Star Equity (STRR) - 2022 Q1 - Quarterly Report

Important Information Regarding Forward-Looking Statements This section clarifies the nature and inherent risks of forward-looking statements, which are based on current expectations and subject to material differences - This Quarterly Report on Form 10-Q contains forward-looking statements based on current beliefs, expectations, and projections regarding business strategies, market potential, future financial performance, and industry matters[8] - Forward-looking statements are identified by words such as 'believe,' 'expect,' 'anticipate,' 'project,' 'could,' 'would,' and similar expressions, and are subject to risks, uncertainties, and other factors that could cause actual results to differ materially[8] - The most significant risks are described in 'Item 1A — Risk Factors' of this report and the Annual Report on Form 10-K for the fiscal year ended December 31, 2021[8] PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements for Star Equity Holdings, Inc., including statements of operations, balance sheets, cash flows, and changes in equity, along with detailed notes explaining the basis of presentation, significant accounting policies, and specific financial items for the quarter ended March 31, 2022 Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------- | :-------------------------------- | :-------------------------------- | | Total revenues | $25,049 | $22,354 | | Gross profit | $4,663 | $3,077 | | Loss from operations | $(2,555) | $(1,569) | | Net (loss) income | $(3,701) | $5,432 | | Net (loss) income attributable to common shareholders | $(4,180) | $4,953 | | Net (loss) income per share—basic and diluted | $(0.29) | $1.10 | | Weighted-average shares outstanding—basic and diluted | 12,669 | 4,916 | - Net loss from continuing operations significantly increased to $(3.701) million in Q1 2022 from $(0.588) million in Q1 2021, primarily due to the absence of income from discontinued operations which contributed $6.020 million in Q1 2021[12] Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands) | Metric | March 31, 2022 | December 31, 2021 | | :------------------------------------- | :------------- | :---------------- | | Total assets | $81,191 | $68,052 | | Total current assets | $44,776 | $31,863 | | Cash and cash equivalents | $15,035 | $4,538 | | Total liabilities | $36,740 | $32,310 | | Total current liabilities | $30,721 | $27,821 | | Total stockholders' equity | $25,463 | $16,754 | - Total assets increased by $13.1 million from December 31, 2021, to March 31, 2022, driven by a significant increase in cash and cash equivalents from $4.5 million to $15.0 million[14] - Stockholders' equity increased by $8.7 million, primarily due to proceeds from the sale of common stock and warrants[15] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(636) | $(2,232) | | Net cash (used in) provided by investing activities | $(1,310) | $18,315 | | Net cash provided by (used in) financing activities | $12,550 | $(6,180) | | Net increase in cash, cash equivalents, and restricted cash | $10,604 | $9,950 | - Net cash provided by financing activities significantly increased to $12.55 million in Q1 2022 from a net cash used of $6.18 million in Q1 2021, primarily due to proceeds from the 2022 Public Offering[17] - Net cash used in investing activities was $(1.310) million in Q1 2022, a substantial decrease from $18.315 million provided in Q1 2021, which included proceeds from the sale of discontinued operations[17] Condensed Consolidated Statements of Mezzanine Equity and Stockholders' Equity Condensed Consolidated Statements of Mezzanine Equity and Stockholders' Equity (in thousands) | Metric | Balance at Dec 31, 2021 | Balance at Mar 31, 2022 | | :------------------------------------- | :---------------------- | :---------------------- | | Perpetual Preferred Stock Amount | $18,988 | $18,988 | | Common stock Shares | 5,805 | 15,029 | | Additional paid-in capital | $150,451 | $162,860 | | Accumulated deficit | $(127,969) | $(131,670) | | Total stockholders' equity | $16,754 | $25,463 | - Total stockholders' equity increased by $8.7 million from December 31, 2021, to March 31, 2022, primarily due to $13.198 million in proceeds from the sale of common stock and warrants, partially offset by a net loss of $3.701 million[21] Note 1. Basis of Presentation and Significant Policies - The unaudited condensed consolidated financial statements are prepared in accordance with SEC