SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
|☒||QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 2020
|☐||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
FOR THE TRANSITION PERIOD FROM TO
Commission file number: 001-35947
(Exact name of registrant as specified in its charter)
|(State or Other Jurisdiction of Incorporation or Organization)|| ||(I.R.S. Employer Identification No.)|
|1048 Industrial Court,|| Suwanee||GA|| ||30024|
|(Address of Principal Executive Offices)|| ||(Zip Code)|
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
|Title of each class||Trading Symbol(s)||Name of each exchange on which registered|
|Common Stock, par value $0.0001 per share||DRAD||NASDAQ Global Market|
|Series A Cumulative Perpetual Preferred Stock, par value $0.0001 per share||DRADP||NASDAQ Global Market|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|Large accelerated filer||o||Accelerated filer||o|
|Non-accelerated filer||☒||Smaller reporting company||☒|
|Emerging growth company||☐|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes No ☒
As of October 30, 2020, the registrant had 4,759,701 shares of Common Stock ($0.0001 par value) outstanding.
TABLE OF CONTENTS
Important Information Regarding Forward-Looking Statements
Portions of this Quarterly Report on Form 10-Q (including information incorporated by reference) include “forward-looking statements” based on our current beliefs, expectations, and projections regarding our business strategies, market potential, future financial performance, industry, and other matters. This includes, in particular, “Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q, as well as other portions of this Quarterly Report on Form 10-Q. The words “believe,” “expect,” “anticipate,” “project,” “could,” “would,” and similar expressions, among others, generally identify “forward-looking statements,” which speak only as of the date the statements were made. The matters discussed in these forward-looking statements are subject to risks, uncertainties, and other factors that could cause our actual results to differ materially from those projected, anticipated, or implied in the forward-looking statements. The most significant of these risks, uncertainties, and other factors are described in “Item 1A — Risk Factors” of this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the U.S. Securities and Exchange Commission on March 9, 2020. Except to the limited extent required by applicable law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
PART I. FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except for per share amounts)
|Three Months Ended |
|Nine Months Ended|
|Healthcare ||$||21,794 ||$||25,596 ||$||62,441 ||$||75,306 |
|Building and Construction||8,542 ||2,729 ||19,061 ||2,729 |
|Real Estate and Investments||17 ||8 ||50 ||8 |
|Total revenues||30,353 ||28,333 ||81,552 ||78,043 |
|Cost of revenues:|
|Healthcare ||18,164 ||20,819 ||51,702 ||61,367 |
|Building and Construction||7,289 ||2,252 ||16,352 ||2,252 |
|Real Estate and Investments||65 ||66 ||196 ||243 |
|Total cost of revenues||25,518 ||23,137 ||68,250 ||63,862 |
|Gross profit||4,835 ||5,196 ||13,302 ||14,181 |
|Marketing, sales and general and administrative expenses||5,566 ||4,948 ||16,545 ||14,648 |
|Amortization of intangible assets||802 ||399 ||2,420 ||965 |
|Merger and finance costs||— ||1,058 ||— ||2,058 |
|Total operating expenses||6,368 ||6,405 ||18,965 ||17,671 |
|Loss from operations||(1,533)||(1,209)||(5,663)||(3,490)|
|Other income (expense):|
|Other income (expense), net||135 ||3 ||967 ||(200)|
|Interest expense, net||(356)||(292)||(1,214)||(727)|
