STAR EQUITY HOLDINGS, INC.
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, 2021 , which were included
in our Annual Report on Form 10-K, filed with the SEC on March 31, 2022 .
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 Holdings, Inc. ("Star Equity", the "Company", "we", "our") has operated as a multi-industry holding company since the acquisition ofATRM Holdings, Inc. ("ATRM") inSeptember 2019 . With that merger, we added two construction businesses and one investments business to what historically had 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 asDigirad Health, Inc. , ("Digirad Health ") provides products and services in the area of nuclear medical imaging with a focus on cardiac health.Digirad Health operates acrossthe United States and comprises two lines of business-imaging services to healthcare providers using a fleet of our proprietary solid-state gamma cameras as well as the manufacture, distribution, and maintenance of our proprietary solid-state gamma cameras. Our Construction division is made up of three operating businesses,KBS Builders, Inc. ("KBS"),EdgeBuilder, Inc. ("EdgeBuilder"), andGlenbrook Building Supply, Inc. ("Glenbrook"), with the latter two managed together and referred to jointly as "EBGL". KBS is based inMaine and manufactures modular buildings for installation principally in theNew England market. EBGL is based in theMinneapolis -Saint Paul area and principally serves the Upper Midwest. Together, the EBGL businesses manufacture and deliver structural wall panels and other engineered wood-based products as well as distribute building materials primarily to professional builder customers. Currently, our Investments division is an internally focused unit directly supervised byStar Equity management. This entity currently holds our corporate-owned real estate, which currently includes our three manufacturing facilities inMaine that are leased to KBS, as well as any minority investments we make in public and private companies.
Strategy
We believe our diversified, multi-industry holding company structure will allowStar Equity management to focus on capital allocation, strategic leadership, mergers and acquisitions, capital markets transactions, investor relations, and management of our Investments division. Our structure frees up our operating company management teams to focus on their respective businesses, look for organic and bolt-on growth opportunities, and improve operations with less distraction and administrative burden associated with running a public company. We continue to explore strategic alternatives to improve our market position and the profitability of our product offerings, generate additional liquidity, and enhance our valuation. We may pursue our goals through organic growth and through strategic alternatives. Some of these alternatives have included, and could continue to include, selective acquisitions of businesses, divestitures of assets or businesses, equity offerings, debt financings, or a restructuring of our Company. Operating Businesses We believe that both of our primary divisions, Healthcare and Construction, are well positioned for growth in large addressable markets. The key elements of our growth strategy include the following: •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. •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 37
-------------------------------------------------------------------------------- we can either purchase or develop new and complementary businesses, and take advantage of our customer loyalty and distribution channels. Additionally, we are exploring new imaging technologies through the recent establishment of a joint venture that is presently conducting research and development in the area of heart imaging. In the Construction division, we will consider opportunities to augment our service offering to better serve our customer base. We have done this in theNew England market with our entry into the commercial multi-family segment. Other areas might include logistics, installation on site, and manufacturing of sub-components. •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 public and private targets that can be acquired over time and integrated into our platform. We will also look at larger, more transformational mergers and acquisitions if we believe the appropriate mix of value, risk, and return is present for our stockholders. The timing of these potential transactions will always depend on market conditions, available capital, and valuation. 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 stockholders. Current Market Conditions The COVID-19 pandemic has been a challenge for most businesses in the past two years. Since early 2021, the vaccine rollout has gradually allowed us to return to a more normal operating environment. Our Healthcare business has now returned to pre-COVID levels, after a brief scare with the onset of the Omicron variant late last year. On the Construction side, we continue to benefit from a strong housing market on the demand side, while a tight labor market and continued supply chain disruption make it difficult to maintain optimal production levels. The target market for our Healthcare products and services is comprised of cardiologists, internal medicine physicians, family practice physicians, hospitals, integrated delivery networks, and federal institutions inthe United States that perform or could perform a diagnostic imaging procedure or have interest in purchasing diagnostic imaging products. Our diagnostic services businesses currently operate in approximately 25 states. During the three months endedMarch 31, 2022 , we have seen a return to a more normal pre-COVID volume of imaging. The target customers for our Construction division include professional home builders, general contractors, project owners, developers, and design firms. While housing demand and home improvement activity continues to be very strong, supply chain disruptions caused by the COVID-19 pandemic led to a historic increase in building materials prices during the first half of 2021. Since that time, building materials prices have continued to be very volatile. We have implemented both price increases and margin protection measures through our contract language since that time and we believe these factors will have a significantly positive effect on our profitability in 2022.
