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 | September 30, 2022 | |||||||
| ☐ | 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 November 7, 2022, the registrant had 15,138,732 shares of Common Stock ($0.0001 par value) outstanding.
STAR EQUITY HOLDINGS, INC.
TABLE OF CONTENTS
3
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, 2021 filed with the U.S. Securities and Exchange Commission on March 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.
4
PART I. FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
5
STAR EQUITY HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In thousands, except for per share amounts)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||
| Healthcare | $ | 13,137 | $ | 14,807 | $ | 40,467 | $ | 42,984 | ||||||||||||||||||
| Construction | 11,107 | 14,052 | 39,544 | 34,035 | ||||||||||||||||||||||
| Total revenues | 24,244 | 28,859 | 80,011 | 77,019 | ||||||||||||||||||||||
| Cost of revenues: | ||||||||||||||||||||||||||
| Healthcare | 10,412 | 11,551 | 30,888 | 33,721 | ||||||||||||||||||||||
| Construction | 7,975 | 13,511 | 32,341 | 34,794 | ||||||||||||||||||||||
| Investments | 58 | 50 | 221 | 176 | ||||||||||||||||||||||
| Total cost of revenues | 18,445 | 25,112 | 63,450 | 68,691 | ||||||||||||||||||||||
| Gross profit | 5,799 | 3,747 | 16,561 | 8,328 | ||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Selling, general and administrative | 6,860 | 5,201 | 20,515 | 15,839 | ||||||||||||||||||||||
| Amortization of intangible assets | 430 | 430 | 1,290 | 1,298 | ||||||||||||||||||||||
| Gain on sale of MD Office Solutions | — | — | — | (847) | ||||||||||||||||||||||
| Total operating expenses | 7,290 | 5,631 | 21,805 | 16,290 | ||||||||||||||||||||||
| Income (loss) from operations | (1,491) | (1,884) | (5,244) | (7,962) | ||||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||
| Other income (expense), net | (575) | 3 | (997) | 4,208 | ||||||||||||||||||||||
| Interest expense, net | (185) | (260) | (664) | (732) | ||||||||||||||||||||||
| Total other income (expense) | (760) | (257) | (1,661) | 3,476 | ||||||||||||||||||||||
| Income (loss) from continuing operations before income taxes | (2,251) | (2,141) | (6,905) | (4,486) | ||||||||||||||||||||||
| Income tax benefit (provision) | 367 | — | (256) | (34) | ||||||||||||||||||||||
| Income (loss) from continuing operations, net of tax | (1,884) | (2,141) | (7,161) | (4,520) | ||||||||||||||||||||||
| Income (loss) from discontinued operations, net of tax | — | — | — | 5,955 | ||||||||||||||||||||||
| Net income (loss) | (1,884) | (2,141) | (7,161) | 1,435 | ||||||||||||||||||||||
| Deemed dividend on Series A perpetual preferred stock | (479) | (479) | (1,437) | (1,437) | ||||||||||||||||||||||
| Net income (loss) attributable to common shareholders | $ | (2,363) | $ | (2,620) | $ | (8,598) | $ | (2) | ||||||||||||||||||
| Net income (loss) per share—basic and diluted | ||||||||||||||||||||||||||
| Net income (loss) per share, continuing operations | $ | (0.12) | $ | (0.42) | $ | (0.49) | $ | (0.90) | ||||||||||||||||||
| Net income (loss) per share, discontinued operations | $ | — | $ | — | $ | — | $ | 1.19 | ||||||||||||||||||
| Net income (loss) per share—basic and diluted* | $ | (0.12) | $ | (0.42) | $ | (0.49) | $ | 0.29 | ||||||||||||||||||
| Deemed dividend on Series A cumulative perpetual preferred stock per share | $ | (0.03) | $ | (0.09) | $ | (0.10) | $ | (0.29) | ||||||||||||||||||
| Net income (loss) per share, attributable to common shareholders—basic and diluted* | $ | (0.15) | $ | (0.51) | $ | (0.59) | $ | — | ||||||||||||||||||
| Weighted-average shares outstanding—basic and diluted | 15,434 | 5,101 | 14,503 | 5,019 | ||||||||||||||||||||||
| Dividends declared per Series A perpetual preferred stock | $ | 0.25 | $ | 0.25 | $ | 0.75 | $ | 0.50 | ||||||||||||||||||
*Earnings per share may not add due to rounding
See accompanying notes to the unaudited condensed consolidated financial statements.
6
STAR EQUITY HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
September 30, 2022 (unaudited) | December 31, 2021 | ||||||||||
| Assets: | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 8,503 | $ | 4,538 | |||||||
| Restricted cash | 846 | 278 | |||||||||
| Investments in equity securities | 3,180 | 47 | |||||||||
| Lumber derivative contracts | — | 666 | |||||||||
Accounts receivable, net of allowances of $0.9 million and $0.8 million, respectively | 13,754 | 15,811 | |||||||||
| Inventories, net | 13,065 | 8,525 | |||||||||
| Other current assets | 3,069 | 1,998 | |||||||||
| Total current assets | 42,417 | 31,863 | |||||||||
| Property and equipment, net | 8,499 | 8,918 | |||||||||
| Operating lease right-of-use assets, net | 4,823 | 4,494 | |||||||||
| Intangible assets, net | 13,782 | 15,072 | |||||||||
| Goodwill | 6,046 | 6,046 | |||||||||
| Other assets | 1,408 | 1,659 | |||||||||
| Total assets | $ | 76,975 | $ | 68,052 | |||||||
| Liabilities, Mezzanine Equity and Stockholders’ Equity: | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 6,094 | $ | 4,277 | |||||||
| Accrued liabilities | 4,307 | 2,445 | |||||||||
| Accrued compensation | 3,395 | 3,051 | |||||||||
| Accrued warranty | 247 | 569 | |||||||||
| Lumber derivative contracts | 635 | — | |||||||||
| Billings in excess of costs and estimated profit | — | 312 | |||||||||
| Deferred revenue | 3,801 | 2,457 | |||||||||
| Short-term debt | 11,852 | 12,869 | |||||||||
| Operating lease liabilities | 1,443 | 1,253 | |||||||||
| Finance lease liabilities | 460 | 588 | |||||||||
| Total current liabilities | 32,234 | 27,821 | |||||||||
| Deferred tax liabilities | 298 | 72 | |||||||||
| Operating lease liabilities, net of current portion | 3,463 | 3,299 | |||||||||
| Finance lease liabilities, net of current portion | 459 | 706 | |||||||||
| Other liabilities | 312 | 412 | |||||||||
| Total liabilities | 36,766 | 32,310 | |||||||||
| Commitments and contingencies (Note 9) | |||||||||||
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 December 31, 2021. (Liquidation preference: $18,988,390 as of December 31, 2021.) | — | 18,988 | |||||||||
| Stockholders’ Equity: | |||||||||||
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 September 30, 2022. (Liquidation preference: $18,988,390 as of September 30, 2022.) | 18,988 | — | |||||||||
Preferred stock, $0.0001 par value: 25,000 shares authorized; Series C Preferred stock, no shares issued or outstanding | — | — | |||||||||
7
Common stock, $0.0001 par value: 30,000,000 shares authorized; 15,138,732 and 5,805,916 shares issued and outstanding (net of treasury shares) at September 30, 2022 and December 31, 2021, respectively | 1 | — | |||||||||
Treasury stock, at cost; 258,849 shares at September 30, 2022 and December 31, 2021, respectively | (5,728) | (5,728) | |||||||||
| Additional paid-in capital | 162,078 | 150,451 | |||||||||
| Accumulated deficit | (135,130) | (127,969) | |||||||||
| Total stockholders’ equity | 40,209 | 16,754 | |||||||||
| Total liabilities, mezzanine equity and stockholders’ equity | $ | 76,975 | $ | 68,052 | |||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
8
STAR EQUITY HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Nine Months Ended September 30, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Operating activities | ||||||||||||||
| Net (loss) income | $ | (7,161) | $ | 1,435 | ||||||||||
| Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: | ||||||||||||||
| Depreciation of property and equipment | 1,369 | 1,333 | ||||||||||||
| Amortization of intangible assets | 1,290 | 1,298 | ||||||||||||
| Non-cash lease expense | 885 | 1,123 | ||||||||||||
| Provision for bad debt, net | 435 | (30) | ||||||||||||
| Stock-based compensation | 322 | 391 | ||||||||||||
| Gain on disposal of discontinued operations | — | (5,159) | ||||||||||||
| Amortization of loan issuance costs | 104 | 141 | ||||||||||||
| Write-off of borrowing costs | — | 130 | ||||||||||||
| Gain on disposal of MD Office Solutions | — | (847) | ||||||||||||
| (Gain) loss on sale of assets | 156 | 29 | ||||||||||||
| Gain on Paycheck Protection Program loan forgiveness | — | (4,179) | ||||||||||||
| Deferred income taxes | 226 | 34 | ||||||||||||
| Unrealized loss (gain) of equity securities and lumber derivatives | 2,132 | 381 | ||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||
| Accounts receivable | 1,622 | (3,131) | ||||||||||||
| Inventories | (4,539) | (193) | ||||||||||||
| Other assets | (848) | (1,032) | ||||||||||||
| Accounts payable | 1,817 | (709) | ||||||||||||
| Accrued compensation | 345 | 582 | ||||||||||||
| Deferred revenue and billings in excess of costs and estimated profit | 1,035 | 1,383 | ||||||||||||
| Operating lease liabilities | (865) | (1,100) | ||||||||||||
| Other liabilities | 1,441 | (56) | ||||||||||||
| Net cash provided (used) by operating activities | (234) | (8,176) | ||||||||||||
| Investing activities | ||||||||||||||
| Purchases of property and equipment | (1,232) | (675) | ||||||||||||
| Proceeds from sale of discontinued operations | — | 18,750 | ||||||||||||
| Proceeds from sale of property and equipment | 217 | 76 | ||||||||||||
| Purchases of equity securities | (3,994) | (399) | ||||||||||||
| Proceeds from sales of equity securities | 27 | 42 | ||||||||||||
| Net cash provided (used) by investing activities | (4,982) | 17,794 | ||||||||||||
| Financing activities | ||||||||||||||
| Proceeds from borrowings | 80,061 | 91,309 | ||||||||||||
| Repayment of debt | (81,152) | (97,594) | ||||||||||||
| Proceeds from the sale of common stock, warrants, and exercise of over allotment options | 13,198 | — | ||||||||||||
| Fees paid on issuance of common stock | (450) | — | ||||||||||||
| Proceeds from exercise of warrants | — | 567 | ||||||||||||
| Fees paid on issuance of rights agreement | — | (28) | ||||||||||||
| Taxes paid related to net share settlement of equity awards | (5) | (18) | ||||||||||||
| Repayment of obligations under finance leases | (466) | (595) | ||||||||||||
| Preferred stock dividends paid | (1,437) | (958) | ||||||||||||
| Net cash provided (used) by financing activities | 9,749 | (7,317) | ||||||||||||
| Net increase in cash, cash equivalents, and restricted cash including cash classified within current assets held for sale | 4,533 | 2,301 | ||||||||||||
9
| Less: net increase in cash classified within current assets held for sale | — | (46) | ||||||||||||
| Net increase in cash, cash equivalents, and restricted cash | 4,533 | 2,347 | ||||||||||||
| Cash, cash equivalents, and restricted cash at beginning of period | 4,816 | 3,393 | ||||||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 9,349 | $ | 5,740 | ||||||||||
| Reconciliation of cash, cash equivalents, and restricted cash at end of year | ||||||||||||||
| Cash and cash equivalents | $ | 8,503 | $ | 5,572 | ||||||||||
| Restricted cash | 846 | 168 | ||||||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 9,349 | $ | 5,740 | ||||||||||
| Non-Cash Investing Activities | ||||||||||||||
| MD Office Solutions Promissory Note Receivable | $ | — | $ | 1,385 | ||||||||||
| Non-Cash Financing Activities | ||||||||||||||
| Gain on Paycheck Protection Program Loan Forgiveness | $ | — | $ | 4,179 | ||||||||||
| Noncash property, plant, and equipment obtained in exchange for finance lease liabilities | $ | 90 | $ | — | ||||||||||
| Noncash right-of-use assets obtained in exchange for operating lease liabilities | $ | 1,436 | $ | — | ||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
10
STAR EQUITY HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)
