10-Q 1 drad10q-2019q2.htm QUARTERLY REPORT ON FORM 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM              TO             
Commission file number: 001-35947
dradlogoa01.jpg
Digirad Corporation
(Exact name of registrant as specified in its charter)
Delaware
 
33-0145723
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
1048 Industrial Court, Suwanee, GA
 
30024
(Address of Principal Executive Offices)
 
(Zip Code)
(858) 726-1600
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.0001 per share
DRAD
NASDAQ Global Market
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.
Large accelerated filer
o
Accelerated filer
o
 
 
 
 
Non-accelerated filer
x
Smaller reporting company
x
 
 
 
 
 
 
Emerging growth company
o
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 July 30, 2019 the registrant had 2,042,493 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.
FINANCIAL STATEMENTS
DIGIRAD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands, except for per share amounts)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
 
Services
 
$
22,749

 
$
24,324

 
$
44,138

 
$
46,947

Product and product-related
 
3,049

 
2,756

 
5,572

 
5,598

Real estate operations
 

 

 

 

Total revenues
 
25,798

 
27,080

 
49,710

 
52,545

 
 
 
 
 
 
 
 
 
Cost of revenues:
 
 
 
 
 
 
 
 
Services
 
18,648

 
20,023

 
36,842

 
39,284

Product and product-related
 
1,969

 
1,490

 
3,706

 
3,087

Real estate operations
 
177

 

 
177

 

Total cost of revenues
 
20,794

 
21,513

 
40,725

 
42,371

 
 
 
 
 
 
 
 
 
Gross profit
 
5,004

 
5,567

 
8,985

 
10,174

 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
Marketing and sales
 
1,215

 
1,461

 
2,358

 
2,928

General and administrative
 
3,652

 
3,522

 
7,342

 
7,914

Amortization of intangible assets
 
283

 
356

 
566

 
713

Goodwill impairment
 

 
476

 

 
476

Merger and finance costs
 
1,000

 

 
1,000

 

Total operating expenses
 
6,150

 
5,815

 
11,266

 
12,031

 
 
 
 
 
 
 
 
 
Loss from operations
 
(1,146
)
 
(248
)
 
(2,281
)
 
(1,857
)
 
 
 
 
 
 
 
 
 
Other expense:
 
 
 
 
 
 
 
 
Other expense, net
 
(5
)
 
(19
)
 
(203
)
 
(36
)
Interest expense, net
 
(254
)
 
(189
)
 
(435
)
 
(363
)
Loss on sale of building
 
(232
)
 

 
(232
)
 

Loss on extinguishment of debt
 

 

 
(151
)
 
(43
)
Total other expense
 
(491
)
 
(208
)
 
(1,021
)
 
(442
)
 
 
 
 
 
 
 
 
 
Loss before income taxes
 
(1,637
)
 
(456
)
 
(3,302
)
 
(2,299
)
Income tax benefit
 
162

 
106

 
170

 
561

Net loss from continuing operations
 
(1,475
)
 
(350
)
 
(3,132
)
 
(1,738
)
Net income from discontinued operations
 
266

 

 
266

 
5,494

Net (loss) income
 
$
(1,209
)
 
$
(350
)
 
$
(2,866
)
 
$
3,756

 
 
 
 
 
 
 
 
 
Net (loss) income per share—basic and diluted
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.72
)
 
$
(0.17
)
 
$
(1.54
)
 
$
(0.86
)
Discontinued operations
 
0.13

 

 
0.13

 
2.73

Net (loss) income per share—basic and diluted
 
$
(0.59
)
 
$
(0.17
)
 
$
(1.41
)
 
$
1.87

 
 
 
 
 
 
 
 
 
Dividends declared per common share
 
$

 
$
0.55

 
$

 
$
1.10

 
 
 
 
 
 
 
 
 
Net (loss) income
 
$
(1,209
)
 
$
(350
)

$
(2,866
)

$
3,756

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Reclassification of tax provision impact
 

 

 
22

 

Reclassification of unrealized gains on equity securities to retained earnings
 

 

 

 
(17
)
Total other comprehensive income (loss)
 

 

 
22

 
(17
)
Comprehensive (loss) income
 
$
(1,209
)
 
$
(350
)
 
$
(2,844
)
 
$
3,739

See accompanying notes to the unaudited condensed consolidated financial statements.

