DIGIRAD : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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, 2019, which were included
in our Form 10-K, filed with the SEC on March 9, 2020.
The results of operations for the periods reflected herein are not necessarily
indicative of results that may be expected for future periods.
Overview
Upon Digirad's acquisition of ATRM Holdings, Inc. ("ATRM") on September 10, 2019
(the "ATRM Merger" or the "ATRM Acquisition"), Digirad converted into a
diversified holding company (the "HoldCo Conversion"). As a diversified holding
company, Digirad has three divisions:
•Healthcare (Digirad Health): Digirad Health operates in three businesses:
Diagnostic Services, Mobile Healthcare, and Diagnostic Imaging. The Diagnostic
Services business offers imaging and monitoring services to healthcare providers
as an alternative to purchasing the equipment or outsourcing the job. The Mobile
Healthcare business provides contract diagnostic imaging, including computerized
tomography ("CT"), magnetic resonance imaging ("MRI"), positron emission
tomography ("PET"), PET/CT, and nuclear medicine and healthcare expertise
through a convenient mobile service. The Diagnostic Imaging business develops,
sells, and maintains solid-state gamma cameras.
•Building and Construction (ATRM): services residential and commercial
construction projects by manufacturing modular housing units, structural wall
panels, permanent wood foundation systems, and other engineered wood products,
and supplies general contractors with building materials.
•Real Estate and Investments: manages real estate assets (currently three
manufacturing plants in Maine) and investments.
Healthcare (Digirad Health) delivers convenient, effective, and efficient
healthcare solutions on an as needed, when needed, and where needed basis.
Digirad's diverse portfolio of mobile healthcare solutions and diagnostic
imaging equipment and services provides hospitals, physician practices, and
imaging centers throughout the United States access to technology and services
necessary to provide patient care in the rapidly changing healthcare
environment. Digirad's direct and indirect subsidiaries that are included in
this division are referred to collectively herein as the "Healthcare
Subsidiaries".
Building and Construction (ATRM) manufactures modular housing units for
commercial and residential applications. ATRM operates in two businesses: (i)
modular building manufacturing and (ii) structural wall panel and wood
foundation manufacturing, including building supply retail operations. The
modular building manufacturing business is operated by KBS Builders, Inc.
("KBS"), and the structural wall panel and wood foundation manufacturing segment
is operated by EdgeBuilder, Inc. ("EdgeBuilder"), and the retail building
supplies are sold through Glenbrook Building Supply, Inc. ("Glenbrook" and
together with EdgeBuilder, "EBGL"). KBS, EdgeBuilder and Glenbrook are
wholly-owned subsidiaries of ATRM and are referred to collectively herein, and
together with ATRM, as the "Building and Construction Subsidiaries".
Real Estate & Investments generates revenue from the lease of commercial
properties and equipment through Star Real Estate Holdings USA, Inc. ("SRE"), a
wholly-owned subsidiary of Digirad, and provides services that include
investment advisory services and the servicing of pooled investment vehicles
through Lone Star Value Management, LLC ("LSVM"), a Connecticut based exempt
reporting advisor. LSVM, which was a wholly owned subsidiary of ATRM on the ATRM
Acquisition Date (as defined below), was acquired by the Company in the ATRM
Acquisition. In April 2019, as an initial transaction to create Digirad's real
estate division under SRE and launch that aspect of the HoldCo Conversion,
Digirad funded the initial purchase of three modular building manufacturing
facilities in Maine and then leased those three properties to KBS. The funding
of the assets acquisition was primarily through the revolver loan under our
credit facility with Sterling National Bank ("Sterling" or "SNB"), a national
banking association. LSVM, SRE and the subsidiaries of SRE that are included in
this division are referred to collectively herein as the "Real Estate and
Investments Subsidiaries".
In February of 2018, we completed the sale of our customer contracts relating to
our MDSS post-warranty service business to Philips. On October 31, 2018, we sold
our Telerhythmics business to G Medical Innovations USA, Inc., for $1.95 million
cash.
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On December 14, 2018, Digirad and ATRM, entered into a joint venture and formed
Star Procurement, with Digirad and ATRM each holding a 50% interest. The purpose
of the joint venture is to provide the service of purchasing and selling
building materials and related goods to KBS with which Star Procurement entered
into a Services Agreement on January 2, 2019. In accordance with the terms of
the Star Procurement Limited Liability Company Agreement, Digirad made a $1.0
million capital contribution to the joint venture, which was made in January
2019. This entity was subsequently consolidated within the unaudited condensed
consolidated financial statements upon completion of the ATRM Merger.
On September 10, 2019 (the "ATRM Acquisition Date"), Digirad completed its
acquisition of ATRM pursuant to an Agreement and Plan of Merger, dated as of
July 3, 2019 (the "ATRM Merger Agreement"), among Digirad, Digirad Acquisition
Corporation, a Minnesota corporation and wholly-owned subsidiary of Digirad
("Merger Sub"), and ATRM. Under the terms of the ATRM Merger Agreement, Merger
Sub merged with and into ATRM, with ATRM surviving as a wholly owned subsidiary
of Digirad.
At the effective time of the ATRM Merger, (i) each share of ATRM common stock
was converted into the right to receive three one-hundredths (0.03) of a share
of 10.0% Series A Cumulative Perpetual Preferred Stock, par value $0.0001 per
share, of the Company ("Company Preferred Stock") and (ii) each share of ATRM
10.00% Series B Cumulative Preferred Stock, par value $0.001 per share ("ATRM
Preferred Stock"), converted into the right to receive two and one-half (2.5)
shares of Company Preferred Stock, for an approximate aggregate total of 1.6
million shares of Company Preferred Stock. No fractional shares of Company
Preferred Stock were issued to any ATRM shareholder in the ATRM Merger. Each
ATRM shareholder who would otherwise have been entitled to receive a fraction of
a share of Company common stock in the ATRM Merger received one whole share of
Company Preferred Stock.
As a result of the ATRM Merger, ATRM's operations have been included in our
unaudited consolidated financial statements since the ATRM Acquisition Date.
Digirad's aim with this acquisition is to continue to grow its business into an
integrated healthcare services company while simultaneously converting into a
diversified holding company through the acquisition of businesses that meet
Digirad's internally developed financial screen for acquisitions. The Company
expects to achieve significant synergies and cost reductions by eliminating
redundant processes and facilities.
COVID-19
On March 11, 2020, the World Health Organization declared the outbreak of a
novel strain of coronavirus, COVID-19, a global pandemic, which continues to
spread throughout the United States and around the world. Governmental
authorities in the states in which we operate issued social distancing orders,
which orders have required businesses in subject jurisdictions to cease
non-essential operations at physical locations in those locations, unless
exempted, rescinded, or amended. Accordingly, to comply with applicable
regulations and to safeguard the health and safety of our employees and
customers, we have temporarily reduced our business operations.
During the three and six months ended June 30, 2020, we experienced a $8.5
million increase and a $9.1 million decrease, respectively, in the Digirad
Health revenue related to a decrease in our diagnostic services due to the
Covid-19 pandemic. The decrease was offset by $5.0 million and $10.5 million,
respectively, increase in Building and Construction revenue, as compared to the
same period of the prior year, related to a decrease in our diagnostic services
due to the COVID-19 pandemic. As the COVID-19 pandemic affected the results of
segments of our business during the three and six months ended June 30, 2020, we
took steps to contain the impact of the COVID-19 pandemic on our business.
On April 1, 2020, we announced that in response to the COVID-19 pandemic,
Matthew G. Molchan, our President and Chief Executive Officer, David J. Noble,
our Chief Financial Officer and Chief Operating Officer, and Martin B. Shirley,
the president of our Diagnostic Imaging Solutions Inc. subsidiary, had each
agreed to have their base salaries reduced by 20%. These reductions were
effective as of April 6, 2020, and remained in effect until May 15, 2020.
On April 1, 2020, we also announced that in response to the COVID-19 pandemic,
we planned to furlough certain employees and that we would institute a 20%
salary reduction for most of our salaried employees and reduce the number of
working hours of most of our hourly employees by 20%. These reductions, which
applied to our healthcare division, were effective as of April 6, 2020, and
remained in effect until May 15, 2020. Throughout the COVID-19 pandemic, our
building and construction division has furloughed employees or reduced employee
hours based on fluctuations in demand for our products. As of June 30, 2020, KBS
brought back furloughed employees and increased its work force by over 20% to
meet the higher manufacturing requirements for two commercial projects as well
as the future growth we expect.

