DIGIRAD CORP (Form: 10-Q, Received: 05/01/2015 06:13:28)

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 MARCH 31, 2015



¨	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: 000-50789

__________________________________

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)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	¨	Accelerated filer	¨

Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	x

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes No ý

As of April 24, 2015 the registrant had 19,243,445 shares of Common Stock ($0.0001 par value) outstanding.

DIGIRAD CORPORATION

TABLE OF CONTENTS



IMPORTANT INFORMATION REGARDING FOWARD-LOOKING STATEMENTS	3
PART I. FINANCIAL INFORMATION	4
Item 1. Financial Statements	4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3. Quantitative and Qualitative Disclosures about Market Risk	20
Item 4. Controls and Procedures	20
PART II. OTHER INFORMATION	21
Item 1. Legal Proceedings	21
Item 1A. Risk Factors	21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3. Defaults Upon Senior Securities	21
Item 4. Mine Safety Disclosures	21
Item 5. Other Information	21
Item 6. Exhibits	22
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2
EXHIBIT 101.INS XBRL Instance Document
EXHIBIT 101.SCH XBRL Taxonomy Extension Schema Document
EXHIBIT 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
EXHIBIT 101.LAB XBRL Taxonomy Extension Label Linkbase Document
EXHIBIT 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
EXHIBIT 101.DEF XBRL Taxonomy Extension Definition Linkbase Document

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, 2014 filed with the Securities and Exchange Commission on March 6, 2015. 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.

PART I. FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

DIGIRAD CORPORATION

CONDENSED CONSOLIDATED STATEMENTS

OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)



	Three Months Ended March 31,
(in thousands, except per share data)	2015			2014
Revenues:
Diagnostic Services	$	10,563		$	9,555
Diagnostic Imaging	3,276			3,442
Total revenues	13,839			12,997

Cost of revenues:
Diagnostic Services	8,505			7,534
Diagnostic Imaging	1,686			2,021
Total cost of revenues	10,191			9,555

Gross profit	3,648			3,442

Operating expenses:
Marketing and sales	1,210			1,095
General and administrative	2,168			1,995
Amortization of intangible assets	105			66
Restructuring charges	—			441
Total operating expenses	3,483			3,597

Income (loss) from operations	165			(155		)

Other income (expense):
Interest and other income, net	11			17
Interest expense	(11		)	(8		)
Total other income	—			9

Income (loss) before income taxes	165			(146		)
Income tax benefit (expense)	580			(2		)
Net income (loss)	$	745		$	(148	)

Net income (loss) per share:
Basic	$	0.04		$	(0.01	)
Diluted	$	0.04		$	(0.01	)

Shares used in per share computations:
Weighted average shares outstanding – basic	18,803			18,518
Weighted average shares outstanding – diluted	19,291			18,518

Dividends declared per common share	$	0.05		$	0.05

Net income (loss)	$	745		$	(148	)
Other comprehensive income (loss):
Unrealized gain (loss) on marketable securities	14			(18		)
Total other comprehensive income (loss)	14			(18		)
Comprehensive income (loss)	$	759		$	(166	)

See accompanying notes to the unaudited condensed consolidated financial statements

DIGIRAD CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



(in thousands, except share data)	March 31, 2015			December 31, 2014
Assets
Current assets:
Cash and cash equivalents	$	13,876		$	14,051
Securities available-for-sale	7,048			7,935
Accounts receivable, net	7,060			5,989
Inventories, net	3,657			3,644
Other current assets	898			856
Restricted cash	477			477
Total current assets	33,016			32,952

Property and equipment, net	5,197			4,766
Intangible assets, net	3,479			2,577
Goodwill	2,889			1,337
Other assets	289			269
Total assets	$	44,870		$	41,901

Liabilities and stockholders’ equity
Accounts payable	$	2,242		$	1,423
Accrued compensation	2,587			3,261
Accrued warranty	159			176
Deferred revenue	1,481			1,644
Other accrued liabilities	2,086			1,789
Total current liabilities	8,555			8,293
Other liabilities	966			963
Total liabilities	9,521			9,256

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; 19,240,945 and 18,615,945 shares issued and outstanding (net of treasury shares) at March 31, 2015 and December 31, 2014, respectively	2			2
Treasury stock, at cost; 2,588,484 shares at March 31, 2015 and December 31, 2014	(5,728		)	(5,728		)
Additional paid-in capital	155,714			153,769
Accumulated other comprehensive loss	(5		)	(19		)
Accumulated deficit	(114,634		)	(115,379		)
Total stockholders’ equity	35,349			32,645
Total liabilities and stockholders’ equity	$	44,870		$	41,901

See accompanying notes to the unaudited condensed consolidated financial statements

DIGIRAD CORPORATION

CONDENSED CONSOLIDATED STATEMENTS

OF CASH FLOWS

(Unaudited)



	Three Months Ended March 31,
(in thousands)	2015			2014
Operating activities
Net income (loss)	$	745		$	(148	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation	383			387
Amortization of intangible assets	105			66
Provision for bad debt	37			21
Stock-based compensation	144			50
(Gain) loss on sale of assets	(17		)	5
Amortization of premiums on investments	36			51
Changes in operating assets and liabilities:
Accounts receivable	(665		)	(1,699		)
Inventories	(13		)	293
Other assets	(6		)	70
Accounts payable	670			449
Accrued compensation	(755		)	(1,019		)
Deferred revenue	(163		)	(250		)
Other liabilities	(379		)	168
Restricted cash	—			(233		)
Net cash provided by (used in) operating activities	122			(1,789		)

Investing activities
Purchases of property and equipment	(211		)	(571		)
Net proceeds from sale of assets	17			—
Purchases of securities available-for-sale	—			(2,617		)
Maturities of securities available-for-sale	865			350
Net cash received from (paid for) acquisition	3			(3,470		)
Net cash provided by (used in) investing activities	674			(6,308		)

Financing activities
Issuances of common stock	48			—
Dividends paid	(931		)	(925		)
Repayment of long-term debt	—			(131		)
Repayment of obligations under capital leases	(88		)	(42		)
Net cash used in financing activities	(971		)	(1,098		)
Net decrease in cash and cash equivalents	(175		)	(9,195		)
Cash and cash equivalents at beginning of period	14,051			18,744
Cash and cash equivalents at end of period	$	13,876		$	9,549

Non-Cash Investing Activities
Assets acquired by entering into capital leases	$	122		$	54
Issuance of common stock for acquisition	$	2,684		$	—

See accompanying notes to the unaudited condensed consolidated financial statements

DIGIRAD CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. The Company

Digirad Corporation ("Digirad"), a Delaware corporation, is one of the largest national providers of in-office nuclear cardiology imaging and ultrasound services, and also provides cardiac event monitoring services. These services are provided to physician practices, hospitals, and imaging centers through our Diagnostic Services reportable segment. Digirad also sells solid-state gamma cameras for nuclear cardiology and general nuclear medicine applications, as well as provides service on the products sold, through our Diagnostic Imaging reportable segment. These two reportable segments, Diagnostic Services and Diagnostic Imaging, are collectively referred to herein as the “Company.”

The accompanying condensed consolidated financial statements include the operations of both segments. Intercompany accounts and transactions are accounted for at cost and have been eliminated in consolidation. All our long-lived assets are located in the United States and substantially all of our revenues arise from sales activity in the United States.

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, 2014 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, 2014 , filed with the SEC on Form 10-K on March 6, 2015, 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.

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.

The financial results for the three months ended March 31, 2015 include the financial results of MD Office Solutions and Telerhythmics, LLC. See Note 3 to the unaudited condensed consolidated financial statements for more information related to the acquisition of MD Office Solutions and Telerhythmics, LLC.

Recent Accounting Pronouncement

In May 2014, the FASB issued guidance that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers which supersedes most current revenue recognition guidance, including industry-specific guidance. The guidance provides that an entity recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The guidance allows for either full retrospective or modified retrospective adoption and is currently scheduled to become effective for us in the first quarter of 2017. On April 1, 2015, the FASB voted to propose a one-year deferral to the effective date, but to permit entities to adopt one year earlier if they choose (i.e., the original effective date). We are currently evaluating the alternative transition methods and the potential effects of the adoption of this guidance on our financial statements.

Note 2. Basic and Diluted Net Income (Loss) Per Share

For the three months ended March 31, 2015 and 2014 , basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares and vested restricted stock units outstanding during the period. Diluted net income (loss) per common share is calculated to give effect to all dilutive securities, if applicable, using the treasury stock method.