4



DIGIRAD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
 
 
June 30,
2019
 
December 31,
2018
Assets
 

 

Current assets:
 
 
 
 
Cash and cash equivalents
 
$
864

 
$
1,545

Restricted cash
 
168

 
167

Equity securities
 
17

 
153

Accounts receivable, net
 
12,783

 
12,642

Inventories, net
 
5,781

 
5,402

Other current assets
 
1,456

 
1,285

Total current assets
 
21,069

 
21,194

Property and equipment, net
 
24,324

 
21,645

Operating lease right-of-use assets, net
 
3,973

 

Intangible assets, net
 
4,662

 
5,228

Goodwill
 
1,745

 
1,745

Restricted cash
 

 
101

Deferred tax assets
 
75

 

Investments in and receivables from related parties
 
1,275

 
275

Other assets
 
728

 
406

Total assets
 
$
57,851

 
$
50,594

 
 
 
 
 
Liabilities and stockholders’ equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
4,584

 
$
5,206

Accrued compensation
 
4,121

 
3,862

Accrued warranty
 
283

 
197

Deferred revenue
 
1,455

 
1,687

Operating lease liabilities
 
1,427

 

Other current liabilities
 
2,939

 
2,265

Total current liabilities
 
14,809

 
13,217

Long-term debt
 
15,314

 
9,500

Deferred tax liabilities
 
121

 
121

Operating lease liabilities, net of current portion
 
2,674

 

Other liabilities
 
1,721

 
1,956

Total liabilities
 
34,639

 
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: 30,000,000 shares authorized; 2,042,493 and 2,024,979 shares issued and outstanding (net of treasury shares) at June 30, 2019 and December 31, 2018, respectively
 
2

 
2

Treasury stock, at cost; 258,849 shares at June 30, 2019 and December 31, 2018
 
(5,728
)
 
(5,728
)
Additional paid-in capital
 
145,706

 
145,428

Accumulated other comprehensive loss
 

 
(22
)
Accumulated deficit
 
(116,768
)
 
(113,880
)
Total stockholders’ equity
 
23,212

 
25,800

Total liabilities and stockholders’ equity
 
$
57,851

 
$
50,594

See accompanying notes to the unaudited condensed consolidated financial statements.

5



DIGIRAD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
Six Months Ended June 30,
 
 
2019
 
2018
Operating activities
 
 
 
 
Net (loss) income
 
$
(2,866
)
 
$
3,756

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation
 
3,094

 
3,842

Amortization of intangible assets
 
566

 
727

Amortization of operating lease right-of-use assets
 
604

 

Provision for bad debt
 
109

 
82

Stock-based compensation
 
302

 
371

Goodwill impairment
 

 
476

Gain on disposal of discontinued operations
 
(350
)
 
(6,261
)
Amortization of loan issuance costs
 
28

 
21

Debt issuance costs write-off
 
151

 
43

Financing costs write-off
 
273

 

Loss (gain) on sale of assets
 
24

 
(238
)
Deferred income taxes
 
(75
)
 
120

Other, net
 
(23
)
 
36

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(348
)
 
3,219

Inventories
 
(290
)
 
(463
)
Other assets
 
(529
)
 
339

Accounts payable
 
(694
)
 
(73
)
Accrued compensation
 
262

 
(1,385
)
Deferred revenue
 
159

 
(844
)
Operating lease liabilities
 
(625
)
 

Other liabilities
 
596

 
(727
)
Net cash provided by operating activities
 
368

 
3,041

 
 
 
 
 
Investing activities
 
 
 
 
Purchases of property and equipment
 
(1,446
)
 
(919
)
Purchase of real estate from related and third parties
 
(5,180
)
 

Proceeds from sale of property and equipment
 
1,320

 
325

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
 
(6,166
)
 
6,236

 
 
 
 
 
Financing activities
 
 
 
