Filed Pursuant to Rule 424(b)(3)

Registration No. 333-232738

 

 

Prospectus of:   Proxy Statement of:
     
(LOGO)
(LOGO)

1048 Industrial Court 

Suwanee, Georgia 30024 

5215 Gershwin Avenue N. 

Oakdale, Minnesota 55128 

   
August 9, 2019

 

PROPOSED MERGER—YOUR VOTE IS VERY IMPORTANT

 

To the Shareholders of ATRM Holdings, Inc.:

 

On July 3, 2019, Digirad Corporation (“Digirad”) and ATRM Holdings, Inc. (“ATRM”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which Digirad has agreed to acquire ATRM. The Merger Agreement provides for the acquisition of ATRM through a statutory merger of Digirad Acquisition Corporation (the “Merger Sub”), a wholly-owned subsidiary of Digirad, with and into ATRM, with ATRM as the surviving entity (the “Merger”). As a result of the Merger, the separate corporate existence of Merger Sub will cease, and ATRM will continue as the surviving corporation and a wholly-owned subsidiary of Digirad.

 

In the proposed Merger, each issued and outstanding share of common stock, par value $0.001 per share, of ATRM (“ATRM Common Stock”) will be converted into the right to receive 0.03 validly issued, fully paid and nonassessable shares of Series A Cumulative Perpetual Preferred Stock, par value $0.0001 per share, of Digirad (“Digirad Preferred Stock”) and each issued and outstanding share of 10.0% Series B Cumulative Preferred Stock, par value $0.001 per share, of ATRM (“ATRM Preferred Stock”) will be converted into the right to receive 2.5 validly issued, fully paid and nonassessable shares of Digirad Preferred Stock, in each case subject to certain exceptions and with the rounding up of any fractional shares to the nearest whole share of Digirad Preferred Stock. Upon the effectiveness of the Merger, each share of ATRM Common Stock and each share of ATRM Preferred Stock issued and outstanding shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist. Each certificate formerly representing any share of ATRM Common Stock or ATRM Preferred Stock and each uncertificated share of ATRM Common Stock or ATRM Preferred Stock registered to a holder on the stock transfer books of ATRM, shall thereafter represent only the right to receive shares of Digirad Preferred Stock.

 

Prior to the Merger, there has been no public market for the Digirad Preferred Stock and no shares of the Digirad Preferred Stock are outstanding. Digirad intends to apply to have the Digirad Preferred Stock listed on the Nasdaq Global Market under the symbol “DRADP.” There can be no assurance that such listing will be approved.

 

ATRM will hold a special meeting of its shareholders on September 6, 2019 at 11:00 a.m. Eastern Time, at 53 Forest Ave., 1st Floor, Old Greenwich, CT 06870. At the ATRM special meeting, (i) the holders of ATRM Common Stock and ATRM Preferred Stock, voting as separate classes, will each be asked to approve the Merger Agreement and the transactions contemplated thereby, including the Merger, (ii) holders of ATRM Common Stock will be asked to approve, by an advisory vote, the potential change in control payments to ATRM’s President and Chief Executive Officer, and (iii) holders of ATRM Common Stock will be asked to adjourn or postpone the ATRM special meeting, if necessary or appropriate, for, among other reasons, the solicitation of additional proxies.

  

The board of directors of ATRM recommends that (i) holders of ATRM Common Stock and ATRM Preferred Stock vote “FOR” the approval of Merger Agreement and the transactions contemplated thereby, including the Merger, (ii) holders of ATRM Common Stock vote “FOR” the approval, by an advisory vote, of the change in control payments to ATRM’s President and Chief Executive Officer, and (iii) holders of ATRM Common Stock vote “FOR” the proposal to adjourn or postpone the ATRM special meeting, if necessary or appropriate, to, among other reasons, solicit additional proxies.

 

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YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the ATRM special meeting, please take the time to vote by using the internet or by telephone as described in this proxy statement/prospectus or by completing the enclosed proxy card and mailing it in the enclosed envelope. Information about the meeting, the Merger and the other business to be considered at the meeting is contained in this proxy statement/prospectus. You are urged to read this proxy statement/prospectus carefully.

 

In particular, you should read the “Risk Factors Relating to the Merger” section beginning on page 25 for a discussion of some of the risks you should consider in evaluating the Merger Agreement and the Merger and how they will affect you.

 

Thank you for your cooperation and continued support.

 

Sincerely, 

 

/s/ Daniel M. Koch

Daniel M. Koch
President, Chief Executive Officer and Director
ATRM Holdings, Inc.

 

Neither the Securities and Exchange Commission nor any state securities regulator has approved or disapproved the Merger Agreement and the Merger described in this proxy statement/prospectus or the Digirad Preferred Stock to be issued in the Merger contemplated by the Merger Agreement or passed upon the adequacy or accuracy of this proxy statement/prospectus. Any representation to the contrary is a criminal offense.

 

This proxy statement/prospectus is dated August 9, 2019 and is first being mailed to ATRM shareholders on or about August 13, 2019.

 

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ABOUT THIS DOCUMENT

 

This proxy statement/prospectus forms a part of a registration statement on Form S-4 (Registration No. 333-232738) filed by Digirad and ATRM with the Securities and Exchange Commission. It constitutes a prospectus of Digirad under Section 5 of the Securities Act of 1933, as amended, and the rules thereunder, with respect to the shares of Digirad Preferred Stock to be issued to ATRM shareholders in the Merger. In addition, it constitutes a proxy statement under Section 14(a) of the Securities Exchange Act of 1934, as amended, and the rules thereunder, and a notice of meeting with respect to the special meeting of ATRM shareholders at which (a) holders of ATRM Common Stock and ATRM Preferred Stock will consider and vote upon the proposal to approve the Merger Agreement and the transactions contemplated thereby, including the Merger, (b) holders of ATRM Common Stock will consider and vote upon the proposal to approve, by an advisory vote, the change in control payments to ATRM’s President and Chief Executive Officer, and (c) holders of ATRM Common Stock will consider and vote upon the proposal to adjourn or postpone the ATRM special meeting, if necessary or appropriate, for, among other reasons, the solicitation of additional proxies.

 

Digirad has supplied all information contained in this proxy statement/prospectus relating to Digirad, and ATRM has supplied all such information relating to ATRM. Digirad and ATRM have not authorized anyone to provide you with information that is different from what is contained in this proxy statement/prospectus.

 

You should rely only on the information contained in this proxy statement/prospectus. No one has been authorized to provide you with information that is different from that contained in this proxy statement/prospectus. This proxy statement/prospectus is dated August 9, 2019. You should not assume that the information contained in this proxy statement/prospectus is accurate as of any date other than that date. Neither the mailing of this proxy statement/prospectus to ATRM shareholders nor the issuance by Digirad of Digirad Preferred Stock pursuant to the Merger will create any implication to the contrary.

 

This proxy statement/prospectus does not constitute an offer to sell or a solicitation of or offer to buy any securities, or the solicitation of a proxy, in any jurisdiction where or from any person to whom it is unlawful to make any such offer or solicitation in such jurisdiction.

 

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(LOGO)

 

ATRM HOLDINGS, INC.

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

TO BE HELD September 6, 2019

 

To Our Shareholders:

 

A special meeting of shareholders of ATRM Corporation (“ATRM”), will be held at 53 Forest Ave., 1st Floor, Old Greenwich, CT 06870, on September 6, 2019 at 11:00 a.m., Eastern Time. The special meeting of shareholders is being held for the following purposes:

 

1.For holders of common stock, par value $0.001 per share, of ATRM (“ATRM Common Stock”) and holders of 10.0% Series B Cumulative Preferred Stock, par value $0.001 per share, of ATRM (“ATRM Preferred Stock”), voting as separate classes, to each approve the Agreement and Plan of Merger, dated as of July 3, 2019 (the “Merger Agreement”), by and among ATRM, Digirad Corporation, a Delaware corporation (“Digirad”), and Digirad Acquisition Corporation, a Minnesota corporation and a wholly owned subsidiary of Digirad (“Merger Sub”), a copy of which is attached as Annex I to the accompanying proxy statement/prospectus, pursuant to which Merger Sub will merge with and into ATRM, with ATRM as the surviving entity (the “Merger”), and the transactions contemplated thereby, (ATRM Proposal No. 1);

 

2.For holders of ATRM Common Stock to approve, by an advisory vote, the change in control payments to ATRM’s President and Chief Executive Officer (ATRM Proposal No. 2); and

 

3.For holders of ATRM Common Stock to approve the adjournment or postponement of the special meeting, if necessary or appropriate, for, among other reasons, the solicitation of additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve ATRM Proposal No. 1 (ATRM Proposal No. 3).

 

Only holders of record of ATRM Common Stock and ATRM Preferred Stock at the close of business on July 30, 2019 are entitled to vote at the ATRM special meeting or at any adjournment or postponement thereof. Adoption of the Merger Agreement requires the affirmative vote of at least a majority of the outstanding shares of ATRM Common Stock entitled to vote thereon and two-thirds of the outstanding shares of ATRM Preferred Stock entitled to vote thereon (voting as separate classes).

 

We hope that as many shareholders as possible will personally attend the ATRM special meeting. Whether or not you plan to attend the special meeting, please complete the enclosed proxy card and sign, date, and return it promptly so that your shares will be represented. You also may vote your shares by telephone or through the internet by following the instructions set forth on the proxy card. Submitting your proxy in writing, by telephone, or through the internet will not prevent you from voting in person at the special meeting.

 

Because the ATRM Common Stock is not listed on a national stock exchange, holders of ATRM Common Stock have dissenters’ rights in connection with the Merger to receive the fair value, in cash, of their shares of ATRM Common Stock. In order to exercise dissenters’ rights, ATRM Common Stock holders must strictly comply with the dissenters’ rights procedures under Minnesota law or they will lose their dissenters’ rights. The dissenters’ rights procedures are described in the enclosed proxy statement/prospectus. See “The Merger—Dissenters’ Rights of ATRM Shareholders.”

 

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The board of directors of ATRM, by unanimous vote, has determined that it is in the best interests of ATRM and its shareholders to consummate the transactions contemplated by the Merger Agreement, and unanimously recommends that (i) holders of ATRM Common Stock and ATRM Preferred Stock vote “FOR” the approval of Merger Agreement and the transactions contemplated thereby, including the Merger, (ii) holders of ATRM Common Stock vote “FOR” the approval, by an advisory vote, of the change in control payments to ATRM’s President and Chief Executive Officer, and (iii) holders of ATRM Common Stock vote “FOR” the proposal to adjourn or postpone the ATRM special meeting, if necessary or appropriate, to, among other reasons, solicit additional proxies. If you fail to vote by proxy or in person, it will have the same effect as a vote “against” the adoption of the Merger Agreement. 

     
 August 9, 2019   By Order of the Board of Directors,
     
   

/s/ Jeffrey Eberwein

Jeffrey Eberwein
Board Chair

 

SHAREHOLDERS WHO CANNOT ATTEND IN PERSON ARE REQUESTED TO VOTE AS PROMPTLY AS POSSIBLE. YOU MAY VOTE OVER THE INTERNET, BY TELEPHONE, OR BY U.S. MAIL.

 

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TABLE OF CONTENTS

 

  Page
DEFINED TERMS USED IN THIS PROXY STATEMENT/PROSPECTUS 1
QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE ATRM SPECIAL MEETING 2
What is the Merger? 2
Is shareholder approval necessary to complete the Merger? 2
Are there other matters related to the Merger that require the vote of ATRM shareholders? 2
What are the “change in control payments?” 2
Why am I being asked to cast a non-binding, advisory vote to approve the change in control payments payable to ATRM’s President and Chief Executive Officer under his change of control agreement? 2
What will happen if the ATRM shareholders do not approve the change in control payments at the ATRM special meeting? 3
What will ATRM shareholders receive in the Merger? 3
Where and when is the special meeting of ATRM shareholders? 3
Who can vote at the ATRM special meeting? 3
What vote of ATRM shareholders is required to approve the proposals? 3
What constitutes a quorum for the ATRM special meeting? 4
How does the Board of Directors of ATRM recommend that ATRM shareholders vote? 4
How do I vote? 4
What is the difference between a shareholder of record and a “street name” beneficial holder of shares? 5
If my shares are held in “street name” by my broker, will my broker vote my shares for me? 5
Will anyone contact me regarding this vote? 5
Can I change my vote after I have delivered my proxy? 5
Should I send in my ATRM stock certificates with my proxy card? 6
What are the material U.S. federal income tax consequences of the Merger to U.S. holders of ATRM shares? 6
When do ATRM and Digirad expect the Merger to be completed? 6
Can ATRM shareholders dissent and require appraisal of their shares? 6
Where can I find more information about ATRM and Digirad? 7
Who can help answer my questions? 7
SUMMARY 8
The Companies (page 52) 8
General 9
The ATRM Special Meeting (page 200) 11
Record Dates; Shares Entitled to Vote; Required Vote with respect to the Merger; Quorum (page 200) 11
Shares Owned by ATRM Directors and Executive Officers (page 201) 12
The Merger (pages 52 and 83) 12
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF DIGIRAD 14
SUMMARY HISTORICAL FINANCIAL INFORMATION OF ATRM 16
SUMMARY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED COMBINED FINANCIAL INFORMATION 18
COMPARATIVE PER SHARE MARKET PRICE, DIVIDEND AND OTHER DATA 20

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 23
RISK FACTORS RELATING TO THE MERGER 25
DIGIRAD RISK FACTORS 33
ATRM RISK FACTORS 46
THE MERGER 52
The Companies 52
The Agreement and Plan of Merger 53
Background of the Merger 53
Recommendation of the ATRM Board; ATRM’s Reasons for the Merger 60
Financial Forecasts of ATRM’s Management 65
Digirad’s Reasons for the Merger 66
Opinion of Financial Advisor to Digirad 67
Interests of ATRM Directors and Executive Officers in the Merger 72
Effect of the Merger 74
Merger Consideration 74
Ownership of Digirad Unchanged Following the Merger 75
Conversion of Shares; Exchange Procedures; Fractional Shares 75
Accounting Treatment 76
No Regulatory Approvals Required for the Merger 76
Dissenters’ Rights of ATRM Shareholders 76
Stock Exchange Listing of Digirad Preferred Stock 78
Delisting and Deregistration of ATRM Common Stock 78
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES 79
THE MERGER AGREEMENT 83
The Merger 83
Closing and Effectiveness of the Merger 83
Consideration to be Received in the Merger 83
Treatment of ATRM Equity Awards 83
Representations and Warranties 83
ATRM’s Conduct of Business Before Completion of the Merger 85
Digirad’s Forbearances Before Completion of the Merger 87
No Solicitation; Changes in Recommendations 87
Commercially Reasonable Efforts to Complete the Merger; Other Agreements 89
Access to Information 90
Director and Officer Indemnification and Insurance 90
Employee Matters 90
Definition of Material Adverse Effect 91
Conditions of the Merger 91
Termination; Termination Fees; Expenses 93
Specific Performance; Remedies 95
Amendment; Extension and Waiver 95
Governing Law; Venue 95
FINANCING 96
General 96
Private Placement 96
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED COMBINED FINANCIAL STATEMENTS 97

 

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS 101
BUSINESS OF DIGIRAD 107
DIGIRAD MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 116
BUSINESS OF ATRM 130
ATRM MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 135
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS OF ATRM 145
MANAGEMENT 149
EXECUTIVE AND DIRECTOR COMPENSATION 157
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF DIGIRAD 165
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF ATRM 167
DESCRIPTION OF DIGIRAD CAPITAL STOCK 168
Authorized and Outstanding Digirad Capital Stock 168
Common Stock 168
Digirad Series A Preferred Stock 168
No Sinking Fund 168
Listing 169
Dividends 169
Redemption 170
Liquidation Preference 175
Ranking 173
Voting Rights 173
Conversion 174
Book-Entry Procedures 175
Information Rights 175
No Preemptive Rights 175
Listing 175
Global Clearance and Settlement Procedures 176
No Credit Rating of the Digirad Preferred Stock 176
Digirad’s Transfer Agent 176
Dividend Paying Agent 176
Certain Anti-Takeover Provisions of Digirad’s Certificate of Incorporation and By-Laws 176
Repurchases 178
COMPARISON OF RIGHTS OF HOLDERS OF ATRM COMMON STOCK AND ATRM PREFERRED STOCKAND HOLDERS OF DIGIRAD PREFERRED STOCK 179
THE ATRM SPECIAL MEETING 200
Date, Time, and Place 200
Purposes of the ATRM Special Meeting 200
ATRM Board Recommendation 200
Who Can Vote at the ATRM Special Meeting? 200
Vote Required; Quorum 200

 

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Shares Owned by ATRM Directors and Executive Officers 201
Voting by Proxy 201
Solicitation of Proxies 202
ATRM PROPOSAL NO. 1: APPROVAL OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER 203
ATRM PROPOSAL NO. 2: APPROVAL, BY AND ADVISORY VOTE, OF THE CHANGE IN CONTROL PAYMENTS 204
ATRM PROPOSAL NO. 3: APPROVAL OF THE ADJOURNMENT OR POSTPONEMENT OF THE SPECIAL MEETING, IF NECESSARY OR APPROPRIATE 205
LEGAL MATTERS 206
EXPERTS 206
OTHER MATTERS 206
FUTURE SHAREHOLDER PROPOSALS 208
WHERE YOU CAN FIND MORE INFORMATION 208
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES 208

 

ANNEX I Merger Agreement
ANNEX IIFairness Opinion of Oberon
ANNEX IIIMinnesota Statutes Relating to Dissenters’ Rights
ANNEX IVDigirad Corporation’s Financial Statements
ANNEX VATRM Holdings, Inc.’s Financial Statements

 

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DEFINED TERMS USED IN THIS PROXY STATEMENT/PROSPECTUS 

 

ATRM   ATRM Holdings, Inc., a Minnesota corporation
     
Digirad   Digirad Corporation, a Delaware corporation
     
Digirad Preferred Stock   Series A Cumulative Perpetual Preferred Stock, par value $0.0001 per share, of Digirad

Exchange Act
 
Securities Exchange Act of 1934, as amended

Merger
 
Business combination whereby Merger Sub will merge with and into ATRM, with ATRM as the surviving entity, pursuant to the Merger Agreement

Merger Agreement
 
Agreement and Plan of Merger, dated as of July 3, 2019, as it may be amended from time to time, by and among Digirad, ATRM and Merger Sub
     
Merger Consideration   With respect to a given share of ATRM Common Stock, the right to receive 0.03 validly issued, fully paid and nonassessable shares of Digirad Preferred Stock, and with respect to a given share of ATRM Preferred Stock, the right to receive 2.5 validly issued, fully paid and nonassessable shares of Digirad Preferred Stock, in each case subject to certain exceptions and with the rounding up of any fractional shares to the nearest whole share of Digirad Preferred Stock

Merger Sub
 
Digirad Acquisition Corporation, a Minnesota corporation and a wholly-owned subsidiary of Digirad
     
Oberon   Oberon Securities LLC, financial advisor to Digirad
     
SEC   Securities and Exchange Commission
     
Securities Act   Securities Act of 1933, as amended

 

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QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE ATRM SPECIAL MEETING

 

The following questions and answers address briefly some questions you may have regarding the Merger and the ATRM special meeting. These questions and answers may not address all questions that may be important to you as a shareholder of ATRM or as a stockholder of Digirad. Please refer to the more detailed information contained elsewhere in this proxy statement/prospectus, the annexes to this proxy statement/prospectus and the documents referred to in this proxy statement/prospectus.

 

What is the Merger?

 

In accordance with the terms and conditions of the Merger Agreement, if the holders of ATRM Common Stock and ATRM Preferred Stock approve the Merger Agreement and the transactions contemplated thereby, including the Merger, and the other closing conditions under the Merger Agreement are satisfied or waived, Merger Sub will merge with and into ATRM, and ATRM will be the surviving corporation and a wholly owned subsidiary of Digirad. A copy of the Merger Agreement is attached as Annex I to this proxy statement/prospectus.

 

Is shareholder approval necessary to complete the Merger?

 

Yes. ATRM and Digirad have agreed to combine the two companies upon the terms and conditions of the Merger Agreement that is described in this proxy statement/prospectus. You are receiving these proxy materials to help you decide, among other matters, how to vote your shares of ATRM with respect to the proposed Merger.

 

The Merger cannot be completed unless, among other things, ATRM shareholders approve the Merger Agreement and the transactions contemplated thereby, including the Merger. The ATRM special meeting is being held to vote on, among other matters, the proposals necessary to complete the Merger. Information about the special meeting, the Merger and the other business to be considered by ATRM shareholders is contained in this proxy statement/prospectus. Your vote is important. ATRM encourages you to vote as soon as possible.

 

Approval by Digirad stockholders of the Merger Agreement and the transactions contemplated thereby, including the Merger and the issuance of the Digirad Preferred Stock, is not required and will not be sought by Digirad.

 

Are there other matters related to the Merger that require the vote of ATRM shareholders?

 

Yes. At the ATRM special meeting, holders of ATRM Common Stock will be asked to consider and vote upon a proposal to approve, by a non-binding advisory vote, the agreements and understandings of ATRM and its President and Chief Executive Officer concerning compensation that is based on or otherwise relates to the Merger contemplated by the Merger Agreement, and the aggregate total of all such compensation that may be paid or become payable to or on behalf of such executive officer, as disclosed in this proxy statement/prospectus under the heading “The Merger—Interests of ATRM Directors and Executive Officers in the Merger—Change of Control Benefits for Executive Officers” (the “change in control payments”).

 

What are the “change in control payments?”

 

“Change in control payments” are certain compensation that is tied to or based on the completion of the Merger and may be payable to ATRM’s President and Chief Executive Officer under ATRM’s existing plans or agreements.

 

Why am I being asked to cast a non-binding, advisory vote to approve the change in control payments payable to ATRM’s President and Chief Executive Officer under his change of control agreement?

 

In accordance with the rules promulgated under the Exchange Act, ATRM is providing its shareholders with the opportunity to cast a non-binding, advisory vote on the change in control payments proposal on the compensation that may be payable to its President and Chief Executive Officer in connection with the Merger.

 

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What will happen if the ATRM shareholders do not approve the change in control payments at the ATRM special meeting?

 

Approval of the change in control payments is not a condition to the completion of the Merger. The vote with respect to the change in control payments is an advisory vote and will not be binding on ATRM or Digirad. Further, the underlying compensation plans and agreements are contractual in nature and are not, by their terms, subject to shareholder approval. Accordingly, payment of the change in control compensation is not contingent on shareholder approval.

 

What will ATRM shareholders receive in the Merger?

 

Unless a holder of ATRM Common Stock exercise its dissenters’ rights and satisfies the procedures relating to dissenters’ rights under Minnesota law, a holder of ATRM Common Stock will be entitled to receive 0.03 shares of Digirad Preferred Stock for each share of ATRM Common Stock owned at the effective time of the Merger, and holders of ATRM Preferred Stock will be entitled to receive 2.5 shares of Digirad Preferred Stock for each share of ATRM Preferred Stock owned at the effective time of the Merger. No fractional shares of Digirad Preferred Stock will be issued. Each ATRM shareholder will be entitled to receive, in lieu of any fractional share of Digirad Preferred Stock, one whole share of Digirad Preferred Stock.

 

After completion of the Merger, each Digirad stockholder will have the same number of shares of Digirad common stock that such stockholder held immediately prior to the completion of the Merger. However, each share of Digirad common stock will then represent an interest in a combined company with more assets and more liabilities. In addition, upon completion of the Merger, all Digirad Preferred Stock will be held by former ATRM shareholders.

 

Where and when is the special meeting of ATRM shareholders?

 

The ATRM special meeting will be held at 11:00 a.m., Eastern Time, on September 6, 2019, at 53 Forest Ave., 1st Floor, Old Greenwich, CT 06870.

 

Who can vote at the ATRM special meeting?

 

Holders of ATRM Common Stock and holders of ATRM Preferred Stock can vote at the ATRM special meeting if such shareholders held such shares as of the close of business on July 30, 2019, which is the record date for the special meeting.

 

What vote of ATRM shareholders is required to approve the proposals?

 

To approve the Merger Agreement and the transactions contemplated thereby, including the Merger, holders of (i) at least a majority of the outstanding shares of ATRM Common Stock entitled to vote and (ii) at least two-thirds of the outstanding shares of ATRM Preferred Stock entitled to vote must vote their shares “FOR” the approval of the proposal.

 

To approve, by an advisory vote, the change in control payments, holders of the greater of (1) a majority of the outstanding shares of ATRM Common Stock present in person or represented by proxy and entitled to vote on this item of business at the ATRM special meeting, or (2) a majority of the voting power of the minimum number of the shares of ATRM Common Stock entitled to vote that would constitute a quorum for the transaction of business at the ATRM special meeting, must vote their shares “FOR” the proposal.

 

To approve adjournment of the special meeting, if necessary or appropriate, for, among other reasons, the solicitation of additional proxies, holders of a majority of the voting power of the shares of ATRM Common Stock present in person or represented by proxy and entitled to vote on this item of business at the ATRM special meeting, whether or not a quorum is present, must vote their shares “FOR” the proposal.

 

Digirad has entered into a voting agreement with the holders of all of the ATRM Preferred Stock and approximately 17.4% of the ATRM Common Stock pursuant to which such holders have agreed, among other things, to vote their ATRM shares in favor of the Merger and have given Digirad their proxies to vote “FOR” the approval of the Merger Agreement and the transactions contemplated thereby, including the Merger.

 

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What constitutes a quorum for the ATRM special meeting?

 

The presence at the special meeting on September 6, 2019, in person or by proxy, of at least a majority of the outstanding ATRM Common Stock and a majority of the outstanding ATRM Preferred Stock votes that are entitled to cast a vote at the special meeting will constitute a quorum. A quorum is necessary to hold the meeting. In the event that a quorum is not present at the special meeting, ATRM expects that the special meeting will be adjourned or postponed to solicit additional proxies. If a quorum is not present, the shareholders present, in person or by proxy, may adjourn the meeting, without notice other than announced at the meeting, to another place, if any, date or time.

 

How does the Board of Directors of ATRM recommend that ATRM shareholders vote?

 

The ATRM board of directors has determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are in the best interests of ATRM and its shareholders and recommends that: (i) holders of ATRM Common Stock and ATRM Preferred Stock vote “FOR” the approval of the Merger Agreement and the transactions contemplated thereby, including the Merger; (ii) holders of ATRM Common Stock vote “FOR” the approval, by advisory vote, of the change in control payments; and (iii) holders of ATRM Common Stock vote “FOR” the proposal to adjourn or postpone the special meeting, if necessary or appropriate, for, among other reasons, the solicitation of additional proxies. The ATRM board of directors is soliciting shareholder votes consistent with the board’s recommendation. Digirad has entered into a voting agreement with the holders of all of the ATRM Preferred Stock and approximately 17.4% of the ATRM Common Stock pursuant to which such holders have agreed, among other things, to vote their ATRM shares in favor of the Merger and have given Digirad their proxies to vote “FOR” the approval of the Merger Agreement and the transactions contemplated thereby, including the Merger. You should read the section entitled “The Merger— Recommendation of the ATRM Board of Directors; ATRM’s Reasons for the Merger” for a discussion of the factors that the board considered in deciding to recommend voting “FOR” the approval of the Merger Agreement and the transactions contemplated thereby, including the Merger.

 

How do I vote?

 

If you are a holder of record of ATRM Common Stock or ATRM Preferred Stock, as of the record date, after carefully reading and considering the information contained in this proxy statement/prospectus, you may vote by any of the following methods:

 

Internet.    Electronically through the internet by accessing www.proxyvote.com. You may vote through the Internet until 11:59 p.m., Eastern Time, on September 5, 2019. Have your proxy card in hand when you access the website and follow the instructions to obtain your records and create an electronic voting instruction form. Internet voting is available 24 hours a day, and the procedures are designed to authenticate votes cast by using a control number located on your proxy card. These procedures allow you to give a proxy to vote your shares and to confirm that your instructions have been properly recorded. If you vote through the Internet, you should not return your proxy card. 

 

Mail.    By returning your proxy through the mail. If you complete and properly sign the accompanying proxy card and return it to ATRM, it will be voted as you direct on the proxy card. You should follow the instructions set forth on the proxy card, being sure to complete it, to sign it, and to mail it in the enclosed postage-paid envelope. 

 

Telephone.    By calling 1-800-454-8683. You may vote by telephone until 11:59 p.m., Eastern Time, on September 5, 2019. This toll free number is also included on the proxy card. Telephone voting is available 24 hours a day, and the procedures are designed to authenticate votes cast by using a control number located on your proxy card. These procedures allow you to give a proxy to vote your shares and to confirm that your instructions have been properly recorded. If you vote by telephone, you should not return your proxy card. 

 

In Person.    In person at the meeting. If you are a shareholder of record and attend the meeting, you may vote at the meeting or deliver your complete proxy card in person.

 

ATRM recommends that you vote in advance even if you plan to attend the meeting so that ATRM will know as soon as possible that enough votes will be present for ATRM to hold the meeting. If you properly return or submit your proxy but do not indicate how you wish to vote, ATRM will count your proxy as a vote “FOR” the approval of the Merger Agreement and the transactions contemplated thereby, including the Merger, “FOR” the approval, by advisory vote, of the change in control payments and “FOR” the proposal to adjourn or postpone the special meeting, if necessary or appropriate, for, among other reasons, the solicitation of additional proxies.

 

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If your shares are held in “street name,” please refer to the information forwarded to you by your bank, broker or other holder of record to see what you must do in order to vote your shares, including whether you may be able to vote electronically through your bank, broker or other record holder. If so, instructions regarding electronic voting will be provided by the bank, broker or other holder of record to you as part of the package that includes this proxy statement/prospectus. If you are a “street name” beneficial holder of shares and you wish to vote in person at the meeting, you will need to obtain a proxy from the institution that holds your shares and present it to the inspector of elections with your ballot when you vote at the special meeting.

 

If you fail to vote by proxy or in person, it will have the same effect as a vote “against” the approval of the Merger Agreement.

 

What is the difference between a shareholder of record and a “street name” beneficial holder of shares?

 

If your shares are registered directly in your name with ATRM’s transfer agent, ComputerShare, Inc., you are considered a shareholder of record with respect to those shares. If this is the case, the shareholder proxy materials have been sent or provided directly to you by ATRM.

 

If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the “beneficial holder” of the shares held for you in what is known as “street name.” If this is the case, the proxy materials have been forwarded to you by your brokerage firm, bank or other nominee, which is considered the shareholder of record with respect to these shares. As the beneficial holder, you have the right to direct your broker, bank or other nominee how to vote your shares. Please contact your broker, bank, or other nominee for instructions on how to vote any shares you beneficially own.

 

If my shares are held in “street name” by my broker, will my broker vote my shares for me?

 

If your shares are held for you as a beneficial owner in “street name,” your broker will vote your shares on the proposals only if you provide instructions to your broker on how to vote. You should follow the directions provided by your broker regarding how to instruct your broker to vote your shares. Without instructions, your shares will not be voted, which will have the effect of an “Against” vote for the proposal to approve the Merger Agreement and the transactions contemplated thereby, including the Merger, and will have no effect on the proposals to approve, by an advisory vote, the change in control payments and to adjourn or postpone the special meeting, if necessary or appropriate, for, among other reasons, the solicitation of additional proxies.

 

Will anyone contact me regarding this vote?

 

ATRM has retained InvestorCom, LLC to aid in the solicitation of proxies and to verify certain records related to the solicitation. ATRM will pay InvestorCom, LLC a fee of $10,000 plus reimbursement for its reasonable out-of-pocket expenses. Such solicitations may be made by mail, telephone, facsimile, e-mail, the internet or personal interviews.

 

Can I change my vote after I have delivered my proxy?

 

Yes. You can change your vote before the ATRM special meeting. If you are an ATRM shareholder of record, you may change your proxy voting instructions prior to commencement of the special meeting by granting a new proxy (by mail, by phone or over the internet), as described under “The ATRM Special Meeting—Voting by Proxy” on page 201. You may also revoke a proxy by submitting a notice of revocation to the Secretary of ATRM at the address set forth under “The ATRM Special Meeting—Voting by Proxy” on page 201 prior to the commencement of the special meeting. Attendance at the special meeting will not in and of itself constitute revocation of a proxy.

 

If your shares are held in “street name,” you may change your vote by submitting new voting instructions to your broker or other nominee holder in accordance with the procedures established by it. Please contact your broker or other nominee and follow its directions in order to change your vote.

 

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Should I send in my ATRM stock certificates with my proxy card?

 

No. Please DO NOT send your ATRM stock certificates with your proxy card.

 

What are the material U.S. federal income tax consequences of the Merger to U.S. holders of ATRM shares?

 

The receipt of Digirad Preferred Stock pursuant to the Merger will be a taxable transaction for U.S. federal income tax purposes. For U.S. federal income tax purposes, a U.S. Holder (as defined below in the section titled “Material United States Federal Income Tax Consequences” beginning on (page 79)) will generally recognize gain or loss equal to the difference, if any, between (i) the fair market value (as of the effective time) of the Digirad Preferred Stock received in the Merger and (ii) the U.S. Holder’s adjusted tax basis in the ATRM shares surrendered in exchange therefor.

 

Each U.S. Holder of ATRM shares should read the discussion under “Material United States Federal Income Tax Consequences” beginning on (page 79) for a more complete discussion of the U.S. federal income tax consequences of the Merger. Tax matters can be complicated, and the tax consequences of the Merger to a particular holder of ATRM shares will depend on such holder’s particular facts and circumstances. Holders of ATRM shares should consult their own tax advisors to determine the specific consequences to them of exchanging their ATRM shares for Digirad Preferred Stock pursuant to the Merger.

 

The tax discussion regarding the Merger does not address any state, local or foreign tax consequences of the Merger.

 

Please carefully review the information set forth in the section titled “Material United States Federal Income Tax Consequences” beginning on page 79 for a description of the material United States federal income tax consequences of the Merger. The tax consequences of the Merger to each ATRM shareholder will depend on such ATRM shareholder’s own situation. ATRM shareholders should consult with their own tax advisors for a full understanding of the tax consequences of the Merger to them.

 

When do ATRM and Digirad expect the Merger to be completed?

 

ATRM and Digirad are working to complete the Merger as quickly as possible. If the Merger Agreement and the transactions contemplated thereby, including the Merger, are approved by ATRM shareholders and the other conditions to completion of the Merger are satisfied or waived, including any required regulatory approvals, it is anticipated that the Merger will be completed in the third quarter of 2019. However, it is possible that factors outside the control of ATRM and Digirad could require ATRM and Digirad to complete the Merger at a later time or not complete it at all. If the Merger is not completed by November 30, 2019, either ATRM or Digirad may terminate the Merger Agreement (provided that the party terminating the Merger Agreement has not materially contributed to the failure to fulfill any condition under the Merger Agreement).

 

Can ATRM shareholders dissent and require appraisal of their shares?

 

Yes. Because the ATRM Common Stock is not listed on a national stock exchange, holders of ATRM Common Stock have dissenters’ rights in connection with the Merger to receive the fair value, in cash, of their shares of ATRM Common Stock. In order to exercise dissenters’ rights, ATRM Common Stock holders must strictly comply with the dissenters’ rights procedures under Minnesota law or they will lose their dissenters’ rights. One of these rules is that you must not vote FOR the Merger. If you vote FOR the Merger, you will lose your dissenters’ rights. The cash you receive upon the exercise of your dissenters’ rights may be more or less than the value of the Digirad Preferred Stock you would have received in the Merger if you had not exercised your dissenters’ rights. The dissenters’ rights procedures are described in the section of this proxy statement/prospectus entitled “The Merger—Dissenters’ Rights of ATRM Shareholders.”

 

ATRM and Digirad have entered into a voting agreement with the holders of all of the ATRM Preferred Stock and approximately 17.4% of the ATRM Common Stock pursuant to which such holders have agreed, among other things, to vote their ATRM shares in favor of the Merger and have given Digirad their proxies to vote “FOR” the approval of the Merger Agreement and the transactions contemplated thereby, including the Merger.

 

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Where can I find more information about ATRM and Digirad?

 

ATRM shareholders can find more information about ATRM and Digirad in their publicly filed reports with the SEC, and in the section titled “Where You Can Find More Information” beginning on page 208.

 

Who can help answer my questions?

 

If ATRM shareholders have any questions about the Merger or the ATRM special meeting, or if they need additional copies of this proxy statement/prospectus or the enclosed proxy card, they should contact:

 

InvestorCom, LLC
19 Old Kings Highway S. Suite 210 

Darien, CT 06820 

Banks and Brokerage Firms, please call: 203-972-9300
Stockholders and All others, call toll-free: 877-972-0090
Email: info@investor-com.com

 

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SUMMARY

 

This summary highlights selected information from this proxy statement/prospectus and may not contain all the information that is important to you. To understand the Merger fully and for a more complete description of the legal terms of the Merger, you should carefully read this entire proxy statement/prospectus and the other documents to which you are referred. See also “Where You Can Find More Information” on page 208. Page references are included to direct you to a more complete description of the topics presented in this summary.

 

The Companies (page 52)

 

Digirad 

 

Digirad Corporation
1048 Industrial Court 

Suwanee, Georgia 30024 

Attention: David Noble 

Telephone: (858) 726-1600

 

On September 10, 2018, Digirad announced that its board of directors approved the conversion of Digirad into a diversified holding company (the “HoldCo Conversion”).

 

Historically, Digirad has delivered 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 has grown both organically and through acquisitions over the last three years. Prior to the year ended December 31, 2016, Digirad was organized as two reportable segments: Diagnostic Services and Diagnostic Imaging. With the acquisition of Project Rendezvous Holding Corporation (“PRHC”), the ultimate parent company of DMS Health Technologies, Inc. (collectively referred to hereinafter as “DMS Health Technologies” or “DMS Health”) on January 1, 2016, Digirad added two additional reportable segments: Mobile Healthcare and Medical Device Sales and Services (“MDSS”). In February of 2018, Digirad completed the sale of its customer contracts relating to its MDSS post-warranty service business to Philips North America LLC (“Philips”). On October 31, 2018, Digirad sold its Telerhythmics, LLC (“Telerhythmics”) business to G Medical Innovations USA, Inc., for $1.95 million in cash. As of December 31, 2018, Digirad’s business was organized into three reportable segments: Diagnostic Services, Mobile Healthcare, and Diagnostic Imaging.

 

Digirad’s aim 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 financially disciplined approach for acquisitions.

 

On December 14, 2018, Digirad and ATRM, entered into a joint venture and formed Star Procurement, LLC (“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 Builders, Inc. (“KBS”), a wholly-owned subsidiary of ATRM 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.

 

As part of the HoldCo Conversion, Digirad formed a real estate subsidiary named Star Real Estate Holdings USA, Inc. (“SRE”). SRE will hold any significant real estate assets Digirad acquires. 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 an initial transaction to create Digirad’s real estate division under SRE and launch that aspect of the HoldCo Conversion, in April 2019, Digirad purchased three plants in Maine that manufacture modular buildings (two of which were purchased from KBS) and leased those three properties to KBS.

 

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ATRM 

 

ATRM Holdings, Inc.
5215 Gershwin Avenue N. 

Oakdale, Minnesota 55128 

Attention: Daniel Koch 

Telephone: (651) 704-1800

 

ATRM, a Minnesota corporation, through its wholly-owned subsidiaries, KBS, Glenbrook Building Supply, Inc. (“Glenbrook”) and EdgeBuilder, Inc. (“EdgeBuilder”) manufactures modular buildings for commercial and residential applications in production facilities located in South Paris and Waterford, Maine, operates a retail lumber yard located in Oakdale, Minnesota, and manufactures structural wall panels, permanent wood foundation systems and other engineered wood products for use in construction of residential and commercial buildings in a production facility located in Prescott, Wisconsin.

 

General

 

What ATRM Shareholders Will Receive in the Merger (page 74)

 

At the effective time of the Merger, unless a holder of ATRM Common Stock previously exercised its dissenters’ rights and satisfied the procedures relating to dissenters’ rights under Minnesota law, a holder of ATRM Common Stock will be entitled to receive 0.03 shares of Digirad Preferred Stock for each share of ATRM Common Stock owned at the effective time of the Merger, and holders of ATRM Preferred Stock will be entitled to receive 2.5 shares of Digirad Preferred Stock for each share of ATRM Preferred Stock owned at the effective time of the Merger. No fractional shares of Digirad Preferred Stock will be issued. Each ATRM shareholder will be entitled to receive, in lieu of any fractional share of Digirad Preferred Stock, one whole share of Digirad Preferred Stock.

 

Ownership of Digirad Following the Merger (page 75)

 

Upon completion of the Merger, all Digirad Preferred Stock will be held by former ATRM shareholders. Each Digirad stockholder will continue to have the same number of shares of Digirad common stock that such stockholder held immediately prior to the completion of the Merger. However, each share of Digirad common stock will then represent an interest in a combined company with more assets and liabilities.

 

Effect of the Merger (page 74)

 

Pursuant to the terms of the Merger Agreement, if the holders of ATRM Common Stock and ATRM Preferred Stock approve the Merger Agreement and the transactions contemplated thereby, including the Merger, and the other closing conditions under the Merger Agreement are satisfied or waived, Merger Sub will merge with and into ATRM, and ATRM will be the surviving corporation and a wholly owned subsidiary of Digirad. As a result of the Merger, upon the closing of the Merger, ATRM Common Stock will cease trading on the OTC Marketplace, the registration of ATRM Common Stock under the Exchange Act will be terminated and ATRM will no longer be required to file reports with the SEC. 

 

Material United States Federal Income Tax Consequences (page 79)

 

The receipt of Digirad Preferred Stock pursuant to the Merger will be a taxable transaction for U.S. federal income tax purposes. For U.S. federal income tax purposes, a U.S. Holder (as defined below in the section titled “Material United States Federal Income Tax Consequences” beginning on (page 79) will generally recognize gain or loss equal to the difference, if any, between (i) the fair market value (as of the effective time) of the Digirad Preferred Stock received in the Merger and (ii) the U.S. Holder’s adjusted tax basis in the ATRM shares surrendered in exchange therefor.

 

Each U.S. Holder of ATRM shares should read the discussion under “Material United States Federal Income Tax Consequences” beginning on (page 79]) for a more complete discussion of the U.S. federal income tax consequences of the Merger. Tax matters can be complicated, and the tax consequences of the Merger to a particular holder of ATRM shares will depend on such holder’s particular facts and circumstances. Holders of ATRM shares should consult their own tax advisors to determine the specific consequences to them of exchanging their ATRM shares for Digirad Preferred Stock pursuant to the Merger.

 

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The tax discussion regarding the Merger does not address any state, local or foreign tax consequences of the Merger.

 

Recommendation of the ATRM Board of Directors (page 60)

 

ATRM’s board of directors appointed a special committee of independent, disinterested directors of ATRM (the “ATRM Special Committee”) to evaluate and negotiate the Merger Agreement and the transactions contemplated thereby, including the Merger. Following its negotiation of the Merger Agreement and its determination that the Merger is in the best interests of ATRM and all of its shareholders, the ATRM Special Committee recommended that the ATRM board of directors approve the Merger and adopt the Merger Agreement.

 

Upon the recommendation of the ATRM Special Committee, the ATRM board of directors has determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are in the best interests of ATRM and its shareholders and recommends that holders of ATRM Common Stock and ATRM Preferred Stock vote “FOR” the approval of the Merger Agreement and the transactions contemplated thereby, including the Merger, that holders of ATRM Common Stock vote “FOR” the approval, by advisory vote, of the change in control payments and that holders of ATRM Common Stock vote “FOR” the proposal to adjourn or postpone the special meeting, if necessary or appropriate, for, among other reasons, the solicitation of additional proxies.

 

Digirad has entered into a voting agreement with the holders of all of the ATRM Preferred Stock and approximately 17.4% of the ATRM Common Stock pursuant to which such holders have agreed, among other things, to vote their ATRM shares in favor of the Merger and have given Digirad their proxies to vote “FOR” the approval of the Merger Agreement and the transactions contemplated thereby, including the Merger.

 

Interests of ATRM Directors and Executive Officers in the Merger (page 201)

 

In considering the recommendation of the ATRM board of directors with respect to the Merger Agreement, you should be aware that some of ATRM’s directors and executive officers have interests in the Merger that are different from, or in addition to, those of ATRM shareholders generally. The ATRM board of directors was aware of these interests and considered them, among other matters, in reaching its decision to approve the Merger Agreement and the transactions contemplated thereby, including the Merger, and to recommend that ATRM shareholders vote “FOR” the approval of the Merger Agreement and the transactions contemplated thereby, including the Merger.

