies created by selling or closing
underperforming DIS hub locations, flattening the management structure, and
continuing our focus on creating more leverage from our Centers of Influence
(COI) strategy, which pairs DIS and leading academic or regional medical centers
with community-based physicians in locations with high potential for
growth. 2009 also saw the introduction of our new product: the
Cardius® X-ACT camera. This camera uses the Cardius® 3 XPO solid-state detectors
with an x-ray tube, and is setting a new clinical standard for cardiac SPECT
with attenuation correction. The X-ACT approach exploits the high-count rate
capabilities of solid-state detectors and takes advantage of the full 24-inch
wide triple-head detector geometry to eliminate truncation in the attenuation
scan. The imaging system offers the benefits of high precision, faster speed and
ultra-low patient dose. Our X-ACT systems have already been sold to a
number of leading hospitals.
In 2010,
we will continue our focus on profitability and positive cash
flow. In the first quarter of 2010, we restructured our DIS
organization into nine territories to provide greater autonomy and control over
local sales and operations activities. We expect this structure to
offer greater efficiencies and adaptability to local market needs and
conditions. To offset expected reimbursement declines for
cardiovascular imaging procedures in 2010, we intend to implement new types of
ultrasound equipment services that will expand our available product offerings
in many of our service areas and increase the potential maximum daily patient
volume. In addition, we have developed more efficient ways to
identify qualified potential customers from our COI strategy, which will enable
us to further penetrate the available market. In our Product segment,
we expect to introduce our products for sale and expand our market share by
leveraging our growing installed base of satisfied Cardius® X-ACT customers.
2009
Highlights
Our
consolidated revenues were $69.6 million during 2009, a decrease of $10.8
million, or 13.4%, from the prior year, driven by a decrease in camera sales in
our Product segment as well as a decrease in imaging services revenue in our DIS
segment. In the Product segment, revenue decreased $6.9 million, or 28.5%, as a
result of decreased gamma camera sales due in part to economic-driven tightening
of hospital capital budgets and limitations on the availability of credit for
our traditional customer base. DIS revenue decreased $3.9 million, or 6.9%,
primarily as a result of discontinuance of business in the hubs sold or closed
in connection with our hub restructuring plan initiated in 2008.
Our DIS
business currently operates in 19 states. As of December 31, 2009,
DIS operated 75 nuclear gamma cameras and 62 ultrasound imaging systems,
compared to 98 nuclear gamma cameras and 62 ultrasound imaging systems as of
December 31, 2008. We believe we can improve our profitability by
improving the utilization of our fleet of gamma cameras and ultrasound
machines. We measure efficiency by tracking system utilization, which
is measured on the percentage of days that our nuclear and ultrasound imaging
machines are used to deliver services to customers out of the total number of
days that they are available to deliver such services. System
utilization increased to 64% in 2009, compared to 58% in 2008.
Results
of Operations
The
following table sets forth our results from operations, expressed as percentages
of total revenues for the years ended December 31, 2009, 2008 and
2007:
|
2009
|
2008
|
2007
|
||||||||||
|
Revenues:
|
||||||||||||
|
DIS
|
75.2 | % | 69.9 | % | 70.9 | % | ||||||
|
Product
|
24.8 | 30.1 | 29.1 | |||||||||
|
Total
revenues
|
100.0 | 100.0 | 100.0 | |||||||||
|
Total
cost of revenues
|
70.9 | 75.0 | 72.3 | |||||||||
|
Gross
profit
|
29.1 | 25.0 | 27.7 | |||||||||
|
Operating
expenses:
|
||||||||||||
|
Research
and development
|
4.8 | 3.4 | 4.2 | |||||||||
|
Marketing
and sales
|
10.0 | 10.6 | 10.4 | |||||||||
|
General
and administrative
|
12.8 | 14.8 | 16.0 | |||||||||
|
Amortization
and impairment of intangible assets
|
0.9 | 1.0 | 0.9 | |||||||||
|
Restructuring
loss
|
0.5 | 1.6 | — | |||||||||
|
Goodwill
impairment loss
|
— | 3.1 | — | |||||||||
|
Total
operating expenses
|
29.0 | 34.5 | 31.5 | |||||||||
|
Income
(loss) from operations
|
0.1 | (9.5 | ) | (3.8 | ) | |||||||
|
Other
income, net
|
0.8 | 1.0 | 1.9 | |||||||||
|
Net
income (loss)
|
0.9 | % | (8.5 | )% | (1.9 | )% | ||||||
Comparison
of Years Ended December 31, 2009 and 2008
Revenues
Consolidated.
Consolidated
revenue was $69.6 million for 2009, which represents a decrease of $10.8
million, or 13.4%, compared to the prior year, as a result of lower Product and
DIS revenues. DIS revenue accounted for approximately 75% of total revenues for
2009, compared to approximately 70% for 2008. We expect DIS revenue to continue
to represent the larger percentage of our consolidated revenue in future
periods.
DIS.
Our DIS revenue
was $52.3 million for 2009, which represents a decrease of $3.9 million, or
6.9%, compared to the prior year. The decrease resulted from the sale
or closure of underperforming locations in connection with the restructuring
plan initiated in the fourth quarter of 2008, partially offset by revenue
increases from our current locations. In the future, we expect DIS
revenue to fluctuate throughout the year based on seasonality stemming from
physician vacations, holidays and inclement weather. Also, declines in
reimbursement rates may substantially affect our DIS revenue.
Product.
Our product
revenue was $17.3 million for 2009, which represents a decrease of $6.9 million,
or 28.5%, compared to the prior year. This decrease in revenue was
primarily due to a decrease in the number of gamma cameras sold in 2009 to 45
cameras compared to 85 cameras sold in the prior year and the lowering of
average sales prices as our product sales mix was represented by a larger
percentage of refurbished cameras. The decrease in revenue was
partially offset by an increase in maintenance contract revenues to $10.3
million in 2009 from $9.1 million in the prior year due to the expansion of our
installed base of gamma cameras. We believe that the decrease in
gamma camera sales and the demand for refurbished cameras was due to the slowing
economy, the reduction in available credit for potential buyers, lower levels of
available capital budgets and the continued downward pressure on healthcare
imaging reimbursement rates. To offset continued pricing pressures
and declines in reimbursement rates on our gamma cameras, we introduced our new
Cardius® X-ACT product in 2009, which we believe will increase sales to the
hospital market.
Gross
Profit
Consolidated.
Consolidated
gross profit was $20.2 million for 2009, which was essentially unchanged in
comparison to the prior year, as the increased gross profits at our DIS segment
were offset by a decrease in gross profits at our Product
segment. The increase in gross profit at our DIS segment were due to
the realignment of this segment initiated in the fourth quarter of 2008,
increased utilization of our DIS assets and reduced personnel costs and other
efficiency and cost improvements. The decrease in Product segment gross profit
is principally the result of fewer camera sales, offset slightly by an increase
in Product maintenance contract gross profit. Consolidated gross
profit as a percentage of revenue increased to 29.1% in 2009 from 25.0% for
2008.
DIS
. Cost of DIS revenue
consists primarily of labor, radiopharmaceuticals, equipment depreciation, and
other costs associated with the provision of services. Cost of DIS revenue was
$38.5 million for 2009, representing a decrease of $6.2 million, or 13.9%,
compared to the prior year. The decrease in cost of DIS revenue is
primarily a result of decreased labor, radiopharmaceutical, and depreciation
costs predominantly attributed to the increased utilization of our personnel and
assets. DIS gross profit was $13.8 million for 2009, which represents
an increase of $2.3 million, or 20.3%. DIS gross profit as a percentage of
revenue increased to 26.5% for 2009 from 20.5% for 2008. The
improvement in operational performance is primarily associated with the
realignment of the segment, which included the sale or closure of
underperforming locations and a focus on selling within certain geographical
areas, along with improved asset utilization.
Product
. Cost of Product
revenue primarily consists of materials, labor and overhead costs associated
with the manufacturing and warranty of our products. Cost of goods sold for the
Product segment was $10.9 million for 2009, representing a decrease of $4.7
million, or 30.1%, compared to the prior year as fewer gamma cameras were sold
and as our product sales mix was represented by a larger percentage of
refurbished cameras. Product gross profit was $6.4 million for 2009,
representing a decrease of $2.2 million, or 25.5%, compared to the prior
year. Product gross profit as a percentage of revenue increased to
36.9% for 2009 from 35.5% for 2008, primarily due to the sale of proportionately
more higher margin refurbished cameras and a decrease in personnel and
manufacturing overhead costs as a result of our cost reduction
initiatives.
Operating
Expenses
Research and
Development.
Research and development expenses are the costs
associated with the design, development and enhancement of our products, and
consist of salaries, developmental materials, facility and overhead costs,
consulting fees, and non-recurring engineering costs. We continue to invest in
research and development with a focus on innovation as we seek to improve our
existing technology. In March 2009, we received U.S. Food and Drug
Administration 510(k) clearance for our new Cardius® X-ACT imaging
system. Research and development expenses were $3.4 million for 2009,
which represents an increase of $0.6 million, or 21.6%, compared to the prior
year. The increase in research and development expenses was primarily
attributable to higher personnel and development costs, as well as certain
clinical evaluation costs related to our new Cardius® X-ACT imaging system.
Research and development expenses were 19.4% of Product revenue for 2009
compared to 11.4% in 2008, due to the lower camera sales and increased product
development activity in 2009. We plan to invest further in our
technology platform to penetrate new and existing market segments and attract
new customers.
Marketing and
Sales.
Marketing and sales expenses consist primarily of salaries,
commissions, bonuses, travel, marketing, and collateral materials and tradeshow
costs. Marketing and sales expenses were $7.0 million for 2009,
a decrease of $1.6 million, or 18.4%, compared to the prior year, principally as
a result of lower personnel costs. Marketing and sales expenses were 10.0% of
total revenue for 2009 compared to 10.6% for 2008.
General and
Administrative.
General and administrative expenses consist
primarily of salaries and other related costs for accounting, human resources,
information technology and executive personnel, legal related costs,
professional fees, outside services, insurance, and costs related to our board
of directors. General and administrative expenses were $8.9 million for 2009, a
decrease of $2.9 million, or 24.4% compared to the prior year, principally as a
result of lower personnel costs. General and administrative expenses were 12.8%
of total revenue for 2009 compared to 14.8% for 2008.
Restructuring
Loss
. Restructuring loss declined from $1.3 million in 2008 to
$0.3 million in 2009. To improve company profitability, we initiated
restructuring plans in the third quarter of 2009 and in the fourth quarter of
2008. In 2009, we reduced our workforce within both the Product and
DIS segments in order to realign manufacturing and overhead expenses to a lower
level of camera sales and to flatten the management structure. To
this end, the majority of the restructuring loss incurred in 2009 consisted of
severance expense. In the fourth quarter of 2008, we initiated plans
to sell, close, and consolidate certain DIS hub locations during the first
quarter of 2009 in order to focus on hub locations that have stronger
anticipated margin and growth potential. These sales and closures
involved the sale or abandonment of property and equipment and staff reductions
at the hub locations impacted by the restructuring plans. The
majority of the restructuring loss incurred in 2008 consisted of a $1.0 million
loss on property and equipment.
Goodwill Impairment
Loss.
The acquisition of net assets from Ultrascan in May 2007
resulted in the recording of goodwill. Among other assets, goodwill was recorded
within a reporting unit in our DIS segment on the date of the acquisition, and
represented the excess between the purchase price and the net assets acquired.
During our annual impairment analysis in the fourth quarter of 2008, we
determined that the carrying value of the goodwill exceeded the implied fair
value of the assets held by the reporting unit, which resulted in a goodwill
impairment loss of $2.5 million. No impairment losses were recorded
in 2009.
Other
Income
Other
income consists primarily of interest income, net of interest paid and other
associated expenses. The decrease in other income of $0.2 million is
attributable to a decrease in interest rates.
