markdown Part I [Business](index=5&type=section&id=Item%201.%20Business) Star Equity Holdings operates as a diversified holding company across healthcare, building & construction, and real estate, with its Mobile Healthcare business classified as discontinued operations - Star Equity Holdings operates as a **diversified holding company** with three main divisions: Digirad Health, Star Building & Construction, and Star Real Estate & Investments[15](index=15&type=chunk)[16](index=16&type=chunk) Revenue Contribution by Segment (Continuing Operations) | Segment | 2020 Revenue % | 2019 Revenue % | | :--- | :--- | :--- | | **Healthcare** | **63.0%** | **84.5%** | | Diagnostic Services | 50.3% | 65.5% | | Diagnostic Imaging | 12.7% | 19.0% | | **Building & Construction** | **36.9%** | **15.4%** | | **Real Estate & Investments** | **0.1%** | **0.1%** | - The company's strategy focuses on **organic growth**, new service introduction, and **value-driven acquisitions** of complementary businesses[21](index=21&type=chunk)[23](index=23&type=chunk) - On October 30, 2020, the company agreed to sell its Mobile Healthcare business (DMS Health), now classified as **discontinued operations**[78](index=78&type=chunk) [Risk Factors](index=17&type=section&id=Item%201A.%20Risk%20Factors) The company faces diverse risks including business integration, IT reliance, reimbursement declines, supply chain vulnerabilities, debt covenants, stock volatility, and a material weakness in internal controls [Risks Related to Our Business and Industry](index=19&type=section&id=Risks%20Related%20to%20Our%20Business%20and%20Industry) Business and industry risks include acquisition integration failures, IT threats, healthcare reimbursement declines, supply chain vulnerabilities, and ongoing COVID-19 impacts - The company's conversion to a diversified holding company and related acquisitions involve **unknown risks** that could harm the business[88](index=88&type=chunk) - Revenues may decline due to **reductions in Medicare and Medicaid reimbursement rates**, directly impacting healthcare customer viability[95](index=95&type=chunk)[96](index=96&type=chunk) - Operating results in both healthcare and construction are susceptible to changes in **costs and availability of key supplies** like radiopharmaceuticals and lumber[100](index=100&type=chunk)[101](index=101&type=chunk)[102](index=102&type=chunk) - The **COVID-19 pandemic** has disrupted business and could materially adversely affect future operations and financial results[127](index=127&type=chunk) [Risks Related to our Indebtedness](index=28&type=section&id=Risks%20Related%20to%20our%20Indebtedness) Indebtedness risks include restrictive loan covenants, potential default from breaches, pledged assets, and the risk of PPP loans not being fully forgiven - The company's loan agreements contain **restrictive covenants** limiting its ability to incur debt, sell assets, and pay dividends, restricting operating flexibility[141](index=141&type=chunk)[142](index=142&type=chunk) - Substantially all company assets are **pledged as collateral** for its debt, risking seizure upon default[149](index=149&type=chunk) - Subsidiaries KBS and EBGL were **not in compliance with financial covenants** as of December 31, 2020, but obtained waivers[150](index=150&type=chunk) - The company received **$6.7 million in PPP loans** and faces the risk of non-forgiveness or impermissible application[145](index=145&type=chunk)[148](index=148&type=chunk) [Risks Related to our Common Stock and our Company Preferred Stock](index=31&type=section&id=Risks%20Related%20to%20our%20Common%20Stock%20and%20our%20Company%20Preferred%20Stock) Risks include volatile stock prices, common stock dividend restrictions due to preferred stock arrears, potential preferred stockholder board election rights, and an anti-takeover "Protective Amendment" impacting liquidity - Payment of **common stock dividends is prohibited** until full accumulated dividends on Company Preferred Stock are paid, with none paid to date[158](index=158&type=chunk) - If preferred stock dividends are in arrears for **six or more consecutive quarters**, preferred stockholders can elect two additional directors[155](index=155&type=chunk) - As a **"smaller reporting company,"** scaled disclosure requirements may challenge investor analysis of prospects[164](index=164&type=chunk) - A **"Protective Amendment"** in the certificate of incorporation, intended to preserve NOLs, restricts stock transfers and may have an anti-takeover effect[175](index=175&type=chunk)[177](index=177&type=chunk)[178](index=178&type=chunk) [Risks Related to Our Material Weakness and Restatements](index=35&type=section&id=Risks%20Related%20to%20Our%20Material%20Weakness%20and%20Restatements) A material weakness in internal control over financial reporting, related to debt agreement review and GAAP application, led to financial statement restatements and risks future misstatements - A **material weakness** was identified in internal controls over financial reporting regarding new debt agreement review and GAAP application[182](index=182&type=chunk)[585](index=585&type=chunk) - This material weakness resulted in the **restatement of financial statements** for periods after March 31, 2019[182](index=182&type=chunk) [Unresolved Staff Comments](index=35&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company has no unresolved staff comments from the SEC - None[183](index=183&type=chunk) [Properties](index=36&type=section&id=Item%202.