| Perpetual Redeemable Preferred Stock | Perpetual Preferred Stock | Common stock | Treasury Stock | Additional paid-in capital | Accumulated deficit | Total stockholders’ equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | 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 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | 72 | — | 72 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued under stock incentive plans, net of shares withheld for employee taxes | — | — | — | — | 53 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accrued dividends on redeemable preferred stock | — | — | — | 479 | — | — | — | (479) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividends paid | — | — | — | (479) | — | — | — | — | — | (479) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Reclassification of preferred stock to permanent equity (See Note 1) | (1,916) | (18,988) | 1,916 | 18,988 | — | — | — | — | — | 18,988 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | (1,576) | (1,576) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | — | — | 1,916 | 18,988 | 15,082 | 1 | (5,728) | 162,453 | (133,246) | 42,468 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | 106 | — | 106 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued under stock incentive plans, net of shares withheld for employee taxes | — | — | — | — | 57 | — | — | (2) | — | (2) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on preferred stock | — | — | — | — | — | — | — | (479) | — | (479) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | (1,884) | (1,884) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2022 | — | $ | — | 1,916 | $ | 18,988 | 15,139 | $ | 1 | $ | (5,728) | $ | 162,078 | $ | (135,130) | $ | 40,209 | |||||||||||||||||||||||||||||||||||||||||||||
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| Perpetual Redeemable 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 | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | 134 | — | 134 | ||||||||||||||||||||||||||||||||||||||||||
| Shares issued under stock incentive plans, net of shares withheld for employee taxes | — | — | 20 | — | — | (13) | — | (13) | ||||||||||||||||||||||||||||||||||||||||||
| Accrued dividends on perpetual preferred stock | — | 479 | — | — | — | (479) | — | (479) | ||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividends paid | — | (479) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Fees paid on issuance of rights agreement | — | — | — | — | — | (28) | — | (28) | ||||||||||||||||||||||||||||||||||||||||||
| Proceeds from exercise of warrants | — | — | 33 | — | — | 74 | — | 74 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | (1,856) | (1,856) | ||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | 1,916 | 21,979 | 5,074 | — | (5,728) | 148,971 | (121,410) | 21,833 | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | 126 | — | 126 | ||||||||||||||||||||||||||||||||||||||||||
| Shares issued under stock incentive plans, net of shares withheld for employee taxes | — | — | 46 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Accrued dividends on perpetual preferred stock | — | 479 | — | — | — | (479) | — | (479) | ||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividends paid | — | (479) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | (2,141) | (2,141) | ||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2021 | 1,916 | $ | 21,979 | 5,120 | $ | — | $ | (5,728) | $ | 148,618 | $ | (123,551) | $ | 19,339 | ||||||||||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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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, 2021 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, 2021, filed with the SEC on Form 10-K on March 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
Star Equity Holdings, Inc. (“Star Equity,” the “Company,” “we,” or “our”) is a multi-industry diversified holding company with three divisions: Healthcare, Construction, and Investments. Our common stock and preferred stock are listed on the NASDAQ Global Market exchange as “STRR” and “STRRP”, respectively.
Mezzanine and Permanent 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 (formerly Digirad Corporation) (the “Certificate of Designations”), upon a Change of Control Triggering Event, as defined in the Certificate of Designations, holders of the Series A Preferred Stock had the ability to require the Company to redeem the Series 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 was not solely within the control of the Company, the Series A Preferred Stock did not qualify as permanent equity and was classified as mezzanine or temporary equity. The Series A Preferred Stock was not redeemable and it was not probable that our Series A Preferred Stock would become redeemable as of December 31, 2021. Therefore, we were not previously required to accrete the Series A Preferred Stock to its redemption value.
On June 2, 2022, the Certificate of Designations was amended to include a “Special Optional Redemption Right” at the Company’s discretion and to extinguish the option of preferred stockholders to redeem preferred shares upon a Change of Control Triggering Event, as defined in the Certificate of Designations, as amended. As the redemption features of the Series A Preferred Stock are now solely within the control of the Company, the Series A Preferred Stock qualifies as permanent equity and has been reclassified to permanent equity effective June 2, 2022.
In addition to the foregoing redemption features, the Certificate of Designations also provides that we may redeem (at our option, in whole or in part) the Series A Preferred Stock following the fifth anniversary of issuance of the Series A Preferred Stock, at a cash redemption price of $10.00 per share, plus any accumulated and unpaid dividends.
Refer to preferred stock dividends discussed in Note 13. Perpetual Preferred Stock.
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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 $1.9 million and $7.2 million for the three and nine months ended September 30, 2022, respectively, and $2.1 million and $4.5 million for the three and nine months ended September 30, 2021, respectively. We have an accumulated deficit of $135.1 million and $128.0 million as of September 30, 2022 and December 31, 2021, respectively. As of September 30, 2022, cash and cash equivalents increased to $8.5 million from $4.5 million as of December 31, 2021, primarily as a result of an underwritten public offering (the “2022 Public Offering”) which closed on January 24, 2022. Refer to Note 14. Equity Transactions for details.
At September 30, 2022, we had approximately $11.9 million in debt outstanding. All of our debt is categorized as short-term on our condensed Consolidated Balance Sheets. For more detail, see Note 8. Debt. The Company’s loan pursuant to the Webster Loan Agreement (as defined below) (the “Webster Loan”) with Webster Bank, N.A., a national banking association as lender (“Webster”), as successor in interest to Sterling National Bank, with a loan balance of approximately $7.5 million, supports our Healthcare business. While the Webster Loan matures in 2024, GAAP rules require that the outstanding balance be classified as short-term debt. This is due to both the automatic sweep feature embedded in the traditional lockbox arrangement and the subjective acceleration clause in the Webster Loan Agreement.
As of September 30, 2022, we were not in compliance with covenants in the Webster Loan Agreement related to our Healthcare division and we have not yet obtained a waiver from Webster for these financial covenant breaches. Upon the occurrence and during the continuation of an event of default under the Webster Loan Agreement, Webster may, among other things, declare the loans and all other obligations under the Webster Loan Agreement immediately due and payable and increase the interest rate at which loans and obligations under the Webster Loan Agreement bear interest. While we do not believe we will be required to pay down the current balance, our current cash is sufficient to repay the Webster Loan in full.
Management has historically concluded that this forecasted violation raises substantial doubt about our ability to continue as a going concern within twelve months. In consideration of the cash flow results for the nine months ended September 30, 2022, our current balance of cash and cash equivalents of $8.5 million and our projected use of cash for the next twelve months, management believes that the Company's existing cash and current free cash flow generation expectations will allow the Company to continue its operations for at least the next 12 months from the date these unaudited condensed consolidated financial statements are issued, even in the event that we are requested to pay some or all of the outstanding Webster Loan balance. Therefore, the conditions that led us to conclude substantial doubt in prior periods have been alleviated. As a result of recurring losses, the continued viability of the Company beyond November 2023 may be dependent on its ability to continue to raise additional capital to finance its operations.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and disclosures made in the accompanying notes to the condensed consolidated financial statements. Significant estimates and judgments include those related to revenue recognition, goodwill valuation, and income taxes. Actual results could materially differ from those estimates.
Revenue Recognition
We recognize revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606 and Topic 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 we expect 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.
We have 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.
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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 to our customers. Service revenue within our Healthcare reportable segment 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 Healthcare 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 that rental 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 radiopharmaceuticals doses.
Healthcare 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.
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Construction Revenue Recognition. Our Construction division is made up of three operating businesses: KBS Builders, Inc. (“KBS”), EdgeBuilder, Inc. (“EdgeBuilder”), and Glenbrook Building Supply, Inc. (“Glenbrook”)—with the latter two managed together and referred to jointly as “EBGL”. KBS, EdgeBuilder and Glenbrook are wholly-owned subsidiaries of Star Equity and are referred to collectively herein, and together with ATRM Holdings, Inc. (“ATRM”), as the “Construction Subsidiaries.” Within the Construction division, we service residential and commercial construction projects by manufacturing modular housing units and other products and supplying 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. 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 profit. We recognize billings in excess of costs and estimated profit on uncompleted contracts within current liabilities. Such amounts 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 profit 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 Assets. 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, finance lease liabilities, net of current portion, and finance lease liabilities in our condensed Consolidated Balance Sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. 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 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 our leases in which we are 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.
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Lessor Accounting
The majority of the lease income of the Healthcare division comes from camera rentals. 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 90 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 our leases is classified as an operating lease.
We elected the operating lease practical expedient for our leases and do 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.
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Reclassification of Prior Year Presentation
Paycheck Protection Program Loan forgiveness reclassification has been made to the prior period financial statements to conform to the current year financial statement 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.
Other reclassifications have been made to the current period financial statement presentation of the condensed Consolidated Balance Sheets. These changes did not impact previously reported net loss, loss per share, stockholders’ equity, total assets or the condensed Consolidated Statements of Cash Flows.
New Accounting Standards To Be Adopted
No new accounting standards were issued in the quarter ended September 30, 2022 that are expected to have a material impact on our financial statements.
Recently Adopted Accounting Standards
No accounting standards were adopted in the quarter ended September 30, 2022 that are expected to have a material impact on our financial statements.
