Acquisition of Telerhythmics (Notes)

12 Months Ended

Dec. 31, 2014

Business Combinations [Abstract]

Acquisition of Telerhythmics, LLC

Acquisition of Telerhythmics, LLC

On March 13, 2014, we acquired 100% of the membership interest of Telerhythmics, LLC (Telerhythmics), a provider of 24-hour cardiac monitoring services. Telerhythmics and Digirad each have a very similar customer base, yet with only minor overlaps in current customers. We believe this similar customer base will allow us to leverage each company’s strengths to grow sales and also diversify Digirad’s service offerings.

We paid to the sellers of the membership interest (the Sellers) aggregate up-front consideration of $3.4 million and assumed approximately $131,000 in debt. In addition, there is an aggregate earn-out opportunity of up to $501,000 from the period March 14, 2014 through December 31, 2016 based on the Telerhythmics business meeting certain earnings before interest, taxes, depreciation and amortization (EBITDA) milestones. The Sellers will receive fifty percent (50%) of the EBITDA generated by the Telerhythmics business in excess of the EBITDA milestone amounts, which are as follows:

• $415,000 of EBITDA for the period from the closing date through December 31, 2014,

• $825,000 of EBITDA for the period from January 1, 2015 through December 31, 2015; and

• $825,000 of EBITDA for the period from January 1, 2016 through December 31, 2016.

At December 31, 2014, we have estimated the fair value of the contingent earn-out opportunity to be $229,000. The earn-out opportunity is estimated based on expected performance of the business over the period from January 1, 2015 through December 31, 2016, utilizing an income approach. No earn-out consideration was earned by the Sellers for the period from the closing date through December 31, 2014. It is reasonably possible that our estimate of the earn-out potential could change in the near term. Any adjustment in the estimated earn-out opportunity until settled will be recorded as a gain or loss to current operations in the period the estimate changes.

As of December 31, 2014, the allocation of the purchase price to the assets acquired and liabilities assumed on the acquisition date was as follows (in thousands):

	Allocation of purchase price
Assets
Current assets:
Accounts receivable, net	$	256
Other current assets	34
Total current assets	290
Property and equipment, net	290
Intangible assets, net	2,580
Goodwill	1,153
Total assets	$	4,313
Liabilities
Current liabilities:
Accounts payable	$	36
Accrued compensation	169
Other accrued liabilities	356
Current portion of long-term debt	131
Total current liabilities	692
Other liabilities	174
Total liabilities	$	866

The long-term debt was paid in full on March 28, 2014.

The goodwill recognized as part of the transaction primarily represents synergies between Digirad and Telerhythmics that were not separately identified as part of the acquisition valuation process. Telerhythmics activities are considered their own operating segment, which is aggregated into our Diagnostic Services reportable segment (formerly Digirad Imaging Solutions). The resulting goodwill from the acquisition is expected to be deductible for federal and state tax reporting purposes.

The below tables display estimated pro forma results had the business acquisition been completed as of January 1, 2013. In deriving the pro forma results, we utilized the historical operating results of Telerhythmics and adjusted for the impact of the purchase accounting and transaction costs as if the acquisition occurred on January 1, 2013.

	Year Ended December 31, (unaudited)
(in thousands)	2014		2013
Revenues	$	56,763	$	55,494
Net income	$	2,688	$	247

Included within our consolidated operating results for the year ended December 31, 2014 are Telerhythmics operations for the period March 14, 2014 through December 31, 2014 as follows:

(in thousands)	Year Ended December 31, 2014 (unaudited)
Revenues	$	3,926
Net loss	$	(777	)

Included within the results for Telerhythmics is approximately $155,000 of transaction costs related to the acquisition. These costs are classified as general and administrative expenses in the consolidated statements of comprehensive income (loss).