Star Equity (STRR) - 2021 Q1 - Quarterly Report

markdown [Important Information Regarding Forward-Looking Statements](index=4&type=section&id=IMPORTANT%20INFORMATION%20REGARDING%20FORWARD-LOOKING%20STATEMENTS) This section highlights forward-looking statements, subject to risks and uncertainties, which could cause actual results to differ materially - This section highlights that the report contains forward-looking statements based on current beliefs, expectations, and projections, particularly in '**Item 2 — Management's Discussion and Analysis of Financial Condition and Results of Operations**'. These statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially, as described in '**Item 1A — Risk Factors**'[7](index=7&type=chunk) [Part I. Financial Information](index=5&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This part presents the company's unaudited consolidated financial statements and management's discussion and analysis [Item 1. Financial Statements (Unaudited)](index=5&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS) Presents unaudited consolidated financial statements for Q1 2021, including operations, balance sheets, cash flows, and equity changes [Consolidated Statements of Operations](index=5&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20OPERATIONS) The company reported significant improvement in net income and EPS for Q1 2021, driven by discontinued operations and Construction division growth Consolidated Statements of Operations (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change (2021 vs 2020) | % Change | | :-------------------- | :-------------------------------- | :-------------------------------- | :-------------------- | :------- | | **Revenues:** | | | | | | Healthcare | $13,307 | $13,675 | $(368) | (2.7)% | | Construction | $9,047 | $5,484 | $3,563 | 65.0% | | Investments | $— | $31 | $(31) | (100.0)% | | Total revenues | $22,354 | $19,190 | $3,164 | 16.5% | | **Gross profit** | $3,077 | $3,243 | $(166) | (5.1)% | | **Loss from operations** | $(1,569) | $(2,196) | $627 | (28.6)% | | **Net income (loss)** | $5,432 | $(2,953) | $8,385 | 283.9% | | **Net income (loss) attributable to common shareholders** | $4,953 | $(3,437) | $8,390 | 244.1% | | **Net income (loss) per share—basic and diluted** | $1.10 | $(1.44) | $2.54 | 176.4% | | **Net income (loss) per share, attributable to common shareholders—basic and diluted** | $1.01 | $(1.67) | $2.68 | 160.5% | [Consolidated Balance Sheets](index=6&type=section&id=CONSOLIDATED%20BALANCE%20SHEETS) The balance sheet reflects the DMS Health sale, with increased cash, decreased total assets and liabilities, and improved stockholders' equity Consolidated Balance Sheets (in thousands) | Metric (in thousands) | March 31, 2021 | December 31, 2020 | Change (2021 vs 2020) | % Change | | :-------------------- | :------------- | :---------------- | :-------------------- | :------- | | **Assets:** | | | | | | Cash and cash equivalents | $13,175 | $3,225 | $9,950 | 308.5% | | Assets held for sale | $— | $20,756 | $(20,756) | (100.0)% | | Total current assets | $40,805 | $48,936 | $(8,131) | (16.6)% | | Total assets | $81,391 | $88,293 | $(6,902) | (7.8)% | | **Liabilities:** | | | | | | Short-term debt and current portion of long-term debt | $12,548 | $18,362 | $(5,814) | (31.7)% | | Liabilities held for sale | $— | $7,871 | $(7,871) | (100.0)% | | Total current liabilities | $30,551 | $42,726 | $(12,175) | (28.5)% | | Total liabilities | $35,411 | $48,364 | $(12,953) | (26.8)% | | **Stockholders' Equity:** | | | | | | Total stockholders' equity | $24,001 | $18,429 | $5,572 | 30.2% | [Consolidated Statements of Cash Flows](index=8&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20CASH%20FLOWS) Operating cash flow shifted to net use, investing activities provided significant cash from asset sales, and financing activities used more cash for debt repayment Cash Flow Activity (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change (2021 vs 2020) | | :-------------------- | :-------------------------------- | :-------------------------------- | :-------------------- | | Net cash (used in) provided by operating activities | $(2,232) | $623 | $(2,855) | | Net cash provided by (used in) investing activities | $18,315 | $(135) | $18,450 | | Net cash used in financing activities | $(6,180) | $(957) | $(5,223) | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $9,950 | $(577) | $10,527 | | Cash, cash equivalents, and restricted cash at end of period | $13,343 | $1,410 | $11,933 | - Proceeds from the sale of **discontinued operations** amounted to **$18,750 thousand** in Q1 2021, significantly