DIGIRAD CORP
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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ý
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019
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o
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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
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Commission file number: 001-35947
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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1048 Industrial Court, Suwanee, GA
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30024
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(Address of Principal Executive Offices)
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(Zip Code)
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(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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Trading Symbol(s)
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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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DRAD
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NASDAQ Global Market
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
x
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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o
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Accelerated filer
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o
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Non-accelerated filer
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x
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Smaller reporting company
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x
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Emerging growth company
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o
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||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o
Yes No
x
As of
April 29, 2019
the registrant had 20,309,908 shares of Common Stock ($0.0001 par value) outstanding.
DIGIRAD CORPORATION
TABLE OF CONTENTS
2
Important Information Regarding Forward-Looking Statements
Portions of this Quarterly Report on Form 10-Q (including information incorporated by reference) include “forward-looking statements” based on our current beliefs, expectations, and projections regarding our business strategies, market potential, future financial performance, industry, and other matters. This includes, in particular, “Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q, as well as other portions of this Quarterly Report on Form 10-Q. The words “believe,” “expect,” “anticipate,” “project,” “could,” “would,” and similar expressions, among others, generally identify “forward-looking statements,” which speak only as of the date the statements were made. The matters discussed in these forward-looking statements are subject to risks, uncertainties, and other factors that could cause our actual results to differ materially from those projected, anticipated, or implied in the forward-looking statements. The most significant of these risks, uncertainties, and other factors are described in “Item 1A — Risk Factors” of this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the U.S. Securities and Exchange Commission on March 1, 2019. Except to the limited extent required by applicable law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
3
PART I. FINANCIAL INFORMATION
|
ITEM 1.
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FINANCIAL STATEMENTS
|
DIGIRAD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands, except for per share amounts)
|
Three Months Ended March 31,
|
||||||||
|
2019
|
2018
|
|||||||
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Revenues:
|
||||||||
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Services
|
$
|
21,389
|
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$
|
22,623
|
|
||
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Product and product-related
|
2,523
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|
2,842
|
|
||||
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Total revenues
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23,912
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25,465
|
|
||||
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Cost of revenues:
|
||||||||
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Services
|
18,194
|
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19,261
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|
||||
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Product and product-related
|
1,737
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1,597
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|
||||
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Total cost of revenues
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19,931
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20,858
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|
||||
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Gross profit
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3,981
|
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4,607
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|
||||
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Operating expenses:
|
||||||||
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Marketing and sales
|
1,143
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1,467
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|
||||
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General and administrative
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3,690
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4,392
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||||
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Amortization of intangible assets
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283
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357
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||||
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Total operating expenses
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5,116
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6,216
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||||
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Loss from operations
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(1,135
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)
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(1,609
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)
|
||||
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Other expense:
|
||||||||
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Other expense, net
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(198
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)
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(17
|
)
|
||||
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Interest expense, net
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(181
|
)
|
(217
|
)
|
||||
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Loss on extinguishment of debt
|
(151
|
)
|
—
|
|
||||
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Total other expense
|
(530
|
)
|
(234
|
)
|
||||
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Loss before income taxes
|
(1,665
|
)
|
(1,843
|
)
|
||||
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Income tax benefit
|
8
|
|
455
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|
||||
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Net loss from continuing operations
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(1,657
|
)
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(1,388
|
)
|
||||
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Net income from discontinued operations
|
—
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5,494
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|
||||
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Net (loss) income
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$
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(1,657
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)
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$
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4,106
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||
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Net (loss) income per share—basic and diluted
|
||||||||
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Continuing operations
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$
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(0.08
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)
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$
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(0.07
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)
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Discontinued operations
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—
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0.27
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||||
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Net (loss) income per share—basic and diluted
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$
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(0.08
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)
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$
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0.20
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||
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Dividends declared per common share
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$
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—
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$
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0.055
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||
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Net (loss) income
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$
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(1,657
|
)
|
$
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4,106
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||
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Other comprehensive (loss) income:
|
||||||||
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Reclassification of tax provision impact
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22
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—
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||||
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Reclassification of unrealized gains on equity securities to retained earnings
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—
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(17
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)
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||||
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Total other comprehensive income (loss)
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22
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(17
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)
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||||
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Comprehensive (loss) income
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$
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(1,635
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)
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$
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4,089
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||
See accompanying notes to the unaudited condensed consolidated financial statements.
4
DIGIRAD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
|
March 31,
2019 |
December 31,
2018 |
|||||||
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Assets
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|
|
||||||
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Current assets:
|
||||||||
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Cash and cash equivalents
|
$
|
797
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$
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1,545
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||
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Equity securities
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17
|
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153
|
|
||||
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Accounts receivable, net
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13,361
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12,642
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|
||||
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Inventories, net
|
5,483
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|
5,402
|
|
||||
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Restricted cash
|
168
|
|
167
|
|
||||
|
Other current assets
|
1,522
|
|
1,285
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|
||||
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Total current assets
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21,348
|
|
21,194
|
|
||||
|
Property and equipment, net
|
20,575
|
|
21,645
|
|
||||
|
Operating lease right-of-use assets, net
|
3,681
|
|
—
|
|
||||
|
Intangible assets, net
|
4,944
|
|
5,228
|
|
||||
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Goodwill
|
1,745
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|
1,745
|
|
||||
|
Restricted cash
|
101
|
|
101
|
|
||||
|
Deferred tax assets
|
16
|
|
—
|
|
||||
|
Other assets
|
2,183
|
|
681
|
|
||||
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Total assets
|
$
|
54,593
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$
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50,594
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|
||
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Liabilities and stockholders’ equity
|
||||||||
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Current liabilities:
|
||||||||
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Accounts payable
|
$
|
4,808
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$
|
5,206
|
|
||
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Accrued compensation
|
3,246
|
|
3,862
|
|
||||
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Accrued warranty
|
230
|
|
197
|
|
||||
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Deferred revenue
|
1,414
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|
1,687
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|
||||
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Operating lease liabilities
|
1,251
|
|
—
|
|
||||
|
Other current liabilities
|
2,474
|
|
2,265
|
|
||||
|
Total current liabilities
|
13,423
|
|
13,217
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|
||||
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Long-term debt
|
12,517
|
|
9,500
|
|
||||
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Deferred tax liabilities
|
121
|
|
121
|
|
||||
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Operating lease liabilities, net of current portion
|
2,564
|
|
—
|
|
||||
|
Other liabilities
|
1,715
|
|
1,956
|
|
||||
|
Total liabilities
|
30,340
|
|
24,794
|
|
||||
|
Commitments and contingencies (Note 9)
|
|
|
||||||
|
Stockholders’ equity:
|
||||||||
|
Preferred stock, $0.0001 par value: 10,000,000 shares authorized; no shares issued or outstanding
|
—
|
|
—
|
|
||||
|
Common stock, $0.0001 par value: 80,000,000 shares authorized; 20,309,908 and 20,249,786 shares issued and outstanding (net of treasury shares) at March 31, 2019 and December 31, 2018, respectively
|
2
|
|
2
|
|
||||
|
Treasury stock, at cost; 2,588,484 shares at March 31, 2019 and December 31, 2018
|
(5,728
|
)
|
(5,728
|
)
|
||||
|
Additional paid-in capital
|
145,516
|
|
145,428
|
|
||||
|
Accumulated other comprehensive loss
|
—
|
|
(22
|
)
|
||||
|
Accumulated deficit
|
(115,537
|
)
|
(113,880
|
)
|
||||
|
Total stockholders’ equity
|
24,253
|
|
25,800
|
|
||||
|
Total liabilities and stockholders’ equity
|
$
|
54,593
|
|
$
|
50,594
|
|
||
See accompanying notes to the unaudited condensed consolidated financial statements.
5
DIGIRAD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
Three Months Ended March 31,
|
||||||||
|
2019
|
2018
|
|||||||
|
Operating activities
|
||||||||
|
Net (loss) income
|
$
|
(1,657
|
)
|
$
|
4,106
|
|
||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||
|
Depreciation
|
1,526
|
|
1,910
|
|
||||
|
Amortization of intangible assets
|
283
|
|
370
|
|
||||
|
Amortization of operating lease right-of-use assets
|
276
|
|
—
|
|
||||
|
Provision for bad debt
|
75
|
|
13
|
|
||||
|
Gain on disposal of discontinued operations
|
—
|
|
(6,261
|
)
|
||||
|
Stock-based compensation
|
112
|
|
200
|
|
||||
|
Amortization of loan issuance costs
|
8
|
|
54
|
|
||||
|
Debt issuance costs write-off
|
151
|
|
—
|
|
||||
|
(Gain) loss on sale of assets
|
(42
|
)
|
5
|
|
||||
|
Deferred income taxes
|
(16
|
)
|
107
|
|
||||
|
Other, net
|
(28
|
)
|
17
|
|
||||
|
Changes in operating assets and liabilities:
|
||||||||
|
Accounts receivable
|
(794
|
)
|
3,119
|
|
||||
|
Inventories
|
8
|
|
(177
|
)
|
||||
|
Other assets
|
(454
|
)
|
185
|
|
||||
|
Accounts payable
|
(664
|
)
|
21
|
|
||||
|
Accrued compensation
|
(616
|
)
|
(2,299
|
)
|
||||
|
Deferred revenue
|
(273
|
)
|
(568
|
)
|
||||
|
Operating lease liabilities
|
(287
|
)
|
—
|
|
||||
|
Other liabilities
|
207
|
|
(382
|
)
|
||||
|
Net cash (used in) provided by operating activities
|
(2,185
|
)
|
420
|
|
||||
|
Investing activities
|
||||||||
|
Purchases of property and equipment
|
(387
|
)
|
(201
|
)
|
||||
|
Proceeds from sale of property and equipment
|
257
|
|
40
|
|
||||
|
Purchases of equity securities
|
—
|
|
(14
|
)
|
||||
|
Proceeds from sales of equity securities
|
140
|
|
—
|
|
||||
|
Proceeds from sale of discontinued operations
|
—
|
|
6,844
|
|
||||
|
Payments to acquire interest in joint ventures
|
(1,000
|
)
|
—
|
|
||||
|
Net cash (used in) provided by investing activities
|
(990
|
)
|
6,669
|
|
||||
|
Financing activities
|
||||||||
|
Proceeds from long-term borrowings
|
23,517
|
|
7,758
|
|
||||
|
Repayment of long-term debt
|
(20,500
|
)
|
(14,257
|
)
|
||||
|
Loan issuance costs
|
(381
|
)
|
(4
|
)
|
||||
|
Dividends paid
|
—
|
|
(1,105
|
)
|
||||
|
Taxes paid related to net share settlement of equity awards
|
(24
|
)
|
(70
|
)
|
||||
|
Repayment of obligations under finance leases
|
(184
|
)
|
(254
|
)
|
||||
|
Net cash provided by (used in) financing activities
|
2,428
|
|
(7,932
|
)
|
||||
|
Net decrease in cash and cash equivalents and restricted cash
|
(747
|
)
|
(843
|
)
|
||||
|
Cash, cash equivalents, and restricted cash at beginning of period
|
1,813
|
|
2,220
|
|
||||
|
Cash, cash equivalents, and restricted cash at end of period
|
$
|
1,066
|
|
$
|
1,377
|
|
||
See accompanying notes to the unaudited condensed consolidated financial statements.
6
DIGIRAD CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
|
Common stock
|
Treasury Stock
|
Additional
paid-in
capital
|
Accumulated
other
comprehensive
income (loss)
|
Accumulated
deficit
|
Total
stockholders’
equity
|
||||||||||||||||||||||
|
Shares
|
Amount
|
||||||||||||||||||||||||||
|
Balance at December 31, 2018
|
20,250
|
|
$
|
2
|
|
$
|
(5,728
|
)
|
$
|
145,428
|
|
$
|
(22
|
)
|
$
|
(113,880
|
)
|
$
|
25,800
|
|
|||||||
|
Stock-based compensation
|
—
|
|
—
|
|
—
|
|
112
|
|
—
|
|
—
|
|
112
|
|
|||||||||||||
|
Shares issued under stock incentive plans, net of shares withheld for employee taxes
|
60
|
|
—
|
|
—
|
|
(24
|
)
|
—
|
|
—
|
|
(24
|
)
|
|||||||||||||
|
Net loss
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(1,657
|
)
|
(1,657
|
)
|
|||||||||||||
|
Reclassification of tax provision impact
|
—
|
|
—
|
|
—
|
|
—
|
|
22
|
|
—
|
|
22
|
|
|||||||||||||
|
Balance at March 31, 2019
|
20,310
|
|
$
|
2
|
|
$
|
(5,728
|
)
|
$
|
145,516
|
|
$
|
—
|
|
$
|
(115,537
|
)
|
$
|
24,253
|
|
|||||||
|
Common stock
|
Treasury Stock
|
Additional
paid-in
capital
|
Accumulated
other
comprehensive
income (loss)
|
Accumulated
deficit
|
Total
stockholders’
equity
|
||||||||||||||||||||||
|
Shares
|
Amount
|
||||||||||||||||||||||||||
|
Balance at December 31, 2017
|
20,060
|
|
$
|
2
|
|
$
|
(5,728
|
)
|
$
|
148,163
|
|
$
|
(5
|
)
|
$
|
(114,633
|
)
|
$
|
27,799
|
|
|||||||
|
Stock-based compensation
|
—
|
|
—
|
|
—
|
|
200
|
|
—
|
|
—
|
|
200
|
|
|||||||||||||
|
Shares issued under stock incentive plans, net of shares withheld for employee taxes
|
59
|
|
—
|
|
—
|
|
(69
|
)
|
—
|
|
—
|
|
(69
|
)
|
|||||||||||||
|
Dividends paid
|
—
|
|
—
|
|
—
|
|
(1,105
|
)
|
—
|
|
—
|
|
(1,105
|
)
|
|||||||||||||
|
Net income
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
4,106
|
|
4,106
|
|
|||||||||||||
|
Unrealized loss on securities available-for-sale
|
—
|
|
—
|
|
—
|
|
—
|
|
(17
|
)
|
17
|
|
—
|
|
|||||||||||||
|
Balance at March 31, 2018
|
20,119
|
|
$
|
2
|
|
$
|
(5,728
|
)
|
$
|
147,189
|
|
$
|
(22
|
)
|
$
|
(110,510
|
)
|
$
|
30,931
|
|
|||||||
See accompanying notes to consolidated financial statements.
