Star Equity (STRR) - 2021 Q4 - Annual Report

Part I Business Star Equity Holdings is a diversified holding company operating in Healthcare, Construction, and Investments - Star Equity operates as a multi-industry holding company with divisions in Healthcare (Digirad Health), Construction (KBS and EBGL), and Investments[15][16] - The company's strategy involves organic growth, introducing new services, acquiring complementary businesses, and focusing on capital allocation at the holding company level[21][22][24] - In 2021, the company completed the sale of its DMS Health Technologies Inc. subsidiary (Mobile Healthcare segment) and its MD Office Solutions (MDOS) subsidiary[69][70][71] Revenue Contribution by Division (Continuing Operations) | Division | 2021 Revenue % | 2020 Revenue % | | :--- | :--- | :--- | | Healthcare | 55.0% | 63.0% | | - Diagnostic Services | 41.1% | 50.3% | | - Diagnostic Imaging | 13.9% | 12.7% | | Construction | 45.0% | 36.9% | Business Segments The company operates three distinct business segments: Healthcare, Construction, and Investments - The Healthcare division, operating as Digirad Health, provides nuclear medical imaging products and services, split into Diagnostic Services (imaging services using proprietary cameras) and Diagnostic Imaging (manufacturing and sales of cameras)[17] - The Construction division comprises KBS Builders, Inc. (modular buildings in New England) and EBGL (structural wall panels and building materials in the Upper Midwest)[18] - The Investments division holds corporate-owned real estate, including three manufacturing facilities in Maine leased to KBS, and other minority investments[19][34] Competition The company faces competition in Healthcare from local and large medical device providers, and in Construction from regional and retail suppliers - In Diagnostic Services, the company competes with smaller local and regional providers. In Diagnostic Imaging, it competes with large medical device manufacturers like GE Healthcare, Siemens Healthineers, and Philips, which have greater brand recognition and resources[46][47] - In Construction, KBS competes with regional modular manufacturers in New England and Pennsylvania, while EBGL competes with local lumber yards, regional suppliers, and large retail stores like Home Depot and Lowe's[48][49] Intellectual Property & Manufacturing The company holds Healthcare patents, faces wood price sensitivity in Construction, and adheres to FDA regulations for Diagnostic Imaging - The company holds 10 non-expired U.S. patents related to its solid-state radiation detectors and scan technology, expiring between 2022 and 2030. It holds no patents in the Construction business[52][53] - The primary raw materials for the Construction division are dimensional lumber (spruce-pine-fir) and sheathing (OSB and plywood), making the business sensitive to wood commodity price fluctuations[57] - Diagnostic Imaging manufacturing is subject to FDA Quality System Regulations and is certified to EN ISO 13485:2016. The company has received FDA 510(k) clearance for its nuclear imaging camera product line[59] Government Regulation & Human Capital The Healthcare business is subject to extensive government regulations, including FDA medical device classifications, and the company employs 458 individuals - The Healthcare business is subject to extensive regulation, including Anti-Kickback laws, the Stark Law, HIPAA, and FDA medical device regulations. The company's cameras are classified as Class II medical devices[66][67] - As of December 31, 2021, the company had 458 employees, with 202 in clinical health-related positions and 105 in manufacturing[68] Risk Factors The company faces risks from recurring losses, operational disruptions, debt covenants, and internal control weaknesses - The company has a history of annual net losses attributable to common stockholders, reporting a loss of $4.9 million in 2021 and $8.4 million in 2020[88] - Business operations are exposed to risks from health pandemics (like COVID-19), wars, and inflation, which could disrupt operations, supply chains, and financial results[94] - Loan agreements contain restrictive covenants, and substantially all company assets are pledged as security. As of December 31, 2021, the KBS subsidiary was not in compliance with financial covenants under its loan agreement but obtained a waiver[140][144][145] - A material weakness in internal control over financial reporting was identified, related to not having a sufficient complement of accounting resources to address complex accounting matters and ensure timely reporting[87][170] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - Not applicable[171] Properties The company's principal executive offices are in Old Greenwich, CT, with Healthcare operations in Poway, CA, and Investments owning manufacturing