boosting investing cash flow[16](index=16&type=chunk) [Consolidated Statements of Mezzanine Equity and Stockholders' Equity](index=10&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20MEZZANINE%20EQUITY%20AND%20STOCKHOLDERS'%20EQUITY) Details changes in preferred stock, common stock, paid-in capital, and accumulated deficit, showing increased equity from net income and warrant exercises Consolidated Statements of Mezzanine Equity and Stockholders' Equity (in thousands) | Metric (in thousands) | Balance at December 31, 2020 | Stock-based compensation | Accrued dividend on redeemable preferred stock | Proceeds from exercise of warrants | Net income | Balance at March 31, 2021 | | :-------------------- | :--------------------------- | :----------------------- | :--------------------------------------------- | :--------------------------------- | :--------- | :------------------------ | | Perpetual Preferred Stock | $21,500 | — | $479 | — | — | $21,979 | | Treasury Stock | $(5,728) | — | — | — | — | $(5,728) | | Additional paid-in capital | $149,143 | $131 | $(479) | $493 | — | $149,283 | | Accumulated deficit | $(124,986) | — | — | — | $5,432 | $(119,554) | | Total stockholders' equity | $18,429 | $131 | $(479) | $493 | $5,432 | $24,001 | [Notes to Consolidated Financial Statements](index=11&type=section&id=NOTES%20TO%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) These notes provide detailed disclosures on accounting policies, discontinued operations, revenue, debt, related parties, and segment information [Note 1. Basis of Presentation](index=11&type=section&id=Note%201.%20Basis%20of%20Presentation) Outlines the basis for financial statement preparation, details the DMS Health sale, COVID-19 impact, preferred stock classification, and liquidity outlook - The company completed the sale of **DMS Health Technologies, Inc. for $18.75 million in cash** on March 31, 2021, with its operations presented as discontinued[23](index=23&type=chunk) - COVID-19 impact: Healthcare division revenue decreased by **$0.4 million**, while Construction division revenue increased by **$3.6 million** for the three months ended March 31, 2021, compared to the prior year[24](index=24&type=chunk) - As of March 31, 2021, the company had **$13.3 million in cash and cash equivalents** and **$4.5 million in borrowing capacity** under its Healthcare division's credit facility. **Related party notes of $2.3 million** were paid off on April 1, 2021[33](index=33&type=chunk) [Note 2. Discontinued Operations](index=15&type=section&id=Note%202.%20Discontinued%20Operations) Details the $18.75 million sale of DMS Health, presenting its results as discontinued operations and recognizing a pre-tax gain of $5.224 million - **The DMS Sale Transaction** was completed on March 31, 2021, for **$18.75 million in cash**, leading to the classification of the Mobile Healthcare business as **discontinued operations**[54](index=54&type=chunk) Discontinued Operations Financial Summary (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Total revenues | $9,490 | $9,667 | | Gross profit | $2,517 | $1,198 | | Income (loss) from discontinued operations | $1,048 | $(409) | | Gain on sale of discontinued operations | $5,224 | $— | | Income (loss) from discontinuing operations | $6,020 | $(585) | - A pre-tax **gain of $5,224 thousand** was recognized on the disposition of DMS Health[58](index=58&type=chunk) [Note 3. Revenue](index=18&type=section&id=Note%203.%20Revenue) Details revenue recognition policies, disaggregating revenue by major source and timing across Healthcare, Construction, and Investments segments Revenue by Segment (in thousands) | Segment (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--------------------- | :-------------------------------- | :-------------------------------- | | Diagnostic Services | $10,239 | $10,814 | | Diagnostic Imaging | $3,068 | $2,861 | | Construction | $9,047 | $5,484 | | Investments | $— | $31 | | Total Revenues | $22,354 | $19,190 | Revenue by Timing of Recognition (in thousands) | Timing of Revenue Recognition (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------------------- | :-------------------------------- | :-------------------------------- | | Services and goods transferred over time | $14,460 | $12,385 | | Services and goods transferred at a point in time | $7,894 | $6,805 | | Total Revenues | $22,354 | $19,190 | - Deferred revenue for continuing operations increased from **$2,352 thousand** at December 31, 2020, to **$2,660 thousand** at March 31, 2021[77](index=77&type=chunk) [Note 4. Basic and Diluted Net Income (Loss) Per Share](index=22&type=section&id=Note%204.