7
DIGIRAD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
Basis of Presentation
The unaudited condensed consolidated financial statements included in this Form 10-Q have been prepared in accordance with the U.S. Securities and Exchange Commission (“SEC”) instructions for Quarterly Reports on Form 10-Q. Accordingly, the condensed consolidated financial statements are unaudited and do not contain all the information required by U.S. generally accepted accounting principles (“GAAP”) to be included in a full set of financial statements. The unaudited condensed consolidated balance sheet at
December 31, 2018
has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for a complete set of financial statements. The audited consolidated financial statements for our fiscal year ended
December 31, 2018
, filed with the SEC on Form 10-K on
March 1, 2019
, include a summary of our significant accounting policies and should be read in conjunction with this Form 10-Q. In the opinion of management, all material adjustments necessary to present fairly the results of operations, cash flows, and balance sheets for such periods have been included in this Form 10-Q. All such adjustments are of a normal recurring nature. The results of operations for interim periods are not necessarily indicative of the results of operations for the entire year.
Discontinued Operations
On February 1, 2018, the Company completed the sale of its customer contracts relating to the Medical Device Sales and Service (“MDSS”) post-warranty service business to Philips North America LLC (“Philips”) pursuant to an Asset Purchase Agreement, dated as of December 22, 2017 for
$8.0 million
. For all periods presented in our condensed consolidated statements of operations, all sales, costs, expenses, and income taxes attributable to MDSS, except as related to the impact of the decrease in the federal statutory tax rate (see Note 10
Income Taxes
), have been aggregated under the caption “earnings from discontinued operations, net of income taxes.” Cash flows used in or provided by MDSS operations as part of discontinued operations are disclosed in Note 2
Discontinued Operations
. Unless otherwise noted, amounts and disclosures throughout these notes to condensed consolidated financial statements relate to our continuing operations.
Sale of Telerhythmics, LLC
On October 31, 2018, the Company entered into a membership interest purchase agreement (the “Telerhythmics Purchase Agreement”) with G Medical Innovations USA, Inc. (“G Medical”), pursuant to which we sold all the outstanding membership interests in Telerhythmics (“Telerhythmics”) to G Medical. The total consideration related to the Telerhythmics Purchase Agreement was
$1.95 million
in cash, which was paid at the closing on October 31, 2018. In connection with the transaction, the Company agreed to make partial monthly rent payments aggregating
$0.2 million
through January 2021. The Telerhythmics Purchase Agreement includes customary representations, warranties, covenants and indemnification obligations of the parties, including a non-competition covenant by the Company. The gain on the sale of Telerhythmics, LLC was approximately
$19 thousand
.
Use of Estimates
Preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ from management’s estimates.
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities, and operating lease liabilities, net of current portion in our condensed consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our condensed consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We use the implicit discount rate when readily determinable; however, as most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease valuation may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
8
The Company elected to not separate lease and non-lease components of its operating leases in which it is the lessee and lessor. Additionally, The Company elected not to recognize right-of use assets and leases liabilities that arise from short-term leases of twelve months or less.
Recently Adopted Accounting Standards
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which amended the existing accounting standards for the accounting for leases. Most significant among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under current U.S. GAAP. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted ASC 842 beginning January 1, 2019, using the modified-retrospective method, which will result in a cumulative effect adjustment to accumulated deficit at the beginning of 2019, rather than adjustments to the comparative prior periods presented in the financial statements. In connection with the adoption, the Company has elected to utilize the package of practical expedients, including: (1) not reassess the lease classification for any expired or existing leases, (2) not reassess the treatment of initial direct costs as they related to existing leases, and (3) not reassess whether expired or existing contracts are or contain leases. Upon adoption, the Company recorded right-of-use assets and lease liabilities on its condensed consolidated balance sheet
$3.8 million
and
$3.9 million
, respectively, primarily related to real estate and vehicle leases. See Note 6
Leases
for further detail.
In August 2018, the FASB issued ASU 2018-15,
Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract
, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The Company early adopted ASU 2018-15 beginning January 1, 2019, and applied the guidance prospectively to the implementation costs incurred in the Net-Suite ERP implementation. As of
March 31, 2019
, the Company has capitalized
$29 thousand
of implementation costs.
Note 2. Discontinued Operations
On
February 1, 2018
, the Company completed the sale of its customer contracts relating to our MDSS post-warranty service business to Philips pursuant to an Asset Purchase Agreement, dated as of December 22, 2017, for
$8.0 million
. The total cash proceeds were adjusted for deferred revenue liabilities assigned to Philips at the closing date, as well as
$0.5 million
of proceeds held in escrow, subject to claims for breaches of general representation and warranties, which was recorded in other current assets at the date of sale. All claims were settled as of
December 31, 2018
.
Prior to the contemplation of the transaction entered into above, on
September 28, 2017
, we received notification from Philips that our distribution agreement to sell Philips imaging systems on a commission basis would be terminated, effective
December 31, 2017
. As a result, our product sales activities within our MDSS reportable segment were also discontinued effective in the first quarter of
2018
.
The Company deemed the disposition of our MDSS reportable segment in the first quarter of 2018 to represent a strategic shift that will have a major effect on our operations and financial results, in accordance with the provisions of FASB authoritative guidance on the presentation of financial statements, we have classified the results of our MDSS segment as discontinued operations in our condensed consolidated statement of operations for all periods presented.
The Company has allocated a portion of interest expense to discontinued operations since the proceeds received from the sale were required to be used to pay down outstanding borrowings under our previous revolving credit facility with Comerica Bank, a Texas banking association (“Comerica Bank”) under that certain Revolving Credit Agreement, dated June 21, 2017, by and between the Company and Comerica Bank (the “Comerica Credit Agreement”). The allocation was based on the ratio of proceeds received in the sale to total borrowings for the period. In addition, certain general and administrative costs related to corporate and shared service functions previously allocated to the MDSS reportable segment are not included in discontinued operations.
9
The following table presents financial results of the MDSS business (in thousands):
|
Three Months Ended March 31,
|
||||||||
|
2019
|
2018
|
|||||||
|
Total revenues
|
$
|
—
|
|
$
|
624
|
|
||
|
Total cost of revenues
|
—
|
|
516
|
|
||||
|
Gross profit
|
—
|
|
108
|
|
||||
|
Operating expenses:
|
||||||||
|
Marketing and sales
|
—
|
|
85
|
|
||||
|
General and administrative
|
—
|
|
172
|
|
||||
|
Amortization of intangible assets
|
—
|
|
13
|
|
||||
|
Gain on sale of discontinued operations
|
—
|
|
(6,261
|
)
|
||||
|
Total operating expenses
|
—
|
|
(5,991
|
)
|
||||
|
Income from discontinued operations
|
—
|
|
6,099
|
|
||||
|
Interest expense
|
—
|
|
(26
|
)
|
||||
|
Income from discontinuing operations before income taxes
|
—
|
|
6,073
|
|
||||
|
Income tax expense
|
—
|
|
(579
|
)
|
||||
|
Income from discontinuing operations
|
$
|
—
|
|
$
|
5,494
|
|
||
The following table presents supplemental cash flow information of discontinued operations (in thousands):
|
Three Months Ended March 31,
|
||||||||
|
2019
|
2018
|
|||||||
|
Operating activities:
|
||||||||
|
Depreciation
|
$
|
—
|
|
$
|
2
|
|
||
|
Amortization of intangible assets
|
$
|
—
|
|
$
|
13
|
|
||
|
Gain on sale of discontinued operations
|
$
|
—
|
|
$
|
(6,261
|
)
|
||
|
Stock-based compensation
|
$
|
—
|
|
$
|
(1
|
)
|
||
|
Investing activities:
|
||||||||
|
Proceeds from the sale of discontinued operations
|
$
|
—
|
|
$
|
6,844
|
|
||
10
Note 3. Revenue
Product and Product-Related Revenues and Services Revenue
Product and product-related revenue are generated from the sale of gamma cameras and post-warranty maintenance service contracts within our Diagnostic Imaging reportable segment.
Services revenue are generated from providing diagnostic imaging and cardiac monitoring services to customers within our Diagnostic Services and Mobile Healthcare reportable segments. Services revenue also includes lease income generated from interim rentals of imaging systems to our customers.
Revenue Recognition
Revenue is recognized when a customer obtains control of promised goods or services. The Company records the amount of revenue that reflects the consideration that it expects to receive in exchange for those goods or services. The Company applies the following five-step model in order to determine this amount: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. Taxes collected from customers, which are subsequently remitted to governmental authorities, are excluded from revenue.
The majority of our contracts have a single performance obligation as we provide a series of distinct services that are substantially the same and are transferred with the same pattern to the customer. For contracts with multiple performance obligations, we allocate the total transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. We use an observable price to determine the stand-alone selling price for separate performance obligations or a cost plus margin approach when one is not available.
Our products are generally not sold with a right of return and the Company does not provide significant credits or incentives, which may be required for as variable consideration when estimating the amount of revenue to be recognized.
Disaggregation of Revenue
The following tables present our revenues for the
three months ended March 31, 2019
and
2018
, disaggregated by major source (in thousands):
|
Three Months Ended March 31, 2019
|
||||||||||||||||
|
Diagnostic Services
|
Diagnostic Imaging
|
Mobile Healthcare
|
Total
|
|||||||||||||
|
Major Goods/Service Lines
|
||||||||||||||||
|
Mobile Imaging and Cardiac Monitoring
|
$
|
11,585
|
|
$
|
—
|
|
$
|
7,494
|
|
$
|
19,079
|
|
||||
|
Camera
|
—
|
|
804
|
|
—
|
|
804
|
|
||||||||
|
Camera Support
|
—
|
|
1,719
|
|
—
|
|
1,719
|
|
||||||||
|
Revenue from Contracts with Customers
|
11,585
|
|
2,523
|
|
7,494
|
|
21,602
|
|
||||||||
|
Lease Income
|
141
|
|
—
|
|
2,169
|
|
2,310
|
|
||||||||
|
Total Revenues
|
$
|
11,726
|
|
$
|
2,523
|
|
$
|
9,663
|
|
$
|
23,912
|
|
||||
|
Timing of Revenue Recognition
|
||||||||||||||||
|
Services and goods transferred over time
|
$
|
11,726
|
|
$
|
1,551
|
|
$
|
9,525
|
|
$
|
22,802
|
|
||||
|
Services and goods transferred at a point in time
|
—
|
|
972
|
|
138
|
|
1,110
|
|
||||||||
|
Total Revenues
|
$
|
11,726
|
|
$
|
2,523
|
|
$
|
9,663
|
|
$
|
23,912
|
|
||||
11
|
Three Months Ended March 31, 2018
|
||||||||||||||||
|
Diagnostic Services
|
Diagnostic Imaging
|
Mobile Healthcare
|
Total
|
|||||||||||||
|
Major Goods/Service Lines
|
||||||||||||||||
|
Mobile Imaging and Cardiac Monitoring
|
$
|
11,898
|
|
$
|
—
|
|
$
|
8,079
|
|
$
|
19,977
|
|
||||
|
Camera
|
—
|
|
1,070
|
|
—
|
|
1,070
|
|
||||||||
|
Camera Support
|
—
|
|
1,744
|
|
—
|
|
1,744
|
|
||||||||
|
Revenue from Contracts with Customers
|
11,898
|
|
2,814
|
|
8,079
|
|
22,791
|
|
||||||||
|
Lease Income
|
127
|
|
28
|
|
2,519
|
|
2,674
|
|
||||||||
|
Total Revenues
|
$
|
12,025
|
|
$
|
2,842
|
|
$
|
10,598
|
|
$
|
25,465
|
|
||||
|
Timing of Revenue Recognition
|
||||||||||||||||
|
Services and goods transferred over time
|
$
|
10,964
|
|
$
|
1,720
|
|
$
|
10,491
|
|
$
|
23,175
|
|
||||
|
Services and goods transferred at a point in time
|
1,061
|
|
1,122
|
|
107
|
|
2,290
|
|
||||||||
|
Total Revenues
|
$
|
12,025
|
|
$
|
2,842
|
|
$
|
10,598
|
|
$
|
25,465
|
|
||||
Nature of Goods and Services
Mobile Imaging
Within our Diagnostic Services and Mobile Healthcare reportable segments, our sales are derived from providing services and materials to our customers, primarily physician practices and hospitals, that allow them to perform diagnostic imaging services at their site. We typically bundle our services in providing staffing, our imaging systems, licensing, radiopharmaceuticals, and supplies depending on our customers’ needs. Our contracts with customers are typically entered into annually and are billed on a fixed rate per-day or per-scan basis, depending on terms of the contract. For the majority of these contracts, the Company has the right to invoice the customer in an amount that directly corresponds with the value to the customer of the Company’s performance to date. The Company uses the practical expedient to recognize revenue corresponding with amounts we have the right to invoice for services performed.