 
Proceeds from long-term borrowings
 
40,982

 
18,125

Repayment of long-term debt
 
(35,168
)
 
(25,125
)
Loan issuance costs
 
(404
)
 
(7
)
Dividends paid
 

 
(2,212
)
Taxes paid related to net share settlement of equity awards
 
(24
)
 
(74
)
Repayment of obligations under finance leases
 
(369
)
 
(450
)
Net cash provided by (used in) financing activities
 
5,017

 
(9,743
)
Net decrease in cash, cash equivalents, and restricted cash
 
(781
)
 
(466
)
Cash, cash equivalents, and restricted cash at beginning of period
 
1,813

 
2,220

Cash, cash equivalents, and restricted cash at end of period
 
$
1,032

 
$
1,754

See accompanying notes to the unaudited condensed consolidated financial statements.

6



DIGIRAD CORPORATION
CONDENSED 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
 
2,025

 
$
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
 
6

 

 

 
(24
)
 

 

 
(24
)
Net loss
 

 

 

 

 

 
(1,657
)
 
(1,657
)
Reclassification of tax provision impact
 

 

 

 

 
22

 

 
22

Balance at March 31, 2019
 
2,031

 
$
2

 
$
(5,728
)
 
$
145,516

 
$

 
$
(115,537
)
 
$
24,253

Stock-based compensation
 

 

 

 
190

 

 

 
190

Shares issued under stock incentive plans, net of shares withheld for employee taxes
 
9

 

 

 

 

 

 

Shares issued for fractional shares in conjunction with reverse stock split
 
2

 

 

 

 

 

 

Net loss
 

 

 

 

 

 
(1,209
)
 
(1,209
)
Reclassification of tax provision impact
 

 

 

 

 

 
(22
)
 
(22
)
Balance at June 30, 2019
 
2,042

 
$
2

 
$
(5,728
)
 
$
145,706

 
$

 
$
(116,768
)
 
$
23,212


 
 
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
 
2,006

 
$
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
 
6

 

 

 
(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
 
2,012

 
$
2

 
$
(5,728
)
 
$
147,189

 
$
(22
)
 
$
(110,510
)
 
$
30,931

Stock-based compensation
 

 

 

 
171

 

 

 
171

Shares issued under stock incentive plans, net of shares withheld for employee taxes
 

 

 

 
(6
)
 

 

 
(6
)
Dividends paid
 

 

 

 
(1,107
)
 

 

 
(1,107
)
Net loss
 

 

 

 

 

 
(350
)
 
(350
)
Balance at June 30, 2018
 
2,012

 
$
2

 
$
(5,728
)
 
$
146,247

 
$
(22
)
 
$
(110,860
)
 
$
29,639

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.
Reverse Stock Split
On May 31, 2019, the Company filed a Certificate of Amendment to its Restated Certificate of Incorporation (the “Amendment”) in order to effect a reverse stock split of the issued and outstanding shares of its common stock at a ratio of 1-for-10 (the “Reverse Stock Split”) and to reduce of the number of authorized shares of common stock to 30 million shares authorized (the “Share Reduction”). The Reverse Stock Split was implemented for the purpose of regaining compliance with the minimum bid price requirement for continued listing of the Company’s common stock on the Nasdaq Global Market.
The Reverse Stock Split and the Share Reduction became effective on June 4, 2019, at which time (a) every ten shares of the Company’s issued and outstanding common stock were automatically combined into one issued and outstanding share of common stock and (b) the number of authorized shares of common stock under the Company’s Restated Certificate of Incorporation, as amended, was automatically reduced to 30 million shares authorized. No fractional shares were issued in connection with the Reverse Stock Split. Instead, the Company issued one full share of the post-Reverse Stock Split common stock to any stockholder who would have been entitled to receive a fractional share as a result of the Reverse Stock Split. The Amendment did not affect the par value of the Company’s common stock. The Company’s common stock began trading on a split-adjusted basis on June 5, 2019.
The Amendment, effecting the Reverse Stock Split and the Share Reduction, was approved by the stockholders of the Company at the Company’s 2019 Annual Meeting of Stockholders held on May 1, 2019. In connection with approving the Reverse Stock Split, the Company’s stockholders granted authority to the Company’s board of directors to determine, at its discretion, a ratio within the range of 1-for-5 to 1-for-10, at which to effectuate the Reverse Stock Split. The Reverse Stock Split was approved by the Company’s board of directors on March 8, 2019, and the ratio of 1-for-10 was approved by the Company’s board of directors on May 15, 2019.