Note 2. Discontinued Operations
On October 30, 2020, Star Equity entered into a Stock Purchase Agreement (the “DMS Purchase Agreement”) between the Company (“Seller”), DMS Health, and Knob Creek Acquisition Corp., a Tennessee corporation (“Buyer”), pursuant to which the 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 under the DMS Purchase Agreement was $18.75 million in cash, subject to certain adjustments, including a working capital adjustment. The transactions closed effective March 31, 2021.
We deemed the disposition of the Mobile Healthcare business unit to represent a strategic shift that will have a major effect on our operations and financial results. For the year ended December 31, 2021, the Mobile Healthcare business met the criteria to be classified as held for sale.
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 under the Webster 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 and nine months ended September 30, 2021. There have been no activities for the nine months ended September 30, 2022 (in thousands):
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| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| 2021 | 2021 | |||||||||||||
| Total revenues | $ | — | $ | 9,490 | ||||||||||
| Total cost of revenues | — | 6,973 | ||||||||||||
| Gross profit | — | 2,517 | ||||||||||||
| Operating expenses: | ||||||||||||||
| 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 | — | 5,159 | ||||||||||||
| Income from discontinuing operations before income taxes | — | 6,027 | ||||||||||||
| Income tax expense | — | (72) | ||||||||||||
| Income from discontinuing operations | $ | — | $ | 5,955 | ||||||||||
The following table presents the significant non-cash operating, investing and financing activities from discontinued operations for the nine months ended September 30, 2021 (in thousands):
| Nine Months Ended September 30, | |||||||||||
| 2021 | |||||||||||
| Operating activities | |||||||||||
| Depreciation | $ | 7 | |||||||||
| Non-cash lease expense | 256 | ||||||||||
| Write-off of borrowing costs | 130 | ||||||||||
| Gain on sale of DMS discontinued operations | (5,159) | ||||||||||
| 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 nine months ended September 30, 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 | (383) | ||||
| Pre-tax gain on the disposition | $ | 5,159 | |||
In April 2021, DMS Health contracted Digirad Imaging Solutions for a term of three years to purchase radiopharmaceuticals doses, resulting in $1.1 million of revenues for the nine months ended September 30, 2022.
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Note 3. Revenue
Disaggregation of Revenue
The following tables present our revenues for the three and nine months ended September 30, 2022 and 2021, disaggregated by major source (in thousands):
| Three Months Ended September 30, 2022 | ||||||||||||||||||||
| Healthcare | Construction | Total | ||||||||||||||||||
| Major Goods/Service Lines | ||||||||||||||||||||
| Mobile Imaging | $ | 9,867 | $ | — | $ | 9,867 | ||||||||||||||
| Camera | 1,302 | — | 1,302 | |||||||||||||||||
| Camera Support | 1,853 | — | 1,853 | |||||||||||||||||
| Healthcare Revenue from Contracts with Customers | 13,022 | — | 13,022 | |||||||||||||||||
| Lease Income | 115 | — | 115 | |||||||||||||||||
| Construction | — | 11,107 | 11,107 | |||||||||||||||||
| Total Revenues | $ | 13,137 | $ | 11,107 | $ | 24,244 | ||||||||||||||
| Timing of Revenue Recognition | ||||||||||||||||||||
| Services and goods transferred over time | $ | 10,072 | $ | 3,816 | $ | 13,888 | ||||||||||||||
| Services and goods transferred at a point in time | 3,065 | 7,291 | 10,356 | |||||||||||||||||
| Total Revenues | $ | 13,137 | $ | 11,107 | $ | 24,244 | ||||||||||||||
| Three Months Ended September 30, 2021 | ||||||||||||||||||||
| Healthcare | Construction | Total | ||||||||||||||||||
| Major Goods/Service Lines | ||||||||||||||||||||
| Mobile Imaging | $ | 11,036 | $ | — | $ | 11,036 | ||||||||||||||
| Camera | 2,057 | — | 2,057 | |||||||||||||||||
| Camera Support | 1,652 | — | 1,652 | |||||||||||||||||
| Healthcare Revenue from Contracts with Customers | 14,745 | — | 14,745 | |||||||||||||||||
| Lease Income | 62 | — | 62 | |||||||||||||||||
| Construction | — | 14,052 | 14,052 | |||||||||||||||||
| Total Revenues | $ | 14,807 | $ | 14,052 | $ | 28,859 | ||||||||||||||
| Timing of Revenue Recognition | ||||||||||||||||||||
| Services and goods transferred over time | $ | 11,384 | $ | 232 | $ | 11,616 | ||||||||||||||
| Services and goods transferred at a point in time | 3,423 | 13,820 | 17,243 | |||||||||||||||||
| Total Revenues | $ | 14,807 | $ | 14,052 | $ | 28,859 | ||||||||||||||
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| Nine Months Ended September 30, 2022 | ||||||||||||||||||||
| Healthcare | Construction | Total | ||||||||||||||||||
| Major Goods/Service Lines | ||||||||||||||||||||
| Mobile Imaging | $ | 31,096 | $ | — | $ | 31,096 | ||||||||||||||
| Camera | 3,895 | — | 3,895 | |||||||||||||||||
| Camera Support | 5,199 | — | 5,199 | |||||||||||||||||
| Healthcare Revenue from Contracts with Customers | 40,190 | — | 40,190 | |||||||||||||||||
| Lease Income | 277 | — | 277 | |||||||||||||||||
| Construction | — | 39,544 | 39,544 | |||||||||||||||||
| Total Revenues | $ | 40,467 | $ | 39,544 | $ | 80,011 | ||||||||||||||
| Timing of Revenue Recognition | ||||||||||||||||||||
| Services and goods transferred over time | $ | 31,727 | $ | 11,569 | $ | 43,296 | ||||||||||||||
| Services and goods transferred at a point in time | 8,740 | 27,975 | 36,715 | |||||||||||||||||
| Total Revenues | $ | 40,467 | $ | 39,544 | $ | 80,011 | ||||||||||||||
| Nine Months Ended September 30, 2021 | ||||||||||||||||||||
| Healthcare | Construction | Total | ||||||||||||||||||
| Major Goods/Service Lines | ||||||||||||||||||||
| Mobile Imaging | $ | 32,903 | $ | — | $ | 32,903 | ||||||||||||||
| Camera | 4,943 | — | 4,943 | |||||||||||||||||
| Camera Support | 4,961 | — | 4,961 | |||||||||||||||||
| Healthcare Revenue from Contracts with Customers | 42,807 | — | 42,807 | |||||||||||||||||
| Lease Income | 177 | 41 | 218 | |||||||||||||||||
| Construction | — | 33,994 | 33,994 | |||||||||||||||||
| Total Revenues | $ | 42,984 | $ | 34,035 | $ | 77,019 | ||||||||||||||
| Timing of Revenue Recognition | ||||||||||||||||||||
| Services and goods transferred over time | $ | 34,529 | $ | 3,180 | $ | 37,709 | ||||||||||||||
| Services and goods transferred at a point in time | 8,455 | 30,855 | 39,310 | |||||||||||||||||
| Total Revenues | $ | 42,984 | $ | 34,035 | $ | 77,019 | ||||||||||||||
We have corrected an immaterial disclosure error in the previously disclosed disaggregated revenue balances relating to the timing of revenue for the nine months ended September 30, 2021. For the nine months ended September 30, 2021, the amount of $0.4 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 $0.4 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 Healthcare segment, our sales are derived from providing services and materials to our customers, primarily physician practices and hospitals that allow them to perform diagnostic 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, we have the right to invoice the customer in an amount that directly corresponds with the value to the customer as we perform the services. We use the practical expedient to recognize revenue corresponding with amounts we have the right to invoice for services performed.
Camera
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Within our Healthcare 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. We recognize revenues for installation and training over time as the customer receives and consumes benefits provided as we 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 Healthcare 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 Healthcare 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 supplying 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 Revenue
Changes in the deferred revenue for nine months ended September 30, 2022, is as follows (in thousands):
| Balance at December 31, 2021 | $ | 2,869 | ||||||
| Revenue recognized that was included in balance at beginning of the year | (1,965) | |||||||
| Deferred revenue, net, related to contracts entered into during the year | 3,209 | |||||||
Balance at September 30, 2022 | $ | 4,113 | ||||||
As of September 30, 2022 and December 31, 2021, non-current deferred revenue was $312 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 nine months ended September 30, 2022 is as follows (in thousands):
| Balance at December 31, 2021 | $ | 312 | ||||||
| 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 | — | |||||||
Balance at September 30, 2022 | $ | — | ||||||
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Note 4. Basic and Diluted Net Income (Loss) Per Share
We present net income (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) or income per share for the periods indicated (in thousands):
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||||
| Income (loss) from continuing operations, net of tax | $ | (1,884) | $ | (2,141) | $ | (7,161) | $ | (4,520) | ||||||||||||||||||
| Income (loss) from discontinued operations, net of tax | — | — | — | 5,955 | ||||||||||||||||||||||
| Net income (loss) | (1,884) | (2,141) | (7,161) | 1,435 | ||||||||||||||||||||||
| Deemed dividend on Series A perpetual preferred stock | (479) | (479) | (1,437) | (1,437) | ||||||||||||||||||||||
| Net income (loss) attributable to common shareholders | $ | (2,363) | $ | (2,620) | $ | (8,598) | $ | (2) | ||||||||||||||||||
| Denominator: | ||||||||||||||||||||||||||
| Weighted average common shares outstanding | 15,109 | 5,101 | 14,208 | 5,019 | ||||||||||||||||||||||
| Weighted average prefunded warrants outstanding | 325 | — | 295 | — | ||||||||||||||||||||||
| Weighted average shares outstanding - basic and diluted | 15,434 | 5,101 | 14,503 | 5,019 | ||||||||||||||||||||||
| Net income (loss) per share—basic and diluted | ||||||||||||||||||||||||||
| Net income (loss) per share, continuing operations | $ | (0.12) | $ | (0.42) | $ | (0.49) | $ | (0.90) | ||||||||||||||||||
| Net income (loss) per share, discontinued operations | $ | — | $ | — | $ | — | $ | 1.19 | ||||||||||||||||||
| Net income (loss) per share—basic and diluted* | $ | (0.12) | $ | (0.42) | $ | (0.49) | $ | 0.29 | ||||||||||||||||||
| Deemed dividend on Series A cumulative perpetual preferred stock per share | $ | (0.03) | $ | (0.09) | $ | (0.10) | $ | (0.29) | ||||||||||||||||||
| Net income (loss) per share, attributable to common shareholders—basic and diluted* | $ | (0.15) | $ | (0.51) | $ | (0.59) | $ | — | ||||||||||||||||||
*Earnings per share may not add due to rounding
Antidilutive common stock equivalents are excluded from the computation of diluted loss per share. The computation of diluted earnings per share excludes stock options, RSUs, and stock warrants that are anti-dilutive. The following common stock equivalents were anti-dilutive (in thousands):
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Stock options | 3 | 11 | 5 | 19 | ||||||||||||||||||||||
| Restricted stock units | 109 | 67 | 128 | 73 | ||||||||||||||||||||||
| Stock warrants | 11,865 | 730 | 10,843 | 783 | ||||||||||||||||||||||
| Total | 11,977 | 808 | 10,976 | 875 | ||||||||||||||||||||||
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Note 5. Supplementary Balance Sheet Information
Inventories
The components of inventories are as follows (in thousands):
| September 30, 2022 | December 31, 2021 | |||||||||||||
| Raw materials | $ | 8,122 | $ | 5,870 | ||||||||||
| Work-in-process | 3,078 | 2,145 | ||||||||||||
| Finished goods | 2,184 | 830 | ||||||||||||
| Total inventories | 13,384 | 8,845 | ||||||||||||
| Less reserve for excess and obsolete inventories | (319) | (320) | ||||||||||||
| Total inventories, net | $ | 13,065 | $ | 8,525 | ||||||||||
Property and Equipment
Property and equipment consist of the following (in thousands):
| September 30, 2022 | December 31, 2021 | |||||||||||||
| Land | $ | 805 | $ | 805 | ||||||||||
| Buildings and leasehold improvements | 4,843 | 4,823 | ||||||||||||
| Machinery and equipment | 25,088 | 24,881 | ||||||||||||
| Computer hardware and software | 2,451 | 2,387 | ||||||||||||
| Gross property and equipment | 33,187 | 32,896 | ||||||||||||
| Accumulated depreciation | (24,688) | (23,978) | ||||||||||||
| Total property and equipment, net | $ | 8,499 | $ | 8,918 | ||||||||||
As of September 30, 2022, the non-operating land and buildings, held for investments, had a carry value of $1.9 million and was included within property and equipment on the condensed Consolidated Balance Sheet.
