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Subordination Agreement
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Restated Subordination Agreement
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(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section
12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, par value $0.0001 per share
iSTRR
iNASDAQ
Global Market
iSeries A Cumulative Perpetual Preferred Stock, par value $0.0001 per share
iSTRRP
iNASDAQ
Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYesx No o
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYesx No o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
o
iNon-accelerated
filer
☒
Smaller reporting company
i☒
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). i☐ Yes No ☒
Important
Information Regarding Forward-Looking Statements
Portions of this Quarterly Report on Form 10-Q (including information incorporated by reference) include “forward-looking statements” based on our current beliefs, expectations, and projections regarding our business strategies, market potential, future financial performance, industry, and other matters. This includes, in particular, “Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q, as well as other portions of this Quarterly Report on Form 10-Q. The words “believe,”“expect,”“anticipate,”“project,”“could,”“would,” and similar expressions, among others, generally identify “forward-looking statements,” which speak only as of the date the statements were made. The matters discussed
in these forward-looking statements are subject to risks, uncertainties, and other factors that could cause our actual results to differ materially from those projected, anticipated, or implied in the forward-looking statements. The most significant of these risks, uncertainties, and other factors are described in “Item 1A — Risk Factors” of this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the U.S. Securities and Exchange Commission on March 29, 2021. Except to the limited extent required by applicable law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
4
PART
I. FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
STAR EQUITY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In thousands, except for per share amounts)
Liabilities,
Mezzanine Equity and Stockholders’ Equity:
Current liabilities:
Accounts payable
$
i5,104
$
i4,952
Accrued
compensation
i2,684
i2,825
Accrued
warranty
i345
i214
Deferred
revenue
i3,206
i2,184
Short-term
debt and current portion of long-term debt
i13,113
i18,362
Payable
to related parties
i—
i2,307
Operating
lease liabilities
i1,044
i1,011
Other
current liabilities
i2,665
i3,000
Liabilities
held for sale
i—
i7,871
Total
current liabilities
i28,161
i42,726
Long-term
debt, net of current portion
i—
i3,700
Deferred
tax liabilities
i85
i51
Operating
lease liabilities, net of current portion
i2,155
i828
Other
liabilities
i1,173
i1,059
Total
liabilities
i31,574
i48,364
Commitments
and contingencies (Note 9)
i
i
Preferred
stock, $ii0.0001/ par value: ii10,000,000/
shares authorized: ii10/% Series A Cumulative Perpetual
Preferred Stock, ii8,000,000/
shares authorized, liquidation preference ($ii10.00/ per share), iiii1,915,637///
shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively
i21,979
i21,500
Stockholders’
Equity:
Preferred stock, $ii0.0001/
par value: ii25,000/ shares authorized;
Series C Participating Preferred stock, iiiino///
shares issued or outstanding
i—
i—
7
Common
stock, $ii0.0001/ par value: ii30,000,000/
shares authorized; ii5,073,654/ and ii4,798,367/
shares issued and outstanding (net of treasury shares) at June 30, 2021 and December 31, 2020, respectively
See
accompanying notes to unaudited consolidated financial statements.
12
STAR EQUITY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. iBasis
of Presentation
iBasis of Presentation
The unaudited consolidated financial statements included in this Form 10-Q have been prepared in accordance with the U.S. Securities and Exchange Commission (the “SEC”) instructions for Quarterly Reports on Form 10-Q. Accordingly, the consolidated financial statements are unaudited and do not contain all the information required by U.S. generally accepted accounting principles (“GAAP”) to be included in a full set
of financial statements. The unaudited condensed consolidated balance sheet at December 31, 2020 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for a complete set of financial statements. The audited consolidated financial statements for our fiscal year ended December 31, 2020, filed with the SEC on Form 10-K on March 29, 2021, include a summary of our significant accounting policies and should be read in conjunction with this Form 10-Q. In the opinion of management, all material adjustments necessary to present fairly the results of operations, cash flows, and balance sheets for such periods have been included in this Form 10-Q. All such adjustments are of a normal recurring nature. The results of operations for
interim periods are not necessarily indicative of the results of operations for the entire year.
On March 31, 2021, Star Equity Holdings, Inc. (“Star Equity,” the “Company,”“we,” or “our”), a diversified holding company with ithree divisions: Healthcare, Construction, and Investments,
announced the completion of the sale of DMS Health Technologies, Inc., a North Dakota corporation and wholly owned indirect subsidiary of Star Equity (“DMS Health”), for $i18.75 million in cash, as originally announced on November 3, 2020 (the “DMS Sale Transaction”). The assets and liabilities of DMS Health were previously classified as held for sale and the results of DMS Health’s operations were presented as a discontinued operations in our previously issued financial statements. Unless
otherwise noted, discussion within these notes to the consolidated financial statements relates to continuing operations. Refer to Note 2. Discontinued Operations for additional information.
COVID-19 Pandemic
During the three and six months ended June 30, 2021, we had a $i5.4 million and $i5.0
million increase, respectively, in Healthcare division revenue and a $i5.9 million and $i9.5 million increase, respectively, in Construction division revenue, as compared
to the same period of the prior year. We have largely recovered from the economic effects of the COVID-19 pandemic and made our way back to pre-COVID-19 levels of business activity, and we have actual revenue growth, especially in our construction division. In our Healthcare Division, our imaging volume rebound as the pandemic is brought further under control. The current COVID-19 pandemic, which is impacting worldwide economic activity, poses the risk that the Company or its employees, contractors, suppliers, and other partners may be prevented from conducting business activities for an indefinite period of time, including due to shutdowns that may be requested or mandated by governmental authorities. The extent to which the COVID-19 pandemic will impact the Company’s business will depend on future
developments that are highly uncertain and cannot be predicted at this time.
Mezzanine Equity
Pursuant to the Certificate of Designations, Rights and Preferences of i10% Series A Cumulative Perpetual Preferred Stock of Star Equity Holdings, Inc. (formerly Digirad Corporation) (the “Certificate of Designations”), upon a Change of Control Triggering Event, as defined in the Certificate of Designations, holders of the i10%
Series A Cumulative Perpetual Preferred Stock (the “Preferred Stock”) may require us to redeem the Preferred Stock at a price of $i10.00 per share, plus any accumulated and unpaid dividends (a “Change of Control Redemption”). As this redemption feature of the shares is not solely within the control of the Company, the Preferred Stock does not qualify as permanent equity and has been classified as mezzanine or temporary equity. Accordingly, the Preferred Stock is not redeemable
and it was not probable that the Preferred Stock would become redeemable as of June 30, 2021. Therefore, we are not currently required to accrete the Preferred Stock to its redemption value.
In addition to a Change of Control Redemption, the Certificate of Designations also provides that we may redeem (at its option, in whole or in part) the Preferred Stock following the fifth anniversary of issuance of the Preferred Stock, at a cash redemption price of $i10.00 per share,
plus any accumulated and unpaid dividends.
On May 26, 2021, our board of directors declared a cash dividend to holders of i10% Series A Cumulative Perpetual Preferred Stock of $i0.25
per share, for an aggregate amount of approximately $i479 thousand. The record date for this dividend was June 1, 2021, and the payment date was June 11, 2021. Refer to preferred stock dividends discussed in Note 13, Perpetual Preferred Stock.
13
Common
Stock Equity Offering
On May 28, 2020, we closed a public offering (the “Offering”) of i2,225,000 shares of our common stock, and i2,225,000
warrants (the “Warrants”) to purchase up to i1,112,500 additional shares of our common stock. The Offering price was $i2.24
per share of common stock and $i0.01 per accompanying Warrant (for a combined Offering price of $i2.25), initially raising $i5.0 million
in gross proceeds before underwriter discounts and offering-related expenses. The underwriting agreement (the “Underwriting Agreement”) we entered into with Maxim Group LLC (“Maxim”), as representative of the underwriters, for the Offering contained customary representations, warranties, and agreements by the Company, customary conditions to closing, indemnification obligations of the Company and Maxim and certain other obligations.
Pursuant to the terms of the Underwriting
Agreement, we granted to Maxim an option for a period of i45 days (the “Over-Allotment Option”) to purchase up to i225,000
additional shares of our common stock and i225,000 Warrants to purchase up to an additional i112,500
shares of our common stock. Effective as of the closing of the Offering, Maxim exercised the Over-Allotment Option for the purchase of i225,000 Warrants for a price of $i0.01
per Warrant. On June 10, 2020, Maxim exercised the Over-Allotment Option for the purchase of i225,000 shares of our common stock for a price of $i2.24
per share, before underwriting discounts. The closing of the sale of the over-allotment shares brought the total number of shares of common stock we sold in the Offering to i2,450,000 shares, and total gross proceeds to approximately $i5.5 million.
In addition, we received $i0.5 million from investors in the Offering throughout the balance of 2020 due to the exercise of a portion of the Warrants sold in the Offering, bringing the total gross proceeds from equity issuance to $i6.0 million.
The
net proceeds to us from the Offering and Warrant exercises in 2020 were approximately $i5.2 million (inclusive of the exercise of the over-allotment option), after deducting underwriter fees and offering-related expenses estimated at $i0.8 million.
We used a significant portion of the net proceeds from the Offering to fund working capital needs at our construction businesses, particularly related to modular housing projects which we produced at KBS Builders, Inc. (“KBS”) for the Boston-area projects. The remainder of the net proceeds is being used for working capital and for other general corporate purposes. We have broad discretion in determining how the proceeds of the Offering is used, and our discretion is not limited by the aforementioned possible uses.
As of June 30, 2021, i1.0 million
warrants were exercised and i1.5 million warrants remained outstanding at an exercise price of $i2.25.
Liquidity
Outlook
The accompanying financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and settlement of obligations in the normal course of business. We incurred net losses from operations of approximately $i4.5 million and $i6.1
million for the three and six months ended June 30, 2021, respectively, and $i1.1 million and $i3.3 million for
the three and six months ended June 30, 2020, respectively. We have an accumulated deficit of $i121.4 million and $i125.0 million
as of June 30, 2021 and December 31, 2020, respectively. Net cash used in operations was $i7.6 million for the six months ended June 30, 2021, compared to net cash provided by operations of $i49 thousand
for the same prior year period in 2020.
Regarding our debt, we had approximately $i13.1 million in short term debt due to our borrowings which is classified as short term as disclosed in Note 8. Debt. The $i7.2 million
SNB debt primarily supports our healthcare business and matures in 2024, but GAAP rules require that the outstanding balance be classified as short-term debt, due to the automatic sweep feature embedded in the traditional lockbox arrangement along with a subjective acceleration clause in the SNB Loan and Security Agreement. In practice, we have the ability to immediately borrow back these daily sweeps to fund our working capital. As of June 30, 2021, we were in compliance with all borrowing arrangements related to our Healthcare division. As of June 30, 2021, we had $i2.5 million
of borrowing capacity to fund the operations of these divisions.
As of June 30, 2021, we have $i4.7 million outstanding on our Construction revolvers with Gerber and were not in compliance with all borrowing covenants for Gerber, but obtained waivers for the measurement period ended June 30, 2021. While Gerber has historically provided us with waivers, there is no assurance that we will be able to receive waivers for covenant violations in the future,
or that we will meet compliance with covenants in the future. We have $i1.2 million outstanding on our Star term loan, on which we have been making timely payments and are in compliance with the borrowing arrangements. Related party notes of $i2.3 million
that were outstanding at December 31, 2020 were was fully paid off on April 1, 2021, using proceeds from the DMS Sale Transaction. In addition, as of June 30, 2021, we had cash and cash equivalents of $i6.3 million. We expected to return to normal levels in the second half of this year due to steps we took to increase our product pricing and the expectation
that raw materials prices will continue to normalize.
Management believes that we have the liquidity and operations to continue to support the business through the next 12 months from the issuance of this Quarterly Report. Our ability to continue as a going concern is dependent on our ability to execute its plans.
14
i
Use of Estimates
Preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ from management’s estimates.
i
Revenue Recognition
We recognize revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606 and Topic 842.
Pursuant
to ASC 606, Revenue from Contracts with Customers, we recognize revenue when a customer obtains control of promised goods or services. We record the amount of revenue that reflects the consideration that it expects to receive in exchange for those goods or services. We apply the following five-step model in order to determine this amount: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration;
(iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
Revenue recognition is evaluated on a contract by contract basis. Performance obligations are satisfied over time as work progresses or at a point in time. A performance obligation is satisfied over time if we have an enforceable right to payment. Determining if there is an enforceable right to payment is assessed on a contract by contract
basis. For contracts requiring over time revenue recognition, the selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We use a cost-based input measurement of progress because it best depicts the transfer of assets to the customer, which occurs as costs are incurred during the manufacturing process or as services are rendered. Under the cost-based measure of progress, the extent of progress towards completion is measured based on the costs incurred to date.
Healthcare Services Revenue Recognition. We generate service revenue primarily from providing diagnostic services and cardiac monitoring services to our customers. Service revenue within our Diagnostic Services reportable segments is derived from providing our
customers with contract diagnostic services, which includes use of our imaging systems, qualified personnel, radiopharmaceuticals, licensing, logistics and related items required to perform testing in their own offices. We bill customers either on a per-scan or fixed-payment methodology, depending upon the contract that is negotiated with the customer. Within our Diagnostic Service segment, we also rent cameras to healthcare customers for use in their operations. Rental revenues are structured as either a weekly or monthly payment arrangement, and are recognized in the month services are provided. Revenue related to provision of our services is recognized at the time services are performed.
Healthcare Product and Product-Related Revenue Recognition.
We generate revenue from product and product-related sales, primarily from the sale of gamma cameras and accessories.
Diagnostic Imaging product revenues are generated from the sale of internally developed solid-state gamma camera imaging systems and camera maintenance service contracts. Revenue from sales of imaging systems is generally recognized upon the delivery of systems and acceptance by customers. We also provide installation services and training on cameras sold, primarily in the United States. Installation and initial training is generally performed shortly after delivery and the revenue related to the provision of these services is recognized at the time services are performed. Neither installation nor training is essential to the functionality of the product. Finally, we offer camera maintenance service contracts
that are sold beyond the term of the initial warranty, generally ione year from the date of purchase. Revenue from these service contracts is deferred and recognized ratably over the period of the obligation.
/
15
Construction
Revenue Recognition. Within the Construction segment, we service residential and commercial construction projects by manufacturing modular housing units and other products and supplies general contractors with building materials. KBS manufactures modular buildings for both single-family residential homes and larger, commercial building projects. Our EdgeBuilder, Inc. (“EdgeBuilder”) subsidiary manufactures structural wall panels, permanent wood foundation systems and other engineered wood products, and our Glenbrook Building Supply, Inc. (“Glenbrook”) subsidiary is a retail supplier of lumber and other building supplies. Revenue is generally recognized upon delivery of the product. Retail sales at Glenbrook are recognized at the point of sale. For bill and hold sales, we determine when the customer obtains control of the product on a case-by-case basis to determine the amount of revenue to recognize each period.
Leases
i
Lessee
Accounting
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities, and operating lease liabilities, net of current portion in our condensed consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our condensed consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We use the implicit discount rate when readily determinable; however, as most of our leases do not provide an implicit rate, we use our
incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease valuation may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
We elected not to separate lease and non-lease components of its operating leases in which it is the lessee and lessor. Additionally, we elected not to recognize right-of-use assets and leases liabilities that arise from short-term leases of twelve months or less.
i
Lessor
Accounting
The majority of the lease income of the Healthcare division comes from camera rentals and the lease income of the Construction division comes from the rental of the Waterford facility to a commercial tenant. We determine lease classification at the commencement date. Leases not classified as sales-type or direct financing leases are classified as operating leases. The primary accounting criteria we use for lease classification are (a) review to determine if the lease transfers ownership of the underlying asset to the lessee by the end of the lease term, (b) review to determine if the lease grants the lessee a purchase option that the lessee is reasonably certain to exercise, (c) determine, using a seventy-five percent or more threshold, if the lease term is for a major part of the remaining economic life of the underlying asset (however, we do not use this classification criterion when the lease commencement date
falls within the last 25 percent of the total economic life of the underlying asset) and (d) determine, using a ninety percent or more threshold, if the present value of the sum of the lease payments and any residual value guarantees equal or exceeds substantially all of the fair value of the underlying asset. We do not lease equipment of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. Each of our leases is classified as an operating lease.