Net
Income (Loss)
Our net
income was $0.6 million for 2009 compared to a net loss of $6.9 million for
2008, an improvement of $7.5 million, primarily as a result of increased DIS
segment gross profits and a reduction in our operating expenses. The
increase in DIS gross profit is primarily due to decreased labor,
radiopharmaceutical, depreciation, and maintenance costs. The
reduction in our operating expenses was primarily achieved through reduction of
personnel costs and other restructuring initiatives implemented in the fourth
quarter of 2008, the first quarter of 2009 and the third quarter of
2009.
Comparison
of Years Ended December 31, 2008 and 2007
Revenues
Consolidated.
Consolidated
revenue was $80.4 million for 2008, which represents an increase of $6.4
million, or 8.7%, over the prior year, driven by an increase in imaging services
revenue in our DIS segment, as well as increases in camera sales and maintenance
contract revenues in our Product segment. DIS revenue accounted for
approximately 70% of total revenues for 2008, which is consistent with prior
years.
DIS.
Our DIS revenue was
$56.2 million for 2008, which represents an increase of $3.8 million, or 7.2%,
over the prior year. This increase is primarily attributed to the
acquisition of substantially all of the assets and liabilities of Ultrascan, a
provider of ultrasound imaging systems and services to physicians’ offices and
hospitals, in May 2007, which enabled us to generate revenue from ultrasound
imaging services.
Product.
Our product
revenue was $24.2 million for 2008, which represents an increase of $2.6
million, or 12.3%, over the prior year. This increase was primarily
due to an increase in the number of gamma cameras sold in 2008 to 85 systems
compared to 73 sold in the prior year and an increase in maintenance contract
revenues to $9.1 million in 2008 from $7.9 million in the prior year due to the
expansion of our installed base of gamma cameras.
Gross
Profit
Consolidated.
Consolidated
gross profit was $20.1 million for 2008, representing a decrease of $0.4
million, or 2.2%, over the prior year. This decrease is primarily related to an
increase in costs of revenues in the DIS segment. Consolidated gross
profit as a percentage of revenue decreased to 25.0% for 2008 from 27.7% for
2007.
DIS
. DIS gross profit
was $11.5 million for 2008, which represents a decrease of $1.4 million, or
10.9%, over the prior year, primarily due to the overall increase in labor,
depreciation and other servicing costs. Depreciation costs increased
due to our investment in the upgrade of our DIS portable fleet, which was
completed during the second quarter of 2008. Our DIS portable fleet consists
primarily of cameras available for lease. DIS gross profit as a
percentage of revenue decreased to 20.5% for 2008 from 24.6% for
2007.
Product
. Product gross
profit increased to $8.6 million for 2008, representing an increase of $1.0
million, or 12.7%, over the prior year. The increase is primarily
attributable to the increase in product sales. Product gross profit
as a percentage of revenue increased to 35.5% for 2008 from 35.3% for
2007.
Operating
Expenses
Research and
Development.
Research and development expenses were $2.8 million
for 2008, which represents a decrease of $0.3 million, or 10.0%, over the prior
year. The decrease in research and development expenses was primarily
attributable to lower personnel costs. Research and development expenses were
11.4% and 14.3% of product revenue for 2008 and 2007, respectively.
Marketing and sales.
Marketing and sales expenses were $8.6 million for 2008, which represents an
increase of $0.9 million, or 11.5%, over the prior year, principally as a result
of additional personnel costs, consistent with the increase in revenues in both
the DIS and Product segments. Marketing and sales expenses were 10.6% of total
revenue for 2008 compared to 10.4% for 2007.
General and
Administrative.
General and administrative expenses were $11.8
million for 2008, which was essentially unchanged compared to the prior year.
General and administrative expenses were 14.8% of total revenue for 2008
compared to 16.0% for 2007.
Restructuring Loss
. We
initiated a restructuring plan to enhance company profitability in the fourth
quarter of 2008. The initiatives included plans to sell, close, and consolidate
certain DIS hub locations during the first quarter of 2009 in order to focus on
hubs that have stronger anticipated margin and growth potential. These sales and
closures involved the sale or abandonment of property and equipment and staff
reductions at the hub locations impacted by the restructuring plans, as well as
the reduction of certain management positions. The loss on property and
equipment makes up $1.0 million of the $1.3 million loss recorded in 2008. The
remaining loss of $0.3 million primarily represents severance payments. No
losses pertaining to restructuring efforts were recorded in the prior
year.
Goodwill Impairment
Loss.
During our annual impairment analysis in the fourth
quarter of 2008, we determined that the carrying value of the goodwill exceeded
the implied fair value of the assets held by the reporting unit, which resulted
in a goodwill impairment loss of $2.5 million. No impairment losses
were recorded in 2007.
Other
Income
The
decrease of $0.7 million in other income reflects decreasing market yields and
the lower levels of average cash and investments balances in 2008 compared to
2007 as a result of cash used to upgrade the DIS fleet and acquire assets from
Ultrascan.
Net
Loss
Our net
loss increased to $6.9 million for 2008 compared to a net loss of $1.4 million
for 2007, primarily as a result of a significant increase in operating
expenses. The increase in operating expenses is due to a $2.5 million
goodwill impairment, $1.3 million in restructuring losses and a $0.9 million
increase in marketing and sales expense. Furthermore, gross profit
decreased by $0.4 million primarily related to an increase in costs of revenues
in the DIS segment.
Liquidity
and Capital Resources
General
We
require capital principally for capital expenditures and to finance accounts
receivable and inventory. Our working capital requirements vary from period to
period depending on manufacturing volumes, the timing of deliveries and the
payment cycles of our customers. Our capital expenditures consist primarily of
DIS nuclear cameras, ultrasound machines, vans, and computer hardware and
software. As of December 31, 2009, we had cash, cash equivalents and current
securities available-for-sale of $31.8 million. We currently invest our cash
reserves in money market funds, U.S. treasury, government and corporate debt
securities. Based upon our current level of expenditures, we believe our working
capital, together with cash flows from operating activities, will be adequate to
meet our anticipated cash requirements for capital expenditures and working
capital for at least the next 12 months.
Net cash
provided by operations totaled $4.8 million in 2009 due to cash flow from net
income plus non-cash charges such as depreciation, amortization and stock
compensation. Net cash used by investing activities amounted to $3.8 million in
2009 primarily for purchases of property and equipment and net purchases of
securities available for sale. Net cash used in financing activities amounted to
approximately $1.0 million in 2009, for the repurchase of common stock and
repayment of capital lease obligations.
On
February 4, 2009, our board of directors authorized a stock buyback program to
repurchase up to an aggregate of $2.0 million of our issued and outstanding
common shares. The timing of stock repurchases and the number of shares of
common stock to be repurchased have been and will be made in compliance with
Rule 10b-18 under the Securities Exchange Act of 1934. The timing and extent of
the repurchase will depend upon market conditions, applicable legal and
contractual requirements, and other factors. Through December 31, 2009, the
Company had repurchased stock with a value of approximately $1.0
million.
The
acquisition of net assets from Ultrascan may require additional consideration of
cash and common stock of up to $3.9 million to be paid to the seller or its
designees in the event that certain financial milestones are achieved over the
next three years.
As of
December 31, 2009, we had capital lease obligations totaling less than $0.2
million. These obligations are secured by the specific equipment financed under
each lease and will be repaid monthly over the lease terms, which range up to 49
months. Our DIS subsidiary entered these capital lease 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, 2009
(dollars in thousands):
|
Payments Due by Period
|
||||||||||||||||||||
|
Contractual
obligations
|
Total
|
Less than 1
year
|
1-3 years
|
3-5 years
|
More than 5
years
|
|||||||||||||||
|
Capital
lease obligations
|
$ | 171 | $ | 63 | $ | 85 | $ | 23 | $ | - | ||||||||||
|
Operating
lease obligations
|
5,262 | 1,275 | 2,001 | 1,303 | 683 | |||||||||||||||
|
Total
|
$ | 5,433 | $ | 1,338 | $ | 2,086 | $ | 1,326 | $ | 683 | ||||||||||
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 accounting principles that are generally accepted in the United
States. 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 continually evaluate our estimates and
judgments, the most critical of which are those related to revenue recognition
and inventory valuation. We base our estimates and judgments on historical
experience and other factors that we believe to be reasonable under the
circumstances. Materially different results can occur as circumstances change
and additional information becomes known.
Revenue
Recognition
We derive
revenue principally from providing in-office services to support the performance
of cardiac imaging procedures and from selling and servicing solid-state digital
gamma cameras. We recognize revenue when all of the following four criteria are
met:
1. A
contract or sales arrangement exists;
2.
Products have been shipped and title has transferred or services have been
rendered;
3. The
price of the products or services is fixed or determinable; and
4.
Collectibility 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.
DIS
revenue is derived from the leasing of personnel and equipment for in-office
nuclear and ultrasound imaging procedures. Revenue related to the leasing of
personnel and equipment is recognized at the time services are provided and
collection is reasonably assured. DIS leasing services are generally billed on a
per-day basis under annual contracts, which specify the number of days of
service to be provided, or on a flat rate month-to-month basis.
Product
revenues are generated from the sales of gamma cameras and follow-on maintenance
service contracts. We generally recognize revenue upon delivery to customers. We
also provide installation and training for camera sales in the United
States. Installation and training is generally performed shortly
after delivery and represents a relatively insignificant 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 Product sales in the accompanying consolidated
statements of operations.
Reserves
for Doubtful Accounts and Billing Adjustments
We
provide reserves for billing adjustments and doubtful accounts. We review
reserves on a quarterly basis and make adjustments based on our historical
experience rate and known collectibility issues and disputes. We also consider
our bad debt write-off history. Our estimates of collectibility 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 DIS, we record adjustments and credit memos that represent
billing errors that are normally adjusted within the first 90 days subsequent to
the performance of service. A provision for billing adjustments is charged
against DIS revenues and a provision for doubtful accounts is charged to general
and administrative expenses. Our risk of material loss is mitigated as we only
have a small number of customer accounts in both DIS and Product that have
receivable balances in excess of $100,000.
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 costs. We rely on historical information to support our
reserve and utilize management’s business judgment. We reserve 100% of the cost
of service inventory quantities in excess of a projected 36 month
demand. In the third quarter of 2009, we implemented several changes
to the control and analysis of our inventory and we were able to obtain more
accurate future demand information particularly in light of our product life
cycles. In conjunction with inventory projects, we physically
segregated our production and service inventory and implemented new forecasting
software. As a result of these changes and our increased ability to
obtain and better analyze information, we began reserving 100% of the cost of
production inventory quantities in excess of a projected 24 month
demand. Historically, we reserved 100% of the cost of production
inventory quantities in excess of a projected 12 month demand. The
refinement of our reserve methodology did not result in the write-up of
inventory previously reserved and did not impact the comparability of the
financial statements presented. Once inventory is reserved, we do not
adjust the reserve balance until the inventory is sold or disposed.
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. 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. We perform an annual review of the carrying
value of our long-lived assets to be held and used, including certain
identifiable intangible assets, during the fourth quarter of each fiscal
year.
Long-lived
assets that are not used in operations and are actively being marketed for sale
are classified as held for sale and are reflected as current assets on our
balance sheet. The values of these assets are reviewed quarterly and
do not exceed the anticipated cash inflows generated from the sale of the
assets.
Valuation
of Goodwill
On
May 1, 2007, we completed the acquisition of substantially all of the
assets and liabilities of Ultrascan, Inc. (“Ultrascan”), a provider of
ultrasound imaging systems and services to physicians’ offices and hospitals.
The acquisition of net assets from Ultrascan resulted in the recording of
goodwill, which represented the excess between the purchase price and the net
assets acquired. 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 perform a two-step impairment test
on goodwill. In the first step, we compare the fair value of the
reporting unit with goodwill to the carrying value of its long-term assets. If
the carrying value of the long-term assets exceeds the fair value of the
reporting unit, then we must perform the second step of the impairment test,
whereby the carrying value of the reporting unit’s goodwill is compared to its
implied fair value. If the carrying value of the goodwill exceeds the implied
fair value, an impairment loss equal to the difference would be
recorded.
No
impairment losses were recorded to Goodwill in 2009. In 2008, we
recorded a $2.5 million impairment loss in part due to a significant decline in
our market capitalization. We determined that the implied fair value
of goodwill is $0.2 million utilizing the discounted cash flow method under the
income approach as well as the market approach, down from $2.7 million in
2007. The impairment loss is included in loss from operations on our
statement of operations.