 

Jeffrey E. Eberwein, who is the Chairman of Digirad’s board of directors and is also the Chairman of the board of directors of ATRM, owns approximately 4.3% of the outstanding common stock of Digirad and 17.4% of the outstanding ATRM Common Stock. Mr. Eberwein is also the Chief Executive Officer of Lone Star Value Management, LLC (“LSVM”), a Connecticut investment advisor located in Greenwich, CT and a wholly owned subsidiary of ATRM. LSVM is the investment manager of Lone Star Value Investors, LP (“LSVI”) and Lone Star Value Co-Invest I, LP (“LSV Co-Invest I”) which together own all of the outstanding ATRM Preferred Stock. Through these relationships and other relationships with affiliated entities, Mr. Eberwein may be deemed the beneficial owner of the securities owned by LSVI and LSV Co-Invest I. Mr. Eberwein disclaims beneficial ownership of the ATRM Preferred Stock, except to the extent of his pecuniary interest therein.

 

In addition to stock of ATRM, LSV Co-Invest I holds unsecured promissory notes of ATRM for a principal amount totaling $1.4 million; LSVM holds an unsecured note of ATRM for a principal amount totaling $0.3 million; and LSVI has pledged up to $3.0 million plus additional fees as collateral to secure a promissory note payable by ATRM to Gerber Finance, Inc. (“Gerber Finance”) due December 31, 2019.

 

LSVM and LSV Co-Invest I are party to subordination agreements with ATRM and Gerber Finance pursuant to which LSVM and LSV Co-Invest I agreed to subordinate their rights under their ATRM unsecured promissory notes to the rights of Gerber Finance as a lender to ATRM. Additionally, as a condition to a revolving credit loan agreement with Premier Bank, Mr. Eberwein entered into a guaranty in favor of Premier Bank, guaranteeing certain obligations of EdgeBuilder and Glenbrook (such subsidiaries together, “EBGL”). Also, in connection with amendments of a loan agreement between Gerber Finance and KBS, Mr. Eberwein has executed reaffirmations of guaranty in favor of Gerber Finance relating to his unconditional guaranty of $0.6 million of KBS’s obligations under a loan agreement related to over-advances.

 

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Further, Mr. Eberwein may be owed or may owe certain funds in connection with the resolution of a working capital adjustment related to ATRM’s acquisition of LSVM.

 

Digirad has entered into a voting agreement with Mr. Eberwein and certain of his affiliates, which together hold all of the ATRM Preferred Stock and approximately 17.4% of the ATRM Common Stock, pursuant to which such holders have agreed, among other things, to vote their ATRM shares in favor of the Merger and have given Digirad their proxies to vote “FOR” the approval of the Merger Agreement and the transactions contemplated thereby, including the Merger (the “Voting and Support Agreement”).

 

In addition, ATRM’s other executive officers and directors own approximately 2.17% of the outstanding ATRM Common Stock. As a result of the Merger, Mr. Eberwein, LSVI and LSV Co-Invest I will receive approximately 96% in the aggregate of the Digirad Preferred Stock issued as Merger Consideration, and ATRM’s other executive officers and directors will receive approximately 0.10% in the aggregate of the Digirad Preferred Stock issued as Merger Consideration.

 

Further, ATRM’s President and Chief Executive Officer is entitled to certain change in control payments in the event that, in connection with or following the Merger, he is terminated without cause or he terminates for “good reason.”

 

ATRM’s directors and executive officers are also entitled to continued indemnification and insurance coverage following completion of the Merger.

 

Comparison of Rights of Shareholders of ATRM and Stockholders of Digirad (page 183)

 

The rights of all ATRM shareholders are currently governed by the ATRM articles of incorporation, the ATRM bylaws and Minnesota law. In addition, the rights of holders of ATRM Preferred Stock are subject to the certificate of designation of the ATRM Preferred Stock. Upon completion of the Merger, all shareholders of ATRM will become holders of Digirad Preferred Stock and their rights will be governed by the Digirad certificate of incorporation, the certificate of designation for the Digirad Preferred Stock (the “Certificate of Designation”), the Digirad bylaws and Delaware law.

 

 The ATRM Special Meeting (page 200)

 

The special meeting of ATRM shareholders will be held on September 6, 2019 at 53 Forest Ave., 1st Floor in Old Greenwich, CT 06870, at 11:00 a.m., Eastern Time. At the special meeting, (i) holders of ATRM Common Stock and holders of ATRM Preferred Stock, voting as separate classes will be asked to approve the Merger Agreement and the transactions contemplated thereby, including the Merger, (ii) holders of ATRM Common Stock will be asked to approve, by an advisory vote, the change in control payments to ATRM’s President and Chief Executive Officer, and (iii) holders of ATRM Common Stock will be asked to adjourn or postpone the ATRM special meeting, if necessary or appropriate, for, among other reasons, the solicitation of additional proxies.

 

Record Dates; Shares Entitled to Vote; Required Vote with respect to the Merger; Quorum (page 200) 

 

ATRM shareholders are entitled to vote at the special meeting if they owned shares of ATRM Common Stock or ATRM Preferred Stock at the close of business on July 30, 2019, the record date. On the record date, there were 2,466,219 shares of ATRM Common Stock outstanding and 615,054 shares of ATRM Preferred Stock outstanding. ATRM shareholders will be entitled to one vote for each share of ATRM Common Stock and ATRM Preferred Stock (as applicable) that they owned on the record date on all matters submitted to a vote at the special meeting for each class of ATRM stock.

 

To approve the Merger Agreement and the transactions contemplated thereby, including the Merger, the affirmative vote of at least a majority of the outstanding shares of ATRM Common Stock entitled to vote thereon, voting as a separate class, and two-thirds of the outstanding shares of ATRM Preferred Stock entitled to vote thereon, voting as a separate class, are required. The presence at the special meeting on September 6, 2019, in person or by proxy, of shareholders entitled to cast at least a majority of the outstanding ATRM Common Stock and at least a majority of the outstanding ATRM Preferred Stock that are entitled to cast at the special meeting will constitute a quorum, which is necessary to hold the meeting. In the event that a quorum is not present at the special meeting, ATRM expects that the special meeting will be adjourned or postponed to solicit additional proxies.

 

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Shares Owned by ATRM Directors and Executive Officers (page 201) 

 

At the close of business on the record date, directors and executive officers of ATRM beneficially owned and were entitled to vote, in the aggregate 481,527 shares of ATRM Common Stock and 615,054 shares of ATRM Preferred Stock, which represented approximately 19.5% of the shares of ATRM Common Stock and 100% of the shares of ATRM Preferred Stock outstanding on that date. The affirmative vote of at least a majority of the outstanding shares of ATRM Common Stock and two-thirds of the outstanding shares of ATRM Preferred Stock are required to approve the Merger Agreement and the transactions contemplated thereby, including the Merger. The directors and executive officers of ATRM have confirmed to ATRM that they intend to vote all of their shares of ATRM Common Stock and ATRM Preferred Stock “FOR” the approval of the Merger Agreement and the transactions contemplated thereby, including the Merger. The following directors and executive officers of ATRM may be deemed to beneficially own and be entitled to vote the respective shares listed: Jeffrey Eberwein, Chairman, 428,017 shares of ATRM Common Stock and 615,054 shares of ATRM Preferred Stock; Daniel M. Koch, Chief Executive Officer, 33,510 shares of ATRM Common Stock; Mark C. Hood, Director, 10,000 shares of ATRM Common Stock, and Rodney Schwatken, Director, 10,000 shares of ATRM Common Stock.

 

The Merger (pages 52 and 83) 

 

The Merger Agreement is attached as Annex I to this proxy statement/prospectus. You are encouraged to read the Merger Agreement carefully and in its entirety because it is the principal document governing the Merger.

 

Conditions to the Merger (page 91)

 

ATRM and Digirad are obligated to complete the Merger only if certain conditions precedent are satisfied or waived, including the following:

 

The Merger Agreement has been approved by the affirmative vote of holders of not less than a majority of the outstanding shares of ATRM Common Stock and two-thirds of the outstanding shares of ATRM Preferred Stock at the ATRM special meeting. 

 

No order, injunction, statute, rule, regulation or decree shall have been issued, enacted, entered, promulgated or enforced by a governmental entity that prohibits, precludes, restrains, enjoins or makes illegal the consummation of the Merger. 

 

Digirad’s registration statement on Form S-4, of which this proxy statement/prospectus forms a part, has been declared effective by the SEC and no stop order suspending the effectiveness of the registration statement is in effect, and no proceeding for such purpose is pending or, to Digirad’s knowledge or ATRM’s, threatened by the SEC. 

 

Digirad shall have completed a private placement of Digirad Preferred Stock for gross proceeds to Digirad of no less than $3,000,000 (the “Private Placement”).

 

Digirad shall have entered into an agreement with Jeffrey Eberwein, the Chairman of the boards of directors of Digirad and ATRM, pursuant to which Digirad shall have the right to require Mr. Eberwein to acquire 100,000 shares of Digirad Preferred Stock at a price of $10.00 per share for aggregate proceeds of $1,000,000 at any time, in Digirad’s discretion, during the 12 calendar months following the effective time of the Merger (the “Issuance Option”).

 

Other contractual conditions set forth in the Merger Agreement have been satisfied or waived.

 

Termination; Termination Fees; Expenses (page 93)

 

The Merger Agreement contains provisions addressing the circumstances under which Digirad or ATRM may terminate the Merger Agreement. In addition, the Merger Agreement provides that, in certain circumstances, ATRM may be required to pay Digirad a termination fee of $725,000, plus up to $225,000 of Digirad’s expenses.

 

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No Solicitation; Changes in Recommendation (page 87)

 

The Merger Agreement contains certain restrictions on ATRM’s ability to solicit or engage in discussions or negotiations with a third party regarding specified transactions involving ATRM. Notwithstanding these restrictions, under certain circumstances, the ATRM board of directors may (i) respond to an unsolicited bona fide proposal for an alternative acquisition (ii) terminate the Merger Agreement and enter into an agreement with respect to a superior proposal, and (iii) change its recommendation that shareholders vote in favor of the Merger if the board concludes that a change is advisable to comply with its fiduciary duties under applicable law (if the Merger Agreement is terminated due to these circumstances, ATRM will be required to pay to Digirad the termination fee described above).

 

No Regulatory Approvals Required for the Merger (page 76)

 

ATRM and Digirad are not required to obtain any regulatory approvals for the Merger, as the Merger does not exceed any value thresholds for antitrust approval by the Antitrust Division of the Department of Justice or the Federal Trade Commission and neither the business of ATRM nor Digirad is subject to regulatory oversight which requires approval of the Merger.

 

Financing (page 96)

 

Digirad intends to finance the repayment of existing indebtedness of ATRM and pay fees and expenses incurred in connection with the transactions contemplated by the Merger Agreement with funds available under its existing credit facility, the proceeds of the Private Placement and cash on hand.

 

Dissenters’ Rights of ATRM Shareholders (page 76)

 

Under Minnesota law, unless otherwise set forth in the articles of incorporation or bylaws, dissenters’ rights are not available in connection with a merger to the holders of shares listed on certain national stock exchanges and the consideration to be received for such shares consists only of shares that are listed on one of such national stock exchanges and cash in lieu of fractional shares. Because the ATRM Common Stock is not listed on a national stock exchange, holders of ATRM Common Stock have dissenters’ rights in connection with the Merger to receive the fair value, in cash, of their shares of ATRM Common Stock. In order to exercise dissenters’ rights, ATRM Common Stock holders must strictly comply with the dissenters’ rights procedures under Minnesota law or they will lose their dissenters’ rights. One of these rules is that you must not vote FOR the Merger. If you vote FOR the Merger, you will lose your dissenters’ rights. The cash you receive upon the exercise of your dissenters’ rights may be more or less than the value of the Digirad Preferred Stock you would have received in the Merger if you had not exercised your dissenters’ rights. The dissenters’ rights procedures are described in the section of this proxy statement/prospectus entitled “The Merger—Dissenters’ Rights of ATRM Shareholders.”

 

ATRM and Digirad have entered into the Voting and Support Agreement with the holders of all of the ATRM Preferred Stock and approximately 17.4% of the ATRM Common Stock pursuant to which such holders have given Digirad their proxies to vote “FOR” the approval of the Merger Agreement and the transactions contemplated thereby, including the Merger.

 

Opinion of Financial Advisor to Digirad (page 67)

 

On July 2, 2019, Oberon delivered its final draft written opinion to the Digirad Special Committee to the effect that, as of July 3, 2019, and based on and subject to various assumptions made, procedures followed, matters considered and limitations on the review undertaken by Oberon in connection with the opinion, the experience of its investment bankers and other factors it deemed relevant, the exchange ratios pursuant to the Merger Agreement were fair, from a financial point of view, to Digirad.

 

Risk Factors (page 25)

 

Before voting at the ATRM special meeting, ATRM shareholders should carefully consider all information contained in this proxy statement/prospectus, including the “Risk Factors Relating to the Merger” section beginning on page 25 for a discussion of some of the risks related to the Merger Agreement and the Merger and how they will affect ATRM shareholders. 

 

13 

 

 

SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF DIGIRAD

 

Digirad is providing you with the following summary historical consolidated financial information to assist you in your analysis of the financial aspects of the Merger. Digirad derived (i) the financial information as of and for the fiscal years ended December 31, 2018 and 2017 from its historical audited consolidated financial statements and related notes for the fiscal years then ended and (ii) the financial information as of and for the three months ended March 31, 2019 and 2018 from its unaudited condensed consolidated financial statements and related notes, which include, in the opinion of Digirad’s management, all normal and recurring adjustments that are considered necessary for the fair statement of the results for such interim periods and dates. The information set forth below is only a summary that you should read together with the historical audited consolidated financial statements of Digirad for the fiscal years ended December 31, 2018 and 2017 and its unaudited condensed consolidated financial statements for the three-month period ended March 31, 2019 and 2018 and the related notes, as well as the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Digirad’s annual report on Form 10-K for the year ended December 31, 2018 and quarterly report on Form 10-Q for the three months ended March 31, 2019 that Digirad previously filed with the SEC and which are provided in Annex IV of this proxy statement/prospectus. For more information, see the section entitled “Where You Can Find More Information” beginning on page 208. The historical results presented are not necessarily indicative of results to be expected in any future period. All share and per share amounts below reflect Digirad’s 1-for-10 reverse split of its common stock, effected on June 4, 2019 (the “Reverse Stock Split”). 

         
   Year Ended December 31, 
   2018   2017 
Statements of operations data (in thousands, except per share amounts):  (in thousands, except per share data) 
Total revenue  $104,180   $104,632 
Net loss from continuing operations  $(3,839)  $(35,036)
Net income/(loss) from discontinued operations  $4,575   $(694)
Net income (loss)  $736   $(35,730)
Net loss per share from continuing operations – basic and diluted  $(1.90)  $(17.52)
Net income/(loss) from discontinued operations – basic and diluted  $2.27   $(0.35)
Net income (loss) per share – basic and diluted  $0.37   $(17.87)
           
Balance sheet data:          
Cash and cash equivalents  $1,545   $1,877 
Total assets  $50,594   $66,703 
Total current liabilities  $13,217   $16,970 
Total liabilities  $24,794   $38,904 
Accumulated deficit  $(113,880)  $(114,633)
Total stockholder’s equity  $25,800   $27,799 
           
Other information:          
Working capital  $7,977   $8,606 
Weighted-average shares outstanding – basic and diluted   2,016    2,000 

 

  

Three Months Ended
March 31, 

 
   2019   2018 
Statements of operations data:  (in thousands, except per share data) 
Total revenue  $23,912   $25,465 
Net loss from continuing operation  $(1,657)  $(1,388)
Net income from discontinued operations  $   $5,494 
Net (loss) income  $(1,657)  $4,106 
Net loss per share from continuing operations – basic and diluted  $(0.82)  $(0.69)
Net income loss) per share from discontinued operations – basic and diluted      $2.75 
Net (loss) income per share – basic and diluted – basic and diluted  $(0.82)  $2.05 
           
Weighted-average shares outstanding – basic and diluted   2,028    2,009 

  

14 

 

 

  

March 31,
2019

   December 31,
2018
 
Balance sheet data:  (in thousands) 
Cash and cash equivalents  $797   $1,545 
Total assets  $54,593   $50,594 
Total current liabilities  $13,423   $13,217 
Total liabilities  $30,340   $24,794 
Accumulated deficit  $(115,537)  $(113,880)
Total stockholder’s equity  $24,253   $25,800 
           
Working capital  $7,925   $7,977 

 

Recent Developments

 

Results for the Three and Six Months ended June 30, 2019. On August 6, 2019, Digirad issued a press release announcing financial results for the three and six months ended June 30, 2019. The press release included the following financial results:

 

Digirad had revenues from continuing operations for the second quarter of 2019 of $25.8 million, compared to $27.1 million in the second quarter of the 2018. Digirad’s total revenues from continuing operations for the six months ended June 30, 2019 were $49.7 million, compared to $52.5 million in the six months ended June 30, 2018.

 

Digirad’s net loss from continuing operations for the second quarter of 2019 was $1.5 million, or $0.72 net loss per basic and diluted share, compared to net loss from continuing operations of $0.4 million, or $0.17 net loss per basic and diluted share in the same period in 2018. Digirad’s net loss from continuing operations for the six months ended June 30, 2019 was $3.1 million, or $1.54 net loss per basic and diluted share, compared to net loss from continuing operations of $1.7 million, or $0.86 net loss per basic and diluted share in the same period in 2018.

 

Digirad’s operating cash flow for the second quarter of 2019 was an inflow of $2.6 million, compared to an inflow of $2.6 million for the same period in 2018. Digirad’s operating cash flow for the six months ended June 30, 2019 was an inflow of $0.4 million, compared to an inflow of $3.0 million for the same period in 2018.

 

15 

 

 

SUMMARY HISTORICAL FINANCIAL INFORMATION OF ATRM

 

ATRM is providing you with the following summary historical consolidated financial information to assist you in your analysis of the financial aspects of the Merger. ATRM derived (i) the financial information as of and for the fiscal years ended December 31, 2018 and 2017 from its historical audited consolidated financial statements and related notes for the fiscal years then ended and (ii) the financial information as of and for the three months ended March 31, 2019 and 2018 from its unaudited consolidated financial statements and related notes which include, in the opinion of ATRM’s management, all normal and recurring adjustments that are considered necessary for the fair statement of the results for such interim periods and dates. The information set forth below is only a summary that you should read together with the historical audited consolidated financial statements of ATRM for the fiscal years ended December 31, 2018 and 2017 and its unaudited condensed consolidated financial statements for the three-month period ended March 31, 2019 and 2018 and the related notes, as well as the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in ATRM’s annual report on Form 10-K for the year ended December 31, 2018 and quarterly report on Form 10-Q for the three months ended March 31, 2019 that ATRM previously filed with the SEC and which are provided in Annex V of this proxy statement/prospectus. For more information, see the section entitled “Where You Can Find More Information” beginning on page 208. The historical results presented are not necessarily indicative of results to be expected in any future period. 

         
   Year Ended
December 31,
 
   2018   2017 
Statements of operations data (in thousands, except per share amounts):        
Net sales  $34,477   $40,553 
Net loss  $(3,516)  $(8,677)
Net loss per share – Basic and Diluted  $(2.17)  $(3.83)
           
Balance sheet data (in thousands):          
Cash and cash equivalents  $187   $48 
Total assets  $11,578   $12,915 
Total current liabilities  $19,174   $15,662 
Total liabilities  $21,297   $18,751 
Accumulated deficit  $(92,368)  $(88,852)
Total stockholder’s deficit  $(9,719)  $(5,836)
           
Other information (in thousands):          
Working capital  $(13,001)  $(8,853)
Weighted average shares outstanding – Basic and Diluted   2,407    2,372 

 

   Three Months Ended
March 31,
 
   2019   2018 

Statements of operations data

(in thousands, except per share data):

        
Net sales  $7,335   $7,684 
Net loss  $(781)  $(1,010)
Net loss per common share – Basic and Diluted  $(0.51)  $(0.59)
           
Weighted average shares outstanding – Basic and Diluted   2,407    2,396 

 

16 

 

 

   March 31,
2019
   December 31,
2018
 
Balance sheet data (in thousands):          
Cash and cash equivalents  $87   $187 
Total assets  $10,994   $11,578 
Total current liabilities  $18,414   $19,174 
Total liabilities  $20,937   $21,297 
Accumulated deficit  $(93,149)  $(92,368))
           
Total stockholder’s deficit  $(9,943)  $(9,719)
Other information (in thousands):          
Working capital  $(13,298)  $(13,001)

 

17 

 

 

SUMMARY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED COMBINED FINANCIAL INFORMATION

 

The following summary unaudited pro forma condensed combined financial information (“summary pro forma financial information”) is based upon the historical consolidated financial statements of Digirad and ATRM, which are included in this proxy statement/prospectus, and has been prepared to reflect the Merger, based on the acquisition method of accounting, with Digirad treated as the acquirer. The historical consolidated financial statements have been adjusted to give effect to pro forma events that are directly attributable to the Merger and factually supportable and, in the case of the statement of income, which are expected to have a continuing impact.

 

The summary pro forma financial information is derived from the unaudited pro forma condensed consolidated combined financial statements contained in this proxy statement/prospectus. See “Unaudited Pro Forma Condensed Consolidated Combined Financial Statements.” The summary pro forma financial information should be read in conjunction with the historical consolidated financial statements and accompanying notes of Digirad and ATRM, incorporated included in this proxy statement/prospectus and the unaudited pro forma condensed consolidated combined financial statements. The unaudited pro forma condensed consolidated combined statements of income, which have been prepared for the three months ended March 31, 2019 and the year ended December 31, 2018, give effect to the Merger as if it had occurred on January 1, 2018. The unaudited pro forma condensed consolidated combined balance sheet has been prepared as of March 31, 2019 and gives effect to the Merger as if it had occurred on that date.

 

As of the date of this proxy statement/prospectus, Digirad has not finalized the detailed valuation studies necessary to arrive at the required fair market value of the ATRM assets to be acquired and the liabilities to be assumed and the related allocations of the purchase price. Digirad has made certain pro forma adjustments to the historical book values of the assets and liabilities of ATRM to reflect certain preliminary estimates of the fair value of the net assets acquired, with the excess of the estimated purchase price over the estimated fair values of ATRM’s acquired assets and assumed liabilities recorded as goodwill. See Note 1 to the “Unaudited Pro Forma Condensed Consolidated Combined Financial Statements.” Actual results are expected to differ from these preliminary estimates once Digirad has completed the valuation studies necessary to finalize the required purchase price allocations. There can be no assurances that such finalization of the valuation studies will not result in material changes. Digirad performed a preliminary assessment of accounting policies and financial statement presentation which has identified certain adjustments necessary to conform information in ATRM’s historical financial statements to Digirad’s accounting policies and presentation. The review of the accounting policies is not yet complete and additional policy and presentation differences may be identified upon completion.

 

The summary pro forma financial information is not intended to represent or be indicative of the consolidated results of operations or financial condition of the combined company that would have been reported had the Merger been completed as of the dates presented and should not be taken as representative of the future consolidated results of operations or financial condition of the combined company.

 

Upon completion of the Merger, various triggering events may occur which would result in the cash payment pursuant to change in control agreements of certain ATRM employees. The estimated payments under these agreements will range from approximately $0 to $0.5 million. No adjustment has been included in the unaudited pro forma condensed combined financial statements for these payments.

 

The summary pro forma financial information does not include the realization of future cost savings or synergies or costs or restructuring charges that are expected to result from Digirad’s acquisition of ATRM. The transaction is expected to generate annual operating synergies of approximately $0.4 million, which are expected to be achieved through savings related to ATRM ceasing to have public company reporting and compliance expenses. Digirad also expects to incur merger and integration costs, of approximately $1.2 million in operating expense. However, no assurance can be given with respect to the ultimate level of such synergies or the timing of their realization.

 

All share and per share amounts below are reflective of the Reverse Stock Split.

 

18 

 

 

   For the Three
Months Ended
March 31, 2019
   For the Year
Ended
December 31, 2018
 
Unaudited Pro Forma Condensed Consolidated Combined          
Statements of Operations Data (in thousands, except per share data):          
Revenue  $31,247   $138,657 
Cost of revenue  $26,285   $117,410 
Gross profit  $4,962   $21,247 
Operating expenses  $6,913   $28,297 
Net loss attributable to common shareholders  $(2,958)  $(9,051)
Net loss per common share attributable to common shareholders—basic and diluted  $(1.46)  $(4.49)
Weighted average common shares outstanding   2,028    2,016 

 

   As of
March 31, 2019
 
     
Unaudited Pro Forma Condensed Combined     
Balance Sheet Data (in thousands):     
Cash and cash equivalents  $884 
Total assets  $92,382 
Long term debt  $17,714 
Stockholders’ equity  $39,818 

 

19 

 

 

COMPARATIVE PER SHARE MARKET PRICE, DIVIDEND AND OTHER DATA

 

ATRM Common Stock is quoted for trading on the OTC Marketplace under the symbol “ATRM.” The following table sets forth, for the calendar quarters indicated, the high and low daily closing price per share of ATRM Common Stock as reported on the OTC Marketplace (other than with respect to the prices reported for the calendar quarters ended March 31, 2019 and thereafter) as reported in ATRM’s Annual Report on Form 10-K for the years ended December 31, 2017 and December 31, 2018. On August 8, the last practicable trading day prior to the date of this proxy statement/prospectus, 2,466,219 shares of ATRM Common Stock and 615,054 shares of ATRM Preferred Stock were outstanding. As of July 16, 2019, ATRM had 90 holders of record of the ATRM Common Stock. 

         
    

ATRM Common Stock

Price Range

 
    Low    High 
Year ended December 31, 2019          
First Quarter  $0.10   $0.32 
Second Quarter  $0.14   $0.30 
Third Quarter (through August 6, 2019)  $0.15   $0.24 
           
Year ended December 31, 2018          
First Quarter  $0.80   $1.15 
Second Quarter  $0.06   $1.05 
Third Quarter  $0.06   $0.65 
Fourth Quarter  $0.11   $0.57 
           
Year ended December 31, 2017          
First Quarter  $1.33   $2.10 
Second Quarter  $1.18   $1.99 
Third Quarter  $1.34   $1.94 
Fourth Quarter  $1.03   $1.80 

 

As of the date of the proxy statement/prospectus, there was no public market for the ATRM Preferred Stock. The liquidation value of the ATRM Preferred Stock was $25 per share, and holders of the ATRM Preferred Stock are entitled to receive, when, as and if declared by the ATRM board of directors, cumulative preferential dividends, payable quarterly in cash at a rate per annum equal to 10.0% multiplied by the liquidation value of $25 per share; provided that ATRM may pay such dividends in-kind through the issuance of additional shares of ATRM Preferred Stock at a rate per annum equal to 12.0% multiplied by the liquidation value of $25, at the sole option of ATRM, for up to four quarterly dividend periods in any consecutive 36-month period (determined on a rolling basis). As of the date of this proxy statement/prospectus, ATRM has only paid in-kind dividends on the ATRM Preferred Stock, and on July 16, 2019, ATRM, LSVI and LSV Co-Invest I entered into a Series B Preferred Stock Dividend Agreement, pursuant to which the parties thereto agreed to cancel all accrued but unpaid dividends for 2018 on the ATRM Preferred Stock in exchange for the issuance to LSVI and LSV Co-Invest I of an aggregate of 17,915 shares of ATRM Preferred Stock. As a result of such agreement, there are no accrued dividends on the ATRM Preferred Stock. As of July 16, 2019, ATRM had 90 holders of record of the ATRM Common Stock and two holders of record of the ATRM Preferred Stock.

 

As of the date of the proxy statement/prospectus, there was no public market for the Digirad Preferred Stock and no shares of the Digirad Preferred Stock were outstanding. Digirad intends to apply to have the Digirad Preferred Stock listed on the Nasdaq Global Market under the symbol “DRADP.” There can be no assurance that such listing will be approved. The Digirad Preferred Stock has a liquidation value of $10.00 per share. Dividends will be payable on the Digirad Preferred Stock out of amounts legally available therefor at a rate equal to 10.0% per annum per $10.00 of stated liquidation preference per share, or $1.00 per share of Digirad Preferred Stock per year. Dividends on the Digirad Preferred Stock will only be payable in cash.

 

20 

 

 

The following table sets forth the closing sale price per share of ATRM Common Stock, the liquidation value of the ATRM Preferred Stock and the liquidation value of the Digirad Preferred Stock as of July 3, 2019, the last trading day prior to the public announcement of the proposed Merger, and as of August 8, 2019, the most recent practicable trading day prior to the date of this proxy statement/prospectus. The table also includes the value of each of ATRM Common Stock and ATRM Preferred Stock on an equivalent price per share basis, as determined by reference to the value of Merger Consideration to be received in respect of each share of each of ATRM Common Stock and ATRM Preferred Stock in the Merger. These equivalent prices per share reflect the value of the Digirad Preferred Stock that ATRM shareholders would receive in exchange for each share of ATRM Common Stock and ATRM Preferred Stock if the Merger was completed on either of these dates, applying the exchange ratio of 0.03 shares of Digirad Preferred Stock for each share of ATRM Common Stock and the exchange ratio of 2.5 shares of Digirad Preferred Stock for each share of ATRM Preferred Stock. As shown below, because the exchange ratios are fixed, and the value of the Digirad Preferred Stock is fixed, the value to be received by holders of ATRM Common Stock and ATRM Preferred Stock in the Merger is fixed, regardless of any change in the price of the ATRM Common Stock.

 

    ATRM
Common Stock
   ATRM
Preferred Stock
   Digirad
Preferred Stock
  

Equivalent 

Value of 

ATRM 

Common Stock

  

Equivalent

Value of

ATRM

Preferred Stock

 
July 3, 2019   $0.15   $25.00   $10.00   $0.30   $25.00 
August 8, 2019   $0.20   $25.00   $10.00   $0.30   $25.00 

 

The liquidation value of the Digirad Preferred Stock to be issued in exchange for shares of ATRM Common Stock and ATRM Preferred Stock upon the completion of the Merger will be $10.00. The above tables show only historical comparisons. Because the market price of ATRM Common Stock will likely fluctuate prior to the Merger, the comparison above may not provide meaningful information to holders of ATRM Common Stock in determining whether to approve the Merger Agreement. Shareholders are encouraged to obtain current market quotations for ATRM Common Stock and to review carefully the other information contained in this proxy statement/prospectus.

 

No assurance can be given as to the market price of Digirad Preferred Stock or the market price of ATRM Common Stock or ATRM Preferred Stock at the effective time of the Merger. The market price of Digirad Preferred Stock may fluctuate after the effective time of the Merger. See “Risk Factors Relating to the Merger.”

 

The following table sets forth for the period presented certain per share information for Digirad common stock and ATRM Common Stock on a historical basis and on an unaudited pro forma basis after giving effect to the Merger under the acquisition method of accounting. The historical per share information for Digirad and ATRM has been derived from, and should be read in conjunction with, the historical consolidated financial statements of Digirad and ATRM included in Annexes IV and V of this proxy statement/prospectus. Also see the section entitled “Where You Can Find More Information” on page 208. The Digirad unaudited pro forma combined per share information has been derived from, and should be read in conjunction with, the unaudited pro forma condensed consolidated combined financial information included in this proxy statement/prospectus. See the section entitled “Summary Unaudited Pro Forma Condensed Consolidated Combined Financial Information” on page 18.

 

Unaudited pro forma ATRM Common Stock equivalent information is not provided below, as Digirad common stock is not being exchanged for any capital stock of ATRM in the Merger. Accordingly, each share of ATRM Common Stock that is converted in the Merger into shares of Digirad Preferred Stock would not have participated in income from continuing operations, cash dividends declared and book value of Digirad if ATRM and Digirad had been combined for accounting and financial reporting purposes for the period presented. The Digirad Historical and Pro Forma Combined share and per share amounts below reflect the Reverse Stock Split.

 

21 

 

 

   Digirad
Historical
   ATRM
Historical
   Consolidated
Unaudited
Pro Forma
Combined
 
For the Three Months Ended March 31, 2019               
Loss attributable to common stockholders/shareholders per share (basic and diluted)  $(0.82)  $(0.51)  $(1.46)
Book value per share at period end (unaudited)   11.94    (4.03)   19.61 
For the Year Ended December 31, 2018               
Loss attributable to common stockholders/shareholders per share (basic and diluted)  $(1.90)  $(2.17)  $(4.49)
Cash dividends per share   1.65        1.65 

 

During the year ended December 31, 2018 and as adjusted for the Reverse Stock Split, Digirad paid three quarterly cash dividends of $0.55 per share of Digirad common stock, for total dividends paid of $1.65 per share of Digirad common stock. During the first half of 2017, Digirad paid two quarterly dividends of $0.50 per share of Digirad common stock and paid two quarterly dividends of $0.55 per share of Digirad common stock in the second half of the year, for total dividends paid of $2.10 per share of Digirad common stock. Digirad does not currently plan to pay dividends on its common stock for the foreseeable future.

 

Dividends will be payable on the Digirad Preferred Stock out of amounts legally available therefor at a rate equal to 10.0% per annum per $10.00 of stated liquidation preference per share, or $1.00 per share of Digirad Preferred Stock per year. Dividends on the Digirad Preferred Stock will only be payable in cash. Digirad’s ability to pay dividends could be affected by future business performance, liquidity, capital needs, and financial covenants under its commercial credit facility. Though such credit facility does not prohibit Digirad from paying dividends, if there is insufficient cash generation from Digirad’s business to satisfy its required financial covenants, or if there is a default or event of default under the credit facility that has occurred and is continuing, Digirad may be required to reduce or eliminate its quarterly cash dividend until compliance with the financial covenants can be met.

 

ATRM has never paid cash dividends on the ATRM Common Stock. ATRM currently does not anticipate paying cash dividends on the ATRM Common Stock in the foreseeable future. ATRM has paid in-kind dividends on the ATRM Preferred Stock in accordance with the terms of the certificate of designation of the ATRM Preferred Stock and will continue to do so until the completion of the Merger.

 

On July 16, 2019, ATRM, LSVI and LSV Co-Invest I entered into a Series B Preferred Stock Dividend Agreement, pursuant to which the parties thereto agreed to cancel all accrued but unpaid dividends for 2018 on the ATRM Preferred Stock in exchange for the issuance to LSVI and LSV Co-Invest I of an aggregate of 17,915 shares of ATRM Preferred Stock. As a result of such agreement, there are no accrued dividends on the ATRM Preferred Stock.

 

22 

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This proxy statement/prospectus, and the documents to which this proxy statement/prospectus refers, contain forward-looking statements within the meaning of the “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995. Any statements contained in this proxy statement/prospectus, or any such documents, that are not statements of historical fact, including statements about Digirad’s and/or ATRM’s beliefs and expectations, are forward-looking statements and should be evaluated as such.

 

Forward-looking statements may be identified by the use of words such as “anticipate,” “believe,” “expect,” “intend,” “plan,” “may,” “estimate,” “target,” “project,” “should,” “will,” “can,” “likely,” similar expressions and any other statements that predict or indicate future events or trends or that are not statements of historical facts. These forward-looking statements are subject to numerous risks and uncertainties. Such forward-looking statements reflect, among other things, Digirad’s and/or ATRM’s current expectations, plans, strategies and anticipated financial results and involve a number of known and unknown risks, uncertainties, and factors that may cause Digirad’s and/or ATRM’s actual results to differ materially from those expressed or implied by these forward-looking statements. These risks, uncertainties and factors include, but are not limited to, the following:

 

Digirad’s and ATRM’s ability to complete the Merger;

Digirad’s ability to successfully integrate ATRM’s operations and to realize the synergies from the acquisition;

failure of ATRM’s shareholders to approve the Merger Agreement; 

final terms of the financing Digirad uses to repay ATRM debt;

the substantial amount of Digirad’s debt and Digirad’s ability to incur additional debt in the future; 

Digirad’s need for a significant amount of cash to service and repay its debt; 

restrictions contained in Digirad’s debt agreements that limit the discretion of management in operating the business;

Digirad’s ability to refinance its existing debt as necessary and interest rate risk associated with variable-rate debt;

ATRM’s cash-flow dependency and capital commitment to maintain and upgrade operations;

rapid development and introduction of new technologies in the industries in which Digirad and ATRM operate;

intense competition in the industries in which Digirad and ATRM operate; 

unanticipated higher capital spending for, or delays in, the deployment of new technologies, and the pricing and availability of equipment, materials and inventories; 

risks associated with Digirad’s possible pursuit of further acquisitions; 

economic conditions in the Digirad and ATRM service areas; 

costs associated with protection of owned intellectual property rights and pursuit of potential infringement by third parties; 

system failures; 

losses of large customers, partnerships, or certifications; 

losses of large numbers of other customers, or an inability to secure new customers at the pace and cost at which they have previously been secured; 

disruptions in the relationships with third party vendors; 

losses of key management personnel and the inability to attract and retain highly qualified management and personnel in the future; 

the cost and competitive impact of legislation and regulatory changes in the industries in which Digirad and ATRM operate; 

maintenance of data security; 

significant costs associated with lawsuits and regulatory inquiries; 

liability and compliance costs regarding environmental regulations; and 

risks to the Merger and the surviving company related to litigation in which Digirad and ATRM may become involved.

 

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These and other uncertainties related to the businesses of Digirad and ATRM are described in greater detail in the section entitled “Risk Factors Relating to the Merger” and in the filings of Digirad and of ATRM with the SEC, including Digirad’s and ATRM’s Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q provided in Annexes IV and V of this proxy statement/prospectus. Many of these risks are beyond each of Digirad’s and ATRM’s management’s ability to control or predict. All forward-looking statements attributable to Digirad, ATRM or persons acting on behalf of them are expressly qualified in their entirety by the cautionary statements contained, and risk factors identified, in this proxy statement/prospectus and the companies’ filings with the SEC. Because of these risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements. Furthermore, forward-looking statements speak only as of the date they are made. Except as required under the federal securities laws or the rules and regulations of the SEC, neither Digirad nor ATRM undertakes any obligation to update or review any forward-looking information, whether as a result of new information, future events or otherwise.

 

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RISK FACTORS RELATING TO THE MERGER

 

In addition to the other information included in this proxy statement/prospectus, ATRM’s shareholders should consider carefully the matters described below in determining whether to approve the Merger Agreement and the transactions contemplated thereby, including the Merger.

 

The price of Digirad Preferred Stock may be affected by factors different from those affecting the price of ATRM Common Stock and ATRM Preferred Stock.  Upon completion of the Merger, holders of ATRM Common Stock and ATRM Preferred Stock will become holders of Digirad Preferred Stock. Digirad’s business and results of operations and the market price of Digirad Preferred Stock may be affected by factors different than those affecting ATRM’s business and results of operations and the market price of ATRM Common Stock and ATRM Preferred Stock. For a discussion of Digirad’s and ATRM’s businesses and certain factors to consider in connection with their businesses, see each company’s risk factors and business sections included in this proxy statement/prospectus.

 

The Merger Agreement contains provisions that could discourage a potential competing acquiror that might be willing to pay more to effect a business combination with ATRM.  The Merger Agreement contains “no solicitation” provisions that restrict ATRM’s ability to solicit or facilitate proposals regarding a merger or similar transaction with another party. Further, several conditions must be satisfied in order for the ATRM board of directors to withdraw, amend or modify its recommendation regarding the proposed Merger, including that Digirad generally has an opportunity to offer to modify the terms of the proposed Merger in response to any competing acquisition proposal that may be made before the ATRM board of directors may withdraw, amend or modify its recommendation regarding the proposed Merger. See “The Merger Agreement—No Solicitations; Changes in Recommendation.” If the ATRM board of directors withdraws, amends or modifies its recommendation regarding the proposed Merger, Digirad has the right to terminate the Merger Agreement and receive a $725,000 termination fee from ATRM and the payment of its expenses up to $225,000. These provisions could discourage a potential competing acquiror from considering or proposing an acquisition of ATRM, even if it were prepared to pay consideration with a higher value than the shares proposed to be issued in the Merger, or might result in a potential competing acquiror proposing to pay a lower per share price than it might otherwise have proposed to pay because of the added expense of the termination fee.

 

The integration of Digirad and ATRM following the Merger may present significant challenges.    Digirad may face significant challenges in combining ATRM’s operations into its operations in a timely and efficient manner and in retaining key ATRM personnel. The failure to integrate successfully Digirad and ATRM and to manage successfully the challenges presented by the integration process may result in Digirad not achieving the anticipated benefits of the Merger including operational and financial synergies.

 

Digirad will incur transaction, integration and restructuring costs in connection with the Merger.  Digirad and ATRM expect to incur costs associated with transaction fees and other costs related to the Merger. Specifically, Digirad and ATRM each expects to incur approximately $1.2 million and $0.2 million, respectively, of transaction costs related to the Merger. In addition, Digirad will incur integration and restructuring costs following the completion of the Merger as it integrates the businesses of ATRM with those of Digirad. Although Digirad expects that the realization of efficiencies related to the integration of the businesses will offset incremental transaction, integration and restructuring costs over time, Digirad cannot give any assurance that this net benefit will be achieved in the near term.

 

The Digirad Preferred Stock will rank junior to all of Digirad’s indebtedness and other liabilities. In the event of Digirad’s bankruptcy, liquidation, dissolution, or winding-up of its affairs, Digirad’s assets will be available to pay obligations on the Digirad Preferred Stock only after all of its indebtedness and other liabilities have been paid. The rights of holders of the Digirad Preferred Stock to participate in the distribution of Digirad’s assets will rank junior to the prior claims of Digirad’s current and future creditors and any future series or class of preferred stock Digirad may issue that ranks senior to the Digirad Preferred Stock. Also, the Digirad Preferred Stock will effectively rank junior to all existing and future indebtedness and to the indebtedness and other liabilities of Digirad’s existing subsidiaries and any future subsidiaries. Digirad’s existing subsidiaries are, and future subsidiaries would be, separate legal entities and have no legal obligation to pay any amounts to Digirad in respect of dividends due on the Digirad Preferred Stock.

 

Digirad has incurred and may in the future incur substantial amounts of debt and other obligations that will rank senior to the Digirad Preferred Stock. As of March 31, 2019, Digirad’s total liabilities equaled approximately $30.3 million, including $12.5 million owed under a commercial revolving credit facility pursuant to a Loan and Security Agreement with Sterling National Bank (the “SNB Loan Agreement”) for borrowings of up to $20 million. If Digirad is forced to liquidate its assets to pay its creditors, Digirad may not have sufficient assets to pay amounts due on any or all of the Digirad Preferred Stock then outstanding.

 

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Digirad may not be able to pay dividends on the Digirad Preferred Stock if it falls out of compliance with its loan covenants. Digirad is currently permitted to pay dividends under the restrictive covenants of the SNB Loan Agreement. However, Digirad may be restricted from paying dividends on the Digirad Preferred Stock if it falls out of compliance with its loan covenants and are prohibited by Sterling National Bank from paying dividends.

 

The SNB Loan Agreement requires Digirad to comply with various financial covenants as specifically set forth in the SNB Loan Agreement. The SNB Loan Agreement limits Digirad’s ability to pay dividends if such dividend would result in Digirad’s non-compliance with the financial covenants in the SNB Loan Agreement, there is insufficient borrowing availability under the SNB Loan Agreement, or if there is a default or event of default under the SNB Loan Agreement that has occurred and is continuing. In such a circumstance, Digirad would be required to reduce or eliminate the Digirad Preferred Stock cash dividend until compliance with the financial covenants is met.

 

Digirad must adhere to prescribed legal requirements, and must also have sufficient cash, in order to be able to pay dividends. In accordance with Section 170 of the Delaware General Corporation Law, Digirad may only declare and pay cash dividends on the Digirad Preferred Stock if Digirad has either net profits during the fiscal year in which the dividend is declared and/or the preceding fiscal year, or a “surplus,” meaning the excess, if any, of Digirad’s net assets (total assets less total liabilities) over Digirad’s capital. Digirad can provide no assurance that it will satisfy such requirements in any given year. Further, even if Digirad has the legal ability to declare a dividend, it may not have sufficient cash to pay dividends on the Digirad Preferred Stock. Digirad’s ability to pay dividends may be impaired if any of the risks described in this proxy statement/prospectus actually occur. Also, payment of dividends will depend upon Digirad’s financial condition and other factors as Digirad’s board of directors may deem relevant from time to time. Digirad cannot assure you that its businesses will generate sufficient cash flow from operations or that future borrowings will be available to Digirad in an amount sufficient to enable it to pay dividends on the Digirad Preferred Stock.