The following table sets forth the reconciliation of shares used to compute basic and diluted net income (loss) per share for the periods indicated:



	Three Months Ended March 31,
(shares in thousands)	2015	2014
Weighted average shares outstanding - basic	18,803	18,518
Dilutive potential common stock outstanding:
Stock options	474	—
Restricted stock units	14	—
Weighted average shares outstanding - diluted	19,291	18,518

The following weighted average outstanding common stock equivalents were not included in the calculation of diluted net income (loss) per share because their effect was anti-dilutive:



	Three Months Ended March 31,
(shares in thousands)	2015	2014
Stock options	3	373
Restricted stock units	—	—
Total	3	373

Note 3. Acquisitions

MD Office Solutions (2015)

On March 5, 2015, we entered into an Agreement of Merger and Plan of Reorganization (the Merger Agreement) to acquire MD Office Solutions (MD Office). MD office is a provider of in-office nuclear cardiology imaging in the northern and central California regions. The acquisition expands the geographical region in which we are able to provide our in-office nuclear cardiology imaging services.

Total consideration related to the Merger Agreement paid to the sellers was 610,000 shares of common stock of Digirad Corporation, with a total value at closing of $2,684,000 , as well as settlement of a $15,000 accounts receivable balance owed to the Company. The Company issued new shares for the consideration. In addition, there is an earn-out opportunity of up to $400,000 in cash over approximately three years based on the MD Office business meeting certain earnings before interest, taxes, depreciation, and amortization (EBITDA) milestones. The sellers will receive fifty percent of the EBITDA generated by the MD Office business in excess of the EBITDA milestone amounts, which are $650,000 for each of the annual periods ending December 31, 2015, 2016, and 2017, with the target for 2015 being prorated based on the close date.

At March 31, 2015 , we have estimated the fair value of the contingent earn-out opportunity to be $6,000 . The earn-out opportunity is estimated based on the expected performance of the business over the period from the acquisition date through December 31, 2017, utilizing an income approach. 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.

The Merger Agreement is also subject to a post-closing purchase price adjustment based on the final working capital balance, as defined in the Merger Agreement, as well as a Registration Rights Agreement related to the common shares provided to the sellers as part of the consideration.

The following table summarizes the preliminary purchase price allocation recognized as of the close date of March 5, 2015:



(in thousands)	Allocation of purchase price
Assets
Current assets:
Cash and cash equivalents	$	3
Accounts receivable, net	457
Other current assets	32
Total current assets	492

Property and equipment, net	481
Intangible assets, net	1,007
Goodwill	1,552
Other assets	24
Total assets	$	3,556

Liabilities
Current liabilities:
Accounts payable	$	149
Accrued compensation	81
Other accrued liabilities	33
Total current liabilities	263
Deferred tax liability	588
Other liabilities	6
Total liabilities	$	857

The goodwill recognized as part of the transaction primarily represents synergies between Digirad and MD Office that were not separately identified as part of the acquisition valuation process. MD Office activities are included within the Diagnostic Services reportable segment. The resulting goodwill from the acquisition is not deductible for federal and state tax reporting purposes.

The following table summarizes the fair value of acquired identifiable intangible assets as of the acquisition date:



(in thousands)	Weighted Average Useful Lives (in years)	Fair Value
Customer relationships	7.0	$	639
Trademarks	5.0	187
Covenants not to compete	5.0	181
Total intangible assets acquired, excluding goodwill		$	1,007

As of March 31, 2015, the final working capital adjustment has not been completed, and therefore the accounting for the acquisition is incomplete. We have estimated the working capital adjustment at March 5, 2015 at approximately $7,000 due to the sellers, which is included in the estimated consideration above. It is reasonably possible this estimated working capital adjustment could change based on the final agreed upon amount pursuant to the Merger Agreement. Any adjustment to this amount will affect the purchase consideration, and therefore the allocation of the purchase price, with the majority of any such adjustment likely affecting the recorded goodwill amount. We anticipate closing the measurement period by June 30, 2015.

The below tables display estimated proforma results had the business acquisition been completed as of January 1, 2014. In deriving the proforma results, we utilized the historical operating results of MD Office and adjusted for the impact of the purchase accounting and transaction costs as if the acquisition occurred on January 1, 2014.



	Three Months Ended March 31,
(in thousands)	2015		2014
Revenues	$	14,406	$	13,751
Net income (loss)	$	895	$	(324	)

Included within our consolidated operating results for the period ending March 31, 2015 are MD Office operations for the period March 6, 2015 through March 31, 2015 as follows:



	March 6, 2015 - March 31, 2015
Revenues	$	216
Net loss	$	(106	)

Included within the results for MD Office is approximately $136,000 of transaction costs related to the acquisition. These costs are classified as general and administrative expenses in the consolidated statements of comprehensive income (loss).

Telerhythmics, LLC (2014)

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 March 31, 2015 , we have estimated the fair value of the contingent earn-out opportunity to be $229,000 . The earn-out opportunity is estimated based on the 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.

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 subsequently 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. The resulting goodwill from the acquisition is expected to be deductible for federal and state tax reporting purposes.

The below tables display estimated proforma results had the business acquisition been completed as of January 1, 2013. In deriving the proforma 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.



	Three Months Ended March 31,
(in thousands)	2014		2013
Revenues	$	14,152	$	12,959
Net income (loss)	$	26	$	(2,534	)

Note 4. Inventories

Our inventories are stated at the lower of cost (first-in, first-out) or market (net realizable value) and we review inventory balances for excess and obsolete inventory levels on a quarterly basis.



(in thousands)	March 31, 2015			December 31, 2014
Inventories:
Raw materials	$	2,385		$	2,439
Work-in-process	1,784			2,560
Finished goods	1,203			558
Total inventories	5,372			5,557
Less reserve for excess and obsolete inventories	(1,715		)	(1,913		)
Total inventories, net	$	3,657		$	3,644

Note 5. Property and Equipment



(in thousands)	March 31, 2015			December 31, 2014
Property and equipment:
Machinery and equipment	$	23,962		$	23,412
Computer hardware and software	3,079			2,917
Leasehold improvements	583			571
Total property and equipment	27,624			26,900
Less accumulated depreciation	(22,427		)	(22,134		)
Total property and equipment, net	$	5,197		$	4,766

Note 6. Intangibles and Goodwill



	March 31, 2015
(in thousands)	Weighted Average Useful Life (years)	Gross Carrying Amount		Accumulated Amortization			Intangible Assets, Net (1)
Intangible assets with indefinite useful lives:
Goodwill (2)	Indefinite	$	2,889	$	—		$	2,889

Intangible assets with finite useful lives:
Customer relationships (2)	8.2	$	5,489	$	(2,982	)	$	2,507
Trademarks (2)	8.0	787		(72		)	715
Patents	13.4	141		(118		)	23
Covenants not to compete (2)	5.0	251		(17		)	234
Total intangible assets, net		$	6,668	$	(3,189	)	$	3,479



	December 31, 2014
	Weighted Average Useful Life (years)	Gross Carrying Amount		Accumulated Amortization			Intangible Assets, Net (1)
Intangible assets with infinite useful lives:
Goodwill	Indefinite	$	1,337	$	—		$	1,337

Intangible assets with finite useful lives:
Customer relationships	8.6	$	4,850	$	(2,904	)	$	1,946
Trademarks	9.0	600		(53		)	547
Patents	13.2	141		(116		)	25
Covenants not to compete	5.0	70		(11		)	59
Total intangible assets, net		$	5,661	$	(3,084	)	$	2,577


(1)	Amortization expense for intangible assets, net was $0.1 million for the three months ended March 31, 2015 and 2014 . Estimated amortization expense for intangible assets for the remainder of 2015 is $0.4 million , for 2016 is $0.5 million , for 2017 is $0.5 million , for 2018 is $0.5 million , for 2019 is $0.4 million , for 2020 is $0.4 million , and thereafter is $0.8 million .


(2)	As a result of our acquisition of MD Office on March 5, 2015, we recorded certain intangible assets (See Note 3).

Note 7. Restructuring Charges

Facilities restructuring initiative

On January 27, 2014, we announced a plan to exit our 47,000 square foot former headquarters facility in Poway, California (the Facilities restructuring initiative). This action was undertaken as the facility had excess space and capacity given our current operating plan. We entered into a termination agreement to end the lease on the facility as of April 30, 2014. The original term of the lease would have continued through February 29, 2016. Concurrently with the termination of the lease for the 47,000 square foot Poway,

California facility, we entered into a new lease agreement on January 23, 2014 for a separate 21,300 square foot facility in Poway, California to house our Diagnostic Imaging operations.

As a result of the Facilities restructuring initiative, we incurred a total of $0.7 million in restructuring charges which occurred solely during fiscal year 2014 . Facilities restructuring charges of $0.4 million were incurred during the three months ended March 31, 2014 . No Facilities restructuring charges were incurred during the three months ended March 31, 2015 . The charges were comprised of lease termination, moving, and other related costs. All Facilities restructuring charges were included in the Diagnostic Imaging segment. Restructuring liabilities and associated charges were measured at fair value as incurred.