Restructuring
Restructuring
costs are included in loss from operations on our income
statement. Restructuring loss for the year ended December 31, 2009 is
comprised of one-time termination benefits for involuntarily terminated
employees. Restructuring loss for the year ended December 31, 2008 is
comprised of losses on the abandonment of property and equipment and assets held
for sale, one-time termination benefits for involuntarily terminated employees,
and obligations pertaining to abandoned property leases. Losses on
property and equipment are recorded in accordance with our accounting policy
related to long-lived assets described above. 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.
Share-based
Payments
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-Merton 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. The fair
value of stock options is derived using the following assumptions, some of which
are subjective by nature. The weighted-average assumptions used in
the Black-Scholes-Merton model for the year ended December 31, 2009 were 6.0
years for the expected term, 64% for the expected volatility, 2.5% for the risk
free rate and 0% for dividend yield. The weighted-average expected option term
for 2009, 2008, and 2007 reflects the application of the simplified method,
which defines the life as the average of the contractual term of the options and
the weighted average vesting period for all options. We utilized this approach
as our historical share option exercise experience does not provide a reasonable
basis upon which to estimate an expected term. Expected volatilities are based
on historical volatility of our stock. We estimated the forfeiture rate based on
historical data for forfeitures and we are recognizing compensation costs only
for those equity awards expected to vest. The risk-free rate for
periods within the contractual life of the option is based on the U.S. Treasury
yield in effect at the time of grant. We have never declared or paid
dividends and have no plans to do so in the foreseeable future.
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 Product 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.
Ite
m 7A. Quantitative and Qualitative Disclosures About Market
Risk
Our
exposure to market risk due to changes in interest rates relates primarily to
the return on 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 hypothetical 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 due to their relatively short term nature. Declines in interest
rates over time will, however, reduce our interest income while increases in
interest rates over time will increase our interest income.
Ite
m 8. Financial Statements and Supplementary Data
See the
list of financial statements filed with this report under Item 15
below.
Ite
m 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures
Not
applicable.
Ite
m 9A. Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Securities and Exchange Commission
Act of 1934 reports is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission’s rules and
forms and that such information is accumulated and communicated to our
management, including our chief executive officer and chief financial officer,
as appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As
required by Securities and Exchange Commission Rule 13a-15(e) and 15d-15(e), we
carried out an evaluation, under the supervision and with the participation of
our management, including our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the period covered by this report.
Based on the foregoing, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures were effective at the
reasonable assurance level.
There has
been no change in our internal controls over financial reporting during our most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f) and 15d-15(f). Because of its inherent limitations,
internal control over financial reporting may not prevent or detect all
misstatements. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
We
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in
Internal Control—Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on our evaluation under the framework in
Internal Control—Integrated
Framework
, our management concluded that our internal control over
financial reporting was effective as of December 31, 2009.
This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to
attestation by the Company’s independent registered public accounting firm
pursuant to the rules of the SEC that permit the Company to provide only a
management’s report in this report.
Ite
m 9B. Other Information
None.
It
em 10. Directors and Executive Officers of the
Registrant
The
information required by this item will be set forth in the Proxy Statement and
is incorporated in this report by reference.
Ite
m 11. Executive Compensation
The
information required by this item will be set forth in the Proxy Statement and
is incorporated in this report by reference.
It
em 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
The
information required by this item will be set forth in the Proxy Statement and
is incorporated in this report by reference.
It
em 13. Certain Relationships and Related
Transactions
The
information required by this item will be set forth in the Proxy Statement and
is incorporated in this report by reference.
Ite
m 14. Principal Accounting Fees and Services
The
information required by this item will be set forth in the Proxy Statement and
is incorporated in this report by reference.
Ite
m 15. Exhibits and Financial Statement
Schedules
(a)
Documents filed as part of this report.
1. The
following financial statements of Digirad Corporation and Report of
Ernst & Young LLP, independent registered public accounting firm, are
included in this report:
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Consolidated
Balance Sheets
|
F-3
|
|
Consolidated
Statements of Operations
|
F-4
|
|
Consolidated
Statements of Stockholders’ Equity
|
F-5
|
|
Consolidated
Statements of Cash Flows
|
F-6
|
|
Notes
to Consolidated Financial Statements
|
F-7
|
2.
Financial statement schedules.
SCHEDULE
II—VALUATION AND QUALIFYING ACCOUNTS
|
Reserve for bad debt (1)
|
Reserves for billing
adjustments
and
contractual allowances
(2)
|
Reserve for excess and
obsolete inventories (3)
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Balance
at December 31, 2006
|
$ | 677 | $ | 293 | $ | 912 | ||||||
|
Provision
|
636 | 1,111 | 411 | |||||||||
|
Write-offs
and recoveries, net
|
(608 | ) | (1,130 | ) | (493 | ) | ||||||
|
Balance
at December 31, 2007
|
705 | 274 | 830 | |||||||||
|
Provision
|
653 | 1,186 | 202 | |||||||||
|
Write-offs
and recoveries, net
|
(521 | ) | (1,052 | ) | (437 | ) | ||||||
|
Balance
at December 31, 2008
|
837 | 408 | 595 | |||||||||
|
Provision
|
58 | 1,280 | 538 | |||||||||
|
Write-offs
and recoveries, net
|
(18 | ) | (1,275 | ) | (336 | ) | ||||||
|
Balance
at December 31, 2009
|
$ | 877 | $ | 413 | $ | 797 | ||||||
__________________
|
(1)
|
The
provision was charged against general and administrative
expenses.
|
|
(2)
|
The
provision was charged against
revenue.
|
|
(3)
|
The
provision was charged against cost of
revenues.
|
No other
financial statement schedules are provided because the information called for is
not required or is shown either in the consolidated financial statements or the
notes thereto.
3. List
of exhibits required by Item 601 of Regulation S-K. See part
(b) below.
(b)
Exhibits.
The following
exhibits are filed as a part of this report:
|
Exhibit
Number
|
Description
|
|
3.1(1)
|
Restated
Certificate of Incorporation.
|
|
3.2(13)
|
Amended
and Restated Bylaws.
|
|
4.1(2)
|
Form
of Specimen Stock Certificate.
|
|
4.2(3)
|
Amended
and Restated Investors’ Rights Agreement by and among Digirad Corporation
and the investors listed on the schedule attached thereto, dated April 23,
2002, as amended.
|
|
10.1(2)†
|
License
Agreement by and between Digirad Corporation and the Regents of the
University of California dated May 19, 1999, as
amended.
|
|
10.2(1)†
|
Amendment
to License Agreement by and between Digirad Corporation and the Regents of
the University of California, dated July 26, 2004.
|
|
10.3(2)†
|
Software
License Agreement by and between Digirad Corporation and Segami
Corporation, dated June 16, 1999, as amended.
|
|
10.4(7)+
|
Addendum
to Software License Agreement by and between Digirad Corporation and
Segami Corporation, dated June 16, 1999, as amended.
|
|
10.5(2)†
|
License
Agreement by and between Digirad Corporation and Cedars-Sinai Health
System, dated May 22, 2001.
|
|
10.6(2)†
|
License
Agreement by and between Digirad Corporation and Cedars-Sinai Health
System, dated April 1, 2003.
|
|
Exhibit
Number
|
Description
|
|
10.7(2)†
|
Development
and Supply Agreement by and between Digirad Corporation and QuickSil,
Inc., dated June 18, 1999.
|
|
10.8(2)
|
Loan
and Security Agreement by and between Digirad Corporation and Silicon
Valley Bank, dated July 31, 2001, as amended.
|
|
10.9(2)
|
Irrevocable
Standby Letter of Credit executed by Silicon Valley Bank in favor of
Digirad Corporation, dated November 5, 2003.
|
|
10.10(2)
|
Loan
Agreement by and between Digirad Corporation and Gerald G. Loehr Trust,
dated September 1, 1993, as amended.
|
|
10.11(4)
|
Amendment
to Loan Agreement dated effective August 9, 2004, by and between Digirad
Corporation and the Gerald G. Loehr Separate Property
Trust.
|
|
10.12(2)
|
Loan
Agreement by and between Digirad Corporation and Clinton L. Lingren, dated
September 1, 1993, as amended.
|
|
10.13(2)
|
Loan
Agreement by and between Digirad Corporation and Jack F. Butler, dated
September 1, 1993, as amended.
|
|
10.14(2)
|
Equipment
Lease Agreement by and between Orion Imaging Systems, Inc. and MarCap
Corporation, dated October 1, 2000.
|
|
10.15(2)
|
Equipment
Lease Agreement by and between Digirad Imaging Solutions, Inc. and MarCap
Corporation, dated June 13, 2003.
|
|
10.16(2)
|
Master
Equipment Lease Agreement by and between Digirad Imaging Solutions, Inc.
and DVI Financial Services, Inc., dated May 24, 2001.
|
|
10.17(2)
|
Sublease
Agreement by and between Digirad Corporation as sub-lessee and REMEC, Inc.
as sub-lessor, dated November 3, 2003.
|
|
10.18(2)#
|
1991
Stock Option Program Stock Option Agreement.
|
|
10.19(2)#
|
1997
Stock Option/Stock Issuance Plan, as amended.
|
|
10.20(7)#
|
1998
Stock Option/Stock Issuance Plan, as amended.
|
|
10.21(1)#
|
2004
Stock Incentive Plan.
|
|
10.22(7)#
|
Form
of Notice of Stock Option Award and Stock Option Award Agreement for 2004
Stock Incentive Plan.
|
|
10.23(2)#
|
2004
Non-Employee Director Option Program.
|
|
10.24(7)#
|
Form
of Notice of Stock Option Award and Stock Option Award Agreement for 2004
Non-Employee Director Option Program.
|
|
10.25(2)#
|
Form
of Indemnification Agreement.
|
|
10.26(2)#
|
Letter
Agreement by and between Digirad Corporation and David M. Sheehan, dated
June 11, 2002.
|
|
10.27(2)
|
Loan
and Security Agreement by and between Orion Imaging Systems, Inc., Digirad
Imaging Systems, Inc. and Heller Healthcare Finance, Inc., dated January
9, 2001, as amended.
|
|
10.28(2)
|
Master
Lease Agreement by and between Digirad Corporation and GE Healthcare
Financial Services, dated September 26, 2000.
|
|
10.29(12)+
|
Agreement
for Services between our wholly-owned subsidiary, Digirad Imaging
Solutions, Inc. (“
DIS
”) and MBR and
Associates, Inc., dated December 27,
2006.
|
|
Exhibit
Number
|
Description
|
|
10.30(2)
|
Form
of Warrant to purchase shares of Series E Preferred Stock by and among
Digirad Corporation and the investors listed on the schedule attached
thereto.
|
|
10.31(2)
|
Form
of Warrant to purchase shares of Series E Preferred Stock by and among
Digirad Corporation and the investors listed on the schedule attached
thereto.
|
|
10.32(2)
|
Form
of Warrant to purchase shares of Common Stock by and among Digirad
Corporation and the investors listed on the schedule attached
thereto.
|
|
10.33(2)
|
Warrant
to purchase shares of Series E Preferred Stock by and between Digirad
Corporation and Silicon Valley Bank, dated July 31,
2001.
|
|
10.34(2)
|
Form
of Warrant to purchase shares of Common Stock by and among Digirad
Corporation and the investors listed on the schedule attached
thereto.
|
|
10.35(2)
|
Form
of Warrant to purchase shares of Common Stock by and among Digirad
Corporation and the investors listed on the schedule attached
thereto.
|
|
10.36(2)
|
Form
of Warrant to purchase shares of Common Stock by and between Digirad
Corporation and the investors listed on the schedule attached
thereto.
|
|
10.37(1)
|
Form
of Warrant to purchase shares of Common Stock by and between Digirad
Corporation and the investors listed on the schedule attached
thereto.
|
|
10.38(3)
|
Form
of Warrant to purchase shares of Common Stock by and between Digirad
Corporation and the investors listed on the schedule attached
thereto.