|Loss on sale of building||— ||(4)||— ||(236)|
|Loss on extinguishment of debt||— ||— ||— ||(151)|
|Total other expense||(221)||(293)||(247)||(1,314)|
|Loss before income taxes||(1,754)||(1,502)||(5,910)||(4,804)|
|Income tax (expense) benefit ||(6)||(2)||(90)||168 |
|Net loss from continuing operations||(1,760)||(1,504)||(6,000)||(4,636)|
|Net income from discontinued operations||— ||— ||— ||266 |
|Deemed dividend on Series A redeemable preferred stock||(474)||(106)||(1,442)||(106)|
|Net loss attributable to common shareholders||$||(2,234)||$||(1,610)||$||(7,442)||$||(4,476)|
|Net loss per share, attributable to common shareholders — basic and diluted:||$||(0.47)||$||(0.79)||$||(2.27)||$||(2.20)|
|Other comprehensive (loss) income:|
|Reclassification of tax provision impact ||— ||— ||— ||22 |
|Total other comprehensive income||— ||— ||— ||22 |
See accompanying notes to the unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
|Cash and cash equivalents||$||4,267 ||$||1,821 |
|Restricted cash||169 ||240 |
|Equity securities||31 ||26 |
|Accounts receivable, net||15,751 ||18,571 |
|Inventories, net||9,000 ||7,097 |
|Other current assets||2,360 ||1,794 |
|Total current assets||31,578 ||29,549 |
|Property and equipment, net||18,129 ||22,138 |
|Operating lease right-of-use assets, net||4,631 ||4,827 |
|Intangible assets, net||20,484 ||22,903 |
|Goodwill||9,978 ||9,978 |
|Other assets||1,155 ||1,165 |
|Total assets||$||85,955 ||$||90,560 |
|Liabilities, Mezzanine Equity and Stockholders’ Equity|
|Accounts payable||$||7,025 ||$||8,932 |
|Accrued compensation||3,735 ||4,579 |
|Accrued warranty||237 ||421 |
|Deferred revenue||2,293 ||1,786 |
|Short-term debt and current portion of long-term debt||4,260 ||4,036 |
|Payable to related parties||2,155 ||1,920 |
|Operating lease liabilities||1,839 ||1,866 |
|Other current liabilities||3,355 ||4,638 |
|Total current liabilities||24,899 ||28,178 |
|Long-term debt, net of current portion||16,896 ||17,038 |
|Deferred tax liabilities||90 ||23 |
|Operating lease liabilities, net of current portion||2,881 ||3,073 |
|Other liabilities||1,031 ||1,551 |
|Total liabilities||45,797 ||49,863 |
|Commitments and contingencies (Note 9)|
|Preferred stock, $0.0001 par value: 10,000,000 shares authorized: 10% Series A Cumulative Redeemable preferred stock, 8,000,000 shares liquidation preference ($10.00 per share), 1,915,637 shares issued or outstanding at September 30, 2020 and December 31, 2019, respectively||21,041 ||19,602 |
|Common stock, $0.0001 par value: 30,000,000 shares authorized; 4,750,951 and 2,050,659 shares issued and outstanding (net of treasury shares) at September 30, 2020 and December 31, 2019, respectively||— ||— |
|Treasury stock, at cost; 258,849 shares at September 30, 2020 and December 31, 2019, respectively||(5,728)||(5,728)|
|Additional paid-in capital||149,374 ||145,352 |
|Total stockholders’ equity||19,117 ||21,095 |
|Total liabilities, mezzanine equity and stockholders’ equity||$||85,955 ||$||90,560 |
See accompanying notes to the unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|Nine Months Ended September 30,|
|Adjustments to reconcile net income to net cash provided by operating activities:|
|Depreciation||4,735 ||4,670 |
|Amortization of intangible assets||2,420 ||965 |
|Provision for bad debt, net||(29)||113 |
|Stock-based compensation||382 ||416 |
|Gain on disposal of discontinued operations||— ||(350)|
|Amortization of loan issuance costs||248 ||48 |
|Debt issuance costs write-off||— ||151 |
|Financing costs write-off||— ||273 |
|Loss (Gain) on sale of assets ||142 ||(56)|
|Deferred income taxes, net||68 ||(75)|
