Star Equity (STRR) - 2022 Q4 - Annual Report

Part I Business Star Equity Holdings, Inc. is a diversified holding company with operations in healthcare, construction, and investments, pursuing strategic growth and capital allocation - The company operates as a diversified holding company with three divisions: Healthcare (Digirad Health), Construction (KBS, EdgeBuilder, Glenbrook), and Investments[17] - Effective in the first quarter of 2022, the company reorganized its financial reporting from four segments into three: Healthcare, Construction, and Investments[23] Revenue Mix by Division (2021 vs 2022) | Division | 2022 Revenue % | 2021 Revenue % | | :--- | :--- | :--- | | Healthcare | 49.0% | 55.0% | | Construction | 51.0% | 45.0% | - In the fourth quarter of 2022, the Healthcare division experienced a short-term worldwide shortage in the supply of radiopharmaceuticals, which had a negative impact on business[52] - On January 24, 2022, the company closed an underwritten public offering, raising gross proceeds of $14.3 million[75] - Effective April 1, 2022, Richard K. Coleman Jr. was appointed as the new Chief Executive Officer[76] Business Segments The company's operations are structured into Healthcare, Construction, and Investments segments, each providing specialized products and services - Healthcare Division (Digirad Health): Provides nuclear medical imaging products and services, including imaging services using its proprietary cameras and the manufacturing and sale of these cameras[18] - Construction Division (KBS and EBGL): KBS manufactures modular buildings for the New England market. EBGL manufactures structural wall panels and building materials and distributes them in the Upper Midwest[19] - Investments Division: Holds and manages corporate-owned real estate, including three manufacturing facilities in Maine leased to its subsidiary KBS, and holds minority investments in public companies[20] Competition and Intellectual Property The company faces intense competition across its Healthcare and Construction segments and protects its technology through patents, trademarks, and trade secrets, primarily in Healthcare - The Healthcare division competes with smaller local providers and large medical device manufacturers like those offering x-ray, MRI, and CT systems, who have greater brand recognition and resources[41][42] - The Construction division's KBS business competes with regional modular manufacturers in New England and Pennsylvania, while the EBGL business competes with local lumber yards and big-box stores like Home Depot and Lowe's[44][45] - The company holds 9 non-expired U.S. patents in its Healthcare segment, covering solid-state radiation detectors and scan technology, and holds no patents in the Construction segment[48][49] Regulation and Human Capital The Healthcare division is subject to extensive federal and state regulations, including Anti-Kickback, Stark Law, HIPAA, and FDA rules, while the company employed 413 people as of December 31, 2022 - The Healthcare division is heavily regulated by laws such as the Anti-Kickback Statute, the Stark Law, HIPAA, and FDA medical device regulations[62][63][65] - As of December 31, 2022, the company had a total of 413 employees, with 174 in clinical health-related positions and 106 in manufacturing[65] Risk Factors The company faces significant risks including a history of net losses, global instability, debt covenant non-compliance, liquidity challenges, and potential NASDAQ delisting - The company has a history of annual net losses attributable to common stockholders, with a loss of $7.2 million in 2022 and $4.9 million in 2021[85] - The company faces risks from global instability, including health pandemics, wars, and inflation, which could disrupt operations, increase costs, and impact financial results[90][91] - Debt agreements contain restrictive covenants, and failure to comply, which has occurred, could lead to default and acceleration of indebtedness; substantially all company assets are pledged as security[136][140] - As of December 31, 2022, Digirad Health was not in compliance with the quarterly financial covenants under the Webster Bank Loan Agreement[141] - The company's stock faces delisting risk from the Nasdaq Global Market if it fails to maintain a minimum closing bid price of $1.00 per share, with a notice of non-compliance received on January 19, 2023[149][150] - A stockholder rights plan ("poison pill") and a protective amendment to the Certificate of Incorporation are in place to protect significant Net Operating Loss (NOL) carryforwards, but these may have anti-takeover effects[157][160][163] Unresolved Staff Comments There are no unresolved staff comments - Not applicable[166] Properties The company leases its principal executive offices and healthcare facilities, while its Investments division owns and leases manufacturing facilities to its construction subsidiary - The company leases its principal executive offices in Old Greenwich, CT, and other facilities for its healthcare operations in Georgia and California[167][168] - The Investments division owns three manufacturing facilities in Maine (South Paris, Oxford, Waterford) which it leases back to its construction subsidiary, KBS[169] - The EBGL construction business utilizes three leased facilities in Oakdale, MN, Prescott, WI, and Hudson, WI[170] Legal Proceedings The company settled the Livingston v. Digirad Corporation case for $200,000 plus attorney's fees, alleging False Claims Act and Stark Law violations, with no admission of liability - The company settled the Livingston v. Digirad Corporation case, which alleged violations of the False Claims Act and Stark Law, for $200,000 plus attorney's fees, with no admission of liability; the amount was fully paid by year-end 2022[388] Mine Safety Disclosures This item is not applicable to the company - Not applicable[173] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common and preferred stock trade on NASDAQ, with approximately 164 common stock holders of record and an active 200,000-share repurchase program - The company's common stock and preferred stock are traded on the NASDAQ Global Market under the symbols "STRR" and "STRRP", respectively[176] - As of March 7, 2023, there were approximately 164 holders of record of the company's common stock[177] - Under the 2018 Buyback Program, no shares were repurchased in the fourth quarter of 2022, and the program has authorization to repurchase up to 200,000 shares, with no time limit[178][180] Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations Star Equity's 2022 revenues increased 5.2% to $112.2 million, driven by Construction growth, leading to a 69.8% surge in gross profit and reduced operating losses, despite debt covenant non-compliance 2022 Financial Highlights | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $112.2M | $106.6M | 5.2% | | Gross Profit | $25.9M | $15.2M | 69.8% | | Loss from Continuing Operations | ($5.3M) | ($8.9M) | (40.3)% | - The increase in gross profit