Star Equity (STRR) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides unaudited financial statements, management's analysis of financial condition, and disclosures on internal controls Item 1. Financial Statements (Unaudited) Unaudited financial statements for Q2 and H1 2021 show revenue growth, reduced gross profit, and a net income primarily from discontinued operations Consolidated Statements of Operations Total revenues significantly increased for both the three and six months ended June 30, 2021, but gross profit declined due to rising costs, leading to operating losses, partially offset by income from discontinued operations Consolidated Statements of Operations Summary (Thousands of US Dollars) | Financial Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $25,806 | $14,510 | $48,160 | $33,700 | | Gross Profit | $1,504 | $3,174 | $4,581 | $6,417 | | Loss from Operations | $(4,510) | $(1,055) | $(6,078) | $(3,251) | | Loss from Continuing Operations | $(1,791) | $(811) | $(2,379) | $(3,179) | | Net (Loss) Income | $(1,856) | $(1,287) | $3,576 | $(4,240) | | Net (Loss) Income per Share | $(0.37) | $(0.42) | $0.72 | $(1.66) | Consolidated Balance Sheets As of June 30, 2021, total assets and liabilities decreased primarily due to the DMS Health sale, while cash and stockholders' equity increased Consolidated Balance Sheets Summary (Thousands of US Dollars) | Balance Sheet Item | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Current Assets | $35,127 | $48,936 | | Total Assets | $75,386 | $88,293 | | Total Current Liabilities | $28,161 | $42,726 | | Total Liabilities | $31,574 | $48,364 | | Total Stockholders' Equity | $21,833 | $18,429 | Consolidated Statements of Cash Flows For the six months ended June 30, 2021, cash was primarily used in operations and financing, while investing activities provided significant cash due to the sale of discontinued operations Consolidated Statements of Cash Flows Summary (Thousands of US Dollars) | Cash Flow Activity | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net Cash (Used in) Provided by Operating Activities | $(7,599) | $49 | | Net Cash Provided by (Used in) Investing Activities | $18,021 | $(202) | | Net Cash (Used in) Provided by Financing Activities | $(7,534) | $7,372 | | Net Increase in Cash | $2,935 | $7,293 | Notes to Consolidated Financial Statements The notes detail the financial statement basis, the impact of the DMS Health divestiture, debt structure, and liquidity, including covenant non-compliance and PPP loan forgiveness - On March 31, 2021, the company completed the sale of DMS Health Technologies, Inc. for $18.75 million in cash. The results of DMS Health's operations are presented as discontinued operations[27] - The company incurred net losses from operations of $4.5 million for Q2 2021 and $6.1 million for the six months ended June 30, 2021. Net cash used in operations was $7.6 million for the six-month period[36] - As of June 30, 2021, the company was not in compliance with all borrowing covenants for its Construction revolvers with Gerber but obtained waivers for the measurement period[38] - During Q2 2021, all remaining Paycheck Protection Program (PPP) loans were forgiven. As of June 30, 2021, the company has no PPP loans outstanding[137] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's diversified structure, growth strategy, and financial performance, highlighting revenue growth, declining gross profit due to material costs, and liquidity challenges with debt covenant waivers Overview and Strategy Star Equity operates as a diversified holding company across healthcare, construction, and investments, pursuing growth through organic expansion, new services, and strategic acquisitions - The company is a diversified holding company with operating businesses in two key sectors: healthcare and construction[181] - Star Equity's growth strategy includes: organic growth from core businesses, introduction of new services in both Healthcare and Construction divisions, and acquisition of complementary businesses through a financially disciplined approach[187][192] Results of Operations For Q2 and H1 2021, total revenues significantly increased, driven by both Healthcare and Construction segments, but gross profit declined sharply due to increased costs, particularly in Construction, leading to larger operating losses Results of Operations Summary - Three Months Ended June 30 (Thousands of US Dollars) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $25,806 | $14,510 | 77.8% | | Healthcare Revenue | $14,870 | $9,473 | 57.0% | | Construction Revenue | $10,936 | $5,035 | 117.2% | | Gross Profit | $1,504 | $3,174 | (52.6)% | | Construction Gross (Loss) | $(1,844) | $1,053 | (275.1)% | | Loss from Operations | $(4,510) | $(1,055) | 327.5% | Results of Operations Summary - Six Months Ended June 30 (Thousands of US Dollars) | Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $48,160 | $33,700 | 42.9% | | Healthcare Revenue | $28,177 | $23,148 | 21.7% | | Construction Revenue | $19,983 | $10,519 | 90.0% | | Gross Profit | $4,581 | $6,417 | (28.6)% | | Construction Gross (Loss) | $(1,300) | $1,456 | (189.3)% | | Loss from Operations | $(6,078) | $(3,251) | 87.0% | Liquidity and Capital Resources The company's liquidity is supported by cash and credit facilities, with cash used in operations offset by proceeds from the DMS sale, despite non-compliance with certain debt covenants for which waivers were obtained - As of June 30, 2021, the company had $6.3 million in cash, cash equivalents, and restricted cash, with an additional $2.5 million available under its Sterling revolving line of credit[236] - For the six months ended June 30, 2021, cash used in operations was $7.6 million, cash from investing was $18.0 million (from the DMS sale), and cash used in financing was $7.5 million (for debt repayment)[235][245] - The company was not in compliance with all borrowing covenants for its Construction revolvers with Gerber as of June 30, 2021, but has historically received waivers and obtained one for this period[239][266] - All Paycheck Protection Program (PPP) loans, totaling $6.7 million, were forgiven as of Q2 2021, and no PPP loans remain outstanding[281][286] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of June 30, 2021, due to a material weakness in debt classification accounting, with a remediation plan in progress - Management concluded that disclosure controls and procedures were not effective as of June 30, 2021[291] - The ineffectiveness is due to a material weakness related to improperly designed controls over the review of new debt agreements and the application of GAAP, which led to errors in debt classification[294] - A remediation plan is in place, focusing on more detailed reviews of debt contracts to ensure proper accounting treatment[295] PART II. OTHER INFORMATION This section provides updates on risk factors, defaults on senior securities, and other material information, including the adoption of an executive incentive bonus plan Item 1A. Risk Factors The company reports no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2020 - There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2020[301] Item 3. Defaults Upon Senior Securities The company reports a $3.0 million arrearage in cumulative cash dividends on its 10.0% Series A Cumulative Perpetual Preferred Stock - As of the filing date, the company is in arrears by $3.0 million for cash dividends due on its Series A Cumulative Perpetual Preferred Stock[303] Item 5. Other Information The Board of Directors approved the 2021 Executive Incentive Bonus Plan, linking executive cash bonuses to consolidated EBITDA performance for fiscal 2021 - The Board of Directors adopted the 2021 Executive Incentive Bonus Plan on August 4, 2021[305] - Cash bonuses for certain executives are tied to achieving a consolidated EBITDA threshold for fiscal 2021, with payouts ranging from 50% to 150% of the target bonus based on performance[308]