%20Basic%20and%20Diluted%20Net%20Income%20(Loss)%20Per%20Share) Explains EPS computation using the two-class method, showing significant improvement for common shareholders in Q1 2021 Net Income (Loss) Per Share (in thousands, except per share) | Metric (in thousands, except per share) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Net income (loss) attributable to common shareholders | $4,953 | $(3,437) | | Weighted average shares outstanding - basic and diluted | 4,916 | 2,055 | | Net income (loss) per share, attributable to common shareholders - basic and diluted | $1.01 | $(1.67) | - Antidilutive common stock equivalents, including stock options, restricted stock units, and stock warrants, totaled **959 thousand** in Q1 2021, compared to **67 thousand** in Q1 2020[82](index=82&type=chunk) [Note 5. Supplementary Balance Sheet Information](index=23&type=section&id=Note%205.%20Supplementary%20Balance%20Sheet%20Information) Provides a breakdown of inventories and property and equipment, net, as of March 31, 2021, and December 31, 2020 Inventories (in thousands) | Inventories (in thousands) | March 31, 2021 | December 31, 2020 | | :------------------------- | :------------- | :---------------- | | Raw materials | $6,170 | $5,489 | | Work-in-process | $2,879 | $2,821 | | Finished goods | $1,108 | $1,876 | | Total inventories, net | $9,838 | $9,787 | Property and Equipment (in thousands) | Property and Equipment (in thousands) | March 31, 2021 | December 31, 2020 | | :------------------------------------ | :------------- | :---------------- | | Land | $805 | $805 | | Buildings and leasehold improvements | $4,771 | $4,771 | | Machinery and equipment | $28,635 | $29,375 | | Total property and equipment, net | $9,383 | $9,762 | [Note 6. Leases](index=23&type=section&id=Note%206.%20Leases) Details operating and finance leases, including expenses, cash flow impacts, ROU assets, lease liabilities, terms, and discount rates Lease Expense (in thousands) | Lease Expense (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--------------------------- | :-------------------------------- | :-------------------------------- | | Operating lease cost | $334 | $328 | | Total finance lease cost | $127 | $148 | Lease Balances (in thousands) | Lease Balances (in thousands) | March 31, 2021 | December 31, 2020 | | :---------------------------- | :------------- | :---------------- | | Operating lease right-of-use assets, net | $2,848 | $1,769 | | Total operating lease liabilities | $2,899 | $1,839 | | Finance lease assets, net | $1,437 | $1,974 | | Total finance lease liabilities | $1,302 | $1,531 | - The weighted average remaining lease term for operating leases is **3.1 years** (**2.3 years** at Dec 31, 2020) and for finance leases is **2.7 years** (**2.8 years** at Dec 31, 2020)[87](index=87&type=chunk) [Note 7. Financial Instruments](index=25&type=section&id=Note%207.%20Financial%20Instruments) Provides information on financial instruments measured at fair value, specifically equity securities, and mentions occasional lumber derivative contracts Financial Assets Fair Value (in thousands) | Financial Assets (in thousands) | Fair Value as of March 31, 2021 | Fair Value as of December 31, 2020 | | :------------------------------ | :------------------------------ | :--------------------------------- | | Equity securities | $114 | $90 | - The company recorded a net unrealized **loss of $23 thousand** in Q1 2021 (compared to a **gain of $26 thousand** in Q1 2020) from equity securities[91](index=91&type=chunk) [Note 8. Debt](index=26&type=section&id=Note%208.%20Debt) Summarizes debt, including credit facilities, term loans, PPP notes, and related party notes, detailing balances, interest rates, and covenant compliance Debt Summary (in thousands) | Debt Type (in thousands) | March 31, 2021 Amount | March 31, 2021 Weighted Average Interest Rate | December 31, 2020 Amount | December 31, 2020 Weighted Average Interest Rate | | :----------------------- | :-------------------- | :-------------------------------------------- | :----------------------- | :--------------------------------------------- | | Total Short-term Revolving Credit Facility | $9,641 | 4.24% | $15,825 | 3.30% | | Total Short Term Debt | $606 | 5.97% | $681 | 6.13% | | Short-term Paycheck Protection Program Notes | $2,301 | 1.00% | $1,856 | 1.00% | | Short-term debt and current portion of long-term debt | $12,548 | 3.73% | $18,362 | 3.17% | | Long-term debt, net of current portion | $1,967 | 4.41% | $3,700 | 3.06% | | Total Notes Payable To Related Parties | $2,307 | 12.00% | $2,307 | 12.00% | | Total Debt | $16,822 | 4.94% | $24,369 | 