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. Risks arising from global economic instability and conflicts, wars, and health crises could impact our business. In addition the inflation caused by such events may impact demand for our products and services and our cost to provide products and services. COVID-19 Pandemic We continue to recover from the economic effects of the COVID-19 pandemic. During the three months endedMarch 31, 2022 , we had a$0.1 million increase in Healthcare division revenue and a$2.6 million increase in Construction division revenue as compared to the same period of the prior year. The Healthcare division continued to operate at normal levels versus 38 -------------------------------------------------------------------------------- last year with revenue increasing 0.8% for the three months endedMarch 31, 2022 . Our Construction division grew revenue by 28.6% due to increased output at both KBS and EBGL coupled with pricing increases associated with higher raw materials costs. Nevertheless, the current COVID-19 pandemic continues to impact worldwide economic activity, and the extent to which the COVID-19 pandemic will impact our business will depend on future developments that are highly uncertain and cannot be predicted at this time.
Discontinued Operations
The DMS Sale Transaction (as defined in Note 1 to our condensed consolidated financial statements) was completed onMarch 31, 2021 , for$18.75 million in cash. After certain adjustments, including a working capital adjustment, we received an immaterial net escrow settlement inJanuary 2022 .
We review goodwill for impairment on an annual basis during the fourth quarter, and when events or changes in circumstances indicate that a reduction in the carrying value may not be recoverable. During the three months endedMarch 31, 2022 , we began the process by assessing qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. Upon review of the results of such assessment, we may begin performing impairment analysis by quantitatively comparing the fair value of the reporting unit to the carrying value of the reporting unit, including goodwill. An impairment charge for goodwill is recognized for the amount by which the carrying value of the reporting unit exceeds its fair value and such loss should not exceed the total goodwill allocated to the reporting unit. There are numerous factors that may cause the fair value of a reporting unit to fall below its carrying amount and/or that may cause the value of long-lived assets to not be recoverable, which could lead to the measurement and recognition of goodwill and/or long-lived asset impairment charges. These factors include, but are not limited to, significant negative variances between actual and expected financial results, lowered expectations of future financial results, failure to realize anticipated synergies from acquisitions, adverse changes in the business climate, and the loss of key personnel. As ofMarch 31, 2022 , we performed qualitative trigger events analysis and concluded that if we are not able to achieve projected performance levels, future impairments could be possible, which could negatively impact our earnings.
Business Segments
Our reportable segments are based upon our internal organizational structure;
the manner in which our operations are managed; the criteria used by our
Executive Chairman, who is our Chief Operating Decision Maker ("CODM"), to
evaluate segment performance; the availability of separate financial
information; and overall materiality considerations. Effective the first quarter
of 2022, we reorganized our financial statements into three reportable segments
by combining Diagnostic Imaging and Diagnostic Services into one Healthcare
segment to reflect the manner in which our CODM assesses performance and
allocates resources under the HoldCo Strategy:
•Healthcare
•Construction
•Investments
Healthcare
Through this segment, we provide services and products to our customers. 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. Further, 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 Healthcare segment revenues derive primarily
from selling solid-state gamma cameras and post-warranty camera maintenance
contracts.
Construction
39-------------------------------------------------------------------------------- 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 aMaine -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 inOakdale, Minnesota . EdgeBuilder is a manufacturer of structural wall panels, permanent wood foundation systems and other engineered wood products and conducts its operations inPrescott, Wisconsin .