Camera
Within our Diagnostic Imaging segment, camera revenues are generated from the sale of internally developed solid-state gamma camera imaging systems. We recognize revenue upon transfer of control to the customer, which is generally upon delivery and acceptance. We also provide installation services and training on cameras we sell, primarily in the United States. Installation and initial training is generally performed shortly after delivery. The Company recognizes revenues for installation and training over time as the customer receives and consumes benefits provided as the Company performs the installation services.
Our sale of imaging systems includes a
one
-year warranty that we account for as an assurance-type warranty. The expected costs associated with our standard warranties and field service actions continue to be recognized as expense when cameras are sold. Maintenance service contracts sold beyond the term of our standard warranties are accounted for as a service-type warranty and revenue is deferred and recognized ratably over the period of the obligation.
Camera Support
Within our Diagnostic Imaging segment, camera support revenue is derived from the sale of separately-priced extended maintenance contracts to camera owners, training, and the sale of parts to customers that do not have an extended warranty. Our separately priced service contracts range from
12
to
48
months. Service contracts are usually billed at the beginning of the contract period or at periodic intervals (e.g., monthly or quarterly) and revenue is recognized ratably over the term of the agreement.
Services and training revenues are recognized in the period the services and training are performed. Revenue for sales of parts are recognized when the parts are delivered to the customer and control is transferred.
Lease Income
Within primarily our Mobile Healthcare segment, we also generate income from interim rentals of our imaging systems to customers that are in the midst of new construction or refurbishing their current facilities. Rental contracts are structured as either a weekly or monthly payment arrangement and are accounted for as operating leases. Revenues are recognized on a straight-line basis over the term of the rental.
12
Deferred Revenues
We record deferred revenues when cash payments are received or due in advance of our performance, including amounts that are refundable. We have determined our contracts do not include a significant financing component. The majority of our deferred revenue relates to payments received on camera support post-warranty service contracts, which are billed at the beginning of the annual contract period or at periodic intervals (e.g., monthly or quarterly).
Changes in the deferred revenues for three months ended
March 31, 2019
, is as follows (in thousands):
|
Balance at December 31, 2018
|
$
|
1,713
|
|
|
|
Revenue recognized that was included in balance at beginning of the year
|
(541
|
)
|
||
|
Deferred revenue, net, related to contracts entered into during the year
|
262
|
|
||
|
Balance at March 31, 2019
|
$
|
1,434
|
|
|
Included in the balances above as of
March 31, 2019
and
December 31, 2018
is non-current deferred revenue of
$20 thousand
and
$26 thousand
, respectively.
The Company has elected to use the practical expedient under ASC 606 to exclude disclosures of unsatisfied remaining performance obligations for (i) contracts having an original expected length of one year or less or (ii) contracts for which the practical expedient has been applied to recognize revenue at the amount for which it has a right to invoice.
Contract Costs
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. The Company applies a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period would have been one year or less. These costs mainly include the Company’s internal sales commissions; under the terms of these programs these are generally earned and the costs are recognized at the time the revenue is recognized.
Note 4. Basic and Diluted Net Income (Loss) Per Share
For the
three
months ended
March 31, 2019
and
2018
, basic net income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income per common share is calculated to give effect to all dilutive securities, if applicable, using the treasury stock method. In periods for which there is a net loss, diluted loss per common share is equal to basic loss per common share, since the effect of including any common stock equivalents would be antidilutive.
The following table sets forth the reconciliation of shares used to compute basic and diluted net (loss) income per share for the periods indicated (in thousands):
|
Three Months Ended March 31,
|
||||||||
|
2019
|
2018
|
|||||||
|
Loss from continuing operations
|
$
|
(1,657
|
)
|
$
|
(1,388
|
)
|
||
|
Income from discontinued operations
|
—
|
|
5,494
|
|
||||
|
Net (loss) income
|
$
|
(1,657
|
)
|
$
|
4,106
|
|
||
|
Weighted-average shares outstanding—basic and diluted
|
20,278
|
|
20,092
|
|
||||
|
(Loss) income per common share—basic and diluted
|
||||||||
|
Continuing operations
|
$
|
(0.08
|
)
|
$
|
(0.07
|
)
|
||
|
Discontinued operations
|
—
|
|
0.27
|
|
||||
|
Net (loss)income per common share—basic and diluted
|
$
|
(0.08
|
)
|
$
|
0.20
|
|
||
The computation of diluted earnings per share excludes stock options and stock units that are anti-dilutive. The following common stock equivalents were anti-dilutive (in thousands):
|
Three Months Ended March 31,
|
||||||
|
2019
|
2018
|
|||||
|
Stock options
|
1,000
|
|
207
|
|
||
|
Restricted stock units
|
287
|
|
129
|
|
||
|
Total
|
1,287
|
|
336
|
|
||
Note 5. Supplementary Balance Sheet Information
The components of inventories are as follows (in thousands):
|
March 31,
2019 |
December 31,
2018 |
|||||||
|
Inventories:
|
||||||||
|
Raw materials
|
$
|
2,425
|
|
$
|
2,419
|
|
||
|
Work-in-process
|
2,285
|
|
2,307
|
|
||||
|
Finished goods
|
1,154
|
|
1,056
|
|
||||
|
Total inventories
|
5,864
|
|
5,782
|
|
||||
|
Less reserve for excess and obsolete inventories
|
(381
|
)
|
(380
|
)
|
||||
|
Total inventories, net
|
$
|
5,483
|
|
$
|
5,402
|
|
||
Property and equipment consist of the following (in thousands):
|
March 31,
2019 |
December 31, 2018
|
|||||||
|
Property and equipment:
|
|
|
||||||
|
Land
|
$
|
550
|
|
$
|
550
|
|
||
|
Buildings and leasehold improvements
|
1,989
|
|
1,989
|
|
||||
|
Machinery and equipment
|
52,138
|
|
52,409
|
|
||||
|
Computer hardware and software
|
4,489
|
|
4,490
|
|
||||
|
Total property and equipment
|
59,166
|
|
59,438
|
|
||||
|
Less accumulated depreciation
|
(38,591
|
)
|
(37,793
|
)
|
||||
|
Total property and equipment, net
|
$
|
20,575
|
|
$
|
21,645
|
|
||
Note 6. Leases
We have operating and finance leases for corporate offices, vehicles, and certain equipment. Our leases have remaining lease terms of
1 year
to
6 years
, some of which include options to extend the leases and some of which include options to terminate the leases within
1 year
. Operating leases are included separately in the condensed consolidated balance sheets and finance leases are included in other current liabilities and other liabilities in the condensed consolidated balance sheets.
The components of lease expense are as follows (in thousands):
|
Three Months Ended
March 31, 2019 |
||||
|
Operating lease cost
|
$
|
326
|
|
|
|
Finance lease cost:
|
||||
|
Amortization of finance lease assets
|
$
|
53
|
|
|
|
Interest on finance lease liabilities
|
33
|
|
||
|
Total finance lease cost
|
$
|
86
|
|
|
13
Supplemental cash flow information related to leases was as follows (in thousands):
|
Three Months Ended
March 31, 2019 |
||||
|
Cash paid for amounts included in the measurement of lease liabilities
|
||||
|
Operating cash flows from operating leases
|
$
|
287
|
|
|
|
Operating cash flows from finance leases
|
$
|
33
|
|
|
|
Financing cash flows from finance leases
|
$
|
184
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations
|
||||
|
Operating leases
|
$
|
323
|
|
|
|
Finance leases
|
$
|
145
|
|
|
Supplemental balance sheet information related to leases was as follows (in thousands):
|
March 31,
2019 |
||||
|
Operating lease right-of-use assets, net
|
$
|
3,681
|
|
|
|
Operating lease liabilities
|
$
|
1,251
|
|
|
|
Operating lease liabilities, net of current
|
2,564
|
|
||
|
Total operating lease liabilities
|
$
|
3,815
|
|
|
|
Finance lease assets
|
$
|
3,702
|
|
|
|
Finance lease accumulated amortization
|
(1,100
|
)
|
||
|
Finance lease assets, net
|
$
|
2,602
|
|
|
|
Finance lease liabilities
|
$
|
809
|
|
|
|
Finance lease liabilities, net of current
|
1,607
|
|
||
|
Total finance lease liabilities
|
$
|
2,416
|
|
|
|
Weighted-Average Remaining Lease Term (in years)
|
||||
|
Operating leases
|
3.4
|
|
||
|
Finance leases
|
2.9
|
|
||
|
Weighted-Average Discount Rate
|
||||
|
Operating leases
|
5.00
|
%
|
||
|
Finance leases
|
6.00
|
%
|
||
14
We are committed to making future cash payments on non-cancelable operating leases and finance leases (including interest). The future minimum lease payments due under both non-cancelable operating leases and finance leases having initial or remaining lease terms in excess of one year as of
March 31, 2019
were as follows (in thousands):
|
|
Operating
Leases |
Finance
Leases
|
||||||
|
2019 (excludes the three-months ended March 31, 2019)
|
$
|
1,066
|
|
$
|
696
|
|
||
|
2020
|
1,317
|
|
842
|
|
||||
|
2021
|
953
|
|
817
|
|
||||
|
2022
|
552
|
|
258
|
|
||||
|
2023
|
259
|
|
10
|
|
||||
|
Thereafter
|
4
|
|
—
|
|
||||
|
Total future minimum lease payments
|
$
|
4,151
|
|
$
|
2,623
|
|
||
|
Less amounts representing interest
|
336
|
|
207
|
|
||||
|
Present value of lease obligations
|
$
|
3,815
|
|
$
|
2,416
|
|
||
Note 7. Financial Instruments
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents information about our financial assets that are measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques we utilize to determine such fair value at
March 31, 2019
and
December 31, 2018
(in thousands).
|
Fair Value as of March 31, 2019
|
||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
|
Equity securities
|
$
|
17
|
|
$
|
31
|
|
$
|
—
|
|
$
|
48
|
|
||||
|
Fair Value as of December 31, 2018
|
||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
|
Equity securities
|
$
|
153
|
|
$
|
6
|
|
$
|
—
|
|
$
|
159
|
|
||||
The investment in equity securities consists of common stock of publicly traded companies. The level 2 securities are included in other assets on the Company’s condensed consolidated balance sheet. The fair value of these securities is based on the closing prices observed on
March 31, 2019
. During the
three
months ended
March 31, 2019
the Company recorded in the condensed consolidated statement of operations an unrealized gain of
$28 thousand
and immaterial unrealized losses.
We did not reclassify any investments between levels in the fair value hierarchy during the
three
months ended
March 31, 2019
.
The fair values of the Company’s revolving credit facility approximate carrying value due to the variable rate nature of these borrowings.
15
Note 8. Debt
A summary of long-term debt is as follows (in thousands):
|
March 31, 2019
|
December 31, 2018
|
|||||||||||
|
Amount
|
Weighted-Average Interest Rate
|
Amount
|
Weighted-Average Interest Rate
|
|||||||||
|
Revolving Credit Facility - SNB
|
$
|
12,517
|
|
5.00%
|
$
|
—
|
|
—%
|
||||
|
Revolving Credit Facility - Comerica
|
$
|
—
|
|
—%
|
$
|
9,500
|
|
4.87%
|
||||
On March 29, 2019, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) by and among certain subsidiaries of the Company, as borrowers (collectively, the “Borrowers”); the Company, as guarantor; and Sterling National Bank, a national banking association, as lender (“SNB”).
The Loan Agreement is a
five
-year credit facility maturing in March 2024, with a maximum credit amount of
$20.0 million
for both revolving loans and outstanding letter of credit obligations (the “SNB Credit Facility”). Under the SNB Credit Facility, Borrowers can request the issuance of letters of credit in an aggregate amount not to exceed
$0.5 million
at any one time outstanding. As of
March 31, 2019
, the Company had
$0.1 million
of letters of credit outstanding and had additional borrowing capacity of
$7.5 million
.