We elected the operating lease practical expedient for its leases to not separate non-lease components of regular maintenance services from associated lease components. This practical expedient is available when both of the following are met: (i) the timing and pattern of transfer of the non-lease components and associated lease component are the same and (ii) the lease component, if accounted for separately, would be classified
as an operating lease.
Property taxes paid by the lessor that are reimbursed by the lessee are considered to be lessor costs of owning the asset, and are recorded gross with revenue included in other non-interest income and expense recorded in operating expenses.
We selected a lessor accounting policy election to exclude from revenue and expenses sales taxes and other similar taxes assessed by a governmental authority on lease revenue-producing transactions and collected by the lessor from a lessee.
Operating lease equipment is carried at cost less accumulated depreciation. Operating lease equipment is depreciated to its estimated residual value using the straight-line method over the lease term or estimated useful life of the asset.
Rental revenue on operating leases is recognized on a straight-line
basis over the lease term unless collectability is not probable. In these cases, rental revenue is recognized as payments are received.
16
i
Recently Adopted Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board issued ASU No 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”).
ASU 2019-12 removes certain exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles. ASU 2019-12 is effective for public entities for fiscal years beginning after December 15, 2020, with early adoption permitted. We adopted the guidance effective the first quarter of 2021. ASU 2019-12 does not have a material effect on our current financial position, results of operations or financial statement disclosures.
New Accounting Standards To Be Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available-for-sale
debt securities. This update is effective for annual periods beginning after December 15, 2022, and interim periods within those periods, and early adoption is permitted. We expect to adopt the standard on its effective date in the first quarter of 2023. We believe the adoption will modify the way we analyze financial instruments, but currently do not expect the adoption to have a material financial impact on our consolidated financial statements.
In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2020-04, Reference Rate Reform (Topic 848), to temporarily ease the potential burden in accounting for reference rate reform. The standard provides optional expedients and exceptions for applying GAAP to contracts,
hedging relationships and other transactions affected by reference rate reform. The guidance generally can be applied through December 31, 2022. We will monitor our contracts and transactions for potential application of this ASU.
Note 2. iDiscontinued
Operations
On October 30, 2020, Star Equity entered into a Stock Purchase Agreement (the “DMS Purchase Agreement”) by and among the Company, Project Rendezvous Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of the Company (“Seller”), DMS Health, and Knob Creek Acquisition Corp., a Tennessee corporation (“Buyer”) pursuant to which, subject to the satisfaction or waiver of certain conditions, Buyer purchased all of the issued and outstanding common stock of DMS Health from Seller. The purchase price for the DMS Sale Transaction was $i18.75
million in cash, subject to certain adjustments, including a working capital adjustment. The DMS Sale Transaction was announced on November 3, 2020, and was subsequently completed on March 31, 2021. We deemed the disposition of the Mobile Healthcare business unit, which was effected upon the closing of the DMS Sale Transaction, to represent a strategic shift that will have a major effect on our operations and financial results. As of December 31, 2020, the Mobile Healthcare business met the criteria to be classified as held for sale. This segment is reported on the Consolidated Statement of Operations as discontinued operations and on the Consolidated Balance Sheet as Assets and Liabilities held for sale.
We allocated a portion of interest expense to discontinued operations
since the proceeds received from the sale were required to be used to pay down outstanding borrowings under our revolving credit facility with Sterling National Bank. The allocation was based on the ratio of assets generated based on the borrowing capacity to total borrowings capacity for the period. In addition, certain general and administrative costs related to corporate and shared service functions previously allocated to the mobile healthcare reportable segment are included in discontinued operations.
17
i
The
following table presents financial results of DMS Health for the three and six months ended June 30, 2021 and 2020 business (in thousands):
(Loss)
income from discontinuing operations before income taxes
(i65)
(i460)
i6,027
(i1,038)
Income
tax expense
i—
(ii16/)
(i72)
(i23)
(Loss)
income from discontinuing operations
$
(i65)
$
(i476)
$
i5,955
$
(i1,061)
The
following represents the carrying amounts of the major classes of assets reported as “Assets held for sale” as of December 31, 2020 (in thousands):
The
following represents the carrying amounts of the major classes of liabilities reported as “Liabilities held for sale” as of December 31, 2020 (in thousands):
The
following table presents the significant non-cash operating, investing and financing activities from discontinued operations for the six months ended June 30, 2021 and 2020 (in thousands):
Lease
assets obtained in exchange for new operating lease liabilities
i—
i681
Following
is the reconciliation of purchase price to the gain recognized in income from discontinued operations for the three months and six months ended June 30, 2021 (in thousands):
Estimated proceeds of the disposition, net of transaction costs
$
i18,750
Assets
of the businesses
(i20,920)
Liabilities of the businesses
i7,712
Transaction
expenses
(i383)
Pre-tax gain on the disposition
$
i5,159
19
Note
3. iRevenue
Healthcare Product and Product-Related Revenues and Services Revenue
Healthcare product and product-related services revenue are generated from the sale of gamma cameras, accessories and post-warranty maintenance service contracts within our Diagnostic Imaging reportable segment.
Healthcare Imaging services revenue are generated
from providing diagnostic imaging services to customers within our Diagnostic Services reportable segment. Services revenue also includes lease income generated from camera rentals of imaging systems to our customers.
Construction
Construction revenue is generated from selling modular buildings for both single-family residential homes, larger commercial building projects and selling structural wall panels, permanent wood foundation systems and other engineered wood products.
Investments
Star Real Estate Holdings USA, Inc. (“SRE”) generates revenue from the lease of commercial properties and equipment and Lone Star Value Management, LLC (“LSVM”), a Connecticut based exempt reporting advisor provided services that included investment advisory services, and the servicing of pooled
investment vehicles.
Revenue Recognition
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. Taxes collected from customers, which are subsequently remitted to governmental authorities, are excluded from revenue.
The majority of our contracts have a single performance obligation, as we provide a series of distinct goods or services that are substantially the same and are transferred with the same pattern to the customer. For contracts with multiple performance obligations, we allocate the total transaction price
to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. We use an observable price to determine the stand-alone selling price for separate performance obligations or a cost plus margin approach when one is not available. For bill and hold sales, we determine when the customer obtains control of the product on a case-by-case basis to determine the amount of revenue to recognize each period.
Revenue recognition is evaluated on a contract by contract basis. Performance obligations are satisfied over time as work progresses or at a point-in-time. A performance obligation is satisfied
over time if we have an enforceable right to payment. Determining if there is an enforceable right to is assessed on a contract by contract basis. For contracts requiring over time revenue recognition, the selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We use a cost-based input measurement of progress because it best depicts the transfer of assets to the customer, which occurs as costs are incurred during the manufacturing process or as services are rendered. Under the cost-based measure of progress, the extent of progress towards completion is measured based on the costs incurred to date.
Our
products are generally not sold with a right of return and we do not provide significant credits or incentives, which may be a variable consideration when estimating the amount of revenue to be recognized.
20
Disaggregation of Revenue
i
The following tables present our revenues for the three and
six months ended June 30, 2021 and 2020, disaggregated by major source (in thousands):
Within our Diagnostic Services segment, our sales are derived from providing services and materials to our customers, primarily physician practices and hospitals that allow them to perform diagnostic imaging services at their site. We typically bundle our services in providing staffing, our imaging systems, licensing, radiopharmaceuticals, and supplies depending on our customers’ needs. Our contracts with customers are typically entered into annually and are billed on a fixed rate per-day or per-scan basis, depending on terms of the contract. For the majority of these contracts,
we have the right to invoice the customer in an amount that directly corresponds with the value to the customer as we perform the services. We use the practical expedient to recognize revenue corresponding with amounts we have the right to invoice for services performed.
22
Camera
Within our Diagnostic Imaging segment, camera revenues are generated from the sale of internally developed solid-state gamma camera imaging systems and accessories. We recognize revenue upon transfer of control to the customer at a point-in-time, which is generally upon delivery and acceptance. We also provide installation services and training on cameras we sell, primarily in the United States. Installation and initial training is generally performed
shortly after delivery. We recognizes revenues for installation and training over time as the customer receives and consumes benefits provided as we perform the installation services.
Our sale of imaging systems includes a ione-year assurance-type warranty. The estimated costs associated with our standard warranties and field service actions continue to be recognized as expense when cameras are sold. Maintenance service contracts sold beyond the term of our standard warranties are accounted for as a
service-type warranty and revenue is deferred and recognized ratably over the period of the warranty obligation.
Camera Support
Within our Diagnostic Imaging segment, camera support revenue is derived from the sale of separately-priced extended maintenance contracts to camera owners, training, and the sale of parts to customers that do not have an extended warranty. Our separately priced service contracts range from i12
to i48 months. Service contracts are usually billed at the beginning of the contract period or at periodic intervals (e.g., monthly, quarterly, or annually) and revenue is recognized ratably over the term of the agreement.
Services and training revenues are recognized in the period the services and training are performed. Revenue for sales of parts are recognized when the parts are delivered to the customer
and control is transferred.
Lease Income
Within our Diagnostic Service segment, we also generate income from rentals of state-of-the-art equipment including cameras and ultrasound machines to customers. Rental contracts are structured as either a weekly or monthly payment arrangement and are accounted for as operating leases. Revenues are recognized on a straight-line basis over the term of the rental.
Construction
Within the Construction segment, we service residential and commercial construction projects by manufacturing modular housing units and other products and supply general contractors with building materials. KBS manufactures modular buildings for both single-family residential homes and larger,
commercial building projects. EdgeBuilder manufactures structural wall panels, permanent wood foundation systems and other engineered wood products, and Glenbrook is a retail supplier of lumber and other building supplies. Revenues are evaluated on a contract by contract basis. In general, construction revenues are recognized upon transfer of control to the customer at a point-in-time, which is generally upon delivery and acceptance. However, construction revenues are recognized over time for arrangements with customers for which: (i) performance does not create an asset with an alternative use, and (ii) we have an enforceable right to payment for performance completed to date.
Deferred Revenues
We
record deferred revenues when cash payments are received in advance of our performance. We have determined our contracts do not include a significant financing component. The majority of our deferred revenue relates to payments received on camera support post-warranty service contracts, which are billed at the beginning of the contract period or at periodic intervals (e.g., monthly, quarterly, or annually).
i
Changes
in the deferred revenues for six months ended June 30, 2021, is as follows (in thousands):
Included in the balances above as of June 30, 2021 and December 31, 2020 is non-current deferred revenue included in other liabilities of $i0.4
million and $i0.2 million, respectively.
/
We have elected to use the practical expedient under ASC 606 to exclude disclosures of unsatisfied remaining performance obligations for (i) contracts having an original expected length of one year or less or (ii) contracts
for which the practical expedient has been applied to recognize revenue at the amount for which it has a right to invoice.
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We apply a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period would have been one year or less. These costs
mainly include our internal sales commissions; under the terms of these programs these are generally earned and the costs are recognized at the time the revenue is recognized.
24
Note 4. iBasic and Diluted Net Income (Loss) Per Share
We present
net loss per share attributable to common stockholders in conformity with the two-class method required for participating securities, as the warrants are considered participating securities. We have not allocated net loss attributable to common stockholders to warrants because the holders of our warrants are not contractually obligated to share in our losses. Basic net loss per share attributable to common stockholders is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per share attributable to common stockholders is calculated to give effect to all potential shares of common stock, including common stock issuable upon exercise of warrants, stock options, and restricted stock units (“RSUs”). In periods for which there is a net loss, diluted loss per common share is equal to basic loss per common share, since the effect of including any common stock
equivalents would be antidilutive.
i
The following table sets forth the reconciliation of shares used to compute basic and diluted net (loss) or income per share for the periods indicated (in thousands):
(Loss)
income from discontinued operations, net of tax
(i65)
(i476)
ii5,955/
(ii1,061/)
Net
(loss) income
(i1,856)
(i1,287)
i3,576
(i4,240)
Deemed
dividend on Series A perpetual preferred stock
(ii479/)
(ii484/)
(ii958/)
(ii968/)
Net
(loss) income attributable to common shareholders
$
(i2,335)
$
(i1,771)
$
i2,618
$
(i5,208)
Denominator:
Weighted
average shares outstanding - basic and diluted
ii5,039/
ii3,041/
ii4,978/
ii2,547/
Net
loss per common share - basic and diluted
Net loss per share, continuing operations
$
(ii0.36/)
$
(ii0.27/)
$
(ii0.48/)
$
(ii1.25/)
Net
(loss) income per share, discontinued operations
$
(ii0.01/)
$
(ii0.16/)
$
ii1.20/
$
(ii0.42/)
Net
(loss) income per share
$
(ii0.37/)
$
(ii0.42/)
$
ii0.72/
$
(ii1.66/)
Deemed
dividend on Series A perpetual preferred stock per share
$
(i0.10)
$
(i0.16)
$
(i0.19)
$
(i0.38)
Net
(loss) income per share, attributable to common shareholders - basic and diluted
$
(ii0.46/)
$
(ii0.58/)
$
ii0.53/
$
(ii2.04/)
/
Antidilutive
common stock equivalents are excluded from the computation of diluted loss per share. Stock options and restricted stock units are antidilutive when the assumed proceeds per share are greater than the average market price of the common shares. In addition, in periods where net losses are incurred, stock options and restricted stock units with assumed proceeds per share less than the average market price of the common shares become antidilutive as well. iThe computation of
diluted earnings per share excludes stock options and stock units that are anti-dilutive. The following common stock equivalents were anti-dilutive (in thousands):
On
June 9, 2021,we, through its subsidiary 947 Waterford Road, LLC, entered into a contract for the sale of commercial real estate agreement (the "Waterford Sale Agreement"), pursuant to which we will sell 947 Waterford Road, in the Town of Waterford, Oxford County, and State of Maine, together with any fixtures and other items of real property situated thereon to Barnum. The total consideration related to the Waterford Sale Agreement is $i1.2
million in cash, which will be paid at the closing. Expected closing date will be in the third quarter of 2021. Waterford property was classified as held-for-sale as of June 30, 2021, with a carry value of $i1.0 million, and included within property and equipment on the unaudited consolidated balance sheet. The Waterford Sale Agreement includes customary representations, warranties, covenants, and indemnification obligations of the parties.
Note 6. iiLeases/
Lessee
We
have operating and finance leases for corporate offices, vehicles, and certain equipment. Our leases have remaining lease terms of i1 year to i10 years, some of which include options to extend the leases and some of which include options to terminate the leases within
i1 year. Operating leases are included separately in the unaudited condensed consolidated balance sheets and finance lease assets are included in property and equipment with the related liabilities included in other current liabilities and other liabilities in the unaudited consolidated balance sheets.
i
The
components of lease expense are as follows (in thousands):
We
are committed to making future cash payments on non-cancelable operating leases and finance leases (including interest). iiThe future
minimum lease payments due under both non-cancelable operating leases and finance leases having initial or remaining lease terms in excess of one year as of June 30, 2021 were as follows (in thousands):/
In
the Healthcare division, we generate lease income in the Diagnostic Services segment, from equipment rentals to customers. Rental contracts are structured as either a weekly or monthly payment arrangement and are accounted for as operating leases. Revenues are recognized on a straight-line basis over the term of the rental. During the six months ended June 30, 2021 and 2020, our lease contracts are mainly month to month contracts.
Note 7. iFinancial
Instruments
Assets and Liabilities Measured at Fair Value on a Recurring Basis
i
The following table presents information about our financial assets that are measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques we utilize to determine such fair value at June 30, 2021 and December 31,
2020 (in thousands):
The
investment in equity securities consists of common stock of publicly traded companies. The fair value of these securities is based on the closing prices observed on June 30, 2021 and December 31, 2020, respectively. During the six months ended June 30, 2021 and 2020, we recorded net unrealized loss and gain of $i0.3 million and $i20
thousand, respectively, in the cost of goods sold and other income (expenses), respectively of condensed unaudited consolidated statement of operations.