8



The terms of equity awards under the Company’s incentive plans, including the per share exercise price of options and the number of shares issuable under outstanding awards, were converted on the effective date of the Reverse Stock Split in proportion to the reverse split ratio (subject to adjustment for fractional interests). In addition, the total number of shares of common stock that may be the subject of future grants under the Company’s incentive plans were adjusted and proportionately decreased as a result of the Reverse Stock Split.
All authorized, issued, and outstanding stock and per share amounts contained in the accompanying condensed consolidated financial statements have been adjusted to reflect the 1-for-10 Reverse Stock Split for all prior periods presented. The Reverse Stock Split was effective June 4, 2019.
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
Lessee Accounting
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.
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.
Lessor Accounting
We determine lease classification at the commencement date. Leases not classified as sales-type or direct financing leases are classified as operating leases. The primary accounting criteria we use for  lease classification are (a) review to determine if the lease transfers ownership of the underlying asset to the lessee by the end of the lease term, (b) review to determine if the lease grants the lessee a purchase option that the lessee is reasonably certain to exercise, (c) determine, using a seventy-five percent or more threshold, if the lease term is for a major part of the remaining economic life of the underlying asset (however, we do not use this classification criterion when the lease commencement date falls within the last 25 percent of the total economic life of the underlying asset) and (d) determine, using a ninety percent or more threshold, if the present value of the sum of the lease payments and any residual value guarantees equal or exceeds substantially all of the fair value of the underlying asset. We do not lease equipment of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. Each of the Company’s leases is classified as an operating lease.
The Company elected the operating lease practical expedient for its leases to not separate non-lease components of regular maintenance services from associated lease components. This practical expedient is available when both of the following are met: (i) the timing and pattern of transfer of the non-lease components and associated lease component are the same and (ii) the lease component, if accounted for separately, would be classified as an operating lease.
Property taxes paid by the lessor that are reimbursed by the lessee are considered to be lessor costs of owning the asset, and are recorded gross with revenue included in other non-interest income and expense recorded in operating expenses. 
The Company selected a lessor accounting policy election to exclude from revenue and expenses sales taxes and other similar taxes assessed by a governmental authority on lease revenue-producing transactions and collected by the lessor from a lessee.
Operating lease equipment is carried at cost less accumulated depreciation. Operating lease equipment is depreciated to its estimated residual value using the straight-line method over the lease term or estimated useful life of the asset.

9



Rental revenue on operating leases is recognized on a straight-line basis over the lease term unless collectibility is not probable. In these cases rental revenue is recognized as payments are received.
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 of $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 its NetSuite ERP implementation. As of June 30, 2019, the Company has capitalized $0.1 million 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 sale of the customer contracts, we received notification from Philips on September 28, 2017, 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.
For the six months ended June 30, 2019, Digirad recognized a $0.4 million gain for the remaining settlement of the warranty claims in regards to equipment sold to Phillips.
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.

10



The following table presents financial results of the MDSS business (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Total revenues
 
$

 
$
165

 
$

 
$
789

Total cost of revenues
 

 
30

 

 
546

Gross profit
 

 
135

 

 
243

Operating expenses:
 
 
 
 
 
 
 
 
Marketing and sales
 

 

 

 
85

General and administrative
 

 

 

 
172

Amortization of intangible assets
 

 

 

 
13

Gain on sale of discontinued operations
 
(350
)
 

 
(350
)
 
(6,261
)
Total operating expenses
 
(350
)
 

 
(350
)
 
(5,991
)
Income from discontinued operations
 
350


135


350


6,234

Interest expense
 

 

 

 
(26
)
Income from discontinuing operations before income taxes
 
350

 
135

 
350

 
6,208

Income tax expense
 
(84
)
 