facilities leased to Construction - The principal executive offices are leased in Old Greenwich, CT[172] - The Investments division owns three manufacturing facilities in Maine (South Paris, Oxford, and Waterford) which are leased back to the KBS construction business[174] - The Diagnostic Imaging operations are housed in a 21,300 sq. ft. leased facility in Poway, CA, and the Diagnostic Services segment leases approximately 24 small hub locations across the U.S[173] Legal Proceedings Information regarding legal proceedings is detailed in Note 9 of the consolidated financial statements - For a summary of legal proceedings, refer to Note 9, Commitments and Contingencies, within the notes to the consolidated financial statements[177] Mine Safety Disclosures This section is not applicable to the company's operations - Not applicable[178] 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 no shares repurchased under its 2018 program as of December 31, 2021 - Common stock and preferred stock trade on the NASDAQ Global Market under symbols "STRR" and "STRRP", respectively[181] - A stock repurchase program approved in October 2018 allows for the repurchase of up to 200,000 shares of common stock. As of December 31, 2021, no shares had been purchased under this program[183][186] Management's Discussion and Analysis of Financial Condition and Results of Operations Revenues increased significantly in 2021, but rising costs led to wider losses and raised going concern doubts 2021 Financial Highlights The company saw significant revenue growth in 2021, driven by Construction and Healthcare, but gross profit growth was modest - The revenue increase was driven by a $19.1 million (66.2%) increase in the Construction division and a $9.3 million (18.9%) increase in the Healthcare division, reflecting recovery from the COVID-19 pandemic[198][203] 2021 vs. 2020 Financial Performance | Metric | 2021 | 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $106.6 million | $78.2 million | +36.3% | | Gross Profit | $15.2 million | $14.0 million | +9.0% | | Loss from Continuing Operations | ($8.9 million) | ($5.3 million) | +69.0% | | EBITDA from Continuing Operations | ($4.5 million) | $0.07 million | N/A | Results of Operations Healthcare saw strong revenue and gross profit growth, while Construction's gross profit declined due to rising raw material costs - The decrease in Construction gross profit was predominantly due to the adverse impact of a rapid and historic rise in raw materials costs[218] - Operating expenses increased by $5.6 million, driven by a $4.0 million increase in SG&A and a $3.4 million goodwill impairment charge related to the KBS reporting unit, partially offset by a gain on the sale of MDOS[204][220][222] Revenue by Segment (in thousands) | Segment | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Diagnostic Services | $43,765 | $39,267 | 11.5% | | Diagnostic Imaging | $14,791 | $9,965 | 48.4% | | Total Healthcare | $58,556 | $49,232 | 18.9% | | Construction | $48,003 | $28,879 | 66.2% | Gross Profit by Segment (in thousands) | Segment | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Diagnostic Services | $7,364 | $6,758 | 9.0% | | Diagnostic Imaging | $5,095 | $3,391 | 50.3% | | Total Healthcare | $12,459 | $10,149 | 22.8% | | Construction | $3,008 | $4,047 | (25.7)% | Liquidity and Capital Resources The company faces going concern doubts due to recurring losses and a forecasted loan covenant breach, despite a recent capital raise - The company has incurred recurring losses from continuing operations ($8.9 million in 2021, $5.3 million in 2020) and is forecasting a covenant breach on its SNB Loan Agreement, which raises substantial doubt about its ability to continue as a going concern[233][237][327] - In January 2022, the company closed an underwritten public offering, raising net proceeds of $12.8 million to be used for growth initiatives, potential acquisitions, and working capital[239][242][243] - As of December 31, 2021, the company had $12.9 million in outstanding debt, all of which is classified as short-term. This includes $7.0 million under the SNB facility and $4.8 million under Construction division revolvers[234][235] Cash Flow Summary (in thousands) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net Cash Used in Operating | $(6,450) | $(4,953) | | Net Cash Provided by (Used in) Investing | $17,802 | $(1,332) | | Net Cash (Used in) Provided by Financing | $(9,975) | $8,060 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure is to interest rate fluctuations, as its debt obligations under its credit facilities are subject to variable rates - The company is exposed to interest rate risk as all borrowings under its Company Loan Agreements are at variable rates[295] - A 100 basis point increase in the underlying interest rate would result in approximately $0.1 