We occasionally enters into lumber derivative contracts in order to protect its gross profit margins from fluctuations caused by volatility in lumber prices. At December 31, 2020, we had ino lumber derivative contracts.
At June 30, 2021, we had a net long (buying) position of i1,540,000 board feet pursuant to ifourteen
lumber derivatives contracts.
The derivative contracts are included in other assets on our consolidated balance sheet. We did not reclassify any investments between levels in the fair value hierarchy during the three and six months ended June 30, 2021. The fair values of our revolving credit facility approximate carrying value due to the variable rate nature of these borrowings.
On March 29, 2019, the Company entered into a Loan and Security Agreement (the “SNB Loan Agreement”) by and among certain subsidiaries of the Company, as borrowers (collectively, the “SNB Borrowers”); the Company, as guarantor; and Sterling National Bank, a national banking association, as lender (“Sterling” or “SNB”).
The SNB Loan Agreement is a ifive-year
credit facility maturing in March 2024, with a maximum credit amount of $i20.0 million for revolving loans (the “SNB Credit Facility”). Under the SNB Credit Facility, the SNB Borrowers can request the issuance of letters of credit in an aggregate amount not to exceed $i0.5
million at any one time outstanding. The borrowings under the SNB Loan Agreement were classified as short-term obligations under GAAP as the agreement contained a subjective acceleration clause and required a lockbox arrangement whereby all receipts within the lockbox are swept daily to reduce borrowings outstanding. As of June 30, 2021, the Company had $i0.2 million of letters of credit outstanding and had additional borrowing capacity
of $i2.5 million.
At the Borrowers’ option, the SNB Credit Facility will bear interest at either (i) a Floating LIBOR Rate, as defined in the Loan Agreement, plus a margin of i2.50%
per annum; or (ii) a Fixed LIBOR Rate, as defined in the Loan Agreement, plus a margin of i2.25% per annum. As our largest single debt outstanding, our floating rate on this facility at June 30, 2021 was i2.60%.
The SNB Loan Agreement includes certain representations, warranties of SNB Borrowers, as well as events of default and certain affirmative and negative covenants by the SNB Borrowers that are customary for loan agreements of this type. These covenants include restrictions on borrowings, investments and dispositions by SNB Borrowers, as well as limitations on the SNB Borrowers’ ability to make certain distributions. Upon the occurrence and during the continuation of an event of default under the SNB Loan Agreement, SNB may, among other things, declare the loans and all other obligations under the SNB Loan Agreement immediately due and payable and increase the interest rate at which loans and obligations under the SNB Loan Agreement bear interest. The SNB Credit Facility is secured by a first-priority security interest in substantially all of the assets of the
Company and the SNB Borrowers and a pledge of all shares of the SNB Borrowers.
On March 29, 2019, in connection with the Company’s entry into the SNB Loan Agreement, Jeffery E. Eberwein, the Executive Chairman of the Company’s board of directors, entered into Limited Guaranty Agreement (the “SNB Eberwein Guaranty”) with SNB pursuant to which he guaranteed the prompt performance of all the Borrowers’ obligations under the SNB Loan Agreement. The SNB Eberwein Guaranty is limited in the aggregate to the amount of (a) $i1.5
million, plus (b) reasonable costs and expenses of SNB incurred in connection with the SNB Eberwein Guaranty. Mr. Eberwein’s obligations under the SNB Eberwein Guaranty terminate upon the Company and Borrowers achieving certain milestones set forth therein.
On February 1, 2021, in connection with the closing of the Company’s sale of MD Office Solutions, the Company entered into a First Amendment to the SNB Loan Agreement pursuant to which, among other things, Sterling consented to the sale of MD Office Solutions and the Company’s name change
from Digirad Corporation to Star Equity Holdings, Inc.
On March 31, 2021, in connection with completing the sale of DMS Health, the Company, certain subsidiaries of the Company, and Sterling entered into a Second Amendment to the SNB Loan Agreement pursuant to which, among other things, Sterling consented to the sale of DMS Health and its subsidiaries, removed DMS Health and its subsidiaries as borrowers under the SNB Loan Agreement, and required
the principle to be paid down to $i7.0 million.
At June 30, 2021, the Company was in compliance with the covenants under the SNB Loan Agreement.
30
Construction
Loan Agreements
As of June 30, 2021, the Construction division had outstanding revolving lines of credit and term loans of approximately $i4.7 million. This debt includes: (i) $i2.2 million
principal outstanding on KBS’s $i4.0 million revolving credit facility under a Loan and Security Agreement, dated February 23, 2016, (as amended, the “KBS Loan Agreement”), with Gerber and (ii) $i2.5 million
principal outstanding on EBGL’s $i3.0 million revolving credit facility under a Revolving Credit Loan Agreement, which was increased from $i3.0 million
to $i4.0 million on July 30, 2021. The Construction division was at the maximum borrowing capacity under both revolving lines of credit, based on the inventory and accounts receivable on June 30, 2021 which fluctuates weekly.
KBS Loan Agreement
On February 23, 2016, ATRM, KBS and Main Modular Haulers,
Inc. (a former subsidiary of ATRM) entered into a Loan and Security Agreement, (as amended, the “KBS Loan Agreement”), with Gerber. The KBS Loan Agreement provides KBS with a revolving line of credit with borrowing availability of up to $i4.0 million. Availability under the line of credit is based on a formula tied to KBS’s eligible accounts receivable, inventory and other collateral. The KBS Loan Agreement, which was scheduled to expire on February 22, 2018, has been automatically
extended for successive one (1) year periods in accordance with its terms and is now scheduled to expire on February 22, 2022. The KBS Loan Agreement will be automatically extended for another one (1) year period unless a party thereto provides prior written notice of termination. As of June 30, 2021 neither party has provided notice of termination. Upon the final expiration of the term of the KBS Loan Agreement, the outstanding principal balance is payable in full. Borrowings bear interest at the prime rate plus i2.75%,
equating to i6.00% at June 30, 2021, with interest payable monthly. The KBS Loan Agreement also provides for certain fees payable to Gerber during its term, including a i1.5%
annual facilities fee and a i0.10% monthly collateral monitoring fee. KBS’s obligations under the KBS Loan Agreement are secured by all of its assets and are guaranteed by ATRM. Unsecured promissory notes issued by KBS and ATRM are subordinate to KBS’s obligations under the KBS Loan Agreement. The KBS Loan Agreement contains representations, warranties, affirmative and negative covenants, defined events of default and other provisions customary for financings of this type. Financial covenants require that KBS maintain a maximum leverage ratio (as defined in the KBS Loan Agreement)
and KBS not incur a net annual post-tax loss in any fiscal year during the term of the KBS Loan Agreement. The borrowings under the KBS Loan Agreement were classified as short-term obligations under GAAP as the agreement contained a subjective acceleration clause and required a lockbox arrangement whereby certain receipts are swept daily to reduce borrowings outstanding. At June 30, 2021, approximately $i2.2 million was outstanding under the KBS Loan Agreement.
On September
10, 2019, the parties to the KBS Loan Agreement entered into the twelfth amendment to the KBS Loan Agreement (the “Twelfth KBS Amendment”), pursuant to which the Company agreed to guarantee amounts borrowed by certain ATRM’s subsidiaries from Gerber.
On January 31, 2020, the Company, ATRM, KBS and Gerber entered into a thirteenth amendment to the KBS Loan Agreement (the “Thirteenth KBS Amendment”) to amend the terms of the KBS Loan Agreement, in order to, among other things (a) amend the definitions of “Ancillary Credit Parties,”“Guarantor,”“Obligations,” and “Subordinated Lender”
to address the obligations of the Star Borrowers, the EBGL Borrowers, the Star Credit Parties, and the EBGL Credit Parties under the Star Loan Agreement, EBGL Loan Agreement and the Subordination Agreements (each as defined below) to which they are a party and (b) add a new cross default provision.
On March 5, 2020, in connection with the First EBGL Amendment, Gerber, KBS, ATRM and the Company entered into a fourteenth amendment to the KBS Loan Agreement in order to, among other things consent to the First EBGL Amendment and remove cash and cash collateral from the borrowing base.
On April 1, 2020, Gerber and KBS entered into a fifteenth amendment to the KBS Loan Agreement pursuant to which the “Minimum
Average Monthly Loan Amount” was decreased to twenty-five percent (i25%) of the Maximum Revolving Amount.
On January 5, 2021, Gerber and KBS entered into a sixteenth amendment to the KBS Loan Agreement in order to, among other things, amend certain definitions under the KBS Loan Agreement and to increase the inventory assets against which funds can be borrowed.
On February 26, 2021 Gerber and KBS entered into
a seventeenth amendment to the KBS Loan Agreement in order to provide the waiver to the 2020 covenant breach and amended the financial covenants. The financial covenants under the KBS Loan Agreement, as amended, provide that (i) KBS shall make no distribution, transfer, payment, advance, or contribution of cash or property which would constitute a restricted payment as such term is defined in the agreement; (ii) KBS shall report annual post-tax net income at least equal to (a) $i385 thousand for the trailing 6-month period ending June
30, 2021 and (b) $i500 thousand for the trailing fiscal year end December 31, 2021; and (iii) a minimum EBITDA at June 30, 2021 of more than $i880 thousand
or at December 31, 2021 of more than $i1.5 million.
31
On March 31, 2021, the parties to the KBS Loan Agreement amended the KBS Loan Agreement to provide for increased availability under the KBS Loan Agreement
to KBS under certain circumstances, including for new equipment additions, and certain other changes, as well as a waiver of certain covenants.
As of June 30, 2021 and December 31, 2020, KBS was not in compliance with the financial covenants requiring no net annual post-tax income for KBS of at least $i385 thousand and EBITDA to equal at least $i880 thousand,
during the six months ended June 30, 2021. The occurrence of any event of default under the KBS Loan Agreement may result in KBS’s obligations under the KBS Loan Agreement becoming immediately due and payable. Subsequently, we obtained a waiver from Gerber for these events.
On July 30, 2021 in connection with the Fourth EBGL Amendment, Gerber, KBS, ATRM and the Company entered into an eighteenth amendment to the KBS Loan Agreement in order to, among other things, (a) confirm the cancellation of certain subordination agreements with Lone Star Value Management, LLC (“LSVM”) and Lone Star Value Co-Invest I, LP (“LSV Co-Invest I”), after the LSVM Note and LSV Co-Invest June Note and January Note were paid by the
Company, (b) amend the terms of the KBS Loan Agreement, including the definitions of “Ancillary and “Subordinated Lender” to include SRE and remove LSVM and LSV Co-Invest I, and (c) add confirm certain cross-default provisions.
EBGL Premier Note
On June 30, 2017, EdgeBuilder and Glenbrook (together, EBGL) entered into a Revolving Credit Loan Agreement (as amended, the “Premier Loan Agreement”) with Premier providing EBGL with a working capital line of credit of up to $i3.0 million.
The Premier Loan Agreement replaced the prior revolving credit facility.
Availability under the Premier Loan Agreement is based on a formula tied to EBGL’s eligible accounts receivable, inventory and equipment, and borrowings bear interest at the prime rate plus i1.50%, with interest payable monthly and the outstanding principal balance payable upon expiration of the term of the Premier Loan Agreement. The Premier Loan Agreement also provides for certain fees payable to Premier during its term. The initial term of the Premier Loan
Agreement was scheduled to expire on June 30, 2018, but was extended multiple times by Premier until January 31, 2023. EBGL’s obligations under the Premier Loan Agreement are secured by all of their inventory, equipment, accounts and other intangibles, fixtures and all proceeds of the foregoing.
On January 31, 2020, Glenbrook and EdgeBuilder entered into an Extension and Modification Agreement (the “Modification Agreement”) with Premier that modified the terms of the Revolving Credit Promissory Note made by Glenbrook and EdgeBuilder. The Modification Agreement reduced the outstanding borrowings to $i1.0 million,
extended the final maturity date to January 31, 2023, and set the interest rate to at i5.75% per annum. Mr. Eberwein executed a guaranty in favor of Premier, which had been extended through January 1, 2023, under which ATRM and Mr. Eberwein absolutely and unconditionally guaranteed all of EBGL’s obligations under the Premier Loan Agreement.
As of June 30, 2021, all obligations under
the Premier Loan Agreement have been repaid in full and ino amount remains outstanding. In exchange Premier terminated all of its security interests in the assets of EBGL.
Gerber Star and EBGL Loans
On January 31, 2020, SRE, 947 Waterford Road, LLC (“947 Waterford”), 300 Park Street, LLC (“300 Park”), and 56 Mechanic Falls Road, LLC (“56 Mechanic” and together with SRE, 947 Waterford, and 300 Park, (the “Star Borrowers”), each
an Investments Subsidiary, and the Company, ATRM, KBS, EdgeBuilder, and Glenbrook (collectively, the “Star Credit Parties”), entered into a Loan and Security Agreement (as amended, the “Star Loan Agreement”) with Gerber providing the Star Borrowers with a credit facility with borrowing availability of up to $i2.5 million ($i2.0 million
and $i0.5 million to KBS and EBGL, respectively) (the “Star Loan”). The advance of $i2.0 million
to KBS is to be repaid in monthly installments of sixty (i60) consecutive equal payments. The advance of $i0.5 million to EBGL, which has been temporarily increased by
$i0.3 million due to be repaid on April 30, 2020, is to be repaid in monthly installments of twelve (12) consecutive equal payments. On February 20, 2020, the Star Borrowers entered into a first amendment to the Star Loan Agreement (the “First Star Amendment”) in order to (i) temporarily advance $i0.3 million
to EBGL, which amount is to be repaid to Gerber on or before April 30, 2020; (ii) clarify that Gerber can make multiple advances under the Star Loan Agreement, and (iii) to correct the maturity date of the Star Loan. On April 30, 2020, the Star Borrowers entered into a second amendment to the Star Loan Agreement (the “Second Star Amendment”) to change terms of repayment for the advance of $i0.3 million to EBGL to provide for repayment
in three consecutive equal monthly installments, commencing on May 30, 2020, with a final installment on or before July 31, 2020. EBGL paid off approximately $i0.5 million of the advance in 2020 and $i1.2
million was outstanding, net with deferred financing costs, under the Star Loan Agreement as of June 30, 2021.
32
On January 31, 2020, EdgeBuilder and Glenbrook (the “EBGL Borrowers”), each a Construction subsidiary, and the Company, Star, 947 Waterford, 300 Park, 56 Mechanic, ATRM, and KBS (collectively, the “EBGL Credit Parties”), entered into a Loan and Security Agreement (the “EBGL Loan Agreement”) with Gerber providing the EBGL Borrowers with a credit facility with borrowing availability of up to $i3.0 million
(the “EBGL Loan”). On March 5, 2020, the EBGL Borrowers entered into a first amendment to the EBGL Loan Agreement (the “First EBGL Amendment”) with Gerber that amended the EBGL Loan Agreement and the KBS Loan Agreement to include a pledge $i0.3 million of cash collateral by LSVI under the EBGL Loan Agreement which, prior to the First EBGL Amendment, was pledged by LSVI in connection with the KBS Loan Agreement. On July 1, 2020, the EBGL Borrowers entered into a second amendment to the EBGL Loan Agreement to terminate
the pledge of $0.3 million in cash collateral. On February 26, 2021, the EBGL Borrowers entered into a third amendment to the EBGL Loan Agreement (the “Third EBGL Amendment”) pursuant to which the Company and Gerber agreed to, among other things, eliminate the minimum leverage ratio covenant, lower the minimum EBITDA, and require the borrowers to not incur a net operating loss on bi-annual basis. The Third EBGL Amendment also discharged the EBGL Eberwein Guaranty described below. As of June 30, 2021, approximately $i2.5 million
was outstanding under the EBGL Loan Agreement.