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This partial disruption, although expected to be temporary, may impact our
operations and overall business. The impact of COVID-19 is evolving rapidly and
its future effects are uncertain. Given the uncertainty caused by the COVID-19
pandemic, the duration of the disruption and related financial impact cannot be
reasonably estimated at this time. As a result of the evolving impact of
COVID-19 on the economy, on April 7, 2020, we withdrew our 2020 full-year
guidance. At Digirad, our highest priority remains the safety, health and
well-being of our employees, their families and our communities and we remain
committed to serving the needs of our customers. The COVID-19 pandemic is a
highly fluid situation and it is not currently possible for us to reasonably
estimate the impact it may have on our financial and operating results. We will
continue to evaluate the impact of the COVID-19 pandemic on our business as we
learn more and the impact of COVID-19 on our industry becomes clearer.
Equity Offering
On April 30, 2020, the Company filed a registration statement with the SEC (the
"Registration Statement") relating to a public offering of Common Stock and
warrants to purchase Common Stock (the "Offering"). On May 28, 2020, the Company
closed the Offering in which, pursuant to the underwriting agreement entered
into by and between the Company and Maxim Group LLC ("Maxim"), as representative
of the underwriters, dated May 26, 2020, the Company issued and sold (i)
2,225,000 shares of Common Stock, and (ii) 2,225,000 warrants (the "Warrants")
to purchase up to 1,112,500 shares of Common Stock. The Offering price was $2.24
per share of Common Stock and $0.01 per accompanying Warrant (for a combined
Offering price of $2.25). The Underwriting Agreement contained customary
representations, warranties, and agreements by the Company, customary conditions
to closing, indemnification obligations of the Company and Maxim (including for
liabilities under the Securities Act of 1933, as amended) and certain other
obligations.
Pursuant to the Underwriting Agreement, the Company granted to Maxim an option
for a period of 45 days (the "Over-Allotment Option") to purchase up to 225,000
additional shares of Common Stock and 225,000 Warrants to purchase up to an
additional 112,500 shares of Common Stock. Effective as of the closing of the
Offering, Maxim exercised the Over-Allotment Option for the purchase of 225,000
Warrants for a price of $0.01 per Warrant. On June 10, 2020, Maxim exercised the
Over-Allotment Option for the purchase of 225,000 shares of Common Stock for a
price of $2.24 per share, before underwriting discounts. The closing of the sale
of the over-allotment shares brought the total number of shares of common stock
sold by the Company in the Offering to 2,450,000, and total gross proceeds to
approximately $5.5 million.
The net proceeds to the Company from the Offering (including the exercise of the
Over-Allotment Option) were approximately $4.2 million, after deducting the fees
and commissions and estimated Offering expenses payable by the Company, and
excluding any proceeds the Company may receive upon exercise of the Warrants.
The Company currently intends to use at least $3.0 million of the net proceeds
from the sale of shares of Common Stock and the Warrants in the Offering to fund
commercial modular housing projects to be constructed in New England by the
Company's KBS Builders, Inc. subsidiary, and the remainder of the net proceeds
(if any) will be used for working capital and for other general corporate
purposes. The Company will have broad discretion in determining how the proceeds
of the Offering will be used, and its discretion is not limited by the
aforementioned possible uses.
Strategy
We seek to grow our business by, among other things:
•Organic growth from our core businesses. We believe that we operate in markets
and geographies that will allow us to continue to grow our core businesses,
allowing us to benefit from our scale and strengths. We plan to focus our
efforts on markets in which we already have a presence in order to take
advantage of personnel, infrastructure, and brand recognition we have in these
areas.
•Introduction of new services. We plan to continue to focus on healthcare
solutions related businesses that deliver necessary assets, services and
logistics directly to the customer site. We believe that over time we can either
purchase or develop new and complementary businesses and take advantage of our
customer loyalty and distribution channels. In addition, as we transform into a
multi-industry holding company, our largest near-term growth opportunity is to
execute a successful turnaround of the KBS modular business that we acquired
pursuant to the ATRM Merger. While we intend to continue to pursue and grow our
residential modular building business, which provides us with positive margins
and cash flow, we are also targeting large multi-family projects in the 25 to
100 building modules range.
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•Acquisition of complementary businesses. The current economic environment
offers significant opportunities for strategic acquisitions which can be either
be bolt-on acquisitions for existing platform businesses, or new core businesses
complementary to our new holding company structure. We will have a disciplined
approach for making any potential acquisitions and will focus on faster growing
and higher margin businesses. We believe there are many potential targets in the
range of $3 million to $10 million in annual revenues that can be acquired over
time and integrated into our businesses. We will also look at larger, more
transformational acquisitions if we believe the appropriate mix of value, risk
and return is present for our shareholders. The timing of these potential
acquisitions will always depend on market conditions, available capital, and the
value for each transaction. In general, we want to be "value" buyers, and will
not pursue any transaction unless we believe the post-transaction potential
value is high for shareholders.
•Divestiture of business units. From time to time we consider divestitures of
business units and/or assets which are not consistent with the future strategy
of our business, or if we believe the sale of such units and/or assets could be
in the best interests of our business and its stockholders, subject to our
ability to agree on acceptable terms with a prospective buyer. We currently are
considering several possible transactions, including discussions regarding the
sale of a business unit. Upon any such sale, a significant portion of the
proceeds would be used to repay indebtedness, with the remainder being used for
working capital purposes, and potentially the acquisition of complementary
businesses as discussed above. There is no assurance that any such divestiture
will occur, or if it does, if it would occur for a sales price currently
contemplated. If it occurs, there is no assurance that we will be able to use
the proceeds in the acquisition of a complementary business, or if we do if such
acquisition will be successful.
We continue to explore strategic alternatives to improve the market position and
profitability of our product offerings in the marketplace, generate additional
liquidity, and enhance our valuation. We may pursue our goals through organic
growth and through strategic alternatives. Some of these alternatives have
included, and could continue to include, selective acquisitions of business
segments or entire businesses, divestitures of assets or divisions, or a
restructuring of our company.
Business Segments
As of June 30, 2020, our business is organized into five reportable segments:
•Diagnostic Services
•Mobile Healthcare
•Diagnostic Imaging
•Building and Construction
•Real Estate and Investments
Diagnostic Services. Through Diagnostic Services, we offer a convenient and
economically efficient imaging and monitoring services program as an alternative
to purchasing equipment or outsourcing the procedures to another physician or
imaging center. For physicians who wish to perform nuclear imaging,
echocardiography, vascular or general ultrasound tests, we provide imaging
systems, qualified personnel, radiopharmaceuticals, licensing services, and the
logistics required to perform imaging in their own offices, and thereby the
ability to bill Medicare, Medicaid, or one of the third-party healthcare
insurers directly for those services, which are primarily cardiac in nature. We
provide imaging services primarily to cardiologists, internal medicine
physicians, and family practice doctors who typically enter into annual
contracts for a set number of days ranging from once per month to five times per
week.
Mobile Healthcare. Through Mobile Healthcare, we provide contract diagnostic
imaging, including computerized tomography ("CT"), magnetic resonance imaging
("MRI"), positron emission tomography ("PET"), PET/CT, and nuclear medicine and
healthcare expertise to hospitals, integrated delivery networks ("IDNs"), and
federal institutions on a long-term contract basis, as well as provisional
(short-term) services to institutions that are in transition. Rather than our
customers owning the equipment directly and operating the related services, we
provide this service when there is a cost, ease, and efficiency benefit.
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Diagnostic Imaging. Through Diagnostic Imaging, we sell our internally developed
solid-state gamma cameras, imaging systems and camera maintenance contracts. Our
imaging systems include nuclear cardiac imaging systems, as well as general
purpose nuclear imaging systems. We sell our imaging systems to physician
offices and hospitals primarily in the United States, although we have sold a
small number of imaging systems internationally. Our imaging systems are sold in
both portable and fixed configurations, provide enhanced operability and
improved patient comfort, 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). Our Diagnostic
Imaging segment revenues derive primarily from selling solid-state gamma cameras
and post-warranty camera maintenance contracts.
Building and Construction. ATRM through its wholly-owned subsidiaries KBS,
Glenbrook and EdgeBuilder, services residential and commercial construction
projects by manufacturing modular housing units, structural wall panels,
permanent wood foundation systems, and other engineered wood products, and
supplies general contractors with building materials. KBS is a Maine-based
manufacturer that started business in 2001 as a manufacturer of modular homes.
Our focus is to offer high quality products for both commercial and residential
buildings with a focus on customization to suit the project requirements,
provide value with our engineering and design expertise, and deliver product
when required by the customer. Glenbrook is a retail supplier of lumber,
windows, doors, cabinets, drywall, roofing, decking and other building materials
and conducts its operations in Oakdale, Minnesota. EdgeBuilder is a manufacturer
of structural wall panels, permanent wood foundation systems and other
engineered wood products and conducts its operations in Prescott, Wisconsin. We
provide high quality building materials and unmatched service and attention to
detail to building professionals, as well as homeowners. In addition, we provide
highly personalized service, knowledgeable salespeople and attention to detail
that the larger, big-box chain home stores do not provide. We offer superior
products unique to each project's requirements, provide value with our
engineering and design expertise that meet the customer's needs, while staying
cost-competitive and on schedule. While EdgeBuilder supplies the wall panels,
Glenbrook supplies "loose lumber" such as floor and roof sheathing, bracing, and
hardware with a "tandem" approach to every project. Our production strategy is
to utilize automation and the most efficient methods of manufacturing and
high-quality materials in all of our projects.
Real Estate and Investments. As part of the HoldCo Conversion, Digirad formed a
real estate division under a newly formed subsidiary named Star Real Estate
Holdings USA, Inc. ("SRE") for the purposes of holding significant real estate
assets that Digirad acquires. As an initial transaction to create Digirad's real
estate division under SRE and launch that aspect of the HoldCo Conversion, in
April 2019, Digirad funded the initial purchase of three manufacturing
facilities in Maine that manufacture modular buildings and leased those three
properties. The funding of the assets acquisition was primarily through the
revolver loan under our SNB Credit Facility. Digirad expects SRE to be
substantially self-funded over time and SRE has recently closed a commercial
mortgage financing with Gerber, whereby monies raised will be injected into KBS.
Lone Star Value Management, LLC (LSVM), which was a wholly owned subsidiary of
ATRM on the ATRM Acquisition Date, is a Connecticut based exempt reporting
advisor that was acquired by the Company in the ATRM Acquisition. As a result of
internal restructuring as of October 25, 2019, LSVM became a direct wholly owned
subsidiary of Digirad. LSVM provides services that include investment advisory
services and the servicing of pooled investment vehicles. The Company expects to
use LSVM to make strategic investments in future potential acquisition targets
for the Company.
Our Market
Healthcare Services and Products

Diagnostic imaging depictions of the internal anatomy or physiology are
generated primarily through non-invasive means. Diagnostic imaging facilitates
the early diagnosis of diseases and disorders, often minimizing the scope, cost,
and amount of care required and reducing the need for more invasive procedures.
Currently, the major types of non-invasive diagnostic imaging technologies
available are: x-ray, MRI, CT, ultrasound, PET, and nuclear imaging. The most
widely used imaging acquisition technology utilizing gamma cameras is single
photon emission computed tomography, or SPECT. All our current
internally-developed cardiac gamma cameras employ SPECT technology.