Investments
Through this segment, we hold real estate assets that we have acquired and will potentially manage other future investments ofStar Equity . InApril 2019 , the Company funded the initial purchase of three manufacturing facilities inMaine 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 (as defined in Note 8 to our condensed consolidated financial statements). 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 theNew England states (Connecticut ,Maine ,Massachusetts ,New Hampshire ,Rhode Island , andVermont ). 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 ofNew 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 aroundMinneapolis andSt. 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 condensed Consolidated Balance Sheets. 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 endedDecember 31, 2021 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. 40 --------------------------------------------------------------------------------
Results of Operations
Comparison of the Three Months Ended
The following table summarizes our results for the three months ended
Three Months Ended March 31,
Percent of Percent of Change from Prior Year
2022 Revenues 2021 Revenues Dollars Percent *
Total revenues $ 25,049 100.0 % $ 22,354 100.0 % $ 2,695 12.1 %
Total cost of revenues 20,386 81.4 % 19,277 86.2 % 1,109 5.8 %
Gross profit 4,663 18.6 % 3,077 13.8 % 1,586 51.5 %
Total operating expenses 7,218 28.8 % 4,646 20.8 % 2,572 55.4 %
Loss from operations (2,555) (10.2) % (1,569) (7.0) % (986) 62.8 %
Total other (expense) income (196) (0.8) % 983 4.4 % (1,179) (119.9) %
Loss before income taxes (2,751) (11.0) % (586) (2.6) % (2,165) 369.5 %
Income tax provision (950) (3.8) % (2) - % (948) 47,400.0 %
Net loss from continuing
operations (3,701) (14.8) % (588) (2.6) % (3,113) 529.4 %
Net income from discontinued
operations - - % 6,020 26.9 % (6,020) (100.0) %
Net (loss) income $ (3,701) (14.8) % $ 5,432 24.3 % $ (9,133) (168.1) %
*Percentage may not add due to rounding
Revenues
Healthcare
Healthcare revenue is summarized as follows (in thousands):
Three Months Ended March 31,
2022 2021 Change % Change
Healthcare $ 13,418 $ 13,307 $ 111 0.8 %
Healthcare Revenue $ 13,418 $ 13,307 $ 111 0.8 %
Healthcare revenue increased 0.8% compared to the prior year quarter, partially
driven by an increase in revenue from radiopharmaceuticals contracts. This
increase was partially offset by fewer camera sales and fewer total scanning
days.
Construction
Construction revenue is summarized as follows (in thousands):
Three Months Ended March 31,
2022 2021 Change % Change
Construction $ 11,631 $ 9,047 $ 2,584 28.6 %
Construction Revenue $ 11,631 $ 9,047 $ 2,584 28.6 %
The increase in revenue for the Construction division was predominately driven
by large commercial projects at our EBGL business, partially offset by a $0.6
million decrease in revenues for KBS business.
41
--------------------------------------------------------------------------------Gross Profit
Healthcare Gross Profit
Healthcare gross profit and gross margin is summarized as follows (in
thousands):
Three Months Ended March 31,
2022 2021 % Change
Healthcare gross profit $ 3,176 $ 2,598 22.2 %
Healthcare gross margin 23.7 % 19.5 %
The increase in Healthcare gross margin percentage was mainly due to the
increased percentage of high margin radiopharmaceuticals contracts for the three
months ended
Construction Gross Profit
Construction gross profit and margin is summarized as follows (in thousands):
Three Months Ended March 31,
2022 2021 % Change
Construction gross profit $ 1,586 $ 544 191.5 %
Construction gross margin 13.6 % 6.0 %
The increase in Construction gross profit was predominately due to significantly
increased pricing levels during 2022 to offset higher input costs in both
residential and commercial projects, slightly offset by net loss of $0.2 million
from lumber derivatives. Our backlog and sales pipeline remain at record levels
due to newly signed contracts.
Investments Gross Loss
Investments gross loss is summarized as follows (in thousands):
Three Months Ended March 31,
2022 2021 % Change
Real Estate and Investments gross loss $ (99) $ (65) 52.3 %
The gross loss relates to depreciation expense associated with the three
manufacturing facilities acquired in
42
--------------------------------------------------------------------------------Operating Expenses
Operating expenses are summarized as follows (in thousands):
Three Months Ended March 31, Percent of Revenues
Change
2022 2021 Dollars Percent 2022 2021
Selling, general and
administrative $ 6,788 $ 5,055 $ 1,733 34.3 % 27.1 % 22.6 %
Amortization of intangible assets 430 438 (8) (1.8) % 1.7 % 2.0 %
Gain on sale of MD Office
Solutions - (847) 847 (100.0) % - % (3.8) %
Total operating expenses $ 7,218 $ 4,646 $ 2,572 55.4 % 28.8 % 20.8 %
On a consolidated basis, there was a $1.7 million increase in sales, general and
administrative expenses. Most of the increase in SG&A was primarily associated
with a $0.3 million increase in Construction due to headcount and consulting
service expenses, a $0.2 million increase in corporate administrative expenses
due to headcount, a $0.8 million increase in legal expenses and a $0.4 million
increase in outside services expenses. SG&A as a percentage of revenue increased
to 27.1% of revenue, versus 22.6% in the prior year period.