3.99% | - The **Sterling Credit Facility** had **$5.0 million outstanding** and **$4.5 million additional borrowing capacity** as of March 31, 2021, with the company in compliance with covenants[98](index=98&type=chunk)[104](index=104&type=chunk) - Construction division loans (KBS, EBGL) had **outstanding revolving lines of credit of approximately $5.4 million** as of March 31, 2021. KBS and EBGL were **not in compliance with financial covenants** as of December 31, 2020, but **obtained waivers** in February 2021[106](index=106&type=chunk)[109](index=109&type=chunk)[125](index=125&type=chunk) - **All Construction division PPP Notes were forgiven in Q1 2021**, while **$3.0 million in PPP loans** for the Healthcare division remained **outstanding** as of March 31, 2021[134](index=134&type=chunk) [Note 9. Commitments and Contingencies](index=32&type=section&id=Note%209.%20Commitments%20and%20Contingencies) States the company is subject to litigation but does not expect a material adverse effect on its financial position or results of operations - The company is involved in various legal and administrative proceedings but does not anticipate a **material adverse effect** on its financial position or results of operations[135](index=135&type=chunk) [Note 10. Income Taxes](index=32&type=section&id=Note%2010.%20Income%20Taxes) Details income tax accounting, deferred tax assets and liabilities, full valuation allowance, and the impact of the CARES Act - The company maintains a **full valuation allowance** against its deferred tax assets[136](index=136&type=chunk) Income Tax Expense (in thousands) | Income Tax Expense (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Continuing operations | $2 | $27 | | Discontinued operations | $72 | $7 | - As of March 31, 2021, unrecognized tax benefits related to uncertain tax positions amounted to approximately **$2.6 million**[139](index=139&type=chunk) [Note 11. Segments](index=34&type=section&id=Note%2011.%20Segments) Provides financial results disaggregated by Diagnostic Services, Diagnostic Imaging, Construction, and Investments segments for Q1 2021 and 2020 Segment Performance (in thousands) | Segment (in thousands) | Revenue 2021 | Revenue 2020 | Gross Profit 2021 | Gross Profit 2020 | Income (Loss) from Operations 2021 | Income (Loss) from Operations 2020 | | :--------------------- | :----------- | :----------- | :---------------- | :---------------- | :--------------------------------- | :--------------------------------- | | Diagnostic Services | $10,239 | $10,814 | $1,608 | $2,005 | $859 | $59 | | Diagnostic Imaging | $3,068 | $2,861 | $990 | $869 | $(22) | $(267) | | Construction | $9,047 | $5,484 | $544 | $403 | $(1,547) | $(1,300) | | Investments | $— | $31 | $(65) | $(34) | $76 | $(54) | | Unallocated corporate and other expenses | — | — | — | — | $(935) | $(634) | | Consolidated | $22,354 | $19,190 | $3,077 | $3,243 | $(1,569) | $(2,196) | - Construction revenue increased by **65.0%** year-over-year, while Diagnostic Services revenue decreased by **5.3%**[148](index=148&type=chunk) - Diagnostic Imaging saw a **13.9% increase in gross profit**, while Diagnostic Services gross profit decreased by **19.8%**[148](index=148&type=chunk) [Note 12. Related Party Transactions](index=35&type=section&id=Note%2012.%20Related%20Party%20Transactions) Details transactions with related parties, including personal guarantees, preferred stock placements, and repayment of ATRM promissory notes - Jeffrey E. Eberwein provided personal guarantees for various company loans, including SNB, Gerber, and Premier facilities, with some guarantees being discharged in February 2021[150](index=150&type=chunk)[151](index=151&type=chunk)[152](index=152&type=chunk)[153](index=153&type=chunk) - ATRM Notes Payable, totaling **$2.3 million**, were repaid in full in April 2021 using proceeds from the DMS Sale Transaction[162](index=162&type=chunk)[163](index=163&type=chunk)[164](index=164&type=chunk)[165](index=165&type=chunk) - The company's SRE subsidiary acquired three manufacturing facilities in Maine from KBS (a wholly-owned subsidiary of ATRM) and leased them back to KBS, which are treated as intercompany transactions[167](index=167&type=chunk)[168](index=168&type=chunk)[169](index=169&type=chunk)[170](index=170&type=chunk)[171](index=171&type=chunk)[172](index=172&type=chunk) [Note 13. Perpetual Preferred Stock](index=38&type=section&id=Note%2013.