instructions for Form 10-Q and U.S. GAAP, with all material adjustments for fair presentation included[23] - The Company operates as a diversified holding company with Healthcare, Construction, and Investments divisions. DMS Health Technologies, Inc. (Mobile Healthcare business unit) was sold on March 31, 2021, and its results are presented as discontinued operations[24] - The Series A Preferred Stock is classified as mezzanine equity due to a redemption feature not solely within the Company's control, though redemption was not probable as of March 31, 2022[25] - The Company incurred losses from continuing operations of $3.7 million for the three months ended March 31, 2022, and has an accumulated deficit of $131.7 million, raising substantial doubt about its ability to continue as a going concern without additional financing or covenant restructuring[29][31] - Revenue is recognized when a customer obtains control of promised goods or services, applying a five-step model. The majority of contracts have a single performance obligation, satisfied over time or at a point in time[38][41][42] - The Company early adopted ASU 2020-06 on January 1, 2021, with no cumulative-effect transition adjustment, and expects to adopt ASU 2016-13 (Credit Losses) in Q1 2023, which is not expected to have a material financial impact[64][66] Note 2. Discontinued Operations - The sale of DMS Health Technologies, Inc. (Mobile Healthcare business unit) was completed on March 31, 2021, for $18.75 million in cash, with an immaterial net escrow settlement received in January 2022[67] - The disposition of the Mobile Healthcare business unit was deemed a strategic shift with a major effect on operations and financial results, thus classified as discontinued operations[67] Discontinued Operations (in thousands) | Metric | Three Months Ended March 31, 2021 | | :------------------------------------- | :-------------------------------- | | Total revenues | $9,490 | | Gross profit | $2,517 | | Income from discontinued operations | $1,048 | | Gain on sale of discontinued operations | $5,224 | | Income from discontinuing operations | $6,020 | - There were no activities for discontinued operations for the three months ended March 31, 2022[69] Note 3. Revenue Revenue by Segment/Type (in thousands) | Segment/Type | Q1 2022 Revenue | Q1 2021 Revenue | | :------------------------------------- | :-------------- | :-------------- | | Healthcare | $13,418 | $13,307 | | Construction | $11,631 | $9,047 | | Total Revenues | $25,049 | $22,354 | | Services and goods transferred over time | $12,751 | $13,823 | | Services and goods transferred at a point in time | $12,298 | $8,531 | - Total revenues increased by $2.695 million (12.1%) year-over-year, with Construction revenue growing significantly by 28.6% ($2.584 million) and Healthcare revenue showing a slight increase of 0.8% ($0.111 million)[70] - Healthcare revenue is primarily from mobile imaging services, camera sales, and camera support contracts, with services recognized over time and product sales at a point in time[71][73][75] - Construction revenue is generated from manufacturing modular housing units, structural wall panels, and supplying building materials, recognized either at a point in time (delivery) or over time (progress towards completion)[78] Deferred Revenue (in thousands) | Deferred Revenue | Balance at Dec 31, 2021 | Balance at Mar 31, 2022 | | :------------------------------------- | :---------------------- | :---------------------- | | Deferred revenue | $2,869 | $3,361 | | Billings in excess of costs and estimated profit | $312 | $15 | Note 4. Basic and Diluted Net Income (Loss) Per Share - Net loss per share attributable to common shareholders was $(0.33) for the three months ended March 31, 2022, compared to net income per share of $1.01 for the same period in 2021[82] - In periods of net loss, diluted loss per common share equals basic loss per common share, as common stock equivalents are antidilutive[81] Net Income (Loss) Per Share Calculation (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------- | :-------------------------------- | :-------------------------------- | | Net (loss) income attributable to common shareholders | $(4,180) | $4,953 | | Weighted average common shares outstanding | 12,434 | 4,916 | | Weighted average shares outstanding - basic and diluted | 12,669 | 4,916 | | Net (loss) income per share - basic and diluted | $(0.29) | $1.10 | - Antidilutive common stock