Total Other Income (Expense)
Total other income (expense) is summarized as follows (in thousands):
Three Months Ended March 31,
2022 2021
Other (expenses) income, net $ (6) $ 35
Interest expense, net (190) (272)
Gain on forgiveness of PPP loans - 1,220
Total other (expense) income $ (196)
Other (expenses) income, net, for the three months ended
Interest expense, net, for the three months ended
Income Tax Expense
For the three months endedMarch 31, 2022 , and 2021 we recorded an income tax expense of$950 thousand and$2 thousand , respectively, within continuing operations. See Note 10. Income Taxes, within the notes to our condensed consolidated financial statements for further information related to the income taxes.
Income from Discontinued Operations
See Note 2. Discontinued Operations of the condensed consolidated financial statements for information regarding discontinued operations.
43
--------------------------------------------------------------------------------Liquidity and Capital Resources
Overview
Cash Flows from Operating Activities
For the three months endedMarch 31, 2022 , net cash used in operating activities was$0.6 million , as compared to$2.2 million in 2021, resulting in a decrease in net cash used in operating activities of$1.6 million . The decrease in net cash used in operating activities was attributable to net loss from operations and positive impact on net working capital changes. Additionally, 2021 consolidated net income included discontinued operations fromDMS Health Technologies, Inc. ("DMS Health "), the sale of our MD Office Solutions subsidiary, and PPP loan forgiveness.
Cash Flows from Investing Activities
For the three months endedMarch 31, 2022 , net cash used in investing activities was$1.3 million , as compared to$18.3 million of net cash provided by investing activities in 2021. The$19.6 million decrease in net cash used in investing activities was attributable to the proceeds from the sale of discontinued operations of$18.8 million in 2021.
Cash Flows from Financing Activities
For the three months endedMarch 31, 2022 , net cash provided by financing activities was$12.6 million , as compared to net cash used in financing activities of$6.2 million in 2021, resulting in an increase in net cash provided by financing activities of$18.7 million . The increase was attributable to a net proceeds in principal on existing debt of$6.8 million , payment of dividends of$0.5 million , partially offset by proceeds received related to the 2022 Public Offering of$12.7 million . 44 --------------------------------------------------------------------------------
Summary Cash Flows
The following table shows cash flow information for the three months ended
Three
Months Ended
2022 2021
Net cash used in operating activities $ (636) $ (2,232)
Net cash (used in) provided by investing activities $ (1,310) $ 18,315
Net cash provided by (used in) financing activities $ 12,550 $ (6,180)
Sources of Liquidity
Our principal sources of liquidity are our existing cash and cash equivalents,
cash generated from operations, availability on our revolving lines of credit
from our credit facility with Webster Bank, N.A. ("Webster"), as successor in
interest to Sterling National Bank ("Sterling" or "SNB"), our three credit
facilities with Gerber, and cash raised from equity financing. As of March 31,
2022 , we had $15.0 million of cash and cash equivalents. The Gerber facilities
directly support our Construction businesses. As of March 31, 2022 , we were
fully drawn in terms of available capacity and at $2.9 million outstanding on
the KBS revolver. We were at $2.1 million outstanding balance with approximately
$0.4 million in undrawn available capacity on the EBGL revolver. However, those
facilities have loan limits of $4.0 million each and we expect to be able to use
more of that availability as our borrowing base increases with higher production
levels. In January 2022 , we successfully completed the 2022 Public Offering with
net proceeds of $12.7 million .
