UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One) | | | | | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| FOR THE QUARTERLY PERIOD ENDED | MARCHMarch 31, 20212022 |
| | | | | |
☐ | 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
Star Equity Holdings, Inc.
(Exact name of registrant as specified in its charter) | | | | | | | | | | | | | | | | | |
Delaware | | 33-0145723 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
| | | | |
| 53 Forest Ave., Suite 101, | Old Greenwich | CT | | 06870 |
(Address of Principal Executive Offices) | | (Zip Code) |
(203) 489-9500
(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 | STRR | NASDAQ Global Market |
Series A Cumulative Perpetual Preferred Stock, par value $0.0001 per share | STRRP
| 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, a 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 May 7, 2021,5th, 2022, the registrant had 5,018,27115,025,295 shares of Common Stock ($0.0001 par value) outstanding.
STAR EQUITY HOLDINGS, INC.
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, 20202021 filed with the U.S. Securities and Exchange Commission on March 29, 2021.31, 2022. 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
STAR EQUITY HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In thousands, except for per share amounts) | | | Three Months Ended March 31, | | | | Three Months Ended March 31, | |
| | 2021 | | 2020 | | | | 2022 | | 2021 | |
Revenues: | Revenues: | | | | | | | Revenues: | | | | | |
Healthcare | Healthcare | | $ | 13,307 | | | $ | 13,675 | | | | Healthcare | | $ | 13,418 | | | $ | 13,307 | | |
Construction | Construction | | 9,047 | | | 5,484 | | | | Construction | | 11,631 | | | 9,047 | | |
Investments | | 0 | | | 31 | | | | |
| Total revenues | Total revenues | | 22,354 | | | 19,190 | | | | Total revenues | | 25,049 | | | 22,354 | | |
| Cost of revenues: | Cost of revenues: | | | Cost of revenues: | | |
Healthcare | Healthcare | | 10,709 | | | 10,801 | | | | Healthcare | | 10,242 | | | 10,709 | | |
Construction | Construction | | 8,503 | | | 5,081 | | | | Construction | | 10,045 | | | 8,503 | | |
Investments | Investments | | 65 | | | 65 | | | | Investments | | 99 | | | 65 | | |
Total cost of revenues | Total cost of revenues | | 19,277 | | | 15,947 | | | | Total cost of revenues | | 20,386 | | | 19,277 | | |
| Gross profit | Gross profit | | 3,077 | | | 3,243 | | | | Gross profit | | 4,663 | | | 3,077 | | |
| Operating expenses: | Operating expenses: | | | Operating expenses: | | |
Selling, general and administrative | Selling, general and administrative | | 5,055 | | | 4,863 | | | | Selling, general and administrative | | 6,788 | | | 5,055 | | |
Amortization of intangible assets | Amortization of intangible assets | | 438 | | | 576 | | | | Amortization of intangible assets | | 430 | | | 438 | | |
| Gain on sale of MD Office Solutions | Gain on sale of MD Office Solutions | | (847) | | | 0 | | | | Gain on sale of MD Office Solutions | | — | | | (847) | | |
Total operating expenses | Total operating expenses | | 4,646 | | | 5,439 | | | | Total operating expenses | | 7,218 | | | 4,646 | | |
| Loss from operations | Loss from operations | | (1,569) | | | (2,196) | | | | Loss from operations | | (2,555) | | | (1,569) | | |
| Other income (expense): | | | |
Other income, net | | 1,255 | | | 160 | | | | |
Other (expense) income: | | Other (expense) income: | | |
Other (expense) income, net | | Other (expense) income, net | | (6) | | | 35 | | |
Interest expense, net | Interest expense, net | | (272) | | | (305) | | | | Interest expense, net | | (190) | | | (272) | | |
| Total other income (expense) | | 983 | | | (145) | | | | |
Gain on forgiveness of PPP loans | | Gain on forgiveness of PPP loans | | — | | | 1,220 | | |
Total other (expense) income | | Total other (expense) income | | (196) | | | 983 | | |
| Loss from continuing operations before income taxes | Loss from continuing operations before income taxes | | (586) | | | (2,341) | | | | Loss from continuing operations before income taxes | | (2,751) | | | (586) | | |
Income tax expense | | (2) | | | (27) | | | | |
Income tax provision | | Income tax provision | | (950) | | | (2) | | |
Loss from continuing operations, net of tax | Loss from continuing operations, net of tax | | (588) | | | (2,368) | | | | Loss from continuing operations, net of tax | | (3,701) | | | (588) | | |
Income (loss) from discontinued operations, net of tax | | 6,020 | | | (585) | | | | |
Net income (loss) | | 5,432 | | | (2,953) | | | | |
Deemed dividend on Series A redeemable preferred stock | | (479) | | | (484) | | | | |
Net income (loss) attributable to common shareholders | | $ | 4,953 | | | $ | (3,437) | | | | |
Income from discontinued operations, net of tax | | Income from discontinued operations, net of tax | | — | | | 6,020 | | |
Net (loss) income | | Net (loss) income | | (3,701) | | | 5,432 | | |
Deemed dividend on Series A perpetual preferred stock | | Deemed dividend on Series A perpetual preferred stock | | (479) | | | (479) | | |
Net (loss) income attributable to common shareholders | | Net (loss) income attributable to common shareholders | | $ | (4,180) | | | $ | 4,953 | | |
| Net income (loss) per share—basic and diluted | Net income (loss) per share—basic and diluted | | | Net income (loss) per share—basic and diluted | | |
Net loss per share, continuing operations | Net loss per share, continuing operations | | $ | (0.12) | | | $ | (1.15) | | | | Net loss per share, continuing operations | | $ | (0.29) | | | $ | (0.12) | | |
Net income (loss) per share, discontinued operations | | $ | 1.22 | | | $ | (0.28) | | | | |
Net income (loss) per share—basic and diluted | | $ | 1.10 | | | $ | (1.44) | | | | |
Net income per share, discontinued operations | | Net income per share, discontinued operations | | $ | — | | | $ | 1.22 | | |
Net (loss) income per share—basic and diluted* | | Net (loss) income per share—basic and diluted* | | $ | (0.29) | | | $ | 1.10 | | |
Deemed dividend on Series A cumulative perpetual preferred stock per share | Deemed dividend on Series A cumulative perpetual preferred stock per share | | $ | (0.10) | | | $ | (0.24) | | | | Deemed dividend on Series A cumulative perpetual preferred stock per share | | $ | (0.04) | | | $ | (0.10) | | |
Net income (loss) per share, attributable to common shareholders—basic and diluted: | | $ | 1.01 | | | $ | (1.67) | | | | |
Net (loss) income per share, attributable to common shareholders—basic and diluted* | | Net (loss) income per share, attributable to common shareholders—basic and diluted* | | $ | (0.33) | | | $ | 1.01 | | |
Weighted-average shares outstanding—basic and diluted | Weighted-average shares outstanding—basic and diluted | | 4,916 | | | 2,055 | | | | Weighted-average shares outstanding—basic and diluted | | 12,669 | | | 4,916 | | |
| Dividends declared per Series A perpetual preferred stock | | Dividends declared per Series A perpetual preferred stock | | $ | 0.25 | | | $ | — | | |
|
*Earnings per share may not add due to rounding
See accompanying notes to the unaudited condensed consolidated financial statements.
STAR EQUITY HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts) | | | March 31, 2021 | | December 31, 2020 | | March 31, 2022 (unaudited) | | December 31, 2021 | |
Assets: | Assets: | | | | Assets: | | | | |
Current assets: | Current assets: | | Current assets: | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 13,175 | | | $ | 3,225 | | Cash and cash equivalents | $ | 15,035 | | | $ | 4,538 | | |
Restricted cash | Restricted cash | 168 | | | 168 | | Restricted cash | 385 | | | 278 | | |
| Accounts receivable, net | 14,886 | | | 12,975 | | |
Investments | | Investments | 1,182 | | | 713 | | |
Accounts receivable, net of allowances of $1.2 million and $0.8 million, respectively | | Accounts receivable, net of allowances of $1.2 million and $0.8 million, respectively | 15,910 | | | 15,811 | | |
Inventories, net | Inventories, net | 9,838 | | | 9,787 | | Inventories, net | 10,287 | | | 8,525 | | |
Other current assets | Other current assets | 2,738 | | | 2,025 | | Other current assets | 1,977 | | | 1,998 | | |
Assets held for sale | 0 | | | 20,756 | | |
| Total current assets | Total current assets | 40,805 | | | 48,936 | | Total current assets | 44,776 | | | 31,863 | | |
Property and equipment, net | Property and equipment, net | 9,383 | | | 9,762 | | Property and equipment, net | 8,853 | | | 8,918 | | |
Operating lease right-of-use assets, net | Operating lease right-of-use assets, net | 2,848 | | | 1,769 | | Operating lease right-of-use assets, net | 5,346 | | | 4,494 | | |
Intangible assets, net | Intangible assets, net | 16,362 | | | 16,900 | | Intangible assets, net | 14,642 | | | 15,072 | | |
Goodwill | Goodwill | 9,405 | | | 9,542 | | Goodwill | 6,046 | | | 6,046 | | |
| Other assets | Other assets | 2,588 | | | 1,384 | | Other assets | 1,528 | | | 1,659 | | |
Total assets | Total assets | $ | 81,391 | | | $ | 88,293 | | Total assets | $ | 81,191 | | | $ | 68,052 | | |
| Liabilities, Mezzanine Equity and Stockholders’ Equity: | Liabilities, Mezzanine Equity and Stockholders’ Equity: | | Liabilities, Mezzanine Equity and Stockholders’ Equity: | | |
Current liabilities: | Current liabilities: | | Current liabilities: | | |
Accounts payable | Accounts payable | $ | 5,535 | | | $ | 4,952 | | Accounts payable | $ | 5,196 | | | $ | 4,277 | | |
Accrued liabilities | | Accrued liabilities | 3,608 | | | 2,445 | | |
Accrued compensation | Accrued compensation | 3,695 | | | 2,825 | | Accrued compensation | 3,192 | | | 3,051 | | |
Accrued warranty | Accrued warranty | 180 | | | 214 | | Accrued warranty | 420 | | | 569 | | |
Billings in excess of costs and estimated profit | | Billings in excess of costs and estimated profit | 15 | | | 312 | | |
Deferred revenue | Deferred revenue | 2,352 | | | 2,184 | | Deferred revenue | 2,975 | | | 2,457 | | |
Short-term debt and current portion of long-term debt | 12,548 | | | 18,362 | | |
Payable to related parties | 2,307 | | | 2,307 | | |
Short-term debt | | Short-term debt | 13,334 | | | 12,869 | | |
Operating lease liabilities | Operating lease liabilities | 1,075 | | | 1,011 | | Operating lease liabilities | 1,422 | | | 1,253 | | |
Other current liabilities | 2,859 | | | 3,000 | | |
Liabilities held for sale | 0 | | | 7,871 | | |
Finance lease liabilities | | Finance lease liabilities | 559 | | | 588 | | |
| Total current liabilities | Total current liabilities | 30,551 | | | 42,726 | | Total current liabilities | 30,721 | | | 27,821 | | |
Long-term debt, net of current portion | 1,967 | | | 3,700 | | |
| Deferred tax liabilities | Deferred tax liabilities | 51 | | | 51 | | Deferred tax liabilities | 998 | | | 72 | | |
Operating lease liabilities, net of current portion | Operating lease liabilities, net of current portion | 1,824 | | | 828 | | Operating lease liabilities, net of current portion | 3,996 | | | 3,299 | | |
Finance lease liabilities, net of current portion | | Finance lease liabilities, net of current portion | 639 | | | 706 | | |
Other liabilities | Other liabilities | 1,018 | | | 1,059 | | Other liabilities | 386 | | | 412 | | |
Total liabilities | Total liabilities | 35,411 | | | 48,364 | | Total liabilities | 36,740 | | | 32,310 | | |
| Commitments and contingencies (Note 9) | Commitments and contingencies (Note 9) | 0 | | 0 | Commitments and contingencies (Note 9) | 0 | | 0 | |
| Preferred stock, $0.0001 par value: 10,000,000 shares authorized: 10% Series A Cumulative Redeemable preferred stock, 8,000,000 shares authorized, liquidation preference ($10.00 per share), 1,915,637 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively | 21,979 | | | 21,500 | | |
Preferred stock, $0.0001 par value: 10,000,000 shares authorized: Series A Preferred Stock, 8,000,000 shares authorized, liquidation preference ($10.00 per share), 1,915,637 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | | Preferred stock, $0.0001 par value: 10,000,000 shares authorized: Series A Preferred Stock, 8,000,000 shares authorized, liquidation preference ($10.00 per share), 1,915,637 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | 18,988 | | | 18,988 | | |
| Stockholders’ Equity: | Stockholders’ Equity: | | Stockholders’ Equity: | | |
Common stock, $0.0001 par value: 30,000,000 shares authorized; 5,020,969 and 4,798,367 shares issued and outstanding (net of treasury shares) at March 31, 2021 and December 31, 2020, respectively | 0 | | | 0 | | |
Treasury stock, at cost; 258,849 shares at March 31, 2021 and December 31, 2020, respectively | (5,728) | | | (5,728) | | |
Preferred stock, $0.0001 par value: 25,000 shares authorized; Series C Preferred stock, no shares issued or outstanding | | Preferred stock, $0.0001 par value: 25,000 shares authorized; Series C Preferred stock, no shares issued or outstanding | — | | | — | | |
Common stock, $0.0001 par value: 30,000,000 shares authorized; 15,029,410 and 5,805,916 shares issued and outstanding (net of treasury shares) at March 31, 2022 and December 31, 2021, respectively | | Common stock, $0.0001 par value: 30,000,000 shares authorized; 15,029,410 and 5,805,916 shares issued and outstanding (net of treasury shares) at March 31, 2022 and December 31, 2021, respectively | 1 | | | — | | |
Treasury stock, at cost; 258,849 shares at March 31, 2022 and December 31, 2021, respectively | | Treasury stock, at cost; 258,849 shares at March 31, 2022 and December 31, 2021, respectively | (5,728) | | | (5,728) | | |
Additional paid-in capital | | Additional paid-in capital | 162,860 | | | 150,451 | | |
| Accumulated deficit | | Accumulated deficit | (131,670) | | | (127,969) | | |
| Additional paid-in capital | 149,283 | | | 149,143 | | |
| Accumulated deficit | (119,554) | | | (124,986) | | |
Total stockholders’ equity | Total stockholders’ equity | 24,001 | | | 18,429 | | Total stockholders’ equity | 25,463 | | | 16,754 | | |
Total liabilities, mezzanine equity and stockholders’ equity | Total liabilities, mezzanine equity and stockholders’ equity | $ | 81,391 | | | $ | 88,293 | | Total liabilities, mezzanine equity and stockholders’ equity | $ | 81,191 | | | $ | 68,052 | | |
See accompanying notes to the unaudited condensed consolidated financial statements.
STAR EQUITY HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands) | | | Three Months Ended March 31, | | Three Months Ended March 31, |
| | 2021 | | 2020 | | 2022 | | 2021 |
Operating activities | Operating activities | | | | | Operating activities | | | | |
Net income (loss) | | $ | 5,432 | | | $ | (2,953) | | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | |
Net (loss) income | | Net (loss) income | | $ | (3,701) | | | $ | 5,432 | |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | | Adjustments to reconcile net income (loss) to net cash used in operating activities: | |
Depreciation | Depreciation | | 471 | | | 1,593 | | Depreciation | | 471 | | | 471 | |
Amortization of intangible assets | Amortization of intangible assets | | 438 | | | 814 | | Amortization of intangible assets | | 430 | | | 438 | |
Non-cash lease expense | Non-cash lease expense | | 584 | | | 543 | | Non-cash lease expense | | 199 | | | 584 | |
Provision for bad debt, net | Provision for bad debt, net | | 359 | | | 32 | | Provision for bad debt, net | | 300 | | | 359 | |
Stock-based compensation | Stock-based compensation | | 131 | | | 109 | | Stock-based compensation | | 144 | | | 131 | |
| Gain on disposal of discontinued operations | | Gain on disposal of discontinued operations | | — | | | (5,224) | |
Amortization of loan issuance costs | Amortization of loan issuance costs | | 50 | | | 31 | | Amortization of loan issuance costs | | 37 | | | 50 | |
Debt issuance costs write-off | | 130 | | | 0 | | |
| Gain on disposal of discontinued operations | | (5,224) | | | 0 | | |
Write-off of borrowing costs | | Write-off of borrowing costs | | — | | | 130 | |
Gain on disposal of MD Office Solutions | Gain on disposal of MD Office Solutions | | (847) | | | 0 | | Gain on disposal of MD Office Solutions | | — | | | (847) | |
Loss on sale of assets | | 34 | | | 180 | | |
(Gain) loss on sale of assets | | (Gain) loss on sale of assets | | (96) | | | 34 | |
Gain on Paycheck Protection Program loan forgiveness | Gain on Paycheck Protection Program loan forgiveness | | (1,220) | | | 0 | | Gain on Paycheck Protection Program loan forgiveness | | — | | | (1,220) | |
Deferred income taxes | Deferred income taxes | | 0 | | | 20 | | Deferred income taxes | | 926 | | | — | |
Other, net | | (23) | | | 26 | | |
Unrealized loss (gain) of equity securities and lumber derivatives | | Unrealized loss (gain) of equity securities and lumber derivatives | | 584 | | | (23) | |
Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | |
Accounts receivable | Accounts receivable | | (2,476) | | | 3,606 | | Accounts receivable | | (397) | | | (2,476) | |
Inventories | Inventories | | (51) | | | 481 | | Inventories | | (1,762) | | | (51) | |
Other assets | | (782) | | | 154 | | |
Investments and other assets | | Investments and other assets | | 144 | | | (782) | |
Accounts payable | Accounts payable | | 258 | | | (1,525) | | Accounts payable | | 919 | | | 258 | |
Accrued compensation | Accrued compensation | | 1,075 | | | (1,123) | | Accrued compensation | | 142 | | | 1,075 | |
Deferred revenue | | 119 | | | (166) | | |
Deferred revenue and billings in excess of costs and estimated profit | | Deferred revenue and billings in excess of costs and estimated profit | | 220 | | | 119 | |
Operating lease liabilities | Operating lease liabilities | | (597) | | | (545) | | Operating lease liabilities | | (185) | | | (597) | |
Other liabilities | Other liabilities | | (93) | | | (654) | | Other liabilities | | 989 | | | (93) | |
Net cash (used in) provided by operating activities | | (2,232) | | | 623 | | |
Net cash used in operating activities | | Net cash used in operating activities | | (636) | | | (2,232) | |
| Investing activities | Investing activities | | Investing activities | |
Purchases of property and equipment | Purchases of property and equipment | | (449) | | | (158) | | Purchases of property and equipment | | (366) | | | (449) | |
Proceeds from sale of discontinued operations | Proceeds from sale of discontinued operations | | 18,750 | | | 0 | | Proceeds from sale of discontinued operations | | — | | | 18,750 | |
| Proceeds from sale of property and equipment | Proceeds from sale of property and equipment | | 14 | | | 23 | | Proceeds from sale of property and equipment | | 112 | | | 14 | |
| Net cash provided by (used in) investing activities | | 18,315 | | | (135) | | |
Purchases of equity securities | | Purchases of equity securities | | (1,070) | | | — | |
Proceeds from sales of equity securities | | Proceeds from sales of equity securities | | 14 | | | — | |
Net cash (used in) provided by investing activities | | Net cash (used in) provided by investing activities | | (1,310) | | | 18,315 | |
| Financing activities | Financing activities | | Financing activities | |
Proceeds from borrowings | Proceeds from borrowings | | 32,088 | | | 31,996 | | Proceeds from borrowings | | 25,186 | | | 32,088 | |
Repayment of debt | Repayment of debt | | (38,495) | | | (32,407) | | Repayment of debt | | (24,748) | | | (38,495) | |
| Loan issuance costs | | 0 | | | (317) | | |
| Proceeds from exercise of warrants | | 493 | | | 0 | | |
Proceeds from the sale of common stock, warrants, and exercise of over allotment options | | Proceeds from the sale of common stock, warrants, and exercise of over allotment options | | 13,198 | | | — | |
Fees paid on issuance of common stock | | Fees paid on issuance of common stock | | (450) | | | — | |
Proceeds from the exercise of warrants | | Proceeds from the exercise of warrants | | — | | | 493 | |
| | Taxes paid related to net share settlement of equity awards | Taxes paid related to net share settlement of equity awards | | (6) | | | 0 | | Taxes paid related to net share settlement of equity awards | | (3) | | | (6) | |
Repayment of obligations under finance leases | Repayment of obligations under finance leases | | (260) | | | (229) | | Repayment of obligations under finance leases | | (154) | | | (260) | |
Net cash used in financing activities | | (6,180) | | | (957) | | |
Net increase (decrease) in cash, cash equivalents, and restricted cash including cash classified within current assets held for sale | | 9,903 | | | (469) | | |
Less: Net (decrease) increase in cash classified within current held for sale | | (47) | | | 108 | | |
Net increase (decrease) in cash, cash equivalents, and restricted cash | | 9,950 | | | (577) | | |
Cash, cash equivalents, and restricted cash at beginning of period | | 3,393 | | | 1,987 | | |
Cash, cash equivalents, and restricted cash at end of period | | $ | 13,343 | | | $ | 1,410 | | |
| Preferred stock dividends paid | | Preferred stock dividends paid | | (479) | | | — | |
Net cash provided by (used in) financing activities | | Net cash provided by (used in) financing activities | | 12,550 | | | (6,180) | |
Net increase in cash, cash equivalents, and restricted cash including cash classified within current assets held for sale | | Net increase in cash, cash equivalents, and restricted cash including cash classified within current assets held for sale | | 10,604 | | | 9,903 | |
Less: net increase in cash classified within current held for sale | | Less: net increase in cash classified within current held for sale | | — | | | (47) | |
| Net increase in cash, cash equivalents, and restricted cash | | Net increase in cash, cash equivalents, and restricted cash | | 10,604 | | | 9,950 | |
Cash, cash equivalents, and restricted cash at beginning of period | | Cash, cash equivalents, and restricted cash at beginning of period | | 4,816 | | | 3,393 | |
Cash, cash equivalents, and restricted cash at end of period | | Cash, cash equivalents, and restricted cash at end of period | | $ | 15,420 | | | $ | 13,343 | |
| Reconciliation of cash, cash equivalents, and restricted cash at end of year | | Reconciliation of cash, cash equivalents, and restricted cash at end of year | |
Cash and cash equivalents | | Cash and cash equivalents | | $ | 15,035 | | | $ | 13,175 | |
Restricted cash | | Restricted cash | | 385 | | | 168 | |
Cash, cash equivalents, and restricted cash at end of period | | Cash, cash equivalents, and restricted cash at end of period | | $ | 15,420 | | | $ | 13,343 | |
| | Non-Cash Investing Activities | Non-Cash Investing Activities | | Non-Cash Investing Activities | |
MD Office Solutions Promissory Note Receivable | MD Office Solutions Promissory Note Receivable | | $ | 1,385 | | | $ | 0 | | MD Office Solutions Promissory Note Receivable | | $ | — | | | $ | 1,385 | |
Non-Cash Financing Activities | Non-Cash Financing Activities | | Non-Cash Financing Activities | |
Gain on Paycheck Protection Program Loan Forgiveness | Gain on Paycheck Protection Program Loan Forgiveness | | $ | 1,220 | | | $ | 0 | | Gain on Paycheck Protection Program Loan Forgiveness | | $ | — | | | $ | 1,220 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
STAR EQUITY HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)
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| | Perpetual Preferred Stock | | Common stock | | | Treasury Stock | | Additional paid-in capital | | | Accumulated deficit | | Total stockholders’ equity |
| | Shares | | Amount | | Shares | | Amount | | | |
Balance at December 31, 2020 | | 1,916 | | | $ | 21,500 | | | 4,798 | | | $ | 0 | | | | $ | (5,728) | | | $ | 149,143 | | | | $ | (124,986) | | | $ | 18,429 | |
Stock-based compensation | | — | | | — | | | — | | | — | | | | — | | | 131 | | | | — | | | 131 | |
Shares issued under stock incentive plans, net of shares withheld for employee taxes | | — | | | — | | | 3 | | — | | | | — | | | (5) | | | | — | | | (5) | |
Accrued dividend on redeemable preferred stock | | — | | | 479 | | — | | | — | | | | — | | | (479) | | | | — | | | (479) | |
Proceeds from exercise of warrants | | — | | | — | | | 220 | | — | | | | — | | | 493 | | | | — | | | 493 | |
Net income | | — | | | — | | | — | | | — | | | | — | | | — | | | | 5,432 | | | 5,432 | |
Balance at March 31, 2021 | | 1,916 | | | $ | 21,979 | | | 5,021 | | | $ | 0 | | | | $ | (5,728) | | | $ | 149,283 | | | | $ | (119,554) | | | $ | 24,001 | |
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| | Perpetual Preferred Stock | | Common stock | | | Treasury Stock | | Additional paid-in capital | | | Accumulated deficit | | Total stockholders’ equity |
| | Shares | | Amount | | Shares | | Amount | | | |
Balance at December 31, 2021 | | 1,916 | | | $ | 18,988 | | | 5,805 | | | $ | — | | | | $ | (5,728) | | | $ | 150,451 | | | | $ | (127,969) | | | $ | 16,754 | |
Stock-based compensation | | — | | | — | | | — | | | — | | | | — | | | 144 | | | | — | | | 144 | |
Shares issued under stock incentive plans, net of shares withheld for employee taxes | | — | | | — | | | 49 | | | — | | | | — | | | (3) | | | | — | | | (3) | |
Accrued dividends on redeemable preferred stock | | — | | | 479 | | | — | | | — | | | | — | | | (479) | | | | — | | | (479) | |
Preferred stock dividends paid | | — | | | (479) | | | — | | | — | | | | — | | | — | | | | — | | | — | |
Equity issuance costs | | — | | | — | | | — | | | — | | | | — | | | (450) | | | | — | | | (450) | |
Proceeds from the sale of common stock, warrants, and exercise of over allotment options | | — | | | — | | | 9,175 | | | 1 | | | | — | | | 13,197 | | | | — | | | 13,198 | |
Net loss | | — | | | — | | | — | | | — | | | | — | | | — | | | | (3,701) | | | (3,701) | |
Balance at March 31, 2022 | | 1,916 | | | $ | 18,988 | | | 15,029 | | | $ | 1 | | | | $ | (5,728) | | | $ | 162,860 | | | | $ | (131,670) | | | $ | 25,463 | |
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| | Perpetual Preferred Stock | | Common stock | | | Treasury Stock | | Additional paid-in capital | | | Accumulated deficit | | Total stockholders’ equity |
| | Shares | | Amount | | Shares | | Amount | | | |
Balance at December 31, 2019 | | 1,916 | | | $ | 19,602 | | | 2,050 | | | $ | 0 | | | | $ | (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 | | — | | | | — | | | — | | | | — | | | 0 | |
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 | | | $ | 0 | | | | $ | (5,728) | | | $ | 144,977 | | | | $ | (121,482) | | | $ | 17,767 | |
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| | Perpetual Preferred Stock | | Common stock | | | Treasury Stock | | Additional paid-in capital | | | Accumulated deficit | | Total stockholders’ equity |
| | Shares | | Amount | | Shares | | Amount | | | |
Balance at December 31, 2020 | | 1,916 | | | $ | 21,500 | | | 4,798 | | | $ | — | | | | $ | (5,728) | | | $ | 149,143 | | | | $ | (124,986) | | | $ | 18,429 | |
Stock-based compensation | | — | | | — | | | — | | | — | | | | — | | | 131 | | | | — | | | 131 | |
Shares issued under stock incentive plans, net of shares withheld for employee taxes | | — | | | — | | | 3 | | | — | | | | — | | | (5) | | | | — | | | (5) | |
Accrued dividend on redeemable preferred stock | | — | | | 479 | | | — | | | — | | | | — | | | (479) | | | | — | | | (479) | |
Proceeds from the exercise of warrants | | — | | | — | | | 220 | | | — | | | | — | | | 493 | | | | — | | | 493 | |
Net income | | — | | | — | | | — | | | — | | | | — | | | — | | | | 5,432 | | | 5,432 | |
Balance at March 31, 2021 | | 1,916 | | | $ | 21,979 | | | 5,021 | | | $ | — | | | | $ | (5,728) | | | $ | 149,283 | | | | $ | (119,554) | | | $ | 24,001 | |
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See accompanying notes to unaudited condensed consolidated financial statements.
STAR EQUITY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation and Significant Policies
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, 20202021 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, 2020,2021, filed with the SEC on Form 10-K on March 29, 2021,31, 2022, 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.