|Changes in operating assets and liabilities:|
|Accounts receivable||2,850 ||(1,380)|
|Accounts payable||(2,109)||242 |
|Deferred revenue||494 ||142 |
|Operating lease liabilities||(12)||(46)|
|Other liabilities||(1,604)||375 |
|Net cash used in operating activities||(1,880)||(765)|
|Purchases of property and equipment||(646)||(1,182)|
|Purchase of real estate from related and third parties||— ||(5,180)|
|Proceeds from sale of property and equipment||156 ||1,496 |
|Proceeds from sales of equity securities||— ||140 |
|Payments to acquire interest in joint ventures||— ||(1,000)|
|Net cash used in investing activities||(490)||(5,726)|
|Proceeds from borrowings||85,648 ||66,640 |
|Repayment of debt||(84,940)||(59,057)|
|Repayment of Gerber acquisition loan||— ||(3,000)|
|Loan issuance costs||(317)||(421)|
|Net proceeds from sale of common stock and warrants||4,203 ||— |
|Proceeds from exercise of over-allotment options and warrants||892 ||— |
|Proceeds from issuance of preferred stock||— ||3,000 |
|Fees paid on issuance of preferred stock||(3)||(150)|
|Taxes paid related to net share settlement of equity awards||(13)||(24)|
|Repayment of obligations under finance leases||(725)||(626)|
|Net cash provided by financing activities||4,745 ||6,362 |
|Net increase (decrease) in cash, cash equivalents, and restricted cash||2,375 ||(129)|
|Cash, cash equivalents, and restricted cash at beginning of period||2,061 ||1,802 |
|Cash, cash equivalents, and restricted cash at end of period||$||4,436 ||$||1,673 |
See accompanying notes to the unaudited condensed consolidated financial statements.
DIGIRAD CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
|Redeemable Preferred Stock||Common stock||Treasury Stock||Additional paid-in capital||Accumulated deficit||Total|
|Balance at December 31, 2019||1,916 ||$||19,602 ||2,050 ||$||— ||$||(5,728)||$||145,352 ||$||(118,529)||$||21,095 |
|Stock-based compensation||— ||— ||— ||— ||— ||109 ||— ||109 |
|Shares issued under stock incentive plans, net of shares withheld for employee taxes||— ||— ||5||— ||— ||— ||— ||— |
|Accrued dividend on redeemable preferred stock||— ||484 ||— ||— ||— ||(484)||— ||(484)|
|Net loss||— ||— ||— ||— ||— ||— ||(2,953)||(2,953)|
|Balance at March 31, 2020||1,916 ||20,086 ||2,055 ||— ||(5,728)||144,977 ||(121,482)||17,767 |
|Stock-based compensation||— ||— ||— ||— ||151 ||— ||151 |
|Shares issued under stock incentive plans, net of shares withheld for employee taxes||— ||— ||42||— ||— ||(13)||— ||(13)|
|Accrued dividend on redeemable preferred stock||— ||484||— ||— ||— ||(484)||— ||(484)|
|Net proceeds from sale of common stock and warrants ||— ||— ||2,450||— ||— ||4,203 ||— ||4,203 |
|Proceeds from exercise of the over-allotment options and warrants||— ||— ||145||— ||— ||773 ||— ||773 |
|Net loss||— ||— ||— ||— ||— ||— ||(1,287)||(1,287)|
|Balance at June 30, 2020||1,916 ||20,570 ||4,692 ||— ||(5,728)||149,607 ||(122,769)||21,110 |
|Stock-based compensation||— ||— ||— ||— ||— ||122 ||— ||122 |
|Shares issued under stock incentive plans, net of shares withheld for employee taxes||— ||— ||6||— ||— ||— ||— ||— |
|Accrued dividend on redeemable preferred stock||— ||474||— ||— ||— ||(474)||— ||(474)|
|Equity issuance costs||— ||(3)||— ||— ||— ||— ||— ||— |
|Proceeds from exercise of warrants||— ||— ||53||— ||— ||119 ||— ||119 |
|Net loss||— ||— ||— ||— ||— ||— ||(1,760)||(1,760)|
|Balance at September 30, 2020||1,916 ||$||21,041 ||4,751 ||$||— ||$||(5,728)||$||149,374 ||$||(124,529)||$||19,117 |
|Redeemable Preferred Stock||Common stock||Treasury Stock||Additional paid-in capital||Accumulated other comprehensive income (loss)||Accumulated deficit||Total|