Diagnostic imaging is the standard of care in diagnosis of diseases and
disorders. We offer, through our businesses, the majority of these diagnostic
imaging modalities. All of the diagnostic imaging modalities that we offer (both
from provision of services and product sales) have been consistently utilized in
clinical applications for many years, and are stable in their use and need. By
offering a wide array of these modalities, we believe that we have strategically
diversified our operations in possible changing trends of utilization of one
diagnostic imaging modality from another.
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Construction Services and Products
In the building and construction business, KBS markets its modular homes
products through a direct sales organization and through inside sales, outside
sales, a network of independent dealers, builders, and contractors in the New
England states (Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island,
and Vermont). KBS's direct sales organization is responsible for all commercial
building projects, and works with developers, architects, owners, and general
contractors to establish the scope of work, terms of payment, and general
requirements for each project. KBS's sales people also work with independent
dealers, builders, and contractors to accurately configure and place orders for
residential homes for their end customers. KBS's network of independent dealers
and contractors do not work with it exclusively, although many have KBS model
homes on display at their retail centers. KBS does not assign exclusive
territories to its independent dealers and contractors, but they tend to sell in
areas of New England where they will not be competing against another KBS dealer
or contractor. KBS's backlog and pipeline, along with its market initiatives to
build more workforce housing, are expected to position KBS for growth in 2020.
EBGL markets its engineered structural wall panels and permanent wood foundation
systems through direct sales people and a network of builders, contractors and
developers in and around Minneapolis and St. Paul areas. EBGL's direct sales
organization is responsible for both residential and commercial projects and it
works with general contractors, developers and builders to provide bids and
quotes for specific projects. Our marketing efforts include participation in
industry trade shows, production of product literature, and sales support tools.
These efforts are designed to generate sales leads for our independent builders
and dealers, and direct salespeople.
Trends and Drivers
The market for diagnostic products and services is highly competitive. Our
business, which is focused primarily on the private practice and hospital
sectors, continues to face challenges of demand for diagnostic services and
imaging equipment, which we believe is due in part to the impact of the Deficit
Reduction Act on the reimbursement environment and the 2010 Healthcare Reform
laws, as well as general uncertainty in overall healthcare and legislative
changes in healthcare, such as the Affordable Care Act. These challenges have
impacted, and will likely continue to impact, our operations. We believe that
the principal competitive factors in our market include acceptance by hospitals
and physicians, relationships that we develop with our customers, budget
availability for our capital equipment, requirements for reimbursement, pricing,
ease-of-use, reliability, and mobility.
Diagnostic Services. In providing diagnostic services, we compete against many
smaller local and regional nuclear and/or ultrasound providers, often
owner-operators that may have lower operating costs. The fixed-installation
operators often utilize older, used equipment, and the mobile operators may use
older Digirad single-head cameras or newer dual-head cameras. We are the only
mobile provider with our own exclusive source of triple-head mobile systems.
Some competing operators place new or used cameras into physician offices and
then provide the staffing, supplies, and other support as an alternative to a
Diagnostic Services service contract. In addition, we compete against imaging
centers that install fixed nuclear gamma cameras and make them available to
referring physicians in their geographic vicinity. In these cases, the physician
sends their patients to the imaging center.
Diagnostic Imaging. In selling our imaging systems, we compete against several
large medical device manufacturers who offer a full line of imaging cameras for
each diagnostic imaging technology, including x-ray, MRI, CT, ultrasound,
nuclear medicine, or SPECT/CT and PET/CT hybrid imagers. The existing nuclear
imaging systems sold by these competitors have been in use for a longer period
of time than our internally developed nuclear gamma cameras, and are more widely
recognized and used by physicians and hospitals for nuclear imaging; however,
they are generally not solid-state, lightweight, as flexible, or portable.
Additionally, certain medical device companies have developed a version of
solid-state gamma cameras that may directly compete with our product offerings.
Many of the larger multi-modality competitors enjoy significant competitive
advantages over us, including greater brand recognition, greater financial and
technical resources, established relationships with healthcare professionals,
broader distribution networks, more resources for product development and
marketing and sales, and the ability to bundle products to offer discounts.
Mobile Healthcare. The market for selling, servicing, and operating diagnostic
imaging services, patient monitoring equipment, and imaging systems is highly
competitive. In providing our Mobile Healthcare services, we compete against a
few large national and regional providers. In addition to direct competition
from other providers of services similar to those offered by us, we compete with
freestanding imaging centers and healthcare providers that have their own
diagnostic imaging systems, as well as with equipment manufacturers that sell
imaging equipment directly to healthcare providers for permanent installation.
Some of the direct competitors, which provide contract MRI and PET/CT services,
have access to greater financial resources than we do. In addition, some of our
customers are capable of providing the same services we provide to their
patients directly, subject only to their decision to acquire a high-cost
diagnostic imaging system, assume the financial and technology risk, and employ
the necessary technologists, rather than obtain equipment and services from us.
We may also experience greater competition in states that currently have
certificate of need laws if such laws were repealed, thereby reducing barriers
to entry
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and competition in those states. We also compete against other similar providers
in quality of services, quality of imaging systems, relationships with
healthcare providers, knowledge and service quality of technologists, price,
availability, and reliability.
Building and Construction. The market for building and construction is highly
competitive. KBS is a regional manufacturer of modular housing units with its
primary market in the New England states. Several modular manufacturers are
located in these New England states and in nearby Pennsylvania. Some competitors
have manufacturing locations in Canada and ship their products to the United
States. KBS's competitors include Apex Homes, Commodore Corporation, Skyline
Champion Homes, Custom Building Systems, Durabuilt, Excel Homes, Huntington
Homes, Icon Legacy Homes, Kent Homes (Canada), Maple Leaf Homes (Canada), Muncy
Homes, New England Homes, New Era, Pennwest, Premier Builders (PA), Professional
Builders Systems, RCM (Canada), Redmond Homes, Ritz-Craft, Simplex Homes, and
Westchester Modular. EBGL is a regional manufacturer of engineered structural
wall panels and permanent wood foundation systems, and also has a local retail
business. EBGL's market is primarily the Upper Midwest states (Iowa, Minnesota,
Missouri, North Dakota, South Dakota, and Wisconsin). EBGL's competitors include
Precision Wall Systems, Component Manufacturing Company, JL Schwieters
Construction, Arrow Building Center, and Marshall Truss Systems Incorporated.
EBGL's professional building supply business competes on a local level against
both small, local lumber yards, regional building supply companies and to a
certain degree, the "big box" stores such as Home Depot, Lowe's, and Menard's.
Real Estate and Investments. As part of the HoldCo Conversion, Digirad formed a
real estate division under a newly formed subsidiary named Star Real Estate
Holdings USA, Inc. ("SRE") for the purposes of holding significant real estate
assets that Digirad acquires. As an initial transaction to create Digirad's real
estate division under SRE and launch that aspect of the HoldCo Conversion, in
April 2019, Digirad funded the initial purchase of three manufacturing
facilities in Maine that manufacture modular buildings and leased those three
properties. The funding of the assets acquisition was primarily through the
revolver loan under our SNB Credit Facility. Digirad expects SRE to be
substantially self-funded over time by raising its own capital in the form of
commercial mortgages on the properties it owns or by raising other forms of
external capital. As part of the investment arm of the Company, LSVM, a
Connecticut based exempt reporting advisor may make strategic investments in
future potential acquisition targets for the Company or in pursuit of other
strategic relationships. LSVM currently also provides investment advisory
services and manages assets of related and unrelated parties to the Company
through pooled investment vehicles.
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, 2019 have the greatest
potential impact on our financial statements, so we consider them to be our
critical accounting policies and estimates.
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Results of Operations
Comparison of the Three Months Ended June 30, 2020 and 2019
The following table summarizes our results for the three months ended June 30,
2020 and 2019 (in thousands):
                                                                                    Three Months Ended June 30,
                                                            Percent of                                Percent of                Change from Prior Year
                                          2020               Revenues               2019               Revenues                                                               Dollars        Percent
Total revenues                         $ 22,342                   100.0  %       $ 25,798                   100.0  %       $   (3,456)              (13.4) %
Total cost of revenues                   18,316                    82.0  %         20,794                    80.6  %           (2,478)              (11.9) %
Gross profit                              4,026                    18.0  %          5,004                    19.4  %             (978)              (19.5) %
Total operating expenses                  5,552                    24.9  %          6,150                    23.8  %             (598)               (9.7) %
Loss from operations                     (1,526)                   (6.9) %         (1,146)                   (4.4) %             (380)               33.2  %
Total other income (expense)                289                     1.3  %           (491)                   (1.9) %              780              (158.9) %
Loss before income taxes                 (1,237)                   (5.6) %         (1,637)                   (6.3) %              400               (24.4) %
Income tax (expense) benefit                (50)                   (0.2) %            162                     0.6  %             (212)             (130.9) %
Net loss from continuing
operations                               (1,287)                   (5.8) %         (1,475)                   (5.7) %              188               (12.7) %
Net income from discontinued
operations                                    -                       -  %            266                     1.0  %             (266)             (100.0) %
Net loss                               $ (1,287)                   (5.8) %       $ (1,209)                   (4.7) %       $      (78)                6.5  %