 

Digirad may not be able to redeem the Digirad Preferred Stock upon a Change of Control Triggering Event. Upon the occurrence of a Change of Control Triggering Event, unless Digirad has exercised its option to redeem the Digirad Preferred Stock after the fifth anniversary of the effective date of the Merger, each holder of the Digirad Preferred Stock will have the right to require Digirad to redeem all or any part of such holder’s Digirad Preferred Stock at a price equal to the liquidation preference of $10.00 per share, plus an amount equal to any accumulated and unpaid dividends up to but excluding the date of payment, but without interest. If Digirad experiences a Change of Control Triggering Event, there can be no assurance that Digirad would have sufficient financial resources available to satisfy its obligations to redeem the Digirad Preferred Stock and any indebtedness that may be required to be repaid or repurchased as a result of such event. In addition, Digirad may be unable to redeem the Digirad Preferred Stock upon a Change of Control Triggering Event if such redemption would result in our non-compliance with the financial covenants in the SNB Loan Agreement, there is insufficient borrowing availability under the SNB Loan Agreement, or if there is a default or event of default under the SNB Loan Agreement that has occurred and is continuing in connection with the Change of Control Triggering Event. Digirad’s failure to redeem the Digirad Preferred Stock could have material adverse consequences for Digirad and the holders of the Digirad Preferred Stock. See “Description of Digirad Capital Stock—Digirad Series A Preferred Stock—Redemption—Change of Control.”

 

If Nasdaq delists the Digirad Preferred Stock from quotation on its exchange, investors’ ability to make transactions in the Digirad Preferred Stock could be limited. Digirad anticipates that the Digirad Preferred Stock will be listed on the Nasdaq Global Market, a national securities exchange, upon consummation of the Merger. Since Digirad’s common stock is listed on the Nasdaq Global Market, in order to for the Digirad Preferred Stock to be listed on the Nasdaq Global Market, Digirad must meet certain modified criteria, including a minimum of publicly held shares of Digirad Preferred Stock (generally 200,000 shares), with a minimum market value (generally $4,000,000) and a minimum number of holders (generally 100 public holders). If Digirad meets such standards and has the Digirad Preferred Stock listed on the Nasdaq Global Market, Digirad cannot assure you that the Digirad Preferred Stock will continue to be listed on the Nasdaq Global Market in the future. In order to continue listing the Digirad Preferred Stock on the Nasdaq Global Market, Digirad must maintain certain financial, distribution and share price levels. Generally, this means having a minimum number of publicly held shares of Digirad Preferred Stock (generally 100,000 shares), a minimum market value (generally $1,000,000) and a minimum number of holders (generally 100 public holders). If Digirad common stock is delisted from the Nasdaq Global Market, the Digirad Preferred Stock would be required to meet the more stringent initial listing standards of the Nasdaq Global Market for a Primary Equity Security, including a minimum number of publicly held shares of Digirad Preferred Stock (generally 1,100,000 shares) and a minimum number of holders (generally 400 public holders). If Digirad is unable to meet these standards and the Digirad Preferred Stock is delisted from the Nasdaq Global Market, Digirad may apply to list the Digirad Preferred Stock on the Nasdaq Capital Market. If we are also unable to meet the listing standards for the Nasdaq Capital Market, we may apply to quote the Digirad Preferred Stock on the OTC Marketplace. If Digirad is unable to maintain listing for the Digirad Preferred Stock, the ability to transfer or sell shares of the Digirad Preferred Stock will be limited and the market value of the Digirad Preferred Stock will likely be materially adversely affected.

 

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The market for Digirad Preferred Stock may not provide investors with adequate liquidity. Digirad is applying to have the Digirad Preferred Stock listed on the Nasdaq Global Market. However, Digirad may not obtain listing on the Nasdaq Global Market, and even if it does obtain such listing, a trading market for the Digirad Preferred Stock may not develop or be maintained and may not provide investors with adequate liquidity. Liquidity of the market for the Digirad Preferred Stock will depend on a number of factors, including prevailing interest rates, Digirad’s financial condition and operating results, the number of holders of the Digirad Preferred Stock, the market for similar securities and the interest of securities dealers in making a market in the Digirad Preferred Stock. Digirad cannot predict the extent to which investor interest in Digirad will maintain a trading market in the Digirad Preferred Stock, or how liquid that market will be. If an active market is not maintained, investors may have difficulty selling shares of the Digirad Preferred Stock.

 

Digirad is generally restricted from issuing shares of other series of preferred stock that rank senior to the Digirad Preferred Stock as to dividend rights, rights upon liquidation or voting rights, but may do so with the requisite consent of the holders of the Digirad Preferred Stock; and, further, no such consent is required for the issuance of additional series of preferred stock ranking pari passu with the Digirad Preferred Stock. Digirad is generally restricted from issuing shares of other series of preferred stock that rank senior to the Digirad Preferred Stock as to dividend rights, rights upon liquidation or voting rights, but may do so with the requisite consent of the holders of the Digirad Preferred Stock; and, further, no such consent is required for the issuance of additional series of preferred stock ranking pari passu with the Digirad Preferred Stock.

 

Digirad is allowed to issue shares of other series of preferred stock that rank above the Digirad Preferred Stock as to dividend payments and rights upon Digirad’s liquidation, dissolution or winding up of its affairs, only with the approval of the holders of at least a majority of the outstanding Digirad Preferred Stock; however, Digirad is allowed to issue additional shares of Digirad Preferred Stock and/or additional series of preferred stock that would rank equally to the Digirad Preferred Stock as to dividend payments and rights upon Digirad’s liquidation or winding up of its affairs without first obtaining the approval of the holders of the Digirad Preferred Stock. The issuance of additional shares of Digirad Preferred Stock and/or additional series of preferred stock could have the effect of reducing the amounts available to the Digirad Preferred Stock upon Digirad’s liquidation or dissolution or the winding up of its affairs. It also may reduce dividend payments on the Digirad Preferred Stock if Digirad does not have sufficient funds to pay dividends on all Digirad Preferred Stock outstanding and other classes or series of stock with equal or senior priority with respect to dividends. Future issuances and sales of senior or pari passu preferred stock, or the perception that such issuances and sales could occur, may cause prevailing market prices for the Digirad Preferred Stock and Digirad’s common stock to decline and may adversely affect Digirad’s ability to raise additional capital in the financial markets at times and prices favorable to Digirad.

 

The Digirad Preferred Stock will bear a risk of early redemption. Digirad may voluntarily redeem some or all of the Digirad Preferred Stock on or after the fifth anniversary of the effective date of the Merger. Any such redemptions may occur at a time that is unfavorable to holders of the Digirad Preferred Stock. Digirad may have an incentive to redeem the Digirad Preferred Stock voluntarily if market conditions allow Digirad to issue other preferred stock or debt securities at a rate that is lower than the rate on the Digirad Preferred Stock.

 

On or after the fifth anniversary of the effective date of the Merger, Digirad may, at its option, redeem the Digirad Preferred Stock, in whole or in part, at any time or from time to time. Also, upon the occurrence of a Change of Control Triggering Event (as defined in the section of this proxy statement/prospectus entitled “Description of Digirad Capital Stock—Digirad Series A Preferred Stock—Redemption”), prior to the fifth anniversary of the effective date of the Merger, Digirad may, at its option, redeem the Digirad Preferred Stock, in whole or in part, within 120 days after the first date on which such Change of Control Triggering Event occurred. If Digirad redeems the Digirad Preferred Stock, then from and after the redemption date, dividends will cease to accrue on shares of Digirad Preferred Stock, the shares of Digirad Preferred Stock shall no longer be deemed outstanding and all rights as a holder of those shares will terminate, except the right to receive the redemption price plus accumulated and unpaid dividends, if any, payable upon redemption. For further information regarding Digirad’s ability to redeem the Digirad Preferred Stock, see “Description of Digirad Capital Stock—Digirad Series A Preferred Stock—Redemption.

 

Holders of the Digirad Preferred Stock will be subject to inflation risk. Inflation is the reduction in the purchasing power of money resulting from the increase in the price of goods and services. Inflation risk is the risk that the inflation-adjusted, or “real,” value of an investment in term preferred stock or the income from that investment will be worth less in the future. As inflation occurs, the real value of the Digirad Preferred Stock and dividends payable on such shares declines.

 

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Market interest rates may materially and adversely affect the value of the Digirad Preferred Stock. One of the factors that will influence the price of the Digirad Preferred Stock is the dividend yield on the Digirad Preferred Stock (as a percentage of the market price of the Digirad Preferred Stock) relative to market interest rates. Continued increase in market interest rates, which are currently at low levels relative to historical rates, may lead prospective purchasers of the Digirad Preferred Stock to expect a higher dividend yield (and higher interest rates would likely increase Digirad’s borrowing costs and potentially decrease funds available for dividend payments). Thus, higher market interest rates could cause the market price of the Digirad Preferred Stock to materially decrease.

 

Holders of the Digirad Preferred Stock may be unable to use the dividends-received deduction and may not be eligible for the preferential tax rates applicable to “qualified dividend income.” Distributions paid to corporate U.S. holders of the Digirad Preferred Stock may be eligible for the dividends-received deduction, and distributions paid to non-corporate U.S. holders of the Digirad Preferred Stock may be subject to tax at the preferential tax rates applicable to “qualified dividend income,” if Digirad has current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. Additionally, Digirad may not have sufficient current earnings and profits during future fiscal years for the distributions on the Digirad Preferred Stock to qualify as dividends for U.S. federal income tax purposes. If the distributions fail to qualify as dividends, U.S. holders would be unable to use the dividends-received deduction and may not be eligible for the preferential tax rates applicable to “qualified dividend income.” If any distributions on the Digirad Preferred Stock with respect to any fiscal year are not eligible for the dividends-received deduction or preferential tax rates applicable to “qualified dividend income” because of insufficient current or accumulated earnings and profits, it is possible that the market value of the Digirad Preferred Stock might decline.

 

Digirad’s revenues, operating results and cash flows may fluctuate in future periods, and Digirad may fail to meet investor expectations, which may cause the price of the Digirad Preferred Stock to decline. Variations in Digirad’s quarterly and year-end operating results are difficult to predict and our income and cash flows may fluctuate significantly from period to period, which may impact the Digirad board of directors’ willingness or legal ability to declare a quarterly dividend. If Digirad’s operating results fall below the expectations of investors or securities analysts, the price of the Digirad Preferred Stock could decline substantially. Specific factors that may cause fluctuations in our operating results include:

 

  demand and pricing for our products and services;

 

  introduction of competing products;

 

  our operating expenses which fluctuate due to growth of our business; and

 

  variable sales cycle and implementation periods for products and services.

 

The Digirad Preferred Stock will not be rated. Digirad does not intend to have the Digirad Preferred Stock rated by any rating agency. Unrated securities usually trade at a discount to similar, rated securities. As a result, there is a risk that the Digirad Preferred Stock may trade at a price that is lower than they might otherwise trade if rated by a rating agency. It is possible, however, that one or more rating agencies might independently determine to assign a rating to the Digirad Preferred Stock. In addition, we may elect to issue other securities for which we may seek to obtain a rating. If any ratings are assigned to the Digirad Preferred Stock in the future or if we issue other securities with a rating, such ratings, if they are lower than market expectations or are subsequently lowered or withdrawn, could adversely affect the market for or the market value of the Digirad Preferred Stock.

 

The market price of the Digirad Preferred Stock could be substantially affected by various factors. The market price of the Digirad Preferred Stock could be subject to wide fluctuations in response to numerous factors. The price of the Digirad Preferred Stock that will prevail in the market after this offering may be higher or lower than the offering price depending on many factors, some of which are beyond Digirad’s control and may not be directly related to Digirad’s operating performance.

 

These factors include, but are not limited to, the following:

 

  prevailing interest rates, increases in which may have an adverse effect on the market price of the Digirad Preferred Stock;

 

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  trading prices of similar securities;

 

  Digirad’s history of timely dividend payments;

 

  the annual yield from dividends on the Digirad Preferred Stock as compared to yields on other financial instruments;

 

  general economic and financial market conditions;

 

  government action or regulation;

 

  the financial condition, performance and prospects of us and Digirad’s competitors;

 

  changes in financial estimates or recommendations by securities analysts with respect to Digirad or its competitors in its industries;

 

  Digirad’s issuance of additional preferred equity or debt securities; and

 

  actual or anticipated variations in quarterly operating results of Digirad and its competitors.

 

As a result of these and other factors, investors who receive the Digirad Preferred Stock pursuant to the Merger may experience a decrease, which could be substantial and rapid, in the market price of the Digirad Preferred Stock, including decreases unrelated to Digirad’s operating performance or prospects.

 

A holder of Digirad Preferred Stock has extremely limited voting rights. The voting rights for a holder of Digirad Preferred Stock are limited. Digirad’s common stock is the only class of Digirad’s securities that carry full voting rights. Voting rights for holders of Digirad Preferred Stock exist primarily with respect to material and adverse changes in the terms of the Digirad Preferred Stock and Digirad’s failure to pay dividends on the Digirad Preferred Stock. See “Description of Digirad Capital Stock—Digirad Series A Preferred Stock—Voting Rights” in this proxy statement/prospectus. Other than the limited circumstances described in this proxy statement/prospectus and except to the extent required by law, holders of Digirad Preferred Stock do not have any voting rights. Consequently, ATRM shareholders, as a general matter, will have significantly less influence over the management and policies of Digirad than they currently exercise over the management and policies of ATRM.

 

The Digirad Preferred Stock is not convertible into common stock, including in the event of a change of control of Digirad, and investors will not realize a corresponding upside if the price of the Digirad common stock increases. The Digirad Preferred Stock is not convertible into shares of common stock and earns dividends at a fixed rate. Accordingly, an increase in market price of Digirad’s common stock will not necessarily result in an increase in the market price of the Digirad Preferred Stock. The market value of the Digirad Preferred Stock may depend more on dividend and interest rates for other preferred stock, commercial paper and other investment alternatives and Digirad’s actual and perceived ability to pay dividends on, to redeem, and, in the event of dissolution, satisfy the liquidation preference with respect to the Digirad Preferred Stock.

 

Digirad’s cash available for dividends to holders of the Digirad Preferred Stock may not be sufficient to pay anticipated dividends, nor can Digirad assure you of Digirad’s ability to make dividends in the future, and Digirad may need to borrow to make such dividends or may not be able to make such dividends at all. To remain competitive with alternative investments, Digirad’s dividend rate may exceed Digirad’s cash available for dividends, including cash generated from operations. In the event this happens, Digirad intends to fund the difference out of any excess cash on hand or, if permitted, from borrowings under Digirad’s revolving credit facility. If Digirad does not have sufficient cash available for dividends generated by its assets, or if cash available for dividends decreases in future periods, the market price of the Digirad Preferred Stock could decrease.

  

Digirad’s ability to pay dividends and/or make any required redemption payments to the holders of the Digirad Preferred Stock may be adversely affected by the operating results of Digirad’s present and future acquisition targets, including ATRM and Digirad’s real estate acquisitions. Digirad previously announced its intent to convert Digirad into a diversified holding company. Digirad also previously announced its acquisition of three plants which manufacture modular buildings. The acquisitions of those plants and the Merger are part of Digirad’s conversion into a diversified holding company. As of the date of this proxy statement/prospectus, Digirad is not able to fully determine the potential operating results of its real estate assets. Digirad can make no assurance that all closing conditions to the Merger will be satisfied in order to consummate the Merger or any other acquisition in furtherance of Digirad’s intended strategy or that, in the event that the Merger or any other acquisition is consummated, such acquisition will have a positive impact on Digirad’s profitability, cash flow or financial condition. In the event that the financial and operating performance and results of Digirad’s real estate division and/or ATRM post-Merger are not positive and in line with Digirad’s expectations, Digirad’s ability to pay dividends and/or make any required redemption payments to the holders of the Digirad Preferred Stock may be adversely impacted.

 

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Digirad may not be able to raise sufficient capital or borrow money in sufficient amounts or on sufficiently favorable terms necessary to attain the optimal degree of leverage to operate its business, which may have an adverse effect on its operations and ability to pay dividends. Digirad’s ability to raise additional capital in the markets may be limited due to market conditions and applicable SEC regulations. Digirad’s business and acquisition strategies rely heavily on borrowing funds, so that Digirad may make more investments than would otherwise be possible to maximize potential returns to holders of Digirad’s securities. Digirad may borrow on a secured or unsecured basis. Pursuant to the terms of the SNB Loan Agreement, Digirad’s ability to incur additional indebtedness is subject to the consent of Sterling National Bank, with certain limited exceptions. The SNB Loan Agreement is secured by a first-priority security interest in substantially all of the assets (excluding real estate) of Digirad and its subsidiaries and a pledge of all shares and membership interests of the Digirad’s subsidiaries. The SNB Loan Agreement, amongst other things, limits Digirad’s ability, without the prior consent of the lender, to grant further security interests on Digirad’s assets which serve as collateral for the SNB Loan Agreement, to discontinue insurance coverage, to incur additional indebtedness, to dispose of assets of Digirad and its subsidiaries, to make investments, and to make distributions or pay dividends to Digirad’s stockholders. The SNB Loan Agreement also specifies certain debt and other ratios that Digirad is required to maintain. If Digirad is unable to obtain the degree of leverage that it believes to be optimal, it may have less cash for the payment of dividends to holders of Digirad Preferred Stock. Digirad’s use of leverage could also make Digirad more vulnerable to a downturn in its business or the economy generally and a significant increase in the ratio of Digirad’s indebtedness to its assets may have an adverse effect on the future market price of the Digirad Preferred Stock.

 

Future issuances of preferred stock may adversely affect the value of the Digirad Preferred Stock. Digirad intends to authorize 8,000,000 shares of Digirad Preferred Stock, and following the issuance of 1,612,655 shares of Digirad Preferred Stock in connection with the Merger, Digirad would have 6,387,345 shares of authorized but unissued shares of Digirad Preferred Stock. Digirad also expects to issue 300,000 shares of Digirad Preferred Stock pursuant to the Private Placement and may issue 100,000 shares of Digirad Preferred Stock pursuant to the Issuance Option. Digirad may issue additional shares of Digirad Preferred Stock and/or other classes of preferred shares, whether to raise additional capital or pursuant to other transactions Digirad may enter into. The issuance of additional preferred shares on parity with or senior to the Digirad Preferred Stock could affect the interests of the holders of Digirad Preferred Stock issued in connection with the Merger, and any issuance of preferred stock that is senior to the Digirad Preferred Stock could affect Digirad’s ability to pay dividends on, redeem or pay the liquidation preference on the Digirad Preferred Stock. However, the Certificate of Designations prevents Digirad, without the consent of a majority of the holders of the Digirad Preferred Stock, from issuing stock senior to the Digirad Preferred Stock if the terms and rights of the holders of the Digirad Preferred Stock would be materially and adversely changed.

 

The shares of Digirad Preferred Stock to be received by ATRM shareholders as a result of the Merger will have different rights from the shares of ATRM Common Stock and ATRM Preferred Stock. The rights of all ATRM shareholders are currently governed by the ATRM articles of incorporation, the ATRM bylaws, and Minnesota law. In addition, the rights of holders of ATRM Preferred Stock are subject to the certificate of designation of the ATRM Preferred Stock. Upon completion of the Merger, all shareholders of ATRM will become holders of Digirad Preferred Stock and their rights will be governed by the Digirad certificate of incorporation, the Digirad Preferred Stock Certificate of Designation, the Digirad bylaws, and Delaware law. See “Comparison of Rights of ATRM Common Stock, ATRM Preferred Stock and Digirad Preferred Stock.”

 

Certain directors and executive officers of ATRM may have potential conflicts of interest with respect to the approval of the Merger Agreement.  Some of ATRM’s directors and executive officers have interests in the Merger that are different from, or in addition to, those of ATRM shareholders generally. Although other ATRM directors will not become directors of Digirad after the Merger, Digirad will indemnify and maintain liability insurance for all of the officers and directors of ATRM for their services as directors or officers before the Merger. In addition, the President and Chief Executive Officer of ATRM is a party to change in control agreements that entitle each such executive officer to enhanced severance if his employment were to terminate following the Merger under specific circumstances. The Merger Agreement also provides that certain equity awards held by ATRM executive officers and directors will and be converted to the right to receive 0.03 shares of Digirad Preferred Stock for each share of ATRM Common Stock which would otherwise be issuable pursuant to such awards.

 

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In addition, Jeffrey E. Eberwein, who is the Chairman of Digirad’s board of directors and is also the Chairman of the board of directors of ATRM, owns approximately 17.4% of the outstanding ATRM Common Stock. Mr. Eberwein is also the Chief Executive Officer of LSVM, a subsidiary of ATRM. LSVM is the investment manager of LSVI and LSV Co-Invest I, which together own all of the outstanding ATRM Preferred Stock. Through these relationships and other relationships with affiliated entities, Mr. Eberwein may be deemed the beneficial owner of the securities owned by LSVI and LSV Co-Invest I. Mr. Eberwein disclaims beneficial ownership of the ATRM Preferred Stock, except to the extent of his pecuniary interest therein.

 

In addition to stock of ATRM, LSV Co-Invest I holds unsecured promissory notes of ATRM for a principal amount totaling $1.4 million; LSVM holds an unsecured note of ATRM for a principal amount totaling $0.3 million; and LSVI has pledged up to $3.0 million plus additional fees as collateral to secure a promissory note payable by ATRM to Gerber Finance due December 31, 2019.

 

LSVM and LSV Co-Invest I are party to subordination agreements with ATRM and Gerber Finance pursuant to which LSVM and LSV Co-Invest I agreed to subordinate their rights under their ATRM unsecured promissory notes to the rights of Gerber Finance as a lender to ATRM. Additionally, as a condition to a revolving credit loan agreement with Premier Bank, Mr. Eberwein entered into a guaranty in favor of Premier Bank, guaranteeing certain obligations of EBGL. Also, in connection with amendments of a loan agreement between Gerber Finance and KBS, Mr. Eberwein has executed reaffirmations of guaranty in favor of Gerber Finance relating to his unconditional guaranty of $0.6 million of KBS’s obligations under a loan agreement related to over-advances.

 

Further, Mr. Eberwein may be owed or may owe certain funds in connection with the resolution of a working capital adjustment related to ATRM’s acquisition of LSVM.

 

Digirad has entered into the Voting and Support Agreement with Mr. Eberwein and certain of his affiliates, which together hold all of the ATRM Preferred Stock and approximately 17.4% of the ATRM Common Stock, pursuant to which such holders have given Digirad their proxies to vote “FOR” the approval of the Merger Agreement and the transactions contemplated thereby, including the Merger.

 

Further, ATRM’s other executive officers and directors own approximately 2.2% of the outstanding ATRM Common Stock. As a result of the Merger, Mr. Eberwein, LSVI and LSV Co-Invest I will receive approximately 96% in the aggregate of the Digirad Preferred Stock issued as Merger Consideration. ATRM’s other executive officers and directors will receive approximately 0.2% in the aggregate of the Digirad Preferred Stock issued as Merger Consideration. See “The Merger—Interests of ATRM Directors and Executive Officers in the Merger” for a discussion of these interests.

 

Whether or not the Merger is completed, the pendency of the transaction could cause disruptions in the businesses of ATRM and Digirad, which could have an adverse effect on their businesses and financial results.    These disruptions could include the following:

 

current and prospective employees may experience uncertainty about their future roles with the combined company or consider other employment alternatives, which might adversely affect ATRM’s and Digirad’s ability to retain or attract key managers and other employees; 

 

current and prospective customers of ATRM or Digirad may experience variations in levels of services as the companies prepare for integration or may anticipate change in how they are served and may, as a result, choose to discontinue their service with either company or choose another provider; and 

 

the attention of management of each of ATRM and Digirad may be diverted from the operation of the businesses toward the completion of the Merger.

 

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The unaudited pro forma financial statements are presented for illustrative purposes only and should not be viewed as a forecast of Digirad’s financial condition or results of operations following the Merger.    The unaudited pro forma financial statements have been derived from the historical financial statements of Digirad and ATRM and certain adjustments and assumptions have been made regarding Digirad after giving effect to the Merger. The information upon which these adjustments and assumptions have been made is preliminary, and these kinds of adjustments and assumptions are difficult to make with complete accuracy. Moreover, the unaudited pro forma financial statements do not reflect all costs that are expected to be incurred or savings to be achieved by Digirad in connection with the Merger. For example, neither the impact of any incremental costs incurred in integrating the two companies, nor any potential cost savings is reflected in the unaudited pro forma financial statements. As a result, the actual financial condition and results of operations of Digirad following the Merger will likely not be consistent with, or evident from, these unaudited pro forma financial statements. In addition, the assumptions used in preparing the unaudited pro forma financial information may not prove to be accurate, and other factors may affect Digirad’s financial conditions or results of operations following the Merger. Therefore, the shareholders of ATRM should not place undue reliance on the pro forma financial statements when deciding whether to vote for the proposals relating to the Merger. See “Summary Unaudited Pro Forma Financial Information.”

 

Any delay in the completion of the Merger may significantly reduce the benefits expected to be obtained from the Merger or could adversely affect the market price of the common stock of each of Digirad or ATRM or their future business and financial results.    The Merger is subject to a number of conditions, including approval of ATRM shareholders, that are beyond the control of Digirad and ATRM and that may prevent, delay or otherwise materially and adversely affect completion of the Merger. Digirad and ATRM cannot predict whether and when these other conditions will be satisfied.

 

Failure to complete the Merger would prevent Digirad and ATRM from realizing the anticipated benefits of the Merger. Each company would also remain liable for significant transaction costs, including legal, accounting and financial advisory fees. Any delay in completing the Merger may significantly reduce the synergies and other benefits that Digirad expects to achieve if it successfully completes the Merger within the expected timeframe and integrates the businesses. In addition, the market price of each company’s common stock may reflect various market assumptions as to whether and when the Merger will be completed. Consequently, the completion of, the failure to complete, or any delay in the completion of the Merger could result in a significant change in the market price of the common stock of each of Digirad or ATRM.

 

The Merger is a taxable transaction and the resulting tax liability of an ATRM shareholder, if any, will depend on each such ATRM shareholder’s particular situation. The receipt of Digirad Preferred Stock as Merger Consideration in exchange for ATRM Common Stock or ATRM Preferred Stock in the Merger will be treated as a taxable sale by each ATRM shareholder for U.S. federal income tax purposes. The amount of gain or loss recognized by each ATRM shareholder in the Merger will vary depending on each ATRM shareholder’s particular situation, including the value of the Digirad Preferred Stock received by each shareholder as Merger Consideration in the Merger, and the adjusted tax basis of the ATRM Common Stock or ATRM Preferred Stock exchanged by each shareholder in the Merger. For a more complete discussion of certain U.S. federal income tax consequences of the Merger, see “Material United States Federal Income Tax Consequences”.

 

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DIGIRAD RISK FACTORS

 

In addition to the risks of the Merger to Digirad set forth in “Risk Factors Relating to the Merger,” Digirad’s business is, and will continue after the Merger to be, subject to the risks described below. Upon the completion of the Merger, the business risks of ATRM set forth in “ATRM Risk Factors” will become additional risks to the business of Digirad.

 

Risks Related to Digirad’s Business and Industry

 

Digirad’s HoldCo Conversion and related acquisitions or investments could involve unknown risks that could harm its business and adversely affect its financial condition. Digirad is in the process of becoming a diversified holding company with interests in a variety of industries and market sectors. The real estate acquisitions that Digirad has made under its SRE real estate division and the pending and future acquisitions that Digirad consummate will involve unknown risks, some of which will be particular to the industry in which the acquisition target operates. Although Digirad intends to conduct extensive business, financial and legal due diligence in connection with the evaluation of all its acquisition and investment opportunities, there can be no assurance its due diligence investigations will identify every matter that could have a material adverse effect on Digirad. Digirad may be unable to adequately address the financial, legal and operational risks raised by such acquisitions or investments, especially if Digirad is unfamiliar with the industry in which Digirad invests. The realization of any unknown risks could prevent or limit Digirad from realizing the projected benefits of the acquisitions or investments, which could adversely affect its financial condition and liquidity. In addition, its financial condition, results of operations and the ability to service its debt will be subject to the specific risks applicable to any company Digirad acquires or in which Digirad invests.

 

Digirad is subject to particular risks associated with real estate ownership, which could result in unanticipated losses or expenses. Following its recent acquisition of real estate, its business is subject to many risks that are associated with the ownership of real estate. For example, if its tenants do not renew their leases or default on their leases, Digirad may be unable to re-lease the facilities at favorable rental rates. Other risks that are associated with real estate acquisition and ownership include, without limitation, the following:

 

general liability, property and casualty losses, some of which may be uninsured;

 

the inability to purchase or sell its assets rapidly to respond to changing economic conditions, due to the illiquid nature of real estate and the real estate market;

 

leases which are not renewed or are renewed at lower rental amounts at expiration;

 

the default by a tenant or guarantor under any lease;

 

costs relating to maintenance and repair of its facilities and the need to make expenditures due to changes in governmental regulations, including the Americans with Disabilities Act;

 

environmental hazards created by prior owners or occupants, existing tenants, mortgagors or other persons for which Digirad may be liable;

 

acts of God affecting its properties; and

 

acts of terrorism affecting its properties.

 

Digirad relies on information technology in its operations, and any material failure, inadequacy, interruption or security failure of that technology could materially harm its business. Digirad relies on information technology and systems, including the Internet, commercially available software, and other applications, to process, transmit, store, and safeguard information and to manage or support a variety of its business processes, including financial transactions and maintenance of records, which may include personal identifying information and other valuable or confidential information. If Digirad experiences material failures, inadequacies, or interruptions or security failures of its information technology, Digirad could incur material costs and losses. Further, third-party vendors could experience similar events with respect to their information technology and systems that impact the products and services they provide to Digirad or to its customers. Digirad relies on commercially available systems, software, tools, and monitoring, as well as other applications and internal procedures and personnel, to provide security for processing, transmitting, storing, and safeguarding confidential information such as personally identifiable information related to its employees and others, information regarding financial accounts, and information regarding customers and vendors. Digirad takes various actions, and Digirad incurs significant costs, to maintain and protect the operation and security of its information technology and systems, including the data maintained in those systems. However, it is possible that these measures will not prevent the systems’ improper functioning or a compromise in security, such as in the event of a cyberattack or the improper disclosure of information. Security breaches, computer viruses, attacks by hackers, online fraud schemes, and similar breaches can create significant system disruptions, shutdowns, fraudulent transfer of assets, or unauthorized disclosure of confidential information. For example, in April 2019, Digirad became aware that Digirad had been a victim of criminal fraud commonly referred to as “business email compromise fraud.” The incident involved the impersonation of an officer of Digirad and improper access to his email, resulting in the transfer by Digirad of funds to a third-party account.

 

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Despite any defensive measures Digirad takes to manage threats to its business, its risk and exposure to these matters remain heightened because of, among other things, the evolving nature of such threats in light of advances in computer capabilities, new discoveries in the field of cryptography, new and sophisticated methods used by criminals including phishing, social engineering, or other illicit acts, or other events or developments that Digirad may be unable to anticipate or fail to adequately mitigate. Any failure to maintain the security, proper function and availability of its information technology and systems, or certain third-party vendors’ failure to similarly protect their information technology and systems that are relevant to its operations, or to safeguard its business processes, assets, and information could result in financial losses, interrupt its operations, damage its reputation, cause Digirad to be in default of material contracts, and subject Digirad to liability claims or regulatory penalties, any of which could materially and adversely affect Digirad.

 

Digirad may not be able to achieve the anticipated synergies and benefits from business acquisitions. Part of its business strategy is to acquire businesses that Digirad believes can complement its current business activities, both financially and strategically. On January 1, 2016, Digirad acquired PRHC and its subsidiaries, including DMS Health, with these synergistic benefits in mind. Previously, Digirad acquired MD Office on March 5, 2015, and Telerhythmics on March 13, 2014, which Digirad subsequently sold on October 31, 2018. Acquisitions involve many complexities, including, but not limited to, risks associated with the acquired business’ past activities, loss of customers, regulatory changes that are not anticipated, difficulties in integrating personnel and human resource programs, integrating ERP systems and other infrastructures, general underperformance of the business under Digirad control versus the prior owners, unanticipated expenses and liabilities, and the impact on its internal controls of compliance with the regulatory requirements under the Sarbanes-Oxley Act of 2002. There is no guarantee that its acquisitions will increase the profitability and cash flow of Digirad, and its efforts could cause unforeseen complexities and additional cash outflows, including financial losses. As a result, the realization of anticipated synergies or benefits from acquisitions may be delayed or substantially reduced, and could potentially result in the impairment of its investment in these businesses.

 

There can be no assurances that Digirad will successfully complete its planned conversion into a diversified holding company or complete its proposed acquisition of ATRM. Part of its strategy is to become a diversified holding company through the acquisition of businesses that, Digirad believes, will realize a material benefit from being part of a larger holding company structure, both financially and strategically. There can be no assurances that Digirad will find suitable acquisition targets that will enable Digirad to successfully realize its conversion into a diversified holding company, and even if such targets are identified, there can be no assurances that Digirad can negotiate and complete such acquisitions on attractive terms, including with regard to the proposed acquisition of ATRM.

 

If Digirad is unable to make successful acquisitions, its ability to grow its business could be adversely affected and its conversion to a diversified holding company structure may not succeeds. If Digirad succeed in making suitable acquisitions, Digirad may not be able to obtain the expected profitability or other benefits in the short or long term from such acquisitions.

 

Acquisitions, including the possible ATRM acquisition, involve many complexities, including, but not limited to, risks associated with the acquired business’ past activities, loss of customers, regulatory changes that are not anticipated, difficulties in integrating personnel and human resource programs, integrating ERP systems and other infrastructures under Company control, unanticipated expenses and liabilities, and the impact on its internal controls of compliance with the regulatory requirements under the Sarbanes-Oxley Act of 2002. There is no guarantee that its acquisitions will increase the profitability and cash flow of Digirad, and its efforts could cause unforeseen complexities and additional cash outflows, including financial losses. As a result, the realization of anticipated benefits from acquisitions may be delayed or substantially reduced. In addition, its leadership team’s attention may also be diverted by any historical or potential acquisitions.

 

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Digirad conducts certain operations through a joint venture and may enter into additional joint ventures in the future. Digirad may not be able to achieve anticipated benefits from joint ventures and disagreements with joint venture partners could adversely affect its interest in the joint ventures and lead to an unwinding of joint ventures. 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. Digirad may enter into additional joint ventures in the future. Joint ventures involve many complexities and there is no guarantee that its joint ventures will increase the profitability and cash flow of Digirad. Digirad’s efforts could also cause unforeseen complexities and additional cash outflows, including financial losses. As a result, the realization of anticipated benefits from joint ventures may be delayed or substantially reduced.

 

Additionally, joint venture partners may have interests that are different from Digirad’s, which may result in conflicting views as to the conduct of the business of the joint venture. In the event that Digirad has a disagreement with a joint venture partner as to the resolution of a particular issue to come before the joint venture, or as to the management or conduct of the business of the joint venture in general, Digirad may not be able to resolve such disagreement in its favor and such disagreement could have a material adverse effect on its interest in the joint venture or the business of the joint venture in general.

 

Digirad’s revenues may decline due to reductions in Medicare and Medicaid reimbursement rates. The success of its business is largely dependent upon its medical professional customers’ ability to provide diagnostic care to their patients in an economically sustainable manner, either through the purchase of its imaging systems or using its diagnostic services, or both. Digirad’s customers are directly impacted by changes (decreases and increases) in governmental and private payor reimbursements for diagnostic services. Digirad is directly and indirectly impacted by changes in reimbursements. In its businesses, where Digirad is indirectly affected by reimbursement changes, Digirad makes every effort to act as a business partner with its physician customers. For example, in 2010, Digirad proactively adjusted its diagnostic imaging services rates down due to the dramatic reimbursement declines that its customers experienced from the Centers for Medicare & Medicaid Services. Reimbursements remain a source of concern for its customers and downward pressure on reimbursements causes greater pricing pressure on its services and influences the buying decisions of its customers. Although the gap is closing, hospital reimbursements remain higher than in-office reimbursements. Digirad’s Diagnostic Imaging segment’s products are targeted to serve the hospital market. A smaller portion of its Diagnostic Services business segment operates in the hospital market.

 

Reductions in reimbursements could significantly impact the viability of in-office imaging performed by independent physicians, as well as the viability of its cardiac event monitoring services business. The historical decline in reimbursements in diagnostic imaging has resulted in cancellations of imaging days in its Diagnostic Services business and the delay of purchase and service decisions by its existing and prospective customers in its Diagnostic Imaging business.

 

Digirad’s Diagnostic Services revenues may decline due to changes in diagnostic imaging regulations and the use of third party benefit managers by states and private payors to drive down diagnostic imaging volumes. Nuclear medicine is a “designated health service” under the federal physician self-referral prohibition law known as the “Stark Law,” which states that a physician may not refer designated health services to an entity with which the physician or an immediate family member has a financial relationship, unless a statutory exception applies. Digirad’s business model and service agreements are structured to enable its physician customers to meet the statutory in-office ancillary services (“IOAS”) exception to the Stark Law, allowing them to perform nuclear diagnostic imaging services on their patients in the convenience of their own office. From time-to-time, the Centers for Medicare and Medicaid Services and Congress have proposed to modify the IOAS to further limit or eliminate this exception. Various lobbying organizations, including the Medicare Payment Advisory Commission (“MedPAC”), in the past have pushed for, discussed, and recommended that Congress limit the availability of the IOAS exception in order to reduce federal healthcare costs. Legislation has been introduced in prior Congresses to modify or eliminate the exception, but has not been enacted. The outcome of these efforts is uncertain at this time; however, the limitation or elimination of the IOAS exception could significantly impact Digirad’s Diagnostic Services business segment as currently structured.

 

Digirad’s customers who perform imaging services in their office also experience the continuing efforts by some private insurance companies to reduce healthcare expenditures by hiring radiology benefit managers to help them manage and limit imaging. The federal government has also set aside monies in the 2009 recession recovery acts to hire radiology benefit managers to provide image management services to Medicare/Medicaid and MedPAC has recommended and the Centers for Medicare & Medicaid Services has, in the past, proposed legislation requiring Medicare physicians who engage in a relatively high volume of medical imaging be required to obtain pre-authorization through a radiology benefit manager. A radiology benefit manager is an unregulated entity that performs various functions for private payors and managed care organizations. Radiology benefit manager activities can include pre-authorization for imaging procedures, setting and enforcing standards, approving which contracted physicians can perform the services, such as requiring even the most experienced and highly qualified cardiologists to obtain additional board certifications, or interfering with the financial decision of the private practitioner by requiring them to own their own imaging system and not allowing them to lease the system. The radiology benefit managers often do not provide written documentation of their decisions or an appeals process, leaving leasing physicians unable to challenge their decisions with the carrier or the state insurance department. Unregulated radiology benefit manager activities have and could continue to adversely affect Digirad’s physician customers’ ability to receive reimbursement, therefore impacting its customers’ decision to utilize its Diagnostic Services imaging services.

 

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Manufacturing and providing service for Digirad’s nuclear imaging cameras is highly dependent upon the availability of certain suppliers, thereby making Digirad vulnerable to supply problems that could harm its business. Digirad’s manufacturing process within Diagnostic Imaging, and its warranty and post-warranty camera support business, rely on a limited number of third parties to supply certain key components and manufacture its products. Alternative sources of production and supply may not be readily available or may take several months to scale-up and develop effective production processes. If a disruption in the availability of parts or in the operations of its suppliers were to occur, its ability to have gamma cameras built as well as its ability to provide support could be materially adversely affected. In certain cases, Digirad has developed backup plans and has alternative procedures should Digirad experience a disruption. However, if these plans are unsuccessful or if Digirad has a single source, delays in the production and support of its gamma cameras for an extended period of time could cause a loss of revenue and/or higher production and support costs, which could significantly harm its business and results of operations.

 

Digirad’s Diagnostic Services and portions of its Mobile Healthcare operations are highly dependent upon the availability of certain radiopharmaceuticals, thereby making Digirad vulnerable to supply problems and price fluctuations that could harm its business. Both its Diagnostic Service business and portions of its Mobile Healthcare business involve the use of radiopharmaceuticals. There is a limited number of major nuclear reactors supplying medical radiopharmaceuticals worldwide and there is no guarantee that the reactors will remain in good repair or that its supplier will have continuing access to ample supply of its radiopharmaceutical product. If Digirad is unable to obtain an adequate supply of the necessary radiopharmaceuticals, Digirad may be unable to utilize its personnel and equipment through its in-office service operations, or the volume of its services could decline and its business may be adversely affected. Shortages can also cause price increases that may not be accounted for in third party reimbursement rates, thereby causing Digirad to lose margin or require Digirad to pass increases on to its physician customers.

 

Digirad’s business is not widely diversified. Digirad currently provides its mobile diagnostic services and sell its products primarily into the cardiac nuclear and ultrasound imaging private practice, in-office markets and hospitals. Digirad may not be able to leverage its assets and technology to diversify its products and services in order to generate revenue beyond these. If Digirad is unable to diversify its product and service offerings, its financial condition may suffer.

 

Digirad competes against businesses that have greater resources and different competitive strengths. The market for mobile diagnostic services and diagnostic imaging systems is limited and has experienced some declines in the past. Some of Digirad’s competitors have greater resources and a more diverse product offering than Digirad can offer. Some of its competitors also enjoy significant advantages over Digirad, including greater brand recognition, greater financial and technical resources, established relationships with healthcare professionals, larger distribution networks, and greater resources for product development and capital expenditures, as well as more extensive marketing and sales resources. If Digirad is unable to expand its current market share, its revenues and related financial condition could decline.

 

Digirad’s quarterly and annual financial results are difficult to predict and are likely to fluctuate from period to period. Digirad has historically experienced seasonality in all of its businesses, volatility due to the changing healthcare environment, the variable supply of radiopharmaceuticals, and downturns based on the changing U.S. economy. While its customers are typically obligated to pay Digirad for imaging days to which they have committed, its contracts permit some flexibility in scheduling when services are to be performed. Digirad cannot predict with certainty the degree to which seasonal circumstances such as the summer slowdown, winter holiday vacations, and weather conditions may affect the results of its operations. Digirad has also experienced fluctuations in demand of its diagnostic imaging product sales due to economic conditions, capital budget availability, and other financial or business reasons. In addition, due to the way that customers in Digirad’s target markets acquire its products, a large percentage of its products are booked during the last month of each quarterly accounting period, and often there can be a large amount in the last month of the year. As such, a delivery delay of only a few days may significantly impact quarter-to-quarter comparisons of its results of operations. Moreover, the sales cycle for all of its capital products is typically lengthy, particularly in the hospital market, which may cause Digirad to experience significant revenue fluctuations.

 

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Digirad spends considerable time and money complying with federal and state laws, regulations, and other rules, and if Digirad is unable to fully comply with such laws, regulations, and other rules, Digirad could face substantial penalties. Digirad is directly, or indirectly through its customers, subject to extensive regulation by both the federal government and the states in which Digirad conducts its business, including: the federal Medicare and Medicaid anti-kickback laws and other Medicare laws, regulations, rules, manual provisions, and policies that prescribe requirements for coverage and payment for services performed by Digirad and its physician customers; the federal False Claims statutes; the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended in 2009 under the HITECH Act that places direct legal obligations and higher liability on Digirad with respect to the security and handling of personal health information; the Stark Law; the federal Food, Drug and Cosmetic Act; federal and state radioactive materials laws; state food and drug and pharmacy laws and regulations; state laws that prohibit the practice of medicine by non-physicians and fee-splitting arrangements between physicians and non-physicians; state scope-of-practice laws; and federal rules prohibiting the mark-up of diagnostic tests to Medicare under certain circumstances. If Digirad’s customers are unable or unwilling to comply with these statutes, regulations, rules, and policies, rates of its services and products could decline and its business could be harmed. Additionally, new government mandates will require Digirad to provide a certain baseline of health benefits and premium contribution for its employees and their families or pay governmental penalties. Some of these costs are not tax deductible. Digirad has opted to provide this coverage to its employee base in order to maintain retention of qualified medical technicians and other professionals rather than plan to pay penalties to the government. Either option will result in additional costs to Digirad and could negatively impact its cash reserves.

 

Digirad maintains a compliance program to identify and correct any compliance issues and remain in compliance with all applicable laws, to train employees, to audit and monitor its operations, and to achieve other compliance goals. Like most companies with compliance programs, Digirad occasionally discovers compliance concerns. In such cases, Digirad takes responsive action, including corrective measures when necessary. There can be no assurance that its responsive actions will insulate Digirad from liability associated with any detected compliance concerns.

 

If its past or present operations are found to be in violation of any of the laws, regulations, rules, or policies described above or the other laws or regulations to which Digirad or its customers are subject, Digirad may be subject to civil and criminal penalties, damages, fines, exclusion from federal or state healthcare programs, or the curtailment or restructuring of its operations. Similarly, if its physician customers are found to be non-compliant with applicable laws, they may be subject to sanctions that could have a negative impact on Digirad. Any penalties, damages, fines, curtailment, or restructuring of its operations could adversely affect Digirad’s ability to operate its business and its financial results. Any action against Digirad for violation of these laws, even if Digirad successfully defend against it, could cause Digirad to incur significant legal expenses, divert its management’s attention from the operation of its business, and damage its reputation. Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, regulations, rules, and policies, the risks cannot be entirely eliminated. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security, and fraud laws may prove costly.