At the Borrowers’ option, the SNB Credit Facility will bear interest at either (i) a Floating LIBOR Rate, as defined in the Loan Agreement, plus a margin of
2.50%
per annum; or (ii) a Fixed LIBOR Rate, as defined in the Loan Agreement, plus a margin of
2.25%
per annum.
The Company used a portion of the financing made available under the SNB Credit Facility to refinance and terminate, effective as of March 29, 2019, its previous credit facility under the Comerica Credit Agreement.
The Loan Agreement includes certain representations, warranties of Borrowers, as well as events of default and certain affirmative and negative covenants by the Borrowers that are customary for loan agreements of this type. These covenants include restrictions on borrowings, investments and dispositions by Borrowers, as well as limitations on the Borrowers’ ability to make certain distributions. Upon the occurrence and during the continuation of an event of default under the Loan Agreement, SNB may, among other things, declare the loans and all other obligations under the Loan Agreement immediately due and payable and increase the interest rate at which loans and obligations under the Loan Agreement bear interest. The SNB Credit Facility is secured by a first-priority security interest in substantially all of the assets of the Company and the Borrowers and a pledge of all shares of the Borrowers.
On March 29, 2019, in connection with the Company’s entry into the SNB Loan Agreement, Mr. Eberwein, the Chairman of the Company’s board of directors, entered into Limited Guaranty Agreement (the “Limited Guaranty”) with SNB pursuant to which he guaranteed to SNB the prompt performance of all the Borrowers’ obligations to SNB under the SNB Loan Agreement, including the full payment of all indebtedness owing by Borrowers to SNB under or in connection with the Loan Agreement and related SNB Credit Facility documents. Mr. Eberwein’s obligations under the Limited Guaranty are limited in the aggregate to the amount of (a)
$1.5 million
, plus (b) reasonable costs and expenses of SNB incurred in connection with the Limited Guaranty. Mr. Eberwein’s obligations under the Limited Guaranty terminate upon the Company and Borrowers achieving certain milestones set forth therein.
In connection with the SNB Credit Facility, in the
three months ended March 31, 2019
, the Company recognized a
$0.2 million
loss on extinguishment due to the write off of unamortized deferred financing costs associated with the Comerica Credit Agreement.
At
March 31, 2019
, the Company was in compliance with all covenants.
Note 9. Commitments and Contingencies
Other Matters
In the normal course of business, we have been, and will likely continue to be, subject to litigation or administrative proceedings incidental to our business, such as claims related to customer disputes, employment practices, wage and hour disputes, product liability, professional liability, commercial disputes, licensure restrictions or denials, and warranty or patent infringement. Responding to litigation or administrative proceedings, regardless of whether they have merit, can be expensive and disruptive to normal business operations. We are not able to predict the timing or outcome of these matters.
16
Note 10. Income Taxes
We provide for income taxes under the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of differences between the tax basis of assets or liabilities and their carrying amounts in the financial statements. We provide a valuation allowance for deferred tax assets if it is more likely than not that these items will expire before we are able to realize their benefit. We calculate the valuation allowance in accordance with the authoritative guidance relating to income taxes, which requires an assessment of both positive and negative evidence regarding the realizability of these deferred tax assets, when measuring the need for a valuation allowance. Significant judgment is required in determining any valuation allowance against deferred tax assets. As of December 31, 2017, as a result of a three-year cumulative loss and recent events, such as the unanticipated termination of the Philips distribution agreement and its effect on our forecasted income, we concluded that a full valuation allowance was necessary to offset our deferred tax assets. We continue to record a full valuation allowance against our deferred tax assets and intend to maintain a valuation allowance until sufficient positive evidence exists to support its reversal.
Intraperiod tax allocation rules require us to allocate our provision for income taxes between continuing operations and other categories of comprehensive income, such as discontinued operations. In periods in which we have a year-to-date pre-tax loss from continuing operations and pre-tax income in other categories of comprehensive income, such as discontinued operations, we must consider that income in determining the amount of tax benefit that results from a loss in continuing operations and that shall be allocated to continuing operations.
For the
three
months ended
March 31, 2019
, the Company recorded an income tax benefit of
$8 thousand
within continuing operations. As a result of the intraperiod tax allocation rules, for the
three
months ended
March 31, 2018
, the Company recorded an income tax benefit of
$0.5 million
and
$0.6 million
of income tax expense within continuing operations and discontinued operations, respectively.
As of
March 31, 2019
, we had unrecognized tax benefits of approximately
$3.6 million
related to uncertain tax positions. Included in the unrecognized tax benefits were
$3.2 million
of tax benefits that, if recognized, would reduce our annual effective tax rate, subject to the valuation allowance.
We file income tax returns in the U.S. and in various state jurisdictions with varying statutes of limitations. We are no longer subject to income tax examination by tax authorities for years prior to 2014; however, our net operating loss carryforwards and research credit carryforwards arising prior to that year are subject to adjustment. Our policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense.
17
Note 11. Segments
Our reporting segments have been determined based on the nature of the products and services offered to customers or the nature of their function in the organization. We evaluate performance based on the gross profit and operating income (loss). The Company does not identify or allocate its assets by operating segments.
Segment information is as follows (in thousands):
|
|
Three Months Ended March 31,
|
|||||||
|
|
2019
|
2018
|
||||||
|
Revenue by segment:
|
||||||||
|
Diagnostic Services
|
$
|
11,726
|
|
$
|
12,025
|
|
||
|
Diagnostic Imaging
|
2,523
|
|
2,842
|
|
||||
|
Mobile Healthcare
|
9,663
|
|
10,598
|
|
||||
|
Condensed consolidated revenue
|
$
|
23,912
|
|
$
|
25,465
|
|
||
|
Gross profit by segment:
|
||||||||
|
Diagnostic Services
|
$
|
2,581
|
|
$
|
2,247
|
|
||
|
Diagnostic Imaging
|
786
|
|
1,245
|
|
||||
|
Mobile Healthcare
|
614
|
|
1,115
|
|
||||
|
Condensed consolidated gross profit
|
$
|
3,981
|
|
$
|
4,607
|
|
||
|
Loss from continuing operations by segment:
|
||||||||
|
Diagnostic Services
|
$
|
1,736
|
|
$
|
993
|
|
||
|
Diagnostic Imaging
|
343
|
|
619
|
|
||||
|
Mobile Healthcare
|
(623
|
)
|
(51
|
)
|
||||
|
Unallocated corporate and other expenses
|
(2,591
|
)
|
(3,170
|
)
|
||||
|
Condensed consolidated loss from continuing operations
|
$
|
(1,135
|
)
|
$
|
(1,609
|
)
|
||
|
Depreciation and amortization by segment:
|
||||||||
|
Diagnostic Services
|
$
|
304
|
|
$
|
596
|
|
||
|
Diagnostic Imaging
|
78
|
|
74
|
|
||||
|
Mobile Healthcare
|
1,427
|
|
1,592
|
|
||||
|
Total depreciation and amortization
|
$
|
1,809
|
|
$
|
2,262
|
|
||
Note 12. Related Party Transactions
Perma-Fix
Mr. John Climaco currently serves as a Director of the Company and a member of the Corporate Governance and Strategic Advisory committees of the Board. Until July 11, 2017, Mr. Climaco also served as a Director of Perma-Fix Environmental Services, Inc. (NASDAQ: PESI). Further, from June 2, 2015 until July 11, 2017, Mr. Climaco served as the Executive Vice President of Perma-Fix Medical S.A., a majority-owned Polish subsidiary of Perma-Fix Environmental Services, Inc. On July 27, 2015, we entered into a Stock Subscription Agreement (the “Subscription Agreement”) and Tc-99m Supplier Agreement (the “Supply Agreement”) with Perma-Fix Medical. Under the terms of the Subscription Agreement, we invested
$1.0 million
USD in exchange for
71,429
shares of Perma-Fix Medical. Pursuant to the Supply Agreement, should Perma-Fix Medical successfully complete development of the new Tc-99m resin, Perma-Fix Medical will supply us or our preferred nuclear pharmacy supplier with Tc-99m at a preferred rate and we will purchase agreed upon quantities of such Tc-99m for our nuclear imaging operations, either directly or in conjunction with our preferred nuclear pharmacy supplier. In addition, in connection with the Subscription Agreement, the Company’s President and CEO was appointed to the Supervisory Board of Perma-Fix Medical. The investment in Perma-Fix is included in other assets in the condensed consolidated balance sheets.
18
Limited Guaranty
On March 29, 2019, in connection with the Company’s entry into the Loan Agreement, Mr. Eberwein, the Chairman of the Company’s board of directors, entered into Limited Guaranty Agreement (the “Limited Guaranty”) with SNB pursuant to which he guaranteed to SNB the prompt performance of all the Borrowers’ obligations to SNB under the Loan Agreement, including the full payment of all indebtedness owing by Borrowers to SNB under or in connection with the Loan Agreement and related SNB Credit Facility documents. Mr. Eberwein’s obligations under the Limited Guaranty are limited in the aggregate to the amount of (a)
$1.5 million
, plus (b) reasonable costs and expenses of SNB incurred in connection with the Limited Guaranty. Mr. Eberwein’s obligations under the Limited Guaranty terminate upon the Company and Borrowers achieving certain milestones set forth therein.
ATRM
Jeffrey E. Eberwein, the Chairman of our board of directors and the Chairman of the board of directors of ATRM Holdings, Inc., (“ATRM”), owns approximately
17.4%
of the outstanding common stock of ATRM. Mr. Eberwein is also the Chief Executive Officer of Lone Star Value Management, LLC, which is the investment manager of Lone Star Value Investors, LP (“LSVI”). LSVI owns
222,577
shares of ATRM’s
10.0%
Series B Cumulative Preferred Stock (the “Series B Stock”) and another
374,562
shares of Series B Stock are owned directly by Lone Star Value Co-Invest I, LP (“LSV Co-Invest I”). Through these relationships and other relationships with affiliated entities, Mr. Eberwein may be deemed the beneficial owner of the securities owned by LSVI and LSV Co-Invest I. Mr. Eberwein disclaims beneficial ownership of Series B Stock, except to the extent of his pecuniary interest therein.
Joint Venture
On December 14, 2018, Digirad and ATRM, entered into a joint venture and formed Star Procurement, LLC (“Star Procurement”), with Digirad and ATRM each holding a
50%
interest. The purpose of the joint venture is to provide the service of purchasing and selling building materials and related goods to KBS Builders, Inc., a wholly-owned subsidiary of ATRM with which Star Procurement entered into a Services Agreement on January 2, 2019. In accordance with the terms of the Star Procurement Limited Liability Company Agreement, Digirad made a
$1.0 million
capital contribution to the joint venture, which was made in January 2019. The investment in Star Procurement is included in other assets in the condensed consolidated balance sheets.
Note Receivable
On December 14, 2018, the Company received an unsecured promissory note from ATRM in the principal amount of
$0.3 million
(the “ATRM Note”) in exchange for a loan to ATRM in the same amount. The ATRM Note bears interest at
10%
per annum for the first 12 months of its term, and at
12%
per annum for the remaining 12 months. All unpaid principal and interest is due on December 14, 2020. ATRM may prepay the note at any time after a specified amount of advance notice to the Company. The ATRM Note provides for customary events of default, the occurrence of any of which may result in the principal and unpaid interest then outstanding becoming immediately due and payable. The ATRM Note is included in other assets in the condensed consolidated balance sheets.
Note 13. Subsequent Events
Acquisitions and Leases of Maine Facilities
As part of the Company’s previously announced conversion into a diversified holding company (the “HoldCo Conversion”), we formed a real estate subsidiary named Star Real Estate Holdings USA, Inc. (“SRE”). SRE will hold any significant real estate assets we acquire. We expect SRE to be substantially self-funded over time by raising its own capital in the form of commercial mortgages on the properties it owns or by raising other forms of external capital. As an initial transaction to create our real estate division under SRE and launch that aspect of the HoldCo Conversion, we purchased three plants in Maine that manufacture modular buildings and leased these three properties, as further described below.
Oxford
On March 27, 2019, 56 Mechanic Falls Road, LLC (“56 Mechanic”), a wholly-owned subsidiary of SRE, entered into a Purchase and Sale Agreement (the “Oxford Purchase Agreement”) with RJF - Keiser Real Estate, LLC (“RJF”), pursuant to which 56 Mechanic will purchase certain real property and related improvements and personal property (including buildings, fixtures, and other improvements on the land, and all machinery and equipment and other personal property, if any, owned by RJF and located on the property) located in Oxford, Maine (the “Oxford Facility”) from RJF (the “Oxford Transaction”). The Oxford Transaction was closed on April 25, 2019. The purchase price of the Oxford Facility was
$1.2 million
(the “Oxford Purchase Price”), subject to adjustment for taxes and other charges and assessments.
