UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
For the fiscal year ended December 31 , 2023
or
For the transition period from to
Commission file number: 001-35947
(Exact name of registrant as specified in its charter)
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(203 ) 489-9500
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý
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. Yes ý No ¨
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). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
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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. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
The aggregate market value of the voting common stock held by non-affiliates based on the closing stock price on June 30, 2023, was $10.4 million. For purposes of this computation only, all executive officers and directors have been deemed affiliates.
The number of outstanding shares of the registrant’s common stock, par value $0.0001 per share, as of March 7, 2024 was 15,848,202 .
DOCUMENTS INCORPORATED BY REFERENCE
None.
STAR EQUITY HOLDINGS, INC.
FORM 10-K—ANNUAL REPORT
For the Fiscal Year Ended December 31, 2023
Table of Contents
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PART I
Cautionary Statement Regarding Forward-Looking Statements
Portions of this Annual Report on Form 10-K (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 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K, as well as other portions of this Annual Report on Form 10-K. 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 Annual Report on Form 10-K. 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.
Corporate Information
Star Equity Holdings, Inc. is a diversified holding company with two divisions: Construction and Investments. For additional details related to the Company’s reportable segments, see Item 1. Business – Business Segments and Note 15. Segments within the notes to our accompanying consolidated financial statements. Unless the context requires otherwise, in this report the terms “we,” “us,” and, “our” refer to Star Equity and our wholly owned subsidiaries.
ITEM 1. BUSINESS
Overview
Star Equity Holdings, Inc. (“Star Equity”, the “Company”, “we”, “our”) is a multi-industry diversified holding company incorporated as a Delaware corporation in 1997. Currently, we have two divisions which include the operating businesses in our Construction division and an Investments division. We previously had a Healthcare division which we sold on May 4, 2023, as further described in Note 3. Discontinued Operations.
Our Construction division is currently made up of three operating businesses: KBS Builders, Inc. (“KBS”), EdgeBuilder, Inc. (“EdgeBuilder”), and Glenbrook Building Supply, Inc. (“Glenbrook”), with the latter two managed together and referred to jointly as “EBGL”. KBS is based in Maine and manufactures modular buildings, typically in the single and multi-family residential segments, principally servicing the New England market. EBGL is based in the Minneapolis-Saint Paul area and principally serves the Upper Midwest region. Together, the EBGL businesses manufacture and deliver structural wall panels and other engineered wood-based products for commercial and residential customers. We distribute building materials from two lumberyard locations primarily focused on professional builder customers. EBGL expanded its market share of the Greater Minneapolis area through the acquisition of all of the assets of Big Lake Lumber Inc. (“BLL”) in October 2023. See Note 16. Mergers and Acquisitions for further information.
Our Investments division currently holds and manages our corporate-owned real estate, including two manufacturing facilities in Maine that are leased to KBS and one manufacturing facility in Minnesota that is leased to Glenbrook. The Investments division also manages internally-funded, concentrated minority investments in a number of public companies, cost method investments in private companies, and notes receivable.
Strategy
Star Equity
We believe our multi-industry diversified holding company structure allows Star Equity management to focus on capital allocation, strategic leadership, mergers and acquisitions, capital markets transactions, and investor relations, as well as direct 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.
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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 corporate restructuring.
Operating Businesses
We believe that our Construction division companies 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. Our primary focus will be on markets in which we already have a presence in order to leverage the personnel, infrastructure, and brand recognition we have in these areas.
•Introduction of new services. Within our Construction division companies, we will consider opportunities to augment our service offering to better serve our customer base. We have done this in the New England market with our entry into the commercial multi-family segment. Other areas might include logistics, on site installation, and manufacturing of sub-components.
•Acquisition of complementary businesses. We plan to continue to look at complementary businesses that meet our financial criteria 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.
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 Chief Executive Officer (Chief Operating Decision Maker or "CODM") to evaluate segment performance, the availability of separate financial information, and overall materiality considerations. Prior to May 2023, we had three reportable segments: Healthcare, Construction, and Investments. Effective as of May 2023 with the sale of our Digirad Health business, we have two reportable segments: Construction and Investments. Our corporate structure reflects the manner in which our CODM assesses performance and allocates resources.
See Note 15. Segments, within the notes to our accompanying consolidated financial statements.
Detailed Description of Our Operating Segments
Construction
Our Construction division services residential and commercial construction projects via our KBS, EdgeBuilder, and Glenbrook brands, through which we manufacture modular housing units, structural wall panels, permanent wood foundation systems, and other engineered wood products, and also supply general contractors and retail customers with building materials.
KBS is a Maine-based modular builder that started operations in 2001. Today, KBS manufactures fully custom modular homes. KBS offers products for both multi-family and single-family residential buildings leveraging an in-house engineering team and design expertise. KBS markets its modular homes through a direct sales organization, which consists of inside sales and outside sales teams who work with a network of independent dealers, builders, and contractors, primarily in the New England states (Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont). KBS’s outside sales organization focuses on 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 inside sales people focus on a network of independent dealers, builders, and contractors to accurately configure and place orders for mainly single-family residential homes. KBS’s network of independent dealers and contractors do not work with KBS exclusively, although some have KBS model homes on display at their retail centers. KBS’s backlog and pipeline, along with its market initiatives to build more student, workforce, and affordable housing, are expected to position KBS for continued growth, particularly in the multi-family segment.
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EdgeBuilder is a manufacturer of structural wall panels, permanent wood foundation systems, and other engineered wood products and conducts its operations in Prescott, Wisconsin. EdgeBuilder 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 the Minneapolis-Saint Paul region. EdgeBuilder’s direct sales organization is responsible for both residential and commercial projects and 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.
Glenbrook (inclusive of BLL acquired in 2023) is a supplier of lumber, windows, doors, cabinets, drywall, roofing, decking, and other building materials to professional builders. Glenbrook conducts its operations in Oakdale, Minnesota and Big Lake, Minnesota with an operational facility in Hudson, Wisconsin. EdgeBuilder and Glenbrook operate as one business with a single management team and we refer to them together as EBGL.
Investments
We hold three real estate assets in our portfolio, two of which we lease to our construction subsidiary, KBS, and the third we lease to our construction subsidiary, Glenbrook. These include their principal production facilities in South Paris, Maine and Big Lake, Minnesota, respectively. Also, we continue to expand our investment activities and have established minority positions in the equity securities of a small number of publicly traded companies, cost method investments in private companies, and notes receivables.
Our Competitive Strengths
Construction Services and Products
Our competitive strengths at KBS include our strategic location near the Greater Boston region and our ability to serve all of New England. We have the largest manufacturing capacity in New England with the ability to provide high quality wood-based modules for both single and commercial scale multi-family residential buildings. We also provide significant value through our longstanding engineering and design expertise, with a focus on customization to suit specific project requirements. We continue to develop our expertise and specialized knowledge in highly energy-efficient passive homes, which included the delivery of our first zero-energy modular homes for the affordable housing segment during 2020. Additionally, we believe there is a large opportunity in the commercial-scale multi-family modular segment and we have continued to pursue more of these projects.
At EdgeBuilder, we offer a superior product for commercial-scale multi-family projects, focusing on structural wall panels. Our engineering and design capabilities allow us to create a product that is unique to the specific project’s requirements. We also provide value with our vertically integrated in-house delivery capability, which helps us to be cost-competitive. Our production strategy is to utilize automation and the most efficient manufacturing methods and high-quality materials in all EdgeBuilder projects. Through our building products distribution business, we operate a professional lumber yard and showroom and deliver highly personalized service, knowledgeable salespeople, and attention to detail that the larger, big-box chain home stores do not provide.
We expect the offsite construction industry to achieve revenue growth over the next several years driven largely by rising housing demand which can be met via modular construction. We believe our Construction division is well positioned to capitalize on the growing popularity of offsite construction—both modular and panelized— in our two current target markets and the United States as a whole.
Sales
Construction
KBS markets its modular homes products through both outside and inside salespeople. Our inside sales team works primarily with our network of independent dealers who source end customers for single family homes, largely in northern New England. Our outside sales team focuses on commercial scale multi-unit projects through new and established relationships with architects, designers, developers, owners builders, general contractors, consultants, and construction managers throughout New England. Their work involves developing and negotiating the full scope of work for KBS, terms of payment, and general requirements for each project.
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EBGL markets its engineered structural wall panels and permanent wood foundation systems through direct sales people to a network of builders, contractors, and developers in the Minneapolis-Saint Paul area and the Upper Midwest states. EBGL’s direct sales organization is responsible for both residential and commercial projects. Our marketing efforts include participation in industry trade shows, production of product literature, and the use of sales support tools. Our showroom and lumber yard processes orders over the phone and services walk-in traffic, mainly focusing on serving professional builders with our highly experienced in-house sales team.
Competition
Construction
The market for construction, including through offsite manufacturing, is highly competitive.
KBS. KBS is a regional manufacturer of modular housing units with a primary target market in the New England states. Several modular manufacturing competitors are located in these New England states and in nearby Pennsylvania. Some competitors have manufacturing locations in Canada and ship their products to the United States.
EBGL. EBGL is a regional manufacturer of engineered structural wall panels and permanent wood foundation systems and also has a local professional-builder-focused retail distribution business. EBGL’s market is primarily the Upper Midwest states (Iowa, Minnesota, Missouri, North Dakota, South Dakota, and Wisconsin), though largely concentrated within Minnesota and Wisconsin. Glenbrook’s professional building material distribution businesses (including the newly acquired BLL, as discussed in Note 16. Mergers and Acquisitions) compete on a local level against both small, local lumber yards, regional building supply companies, and to a certain degree, the “big box” stores such as Home Depot, Lowe’s, and Menard’s.
Intellectual Property
Intellectual property is not a significant factor in our Construction business.
Patents
We do not hold any patents within our Construction business.
Raw Materials
Construction. Both KBS and EBGL operate in the wood-based construction market. The primary raw materials used in their production processes include dimensional lumber, mainly spruce-pine-fir (SPF), and sheathing/sheet goods (OSB and plywood). The majority of underlying raw material for both KBS and EBGL are sourced by wholesalers and mills in the United States, though from time to time are also sourced from Canada. Both businesses depend on the reliability of the lumber supply chain and are sensitive to varying degrees to wood-based commodity price fluctuations.
Manufacturing
Construction. KBS began manufacturing single family homes in 2001 and commercial modular multi-family housing units in 2008. In subsequent years, KBS expanded its product offerings to include a variety of commercial-scale multi-family buildings including apartments, condominiums, townhouses, and dormitories. The structures are built inside our climate-controlled factories and are then transported to the site where they are set, assembled, and secured on the foundation. Electrical, plumbing, and HVAC systems are inspected and tested in the factory, prior to transportation to the site, to ensure the modules meet all local building codes and quality requirements. Modular construction has gained increased acceptance and is a preferred method of building by many architects and general contractors. The advantages of modular construction include: modules are constructed in a climate-controlled environment; weather conditions usually do not interrupt or delay construction; the building is protected from weather, reducing the risk of mold or other materials damage due to materials absorbing moisture from rain or snow; reduced site work; improved safety and security; reduced vandalism and attrition; and a significant reduction in overall project time.
EBGL consists of two separate companies (EdgeBuilder and Glenbrook) operating in tandem with a common management team. EdgeBuilder manufactures wall panels and permanent wood foundations (PWF) in a climate-controlled factory, then transports the panels to the construction site via flat-bed trucks. The panels are typically unloaded by crane and erected, or assembled, on site by professional framing contractors. Panelized construction, especially in large-scale, multi-unit projects, is becoming increasingly popular due to the heightened demand for construction labor. Additionally, because the wall panels are constructed in a controlled indoor environment, waste, weather-related delays, and mistakes are minimized. This shaves weeks off large, multi-unit construction schedules, leaving room for more annual builds. Glenbrook, as a retailer of professional building products, is not directly involved in manufacturing but does often sell and ship product in tandem with EdgeBuilder wall panel deliveries. As International Building Code® continues to evolve, KBS and EBGL, along with our professional partners in the industry, meet code changes with innovative products and a dedicated staff for adherent builds.
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Human Capital Resources
As of December 31, 2023, we had a total of 171 employees in all our divisions, of which 103 were employed in manufacturing, 20 in operational roles, 27 in general and administrative functions, and 21 in marketing and sales. All of our 171 employees are full-time employees. All positions are in the United States. We also utilize varying amounts of temporary workers as necessary to fulfill customer requirements. We have policies to prevent discrimination based on gender, race, disability, ethnicity, nationality, religion, sexual orientation, gender identity, or gender expression. We take affirmative action to ensure that applicants are employed, and that employees are treated during employment, without regard to their race, color, religion, sex, or national origin. We also take affirmative action to employ and advance veterans in employment. We have not experienced any work stoppages and consider our employee relations to be good.
Recent History of our Business Transformation
On May 4, 2023, we entered into a Stock Purchase and Contribution Agreement (the “Digirad Purchase Agreement”), by and among the Company, Digirad Health Inc., a Delaware corporation and wholly owned subsidiary of the Company (“Digirad Health”), TTG Imaging Solutions, LLC, a Pennsylvania limited liability company (“TTG”), and TTG’s parent, Insignia TTG Parent LLC, a Delaware limited liability company (“TTG Parent”). Pursuant to the Digirad Purchase Agreement, (i) TTG purchased 85% of the issued and outstanding shares of Digirad Health, on the terms and subject to the conditions set forth therein and (ii) the Company contributed to TTG Parent 15% of the issued and outstanding shares of stock of Digirad Health (the “Contributed Shares”) in exchange for New Units (as defined in the Digirad Purchase Agreement) of TTG Parent (the “Transaction”). The total aggregate consideration payable to the Company for the Transaction was $40 million, comprised of $19.7 million ($27 million less payoff of debt to Webster Bank (see Note 8. Debt) and transaction costs) in cash, a $7 million promissory note (see Note 5. Supplemental Balance Sheet Information), and $6 million of New Units in TTG Parent (see Note 5. Supplemental Balance Sheet Information). The Company completed the sale of Digirad Health simultaneously with entering into the Digirad Purchase Agreement. See Note 3. Discontinued Operations for further information.
On October 31, 2023, we purchased certain assets of BLL. Pursuant to this transaction, BLL sold its lumberyard and showroom facility to 791 Rose Drive LLC, a wholly-owned subsidiary of the Company, and certain related assets to Glenbrook, and rebranded the location and business operations to fall under the Glenbrook name, for a combined purchase price of $3.3 million (the “BLL Purchase Price”). The BLL Purchase Price is subject to certain post-closing adjustments including an earn-out provision of up to $0.5 million payable over two years and a hold back to satisfy certain indemnification obligations of Glenbrook under the purchase agreement. As discussed in more detail in Note 16. Mergers and Acquisitions, we recognized a gain upon the acquisition which represents the excess of the fair value of net assets acquired over the purchase price.
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Available Information
We file electronically with the SEC, our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”). The SEC maintains a website (www.sec.gov), which contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge on our website (www.starequity.com) as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Such reports will remain available on our website for at least 12 months and are also available free of charge by written request or by contacting Star Equity at (203) 489-9500 or our third-party Investor Relations representative at (212) 836-9611.
The contents of our website or any other website are not incorporated by reference into this Annual Report on Form 10-K.
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ITEM 1A.RISK FACTORS
Summary of Risk Factors
The summary below provides a non-exhaustive overview of the risks that, if realized, could materially harm our business, prospects, operating results, and financial condition. This summary is qualified by reference to the full set of risk factors set forth in this Item.
•We have a history of annual net losses attributable to common stockholders which may continue and which may negatively impact our ability to achieve our growth initiatives.
•We rely on information technology in our operations, and any material failure, inadequacy, interruption, or security failure of that technology could materially harm our business.
•We may not be able to achieve the anticipated synergies and benefits from business acquisitions.
•We face risks related to health pandemics, wars, inflation, and other widespread outbreaks of contagious disease, including COVID-19 and its variants, or other potential causes of global instability which could significantly disrupt our operations and impact our financial results.
•We are subject to particular risks associated with real estate ownership, which could result in unanticipated losses or expenses.
•Operating results may be adversely affected by changes in the costs and availability of supplies and materials.
•Our quarterly and annual financial results are difficult to predict and are likely to fluctuate from period to period.
•We spend considerable time and money complying with federal and state laws, regulations, and other rules which may fluctuate, and if we are unable to fully comply with such laws, regulations, and other rules, we could face substantial penalties.
•We are subject to risks associated with self-insurance related to health benefits.
•Our long-term results depend upon our ability to improve existing products and services and develop, introduce, and market new products and services successfully.
•We may make financial investments in other businesses that may lose value.
•Our goodwill and other long-lived assets are subject to potential impairment that could negatively impact our earnings.
•If KBS is unable to maintain or establish its relationships with independent dealers and contractors who sell its homes, KBS revenue could decline.
•Due to the nature of our business, many of our expenses are fixed costs and if there are decreases in demand for products, it may adversely affect operating results.
•Due to the nature of the work we and our subsidiaries perform, we may be subject to significant liability claims and disputes.
•Rising inflation and interest rates could negatively impact our revenues, profitability, and borrowing costs. In addition, if our costs increase and we are not able to correspondingly adjust our commercial relationships to account for this increase, our net income would be adversely affected, and the adverse impact may be material.
•Any indebtedness incurred by the Company could restrict our operations and make us more vulnerable to adverse economic conditions.
•If we are unable to generate or borrow sufficient cash to make payments on our indebtedness, our financial condition would be materially harmed, our business could fail, and stockholders may lose all of their investment.
•The market price of our common stock may be volatile, and the value of your investment could decline significantly.
•Our common stock has a low trading volume and shares available under our equity compensation plans could affect the trading price of our common stock.
•If we cannot continue to satisfy the Nasdaq Global Market continued listing standards and other Nasdaq rules, our common stock could be delisted, which would harm our business, the trading price of our common stock, our ability to raise additional capital and the liquidity of the market for our common stock.
•A possible “short squeeze” due to a sudden increase in demand of our common stock that largely exceeds supply may lead to price volatility in our common stock.
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•Payment of dividends on our common stock is prohibited unless we have declared and paid (or set apart for payment) full accumulated dividends on the Series A Preferred Stock, which also has a significant liquidation value.
•If we fail to pay dividends on our Series A Preferred Stock for six or more consecutive quarters, holders of our Series A Preferred Stock will be entitled to elect two additional directors to our board of directors.
•We may not be able to redeem our Series A Preferred Stock upon a Change of Control Triggering Event (as defined herein).
•As a smaller reporting company, we are subject to scaled disclosure requirements that may make it more challenging for investors to analyze and compare our results of operations and financial prospects.
•If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, the price and trading volume of our securities could decline.
•The protective amendment contained in our Restated Certificate of Incorporation, which is intended to help preserve the value of certain income tax assets, primarily NOLs, may have unintended negative effects.
•Our stockholder rights plan, or “poison pill,” includes terms and conditions which could discourage a takeover or other transaction that stockholders may consider favorable.
•Anti-takeover provisions in our organizational documents and Delaware law may prevent or delay removal of current management or a change in control.
•We expect to be limited in our ability to utilize net operating loss carryforwards to reduce our future tax liability as a result of our January 2022 public offering.
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Risks Related to Our Business and Industry
We have a history of annual net losses attributable to common stockholders which may continue and which may negatively impact our ability to achieve our growth initiatives.
Our total stockholders’ equity increased to $65.3 million as of December 31, 2023. For the year ended December 31, 2023, we had revenue of $45.8 million, compared to revenue of $57.1 million for the comparable period in 2022. We had net income attributable to common stockholders of $23.2 million for the year ended December 31, 2023, compared to a net loss attributable to common stockholders of $7.2 million for the comparable 2022 period. There can be no assurance that, even if our revenue increases, our future operations will result in net income attributable to common stockholders. Our failure to increase our revenues or improve our gross margins will harm our business. We may not be able to sustain or increase profitability on a quarterly or annual basis in the future. If our revenues grow more slowly than we anticipate, our gross margins fail to improve or our operating expenses exceed our expectations, our operating results will suffer. The prices we charge for our products and services may decrease, which would reduce our revenues and harm our business. If we are unable to sell our products at acceptable prices relative to our costs, or if we fail to develop and introduce on a timely basis new products from which we can derive additional revenues, our financial results will suffer.
We rely on information technology in our operations, and any material failure, inadequacy, interruption, or security failure of that technology could materially harm our business.
We rely on information technology and systems, including the Internet, commercially available software, and other applications, to process, transmit, store, and safeguard information and to manage or support a variety of our business processes, including financial transactions and maintenance of records, which may include personal identifying information and other valuable or confidential information. If we experience material failures, inadequacies, or interruptions or security failures of our information technology, we could incur material costs and losses. Further, third-party vendors could experience similar events with respect to their information technology and systems that impact the products and services they provide to us or to our customers. We rely on commercially available systems, software, tools, and monitoring, as well as other applications and internal procedures and personnel, to provide security for processing, transmitting, storing, and safeguarding confidential information such as personally identifiable information related to our employees and others, information regarding financial accounts, and information regarding customers and vendors. We take various actions, and we incur significant costs, to maintain and protect the operation and security of our information technology and systems, including the data maintained in those systems. However, it is possible that these measures will not prevent the systems’ improper functioning or a compromise in security, such as in the event of a cyberattack or the improper disclosure of information. Security breaches, computer viruses, attacks by hackers, online fraud schemes, and similar breaches can create significant system disruptions, shutdowns, fraudulent transfer of assets, or unauthorized disclosure of confidential information. For example, in April 2019, we became aware that we had been a victim of criminal fraud commonly referred to as “business email compromise fraud.” The incident involved the impersonation of one of our officers and improper access to his email, wherein the transfer by us of funds to a third-party account almost occurred.
Despite any defensive measures we take to manage threats to our business, our risk and exposure to these matters remain heightened because of, among other things, the evolving nature of such threats in light of advances in computer capabilities, new discoveries in the field of cryptography, new and sophisticated methods used by criminals including phishing, social engineering, or other illicit acts, or other events or developments that we may be unable to anticipate or fail to adequately mitigate. Any failure to maintain the security, proper function and availability of our information technology and systems, or certain third-party vendors’ failure to similarly protect their information technology and systems that are relevant to our operations, or to safeguard our business processes, assets, and information could result in financial losses, interrupt our operations, damage our reputation, cause us to be in default of material contracts, and subject us to liability claims or regulatory penalties, any of which could materially and adversely affect us.
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We may not be able to achieve the anticipated synergies and benefits from business acquisitions.
Part of our business strategy is to acquire businesses that we believe can complement or expand our current business activities, both financially and strategically. With these synergistic benefits in mind, we acquired KBS, EdgeBuilder and Glenbrook in 2019 and BLL in 2023, and will continue to seek strategic acquisitions in line with our business activities. Acquisitions involve many complexities, including, but not limited to, risks associated with the acquired business’ past activities, loss of customers, regulatory changes that are not anticipated, difficulties in integrating personnel and human resource programs, integrating ERP systems and other infrastructures, general underperformance of the business under our control versus the prior owners, unanticipated expenses and liabilities, and the impact on its internal controls of compliance with the regulatory requirements under the Sarbanes-Oxley Act of 2002. As a result, the realization of anticipated synergies or benefits from acquisitions may be delayed or substantially reduced, and could potentially result in the impairment of our investment in these businesses.
We face risks related to health pandemics, wars, inflation, and other widespread outbreaks of contagious disease, including COVID-19 and its variants, or other potential causes of global instability which could significantly disrupt our operations and impact our financial results.
Our business has been disrupted and could be further materially adversely affected by the COVID-19 pandemic, wars, or other causes of global instability. Global concerns, such as COVID-19 or other health concerns, wars, or global conflicts, could also result in social, economic, and labor instability in the United States or countries in which we or the third parties with whom we engage operate. The future progression of the COVID-19 pandemic and its effects on our business and operations are uncertain, as well as the impact of global conflicts on supply chains and inflation. We cannot presently predict the scope and severity of any potential business shutdowns or disruptions, including downturns in global economies and financial markets that could affect our future operating results.
Additionally, during 2022 and into early 2023 the global economy experienced high levels of inflation, rising interest rates, significant fluctuations in currency values, and increasing economic uncertainty, particularly in Europe. While inflation in the United States retreated during the latter part of 2023, our results of operations may continue to be negatively impacted by higher costs of raw materials, labor and freight resulting from inflationary pressures. These factors and global events including the ongoing military conflicts between Russia and Ukraine and Israel and Hamas, a softening economy in Europe, and fluctuating interest rates may also have a negative impact on our results.
We are subject to particular risks associated with real estate ownership, which could result in unanticipated losses or expenses.
Our business is subject to many risks that are associated with the ownership of real estate. Risks that are associated with real estate acquisition and ownership include, without limitation, the following:
•general liability, property and casualty losses, some of which may be uninsured;
•the inability to purchase or sell our assets rapidly due to the illiquid nature of real estate and the real estate market;
•leases which are not renewed or are renewed at lower rental amounts at expiration;
•the default by a tenant or guarantor under any lease;
•costs relating to maintenance and repair of our facilities and the need to make expenditures due to changes in governmental regulations, such as the Americans with Disabilities Act or remediation of unknown environmental hazards; and
•acts of God and acts of terrorism affecting our properties.
Operating results may be adversely affected by changes in the costs and availability of supplies and materials.
Our Construction operating results could be adversely affected by changes in the cost and availability of raw materials. Prices and availability of raw materials used to manufacture our products can change significantly due to fluctuations in supply and demand. Additionally, availability of the raw materials used to manufacture our products may be limited at times resulting in higher prices and/or the need to find alternative suppliers. Both KBS’s and EdgeBuilder’s major material components are dimensional lumber and wood sheet products, which include plywood and oriented strand board. Lumber costs are subject to market fluctuations. Furthermore, the cost of raw materials may also be influenced by transportation costs. It is not certain that any price increases can be passed on to our customers without affecting demand or that limited availability of materials will not impact our production capabilities. The state of the financial and housing markets may also impact our suppliers and affect the availability or pricing of materials. The inability of KBS or EdgeBuilder to raise the price of their products in response to increases in prices of raw materials or to maintain a proper supply of raw materials could have an adverse effect on their revenue and earnings.
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Our quarterly and annual financial results are difficult to predict and are likely to fluctuate from period to period.
We have historically experienced seasonality in all of our businesses and downturns based on the changing U.S. economy.
The Construction industry is sensitive to changes in economic conditions and other factors, including, but not limited to, consumer confidence, increases in interest rates, and the cost and availability of financing. Adverse changes in any of these conditions could decrease demand and pricing for new projects in the areas in which we operate or result in customer cancellations of pending contracts, which could result in a decrease in our revenues in particular periods.
We cannot predict with certainty the overall trajectory of the Construction industry or the duration of trends due to changes in conditions that are beyond our control. These conditions include, but are not limited to:
•rising interest rates;
•economic recession or downturn;
•changes in demographics and population migration that impair the demand for new housing;
•labor issues such as shortages and rising costs of labor; and
•tax law changes.
We spend considerable time and money complying with federal and state laws, regulations, and other rules which may fluctuate, and if we are unable to fully comply with such laws, regulations, and other rules, we could face substantial penalties.
Our Construction businesses are subject to various federal, state and local laws and regulations. In recent years, a number of new laws and regulations have been adopted, and there has been expanded enforcement of certain existing laws and regulations by federal, state, and local agencies. These laws and regulations, and related interpretations and enforcement activity, may change as a result of a variety of factors, including political, economic or social events. Changes in, expanded enforcement of, or adoption of new federal, state or local laws and regulations governing minimum wage or living wage requirements; the classification of exempt and non-exempt employees; the distinction between employees and contractors; other wage, labor or workplace regulations; healthcare; data protection and cybersecurity; the sale and pricing of some of our products; transportation; logistics; supply chain transparency; taxes; unclaimed property; energy costs and consumption; or environmental matters could increase our costs of doing business or impact our operations.
We maintain a compliance program to identify and correct any compliance issues and remain in compliance with all applicable laws, to train employees, to audit and monitor our operations, and to achieve other compliance goals. Like most companies with compliance programs, we occasionally discover compliance concerns. In such cases, we take responsive action, including corrective measures when necessary. There can be no assurance that our responsive actions will insulate us from liability associated with any detected compliance concerns.