Revenues
Healthcare

Healthcare revenue by segments is summarized as follows (in thousands):

                                                      Three Months Ended June 30,
                                           2020           2019          Change        % Change
          Diagnostic Services           $  7,140       $ 12,318       $ (5,178)        (42.0) %
          Mobile Healthcare                7,832         10,431         (2,599)        (24.9) %
          Diagnostic Imaging               2,333          3,049           (716)        (23.5) %
          Total Healthcare Revenue      $ 17,305       $ 25,798       $ (8,493)        (32.9) %


The decrease in Diagnostic Services, Mobile Healthcare and Diagnostic Imaging
revenue compared to the prior year quarter was primarily due to the COVID-19
pandemic impact.
Building and Construction
Building and construction revenue is summarized as follows (in thousands):
                                                             Three Months Ended June 30,
                                                   2020                2019       Change       % Change
 Building and Construction                    $    5,035              $ -       $ 5,035             -  %
 Total Building and Construction Revenue      $    5,035              $ -       $ 5,035             -  %


The increase in building and construction revenue was revenue generated by the
segment subsequent to the ATRM Merger.
Real Estate and Investments
Real Estate and Investments revenue is summarized as follows (in thousands):
                                                            Three Months Ended June 30,
                                              2020                        2019      Change      % Change
Real Estate and Investments               $      2                       $ -       $   2             -  %
Real Estate and Investments Revenue       $      2                       $ -       $   2             -  %


The increase in real estate and investments revenue was revenue generated by the
LSVM and intercompany lease revenue from SRE subsequent to the ATRM Merger. The
SRE lease revenue was eliminated through intercompany consolidation in the
condensed consolidated financial statements.
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Gross Profit
Healthcare Gross Profit
Healthcare gross profit and gross margin by segments is summarized as follows
(in thousands):
                                                       Three Months Ended June 30,
                                                2020                       2019        % Change
   Diagnostic Services gross profit       $        953                  $ 

2,805 (66.0) %

   Diagnostic Services gross margin               13.3   %                 

22.8 %

   Mobile Healthcare gross profit         $        851                  $ 

1,296 (34.3) %

   Mobile Healthcare gross margin                 10.9   %                 

12.4 %

   Diagnostic Imaging gross profit        $      1,232                  $ 

1,080 14.1 %

   Diagnostic Imaging gross margin                52.8   %                 

35.4 %

   Total healthcare gross profit          $      3,036                  $ 

5,181 (41.4) %

   Total healthcare gross margin                  17.5   %                 

20.1 %

The decrease in Diagnostic Services and Mobile Healthcare gross margin
percentage was mainly due to COVID-19 pandemic and the associated public health
measures in place during the three months ended June 30, 2020, which
significantly reduced our scanning revenue.
The increase in Diagnostic Imaging gross margin percentage was primarily due to
the decrease in lower margin camera support business compared to the same period
prior year.
Building and Construction Gross Profit
Building and Construction gross profit and margin is summarized as follows (in
thousands):
                                                                            

Three Months Ended June 30,

                                                                      2020                   2019               % Change
Building and Construction gross profit                        $          1,053            $      -                       -  %
Building and Construction gross margin                                    20.9    %              -  %


The Building and Construction gross profit was generated by the segment
subsequent to the ATRM Merger.
Real Estate and Investments Gross Profit
Real Estate and Investments gross profit and margin is summarized as follows (in
thousands):
                                                                             Three Months Ended June 30,
                                                                   2020                2019               % Change
Real Estate and Investments gross loss                        $       (63)          $   (177)                  (64.4) %
Real Estate and Investments gross margin                         (3,150.0)  %              -  %

The Real Estate and Investments gross loss relates to depreciation expense associated with the three manufacturing facilities acquired in April 2019.

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Operating Expenses
Operating expenses are summarized as follows (in thousands):
                                                            Three Months Ended June 30,                                                                                            Percent of Revenues
                                                                                         Change
                                            2020               2019                                            Dollars                  Percent        2020          2019
Selling, general and
administrative expenses                 $   4,751           $ 4,867          $   (116)               (2.4) %                  21.3  %                    18.9  %
Amortization of intangible assets             801               283               518               183.0  %                   3.6  %                     1.1  %
Merger and financing                            -             1,000            (1,000)             (100.0) %                     -  %                     3.9  %
Total operating expenses                $   5,552           $ 6,150          $   (598)               (9.7) %                  24.9  %                   

23.9 %

The decrease in selling, general and administrative expenses was primarily due
to $1.2 million cost saving in selling and travelling expenses from Digirad
Health Division offset with a $1.1 million increase from the Building and
Construction Division.
The increase in amortization of intangible assets was due to the ATRM Merger by
approximately $0.5 million of the increase.
Merger and financing costs for three months ended June 30, 2019 are
predominantly comprised of one-time costs related to the acquisition of ATRM,
including an increase of $0.7 million in ATRM related expenses and a write-off
of approximately $0.3 million of capitalized costs related to the Equity
Offering described below under "Liquidity and Capital Resources" in this MD&A.
Total Other Income (Expense)
Total other income (expense) is summarized as follows (in thousands):
                                                  Three Months Ended June 

30,

                                                2020                        

2019

        Other income (expense), net       $        672

$ (5)

        Interest expense, net                     (383)                     

(254)

        Loss on sale of the building                 -                      

(232)

        Total other income (expense)      $        289

$ (491)

Other income, net for three months ended June 30, 2020 is predominantly
comprised of $0.4 million and $0.2 million settlements of aged Massachusetts
sales and use tax payable in KBS and aged legal costs in ATRM, respectively.
Interest expense, net, for the three months ended June 30, 2020 and 2019 is
predominantly comprised of interest costs and the related amortization of
deferred issuance costs on our debt.
The loss on building relates to the completion of the sale of buildings and land
in Fargo, North Dakota.
Income Tax Expense
For the three months ended June 30, 2020, the Company recorded an income tax
expense of $50 thousand. See Note 10, Income Taxes, within the notes to our
unaudited condensed consolidated financial statements for further information
related to the Company's income taxes.
Income from Discontinued Operations
See Note 14, Discontinued Operations of the unaudited condensed consolidated
financial statements for information regarding discontinued operations.

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Results of Operations
Comparison of the Six Months Ended June 30, 2020 and 2019
The following table summarizes our results for the six months ended June 30,
2020 and 2019 (in thousands):
                                                                                     Six Months Ended June 30,
                                                            Percent of                                Percent of                 Change from Prior Year
                                          2020               Revenues               2019               Revenues                                                                Dollars        Percent
Total revenues                         $ 51,199                   100.0  %       $ 49,710                   100.0  %       $    1,489                  3.0  %
Total cost of revenues                   42,732                    83.5  %         40,725                    81.9  %            2,007                  4.9  %
Gross profit                              8,467                    16.5  %          8,985                    18.1  %             (518)                (5.8) %
Total operating expenses                 12,597                    24.6  %         11,266                    22.7  %            1,331                 11.8  %
Loss from operations                     (4,130)                   (8.1) %         (2,281)                   (4.6) %           (1,849)                81.1  %
Total other expense                         (26)                   (0.1) %         (1,021)                   (2.1) %              995                (97.5) %
Loss before income taxes                 (4,156)                   (8.0) %         (3,302)                   (6.6) %             (854)                25.9  %
Income tax (expense) benefit                (84)                   (0.2) %            170                     0.3  %             (254)              (149.4) %
Net loss from continuing
operations                               (4,240)                   (8.2) %         (3,132)                   (6.3) %           (1,108)                35.4  %
Net loss from discontinued
operations                                    -                       -  %            266                     0.5  %             (266)              (100.0) %
Net loss                               $ (4,240)                   (8.2) %       $ (2,866)                   (5.8) %       $   (1,374)                47.9  %


Revenues
Healthcare

Healthcare revenue by segments is summarized as follows (in thousands):