Going Concern
The accompanying condensed consolidated 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 losses from continuing operations, net of income taxes, of approximately$3.7 million and$0.6 million for the three months endedMarch 31, 2022 and 2021, respectively. We have an accumulated deficit of$131.7 million and$128.0 million as ofMarch 31, 2022 and 2021, respectively. Net cash used in operations was$0.6 million for the three months endedMarch 31, 2022 , compared to net cash used in operations of$2.2 million for the same period in 2021. The Company will likely need to secure additional financing in the future to accomplish its business plan over the next several years and there can be no assurance on the availability or terms upon which such financing and capital might be available at that time. As ofMarch 31, 2022 , cash and cash equivalents increased to$15.0 million from$4.5 million as ofDecember 31, 2021 . AtMarch 31, 2022 , we had approximately$13.3 million in debt outstanding. All of our debt is categorized as short-term on our condensed Consolidated Balance Sheets. For more detail, see Note 8. Debt. The Company's loan pursuant to the SNB Loan Agreement (as defined below) (the "SNB Loan"), which has a current balance owed of$7.3 million , supports our Healthcare business. While the SNB Loan matures in 2024, GAAP rules require that the outstanding balance be classified as short-term debt. This is due to both the automatic sweep feature embedded in the traditional lockbox arrangement and the subjective acceleration clause in the SNB Loan Agreement. As ofMarch 31, 2022 , we were not in compliance with covenants in the SNB Loan Agreement related to our Healthcare division and we have not obtained a waiver from the Webster for these financial covenant breaches. However, we have enough cash to pay down the SNB Loan. Upon the occurrence and during the continuation of an event of default under the SNB Loan Agreement, Webster 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. Management has concluded that this forecasted violation raises substantial doubt about our ability to continue as a going concern within twelve months after the date that financial statements are issued, if we are not able to restructure those agreements or receive a waiver for non-compliance with our covenants. Our financial statements do not reflect any adjustments that might result from the outcome of this uncertainty. Management is taking a number of steps to avoid these breaches and/or restructure the covenants within these agreements. These steps include improving our operations, considering additional or alternative financing arrangements, and negotiating with current lenders to amend our covenants. While we believe that we maintain strong transparency and relationships with our lenders, there can be no assurance that we will be successful in these efforts. As ofMarch 31, 2022 , we had$5.0 million outstanding on our two Construction division revolvers withGerber Finance, Inc. ("Gerber"). As ofDecember 31, 2021 , we were not in compliance with our bi-annual covenants on either of these Gerber facilities. However, we have obtained waivers from Gerber covering the measurement period endingJune 30, 2022 . While Gerber has historically provided us with such waivers, when needed, there is no assurance that we will be able to receive waivers for covenant violations in the future. OnJanuary 31, 2020 , we and certain of our Investments subsidiaries entered into a Loan and Security Agreement with Gerber (as amended, the "Star Loan Agreement"), which provides for a credit facility with borrowing availability of up to$2.5 million , bearing interest at the prime rate plus 3.5% per annum, and matures onJanuary 1, 2025 , unless terminated in 45 -------------------------------------------------------------------------------- accordance with the terms therein (the "Star Loan"). We currently have$1.0 million outstanding on the Star Loan, on which we are and historically have been making timely payments in full compliance with all covenants. Related party notes of$2.3 million that were outstanding as ofDecember 31, 2020 were fully paid off onApril 1, 2021 using proceeds from the sale ofDMS Health . In addition, as ofMarch 31, 2022 , we had cash and cash equivalents of$15.0 million . OnJanuary 24, 2022 , we closed an underwritten public offering (the "2022 Public Offering"), and gross proceeds, before deducting underwriting discounts and offering expenses and excluding any proceeds we may receive upon exercise of the common warrants, were$14.3 million and net proceeds were$12.7 million . Refer to Note 14. Equity Transactions for details.
In the first quarter of 2022, we declared and made a
Common Stock Equity Offering
OnMay 28, 2020 , we closed an underwritten public offering (the "2020 Public Offering") pursuant to an underwriting agreement withMaxim Group LLC , as representative of the underwriters. The 2020 Public Offering was for 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 2020 Public Offering price was$2.24 per share of common stock and$0.01 per accompanying Warrant (for a combined offering price of$2.25 ). Gross proceeds, before deducting underwriting discounts and offering expenses and excluding any proceeds we may receive upon exercise of the common warrants, were$5.5 million and net proceeds were$5.2 million . As noted above, onJanuary 24, 2022 , we closed the 2022 Public Offering pursuant to an underwriting agreement withMaxim Group LLC , as representative of the underwriters. The 2022 Public Offering was for 9,500,000 shares of common stock (or pre-funded warrants to purchase shares of common stock in lieu thereof) and warrants to purchase up to 9,500,000 shares of common stock (the "common warrants"). Each share of common stock (or pre-funded warrant in lieu thereof) was sold together with one common warrant to purchase one share of common stock at a price of$1.50 per share and common warrant. Gross proceeds, before deducting underwriting discounts and offering expenses and excluding any proceeds we may receive upon exercise of the common warrants, were$14.3 million and net proceeds were$12.7 million . As ofMarch 31, 2022 , of the warrants issued through the 2020 Public Offering, 1.0 million warrants were exercised and 1.4 million warrants remained outstanding, which represents 0.7 million shares of common stock equivalents, at an exercise price of$2.25 . As ofMarch 31, 2022 , of the warrants issued through the 2022 Public Offering, there were 10.9 million of warrants and 0.3 million of prefunded warrants outstanding at an exercise price of$1.50 and$0.01 , respectively.