The Company and Discontinued Operations
On March 31, 2021, Star Equity Holdings, Inc. (“Star Equity,” the “Company,” “we,” or “our”), a diversified holding company with 3 divisions: Healthcare, Construction, and Investments, announced the completion of the sale of DMS Health Technologies, Inc., a North Dakota corporation and wholly owned indirect subsidiary of Star Equity (“DMS Health”), for $18.75 million in cash, as originally announced on November 3, 2020 (the “DMS Sale Transaction”). The assets and liabilities of DMS Health were previously classified as held for sale and the results of DMS Health’s operations were presented as a discontinued operations in our previously issued financial statements. Unless otherwise noted, discussion within these notes to the condensed consolidated financial statements relates to continuing operations. Refer to Note 2. Discontinued Operations for additional information.
COVID-19 Pandemic
During the three months ended March 31, 2021, we experienced a $0.4 million decrease in Healthcare division revenue which was offset by a $3.6 million increase, in Construction division revenue, as compared to the same period of the prior year. With the COVID-19 vaccine rollout now well underway, we are hopeful that we will gradually make our way back to pre-COVID levels of business activity. We believe the uncertainty surrounding the pandemic will continue to decrease as we progress through 2021. On the healthcare side, we expect to see imaging volume recover as the pandemic is brought under control. In construction, we expect that continued recovery in employment and a strong housing market will underpin the growth we are seeing. However, we are unsure about the potential impact.
Mezzanine Equity
Pursuant to the Certificate of Designations, Rights and Preferences of 10% Series A Cumulative Perpetual Preferred Stock (the “Series A Preferred Stock”) of Star Equity Holdings, Inc. (formerly Digirad Corporation) (the “Certificate of Designations”), upon a Change of Control Triggering Event, as defined in the Certificate of Designations, holders of the 10% Series A Cumulative Perpetual Preferred Stock (the “Company Preferred Stock”) may require usthe Company to redeem the CompanySeries A 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 the Company, the CompanySeries A Preferred Stock does not qualify as permanent equity and has been classified as mezzanine or temporary equity. Accordingly, the CompanySeries A Preferred Stock is not redeemable and it was not probable that the Companyour Series A Preferred Stock would become redeemable as of March 31, 2022 and 2021. Therefore, we are not currently required to accrete the Series A Preferred Stock to its redemption value.
In addition to a Change of Control Redemption, the Certificate of Designations also provides that the Companywe may redeem (at itsour option, in whole or in part) the CompanySeries A Preferred Stock following the fifth anniversary of issuance of the CompanySeries A Preferred Stock, at a cash redemption price of $10.00 per share, plus any accumulated and unpaid dividends.
On February 25, 2022, our board of directors declared a cash dividend to holders of our Series A Preferred Stock of $0.25 per share, for an aggregate amount of approximately $0.5 million. The record date for this dividend was March 1, 2022, and the payment date was March 10, 2022. Refer to preferred stock dividends discussed in Note 13. Perpetual Preferred Stock.
Common Stock Equity Offering
On May 28, 2020, we closed a public offering (the “Offering”) of 2,225,000 shares of our common stock, and 2,225,000 warrants (the “Warrants”) to purchase up to 1,112,500 additional shares of our common stock. The Offering price was $2.24 per share of common stock and $0.01 per accompanying Warrant (for a combined Offering price of $2.25), initially raising $5.0 million in gross proceeds before underwriter discounts and offering-related expenses. The underwriting agreement (the “Underwriting Agreement”) we entered into with Maxim Group LLC (“Maxim”), as representative of the underwriters, for the Offering contained customary representations, warranties, and agreements by the Company, customary conditions to closing, indemnification obligations of the Company and Maxim and certain other obligations.
Pursuant to the terms of the Underwriting Agreement, we granted to Maxim an option for a period of 45 days (the “Over-Allotment Option”) to purchase up to 225,000 additional shares of our common stock and 225,000 Warrants to purchase up to an additional 112,500 shares of our 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 our 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 we sold in the Offering to 2,450,000 shares, and total gross proceeds to approximately $5.5 million. In addition, the Company received $0.5 million from investors in the Offering throughout the balance of 2020 due to the exercise of a portion of the Warrants sold in the Offering, bringing the total gross proceeds from equity issuance to $6.0 million.
The net proceeds to the Company from the Offering and Warrant exercises in 2020 were approximately $5.2 million (inclusive of the exercise of the over-allotment option), after deducting underwriter fees and offering-related expenses estimated at $0.8 million. We used a significant portion of the net proceeds from the Offering to fund working capital needs at our construction businesses, particularly related to modular housing projects which we produced at KBS Builders, Inc. (“KBS”) for the Boston-area projects. The remainder of the net proceeds is being used for working capital and for other general corporate purposes. We have broad discretion in determining how the proceeds of the Offering is used, and our discretion is not limited by the aforementioned possible uses.
As of March 31, 2021, 0.9 million warrants were exercised and 1.5 million warrants remained outstanding at an exercise price of $2.25.
Liquidity OutlookGoing Concern
The accompanying condensed consolidated 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 continuing operations, net of income taxes, of approximately $1.6$3.7 million and $2.2$0.6 million for the three months ended March 31, 20212022 and 2020,2021, respectively. We have an accumulated deficit of $119.6$131.7 million and $125.0$128.0 million as of March 31, 20212022 and December 31, 2020,2021, respectively. Net cash used in operations was $0.6 million for the three months ended March 31, 2022, compared to net cash used in operations of $2.2 million for the three months endedsame period in 2021. We will likely need to secure additional financing in the future to accomplish our business plan over the next several years and there can be no assurance on the availability or terms upon which such financing and capital might be available at that time. As of March 31, 2021 compared2022, cash and cash equivalents increased to net cash provided by operations$15.0 million from $4.5 million as of $0.6 million for the same prior year period in 2020.December 31, 2021.
Regarding our debt,At March 31, 2022, we had approximately $12.5$13.3 million in short term debt due tooutstanding. All of our borrowings whichdebt is classifiedcategorized as short term as disclosed inshort-term on our condensed Consolidated Balance Sheets. For more detail, see Note 8. Debt. The $5.0Company’s loan pursuant to the SNB Loan Agreement (as defined below) (the “SNB Loan”) with Sterling National Bank, a national banking association as lender (“Sterling” or “SNB”), which has a current balance owed of $7.3 million, SNB debt primarily supports our healthcare businessHealthcare business. On February 1, 2022, Sterling became part of Webster Bank, N.A. (“Webster”), and actuallyWebster became successor in interest to the SNB Loan Agreement. While the SNB Loan matures in 2024, but GAAP rules require that the outstanding balance be classified as short-term debt,debt. This is due to both the automatic sweep feature embedded in the traditional lockbox arrangement along with aand the subjective acceleration clause in the SNB Loan and Security Agreement. In practice, we have the ability to immediately borrow back these daily sweeps to fund our working capital. As of March 31, 2021,2022, we were not in compliance with all borrowing arrangementscovenants in the SNB Loan Agreement related to our Healthcare division. Asdivision and we have not yet obtained a waiver from Webster for these financial covenant breaches. We are currently in negotiations to avoid a default. While we do not believe we will be required to pay down the current balance, our current cash is sufficient to repay the SNB Loan in full.
Upon the occurrence and during the continuation of March 31, 2021,an event of default under the SNB Loan Agreement, Webster may, among other things, declare the loans and all other obligations under the SNB Loan Agreement immediately due and payable and increase the interest rate at which loans and obligations under the SNB Loan Agreement bear interest. Management has concluded that this forecasted violation raises substantial doubt about our ability to continue as a going concern within twelve months after the date that financial statements are issued, if we had $4.5 millionare not able to restructure those agreements or receive a waiver for non-compliance with our covenants. Our financial statements do not reflect any adjustments that might result from the outcome of borrowing capacitythis uncertainty. Management is taking a number of steps to fundavoid these breaches and/or restructure the covenants within these agreements. These steps include improving our operations, ofconsidering additional or alternative financing arrangements, and negotiating with current lenders to amend our covenants. While we believe that we maintain strong transparency and relationships with our lenders, there can be no assurance that we will be successful in these divisions.efforts.
As of March 31, 2021,2022, we have $4.6had $5.0 million outstanding on our two Construction division revolvers with Gerber andFinance, Inc. (“Gerber”). As of December 31, 2021, we were not in compliance with all borrowingour bi-annual covenants foron either of these Gerber however,facilities. However, we were in breach of our covenants as of December 31, 2020 and may be in breach at our nexthave obtained waivers from Gerber covering the measurement period atending June 30, 2021.2022. While Gerber has historically provided us with such waivers, when needed, there is no assurance that we will be able to receive waivers for covenant violations in the future, or thatfuture.
On January 31, 2020, we will meetand certain of our Investments subsidiaries entered into a Loan and Security Agreement with Gerber (as amended, the “Star Loan Agreement”), which provides for a credit facility with borrowing availability of up to $2.5 million, bearing interest at the prime rate plus 3.5% per annum, and matures on January 1, 2025, unless terminated in accordance with the terms therein (the “Star Loan”). We currently have $1.0 million outstanding on the Star Loan, on which we are and historically have been making timely payments in full compliance with covenants in the future.all covenants. Related party notes of $2.3 million wasthat were outstanding as of December 31, 2020 were fully paid off on April 1, 2021 using proceeds from the DMS Sale Transaction. In addition, as
On January 24, 2022, we closed an underwritten public offering (the “2022 Public Offering”), and gross proceeds, before deducting underwriting discounts and offering expenses and excluding any proceeds we may receive upon exercise of March 31, 2021, we had cashthe common warrants, were $14.3 million and cash equivalents of $13.3net proceeds were $12.7 million.
Management believes that the Company has the liquidity and operations Refer to continue to support the business through the next 12 months from the issuance of this Quarterly Report. Our ability to continue as a going concern is dependent on its ability to execute its plans.
Note 14.
Equity Transactions for details.
In the first quarter of 2022, we declared and made $0.5 million preferred stock dividend payment. In the second quarter of 2022, we declared a $0.5 million preferred stock dividend payment. Refer to Note 13.
Perpetual Preferred Stock and Note 17. Subsequent Events for details.Use of Estimates
PreparationThe preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported amounts of assetsin the condensed consolidated financial statements and liabilities,disclosures made in the disclosure of contingent assetsaccompanying notes to the condensed consolidated financial statements. Significant estimates and liabilities,judgments include those related to revenue recognition, goodwill valuation, and the reported amounts of revenues and expenses. By their nature, estimates are subject to an inherent degree of uncertainty.income taxes. Actual results could materially differ from management’sthose estimates.
Revenue Recognition
We recognize revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606 and Topic 842 for the three months ended March 31, 2021 and 2020, which are explained below.842.
Pursuant to ASC 606, Revenue from Contracts with Customers, we recognize revenue when a customer obtains control of promised goods or services. We record the amount of revenue that reflects the consideration that it expects to receive in exchange for those goods or services. We apply the following five-step model in order to determine this amount: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
The Company has elected to use the practical expedient under ASC 606 to exclude disclosures of unsatisfied remaining performance obligations for (i) contracts having an original expected length of one year or less or (ii) contracts for which the practical expedient has been applied to recognize revenue at the amount for which it has a right to invoice.
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, as we provide a series of distinct goods or services that are substantially the same and are transferred with the same pattern to the customer. 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.
Revenue recognition is evaluated on a contract by contract basis. Performance obligations are satisfied over time as work progresses or at a point in time. A performance obligation is satisfied over time if we have an enforceable right to payment. Determining if there is an enforceable right to payment is assessed on a contract by contract basis. For contracts requiring over time revenue recognition, the selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We use a cost-based input measurement of progress because it best depicts the transfer of assets to the customer, which occurs as costs are incurred during the manufacturing process or as services are rendered. Under the cost-based measure of progress, the extent of progress towards completion is measured based on the costs incurred to date.
Our products are generally not sold with a right of return and the Company does not provide significant credits or incentives, which may be variable consideration when estimating the amount of revenue to be recognized.
Healthcare Services Revenue Recognition. We generate service revenue primarily from providing diagnostic services and cardiac monitoring services to our customers. Service revenue within our Diagnostic ServicesHealthcare reportable segmentssegment is derived from providing our customers with contract diagnostic services, which includes use of our imaging systems, qualified personnel, radiopharmaceuticals, licensing, logistics and related items required to perform testing in their own offices. We bill customers either on a per-scan or fixed-payment methodology, depending upon the contract that is negotiated with the customer. Within our Diagnostic ServiceHealthcare segment, we also rent cameras to healthcare customers for use in their operations. Rental revenues are structured as either a weekly or monthly payment arrangement, and are recognized in the month servicesrental assets are provided. Revenue related to provision of our services is recognized at the time services are performed.
Healthcare Product and Product-Related Revenue Recognition. We generate revenue from product and product-related sales, primarily from the sale of gamma cameras, accessories, and accessories.radiopharmaceuticals doses.
Diagnostic ImagingHealthcare product revenues are generated from the sale of internally developed solid-state gamma camera imaging systems and post-warranty camera maintenance service contracts. Revenue from sales of imaging systems is generally recognized at point in time upon delivery of systems and acceptance by customers. We also provide installation services and training on cameras sold, primarily in the United States. Installation and initial training is generally performed shortly after delivery and the revenue related to the provision of these services is recognized at the time services are performed. Neither installation nor training is essential to the functionality of the product. Finally, we offer camera maintenance service contracts that are sold beyond the term of the initial warranty, generally one year from the date of purchase. Revenue from these service contracts is deferred and recognized ratably over the period of the obligation. We offer time and material services and record revenue when service is performed. Radiopharmaceuticals doses revenue, generated by Healthcare, is generally recognized when delivered to the customer.
Construction Revenue Recognition. Within the Construction segment,division, we service residential and commercial construction projects by manufacturing modular housing units and other products and suppliessupply general contractors with building materials. KBS manufactures modular buildings for both single-family residential homes and larger, commercial building projects. Our EdgeBuilder Inc. (“EdgeBuilder”) subsidiary manufactures structural wall panels, permanent wood foundation systems and other engineered wood products, and our Glenbrook Building Supply, Inc. (“Glenbrook”) subsidiary is a retail supplier of lumber and other building supplies. Revenue is generally recognized at point in time upon delivery of product. Retail sales at Glenbrook are recognized at the point of sale. 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. Revenue is generally recognized at point in time upon delivery of product or over time by measuring progress towards completion
Billings in excess of costs and estimated earnings.We recognize billings in excess of costs and estimated earnings on uncompleted contracts are current liabilities, which relate to fixed-price contracts recognized over time, and represents payments in advance of performing the related contract work. Billings in excess of costs and estimated earnings on uncompleted contracts are not considered to be a significant financing component because they are generally used to meet working capital demands that can be higher in the early stages of a contract. Contract liabilities are classified in deferred revenue in the condensed Consolidated Balance Sheets. Contract liabilities are reduced when the associated revenue from the contract is recognized, which is generally within one year.
Contract Costs.We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. The Company applies a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period would have been one year or less. These costs mainly include the internal sales commissions; under the terms of these programs these are generally earned and the costs are recognized at the time the revenue is recognized.
Deferred Revenue
We record deferred revenue when cash payments are received in advance of our performance. We have determined our contracts do not include a significant financing component. The majority of our deferred revenue relates to payments received on camera support post-warranty service contracts, which are billed at the beginning of the contract period or at periodic intervals (e.g., monthly, quarterly, or annually).
Leases
Lessee Accounting
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.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.
We elected not to separate lease and non-lease components of its operating leases in which it is the lessee and lessor. Additionally, we elected not to recognize right-of-use assets and leases liabilities that arise from short-term leases of twelve months or less.
Lessor Accounting
MajorityThe majority of the lease income of the Healthcare division comes from camera rentals and the lease income of the Construction division comes from the rental of the Waterford facility to a commercial tenant. 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 ninety90 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’sour leases is classified as an operating lease.
We 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.
We 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.
Concentration of Credit Risk
Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of cash and cash equivalents and accounts receivable. We limit our exposure to credit loss by generally placing cash in high credit quality financial institutions. Cash balances are maintained primarily at major financial institutions in the United States and a portion of which exceed the regulatory limit of $250,000 insured by the Federal Deposit Insurance Corporation (FDIC). We have not experienced any credit losses associated with our cash balances. Additionally, we have established guidelines regarding diversification of our investments and their maturities, which are designed to maintain principal and maximize liquidity.
Variable Interest Entities
We determine at the inception of each arrangement whether an entity in which we have made an investment or in which we have other variable interests is considered a variable interest entity (“VIE”). We consolidate VIEs when we are the primary beneficiary. We are the primary beneficiary of a VIE when we have the power to direct activities that most significantly affect the economic performance of the VIE and have the obligation to absorb the significant losses or benefits. If we are not the primary beneficiary in a VIE, we account for the investment or other variable interests in a VIE in accordance with applicable GAAP.
Periodically, we assess whether any changes in our interest or relationship with the entity affect our determination of whether the entity is a VIE and, if so, whether we are the primary beneficiary.
Recently Adopted Accounting PronouncementsReclassification
In December of 2019, the Financial Accounting Standards Board issued ASU No 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12 removes certain exceptionsPPP Loan forgiveness reclassification has been made to the general principles in Topic 740 in Generally Accepted Accounting Principles. ASU 2019-12 is effective for public entities for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company adoptedprior period financial statements to conform to the guidance during the three months ended 2021. ASU 2019-12 does not have a material effect on the Company’s current financial position, results of operations oryear financial statement disclosures.presentation of the condensed Consolidated Statements of Operations. This change did not impact previously reported net loss, loss per share, stockholders’ equity, total assets or the condensed Consolidated Statements of Cash Flows.
Finance Lease liabilities and Investments reclassifications have been made to the prior period financial statements to conform to the current year financial statement presentation of the condensed Consolidated Balance Sheets. These changes did not impact previously reported net (loss) income, (loss) income per share, stockholders’ equity, total liabilities, total assets or the condensed Consolidated Statements of Cash Flows.
New Accounting Standards To Be Adopted
In June 2016, the FASBFinancial Accounting Standards Board (the “FASB”) issued ASUAccounting Standards Update (“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 condensed consolidated financial statements.
In March 2020, the Financial Accounting Standards BoardFASB issued Accounting Standards Update ("ASU")ASU 2020-04, Reference Rate Reform (Topic 848), to temporarily ease the potential burden in accounting for reference rate reform. The standard provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform. The guidance generally can be applied through December 31, 2022. We will monitor our contracts and transactions for potential application of this ASU.
Recently Adopted Accounting Standards
In August 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). ASU 2020-06 eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, ASU 2020-06 modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2021 (or December 15, 2023 for companies who meet the SEC definition of Smaller Reporting Companies), and interim periods within those fiscal years. The amendment is to be adopted through either a fully retrospective or modified retrospective method of transition. Early adoption is permitted. The Company early adopted this standard on January 1, 2021 by applying the modified retrospective approach. There was no cumulative-effect transition adjustment required to the opening balance of accumulated deficit upon the adoption of this standard.
Note 2. Discontinued Operations
On October 30, 2020, Star Equity entered into a Stock Purchase Agreement (the “DMS Purchase Agreement”) by and among the Company, Project Rendezvous Acquisition Corporation, a Delaware corporation and wholly owned subsidiary ofbetween the Company (“Seller”), DMS Health, and Knob Creek Acquisition Corp., a Tennessee corporation (“Buyer”), pursuant to which subject to the satisfaction or waiver of certain conditions, Buyer purchased all of the issued and outstanding common stock of DMS Health, which operated our Mobile Healthcare business unit, from Seller. The purchase price forunder the DMS Sale TransactionPurchase Agreement was $18.75 million in cash, subject to certain adjustments, including a working capital adjustment. The DMS Sale Transaction was announced on November 3, 2020, and was subsequently completed on March 31, 2021. We deemed the disposition of the Mobile Healthcare business unit which was effected upon the closing of the DMS Sale Transaction, to represent a strategic shift that will have a major effect on our operations and financial results. As ofFor the year ended December 31, 2020,2021, the Mobile Healthcare business met the criteria to be classified as held for sale. This segment is reported on the condensed Consolidated StatementStatements of Operations as discontinued operations and on the condensed Consolidated Balance SheetSheets as Assets and Liabilities held for sale. In January, 2022, we received an immaterial amount of net escrow settlement. In April 2021, DMS Health contracted Digirad Imaging Solutions for a term of three years to purchase radiopharmaceuticals doses, resulting in $0.4 million of revenues for the three months ended March 31, 2022.
We allocated a portion of interest expense to discontinued operations since the proceeds received from the sale were required to be used to pay down outstanding borrowings under our revolving credit facility with Sterling National Bank.under the SNB Loan Agreement. The allocation was based on the ratio of assets generated based on the borrowing capacity to total borrowings capacity for the period. In addition, certain general and administrative costs related to corporate and shared service functions previously allocated to the mobile healthcare reportable segment are included in discontinued operations.
The following table presents financial results of DMS Health for the three months ended March 31, 2021 and 2020 business2021. There have been no activities for the three months ended March 31, 2022 (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Total revenues | $ | 9,490 | | | $ | 9,667 | | | | | |
Total cost of revenues | 6,973 | | | 8,469 | | | | | |
Gross profit | 2,517 | | | 1,198 | | | | | |
| | | | | | | |
Operating expenses: | | | | | | | |
Selling, general and administrative | 1,469 | | | 1,366 | | | | | |
Amortization of intangible assets | 0 | | | 241 | | | | | |
Total operating expenses | 1,469 | | | 1,607 | | | | | |
| | | | | | | |
Income (loss) from discontinued operations | 1,048 | | | (409) | | | | | |
Interest expense | (180) | | | (169) | | | | | |
| | | | | | | |
Gain on sale of discontinued operations | 5,224 | | | 0 | | | | | |
Income (loss) from discontinuing operations before income taxes | 6,092 | | | (578) | | | | | |
Income tax expense | (72) | | | (7) | | | | | |
Income (loss) from discontinuing operations | $ | 6,020 | | | $ | (585) | | | | | |
The following represents the carrying amounts of the major classes of assets reported as “Assets held for sale” as of twelve months ended December 31, 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| Cash and cash equivalentsThree Months Ended March 31, | | $ | 443 | |
Accounts receivable, net | | 4,305 | |
Inventories, net | | 50 | |
Other current assets | | 459 | |
Property and equipment, net | | 7,721 | |
Operating lease right-of-use assets, net | | 4,863 | |
Intangible assets, net | | 2,915 | |
| | |
| | | | 2021 | | | | | | | | | |
Total revenues | | | | $ | 20,7569,490 | | | | | | | | | | |
The following represents the carrying amounts of the major classes of liabilities reported as “Liabilities held for sale” as of December 31, 2020 (in thousands):
Total cost of revenues | | | | 6,973 | | | | | | | | | | |
Gross profit | | | | 2,517 | | | | | | | | | | |
| | December 31, 2020 |
Accounts payable | | $ | 1,597 | |
Accrued compensation | | 645 | |
Deferred revenue | | 96 | |
Operating lease liabilities | | 4,863 | |
Other current liabilities | | 560 | |
Deferred tax liabilities | | 16 | |
| | |
Other liabilitiesOperating expenses: | | 94 | | | | | | | | | | | |
Selling, general and administrative | | | | 1,469 | | | | | | | | | | |
| | | | | | | | | | | | | |
Total operating expenses | | | | 1,469 | | | | | | | | | | |
| | | | | | | | | | | | | |
Income from discontinued operations | | | | 1,048 | | | | | | | | | | |
Interest expense, net | | | | (180) | | | | | | | | | | |
| | | | | | | | | | | | | |
Gain on sale of discontinued operations | | | | 5,224 | | | | | | | | | | |
Income from discontinuing operations before income taxes | | | | 6,092 | | | | | | | | | | |
Income tax expense | | | | (72) | | | | | | | | | | |
Income from discontinuing operations | | | | $ | 7,8716,020 | | | | | | | | | | |
There have been no activities for the three months ended March 31, 2022. The following table presents the significant non-cash operating, investing and financing activities from discontinued operations for the three months ended March 31, 2021 and 2020 (in thousands): | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2021 | | 2020 |
Operating activities | | | | |
| | | | |
Depreciation | | $ | 8 | | | $ | 1,137 | |
Amortization of intangible assets | | 0 | | | 241 | |
Non-cash lease expense | | 256 | | | 192 | |
Loss on extinguishment of debt | | 130 | | | 0 | |
Gain on sale of DMS discontinued operations | | (5,224) | | | 0 | |
Share-based compensation | | 2 | | | 4 | |
Loss on disposal of assets | | 1 | | | 130 | |
Provision for bad debt | | 0 | | | 2 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Investing activities | | | | |
Purchase of property and equipment | | (154) | | | (243) | |
Proceeds from sale of discontinued operations | | 18,750 | | | 0 | |
Proceeds from sale of property and equipment | | 3 | | | 15 | |
| | | | |
Financing activities | | | | |
Repayment of obligations under finance leases | | (60) | | | (80) | |
| | | | |
| | | | |
Non-Cash Investing Activities | | | | |
Fixed asset purchases in accounts payable | | 0 | | | 150 | |
Lease assets obtained in exchange for new operating lease liabilities | | 0 | | | 564 | |
| | | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, |
| | | | | | | | 2021 |
Operating activities | | | | | | | | |
| | | | | | | | |
Depreciation | | | | | | | | $ | 8 | |
| | | | | | | | |
Non-cash lease expense | | | | | | | | 256 | |
Write-off of borrowing costs | | | | | | | | 130 | |
Gain on sale of DMS discontinued operations | | | | | | | | (5,224) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Investing activities | | | | | | | | |
Purchase of property and equipment | | | | | | | | (154) | |
Proceeds from sale of discontinued operations | | | | | | | | 18,750 | |
Proceeds from sale of property and equipment | | | | | | | | 3 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Following is the reconciliation of purchase price to the gain recognized in income from discontinued operations for the three months ended March 31, 2021 (in thousands):
| | | | | |
| |
Estimated proceeds of the disposition, net of transaction costs | $ | 18,750 | |
Assets of the businesses | (20,920) | |
Liabilities of the businesses | 7,712 | |
Transaction expenses | (318) | |
Pre-tax gain on the disposition | $ | 5,224 | |
Note 3. Revenue
Healthcare Product and Product-Related Revenues and Services Revenue
Healthcare product and product-related services revenue are generated from the sale of gamma cameras, accessories 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 reportable segment. Services revenue also includes lease income generated from camera rentals of imaging systems to our customers.
Construction
Construction revenue is generated from selling modular buildings for both single-family residential homes, larger commercial building projects and selling structural wall panels, permanent wood foundation systems and other engineered wood products.
Investments
Star Real Estate Holdings USA, Inc. (“SRE”) generates revenue from the lease of commercial properties and equipment and Lone Star Value Management, LLC (“LSVM”), a Connecticut based exempt reporting advisor through March 31, 2021, provided services that included investment advisory services, and the servicing of pooled investment vehicles.
Revenue Recognition
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, as we provide a series of distinct goods or services that are substantially the same and are transferred with the same pattern to the customer. 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.
Revenue recognition is evaluated on a contract by contract basis. Performance obligations are satisfied over time as work progresses or at a point-in-time. A performance obligation is satisfied over time if the Company has an enforceable right to payment. Determining if there is an enforceable right to is assessed on a contract by contract basis. For contracts requiring over time revenue recognition, the selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. The Company uses a cost-based input measurement of progress because it best depicts the transfer of assets to the customer, which occurs as costs are incurred during the manufacturing process or as services are rendered. Under the cost-based measure of progress, the extent of progress towards completion is measured based on the costs incurred to date.
Our products are generally not sold with a right of return and the Company does not provide significant credits or incentives, which may be a variable consideration when estimating the amount of revenue to be recognized.