Warranty Reserves
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 make adjustments, as necessary.
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 period ended September 30, 2022 and year ended December 31, 2021 are as follows (in thousands):
| September 30, 2022 | December 31, 2021 | |||||||||||||
| Balance at the beginning of year | $ | 569 | $ | 214 | ||||||||||
| Charges to cost of revenues | 49 | 963 | ||||||||||||
| Applied to liability | (371) | (608) | ||||||||||||
| Balance at the end of period | $ | 247 | $ | 569 | ||||||||||
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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 and finance leases are included separately in the condensed consolidated balance sheets.
The components of lease expense are as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Operating lease cost | $ | 408 | $ | 363 | $ | 1,205 | $ | 1,056 | ||||||||||||||||||
| Finance lease cost: | ||||||||||||||||||||||||||
| Amortization of finance lease assets | $ | 132 | $ | 117 | $ | 356 | $ | 393 | ||||||||||||||||||
| Interest on finance lease liabilities | 13 | 19 | 44 | 63 | ||||||||||||||||||||||
| Total finance lease cost | $ | 145 | $ | 136 | $ | 400 | $ | 456 | ||||||||||||||||||
Supplemental cash flow information related to leases from continuing operations was as follows (in thousands):
| Nine Months Ended September 30, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||||||||
| Operating cash flows from operating leases | $ | 885 | $ | 867 | ||||||||||
| Operating cash flows from finance leases | $ | 44 | $ | 63 | ||||||||||
| Financing cash flows from finance leases | $ | 466 | $ | 494 | ||||||||||
| Right-of-use assets obtained in exchange for lease obligations | ||||||||||||||
| Operating leases | $ | 1,436 | $ | 1,532 | ||||||||||
Supplemental balance sheet information related to leases was as follows (in thousands):
| September 30, 2022 | December 31, 2021 | |||||||||||||
| Weighted average remaining lease term (in years) | ||||||||||||||
| Operating leases | 3.8 | 3.9 | ||||||||||||
| Finance leases | 2.3 | 2.6 | ||||||||||||
| Weighted average discount rate | ||||||||||||||
| Operating leases | 4.63 | % | 4.23 | % | ||||||||||
| Finance leases | 5.98 | % | 5.05 | % | ||||||||||
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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 September 30, 2022 were as follows (in thousands):
| Operating Leases | Finance Leases | |||||||||||||
2022 (excludes the nine months ended September 30, 2022) | $ | 408 | $ | 147 | ||||||||||
| 2023 | 1,587 | 428 | ||||||||||||
| 2024 | 1,427 | 274 | ||||||||||||
| 2025 | 905 | 106 | ||||||||||||
| 2026 | 590 | 16 | ||||||||||||
| 2027 and thereafter | 361 | 1 | ||||||||||||
| Total future minimum lease payments | 5,278 | 972 | ||||||||||||
| Less amounts representing interest | 372 | 53 | ||||||||||||
| Present value of lease obligations | $ | 4,906 | $ | 919 | ||||||||||
Lessor
We generate lease income in the Healthcare 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 nine months ended September 30, 2022 and 2021, our lease contracts were mainly month-to-month contracts.
Note 7. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Financial Accounting Standards Board’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 September 30, 2022 and December 31, 2021 (in thousands):
| Fair Value as of September 30, 2022 | ||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
| Assets (Liabilities): | ||||||||||||||||||||||||||
| Equity securities | $ | 3,180 | $ | — | $ | — | $ | 3,180 | ||||||||||||||||||
| Lumber derivative contracts | (635) | — | — | (635) | ||||||||||||||||||||||
| VIE Investments | — | — | 337 | 337 | ||||||||||||||||||||||
| Total | $ | 2,545 | $ | — | $ | 337 | $ | 2,882 | ||||||||||||||||||
| Fair Value as of December 31, 2021 | ||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
| Assets (Liabilities): | ||||||||||||||||||||||||||
| Equity securities | $ | 47 | $ | — | $ | — | $ | 47 | ||||||||||||||||||
| Lumber derivative contracts | 666 | — | — | 666 | ||||||||||||||||||||||
| VIE Investments | — | — | 337 | 337 | ||||||||||||||||||||||
| Total | $ | 713 | $ | — | $ | 337 | $ | 1,050 | ||||||||||||||||||
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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 September 30, 2022 and December 31, 2021, respectively, and recorded in Investments in the Consolidated Balance Sheets. During the nine months ended September 30, 2022 and 2021, we recorded an unrealized loss of $834 thousand and unrealized gain of $30 thousand, respectively, recorded in other (expense) income, net in the condensed Consolidated Statements of Operations.
We may enter into lumber derivative contracts in order to protect our gross profit margins from fluctuations caused by volatility in lumber price, recorded within current assets or liabilities in the condensed Consolidated Balance Sheets. For the nine months ended September 30, 2022 and 2021, we recorded a net loss of $1.8 million and $0.4 million, respectively, in the cost of goods sold in the condensed Consolidated Statements of Operations. As of September 30, 2022, we had a net long (buying) position of 2,310,000 board feet under 21 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 condensed Consolidated Statements of Operations and included the following for the nine months ended September 30:
| September 30, 2022 | September 30, 2021 | |||||||||||||
| Amount | Amount | |||||||||||||
| Unrealized loss on lumber derivatives | $ | 1,298 | $ | 322 | ||||||||||
| Realized loss on lumber derivatives | 549 | 76 | ||||||||||||
| Total loss on lumber derivatives | $ | 1,847 | $ | 398 | ||||||||||
The fair value of VIE investments of $0.3 million recorded in Other Assets in the Consolidated Balance Sheets is based on unobservable inputs evaluated on September 30, 2022 and December 31, 2021, respectively. During the nine months ended September 30, 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 September 30, 2022 and December 31, 2021 is as follows (dollars in thousands):
| September 30, 2022 | December 31, 2021 | |||||||||||||||||||||||||
| Amount | Weighted-Average Interest Rate | Amount | Weighted-Average Interest Rate | |||||||||||||||||||||||
| Revolving Credit Facility - eCapital KBS | $ | 909 | 9.00% | $ | 3,131 | 6.00% | ||||||||||||||||||||
| Revolving Credit Facility - eCapital EBGL | 2,595 | 9.00% | 1,652 | 6.00% | ||||||||||||||||||||||
| Revolving Credit Facility - Webster | 7,484 | 5.64% | 7,016 | 2.60% | ||||||||||||||||||||||
| Total Short-term Revolving Credit Facilities | $ | 10,988 | 6.71% | $ | 11,799 | 3.98% | ||||||||||||||||||||
| eCapital - Star Loan Principal, net | $ | 864 | 9.25% | $ | 1,070 | 6.25% | ||||||||||||||||||||
| Short Term Loan | $ | 864 | 9.25% | $ | 1,070 | 6.25% | ||||||||||||||||||||
| Total Short-term debt | $ | 11,852 | 6.90% | $ | 12,869 | 4.17% | ||||||||||||||||||||
Webster Credit Facility
On March 29, 2019, the Company entered into a Loan and Security Agreement (the “Webster Loan Agreement”) by and among certain subsidiaries of the Company, as borrowers (collectively, the “Webster Borrowers”); the Company, as guarantor; and Sterling National Bank (“Sterling”). On February 1, 2022, Sterling became part of Webster, and Webster became the
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successor in interest to the Webster Loan Agreement. The Webster Loan Agreement is also subject to a limited guarantee by Mr. Eberwein, the Executive Chairman of our board of directors.
The Webster 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 “Webster Credit Facility”). Under the Webster Credit Facility, the Webster 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 Webster 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 September 30, 2022, the Company had $0.1 million of letters of credit outstanding and had additional borrowing capacity of $0.6 million under the Webster Credit Facility.
At the Webster Borrowers’ option, the Webster Credit Facility will bear interest at either (i) a Floating LIBOR Rate, as defined in the Webster Loan Agreement, plus a margin of 2.50% per annum; or (ii) a Fixed LIBOR Rate, as defined in the Webster Loan Agreement, plus a margin of 2.25% per annum. Our floating rate on this facility at September 30, 2022 was 5.64%. The Webster Loan Agreement also provides for unused line fees and restricts the usage of borrowings under the line solely to support the Healthcare businesses, subject to certain limitations.
The Webster Credit Facility is secured by the assets of the Digirad Health businesses.