Note 8. Financial Instruments

Assets and Liabilities Measured at Fair Value on a Recurring Basis. The following table presents information about our financial assets and liabilities 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, 2015 and December 31, 2014 .



	Fair Value as of March 31, 2015
(in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Corporate debt securities	$	—	$	7,048	$	—	$	7,048
Liabilities:
Acquisition related contingent consideration	$	—	$	—	$	235	$	235



	Fair Value as of December 31, 2014
(in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Corporate debt securities	$	—	$	7,935	$	—	$	7,935
Liabilities:
Acquisition related contingent consideration	$	—	$	—	$	229	$	229

The fair value of our corporate debt securities is determined using proprietary valuation models and analytical tools. These valuation models and analytical tools use market pricing or prices for similar instruments that are both objective and publicly available, including matrix pricing or reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, and/or offers. We did not reclassify any investments between levels in the fair value hierarchy during the three months ended March 31, 2015 .

The acquisition related contingent consideration is related to our acquisition of Telerhythmics on March 13, 2014 and acquisition of MD Office on March 5, 2015 (See Note 3). We reassess the fair value of the contingent consideration to be settled in cash related to our acquisitions of Telerhythmics and MD Office on a quarterly basis using the income approach, which is a Level 3 measurement. There was no change to the fair value of the acquisition related contingent consideration during the three months ended March 31, 2015 , other than the addition of $6,000 of contingent consideration related to the MD Office acquisition. Significant assumptions used in the measurement include probabilities of achieving the EBITDA milestones.

Securities Available-for-Sale

Securities available-for-sale primarily consist of investment grade corporate debt securities. We classify all securities as available-for-sale and as current assets, as the sale of such securities may be required prior to maturity to execute management strategies. These securities are carried at fair value, with the unrealized gains and losses reported as a component of accumulated other comprehensive income (loss) in stockholders' equity until realized. Realized gains and losses from the sale of available-for-sale securities, if any, are determined on a specific identification basis. A decline in the market value of any available-for-sale security below cost that is determined to be other than temporary will result in an impairment charge to earnings and a new cost basis for the security is established. No such impairment charges were recorded for any period presented. It is not more likely than not that we will be required to sell investments before recovery of their amortized costs. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the straight-line method and included in interest income. Interest income is recognized when earned. Realized gains and losses on investments in securities are included in other income (expense) within the condensed consolidated statements of comprehensive income (loss). The realized gains and losses on these sales were minimal for the three months ended March 31, 2015 and 2014 .

The following table sets forth the composition of securities available-for-sale as of March 31, 2015 and December 31, 2014 .



	Maturity in Years	Amortized Cost		Unrealized					Fair Value
As of March 31, 2015 (in thousands)	Maturity in Years	Amortized Cost		Gains		Losses			Fair Value
Corporate debt securities	Less than 1 year	$	4,489	$	1	$	(2	)	$	4,488
Corporate debt securities	1-3 years	2,564		1		(5		)	2,560
		$	7,053	$	2	$	(7	)	$	7,048

	Maturity in Years	Amortized Cost		Unrealized					Fair Value
As of December 31, 2014 (in thousands)	Maturity in Years	Amortized Cost		Gains		Losses			Fair Value
Corporate debt securities	Less than 1 year	$	4,650	$	—	$	(5	)	$	4,645
Corporate debt securities	1-3 years	3,304		—		(14		)	3,290
		$	7,954	$	—	$	(19	)	$	7,935

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

For the quarter ended March 31, 2015 , we recorded an income tax benefit of approximately $0.6 million related to the release of valuation allowance associated with the acquisition of MD Office. The valuation allowance release occurred when we recorded an increase to our deferred tax liability balance as a result of book and tax basis differences in acquired fixed, intangible and other assets of MD Office.

As of December 31, 2014 , we had unrecognized tax benefits of approximately $1.6 million . Included in the unrecognized tax benefits were $1.3 million of tax benefits that, if recognized, would reduce our annual effective tax rate, subject to the valuation allowance.

We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was our cumulative profitability over the three-year period ended March 31, 2015 . Such objective evidence limits the ability to consider other subjective evidence such as our projections for future income. On the basis of this evaluation, as of March 31, 2015 , a valuation allowance has been recorded as we cannot conclude that it is more likely than not that the existing deferred tax assets will be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projected future income.

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 2009; however, our net operating loss and research credit carry-forwards arising prior to that year are subject to adjustment. It is our policy to recognize interest expense and penalties related to income tax matters as a component of income tax expense.

Note 11. Segments

Our reporting segments have been determined based on the nature of the products and/or services offered to customers or the nature of their function in the organization. We evaluate performance based on the operating income (loss) contributed by each segment.

On March 5, 2015, we acquired MD Office (See Note 3). As part of the acquisition, we evaluated MD Office's business operations, both on a quantitative and qualitative basis, and determined its business operations appropriately met the criteria to be aggregated with our Diagnostic Services business in accordance with the authoritative accounting guidance for segment reporting.

The financial results below for the three months ended March 31, 2015 include the financial results of MD Office for the period since the acquisition date of March 5, 2015.



	Three Months Ended March 31,
(in thousands)	2015			2014
Gross profit by segment:
Diagnostic Services	$	2,058		$	2,021
Diagnostic Imaging	1,590			1,421
Condensed consolidated gross profit	$	3,648		$	3,442

Income (loss) from operations by segment:
Diagnostic Services	$	(537	)	$	(333	)
Diagnostic Imaging ⁽¹⁾	702			178
Condensed consolidated income (loss) from operations	$	165		$	(155	)

Depreciation and amortization:
Diagnostic Services	$	417		$	375
Diagnostic Imaging	71			78
Condensed consolidated depreciation and amortization	$	488		$	453



(in thousands)	March 31, 2015		December 31, 2014
Identifiable assets by segment:
Diagnostic Services	$	21,596	$	18,724
Diagnostic Imaging	23,274		23,177
Condensed consolidated assets	$	44,870	$	41,901

⁽¹⁾ Included in the Diagnostic Imaging income from operations for the three months ended March 31, 2014 , are approximately $0.4 million of charges associated with our Facilities restructuring initiative (See Note 7).

Note 12. Subsequent Events

On April 30, 2015, the Company announced a cash dividend of $0.05 per share payable on May 27, 2015 to shareholders of record on May 13, 2015.


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, 2014 , which were included in our Form 10-K, filed with the U.S. Securities and Exchange Commission (“SEC”) on March 6, 2015.

The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods.

Overview

We are one of the largest national providers of in-office nuclear cardiology imaging and ultrasound services, and also provide cardiac event monitoring services. Our services are provided to physician practices, hospitals, and imaging centers through our Diagnostic Services reportable segment. We also sell solid-state gamma cameras for nuclear cardiology and general nuclear medicine applications, as well as provide service on the products we sell through our Diagnostic Imaging reportable segment. We designed and commercialized the first solid-state nuclear gamma camera for the detection of cardiovascular disease and other medical conditions. Our imaging systems are sold in both portable and fixed configurations, and provide enhanced operability and improved patient comfort. Our nuclear cameras fit easily into floor spaces as small as seven feet by eight feet, and facilitate the delivery of nuclear medicine procedures in a physician’s office, an outpatient hospital setting, or within multiple departments of a hospital, (e.g., emergency and operating rooms).

Through Diagnostic Services, we offer a convenient and economically efficient imaging services program as an alternative to purchasing a gamma camera or ultrasound 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, or any combination of these procedures in their offices, we provide the ability for them to engage our services, which includes the use of our imaging system, qualified personnel, and related items required to perform imaging in their own offices and bill Medicare, Medicaid, or one of the third-party healthcare insurers directly for those services. The flexibility of our products and our service allows physicians to ensure continuity of care and convenience for their patients and allows them to retain revenue from procedures they would otherwise refer to imaging centers and hospitals. The imaging services are primarily provided to cardiologists, internal medicine physicians, and family practice doctors who enter into annual contracts for a set number of days ranging from once per month to five times per week. We experience some seasonality related to vacations, holidays, and inclement weather. Most of the imaging services are focused on cardiac care. Many of our physician customers are reliant on reimbursements from Medicare, Medicaid, and third-party insurers where, in the past, there has been downward price pressure and uncertainty of reimbursement rates due to factors outside the physicians’ control. The uncertainty created by the 2010 healthcare reform laws and other legislation has impacted our business in the past, and will likely have some impact on our business in the future. Future changes and related impacts may require modifications to our current business model in order for our physician customers and us to maintain a viable economic model.