|
|
10.39(5)#
|
2005
Inducement Stock Incentive Plan.
|
|
10.40(5)#
|
2005
Inducement Stock Incentive Plan Award Agreement.
|
|
10.41(6)#
|
Executive
Employment Agreement by and between Digirad Corporation and Mark Casner,
dated September 14, 2005.
|
|
10.42(7)+
|
Supply
Agreement by and between Digirad Corporation and QuickSil, Inc., dated
October 31, 2005.
|
|
10.43(7)#
|
Amendment
to Executive Employment Agreement by and between Digirad Corporation and
Mark Casner, dated January 15, 2006.
|
|
10.44(7)#
|
Second
Amendment to Executive Employment Agreement by and between Digirad
Corporation and Mark Casner, dated March 3, 2006.
|
|
10.45(8)#
|
Third
Amendment to Executive Employment Agreement by and between Digirad
Corporation and Mark Casner, dated December 13, 2006.
|
|
10.46(10)#
|
Digirad
Corporation 2004 Stock Incentive Plan as Amended and Restated August 2,
2007
|
|
10.47(11)
|
Asset
Purchase Agreement by and between Digirad Corporation, Digirad Imaging
Solutions, Inc., Digirad Ultrascan Solutions, Inc. and Ultrascan, Inc.
dated May 1, 2007.
|
|
10.48
#
|
Executive
Employment Agreement by and between Digirad Corporation and Todd Clyde,
dated October 30, 2008.
|
|
21.1(2)
|
Subsidiaries
of Digirad Corporation.
|
|
Consent
of Independent Registered Public Accounting Firm.
|
|
|
Certification
of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)
promulgated pursuant to the Securities Exchange Act of 1934, as
amended.
|
|
|
Certification
of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a)
promulgated pursuant to the Securities Exchange Act of 1934, as
amended.
|
|
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
(1)
|
This
exhibit was previously filed as an exhibit to the Company’s quarterly
report on Form 10-Q originally filed with the Commission on
August 11, 2004, as amended thereafter, and is incorporated herein by
reference.
|
|
(2)
|
This
exhibit was previously filed as an exhibit to the Registration Statement
on Form S-1 (File No. 333-113760) originally filed with the
Securities and Exchange Commission on March 19, 2004, as amended
thereafter, and is incorporated herein by
reference.
|
|
(3)
|
This
exhibit was previously filed as an exhibit to the Company’s quarterly
report on Form 10-Q filed with the Commission on November 2, 2004,
and is incorporated herein by
reference.
|
|
(4)
|
This
exhibit was previously filed as an exhibit to the Company’s current report
on Form 8-K filed with the Commission on September 7, 2004, and is
incorporated herein by reference.
|
|
(5)
|
This
exhibit was previously filed as an exhibit to the Company’s current report
on Form 8-K filed with the Commission on September 15, 2005, and is
incorporated herein by reference.
|
|
(6)
|
The
exhibit was previously filed as an exhibit to the Company’s quarterly
report on Form 10-Q filed with the Commission on November 4, 2005, and is
incorporated herein by reference.
|
|
(7)
|
This
exhibit was previously filed as an exhibit to the Company’s annual report
on Form 10-K filed with the Commission on March 3, 2005, and is
incorporated herein by reference.
|
|
(8)
|
This
exhibit was previously filed as an exhibit to the Company’s current report
on Form 8-K filed with the Commission on December 14, 2006, and is
incorporated herein by reference.
|
|
(9)
|
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 Exchange Act of 1933,
as amended, or the Securities Exchange Act of 1934, as amended, whether
made before or after the date of this Form 10-K, irrespective of any
general incorporation language contained in such
filing.
|
|
(10)
|
The
exhibit was previously filed as an exhibit to the Company’s quarterly
report on Form 10-Q filed with the Commission on August 7, 2007, and is
incorporated herein by reference.
|
|
(11)
|
The
exhibit was previously filed as an exhibit to the Company’s quarterly
report on Form 10-Q filed with the Commission on May 7, 2007, and is
incorporated herein by reference.
|
|
(12)
|
The
exhibit was previously filed as an exhibit to the Company’s quarterly
report on Form 10-K filed with the Commission on February 20, 2007, and is
incorporated herein by reference.
|
|
(13)
|
The
exhibit was previously filed as an exhibit to the Company’s quarterly
report on Form 8-K filed with the Commission on May 9, 2007, and is
incorporated herein by reference.
|
|
†
|
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.
|
|
+
|
Portions
of this exhibit (indicated by asterisks) have been omitted pursuant to a
request for confidential treatment and have been separately filed with the
Commission.
|
|
#
|
Indicates
management contract or compensatory
plan.
|
SIG
NATURES
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.
|
DIGIRAD
CORPORATION
|
||
|
Dated:
February 11, 2010
|
By:
|
/s/ TODD
P. CLYDE
|
|
Name:
|
Todd
P. Clyde
|
|
|
Title:
|
President
,Chief Executive Officer and Chief Financial
Officer
|
|
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/ TODD P.
CLYDE
|
President
and Chief Executive Officer
|
February
11, 2010
|
||
|
Todd
P. Clyde
|
(
Principal Executive
Officer
)
|
|||
|
/s/
Richard B.
Slansky
|
Executive
Vice President and Chief Financial Officer
|
February
11, 2010
|
||
|
Richard
B. Slansky
|
(
Principal Financial
Officer
)
|
|||
|
/s/ R. KING
NELSON
|
Director
|
February
11, 2010
|
||
|
R.
King Nelson
|
(
Chairman of the Board of
Directors
)
|
|||
|
/s/ GARY F.
BURBACH
|
Director
|
February
11, 2010
|
||
|
Gary
F. Burbach
|
||||
|
/s/
Lloyd H.
Malchow
|
Director
|
February
11, 2010
|
||
|
Lloyd
H.
Malchow
|
||||
|
/s/
Steve C.
Mendell
|
Director
|
February
11, 2010
|
||
|
Steve
C. Mendell
|
||||
|
/s/
John W.
Sayward
|
Director
|
February
11, 2010
|
||
|
John
W. Sayward
|
||||
|
/s/ Kenneth
Olson
|
Director
|
February
11, 2010
|
||
|
Kenneth
Olson
|
DIGIRAD
CORPORATION
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Consolidated
Balance Sheets
|
F-3
|
|
Consolidated
Statements of Operations
|
F-4
|
|
Consolidated
Statements of Stockholders’ Equity
|
F-5
|
|
Consolidated
Statements of Cash Flows
|
F-6
|
|
Notes
to Consolidated Financial Statements
|
F-7
|
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders of Digirad Corporation
We have
audited the accompanying consolidated balance sheets of Digirad Corporation as
of December 31, 2009 and 2008, and the related statements of operations,
stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2009. Our audits also included the financial statement
schedule listed in the Index at Item 15(a). These financial statements and
schedule are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements and schedule 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 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, 2009 and 2008, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended
December 31, 2009, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects the information set forth
therein.
|
/s/
Ernst & Young LLP
|
San
Diego, California
February
11, 2010
Digirad
Corporation
(In
thousands, except par value amounts)
|
As
of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 13,560 | $ | 13,525 | ||||
|
Securities
available-for-sale
|
18,250 | 14,759 | ||||||
|
Accounts
receivable, net
|
7,553 | 9,324 | ||||||
|
Inventories,
net
|
6,402 | 4,978 | ||||||
|
Property
and equipment held for sale
|
— | 1,122 | ||||||
|
Other
current assets
|
1,234 | 1,982 | ||||||
|
Total
current assets
|
46,999 | 45,690 | ||||||
|
Property
and equipment, net
|
10,263 | 13,428 | ||||||
|
Intangible
assets, net
|
1,243 | 1,833 | ||||||
|
Goodwill
|
184 | 184 | ||||||
|
Restricted
cash
|
— | 60 | ||||||
|
Total
assets
|
$ | 58,689 | $ | 61,195 | ||||
|
Liabilities
and stockholders’ equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 1,797 | $ | 2,197 | ||||
|
Accrued
compensation
|
2,344 | 3,457 | ||||||
|
Accrued
warranty
|
332 | 906 | ||||||
|
Other
accrued liabilities
|
2,106 | 2,811 | ||||||
|
Deferred
revenue
|
2,594 | 2,723 | ||||||
|
Total
current liabilities
|
9,173 | 12,094 | ||||||
|
Deferred
rent
|
127 | 142 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders’
equity:
|
||||||||
|
Preferred
stock, $0.0001 par value: 10,000 shares authorized at December 31, 2009
and 2008, respectively; no shares issued and outstanding at December 31,
2009 and 2008
|
— | — | ||||||
|
Common
stock, $0.0001 par value: 80,000 shares authorized at December 31, 2009
and 2008; 18,477 and 18,944 shares issued and outstanding (net of treasury
shares) at December 31, 2009 and 2008, respectively
|
2 | 2 | ||||||
|
Treasury
stock, at cost; 547 shares at December 31, 2009 and no shares at December
31, 2008
|
(991 | ) | — | |||||
|
Additional
paid-in capital
|
153,867 | 153,225 | ||||||
|
Accumulated
other comprehensive income (loss)
|
149 | (22 | ) | |||||
|
Accumulated
deficit
|
(103,638 | ) | (104,246 | ) | ||||
|
Total
stockholders’ equity
|
49,389 | 48,959 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 58,689 | $ | 61,195 | ||||
See
accompanying notes.
Digirad
Corporation
(In
thousands, except per share amounts)
|
Years ended
December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Revenues:
|
||||||||||||
|
DIS
|
$ | 52,318 | $ | 56,204 | $ | 52,440 | ||||||
|
Product
|
17,278 | 24,154 | 21,507 | |||||||||
|
Total
revenues
|
69,596 | 80,358 | 73,947 | |||||||||
|
Cost
of revenues:
|
||||||||||||
|
DIS
|
38,476 | 44,697 | 39,520 | |||||||||
|
Product
|
10,895 | 15,590 | 13,909 | |||||||||
|
Total
cost of revenues
|
49,371 | 60,287 | 53,429 | |||||||||
|
Gross
profit
|
20,225 | 20,071 | 20,518 | |||||||||
|
Operating
expenses:
|
||||||||||||
|
Research
and development
|
3,360 | 2,764 | 3,072 | |||||||||
|
Marketing
and sales
|
6,977 | 8,554 | 7,670 | |||||||||
|
General
and administrative
|
8,921 | 11,805 | 11,920 | |||||||||
|
Amortization
and impairment of intangible assets
|
590 | 798 | 697 | |||||||||
|
Restructuring
loss
|
319 | 1,308 | — | |||||||||
|
Goodwill
impairment loss
|
— | 2,466 | — | |||||||||
|
Total
operating expenses
|
20,167 | 27,695 | 23,359 | |||||||||
|
Income
(loss) from operations
|
58 | (7,624 | ) | (2,841 | ) | |||||||
|
Other
income (expense):
|
||||||||||||
|
Interest
income
|
499 | 851 | 1,608 | |||||||||
|
Interest
expense
|
(9 | ) | (32 | ) | (42 | ) | ||||||
|
Other
income (expense)
|
60 | (60 | ) | (101 | ) | |||||||
|
Total
other income
|
550 | 759 | 1,465 | |||||||||
|
Net
income (loss)
|
$ | 608 | $ | (6,865 | ) | $ | (1,376 | ) | ||||
|
Net
income (loss) per share:
|
||||||||||||
|
Basic
and diluted
|
$ | 0.03 | $ | (0.36 | ) | $ | (0.07 | ) | ||||
|
Shares
used in per share computations:
|
||||||||||||
|
Weighted
average shares outstanding – basic
|
19,073 | 18,955 | 18,845 | |||||||||
|
Weighted
average shares outstanding – diluted
|
19,557 | 18,955 | 18,845 | |||||||||
See
accompanying notes.