If our past or present operations are found to be in violation of any of the laws, regulations, rules, or policies described above or the other laws or regulations to which we or our customers are subject, we may be subject to civil and criminal penalties, damages, fines, or the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment, or restructuring of our operations could adversely affect our ability to operate our business and our financial results. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management’s attention from the operation of our business, and damage our reputation. Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, regulations, rules, and policies, the risks cannot be entirely eliminated. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security, and fraud laws may prove costly.
We are subject to risks associated with self-insurance related to health benefits.
To help control our overall long-term costs associated with employee health benefits, we are self-insured up to certain limits for our health plans. As such, we are subject to risks associated with self-insurance of these health plan benefits. To limit our exposure, we have third party stop-loss insurance coverage for both individual and aggregate claim costs. However, we could still experience unforeseen and potentially significant fluctuations in our healthcare costs based on a higher than expected volume of claims below these stop-loss levels. These fluctuations could have a material adverse effect on our financial position and results of operations.
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Our long-term results depend upon our ability to improve existing products and services and develop, introduce, and market new products and services successfully.
Our business is dependent on the continued improvement of our existing products and services and our development of new products and services utilizing our current or other potential future technology. As we introduce new products and services or refine, improve, or upgrade versions of existing products and services, we cannot predict the level of market acceptance or the amount of market share these products and services will achieve, if any. We cannot be certain that we will not experience material delays in the introduction of new products or services in the future.
We generally sell our products and services in industries that are characterized by rapid technological changes, frequent new product introductions, and changing industry standards. If we do not develop new products and services and product enhancements based on technological innovation on a timely basis, our products and services may become obsolete over time and our revenues, cash flow, profitability, and competitive position may suffer. Even if we successfully innovate and develop new products, services and product enhancements, we may incur substantial costs in doing so, and our profitability may suffer.
We may make financial investments in other businesses that may lose value.
As we look for the best ways to deploy our capital and maximize our returns for our businesses and stockholders, we may make financial investments in other businesses or processes for purposes of enhancing our supply chain, creating financial returns, strategic developments, or other purposes. These investments may be speculative in nature, and there is no guarantee that we will experience a financial return and we may lose our entire principal balance if not successful.
Our goodwill and other long-lived assets are subject to potential impairment that could negatively impact our earnings.
A significant portion of our assets consists of goodwill and other long-lived assets, the carrying value of which may be reduced if we determine that those assets are impaired. At December 31, 2023, goodwill and net intangible assets represented $17.0 million, or 22.5% of our total assets, and at December 31, 2022, goodwill and net intangible assets represented $17.8 million, or 24.3% of our total assets. In addition, net property and equipment assets totaled $7.8 million and $5.7 million, or 10.4% and 7.7%, respectively, of our total assets at those dates. If actual results differ from the assumptions and estimates used in our goodwill and long-lived asset valuation calculations, we could incur impairment charges, which could negatively impact our earnings.
We review our reporting units for potential goodwill impairment annually or more often if events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. In addition, we test the recoverability of long-lived assets if events or circumstances indicate the carrying values may not be recoverable. Recoverability of long-lived assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. We conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as future expectations. There are numerous risks that may cause the fair value of a reporting unit to fall below its carrying amount and/or 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. These risks 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. If we are not able to achieve projected performance levels, future impairments could be possible, which could negatively impact our earnings.
We recorded no impairment loss during the years ended December 31, 2023 and 2022. See Note 2. Basis of Presentation and Significant Accounting Policies, and Note 7. Goodwill, within the notes to our accompanying consolidated financial statements for further discussion regarding goodwill and long-lived assets.
If KBS is unable to maintain or establish its relationships with independent dealers and contractors who sell its homes, KBS revenue could decline.
KBS sells residential homes through a network of independent dealers and contractors. As is common in the modular home industry, KBS’s independent dealers may also sell homes produced by competing manufacturers and can cancel their relationships with KBS on short notice. In addition, these dealers may not remain financially solvent, as they are subject to industry, economic, demographic and seasonal trends similar to those faced by KBS. If KBS is not able to maintain good relationships with its dealers and contractors or establish relationships with new solvent dealers or contractors, KBS’s revenue could decline.
Due to the nature of our business, many of our expenses are fixed costs and if there are decreases in demand for products, it may adversely affect operating results.
Many of our expenses, particularly those relating to properties, capital equipment, and certain manufacturing overhead items, are fixed in the short term. Reduced demand for products causes fixed production costs to be allocated across reduced production volumes, which may adversely affect gross margins and profitability.
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Due to the nature of the work we and our subsidiaries perform, we may be subject to significant liability claims and disputes.
We and our wholly owned subsidiaries engage in services that can result in substantial injury or damages that may expose us to legal proceedings, investigations and disputes. For example, in the ordinary course of our business, we may be involved in legal disputes regarding personal injury and wrongful death claims, employee or labor disputes, professional liability claims, and general commercial disputes, as well as other claims. An unfavorable legal ruling against us or our subsidiaries could result in substantial monetary damages. Although we have adopted a range of insurance, risk management, safety, and risk avoidance programs designed to reduce potential liabilities, there can be no assurance that such programs will protect us fully from all risks and liabilities. If we sustain liabilities that exceed our insurance coverage or for which we are not insured, it could have a material adverse impact on our results of operations and financial condition.
Rising inflation and interest rates could negatively impact our revenues, profitability and borrowing costs. In addition, if our costs increase and we are not able to correspondingly adjust our commercial relationships to account for this increase, our net income would be adversely affected, and the adverse impact may be material.
Inflation rates in the U.S. recently increased to a 40-year high before retreating in the latter part of 2023. Increased inflation may result in decreased demand for our products, increased operating costs (including our labor costs), reduced liquidity, and limitations on our ability to access credit or otherwise raise debt and equity capital. In addition, the United States Federal Reserve has raised, and may again raise, interest rates in response to concerns about inflation. Increases in interest rates have had, and could continue to have, a material impact on our borrowing costs. In an inflationary environment, we may be unable to raise the sales prices of our products at or above the rate at which our costs increase, which could reduce our profit margins and have a material adverse effect on our financial results and net income. We also may experience lower than expected sales if there is a decrease in spending on products in our industry in general or a negative reaction to our pricing. A reduction in our revenue would be detrimental to our profitability and financial condition and could also have an adverse impact on our future growth.
Risks Related to Indebtedness
Any indebtedness incurred by the Company could restrict our operations and make us more vulnerable to adverse economic conditions.
Any indebtedness we incur in the future could have important consequences for us and our stockholders. Our indebtedness could:
•increase our vulnerability to adverse economic and competitive pressures in our industry;
•place us at a competitive disadvantage compared to our competitors that have less debt;
•limit our flexibility in planning for, or reacting to, changes in our business and our industry; and
•limit our ability to borrow additional funds on terms that are acceptable to us or at all.
If we are unable to generate or borrow sufficient cash to make payments on our indebtedness, our financial condition would be materially harmed, our business could fail, and stockholders may lose all of their investment.
To the extent we incur indebtedness in the future, our ability to make scheduled payments on or to refinance our obligations will depend on our financial and operating performance, which will be affected by economic, financial, competitive, business, and other factors, some of which are beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations to service our indebtedness or to fund our other liquidity needs. If we are unable to meet our debt obligations or fund our other liquidity needs, we may need to restructure or refinance all or a portion of our indebtedness on or before maturity or sell certain of our assets. We cannot assure you that we will be able to restructure or refinance any of our indebtedness on commercially reasonable terms, if at all, which could cause us to default on our debt obligations and impair our liquidity. Any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations.
Risks Related to our Common Stock and our Company Preferred Stock
The market price of our common stock may be volatile, and the value of your investment could decline significantly.
The market price of our common stock has been, and we expect it to continue to be, volatile. The prices at which our shares of common stock trade depend upon a number of factors, including our historical and anticipated operating results, our financial situation, announcements of new products by us or our competitors, history of timely dividend payments, our ability or inability to raise the additional capital we may need and the terms on which we raise it, and general market and economic conditions. Some of these factors are beyond our control. Broad market fluctuations may lower the market price of our common stock and affect the volume of trading in our stock, regardless of our financial condition, results of operations, business, or prospects. It is impossible to assure you that the market price of our shares of common stock will not fall in the future.
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Our common stock has a low trading volume and shares available under our equity compensation plans could affect the trading price of our common stock.
Our common stock historically has had a low trading volume. Any significant sales of our common stock may cause volatility in our stock price. We also have registered shares of common stock that we may issue under our employee benefit plans or from our treasury stock. Accordingly, these shares can be freely sold in the public market upon issuance, subject to restrictions under the securities laws. If any of these stockholders, or other selling stockholders, cause a large number of securities to be sold in the public market without a corresponding demand, the sales could reduce the trading price of our common stock. One or more stockholders holding a significant amount of our common stock might be able to significantly influence matters requiring approval by our stockholders, possibly including the election of directors and the approval of mergers or other business combination transactions.
If we cannot continue to satisfy the Nasdaq Global Market continued listing standards and other Nasdaq rules, our common stock could be delisted, which would harm our business, the trading price of our common stock, our ability to raise additional capital and the liquidity of the market for our common stock.
Our common stock is currently listed on the Nasdaq Global Market. To maintain the listing of our common stock on the Nasdaq Global Market, we are required to meet certain listing requirements, including, among others, either: (i) a minimum closing bid price of $1.00 per share, a market value of publicly held shares (excluding shares held by our executive officers, directors and 10% or more stockholders) of at least $5.0 million and stockholders’ equity of at least $10 million; or (ii) a minimum closing bid price of $1.00 per share, a market value of publicly held shares (excluding shares held by our executive officers, directors and 10% or more stockholders) of at least $15.0 million and total assets of at least $50.0 million and total revenue of at least $50.0 million (in the latest fiscal year or in two of the last three fiscal years).
There is no assurance that we will be able to maintain compliance with the minimum closing price requirement. In the event that we fail to maintain compliance with Nasdaq listing requirements for 30 consecutive trading days, Nasdaq may send us a notice stating we will be provided a period of 180 days to regain compliance with the minimum bid requirement or else Nasdaq may make a determination to delist our common stock or grant a transfer of our listing to the Nasdaq Capital Market, wherein we would be provided another 180 days to regain compliance. On January 19, 2023 we received a letter stating that we had failed to meet the closing bid price for the last 30 consecutive business days. On June 8, 2023, we received a letter from Nasdaq advising we had regained compliance with the minimum bid price requirement. On February 14, 2024, we received an additional letter from Nasdaq stating that we had failed to meet the closing bid requirement for the last 30 consecutive business days. If our common stock were to be delisted from Nasdaq and was not eligible for quotation or listing on another market or exchange, trading of our common stock could be conducted only in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult to dispose of, or obtain accurate price quotations for, our common stock, and there would likely also be a reduction in our coverage by securities analysts and the news media, which could cause the price of our common stock to decline.
A possible “short squeeze” due to a sudden increase in demand of our common stock that largely exceeds supply may lead to price volatility in our common stock.
Investors may purchase our common stock to hedge existing exposure in our common stock or to speculate on the price of our common stock. Speculation on the price of our common stock may involve long and short exposures. To the extent aggregate short exposure exceeds the number of shares of our common stock available for purchase in the open market, investors with short exposure may have to pay a premium to repurchase our common stock for delivery to lenders of our common stock. Those repurchases may in turn, dramatically increase the price of our common stock until investors with short exposure are able to purchase additional common shares to cover their short position. This is often referred to as a “short squeeze.” A short squeeze could lead to volatile price movements in our common stock that are not directly correlated to the performance or prospects of our Company and once investors purchase the shares of common stock necessary to cover their short position the price of our common stock may decline.
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Payment of dividends on our common stock is prohibited unless we have declared and paid (or set apart for payment) full accumulated dividends on the Series A Preferred Stock, which also has a significant liquidation value.
Unless full cumulative dividends on our preferred stock have been, or contemporaneously are, declared and paid or declared and a sum sufficient for the payment thereof is set apart for payment for all past dividend periods, no dividends (other than a dividend in shares of common stock or other shares of stock ranking junior to the Series A Preferred Stock (as defined herein) as to dividends and upon liquidation) may be declared and paid or declared and set apart for payment on our common stock, nor may any shares of common stock be redeemed, purchased or otherwise acquired for any consideration by us. To the extent dividends are not paid on our preferred stock, cumulative dividends accrue as part of the liquidation value of our preferred stock, which has a liquidation value of $10.00 per share at issuance. Dividends on our preferred stock are payable out of amounts legally available therefor at a rate equal to 10.0% per annum per $10.00 of stated liquidation preference per share, or $1.00 per share of our preferred stock per year. Dividends on our preferred stock are only payable in cash. As of December 31, 2023, there were 1,915,637 shares of our Series A Preferred Stock outstanding.
If we fail to pay dividends on our Series A Preferred Stock for six or more consecutive quarters, holders of our Series A Preferred Stock will be entitled to elect two additional directors to our board of directors.
To the extent dividends are not paid on the Series A Preferred Stock in accordance with their terms, cumulative dividends will accrue as part of the liquidation value of the Series A Preferred Stock. Whenever dividends on any shares of Series A Preferred Stock are in arrears for six or more consecutive quarters, then the holders of those shares together with the holders of all other series of preferred stock equal in rank with the Series A Preferred Stock upon which like voting rights have been conferred and are exercisable, will be entitled to vote separately as a class for the election of a total of two additional directors to our board of directors. Holders of our common stock will not be entitled to vote for or against such additional directors.
As a smaller reporting company, we are subject to scaled disclosure requirements that may make it more challenging for investors to analyze and compare our results of operations and financial prospects.
Currently, we are a “smaller reporting company,” as defined by Rule 12b-2 of the Exchange Act. As a “smaller reporting company,” we are able to provide simplified executive compensation disclosures in our filings and have certain other decreased disclosure obligations in our filings with the SEC, including being required to provide only two years of audited financial statements in annual reports. Consequently, it may be more challenging for investors to analyze our results of operations and financial prospects.
Furthermore, we are a non-accelerated filer as defined by Rule 12b-2 of the Exchange Act, and, as such, are not required to provide an auditor attestation of management’s assessment of internal control over financial reporting, which is generally required for SEC reporting companies under Section 404(b) of the Sarbanes-Oxley Act. Because we are not required to, and have not, had our auditor provide an attestation of our management’s assessment of internal control over financial reporting, a material weakness in internal controls may remain undetected for a longer period.
If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, the price and trading volume of our securities could decline.
The trading market for our securities will be influenced by the research and reports that industry or securities analysts publish about us or our business. We currently have two securities and industry analysts providing research coverage. In the event that any of the analysts who cover us issue an adverse or misleading opinion regarding us, our business model, our intellectual property or our stock performance, or if our operating results fail to meet the expectations of analysts, the price of our securities would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause the price or trading volume of our securities to decline.
The protective amendment contained in our Restated Certificate of Incorporation, which is intended to help preserve the value of certain income tax assets, primarily tax net operating loss carryforwards, may have unintended negative effects.
Pursuant to Sections 382 and 383 of the Code, use of our NOLs may be limited by an “ownership change” as defined under Section 382 of the Code and the Treasury Regulations thereunder. In order to protect our significant NOLs, we filed an amendment to our certificate of incorporation (the “Restated Certificate of Incorporation”) (as amended and extended, the “Protective Amendment”) with the Delaware Secretary of State on May 5, 2015. The Protective Amendment was approved by our stockholders at our 2021 Annual Meeting of Stockholders held on October 21, 2021.
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The Protective Amendment is designed to assist us in protecting the long-term value of our accumulated NOLs by limiting certain transfers of our common stock. The Protective Amendment’s transfer restrictions generally restrict any direct or indirect transfers of the common stock if the effect would be to increase the direct or indirect ownership of the common stock by any person from less than 4.99% to 4.99% or more of the common stock, or increase the percentage of the common stock owned directly or indirectly by a person owning or deemed to own 4.99% or more of the common stock. Any direct or indirect transfer attempted in violation of the Protective Amendment will be void as of the date of the prohibited transfer as to the purported transferee.
The Protective Amendment also requires any person attempting to become a holder of 4.99% or more of our common stock to seek the approval of our board of directors. This may have an unintended “anti-takeover” effect because our board of directors may be able to prevent any future takeover. Similarly, any limits on the amount of stock that a stockholder may own could have the effect of making it more difficult for stockholders to replace current management. Additionally, because the Protective Amendment may have the effect of restricting a stockholder’s ability to dispose of or acquire our common stock, the liquidity and market value of our common stock might suffer.
Our stockholder rights plan, or “poison pill,” includes terms and conditions which could discourage a takeover or other transaction that stockholders may consider favorable.
On June 2, 2021, stockholders of record at the close of business on that date received a dividend of one right (a “Right”) for each outstanding share of common stock. Each Right entitles the registered holder to purchase one one-thousandth of a share of our Series C Participating Preferred Stock (the “Series C Preferred Stock”, and together with the Series A Preferred Stock, the “Company Preferred Stock”), at a price of $12.00 per one-thousandth of a share of Series C Preferred Stock, subject to adjustment (the “Exercise Price”). The Rights are not exercisable until the Distribution Date referred to below. The description and terms of the Rights are set forth in the Rights Agreement, which has previously been filed as an exhibit to our public reports.
The Rights Agreement imposes a significant penalty upon any person or group that acquires 4.99% or more (but less than 50%) of our then-outstanding common stock without the prior approval of our board of directors. A person or group that acquires shares of our common stock in excess of the applicable threshold, subject to certain limited exceptions, is called an “Acquiring Person.” Any rights held by an Acquiring Person are void and may not be exercised. The Rights will not be exercisable until the earlier of ten days after a public announcement by us that a person or group has become an Acquiring Person and ten business days (or a later date determined by our board of directors) 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. On the date (if any) that the Rights become exercisable (the “Distribution Date”), each Right would allow its holder to purchase one one-thousandth of a share of Preferred Stock for a purchase price of $12.00. In addition, if a person or group becomes an Acquiring Person after the Distribution Date or already is an Acquiring Person and acquires more shares after the Distribution Date, all holders of Rights, except the Acquiring Person, may exercise their rights to purchase a number of shares of the common stock (in lieu of preferred stock) with a market value of twice the Exercise Price, upon payment of the purchase price.
The Rights will expire on the earliest of (i) June 2, 2024, or such earlier date as of which our board of directors determines that the Rights Agreement is no longer necessary for the preservation of our tax assets, (ii) the time at which the rights are redeemed, (iii) the time at which the rights are exchanged, (iv) the effective time of the repeal of Section 382 of the Code or any successor statute if our board of directors determines that the Rights Agreement is no longer necessary for the preservation of our tax assets, and (v) the first day of our taxable year in which our board determines that no NOLs or other tax assets may be carried forward.
The Rights have certain anti-takeover effects, including potentially discouraging a takeover that stockholders may consider favorable. The Rights will cause substantial dilution to a person or group that attempts to acquire us on terms not approved by the board of directors.
Anti-takeover provisions in our organizational documents and Delaware law may prevent or delay removal of current management or a change in control.
Our Restated Certificate of Incorporation and Bylaws contain provisions that may delay or prevent a change in control, discourage bids at a premium over the market price of our common stock, and adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock. In addition, as a Delaware corporation, we are subject to Delaware corporate law, including Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder unless certain specific requirements are met as set forth in Section 203. These provisions, alone or together, could have the effect of deterring or delaying changes in incumbent management, proxy contests or changes in control.
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We expect to be limited in our ability to utilize net operating loss carryforwards to reduce our future tax liability as a result of our January 2022 public offering.
Under Section 382 of the Code, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change NOLs and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited. We expect that the public offering we closed on January 24, 2022 (the “2022 Public Offering”), alone or in conjunction with other changes in our stock ownership that we cannot control, may result in an “ownership change.” We may also experience ownership changes in the future as a result of strategic transactions or partnerships, equity offerings and other shifts in our stock ownership. As a result, if we earn net taxable income, our ability to use our pre-change NOL carryforwards and other deferred tax assets to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us. In addition, similar limitations may apply at the state level and there may be periods during which the use of NOL carryforwards is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.
ITEM 1B.UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 1C.CYBERSECURITY
Risk Management and Strategy
We identify and address cybersecurity threats and risks related to our business using an interdisciplinary approach that includes assessments primarily by our management, IT team and legal department. To defend against, detect and respond to cybersecurity incidents, we employ a multi-layered approach that has been integrated into our overall risk management systems and processes which includes, among other things: conducting proactive privacy and cybersecurity reviews of systems and applications, auditing applicable data policies, conducting employee training, monitoring emerging laws and regulations related to data protection and information security and continuously improving controls and implementing appropriate changes. The cybersecurity-control principles that form the basis of our cybersecurity program are informed by the National Institute of Standards and Technology Cybersecurity Framework. Our management performs an annual review of third-party service providers’ SOC reports to verify appropriate controls are in place.
In 2023, we did not identify any cybersecurity threats that have materially affected or are reasonably likely to materially affect our business strategy, results of operations, or financial condition. However, despite our ongoing efforts, we cannot eliminate all risks from cybersecurity threats, or provide assurances that we have not experienced undetected cybersecurity incidents. Please refer to the risk factor titled “We rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could materially harm our business.” in “Risk Factors” in Part I, Item 1A of this Form 10-K for more information on the risks posed to us by cybersecurity threats.
Cybersecurity Governance
Cybersecurity is an important part of our risk management processes and is an area of focus for our board of directors and management. Our board of directors, as a whole, has oversight responsibility for our strategic and operational risks, and ensures that appropriate risk mitigation strategies are implemented by management. Our audit committee assists the board of directors with this responsibility by periodically reviewing and discussing our risk assessment and risk management practices, including cybersecurity risks, with members of our management team, which is responsible for the assessment and management of cybersecurity risks.
In addition, we have retained an external consultant to serve as our internal audit function and to support our cybersecurity risk management and governance practices. Our consultant has substantial experience in cybersecurity risk management and information technology, including security, compliance, systems and programming and reports to our audit committee and our board of directors on any appropriate items.
ITEM 2.PROPERTIES
Our principal executive offices are in Old Greenwich, Connecticut, where we lease 2,006 square feet of office space.
In April 2019, our Investments division (through Star Real Estate, “SRE”) acquired three manufacturing facilities in Maine, which it then leased back to KBS in our Construction segment. These included KBS’s 84,800 square foot main production facility in South Paris, Maine and a 92,200 square foot manufacturing facility in Oxford, Maine. We sold our Waterford, Maine production facility in June 2023. See Note 5. Supplementary Balance Sheet Information for further details.
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We utilize four additional facilities in our construction businesses, related specifically to EBGL. In October 2021, we extended two existing leases, a 10,800 square foot office/sales/showroom space in Oakdale, Minnesota and a 34,200 square foot production facility in Prescott, Wisconsin. In addition, we entered into a new lease in October 2021 for 22,800 square feet of lumberyard/warehouse space in Hudson, Wisconsin. With the BLL acquisition in late 2023, we acquired a fourth facility, a 22,300 square foot lumberyard/warehouse/showroom space in Big Lake, Minnesota. See Note 16. Mergers and Acquisitions for further information.
We believe that we have adequate space for our anticipated needs and that suitable additional space will be available at commercially reasonable prices as needed.
ITEM 3. LEGAL PROCEEDINGS
See Note 9. Commitments and Contingencies, within the notes to our accompanying consolidated financial statements for a summary of any legal proceedings.
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock and preferred stock are traded on the Nasdaq Global Market under the symbols “STRR” and “STRRP”, respectively.
As of March 7, 2024 there were approximately 168 holders of record of our common stock. We believe that the number of beneficial owners is substantially greater than the number of record holders because a large portion of our common stock is held of record through brokerage firms in “street name.”
Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
| Period | Total Number of Shares Purchased During the Period | Average Price Paid Per Share for Period Presented | Total Cumulative Number of Shares Purchased as Part of Publicly Announced Plan (1) | Maximum Number of Shares that May Yet Be Purchased Under the Plan (2) | ||||||||||||||||||||||
October 1, 2023 – October 31, 2023 | — | — | — | 200,000 | ||||||||||||||||||||||
November 1, 2023 – November 30, 2023 | — | — | — | 200,000 | ||||||||||||||||||||||
December 1, 2023 – December 31, 2023 | — | — | — | 200,000 | ||||||||||||||||||||||
| Total | — | — | — | 200,000 | ||||||||||||||||||||||
(1)On October 31, 2018, our board of directors approved a stock repurchase program that will enable us to repurchase up to 200,000 shares of our common stock from time to time in market or private transactions (the “2018 Buyback Program”). Under the 2018 Buyback Program, we may purchase shares of our common stock through various means, including open market transactions in compliance with Rule 10b-18 under the Exchange Act, privately negotiated transactions, tender offers or any combination thereof. The number of shares repurchased and the timing of repurchases will depend on a number of factors, including, but not limited to, stock price, trading volume and general market conditions, along with our working capital requirements, general business conditions and other factors. The 2018 Buyback Program has no time limit and may be modified, suspended or terminated at any time by our board of directors. Repurchases under the 2018 Buyback Program will be funded from our existing cash and cash equivalents or future cash flow and equity or debt financings.
(2)As of December 31, 2023, there were no cumulative shares purchased as part of the 2018 Buyback Program and 200,000 shares that may yet be purchased under the 2018 Buyback Program.
Securities Authorized for Issuance Under Equity Compensation Plans
See Item 12. Security Ownership of Certain Beneficial Owners and Management Related Stockholders Matters for information with respect to our compensation plans under which equity securities are authorized for issuance.
ITEM 6.[RESERVED]
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ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth previously under the caption “Risk Factors.” This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this report.
Overview
Star Equity is a multi-industry diversified holding company with two divisions. Our operating division focuses in the Construction industry. In addition, we have an Investments division.
Our Construction division is currently made up of three operating businesses: KBS, EdgeBuilder, and Glenbrook, with the latter two managed together and referred to jointly as “EBGL”. KBS is based in Maine and manufactures modular buildings, typically in the single and multi-family residential segments, servicing principally the New England market. EBGL is based in the Minneapolis-Saint Paul area and principally serves the Upper Midwest region. Together, the EBGL businesses manufacture and deliver structural wall panels, primarily for multi-family residential buildings, and other engineered wood-based products. We distribute building materials from two lumberyard locations primarily focused on professional builder customers.
Our Investments division currently holds and manages our corporate-owned real estate, including two manufacturing facilities in Maine that are leased to KBS and one manufacturing facility in Minnesota that is leased to Glenbrook. The Investments division also manages internally-funded, concentrated minority investments in a number of public companies. It also holds and manages a $7 million promissory note and a $6 million private equity stake in TTG Parent LLC, the parent entity of TTG Imaging Solutions, LLC. We acquired these interests in May 2023 as a result of the sale of Digirad Health (see Note 3. Discontinued Operations for further information).
Current Market Conditions
The target customers for our Construction division include professional home builders, general contractors, project owners, developers, and design firms. Despite a higher interest rate environment, we are continuing to see significant demand for our products, although there have been some delays in execution as customers finalize project financing. We have benefited from having implemented both price increases and margin protection language in our contracts and this had a significantly positive effect on our profitability in 2023. We noted slower business activity in the second half of 2023 and related lower revenues, but believe this slowdown is temporary. Our sales pipelines continue to indicate strong potential demand for our services, but we can give no assurances as to our ability to compete for these opportunities, or the periods during which successfully negotiated projects will be completed.
Trends and Drivers
The Modular Building Institute has estimated that permanent modular construction increased as a percentage of the construction industry from 2.14% in 2015 to 6.03% as of the end of 2022. In turn, in our Construction division, we continue to see a greater acceptance of offsite or prefab construction in single-family and multi-family residential building projects in 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, and potential cost savings, among others. 3D modeling software and developments in engineered wood products offer greater design flexibility for higher-end applications. The need for more affordable housing solutions also presents opportunities for the continued growth 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.