With the acquisition of Telerhythmics, LLC on March 13, 2014, we broadened our suite of service offerings provided through the Diagnostic Services segment, enabling the provision of outsourced cardiac event monitoring services. Providing these services offers flexibility and convenience to our customers who do not have to incur the costs of staffing, equipment, and logistics to monitor patients as part of their standard of care. Our cardiac event monitoring services are provided primarily through an independent diagnostic testing facility model which allows us to bill Medicare, Medicaid, or one of the third-party healthcare insurers directly for services provided. As such, our cardiac event monitoring services are subject to reimbursements from Medicare, Medicaid, and third-party insurers which are subject to change on a periodic basis. Our cardiac event monitoring services are mainly provided to physician practices and hospitals.

Our Diagnostic Imaging segment revenue results primarily from selling solid-state gamma cameras and camera maintenance contracts. 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.

For many years since our Initial Public Offering in 2004, we focused significant efforts on research and development activities to develop and further enhance our nuclear imaging cameras, primarily for alternative uses within the healthcare environment. These efforts, along with a fixed infrastructure that was sized for a much higher volume of manufacturing and sales of our nuclear imaging cameras than we have experienced, resulted in several years of financial losses. On February 28, 2013, we announced a plan to restructure our Diagnostic Imaging business to significantly reduce costs and improve profitability (the "Diagnostic Imaging restructuring initiative"). The Diagnostic Imaging restructuring initiative involved a reduction in force focused on manufacturing,

research and development, and administrative personnel. In addition, we entered into an agreement in September 2013 with a third party to outsource the majority of the manufacturing associated with our cameras. All restructuring efforts associated with this initiative were complete as of June 30, 2014. Further, on January 27, 2014, we entered into a termination agreement to end the lease on our 47,000 square foot former headquarters facility in Poway, California (the Facilities restructuring initiative) and moved our Diagnostic Imaging operations into a separate 21,300 square foot facility. All restructuring efforts associated with the Facilities restructuring initiative were complete as of December 31, 2014. With these restructuring initiatives complete, we plan to continue selling and servicing our cameras, but at a more profitable level with our restructured, leaner infrastructure. We believe that our cameras have underlying technology and related patents that make them relevant for many years into the future, negating the need for a fixed cost research and development infrastructure.

Our main strategic focus moving forward is on growing our Diagnostic Services business, which we plan to accomplish by driving revenue density with our existing customers by providing additional service offerings, such as cardiac event monitoring, as well as by increasing our overall customer relationships through territory expansion and acquisition of other diagnostic services companies. On March 5, 2015, we acquired MD Office Solutions, a provider of in-office nuclear cardiology imaging in the northern and central California regions. We will also continue to evaluate acquisition opportunities related to complementary healthcare services and products to diversify and expand our current offerings.

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, 2014 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. We believe that there were no significant changes in those critical accounting policies and estimates during the three months ended March 31, 2015 .

Results of Operations

The following tables set forth our results from operations for the three months ended March 31, 2015 and 2014 :



	Three Months Ended March 31,
	2015			Percent of 2015 Revenues		2014			Percent of 2014 Revenues		Change from Prior Year
(in thousands)	2015			Percent of 2015 Revenues		2014			Percent of 2014 Revenues		Dollars			Percent
Revenues:
Diagnostic Services	$	10,563		76.3	%	$	9,555		73.5	%	$	1,008		10.5	%
Diagnostic Imaging	3,276			23.7	%	3,442			26.5	%	(166		)	(4.8	)%
Total revenues	13,839			100.0	%	12,997			100.0	%	842			6.5	%
Cost of revenues:
Diagnostic Services	8,505			61.5	%	7,534			58.0	%	971			12.9	%
Diagnostic Imaging	1,686			12.2	%	2,021			15.5	%	(335		)	(16.6	)%
Total cost of revenues	10,191			73.6	%	9,555			73.5	%	636			6.7	%
Gross profit	3,648			26.4	%	3,442			26.5	%	206			6.0	%

Diagnostic Services gross profit percentage	19.5		%			21.2		%						(1.7	)%
Diagnostic Imaging gross profit percentage	48.5		%			41.3		%						7.2	%

Operating expenses:
Marketing and sales	1,210			8.7	%	1,095			8.4	%	115			10.5	%
General and administrative	2,168			15.7	%	1,995			15.3	%	173			8.7	%
Amortization of intangible assets	105			0.8	%	66			0.5	%	39			59.1	%
Restructuring charges	—			—	%	441			3.4	%	(441		)	(100.0	)%
Total operating expenses	3,483			25.2	%	3,597			27.7	%	(114		)	(3.2	)%
Income (loss) from operations	165			1.2	%	(155		)	(1.2	)%	320			(206.5	)%
Total other income	—			—	%	9			0.1	%	(9		)	(100.0	)%
Income (loss) before income taxes	165			1.2	%	(146		)	(1.1	)%	311			(213.0	)%
Income tax benefit (expense)	580			4.2	%	(2		)	—	%	582			(29,100.0	)%
Net income (loss)	$	745		5.4	%	$	(148	)	(1.1	)%	$	893		(603.4	)%

Comparison of the Three Months Ended March 31, 2015 and 2014

Revenues

Consolidated. Consolidated revenue was $13.8 million for the three months ended March 31, 2015 , an increase of $0.8 million , or 6.5% , compared to the prior year quarter, due to an increase in revenue associated with our Diagnostic Services business, driven by $0.8 million of incremental cardiac event monitoring revenue associated with the Telerhythmics acquisition, which occurred on March 13, 2014, as well as $0.2 million of incremental revenue associated with the MD Office acquisition, which occurred on March 5, 2015. Excluding the impact of acquisitions, revenue in the Diagnostic Services business increased slightly compared to the prior year quarter driven by a greater number of imaging days provided, offset by a decrease in the average mobile imaging rate per day and a decrease in ancillary revenue from short-term equipment rentals. Diagnostic Imaging revenue for the three months ended March 31, 2015 decreased $0.2 million compared to the prior year quarter due to a decrease in the number of cameras sold, as well as attrition in the number of associated camera maintenance contracts. Diagnostic Services revenue accounted for 76.3% of total revenues for the three months ended March 31, 2015 , compared to 73.5% for the prior year quarter. The percentage of consolidated revenue associated with our Diagnostic Services segment was higher for the three months ended March 31, 2015 compared to the prior year quarter, primarily as a result of incremental revenue associated with the Telerhythmics and MD Office acquisitions. We expect our Diagnostic Services revenue to continue to represent the larger percentage of our consolidated revenue, however the percentage will fluctuate quarter by quarter given the significant variability in the timing and volume of camera unit sales.

Cost of Revenue and Gross Profit

Consolidated. Consolidated gross profit was $3.6 million for the three months ended March 31, 2015 , an increase of $0.2 million , or 6.0% , compared to the prior year quarter. The increase in consolidated gross profit is primarily the result of improved gross profit as a percentage of revenue in our Diagnostic Imaging segment, driven by a more favorable mix of cameras sold during the three months ended March 31, 2015 compared to the prior year quarter, as well as reduced manufacturing and overhead costs. Diagnostic Services gross profit increased slightly for the three months ended March 31, 2015 compared to the prior year quarter, driven by increased revenue but offset by a decrease in gross profit as a percentage of revenue. Diagnostic Services gross profit

as a percentage of revenue decreased primarily due to Telerhythmics transition costs, as well as the impact of inclement weather on our cardiac event monitoring business. Consolidated gross profit as a percentage of revenue decreased slightly to 26.4% for the three months ended March 31, 2015 , from 26.5% for the prior year quarter, with unfavorability in our Diagnostic Services business offsetting favorability in our Diagnostic Imaging business.

Diagnostic Services . Cost of Diagnostic Services revenue primarily consists of labor, radiopharmaceuticals, equipment depreciation, and other costs associated with the provision of services. Cost of Diagnostic Services revenue was $8.5 million for the three months ended March 31, 2015 , an increase of $1.0 million , or 12.9% , compared to the prior year quarter. The increase in cost of Diagnostic Services revenue for the three months ended March 31, 2015 as compared to the prior year quarter, is primarily a result of the provision of incremental cardiac event monitoring services associated with the Telerhythmics acquisition as a result of owning Telerhythmics for the full quarter in 2015 versus a portion of a quarter in 2014, as well as an increased amount of imaging days provided driven by the MD Office acquisition. Diagnostic Services gross profit was $2.1 million for the three months ended March 31, 2015 , an increase of $37 thousand , or 1.8% , compared to the prior year quarter, primarily as a result of increased revenue volume offset by decreased gross profit as a percentage of revenue. Diagnostic Services gross profit as a percentage of Diagnostic Services revenue decreased to 19.5% for the three months ended March 31, 2015 from 21.2% for the prior year quarter due to Telerhythmics transition costs as well as the impact of inclement weather on our cardiac event monitoring business.