Availability under the Star Loan Agreement is based on a formula tied to the value of real estate owned by the Star Borrowers, and borrowings bear interest at the prime rate plus i3.5% per annum. Availability under the EBGL Loan Agreement is based on a formula tied to the EBGL Borrowers’ eligible accounts receivable and inventory, and borrowings bear interest at the prime rate plus i2.75%
per annum. The Loan Agreements also provide for certain fees payable to Gerber during their respective terms. The Star Loan matures on the earlier of (a) January 1, 2025 or (b) the termination, the maturity or repayment of the EBGL Loan. The EBGL Loan matures on the earlier of (a) January 1, 2022, unless extended, or (b) the termination, the maturity or repayment of the Star Loan. The maturity of the EBGL Loan is automatically extended for successive periods of one (i1) year each unless terminated by
Gerber or the EBGL Borrowers. The borrowings under the EBGL Loan Agreement were classified as short-term obligations under GAAP as the agreement contained a subjective acceleration clause and required a lockbox arrangement whereby all receipts are swept daily to reduce borrowings outstanding.
The obligations of the EBGL Borrowers under the EBGL Loan Agreement are guaranteed by the EBGL Credit Parties and are secured by substantially all the assets of the EBGL Borrowers and the EBGL Credit Parties. The obligations of the Star Borrowers under the Star Loan Agreement are guaranteed by the Star Credit Parties and are secured by substantially all the assets of the Star Borrowers and the Star Credit Parties. Contemporaneously with the execution and delivery of the Star Loan Agreement, Jeffrey E. Eberwein, the
Executive Chairman of the Company’s board of directors, executed and delivered a Guaranty (the “Gerber Eberwein Guaranty”) to Gerber pursuant to which he guaranteed the performance of all the Star Borrowers’ obligations to Gerber under the Star Loan Agreement, including the full payment of all indebtedness owing by the Star Borrowers to Gerber under or in connection with the Star Loan Agreement and related financing documents. Mr. Eberwein’s obligations under the Gerber Eberwein Guaranty are limited in the aggregate to the amount of (a) $i2.5 million,
plus (b) costs of Gerber incidental to the enforcement of the Gerber Eberwein Guaranty or any guaranteed obligations. On March 5, 2020, contemporaneously with the execution and delivery of the First EBGL Amendment, Mr. Eberwein, the Executive Chairman of the Company’s board of directors, executed and delivered a Guaranty (the “EBGL Eberwein Guaranty”) to Gerber pursuant to which he guaranteed the performance of all the EBGL Borrowers’ obligations to Gerber under the EBGL Loan Agreement, including the full payment of all indebtedness owing by the EBGL Borrowers to Gerber under or in connection with the EBGL Loan Agreement and related financing documents. Mr. Eberwein’s obligations under the EBGL Eberwein Guaranty are limited in the aggregate to the amount of (a) $i0.5 million,
plus (b) costs of Gerber incidental to the enforcement of the EBGL Eberwein Guaranty or any guaranteed obligations.
On February 26, 2021, the Star Borrowers entered into a third amendment to the Star Loan Agreement (the “Third Star Amendment”) with Gerber that, among other things, amended the contract rate to prime rate plus i3% and discharged the $i2.5 million
Gerber Eberwein Guaranty.
On July 30, 2021, the Star Borrowers entered into a fourth amendment to the Star Loan Agreement (the “Fourth Star Amendment”) with Gerber that, among other things, amended the terms of the Star Loan Agreement, in order to, among other things to increase the eligible inventory against which Gerber will advance credit, to increase the line of credit from $i3.0 million to $i4.0 million,
with a new promissory note between Gerber and EBGL, and amend the definition of “Subordinated Lender” to include only Star Procurement, Inc., ATRM, and the Company.
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The Star Loan Agreement and EBGL Loan Agreement contain representations, warranties, affirmative and negative covenants, events of default and other provisions customary for financings of this type. The financial covenants under the EBGL Loan Agreement applicable to the EBGL Borrowers include maintenance of a minimum tangible net worth, a minimum debt service coverage ratio and minimum net income. The Financial covenants under the Star Loan Agreement applicable to the Star Borrowers include a minimum debt service coverage
ratio. The occurrence of any event of default under the Loan Agreements may result in the obligations of the Borrowers becoming immediately due and payable. As of June 30, 2021, EBGL was not in compliance with the financial covenants under the Star Loan Agreement and EBGL Loan Agreement. The occurrence of any event of default under the EBGL Loan Agreement may result in EBGL’s obligations under the EBGL Loan Agreement becoming immediately due and payable. In July, 2021, we obtained a waiver from Gerber for these events and, as part of the Fourth EBGL Amendment (described above).
As a condition to the extension of credit to the Star Borrowers and EBGL Borrowers under the Star Loan Agreement and EBGL Loan Agreement, the holders of certain existing unsecured promissory notes made by ATRM and certain of its subsidiaries
entered into subordination agreements (the “Subordination Agreements”) with Gerber pursuant to which such noteholders (including the Company and certain of its subsidiaries) agreed to subordinate the obligations of ATRM and its subsidiaries to such noteholders to the obligations of the Star Borrowers and EBGL Borrowers to Gerber under the loan agreements.
Paycheck Protection Program
From April 2020 through May 2020, the Company and its subsidiaries
received $i6.7 million, of loans under the Paycheck Protection Program (“PPP”). Total PPP loans received the Healthcare division and Construction division were $i5.5 million and $i1.2 million,
respectively.
The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). PPP loans for the Construction and Healthcare division were made through Bremer Bank and Sterling as lenders, respectively.
The PPP loans have two-year terms and bear interest at a rate of 1.00% per annum. Monthly principal and interest payments under the PPP loans are deferred for ten months, after the end of covered periods. The PPP loans may be prepaid at any time prior to maturity with no prepayment penalties.
The promissory notes issued in connection with the PPP loans (the “PPP Notes”) contain customary events of default relating to, among other things, payment defaults, making materially false and misleading representations
to the SBA or lender, or breaching the terms of the applicable PPP loan documents. Upon an event of default under a PPP Note, the lender thereunder may, among other things, require immediate payment of all amounts owing under the applicable PPP Note, collect all amounts owing from the applicable borrower, or file suit and obtain judgment.
Under the terms of the CARES Act, recipients of loans under the PPP can apply for and be granted forgiveness for all or a portion of the loan granted under the PPP. Such forgiveness is determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and certain other eligible costs. Even if forgiveness is granted the PPP loans may remain subject to review and audit for up to six (6) years.
During Q4 2020 and January 2021, the Company
applied for forgiveness on all PPP loans. As of Q4 2020, $i2.5 million of the Healthcare division PPP Notes were forgiven. During Q2, 2021, all amounts under the Construction division and Healthcare division PPP Notes were forgiven. As of June 30, 2021, the Company has no PPP loans outstanding.
Note
9. iCommitments and Contingencies
In the normal course of business, we have been, and will likely continue to be, subject to other litigation or administrative proceedings incidental to our business, such as claims related to customer disputes, employment practices, wage and hour disputes, product liability, professional liability, commercial disputes, licensure restrictions or denials, and warranty or patent infringement. Responding to litigation or administrative proceedings, regardless of whether they have
merit, can be expensive and disruptive to normal business operations. We are not able to predict the timing or outcome of these matters and do not expect that the resolution of these matters will have a material adverse effect on our financial position or results of operations.
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Note 10. iIncome
Taxes
We provide for income taxes under the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of differences between the tax basis of assets or liabilities and their carrying amounts in the financial statements. We provide a valuation allowance for deferred tax assets if it is more likely than not that these items will expire before we are able to realize their benefit. We calculate the valuation allowance in accordance with the authoritative guidance relating to income taxes, which requires an assessment of both positive and negative evidence regarding the realizability of these deferred tax assets, when measuring the need for a valuation allowance. Significant judgment is required in determining any valuation allowance against deferred tax assets. We continue to record a full valuation allowance against our deferred tax
assets and intend to maintain a valuation allowance until sufficient positive evidence exists to support its reversal.
Intraperiod tax allocation rules require us to allocate our provision for income taxes between continuing operations and other categories of comprehensive income, such as discontinued operations.
For the three months ended June 30, 2021, we recorded an income tax expense of $i32 thousand within continuing operations and
zero income tax expense within discontinued operations. For the three months ended June 30, 2020, we recorded an income tax expense of $i34 thousand within continuing operations and an income tax expense of $i17
thousand within discontinued operations.
For the six months ended June 30, 2021, we recorded an income tax expense of $i34 thousand within continuing operations and an income tax expense of $i72
thousand within discontinued operations. For the six months ended June 30, 2020, we recorded an income tax expense of $i61 thousand within continuing operations and an income tax expense of $i23
thousand within discontinued operations.
As of June 30, 2021, we had unrecognized tax benefits of approximately $i2.6 million related to uncertain tax positions. Included in the unrecognized tax benefits were $i2.1
million of tax benefits that, if recognized, would reduce our annual effective tax rate, subject to the valuation allowance.
We file income tax returns in the U.S. and in various state jurisdictions with varying statutes of limitations. We are no longer subject to income tax examination by tax authorities for years prior to 2016; however, our net operating loss carryforwards and research credit carryforwards arising prior to that year are subject to adjustment. Our policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense.
On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). There were several income tax provisions included in the CARES Act, as well
as other non-tax matters incorporated into law as a result of the enactment of the CARES Act.
Under the CARES Act, net operating losses generated in tax years 2018, 2019, and 2020 can be carried back five years, allowing corporate taxpayers to amend earlier tax returns and potentially obtain a tax refund. In addition, losses generated and utilized prior to January 1, 2021 are not subject to the 80 percent limitation that was previously applied to losses generated after December 31, 2017 under the Tax Cuts and Jobs Act of 2017. We don’t currently estimate that any tax will be recoverable from these tax provisions and therefore does not anticipate there to be a material impact from these provisions on our income tax balances in its current year financial statements.
The Tax Cuts and
Jobs Act of 2017 limited interest deductions to 30% of adjusted taxable income (ATI). The CARES Act increases the limitation to 50 percent of adjusted taxable income for tax years 2019 or 2020, thereby raising the limitation ceiling and potentially allowing for increased interest deductions.In addition, companies have the option of using 2019 ATI to compute the limitation for 2020.We tentatively plans to take advantage of certain of these provisions to eliminate any potential section 163(j) interest carryovers from its inventory of deferred tax assets for the year ending December 31, 2020.
The CARES Act adopts a technical correction to the Tax Cuts and Jobs Act’s apparent oversight in excluding the eligibility of qualified improvement property (e.g., real estate/leasehold improvements)
from eligibility for bonus depreciation for tax years after 2017.Companies are allowed to amend 2018 income tax or file accounting method changes in 2019 to claim the additional deductions.We are still evaluating the impact of this provision; however, we do not anticipate that this provision will have any impact on our tax expense or payable balances.If pursued, this provision may have an impact on our allocation of its deferred tax assets related to property, plant, and equipment and net operating losses, which are substantially offset by the full valuation allowance.
Certain other provisions of the CARES Act, such as the ability to obtain a refund of alternative minimum taxes (“AMT”) previously paid to the IRS and the increased ability to deduct charitable contributions
by corporations are not expected to be applicable to us. Overall, we do not expect the income tax provisions of the CARES Act to have a material impact to our financial statements.
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On December 21, 2020, Congress passed the $2.3 trillion Consolidated Appropriations Act, 2021, H.R. 133 (the “Act”), which combined the $1.4 trillion omnibus spending bill for the 2021 federal fiscal year with the $900 billion stimulus relief package aimed to respond to the economic fallout caused by the COVID-19 pandemic. On December 27, 2020, the United States enacted the Consolidated Appropriations Act of 2021 (CAA). The CAA includes provisions extending certain CARES Act provisions
and adds coronavirus relief tax and health extenders. We will continue to evaluate the impact of the CAA and its impact on our financial statements in 2021 and beyond.
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Note 11. iSegments
Our
business is organized into four reportable segments:
1. Diagnostic Services
2. Diagnostic Imaging
3. Construction
4. Investments
Effective January 1, 2020, we revised the allocation methodology used to allocate corporate costs to each of the operating segments. “Loss (income) by operating segment” for the historical period has been recast to conform to our current allocation methodology. iSegment
information is as follows (in thousands):
On March 29, 2019, in connection with the Company’s entry into the SNB Loan Agreement, Mr. Eberwein, the Executive Chairman of the Company’s board of
directors, entered into the Limited Guaranty Agreement (the SNB Eberwein Guaranty) with SNB pursuant to which he guaranteed to SNB the prompt performance of all the Borrowers’ obligations to SNB under the SNB Loan Agreement, including the full payment of all indebtedness owing by Borrowers to SNB under or in connection with the SNB Loan Agreement and related SNB Credit Facility documents. Mr. Eberwein’s obligations under the SNB Eberwein Guaranty are limited in the aggregate to the amount of (a) $i1.5 million, plus (b) reasonable costs and expenses of SNB incurred
in connection with the SNB Eberwein Guaranty. Mr. Eberwein’s obligations under the SNB Eberwein Guaranty terminate upon the Company and SNB Borrowers achieving certain milestones set forth therein.
Gerber
On March 5, 2020, contemporaneously with the execution and delivery of the First EBGL Amendment, Mr. Eberwein, the Executive Chairman of the Company’s board of directors, executed and delivered a Guaranty (the EBGL Eberwein Guaranty) to Gerber pursuant to which he guaranteed the performance of all the EBGL Borrowers’ obligations to Gerber under the EBGL Loan Agreement, including the full payment of all indebtedness owing by the EBGL Borrowers to Gerber under or
in connection with the EBGL Loan Agreement and related financing documents. Mr. Eberwein’s obligations under the EBGL Eberwein Guaranty were limited in the aggregate to the amount of (a) $i0.5 million, plus (b) costs of Gerber incidental to the enforcement of the EBGL Eberwein Guaranty or any guaranteed obligations.
On February 26, 2021, the Third EBGL Amendment discharged the EBGL Eberwein Guaranty and removed Mr. Eberwein as an ancillary guarantor from the EBGL Loan
Agreement. On February 26, 2021, the Third Star Amendment discharged the $i2.5 million Gerber Eberwein Guaranty.
Premier
As a condition to the Premier Loan Agreement, Mr. Eberwein entered into a guaranty in favor of Premier, absolutely and unconditionally guaranteeing all of the borrowers’ obligations thereunder. As of June 30, 2021, all obligations under the Premier Loan Agreement have been repaid in full and
no amount remains outstanding.
Premier Participation
Pursuant to a certain Participation Agreement by and between Mr. Eberwein and Premier, which was signed on March 31, 2020 and was effective as of March 26, 2020, Mr. Eberwein purchased a ratable participation in, and assumed a ratable part of, the aggregate maximum principal amount of the outstanding balance of the loan under the Premier Loan Agreement in the amount of $i0.3 million.
This participation amount has been repaid.
ATRM
Jeffrey E. Eberwein, the Executive Chairman of our board of directors is also the Chief Executive Officer of Lone Star Value Management, LLC (“LSVM”), which is the investment manager of Lone Star Value Investors, LP (“LSVI”) and Lone Star Value Co-Invest I, LP (“LSV Co-Invest I”). Mr. Eberwein is also the sole manager of Lone Star Value Investors GP, LLC (“LSV GP”), the general partner of LSVI and LSV Co-Invest I, and is the sole owner of LSV Co-Invest I. LSVM was a wholly owned subsidiary of ATRM on the ATRM Acquisition Date (see Acquisition of LSVM below). Prior to the closing of the ATRM Merger, Mr. Eberwein was also Chairman of the board of directors of ATRM. On October 25,
2019, ATRM distributed its interest in LSVM to Star Equity, resulting in LSVM becoming a wholly owned direct subsidiary of Star Equity.
Prior to the closing of the ATRM Merger, Mr. Eberwein and his affiliates owned approximately i4.3% of the outstanding Company common stock and i17.4%
of the outstanding ATRM common stock. In addition, LSVI owned i222,577 shares of ATRM’s i10.0% Series B Cumulative Preferred Stock (the “ATRM Preferred Stock”) and another
i374,562 shares of ATRM Preferred Stock were owned directly by LSV Co-Invest I. Through these relationships and other relationships with affiliated entities, Mr. Eberwein may be deemed the beneficial owner of the securities owned by LSVI and LSV Co-Invest I. Mr. Eberwein disclaimed beneficial ownership of ATRM Preferred Stock, except to the extent of his pecuniary interest therein. At the effective time of the ATRM Merger, (i) each share of ATRM common stock converted into the right to receive three one-hundredths (i0.03)
of a share of Company Preferred Stock and (ii) each share of ATRM Preferred Stock converted into the right to receive two and one-half (i2.5) shares of Company Preferred Stock.