Discontinued Operations
As discussed in detail in Note 3. Discontinued Operations, we completed the sale of Digirad Health on May 4, 2023, for total aggregate consideration of $40 million, comprised of $27 million in cash, a $7 million promissory note (“Seller Note”), and $6 million in rollover equity in the parent entity of TTG. We deemed the disposition of Digirad Health, which was our entire Healthcare business unit, to represent a strategic shift that will have a major effect on our operations and financial results. As of the date of the accompanying consolidated financial statements, the results of operations of the Healthcare business unit represent “discontinued operations” in accordance with U.S. Generally Accepted Accounting Practices (“GAAP”) (ASC 205-20-45-1B). Therefore, the assets and liabilities, as well as the earnings, of the discontinued operation are presented separately in the accompanying consolidated financial statements for all periods presented. Unless otherwise noted, discussion
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within the notes to the consolidated financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations relates to continuing operations.
Goodwill Valuation
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. We recognize an impairment charge if we determine that 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. No impairment of goodwill was recorded in 2023.
We also review long-lived assets for impairment when events or changes in circumstances indicate that a reduction in the carrying value may not be recoverable. Certain factors may cause the fair value of a reporting unit to fall below its carrying amount and/or the value of long-lived assets to not be recoverable. This could lead to the measurement and recognition of long-lived asset impairment charges and may cause impairment. 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 of December 31, 2023, we performed qualitative trigger events analyses designed to conclude whether we were able to achieve projected performance levels and determined that it is more likely than not that long-lived assets were not impaired.
See Note 7. Goodwill within the notes to our accompanying consolidated financial statements for further information.
2023 Financial Highlights
2023 Revenues were $45.8 million, representing a decrease of $11.4 million or 19.9% versus 2022 Revenues of $57.1 million. This decrease was driven by lower revenues at both KBS and EBGL related to slower business activity, which we believe is temporary.
2023 Gross profit was $11.9 million, representing a decrease of $0.4 million or 3.6% versus 2022 Gross profit of $12.4 million. This decrease was related to lower 2023 revenues and was mitigated by our ability to sustain pricing, while benefiting from commodity and input price stability.
2023 Operating expenses were $16.3 million, representing an increase of $0.4 million or 2% versus 2022 total Operating expenses of $15.9 million. The increase of $0.4 million was driven by increased legal and outside services expenses related to the sale of Digirad Health and our Investments division-related activities.
2023 Loss from continuing operations, net of income taxes, was $1.9 million which reflects improved results compared to 2022 Loss from continuing operations, net of tax, of $5.8 million. The improved results were primarily driven by increased interest and other income resulting from our strong cash position and gains realized on certain purchases and sales, and the bargain purchase gain we recognized resulting from the October 2023 acquisition of BLL of approximately $1.2 million (see Note 16. Mergers and Acquisitions for further information). These results were partially offset by a decrease in gross profit of $0.5 million from our operating segments and higher overall Operating expenses of $0.4 million.
Use of EBITDA (Non-GAAP measure)
Management believes earnings before taxes, interest, depreciation, and amortization (“EBITDA”) is a meaningful indicator of the Company’s performance that provides useful information to investors regarding the Company’s financial condition and results of operations. EBITDA is also considered by management as an indicator of operating performance and the most comparable measure across the regions in which we operate. Management also uses this measurement to evaluate capital needs and working capital requirements. EBITDA is a non-Generally Accepted Accounting Principles (“non-GAAP”) financial measure that is not intended to be considered in isolation from, as substitute for, or as superior to, the corresponding financial measure prepared in accordance with GAAP or as a measure of the Company’s profitability. Because of these and other limitations, EBITDA should be considered along with GAAP based financial performance measures, including operating income or net income prepared in accordance with GAAP. EBITDA is derived from net income (loss) adjusted for the provision for (benefit from) income taxes, interest expense (income), and depreciation and amortization.
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The reconciliation of EBITDA from continuing operations to the most directly comparable GAAP financial measure is provided in the table below:
| Year Ended December 31, | ||||||||||||||
| $ in thousands | 2023 | 2022 | ||||||||||||
| Net income (loss) | $ | 25,132 | $ | (5,252) | ||||||||||
| Adjustment for income (loss) from discontinued operations, net of income taxes | 27,039 | 575 | ||||||||||||
| Loss from continuing operations | (1,907) | (5,827) | ||||||||||||
| Adjustments to loss from continuing operations | ||||||||||||||
| Depreciation and amortization | 2,327 | 2,273 | ||||||||||||
| Interest expense, net | (974) | 564 | ||||||||||||
| Provision for income taxes | (614) | 383 | ||||||||||||
| Total adjustments from income (loss) from continuing operations to EBITDA | 739 | 3,220 | ||||||||||||
| EBITDA from continuing operations | $ | (1,168) | $ | (2,607) | ||||||||||
Results of Operations
Comparison of Years Ended December 31, 2023 and 2022
The following table sets forth our results from operations for the years ended December 31, 2023 and 2022 (in thousands):
| Year ended December 31, | Change from Prior Year | |||||||||||||||||||||||||||||||||||||
| 2023 | % of Revenues | 2022 | % of Revenues * | Dollars | Percent | |||||||||||||||||||||||||||||||||
| Total revenues | $ | 45,785 | 100.0 | % | $ | 57,149 | 100.0 | % | $ | (11,364) | (19.9) | % | ||||||||||||||||||||||||||
| Total cost of revenues | 33,859 | 74.0 | % | 44,779 | 78.4 | % | (10,920) | (24.4) | % | |||||||||||||||||||||||||||||
| Gross profit | 11,926 | 26.0 | % | 12,370 | 21.6 | % | (444) | (3.6) | % | |||||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative | 14,538 | 31.8 | % | 14,195 | 24.8 | % | 343 | 2.4 | % | |||||||||||||||||||||||||||||
| Amortization of intangible assets | 1,734 | 3.8 | % | 1,719 | 3.0 | % | 15 | 0.9 | % | |||||||||||||||||||||||||||||
| Total operating expenses | 16,272 | 35.5 | % | 15,914 | 27.8 | % | 358 | 2.2 | % | |||||||||||||||||||||||||||||
| Net income (loss) from continuing operations | (4,346) | (9.5) | % | (3,544) | (6.2) | % | (802) | 22.6 | % | |||||||||||||||||||||||||||||
| Other (expenses) income | 852 | 1.9 | % | (1,336) | (2.3) | % | 2,188 | (163.8) | % | |||||||||||||||||||||||||||||
| Interest expense, net | 973 | 2.1 | % | (564) | (1.0) | % | 1,537 | (272.5) | % | |||||||||||||||||||||||||||||
| Total other income (loss) | 1,825 | 4.0 | % | (1,900) | (3.3) | % | 3,725 | (196.1) | % | |||||||||||||||||||||||||||||
| Income (loss) from continuing operations before income taxes | (2,521) | (5.5) | % | (5,444) | (9.5) | % | 2,923 | (53.7) | % | |||||||||||||||||||||||||||||
Income tax benefit (provision) | 614 | 1.3 | % | (383) | (0.7) | % | 997 | (260.3) | % | |||||||||||||||||||||||||||||
| Income (loss) from continuing operations, net of income taxes | (1,907) | (4.2) | % | (5,827) | (10.2) | % | 3,920 | (67.3) | % | |||||||||||||||||||||||||||||
| Income (loss) from discontinued operations, net of income taxes | 27,039 | 59.1 | % | 575 | 1.0 | % | 26,464 | 4,602.4 | % | |||||||||||||||||||||||||||||
| Net income (loss) | $ | 25,132 | 54.9 | % | $ | (5,252) | (9.2) | % | $ | 30,384 | (578.5) | % | ||||||||||||||||||||||||||
*Percentage may not add due to rounding
Revenues
Construction
Construction revenue is summarized as follows (in thousands):
| Year Ended December 31, | ||||||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||||||||||||
| Construction Revenue | $ | 45,785 | $ | 57,149 | $ | (11,364) | (19.9) | % | ||||||||||||||||||
22
Construction revenue decreased 19.9% primarily due to lower revenues at KBS and EBGL on large commercial projects. Slower business activity due to economic headwinds such as higher interest rates was a predominant driver. We believe the effect of this on our revenues is temporary as our backlog and sales pipeline remain strong despite these economic headwinds.
Gross Profit
Construction gross profit is summarized as follows (in thousands):
| Year Ended December 31, | ||||||||||||||||||||
| 2023 | 2022 | % Change | ||||||||||||||||||
| Construction gross profit (loss) | $ | 12,154 | $ | 12,660 | (4.0) | % | ||||||||||||||
| Construction gross margin | 26.5 | % | 22.2 | % | ||||||||||||||||
The decrease in Construction gross profit was due to decreases in revenue at KBS and EBGL for large commercial projects. However, we have significantly increased prices to offset higher input costs and have seen an improvement in our gross margin percentage in 2023.
Investments Gross Loss
Investments gross loss is summarized as follows (in thousands):
| Year Ended December 31, | ||||||||||||||||||||
| 2023 | 2022 | % Change | ||||||||||||||||||
| Investments gross profit (loss) | $ | (228) | $ | (290) | 21.4 | % | ||||||||||||||
The gross loss relates to depreciation expense associated with the manufacturing facilities owned by the Company. As of December 31, 2023, there was a decrease in total gross loss due to a decrease in depreciation expense. In October 2023, the Company acquired a manufacturing facility as part of the BLL acquisition. In June 2023, we sold one of our manufacturing facilities.
Operating Expenses
Operating expenses are summarized as follows (in thousands):
| Year Ended December 31, | Percent of Revenues | |||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | 2023 | 2022 | |||||||||||||||||||||||||||||||||
| Selling, general and administrative | $ | 14,538 | $ | 14,195 | $ | 343 | 2.4 | % | 31.8 | % | 24.8 | % | ||||||||||||||||||||||||||
| Amortization of intangible assets | 1,734 | 1,719 | 15 | 0.9 | % | 3.8 | % | 3.0 | % | |||||||||||||||||||||||||||||
| Total operating expenses | $ | 16,272 | $ | 15,914 | $ | 358 | 2.2 | % | 35.5 | % | 27.8 | % | ||||||||||||||||||||||||||
On a consolidated basis, total operating expenses increased by $0.4 million. Sales, general and administrative expenses increased by $0.3 million. This was primarily due to increased legal and outside services expenses related to the sale of Digirad Health and our Investments division-related activities. As a percentage of revenue, Sales, general and administrative expenses increased to 31.8%, versus 24.8% in the prior year period.
Other Income (Expense)
Total other income (expense) is summarized as follows (in thousands):
| Year Ended December 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Other income (expense) | $ | 852 | $ | (1,336) | ||||||||||
Interest income (expense), net | 973 | (564) | ||||||||||||
| Total other income (expense) | $ | 1,825 | $ | (1,900) | ||||||||||
Other income (expense) for the years ended December 31, 2023 and 2022 improved principally due to unrealized gains from available for sale securities recorded in our Investments division, the gain on the sale of our Waterford, Maine facility and a bargain purchase gain of $1.2 million we realized as part of the BLL purchase which is discussed in more detail in Note 16. Mergers and Acquisitions.
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Interest income (expense), net, for the year ended December 31, 2023 improved substantially compared to 2022 due to our cash position and the Seller Note acquired as a result of the sale of Digirad Health, as well as lower average debt balances in 2023 which resulted in part from the sale of Digirad Health. See Note 5. Supplementary Balance Sheet Information for further information.
Income Tax (Expense) Benefit
Intraperiod allocation rules require us to allocate our provision for income taxes between continuing operations and other categories or comprehensive income (loss) such as discontinued operations. During the twelve months ended December 31, 2023 and 2022, we recorded a tax provision of $614 thousand and $383 thousand, respectively. For the years ended December 31, 2023 and 2022, we recorded a tax expense of $693 thousand and a tax benefit of $209 thousand, respectively, for discontinued operations.
See Note 12. Income Taxes, within the notes to our accompanying consolidated financial statements for further information.
Net income (loss) from Discontinued Operations
As described in Note 3. Discontinued Operations, within the notes to our accompanying consolidated financial statements, the results of our Healthcare reportable segment have been reported as discontinued operations for all periods presented.
Liquidity and Capital Resources
Overview
Cash Flows from Operating Activities
For the year ended December 31, 2023, net cash provided by operating activities, including cash provided by discontinued operations, was $2.7 million, as compared to $3.9 million used in 2022. The improvement in cash flow from operating activities is attributable to higher margins and strong collections at our Construction Division.
Cash Flows from Investing Activities
For the year ended December 31, 2023, net cash provided by investing activities, including cash provided by discontinued operations, was $16.2 million, as compared to net cash used in investing activities of $5.1 million in 2022. 2023 cash provided by investing activities principally consists of cash received from the sale of our Healthcare division after paying down related debt of $19.7 million and proceeds from the sale of property and equipment (primarily our Waterford property) of $1.2 million. This was partially offset by cash paid for the acquisition of BLL of $2.8 million and cash paid for investments of $1.5 million as we continued to expand our investments portfolio. The 2022 investing activities were primarily attributable to purchases of equity securities as we expanded our investments portfolio and net fixed asset purchases.
Cash Flows from Financing Activities
For the year ended December 31, 2023, net cash used in financing activities, including cash provided by discontinued operations, was $3.1 million, as compared to net cash provided by financing activities of $8.9 million in 2022. The 2023 cash flow from financing activities reflected paydowns of all existing debt at the time of the sale of our Healthcare division. The 2022 cash provided by financing activities was principally due to net proceeds of $12.7 million raised through our 2022 Public Offering.
Summary of Cash Flows
The following table shows cash flow information for the years ended December 31, 2023 and 2022 (in thousands):
| Year Ended December 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
Net cash provided by (used in) operating activities | $ | 2,698 | $ | (3,857) | ||||||||||
Net cash provided by (used in) investing activities | $ | 16,182 | $ | (5,093) | ||||||||||
| Net cash provided by (used in) financing activities | $ | (3,072) | $ | 8,941 | ||||||||||
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Sources of Liquidity
Our principal sources of liquidity are our existing cash and cash equivalents and cash generated from operations. As of December 31, 2023, we had $18.3 million of cash and cash equivalents. In connection with the sale of our Healthcare business on May 4, 2023, we paid off the credit facility pursuant to the Webster Loan Agreement (as defined below) using some of the proceeds from that sale. We also paid off and closed all credit facilities with eCapital during the second quarter of 2023. As discussed in Note 8. Debt, we have approximately $2.0 million in debt at our EBGL business at December 31, 2023.
Common Stock Offerings
On May 28, 2020, we closed an underwritten public offering (the “2020 Public Offering”) pursuant to an underwriting agreement with Maxim 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 $5.0 million and net proceeds were $5.2 million.
On January 24, 2022, we closed the 2022 Public Offering. 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 combined price of $1.50 per share and common warrant. Additionally, Company issued to Maxim 237,500 common stock purchase warrants (the “Underwriter’s Warrants”) to purchase up to 237,500 shares of Common Stock at an exercise price of $1.65 per 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 of December 31, 2023, of the warrants issued through the 2020 Public Offering, 1.0 million warrants had been 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 of December 31, 2023, of the Warrants issued through the 2022 Public Offering, 0.3 million prefunded warrants had been exercised and 10.9 million warrants remained outstanding at an exercise price of $1.50. The Underwriter’s Warrants have not been exercised.
Credit Facilities
Premier Facility
On August 16, 2023, EdgeBuilder and Glenbrook (the “EBGL Borrowers”) entered into a Revolving Credit Loan Agreement with Premier Bank (“Premier”) providing the EBGL Borrowers with a working capital line of credit of up to $4 million, which agreement was subsequently replaced and increased to $6 million on December 5, 2023 (the “Premier Loan Agreement”). Availability under the Premier Loan Agreement is based on a formula tied to the EBGL Borrowers’ eligible accounts receivable, inventory and equipment. Borrowings under the Premier Loan Agreement bear interest at the prime rate plus 0.75% (and a minimum interest rate of 6.75%), 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 expires on December 5, 2024 but may be extended from time to time at the request of the EBGL Borrowers, subject to approval by Premier. The EBGL Borrowers’ obligations under the Premier Loan Agreement are guaranteed by the Company and secured by all of their inventory, equipment, accounts and other intangibles. As of December 31, 2023, availability under the Premier Loan Agreement was approximately $3 million.
Financial covenants associated with the Premier Loan Agreement require that the EBGL Borrowers maintain (a) a debt service coverage ratio for any calendar year of less than 1.25; (b) a debt-to-equity ratio at the end of each calendar year in excess of 1.65; (c) a fixed charge coverage ratio at the end of each calendar year of less than 1.10; (d) working capital of at least $2 million; and (e) a current ratio of at least 1.50. As of December 31, 2023, the EBGL Borrowers were not in compliance with the Premier Loan Agreement covenants. The EBGL Borrowers have obtained a waiver from Premier for the annual covenant breach.
Webster Credit Facility
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On March 29, 2019, the Company entered into a Loan and Security Agreement (the “Webster Loan Agreement”) by and among certain subsidiaries of the Company, as borrowers; the Company, as guarantor; and Sterling National Bank (“Sterling”). On February 1, 2022, Sterling became part of Webster Bank, N.A. (“Webster”), and Webster became the successor in interest to the Webster Loan Agreement. The Webster Loan Agreement was also subject to a limited guarantee by Mr. Eberwein, the Executive Chairman of our board of directors.
The Webster Loan Agreement was a five-year credit facility maturing in March 2024, with a maximum credit amount of $20.0 million for revolving loans (the “Webster Credit Facility”). In connection with the sale of our Healthcare business on May 4, 2023, we paid all amounts due and closed the Webster Credit Facility.
eCapital Credit Facilities
The EBGL Borrowers were parties to a Loan and Security Agreement with eCapital Asset Based Lending Corp. (“eCapital”), providing for a $4.0 million credit facility with a maturity date of June 2023 and an auto-renewal of one year thereafter. KBS was a party to a Loan and Security Agreement with eCapital, providing up to $4.0 million in working capital which was scheduled to mature in June 2023 and renew automatically for a period of one year moving forward. During the second quarter of 2023, we closed these two credit facilities and have no remaining debt balance with eCapital.
eCapital Term Loan
We and certain of our Investments subsidiaries were party to a Loan and Security Agreement with eCapital, as successor in interest to Gerber Finance, Inc. (as amended, the “Star Loan Agreement”), which provided 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 maturing on January 31, 2025, unless terminated in accordance with the terms therein. During the second quarter of 2023, we paid in full all amounts related to the Star Loan Agreement and have no remaining debt balance with eCapital.
Off-Balance Sheet Arrangements
As of December 31, 2023, there were no off balance sheet arrangements.
Critical Accounting Policies
Management’s discussion and analysis of our financial condition and results of operations are based upon our accompanying consolidated financial statements, which are prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, related disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates and judgments, the most critical of which are those related to revenue recognition, business combination accounting, goodwill valuation and income taxes. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known.
Revenue Recognition
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 basis. Performance obligations are satisfied over time as work progresses or at a point in time. From time-to-time we enter into contracts within our construction sector that produce assets with no alternative use and contain an enforceable right to payment, including a reasonable profit margin. Determining if an enforceable right to payment includes a reasonable profit margin requires judgment and 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. We had no contracts in place as of December 31, 2023 or December 31, 2022 that require recognition over time.
Business Combination Accounting
26
The Company accounts for business combinations using the acquisition method of accounting, and records the identifiable assets and liabilities of the acquired business at their acquisition date fair values under ASC 805, Business Combinations. The excess of the purchase price over the estimated fair value of the net assets acquired is recorded as goodwill, and, conversely, any excess of the estimated fair values of the net assets acquired over the purchase price is recorded as a bargain purchase gain. Any changes in the estimated acquisition date fair values of the net assets recorded prior to the finalization of a more detailed analysis, but not to exceed one year from the date of acquisition, could change the amount of the purchase price allocated to goodwill or bargain purchase gain. Amounts allocated to goodwill would be recorded in the Consolidated Balance Sheets and bargain purchase gains would be recorded on the Consolidated Statement of Operations. Any subsequent changes to any purchase price allocations that are material to the Company’s Consolidated Financial Statements will be adjusted retrospectively. All acquisition related costs are expensed as incurred.
The results of operations of the acquired companies are recorded in the Consolidated Statements of Operations from the date of acquisition. The application of business combination principles, including the determination of the fair value of the net assets acquired, requires the use of significant estimates and assumptions.
Goodwill Valuation
We review goodwill for impairment on an annual basis during the fourth quarter, and when events or changes in circumstances indicate that a reporting unit’s carrying value may be impaired. We initially assess 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 of December 31, 2023, we performed a qualitative assessment and did not identify any triggering events that would lead to the performance of a quantitative analysis. See Note 7. Goodwill, within the notes to our accompanying consolidated financial statements, for further information.
Income 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. Significant judgment is required in determining any valuation allowance against deferred tax assets.
The authoritative guidance for income taxes defines a recognition threshold and measurement attributes for financial statement recognition and measurement of a tax provision taken or expected to be taken in a tax return. The guidance also provides direction on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Under the guidance, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. We recognize interest and penalties related to uncertain tax positions as a component of the income tax provision.
New Accounting Pronouncements
See Note 2. Basis of Presentation and Significant Accounting Policies, within the notes to our accompanying consolidated financial statements for discussion of our discussion of new accounting pronouncements.
27
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Debt obligations under the Premier Loan Agreement are subject to variable rates of interest based on the U.S. Prime Rate. A 100 basis point increase in the underlying interest rate would result in an additional annual interest expense of approximately $20 thousand, assuming related line of credit of $2 million, which is the amount of outstanding borrowings at December 31, 2023.
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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
STAR EQUITY HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | ||||||||
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Star Equity Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying Consolidated Balance Sheets of Star Equity Holdings, Inc. (the “Company”) as of December 31, 2023 and 2022, the related Consolidated Statements of Operations, Stockholders’ Equity and Cash Flows, for the years then ended, and the related notes to the Consolidated Financial Statements (collectively, the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and 2022, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Business Combination Accounting
As discussed in Note 16 to the financial statements, the Company completed an acquisition of Big Lake Lumber Inc. during 2023. The Company accounted for this acquisition as a business combination, which resulted in the recognition of a bargain purchase gain.
Auditing the accounting for the acquisition was complex due to the significant estimation uncertainty in determining the fair values of identified assets, including the customer relationship intangible asset of $900 thousand and the fair value of contingent consideration of $169 thousand.
The significant estimation uncertainty was primarily due to the sensitivity of the respective fair values to underlying assumptions about future performance of the acquired business and due to the limited historical data on which to base these assumptions. The significant assumptions used to form the basis of the forecasted results included forecasted revenues and expenditures and customer attrition rates. These significant assumptions were forward-looking and could be affected by future economic and market conditions.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included, among others (i) obtaining an understanding of management’s process for accounting for the transaction; (ii) evaluating the qualifications of the third-party expert engaged by management; (iii) testing management’s, and the third-party expert’s, process for developing the valuation models; and (iv) evaluating the significant assumptions used in developing the valuation models. In evaluating management’s assumptions used in the
30
development of the valuation models we considered (i) whether these assumptions were consistent with evidence obtained in other areas of the audit and (ii) the sensitivity to change of the assumptions used.
We have served as the Company’s auditor since 2022.
| /s/ Wolf & Company, P.C. | ||||||||
Boston, Massachusetts
March 22, 2024
31
STAR EQUITY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
| Year ended December 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Revenues: | ||||||||||||||
| Construction | $ | $ | ||||||||||||
| Investments | ||||||||||||||
| Total revenues | ||||||||||||||
| Cost of revenues: | ||||||||||||||
| Construction | ||||||||||||||
| Investments | ||||||||||||||
| Total cost of revenues | ||||||||||||||
| Gross profit | ||||||||||||||
| Operating expenses: | ||||||||||||||
| Selling, general and administrative | ||||||||||||||
| Amortization of intangible assets | ||||||||||||||
| Total operating expenses | ||||||||||||||
| Net income (loss) from continuing operations | ( | ( | ||||||||||||
| Other income (expense): | ||||||||||||||
| Other income (expense), net | ( | |||||||||||||
Interest income (expense), net | ( | |||||||||||||
| Total other income (expense), net | ( | |||||||||||||
| Income (loss) from continuing operations before income taxes | ( | ( | ||||||||||||
Income tax benefit (provision) | ( | |||||||||||||
| Income (loss) from continuing operations, net of tax | ( | ( | ||||||||||||
| Income (loss) from discontinued operations, net of tax | ||||||||||||||
| Net income (loss) | ( | |||||||||||||
Dividend on Series A perpetual preferred stock | ( | ( | ||||||||||||
| Net income (loss) attributable to common stockholders | $ | $ | ( | |||||||||||
| Net income (loss) per share | ||||||||||||||
| Net income (loss) per share, continuing operations | ||||||||||||||
| Basic* | $ | ( | $ | ( | ||||||||||
| Diluted | $ | ( | $ | ( | ||||||||||
| Net income (loss) per share, discontinued operations | ||||||||||||||
| Basic* | $ | $ | ||||||||||||
| Diluted | $ | $ | ||||||||||||
| Net income (loss) per share | ||||||||||||||
| Basic* | $ | $ | ( | |||||||||||
| Diluted* | $ | $ | ( | |||||||||||
| Net income (loss) per share, attributable to common shareholders | ||||||||||||||
| Basic* | $ | $ | ( | |||||||||||
| Diluted* | $ | $ | ( | |||||||||||
| Weighted-average common shares outstanding | ||||||||||||||
| Basic* | ||||||||||||||
| Diluted* | ||||||||||||||
| Dividends declared per share of Series A perpetual preferred stock | $ | $ | ||||||||||||
*Earnings per share may not add due to rounding
See accompanying notes to consolidated financial statements.
32
STAR EQUITY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts and par value)
| December 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Assets: | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Restricted cash | ||||||||||||||
| Investments in equity securities | ||||||||||||||
| Lumber derivative contracts | ||||||||||||||
Accounts receivable, net of allowances of $ | ||||||||||||||
Note receivable, current portion | ||||||||||||||
| Inventories, net | ||||||||||||||
| Other current assets | ||||||||||||||
| Current assets – discontinued operations | ||||||||||||||
| Total current assets | ||||||||||||||
| Property and equipment, net | ||||||||||||||
| Operating lease right-of-use assets, net | ||||||||||||||
| Intangible assets, net | ||||||||||||||
| Goodwill | ||||||||||||||
| Deferred tax assets | ||||||||||||||
Cost method investment | ||||||||||||||
Notes receivable | ||||||||||||||
| Other assets | ||||||||||||||
| Non-current assets – discontinued operations | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
Liabilities and Stockholders’ Equity: | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable | $ | $ | ||||||||||||
| Accrued liabilities | ||||||||||||||
| Accrued compensation | ||||||||||||||
| Accrued warranty | ||||||||||||||
| Lumber derivative contracts | ||||||||||||||
| Deferred revenue | ||||||||||||||
| Short-term debt | ||||||||||||||
| Operating lease liabilities | ||||||||||||||
| Finance lease liabilities | ||||||||||||||
| Current liabilities - discontinued operations | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Deferred tax liabilities | ||||||||||||||
| Operating lease liabilities, net of current portion | ||||||||||||||
| Finance lease liabilities, net of current portion | ||||||||||||||
| Non-current liabilities - discontinued operations | ||||||||||||||
| Total liabilities | ||||||||||||||
Commitments and contingencies (Note 9) | ||||||||||||||
| Stockholders’ equity: | ||||||||||||||
Preferred stock, $ | ||||||||||||||
33
Preferred stock, $ | ||||||||||||||
Common stock, $ | ||||||||||||||
Treasury stock, at cost; | ( | ( | ||||||||||||
| Additional paid-in capital | ||||||||||||||
| Accumulated deficit | ( | ( | ||||||||||||
| Total stockholders’ equity | ||||||||||||||
Total liabilities and stockholders’ equity | $ | $ | ||||||||||||
See accompanying notes to consolidated financial statements.