(135
)
 
(84
)
 
(714
)
Income from discontinuing operations
 
$
266

 
$

 
$
266

 
$
5,494

The following table presents supplemental cash flow information of discontinued operations (in thousands):
 
 
Six Months Ended June 30,
 
 
2019
 
2018
Operating activities:
 
 
 
 
Depreciation
 
$

 
$
2

Amortization of intangible assets
 
$

 
$
13

Gain on sale of discontinued operations
 
$
(350
)
 
$
(6,261
)
Stock-based compensation
 
$

 
$
(1
)
Investing activities:
 
 
 
 
Proceeds from the sale of discontinued operations
 
$

 
$
6,844

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 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 when an observable price is not available, we use a cost plus margin approach.
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.

11



Disaggregation of Revenue
The following tables present our revenues for the three and six months ended June 30, 2019 and 2018, disaggregated by major source (in thousands):
 
 
Three Months Ended June 30, 2019
 
 
Diagnostic Services
 
Diagnostic Imaging
 
Mobile Healthcare
 
Total
Major Goods/Service Lines
 
 
 
 
 
 
 
 
Mobile Imaging
 
$
12,148

 
$

 
$
8,085

 
$
20,233

Camera
 

 
1,494

 

 
1,494

Camera Support
 

 
1,555

 

 
1,555

Revenue from Contracts with Customers
 
12,148

 
3,049

 
8,085

 
23,282

Lease Income - Equipment
 
170

 

 
2,346

 
2,516

Total Revenues
 
$
12,318

 
$
3,049

 
$
10,431

 
$
25,798

 
 
 
 
 
 
 
 
 
Timing of Revenue Recognition
 
 
 
 
 
 
 
 
Services and goods transferred over time
 
$
12,318

 
$
1,500

 
$
10,268

 
$
24,086

Services and goods transferred at a point in time
 

 
1,549

 
163

 
1,712

Total Revenues
 
$
12,318

 
$
3,049

 
$
10,431

 
$
25,798


 
 
Six Months Ended June 30, 2019
 
 
Diagnostic Services
 
Diagnostic Imaging
 
Mobile Healthcare
 
Total
Major Goods/Service Lines
 
 
 
 
 
 
 
 
Mobile Imaging
 
$
23,733

 
$

 
$
15,579

 
$
39,312

Camera
 

 
2,298

 

 
2,298

Camera Support
 

 
3,274

 

 
3,274

Revenue from Contracts with Customers
 
23,733

 
5,572

 
15,579

 
44,884

Lease Income - Equipment
 
311

 

 
4,515

 
4,826

Total Revenues
 
$
24,044

 
$
5,572

 
$
20,094

 
$
49,710

 
 
 
 
 
 
 
 
 
Timing of Revenue Recognition
 
 
 
 
 
 
 
 
Services and goods transferred over time
 
$
24,044

 
$
3,051

 
$
19,793

 
$
46,888

Services and goods transferred at a point in time
 

 
2,521

 
301

 
2,822

Total Revenues
 
$
24,044

 
$
5,572

 
$
20,094

 
$
49,710


 
 
Three Months Ended June 30, 2018
 
 
Diagnostic Services
 
Diagnostic Imaging
 
Mobile Healthcare
 
Total
Major Goods/Service Lines
 
 
 
 
 
 
 
 
Mobile Imaging
 
$
13,075

 
$

 
$
8,554

 
$
21,629

Camera
 

 
913

 

 
913

Camera Support
 

 
1,809

 

 
1,809

Revenue from Contracts with Customers
 
13,075

 
2,722

 
8,554

 
24,351

Lease Income - Equipment
 
192

 
34

 
2,503

 
2,729

Total Revenues
 
$
13,267

 
$
2,756

 
$
11,057

 
$
27,080

 
 
 
 
 
 
 
 
 
Timing of Revenue Recognition
 
 
 
 
 
 
 
 
Services and goods transferred over time
 
$
12,123

 
$
1,630

 
$
10,986

 
$
24,739

Services and goods transferred at a point in time
 
1,144

 
1,126

 
71

 
2,341

Total Revenues
 
$
13,267

 
$
2,756

 
$
11,057

 
$
27,080



12



 
 