See Note 14. Equity Transactions in the accompanying notes to the condensed consolidated financial statements for further details.
Credit Facilities
SNB Credit Facility
OnMarch 29, 2019 , we 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. OnFebruary 1, 2022 , Sterling became part of Webster, andWebster became the successor in interest to the SNB Loan Agreement. The SNB Loan Agreement is a five-year credit facility maturing inMarch 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 ofMarch 31, 2022 , the Company had$0.1 million of letters of credit outstanding and had additional borrowing capacity of$1.1 million . Financial covenants required that the SNB Borrowers maintain (a) a Fixed Charge Coverage Ratio as of the last day of a fiscal quarter of not less than 1.25 to 1.0 and (b) a Leverage Ratio as of the last day of such fiscal quarter of no greater than 3.50 to 1.0. As ofMarch 31, 2022 , we were not in compliance with covenants related to our Healthcare division and we have not obtained a waiver fromWebster for these financial covenant breaches. While we do not believeWebster will require us to pay down our balance on this facility, we have sufficient cash to do so if necessary.
Construction Loan Agreements
46
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As of March 31, 2022 , the Construction division had outstanding revolving lines
of credit and term loans of approximately $5.0 million . This debt includes: (i)
$2.9 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) $2.1 million principal
outstanding on EBGL's $4.0 million revolving credit facility under a Revolving
Credit Loan Agreement, collectively known as the "Construction Loan Agreements"
with Gerber. The Construction division had a borrowing capacity under both
revolving lines of credit of $0.4 million , based on the inventory and accounts
receivable on March 31, 2022 which fluctuates weekly. The Construction Loan
Agreements contain cross-default provisions and subjective acceleration clauses
which may, in the event of a material adverse event, as determined by Gerber,
allow Gerber to declare the loans and all other obligations under the
Construction Loan Agreements immediately due and payable or increase the
interest rate at which loans and obligations under the Construction Loan
Agreements bear interest. Each of the two Gerber credit facilities are backed by
the assets of their respective borrower (KBS or EBGL), which serve as collateral
support. Therefore, distributions from each facility are restricted in their
use, as they must be used solely to finance the operations of their respective
borrower.
KBS Loan Agreement
The KBS Loan Agreement provides KBS with a revolving line of credit with
borrowing availability of up to
Financial covenants required that KBS maintain (a) a net cash income (as defined in the KBS Loan Agreement) of at least equal to no less than$0 for the trailing 6-month period endingJune 30, 2022 and be no less than$500,000 for the trailing fiscal year endingDecember 31, 2022 and (b) a minimum EBITDA (as defined in the KBS Loan Agreement) no less than$0 as ofJune 30, 2022 and no less than$850,000 as of the fiscal year endingDecember 31, 2022 . As ofMarch 31, 2022 , we are not required to measure financial covenants. TheDecember 31, 2021 Gerber covenants waivers last until the next measurement period. 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 all receipts are swept daily to reduce borrowings outstanding. AtMarch 31, 2022 , approximately$2.9 million was outstanding under the KBS Loan Agreement.