Disaggregation of Revenue
The following tables present our revenues for the three months ended March 31, 20212022 and 2020,2021, disaggregated by major source (in thousands):
| | | Three Months Ended March 31, 2021 | | Three Months Ended March 31, 2022 |
| | Diagnostic Services | | Diagnostic Imaging | | Construction | | | Total | | Healthcare | | | Construction | | | Total |
Major Goods/Service Lines | Major Goods/Service Lines | | | | | | | | | Major Goods/Service Lines | | | | | | | |
Mobile Imaging | Mobile Imaging | | $ | 10,181 | | | $ | 0 | | | $ | 0 | | | | $ | 10,181 | | Mobile Imaging | | $ | 10,518 | | | | $ | — | | | | $ | 10,518 | |
Camera | Camera | | 0 | | | 1,422 | | | 0 | | | | 1,422 | | Camera | | 1,132 | | | | — | | | | 1,132 | |
Camera Support | Camera Support | | 0 | | | 1,646 | | | 0 | | | | 1,646 | | Camera Support | | 1,679 | | | | — | | | | 1,679 | |
Healthcare Revenue from Contracts with Customers | Healthcare Revenue from Contracts with Customers | | 10,181 | | | 3,068 | | | 0 | | | | 13,249 | | Healthcare Revenue from Contracts with Customers | | 13,329 | | | | — | | | | 13,329 | |
Lease Income | Lease Income | | 58 | | | 0 | | | 38 | | | | 96 | | Lease Income | | 89 | | | | — | | | | 89 | |
Construction | Construction | | 0 | | | 0 | | | 9,009 | | | | 9,009 | | Construction | | — | | | | 11,631 | | | | 11,631 | |
| Total Revenues | Total Revenues | | $ | 10,239 | | | $ | 3,068 | | | $ | 9,047 | | | | $ | 22,354 | | Total Revenues | | $ | 13,418 | | | | $ | 11,631 | | | | $ | 25,049 | |
| Timing of Revenue Recognition | Timing of Revenue Recognition | | | | Timing of Revenue Recognition | | | | | |
Services and goods transferred over time | Services and goods transferred over time | | $ | 10,239 | | | $ | 1,490 | | | $ | 2,731 | | | | $ | 14,460 | | Services and goods transferred over time | | $ | 10,854 | | | | $ | 1,897 | | | | $ | 12,751 | |
Services and goods transferred at a point in time | Services and goods transferred at a point in time | | 0 | | | 1,578 | | | 6,316 | | | | 7,894 | | Services and goods transferred at a point in time | | 2,564 | | | | 9,734 | | | | 12,298 | |
Total Revenues | Total Revenues | | $ | 10,239 | | | $ | 3,068 | | | $ | 9,047 | | | | $ | 22,354 | | Total Revenues | | $ | 13,418 | | | | $ | 11,631 | | | | $ | 25,049 | |
| | | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2021 |
| | Diagnostic Services | | Diagnostic Imaging | | Construction | | Investments | | Total | | Healthcare | | | Construction | | | Total |
Major Goods/Service Lines | Major Goods/Service Lines | | | | | | | | | | | Major Goods/Service Lines | | | | | | | | |
Mobile Imaging | Mobile Imaging | | $ | 10,602 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 10,602 | | Mobile Imaging | | $ | 10,181 | | | | $ | — | | | | $ | 10,181 | |
Camera | Camera | | 0 | | | 1,339 | | | 0 | | | 0 | | | 1,339 | | Camera | | 1,422 | | | | — | | | | 1,422 | |
Camera Support | Camera Support | | 0 | | | 1,522 | | | 0 | | | 0 | | | 1,522 | | Camera Support | | 1,646 | | | | — | | | | 1,646 | |
Healthcare Revenue from Contracts with Customers | Healthcare Revenue from Contracts with Customers | | 10,602 | | | 2,861 | | | 0 | | | 0 | | | 13,463 | | Healthcare Revenue from Contracts with Customers | | 13,249 | | | | — | | | | 13,249 | |
Lease Income | Lease Income | | 212 | | | 0 | | | 84 | | | 0 | | | 296 | | Lease Income | | 58 | | | | 38 | | | | 96 | |
Construction | Construction | | 0 | | | 0 | | | 5,400 | | | 0 | | | 5,400 | | Construction | | — | | | | 9,009 | | | | 9,009 | |
Investments | | 0 | | | 0 | | | 0 | | | 31 | | | 31 | | |
| Total Revenues | Total Revenues | | $ | 10,814 | | | $ | 2,861 | | | $ | 5,484 | | | $ | 31 | | | $ | 19,190 | | Total Revenues | | $ | 13,307 | | | | $ | 9,047 | | | | $ | 22,354 | |
| Timing of Revenue Recognition | Timing of Revenue Recognition | | Timing of Revenue Recognition | | | | | |
Services and goods transferred over time | Services and goods transferred over time | | $ | 10,814 | | | $ | 1,487 | | | $ | 84 | | | $ | 0 | | | $ | 12,385 | | Services and goods transferred over time | | $ | 11,092 | | | | $ | 2,731 | | | | $ | 13,823 | |
Services and goods transferred at a point in time | Services and goods transferred at a point in time | | 0 | | | 1,374 | | | 5,400 | | | 31 | | | 6,805 | | Services and goods transferred at a point in time | | 2,215 | | | | 6,316 | | | | 8,531 | |
Total Revenues | Total Revenues | | $ | 10,814 | | | $ | 2,861 | | | $ | 5,484 | | | $ | 31 | | | $ | 19,190 | | Total Revenues | | $ | 13,307 | | | | $ | 9,047 | | | | $ | 22,354 | |
We have corrected an immaterial disclosure error in the previously disclosed disaggregated revenue balances relating to the timing of revenue for the three months ended March 31, 2021. For the three months ended March 31, 2021, the amount of $0.6 million was revised from over time to point in time related to revenue recognition in the table above. Healthcare for goods transferred over time decreased by $0.6 million, with a corresponding increase to revenue recognized for goods and services transferred at a point in time. The adjustments did not impact the total amount of revenue or the period in which it was recognized, therefore, they had no effect on the condensed Consolidated Balance Sheets, Statements of Operations and Cash Flows for the periods presented.
Nature of Goods and Services
Mobile Imaging
Within our Diagnostic ServicesHealthcare segment, our sales are derived from providing services and materials to our customers, primarily physician practices and hospitals that allow them to perform diagnostic imaging services at their site. We typically bundle our services in providing staffing, our imaging systems, licensing, radiopharmaceuticals, and supplies depending on our customers’ needs. Our contracts with customers are typically entered into annually and are billed on a fixed rate per-day or per-scan basis, depending
on terms of the contract. For the majority of these contracts, the Company haswe have the right to invoice the customer in an amount that directly corresponds with the value to the customer as the Company performswe perform the services. The Company usesWe use the practical expedient to recognize revenue corresponding with amounts we have the right to invoice for services performed.
Camera
Within our Diagnostic ImagingHealthcare segment, camera revenues are generated from the sale of internally developed solid-state gamma camera imaging systems and accessories. We recognize revenue upon transfer of control to the customer at a point-in-time, which is generally upon delivery and acceptance. We also provide installation services and training on cameras we sell, primarily in the United States. Installation and initial training is generally performed shortly after delivery. The Company recognizesWe recognize revenues for installation and training over time as the customer receives and consumes benefits provided as the Company performswe perform the installation services.
Our sale of imaging systems includes a one-year assurance-type warranty. The estimated costs associated with our standard warranties and field service actions continue to be recognized as expense when cameras are sold. Maintenance service contracts sold beyond the term of our standard warranties are accounted for as a service-type warranty and revenue is deferred and recognized ratably over the period of the warranty obligation.
Camera Support
Within our Diagnostic ImagingHealthcare segment, camera support revenue is derived from the sale of separately-priced extended maintenance contracts to camera owners, training, and the sale of parts to customers that do not have an extended warranty. Our separately priced service contracts range from 12 to 48 months. Service contracts are usually billed at the beginning of the contract period or at periodic intervals (e.g., monthly, quarterly, or annually) and revenue is recognized ratably over the term of the agreement.
Services and training revenues are recognized in the period the services and training are performed. Revenue for sales of parts are recognized when the parts are delivered to the customer and control is transferred.
Lease Income
Within our Diagnostic ServiceHealthcare segment, we also generate income from rentals of state-of-the-art equipment including cameras and ultrasound machines to customers. Rental contracts are structured as either a weekly or monthly payment arrangement and are accounted for as operating leases. Revenues are recognized on a straight-line basis over the term of the rental.
Construction
Within the Construction segment, we service residential and commercial construction projects by manufacturing modular housing units and other products and supply general contractors with building materials. KBS manufactures modular buildings for both single-family residential homes and larger, commercial building projects. EdgeBuilder manufactures structural wall panels, permanent wood foundation systems and other engineered wood products, and Glenbrook is a retail supplier of lumber and other building supplies. Revenues are evaluated on a contract by contract basis. In general, construction revenues are recognized upon transfer of control to the customer at a point-in-time, which is generally upon delivery and acceptance. However, construction revenues are recognized over time for arrangements with customers for which: (i) performance does not create an asset with an alternative use, and (ii) we have an enforceable right to payment for performance completed to date.
Deferred Revenues
We record deferred revenues when cash payments are received in advance of our performance. We have determined our contracts do not include a significant financing component. The majority of our deferred revenue relates to payments received on camera support post-warranty service contracts, which are billed at the beginning of the contract period or at periodic intervals (e.g., monthly, quarterly, or annually).Revenue
Changes in the deferred revenues for continuing operationsrevenue for three months ended March 31, 2021,2022, is as follows (in thousands):
| | | | | | | | |
Balance at December 31, 20202021 | | $ | 2,3522,869 | |
Revenue recognized that was included in balance at beginning of the year | | (1,019)(2,011) | |
Deferred revenue, net, related to contracts entered into during the year | | 1,3272,503 | |
Balance at March 31, 2022 | | $ | 3,361 | |
As of March 31, 2022 and December 31, 2021, non-current deferred revenue was $386 thousand and $412 thousand, respectively, in other liabilities within our condensed Consolidated Balance Sheets, which is expected to be recognized over a period of 2-4 years.
Billings in Excess of Costs and Estimated Profit
Changes in the billings in excess of costs and estimated profit for three months ended March 31, 2022 is as follows (in thousands):
| | | | | | | | |
Balance at December 31, 2021 | | $ | 2,660312 | |
Revenue recognized that was included in balance at beginning of the year | | (312) | |
Billings in excess of costs, related to contracts entered into during the year | | 15 | |
Balance at March 31, 2022 | | $ | 15 | |
Included in the balances above asAs of March 31, 20212022, billings in excess of costs and estimated profit was $15 thousand and $0.3 million balance as of December 31, 2020 is non-current deferred revenue included2021, respectively in current liabilities within our condensed Consolidated Balance Sheet. As of March 31, 2022, total contract assets was $55 thousand and no balance as of December 31, 2021, respectively in other liabilities of $308 thousand and $168 thousand, respectively.
The Company has elected to use the practical expedient under ASC 606 to exclude disclosures of unsatisfied remaining performance obligations for (i) contracts having an original expected length of one year or less or (ii) contracts for which the practical expedient has been applied to recognize revenue at the amount for which it has a right to invoice.current assets within our condensed Consolidated Balance Sheet.
Contract Costs
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. The Company applies a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period would have been one year or less. These costs mainly include the Company’s internal sales commissions; under the terms of these programs these are generally earned and the costs are recognized at the time the revenue is recognized.
Note 4. Basic and Diluted Net Income (Loss) Per Share
We present net lossincome (loss) per share attributable to common stockholders in conformity with the two-class method required for participating securities, as the warrants are considered participating securities. We have not allocated net loss attributable to common stockholders to warrants because the holders of our warrants are not contractually obligated to share in our losses. Basic net loss per share attributable to common stockholders is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per share attributable to common stockholders is calculated to give effect to all potential shares of common stock, including common stock issuable upon exercise of warrants, stock options, and restricted stock units (“RSUs”). In periods for which there is a net loss, diluted loss per common share is equal to basic loss per common share, since the effect of including any common stock equivalents would be antidilutive.
The following table sets forth the reconciliation of shares used to compute basic and diluted net loss(loss) or income per share for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31 | | |
| | 2021 | | 2020 | | | | |
Numerator: | | | | | | | | |
Loss from continuing operations, net of tax | | $ | (588) | | | $ | (2,368) | | | | | |
Income (loss) from discontinued operations, net of tax | | 6,020 | | | (585) | | | | | |
Net income (loss) | | 5,432 | | | (2,953) | | | | | |
Deemed dividend on Series A redeemable preferred stock | | (479) | | | (484) | | | | | |
Net income (loss) attributable to common shareholders | | $ | 4,953 | | | $ | (3,437) | | | | | |
| | | | | | | | |
Denominator: | | | | | | | | |
Weighted average shares outstanding - basic and diluted | | 4,916 | | | 2,055 | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Net loss per common share - basic and diluted | | | | | | | | |
Net loss per share, continuing operations | | $ | (0.12) | | | $ | (1.15) | | | | | |
Net income (loss) per share, discontinued operations | | $ | 1.22 | | | $ | (0.28) | | | | | |
Net income (loss) per share | | $ | 1.10 | | | $ | (1.44) | | | | | |
Deemed dividend on Series A perpetual preferred stock per share | | $ | (0.10) | | | $ | (0.24) | | | | | |
Net income (loss) per share, attributable to common shareholders - basic and diluted | | $ | 1.01 | | | $ | (1.67) | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
Numerator: | | | | | | | | |
Loss from continuing operations, net of tax | | $ | (3,701) | | | $ | (588) | | | | | |
Income from discontinued operations, net of tax | | — | | | 6,020 | | | | | |
Net (loss) income | | (3,701) | | | 5,432 | | | | | |
Deemed dividend on Series A perpetual preferred stock | | (479) | | | (479) | | | | | |
Net (loss) income attributable to common shareholders | | $ | (4,180) | | | $ | 4,953 | | | | | |
| | | | | | | | |
Denominator: | | | | | | | | |
Weighted average common shares outstanding | | 12,434 | | | 4,916 | | | | | |
Weighted average prefunded warrants outstanding | | 235 | | | — | | | | | |
Weighted average shares outstanding - basic and diluted | | 12,669 | | | 4,916 | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Net (loss) income per share - basic and diluted | | | | | | | | |
Net loss per share, continuing operations | | $ | (0.29) | | | $ | (0.12) | | | | | |
Net income per share, discontinued operations | | $ | — | | | $ | 1.22 | | | | | |
Net (loss) income per share - basic and diluted | | $ | (0.29) | | | $ | 1.10 | | | | | |
Deemed dividend on Series A perpetual preferred stock per share | | $ | (0.04) | | | $ | (0.10) | | | | | |
Net (loss) income per share, attributable to common shareholders - basic and diluted | | $ | (0.33) | | | $ | 1.01 | | | | | |
Antidilutive common stock equivalents are excluded from the computation of diluted loss per share. Stock options and restricted stock units are antidilutive when the assumed proceeds per share are greater than the average market price of the common shares. In addition, in periods where net losses are incurred, stock options and restricted stock units with assumed proceeds per share less than the average market price of the common shares become antidilutive as well. The computation of diluted earnings per share excludes stock options, RSUs, and stock unitswarrants that are anti-dilutive. The following common stock equivalents were anti-dilutive (in thousands):
| | | Three Months Ended March 31 | | | Three Months Ended March 31, | |
| | 2021 | | 2020 | | | 2022 | | 2021 | |
Stock options | Stock options | | 25 | | | 54 | | | Stock options | | 6 | | | 25 | | |
Restricted stock units | Restricted stock units | | 68 | | | 13 | | | Restricted stock units | | 271 | | | 68 | | |
Stock warrants | Stock warrants | | 866 | | | 0 | | | Stock warrants | | 9,361 | | | 866 | | |
Total | Total | | 959 | | | 67 | | | Total | | 9,638 | | | 959 | | |
As of March 31, 2021, 0.9 million warrants were exercised and 1.5 million warrants remained outstanding at an exercise price of $2.25.
Note 5. Supplementary Balance Sheet Information
The components of inventories are as follows (in thousands):
| | | March 31, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
Raw materials | Raw materials | | $ | 6,170 | | | $ | 5,489 | | Raw materials | | $ | 7,167 | | | $ | 5,870 | |
Work-in-process | Work-in-process | | 2,879 | | | 2,821 | | Work-in-process | | 2,252 | | | 2,145 | |
Finished goods | Finished goods | | 1,108 | | | 1,876 | | Finished goods | | 1,191 | | | 830 | |
Total inventories | Total inventories | | 10,157 | | | 10,186 | | Total inventories | | 10,610 | | | 8,845 | |
Less reserve for excess and obsolete inventories | Less reserve for excess and obsolete inventories | | (319) | | | (399) | | Less reserve for excess and obsolete inventories | | (323) | | | (320) | |
Total inventories, net | Total inventories, net | | $ | 9,838 | | | $ | 9,787 | | Total inventories, net | | $ | 10,287 | | | $ | 8,525 | |
Property and equipment consist of the following (in thousands):
| | | March 31, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
Land | Land | | $ | 805 | | | $ | 805 | | Land | | $ | 805 | | | $ | 805 | |
Buildings and leasehold improvements | Buildings and leasehold improvements | | 4,771 | | | 4,771 | | Buildings and leasehold improvements | | 4,832 | | | 4,823 | |
Machinery and equipment | Machinery and equipment | | 28,635 | | | 29,375 | | Machinery and equipment | | 24,940 | | | 24,881 | |
Total property and equipment | | 34,211 | | | 34,951 | | |
Less accumulated depreciation | | (24,828) | | | (25,189) | | |
Computer hardware and software | | Computer hardware and software | | 2,387 | | | 2,387 | |
Gross property and equipment | | Gross property and equipment | | 32,964 | | | 32,896 | |
Accumulated depreciation | | Accumulated depreciation | | (24,111) | | | (23,978) | |
Total property and equipment, net | Total property and equipment, net | | $ | 9,383 | | | $ | 9,762 | | Total property and equipment, net | | $ | 8,853 | | | $ | 8,918 | |
As of March 31, 2022, the non-operating land and building, held for investments, had a carry value of $2.0 million and was included within property and equipment on the condensed Consolidated Balance Sheet.
Depreciation expense for the three months ended March 31, 2022 and 2021 was $0.5 million and $0.5 million, respectively.
In our Healthcare division, we generally provide a 12 month assurance warranty on our gamma cameras. We accrue the estimated cost of this warranty at the time revenue is recorded and charge warranty expense to product and product-related cost of revenues. Warranty reserves are established based on historical experience with failure rates and repair costs and the number of systems covered by warranty. Warranty reserves are depleted as gamma cameras are repaired. The costs consist principally of materials, personnel, overhead, and transportation. We review warranty reserves quarterly and, if necessary, make adjustments.
Within our Construction division, KBS provides a limited assurance warranty on its residential homes that covers substantial defects in materials or workmanship for a period of 12 months after delivery to the owner. EBGL provides a limited warranty on the sale of its wood foundation products that covers leaks resulting from defects in workmanship for a period of twenty-five years. Estimated warranty costs are accrued in the period that the related revenue is recognized.
The activities related to our warranty reserve for the quarter ended March 31, 2022 and year ended December 31, 2021 are as follows (in thousands):
| | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
Balance at the beginning of year | | $ | 569 | | | $ | 214 | |
Charges to cost of revenues | | 26 | | | 963 | |
Applied to liability | | (175) | | | (608) | |
Balance at the end of period | | $ | 420 | | | $ | 569 | |
Note 6. Leases
Lessee
We have operating and finance leases for corporate offices, vehicles, and certain equipment. Our leases have remaining lease terms of 1 year to 10 years, some of which include options to extend the leases and some of which include options to
terminate the leases within 1 year. Operating leases are included separately in the unaudited condensed consolidated balance sheetsConsolidated Balance Sheets and finance lease assets are included in property and equipment with the related liabilities separately included in other current liabilities and other liabilities in the unaudited consolidated balance sheets.condensed Consolidated Balance Sheets.
The components of lease expense are as follows (in thousands):
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2021 | | 2020 | | | | |
Operating lease cost | | $ | 334 | | | $ | 328 | | | | | |
| | | | | | | | |
Finance lease cost: | | | | | | | | |
Amortization of finance lease assets | | $ | 106 | | | $ | 124 | | | | | |
Interest on finance lease liabilities | | 21 | | | 24 | | | | | |
Total finance lease cost | | $ | 127 | | | $ | 148 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | | | | | | |
| | 2022 | | 2021 | | | | | | | | | | | |
Operating lease cost | | $ | 396 | | | $ | 334 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Finance lease cost: | | | | | | | | | | | | | | | |
Amortization of finance lease assets | | $ | 123 | | | $ | 106 | | | | | | | | | | | | |
Interest on finance lease liabilities | | 17 | | | 21 | | | | | | | | | | | | |
Total finance lease cost | | $ | 140 | | | $ | 127 | | | | | | | | | | | | |
Supplemental cash flow information related to leases from continuing operations was as follows (in thousands):
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2021 | | 2020 |
Cash paid for amounts included in the measurement of lease liabilities | | | | |
Operating cash flows from operating leases | | $ | 317 | | | $ | 282 | |
Operating cash flows from finance leases | | $ | 21 | | | $ | 24 | |
Financing cash flows from finance leases | | $ | 149 | | | $ | 148 | |
| | | | |
Right-of-use assets obtained in exchange for lease obligations | | | | |
Operating leases | | $ | 1,537 | | | $ | 596 | |
| | | | |
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 |
Cash paid for amounts included in the measurement of lease liabilities | | | | |
Operating cash flows from operating leases | | $ | 199 | | | $ | 317 | |
Operating cash flows from finance leases | | $ | 17 | | | $ | 21 | |
Financing cash flows from finance leases | | $ | 157 | | | $ | 149 | |
| | | | |
Right-of-use assets obtained in exchange for lease obligations | | | | |
Operating leases | | $ | 1,229 | | | $ | 1,537 | |
| | | | |
| | | | |
Supplemental balance sheet information related to leases was as follows (in thousands):
| | | | | | | | | | | | | | |
| | March 31, 2021 | | December 31, 2020 |
Operating lease right-of-use assets, net | | $ | 2,848 | | | $ | 1,769 | |
| | | | |
Operating lease liabilities | | $ | 1,075 | | | $ | 1,011 | |
Operating lease liabilities, net of current | | 1,824 | | | 828 | |
Total operating lease liabilities | | $ | 2,899 | | | $ | 1,839 | |
| | | | |
Finance lease assets | | $ | 2,567 | | | $ | 2,765 | |
Finance lease accumulated amortization | | (1,130) | | | (791) | |
Finance lease assets, net | | $ | 1,437 | | | $ | 1,974 | |
| | | | |
Finance lease liabilities | | $ | 580 | | | $ | 594 | |
Finance lease liabilities, net of current | | 722 | | | 937 | |
Total finance lease liabilities | | $ | 1,302 | | | $ | 1,531 | |
| | | | |
Weighted average remaining lease term (in years) | | | | |
Operating leases | | 3.1 | | 2.3 |
Finance leases | | 2.7 | | 2.8 |
| | | | |
Weighted average discount rate | | | | |
Operating leases | | 4.54 | % | | 5.53 | % |
Finance leases | | 6.44 | % | | 6.44 | % |
| | | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
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| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Weighted average remaining lease term (in years) | | | | | |
Operating leases | | 4.2 | | 3.9 | |
Finance leases | | 2.6 | | 2.6 | |
| | | | | |
Weighted average discount rate | | | | | |
Operating leases | | 3.82 | % | | 4.23 | % | |
Finance leases | | 4.99 | % | | 5.05 | % | |
We are committed to making future cash payments on non-cancelable operating leases and finance leases (including interest). The future minimum lease payments due under both non-cancelable operating leases and finance leases having initial or remaining lease terms in excess of one year as of March 31, 20212022 were as follows (in thousands):
| | | Operating Leases | | Finance Leases | | Operating Leases
| | Finance Leases
|
2021 (excludes the three-months ended March 31, 2021) | | $ | 931 | | | $ | 507 | | |
2022 | | 831 | | | 515 | | |
2022 (excludes the three months ended March 31, 2022) | | 2022 (excludes the three months ended March 31, 2022) | | $ | 1,218 | | | $ | 480 | |
2023 | 2023 | | 330 | | | 273 | | 2023 | | 1,517 | | | 419 | |
2024 | 2024 | | 606 | | | 118 | | 2024 | | 1,354 | | | 264 | |
2025 and thereafter | | 373 | | | 2 | | |
2025 | | 2025 | | 828 | | | 96 | |
2026 and thereafter | | 2026 and thereafter | | 951 | | | 14 | |
Total future minimum lease payments | Total future minimum lease payments | | 3,071 | | | 1,415 | | Total future minimum lease payments | | 5,868 | | | 1,273 | |
Less amounts representing interest | Less amounts representing interest | | 172 | | | 113 | | Less amounts representing interest | | 450 | | | 75 | |
Present value of lease obligations | Present value of lease obligations | | $ | 2,899 | | | $ | 1,302 | | Present value of lease obligations | | $ | 5,418 | | | $ | 1,198 | |
Lessor
In the Healthcare division, we generate lease income in the Diagnostic ServicesHealthcare segment, from equipment rentals to customers. Rental contracts are structured as either a weekly or monthly payment arrangement and are accounted for as operating leases. Revenues are recognized on a straight-line basis over the term of the rental. During the three months ended March 31, 20212022 and 2020,2021, our lease contracts arewere mainly month to month contracts.
Note 7. Financial InstrumentsFair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The FASB's authoritative guidance for fair value measurements establishes a three-level hierarchy based upon the inputs to the valuation model of an asset or liability. Level 1 inputs are quoted prices in active markets for identical assets; Level 2 inputs are inputs other than quoted prices that are significant and observable; and Level 3 inputs are significant unobservable inputs to be used in situations where markets do not exist or illiquid. The following table presents information about our financial assets that are measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques we utilize to determine such fair value at March 31, 20212022 and December 31, 20202021 (in thousands).:
| | | Fair Value as of March 31, 2021 | | Fair Value as of March 31, 2022 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | Assets: | | | | | | | | | Assets: | | | | | | | | |
Equity securities | Equity securities | | $ | 65 | | | $ | 49 | | | $ | 0 | | | $ | 114 | | Equity securities | | $ | 1,195 | | | $ | — | | | $ | — | | | $ | 1,195 | |
Lumber derivative contracts | | Lumber derivative contracts | | (13) | | | — | | | — | | | (13) | |
VIE Investments | | VIE Investments | | — | | | — | | | 337 | | | 337 | |
Total | Total | | $ | 65 | | | $ | 49 | | | $ | 0 | | | $ | 114 | | Total | | $ | 1,182 | | | $ | — | | | $ | 337 | | | $ | 1,519 | |
| | | Fair Value as of December 31, 2020 | | Fair Value as of December 31, 2021 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | Assets: | | | | | | | | | Assets: | | | | | | | | |
Equity securities | Equity securities | | $ | 35 | | | $ | 55 | | | $ | 0 | | | $ | 90 | | Equity securities | | $ | 47 | | | $ | — | | | $ | — | | | $ | 47 | |
Lumber derivative contracts | | Lumber derivative contracts | | 666 | | | — | | | — | | | 666 | |
VIE Investments | | VIE Investments | | — | | | — | | | 337 | | | 337 | |
Total | Total | | $ | 35 | | | $ | 55 | | | $ | 0 | | | $ | 90 | | Total | | $ | 713 | | | $ | — | | | $ | 337 | | | $ | 1,050 | |
The investment in equity securities consists of common stock of publicly traded companies. The fair value of these securities is based on the closing prices observed on March 31, 20212022 and December 31, 2020,2021, respectively. During the three months ended March 31, 2022, and 2021, and 2020, the Companywe recorded netan unrealized gain of $92 thousand and unrealized loss and gain of $23 thousand, and $26 thousand, respectively, recorded in other (expense) income, net in the other income (expenses)condensed Consolidated Statements of condensed unaudited consolidated statement of operations.Operations.
The Company occasionally entersWe may enter into lumber derivative contracts in order to protect itsour gross profit margins from fluctuations caused by volatility in lumber prices. At March 31, 2021 and December 31, 2020, the Company had no lumber derivative contracts.
We did not reclassify any investments between levels in the fair value hierarchy duringFor the three months ended March 31, 2021.The fair values2022, we recorded a net loss of $0.2 million in the cost of goods sold of the Company’s revolving credit facility approximate carrying value due tocondensed Consolidated Statements of Operations. As of March 31, 2022, we had a net long (buying) position of 2,530,000 board feet under 23 lumber derivatives contracts. As of December 31, 2021, we had a net long (buying) position of 2,420,000 board feet under 22 lumber derivatives contracts.
Gains and losses from lumber derivative contracts, are recorded in cost of goods sold of the variable rate naturecondensed Consolidated Statements of these borrowings.Operations and included the following:
| | | | | | | | | | | | | |
| | March 31, 2022 | | | | | |
| | Amount | | | | | |
Unrealized loss on lumber derivatives | | $ | 676 | | | | | | |
Realized gain on lumber derivatives | | (448) | | | | | | |
Total loss on lumber derivatives | | $ | 228 | | | | | | |
The fair value of VIE investments of $0.3 million recorded, in Other Assets, is based on unobservable inputs evaluated on March 31, 2022 and December 31, 2021, respectively. During the three months ended March 31, 2022 and 2021, there were no realized or unrealized gains, losses, or impairments recorded in the condensed Consolidated Statements of Operations. See Note 16. Variable Interest Entity for further details.