Six Months Ended June 30, 2018
 
 
Diagnostic Services
 
Diagnostic Imaging
 
Mobile Healthcare
 
Total
Major Goods/Service Lines
 
 
 
 
 
 
 
 
Mobile Imaging
 
$
24,973

 
$

 
$
16,633

 
$
41,606

Camera
 

 
1,983

 

 
1,983

Camera Support
 

 
3,553

 

 
3,553

Revenue from Contracts with Customers
 
24,973

 
5,536

 
16,633

 
47,142

Lease Income - Equipment
 
319

 
62

 
5,022

 
5,403

Total Revenues
 
$
25,292

 
$
5,598

 
$
21,655

 
$
52,545

 
 
 
 
 
 
 
 
 
Timing of Revenue Recognition
 
 
 
 
 
 
 
 
Services and goods transferred over time
 
$
23,087

 
$
3,350

 
$
21,477

 
$
47,914

Services and goods transferred at a point in time
 
2,205

 
2,248

 
178

 
4,631

Total Revenues
 
$
25,292

 
$
5,598

 
$
21,655

 
$
52,545

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 our real estate division under Star Real Estate Holdings USA, Inc. (“SRE”), we generate income from the lease of commercial properties and equipment. As an initial transaction to create our real estate division under SRE and launch that aspect of the Company’s conversion into a diversified holding company (the “HoldCo Conversion”), we purchased three plants in Maine that manufacture modular buildings and leased these three properties.
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.

13



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 six months ended June 30, 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
 
(929
)
Deferred revenue, net, related to contracts entered into during the year
 
690

Balance at June 30, 2019
 
$
1,474

Included in the balances above as of June 30, 2019 and December 31, 2018 is non-current deferred revenue included in other liabilities of $19 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 and six months ended June 30, 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 June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Loss from continuing operations
 
$
(1,475
)
 
$
(350
)
 
$
(3,132
)
 
$
(1,738
)
Income from discontinued operations
 
266

 

 
266

 
5,494

Net (loss) income
 
$
(1,209
)
 
$
(350
)
 
$
(2,866
)
 
$
3,756

 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding—basic and diluted
 
2,038

 
2,012

 
2,034

 
2,011

 
 
 
 
 
 
 
 
 
(Loss) income per common share—basic and diluted
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.72
)
 
$
(0.17
)
 
$
(1.54
)
 
$
(0.86
)
Discontinued operations
 
0.13

 

 
0.13

 
2.73

Net (loss) income per common share—basic and diluted
 
$
(0.59
)
 
$
(0.17
)
 
$
(1.41
)
 
$
1.87

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 June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Stock options
 
111

 
36

 
106

 
26

Restricted stock units
 
34

 
23

 
32

 
17

Total
 
145

 
59

 
138

 
43


14



Note 5. Supplementary Balance Sheet Information
The components of inventories are as follows (in thousands):
 
 
June 30,
2019
 
December 31,
2018
Raw materials
 
$
2,904

 
$
2,419

Work-in-process
 
2,133

 
2,307

Finished goods
 
1,121

 
1,056

Total inventories
 
6,158

 
5,782

Less reserve for excess and obsolete inventories
 
(377
)
 
(380
)
Total inventories, net
 
$
5,781

 
$
5,402

Property and equipment consist of the following (in thousands):
 
 
June 30,
2019
 
December 31, 2018
Land
 
$
604

 
$
550

Buildings and leasehold improvements
 
5,445

 
1,989

Machinery and equipment
 
53,011

 
52,409

Computer hardware and software
 
4,471

 
4,490

Total property and equipment
 
63,531

 
59,438

Less accumulated depreciation
 
(39,207
)
 