Financial covenants require that the Webster 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 September 30, 2022, the Company was not in compliance with the covenants under the Webster Loan Agreement and had not yet obtained a waiver from Webster for these financial covenant breaches.
eCapital Credit Facilities
EBGL
EdgeBuilder and Glenbrook (the “EBGL Borrowers”) are a party to a revolving credit facility with eCapital Asset Based Lending Corp., formerly known as Gerber Finance Inc. (“eCapital”) (the “EBGL Loan Agreement”). The facility, as amended, provides for borrowings up to $4.0 million, subject to certain borrowing base limitations. As of September 30, 2022, EBGL was fully drawn in terms of available borrowing capacity available under the facility. Amounts outstanding bear interest, payable monthly, at the prime rate plus 2.75% and payments of outstanding principal are due in full upon maturity. The facility is subject to annual renewal and is currently set to mature on the earlier of January 31, 2023 or upon repayment of the Star Loan (see below). The facility is secured by substantially all of the assets of EBGL and borrowings under the line are restricted for use to finance the operations of EBGL.
On March 8, 2022, the EBGL Borrowers entered into the Seventh Amendment to the EBGL Loan Agreement with eCapital to amend and lower the 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.
On August 11, 2022, the EBGL Borrowers entered into the Eighth Amendment to the EBGL Loan Agreement with eCapital to amend the lender name to eCapital Asset Based Lending Corp. formerly known as Gerber Finance, Inc. and to provide a waiver of certain covenants violated as of June 30, 2022.
EBGL was not in compliance with the bi-annual financial covenants under the EBGL Loan Agreement measured as of June 30, 2022. However, we obtained a waiver from eCapital for the bi-annual financial covenant breach. There can be no assurance that we will be able to obtain such waivers in the event of future financial covenant violations.
KBS
KBS is a party to a revolving credit facility with eCapital (“KBS Loan Agreement”). The facility, as amended, provides for borrowings up to $4.0 million, subject to certain borrowing base limitations. As of September 30, 2022, KBS had additional borrowing capacity of $0.2 million under the facility. Amounts outstanding bear interest, payable monthly, at the prime rate plus 2.75% and payments of outstanding principal are due in full upon maturity. The facility is subject to annual renewal and is currently set to mature on February 22, 2023. The facility is secured by the assets of KBS and borrowings under the line are restricted for use to finance the operations of KBS. As of June 30, 2022, KBS was in compliance with the bi-annual financial covenants under the KBS Loan Agreement.
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On March 8, 2022, the borrowers under the KBS Loan Agreement entered into the Nineteenth Amendment to the KBS Loan Agreement to amend the financial covenants to require that KBS maintain (a) net 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 be no less than $500,000 for the trailing fiscal year end and (b) a minimum EBITDA (as defined in the KBS Loan Agreement) no less than $0 as of June 30, 2022 and no less than $850,000 as of the fiscal year end, as well as a waiver of certain covenants as of December 31, 2021.
The eCapital credit facilities contain cross-default provisions and subjective acceleration clauses which may, in the event of a material adverse event, as determined by eCapital, allow eCapital to declare the loans immediately due and payable or increase the interest rate. The facilities are also subject to a guaranty by the Company and the Company is responsible for certain facility and other fees.
Borrowings under the eCapital credit facilities are classified as short-term obligations as the agreements contain a subjective acceleration clauses and require a lockbox arrangement whereby all receipts within the lockbox are swept daily to reduce borrowings outstanding.
Term Loan
We and certain of our Investments subsidiaries (collectively, the “Star Borrowers”) are party to a Loan and Security Agreement with eCapital, as successor in interest to Gerber Finance, Inc. (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”).
The following table presents the Star Loan balance, net of unamortized debt issuance costs as of September 30, 2022 (in thousands):
| September 30, 2022 | December 31, 2021 | |||||||||||||
| Amount | Amount | |||||||||||||
| eCapital - Star Loan Principal | $ | 964 | $ | 1,246 | ||||||||||
| Unamortized debt issuance costs | (100) | (176) | ||||||||||||
| eCapital - Star Loan Principal, net | $ | 864 | $ | 1,070 | ||||||||||
The Star Loan, as amended, requires monthly payments of principal of $33 thousand plus interest at the prime rate plus 3% per annum through the earlier of maturity in January 2025 or the termination, maturity or repayment of the EBGL credit facility.
The Star Loan is secured by the assets of SRE, 947 Waterford Road, LLC, 300 Park Street, LLC and 56 Mechanic Falls Road, LLC and guaranteed by the Company. The Star loan is subject to certain annual financial covenants. The financial covenants under the Star Loan Agreement include maintenance of a Debt Service Coverage Ratio of not less than 1:00 to 1:00, as defined in the Star Loan Agreement. The occurrence of any event of default under the Star Loan Agreement may result in the obligations of the Star Borrowers becoming immediately due and payable. As of December 31, 2021, no event of default was deemed to have occurred and the Star Borrowers were in compliance with the annual financial covenants under the Star Loan Agreement measured as of December 31, 2021.
The outstanding balance is classified as a short-term obligation as a result of the acceleration clauses within the EBGL and KBS credit facility and the cross-default provisions.
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 Healthcare division and Construction division were $5.5 million and $1.2 million, respectively.
During the fiscal years ended 2020 and 2021, the Company applied for forgiveness on all PPP loans. As of December 31, 2021, all PPP loans were forgiven, resulting in a gain of $4.2 million in 2021 and $2.5 million in 2020.
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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 different 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.
In Livingston v. Digirad Corporation, et. al., the District Court, N.D. Ala. entered a dismissal on September 19, 2022. In contemplation of a dismissal, the Company agreed to settle for less than the anticipated cost of ongoing litigation with no admission of liability. The original complaint, filed in December 2018, alleged violations of the False Claims Act and Stark Law beginning in 2016. The amount of the claim was not known until the third quarter of 2022. The potential settlement amount of $200 thousand, plus a portion of attorney’s fees, is reflected as a component of accrued liabilities in the condensed Consolidated Balance Sheet as of September 30, 2022.
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 September 30, 2022, we recorded an income tax benefit of $367 thousand within continuing operations and zero income tax expense within discontinued operations. For the three months ended September 30, 2021, we recorded zero income tax expense within continuing operations and discontinued operations.
For the nine months ended September 30, 2022, we recorded an income tax expense of $256 thousand within continuing operations and zero income tax expense within discontinued operations. For the nine months ended September 30, 2021, we recorded an income tax expense of $34 thousand within continuing operations and an income tax expense of $72 thousand within discontinued operations. The tax expense for the nine months ended September 30, 2022 primarily relates to an ownership change under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”) that occurred in January 2022 which required us to establish an additional valuation allowance on net operating losses that the Company cannot utilize in the future.
As of September 30, 2022, we had unrecognized tax benefits of approximately $2.4 million related to uncertain tax positions. Included in the unrecognized tax benefits were $2.0 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 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.
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Note 11. Segments
Our reportable segments are based upon our internal organizational structure; the manner in which our operations are managed; the criteria used by our Chief Executive Officer, who is our Chief Operating Decision Maker ("CODM"), to evaluate segment performance; the availability of separate financial information; and overall materiality considerations. Prior to 2022, 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 three 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. Healthcare
2. Construction
3. Investments
Segment information has been recast to conform to our current allocation methodology. It is as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 (1) | 2022 | 2021 (1) | |||||||||||||||||||||||
| Revenue by segment: | ||||||||||||||||||||||||||
| Healthcare | $ | 13,137 | $ | 14,807 | $ | 40,467 | $ | 42,984 | ||||||||||||||||||
| Construction | 11,107 | 14,052 | 39,544 | 34,035 | ||||||||||||||||||||||
| Investments | 159 | 475 | 475 | 475 | ||||||||||||||||||||||
| Intersegment elimination | (159) | (475) | (475) | (475) | ||||||||||||||||||||||
| Consolidated revenue | $ | 24,244 | $ | 28,859 | $ | 80,011 | $ | 77,019 | ||||||||||||||||||
| Gross profit (loss) by segment: | ||||||||||||||||||||||||||
| Healthcare | $ | 2,725 | $ | 3,256 | $ | 9,579 | $ | 9,263 | ||||||||||||||||||
| Construction | 3,132 | 541 | 7,203 | (759) | ||||||||||||||||||||||
| Investments | 100 | 425 | 253 | 299 | ||||||||||||||||||||||
| Intersegment elimination | (158) | (475) | (474) | (475) | ||||||||||||||||||||||
| Consolidated gross profit | $ | 5,799 | $ | 3,747 | $ | 16,561 | $ | 8,328 | ||||||||||||||||||
| Income (loss) from operations by segment: | ||||||||||||||||||||||||||
| Healthcare | $ | (1,036) | $ | 955 | $ | (953) | $ | 2,627 | ||||||||||||||||||
| Construction | 1,149 | (956) | 680 | (6,341) | ||||||||||||||||||||||
| Investments | 97 | 123 | 236 | 278 | ||||||||||||||||||||||
| Star equity corporate and intersegment elimination | (1,701) | (2,006) | (5,207) | $ | (4,526) | |||||||||||||||||||||
| Segment loss from operations | $ | (1,491) | $ | (1,884) | $ | (5,244) | $ | (7,962) | ||||||||||||||||||
| Depreciation and amortization by segment: | ||||||||||||||||||||||||||
| Healthcare | $ | 330 | $ | 321 | $ | 967 | $ | 998 | ||||||||||||||||||
| Construction | 489 | 489 | 1,471 | 1,450 | ||||||||||||||||||||||
| Investments | 58 | 50 | 221 | 176 | ||||||||||||||||||||||
| Total depreciation and amortization | $ | 877 | $ | 860 | $ | 2,659 | $ | 2,624 | ||||||||||||||||||
(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.
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Note 12. Related Party Transactions
Star Equity Holdings, Inc.
On December 10, 2021, the Company entered into a securities purchase agreement with its Executive Chairman, Jeffrey E. Eberwein, relating to the issuance and sale of 650,000 shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”) at a purchase price of $3.25 per share pursuant to a private placement. As of September 30, 2022, Mr. Eberwein owned 2,559,737 shares of Common Stock, representing approximately 16.91% of our outstanding Common Stock. In addition, as of September 30, 2022, Mr. Eberwein owned 1,243,422 shares of Series A Preferred Stock.
ATRM Notes Payable
ATRM had a total of $2.3 million of outstanding related party promissory notes payable to Lone Star Value Co-Invest I, LP and Lone Star Value Management as of December 31, 2020. These amounts were repaid in full during April 2021. Mr. Eberwein was the general partner of these entities.
Note 13. Perpetual Preferred Stock
Holders of shares of our Series A 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, by 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 Series 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 Series A Preferred Stock for the past dividend periods and the dividend for the 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 Series A Preferred Stock may be subject to redemption. The Company may redeem the Series 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 Series A Preferred Stock on or after September 10, 2024.
On February 25, 2022, May 19, 2022 and August 19, 2022, our board of directors declared cash dividends to holders of our Series A Preferred Stock of $0.25 per share, for an aggregate amount of approximately $1.4 million. The record dates for these dividends were March 1, 2022, June 1, 2022 and September 1, 2022, respectively, and the payment dates were March 10, 2022, June 10, 2022 and September 12, 2022, respectively.