|Balance at December 31, 2018||— ||$||— ||2,025 ||$||—||$||(5,728)||$||145,430 ||$||(22)||$||(113,880)||$||25,800 |
|Stock-based compensation||— ||— ||— ||—||— ||112 ||— ||— ||112 |
|Shares issued under stock incentive plans, net of shares withheld for employee taxes||— ||— ||6 ||—||— ||(24)||— ||— ||(24)|
|Reclassification of tax provision impact||— ||— ||— ||—||— ||— ||22 ||— ||22 |
|Net loss||— ||— ||— ||—||— ||— ||— ||(1,657)||(1,657)|
|Balance at March 31, 2019||— ||— ||2,031 ||— ||(5,728)||145,518 ||— ||(115,537)||24,253 |
|Stock-based compensation||— ||— ||— ||— ||— ||190 ||— ||— ||190 |
|Shares issued under stock incentive plans, net of shares withheld for employee taxes||— ||— ||9 ||— ||— ||— ||— ||— ||— |
|Shares issued for fractional shares in conjunction with reverse stock split ||— ||— ||2 ||— ||— ||— ||— ||— ||— |
|Net loss||— ||— ||— ||— ||— ||— ||— ||(1,209)||(1,209)|
|Reclassification of tax provision impact||— ||— ||— ||— ||— ||— ||— ||(22)||(22)|
|Balance at June 30, 2019||— ||— ||2,042 ||— ||(5,728)||145,708 ||— ||(116,768)||23,212 |
|Stock-based compensation||— ||— ||— ||—||— ||114 ||— ||— ||114 |
|Shares issued under stock incentive plans, net of shares withheld for employee taxes||— ||— ||6 ||—||— ||— ||— ||— ||— |
|Issuance of preferred stock||1,916 ||19,156 ||— ||—||— ||— ||— ||— ||— |
|Fees payable on issuance of preferred stock||— ||— ||— ||—||— ||(150)||— ||— ||(150)|
|Net loss||— ||— ||— ||—||— ||— ||— ||(1,504)||(1,504)|
|Balance at September 30, 2019||1,916 ||$||19,156 ||2,048 ||$||— ||$||(5,728)||$||145,672 ||$||— ||$||(118,272)||$||21,672 |
See accompanying notes to unaudited consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
Basis of Presentation
The unaudited condensed consolidated financial statements included in this Form 10-Q have been prepared in accordance with the U.S. Securities and Exchange Commission (the “SEC”) instructions for Quarterly Reports on Form 10-Q. Accordingly, the condensed consolidated financial statements are unaudited and do not contain all the information required by U.S. generally accepted accounting principles (“GAAP”) to be included in a full set of financial statements. The unaudited condensed consolidated balance sheet at December 31, 2019 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for a complete set of financial statements. The audited consolidated financial statements for our fiscal year ended December 31, 2019, filed with the SEC on Form 10-K on March 9, 2020, include a summary of our significant accounting policies and should be read in conjunction with this Form 10-Q. In the opinion of management, all material adjustments necessary to present fairly the results of operations, cash flows, and balance sheets for such periods have been included in this Form 10-Q. All such adjustments are of a normal recurring nature. The results of operations for interim periods are not necessarily indicative of the results of operations for the entire year.
On March 11, 2020, the World Health Organization declared the outbreak of a novel strain of coronavirus, COVID-19, a global pandemic, which continues to spread throughout the United States and around the world. Governmental authorities in the states in which we operate issued social distancing orders, which orders have required businesses in subject jurisdictions to cease non-essential operations at physical locations in those locations, unless exempted, rescinded, or amended. Accordingly, to comply with applicable regulations and to safeguard the health and safety of our employees and customers, we temporarily reduced our business operations.