19
Waterford
On April 3, 2019, 947 Waterford Road, LLC (“947 Waterford”), a wholly-owned subsidiary of SRE, entered into a Purchase and Sale Agreement (the “Waterford Purchase Agreement”) with KBS Builders, Inc. (“KBS”), a wholly-owned subsidiary of ATRM, pursuant to which 947 Waterford closed on the purchase of certain real property and related improvements (including buildings) located in Waterford, Maine (the “Waterford Facility”) from KBS, and acquired the Waterford Facility. The purchase price of the Waterford Facility was
$1.0 million
, subject to adjustment for taxes and other charges and assessments.
Paris
On April 3, 2019, 300 Park Street, LLC (“300 Park”), a wholly-owned subsidiary of SRE, entered into a Purchase and Sale Agreement (the “Park Purchase Agreement”) with KBS, pursuant to which 300 Park closed on the purchase of certain real property and related improvements and personal property (including buildings, machinery and equipment) located in Paris, Maine (the “Park Facility”) from KBS, and acquired the Park Facility. The purchase price of the Park Facility was
$2.9 million
, subject to adjustment for taxes and other charges and assessments.
Lease of Maine Facilities
On April 3, 2019, KBS entered into a separate lease agreement with each of 947 Waterford (the “Waterford Lease”) and 300 Park (the “Park Lease”). The Waterford Lease has an initial term of
120 months
, which is subject to extension. The base rental payments associated with the initial term under the Waterford Lease are estimated to be between
$1.2 million
and
$1.3 million
in the aggregate. The Park Lease has an initial term of
120 months
, which is subject to extension. The base rental payments associated with the initial term under the Park Lease are estimated to be between
$3.3 million
and
$3.6 million
in the aggregate. ATRM has unconditionally guaranteed the performance of all obligations under the Waterford Lease and Park Lease to be performed by KBS under each lease, including, without limitation, the payment of all required rent.
On April 3rd and 18th of 2019, KBS signed a lease and an amendment, respectively, with 56 Mechanic (the “Oxford Lease”), which became effective upon the closing of the Oxford Transaction. The initial term under the Oxford Lease will commence upon delivery of the Oxford Facility to KBS. The Oxford Lease has an initial term of
120 months
, which is subject to extension. The base rental payments associated with the initial term under the Oxford Lease are estimated to be between
$1.4 million
and
$1.5 million
in the aggregate. ATRM has unconditionally guaranteed the performance of all obligations under the Oxford Lease to be performed by KBS, including, without limitation, the payment of all required rent.
Series A Preferred Stock Offering
The Company has filed a registration statement on Form S-1 and Form S-1/A with the SEC for a potential offering (the “Preferred Offering”) of nonconvertible Series A Cumulative Term Preferred Stock (the “Series A Preferred Stock”) on March 12, 2019 and April 09, 2019, respectively. However, it is unlikely that the Company will proceed with its proposed offering of nonconvertible preferred stock on substantially the terms described in the registration statement.
Fargo Building Sale
The Company completed the sale on the remaining Fargo building for
$0.8 million
on May 1, 2019. On the same day, we entered into an agreement with JS2L Partners, LLP, to lease this property for a term of
12 months
. The base rental payments associated with the lease are
$0.1 million
in aggregate.
20
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
This management’s discussion and analysis of financial condition and results of operations (“MD&A”), contains forward-looking statements that involve risks and uncertainties. Please see “Important Information Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks, and assumptions that may cause our actual results to differ materially from those discussed in the forward-looking statements. This discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q, and the audited consolidated financial statements and related notes thereto for the fiscal year ended
December 31, 2018
, which were included in our Form 10-K, filed with the SEC on
March 1, 2019
.
The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods.
Overview
Digirad delivers convenient, effective, and efficient healthcare solutions on an as needed, when needed, and where needed basis. Digirad’s diverse portfolio of mobile healthcare solutions and diagnostic imaging equipment and services provides hospitals, physician practices, and imaging centers throughout the United States access to technology and services necessary to provide patient care in the rapidly changing healthcare environment.
In February of 2018, we completed the sale of our customer contracts relating to our MDSS post-warranty service business to Philips. On October 31, 2018, we sold our Telerhythmics business to G Medical Innovations USA, Inc., for
$1.95 million
cash. Our business is organized into three reportable segments: Diagnostic Services, Mobile Healthcare, and Diagnostic Imaging.
On September 10, 2018, we announced that our board of directors approved the conversion of Digirad into a diversified holding company, and the potential acquisition of ATRM as an initial “kick-off” transaction (the “ATRM Acquisition”). ATRM is a modular building company consisting of two divisions, KBS Builders and EdgeBuilder. The KBS division manufactures and distributes modular housing units. EdgeBuilder manufactures engineered wood products used in modular construction, as well as distributes building materials through its Glenbrook unit. Both divisions serve the residential and commercial segments of the market.
Strategy
Our main strategic focus is to continue to grow our business into an integrated healthcare services company while simultaneously converting into a diversified holding company through the acquisition of businesses that meet our internally developed financially disciplined approach for acquisitions. Within the healthcare industry, we believe that there are many opportunities to provide outsourced and mobile healthcare services and solutions in the current healthcare environment. We believe that our strategy within the healthcare industry will be accomplished by:
|
•
|
Focused organic growth from our core businesses.
|
|
•
|
Introducing of new service offerings through our existing businesses or through acquisitions; and
|
|
•
|
Acquiring complementary companies.
|
Discontinued Operations
On February 1, 2018, the Company completed the sale of its customer contracts relating to our MDSS post-warranty service business to Philips pursuant to an Asset Purchase Agreement, dated as of December 22, 2017 for $8.0 million. The Company deemed the disposition of our MDSS reportable segment in the first quarter of 2018 to represent a strategic shift that will have a major effect on our operations and financial results. In accordance with the provisions of FASB authoritative guidance on the presentation of financial statements we have classified the results of our MDSS segment as discontinued operations in our condensed consolidated statement of operations for all periods presented.
Business Segments
As of
December 31, 2018
, our business is organized into three reportable segments:
•
Diagnostic Services
•
Mobile Healthcare
•
Diagnostic Imaging
21
Diagnostic Services.
Through Diagnostic Services, we offer a convenient and economically efficient imaging and monitoring services program as an alternative to purchasing equipment or outsourcing the procedures to another physician or imaging center. For physicians who wish to perform nuclear imaging, echocardiography, vascular or general ultrasound tests, we provide imaging systems, qualified personnel, radiopharmaceuticals, licensing services, and the logistics required to perform imaging in their own offices, and thereby the ability to bill Medicare, Medicaid, or one of the third-party healthcare insurers directly for those services, which are primarily cardiac in nature. We provide imaging services primarily to cardiologists, internal medicine physicians, and family practice doctors who typically enter annual contracts for a set number of days ranging from once per month to five times per week.
Mobile Healthcare.
Through Mobile Healthcare, we provide contract diagnostic imaging, including computerized tomography (“CT”), magnetic resonance imaging (“MRI”), positron emission tomography (“PET”), PET/CT, and nuclear medicine and healthcare expertise to hospitals, integrated delivery networks (“IDNs”), and federal institutions on a long-term contract basis, as well as provisional (short-term) services to institutions that are in transition. These services are provided primarily when there is a cost, ease, and efficiency component of providing the services directly rather than owning and operating the related services and equipment directly by our customers.
Diagnostic Imaging.
Through Diagnostic Imaging, we sell our internally developed solid-state gamma cameras, imaging systems and camera maintenance contracts. Our imaging systems include nuclear cardiac imaging systems, as well as general purpose nuclear imaging systems. We sell our imaging systems to physician offices and hospitals primarily in the United States, although we have sold a small number of imaging systems internationally.
Our Market
The target market for our products and services is comprised of cardiologists, internal medicine physicians, family practice physicians, hospitals, IDNs, and federal institutions in the United States that perform or could perform a diagnostic imaging procedure, have a need for cardiac event monitoring, or have interest in purchasing a diagnostic imaging product. During the year ended December 31, 2018, through Diagnostic Services and Mobile Healthcare, we provided imaging services to 992 physicians, physician groups, hospitals, IDNs and federal institutions. Our Diagnostic Services and Mobile Healthcare businesses currently operate in approximately 40 states. In the past, our market has been negatively affected by lower reimbursements from the Center for Medicare and Medicaid Services (“CMS”) and third-party insurance providers for the codes under which our customers bill for our services, although reimbursements have stabilized in the last several years. We have addressed, and will continue to address, these market pressures by modifying our Diagnostic Services and Mobile Healthcare business models, and by assisting our healthcare customers in complying with new regulations and requirements.
Trends and Drivers
The market for diagnostic services and products is highly competitive. Our business, which is focused primarily on the private practice and hospital sectors, continues to face uncertainty in the demand for diagnostic services and imaging equipment, which we believe is due in part to the impact of the Deficit Reduction Act on the reimbursement environment and the 2010 Healthcare Reform laws, as well as general uncertainty in overall healthcare and legislative changes in healthcare, such as the Affordable Care Act. These challenges have impacted, and will likely continue to impact, our operations. We believe that the principal competitive factors in our market include budget availability for our capital equipment, qualifications for reimbursement, pricing, ease-of-use, reliability, and mobility.
Diagnostic Services.
In providing Diagnostic Services imaging services, we compete against many smaller local and regional nuclear and ultrasound providers that may have lower operating costs. The fixed-installation operators often utilize older, used equipment, and the mobile operators may use older Digirad single-head cameras or newer dual-head cameras. We are the only mobile provider with our own exclusive source of triple-head mobile systems. Some competing operators place new or used cameras into physician offices and then provide the staffing, supplies, and other support as an alternative to a Diagnostic Services service contract. In addition, we compete against imaging centers that install fixed nuclear gamma cameras and make them available to referring physicians in their geographic vicinity. In these cases, the physician sends their patients to the imaging center.
Diagnostic Imaging.
In selling our imaging systems, we compete against several large medical device manufacturers who offer a full line of imaging cameras for each diagnostic imaging technology, including x-ray, MRI, CT, ultrasound, nuclear medicine, or SPECT/CT and PET/CT hybrid imagers. The existing nuclear imaging systems sold by these competitors have been in use for a longer period of time than our internally developed nuclear gamma cameras, and are more widely recognized and used by physicians and hospitals; however, they are generally not solid-state, light-weight, as flexible, or portable. Additionally, certain medical device companies have developed a version of solid-state gamma cameras that may directly compete with our product offerings. Many of the larger multi-modality competitors enjoy significant competitive advantages over us, including greater brand recognition, greater financial and technical resources, established relationships with healthcare professionals, broader distribution networks, more resources for product development and marketing and sales, and the ability to bundle products to offer discounts.
22
Mobile Healthcare.
The market for selling, servicing, and operating diagnostic imaging services, and imaging systems is highly competitive. In addition to direct competition from other providers of services similar to those offered by us, we compete with freestanding imaging centers and healthcare providers that have their own diagnostic imaging systems, as well as with equipment manufacturers that sell imaging equipment directly to healthcare providers for permanent installation. Some of the direct competitors, which provide contract MRI and PET/CT services, have access to greater financial resources than we do. In addition, some of our customers are capable of providing the same services we provide to their patients directly, subject only to their decision to acquire a high-cost diagnostic imaging system, assume the financial and technology risk, and employ the necessary technologists, rather than obtain equipment and services from us. We may also experience greater competition in states that currently have certificate of need laws if such laws were repealed, thereby reducing barriers to entry and competition in those states. We also compete against other similar providers in quality of services, quality of imaging systems, relationships with healthcare providers, knowledge and service quality of technologists, price, availability, and reliability.
Proposed Acquisition of ATRM Holdings, Inc.
As described above, on September 10, 2018, we announced a potential acquisition of ATRM. As currently contemplated by the non-binding letter of intent with ATRM (the “LOI”), ATRM stockholders would receive consideration consisting of 0.4 shares of Digirad common stock for each share of outstanding ATRM common stock we acquire in the ATRM Acquisition. The issuance of Digirad common stock in connection with the ATRM Acquisition is expected to increase the number of shares of outstanding Digirad common stock by less than 5%. Proceeding with the ATRM Acquisition is subject to, among other things, ATRM becoming current with its filings with the SEC and the negotiation and execution of definitive documentation. The ATRM Acquisition has been approved by a special committee of independent directors of ATRM. The final terms of the ATRM Acquisition are subject to change depending on the outcome of our due diligence investigation and may differ from those reflected in the LOI, and there can be no assurance that we will complete the ATRM Acquisition or the HoldCo Conversion.
On December 14, 2018, Digirad and ATRM, entered into a joint venture and formed Star Procurement, LLC (“Star Procurement”), with Digirad and ATRM each holding a
50%
interest. The purpose of the joint venture is to provide the service of purchasing and selling building materials and related goods to KBS Builders, Inc., a wholly-owned subsidiary of ATRM with which Star Procurement entered into a Services Agreement on January 2, 2019. In accordance with the terms of the Star Procurement Limited Liability Company Agreement, Digirad made a
$1.0 million
capital contribution to the joint venture, which was made in January 2019.