%20Properties) The company's principal executive offices are in Old Greenwich, CT, with leased operational facilities in Poway, CA, and owned manufacturing facilities in Maine - The company's principal executive offices are in **Old Greenwich, CT**. Key operational facilities include a leased **21,300 sq ft facility** in Poway, CA for Diagnostic Imaging, and **three owned manufacturing facilities** in Maine for the Building & Construction segment[184](index=184&type=chunk) [Legal Proceedings](index=36&type=section&id=Item%203.%20Legal%20Proceedings) Information regarding legal proceedings is provided in Note 11 of the consolidated financial statements - For a summary of legal proceedings, refer to **Note 11, Commitments and Contingencies**, within the notes to the accompanying consolidated financial statements[186](index=186&type=chunk) [Mine Safety Disclosures](index=36&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[187](index=187&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=37&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common and preferred stock trade on NASDAQ, with a stock repurchase program approved in 2018 under which no shares have been repurchased - Common stock and preferred stock are traded on the **NASDAQ Global Market** under symbols **"STRR"** and **"STRRP"**[190](index=190&type=chunk) - A stock repurchase program for up to **200,000 shares** of common stock was approved in October 2018, with no repurchases as of December 31, 2020[195](index=195&type=chunk) [Selected Consolidated Financial Data](index=37&type=section&id=Item%206.%20Selected%20Consolidated%20Financial%20Data) This item is not applicable - Not applicable[194](index=194&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=38&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In 2020, revenues from continuing operations increased to $78.2 million, driven by the Building & Construction segment, while net loss widened to $5.3 million due to increased expenses and amortization 2020 Financial Highlights (Continuing Operations) | Metric | 2020 | 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $78.2 million | $72.9 million | +$5.2 million | +7.2% | | Gross Profit | $14.0 million | $17.2 million | -$3.2 million | -18.5% | | Operating Expenses | $21.2 million | $19.1 million | +$2.1 million | +11.1% | | Net Loss | ($5.3 million) | ($2.7 million) | ($2.5 million) | +92.9% | - The **2020 revenue increase** was primarily due to a **$17.6 million** contribution from the Building and Construction segment, offsetting declines in Diagnostic Services and Imaging due to COVID-19[219](index=219&type=chunk) - The company's liquidity was strengthened by a May 2020 public offering of common stock and warrants, raising approximately **$5.2 million in net proceeds**[251](index=251&type=chunk)[253](index=253&type=chunk) - Despite a net loss and significant short-term debt, management believes the company has **sufficient liquidity** to continue as a going concern for the next 12 months, supported by cash, credit, and Executive Chairman's support[245](index=245&type=chunk)[250](index=250&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=55&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is exposed to interest rate risk from $15.8 million in variable-rate debt, where a 100 basis point increase would raise annual interest expense by approximately $0.2 million - The company's primary market risk is **interest rate risk** from its variable-rate debt; a **100 basis point increase** would raise annual interest expense by approximately **$0.2 million** based on **$15.8 million** variable-rate debt outstanding at year-end 2020[309](index=309&type=chunk) [Financial Statements and Supplementary Data](index=56&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) The 2020 consolidated financial statements report a $6.5 million net loss on $78.2 million total revenues, with the auditor's report noting a 2019 restatement and critical audit matters regarding goodwill valuation and going concern Consolidated Statement of Operations Highlights (Year Ended Dec 31) | Metric (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Total Revenues | $78,163 | $72,934 | | Gross Profit | $13,987 | $17,160 | | Loss from Continuing Operations | ($5,285) | ($2,740) | | Loss from Discontinued Operations | ($1,172) | ($1,887) | | **Net Loss** | **($6,457)** | **($4,627)** | Consolidated Balance Sheet Highlights (As of Dec 31) | Metric (in thousands) | 2020 | 2019 (Restated) | | :--- | :--- | :--- | | Total Current Assets | $48,936 | $29,548 | | Total Assets | $88,293 | $90,560 | | Total Current Liabilities | $42,726 | $44,476 | | Total Liabilities | $48,364 | $49,863 | | Total Stockholders' Equity | $18,429 | $21,095 | - The independent auditor's report identifies two **critical audit matters**: goodwill valuation and the company's going concern assessment[319](index=319&type=chunk)[321](index=321&type=chunk) - The **2019 financial statements were restated** to correct a material misstatement in debt classification, reclassifying **$17.0 million** of the SNB revolver balance from long-term to short-term debt[314](index=314&type=chunk)[341](index=341&type=chunk)[344](index=344&type=chunk) [Changes in and Disagreements with Accountants on Accounting and Financial Disclosures](index=112&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosures) The company reported no disagreements with its accountants on accounting principles, financial disclosure, or auditing scope - None[580](index=580&type=chunk) [Controls and Procedures](index=112&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls were ineffective as of December 31, 2020, due to a material weakness in internal control over financial reporting, leading to financial statement restatements - Management concluded that **disclosure controls and procedures were not effective** as of December 31, 2020[582](index=582&type=chunk) - A **material weakness** was identified in controls over new debt agreement review and GAAP application, which resulted in material debt classification errors[585](index=585&type=chunk) - The company has developed a **remediation plan** including a more detailed review of debt contracts and proper GAAP application[586](index=586&type=chunk) [Other Information](index=113&type=section&id=Item%209B.