Note 14. Equity Transactions
On January 24, 2022, we closed the 2022 Public Offering pursuant to an underwriting agreement with Maxim Group LLC (“Maxim”), as representative of the underwriters. Company issued and sold (A)(i) 9,175,000 shares of the Company’s 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 Warrants, were $14.3 million and net proceeds were $12.7 million.
In addition, as part of the 2022 Public Offering, the Company issued to Maxim 237,500 common stock purchase warrants (the “Underwriter’s Warrants”) to purchase up to 237,500 shares of Common Stock at an exercise price of $1.65 per common warrant. The Underwriter’s Warrants have an initial exercise date beginning July 19, 2022, and no exercises have occurred as of September 30, 2022.
As of September 30, 2022, of the warrants issued through the public offering we closed on May 28, 2020 (the “2020 Public Offering”), 1.0 million warrants 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 September 30, 2022, of the Warrants issued through the 2022 Public Offering, there were 10.9 million Warrants and 0.3 million prefunded warrants outstanding at an exercise price of $1.50 and $0.01, respectively. The Underwriter’s Warrants have not been exercised.
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Note 15. Preferred Stock Rights
On June 2, 2021, the board of 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 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 registered holder to purchase from the one one-thousandth of a share of Series C Participating Preferred Stock, par value $0.0001 per share (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.
The rights will become exercisable following (i) 10 days after a public announcement that a person or group has become an Acquiring Person (as defined in the 382 Agreement); 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 rights would be adjusted and holders of the 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 September 30, 2022. There is no impact to financial results as a result of the adoption of the rights plan for the nine months ended September 30, 2022.
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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 non-marketable equity securities which is valued at cost less impairment.
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 September 30, 2022. As of September 30, 2022, we performed a qualitative assessment on the carrying value via inquiries with the board of directors and a review of the entity’s financial statements and determined that there have not been any impairment indicators to the carrying value.
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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, 2021, which were included in our Annual Report on Form 10-K, filed with the SEC on March 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
Star Equity Holdings, Inc. (“Star Equity”, the “Company”, “we”, “our”) is a multi-industry diversified holding company with three divisions which include operating businesses in two key industry sectors of the economy, Healthcare and Construction, and an Investments division.
Our Healthcare division, which operates 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 United States and comprises two 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 maintenance of our proprietary solid-state gamma cameras.
Our Construction division is made up of three operating businesses: KBS Builders, Inc. (“KBS”), EdgeBuilder, Inc. (“EdgeBuilder”), and 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 principally in the New England market. EBGL is based in the Minneapolis-Saint Paul area and 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.
Currently, our Investments division is an internally focused unit directly supervised by Star Equity management. This entity currently holds our corporate-owned real estate, which currently includes our three manufacturing facilities in Maine that are leased to 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 Investments division. Our structure frees up our operating company management teams to focus on their respective businesses, look for organic and bolt-on growth opportunities, and improve operations with less distraction and administrative burden associated with running a public company.
We continue to explore strategic alternatives to improve our market position and the profitability of our product offerings, 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 businesses, divestitures of assets or businesses, equity offerings, debt financings, or a restructuring of our Company.
Operating Businesses
We believe that both of our 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-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
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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 with our entry into the commercial multi-family segment. Other areas might include logistics, installation on site, and manufacturing of 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. 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 if we believe the appropriate mix of value, risk, and return is present for our stockholders. The timing of these potential transactions will always depend on market conditions, available capital, and 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 stockholders.
Current Market Conditions
The COVID-19 pandemic has been a challenge for most businesses in the past two years. Since early 2021, the vaccine rollout has gradually allowed us to return to a more normal operating environment. Our Healthcare business has now returned to pre-COVID levels, after a brief scare with the onset of the Omicron variant late last year. On the Construction side, we continue to benefit from a strong housing market on the 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 Healthcare products and services is comprised of cardiologists, internal medicine physicians, family practice physicians, hospitals, integrated delivery networks, and federal institutions in the United States that perform or could perform a diagnostic imaging procedure or have interest in purchasing diagnostic imaging products. Our Healthcare businesses currently operate in approximately 25 states. During the nine months ended September 30, 2022, we have seen a return to a more normal pre-COVID volume of imaging.
The target customers for our Construction division include professional home builders, general contractors, project owners, developers, and design firms. While housing demand and home improvement activity continues to be very strong, supply chain disruptions caused by the COVID-19 pandemic led to a historic increase in building materials prices during the first half of 2021. Since that time, building materials prices have continued to be very volatile. We have implemented both price increases and margin protection measures through our contract language since that time and we believe these factors will have a significantly positive effect on 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 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 Healthcare 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, including shorter time to market, higher quality, reduced waste, readily available labor and potential cost savings. 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 and nine months ended September 30, 2022, we had decreases of $1.7 million and $2.5 million, respectively, in Healthcare division revenue and a decrease of $2.9 million and an increase of $5.5 million, respectively, in Construction division revenue as compared to the same period of the prior year. The Healthcare division continued to operate at lower levels versus last year with revenue decreasing 11.3% and 5.9% for the three and nine months ended September 30, 2022, primarily due to the national shortage of Nuclear
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Medicine Technologists. Our Construction division revenue decreased by 21.0% for the three months ended September 30, 2022 and increased by 16.2% for the nine months ended September 30, 2022 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 pandemic will impact our business will depend on future developments that are highly unpredictable.
Discontinued Operations
The DMS Sale Transaction (as defined in Note 2 to our condensed consolidated financial statements) was completed on March 31, 2021, for $18.75 million in cash. After certain adjustments, including a working capital adjustment, 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. In each quarter in 2022 we assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. Upon review of the results of such 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 amount by which the carrying value of the reporting unit exceeds its fair value and such loss should not exceed the total goodwill allocated to the reporting 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 results, lowered expectations of future financial results, failure to realize anticipated synergies from acquisitions, adverse changes in the business climate, and the loss of key personnel. As of September 30, 2022, we performed a qualitative assessment and did not identify any triggering events that would lead to the performance of a quantitative analysis.
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 Chief Executive Officer, who is our Chief Operating Decision Maker ("CODM"), to evaluate segment performance; the availability of separate financial information; and overall materiality considerations. Effective as of the first quarter of 2022, we reorganized our financial statements into three 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 under the Company’s HoldCo strategy:
•Healthcare
•Construction
•Investments
Healthcare
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. We offer a convenient and economically efficient cardiac imaging services program as an alternative to purchasing equipment or outsourcing the procedure to an imaging center.
In addition, we manufacture and sell our internally developed solid-state gamma cameras and imaging systems, as well as provide field services through camera maintenance contracts. Our imaging systems include nuclear cardiac imaging systems, as well as general purpose nuclear imaging systems. We sell our imaging systems and service contracts 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).
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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”. All of our current internally-developed cardiac gamma cameras employ SPECT technology.
Construction
Through this segment, we service residential and commercial construction projects through our KBS, EdgeBuilder and Glenbrook brands, through which we manufacture modular housing units, structural wall panels, permanent wood foundation systems and other engineered wood products, as well as supply general contractors with building materials.
KBS is a Maine-based manufacturer that started operations 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. We market our modular homes 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 us exclusively, although some have KBS model homes on display at their retail centers. KBS’s backlog and pipeline, along with its market initiatives to build more workforce housing, are expected to position KBS for continued growth, particularly in the multi-family arena.
EdgeBuilder is a manufacturer of structural wall panels, permanent wood foundation systems and other engineered wood products and conducts its operations in Prescott, Wisconsin. EdgeBuilder 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. EdgeBuilder’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.
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 and Glenbrook operate as one business with a single management team and we refer to them together as EBGL.
Investments
We have begun to expand our investments activities and have established minority positions in the equity securities of a small number of publicly traded companies. We also hold 3 real estate assets in our portfolio, all of which we lease to our construction subsidiary, KBS. These include their principal production facility in South Paris, ME.
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 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, 2021 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 September 30, 2022 and 2021
The following table summarizes our results for the three months ended September 30, 2022 and 2021 (in thousands):
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| Three Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||
| 2022 | Percent of Revenues | 2021 | Percent of Revenues | Change from Prior Year | ||||||||||||||||||||||||||||||||||
| Dollars | Percent * | |||||||||||||||||||||||||||||||||||||
| Total revenues | $ | 24,244 | 100.0 | % | $ | 28,859 | 100.0 | % | $ | (4,615) | (16.0) | % | ||||||||||||||||||||||||||
| Total cost of revenues | 18,445 | 76.1 | % | 25,112 | 87.0 | % | (6,667) | (26.5) | % | |||||||||||||||||||||||||||||
| Gross profit | 5,799 | 23.9 | % | 3,747 | 13.0 | % | 2,052 | 54.8 | % | |||||||||||||||||||||||||||||
| Total operating expenses | 7,290 | 30.1 | % | 5,631 | 19.5 | % | 1,659 | 29.5 | % | |||||||||||||||||||||||||||||
| Loss from operations | (1,491) | (6.1) | % | (1,884) | (6.5) | % | 393 | (20.9) | % | |||||||||||||||||||||||||||||
| Total other expense | (760) | (3.1) | % | (257) | (0.9) | % | (503) | 195.7 | % | |||||||||||||||||||||||||||||
| Loss before income taxes | (2,251) | (9.3) | % | (2,141) | (7.4) | % | (110) | 5.1 | % | |||||||||||||||||||||||||||||
| Income tax benefit (provision) | 367 | 1.5 | % | — | — | % | 367 | — | % | |||||||||||||||||||||||||||||
| Net loss from continuing operations | (1,884) | (7.8) | % | (2,141) | (7.4) | % | 257 | (12.0) | % | |||||||||||||||||||||||||||||
| Net loss from discontinued operations | — | — | % | — | — | % | — | — | % | |||||||||||||||||||||||||||||
| Net loss | $ | (1,884) | (7.8) | % | $ | (2,141) | (7.4) | % | $ | 257 | (12.0) | % | ||||||||||||||||||||||||||
*Percentage may not add due to rounding
Revenues
Healthcare
Healthcare revenue is summarized as follows (in thousands):
| Three Months Ended September 30, | ||||||||||||||||||||||||||
| 2022 | 2021 | Change | % Change | |||||||||||||||||||||||
| Healthcare | $ | 13,137 | $ | 14,807 | $ | (1,670) | (11.3) | % | ||||||||||||||||||
| Healthcare Revenue | $ | 13,137 | $ | 14,807 | $ | (1,670) | (11.3) | % | ||||||||||||||||||
Healthcare revenue decreased 11.3% compared to the prior year quarter, driven primarily by a decrease in revenue from fewer camera sales in 2022 and fewer total scanning days due to the national shortage of Nuclear Medicine Technologists, partially offset by pricing increases in Diagnostic Services in 2022.