On December 14, 2018, the Company received an unsecured promissory note from ATRM in the principal amount of
$0.3 million
(the “ATRM Note”) in exchange for a loan to ATRM in the same amount. The ATRM Note bears interest at
10%
per annum for the first 12 months of its term, and at
12%
per annum for the remaining 12 months. All unpaid principal and interest is due on December 14, 2020. ATRM may prepay the note at any time after a specified amount of advance notice to the Company. The ATRM Note provides for customary events of default, the occurrence of any of which may result in the principal and unpaid interest then outstanding becoming immediately due and payable.
Jeffrey E. Eberwein, the Chairman of our board of directors and the Chairman of the board of directors of ATRM, owns approximately
17.4%
of the outstanding common stock of ATRM. Mr. Eberwein is also the Chief Executive Officer of Lone Star Value Management, LLC, which is the investment manager of Lone Star Value Investors, LP (“LSVI”). LSVI owns
222,577
shares of ATRM’s
10.0%
Series B Cumulative Preferred Stock (the “Series B Stock”) and another
374,562
shares of Series B Stock are owned directly by Lone Star Value Co-Invest I, LP (“LSV Co-Invest I”). Through these relationships and other relationships with affiliated entities, Mr. Eberwein may be deemed the beneficial owner of the securities owned by LSVI and LSV Co-Invest I. Mr. Eberwein disclaims beneficial ownership of Series B Stock, except to the extent of his pecuniary interest therein.
Series A Preferred Stock Offering
The Company has filed a registration statement on Form S-1 with the SEC for a potential offering of nonconvertible Series A Preferred Stock. However, it is unlikely that the Company will proceed with its proposed offering of nonconvertible preferred stock on substantially the terms described in the registration statement.
Acquisitions and Leases of Maine Facilities
As part of the HoldCo Conversion, we formed a real estate subsidiary named Star Real Estate Holdings USA, Inc. (“SRE”). SRE will hold any significant real estate assets we acquire. We expect SRE to be substantially self-funded over time by raising its own capital in the form of commercial mortgages on the properties it owns or by raising other forms of external capital. As an initial transaction to create our real estate division under SRE and launch that aspect of the HoldCo Conversion, we purchased three plants in Maine that manufacture modular buildings and leased these three properties, as further described below.
23
Oxford
On March 27, 2019, 56 Mechanic Falls Road, LLC (“56 Mechanic”), a wholly-owned subsidiary of SRE, entered into a Purchase and Sale Agreement (the “Oxford Purchase Agreement”) with RJF - Keiser Real Estate, LLC (“RJF”), pursuant to which 56 Mechanic will purchase certain real property and related improvements and personal property (including buildings, fixtures, and other improvements on the land, and all machinery and equipment and other personal property, if any, owned by RJF and located on the property) located in Oxford, Maine (the “Oxford Facility”) from RJF (the “Oxford Transaction”). The Oxford Transaction was closed on April 25, 2019. The purchase price of the Oxford Facility was
$1.2 million
(the “Oxford Purchase Price”), subject to adjustment for taxes and other charges and assessments.
Waterford
On April 3, 2019, 947 Waterford Road, LLC (“947 Waterford”), a wholly-owned subsidiary of SRE, entered into a Purchase and Sale Agreement (the “Waterford Purchase Agreement”) with KBS Builders, Inc. (“KBS”), a wholly-owned subsidiary of ATRM, pursuant to which 947 Waterford closed on the purchase of certain real property and related improvements (including buildings) located in Waterford, Maine (the “Waterford Facility”) from KBS, and acquired the Waterford Facility. The purchase price of the Waterford Facility was
$1.0 million
, subject to adjustment for taxes and other charges and assessments.
Paris
On April 3, 2019, 300 Park Street, LLC (“300 Park”), a wholly-owned subsidiary of SRE, entered into a Purchase and Sale Agreement (the “Park Purchase Agreement”) with KBS, pursuant to which 300 Park closed on the purchase of certain real property and related improvements and personal property (including buildings, machinery and equipment) located in Paris, Maine (the “Park Facility”) from KBS, and acquired the Park Facility. The purchase price of the Park Facility was
$2.9 million
, subject to adjustment for taxes and other charges and assessments.
Lease of Maine Facilities
On April 3, 2019, KBS entered into a separate lease agreement with each of 947 Waterford (the “Waterford Lease”) and 300 Park (the “Park Lease”). The Waterford Lease has an initial term of 120 months, which is subject to extension. The base rental payments associated with the initial term under the Waterford Lease are estimated to be between
$1.2 million
and
$1.3 million
in the aggregate. The Park Lease has an initial term of
120
months, which is subject to extension. The base rental payments associated with the initial term under the Park Lease are estimated to be between
$3.3 million
and
$3.6 million
in the aggregate. ATRM has unconditionally guaranteed the performance of all obligations under the Waterford Lease and Park Lease to be performed by KBS under each lease, including, without limitation, the payment of all required rent.
On April 3rd and 18th of 2019, KBS signed a lease and an amendment, respectively, with 56 Mechanic (the “Oxford Lease”), which became effective upon the closing of the Oxford Transaction. The initial term under the Oxford Lease will commence upon delivery of the Oxford Facility to KBS. The Oxford Lease has an initial term of
120
months, which is subject to extension. The base rental payments associated with the initial term under the Oxford Lease are estimated to be between
$1.4 million
and
$1.5 million
in the aggregate. ATRM has unconditionally guaranteed the performance of all obligations under the Oxford Lease to be performed by KBS, including, without limitation, the payment of all required rent.
Critical Accounting Policies and Estimates
In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our revenue and net income or loss, as well as on the value of certain assets and liabilities on our balance sheet. We believe that the estimates, assumptions, and judgments involved in the accounting policies described in
Management’s Discussion and Analysis of Financial Condition
and
Results of Operations
in Item 7 of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2018
have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates.
24
Results of Operations
Comparison of the
Three Months Ended March 31,
2019
and
2018
The following table summarizes our results for the
three
months ended
March 31, 2019
and
2018
(in thousands):
|
|
Three Months Ended March 31,
|
||||||||||||||||||||
|
|
2019
|
|
Percent of
Revenues |
|
2018
|
|
Percent of
Revenues |
|
Change from Prior Year
|
||||||||||||
|
|
Dollars
|
|
Percent
|
||||||||||||||||||
|
Total revenues
|
$
|
23,912
|
|
|
100.0
|
%
|
|
$
|
25,465
|
|
|
100.0
|
%
|
|
$
|
(1,553
|
)
|
|
(6.1
|
)%
|
|
|
Total cost of revenues
|
19,931
|
|
|
83.4
|
%
|
|
20,858
|
|
|
81.9
|
%
|
|
(927
|
)
|
|
(4.4
|
)%
|
||||
|
Gross profit
|
3,981
|
|
|
16.6
|
%
|
|
4,607
|
|
|
18.1
|
%
|
|
(626
|
)
|
|
(13.6
|
)%
|
||||
|
Total operating expenses
|
5,116
|
|
|
21.4
|
%
|
|
6,216
|
|
|
24.4
|
%
|
|
(1,100
|
)
|
|
(17.7
|
)%
|
||||
|
Loss from operations
|
(1,135
|
)
|
|
(4.7
|
)%
|
|
(1,609
|
)
|
|
(6.3
|
)%
|
|
474
|
|
|
(29.5
|
)%
|
||||
|
Total other expense
|
(530
|
)
|
(2.2
|
)%
|
(234
|
)
|
(0.9
|
)%
|
(296
|
)
|
126.5
|
%
|
|||||||||
|
Loss before income taxes
|
(1,665
|
)
|
(7.0
|
)%
|
(1,843
|
)
|
(7.2
|
)%
|
178
|
|
(9.7
|
)%
|
|||||||||
|
Income tax benefit
|
8
|
|
—
|
%
|
455
|
|
1.8
|
%
|
(447
|
)
|
(98.2
|
)%
|
|||||||||
|
Net loss from continuing operations
|
(1,657
|
)
|
|
(6.9
|
)%
|
|
(1,388
|
)
|
|
(5.5
|
)%
|
|
(269
|
)
|
|
19.4
|
%
|
||||
|
Net income from discontinued operations
|
—
|
|
—
|
%
|
5,494
|
|
21.6
|
%
|
(5,494
|
)
|
(100.0
|
)%
|
|||||||||
|
Net (loss) income
|
$
|
(1,657
|
)
|
(6.9
|
)%
|
$
|
4,106
|
|
16.1
|
%
|
$
|
(5,763
|
)
|
(140.4
|
)%
|
||||||
Revenues
Services Revenue
Services revenue by segment is summarized as follows (in thousands):
|
Three Months Ended March 31,
|
|||||||||||||||
|
2019
|
2018
|
Change
|
% Change
|
||||||||||||
|
Diagnostic Services
|
$
|
11,726
|
|
$
|
12,025
|
|
$
|
(299
|
)
|
(2.5
|
)%
|
||||
|
Mobile Healthcare
|
9,663
|
|
10,598
|
|
(935
|
)
|
(8.8
|
)%
|
|||||||
|
Total Services Revenue
|
$
|
21,389
|
|
$
|
22,623
|
|
$
|
(1,234
|
)
|
(5.5
|
)%
|
||||
The decrease in Diagnostic Services revenue
compared to the prior year quarter was due to the sale of our Telerhythmics business as of October 31, 2018 resulting in a loss of revenues of $1.1 million, partially offset by a higher volume of days ran and studies performed and an increase in the average mobile imaging rate per day
.
The decrease in Mobile Healthcare revenue compared to the prior year quarter was
primarily due to an increase in cancellations, resulting in a $0.6 million decrease in scan volumes, as well as a $0.3 million decrease in interim rentals due to lower utilization of owned units. The utilization of our interim rentals can vary in each period based on customers that are in the midst of new construction or refurbishing their current facilities.
Product and Product-Related Revenue
Product and product-related revenue by segment is summarized as follows (in thousands):
|
Three Months Ended March 31,
|
|||||||||||||||
|
2019
|
2018
|
Change
|
% Change
|
||||||||||||
|
Diagnostic Imaging
|
$
|
2,523
|
|
$
|
2,842
|
|
$
|
(319
|
)
|
(11.2
|
)%
|
||||
The decrease in Diagnostic Imaging revenue was due to a lower volume and less favorable mix of cameras sold.
25
Gross Profit
Services Gross Profit
Services gross profit and gross margin by segment is summarized as follows (in thousands):
|
Three Months Ended March 31,
|
|||||||||||
|
2019
|
2018
|
% Change
|
|||||||||
|
Diagnostic Services gross profit
|
$
|
2,581
|
|
$
|
2,247
|
|
14.9
|
%
|
|||
|
Diagnostic Services gross margin
|
22.0
|
%
|
18.7
|
%
|
|||||||
|
Mobile Healthcare gross profit
|
$
|
614
|
|
$
|
1,115
|
|
(44.9
|
)%
|
|||
|
Mobile Healthcare gross margin
|
6.4
|
%
|
10.5
|
%
|
|||||||
|
Total Services gross profit
|
$
|
3,195
|
|
$
|
3,362
|
|
(5.0
|
)%
|
|||
|
Total Services gross margin
|
14.9
|
%
|
14.9
|
%
|
|||||||
Diagnostic Services gross profit increased
$0.3 million
, or
14.9%
, to
$2.6 million
compared to
$2.2 million
in the prior year quarter, and the gross margin percentage was
22.0%
in the current quarter compared to
18.7%
in the prior year quarter. The increase in gross margin percentage was mainly due to lower equipment repair costs and professional services fees, as well as the sale of
our Telerhythmics business which typically had narrow or negative gross margins
.
Mobile Healthcare gross profit decreased
$0.5 million
, or
44.9%
, to
$0.6 million
in the current year quarter compared to
$1.1 million
in the prior year quarter, and gross margin percentage was
6.4%
in the current quarter compared to
10.5%
in the prior year quarter. The decrease in gross margin percentage was primarily due to an unfavorable mix of services provided, as well as higher equipment and vehicle leasing costs of $0.3 million compared to the prior year quarter.
Product and Product-Related Gross Profit
Product and product-related gross profit and margin by segment is summarized as follows (in thousands):
|
Three Months Ended March 31,
|
|||||||||||
|
2019
|
2018
|
% Change
|
|||||||||
|
Diagnostic Imaging gross profit
|
$
|
786
|
|
$
|
1,245
|
|
(36.9
|
)%
|
|||
|
Diagnostic Imaging gross margin
|
31.2
|
%
|
43.8
|
%
|
|||||||
The decrease in Diagnostic Imaging gross margin percentage was primarily due to lower revenue, a less favorable mix of cameras sold during the period, and higher service and camera part costs of approximately
$0.2 million
compared to the prior year quarter.