34
STAR EQUITY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Year ended December 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Operating activities | ||||||||||||||
| Net income (loss) | $ | $ | ( | |||||||||||
| Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: | ||||||||||||||
| Depreciation of property and equipment | ||||||||||||||
| Amortization of intangible assets | ||||||||||||||
| Non-cash lease expense | ||||||||||||||
| Provision for bad debt, net | ||||||||||||||
| Stock-based compensation | ||||||||||||||
| Non-cash interest expense | ||||||||||||||
| Gain on disposal of discontinued operations | ( | |||||||||||||
Bargain purchase gain on acquisition | ( | |||||||||||||
| (Gain) Loss on sale of assets | ( | ( | ||||||||||||
| Deferred income taxes | ( | |||||||||||||
Unrealized (gain) loss on equity securities and lumber derivatives | ( | |||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||
| Accounts receivable | ( | |||||||||||||
| Inventories | ( | |||||||||||||
| Other assets | ( | |||||||||||||
| Accounts payable | ( | |||||||||||||
| Accrued compensation | ( | |||||||||||||
| Deferred revenue and billings in excess of costs and estimated profit | ( | |||||||||||||
| Operating lease liabilities | ( | ( | ||||||||||||
| Other liabilities | ( | |||||||||||||
| Net cash provided (used) by operating activities | ( | |||||||||||||
| Investing activities | ||||||||||||||
| Purchases of property and equipment | ( | ( | ||||||||||||
| Proceeds from sale of discontinued operations | ||||||||||||||
| Proceeds from sale of property and equipment | ||||||||||||||
| Purchases of equity securities | ( | ( | ||||||||||||
| Proceeds from sales of equity securities | ||||||||||||||
Cash paid for business acquisition | ( | |||||||||||||
| Net cash provided (used) by investing activities | ( | |||||||||||||
| Financing activities | ||||||||||||||
| Proceeds from borrowings | ||||||||||||||
| Repayment of debt | ( | ( | ||||||||||||
| Proceeds from exercise of warrants | ||||||||||||||
| Fees paid on issuance of common stock | ( | |||||||||||||
| Proceeds from the sale of common stock, warrants, and exercise of over allotment options | ||||||||||||||
| Taxes paid related to net share settlement of equity awards | ( | ( | ||||||||||||
| Repayment of obligations under finance leases | ( | ( | ||||||||||||
| Preferred stock dividends paid | ( | ( | ||||||||||||
| Net cash provided (used) by financing activities | ( | |||||||||||||
Net change in cash, cash equivalents, and restricted cash including cash classified within current assets-discontinued operations | ( | |||||||||||||
Less: Net (decrease) increase in cash classified within current assets-discontinued operations | ( | |||||||||||||
| Net change in cash, cash equivalents, and restricted cash | ||||||||||||||
| Cash, cash equivalents, and restricted cash at beginning of year | ||||||||||||||
| Cash, cash equivalents, and restricted cash at end of year | $ | $ | ||||||||||||
| Reconciliation of cash, cash equivalents, and restricted cash at end of year | ||||||||||||||
35
| Cash and cash equivalents | $ | $ | ||||||||||||
| Restricted cash | ||||||||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | $ | ||||||||||||
| Supplemental Information | ||||||||||||||
| Cash paid during the year for interest | $ | $ | ||||||||||||
| Cash paid during the year for income taxes | $ | $ | ||||||||||||
| Non-Cash Investing Activities | ||||||||||||||
| Noncash note receivable | ||||||||||||||
| Noncash investment in private company | ||||||||||||||
| Non-Cash Financing Activities | ||||||||||||||
| Noncash property, plant, and equipment obtained in exchange for finance lease liabilities | ||||||||||||||
| Noncash right-of-use assets obtained in exchange for operating lease liabilities | ||||||||||||||
See accompanying notes to consolidated financial statements.
36
STAR EQUITY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
| Perpetual Redeemable Preferred Stock | Perpetual Preferred Stock | Common stock | Treasury Stock | Additional paid-in capital | Accumulated deficit | Total stockholders’ equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2021 | $ | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued under stock incentive plans, net of shares withheld for employee taxes | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity issuance costs | — | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends to holders of preferred stock ($ | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividends paid | — | ( | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Proceeds from the sale of common stock, warrants, and exercise of over allotment options | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reclassification of preferred stock to permanent equity (See Note 2) | ( | ( | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2022 | $ | $ | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued under stock incentive plans, net of shares withheld for employee taxes | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends to holders of preferred stock ($ | — | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Proceeds from the sale of common stock, warrants, and exercise of over allotment options | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2023 | $ | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
37
STAR EQUITY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The Company
Star Equity Holdings, Inc. (“Star Equity”, or the “Company”) is a diversified holding company with two divisions: Construction and Investments. We previously had a Healthcare division which was sold on May 4, 2023, as further described in Note 3. Discontinued Operations. Unless the context requires otherwise, in this report the terms “we,” “us,” and, “our” refer to Star Equity and our wholly owned subsidiaries.
Construction
Construction manufactures modular housing units for commercial and residential applications. Construction operates in two businesses: (i) modular building manufacturing and (ii) structural wall panel and wood foundation manufacturing, including building supply retail operations. The modular building manufacturing business services the northeast United States and is operated by KBS Builders, Inc. (“KBS”) in Maine. The structural wall panel and wood foundation manufacturing business is operated by EdgeBuilder, Inc. (“EdgeBuilder”), and the retail building supplies are sold through Glenbrook Building Supply, Inc. (“Glenbrook” and together with EdgeBuilder, “EBGL”). EBGL is based in and services the Greater Minneapolis metropolitan area. KBS, EdgeBuilder and Glenbrook are wholly owned subsidiaries of Star Equity and are referred to collectively herein, and together with ATRM Holdings, Inc. (“ATRM”), as the “Construction Subsidiaries.”
EBGL expanded its market share of the Greater Minneapolis area via the acquisition of all of the assets of Big Lake Lumber Inc. (“BLL”) in October 2023. BLL’s operations were integrated into and became part of Glenbrook’s operations. See Note 16. Mergers and Acquisitions for further information.
Investments
Investments generates intercompany revenue from the lease of commercial properties and equipment through Star Real Estate Holdings. Our Investments division is an internally-focused unit. This entity was established to hold our corporate-owned real estate, which currently includes our manufacturing facilities that are leased to KBS and EBGL, as well as any minority investments we make in public and private companies. Star Equity Fund GP, LLC (“Star Equity Fund”), Star Investment Management, LLC (“Star Investment”), Star Equity Investment Holdings Inc. (“SEI”), Star Real Estate Holdings USA, Inc. (“SRE”), and the subsidiaries of SRE that are included in this division are referred to collectively herein as the “Investments Subsidiaries.”
Note 2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The consolidated financial statements are prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States of America and include our wholly owned subsidiaries financial statements. All intercompany accounts and transactions have been eliminated. The divestiture of our former Healthcare division is separately presented as discontinued operations in the Consolidated Statement of Operations for the years ended December 31, 2023 and December 31, 2022. Refer to Note 3. Discontinued Operations for additional information.
Mezzanine Equity
Pursuant to the Certificate of Designations, Rights and Preferences of 10% Series A Cumulative Perpetual Preferred Stock (the “Series A Preferred Stock”) of Star Equity (the “Certificate of Designations”), upon a Change of Control Triggering Event, as defined in the Certificate of Designations, holders of the Series A Preferred Stock had the ability to require the Company to redeem the Series A Preferred Stock at a price of $10.00 per share, plus any accumulated and unpaid dividends. As this redemption feature of the shares was not solely within the control of the Company, the Series A Preferred Stock did not qualify as permanent equity and was classified as mezzanine or temporary equity.
On June 2, 2022, the Certificate of Designations was amended to include a “Special Optional Redemption Right” at the Company’s discretion and to extinguish the option of preferred stockholders to redeem preferred shares upon a Change of Control Triggering Event, as defined in the Certificate of Designations, as amended. As the redemption features of the Series A Preferred Stock are now solely within the control of the Company, the Series A Preferred Stock qualifies as permanent equity and has been reclassified to permanent equity effective June 2, 2022.
In addition to the foregoing redemption features, the Certificate of Designations also provides that we may redeem (at our option, in whole or in part) the Series A Preferred Stock following the fifth anniversary of issuance of the Series A Preferred Stock, at a cash redemption price of $10.00 per share, plus any accumulated and unpaid dividends.
Refer to preferred stock dividends discussed in Note 17. Perpetual Preferred Stock.
38
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. Generally Accepted Accounting Practices (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and disclosures made in the accompanying notes to the consolidated financial statements. Significant estimates and judgments include those related to revenue recognition, goodwill valuation, business combination accounting, and income taxes. Actual results could materially differ from those estimates.
Revenue Recognition
We recognize revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606 and, specific to our discontinued Healthcare Operations, Topic 842, as further explained below.
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.
The Company has 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 revenue 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, including certain instances which 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 when the company creates an asset with no alternative use and we have an enforceable right to payment, including a reasonable profit margin. Determining if an enforceable right to payment includes a reasonable profit margin requires judgment and 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 the Company does not provide significant credits or incentives, which may be variable consideration when estimating the amount of revenue to be recognized.
Construction Revenue Recognition. Within the Construction division, we service residential and commercial construction projects by manufacturing modular housing units and other products and supplying 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. 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. Revenue is generally recognized at point in time upon delivery of product or over time by measuring progress towards completion.
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Billings in excess of costs and estimated profit. We recognize billings in excess of costs and estimated profit on uncompleted contracts within current liabilities. Such amounts relate to fixed-price contracts recognized over time, and represents payments in advance of performing the related contract work. Billings in excess of costs and estimated profit on uncompleted contracts are not considered to be a significant financing component because they are generally used to meet working capital demands that can be higher in the early stages of a contract. Contract liabilities are reduced when the associated revenue from the contract is recognized, which is generally within one year. There is no liability associated with billings in excess of costs at December 31, 2023 or December 31, 2022.
Healthcare Revenue Recognition. We generated Healthcare service revenue and product and product-related sales revenue primarily from providing diagnostic services to our customers and from the sale of gamma cameras, accessories, and radiopharmaceuticals doses. Service revenues within our former Healthcare reportable segment, which is now recorded as part of discontinued operations, and, in 2023 covers the period through the date of sale of our Healthcare division as discussed in Note 2. Discontinued Operations, was derived from providing our customers with contract diagnostic services, which included use of our imaging systems, qualified personnel, radiopharmaceuticals, licensing, logistics and related items required to perform testing in their own offices. We billed customers either on a per-scan or fixed-payment methodology, depending upon the contract negotiated with the customer. We also rented cameras to customers for use in their healthcare operations. Rental revenues were structured as either a weekly or monthly payment arrangement, and were recognized in the month that rental assets were provided. Revenue related to provision of our services was recognized at the time services were performed. Revenue from product and product-related sales, which is recorded as part of discontinued operations, was derived primarily from the sale of gamma cameras, accessories, and radiopharmaceuticals doses.
Contract Costs. 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. The Company applies 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 the 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. As of December 31, 2023 and 2022, there were no
Leases
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 Consolidated Balance Sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our 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 discount rate, we use an 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 to not separate lease and non-lease components of our operating leases. Additionally, the Company elected not to recognize ROU assets and leases liabilities that arise from short-term leases of twelve months or less.
Lessor Accounting
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 used 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 us at the end of the lease term.
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We elected the operating lease practical expedient for leases to not separate non-lease components of regular maintenance services from associated lease components.
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 income 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.
Concentration of Credit Risk
Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of cash and cash equivalents and accounts receivable. We limit our exposure to credit loss by generally placing cash in high credit quality financial institutions. Cash balances are maintained primarily at major financial institutions in the United States and a portion of which exceed the regulatory limit of $250,000 insured by the Federal Deposit Insurance Corporation (“FDIC”). We have not experienced any credit losses associated with our cash balances. Additionally, we have established guidelines regarding diversification of our investments and their maturities, which are designed to maintain principal and maximize liquidity. As of December 31, 2023, we have $1.0 million of cash in excess of FDIC insured limits.
Fair Value of Financial Instruments
The authoritative guidance for fair value measurements defines fair value for accounting purposes, establishes a framework for measuring fair value, and provides disclosure requirements regarding fair value measurements. The guidance defines fair value as an exit price, which is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date. The degree of judgment utilized in measuring the fair value of assets and liabilities generally correlates to the level of pricing observability. Financial instruments primarily consist of cash equivalents, equity securities, accounts receivable, other current assets, restricted cash, and accounts payable. The carrying amount of short-term and long-term debt and notes payable approximates fair value because of the relative short maturity of these instruments and interest rates we could currently obtain.
Variable Interest Entities
We determine at the inception of each arrangement whether an entity in which we have made an investment or in which we have other variable interests is considered a variable interest entity (“VIE”). We consolidate VIEs when we are the primary beneficiary. We are the primary beneficiary of a VIE when we have the power to direct activities that most significantly affect the economic performance of the VIE and have the obligation to absorb the significant losses or benefits. If we are not the primary beneficiary in a VIE, we account for the investment or other variable interests in a VIE in accordance with applicable GAAP.
Periodically, we assess whether any changes in our interest or relationship with the entity affect our determination of whether the entity is a VIE and, if so, whether we are the primary beneficiary.
Cash and Cash Equivalents
We consider all investments with a maturity of three months or less when acquired to be cash equivalents.
Equity Securities
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Cost Method Investment
As a part of the sale of Digirad Health, described further in Note 3. Discontinued Operations, we received common equity of TTG Parent. We have elected the measurement alternative under ASC 321. The measurement alternative election allows for equity securities that do not have readily determinable fair values to be recorded at cost, with adjustments for impairment and certain observable price changes reflected in earnings. Such securities are adjusted to fair value when an observable price change occurs or impairment is identified.
Allowance for Doubtful Accounts
Accounts receivable consist principally of trade receivables from customers. These are recorded at the invoiced amount and are generally unsecured and due within 30 days. Trade receivables do not bear interest. We adopted ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”), as amended, which replaces the incurred loss methodology with an expected loss methodology . This methodology includes information about past events, current economic conditions and reasonable and supportable forecasts that impact the collectibility of the reported amounts of the receivables over their lifetime. Within the CECL guidelines, we utilize a “probability of default” methodology to determine expected credit losses under the CECL model. Account balances are charged off against the allowance when we believe it is probable the receivable will not be recovered. Our “probability of default” methodology principally entails evaluating the collectability of our trade receivables and providing reserves for doubtful accounts based on our historical experience rate, known collectability issues and disputes, and our bad debt write-off history. The impact of adopting CECL did not have a material impact on our financial statements.
Our estimates of collectability could be impacted by material amounts due to changed circumstances, such as a higher number of defaults or material adverse changes in a payor’s ability to meet its obligations. Expected credit losses related to trade accounts receivable are recorded as an allowance for doubtful accounts within accounts receivable, net in the Consolidated Balance Sheets, and the related provision for doubtful accounts is charged to general and administrative expenses. We do not have any off-balance sheet credit exposure related to our customers.
The following table summarizes the allowance for doubtful accounts from continuing operations as of and for the years ended December 31, 2023 and 2022 (in thousands):
Allowance for Doubtful Accounts(1) | ||||||||
Balance at December 31, 2021 | $ | ( | ||||||
| Provision adjustment | ( | |||||||
| Write-offs and recoveries, net | ||||||||
Balance at December 31, 2022 | ( | |||||||
| Provision adjustment | ( | |||||||
| Write-offs and recoveries, net | ||||||||
Balance at December 31, 2023 | $ | ( | ||||||
(1)The provision was charged against general and administrative expenses.
Inventory
Inventories are valued using first-in, first-out or the weighted-average inventory method; stated at the lower of cost or net realizable value. Finished goods and work-in-process inventory values include the cost of raw materials, labor and manufacturing overhead. Inventory, when written down to net realizable value, establishes a new cost basis and its value is not subsequently increased based upon changes in underlying facts and circumstances. We also make adjustments to reduce the carrying amount of inventories for estimated excess or obsolete inventories. Factors influencing these adjustments include inventories on-hand compared with historical and estimated future sales and usage for existing and new products and assumptions about the likelihood of obsolescence.
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Long-Lived Assets including Finite Lived Purchased Intangible Assets
Long-lived assets consist of property and equipment and finite lived intangible assets. We generally record property and equipment at cost. We record property and equipment and intangible assets acquired in business combinations based on their fair values at the date of acquisition. We calculate depreciation on property and equipment using the straight-line method over the estimated useful life of the assets, which range from 5 to 20 years for buildings and improvements, 3 to 13 years for machinery and equipment, 1 to 10 years for computer hardware and software, and the lesser of the estimated useful life or remaining lease term for leasehold improvements. Charges related to amortization of assets recorded under finance leases are included within depreciation expense. We calculate amortization on intangible assets using either the accelerated or the straight-line method over the estimated useful life of the assets, based on when we expect to receive cash inflows generated by the intangible assets. Estimated useful lives for intangibles range from 1 to 15 years.
Goodwill Valuation
Goodwill has historically been derived from the acquisition of ATRM in 2019. See Note 7. Goodwill, for further information.
Business Combinations
In accordance with ASC 805, Business Combinations, the Company allocates the purchase consideration to the identifiable assets acquired and liabilities assumed in business combinations based on their fair values as of the respective acquisition date. The excess of the purchase consideration over the amounts assigned to the identifiable assets and liabilities is recognized as goodwill, or if the fair value of the net assets acquired exceeds the purchase consideration, a bargain purchase gain is recorded within the Consolidated Statement of Operations. Factors giving rise to goodwill generally include operational synergies that are anticipated as a result of the business combination and growth expected to result in economic benefits from access to new customers and markets. The fair values of identifiable intangible assets acquired in business combinations are generally determined using an income approach, requiring financial forecasts and estimates as well as market participant assumptions.
In connection with the acquisition of BLL during the fiscal year ended December 31, 2023, the Company recorded an initial bargain purchase gain of $1.2 million that was recorded as a component of other income on the Consolidated Statement of Operations. The bargain purchase gain amount represents the excess of the estimated fair value of the net assets and intangibles acquired over the estimated fair value of the consideration transferred. In accordance with ASC 805, we have estimated the fair value of the net assets acquired as of the acquisition date.
The incremental financial results of the BLL acquisition are included in the Company’s consolidated financial results from the respective acquisition date. See Note 16. Mergers and Acquisitions for further information.
Restricted Cash
Debt Issuance Costs
We incur debt issuance costs in connection with debt financings. Debt issuance costs for line of credit are presented in other assets and are amortized over the term of the revolving debt agreements using the straight-line method. Debt issuance costs for term debt are netted against the debt and are amortized over the term of the loan using the effective interest method. Amortization of debt issuance costs are included in interest expense. As of December 31, 2022, we had $0.1 million of unamortized debt issuance costs. As of December 31, 2023 we have no unamortized debt issuance costs.
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Shipping and Handling Fees and Costs
Share-Based Compensation
We account for share-based awards exchanged for employee and board services in accordance with the authoritative guidance for share-based compensation. Under this guidance, share-based compensation expense is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense, net of forfeitures, over the requisite service period.
Warranties
Within our Construction division, KBS provides a limited assurance warranty on its residential homes that covers substantial defects in materials or workmanship for a period of 12 months after delivery to the owner. EBGL provides a limited warranty on the sale of its wood foundation products that covers leaks resulting from defects in workmanship for a period of twenty-five years . Estimated warranty costs are accrued in the period that the related revenue is recognized. See Note 5. Supplementary Balance Sheet Information, for further information.
Advertising Costs
Basic and Diluted Net income (loss) Per Share
We present net income (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 income (loss) attributable to common stockholders to warrants because the holders of our warrants are not contractually obligated to share in our income (loss). 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.
| Year Ended December 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Stock options | ||||||||||||||
| Stock warrants | ||||||||||||||
| Restricted stock units | ||||||||||||||
| Total | ||||||||||||||
As of December 31, 2023, there were 1,370,460 warrants exercised and 12,567,040 warrants outstanding, which represents 11,864,770 shares of common stock equivalents, remained outstanding. See Note 18. Equity Transactions, for further information about warrants outstanding.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the consolidated financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We recognize net deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
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We record uncertain tax positions on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. We recognize interest and penalties related to unrecognized tax benefits within income tax expense, and any accrued interest and penalties would be included within the related tax liability. No such costs were recorded for the years ended December 31, 2023 and December 31, 2022.
Reclassifications
Certain items in the prior year financial statements were reclassified to conform with the current year presentation. These reclassifications primarily relate to reporting our Healthcare division as a discontinued operation and inventory.
New Accounting Standards Recently Adopted and To Be Adopted
No recently issued and adopted accounting standards had a significant impact on our consolidated financial statements.
In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which requires disclosure of detailed information related to significant expenses of the entity’s reportable segments which is regularly provided to the chief operating decision maker. ASU 2023-07 is effective for annual periods beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. ASU 2023-07 requires retrospective application in the period of initial application. We will apply ASU 2023-07 for annual periods beginning on January 1, 2024, and for interim periods beginning on January 1, 2025. ASU 2023-07 affects financial statement disclosure only, and its adoption will not affect our results of operations or financial position.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”), which requires, among other things, greater disaggregation of information in the rate reconciliation, and income taxes paid disaggregated by jurisdiction. ASU 2023-09 is effective for annual periods beginning after December 15, 2024. We will apply ASU 2023-09 on January 1, 2025. ASU 2023-09 affects financial statement disclosure only and its adoption will not affect our results of operations or financial position.
Note 3. Discontinued Operations
On May 4, 2023, we entered into a Stock Purchase and Contribution Agreement (the “Digirad Purchase Agreement”), by and among the Company, Digirad Health Inc., a Delaware corporation and wholly owned subsidiary of the Company (“Digirad Health”), TTG Imaging Solutions, LLC, a Pennsylvania limited liability company (“TTG”), and TTG’s parent, Insignia TTG Parent LLC, a Delaware limited liability company (“TTG Parent”). Pursuant to the Digirad Purchase Agreement, (i) TTG purchased 85 % of the issued and outstanding shares of Digirad Health, on the terms and subject to the conditions set forth therein and (ii) the Company contributed to TTG Parent 15 % of the issued and outstanding shares of stock of Digirad Health (the “Contributed Shares”) in exchange for New Units (as defined in the Digirad Purchase Agreement) of TTG Parent (the “Transaction”). The total aggregate consideration payable to the Company for the Transaction was $40 million, comprised of $19.7 million ($27 million less payoff of debt to Webster Bank (see Note 8. Debt) and transaction costs) in cash, a $7 million promissory note (see Note 5. Supplemental Balance Sheet Information), and $6 million of New Units in TTG Parent (see Note 5. Supplemental Balance Sheet Information). The Company completed the sale of Digirad Health simultaneously with entering into the Digirad Purchase Agreement.
We deemed the disposition of Digirad Health, which operated our Healthcare business unit, to represent a strategic shift that will have a major effect on our operations and financial results. As of the date of these financial statements, the results of operations of the Healthcare business unit represent “discontinued operations” in accordance with GAAP (ASC 205-20-45-1B). As such, the assets and liabilities, as well as the earnings, of the discontinued operation are presented separately in the consolidated financial statements for all periods presented. Unless otherwise noted, discussion within the notes to the consolidated financial statements relates to continuing operations.
Our variable interest entity (“VIE”), for which we are not the primary beneficiary, was disposed of as part of the sale of our Healthcare division. This VIE was in a small private company that is primarily involved in research related to new heart imaging technologies.
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The following table presents financial results of our Healthcare division for the twelve months ended December 31, 2023 and 2022 (in thousands). Note that we owned this division through May 4, 2023 and that the results for the twelve months ended December 31, 2023 reflect that period only:
| Twelve Months Ended December 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Total revenues | $ | $ | ||||||||||||
| Total cost of revenues | ||||||||||||||
| Gross profit | ||||||||||||||
| Operating expenses: | ||||||||||||||
| Selling, general and administrative | ||||||||||||||
| Amortization of intangible assets | ||||||||||||||
| (Gain) loss on disposal of discontinued operations | ( | |||||||||||||
| Total operating expenses | ( | |||||||||||||
| Income (loss) from discontinued operations | ||||||||||||||
| Other (expense) income, net | ( | |||||||||||||
| Interest expense, net | ( | ( | ||||||||||||
| Income (loss) from discontinued operations before income taxes | ||||||||||||||
| Income tax benefit (provision) | ( | |||||||||||||
| Income (loss) from discontinued operations | $ | $ | ||||||||||||
The carrying amounts of the major classes of assets reported as “Assets - discontinued operations” consist of the following as of December 31, 2022 (in thousands):
| December 31, 2022 | ||||||||
| Cash and cash equivalents | $ | |||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Other current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets, net | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| $ | ||||||||
The carrying amounts of the major classes of liabilities reported as “Liabilities - discontinued operations” consist of the following as of December 31, 2022 (in thousands):
| December 31, 2022 | ||||||||
| Accounts payable | $ | |||||||
Other liabilities | ||||||||
| Accrued compensation | ||||||||
| Accrued liabilities | ||||||||
| Deferred revenue | ||||||||
| Short-term debt and current portion of long-term debt | ||||||||
| Operating lease liabilities | ||||||||
| Finance lease liabilities, current portion | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Finance lease liabilities, net of current portion | ||||||||
| Short-term debt and current portion of long-term debt | $ | |||||||
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The following table presents the significant operating, investing and financing activities from discontinued operations for the twelve months ended December 31, 2023 and 2022 (in thousands):
| Twelve Months Ended December 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Operating activities | ||||||||||||||
| Net income (loss) from discontinued operations | ||||||||||||||
| Depreciation | ||||||||||||||
| Amortization of intangible assets | ||||||||||||||
| Non-cash lease expense | ||||||||||||||
| Write-off of borrowing costs | ||||||||||||||
| (Gain) loss on disposal of discontinued operations | ( | |||||||||||||
| Share-based compensation | ||||||||||||||
| (Gain )Loss on disposal of assets | ( | |||||||||||||
| Provision for bad debt | ||||||||||||||
| Deferred income taxes | ( | |||||||||||||
| Accounts receivable | ( | |||||||||||||
| Inventory | ( | ( | ||||||||||||
| Other assets | ||||||||||||||
| Accounts payable | ||||||||||||||
| Accrued compensation | ( | ( | ||||||||||||
| Deferred revenue | ( | |||||||||||||
| Operating lease liabilities | ( | ( | ||||||||||||
| Other liabilities | ( | ( | ||||||||||||
| Net cash provided by (used in) operating activities | ( | |||||||||||||
| Net cash provided by (used in) investing activities | ( | |||||||||||||
| Net cash provided by (used in) financing activities | ||||||||||||||
| Net increase (decrease) in cash and cash equivalents and restricted cash | $ | $ | ( | |||||||||||
| Non-Cash Investing Activities | ||||||||||||||
Lease assets obtained in exchange for new finance lease liabilities | $ | $ | ||||||||||||
| Lease assets obtained in exchange for new operating lease liabilities | $ | $ | ||||||||||||
Following is the reconciliation of purchase price to the gain recognized in income from discontinued operations for the twelve months ended December 31, 2023 (in thousands), prior to any proposed working capital adjustments:
Proceeds of the disposition, net of transaction costs and indebtedness payoff | $ | ||||
| Assets of the businesses | $ | ( | |||
| Liabilities of the businesses | $ | ||||
| Pre-tax gain on the disposition | $ | 26,680 | |||
Note 4. Revenue
Disaggregation of Revenue
The following table presents our continuing revenues disaggregated by major source for the years ended December 31, 2023 and 2022 (in thousands):
| December 31, 2023 | ||||||||||||||
| Construction | Total | |||||||||||||
| Major Goods/Service Lines | ||||||||||||||
| Construction Revenue from Contracts with Customers | $ | $ | ||||||||||||
Total Revenues | $ | $ | ||||||||||||
| Timing of Revenue Recognition | ||||||||||||||
| Services and goods transferred at a point in time | ||||||||||||||
Total Revenues | $ | $ | ||||||||||||
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| December 31, 2022 | ||||||||||||||
| Construction | Total | |||||||||||||
| Major Goods/Service Lines | ||||||||||||||
| Construction revenue from Contracts with Customers | $ | $ | ||||||||||||
| Total Revenues | $ | $ | ||||||||||||
| Timing of Revenue Recognition | ||||||||||||||
| Services and goods transferred over time | $ | $ | ||||||||||||
| Services and goods transferred at a point in time | ||||||||||||||
| Total Revenues | $ | $ | ||||||||||||
Deferred Revenue
Changes in the deferred revenues for the year ended December 31, 2023 and 2022, is as follows (in thousands):
Balance at December 31, 2021 | $ | |||||||
| Revenue recognized that was included in balance at beginning of the year | ( | |||||||
| Deferred revenue, net, related to contracts entered into during the year | ||||||||
Balance at December 31, 2022 | ||||||||
| Revenue recognized that was included in balance at beginning of the year | ( | |||||||
| Deferred revenue, net, related to contracts entered into during the year | ||||||||
Balance at December 31, 2023 | $ | |||||||
Note 5. Supplementary Balance Sheet Information
The following tables show the Consolidated Balance Sheet details as of December 31, 2023 and 2022 (in thousands):
Inventories
| December 31, 2023 | December 31, 2022 | |||||||||||||
| Inventories: | ||||||||||||||
| Raw materials | $ | $ | ||||||||||||
| Work-in-process | ||||||||||||||
| Finished goods | ||||||||||||||
| Total inventories | ||||||||||||||
| Less reserve for excess and obsolete inventories | ||||||||||||||
| Total inventories, net | $ | $ | ||||||||||||
Property and Equipment, net
| December 31, 2023 | December 31, 2022 | |||||||||||||
| Property and equipment, net: | ||||||||||||||
| Land | $ | $ | ||||||||||||
| Buildings and leasehold improvements | ||||||||||||||
| Machinery and equipment | ||||||||||||||
| Gross property and equipment | ||||||||||||||
| Accumulated depreciation | ( | ( | ||||||||||||
| Total property and equipment, net | $ | $ | ||||||||||||
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As of December 31, 2023, we held non-operating land and building in Oxford, Maine for investments which had a carrying value of $0.9 million and was included within property and equipment on the Consolidated Balance Sheets. Furthermore, we sold our Waterford, Maine facility on June 30, 2023 for approximately $1.2 million after closing costs and recognized a gain of $0.4 million which we recorded in other income/expense.