Note 8. Debt
A summary of debt as of March 31, 20212022 and December 31, 2020 are2021 is as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2021 | | December 31, 2020 |
| | Amount | | Weighted-Average Interest Rate | | Amount | | Weighted-Average Interest Rate |
Revolving Credit Facility - Gerber KBS | | $ | 2,672 | | | 6.00% | | $ | 1,099 | | | 6.00% |
| | | | | | | | |
Revolving Credit Facility - Gerber EBGL | | 1,969 | | | 6.00% | | 2,016 | | | 6.00% |
Revolving Credit Facility - SNB | | 5,000 | | | 2.61% | | 12,710 | | | 2.64% |
Total Short-term Revolving Credit Facility | | $ | 9,641 | | | 4.24% | | $ | 15,825 | | | 3.30% |
Gerber - Star Term Loan | | $ | 271 | | | 6.25% | | $ | 262 | | | 6.75% |
Premier - Term Loan | | 335 | | | 5.75% | | 419 | | | 5.75% |
Total Short Term Debt | | $ | 606 | | | 5.97% | | $ | 681 | | | 6.13% |
Short-term Paycheck Protection Program Notes | | $ | 2,301 | | | 1.00% | | $ | 1,856 | | | 1.00% |
Short-term debt and current portion of long-term debt | | $ | 12,548 | | | 3.73% | | $ | 18,362 | | | 3.17% |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Gerber - Star Term Loan | | $ | 985 | | | 6.25% | | $ | 1,058 | | | 6.75% |
Premier - Term Loan | | 324 | | | 5.75% | | 321 | | | 5.75% |
Total Long Term Debt | | $ | 1,309 | | | 6.13% | | $ | 1,379 | | | 6.52% |
Long-term Paycheck Protection Program Notes | | $ | 658 | | | 1.00% | | $ | 2,321 | | | 1.00% |
Long-term debt, net of current portion | | $ | 1,967 | | | 4.41% | | $ | 3,700 | | | 3.06% |
| | | | | | | | |
LSV Co-Invest I Promissory Note (“January Note”) | | $ | 709 | | | 12.00% | | $ | 709 | | | 12.00% |
LSV Co-Invest I Promissory Note (“June Note”) | | 1,220 | | | 12.00% | | 1,220 | | | 12.00% |
LSVM Note | | 378 | | | 12.00% | | 378 | | | 12.00% |
Total Notes Payable To Related Parties (1) | | $ | 2,307 | | | 12.00% | | $ | 2,307 | | | 12.00% |
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Total Debt | | $ | 16,822 | | | 4.94% | | $ | 24,369 | | | 3.99% |
(1) See Note 12. Related Party Transactions, for information regarding certain ATRM promissory notes that are outstanding. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
| | Amount | | Weighted-Average Interest Rate | | Amount | | Weighted-Average Interest Rate |
Revolving Credit Facility - Gerber KBS | | $ | 2,921 | | | 6.25% | | $ | 3,131 | | | 6.00% |
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Revolving Credit Facility - Gerber EBGL | | 2,081 | | | 6.25% | | 1,652 | | | 6.00% |
Revolving Credit Facility - SNB | | 7,334 | | | 2.95% | | 7,016 | | | 2.60% |
Total Short-term Revolving Credit Facilities | | $ | 12,336 | | | 4.29% | | $ | 11,799 | | | 3.98% |
Gerber - Star Loan Principal, net | | $ | 998 | | | 6.50% | | $ | 1,070�� | | | 6.25% |
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Short Term Loan | | $ | 998 | | | 6.50% | | $ | 1,070 | | | 6.25% |
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Total Short-term debt | | $ | 13,334 | | | 4.45% | | $ | 12,869 | | | 4.17% |
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Term Loan Facilities
As of March 31, 2021,2022, the short-term debt and current portion of long-term debt included $0.3 million of the Gerber Starshort term loan net of issuance costs, and $0.3 million of the Premier term loan. Long-term debt, net of current portion, includedincludes $1.0 million of the Gerber Star term loan,Loan, net of issuance costs, and $0.3 million of the Premier term loan.costs.
The following table presents the Star and Premier term loansLoan balance, net of unamortized debt issuance costs as of March 31, 20212022 (in thousands): | | | | | | | | | | |
| | March 31, 20212022 | | |
| | Amount | | |
Gerber - Star Term Loan Principal | | $ | 1,5331,146 | | | |
Premier - Term Loan | | 659 | | | |
Total Principal | | 2,192 | | | |
Unamortized debt issuance costs | | (277)(148) | | | |
TotalGerber - Star Loan Principal, net | | $ | 1,915998 | | | |
SterlingSNB Credit Facility
On March 29, 2019, the Company entered into a Loan and Security Agreement (the “SNB Loan Agreement”) by and among certain subsidiaries of the Company, as borrowers (collectively, the “SNB Borrowers”); the Company, as guarantor; and Sterling. On February 1, 2022, Sterling National Bank, a national banking association, as lender (“Sterling” or “SNB”).became part of Webster, and Webster became the successor in interest to the SNB Loan Agreement.
The SNB Loan Agreement is a five-year credit facility maturing in March 2024, with a maximum credit amount of $20.0 million for revolving loans (the “SNB Credit Facility”). Under the SNB Credit Facility, the SNB Borrowers can request the issuance of letters of credit in an aggregate amount not to exceed $0.5 million at any one time outstanding. The borrowings under the SNB Loan Agreement were classified as short-term obligations under GAAP as the agreement contained a subjective acceleration clause and required a lockbox arrangement whereby all receipts within the lockbox are swept daily to reduce borrowings outstanding. As of March 31, 2021,2022, the Company had $0.2$0.1 million of letters of credit outstanding and had additional borrowing capacity of $4.5$1.1 million.
At the SNB Borrowers’ option, the SNB Credit Facility will bear interest at either (i) a Floating LIBOR Rate, as defined in the SNB Loan Agreement, plus a margin of 2.50% per annum; or (ii) a Fixed LIBOR Rate, as defined in the SNB Loan Agreement, plus a margin of 2.25% per annum. As our largest single debt outstanding, ourOur floating rate on this facility at March 31, 20212022 was 2.61%2.95%.
The SNB Loan Agreement includesalso provides for certain representations, warrantiesfees payable to Webster during its term including an unused line fee determined on a daily basis, in an amount equal to one-quarter of SNB Borrowers, as well as events of default and certain affirmative and negative covenantsone percent (0.25%) per annum multiplied by the SNB Borrowers that are customary for loan agreements of this type. These covenants include restrictions on borrowings, investments and dispositionsamount by SNB Borrowers, as well as limitations on the SNB Borrowers’ ability to make certain distributions. Upon the occurrence and during the continuation of an event of default underwhich the SNB Loan Agreement SNB may, among other things, declarecredit limit exceeded the loanssum of the average daily outstanding amount and all other obligations under the SNB Loan Agreement immediately due and payable and increase the interest rate at which loans and obligations under the SNB Loan Agreement bear interest. The SNB Credit Facility is secured by a first-priority security interest in substantially alloutstanding letters of credit. Given that only the assets of the Company andDigirad Health businesses serve as collateral support for the SNB Borrowers and a pledge of all shares of the SNB Borrowers.
On March 29, 2019,Credit Facility, distributions from this facility are restricted in connection with the Company’s entry into the SNB Loan Agreement, Jeffery E. Eberwein, the Executive Chairman of the Company’s board of directors, entered into Limited Guaranty Agreement (the “SNB Eberwein Guaranty”) with SNB pursuanttheir use. They must be used solely to which he guaranteed the prompt performance of all the Borrowers’ obligations under the SNB Loan Agreement. The SNB Eberwein Guarantyfinance these Healthcare businesses, unless there is limited$4.0 million or greater remaining in the aggregateundrawn capacity after any distributions made to the amount of (a) $1.5 million, plus (b) reasonable costs and expenses of SNB incurred in connection with the SNB Eberwein Guaranty. Mr. Eberwein’s obligations under the SNB Eberwein Guaranty terminate upon the Company and Borrowers achieving certain milestones set forth therein.parent company or other Star Equity entities.
On February 1, 2021, in connection with the closing of the Company’s sale of our MD Office Solutions the Company(“MDOS”) subsidiary, we entered into a First Amendment to the SNB Loan Agreement pursuant to which among other things, SterlingSNB consented to the sale of MD Office SolutionsMDOS and the Company’s name change from Digirad Corporation to Star Equity Holdings, Inc.
On March 31, 2021, in connection with completing the sale of DMS Health, the Company, certain subsidiaries of the Company, and Sterlingwe entered into a Second Amendment to the SNB Loan Agreement pursuant to which among other things, SterlingSNB consented to the sale of DMS Health and its subsidiaries removed DMS Health and its subsidiaries as borrowers under the SNB Loan Agreement, and required the principleprincipal to be paid down to $7.0 million.
AtFinancial covenants require that the SNB Borrowers maintain (a) a Fixed Charge Coverage Ratio as of the last day of a fiscal quarter of not less than 1.25 to 1.0 and (b) a Leverage Ratio as of the last day of such fiscal quarter of no greater than 3.50 to 1.0. As of March 31, 2021,2022, the Company was not in compliance with the covenants under the SNB Loan Agreement.
Agreement and had not yet obtained a waiver from Webster for these financial covenant breaches.Construction Loan Agreements
As of March 31, 2021,2022, the Construction division had outstanding revolving lines of credit and term loans of approximately $5.4$5.0 million. ThisOur Construction debt includes:primarily included: (i) $2.7$2.9 million principal outstanding on KBS’s $4.0 million revolving credit facility under a Loan and Security Agreement, dated February 23, 2016 (as amended, the “KBS Loan Agreement”), with Gerber and (ii) $2.0$2.1 million principal outstanding on EBGL’s $3.0 million revolving credit facility under a Revolving Credit Loan Agreement, which was increased from $3.0 million to $4.0 million on July 30, 2021. The KBS Loan Agreement, and $0.7EBGL’s $4.0 million with Premier term loan, dated June 30, 2017 (as amended,revolving credit facility under a Revolving Credit Loan Agreement are collectively referred to as the “Premier“Construction Loan Agreement”).Agreements.” The Construction division was at the maximumhad a borrowing capacity under both revolving lines of credit of $0.4 million, based on the inventory and accounts receivable on March 31, 20212022 which fluctuates weekly. The Construction Loan Agreements contain cross-default provisions and subjective acceleration clauses which may, in the event of a material adverse event, as determined by Gerber, allow Gerber to declare the loans and all other obligations under the Construction Loan Agreements immediately due and payable or increase the interest rate at which loans and obligations under the Construction Loan Agreements bear interest. Each of the two Gerber credit facilities are backed by the assets of their respective borrower (KBS or EBGL), which serve as collateral support. Therefore, distributions from each facility are restricted in their use, as they must be used solely to finance the operations of their respective borrower.
KBS Loan Agreement
On February 23, 2016, ATRM, KBS and Main Modular Haulers, Inc. (a former subsidiary of ATRM) entered into athe KBS Loan and Security Agreement (as amended, the “KBS Loan Agreement”), with Gerber. The KBS Loan Agreement provides KBS with a revolving line of credit with borrowing availability of up to $4.0 million. Availability under the line of credit is based on a formula tied to KBS’s eligible accounts receivable, inventory and other collateral. The KBS Loan Agreement, which was scheduled to expire on February 22, 2018, has been automatically extended for successive one (1) year periods in accordance with its terms and is now scheduled to expire on February 22, 2022.2023. The KBS Loan Agreement will be automatically extended for another one (1) year period unless a party thereto provides prior written notice of termination. As of March 31, 20212022, neither party has provided notice of termination. Upon the final expiration of the term of the KBS Loan Agreement, the outstanding principal balance is payable in full. Borrowings bear interest at the prime rate plus 2.75%, equating to 6.00%6.25% at March 31, 2021,2022, with interest payable monthly. The KBS Loan Agreement also provides for certain fees payable to Gerber during its term, including a 1.5% annual facilities fee and a 0.10% monthly collateral monitoring fee. KBS’s obligations under the KBS Loan Agreement are secured by all of its assets and are guaranteed by ATRM. Unsecured promissory notes issued by KBS and ATRM are subordinate to KBS’s obligations under the KBS Loan Agreement. The KBS Loan Agreement contains representations, warranties, affirmative and negative covenants, defined events of default and other provisions customary for financings of this type. Financial covenants require that KBS maintain a maximum leverage ratio (as defined in the KBS Loan Agreement) and KBS not incur a net annual post-tax loss in any fiscal year during the term of the KBS Loan Agreement.Company. The borrowings under the KBS Loan Agreement were classified as short-term obligations under GAAP as the agreement contained a subjective acceleration clause and required a lockbox arrangement whereby certainall receipts are swept daily to reduce borrowings outstanding. AtAs of March 31, 2021,2022, approximately $2.7$2.9 million was outstanding under the KBS Loan Agreement.
During the three months ended,On March 31, 2021, the parties to the KBS Loan Agreement have amended the KBS Loan Agreement to provide for increased availability under the KBS Loan Agreement to KBS under certain circumstances, including for new equipment additions, and certain other changes, as well as a waiver of certain covenants.
As of December 31, 2020 and 2019, KBS was not in compliance withOn March 8, 2022, the financial covenants requiring no net annual post-tax loss for KBS or the minimum leverage ratio covenant as of 2020. The occurrence of any event of defaultborrowers under the KBS Loan Agreement may result in KBS’s obligations under the KBS Loan Agreement becoming immediately due and payable. In April 2019, June 2019, February 2020 and February 2021, we obtained a waiver from Gerber for these events.
On September 10, 2019, the parties to the KBS Loan Agreement entered into the twelfth amendmentNineteenth Amendment to KBS Loan Agreement to amend the financial covenants to require that KBS maintain (a) net cash income (as defined in the KBS Loan Agreement (the “Twelfth KBS Amendment”), pursuant to which the Company agreed to guarantee amounts borrowed by certain ATRM’s subsidiaries from Gerber.
On January 31, 2020, the Company, ATRM, KBS and Gerber entered into a thirteenth amendment to the KBS Loan Agreement (the “Thirteenth KBS Amendment”) to amend the termsAgreement) of the KBS Loan Agreement, in order to, among other things (a) amend the definitions of “Ancillary Credit Parties,” “Guarantor,” “Obligations,” and “Subordinated Lender” to address the obligations of the Star Borrowers, the EBGL Borrowers, the Star Credit Parties, and the EBGL Credit Parties under the Star Loan Agreement, EBGL Loan Agreement and the Subordination Agreements (each as defined below) to which they are a party and (b) add a new cross default provision.
On March 5, 2020, in connection with the First EBGL Amendment, Gerber, KBS, ATRM and the Company entered into a fourteenth amendment to the KBS Loan Agreement in order to, among other things consent to the First EBGL Amendment and remove cash and cash collateral from the borrowing base.
On April 1, 2020, Gerber and KBS entered into a fifteenth amendment to the KBS Loan Agreement pursuant to which the “Minimum Average Monthly Loan Amount” was decreased to twenty-five percent (25%) of the Maximum Revolving Amount.
On January 5, 2021, Gerber and KBS entered into a sixteenth amendment to the KBS Loan Agreement in order to, among other things, amend certain definitions under the KBS Loan Agreement and to increase the inventory assets against which funds can be borrowed.
On February 26, 2021 Gerber and KBS entered into a seventeenth amendment to the KBS Loan Agreement in order to provide the waiver to the 2020 covenant breach and amended the financial covenants. The financial covenants under the KBS Loan Agreement, as amended, provide that (i) KBS shall make no distribution, transfer, payment, advance, or contribution of cash or property which would constitute a restricted payment; (ii) KBS shall report annual post-tax net income at least equal to (a) $385 thousandno less than $0 for the trailing 6-month period ending June 30, 20212022 and (b) $500 thousandbe no less than $500,000 for the trailing fiscal year end December 31, 2021; and (iii)(b) a minimum EBITDA at(as defined in the KBS Loan Agreement) no less than $0 as of June 30 2021and no less than $850,000 as of more than $880 thousand or atthe fiscal year end, as well as a waiver of certain covenants as of December 31, 2021. As of March 31, 2022, we are not required to measure financial covenants. As of December 31, 2021, our last test date, KBS was not in compliance with the bi-annual financial covenants under the KBS Loan Agreement, which required no net annual post-tax loss and certain minimum leverage ratios as of more than $1.5 million.the test date. The December 31, 2021 Gerber covenants waivers last until the next measurement period.
EBGL Premier Note
On June 30, 2017, EdgeBuilder and Glenbrook (together, EBGL)EBGL entered into a Revolving Credit Loan Agreement (as amended, the “Premier Loan Agreement”) with Premier Bank (“Premier”)), providing EBGL with a working capital line of credit of up to $3.0 million. The Premier Loan Agreement replaced the prior revolving credit facility.
Availability under the Premier Loan Agreement is based on a formula tied to EBGL’s eligible accounts receivable, inventory and equipment, and borrowings bear interest at the prime rate plus 1.50%, with interest payable monthly and the outstanding principal balance payable upon expiration of the term of the Premier Loan Agreement. The Premier Loan Agreement also provides for certain fees payable to Premier during its term. The initial term of the Premier Loan Agreement was scheduled to expire on June 30, 2018, but was extended multiple times by Premier until January 31, 2023. EBGL’s obligations under the Premier Loan Agreement are secured by all of their inventory, equipment, accounts and other intangibles, fixtures and all proceeds of the foregoing.
On January 31, 2020, Glenbrook and EdgeBuilder entered into an Extension and Modification Agreement (the “Modification Agreement”) with Premier that modified the terms of the Revolving Credit Promissory Note made by Glenbrook and EdgeBuilder. The Modification Agreement reduced the outstanding borrowings to $1.0 million, extended the final maturity date to January 31, 2023, and set the interest rate to at 5.75% per annum. Mr.Jeffrey E. Eberwein, the Executive Chairman of the Company’s board of directors, executed a guaranty in favor of Premier, which hashad been extended through January 1, 2023, under which ATRM and Mr. Eberwein have absolutely and unconditionally guaranteed all of EBGL’s obligations under the Premier Loan Agreement. As of March 31, 2021, approximately $0.7 million was outstanding
All obligations under the Premier Loan Agreement.Agreement were repaid in full on May 26, 2021 and no amount remains outstanding as of March 31, 2022. In exchange, Premier terminated all of its security interests in the assets of EBGL.
Gerber Star and EBGL LoansLoan
On January 31, 2020, SRE, 947 Waterford Road, LLC (“947 Waterford”), 300 Park Street, LLC (“300 Park”), and 56 Mechanic Falls Road, LLC (“56 Mechanic” and together with SRE, 947 Waterford, and 300 Park, (the “Star Borrowers”), each an Investments Subsidiary,subsidiary, and the Company, ATRM, KBS, EdgeBuilder, and Glenbrook (collectively, the “Star Credit Parties”), entered into athe Star Loan and Security Agreement (as amended, the “Star Loan Agreement”) with Gerber providing the Star Borrowers with a credit facility with borrowing availability of up to $2.5 million ($2.0 million and $0.5 million to KBS and EBGL, respectively) (the “Star Loan”).or the Star Loan. The advance of $2.0 million to KBS is to be repaid in monthly installments of sixty (60) consecutive equal payments. The advance of $0.5 million to EBGL, which has been temporarily increased by $0.3 million due to be repaid on April 30, 2020, iswas to be repaid in monthly installments of twelve (12) consecutive equal payments. The Star Loan matures on the earlier of (a) January 1, 2025 or (b) the termination, the maturity or repayment of the EBGL Loan (as defined below). Availability under the Star Loan Agreement was based on a formula tied to the value of real estate owned by the Star Borrowers, and borrowings bear interest at the prime rate plus 3.5% per annum. The Star Loan also provides for certain fees payable to Gerber during its term, including a 1.5% annual facilities fee and a 0.10% monthly collateral monitoring fee.
The obligations of the Star Borrowers under the Star Loan Agreement are guaranteed by the Star Credit Parties and are secured by substantially all the assets of the Star Borrowers and the Star Credit Parties. Contemporaneously with the execution and delivery of the Star Loan Agreement, Mr. Eberwein executed and delivered a Guaranty (the “Gerber Eberwein Guaranty”) to Gerber, pursuant to which he guaranteed the performance of all the Star Borrowers’ obligations to Gerber. Mr. Eberwein’s obligations under the Gerber Eberwein Guaranty are limited in the aggregate to the amount of (a) $2.5 million, plus (b) costs of Gerber incidental to the enforcement of the Gerber Eberwein Guaranty or any guaranteed obligations.
On February 20, 2020,26, 2021, the Star Borrowers entered into a first amendmentThird Amendment to the Star Loan Agreement (the “First“Third Star Amendment”) in orderwith Gerber that amended the contract rate to (i) temporarily advance $0.3prime rate plus 3% and discharged the $2.5 million to EBGL, which amount is to be repaid to Gerber on or before April 30, 2020; (ii) clarify that Gerber can make multiple advancesEberwein Guaranty.
The financial covenants under the Star Loan Agreement and (iii)include maintenance of a Debt Service Coverage Ratio of not less than 1:00 to correct the maturity date of1:00, as defined in the Star Loan. On April 30, 2020, the Star Borrowers entered into a second amendment toLoan Agreement. The occurrence of any event of default under the Star Loan Agreement (the “Secondmay result in the obligations of the Star Amendment”) to change terms of repayment for the advance of $0.3 million to EBGL to provide for repayment in three consecutive equal monthly installments, commencing on May 30, 2020, with a final installment on or before July 31, 2020.Borrowers becoming immediately due and payable. As of March 31, 2021, EBGL repaid approximately $0.5 million2022, no event of default was deemed to have occurred and $1.3 million was outstanding, netthe Star Borrowers were in compliance with deferred financing costs,the bi-annual financial covenants under the Star Loan Agreement.Agreement measured as of December 31, 2021.
As of March 31, 2022, $1.0 million was outstanding under the Star Loan Agreement. The borrowings under the Star Loan Agreement were classified as short-term obligations under GAAP, because the borrowings under the EBGL Loan Agreement were classified as short-term obligations under GAAP given the EBGL and KBS Loan Agreements contain a subjective acceleration clause and require a lockbox arrangement whereby all receipts are swept daily to reduce borrowings outstanding. Accordingly, if (i) a material adverse effect may be seen to have occurred, (ii) Gerber in its discretion deems a EBGL Loan Agreement default occurred, and (iii) the proceeds swept are insufficient to pay the balance outstanding, Gerber may then demand all obligations under the Star Loan Agreement immediately due and payable due to cross-default provision, occurring within the Star Loan Agreement. Since a material event can occur at any time, all obligations under the Star Loan Agreement, EBGL Loan Agreement and KBS Loan Agreement are classified as short-term obligations.
On January 31, 2020, EdgeBuilder and Glenbrook (the “EBGL Borrowers”), each a Construction Subsidiary, and the Company, Star, 947 Waterford, 300 Park, 56 Mechanic, ATRM, and KBS (collectively, the “EBGL Credit Parties”), entered into a Loan and Security Agreement (the “EBGL Loan Agreement”) with Gerber providing the EBGL Borrowers with a credit facility with borrowing availability of up to $3.0 million (the “EBGL Loan”). On March 5, 2020, the EBGL Borrowers entered into a first amendmentFirst Amendment to the EBGL Loan and Security Agreement (the “First EBGL Amendment”) with Gerber that amended the EBGL Loan Agreement and the KBS Loan Agreement to include a pledge $0.3 million of cash collateral by LSVILone Star Value Investors (“LSVI”) under the EBGL Loan Agreement which, prior to the First EBGL Amendment, was pledged by LSVI in connection with the KBS Loan Agreement. On July 1, 2020, the EBGL Borrowers entered into a second amendment to the EBGL Loan Agreement to terminateSecond Amendment that terminated the pledge of $0.3 million in cash collateral. On February 26, 2021, the EBGL Borrowers entered into a third amendmentThird Amendment to the EBGL Loan Agreement (the “Third EBGL Amendment”), pursuant to which the Company and Gerber agreed to, among other things, eliminateeliminated the minimum leverage ratio covenant, lowerlowered the minimum EBITDA, and requirerequired the borrowers to not incur a net operating loss on bi-annual basis. The Third EBGL Amendment also discharged the EBGL Eberwein Guaranty described below. As of March 31, 2021, approximately $2.02022, $2.1 million was outstanding under the EBGL Loan Agreement.Loan.
Availability under the Star Loan Agreement is based on a formula tied to the value of real estate owned by the Star Borrowers, and borrowings bear interest at the prime rate plus 3.5% per annum. Availability under the EBGL Loan Agreement iswas also based on a formula tied to the EBGL Borrowers’ eligible accounts receivable and inventory, and borrowings bear interest at the prime rate plus 2.75% per annum. The EBGL Loan AgreementsAgreement also provideprovides for certain fees payable to Gerber during their respectiveits term, including a 1.5% annual facilities fee and a 0.10% monthly collateral monitoring fee. EBGL’s obligations under the Premier Loan Agreement are secured by all of its assets. The EBGL Loan Agreement also provided for certain fees payable to Gerber during its terms. The Star Loan matures on the earlier of (a) January 1, 2025 or (b) the termination, the maturity or repayment of the EBGL Loan. The EBGL Loan matures on the earlier of (a) January 1, 2022,2023, unless extended, or (b) the termination, the maturity or repayment of the Star Loan. The maturity of the EBGL Loan is automatically extended for successive periods of one (1) year each unless terminated by Gerber or the EBGL Borrowers. The borrowings under the EBGL Loan Agreement were classified as short-term obligations under GAAP as the agreement contained a subjective acceleration clause and required a lockbox arrangement whereby all receipts are swept daily to reduce borrowings outstanding.
The obligations of the EBGL Borrowers under the EBGL Loan Agreement are guaranteed by the EBGL Credit Parties and are secured by substantially all the assets of the EBGL Borrowers and the EBGL Credit Parties. The obligations of the Star Borrowers under the Star Loan Agreement are guaranteed by the Star Credit Parties and are secured by substantially all the assets of the Star Borrowers and the Star Credit Parties. Contemporaneously with the execution and delivery of the Star Loan Agreement, Jeffrey E. Eberwein, the Executive Chairman of the Company’s board of directors, executed and delivered a Guaranty (the “Gerber Eberwein Guaranty”) to Gerber pursuant to which he guaranteed the performance of all the Star Borrowers’ obligations to Gerber under the Star Loan Agreement, including the full payment of all indebtedness owing by the Star Borrowers to Gerber under or in connection with the Star Loan Agreement and related financing documents. Mr. Eberwein’s obligations under the Gerber Eberwein Guaranty are limited in the aggregate to the amount of (a) $2.5 million, plus (b) costs of Gerber incidental to the enforcement of the Gerber Eberwein Guaranty or any guaranteed obligations. On March 5, 2020, contemporaneously with the execution and delivery of the First EBGL Amendment, Mr. Eberwein the Executive Chairman of the Company’s board of directors, executed and delivered a Guaranty (the “EBGL Eberwein Guaranty”) to Gerber pursuant to which he guaranteed the performance of all the EBGL Borrowers’ obligations to Gerber under the EBGL Loan Agreement, including the full payment of all indebtedness owing by the EBGL Borrowers to Gerber under or in connection with the EBGL Loan Agreement and related financing documents. Mr. Eberwein’s obligations under the EBGL Eberwein Guaranty are limited in the aggregate to the amount of (a) $0.5 million, plus (b) costs of Gerber incidental to the enforcement of the EBGL Eberwein Guaranty or any guaranteed obligations.
On February 26,July 30, 2021, the StarEBGL Borrowers entered into a third amendmentFourth Amendment to the StarEBGL Loan Agreement (the “Third Star“Fourth EBGL Amendment”) with Gerber, that, among other things, amendedwhich increased the contract rateeligible inventory and the maximum borrowing limit from $3.0 million to prime rate plus 3% and discharged the $2.5 million Gerber Eberwein Guaranty.$4.0 million.
The Star Loan Agreement and EBGL Loan Agreement contains representations, warranties, affirmative and negative covenants, events of default and other provisions customary for financings of this type. The financial covenants under the EBGL Loan Agreement applicable to the EBGL Borrowers include maintenance of a minimum tangibleEBITDA and no net worth, a minimum debt service coverage ratio and minimum net income. The Financial covenants under the Star Loan Agreement applicable to the Star Borrowers include a minimum debt service coverage ratio. The occurrence of any event of default under the Loan Agreements may resultoperating loss, as defined in the obligations of the Borrowers becoming immediately due and payable. As of December 31, 2020, EBGL was not in compliance with the financial covenants under the Star Loan Agreement and EBGL Loan Agreement, as of 2020.for the six months ending June 30, 2022 and for the year ending December 31, 2022. The occurrence of any event of default under the EBGL Loan Agreement and certain events of default under the KBS Loan Agreement may result in EBGL’sthe obligations of the EBGL Borrowers becoming immediately due and payable. As of March 31, 2022, no event of default was deemed to have occurred and EBGL was in compliance with the bi-annual financial covenants under the EBGL Loan Agreement becoming immediately due and payable. In Februaryas of December 31, 2021.
On October 21, 2021, we obtained a waiver from Gerber for these events and, as part of the Third EBGL Amendment (described above), the Company and Gerber agreed to, among other things, eliminate the minimum leverage ratio covenant, lower the minimum EBITDA, and require the borrowers to not incur a net operating loss on bi-annual basis, as well as discharge the EBGL Eberwein Guaranty.
As a conditionBorrowers entered into the Fifth Amendment to the extension of credit to the Star Borrowers and EBGL Borrowers under the Star Loan Agreement and EBGL Loan Agreement the holders of certain existing unsecured promissory notes made by ATRM and certain of its subsidiaries entered into subordination agreements (the “Subordination Agreements”“Fifth EBGL Amendment”) with Gerber pursuant to which such noteholders (includingamend the Company and certaindefinition of its subsidiaries) agreed“Reserves” to subordinateinclude a minimum amount, subsequent to Glenbrook Building Supply, Inc. entering a new lease for a larger property.
On January 20, 2022, the obligations of ATRM and its subsidiaries to such noteholdersEBGL Borrowers entered into the Sixth Amendment to the obligationsEBGL Loan Agreement (the “Sixth EBGL Amendment”) with Gerber and reduced the minimum average monthly loan amount to 25% of the Star Borrowers and$4.0 million maximum revolving amount.