was primarily driven by a $9.7 million increase in the Construction division's gross profit due to better pricing[197] - The company was not in compliance with its Webster Loan Agreement covenants as of December 31, 2022, but management believes it has alleviated conditions that previously raised substantial doubt about its ability to continue as a going concern[219][221] Results of Operations (2022 vs 2021) In 2022, total revenues increased to $112.2 million, driven by Construction growth offsetting Healthcare declines, leading to significant gross margin improvement despite higher operating expenses from one-time legal and severance costs Revenue by Segment (in thousands) | Segment | 2022 | 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Healthcare | $55,002 | $58,556 | ($3,554) | (6.1)% | | Construction | $57,149 | $48,003 | $9,146 | 19.1% | Gross Profit & Margin by Segment | Segment | 2022 Gross Profit | 2022 Gross Margin | 2021 Gross Profit | 2021 Gross Margin | | :--- | :--- | :--- | :--- | :--- | | Healthcare | $13,509 | 24.6% | $12,459 | 21.3% | | Construction | $12,660 | 22.2% | $3,008 | 6.3% | - Selling, general and administrative (SG&A) expenses increased by $4.7 million, with the largest components being $3.0 million in one-time legal costs and $0.8 million in retention and severance costs[208] - 2021 results included a $3.4 million non-cash goodwill impairment charge and a $4.2 million gain on the forgiveness of PPP loans, neither of which recurred in 2022[209][210] Liquidity and Capital Resources The company's 2022 liquidity improved with reduced cash used in operations and significant financing proceeds from an equity offering, despite year-end non-compliance with debt covenants, which management expects to remediate Summary of Cash Flows (in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(3,857) | $(6,450) | | Net cash (used in) provided by investing activities | $(5,093) | $17,802 | | Net cash provided by (used in) financing activities | $8,941 | $(9,975) | - Net cash provided by financing activities in 2022 was primarily due to $12.7 million in net proceeds from the 2022 public equity offering[216] - As of December 31, 2022, the company had $4.7 million in cash and cash equivalents and additional borrowing capacity of $2.0 million across its credit facilities[218][220] - The company was not in compliance with the financial covenants of its Webster Loan Agreement as of December 31, 2022, but anticipates regaining compliance in 2023[219][221][226] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk on its variable-rate debt, with a 100 basis point increase impacting annual interest expense by approximately $0.1 million - A 100 basis point increase in interest rates would result in approximately $0.1 million of additional annual interest expense, based on the $11.7 million of variable-rate debt outstanding at year-end 2022[243] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements and notes, with the 2022 auditor's report highlighting going concern as a critical audit matter and the 2021 report noting going concern uncertainty - The auditor's report for 2022 identified the assessment of the company's ability to continue as a going concern as a critical audit matter, noting significant judgment was required to evaluate cash flow projections and debt repayment timing[253][254] - The auditor's report for 2021 contained a paragraph expressing substantial doubt about the company's ability to continue as a going concern due to recurring losses and a potential loan covenant breach[260] - In 2021, a goodwill impairment loss of $3.4 million was recorded for the KBS reporting unit within the Construction segment, with no goodwill impairment recorded in 2022[366] - As of December 31, 2022, the company was not in compliance with the financial covenants of the Webster Loan Agreement[373] Changes in and Disagreements with Accountants on Accounting and Financial Disclosures There were no changes in or disagreements with accountants on accounting and financial disclosures - None[440] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022, having remediated a prior material weakness related to accounting resources - Disclosure controls and procedures were deemed effective as of the end of the reporting period[441] - Management concluded that internal control over financial reporting was effective as of December 31, 2022[442] - A material weakness identified in the 2021 Form 10-K related to insufficient accounting resources was remediated as of December 31, 2022[443] Other Information There is no other information to report - None[445] Disclosure Regarding Foreign Jurisdictions That Prevent Inspections This item is not applicable - Not Applicable[446] Part III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the 2023 proxy statement, detailing directors, executive officers, and the company's adopted Code of Business Ethics and Conduct - The information required by this item is incorporated by reference from the company's 2023 Proxy Statement[448] - The company has adopted a Code of Business Ethics and Conduct, which is intended to qualify as a "code of ethics" under Sarbanes-Oxley Act Section 406[449] Executive Compensation Information required for this item is incorporated by reference from the company's definitive proxy statement for its 2023 annual meeting of shareholders - The information required by this item is incorporated by reference from the company's 2023 Proxy Statement[450][448] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required for this item is incorporated by reference from the company's definitive proxy statement for its 2023 annual meeting of shareholders - The information required by this item is incorporated by reference from the company's 2023 Proxy Statement[451][448] Certain Relationships and Related Transactions, and Director Independence Information required for this item is incorporated by reference from the company's definitive proxy statement for its 2023 annual meeting of shareholders - The information required by this item is incorporated by reference from the company's 2023 Proxy Statement[452][448] Principal Accounting Fees and Services Information on principal accounting fees and services is incorporated by reference from the 2023 Proxy Statement, noting Wolf & Company, PC as the 2022 auditor - The information required by this item is incorporated by reference from the "Audit Matters" section of the 2023 Proxy Statement[453] - The company engaged Wolf & Company, PC for the audit of the 2022 consolidated financial statements[453] Part IV Exhibits, Financial Statement Schedules This section details the financial statements and schedules filed, including the auditor's report and consolidated statements, along with a comprehensive index of all exhibits to the Form 10-K - This section lists the financial statements filed under Item 8 and provides an index of all exhibits required by Item 601 of Regulation S-K[456][457] Form 10-K Summary No Form 10-K summary was provided - None[473]