(37,793
)
Total property and equipment, net
 
$
24,324

 
$
21,645

In April 2019, Digirad purchased three manufacturing facilities, including land, in Maine that manufacture modular buildings (two of which were purchased from KBS Builders, Inc., a wholly-owned subsidiary of ATRM (“KBS”) for $5.2 million and leased those three properties to KBS. Refer to lease income discussed in Note 3. Revenue.
Note 6. Leases
Lessee
We have operating and finance leases for corporate offices, vehicles, and certain equipment. Our leases have remaining lease terms of 1 year to 5 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 lease assets are included in property and equipment with the related liabilities 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
June 30, 2019
 
Six Months Ended June 30, 2019
Operating lease cost
 
$
391

 
$
717

 
 
 
 
 
Finance lease cost:
 
 
 
 
Amortization of finance lease assets
 
$
269

 
$
322

Interest on finance lease liabilities
 
32

 
65

Total finance lease cost
 
$
301

 
$
387

Supplemental cash flow information related to leases was as follows (in thousands):
 
 
Six Months Ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
 
Operating cash flows from operating leases
 
$
625

Operating cash flows from finance leases
 
$
67

Financing cash flows from finance leases
 
$
369

 
 
 
Right-of-use assets obtained in exchange for lease obligations
 
 
Operating leases
 
$
868

Finance leases
 
$
422


15



Supplemental balance sheet information related to leases was as follows (in thousands):
 
 
June 30,
2019
Operating lease right-of-use assets, net
 
$
3,973

 
 
 
Operating lease liabilities
 
$
1,427

Operating lease liabilities, net of current
 
2,674

Total operating lease liabilities
 
$
4,101

 
 
 
Finance lease assets
 
$
3,978

Finance lease accumulated amortization
 
(1,266
)
Finance lease assets, net
 
$
2,712

 
 
 
Finance lease liabilities
 
$
858

Finance lease liabilities, net of current
 
1,638

Total finance lease liabilities
 
$
2,496

 
 
 
Weighted-Average Remaining Lease Term (in years)
 
 
Operating leases
 
3.2

Finance leases
 
2.9

 
 
 
Weighted-Average Discount Rate
 
 
Operating leases
 
5.00
%
Finance leases
 
6.00
%
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 June 30, 2019 were as follows (in thousands):
 
 
Operating
Leases
 
Finance
Leases
2019 (excludes the six-months ended June 30, 2019)
 
$
813

 
$
498

2020
 
1,524

 
924

2021
 
1,144

 
895

2022
 
643

 
336

2023
 
299

 
54

Thereafter
 
21

 

Total future minimum lease payments
 
$
4,444

 
$
2,707

Less amounts representing interest
 
343

 
211

Present value of lease obligations
 
$
4,101

 
$
2,496

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 June 30, 2019 and December 31, 2018 (in thousands).
 
 
Fair Value as of June 30, 2019
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Equity securities
 
$
17

 
$
25

 
$

 
$
42

 
 
Fair Value as of December 31, 2018
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Equity securities
 
$
153

 
$
6

 
$

 
$
159


16



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 June 30, 2019. During the six months ended June 30, 2019 the Company recorded in the condensed consolidated statement of operations an unrealized gain of $24 thousand and immaterial unrealized losses. During the year ended December 31, 2018 the Company recorded unrealized gains of $43 thousand and unrealized losses of $105 thousand.
We did not reclassify any investments between levels in the fair value hierarchy during the six months ended June 30, 2019.
The fair values of the Company’s revolving credit facility approximate carrying value due to the variable rate nature of these borrowings.
Note 8. Debt
A summary of long-term debt is as follows (in thousands):
 
 
June 30, 2019
 
December 31, 2018
 
 
Amount
 
Weighted-Average Interest Rate
 
Amount
 
Weighted-Average Interest Rate
Revolving Credit Facility - SNB
 
$
15,314

 
4.90%
 
$

 
—%
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 June 30, 2019, the Company had $0.1 million of letters of credit outstanding and had additional borrowing capacity of $4.7 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 six months ended June 30, 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 June 30, 2019, the Company was in compliance with all covenants.

17




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.
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.
As a result of the intraperiod tax allocation rules, for the six months ended June 30, 2019, the Company recorded an income tax benefit of $0.2 million and an income tax expense of $0.1 million within continuing operations and discontinued operations, respectively. For the six months ended June 30, 2018, the Company recorded an income tax benefit of $0.6 million and $0.7 million of income tax expense within continuing operations and discontinued operations, respectively.
As of June 30, 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.