 

Healthcare policy changes could have a material adverse effect on Digirad’s business. In response to perceived increases in healthcare costs in recent years, there have been and continue to be proposals by the federal government, state governments, regulators, and third-party payers to control these costs and, more generally, to reform the U.S. healthcare system. Certain of these proposals could limit the prices Digirad is able to charge for its products or the amounts of reimbursement available for its products, and could limit the acceptance and availability of its products. The adoption of some or all of these proposals could have a material adverse effect on Digirad’s financial position and results of operations.

 

Any intrusions or attacks on Digirad’s information technology infrastructure could impact its ability to conduct operations and could subject Digirad to fines, penalties, and lawsuits related to healthcare privacy laws. The operation of Digirad’s business includes use of complex information technology infrastructures, access to the information technology networks of its customers, as well as the collection of storing of patient information that is subject to HIPAA. In recent years, attacks on corporate information technology infrastructures have become more common and more sophisticated. Attacks can range from attempts that are routinely blocked by security and related infrastructure, to intrusions that disrupt activity temporarily, to extensive intrusions that severely impact or disable a network, including “ransom” ware that holds a network hostage until the impacted company pays a fee to the attacker. Further, attacks can specifically impact patient information stored on such networks, requiring a widespread notice to the affected population, which can be very costly. Any successful attack on its network could severely impact its ability to conduct operations and could result in lost customers. Though Digirad carries customary insurance for notification events in the event of a patient information breach under HIPAA, its coverage may not be sufficient to cover every situation, and any notification could severely impact its customer confidence and operations.

 

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Digirad is subject to risks associated with self-insurance related to health benefits. To help control its overall long-term costs associated with employee health benefits, Digirad is self-insured up to certain limits for its health plans. As such, Digirad is subject to risks associated with self-insurance of these health plan benefits. To limit its exposure, Digirad has third party stop-loss insurance coverage for both individual and aggregate claim costs. However, Digirad could still experience unforeseen and potentially significant fluctuations in its healthcare costs based on a higher than expected volume of claims below these stop-loss levels. These fluctuations could have a material adverse effect on its financial position and results of operations.

 

A portion of Digirad’s operations are located in a facility that may be at risk from fire, earthquakes, or other disasters. Final assembly in its manufacturing process and significant portions of its inventory are located in a single facility in Poway, California, near known fire areas and earthquake fault zones. Future natural disasters could cause substantial delays in its operations and cause Digirad to incur additional expenses. Although Digirad has taken precautions to insure its facilities and continuing operations, as well as provide for offsite back-up of its information systems, this may not be adequate to cover its losses in any particular case. A disaster could significantly harm its business and results of operations.

 

The medical device industry is litigious, which could result in the diversion of Digirad’s management’s time and efforts, and require Digirad to incur expenses and pay damages that may not be covered by its insurance. Digirad’s operations entail risks of claims or litigation relating to product liability, radioactive contamination, patent infringement, trade secret disclosure, warranty claims, vendor disputes, product recalls, property damage, misdiagnosis, breach of contract, personal injury, and death. Any litigation or claims against us, or claims Digirad bring against others, may cause Digirad to incur substantial costs, could place a significant strain on its financial resources, divert the attention of its management from its core business, and harm its reputation. Digirad may incur significant liability in the event of any such litigation, regardless of the merit of the action. If Digirad is unable to obtain insurance, or if its insurance is inadequate to cover claims, its cash reserves and other assets could be negatively impacted. Additionally, costs associated with maintaining its insurance could become prohibitively expensive, and its ability to become or remain profitable could be diminished.

 

If Digirad cannot provide quality technical and applications support, Digirad could lose customers and its business and prospects will suffer. The placement of its products and the introduction of its technology at new customer sites requires the services of highly trained technical support personnel. Hiring technical support personnel is very competitive in Digirad’s industry due to the limited number of people available with the necessary scientific and technical backgrounds and ability to understand its technology at a technical level. To effectively support potential new customers and the expanding needs of current customers, Digirad will need to expand its technical support staff. If Digirad is unable to attract, train or retain the number of highly qualified technical services personnel that its business needs, its business and prospects will suffer.

 

Digirad’s long-term results depend upon its ability to improve existing products and services and introduce and market new products and services successfully. Digirad’s business is dependent on the continued improvement of its existing products and services and its development of new products and services utilizing its current or other potential future technology. As Digirad introduces new products and services or refines, improves or upgrades versions of existing products and services, Digirad cannot predict the level of market acceptance or the amount of market share these products and services will achieve, if any. Digirad cannot assure you that Digirad will not experience material delays in the introduction of new products or services in the future.

 

Digirad generally sells its products and services in industries that are characterized by rapid technological changes, frequent new product introductions and changing industry standards. If Digirad does not develop new products and services and product enhancements based on technological innovation on a timely basis, its products and services may become obsolete over time and its revenues, cash flow, profitability and competitive position may suffer. Digirad’s success will depend on several factors, including its ability to:

 

correctly identify customer needs and preferences and predict future needs and preferences;

 

allocate its research and development funding to products and services with higher growth prospects;

 

anticipate and respond to its competitors’ development of new products, services, and technological innovations;

 

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innovate and develop new technologies and applications, and acquire or obtain rights to third-party technologies that may have valuable applications in the markets Digirad serves;

 

recruit, train, retain, motivate, and integrate key personnel, including its research and development, manufacturing, and sales and marketing personnel; and

 

successfully commercialize new technologies in a timely manner, price them competitively and manufacture and deliver sufficient volumes of new products of appropriate quality on time.

 

Even if Digirad successfully innovates and develops new products, services and product enhancements, Digirad may incur substantial costs in doing so, and its profitability may suffer.

 

If Digirad does not successfully manage the development and launch of new products and services, its financial results could be adversely affected. Digirad may face risks associated with launching new products and services. If Digirad encounters development or manufacturing challenges or discovers errors during its product development cycle, the product launch dates of new products and services may be delayed. The expenses or losses associated with unsuccessful product development or launch activities or lack of market acceptance of its new products and services could adversely affect its business or financial condition.

 

Undetected errors or defects in Digirad’s products could harm its reputation or decrease market acceptance of its products. Digirad’s products may contain undetected errors or defects when first introduced or as new versions or new products are released. Disruptions affecting the introduction or release of, or other performance problems with, its products may damage its customers’ businesses and could harm their and its reputation. If that occurs, Digirad may incur significant costs, the attention of its key personnel could be diverted, or other significant customer relations problems may arise. Digirad may also be subject to warranty and liability claims for damages related to errors or defects in its products. In addition, if Digirad does not meet industry or quality standards, if applicable, its products may be subject to recall. A material liability claim, recall, or other occurrence that harms Digirad’s reputation or decreases market acceptance of its products could harm its business and operating results.

 

Digirad’s ability to protect its intellectual property and proprietary technology through patents and other means is uncertain. Digirad relies on patent protection as well as trademark, copyright, trade secret and other intellectual property rights protection and contractual restrictions to protect its proprietary technologies, all of which provide limited protection and may not adequately protect its rights or permit Digirad to gain or keep any competitive advantage. Digirad’s success depends, in part, on its ability to protect its proprietary rights to the technologies used in its products. If Digirad fails to protect and/or maintain its intellectual property, third parties may be able to compete more effectively against Digirad, Digirad may lose its technological or competitive advantage, and/or Digirad may incur substantial litigation costs in its attempts to recover or restrict use of its intellectual property.

 

Digirad does not have any pending patent applications. Digirad cannot assure investors that Digirad will continue to innovate and file new patent applications, or that if filed any future patent applications will result in granted patents. Further, Digirad cannot predict how long it will take for such patents to issue, if at all. It is possible that, for any of its patents that have issued or that may issue in the future, its competitors may design their products around its patented technologies. Further, Digirad cannot assure investors that other parties will not challenge any patents granted to Digirad, or that courts or regulatory agencies will hold its patents to be valid, enforceable, and/or infringed. Digirad cannot guarantee investors that Digirad will be successful in defending challenges made against its patents and patent applications. Any successful third-party challenge or challenges to its patents could result in the unenforceability or invalidity of such patents, or such patents being interpreted narrowly and/or in a manner adverse to its interests. Digirad’s ability to establish or maintain a technological or competitive advantage over its competitors and/or market entrants may be diminished because of these uncertainties. For these and other reasons, its intellectual property may not provide Digirad with any competitive advantage. For example:

 

Digirad may not have been the first to make the inventions claimed or disclosed in its issued patents;

 

Digirad may not have been the first to file patent applications for these inventions. To determine the priority of these inventions, Digirad may have to participate in interference proceedings or derivation proceedings declared by the U.S. Patent and Trademark Office (“USPTO”), which could result in substantial cost to Digirad, and could possibly result in a loss or narrowing of patent rights. No assurance can be given that its granted patents will have priority over any other patent or patent application involved in such a proceeding, or will be held valid as an outcome of the proceeding;

 

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other parties may independently develop similar or alternative products and technologies or duplicate any of its products and technologies, which can potentially impact its market share, revenue, and goodwill, regardless of whether intellectual property rights are successfully enforced against these other parties;

 

it is possible that its issued patents may not provide intellectual property protection of commercially viable products or product features, may not provide Digirad with any competitive advantages, or may be challenged and invalidated by third parties, patent offices, and/or the courts;

 

Digirad may be unaware of or unfamiliar with prior art and/or interpretations of prior art that could potentially impact the validity or scope of its patents or patent applications that Digirad may to file;

 

Digirad takes efforts and enter into agreements with employees, consultants, collaborators, and advisors to confirm ownership and chain of title in intellectual property rights. However, an inventorship or ownership dispute could arise that may permit one or more third parties to practice or enforce its intellectual property rights, including possible efforts to enforce rights against us;

 

Digirad may elect not to maintain or pursue intellectual property rights that, at some point in time, may be considered relevant to or enforceable against a competitor;

 

Digirad may not develop additional proprietary products and technologies that are patentable, or Digirad may develop additional proprietary products and technologies that are not patentable;

 

the patents or other intellectual property rights of others may have an adverse effect on its business; and

 

Digirad applies for patents relating to its products and technologies and uses thereof, as Digirad deems appropriate. However, Digirad or its representatives or their agents may fail to apply for patents on important products and technologies in a timely fashion or at all, or Digirad or its representatives or their agents may fail to apply for patents in potentially relevant jurisdictions.

 

To the extent its intellectual property offers inadequate protection, or is found to be invalid or unenforceable, Digirad would be exposed to a greater risk of direct or indirect competition. If Digirad’s intellectual property does not provide adequate coverage of its competitors’ products, its competitive position could be adversely affected, as could its business.

 

The measures that Digirad uses to protect the security of its intellectual property and other proprietary rights may not be adequate, which could result in the loss of legal protection for, and thereby diminish the value of, such intellectual property and other rights. In addition to pursuing patents on its technology, Digirad also relies upon trademarks, trade secrets, copyrights and unfair competition laws, as well as license agreements and other contractual provisions, to protect its intellectual property and other proprietary rights. Despite these measures, any of its intellectual property rights could be challenged, invalidated, circumvented or misappropriated. In addition, Digirad takes steps to protect its intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with its employees, consultants, corporate partners and, when needed, its advisors. Such agreements may not be enforceable or may not provide meaningful protection for its trade secrets and/or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements, and Digirad may not be able to prevent such unauthorized disclosure. Moreover, if a party having an agreement with Digirad has an overlapping or conflicting obligation to a third party, its rights in and to certain intellectual property could be undermined. Monitoring unauthorized and inadvertent disclosure is difficult, and Digirad does not know whether the steps Digirad has taken to prevent such disclosure are, or will be, adequate. If Digirad were to enforce a claim that a third party had illegally obtained and was using its trade secrets, it would be expensive and time consuming, the outcome would be unpredictable, and any remedy may be inadequate.

 

In addition, competitors could purchase its products and attempt to replicate and/or improve some or all of the competitive advantages Digirad derives from its development efforts, willfully infringe its intellectual property rights, design their products around its protected technology or develop their own competitive technologies that fall outside of Digirad’s intellectual property rights. If its intellectual property does not adequately protect its market share against competitors’ products and methods, Digirad’s competitive position could be adversely affected, as could its business.

 

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Digirad may need to enter into license agreements in the future. Digirad may need or may choose to obtain licenses and/or acquire intellectual property rights from third parties to advance its research or commercialization of its current or future products, and Digirad cannot provide any assurances that third-party patents do not exist that might be enforced against its current or future products in the absence of such a license. Digirad may fail to obtain any of these licenses or intellectual property rights on commercially reasonable terms. Even if Digirad is able to obtain a license, it may be non-exclusive, thereby giving its competitors access to the same technologies licensed to Digirad. In that event, Digirad may be required to expend significant time and resources to develop or license replacement technology. If Digirad is unable to do so, Digirad may be unable to develop or commercialize the affected products, which could materially harm its business and the third parties owning such intellectual property rights could seek either an injunction prohibiting its sales, or, with respect to its sales, an obligation on its part to pay royalties and/or other forms of compensation.

 

If Digirad is sued for infringing intellectual property rights of third parties, it would be costly and time consuming, and an unfavorable outcome in that litigation could have a material adverse effect on its business. Digirad’s success also depends on its ability to develop, manufacture, market and sell its products and perform its services without infringing the proprietary rights of third parties. Numerous U.S. issued patents and pending patent applications owned by third parties exist in the fields in which Digirad is developing products and services. As part of a business strategy to impede its successful commercialization and entry into new markets, competitors may allege that its products and/or services infringe their intellectual property rights.

 

Digirad could incur substantial costs and divert the attention of its management and technical personnel in defending itself against claims of infringement made by third parties. Any adverse ruling by a court or administrative body, or perception of an adverse ruling, may have a material adverse impact on its ability to conduct its business and its finances. Moreover, third parties making claims against Digirad may be able to obtain injunctive relief against Digirad, which could block its ability to offer one or more products or services and could result in a substantial award of damages against Digirad. Intellectual property litigation can be very expensive, and Digirad may not have the financial means to defend itself.

 

Because patent applications can take many years to issue, there may be pending applications, some of which are unknown to Digirad, which may result in issued patents upon which its products or proprietary technologies may infringe. Moreover, Digirad may fail to identify issued patents of relevance or incorrectly conclude that an issued patent is invalid or not infringed by its technology or any of its products. If a third-party claims that Digirad infringes upon a third-party’s intellectual property rights, Digirad may have to:

 

seek to obtain licenses that may not be available on commercially reasonable terms, if at all;

 

abandon any product alleged or held to infringe, or redesign its products or processes to avoid potential assertion of infringement;

 

pay substantial damages including, in exceptional cases, treble damages and attorneys’ fees, which Digirad may have to pay if a court decides that the product or proprietary technology at issue infringes upon or violates the third-party’s rights;

 

pay substantial royalties or fees or grant cross-licenses to its technology; or

 

defend litigation or administrative proceedings that may be costly whether Digirad wins or loses, and which could result in a substantial diversion of its financial and management resources.

 

Digirad’s issued patents could be found invalid or unenforceable if challenged in court or at the Patent Office or other administrative agency, which could have a material adverse impact on its business. Any patents Digirad has obtained or obtains in future may be challenged by re-examination or otherwise invalidated or eventually found unenforceable. Both the patent application process and the process of managing patent disputes can be time consuming and expensive. If Digirad were to initiate legal proceedings against a third party to enforce a patent related to one of its products or services, the defendant in such litigation could counterclaim that Digirad’s patent is invalid and/or unenforceable. In patent litigation in the U.S., defendant counterclaims alleging invalidity and/or unenforceability are commonplace, as are validity challenges by the defendant against the subject patent or other patents before the USPTO. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement, failure to meet the written description requirement, indefiniteness, and/or failure to claim patent eligible subject matter. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent intentionally withheld material information from the USPTO, or made a misleading statement, during prosecution. Additional grounds for an unenforceability assertion include an allegation of misuse or anticompetitive use of patent rights, and an allegation of incorrect inventorship with deceptive intent. Third parties may also raise similar claims before the USPTO even outside the context of litigation. The outcome is unpredictable following legal assertions of invalidity and unenforceability. With respect to the validity question, for example, Digirad cannot be certain that no invalidating prior art existed of which Digirad and the patent examiner were unaware during prosecution. These assertions may also be based on information known to Digirad or the Patent Office. If a defendant or third party were to prevail on a legal assertion of invalidity and/or unenforceability, Digirad would lose at least part, and perhaps all, of the claims of the challenged patent. Such a loss of patent protection would or could have a material adverse impact on its business.

 

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Digirad may be involved in lawsuits to protect or enforce its patents, which could be expensive, time-consuming and unsuccessful. Competitors may attempt to challenge or invalidate its patents or may be able to design alternative techniques or devices that avoid infringement of its patents that have issued or that may issue in the future, or develop products with functionalities that are comparable to Digirad’s. In the event a competitor infringes upon Digirad’s patent or other intellectual property rights, litigation to enforce its intellectual property rights or to defend its patents against challenge, even if successful, could be expensive and time consuming and could require significant time and attention from its management. Digirad may not have sufficient resources to enforce its intellectual property rights or to defend its patents against challenges from others.

 

An adverse result in any such litigation proceedings could put one or more of its patents at risk of being invalidated, being found to be unenforceable, and/or being interpreted narrowly and could impact the validity or enforceability positions of its other patents. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of its confidential information could be compromised by disclosure during this type of litigation. In addition, an adverse outcome in such litigation or proceedings may expose Digirad to loss of its proprietary position, expose Digirad to significant liabilities, or require Digirad to seek licenses that may not be available on commercially acceptable terms, if at all.

 

Digirad may make financial investments in other businesses that may lose value. As Digirad looks for the best ways to deploy its capital and maximize its returns for its businesses and shareholders, Digirad may make financial investments in other businesses or processes for purposes of enhancing its supply chain, creating financial returns, strategic developments, or other purposes. These investments may be speculative in nature, and there is no guarantee that Digirad will experience a financial return and Digirad may lose its entire principal balance if not successful.

 

Digirad’s mobile healthcare fleet is highly utilized; any downtime in its assets could have a material impact on its revenues and costs. Digirad’s Mobile Healthcare business unit utilizes a fleet of highly sophisticated imaging and related transportation assets that require nearly 100% uptime to service its customer needs. Though Digirad utilizes an array of highly competent service providers to support its imaging fleet, imaging and related transportation machines can experience unproductive downtime. Any downtime of its imaging fleet could have near term impacts on its revenues and underlying costs.

 

Digirad’s goodwill and other long-lived assets are subject to potential impairment that could negatively impact its earnings. A significant portion of its assets consists of goodwill and other long-lived assets, the carrying value of which may be reduced if Digirad determines that those assets are impaired. At December 31, 2018, goodwill and net intangible assets represented $7.0 million, or 13.8% of its total assets. In addition, net property, plant and equipment assets totaled $21.6 million, or 42.8% of its total assets. If actual results differ from the assumptions and estimates used in its goodwill and long-lived asset valuation calculations, Digirad could incur impairment charges, which could negatively impact its earnings.

 

Digirad reviews its reporting units for potential goodwill impairment annually or more often if events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. In addition, Digirad tests the recoverability of long-lived assets if events or circumstances indicate the carrying values may not be recoverable. Recoverability of long-lived assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. Digirad conducts impairment testing based on its current business strategy in light of present industry and economic conditions, as well as future expectations. There are numerous risks that may cause the fair value of a reporting unit to fall below its carrying amount and/or the value of long-lived assets to not be recoverable, which could lead to the measurement and recognition of goodwill and/or long-lived asset impairment. These risks include, but are not limited to, significant negative variances between actual and expected financial results, lowered expectations of future financial results, failure to realize anticipated synergies from acquisitions, adverse changes in the business climate, and the loss of key personnel. If Digirad is not able to achieve projected performance levels, future impairments could be possible, which could negatively impact its earnings.

 

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During the year ended December 31, 2018, Digirad derecognized $1.1 million of goodwill related to the termination of the Philips Agreements with DMS Health effective December 31, 2017. During the years ended December 31, 2018 and 2017, Digirad recorded a $0.5 million and $0.2 million goodwill impairment loss, respectively, related to Telerhythmics, Digirad’s cardiac event monitoring services business that was acquired on March 13, 2014. On October 31, 2018, Digirad entered into a membership interest purchase agreement (the “Telerhythmics Purchase Agreement”) with G Medical Innovations USA, Inc. (“G Medical”), pursuant to which Digirad sold all the outstanding membership interests in Telerhythmics to G Medical. No other significant impairment losses on long-lived assets were recognized during the years ended December 31, 2018 and 2017. See Note 2. Basis of Presentation and Note 7. Goodwill, within the notes to its accompanying consolidated financial statements for further discussion regarding goodwill and long-lived assets.

 

Risks Related to Digirad’s Indebtedness

 

On March 29, 2019, Digirad entered into the SNB Loan Agreement, with Sterling National Bank, a national banking association. The SNB Loan Agreement is a five-year revolving credit facility (maturing in March 2024), which, as amended, has a maximum credit amount of $20 million. Digirad used a portion of the financing made available under the SNB Loan Agreement to refinance and terminate, effective as of March 29, 2019, its previous credit facility under the Comerica Credit Agreement.

 

Digirad’s indebtedness could restrict its operations and make Digirad more vulnerable to adverse economic conditions. Digirad’s indebtedness could have important consequences for Digirad and its stockholders. For example, the SNB Loan Agreement requires a balloon payment at the termination of the facility in March 2024, which may require Digirad to dedicate a substantial portion of its cash flow from operations to this future payment if Digirad cannot refinance successfully in the future, thereby reducing the availability of its cash flow to fund working capital, capital expenditures, and acquisitions, and for other general corporate purposes. In addition, its indebtedness could:

 

increase its vulnerability to adverse economic and competitive pressures in its industry;

 

place Digirad at a competitive disadvantage compared to its competitors that have less debt;

 

limit its flexibility in planning for, or reacting to, changes in its business and its industry; and

 

limit its ability to borrow additional funds on terms that are acceptable to Digirad or at all.

 

The SNB Loan Agreement governing its indebtedness contains restrictive covenants that will restrict its operating flexibility and require that Digirad maintain specified financial ratios. If Digirad cannot comply with these covenants, Digirad may be in default under the SNB Loan Agreement. The SNB Loan Agreement governing its indebtedness contains restrictions and limitations on its ability to engage in activities that may be in its long-term best interests. The SNB Loan Agreement contains affirmative and negative covenants that limit and restrict, among other things, its ability to:

 

incur additional debt;

 

sell assets;

 

incur liens or other encumbrances;

 

make certain restricted payments and investments;

 

acquire other businesses; and

 

merge or consolidate.

 

The SNB Loan Agreement limits its ability to pay dividends and to redeem its equity securities if such dividend or redemption would result in its non-compliance with the financial covenants in the SNB Loan Agreement, there is insufficient borrowing availability under the SNB Loan Agreement, or if there is a default or event of default under the SNB Loan Agreement that has occurred and is continuing. Digirad may therefore be required to reduce or eliminate its dividends, if any, including on the Digirad Preferred Stock, and/or may be unable to redeem shares of the Digirad Preferred Stock until compliance with such financial covenants can be met.

 

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The SNB Loan Agreement contains a fixed charge coverage ratio covenant and a leverage ratio covenant. Going forward, Digirad may not have the ability to meet these and other covenants under the SNB Loan Agreement depending on a number of factors including, without limitation, the performance of its business, capital allocation decisions made by Digirad, or events beyond its control.

 

Digirad’s failure to comply with its covenants and other obligations under the SNB Loan Agreement may result in an event of default thereunder. A default, if not cured or waived, may permit acceleration of its indebtedness. If its indebtedness is accelerated, Digirad cannot be certain that Digirad will have sufficient funds available to pay the accelerated indebtedness (together with accrued interest and fees), or that Digirad will have the ability to refinance the accelerated indebtedness on terms favorable to Digirad or at all. This could have serious consequences to its financial condition, operating results, and business, and could cause Digirad to become insolvent or enter bankruptcy proceedings, and stockholders may lose all or a portion of their investment because of the priority of the claims of its creditors on its assets.

 

Substantially all of Digirad’s assets have been pledged to SNB as security for its indebtedness under the SNB Loan Agreement. Pursuant to the SNB Loan Agreement, the SNB Loan Agreement is secured by a first-priority security interest in substantially all of the assets of Digirad and its subsidiaries and a pledge of all shares and equity interests of Digirad’s subsidiaries. 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 rate at which loans and obligations under the SNB Loan Agreement bear interest. The exercise by SNB of remedies provided under the SNB Loan Agreement in the event of a default thereunder may have a material adverse effect on the liquidity, financial condition and results of operations of Digirad and could cause Digirad to become bankrupt or insolvent. In the event of any bankruptcy, liquidation, dissolution, reorganization, or similar proceeding against Digirad, the assets that are pledged as collateral securing any unpaid amounts under the SNB Loan Agreement must first be used to pay such amounts, as well as any other obligation secured by the pledged assets, in full, before making any distributions to its stockholders. In the event of any of the foregoing, its stockholders could lose all or a part of their investment.

 

If Digirad is unable to generate or borrow sufficient cash to make payments on its indebtedness, its financial condition would be materially harmed, its business could fail, and stockholders may lose all of their investment. Digirad’s ability to make scheduled payments on or to refinance its obligations will depend on its financial and operating performance, which will be affected by economic, financial, competitive, business, and other factors, some of which are beyond its control. Digirad cannot assure you that its business will generate sufficient cash flow from operations to service its indebtedness or to fund its other liquidity needs. If Digirad is unable to meet its debt obligations or fund its other liquidity needs, Digirad may need to restructure or refinance all or a portion of its indebtedness on or before maturity or sell certain of its assets. Digirad cannot assure you that Digirad will be able to restructure or refinance any of its indebtedness on commercially reasonable terms, if at all, which could cause Digirad to default on its debt obligations and impair its liquidity. Any refinancing of its indebtedness could be at higher interest rates and may require Digirad to comply with more onerous covenants, which could further restrict its business operations.

 

Increases in interest rates could adversely affect Digirad’s results from operations and financial condition. The SNB Loan Agreement allows Digirad to elect for amounts borrowed under the SNB Loan Agreement to be subject to a floating interest rate which may change with market interest rates. An increase in prevailing interest rates would have an effect on the interest rates charged on its variable rate debt, which rise and fall upon changes in interest rates. If prevailing interest rates or other factors result in higher interest rates, the increased interest expense would adversely affect its cash flow and its ability to service its indebtedness.

 

The ability of Digirad and ATRM to use net operating loss carryforwards to offset future taxable income for U.S. income tax purposes may be limited, including as a result of the Merger. As of December 31, 2018, ATRM had federal net operating loss carryforwards (“NOLs”) of approximately $104.7 million and state NOLs of approximately $23.3 million. Additionally, as of December 31, 2018, Digirad had federal NOLs of approximately $83.7 million and state NOLs of approximately $26.7 million. Significant changes that impact each of ATRM and Digirad in the 2017 Tax Cut and Jobs Act (the “TCJA”) include a limitation on the utilization of NOLs arising after December 31, 2017 to 80% of taxable income with an indefinite carryforward. The TCJA also reduced the corporate income tax rate to 21%, from a prior rate of 35%, which may cause a reduction in the economic benefit of its NOLs and other deferred tax assets available to us. In addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed. Further, the ability of ATRM and Digirad to use NOLs to offset future taxable income will depend on the amount of taxable income ATRM and Digirad generate in future periods and whether ATRM and Digirad become subject to annual limitations on the amount of taxable income that may be offset by their NOLs.

 

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Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), imposes an annual limitation on the amount of taxable income that may be offset by a corporation’s NOLs if the corporation experiences an “ownership change” as defined in Section 382 of the Code. An ownership change occurs when the corporation’s “5-percent shareholders” (as defined in Section 382 of the Code) collectively increase their ownership in the corporation by more than 50 percentage points (by value) over a rolling three-year period. Additionally, various states have similar limitations on the use of state NOLs following an ownership change. The completion of the Merger will result in an ownership change under Section 382 with respect to ATRM.

 

ATRM’s Amended and Restated Articles of Incorporation include provisions designed to protect the tax benefits of its NOLs by generally restricting any direct or indirect transfers of ATRM Common Stock that increase the direct or indirect ownership of ATRM Common Stock by any person from less than 4.99% to 4.99% or more, or increase the percentage of ATRM Common Stock owned directly or indirectly by a person owning or deemed to own 4.99% or more of its common stock. Any direct or indirect transfer attempted in violation of these transfer restrictions will be void as of the date of the prohibited transfer as to the purported transferee. These restrictions were scheduled to expire on December 5, 2017, however, at ATRM’s 2017 Annual Meeting of Shareholders held on December 4, 2017, the shareholders approved an amendment to ATRM’s Amended and Restated Articles of Incorporation to extend this provision to December 5, 2020. On December 4, 2017, ATRM filed Articles of Amendment with the Office of the Secretary of State of the State of Minnesota to effect this, as well as other, amendments. However, notwithstanding the extension of such restrictions on the transfer of ATRM Common Stock, the ATRM board of directors has approved Digirad’s acquisition of all of the outstanding capital stock of ATRM in connection with the Merger and has recommended that ATRM’s shareholders vote “FOR” the approval of the Merger Agreement and the transactions contemplated thereby, including the Merger. Accordingly, such restrictions on the transfer of ATRM Common Stock will not apply to the Merger.

 

The Merger should not result in an ownership change with respect to Digirad’s NOLs because Digirad believes that the Digirad Preferred Stock issued to ATRM shareholders in the Merger should be treated as “plain vanilla” or “pure preferred stock” within the meaning of Section 1504(a)(4) of the Code and would, therefore, be excluded for the purposes of determining whether an ownership change under Section 382 has occurred. However, if the Digirad Preferred Stock issued in the Merger is not considered “plain vanilla” or “pure preferred stock” within the meaning of Section 1504(a)(4) of the Code, the Digirad Preferred Stock will be treated as “stock” for purposes of Section 382 of the Code. In such event, an ownership change under Section 382 will likely occur with respect to Digirad’s NOLs.

 

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ATRM RISK FACTORS

 

In addition to the risks of the Merger to ATRM set forth in “Risk Factors Relating to the Merger,” ATRM’s business is currently subject to the risks described below, and, in the event the Merger is not consummated, will continue to be subject to the risks described below. To the extent ATRM’s business risks will be affected by the combination of ATRM’s business with Digirad’s business upon the completion of the Merger, Digirad’s impact on the applicable risk is noted.

 

ATRM has a history of operating losses and substantial indebtedness. Future cash flows from operations and financings may not be sufficient to enable ATRM to meet its obligations under its indebtedness, which likely would have a material adverse effect on its business, financial condition, and results of operations. ATRM has incurred significant operating losses in recent years and, as of December 31, 2018, ATRM had an accumulated deficit of approximately $92.4 million. There can be no assurance that ATRM will generate sufficient revenue in the future to cover its expenses and achieve profitability on a consistent basis or at all.

 

ATRM has issued various promissory notes to finance its acquisitions of KBS and EBGL and to provide for its general working capital needs. As of March 31, 2019, ATRM had outstanding debt totaling approximately $11.5 million. ATRM’s debt primarily included (i) $3.4 million principal outstanding on KBS’s $4.0 million revolving credit facility under a loan and security agreement (as amended, the “KBS Loan Agreement”) with Gerber Finance, and $3.0 million principal outstanding under a loan and security agreement with Gerber Finance used to finance the acquisition of EBGL (as amended, the “Acquisition Loan Agreement”), and (ii) $2.9 million principal outstanding on EdgeBuilder’s $3.0 million revolving credit facility under a revolving credit loan agreement with Premier Bank (the “Premier Loan Agreement”), which became effective on June 30, 2017 and replaced the prior $3.0 million revolving credit facility under a loan and security agreement with Gerber Finance (the “EBGL Loan Agreement”). ATRM also has debt with related parties which includes (i) $1.5 million of unsecured promissory notes with LSV Co-Invest I with interest payable semi-annually at a rate of 10.0% per annum (LSV Co-Invest I may elect to receive interest in-kind at a rate of 12.0% per annum), with any unpaid principal and interest due on January 12, 2020, (ii) $0.3 million of unsecured promissory notes with LSVM, with interest payable annually at a rate of 10.0% per annum (LSVM may elect to receive any interest payment entirely in-kind at a rate of 12.0% per annum), with any unpaid principal and interest due on November 30, 2020 (the “LSVM December 2018 Loan”), and (iii) a $0.3 million unsecured promissory note with Digirad, with interest payable at 10.0% per annum for the first 12 months of its term, and at 12.0% per annum for the remaining 12 months, with any unpaid principal and interest due on December 14, 2020.

 

There can be no assurance that ATRM’s existing cash reserves, together with funds generated by its operations and any future financings, will be sufficient to satisfy its debt payment obligations, to avoid liquidity issues and/or fund operations beyond this fiscal year. ATRM’s inability to generate funds from its operations and/or obtain financing sufficient to satisfy its payment obligations, including financing from Digirad following the closing of the Merger, may result in its obligations being accelerated by its lenders, which would likely have a material adverse effect on its business, financial condition and results of operations. Given these uncertainties, there can be no assurance that ATRM’s existing cash reserves will be sufficient to avoid liquidity issues and/or fund operations beyond this fiscal year.

 

ATRM may need additional financing and its ability to obtain such financing may be limited. ATRM may need additional financing in order to satisfy its debt payment obligations and effectively execute its business plan, which may include strategic acquisitions. There is no assurance that ATRM will be able to obtain such additional financing, including financing from Digirad following the closing of the Merger, or that if third-party financing is available, that it will be available to ATRM on acceptable terms. ATRM’s existing loan agreements with Gerber Finance contain negative covenants limiting its ability to obtain additional debt financing without the consent of Gerber Finance. Due to its history of operating losses, existing debt payment obligations and the restrictions under the Gerber Finance loan agreements, its ability to obtain such additional third-party financing may be limited.

 

The Gerber Finance loan agreements contain certain covenants that restrict its ability to engage in certain transactions and may impair its ability to respond to changing business and economic conditions. ATRM’s loan agreements with Gerber Finance contain certain affirmative and negative covenants, including a financial covenant requiring ATRM to not incur a net annual post-tax loss for the fiscal year ending December 31, 2019 and a minimum level of net income for each fiscal year thereafter. These covenants also include restrictions on its abilities to take certain actions without the consent of Gerber Finance, and may limit its ability to respond to changing business and economic conditions. These restrictions include, among other things, limitations on the ability of the borrowers to take the following actions: merge, consolidate, acquire or invest in another company; incur additional debt; enter into transactions with affiliates; engage in other businesses; sell, transfer or otherwise dispose of assets; and make certain payments, including dividends or distributions to ATRM shareholders (which will include Digirad following completion of the Merger).

 

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ATRM’s inability to comply with the financial covenants under its loan agreements with Gerber Finance and Premier Bank could have a material adverse effect on its financial condition. As of December 31, 2018, KBS was not in compliance with the financial covenants under the KBS Loan Agreement requiring no net annual post-tax loss for KBS or the minimum leverage ratio covenant as of these test dates. Additionally, KBS was not in compliance with the requirement to deliver ATRM’s fiscal year-end financial statements reviewed by an independent certified accounting firm acceptable to Gerber Finance within 105 days from the fiscal year ended December 31, 2017. 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, ATRM obtained a waiver from Gerber Finance for these events. In addition, ATRM and Gerber Finance agreed to eliminate the minimum leverage ratio covenant for years after 2018.

 

As of December 31, 2018, EBGL was not 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. In April 2019, ATRM obtained a waiver from Premier Bank for these events through August 1, 2019 (the current maturity date of the Premier Loan Agreement).

 

If ATRM fails to comply with any financial covenants under its loan agreements with Gerber Finance or Premier Bank going forward, the applicable lender(s) may demand the repayment of the credit facilities amount outstanding and any unpaid interest thereon.

 

ATRM is dependent on its senior management team and other key employees. ATRM’s success depends, to a significant extent, on its senior management team and other key employees and the ability of other personnel or new hires to effectively replace key employees who may retire or resign. Failure to retain its leadership team and attract and retain new leadership and other important personnel could lead to ineffective management and operations, which could materially and adversely affect its business and operating results.

 

The cyclical and seasonal nature of the housing industry causes ATRM’s revenues and operating results to fluctuate, and ATRM expects this cyclicality and seasonality to continue in the future. The housing industry is highly cyclical and seasonal. It is influenced by many national and regional factors, including the availability of financing for home buyers and developers, consumer confidence, interest rates, demographic and employment trends, income levels, housing demand, general economic conditions (including inflation and recessions), and the availability of suitable home sites. As a result of the foregoing factors, ATRM’s revenues and operating results have been volatile, and ATRM expects this volatility to continue in the future. Unfavorable changes in any of the above factors or other issues that may arise could have an adverse effect on ATRM’s revenue and earnings.

 

Although modular and wall panel construction in its factories eliminates many of the weather-related challenges encountered with site-built construction, ATRM’s operations can still be impacted by weather and other seasonal factors. Weather can cause delays in site preparation, including delays in building the foundation for a commercial project or residential home, access to building sites and customer delays in setting modular homes or wall panels due to weather conditions and temperature. Additionally, sales demand, especially for residential homes, generally weakens in the winter months, particularly in the northeast and upper Midwest regions of the United States. As a result, both KBS and EBGL experience some seasonality. At KBS, the third quarter typically is the strongest demand period and the first quarter typically is the lowest demand period during the year. Although EBGL experiences some seasonality, it is less pronounced than KBS. EBGL’s fluctuations in business are impacted more by the timing of its large wall panel projects. At EBGL, the first quarter typically is the strongest demand period and the third quarter typically is the lowest demand period during the year.

 

ATRM’s operating results could be adversely affected by changes in the cost and availability of raw materials. Prices and availability of raw materials used to manufacture its products can change significantly due to fluctuations in supply and demand. Additionally, availability of the raw materials used to manufacture its products may be limited at times resulting in higher prices and/or the need to find alternative suppliers. Both KBS’s and EBGL’s major material components are dimensional lumber and wood sheet products, which include plywood and oriented strand board. Lumber costs are subject to market fluctuations. Furthermore, the cost of raw materials may also be influenced by transportation costs. It is not certain that any price increases can be passed on to its customers without affecting demand or that limited availability of materials will not impact its production capabilities. The state of the financial and housing markets may also impact its suppliers and affect the availability or pricing of materials. ATRM’s inability to raise the price of its products in response to increases in prices of raw materials or to maintain a proper supply of raw materials could have an adverse effect on its revenue and earnings.

 

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ATRM has material weaknesses in its internal control over financial reporting and concluded that its disclosure controls and procedures and internal control over financial reporting were not effective as of December 31, 2018. ATRM’s chief executive officer and chief financial officer concluded that its disclosure controls and procedures and its internal control over financial reporting were not effective as of December 31, 2018 due to material weaknesses in its internal control over financial reporting related to inadequate accounting processes and internal control procedures. ATRM’s failure to successfully remediate these material weaknesses could cause ATRM to fail to meet its reporting obligations and to produce timely and reliable financial information if the Merger is not completed and ATRM continues as an independent public company. Additionally, such failure could cause investors to lose confidence in its public disclosures, which could have a negative impact on its stock price. However, upon the completion of the Merger, ATRM will cease to be a public company and will be a wholly-owned subsidiary of Digirad, which will take over and improve ATRM’s internal controls and financial reporting functions.

 

The report of ATRM’s independent registered public accounting firm contains an emphasis paragraph regarding the substantial doubt about its ability to continue as a “going concern.” The audit report of ATRM’s independent registered public accounting firm covering the December 31, 2018 consolidated financial statements contains an explanatory paragraph that states that its recurring losses from operations and net capital deficiency, among other matters, raise substantial doubt about its ability to continue as a going concern. This going concern opinion could materially limit its ability to raise additional funds through the issuance of new debt or equity securities or otherwise. Future reports on its financial statements may also include an explanatory paragraph with respect to its ability to continue as a going concern (assuming ATRM remains an independent company). As of December 31, 2018, ATRM had an accumulated deficit of approximately $92.4 million. Working capital has remained negative over the past several years. Cash used in operating activities, while improved over 2017, remains negative, which has required ATRM to generate funds from investing and financing activities. At December 31, 2018, ATRM had outstanding debt of approximately $11.7 million. To date, ATRM’s operating losses have been funded primarily from investing and financing activities.

 

ATRM has had, and if the Merger is not completed it will likely continue to have, an ongoing need to raise additional cash from outside sources to fund its future operations. If the Merger is completed, ATRM may require additional funds to be provided by Digirad. However, no assurance can be given that additional capital will be available when required (including from Digirad, if the Merger is completed) or on terms acceptable to ATRM. If ATRM is unsuccessful in its efforts to raise any such additional capital, it would be required to take actions that could materially and adversely affect its business, and it may not be able to continue operations. Additionally, a failure to generate additional liquidity could negatively impact its access to materials or services that are important to the operation of its business. ATRM also cannot give assurance that it will achieve sufficient revenues in the future to achieve profitability and cash flow positive operations to allow it to continue as a going concern (provided that, if the Merger is completed, Digirad may provide financial assistance to ATRM to allow it continue operations). The perception that ATRM may not be able to continue as a going concern may cause third parties to choose not to deal with it due to concerns about its ability to meet its contractual obligations, which could have a material adverse effect on ATRM’s business.

 

ATRM has a few customers that account for a significant portion of its revenues, and the loss of these customers, or decrease in their demand for its products, could have a material adverse effect on its results. ATRM relies on a limited number of customers for a substantial percentage of its net sales and accounts receivable. For example, two customers, each commercial builders, accounted for approximately 10.4% and 10.8%, respectively, of EdgeBuilder’s total net sales in 2018. A reduction, delay, or cancellation of orders from one or more of these significant customers, or the loss of one or more of these customers, would likely have an adverse impact on its operating results.

 

If KBS is unable to maintain or establish its relationships with independent dealers and contractors who sell its homes, KBS revenue could decline. KBS sells residential homes through a network of independent dealers and contractors. As is common in the modular home industry, KBS’s independent dealers may also sell homes produced by competing manufacturers and can cancel their relationships with KBS on short notice. In addition, these dealers may not remain financially solvent, as they are subject to industry, economic, demographic and seasonal trends similar to those faced by KBS. If KBS is not able to maintain good relationships with its dealers and contractors or establish relationships with new solvent dealers or contractors, KBS’s revenue could decline.

 

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Due to the nature of ATRM’s business, many of its expenses are fixed costs and if there are decreases in demand for its products, it may adversely affect its operating results. Many of its expenses, particularly those relating to properties, capital equipment, and certain manufacturing overhead items, are fixed in the short term. Reduced demand for its products causes its fixed production costs to be allocated across reduced production volumes, which adversely affects its gross margins and profitability.

 

Certain actions taken in connection with reducing operating costs may have a negative impact on ATRM’s business. In the event of a housing downturn and a decline in its revenues, ATRM may implement cost reduction actions such as temporary factory shutdowns, workforce reductions, pay freezes and reductions, and reductions in other expenditures. In doing so, ATRM will attempt to maintain the necessary infrastructures to allow ATRM to take full advantage of subsequent improvements in market conditions. However, there can be no assurance that reductions ATRM may make in personnel and expenditure levels and the loss of the capabilities of personnel ATRM has terminated or may terminate will not inhibit ATRM in the timely ramp up of production in response to improving market conditions.

 

Due to the nature of the work ATRM and its subsidiaries perform, ATRM may be subject to significant liability claims and disputes. ATRM and its wholly owned subsidiaries, KBS, EdgeBuilder, Glenbrook and LSVM, engage in services that can result in substantial injury or damages that may expose ATRM to legal proceedings, investigations and disputes. For example, in the ordinary course of its business, ATRM may be involved in legal disputes regarding personal injury and wrongful death claims, employee or labor disputes, professional liability claims, and general commercial disputes, as well as other claims. LSVM as an investment advisor may also be subject to legal proceedings and investigations with the SEC or other regulatory bodies and may have disputes related to its fiduciary duties to the funds or instruments LSVM manages. An unfavorable legal ruling against ATRM or its subsidiaries could result in substantial monetary damages. Although ATRM has adopted a range of insurance, risk management, safety, and risk avoidance programs designed to reduce potential liabilities, there can be no assurance that such programs will protect ATRM fully from all risks and liabilities. If ATRM sustains liabilities that exceed its insurance coverage or for which ATRM is not insured, it could have a material adverse impact on its results of operations and financial condition.

 

ATRM’s costs of doing business could increase as a result of changes in, expanded enforcement of, or adoption of new federal, state or local laws and regulations. ATRM is subject to various federal, state and local laws and regulations that govern numerous aspects of its business. In recent years, a number of new laws and regulations have been adopted, and there has been expanded enforcement of certain existing laws and regulations by federal, state and local agencies. These laws and regulations, and related interpretations and enforcement activity, may change as a result of a variety of factors, including political, economic or social events. Changes in, expanded enforcement of, or adoption of new federal, state or local laws and regulations governing minimum wage or living wage requirements; the classification of exempt and non-exempt employees; the distinction between employees and contractors; other wage, labor or workplace regulations; healthcare; data protection and cybersecurity; the sale and pricing of some of its products; transportation; logistics; supply chain transparency; taxes; unclaimed property; energy costs and consumption; or environmental matters could increase its costs of doing business or impact its operations.