                                                       Six Months Ended June 30,
                                           2020           2019          Change        % Change
          Diagnostic Services           $ 17,954       $ 24,044       $ (6,090)        (25.3) %
          Mobile Healthcare               17,499         20,094         (2,595)        (12.9) %
          Diagnostic Imaging               5,194          5,572           (378)         (6.8) %
          Total Healthcare Revenue      $ 40,647       $ 49,710       $ (9,063)        (18.2) %


The decrease in Diagnostic Services, Mobile Healthcare and Diagnostic Imaging
revenue compared to the prior year six months period was primarily due to the
COVID-19 pandemic impact and the associated public health measures in place
during the six months ended, June 30, 2020.
Building and Construction
Building and construction revenue is summarized as follows (in thousands):
                                                              Six Months Ended June 30,
                                                     2020          2019       Change        % Change
    Building and Construction                    $   10,519       $ -       $ 10,519             -  %

Total Building and Construction Revenue $ 10,519 $ - $ 10,519

             -  %


The increase in building and construction revenue was revenue generated by the
segment subsequent to the ATRM Merger.
Real Estate and Investments
Real Estate and Investments revenue is summarized as follows (in thousands):
                                                             Six Months Ended June 30,
                                                2020                   2019      Change      % Change
   Real Estate and Investments               $    33                  $ -       $  33             -  %
   Real Estate and Investments Revenue       $    33                  $ -       $  33             -  %


The increase in real estate and investments revenue was revenue generated by the
LSVM and intercompany lease revenue from SRE subsequent to the ATRM Merger. The
SRE lease revenue was eliminated through intercompany consolidation in the
condensed consolidated financial statements.
                                       51
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Gross Profit
Healthcare Gross Profit
Healthcare gross profit and gross margin by segments is summarized as follows
(in thousands):
                                                         Six Months Ended June 30,
                                                 2020                     2019        % Change
     Diagnostic Services gross profit       $     2,958                $ 

5,386 (45.1) %

     Diagnostic Services gross margin              16.5   %               

22.4 %

     Mobile Healthcare gross profit               2,050                  1,910           7.3  %
     Mobile Healthcare gross margin                11.7   %               

9.5 %

     Diagnostic Imaging gross profit              2,101                  

1,866 12.6 %

     Diagnostic Imaging gross margin               40.5   %               

33.5 %

     Total healthcare gross profit          $     7,109                $ 

9,162 (22.4) %

     Total healthcare gross margin                 17.5   %               

18.4 %

The decrease in Diagnostic Services gross margin percentage was mainly due to
the COVID-19 pandemic impact and the associated public health measures in place
which directly reduced scanning revenue, during the six months ended, June 30,
2020.
The increase in Mobile Healthcare gross margin percentage was mainly due to cost
saving from furloughs of employees and less lease expenses from interim rental
equipment which exceeded the revenue reduction.
The decrease in Diagnostic Imaging gross margin percentage was primarily due to
the decrease in lower margin camera support business compared to the same period
prior year.
Building and Construction Gross Profit
Building and Construction gross profit and margin is summarized as follows (in
thousands):
                                                           Six Months Ended June 30,
                                                    2020                        2019      % Change
Building and Construction gross profit       $        1,456                    $ -             -  %
Building and Construction gross margin                 13.8   %             

- %

The Building and Construction gross profit was generated by the segment
subsequent to the ATRM Merger.
Real Estate and Investments Gross Profit
Real Estate and Investments gross profit and margin is summarized as follows (in
thousands):
                                                            Six Months Ended June 30,
                                                    2020                      2019        % Change
 Real Estate and Investments gross loss        $      (98)

$ (177) (44.6) %

 Real Estate and Investments gross margin          (297.0)  %               

- %

The Real Estate and Investments gross loss relates to depreciation expense
associated with the three manufacturing facilities acquired in April 2019. The
decrease in gross loss was mainly due to one time write off expenses of small
equipment purchased not meeting our fixed asset policy in 2019.

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Operating Expenses
Operating expenses are summarized as follows (in thousands):
                                                              Six Months Ended June 30,                                                                                            Percent of Revenues
                                                                                          Change
                                             2020              2019                                            Dollars                  Percent        2020          2019
Selling, general and administrative
expenses                                  $ 10,979          $  9,700          $ 1,279                13.2  %                  21.4  %                    19.5  %
Amortization of intangible assets            1,618               566            1,052               185.9  %                   3.2  %                     1.1  %
Merger and financing                             -             1,000           (1,000)             (100.0) %                     -  %                     2.0  %
Total operating expenses                  $ 12,597          $ 11,266          $ 1,331                11.8  %                  24.6  %                   

22.6 %

The increase in selling, general and administrative expenses was primarily due
to $2.4 million of expenses from the Building and Construction Division and
offset by a $0.9 million decrease due to cost saving in the Digirad Health
Division.
The increase in amortization of intangible assets was due to the ATRM Merger by
approximately $1.1 million.
Merger and financing costs for six months ended June 30, 2019, are predominantly
comprised of one-time costs related to the acquisition of ATRM, including an
increase of $0.7 million in ATRM related expenses and a write-off of
approximately $0.3 million of capitalized costs related to the Equity Offering
described below under "Liquidity and Capital Resources" in this MD&A.
Total Other Expense
Total other expense is summarized as follows (in thousands):
                                                    Six Months Ended June 30,
                                                  2020                      2019
          Other income (expense), net         $     832                  $   (203)
          Interest expense, net                    (858)                     (435)
          Loss on sale of building                    -                      (232)
          Loss on extinguishment of debt              -                      (151)
          Total other expense                 $     (26)                 $ (1,021)


Other income, net for six months ended June 30, 2020 is predominantly comprised
of the settlements of aged Massachusetts sales and use tax payable in KBS and
aged legal costs in ATRM, respectively.
Interest expense, net, for the six months ended June 30, 2020 and 2019 is
predominantly comprised of interest costs and the related amortization of
deferred issuance costs on our debt.
The loss on building relates to the completion of the sale of buildings and land
in Fargo, North Dakota.
Loss on extinguishment of debt is related to the write-off of unamortized
deferred financing costs related to the termination of the Comerica Credit
Agreement on March 29, 2019. See Note 8, Debt to the unaudited condensed
consolidated financial statements for further information.
Income Tax Expense
For the six months ended June 30, 2020, the Company recorded an income tax
expense of $84 thousand. See Note 10, Income Taxes, within the notes to our
unaudited condensed consolidated financial statements for further information
related to the Company's income taxes.
Income from Discontinued Operations
See Note 14, Discontinued Operations of the unaudited condensed consolidated
financial statements for information regarding discontinued operations.
                                       53
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Liquidity and Capital Resources
Overview
We generated cash of $49 thousand from operations during the six months ended
June 30, 2020. Cash flows from operations primarily consist of our net loss
(adjusted for depreciation, amortization, and other non-cash items), and the net
effect of changes in working capital. Cash flows used in investing activities
primarily consist of our investment in capital equipment required to maintain
and grow our business, as well as acquisitions and dispositions. Cash flows from
financing activities primarily consist of our net proceeds from borrowings and
the receipt of cash related to our common stock and warrants offering, offset by
the repayments of long-term borrowings.
Our principal sources of liquidity include our existing cash and cash
equivalents, cash generated from operations, and funds available under various
credit facilities. As of June 30, 2020, we had $9.1 million of cash and cash
equivalents and $5.7 million available under our Sterling revolving line of
credit.
We require capital, principally for capital expenditures, acquisition activity,
dividend payments and to finance accounts receivable and inventory. Our working
capital requirements vary from period to period depending on inventory
requirements, the timing of deliveries, and the payment cycles of our customers.
Our capital expenditures consist primarily of medical imaging and diagnostic
devices utilized in the delivery of our services, as well as vehicles and
information technology hardware and software.
The accompanying financial statements have been prepared assuming we will
continue as a going concern, which contemplates the realization of assets and
settlement of obligations in the normal course of business. We incurred net
losses from operations of approximately $1.5 million and $4.1 million for the
three and six months ended June 30, 2020, respectively and $1.1 million and $2.3
million for the three and six months ended June 30, 2019, respectively. We have
an accumulated deficit of $122.8 million and $118.5 million as of June 30, 2020
and December 31, 2019, respectively. Net cash provided from operations was
$49 thousand for the six months ended June 30, 2020 compared to $0.4 million for
the same prior year period in 2019.
As of June 30, 2020, we had approximately $4.5 million in third party credit
facilities and $2.2 million in related party notes coming due in the current
business cycle. As noted below, we previously had a covenant breach with Gerber.
In January 2020, as discussed more fully below, we refinanced our debt with
Gerber and Premier and reset the debt covenants with these lenders.
The operating losses resulted from our Healthcare and Building and Construction
divisions. As a part of the ATRM Merger, ATRM has restructured operations to
focus on higher value added properties and larger commercial projects with the
goal of increasing sales prices and increasing margins.
Should the Company not be able to increase sales and profit margins in the
Building and Construction division, the Company may require additional support.
To this end, a significant shareholder and lender has committed to provide
financial support to the Company by providing written assurances that he will
(a) not call approximately $2.2 million of related party debt when it becomes
due in October 2020; and (b) extend through June 2021 the Company's put option
with this shareholder of $1.0 million in Series A Cumulative Perpetual Preferred
stock. Management believes that the Company has the liquidity and operations to
continue to support the business through the next 12 months from the issuance of
this Quarterly Report. The Company's ability to continue as a going concern is
dependent on its ability to execute its plans.
Equity Offering
On April 30, 2020, the Company filed a registration statement with the SEC (the
"Registration Statement") relating to a public offering of Common Stock and
warrants to purchase Common Stock (the "Offering"). On May 28, 2020, the Company
closed the Offering in which, pursuant to the underwriting agreement entered
into by and between the Company and Maxim Group LLC ("Maxim"), as representative
of the underwriters, dated May 26, 2020, the Company issued and sold (i)
2,225,000 shares of Common Stock, and (ii) 2,225,000 warrants (the "Warrants")
to purchase up to 1,112,500 shares of Common Stock. The Offering price was $2.24
per share of Common Stock and $0.01 per accompanying Warrant (for a combined
Offering price of $2.25). The Underwriting Agreement contained customary
representations, warranties, and agreements by the Company, customary conditions
to closing, indemnification obligations of the Company and Maxim (including for
liabilities under the Securities Act of 1933, as amended) and certain other
obligations.
                                       54
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Pursuant to the Underwriting Agreement, the Company granted to Maxim an option
for a period of 45 days (the "Over-Allotment Option") to purchase up to 225,000
additional shares of Common Stock and 225,000 Warrants to purchase up to an
additional 112,500 shares of Common Stock. Effective as of the closing of the
Offering, Maxim exercised the Over-Allotment Option for the purchase of 225,000
Warrants for a price of $0.01 per Warrant. On June 10, 2020, Maxim exercised the
Over-Allotment Option for the purchase of 225,000 shares of Common Stock for a
price of $2.24 per share, before underwriting discounts. The closing of the sale
of the over-allotment shares brought the total number of shares of common stock
sold by the Company in the Offering to 2,450,000, and total gross proceeds to
approximately $5.5 million
The net proceeds to the Company from the Offering (including the exercise of the
Over-Allotment Option) were approximately $4.2 million, after deducting the fees
and commissions and estimated Offering expenses payable by the Company, and
excluding any proceeds the Company may receive upon exercise of the Warrants.
The Company currently intends to use at least $3.0 million of the net proceeds
from the sale of shares of Common Stock and the Warrants in the Offering to fund
commercial modular housing projects to be constructed in New England by the
Company's KBS Builders, Inc. subsidiary, and the remainder of the net proceeds
(if any) will be used for working capital and for other general corporate
purposes. The Company will have broad discretion in determining how the proceeds
of the Offering will be used, and its discretion is not limited by the
aforementioned possible uses.
Cash Flows
The following table shows cash flow information for the six months ended
June 30, 2020 and 2019 (in thousands):
                                                      Six Months Ended June 