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As of June 30,
2021, Mr. Eberwein owned approximately i3.5% of the outstanding Star Equity common stock. In addition, as of June 30, 2021, Mr. Eberwein owned i1,310,036
shares of Company Preferred Stock. Mr. Eberwein as the CEO of LSVM, which is the investment advisor of LSVI, and as the sole manager of LSV GP, which is the general partner of LSVI Mr. Eberwein may be deemed the beneficial owner of the securities held by LSVI. Mr. Eberwein disclaims beneficial ownership of Company Preferred Stock, except to the extent of his pecuniary interest therein.
On July 10, 2020, Star Equity authorized LSVI to initiate a pro-rata distribution to its partners of an aggregate of i300,000
shares of Company Preferred Stock at $i10 per share, which was finalized by the Company’s transfer agent on July 22, 2020 (the Distribution), which includes i114,624
shares of Company Preferred Stock consisting of (i) i113,780 shares of Company Preferred Stock received by the Jeffrey E. Eberwein Revocable Trust (the “Eberwein Trust”) as a result of the Distribution and (ii) i844
shares of Company Preferred Stock acquired by the Eberwein Trust as a result of shares of Company Preferred Stock distributable to LSV GP in the Distribution being transferred directly to the Eberwein Trust contemporaneously with the Distribution. At the time of the Distribution, the Eberwein Trust was a limited partner of LSVI and LSV GP was the general partner of LSVI. Mr. Eberwein, as the trustee of the Eberwein Trust, may be deemed to beneficially own the securities held in the Eberwein Trust. Mr. Eberwein expressly disclaims beneficial ownership of such securities held in the Eberwein Trust except to the extent of his pecuniary interest therein. Mr. Eberwein, by virtue of his position as the manager and sole beneficial owner of LSV GP, the general partner of LSVI, may be deemed to beneficially own the securities owned by LSVI and LSV GP. Mr. Eberwein expressly disclaims beneficial ownership of such securities owned by LSVI and the securities owned by LSV GP, except
to the extent of his pecuniary interest therein.
Private Placement
Immediately prior to the closing of the ATRM Merger, the Company issued i300,000 shares of Company Preferred Stock in a private placement (the “Private Placement”) to LSVI for a price of $i10.00
per share for total proceeds to the Company of $i3.0 million.
In
addition, prior to the effective time of the ATRM Merger, the Company entered into a put option purchase agreement with Mr. Eberwein, pursuant to which the Company has the right to require Mr. Eberwein to acquire up to i100,000 shares of Company Preferred Stock at a price of $i10.00
per share for aggregate proceeds of up to $i1.0 million at any time, in the Company’s discretion, during the 12 months following the effective time of the ATRM Merger. In March 2020, Mr. Eberwein extended the put option agreement through June 30, 2021.
ATRM Notes Payable
ATRM,
had the following related party promissory notes (the “ATRM Notes”) outstanding as of March 31, 2021, which were repaid in full during April 2021 using proceeds from the DMS Sale Transaction:
(i) Unsecured promissory note (principal amount of $i0.7 million payable to LSV Co-Invest I), with interest payable semi-annually at a rate of i10.0%
per annum (LSV Co-Invest I may elect to receive interest in-kind at a rate of i12.0% per annum), with any unpaid principal and interest previously due on January 12, 2020 (the “January Note”). On November 13, 2019, LSV Co-Invest I extended the maturity date of the January Note from January 12, 2020, to the earlier of (i) October 1, 2020 and (ii) the date when the January
Note is no longer subject to a certain Subordinate Agreement dated January 12, 2018, as amended, in favor of Gerber. As described below, in November 2020 and March 2021, Mr. Eberwein signed the second and third extension letter to extend the maturity date of the January Note.
(ii) Unsecured promissory note (principal amount of $i1.2 million payable to LSV Co-Invest I), with interest payable semi-annually at a rate of i10.0%
per annum (LSV Co-Invest I may elect to receive interest in-kind at a rate of i12.0% per annum), with any unpaid principal and interest previously due on June 1, 2020 (the “June Note”). On November 13, 2019 LSV Co-Invest I also extended the maturity date of the June Note from June 1, 2020, to the earlier of (i) October 1, 2020 and (ii) the date when the January Note is
no longer subject to a certain Subordinate Agreement dated June 1, 2018, as amended, in favor of Gerber. As described below, in November 2020 and March 2021, Mr. Eberwein signed the second and third extension letter to extend the maturity date of the June Note.
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(iii) Unsecured promissory note (principal amount of $i0.4 million payable
to LSVM), with interest payable annually at a rate of i10.0% per annum (LSVM may elect to receive any interest payment entirely in-kind at a rate of i12.0% per annum), with any
unpaid principal and interest previously due on November 30, 2020 (the “LSVM Note”). As described below, in November 2020, Mr. Eberwein signed the second and third extension letter to extend the maturity date of the LSVM Note.
LSVM and LSV Co-Invest I on July 17, 2019, waived any right to accelerate payment with respect to the ATRM Merger under the ATRM Notes. In March 2020, Mr. Eberwein, sole manager of LSV Co-Invest I and LSVM, provided the Company a Letter of Support of the ATRM Notes indicating that he will take no adverse action against ATRM for failure to pay the principal due on the ATRM Notes by the maturity date and intends to work with the Company
and ATRM to assure the financial success of the Company. In November 2020, Mr. Eberwein signed the second extension letter to extend the maturity date of the ATRM Notes to the earlier of (i) the date that is 5 business days after the Closing Date defined within the DMS stock Purchase Agreement dated October 30, 2020 between the Company and Knob Creek Acquisition Corp. or (ii) the date when the Note is no longer subject to a certain subordinate letter agreement dated January 12, 2018, as amended in favor of Gerber. In March 2021, Mr. Eberwein signed the third extension letter to extend the maturity dates of the ATRM Notes to aforementioned two conditions or to June
30, 2022. The ATRM Notes were paid off in full in April 2021, upon the completion of DMS Sale Transaction.
Subordination Agreement
LSVM and LSV Co-Invest I were parties to subordination agreements with ATRM and Gerber pursuant to which LSVM and LSV Co-Invest I agreed to subordinate the obligations of ATRM under their unsecured promissory notes to the obligations of the borrowers to Gerber. These subordination agreements were cancelled with the execution of the eighteenth amendment to the KBS Loan Agreement and the fourth amendment to the EGBL Loan Agreement,
Note 13. iPerpetual
Preferred Stock
Holders of shares of Series A Preferred Stock (the Preferred Stock) are entitled to receive, when, as and if, authorized by the board of directors (or a duly authorized committee of the board of directors) and declared by the Company out of funds legally available for the payment of dividends, preferential cumulative cash dividends at the rate of i10.0% per annum of the liquidation preference of $i10.00
per share. Dividends are payable quarterly, in arrears, on the last calendar day of March, June, September and December to holders of record at the close of business on the first day of each payment month. The Preferred Stock is not convertible and does not have any voting rights, except when dividends are in arrears for six or more consecutive quarters, then the holders of those shares together with holders of all other series of preferred stock equal in rank will be entitled to vote separately as a class for the election of two additional directors to board of directors, until all dividends accumulated on such shares of Preferred Stock for the past dividend periods and the dividend for the then current dividend period shall have been fully paid or declared and a sum sufficient for the payment thereof set apart for payment. Under change of control or other conditions, the Preferred Stock may be subject to redemption. We may redeem the Preferred Stock upon the occurrence
of a change of control, subject to certain conditions. We may also voluntarily redeem some or all of the Preferred Stock on or after September 10, 2024.
On May 26, 2021, our board of directors declared a cash dividend to holders of the i10% Series A Cumulative Perpetual Preferred Stock of $i0.25
per share, for an aggregate amount of approximately $i479 thousand. The record date for this dividend was June 1, 2021, and and the payment date was on June 11, 2021.
As of June 30, 2021, the aggregate and per-share amounts of cumulative preferred dividends in arrears are $i3.0 million
and $i1.56 per share, respectively.
i
A roll forward of the balance of Preferred Stock for the quarter ended June 30,
2021 is as follows (in thousands):
On June 2, 2021, the Board of Directors adopted a tax benefit preservation plan in the form of a Section 382 Rights Agreement (the “382 Agreement”). The 382 Agreement is intended to diminish the risk that our ability to use our net operating loss carryforwards to reduce future federal income tax obligations may become substantially limited due to an “ownership change,” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the “Code’). The Board authorized and declared a dividend distribution of one right for each outstanding share of common stock, par value $i0.0001
per share, to stockholders of record as of the close of business on June 14, 2021. Each right entitles the registered holder to purchase from the one one-thousandth of a share of Series C Participating Preferred Stock, par value $i0.0001 per share, at an exercise price of $i12.00
per one one-thousandth of a Preferred Share, subject to adjustment.
The rights will become exercisable following (i) i10 days after a public announcement that a person or group has become an Acquiring Person; and (ii) i10
business days (or a later date determined by the Board) after a person or group begins a tender or an exchange offer that, if completed, would result in that person or group becoming an Acquiring Person.
In addition, upon the occurrence of certain events, the exercise price of the rights would be adjusted and holders of the rights (other than rights owned by an acquiring person or group) would be entitled to purchase common stock at approximately half of market value. Given the potential adjustment of the exercise price of the rights, the rights could cause substantial dilution to a person or group that acquires i4.99%
or more of common stock on terms not approved by the Board of Directors.
iNo rights were exercisable at June 30, 2021. There is no impact to financial results as a result of the adoption of the rights plan for the quarter ended June 30, 2021.
Note
15. iSubsequent Events
On August 4, 2021, our Board of Directors approved to distribute Star Equity’s interest in Diagnostic Imaging Solutions, Inc. (“Diagnostic Services”) business to Digirad Health, resulting in Diagnostic Imaging Service becoming a wholly owned direct subsidiary of Digirad Health.
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ITEM
2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This management’s discussion and analysis of financial condition and results of operations (“MD&A”), contains forward-looking statements that involve risks and uncertainties. Please see “Important Information Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks, and assumptions that may cause our actual results to differ materially from those discussed in the forward-looking statements. This discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q, and the audited consolidated financial statements and related notes thereto for the fiscal year ended December 31, 2020,
which were included in our Form 10-K, filed with the SEC on March 29, 2021.
The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods.
Overview
Star Equity, known prior to January 1, 2021 as Digirad Corporation, has operated as a multi-industry holding company since the acquisition of ATRM in September 2019. With that merger, we added two construction businesses to what had historically been a pure-play healthcare company. Today, Star Equity is a diversified holding company with operating businesses in two key industry sectors of the economy, healthcare and construction.
Our
Healthcare division, which operates as Digirad Health, provides products and services in the area of nuclear medical imaging with a focus on cardiac health. Digirad Health operates across the U.S. The healthcare business involves two reporting segments, Diagnostic Services, which offers imaging services to healthcare providers using a fleet of our proprietary solid-state gamma cameras and Diagnostic Imaging, which manufactures, distributes and maintains our proprietary solid-state gamma cameras.
Our Construction division is a single reporting segment but is made up of three operating business, KBS, EdgeBuilder and Glenbrook. KBS is based in Maine and manufactures modular buildings for installation throughout the New England market. EdgeBuilder and Glenbrook, referred to together as “EBGL” internally and based in the Minneapolis-Saint Paul area, together manufacture and deliver
structural wall panels and other engineered wood-based products as well as distribute building materials to professional builder customers in the Upper Midwest.
Currently, our Investments division is an internally-focused unit that is directly supervised by Star Equity management and is primarily responsible for the management of our real estate and investments, which currently includes our three manufacturing facilities in Maine that are leased to KBS.
Strategy
Star Equity
We believe our diversified, multi-industry holding company structure will allow Star Equity management to focus on capital allocation, strategic leadership, mergers and acquisitions, capital markets transactions, investor relations, management of our real estate and investments, and other
public company activities. Our structure will free up our operating Chief Executive Officers to manage their respective businesses, improve operations, and look for organic and bolt-on growth opportunities, with fewer distractions and less administrative burden.
We continue to explore strategic alternatives to improve the market position and profitability of our product offerings in the marketplace, generate additional liquidity, and enhance our valuation. We may pursue our goals through organic growth or through strategic transactions. Some of these strategic transactions have included, and could continue to include, selective acquisitions of business segments or entire businesses, divestitures of assets or divisions, or a restructuring of our company.
We
seek to grow our business by, among other things:
•Organic growth from our core businesses. We believe that we operate in markets and geographies that will allow us to continue to grow our core businesses, allowing us to benefit from our scale and strengths. We plan to focus our efforts on markets in which we already have a presence in order to take advantage of personnel, infrastructure, and brand recognition we have in these areas.
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•Introduction of new services. In the Healthcare division, we plan to continue to focus on healthcare solutions related businesses that deliver necessary assets, services and logistics directly to the customer
site. We believe that over time we can either purchase or develop new and complementary businesses and take advantage of our customer loyalty and distribution channels. In the Construction division, we will consider opportunities to augment our service offering to better serve our customer base. We have done this in the New England market by adding a structural wall panel line. Other areas might include logistics, installation on site, and manufacturing of sub-components or enhancements that create even more complete modules, such as full HVAC installation.
•Acquisition of complementary businesses. We plan to continue to look at complementary businesses that meet our internally developed financially disciplined approach for acquisitions to grow our company. We believe there are many potential
small targets that can be acquired over time and integrated into our platform. We will also look at larger, more transformational acquisitions (public or private) if we believe the appropriate mix of value, risk and return is present for our shareholders. The timing of these potential acquisitions will always depend on market conditions, available capital, and the value for each transaction. In general, we want to be “value” buyers, and will not pursue any transaction unless we believe the post-transaction potential value is high for shareholders.
Current Market Conditions
Since the second quarter of 2020, navigating the COVID-19 pandemic has proved to be challenging year for the vast majority of businesses across many sectors of the economy. As the vaccine rollout expanded through the second quarter of this year, we have seen our businesses
return substantially to pre-COVID levels. We believe the uncertainty surrounding the pandemic will continue to decrease as we progress through second half of 2021. On the healthcare side, we see imaging volume stabilize at pre-pandemic levels. In construction, we expect that continued recovery in employment and a strong housing market will underpin a period of secular growth.
The target market for our healthcare products and services is comprised of cardiologists, internal medicine physicians, family practice physicians, hospitals, IDNs, and federal institutions in the United States that perform or could perform a diagnostic imaging procedure, have a need for cardiac event monitoring, or have interest in purchasing a diagnostic imaging products. Our diagnostic services businesses currently operate in approximately 25 states. The overriding challenge during 2020 was the drop in imaging volume due to the COVID-19 pandemic. During
the six months ended June 30, 2021, we have seen a return to a more normal pre-COVID volume of imaging.
The target market for our construction division includes residential home builders, general contractors, owners or developers of commercial buildings, and individual retail customers. While housing demand and home improvement activity continues to be very strong, this demand and supply disruptions resulting from the COVID-19 pandemic caused a historic increase in the price of building materials during second half of 2020 and through the second quarter of 2021. While revenues have tracked the robust activity in the housing sector, our bottom line has been impacted by this rapid price increase in materials. As the second quarter 2021 came to a close, prices began to decline and are significantly lower than the peak. We believe this will bode well for second half of 2021 as our
pricing levels have increased due to adjustments made in the first half of 2021.
Trends and Drivers
The market for diagnostic services and products is highly competitive. Our business, which is focused primarily on the private practice and hospital sectors, continues to face uncertainty in the demand for diagnostic services and imaging equipment, which we believe is due in part to the impact of the Deficit Reduction Act on the reimbursement environment and the 2010 Healthcare Reform laws, COVID-19 pandemic impact, as well as general uncertainty in overall healthcare and legislative changes in healthcare, such as the Affordable Care Act. These challenges have impacted, and will likely continue to impact, our operations. We believe that the principal competitive factors in our market include budget availability for our capital equipment, qualifications for reimbursement, pricing, ease-of-use,
reliability, and mobility. We have addressed, and will continue to address, these market pressures by modifying our Diagnostic Services business models, and by assisting our healthcare customers in complying with new regulations and requirements.