Depreciation expense for the years ended December 31, 2023 and 2022 was $0.6 million and $1.8 million, respectively.
Warranty Reserves
Within our Construction division, KBS provides a limited assurance warranty on its residential homes that covers substantial defects in materials or workmanship for a period of 12 months after delivery to the owner. EBGL provides a limited warranty on the sale of its wood foundation products that covers leaks resulting from defects in workmanship for a period of twenty-five years . Estimated warranty costs are accrued in the period that the related revenue is recognized. Warranty reserves and related activity were minimal as of and for the periods ended December 31, 2023 and December 31, 2022.
Intangible Assets
| December 31, 2023 | ||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Intangible Assets, Net | ||||||||||||||||||
| Intangible assets with finite useful lives: | ||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | ||||||||||||||||
| Trademarks | ( | |||||||||||||||||||
| Total intangible assets, net | $ | $ | ( | $ | ||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Intangible Assets, Net | ||||||||||||||||||
| Intangible assets with finite useful lives: | ||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | ||||||||||||||||
| Trademarks | ( | |||||||||||||||||||
| Total intangible assets, net | $ | $ | ( | $ | ||||||||||||||||
Amortization expense for intangible assets, net for the years ended December 31, 2023 and 2022 was $1.7
Estimated amortization expense for intangible assets for each year 2024 through 2028 is $1.8 3.5 million.
Notes Receivable
Notes receivable consists of the following principal and interest balances as of December 31, 2023 and December 31, 2022 (in thousands):
| December 31, 2023 | December 31, 2022 | ||||||||||
| Principal and interest | Principal and interest | ||||||||||
TTG Note | $ | $ | |||||||||
MDOS Note | |||||||||||
KBS Customer Note | |||||||||||
| $ | $ | ||||||||||
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As a part of the sale of Digirad Health, described further in Note 3. Discontinued Operations, a $7 million promissory note (the “TTG Note”) was entered into which represents an unsecured note receivable on our balance sheet. The note has a maturity date of May 3, 2029 with payment-in-kind (non-cash) interest on the outstanding principal balance hereof to accrue at the Interest Rate. The Interest Rate is defined as (i) during the period from the date of issuance of the note through the third anniversary of the date of issuance of the note, a per annum rate equal to the sum of (x) 5.0 % per annum plus (y) the greater of 5.0 % per annum and the weighted-average term SOFR-based interest rate of outstanding loans under the Senior Loan Agreement (as defined in the Digirad Purchase Agreement) during such period, and (ii) during the period following the third anniversary of the date of issuance of the note, a per annum rate equal to the sum of (x) 5.0 % per annum plus (y) the greater of 7.0 % per annum and the weighted-average term SOFR-based interest rate of outstanding loans under the Senior Loan Agreement during such period.
In 2021, we completed the sale of MD Office Solutions in exchange for a secured promissory note (the “MDOS Note”). The original principal amount of the MDOS Note was $1.4 million and in December 2022 the principal was modified to $1.5 million. The MDOS Note, the principal of which is approximately $1.2 million at December 31, 2023, is included in “Notes receivable, current portion” and “Notes receivable” in our Consolidated Balance Sheets at December 31, 2023 for $0.2 million and $1.0 million, respectively. The MDOS Note requires quarterly installments of $74 thousand and incurs interest at a fixed rate of 5.0 % through maturity in 2028.
In 2023, KBS issued a promissory note to a customer, incurring 12 % interest per annum (the “KBS Customer Note”). The KBS Customer Note is included in “Notes receivable, current portion” in the Consolidated Balance Sheets at December 31, 2023.
The balance of the Notes Receivable outstanding include any unpaid accrued interest. Interest Income recognized on Notes Receivable for the periods ended December 31, 2023 and December 31, 2022 totaled $0.5 million and $0.2 million, respectively. We have determined that all notes receivable are collectible in full and have established no reserves.
Cost Method Investment
As a part of the sale of Digirad Health, we received $6 million in the common equity of TTG Parent LLC. We have elected the measurement alternative under ASC 321. The measurement alternative election allows for equity securities that do not have readily determinable fair values to be recorded at cost, with adjustments for impairment and certain observable price changes reflected in earnings. Such securities are adjusted to fair value when an observable price change occurs or impairment is identified.
Accrued Liabilities
| December 31, 2023 | December 31, 2022 | |||||||||||||
Accrued liabilities: | ||||||||||||||
| Professional fees | $ | $ | ||||||||||||
| Sales and property taxes payable | ||||||||||||||
Outside services and consulting | ||||||||||||||
Earn-out Provision | ||||||||||||||
Taxes Payable related to Digirad Sale | ||||||||||||||
| Other accrued liabilities | ||||||||||||||
Total accrued liabilities | $ | $ | ||||||||||||
Note 6. Fair Value Measurements
We categorize our assets and liabilities measured at fair value into a three-level hierarchy in accordance with the authoritative guidance for fair value measurements. Assets and liabilities presented at fair value in our Consolidated Balance Sheets are generally categorized as follows:
Level 1:Quoted prices in active markets for identical assets or liabilities.
Level 2:Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3:Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Such assets and liabilities may have values determined using pricing models, discounted cash flow methodologies, or similar techniques, and include instruments for which the determination of fair value requires significant management judgment or estimation.
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Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of assets and liabilities and their placement within the fair value hierarchy levels. The following table sets forth by level within the fair value hierarchy our assets and liabilities that were recorded at fair value as of December 31, 2023 and 2022 (in thousands):
At Fair Value as of December 31, 2023 | ||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
| Assets (liabilities): | ||||||||||||||||||||||||||
| Equity securities | $ | $ | $ | $ | ||||||||||||||||||||||
| Lumber derivative contracts | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
At Fair Value as of December 31, 2022 | ||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
| Assets (liabilities): | ||||||||||||||||||||||||||
| Equity securities | $ | $ | $ | $ | ||||||||||||||||||||||
| Lumber derivative contracts | ( | ( | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
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 December 31, 2023 and 2022, respectively. During the years ended December 31, 2023, and 2022, we recorded an unrealized gain of $85 thousand and loss of $893 thousand, respectively, in the Consolidated Statements of Operations.
We entered into lumber derivative contracts in order to protect our gross profit margins from fluctuations caused by volatility in lumber prices. For the years ended December 31, 2023 and 2022, we recorded a net realized and unrealized loss of $53 thousand and $1.8 million, respectively, within in our Consolidated Statements of Operations. As of December 31, 2023, we had a net long (buying) position of 605,000 board feet under twenty-two lumber derivatives contracts. As of December 31, 2022, we had a net long (buying) position of 550,000 board feet under five lumber derivatives contracts.
Note 7. Goodwill
Goodwill has historically been derived from the acquisition of ATRM in 2019. KBS and EBGL carry a goodwill balance of $0.5 million and $4.0 million, respectively.
The carrying amount of goodwill for the years ended December 31, 2023 and 2022, by reportable segment, changed as follows (in thousands):
| Construction | Total | |||||||||||||
Balance at December 31, 2022 | $ | $ | ||||||||||||
Balance at December 31, 2023 | $ | $ | ||||||||||||
The Company assesses qualitative and quantitative factors to determine whether goodwill is impaired. The analysis includes assessing the impact of changes in certain factors including: (1) changes in forecasted operating results and comparing actual results to projections, (2) changes in the industry or our competitive environment since the acquisition date, (3) changes in the overall economy, our market share and market interest rates since the acquisition date, (4) trends in the stock price and related market capitalization and enterprise values, (5) trends in peer companies’ total enterprise value metrics, and (6) additional factors such as management turnover, changes in regulation and changes in litigation matters.
Based on the annual assessment performed as of December 31, 2023, the Company concluded it was more likely than not that the estimated fair value of our reporting units exceeded their carrying value, and therefore, determined it was not necessary to perform a quantitative goodwill impairment test.
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Note 8. Debt
A summary of debt as of December 31, 2023 and 2022 is as follows (dollars in thousands):
| December 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||
| Amount | Weighted-Average Interest Rate | Amount | Weighted-Average Interest Rate | |||||||||||||||||||||||
| Revolving Credit Facility - Premier | $ | $ | ||||||||||||||||||||||||
| Revolving Credit Facility - eCapital EBGL | ||||||||||||||||||||||||||
| Total Short-term Revolving Credit Facilities | $ | $ | ||||||||||||||||||||||||
| eCapital - Star Loan Principal, net | $ | $ | ||||||||||||||||||||||||
| Short Term Loan | $ | $ | ||||||||||||||||||||||||
| Total Short-term debt | $ | $ | ||||||||||||||||||||||||
Premier Facility
On August 16, 2023, EdgeBuilder and Glenbrook (the “EBGL Borrowers”) entered into a Revolving Credit Loan Agreement with Premier Bank (“Premier”) providing the EBGL Borrowers with a working capital line of credit of up to $4 million, which agreement was subsequently replaced and increased to $6 million on December 5, 2023 (the “Premier Loan Agreement”). Availability under the Premier Loan Agreement is based on a formula tied to the EBGL Borrowers’ eligible accounts receivable, inventory and equipment. Borrowings under the Premier Loan Agreement bear interest at the prime rate plus 0.75 % (and a minimum interest rate of 6.75 %), 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 expires on December 5, 2024 but may be extended from time to time at the request of the EBGL Borrowers, subject to approval by Premier. The EBGL Borrowers’ obligations under the Premier Loan Agreement are guaranteed by the Company and secured by all of their inventory, equipment, accounts and other intangibles. As of December 31, 2023, availability under the Premier Loan Agreement was approximately $3 million.
Financial covenants associated with the Premier Loan Agreement require that the EBGL Borrowers maintain (a) a debt service coverage ratio for any calendar year of less than 1.25 ; (b) a debt-to-equity ratio at the end of each calendar year in excess of 1.65 ; (c) a fixed charge coverage ratio at the end of each calendar year of less than 1.10 ; (d) working capital of at least $2 million; and (e) a current ratio of at least 1.50 . As of December 31, 2023, the EBGL Borrowers were not in compliance with the Premier Loan Agreement covenants. The EBGL Borrowers have obtained a waiver from Premier for the annual covenant breach.
Webster Credit Facility
On March 29, 2019, the Company entered into a Loan and Security Agreement (the “Webster Loan Agreement”) by and among certain subsidiaries of the Company, as borrowers; the Company, as guarantor; and Sterling National Bank (“Sterling”). On February 1, 2022, Sterling became part of Webster Bank, N.A. (“Webster”), and Webster became the successor in interest to the Webster Loan Agreement. In connection with the sale of our Healthcare business on May 4, 2023, the credit facility pursuant to the Webster Loan Agreement was paid in full and terminated.
eCapital Credit Facilities and Term Loan
EBGL
The EBGL Borrowers were formerly parties to a Loan and Security Agreement providing the EBGL Borrowers with a credit facility with eCapital Asset Based Lending Corp. formerly known as Gerber Finance, Inc. (“eCapital”) for borrowings up to $4.0 million, subject to certain borrowing base limitations (the “EBGL Loan”). KBS was also party to a revolving credit facility with eCapital which provided for borrowing up to $4.0 million, subject to certain borrowing base limitations.
We and certain of our Investments subsidiaries were party to a Loan and Security Agreement with eCapital, as successor in interest to Gerber Finance, Inc., which provided 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 maturing on January 31, 2025, unless terminated in accordance with the terms therein (the “Star Loan”).
During the second quarter of 2023, we notified eCapital that we would not be renewing any of our outstanding eCapital positions upon expiry at June 30, 2023. Subsequently, we paid in full all amounts then outstanding under the Star Loan on May 9, 2023. We are no longer party to any credit agreements with eCapital.
52
Note 9. Commitments 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 compliance with regulatory standards. customer disputes, employment practices, wage and hour disputes, product liability, professional liability, malpractice 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 currently do not expect that the resolution of these matters will have a material adverse effect on our financial position or results of operations.
The outcome of litigation and the amount or range of potential loss at particular points in time may be difficult to ascertain. Among other things, uncertainties can include how trial and appellate courts will apply the law and interpret facts, as well as the contractual and statutory obligations of other indemnifying and insuring parties. The estimated range of reasonably possible losses, and their effect on our financial position is based upon currently available information and is subject to significant judgment and a variety of assumptions, as well as known and unknown uncertainties.
.
Note 10. Leases
Lessee
We have operating and finance leases for corporate offices and operating locations, vehicles, and certain equipment. Our leases have remaining lease terms of 1 year to 10 years, some of which include options to extend the leases and some of which include options to terminate the leases within 1 year. Operating leases and finance leases are included separately in the Consolidated Balance Sheets.
The components of lease expense for the years ended December 31, 2023 and 2022 are as follows (in thousands):
| December 31, 2023 | December 31, 2022 | |||||||||||||
| Operating lease cost | $ | $ | ||||||||||||
| Finance lease cost: | ||||||||||||||
| Amortization of finance lease assets | $ | $ | ||||||||||||
| Interest on finance lease liabilities | ||||||||||||||
| Total finance lease cost | $ | $ | ||||||||||||
Supplemental cash flow information related to leases from continuing operations were as follows (in thousands):
| December 31, 2023 | December 31, 2022 | |||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||
| Operating cash flows from operating leases | $ | $ | ||||||||||||
| Operating cash flows from finance leases | $ | $ | ||||||||||||
| Financing cash flows from finance leases | $ | $ | ||||||||||||
| Right-of-use assets obtained in exchange for lease obligations: | ||||||||||||||
| Operating leases | $ | $ | ||||||||||||
| Finance leases | $ | $ | ||||||||||||
Supplemental balance sheet information related to leases as of December 31, 2023 and 2022 were as follows (in thousands):
| December 31, 2023 | December 31, 2022 | |||||||||||||
| Weighted-Average Remaining Lease Term (in years) | ||||||||||||||
| Operating leases | ||||||||||||||
| Finance leases | ||||||||||||||
| Weighted-Average Discount Rate | ||||||||||||||
| Operating leases | % | % | ||||||||||||
| Finance leases | % | % | ||||||||||||
53
We are committed to making future cash payments on non-cancelable operating leases and finance leases (including interest). The 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 December 31, 2023 were as follows (in thousands):
| Operating Leases | Finance Leases | |||||||||||||
| 2024 | $ | $ | ||||||||||||
| 2025 | ||||||||||||||
| 2026 | ||||||||||||||
| 2027 | ||||||||||||||
| 2028 | ||||||||||||||
2029 and thereafter | ||||||||||||||
| Total future minimum lease payments | ||||||||||||||
| Less amounts representing interest | ( | ( | ||||||||||||
| Present value of lease obligations | $ | $ | ||||||||||||
Lessor
Note 11. Share-Based Compensation
At December 31, 2023, we had two active equity incentive plans, the 2011 Inducement Stock Incentive Plan (the “2011 Plan”), and the 2018 Incentive Plan (the “2018 Plan” and together with the 2011 Plan, the “Plans”), under which stock options, restricted stock units, and other stock-based awards may be granted to employees and non-employees, including members of our board of directors. The terms of any equity instruments granted under the Plans are approved by our board of directors. Stock options typically vest over the requisite service period of to four years and have a contractual term of to ten years . Restricted stock units generally vest over to three years . Under the Plans, we are authorized to issue an aggregate of 1,450,000 shares of common stock. As of December 31, 2023, the Plans had 500,256 shares available for future issuance. The number of shares reserved for issuance under the 2018 Plan is subject to increase by (i) the number of shares of common stock that remained available for grant under the 2014 Equity Incentive Award Plan (the “2014 Plan”) as of the effective date of the 2018 Plan, plus (ii) any shares of common stock under the 2014 Plan that are forfeited, expire, or are canceled. As of December 31, 2023, the number of shares provided for issuance under the 2018 Plan due to unissued, forfeited, expired, and canceled shares under the 2014 Plan was 65,658 shares.
Stock Options
The estimated fair value of our stock options is determined using the Black-Scholes model. All stock options were granted with an exercise price equal to the fair value of the common stock on the grant date. There were no
A summary of our stock option award activity as of and for the year ended December 31, 2023 is as follows (in thousands, except per share data):
| Number of Shares | Weighted-Average Exercise Price per Share | Weighted-Average Remaining Contractual Term (In Years) | Aggregate Intrinsic Value | |||||||||||||||||||||||
Options outstanding at December 31, 2022 | $ | |||||||||||||||||||||||||
| Options granted | ||||||||||||||||||||||||||
| Options forfeited | ||||||||||||||||||||||||||
| Options expired | $ | |||||||||||||||||||||||||
| Options exercised | ||||||||||||||||||||||||||
Options outstanding at December 31, 2023 | $ | $ | ||||||||||||||||||||||||
Options exercisable at December 31, 2023 | $ | $ | ||||||||||||||||||||||||
At December 31, 2023, there is no unrecognized compensation cost related to unvested stock options.
Upon exercise, we issue new shares of common stock. There were no
54
Under the guidance for share-based payments, the fair value of our restricted stock units is based on the grant date fair value of our common stock. All restricted stock units were granted with no purchase price. Vesting of the restricted stock units is subject to service conditions, as well as the attainment of additional performance objectives for certain of the awards. The weighted-average grant date fair value of the restricted stock units was $0.93 per share during the year ended December 31, 2023.
A summary of our restricted stock unit activity as of and for the year ended December 31, 2023 is as follows (in thousands, except per share data):
| Number of Shares | Weighted-Average Grant Date Fair Value Per Share | |||||||||||||
Non-vested restricted stock units outstanding at December 31, 2022 | $ | |||||||||||||
| Granted | $ | |||||||||||||
| Forfeited | $ | |||||||||||||
| Vested | ( | $ | ||||||||||||
Non-vested restricted stock units outstanding at December 31, 2023 | $ | |||||||||||||
The following table summarizes information about restricted stock units that vested during the years ended December 31, 2023 and 2022 based on service conditions (in thousands):
| Year Ended December 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Fair value on vesting date of vested restricted stock units | $ | $ | ||||||||||||
At December 31, 2023, total unrecognized compensation cost related to non-vested restricted stock units was $0.3 million, which is expected to be recognized over a weighted-average period of 1.9 years.
Allocation of Share-Based Compensation Expense
Total share-based compensation expense related to all of our share-based units for the years ended December 31, 2023 and 2022 was allocated as follows (in thousands):
| Year Ended December 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Cost of revenues | $ | $ | ||||||||||||
| Selling, general and administrative | ||||||||||||||
| Total share-based compensation expense | $ | $ | ||||||||||||
Note 12. Income Taxes
Significant components of the provision for income taxes from continuing operations for the years ended December 31, 2023 and 2022 are as follows (in thousands):
| Year Ended December 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Current provision: | ||||||||||||||
| Federal | $ | $ | ||||||||||||
| State | ||||||||||||||
| Total current provision | ||||||||||||||
| Deferred provision: | ||||||||||||||
| Federal | ( | |||||||||||||
| State | ( | |||||||||||||
Total deferred (benefit) provision | ( | |||||||||||||
Total income tax (benefit) provision | $ | ( | $ | |||||||||||
55
Intraperiod allocation rules require us to allocate our provision for income taxes between continuing operations and other categories of comprehensive income (loss) such as discontinued operations. As described in Note 3. Discontinued Operations, the results of our Healthcare reportable segment have been reported as discontinued operations for 2022. As a result of the intraperiod allocation rules, for the years ended December 31, 2023 and 2022, the Company recorded a tax expense of $693 thousand and a tax benefit of $209 thousand, respectively, for discontinued operations.
Differences between the provision for income taxes and income taxes at the statutory federal income tax rate for continuing operations are for the years ended December 31, 2023 and 2022 as follows:
| Year Ended December 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Income tax expense at statutory federal rate | % | % | ||||||||||||
| State income tax expense, net of federal benefit | % | % | ||||||||||||
| Permanent differences and other | % | % | ||||||||||||
| Revaluation of deferred taxes due to change in effective state tax rates | ( | % | % | |||||||||||
| Expiration of net operating loss and tax credit carryovers | % | ( | % | |||||||||||
| Change in valuation allowance | % | ( | % | |||||||||||
| Provision for income taxes | % | ( | % | |||||||||||
Our net deferred tax assets (liabilities) as of December 31, 2023 and 2022 consisted of the following (in thousands):
| December 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Deferred tax assets: | ||||||||||||||
| Net operating loss carryforwards | $ | $ | ||||||||||||
| Research and development and other credits | ||||||||||||||
| Reserves | ||||||||||||||
| Operating lease liabilities | ||||||||||||||
| Interest carryover | ||||||||||||||
| Other, net | ||||||||||||||
| Total deferred tax assets | ||||||||||||||
| Deferred tax liabilities: | ||||||||||||||
| Fixed assets and other | ( | ( | ||||||||||||
| Right of use assets | ( | ( | ||||||||||||
| Intangibles | ( | ( | ||||||||||||
| Total deferred tax liabilities | ( | ( | ||||||||||||
| Valuation allowance for deferred tax assets | ( | ( | ||||||||||||
| Net deferred tax liabilities | $ | ( | $ | ( | ||||||||||
The Company recognizes federal and state deferred tax assets or liabilities based on the Company’s estimate of future tax effects attributable to temporary differences and carryovers. The Company records a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. The Company considers projected future taxable income and planning strategies in making this assessment. As of December 31, 2023, as a result of a three-year cumulative loss in continuing operations and recent events, we concluded that a valuation allowance was necessary to offset substantially all of our deferred tax assets. We intend to maintain a valuation allowance until sufficient positive evidence exists to support its reversal. The Company’s valuation allowance balance at December 31, 2023 is $8.3 million, offsetting the Company’s deferred tax assets. The valuation allowance decreased by $7.6 million and increased by $2.2 million for the years ended December 31, 2023 and 2022, respectively. The Company will continue to evaluate its deferred tax balances to determine any assets that are more likely than not to be realized.
56
As of December 31, 2023, we had federal and state income tax net operating loss carryforwards of $43.2 million and $20.9 million, respectively. Federal and certain state net operating losses of $5.3 million and $1.3 million, respectively, generated after 2017 carry forward without expiration. The remaining federal and state loss carryforwards will expire in 2024 through 2042 unless previously utilized. Federal and state loss carryforwards of approximately $15.6 million and $1.5 million expired in 2022. Pursuant to Internal Revenue Code (“Code”) Sections 382 and 383, use of our net operating loss and credit carryforwards may be limited because of a cumulative change in ownership greater than 50%. The Company experienced an ownership change under Code Section 382 in January 2022 which will restrict the Company’s ability to fully utilize its net operating losses. In addition, the net operating losses acquired in the ATRM Acquisition (as defined below) are also limited under Code Section 382. The Company analyzed these limitations when scheduling the reversal of deferred tax assets and liabilities in arriving at the necessary valuation allowance as of December 31, 2023. Future ownership changes may occur which could further limit our ability to utilize tax attributes.
The following table summarizes the activity related to our unrecognized tax benefits for the years ended December 31, 2023 and 2022 (in thousands):
| December 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Balance at beginning of year | $ | $ | ||||||||||||
| Expiration of the statute of limitations for the assessment of taxes | ( | |||||||||||||
Write-off of tax attributes in states in which the Company no longer files | ( | |||||||||||||
| Balance at end of year | $ | $ | ||||||||||||
Included in the unrecognized tax benefits of $0.3 million at December 31, 2023 was $0.3 million of tax benefits that, if recognized, would reduce our annual effective tax rate, subject to the valuation allowance. The Company does not expect our unrecognized tax benefits to change significantly over the next 12 months.
Note 13. Employee Retirement Plan
Note 14. Related Party Transaction
Star Equity Holdings, Inc.
Note 15. Segments
Our reportable segments are based upon our internal organizational structure; the manner in which our operations are managed; the criteria used by our Chief Executive Officer, who is our CODM, to evaluate segment performance; the availability of separate financial information; and overall materiality considerations. Under the prior period Holdco strategy, we organized our reportable segments into three reportable segments: Healthcare, Construction and Investments. Effective with the sale of our Healthcare business on May 4, 2023, we reorganized our segments into two reportable segments to reflect the manner in which our CODM assesses performance and allocates resources:
1.Construction
2.Investments
57
Construction. Through 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 commercial and residential buildings with a focus on customization to suit the project requirements and provide engineering and design expertise. Glenbrook is a retail supplier of lumber, windows, doors, cabinets, drywall, roofing, decking and other building materials 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. Our Investments division is an internally-funded unit. This unit holds our corporate-owned real estate, which currently includes our two manufacturing facilities in Maine that we lease back to KBS and our manufacturing facility in Minnesota that we lease back to Glenbrook. In addition, it holds several minority equity investments in other small public companies. It also holds and manages a $7 million promissory note and a $6 million private equity stake in TTG Parent, the parent entity of TTG. We acquired these positions as a result of the sale of Digirad Health (discussed in Note 3. Discontinued Operations).
Our reporting segments have been determined based on the nature of the products and services offered to customers or the nature of their function in the organization. We evaluate performance based on the gross profit and operating income (loss). Our operating costs included in our shared service functions primarily consist of senior executive officers, finance, human resources, legal, and information technology. Star Equity shared service corporate costs have been separated from the reportable segments. Prior period presentation previously disclosed conforms to current year presentation.
Segment information for the years ended December 31, 2023 and 2022 is as follows (in thousands):
| Year ended December 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Revenue by segment: | ||||||||||||||
| Construction | $ | $ | ||||||||||||
| Investments | ||||||||||||||
| Intersegment elimination | ( | ( | ||||||||||||
| Consolidated revenue | $ | $ | ||||||||||||
| Gross profit (loss) by segment: | ||||||||||||||
| Construction | ||||||||||||||
| Investments | ||||||||||||||
| Intersegment elimination | ( | ( | ||||||||||||
| Consolidated gross profit | $ | $ | ||||||||||||
| Income (loss) from operations by segment: | ||||||||||||||
| Construction | ||||||||||||||
| Investments | ( | |||||||||||||
| Corporate, eliminations and other | ( | ( | ||||||||||||
| Segment income (loss) from operations | ( | ( | ||||||||||||
| Consolidated income (loss) from operations | $ | ( | $ | ( | ||||||||||
| Depreciation and amortization by segment: | ||||||||||||||
| Construction | ||||||||||||||
| Investments | ||||||||||||||
| Star equity corporate | ||||||||||||||
| Total depreciation and amortization | $ | $ | ||||||||||||
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Note 16. Mergers and Acquisitions
On October 31, 2023, we acquired, through certain wholly owned subsidiaries, the assets and liabilities of BLL for consideration consisting of cash of $2.8 million and an earn-out provision of up to $0.5 million. As a result of this transaction, EBGL expanded its market share of the Greater Minneapolis area. BLL’s operations were integrated into and became part of Glenbrook’s operations. The earn-out provision, which is accounted for as a contingent liability, is based on a specific gross profit threshold with a measurement period of two years to begin one year after the closing date of the acquisition and can potentially amount to up to $250,000 for each of the two years, subject to certain limitations. The estimated fair value of the earn-out, which is determined using estimates of forecasted operations and other assumptions, was $0.2 million as of the acquisition date. No change to the fair value of the earn-out was recorded through December 31, 2023.