%20Perpetual%20Preferred%20Stock) Describes 10% Series A Cumulative Perpetual Preferred Stock, including dividend rights, voting rights, redemption features, and cumulative dividends in arrears - Holders of Series A Preferred Stock are entitled to preferential cumulative cash dividends at **10.0% per annum** of the **$10.00 liquidation preference per share**[173](index=173&type=chunk) Cumulative Preferred Dividends in Arrears | Metric | Amount | | :-------------------- | :----- | | Cumulative preferred dividends in arrears | $3,000 | | Per-share amount of cumulative preferred dividends in arrears | $0.60 | [Note 14. Subsequent Events](index=38&type=section&id=Note%2014.%20Subsequent%20Events) States there were no subsequent events requiring disclosure after March 31, 2021 - **no subsequent events requiring disclosure** after March 31, 2021[174](index=174&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=39&type=section&id=ITEM%202.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) Management's perspective on financial condition and results for Q1 2021, discussing transformation, strategy, market conditions, segment performance, and liquidity [Overview](index=39&type=section&id=Overview) Star Equity Holdings transformed into a diversified multi-industry holding company with Healthcare, Construction, and Investments divisions - **Star Equity Holdings, Inc.** operates as a diversified holding company with Healthcare, Construction, and Investments divisions[179](index=179&type=chunk)[180](index=180&type=chunk)[181](index=181&type=chunk)[182](index=182&type=chunk) [Strategy](index=39&type=section&id=Strategy) The company's strategy focuses on capital allocation, leadership, M&A, and capital markets, aiming for organic growth and complementary acquisitions - The company's strategy involves focusing on **capital allocation**, **strategic leadership**, **mergers and acquisitions**, and **capital markets transactions**[183](index=183&type=chunk) - Growth initiatives include **organic growth** from core businesses, introduction of new services (e.g., structural wall panel line in Construction), and **acquisition of complementary businesses**[185](index=185&type=chunk)[190](index=190&type=chunk) [Current Market Conditions](index=40&type=section&id=Current%20Market%20Conditions) Q1 2021 market conditions saw reduced Healthcare imaging volume due to COVID-19, while Construction demand increased despite supply chain issues - Healthcare imaging volume was reduced due to the **COVID-19 pandemic**, but recovery is expected with vaccine rollout[188](index=188&type=chunk) - Construction demand increased due to 'nesting' at home, but faced **supply chain disruption** and rapidly increasing wood-based commodity prices[189](index=189&type=chunk) [Trends and Drivers](index=41&type=section&id=Trends%20and%20Drivers) Diagnostic services and products market faces competition and reimbursement changes, while construction benefits from offsite construction and affordable housing demand - The healthcare market faces **competition** and uncertainty from **reimbursement changes** and legislative reforms, impacting demand for diagnostic services and imaging equipment[191](index=191&type=chunk) - The construction division benefits from the growing adoption of **offsite/prefab construction**, offering benefits like shorter time to market, higher quality, and reduced waste[192](index=192&type=chunk) [Discontinued Operations](index=41&type=section&id=Discontinued%20Operations) The $18.75 million sale of DMS Health (Mobile Healthcare) on March 31, 2021, represents a strategic shift with significant financial impact - **The DMS Sale Transaction**, involving the Mobile Healthcare segment, was completed on March 31, 2021, for **$18.75 million in cash**[194](index=194&type=chunk) - The divestiture is considered a **strategic shift** with **significant impact on the company's operations and financial results**[194](index=194&type=chunk) [Business Segments](index=41&type=section&id=Business%20Segments) The company operates through Diagnostic Services, Diagnostic Imaging, Construction, and Investments segments, offering diverse products and services - Diagnostic Services provides imaging and monitoring services, including imaging systems, personnel, and logistics, primarily to cardiologists and physicians[195](index=195&type=chunk) - Diagnostic Imaging sells internally developed solid-state gamma cameras, imaging systems, and camera maintenance contracts to physician offices and hospitals[196](index=196&type=chunk) - The Construction segment, through KBS, Glenbrook, and EdgeBuilder, manufactures modular housing units, structural wall panels, and supplies building materials for residential and commercial projects[197](index=197&type=chunk) - The Investments segment holds real estate assets, including three manufacturing facilities in Maine leased