equivalents, including stock options, restricted stock units, and stock warrants, totaled 9,638 thousand in Q1 2022, significantly higher than 959 thousand in Q1 2021[82] Note 5. Supplementary Balance Sheet Information Inventories (in thousands) | Inventories | March 31, 2022 | December 31, 2021 | | :------------------------------------- | :------------- | :---------------- | | Raw materials | $7,167 | $5,870 | | Work-in-process | $2,252 | $2,145 | | Finished goods | $1,191 | $830 | | Total inventories, net | $10,287 | $8,525 | Property and Equipment (in thousands) | Property and Equipment | March 31, 2022 | December 31, 2021 | | :------------------------------------- | :------------- | :---------------- | | Gross property and equipment | $32,964 | $32,896 | | Accumulated depreciation | $(24,111) | $(23,978) | | Total property and equipment, net | $8,853 | $8,918 | - Depreciation expense for the three months ended March 31, 2022 and 2021 was $0.5 million for both periods[84] Warranty Reserve (in thousands) | Warranty Reserve | March 31, 2022 | December 31, 2021 | | :------------------------------------- | :------------- | :---------------- | | Balance at the beginning of year | $569 | $214 | | Charges to cost of revenues | $26 | $963 | | Applied to liability | $(175) | $(608) | | Balance at the end of period | $420 | $569 | Note 6. Leases - The Company has operating and finance leases for corporate offices, vehicles, and equipment, with remaining lease terms ranging from 1 to 10 years[88] Lease Cost (in thousands) | Lease Cost | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------- | :-------------------------------- | :-------------------------------- | | Operating lease cost | $396 | $334 | | Total finance lease cost | $140 | $127 | Lease Metrics | Lease Metrics | March 31, 2022 | December 31, 2021 | | :------------------------------------- | :------------- | :---------------- | | Weighted average remaining lease term (Operating) | 4.2 years | 3.9 years | | Weighted average discount rate (Operating) | 3.82% | 4.23% | Future Minimum Lease Payments (in thousands) | Future Minimum Lease Payments | Operating Leases | Finance Leases | | :------------------------------------- | :--------------- | :------------- | | Total future minimum lease payments | $5,868 | $1,273 | | Present value of lease obligations | $5,418 | $1,198 | - In the Healthcare division, lease income is generated from equipment rentals, primarily month-to-month contracts, accounted for as operating leases[90] Note 7. Fair Value Measurements Assets Measured at Fair Value (in thousands) | Assets Measured at Fair Value | March 31, 2022 (Total) | December 31, 2021 (Total) | | :------------------------------------- | :--------------------- | :------------------------ | | Equity securities | $1,195 | $47 | | Lumber derivative contracts | $(13) | $666 | | VIE Investments | $337 | $337 | | Total | $1,519 | $1,050 | - The Company recorded an unrealized gain of $92 thousand on equity securities in Q1 2022, compared to an unrealized loss of $23 thousand in Q1 2021[91] - A net loss of $0.2 million from lumber derivative contracts was recorded in cost of goods sold for Q1 2022, reflecting volatility in lumber prices[92][93] - VIE investments, valued at $0.3 million, are based on unobservable inputs (Level 3) and are not consolidated as the Company is not the primary beneficiary[94][163][164] Note 8. Debt Debt Type (in thousands) | Debt Type | March 31, 2022 Amount | March 31, 2022 Weighted Average Interest Rate | December 31, 2021 Amount | December 31, 2021 Weighted Average Interest Rate | | :------------------------------------- | :-------------------- | :-------------------------------------------- | :----------------------- | :--------------------------------------------- | | Revolving Credit Facility - Gerber KBS | $2,921 | 6.25% | $3,131 | 6.00% | | Revolving Credit Facility - Gerber EBGL | $2,081 | 6.25% | $1,652 | 6.00% | | Revolving Credit Facility - SNB | $7,334 | 2.95% | $7,016 | 2.60% | | Gerber - Star Loan Principal, net | $998 | 6.50% | $1,070 | 6.25% | | Total Short-term debt | $13,334 | 4.45% | $12,869 | 4.17% | - All debt is classified as short-term due to subjective acceleration clauses and lockbox arrangements, despite some loans having longer maturities[30][98][104][116][118][219][231][237][245] - As of March 31, 2022, the Company was not in compliance with covenants under the SNB Loan Agreement for its Healthcare division and had not obtained a waiver, raising