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 have been settled as of December 31, 2019.

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.

As of December 31, 2019, Digirad recognized a $350 thousand 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 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 revolving credit facility with Comerica Bank, a Texas banking association (“Comerica”). 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.

The following table summarizes the MDSS results for each period (in thousands):



	Year ended December 31,
	2019			2018
Total revenues	$	—		$	789
Total cost of revenues	—			555
Gross profit	—			234

Operating expenses:
Marketing and sales	—			85
General and administrative	—			163
Amortization of intangible assets	—			13
Gain on sale of discontinued operations	(350		)	(6,161		)
Total operating expenses	(350		)	(5,900		)

Income from operations	350			6,134
Interest expense, net	—			(26		)
Income from discontinued operations before income taxes	350			6,108
Income tax expense	(84		)	(1,533		)
Net income from discontinued operations	$	266		$	4,575

The following table presents supplemental cash flow information of discontinued operations (in thousands):



	December 31,
	2019			2018
Operating activities
Depreciation	$	—		$	2
Amortization of intangible assets	$	—		$	13
Gain on sale of discontinued operations	$	(350	)	$	(6,161	)
Share-based compensation	$	—		$	—

Investing activities
Proceeds from sale of discontinued operations	$	—		$	6,844