In our construction division, we continue to see a greater adoption of offsite or prefab construction in single-family and multi-family residential building projects, our target market. Our modular units and structural wall panels offer builders a number of benefits over traditional onsite or “stick built” construction. These include shorter time to market, higher quality, reduced waste, readily available labor and potential cost savings, among others. 3D BIM software modeling and developments in engineered wood products offers greater design flexibility for higher-end applications. The need for more affordable housing solutions also presents a great opportunity for the continued
emergence of factory built housing.
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COVID-19 Pandemic
During the three and six months ended June 30, 2021, we had a $5.4 million and $5.0 million increase in Healthcare division revenue, respectively and a $5.9 million and $9.5 million increase, respectively, in Construction division revenue, as compared to the same period of the prior year. We have largely recovered from the economic effects of the COVID-19 pandemic and made our way back to pre-COVID-19 levels of business activity, and we have actual revenue growth, especially in our construction division. On the healthcare side, we have seen imaging volume recover as the pandemic is brought further under control. In construction,
the continued recovery in employment and a strong housing market underpinned the growth in that division. However, we experienced high costs in the price of materials. The current COVID-19 pandemic, which is impacting worldwide economic activity, poses the risk that the Company or its employees, contractors, suppliers, and other partners may be prevented from conducting business activities for an indefinite period of time, including due to shutdowns that may be requested or mandated by governmental authorities. The extent to which the COVID-19 pandemic will impact the Company’s business will depend on future developments that are highly uncertain and cannot be predicted at this time.
Discontinued Operations
The DMS
Sale Transaction was completed on March 31, 2021, for $18.75 million in cash, subject to certain adjustments, including a working capital adjustment. The divestiture of DMS Health, which operated our Mobile Healthcare segment, met the definition of a strategic shift that has a significant effect on our operations and financial results; therefore, the results of operations for the Mobile Healthcare segment have been presented as discontinued operations in accordance with ASC 205-20, Presentation of Financial Statements-Discontinued Operations for all periods presented. Additionally, Mobile Healthcare’s assets and liabilities as of December 31, 2020 are separately presented as held for sale on the unaudited consolidated balance sheet. Unless otherwise noted, discussion within these notes to the unaudited consolidated financial statements relates to continuing operations.
Business Segments
As of June 30, 2021, our business is organized into four reportable segments:
•Diagnostic Services
•Diagnostic Imaging
•Construction
•Investments
Diagnostic Services
Through this segment, we offer a convenient and economically efficient imaging and monitoring services program as an alternative to purchasing equipment or outsourcing the procedures to another physician or imaging center. For physicians who wish to perform nuclear imaging, echocardiography, vascular
or general ultrasound tests, we provide imaging systems, qualified personnel, radiopharmaceuticals, licensing services, and the logistics required to perform imaging in their own offices, and thereby the ability to bill Medicare, Medicaid, or one of the third-party healthcare insurers directly for those services, which are primarily cardiac in nature. We provide imaging services primarily to cardiologists, internal medicine physicians, and family practice doctors who typically enter into annual contracts for a set number of days ranging from once per month to five times per week.
Diagnostic Imaging
Through this segment, we sell our internally developed solid-state gamma cameras, imaging systems and camera maintenance contracts.
Our imaging systems include nuclear cardiac imaging systems, as well as general purpose nuclear imaging systems. We sell our imaging systems to physician offices and hospitals primarily in the United States, although we have sold a small number of imaging systems internationally. Our imaging systems are sold in both portable and fixed configurations, provide enhanced operability and improved patient comfort, fit easily into floor spaces as small as seven feet by eight feet, and facilitate the delivery of nuclear medicine procedures in a physician’s office, an outpatient hospital setting, or within multiple departments of a hospital (e.g., emergency and operating rooms). Our Diagnostic Imaging segment revenues derive primarily from selling solid-state gamma cameras and post-warranty camera maintenance contracts.
Construction
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Through
this segment, by way of our wholly-owned subsidiaries KBS, Glenbrook and EdgeBuilder, we service residential and commercial construction projects by manufacturing modular housing units, structural wall panels, permanent wood foundation systems, other engineered wood products, and supply general contractors with building materials. KBS is a Maine-based manufacturer that started business in 2001 as a manufacturer of modular homes. KBS offers products for both multi-family and single-family residential buildings with a focus on customization to suit the project requirements and provide engineering and design expertise. Glenbrook is a supplier of lumber, windows, doors, cabinets, drywall, roofing, decking and other building materials to professional builders and conducts its operations in Oakdale, Minnesota. EdgeBuilder is a manufacturer of structural wall panels, permanent wood foundation
systems and other engineered wood products and conducts its operations in Prescott, Wisconsin.
Investments
Through this segment, we hold real estate assets that we have acquired and will potentially manage other future investments of Star Equity. In April 2019, the Company funded the initial purchase of three manufacturing facilities in Maine that manufacture modular buildings and leased those three properties back to KBS. The initial funding of the assets acquisition was primarily through the revolver loan under our SNB Credit Facility. Since that time, we have secured a new facility from Gerber to finance these properties.
Healthcare Services and Products
Diagnostic imaging
depictions of the internal anatomy or physiology are generated primarily through non-invasive means. Diagnostic imaging facilitates the early diagnosis of diseases and disorders, often minimizing the scope, cost, and amount of care required and reducing the need for more invasive procedures. Currently, the major types of non-invasive diagnostic imaging technologies available are: ultrasound and nuclear imaging. The most widely used imaging acquisition technology utilizing gamma cameras is single photon emission computed tomography, or SPECT. All our current internally-developed cardiac gamma cameras employ SPECT technology.
Diagnostic imaging is the standard of care in diagnosis of diseases and disorders. We offer, through our businesses, the majority of these diagnostic imaging modalities. All of the diagnostic imaging modalities that we offer (both from provision of services and product sales) have been consistently utilized
in clinical applications for many years, and are stable in their use and need. By offering a wide array of these modalities, we believe that we have strategically diversified our operations in possible changing trends of utilization of one diagnostic imaging modality from another.
Construction Services and Products
In the construction business, KBS markets its modular homes products through a direct sales organization and through inside sales, outside sales, a network of independent dealers, builders, and contractors in the New England states (Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont). KBS’s direct sales organization is responsible for all commercial building projects, and works with developers, architects, owners, and general contractors to establish the scope of work, terms of payment, and general requirements for each project. KBS’s sales people
also work with independent dealers, builders, and contractors to accurately configure and place orders for residential homes for their end customers. KBS’s network of independent dealers and contractors do not work with it exclusively, although many have KBS model homes on display at their retail centers. KBS does not assign exclusive territories to its independent dealers and contractors, but they tend to sell in areas of New England where they will not be competing against another KBS dealer or contractor. KBS’s backlog and pipeline, along with its market initiatives to build more workforce housing, are expected to position KBS for continued growth.
EBGL markets its engineered structural wall panels and permanent wood foundation systems through direct sales people and a network of builders, contractors and developers in and around Minneapolis and St. Paul areas. EBGL’s direct sales organization is responsible for both residential
and commercial projects and it works with general contractors, developers and builders to provide bids and quotes for specific projects. Our marketing efforts include participation in industry trade shows, production of product literature, and sales support tools. These efforts are designed to generate sales leads for our independent builders and dealers, and direct salespeople.
Critical Accounting Policies and Estimates
In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our revenue and net income or loss, as well as on the value of certain assets and liabilities on our balance sheet. We believe that the estimates, assumptions, and judgments involved in the accounting policies described in Management’s Discussion and Analysis of Financial Condition and Results
of Operations in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates.
Diagnostic Services revenue increased 64.5% compared to prior year quarter. This business has recovered from COVID-19 and is now performing at pre-pandemic levels. Most doctor offices have reopened and hospitals are now performing non-emergency procedures. As state-by-state vaccination levels increase, our operations fully returned to normal levels for the three months ended June 30, 2021.
The increase in Diagnostic Imaging is due to higher number of cameras sold compared to the prior year quarter.
Construction
Construction revenue is summarized as follows (in thousands):
The increase in Diagnostic Services gross margin percentage
was mainly due to an increase in revenue. Our fixed costs such as employee costs, insurance, workers compensation, rents, utilities, repairs, and maintenance remained fairly constant.
The decrease in Diagnostic Imaging gross margin percentage was mainly due to higher installation, training, and freight costs. Further, there are higher costs accrued to service cameras and adjustments to warranty provision for the three months ended June 30, 2021, compared to the same period in the prior year.
Construction Gross(Loss) Profit
Construction gross (loss) profit and margin is summarized as follows (in thousands):
The decrease in Construction gross profit was predominately due to higher material costs at KBS and EBGL, with revenue recognized on large commercial projects. The decrease in gross margin percentage is due to the negative effect of higher raw material prices.
Investments Gross Loss
Investments gross loss is summarized as follows (in thousands):
The
gross loss relates to depreciation expense associated with the three manufacturing facilities acquired in April 2019.
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Operating Expenses
Operating expenses are summarized as follows (in thousands):
Three Months Ended
June 30,
Percent of Revenues
2021
2020
Change
2021
2020
Dollars
Percent
Selling,
general and administrative
$
5,584
$
3,670
$
1,914
52.2
%
21.6
%
25.3
%
Amortization of intangible assets
430
559
(129)
(23.1)
%
1.7
%
3.9
%
Total
operating expenses
$
6,014
$
4,229
$
1,785
42.2
%
23.3
%
29.2
%
The $1.9 million increase in sales, general and administrative
expenses was primarily due to a $0.4 million increase in the Construction business as a result of increased commissions and headcount, a $0.2 million increase in the Digirad Health business as a result of increased commissions, a $0.4 million increase in external and internal auditors review fees, a $0.1 million increase in administrative department due to headcount and $0.4 million increase in IT and outside services costs .
Total Other Income (Expense)
Total other income (expense) is summarized as follows (in thousands):
Other income, net for three months ended June 30, 2021 is predominantly comprised of remaining $3.0 million PPP loan forgiveness from Diagnostic Services. As of June 30, 2021, the Company has no PPP loans outstanding.
Interest expense, net, for the three months ended June 30, 2021 and 2020
are predominantly comprised of interest costs and the related amortization of deferred issuance costs on our debt, respectively.
Income Tax Expense
For the three months ended June 30, 2021, we recorded an income tax expense from continuing operations of $32 thousand. See Note 10, Income Taxes, within the notes to our unaudited consolidated financial statements for further information related to the income taxes.
Income from Discontinued Operations
See Note 2, Discontinued Operations of the unaudited condensed consolidated financial statements for information regarding discontinued operations.
Diagnostic Services revenue increased 22.4% compared to prior year quarter. This business has recovered and is now performing at pre-pandemic levels. Most doctor’s offices have reopened and hospitals are now performing non-emergency procedures. As state-by-state vaccination levels increase,
our operations fully return to normal levels for the six months ended 2021.
The increase in Diagnostic Imaging is due to higher number of cameras sold compared to the prior year quarter.
Construction
Construction revenue is summarized as follows (in thousands):
The increase in revenue for the Construction division was predominately due to higher production levels and undergoing several large commercial jobs at KBS and EBGL.
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Real
Estate and Investments
Real Estate and Investments revenue is summarized as follows (in thousands):
The increase
in Diagnostic Services gross margin percentage was mainly due to increased sales from continued recovery from the COVID-19 pandemic. Our fixed costs such as employee costs, insurance, workers compensation, rents, utilities, repairs, and maintenance remained fairly constant.
The decrease in Diagnostic Imaging gross margin percentage was mainly due to installation, training, and freight costs. Further, there are higher costs accrued to service cameras and adjustments to warranty provision for the six months ended June 30, 2021, compared to the same period in the prior year.
Construction Gross (Loss) Profit
Construction gross profit and margin is summarized as follows (in thousands):
The decrease in Construction gross profit was predominately due to higher material costs at KBS and EBGL, with revenue recognized on large commercial projects. The decrease in gross margin percentage is due to the negative effect of higher raw material prices.
Real Estate and Investments Gross Profit
Real Estate and Investments gross profit and margin is summarized as follows (in thousands):
The
Investments gross loss relates to depreciation expense associated with the three manufacturing facilities acquired in April 2019.
Operating Expenses
Operating expenses are summarized as follows (in thousands):
Six
Months Ended June 30,
Percent of Revenues
2021
2020
Change
2021
2020
Dollars
Percent
Selling,
general and administrative expenses
$
10,638
$
8,533
$
2,105
24.7
%
22.1
%
25.3
%
Amortization of intangible assets
868
1,135
(267)
(23.5)
%
1.8
%
3.4
%
Gain
on sale of MD Office Solutions
(847)
—
(847)
(100.0)
%
(1.8)
%
—
%
Total operating expenses
$
10,659
$
9,668
$
991
10.3
%
22.1
%
28.7
%
The
$2.1 million increase in sales, general and administrative expenses was primarily due to a $0.4 million increase in the Construction business as a result of increased commissions and headcount, a $0.3 million increase due to reserve from tenant receivables in the Construction business, a $0.2 million increase in the Digirad Health business as a result of increased commissions, a $0.3 million increase in external and internal auditors review fees, a $0.2 million increase in administrative department due to headcount and a $0.6 million increase in IT and outside services costs.
On February 1, 2021, we completed the sale of MD Office Solutions business and recognized $0.8 million in gain upon sale.
Total other expense is summarized as follows (in thousands):
Other income, net for six months ended June 30, 2021 is predominantly comprised of $4.2 million PPP loan forgiveness from Diagnostic Services and Construction business. As of June 30, 2021, the Company has no PPP loans outstanding.
Interest expense, net, for the six months ended June 30, 2021 and 2020
is predominantly comprised of interest costs and the related amortization of deferred issuance costs on our debt.
Income Tax Expense
For the six months ended June 30, 2021, we recorded an income tax expense of $34 thousand. See Note 10, Income Taxes, within the notes to our unaudited condensed consolidated financial statements for further information related to the income taxes.
Income from Discontinued Operations
See Note 2, Discontinued Operations of the unaudited condensed consolidated financial statements for information regarding discontinued operations.
Liquidity
and Capital Resources
Overview
We used cash of $7.6 million for operations during the six months ended June 30, 2021, predominately from changes in net working capital. Cash flow used in operations primarily consist of our overall net loss (adjusted for depreciation, amortization, and other non-cash items), and the net effect of changes in working capital. Cash flow provided by investing activities from the DMS Sale Transaction was used primarily for investment in capital equipment required to maintain and grow our business, as well as acquisitions and dispositions. Cash flow from financing activities primarily consisted of our net payments of borrowings on various revolving facilities and the receipt of cash from the conversion of cash warrants converted into common stock, offset by the repayments of on finance leases and dividends.
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Our principal sources of liquidity include our existing cash and cash equivalents, cash generated from operations, and funds available under various credit facilities and proceeds from sale of DMS Health. As of June 30, 2021, we had $6.3 million of cash, cash equivalents and restricted cash and $2.5 million available under our Sterling revolving line of credit.
We require capital, principally for capital expenditures, acquisition activity, dividend payments and to finance accounts receivable and inventory. Our working capital requirements vary from period to period depending on inventory requirements, the timing of deliveries, and the payment cycles of our customers. Our capital
expenditures consist primarily of medical imaging and diagnostic devices utilized in the delivery of our services, as well as vehicles and information technology hardware and software.
Regarding our debt, we had approximately $13.1 million in short term debt due to our borrowings which is classified as short term as disclosed in Note 8. Debt. The $7.2 million SNB credit facility primarily supports our healthcare business and actually matures in 2024, but GAAP rules require that the outstanding balance be classified as short-term debt, due to the automatic sweep feature embedded in the traditional lockbox arrangement along with a subjective acceleration clause in the SNB Loan and Security Agreement. In practice, we have the ability to immediately borrow back these daily sweeps to fund our working capital. As of June 30, 2021, we
were in compliance with all borrowing arrangements related to our Healthcare division. As of June 30, 2021, we had $2.5 million of borrowing capacity to fund the operations of these divisions.