During the three and nine months ended September 30, 2020, we experienced a $3.8 million and $12.9 million decrease respectively, in Digirad Health division revenue which was offset by a $5.8 million and $16.3 million increase respectively, in Building and Construction revenue, as compared to the same period of the prior year. As the COVID-19 pandemic affected the results of segments of our business during the three and nine months ended September 30, 2020, we took steps to contain the impact of the COVID-19 pandemic on our business.
On April 1, 2020, we announced that in response to the COVID-19 pandemic, Matthew G. Molchan, our President and Chief Executive Officer, David J. Noble, our Chief Financial Officer and Chief Operating Officer, and Martin B. Shirley, the president of our Diagnostic Imaging Solutions Inc. subsidiary, had each agreed to have their base salaries reduced by 20%. These reductions were effective as of April 6, 2020 and remained in effect until May 15, 2020.
On April 1, 2020, we also announced that in response to the COVID-19 pandemic, we planned to furlough certain employees and that we would institute a 20% salary reduction for most of our salaried employees and reduce the number of working hours of most of our hourly employees by 20%. These reductions, which applied to our healthcare division, were effective as of April 6, 2020, and remained in effect until May 15, 2020. Throughout the COVID-19 pandemic, our building and construction division has furloughed employees or reduced employee hours based on fluctuations in demand for our products. As of September 30, 2020, the Company’s KBS Builders, Inc. subsidiary (“KBS”) brought back furloughed employees and increased its work force by over 20% to meet the higher manufacturing requirements for two commercial projects as well as the future growth we expect.
This partial disruption, although expected to be temporary, may impact our operations and overall business. The impact of COVID-19 is evolving rapidly and its future effects are uncertain. Given the uncertainty caused by the COVID-19 pandemic, the duration of the disruption and related financial impact cannot be reasonably estimated at this time. As a result of the evolving impact of COVID-19 on the economy, on April 7, 2020, we withdrew our 2020 full-year guidance. The COVID-19 pandemic is a highly fluid situation and it is not currently possible for us to reasonably estimate the impact it may have on our financial and operating results. We will continue to evaluate the impact of the COVID-19 pandemic on our business as we learn more and the impact of COVID-19 on our industry becomes clearer.
On September 10, 2019, Digirad completed its acquisition of ATRM Holdings, Inc. (“ATRM”) pursuant to an Agreement and Plan of Merger, dated as of July 3, 2019 (the “ATRM Merger Agreement”), among Digirad, Digirad Acquisition Corporation, a Minnesota corporation and wholly-owned subsidiary of Digirad (“Merger Sub”), and ATRM. Under the terms of the ATRM Merger Agreement, Merger Sub merged with and into ATRM, with ATRM surviving as a wholly owned subsidiary of Digirad (the “ATRM Merger” or the “ATRM Acquisition”).
At the effective time of the ATRM Merger, (i) each share of ATRM common stock was converted into the right to receive three one-hundredths (0.03) of a share of 10.0% Series A Cumulative Perpetual Preferred Stock, par value $0.0001 per share, of the Company (“Company Preferred Stock”) and (ii) each share of ATRM 10.00% Series B Cumulative Preferred Stock, par value $0.001 per share (“ATRM Preferred Stock”), converted into the right to receive two and one-half (2.5) shares of Company Preferred Stock, for an approximate aggregate total of 1.6 million shares of Company Preferred Stock. No fractional shares of Company Preferred Stock were issued to any ATRM shareholder in the ATRM Merger. Each ATRM shareholder who would otherwise have been entitled to receive a fraction of a share of Company common stock in the ATRM Merger received one whole share of Company Preferred Stock. See Note 4, Merger, within the notes to our unaudited condensed consolidated financial statements for further detail.
Immediately prior to the closing of the ATRM Merger, the Company issued 300,000 shares of Company Preferred Stock in a private placement (the “Private Placement”) to Lone Star Value Investors, LP (“LSVI”) for a price of $10.00 per share for total proceeds to the Company of $3.0 million. The Private Placement was made pursuant to the terms of a Stock Purchase Agreement, dated as of September 10, 2019. The shares of Company Preferred Stock sold in the Private Placement had not been registered under the Securities Act of 1933, as amended (the “Act”) and could not be resold absent registration under, or exemption from registration under, the Act.