Operating Expenses
Operating expenses are summarized as follows (in thousands):
|
Three Months Ended March 31,
|
Percent of Revenues
|
||||||||||||||||||||
|
2019
|
2018
|
Change
|
2019
|
2018
|
|||||||||||||||||
|
Dollars
|
Percent
|
||||||||||||||||||||
|
Marketing and sales
|
$
|
1,143
|
|
$
|
1,467
|
|
$
|
(324
|
)
|
(22.1
|
)%
|
4.8
|
%
|
5.8
|
%
|
||||||
|
General and administrative
|
3,690
|
|
4,392
|
|
(702
|
)
|
(16.0
|
)%
|
15.4
|
%
|
17.2
|
%
|
|||||||||
|
Amortization of intangible assets
|
283
|
|
357
|
|
(74
|
)
|
(20.7
|
)%
|
1.2
|
%
|
1.4
|
%
|
|||||||||
|
Total operating expenses
|
$
|
5,116
|
|
$
|
6,216
|
|
$
|
(1,100
|
)
|
(17.7
|
)%
|
21.4
|
%
|
24.4
|
%
|
||||||
The decrease in marketing and sales expenses was primarily due to lower headcount, as well as the sale of
our Telerhythmics which resulted in approximately $0.1 million in savings
.
The decrease in general and administrative expenses of
$0.7 million
was primarily due to lower employee related costs of $0.6 million due to lower headcount and $0.1 million of non-recurring restructuring costs incurred in the prior year quarter related to the sale of our MDSS reportable segment on February 1, 2018.
The decrease in amortization of intangible assets was due to the sale of Telerhythmics.
26
Total Other Expense
Total other expense is summarized as follows (in thousands):
|
Three Months Ended March 31,
|
||||||||
|
2019
|
2018
|
|||||||
|
Other expense, net
|
$
|
(198
|
)
|
$
|
(17
|
)
|
||
|
Interest expense, net
|
(181
|
)
|
(217
|
)
|
||||
|
Loss on extinguishment of debt
|
(151
|
)
|
—
|
|
||||
|
Total other expense
|
$
|
(530
|
)
|
$
|
(234
|
)
|
||
Other expense, net for
three
months ended
March 31, 2019
, is predominantly comprised of one-time costs related to the potential acquisition of ATRM, of which $0.2M related to costs paid on behalf of ATRM, and partially offset by unrealized gains on available-for-sale equities.
Interest expense, net, for the
three
months ended
March 31, 2019
and
2018
is predominantly comprised of cash interest costs and related amortization of deferred issuance costs on our debt. A portion of interest costs has been allocated to discontinued operations in 2018 because the proceeds received in the sale were required to be used to reduce our borrowings under our previous revolving credit facility with Comerica Bank.
Loss on extinguishment of debt is related to the write-off of unamortized deferred financing costs related to the termination of the Comerica Credit Agreement on March 29, 2019. See Note 8
Debt
to the unaudited consolidated financial statements for further information.
Income Tax Expense
Intraperiod allocation rules require us to allocate our provision for income taxes between continuing operations and other categories or comprehensive income such as discontinued operations. As described in Note 2
Discontinued Operations
, of the unaudited consolidated financial statements, the results of our MDSS reportable segment have been reported as discontinued operations for the prior year quarter. As a result of the intraperiod tax allocation rules, for the
three
months ended
March 31, 2019
, the Company recorded an income tax benefit of
$8 thousand
within continuing operations. For the
three
months ended
March 31, 2018
, the Company recorded an income tax benefit of
$0.5 million
within continuing operations and
$0.6 million
of tax expense within discontinued operations.
See Note 10
Income Taxes
to the unaudited condensed consolidated financial statements for further information related to the Company’s income taxes.
Income from Discontinued Operations
As described in Note 2
Discontinued Operations
of the unaudited condensed consolidated financial statements, the results of our MDSS reportable segment have been reported as discontinued operations for all periods presented. During the
three
months ended
March 31, 2018
, discontinued operations includes a
$6.3 million
gain on the sale of our MDSS post-warranty service contracts to Philips that closed on February 1, 2018.
27
Liquidity and Capital Resources
Overview
We used cash of
$2.2 million
from operations during the
three
months ended
March 31, 2019
. Cash flows from operations primarily represents net loss (adjusted for depreciation, amortization, and other non-cash items), as well as the net effect of changes in working capital. Cash flows from investing activities primarily represent our investment in capital equipment required to maintain and grow our business, as well as acquisitions and dispositions. Cash flows from financing activities primarily represent net proceeds from borrowings and receipt of cash related to the exercise of stock options, offset by outflows related to dividend payments and repayments of long-term borrowings.
Our principal sources of liquidity are our existing cash and cash equivalents, cash generated from operations, and availability on our revolving line of credit from our Sterling Credit Agreement. As of
March 31, 2019
, we had
$0.8 million
of cash and cash equivalents, as well as
$7.5 million
available under our revolving line of credit.
We require capital principally for capital expenditures, acquisition activity, dividend payments, and to finance accounts receivable and inventory. Our working capital requirements vary from period to period depending on inventory requirements, the timing of deliveries, and the payment cycles of our customers. Our capital expenditures consist primarily of medical imaging and diagnostic devices utilized in the provision of our services, as well as vehicles and information technology hardware and software. Based upon our current level of expenditures, we believe our current working capital, together with cash flows from operating activities, will be more than adequate to meet our anticipated cash requirements for at least the next 12 months.
Cash Flows
The following table shows cash flow information for the
three
months ended
March 31, 2019
and
2018
(in thousands):
|
Three Months Ended March 31,
|
||||||||
|
2019
|
2018
|
|||||||
|
Net cash (used in) provided by operating activities
|
$
|
(2,185
|
)
|
$
|
420
|
|
||
|
Net cash (used in) provided by investing activities
|
$
|
(990
|
)
|
$
|
6,669
|
|
||
|
Net cash provided by (used in) financing activities
|
$
|
2,428
|
|
$
|
(7,932
|
)
|
||
Operating Activities
The decrease in cash compared to the prior year quarter was primarily due to lower net income adjusted for non-cash items as a result of higher accounts receivable and lower accounts payable.
Investing Activities
The decrease in cash provided by investing activities compared to the prior year quarter was primarily attributable to
$6.8 million
of proceeds received from the sale of our MDSS service contract business to Philips during the prior year quarter.
Financing Activities
The increase in cash flows from financing activities is primarily due to net borrowings of approximately $3.0 million compared to net principal repayments in the prior year quarter of $6.5 million as we used proceeds from the Sterling National Bank credit facility to refinance and terminate the Comerica Credit Agreement (see further discussion below).
Sterling Credit Facility
On March 29, 2019, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) by and among certain subsidiaries of the Company, as borrowers (collectively, the “Borrowers”); the Company, as guarantor; and Sterling National Bank, a national banking association, as lender (“SNB”).
The Loan Agreement is a five-year credit facility maturing in March 2024, with a maximum credit amount of
$20.0 million
for both revolving loans and outstanding letter of credit obligations (the “SNB Credit Facility”). Under the SNB Credit Facility, Borrowers can request the issuance of letters of credit in an aggregate amount not to exceed
$0.5 million
at any one time outstanding.
At the Borrowers’ option, the SNB Credit Facility will bear interest at either (i) a Floating LIBOR Rate, as defined in the Loan Agreement, plus a margin of
2.50%
per annum; or (ii) a Fixed LIBOR Rate, as defined in the Loan Agreement, plus a margin of
2.25%
per annum.
The Company used a portion of the financing made available under the SNB Credit Facility to refinance and terminate, effective as of March 29, 2019, its previous credit facility under the Comerica Credit Agreement.
28
The Loan Agreement includes certain representations, warranties of Borrowers, as well as events of default and certain affirmative and negative covenants by the Borrowers that are customary for loan agreements of this type. These covenants include restrictions on borrowings, investments and dispositions by Borrowers, as well as limitations on the Borrowers’ ability to make certain distributions. Upon the occurrence and during the continuation of an event of default under the Loan Agreement, SNB may, among other things, declare the loans and all other obligations under the Loan Agreement immediately due and payable and increase the interest rate at which loans and obligations under the Loan Agreement bear interest. The SNB Credit Facility is secured by a first-priority security interest in substantially all of the assets of the Company and the Borrowers and a pledge of all shares of the Borrowers.
In connection with the SNB Credit Facility, in the
three months ended March 31, 2019
, the Company recognized a
$0.2 million
loss on extinguishment due to the write off of unamortized deferred financing costs associated with the Comerica Credit Agreement.
At
March 31, 2019
, the Company was in compliance with all covenants.
Off-Balance Sheet Arrangements
As of
March 31, 2019
, we did not have any off-balance sheet arrangements.
|
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Not applicable.
|
ITEM 4.
|
CONTROLS AND PROCEDURES
|
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934 (the “Exchange Act”) reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. See Item 5. (Other Information) for a discussion of the security breach that occurred following March 31, 2019.
As required by Rules 13a-15(e) and 15d-15(e) of the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of
March 31, 2019
.
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all errors and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 under the Exchange Act that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
29
PART II. OTHER INFORMATION
|
ITEM 1.
|
LEGAL PROCEEDINGS
|
See Note 9
Commitments and Contingencies
, within the notes to our unaudited condensed consolidated financial statements for a summary of legal proceedings.
|
ITEM 1A.
|
RISK FACTORS
|
In evaluating us and our common stock, we urge you to carefully consider the risks and other information in this Quarterly Report on Form 10-Q, as well as the risk factors disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2018
, which we filed with the SEC on
March 1, 2019
, and in our registration statement on Form S-1/A filed with the SEC for the Preferred Offering on April 9, 2019. Except as noted below, the risks and uncertainties described in “Item 1A - Risk Factors” of our Annual Report on Form 10-K have not materially changed. Any of the risks discussed in this Quarterly Report on Form 10-Q or any of the risks disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2018
, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, could materially and adversely affect our results of operations or financial condition.
Risks Related to our Common Stock
Our common stock may be subject to delisting from the Nasdaq Global Market if we do not meet Nasdaq’s Minimum Bid Price Requirement.
On January 8, 2019, we received a deficiency letter from the Nasdaq Listing Qualifications Department notifying us that, for the prior thirty consecutive business days, the closing bid price for our common stock had closed below the minimum $1.00 per share requirement for continued listing on the Nasdaq Global Market pursuant to Nasdaq Listing Rule 5450(a)(1) (the “Minimum Bid Price Requirement”). In accordance with Nasdaq Listing Rules, we have been given 180 calendar days, or until July 8, 2019 to regain compliance with the Minimum Bid Price Requirement. If we do not regain compliance by July 8, 2019, we may transfer from The Nasdaq Global Market to The Nasdaq Capital Market and may be eligible for an additional compliance period of 180 days. To qualify for the additional compliance period, we will have to: (i) submit a transfer application and related application fees; (ii) meet the continued listing requirement for market value of publicly held shares and all other initial listing standards of The Nasdaq Capital Market (except for the bid price requirement); and (iii) provide written notice to Nasdaq of our intention to cure the deficiency during the additional 180-day compliance period by effecting a reverse stock split if necessary. If we do not qualify for an additional compliance period, or should we determine not to submit a transfer application or make the required representation, or if Nasdaq concludes that we will not be able to cure the deficiency, Nasdaq will provide written notice to us that our common stock will be subject to delisting.
On March 8, 2019, our board of directors unanimously approved, subject to stockholder approval, an amendment to our Restated Certificate of Incorporation to effect a reverse stock split of our outstanding common stock by a ratio of not less than 1-for-5 and not more than 1-for-10 at any time within 12 months following the date of stockholder approval of the reverse stock split, with the exact ratio to be set within this range by our board of directors at its sole discretion (the “Reverse Stock Split”), and a reduction of the number of authorized shares of common stock to 30 million shares authorized. Our board of directors may alternatively elect to abandon such proposed amendment and not effect the Reverse Stock Split authorized by stockholders, in its sole discretion. As proposed to our stockholders, our board of directors will have 12 months following stockholder approval to implement the Reverse Stock Split, and if we implement the Reverse Stock Split to regain compliance with the Minimum Bid Price Requirement by the July 8, 2019 deadline, we must complete the Reverse Split no later than ten business days prior to such deadline. The Reverse Stock Split (which includes the reduction of the number of authorized shares of common stock), if approved by our stockholders, would become effective at the time and date set forth in a certificate of amendment to our Restated Certificate of Incorporation to be filed with the Secretary of State of the State of Delaware. The form of the proposed certificate of amendment to our Restated Certificate of Incorporation to effect the Reverse Stock Split is attached as Appendix A to our preliminary proxy statement filed on March 8, 2019. If we choose to implement a reverse stock split, it must be completed no later than ten business days prior to July 8, 2019.
If we do not regain compliance with the Minimum Bid Price Requirement by July 8, 2019 and we are not eligible for an additional compliance period at that time, the staff will provide written notification to us that our common stock will be subject to delisting. At that time, we may appeal the staff’s decision to a Nasdaq Listing Qualifications Panel (the “Panel”). We would remain listed pending the Panel’s decision. There can be no assurance that, if we do appeal a subsequent delisting determination by the staff to the Panel, that such an appeal would be successful.