As of June 30, 2021, we have $4.7 million outstanding on our Construction revolvers with Gerber and were not in compliance with all borrowing covenants for Gerber; further, we were in breach of our covenants as of December 31, 2020 and may be in breach at our next measurement period at June 30, 2021. While Gerber has historically provided us with waivers, there is no assurance that we will be able to receive waivers for covenant violations in the future, or that we will meet compliance with covenants in the future. We have $1.2 million
outstanding on our Star term loan, on which we have been making timely payments and are in compliance with the borrowing arrangements. Related party notes of $2.3 million were paid off on April 1, 2021 using proceeds from the DMS Sale Transaction. While revenues have tracked the robust activity in the housing sector, our bottom line has been impacted by this rapid price increase in materials. As part of our plan, we have increased prices since the beginning of 2021 to offset these higher input costs, we expect see the full benefit of these increases on our margins in the second half of the year.We expect gross margins in Construction to continue to improve over time. As the second quarter 2021 came to a close, prices began to decline and are significantly lower than the peak. Our backlog remains very strong. We believe this will bode well for second half of 2021, as our
pricing levels have increased due to adjustments made in the first half of 2021.
Management believes that the Company has the liquidity and operations to continue to support the business through the next 12 months from the issuance of this Quarterly Report. Our ability to continue as a going concern is dependent on our ability to execute our plans.
Common Stock Equity Offering
On May 28, 2020, we closed a public offering (the “Offering”) of 2,225,000 shares of our common stock, and 2,225,000 warrants (the “Warrants”) to purchase up to 1,112,500 additional shares of our common stock. The Offering price was $2.24 per share of common stock and $0.01 per accompanying Warrant (for a combined Offering
price of $2.25), initially raising $5.0 million in gross proceeds before underwriter discounts and offering-related expenses. The underwriting agreement (the “Underwriting Agreement”) we entered into with Maxim Group LLC (“Maxim”), as representative of the underwriters, for the Offering contained customary representations, warranties, and agreements by the Company, customary conditions to closing, indemnification obligations of the Company and Maxim and certain other obligations.
Pursuant to the terms of the Underwriting
Agreement, we granted to Maxim an option for a period of 45 days (the “Over-Allotment Option”) to purchase up to 225,000 additional shares of our common stock and 225,000 Warrants to purchase up to an additional 112,500 shares of our common stock. Effective as of the closing of the Offering, Maxim exercised the Over-Allotment Option for the purchase of 225,000 Warrants for a price of $0.01 per Warrant. On June 10, 2020, Maxim exercised the Over-Allotment Option for the purchase of 225,000 shares of our common stock for a price of $2.24 per share, before underwriting discounts. The closing of the sale of the over-allotment shares brought the total number of shares of common stock we sold in the Offering to 2,450,000 shares, and total gross proceeds to approximately $5.5 million. In addition, the Company received $0.5 million
from investors in the Offering throughout the balance of June 30, 2021, due to the exercise of a portion of the Warrants sold in the Offering, bringing the total gross proceeds from equity issuance to $6.5 million.
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The net proceeds to the Company from the Offering and Warrant exercises in 2020 were approximately $5.2 million (inclusive of the exercise of the over-allotment option), after deducting underwriter fees and offering-related expenses estimated at $0.8 million. We used a significant portion of the net proceeds from the Offering to fund working capital needs at our construction businesses,
particularly related to modular housing projects which we produced at KBS Builders, Inc. (“KBS”) for the Boston-area projects. The remainder of the net proceeds is being used for working capital and for other general corporate purposes. We have broad discretion in determining how the proceeds of the Offering is used, and our discretion is not limited by the aforementioned possible uses.
As of June 30, 2021, 1.0 million warrants were exercised and 1.5 million warrants remained outstanding at an exercise price of $2.25.
Cash Flows
The following table shows cash flow information for the six months ended June 30, 2021 and 2020 (in thousands):
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
Operating Activities
The increase in cash used compared to the prior year period was primarily due to operating losses from increased material prices in Construction division.
Investing Activities
The increase in investing activities cash flow compared to the prior year period was primarily attributable to $18.75 million proceeds received from DMS Health disposition.
Financing Activities
The
decrease in cash flows from financing activities is primarily due to a $7.9 million pay down of the SNB Credit Facility, $2.3 million pay down of the ATRM Promissory Notes, $0.7 million pay down of the EBGL Premier Note, $0.5 million pay down of preferred stock dividends, using the proceeds from the sale of the DMS Health business.
Sterling Credit Facility
On March 29, 2019, the Company entered into a Loan and Security Agreement (the “SNB Loan Agreement”) by and among certain subsidiaries of the Company, as borrowers (collectively, the “SNB Borrowers”); the
Company, as guarantor; and Sterling National Bank, a national banking association, as lender (“Sterling” or “SNB”).
The SNB Loan Agreement is a five-year credit facility maturing in March 2024, with a maximum credit amount of $20.0 million for revolving loans (the “SNB Credit Facility”). Under the SNB Credit Facility, the SNB Borrowers can request the issuance of letters of credit in an aggregate amount not to exceed $0.5 million at any one time outstanding. The borrowings under the SNB Loan Agreement were classified as short-term obligations under GAAP as the agreement contained a subjective acceleration clause and required a lockbox arrangement whereby all receipts within the lockbox are swept daily to reduce borrowings outstanding. As of June 30, 2021, the Company
had $0.2 million of letters of credit outstanding and had additional borrowing capacity of $2.5 million.
At the Borrowers’ option, the SNB Credit Facility will bear interest at either (i) a Floating LIBOR Rate, as defined in the Loan Agreement, plus a margin of 2.50% per annum; or (ii) a Fixed LIBOR Rate, as defined in the Loan Agreement, plus a margin of 2.25% per annum. As our largest single debt outstanding, our floating rate on this facility at June 30, 2021 was 2.60%.
The SNB Loan Agreement includes certain representations, warranties of SNB Borrowers, as well as events of default and certain affirmative and negative covenants by the SNB Borrowers that are customary for loan agreements of this type. These covenants include restrictions on borrowings, investments and dispositions by SNB Borrowers, as well as limitations on the
SNB Borrowers’ ability to make certain distributions. Upon the occurrence and during the continuation of an event of default under the SNB Loan Agreement, SNB may, among other things, declare the loans and all other obligations under the SNB Loan Agreement immediately due and payable and increase the interest rate at which loans and obligations under the SNB Loan
53
Agreement bear interest. The SNB Credit Facility is secured by a first-priority security interest in substantially all of the assets of the Company and the SNB Borrowers and a pledge of all shares of the SNB Borrowers.
On March 29, 2019,
in connection with the Company’s entry into the SNB Loan Agreement, Jeffery E. Eberwein, the Executive Chairman of the Company’s board of directors, entered into Limited Guaranty Agreement (the “SNB Eberwein Guaranty”) with SNB pursuant to which he guaranteed the prompt performance of all the Borrowers’ obligations under the SNB Loan Agreement. The SNB Eberwein Guaranty is limited in the aggregate to the amount of (a) $1.5 million, plus (b) reasonable costs and expenses of SNB incurred in connection with the SNB Eberwein Guaranty. Mr. Eberwein’s obligations under the SNB Eberwein Guaranty terminate upon the Company and Borrowers achieving certain milestones set forth therein.
On
February 1, 2021, in connection with the closing of the Company’s sale of MD Office Solutions, the Company entered into a First Amendment to the SNB Loan Agreement pursuant to which, among other things, Sterling consented to the sale of MD Office Solutions and the Company’s name change from Digirad Corporation to Star Equity Holdings, Inc.
On March 31, 2021, in connection with completing the sale of DMS Health, the Company, certain subsidiaries
of the Company, and Sterling entered into a Second Amendment to the SNB Loan Agreement pursuant to which, among other things, Sterling consented to the sale of DMS Health and its subsidiaries, removed DMS Health and its subsidiaries as borrowers under the SNB Loan Agreement, and required the principle to be paid down to $7.0 million.
At June 30, 2021, the Company was in compliance with the covenants under the SNB Loan Agreement.
Construction Loan Agreements
As
of June 30, 2021, the Construction division had outstanding revolving lines of credit and term loans of approximately $4.7 million. This debt includes: (i) $2.2 million principal outstanding on KBS’s $4.0 million revolving credit facility under a Loan and Security Agreement, dated February 23, 2016, (as amended, the “KBS Loan Agreement”), with Gerber and (ii) $2.5 million principal outstanding on EBGL’s $3.0 million revolving credit facility under a Revolving Credit Loan Agreement, which was increased om $3.0 million to $4.0 million on July 30, 2021. The Construction division was at the maximum borrowing capacity under both revolving lines of credit, based on the inventory and accounts receivable on June 30, 2021 which fluctuates weekly.
KBS
Loan Agreement
On February 23, 2016, ATRM, KBS and Main Modular Haulers, Inc. (a former subsidiary of ATRM) entered into a Loan and Security Agreement, (as amended, the “KBS Loan Agreement”), with Gerber. The KBS Loan Agreement provides KBS with a revolving line of credit with borrowing availability of up to $4.0 million. Availability under the line of credit is based on a formula tied to KBS’s eligible accounts receivable, inventory and other collateral. The KBS Loan Agreement, which was scheduled to expire on February 22, 2018, has been automatically extended for successive one (1) year periods in accordance with its terms and is now scheduled to expire on February 22, 2022. The KBS Loan Agreement will be automatically extended for another one (1) year period unless a
party thereto provides prior written notice of termination. As of June 30, 2021 neither party has provided notice of termination. Upon the final expiration of the term of the KBS Loan Agreement, the outstanding principal balance is payable in full. Borrowings bear interest at the prime rate plus 2.75%, equating to 6.00% at June 30, 2021, with interest payable monthly. The KBS Loan Agreement also provides for certain fees payable to Gerber during its term, including a 1.5% annual facilities fee and a 0.10% monthly collateral monitoring fee. KBS’s obligations under the KBS Loan Agreement are secured by all of its assets and are guaranteed by ATRM. Unsecured promissory notes issued by KBS and ATRM are subordinate to KBS’s obligations under the KBS Loan Agreement. The KBS Loan Agreement contains representations, warranties, affirmative and negative covenants, defined events
of default and other provisions customary for financings of this type. Financial covenants require that KBS maintain a maximum leverage ratio (as defined in the KBS Loan Agreement) and KBS not incur a net annual post-tax loss in any fiscal year during the term of the KBS Loan Agreement. The borrowings under the KBS Loan Agreement were classified as short-term obligations under GAAP as the agreement contained a subjective acceleration clause and required a lockbox arrangement whereby certain receipts are swept daily to reduce borrowings outstanding. At June 30, 2021, approximately $2.2 million was outstanding under the KBS Loan Agreement.
On September 10, 2019, the parties to the KBS Loan Agreement entered into the twelfth amendment to the KBS Loan Agreement (the “Twelfth KBS Amendment”), pursuant to which the
Company agreed to guarantee amounts borrowed by certain ATRM’s subsidiaries from Gerber.
On January 31, 2020, the Company, ATRM, KBS and Gerber entered into a thirteenth amendment to the KBS Loan Agreement (the “Thirteenth KBS Amendment”) to amend the terms of the KBS Loan Agreement, in order to, among other things (a) amend the definitions of “Ancillary Credit Parties,”“Guarantor,”“Obligations,” and “Subordinated Lender” to address the obligations of the Star Borrowers, the EBGL Borrowers, the Star Credit Parties, and the EBGL Credit Parties under the Star Loan Agreement, EBGL Loan Agreement and the Subordination Agreements (each as defined below) to which they
are a party and (b) add a new cross default provision.
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On March 5, 2020, in connection with the First EBGL Amendment, Gerber, KBS, ATRM and the Company entered into a fourteenth amendment to the KBS Loan Agreement in order to, among other things consent to the First EBGL Amendment and remove cash and cash collateral from the borrowing base.
On April 1, 2020, Gerber and KBS entered into a fifteenth amendment to the KBS Loan Agreement pursuant to which the “Minimum Average Monthly Loan Amount” was decreased to twenty-five percent (25%) of
the Maximum Revolving Amount.
On January 5, 2021, Gerber and KBS entered into a sixteenth amendment to the KBS Loan Agreement in order to, among other things, amend certain definitions under the KBS Loan Agreement and to increase the inventory assets against which funds can be borrowed.
On February 26, 2021 Gerber and KBS entered into a seventeenth amendment to the KBS Loan Agreement in order to provide the waiver to the 2020 covenant breach and amended the financial covenants. The financial covenants under the KBS Loan Agreement, as amended, provide that (i) KBS shall make no distribution, transfer, payment, advance, or contribution of cash or property which would constitute a restricted payment as such term is defined in the agreement; (ii) KBS shall report annual post-tax net income
at least equal to (a) $385 thousand for the trailing 6-month period ending June 30, 2021 and (b) $500 thousand for the trailing fiscal year end December 31, 2021; and (iii) a minimum EBITDA at June 30, 2021 of more than $880 thousand or at December 31, 2021 of more than $1.5 million.
On March 31, 2021, the parties to the KBS Loan Agreement amended the KBS Loan Agreement to provide for increased availability under the KBS Loan Agreement to KBS under certain circumstances, including for new equipment additions, and certain other changes, as well as a waiver of certain covenants.
As of June
30, 2021 and December 31, 2020, KBS was not in compliance with the financial covenants requiring no net annual post-tax income for KBS of at least $385 thousand, during the six months ended June 30, 2021. So long as EBITDA for the year ended December 31, 2021 is at least $1.5 million, KBS may nevertheless comply with the covenant for the year, but as of June 30, 2021, KBS is not in compliance with the financial requirement requiring EBITDA to equal at least $880 thousand. The occurrence of any event of default under the KBS Loan Agreement may result in KBS’s obligations under the KBS Loan Agreement becoming immediately due and payable. Subsequently, we obtained a waiver from Gerber for these events.
On July
30, 2021 in connection with the Fourth EBGL Amendment, Gerber, KBS, ATRM and the Company entered into an eighteenth amendment to the KBS Loan Agreement in order to, among other things, (a) confirm the cancellation of certain subordination agreements with Lone Star Value Management, LLC (“LSVM”) and Lone Star Value Co-Invest I, LP (“LSV Co-Invest I”), after the [ATRM notes] were paid by the Company, and (b) amend the terms of the KBS Loan Agreement, including the definitions of “Ancillary and “Subordinated Lender” to include SRE. and remove LSVM and LSV Co-Invest I.
EBGL Premier Note
On June 30, 2017, EdgeBuilder and Glenbrook (together,
EBGL) entered into a Revolving Credit Loan Agreement (as amended, the “Premier Loan Agreement”) with Premier providing EBGL with a working capital line of credit of up to $3.0 million. The Premier Loan Agreement replaced the prior revolving credit facility.
Availability under the Premier Loan Agreement is based on a formula tied to EBGL’s eligible accounts receivable, inventory and equipment, and borrowings bear interest at the prime rate plus 1.50%, with interest payable monthly and the outstanding principal balance payable upon expiration of the term of the Premier Loan Agreement. The Premier Loan Agreement also provides for certain fees payable to Premier during its term. The initial term of the Premier Loan Agreement was scheduled to expire on June 30, 2018, but was extended multiple times by Premier until January 31,
2023. EBGL’s obligations under the Premier Loan Agreement are secured by all of their inventory, equipment, accounts and other intangibles, fixtures and all proceeds of the foregoing.
On January 31, 2020, Glenbrook and EdgeBuilder entered into an Extension and Modification Agreement (the “Modification Agreement”) with Premier that modified the terms of the Revolving Credit Promissory Note made by Glenbrook and EdgeBuilder. The Modification Agreement reduced the outstanding borrowings to $1.0 million, extended the final maturity date to January 31, 2023, and set the interest rate to at 5.75% per annum. Mr. Eberwein executed a guaranty in favor of Premier, which had been extended through January 1, 2023, under which ATRM and Mr. Eberwein absolutely and unconditionally
guaranteed all of EBGL’s obligations under the Premier Loan Agreement.
As of June 30, 2021, all obligations under the Premier Loan Agreement have been repaid in full and no amount remains outstanding. In exchange Premier terminated all of its security interests in the assets of EBGL.