At the closing of the Private Placement, the Company and LSVI entered into a Registration Rights Agreement, dated as of September 10, 2019 (the “Registration Rights Agreement”), pursuant to which the Company agreed to file a registration statement with the U.S. Securities and Exchange Commission (the “SEC”), covering the resale of the shares of Company Preferred Stock issued in the Private Placement.
On September 17, 2020, in connection with satisfying the Company’s obligations under the Registration Rights Agreement, the Company filed a registration statement with the SEC (the “September Registration Statement”) relating to the sale or other disposition from time to time of up to 1,492,321 shares of Company Preferred Stock by the selling stock holders identified in the September Registration Statement, including their transferees, pledgees, donees or successors. Mr. Eberwein, the Chairman of the Company’s board of directors, is a selling stockholder under the September Registration Statement. The selling stockholders may, from time to time, sell transfer, or otherwise dispose of any or all of their shares of Company Preferred Stock or interests in shares of Company Preferred Stock on any stock exchange, market, or trading facility on which the shares are traded or in private transactions. These dispositions by the selling stockholders may be at fixed prices, at prevailing market prices at the time of sale, at prices related to prevailing market price, at varying prices determined at the time of sale, or at negotiated prices.
Pursuant to the Certificate of Designations, Rights and Preferences of 10% Series A Cumulative Perpetual Preferred Stock of Digirad Corporation (the “Certificate of Designations”), upon a Change of Control Triggering Event, as defined in the Certificate of Designations, holders of the Company Preferred Stock may require the Company to redeem the Company Preferred Stock at a price of $10.00 per share, plus any accumulated and unpaid dividends (a “Change of Control Redemption”). As this redemption feature of the shares is not solely within the control of Digirad, the equity of Digirad does not qualify as permanent equity and has been classified as mezzanine or temporary equity. Accordingly, the Company recognizes Company Preferred Stock as mezzanine equity in the unaudited condensed consolidated financial statements. Company Preferred Stock is not redeemable and it was not probable that the Company Preferred Stock would become redeemable as of September 30, 2020.
In addition to a Change of Control Redemption, the Certificate of Designations also provides that the Company may redeem (at its option, in whole or in part) the Company Preferred Stock following the fifth anniversary of issuance of the Company Preferred Stock, at a cash redemption price of $10.00 per share, plus any accumulated and unpaid dividends.
Common Stock Equity Offering
On April 30, 2020, the Company filed a registration statement with the SEC (the “April Registration Statement”) relating to a public offering of the Company’s common stock, par value $0.0001 per share (the “Common Stock”) and warrants to purchase Common Stock (the “Offering”). On May 28, 2020, the Company closed the Offering in which, pursuant to the underwriting agreement (the “Underwriting Agreement”) entered into by and between the Company and Maxim Group LLC (“Maxim”), as representative of the underwriters, dated May 26, 2020, the Company issued and sold (i) 2,225,000 shares of Common Stock, and (ii) 2,225,000 warrants (the “Warrants”) to purchase up to 1,112,500 shares of Common Stock. The warrants will expire 5 years from the date of issuance. The Offering price was $2.24 per share of Common Stock and $0.01 per accompanying Warrant (for a combined Offering price of $2.25). The Underwriting Agreement contained customary representations, warranties, and agreements by the Company, customary conditions to closing, indemnification obligations of the Company and Maxim (including for liabilities under the Securities Act of 1933, as amended) and certain other obligations.
Pursuant to the Underwriting Agreement, the Company granted to Maxim an option for a period of 45 days (the “Over-Allotment Option”) to purchase up to 225,000 additional shares of Common Stock and 225,000 Warrants to purchase up to an additional 112,500 shares of Common Stock. Effective as of the closing of the Offering, Maxim exercised the Over-Allotment Option for the purchase of 225,000 Warrants for a price of $0.01 per Warrant. On June 10, 2020, Maxim exercised the Over-Allotment Option for the purchase of 225,000 shares of Common Stock for a price of $2.24 per share, before underwriting discounts. The closing of the sale of the over-allotment shares brought the total number of shares of common stock sold by the Company in the Offering to 2,450,000, and total gross proceeds to approximately $5.5 million.