%20Other%20Information) There is no other information to report for this item - None[589](index=589&type=chunk) Part III [Directors, Executive Officers, and Corporate Governance](index=114&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%2C%20and%20Corporate%20Governance) The Board of Directors consists of five members, including the Executive Chairman, with an established Code of Business Ethics and an Audit Committee composed of independent directors - The Board of Directors consists of **five members**, including Jeffrey E. Eberwein (Executive Chairman) and Mitchell I. Quain (Lead Independent Director)[591](index=591&type=chunk)[592](index=592&type=chunk) - The company has adopted a **Code of Business Ethics and Conduct** applicable to all officers, directors, and employees[614](index=614&type=chunk) - The Audit Committee is composed of **three independent directors**, with John W. Sayward qualifying as an **"audit committee financial expert"**[616](index=616&type=chunk)[617](index=617&type=chunk) [Executive Compensation](index=119&type=section&id=Item%2011.%20Executive%20Compensation) In 2020, named executive officers received base salaries and discretionary bonuses, with no new equity awards, while non-employee directors received retainers in RSUs 2020 Summary Compensation Table | Name and Principal Position | Year | Salary ($) | Bonus ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | Matthew G. Molchan (President, CEO of Digirad Health) | 2020 | $405,619 | — | $409,119 | | David J. Noble (CFO & COO) | 2020 | $293,077 | $150,000 | $446,577 | | Martin B. Shirley (President, Diagnostic Imaging) | 2020 | $254,000 | $65,000 | $322,500 | - Due to COVID-19, the 2020 Annual Incentive Plan was **100% discretionary**, with cash bonuses awarded to Mr. Noble (**$150,000**) and Mr. Shirley (**$65,000**)[626](index=626&type=chunk)[628](index=628&type=chunk) - **No new stock awards** were granted to named executive officers in 2020[629](index=629&type=chunk) - In April 2020, non-employee directors elected to receive annual retainer payments in **company RSUs** instead of cash[656](index=656&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=126&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) As of February 22, 2021, no beneficial owners held 5% or more of common stock, while executive officers and directors as a group owned 8.21%, with 368,334 securities available for future issuance under equity plans - As of February 22, 2021, there were **no known beneficial owners of 5% or more** of the company's common stock[663](index=663&type=chunk) - All executive officers and directors as a group beneficially owned **410,759 shares**, representing **8.21%** of the outstanding common stock[663](index=663&type=chunk) - As of December 31, 2020, **368,334 securities** remained available for future issuance under the company's equity compensation plans[666](index=666&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=128&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) The company has multiple related-party transactions with Executive Chairman Jeffrey E. Eberwein and his controlled entities, including personal guarantees, $2.3 million in outstanding promissory notes, and a preferred stock private placement, with a majority of the Board deemed independent - Executive Chairman Jeffrey E. Eberwein has provided **personal guarantees** on the company's credit facilities with Sterling National Bank (SNB), Gerber, and Premier[667](index=667&type=chunk)[669](index=669&type=chunk)[671](index=671&type=chunk) - The company has outstanding related-party promissory notes payable to entities controlled by Mr. Eberwein, totaling approximately **$2.3 million** as of December 31, 2020[549](index=549&type=chunk)[550](index=550&type=chunk)[551](index=551&type=chunk) - Immediately prior to the ATRM Merger, the company issued **300,000 shares** of Company Preferred Stock to Lone Star Value Investors, LP (LSVI) in a private placement for **$3.0 million**[678](index=678&type=chunk) - The Board has determined that a **majority of its directors** are independent under Nasdaq listing standards[699](index=699&type=chunk) [Principal Accounting Fees and Services](index=133&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) BDO USA, LLP served as the independent auditor, with aggregate fees of approximately $1.04 million in 2020 and $0.93 million in 2019, all pre-approved by the Audit Committee Accounting Fees Paid to BDO USA, LLP (in thousands) | Type of Fee | 2020 | 2019 | | :--- | :--- | :--- | | Audit Fees | $733 | $786 | | Tax Fees | $311 | $139 | | **Total** | **$1,044** | **$925** | - All audit and non-audit services provided by BDO were **pre-approved by the Audit Committee**, which ensured auditor independence[707](index=707&type=chunk)[709](index=709&type=chunk) Part IV [Exhibits, Financial Statement Schedules](index=135&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists all financial statements, schedules, and exhibits filed with the Form 10-K report, with financial statements included in Item 8 - This item lists all financial statements, schedules, and exhibits filed with the report; the financial statements are located in **Item 8**[712](index=712&type=chunk) [Form 10-K Summary](index=143&type=section&id=Item%2016.%20Form%2010-K%20Summary) No summary is provided for the Form 10-K in this section - None[723](index=723&type=chunk)
Star Equity (STRR) - 2020 Q4 - Annual Report