In accordance with ASC 805, we accounted for this transaction as a business combination and recorded the assets and liabilities of BLL at fair value. The fair value of the net assets acquired amounted to approximately $4.1 million at the date of acquisition, and as a result, we recorded a gain of $1.2 million on our Consolidated Statement of Operations related to the excess of the fair value of the net assets acquired over the acquisition price. This excess is referred to as a “bargain purchase.” This bargain purchase indicates that the fair value of the net assets acquired (which represents the price that the assets would be exchanged between a willing buyer and seller) was in excess of the amount for which we acquired such net assets. As a result of the bargain purchase, we reassessed the recognition and measurement of net identifiable assets acquired and determined the valuation procedures applied and resulting measurements of the net identifiable assets were appropriate. We believe the seller was motivated to complete the sale as part of its overall business strategy of exiting the market segment. The revenue and earnings of BLL from November 1, 2023 through December 31, 2023 totaled $1.4 million and $0.4 million, respectively.
The following table sets forth the purchase price allocation of BLL to the estimated fair value of assets acquired as of the acquisition date (in thousands):
As of Acquisition date | ||||||||
Purchase Price | ||||||||
Cash Paid to Sellers | $ | |||||||
Fair Value of Earn-out Provision | ||||||||
Total consideration | ||||||||
Purchase Price allocation | ||||||||
| Inventories, net | ||||||||
Accounts receivable | ||||||||
Property and equipment | ||||||||
Intangible assets, | ||||||||
Deferred tax liability | ( | |||||||
Fair value allocated to net assets acquired | ||||||||
| Bargain purchase gain | $ | ( | ||||||
The following unaudited pro forma combined financial information presents our results as if the BLL acquisition had occurred at the beginning of fiscal 2022 (in thousands):
| December 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
(unaudited) | ||||||||||||||
Revenue | $ | $ | ||||||||||||
Gross Profit | $ | $ | ||||||||||||
Net income (loss) | $ | $ | ( | |||||||||||
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Note 17. Perpetual Preferred Stock
Holders of shares of 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. Series A 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 Series A Preferred Stock for the past dividend periods and the dividend for the 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, Series A Preferred Stock may be subject to redemption. The Company may redeem the Series A Preferred Stock upon the occurrence of a change of control, subject to certain conditions. The Company may also voluntarily redeem some or all of the Series A Preferred Stock on or after September 10, 2024.
On February 17, 2023, May 19, 2023, August 17, 2023 and November 17, 2023 our board of directors declared cash dividends to holders of our Series A Preferred Stock of $0.25 1.9 million. The record dates for these dividends were March 1, 2023, June 1, 2023, September 1, 2023 and December 1, 2023, respectively, and the payment dates were March 10, 2023, June 10, 2023, September 11, 2023 and December 11, 2023, respectively. As of December 31, 2023, we have no preferred dividends in arrears.
On February 16, 2024, our board of directors declared a cash dividend to holders of our Series A Preferred Stock of $0.25 per share for an aggregate amount of approximately $0.5 million. The record date for this dividend was March 1, 2024, and the payment date was March 11, 2024.
A roll forward of the balance of Company Preferred Stock for the year ended December 31, 2023 is as follows (in thousands):
Balance at December 31, 2022 | $ | ||||
Dividend on Series A Preferred Stock | |||||
| Cash Dividend paid on Preferred Stock | ( | ||||
Balance at December 31, 2023 | $ | ||||
Note 18. Equity Transactions
On January 24, 2022, we closed a public offering (the “2022 Public Offering”) pursuant to an underwriting agreement with Maxim Group LLC (“Maxim”), as representative of the underwriters. Through the 2022 Public Offering, we issued and sold (A)(i) 9,175,000 shares of the Company’s Common Stock, (ii) an aggregate of 325,000 pre-funded warrants to purchase up to an aggregate of 325,000 shares of Common Stock, and (iii) an aggregate of 9,500,000 common stock purchase warrants (the “Firm Purchase Warrants”) to purchase up to 9,500,000 shares of Common Stock and (B) at the election of Maxim, (i) up to an additional 1,425,000 shares of Common Stock and/or (ii) up to an additional 1,425,000 shares of common stock purchase warrants (the “Option Purchase Warrants”, and together with the Firm Purchase Warrants, the “Warrants”). Maxim partially exercised its over-allotment option for the purchase of 1,425,000 Warrants for a price of $0.01 per Warrant. 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 Warrants, were $14.3 million and net proceeds were $12.7 million.
In addition, as part of the 2022 Public Offering, the Company issued to Maxim 237,500 common stock purchase warrants (the “Underwriter’s Warrants”) to purchase up to 237,500 shares of Common Stock at an exercise price of $1.65 per common warrant. The Underwriter’s Warrants have an initial exercise date beginning July 19, 2022, and no exercises have occurred as of December 31, 2023.
As of December 31, 2023, of the warrants issued through the public offering we closed on May 28, 2020 (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 of December 31, 2023, of the Warrants issued through the 2022 Public Offering, 0.3 million prefunded warrants were exercised and 10.9 million warrants remained outstanding at an exercise price of $1.50 . The Underwriter’s Warrants have not been exercised.
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Note 19. Preferred Stock Rights
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 Code. The board of directors authorized and declared a dividend distribution of one right for each outstanding share of common stock, par value $0.0001 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 $0.0001 per share (the “Series C Preferred Stock”), at an exercise price of $12.00 per one one-thousandth of a share of Series C Preferred Stock, subject to adjustment.
The rights will become exercisable following (i) 10 days after a public announcement that a person or group has become an Acquiring Person (as defined in the 382 Agreement); and (ii) 10 business days (or a later date determined by the board of directors) 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 4.99 % or more of common stock on terms not approved by the board of directors.
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ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
ITEM 9A.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on an evaluation under the supervision and with the participation of our management, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management's assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of BLL, which is included in the 2023 consolidated financial statements of the Company and constituted 2% of both total and net assets, as of December 31, 2023 and 3% of revenues and less than 1% of net income, for the year then ended.
Management’s Report on Internal Control over Financial Reporting
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Management conducted an assessment of the effectiveness of the Company's internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013 Framework). Based on this assessment, our management concluded that, as of December 31, 2023, our internal control over financial reporting was effective based on those criteria.
Changes in Internal Control over Financial Reporting
Except as described above, there were no changes 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 fourth quarter of 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Security Trading Plans of Directors and Executive Officers
None of the Company's directors or executive officers adopted terminated
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not Applicable.
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PART III
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our Board of Directors
The current number of directors on our board of directors is six. Under our bylaws, the number of directors on our board of directors will not be less than five, nor more than nine. The number of directors may be increased or decreased by resolution of the board of directors.
| Name | Age | Position | ||||||
| Jeffrey E. Eberwein | 53 | Director, Executive Chairman of the Board | ||||||
| Richard K. Coleman, Jr. | 67 | Director, Chief Executive Officer | ||||||
| Michael A. Cunnion | 53 | Director | ||||||
| John W. Sayward | 72 | Director | ||||||
| Mitchell I. Quain | 72 | Director | ||||||
John W. Gildea | 80 | Director | ||||||
Information about the Company’s Directors
Set forth below are descriptions of the backgrounds of each director and their principal occupations for at least the past five years and their public-company directorships. There are no family relationships among any of our directors or executive officers. All ages are as of March 22, 2024.
In addition to the information presented below regarding each director’s specific experience, qualifications, attributes and skills that led our board of directors to the conclusion that he should serve as a director, we also believe that all of our directors have a reputation for integrity, honesty and adherence to high ethical standards. They each have demonstrated business acumen and an ability to exercise sound judgment, as well as a commitment of service to Star Equity and our board of directors.
| Jeffrey E. Eberwein | Age 53 | Director since 2012 | ||||||
| Chief Executive Officer of Hudson Global Inc. (“Hudson”) and Executive Chairman of Star Equity | ||||||||
Mr. Eberwein was elected Executive Chairman of the board of directors of the Company on January 1, 2021, after serving as Chairman of the board of directors since February 6, 2013. Mr. Eberwein has served as a director of Hudson since May 2014 and as its Chief Executive Officer since April 1, 2018. He has 25 years of Wall Street experience, and has valuable public company and financial expertise gained through his employment history and directorships. Prior to founding Lone Star Value Management, LLC (“LSVM”), a Connecticut-based investment firm he founded in 2013, Mr. Eberwein was a private investor and served as a portfolio manager at Soros Fund Management from 2009 to 2011 and Viking Global Investors from 2005 to 2008. LSVM was a wholly owned subsidiary of ATRM Holdings, Inc. (“ATRM”) when ATRM, a modular building company, was acquired by the Company on September 10, 2019 (the “ATRM Acquisition”). Previously, Mr. Eberwein served as chairman of the board of Ameri Holdings, Inc. from May 2015 to August 2018. Mr. Eberwein also previously served as a director of Novation Companies, Inc. from April 2015 to March 2018; Crossroads Systems, Inc. from June 2013 to May 2016; NTS, Inc. from December 2012 to June 2014; On Track Innovations Ltd. from 2012 to 2014; and Goldfield Corporation from 2012 to 2013. Mr. Eberwein earned an M.B.A. from The Wharton School, University of Pennsylvania and a B.B.A. with High Honors from The University of Texas at Austin.
We believe Mr. Eberwein’s expertise in finance and experience in the investment community, along with his extensive experience, qualifications, attributes and skills make him well qualified to serve as a director of our Company.
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On February 14, 2017, the SEC issued an order (Securities Exchange Act Release No. 80038) (the “Order”) relating to allegations that certain groups of investors failed to properly disclose ownership information during a series of five campaigns to influence or exert control over microcap companies. The Order alleged violations of Section 13(d)(1) of the Exchange Act and Rule 13d-1 thereunder, Section 13(d)(2) of the Exchange Act and Rule 13d-2(a) thereunder and Section 16(a) of the Exchange Act and Rules 16a-2 and 16a-3 thereunder by Mr. Eberwein and a hedge fund adviser headed by him, LSVM, a mutual fund adviser and another investor. Without admitting or denying the findings, they consented to the Order and agreed to cease and desist from committing any violations of the above-referenced Exchange Act provisions and civil penalties of $90 thousand for Mr. Eberwein, $120 thousand for LSVM, $180 thousand for the mutual fund advisor and $30 thousand for the other investor. On February 24, 2020, the SEC issued an order (Securities Exchange Act Release No. 5448) (the “Advisers Act Order”) relating to allegations, among other things, that LSVM failed to properly disclose certain specific transactions in advance and obtain client consent for these transactions prior to their completion and that LSVM failed to implement certain written policies and procedures. The Advisers Act Order alleged violations of Section 206(3) and 206(4) of the Investment Advisers Act of 1940 (“Advisers Act”) and Rule 206(4)-7 thereunder by Mr. Eberwein and LSVM. Without admitting or denying the findings, they consented to the Advisers Act Order and agreed to cease and desist from committing or causing any violations of the above-referenced Advisers Act provisions, for LSVM to be censured and to pay civil penalties of $25 thousand for Mr. Eberwein and $100 thousand for LSVM.
Richard K. Coleman, Jr. | Age 67 | Director since 2022 | ||||||
Chief Executive Officer of Star Equity | ||||||||
Mr. Coleman was appointed as our Chief Executive Officer in April 2022. Prior to being appointed as our Chief Executive Officer, Mr. Coleman served as our Chief Operating Officer from January 2022 to March 2022. Mr. Coleman was formerly the President, Chief Executive Officer and director of Command Center, Inc., a provider of on-demand flexible employment solutions, from April 2018 to July 2019. He was also the Chairman of Hudson Global Inc., a global talent solutions company, from May 2014 to January 2022. He was the Principal Executive Officer of Crossroads Systems, Inc., a global provider of data archive solutions, from August 2017 to March 2018. Mr. Coleman began his career as an Air Force Telecommunications Officer managing Department of Defense R&D projects. He has also served as an adjunct professor for Regis University’s graduate management program and is a guest lecturer for Denver University’s Pioneer Leadership Program, focusing on leadership and ethics. Coleman holds a master’s degree in Business Administration from Golden Gate University and is a graduate of the United States Air Force Communications Systems Officer School. He holds a Bachelor of Science Degree from the United States Air Force Academy and also has completed leadership, technology, and marketing programs at Kansas University, UCLA, and Harvard Business School.
We believe Mr. Coleman’s extensive business development and operating expertise, his public company board experience, and his broad leadership experience make him well qualified to serve as a director of our Company.
| Michael A. Cunnion | Age 53 | Director since 2014 | ||||||
| Director and Advisor to Growth Companies | ||||||||
Committees: Audit, Compensation (Chairman), and Corporate Governance
Mr. Cunnion has an extensive history of leadership roles at healthcare media and communication companies. Since October 2022, Mr. Cunnion has served on the board of directors of Remedy Health Media, a privately held health media company. From September 2008 to September 2022, Mr. Cunnion served as Remedy Health Media’s Chief Executive Officer. In addition, prior to that, from January 2004 to December 2007, Mr. Cunnion was the President of privately held HealthTalk, a leading provider of tools and information for chronically ill patients and caregivers. Mr. Cunnion successfully built this company and subsequently sold it to Revolution Health in December 2007. Subsequent to this sale, Mr. Cunnion took on the role of Executive Vice President of Revolution Health, where he oversaw revenue and sales strategy until Revolution Health merged with Everyday Health. Prior to HealthTalk, from December 1998 to December 2003, Mr. Cunnion held the role of Senior Director, Consumer Marketing at WebMD, where he led consumer sales strategy, product development and advertising operations. Mr. Cunnion currently serves on the board of directors of Health-e-Commerce, a healthcare e-commerce platform that simplifies healthcare purchasing for consumers, employers and benefit administrators. This is a post that he has held since 2011. Mr. Cunnion earned a B.A. degree in English from Florida State University.
We believe that Mr. Cunnion’s extensive experience with media companies, coupled with his experience with building up companies and creating ownership value, are of significant strategic importance to us and make him well qualified to serve on our board of directors. His history of creating and leveraging collaborative relationships with the companies he has been part of to maximize value in both the continued organic growth and sale of such companies can be of great benefit to our stockholders.
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| John W. Sayward | Age 72 | Director since 2008 | ||||||
| Retired Partner, Nippon Heart Hospital LLC | ||||||||
Committees: Audit (Chairman) and Compensation
Mr. Sayward is a career healthcare and pharmaceutical executive. Most recently, he served as Chief Executive Officer for Hera Therapeutics Inc., a position he held through June 2015. Prior to this, Mr. Sayward served as the Chief Operating Officer and Chief Financial Officer of Hera Therapeutics Inc. since September 2014. Previously, he was Partner at Nippon Heart Hospital, LLC from September 2005 to January 2007, which was formed to build and manage cardiovascular care hospitals in Japan. From 2002 to 2005, Mr. Sayward was the Executive Vice President and Chief Financial Officer of LMA North America Inc., a medical device business focused on patient airway management. From 1996 to 2001, Mr. Sayward served as the Executive Vice President of Finance, Chief Financial Officer and Treasurer of SICOR Inc., and was elected to its board of directors in 1998. Previous to the above, he served in various management positions with Baxter Healthcare. He received a B.A. in History from Northwestern University in 1973 and a Master of Management from the Kellogg School of Management at Northwestern University in 1975.
We believe that Mr. Sayward’s extensive business experience in a variety of sectors makes him well qualified to serve on our board of directors. Further, Mr. Sayward’s depth and breadth of positions and experiences also makes him well qualified to serve as a financial expert and audit committee chairman.
| Mitchell I. Quain | Age 72 | Director since 2019 | ||||||
| Industrialist | ||||||||
Committees: Compensation and Corporate Governance (Chairman)
Mr. Quain joined the board of directors of the Company in January 2019 and became lead independent director on January 1, 2021. He has been a member of the Executive Council at American Securities since 2020, and was a Partner at One Equity Partners, a private equity investment firm, from 2010 to 2011. A Chartered Financial Analyst and “Financial Expert”, he serves on the board of directors of AstroNova, Inc., Kensington Acquisitions V, and Williams Industrial Holdings. Previously, he served on the boards of publicly traded DeCrane Aircraft Holdings, Inc., Handy & Harman Ltd., Hardinge, Inc., HEICO Corporation, Jason Industries, Kensington Acquisitions, MagneTek, Inc., Mechanical Dynamics, Inc., RBC Bearings, Inc., Strategic Distribution, Tecumseh Products Company, Titan International, Xerium, Inc., was Executive Chairman of the Board of Register.com and a Senior Advisor at Carlyle Group.
He is Chairman Emeritus of the Board of Overseers of The University of Pennsylvania’s School of Engineering and Applied Sciences and has served for 10 years on Penn’s Board of Trustees. He has served for 9 years on the Board and Executive Committee of Penn Medicine, a $4 billion enterprise. He is also a member of the Board of Trustees of Curry College, in Milton, Massachusetts. He is on the board of directors of the Palm Beach Zoological Society.
He was born and raised in the New York City area; received his B.S. in electrical engineering from the University of Pennsylvania in 1973 and his MBA with distinction from Harvard Business School in 1975.
He joined the research department of Wertheim & Company in June 1975, and chose machinery as his specialty, having worked for a summer at United Engineers & Contractors, in Philadelphia. He appeared on Institutional Investor magazine’s All American research team for fifteen years, “retiring” from research in 1995 while holding the “number one” ranking. Meanwhile, he became a partner in Wertheim in 1984, and in 1995 joined its operating committee, having assumed responsibility for the equity capital markets department. He left the firm in early 1997, joined Furman Selz as an Executive Vice President and a member of its board of directors. There he built Wall Street’s second industrial manufacturing group (“the Golden Gear”), having begun its first at Wertheim (“In Rust We Trust”). He left the “sellside” in 2001, retiring as Vice Chairman of ABN AMRO.
Mr. Quain brings to the board of directors experience in public company governance and investment experience in small-cap and industrial companies, which gives him a valuable perspective in his role as a director. His qualifications to serve as a director also include his private equity investment experience.
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| John W. Gildea | Age 80 | Director since 2021 | ||||||
Retired Principal, Gildea Management Company | ||||||||
Committees: Audit and Corporate Governance
Mr. Gildea brings over three decades of experience investing in special situation debt and equity of small to middle market companies. Previously, he was the founding partner of Gildea Management Company from 1984-2003, the general partner of The Network Funds. The fund focused on investing and sponsoring special situation investments in public and private companies, primarily in the United States. His previous experience includes a joint venture of Gildea Management with J.O. Hambro Capital Management Co. to manage accounts targeting high yield debt and small capitalization equities. He was also founder of Latona Europe, a joint venture based in Prague seeking restructuring opportunities in Central Europe. Before forming Gildea Management, Mr. Gildea managed the Corporate Services Group at Donaldson, Lufkin and Jenrette, an investment banking firm.
Throughout his extensive career, Mr. Gildea has served on a range of public and private corporate boards. Previously, he served on the board and board committees of the following companies: America Service Group, Inc.; Amdura Corp.; American Healthcare Management, Inc.; America Opportunities Fund; Country Pure Juice; Gentek, Inc.; General Chemical Group, Inc.; Hain Food Group, Inc.; International Textile Group, Inc.; Konover Property Trust, Inc.; Misonix, Inc.; Shearers Foods; Sothic Capital, Sterling Chemicals, Inc.; Trident North Atlantic Fund; and UNC, Inc. Mr. Gildea received a Bachelor of Arts degree from the University of Pittsburgh.
Mr. Gildea brings to the board of directors experience in public company governance and investment experience in small-cap and industrial companies, which gives him a valuable perspective in his role as a director. His qualifications to serve as a director also include his private equity investment experience.
Executive Officers
The names of our executive officers, their ages, their positions with Star Equity, and other biographical information as of March 22, 2024, are set forth below. There are no family relationships among any of our directors or executive officers.
| Name | Age | Position | ||||||||||||
Jeffrey E. Eberwein | 53 | Director, Executive Chairman of the Board of Directors | ||||||||||||
| Richard K. Coleman, Jr. | 67 | Chief Executive Officer | ||||||||||||
| David J. Noble | 53 | Chief Financial Officer | ||||||||||||
Thatcher Butcher | 42 | President of KBS Builders, Inc. | ||||||||||||
Jeffrey E. Eberwein. Mr. Eberwein’s full biographical information is provided above under the heading “Information about the Company’s Directors.”
Richard K. Coleman, Jr. Mr. Coleman’s full biographical information is provided above under the heading “Information about the Company’s Directors.”
David J. Noble was appointed as our Chief Financial Officer in July 2019. Prior to being appointed as our Chief Financial Officer, Mr. Noble served as our Chief Operating Officer from September 2018 to January 2022 and as our Interim Chief Financial Officer from January 2019 to July 2019. Prior to joining the Company, Mr. Noble served as Managing Member of Noble Point LLC, a business and financial advisory firm. From July 2005 through September 2017, Mr. Noble was a senior investment banker at HSBC, serving as Managing Director & Head of Equity Capital Markets for the Americas for more than a decade. Prior to joining HSBC, Mr. Noble held various senior roles within Equity Capital Markets at Lehman Brothers, both in the U.S. and overseas, from August 1997 to July 2005. In his 20-year Wall Street career, Mr. Noble was involved in hundreds of equity transactions across a wide range of sectors, including healthcare, industrials, financial services, media, technology, and energy, among others. Mr. Noble earned a B.A. degree in Political Science from Yale University in 1992 and an M.B.A. in Finance from MIT’s Sloan School of Management in 1997.
Thatcher Butcher was appointed as President of KBS Builders, Inc. in May 2022. Prior to joining the Company, Mr. Butcher served as the General Manager, Mid Atlantic Division at Anthony & Sylvan Pools from September 2018 to May 2022. Prior to that, Mr. Butcher worked as Truss and Engineered Lumber Division General Manager at TW Perry from December 2009 to September 2018. Prior to joining TW Perry, Mr. Butcher held various other positions with Rocky Top Building products and Best Building Components. Mr. Butcher studied Architectural Design & Building technology at the State University of New York and completed coursework in Architecture at Clemson University. He has also completed General Management and Leadership Development training at George Mason University.
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Director Nomination Process
During the fiscal year ended December 31, 2023, we made no material changes to the procedures by which stockholders may recommend nominees to our board of directors, as described in our most recent proxy statement.
Audit Committee
The audit committee of the board of directors (the “Audit Committee”), established in accordance with Section 3(a)(58)(A) of the Exchange Act, consists of Messrs. Gildea, Cunnion, and Sayward, with Mr. Sayward serving as chairman. All members of the Audit Committee (i) are independent directors (as currently defined in Rule 5605(a)(2) of the Nasdaq listing rules); (ii) meet the criteria for independence set forth in Rule 10A-3(b)(1) under the Exchange Act; (iii) have not participated in the preparation of the financial statements of the Company or any current subsidiary of the Company at any time during the past three years; and (iv) are able to read and understand fundamental financial statements. Mr. Sayward qualifies as an “audit committee financial expert” as defined in the rules and regulations established by the SEC. The Audit Committee is governed by a written charter approved by our board of directors.
Compensation Committee
The compensation committee of the board of directors (the “Compensation Committee”) consists of Messrs. Cunnion, Sayward, and Gildea with Mr. Cunnion serving as chairman. All members of the Compensation Committee are independent, as determined under the various Nasdaq, SEC and Internal Revenue Service qualification requirements. The Compensation Committee is governed by a written charter approved by our board of directors. The functions of this committee include, among other things reviewing and, as it deems appropriate, recommending to our board of directors, policies, practices, and procedures relating to the compensation of our directors, officers and other managerial employees and the establishment and administration of our employee benefit plans; establishing appropriate incentives for officers, including the chief executive officer, to encourage high performance, promote accountability and adherence to company values and further our long-term strategic plan and long-term value; and exercising authority under our employee benefit plans.
Corporate Governance Committee
The corporate governance committee of the board of directors (the “Corporate Governance Committee”) consists of Messrs. Cunnion, Gildea and Quain with Mr. Quain serving as chairman. The functions of the Corporate Governance Committee include, among other things: reviewing and recommending nominees for election as directors, assessing the performance of our board of directors, developing guidelines for the composition of our board of directors, reviewing and administering our corporate governance guidelines and considering other issues relating to corporate governance; and oversight of the Company compliance officer and compliance with the Ethics Code. The Corporate Governance Committee is governed by a written charter (the “Corporate Governance Committee Charter”) approved by our board of directors. A copy of the Corporate Governance Committee Charter can be found by clicking on the “Corporate Governance” link under the Investors tab on our website at www.starequity.com. All members of the Corporate Governance Committee are independent directors (as defined in Rule 5605(a)(2) of the Nasdaq listing rules).
Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act requires Star Equity’s directors, executive officers and holders of more than 10% of its common stock to file with the SEC reports (typically, Forms 3, 4, and/or 5) regarding their ownership and changes in ownership of Star Equity’s securities. Based solely on a review of Forms 3, 4, and 5 and amendments thereto filed with the SEC, we believe that during the fiscal year ended December 31, 2023, Star Equity’s directors, officers and 10% stockholders have complied with all applicable Section 16(a) filing requirements, except for one Form 4 that was inadvertently filed late on behalf of David Noble, the Company’s Chief Financial Officer, reporting one transaction.
Code of Business Ethics and Conduct
We have adopted a Code of Business Ethics and Conduct (“Ethics Code”) that applies to all our officers, directors, employees, and contractors. The Ethics Code contains general guidelines for conducting our business consistent with the highest standards of business ethics and compliance with applicable law, and is intended to qualify as a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and Item 406 of Regulation S-K. Day-to-day compliance with the Ethics Code is overseen by the Company compliance officer appointed by our board of directors. If we make any substantive amendments to the Ethics Code or grant any waiver from a provision of the Ethics Code to any director or executive officer, we will promptly disclose the nature of the amendment or waiver on our website at www.starequity.com.
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ITEM 11.EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides information regarding the compensation earned during the fiscal years ended December 31, 2023 and 2022 by our principal executive officer and our two other most highly compensated executive officers (the “named executive officers”) who were serving as executive officers as of December 31, 2023.
| Name and Principal Position | Year | Salary ($) (1) | Bonus ($) (2) | Stock Awards ($) (3) | Nonequity Incentive Plan Compensation ($) | All Other Compensation ($) (4) | Total ($) | |||||||||||||||||||||||||||||||||||||
Richard K. Coleman* | 2023 | 400,000 | 185,000 | 74,000 | — | 2,500 | 661,500 | |||||||||||||||||||||||||||||||||||||
Chief Executive Officer | 2022 | 382,773 | — | 100,001 | — | 2,500 | 485,274 | |||||||||||||||||||||||||||||||||||||
David J. Noble | 2023 | 325,000 | 125,000 | 50,000 | — | 4,000 | 504,000 | |||||||||||||||||||||||||||||||||||||
| Chief Financial Officer | 2022 | 322,503 | 78,000 | — | — | 3,500 | 404,003 | |||||||||||||||||||||||||||||||||||||
Thatcher Butcher | 2023 | 250,016 | 106,731 | 21,347 | — | 1,017 | 379,111 | |||||||||||||||||||||||||||||||||||||
President of KBS Builders, Inc. | 2022 | 158,664 | 500 | — | — | 1,017 | 160,181 | |||||||||||||||||||||||||||||||||||||
__________________
* Effective April 1, 2022, Richard K. Coleman, Jr. was appointed as the Company’s Chief Executive Officer.
(1)The base salary for each executive is initially established through negotiation at the time the executive is hired, and year-to-year adjustments are made, taking into account attributes and factors described below in the Narrative Disclosure to Summary Compensation Table. Based on the factors discussed above, 2022 base salaries were as follows: Mr. Coleman’s 2023 base salary was $400,000, which has not been adjusted since it was initially set in April 2022; the total salary for 2023 was $400,000; Mr. Noble’s 2023 base salary was $325,000, which was initially set at $300,000 from his last adjustment in 2018; the total salary for 2023 was $325,000; Mr. Butcher’s 2023 base salary was initially set at $250,016, the total for 2023 was $250,016. The differences between base and actual salary are due to pay period timing differences at year end.
