Merger

9 Months Ended

Sep. 30, 2020

On September 10, 2019 (the “ATRM Acquisition Date”), Digirad completed its acquisition of ATRM pursuant to the ATRM Merger Agreement under which Merger Sub (a wholly owned subsidiary of Digirad) merged with and into ATRM, with ATRM surviving as a wholly owned subsidiary of Digirad. As a result of the ATRM Merger, ATRM’s operations have been included in our consolidated financial statements since the ATRM Acquisition Date.

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. 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.

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.

The acquisition-date fair value of the consideration transferred in connection with the ATRM Merger approximately $17.5 million, which consisted of the following (in thousands):


Digirad Series A Cumulative Perpetual Preferred Stock (1,615,637 shares)	$	16,156
Settlement of pre-existing note receivable between DRAD and ATRM	296
Fair value of pre-existing joint venture settlement between DRAD and ATRM	1,000
Estimated purchase price	$	17,452

The fair value of the preferred shares issued was determined based on the product of (a) $10.00 (the stated liquidation preference per share of Company Preferred Stock), and (b) 1,615,637 (the number of shares of Company Preferred Stock were issued and exchanged in the ATRM Merger).

The following table summarizes the fair values of the assets acquired and liabilities assumed at the ATRM Acquisition Date (in thousands):


(in thousands)	As originally reported		Measurement period adjustments		As adjusted
Cash and cash equivalents	$	—	$	—	$	—
Accounts receivable, net	2,831		—		2,831
Inventory, net	1,609		—		1,609
Other current assets	481		252		733
Property and equipment, net	840		—		840
Operating Lease Right-of-use assets, net	495		—		495
Accounts payable and other accrued liabilities	(10,851)		—		(10,851)
Debt and notes payable	(5,144)		—		(5,144)
Lease liability	(499)		—		(499)
Deferred income taxes	—		(265)		(265)
Net assets acquired (liabilities assumed)	(10,238)		(13)		(10,251)
Goodwill	8,230		3		8,233
Intangibles	19,460		10		19,470
Estimated purchase price	$	17,452	$	—	$	17,452

The $19.5 million of identified intangible assets was allocated as follows (in thousands):


	Fair Value		Useful Life (years)
Trade Names	$	5,540	15
Customer Relationships - Modular Buildings	7,830		10
Customer Relationships - Wood Products	5,670		10
Backlog	430		1
Fair value of identified intangible assets	$	19,470

Goodwill and intangibles of $8.2 million and $19.5 million, respectively, were assigned to the Building and Construction segment. The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of ATRM. As of September 30, 2020, there were no changes in the recognized amounts of goodwill resulting from the acquisition of ATRM.

The Company recognized $2.3 million of acquisition related costs including legal, accounting that were expensed in 2019.

The amounts of revenue and earnings of ATRM included in the Company’s condensed consolidated statement of operations for the three and nine month period ending September 30, 2020 are as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Revenue	$	8,559	$	2,737	$	19,111	$	2,737
Net loss	$	(621)	$	(178)	$	(2,298)	$	(178)

The following represents the pro forma condensed consolidated statement of operations as if ATRM had been included in the consolidated results of the Company for the three and nine months ending September 30, 2020 and 2019 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Revenue	$	30,353	$	33,437	$	81,552	$	97,431
Net loss	$	(1,652)	$	(1,333)	$	(5,676)	$	(6,746)

These amounts have been calculated after applying the Company’s accounting policies and adjusting the results of ATRM to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant, and equipment and intangible assets had been applied on January 1, 2019, together with the consequential tax effects.