to KBS[198](index=198&type=chunk) [Critical Accounting Policies and Estimates](index=43&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section refers to the Annual Report on Form 10-K for detailed discussion of critical accounting policies and estimates - The company's critical accounting policies and estimates are detailed in **Item 7 of its Annual Report on Form 10-K** for the fiscal year ended December 31, 2020[203](index=203&type=chunk) [Results of Operations](index=43&type=section&id=Results%20of%20Operations) Q1 2021 results show 16.5% revenue increase, slight gross profit decrease, improved operating loss, and significant net income from discontinued operations [Revenues](index=43&type=section&id=Revenues) Total revenues increased by 16.5% year-over-year, driven by Construction, while Healthcare revenue slightly decreased and Investments revenue ceased Revenue by Segment (in thousands) | Segment (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | % Change | | :--------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Diagnostic Services | $10,239 | $10,814 | $(575) | (5.3)% | | Diagnostic Imaging | $3,068 | $2,861 | $207 | 7.2% | | Total Healthcare Revenue | $13,307 | $13,675 | $(368) | (2.7)% | | Construction Revenue | $9,047 | $5,484 | $3,563 | 65.0% | | Investments Revenue | $— | $31 | $(31) | (100.0)% | - Construction revenue increase was predominately due to higher production levels at KBS, including **$2.7 million** from a large commercial project[207](index=207&type=chunk) [Gross Profit](index=44&type=section&id=Gross%20Profit) Overall gross profit decreased by 5.1%; Diagnostic Services gross margin declined, Diagnostic Imaging increased, and Construction gross margin decreased due to raw material prices Segment Gross Profit (in thousands) | Segment Gross Profit (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | % Change | | :---------------------------------- | :-------------------------------- | :-------------------------------- | :------- | | Diagnostic Services gross profit | $1,608 | $2,005 | (19.8)% | | Diagnostic Services gross margin | 15.7% | 18.5% | | | Diagnostic Imaging gross profit | $990 | $869 | 13.9% | | Diagnostic Imaging gross margin | 32.3% | 30.4% | | | Construction gross profit | $544 | $403 | 35.0% | | Construction gross margin | 6.0% | 7.3% | | | Investments gross loss | $(65) | $(34) | 91% | - The decrease in Construction gross margin percentage was due to the negative effect of higher raw material prices[211](index=211&type=chunk) [Operating Expenses](index=45&type=section&id=Operating%20Expenses) Total operating expenses decreased by 14.6% due to a gain on asset sale and lower amortization, partially offset by increased SG&A in Construction Operating Expense Summary (in thousands) | Operating Expense (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | % Change | | :------------------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Selling, general and administrative | $5,055 | $4,863 | $192 | 3.9% | | Amortization of intangible assets | $438 | $576 | $(138) | (24.0)% | | Gain on sale of MD Office Solutions | $(847) | $— | $(847) | (100.0)% | | Total operating expenses | $4,646 | $5,439 | $(793) | (14.6)% | - The increase in SG&A was mainly due to a **$0.3 million increase** in the Construction business from increased commissions and headcount, offset by reduced travel in Healthcare[213](index=213&type=chunk) [Total Other Income (Expense)](index=45&type=section&id=Total%20Other%20Income%20(Expense)) Total other income significantly increased to $983 thousand, primarily driven by $1.3 million in PPP loan forgiveness Other Income (Expense) (in thousands) | Other Income (Expense) (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Other income, net | $1,255 | $160 | | Interest expense, net | $(272) | $(305) | | Total other income (expense) | $983 | $(145) | - Other income, net, for Q1 2021 predominantly includes **$1.3 million from PPP loan forgiveness** for KBS and EBGL[215](index=215&type=chunk) [Income Tax Expense](index=45&type=section&id=Income%20Tax%20Expense) The company recorded a minimal income tax expense of $2 thousand from continuing operations for Q1 2021 - Income tax expense from continuing operations was **$2 thousand** for the three months ended March 31, 2021[217](index=217&type=chunk) [Income from Discontinued Operations](index=45&type=section&id=Income%20from%20Discontinued%20Operations) This section refers to Note 2 for detailed information regarding income from discontinued operations, which significantly contributed to net income - Details on income from **discontinued operations** are provided in **Note 2** of the unaudited condensed consolidated financial statements[218](index=218&type=chunk) [Liquidity and Capital Resources](index=46&type=section&id=Liquidity%20and%20Capital%20Resources) Discusses liquidity, including cash, credit facilities, and cash flow activities, highlighting the DMS Health sale impact and debt arrangements [Overview](index=46&type=section&id=Overview) The company used $2.2 million in cash for operations in Q1 2021, with $13.3 million cash and $4.5 million borrowing capacity available - The company used **$2.2 million for operations** during the three months ended March 31, 2021[219](index=219&type=chunk) - As of March 31, 2021, the company had **$13.3 million of cash, cash equivalents and restricted cash**, and **$4.5 million available** under its Sterling revolving line of credit[220](index=220&type=chunk) - Management believes the company has **sufficient liquidity and operations to support the business for the next 12 months**[224](index=224&type=chunk) [Common Stock Equity Offering](index=46&type=section&id=Common%20Stock%20Equity%20Offering) A May 2020 public offering raised $5.2 million net, primarily for construction working capital, with 1.5 million warrants remaining outstanding - A public offering of common stock and warrants in May 2020 raised approximately **$5.5 million in gross proceeds** and **$5.2 million in net proceeds**[225](index=225&type=chunk)[226](index=226&type=chunk)[227](index=227&type=chunk) - Net proceeds were primarily used to fund **working capital needs** at the construction businesses[227](index=227&type=chunk) - As of March 31, 2021, **0.9 million warrants** were exercised, and **1.5 million warrants** remained outstanding at an exercise price of **$2.25**[228](index=228&type=chunk) [Cash Flows](index=47&type=section&id=Cash%20Flows) Operating cash flow shifted to outflow, investing activities generated cash from asset disposition, and financing activities used more cash for debt repayment Cash Flow Activity (in thousands) | Cash Flow Activity (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash (used in) provided by operating activities | $(2,232) | $623 | | Net cash provided by (used in) investing activities | $18,315 | $(135) | | Net cash (used in) provided by financing activities | $(6,180) | $(957) | - The increase in investing cash flow was primarily due to **$18.75 million in proceeds** from the DMS Health disposition[231](index=231&type=chunk) - The decrease in financing cash flow was primarily due to a **$7.9 million pay down** of the SNB Credit Facility[232](index=232&type=chunk) [Sterling Credit Facility](index=47&type=section&id=Sterling%20Credit%20Facility) The $20.0 million SNB credit facility has $5.0 million outstanding and $4.5 million borrowing capacity, with the company in covenant compliance - The **SNB Credit Facility** has a maximum credit amount of **$20.0 million**, maturing in March 2024[234](index=234&type=chunk) - As of March 31, 2021, **$5.0 million was outstanding** and the company had **$4.5 million additional borrowing capacity**[222](index=222&type=chunk)[234](index=234&type=chunk) - The company was **in compliance with all covenants** under the SNB Loan Agreement as of March 31, 2021[241](index=241&type=chunk) [Construction Loan Agreements](index=48&type=section&id=Construction%20Loan%20Agreements) Construction division had $5.4 million in outstanding revolving lines and term loans, with waivers obtained for past covenant breaches but no future assurance - The Construction division had approximately **$5.4 million in outstanding revolving lines of credit and term loans** as of March 31, 2021[242](index=242&type=chunk) - KBS had **$2.7 million outstanding** under its **$4.0 million revolving credit facility** with Gerber, and EBGL had **$2.0 million outstanding** under its **$3.0 million revolving credit facility** and **$0.7 million** with Premier[242](index=242&type=chunk) - KBS and EBGL were **not in compliance with financial covenants** as of December 31, 2020, but **obtained waivers** in February 2021. Future compliance or waivers are not assured[245](index=245&type=chunk)[250](index=250&type=chunk)[260](index=260&type=chunk) [Paycheck Protection Program](index=51&type=section&id=Paycheck%20Protection%20Program) All Construction division PPP loans were forgiven in Q1 2021, while $3.0 million in Healthcare division PPP loans remained outstanding - The company received a total of **$6.7 million in PPP loans**, with **$5.5 million** for Construction and **$1.2 million** for Healthcare[262](index=262&type=chunk) - **All Construction division PPP Notes were forgiven in Q1 