30,

                                                     2020                   

2019

Net cash provided by operating activities       $        49                $    368
Net cash used in investing activities           $      (202)               $ (6,166)
Net cash provided by financing activities       $     7,372

$ 5,017

Operating Activities
The decrease in cash compared to the prior year period was primarily due to
increased net loss and net working capital changes.
Investing Activities
The decrease in investing activities cash flow compared to the prior year period
was primarily attributable to lower capital expenditures.
Financing Activities
The increased in cash flows from financing activities is primarily due to $4.2
million net proceeds received from the Offering.
Digirad Loan Agreement
On March 29, 2019, the Company entered into a Loan and Security Agreement (the
"SNB Loan Agreement") by and among the Healthcare Subsidiaries of the Company,
as SNB Borrowers (collectively, the "SNB Borrowers"); the Company, as guarantor;
and Sterling National Bank, a national banking association, as lender ("SNB").
The SNB Loan Agreement is a five-year credit facility maturing in March 2024,
with a maximum credit amount of $20.0 million for both revolving loans and
outstanding letter of credit obligations (the "SNB Credit Facility"). Under the
SNB Credit Facility, the SNB Borrowers can request the issuance of letters of
credit in an aggregate amount not to exceed $0.5 million at any one time
outstanding. As of June 30, 2020, the Company had $0.2 million of letters of
credit outstanding and had additional borrowing capacity of $5.7 million.
At the SNB Borrowers' option, the SNB Credit Facility will bear interest at
either (i) a Floating LIBOR Rate, as defined in the SNB Loan Agreement, plus a
margin of 2.50% per annum; or (ii) a Fixed LIBOR Rate, as defined in the SNB
Loan Agreement, plus a margin of 2.25% per annum.
The Company used a portion of the financing made available under the SNB Credit
Facility to refinance and terminate, effective as of March 29, 2019, its
previous credit facility with Comerica Bank (the "Comerica Credit Facility").
                                       55
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The SNB Loan Agreement includes certain representations, warranties of SNB
Borrowers, as well as events of default and certain affirmative and negative
covenants by the SNB Borrowers that are customary for loan agreements of this
type. These covenants include restrictions on borrowings, investments and
dispositions by SNB Borrowers, as well as limitations on the SNB Borrowers'
ability to make certain distributions. Upon the occurrence and during the
continuation of an event of default under the SNB Loan Agreement, SNB may, among
other things, declare the loans and all other obligations under the SNB Loan
Agreement immediately due and payable and increase the interest rate at which
loans and obligations under the SNB Loan Agreement bear interest. The SNB Credit
Facility is secured by a first-priority security interest in substantially all
of the assets of the Company and the SNB Borrowers and a pledge of all shares of
the SNB Borrowers.
On March 29, 2019, in connection with the Company's entry into the SNB Loan
Agreement, Mr. Eberwein, the Chairman of the Company's board of directors,
entered into Limited Guaranty Agreement (the "SNB Eberwein Guaranty") with SNB
pursuant to which he guaranteed to SNB the prompt performance of all the
Borrowers' obligations to SNB under the SNB Loan Agreement, including the full
payment of all indebtedness owing by Borrowers to SNB under or in connection
with the SNB Loan Agreement and related SNB Credit Facility documents. Mr.
Eberwein's obligations under the SNB Eberwein Guaranty are limited in the
aggregate to the amount of (a) $1.5 million, plus (b) reasonable costs and
expenses of SNB incurred in connection with the SNB Eberwein Guaranty. Mr.
Eberwein's obligations under the SNB Eberwein Guaranty terminate upon the
Company and Borrowers achieving certain milestones set forth therein.
In connection with the SNB Credit Facility, in the twelve months ended December
31, 2019, the Company recognized a $0.2 million loss on extinguishment due to
the write off of unamortized deferred financing costs associated with the
Comerica Credit Facility.
At June 30, 2020, the Company was in compliance with SNB covenants.
ATRM Promissory Notes
See Note 12, Related Party Transactions, for information regarding certain ATRM
promissory notes that are outstanding.
KBS Loan Agreement
On February 23, 2016, ATRM, KBS and Main Modular Haulers, Inc. (a subsidiary of
ATRM) entered into a Loan and Security Agreement, (as amended, the "KBS Loan
Agreement"), with Gerber Finance Inc. ("Gerber"). The KBS Loan Agreement
provides KBS with a revolving line of credit with borrowing availability of up
to $4.0 million. Availability under the line of credit is based on a formula
tied to KBS's eligible accounts receivable, inventory and other collateral. The
KBS Loan Agreement, which was scheduled to expire on February 22, 2018, has been
automatically extended for successive one (1) year periods in accordance with
its terms and is now scheduled to expire on February 22, 2021. The KBS Loan
Agreement will be automatically extended for another one (1) year period unless
a party thereto provides prior written notice of termination As of June 30,
2020, neither parties has provided notice of termination. Upon the final
expiration of the term of the KBS Loan Agreement, the outstanding principal
balance is payable in full. Borrowings bear interest at the prime rate plus
2.75%, with interest payable monthly. The KBS Loan Agreement also provides for
certain fees payable to Gerber during its term, including a 1.5% annual
facilities fee and a 0.10% monthly collateral monitoring fee. KBS's obligations
under the KBS Loan Agreement are secured by all of its assets and are guaranteed
by ATRM. Unsecured promissory notes issued by KBS and ATRM are subordinate to
KBS's obligations under the KBS Loan Agreement. The KBS Loan Agreement contains
representations, warranties, affirmative and negative covenants, defined events
of default and other provisions customary for financings of this type. Financial
covenants require that KBS maintain a maximum leverage ratio (as defined in the
KBS Loan Agreement) and KBS not incur a net annual post-tax loss in any fiscal
year during the term of the KBS Loan Agreement.
The parties to the KBS Loan Agreement have amended the KBS Loan Agreement to
provide for increased availability under the KBS Loan Agreement to KBS under
certain circumstances, including for new equipment additions, and certain other
changes, as well as a waiver of certain covenants.
As of December 31, 2019 and 2018, KBS was not in compliance with the financial
covenants requiring no net annual post-tax loss for KBS or the minimum leverage
ratio covenant as of 2018. The occurrence of any event of default under the KBS
Loan Agreement may result in KBS's obligations under the KBS Loan Agreement
becoming immediately due and payable. In April 2019, June 2019 and February
2020, we obtained a waiver from Gerber for these events. In addition to
obtaining a waiver for these covenants, the Company and Gerber agreed to
eliminate the minimum leverage ratio covenant for fiscal years after 2018.
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On September 10, 2019, the parties of the KBS Loan Agreement entered into a
Consent and Acknowledgment Agreement and Twelfth Amendment to Loan Agreement
(the "Twelfth Amendment"), by and among Gerber, KBS, ATRM and the Company,
pursuant to which the Company agreed to guarantee amounts borrowed by certain
ATRM's subsidiaries from Gerber. The Twelfth Amendment requires the Company to
serve as an additional guarantor with the existing guarantor, ATRM, with respect
to the payment, performance and discharge of each and every obligation of
payment and performance by the borrowing subsidiaries with respect to the loans
made by Gerber to them. The Twelfth Amendment also provides that upon payment in
full of the EBGL Obligations (as defined therein), the amount of the Cash
Collateral (as defined therein) will be reduced to $0.3 million. Additionally,
ATRM had on deposit $0.2 million in a collateral account maintained with Gerber
to secure the loans under the KBS Loan Agreement which was returned to ATRM in
November 2019.
On January 31, 2020, the Company, ATRM, KBS and Gerber entered into a Thirteenth
Amendment to Loan and Security Agreement (the "Thirteenth Amendment") to amend
the terms of the KBS Loan Agreement, in order to, among other things (a) amend
the definitions of "Ancillary Credit Parties," "Guarantor," "Obligations," and
"Subordinated Lender" to address the obligations of the Star Borrowers, the EBGL
Borrowers, the Star Credit Parties, and the EBGL Credit Parties under the Star
Loan Agreement, EBGL Loan Agreement and the Subordination Agreements (each as
defined below) to which they are a party and (b) add a new cross default