On March 8, 2022, the EBGL Borrowers entered into the Seventh Amendment to the EBGL Loan Agreement (the “Seventh EBGL Amendment”) with Gerber underto amend and lower the loan agreements.financial covenants to require that EBGL maintain (a) a lower net cash income (as defined in the EBGL Loan Agreement) at least equal to no less than $0 for the trailing 6-month period ending June 30, 2022 and no less than $1,000,000 for the trailing fiscal year ending December 31, 2022 and (b) a reduced minimum EBITDA (as defined in the EBGL Loan Agreement) to be no less than $0 as of June 30, 2022 and no less than $1,000,000 as of the fiscal year ending December 31, 2022.
Paycheck Protection Program
From April 2020 through May 2020, the Company and its subsidiaries received $6.7 million, of loans under the Paycheck Protection Program (“PPP”). Total PPP loans received by the ConstructionHealthcare division and HealthcareConstruction division were $5.5 million and $1.2 million, respectively.
On April 30, 2020, each of KBS, EdgeBuilder and Glenbrook executed a separate promissory note evidencing unsecured loans under the PPP. The promissory note executed by KBS is for $0.8 million (the “KBS Note”), the promissory note executed by EdgeBuilder is for $0.2 million (the “EdgeBuilder Note”) and the promissory note executed by Glenbrook is for $0.2 million (the “Glenbrook Note”). The KBS Note, the EdgeBuilder Note and the Glenbrook Note, each dated April 30, 2020, are referred to together as the “Construction Notes”.
On May 11, 2020, the Company and each of Digirad Imaging Solutions, Inc. (“DIS”), DMS Imaging, Inc. (“DMS Imaging”) and DMS Health, each a direct or indirect wholly owned subsidiary of the Company, executed a separate promissory note evidencing unsecured loans under the PPP. The promissory note executed by the Company, dated May 7, 2020, is for $0.8 million (the “Company Note”); the promissory note executed by DIS, dated May 5, 2020, is for $3.0 million (the “DIS Note”); the promissory note executed by DMS Imaging, dated May 5, 2020, is for $1.6 million (the “DMS Imaging Note”) and the promissory note executed by DMS Health, dated May 7, 2020, is for $0.1 million (the “DMS Health Note”). The Company Note, the DIS Note, the DMS Imaging Note, and the DMS Health Note are referred to together as the “Healthcare Notes”. The Construction Notes and the Healthcare Notes are referred to collectively as the “PPP Notes” and each promissory note individually as a “PPP Note”.
The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). PPP loans for the Construction and Healthcare division were made through Bremer Bank and Sterling as lenders, respectively.
The PPP loans have two-year terms and bear interest at a rate of 1.00% per annum. Monthly principal and interest payments under the PPP loans are deferred for ten months, after the end of covered periods. The PPP loans may be prepaid at any time prior to maturity with no prepayment penalties.
The promissory notes issued in connection with the PPP loans (the “PPP Notes”)Notes contain customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the SBA or lender, or breaching the terms of the applicable PPP loan documents. Upon an event of default under a PPP Note, the lender thereunder may, among other things, require immediate payment of all amounts owing under the applicable PPP Note, collect all amounts owing from the applicable borrower, or file suit and obtain judgment.
Under the terms of the CARES Act, recipients of loans under the PPP can apply for and be granted forgiveness for all or a portion of the loan granted under the PPP. Such forgiveness will beis determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and certain other eligible costs. However, no assurance is provided that forgiveness for any portion of the PPP loans will be obtained. and evenEven if forgiveness is granted the PPP loans may remain subject to review and audit duefor up to all affiliated PPP Notes equaling more than $2 million.six (6) years.
In order to apply for
During the PPP loans, we certified that the economic uncertainty at the time of application, made the PPP loans request necessary to support ongoing operations of the Company. This certification was made taking into account our then current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that would not be significantly detrimental to the business.
The Company is continuing to evaluate the criteria and new guidance put out by the SBA regarding loan forgiveness criteria and procedures to seek loan forgiveness. During Octoberfiscal years ended 2020 and January 2021, the Company applied for forgiveness on all PPP loans. Our PPP loan forgiveness is sought under the beliefLoans. As of December 31, 2021, all entities requesting loan forgiveness have met the stated criteria and guidelines provided by the SBA and terms of the CARES Act; however, no assurance can be provided that forgiveness for any portion of the PPP loans will be obtained.
During Q4 2020,were forgiven, resulting in a gain of $4.2 million in 2021 and $2.5 million of the Healthcare division PPP Notes were forgiven. As of March 31, 2021,in 2020, thus, the Company has $3.0 million inno PPP loans outstanding for the Healthcare division. During Q1, 2021, all amounts under the Construction division PPP Notes were forgiven.
Note 9. Commitments and Contingencies
In the normal course of business, we have been and will likely continue to be subject to other litigation or administrative proceedings incidental to our business, such as claims related to compliance with regulatory standards, customer disputes, employment practices, wage and hour disputes, product liability, professional liability, malpractice liability, commercial disputes, licensure restrictions or denials, and warranty or patent infringement. Responding to litigation or administrative proceedings, regardless of whether they have merit, can be expensive and disruptive to normal business operations. We are not able to predict the timing or outcome of these matters and currently do not expect that the resolution of these matters will have a material adverse effect on our financial position or results of operations.
The outcome of litigation and the amount or range of potential loss at particular points in time may be difficult to ascertain. Among other things, uncertainties can include how trial and appellate courts will apply the law and interpret facts, as well as the contractual and statutory obligations of other indemnifying and insuring parties. The estimated range of reasonably possible losses, and their effect on our financial position is based upon currently available information and is subject to significant judgment and a variety of assumptions, as well as known and unknown uncertainties.
On December 27, 2021, the Company reached a settlement in the matter of Keifer v. Heart of Georgia, et al, GA State Ct. (“Keifer”), where a judgment for wrongful death and medical expenses in the amount of $4.96 million was entered on October 4, 2021 against a prior employee of DIS, which employee DIS contractually indemnified. The plaintiff’s original complaint was filed April 19, 2018, regarding events occurring on October 12, 2015. A settlement agreement resulted in the payment of $0.1 million by the Company on December 20, 2021. Following such payment, DIS was released from any claims, damages, rights and causes of action.
On April 1, 2022, the Company entered into a Guaranty Agreement to guarantee certain obligations of KBS to Consigli Construction Co., Inc. under a subcontract in the event of a material breach by KBS in an amount up to $4.4 million, with such amount decreasing as product deliveries occur.
Note 10. Income Taxes
We provide for income taxes under the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of differences between the tax basis of assets or liabilities and their carrying amounts in the financial statements. We provide a valuation allowance for deferred tax assets if it is more likely than not that these items will expire before we are able to realize their benefit. We calculate the valuation allowance in accordance with the authoritative guidance relating to income taxes, which requires an assessment of both positive and negative evidence regarding the realizability of these deferred tax assets, when measuring the need for a valuation allowance. Significant judgment is required in determining any valuation allowance against deferred tax assets. We continue to record a full valuation allowance against our deferred tax assets and intend to maintain a valuation allowance until sufficient positive evidence exists to support its reversal.
Intraperiod tax allocation rules require us to allocate our provision for income taxes between continuing operations and other categories of comprehensive income, such as discontinued operations.
For the three months ended March 31, 2022, we recorded an income tax expense of $950 thousand within continuing operations and zero income tax expense within discontinued operations. For the three months ended March 31, 2021, the Companywe recorded an income tax expense of $2 thousand within continuing operations and an income tax expense of $72 thousand within discontinued operations. ForThe tax expense for the three months ended March 31, 2020,2022, primarily relates to an ownership change under Internal Revenue Code Section 382 that occurred in January 2022 which required us to establish an additional valuation allowance on net operating losses that the Company recorded an income tax expense of $27 thousand within continuing operations and an income tax expense of $7 thousand within discontinued operations.cannot utilize in the future.
As of March 31, 2021,2022, we had unrecognized tax benefits of approximately $2.6 million related to uncertain tax positions. Included in the unrecognized tax benefits were $2.1 million of tax benefits that, if recognized, would reduce our annual effective tax rate, subject to the valuation allowance.
We file income tax returns in the U.S. and in various state jurisdictions with varying statutes of limitations. We are no longer subject to income tax examination by tax authorities for years prior to 2016;2017; however, our net operating loss carryforwards and research credit carryforwards arising prior to that year are subject to adjustment. Our policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense.
On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). There were several income tax provisions included in the CARES Act, as well as other non-tax matters incorporated into law as a result of the enactment of the CARES Act.
Under the CARES Act, net operating losses generated in tax years 2018, 2019, and 2020 can be carried back five years, allowing corporate taxpayers to amend earlier tax returns and potentially obtain a tax refund. In addition, losses generated and utilized prior to January 1, 2021 are not subject to the 80 percent limitation that was previously applied to losses generated after December 31, 2017 under the Tax Cuts and Jobs Act of 2017. The Company doesn’t currently estimate that any tax will be recoverable from these tax provisions and therefore does not anticipate there to be a material impact from these provisions on the Company’s income tax balances in its current year financial statements.
The Tax Cuts and Jobs Act of 2017 limited interest deductions to 30% of adjusted taxable income ("ATI"). The CARES Act increases the limitation to 50 percent of adjusted taxable income for tax years 2019 or 2020, thereby raising the limitation ceiling and potentially allowing for increased interest deductions.In addition, companies have the option of using 2019 ATI to compute the limitation for 2020.The Company tentatively plans to take advantage of certain of these provisions to eliminate any potential section 163(j) interest carryovers from its inventory of deferred tax assets for the year ending December 31, 2020.
The CARES Act adopts a technical correction to the Tax Cuts and Jobs Act's apparent oversight in excluding the eligibility of qualified improvement property (e.g., real estate/leasehold improvements) from eligibility for bonus depreciation for tax years after 2017.Companies are allowed to amend 2018 income tax or file accounting method changes in 2019 to claim the additional deductions.The Company is still evaluating the impact of this provision; however, the Company does not anticipate that this provision will have any impact on the Company’s tax expense or payable balances.If pursued, this provision may have an impact on the Company’s allocation of its deferred tax assets related to property, plant, and equipment and net operating losses, which are substantially offset by the Company’s full valuation allowance.
Certain other provisions of the CARES Act, such as the ability to obtain a refund of alternative minimum taxes (“AMT”) previously paid to the IRS and the increased ability to deduct charitable contributions by corporations are not expected to be applicable to the Company. Overall, we do not expect the income tax provisions of the CARES Act to have a material impact to the Company’s financial statements.
On December 21, 2020, Congress passed the $2.3 trillion Consolidated Appropriations Act, 2021, H.R. 133 (the “Act”), which combined the $1.4 trillion omnibus spending bill for the 2021 federal fiscal year with the $900 billion stimulus relief package aimed to respond to the economic fallout caused by the COVID-19 pandemic. On December 27, 2020, President Trump signed the Act, which enhanced and expanded certain provisions of the previous relief package—the Coronavirus Aid, Relief, and Economic Security Act, H.R. 748 (the “Cares Act”) into law. The Company does not expect the Act to have a material effect on the Company’s current financial position, results of operations or financial statement disclosures.
Note 11. Segments
Our businessreportable segments are based upon our internal organizational structure; the manner in which our operations are managed; the criteria used by our Executive Chairman, who is our Chief Operating Decision Maker ("CODM"), to evaluate segment performance; the availability of separate financial information; and overall materiality considerations. Under the prior period Holdco strategy, we organized our reportable segments into four reportable segments: Diagnostic Imaging, Diagnostic Services, Construction and Investments. Effective the first quarter of 2022, we realigned our internal reporting structure into 3 reportable segments by combining Diagnostic Imaging and Diagnostic Services into one Healthcare segment to reflect the manner in which our CODM assesses performance and allocates resources:
1. Diagnostic ServicesHealthcare
2. Diagnostic ImagingConstruction
3. Construction
4. Investments
Effective January 1, 2020, the Company revised the allocation methodology used to allocate corporate costs to each of the operating segments. “Loss (income) by operating segment” for the historical periodSegment information has been recast to conform to our current allocation methodology. Segment informationIt is as follows (in thousands):
| | | Three Months Ended March 31, | | | Three Months Ended March 31, | |
| | 2021 | | 2020 | | | 2022 | | 2021 (1) | |
Revenue by segment: | Revenue by segment: | | | | | | Revenue by segment: | | | | | |
Diagnostic Services | | $ | 10,239 | | | $ | 10,814 | | | |
Diagnostic Imaging | | 3,068 | | | 2,861 | | | |
| Healthcare | | Healthcare | | $ | 13,418 | | | $ | 13,307 | | |
Construction | Construction | | 9,047 | | | 5,484 | | | Construction | | 11,631 | | | 9,047 | | |
Investments | Investments | | 0 | | | 31 | | | Investments | | 158 | | | 158 | | |
Intersegment elimination | | Intersegment elimination | | (158) | | | (158) | | |
Consolidated revenue | Consolidated revenue | | $ | 22,354 | | | $ | 19,190 | | | Consolidated revenue | | $ | 25,049 | | | $ | 22,354 | | |
| Gross profit by segment: | | | |
Diagnostic Services | | $ | 1,608 | | | $ | 2,005 | | | |
Diagnostic Imaging | | 990 | | | 869 | | | |
| Gross profit (loss) by segment: | | Gross profit (loss) by segment: | | |
Healthcare | | Healthcare | | $ | 3,176 | | | $ | 2,598 | | |
Construction | Construction | | 544 | | | 403 | | | Construction | | 1,586 | | | 544 | | |
Investments | Investments | | (65) | | | (34) | | | Investments | | 59 | | | 93 | | |
Intersegment elimination | | Intersegment elimination | | (158) | | | (158) | | |
Consolidated gross profit | Consolidated gross profit | | $ | 3,077 | | | $ | 3,243 | | | Consolidated gross profit | | $ | 4,663 | | | $ | 3,077 | | |
| Income (loss) from operations by segment: | Income (loss) from operations by segment: | | | Income (loss) from operations by segment: | | |
Diagnostic Services | | $ | 859 | | | $ | 59 | | | |
Diagnostic Imaging | | (22) | | | (267) | | | |
| Healthcare | | Healthcare | | $ | 78 | | | $ | 837 | | |
Construction | Construction | | (1,547) | | | (1,300) | | | Construction | | (759) | | | (1,547) | | |
Investments | Investments | | 76 | | | (54) | | | Investments | | 59 | | | 234 | | |
Unallocated corporate and other expenses | | (935) | | | (634) | | | |
Star equity corporate and intersegment elimination | | Star equity corporate and intersegment elimination | | (1,933) | | | (1,093) | | |
Segment loss from operations | Segment loss from operations | | $ | (1,569) | | | $ | (2,196) | | | Segment loss from operations | | $ | (2,555) | | | $ | (1,569) | | |
| | Depreciation and amortization by segment: | Depreciation and amortization by segment: | | | Depreciation and amortization by segment: | | |
Diagnostic Services | | $ | 290 | | | $ | 329 | | | |
Diagnostic Imaging | | 67 | | | 63 | | | |
| Healthcare | | Healthcare | | $ | 315 | | | $ | 357 | | |
Construction | Construction | | 479 | | | 572 | | | Construction | | 487 | | | 479 | | |
Investments | Investments | | 65 | | | 65 | | | Investments | | 99 | | | 65 | | |
Total depreciation and amortization | Total depreciation and amortization | | $ | 901 | | | $ | 1,029 | | | Total depreciation and amortization | | $ | 901 | | | $ | 901 | | |
(1) Segment information has been recast for all periods presented to reflect Healthcare as one segment. Intersegment eliminations previously allocated to Investments have been reclassified to a separate line.
Note 12. Related Party Transactions
Eberwein Guarantees
SNB
On March 29, 2019, in connection with the Company’s entry into the SNB Loan Agreement, Mr. Eberwein, the Executive Chairman of the Company’s board of directors, entered into the Limited Guaranty Agreement (the SNB“SNB Eberwein Guaranty)Guaranty”) with SNB pursuant to which he guaranteed to SNB the prompt performance of all the SNB Borrowers’ obligations to SNB under the SNB Loan Agreement, including the full payment of all indebtedness owing by SNB Borrowers to SNB under or in connection with the SNB Loan Agreement and related SNB Credit Facility documents. Mr. Eberwein’s obligations under the SNB Eberwein Guaranty are limited in the aggregate to the amount of (a) $1.5 million, plus (b) reasonable costs and expenses of SNB incurred in connection with the SNB Eberwein Guaranty. Mr. Eberwein’s obligations under the SNB Eberwein Guaranty terminate upon the Company and SNB Borrowers achieving certain milestones set forth therein.in the SNB Loan Agreement, which the Company reasonably believes have been met.
Gerber
On March 5, 2020, contemporaneously with the execution and delivery of the First EBGL Amendment, Mr. Eberwein the Executive Chairman of the Company’s board of directors, executed and delivered a Guaranty (thethe EBGL Eberwein Guaranty)Guaranty to Gerber pursuant to which he guaranteed the performance of all the EBGL Borrowers’ obligations to Gerber under the EBGL Loan Agreement, including the full payment of all indebtedness owing by the EBGL Borrowers to Gerber under or in connection with the EBGL Loan Agreement and related financing documents. Mr. Eberwein’s obligations under the EBGL Eberwein Guaranty were limited in the aggregate to the amount of (a) $0.5 million, plus (b) costs of Gerber incidental to the enforcement of the EBGL Eberwein Guaranty or any guaranteed obligations.
On February 26, 2021, the Third EBGL Amendment discharged the EBGL Eberwein Guaranty and removed Mr. Eberwein as an ancillary guarantor from the EBGL Loan Agreement. On February 26, 2021, the Third Star Amendment discharged the $2.5 million Gerber Eberwein Guaranty.
Premier
As a condition to the Premier Loan Agreement, Mr. Eberwein entered into a guaranty in favor of Premier, absolutely and unconditionally guaranteeing all of the borrowers’ obligations thereunder.
Premier Participation
Pursuant to a certain Participation Agreement by and between Mr. Eberwein and Premier, which was signed on March 31, 2020 and was effective as As of MarchMay 26, 2020, Mr. Eberwein purchased a ratable participation in, and assumed a ratable part of, the aggregate maximum principal amount of the outstanding balance of the loan2021, all obligations under the Premier Loan Agreement have been repaid in thefull and no amount of $0.3 million.remains outstanding and Premier discharged Mr. Eberwein’s guaranty.
ATRMStar Equity Holdings, Inc.
Jeffrey E.Mr. Eberwein the Executive Chairman of our board of directors iswas also the Chief Executive Officer of Lone Star Value Management, LLC (“LSVM”), which isLSVM prior to its dissolution. LSVM was the investment manager of Lone Star Value Investors, LP (“LSVI”)LSVI, now dissolved, and Lone Star Value Co-Invest I, LP (“LSV Co-Invest I”). Mr. Eberwein iswas also the sole manager of Lone Star Value Investors GP, LLC (“LSV GP”), the general partner of LSVI and LSV Co-Invest I, and is the sole owner of LSV Co-Invest I.I, and over 25% owner of LSVI. LSVM was a wholly owned subsidiary of ATRM on the ATRM Acquisition Date (see Acquisition of LSVM below). Prior to the closing of the ATRM Merger, Mr. Eberwein was also Chairman of the board of directors of ATRM. On October 25, 2019, ATRM distributed its interest in LSVM to Star Equity resulting in LSVM becoming a wholly owned direct subsidiaryand was dissolved as of Star Equity.
Prior to the closing of the ATRM Merger, Mr. Eberwein and his affiliates owned approximately 4.3% of the outstanding Company common stock and 17.4% of the outstanding ATRM common stock. In addition, LSVI owned 222,577 shares of ATRM’s 10.0% Series B Cumulative Preferred Stock (the “ATRM Preferred Stock”) and another 374,562 shares of ATRM Preferred Stock were 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 disclaimed beneficial ownership of ATRM Preferred Stock, except to the extent of his pecuniary interest therein. At the effective time of the ATRM Merger, (i) each share of ATRM common stock converted into the right to receive three one-hundredths (0.03) of a share of Company Preferred Stock and (ii) each share of ATRM Preferred Stock converted into the right to receive two and one-half (2.5) shares of Company Preferred Stock.
As of March 31, 2021,2022, Mr. Eberwein owned 1,958,227 shares of common stock, representing approximately 3.1%13.03% of the outstanding Star Equity common stock. In addition, as of March 31, 2021,2022, Mr. Eberwein owned 1,310,0361,289,772 shares of CompanySeries A Preferred Stock. Mr. Eberwein as the CEO of LSVM, which is the investment advisor of LSVI, and as the sole manager of LSV GP, which is the general partner of LSVI Mr. Eberwein may be deemed the beneficial owner of the securities held by LSVI. Mr. Eberwein disclaims beneficial ownership of Company Preferred Stock, except to the extent of his pecuniary interest therein.
Private Placement
On JulyDecember 10, 2020, Star Equity authorized LSVI to initiate2021, the Company entered into a pro-rata distribution tosecurities purchase agreement with its partners of an aggregate of 300,000 shares of Company Preferred Stock at $10 per share, which was finalized by the Company's transfer agent on July 22, 2020 (the "Distribution"), which includes 114,624 shares of Company Preferred Stock consisting of (i) 113,780 shares of Company Preferred Stock received by theExecutive Chairman, Jeffrey E. Eberwein, Revocable Trust (the “Eberwein Trust”) as a resultrelating to the issuance and sale of the Distribution and (ii) 844650,000 shares of Company Preferred Stock acquired by the Eberwein Trust asour common stock at a resultpurchase price of shares of Company Preferred Stock distributable$3.25 per share pursuant to LSV GP in the Distribution being transferred directly to the Eberwein Trust contemporaneously with the Distribution. At the time of the Distribution, the Eberwein Trust was a limited partner of LSVI and LSV GP was the general partner of LSVI. Mr. Eberwein, as the trustee of the Eberwein Trust, may be deemed to beneficially own the securities held in the Eberwein Trust. Mr. Eberwein expressly disclaims beneficial ownership of such securities held in the Eberwein Trust except to the extent of his pecuniary interest therein. Mr. Eberwein, by virtue of his position as the manager and sole beneficial owner of LSV GP, the general partner of LSVI, may be deemed to beneficially own the securities owned by LSVI and LSV GP. Mr. Eberwein expressly disclaims beneficial ownership of such securities owned by LSVI and the securities owned by LSV GP, except to the extent of his pecuniary interest therein.
Private Placement
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 LSVI for a price of $10.00 per share for total proceeds to the Company of $3.0 million.
At the closing of the Private Placement, the Company and LSVI entered into a Registration Rights Agreement.
On September 17, 2020, in connection with satisfying the Company’s obligations under the Registration Rights Agreement, the Company filed a registration statement 1,492,321 shares of Company Preferred Stock.placement.
Put Option Agreement
In addition, prior to the effective time of the ATRM Merger,On September 10, 2019, the Company entered into a put option purchase agreement with Mr. Eberwein, pursuant to which the Company has the right to require Mr. Eberwein to acquire up to 100,000 shares of CompanySeries A Preferred Stock at a price of $10.00 per share for aggregate proceeds of up to $1.0 million at any time, in the Company’s discretion, during the 12 months following the effective time of the ATRM Merger.acquisition (the “Issuance Option”). In March 2020, Mr. Eberwein extended the put option agreementIssuance Option through June 30, 2021. As of July 1, 2021, these put options expired un-exercised.
ATRM Notes Payable
ATRM had the following related party promissory notes (the “ATRM Notes”) outstanding as of MarchDecember 31, 2021,2020, which were repaid in full during April 2021 using proceeds from the DMS Sale Transaction:
(i) Unsecured promissory note (principal amount of $0.7 million payable to 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 previously due on January 12, 2020, (the “January Note”). On November 13, 2019, LSV Co-Invest Isubsequently extended the maturity date of the January Note from January 12, 2020, to the earlier of (i) October 1, 2020 and (ii) the dateJune 30, 2022 or when the January Note is no longer subject to a certain Subordinate Agreement dated January 12, 2018, as amended, in favorsubordination agreement (which occurred upon the sale of Gerber. As described below, in November 2020 and March 2021, Mr. Eberwein signed the second and third extension letter to extend the maturity date of the January Note.DMS).
(ii) Unsecured promissory note (principal amount of $1.2 million payable to 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 previously due on June 1, 2020, (the “June Note”). On November 13, 2019 LSV Co-Invest I alsosubsequently extended the maturity date of the June Note from June 1, 2020, to the earlier of (i) October 1, 2020 and (ii) the dateJune 30, 2022 or when the January Note is no longer subject to a certain Subordinate Agreement dated June 1, 2018, as amended, in favorsubordination agreement (which occurred upon the sale of Gerber. As described below, in November 2020 and March 2021, Mr. Eberwein signed the second and third extension letter to extend the maturity date of the June Note.
(iii) Unsecured promissory note (principal amount of $0.4 million payable to 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 previously due on November 30, 2020, (the “LSVM Note”). As described below, in November 2020, Mr. Eberwein signed the second and third extension letter to extend the maturity date of the LSVM Note.
LSVM and LSV Co-Invest I on July 17, 2019, waived any right to accelerate payment with respect to the ATRM Merger under the ATRM Notes. In March 2020, Mr. Eberwein, sole manager of LSV Co-Invest I and LSVM, provided the Company a Letter of Support of the ATRM Notes indicating that he will take no adverse action against ATRM for failure to pay the principal due on the ATRM Notes by the maturity date and intends to work with the Company and ATRM to assure the financial success of the Company. In November 2020, Mr. Eberwein signed the second extension letter to extend the maturity date of the ATRM Notessubsequently extended to the earlier of (i) the date that is 5 business days after the Closing Date defined within the DMS stock Purchase Agreement dated OctoberJune 30, 2020 between the Company and Knob Creek Acquisition Corp.2022 or (ii) the date when the Note is no longer subject to a certain subordinate lettersubordination agreement dated January 12, 2018, as amended in favor of Gerber. In March 2021, Mr. Eberwein signed the third extension letter to extend the maturity dates of the ATRM Notes to aforementioned two conditions or to June 30, 2022. The ATRM Notes were paid off in full in April 2021,(which occurred upon the completionsale of DMS Sale Transaction.
Subordination Agreement
LSVM and LSV Co-Invest I are party to subordination agreements with ATRM and Gerber pursuant to which LSVM and LSV Co-Invest I agreed to subordinate the obligations of ATRM under their unsecured promissory notes to the obligations of the borrowers to Gerber.
Acquisitions and Leases of Maine Facilities
Through its SRE subsidiary, and prior to the completion of the ATRM Merger, the Company purchased two plants in Maine that manufacture modular buildings from KBS, a wholly-owned subsidiary of ATRM. SRE then leased these properties back to KBS, as further described below.
Waterford
On April 3, 2019, 947 Waterford, a wholly-owned subsidiary of SRE, entered into a Purchase and Sale Agreement (the “Waterford Purchase Agreement”) with KBS pursuant to which 947 Waterford closed on the purchase of certain real property and related improvements (including buildings) located in Waterford, Maine (the “Waterford Facility”) from KBS, and acquired the Waterford Facility. The purchase price of the Waterford Facility was $1.0 million, subject to adjustment for taxes and other charges and assessments.
Paris
On April 3, 2019, 300 Park, a wholly-owned subsidiary of SRE, entered into a Purchase and Sale Agreement (the “Park Purchase Agreement”) with KBS, pursuant to which 300 Park closed on the purchase of certain real property and related improvements and personal property (including buildings, machinery and equipment) located in Paris, Maine (the “Park Facility”) from KBS, and acquired the Park Facility. The purchase price of the Park Facility was $2.9 million, subject to adjustment for taxes and other charges and assessments.
Lease of Maine Facilities
On April 3, 2019, KBS entered into a separate lease agreement with each of 947 Waterford (the “Waterford Lease”) and 300 Park (the “Park Lease”)DMS). The Waterford Lease has an initial term of 120 months, which is subject to extension. The base rental payments associated with the initial term under the Waterford Lease were estimated to be between $1.2 million and $1.3 million in the aggregate. The Park Lease had an initial term of 120 months, which is subject to extension. The base rental payments associated with the initial term under the Park Lease are estimated to be between $3.3 million and $3.6 million in the aggregate. ATRM had unconditionally guaranteed the performance of all obligations under the Waterford Lease and Park Lease to be performed by KBS under each lease, including, without limitation, the payment of all required rent.
On March 27, 2019, 56 Mechanic, a wholly-owned subsidiary of SRE, purchased from a third party certain property and equipment located in Oxford, Maine (the “Oxford Facility”). The transaction closed on April 25, 2019. The purchase price of the Oxford Facility was $1.2 million, subject to adjustment for taxes and other charges and assessments. On April 3rd and 18th of 2019, KBS signed a lease and an amendment, respectively, with 56 Mechanic (the “Oxford Lease”), which became effective upon the closing of the transaction. The initial term under the Oxford Lease will commence upon delivery of the Oxford Facility to KBS. The Oxford Lease had an initial term of 120 months, which is subject to extension. The base rental payments associated with the initial term under the Oxford Lease are estimated to be between $1.4 million and $1.5 million in the aggregate. ATRM had unconditionally guaranteed the performance of all obligations under the Oxford Lease to be performed by KBS, including, without limitation, the payment of all required rent.