substantial doubt about its going concern ability[30][102][219][232] - The Construction division had $5.0 million outstanding on two Gerber revolvers, with waivers obtained for bi-annual covenant non-compliance as of December 31, 2021, covering the period ending June 30, 2022[32][103][106][221][234][236] - All Paycheck Protection Program (PPP) loans, totaling $6.7 million, were forgiven in fiscal years 2020 and 2021, resulting in a gain of $4.2 million in 2021 and $2.5 million in 2020, with no outstanding PPP loans[132][249] Note 9. Commitments and Contingencies - The Company is subject to various litigation and administrative proceedings, including claims related to regulatory compliance, customer disputes, employment practices, and product liability[133] - In December 2021, the Company settled a wrongful death and medical expenses judgment for $4.96 million, paying $0.1 million and being released from further claims[135] - On April 1, 2022, the Company entered into a Guaranty Agreement for KBS's obligations under a subcontract, up to $4.4 million, decreasing with product deliveries[136][251] Note 10. Income Taxes - The Company uses the asset and liability method for income taxes, recognizing deferred tax assets and liabilities and providing a full valuation allowance against deferred tax assets due to uncertainty of realization[137] - Income tax expense for continuing operations was $950 thousand in Q1 2022, significantly higher than $2 thousand in Q1 2021, primarily due to an ownership change under IRC Section 382 requiring an additional valuation allowance on net operating losses[139] - As of March 31, 2022, unrecognized tax benefits related to uncertain tax positions totaled approximately $2.6 million, with $2.1 million potentially reducing the effective tax rate if recognized[140] Note 11. Segments - Effective Q1 2022, the Company realigned its internal reporting structure into three reportable segments: Healthcare, Construction, and Investments, combining Diagnostic Imaging and Diagnostic Services into Healthcare[142][143] Segment Performance (in thousands) | Segment Performance | Q1 2022 Revenue | Q1 2021 Revenue | Q1 2022 Gross Profit | Q1 2021 Gross Profit | Q1 2022 Loss from Operations | Q1 2021 Loss from Operations | | :------------------------------------- | :-------------- | :-------------- | :------------------- | :------------------- | :--------------------------- | :--------------------------- | | Healthcare | $13,418 | $13,307 | $3,176 | $2,598 | $78 | $837 | | Construction | $11,631 | $9,047 | $1,586 | $544 | $(759) | $(1,547) | | Investments | $158 | $158 | $59 | $93 | $59 | $234 | | Consolidated | $25,049 | $22,354 | $4,663 | $3,077 | $(2,555) | $(1,569) | - Healthcare segment's income from operations decreased significantly from $837 thousand in Q1 2021 to $78 thousand in Q1 2022, despite a slight revenue increase[142] - Construction segment improved its loss from operations from $(1.547) million in Q1 2021 to $(0.759) million in Q1 2022, driven by strong revenue growth and gross profit improvement[142] Note 12. Related Party Transactions - Jeffrey E. Eberwein, Executive Chairman, provided limited guarantees for SNB and Gerber loans, with some guarantees discharged or expired[144][145][146] - As of March 31, 2022, Mr. Eberwein owned approximately 13.03% of outstanding common stock and 1,289,772 shares of Series A Preferred Stock[148] - In December 2021, Mr. Eberwein participated in a private placement, purchasing 650,000 shares of common stock for $3.25 per share[150] - Related party promissory notes totaling $2.3 million, payable to LSV Co-Invest I and LSVM, were fully repaid in April 2021 using proceeds from the DMS Sale Transaction[152][153][154] Note 13. Perpetual Preferred Stock - Holders of Series A Preferred Stock are entitled to preferential cumulative cash dividends at 10.0% per annum of the $10.00 liquidation preference, payable quarterly[155] - Series A Preferred Stock is not convertible and has limited voting rights, primarily when dividends are six or more consecutive quarters in arrears[155] - On February 25, 2022, a cash dividend of $0.25 per share ($0.5 million aggregate) was declared and paid on March 10, 2022, with no preferred dividends in arrears as of March 31, 2022[156] Note 14. Equity Transactions - On January 24, 2022, the Company closed a public offering, issuing 9,175,000 shares of common stock, 325,000 pre-funded warrants, and 9,500,000 common stock purchase warrants, generating net proceeds of $12.7 million[157] - As of March 31, 2022, 1.4 million warrants from the 2020 Public Offering remained outstanding (0.7 million common stock equivalents at $2.25 exercise price)[158] - As of March 31, 2022, 10.9 million warrants and 0.3 million prefunded warrants from the 2022 Public Offering were outstanding, with exercise prices of $1.50 and $0.01, respectively[158] Note 15. Preferred Stock Rights - On June 2, 2021, the board adopted a tax benefit preservation plan (Section 382 Rights Agreement) to mitigate the risk of an 'ownership change' limiting net operating loss carryforwards[159] - Each right entitles holders to purchase one one-thousandth of a Series C Preferred Stock share at an exercise price of $12.00, subject to adjustment[159] - The rights become exercisable following certain events, such as a person or group becoming an Acquiring Person, and could cause substantial dilution to those acquiring 4.99% or more of common stock without board approval[160][161] Note 16. Variable Interest Entity - The Company has a $0.3 million investment in a Variable Interest Entity (VIE) involved in heart imaging technologies, recorded in Other Assets[163] - The Company is not the primary beneficiary of this VIE, as its governance structure does not allow it to direct activities significantly affecting economic performance, thus the VIE's financials are not consolidated[164] - The maximum exposure to this unconsolidated VIE is its $0.3 million capital investment, with no impairment indicators identified as of March 31, 2022[165] Note 17. Subsequent Events - On May 19, 2022, the board declared a cash dividend of $0.25 per share ($0.5 million aggregate) for Series A Preferred Stock, payable on June 10, 2022[166] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the Company's financial condition and results of operations for the three months ended March 31, 2022, discussing key financial performance, strategic initiatives, market conditions, and liquidity. It highlights the Company's multi-industry holding structure, segment performance, and ongoing challenges related to debt covenants and market volatility Overview - Star Equity Holdings, Inc. operates as a diversified multi-industry holding company with three divisions: Healthcare, Construction, and Investments[170] - The Healthcare division (Digirad Health, Inc.) provides nuclear medical imaging products and services, focusing on cardiac health, including imaging services and camera manufacturing/maintenance[171] - The Construction division comprises KBS Builders, Inc. (modular buildings) and EBGL (structural wall panels, engineered wood products, building materials)[172] - The Investments division is an internally focused unit holding corporate-owned real estate (leased to KBS) and managing minority investments[173] Strategy - Star Equity's strategy focuses on capital allocation, strategic leadership, M&A, capital markets, investor relations, and Investments division management, allowing operating companies to focus on their core businesses[174] - The Company explores strategic alternatives like organic growth, selective acquisitions, divestitures, equity offerings, debt financings, or restructuring to improve market position and profitability[175] - Key growth elements include organic growth in existing markets, introduction of new services (e.g., new imaging technologies in Healthcare, logistics/installation in Construction), and acquisition of complementary businesses with a financially disciplined approach[176][177] Current Market Conditions - The Healthcare business has returned to pre-COVID levels, with diagnostic imaging volumes normalizing in Q1 2022[178][179] - The Construction division benefits from strong housing demand but faces challenges from a tight labor market and continued supply chain disruptions, leading to volatile building material prices[178][180] - The Company has implemented price increases and margin protection measures in Construction to offset higher input costs, expecting a positive effect on 2022 profitability[180] Trends and Drivers - The diagnostic services and products market is highly competitive, facing uncertainties from reimbursement changes (Deficit Reduction Act, Healthcare Reform laws), COVID-19, and legislative changes[181] - Competitive factors include budget availability, reimbursement qualifications, pricing, ease-of-use, reliability, and mobility, which the Company addresses by modifying business models and assisting