 

In fiscal 2017, Congress enacted the Tax Cuts and Jobs Act (the “TCJA”), which significantly changes how the U.S. taxes corporations. During fiscal 2018, additional guidance related to the TCJA was issued by the U.S. Department of the Treasury and the IRS. The TCJA requires complex computations to be performed that were not previously required under U.S. tax law, significant judgments to be made in interpretation of the provisions of the TCJA, significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Department of the Treasury, the IRS, and other standard-setting bodies could interpret or issue guidance on how provisions of the TCJA will be applied or otherwise administered that is different from its interpretations. Further, uncertainties also exist in terms of how U.S. states and foreign countries within which ATRM operates will react to these U.S. federal income tax changes, which could have additional impacts on its effective tax rate.

 

There is a limited market for the ATRM Common Stock. ATRM Common Stock is currently quoted on the OTC Pink market of the OTC Markets Group, Inc. under the symbol “ATRM.” Trading of securities on this quotation service is generally limited and is effected on a less regular basis than on exchanges such as NASDAQ. The average daily trading volume in ATRM Common Stock during the fiscal year 2018 was approximately 900 shares per day. ATRM cannot provide assurances that a more active trading market will develop or be sustained. As a result of low trading volume in ATRM Common Stock, the purchase or sale of a relatively small number of securities could result in significant price fluctuations and it may be difficult for holders to sell their securities without depressing the market price for such securities. If the Merger is not completed, holders of ATRM Common Stock will continue to be affected by the limited market for the ATRM Common Stock. However, if the Merger is completed, all ATRM Common Stock will be exchanged for Digirad Preferred Stock, which Digirad intends to apply to have listed for trading on the Nasdaq Global Market.

 

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The ability of Digirad and ATRM to use net operating loss carryforwards to offset future taxable income for U.S. income tax purposes may be limited, including as a result of the Merger. As of December 31, 2018, ATRM had federal NOLs of approximately $104.7 million and state NOLs of approximately $23.3 million. Additionally, as of December 31, 2018, Digirad had federal NOLs of approximately $83.7 million and state NOLs of approximately $26.7 million. Significant changes that impact each of ATRM and Digirad in the TCJA include a limitation on the utilization of NOLs arising after December 31, 2017 to 80% of taxable income with an indefinite carryforward. The TCJA also reduced the corporate income tax rate to 21%, from a prior rate of 35%, which may cause a reduction in the economic benefit of its NOLs and other deferred tax assets available to us. In addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed. Further, the ability of ATRM and Digirad to use NOLs to offset future taxable income will depend on the amount of taxable income ATRM and Digirad generate in future periods and whether ATRM and Digirad become subject to annual limitations on the amount of taxable income that may be offset by their NOLs.

 

Section 382 of the Code, imposes an annual limitation on the amount of taxable income that may be offset by a corporation’s NOLs if the corporation experiences an “ownership change” as defined in Section 382 of the Code. An ownership change occurs when the corporation’s “5-percent shareholders” (as defined in Section 382 of the Code) collectively increase their ownership in the corporation by more than 50 percentage points (by value) over a rolling three-year period. Additionally, various states have similar limitations on the use of state NOLs following an ownership change. The completion of the Merger will result in an ownership change under Section 382 with respect to ATRM.

 

ATRM’s Amended and Restated Articles of Incorporation include provisions designed to protect the tax benefits of its NOLs by generally restricting any direct or indirect transfers of ATRM Common Stock that increase the direct or indirect ownership of ATRM Common Stock by any person from less than 4.99% to 4.99% or more, or increase the percentage of ATRM Common Stock owned directly or indirectly by a person owning or deemed to own 4.99% or more of its common stock. Any direct or indirect transfer attempted in violation of these transfer restrictions will be void as of the date of the prohibited transfer as to the purported transferee. These restrictions were scheduled to expire on December 5, 2017, however, at ATRM’s 2017 Annual Meeting of Shareholders held on December 4, 2017, the shareholders approved an amendment to ATRM’s Amended and Restated Articles of Incorporation to extend this provision to December 5, 2020. On December 4, 2017, ATRM filed Articles of Amendment with the Office of the Secretary of State of the State of Minnesota to effect this, as well as other, amendments. However, notwithstanding the extension of such restrictions on the transfer of ATRM Common Stock, the ATRM board of directors has approved Digirad’s acquisition of all of the outstanding capital stock of ATRM in connection with the Merger and has recommended that ATRM’s shareholders vote “FOR” the approval of the Merger Agreement and the transactions contemplated thereby, including the Merger. Accordingly, such restrictions on the transfer of ATRM Common Stock will not apply to the Merger.

 

The Merger should not result in an ownership change with respect to Digirad’s NOLs because Digirad believes that the Digirad Preferred Stock issued to ATRM shareholders in the Merger should be treated as “plain vanilla” or “pure preferred stock” within the meaning of Section 1504(a)(4) of the Code and would, therefore, be excluded for the purposes of determining whether an ownership change under Section 382 has occurred. However, if the Digirad Preferred Stock issued in the Merger is not considered “plain vanilla” or “pure preferred stock” within the meaning of Section 1504(a)(4) of the Code, the Digirad Preferred Stock will be treated as “stock” for purposes of Section 382 of the Code. In such event, an ownership change under Section 382 will likely occur with respect to Digirad’s NOLs.

 

The concentration of ATRM’s stock ownership may limit individual stockholder ability to influence corporate matters. As of July 19, 2019, Jeffrey E. Eberwein, the Chairman of ATRM’s board of directors, owned approximately 17.4% of the outstanding ATRM Common Stock. Mr. Eberwein also is the Chairman of the Board of Digirad and beneficially owns 86,916 shares of Digirad’s common stock, or approximately 4.3% of the shares outstanding. Mr. Eberwein is also the Chief Executive Officer of LSVM, which is the investment manager of LSVI and LSV Co-Invest I. LSVI owns 229,255 shares of ATRM’s 10.0% Series B Cumulative Preferred Stock (“Series B Stock”) and another 385,799 shares of Series B Stock are owned directly by LSV Co-Invest I. Through these relationships and other relationships with affiliated entities, Mr. Eberwein may be deemed the beneficial owner of the securities owned by LSVI and LSV Co-Invest I. Mr. Eberwein disclaims beneficial ownership of Series B Stock, except to the extent of his pecuniary interest therein.

 

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In addition to stock of ATRM, LSV Co-Invest I holds unsecured promissory notes of ATRM with a principal amount totaling $1.4 million; LSVM holds an unsecured note of ATRM with a principal amount totaling $0.3 million; and LSVI has pledged up to $3.0 million plus additional fees as collateral to secure a promissory note payable by ATRM to Gerber Finance due December 31, 2019.

 

If the Merger is not completed, Mr. Eberwein and his affiliates will continue to hold approximately 17.4% of the outstanding ATRM Common Stock and Mr. Eberwein and his affiliates will continue to be able to exert influence over ATRM’s corporate affairs. If the Merger is completed, ATRM will become a wholly-owned subsidiary of Digirad and ATRM’s current shareholders will receive the Digirad Preferred Stock, which will have very limited voting rights with respect to Digirad corporate matters.

 

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THE MERGER

 

This summary highlights selected information from this proxy statement/prospectus. It may not contain all of the information that is important to you. You are urged to carefully read the entire proxy statement/prospectus, including the annexes and the other documents referred to in this proxy statement/prospectus because the information in this section does not provide all the information that might be important to you with respect to the Merger Agreement, the Merger and the other matters being considered at the ATRM special meeting. For additional information, see “Where You Can Find More Information” on page 208.

 

The Companies

 

Digirad

 

On September 10, 2018, Digirad announced that its board of directors approved the conversion of Digirad into a diversified holding company.

 

Historically, Digirad has delivered 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 has grown both organically and through acquisitions over the last three years. Prior to the year ended December 31, 2016, Digirad was organized as two reportable segments: Diagnostic Services and Diagnostic Imaging. With the acquisition of DMS Health on January 1, 2016, Digirad added two additional reportable segments: Mobile Healthcare and Medical Device Sales and Services. In February of 2018, Digirad completed the sale of its customer contracts relating to our MDSS post-warranty service business to Philips North America LLC. On October 31, 2018, Digirad sold its Telerhythmics business to G Medical, for $1.95 million in cash. As of December 31, 2018, Digirad’s business was organized into three reportable segments: Diagnostic Services, Mobile Healthcare, and Diagnostic Imaging.

 

Digirad’s aim 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 financially disciplined approach for acquisitions.

 

On December 14, 2018, Digirad and ATRM, entered into a joint venture and formed Star Procurement, LLC, 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, a wholly-owned subsidiary of ATRM 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.

 

As part of the HoldCo Conversion, Digirad formed a real estate subsidiary named Star Real Estate Holdings USA, Inc. SRE will hold any significant real estate assets Digirad acquires. 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 an initial transaction to create Digirad’s real estate division under SRE and launch that aspect of the HoldCo Conversion, in April 2019, Digirad purchased three plants in Maine that manufacture modular buildings (two of which were purchased from KBS) and leased those three properties to KBS.

 

ATRM

 

ATRM, a Minnesota corporation, through its wholly-owned subsidiaries, KBS, Glenbrook and EdgeBuilder, manufactures modular buildings for commercial and residential applications in production facilities located in South Paris and Waterford, Maine, operates a retail lumber yard located in Oakdale, Minnesota, and manufactures structural wall panels, permanent wood foundation systems and other engineered wood products for use in construction of residential and commercial buildings in a production facility located in Prescott, Wisconsin. ATRM wholly owns LSVM, a Connecticut investment advisor located in Greenwich, CT. ATRM and its subsidiaries have 124 employees. ATRM’s corporate headquarters is located in Oakdale, Minnesota.

 

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Digirad Acquisition Corporation

 

Merger Sub is a Minnesota corporation and a wholly-owned subsidiary of Digirad. It was incorporated on June 20, 2019 solely for the purpose of effecting the Merger with ATRM, pursuant to the Merger Agreement.

 

The Agreement and Plan of Merger

 

Under the terms of the Merger Agreement, Merger Sub will merge with and into ATRM, with ATRM continuing as the surviving corporation and a wholly-owned subsidiary of Digirad. The Merger Agreement is attached to this proxy statement/prospectus as Annex I and is incorporated into this proxy statement/prospectus by reference. ATRM and Digirad encourage you to read the entire Merger Agreement carefully as it is the legal document which governs the Merger.

 

As a result of the Merger, the separate corporate existence of Merger Sub will cease and ATRM will continue as the surviving corporation and a wholly-owned direct subsidiary of Digirad.

 

At the effective time of the Merger, unless a holder of ATRM Common Stock previously exercised its dissenters’ rights and satisfied the procedures relating to dissenters’ rights under Minnesota law, a holder of ATRM Common Stock will be entitled to receive 0.03 shares of Digirad Preferred Stock for each share of ATRM Common Stock owned at the effective time of the Merger, and holders of ATRM Preferred Stock will be entitled to receive 2.5 shares of Digirad Preferred Stock for each share of ATRM Preferred Stock owned at the effective time of the Merger. No fractional shares of Digirad Preferred Stock will be issued. Each ATRM shareholder will be entitled to receive, in lieu of any fractional share of Digirad Preferred Stock, one whole share of Digirad Preferred Stock.

 

Upon the closing of the Merger, ATRM Common Stock will cease trading on the OTC Marketplace. Digirad has applied for the Digirad Preferred Stock to trade on the Nasdaq Global Market under the symbol “DRADP” upon the consummation of the Merger.

 

Background of the Merger

 

Digirad Background

 

The ATRM board of directors regularly reviews ATRM’s performance, risks, opportunities and strategy and discusses such matters at board meetings. ATRM’s board of directors and management team review and evaluate the possibility of pursuing various strategic alternatives and relationships as part of ATRM’s ongoing efforts to strengthen its businesses and improve its operations and financial performance in order to create value for its shareholders, taking into account economic, competitive and other conditions.

 

Likewise, the Digirad board of directors and the senior management team of Digirad regularly discuss opportunities intended to enhance value for Digirad stockholders. As part of its strategic planning process, Digirad’s management regularly considers and evaluates business and strategic opportunities, including to identify and investigate prospective transactions that could complement Digirad’s existing operations, development and operating expertise and capabilities and support its strategic growth plans. In connection with the foregoing, Digirad regularly discusses such matters with financial advisors, including Oberon Securities LLC (“Oberon”) to, among other things, review potential acquisition opportunities. As described below, a special committee of the board of directors of Digirad composed of independent Digirad board members (the “Digirad Special Committee”) engaged Oberon to provide advisory services in respect of the Merger, and subsequently entered into a formal advisory engagement in respect of the Merger effective June 1, 2018.

 

On April 25, 2018, the Digirad board of directors met and discussed ways to create value for the Digirad stockholders over the long term. The Digirad board of directors considered Digirad’s cash flow generating healthcare business, Digirad’s NOLs, Digirad’s public listing on the Nasdaq Global Market, and ways to leverage scale and scope in order to allocate corporate and public company costs over a wider base of operations, revenues, and cash flow. Mr. Eberwein, the Chairman of the Digirad board of directors and the ATRM board of directors, suggested creating a multi-industry holding company in order to accomplish these goals and mentioned his involvement in ATRM, a smaller company that may be interested in being acquired or merging with a larger entity. The Digirad board of directors decided to investigate the idea of converting Digirad into a multi-industry holding company and possibly acquiring ATRM. The Board formed the Digirad Special Committee to investigate, assess, negotiate, accept or reject a transaction with ATRM and/or any or all of its affiliates.

 

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On April 27, 2018, the Digirad Special Committee met and discussed the proposed acquisition of ATRM (the “ATRM Transaction”) and the process of evaluating the transaction, including with regard to due diligence, utilizing the appropriate form, determining terms of the ATRM Transaction, preparing a term sheet, negotiating a definitive agreement and preparing and filing a registration statement. The Digirad Special Committee discussed potential financial advisors and determined that members of the Digirad Special Committee would speak with candidates to serve as potential advisors.

 

On June 1, 2018, the Digirad Special Committee engaged Oberon to serve as its financial advisor with respect to a potential ATRM Transaction.

 

On August 1, 2018, the Digirad board of directors met in executive session and received an update on work being done by the Digirad Special Committee in connection with the ATRM Transaction.

 

On August 21, 2018, the Digirad Special Committee met and discussed the proposed ATRM Transaction and a presentation prepared by Oberon (the “Oberon Presentation”) analyzing the proposed ATRM Transaction.  Stephen Clark, the Chief Financial Officer of ATRM at the time, gave an overview of recent ATRM transactions and an update on market conditions and other factors affecting ATRM.  Mr. Clark reviewed and provided feedback on portions of the Oberon Presentation.  Subsequent to this meeting, Mr. Eberwein made a presentation to the Digirad Special Committee regarding the potential benefits of converting Digirad into a multi-industry holding company and consummating the ATRM Transaction as an initial “kick-off” transaction to get the concept started. 

 

On August 24, 2018, the Digirad Special Committee met and discussed the proposed ATRM Transaction, Digirad’s financial condition, strategic alternatives, transaction mechanics, considerations regarding how and when to announce the potential ATRM Transaction and transaction related risks.

 

On August 27, 2018, Oberon made a presentation to the Digirad Special Committee highlighting the potential benefits of converting into a holding company structure and potentially acquiring ATRM as an initial acquisition to establish proof of concept.

 

On August 31, 2018, the Digirad Special Committee met and discussed the ATRM Transaction, the preparation of a non-binding letter of intent setting forth proposed terms of the proposed ATRM Transaction (the “Transaction LOI”), obtaining consents and approvals for the ATRM Transaction, fairness opinions, the need for audited ATRM financials and risks related to the ATRM Transaction.

 

On September 4, 2018, the Digirad board of directors met and received an update from the Digirad Special Committee on its review of the ATRM Transaction. The Digirad board of directors discussed converting Digirad into a diversified holding company, Oberon’s conclusions regarding the ATRM Transaction and the need for audited ATRM financials. The Digirad board of directors also discussed the timing of the ATRM Transaction, the announcement of the Transaction LOI following its execution, ATRM Transaction approvals, ATRM debt, Digirad debt, fairness opinions and the related party nature of the ATRM Transaction. The Digirad board of directors approved the preparation and filing of a Current Report on Form 8-K with the SEC on September 10, 2018, disclosing the execution and delivery of the Transaction LOI and Digirad’s planned conversion into a diversified holding company.

 

On September 6, 2018, the Digirad Special Committee met and discussed the proposed ATRM Transaction, including with regard to shareholder approval requirements, and received an update from Mr. Eberwein.

 

On September 6, 2018, the Digirad board of directors also met and discussed the ATRM Transaction and the proposed conversion of Digirad into a diversified holding company. Mr. Eberwein described his ownership of ATRM preferred stock. The Digirad board of directors discussed Mr. Eberwein’s relationship with ATRM and Digirad, the related party nature of the transaction and Nasdaq shareholder approval requirements. The Board also discussed feedback from the Digirad Special Committee on the Transaction LOI, financing options, ATRM’s historical liabilities, ATRM’s preferred stock and indebtedness, transaction timing and mechanics, and transaction risks.

 

On September 7, 2018, the Digirad Special Committee met and discussed the ATRM Transaction and the Transaction LOI to be delivered by Digirad to ATRM. The Digirad Special Committee approved the Transaction LOI and authorized Mr. Climaco to execute and deliver the Transaction LOI, which was signed by Digirad and ATRM later that same day.

 

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On September 7, 2018, the Board met and discussed the ATRM Transaction, fairness opinion, Oberon’s fees and the conversion of the Company into a diversified holding company. The Board approved (a) the conversion of the Company into a diversified holding company, (b) a waiver for Mr. Eberwein and affiliated entities (the “Eberwein Group”) under the protective amendment to Digirad’s Amended and Restated Certificate of Incorporation (the “Charter”) in order to permit the Eberwein Group’s possible acquisition of shares as a result of the ATRM Transaction and pursuant to a put option and standstill agreement contemplated by Mr. Eberwein and another Digirad stockholder (the “Put Option Agreement”) and (c) the filing of a current report on Form 8-K and the release of a press release and presentation, in each case disclosing Digirad’s conversion into a diversified holding company, the entry into the Transaction LOI on September 7, 2018 and Mr. Eberwein’s entry into the Put Option Agreement on September 7, 2018.

 

On September 10, 2018, Digirad filed a Current Report on Form 8-K and issued a press release that publicly announced its planned conversion into a diversified holding company and the entry into the Transaction LOI with ATRM and the contemplated terms thereunder.

 

October 31, 2018, the Digirad board of directors met and received an update from Mr. Eberwein on Digirad’s transition to a holding company structure.

 

On November 5, 2018 and November 6, 2018, Messrs. Climaco and Angelis traveled to Minnesota and Wisconsin to conduct due diligence related to the ATRM Transaction and to meet with the management teams of ATRM’s subsidiaries, EdgeBuilder and KBS, and certain KBS clients in Maine.  Messrs. Sayward and Noble were also present during portions of the trip, which was hosted by Dan Koch, the Chief Executive Officer of ATRM.

 

On November 13, 2018, the Digirad Special Committee met and received an update from Mr. Clark to his prior report to the Digirad Special Committee in which he reviewed Oberon Presentation. Mr. Clark described recent developments in ATRM’s business operations, reviewed certain business and financial metrics, and provided an update on market conditions and other factors affecting ATRM.

 

On December 6, 2018, the Digirad board of directors met and received an update from Mr. Eberwein on the ATRM Transaction and a proposed joint venture with ATRM, and to discuss Digirad’s conversion into a diversified holding company.

 

On December 11, 2018, the Digirad board of directors and the Digirad Special Committee met and received an update from Mr. Eberwein on the ATRM Transaction, a proposed bridge loan to ATRM of up to $275,000 (the “Bridge Loan”), and a proposed joint venture with ATRM, with initial funding by Digirad of $250,000 and additional funding of up to $1 million (the “Joint Venture”). The Digirad board of directors and the Digirad Special Committee approved the Bridge Loan and the Joint Venture.

 

On December 14, 2018, the Digirad Special Committee met and received an update from Mr. Eberwein on the ATRM Transaction and received a presentation from Mr. Eberwein on the Digirad’s transition to a holding company structure. The Digirad Special Committee discussed various considerations related to the ATRM Transaction, including with regard to Oberon’s services, and the conversion of Digirad to a holding company structure.

 

On December 18, 2018, the Digirad Special Committee met and discussed the ATRM Transaction and expected timing for its completion.

 

On December 18, 2018, Digirad’s board of directors met and received an update from Mr. Eberwein on the ATRM Transaction and the proposed Joint Venture. Mr. Eberwein reviewed the proposed purchase of two plants from KBS in a potential sale leaseback transaction with ATRM (the “ATRM Sale-Leaseback”), and Digirad’s board of directors directed management to move forward with the ATRM Sale-Leaseback.

 

On January 15, 2019, the Digirad board of directors met and received an update from Mr. Eberwein on the ATRM Transaction in which he described his continued analysis of various considerations. Mr. Eberwein updated the Digirad board of directors on the Joint Venture and proposed that the Digirad board of directors increase funding of the Joint Venture up to the full $1,000,000 originally contemplated. The Digirad board of directors approved an additional investment of $750,000 in the Joint Venture. Mr. Eberwein updated the Digirad board of directors on Digirad’s purchase of real property and equipment from KBS.

 

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On January 18, 2019, Mitch Quain was appointed to the Digirad board of directors and was later appointed to the Digirad Special Committee. Following his appointment to the Board, Mr. Quain traveled to Maine to conduct due diligence related to the ATRM Sale-Leaseback.

 

On February 27, 2019, the Digirad Special Committee met and discussed the proposed ATRM Sale-Leaseback, which involved (i) the purchase from KBS of a facility in Waterford, ME for a purchase price of $990,000, and a facility in Paris, ME for a purchase price of $2.9 million; and (ii) entering into lease agreements with KBS for each of the facilities. The Digirad Special Committee also discussed purchasing a third facility in Maine from RJF - Keiser Real Estate, LLC (“RJF”), an unaffiliated third party, for $1.2 million and leasing that facility to KBS (the “Oxford Purchase and Lease”). The Digirad Special Committee considered the advisability of the ATRM Sale-Leaseback and Oxford Purchase and Lease, considered the purchase price and lease payments, and other business terms and determined that they were fair and reasonable and the transactions were in the best interest of Digirad. The Digirad Special Committee determined that the ATRM Sale-Leaseback and the Oxford Purchase and Lease were in the best interest of the Company and recommended that the Digirad board of directors authorize and approve such transactions.

 

On February 27, 2019, the Digirad board of directors met and received an update from Mr. Noble on the ATRM Transaction, the ATRM Sale-Leaseback and the Oxford Purchase and Lease. The Digirad board of directors then approved the ATRM Sale-Leaseback and the Oxford Purchase and Lease.

 

On April 3, 2019, Digirad filed a Current Report on Form 8-K and issued a press release announcing the formation of its real estate division, SRE, and the entry into purchase agreements and leases in connection with the ATRM Sale Leaseback and the Oxford Purchase and Lease.

 

On May 1, 2019, the Digirad Special Committee met and discussed providing financial assistance to ATRM in order to enable ATRM to become current with its financial statements and filings with the SEC. The Digirad Special Committee approved such financial assistance up to an aggregate maximum amount of $400,000, with Mr. Angelis being authorized to approve additional amounts in increments of up to $10,000, on the condition that Digirad negotiate and enter into an agreement with ATRM that provides for the repayment of all such financial assistance if the proposed ATRM Transaction is not consummated.

 

On May 1, 2019, the Digirad board of directors met and received an update from Mr. Eberwein and Mr. Noble on the proposed ATRM Transaction. The Digirad board of directors also discussed providing financial assistance to ATRM in order to enable ATRM to become current with its financial statements and filings with the SEC. The Digirad board of directors approved such financial assistance up to an aggregate maximum amount of $400,000, with Mr. Angelis being authorized to approve additional amounts in increments of up to $10,000, and on the condition that Digirad negotiate and enter into an agreement with ATRM that provides for the repayment of all financial assistance to ATRM if the proposed ATRM Transaction is not consummated.

 

The Digirad Special Committee considered various candidates to represent it as counsel in connection with the Merger. On May 22, 2019, Mr. Climaco, as Chairman of the Digirad Special Committee, interviewed Martin W. Enright, partner of Littman Krooks LLP (“LK”), regarding LK’s expertise on matters such as the Merger and investigated whether LK had any conflict of interest that would prevent it from representing the Digirad Special Committee. At that time, Messrs. Enright and Climaco discussed the role of the Digirad Special Committee in evaluating the Merger and making its recommendation to the full Board, including the relevant standards of review under Delaware law for related party transactions. LK had not represented Digirad, ATRM, any of the executive officers of either Digirad, or the Chairman of the Board of Directors of Digirad and ATRM or any of his or their affiliates. Following their discussion on May 22, 2019 other members of the Digirad Special Committee had telephonic conversations with Mr. Enright on these same topics and the Digirad Special Committee engaged LK as counsel to the Digirad Special Committee in connection with the negotiation and implementation of the Merger.

 

On May 23, 2019 the Digirad Special Committee received a proposed term sheet for the ATRM Transaction that was prepared by Digirad management and their advisors and on May 24, 2019, the Digirad Special Committee received a draft Merger Agreement from Olshan Frome Wolosky LLP, counsel to Digirad. The Digirad Special Committee took the Term Sheet and draft Merger Agreement under advisement, asked LK to review them and to report back to the Digirad Special Committee. A Digirad Special Committee meeting was scheduled for Monday, June 3. The Digirad Special Committee also scheduled a meeting for June 3 with management of ATRM, Digirad management and Oberon to hear a presentation from ATRM management regarding ATRM’s proposed business plan going forward and their projections for operating results following the consummation of the proposed Merger.

 

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Prior to the June 3, 2019 meeting with ATRM, the Digirad Special Committee received a PowerPoint presentation prepared by ATRM containing a narrative discussion of the business units of ATRM and detailed financial projections. At the June 3, 2019 meeting of the Digirad Special Committee, ATRM management gave an oral presentation to the Digirad Special Committee detailing the strategic rationale for the ATRM Transaction, the merits of the Merger as part of Digirad’s plans to become a diversified holding company and the projected value that would accrue to Digirad as a result. ATRM management guided the Digirad Special Committee through its projections through 2023 and explained the underlying assumptions, including regarding ATRM’s order backlog and sales pipeline. The analysis was broken down by ATRM subsidiaries KBS, EdgeBuilder and LSVM. ATRM management indicated that Digirad’s strategy of arranging or providing financing for ATRM operations, as well as the ATRM Sale-Leaseback and Star Procurement materials purchasing program had helped restore customer confidence in ATRM and allowed it to build a better order backlog and generate significantly more interest from potential new orders. ATRM management provided an analysis of its internal valuation of ATRM based on projected results and historical evidence regarding stock performance of other companies in the same industry grouping. Members of the Digirad Special Committee and representatives of Oberon asked questions of ATRM management regarding the assumptions underlying the projections and management’s degree of confidence that the projections could be met. Management indicated that current order book, expressions of interest on new orders, enhancements in purchasing and cost of goods reductions should result in significant improvements in performance in the coming years.

 

Following the meeting with ATRM management, the Digirad Special Committee met separately on June 3, 2019 with representatives of Oberon and LK to discuss next steps. Oberon described its process for evaluating the approximate value of ATRM, the data required for them to prepare their fairness opinion and the methods by which ATRM would be valued in their analysis. Mr. Enright of LK advised the Digirad Special Committee as to the “entire fairness” standard under which Delaware courts would evaluate the fairness of the proposed ATRM transaction to Digirad’s minority stockholders. Members of the Digirad Special Committee asked questions regarding the proposed term sheet and Merger Agreement and Mr. Enright reported on the results of his review of those documents.

 

On June 6, 2019 the Digirad Special Committee met to further discuss Oberon’s role, the ATRM projections, additional questions to put to ATRM, SEC reporting responsibilities and projected cost savings as a result of the Merger. The Committee further discussed the proposed term sheet for the Merger, including the terms and conditions of the proposed new Digirad Preferred Stock and related tax considerations.

 

On June 11, 2019, the Digirad Special Committee met to discuss the latest drafts of ATRM’s financial statements as well as the drafts of Merger Agreement and term sheet. The Digirad Special Committee received counsel from LK and reviewed Oberon’s preliminary valuation findings. Based on these inputs, the Digirad Special Committee determined that it wished to advance negotiations with ATRM and its counsel and asked Mr. Enright to authorize Olshan to transmit drafts of the Merger Agreement and term sheet to ATRM and their counsel for review and comment.

 

On June 17, 2019 the Digirad Special Committee met and provisionally adopted the term sheet dated as of June 14, 2019 as accurately reflecting terms on which the parties would continue to negotiate the Merger Agreement.

 

On June 20, 2019 the Digirad Special Committee met with LK and Oberon. Oberon presented a draft of their analysis on the value of ATRM and the proposed Digirad Preferred Stock. Oberon explained their analysis to the Digirad Special Committee, and informed the Digirad Special Committee that subject to Oberon’s receipt of certain outstanding data that prior to the execution of a Merger Agreement, Oberon would be able to conclude that the proposed Merger would be fair to Digirad from a financial perspective. The Digirad Special Committee also discussed Digirad management’s projected consolidated financial statements for the combined companies post-Merger.

 

On June 21, 2019, the Digirad board of directors met and received an update from Mr. Eberwein on the ATRM Transaction, reviewed the merits and terms of the ATRM Transaction, and reviewed information prepared for the Digirad Special Committee. Mr. Eberwein explained the form and nature of the consideration being paid in the ATRM Transaction. Andrew Silver, of Oberon, discussed the review by Oberon of the ATRM Transaction, including the merit of Digirad’s conversion to a holding company structure, the benefits of acquiring ATRM, and the financial analysis performed by Oberon in evaluating the ATRM Transaction. Mr. Silver informed the Digirad board of directors that Oberon had advised the Digirad Special Committee that Oberon viewed the ATRM Transaction as fair to Digirad and its stockholders from a financial point of view. The Digirad board of directors discussed with Mr. Silver and Digirad’s management ATRM’s past performance, projections and other considerations related to combining the Digirad and ATRM. The Digirad Special Committee indicated to the Digirad board of directors that they were inclined to approve the Merger, subject to their review of ATRM’s final SEC filings, an execution copy of the Merger Agreement and all ancillary documents.

 

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On June 26, 2019 the Digirad Special Committee met with Oberon and LK to discuss the contents of ATRM’s recently filed periodic reports for 2018 and a draft of 2019 ATRM financial statements. The parties discussed proposed cost savings of the Merger, the potential impact of Digirad’s assumption of ATRM debt on Digirad’s liquidity and BDO’s conclusions on the preservation of NOLs in connection with the issuance of the Digirad Preferred Stock. Mr. Silver noted that ATRM’s EBITDA for the first quarter of 2019 was higher than prior estimates and the previous draft financial statements had indicated and that the value of the Merger Consideration to be issued to ATRM stockholders remained in a range that Oberon would consider fair. Mr. Silver also noted that, while both Digirad and ATRM believe that there will be savings of approximately $400,000 relating to ATRM ceasing to be a public company as a result of the Merger, which savings are reflected in the ATRM projections, but Oberon’s financial analysis did not assume any other potential synergies or savings.

 

The Digirad Special Committee met again on June 27, 2019 to discuss the impact on Digirad’s liquidity of the dividend on the Digirad Preferred Stock to be issued in the Merger, Digirad’s available borrowings under its current lines of credit, certain plans to refinance certain ATRM properties post-Merger and whether any further action was warranted to ensure that Digirad would have adequate liquidity going forward after the consummation of the Merger. Certain potential strategies to enhance Digirad’s liquidity were discussed. The Committee further discussed the impact of the issuance of the Digirad Preferred Stock to ATRM shareholders on Digirad’s NOLs and reviewed further ATRM’s draft first quarter 2019 financials.

 

On July 2, 2019, the Digirad Special Committee met to discuss a proposal that arose in conversations between John Climaco, Chairman of the Digirad Special Committee, and Jeffrey Eberwein, Chairman of the Board of Digirad regarding Digirad’s liquidity going forward after the Merger. The Digirad Special Committee authorized Mr. Climaco to negotiate the terms of a put option that would require Mr. Eberwein to purchase an additional $1 million of Preferred Stock, at Digirad’s option, should Digirad determine that it was advisable to enhance Digirad’s liquidity.

 

On July 3, 2019, the Digirad Special Committee unanimously adopted a written Action by Consent in Lieu of Meeting (i) determining and declaring that the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement are advisable, fair to and in the best interests of Digirad and its stockholders and (ii) recommending to the full Board of Directors of Digirad that it adopt and approve the execution, delivery and performance of the Merger Agreement and the consummation of the Merger and the other transactions contemplated by the Agreement in accordance with the Merger Agreement.

 

The Digirad board of directors met on July 3, 2019 to finally consider the merits and parameters of the Merger including the exchange ratios with respect to each of the ATRM Common Stock and ATRM Preferred Stock and the proposed terms of the Merger Agreement. Prior to the final Digirad board meeting on that date, final presentation materials concerning the proposed Merger had been circulated to the individual members of the Digirad board of directors. The Digirad board of directors also had reference to the proposed forms of the Merger Agreement, the Voting and Support Agreement and other related documentation. At the meeting, the Digirad board of directors received a report from the Digirad Special Committee that having received Oberon’s final draft fairness opinion on July 2, 2019 stating that the Merger was advisable, fair and in the best interests of Digirad and its stockholders, the Digirad Special Committee recommended that the Digirad board of directors approve the Merger. A representative of Oberon was also present at the meeting and discussed its analysis with the Digirad board of directors. Having received the recommendation of the Digirad Special Committee and discussed the matters at hand with regard to the best interests of Digirad and the Digirad stockholders, and following the receipt of legal and financial advice, including the oral opinion from Digirad’s financial advisor that the proposed Merger was fair as of the date of the Merger Agreement, from a financial point of view, to Digirad stockholders, the Digirad board of directors unanimously determined that the Merger was in the best interests of Digirad and determined to unanimously support Digirad’s entry into the Merger Agreement, the Voting and Support Agreement and related matters. The exchange ratios were formally agreed to by the parties after market close on July 3, 2019, with the support of the Digirad board of directors.

 

ATRM Background

 

Conversation between ATRM and Digirad occurred throughout 2018, culminating in the Transaction LOI dated September 7, 2018 and publicly announced September 10, 2018. The Transaction LOI expired on December 31, 2018, as the parties recognized the transaction contemplated by that letter of intent could not be implemented because ATRM was not current in filing its periodic reports.

 

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The parties again began discussions about a possible transaction in late spring of 2019. The focal point for those conversations was Mr. Eberwein, the Chairman of the board of directors of ATRM, who is also a member of the board of directors of Digirad. Because of the potential conflicts, the ATRM board of directors created a special committee of that board (the “ATRM Special Committee”) composed of the two ATRM Board members who did not have a conflict, Mr. Rodney Schwatken and Mr. Mark Hood. The fourth member of the ATRM Board of Directors, Mr. Daniel Koch, was deemed conflicted because of the impact a proposed transaction might have on his compensation.

 

The ATRM Special Committee met on May 30, 2019 by teleconference. The ATRM Special Committee members were joined by Mr. Koch and by Steve Carman, a partner at Husch Blackwell LLP. The ATRM Special Committee had previously obtained information from three different law firms, and asked Mr. Carman to attend the meeting and answer questions so that he could be considered as counsel to the ATRM Special Committee. After a discussion with Mr. Carman about his firm, his experience, and the terms of his retention, the ATRM Special Committee retained Husch Blackwell to represent the ATRM Special Committee. Husch Blackwell had not previously done work for ATRM, Digirad, any of the executive officers of either company, or the Chairman of the Board of Directors of ATRM or any of his or their affiliates. At the first meeting, the ATRM Special Committee also considered retaining a financial advisor. After much discussion, it was concluded that because of the financial expertise of the members of the ATRM Special Committee, the prospects of ATRM as a stand-alone entity, the expected cost of a financial advisor, and the access to Mr. Koch as a resource as needed, the ATRM Special Committee would proceed without retaining its own financial advisor.

 

The ATRM Special Committee received on June 10, 2019, a draft of the Merger Agreement and a draft letter of intent describing the proposed terms of the transaction. After separately reviewing those documents, the Special Committee scheduled a meeting with its counsel and with Mr. Koch for June 12, 2019. As a result of an unexpected matter, Mr. Hood was unable to attend but encouraged Mr. Schwatken to proceed without him. At the meeting, Mr. Schwatken asked numerous questions about the proposed transaction, some of which related to facts about the business of ATRM and that were answered by Mr. Koch, and some of which related to the proposed transaction and the appropriate process to follow in considering what was being proposed by Digirad. Those questions were answered by Mr. Carman. Mr. Schwatken noted that significant progress had been made in bringing current ATRM’s periodic reports with the SEC and that he had increasing comfort with the accuracy of the recent financial statements of ATRM that he had reviewed. As a result, Mr. Schwatken noted that he and Mr. Hood should be in a position to accurately evaluate the financial condition of ATRM, the book value and potential of the ATRM Common Stock, the ability of ATRM to continue as a going concern, and the value of a share of ATRM Common Stock if ATRM could not continue.

 

The ATRM Special Committee also considered the need to conduct due diligence of Digirad because the proposed transaction contemplated that Digirad securities would be the sole consideration received by ATRM shareholders. The ATRM Special Committee requested counsel to prepare a due diligence request list for the Special Committee to review and forward to Digirad, and Mr. Schwatken suggested several pieces of information he would be interested in reviewing. Mr. Schwatken noted that the draft documents from Digirad did not include an exchange ratio. As a result, he concluded that it would be premature to respond to Digirad in any way based on those documents. At the conclusion of the meeting, Mr. Schwatken undertook to provide Mr. Hood a complete update on the conversation. Mr. Hood provided his comments on the proposed transaction separately.

 

The ATRM Special Committee met again on June 19, 2019, after receiving from Digirad, a fully completed letter of intent for the proposed transaction and the requested due diligence material. The ATRM Special Committee members were joined by Mr. Carman, Ms. Taylor, and Ms. Simpson-Conner from Husch Blackwell, Mr. Koch, and Ms. Hannah Bible, an employee of LSVM and ATRM. The ATRM Special Committee first asked Mr. Carman to provide a thorough review of the proposed draft of the Merger Agreement, highlighting areas in which Husch Blackwell would propose changes be made. During the course of Mr. Carman’s presentation, the ATRM Special Committee members asked numerous questions for which satisfactory answers were provided. Mr. Carman noted the work to be done to confirm the accuracy of the representations to be made by ATRM and the ability of ATRM to comply with the proposed covenants.

 

The ATRM Special Committee then reviewed and discussed the material provided by Digirad in response to the due diligence request. The ATRM Special Committee considered whether they would benefit from having any additional information about Digirad before proceeding. The ATRM Special Committee concluded that, in light of the information publicly available and the information provided, no additional information was needed.

 

The ATRM Special Committee then authorized Mr. Carman to provide comments on the proposed Merger Agreement to counsel for Digirad and then discussed the most efficient process to follow for moving forward. The ATRM Special Committee concluded that it was in a position to make a decision to recommend the proposed merger to the full board of directors of ATRM for approval.

 

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After the meeting, Mr. Carman called counsel to Digirad to discuss the changes in the draft Merger Agreement sought by the ATRM Special Committee. Counsel for Digirad subsequently conferred with Mr. Carman concerning the proposed changes, some of which were agreed to and some of which were not, and Mr. Carman reported that information back to the ATRM Special Committee. In addition, after the June 19, 2019 meeting, Husch Blackwell worked closely with Mr. Koch to ensure the accuracy of the ATRM representations and to prepare the related disclosure schedule.

 

The ATRM board of directors met on June 21, 2019 to consider the merits and parameters of the Merger, including the exchange ratios with respect to each of the ATRM Common Stock and ATRM Preferred Stock and the proposed terms of the Merger Agreement. Prior to the ATRM board meeting, a fully negotiated version of the Merger Agreement had been circulated to the members of the ATRM board of directors. Following discussion by the ATRM board of directors, including a full reflection of the prior separate deliberation by the independent directors of the ATRM board, and following the receipt of legal advice, the ATRM board of directors unanimously determined that the Merger was in the best interests of ATRM and the holders of ATRM Common Stock and ATRM Preferred Stock and determined to unanimously support the entry into the Merger Agreement and to recommend the approval of the Merger to its shareholders.

 

The Merger Agreement were then executed by ATRM after the close of markets on July 3, 2019 and the Merger Agreement and the Voting and Support Agreement were executed by the other parties thereto at the same time. The Merger Agreement and the Voting and Support Agreement were publicly announced by a press release by Digirad on July 3, 2019. For a discussion of the Merger Agreement, see “The Merger Agreement” beginning on page 83 of this proxy statement/prospectus.

 

On July 16, 2019, ATRM, LSVI and LSV Co-Invest I entered into a Series B Preferred Stock Dividend Agreement, pursuant to which the parties thereto agreed to cancel all accrued but unpaid dividends for 2018 on the ATRM Preferred Stock in exchange for the issuance to LSVI and LSV Co-Invest I of an aggregate of 17,915 shares of ATRM Preferred Stock. As a result of such agreement, there are no accrued dividends on the ATRM Preferred Stock.

 

On July 17, 2019, ATRM entered into two waivers with LSV Co-Invest I and one waiver with LSVM, pursuant to which the parties thereto agreed (i) that the closing of the Merger would not constitute an event of default under the terms of two promissory notes issued by ATRM to LSV Co-Invest I on January 12, 2018 and June 1, 2018 for the principal amounts of $500,000 and $900,000, respectively, or under the terms of a promissory note issued by ATRM to LSVM on December 17, 2018 for the principal amount of $300,000, (ii) that neither LSV Co-Invest I nor LSVM would be entitled to accelerate any payment under such notes as a result of the closing of the Merger and (iii) upon the closing of the Merger, ATRM would be permitted to amend its governing documents in accordance with the terms of the Merger Agreement.

 

Recommendation of the ATRM Board; ATRM’s Reasons for the Merger

 

At a meeting of ATRM’s board of directors held on June 21, 2019, the board of directors determined that the Merger Agreement and the Merger are advisable, fair to and in the best interests of ATRM and ATRM’s shareholders and unanimously approved the Merger Agreement and the Merger. Accordingly, ATRM’s board of directors unanimously recommends that ATRM’s shareholders vote “FOR” adoption of the Merger Agreement and approval of the Merger and the other transactions contemplated by the Merger Agreement.

 

In reaching its decision to approve the Merger Agreement and the Merger and to recommend that ATRM shareholders vote “FOR” adoption of the Merger Agreement and approval of the Merger and related transactions, the ATRM Special Committee, and then the ATRM board of directors, with the assistance of ATRM’s management and legal advisors, considered and analyzed a number of factors, including those reviewed by the ATRM board of directors at the meetings described in this proxy statement/prospectus under “—Background of the Merger.” The following are the material factors considered by the ATRM board of directors in determining to approve the Merger Agreement and the Merger transactions and to recommend that ATRM shareholders vote “FOR” adoption of the Merger Agreement and approval of the Merger and related transactions (which are not listed in any relative order of importance):

 

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Positive Factors Relating to the Merger

 

Strategic Benefits of the Merger. The ATRM board of directors believes that the combination of ATRM and Digirad should result in significant strategic benefits to Digirad upon completion of the Merger, which would benefit ATRM and the ATRM shareholders as holders of Digirad Preferred Stock following completion of the Merger. These strategic benefits include the following:

 

An improved working capital position as a result of cost savings to be realized following the Merger will help ATRM avoid supply interruptions that have depressed sales and hindered growth in the past. Better relations with suppliers will allow ATRM to obtain better supply pricing and work with more suppliers.

 

Reducing the combined companies’ cost of capital as a result of greater combined assets and financial resources, which will also provide the combined companies with access to more sophisticated banking products and increase the likelihood the combined companies will be able to refinance their debt on more favorable terms with the benefit of the added scale of the post-Merger enterprise.

 

A better capitalized and broader business platform to pursue future acquisitions that may enhance both companies’ businesses and support their respective growth opportunities, which each company might not otherwise have the resources to pursue on its own.

 

Greater access to public investment based on the anticipated liquidity of the Digirad Preferred Stock (which Digirad plans to list on the Nasdaq Global Market) as compared to the ATRM Preferred Stock which has not had a public market to date, and the ATRM Common Stock which has historically very limited trading volume.

 

Eliminating the need for ATRM to continue to fulfill SEC and trading market requirements for publicly traded companies, thereby reducing costs and administrative burden of the combined companies and allowing ATRM’s management team to devote more of their time and resources to executing ATRM’s business plan.