Digirad
Corporation
Consolidated
Statements of Stockholders’ Equity
(In
thousands)
|
Common
stock
|
Treasury
Stock
|
Additional paid-in capital | Accumulated other comprehensive income (loss) | Accumulated deficit | Total stockholders’ equity | |||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||||||||||||||||||
|
Balance
at December 31, 2006
|
18,795 | $ | 2 | — | $ | — | ||||||||||||||||||||||||||
|
Stock-based
compensation
|
— | — | — | — | 898 | — | — | 898 | ||||||||||||||||||||||||
|
Exercise
of stock options
|
136 | — | — | — | 66 | — | — | 66 | ||||||||||||||||||||||||
|
Comprehensive
loss:
|
— | |||||||||||||||||||||||||||||||
|
Net
loss
|
— | — | — | — | — | — | (1,376 | ) | (1,376 | ) | ||||||||||||||||||||||
|
Unrealized
gain on securities available-for-sale
|
— | — | — | — | — | 214 | — | 214 | ||||||||||||||||||||||||
|
Total
comprehensive loss
|
— | — | — | — | — | — | — | (1,162 | ) | |||||||||||||||||||||||
|
Balance
at December 31, 2007
|
18,931 | $ | 2 | — | — | 152,503 | 123 | (97,381 | ) | 55,247 | ||||||||||||||||||||||
|
Stock-based
compensation
|
— | — | — | — | 716 | — | — | 716 | ||||||||||||||||||||||||
|
Exercise
of stock options
|
13 | — | — | — | 6 | — | — | 6 | ||||||||||||||||||||||||
|
Comprehensive
loss:
|
— | |||||||||||||||||||||||||||||||
|
Net
loss
|
— | — | — | — | — | — | (6,865 | ) | (6,865 | ) | ||||||||||||||||||||||
|
Unrealized
loss on securities available-for-sale
|
— | — | — | — | — | (145 | ) | — | (145 | ) | ||||||||||||||||||||||
|
Total
comprehensive loss
|
— | — | — | — | — | — | — | (7,010 | ) | |||||||||||||||||||||||
|
Balance
at December 31, 2008
|
18,944 | $ | 2 | — | — | 153,225 | (22 | ) | (104,246 | ) | 48,959 | |||||||||||||||||||||
|
Stock-based
compensation
|
— | — | — | — | 606 | — | — | 606 | ||||||||||||||||||||||||
|
Exercise
of stock options and settlement of restricted stock units
|
80 | — | — | — | 36 | — | — | 36 | ||||||||||||||||||||||||
|
Repurchases
of common stock
|
— | — | 547 | $ | (991 | ) | — | — | — | (991 | ) | |||||||||||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||||||||||
|
Net
income
|
— | — | — | — | — | — | 608 | 608 | ||||||||||||||||||||||||
|
Unrealized
gain on securities available-for-sale
|
— | — | — | — | — | 171 | — | 171 | ||||||||||||||||||||||||
|
Total
comprehensive income
|
— | — | — | — | — | — | — | 779 | ||||||||||||||||||||||||
|
Balance
at December 31, 2009
|
19,024 | $ | 2 | 547 | $ | (991 | ) | $ | 153,867 | $ | 149 | $ | (103,638 | ) | $ | 49,389 | ||||||||||||||||
See
accompanying notes.
Digirad
Corporation
(In
thousands)
|
Years ended
December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Operating
activities
|
||||||||||||
|
Net
income (loss)
|
$ | 608 | $ | (6,865 | ) | $ | (1,376 | ) | ||||
|
Adjustments
to reconcile net income (loss) to cash provided by operating
activities:
|
||||||||||||
|
Depreciation
|
4,588 | 5,609 | 4,438 | |||||||||
|
Amortization
and impairment of intangible assets
|
590 | 798 | 697 | |||||||||
|
Provision
for bad debt
|
58 | 653 | 636 | |||||||||
|
Stock-based
compensation
|
606 | 716 | 905 | |||||||||
|
Restructuring
loss
|
319 | 1,308 | — | |||||||||
|
(Gain)
loss on disposal of assets
|
(26 | ) | 90 | 166 | ||||||||
|
Goodwill
impairment
|
— | 2,466 | — | |||||||||
|
Amortization
of premium on securities available-for-sale
|
454 | 314 | 30 | |||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Accounts
receivable
|
1,713 | (1,441 | ) | (685 | ) | |||||||
|
Inventories
|
(1,565 | ) | 477 | 398 | ||||||||
|
Other
assets
|
809 | (196 | ) | (233 | ) | |||||||
|
Accounts
payable
|
(400 | ) | (453 | ) | 4 | |||||||
|
Accrued
compensation
|
(1,295 | ) | (352 | ) | (262 | ) | ||||||
|
Deferred
revenue
|
(129 | ) | (186 | ) | 134 | |||||||
| Other accrued liabilities | (1,524 | ) | (572 | ) | (134 | ) | ||||||
|
Net
cash provided by operating activities
|
4,806 | 2,366 | 4,718 | |||||||||
|
Investing
activities
|
||||||||||||
|
Payments
made in connection with a business acquisition, net
|
— | — | (8,804 | ) | ||||||||
|
Purchases
of property and equipment
|
(1,014 | ) | (5,058 | ) | (8,561 | ) | ||||||
|
Proceeds
from sale of property and equipment
|
1,024 | — | — | |||||||||
|
Purchases
of securities available-for-sale
|
(20,360 | ) | (16,946 | ) | (2,800 | ) | ||||||
|
Maturities
of securities available-for-sale
|
16,586 | 18,467 | 20,501 | |||||||||
|
Net
cash (used in) provided by investing activities
|
(3,764 | ) | (3,537 | ) | 336 | |||||||
|
Financing
activities
|
||||||||||||
|
Issuances
of common stock
|
36 | 6 | 66 | |||||||||
|
Repurchases
of common stock
|
(991 | ) | — | — | ||||||||
|
Repayment
of obligations under capital leases
|
(52 | ) | (232 | ) | (268 | ) | ||||||
|
Net
cash used in financing activities
|
(1,007 | ) | (226 | ) | (202 | ) | ||||||
|
Net
(decrease) increase in cash and cash equivalents
|
35 | (1,397 | ) | 4,852 | ||||||||
|
Cash
and cash equivalents at beginning of year
|
13,525 | 14,922 | 10,070 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 13,560 | $ | 13,525 | $ | 14,922 | ||||||
|
Supplemental
information:
|
||||||||||||
|
Cash
paid during the period for interest
|
$ | 9 | $ | 33 | $ | 43 | ||||||
|
Non-cash
investing and financing activities:
|
||||||||||||
|
Purchase
of assets under capital leases
|
$ | 113 | $ | — | $ | 113 | ||||||
See
accompanying notes.
Digirad
Corporation
Notes
to Consolidated Financial Statements
1.
Organization and Summary of Significant Accounting Policies
Organization
and Business
Digirad Corporation (“Digirad”), a
Delaware corporation, is a leading provider of diagnostic imaging products and
personnel and equipment leasing services that improve patient care while driving
positive healthcare economics. Digirad has two reportable segments, Digirad
Imaging Solutions (“DIS”) and Product. The accompanying consolidated financial
statements include the operations of both segments. Intercompany accounts and
transactions have been eliminated in consolidation. All of our assets, and the
majority of our sales, are associated with operations in the continental United
States. Through DIS, we provide in-office leasing services to physicians,
offering certified personnel, required licensure, an imaging system and other
support and supplies for the performance of nuclear and ultrasound imaging
procedures under the supervision of our physician customers. DIS physician
customers enter into annual lease contracts for imaging services generally
delivered on a per-day basis. Our Product segment sells solid-state gamma
cameras and provides camera service and maintenance contracts. No customer
accounted for more than 10% of our revenue for any period
presented. We evaluated subsequent events through February 11, 2010,
the date on which we issued these financial statements.
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. Our significant estimates include the loss on restructuring,
valuation of goodwill, the valuation of long-lived assets, the reserve for
doubtful accounts, revenue and billing adjustments, excess and obsolete
inventories, warranty costs, the valuation allowance for deferred tax assets,
and the assumptions used in estimating the fair value of stock options. Actual
results could differ from those estimates.
Revenue
Recognition
We derive
revenue principally from providing in-office services to support the performance
of cardiac imaging procedures and from selling and servicing solid-state digital
gamma cameras. We recognize revenue in accordance with Staff Accounting Bulletin
No. 104,
Revenue
Recognition
(“SAB 104”), when all of the following four criteria are
met:
1. A
contract or sales arrangement exists;
2.
Products have been shipped and title has transferred or services have been
rendered;
3. The
price of the products or services is fixed or determinable; and
4.
Collectibility 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.
DIS
revenue is derived from the leasing of personnel and equipment for in-office
nuclear and ultrasound imaging procedures. Revenue related to imaging services
is recognized at the time services are performed and collection is reasonably
assured. DIS services are generally billed on a per-day basis under annual
contracts, which specify the number of days of service to be provided, or on a
flat rate month-to-month basis.
Product
revenues are generated from the sales of gamma cameras and follow-on maintenance
service contracts. We generally recognize revenue upon delivery to customers. We
also provide installation and training for camera sales in the United
States. Installation and 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 product sales.
Fair-value
of Financial Instruments
The
carrying value of financial instruments, such as cash and cash equivalents,
securities available-for-sale, accounts receivable, accounts payable and accrued
liabilities approximate their fair value because of their short term nature. We
do not hold or issue financial instruments for trading purposes.
Cash and Cash
Equivalents
We
consider all investments with a maturity of three months or less when acquired
to be cash equivalents. Cash equivalents primarily are funds invested in money
market funds whose cost equals fair market value.
Digirad
Corporation
Notes
to Consolidated Financial Statements—(Continued)
Securities
Available-for-Sale
Securities
available-for-sale primarily consist of U.S. treasury securities and high-grade
corporate debt securities and obligations of government sponsored entities. We
classify all securities as available-for-sale, as the sale of such securities
may be required prior to maturity to implement management strategies. These
securities are carried at fair value, with the unrealized gains and losses
reported as a component of other comprehensive income (loss) in stockholder’s
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
a revaluation of its carrying amount to fair value. The impairment is charged to
earnings and a new cost basis for the security is established. No such
impairment charges were recorded for any period presented. As of December 31,
2009, none of our investments has been in an unrealized loss position for more
than 12 months. Premiums and discounts are amortized or accreted over
the life of the related security as an adjustment to yield using the
straight-line method. Interest income is recognized when earned. Realized gains
and losses on investments in securities are included in other income within the
Consolidated Statements of Operations. Realized gains were $0.1
million in 2009. Net realized losses were $0.1 million in 2008 and
were not material in 2007. The amortization, accretion and interest
income are included in interest income within the Consolidated Statements of
Operations. The composition of securities available for sale are as
follows (in thousands):
| Maturity in Years |
Unrealized
|
||||||||||||||||
|
As
of December 31, 2009
|
Amortized Cost
|
Gains
|
Losses
|
Fair Value
|
|||||||||||||
|
U.S.
treasury securities
|
2
or less
|
$ | 4,050 | $ | 16 | $ | — | $ | 4,066 | ||||||||
|
Government
sponsored entities
|
3
or less
|
3,912 | 6 | (5 | ) | 3,913 | |||||||||||
|
Corporate
debt securities
|
3
or less
|
10,037 | 155 | (24 | ) | 10,168 | |||||||||||
|
Municipal
debt securities
|
3 or less
|
102 | 1 | — | 103 | ||||||||||||
| $ | 18,101 | $ | 178 | $ | (29 | ) | $ | 18,250 | |||||||||
|
Maturity in
Years
|
Unrealized
|
||||||||||||||||
|
As
of December 31, 2008
|
Amortized Cost
|
Gains
|
Losses
|
Fair Value
|
|||||||||||||
|
U.S.
treasury securities
|
2
or less
|
$ | 7,190 | $ | 74 | $ | — | $ | 7,264 | ||||||||
|
Government
sponsored entities
|
2
to 3
|
1,530 | — | (16 | ) | 1,514 | |||||||||||
|
Corporate
debt securities
|
3
or less
|
3,561 | 3 | (83 | ) | 3,481 | |||||||||||
|
Auction
rate securities
|
1 or less
|
2,500 | — | — | 2,500 | ||||||||||||
| $ | 14,781 | $ | 77 | $ | (99 | ) | $ | 14,759 | |||||||||
We invest
our cash in accordance with guidelines which require our investments in
marketable securities to meet minimum credit ratings assigned by established
credit organizations. We also diversify our investments through specifying
maximum investments by instrument type and issuer. It is our policy to invest in
instruments that have a final maturity of no longer than three years, with a
portfolio weighted average maturity of no longer than 18 months.