Construction
Construction revenue is summarized as follows (in thousands):
| Three Months Ended September 30, | ||||||||||||||||||||||||||
| 2022 | 2021 | Change | % Change | |||||||||||||||||||||||
| Construction | $ | 11,107 | $ | 14,052 | $ | (2,945) | (21.0) | % | ||||||||||||||||||
| Construction Revenue | $ | 11,107 | $ | 14,052 | $ | (2,945) | (21.0) | % | ||||||||||||||||||
The decrease in revenue for the Construction division was predominately driven by the timing of revenue recognition at our KBS business.
Gross Profit
Healthcare Gross Profit
Healthcare gross profit and gross margin is summarized as follows (in thousands):
| Three Months Ended September 30, | ||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||
| Healthcare gross profit | $ | 2,725 | $ | 3,256 | $ | (531) | (16.3) | % | ||||||||||||||||||
| Healthcare gross margin | 20.7 | % | 22.0 | % | ||||||||||||||||||||||
The decrease in Healthcare gross margin percentage was mainly driven by lower camera sales and lower scanning revenue for the three months ended September 30, 2022, compared to the same period in the prior year.
Construction Gross Profit
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Construction gross profit and margin is summarized as follows (in thousands):
| Three Months Ended September 30, | ||||||||||||||||||||||||||
2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||
Construction gross profit | $ | 3,132 | $ | 541 | $ | 2,591 | 478.9 | % | ||||||||||||||||||
Construction gross margin | 28.2 | % | 3.8 | % | ||||||||||||||||||||||
The increase in Construction gross profit was predominately due to significantly increased pricing levels during 2022 to offset higher input costs in both residential and commercial projects. Our backlog and sales pipeline remain relatively strong despite economic headwinds.
Operating Expenses
Operating expenses are summarized as follows (in thousands):
| Three Months Ended September 30, | Percent of Revenues | |||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Change | 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| Dollars | Percent | |||||||||||||||||||||||||||||||||||||
| Selling, general and administrative | $ | 6,860 | $ | 5,201 | $ | 1,659 | 31.9 | % | 28.3 | % | 18.0 | % | ||||||||||||||||||||||||||
| Amortization of intangible assets | 430 | 430 | — | — | % | 1.8 | % | 1.5 | % | |||||||||||||||||||||||||||||
| Total operating expenses | $ | 7,290 | $ | 5,631 | $ | 1,659 | 29.5 | % | 30.1 | % | 19.5 | % | ||||||||||||||||||||||||||
On a consolidated basis, there was a $1.7 million increase in sales, general and administrative expenses. The major drivers of the increase in selling, general and administrative expenses (“SG&A”) were a $1.2 million increase in legal expenses and $0.3 million in severance and retention costs, both attributed to our healthcare segment. As a percentage of revenue, SG&A increased to 28.3% for the three months ended September 30, 2022, versus 18.0% in the prior year period.
Total Other Income (Expense)
Total other income (expense) is summarized as follows (in thousands):
| Three Months Ended September 30, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Other income (expense), net | $ | (575) | $ | 3 | ||||||||||
| Interest expense, net | (185) | (260) | ||||||||||||
| Total other income (expense) | $ | (760) | $ | (257) | ||||||||||
Other (expenses) income, net, for the three months ended September 30, 2022 and 2021 are predominately comprised of unrealized losses and gains from available for sale securities recorded in our investments division, and finance costs.
Interest expense, net, for the three months ended September 30, 2022 and 2021 are predominantly comprised of interest costs and the related amortization of deferred issuance costs on our debt.
Income Tax Expense
For the three months ended September 30, 2022 and 2021 we recorded an income tax benefit of $367 thousand and zero income tax expense respectively, within continuing operations. See Note 10. Income Taxes, within the notes to our condensed consolidated financial statements for further information related to the income taxes.
Income from Discontinued Operations
See Note 2. Discontinued Operations of the condensed consolidated financial statements for information regarding discontinued operations.
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Results of Operations
Comparison of the Nine Months Ended September 30, 2022 and 2021
The following table summarizes our results for the nine months ended September 30, 2022 and 2021 (in thousands):
| Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||
| 2022 | Percent of Revenues | 2021 | Percent of Revenues | Change from Prior Year | ||||||||||||||||||||||||||||||||||
| Dollars | Percent * | |||||||||||||||||||||||||||||||||||||
| Total revenues | $ | 80,011 | 100.0 | % | $ | 77,019 | 100.0 | % | $ | 2,992 | 3.9 | % | ||||||||||||||||||||||||||
| Total cost of revenues | 63,450 | 79.3 | % | 68,691 | 89.2 | % | (5,241) | (7.6) | % | |||||||||||||||||||||||||||||
| Gross profit | 16,561 | 20.7 | % | 8,328 | 10.8 | % | 8,233 | 98.9 | % | |||||||||||||||||||||||||||||
| Total operating expenses | 21,805 | 27.3 | % | 16,290 | 21.2 | % | 5,515 | 33.9 | % | |||||||||||||||||||||||||||||
| Loss from operations | (5,244) | (6.6) | % | (7,962) | (10.3) | % | 2,718 | (34.1) | % | |||||||||||||||||||||||||||||
| Total other income (expense) | (1,661) | (2.1) | % | 3,476 | 4.5 | % | (5,137) | (147.8) | % | |||||||||||||||||||||||||||||
| Loss before income taxes | (6,905) | (8.6) | % | (4,486) | (5.8) | % | (2,419) | 53.9 | % | |||||||||||||||||||||||||||||
| Income tax provision | (256) | (0.3) | % | (34) | — | % | (222) | 652.9 | % | |||||||||||||||||||||||||||||
| Net loss from continuing operations | (7,161) | (9.0) | % | (4,520) | (5.9) | % | (2,641) | 58.4 | % | |||||||||||||||||||||||||||||
| Net income from discontinued operations | — | — | % | 5,955 | 7.7 | % | (5,955) | (100.0) | % | |||||||||||||||||||||||||||||
| Net income (loss) | $ | (7,161) | (9.0) | % | $ | 1,435 | 1.9 | % | $ | (8,596) | (599.0) | % | ||||||||||||||||||||||||||
*Percentage may not add due to rounding
Revenues
Healthcare
Healthcare revenue by segments is summarized as follows (in thousands):
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| 2022 | 2021 | Change | % Change | |||||||||||||||||||||||
| Healthcare | $ | 40,467 | $ | 42,984 | $ | (2,517) | (5.9) | % | ||||||||||||||||||
| Total Healthcare Revenue | $ | 40,467 | $ | 42,984 | $ | (2,517) | (5.9) | % | ||||||||||||||||||
Healthcare revenue decreased 5.9% compared to the prior year period, primarily driven by a decrease in revenue from fewer total scanning days due to the national shortage of Nuclear Medicine Technologists.
Construction
Construction revenue is summarized as follows (in thousands):
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| 2022 | 2021 | Change | % Change | |||||||||||||||||||||||
| Construction | $ | 39,544 | $ | 34,035 | $ | 5,509 | 16.2 | % | ||||||||||||||||||
| Total Construction Revenue | $ | 39,544 | $ | 34,035 | $ | 5,509 | 16.2 | % | ||||||||||||||||||
The increase in revenue for the Construction division was predominately due to a higher number of projects completed of varying sizes and increased pricing at KBS and EBGL, including a large contract entered into during 2022 that has resulted in recognized revenue of approximately $9 million.
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Gross Profit
Healthcare Gross Profit
Healthcare gross profit and gross margin by segments is summarized as follows (in thousands):
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| 2022 | 2021 | Change | % Change | |||||||||||||||||||||||
| Healthcare gross profit | $ | 9,579 | $ | 9,263 | $ | 316 | 3.4 | % | ||||||||||||||||||
| Healthcare gross margin | 23.7 | % | 21.5 | % | ||||||||||||||||||||||
The increase in Healthcare gross margin percentage was mainly driven by an improved mix of product and service revenues.
Construction Gross Profit (Loss)
Construction gross profit and margin is summarized as follows (in thousands):
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| 2022 | 2021 | Change | % Change | |||||||||||||||||||||||
Construction gross profit (loss) | $ | 7,203 | $ | (759) | $ | 7,962 | 1,049.0 | % | ||||||||||||||||||
Construction gross margin | 18.2 | % | (2.2) | % | ||||||||||||||||||||||
The increase in Construction gross profit was predominately due to an increase in revenues at KBS and EBGL for large commercial projects. We have significantly increased prices to offset higher input costs and have seen an improvement in our gross margin overall in 2022. Our backlog and sales pipeline remain strong despite economic headwinds.
Operating Expenses
Operating expenses are summarized as follows (in thousands):
| Nine Months Ended September 30, | Percent of Revenues | |||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Change | 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| Dollars | Percent | |||||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | $ | 20,515 | $ | 15,839 | $ | 4,676 | 29.5 | % | 25.6 | % | 20.6 | % | ||||||||||||||||||||||||||
| Amortization of intangible assets | 1,290 | 1,298 | (8) | (0.6) | % | 1.6 | % | 1.7 | % | |||||||||||||||||||||||||||||
| Gain on sale of MD Office Solutions | — | (847) | 847 | (100.0) | % | — | % | (1.1) | % | |||||||||||||||||||||||||||||
| Total operating expenses | $ | 21,805 | $ | 16,290 | $ | 5,515 | 33.9 | % | 27.2 | % | 21.2 | % | ||||||||||||||||||||||||||
On a consolidated basis, there was a $4.7 million increase in sales, general and administrative expenses. Two major drivers of the increase in SG&A were a $3 million increase in legal expenses and a $0.7 million increase in severance and retention costs, both attributed to our healthcare segment. We also had a $0.8 million increase at the corporate level related to corporate finance costs. As a percentage of revenue, SG&A increased to 25.6%, versus 20.6% in the prior year period.
On February 1, 2021, we completed the sale of our MD Office Solutions business and recognized $0.8 million in gain upon sale.
Total Other Income (Expense)
Total other Income (expense) is summarized as follows (in thousands):
| Nine Months Ended September 30, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Other income (expense), net | $ | (997) | $ | 4,208 | ||||||||||
| Interest expense, net | (664) | (732) | ||||||||||||
| Total other income (expense) | $ | (1,661) | $ | 3,476 | ||||||||||
Other income, net for nine months ended September 30, 2022 is predominantly comprised of gains and losses from equity securities and sales of assets, whereas the nine months ended September 30, 2021 comprised of primarily $4.2 million in PPP
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loan forgiveness from the Healthcare and Construction businesses. As of September 30, 2022, the Company has no PPP loans outstanding.
Interest expense, net, for the nine months ended September 30, 2022 and 2021 is predominantly comprised of interest costs and the related amortization of deferred issuance costs on our debt.