provision. As of June 30, 2020, approximately $1.2 million was outstanding under
the KBS Loan Agreement.
On March 5, 2020, in connection with the First EBGL Amendment, Gerber, KBS, ATRM
and the Company entered into a Consent and as a Fourteenth Amendment to Loan and
Security Agreement that amended the KBS Loan Agreement (the "Consent and
Fourteenth Amendment"). Under the terms of the Consent and Fourteenth Amendment,
the parties thereto (and the subordinated creditors that consented thereto)
consented to the First EBGL Amendment and agreed that cash collateral would no
longer be part of the borrowing base and that the borrowing base would no longer
be based on cash availability for purposes of the KBS Loan Agreement.
On April 1, 2020, Gerber and KBS entered into a Fifteenth Amendment to Loan
Agreement (the "Fifteenth Amendment") pursuant to which the "Minimum Average
Monthly Loan Amount" under the KBS Loan Agreement was decreased to twenty-five
percent (25%) of the Maximum Revolving Amount (as defined in the KBS Loan
Agreement).
EBGL Premier Note
On June 30, 2017, EdgeBuilder and Glenbrook (together, EBGL) entered into a
Revolving Credit Loan Agreement (as amended, the "Premier Loan Agreement") with
Premier Bank ("Premier") providing EBGL with a working capital line of credit of
up to $3.0 million. The Premier Loan Agreement replaced the prior revolving
credit facility under a loan and security agreement with Gerber (the "EBGL Loan
Agreement"), which was terminated on the same date and all obligations of EBGL
and ATRM in favor of Gerber in connection with the EBGL Loan Agreement were
extinguished.
Availability under the Premier Loan Agreement is based on a formula tied to
EBGL's eligible accounts receivable, inventory and equipment, and borrowings
bear interest at the prime rate plus 1.50%, with interest payable monthly and
the outstanding principal balance payable upon expiration of the term of the
Premier Loan Agreement. The Premier Loan Agreement also provides for certain
fees payable to Premier during its term. The initial term of the Premier Loan
Agreement was scheduled to expire on June 30, 2018, but was extended by Premier
until February 1, 2019, and in July 2019, it was extended further by Premier
until October 1, 2019. On October 1, 2019, it was extended until November 1,
2019; and on November 1, 2019, was extended until January 1, 2020; and on
January 31, 2020, it was extended until January 31, 2023. The Premier Loan
Agreement may be further extended from time to time at our request, subject to
approval by Premier. EBGL's obligations under the Premier Loan Agreement are
secured by all of their inventory, equipment, accounts and other intangibles,
fixtures and all proceeds of the foregoing.
As of December 31, 2019, EBGL was in compliance with the following covenants
under the Premier Loan Agreement: (i) a requirement to maintain a Debt Service
Coverage Ratio for the calendar year of at least 1.0; and (ii) a requirement to
deliver ATRM's fiscal year-end audited financial statements within 120 days of
the end of each calendar year. The occurrence of any event of default under the
Premier Loan Agreement may result in EBGL's obligations under the Premier Loan
Agreement becoming immediately due and payable.
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On January 31, 2020, contemporaneously with the execution and delivery of the
Star Loan Agreement and EBGL Loan Agreement described below, Glenbrook and
EdgeBuilder entered into an Extension and Modification Agreement (the
"Modification Agreement") with Premier that modified the terms of that certain
Revolving Credit Promissory Note (the "Premier Note") made by Glenbrook and
EdgeBuilder pursuant to that the Premier Loan Agreement. Pursuant to the
Modification Agreement, the amount of indebtedness evidenced by the Premier Note
was reduced to $1.0 million, and the Premier Note was modified to, among other
things: (a) extend the Final Maturity Date (as defined in the Premier Note) of
the Premier Note to January 31, 2023, and (b) set the interest that the Premier
Note will bear at 5.75% per annum. As a condition to close and to then later
extend the term of the Premier Loan Agreement, ATRM and Mr. Eberwein executed a
guaranty in favor of Premier, which has, through the multiple extensions
described above, been extended through January 1, 2023, under which ATRM and Mr.
Eberwein have absolutely and unconditionally guaranteed all of EBGL's
obligations under the Premier Loan Agreement. As of June 30, 2020, approximately
$0.9 million was outstanding under the Premier Loan Agreement.
Gerber Star and EBGL Loans
On January 31, 2020, SRE, 947 Waterford Road, LLC ("947 Waterford"), 300 Park
Street, LLC ("300 Park"), and 56 Mechanic Falls Road, LLC ("56 Mechanic" and
together with SRE, 947 Waterford, and 300 Park, (the "Star Borrowers"), each an
Investments Subsidiary, and the Company, ATRM, KBS, EdgeBuilder, and Glenbrook
(collectively, the "Star Credit Parties"), entered into a Loan and Security
Agreement (as amended, the "Star Loan Agreement") with Gerber providing the Star
Borrowers with a credit facility with borrowing availability of up to $2.5
million ($2.0 million and $0.5 million to KBS and EBGL, respectively) (the "Star
Term Loan"). The advance of $2.0 million to KBS is to be repaid in monthly
installments of sixty (60) consecutive equal payments. The advance of $0.5
million to EBGL, which has been temporarily increased by $0.3 million due to be
repaid on April 30, 2020, is to be repaid in monthly installments of twelve (12)
consecutive equal payments. On February 20, 2020, the Star Borrowers entered
into a First Amendment to Loan and Security Agreement (the "First Star
Amendment") with Gerber that amended the Star Loan Agreement in order to (i)
temporarily advance $0.3 million to EBGL, which amount was, prior to the Second
Star Amended described below, to be repaid to Gerber on or before April 30,
2020; (ii) clarify that Gerber can make multiple advances under the Star Loan
Agreement, and (iii) to correct the maturity date of the Star Term Loan. On
April 30, 2020, the Star Borrowers entered into a Second Amendment to Loan and
Security Agreement (the "Second Star Amendment") with Gerber that amended the
Star Loan Agreement in order to change terms of repayment for the advance of
$0.3 million to EBGL provided for under the First Star Amendment. Under the
terms of the Second Star Amendment, the advance of $0.3 million to EBGL is to be
repaid in three (3) consecutive equal monthly installments on the thirtieth
(30th) day in each calendar month, commencing May 30, 2020, and in a final
installment on or before July 31, 2020. As of June 30, 2020, EBGL repaid $0.3
million to Gerber and approximately $2.1 million was outstanding under the Star
Loan Agreement.
On January 31, 2020, EdgeBuilder and Glenbrook (the "EBGL Borrowers"), each a
Construction Subsidiary, and the Company, Star, 947 Waterford, 300 Park, 56
Mechanic, ATRM, and KBS (collectively, the "EBGL Credit Parties"), entered into
a Loan and Security Agreement (the "EBGL Loan Agreement") with Gerber providing
the EBGL Borrowers with a credit facility with borrowing availability of up to
$3.0 million (the "EBGL Loan"). On March 5, 2020, the EBGL Borrowers entered
into a First Amendment to Loan and Security Agreement (the "First EBGL
Amendment") with Gerber that amended the EBGL Loan Agreement and the KBS Loan
Agreement in order to, among other things, include a pledge $0.3 million of cash
collateral by LSVI under the EBGL Loan Agreement which, prior to the First EBGL
Amendment, was pledged by LSVI in connection with the KBS Loan Agreement. On
July 1, 2020, the EBGL Borrowers entered into a Second Amendment to Loan and
Security Agreement that amended the EBGL Loan Agreement in order to, among other
things, terminate the pledge of $0.3 million in cash collateral. As of June 30,
2020, approximately $1.4 million was outstanding under the EBGL Loan Agreement.
Availability under the Star Loan Agreement is based on a formula tied to the
value of real estate owned by the Star Borrowers, and borrowings bear interest
at the prime rate plus 3.5% per annum. Availability under the EBGL Loan
Agreement is based on a formula tied to the EBGL Borrowers' eligible accounts
receivable and inventory, and borrowings bear interest at the prime rate plus
2.75% per annum. The Loan Agreements also provide for certain fees payable to
Gerber during their respective terms. The Star Term Loan matures on the earlier
of (a) January 1, 2025 or (b) the termination, the maturity or repayment of the
EBGL Loan. The EBGL Loan matures on the earlier of (a) January 1, 2022, unless
extended, or (b) the termination, the maturity or repayment of the Star Term
Loan. The maturity of the EBGL Loan is automatically extended for successive
periods of one (1) year each unless terminated by Gerber or the EBGL Borrowers.
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The obligations of the EBGL Borrowers under the EBGL Loan Agreement are
guaranteed by the EBGL Credit Parties and are secured by substantially all the
assets of the EBGL Borrowers and the EBGL Credit Parties. The obligations of the