2021**[269](index=269&type=chunk) - As of March 31, 2021, **$3.0 million in PPP loans** for the Healthcare division remained **outstanding**[269](index=269&type=chunk) [Off-Balance Sheet Arrangements](index=52&type=section&id=Off-Balance%20Sheet%20Arrangements) Off-balance sheet arrangements primarily consist of guarantees, including for KBS's obligations under its loan agreement and a subcontract - The company guarantees amounts borrowed by certain ATRM subsidiaries from Gerber under the **KBS Loan Agreement**[270](index=270&type=chunk) - The company provided a Guaranty Agreement to Tocci Building Corporation, limiting its liability to **$2.0 million** for KBS's obligations under a subcontract[271](index=271&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=52&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) This section states that there are no applicable quantitative and qualitative disclosures about market risk for the company - **This item is not applicable** to the company[272](index=272&type=chunk) [Item 4. Controls and Procedures](index=52&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) Disclosure controls were not effective as of March 31, 2021, due to a material weakness in debt contract review and GAAP application, leading to a restatement - **Disclosure controls and procedures were not effective** as of March 31, 2021[274](index=274&type=chunk) - A **material weakness** was identified related to ineffectively designed controls over the review of debt contracts and the proper application of GAAP, which resulted in a restatement of previously issued financial statements[277](index=277&type=chunk) - A remediation plan has been developed, including a more detailed review of debt contracts and GAAP application[278](index=278&type=chunk) [Part II. Other Information](index=54&type=section&id=PART%20II.%20OTHER%20INFORMATION) This part covers legal proceedings, risk factors, equity sales, defaults, mine safety, and other disclosures [Item 1. Legal Proceedings](index=54&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) This section refers to Note 9 of the consolidated financial statements for a summary of legal proceedings, indicating no new material information beyond what is disclosed there - Legal proceedings information is summarized in **Note 9** of the unaudited consolidated financial statements[283](index=283&type=chunk) [Item 1A. Risk Factors](index=54&type=section&id=ITEM%201A.%20RISK%20FACTORS) This section directs readers to the risk factors disclosed in the company's Annual Report on Form 10-K, stating these risks have not materially changed - Risk factors are detailed in **Item 1A of the Annual Report on Form 10-K** for the fiscal year ended December 31, 2020, and have **not materially changed**[284](index=284&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=55&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS) This section states that there were no unregistered sales of equity securities or use of proceeds to report for the period - **There were no unregistered sales of equity securities or use of proceeds to report**[285](index=285&type=chunk) [Item 3. Defaults Upon Senior Securities](index=55&type=section&id=ITEM%203.%20DEFAULTS%20UPON%20SENIOR%20SECURITIES) The board has not declared a dividend on Series A Preferred Stock, resulting in a total arrearage of $3.0 million in cumulative cash dividends - The company's board of directors has **not declared a dividend** on the Series A Cumulative Perpetual Preferred Stock[286](index=286&type=chunk) Series A Preferred Stock Dividend Arrearage (in millions) | Metric | Amount | | :----- | :----- | | Total arrearage of cash dividends due on Series A Preferred Stock | $3.0 million | [Item 4. Mine Safety Disclosures](index=55&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) This section states that mine safety disclosures are not applicable to the company - **This item is not applicable** to the company[287](index=287&type=chunk) [Item 5. Other Information](index=55&type=section&id=ITEM%205.%20OTHER%20INFORMATION) This section indicates that there is no other information to report for the period - **There is no other information to report**[288](index=288&type=chunk) [Item 6. Exhibits](index=56&type=section&id=ITEM%206.%20EXHIBITS) This section lists all exhibits filed as part of the Form 10-Q, including various amendments to loan and security agreements, certifications, and XBRL-related documents - The report includes **exhibits** such as amendments to loan and security agreements (e.g., Sterling National Bank, Gerber Finance Inc.), and certifications from executive officers[291](index=291&type=chunk)