 

Digirad’s Businesses, Operating Results, Financial Condition and Management. The ATRM board of directors believes that the combination of ATRM and Digirad should result in significant financial benefits to the businesses, operating results and financial condition of Digirad, on both a historical and prospective basis, and the quality, breadth and experience of Digirad’s senior management, including:

 

The results of the due diligence review performed on Digirad by ATRM’s management and financial and legal advisors regarding Digirad’s assets, financial condition, results of operations, business plan and prospects, including the size, scale, competitive position, and prospects of the combined company;

 

Digirad’s substantial operating resources, including the information technology, human resources, finance and general administrative resources, which should enable the combined company to reduce combined operating costs, increase gross margins and compete effectively; 

 

Digirad’s success in operating its business; 

 

Digirad’s strategic vision, shared by ATRM, concerning Digirad’s conversion into a diversified holding company structure; and

 

Digirad’s financial resources, which could be deployed to fund long-term growth projects.

 

Merger Consideration.

 

The business judgment of the ATRM board of directors, in light of arms-length negotiations with Digirad and advice from management and financial and legal advisors described herein, that the Merger Consideration is likely the highest price reasonably attainable for ATRM shareholders as compared to any other business combination or other strategic alternatives, including having ATRM remain independent and seek to implement its strategic plan. 

 

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ATRM’s board of director’s assessment of the historical and anticipated future trading price of ATRM’s Common Stock and ability to pay dividends on the ATRM Preferred Stock and the risks that the trading price of ATRM’s Common Stock would not exceed the value of the Merger Consideration and ATRM would be unable to pay cash dividends on the ATRM Preferred Stock for the foreseeable future. 

 

Based on the liquidation value of the Digirad Preferred Stock and the closing price of ATRM Common Stock on June 20, 2019, which was the last trading day before the meeting of the ATRM board of directors at which it approved the Merger Agreement, the Merger Consideration had an implied value of $0.30 per share of ATRM Common Stock, which represented approximately a 50% premium to the closing price of ATRM Common Stock on June 20, 2019, approximately a 50% premium to the average closing price of ATRM Common Stock over the 30-day period before June 20, 2019, and approximately a 36% premium to the average closing price of ATRM Common Stock over the 90-day period before June 20, 2019. 

 

A fixed exchange ratio would provide certainty as to the number of shares of Digirad Preferred Stock to be issued in the Merger, and that an increase in the market price of ATRM Common Stock before the Merger closing would not provide Digirad with a right to terminate the Merger Agreement, but would permit the ATRM board to change its recommendation to vote for the Merger Agreement and the Merger, and to terminate the Merger Agreement, if required by its fiduciary duties and ATRM paid the termination fee. 

 

Digirad’s ability and willingness to pay dividends on the Digirad Preferred Stock in the future. 

 

ATRM shareholders may benefit from enhanced liquidity of their investment after the Merger based on the anticipated liquidity of the Digirad Preferred Stock if listed for trading on the Nasdaq Global Market compared to that of the ATRM Preferred Stock which has not had a public market to date and the ATRM Common Stock which has historically very limited trading volume. Liquidity of the Digirad Preferred Stock would provide the ATRM shareholders with the flexibility to sell more quickly all or a portion of their shares for cash in a much more liquid market. 

 

Terms and Conditions of the Merger Agreement. The ATRM board of directors considered the terms and conditions of the Merger Agreement in addition to the exchange ratios, including the following:

 

The consummation of the Merger is conditioned on approval of the Merger by the holders of two-thirds of the outstanding shares of ATRM’s Preferred Stock and holders of a majority of the outstanding shares of ATRM’s Common Stock. 

 

The Merger Agreement does not include a financing contingency to refinance ATRM’s outstanding debt. The ATRM board of directors also considered the financing proposed by Digirad’s Private Placement to refinance or repay ATRM’s outstanding debt.

 

The availability of the Issuance Option to Digirad following the Merger.

 

Provisions of the Merger Agreement that would permit ATRM, until adoption of the Merger Agreement by its shareholders, to furnish information to, and engage in discussions and negotiations with, third parties making unsolicited acquisition proposals that the board determines are reasonably likely to lead to a superior proposal and to terminate the Merger Agreement to accept a superior proposal, subject to payment to Digirad of a termination fee of $725,000.

 

The ATRM board determined upon the advice and recommendation of the ATRM Special Committee the amount of the termination fee to be reasonable in light of, among other factors, the benefits of the Merger to ATRM’s shareholders, the advice of its legal advisors that the percentage of equity value it represented is consistent with such percentage in comparable business combination transactions, and the likelihood that an obligation to make a payment of such an amount would not preclude other acquisition proposals (the likelihood of which the board discussed with its legal advisors). 

 

The ATRM board of directors noted that the opportunity to accept a financially superior proposal would provide further validation of the fairness of the Merger Consideration to be received by ATRM if such a proposal did not emerge. 

 

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Provisions of the Merger Agreement that permit the ATRM board of directors to change its recommendation with respect to the Merger Agreement if required by its fiduciary duties, without regard to whether such change is due to an intervening event, but subject to payment of a termination fee of $725,000. 

 

Provisions of the Merger Agreement that give ATRM the right to seek specific performance of the Merger Agreement against Digirad. 

 

The limited conditions in the Merger Agreement to consummation of the Merger, the advice of its legal advisor that regulatory approval is not required to be obtained, and the high degree of likelihood that the Merger would be consummated.

 

The Merger Agreement would provide ATRM with sufficient operating flexibility for it to conduct its business in the ordinary course of business consistent with past practice between the signing of the Merger Agreement and the completion of the Merger.

 

Continued Operation as a Stand-Alone Enterprise.    Evaluation, as an alternative to the Merger, of the potential rewards and risks associated with the continued execution by ATRM of its strategic plan as an independent company. Due to ATRM’s operating results, substantial doubt exists as to ATRM’s ability to continue as a going concern and there can be no assurance that ATRM’s actions to generate liquidity, including additional debt financing, will generate expected liquidity as currently planned or be successful at all. The ATRM board of directors reviewed ATRM’s historical and possible future performance in light of execution risks of meeting its plans, as illustrated by its capital and liquidity constraints, and the risks affecting its businesses, operations and financial condition. The ATRM board of directors considered, among other factors, the challenges of continuing to operate independently and the risks affecting ATRM’s ability to compete effectively against larger and better capitalized competitors. The ATRM board also considered the potential downside risk in the long-term stock price as a stand-alone enterprise as compared to that of the combined company following a combination with Digirad.

 

Alternative Transactions. Evaluation, as alternatives to the Merger or continued independent operations, of ATRM’s prospects for a merger transaction with a company other than Digirad and the potential terms of any such transaction, including consideration of the following:

 

An understanding that there were a limited number of potential strategic acquirers and a limited likelihood that any of those acquirers would make a financially superior acquisition proposal.

 

An understanding that it was unlikely that a financial buyer, such as a private equity firm, would be interested in making a financially superior acquisition proposal because of its inability to produce cost synergies that would justify a higher price.

 

In light of the foregoing, the ATRM board determined not to solicit other offers, and instead rely on the “window shop” provision in the Merger Agreement to further validate the fairness considerations, as well as the public announcement by Digirad over six months prior to signing the Merger Agreement of entry into the Transaction LOI based upon, among other things: (i) the value of the merger consideration; (ii) the risk of losing the Digirad offer if ATRM elected to solicit other offers; (iii) the risk of causing Digirad to lower its offer if ATRM elected to solicit other offers and little or no competitive bidding emerged; (iv) the limited likelihood that a competing acquisition proposal would be made at a higher price; (v) the risks associated with an auction process, including, among other things, the financial and administrative demands of conducting an auction (without assurance that a financially superior proposal would be made or consummated); (vi) the risk of breaches of confidentiality by prospective participants in the auction process and their advisors; (vii) the substantial management time and resources that would be required, potentially causing significant management distraction from operating ATRM’s business, and (viii) the risk that competitors and others would attempt to hire or solicit some of ATRM’s key employees and customers if it became known that ATRM was seeking to be sold.

 

The absence of any proposals, or indications of interest, to acquire ATRM, other than from Digirad.

 

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Potentially Negative Factors Relating to the Merger

 

The ATRM board of directors took into account a number of potentially negative factors in its deliberations concerning the Merger with Digirad, including the following considerations:

 

Following completion of the Merger, ATRM would no longer exist as an independent public company and ATRM’s shareholders would be unable to participate exclusively in any future earnings growth of ATRM through their ownership of Digirad Preferred Stock.

 

Because the exchange ratio for ATRM Common Stock would be fixed, an increase in the share price of ATRM Common Stock before the Merger closing would cause the value of the share price premium of the Merger Consideration for ATRM Common Stock to decline.

 

Although the Digirad Preferred Stock is intended to be listed on the Nasdaq Global Market, there can be no assurance that such listing will be approved which may reduce liquidity for some ATRM shareholders, if the Nasdaq listing does not occur on a timely basis.

 

ATRM shareholders will have exposure to the risks associated with holding shares of Digirad Preferred Stock, including the ability of Digirad to pay cash dividends on the Digirad Preferred Stock which may result in a decline in the trading price of Digirad’s Preferred Stock.

 

Although the terms of the Merger Agreement would permit ATRM, until adoption of the Merger Agreement by its shareholders, to furnish information to, and engage in discussions and negotiations with, third parties making unsolicited acquisition proposals that the board determines are reasonably likely to lead to a financially superior proposal and to terminate the Merger Agreement to accept a superior proposal, it would require payment to Digirad of a termination fee of $725,000 which may deter others from making an acquisition proposal that may be more advantageous to ATRM’s shareholders.

 

ATRM’s business could be harmed as a result of uncertainties about the effect of the proposed Merger on ATRM’s employees and customers, which could impair ATRM’s ability to attract, retain and motivate key personnel until the Merger is completed and for a period of time thereafter, and could cause customers, suppliers and others that deal with ATRM to seek to change existing business relationships with the company.

 

The Merger may not be completed, or may not be completed within the period anticipated, as a result of a failure to satisfy, or satisfy in a timely manner, one or more closing conditions, including as a result of failure to obtain approval of the Merger by the shareholders of ATRM.

 

ATRM had incurred, and would continue to incur, significant fees for professional services and other transaction costs and expenses in connection with the Merger, a significant portion of which would be payable by ATRM even if the Merger were not completed.

 

The interests of certain executive officers and directors of ATRM in the Merger that are different from, or in addition to, their general interests as shareholders of ATRM, as described under “The Merger—Interests of ATRM Directors and Executive Officers in the Merger.”

 

If the Merger were not consummated, ATRM’s employees would have expended extensive time and effort to attempt to complete the Merger and would have experienced significant distractions from their work and progress on achieving ATRM’s business plan during the pendency of the transaction.

 

The receipt of the Merger Consideration by ATRM shareholders in exchange for shares of ATRM Common Stock and/or ATRM Preferred Stock pursuant to the Merger will be a taxable transaction for U.S. federal income tax purposes and could have material U.S. federal income tax consequences for such shareholders.

 

After consideration of these factors, the ATRM board of directors determined that the potential negative factors were significantly outweighed by the potential positive factors referenced above and the other potential benefits of the Merger to ATRM’s shareholders.

 

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The foregoing summary of the factors considered by the ATRM board is not intended to be exhaustive, but is believed to include material factors considered by the ATRM board of directors. In view of the variety of factors considered in connection with its evaluation of the Merger, ATRM’s board did not find it practicable to, and did not, quantify or otherwise assign relative or specific weight to these factors. In addition, individual members of ATRM’s board of directors may have given different weight to different factors.

 

Financial Forecasts of ATRM’s Management

 

In connection with the Merger discussions between Digirad and ATRM, the management of ATRM provided to Digirad, and Digirad’s financial advisors, certain non-public, internal five-year financial forecasts regarding the anticipated future operations of ATRM on a stand-alone basis.

 

ATRM has presented below in summary form these internal five-year financial forecasts to give its shareholders access to this non-public financial information because the financial forecasts were provided to Digirad’s financial advisors. The summary of these internal financial forecasts is not being included in this proxy statement/prospectus to influence your decision whether to vote for adoption of the Merger Agreement and approval of the Merger and the other transactions contemplated by the Merger Agreement.

 

ATRM does not, as a matter of course, make public its management’s projections as to future results. The accompanying prospective financial information was not prepared with a view toward public disclosure or with a view toward complying with the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information or published guidelines of the SEC regarding forward-looking statements.

 

The prospective financial information has been prepared by, and is the responsibility of, ATRM’s management. BDO USA, LLP, ATRM’s and Digirad’s independent registered public accounting firm, have neither examined, compiled nor performed any procedures with respect to the accompanying prospective financial information and, accordingly, BDO USA, LLP does not express an opinion or any other form of assurance with respect thereto. The reports of BDO USA, LLP included with this proxy statement/prospectus do not extend to the prospective financial information and should not be read to do so. Furthermore, the information:

 

while presented with numerical specificity, necessarily makes numerous assumptions, many of which are beyond the control of ATRM, including with respect to industry performance, general business, economic, regulatory, market and financial conditions, as well as matters specific to ATRM’s business, and may not prove to have been, or may no longer be, accurate;

 

does not necessarily reflect revised prospects for ATRM’s business, changes in general business, economic, regulatory, market and financial conditions, or any other transaction or event that has occurred or that may occur and that was not anticipated at the time the projections were prepared;

 

is not necessarily indicative of current values or future performance, which may be significantly more favorable or less favorable than as set forth below; and

 

should not be regarded as a representation that these estimates will be achieved and readers of this proxy statement/prospectus are cautioned not to place undue reliance on these estimates.

 

ATRM believes the assumptions its management used as a basis for the estimates were reasonable at the time the estimates were prepared, given the information its management had at the time. While the prospective financial information set forth below was prepared in good faith, no assurance can be given regarding future events. The prospective financial information is subjective in many respects and is thus susceptible to interpretation and periodic revision based on actual experience and recent developments. In light of the foregoing, as well as the uncertainties inherent in any prospective financial information, ATRM shareholders are cautioned not to unduly rely on this information as a predictor of future operating results or otherwise.

 

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The estimates involve risks, uncertainties and assumptions. The future financial results of ATRM may materially differ from those expressed in the estimates due to factors that are beyond ATRM’s ability to control or predict. Historically ATRM has not achieved 100% of goals set forth in its forecasts. These estimates are forward-looking information and as such are subject to the qualifications set forth in the proxy statement/prospectus “Special Note Regarding Forward-Looking Statements” on page 23. ATRM cannot assure you that the estimates will be realized or that ATRM’s future financial results will not materially vary from the estimates. Since the estimates cover multiple years, such information by its nature becomes less reliable with each successive year. The estimates do not take into account any circumstances or events occurring after the date they were prepared.

  

The following table provides in summary form the five-year revenue forecast provided to Digirad and Digirad’s financial advisors:

 

Summary of Five-Year Revenue Forecast Provided to
Digirad and Digirad’s Financial Advisors
(Unaudited) 

 

   Projected
2019
   Projected
2020
   Projected
2021
   Projected
2022
   Projected
2023
 
   (in millions of dollars) 
Revenue  $35.36   $47.28   $49.09   $50.98   $52.94 

 

ATRM has not updated, and does not intend to update or otherwise revise, the foregoing five-year revenue forecast to reflect circumstances existing since its preparation or to reflect the occurrence of unanticipated events, even in the event that any or all of the underlying assumptions are shown to be in error. Furthermore, ATRM has not updated, and does not intend to update or otherwise revise, the accompanying prospective financial information to reflect any changes in general economic or industry conditions since its preparation.

 

Digirad’s Reasons for the Merger

 

On September 10, 2018, Digirad announced that its board of directors approved Digirad’s HoldCo Conversion strategy. Digirad’s aim 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 financially disciplined approach for acquisitions.

 

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 Builders, Inc., a wholly-owned subsidiary of ATRM 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.

 

As part of the HoldCo Conversion, Digirad formed a real estate subsidiary named Star Real Estate Holdings USA, Inc. SRE will hold any significant real estate assets Digirad acquires. 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 an initial transaction to create Digirad’s real estate division under SRE and launch that aspect of the HoldCo Conversion, in April 2019, Digirad purchased three plants in Maine that manufacture modular buildings and leased those three properties.

 

As a part of HoldCo Conversion process, the management team and the Digirad board of directors determined that ATRM met Digirad’s criteria for potential acquisitions, and identified ATRM as an attractive potential acquisition candidate. Digirad entered into a non-disclosure agreement with ATRM on June 6, 2018 for the purpose of conducting due diligence on ATRM and evaluating a potential transaction.

 

From time to time throughout the period from the time beginning with the initial merger discussions between Digirad and ATRM in 2018, and continuing through the time the Merger Agreement was executed on July 3, 2019, the Digirad board of directors worked with the Digirad management team to develop various strategies and approaches, including the approval of what became the terms of the Merger Agreement.

 

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In approving the Merger Agreement and the Merger, Digirad’s board of directors consulted with the Digirad Special Committee and Digirad’s management, as well as with Digirad’s legal and financial advisors, and considered, among other things, the following material factors:

 

that the Merger would broaden Digirad’s capabilities in key strategic growth areas, including housing and construction; 

 

that the Merger would diversify Digirad’s revenue and cash flow streams across multiple business lines and geographies; 

 

the expectation that the Merger would be accretive to cash flow, after synergies; 

 

the expectation that the Merger would result in a financially strong company with enhanced growth opportunities, an improved balance sheet, manageable dividend payout ratio and the ability to delever over time; 

 

the expectation that, after the consummation of the Merger, the combined companies would realize operating synergies; 

 

the expectation that the Merger would create a platform for future growth through acquisitions to fill in Digirad’s national footprint, and organically through investments in the combined company’s existing markets; and

 

the opportunity to integrate ATRM’s business efficiently with Digirad’s existing business.

 

Digirad’s board of directors also considered, among other things, the following risks:

 

that there are risks associated with obtaining necessary approvals on terms that satisfy closing conditions to the respective parties’ obligations to complete the Merger, and, as a result of certain conditions to the completion of the Merger, it is possible that the Merger may not be completed even if approved by ATRM’s shareholders (see “The Merger Agreement—Conditions of the Merger”);

 

the challenges of combining the businesses of the two companies and the attendant risks of not achieving the expected strategic benefits and cost savings, other financial and operating benefits or improvement in earnings, and of diverting management focus and resources from other strategic opportunities and from operational matters for an extended period of time; 

 

the perception of investors and the potential impact on the prices of Digirad’s securities; 

 

the level of capital expenditures that will be required with respect to the combined business; 

 

the ability to secure financing on terms satisfactory to Digirad; 

 

the terms and conditions of the Merger Agreement, which include restrictions on the conduct of Digirad’s business pending the closing of the Merger (see “The Merger Agreement—Digirad’s Forbearances Before Completion of the Merger”); and 

 

other risks of the type and nature discussed above under “Risk Factors Relating to the Merger.”

 

Opinion of Financial Advisor to Digirad

 

The Digirad Special Committee retained Oberon to act as Digirad’s financial advisor in connection with a possible transaction involving Digirad and ATRM. In connection with this engagement, the board of directors of Digirad requested that Oberon provide its opinion as to the fairness, from a financial point of view, to Digirad of the exchange ratios pursuant to the Merger Agreement. In selecting Oberon as its financial advisor, Digirad considered, among other things, the fact that Oberon is a respected financial advisory firm with substantial experience advising companies in strategic transactions and has familiarity with Digirad and ATRM and has substantial experience providing strategic advisory services in similar transactions. Oberon, as part of its business, is continuously engaged in the evaluation of businesses and debt and equity securities in connection with mergers and acquisitions, underwritings, private placements and other securities offerings, senior credit financings, and general corporate advisory services.

 

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On July 2, 2019, Oberon delivered its final draft written opinion to the Digirad Special Committee to the effect that, as of July 3, 2019, and based on and subject to various assumptions made, procedures followed, matters considered and limitations on the review undertaken by Oberon in connection with the opinion, the experience of its investment bankers and other factors it deemed relevant, the exchange ratios pursuant to the Merger Agreement were fair, from a financial point of view, to Digirad. The issuance of the opinion of Oberon was approved by an authorized committee of Oberon.

 

The full text of the written opinion of Oberon sets forth, among other things, assumptions made, procedures followed, matters considered and limitations on the review undertaken by Oberon in connection with such opinion. This written opinion is attached as Annex II to this proxy statement/prospectus and is incorporated by reference in its entirety into this proxy statement/prospectus. The following summary is qualified in its entirety by reference to the full text of the opinion. Oberon provided its opinion for the information and use of the board of directors of Digirad in connection with its evaluation of the exchange ratios pursuant to the Merger Agreement. Oberon’s opinion did not and does not constitute a recommendation as to how any holder of shares of ATRM Common Stock or ATRM Preferred Stock should vote with respect to approval of the Merger Agreement or any other matter.

 

In arriving at its opinion, Oberon, among other things:

 

Reviewed the Merger Agreement, including the financial terms thereof; 

 

Reviewed certain business, financial and other information regarding ATRM that was publicly available or was furnished to Oberon by ATRM or Digirad; 

 

Reviewed certain financial projections for ATRM prepared by the management of ATRM; 

 

Discussed with the managements of ATRM and Digirad the operations and prospects of ATRM, including the historical financial performance and trends in the results of operations of ATRM; 

 

Discussed with the management of Digirad the strategic rationale for the Merger; 

 

Compared certain business, financial and other information regarding ATRM that was publicly available or was furnished to Oberon by the management of ATRM with publicly available business, financial and other information regarding certain publicly traded companies that Oberon deemed relevant; 

 

Compared the proposed financial terms of the Merger Agreement with the financial terms of certain other business combinations and transactions that Oberon deemed relevant; 

 

Prepared a discounted cash flow analysis of ATRM based upon the ATRM projections, as well as other assumptions discussed with and confirmed as reasonable by the management of Digirad; and

 

Considered other information such as financial studies, analyses and investigations, as well as financial, economic and market criteria that Oberon deemed relevant.

 

In connection with its review, Oberon assumed and relied upon the accuracy and completeness of all the financial and other information provided, discussed with or otherwise made available to it, including all accounting, tax and legal information, and Oberon did not make (and did not assume any responsibility for) any independent verification of such information. Oberon assumed, with the consent of the board of directors of Digirad, that neither the management of ATRM nor of Digirad was aware of any facts or circumstances that would make such information inaccurate or misleading in any way meaningful to the analysis of Oberon. With respect to the financial forecasts and estimates utilized in Oberon’s analyses, including the ATRM Projections, Oberon assumed, with the consent of the board of directors of Digirad, that they were reasonably prepared and reflected the best current estimates, judgments and assumptions of the management of Digirad as to the future financial performance of ATRM Oberon assumed no responsibility for, and expressed no view as to, such forecasts or estimates or the judgments or assumptions upon which they are based. Oberon also assumed that there were no material changes in the condition (financial or otherwise), results of operations, business or prospects of ATRM or Digirad since the date of the last financial statements provided to Oberon. In arriving at its opinion, Oberon did not conduct any physical inspection or appraisals of the assets or liabilities (contingent or otherwise) of ATRM or Digirad.

 

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In rendering its opinion, Oberon assumed that the Merger and financings contemplated to be undertaken by Digirad in connection with the Merger would be consummated in accordance with the terms described in the Merger Agreement and in compliance with all applicable laws, without waiver, modification or amendment of any material terms or conditions, and that in the course of obtaining any necessary legal, regulatory or third party consents or approvals for the Merger or such contemplated financings, no delays, limitations, conditions or restrictions would be imposed or actions would be taken that would have an adverse effect on Digirad, ATRM or the expected benefits of the Merger in any way meaningful to Oberon’s analysis. Oberon’s opinion was necessarily based on economic, market, financial and other conditions and the information made available to it as of the date hereof. Although subsequent developments may affect this opinion, Oberon does not have any obligation to update, revise or reaffirm this opinion.

 

Oberon’s opinion only addresses the fairness, from a financial point of view, to Digirad of the exchange ratios to the extent expressly specified in its opinion, and does not address any other terms or aspects of the Merger, including, without limitation, the form or structure of the Merger, any tax or accounting matters relating to the Merger or otherwise, any financing arrangements or any aspect or implication of any other agreement or arrangement entered into in connection with or contemplated by the Merger or otherwise. In addition, Oberon’s opinion does not address the fairness of the amount or nature of, or any other aspects relating to, any compensation to be received by any officers, directors or employees of any parties to the Merger, or class of such persons, relative to the exchange ratio or otherwise. Oberon’s opinion does not express any opinion as to the prices at which shares of Digirad common stock, Digirad Preferred Stock or shares of ATRM Common Stock will trade at any time. Oberon’s opinion does not address the merits of the underlying decision by Digirad to enter into the Merger Agreement or the relative merits of the Merger or contemplated financings compared with other business strategies or transactions available or that have been or might be considered by the management or the board of directors of Digirad or in which Digirad might engage.

 

In connection with rendering its opinion, Oberon performed certain financial, comparative and other analyses as summarized below. This summary is not a complete description of the financial analyses performed and factors considered in connection with such opinion. In arriving at its opinion, Oberon made its determinations as to the fairness, from a financial point of view, to Digirad of the exchange ratios pursuant to the Merger Agreement, on the basis of various financial and comparative analyses taken as a whole. The preparation of a financial opinion is a complex process and involves various determinations as to the most appropriate and relevant methods of financial and comparative analyses and the application of those methods to the particular circumstances. Therefore, a financial opinion is not readily susceptible to summary description.

 

In arriving at its opinion, Oberon did not attribute any particular weight to any single analysis or factor considered but rather made qualitative judgments as to the significance and relevance of each analysis and factor relative to all other analyses and factors performed and considered and in the context of the circumstances of the particular transaction. Accordingly, the analyses must be considered as a whole, as considering any portion of such analyses and factors, without considering all analyses and factors as a whole, could create a misleading or incomplete view of the process underlying such opinion. The fact that any specific analysis has been referred to in the summary below is not meant to indicate that such analysis was given greater weight than any other analysis referred to in the summary. No company, business or transaction reviewed is identical to ATRM or Digirad or the Merger. An evaluation of these analyses is not entirely mathematical; rather, the analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the public trading or other values of the companies, business segments or transactions reviewed.

 

In performing its analyses, Oberon considered industry performance, general business and economic conditions and other matters existing as of July 1, 2019, many of which are beyond the control of ATRM and Digirad. None of ATRM, Digirad or Oberon or any other person assumes responsibility if future results are different from those discussed whether or not any such difference is material. Any estimates contained in these analyses and the ranges of valuations resulting from any particular analysis are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than as set forth below. In addition, analyses relating to the value of businesses or securities do not purport to be appraisals or necessarily reflect the prices at which businesses or securities may actually be sold or acquired. Accordingly, the assumptions and estimates used in, and the results derived from, the following analyses are inherently subject to substantial uncertainty.

 

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The following is a summary of the material financial analyses provided on July 3, 2019 to the Digirad Special Committee by Oberon in connection with its opinion. 

 

Financial Analyses of ATRM

 

Selected Publicly Traded Companies Analysis. Using publicly available information and financial forecast projections provided by ATRM (the “ATRM Projections”), Oberon compared certain financial and other information and financial multiples relating to ATRM to corresponding financial and other information and financial multiples for certain publicly traded manufactured housing and building products companies that Oberon, using its professional judgment and expertise, deemed comparable to ATRM. Although none of these companies is directly comparable to ATRM in all respects, Oberon selected these companies because they are publicly traded companies with operations that, for purposes of this analysis, may be considered similar to certain operations of ATRM. The companies included in the selected publicly traded companies analysis for ATRM were:

 

Cavco Industries, Inc.

Continental Building Products, Inc.

Legacy Housing Corp.

Nobility Homes, Inc.

Quanex Building Products Corp.

Skyline Champion Corp.

 

Oberon reviewed, among other information, enterprise values of the selected companies, calculated as market value of equity based on closing stock prices on July 1, 2019, plus book value of debt, capital leases, preferred stock, and minority interest less cash and cash equivalents, as a multiple of latest twelve months’ (“LTM”) and also projected next twelve months’(“NTM”) estimated revenues and earnings before interest, taxes, depreciation, amortization and excluding the impact of stock-based compensation and non-cash pension expense, which is referred to in this proxy statement/prospectus as “adjusted EBITDA.”

 

Based on these analyses and utilizing its professional judgment and experience, Oberon then applied selected ranges of enterprise value/ LTM revenues multiples of 0.9x to 2.0x; NTM adjusted EBITDA multiples of 7.2x to 12.8x; and NTM revenue multiples of 0.8x to 1.9x derived from the analyses of the selected companies, to ATRM’s LTM revenues and NTM revenues and adjusted EBITDA. Financial data of the selected companies were based on public filings, common stock closing prices on July 1, 2019, and projections taken from a third party subscription service. Financial data of ATRM were based on the ATRM Projections, public filings, common stock closing prices on July 1, 2019 and other publicly available information. This analysis indicated an implied enterprise value for ATRM of $22.5 million to $74.9 million.

 

Selected Transactions Analysis. Utilizing publicly available information, Oberon analyzed certain information relating to the following selected transactions involving building products companies announced since 2016. Although none of the companies involved in the selected transactions are directly comparable to ATRM in all respects, nor are any of the selected transactions directly comparable to the Merger in all respects, Oberon chose the transactions in the selected transactions analysis because the companies that participated in the selected transactions are companies with operations that, for the purposes of analysis, may be considered similar to certain of the results, market size or operations of ATRM.

 

Target   Acquiror   Announcement Date
Formica Corp.   Broadview Holdings B.V.   12/17/ 2018
Armstrong Wood Products   American Industrial Partners   11/15/2018
Steel Ceilings, Inc.   Armstrong World Industries, Inc.   7/31/2018
WWS Acquisition, LLC   PGT Innovations, Inc.   7/24/2018
Ashland Products, Inc.   Amesbury Group, Inc.   3/7/2018
Ply Gem Midco, Inc.   Clayton, Dubilier & Rice, Inc.   1/31/2018
A&F Wood Products, Inc.   Masonite International Corp.   10/02/2017
Halex Corp.   GCP Applied Technologies Inc.   11/09/2016
EdgeBuilder, Inc. and Glenbrook Building Supply, Inc.   ATRM Holdings, Inc.   10/05/2016
Nortek Inc.   Melrose Industries plc   7/06/2016

 

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For each of the selected transactions, Oberon reviewed and analyzed, among other things, enterprise value, calculated as the equity value implied for the target company based on the consideration payable in the selected transaction at the announcement, plus the book value of debt, capital leases, preferred stock, and minority interest less cash and cash equivalents, as a multiple of the target company’s latest 12 months revenues. Based on these analyses and utilizing its professional judgment and experience, Oberon then applied a selected range of latest 12 months revenue multiples of 0.4x to 1.5x derived from the selected transactions to ATRM’s latest 12 months revenue of $34.1 million. LTM adjusted EBITDA multiples are not meaningful because ATRM had negative LTM adjusted EBITDA and therefore were excluded from the analysis. Financial data of the selected transactions were based on public filings and other publicly available information at the time of announcement of the relevant transaction. Financial data of ATRM were based on the ATRM Projections, public filings and other publicly available information. This analysis indicated an implied enterprise value for ATRM $13.7 million to $51.2 million.

 

Discounted Cash Flow Analysis.  Oberon conducted a discounted cash flow analysis for ATRM for the purpose of determining an implied total enterprise value for ATRM as of July 1, 2019. A discounted cash flow analysis is a method of evaluating an asset using estimates of the future unlevered free cash flows generated by assets and taking into consideration the time value of money with respect to those future cash flows by calculating their “present value.” “Present value” refers to the current value of one or more future unlevered free cash flows from the asset, which is referred to as that asset’s cash flows, and is obtained by discounting those cash flows back to the present using a discount rate that takes into account macro-economic assumptions and estimates of risk, the opportunity cost of capital, capitalized returns and other appropriate factors. “Terminal value” refers to the capitalized value of all cash flows from an asset for periods beyond the final forecast period. Oberon calculated the value of the unlevered free cash flows that ATRM is expected to generate for fiscal year 2019 through 2023 implied by the ATRM Projections. Oberon also calculated a range of terminal values for ATRM at the end of the four-year period ending in 2023 by applying a terminal value EBITDA multiple of 6.0x to 9.0x to projected 2023 adjusted EBITDA, selected based on Oberon’s experience and professional judgment. The unlevered free cash flows and range of terminal values were then discounted to present value using a range of discount rates from 15.3% to 19.3%, which were chosen by Oberon based on its experience and professional judgment taking into account an analysis of the weighted average cost of capital of ATRM and comparable companies which Oberon deemed to be relevant to its analysis, to arrive at a range of illustrative enterprise values of ATRM. Based on that analysis, Oberon determined a discounted cash flow value for ATRM of $29.9 million to $44.9 million.

 

Other Information. In performing its valuation analysis and arriving at its determinations, Oberon considered the following among other considerations regarding ATRM’s business and financial information:

 

Small company size: ATRM is considerably smaller than the other publicly traded companies in the sector in terms of both its financial performance and market capitalization.

 

Low margins and profitability: ATRM had negative EBITDA for the twelve months ending March 31, 2019.

 

Leveraged capitalization: ATRM is substantially more leveraged than its publicly traded peer group.

 

Lack of equity research coverage: No firms currently publish equity research with financial forecasts for ATRM.

 

Other Considerations

 

Oberon prepared the analyses described above for purposes of providing its opinion to the Digirad Special Committee as to the fairness, from a financial point of view, as of July 1, 2019, to Digirad of the Exchange Ratios pursuant to the Merger Agreement. The type and amount of consideration payable in the Merger were determined through negotiations among the board of directors and management of each of Digirad and ATRM and Digirad’s financial advisors. Oberon did not recommend any specific consideration to the board of directors of Digirad or state that any given consideration constituted the only appropriate consideration for the Merger. The decision to enter into the Merger Agreement was solely that of the board of directors of Digirad, pursuant to the recommendation of the Digirad Special Committee. As described above, Oberon’s opinion and analyses were only one of many factors taken into consideration by the Digirad Special Committee and the Digirad board of directors in evaluating the Merger. Oberon’s analyses summarized above should not be viewed as determinative of the views of the board of directors or management of Digirad with respect to the Merger.

 

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Miscellaneous

 

Oberon is the trade name for certain capital markets and investment banking services of Oberon Securities LLC and its subsidiaries, including Oberon. Pursuant to an engagement letter between Digirad and Oberon, Digirad agreed to pay Oberon an aggregate fee of $400,000, a portion of which was payable upon delivery of its opinion and the principal portion of which will be payable upon consummation of the Merger. Digirad has also agreed to reimburse certain of Oberon’s expenses and to indemnify Oberon and certain related parties against certain liabilities that may arise out of the engagement.

 

Oberon and its affiliates provide a full range of financial advisory services in the ordinary course of business, for which Oberon and such affiliates receive customary fees. In that regard, Oberon or its affiliates in the past have provided, currently are providing, and in the future may provide, financial services to Digirad and its affiliates and ATRM and its affiliates, respectively, for which Oberon and such affiliates have received and expect to receive fees.

 

Interests of ATRM Directors and Executive Officers in the Merger

 

In considering the recommendation of the ATRM board of directors with respect to the Merger, ATRM shareholders should be aware that certain executive officers and directors of ATRM have interests in the Merger that may be different from, or in addition to, the interests of ATRM shareholders generally. The ATRM board of directors was aware of the interests described below and considered them, among other matters, when approving the Merger Agreement and recommending that ATRM shareholders vote to approve the Merger Agreement.

 

In connection with the conversion of Digirad into a diversified holding company as approved by the Digirad board of directors, certain persons within ATRM are expected to hold positions within Digirad following the Merger: Jeffrey Eberwein will continue to serve as Chairman of the board of directors of Digirad, Daniel Koch will continue to serve as Chief Executive Officer of ATRM, and Hannah Bible (currently, an ATRM employee) will serve as Vice President of Legal and Finance at Digirad.

 

Change of Control Benefits for Executive Officers

 

ATRM has entered into a change of control agreement with ATRM’s President and Chief Executive Officer, Daniel M. Koch (the “Change of Control Agreement”). The Change of Control Agreement was entered into by ATRM with Mr. Koch on October 17, 2012.

 

The Change of Control Agreement provides for severance payments of two times Mr. Koch’s annual base salary in the event Mr. Koch’s employment is terminated, either voluntarily with “Good Reason” or other than for “Cause,” during the two-year period following a change of control. The severance payments are to be made over 24 months following the date of employment termination according to ATRM’s regular payroll practices and policies. In addition to severance payments, Mr. Koch is also entitled to reimbursement of ATRM’s portion of group medical and group dental premiums under COBRA continuation coverage. The Change of Control Agreement also provides for immediate vesting of all of Mr. Koch’s unvested options (if any) outstanding upon a change of control.

 

For purposes of the Change in Control Agreement, a “change of control” is deemed to occur upon:

 

the sale or other transfer of all or substantially all of ATRM’s assets;

the approval by ATRM’s shareholders of a liquidation or dissolution of ATRM;

any person, other than a bona fide underwriter, becoming the owner of more than 40% of the outstanding shares of ATRM Common Stock;

a merger, consolidation or exchange involving ATRM, but only if ATRM’s shareholders prior to such transaction own less than 65% of the combined voting power of the surviving or acquiring entity following the transaction; or

the “continuity” members of ATRM’s board of directors, being the incumbent members of ATRM’s board of directors as of the end of 2012 and future members of ATRM’s board of directors who were approved by at least a majority of ATRM’s continuity members, ceasing to constitute at least a majority of ATRM’s board of directors.

 

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“Good Reason” is defined as any of the following, provided Mr. Koch has given ATRM written notice of such condition within 90 days after its first occurrence and ATRM has not cured such condition within 30 days after such written notice:

 

a material diminution in Mr. Koch’s authority, duties or responsibilities;

A material diminution in Mr. Koch’s base salary;

a material change in the geographic location at which Mr. Koch must perform his services; or

any other action or inaction that constitutes a material breach by ATRM of Mr. Koch’s employment arrangement.

 

“Cause” is defined as (a) willful engagement by Mr. Koch in misconduct that is materially and demonstrably injurious to ATRM and its subsidiaries, taken as a whole, or (b) Mr. Koch’s conviction (including a plea of nolo contendere) of willfully engaging in illegal conduct that constitutes a felony and that either is materially and demonstrably injurious to ATRM and its subsidiaries, taken as a whole, or impairs Mr. Koch’s ability to perform substantially his duties with ATRM. No act or failure to act by Mr. Koch will be considered “willful” unless done or omitted to be done by Mr. Koch without a reasonable and actual belief that the action or omission was in the best interests of ATRM and its subsidiaries.

 

Golden Parachute Compensation

 

The following table sets forth the estimated value of the benefits under the Change of Control Agreement and value of other enhanced benefits described above that would be received by Mr. Koch, assuming the occurrence a change of control and termination of employment in within two years of the consummation of the Merger. The actual amount of any payments (if any) will likely differ from the below estimated amounts. No ATRM executive officer is entitled to any tax reimbursement payments from ATRM associated with any change of control payment.

 

Name  Cash
($)
   Equity
($)(1)
   Perquisites/
Benefits
($)(2)
   Total
($)
 
Daniel M. Koch   480,000    0    12,236    492,000 

 

 
(1)Detail of Equity Components Outlined in Golden Parachute Compensation Table

 

Name  Restricted
Stock(i)
   Stock
Options(ii)
   Total 
Daniel M. Koch  $10,000    0    10,000 

 

 

 

(i)Restricted Stock—Any restriction periods and all restrictions imposed on restricted stock shall lapse and they shall immediately become fully vested upon the termination of employment of Mr. Koch by ATRM for any reason other than for cause (as defined in ATRM’s 2014 Incentive Plan) or by Mr. Koch for good reason as defined in ATRM’s 2014 Incentive Plan). All restricted stock is fully vested and therefore no payments in respect of the Mr. Koch’s restricted stock will be required.  

 

(ii)Stock Options—all ATRM stock options outstanding to Mr. Koch on the date of such change of control will become immediately exercisable in full upon such change of control and will remain exercisable for the full stated term thereof, and (b) no payments attributable to or made in lieu of any such stock option will be reduced or reduce any other payments under the Change of Control Agreement to avoid application of Internal Revenue Code Sections 280G or 4999. Amounts shown represent payment in cancellation of the stock option awards for an amount by which the average closing market price for ATRM stock over the first five business days following the public announcement of the transaction exceeds the exercise price of the option. The accelerated vesting is “single trigger” in nature.

 

(2)Perquisites/benefits.  The figures in this column represent an estimated value for ATRM’s portion of group medical and group dental premiums under COBRA continuation coverage for a period of 24 months. The amount included in this column is “double trigger” in nature.

 

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Treatment of ATRM Equity Awards

 

As of the date of the Merger Agreement, ATRM’s outstanding equity awards consisted solely of grants of restricted shares of ATRM Common Stock and restricted stock units for shares of ATRM Common Stock. Pursuant to the Merger Agreement, ATRM may not issue any additional equity grants prior to the completion of the Merger. For any equity grants of restricted shares of ATRM Common Stock and restricted stock units for shares of ATRM Common Stock outstanding at the time of the Merger, at the Effective Time, each unvested share of restricted ATRM Common Stock or restricted ATRM Common Stock unit subject to vesting, repurchase, or other lapse of restrictions (a “Company Restricted Share”) shall, by virtue of the Merger and without any action on the part of the holder thereof, be assumed by Digirad and cease to represent a right with respect to shares of ATRM Common Stock and shall be converted automatically into a right to receive a restricted share of Digirad Preferred Stock or restricted Digirad Preferred Stock unit (as applicable) subject only to time based vesting with respect to a number of shares of Digirad Preferred Stock (each, an “Adjusted Restricted Share”), at a rate equal to three one-hundredths of a share, or 0.03 shares, of Digirad Preferred Stock, with any fractional shares of Digirad Preferred Stock rounded up to the next higher whole number of shares. Each Adjusted Restricted Share shall otherwise be subject to the same terms and conditions applicable to the converted Company Restricted Share under the ATRM’s stock plans and the agreements evidencing grants thereunder, including as to vesting and settlement.

 

Change of Control Benefits for the ATRM Board of Directors 

 

Members of the ATRM board of directors are not entitled to any payments or benefits upon a change of control.

 

Indemnification; Directors’ and Officers’ Insurance 

 

The Merger Agreement provides, from and after the effective time, each of Digirad and ATRM as the surviving company shall jointly and severally indemnify and hold harmless each person who served as a director or officer of ATRM or its subsidiaries prior to the effective time of the Merger and promptly pay to the fullest extent required pay or reimburse expenses incurred in defending, serving as a witness with respect to or otherwise participating in any claim in advance of the final disposition of such claim, subject to certain conditions. The Merger Agreement further provides that, as of the effective time, ATRM shall or, if ATRM is unable to, Digirad shall cause the surviving company in the Merger to, obtain and fully pay the premium for the non-cancellable extension of the directors’ and officers’ liability coverage of ATRM’s existing directors’ and officers’ insurance policies and ATRM’s existing fiduciary liability insurance policies, in each case for a claims reporting or discovery period of at least six years from and after the effective time of the Merger with respect to any claim related to any period of time at or prior to the effective time of the Merger, provided that the annual premium therefor shall not exceed $100,000. If such “tail policy” cannot be obtained, ATRM as the surviving company is required to maintain such insurance in effect for a period of six years subject to an annual cap of $100,000 per year and the other terms and conditions of the Merger Agreement.

 

Effect of the Merger 

 

Subject to the terms and conditions of the Merger Agreement and in accordance with Minnesota law, at the effective time of the Merger, Merger Sub will merge with and into ATRM. ATRM will be the surviving corporation in the Merger and will become a wholly-owned subsidiary of Digirad.

 

Merger Consideration 

 

At the effective time of the Merger, each share of ATRM Common Stock (other than shares owned directly by ATRM, any ATRM subsidiary, Digirad or Merger Sub) issued and outstanding immediately prior to the effective time of the Merger will be converted into and become the right to receive 0.03 shares of Digirad Preferred Stock, and each share of ATRM Preferred Stock (other than shares owned directly by ATRM, any ATRM subsidiary, Digirad or Merger Sub or any shares for which dissenters’ rights are exercised) issued and outstanding immediately prior to the effective time of the Merger will be converted into and become the right to receive 2.5 shares of Digirad Preferred Stock, with any fractional shares rounded up to the nearest whole share of Digirad Preferred Stock.

