Financial Performance Overview

Star Equity is a diversified holding company with two main divisions - Building Solutions and Investments. In 2024, the company reported total revenues of $53.4 million, representing a 16.5% increase from the prior year. This growth was driven by the inclusion of revenues from recent acquisitions, including Timber Technologies (TT) and Bridgewater Lumber & Logistics (BLL). However, the company’s legacy Building Solutions businesses, KBS and Edgebuilder/Glenbrook (EBGL), experienced slower business activity, which the company believes is temporary.

Gross profit for 2024 was $11.1 million, a 7.3% decrease from 2023. This decline was primarily due to fixed costs remaining constant despite the revenue decline at KBS and EBGL. Gross margins were also impacted by a $574,000 purchase price adjustment related to the step-up of TT’s inventory to fair value.

Operating expenses increased by 20% to $19.5 million, driven by the addition of SG&A from the TT and BLL acquisitions. This, combined with impairment charges and unrealized losses on investments, resulted in a net loss from continuing operations of $10.4 million, compared to a $1.9 million loss in 2023.

Segment Performance

The Building Solutions division, which includes KBS, EBGL, and TT, saw revenues increase 16.5% to $53.4 million. This was due to the inclusion of TT and a full year of BLL, partially offset by slower activity at KBS and EBGL. Gross profit for Building Solutions declined 7.2% to $11.3 million, with gross margins contracting from 26.5% to 21.1%. The Investments division, which holds the company’s real estate and investment portfolio, reported a gross loss of $221,000, an improvement from the $228,000 loss in 2023.

Liquidity and Capital Resources

As of December 31, 2024, Star Equity had $4.0 million in cash and cash equivalents. The company utilized several credit facilities to fund operations and acquisitions, including:

• A $6 million revolving credit line with Premier Bank for the EBGL businesses
• A $4 million working capital line of credit with KeyBank for KBS
• A $7 million term loan from Bridgewater Bank to finance the TT acquisition
• A $3 million mortgage-backed term loan secured by the TT manufacturing facility

The company was not in compliance with certain financial covenants on the Bridgewater and KeyBank facilities as of the end of 2024 but obtained waivers from the lenders. Overall, Star Equity’s liquidity position appears strained, with net cash used in operating activities of $5.2 million in 2024.

Strengths and Weaknesses

Key strengths of Star Equity include:

• Diversified business model with exposure to both construction and investment activities
• Recent acquisitions of TT and BLL expanding the Building Solutions footprint
• Demonstrated ability to execute sale-leaseback transactions to unlock capital

Weaknesses include:

• Declining performance and profitability in the legacy Building Solutions businesses
• Reliance on debt financing and covenant compliance issues
• Impairment charges and unrealized losses on investments

Outlook and Future Prospects

The company believes the slowdown experienced by KBS and EBGL in 2024 is temporary, citing a strong sales pipeline and improving interest rate environment. However, the company faces ongoing challenges, including inflation, supply chain disruptions, and macroeconomic uncertainty, which could continue to impact demand for its products and services.

The company’s strategy going forward will likely focus on integrating the recent acquisitions, improving operational efficiency in the Building Solutions division, and carefully managing its investment portfolio. Maintaining compliance with debt covenants and securing additional liquidity will also be key priorities. Overall, the company’s future prospects appear uncertain, with significant work required to return to consistent profitability.