Star Borrowers under the Star Loan Agreement are guaranteed by the Star Credit
Parties and are secured by substantially all the assets of the Star Borrowers
and the Star Credit Parties. Contemporaneously with the execution and delivery
of the Star Loan Agreement, Jeffrey E. Eberwein, the Chairman of the Company's
board of directors, executed and delivered a Guaranty (the "Gerber Eberwein
Guaranty") to Gerber pursuant to which he guaranteed the performance of all the
Star Borrowers' obligations to Gerber under the Star Loan Agreement, including
the full payment of all indebtedness owing by the Star Borrowers to Gerber under
or in connection with the Star Loan Agreement and related financing documents.
Mr. Eberwein's obligations under the Gerber Eberwein Guaranty are limited in the
aggregate to the amount of (a) $2.5 million, plus (b) costs of Gerber incidental
to the enforcement of the Gerber Eberwein Guaranty or any guaranteed
obligations. On March 5, 2020, contemporaneously with the execution and delivery
of the First EBGL Amendment, Mr. Eberwein, the Chairman of the Company's board
of directors, executed and delivered a Guaranty (the "EBGL Eberwein Guaranty")
to Gerber pursuant to which he guaranteed the performance of all the EBGL
Borrowers' obligations to Gerber under the EBGL Loan Agreement, including the
full payment of all indebtedness owing by the EBGL Borrowers to Gerber under or
in connection with the EBGL Loan Agreement and related financing documents. Mr.
Eberwein's obligations under the EBGL Eberwein Guaranty are limited in the
aggregate to the amount of (a) $0.5 million, plus (b) costs of Gerber incidental
to the enforcement of the EBGL Eberwein Guaranty or any guaranteed obligations.
The Star Loan Agreement and EBGL Loan Agreement contains representations,
warranties, affirmative and negative covenants, events of default and other
provisions customary for financings of this type. The financial covenants under
the EBGL Loan Agreement applicable to the EBGL Borrowers include maintenance of
a minimum tangible net worth, a minimum debt service coverage ratio and minimum
net income. The Financial covenants under the Star Loan Agreement applicable to
the Star Borrowers include a minimum debt service coverage ratio. The occurrence
of any event of default under the Loan Agreements may result in the obligations
of the Borrowers becoming immediately due and payable. As a condition to the
extension of credit to the Star Borrowers and EBGL Borrowers under the Star Loan
Agreement and EBGL Loan Agreement, the holders of certain existing unsecured
promissory notes made by ATRM and certain of its subsidiaries entered into
subordination agreements (the "Subordination Agreements") with Gerber pursuant
to which such noteholders (including the Company and certain of its
subsidiaries) agreed to subordinate the obligations of ATRM and its subsidiaries
to such noteholders to the obligations of the Star Borrowers and EBGL Borrowers
to Gerber under the loan agreements.
Paycheck Protection Program
On April 30, 2020, each of KBS, EdgeBuilder and Glenbrook executed a separate
promissory note evidencing unsecured loans under the "Paycheck Protection
Program" (the "PPP"). The promissory note executed by KBS is for $0.8 million
(the "KBS Note"), the promissory note executed by EdgeBuilder is for $0.2
million (the "EdgeBuilder Note") and the promissory note executed by Glenbrook
is for $0.2 million (the "Glenbrook Note"). The KBS Note, the EdgeBuilder Note
and the Glenbrook Note, each dated April 30, 2020, are referred to together as
the "Construction Notes".
On May 11, 2020, the Company and each of Digirad Imaging Solutions, Inc.
("DIS"), DMS Imaging, Inc. ("DMS Imaging") and DMS Health Technologies, Inc.
("DMS Health"), each a direct or indirect wholly owned subsidiary of the
Company, executed a separate promissory note evidencing unsecured loans under
the PPP. The promissory note executed by the Company, dated May 7, 2020, is for
$0.8 million (the "Company Note"); the promissory note executed by DIS, dated
May 5, 2020, is for $3.0 million (the "DIS Note"); the promissory note executed
by DMS Imaging, dated May 5, 2020, is for $1.6 million (the "DMS Imaging Note")
and the promissory note executed by DMS Health, dated May 7, 2020, is for $0.1
million (the "DMS Health Note"). The Company Note, the DIS Note, the DMS Imaging
Note, and the DMS Health Note are referred to together as the "Healthcare
Notes". The Construction Notes and the Healthcare Notes are referred to
collectively as the "PPP Notes" and each promissory note individually as a "PPP
Note".
The PPP was established under the Coronavirus Aid, Relief, and Economic Security
Act (the "CARES Act") and is administered by the U.S. Small Business
Administration ("SBA"). The loans evidenced by the Construction Notes are being
made through Bremer Bank ("Bremer") as lender, and the loans evidenced by the
Healthcare Notes are being made through Sterling as lender.
The loans evidenced by the PPP Notes (the "PPP Loans") have two-year terms and
bear interest at a rate of 1.00% per annum. Monthly principal and interest
payments under the PPP Loans are deferred for six months. Beginning seven months
from the date of a PPP Note, unless fully forgiven prior thereto, the applicable
borrower will pay to its lender thereunder a monthly principal and interest
payments. The PPP Loans may be prepaid at any time prior to maturity with no
prepayment penalties. The Construction Notes mature on April 30, 2022, and the
Healthcare Notes mature two years from the date the loans under the Healthcare
Notes are disbursed. Loans under the Company Note and the DIS Note were
disbursed on May 12, 2020, and the loans under the DMS Health Note and DMS
Imaging Note were disbursed on May 13, 2020.
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The PPP Notes contain customary events of default relating to, among other
things, payment defaults, making materially false and misleading representations
to the SBA or lender, or breaching the terms of the applicable PPP Loan
documents. Upon an event of default under a PPP Note, the lender thereunder may,
among other things, require immediate payment of all amounts owing under the
applicable PPP Note, collect all amounts owing from the applicable borrower, or
file suit and obtain judgment.
Under the terms of the CARES Act, recipients of loans under the PPP can apply
for and be granted forgiveness for all or a portion of loan granted under the
PPP. Such forgiveness will be determined, subject to limitations, based on the
use of loan proceeds for payment of payroll costs and certain other eligible
costs. However, no assurance is provided that forgiveness for any portion of the
PPP Loans will be obtained.
The Company is continuing to evaluate the criteria and new guidance put out by
the SBA regarding qualification of loans under the PPP and the criteria for
meeting loan conditions and forgiveness criteria.
Off-Balance Sheet Arrangements
On September 10, 2019, the parties to the KBS Loan Agreement entered a Consent
and Acknowledgment Agreement and Twelfth Amendment to Loan Agreement, by and
among Gerber, KBS, ATRM and the Company, pursuant to which the Company agreed to
guarantee amounts borrowed by certain of ATRM's subsidiaries from Gerber. The
Twelfth Amendment requires the Company to serve as an additional guarantor with
the existing guarantor, ATRM, with respect to the payment, performance and
discharge of each and every obligation of payment and performance by the
borrowing subsidiaries with respect to the loans made by Gerber to them. On
January 31, 2020, the Company, ATRM, KBS and Gerber entered into a Thirteenth
Amendment to Loan and Security Agreement to amend the KBS Loan Agreement, by and
among the Company, ATRM, KBS and Gerber, in order to, among other things (a)
amend the definitions of "Ancillary Credit Parties," "Guarantor," "Obligations,"
and "Subordinated Lender" to address the obligations of the Star Borrowers, the
EBGL Borrowers, the Star Credit Parties, and the EBGL Credit Parties under the
Star Loan Agreement, the EBGL Loan Agreement and the Subordination Agreements to
which they are a party and (b) add a new cross default provision. On April 1,
2020, Gerber and KBS entered into a Fifteenth Amendment to Loan Agreement
pursuant to which the "Minimum Average Monthly Loan Amount" under the KBS Loan
Agreement was decreased to twenty-five percent (25%) of the Maximum Revolving
Amount (as defined in the KBS Loan Agreement). See Note 8, Debt, within the
notes to our unaudited condensed consolidated financial statements for further
detail.

On June 5, 2020, the Company entered into a Guaranty Agreement (the "Tocci
Guaranty") with Tocci Building Corporation ("Tocci") pursuant to which the
Company irrevocably guaranteed all the obligations of KBS under a certain
Subcontract agreement by and between Tocci and KBS in the event of a material
breach by KBS under the Subcontract. The Company's liability under the Tocci
Guaranty is limited to $2.0 million.

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