Diagnostic Imaging. Cost of Diagnostic Imaging revenue primarily consists of materials, labor, and overhead costs associated with the manufacturing, warranty, and service contracts associated with our products. Cost of Diagnostic Imaging revenue was $1.7 million for the three months ended March 31, 2015 , a decrease of $0.3 million , or 16.6% , compared to the prior year quarter, primarily as a result of decreased revenue and reduced manufacturing and overhead costs during the three months ended March 31, 2015 as compared to the prior year quarter. In both the three months ended March 31, 2015 and three months ended March 31, 2014 , we benefited from a release of $0.2 million of excess inventory reserves due to the sale of previously reserved inventory in each period respectively. At the current expected level of camera sales, we expect to have further sales of previously reserved inventory during the remainder of 2015 and a portion of 2016, although we do not anticipate significant further inventory reserve releases thereafter. Diagnostic Imaging gross profit was $1.6 million for the three months ended March 31, 2015 , an increase of $0.2 million , or 11.9% , compared to the prior year quarter as a result of improved product mix and reduced manufacturing and overhead costs. Diagnostic Imaging gross profit as a percentage of Diagnostic Imaging revenue was 48.5% for the three months ended March 31, 2015 , compared to 41.3% for the prior year quarter, primarily due to improved product mix and reduced manufacturing and overhead costs.

Operating Expenses

Marketing and Sales. Marketing and sales expenses consist primarily of salaries, commissions, bonuses, recruiting costs, travel, marketing and collateral materials, and trade show costs. Marketing and sales expenses were $1.2 million for the three months ended March 31, 2015 , an increase of $0.1 million , or 10.5% , compared to the prior year quarter, primarily as a result of increased marketing and sales resources associated with the Telerhythmics business. On a go forward basis, we expect marketing and sales expense to generally approximate the level of expense noted in the three months ended March 31, 2015 .

General and Administrative. General and administrative expenses consist primarily of salaries and other related costs for accounting, human resources, information technology, executive personnel, legal related costs, professional fees, outside services, insurance, and costs related to our board of directors. General and administrative expenses were $2.2 million for the three months ended March 31, 2015 , an increase of $0.2 million , or 8.7% , compared to the prior year quarter primarily as a result of increased costs related to the administration of the Telerhythmics business. On a go forward basis, we expect general and administrative expense to generally approximate the level of expense noted in the three months ended March 31, 2015 , notwithstanding any one-time initiatives.

Restructuring. On January 27, 2014, we announced a plan to exit our 47,000 square foot former headquarters facility in Poway, California (the "Facilities restructuring initiative"). This action was undertaken as the facility had excess space and capacity given our current operating plan. We entered into a termination agreement to end the lease on the facility as of April 30, 2014. The original term of the lease would have continued through February 29, 2016. Concurrently with the termination of the lease for the 47,000 square foot Poway, California facility, we entered into a new lease agreement on January 23, 2014 for a separate 21,300 square foot facility to house our Diagnostic Imaging operations. As a result of the Facilities restructuring initiative, we incurred a total of $0.7 million of restructuring charges, all of which were incurred during the year ended December 31, 2014 . No costs were incurred related to the initiative in the three months ended March 31, 2015 , which represents a decrease of $0.4 million compared to the prior year quarter. We do not expect to incur restructuring charges in fiscal year 2015 , although we will continue to assess the need to restructure our business to address market changes and achieve corporate objectives.

Income Tax Benefit (Expense)

Consolidated. Income tax benefit was $0.6 million for the three months ended March 31, 2015 , an increase of $0.6 million , compared to the prior year quarter. An income tax benefit of approximately $0.6 million was generated for the three months ended March 31, 2015 due to the acquisition accounting for MD Office, as a result of the timing and deductibility of certain items for

income tax purposes. The income tax benefit related to the MD Office acquisition is a one-time benefit which will not reoccur in future periods. For future periods, our provision for income taxes is expected to be based on income tax benefit or expense from normal business operations, not withstanding any potential one-time events such as future acquisitions or the release of all or a portion of the deferred tax asset valuation allowance. Should our recent positive earnings trend continue into the future, it is reasonably possible that we could recognize a material income tax benefit related to the release of a portion or all of our deferred tax asset valuation allowance during 2015 or 2016.

Liquidity and Capital Resources

We generated $0.1 million of positive cash flow from operations during the three months ended March 31, 2015 , and expect to continue to generate positive cash flow from operations on an annual basis in the future. Cash flows from operations primarily represent inflows from net income (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 grow our business, as well as acquisition and divestiture activity. Cash flows from financing activities primarily represent outflows related to dividend payments and share repurchases, offset by the receipt of cash related to the exercise of stock options.

Our principal sources of liquidity are our existing cash and cash equivalents, short-term investments, and cash generated from operations. As of March 31, 2015 , we had cash, cash equivalents, and securities available-for-sale of $20.9 million . We generally invest our cash reserves in money market funds, U.S. treasury, and corporate debt securities. In addition, we currently have available a shelf registration statement that provides us with increased capital flexibility to pursue corporate objectives by allowing us to offer and sell up to $20.0 million of securities.

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 nuclear cameras, cardiac monitoring devices, ultrasound machines, vans, and computer 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, 2015 and 2014 :



	Three Months Ended March 31,
(in thousands)	2015			2014
Net cash provided by (used in) by operating activities	$	122		$	(1,789	)
Net cash provided by (used in) investing activities	674			(6,308		)
Net cash used in financing activities	(971		)	(1,098		)

Operating Activities

Net cash provided by operating activities increased $1.9 million for the three months ended March 31, 2015 compared to the prior year period. This provision of cash was primarily related to net income generated in the three months ended March 31, 2015 , compared to a net loss generated in the prior year period as well as favorable changes in net working capital.

Investing Activities

Net cash provided by investing activities increased $7.0 million for the three months ended March 31, 2015 compared to the prior year period. This increase was primarily attributable to cash provided by maturities of available-for-sale securities in the three months ended March 31, 2015 , compared to the outlay of cash to acquire Telerhythmics and purchase available-for-sale securities in the three months ended March 31, 2014 . See Note 3 to the unaudited condensed consolidated financial statements for further information related to the acquisition of Telerhythmics.

Financing Activities

Net cash used in financing activities decreased by $0.1 million for the three months ended March 31, 2015 compared to the prior year period. This decrease was primarily attributable to a one-time cash outlay in the three months ended March 31, 2014 to repay debt related to the acquisition of Telerhythmics, LLC on March 13, 2014. In addition, the decrease was attributable to proceeds received from stock option exercises during the three months ended March 31, 2015 .

Off-Balance Sheet Arrangements

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, or SPEs, which would

have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of March 31, 2015 , we were not involved in any unconsolidated SPE transactions.

Contractual Obligations

There have been no material changes outside of the ordinary course of business in our outstanding contractual obligations from those disclosed within “Management's Discussion and Analysis of Financial Condition and Results of Operations,” as contained in our Annual Report on Form 10-K filed with the SEC on March 6, 2015.


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk due to changes in interest rates relates primarily to the increase or decrease in the value of debt securities in our investment portfolio. Our risk associated with fluctuating interest rates is limited to our investments in interest rate sensitive financial instruments. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. We attempt to increase the safety and preservation of our invested principal funds by limiting default risk, market risk, and reinvestment risk. We mitigate default risk by investing in investment grade securities. A 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of our interest sensitive financial instruments. Changes in interest rates over time will increase or decrease our interest income.


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 and Exchange Commission Act of 1934 reports is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, 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.

As required by Securities and Exchange Commission Rule 13a-15(e) and 15d-15(e), we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

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 controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

See Note 9 to the 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, 2014 , which we filed with the SEC on March 6, 2015. 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, 2014 , 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.


ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the quarter ended March 31, 2015 , the Company sold the following equity securities:



	Total Number of Shares Sold During the Period	Value per Share		Aggregate Value
January 1, 2015 - January 31, 2015	—	$	—	$	—
February 1, 2015 - February 28, 2015	—	$	—	$	—
March 1, 2015 - March 31, 2015 ⁽¹⁾	610,000	$	4.40	$	2,684,000
	610,000			$	2,684,000

⁽¹⁾ In connection with the Merger Agreement pursuant to which the Company acquired MD Office, the Company issued an aggregate of 610,000 shares of Company common stock to the sellers of MD Office, including 28,409 shares to be held in escrow for six months following closing of the Merger. The issuance of such shares was exempt from the registration requirements under the Securities Act pursuant to Section 4(a)(2) thereof, because the transaction did not involve a public offering. In connection with the Merger, the Company and the MD Office sellers have also entered into a Registration Rights Agreement pursuant to which the Company agreed to register the shares issued to the MD Office sellers under the Merger Agreement. See Note 3 for further detail regarding the transaction.


ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4.	MINE SAFETY DISCLOSURES

Not applicable.


ITEM 5.	OTHER INFORMATION

None.


ITEM 6.	EXHIBITS



Exhibit Number		Description

2.1		Agreement of Merger and Plan of Reorganization, dated March 5, 2015 by and between Digirad Corporation, Maleah Incorporated, MD Office Solutions, and the Stockholders party thereto (Incorporated by reference to the exhibits to the Company's report on Form 8-K filed with the Commission on March 6, 2015). Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company hereby agrees to furnish supplementary copies of any of the omitted schedules or exhibits upon request by the Securities and Exchange Commission.
3.1		Restated Certificate of Incorporation of Digirad Corporation (Incorporated by reference to the exhibits to the Company's report on Form 8-K originally filed with the Commission on May 3, 2006, as amended thereafter).
3.2		Amended and Restated Bylaws of Digirad Corporation (Incorporated by reference to the exhibits to the Company's report on Form 8-K filed with the Commission on May 9, 2007).
3.3		Certificate of Designation of Rights, Preferences and Privileges of Series B Participating Preferred Stock (Incorporated by reference to the exhibits to the Company's report on Form 8-K filed with the Commission on May 24, 2013).
4.1		Form of Specimen Stock Certificate (Incorporated by reference to the exhibits to the Registration Statement on Form S-1 (File No. 333-113760) originally filed with the Commission on March 19, 2004, as amended thereafter).
4.2		Tax Benefit Preservation Plan by and between Digirad Corporation and American Stock Transfer and Trust Company, dated as of May 23, 2013 (Incorporated by reference to the exhibits to the Company's report on Form 8-K filed with the Commission on May 24, 2013).
4.3		Tax Benefit Preservation Plan Amendment, dated November 11, 2013, by and between the Company and American Stock Transfer & Trust Company, LLC (Incorporated by reference to the exhibits to the Company's report on Form 10-K filed with the Commission on March 20, 2014).
4.4		First Amendment to Preferred Stock Rights Agreement, dated as of March 5, 2015, by and between the Company and American Stock Transfer & Trust Company, LLC (Incorporated by reference to the exhibits to the Company's Annual Report on Form 10-K filed with the Commission on March 6, 2015).
10.1*		Registration Rights Agreement, dated March 5, 2015, by and among the Company, Keenan - Thornton Family Trust, David Keenan and Samia Arram.
31.1*		Certification of the Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated pursuant to the Securities Exchange Act of 1934, as amended.
31.2*		Certification of the Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated pursuant to the Securities Exchange Act of 1934, as amended.
32.1**		Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**		Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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.

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 1, 2015	By:	/s/ MATTHEW G. MOLCHAN
			Matthew G. Molchan President and Chief Executive Officer (Principal Executive Officer)

Date:	May 1, 2015	By:	/s/ JEFFRY R. KEYES
			Jeffry R. Keyes Chief Financial Officer (Principal Financial and Accounting Officer)

EXHIBIT 10.1

REGISTRATION RIGHTS AGREEMENT

This Registration Rights Agreement (the “Agreement”) is made and entered into as of this 5th day of March, 2015 by and among Digirad Corporation, a Delaware corporation (the “Company”), and the “Stockholders” named on the signature pages hereto and in that certain Agreement of Merger and Plan of Reorganization, dated March 5, 2015, by and among the Company, Maleah Incorporated, a California corporation and wholly-owned direct subsidiary of the Company, MD Office Solutions, a California corporation, and the Stockholders party thereto (the “Merger Agreement”). Capitalized terms used herein have the respective meanings ascribed thereto in the Merger Agreement unless otherwise defined herein.

The parties hereby agree as follows:

1. Certain Definitions .

As used in this Agreement, the following terms shall have the following meanings:

“ Common Stock ” means the Company’s common stock, par value $0.0001 per share, and any securities into which such shares may hereinafter be reclassified.

“ Prospectus ” means (i) the prospectus included in any Registration Statement, as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by such Registration Statement and all other amendments and supplements to the prospectus, including post-effective amendments and all material incorporated by reference in such prospectus, and (ii) any “free writing prospectus” as defined in Rule 405 under the 1933 Act.

“ Register ,” “ registered ” and “ registration ” refer to a registration made by preparing and filing a Registration Statement or similar document in compliance with the 1933 Act, and the declaration or ordering of effectiveness of such Registration Statement or document.

“ Registrable Securities ” means (i) the Stock Consideration and (ii) any other securities issued or issuable with respect to or in exchange for Registrable Securities, whether by merger, charter amendment or otherwise; provided, that a security shall cease to be a Registrable Security upon (A) sale pursuant to a Registration Statement or Rule 144 under the 1933 Act, or (B) such security becoming eligible for sale by the applicable Stockholder pursuant to Rule 144 without any volume or manner-of-sale restrictions and without the requirement for the Company to be in compliance with the current public information requirement under Rule 144.

“ Registration Statement ” means any registration statement of the Company filed under the 1933 Act that covers the resale of any of the Registrable Securities pursuant to the provisions of this Agreement, amendments and supplements to such Registration Statement, including post-effective amendments, all exhibits and all material incorporated by reference in such Registration Statement.

“ Required Stockholders ” means the Stockholders beneficially owning a majority of the Registrable Securities.

“ SEC ” means the U.S. Securities and Exchange Commission.

“ Stockholders ” means the Stockholders identified and defined in the Merger Agreement.

“ 1933 Act ” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

“ 1934 Act ” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

2. Registration .

(a) Registration Statement . Promptly following the Closing Date, but no later than ninety (90) days thereafter, the Company shall prepare and file with the SEC one Registration Statement on Form S-3 (or, if Form S-3 is not then available to the Company, on such form of registration statement as is then available to effect a registration for resale of the Registrable Securities) covering the resale of the Registrable Securities. The Registration Statement (and each amendment or supplement thereto, and each request for acceleration of effectiveness thereof) shall be provided in accordance with Section 3(c) to the Stockholders and their counsel prior to its filing or other submission. Such Registration Statement (including any amendments

or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.

(b) Expenses . The Company will pay all expenses associated with effecting the registration of the Registrable Securities, including filing and printing fees, the Company’s counsel and accounting fees and expenses, costs associated with clearing the Registrable Securities for sale under applicable state securities laws, listing fees, but excluding discounts, commissions, fees of underwriters, selling brokers, dealer managers or similar securities industry professionals with respect to any Registrable Securities.

(i) The Company shall use commercially reasonable efforts to have the Registration Statement declared effective as soon as practicable. The Company shall notify the Stockholders by facsimile or e-mail as promptly as practicable, and in any event, within twenty-four (24) hours, after any Registration Statement is declared effective and shall simultaneously provide the Stockholders with copies of any related Prospectus to be used in connection with the sale or other disposition of the securities covered thereby. After the effective date of such Registration Statement, the Company shall file a final Prospectus with the SEC as required by Rule 424.

(ii) For not more than twenty (20) consecutive days or for a total of not more than forty-five (45) days in any twelve (12) month period, the Company may suspend the use of any Prospectus included in any Registration Statement contemplated by this Section in the event that the Company determines in good faith that such suspension is necessary to (A) delay the disclosure of material non-public information concerning the Company, the disclosure of which at the time is not, in the good faith opinion of the Company, in the best interests of the Company or (B) amend or supplement the affected Registration Statement or the related Prospectus so that such Registration Statement or Prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the case of the Prospectus in light of the circumstances under which they were made, not misleading (an “Allowed Delay”); provided, that the Company shall promptly (a) notify each Stockholder in writing of the commencement of an Allowed Delay, (b) advise the Stockholders in writing to cease all sales under the Registration Statement until the end of the Allowed Delay and (c) use commercially reasonable efforts to terminate an Allowed Delay as promptly as practicable.