As of March 31, 2021 and upon the completion of the ATRM Merger, the Waterford Lease, the Park Lease and the Oxford Lease are treated as intercompany transactions and eliminated in the consolidation.
Note 13. Perpetual Preferred Stock
Holders of shares of Series A Preferred Stock (the Company Preferred Stock) are entitled to receive, when, as and if, authorized by the Company’s board of directors (or a duly authorized committee of the Company’s board of directors) and declared by the Company out of funds legally available for the payment of dividends, preferential cumulative cash dividends at the rate of 10.0% per annum of the liquidation preference of $10.00 per share. Dividends are payable quarterly, in arrears, on the last calendar day of March, June, September and December to holders of record at the close of business on the first day of each payment month. The CompanySeries A Preferred Stock is not convertible and does not have any voting rights, except when dividends are in arrears for six or more consecutive quarters, then the holders of those shares together with holders of all other series of preferred stock equal in rank will be entitled to vote separately as a class for the election of two additional directors to board of directors, until all dividends accumulated on such shares of CompanySeries A Preferred Stock for the past dividend periods and the dividend for the then current dividend period shall have been fully paid or declared and a sum sufficient for the payment thereof set apart for payment. Under change of control or other conditions, the CompanySeries A Preferred Stock may be subject to redemption. The Company may redeem the CompanySeries A Preferred Stock upon the occurrence of a change of control, subject to certain conditions. The Company may also voluntarily redeem some or all of the CompanySeries A Preferred Stock on or after September 10, 2024.
On February 25, 2022, our board of directors declared a cash dividend to holders of our Series A Preferred Stock of 0.25 per share, for an aggregate amount of approximately $0.5 million. The record date for this dividend was March 1, 2022, and the payment date was March 10, 2022. As of March 31, 2022, we have no preferred dividends in arrears.
Note 14. Equity Transactions
On January 24, 2022, we closed the 2022 Public Offering pursuant to an underwriting agreement with Maxim Group LLC, as representative of the underwriters. Company issued and sold (A)(i) 9,175,000 shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”), (ii) an aggregate of 325,000 pre-funded warrants to purchase up to an aggregate of 325,000 shares of Common Stock, and (iii) an aggregate of 9,500,000 common stock purchase warrants (the “Firm Purchase Warrants”) to purchase up to 9,500,000 shares of Common Stock and (B) at the election of Maxim, (i) up to an additional 1,425,000 shares of Common Stock and/or (ii) up to an additional 1,425,000 shares of common stock purchase warrants (the “Option Purchase Warrants”, and together with the Firm Purchase Warrants, the “Warrants”). Maxim partially exercised its over-allotment option for the purchase of 1,425,000 Warrants for a price of $0.01 per Warrant. Each share of common stock (or pre-funded warrant in lieu thereof) was sold together with one common warrant to purchase one share of common stock at a price of $1.50 per share and common warrant. Gross proceeds, before deducting underwriting discounts and offering expenses and excluding any proceeds we may receive upon exercise of the common warrants, were $14.3 million and net proceeds were $12.7 million.
As of March 31, 2022, of the warrants issued through the public offering we closed on May 28, 2020 (the “2020 Public Offering”), 1.0 millionwarrants were exercised and 1.4 million warrants remained outstanding, which represents 0.7 million shares of common stock equivalents, at an exercise price of $2.25. As of March 31, 2022, of the warrants issued through the 2022 Public Offering, there were 10.9 million of warrants and 0.3 million prefunded warrants outstanding at an exercise price of $1.50 and $0.01, respectively.
Note 15. Preferred Stock Rights
On June 2, 2021, the Company’s board has notof directors adopted a tax benefit preservation plan in the form of a Section 382 Rights Agreement (the “382 Agreement”). The 382 Agreement is intended to diminish the risk that our ability to use our net operating loss carryforwards to reduce future federal income tax obligations may become substantially limited due to an “ownership change,” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). The board of directors authorized and declared a dividend distribution of one right for each outstanding share of common stock, par value $0.0001 per share, to stockholders of record as of the close of business on June 14, 2021. Each right entitles the Companyregistered holder to purchase from the one one-thousandth of a share of Series C Participating Preferred Stock, and the aggregate and per-share amounts of cumulative preferred dividends in arrears are $3.0 million and $0.60par value $0.0001 per share respectively.(the “Series C Preferred Stock”), at an exercise price of $12.00 per one one-thousandth of a share of Series C Preferred Stock, subject to adjustment.
A roll forwardThe rights will become exercisable following (i) 10 days after a public announcement that a person or group has become an Acquiring Person; and (ii) 10 business days (or a later date determined by the board of directors) after a person or group begins a tender or an exchange offer that, if completed, would result in that person or group becoming an Acquiring Person.
In addition, upon the occurrence of certain events, the exercise price of the balancerights would be adjusted and holders of Company Preferred Stockthe rights (other than rights owned by an acquiring person or group) would be entitled to purchase common stock at approximately half of market value. Given the potential adjustment of the exercise price of the rights, the rights could cause substantial dilution to a person or group that acquires 4.99% or more of common stock on terms not approved by the board of directors.
No rights were exercisable at March 31, 2022. There is no impact to financial results as a result of the adoption of the rights plan for the quarter ended March 31, 20212022.
Note 16. Variable Interest Entity
VIE in which we are not the Primary Beneficiary
We have an investment in a VIE of $0.3 million, recorded in Other Assets, in which we are not the primary beneficiary. This VIE is a small private company that is primarily involved in research related to new heart imaging technologies.
We have determined that the governance structures of this entity do not allow us to direct the activities that would significantly affect its economic performance. Therefore, we are not the primary beneficiary, and the results of operations and financial position of the VIE are not included in our condensed consolidated financial statements. We account for this investment as follows (in thousands):non-marketable equity securities which is valued at cost less impairment.
| | | | | |
Balance at December 31, 2020 | $ | 21,500 | |
Deemed dividend on redeemable convertible preferred stock | 479 | |
Balance at March 31, 2021 | $ | 21,979 | |
The potential maximum exposure of this unconsolidated VIE is generally based on the current carrying value of the investments and any future funding commitments based on the milestone agreement and board approval. We have determined that the single source of our exposure to the VIE is our capital investment in them. The carrying value and maximum exposure of the unconsolidated VIE were $0.3 million as of March 31, 2022. As of March 31, 2022, we performed a qualitative assessment on the carrying value via inquiries with the board of directors and a review of the Company’s financial statements and determined that there have not been any impairment indicators to the carrying value.
Note 14.17. Subsequent Events
None.On May 19, 2022, our board of directors declared a cash dividend to holders of our Series A Preferred Stock of 0.25 per share, for an aggregate amount of approximately $0.5 million. The record date for this dividend was June 1, 2022, and the payment date was June 10, 2022.
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This management’s discussion and analysis of financial condition and results of operations (“MD&A”), contains forward-looking statements that involve risks and uncertainties. Please see “Important Information Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks, and assumptions that may cause our actual results to differ materially from those discussed in the forward-looking statements. This discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q, and the audited consolidated financial statements and related notes thereto for the fiscal year ended December 31, 2020,2021, which were included in our Annual Report on Form 10-K, filed with the SEC on March 29, 2021.31, 2022.
The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods.
Overview
The year 2020 marked the first full year that Star Equity known prior to January 1, 2021 as Digirad Corporation,Holdings, Inc. (“Star Equity”, the “Company”, “we”, “our”) has operated as a multi-industry holding company. Withcompany since the acquisition of ATRM Holdings, Inc. (“ATRM”) in September 2019,2019. With that merger, we added two construction businesses and one investments business to what historically had historically been a pure-play healthcare company and thereby transformed the Company intocompany. Today, Star Equity is a diversified holding company with operating businesses in two importantkey industry sectors of the economy, healthcareHealthcare and construction.
Construction.
Our Healthcare division, which is operatedoperates as Digirad Health, Inc., (“Digirad Health”) provides products and services in the area of nuclear medical imaging with a focus on cardiac health. Digirad Health operates across the U.S. The healthcare business involvesUnited States and comprises two reporting segments, Diagnostic Services, which offers lines of business—imaging services to healthcare providers using a fleet of our proprietary solid-state gamma cameras as well as the manufacture, distribution, and Diagnostic Imaging, which manufactures, distributes and maintainsmaintenance of our proprietary solid-state gamma cameras.
Our Construction division is a single reporting segment but is made up of three operating business,businesses, KBS Builders, Inc. (“KBS”), EdgeBuilder, Inc. (“EdgeBuilder”), and Glenbrook.Glenbrook Building Supply, Inc. (“Glenbrook”), with the latter two managed together and referred to jointly as “EBGL”. KBS is based in Maine and manufactures modular buildings for installation throughoutprincipally in the New England market. EdgeBuilder and Glenbrook, referred to together as “EBGL” internally andEBGL is based in the Minneapolis-Saint Paul area togetherand principally serves the Upper Midwest. Together, the EBGL businesses manufacture and deliver structural wall panels and other engineered wood-based products as well as distribute building materials primarily to professional builder customers in the Upper Midwest.
customers.
Currently, our Investments division is an internally-focusedinternally focused unit that is directly supervised by Star Equity management and is responsible for the management ofmanagement. This entity currently holds our corporate-owned real estate, and investments, which currently includes our three manufacturing facilities in Maine that are leased to KBS.
KBS, as well as any minority investments we make in public and private companies.
Strategy
Star Equity
We believe our diversified, multi-industry holding company structure will allow Star Equity management to focus on capital allocation, strategic leadership, mergers and acquisitions, capital markets transactions, investor relations, and management of our real estate and investments, and other public company activities.Investments division. Our structural will freestructure frees up our operating Chief Executive Officerscompany management teams to managefocus on their respective businesses, look for organic and bolt-on growth opportunities, and improve operations with fewer distractionsless distraction and administrative burdens.
burden associated with running a public company.
We continue to explore strategic alternatives to improve theour market position and the profitability of our product offerings, in the marketplace, generate additional liquidity, and enhance our valuation. We may pursue our goals through organic growth orand through strategic transactions.alternatives. Some of these strategic transactionsalternatives have included, and could continue to include, selective acquisitions of business segments or entire businesses, divestitures of assets or divisions,businesses, equity offerings, debt financings, or a restructuring of our company.Company.
Operating Businesses
We seek to growbelieve that both of our business by, among other things:primary divisions, Healthcare and Construction, are well positioned for growth in large addressable markets. The key elements of our growth strategy include the following:
•Organic growth from our core businesses. We believe that we operate in markets and geographies that will allow us to continue to grow our core businesses, allowing us to benefit from our scale and strengths. We plan to focus our efforts on markets in which we already have a presence in order to take advantage of personnel, infrastructure, and brand recognition we have in these areas.
•Introduction of new services. In the Healthcare division, we plan to continue to focus on healthcare solutions relatedsolutions-related businesses that deliver necessary assets, services, and logistics directly to the customer site. We believe that over time
we can either purchase or develop new and complementary businesses, and take advantage of our customer loyalty and distribution channels. Additionally, we are exploring new imaging technologies through the recent establishment of a joint venture that is presently conducting research and development in the area of heart imaging. In the Construction division, we will consider opportunities to augment our service offering to better serve our customer base. We have done this in the New England market by adding a structural wall panel line.with our entry into the commercial multi-family segment. Other areas might include logistics, installation on site, and manufacturing of sub-components or enhancements that create even more complete modules, such as full HVAC installation.sub-components.
•Acquisition of complementary businesses.We plan to continue to look at complementary businesses that meet our internally developed financially disciplined approach for acquisitions to grow our company.Company. We believe there are many potential small public and private targets that can be acquired over time and integrated into our platform. We will also look at larger, more transformational mergers and acquisitions (public or private) if we believe the appropriate mix of value, risk, and return is present for our shareholders.stockholders. The timing of these potential acquisitionstransactions will always depend on market conditions, available capital, and the value for each transaction.valuation. In general, we want to be “value” buyers, and will not pursue any transaction unless we believe the post-transaction potential value is high for shareholders.stockholders.
We continue to explore strategic alternatives to improve the market position and profitability of our product offerings in the marketplace, generate additional liquidity, and enhance our valuation. We may pursue our goals through organic growth and through strategic alternatives. Some of these alternatives have included, and could continue to include, selective acquisitions of business segments or entire businesses, divestitures of assets or divisions, or a restructuring of our company.
Current Market Conditions
The year 2020 proved to beCOVID-19 pandemic has been a challenging yearchallenge for most businesses in the vast majority of businesses across many sectors ofpast two years. Since early 2021, the economy. With the COVID-19 vaccine rollout has gradually allowed us to return to a more normal operating environment. Our Healthcare business has now well underway, we are hopeful that we will soon make our way backreturned to pre-COVID levels, after a brief scare with the onset of business activity. We believe the uncertainty surroundingOmicron variant late last year. On the pandemic willConstruction side, we continue to decrease as we progress through 2021. On the healthcare side, we expect to see imaging volume recover as the pandemic is brought under control. In construction, we expect that continued recovery in employment andbenefit from a strong housing market will underpinon the growth we are seeing.demand side, while a tight labor market and continued supply chain disruption make it difficult to maintain optimal production levels.
The target market for our healthcareHealthcare products and services is comprised of cardiologists, internal medicine physicians, family practice physicians, hospitals, IDNs,integrated delivery networks, and federal institutions in the United States that perform or could perform a diagnostic imaging procedure have a need for cardiac event monitoring, or have interest in purchasing a diagnostic imaging products. Our diagnostic services businesses currently operate in approximately 25 states. The overriding challenge during 2020 was the drop in imaging volume due to the COVID-19 pandemic. During the three months ended March 31, 2021, while2022, we provide critical and important imaging services focused in the cardiac area, the riskshave seen a return to a more normal pre-COVID volume of exposure led to reduced patient volumes as these tests were deferred or canceled in hopes that the pandemic would abate.imaging.
The target marketcustomers for our constructionConstruction division includes residentialinclude professional home builders, general contractors, project owners, or developers, of commercial buildings, and individual retail customers.design firms. While we witnessed a number of municipalities, especially in the Boston area, shutdown construction sites during the early wave of infections and even shutdown our own plant in South Paris, Maine for six weeks in April and May of 2020, housing demand and demand for building materials have increased ashome improvement activity continues to be very strong, supply chain disruptions caused by the COVID-19 pandemic has led to “nesting” at home, which were positive factorsa historic increase in building materials prices during the secondfirst half of 2020 and2021. Since that time, building materials prices have continued through the first quarter of 2021. The challenge has been less on the demand side and more on the supply chain, as wood-based commodities prices, lumber and OSB, have increased rapidly coming out of the first wave of the pandemic in the Spring of 2020 and supply has not kept up with demand.to be very volatile. We have seen some supply chain disruptionimplemented both price increases and tightness during the second half of 2020margin protection measures through our contract language since that time and that has continued into 2021 as lead timeswe believe these factors will have extended out, but we are still able to operate at normal levels of production. We believe that the high price environment that we are currently experiencing will lead to additional supply cominga significantly positive effect on line later this year.
our profitability in 2022.Trends and Drivers
The market for diagnostic services and products is highly competitive. Our business, which is focused primarily on the private practice and hospital sectors, continues to face uncertainty in the demand for diagnostic services and imaging equipment, which we believe is due in part to the impact of the Deficit Reduction Act on the reimbursement environment and the 2010 Healthcare Reform laws, COVID-19 pandemic impact, as well as general uncertainty in overall healthcare and legislative changes in healthcare, such as the Affordable Care Act. These challenges have impacted, and will likely continue to impact, our operations. We believe that the principal competitive factors in our market include budget availability for our capital equipment, qualifications for reimbursement, pricing, ease-of-use, reliability, and mobility. We have addressed, and will continue to address, these market pressures by modifying our Diagnostic Services business models, and by assisting our healthcare customers in complying with new regulations and requirements.
In our construction division, we continue to see a greater adoption of offsite or prefab construction in single-family and multi-family residential building projects, our target market. Our modular units and structural wall panels offer builders a number of benefits over traditional onsite or “stick built” construction. These include shorter time to market, higher quality, reduced waste, readily available labor and potential cost savings, among others. 3D BIM software modeling and developments in engineered wood products offers greater design flexibility for higher-end applications. The need for more affordable housing solutions also presents a great opportunity for the continued emergence of factory built housing.
Risks arising from global economic instability and conflicts, wars, and health crises could impact our business. In addition the inflation caused by such events may impact demand for our products and services and our cost to provide products and services.
COVID-19 Pandemic
We continue to recover from the economic effects of the COVID-19 pandemic. During the three months ended March 31, 2021,2022, we experiencedhad a $0.4$0.1 million decreaseincrease in Healthcare division revenue which was offset byand a $3.6$2.6 million increase in Construction division revenue as compared to the same period of the prior year. WithThe Healthcare division continued to operate at normal levels versus
last year with revenue increasing 0.8% for the three months ended March 31, 2022. Our Construction division grew revenue by 28.6% due to increased output at both KBS and EBGL coupled with pricing increases associated with higher raw materials costs. Nevertheless, the current COVID-19 pandemic continues to impact worldwide economic activity, and the extent to which the COVID-19 vaccine rollout now well underway, we are hopeful that we will gradually make our way back to pre-COVID levels of business activity. We believe the uncertainty surrounding the pandemic will continue to decrease as we progress through 2021. On the healthcare side, we expect to see imaging volume recover as the pandemic is brought under control. In construction, we expectimpact our business will depend on future developments that continued recovery in employmentare highly uncertain and a strong housing market will underpin the growth we are seeing.cannot be predicted at this time.
Discontinued Operations
The DMS Sale Transaction (as defined in Note 1 to our condensed consolidated financial statements) was completed on March 31, 2021, for $18.75 million in cash, subject tocash. After certain adjustments, including a working capital adjustment. The divestitureadjustment, we received an immaterial net escrow settlement in January 2022.
Goodwill valuation
We review goodwill for impairment on an annual basis during the fourth quarter, and when events or changes in circumstances indicate that a reduction in the carrying value may not be recoverable. During the three months ended March 31, 2022, we began the process by assessing qualitative factors to determine whether it is more likely than not that the fair value of DMS Health, which operated our Mobile Healthcare segment, met the definitionreporting unit is less than its carrying amount. Upon review of a strategic shift that has a significant effect on our operations and financial results; therefore, the results of operationssuch assessment, we may begin performing impairment analysis by quantitatively comparing the fair value of the reporting unit to the carrying value of the reporting unit, including goodwill. An impairment charge for goodwill is recognized for the Mobile Healthcare segment have been presented as discontinued operations in accordance with ASC 205-20, Presentationamount by which the carrying value of Financial Statements-Discontinued Operations for all periods presented. Additionally, Mobile Healthcare’s assetsthe reporting unit exceeds its fair value and liabilities as of December 31, 2020 are separately presented as held for sale onsuch loss should not exceed the unaudited consolidated balance sheet. Unless otherwise noted, discussion within these notestotal goodwill allocated to the unaudited consolidatedreporting unit.
There are numerous factors that may cause the fair value of a reporting unit to fall below its carrying amount and/or that may cause 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 charges. These factors include, but are not limited to, significant negative variances between actual and expected financial statements relatesresults, lowered expectations of future financial results, failure to continuing operations.
Business Segments
realize anticipated synergies from acquisitions, adverse changes in the business climate, and the loss of key personnel. As of March 31, 2021,2022, we performed qualitative trigger events analysis and concluded that if we are not able to achieve projected performance levels, future impairments could be possible, which could negatively impact our businessearnings.
Business Segments
Our reportable segments are based upon our internal organizational structure; the manner in which our operations are managed; the criteria used by our Executive Chairman, who is organizedour Chief Operating Decision Maker ("CODM"), to evaluate segment performance; the availability of separate financial information; and overall materiality considerations. Effective the first quarter of 2022, we reorganized our financial statements into fourthree reportable segments:segments by combining Diagnostic Imaging and Diagnostic Services into one Healthcare segment to reflect the manner in which our CODM assesses performance and allocates resources under the HoldCo Strategy:
•Diagnostic Services
•Diagnostic ImagingHealthcare
•Construction
•Investments
Diagnostic ServicesHealthcare
Through this segment, we provide services and products to our customers. We offer a convenient and economically efficient imaging and monitoring services program as an alternative to purchasing equipment or outsourcing the procedures to another physician or imaging center. For physicians who wish to perform nuclear imaging, echocardiography, vascular or general ultrasound tests, we provide imaging systems, qualified personnel, radiopharmaceuticals, licensing services, and the logistics required to perform imaging in their own offices, and thereby the ability to bill Medicare, Medicaid, or one of the third-party healthcare insurers directly for those services, which are primarily cardiac in nature. We provide imaging services primarily to cardiologists, internal medicine physicians, and family practice doctors who typically enter into annual contracts for a set number of days ranging from once per month to five times per week.
Diagnostic Imaging
Through this segment, Further, we sell our internally developed solid-state gamma cameras, imaging systems and camera maintenance contracts. Our imaging systems include nuclear cardiac imaging systems, as well as general purpose nuclear imaging systems. We sell our imaging systems to physician offices and hospitals primarily in the United States, although we have sold a small number of imaging systems internationally. Our imaging systems are sold in both portable and fixed configurations, provide enhanced operability and improved patient comfort, fit easily into floor spaces as small as seven feet by eight feet, and facilitate the delivery of nuclear medicine procedures in a physician’s office, an outpatient hospital setting, or within multiple departments of a hospital (e.g., emergency and operating rooms). Our Diagnostic ImagingHealthcare segment revenues derive primarily from selling solid-state gamma cameras and post-warranty camera maintenance contracts.
Construction
Through this segment, by way of our wholly-owned subsidiaries KBS, Glenbrook and EdgeBuilder, we service residential and commercial construction projects by manufacturing modular housing units, structural wall panels, permanent wood foundation systems, other engineered wood products, and supply general contractors with building materials. KBS is a Maine-based manufacturer that started business in 2001 as a manufacturer of modular homes. KBS offers products for both multi-family and single-family residential buildings with a focus on customization to suit the project requirements and provide engineering and design expertise. Glenbrook is a supplier of lumber, windows, doors, cabinets, drywall, roofing, decking and other building materials to professional builders and conducts its operations in Oakdale, Minnesota. EdgeBuilder is a manufacturer of structural wall panels, permanent wood foundation systems and other engineered wood products and conducts its operations in Prescott, Wisconsin.
Investments
Through this segment, we hold real estate assets that we have acquired and will potentially manage other future investments of Star Equity. In April 2019, the Company funded the initial purchase of three manufacturing facilities in Maine that manufacture modular buildings and leased those three properties back to KBS. The initial funding of the assets acquisition was primarily through the revolver loan under our SNB Credit Facility.Facility (as defined in Note 8 to our condensed consolidated financial statements). Since that time, we have secured a new facility from Gerber to finance these properties.
Healthcare Services and Products
Diagnostic imaging depictions of the internal anatomy or physiology are generated primarily through non-invasive means. Diagnostic imaging facilitates the early diagnosis of diseases and disorders, often minimizing the scope, cost, and amount of care required and reducing the need for more invasive procedures. Currently, the major types of non-invasive diagnostic imaging technologies available are: ultrasound and nuclear imaging. The most widely used imaging acquisition technology utilizing gamma cameras is single photon emission computed tomography, or SPECT.“SPECT”. All our current internally-developed cardiac gamma cameras employ SPECT technology.
Diagnostic imaging is the standard of care in diagnosis of diseases and disorders. We offer, through our businesses, the majority of these diagnostic imaging modalities. All of the diagnostic imaging modalities that we offer (both from provision of services and product sales) have been consistently utilized in clinical applications for many years, and are stable in their use and need. By offering a wide array of these modalities, we believe that we have strategically diversified our operations in possible changing trends of utilization of one diagnostic imaging modality from another.
Construction Services and Products
In the construction business, KBS markets its modular homes products through a direct sales organization and through inside sales, outside sales, a network of independent dealers, builders, and contractors in the New England states (Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont). KBS’s direct sales organization is responsible for all commercial building projects, and works with developers, architects, owners, and general contractors to establish the scope of work, terms of payment, and general requirements for each project. KBS’s sales people also work with independent dealers, builders, and contractors to accurately configure and place orders for residential homes for their end customers. KBS’s network of independent dealers and contractors do not work with it exclusively, although many have KBS model homes on display at their retail centers. KBS does not assign exclusive territories to its independent dealers and contractors, but they tend to sell in areas of New England where they will not be competing against another KBS dealer or contractor. KBS’s backlog and pipeline, along with its market initiatives to build more workforce housing, are expected to position KBS for continued growth.
EBGL markets its engineered structural wall panels and permanent wood foundation systems through direct sales people and a network of builders, contractors and developers in and around Minneapolis and St. Paul areas. EBGL’s direct sales organization is responsible for both residential and commercial projects and it works with general contractors, developers and builders to provide bids and quotes for specific projects. Our marketing efforts include participation in industry trade shows, production of product literature, and sales support tools. These efforts are designed to generate sales leads for our independent builders and dealers, and direct salespeople.
Critical Accounting Policies and Estimates
In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our revenue and net income or loss, as well as on the value of certain assets and liabilities on our balance sheet.condensed Consolidated Balance Sheets. We believe that the estimates, assumptions, and judgments involved in the accounting policies described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 20202021 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates.
Results of Operations
Comparison of the Three Months Ended March 31, 2022 and 2021 and 2020
The following table summarizes our results for the three months ended March 31, 20212022 and 20202021 (in thousands):
| | | Three Months Ended March 31, | | Three Months Ended March 31, |
| | 2021 | | Percent of Revenues | | 2020 | | Percent of Revenues | | Change from Prior Year | | 2022 | | Percent of Revenues | | 2021 | | Percent of Revenues | | Change from Prior Year |
| | Dollars | | Percent | | Dollars | | Percent * |
Total revenues | Total revenues | | $ | 22,354 | | | 100.0 | % | | $ | 19,190 | | | 100.0 | % | | $ | 3,164 | | | 16.5 | % | Total revenues | | $ | 25,049 | | | 100.0 | % | | $ | 22,354 | | | 100.0 | % | | $ | 2,695 | | | 12.1 | % |
Total cost of revenues | Total cost of revenues | | 19,277 | | | 86.2 | % | | 15,947 | | | 83.1 | % | | 3,330 | | | 20.9 | % | Total cost of revenues | | 20,386 | | | 81.4 | % | | 19,277 | | | 86.2 | % | | 1,109 | | | 5.8 | % |
Gross profit | Gross profit | | 3,077 | | | 13.8 | % | | 3,243 | | | 16.9 | % | | (166) | | | (5.1) | % | Gross profit | | 4,663 | | | 18.6 | % | | 3,077 | | | 13.8 | % | | 1,586 | | | 51.5 | % |
Total operating expenses | Total operating expenses | | 4,646 | | | 20.8 | % | | 5,439 | | | 28.3 | % | | (793) | | | (14.6) | % | Total operating expenses | | 7,218 | | | 28.8 | % | | 4,646 | | | 20.8 | % | | 2,572 | | | 55.4 | % |
Loss from operations | Loss from operations | | (1,569) | | | (7.0) | % | | (2,196) | | | (11.4) | % | | 627 | | | (28.6) | % | Loss from operations | | (2,555) | | | (10.2) | % | | (1,569) | | | (7.0) | % | | (986) | | | 62.8 | % |
Total other expense | | 983 | | | 4.4 | % | | (145) | | | (0.8) | % | | 1,128 | | | (777.9) | % | |
Total other (expense) income | | Total other (expense) income | | (196) | | | (0.8) | % | | 983 | | | 4.4 | % | | (1,179) | | | (119.9) | % |
Loss before income taxes | Loss before income taxes | | (586) | | | (2.6) | % | | (2,341) | | | (12.2) | % | | 1,755 | | | (75.0) | % | Loss before income taxes | | (2,751) | | | (11.0) | % | | (586) | | | (2.6) | % | | (2,165) | | | 369.5 | % |
Income tax expense | | (2) | | | — | % | | (27) | | | (0.1) | % | | 25 | | | (92.6) | % | |
Income tax provision | | Income tax provision | | (950) | | | (3.8) | % | | (2) | | | — | % | | (948) | | | 47,400.0 | % |
Net loss from continuing operations | Net loss from continuing operations | | $ | (588) | | | (2.6) | % | | $ | (2,368) | | | (12.3) | % | | $ | 1,780 | | | (75.2) | % | Net loss from continuing operations | | (3,701) | | | (14.8) | % | | (588) | | | (2.6) | % | | (3,113) | | | 529.4 | % |
Net income from discontinued operations | | Net income from discontinued operations | | — | | | — | % | | 6,020 | | | 26.9 | % | | (6,020) | | | (100.0) | % |
Net (loss) income | | Net (loss) income | | $ | (3,701) | | | (14.8) | % | | $ | 5,432 | | | 24.3 | % | | $ | (9,133) | | | (168.1) | % |
|
*Percentage may not add due to rounding
Revenues
Healthcare
Healthcare revenue by segments is summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2021 | | 2020 | | Change | | % Change |
Diagnostic Services | | $ | 10,239 | | | $ | 10,814 | | | $ | (575) | | | (5.3) | % |
| | | | | | | | |
Diagnostic Imaging | | 3,068 | | | 2,861 | | | 207 | | | 7.2 | % |
Total Healthcare Revenue | | $ | 13,307 | | | $ | 13,675 | | | $ | (368) | | | (2.7) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 | | Change | | % Change |
Healthcare | | $ | 13,418 | | | $ | 13,307 | | | $ | 111 | | | 0.8 | % |
Healthcare Revenue | | $ | 13,418 | | | $ | 13,307 | | | $ | 111 | | | 0.8 | % |
Although Q1 2021 revenues for the Diagnostic Services decreased slightly from Q1 2020, this division has largely recovered and is now performing near pre-pandemic levels. Most doctor offices have reopened and hospitals are now performing non-emergency procedures. As state-by-state vaccination levels increase, we expect to see our operations fully return to normal levels later this year.