million of additional annual interest expense, based on borrowings outstanding at December 31, 2021[294] Financial Statements and Supplementary Data Audited financial statements are presented, with the auditor highlighting going concern uncertainty and goodwill valuation - The independent auditor's report highlights a "Going Concern Uncertainty" due to the company's history of losses and a forecasted potential loan covenant breach[298] - The valuation of the $6.0 million goodwill balance was identified as a Critical Audit Matter, particularly for the construction segment, due to significant management estimates regarding future cash flows and market multiples[303][304] Consolidated Statement of Operations Summary (in thousands) | Line Item | 2021 | 2020 | | :--- | :--- | :--- | | Total Revenues | $106,559 | $78,163 | | Loss from Continuing Operations | $(8,931) | $(5,285) | | Income (Loss) from Discontinued Operations | $5,948 | $(1,172) | | Net Loss | $(2,983) | $(6,457) | | Net Loss Attributable to Common Stockholders | $(4,889) | $(8,373) | Consolidated Balance Sheet Summary (in thousands) | Line Item | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Current Assets | $31,863 | $48,936 | | Goodwill | $6,046 | $9,542 | | Total Assets | $68,052 | $89,459 | | Total Current Liabilities | $27,821 | $42,993 | | Total Liabilities | $32,310 | $49,530 | | Total Stockholders' Equity | $16,754 | $18,429 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures The company reports no changes in or disagreements with its accountants on accounting and financial disclosures - None[511] Controls and Procedures Management concluded that the company's disclosure controls were ineffective due to a material weakness in accounting resources, with a remediation plan outlined - Management concluded that disclosure controls and procedures were not effective as of December 31, 2021[513] - A material weakness was identified in internal control over financial reporting because the company does not have a sufficient complement of accounting resources to address complex accounting matters and allow for timely financial reporting[516] - The remediation plan includes increasing the skills of the accounting staff, investing in training, and potentially retaining outside consultants[520] Other Information The company reports no other information in this section - None[523] Disclosure Regarding Foreign Jurisdictions That Prevent Inspections This section is not applicable to the company - Not Applicable[524] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 proxy statement, and the company has adopted a Code of Business Ethics and Conduct - Information required by this item is incorporated by reference from the company's 2022 Proxy Statement[526] - The company has adopted a Code of Business Ethics and Conduct that applies to all officers, directors, and employees, qualifying as a "code of ethics" under Section 406 of the Sarbanes-Oxley Act[527] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's definitive proxy statement for its 2022 annual meeting of shareholders - Information required by this item is incorporated by reference from the company's 2022 Proxy Statement[528] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information concerning security ownership and related matters is incorporated by reference from the company's definitive proxy statement for its 2022 annual meeting of shareholders - Information required by this item is incorporated by reference from the company's 2022 Proxy Statement[529] Certain Relationships and Related Transactions, and Director Independence Information covering related party transactions and director independence is incorporated by reference from the company's definitive proxy statement for its 2022 annual meeting of shareholders - Information required by this item is incorporated by reference from the company's 2022 Proxy Statement[530] Principal Accounting Fees and Services Information detailing fees paid to the principal accountant, BDO USA, LLP, is incorporated by reference from the "Audit Matters" section of the company's definitive proxy statement for its 2022 annual meeting of shareholders - Information regarding principal accounting fees and services is incorporated by reference from the 2022 Proxy Statement[531] Part IV Exhibits, Financial Statement Schedules This section lists the documents filed as part of the Form 10-K report, including consolidated financial statements and an index of all exhibits - This section lists the financial statements filed as part of the report, which are located in Item 8[534] - An index of all exhibits required by Item 601 of Regulation S-K is provided, referencing various agreements, corporate documents, and certifications[535] Form 10-K Summary The company has not provided a summary in this section of the Form 10-K - None[550]