(d) Rule 415; Cutback If at any time the SEC takes the position that the offering of some or all of the Registrable Securities in a Registration Statement is not eligible to be made on a delayed or continuous basis under the provisions of Rule 415 under the 1933 Act or requires any Stockholder to be named as an “underwriter”, the Company shall use its commercially reasonable efforts to persuade the SEC that the offering contemplated by the Registration Statement is a bona fide secondary offering and not an offering “by or on behalf of the issuer” as defined in Rule 415 and that none of the Stockholders is an “underwriter”. The Stockholders shall have the right to participate or have their counsel participate in any meetings or discussions with the SEC regarding the SEC’s position and to comment or have their counsel comment on any written submission made to the SEC with respect thereto. No such written submission shall be made to the SEC to which the Stockholders’ counsel reasonably objects. In the event that, despite the Company’s commercially reasonable efforts and compliance with the terms of this Section 2(d), the SEC refuses to alter its position, the Company shall (i) remove from the Registration Statement such portion of the Registrable Securities (the “Cut Back Shares”) and/or (ii) agree to such restrictions and limitations on the registration and resale of the Registrable Securities as the SEC may require to assure the Company’s compliance with the requirements of Rule 415 (collectively, the “SEC Restrictions”); provided, however, that the Company shall not agree to name any Stockholder as an “underwriter” in such Registration Statement without the prior written consent of such Stockholder. Any cut-back imposed on the Stockholders pursuant to this Section 2(d) shall be allocated among the Stockholders on a pro rata basis, unless the SEC Restrictions otherwise require or provide or the Stockholders otherwise agree.

3. Company Obligations . The Company will use commercially reasonable efforts to effect the registration of the Registrable Securities in accordance with the terms hereof, and pursuant thereto the Company will, as promptly as possible:

(a) use commercially reasonable efforts to cause such Registration Statement to become effective and to remain continuously effective for a period that will terminate upon the earlier of (i) the date on which all Registrable Securities covered by such Registration Statement have been sold, and (ii) the date on which all Registrable Securities covered by such Registration Statement may be sold pursuant to Rule 144 under the 1933 Act without any volume or manner-of-sale restrictions and without the requirement for the Company to be in compliance with the current public company information requirement under Rule 144 (the “Effectiveness Period”);

(b) prepare and file with the SEC such amendments and post-effective amendments to the Registration Statement and the Prospectus as may be necessary to keep the Registration Statement effective for the Effectiveness Period and to comply with the provisions of the 1933 Act and the 1934 Act with respect to the distribution of all of the Registrable Securities covered thereby;

(c) provide copies to and permit counsel designated by the Stockholders to review each Registration Statement and all amendments and supplements thereto no fewer than three (3) Business Days prior to their filing with the SEC and not file any document to which such counsel reasonably objects;

(d) furnish to the Stockholders and their legal counsel (i) promptly after the same is prepared and publicly distributed, filed with the SEC, or received by the Company (but not later than two (2) Business Days after the filing date, receipt date or sending date, as the case may be) one (1) copy of any Registration Statement and any amendment thereto, each preliminary prospectus and Prospectus and each amendment or supplement thereto, and each letter written by or on behalf of the Company to the SEC or the staff of the SEC, and each item of correspondence from the SEC or the staff of the SEC, in each case relating to such Registration Statement (other than any portion of any thereof which contains information for which the Company has sought confidential treatment), and (ii) such number of copies of a Prospectus, including a preliminary prospectus, and all amendments and supplements thereto and such other documents as each Stockholder may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Stockholder that are covered by the related Registration Statement;

(e) use commercially reasonable efforts to (i) prevent the issuance of any stop order or other suspension of effectiveness, and (ii) if such order is issued, obtain the withdrawal of any such order at the earliest possible moment;

(f) use commercially reasonable efforts to cause all Registrable Securities covered by a Registration Statement to be listed on each securities exchange, interdealer quotation system or other market on which similar securities issued by the Company are then listed to the extent required by applicable law or rule;

(g) immediately notify the Stockholders, at any time prior to the end of the Effectiveness Period, upon discovery that, or upon the happening of any event as a result of which, the Prospectus includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and promptly prepare, file with the SEC and furnish to such holder a supplement to or an amendment of such Prospectus as may be necessary so that such Prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing;

(h) otherwise use commercially reasonable efforts to comply with all applicable rules and regulations of the SEC under the 1933 Act and the 1934 Act, including, without limitation, Rule 172 under the 1933 Act, file any final Prospectus, including any supplement or amendment thereof, with the SEC pursuant to Rule 424 under the 1933 Act, promptly inform the Stockholders in writing if, at any time during the Effectiveness Period, the Company does not satisfy the conditions specified in Rule 172 and, as a result thereof, the Stockholders are required to deliver a Prospectus in connection with any disposition of Registrable Securities and take such other actions as may be reasonably necessary to facilitate the registration of the Registrable Securities hereunder; and

(i) With a view to making available to the Stockholders the benefits of Rule 144 (or its successor rule) and any other rule or regulation of the SEC that may at any time permit the Stockholders to sell shares of Common Stock to the public without registration, the Company covenants and agrees to: (i) make and keep public information available, as those terms are understood and defined in Rule 144, until the earlier of (such date, the “Reporting Date”) (A) six months after such date as all of the Registrable Securities may be sold without restriction by the holders thereof pursuant to Rule 144 or any other rule of similar effect or (B) such date as all of the Registrable Securities shall have been resold; (ii) file with the SEC in a timely manner all reports and other documents required of the Company under the 1934 Act until the Reporting Date; and (iii) until the Reporting Date, furnish to each Stockholder upon request, as long as such Stockholder owns any Registrable Securities, (A) a written statement by the Company that it has complied with the reporting requirements of the 1934 Act, (B) a copy of the Company’s most recent Annual Report on Form 10-K or Quarterly Report on Form 10-Q, and (C) such other information as may be reasonably requested in order to avail such Stockholder of any rule or regulation of the SEC that permits the selling of any such Registrable Securities without registration.

(j) To the extent permitted by law and agreed to by Company counsel, the Company will cause Company counsel to issue an opinion allowing the removal of restrictive legends from certificates bearing such legends.

4. Obligations of the Stockholders .

(a) Each Stockholder shall furnish in writing to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it, as shall be reasonably required to effect the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. At least five (5) Business Days prior to the first anticipated filing date of any Registration Statement, the Company shall notify each Stockholder of the information the Company requires from such Stockholder if such Stockholder elects to have any of its Registrable Securities included in the Registration Statement. A Stockholder shall provide such information to the Company at least three (3) Business Days prior to the first anticipated filing date of such Registration Statement if such Stockholder elects to have any of its Registrable Securities included in the Registration Statement.

(b) Each Stockholder, by its acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of a Registration Statement hereunder, unless such Stockholder has notified the Company in writing of its election to exclude all of its Registrable Securities from such Registration Statement.

(c) Each Stockholder agrees that, upon receipt of any notice from the Company of either (x) the commencement of an Allowed Delay pursuant to Section 2(c)(ii) or (y) the happening of an event pursuant to Section 3(g) hereof, such Stockholder will immediately discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities, until the Stockholder is advised by the Company that such dispositions may again be made.

5. Indemnification .

(a) Indemnification by the Company . The Company will indemnify and hold harmless each Stockholder that participates in the offering of Registrable Securities and its officers, directors, members, employees and agents, successors and assigns, and each other person, if any, who controls such Stockholder (within the meaning of the 1933 Act), against any losses, claims, damages or liabilities, joint or several, to which they may become subject under the 1933 Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of any material fact contained in such Registration Statement, or Prospectus contained therein, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus, in light of the circumstances under which they were made) not misleading; or (ii) any violation by the Company or its agents of any rule or regulation promulgated under the 1933 Act applicable to the Company or its agents and relating to action or inaction required of the Company in connection with such registration, and will reimburse such Stockholder and each such officer, director, member, employee or agent and each such controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided , however , that the Company will not be liable in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by or on behalf of such Stockholder in writing specifically for use in such Registration Statement or Prospectus or amendment or supplement thereto.

(b) Indemnification by the Stockholders . Each Stockholder participating in the offering of Registrable Securities agrees, severally but not jointly, to indemnify and hold harmless, to the fullest extent permitted by law, the Company, its directors, officers, employees, stockholders and each person who controls the Company (within the meaning of the 1933 Act) against any losses, claims, damages, liabilities and expenses (including reasonable attorneys’ fees) arising out of or based upon any untrue statement or alleged untrue statement of any material fact contained in such Registration Statement, or Prospectus contained therein, or any amendment or supplement thereto, or arising out of or based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus, in light of the circumstances under which they were made) not misleading, to the extent, but only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission is contained in or omitted from any information furnished in writing by or on behalf of such Stockholder to the Company specifically for inclusion in such Registration Statement or Prospectus or amendment or supplement thereto. In no event shall the liability of a Stockholder be greater in amount than the dollar amount of the net proceeds received by such Stockholder upon the sale of its Registrable Securities included in the Registration Statement giving rise to such indemnification obligation.