The increase in Diagnostic Imaging is due to higher number of cameras soldHealthcare revenue increased 0.8% compared to the prior year quarter.
quarter, partially driven by an increase in revenue from radiopharmaceuticals contracts. This increase was partially offset by fewer camera sales and fewer total scanning days.Construction
Construction revenue is summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2021 | | 2020 | | Change | | % Change |
Construction | | $ | 9,047 | | | $ | 5,484 | | | $ | 3,563 | | | 65.0 | % |
Construction Revenue | | $ | 9,047 | | | $ | 5,484 | | | $ | 3,563 | | | 65.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 | | Change | | % Change |
Construction | | $ | 11,631 | | | $ | 9,047 | | | $ | 2,584 | | | 28.6 | % |
Construction Revenue | | $ | 11,631 | | | $ | 9,047 | | | $ | 2,584 | | | 28.6 | % |
The increase in revenue for the Construction division was predominately due to higher production levels at KBS, with $2.7 million in revenue recognized on adriven by large commercial project.projects at our EBGL business, partially offset by a $0.6 million decrease in revenues for KBS business.
InvestmentsInvestments revenue is summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2021 | | 2020 | | Change | | % Change |
Investments | | $ | — | | | $ | 31 | | | $ | (31) | | | (100.0) | % |
| | | | | | | | |
Investments Revenue | | $ | — | | | $ | 31 | | | $ | (31) | | | (100.0) | % |
41
The decrease in investments revenue was due to the wind down of investment vehicles from LSVM.
Gross Profit
Healthcare Gross Profit
Healthcare gross profit and gross margin by segments is summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2021 | | 2020 | | % Change |
Diagnostic Services gross profit | | $ | 1,608 | | | $ | 2,005 | | | (19.8) | % |
Diagnostic Services gross margin | | 15.7 | % | | 18.5 | % | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Diagnostic Imaging gross profit | | $ | 990 | | | $ | 869 | | | 13.9 | % |
Diagnostic Imaging gross margin | | 32.3 | % | | 30.4 | % | | |
| | | | | | |
Total healthcare gross profit | | $ | 2,598 | | | $ | 2,874 | | | (9.6) | % |
Total healthcare gross margin | | 19.5 | % | | 21.0 | % | | |
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 | | % Change |
Healthcare gross profit | | $ | 3,176 | | | $ | 2,598 | | | 22.2 | % |
Healthcare gross margin | | 23.7 | % | | 19.5 | % | | |
The decreaseincrease in Diagnostic ServicesHealthcare gross margin percentage was mainly due to the COVID-19 pandemic impact and the associated public health measures in place, which directly reduced scanning revenue. While management proactively applied measures to contain costs during the pandemic, there were fixed costs which resulted in the decrease in gross margin.
The increase in Diagnostic Imaging grossincreased percentage of high margin percentage was mainly due to higher camera revenue recognized inradiopharmaceuticals contracts for the three months ended March 31, 20212022, compared to the same period in the prior year same period.
year.
Construction Gross Profit
Construction gross profit and margin is summarized as follows (in thousands):
| | | Three Months Ended March 31, | | Three Months Ended March 31, |
| | 2021 | | 2020 | | % Change | | 2022 | | 2021 | | % Change |
Construction gross profit | Construction gross profit | | $ | 544 | | | $ | 403 | | | 35.0 | % | Construction gross profit | | $ | 1,586 | | | $ | 544 | | | 191.5 | % |
Construction gross margin | Construction gross margin | | 6.0 | % | | 7.3 | % | | Construction gross margin | | 13.6 | % | | 6.0 | % | |
The increase in Construction gross profit was predominately due to significantly increased pricing levels during 2022 to offset higher productioninput costs in both residential and commercial projects, slightly offset by net loss of $0.2 million from lumber derivatives. Our backlog and sales pipeline remain at record levels at KBS, with $2.7 million in revenue recognized on a large commercial project. The decrease in gross margin percentage is due to the negative effect of higher raw material prices.
Investments Gross Loss
Investments gross loss is summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2021 | | 2020 | | % Change |
| | | | | | |
Investments gross loss | | $ | (65) | | | $ | (34) | | | 91 | % |
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 | | % Change |
| | | | | | |
Real Estate and Investments gross loss | | $ | (99) | | | $ | (65) | | | 52.3 | % |
| | | | | | |
The Investments gross loss relates to depreciation expense associated with the three manufacturing facilities acquired in April 2019 and investment vehicles through LSVM. The decrease was due the reduced activities in investment vehicles from LSVM.2019.
Operating Expenses
Operating expenses are summarized as follows (in thousands): | | | Three Months Ended March 31, | | Percent of Revenues | | Three Months Ended March 31, | | Percent of Revenues |
| | 2021 | | 2020 | | Change | | 2021 | | 2020 | | 2022 | | 2021 | | Change | | 2022 | | 2021 |
| | Dollars | | Percent | | | Dollars | | Percent | |
Selling, general and administrative | Selling, general and administrative | | $ | 5,055 | | | $ | 4,863 | | | $ | 192 | | | 3.9 | % | | 22.6 | % | | 25.3 | % | Selling, general and administrative | | $ | 6,788 | | | $ | 5,055 | | | $ | 1,733 | | | 34.3 | % | | 27.1 | % | | 22.6 | % |
Amortization of intangible assets | Amortization of intangible assets | | 438 | | | 576 | | | (138) | | | (24.0) | % | | 2.0 | % | | 3.0 | % | Amortization of intangible assets | | 430 | | | 438 | | | (8) | | | (1.8) | % | | 1.7 | % | | 2.0 | % |
Gain on sale of MD Office Solutions | Gain on sale of MD Office Solutions | | (847) | | | — | | | (847) | | | (100.0) | % | | (3.8) | % | | — | % | Gain on sale of MD Office Solutions | | — | | | (847) | | | 847 | | | (100.0) | % | | — | % | | (3.8) | % |
Total operating expenses | Total operating expenses | | $ | 4,646 | | | $ | 5,439 | | | $ | (793) | | | (14.6) | % | | 20.8 | % | | 28.3 | % | Total operating expenses | | $ | 7,218 | | | $ | 4,646 | | | $ | 2,572 | | | 55.4 | % | | 28.8 | % | | 20.8 | % |
The $0.2On a consolidated basis, there was a $1.7 million increase in sales, general and administrative expensesexpenses. Most of the increase in SG&A was primarily due toassociated with a $0.3 million increase in the Construction businessdue to headcount and consulting service expenses, a $0.2 million increase in corporate administrative expenses due to headcount, a $0.8 million increase in legal expenses and a $0.4 million increase in outside services expenses. SG&A as a resultpercentage of revenue increased commissions and headcount, offset by $0.1 million reduced travel expenseto 27.1% of revenue, versus 22.6% in Healthcare division.
The $0.1 million decrease in amortization of intangible assets and the $0.8 million gain was due to the sale of MD Office Solutions.prior year period.
Total Other Income (Expense)
Total other income (expense) is summarized as follows (in thousands):
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2021 | | 2020 |
Other income, net | | $ | 1,255 | | | $ | 160 | |
Interest expense, net | | (272) | | | (305) | |
| | | | |
| | | | |
Total other income (expense) | | $ | 983 | | | $ | (145) | |
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 |
Other (expenses) income, net | | $ | (6) | | | $ | 35 | |
Interest expense, net | | (190) | | | (272) | |
Gain on forgiveness of PPP loans | | — | | | 1,220 | |
| | | | |
Total other (expense) income | | $ | (196) | | | $ | 983 | |
Other (expenses) income, net, for the three months ended March 31, 2022 and 2021 is predominantlyare predominately comprised of $1.3 million PPP loan forgivenessunrealized gain from KBSavailable for sale securities, and EBGL.finance costs.
Interest expense, net, for the three months ended March 31, 20212022 and 20202021 are predominantly comprised of interest costs and the related amortization of deferred issuance costs on our debt, respectively.
Income Tax Expense
For the three months ended March 31, 2022, and 2021 we recorded an income tax expense fromof $950 thousand and $2 thousand, respectively, within continuing operations of $2 thousand.operations. See Note 10,10. Income Taxes, within the notes to our unauditedcondensed consolidated financial statements for further information related to the Company’s income taxes.
Income from Discontinued Operations
See Note 2,2. Discontinued Operations of the unaudited condensed consolidated financial statements for information regarding discontinued operations.
Liquidity and Capital Resources
Overview
We used cash of $2.2 million for operations duringCash Flows from Operating Activities
For the three months ended March 31, 2021. Cash flow2022, net cash used in operating activities was $0.6 million, as compared to $2.2 million in 2021, resulting in a decrease in net cash used in operating activities of $1.6 million. The decrease in net cash used in operating activities was attributable to net loss from operations primarily consistand positive impact on net working capital changes. Additionally, 2021 consolidated net income included discontinued operations from DMS Health Technologies, Inc. (“DMS Health”), the sale of our MD Office Solutions subsidiary, and PPP loan forgiveness.
Cash Flows from Investing Activities
For the three months ended March 31, 2022, net loss (adjusted for depreciation, amortization, and other non-cash items), and thecash used in investing activities was $1.3 million, as compared to $18.3 million of net effect of changes in working capital. Cash flowcash provided by investing activities in 2021. The $19.6 million decrease in net cash used in investing activities was used primarily for investmentattributable to the proceeds from the sale of discontinued operations of $18.8 million in capital equipment required to maintain and grow our business, as well as acquisitions and dispositions. 2021.
Cash flowFlows from Financing Activities
For the three months ended March 31, 2022, net cash provided by financing activities primarily consistedwas $12.6 million, as compared to net cash used in financing activities of our$6.2 million in 2021, resulting in an increase in net cash provided by financing activities of $18.7 million. The increase was attributable to a net proceeds from borrowingsin principal on various revolving facilities and the receiptexisting debt of cash from the conversion$6.8 million, payment of cash warrants converted into common stock,dividends of $0.5 million, partially offset by proceeds received related to the repayments2022 Public Offering of long-term borrowings.$12.7 million.
Summary Cash Flows
The following table shows cash flow information for the three months ended March 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 |
Net cash used in operating activities | | $ | (636) | | | $ | (2,232) | |
Net cash (used in) provided by investing activities | | $ | (1,310) | | | $ | 18,315 | |
Net cash provided by (used in) financing activities | | $ | 12,550 | | | $ | (6,180) | |
Sources of Liquidity
Our principal sources of liquidity includeare our existing cash and cash equivalents, cash generated from operations, and funds available under variousavailability on our revolving lines of credit from our credit facility with Webster Bank, N.A. (“Webster”), as successor in interest to Sterling National Bank (“Sterling” or “SNB”), our three credit facilities with Gerber, and proceedscash raised from sale of DMS Health.equity financing. As of March 31, 2021,2022, we had $13.3$15.0 million of cash and cash equivalents. The Gerber facilities directly support our Construction businesses. As of March 31, 2022, we were fully drawn in terms of available capacity and at $2.9 million outstanding on the KBS revolver. We were at $2.1 million outstanding balance with approximately $0.4 million in undrawn available capacity on the EBGL revolver. However, those facilities have loan limits of $4.0 million each and we expect to be able to use more of that availability as our borrowing base increases with higher production levels. In January 2022, we successfully completed the 2022 Public Offering with net proceeds of $12.7 million.
Going Concern
The accompanying condensed consolidated 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 losses from continuing operations, net of income taxes, of approximately $3.7 million and $0.6 million for the three months ended March 31, 2022 and 2021, respectively. We have an accumulated deficit of $131.7 million and $128.0 million as of March 31, 2022 and 2021, respectively. Net cash used in operations was $0.6 million for the three months ended March 31, 2022, compared to net cash used in operations of $2.2 million for the same period in 2021. The Company will likely need to secure additional financing in the future to accomplish its business plan over the next several years and there can be no assurance on the availability or terms upon which such financing and capital might be available at that time. As of March 31, 2022, cash and cash equivalents and restricted cash andincreased to $15.0 million from $4.5 million available under our Sterling revolving lineas of credit.
We require capital, principally for capital expenditures, acquisition activity, dividend payments and to finance accounts receivable and inventory. Our working capital requirements vary from period to period depending on inventory requirements, the timing of deliveries, and the payment cycles of our customers. Our capital expenditures consist primarily of medical imaging and diagnostic devices utilized in the delivery of our services, as well as vehicles and information technology hardware and software.December 31, 2021.
Regarding our debt,At March 31, 2022, we had approximately $12.5$13.3 million in short term debt due tooutstanding. All of our borrowings whichdebt is classifiedcategorized as short term as disclosed inshort-term on our condensed Consolidated Balance Sheets. For more detail, see Note 8. Debt. The $5.0Company’s loan pursuant to the SNB Loan Agreement (as defined below) (the “SNB Loan”), which has a current balance owed of $7.3 million, SNB credit facility primarily supports our healthcare business and actuallyHealthcare business. While the SNB Loan matures in 2024, but GAAP rules require that the outstanding balance be classified as short-term debt,debt. This is due to both the automatic sweep feature embedded in the traditional lockbox arrangement along with aand the subjective acceleration clause in the SNB Loan and Security Agreement. In practice, we have the ability to immediately borrow back these daily sweeps to fund our working capital. As of March 31, 2021,2022, we were not in compliance with all borrowing arrangementscovenants in the SNB Loan Agreement related to our Healthcare division. Asdivision and we have not obtained a waiver from the Webster for these financial covenant breaches. However, we have enough cash to pay down the SNB Loan.
Upon the occurrence and during the continuation of March 31, 2021,an event of default under the SNB Loan Agreement, Webster may, among other things, declare the loans and all other obligations under the SNB Loan Agreement immediately due and payable and increase the interest rate at which loans and obligations under the SNB Loan Agreement bear interest. Management has concluded that this forecasted violation raises substantial doubt about our ability to continue as a going concern within twelve months after the date that financial statements are issued, if we had $4.5 millionare not able to restructure those agreements or receive a waiver for non-compliance with our covenants. Our financial statements do not reflect any adjustments that might result from the outcome of borrowing capacitythis uncertainty. Management is taking a number of steps to fundavoid these breaches and/or restructure the covenants within these agreements. These steps include improving our operations, ofconsidering additional or alternative financing arrangements, and negotiating with current lenders to amend our covenants. While we believe that we maintain strong transparency and relationships with our lenders, there can be no assurance that we will be successful in these divisions.efforts.
As of March 31, 2021,2022, we have $4.6 millionoutstandinghad $5.0 million outstanding on our two Construction division revolvers with Gerber andFinance, Inc. (“Gerber”). As of December 31, 2021, we were not in compliance with all borrowingour bi-annual covenants foron either of these Gerber however,facilities. However, we were in breach of our covenants as of December 31, 2020 and may be in breach at our nexthave obtained waivers from Gerber covering the measurement period atending June 30, 2021.2022. While Gerber has historically provided us with such waivers, when needed, there is no assurance that we will be able to receive waivers for covenant violations in the future, or thatfuture.
On January 31, 2020, we will meetand certain of our Investments subsidiaries entered into a Loan and Security Agreement with Gerber (as amended, the “Star Loan Agreement”), which provides for a credit facility with borrowing availability of up to $2.5 million, bearing interest at the prime rate plus 3.5% per annum, and matures on January 1, 2025, unless terminated in
accordance with the terms therein (the “Star Loan”). We currently have $1.0 million outstanding on the Star Loan, on which we are and historically have been making timely payments in full compliance with covenants in the future.all covenants. Related party notes of $2.3 million wasthat were outstanding as of December 31, 2020 were fully paid off on April 1, 2021 using proceeds from the sale of DMS Sale Transaction.Health. In addition, as of March 31, 2021,2022, we had cash and cash equivalents of $13.3$15.0 million.
Management believes thatOn January 24, 2022, we closed an underwritten public offering (the “2022 Public Offering”), and gross proceeds, before deducting underwriting discounts and offering expenses and excluding any proceeds we may receive upon exercise of the Company hascommon warrants, were $14.3 million and net proceeds were $12.7 million. Refer to Note 14. Equity Transactions for details.
In the liquidityfirst quarter of 2022, we declared and operationsmade a $0.5 million preferred stock dividend payment. In the second quarter of 2022, we declared a $0.5 million preferred stock dividend payment. Refer to continue to support the business through the next 12 months from the issuance of this Quarterly Report. Our ability to continue as a going concern is dependent on its ability to execute its plans.Note 13. Perpetual Preferred Stock and Note 17. Subsequent Events for details.
Common Stock Equity Offering
On May 28, 2020, we closed aan underwritten public offering (the “Offering”“2020 Public Offering”) pursuant to an underwriting agreement with Maxim Group LLC, as representative of the underwriters. The 2020 Public Offering was for 2,225,000 shares of our common stock, and 2,225,000 warrants (the “Warrants”) to purchase up to 1,112,500 additional shares of our common stock. The 2020 Public Offering price was $2.24 per share of common stock and $0.01 per accompanying Warrant (for a combined Offeringoffering price of $2.25), initially raising $5.0 million in gross. Gross proceeds, before underwriterdeducting underwriting discounts and offering-related expenses. Theoffering expenses and excluding any proceeds we may receive upon exercise of the common warrants, were $5.5 million and net proceeds were $5.2 million.
As noted above, on January 24, 2022, we closed the 2022 Public Offering pursuant to an underwriting agreement (the “Underwriting Agreement”) we entered into with Maxim Group LLC, (“Maxim”), as representative of the underwriters,underwriters. The 2022 Public Offering was for the Offering contained customary representations, warranties,9,500,000 shares of common stock (or pre-funded warrants to purchase shares of common stock in lieu thereof) and agreements by the Company, customary conditions to closing, indemnification obligations of the Company and Maxim and certain other obligations.
Pursuant to the terms of the Underwriting Agreement, we granted to Maxim an option for a period of 45 days (the “Over-Allotment Option”)warrants to purchase up to 225,000 additional shares of our common stock and 225,000 Warrants to purchase up to an additional 112,500 shares of our 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 our 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 of9,500,000 shares of common stock (the “common warrants”). Each share of common stock (or pre-funded warrant in lieu thereof) was sold together with one common warrant to purchase one share of common stock at a price of $1.50 per share and common warrant. Gross proceeds, before deducting underwriting discounts and offering expenses and excluding any proceeds we sold in the Offering to 2,450,000 shares, and total gross proceeds to approximately $5.5 million. In addition, the Company received $0.5 million from investors in the Offering throughout the balance of March 31, 2021 due to the exercise of a portion of the Warrants sold in the Offering, bringing the total gross proceeds from equity issuance to $6.5 million.
The net proceeds to the Company from the Offering and Warrant exercises in 2020 were approximately $5.2 million (inclusive of themay receive upon exercise of the over-allotment option), after deducting underwriter feescommon warrants, were $14.3 million and offering-related expenses estimated at $0.8 million. We used a significant portion of the net proceeds from the Offering to fund working capital needs at our construction businesses, particularly related to modular housing projects which we produced at KBS Builders, Inc. (“KBS”) for the Boston-area projects. The remainder of the net proceeds is being used for working capital and for other general corporate purposes. We have broad discretion in determining how the proceeds of the Offering is used, and our discretion is not limited by the aforementioned possible uses.were $12.7 million.
As of March 31, 2021, 0.92022, of the warrants issued through the 2020 Public Offering, 1.0 millionwarrants were exercised and 1.51.4 million warrants remained outstanding, which represents 0.7 million shares of common stock equivalents, at an exercise price of $2.25. As of March 31, 2022, of the warrants issued through the 2022 Public Offering, there were 10.9 million of warrants and 0.3 million of prefunded warrants outstanding at an exercise price of $2.25.
Cash Flows$1.50 and $0.01, respectively.
The following table shows cash flow information forSee Note 14. Equity Transactions in the three months ended March 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2021 | | 2020 |
Net cash (used in) provided by operating activities | | $ | (2,232) | | | $ | 623 | |
Net cash provided by (used in) investing activities | | $ | 18,315 | | | $ | (135) | |
Net cash (used in) provided by financing activities | | $ | (6,180) | | | $ | (957) | |
Operating Activities
The increase in cash used comparedaccompanying notes to the prior year period was primarily due to increased investment in working capital to fund the revenue growth in the Construction division.condensed consolidated financial statements for further details.
Investing ActivitiesCredit Facilities
The increase in investing activities cash flow compared to the prior year period was primarily attributable to $18.75 million proceeds received from DMS Health disposition.
Financing Activities
The decrease in cash flows from financing activities is primarily due to a $7.9 million pay down of the SNB Credit Facility using the proceeds from the sale of the DMS Health business.
Sterling Credit Facility
On March 29, 2019, the Companywe entered into a Loan and Security Agreement (the “SNB Loan Agreement”) by and among certain subsidiaries of the Company, as borrowers (collectively, the “SNB Borrowers”); the Company, as guarantor; and Sterling. On February 1, 2022, Sterling as lender.
became part of Webster, and Webster became the successor in interest to the SNB Loan Agreement. The SNB Loan Agreement is a five-year credit facility maturing in March 2024, with a maximum credit amount of $20.0 million for revolving loans (the “SNB Credit Facility”). Under the SNB Credit Facility, the SNB Borrowers can request the issuance of letters of credit in an aggregate amount not to exceed $0.5 million at any one time outstanding.
The borrowings under the SNB Loan Agreement were classified as short-term obligations under GAAP as the agreement contained a subjective acceleration clause and required a lockbox arrangement whereby all receipts within the lockbox are swept daily to reduce borrowings outstanding. As of March 31, 2021,2022, the Company had $0.2$0.1 million of letters of credit outstanding and had additional borrowing capacity of $4.5$1.1 million.
At the Borrowers’ option,Financial covenants required that the SNB Credit Facility will bear interest at either (i) a Floating LIBOR Rate, as defined in the Loan Agreement, plus a margin of 2.50% per annum; or (ii)Borrowers maintain (a) a Fixed LIBOR Rate,Charge Coverage Ratio as definedof the last day of a fiscal quarter of not less than 1.25 to 1.0 and (b) a Leverage Ratio as of the last day of such fiscal quarter of no greater than 3.50 to 1.0. As of March 31, 2022, we were not in the Loan Agreement, pluscompliance with covenants related to our Healthcare division and we have not obtained a margin of 2.25% per annum. Aswaiver from Webster for these financial covenant breaches. While we do not believe Webster will require us to pay down our largest single debt outstanding, our floating ratebalance on this facility, at March 31, 2021 was 2.61%.we have sufficient cash to do so if necessary.
Construction Loan Agreements
The SNB Loan Agreement includes certain representations, warranties of SNB Borrowers, as well as events of default and certain affirmative and negative covenants by the SNB Borrowers that are customary for loan agreements of this type. These covenants include restrictions on borrowings, investments and dispositions by SNB Borrowers, as well as limitations on the SNB Borrowers’ ability to make certain distributions. Upon the occurrence and during the continuation of an event of default under the SNB Loan Agreement, SNB may, among other things, declare the loans and all other obligations under the SNB Loan Agreement immediately due and payable and increase the interest rate at which loans and obligations under the SNB Loan Agreement bear interest. The SNB Credit Facility is secured by a first-priority security interest in substantially all of the assets of the Company and the SNB Borrowers and a pledge of all shares of the SNB Borrowers.
On March 29, 2019, in connection with the Company’s entry into the SNB Loan Agreement, Jeffery E. Eberwein, the Executive Chairman of the Company’s board of directors, entered into Limited Guaranty Agreement (the “SNB Eberwein Guaranty”) with SNB pursuant to which he guaranteed the prompt performance of all the Borrowers’ obligations under the SNB Loan Agreement. The SNB Eberwein Guaranty is limited in the aggregate to the amount of (a) $1.5 million, plus (b) reasonable costs and expenses of SNB incurred in connection with the SNB Eberwein Guaranty. Mr. Eberwein’s obligations under the SNB Eberwein Guaranty terminate upon the Company and Borrowers achieving certain milestones set forth therein.
On February 1, 2021, in connection with the closing of the Company’s sale of MD Office Solutions, the Company entered into a First Amendment to the SNB Loan Agreement pursuant to which, among other things, Sterling consented to the sale of MD Office Solutions and the Company’s name change from Digirad Corporation to Star Equity Holdings, Inc.
On March 31, 2021, in connection with completing the sale of DMS Health, the Company, certain subsidiaries of the Company, and Sterling entered into a Second Amendment to the SNB Loan Agreement pursuant to which, among other things, Sterling consented to the sale of DMS Health and its subsidiaries, removed DMS Health and its subsidiaries as borrowers under the SNB Loan Agreement, and required the principle to be paid down to $7.0 million.
At March 31, 2021, the Company was in compliance with the covenants under the SNB Loan Agreement.
Construction Loan Agreements
As of March 31, 2021,2022, the Construction division had outstanding revolving lines of credit and term loans of approximately $5.4$5.0 million. This debt includes: (i) $2.7$2.9 million principal outstanding on KBS’s $4.0 million revolving credit facility under a Loan and Security Agreement, dated February 23, 2016, (as amended, the “KBS Loan Agreement”), with Gerber and (ii) $2.0$2.1 million principal outstanding on EBGL’s $3.0$4.0 million revolving credit facility under a Revolving Credit Loan Agreement, and $0.7 millioncollectively known as the “Construction Loan Agreements” with Premier, dated June 30, 2017 (as amended, the “Premier Loan Agreement”).Gerber. The Construction division was at the maximumhad a borrowing capacity under both revolving lines of credit of $0.4 million, based on the inventory and accounts receivable on March 31, 2021,2022 which fluctuates weekly.The Construction Loan Agreements contain cross-default provisions and subjective acceleration clauses which may, in the event of a material adverse event, as determined by Gerber, allow Gerber to declare the loans and all other obligations under the Construction Loan Agreements immediately due and payable or increase the interest rate at which loans and obligations under the Construction Loan Agreements bear interest. Each of the two Gerber credit facilities are backed by the assets of their respective borrower (KBS or EBGL), which serve as collateral support. Therefore, distributions from each facility are restricted in their use, as they must be used solely to finance the operations of their respective borrower.
KBS Loan Agreement
On February 23, 2016, ATRM, KBS and Main Modular Haulers, Inc. (a former subsidiary of ATRM) entered into a Loan and Security Agreement, (as amended, the “KBS Loan Agreement”), with Gerber. The KBS Loan Agreement provides KBS with a revolving line of credit with borrowing availability of up to $4.0 million.million which matures on February 22, 2023. Availability under the line of credit is based on a formula tied to KBS’s eligible accounts receivable, inventory and other collateral. The KBS Loan Agreement, which was scheduled to expire on February 22, 2018, has been automatically extended for successive one (1) year periods in accordance with its terms and is now scheduled to expire on February 22, 2022. The KBS Loan Agreement will be automatically extended for another one (1) year period unless a party thereto provides prior written notice of termination. As of March 31, 2021 neither party has provided notice of termination. Upon the final expiration of the term of the KBS Loan Agreement, the outstanding principal balance is payable in full. Borrowings bear interest at the prime rate plus 2.75%, equating to 6.00% at March 31, 2021, with interest payable monthly. The KBS Loan Agreement also provides for certain fees payable to Gerber during its term, including a 1.5% annual facilities fee and a 0.10% monthly collateral monitoring fee. KBS’s obligations under the KBS Loan Agreement are secured by all of its assets and are guaranteed by ATRM. Unsecured promissory notes issued by KBS and ATRM are subordinate to KBS’s obligations under the KBS Loan Agreement. The KBS Loan Agreement contains representations, warranties, affirmative and negative covenants, defined events of default and other provisions customary for financings of this type.
Financial covenants requirerequired that KBS maintain (a) a maximum leverage rationet cash income (as defined in the KBS Loan Agreement) of at least equal to no less than $0 for the trailing 6-month period ending June 30, 2022 and KBS not incur a net annual post-tax loss in anybe no less than $500,000 for the trailing fiscal year during the term ofending December 31, 2022 and (b) a minimum EBITDA (as defined in the KBS Loan Agreement. Agreement) no less than $0 as of June 30, 2022 and no less than $850,000 as of the fiscal year ending December 31, 2022. As of March 31, 2022, we are not required to measure financial covenants. The December 31, 2021 Gerber covenants waivers last until the next measurement period.