Reserves
for Doubtful Accounts and Billing Adjustments
We
provide reserves for billing adjustments and doubtful accounts. We review
reserves on a quarterly basis and make adjustments based on our historical
experience rate and known collectibility issues and disputes. We also consider
our bad debt write-off history. Within DIS, we provide reserves for
adjustments and credit memos that represent billing errors that are normally
adjusted within the first 90 days subsequent to the performance of service. A
provision for billing adjustments is charged against DIS revenues and a
provision for doubtful accounts is charged to general and administrative
expenses. We believe our risk of material loss is mitigated as we only have a
small number of customer accounts that have receivable balances in excess of
$100,000.
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 costs. We rely on historical information to support our reserve and
utilize management’s business judgment with respect to estimated future demand.
We reserved 100% of the cost of service inventory quantities in excess of a
projected 36 month demand for all periods presented. In the third quarter of
2009, we implemented several changes to the control and analysis of our
inventory and we were able to obtain more accurate future demand information
particularly in light of our product life cycles. In conjunction with physical
inventory valuation projects, we physically segregated our production and
service inventory and implemented new forecasting software. As a result of these
changes and our increased ability to obtain and better analyze information, we
began reserving 100% of the cost of production inventory quantities in excess of
a projected 24 month demand. Historically, we reserved 100% of the cost of
production inventory quantities in excess of a projected 12 month demand. The
refinement of our reserve methodology did not result in the write-up of
inventory previously reserved and did not impact the comparability of the
financial statements presented. Once inventory is reserved, we do not adjust the
reserve balance until the inventory is sold or disposed.
Digirad
Corporation
Notes
to Consolidated Financial Statements—(Continued)
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. 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.
Long-lived
assets that are not used in operations and are actively being marketed for sale
are classified as held for sale and are reflected as current assets on our
balance sheet. The values of these assets are reviewed quarterly and
do not exceed the anticipated cash inflows generated from the sale of these
assets.
Valuation
of Goodwill
On
May 1, 2007, we completed the acquisition of substantially all of the
assets and liabilities of Ultrascan, Inc. (“Ultrascan”), a provider of
ultrasound imaging systems and services to physicians’ offices and hospitals.
The acquisition of net assets from Ultrascan resulted in the recording of
goodwill, which represented the excess between the purchase price and the net
assets acquired. 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 perform a two-step impairment test
on goodwill. In the first step, we compare the fair value of the
reporting unit with goodwill to the carrying value of its long-term assets. If
the carrying value of the long-term assets exceeds the fair value of the
reporting unit, then we must perform the second step of the impairment test,
whereby the carrying value of the reporting unit’s goodwill is compared to its
implied fair value. If the carrying value of the goodwill exceeds the implied
fair value, an impairment loss equal to the difference would be
recorded.
No
impairment losses were recorded to Goodwill in 2009. In 2008, we
recorded a $2.5 million impairment loss in part due to a significant decline in
our evaluation of the goodwill assets. We determined that the implied
fair value of goodwill is $0.2 million utilizing the discounted cash flow method
under the income approach as well as the market approach, down from $2.7 million
in 2007. The impairment loss is included in loss from operations on
our statement of operations for fiscal 2008.
Restructuring
Restructuring
costs are included in loss from operations within the Consolidated Statements of
Operations. Restructuring loss for the year ended December 31, 2009
is comprised of one-time termination benefits for involuntarily terminated
employees. Restructuring loss for the year ended December 31, 2008 is
comprised of losses on the abandonment of property and equipment and assets held
for sale, one-time termination benefits for involuntarily terminated employees,
and obligations pertaining to abandoned property leases. Losses on
property and equipment were recorded consistent with our accounting policy
related to long-lived assets, described above. 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.
Shipping
and Handling Fees and Costs
We record
all shipping and handling billings to a customer as revenue earned for the goods
provided. Shipping and handling costs are included in cost of
revenues and totaled $0.1 million, $0.3 million and $0.3 million for each of the
years ended 2009, 2008 and 2007, respectively.
Share-based
Payments
We grant
options to purchase our common stock and restricted stock units ("RSUs") to our
employees and directors under our equity compensation plans. Share-based
compensation cost is measured at the grant date based on the estimated fair
value of the award and is recognized as expense ratably over the requisite
service period. The Company's employee stock options have various restrictions
that reduce option value, including vesting provisions and restrictions on
transfer and hedging, among others, and are often exercised or forfeited prior
to their contractual maturity.
Compensation
Costs.
Results of operations for each of the years ended 2009,
2008 and 2007 include
stock-based compensation
costs of $0.6 million, $0.7 million, and $0.9 million,
respectively. There were no significant modifications to our
share-based employee payment plans during the periods presented that resulted in
any incremental compensation cost. The following is a summary of
stock-based compensation costs, by income statement classification (in
thousands):
Digirad
Corporation
Notes
to Consolidated Financial Statements—(Continued)
|
Years
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
The
composition of stock-based compensation is as follows:
|
||||||||||||
|
Cost
of DIS revenue
|
$ | 27 | $ | 56 | $ | 71 | ||||||
|
Cost
of product revenue
|
56 | 53 | 49 | |||||||||
|
Research
and development
|
37 | 47 | 78 | |||||||||
|
Marketing
and sales
|
93 | 115 | 100 | |||||||||
|
General
and administrative
|
393 | 445 | 607 | |||||||||
| $ | 606 | $ | 716 | $ | 905 | |||||||
Valuation
. We
estimate the fair value of the stock option awards using the
Black-Scholes-Merton 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. The fair
value of stock options is derived using the following assumptions, some of which
are subjective by nature. The following table summarizes the weighted-average
assumptions used in the valuation of stock options during each
period:
|
Years ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Expected
life (in years)
|
6.0 | 6.0 | 5.8 | |||||||||
|
Weighted
average volatility
|
65 | % | 56 | % | 50 | % | ||||||
|
Forfeiture
rate
|
4 | % | — | 16 | % | |||||||
|
Risk-free
interest rate
|
3.0 | % | 2.8 | % | 4.6 | % | ||||||
|
Expected
dividend yield
|
— | — | — | |||||||||
The
weighted-average expected option term for each of the years ended 2009, 2008,
and 2007 reflects the application of the simplified method, which defines the
life as the average of the contractual term of the options and the weighted
average vesting period for all options. We utilized this approach as our
historical share option exercise experience does not provide a reasonable basis
upon which to estimate an expected term. Expected volatilities are based on
historical volatility of our stock. We estimated the forfeiture rate based on
historical data for forfeitures and we are recognizing compensation costs only
for those equity awards expected to vest. The risk-free rate for
periods within the contractual life of the option is based on the U.S. Treasury
yield in effect at the time of grant. We have never declared or paid
dividends and have no plans to do so in the foreseeable future.
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 product 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 in our warranty reserve are as
follows (in thousands):
|
Years ended
December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Balance
at beginning of year
|
$ | 906 | $ | 930 | $ | 788 | ||||||
|
Charges
to cost of revenues
|
406 | 1,069 | 1,747 | |||||||||
|
Applied
to liability
|
(980 | ) | (1,093 | ) | (1,605 | ) | ||||||
|
Balance
at end of year
|
$ | 332 | $ | 906 | $ | 930 | ||||||
Research
and Development
Research
and development costs are expensed as incurred.
Advertising
Costs
Advertising
costs are expensed as incurred. Total advertising costs for each of the years
ended 2009, 2008 and 2007 were $0.6 million, $0.8 million and $0.7 million,
respectively.
Vender
Concentration
We
currently have one critical vendor relationship related to our
radiopharmaceutical supplies which represents approximately 40% of our liability
balance as of December 31, 2009.
Digirad
Corporation
Notes
to Consolidated Financial Statements—(Continued)
Net
Income (Loss) Per Share
Basic
earnings (loss) per share (“EPS”) is calculated by dividing net income or loss
by the weighted average number of common shares and vested restricted stock
units outstanding. Diluted EPS is computed by dividing net income or loss by the
weighted average number of common shares and vested restricted stock units
outstanding and the weighted average number of dilutive common stock
equivalents, including stock options and non-vested restricted stock
units. Common stock equivalents are only included in the diluted
earnings per share calculation when their effect is dilutive. For the
years ended 2008 and 2007, there is no difference in basic or diluted earnings
per share since we generated a net loss in those years. Potentially dilutive
securities totaling 249,000 and 349,000 at December 31, 2008 and 2007,
respectively, were excluded from diluted earnings per share because of their
anti-dilutive effect. On July 9, 2009, we cancelled options to purchase an
aggregate of 1,087,230 shares of our common stock, and in exchange, granted new
options to purchase an aggregate of 398,493 shares of our common stock, which
did not have a material impact on the Consolidated Statements of Operations or
net income (loss) per share. The following table sets forth the computation of
basic and diluted net income (loss) per share for the periods indicated (in
thousands, except per share amounts):
|
Years
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Net
income (loss)
|
$ | 608 | $ | (6,865 | ) | $ | (1,376 | ) | ||||
|
Shares
used to compute basic net income (loss) per share
|
19,073 | 18,955 | 18,845 | |||||||||
|
Dilutive
potential common shares:
|
||||||||||||
|
Stock
options
|
408 | — | — | |||||||||
|
Restricted
stock units
|
76 | — | — | |||||||||
|
Shares
used to compute diluted net income (loss) per share
|
19,557 | 18,955 | 18,845 | |||||||||
|
Basic
and diluted net income (loss) per share
|
$ | 0.03 | $ | (0.36 | ) | $ | (0.07 | ) | ||||
New
Accounting Pronouncements
The FASB
established the
FASB
Accounting Standards Codification™
(“Codification”) as the source of
authoritative U.S. generally accepted accounting principles (“GAAP”) recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements issued for interim and annual periods ending after
September 15, 2009. The Codification has changed the manner in which U.S. GAAP
guidance is referenced, but did not have an impact on our consolidated financial
position, results of operations or cash flows.
The FASB
issued authoritative guidance on subsequent events in May 2009, which we adopted
on a prospective basis beginning April 1, 2009. The guidance is
intended to establish general standards of accounting and disclosure of events
that occur after the balance sheet date but before financial statements are
issued or are available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for
selecting that date. The application did not have an impact on our consolidated
financial position, results of operations or cash flows.
The FASB
issued authoritative guidance on business combinations in December 2007, which
is effective for business combinations with an acquisition date subsequent to
December 31, 2008. The guidance establishes principles and
requirements for how an acquirer in a business combination recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any controlling interest; recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase;
and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. Also, under the guidance, transaction costs will no
longer be considered part of the fair value of an acquisition, and will be
expensed as incurred.
The FASB
issued authoritative guidance on the reporting of noncontrolling interests in
consolidated financial statements in December 2007, which is effective for
fiscal years beginning on or after December 1, 2008. The guidance
improves the relevance, comparability and transparency of financial information
provided to investors by requiring all entities to report noncontrolling
(minority) interests in subsidiaries in the same way. The guidance also
eliminates the diversity that exists in accounting for transactions between an
entity and noncontrolling interests by requiring they be treated as equity
transactions. As of December 31, 2009, we did not hold any
noncontrolling interests in subsidiaries.
2.