(c) Conduct of Indemnification Proceedings . Any person entitled to indemnification hereunder shall (i) give prompt notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party; provided that any person entitled to indemnification hereunder shall have the right to employ separate counsel and to participate in the

defense of such claim, but the fees and expenses of such counsel shall be at the expense of such person unless (a) the indemnifying party has agreed to pay such fees or expenses, (b) the indemnifying party shall have failed to assume the defense of such claim and employ counsel reasonably satisfactory to such person or (c) in the reasonable judgment of any such person, based upon written advice of its counsel, a conflict of interest exists between such person and the indemnifying party with respect to such claim (in which case, if the person notifies the indemnifying party in writing that such person elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such claim on behalf of such person); and provided , further , that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations hereunder, except to the extent that such failure to give notice shall materially adversely affect the indemnifying party in the defense of any such claim or litigation. It is understood that the indemnifying party shall not, in connection with any proceeding in the same jurisdiction, be liable for fees or expenses of more than one separate firm of attorneys at any time for all such indemnified parties. No indemnifying party will (i) except with the consent of the indemnified party, consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect of such claim or litigation and (ii) be liable for any settlement entered into without the indemnifying party’s prior written approval, such approval not to be unreasonably withheld or delayed.

(d) Contribution . If for any reason the indemnification provided for in the preceding paragraphs (a) and (b) is unavailable to an indemnified party or insufficient to hold it harmless, other than as expressly specified therein, then the indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations. No person guilty of fraudulent misrepresentation within the meaning of Section 11(f) of the 1933 Act shall be entitled to contribution from any person not guilty of such fraudulent misrepresentation. In no event shall the contribution obligation of a holder of Registrable Securities be greater in amount than the dollar amount of the net proceeds received by it upon the sale of its Registrable Securities giving rise to such contribution obligation.

6. Miscellaneous .

(a) Company Representations . As of the date hereof, (i) the Company is eligible to register its Common Stock on a Registration Statement on Form S-3, (ii) the Company’s shares of Common Stock are listed on NASDAQ, and (iii) no person has the right to cause the Company to file a Registration Statement registering Common Stock prior to registration of the Registrable Securities as provided herein.

(b) Amendments and Waivers . This Agreement may be amended only by a writing signed by the Company and the Required Stockholders. The Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company shall have obtained the written consent of the Required Stockholders to such amendment, action or omission to act.

(c) Notices . All notices and other communications provided for or permitted hereunder shall be made as set forth in Section 8.06 of the Merger Agreement.

(d) Assignments . This Agreement may not be assigned by any of the Stockholders (whether by operation of law or otherwise) without the prior written consent of the Company and may not be assigned by the Company (whether by operation of law or otherwise) without the prior written consent of the Required Stockholders, provided, however, that in the event that the Company is a party to a merger, consolidation, share exchange or similar business combination transaction in which the Common Stock is converted into the equity securities of another Person, from and after the effective time of such transaction, such Person shall, by virtue of such transaction, be deemed to have assumed the obligations of the Company hereunder, the term “Company” shall be deemed to refer to such Person and the term “Registrable Securities” shall be deemed to include the securities received by the Stockholders in connection with such transaction unless such securities are otherwise freely tradable by the Stockholders after giving effect to such transaction.

(e) Remedies . In the event of a breach by the Company or by a Stockholder of any of their respective obligations under this Agreement, each Stockholder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement shall be entitled to seek specific performance of its rights under this Agreement. Each of the Company and each Stockholder agrees that monetary damages may not provide adequate compensation for any losses incurred by reason of a breach by it of any of the provisions of this Agreement.

(f) Benefits of the Agreement . The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective permitted successors and assigns of the parties. Nothing in this Agreement, express or implied,

is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.

(g) Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement may also be executed via facsimile or .pdf, which shall be deemed an original.

(h) Titles and Subtitles . The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

(i) Severability . Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof but shall be interpreted as if it were written so as to be enforceable to the maximum extent permitted by applicable law, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, the parties hereby waive any provision of law which renders any provisions hereof prohibited or unenforceable in any respect.

(j) Further Assurances . The parties shall execute and deliver all such further instruments and documents and take all such other actions as may reasonably be required to carry out the transactions contemplated hereby and to evidence the fulfillment of the agreements herein contained.

(k) Entire Agreement . This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. This Agreement supersedes all prior agreements and understandings among the parties with respect to such subject matter.

(l) Governing Law; Consent to Jurisdiction; Waiver of Jury Trial . This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of Delaware without regard to the choice of law principles thereof. Each of the parties hereto irrevocably submits to the exclusive jurisdiction of the courts of the State of Delaware and the United States District Court for the District of Delaware for the purpose of any suit, action, proceeding or judgment relating to or arising out of this Agreement and the transactions contemplated hereby. Service of process in connection with any such suit, action or proceeding may be served on each party hereto anywhere in the world by the same methods as are specified for the giving of notices under this Agreement. Each of the parties hereto irrevocably consents to the jurisdiction of any such court in any such suit, action or proceeding and to the laying of venue in such court. Each party hereto irrevocably waives any objection to the laying of venue of any such suit, action or proceeding brought in such courts and irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. EACH OF THE PARTIES HERETO WAIVES ANY RIGHT TO REQUEST A TRIAL BY JURY IN ANY LITIGATION WITH RESPECT TO THIS AGREEMENT AND REPRESENTS THAT COUNSEL HAS BEEN CONSULTED SPECIFICALLY AS TO THIS WAIVER.

(m) Adjustments For Stock Dividends, Stock Splits, Recapitalizations, Combinations, Etc. If the Company shall at any time issue a stock dividend on its outstanding shares of Common Stock or effect a recapitalization, stock split, reverse stock split, reorganization, consolidation, split-up, combination, repurchase or exchange of shares of its Common Stock or other securities of the Company that affects the outstanding number of shares of Common Stock, all provisions set forth in this Agreement that are affected by a specified number of shares of Common Stock shall be appropriately adjusted.

[Signature page follows]

IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement or caused their duly authorized officers to execute this Registration Rights Agreement as of the date first above written.



The Company:	DIGIRAD CORPORATION
By:	/s/ JEFFRY KEYES
	Name: Jeffry Keyes
	Title: Chief Financial Officer



The Stockholders:
	KEENAN - THORNTON FAMILY TRUST
By:	/s/ MICHAEL KEENAN
	Michael Keenan, Trustee
By:	/s/ CYNTHIA THORNTON
	Cynthia Thornton, Trustee

	/s/ SAMIA ARRAM
	Samia Arram
	/s/ DAVID KEENAN
	David Keenan

EXHIBIT 31.1

CERTIFICATION OF

PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Matthew G. Molchan, certify that:


1.	I have reviewed this quarterly report on Form 10-Q of Digirad Corporation;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c)	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d)	Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;


5.	The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):


a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and


b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

May 1, 2015

/s/ Matthew G. Molchan

Matthew G. Molchan

President and Chief Executive Officer

(Principal Executive Officer)

EXHIBIT 31.2

CERTIFICATION OF

PRINCIPAL FINANCIAL OFFICER

PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Jeffry R. Keyes, certify that:


1.	I have reviewed this quarterly report on Form 10-Q of Digirad Corporation;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c)	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d)	Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;


5.	The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):


a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and


b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

May 1, 2015

/s/ Jeffry R. Keyes

Jeffry R. Keyes

Chief Financial Officer

(Principal Financial Officer)

EXHIBIT 32.1

CERTIFICATION OF

PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)

In connection with the accompanying Quarterly Report on Form 10-Q of Digirad Corporation for the period ended March 31, 2015 , I, Matthew G. Molchan, President and Chief Executive Officer of Digirad Corporation, hereby certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:


(1)	such Quarterly Report on Form 10-Q of Digirad Corporation for the period ended March 31, 2015 , fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and


(2)	the information contained in such Quarterly Report on Form 10-Q of Digirad Corporation for the period ended March 31, 2015 , fairly presents, in all material respects, the financial condition and results of operations of Digirad Corporation at the dates and for the periods indicated.

This certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

May 1, 2015

/s/ Matthew G. Molchan

Matthew G. Molchan

President and Chief Executive Officer

(Principal Executive Officer)

A signed copy of this written statement required by Section 906 has been provided to Digirad Corporation and will be retained by Digirad Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

EXHIBIT 32.2

CERTIFICATION OF

PRINCIPAL FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)

In connection with the accompanying Quarterly Report on Form 10-Q of Digirad Corporation for the period ended March 31, 2015 , I, Jeffry R. Keyes, Chief Financial Officer of Digirad Corporation, hereby certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:


(1)	such Quarterly Report on Form 10-Q of Digirad Corporation for the period ended March 31, 2015 , fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and


(2)	the information contained in such Quarterly Report on Form 10-Q of Digirad Corporation for the period ended March 31, 2015 , fairly presents, in all material respects, the financial condition and results of operations of Digirad Corporation at the dates and for the periods indicated.

This certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

May 1, 2015

/s/ Jeffry R. Keyes

Jeffry R. Keyes

Chief Financial Officer

(Principal Financial Officer)