The borrowings under the KBS Loan Agreement were classified as short-term obligations under GAAP as the agreement contained a subjective acceleration clause and required a lockbox arrangement whereby certainall receipts are swept daily to reduce borrowings outstanding. At March 31, 2021,2022, approximately $2.7$2.9 million was outstanding under the KBS Loan Agreement.
During the three months ended, March 31, 2021, the parties to the KBS Loan Agreement have amended the KBS Loan Agreement to provide for increased availability under the KBS Loan Agreement to KBS under certain circumstances, including for new equipment additions, and certain other changes, as well as a waiver of certain covenants.
As of December 31, 2020 and 2019, KBS was not in compliance with the financial covenants requiring no net annual post-tax loss for KBS or the minimum leverage ratio covenant as of 2020. The occurrence of any event of default under the KBS Loan Agreement may result in KBS’s obligations under the KBS Loan Agreement becoming immediately due and payable. In April 2019, June 2019, February 2020 and February 2021, we obtained a waiver from Gerber for these events.
On September 10, 2019, the parties to the KBS Loan Agreement entered into the twelfth amendment to the KBS Loan Agreement (the “Twelfth KBS Amendment”), pursuant to which the Company agreed to guarantee amounts borrowed by certain ATRM’s subsidiaries from Gerber.
On January 31, 2020, the Company, ATRM, KBS and Gerber entered into a thirteenth amendment to the KBS Loan Agreement (the “Thirteenth KBS Amendment”) to amend the terms of the KBS Loan Agreement, in order to, among other things (a) amend the definitions of “Ancillary Credit Parties,” “Guarantor,” “Obligations,” and “Subordinated Lender” to address the obligations of the Star Borrowers, the EBGL Borrowers, the Star Credit Parties, and the EBGL Credit Parties under the Star Loan Agreement, EBGL Loan Agreement and the Subordination Agreements (each as defined below) to which they are a party and (b) add a new cross default provision.
On March 5, 2020, in connection with the First EBGL Amendment, Gerber, KBS, ATRM and the Company entered into a fourteenth amendment to the KBS Loan Agreement in order to, among other things consent to the First EBGL Amendment and remove cash and cash collateral from the borrowing base.
On April 1, 2020, Gerber and KBS entered into a fifteenth amendment to the KBS Loan Agreement pursuant to which the “Minimum Average Monthly Loan Amount” was decreased to twenty-five percent (25%) of the Maximum Revolving Amount.
On January 5, 2021, Gerber and KBS entered into a sixteenth amendment to the KBS Loan Agreement in order to, among other things, amend certain definitions under the KBS Loan Agreement and to increase the inventory assets against which funds can be borrowed.
On February 26, 2021 Gerber and KBS entered into a seventeenth amendment to the KBS Loan Agreement in order to provide the waiver to the 2020 covenant breach and amended the financial covenants. The financial covenants under the KBS Loan Agreement, as amended, provide that (i) KBS shall make no distribution, transfer, payment, advance, or contribution of cash or property which would constitute a restricted payment; (ii) KBS shall report annual post-tax net income at least equal to (a) $385 thousand for the trailing 6-month period ending June 30, 2021 and (b) $500 thousand for the trailing fiscal year end December 31, 2021; and (iii) a minimum EBITDA at June 30, 2021 of more than $880 thousand or at December 31, 2021 of more than $1.5 million.
EBGL Premier Note
On June 30, 2017, EdgeBuilder and Glenbrook (together, EBGL) entered into aAll obligations under the Revolving Credit Loan Agreement (as amended, the “Premier Loan Agreement”) with Premier providing EBGL with a working capital line of credit of up to $3.0 million. The Premier Loan Agreement replaced the prior revolving credit facility.
Availability under the Premier Loan Agreement is basedBank (“Premier”)) were repaid in full on a formula tied to EBGL’s eligible accounts receivable, inventoryMay 26, 2021 and equipment, and borrowings bear interest at the prime rate plus 1.50%, with interest payable monthly and theno amount remains outstanding principal balance payable upon expiration of the term of the Premier Loan Agreement. The Premier Loan Agreement also provides for certain fees payable to Premier during its term. The initial term of the Premier Loan Agreement was scheduled to expire on June 30, 2018, but was extended multiple times by Premier until January 31, 2023. EBGL’s obligations under the Premier Loan Agreement are secured by all of their inventory, equipment, accounts and other intangibles, fixtures and all proceeds of the foregoing.
On January 31, 2020, Glenbrook and EdgeBuilder entered into an Extension and Modification Agreement (the “Modification Agreement”) with Premier that modified the terms of the Revolving Credit Promissory Note made by Glenbrook and EdgeBuilder. The Modification Agreement reduced the outstanding borrowings to $1.0 million, extended the final maturity date to January 31, 2023, and set the interest rate to at 5.75% per annum. Mr. Eberwein executed a guaranty in favor of Premier, which has been extended through January 1, 2023, under which ATRM and Mr. Eberwein have absolutely and unconditionally guaranteed all of EBGL’s obligations under the Premier Loan Agreement. Asas of March 31, 2021, approximately $0.7 million was outstanding under2022. In exchange, Premier terminated all of its security interests in the Premier Loan Agreement.
Gerber Star and EBGL LoansLoan
On January 31, 2020, SRE, 947 Waterford Road, LLC (“947 Waterford”), 300 Park Street, LLC (“300 Park”), and 56 Mechanic Falls Road, LLC (“56 Mechanic” and together with SRE, 947 Waterford, and 300 Park, (the “Star Borrowers”), each an Investments Subsidiary,subsidiary, and the Company, ATRM, KBS, EdgeBuilder, and Glenbrook (collectively, the “Star Credit Parties”), entered intohave a Loan and Security Agreement (as amended, the “Star Loan Agreement”)credit facility with Gerber providing the Star Borrowers with a credit facility with borrowing availability of up to $2.5 million, ($2.0of which, $2.0 million was advanced to KBS and $0.5 million was advanced to KBS and EBGL respectively) (the “Star Loan”). The advance of $2.0 million to KBS is to be repaid in monthly installments of sixty (60) consecutive equal payments. The advance of $0.5 million to EBGL, which has been temporarily increased by $0.3 million due to be repaid on April 30, 2020, iswas to be repaid in monthly installments of twelve (12) consecutive equal payments. On February 20, 2020, the Star Borrowers entered into a first amendment to theThe Star Loan Agreement (the “First Star Amendment”) in order to (i) temporarily advance $0.3 million to EBGL, which amount is to be repaid to Gerbermatures on the earlier of (a) January 1, 2025 or before April 30, 2020; (ii) clarify that Gerber can make multiple advances under(b) the Star Loan Agreement, and (iii) to correcttermination, the maturity dateor repayment of the Star Loan. On April 30, 2020, the Star Borrowers entered into a second amendment to the Star Loan Agreement (the “Second Star Amendment”) to change terms of repayment for the advance of $0.3 million to EBGL to provide for repayment in three consecutive equal monthly installments, commencing on May 30, 2020, with a final installment on or before July 31, 2020. As of March 31, 2021, EBGL repaid approximately $0.5 million and $1.3 million was outstanding under the Star Loan Agreement.
On January 31, 2020, EdgeBuilder and Glenbrook (the “EBGL Borrowers”), each a Construction Subsidiary, and the Company, Star, 947 Waterford, 300 Park, 56 Mechanic, ATRM, and KBS (collectively, the “EBGL Credit Parties”), entered into a Loan and Security Agreement (the “EBGL Loan Agreement”) with Gerber providing the EBGL Borrowers with a credit facility with borrowing availability of up to $3.0 million (the “EBGL Loan”). On March 5, 2020, the EBGL Borrowers entered into a first amendment to the EBGL Loan Agreement (the “First EBGL Amendment”) with Gerber that amended the EBGL Loan Agreement and the KBS Loan Agreement to include a pledge $0.3 million of cash collateral by LSVI under the EBGL Loan Agreement which, prior to the First EBGL Amendment, was pledged by LSVI in connection with the KBS Loan Agreement. On July 1, 2020, the EBGL Borrowers entered into a second amendment to the EBGL Loan Agreement to terminate the pledge of $0.3 million in cash collateral. On February 26, 2021, the EBGL Borrowers entered into a third amendment to the EBGL Loan Agreement (the “Third EBGL Amendment”) pursuant to which the Company and Gerber agreed to, among other things, eliminate the minimum leverage ratio covenant, lower the minimum EBITDA, and require the borrowers to not incur a net operating loss on bi-annual basis. The Third EBGL Amendment also discharged the EBGL Eberwein Guaranty described below. As of March 31, 2021, approximately $2.0 million was outstanding under the EBGL Loan Agreement.
(as defined below). Availability under the Star Loan Agreement iswas based on a formula tied to the value of real estate owned by the Star Borrowers, and borrowings bear interest at the prime rate plus 3.5% per annum. Availability under the EBGLThe Star Loan Agreement is based on a formula tied to the EBGL Borrowers’ eligible accounts receivable and inventory, and borrowings bear interest at the prime rate plus 2.75% per annum. The Loan Agreements also provideprovides for certain fees payable to Gerber during their respective terms. The Star Loan matures on the earlier of (a) January 1, 2025 or (b) the termination, the maturity or repayment of the EBGL Loan. The EBGL Loan matures on the earlier of (a) January 1, 2022, unless extended, or (b) the termination, the maturity or repayment of the Star Loan. The maturity of the EBGL Loan is automatically extended for successive periods of one (1) year each unless terminated by Gerber or the EBGL Borrowers. The borrowings under the EBGL Loan Agreement were classified as short-term obligations under GAAP as the agreement containedits term, including a subjective acceleration clause1.5% annual facilities fee and required a lockbox arrangement whereby all receipts are swept daily to reduce borrowings outstanding.0.10% monthly collateral monitoring fee.
The obligations of the EBGL Borrowers under the EBGL Loan Agreement are guaranteed by the EBGL Credit Parties and are secured by substantially all the assets of the EBGL Borrowers and the EBGL Credit Parties. The obligations of the Star Borrowers under the Star Loan Agreement are guaranteed by the Star Credit Parties and are secured by substantially all the assets of the Star Borrowers and the Star Credit Parties. Contemporaneously with the execution and delivery of the Star Loan Agreement, Jeffrey E.Mr. Eberwein the Executive Chairman of the Company’s board of directors, executed and delivered a Guaranty (the “Gerber Eberwein Guaranty”) to Gerber, pursuant to which he guaranteed the performance of all the Star Borrowers’ obligations to Gerber under the Star Loan Agreement, including the full payment of all indebtedness owing by the Star Borrowers to Gerber under or in connection with the Star Loan Agreement and related financing documents.Gerber. Mr. Eberwein’s obligations under the Gerber Eberwein Guaranty are limited in the aggregate to the amount of (a) $2.5 million, plus (b) costs of Gerber incidental to the enforcement of the Gerber Eberwein Guaranty or any guaranteed obligations. On March 5, 2020, contemporaneously with the execution and delivery of the First EBGL Amendment, Mr. Eberwein, the Executive Chairman of the Company’s board of directors, executed and delivered a Guaranty (the “EBGL Eberwein Guaranty”) to Gerber pursuant to which he guaranteed the performance of all the EBGL Borrowers’ obligations to Gerber under the EBGL Loan Agreement, including the full payment of all indebtedness owing by the EBGL Borrowers to Gerber under or in connection with the EBGL Loan Agreement and related financing documents. Mr. Eberwein’s obligations under the EBGL Eberwein Guaranty are limited in the aggregate to the amount of (a) $0.5 million, plus (b) costs of Gerber incidental to the enforcement of the EBGL Eberwein Guaranty or any guaranteed obligations.
On February 26, 2021, the Star Borrowers entered into a third amendment to the Third Star Loan Agreement (the “Third Star Amendment”)Amendment with Gerber that among other things, amended the contract rate to prime rate plus 3% and discharged the $2.5 million Gerber Eberwein Guaranty.
The Star Loan Agreement and EBGL Loan Agreement contains representations, warranties, affirmative and negative covenants, events of default and other provisions customary for financings of this type.
The financial covenants under the EBGL Loan Agreement applicable to the EBGL Borrowers include maintenance of a minimum tangible net worth, a minimum debt service coverage ratio and minimum net income. The Financial covenants under the Star Loan Agreement applicableinclude maintenance of a Debt Service Coverage Ratio of not less than 1:00 to 1:00, as defined in the Star Borrowers include a minimum debt service coverage ratio.Loan Agreement, as of December 31, 2021. The occurrence of any event of default under the Star Loan AgreementsAgreement may result in the obligations of the Star Borrowers becoming immediately due and payable. As of DecemberMarch 31, 2020, EBGL2022, no event of default was notdeemed to have occurred and the Star Borrowers were in compliance with the bi-annual financial covenants under the Star Loan Agreement as of December 31, 2021.
As of March 31, 2022, $1.0 million was outstanding under the Star Loan Agreement. The borrowings under the Star Loan Agreement were classified as short-term obligations under GAAP, because the borrowings under the EBGL Loan Agreement were classified as short-term obligations under GAAP given the EBGL and KBS Loan Agreements contain a subjective acceleration clause and require a lockbox arrangement whereby all receipts are swept daily to reduce borrowings outstanding. Accordingly, if (i) a material adverse effect may be seen to have occurred, (ii) Gerber in its discretion deems a EBGL Loan Agreement default occurred, and (iii) the proceeds swept are insufficient to pay the balance outstanding, Gerber may then demand all obligations under the Star Loan Agreement immediately due and payable due to cross-default provision, occurring within the Star Loan Agreement. Since a material event can occur at any time, all obligations under the Star Loan Agreement, EBGL Loan Agreement and KBS Loan Agreement are classified as short-term obligations.
Gerber EBGL Loans
EdgeBuilder and Glenbrook (the “EBGL Borrowers”), each a Construction Subsidiary, and the Company, 947 Waterford, 300 Park, 56 Mechanic, ATRM, and KBS (collectively, the “EBGL Credit Parties”) have a credit facility with Gerber providing the EBGL Borrowers with a credit facility with borrowing availability of up to $4.0 million (the “EBGL Loan”), pursuant to a Loan and Security Agreement (the “EBGL Loan Agreement”) with Gerber, which matures on January 1, 2023. As of March 31, 2022, $2.1 million was outstanding under the EBGL Loan. Availability under the EBGL Loan Agreement was also based on a formula tied to the EBGL Borrowers’ eligible accounts receivable and inventory.
The borrowings under the EBGL Loan Agreement were classified as short-term obligations under GAAP as the agreement contained a subjective acceleration clause and required a lockbox arrangement whereby all receipts are swept daily to reduce borrowings outstanding.
Financial covenants to require that EBGL maintain (a) a lower net cash income (as defined in the EBGL Loan Agreement) at least equal to no less than $0 for the trailing 6-month period ending June 30, 2022 and no less than $1,000,000 for the trailing fiscal year end December 31, 2022 and (b) a reduced minimum EBITDA (as defined in the EBGL Loan Agreement) to be no less than $0 as of June 30, 2022 and no less than $1,000,000 as of the fiscal year ending December 31, 2022. As of March 31, 2022, no event of default was deemed to have occurred and EBGL was in compliance with the bi-annual financial covenants under the EBGL Loan Agreement as of 2020. The occurrence of any event of default under the EBGL Loan Agreement may result in EBGL’s obligations under the EBGL Loan Agreement becoming immediately due and payable. In February 2021, we obtained a waiver from Gerber for these events and, as part of the Third EBGL Amendment (described above), the Company and Gerber agreed to, among other things, eliminate the minimum leverage ratio covenant, lower the minimum EBITDA, and require the borrowers to not incur a net operating loss on bi-annual basis, as well as discharge the EBGL Eberwein Guaranty.
As a condition to the extension of credit to the Star Borrowers and EBGL Borrowers under the Star Loan Agreement and EBGL Loan Agreement, the holders of certain existing unsecured promissory notes made by ATRM and certain of its subsidiaries entered into subordination agreements (the “Subordination Agreements”) with Gerber pursuant to which such noteholders (including the Company and certain of its subsidiaries) agreed to subordinate the obligations of ATRM and its subsidiaries to such noteholders to the obligations of the Star Borrowers and EBGL Borrowers to Gerber under the loan agreements.December 31, 2021.
Paycheck Protection Program
From April 2020 through May 2020, the Company and its subsidiaries received $6.7 million, of loans under the Paycheck Protection Program (“PPP”). Total PPP loans received the Construction division and Healthcare division were $5.5 million and $1.2 million, respectively.
The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). PPPThe loans forevidenced by the Construction and Healthcare divisionNotes were made through Bremer Bank (“Bremer”) as lender, and the loans evidenced by the Healthcare Notes were made through Sterling as lenders, respectively.lender.
The loans evidenced by the PPP loansNotes (the “PPP Loans”) have two-year terms and bear interest at a rate of 1.00% per annum. Monthly principal and interest payments under the PPP loansLoans are deferred for ten months, afteruntil repaid.
During the end of covered periods. The PPP loans may be prepaid at any time prior to maturity with no prepayment penalties.
The promissory notes issued in connection with the PPP loans (the “PPP Notes”) contain customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the SBA or lender, or breaching the terms of the applicable PPP loan documents. Upon an event of default under a PPP Note, the lender thereunder may, among other things, require immediate payment of all amounts owing under the applicable PPP Note, collect all amounts owing from the applicable borrower, or file suit and obtain judgment.
Under the terms of the CARES Act, recipients of loans under the PPP can apply for and be granted forgiveness for all or a portion of the loan granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and certain other eligible costs. However, no assurance is provided that forgiveness for any portion of the PPP loans will be obtained and even if forgiveness is granted the PPP loans may remain subject to review and audit due to all affiliated PPP Notes equaling more than $2 million.
In order to apply for the PPP loans, we certified that the economic uncertainty at the time of application, made the PPP loans request necessary to support ongoing operations of the Company. This certification was made taking into account our then current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that would not be significantly detrimental to the business.
The Company is continuing to evaluate the criteria and new guidance put out by the SBA regarding loan forgiveness criteria and procedures to seek loan forgiveness. During Octoberfiscal years ended 2020 and January 2021, the Company applied for forgiveness on all PPP loans. OurLoans. All PPP loan forgiveness is sought under the belief all entities requesting loan forgiveness have met the stated criteriaLoans were forgiven, resulting in a gain of $4.2 million in 2021 and guidelines provided by the SBA and terms of the CARES Act; however, no assurance can be provided that forgiveness for any portion of the PPP loans will be obtained.
During Q4 2020, $2.5 million of the Healthcare division PPP Notes were forgiven. As of March 31, 2021,in 2020, thus, the Company has $3.0 million no PPP Loans outstanding.
See Note 8. Debt in PPP loans outstandingthe accompanying notes to the financial statements for the Healthcare division. During Q1, 2021, all amounts under the Construction division PPP Notes were forgiven.further details.
Off-Balance Sheet Arrangements
On September 10, 2019, the parties to the KBS Loan Agreement entered into the Twelfth KBS Amendment pursuant to which the Company agreed to guarantee amounts borrowed by certain of ATRM’s subsidiaries from Gerber. The Twelfth KBS Amendment requires the Company to serve as an additional guarantor with the existing guarantor, ATRM, with respect to the payment, performance and discharge of each and every obligation of payment and performance by the borrowing subsidiaries with respect to the loans made by Gerber to them. On January 31, 2020, the Company, ATRM, KBS and Gerber entered into the Thirteenth KBS Amendment, in order to, among other things (a) amend the definitions of “Ancillary Credit Parties,” “Guarantor,” “Obligations,” and “Subordinated Lender” to address the obligations of the Star Borrowers, the EBGL Borrowers, the Star Credit Parties, and the EBGL Credit Parties under the Star Loan Agreement, the EBGL Loan Agreement and the Subordination Agreements to which they are a party and (b) add a new cross default provision. On April 1, 2020, Gerber and KBS entered into a Fifteenth KBS Amendment pursuant to which the “Minimum Average Monthly Loan Amount” under the KBS Loan Agreement was decreased to twenty-five percent (25%) of the Maximum Revolving Amount (as defined in the KBS Loan Agreement). See Note 8, Debt, within the notes to our unaudited consolidated financial statements for further detail.
On June 5, 2020,2022, the Company entered into a Guaranty Agreement (the “Tocci Guaranty”) with Tocci Building Corporation (“Tocci”) pursuant to which the Company irrevocably guaranteed allguarantee the obligations of KBS to Consigli Construction Co., Inc. under a certain Subcontract Agreement by and between Tocci and KBSsubcontract in the event of a material breach by KBS under the Subcontract. The Company’s liability under the Tocci Guaranty is limitedin an amount up to $2.0 million.$4.4 million, with such amount decreasing as product deliveries occur.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934 (the “Exchange Act”) reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our executive chairman and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As further discussed below, we carried out an evaluation, under the supervision and with the participation of our management, including our executive chairman and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Due to the existence of the material weaknesses as described below,Based on that evaluation, our executive chairman and chief financial officer concluded that our disclosure controls and procedures were not effective as of March 31, 2021.2022 as a result of the material weakness discussed below.
As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020,2021, management concluded that we did not maintain effective internal control over financial reporting as of December 31, 20202021 due to the material weaknesses as described below.
Our management identified a material weakness in our internal control over financial reporting as we do not have a sufficient complement of accounting resources to address complex accounting matters across all operating entities and to allow timely completion of financial reporting and accounting activities, including sufficiently precise management review controls. The material weakness did not result in any material identified misstatements to the financial statements, and there were no material changes to previously released financial results.
A “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
The Company identified material errors in the accounting for debt classification which resulted in the restatement of previously issued consolidated financial statements. These errors resulted from a material weakness related to ineffectively designed controls over review of contracts for new debt agreements and the proper application of GAAP for such agreements.
Plan for Remediation of the Material Weakness in Internal Control Over Financial Reporting
The Company has developed a remediation plan which includes, but is not limited to, a more detailed review over debt contracts and the proper application of GAAP.
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all errors and fraud. Any internal control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
Plan for Remediation of the Material Weakness in Internal Control Over Financial Reporting
Management intends to increase the skills and experience of our accounting and financial reporting staff over time and to make future investments in the continuing education and public company accounting training of our accounting and financial professionals. We may also retain additional outside financial consultants to conduct technical accounting reviews, when necessary.
Controls will also be added to increase the precision of management review controls, including the review of key inputs used in the preparation and review process. Our management is committed to remediation of the material weakness described above.
Changes in Internal Control over Financial Reporting
Other than in connection with implementing a plan to remediate the material weakness described above, there has been no change in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 under the Exchange Act that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
See Note 9,9. Commitments and Contingencies, within the notes to our unauditedcondensed consolidated financial statements for a summary of legal proceedings.
ITEM 1A.RISK FACTORS
In evaluating us and our common stock, we urge you to carefully consider the risks and other information in this Quarterly Report on Form 10-Q, as well as the risk factors disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020,2021, which we filed with the SEC on March 29, 2021. The31, 2022. Except as noted below, the risks and uncertainties described in “Item 1A - Risk Factors” of our Annual Report on Form 10-K have not materially changed. Any of the risks discussed in this Quarterly Report on Form 10-Q or any of the risks disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020,2021, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, could materially and adversely affect our results of operations or financial condition.
Risks Related to our Common Stock and our Company Preferred Stock
If we cannot continue to satisfy the Nasdaq Global Market continued listing standards and other Nasdaq rules, our common stock could be delisted, which would harm our business, the trading price of our common stock, our ability to raise additional capital and the liquidity of the market for our common stock.
Our common stock is currently listed on the Nasdaq Global Market. To maintain the listing of our common stock on the Nasdaq Global Market, we are required to meet certain listing requirements, including, among others, either: (i) a minimum closing bid price of $1.00 per share, a market value of publicly held shares (excluding shares held by our executive officers, directors and 10% or more stockholders) of at least $5.0 million and stockholders’ equity of at least $10 million; or (ii) a minimum closing bid price of $1.00 per share, a market value of publicly held shares (excluding shares held by our executive officers, directors and 10% or more stockholders) of at least $15.0 million and total assets of at least $50.0 million and total revenue of at least $50.0 million (in the latest fiscal year or in two of the last three fiscal years).
There is no assurance that we will be able to maintain compliance with the minimum closing price requirement. As of May 23, 2022, our common stock had closed below $1.00 per share for twelve consecutive trading days. In the event that we fail to maintain compliance with Nasdaq listing requirements for 30 consecutive trading days, Nasdaq may send us a notice stating we will be provided a period of 180 days to regain compliance with the minimum bid requirement or else Nasdaq may make a determination to delist our common stock. If our common stock were to be delisted from Nasdaq and was not eligible for quotation or listing on another market or exchange, trading of our common stock could be conducted only in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult to dispose of, or obtain accurate price quotations for, our common stock, and there would likely also be a reduction in our coverage by securities analysts and the news media, which could cause the price of our common stock to decline further.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
Holders of shares of the Company Preferred Stock are entitled to receive, when, as and if authorized by the Company’s board of directors (or a duly authorized committee of the Company’s board of directors) and declared by the Company out of funds legally available for the payment of dividends, preferential cumulative cash dividends at the rate of 10.0% per annum of the liquidation preference of $10.00 per share. Dividends are payable quarterly, in arrears, on the last calendar day of March, June, September and December to holders of record at the close of business on the first day of each payment month. As of the date of this Quarterly Report on Form 10-Q, the Company’s board of directors has not declared a dividend on the Company Preferred Stock and the total arrearage of cash dividends due on the Company Preferred Stock is $3.0 million.None.
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.OTHER INFORMATION
None.
ITEM 6.EXHIBITS | | | | | | | | | |
Exhibit Number | | Description | |
| | | |
10.110.1* | | First Amendment to Loan and Security Agreement, Consent and Release, dated February 1, 2021, by and among Digirad Health, Inc., Digirad Imaging Solutions, Inc., MD Office Solutions, DMS Health Technologies, Inc., DMS Imaging, Inc., DMS Health Technologies-Canada, Inc., Project Rendezvous Holding Corporation, Project Rendezvous Acquisition Corporation, Digirad Diagnostic Imaging, Inc., Star Equity Holdings, Inc., and Sterling National Bank (incorporated by reference to Exhibit 10.72 to the Company’s Annual Report on Form 10-K filed with the Commission on March 29, 2021). | |
| | | |
10.2 | | Sixteenth Amendment to Loan and Security Agreement, dated January 5, 2021, by and among Gerber Finance Inc., KBS Builders, Inc., ATRM Holdings, Inc., and Star Equity Holdings, Inc. (incorporated by reference to Exhibit 10.73 to the Company’s Annual Report on Form 10-K filed with the Commission on March 29, 2021). | |
| | | |
10.3 | | Seventeenth Amendment to Loan and Security Agreement, dated February 26, 2021, by and among Gerber Finance Inc., KBS Builders, Inc., ATRM Holdings, Inc., and Star Equity Holdings, Inc. (incorporated by reference to Exhibit 10.74 to the Company’s Annual Report on Form 10-K filed with the Commission on March 29, 2021). | |
| | | |
10.4 | | Third Amendment to Loan and Security Agreement, dated January 31, 2020, by and among Gerber Finance Inc., Star Real Estate Holdings USA, Inc., 300 Park Street, LLC, 947 Waterford Road, LLC, and 56 Mechanic Falls Road, LLC (incorporated by reference to Exhibit 10.75 to the Company’s Annual Report on Form 10-K filed with the Commission on March 29, 2021). | |
| | | |
10.5 | | | |
| | | |
10.6 | | | |
| | | |
10.7 | | Second Amendment to Loan and Security Agreement, Consent and Release, dated March 31, 2021, by and among Digirad Health, Inc., Digirad Imaging Solutions, Inc., DMS Health Technologies, Inc., DMS Imaging, Inc., DMS Health Technologies-Canada, Inc., Project Rendezvous Holding Corporation, Project Rendezvous Acquisition Corporation, Digirad Diagnostic Imaging, Inc., Star Equity Holdings, Inc., and Sterling National BankRichard K. Coleman, Jr. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 1, 2021)4, 2022). | |
10.2* | | | |
4.1* | | | |
4.2* | | | |
4.3* | | | |
31.1* | | | |
31.2* | | | |
32.1** | | | |
32.2** | | | |
101.INS* | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
101.SCH* | | Inline XBRL Taxonomy Extension Schema | |
101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase | |
101.LAB* | | Inline XBRL Taxonomy Extension Labels Linkbase | |
101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase | |
101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase | |
104.1 | | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101). | |
_________________
* Filed herewith.
** This certification is being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of Star Equity Holdings, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | | | | |
| | STAR EQUITY HOLDINGS, INC. |
| | | |
Date: | May 14, 202123, 2022 | By: | | /s/ JEFFREY E. EBERWEIN |
| | | | Jeffrey E. Eberwein Executive Chairman (Principal Executive Officer) |
| | | |
| | | | | | | | | | | | | | |
| | |
| | | |
| | | | /s/ DAVID J. NOBLE |
| | | | David J. Noble Chief Financial Officer and Chief Operating Officer (Principal Financial and Accounting Officer) |
| | | |