Financial Statement Details
The
composition of certain balance sheet accounts is as follows (in
thousands):
Accounts
Receivable
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Accounts
receivable
|
$ | 8,843 | $ | 10,569 | ||||
|
Less
reserves and allowance for doubtful accounts
|
(1,290 | ) | (1,245 | ) | ||||
| $ | 7,553 | $ | 9,324 | |||||
Inventories
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Raw
materials
|
$ | 3,431 | $ | 1,997 | ||||
|
Work-in-progress
|
1,916 | 3,056 | ||||||
|
Finished
goods
|
1,852 | 520 | ||||||
| 7,199 | 5,573 | |||||||
|
Less
reserves for excess and obsolete inventories
|
(797 | ) | (595 | ) | ||||
| $ | 6,402 | $ | 4,978 | |||||
Property
and Equipment
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Machinery
and equipment
|
$ | 22,440 | $ | 24,743 | ||||
|
Computers
and software
|
2,270 | 3,955 | ||||||
|
Leasehold
improvements
|
764 | 768 | ||||||
| 25,474 | 29,466 | |||||||
|
Less
accumulated depreciation and amortization
|
(15,211 | ) | (16,038 | ) | ||||
| $ | 10,263 | $ | 13,428 | |||||
Other
Accrued Liabilities
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Radiopharmaceuticals
and consumable medical supplies
|
$ | 323 | $ | 507 | ||||
|
Professional
fees
|
338 | 420 | ||||||
|
Facilities
and related costs
|
218 | 400 | ||||||
|
Outside
services and consulting
|
312 | 373 | ||||||
|
Travel
expenses
|
165 | 229 | ||||||
|
Sales
and property taxes payable
|
278 | 197 | ||||||
|
Other
accrued liabilities
|
472 | 685 | ||||||
| $ | 2,106 | $ | 2,811 | |||||
3.
Commitments and Contingencies
Leases.
We lease
our
facilities and certain automotive equipment under non-cancellable operating
leases expiring through 2016
.
Rent
expense (including common area charges) was $1.3 million, $1.4 million and $1.4
million for each of the years ended 2009, 2008 and 2007, respectively.
The future minimum rental payments due under non-cancelable
operating leases having initial or remaining lease terms in excess of one year
at December 31, 2009 are as follows (in thousands):
|
Operating
Leases
|
||||
|
2010
|
$ | 1,275 | ||
|
2011
|
1,057 | |||
|
2012
|
944 | |||
|
2013
|
728 | |||
|
2014
|
575 | |||
|
Thereafter
|
683 | |||
|
Total
minimum lease payments
|
$ | 5,262 | ||
Digirad
Corporation
Notes
to Consolidated Financial Statements—(Continued)
Acquisition.
On
May 1, 2007, we completed the acquisition of substantially all of the
assets and liabilities of Ultrascan, Inc. (“Ultrascan”), a provider of
ultrasound imaging systems and services to physicians’ offices and hospitals.
Additional consideration, payable in cash and common stock, of up to $3.9
million may be payable to the seller, or its designees, in the event that
certain financial milestones are achieved over a four year period commencing on
the date of the acquisition. The additional consideration will be added to
goodwill if and when it is earned, because the nature of the financial
milestones do not give rise to the existence of additional intangible
assets.
Stock Repurchase
Program.
On February 4, 2009, our board of directors
authorized a stock buyback program to repurchase up to an aggregate of $2.0
million of our issued and outstanding common shares. The timing and
extent of the repurchase depends upon market conditions, applicable legal
requirements, and other factors. During 2009, we repurchased 547,000
shares of our common stock at a cost of $1.0 million.
Legal 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.
As litigation and the administrative proceedings are inherently uncertain, we
cannot predict the outcome of such matters. While the ultimate outcome of
litigation is always uncertain, we do not believe that it will have a material
adverse effect on our business or financial results.
4. Intangible
Assets
Our
intangible assets are comprised of customer relationships, covenants not to
compete, and patents. Customer relationships and covenants not to
compete were recorded as a result of the acquisition of net assets from
Ultrascan in May 2007, and have been recorded within the DIS segment since the
date of the acquisition along with the related amortization
expense. All patents and trademarks, as well as their related
amortization and impairment expense, are recorded within the Product
segment. The carrying value of our intangible assets as of December
31, 2009 and 2008 is comprised of the following (in thousands):
|
December
31, 2009
|
||||||||||||||||
|
Weighted
Average Estimated Useful Life (years)
|
Gross
Amount
|
Accumulated
Amortization
|
Net
Book Value
|
|||||||||||||
|
Intangibles
subject to amortization:
|
||||||||||||||||
|
Customer
relationships
|
7 | $ | 2,600 | $ | 1,588 | $ | 1,012 | |||||||||
|
Covenants
not to compete
|
5 | 300 | 160 | 140 | ||||||||||||
|
Patents
|
8 - 15 | 153 | 62 | 91 | ||||||||||||
|
Total
intangible assets:
|
7 | $ | 3,053 | $ | 1,810 | $ | 1,243 | |||||||||
|
December
31, 2008
|
||||||||||||||||
|
Weighted
Average Estimated Useful Life (years)
|
Gross
Amount
|
Accumulated
Amortization
|
Net
Book Value
|
|||||||||||||
|
Intangibles
subject to amortization:
|
|
|||||||||||||||
|
Customer
relationships
|
7 | $ | 2,600 | $ | 1,083 | $ | 1,517 | |||||||||
|
Covenants
not to compete
|
5 | 300 | 100 | 200 | ||||||||||||
|
Patents
|
8 - 15 | 165 | 49 | 116 | ||||||||||||
|
Total
intangible assets:
|
7 | $ | 3,065 | $ | 1,232 | $ | 1,833 | |||||||||
For the
year ended December 31, 2009, our impairment losses related to
patents were not significant. We recorded impairment losses of $0.1
million and $0.2 million related to patents no longer utilized in currently
marketed products for each of the years ended 2008 and 2007,
respectively. Impairment losses are included in general and
administrative expenses in the Consolidated Statements of
Operations.
Digirad
Corporation
Notes
to Consolidated Financial Statements—(Continued)
The
aggregate amortization expense related to intangible assets with finite lives
was $0.6 million, $0.7 million, and $0.5 million for each of the years ended
2009, 2008, and 2007, respectively. Estimated future amortization expense
related to intangible assets with finite lives at December 31, 2009 is as
follows:
|
In
Thousands
|
||||
|
2010
|
$ | 427 | ||
|
2011
|
333 | |||
|
2012
|
234 | |||
|
2013
|
165 | |||
|
2014
|
57 | |||
|
Thereafter
|
27 | |||
|
Total
|
$ | 1,243 | ||
5.
Goodwill
Goodwill
has been recorded within a reporting unit of our DIS segment since the
acquisition of net assets from Ultrascan. As a result of our annual
impairment test during the fourth quarter of 2008, we recorded a $2.5 million
impairment loss due to a significant decline in our market capitalization ,
adjusting goodwill to its current carrying value of $0.2 million. No
impairment loss was recorded in 2009. In performing our annual
impairment test, we determine the implied fair value of our goodwill utilizing
the discounted cash flow method under the income approach as well as the market
approach. Under the income approach, we derive 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. Under the
market-based approach, we derived the fair value based on revenue and earnings
multiples of comparable publicly-traded peer companies.
6. Restructuring
and Assets Held for Sale
Fiscal 2009 Restructuring
Plan.
As part of an ongoing review of current market
conditions and internal operations, we reduced our workforce by approximately 25
positions in the third quarter of 2009. We have completed our
restructuring plan and incurred $125,000 and $109,000 of severance costs in the
Product and DIS imaging segments, respectively, which were included in the
restructuring loss line item within the Consolidated Statements of Operations in
the third quarter of 2009. We do not anticipate significant
additional costs to be incurred in connection with the restructuring
plan.
Fiscal 2008 Restructuring
Plan.
In response to historical operating losses within our
DIS business segment, we initiated a realignment of our imaging business in the
fourth quarter of 2008 which we substantially completed as of March 31,
2009. The realignment of the DIS segment included the sale and
closure of underperforming DIS hub locations, which has allowed us to better
focus on improving hub performance of our existing hub locations and, in part,
benefit from our Centers of Influence marketing model. These sales
and closures involved the sale or abandonment of property and equipment and
staff reductions at the hub locations impacted by the restructuring plans, as
well as the reduction of certain management positions. The related
restructuring charges are included in the restructuring loss line item within
the Consolidated Statements of Operations of the DIS imaging
segment.
Restructuring
activity through December 31, 2009 consisted of the following (in
thousands):
|
Year ended December 31,
2009
|
||||||||||||||||||||||||||||
|
Restructuring
charges:
|
Liability
as of December 31, 2008
|
Charges/
Adjustments
|
Cash
Payments/
Adjustments
|
Non-cash
Settlements
|
Liability
as of December 31, 2009
|
Total
costs incurred as of December
31,
2009
|
Expected
costs as of December 31, 2009
|
|||||||||||||||||||||
|
Fiscal
2009 Restructuring Plan:
|
||||||||||||||||||||||||||||
|
Severance
Pay
|
$ | — | $ | 234 | $ | (231 | ) | $ | — | $ | 3 | $ | 234 | $ | 234 | |||||||||||||
|
Fiscal
2008 Restructuring Plan:
|
||||||||||||||||||||||||||||
|
Loss
on property and equipment
|
— | (19 | ) | 27 | (8 | ) | — | 978 | 978 | |||||||||||||||||||
|
Severance
Pay
|
203 | 47 | (170 | ) | (80 | ) | — | 309 | 309 | |||||||||||||||||||
|
Lease
obligations
|
39 | 57 | (78 | ) | — | 18 | 115 | 115 | ||||||||||||||||||||
|
Other
|
10 | — | (10 | ) | — | — | 10 | 10 | ||||||||||||||||||||
|
Total
restructuring charges
|
$ | 252 | $ | 319 | $ | (462 | ) | $ | (88 | ) | $ | 21 | $ | 1,646 | $ | 1,646 | ||||||||||||
Severance
costs that require no future performance or service are recorded at the time
they are communicated to the affected employees. Losses on the sale
or disposal of property and equipment are recorded when they are estimable or
incurred. The majority of the losses pertained to property and
equipment that were sold or disposed of in the quarters ended March 31, 2009 and
December 31, 2008. Losses on leased property at the hub locations are
recorded when the lease is abandoned. The lease abandonments occurred
in the quarters ended March 31, 2009 and December 31, 2008.
Digirad
Corporation
Notes
to Consolidated Financial Statements—(Continued)
7. Investments
We
measure available-for-sale securities at fair value on a recurring
basis. We measure fair value based on the price that would be
received in selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. In
order to increase consistency and comparability in fair value measurements, the
FASB Codification establishes a fair value hierarchy that prioritizes observable
and unobservable inputs used to measure fair value into three broad
levels. These levels, in order of highest priority to lowest
priority, are described below:
Level
1: Quoted prices (unadjusted) in active markets that are accessible
at the measurement date for assets or liabilities.
Level
2: Observable prices that are based on inputs not quoted on active
markets, but corroborated by market data.
Level
3: Unobservable inputs are used when little or no market data is
available.
The fair
values of our available-for-sale securities were determined using the following
inputs (in thousands):
|
Fair
Value Measurements at December 31, 2009 Using
|
||||||||||||||||
|
Quoted
Prices in Active Markets for Identical Assets
|
Significant
Other Observable Inputs
|
Significant
Unobservable Inputs
|
||||||||||||||
|
Total
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|||||||||||||
|
Available-for-sale
securities:
|
|
|||||||||||||||
|
U.S.
treasury securities
|
$ | 4,066 | $ | 4,066 | $ | — | $ | — | ||||||||
|
Government
sponsored entities
|
3,913 | — | 3,913 | — | ||||||||||||
|
Corporate
debt securities
|
10,168 | — | 10,168 | — | ||||||||||||
|
Municipal
debt securities
|
103 | — | 103 | — | ||||||||||||
|
Total
available-for-sale securities:
|
$ | 18,250 | $ | 4,066 | $ | 14,184 | $ | — | ||||||||
Our
investments in U.S. treasury securities were valued based on publicly available
quoted prices for identical securities as of December 31, 2009. Our
investments in government sponsored entities, corporate debt securities and
municipal debt securities were valued by a third party pricing vendor using
proprietary valuation models and analytical tools. The inputs to
these models related to similar instruments and were both objective and publicly
available.
8.