 

The rights pertaining to Digirad Preferred Stock will be different from the rights pertaining to each of ATRM Common Stock and ATRM Preferred Stock. The rights of all ATRM shareholders are currently governed by the ATRM articles of incorporation, the ATRM bylaws and Minnesota law. In addition, the rights of holders of ATRM Preferred Stock are subject to the certificate of designation of the ATRM Preferred Stock. Upon completion of the Merger, all shareholders of ATRM will become holders of Digirad Preferred Stock and their rights will be governed by the Digirad certificate of incorporation, the Certificate of Designation for the Digirad Preferred Stock, the Digirad bylaws and Delaware law. For a description of the rights pertaining to Digirad Preferred Stock and Digirad’s certificate of incorporation and bylaws, see “Description of Digirad Capital Stock” and “Comparison of Rights of ATRM Shareholders and Holders of Digirad Preferred Stock.”

 

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Ownership of Digirad Unchanged Following the Merger 

 

Upon completion of the Merger, all Digirad Preferred Stock will be held by former ATRM shareholders. Each Digirad stockholder will continue to have the same number of shares of Digirad common stock that such stockholder held immediately prior to the completion of the Merger. However, each share of Digirad common stock will then represent an interest in a combined company with more assets.

 

Conversion of Shares; Exchange Procedures; Fractional Shares 

 

The conversion of ATRM Common Stock and ATRM Preferred Stock into the right to receive the Merger Consideration of Digirad Preferred Stock will occur automatically at the effective time of the Merger. Prior to the effective time of the Merger, Digirad will deposit with the exchange agent certificates representing shares of Digirad Preferred Stock sufficient to effect the conversion of each share of ATRM Common Stock and ATRM Preferred Stock into the shares of Digirad Preferred Stock pursuant to the Merger Agreement.

 

Approximately five business days after the effective time of the Merger, the exchange agent will mail to each holder of record of ATRM Common Stock and ATRM Preferred Stock as of immediately prior to the effective time of the Merger a letter of transmittal containing instructions for obtaining the aggregate Merger Consideration that each such shareholder is entitled to receive pursuant to the Merger. The letter of transmittal will contain instructions for surrendering certificates representing shares of ATRM Common Stock and/or ATRM Preferred Stock to the exchange agent. The exchange agent will mail the aggregate Merger Consideration (including, if applicable, cash in lieu of any fractional share of Digirad Preferred Stock) to such shareholder approximately 10 business days after the exchange agent has received all of such shareholder’s certificates representing shares of ATRM Common Stock and/or ATRM Preferred Stock (to the extent applicable), a properly signed and completed letter of transmittal in accordance with the instructions thereto, and such other documents as may be required pursuant to such instructions.

 

After the effective time of the Merger, each certificate that previously represented shares of ATRM Common Stock and/or ATRM Preferred Stock (to the extent applicable) will represent only the right to receive the Merger Consideration as described above and dividends and distributions on Digirad Preferred Stock as described below.

 

Until holders of certificates previously representing shares of ATRM Common Stock and/or ATRM Preferred Stock (to the extent applicable) have surrendered those certificates to the exchange agent, those holders will not receive dividends or distributions on any shares of Digirad Preferred Stock into which such shares have been converted. When delivery of the Merger Consideration is made to such holders as described above, the exchange agent will also pay to such holders, without interest, all dividends and other distributions in respect of such Digirad Preferred Stock with a record date after the effective time of the Merger and a payment date on or after the date of surrender of certificates.

 

No fractional shares of Digirad Preferred Stock will be issued to any ATRM shareholder in the Merger. Each ATRM shareholder who would otherwise have been entitled to receive a fraction of a share of Digirad Preferred Stock in the Merger will receive one whole share of Digirad Preferred Stock.

 

Digirad and the exchange agent will be entitled to deduct and withhold from the Merger Consideration, and pay to the appropriate taxing authorities, any applicable taxes. Any such amount which is properly withheld and paid to a taxing authority by Digirad or the exchange agent will be treated for all purposes of the Merger Agreement as having been paid to the person from whom it is withheld.

 

If any certificate representing shares of ATRM Common Stock or ATRM Preferred Stock (to the extent such stock was certificated) has been lost, stolen or destroyed, upon the making of an affidavit attesting to that fact by the person claiming that such certificate has been lost, stolen or destroyed and, if required by Digirad or the surviving corporation of the Merger, the delivery by such person of a bond (in such amount as Digirad or the surviving corporation may direct) as indemnity against any claim that may be made against the exchange agent, Digirad or the surviving corporation with respect to on account of the alleged loss, theft or destruction of such certificate, the exchange agent will issue, in exchange for all rights to the lost, stolen or destroyed certificate, the total amount of Merger Consideration in respect of the shares of ATRM Common Stock or ATRM Preferred Stock (to the extent such stock was certificated) represented by such certificate.

 

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Accounting Treatment 

 

The Merger will be accounted for using the acquisition method of accounting. Digirad will allocate the purchase price to the fair value of ATRM’s tangible and intangible assets and liabilities at the acquisition date, with the excess purchase price being recorded as goodwill. Under U.S. generally accepted accounting principles, goodwill is not amortized but is tested for impairment at least annually.

 

No Regulatory Approvals Required for the Merger 

 

ATRM and Digirad are not required to obtain any regulatory approvals for the Merger, as the Merger does not exceed any value thresholds for antitrust approval by the Antitrust Division of the Department of Justice or the Federal Trade Commission and neither the business of ATRM nor Digirad is subject to regulatory oversight which requires approval of the Merger.

 

Dissenters’ Rights of ATRM Shareholders 

 

Under Minnesota law, unless otherwise set forth in the articles of incorporation or bylaws, dissenters’ rights are not available in connection with a merger to the holders of shares listed on certain national stock exchanges and the consideration to be received for such shares consists only of shares that are listed on one of such national stock exchanges and cash in lieu of fractional shares. Because the ATRM Common Stock is not listed on a national stock exchange, holders of ATRM Common Stock have dissenters’ rights in connection with the Merger to receive the fair value, in cash, of their shares of ATRM Common Stock. In order to exercise dissenters’ rights, ATRM Common Stock holders must strictly comply with the dissenters’ rights procedures under Minnesota law or they will lose their dissenters’ rights. One of these rules is that you must not vote FOR the Merger. If you vote FOR the Merger, you will lose your dissenters’ rights. The cash you receive upon the exercise of your dissenters’ rights may be more or less than the value of the Digirad Preferred Stock you would have received in the Merger if you had not exercised your dissenters’ rights.

 

ATRM and Digirad have entered into the Voting and Support Agreement with the holders of all of the ATRM Preferred Stock and approximately 17.4% of the ATRM Common Stock pursuant to which such holders have given Digirad their proxies to vote “FOR” the approval of the Merger Agreement and the transactions contemplated thereby, including the Merger. By voting for the approval of the Merger Agreement and the Merger, such holders will not be entitled to dissenters’ rights.

 

Sections 302A.471 and 302A.473 of the Minnesota Business Corporation Act (the “MBCA”) entitle you to exercise dissenters’ rights and receive cash equal to the “fair value” of your shares of ATRM Common Stock and/or ATRM Preferred Stock instead of shares of Digirad Preferred Stock upon consummation of the Merger. Set forth below is a summary of the procedures relating to the exercise of such dissenters’ rights. This summary does not purport to be a complete statement of dissenters’ rights. If you think that you might exercise your dissenters’ rights in connection with the Merger, you should carefully review the text of Appendix III attached to this proxy statement/prospectus, particularly the specified procedural steps required to perfect dissenters’ rights, which are complex, and you should also consult your legal counsel. Your dissenters’ rights will be lost if you do not fully and precisely satisfy the procedural requirements of sections 302A.471 and 302A.473 of the MBCA.

 

Under the MBCA, if you (i) file with ATRM before the special meeting written notice of your intent to demand the fair value for your shares of ATRM Common Stock and/or ATRM Preferred Stock if the Merger is consummated and becomes effective and (ii) do not vote your shares of ATRM Common Stock and/or ATRM Preferred Stock at the ATRM special meeting in favor of the proposal to approve the Merger Agreement and the Merger, then you will be entitled, if the Merger is approved and effected, to receive a cash payment equal to the fair value of your shares of ATRM Common Stock and/or ATRM Preferred Stock (as applicable) upon compliance with the applicable statutory procedural requirements. If you vote “FOR” the proposal to approve the Merger Agreement and the Merger you will have no dissenters’ rights under the MBCA, however, your failure to vote “AGAINST” the proposal to approve the Merger Agreement and the Merger, this failure will not, in and of itself, constitute a waiver of your dissenters’ rights.

 

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If you intend to demand payment for your shares of ATRM Common Stock and/or ATRM Preferred Stock, you must file a notice of such intent with ATRM at 5215 Gershwin Avenue N. Oakdale, Minnesota 55128, Attention: Corporate Secretary, before the vote on the Merger Agreement and the Merger at the special meeting. A vote against the Merger Agreement and the Merger at the special meeting will not constitute the notice required under the MBCA. If you do not satisfy each of the requirements of Sections 302A.471 and 302A.473 of the MBCA, you will not be entitled to payment for your shares of ATRM Common Stock and/or ATRM Preferred Stock (as applicable) under the dissenters’ rights provisions of the MBCA. Instead, you will be bound by the terms of the Merger Agreement if the Merger is consummated.

 

If the Merger is approved at the special meeting, ATRM must send written notice to all shareholders who have given written notice of dissent and not voted in favor of the Merger a notice containing:

 

The address where the demand for payment and certificates must be sent and the date by which they must be received;

 

Any restrictions on transfer of uncertificated shares that will apply after the demand for payment is received;

 

A form to be used to certify the date on which the shareholder, or the beneficial owner on whose behalf the shareholder dissents, acquired the shares (or an interest in them) and to demand payment; and

 

A copy of the provisions of the MBCA set forth in Appendix C with a brief description of the procedures to be followed under those provisions.

 

If you are sent such a notice and wish to assert dissenters’ rights, you must demand payment and deposit your certificates with ATRM within 30 days after such notice is given. Prior to the Effective Time, you will retain all other rights of a shareholder. From and after the Effective Time, if you are a dissenting shareholder, you will no longer be entitled to any rights of a shareholder, including, but not limited to, the right to receive notice of meetings, to vote at any meetings or to receive dividends, and you will only be entitled to any rights of appraisal as provided by the MBCA. If you fail to perfect your dissenters’ rights, your shares of ATRM Common Stock and/or ATRM Preferred Stock (as applicable) will thereafter be deemed to have been converted into the right to receive the consideration provided for by the Merger Agreement.

 

After the Effective Time or upon receipt of a valid demand for payment, whichever is later, ATRM must remit to you, if you complied with the requirements of the dissenters’ rights statutes, the amount ATRM estimates to be the fair value of your shares of ATRM Common Stock and/or ATRM Preferred Stock (as applicable), plus interest accrued from the Effective Time to the date of payment. The payment also must be accompanied by certain financial data relating to ATRM, ATRM’s estimate of the fair value of the shares and a description of the method used to reach such estimate, and a copy of the applicable provisions of the MBCA with a brief description of the procedures to be followed in demanding supplemental payment. If you believe that the amount remitted is less than the fair value of such shares plus interest, you may give written notice to ATRM of your own estimate of the fair value of the shares, plus interest, within 30 days after ATRM mails its remittance, and demand payment of the difference.

 

If ATRM receives a demand from you to pay such difference, it must, within 60 days after receiving your demand, either pay to you the amount demanded or agreed to by you after discussion with ATRM or file in court a petition requesting that the court determine the fair value of the shares.

 

The court may appoint one or more appraisers to receive evidence and make recommendations to the court on the amount of the fair value of your shares. The court shall determine whether you have complied with the requirements of Section 302A.473 of the MBCA and shall determine the fair value of your shares, taking into account any and all factors the court finds relevant, computed by any method or combination of methods that the court, in its discretion, sees fit to use. The fair value of the shares as determined by the court is binding on all dissenting shareholders.

 

Costs of the court proceeding shall be determined by the court and assessed against ATRM, except that part or all of the costs may be assessed against you if your actions in demanding supplemental payments are found by the court to be arbitrary, vexatious or not in good faith.

 

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If the court finds that ATRM did not substantially comply with the relevant provisions of the MBCA, the court may assess the fees and expenses, if any, of attorneys or experts as the court deems equitable against ATRM. Such fees and expenses may also be assessed against any party in bringing the proceedings if the court finds that such party has acted arbitrarily, vexatiously or not in good faith, and may be awarded to a party injured by those actions. The court may award, in its discretion, fees and expenses of an attorney for the dissenting shareholders out of the amount awarded to such shareholders, if any.

 

You may assert dissenters’ rights as to fewer than all of the shares registered in your name only if you dissent with respect to all shares beneficially owned by you on behalf of any one beneficial shareholder and you notify ATRM in writing of the name and address of each person on whose behalf you are asserting dissenters’ rights. In such a situation, your rights as a dissenting shareholder are determined as if the shares as to which you are dissenting and your other non-dissenting shares were registered in the names of different shareholders.

 

Under Subdivision 4 of Section 302A.471 of the MBCA, you have no right, at law or in equity, to set aside the approval of the Merger Agreement or the consummation of the Merger except if the adoption or consummation of the Merger was fraudulent with respect to you or ATRM.

 

Stock Exchange Listing of Digirad Preferred Stock 

 

Prior to the Merger, there has been no public market for the Digirad Preferred Stock and no shares of the Digirad Preferred Stock are outstanding. Digirad intends to apply to have the Digirad Preferred Stock listed on the Nasdaq Global Market under the symbol “DRADP.” There can be no assurance that such listing will be approved.

 

Delisting and Deregistration of ATRM Common Stock 

 

If the Merger is completed, ATRM Common Stock will be delisted from the OTC Marketplace and deregistered under the Exchange Act, and ATRM will no longer file periodic reports with the SEC on account of ATRM Common Stock.

 

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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

 

The following is a general discussion of the material U.S. federal income tax consequences of the Merger to U.S. Holders (as defined below) that exchange shares of ATRM Common Stock and/or ATRM Preferred Stock for shares of Digirad Preferred Stock pursuant to the Merger. This discussion is based on current provisions of the Internal Revenue Code of 1986, as amended (the “Code”), the U.S. Treasury Regulations promulgated thereunder, judicial opinions and published position of the Internal Revenue Service (the “IRS”), all as in effect as of the date of this proxy statement/prospectus and all of which are subject to change or varying interpretation, possibly with retroactive effect. Any such change or interpretation could affect the accuracy of the statements and conclusions set forth herein.

 

This discussion is limited to U. S. Holders that hold their ATRM Common Stock and/or ATRM Preferred Stock as “capital assets” within the meaning of Section 1221 of the Code (generally, property held for investment). Furthermore, this discussion is for general information purposes only and does not purport to address all aspects of U.S. federal income taxation that may be relevant to particular U.S. Holders in light of their specific circumstances.

 

If any entity or arrangement treated as a partnership for U.S. federal income tax purposes holds ATRM Common Stock and/or ATRM Preferred Stock, the tax treatment of a person treated as a partner in such partnership will generally depend upon the status of the partner and upon the activities of the partnership. Persons that for U.S. federal income tax purposes are treated as a partner in a partnership holding ATRM Common Stock and/or ATRM Preferred Stock should consult their own tax advisors regarding the tax consequences of the Merger.

 

This discussion does not address any tax consequences arising under the unearned income Medicare contribution tax pursuant to the Health Care and Education Reconciliation Act of 2010, nor any state, local or foreign tax consequences, nor does it address any U.S. federal tax considerations other than those pertaining to the income tax. Holders should consult their own tax advisors as to the particular tax consequences to them of the Merger, including the applicability of any U.S. federal income and other tax laws, any state, local or non-U.S. tax laws, and any changes (or proposed changes) in tax laws or interpretations thereof.

 

As used herein, the term “U.S. Holder” means a beneficial owner (other than an Excluded Holder) of ATRM Common Stock and/or ATRM Preferred Stock prior to the Merger and, on or after the Merger, Digirad Preferred Stock that is, for U.S. federal income tax purposes:

 

an individual who is a citizen or resident of the United States;

 

a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States, any state thereof, or the District of Columbia;

 

an estate the income of which is includible in gross income for U.S. federal income tax purposes, regardless of its source; or

 

a trust (a) the administration of which is subject to the primary supervision of a U.S. court and which has one or more U.S. persons who have the authority to control all substantial decisions of the trust, or (b) that has a valid election in effect under applicable Treasury regulations to be treated as a U.S. person.

 

“Excluded Holder” means any person that (1) is subject to special rules under the U.S. federal income tax laws (including, for example, a holder having a “functional currency” other than the U.S. dollar, a person subject to special rules applicable to former citizens and residents of the United States, banks or other financial institutions, mutual funds, persons subject to the alternative minimum tax, grantor trusts, real estate investment trusts, subchapter S corporations or other pass-through entities or arrangements (or investors in subchapter S corporations or other pass-through entities or arrangements), insurance companies, tax-exempt organizations, dealers in securities or currencies, traders in securities who elect to apply a mark-to-market method of accounting, persons holding ATRM Common Stock and/or ATRM Preferred Stock in connection with a hedging transaction, straddle, conversion transaction or other integrated transaction, holders other than U.S. Holders, or U.S. Holders who acquired their ATRM Common Stock and/or ATRM Preferred Stock through the exercise of employee stock options or otherwise as compensation or through a tax-qualified retirement plan) and/or (2) owns (by vote or value) five-percent or more of (a) prior to the Merger, the ATRM Common Stock and/or ATRM Preferred Stock and/or (b) on or after the Merger, the Digirad Preferred and/or the Digirad common stock.

 

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Neither ATRM nor Digirad intends to request any ruling from the Internal Revenue Service or opinion from counsel as to the U.S. federal income tax consequences of the Merger. Consequently, no assurance can be given that the Internal Revenue Service will not assert, or that a court will not sustain, a position contrary to any of the tax consequences set forth in this proxy statement/prospectus.

 

This discussion is intended to provide only a general description of the material U.S. federal income tax consequences of the Merger to U.S. Holders, subject to the qualifications, limitations and assumptions set forth herein. This discussion is not intended to be a complete analysis or description of all potential U.S. federal income tax consequences of the Merger and related transactions. The U.S. federal income tax laws are complex and subject to varying interpretation. Accordingly, the IRS may not agree with the tax consequences described in this proxy statement/prospectus. ALL HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE RECEIPT AND OWNERSHIP OF SHARES OF DIGIRAD PREFERRED STOCK RESULTING FROM THE EXCHANGE FOR SHARES OF ATRM COMMON STOCK AND/OR ATRM PREFERRED STOCK PURSUANT TO THE MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF U.S. FEDERAL, STATE, LOCAL AND NON-U.S. TAX LAWS.

 

Receipt of Digirad Preferred Stock in the Merger

 

The receipt of shares of Digirad Preferred Stock in exchange for shares of ATRM Common Stock and/or ATRM Preferred Stock pursuant to the Merger will be a taxable transaction for U.S. federal income tax purposes. A U.S. Holder generally will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference, if any, between (i) the fair market value (as of the effective time) of the Digirad Preferred Stock received pursuant to the Merger and (ii) such U.S. Holder’s adjusted tax basis in the ATRM Common Stock and/or ATRM Preferred Stock surrendered in exchange therefor. Such gain or loss generally will be capital gain or loss, and will be long-term capital gain or loss if the U.S. Holder’s holding period for such shares exceeds one year as of the date of the Merger. Long-term capital gains for certain noncorporate U.S. Holders, including individuals, are generally eligible for a preferential rate of federal income taxation. Net short-term capital gains are taxed at the same rate as ordinary income. The deductibility of capital losses is subject to limitations. If a U.S. Holder acquired different blocks of ATRM Common Stock and/or ATRM Preferred Stock at different times or at different prices, such U.S. Holder must determine its tax basis, holding period, and gain or loss separately with respect to each block of ATRM Common Stock and/or ATRM Preferred Stock. U.S. Holders are responsible for determining their adjusted basis in their ATRM Common Stock and/or Preferred Stock and should consult their tax advisors regarding such determination.

 

A U.S. Holder’s tax basis in the Digirad Preferred Stock received in the Merger will equal its fair market value as of the effective time. A U.S. Holder’s holding period for the Digirad Preferred Stock received in the Merger will begin on the day following the effective time.

 

Backup Withholding and Information Reporting with respect to the Merger

 

A U.S. Holder generally will be subject to information reporting and may, under certain circumstances, be subject to backup withholding (currently at a rate of 24%) with respect to the per share Merger Consideration received in the Merger, unless such holder properly establishes an exemption or provides, on a properly completed IRS Form W-9, its correct tax identification number and otherwise complies with the applicable requirements of the backup withholding rules.

 

Backup withholding is not an additional tax. Rather, any amounts withheld under the backup withholding rules from a payment to a U.S. Holder can be refunded or credited against the U.S. Holder’s U.S. federal income tax liability, if any, provided that an appropriate claim is timely filed with the IRS.

 

Tax Consequences to U.S. Holders of Digirad Preferred Stock

 

The following discussion is a summary of certain U.S. federal income tax consequences of the ownership and disposition of shares of Digirad Preferred Stock to U.S. Holders receiving Digirad Preferred Stock pursuant to the Merger.

 

Distributions on the Digirad Preferred Stock

 

Cash distributions paid on shares of Digirad Preferred Stock will be treated as a dividend to the extent paid out of Digirad’s current or accumulated earnings and profits (as determined for U.S. federal income tax principles) and will be includible in income by the U.S. Holder and taxable as ordinary income when received. If a distribution exceeds Digirad’s current and accumulated earnings and profits, the excess will be first treated as a tax-free return of the U.S. Holder’s investment, up to the U.S. Holder’s tax basis in the shares of Digirad Preferred Stock. Any remaining excess will be treated as capital gain. Dividends received by non-corporate U.S. Holders will be eligible to be taxed at reduced rates if the U.S. Holders meet certain holding period and other applicable requirements. Dividends received by corporate U.S. Holders will be eligible for the dividends-received deduction if the U.S. Holders meet certain holding period and other applicable requirements.

 

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Constructive Distributions on Digirad Preferred Stock

 

If the Digirad Preferred Stock is treated as issued with a redemption premium (as described below) in excess of de minimis amount (the “Redemption Premium”), then, under certain circumstances, Digirad may be deemed to make constructive distributions (to which Section 301 of the Code would apply) on the Digirad Preferred Stock, even though Digirad makes no actual distribution of cash or property. If this deemed distribution rule applies to the Redemption Premium (if any) on the Digirad Preferred Stock, each U.S. Holder will be required to accrue annually, without regard to such U.S. Holder’s regular method of tax accounting, such Redemption Premium, generally in accordance with the constant yield principles used to accrue for U.S. federal income tax purposes original issue discount (“OID”) on debt instruments under the rules of Sections 1271 through 1275 of the Code and the applicable Treasury regulations (the “OID Rules”). Any such accrual of Redemption Premium (if any) is treated for U.S. federal income tax purposes as an actual distribution on the Digirad Preferred Stock that would constitute a dividend, return of capital or capital gain to the holder of the stock in the same manner as cash distributions described under “Tax Consequences to U.S. Holders of Digirad Preferred Stock- Distributions on the Digirad Preferred Stock.

 

Digirad Preferred Stock will be treated as issued with a Redemption Premium if the Digirad Preferred Stock has a liquidation preference or may be redeemed for an amount in excess of its issue price and such excess exceeds a de minimis amount (as determined in accordance with the OID Rules). While the rules for determining the issue price of the Digirad Preferred Stock are unclear, Digirad intends to take the position that the OID Rules determining the issue price of a debt instrument can be used to determine the issue price of the Digirad Preferred Stock, and, in light of the OID Rules, the issue price for the Digirad Preferred Stock should be no less than the amount at which it may be redeemed under the call option, as described below under “Description Of Digirad Capital Stock- Digirad Series A Preferred Stock- Optional Redemption”(the “Call Option”), or the put option, as described below under “Description Of Digirad Capital Stock- Digirad Series A Preferred Stock- Change of Control”(the “Put Option”). Accordingly, Digirad intends to take the position that the Digirad Preferred Stock is not issued with any Redemption Premium.

 

In the alternative, if the Digirad Preferred Stock is issued with a Redemption Premium, then a U.S. Holder is still not required to accrue the Redemption Premium, unless either the Call Option or the Put Option have certain characteristics (as discussed below).

 

The Call Option will trigger the accrual of the Redemption Premium (if any) on the Digirad Preferred Stock, unless, based on all of the facts and circumstances as of the issue date, a redemption pursuant to the Call Option is not more likely than not to occur. The Treasury regulations provide that a redemption of the Digirad Preferred Stock under the Call Option will not be treated as more likely than not to occur if: (1) Digirad and the U.S. Holder are not related within the meaning of Section 267(b) or Section 707(b) of the Code (substituting “20%” for the phrase “50%”); (2) there are no plans, arrangements, or agreements that effectively require or are intended to compel Digirad to redeem the Digirad Preferred Stock; and (3) exercise of the Call Option would not reduce the yield on the Digirad Preferred Stock using the principles under the OID Rules. Even if the Call Option does not fall within the preceding safe harbor, it does not mean that Digirad’s exercise of the Call Option is more likely than not to occur and the Call Option must still be tested under all the facts and circumstances to determine if such exercise is more likely than not to occur. While not entirely free from doubt, Digirad intends to take the position that the Call Option fits within the safe harbor discussed above with respect to the U.S. Holders of the Digirad Preferred Stock and, under the general facts and circumstances in effect upon the issue of the Digirad Preferred Stock, it is not more likely than not that Digirad will exercise the Call Option. Accordingly, even if the Digirad Preferred Stock were issued with a Redemption Premium, the presence of the Call Option should not require the U.S. Holders of the Digirad Preferred Stock to accrue the Redemption Premium (if any).

 

The Put Option will trigger the accrual of the Redemption Premium (if any) on the Digirad Preferred Stock, unless, the Put Option is subject to a contingency that is (1) beyond legal or practical control holder of U.S. Holder, or of the U.S. Holders as a group, or a related party (within the meaning of Section 267(b) or Section 707(b) of the Code) and (2) renders remote the likelihood of redemption (based on all the facts and circumstances as of the issue date). Under existing law, it is unclear whether the condition (i.e., a Change of Control Triggering Event) allowing the exercise of the Put Option should be treated as a contingency described in clause (2) of the preceding sentence. While not entirely free from doubt, Digirad intends to take the position that the Change of Control Triggering Event condition renders remote the likelihood of redemption of the Digirad Preferred Stock pursuant to Put Option. Accordingly, even if the Digirad Preferred Stock were issued with a Redemption Premium, the presence of the Put Option should not require the U.S. Holders of the Digirad Preferred Stock to accrue the Redemption Premium (if any). However, no assurance can be given that the Internal Revenue Service will not assert, or that a court will not sustain, a contrary position.

 

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Prospective holders of the Digirad Preferred Stock should consult their own tax advisors regarding the potential implications of the constructive distribution rules.

 

Sale or Other Taxable Disposition of the Digirad Preferred Stock, Including Redemptions

 

Upon any sale, exchange, redemption (except as discussed below) or other disposition of the Digirad Preferred Stock, a U.S. Holder will recognize capital gain or loss equal to the difference between the amount realized by the U.S. Holder and the U.S. Holder’s adjusted tax basis in the Digirad Preferred Stock. Such capital gain or loss will be long-term capital gain or loss if the U.S. Holder’s holding period for the Digirad Preferred Stock is longer than one year. A U.S. Holder should consult its own tax advisors with respect to applicable tax rates and netting rules for capital gains and losses. Certain limitations exist on the deduction of capital losses by both corporate and non-corporate taxpayers.

 

A redemption of the Digirad Preferred Stock for cash will be treated as a sale or exchange if it (1) results in a “complete termination” of the U.S. Holder’s interest in Digirad’s stock, (2) is not “essentially equivalent to a dividend” with respect to the U.S. Holder, or (3) is “substantially disproportionate” with respect to the U.S. Holder, each within the meaning of Section 302(b) of the Code. In determining whether any of these tests have been met, stock considered to be owned by the U.S. Holder by reason of certain constructive ownership rules, as well as shares actually owned by such U.S. Holder, must generally be taken into account. If the U.S. Holder does not own (actually or constructively) any additional Digirad Preferred Stock or Digirad common stock, or owns only an insubstantial percentage of Digirad stock, and does not participate in Digirad control or management, a redemption of such U.S. Holder’s Digirad Preferred Stock will generally qualify for sale or exchange treatment. If the redemption is treated as proceeds from a sale or exchange, a U.S. Holder will recognize capital gain or loss (which will be long-term capital gain or loss, if the U.S. Holder’s holding period for such Digirad Preferred Stock exceeds one year) equal to the difference between the amount realized by the U.S. Holder and the U.S. Holder’s adjusted tax basis in the Digirad Preferred Stock redeemed, except to the extent that any cash received is attributable to any accrued but unpaid dividends on the Digirad Preferred Stock. Otherwise, the redemption may be taxable as a dividend to the extent of Digirad’s current or accumulated earnings and profits as discussed above with respect to distributions generally. Because the determination as to whether any of the alternative tests of Section 302(b) of the Code will be satisfied with respect to any particular U.S. Holder depends upon the facts and circumstances at the time that the determination must be made, prospective U.S. Holders are advised to consult their own tax advisors regarding the tax treatment of a redemption.

 

Backup Withholding and Information Reporting with Respect to the Digirad Preferred Stock Received in the Merger

 

Information reporting requirements generally will apply to payments of dividends on shares of Digirad Preferred Stock and to the proceeds of a sale, exchange, redemption or other disposition of a share of Digirad Preferred Stock paid to a U.S. Holder unless the U.S. Holder is an exempt recipient such as a corporation. Backup withholding will apply to those payments if the U.S. Holder fails to provide its correct taxpayer identification number, or certification of exempt status, or (in the case of dividend payments) if the U.S. Holder is notified by the IRS that it has failed to report in full payments of interest and dividend income. Any amounts withheld under the backup withholding rules may be refunded or credited against such U.S. Holder’s U.S. federal income tax liability provided that the required information is timely furnished to the IRS.

 

THE PRECEDING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER. IT IS NOT A COMPLETE ANALYSIS OR DISCUSSION OF ALL POTENTIAL TAX EFFECTS THAT MAY BE IMPORTANT TO A PARTICULAR HOLDER. ALL HOLDERS OF ATRM COMMON STOCK AND/OR ATRM PREFERRED STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO THEM, INCLUDING TAX-REPORTING REQUIREMENTS, AND THE APPLICABILITY AND EFFECT OF ANY FEDERAL, STATE, LOCAL AND NON-U.S. TAX LAWS.

 

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THE MERGER AGREEMENT

 

The following discussion sets forth the principal terms of the Merger Agreement, a copy of which is attached as Annex I to this proxy statement/prospectus and is incorporated by reference herein. The rights and obligations of the parties are governed by the express terms and conditions of the Merger Agreement and not by this discussion, which is a summary by nature. This discussion is not complete and is qualified in its entirety by reference to the complete text of the Merger Agreement. You are encouraged to read the Merger Agreement carefully in its entirety, as well as this proxy statement/prospectus, before making any decisions regarding the Merger.

 

The Merger 

 

Subject to the terms and conditions of the Merger Agreement and in accordance with Minnesota law, Merger Sub, a wholly owned subsidiary of Digirad, will merge with and into ATRM. ATRM will be the surviving company in the Merger and continue its corporate existence as a wholly owned subsidiary of Digirad. Upon consummation of the Merger, the separate corporate existence of Merger Sub will terminate.

 

Closing and Effectiveness of the Merger 

 

The closing of the Merger will occur as soon as possible, but no later than two business days after the date of the conditions to its completion have been satisfied or waived. The Merger will become effective at such time (the “effective time”) as the parties file articles of merger with the Secretary of State of the State of Minnesota (or at such later time as ATRM and Digirad may agree and is specified in the articles of merger).

 

Consideration to be Received in the Merger 

 

At the effective time of the Merger, each share of ATRM Common Stock (other than shares owned directly by ATRM, any ATRM subsidiary, Digirad or Merger Sub) issued and outstanding immediately prior to the effective time of the Merger will be converted into and become the right to receive 0.03 shares of Digirad Preferred Stock, and each share of ATRM Preferred Stock (other than shares owned directly by ATRM, any ATRM subsidiary, Digirad or Merger Sub or any shares for which dissenters’ rights are exercised) issued and outstanding immediately prior to the effective time of the Merger will be converted into and become the right to receive 2.5 shares of Digirad Preferred Stock. No fractional shares of Digirad Preferred Stock will be issued. Each holder will be entitled to receive in lieu of any fractional share of Digirad Preferred Stock one whole share of Digirad Preferred Stock.

 

Treatment of ATRM Equity Awards 

 

As of the date of the Merger Agreement, ATRM’s outstanding equity awards consisted solely of grants of restricted shares of ATRM Common Stock and restricted stock units for shares of ATRM Common Stock. Pursuant to the Merger Agreement, ATRM may not issue any additional equity grants prior to the completion of the Merger. For any equity grants of restricted shares of ATRM Common Stock and restricted stock units for shares of ATRM Common Stock outstanding at the time of the Merger, at the Effective Time, each unvested share of restricted ATRM Common Stock or restricted ATRM Common Stock unit subject to vesting, repurchase, or other lapse of restrictions shall, by virtue of the Merger and without any action on the part of the holder thereof, be assumed by Digirad and cease to represent a right with respect to shares of ATRM Common Stock and shall be converted automatically into a right to receive a restricted share of Digirad Preferred Stock or restricted Digirad Preferred Stock unit (as applicable) subject only to time based vesting with respect to a number of shares of Digirad Preferred Stock, at a rate equal to three one-hundredths of a share, or 0.03 shares, of Digirad Preferred Stock, with any fractional shares of Digirad Preferred Stock rounded up to the next higher whole number of shares. Each Adjusted Restricted Share shall otherwise be subject to the same terms and conditions applicable to the converted Company Restricted Share under the ATRM’s stock plans and the agreements evidencing grants thereunder, including as to vesting and settlement.

 

Representations and Warranties 

 

The Merger Agreement contains representations and warranties made by ATRM to Digirad and by Digirad to ATRM. The assertions embodied in those representations and warranties were made solely for purposes of the Merger Agreement and may be subject to important qualifications and limitations agreed to by the parties in connection with negotiating the terms of the Merger Agreement. Accordingly, ATRM shareholders should not rely on representations and warranties as characterizations of the actual state of facts or circumstances, and should bear in mind that the representations and warranties were made solely for the benefit of the parties to the Merger Agreement, were negotiated for purposes of allocating contractual risk among the parties to the Merger Agreement rather than to establish matters as facts and may be subject to contractual standards of materiality different from those generally applicable to shareholders. Moreover, information concerning the subject matter of such representations and warranties may change after the date of the Merger Agreement, which subsequent information may or may not be reflected in public disclosures of ATRM and Digirad. This description of the representations and warranties is included to provide ATRM’s shareholders with information regarding the terms of the Merger Agreement. The representations and warranties in the Merger Agreement and the description of them in this joint proxy statement/prospectus should be read in conjunction with the other information contained in the reports, statements and filings ATRM and Digirad publicly file with the SEC. See “Where You Can Find Additional Information.”

 

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In the Merger Agreement, ATRM and Digirad made a number of representations and warranties to each other. The parties’ reciprocal representations and warranties relate to, among other things:

 

due incorporation, valid existence and good standing, and corporate authorization and power to enter into the Merger Agreement and consummate the transactions contemplated thereby; 

 

the good standing and corporate power and authority of ATRM’s and Digirad’s subsidiaries, respectively; 

 

capitalization and capital structure;

 

the absence of any violation of or conflict with such party’s organizational documents or applicable laws as a result of entering into the Merger Agreement and consummating the Merger; 

 

required regulatory filings, consents and approvals of governmental entities in connection with the Merger Agreement and the Merger; 

 

documents filed by ATRM and Digirad, respectively, with the SEC since January 1, 2016 and the accuracy of information contained in those documents; 

 

financial statements; 

 

the absence of undisclosed finders’ fees; 

 

the absence of certain changes or events, and the absence of a material adverse effect on ATRM and Digirad, respectively, in each case since January 1, 2018; 

 

the proxy statement/prospectus to be filed with the Securities and Exchange Commission under the Exchange Act and the accuracy of information contained in such document as provided by such party; 

 

litigation and legal proceedings; 

 

ATRM’s and Digirad’s respective compliance with applicable legal requirements and possession of permits and compliance with provisions of the Sarbanes-Oxley Act of 2002 and the listing standards of the NASDAQ Global Market; and

 

the absence of undisclosed liabilities.

 

In addition to the foregoing, the Merger Agreement contains representations and warranties made by ATRM to Digirad relating to, among other things:

 

real and personal properties;

 

intellectual property; 

 

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the inapplicability of certain state takeover statutes; 

 

affiliate transactions;

 

filing of tax returns, payment of taxes and other tax matters; 

 

employee benefit plans;

 

certain material contracts;

 

environmental matters;

 

employment matters; and 

 

insurance.

 

Digirad also represented and warranted to ATRM that Digirad has or will have sufficient shares of authorized and unissued Digirad Preferred Stock and all funds necessary for the issuance and payment of the Merger Consideration and has funds available to it to satisfy its payment obligations under the Merger Agreement.

 

ATRM’s Conduct of Business Before Completion of the Merger 

 

From the date of the Merger Agreement until the effective time, ATRM has agreed, subject to certain exceptions, to conduct its business in the ordinary course. In addition, ATRM may not, among other things and subject to certain exceptions, without Digirad’s consent:

 

adjust, split, combine or reclassify its capital stock;

 

set any record or payment dates for the payment of any dividends or distributions on its capital stock or make, declare or pay any dividend or make any other distribution on any shares of its capital stock or any securities or obligations convertible into or exchangeable for any shares of its capital stock, except that any wholly owned subsidiary of ATRM may declare and pay dividends to its parent and other wholly owned subsidiaries of ATRM; 

 

directly or indirectly redeem, purchase or otherwise acquire, any shares of its capital stock or any securities or obligations convertible into or exchangeable for any shares of its capital stock (except pursuant to the exercise of stock options or vesting of restricted ATRM Common Stock outstanding as of the date of the Merger Agreement or permitted to be issued under the Merger Agreement or pursuant to the surrender of shares to ATRM or the withholding of shares by ATRM to cover tax withholding obligations; 

 

grant any stock appreciation rights or grant any person any right to acquire any shares of its capital stock except in the ordinary course of business in accordance with past practice, or issue, or commit to issue, sell, grant, dispose of, pledge or otherwise encumber, or authorize or propose the issuance, sale, grant, disposition, pledge or other encumbrance of, any additional shares of capital stock (except pursuant to the exercise of ATRM options outstanding as of the Merger Agreement or permitted to be issued as described below or pursuant to the surrender of shares to ATRM or the withholding of shares by ATRM to cover tax withholding obligations under ATRM stock plans), or grant any stock appreciation rights or grant any person any right to acquire any shares of its capital stock except in the ordinary course of business in accordance with past practice, or issue, or commit to issue, sell, grant, dispose of, pledge or otherwise encumber, or authorize or propose the issuance, sale, grant, disposition, pledge or other encumbrance of, any additional shares of capital stock (except pursuant to the exercise of stock options under the ATRM’s stock plans outstanding as of the date of the Merger Agreement in accordance with the terms of the awards or issuances, in each case in the ordinary course of business consistent with past practice), any securities convertible into or exercisable for, or any rights, warrants or options to acquire, any additional shares of capital stock, or any other securities in respect of, in lieu of, or in substitution for, any shares of its capital stock outstanding on the date of the Merger Agreement;

 

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sell, transfer, mortgage, encumber or otherwise dispose of any of its material assets or material properties to any person (other than a direct wholly owned subsidiary), by merger, consolidation, asset sale or other business combination (including formation of a joint venture) or cancel, release or assign any indebtedness to any such person or any claims held by any such person, in each case, except (i) in the ordinary course of business consistent with past practice, including sales of repossessed assets, (ii) dispositions of obsolete or worthless assets, (iii) sales of loans, receivables and other assets in the ordinary course of business consistent with past practice and (iv) sales of immaterial assets which involve the sale of assets outside the ordinary course of business with a purchase price of $10,000 or less in any single case or $50,000 in all such cases;

 

make any investment or acquisition, by purchase or other acquisition of stock or other equity interests, by merger, consolidation, asset purchase or other business combination, or by contributions to capital; or make any material purchases of any property or assets, in or from any other person other than a wholly owned subsidiary of ATRM, except (i) as expressly required by the terms of any contracts or agreements in force at the date of the Merger Agreement, (ii) as otherwise permitted, and (iii) other acquisitions in the ordinary course of business consistent with past practice and, in any case, involving consideration in an aggregate amount not in excess of $10,000;

 

enter into, renew, extend, amend or terminate any material contract or lease;

 

other than general pay increases, including in connection with promotions, made in the ordinary course of business consistent with past practice, for employees, directors or independent contractors generally or as provided by any agreement in effect on the date hereof, (i) increase, or commit to increase, the compensation or severance payable (including by granting or increasing the rate or terms of any salary, bonus, pension or other compensation pursuant to the terms of any employee benefit plan, policy, agreement or arrangement) to any of its employees, directors or independent contractors, (ii) pay any severance other than in the ordinary course of business consistent with past practice or (iii) except as may be required, or advisable, to comply with applicable law or contract, amend, establish or enter into any pension, retirement, profit-sharing, severance, retention or welfare benefit plan or agreement or incentive or employment, agreement with or for the benefit of any employee, director or independent contractor or accelerate the vesting of any stock options or other stock-based compensation;

 

amend its articles of incorporation, bylaws or similar governing documents or similar organizational documents of any of subsidiary of ATRM;

 

except in connection with actions permitted by the Merger Agreement’s non-solicitation covenant, take any action to exempt any person from, or make any acquisition of securities of ATRM by any person not subject to, any state takeover statute or similar statute or regulation that applies to ATRM with respect to an alternative proposal or otherwise, including the restrictions on “business combinations” set forth in Section 302A.671 of the MBCA, except for Digirad, Merger Sub, or any of their respective subsidiaries or affiliates, or the transactions contemplated by the Merger Agreement;

 

enter into any new material line of business outside of its existing business;

 

assign, transfer, lease, cancel, fail to renew or fail to extend any material permit;

 

incur any indebtedness for borrowed money, issue any debt securities or assume, guarantee or endorse or otherwise become responsible for the obligations of another person, or make any loans, advances of capital contributions to, or investments in, any other person, except in the ordinary course of business consistent with past practice;

 

make or change any material tax election or settle or compromise any material tax liability of ATRM or any of its subsidiaries;

 

make any material changes in its accounting methods or method of tax accounting, practices or policies, except as may be required under applicable law, rule, regulation or GAAP;

 

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effect or permit, with respect to ATRM and any of its subsidiaries, a “plant closing” or “mass layoff,” as such terms are defined under the Worker Adjustment and Retraining Notification Act of 1988, as amended;

 

enter into any material agreement, agreement in principle, letter of intent, memorandum of understanding, or similar contract with respect to any joint venture, strategic partnership, or alliance;

 

terminate or modify in any material respect, or fail to exercise renewal rights with respect to, any material insurance policy;

 

except as otherwise permitted, take any action that is intended or may reasonably be expected to result in any of the conditions to the Merger not being satisfied; or

 

agree or make any commitment to do any of the foregoing.

 

Digirad’s Forbearances Before Completion of the Merger 

 

From the date of the Merger Agreement until the effective time, Digirad has agreed not to take the following actions, among other things and subject to certain exceptions, without ATRM’s consent:

 

engage in any action or enter into any transaction or series of transactions, or permit any action to be taken or transaction or series of transactions to be entered into, that could reasonably be expected to delay the consummation of, or otherwise adversely affect, the Merger, including withdrawing or modifying, in a manner adverse to ATRM, the approval by the Digirad board of the Merger Agreement, the Merger or the issuance of Digirad Preferred Stock; or

 

agree or make any commitment to do any of the foregoing.

 

No Solicitation; Changes in Recommendations 

 

In the Merger Agreement, ATRM has agreed that the ATRM board of directors will recommend that ATRM’s shareholders approve the Merger Agreement, and that none of ATRM, the ATRM board of directors or any of its subsidiaries will, nor will any of ATRM, the ATRM board of directors or any of its subsidiaries authorize or permit any of its representatives to, directly or indirectly:

 

conduct, solicit, initiate or knowingly encourage or facilitate any inquiry with respect to, or the making, submission or announcement of, any proposal or offer that constitutes, or is reasonably expected to lead to, an alternative proposal, including through the furnishing of non-public information; 

 

furnish any non-public information relating to ATRM or any of its subsidiaries or afford access to the business, properties, assets, books, records or other non-public information of ATRM or any of its subsidiaries, relating to an alternative proposal or any inquiries or the making of any proposal that could lead to an alternative proposal; 

 

engage in, continue or otherwise participate in any discussions or negotiations regarding an alternative proposal;

 

grant any waiver, amendment or release under any standstill or confidentiality agreement or anti-takeover laws; 

 

resolve to or withdraw, modify or qualify in a manner adverse to Digirad the ATRM board of directors’ recommendation that ATRM’s shareholders approve the Merger Agreement (a “company recommendation change”); 

 

approve or recommend any alternative proposal; or 

 

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enter into any letter of intent, memorandum of understanding, agreement in principal, acquisition agreement, merger agreement, option agreement, joint venture agreement, partnership agreement or other similar agreement relating to an alternative proposal or authorize, approve or publicly recommend an alternative proposal or agreement relating to an alternative proposal.