30
If we are not able to regain compliance with the Minimum Bid Price Requirement or do not transfer to The Nasdaq Capital Market, our common stock could be traded on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it would become more difficult to dispose of, or obtain accurate price quotations for, our common stock, and there would likely be a reduction in our coverage by security analysts and the news media, which could cause the price of our common stock to decline further. Additionally, the sale or purchase of our common stock would likely be made more difficult and the trading volume and liquidity of our common stock would likely decline. A delisting from the Nasdaq would also result in negative publicity and would negatively impact our ability to raise capital in the future.
Risks Related to our Business and Industry
Our HoldCo Conversion and related acquisitions or investments could involve unknown risks that could harm our business and adversely affect our financial condition.
We are in the process of becoming a diversified holding company with interests in a variety of industries and market sectors. The real estate acquisitions that we have made under our SRE real estate division and the pending and future acquisitions that we consummate will involve unknown risks, some of which will be particular to the industry in which the acquisition target operates. Although we intend to conduct extensive business, financial and legal due diligence in connection with the evaluation of all our acquisition and investment opportunities, there can be no assurance our due diligence investigations will identify every matter that could have a material adverse effect on us. We may be unable to adequately address the financial, legal and operational risks raised by such acquisitions or investments, especially if we are unfamiliar with the industry in which we invest. The realization of any unknown risks could prevent or limit us from realizing the projected benefits of the acquisitions or investments, which could adversely affect our financial condition and liquidity. In addition, our financial condition, results of operations and the ability to service our debt will be subject to the specific risks applicable to any company we acquire or in which we invest.
We are subject to particular risks associated with real estate ownership, which could result in unanticipated losses or expenses.
Following our recent acquisition of real estate, our business is subject to many risks that are associated with the ownership of real estate. For example, if our tenants do not renew their leases or default on their leases, we may be unable to re-lease the facilities at favorable rental rates. Other risks that are associated with real estate acquisition and ownership include, without limitation, the following:
|
•
|
general liability, property and casualty losses, some of which may be uninsured;
|
|
•
|
the inability to purchase or sell our assets rapidly to respond to changing economic conditions, due to the illiquid nature of real estate and the real estate market;
|
|
•
|
leases which are not renewed or are renewed at lower rental amounts at expiration;
|
|
•
|
the default by a tenant or guarantor under any lease;
|
|
•
|
costs relating to maintenance and repair of our facilities and the need to make expenditures due to changes in governmental regulations, including the Americans with Disabilities Act;
|
|
•
|
environmental hazards created by prior owners or occupants, existing tenants, mortgagors or other persons for which we may be liable;
|
|
•
|
acts of God affecting our properties; and
|
|
•
|
acts of terrorism affecting our properties.
|
31
We rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could materially harm our business.
We rely on information technology and systems, including the Internet, commercially available software, and other applications, to process, transmit, store, and safeguard information and to manage or support a variety of our business processes, including financial transactions and maintenance of records, which may include personal identifying information and other valuable or confidential information. If we experience material failures, inadequacies, or interruptions or security failures of our information technology, we could incur material costs and losses. Further, third-party vendors could experience similar events with respect to their information technology and systems that impact the products and services they provide to us or to our customers. We rely on commercially available systems, software, tools, and monitoring, as well as other applications and internal procedures and personnel, to provide security for processing, transmitting, storing, and safeguarding confidential information such as personally identifiable information related to our employees and others, information regarding financial accounts, and information regarding customers and vendors. We take various actions, and we incur significant costs, to maintain and protect the operation and security of our information technology and systems, including the data maintained in those systems. However, it is possible that these measures will not prevent the systems’ improper functioning or a compromise in security, such as in the event of a cyberattack or the improper disclosure of information. Security breaches, computer viruses, attacks by hackers, online fraud schemes, and similar breaches can create significant system disruptions, shutdowns, fraudulent transfer of assets, or unauthorized disclosure of confidential information. For example, in April 2019, we became aware that we had been a victim of criminal fraud commonly referred to as “business email compromise fraud.” The incident involved the impersonation of an officer of the Company and improper access to his email, resulting in the transfer by the Company of funds to a third-party account.
Despite any defensive measures we take to manage threats to our business, our risk and exposure to these matters remain heightened because of, among other things, the evolving nature of such threats in light of advances in computer capabilities, new discoveries in the field of cryptography, new and sophisticated methods used by criminals including phishing, social engineering, or other illicit acts, or other events or developments that we may be unable to anticipate or fail to adequately mitigate. Any failure to maintain the security, proper function and availability of our information technology and systems, or certain third-party vendors’ failure to similarly protect their information technology and systems that are relevant to our operations, or to safeguard our business processes, assets, and information could result in financial losses, interrupt our operations, damage our reputation, cause us to be in default of material contracts, and subject us to liability claims or regulatory penalties, any of which could materially and adversely affect us.
Risks Related to our Indebtedness
On March 29, 2019, we entered into the SNB Loan Agreement, with Sterling National Bank, a national banking association. The SNB Loan Agreement is a five-year revolving credit facility (maturing in March 2024), which, as amended, has a maximum credit amount of $20 million. We used a portion of the financing made available under the SNB Loan Agreement to refinance and terminate, effective as of March 29, 2019, our previous credit facility under the Comerica Credit Agreement.
Our indebtedness could restrict our operations and make us more vulnerable to adverse economic conditions.
Our indebtedness could have important consequences for us and our stockholders. For example, the SNB Loan Agreement requires a balloon payment at the termination of the facility in March 2024, which may require us to dedicate a substantial portion of our cash flow from operations to this future payment if we feel we cannot be successful in our ability to refinance in the future, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, and acquisitions, and for other general corporate purposes. In addition, our indebtedness could:
|
•
|
increase our vulnerability to adverse economic and competitive pressures in our industry;
|
|
•
|
place us at a competitive disadvantage compared to our competitors that have less debt;
|
|
•
|
limit our flexibility in planning for, or reacting to, changes in our business and our industry; and
|
|
•
|
limit our ability to borrow additional funds on terms that are acceptable to us or at all.
|
The SNB Loan Agreement governing our indebtedness contains restrictive covenants that will restrict our operating flexibility and require that we maintain specified financial ratios. If we cannot comply with these covenants, we may be in default under the SNB Loan Agreement.
The SNB Loan Agreement governing our indebtedness contains restrictions and limitations on our ability to engage in activities that may be in our long-term best interests. The SNB Loan Agreement contains affirmative and negative covenants that limit and restrict, among other things, our ability to:
|
•
|
incur additional debt;
|
|
•
|
sell assets;
|
32
|
•
|
incur liens or other encumbrances;
|
|
•
|
make certain restricted payments and investments;
|
|
•
|
acquire other businesses; and
|
|
•
|
merge or consolidate.
|
The SNB Loan Agreement limits our ability to pay dividends and to redeem our equity securities if such dividend or redemption would result in our non-compliance with the financial covenants in the SNB Loan Agreement, there is insufficient borrowing availability under the SNB Loan Agreement, or if there is a default or event of default under the SNB Loan Agreement that has occurred and is continuing. The Company may, therefore be required to reduce or eliminate its dividends, if any, including on the Series A Preferred Stock (if any outstanding), and/or may be unable to redeem shares of the Series A Preferred Stock (if any outstanding) until compliance with such financial covenants can be met.
The SNB Loan Agreement contains a fixed charge coverage ratio covenant and a leverage ratio covenant. Going forward, we may not have the ability to meet these and other covenants under the SNB Loan Agreement depending on a number of factors including, without limitation, the performance of our business, capital allocation decisions made by the Company, or events beyond our control.
Our failure to comply with our covenants and other obligations under the SNB Loan Agreement may result in an event of default thereunder. A default, if not cured or waived, may permit acceleration of our indebtedness. If our indebtedness is accelerated, we cannot be certain that we will have sufficient funds available to pay the accelerated indebtedness (together with accrued interest and fees), or that we will have the ability to refinance the accelerated indebtedness on terms favorable to us or at all. This could have serious consequences to our financial condition, operating results, and business, and could cause us to become insolvent or enter bankruptcy proceedings, and stockholders may lose all or a portion of their investment because of the priority of the claims of our creditors on our assets.
Substantially all of our assets have been pledged to SNB as security for our indebtedness under the SNB Loan Agreement.
Pursuant to the SNB Loan Agreement, the SNB Loan Agreement is secured by a first-priority security interest in substantially all of the assets of the Company and its subsidiaries and a pledge of all shares and equity interests of the Company’s subsidiaries. Upon the occurrence and during the continuation of an event of default under the SNB Loan Agreement, SNB may, among other things, declare the loans and all other obligations under the SNB Loan Agreement immediately due and payable and increase the interest rate at which loans and obligations under the SNB Loan Agreement bear interest. The exercise by SNB of remedies provided under the SNB Loan Agreement in the event of a default thereunder may have a material adverse effect on the liquidity, financial condition and results of operations of the Company and could cause the Company to become bankrupt or insolvent. In the event of any bankruptcy, liquidation, dissolution, reorganization, or similar proceeding against us, the assets that are pledged as collateral securing any unpaid amounts under the SNB Loan Agreement must first be used to pay such amounts, as well as any other obligation secured by the pledged assets, in full, before making any distributions to our stockholders. In the event of any of the foregoing, our stockholders could lose all or a part of their investment.
If we are unable to generate or borrow sufficient cash to make payments on our indebtedness, our financial condition would be materially harmed, our business could fail, and stockholders may lose all of their investment.
Our ability to make scheduled payments on or to refinance our obligations will depend on our financial and operating performance, which will be affected by economic, financial, competitive, business, and other factors, some of which are beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations to service our indebtedness or to fund our other liquidity needs. If we are unable to meet our debt obligations or fund our other liquidity needs, we may need to restructure or refinance all or a portion of our indebtedness on or before maturity or sell certain of our assets. We cannot assure you that we will be able to restructure or refinance any of our indebtedness on commercially reasonable terms, if at all, which could cause us to default on our debt obligations and impair our liquidity. Any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations.
Increases in interest rates could adversely affect our results from operations and financial condition.
The SNB Loan Agreement allows the Company to elect for amounts borrowed under the SNB Loan Agreement to be subject to a floating interest rate which may change with market interest rates. An increase in prevailing interest rates would have an effect on the interest rates charged on our variable rate debt, which rise and fall upon changes in interest rates. If prevailing interest rates or other factors result in higher interest rates, the increased interest expense would adversely affect our cash flow and our ability to service our indebtedness.
33
|
ITEM 2.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
None.
|
ITEM 3.
|
DEFAULTS UPON SENIOR SECURITIES
|
None.
|
ITEM 4.
|
MINE SAFETY DISCLOSURES
|
Not applicable.
|
ITEM 5.
|
OTHER INFORMATION
|
On April 22, 2019, the Company determined that it had been the victim of a criminal security breach commonly referred to as “business email compromise fraud.” The Company self-discovered this fraudulent activity and promptly initiated contact with its bank and federal law enforcement authorities. As a result of these efforts, the Company has recovered the full amount of the funds transferred. The Company’s internal investigation of this matter and law enforcement actions are ongoing.
While the Company’s internal controls were followed, this incident of email compromise fraud indicates that the design of the Company’s controls needs to be improved. The Company is in the process of enhancing controls relating to electronic transfers, as well as the ability of our personnel to identify and block attempts by third parties to fraudulently receive electronic payments from us. Our management believes that the foregoing actions will improve our internal controls regarding the detection of fraudulent activities and the safeguarding of our assets.
34
|
ITEM 6.
|
EXHIBITS
|
|
Exhibit
Number
|
Description
|
|
|
10.1
|
||
|
10.2
|
||
|
10.3
|
||
|
10.4
|
||
|
10.5
|
||
|
10.6*
|
||
|
10.7*
|
||
|
10.8
|
||
|
31.1*
|
||
|
31.2*
|
||
|
32.1**
|
||
|
32.2**
|
||
|
101.INS*
|
XBRL Instance Document
|
|
|
101.SCH*
|
XBRL Taxonomy Extension Schema
|
|
|
101.CAL*
|
XBRL Taxonomy Extension Calculation Linkbase
|
|
|
101.LAB*
|
XBRL Taxonomy Extension Labels Linkbase
|
|
|
101.PRE*
|
XBRL Taxonomy Extension Presentation Linkbase
|
|
|
101.DEF*
|
XBRL Taxonomy Extension Definition Linkbase
|
|
_________________
|
*
|
Filed herewith.
|
|
**
|
This certification is being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of Digirad Corporation, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
|
35
SIGNATURES
Pursuant to the requirements of the Securities and 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
|
||||
|
Date:
|
May 8, 2019
|
By:
|
/s/ MATTHEW G. MOLCHAN
|
|
|
Matthew G. Molchan
President and Chief Executive Officer (Principal Executive Officer, Duly Authorized Officer) |
||||
36
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsNote 1. Basis Of PresentationNote 2. Discontinued OperationsNote 3. RevenueNote 4. Basic and Diluted Net Income (loss) Per ShareNote 5. Supplementary Balance Sheet InformationNote 6. LeasesNote 7. Financial InstrumentsNote 8. DebtNote 9. Commitments and ContingenciesNote 10. Income TaxesNote 11. SegmentsNote 12. Related Party TransactionsNote 13. Subsequent EventsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits