LEASES

Sale of Maine Facilities

On April 3, 2019, 947 Waterford Road, LLC (“947 Waterford,” a wholly-owned indirect subsidiary of Digirad) entered into a Purchase and Sale Agreement (the “Waterford Purchase Agreement”) with KBS, pursuant to which 947 Waterford purchased certain real property and related improvements (including buildings) located in Waterford, Maine (the “Waterford Facility”) from KBS (the “Waterford Transaction”), and acquired the Waterford Facility. The Waterford Purchase Agreement contains representations, warranties and covenants of KBS and 947 Waterford that are customary for a transaction of this nature. The purchase price of the Waterford Facility was $1.0 million.

947 Waterford is a wholly-owned indirect subsidiary of Digirad, formed for the purpose of acquiring and holding the Waterford Facility.

On April 3, 2019, 300 Park Street, LLC (“300 Park,” a wholly-owned indirect subsidiary of Digirad) entered into a Purchase and Sale Agreement (the “Park Purchase Agreement”) with KBS, pursuant to which 300 Park purchased certain real property and related improvements and personal property (including buildings, machinery and equipment) located in Paris, Maine (the “Park Facility”) from KBS (the “Park Transaction”), and acquired the Park Facility. The Park Purchase Agreement contains representations, warranties and covenants of KBS and 300 Park that are customary for a transaction of this nature. The purchase price of the Park Facility was $2.3 million.

On April 3, 2019, KBS entered into a separate lease agreement with each of 947 Waterford (the “Waterford Lease”) and 300 Park (the “Park Lease”). The Waterford Lease and Park Lease both have initial terms of 120 months, which are subject to extension.

On April 3, 2019, KBS entered into a lease agreement (the “Oxford Lease”) with 56 Mechanic Falls Road, LLC (“56 Mechanic,” a wholly-owned indirect subsidiary of Digirad), in connection with that certain real property and related improvements and personal property owned by RJF – Keiser Real Estate, LLC (“RJF”) (including buildings, fixtures, and other improvements on the land, and all machinery and equipment and other personal property, if any, owned by RJF and located on the property) located in Oxford, Maine (the “Oxford Premises”). The Oxford Lease was amended as of April 18, 2019 (the “Oxford Lease Amendment”) to provide that the commencement date will be the later of the closing of the sale of the Oxford Premises (the "Oxford Transaction"), which occurred on March 27, 2019. The Oxford Lease has an initial term of 120 months, which is subject to extension. ATRM has unconditionally guaranteed the performance of all obligations under each of the Leases to be performed by KBS, including, without limitation, the payment of all required rent. The payment of rent has been waived by approximately six months at the inception of the lease.

Lease Accounting Policy

In February 2016, the FASB issued ASU 2016-02, Leases, or ASU 2016-02, to enhance the transparency and comparability of financial reporting related to leasing arrangements. The Company adopted ASU 2016-02 on January 1, 2019, or the effective date, and used the effective date as its date of initial application.

At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the facts and circumstances present. Most leases with a term greater than one year are recognized on the balance sheet as right-of-use assets, lease liabilities and, long-term lease liabilities. The Company has elected not to recognize on the balance sheet leases with terms of one year or less. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining fixed lease term. Certain adjustments to the right-of-use asset may be required for items such as incentives received. In calculating the present value of future lease payments, the Company utilizes its incremental borrowing rates, which are the rates incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Company has elected to utilize a single blended interest rate based on geographies and lease terms that comprise the lease portfolio.

Although separation of lease and non-lease components is required, certain practical expedients are available. Entities may elect the practical expedient to not separate lease and non-lease components. The Company has elected to account for the lease and non-lease components of each of its operating leases as a single lease component and allocate all of the contract consideration to the lease component only. The lease component results in an operating right-of-use asset being recorded on the balance sheet and amortized on a straight-line basis as lease expense.

Many of the Company’s leases contain options to renew and extend lease terms and options to terminate leases early. The Company does not recognize the right-of-use asset or lease liability for renewal or termination periods unless the Company is reasonably certain to exercise the option at lease inception.

The Company has operating leases for real estate and non-real estate in Minnesota, Wisconsin and Maine. The Company has finance leases for some equipment that is immaterial.

The Company has lease arrangements with lease and non-lease components and has elected to account for the lease and non-lease component as a single lease component, and has allocated all of the contract consideration to the lease component only. The Company has existing net leases in which the non-lease components (e.g. common area maintenance, maintenance, consumables, etc.) are paid separately from rent based on actual costs incurred and therefore are not included in the right-of-use asset and lease liability and are reflected as an expense in the period incurred.

As of June 30, 2019, a right-of-use asset of $3.4 million and lease liability of $3.6 million are reflected on the balance sheet.

The elements of lease expense were as follows (dollars in thousands)(unaudited):



	Three Months Ended June 30, 2019			Six Months Ended June 30, 2019
Lease Cost
Operating lease cost	$	185		$	253
Variable lease cost	83			117
Total lease cost	$	268		$	370

Other Information
Operating cash flows used for operating leases	$	66		$	133
Net gain recognized from sale and leaseback transactions ⁽¹⁾	531			531

Operating Leases
Weighted average discount rate	10.0		%	10.0		%
Weighted average remaining lease term (years)	8.6			8.6

⁽¹⁾ During the second quarter of 2019, the Company entered into sale leaseback transactions related to three properties, which resulted in total proceeds of $3.9 million.

Future lease payments under non-cancelable leases as of June 30, 2019 were as detailed below (in thousands)(unaudited):



2019 (six months)	$	251
2020	744
2021	686
2022	487
2023	495
Beyond	2,746
Total lease payments	5,409
Less: imputed interest	1,858
Total operating liabilities	$	3,551