Stockholders’ Equity
Stock
Options and Restricted Stock Units
At
December 31, 2009, we have one stock option plan (the “2004 Plan”) under which
stock options and restricted stock units (“RSUs”) may be granted to employees
and non-employee members of our Board of Directors. Terms of any equity
instruments granted under the 2004 Plan are approved by the Board of
Directors. Stock options typically vest over two to four years and
have a contractual term of 10 years. RSUs generally vest over one
year and must be settled at the earlier of the recipients’ termination date or
36 months after grant. Under the 2004 Plan, we are authorized to
issue an aggregate of 2,400,000 shares of common stock. The number of shares
reserved for issuance under the 2004 Plan is subject to increase by any shares
under the 1998 Stock Option/Stock Issuance Plan (the “1998 Plan”) that are
forfeited, expire or are cancelled up to a maximum of 1,500,000
shares. As of December 31, 2009, the number of shares reserved for
issuance under the 2004 Plan was 324,000 shares due to forfeited, expired and
cancelled shares under the 1998 Plan.
Prior to
the completion of our initial public offering in June 2004, we were authorized
to issue options under our 1991 Stock Option Program, 1997 Stock Option/Stock
Issuance Plan and 1998 Stock Option/Stock Issuance Plan; however, no additional
awards may now be made under such plans.
The
following table summarizes option activity under the stock option plans (in
thousands, except per share amounts):
|
Shares
|
Weighted
average exercise price
|
Average
remaining contractual term (in years)
|
Aggregate
intrinsic
value
|
|||||||||||||
|
Outstanding
at December 31, 2008
|
2,756 | $ | 3.82 | 7.46 | $ | 29 | ||||||||||
|
Granted
|
733 | $ | 1.12 | 4,774 | 4,541 | |||||||||||
|
Exercised
|
(66 | ) | $ | 0.51 | (972 | ) | (1,172 | ) | ||||||||
|
Forfeited
or expired
|
(1,652 | ) | $ | 4.48 | (972 | ) | (1,172 | ) | ||||||||
|
Outstanding
at December 31, 2009
|
1,771 | $ | 2.21 | 4.94 | $ | 1,682 | ||||||||||
|
Vested
or expected to vest at December 31, 2009
|
1,771 | $ | 2.21 | 4.94 | $ | 1,682 | ||||||||||
|
Exercisable
at December 31, 2009
|
752 | $ | 3.84 | 4.38 | $ | 561 | ||||||||||
Digirad
Corporation
Notes
to Consolidated Financial Statements—(Continued)
|
2009
|
2008
|
2007
|
||||||||||
|
Weighted
average grant-date fair value of options granted
|
$ | 0.59 | $ | 0.91 | $ | 2.28 | ||||||
|
Aggregate
intrinsic value of options exercised
|
$ | 98 | $ | 17 | $ | 421 | ||||||
|
Fair
value of shares vested
|
$ | 5 | $ | 1,091 | $ | 1,537 | ||||||
A summary
of the status of our nonvested RSUs as of December 31, 2009, and changes during
the year ended December 31, 2009, is presented below (in thousands, except per
share amounts):
|
Shares
|
Weighted average
grant-date
fair value
|
|||||||
|
Nonvested
outstanding at December 31, 2008
|
30 | $ | 2.71 | |||||
|
Granted
|
150 | $ | 1.26 | |||||
|
Vested
|
(127 | ) | $ | 1.60 | ||||
|
Nonvested
outstanding at December 31, 2009
|
53 | $ | 1.25 | |||||
|
Vested
or expected to vest at December 31, 2009
|
53 | $ | 1.25 | |||||
As of
December 31, 2009, $.9 million of total unrecognized compensation cost related
to unvested share-based compensation arrangements granted under our various
plans is expected to be recognized over a weighted-average period of 2.5 years.
Cash received from option exercises for the years ended December 31, 2009, 2008,
and 2007 was $34,000, $6,000, and $66,000, respectively. Because of our net
operating losses, we did not realize any tax benefits for the tax deductions
from share-based payment arrangements during the three years ended December 31,
2009.
Common
Shares Reserved for Issuance
The
following table summarizes common shares reserved for future issuance at
December 31, 2009 (in thousands):
|
Stock
options outstanding
|
1,771 | |||
|
Restricted
stock units outstanding
|
150 | |||
|
Equity
instruments available for future grant
|
1,070 | |||
|
Total
common shares reserved for issuance
|
2,991 |
9.
Income Taxes
As of
December 31, 2009, we had Federal and state income tax net operating loss carry
forwards of $85.9 million and $40.4 million, respectively. Federal
loss carry forwards do not begin expiring until 2011, unless previously
utilized. No material state loss carry forwards will expire until
2014, unless previously utilized. We also have Federal and California research
and other credit carry forwards of approximately $1.8 million and $1.9 million,
respectively. Material Federal credits do not begin expiring until 2012, unless
previously utilized. The California research credits have no expiration.
Pursuant to Internal Revenue Code Sections 382 and 383, use of our net operating
loss and credit carry forwards 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 ASC 740, “Accounting for Income Taxes”.
Our net
deferred tax assets consisted of the following (in thousands):
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Net
operating loss carry forwards
|
$ | 31,797 | $ | 32,830 | ||||
|
Research
and development and other credits
|
3,274 | 3,278 | ||||||
|
Reserves
|
1,349 | 1,215 | ||||||
|
Other,
net
|
4,645 | 4,004 | ||||||
|
Total
deferred tax assets
|
41,065 | 41,327 | ||||||
|
Deferred
tax liabilities - depreciation
|
(950 | ) | (862 | ) | ||||
|
Reserve
for uncertain tax positions
|
(1,403 | ) | (1,451 | ) | ||||
|
Valuation
allowance for deferred tax assets
|
(38,712 | ) | (39,014 | ) | ||||
|
Net
deferred tax assets
|
$ | — | $ | — | ||||
Digirad
Corporation
Notes
to Consolidated Financial Statements—(Continued)
We have
recorded income tax expense of approximately $42,000 during
2009. Owing to its insignificance, we have included it as a
component of other expense in the Consolidated Statements of
Operations. Income tax expense was not significant in either 2008 or
2007.
Differences
between the provision for income taxes and income taxes at the statutory federal
income tax rate are as follows:
|
Years ended
December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Income
tax at statutory federal rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State
income taxes, net of federal benefit
|
13.0 | 4.0 | 3.1 | |||||||||
|
Permanent
differences, tax credits and other true ups
|
4.9 | 5.1 | (11.2 | ) | ||||||||
|
FIN
48 and other reserves
|
(1.0 | ) | 0.1 | (83.5 | ) | |||||||
|
Change
in valuation allowances
|
(45.6 | ) | (44.3 | ) | 56.2 | |||||||
|
Provision
for income taxes
|
6.3 | % | (0.1 | )% | (0.4 | )% | ||||||
On
January 1, 2007, we adopted the guidance related to accounting for
uncertainty in income taxes issued by the FASB. As a result of this change,
the Company recorded a cumulative change of $1.2 million which was recorded
as a decrease to deferred tax assets and a corresponding reduction to the
valuation allowance.
The
following table summarized the activity related to our unrecognized tax benefits
(in thousands):
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Balance
at beginning of year
|
$ | 1,497 | $ | 1,509 | ||||
|
Increases
related to prior year tax positions
|
69 | — | ||||||
|
Increases
related to current year tax positions
|
6 | — | ||||||
|
Change
in valuation allowances
|
(9 | ) | (12 | ) | ||||
|
Balance
at end of year
|
$ | 1,563 | $ | 1,497 | ||||
Included
in the unrecognized tax benefits of $1.6 million at December 31, 2009 was $1.3
million of tax benefits that, if recognized, would reduce our annual effective
tax rate, subject to the valuation allowance. We do not expect our unrecognized
tax benefits to change significantly over the next 12 months.
We file
income tax returns in the U.S. and in various state jurisdictions with varying
statutes of limitations. We are no longer subject to income tax examination by
tax authorities for years prior to 2005; however, our net operating loss
carryforward and research credit carryforwards arising prior to that year are
subject to adjustment. Our policy is to recognize interest expense and penalties
related to income tax matters as a component of income tax expense. There were
no accrued interest and penalties associated with uncertain tax positions as of
December 31, 2009.
10.
Employee Retirement Plan
We have
two 401(k) retirement plans under which all full-time employees may contribute
up to 100% of their annual salary, within IRS limits. Company contributions to
our retirement plans totaled $0.3 million, $0.2 million and $0.2 million for
each of the years ended 2009, 2008 and 2007, respectively.
11.
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. The accounting policies of the reportable segments
are the same as those described in the summary of significant accounting
policies. The majority of our capital expenditures arise at our DIS
segment.
Digirad
Corporation
Notes
to Consolidated Financial Statements—(Continued)
|
Segment
data in thousands
|
Years
ended December 31,
|
|||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Gross
profit by segment:
|
||||||||||||
|
DIS
|
$ | 13,842 | $ | 11,507 | $ | 12,920 | ||||||
|
Product
|
6,383 | 8,564 | 7,598 | |||||||||
|
Consolidated
gross profit
|
$ | 20,225 | $ | 20,071 | $ | 20,518 | ||||||
|
Income
(loss) from operations by segment:
|
||||||||||||
|
DIS
|
$ | 1,290 | $ | (8,357 | ) | $ | (562 | ) | ||||
|
Product
|
(1,232 | ) | 733 | (2,279 | ) | |||||||
|
Consolidated
income (loss) from operations
|
$ | 58 | $ | (7,624 | ) | $ | (2,841 | ) | ||||
|
Depreciation,
amortization:
|
||||||||||||
|
DIS
|
$ | 4,464 | $ | 5,433 | $ | 4,024 | ||||||
|
Product
|
714 | 890 | 1,111 | |||||||||
|
Consolidated
total
|
$ | 5,178 | $ | 6,323 | $ | 5,135 | ||||||
|
As
of December 31,
|
||||||||||||
|
2009
|
2008
|
|
||||||||||
|
Identifiable
assets by segment:
|
||||||||||||
|
DIS
|
$ | 18,067 | $ | 23,881 | ||||||||
|
Product
|
40,622 | 37,314 | ||||||||||
|
Consolidated
assets
|
$ | 58,689 | $ | 61,195 | ||||||||
|
Goodwill
by segment:
|
||||||||||||
|
DIS
|
$ | 184 | $ | 184 | ||||||||
|
Product
|
— | — | ||||||||||
|
Consolidated
goodwill
|
$ | 184 | $ | 184 | ||||||||
12.
Quarterly Financial Data (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 2009 and 2008 are
as follows (in thousands, except per share data):
|
1st
Quarter
|
2nd
Quarter
|
3rd
Quarter
|
4th
Quarter
|
|||||||||||||
|
Fiscal
2009
|
||||||||||||||||
|
Revenues
|
$ | 17,710 | $ | 18,559 | $ | 16,928 | $ | 16,399 | ||||||||
|
Gross
profit
|
$ | 5,109 | $ | 5.888 | $ | 4,513 | $ | 4,715 | ||||||||
|
Income
(loss) from operations
|
$ | (95 | ) | $ | 638 | $ | (514 | ) | $ | 29 | ||||||
|
Net
income (loss)
|
$ | 44 | $ | 784 | $ | (414 | ) | $ | 194 | |||||||
|
Net
income (loss) per common share—basic and diluted
|
$ | 0.00 | $ | 0.04 | $ | (0.02 | ) | $ | 0.01 | |||||||
|
Fiscal
2008
|
||||||||||||||||
|
Revenues
|
$ | 18,271 | $ | 19,897 | $ | 20,203 | $ | 21,987 | ||||||||
|
Gross
profit
|
$ | 4,413 | $ | 4,555 | $ | 4,823 | $ | 6,280 | ||||||||
|
Loss
from operations
|
$ | (1,699 | ) | $ | (1,414 | ) | $ | (981 | ) | $ | (3,530 | ) | ||||
|
Net
loss
|
$ | (1,395 | ) | $ | (1,156 | ) | $ | (869 | ) | $ | (3,445 | ) | ||||
|
Net
loss per common share—basic and diluted (1)
|
$ | (0.07 | ) | $ | (0.06 | ) | $ | (0.05 | ) | $ | (0.18 | ) | ||||
|
|
(1)
|
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.
|
F-19
TABLE OF CONTENTS
Part IItem 1. BusinessPart IIPart IIIPart IV