The net proceeds to the Company from the Offering were approximately $4.2 million, after deducting the fees and commissions and estimated Offering expenses payable by the Company of $0.8 million, and excluding $0.9 million proceeds the Company received upon exercise of the Over-Allotment Options and Warrants. The Company is using $3.0 million of the net proceeds from the sale of shares of Common Stock and the Warrants in the Offering to fund commercial modular housing projects being constructed in New England by the Company’s KBS Builders, Inc. subsidiary, and the remainder of the net proceeds is being used for working capital and for other general corporate purposes. The Company has broad discretion in determining how the proceeds of the Offering is used, and its discretion is not limited by the aforementioned possible uses.
The accompanying financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and settlement of obligations in the normal course of business. We incurred net losses from operations of approximately $1.5 million and $5.7 million for the three and nine months ended September 30, 2020, respectively and $1.2 million and $3.5 million for the three and nine months ended September 30, 2019, respectively. We have an accumulated deficit of $124.5 million and $118.5 million as of September 30, 2020 and December 31, 2019, respectively. Net cash used in operations of $1.9 million for the nine months ended September 30, 2020 compared to net cash used in operations of $0.8 million for the same prior year period in 2019.
As of September 30, 2020, we had approximately $4.3 million in third party credit facilities and $2.2 million in related party notes coming due next twelve months. As noted below, we previously had a covenant breach with Gerber. In January 2020, as discussed more fully below, we refinanced our debt with Gerber Finance Inc. (“Gerber”) and Premier Bank (“Premier”) and reset the debt covenants with these lenders. In addition, as of September 30, 2020 we had cash and cash equivalents of $4.3 million.
The Company completed aforementioned equity financing on April 30, 2020. Net proceeds of the Offering is being used to fund working capital and other general corporate purposes. Further, a significant shareholder and lender has committed to provide financial support to the Company by providing written assurances that he will: (a) extend until five business days after the closing date of the DMS Sale Transaction (described below in Note 15. Subsequent Events), and not call the repayment of approximately $2.2 million of related party debt that was due in October 2020; and (b) extend through June 2021 the Company’s put option with this shareholder of $1.0 million in Series A Cumulative Perpetual Preferred stock. Management believes that the Company has the liquidity and operations to continue to support the business through the next 12 months from the issuance of this Quarterly Report. The Company’s ability to continue as a going concern is dependent on its ability to execute its plans.
Use of Estimates
Preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ from management’s estimates.
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities, and operating lease liabilities, net of current portion in our condensed consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our condensed consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We use the implicit discount rate when readily determinable; however, as most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease valuation may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company elected not to separate lease and non-lease components of its operating leases in which it is the lessee and lessor. Additionally, The Company elected not to recognize right-of use assets and leases liabilities that arise from short-term leases of twelve months or less.
We determine lease classification at the commencement date. Leases not classified as sales-type or direct financing leases are classified as operating leases. The primary accounting criteria we use for lease classification are (a) review to determine if the lease transfers ownership of the underlying asset to the lessee by the end of the lease term, (b) review to determine if the lease grants the lessee a purchase option that the lessee is reasonably certain to exercise, (c) determine, using a seventy-five percent or more threshold, if the lease term is for a major part of the remaining economic life of the underlying asset (however, we do not use this classification criterion when the lease commencement date falls within the last 25 percent of the total economic life of the underlying asset) and (d) determine, using a ninety percent or more threshold, if the present value of the sum of the lease payments and any residual value guarantees equal or exceeds substantially all of the fair value of the underlying asset. We do not lease equipment of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. Each of the Company’s leases is classified as an operating lease.