customers with regulations[181] - In construction, there's increasing adoption of offsite/prefab construction due to benefits like shorter time-to-market, higher quality, reduced waste, and labor availability, presenting opportunities for factory-built housing[182] - Risks from global economic instability, conflicts, wars, and health crises, along with inflation, could impact demand and costs[183] COVID-19 Pandemic - The Company continues to recover from COVID-19's economic effects, with Healthcare revenue increasing 0.8% and Construction revenue growing 28.6% in Q1 2022 compared to the prior year[184][185] - Construction division's growth was driven by increased output at KBS and EBGL, coupled with pricing increases to offset higher raw material costs[185] - The extent of future COVID-19 impact remains uncertain and dependent on future developments[185] Discontinued Operations - The sale of DMS Health Technologies, Inc. (Mobile Healthcare business unit) was completed on March 31, 2021, for $18.75 million in cash, with an immaterial net escrow settlement received in January 2022[186] Goodwill valuation - Goodwill is reviewed annually for impairment during Q4, and when circumstances indicate a reduction in carrying value may not be recoverable, by assessing qualitative factors[187] - As of March 31, 2022, qualitative analysis indicated that future impairments could be possible if projected performance levels are not achieved, potentially impacting earnings[188] Business Segments - Effective Q1 2022, the Company reorganized into three reportable segments: Healthcare, Construction, and Investments, to align with how the Chief Operating Decision Maker assesses performance[189][191] - The Healthcare segment provides diagnostic imaging services (staffing, systems, radiopharmaceuticals) and sells/maintains solid-state gamma cameras, primarily for cardiac health[190] - The Construction segment manufactures modular housing units, structural wall panels, permanent wood foundation systems, and supplies building materials through KBS, Glenbrook, and EdgeBuilder[192] - The Investments segment holds corporate-owned real estate (leased to KBS) and manages other future investments[193] Healthcare Services and Products - Diagnostic imaging, primarily using SPECT technology for gamma cameras, is standard for disease diagnosis, minimizing invasive procedures[194] - The Company offers various diagnostic imaging modalities (ultrasound, nuclear imaging) through services and product sales, diversifying operations against changing utilization trends[195] Construction Services and Products - KBS markets modular homes through direct sales and a network of independent dealers/contractors in New England, focusing on customization and commercial projects[196] - EBGL markets engineered structural wall panels and permanent wood foundation systems via direct sales to builders, contractors, and developers in the Minneapolis-St. Paul area[197] - Marketing efforts include industry trade shows, product literature, and sales support tools to generate leads[197] Critical Accounting Policies and Estimates - The preparation of financial statements involves significant estimates and judgments impacting revenue, net income/loss, and asset/liability values[198] - Critical accounting policies and estimates are detailed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021[198] Results of Operations Results of Operations (in thousands) | Metric | Q1 2022 | Q1 2021 | Change | % Change | | :------------------------------------- | :------ | :------ | :----- | :------- | | Total revenues | $25,049 | $22,354 | $2,695 | 12.1% | | Gross profit | $4,663 | $3,077 | $1,586 | 51.5% | | Total operating expenses | $7,218 | $4,646 | $2,572 | 55.4% | | Loss from operations | $(2,555) | $(1,569) | $(986) | 62.8% | | Net loss from continuing operations | $(3,701) | $(588) | $(3,113) | 529.4% | | Net (loss) income | $(3,701) | $5,432 | $(9,133) | (168.1)% | - Total revenues increased by 12.1% year-over-year, driven by strong performance in the Construction division[199] - Gross profit increased by 51.5%, but total operating expenses rose by 55.4%, leading to a higher loss from operations[199] - Net loss from continuing operations increased significantly by 529.4%, primarily due to higher operating expenses and income tax provision, and the absence of income from discontinued operations[199] Revenues Revenues by Segment (in thousands) | Segment | Q1 2022 Revenue | Q1 2021 Revenue | Change | % Change | | :------------------------------------- | :-------------- | :-------------- | :----- | :------- | | Healthcare | $13,418 | $13,307 | $111 | 0.8% | | Construction | $11,631 | $9,047 | $2,584 | 28.6% | - Healthcare revenue increased slightly by 0.8%, driven by radiopharmaceuticals contracts, partially offset by fewer camera sales and scanning days[200] - Construction revenue increased significantly by 28.6%, primarily due to large commercial projects at EBGL, partially offset by a $0.6 million decrease in KBS revenues[201] Gross Profit Gross Profit by Segment (in thousands) | Segment | Q1 2022 Gross Profit | Q1 2021 Gross Profit | % Change | | :------------------------------------- | :------------------- | :------------------- | :------- | | Healthcare | $3,176 | $2,598 | 22.2% | | Healthcare gross margin | 23.7% | 19.5% | | | Construction | $1,586 | $544 | 191.5% | | Construction gross margin | 13.6% | 6.0% | | | Investments gross loss | $(65) | $(99) | 52.3% | - Healthcare gross margin percentage increased due to a higher percentage of high-margin radiopharmaceuticals contracts[202] - Construction gross profit significantly increased by 191.5%, driven by increased pricing to offset higher input costs, despite a net loss from lumber derivatives[203] - Investments gross loss relates to depreciation expense from manufacturing facilities[204] Operating Expenses Operating Expenses (in thousands) | Expense Type | Q1 2022 | Q1 2021 | Change | % Change | | :------------------------------------- | :------ | :------ | :----- | :------- | | Selling, general and administrative | $6,788 | $5,055 | $1,733 | 34.3% | | Amortization of intangible assets | $430 | $438 | $(8) | (1.8)% | | Gain on sale of MD Office Solutions | $0 | $(847) | $847 | (100.0)% | | Total operating expenses | $7,218 | $4,646 | $2,572 | 55.4% | - Consolidated selling, general and administrative (SG&A) expenses increased by $1.7 million (34.3%), primarily due to increased headcount and consulting in Construction, corporate administrative expenses, legal expenses, and outside services[206] - SG&A as a percentage of revenue increased to 27.1% in Q1 2022 from 22.6% in Q1 2021[206] Total Other Income (Expense) Total Other Income (Expense) (in thousands) | Item | Q1 2022 | Q1 2021 | | :------------------------------------- | :------ | :------ | | Other (expenses) income, net | $(6) | $35 | | Interest expense, net | $(190) | $(272) | | Gain on forgiveness of PPP loans | $0 | $1,220 | | Total other (expense) income | $(196) | $983 | - Total other (expense) income shifted from a gain of $983 thousand in Q1 2021 to an expense of $(196) thousand in Q1 2022, primarily due to the absence of a $1.22 million gain on PPP loan forgiveness[207] - Interest expense, net, decreased from $(272) thousand in Q1 2021 to $(190) thousand in Q1 2022[208] Income Tax Expense - Income tax expense for continuing operations was $950 thousand in Q1 2022, a significant increase from $2 thousand in Q1 2021[209] - The increase in tax expense is mainly due to an ownership change under IRC Section 382 in January 2022, requiring an additional valuation allowance on net operating losses[139][209] Income from Discontinued Operations - There was no income from discontinued operations in Q1 2022, compared to $6.02 million in Q1 2021, following the sale of DMS Health Technologies, Inc. in March 2021[12][210] Liquidity and Capital Resources Cash Flow Activity (in thousands) | Cash Flow Activity | Q1 2022 | Q1 2021 | | :------------------------------------- | :------ | :------ | | Net cash used in operating activities | $(636) | $(2,232) | | Net cash (used in) provided by investing activities | $(1,310) | $18,315 | | Net cash provided by (used in) financing activities | $12,550 | $(6,180) | - Net cash used in operating activities decreased by $1.6 million in Q1 2022, primarily due to positive working capital changes[212] - Net cash used in investing activities was $1.3 million in Q1 2022, a $19.6 million decrease from Q1 2021, which included $18.8 million from the sale of discontinued operations[213] - Net cash provided by financing activities increased by $18.7 million in Q1 2022, driven by $12.7 million net proceeds from the 2022 Public Offering[214] - As of March 31, 2022, the Company had $15.0 million in cash and cash equivalents, and $13.3 million in short-term debt outstanding[217][219] - The Company was not in compliance with SNB Loan Agreement covenants for its Healthcare division as of March 31, 2022, raising substantial doubt about its ability to continue as a going concern without waivers or restructuring[219][220] - The Construction division had $5.0 million outstanding on Gerber revolvers, with waivers obtained for prior covenant non-compliance covering the period ending June 30, 2022[221] - The 2022 Public Offering generated net proceeds of $12.7 million, significantly boosting liquidity[224][227] - The Company entered into a Guaranty Agreement on April 1, 2022, to guarantee KBS's obligations up to $4.4 million under a subcontract[251] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section states that there are no applicable quantitative and qualitative disclosures about market risk for the reporting period ITEM 4. CONTROLS AND PROCEDURES This section details the Company's disclosure controls and procedures, identifying a material weakness in internal control over financial reporting due to insufficient accounting resources and imprecise management review controls. It outlines management's plan to remediate this weakness Disclosure Controls and Procedures - The Company's disclosure controls and procedures were deemed not effective as of March 31, 2022, due to a material weakness in internal control over financial reporting[254] - The material weakness stems from insufficient accounting resources to address complex accounting matters and ensure timely completion of financial reporting, including sufficiently precise management review controls[256] - Despite the material weakness, no material misstatements were identified in the financial statements, and no material changes to previously released financial results occurred[256] Plan for Remediation of the Material Weakness in Internal Control Over Financial Reporting - Management plans to increase the skills and experience of its accounting and financial reporting staff through continuing education and public company accounting training[259] - Additional outside financial consultants may be retained for technical accounting reviews when necessary[259] - Controls will be added to enhance the precision of management review controls, including the review of key inputs in the preparation and review process[260] Changes in Internal Control over Financial Reporting - No changes in internal control over financial reporting occurred during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting, other than those related to the remediation plan for the identified material weakness[261] PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS This section refers to Note 9 of the condensed consolidated financial statements for a summary of legal proceedings - Information regarding legal proceedings is summarized in Note 9. Commitments and Contingencies of the condensed consolidated financial statements[263] ITEM 1A. RISK FACTORS This section highlights risks related to the Company's common stock and preferred stock, specifically the potential for delisting from the Nasdaq Global Market if compliance with listing standards is not maintained, which could harm the business and stock liquidity - The Company's common stock could be delisted from the Nasdaq Global Market if it fails to satisfy continued listing standards, such as maintaining a minimum $1.00 bid price[265][266] - As of May 23, 2022, the common stock had closed below $1.00 per share for twelve consecutive trading days, potentially leading to a Nasdaq notice and a 180-day period to regain compliance[266] - Delisting could harm the business, trading price, ability to raise capital, and liquidity of the common stock[265][266] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section states that there were no unregistered sales of equity securities or use of proceeds to report for the period ITEM 3. DEFAULTS UPON SENIOR SECURITIES This section indicates that there were no defaults upon senior securities to report for the period ITEM 4. MINE SAFETY DISCLOSURES This section states that mine safety disclosures are not applicable to the Company ITEM 5. OTHER INFORMATION This section indicates that there is no other information to report for the period ITEM 6. EXHIBITS This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including employment agreements, separation agreements, warrant forms, and certifications - Exhibits include employment agreements, separation agreements, forms of pre-funded and common stock purchase warrants, and certifications by the Principal Executive and Financial Officers[272]