 

However, at any time prior to obtaining ATRM shareholder approval, if ATRM has complied with its non-solicitation obligations above, ATRM may participate or engage in discussions or negotiations with, furnish non-public information, and afford access to the business, properties, assets, books, records or other non-public information and access to ATRM’s personnel, to any person that makes a bona fide alternative proposal, but only if:

 

ATRM makes available to Digirad any material non-public information concerning ATRM that is provided to any person given such access which was not previously made available to Digirad; 

 

prior to initiating any such action, the ATRM board of directors shall have determined in good faith (after consultation with its financial advisor and outside legal counsel) that such alternative proposal either constitutes a superior proposal or could reasonably be expected to result in a superior proposal; and 

 

prior to furnishing such information or access to, or entering into substantive discussions or negotiations with, such person, ATRM receives a confidentiality agreement that meets terms specified in the Merger Agreement, and ATRM notifies Digirad that it intends to furnish information or access to, or intends to enter into substantive discussions or negotiations with, such person.

 

In addition, at any time prior to obtaining ATRM shareholder approval, if ATRM is then in receipt of a bona fide written alternative proposal that the ATRM board of directors concludes in good faith (after consultation with its financial advisor and outside legal counsel) constitutes a superior proposal or in connection with a fiduciary change (as defined below), the ATRM board of directors may:

 

effect a company recommendation change; and/or 

 

adopt, approve, endorse or recommend, or publicly propose to adopt, approve, endorse or recommend to the shareholders of the ATRM, any superior proposal (as defined below) and/or authorize ATRM to terminate the Merger Agreement to enter into or consummate an alternative acquisition agreement with respect to such superior proposal (provided, however, that in the circumstances described in this bullet point, ATRM concurrently terminates the Merger Agreement, pays the termination fee if, when, and as required by the Merger Agreement and enters into a definitive alternative acquisition agreement with respect to such superior proposal).

 

In the circumstances set forth in the foregoing paragraph, the ATRM board of directors may effect a company recommendation change, if and only if:

 

the ATRM board of directors has determined in good faith (after consultation with its financial advisor and outside legal counsel) that the alternative proposal constitutes a superior proposal, or in the case of a fiduciary change that failure to effect a company recommendation change would reasonably be expected to constitute a breach of its fiduciary duties to the shareholders of ATRM; and

 

if the company recommendation change is in connection with a superior proposal, ATRM shall have validly terminated the Merger Agreement and paid the termination fee in accordance with the Merger Agreement, and prior to terminating the Merger Agreement, ATRM shall have given Digirad at least five business days’ notice (or shorter period specified in the Merger Agreement for material revisions to the superior proposal) thereof, attaching the alternative proposal agreement, and if, within such five business day period (or such shorter period) Digirad makes an offer that the ATRM board of directors determines in good faith is more favorable to the shareholders of ATRM, from a financial point of view, than such superior proposal, and agrees in writing to all adjustments in the terms and conditions of the Merger Agreement to reflect such offer, ATRM’s notice of termination with respect to such superior proposal shall be deemed to be rescinded and of no further force and effect and, if ATRM has entered into a superior proposal agreement, it must promptly terminate such agreement.

 

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The term “alternative proposal” means, any proposal, indication or offer, including any proposal, indication or offer from or to ATRM’s shareholders, made by any person or group (as defined under Rule 13(d) under the Exchange Act) other than Digirad or its subsidiaries and/or affiliates relating to, whether in a single transaction or series of related transactions, and whether directly or indirectly, any (i) transaction or series of transactions (including any merger, reorganization, share exchange, consolidation, business combination, joint venture, partnership, recapitalization, dissolution, liquidation or similar direct or indirect transaction) involving ATRM and/or any of its subsidiaries or the issuance or acquisition of shares of ATRM common stock or other equity securities of ATRM whose business or businesses constitute 20% (in number or voting power) or more of the assets, revenues or earnings of ATRM and its subsidiaries, taken as a whole, (ii) acquisition, license or purchase of assets of ATRM and/or its subsidiaries equal to 20% or more of the consolidated assets of ATRM and its subsidiaries or to which 20% or more of ATRM’s revenues or earnings on a consolidated basis are attributable or (iii) acquisition of beneficial ownership (as defined under Rule 13(d) under the Exchange Act) of equity interests representing a 20% or greater economic or voting interest in ATRM or tender offer (including a self-tender offer) or exchange offer that, if consummated, would result in any person or group (as defined under Rule 13(d) under the Exchange Act) beneficially owning equity interests representing a 20% (in number or voting power) or greater economic or voting interest in ATRM.

 

The term “superior proposal” means any bona fide alternative proposal (except that references to “20% or more” in the definition thereof will be deemed to be references to “50% or more”) made by any person that is on terms that the ATRM board of directors determines in good faith (after consultation with its financial advisor and outside legal counsel and after taking into account all legal, financial (including the financing terms thereof)), regulatory, timing and other aspects of the proposal are more favorable to ATRM’s shareholders from a financial point of view than the transactions contemplated by the Merger Agreement.

 

The term “fiduciary change” means the ATRM board of directors, prior to the approval of the Merger Agreement by the affirmative vote of two-thirds of the outstanding shares of ATRM Preferred Stock and a majority of the outstanding shares of ATRM Common Stock entitled to vote, determines it is obligated to make a company recommendation change because such a change is advisable to comply with its fiduciary duties to shareholders of the Company, including for circumstances as set forth in Frontier Oil Corp. v. Holly Corp., 2005 WL 1039027, (Del. Ch. Apr. 29, 2005).

 

The Merger Agreement provides that ATRM shall not take any of the actions described above unless ATRM has promptly notified Digirad if any alternative proposals are received by ATRM indicating, in connection with such notice, the material terms and conditions of any proposals or offers (including, if applicable, copies of any written requests, proposals or offers, including proposed agreements) and thereafter ATRM must keep Digirad reasonably informed, on a prompt basis, of the status and material terms of any such proposals or offers (including any material amendments thereto), including any change in ATRM’s intentions as previously notified. In addition, ATRM must promptly notify Digirad if any non-public information is requested from, or any discussions or negotiations are sought to be initiated or continued with, ATRM indicating, in connection with such notice, the status of any such discussions or negotiations, including any change in the ATRM’s intentions as previously notified.

 

The ATRM board of directors will not make a company recommendation change in connection with a fiduciary change unless it provides Digirad with written information describing such fiduciary change in reasonable detail as soon as reasonably practicable after become aware of it and keeps Digirad reasonably informed of developments with respect to such change. If a company recommendation change is made in connection with a fiduciary change ATRM must terminate the Merger Agreement and pay the termination fee.

 

Commercially Reasonable Efforts to Complete the Merger; Other Agreements 

 

Commercially Reasonable Efforts.    Digirad and ATRM have each agreed to use their commercially reasonable efforts (i) to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable law to consummate the transactions contemplated by the Merger Agreement and (ii) to promptly prepare, file and provide to third parties and governmental entities all applications, statements, notices, petitions, registrations, requests, declarations and filings which are necessary or advisable to consummate the transactions contemplated by the Merger Agreement (including the Merger), to obtain (and to cooperate with the other party to obtain) as promptly as practicable all material permits, consents, registrations, authorizations and exemptions of or from all third parties and governmental entities which are necessary or advisable to consummate the transactions contemplated by the Merger Agreement (including the Merger), and to comply with the terms and conditions of all such permits, consents, registrations, authorizations and exemptions of all such third parties and governmental entities.

 

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Proxy Statement/Prospectus; Registration Statement; Shareholders’ Meeting.    Digirad and ATRM have agreed to prepare and file with the SEC this proxy statement/prospectus and the registration statement of which this proxy statement/prospectus forms a part as soon as is reasonably practicable after the execution of the Merger Agreement. Digirad and ATRM have also agreed to use commercially reasonable efforts to have the registration statement declared effective. The Merger Agreement also provides that ATRM will hold a meeting of its shareholders following SEC clearance of the proxy statement/prospectus and will recommend the approval of the Merger Agreement by shareholders, and ATRM will use commercially reasonable efforts to obtain such approvals.

 

Access to Information 

 

Under the Merger Agreement, until the effective time, subject to reasonable prior notice, applicable law and the confidentiality agreement between ATRM and Digirad dated June 6, 2018, ATRM agreed to provide Digirad’s authorized representatives access to the properties, books, contracts, commitments and records and to the officers, employees, accountants, counsel and other representatives of ATRM and its subsidiaries.

 

Director and Officer Indemnification and Insurance 

 

The Merger Agreement provides that from and after the effective time, each of Digirad and ATRM, as the surviving company shall, jointly and severally:

 

indemnify and hold harmless the “indemnified parties” (meaning each individual who served as a director or officer of ATRM or its subsidiaries prior to the effective time of the Merger) to the fullest extent required, authorized or permitted by Minnesota law, in connection with any claim and any judgments, fines (including excise taxes), penalties and amounts paid in settlement resulting therefrom; and 

 

promptly pay on behalf of or, within 30 days after any request for advancement, advance to each of the indemnified parties, to the fullest extent required, authorized or permitted by Minnesota law, any expenses incurred in defending, serving as a witness with respect to or otherwise participating in any claim in advance of the final disposition of such claim, but in the case of advancement of expenses upon receipt of an undertaking, to the extent required by applicable law, from such indemnified party to repay such advanced expenses if it is determined by a court of competent jurisdiction in a final order that such indemnified party was not entitled to indemnification hereunder with respect to such expenses.

 

The Merger Agreement further provides that, as of the effective time of the Merger, ATRM shall or, if ATRM is unable to, Digirad shall cause the surviving company in the Merger to, obtain and fully pay the premium for the non-cancellable extension of the directors’ and officers’ liability coverage of ATRM’s existing directors’ and officers’ insurance policies and ATRM’s existing fiduciary liability insurance policies (collectively, “D&O Insurance”), in each case for a claims reporting or discovery period of at least six years from and after the effective time of the Merger with respect to any claim related to any period of time at or prior to the effective time of the Merger from an insurance carrier with the same or better credit rating as the Company’s current insurance carrier with respect to D&O Insurance with terms, conditions, retentions and limits of liability that are no less favorable than the coverage provided under ATRM’s existing policies with respect to any actual or alleged error, misstatement, misleading statement, act, omission, neglect, breach of duty or any matter claimed against a director or officer of ATRM by reason of him or her serving in such capacity that existed or occurred at or prior to the effective time of the Merger (including in connection with the Merger Agreement or the transactions or actions contemplated thereby), provided that the annual premium therefor shall not exceed $100,000. If such “tail policy” cannot be obtained, ATRM as the surviving company is required to maintain D&O Insurance in effect for a period of six years subject to an annual cap of $100,000 per year and the other terms and conditions of the Merger Agreement.

 

Employee Matters 

 

The Merger Agreement provides that, for a period of one year from and after the effective time of the Merger, Digirad will provide to those employees of ATRM and its subsidiaries who are employed immediately prior to the effective time of the Merger who remain employed by Digirad after the effective time of the Merger (the “continuing employees”) compensation and benefits arrangements that are no less favorable in the aggregate than the compensation and benefit arrangements that are provided to similarly situated employees of Digirad, provided that in no event shall such compensation and benefits be less favorable in the aggregate than such continuing employee’s current compensation and benefits arrangements. The Merger Agreement also provides that Digirad will give continuing employees who remain employed by Digirad after the effective time of the Merger, full credit for purposes of determining eligibility and vesting under any employee benefit plans or arrangements maintained by Digirad (other than any defined benefit or equity-based plans) for such continuing employee’s service with ATRM or its subsidiaries, waive all limitations as to preexisting conditions, exclusions and waiting periods with respect to participation and coverage requirements applicable to the continuing employees under any welfare benefit plan maintained by Digirad to the same extent waived by ATRM and its subsidiaries or otherwise not subject to limitation by ATRM and its subsidiaries, provide credit under any such welfare plan for any co-payments, deductible and out-of-pocket expenditures for the remainder of the coverage period during which any transfer of coverage occurs, and honor in accordance with their terms all employee benefit plans or arrangements maintained by ATRM immediately prior to the effective time of the Merger.

 

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Definition of Material Adverse Effect 

 

A “material adverse effect” is defined with respect to any entity as (i) a material adverse effect on the business, results of operations or financial condition of such entity and its subsidiaries, taken as a whole or (ii) a material adverse effect on the ability of such entity to consummate the transactions contemplated by the Merger Agreement on a timely basis, excluding any effect on the entity or its subsidiary relating to or arising in connection with:

 

any adverse change, effect, event or occurrence, state of facts or developments to the extent the public announcement or the pendency of the Merger Agreement or the transactions contemplated thereby or any actions required to be taken (or refrained from being taken) in compliance with the Merger Agreement or otherwise with the written consent or at the written request of the other party, including the impact thereof on the relationships of the entity or any of its subsidiaries with customers, suppliers, distributors, consultants, employees or independent contractors or other third parties with whom the entity or any of its subsidiaries has any relationship and including any litigation brought by any shareholder of ATRM in connection with the transactions contemplated the Merger Agreement; 

 

any failure by the entity to meet any projections or forecasts for any period ending (or for which revenues or earnings are released) on or after the date of the Merger Agreement; 

 

any change in federal, state, non-U.S. or local law, regulations, policies or procedures, or interpretations thereof, GAAP or regulatory accounting requirements applicable or potentially applicable to the industries in which the entity or its subsidiaries operate; 

 

changes generally affecting the industries in which the entity or its subsidiaries operate that are not specifically related to the entity and its subsidiaries and do not have a materially disproportionate adverse effect on such entity and its subsidiaries, taken as a whole; 

 

changes in economic conditions or political conditions, or in the financial, credit or securities markets in general (including changes in the prevailing interest rates, exchange rates or stock, bond or debt prices) in the United States, in any region thereof, or in any non-U.S. or global economy that do not have a materially disproportionate adverse effect on such entity and its subsidiaries, taken as a whole; or 

 

any attack on, or by, outbreak or escalation of hostilities or acts of terrorism (including cyberterrorism) involving, the United States, or any declaration of war by the United States Congress or any hurricane or other natural disaster.

 

Conditions of the Merger 

 

Mutual Conditions. The obligations of ATRM, Digirad and the Merger Sub to consummate the Merger are subject to the satisfaction or waiver of various conditions on or prior to the effective time, including the following:

 

obtaining approval from ATRM’s shareholders; 

 

the absence of any injunctions or other legal prohibitions preventing the consummation of the Merger; 

 

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the effectiveness of the registration statement on Form S-4 in which this proxy statement/prospectus is included as a prospectus and the lack of any stop order suspending the effectiveness of the Form S-4 or pending or threatened SEC proceedings to effect a stop order; 

 

no statute, rule or regulation shall have been enacted which prohibits the Merger; and

 

obtaining all required third-party consents.

 

Digirad Conditions.  Digirad’s and Merger Sub’s obligations to consummate the Merger are subject to the satisfaction or waiver of additional conditions, which include the following:

 

the accuracy (disregarding any materiality or material adverse effect qualifications contained in such representations and warranties) of such representations and warranties except for such inaccuracies as would not, individually or in the aggregate, have a material adverse effect on ATRM; 

 

ATRM’s performance in all material respects of its obligations under the Merger Agreement;

 

the delivery to Digirad of an officers’ certificate from ATRM confirming that the conditions described in the immediately preceding two bullets have been satisfied;

 

the completion by Digirad of a private placement of Digirad Preferred Stock for gross proceeds to Digirad of no less than $3,000,000 and the execution of an agreement with Mr. Eberwein granting Digirad the right to sell to Mr. Eberwein up to 100,000 share of Digirad Preferred Stock at $10 per share at Digirad’s option any time during the 12 months following the effective time of the Merger;

 

the entry into an agreement with Mr. Eberwein pursuant to which Digirad shall have the right to require Mr. Eberwein to acquire 100,000 shares of Digirad Preferred Stock at a price of $10.00 per share for aggregate proceeds of $1,000,000 at any time, in Digirad’s discretion, during the 12 calendar months following the effective time of the Merger;

 

ATRM shall be current in its filings of all periodic and other reports and documents required to be filed by it pursuant to the Exchange Act or Securities Act; and

 

the delivery by ATRM to Digirad of a certification that ATRM complies with the requirements of Treasury Regulations Sections 1.897-2(h) and 1.1445-2(c)(3) to the effect that the shares of ATRM’s securities are not United States real property interests within the meaning of Section 897 of the Code.

 

ATRM Conditions.  ATRM’s obligations to complete the Merger are subject to the satisfaction or waiver of additional conditions, which include the following:

 

the accuracy (disregarding all materiality and material adverse effect qualifications contained in such representations and warranties) of such representations and warranties except for such inaccuracies as would not, individually or in the aggregate, have a material adverse effect on Digirad; 

 

Digirad’s and Merger Sub’s performance in all material respects of their obligations under the Merger Agreement; and 

 

the delivery to ATRM of an officers’ certificate from Digirad confirming that the conditions described in the immediately preceding two bullets have been satisfied.

 

The Merger Agreement provides that certain of the conditions described above may be waived. Neither Digirad nor ATRM currently expects to waive any material condition to the completion of the Merger.

 

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Termination; Termination Fees; Expenses 

 

Termination.    The Merger Agreement may be terminated, and the Merger may be abandoned at any time prior to its completion:

 

by mutual written consent of ATRM and Digirad;

 

by either Digirad or ATRM, if:

 

there is a final and nonappealable legal restraint or prohibition in effect that prevents the completion of the Merger; 

 

the Merger has not been completed by November 30, 2019, provided that the right to terminate is not available to a party whose failure to fulfill any obligation under the Merger Agreement materially contributed to the failure to complete the Merger by such date; 

 

ATRM shareholder approval is not obtained at the ATRM special meeting or any adjournment or postponement thereof; or 

 

there is any state or federal law, rule or regulation adopted or issued that has the effect of prohibiting the Merger; 

 

by ATRM, if:

 

the requirements of a termination in the event of a superior proposal or a fiduciary change as described in the section “No Solicitation; Changes in Recommendations” have been fully satisfied and ATRM pays to Digirad the $725,000 termination fee described below; or 

 

ATRM is not in material breach of the Merger Agreement, and Digirad breaches any of its representations or warranties or fails to perform any covenant or obligation in the Merger Agreement in such a way as to cause the failure of the closing conditions relating thereto, and such failure cannot be cured within thirty business days after notice to Digirad; 

 

by Digirad, if: 

 

neither Digirad nor the Merger Sub are in material breach of its or their obligations under the Merger Agreement, and ATRM breaches any of its representations or warranties or fails to perform any covenant or obligation in the Merger Agreement in such a way as to cause the failure of the closing conditions relating thereto, and such failure cannot be cured within thirty business days after notice to ATRM; 

 

the ATRM board of directors fails to include in the proxy statement/prospectus the recommendation that the shareholders approve the Merger Agreement and the transactions contemplated thereby, including the Merger, or makes a company recommendation change; 

 

the ATRM board of directors approves or recommends an alternative proposal or superior proposal and/or permits ATRM to enter into an alternative acquisition agreement related to an alternative proposal or a superior proposal; 

 

ATRM fails to call a special meeting of its shareholders or to deliver the proxy statement/prospectus to its shareholders; or 

 

a tender offer or exchange offer for the outstanding shares of ATRM common stock is commenced and the ATRM board of directors recommends that the ATRM shareholders tender their shares in connection with such offer or within ten business days after the commencement of such tender or exchange offer, the ATRM board of directors fails to recommend rejection of such offer.

 

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If the Merger Agreement is terminated as described in “The Merger Agreement—Termination of the Merger Agreement” above, the Merger Agreement will be void, and there will be no liability or obligation of any party except that:

 

each party will remain liable for any willful and material breach of the Merger Agreement, and

 

certain provisions of the Merger Agreement, including the provisions relating to the allocation of fees and expenses (including, if applicable, the termination fees described below) and the confidentiality agreement dated June 6, 2018 between ATRM and Digirad will survive termination.

 

Termination Fees.    ATRM has agreed to pay Digirad a termination fee of $725,000 and an amount up to $225,000 of Digirad’s reasonable, documented, out-of-pocket expenses incurred in connection with the Merger Agreement if the Merger Agreement is terminated:

 

by Digirad or ATRM if the Merger has not been consummated by November 30, 2019 because of a breach of the covenant or obligation described in “No Solicitation; Changes in Recommendations” above and prior to such termination, an alternative proposal (substituting 50% for the 20% threshold in the definition thereof, which is referred to as a “qualifying transaction”) was publicly announced or otherwise communicated to ATRM or the ATRM board of directors and is not withdrawn or otherwise abandoned and such qualifying transaction is consummated within 12 months following the termination of the Merger Agreement; 

 

by Digirad or ATRM if the ATRM shareholder approval has not been obtained because of a breach of the covenant or obligation described in “No Solicitation; Changes in Recommendations” above and prior to the ATRM special meeting a qualifying transaction was publicly announced or otherwise communicated to ATRM or the ATRM board of directors and is not withdrawn or otherwise abandoned and such qualifying transaction is consummated within 12 months following the termination of the Merger Agreement; 

 

by Digirad if ATRM has breached the covenant or obligation described in “No Solicitation; Changes in Recommendations” above and prior to such termination an alternative proposal was publicly announced or otherwise communicated to ATRM or the ATRM board of directors and is not withdrawn or otherwise abandoned and such alternative offer is consummated within 12 months following the termination of the Merger Agreement; 

 

by ATRM, in connection with accepting a superior proposal or in connection with a fiduciary change; or 

 

by Digirad, if (i) the ATRM board of directors fails to include in the proxy statement/prospectus the recommendation that the shareholders approve the Merger Agreement and the transactions contemplated thereby, including the Merger, or makes a company recommendation change, (ii) the ATRM board of directors approves or recommends an alternative proposal or superior proposal and/or permits ATRM to enter into an alternative acquisition agreement related to an alternative proposal or a superior proposal, (iii) ATRM fails to call a special meeting of its shareholders or to deliver the proxy statement/prospectus to its shareholders in material breach of specified provisions of the Merger Agreement, or (iv) a tender offer or exchange offer for the outstanding shares of ATRM common stock is commenced and the ATRM board of directors recommends that the ATRM shareholders tender their shares in connection with such offer or within ten business days after the commencement of such tender or exchange offer, the ATRM board of directors fails to recommend rejection of such offer.

 

Expenses.    If ATRM fails promptly to pay any termination fee due to Digirad, ATRM will also be obligated to pay the costs and expenses (including reasonable legal fees and expenses) incurred by Digirad in connection with any legal action take to collect payment, together with interest on the amount of any unpaid fee or obligation from the date such fee was required to be paid. Except as described above, all costs and expenses incurred in connection with the Merger Agreement will be paid by the party incurring the cost or expense.

 

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Specific Performance; Remedies 

 

The parties to the Merger Agreement agreed that irreparable damage would occur if any provision of the Merger Agreement were not performed in accordance with its terms and that the parties will be entitled to an injunction or injunctions to prevent breaches of the Merger Agreement or to enforce specifically the performance of its terms and provisions in addition to any other remedy to which they are entitled at law or in equity.

 

Amendment; Extension and Waiver 

 

Any provision of the Merger Agreement may be amended or waived prior to the effective time if such amendment or waiver is in writing and is signed, in the case of an amendment, by each party to the Merger Agreement or, in the case of a waiver, by each party against whom the waiver is to be effective. After the ATRM shareholder approval has been obtained, however, there will be no amendment or waiver that would require the further approval of ATRM shareholders under Minnesota law without such approval having been first obtained.

 

Governing Law; Venue 

 

The Merger Agreement is governed by and will be construed in accordance with the laws of the State of Delaware. The parties to the Merger Agreement have submitted to exclusive jurisdiction and venue of the courts of the State of Delaware or of the United States of America located in Delaware.

 

95

 

 

FINANCING

 

General

 

Digirad intends to finance the repayment of existing indebtedness of ATRM and pay its fees and expenses incurred in connection with the transactions contemplated by the Merger Agreement with Digirad debt, cash on hand and the proceeds of the Private Placement described below.

 

Private Placement

 

Before the completion of the Merger, Digirad expects to conduct a private placement of Digirad Preferred Stock for gross proceeds to Digirad of no less than $3,000,000. Digirad will use commercially reasonable efforts to complete the Private Placement. The net proceeds of the Private Placement, after the payment of any expenses incurred in connection with the negotiation and consummation of the Private Placement, will be applied toward the costs and expenses of the Merger, including the repayment of ATRM debt. The completion of the Private Placement is a condition to Digirad’s completion of the transactions contemplated by the Merger Agreement. In the event Digirad is unable to complete the Private Placement on terms acceptable to it, Digirad is not required to complete the Merger, unless the Private Placement condition is waived by Digirad.

 

96

 

 

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED COMBINED FINANCIAL STATEMENTS

 

The following unaudited pro forma condensed consolidated combined financial statements (“pro forma financial statements”) have been prepared to reflect the Merger, based on the acquisition method of accounting, with Digirad treated as the acquirer. The pro forma financial statements utilize the historical consolidated financial statements of Digirad and ATRM, which are included in this proxy statement/prospectus. The historical consolidated financial statements have been adjusted to give effect to pro forma events that are directly attributable to the Merger and factually supportable and, in the case of the statement of income, which are expected to have a continuing impact. The unaudited pro forma condensed combined statements of income, which have been prepared for the three months ended March 31, 2019 and the year ended December 31, 2018, give effect to the Merger as if it had occurred on January 1, 2018. The unaudited pro forma condensed combined balance sheet has been prepared as of March 31, 2019 and gives effect to the Merger as if it had occurred on that date.

 

As of the date of this proxy statement/prospectus, Digirad has not finalized the detailed valuation studies necessary to arrive at the required fair market value of the ATRM assets to be acquired and the liabilities to be assumed and the related allocations of the purchase price. As indicated in Note 1 to the pro forma financial statements, Digirad has made certain pro forma adjustments to the historical book values of the assets and liabilities of ATRM to reflect certain preliminary estimates of the fair value of the net assets acquired, with the excess of the estimated purchase price over the estimated fair values of ATRM’s acquired assets and assumed liabilities recorded as goodwill. Actual results are expected to differ from these preliminary estimates once Digirad has determined the final purchase price for ATRM and completed the valuation studies necessary to finalize the required purchase price allocations. There can be no assurances that such finalization of the valuation studies will not result in material changes. Digirad performed a preliminary assessment of accounting policies and financial statement presentation which has identified certain adjustments necessary to conform information in ATRM’s historical financial statements to Digirad’s accounting policies and presentation. The review of the accounting policies and presentation is not yet complete and additional policy differences may be identified when completed.

 

These pro forma financial statements should be read in conjunction with the historical consolidated financial statements and accompanying notes of Digirad and ATRM, included in this proxy statement/prospectus.

 

The pro forma financial statements are not intended to represent or be indicative of the consolidated results of operations or financial condition of the combined company that would have been reported had the Merger been completed as of the dates presented and should not be taken as representative of the future consolidated results of operations or financial condition of the combined company.

 

The pro forma financial statements do not include the realization of future cost savings or synergies or restructuring charges that are expected to result from Digirad’s acquisition of ATRM.

 

All share and per share amounts pertaining to Digirad or the pro forma combined companies in the pro forma financial statements below reflect the Reverse Stock Split.

 

97

 

 

DIGIRAD CORPORATION AND SUBSIDIARIES 

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME 

FOR THE THREE MONTHS ENDED MARCH 31, 2019 

(amounts in thousands, except per share amounts) 

                                     
      Digirad
Corporation
    ATRM
Holdings, Inc.
    Pro Forma
Adjustments
    Note 4   Pro Forma
Combined
 
Operating revenues   $ 23,912     $ 7,335     $         $ 31,247  
Cost of revenues     19,931       6,354                 26,285  
Gross Profit     3,981       981                 4,962  
Total operating expenses     5,116       1,496       301     (b)     6,913  
Loss from operations     (1,135 )   (515 )     (301 )         (1,951 )
Other expense, net     (198 )           229     (a)     31  
Interest expense, net     (181 )     (263 )               (444 )
Loss on extinguishment of debt     (151 )                     (151 )
Total other expense     (530 )     (263 )     229           (564 )
Loss before income taxes     (1,665 )     (778 )     (72 )         (2,515 )
Income tax expense     8       (3 )               5  
Loss from continuing operations     (1,657 )     (781 )     (72 )         (2,510 )
Less: accrued preferred stock dividend           (448 )               (448 )
Net loss attributable to common stockholders   $ (1,657 )   $ (1,229 )   $ (72 )       $ (2,958 )
Net loss per common share attributable to common stockholders—basic and diluted   $ (0.82 )                       $ (1.46 )
Weighted average common shares outstanding—basic and diluted     2,028                           2,028  

 

See accompanying notes to the unaudited pro forma condensed combined financial statements.

 

98

 

 

DIGIRAD CORPORATION AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME 

FOR THE YEAR ENDED DECEMBER 31, 2018

 

(amounts in thousands, except per share amounts)

  

   Digirad
Corporation
   ATRM
Holdings, Inc.
   Pro Forma
Adjustments
   Note 4   Pro Forma
Combined
 
Operating revenues  $104,180   $34,477   $       $ 138,657  
Cost of revenues   85,909    31,501             117,410  
Gross Profit   18,271    2,976             21,247  
Total operating expenses   22,816    5,501    (20)  (a)     28,297  
Operating (loss)   (4,545)   (2,525)   20         (7,050 )
Other expense, net   (61)                (61 )
Interest expense, net   (751)   (997)            (1,748 )
Loss on extinguishment of debt   (43)                (43 )
Change in FV of contingent earn-outs, net       6             6  
Total other expense   (855)   (991)            (1,846 )
Loss before income taxes   (5,400)   (3,516)   20         (8,896 )
Income tax expense   1,561                 1,561  
Loss from continuing operations   (3,839)   (3,516)   20         (7,335 )
Less: accrued preferred stock dividend       (1,716)            (1,716 )
Net loss attributable to common stockholders  $(3,839)  $(5,232)  $20       $ (9,051 )
Net loss per common share attributable to common stockholders—basic and diluted  $(1.90)                $ (4.49 )
Weighted average common shares outstanding—basic and diluted   2,016                   2,016  

 

See accompanying notes to the unaudited pro forma condensed combined financial statements.


99

 

 

DIGIRAD CORPORATION AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

AS OF MARCH 31, 2019

 

(amounts in thousands)

 

    Digirad
Corporation
    ATRM
Holdings, Inc.
    Pro Forma
Adjustments
    Note 5     Pro Forma
Combined
 
ASSETS                                      
Current assets:                                      
Cash and cash equivalents   $ 797     $ 87     $           $ 884  
Equity securities     17                         17  
Accounts receivable, net     13,361       2,654                   16,015  
Inventories, net     5,483       1,569                   7,052  
Restricted cash     168       556                   724  
Other current assets     1,522       250                   1,772  
Total current assets     21,348     5,116                   26,464  
Property, plant and equipment, net     20,575       4,079                   24,654  
Operating lease right-of-use assets     3,681       604                   4,285  
Intangible assets, net     4,944       1,195       16,745     (a)       22,884  
Goodwill     1,745             10,325     (b)       12,070  
Restricted cash     101                         101  
Deferred tax assets     16                         16  
Other assets     2,183             (275 )   (c)       1,908  
Total assets    $ 54,593     $ 10,994     $ 26,795           $ 92,382  
                                       
LIABILITIES AND STOCKHOLDERS’ EQUITY                                      
Current liabilities:                                      
Accounts payable   $ 4,808     $ 5,340                 $ 10,148  
Notes payable           6,311       (275 )   (c)       6,036  
Current portion long-term debt           3,069                   3,069  
Customer deposits           166                   166  
Accrued compensation     3,246       611                   3,857  
Accrued warranty     230                         230  
    Deferred revenue     1,414                         1,414  
Operating lease liabilities     1,251       221                   1,472  
    Other current liabilities    2,474     2,696     1,159     (d)     6,329  
    Dividend Payable           403     (e)     403  
Total current liabilities     13,423       18,414       1,287             33,124  
Long-term debt     12,517       2,128                   14,645  
Deferred tax liabilities     121       10                   131  
Operating lease liabilities, net of current portion     2,564       385                   2,949  
Other liabilities     1,715                         1,715  
Total liabilities     30,340       20,937       1,287             52,564  
                                       
Preferred stock           1       (1 )   (f)       15,724  
                      16,127     (g)          
                      (403 )   (e)          
Common stock     2       2       (2 )   (f)       2  
Treasury stock     (5,728 )                         (5,728 )
Additional paid-in capital     145,516       82,203       (82,203 )   (f)       145,516  
Noncontrolling interest           1,000                   1,000  
Accumulated deficit     (115,537 )     (93,149 )     93,149   (f)       (116,696 )
                      (1,159 )   (d)          
Total stockholders’ equity     24,253       (9,943 )     25,508             39,818  
Total liabilities and stockholders’ equity   $ 54,593     $ 10,994     $ 26,795           $ 92,382  

 

See accompanying notes to the unaudited pro forma condensed combined financial statements.

 

100

 

 

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS 

 

1. Description of the Transaction

 

On July 3, 2019, Digirad, Merger Sub, and ATRM entered into the Merger Agreement. The Merger Agreement provides for, among other things, a business combination whereby Merger Sub will merge with and into ATRM, with ATRM as the surviving entity (the Merger). As a result of the Merger, the separate corporate existence of Merger Sub will cease, and ATRM will continue as the surviving corporation and a wholly-owned subsidiary of Digirad.

 

At the effective time of the Merger, unless a holder of ATRM Common Stock previously exercised its dissenters’ rights and satisfied the procedures relating to dissenters’ rights under Minnesota law, a holder of ATRM Common Stock will be entitled to receive 0.03 shares of Digirad Preferred Stock for each share of ATRM Common Stock owned at the effective time of the Merger, and holders of ATRM Preferred Stock will be entitled to receive 2.5 shares of Digirad Preferred Stock for each share of ATRM Preferred Stock owned at the effective time of the Merger. No fractional shares of Digirad Preferred Stock will be issued. Each ATRM shareholder will be entitled to receive, in lieu of any fractional share of Digirad Preferred Stock, one whole share of Digirad Preferred Stock.

 

The Merger is subject to various customary closing conditions, including, but not limited to, (i) approval by ATRM’s shareholders, (ii)  the absence of any order, injunction, statute, rule, regulation or decree prohibiting, precluding, restraining, enjoining or making illegal the consummation of the Merger, (iii) the material accuracy of the representations and warranties of each party, (iv) performance, in all material respects, of all obligations and compliance with, in all material respects, agreements and covenants to be performed or complied with by each party and (v) declaration of effectiveness of the Registration Statement on Form S-4 to be filed by Digirad.

 

Digirad and ATRM have made customary representations, warranties and covenants in the Merger Agreement, including ATRM agreeing not to solicit alternative transactions or, subject to certain exceptions, enter into discussions concerning, or provide confidential information in connection with, an alternative transaction. The Merger Agreement contains certain termination rights for both Digirad and ATRM, and further provides that, upon termination of the Merger Agreement under certain circumstances, ATRM may be obligated to pay Digirad a termination fee of $725,000 and up to $225,000 of Digirad’s transaction expenses.

 

Digirad will account for its acquisition of ATRM using the acquisition method of accounting. The pro forma adjustments reflect preliminary estimates of the fair value of the consideration transferred, the assets acquired and the liabilities assumed, which are expected to change upon finalization of appraisals and other valuation studies. The pro forma adjustments will be based on the fair value of the consideration transferred and the assets and liabilities that exist as of the effective time of the Merger. The final adjustments could be materially different from the pro forma adjustments presented herein.

 

The unaudited pro forma condensed combined statement of income includes certain accounting adjustments related to the Merger that are expected to have a continuing impact on the combined results, such as increased depreciation and amortization on the acquired tangible and intangible assets, increased interest expense on the debt expected to be incurred to complete the Merger, amortization of deferred financing fees incurred in connection with the new borrowings and the tax impact of these pro forma adjustments.

 

101

 

 

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS (Continued)

 

1. Description of the Transaction (Continued)

 

The unaudited pro forma condensed combined statements of income do not reflect certain adjustments that are expected to result from the Merger that may be significant, such as costs that may be incurred by Digirad for integration and restructuring efforts, as well as payments under a Change in Control Agreement with ATRM’s President and Chief Executive Officer, because they are considered to be of a non-recurring nature. The estimated payments under the Change in Control Agreement will range from approximately $0 to $0.5 million. No adjustment has been included in the pro forma financial statements for these payments.

 

The summary pro forma financial information does not include the realization of future cost savings or synergies or restructuring charges that are expected to result from the Merger. The transaction is expected to generate annual operating synergies of approximately $0.4 million, which are expected to be achieved on a run-rate basis by the end of the second year after close. However, no assurance can be given with respect to the ultimate level of such synergies or costs or the timing of their realization.

 

2. Estimated Purchase Price

 

The following is the calculation of the preliminary estimate of the purchase price for the acquisition of:

 

Number of shares of ATRM Common Stock and equity awards outstanding at the effective time of the Merger (a)    2,466,219 
ATRM Common Stock exchange ratio    0.03 
Digirad Preferred Stock issued for ATRM Common Stock    73,987 
Digirad Preferred Stock issued for fractional shares of ATRM Common Stock (b)    1,033 
Total Digirad Preferred Stock issued for ATRM Common Stock    75,020 
Number of shares of ATRM Preferred Stock outstanding at the effective time of the Merger    615,054 
ATRM Preferred Stock exchange ratio    2.50 
Total Digirad Preferred Stock issued for ATRM Preferred Stock    1,537,635 
Number of shares of Digirad Preferred Stock to be issued to ATRM shareholders    1,612,655 
Digirad Preferred Stock price on July 3, 2019   $10.00 
Estimated stock value to be issued to ATRM shareholders (c)   $16,126,550 
Assumption of ATRM debt by Digirad   $11,508,000 
Estimated purchase price   $27,634,550 

 

 
(a)Based on the number of shares of ATRM Common Stock and equity awards outstanding as of July 16, 2019.
(b)Reflects the maximum number of shares of Digirad Preferred Stock which may be issued in lieu of fractional shares to holders of ATRM Common Stock based on the total number of beneficial owners of ATRM Common Stock as of July 11, 2019.
(c)Represents the product of the estimated number of shares of Digirad Preferred Stock to be issued and the $10.00 stated value per share of Digirad Preferred Stock at the effective time of the Merger. Pursuant to the terms of the Merger Agreement, the final purchase price will be based on the number of shares of ATRM Common Stock, ATRM equity awards and ATRM Preferred Stock outstanding and the price of Digirad Preferred Stock as of the closing date of the Merger. Therefore, the estimated consideration expected to be transferred as reflected in these unaudited pro forma condensed combined financial statements does not purport to represent what the actual consideration transferred will be when the Merger is completed.

 

102

 

 

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS (Continued)

 

3. Estimated Application of the Acquisition Method

 

The estimated fair value of ATRM’s tangible and intangible assets acquired and liabilities assumed on a preliminary basis as of March 31, 2019 are as follows (in thousands):

 

Cash and cash equivalents  $87 
Other assets   5,029 
Property and equipment, net   4,079 
Operating Lease Right-of-use assets, net   604 
Intangible assets   18,320 
Goodwill   8,945 
Accounts payable and other accrued liabilities   (9,429)
Debt and notes payable   (11,508)
Net assets acquired  $16,127 

 

For purposes of preparing the pro forma financial statements, the estimated fair value of the assets acquired and the liabilities assumed are based on preliminary estimates. The final amount recorded will be based on the estimated fair values at the completion of the Merger and could vary significantly from the pro forma amounts due to various factors, including but not limited to, changes in the share price of the Digirad Preferred Stock, the composition of ATRM’s assets, liabilities, outstanding equity ownership shares and changes in fair value assumptions prior to the completion of the Merger. Accordingly, the preliminary estimated fair values of the purchase price and the assets and liabilities recorded are subject to change pending additional information that may be developed by Digirad and ATRM. Any changes to the initial estimates of the fair value of the acquired assets and assumed liabilities will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill.

 

103

 

 

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS (Continued)

 

4. Pro Forma Adjustments—Statements of Income

 

The following pro forma adjustments included in the unaudited pro forma condensed combined statements of income for the three months ended March 31, 2019 and the year ended December 31, 2018 give effect to the Merger as if it had occurred on January 1, 2018:

 

(a)Transaction Costs — Transaction costs incurred in connection with the Merger are not expected to continue subsequent to the Merger.

 

(b)Intangible Asset Amortization — To reflect amortization expense for the fair value of the acquired intangible assets.

 

(c)Earnings Per Share — ATRM shareholders will exchange all shares of ATRM Common Stock held for shares of Digirad Preferred Stock. No ATRM Common Stock will be outstanding following to the Merger.

 

104

 

 

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS (Continued)

 

5. Pro Forma Adjustments—Balance Sheet

 

The following are the pro forma adjustments included in the unaudited pro forma condensed combined balance sheet as of March 31, 2019 and give effect to the Merger as if it had occurred on that date:

 

Accounting Policies and Presentation

 

In connection with the Merger, a preliminary review of the accounting policies and presentation of the financial statements of ATRM has been performed to conform to those of Digirad. Based on this review, certain amounts included in ATRM’s historical balance sheet have been reclassified to conform to the Digirad accounting policies and presentation. The pro forma adjustments reflect the reclassification of ATRM inventory to other current assets, materials and supplies from deferred debt finance costs, net and other assets to property, plant and equipment and the reclassification of accrued compensation from accrued expense.

 

The final results of the complete review of accounting policies and presentation may result in additional differences. There can be no assurances that such finalization will not result in material differences.

 

105

 

 

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS (Continued)

 

(a)             Intangible Assets – To reflect the valuation of intangible assets in conjunction with the Merger.

 

(b)             Goodwill - Goodwill is to be recognized as a result of the Merger.

 

(c)              Promissory Note - This is to reflect the elimination of the existing $0.3 million promissory note between ATRM and Digirad.

 

(d)             Other current liabilities - This is to reflect accrued liabilities that are directly attributable to the closing of the Merger, including estimated transaction costs to complete the Merger of approximately $0.2 million for ATRM and $1.0 million for Digirad. These transaction costs principally consist of financial advisor fees, legal expenses, auditor expenses, and printer fees.

 

(e)              Dividend payable - This is to reflect the dividends payable upon the issuance of the Digirad Preferred Stock.

 

(f)              Stockholders’ Equity – This is to reflect the elimination of ATRM’s historical shareholders’ equity.

 

(g)             Preferred Stock – This is to reflect the conversion of all outstanding ATRM Common Stock and ATRM Preferred Stock into shares of Digirad Preferred Stock.

 

 

106

 

 

BUSINESS OF DIGIRAD

 

Overview

 

On September 10, 2018, Digirad announced that its board of directors approved the conversion of Digirad into a diversified holding company.

 

Historically, Digirad has delivered 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 has grown both organically and through acquisitions over the last three years. Prior to the year ended December 31, 2016, Digirad was organized as two reportable segments: Diagnostic Services and Diagnostic Imaging. With the acquisition of DMS Health on January 1, 2016, Digirad added two additional reportable segments: Mobile Healthcare and Medical Device Sales and Services. In February of 2018, Digirad completed the sale of its customer contracts relating to its MDSS post-warranty service business to Philips North America LLC. On October 31, 2018, Digirad sold its Telerhythmics business to G Medical Innovations USA, Inc., for $1.95 million in cash. As of December 31, 2018, Digirad’s business was organized into three reportable segments: Diagnostic Services, Mobile Healthcare, and Diagnostic Imaging.

 

Digirad’s aim 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 financially disciplined approach for acquisitions.

 

On December 14, 2018, Digirad and ATRM, entered into a joint venture and formed Star Procurement, LLC, 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 Builders, Inc., a wholly-owned subsidiary of ATRM 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.

 

As part of the HoldCo Conversion, Digirad formed a real estate subsidiary named Star Real Estate Holdings USA, Inc. Star Real Estate Holdings USA (SRE) will hold any significant real estate assets Digirad acquires. 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 an initial transaction to create Digirad’s real estate division under SRE and launch that aspect of the HoldCo Conversion, in April 2019, Digirad purchased three plants in Maine that manufacture modular buildings (two of which were purchased from KBS) and leased those three properties to KBS.

 

Digirad’s Competitive Strengths

 

Digirad believes that its competitive strengths are its streamlined and cost-efficient approach to providing healthcare solutions to its customers at the point of need as well as providing an array of industry-leading, technologically-relevant healthcare imaging and monitoring services:

 

Imaging Services and Products

 

Broad Portfolio of Imaging Services. Approximately 88% of Digirad’s revenues are derived from diagnostic imaging services to its customers. Digirad has developed and continues to ref