EBGL Premier Note
All obligations under the Revolving Credit Loan Agreement (as amended, the
"Premier Loan Agreement" with Premier Bank ("Premier")) were repaid in full on
SRE,947 Waterford Road , LLC ("947Waterford "),300 Park Street , LLC ("300 Park"), and56 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"), have a credit facility with Gerber providing the Star Borrowers with borrowing availability of up to$2.5 million , of which,$2.0 million was advanced to KBS and$0.5 million was advanced to EBGL (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 onApril 30, 2020 , was to be repaid in monthly installments of twelve (12) consecutive equal payments. The Star Loan matures on the earlier of (a)January 1, 2025 or (b) the termination, the maturity or repayment of the EBGL Loan (as defined below). Availability under the Star Loan Agreement was 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. The Star Loan 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. 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,Mr. Eberwein 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.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. OnFebruary 26, 2021 , the Star Borrowers entered into the Third Star Amendment with Gerber that amended the contract rate to prime rate plus 3% and discharged the$2.5 million Gerber Eberwein Guaranty. 47 -------------------------------------------------------------------------------- The financial covenants under the Star Loan Agreement include maintenance of a Debt Service Coverage Ratio of not less than 1:00 to 1:00, as defined in the Star Loan Agreement, as ofDecember 31, 2021 . The occurrence of any event of default under the Star Loan Agreement may result in the obligations of the Star Borrowers becoming immediately due and payable. As ofMarch 31, 2022 , no event of default was deemed to have occurred and the Star Borrowers were in compliance with the bi-annual financial covenants under the Star Loan Agreement as ofDecember 31, 2021 . As ofMarch 31, 2022 ,$1.0 million was outstanding under the Star Loan Agreement. The borrowings under the Star Loan Agreement were classified as short-term obligations under GAAP, because the borrowings under the EBGL Loan Agreement were classified as short-term obligations under GAAP given the EBGL and KBS Loan Agreements contain a subjective acceleration clause and require a lockbox arrangement whereby all receipts are swept daily to reduce borrowings outstanding. Accordingly, if (i) a material adverse effect may be seen to have occurred, (ii) Gerber in its discretion deems a EBGL Loan Agreement default occurred, and (iii) the proceeds swept are insufficient to pay the balance outstanding, Gerber may then demand all obligations under the Star Loan Agreement immediately due and payable due to cross-default provision, occurring within the Star Loan Agreement. Since a material event can occur at any time, all obligations under the Star Loan Agreement, EBGL Loan Agreement and KBS Loan Agreement are classified as short-term obligations.
Gerber EBGL Loans
EdgeBuilder and Glenbrook (the "EBGL Borrowers"), each a Construction Subsidiary, and the Company, 947 Waterford, 300 Park, 56 Mechanic, ATRM, and KBS (collectively, the "EBGL Credit Parties") have a credit facility with Gerber providing the EBGL Borrowers with a credit facility with borrowing availability of up to$4.0 million (the "EBGL Loan"), pursuant to a Loan and Security Agreement (the "EBGL Loan Agreement") with Gerber, which matures onJanuary 1, 2023 . As ofMarch 31, 2022 ,$2.1 million was outstanding under the EBGL Loan. Availability under the EBGL Loan Agreement was also based on a formula tied to the EBGL Borrowers' eligible accounts receivable and inventory.
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.
Financial covenants to require that EBGL maintain (a) a lower net cash income (as defined in the EBGL Loan Agreement) at least equal to no less than$0 for the trailing 6-month period endingJune 30, 2022 and no less than$1,000,000 for the trailing fiscal year endDecember 31, 2022 and (b) a reduced minimum EBITDA (as defined in the EBGL Loan Agreement) to be no less than$0 as ofJune 30, 2022 and no less than$1,000,000 as of the fiscal year endingDecember 31, 2022 . As ofMarch 31, 2022 , no event of default was deemed to have occurred and EBGL was in compliance with the bi-annual financial covenants under the EBGL Loan Agreement as ofDecember 31, 2021 .
Paycheck Protection Program
From
The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and is administered by theU.S. Small Business Administration ("SBA"). The loans evidenced by the Construction Notes were made throughBremer Bank ("Bremer") as lender, and the loans evidenced by the Healthcare Notes were made through Sterling as lender.
The loans evidenced by the PPP Notes (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 until repaid.
During the fiscal years ended 2020 and 2021, the Company applied for forgiveness on all PPP Loans. All PPP Loans were forgiven, resulting in a gain of$4.2 million in 2021 and$2.5 million in 2020, thus, the Company has no PPP Loans outstanding.
See Note 8. Debt in the accompanying notes to the financial statements for further details.
Off-Balance Sheet Arrangements
OnApril 1, 2022 , the Company entered into a Guaranty Agreement to guarantee the obligations of KBS toConsigli Construction Co., Inc. under a subcontract in the event of a material breach by KBS in an amount up to$4.4 million , with such amount decreasing as product deliveries occur.
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