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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 June 30,
 
Six Months Ended June 30,

 
2019
 
2018
 
2019
 
2018
Revenue by segment:
 
 
 
 
 
 
 
 
Diagnostic Services
 
$
12,318

 
$
13,267

 
$
24,044

 
$
25,292

Diagnostic Imaging
 
3,049

 
2,756

 
5,572

 
5,598

Mobile Healthcare
 
10,431

 
11,057

 
20,094

 
21,655

Real Estate Holdings
 

 

 

 

Consolidated revenue
 
$
25,798

 
$
27,080

 
$
49,710

 
$
52,545

 
 
 
 
 
 
 
 
 
Gross profit by segment:
 
 
 
 
 
 
 
 
Diagnostic Services
 
$
2,805

 
$
2,969

 
$
5,386

 
$
5,216

Diagnostic Imaging
 
1,080

 
1,266

 
1,866

 
2,511

Mobile Healthcare
 
1,296

 
1,332

 
1,910

 
2,447

Real Estate Holdings
 
(177
)
 

 
(177
)
 

Consolidated gross profit
 
$
5,004

 
$
5,567

 
$
8,985

 
$
10,174

 
 
 
 
 
 
 
 
 
(Loss) income from operations by segment:
 
 
 
 
 
 
 
 
Diagnostic Services
 
$
1,957

 
$
1,096

 
$
3,693

 
$
2,089

Diagnostic Imaging
 
565

 
1,035

 
908

 
1,654

Mobile Healthcare
 
439

 
72

 
(184
)
 
21

Real Estate Holdings
 
(199
)
 

 
(199
)
 

Unallocated corporate and other expenses
 
(2,908
)
 
(1,975
)
 
(5,499
)
 
(5,145
)
Segment (loss) income from operations
 
(146
)
 
228

 
(1,281
)
 
(1,381
)
Goodwill impairment
 

 
(476
)
 

 
(476
)
Merger and finance costs
 
$
(1,000
)
 
$

 
$
(1,000
)
 
$

Consolidated loss from operations
 
$
(1,146
)
 
$
(248
)
 
$
(2,281
)
 
$
(1,857
)
 
 
 
 
 
 
 
 
 
Depreciation and amortization by segment:
 
 
 
 
 
 
 
 
Diagnostic Services
 
$
305

 
$
936

 
$
609

 
$
1,240

Diagnostic Imaging
 
73

 
74

 
151

 
152

Mobile Healthcare
 
1,438

 
1,750

 
2,865

 
3,177

Real Estate Holdings
 
35

 

 
35

 

Total depreciation and amortization
 
$
1,851

 
$
2,760

 
$
3,660

 
$
4,569

The Company formed a real estate segment through its Star Real Estate Holdings USA, Inc. (“SRE”) segment. SRE will hold significant real estate assets with the intent to create revenues through its leasing operations.

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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.
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 2.7% of our outstanding common stock and 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 “ATRM Preferred Stock”) and another 374,562 shares of ATRM Preferred 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 ATRM Preferred Stock, except to the extent of his pecuniary interest therein.
Financial Assistance
On May 1, 2019, the special committee of the Company’s board of directors (the “Special Committee”) approved financial assistance by the Company to ATRM, in the form of advances or cash payments on behalf of ATRM, in order assist ATRM in becoming current with its financial statements and filings with the SEC. Under the terms of this approval, the Company was authorized to advance or spend up to an aggregate maximum amount of $0.4 million, with subsequent increments of $0.01 million subject to further approval by a designated member of the Special Committee. On July 30, 2019, the Special Committee increased the amount of financial assistance that the Company is authorized to provide to $0.8 million. The Company has entered into an agreement with ATRM pursuant to which ATRM has agreed to repay all financial assistance to ATRM if the proposed acquisition of ATRM was not consummated. As of June 30, 2019, the Company has made cash payments on behalf of ATRM of approximately $0.4 million.
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 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.

20



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. Al