(2)The executive incentive plan which provides for bonuses at the completion of each fiscal year is described below in the Narrative Disclosure to Summary Compensation Table.
(3)Represents full fair value at grant date of restricted stock units (“RSUs”), including the stock awards with performance conditions (“PSUs”) described below, representing the right to receive, at settlement, common stock of the Company, granted to our named executive officers, computed in accordance with FASB ASC Topic 718, Stock Compensation. The full grant date fair value of an equity award is the maximum value that may be received over the vesting period if all vesting conditions are satisfied, as discussed further below. Thus, there is no assurance that the value, if any, eventually received by our executive officers will correspond to the amount shown. For information regarding assumptions made in connection with this valuation, please see Note 11. Share-Based Compensation within the notes to our consolidated financial statements.
(4)Amounts shown for 2023 and 2022 include up to $2,500 matching contributions to the executives’ 401(k) retirement plans and up to $1,500 seed contribution to the executive’s Health Savings Account plans.
Narrative Disclosure to Summary Compensation Table.
Base Salary. The base salary for each executive is initially established through negotiation at the time the executive is hired, taking into account his or her scope of responsibilities, qualifications, experience, prior salary, and competitive salary information within the industry. Year-to-year adjustments to each executive officer’s base salary are determined by an assessment of his or her sustained performance against individual goals, including leadership skills and the achievement of high ethical standards, the individual’s impact on the Company’s business and financial results, current salary in relation to the salary range designated for the job, experience, demonstrated potential for advancement, and an assessment against base salaries paid to executives for comparable jobs in the marketplace.
When determining the base salary component of executive compensation for 2023, the Compensation Committee considered the achievements of the executives in 2022 based on actual financial performance of the business and achievement of the goals set by the board of directors for the individual executive, the fiscal 2023 budget and financial performance expectations, the totality of all compensation components. After due consideration, the Compensation Committee set compensation as reflected in the Summary Compensation Table above.
Annual Incentive Bonus. Payments under the Company’s executive bonus plan are based on achieving clearly defined, short-term goals. We believe that such bonuses provide incentive to achieve goals that the Company aligns with its stockholders’ interests by measuring the achievement of these goals, whenever possible, in terms of revenue, income or other financial objectives. In setting bonus levels, the Company reviews its annual business plan and financial performance objectives. After estimating the likely financial results of the business plan as submitted by management and approved by the board of directors, the Company sets financial threshold goals based on those estimated results primarily in terms of EBITDA. The Company sets the minimum performance thresholds that must be reached before any bonus is paid at levels that will take significant effort and skill to achieve. An executive officer’s failure to meet some or all of these personal goals can affect his or her bonus amount. The Company believes that offering significant potential income in the form of bonuses allows the Company to attract and retain executives and to align their interests with those of the Company’s stockholders. The Company awards incentive bonuses based on the metrics described above which provided for discretionary bonuses.
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Fiscal Year 2023. In July 2023, the Company approved and adopted the fiscal year 2023 Executive Incentive Plan (“2023 Annual Plan”) for executive officers. Due to the changing nature of the Company’s business following the sale of Digirad, the 2023 Annual Plan challenged the Company’s executive team to achieve the company’s financial objectives and develop a platform for future organic growth and acquisitions. Actual cash bonus payments under the plan were based on a combination of corporate, team, and individual performance against pre-defined objectives with final payments determined by the Compensation Committee.
The cash bonus amounts under the 2023 Annual Plan were as follows.
Name and Principal Position* | Percentage of Base Salary | Bonus Payout | ||||||||||||
Richard K. Coleman, Chief Executive Officer | 46 | % | 185,000 | |||||||||||
David J. Noble, Chief Financial Officer and Chief Operating Officer | 38 | % | 125,000 | |||||||||||
Thatcher Butcher, President of KBS Builders, Inc. | 43 | % | 106,731 | |||||||||||
Equity Grants
In connection with the adoption of the 2023 Annual Plan, the Compensation Committee determined, as part of a long-term retention mechanism and to incentivize the executive officers to increase the Company’s stockholder value, to award RSUs effective on March 1, 2023 July 27, 2023 August 16, 2023, November 13, 2023 (the “2023 Grant Dates”) to Messrs. Coleman, Noble and Butcher.
The RSUs granted to each of Messrs. Coleman, Noble and Butcher vest over three years in three equal installments, with each such installment vesting on each anniversary of the 2023 Grant Dates. The RSU grants to Messrs. Coleman, Noble and Butcher were made pursuant to and subject to the terms of the 2023 Annual Plan, the Company’s 2018 Incentive Plan, and the respective award agreement that sets forth the terms of the respective grants.
Name and Principal Position | Cash Value of the Restricted Stock Units Granted | |||||||
Richard K. Coleman, Chief Executive Officer | 74,000 | |||||||
David J. Noble, Chief Financial Officer | 50,000 | |||||||
Thatcher Butcher, President of KBS Builders, Inc. | 21,347 | |||||||
Other Compensation
The Company currently maintains benefits for executive officers, that include medical, dental, vision and life insurance coverage and the ability to contribute to a 401(k) retirement plan; however, the Compensation Committee in its discretion may revise, amend or add to the officer's executive benefits if it deems it advisable. The benefits currently available to the executive officers are also available to other employees.
Outstanding Equity Awards at Fiscal Year-End
The following table presents the outstanding equity awards held by each of the named executive officers as of the fiscal year ended December 31, 2023, including the value of the stock awards.
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| Name | Option Awards | Stock Awards | ||||||||||||||||||||||||||||||
| Grant Date | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Option Exercise Price ($) | Option Expiration Date | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) | ||||||||||||||||||||||||||
Richard K. Coleman | 1/1/2022 | (1) | — | — | — | — | 25,512 | 26,788 | ||||||||||||||||||||||||
| 7/27/2023 | (1) | 75,773 | 79,562 | |||||||||||||||||||||||||||||
| David J. Noble | 8/23/2021 | (1) | — | — | — | — | 8,333 | 8,750 | ||||||||||||||||||||||||
| 7/27/2023 | (1) | — | — | — | — | 51,198 | 53,758 | |||||||||||||||||||||||||
Thatcher Butcher | 3/1/2023 | (1) | — | — | — | — | 25,719 | 27,005 | ||||||||||||||||||||||||
____________________
(1)33-1/3% of the units vest annually on the anniversary of the grant date over a three-year period.
(2)100% of the units vest annually on the anniversary of the grant date.
Potential Payments Upon Termination or Change of Control
Richard K. Coleman, Jr.
On December 16, 2021, the Company hired Richard K. Coleman, Jr. to serve as the Company’s Chief Operating Officer, effective January 1, 2022. Effective April 1, 2022, the Company entered into an amended employment agreement with Mr. Coleman (the “Coleman Employment Agreement”), pursuant to which Mr. Coleman serves as Chief Executive Officer of the Company.
Pursuant to the Coleman Employment Agreement, Mr. Coleman can be terminated for “cause,” upon death, upon disability and without “cause.” Under the Coleman Employment Agreement, termination for “cause” generally means the termination of Mr. Coleman’s employment by reason of: (A) the willful failure of Mr. Coleman to perform his duties and obligations in any material respect (other than any failure resulting from his disability), (B) intentional acts of dishonesty or willful misconduct by Mr. Coleman with respect to the Company, (C) arrest or conviction of a felony or violation of any law involving dishonesty, disloyalty, moral turpitude, or fraud, or entry of a plea of guilty or nolo contendere to such charge, (D) Mr. Coleman’s commission at any time of any act of fraud, embezzlement or willful misappropriation of material Company property, (E) repeated refusal to perform the reasonable and legal instructions of the board of directors, (F) willful and material breach of his obligations under any material agreement entered into between Mr. Coleman and the Company or any of its affiliates, or willful and material breach of the Company’s polices or procedures which causes material damage to the Company, its business or reputation, provided that for subsections (A), (E), and (F), if the breach reasonably may be cured, Mr. Coleman has been given at least thirty (30) days after his receipt of written notice of such breach from the Company to cure such breach. Termination without “cause” means termination for any reason other than death, disability, for “cause,” or for no reason at all, upon sixty (60) days’ written notice.
The Coleman Employment Agreement provides for termination of Mr. Coleman’s employment upon his election by voluntary resignation or termination for good reason. Termination by voluntary resignation means Mr. Coleman can terminate his employment with the Company at any time and for any reason whatsoever or for no reason at all in his sole discretion upon giving sixty (60) days’ written notice. A termination for good reason means Mr. Coleman can terminate his employment with the Company pursuant to the occurrence of any of the following events: (i) any material diminution in his authority, duties and responsibilities, (ii) any material reduction of his base salary, aggregate incentive compensation opportunities or aggregate benefits, unless such changes are applied to all members of the Company’s leadership team and amount to less than a 10% reduction in total, or (iii) a material breach by the Company of the Coleman Employment Agreement. In addition, either the Company or Mr. Coleman can deliver to the other party a written notice of non-renewal at least sixty (60) days prior to the applicable renewal date of the Coleman Employment Agreement.
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In the event Mr. Coleman voluntarily resigns, is terminated for “cause,” is terminated upon death, or is terminated upon disability, he would be entitled to receive: (i) his then current salary accrued up to and including the date of termination or resignation, (ii) unreimbursed expenses, and (iii) any vested payment or accrued benefits under any equity or Company benefit plan (the “Coleman Accrued Obligations”). All RSU awards under the Coleman Employment Agreement vest one-third on each of the first, second and third anniversaries of the grant date.
In the event Mr. Coleman terminates his employment for good reason, his employment is terminated without “cause,” or his employment is terminated by delivery of a non-renewal notice by the Company, he would be entitled to receive: (i) the Coleman Accrued Obligations (described above), (ii) a target bonus based on the target bonus metrics used to determine actual performance at the end of the fiscal year, but prorated to reflect the number of full months worked during the fiscal year, (iii) immediate vesting of any RSUs awarded under the Coleman Employment Agreement for which the performance period has not been completed as of the date of termination based on the level of achievement of the performance goals at the end of the performance period, but pro-rated based on the number of full months worked during the performance period, and (iv) immediate vesting of any RSUs awarded under the Coleman Employment Agreement which are outstanding as of the date of termination. Notwithstanding the foregoing, if within twelve (12) months following a change of control (as defined in the Coleman Employment Agreement), the Company terminates Mr. Coleman’s employment without “cause,” he resigns from his employment with good reason, or his employment terminates due to Company’s delivery of a non-renewal notice, then the bonus payment under (ii) above shall equal the equivalent of his target bonus without proration and, in addition to (iii) and (iv) above, he shall receive (v) twelve months of his then-current base salary.
David J. Noble
On October 31, 2018, the Company entered into an employment agreement with David J. Noble, which was amended and restated on December 22, 2021 (the “Noble Employment Agreement”). On this same date, Mr. Noble agreed to relinquish the role of Chief Operating Officer, while retaining the position of Chief Financial Officer effective January 1, 2022.
Pursuant to the Noble Employment Agreement, Mr. Noble can be terminated for “cause,” upon death, upon disability and without “cause.” Under the Noble Employment Agreement, termination for “cause” generally means the termination of Mr. Noble’s employment by reason of: (A) the willful failure of Mr. Noble to perform his duties and obligations in any material respect (other than any failure resulting from his disability), (B) intentional acts of dishonesty or willful misconduct by Mr. Noble with respect to the Company, (C) arrest or conviction of a felony or violation of any law involving dishonesty, disloyalty, moral turpitude, or fraud, or entry of a plea of guilty or nolo contendere to such charge, (D) Mr. Noble’s commission at any time of any act of fraud, embezzlement or willful misappropriation of material Company property, (E) repeated refusal to perform the reasonable and legal instructions of the board of directors, (F) willful and material breach of his obligations under any material agreement entered into between Mr. Noble and the Company or any of its affiliates, or willful and material breach of the Company’s polices or procedures which causes material damage to the Company, its business or reputation, provided that for subsections (A), (E), and (F), if the breach reasonably may be cured, Mr. Noble has been given at least thirty (30) days after his receipt of written notice of such breach from the Company to cure such breach. Termination without “cause” means termination for any reason other than death, disability, for “cause,” or for no reason at all, upon sixty (60) days’ written notice.
The Noble Employment Agreement provides for termination of Mr. Noble’s employment upon his election by voluntary resignation or termination for good reason. Termination by voluntary resignation means Mr. Noble can terminate his employment with the Company at any time and for any reason whatsoever or for no reason at all in his sole discretion upon giving sixty (60) days’ written notice. A termination for good reason means Mr. Noble can terminate his employment with the Company pursuant to the occurrence of any of the following events: (i) any material diminution in his authority, duties and responsibilities, (ii) any material reduction of his base salary, aggregate incentive compensation opportunities or aggregate benefits, unless such changes are applied to all members of the Company’s leadership team and amount to less than a 10% reduction in total, or (iii) a material breach by the Company of the Noble Employment Agreement. In addition, either the Company or Mr. Noble can deliver to the other party a written notice of non-renewal at least sixty (60) days prior to the applicable renewal date of the Noble Employment Agreement.
In the event Mr. Noble voluntarily resigns, is terminated for “cause,” is terminated upon death, or is terminated upon disability, he would be entitled to receive: (i) his then current salary accrued up to and including the date of termination or resignation, (ii) unreimbursed expenses, and (iii) any vested payment or accrued benefits under any equity or Company benefit plan (the “Noble Accrued Obligations”). In March 2021, Mr. Noble agreed by letter that all future RSU awards under the Noble Employment Agreement would vest one-third on each of the first, second and third anniversaries of the grant date
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In the event Mr. Noble terminates his employment for good reason, his employment is terminated without “cause,” or his employment is terminated by delivery of a non-renewal notice by the Company, he would be entitled to receive: (i) the Noble Accrued Obligations (described above), (ii) a target bonus based on the target bonus metrics used to determine actual performance at the end of the fiscal year, but prorated to reflect the number of full months worked during the fiscal year, (iii) immediate vesting of any RSUs awarded under the Noble Employment Agreement for which the performance period has not been completed as of the date of termination based on the level of achievement of the performance goals at the end of the performance period, but pro-rated based on the number of full months worked during the performance period, and (iv) immediate vesting of any RSUs awarded under the Noble Employment Agreement which are outstanding as of the date of termination. Notwithstanding the foregoing, if within twelve (12) months following a change of control (as defined in the Noble Employment Agreement), the Company terminates Mr. Noble’s employment without “cause,” he resigns from his employment with good reason, or his employment terminates due to Company’s delivery of a non-renewal notice, then the bonus payment under (ii) above shall equal the equivalent of his target bonus without proration and, in addition to (iii) and (iv) above, he shall receive (v) twelve months of his then-current base salary.
If Mr. Noble’s employment was terminated in connection with a change of control as of December 31, 2022, he would have been entitled to receive: (i) a cash payment in the amount of $300,000, (ii) and immediate vesting of certain equity awards.
Thatcher Butcher
On April 19, 2022, the Company entered into an employment agreement with Thatcher Butcher (the “Butcher Employment Agreement”), pursuant to which Mr. Butcher serves as “President - KBS Builders, Inc.” Pursuant to the Butcher Employment Agreement, Mr. Butcher can be terminated for “cause,” upon death, upon disability and without “cause.” Under the Butcher Employment Agreement, termination for “cause” generally means the termination of Mr. Butcher’s employment by reason of: (A) the willful failure of Mr. Butcher to perform his duties and obligations in any material respect (other than any failure resulting from his disability), (B) intentional acts of dishonesty or willful misconduct by Mr. Butcher with respect to the Company, (C) arrest or conviction of a felony or violation of any law involving dishonesty, disloyalty, moral turpitude, or fraud, or entry of a plea of guilty or nolo contendere to such charge, (D) Mr. Butcher’s commission at any time of any act of fraud, embezzlement or willful misappropriation of material Company property, (E) repeated refusal to perform the reasonable and legal instructions of the board of directors, (F) willful and material breach of his obligations under any material agreement entered into between Mr. Butcher and the Company or any of its affiliates, or willful and material breach of the Company’s polices or procedures which causes material damage to the Company, its business or reputation, provided that for subsections (A), (E), and (F), if the breach reasonably may be cured, Mr. Butcher has been given at least thirty (30) days after his receipt of written notice of such breach from the Company to cure such breach. Termination without “cause” means termination for any reason other than death, disability, for “cause,” or for no reason at all, upon sixty (60) days’ written notice.
The Butcher Employment Agreement provides for termination of Mr. Butcher’s employment upon his election by voluntary resignation or termination for good reason. Termination by voluntary resignation means Mr. Butcher can terminate his employment with the Company at any time and for any reason whatsoever or for no reason at all in his sole discretion upon giving sixty (60) days’ written notice. A termination for good reason means Mr. Butcher can terminate his employment with the Company pursuant to the occurrence of any of the following events: (i) any material diminution in his authority, duties and responsibilities, (ii) any material reduction of his base salary, aggregate incentive compensation opportunities or aggregate benefits, unless such changes are applied to all members of the Company’s leadership team and amount to less than a 10% reduction in total, or (iii) a material breach by the Company of the Butcher Employment Agreement. In addition, either the Company or Mr. Butcher can deliver to the other party a written notice of non-renewal at least sixty (60) days prior to the applicable renewal date of the Butcher Employment Agreement.
In the event Mr. Butcher voluntarily resigns, is terminated for “cause,” is terminated upon death, or is terminated upon disability, he would be entitled to receive: (i) his then current salary accrued up to and including the date of termination or resignation, (ii) unreimbursed expenses, and (iii) any vested payment or accrued benefits under any equity or Company benefit plan (the “Butcher Accrued Obligations”).
In the event Mr. Butcher terminates his employment for good reason, his employment is terminated without “cause,” or his employment is terminated by delivery of a non-renewal notice by the Company, he would be entitled to receive: (i) the Butcher Accrued Obligations (described above), (ii) a target bonus based on the target bonus metrics used to determine actual performance at the end of the fiscal year, but prorated to reflect the number of full months worked during the fiscal year, (iii) salary continuation for a period of six months in accordance with the Company’s then established payroll practices, provided that payments of the consideration in (ii) and (iii) are subject to Mr. Butcher’s execution and delivery of a customary general release (that is no longer subject to revocation under applicable law) of the Company, its parents, subsidiaries and affiliates and each of their respective officers, directors, employees, agents, successors and assigns.
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Equity Awards
The equity agreements of our named executive officers provide that, in case of a change of control of the Company, all equity instruments then outstanding but neither assumed nor replaced by the successor entity shall vest immediately upon the change of control event. Further, if an executive’s employment is terminated without cause within twelve (12) months of the change of control, all equity instruments then outstanding, either assumed or replaced, shall become fully vested at the time of termination. As of December 31, 2023, the value of the equity instruments of our named executive officers that would accelerate upon (i) termination without cause within twelve (12) months of a change of control in which stock options and restricted stock units are assumed or replaced by the successor entity, or (ii) a change of control in which the outstanding stock options and restricted stock units are neither assumed or replaced by the successor entity, would be as follows based on the difference between the closing price on the last trading day of the year of $1.05 per share and the exercise price of the respective options, and with regard to restricted stock units, based solely on the closing price on the last trading day of the year of $1.05:
| Name | Stock Award Value as of December 31, 2023 | |||||||
Richard K. Coleman | 74,000 | |||||||
| David J. Noble | 50,000 | |||||||
Thatcher Butcher | 21,347 | |||||||
COMPENSATION OF DIRECTORS
Annual Retainer
Non-employee members of our board of directors are paid an annual retainer for their service, with additional compensation for being the chairperson of the board, serving on a committee of the board of directors and chairing a committee of the board of directors. Payments are made quarterly.
The compensation paid to the members of our board of directors is indicated in the chart below:
2023 Director Compensation | ||||||||
Director Annual Retainer (all) (1) | $ | 72,000.00 | ||||||
Additional Annual Retainer to Executive Chairperson | $ | 100,000.00 | ||||||
| Additional Annual Retainer to Audit Committee Chairperson | $ | 25,000.00 | ||||||
| Additional Annual Retainer to Compensation Committee Chairperson | $ | 15,000.00 | ||||||
| Additional Annual Retainer to Corporate Governance Committee Chairperson | $ | 10,000.00 | ||||||
| Additional Annual Retainer to Audit Committee Member | $ | 5,000.00 | ||||||
| Additional Annual Retainer to Compensation Committee Member | $ | 5,000.00 | ||||||
| Additional Annual Retainer to Corporate Governance Committee Member | $ | 5,000.00 | ||||||
(1)Due to the limitation in the RSUs available for issuance, in August 2022, the Compensation Committee of our board of directors elected to suspend all RSU compensation and to provide compensation to all Directors
(2)In August 2023, the Compensation Committee of our board of directors elected to pay compensation to Directors in both cash and RSUs
For the sake of clarity, in fiscal year ended December 31, 2023, each of the Audit Committee, the Compensation Committee, the Corporate Governance Committee, and the Strategic Advisory Committee chairpersons received a chairperson fee in addition to the retainer fee set forth in the table above.
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Equity Compensation
Equity compensation awards, and the amount of such awards, to non-employee members of our board of directors are at the discretion of the Compensation Committee of our board of directors. Historically, such awards have been in the form of RSUs and the Compensation Committee generally set the amount of those awards at a fair market value equal to the annual cash retainer received by non-employee members of our board of directors (the “Retainer Awards”). We believe that equity compensation helps to further align the interests of our directors with those of our stockholders because the value of directors’ share ownership will rise and fall with that of our other stockholders. In March 2021, the Compensation Committee elected to end the separate annual equity awards described above and to instead increase the size of the Retainer Awards to quarterly awards of RSUs having a fair market value (as defined in the 2023 Annual Plan) of $18,000 each. Due to the limitation in the RSUs available for issuance, in August 2022, the Compensation Committee elected to temporarily suspend all RSU compensation and to provide compensation to all Directors in cash. Beginning with the second quarter of 2023, the Compensation Committee determined to begin paying equity compensation awards partially in RSUs and partially in cash.
Director Compensation Table
The following table sets forth summary information concerning compensation paid or accrued for services rendered to us in all capacities to the non-employee members of our board of directors for the fiscal year ended December 31, 2023.
| Fees Paid in Cash ($) | Stock Awards ($) (1) | All Other Compensation ($) | Total ($) | |||||||||||||||||||||||
Jeffrey E. Eberwein | $ | 129,800 | $ | 17,200 | — | $ | 147,000 | |||||||||||||||||||
John Gildea | 78,300 | 8,700 | — | 87,000 | ||||||||||||||||||||||
| Michael A. Cunnion | 87,300 | 9,700 | — | 97,000 | ||||||||||||||||||||||
| John W. Sayward | 91,800 | 10,200 | — | 102,000 | ||||||||||||||||||||||
| Mitchell I. Quain | 73,800 | 8,200 | — | 82,000 | ||||||||||||||||||||||
____________________
(1)Represents full fair value at grant date of restricted stock units granted to our directors, computed in accordance with FASB ASC Topic 718.
PAY VERSUS PERFORMANCE
Pay Versus Performance
As required by Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(v) of Regulation S-K, the following table sets forth information concerning the compensation of our principal executive officer, or “PEO,” and, on an average basis, the compensation of our other named executive officers, or “NEOs,” for each of the fiscal years ending December 31, 2023, 2022 and 2021, as such compensation relates to our financial performance for each such fiscal year.
| Jeffrey E. Eberwein | Richard K. Coleman, Jr. | Value of Initial Fixed $100 Investment(4) Based on: | ||||||||||||||||||||||||||||||
| Year | Summary Compensation Table Total for PEO | Compensation Actually Paid to PEO(1)(2) | Summary Compensation Table Total for PEO | Compensation Actually Paid to PEO(1)(2) | Average Summary Compensation Table Total for Non-PEO NEO's(3) | Average Compensation Actually Paid to Non-PEO NEO's(1)(3) | Total Shareholder Return | Peer Group Total Shareholder Return | Net Income (in thousands) | Company - Selected Measure | ||||||||||||||||||||||
| 2023 | $147,000 | — | $661,500 | $587,500 | $441,556 | $405,882 | $105 | * | $25,132 | * | ||||||||||||||||||||||
| 2022 | $179,500 | 36,000 | $485,274 | $385,273 | $282,092 | $282,092 | $85 | * | $(5,252) | * | ||||||||||||||||||||||
| 2021 | $78,000 | — | N/A | N/A | $322,924 | $431,887 | $255 | * | $(2,983) | * | ||||||||||||||||||||||
* Not required for smaller reporting companies
(1) Compensation actually paid is defined in Item 402(v)(2)(iii) of Regulation S-K. The following table details the applicable adjustments that were made to determine compensation actually paid”:
(2) During 2021 through March 31, 2022, our PEO was Jeffrey E. Eberwein, and Richard K. Coleman, Jr. was appointed as Chief Executive Officer and PEO effective as of April 1, 2022.
(3) The non-PEO NEOs in the 2023 reporting year were David J. Noble and Thatcher Butcher. The non-PEO NEOs in the 2022 reporting year were David J. Noble and Martin Shirley. The non-PEO NEOs in the 2021 reporting year were David J. Noble and Matthew G. Molchan.
(4) Total Shareholder Return assumes $100 was invested on December 31, 2020.
74
Analysis of the Information Presented in the Pay Versus Performance Table
As described in more detail in “Executive Compensation” above, the Company’s executive compensation practices reflect a comprehensive assessment of several compensation components, including actual financial performance of the business. While the Company utilizes several performance measures to align executive compensation with Company performance, all of those measures are not presented in the Pay Versus Performance table. Moreover, the Company generally seeks to incentivize long-term performance and, therefore, does not specifically align the Company’s performance measures with compensation that is actually paid (as computed in accordance with SEC rules) for a particular year. In accordance with SEC rules, the Company is providing the following descriptions of the relationships between information presented in the Pay Versus Performance table. The following charts set forth the relationship between compensation actually paid and the Company’s cumulative TSR and between compensation actually paid and the Company’s net income.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of March 7, 2024 regarding the beneficial ownership of our common stock by (i) each person we know to be the beneficial owner of 5% or more of our common stock, (ii) each of our current named executive officers, (iii) each of our directors, and (iv) all of our current executive officers and directors as a group. Information with respect to beneficial ownership has been furnished by each director, executive officer or 5% or more stockholder, as the case may be. The address for all executive officers and directors is c/o Star Equity Holdings, Inc., 53 Forest Avenue Suite 101, Old Greenwich, Connecticut 06870.
Percentage of beneficial ownership is calculated based on 15,848,202 shares of common stock outstanding as of March 7, 2024. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission which generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities and includes shares of our common stock issuable pursuant to the exercise of stock options, warrants or other securities that are immediately exercisable or convertible or exercisable or convertible within 60 days of March 7, 2024. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them.
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| Name and Address of Beneficial Owner | Number of Shares Beneficially Owned | Percent of Shares Beneficially Owned | ||||||||||||
| 5% Stockholders: | ||||||||||||||
| None | ||||||||||||||
| Named Executive Officers and Directors: | ||||||||||||||
Jeffrey E. Eberwein (1) | 5,137,485 | 30.40% | ||||||||||||
John W. Sayward (2) | 100,422 | 0.63% | ||||||||||||
Michael A. Cunnion (3) | 115,120 | 0.73% | ||||||||||||
Mitchell I. Quain (4) | 272,936 | 1.72% | ||||||||||||
John Gildea (5) | 177,722 | 1.12% | ||||||||||||
Richard K. Coleman (6) | 165,400 | 1.04% | ||||||||||||
David J. Noble (7) | 150,132 | 0.95% | ||||||||||||
Thatcher Butcher (8) | 6,000 | 0.04% | ||||||||||||
All Executive Officers and Directors as a group (8 persons)(9) | 6,125,217 | 35.99% | ||||||||||||
____________________
* Indicates beneficial ownership of less than 1% of the outstanding common stock
(1)Includes (a) 4,062,485 shares of common stock held by Mr. Eberwein and (b) 1,075,000 shares of common stock underlying warrants exercisable within 60 days of March 7, 2024.