Income Tax Expense
For the nine months ended September 30, 2022 and 2021, we recorded income tax expenses of $256 thousand and $34 thousand, respectively. See Note 10, Income Taxes, within the notes to our condensed consolidated financial statements for further information related to the income taxes.
Income from Discontinued Operations
See Note 2, Discontinued Operations of the condensed consolidated financial statements for information regarding discontinued operations.
Liquidity and Capital Resources
Overview
Summary Cash Flows
The following table shows cash flow information for the nine months ended September 30, 2022 and 2021 (in thousands):
| Nine Months Ended September 30, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Net cash provided by (used in) operating activities | $ | (234) | $ | (8,176) | ||||||||||
| Net cash provided by (used in) investing activities | $ | (4,982) | $ | 17,794 | ||||||||||
| Net cash provided by (used in) financing activities | $ | 9,749 | $ | (7,317) | ||||||||||
Cash Flows from Operating Activities
For the nine months ended September 30, 2022, net cash used in operating activities was $0.2 million, as compared to $8.2 million in net cash used in operating activities in 2021. The decrease in net cash used in operating activities is attributable to better operating performance, particularly at our Construction Division. In 2021 consolidated net income included non-cash items related to the gain on sale of our DMS Health Technologies, Inc. (“DMS Health”) and MD Office Solutions businesses, and PPP loan forgiveness.
Cash Flows from Investing Activities
For the nine months ended September 30, 2022, net cash used in investing activities was $5.0 million, which principally consists of $4.0 million in purchases of equity securities as we expanded our Investments Division. In 2021, net cash provided by investing activities was $17.8 million, which was primarily attributable to the proceeds we received from the sale of DMS for $18.75 million.
Cash Flows from Financing Activities
For the nine months ended September 30, 2022, net cash provided by financing activities was $9.7 million, as compared to net cash used in financing activities of $7.3 million in 2021. The increase in cash provided by financing activities was primarily due to net proceeds of $12.7 million raised in our 2022 public equity offering.
Sources of Liquidity
Our principal sources of liquidity are our existing cash and cash equivalents, cash generated from operations, cash available on our revolving lines of credit from our credit facility with Webster Bank, N.A., a national banking association (“Webster”), as successor in interest to Sterling National Bank (“Sterling”), our three credit facilities with eCapital, and cash raised from equity financings. As of September 30, 2022, we had $8.5 million of cash and cash equivalents. The eCapital facilities directly support our Construction businesses. As of September 30, 2022, we have additional borrowing capacity of $0.2 million and $0.9 million outstanding on the KBS revolver. We were at $2.6 million outstanding balance and were fully drawn in terms of available capacity on the EBGL revolver. We were at $7.5 million outstanding balance and an additional borrowing capacity of $0.6 million on the Webster credit facility. 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
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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 $1.9 million and $7.2 million for the three and nine months ended September 30, 2022, respectively, and $2.1 million and $4.5 million for the three and nine months ended September 30, 2021, respectively. We have an accumulated deficit of $135.1 million and $128.0 million as of September 30, 2022 and December 31, 2021, respectively. As of September 30, 2022, cash and cash equivalents increased to $8.5 million from $4.5 million as of December 31, 2021, primarily as a result of an underwritten public offering (the “2022 Public Offering”) which closed on January 24, 2022. Refer to Note 14. Equity Transactions for details.
At September 30, 2022, we had approximately $11.9 million in debt outstanding. All of our debt is categorized as short-term on our condensed Consolidated Balance Sheets. For more detail, see Note 8. Debt. The Company’s loan pursuant to the Webster Loan Agreement (as defined below) (the “Webster Loan”) with Webster, as successor in interest to Sterling National Bank, with a loan balance of approximately $7.5 million, supports our Healthcare business. While the Webster Loan matures in 2024, GAAP rules require that the outstanding balance be classified as short-term debt. This is due to both the automatic sweep feature embedded in the traditional lockbox arrangement and the subjective acceleration clause in the Webster Loan Agreement.
As of September 30, 2022, we were not in compliance with covenants in the Webster Loan Agreement related to our Healthcare division and we have not yet obtained a waiver from Webster for these financial covenant breaches. Upon the occurrence and during the continuation of an event of default under the Webster Loan Agreement, Webster may, among other things, declare the loans and all other obligations under the Webster Loan Agreement immediately due and payable and increase the interest rate at which loans and obligations under the Webster Loan Agreement bear interest. 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 Webster Loan in full.
Management has historically concluded that this forecasted violation raises substantial doubt about our ability to continue as a going concern within twelve months. In consideration of the cash flow results for the nine months ended September 30, 2022, our current balance of cash and cash equivalents of $8.5 million and our projected use of cash for the next twelve months. Management believes that the Company's existing cash and current free cash flow generation expectations will allow the Company to continue its operations for at least the next 12 months from the date these unaudited condensed financial statements are issued, even in the event that we are requested to pay some or all of the outstanding Webster Loan balance. Therefore, the conditions that led us to conclude substantial doubt in prior periods have been alleviated. As a result of recurring losses, the continued viability of the Company beyond November 2023 may be dependent on its ability to continue to raise additional capital to finance its operations.
Common Stock Equity Offering
On May 28, 2020, we closed an underwritten public offering (the “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 offering price of $2.25). Gross proceeds, before deducting underwriting discounts and offering 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 with Maxim Group LLC, as representative of the underwriters. The 2022 Public Offering was for 9,500,000 shares of common stock (or pre-funded warrants to purchase shares of common stock in lieu thereof) and warrants to purchase up to 9,500,000 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. Additionally, Company issued to Maxim 237,500 common stock purchase warrants (the “Underwriter’s Warrants”) to purchase up to 237,500 shares of Common Stock at an exercise price of $1.65 per 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 September 30, 2022, of the warrants issued through the public offering we closed on May 28, 2020 (the “2020 Public Offering”), 1.0 million warrants 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 September 30, 2022, of the Warrants issued through the 2022 Public Offering, there were 10.9 million Warrants and 0.3 million prefunded warrants outstanding at an exercise price of $1.50 and $0.01, respectively. The Underwriter’s Warrants have not been exercised.
See Note 14. Equity Transactions in the accompanying notes to the condensed consolidated financial statements for further details.
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Webster Credit Facility
We have a $20.0 million credit facility with Webster, which matures in March 2024. As of September 30, 2022, the Company had $0.1 million of letters of credit outstanding and had additional borrowing capacity of $0.6 million under the Webster Credit Facility. Financial covenants require that the Webster 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 September 30, 2022, the Company was not in compliance with the covenants under the Webster Loan Agreement and had not yet obtained a waiver from Webster for these financial covenant breaches. While we do not believe Webster will require us to pay down our balance on this facility, we have sufficient cash to do so if necessary.
eCapital Credit Facilities
EdgeBuilder and Glenbrook (the “EBGL Borrowers”) have a $4.0 million credit facility with eCapital, which matures in January 2023. As of September 30, 2022, EBGL was fully drawn in terms of available borrowing capacity is available under the facility. As of September 30, 2022, $2.6 million was outstanding under the EBGL Loan Agreement. As of June 30, 2022, EBGL was not in compliance with the bi-annual financial covenants under the EBGL Loan Agreement measured as of June 30, 2022. As of June 30, 2022, we obtained a waiver from Gerber for the bi-annual financial covenant breaches. However, there can be no assurance that we will be able to obtain such waivers in the event of future financial covenant violations.
Financial covenants 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.
KBS has a $4.0 million credit facility with eCapital, which matures in February 2023. As of September 30, 2022, KBS had additional borrowing capacity of $0.2 million under the facility. As of September 30, 2022, $0.9 million was outstanding under the KBS Loan Agreement. As of June 30, 2022, KBS was in compliance with the bi-annual financial covenants under the EBGL Loan Agreement.
Financial covenants require that KBS maintain (a) net 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 be no less than $500,000 for the trailing fiscal year end and (b) a minimum EBITDA (as defined in the KBS Loan Agreement) no less than $0 as of June 30 and no less than $850,000 as of the fiscal year end.
Term Loan
We and certain of our Investments subsidiaries (collectively, the “Star Borrowers”) are party to a Loan and Security Agreement with eCapital, as successor in interest to Gerber Finance, Inc. (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”). As of September 30, 2022, the short term loan includes $0.9 million of the Star Loan, net of issuance costs.
The Star Loan is secured by the assets of SRE, 947 Waterford Road, LLC, 300 Park Street, LLC and 56 Mechanic Falls Road, LLC and guaranteed by the Company. The Star loan is subject to certain annual financial covenants. The financial covenants under the Star Loan Agreement include maintenance of a Debt Service Coverage Ratio of not less than 1:00 to 1:00, as defined in the Star Loan Agreement. The occurrence of any event of default under the Star Loan Agreement may result in the obligations of the Star Borrowers becoming immediately due and payable. As of December 31, 2021, no event of default was deemed to have occurred and the Star Borrowers were in compliance with the annual financial covenants under the Star Loan Agreement measured as of 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 for the Healthcare division and Construction division were $5.5 million and $1.2 million, respectively.
All PPP loans were forgiven, resulting in a gain of $4.2 million in 2021 and $2.5 million in 2020.
See Note 8. Debt in the accompanying notes to the financial statements for further details.
Off-Balance Sheet Arrangements
As of September 30, 2022, there were no off balance sheet arrangements.
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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 chief executive officer 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 chief executive officer 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. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective as of September 30, 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, 2021, management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2021 due to the material weaknesses as described below.
Our management identified a material weakness in our internal control over financial reporting as we did 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.
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, 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 has taken steps to increase the skills and experience of our accounting and financial reporting staff by making strategic hires and investing in the continuing education and public company accounting training of our accounting and financial professionals. We have also retained additional outside financial consultants to conduct technical accounting reviews, when necessary.
Controls continue 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.
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PART II. OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
See Note 9. Commitments and Contingencies, within the notes to our condensed 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, 2021, which we filed with the SEC on March 31, 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, 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 November 10, 2022, our Common Stock had closed above $1.00 per share for twelve consecutive trading days. In the event that our stock price falls below $1.00 per share 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
None.
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.OTHER INFORMATION
None.
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ITEM 6.EXHIBITS
Exhibit Number | Description | |||||||
| 10.1* | ||||||||
| 10.2* | ||||||||
| 10.3* | ||||||||
| 10.4* | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1** | ||||||||
| 32.2** | ||||||||
| 101.INS* | XBRL Instance 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.
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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: | November 14, 2022 | By: | /s/ RICHARD K. COLEMAN, JR. | |||||||||||
Richard K. Coleman, Jr. Chief Executive Officer (Principal Executive Officer) | ||||||||||||||
| /s/ DAVID J. NOBLE | ||||||||||||||
David J. Noble Chief Financial Officer (Principal Financial and Accounting Officer) | ||||||||||||||
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