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Gerber Star and EBGL Loans
On January 31, 2020, SRE, 947 Waterford Road, LLC (“947 Waterford”), 300 Park Street, LLC (“300 Park”), and 56 Mechanic Falls Road, LLC (“56 Mechanic” and together with SRE, 947 Waterford, and 300 Park, (the “Star
Borrowers”), each an Investments Subsidiary, and the Company, ATRM, KBS, EdgeBuilder, and Glenbrook (collectively, the “Star Credit Parties”), entered into a Loan and Security Agreement (as amended, the “Star Loan Agreement”) with Gerber providing the Star Borrowers with a credit facility with borrowing availability of up to $2.5 million ($2.0 million and $0.5 million to KBS and EBGL, respectively) (the “Star Loan”). The advance of $2.0 million to KBS is to be repaid in monthly installments of sixty (60) consecutive equal payments. The advance of $0.5 million to EBGL, which has been temporarily increased by $0.3 million due to be repaid on April 30, 2020, is to be repaid in monthly installments of twelve (12) consecutive equal payments. On February 20, 2020, the
Star Borrowers entered into a first amendment to the Star Loan Agreement (the “First Star Amendment”) in order to (i) temporarily advance $0.3 million to EBGL, which amount is to be repaid to Gerber on or before April 30, 2020; (ii) clarify that Gerber can make multiple advances under the Star Loan Agreement, and (iii) to correct the maturity date of the Star Loan. On April 30, 2020, the Star Borrowers entered into a second amendment to the Star Loan Agreement (the “Second Star Amendment”) to change terms of repayment for the advance of $0.3 million to EBGL to provide for repayment in three consecutive equal monthly installments, commencing on May 30, 2020, with a final installment on or before July 31, 2020. EBGL paid off approximately $0.5 million of the
advance in 2020 and $1.2 million was outstanding, net with deferred financing costs, under the Star Loan Agreement as of June 30, 2021.
On January 31, 2020, EdgeBuilder and Glenbrook (the “EBGL Borrowers”), each a Construction subsidiary, and the Company, Star, 947 Waterford, 300 Park, 56 Mechanic, ATRM, and KBS (collectively, the “EBGL Credit Parties”), entered into a Loan and Security Agreement (the “EBGL Loan Agreement”) with Gerber providing the EBGL Borrowers with a credit facility with borrowing availability of up to $3.0 million (the “EBGL Loan”). On March 5, 2020, the EBGL Borrowers entered into a first amendment to the
EBGL Loan Agreement (the “First EBGL Amendment”) with Gerber that amended the EBGL Loan Agreement and the KBS Loan Agreement to include a pledge $0.3 million of cash collateral by LSVI under the EBGL Loan Agreement which, prior to the First EBGL Amendment, was pledged by LSVI in connection with the KBS Loan Agreement. On July 1, 2020, the EBGL Borrowers entered into a second amendment to the EBGL Loan Agreement to terminate the pledge of $0.3 million in cash collateral. On February 26, 2021, the EBGL Borrowers entered into a third amendment to the EBGL Loan Agreement (the “Third EBGL Amendment”) pursuant to which the Company and Gerber agreed to, among other things, eliminate the minimum leverage ratio covenant, lower the minimum EBITDA, and require the borrowers to not incur
a net operating loss on bi-annual basis. The Third EBGL Amendment also discharged the EBGL Eberwein Guaranty described below. As of June 30, 2021, approximately $2.5 million was outstanding under the EBGL Loan Agreement.
Availability under the Star Loan Agreement is based on a formula tied to the value of real estate owned by the Star Borrowers, and borrowings bear interest at the prime rate plus 3.5% per annum. Availability under the EBGL Loan Agreement is based on a formula tied to the EBGL Borrowers’ eligible accounts receivable and inventory, and borrowings bear interest at the prime rate plus 2.75% per annum. The Loan Agreements also provide for certain fees payable to Gerber during their respective terms. The Star Loan matures on the earlier of (a) January 1, 2025 or (b) the termination, the maturity or repayment of the
EBGL Loan. The EBGL Loan matures on the earlier of (a) January 1, 2022, unless extended, or (b) the termination, the maturity or repayment of the Star Loan. The maturity of the EBGL Loan is automatically extended for successive periods of one (1) year each unless terminated by Gerber or the EBGL Borrowers. The borrowings under the EBGL Loan Agreement were classified as short-term obligations under GAAP as the agreement contained a subjective acceleration clause and required a lockbox arrangement whereby all receipts are swept daily to reduce borrowings outstanding.
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The obligations of the EBGL Borrowers under the EBGL Loan Agreement are guaranteed by the EBGL Credit Parties and are
secured by substantially all the assets of the EBGL Borrowers and the EBGL Credit Parties. The obligations of the Star Borrowers under the Star Loan Agreement are guaranteed by the Star Credit Parties and are secured by substantially all the assets of the Star Borrowers and the Star Credit Parties. Contemporaneously with the execution and delivery of the Star Loan Agreement, Jeffrey E. Eberwein, the Executive Chairman of the Company’s board of directors, executed and delivered a Guaranty (the “Gerber Eberwein Guaranty”) to Gerber pursuant to which he guaranteed the performance of all the Star Borrowers’ obligations to Gerber under the Star Loan Agreement, including the full payment of all indebtedness owing by the Star Borrowers to Gerber under or in connection with the Star Loan Agreement and
related financing documents. Mr. Eberwein’s obligations under the Gerber Eberwein Guaranty are limited in the aggregate to the amount of (a) $2.5 million, plus (b) costs of Gerber incidental to the enforcement of the Gerber Eberwein Guaranty or any guaranteed obligations. On March 5, 2020, contemporaneously with the execution and delivery of the First EBGL Amendment, Mr. Eberwein, the Executive Chairman of the Company’s board of directors, executed and delivered a Guaranty (the “EBGL Eberwein Guaranty”) to Gerber pursuant to which he guaranteed the performance of all the EBGL Borrowers’ obligations to Gerber under the EBGL Loan Agreement, including the full payment of all indebtedness owing by the EBGL Borrowers to Gerber under or in connection with the EBGL Loan Agreement and related financing documents. Mr. Eberwein’s obligations
under the EBGL Eberwein Guaranty are limited in the aggregate to the amount of (a) $0.5 million, plus (b) costs of Gerber incidental to the enforcement of the EBGL Eberwein Guaranty or any guaranteed obligations.
On February 26, 2021, the Star Borrowers entered into a third amendment to the Star Loan Agreement (the “Third Star Amendment”) with Gerber that, among other things, amended the contract rate to prime rate plus 3% and discharged the $2.5 million Gerber Eberwein Guaranty.
On July 30, 2021, the Star Borrowers entered into a fourth amendment to the Star Loan Agreement (the “Fourth Star Amendment”) with Gerber that, among other things, amended the terms of the Star Loan Agreement,
in order to, among other things amend the definitions of (a) “Inventory” to increase the eligible inventory against which Gerber will advance credit, (b) “Maximum Revolving Amount” to increase the line of credit from $3.0 million to $4.0 million, (c) “Note” to mean the $4.0 million promissory note between Gerber and EBGL, and (d) “Subordinated Lender” to include only Star Procurement, Inc., ATRM, and the Company.
The Star Loan Agreement and EBGL Loan Agreement contain representations, warranties, affirmative and negative covenants, events of default and other provisions customary for financings of this type. The financial covenants under the EBGL Loan Agreement applicable to the EBGL Borrowers include maintenance of a minimum tangible net worth, a minimum debt service coverage ratio and minimum net income. The Financial
covenants under the Star Loan Agreement applicable to the Star Borrowers include a minimum debt service coverage ratio. The occurrence of any event of default under the Loan Agreements may result in the obligations of the Borrowers becoming immediately due and payable. As of June 30, 2021, EBGL was not in compliance with the financial covenants under the Star Loan Agreement and EBGL Loan Agreement. The occurrence of any event of default under the EBGL Loan Agreement may result in EBGL’s obligations under the EBGL Loan Agreement becoming immediately due and payable. In July, 2021, we obtained a waiver from Gerber for these events and, as part of the Fourth EBGL Amendment (described above).
As a condition to the extension of credit to the Star Borrowers and EBGL Borrowers under the Star Loan Agreement and EBGL Loan Agreement, the holders of certain existing unsecured promissory
notes made by ATRM and certain of its subsidiaries entered into subordination agreements (the “Subordination Agreements”) with Gerber pursuant to which such noteholders (including the Company and certain of its subsidiaries) agreed to subordinate the obligations of ATRM and its subsidiaries to such noteholders to the obligations of the Star Borrowers and EBGL Borrowers to Gerber under the loan agreements.
Paycheck Protection Program
From April 2020 through May 2020, the
Company and its subsidiaries received $6.7 million, of loans under the Paycheck Protection Program (“PPP”). Total PPP loans received the Construction division and Healthcare division were $5.5 million and $1.2 million, respectively.
The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). PPP loans for the Construction and Healthcare division were made through Bremer Bank and Sterling as lenders, respectively.
The PPP loans have two-year terms and bear interest at a rate of 1.00% per annum. Monthly principal and interest payments under the PPP loans are deferred for ten months, after the end of covered periods. The PPP loans may be prepaid at any time
prior to maturity with no prepayment penalties.
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The promissory notes issued in connection with the PPP loans (the “PPP Notes”) contain customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the SBA or lender, or breaching the terms of the applicable PPP loan documents. Upon an event of default under a PPP Note, the lender thereunder may, among other things, require immediate payment of all amounts owing under the applicable PPP Note, collect all amounts owing from the applicable borrower, or file suit and obtain judgment.
Under the terms of the CARES Act, recipients of loans under the PPP can apply for and be granted forgiveness for all or
a portion of the loan granted under the PPP. Such forgiveness is determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and certain other eligible costs. Even if forgiveness is granted the PPP loans may remain subject to review and audit for up to six (6) years.
During Q4 2020 and January 2021, the Company applied for forgiveness on all PPP loans. As of Q4 2020, $2.5 million of the Healthcare division PPP Notes were forgiven. During Q2, 2021, all amounts under the Construction division and Healthcare division PPP Notes were forgiven. As of June 30, 2021, the Company has no PPP loans outstanding.
Off-Balance Sheet Arrangements
On September 10, 2019, the parties to the KBS Loan Agreement entered into the Twelfth KBS Amendment pursuant to which the Company agreed to guarantee amounts borrowed by certain of ATRM’s subsidiaries from Gerber. The Twelfth KBS Amendment requires the Company to serve as an additional guarantor with the existing guarantor, ATRM, with respect to the payment, performance and discharge of each and every obligation of payment and performance by the borrowing subsidiaries with respect to the loans made by Gerber to them. On January
31, 2020, the Company, ATRM, KBS and Gerber entered into the Thirteenth KBS Amendment, in order to, among other things (a) amend the definitions of “Ancillary Credit Parties,”“Guarantor,”“Obligations,” and “Subordinated Lender” to address the obligations of the Star Borrowers, the EBGL Borrowers, the Star Credit Parties, and the EBGL Credit Parties under the Star Loan Agreement, the EBGL Loan Agreement and the Subordination Agreements to which they are a party and (b) add a new cross default provision. On April 1, 2020, Gerber and KBS entered into a Fifteenth KBS Amendment pursuant to which the “Minimum Average Monthly Loan Amount” under the KBS Loan Agreement was decreased to twenty-five percent (25%) of the Maximum Revolving Amount (as defined in the KBS Loan Agreement). See Note 8, Debt,
within the notes to our unaudited consolidated financial statements for further detail.
On June 5, 2020, the Company entered into a Guaranty Agreement (the “Tocci Guaranty”) with Tocci Building Corporation (“Tocci”) pursuant to which the Company irrevocably guaranteed all the obligations of KBS under a certain Subcontract Agreement by and between Tocci and KBS in the event of a material breach by KBS under the Subcontract. The Company’s liability under the Tocci Guaranty is limited to $2.0 million.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934 (the “Exchange Act”) reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our executive chairman and chief financial officer, as appropriate, to allow for
timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As further discussed below, we carried out an evaluation, under the supervision and with the participation of our management, including our executive chairman and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Due to the existence of the material weaknesses as described below, our executive chairman and chief financial officer concluded that our disclosure controls and procedures were not
effective as of June 30, 2021.
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As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2020 due to the material weaknesses as described below.
A “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely
basis.
The Company identified material errors in the accounting for debt classification which resulted in the restatement of previously issued consolidated financial statements. These errors resulted from a material weakness related to ineffectively designed controls over review of contracts for new debt agreements and the proper application of GAAP for such agreements.
Plan for Remediation of the Material Weakness in Internal Control Over Financial Reporting
The Company has developed a remediation plan which includes, but is not limited to, a more detailed review over debt contracts
and the proper application of GAAP.
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all errors and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
Changes in Internal Control over Financial Reporting
Other than
in connection with implementing a plan to remediate the material weakness described above, there has been no change in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 under the Exchange Act that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM
1.LEGAL PROCEEDINGS
See Note 9, Commitments and Contingencies, within the notes to our unaudited consolidated financial statements for a summary of legal proceedings.
ITEM 1A.RISK FACTORS
In evaluating us and our common stock, we urge you to carefully consider the risks and other information in this Quarterly Report on Form 10-Q, as well as the risk factors disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, which we filed with the SEC on March 29,
2021. The risks and uncertainties described in “Item 1A - Risk Factors” of our Annual Report on Form 10-K have not materially changed. Any of the risks discussed in this Quarterly Report on Form 10-Q or any of the risks disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, could materially and adversely affect our results of operations or financial condition.
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ITEM 2.UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
Holders of shares of the Company Preferred Stock are entitled to receive, when, as and if authorized by the Company’s board of directors (or a duly authorized committee of the Company’s board of directors) and declared by the Company out of funds legally available for the
payment of dividends, preferential cumulative cash dividends at the rate of 10.0% per annum of the liquidation preference of $10.00 per share. Dividends are payable quarterly, in arrears, on the last calendar day of March, June, September and December to holders of record at the close of business on the first day of each payment month. As of the date of this Quarterly Report on Form 10-Q, the total arrearage of cash dividends due on the Company Preferred Stock is $3.0 million.
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
ITEM
5.OTHER INFORMATION
On August 4, 2021, the Board of Directors (the “Board”) of Star Equity Holdings, Inc. (the “Company”) approved and adopted the Company’s 2021 Executive Incentive Bonus Plan (the “2021 Executive Incentive Plan”) on the recommendation of the Compensation Committee of the Board (the “Compensation Committee”).
Base Salary
As part of the adoption of the 2021 Executive Incentive Plan, the Compensation Committee determined to not make any changes at that time to the annual base salaries of the Company’s
executive officers.
Cash Bonus
Target cash bonus payouts for Matthew G. Molchan, President and CEO of Digirad Health, Inc., and Martin B. Shirley, President of Digirad Imaging Services, shall be $224,208 and $130,000, respectively.
For each executive officer, the amount of total cash bonus payable under the 2021 Executive Incentive Plan will be based on performance above a target measure of consolidated Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) for fiscal 2021 (the “Threshold Measure”), subject to other provisions of the 2021 Executive Incentive Plan. Payouts under the 2021 Executive Incentive Plan are calculated and earned after the
Company achieves the Threshold Measure. Once the Threshold Measure is met, the cash bonuses are calculated based on EBITDA amounts achieved above the Threshold Measure. No bonuses are paid to executive officers under the 2021 Executive Incentive Plan if the Threshold Measure is not achieved. Upon meeting the Threshold Measure, each such executive shall receive 50% of their target bonuses, with a maximum percentage of up to 150% of their target bonus based on achievement above the Threshold Measure.
The actual cash bonuses payable (if any) for the achievement of such objectives will be determined by the Compensation Committee, and will be payable upon the completion of the financial audit of the consolidated financial statements.
The cash bonus targets for our named executive officers, pursuant to
the 2021 Executive Incentive Plan, were approved by the Board after being reviewed by the Compensation Committee and recommended for Board approval.
Bonuses for Messrs. Eberwein, Executive Chairman, and Noble, Chief Operating Officer and Chief Financial Officer shall be discretionary and subject to Board approval after review by the Compensation Committee.
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
** This certification is being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of Star Equity Holdings, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