The Company elected the operating lease practical expedient for its leases to not separate non-lease components of regular maintenance services from associated lease components. This practical expedient is available when both of the following are met: (i) the timing and pattern of transfer of the non-lease components and associated lease component are the same and (ii) the lease component, if accounted for separately, would be classified as an operating lease.
Property taxes paid by the lessor that are reimbursed by the lessee are considered to be lessor costs of owning the asset, and are recorded gross with revenue included in other non-interest income and expense recorded in operating expenses.
The Company selected a lessor accounting policy election to exclude from revenue and expenses sales taxes and other similar taxes assessed by a governmental authority on lease revenue-producing transactions and collected by the lessor from a lessee.
Operating lease equipment is carried at cost less accumulated depreciation. Operating lease equipment is depreciated to its estimated residual value using the straight-line method over the lease term or estimated useful life of the asset.
Rental revenue on operating leases is recognized on a straight-line basis over the lease term unless collectability is not probable. In these cases, rental revenue is recognized as payments are received.
Recently Adopted Accounting Standards
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The Company early adopted ASU 2018-15 beginning January 1, 2019, and applied the guidance prospectively to the implementation costs incurred in its NetSuite ERP implementation. As of September 30, 2020, the Company has capitalized $0.7 million of implementation costs.
New Accounting Standards To Be Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available-for-sale debt securities. This update is effective for annual periods beginning after December 15, 2022, and interim periods within those periods, and early adoption is permitted. We expect to adopt the standard on its effective date in the first quarter of 2023. We believe the adoption will modify the way we analyze financial instruments, but currently do not expect the adoption to have a material financial impact on our consolidated financial statements.
Note 2. Revenue
Healthcare Product and Product-Related Revenues and Services Revenue
Healthcare Product and product-related revenue are generated from the sale of gamma cameras and post-warranty maintenance service contracts within our Diagnostic Imaging reportable segment.
Healthcare Imaging services revenue are generated from providing diagnostic imaging services to customers within our Diagnostic Services and Mobile Healthcare reportable segments. Services revenue also includes lease income generated from interim rentals of imaging systems to our customers.
Building and Construction
Building and Construction revenue are generated from selling modular buildings for both single-family residential homes and larger commercial building projects from KBS, Builders, Inc. (“KBS”), and selling structural wall panels, permanent wood foundation systems and other engineered wood products from EdgeBuilder and GlenBrook (“Glenbrook” and together with EdgeBuilder, “EBGL”).
Real Estate and Investments
Star Real Estate Holdings USA, Inc. (“SRE”) generates revenue from lease of commercial properties and equipment and Lone Star Value Management, LLC (“LSVM”), a Connecticut based exempt reporting advisor, provides services that include investment advisory services, and the servicing of pooled investment vehicles.
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. Taxes collected from customers, which are subsequently remitted to governmental authorities, are excluded from revenue.
The majority of our contracts have a single performance obligation. For contracts with multiple performance obligations, we allocate the total transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. We use an observable price to determine the stand-alone selling price for separate performance obligations or a cost plus margin approach when one is not available. For bill and hold sales, we determine when the customer obtains control of the product on a case-by-case basis to determine the amount of revenue to recognize each period.
Our products are generally not sold with a right of return and the Company does not provide significant credits or incentives, which may be required for as variable consideration when estimating the amount of revenue to be recognized.
Disaggregation of Revenue
The following tables present our revenues for the three and nine months ended September 30, 2020 and 2019, disaggregated by major source (in thousands):
|Three Months Ended September 30, 2020|
|Diagnostic Services||Diagnostic Imaging||Mobile Healthcare||Building and Construction||Real Estate and Investments||Total|
|Major Goods/Service Lines|
|Mobile Imaging||$||10,590 ||$||— ||$||7,388 ||$||— ||$||— ||$||17,978 |
|Camera||— ||540 ||— ||— ||— ||540 |
|Camera Support||— ||1,508 ||— ||— ||— ||1,508 |
|Healthcare Revenue from Contracts with Customers||10,590 ||2,048 ||7,388 |