(2)Includes 100,422 shares of common stock held by Mr. Sayward.
(3)Includes (a) 104,320 shares of common stock held by Mr. Cunnion and (b) 10,800 shares of common stock underlying warrants exercisable within 60 days of March 7, 2024.
(4)Includes 272,936 shares of common stock held by Mr. Quain.
(5)Includes (a) 144,322 shares of common stock held by Mr. Gildea and (b) 33,400 shares underlying warrants exercisable within 60 days of March 7, 2024.
(6)Includes (a) 132,000 shares of common stock held by Mr. Coleman and (b) 33,400 shares underlying warrants exercisable within 60 days of March 7, 2024.
(7)Includes (a) 110,132 shares of common stock held by Mr. Noble and (b) 40,000 shares underlying warrants exercisable within 60 days of March 7, 2024.
(8)Includes 6,000 shares of common stock held by Mr. Butcher.
(9)Includes (a) 6,125,217 shares of common stock held by our 8 executive officers and directors and (b) 1,192,600 shares of common stock underlying the warrants exercisable within 60 days of March 7, 2024.
Securities Authorized for Issuance Under Equity Compensation Plans
| Equity Compensation Plan Information | |||||||||||||||||||||||
December 31, 2023 | |||||||||||||||||||||||
| Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise price of outstanding options, warrants, and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding shares reflected in column (a)) | |||||||||||||||||||||
| Plan Category | (a) | (b) (2) | (c) | ||||||||||||||||||||
| Equity compensation plans approved by security holders | 405,463 | (1) | $ | 51.20 | 690,733 | (3) | |||||||||||||||||
| Equity compensation plans not approved by security holders | — | — | — | ||||||||||||||||||||
| Total | 405,463 | $ | 51.20 | 690,733 | |||||||||||||||||||
____________________
(1)This amount includes the following:
•1,907 shares issuable upon the exercise of outstanding stock options under the Company’s 2004 Stock Incentive 7 Year Plan, the 2004 Stock Incentive Plan, and the 2014 Equity Incentive Award Plan (the “2014 Incentive Plan”), with a weighted-average exercise price of $36.83.
•403,556 RSUs granted under the 2014 Incentive Plan and 2018 Incentive Plan.
(2)The 2014 Incentive Plan and 2018 Incentive Plan RSUs and PSUs have been excluded from the computation of the weighted-average exercise price since these awards have no exercise price.
(3)This amount represents the number of shares available for issuance pursuant to stock options and other awards that could be granted in the future under the 2018 Incentive Plan, as amended July 31, 2020 in order to increase the number of shares authorized for issuance thereunder. The 2018 Incentive Plan allows for issuance of up to the sum of (i) 450,000 shares, plus (ii) the number of shares of common stock of the Company which remain available for grants of options or other awards under the 2014 Incentive Plan as of April 27, 2018, plus (iii) the number of shares that, after April 27, 2018, would again become available for issuance pursuant to the reserved share replenishment provisions of the 2014 Incentive Plan as a result of, stock options issued thereunder expiring or becoming unexercisable for any reason before being exercised in full, or, as a result of restricted stock being forfeited to the Company or repurchased by the Company pursuant to the terms of the agreements governing such shares (the shares described in clauses (ii) and (iii) of this sentence, the “Carryover Shares”). As of December 31, 2023, there were 63,751 Carryover Shares.
76
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Star Equity Holdings, Inc.
As of December 31, 2023, Jeffrey E. Eberwein, the Company’s Executive Chairman, owned 4,062,485 shares of Common Stock, representing approximately 25.67% of our outstanding Common Stock. In addition, as of December 31, 2023, Mr. Eberwein owned 1,182,414 shares of Series A Preferred Stock.
Director Independence
Our board of directors has determined that each of the directors, except Messrs. Eberwein and Coleman, are independent directors (as currently defined in Rule 5605(a)(2) of the Nasdaq listing rules). In determining the independence of our directors, our board of directors considered all transactions in which the Company and any director had any interest, including those discussed above. The independent directors meet as often as necessary to fulfill their responsibilities, including meeting at least twice annually in executive session without the presence of non-independent directors and management.
The Audit Committee currently consists of Messrs. Gildea, Cunnion, and Sayward, with Mr. Sayward serving as chairman. All members of the Audit Committee are independent directors as defined in Rule 5605(a)(2) of the Nasdaq listing rules and Rule 10A-3 under the Exchange Act, and no member of the Audit Committee participated in the preparation of the financial statements of the Company or any current subsidiary of the Company at any time during the past three years.
The Compensation Committee currently consists of Messrs. Cunnion, Sayward, and Gildea with Mr. Cunnion serving as chairman. All members of the Compensation Committee are independent directors as determined in accordance with the Compensation Committee charter and applicable Nasdaq listing rules (Rule 5605(a)(2) of the Nasdaq listing rules).
The Corporate Governance Committee currently consists of Messrs. Cunnion, Gildea and Quain with Mr. Quain serving as chairman. All members of the Corporate Governance Committee are independent directors (as defined in Rule 5605(a)(2) of the Nasdaq listing rules).
ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES
In connection with the audit of the 2023 consolidated financial statements, we entered into an engagement agreement with Wolf & Company, P.C. (Boston, MA , PCAOB ID #392 (“Wolf”)) which sets forth the terms by which Wolf has performed audit and related professional services for us.
The following tables set forth the aggregate accounting fees paid by us to Wolf for the fiscal years ended December 31, 2023 and 2022.
| For the years ended December 31 | ||||||||||||||
| Type of Fee | 2023 | 2022 | ||||||||||||
| (in thousands) | ||||||||||||||
| Audit Fees | $ | 548 | $ | 515 | ||||||||||
| Audit-Related Fees | — | 15 | ||||||||||||
| Totals | $ | 548 | $ | 530 | ||||||||||
The below fees were paid to BDO US, LLP (San Diego, CA, PCAOB ID # 243) for the fiscal year ended December 31, 2022.
| For the years ended December 31 | ||||||||||||||
| Type of Fee | 2023 | 2022 | ||||||||||||
| (in thousands) | ||||||||||||||
| Audit Fees | $ | — | $ | 315 | ||||||||||
| Audit-Related Fees | — | 42 | ||||||||||||
| Tax Fees | — | 245 | ||||||||||||
| Totals | $ | — | $ | 602 | ||||||||||
No other accounting firm was retained to perform the identified accounting work for us. All non-audit related services in the tables above were pre-approved and/or ratified by the Audit Committee.
77
Audit Committee Pre-Approval of Services by Independent Registered Public Accounting Firm
The Audit Committee is granted the authority and responsibility under its charter to pre-approve all audit and non-audit services provided to the Company by its independent registered public accounting firm, including specific approval of internal control and tax-related services. In exercising this responsibility, the Audit Committee considers whether the provision of each professional accounting service is compatible with maintaining the audit firm’s independence.
Pre-approvals are detailed as to the category or professional service and when appropriate are subject to budgetary limits. Company management and the independent registered public accounting firm periodically report to the Audit Committee regarding the scope and fees for professional services provided under the pre-approval.
With respect to the professional services rendered, the Audit Committee had determined that the rendering of all non-audit services by our independent registered public accounting firm were compatible with maintaining the auditor’s independence and had pre-approved all such services.
78
PART IV
ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report:
1.Financial Statements
The financial statements of Star Equity Holdings, Inc. listed below are set forth in Item 8 of this report for the year ended December 31, 2023:
–Report of Independent Registered Public Accounting Firm
–Consolidated Statements of Operations for the Years Ended December 31, 2023 and 2022
–Consolidated Balance Sheets at December 31, 2023 and 2022
–Consolidated Statements of Cash Flows for the Years Ended December 31, 2023 and 2022
–Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2023 and 2022
–Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
3. Exhibits required by Item 601 of Regulation S-K
The information required by this Section (a)(3) of Item 15 is set forth on the exhibit index below.
79
EXHIBIT INDEX
| Exhibit Number | Description | |||||||
3.1 | ||||||||
3.2 | ||||||||
| 3.3 | ||||||||
| 3.4 | ||||||||
| 3.5 | ||||||||
| 3.6 | ||||||||
| 3.7 | ||||||||
| 3.8 | ||||||||
| 3.9 | ||||||||
| 3.10 | ||||||||
3.11 | ||||||||
3.12 | ||||||||
| 3.11 | ||||||||
| 4.1 | ||||||||
4.2 | ||||||||
4.3 | ||||||||
| Form of Warrant (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the Commission on May 29, 2020). | ||||||||
4.4 | ||||||||
4.5 | ||||||||
4.6 | ||||||||
4.7 | ||||||||
80
| Exhibit Number | Description | |||||||
4.8 | ||||||||
4.9 | ||||||||
4.10 | ||||||||
10.1# | ||||||||
10.2# | ||||||||
10.3# | ||||||||
10.4# | ||||||||
10.5# | ||||||||
10.6# | ||||||||
10.7# | ||||||||
10.8 | ||||||||
10.9 | ||||||||
10.10 | ||||||||
10.11 | ||||||||
10.12 | ||||||||
10.13 | ||||||||
10.14 | ||||||||
10.15 | ||||||||
81
| Exhibit Number | Description | |||||||
10.16 | ||||||||
10.17 | ||||||||
10.18 | ||||||||
10.19 | ||||||||
10.20 | ||||||||
10.21 | ||||||||
10.22 | ||||||||
10.23 | ||||||||
10.24 | ||||||||
10.25 | ||||||||
10.26 | ||||||||
10.27 | ||||||||
10.28 | ||||||||
10.29 | ||||||||
82
83
84
| Exhibit Number | Description | |||||||
| 101.INS* | Inline XBRL Instance Document | |||||||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema | |||||||
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase | |||||||
| 101.LAB* | Inline XBRL Taxonomy Extension Labels Linkbase | |||||||
| 101.PRE* | Inline XBRL Taxonomy Presentation Linkbase | |||||||
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase | |||||||
| 104.1 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101). | |||||||
| # | Indicates management contract or compensatory plan. | ||||
| * | Filed herewith. | ||||
| + | The certifications attached as Exhibits 32.1 and 32.2 that accompany this Annual Report on Form 10-K are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Star Equity Holdings, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filings. | ||||
ITEM 16.FORM 10-K SUMMARY
None.
85
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| STAR EQUITY HOLDINGS, INC. | ||||||||||||||
| Dated: | March 22, 2024 | By: | /S/ RICHARD K. COLEMAN, JR. | |||||||||||
| Name: | Richard K. Coleman, Jr. | |||||||||||||
| Title: | Chief Executive Officer | |||||||||||||
Power of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard K. Coleman, Jr. and David J. Noble, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each of said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-facts and agents, or his substitute or substitutes, or any of them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
| Name | Title | Date | ||||||||||||
| /S/ JEFFREY E. EBERWEIN | Executive Chairman of the Board of Directors | March 22, 2024 | ||||||||||||
| Jeffrey E. Eberwein | ||||||||||||||
| /S/ RICHARD K. COLEMAN, JR. | Chief Executive Officer | March 22, 2024 | ||||||||||||
| Richard K, Coleman, Jr. | (Principal Executive Officer) | |||||||||||||
| /S/ DAVID J. NOBLE | Chief Financial Officer | March 22, 2024 | ||||||||||||
| David J. Noble | (Principal Financial and Accounting Officer) | |||||||||||||
| /S/ MITCHELL I. QUAIN | Director | March 22, 2024 | ||||||||||||
| Mitchell I. Quain | ||||||||||||||
| /S/ MICHAEL A. CUNNION | Director | March 22, 2024 | ||||||||||||
| Michael A. Cunnion | ||||||||||||||
| /S/ JOHN W. SAYWARD | Director | March 22, 2024 | ||||||||||||
| John W. Sayward | ||||||||||||||
| /S/ JOHN W. GILDEA | Director | March 22, 2024 | ||||||||||||
| John W. Gildea | ||||||||||||||
86
Section 7.11 Replaces Previous Line of Credit. This Agreement and all of the documents executed in connection with the revolving credit loan evidenced hereby shall completely replace the documents evidencing and securing that certain line of credit in the maximum principal amount of $4,000,000.00 previously granted by Lender to Borrowers on or about August 16, 2023. Such $4,000,000.00 line of credit shall be paid to $0.00 with the proceeds hereof and closed. BORROWERS REPRESENT, WARRANT AND CERTIFY TO THE BANK IHA T THEY HAVE READ ALL OF THIS AGREEMENT AND UNDERSTAND ALL OF ITS PROVISIONS. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed the day and year first above written. BORROWERS: BANK: 4202603-4 19 Glenbrook Building Supply, Inc. a Delaware corporation By: /s/ Ronald A. Schumacher Ronald A. Schumacher Its: Executive Chairman/President Edgebuilder, Inc. a Delaware corporation By: /s/ Ronald A. Schumacher Ronald A. Schumacher Its: Executive Chairman/President Premier Bank, a Minnesota corporation By: /s/ Brian L. Carnes Brian L. Carnes Its: President – Roseville Office ad Chief Credit Officer
IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be executed by their duly authorized undersigned representatives as an instrument wider seal as of the day and year first written above. WITNESS:. -21- LANDLORD: 791Rose Drive /s/ Shoaib Khalid Shoaib Khalid By: /s/ David Noble Name: David Noble Title: President Ronald Schumacher Its: Executive Chairman List of Exhibits Exhibit A - Description of the Leased Premises Exhibit B - Base Rent -22� TENTANT: GLENBROOK BUILDINGS SUPPLY INC. By: /s/ Ron Schumacher Name: WITNESS:. /s/ Erik Soderlund Erik Soderlund
Exhibit 21.1
Subsidiaries of Registrant as of March 22, 2024
Name: Star Real Estate Holdings USA, Inc.
State of Incorporation: Delaware
Name: 947 Waterford Road, LLC
State of Incorporation: Delaware
Name: 56 Mechanic Falls Road, LLC
State of Incorporation: Delaware
Name: 300 Park Street, LLC
State of Incorporation: Delaware
Name: 791 Rose Drive, LLC
State of Incorporation: Delaware
Name: Star Construction Holdings, Inc.
State of Incorporation: Minnesota
Name: KBS Builders, Inc.
State of Incorporation: Delaware
Name: EdgeBuilder, Inc.
State of Incorporation: Delaware
Name: Glenbrook Building Supply, Inc.
State of Incorporation: Delaware
Name: Star Equity Fund GP, LLC
State of Incorporation: Delaware
Name: Star Equity Fund, LP
State of Incorporation: Delaware
Name: Star Value Investments, LLC
State of Incorporation: Delaware
Name: Star Investment Management, LLC
State of Incorporation: Connecticut
Name: Star Equity Investment Holdings, LLC
State of Incorporation: Delaware
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
Star Equity Holdings, Inc.
Old Greenwich, Connecticut
We consent to the incorporation by reference in the Registration Statements on Form S-1 (Nos. 333-261957, 333-248872, and 333-237928) and Form S-8 (Nos. 333-250177 and 333-228214) of Star Equity Holdings, Inc. (the Company) of our report dated March 22, 2024, relating to the consolidated financial statements of the Company, appearing in this Annual Report on Form 10-K for the year ended December 31, 2023.
/s/Wolf & Company, P.C.
Boston, Massachusetts
March 22, 2024
EXHIBIT 31.1
CERTIFICATION OF
PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Richard k. Coleman Jr., certify that:
1.I have reviewed this annual report on Form 10-K of Star Equity Holdings, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:
i.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
ii.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
March 22, 2024
| /S/ RICHARD K. COLEMAN JR. | ||
| Richard K. Coleman Jr. | ||
Chief Executive Officer (Principal Executive Officer) | ||
EXHIBIT 31.2
CERTIFICATION OF
PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, David J. Noble, certify that:
1.I have reviewed this annual report on Form 10-K of Star Equity Holdings, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
March 22, 2024
| /S/ David J. Noble | ||
| David J. Noble | ||
| Chief Financial Officer (Principal Financial and Accounting Officer) | ||
EXHIBIT 32.1
CERTIFICATION OF
PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)
In connection with the accompanying Annual Report on Form 10-K of Star Equity Holdings, Inc. for the year ended December 31, 2023, I, Richard k. Coleman Jr., Chief Executive Officer of Star Equity Holdings, Inc., hereby certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1)such Annual Report on Form 10-K of Star Equity Holdings, Inc. for the year ended December 31, 2023, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)the information contained in such Annual Report on Form 10-K of Star Equity Holdings, Inc. for the year ended December 31, 2023, fairly presents, in all material respects, the financial condition and results of operations of Star Equity Holdings, Inc. at the dates indicated.
This certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.
March 22, 2024
| /S/ RICHARD K. COLEMAN JR. | ||
| Richard K. Coleman Jr. | ||
Chief Executive Officer (Principal Executive Officer) | ||
A signed copy of this written statement required by Section 906 has been provided to Star Equity Holdings, Inc. and will be retained by Star Equity Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION OF
PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)
In connection with the accompanying Annual Report on Form 10-K of Star Equity Holdings, Inc. for the year ended December 31, 2023, I, David J. Noble, Chief Financial Officer of Star Equity Holdings, Inc., hereby certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1)such Annual Report on Form 10-K of Star Equity Holdings, Inc. for the year ended December 31, 2023, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)the information contained in such Annual Report on Form 10-K of Star Equity Holdings, Inc. for the year ended December 31, 2023, fairly presents, in all material respects, the financial condition and results of operations of Star Equity Holdings, Inc. at the dates indicated.
This certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.
March 22, 2024
/S/ David J. Noble | ||
| David J. Noble | ||
| Chief Financial Officer (Principal Financial and Accounting Officer) | ||
A signed copy of this written statement required by Section 906 has been provided to Star Equity Holdings, Inc.and will be retained by Star Equity Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
STAR EQUITY HOLDINGS, INC. COMPENSATION CLAWBACK POLICY
A.OVERVIEW
In accordance with the applicable rules of the NASDAQ Stock Market ("NASDAQ") Listing Rules (the "NASDAQ Rules"), Section 10D and Rule 10D-1 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") ("Rule 10D-1"), the Board of Directors (the "Board") of Star Equity Holdings, inc. (the "Company") has adopted this Policy (the "Clawback Policy") to provide recovery of erroneously awarded Incentive-based Compensation from Executive Officers. All capitalized terms used and not otherwise defined herein shall have the meanings set forth in Section H, below.
B.Recovery of Erroneous Compensation
(1)In the event of an Accounting Restatement, the Company will reasonably promptly recover the Erroneously Awarded Compensation Received in accordance with Nasdaq Rules and Rule 10D-1 as follows:
(i)After an Accounting Restatement, the Compensation Committee (if composed of independent directors, or otherwise a majority of independent directors serving on the Board) (the "Committee") shall determine the amount of any Erroneously Awarded Compensation Received by each Executive Officer and shall promptly notify each Executive Officer with a written notice containing the amount of any Erroneously Awarded Compensation and a demand for repayment or return of such compensation, as applicable.
(a)For Incentive-based Compensation based on (or derived from) the Company's stock price or total shareholder return, where the amount of Erroneously Awarded Compensation is not subject to mathematical recalculation directly from the information in the applicable Accounting Restatement:
i.The amount to be repaid or returned shall be determined by the Committee based on a reasonable estimate of the effect of the Accounting Restatement on the Company's Stock rice or total shareholder return upon which the Incentive-based Compensation was Received; and
ii.The Company shall maintain documentation of the determination of such reasonable estimate and provide the relevant documentation if and as required to the Nasdaq.
(ii)The Committee shall have discretion to determine the appropriate means of recovering Erroneously Awarded Compensation based on the particular facts and circumstances. Notwithstanding the foregoing, except as set forth in Section B(2) below, in no event may the Company accept an amount that is less than the amount of Erroneously Awarded Compensation in satisfaction of an Executive Officer's obligations hereunder.
(iii)To the extent that the Executive Officer has already reimbursed the Company for any Erroneously Awarded Compensation Received under any duplicative recovery obligations established by the Company or applicable law, any such reimbursed amount is to be credited in the amount of Erroneously Awarded Compensation that is subject to recovery under this Policy.
(iv)To the extent that an Executive Officer fails to repay all Erroneously Awarded Compensation to the Company when due, the Company shall take all actions reasonable and appropriate to recover such Erroneously Awarded Compensation from the applicable Executive Officer. The applicable Executive Officer shall be required to reimburse the Company for any and all expenses reasonably incurred (including legal fees) by the Company in recovering such Erroneously Awarded Compensation in accordance with the immediately preceding sentence.
(2)Notwithstanding anything herein to the contrary, the Company shall not be required to take the actions contemplated by Section B(1) above if the Committee determines that recovery would be impracticable and any of the following conditions are met:
(i)The Committee has determined that the direct expenses paid to a third party to assist in enforcing the Policy would exceed the amount to be recovered. Before making this determination, the Company must make a reasonable attempt to recover the Erroneously Awarded Compensation, documented such attempt(s) and provided such documentation to the Nasdaq; or
(ii)Recovery would likely cause an otherwise tax-qualified retirement plan, under which benefits are broadly available to employees of the Company, to fail to meet the requirements of Section 401(a)(13) or Section 411(a) of the Internal Revenue Code of 1986, as amended, and regulations thereunder.
A.DISCLOSURE REQUIREMENTS
The Company shall file all disclosures with respect to this Policy required by applicable U.S. Securities and Exchange Commission ("SEC") filings and rulings.
B.PROHIBITION OF INDEMNIFICATION
The Company shall not be permitted to insure or indemnify any Executive Officer against (i) the loss of any Erroneously Awarded Compensation that is repaid, returned or recovered pursuant to the terms of this Policy, or (ii) any claims relating to the Company's enforcement of its rights under this Policy. Further, the Company shall not enter into any agreement that exempts any Incentive-based Compensation that is granted, paid or awarded to an Executive Officer from the application of this Policy or that waives the Company's right to recovery of any Erroneously Awarded Compensation, and this Policy shall supersede any such agreement (whether entered into before, on or after the Effective Date of this Policy).
C.ADMINISTRATION AND INTERPRETATION
This Policy shall be administered by the Committee, and any determinations made by the Committee shall be final and binding on all affected individuals.
The Committee is authorized to interpret and construe this Policy and to make all determinations necessary, appropriate, or advisable for the administration of this Policy and for the Company's compliance with Nasdaq Rules, Section 10D, Rule 10D-1 and any other applicable law, regulation, rule or interpretation of the SEC or Nasdaq promulgated or issued in connection therewith.
D.AMENDMENT; TERMINATION
The Committee may amend this Policy from time to time in its discretion and shall amend this Policy as it deems necessary. Notwithstanding anything in this Section F to the contrary, no amendment or termination of this Policy shall be effective if such amendment or termination would (after taking into account any actions taken by the Company contemporaneously with such amendment or termination) cause the Company to violate any federal securities laws, SEC rule or Nasdaq rule.
E.OTHER RECOVERY RIGHTS
This Policy shall be binding and enforceable against all Executive Officers and, to the extent required by applicable law or guidance from the SEC or Nasdaq, their beneficiaries, heirs, executors, administrators or other legal representatives. The Committee intends that this Policy will be applied to
the fullest extent required by applicable law. Any employment agreement, equity award agreement, compensatory plan or any other agreement or arrangement with an Executive Officer shall be deemed to include, as a condition to the grant of any benefit thereunder, an agreement by the Executive Officer to abide by the terms of this Policy. Any right of recovery under this Policy is in addition to, and not in lieu of, any other remedies or rights of recovery that may be available to the Company under applicable law, regulation or rule or pursuant to the terms of any policy of the Company or any provision in any employment agreement, equity award agreement, compensatory plan, agreement or other arrangement.
F.DEFINITIONS
For purposes of this Policy, the following capitalized terms shall have the meanings set forth below.
(1) "Accounting Restatement" means an accounting restatement due to the material noncompliance of the Company with any financial reporting requirement under the securities laws, including any required accounting restatement to correct an error in previously issued financial statements that is material to the previously issued financial statements (a "Big R" restatement), or that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period (a "little r" restatement)
(2) "Clawback Eligible Incentive Compensation" means all Incentive-based Compensation Received by an Executive Officer (i) on or after the effective date of the applicable Nasdaq Rules, (ii) after beginning service as an Executive Officer, (iii) who served as an Executive Officer at any time during the applicable performance period relating to any Incentive-based Compensation (whether or not such Executive Officer is serving at the time the Erroneously Awarded Compensation is required to be repaid to the Company), (iv) while the Company has a class of securities listed on a national securities exchange or a national securities association, and (v) during the applicable Clawback Period (as defined below).
(3) "Clawback Period" means, with respect to any Accounting Restatement, the three fiscal years of the Company immediately preceding the Restatement Date (as defined below), and if the Company changes its fiscal year, any transition period of less than nine months within or immediately following those three completed fiscal years.
(4) "Erroneously Awarded Compensation" means, with respect to each Executive Officer in connection with an Accounting Restatement, the amount of Clawback Eligible Incentive Compensation that exceeds the amount of Incentive-based Compensation that otherwise would have been Received had it been determined based on the restated amounts, computed without regard to any taxes paid.
(5) "Executive Officer" means each individual who is currently or was previously designated as an "officer" of the Company as defined in Rule 16a-1(f) under the Exchange Act. For the avoidance of doubt, the identification of an executive officer for purposes of this Policy shall include each executive officer who is or was identified pursuant to Item 401(b) of Regulation S-K or Item 6.A of Form 20-F, as applicable, as well as the principal financial officer and principal accounting officer (or, if there is no principal accounting officer, the controller).
(6) "Financial Reporting Measures" means measures that are determined and presented in accordance with the accounting principles used in preparing the Company's financial statements and all other measures that are derived wholly or in part from such measures. Stock price and total shareholder return (and any measures that are derived wholly or in part from stock price or total shareholder return) shall, for purposes of this Policy, be considered Financial Reporting Measures. For the avoidance of doubt, a Financial Reporting Measure need not be presented in the Company's financial statements or included in a filing with the SEC.
(7) "Incentive-based Compensation" means, any compensation that is granted, earned, or vested based wholly or in part upon the attainment of a Financial Reporting Measure.
(8) "Nasdaq" means The Nasdaq Stock Market.
(9) "Received" means, with respect to any Incentive-based Compensation, actual or deemed receipt, and Incentive-based Compensation shall be deemed received in the Company's fiscal period during which the Financial Reporting Measure specified in the Incentive-based Compensation award is attained, even if the payment or grant of the Incentive-based Compensation to the Executive Officer occurs after the end of that period.
(10) "Restatement Date" means the earlier to occur of (i) the date the Board, a committee of the Board, the Board or the officers of the Company authorized to take such action if Board action is not required, concludes, or reasonably should have concluded, that the Company is required to prepare an Accounting Restatement, or (ii) the date a court, regulator or other legally authorized body directs the Company to prepare an Accounting Restatement.
Effective as of [xxx].
Exhibit A
ATTESTATION AND ACKNOWLEDGEMENT OF COMPENSATION CLAWBACK POLICY
By my signature below, I acknowledge and agree that:
•I have received and read the attached Compensation Clawback Policy (this “Policy”).
•I hereby agree to abide by all of the terms of this Policy both during and after my employment with the Company, including, without limitation, by promptly repaying or returning any Erroneously Awarded Compensation to the Company as determined in accordance with this Policy.
Signature:
Printed Name:
Date:
Exhibit A
ATTESTATION AND ACKNOWLEDGEMENT OF COMPENSATION CLAWBACK POLICY
By my signature below, I acknowledge and agree that:
•I have received and read the attached Compensation Clawback Policy (this “Policy”).
•I hereby agree to abide by all of the terms of this Policy both during and after my employment with the Company, including, without limitation, by promptly repaying or returning any Erroneously Awarded Compensation to the Company as determined in accordance with this Policy.
Signature:
Printed Name:
Date:
Exhibit A
ATTESTATION AND ACKNOWLEDGEMENT OF COMPENSATION CLAWBACK POLICY
By my signature below, I acknowledge and agree that:
•I have received and read the attached Compensation Clawback Policy (this "Policy")
•I hereby agree to abide by all of the terms of this Policy both during and after my employment with the Company, including, without limitation, by promptly repaying or returning any Erroneously Awarded Compensation to the Company as determined in accordance with this Policy.
Signature:
Printed Name:
Date: