STAR EQUITY HOLDINGS, INC. - Quarter Report: 2022 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	FOR THE QUARTERLY PERIOD ENDED	March 31, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
			FOR THE TRANSITION PERIOD FROM TO

Commission file number: 001-35947

Star Equity Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware

33-0145723

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

53 Forest Ave., Suite 101,

Old Greenwich

06870

(Address of Principal Executive Offices)

(Zip Code)

(203) 489-9500

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	STRR	NASDAQ Global Market
Series A Cumulative Perpetual Preferred Stock, par value $0.0001 per share	STRRP	NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

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.


Large accelerated filer	o	Accelerated filer	o

Non-accelerated filer	☒	Smaller reporting company	☒

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes No ☒

As of May 5th, 2022, the registrant had 15,025,295 shares of Common Stock ($0.0001 par value) outstanding.

STAR EQUITY HOLDINGS, INC.

TABLE OF CONTENTS


IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS			4

PART I. FINANCIAL INFORMATION			5
Item 1. Financial Statements (Unaudited)			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			37
Item 3. Quantitative and Qualitative Disclosures about Market Risk			48
Item 4. Controls and Procedures			49

PART II. OTHER INFORMATION			50
Item 1. Legal Proceedings			50
Item 1A. Risk Factors			50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			51
Item 3. Defaults Upon Senior Securities			51
Item 4. Mine Safety Disclosures			51
Item 5. Other Information			51
Item 6. Exhibits			52

Important Information Regarding Forward-Looking Statements

Portions of this Quarterly Report on Form 10-Q (including information incorporated by reference) include “forward-looking statements” based on our current beliefs, expectations, and projections regarding our business strategies, market potential, future financial performance, industry, and other matters. This includes, in particular, “Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q, as well as other portions of this Quarterly Report on Form 10-Q. The words “believe,” “expect,” “anticipate,” “project,” “could,” “would,” and similar expressions, among others, generally identify “forward-looking statements,” which speak only as of the date the statements were made. The matters discussed in these forward-looking statements are subject to risks, uncertainties, and other factors that could cause our actual results to differ materially from those projected, anticipated, or implied in the forward-looking statements. The most significant of these risks, uncertainties, and other factors are described in “Item 1A — Risk Factors” of this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the U.S. Securities and Exchange Commission on March 31, 2022. 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.

PART I. FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

STAR EQUITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited) (In thousands, except for per share amounts)


	Three Months Ended March 31,
	2022		2021
Revenues:
Healthcare	$	13,418	$	13,307
Construction	11,631		9,047

Total revenues	25,049		22,354

Cost of revenues:
Healthcare	10,242		10,709
Construction	10,045		8,503
Investments	99		65
Total cost of revenues	20,386		19,277

Gross profit	4,663		3,077

Operating expenses:
Selling, general and administrative	6,788		5,055
Amortization of intangible assets	430		438


Gain on sale of MD Office Solutions	—		(847)
Total operating expenses	7,218		4,646

Loss from operations	(2,555)		(1,569)

Other (expense) income:
Other (expense) income, net	(6)		35
Interest expense, net	(190)		(272)
Gain on forgiveness of PPP loans	—		1,220
Total other (expense) income	(196)		983

Loss from continuing operations before income taxes	(2,751)		(586)
Income tax provision	(950)		(2)
Loss from continuing operations, net of tax	(3,701)		(588)
Income from discontinued operations, net of tax	—		6,020
Net (loss) income	(3,701)		5,432
Deemed dividend on Series A perpetual preferred stock	(479)		(479)
Net (loss) income attributable to common shareholders	$	(4,180)	$	4,953

Net income (loss) per share—basic and diluted
Net loss per share, continuing operations	$	(0.29)	$	(0.12)
Net income per share, discontinued operations	$	—	$	1.22
Net (loss) income per share—basic and diluted*	$	(0.29)	$	1.10
Deemed dividend on Series A cumulative perpetual preferred stock per share	$	(0.04)	$	(0.10)
Net (loss) income per share, attributable to common shareholders—basic and diluted*	$	(0.33)	$	1.01
Weighted-average shares outstanding—basic and diluted	12,669		4,916

Dividends declared per Series A perpetual preferred stock	$	0.25	$	—

*Earnings per share may not add due to rounding

See accompanying notes to the unaudited condensed consolidated financial statements.

STAR EQUITY HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)


	March 31, 2022 (unaudited)		December 31, 2021
Assets:
Current assets:
Cash and cash equivalents	$	15,035	$	4,538
Restricted cash	385		278
Investments	1,182		713
Accounts receivable, net of allowances of $1.2 million and $0.8 million, respectively	15,910		15,811
Inventories, net	10,287		8,525
Other current assets	1,977		1,998

Total current assets	44,776		31,863
Property and equipment, net	8,853		8,918
Operating lease right-of-use assets, net	5,346		4,494
Intangible assets, net	14,642		15,072
Goodwill	6,046		6,046

Other assets	1,528		1,659
Total assets	$	81,191	$	68,052

Liabilities, Mezzanine Equity and Stockholders’ Equity:
Current liabilities:
Accounts payable	$	5,196	$	4,277
Accrued liabilities	3,608		2,445
Accrued compensation	3,192		3,051
Accrued warranty	420		569
Billings in excess of costs and estimated profit	15		312
Deferred revenue	2,975		2,457
Short-term debt	13,334		12,869
Operating lease liabilities	1,422		1,253
Finance lease liabilities	559		588

Total current liabilities	30,721		27,821
Deferred tax liabilities	998		72
Operating lease liabilities, net of current portion	3,996		3,299
Finance lease liabilities, net of current portion	639		706
Other liabilities	386		412
Total liabilities	36,740		32,310

Commitments and contingencies (Note 9)

Preferred stock, $0.0001 par value: 10,000,000 shares authorized: Series A Preferred Stock, 8,000,000 shares authorized, liquidation preference ($10.00 per share), 1,915,637 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively	18,988		18,988

Stockholders’ Equity:
Preferred stock, $0.0001 par value: 25,000 shares authorized; Series C Preferred stock, no shares issued or outstanding	—		—
Common stock, $0.0001 par value: 30,000,000 shares authorized; 15,029,410 and 5,805,916 shares issued and outstanding (net of treasury shares) at March 31, 2022 and December 31, 2021, respectively	1		—
Treasury stock, at cost; 258,849 shares at March 31, 2022 and December 31, 2021, respectively	(5,728)		(5,728)
Additional paid-in capital	162,860		150,451

Accumulated deficit	(131,670)		(127,969)


Total stockholders’ equity	25,463		16,754
Total liabilities, mezzanine equity and stockholders’ equity	$	81,191	$	68,052

See accompanying notes to the unaudited condensed consolidated financial statements.

STAR EQUITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Three Months Ended March 31,
	2022		2021
Operating activities
Net (loss) income	$	(3,701)	$	5,432
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation	471		471
Amortization of intangible assets	430		438
Non-cash lease expense	199		584
Provision for bad debt, net	300		359
Stock-based compensation	144		131

Gain on disposal of discontinued operations	—		(5,224)
Amortization of loan issuance costs	37		50
Write-off of borrowing costs	—		130
Gain on disposal of MD Office Solutions	—		(847)
(Gain) loss on sale of assets	(96)		34
Gain on Paycheck Protection Program loan forgiveness	—		(1,220)
Deferred income taxes	926		—
Unrealized loss (gain) of equity securities and lumber derivatives	584		(23)
Changes in operating assets and liabilities:
Accounts receivable	(397)		(2,476)
Inventories	(1,762)		(51)
Investments and other assets	144		(782)
Accounts payable	919		258
Accrued compensation	142		1,075
Deferred revenue and billings in excess of costs and estimated profit	220		119
Operating lease liabilities	(185)		(597)
Other liabilities	989		(93)
Net cash used in operating activities	(636)		(2,232)

Investing activities
Purchases of property and equipment	(366)		(449)
Proceeds from sale of discontinued operations	—		18,750
Proceeds from sale of property and equipment	112		14
Purchases of equity securities	(1,070)		—
Proceeds from sales of equity securities	14		—
Net cash (used in) provided by investing activities	(1,310)		18,315

Financing activities
Proceeds from borrowings	25,186		32,088
Repayment of debt	(24,748)		(38,495)



Proceeds from the sale of common stock, warrants, and exercise of over allotment options	13,198		—
Fees paid on issuance of common stock	(450)		—
Proceeds from the exercise of warrants	—		493



Taxes paid related to net share settlement of equity awards	(3)		(6)
Repayment of obligations under finance leases	(154)		(260)
Preferred stock dividends paid	(479)		—
Net cash provided by (used in) financing activities	12,550		(6,180)
Net increase in cash, cash equivalents, and restricted cash including cash classified within current assets held for sale	10,604		9,903
Less: net increase in cash classified within current held for sale	—		(47)


Net increase in cash, cash equivalents, and restricted cash	10,604		9,950
Cash, cash equivalents, and restricted cash at beginning of period	4,816		3,393
Cash, cash equivalents, and restricted cash at end of period	$	15,420	$	13,343

Reconciliation of cash, cash equivalents, and restricted cash at end of year
Cash and cash equivalents	$	15,035	$	13,175
Restricted cash	385		168
Cash, cash equivalents, and restricted cash at end of period	$	15,420	$	13,343




Non-Cash Investing Activities
MD Office Solutions Promissory Note Receivable	$	—	$	1,385
Non-Cash Financing Activities
Gain on Paycheck Protection Program Loan Forgiveness	$	—	$	1,220

See accompanying notes to the unaudited condensed consolidated financial statements.

STAR EQUITY HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands)


	Perpetual Preferred Stock			Common stock			Treasury Stock		Additional paid-in capital		Accumulated deficit		Total stockholders’ equity
	Shares	Amount		Shares	Amount
Balance at December 31, 2021	1,916	$	18,988	5,805	$	—	$	(5,728)	$	150,451	$	(127,969)	$	16,754
Stock-based compensation	—	—		—	—		—		144		—		144
Shares issued under stock incentive plans, net of shares withheld for employee taxes	—	—		49	—		—		(3)		—		(3)
Accrued dividends on redeemable preferred stock	—	479		—	—		—		(479)		—		(479)
Preferred stock dividends paid	—	(479)		—	—		—		—		—		—
Equity issuance costs	—	—		—	—		—		(450)		—		(450)
Proceeds from the sale of common stock, warrants, and exercise of over allotment options	—	—		9,175	1		—		13,197		—		13,198
Net loss	—	—		—	—		—		—		(3,701)		(3,701)
Balance at March 31, 2022	1,916	$	18,988	15,029	$	1	$	(5,728)	$	162,860	$	(131,670)	$	25,463


	Perpetual Preferred Stock			Common stock			Treasury Stock		Additional paid-in capital		Accumulated deficit		Total stockholders’ equity
	Shares	Amount		Shares	Amount
Balance at December 31, 2020	1,916	$	21,500	4,798	$	—	$	(5,728)	$	149,143	$	(124,986)	$	18,429
Stock-based compensation	—	—		—	—		—		131		—		131
Shares issued under stock incentive plans, net of shares withheld for employee taxes	—	—		3	—		—		(5)		—		(5)
Accrued dividend on redeemable preferred stock	—	479		—	—		—		(479)		—		(479)
Proceeds from the exercise of warrants	—	—		220	—		—		493		—		493
Net income	—	—		—	—		—		—		5,432		5,432
Balance at March 31, 2021	1,916	$	21,979	5,021	$	—	$	(5,728)	$	149,283	$	(119,554)	$	24,001

See accompanying notes to unaudited condensed consolidated financial statements.

STAR EQUITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation and Significant Policies

Basis of Presentation

The unaudited condensed consolidated financial statements included in this Form 10-Q have been prepared in accordance with the U.S. Securities and Exchange Commission (the “SEC”) instructions for Quarterly Reports on Form 10-Q. Accordingly, the condensed consolidated financial statements are unaudited and do not contain all the information required by U.S. generally accepted accounting principles (“GAAP”) to be included in a full set of financial statements. The unaudited condensed consolidated balance sheet at December 31, 2021 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for a complete set of financial statements. The audited consolidated financial statements for our fiscal year ended December 31, 2021, filed with the SEC on Form 10-K on March 31, 2022, include a summary of our significant accounting policies and should be read in conjunction with this Form 10-Q. In the opinion of management, all material adjustments necessary to present fairly the results of operations, cash flows, and balance sheets for such periods have been included in this Form 10-Q. All such adjustments are of a normal recurring nature. The results of operations for interim periods are not necessarily indicative of the results of operations for the entire year.

The Company and Discontinued Operations

On March 31, 2021, Star Equity Holdings, Inc. (“Star Equity,” the “Company,” “we,” or “our”), a diversified holding company with three divisions: Healthcare, Construction, and Investments, announced the completion of the sale of DMS Health Technologies, Inc., a North Dakota corporation and wholly owned indirect subsidiary of Star Equity (“DMS Health”), for $18.75 million in cash, as originally announced on November 3, 2020 (the “DMS Sale Transaction”). The assets and liabilities of DMS Health were previously classified as held for sale and the results of DMS Health’s operations were presented as a discontinued operations in our previously issued financial statements. Unless otherwise noted, discussion within these notes to the condensed consolidated financial statements relates to continuing operations. Refer to Note 2. 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 (formerly Digirad Corporation) (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 may require the Company to redeem the Series A Preferred Stock at a price of $10.00 per share, plus any accumulated and unpaid dividends (a “Change of Control Redemption”). As this redemption feature of the shares is not solely within the control of the Company, the Series A Preferred Stock does not qualify as permanent equity and has been classified as mezzanine or temporary equity. Series A Preferred Stock is not redeemable and it was not probable that our Series A Preferred Stock would become redeemable as of March 31, 2022 and 2021. Therefore, we are not currently required to accrete the Series A Preferred Stock to its redemption value.

In addition to a Change of Control Redemption, the Certificate of Designations also provides that we may redeem (at 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.

On February 25, 2022, 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, 2022, and the payment date was March 10, 2022. Refer to preferred stock dividends discussed in Note 13. Perpetual Preferred Stock.

Going Concern

The accompanying condensed consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and settlement of obligations in the normal course of business. We incurred losses from continuing operations, net of income taxes, of approximately $3.7 million and $0.6 million for the three months ended March 31, 2022 and 2021, respectively. We have an accumulated deficit of $131.7 million and $128.0 million as of March 31, 2022 and December 31, 2021, respectively. Net cash used in operations was $0.6 million for the three months ended March 31, 2022, compared to net cash used in operations of $2.2 million for the same period in 2021. We will likely need to secure additional financing in the future to accomplish our business plan over the next several years and there can be no assurance on the availability or terms upon which such financing and capital might be available at that time. As of March 31, 2022, cash and cash equivalents increased to $15.0 million from $4.5 million as of December 31, 2021.

At March 31, 2022, we had approximately $13.3 million in debt outstanding. All of our debt is categorized as short-term on our condensed Consolidated Balance Sheets. For more detail, see Note 8. Debt. The Company’s loan pursuant to the SNB Loan Agreement (as defined below) (the “SNB Loan”) with Sterling National Bank, a national banking association as lender (“Sterling” or “SNB”), which has a current balance owed of $7.3 million, supports our Healthcare business. On February 1, 2022, Sterling became part of Webster Bank, N.A. (“Webster”), and Webster became successor in interest to the SNB Loan Agreement. While the SNB Loan matures in 2024, GAAP rules require that the outstanding balance be classified as short-term debt. This is due to both the automatic sweep feature embedded in the traditional lockbox arrangement and the subjective acceleration clause in the SNB Loan Agreement. As of March 31, 2022, we were not in compliance with covenants in the SNB Loan Agreement related to our Healthcare division and we have not yet obtained a waiver from Webster for these financial covenant breaches. We are currently in negotiations to avoid a default. While we do not believe we will be required to pay down the current balance, our current cash is sufficient to repay the SNB Loan in full.

Upon the occurrence and during the continuation of an event of default under the SNB Loan Agreement, Webster may, among other things, declare the loans and all other obligations under the SNB Loan Agreement immediately due and payable and increase the interest rate at which loans and obligations under the SNB Loan Agreement bear interest. Management has concluded that this forecasted violation raises substantial doubt about our ability to continue as a going concern within twelve months after the date that financial statements are issued, if we are not able to restructure those agreements or receive a waiver for non-compliance with our covenants. Our financial statements do not reflect any adjustments that might result from the outcome of this uncertainty. Management is taking a number of steps to avoid these breaches and/or restructure the covenants within these agreements. These steps include improving our operations, considering additional or alternative financing arrangements, and negotiating with current lenders to amend our covenants. While we believe that we maintain strong transparency and relationships with our lenders, there can be no assurance that we will be successful in these efforts.

As of March 31, 2022, we had $5.0 million outstanding on our two Construction division revolvers with Gerber Finance, Inc. (“Gerber”). As of December 31, 2021, we were not in compliance with our bi-annual covenants on either of these Gerber facilities. However, we have obtained waivers from Gerber covering the measurement period ending June 30, 2022. While Gerber has historically provided us with such waivers, when needed, there is no assurance that we will be able to receive waivers for covenant violations in the future.

On January 31, 2020, we and certain of our Investments subsidiaries entered into a Loan and Security Agreement with Gerber (as amended, the “Star Loan Agreement”), which provides for a credit facility with borrowing availability of up to $2.5 million, bearing interest at the prime rate plus 3.5% per annum, and matures on January 1, 2025, unless terminated in accordance with the terms therein (the “Star Loan”). We currently have $1.0 million outstanding on the Star Loan, on which we are and historically have been making timely payments in full compliance with all covenants. Related party notes of $2.3 million that were outstanding as of December 31, 2020 were fully paid off on April 1, 2021 using proceeds from the DMS Sale Transaction.

On January 24, 2022, we closed an underwritten public offering (the “2022 Public Offering”), and gross proceeds, before deducting underwriting discounts and offering expenses and excluding any proceeds we may receive upon exercise of the common warrants, were $14.3 million and net proceeds were $12.7 million. Refer to Note 14. Equity Transactions for details.

In the first quarter of 2022, we declared and made $0.5 million preferred stock dividend payment. In the second quarter of 2022, we declared a $0.5 million preferred stock dividend payment. Refer to Note 13. Perpetual Preferred Stock and Note 17. Subsequent Events for details.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and disclosures made in the accompanying notes to the condensed consolidated financial statements. Significant estimates and judgments include those related to revenue recognition, goodwill valuation, 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 Topic 842.

Pursuant to ASC 606, Revenue from Contracts with Customers, we recognize revenue when a customer obtains control of promised goods or services. We record the amount of revenue that reflects the consideration that it expects to receive in exchange for those goods or services. We apply the following five-step model in order to determine this amount: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

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.

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. Taxes collected from customers, which are subsequently remitted to governmental authorities, are excluded from revenue.

The majority of our contracts have a single performance obligation, as we provide a series of distinct goods or services that are substantially the same and are transferred with the same pattern to the customer. For contracts with multiple performance obligations, we allocate the total transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. We use an observable price to determine the stand-alone selling price for separate performance obligations or a cost plus margin approach when one is not available. For bill and hold sales, we determine when the customer obtains control of the product on a case-by-case basis to determine the amount of revenue to recognize each period.

Revenue recognition is evaluated on a contract by contract basis. Performance obligations are satisfied over time as work progresses or at a point in time. A performance obligation is satisfied over time if we have an enforceable right to payment. Determining if there is an enforceable right to payment is assessed on a contract by contract basis. For contracts requiring over time revenue recognition, the selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We use a cost-based input measurement of progress because it best depicts the transfer of assets to the customer, which occurs as costs are incurred during the manufacturing process or as services are rendered. Under the cost-based measure of progress, the extent of progress towards completion is measured based on the costs incurred to date.

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.

Healthcare Services Revenue Recognition. We generate service revenue primarily from providing diagnostic services to our customers. Service revenue within our Healthcare reportable segment is derived from providing our customers with contract diagnostic services, which includes use of our imaging systems, qualified personnel, radiopharmaceuticals, licensing, logistics and related items required to perform testing in their own offices. We bill customers either on a per-scan or fixed-payment methodology, depending upon the contract that is negotiated with the customer. Within our Healthcare segment, we also rent cameras to healthcare customers for use in their operations. Rental revenues are structured as either a weekly or monthly payment arrangement, and are recognized in the month rental assets are provided. Revenue related to provision of our services is recognized at the time services are performed.

Healthcare Product and Product-Related Revenue Recognition. We generate revenue from product and product-related sales, primarily from the sale of gamma cameras, accessories, and radiopharmaceuticals doses.

Healthcare product revenues are generated from the sale of internally developed solid-state gamma camera imaging systems and post-warranty camera maintenance service contracts. Revenue from sales of imaging systems is generally recognized at point in time upon delivery of systems and acceptance by customers. We also provide installation services and training on cameras sold, primarily in the United States. Installation and initial training is generally performed shortly after delivery and the revenue related to the provision of these services is recognized at the time services are performed. Neither installation nor training is essential to the functionality of the product. Finally, we offer camera maintenance service contracts that are sold beyond the term of the initial warranty, generally one year from the date of purchase. Revenue from these service contracts is deferred and recognized ratably over the period of the obligation. We offer time and material services and record revenue when service is performed. Radiopharmaceuticals doses revenue, generated by Healthcare, is generally recognized when delivered to the customer.

Construction Revenue Recognition. Within the Construction division, we service residential and commercial construction projects by manufacturing modular housing units and other products and supply general contractors with building materials. KBS manufactures modular buildings for both single-family residential homes and larger, commercial building projects. EdgeBuilder manufactures structural wall panels, permanent wood foundation systems and other engineered wood products, and Glenbrook is a retail supplier of lumber and other building supplies. 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

Billings in excess of costs and estimated earnings. We recognize billings in excess of costs and estimated earnings on uncompleted contracts are current liabilities, which 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 earnings 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 classified in deferred revenue in the condensed Consolidated Balance Sheets. Contract liabilities are reduced when the associated revenue from the contract is recognized, which is generally within one year.

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.

Deferred Revenue

We record deferred revenue when cash payments are received in advance of our performance. We have determined our contracts do not include a significant financing component. The majority of our deferred revenue relates to payments received on camera support post-warranty service contracts, which are billed at the beginning of the contract period or at periodic intervals (e.g., monthly, quarterly, or annually).

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 condensed consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our condensed Consolidated Balance Sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We use the implicit discount rate when readily determinable; however, as most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease valuation may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

We elected not to separate lease and non-lease components of its operating leases in which it is the lessee and lessor. Additionally, we elected not to recognize right-of-use assets and leases liabilities that arise from short-term leases of twelve months or less.

Lessor Accounting

The majority of the lease income of the Healthcare division comes from camera rentals and the lease income of the Construction division comes from the rental of the Waterford facility to a commercial tenant. We determine lease classification at the commencement date. Leases not classified as sales-type or direct financing leases are classified as operating leases. The primary accounting criteria we use for lease classification are (a) review to determine if the lease transfers ownership of the underlying asset to the lessee by the end of the lease term, (b) review to determine if the lease grants the lessee a purchase option that the lessee is reasonably certain to exercise, (c) determine, using a seventy-five percent or more threshold, if the lease term is for a major part of the remaining economic life of the underlying asset (however, we do not use this classification criterion when the lease commencement date falls within the last 25 percent of the total economic life of the underlying asset) and (d) determine, using a 90 percent or more threshold, if the present value of the sum of the lease payments and any residual value guarantees equal or exceeds substantially all of the fair value of the underlying asset. We do not lease equipment of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. Each of our leases is classified as an operating lease.

We elected the operating lease practical expedient for its leases to not separate non-lease components of regular maintenance services from associated lease components. This practical expedient is available when both of the following are met: (i) the timing and pattern of transfer of the non-lease components and associated lease component are the same and (ii) the lease component, if accounted for separately, would be classified as an operating lease.

Property taxes paid by the lessor that are reimbursed by the lessee are considered to be lessor costs of owning the asset, and are recorded gross with revenue included in other non-interest income and expense recorded in operating expenses.

We selected a lessor accounting policy election to exclude from revenue and expenses sales taxes and other similar taxes assessed by a governmental authority on lease revenue-producing transactions and collected by the lessor from a lessee.

Operating lease equipment is carried at cost less accumulated depreciation. Operating lease equipment is depreciated to its estimated residual value using the straight-line method over the lease term or estimated useful life of the asset.

Rental revenue on operating leases is recognized on a straight-line basis over the lease term unless collectability is not probable. In these cases, rental revenue is recognized as payments are received.

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.

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.

Reclassification

PPP Loan forgiveness reclassification has been made to the prior period financial statements to conform to the current year financial statement presentation of the condensed Consolidated Statements of Operations. This change did not impact previously reported net loss, loss per share, stockholders’ equity, total assets or the condensed Consolidated Statements of Cash Flows.

Finance Lease liabilities and Investments reclassifications have been made to the prior period financial statements to conform to the current year financial statement presentation of the condensed Consolidated Balance Sheets. These changes did not impact previously reported net (loss) income, (loss) income per share, stockholders’ equity, total liabilities, total assets or the condensed Consolidated Statements of Cash Flows.

New Accounting Standards To Be Adopted

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available-for-sale debt securities. This update is effective for annual periods beginning after December 15, 2022, and interim periods within those periods, and early adoption is permitted. We expect to adopt the standard on its effective date in the first quarter of 2023. We believe the adoption will modify the way we analyze financial instruments, but currently do not expect the adoption to have a material financial impact on our condensed consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), to temporarily ease the potential burden in accounting for reference rate reform. The standard provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform. The guidance generally can be applied through December 31, 2022. We will monitor our contracts and transactions for potential application of this ASU.

Recently Adopted Accounting Standards

In August 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). ASU 2020-06 eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, ASU 2020-06 modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2021 (or December 15, 2023 for companies who meet the SEC definition of Smaller Reporting Companies), and interim periods within those fiscal years. The amendment is to be adopted through either a fully retrospective or modified retrospective method of transition. Early adoption is permitted. The Company early adopted this standard on January 1, 2021 by applying the modified retrospective approach. There was no cumulative-effect transition adjustment required to the opening balance of accumulated deficit upon the adoption of this standard.

Note 2. Discontinued Operations

On October 30, 2020, Star Equity entered into a Stock Purchase Agreement (the “DMS Purchase Agreement”) between the Company (“Seller”), DMS Health, and Knob Creek Acquisition Corp., a Tennessee corporation (“Buyer”), pursuant to which the Buyer purchased all of the issued and outstanding common stock of DMS Health, which operated our Mobile Healthcare business unit, from Seller. The purchase price under the DMS Purchase Agreement was $18.75 million in cash, subject to certain adjustments, including a working capital adjustment. We deemed the disposition of the Mobile Healthcare business unit to represent a strategic shift that will have a major effect on our operations and financial results. For the year ended December 31, 2021, the Mobile Healthcare business met the criteria to be classified as held for sale. This segment is reported on the condensed Consolidated Statements of Operations as discontinued operations and on the condensed Consolidated Balance Sheets as Assets and Liabilities held for sale. In January, 2022, we received an immaterial amount of net escrow settlement. In April 2021, DMS Health contracted Digirad Imaging Solutions for a term of three years to purchase radiopharmaceuticals doses, resulting in $0.4 million of revenues for the three months ended March 31, 2022.

We allocated a portion of interest expense to discontinued operations since the proceeds received from the sale were required to be used to pay down outstanding borrowings under our revolving credit facility under the SNB Loan Agreement. The allocation was based on the ratio of assets generated based on the borrowing capacity to total borrowings capacity for the period. In addition, certain general and administrative costs related to corporate and shared service functions previously allocated to the mobile healthcare reportable segment are included in discontinued operations.

The following table presents financial results of DMS Health for the three months ended March 31, 2021. There have been no activities for the three months ended March 31, 2022 (in thousands):


	Three Months Ended March 31,
	2021
Total revenues	$	9,490
Total cost of revenues	6,973
Gross profit	2,517

Operating expenses:
Selling, general and administrative	1,469

Total operating expenses	1,469

Income from discontinued operations	1,048
Interest expense, net	(180)

Gain on sale of discontinued operations	5,224
Income from discontinuing operations before income taxes	6,092
Income tax expense	(72)
Income from discontinuing operations	$	6,020

There have been no activities for the three months ended March 31, 2022. The following table presents the significant non-cash operating, investing and financing activities from discontinued operations for the three months ended March 31, 2021 (in thousands):


	Three Months Ended March 31,
		2021
Operating activities

Depreciation		$	8

Non-cash lease expense		256
Write-off of borrowing costs		130
Gain on sale of DMS discontinued operations		(5,224)













Investing activities
Purchase of property and equipment		(154)
Proceeds from sale of discontinued operations		18,750
Proceeds from sale of property and equipment		3

Following is the reconciliation of purchase price to the gain recognized in income from discontinued operations for the three months ended March 31, 2021 (in thousands):



Estimated proceeds of the disposition, net of transaction costs	$	18,750
Assets of the businesses	(20,920)
Liabilities of the businesses	7,712
Transaction expenses	(318)
Pre-tax gain on the disposition	$	5,224

Note 3. Revenue

Disaggregation of Revenue

The following tables present our revenues for the three months ended March 31, 2022 and 2021, disaggregated by major source (in thousands):


	Three Months Ended March 31, 2022
	Healthcare		Construction		Total
Major Goods/Service Lines
Mobile Imaging	$	10,518	$	—	$	10,518
Camera	1,132		—		1,132
Camera Support	1,679		—		1,679
Healthcare Revenue from Contracts with Customers	13,329		—		13,329
Lease Income	89		—		89
Construction	—		11,631		11,631

Total Revenues	$	13,418	$	11,631	$	25,049

Timing of Revenue Recognition
Services and goods transferred over time	$	10,854	$	1,897	$	12,751
Services and goods transferred at a point in time	2,564		9,734		12,298
Total Revenues	$	13,418	$	11,631	$	25,049


	Three Months Ended March 31, 2021
	Healthcare		Construction		Total
Major Goods/Service Lines
Mobile Imaging	$	10,181	$	—	$	10,181
Camera	1,422		—		1,422
Camera Support	1,646		—		1,646
Healthcare Revenue from Contracts with Customers	13,249		—		13,249
Lease Income	58		38		96
Construction	—		9,009		9,009

Total Revenues	$	13,307	$	9,047	$	22,354

Timing of Revenue Recognition
Services and goods transferred over time	$	11,092	$	2,731	$	13,823
Services and goods transferred at a point in time	2,215		6,316		8,531
Total Revenues	$	13,307	$	9,047	$	22,354

We have corrected an immaterial disclosure error in the previously disclosed disaggregated revenue balances relating to the timing of revenue for the three months ended March 31, 2021. For the three months ended March 31, 2021, the amount of $0.6 million was revised from over time to point in time related to revenue recognition in the table above. Healthcare for goods transferred over time decreased by $0.6 million, with a corresponding increase to revenue recognized for goods and services transferred at a point in time. The adjustments did not impact the total amount of revenue or the period in which it was recognized, therefore, they had no effect on the condensed Consolidated Balance Sheets, Statements of Operations and Cash Flows for the periods presented.

Nature of Goods and Services

Mobile Imaging

Within our Healthcare segment, our sales are derived from providing services and materials to our customers, primarily physician practices and hospitals that allow them to perform diagnostic services at their site. We typically bundle our services in providing staffing, our imaging systems, licensing, radiopharmaceuticals, and supplies depending on our customers’ needs. Our contracts with customers are typically entered into annually and are billed on a fixed rate per-day or per-scan basis, depending

on terms of the contract. For the majority of these contracts, we have the right to invoice the customer in an amount that directly corresponds with the value to the customer as we perform the services. We use the practical expedient to recognize revenue corresponding with amounts we have the right to invoice for services performed.

Camera

Within our Healthcare segment, camera revenues are generated from the sale of internally developed solid-state gamma camera imaging systems and accessories. We recognize revenue upon transfer of control to the customer at a point-in-time, which is generally upon delivery and acceptance. We also provide installation services and training on cameras we sell, primarily in the United States. Installation and initial training is generally performed shortly after delivery. We recognize revenues for installation and training over time as the customer receives and consumes benefits provided as we perform the installation services.

Our sale of imaging systems includes a one-year assurance-type warranty. The estimated costs associated with our standard warranties and field service actions continue to be recognized as expense when cameras are sold. Maintenance service contracts sold beyond the term of our standard warranties are accounted for as a service-type warranty and revenue is deferred and recognized ratably over the period of the warranty obligation.

Camera Support

Within our Healthcare segment, camera support revenue is derived from the sale of separately-priced extended maintenance contracts to camera owners, training, and the sale of parts to customers that do not have an extended warranty. Our separately priced service contracts range from 12 to 48 months. Service contracts are usually billed at the beginning of the contract period or at periodic intervals (e.g., monthly, quarterly, or annually) and revenue is recognized ratably over the term of the agreement.

Services and training revenues are recognized in the period the services and training are performed. Revenue for sales of parts are recognized when the parts are delivered to the customer and control is transferred.

Lease Income

Within our Healthcare segment, we also generate income from rentals of state-of-the-art equipment including cameras and ultrasound machines to customers. Rental contracts are structured as either a weekly or monthly payment arrangement and are accounted for as operating leases. Revenues are recognized on a straight-line basis over the term of the rental.

Construction

Within the Construction segment, we service residential and commercial construction projects by manufacturing modular housing units and other products and supply general contractors with building materials. KBS manufactures modular buildings for both single-family residential homes and larger, commercial building projects. EdgeBuilder manufactures structural wall panels, permanent wood foundation systems and other engineered wood products, and Glenbrook is a retail supplier of lumber and other building supplies. Revenues are evaluated on a contract by contract basis. In general, construction revenues are recognized upon transfer of control to the customer at a point-in-time, which is generally upon delivery and acceptance. However, construction revenues are recognized over time for arrangements with customers for which: (i) performance does not create an asset with an alternative use, and (ii) we have an enforceable right to payment for performance completed to date.

Deferred Revenue

Changes in the deferred revenue for three months ended March 31, 2022, is as follows (in thousands):


Balance at December 31, 2021	$	2,869
Revenue recognized that was included in balance at beginning of the year	(2,011)
Deferred revenue, net, related to contracts entered into during the year	2,503
Balance at March 31, 2022	$	3,361

As of March 31, 2022 and December 31, 2021, non-current deferred revenue was $386 thousand and $412 thousand, respectively, in other liabilities within our condensed Consolidated Balance Sheets, which is expected to be recognized over a period of 2-4 years.

Billings in Excess of Costs and Estimated Profit

Changes in the billings in excess of costs and estimated profit for three months ended March 31, 2022 is as follows (in thousands):


Balance at December 31, 2021	$	312
Revenue recognized that was included in balance at beginning of the year	(312)
Billings in excess of costs, related to contracts entered into during the year	15
Balance at March 31, 2022	$	15

As of March 31, 2022, billings in excess of costs and estimated profit was $15 thousand and $0.3 million balance as of December 31, 2021, respectively in current liabilities within our condensed Consolidated Balance Sheet. As of March 31, 2022, total contract assets was $55 thousand and no balance as of December 31, 2021, respectively in other current assets within our condensed Consolidated Balance Sheet.

Note 4. 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 loss attributable to common stockholders to warrants because the holders of our warrants are not contractually obligated to share in our losses. Basic net loss per share attributable to common stockholders is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per share attributable to common stockholders is calculated to give effect to all potential shares of common stock, including common stock issuable upon exercise of warrants, stock options, and restricted stock units (“RSUs”). In periods for which there is a net loss, diluted loss per common share is equal to basic loss per common share, since the effect of including any common stock equivalents would be antidilutive.

The following table sets forth the reconciliation of shares used to compute basic and diluted net (loss) or income per share for the periods indicated (in thousands):


	Three Months Ended March 31,
	2022		2021
Numerator:
Loss from continuing operations, net of tax	$	(3,701)	$	(588)
Income from discontinued operations, net of tax	—		6,020
Net (loss) income	(3,701)		5,432
Deemed dividend on Series A perpetual preferred stock	(479)		(479)
Net (loss) income attributable to common shareholders	$	(4,180)	$	4,953

Denominator:
Weighted average common shares outstanding	12,434		4,916
Weighted average prefunded warrants outstanding	235		—
Weighted average shares outstanding - basic and diluted	12,669		4,916






Net (loss) income per share - basic and diluted
Net loss per share, continuing operations	$	(0.29)	$	(0.12)
Net income per share, discontinued operations	$	—	$	1.22
Net (loss) income per share - basic and diluted	$	(0.29)	$	1.10
Deemed dividend on Series A perpetual preferred stock per share	$	(0.04)	$	(0.10)
Net (loss) income per share, attributable to common shareholders - basic and diluted	$	(0.33)	$	1.01

Antidilutive common stock equivalents are excluded from the computation of diluted loss per share. The computation of diluted earnings per share excludes stock options, RSUs, and stock warrants that are anti-dilutive. The following common stock equivalents were anti-dilutive (in thousands):


	Three Months Ended March 31,
	2022	2021
Stock options	6	25
Restricted stock units	271	68
Stock warrants	9,361	866
Total	9,638	959

Note 5. Supplementary Balance Sheet Information

The components of inventories are as follows (in thousands):


	March 31, 2022		December 31, 2021
Raw materials	$	7,167	$	5,870
Work-in-process	2,252		2,145
Finished goods	1,191		830
Total inventories	10,610		8,845
Less reserve for excess and obsolete inventories	(323)		(320)
Total inventories, net	$	10,287	$	8,525

Property and equipment consist of the following (in thousands):


	March 31, 2022		December 31, 2021
Land	$	805	$	805
Buildings and leasehold improvements	4,832		4,823
Machinery and equipment	24,940		24,881
Computer hardware and software	2,387		2,387
Gross property and equipment	32,964		32,896
Accumulated depreciation	(24,111)		(23,978)
Total property and equipment, net	$	8,853	$	8,918

As of March 31, 2022, the non-operating land and building, held for investments, had a carry value of $2.0 million and was included within property and equipment on the condensed Consolidated Balance Sheet.

Depreciation expense for the three months ended March 31, 2022 and 2021 was $0.5 million and $0.5 million, respectively.

In our Healthcare division, we generally provide a 12 month assurance warranty on our gamma cameras. We accrue the estimated cost of this warranty at the time revenue is recorded and charge warranty expense to product and product-related cost of revenues. Warranty reserves are established based on historical experience with failure rates and repair costs and the number of systems covered by warranty. Warranty reserves are depleted as gamma cameras are repaired. The costs consist principally of materials, personnel, overhead, and transportation. We review warranty reserves quarterly and, if necessary, make adjustments.

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.

The activities related to our warranty reserve for the quarter ended March 31, 2022 and year ended December 31, 2021 are as follows (in thousands):


	March 31, 2022		December 31, 2021
Balance at the beginning of year	$	569	$	214
Charges to cost of revenues	26		963
Applied to liability	(175)		(608)
Balance at the end of period	$	420	$	569

Note 6. Leases

Lessee

We have operating and finance leases for corporate offices, 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 are included separately in the condensed Consolidated Balance Sheets and finance lease assets are included in property and equipment with related liabilities separately included in the condensed Consolidated Balance Sheets.

The components of lease expense are as follows (in thousands):


	Three Months Ended March 31,
	2022		2021
Operating lease cost	$	396	$	334

Finance lease cost:
Amortization of finance lease assets	$	123	$	106
Interest on finance lease liabilities	17		21
Total finance lease cost	$	140	$	127

Supplemental cash flow information related to leases from continuing operations was as follows (in thousands):


	Three Months Ended March 31,
	2022		2021
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	199	$	317
Operating cash flows from finance leases	$	17	$	21
Financing cash flows from finance leases	$	157	$	149

Right-of-use assets obtained in exchange for lease obligations
Operating leases	$	1,229	$	1,537

Supplemental balance sheet information related to leases was as follows (in thousands):


	March 31, 2022		December 31, 2021














Weighted average remaining lease term (in years)
Operating leases	4.2		3.9
Finance leases	2.6		2.6

Weighted average discount rate
Operating leases	3.82	%	4.23	%
Finance leases	4.99	%	5.05	%

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 March 31, 2022 were as follows (in thousands):


	Operating Leases		Finance Leases
2022 (excludes the three months ended March 31, 2022)	$	1,218	$	480
2023	1,517		419
2024	1,354		264
2025	828		96
2026 and thereafter	951		14
Total future minimum lease payments	5,868		1,273
Less amounts representing interest	450		75
Present value of lease obligations	$	5,418	$	1,198

Lessor

In the Healthcare division, we generate lease income in the Healthcare segment, from equipment rentals to customers. Rental contracts are structured as either a weekly or monthly payment arrangement and are accounted for as operating leases. Revenues are recognized on a straight-line basis over the term of the rental. During the three months ended March 31, 2022 and 2021, our lease contracts were mainly month to month contracts.

Note 7. Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The FASB's authoritative guidance for fair value measurements establishes a three-level hierarchy based upon the inputs to the valuation model of an asset or liability. Level 1 inputs are quoted prices in active markets for identical assets; Level 2 inputs are inputs other than quoted prices that are significant and observable; and Level 3 inputs are significant unobservable inputs to be used in situations where markets do not exist or illiquid. The following table presents information about our financial assets that are measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques we utilize to determine such fair value at March 31, 2022 and December 31, 2021 (in thousands):


	Fair Value as of March 31, 2022
	Level 1		Level 2		Level 3		Total
Assets:
Equity securities	$	1,195	$	—	$	—	$	1,195
Lumber derivative contracts	(13)		—		—		(13)
VIE Investments	—		—		337		337
Total	$	1,182	$	—	$	337	$	1,519


	Fair Value as of December 31, 2021
	Level 1		Level 2		Level 3		Total
Assets:
Equity securities	$	47	$	—	$	—	$	47
Lumber derivative contracts	666		—		—		666
VIE Investments	—		—		337		337
Total	$	713	$	—	$	337	$	1,050

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 March 31, 2022 and December 31, 2021, respectively. During the three months ended March 31, 2022, and 2021, we recorded an unrealized gain of $92 thousand and unrealized loss of $23 thousand, respectively, recorded in other (expense) income, net in the condensed Consolidated Statements of Operations.

We may enter into lumber derivative contracts in order to protect our gross profit margins from fluctuations caused by volatility in lumber prices. For the three months ended March 31, 2022, we recorded a net loss of $0.2 million in the cost of goods sold of the condensed Consolidated Statements of Operations. As of March 31, 2022, we had a net long (buying) position of 2,530,000 board feet under 23 lumber derivatives contracts. As of December 31, 2021, we had a net long (buying) position of 2,420,000 board feet under 22 lumber derivatives contracts.

Gains and losses from lumber derivative contracts, are recorded in cost of goods sold of the condensed Consolidated Statements of Operations and included the following:


	March 31, 2022
	Amount
Unrealized loss on lumber derivatives	$	676
Realized gain on lumber derivatives	(448)
Total loss on lumber derivatives	$	228

The fair value of VIE investments of $0.3 million recorded, in Other Assets, is based on unobservable inputs evaluated on March 31, 2022 and December 31, 2021, respectively. During the three months ended March 31, 2022 and 2021, there were no realized or unrealized gains, losses, or impairments recorded in the condensed Consolidated Statements of Operations. See Note 16. Variable Interest Entity for further details.

Note 8. Debt

A summary of debt as of March 31, 2022 and December 31, 2021 is as follows (dollars in thousands):


	March 31, 2022			December 31, 2021
	Amount		Weighted-Average Interest Rate	Amount		Weighted-Average Interest Rate
Revolving Credit Facility - Gerber KBS	$	2,921	6.25%	$	3,131	6.00%

Revolving Credit Facility - Gerber EBGL	2,081		6.25%	1,652		6.00%
Revolving Credit Facility - SNB	7,334		2.95%	7,016		2.60%
Total Short-term Revolving Credit Facilities	$	12,336	4.29%	$	11,799	3.98%
Gerber - Star Loan Principal, net	$	998	6.50%	$	1,070	6.25%

Short Term Loan	$	998	6.50%	$	1,070	6.25%

Total Short-term debt	$	13,334	4.45%	$	12,869	4.17%

Term Loan Facilities

As of March 31, 2022, the short term loan includes $1.0 million of the Star Loan, net of issuance costs.

The following table presents the Star Loan balance, net of unamortized debt issuance costs as of March 31, 2022 (in thousands):


	March 31, 2022
	Amount
Gerber - Star Loan Principal	$	1,146


Unamortized debt issuance costs	(148)
Gerber - Star Loan Principal, net	$	998

SNB Credit Facility

On March 29, 2019, the Company entered into a Loan and Security Agreement (the “SNB Loan Agreement”) by and among certain subsidiaries of the Company, as borrowers (collectively, the “SNB Borrowers”); the Company, as guarantor; and Sterling. On February 1, 2022, Sterling became part of Webster, and Webster became the successor in interest to the SNB Loan Agreement.

The SNB Loan Agreement is a five-year credit facility maturing in March 2024, with a maximum credit amount of $20.0 million for revolving loans (the “SNB Credit Facility”). Under the SNB Credit Facility, the SNB Borrowers can request the issuance of letters of credit in an aggregate amount not to exceed $0.5 million at any one time outstanding. The borrowings under the SNB Loan Agreement were classified as short-term obligations under GAAP as the agreement contained a subjective acceleration clause and required a lockbox arrangement whereby all receipts within the lockbox are swept daily to reduce borrowings outstanding. As of March 31, 2022, the Company had $0.1 million of letters of credit outstanding and had additional borrowing capacity of $1.1 million.

At the SNB Borrowers’ option, the SNB Credit Facility will bear interest at either (i) a Floating LIBOR Rate, as defined in the SNB Loan Agreement, plus a margin of 2.50% per annum; or (ii) a Fixed LIBOR Rate, as defined in the SNB Loan Agreement, plus a margin of 2.25% per annum. Our floating rate on this facility at March 31, 2022 was 2.95%. The SNB Loan Agreement also provides for certain fees payable to Webster during its term including an unused line fee determined on a daily basis, in an amount equal to one-quarter of one percent (0.25%) per annum multiplied by the amount by which the SNB Loan Agreement credit limit exceeded the sum of the average daily outstanding amount and outstanding letters of credit. Given that only the assets of the Digirad Health businesses serve as collateral support for the SNB Credit Facility, distributions from this facility are restricted in their use. They must be used solely to finance these Healthcare businesses, unless there is $4.0 million or greater remaining in undrawn capacity after any distributions made to the parent company or other Star Equity entities.

On February 1, 2021, in connection with the closing of the sale of our MD Office Solutions (“MDOS”) subsidiary, we entered into a First Amendment to the SNB Loan Agreement pursuant to which SNB consented to the sale of MDOS and the Company’s name change from Digirad Corporation to Star Equity Holdings, Inc.

On March 31, 2021, in connection with completing the sale of DMS Health, we entered into a Second Amendment to the SNB Loan Agreement pursuant to which SNB consented to the sale of DMS Health and its subsidiaries and required the principal to be paid down to $7.0 million.

Financial covenants require that the SNB Borrowers maintain (a) a Fixed Charge Coverage Ratio as of the last day of a fiscal quarter of not less than 1.25 to 1.0 and (b) a Leverage Ratio as of the last day of such fiscal quarter of no greater than 3.50 to 1.0. As of March 31, 2022, the Company was not in compliance with the covenants under the SNB Loan Agreement and had not yet obtained a waiver from Webster for these financial covenant breaches.

Construction Loan Agreements

As of March 31, 2022, the Construction division had outstanding revolving lines of credit and term loans of approximately $5.0 million. Our Construction debt primarily included: (i) $2.9 million principal outstanding on KBS’s $4.0 million revolving credit facility under a Loan and Security Agreement, dated February 23, 2016 (as amended, the “KBS Loan Agreement”) with Gerber and (ii) $2.1 million principal outstanding on EBGL’s $3.0 million revolving credit facility under a Revolving Credit Loan Agreement, which was increased from $3.0 million to $4.0 million on July 30, 2021. The KBS Loan Agreement, and EBGL’s $4.0 million revolving credit facility under a Revolving Credit Loan Agreement are collectively referred to as the “Construction Loan Agreements.” The Construction division had a borrowing capacity under both revolving lines of credit of $0.4 million, based on the inventory and accounts receivable on March 31, 2022 which fluctuates weekly. The Construction Loan Agreements contain cross-default provisions and subjective acceleration clauses which may, in the event of a material adverse event, as determined by Gerber, allow Gerber to declare the loans and all other obligations under the Construction Loan Agreements immediately due and payable or increase the interest rate at which loans and obligations under the Construction Loan Agreements bear interest. Each of the two Gerber credit facilities are backed by the assets of their respective borrower (KBS or EBGL), which serve as collateral support. Therefore, distributions from each facility are restricted in their use, as they must be used solely to finance the operations of their respective borrower.

KBS Loan Agreement

On February 23, 2016, ATRM, KBS and Main Modular Haulers, Inc. entered into the KBS Loan Agreement with Gerber. The KBS Loan Agreement provides KBS with a revolving line of credit with borrowing availability of up to $4.0 million. Availability under the line of credit is based on a formula tied to KBS’s eligible accounts receivable, inventory and other collateral. The KBS Loan Agreement, which was scheduled to expire on February 22, 2018, has been automatically extended for successive one (1) year periods in accordance with its terms and is now scheduled to expire on February 22, 2023. The KBS Loan Agreement will be automatically extended for another one (1) year period unless a party thereto provides prior written notice of termination. As of March 31, 2022, neither party has provided notice of termination. Upon the final expiration of the term of the KBS Loan Agreement, the outstanding principal balance is payable in full. Borrowings bear interest at the prime rate plus 2.75%, equating to 6.25% at March 31, 2022, with interest payable monthly. The KBS Loan Agreement also provides for certain fees payable to Gerber during its term, including a 1.5% annual facilities fee and a 0.10% monthly collateral monitoring fee. KBS’s obligations under the KBS Loan Agreement are secured by all of its assets and are guaranteed by the Company. The borrowings under the KBS Loan Agreement were classified as short-term obligations under GAAP as the agreement contained a subjective acceleration clause and required a lockbox arrangement whereby all receipts are swept daily to reduce borrowings outstanding. As of March 31, 2022, approximately $2.9 million was outstanding under the KBS Loan Agreement.

On March 31, 2021, the parties to the KBS Loan Agreement amended the KBS Loan Agreement to provide for increased availability under the KBS Loan Agreement to KBS under certain circumstances, including for new equipment additions, and certain other changes, as well as a waiver of certain covenants.

On March 8, 2022, the borrowers under the KBS Loan Agreement entered into the Nineteenth Amendment to KBS Loan Agreement to amend the financial covenants to require that KBS maintain (a) net cash income (as defined in the KBS Loan Agreement) of at least equal to no less than $0 for the trailing 6-month period ending June 30, 2022 and be no less than $500,000 for the trailing fiscal year end and (b) a minimum EBITDA (as defined in the KBS Loan Agreement) no less than $0 as of June 30 and no less than $850,000 as of the fiscal year end, as well as a waiver of certain covenants as of December 31, 2021. As of March 31, 2022, we are not required to measure financial covenants. As of December 31, 2021, our last test date, KBS was not in compliance with the bi-annual financial covenants under the KBS Loan Agreement, which required no net annual post-tax loss and certain minimum leverage ratios as of the test date. The December 31, 2021 Gerber covenants waivers last until the next measurement period.

EBGL Premier Note

On June 30, 2017, EBGL entered into a Revolving Credit Loan Agreement (as amended, the “Premier Loan Agreement” with Premier Bank (“Premier”)), providing EBGL with a working capital line of credit of up to $3.0 million.

Availability under the Premier Loan Agreement is based on a formula tied to EBGL’s eligible accounts receivable, inventory and equipment, and borrowings bear interest at the prime rate plus 1.50%, with interest payable monthly and the outstanding principal balance payable upon expiration of the term of the Premier Loan Agreement. The Premier Loan Agreement also provides for certain fees payable to Premier during its term. The initial term of the Premier Loan Agreement was scheduled to expire on June 30, 2018, but was extended multiple times by Premier until January 31, 2023. EBGL’s obligations under the Premier Loan Agreement are secured by all of their inventory, equipment, accounts and other intangibles, fixtures and all proceeds of the foregoing.

On January 31, 2020, Glenbrook and EdgeBuilder entered into an Extension and Modification Agreement (the “Modification Agreement”) with Premier that modified the terms of the Revolving Credit Promissory Note made by Glenbrook and EdgeBuilder. The Modification Agreement reduced the outstanding borrowings to $1.0 million, extended the final maturity date to January 31, 2023, and set the interest rate to at 5.75% per annum. Jeffrey E. Eberwein, the Executive Chairman of the Company’s board of directors, executed a guaranty in favor of Premier, which had been extended through January 1, 2023, under which ATRM and Mr. Eberwein absolutely and unconditionally guaranteed all of EBGL’s obligations under the Premier Loan Agreement.

All obligations under the Premier Loan Agreement were repaid in full on May 26, 2021 and no amount remains outstanding as of March 31, 2022. In exchange, Premier terminated all of its security interests in the assets of EBGL.

Gerber Star Loan

On January 31, 2020, SRE, 947 Waterford Road, LLC (“947 Waterford”), 300 Park Street, LLC (“300 Park”), and 56 Mechanic Falls Road, LLC (“56 Mechanic” and together with SRE, 947 Waterford, and 300 Park, (the “Star Borrowers”), each an Investments subsidiary, and the Company, ATRM, KBS, EdgeBuilder, and Glenbrook (collectively, the “Star Credit Parties”), entered into the Star Loan Agreement with Gerber providing the Star Borrowers with a credit facility with borrowing availability of up to $2.5 million ($2.0 million and $0.5 million to KBS and EBGL, respectively) or the Star Loan. The advance of $2.0 million to KBS is to be repaid in monthly installments of sixty (60) consecutive equal payments. The advance of $0.5 million to EBGL, which has been temporarily increased by $0.3 million due to be repaid on April 30, 2020, was to be repaid in monthly installments of twelve (12) consecutive equal payments. The Star Loan matures on the earlier of (a) January 1, 2025 or (b) the termination, the maturity or repayment of the EBGL Loan (as defined below). Availability under the Star Loan Agreement was based on a formula tied to the value of real estate owned by the Star Borrowers, and borrowings bear interest at the prime rate plus 3.5% per annum. The Star Loan also provides for certain fees payable to Gerber during its term, including a 1.5% annual facilities fee and a 0.10% monthly collateral monitoring fee.

The obligations of the Star Borrowers under the Star Loan Agreement are guaranteed by the Star Credit Parties and are secured by substantially all the assets of the Star Borrowers and the Star Credit Parties. Contemporaneously with the execution and delivery of the Star Loan Agreement, Mr. Eberwein executed and delivered a Guaranty (the “Gerber Eberwein Guaranty”) to Gerber, pursuant to which he guaranteed the performance of all the Star Borrowers’ obligations to Gerber. Mr. Eberwein’s obligations under the Gerber Eberwein Guaranty are limited in the aggregate to the amount of (a) $2.5 million, plus (b) costs of Gerber incidental to the enforcement of the Gerber Eberwein Guaranty or any guaranteed obligations.

On February 26, 2021, the Star Borrowers entered into a Third Amendment to the Star Loan Agreement (the “Third Star Amendment”) with Gerber that amended the contract rate to prime rate plus 3% and discharged the $2.5 million Gerber Eberwein Guaranty.

The financial covenants under the Star Loan Agreement include maintenance of a Debt Service Coverage Ratio of not less than 1:00 to 1:00, as defined in the Star Loan Agreement. The occurrence of any event of default under the Star Loan Agreement may result in the obligations of the Star Borrowers becoming immediately due and payable. As of March 31, 2022, no event of default was deemed to have occurred and the Star Borrowers were in compliance with the bi-annual financial covenants under the Star Loan Agreement measured as of December 31, 2021.

As of March 31, 2022, $1.0 million was outstanding under the Star Loan Agreement. The borrowings under the Star Loan Agreement were classified as short-term obligations under GAAP, because the borrowings under the EBGL Loan Agreement were classified as short-term obligations under GAAP given the EBGL and KBS Loan Agreements contain a subjective acceleration clause and require a lockbox arrangement whereby all receipts are swept daily to reduce borrowings outstanding. Accordingly, if (i) a material adverse effect may be seen to have occurred, (ii) Gerber in its discretion deems a EBGL Loan Agreement default occurred, and (iii) the proceeds swept are insufficient to pay the balance outstanding, Gerber may then demand all obligations under the Star Loan Agreement immediately due and payable due to cross-default provision, occurring within the Star Loan Agreement. Since a material event can occur at any time, all obligations under the Star Loan Agreement, EBGL Loan Agreement and KBS Loan Agreement are classified as short-term obligations.

Gerber EBGL Loans

On January 31, 2020, EdgeBuilder and Glenbrook (the “EBGL Borrowers”), each a Construction Subsidiary, and the Company, 947 Waterford, 300 Park, 56 Mechanic, ATRM, and KBS (collectively, the “EBGL Credit Parties”), entered into a Loan and Security Agreement (the “EBGL Loan Agreement”) with Gerber providing the EBGL Borrowers with a credit facility with borrowing availability of up to $3.0 million (the “EBGL Loan”). On March 5, 2020, the EBGL Borrowers entered into a First Amendment to Loan and Security Agreement (the “First EBGL Amendment”) with Gerber that amended the EBGL Loan Agreement and the KBS Loan Agreement to include a pledge $0.3 million of cash collateral by Lone Star Value Investors (“LSVI”) under the EBGL Loan Agreement which, prior to the First EBGL Amendment, was pledged by LSVI in connection with the KBS Loan Agreement. On July 1, 2020, the EBGL Borrowers entered into a Second Amendment that terminated the pledge of $0.3 million in cash collateral. On February 26, 2021, the EBGL Borrowers entered into a Third Amendment to the EBGL Loan Agreement (the “Third EBGL Amendment”), pursuant to which the Company and Gerber eliminated the minimum leverage ratio covenant, lowered the minimum EBITDA, and required the borrowers to not incur a net operating loss on bi-annual basis. The Third EBGL Amendment also discharged the EBGL Eberwein Guaranty described below. As of March 31, 2022, $2.1 million was outstanding under the EBGL Loan.

Availability under the EBGL Loan Agreement was also based on a formula tied to the EBGL Borrowers’ eligible accounts receivable and inventory, and borrowings bear interest at the prime rate plus 2.75% per annum. The EBGL Loan Agreement also provides for certain fees payable to Gerber during its term, including a 1.5% annual facilities fee and a 0.10% monthly collateral monitoring fee. EBGL’s obligations under the Premier Loan Agreement are secured by all of its assets. The EBGL Loan Agreement also provided for certain fees payable to Gerber during its terms. The EBGL Loan matures on the earlier of (a) January 1, 2023, unless extended, or (b) the termination, the maturity or repayment of the Star Loan. The maturity of the EBGL Loan is automatically extended for successive periods of one (1) year each unless terminated by Gerber or the EBGL Borrowers. The borrowings under the EBGL Loan Agreement were classified as short-term obligations under GAAP as the agreement contained a subjective acceleration clause and required a lockbox arrangement whereby all receipts are swept daily to reduce borrowings outstanding.

The obligations of the EBGL Borrowers under the EBGL Loan Agreement are guaranteed by the EBGL Credit Parties and are secured by substantially all the assets of the EBGL Borrowers and the EBGL Credit Parties. On March 5, 2020, contemporaneously with the execution and delivery of the First EBGL Amendment, Mr. Eberwein executed and delivered a Guaranty (the “EBGL Eberwein Guaranty”) to Gerber which guaranteed the performance of all the EBGL Borrowers’ obligations to Gerber under the EBGL Loan Agreement, including the full payment of all indebtedness owing by the EBGL Borrowers to Gerber in connection with the EBGL Loan Agreement and related financing documents. Mr. Eberwein’s obligations under the EBGL Eberwein Guaranty are limited in the aggregate to the amount of (a) $0.5 million, plus (b) costs of Gerber incidental to the enforcement of the EBGL Eberwein Guaranty or any guaranteed obligations.

On July 30, 2021, the EBGL Borrowers entered into a Fourth Amendment to the EBGL Loan Agreement (the “Fourth EBGL Amendment”) with Gerber, which increased the eligible inventory and the maximum borrowing limit from $3.0 million to $4.0 million.

The financial covenants under the EBGL Loan Agreement include maintenance of a minimum EBITDA and no net operating loss, as defined in the EBGL Loan Agreement, for the six months ending June 30, 2022 and for the year ending December 31, 2022. The occurrence of any event of default under the EBGL Loan Agreement and certain events of default under the KBS Loan Agreement may result in the obligations of the EBGL Borrowers becoming immediately due and payable. As of March 31, 2022, no event of default was deemed to have occurred and EBGL was in compliance with the bi-annual financial covenants under the EBGL Loan Agreement as of December 31, 2021.

On October 21, 2021, the EBGL Borrowers entered into the Fifth Amendment to the EBGL Loan Agreement (the “Fifth EBGL Amendment”) with Gerber to amend the definition of “Reserves” to include a minimum amount, subsequent to Glenbrook Building Supply, Inc. entering a new lease for a larger property.

On January 20, 2022, the EBGL Borrowers entered into the Sixth Amendment to the EBGL Loan Agreement (the “Sixth EBGL Amendment”) with Gerber and reduced the minimum average monthly loan amount to 25% of the $4.0 million maximum revolving amount.

On March 8, 2022, the EBGL Borrowers entered into the Seventh Amendment to the EBGL Loan Agreement (the “Seventh EBGL Amendment”) with Gerber to amend and lower the financial covenants to require that EBGL maintain (a) a lower net cash income (as defined in the EBGL Loan Agreement) at least equal to no less than $0 for the trailing 6-month period ending June 30, 2022 and no less than $1,000,000 for the trailing fiscal year ending December 31, 2022 and (b) a reduced minimum EBITDA (as defined in the EBGL Loan Agreement) to be no less than $0 as of June 30, 2022 and no less than $1,000,000 as of the fiscal year ending December 31, 2022.

Paycheck Protection Program

From April 2020 through May 2020, the Company and its subsidiaries received $6.7 million, of loans under the Paycheck Protection Program (“PPP”). Total PPP loans received by the Healthcare division and Construction division were $5.5 million and $1.2 million, respectively.

On April 30, 2020, each of KBS, EdgeBuilder and Glenbrook executed a separate promissory note evidencing unsecured loans under the PPP. The promissory note executed by KBS is for $0.8 million (the “KBS Note”), the promissory note executed by EdgeBuilder is for $0.2 million (the “EdgeBuilder Note”) and the promissory note executed by Glenbrook is for $0.2 million (the “Glenbrook Note”). The KBS Note, the EdgeBuilder Note and the Glenbrook Note, each dated April 30, 2020, are referred to together as the “Construction Notes”.

On May 11, 2020, the Company and each of Digirad Imaging Solutions, Inc. (“DIS”), DMS Imaging, Inc. (“DMS Imaging”) and DMS Health, each a direct or indirect wholly owned subsidiary of the Company, executed a separate promissory note evidencing unsecured loans under the PPP. The promissory note executed by the Company, dated May 7, 2020, is for $0.8 million (the “Company Note”); the promissory note executed by DIS, dated May 5, 2020, is for $3.0 million (the “DIS Note”); the promissory note executed by DMS Imaging, dated May 5, 2020, is for $1.6 million (the “DMS Imaging Note”) and the promissory note executed by DMS Health, dated May 7, 2020, is for $0.1 million (the “DMS Health Note”). The Company Note, the DIS Note, the DMS Imaging Note, and the DMS Health Note are referred to together as the “Healthcare Notes”. The Construction Notes and the Healthcare Notes are referred to collectively as the “PPP Notes” and each promissory note individually as a “PPP Note”.

The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). PPP loans for the Construction and Healthcare division were made through Bremer Bank and Sterling as lenders, respectively.

The PPP loans have two-year terms and bear interest at a rate of 1.00% per annum. Monthly principal and interest payments under the PPP loans are deferred for ten months, after the end of covered periods. The PPP loans may be prepaid at any time prior to maturity with no prepayment penalties.

The PPP Notes contain customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the SBA or lender, or breaching the terms of the applicable PPP loan documents. Upon an event of default under a PPP Note, the lender thereunder may, among other things, require immediate payment of all amounts owing under the applicable PPP Note, collect all amounts owing from the applicable borrower, or file suit and obtain judgment.

Under the terms of the CARES Act, recipients of loans under the PPP can apply for and be granted forgiveness for all or a portion of the loan granted under the PPP. Such forgiveness is determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and certain other eligible costs. Even if forgiveness is granted the PPP loans may remain subject to review and audit for up to six (6) years.

During the fiscal years ended 2020 and 2021, the Company applied for forgiveness on all PPP Loans. As of December 31, 2021, all PPP loans were forgiven, resulting in a gain of $4.2 million in 2021 and $2.5 million in 2020, thus, the Company has no PPP loans outstanding.

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.

On December 27, 2021, the Company reached a settlement in the matter of Keifer v. Heart of Georgia, et al, GA State Ct. (“Keifer”), where a judgment for wrongful death and medical expenses in the amount of $4.96 million was entered on October 4, 2021 against a prior employee of DIS, which employee DIS contractually indemnified. The plaintiff’s original complaint was filed April 19, 2018, regarding events occurring on October 12, 2015. A settlement agreement resulted in the payment of $0.1 million by the Company on December 20, 2021. Following such payment, DIS was released from any claims, damages, rights and causes of action.

On April 1, 2022, the Company entered into a Guaranty Agreement to guarantee certain obligations of KBS to Consigli Construction Co., Inc. under a subcontract in the event of a material breach by KBS in an amount up to $4.4 million, with such amount decreasing as product deliveries occur.

Note 10. 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, when measuring the need for a valuation allowance. Significant judgment is required in determining any valuation allowance against deferred tax assets. We continue to record a full valuation allowance against our deferred tax assets and intend to maintain a valuation allowance until sufficient positive evidence exists to support its reversal.

Intraperiod tax allocation rules require us to allocate our provision for income taxes between continuing operations and other categories of comprehensive income, such as discontinued operations.

For the three months ended March 31, 2022, we recorded an income tax expense of $950 thousand within continuing operations and zero income tax expense within discontinued operations. For the three months ended March 31, 2021, we recorded an income tax expense of $2 thousand within continuing operations and an income tax expense of $72 thousand within discontinued operations. The tax expense for the three months ended March 31, 2022, primarily relates to an ownership change under Internal Revenue Code Section 382 that occurred in January 2022 which required us to establish an additional valuation allowance on net operating losses that the Company cannot utilize in the future.

As of March 31, 2022, we had unrecognized tax benefits of approximately $2.6 million related to uncertain tax positions. Included in the unrecognized tax benefits were $2.1 million of tax benefits that, if recognized, would reduce our annual effective tax rate, subject to the valuation allowance.

We file income tax returns in the U.S. and in various state jurisdictions with varying statutes of limitations. We are no longer subject to income tax examination by tax authorities for years prior to 2017; however, our net operating loss carryforwards and research credit carryforwards arising prior to that year are subject to adjustment. Our policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense.

Note 11. Segments

Our reportable segments are based upon our internal organizational structure; the manner in which our operations are managed; the criteria used by our Executive Chairman, who is our Chief Operating Decision Maker ("CODM"), to evaluate segment performance; the availability of separate financial information; and overall materiality considerations. Under the prior period Holdco strategy, we organized our reportable segments into four reportable segments: Diagnostic Imaging, Diagnostic Services, Construction and Investments. Effective the first quarter of 2022, we realigned our internal reporting structure into three reportable segments by combining Diagnostic Imaging and Diagnostic Services into one Healthcare segment to reflect the manner in which our CODM assesses performance and allocates resources:

1. Healthcare

2. Construction

3. Investments

Segment information has been recast to conform to our current allocation methodology. It is as follows (in thousands):


	Three Months Ended March 31,
	2022		2021 (1)
Revenue by segment:
Healthcare	$	13,418	$	13,307
Construction	11,631		9,047
Investments	158		158
Intersegment elimination	(158)		(158)
Consolidated revenue	$	25,049	$	22,354

Gross profit (loss) by segment:
Healthcare	$	3,176	$	2,598
Construction	1,586		544
Investments	59		93
Intersegment elimination	(158)		(158)
Consolidated gross profit	$	4,663	$	3,077

Income (loss) from operations by segment:
Healthcare	$	78	$	837
Construction	(759)		(1,547)
Investments	59		234
Star equity corporate and intersegment elimination	(1,933)		(1,093)
Segment loss from operations	$	(2,555)	$	(1,569)



Depreciation and amortization by segment:
Healthcare	$	315	$	357
Construction	487		479
Investments	99		65
Total depreciation and amortization	$	901	$	901

(1) Segment information has been recast for all periods presented to reflect Healthcare as one segment. Intersegment eliminations previously allocated to Investments have been reclassified to a separate line.

Note 12. Related Party Transactions

Eberwein Guarantees

SNB

On March 29, 2019, in connection with the Company’s entry into the SNB Loan Agreement, Mr. Eberwein, the Executive Chairman of the Company’s board of directors, entered into the Limited Guaranty Agreement (the “SNB Eberwein Guaranty”) with SNB pursuant to which he guaranteed to SNB the prompt performance of all the SNB Borrowers’ obligations to SNB under the SNB Loan Agreement, including the full payment of all indebtedness owing by SNB Borrowers to SNB under or in connection with the SNB Loan Agreement and related SNB Credit Facility documents. Mr. Eberwein’s obligations under the SNB Eberwein Guaranty are limited in the aggregate to the amount of (a) $1.5 million, plus (b) reasonable costs and expenses of SNB incurred in connection with the SNB Eberwein Guaranty. Mr. Eberwein’s obligations under the SNB Eberwein Guaranty terminate upon the Company and SNB Borrowers achieving certain milestones set forth in the SNB Loan Agreement, which the Company reasonably believes have been met.

Gerber

On March 5, 2020, contemporaneously with the execution and delivery of the First EBGL Amendment, Mr. Eberwein executed and delivered the EBGL Eberwein Guaranty to Gerber pursuant to which he guaranteed the performance of all the EBGL Borrowers’ obligations to Gerber under the EBGL Loan Agreement, including the full payment of all indebtedness owing by the EBGL Borrowers to Gerber under or in connection with the EBGL Loan Agreement and related financing documents. Mr. Eberwein’s obligations under the EBGL Eberwein Guaranty were limited in the aggregate to the amount of (a) $0.5 million, plus (b) costs of Gerber incidental to the enforcement of the EBGL Eberwein Guaranty or any guaranteed obligations. On February 26, 2021, the Third EBGL Amendment discharged the EBGL Eberwein Guaranty and removed Mr. Eberwein as an ancillary guarantor from the EBGL Loan Agreement.

Premier

As a condition to the Premier Loan Agreement, Mr. Eberwein entered into a guaranty in favor of Premier, absolutely and unconditionally guaranteeing all of the borrowers’ obligations thereunder. As of May 26, 2021, all obligations under the Premier Loan Agreement have been repaid in full and no amount remains outstanding and Premier discharged Mr. Eberwein’s guaranty.

Star Equity Holdings, Inc.

Mr. Eberwein was also the Chief Executive Officer of LSVM prior to its dissolution. LSVM was the investment manager of LSVI, now dissolved, and Lone Star Value Co-Invest I, LP (“LSV Co-Invest I”). Mr. Eberwein was also the sole manager of Lone Star Value Investors GP, LLC (“LSV GP”), the general partner of LSVI and LSV Co-Invest I, and the sole owner of LSV Co-Invest I, and over 25% owner of LSVI. LSVM was a wholly owned subsidiary of Star Equity and was dissolved as of December 31, 2021.

As of March 31, 2022, Mr. Eberwein owned 1,958,227 shares of common stock, representing approximately 13.03% of the outstanding Star Equity common stock. In addition, as of March 31, 2022, Mr. Eberwein owned 1,289,772 shares of Series A Preferred Stock.

Private Placement

On December 10, 2021, the Company entered into a securities purchase agreement with its Executive Chairman, Jeffrey E. Eberwein, relating to the issuance and sale of 650,000 shares of our common stock at a purchase price of $3.25 per share pursuant to a private placement.

Put Option Agreement

On September 10, 2019, the Company entered into a put option purchase agreement with Mr. Eberwein, pursuant to which the Company has the right to require Mr. Eberwein to acquire up to 100,000 shares of Series A Preferred Stock at a price of $10.00 per share for aggregate proceeds of up to $1.0 million at any time, in the Company’s discretion, during the 12 months following the effective time of the ATRM acquisition (the “Issuance Option”). In March 2020, Mr. Eberwein extended the Issuance Option through June 30, 2021. As of July 1, 2021, these put options expired un-exercised.

ATRM Notes Payable

ATRM had the following related party promissory notes outstanding as of December 31, 2020, which were repaid in full during April 2021 using proceeds from the DMS Sale Transaction:

(i) Unsecured promissory note (principal amount of $0.7 million payable to LSV Co-Invest I), with interest payable semi-annually at a rate of 10.0% per annum (LSV Co-Invest I may elect to receive interest in-kind at a rate of 12.0% per annum), with any unpaid principal and interest previously due on January 12, 2020, subsequently extended to the earlier of June 30, 2022 or when no longer subject to a certain subordination agreement (which occurred upon the sale of DMS).

(ii) Unsecured promissory note (principal amount of $1.2 million payable to LSV Co-Invest I), with interest payable semi-annually at a rate of 10.0% per annum (LSV Co-Invest I may elect to receive interest in-kind at a rate of 12.0% per annum), with any unpaid principal and interest previously due on June 1, 2020, subsequently extended to the earlier of June 30, 2022 or when no longer subject to a certain subordination agreement (which occurred upon the sale of DMS).

(iii) Unsecured promissory note (principal amount of $0.4 million payable to LSVM), with interest payable annually at a rate of 10.0% per annum (LSVM may elect to receive any interest payment entirely in-kind at a rate of 12.0% per annum), with any unpaid principal and interest previously due on November 30, 2020, subsequently extended to the earlier of June 30, 2022 or when no longer subject to a certain subordination agreement (which occurred upon the sale of DMS).

Note 13. Perpetual Preferred Stock

Holders of shares of Series A 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 25, 2022, 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, 2022, and the payment date was March 10, 2022. As of March 31, 2022, we have no preferred dividends in arrears.

Note 14. Equity Transactions

On January 24, 2022, we closed the 2022 Public Offering pursuant to an underwriting agreement with Maxim Group LLC, as representative of the underwriters. Company issued and sold (A)(i) 9,175,000 shares of the Company’s common stock, par value $0.0001 per share (the “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 common warrants, were $14.3 million and net proceeds were $12.7 million.

As of March 31, 2022, 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 March 31, 2022, of the warrants issued through the 2022 Public Offering, there were 10.9 million of warrants and 0.3 million prefunded warrants outstanding at an exercise price of $1.50 and $0.01, respectively.

Note 15. 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 Internal Revenue Code of 1986, as amended (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; 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.

No rights were exercisable at March 31, 2022. There is no impact to financial results as a result of the adoption of the rights plan for the quarter ended March 31, 2022.

Note 16. Variable Interest Entity

VIE in which we are not the Primary Beneficiary

We have an investment in a VIE of $0.3 million, recorded in Other Assets, in which we are not the primary beneficiary. This VIE is a small private company that is primarily involved in research related to new heart imaging technologies.

We have determined that the governance structures of this entity do not allow us to direct the activities that would significantly affect its economic performance. Therefore, we are not the primary beneficiary, and the results of operations and financial position of the VIE are not included in our condensed consolidated financial statements. We account for this investment as non-marketable equity securities which is valued at cost less impairment.

The potential maximum exposure of this unconsolidated VIE is generally based on the current carrying value of the investments and any future funding commitments based on the milestone agreement and board approval. We have determined that the single source of our exposure to the VIE is our capital investment in them. The carrying value and maximum exposure of the unconsolidated VIE were $0.3 million as of March 31, 2022. As of March 31, 2022, we performed a qualitative assessment on the carrying value via inquiries with the board of directors and a review of the Company’s financial statements and determined that there have not been any impairment indicators to the carrying value.

Note 17. Subsequent Events

On May 19, 2022, 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 June 1, 2022, and the payment date was June 10, 2022.

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This management’s discussion and analysis of financial condition and results of operations (“MD&A”), contains forward-looking statements that involve risks and uncertainties. Please see “Important Information Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks, and assumptions that may cause our actual results to differ materially from those discussed in the forward-looking statements. This discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q, and the audited consolidated financial statements and related notes thereto for the fiscal year ended December 31, 2021, which were included in our Annual Report on Form 10-K, filed with the SEC on March 31, 2022.

The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods.

Overview

Star Equity Holdings, Inc. (“Star Equity”, the “Company”, “we”, “our”) has operated as a multi-industry holding company since the acquisition of ATRM Holdings, Inc. (“ATRM”) in September 2019. With that merger, we added two construction businesses and one investments business to what historically had been a pure-play healthcare company. Today, Star Equity is a diversified holding company with operating businesses in two key industry sectors of the economy, Healthcare and Construction.

Our Healthcare division, which operates as Digirad Health, Inc., (“Digirad Health”) provides products and services in the area of nuclear medical imaging with a focus on cardiac health. Digirad Health operates across the United States and comprises two lines of business—imaging services to healthcare providers using a fleet of our proprietary solid-state gamma cameras as well as the manufacture, distribution, and maintenance of our proprietary solid-state gamma cameras.

Our Construction division is made up of three operating businesses, KBS Builders, Inc. (“KBS”), EdgeBuilder, Inc. (“EdgeBuilder”), 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 for installation principally in the New England market. EBGL is based in the Minneapolis-Saint Paul area and principally serves the Upper Midwest. Together, the EBGL businesses manufacture and deliver structural wall panels and other engineered wood-based products as well as distribute building materials primarily to professional builder customers.

Currently, our Investments division is an internally focused unit directly supervised by Star Equity management. This entity currently holds our corporate-owned real estate, which currently includes our three manufacturing facilities in Maine that are leased to KBS, as well as any minority investments we make in public and private companies.

Strategy

Star Equity

We believe our diversified, multi-industry holding company structure will allow Star Equity management to focus on capital allocation, strategic leadership, mergers and acquisitions, capital markets transactions, investor relations, and management of our Investments division. Our structure frees up our operating company management teams to focus on their respective businesses, look for organic and bolt-on growth opportunities, and improve operations with less distraction and administrative burden associated with running a public company.

We continue to explore strategic alternatives to improve our market position and the profitability of our product offerings, generate additional liquidity, and enhance our valuation. We may pursue our goals through organic growth and through strategic alternatives. Some of these alternatives have included, and could continue to include, selective acquisitions of businesses, divestitures of assets or businesses, equity offerings, debt financings, or a restructuring of our Company.

Operating Businesses

We believe that both of our primary divisions, Healthcare and Construction, are well positioned for growth in large addressable markets. The key elements of our growth strategy include the following:

•Organic growth from our core businesses. We believe that we operate in markets and geographies that will allow us to continue to grow our core businesses, allowing us to benefit from our scale and strengths. We plan to focus our efforts on markets in which we already have a presence in order to take advantage of personnel, infrastructure, and brand recognition we have in these areas.

•Introduction of new services. In the Healthcare division, we plan to continue to focus on healthcare solutions-related businesses that deliver necessary assets, services, and logistics directly to the customer site. We believe that over time

we can either purchase or develop new and complementary businesses, and take advantage of our customer loyalty and distribution channels. Additionally, we are exploring new imaging technologies through the recent establishment of a joint venture that is presently conducting research and development in the area of heart imaging. In the Construction division, we will consider opportunities to augment our service offering to better serve our customer base. We have done this in the New England market with our entry into the commercial multi-family segment. Other areas might include logistics, installation on site, and manufacturing of sub-components.

•Acquisition of complementary businesses. We plan to continue to look at complementary businesses that meet our internally developed financially disciplined approach for acquisitions to grow our Company. We believe there are many potential small public and private targets that can be acquired over time and integrated into our platform. We will also look at larger, more transformational mergers and acquisitions if we believe the appropriate mix of value, risk, and return is present for our stockholders. The timing of these potential transactions will always depend on market conditions, available capital, and valuation. In general, we want to be “value” buyers, and will not pursue any transaction unless we believe the post-transaction potential value is high for stockholders.

Current Market Conditions

The COVID-19 pandemic has been a challenge for most businesses in the past two years. Since early 2021, the vaccine rollout has gradually allowed us to return to a more normal operating environment. Our Healthcare business has now returned to pre-COVID levels, after a brief scare with the onset of the Omicron variant late last year. On the Construction side, we continue to benefit from a strong housing market on the demand side, while a tight labor market and continued supply chain disruption make it difficult to maintain optimal production levels.

The target market for our Healthcare products and services is comprised of cardiologists, internal medicine physicians, family practice physicians, hospitals, integrated delivery networks, and federal institutions in the United States that perform or could perform a diagnostic imaging procedure or have interest in purchasing diagnostic imaging products. Our diagnostic services businesses currently operate in approximately 25 states. During the three months ended March 31, 2022, we have seen a return to a more normal pre-COVID volume of imaging.

The target customers for our Construction division include professional home builders, general contractors, project owners, developers, and design firms. While housing demand and home improvement activity continues to be very strong, supply chain disruptions caused by the COVID-19 pandemic led to a historic increase in building materials prices during the first half of 2021. Since that time, building materials prices have continued to be very volatile. We have implemented both price increases and margin protection measures through our contract language since that time and we believe these factors will have a significantly positive effect on our profitability in 2022.

Trends and Drivers

The market for diagnostic services and products is highly competitive. Our business, which is focused primarily on the private practice and hospital sectors, continues to face uncertainty in the demand for diagnostic services and imaging equipment, which we believe is due in part to the impact of the Deficit Reduction Act on the reimbursement environment and the 2010 Healthcare Reform laws, COVID-19 pandemic impact, as well as general uncertainty in overall healthcare and legislative changes in healthcare, such as the Affordable Care Act. These challenges have impacted, and will likely continue to impact, our operations. We believe that the principal competitive factors in our market include budget availability for our capital equipment, qualifications for reimbursement, pricing, ease-of-use, reliability, and mobility. We have addressed, and will continue to address, these market pressures by modifying our Diagnostic Services business models, and by assisting our healthcare customers in complying with new regulations and requirements.

In our construction division, we continue to see a greater adoption of offsite or prefab construction in single-family and multi-family residential building projects, our target market. Our modular units and structural wall panels offer builders a number of benefits over traditional onsite or “stick built” construction. These include shorter time to market, higher quality, reduced waste, readily available labor and potential cost savings, among others. 3D BIM software modeling and developments in engineered wood products offers greater design flexibility for higher-end applications. The need for more affordable housing solutions also presents a great opportunity for the continued emergence of factory built housing.

Risks arising from global economic instability and conflicts, wars, and health crises could impact our business. In addition the inflation caused by such events may impact demand for our products and services and our cost to provide products and services.

COVID-19 Pandemic

We continue to recover from the economic effects of the COVID-19 pandemic. During the three months ended March 31, 2022, we had a $0.1 million increase in Healthcare division revenue and a $2.6 million increase in Construction division revenue as compared to the same period of the prior year. The Healthcare division continued to operate at normal levels versus

last year with revenue increasing 0.8% for the three months ended March 31, 2022. Our Construction division grew revenue by 28.6% due to increased output at both KBS and EBGL coupled with pricing increases associated with higher raw materials costs. Nevertheless, the current COVID-19 pandemic continues to impact worldwide economic activity, and the extent to which the COVID-19 pandemic will impact our business will depend on future developments that are highly uncertain and cannot be predicted at this time.

Discontinued Operations

The DMS Sale Transaction (as defined in Note 1 to our condensed consolidated financial statements) was completed on March 31, 2021, for $18.75 million in cash. After certain adjustments, including a working capital adjustment, we received an immaterial net escrow settlement in January 2022.

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. During the three months ended March 31, 2022, we began the process by assessing qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. Upon review of the results of such assessment, we may begin performing impairment analysis by quantitatively comparing the fair value of the reporting unit to the carrying value of the reporting unit, including goodwill. An impairment charge for goodwill is recognized for the amount by which the carrying value of the reporting unit exceeds its fair value and such loss should not exceed the total goodwill allocated to the reporting unit.

There are numerous factors that may cause the fair value of a reporting unit to fall below its carrying amount and/or that may cause the value of long-lived assets to not be recoverable, which could lead to the measurement and recognition of goodwill and/or long-lived asset impairment charges. These factors include, but are not limited to, significant negative variances between actual and expected financial results, lowered expectations of future financial results, failure to realize anticipated synergies from acquisitions, adverse changes in the business climate, and the loss of key personnel. As of March 31, 2022, we performed qualitative trigger events analysis and concluded that if we are not able to achieve projected performance levels, future impairments could be possible, which could negatively impact our earnings.

Business Segments

Our reportable segments are based upon our internal organizational structure; the manner in which our operations are managed; the criteria used by our Executive Chairman, who is our Chief Operating Decision Maker ("CODM"), to evaluate segment performance; the availability of separate financial information; and overall materiality considerations. Effective the first quarter of 2022, we reorganized our financial statements into three reportable segments by combining Diagnostic Imaging and Diagnostic Services into one Healthcare segment to reflect the manner in which our CODM assesses performance and allocates resources under the HoldCo Strategy:

•Healthcare

•Construction

•Investments

Healthcare

Through this segment, we provide services and products to our customers. We offer a convenient and economically efficient imaging and monitoring services program as an alternative to purchasing equipment or outsourcing the procedures to another physician or imaging center. For physicians who wish to perform nuclear imaging, echocardiography, vascular or general ultrasound tests, we provide imaging systems, qualified personnel, radiopharmaceuticals, licensing services, and the logistics required to perform imaging in their own offices, and thereby the ability to bill Medicare, Medicaid, or one of the third-party healthcare insurers directly for those services, which are primarily cardiac in nature. We provide imaging services primarily to cardiologists, internal medicine physicians, and family practice doctors who typically enter into annual contracts for a set number of days ranging from once per month to five times per week. Further, we sell our internally developed solid-state gamma cameras, imaging systems and camera maintenance contracts. Our imaging systems include nuclear cardiac imaging systems, as well as general purpose nuclear imaging systems. We sell our imaging systems to physician offices and hospitals primarily in the United States, although we have sold a small number of imaging systems internationally. Our imaging systems are sold in both portable and fixed configurations, provide enhanced operability and improved patient comfort, fit easily into floor spaces as small as seven feet by eight feet, and facilitate the delivery of nuclear medicine procedures in a physician’s office, an outpatient hospital setting, or within multiple departments of a hospital (e.g., emergency and operating rooms). Our Healthcare segment revenues derive primarily from selling solid-state gamma cameras and post-warranty camera maintenance contracts.

Construction

Through this segment, by way of our wholly-owned subsidiaries KBS, Glenbrook and EdgeBuilder, we service residential and commercial construction projects by manufacturing modular housing units, structural wall panels, permanent wood foundation systems, other engineered wood products, and supply general contractors with building materials. KBS is a Maine-based manufacturer that started business in 2001 as a manufacturer of modular homes. KBS offers products for both multi-family and single-family residential buildings with a focus on customization to suit the project requirements and provide engineering and design expertise. Glenbrook is a supplier of lumber, windows, doors, cabinets, drywall, roofing, decking and other building materials to professional builders and conducts its operations in Oakdale, Minnesota. EdgeBuilder is a manufacturer of structural wall panels, permanent wood foundation systems and other engineered wood products and conducts its operations in Prescott, Wisconsin.

Investments

Through this segment, we hold real estate assets that we have acquired and will potentially manage other future investments of Star Equity. In April 2019, the Company funded the initial purchase of three manufacturing facilities in Maine that manufacture modular buildings and leased those three properties back to KBS. The initial funding of the assets acquisition was primarily through the revolver loan under our SNB Credit Facility (as defined in Note 8 to our condensed consolidated financial statements). Since that time, we have secured a new facility from Gerber to finance these properties.

Healthcare Services and Products

Diagnostic imaging depictions of the internal anatomy or physiology are generated primarily through non-invasive means. Diagnostic imaging facilitates the early diagnosis of diseases and disorders, often minimizing the scope, cost, and amount of care required and reducing the need for more invasive procedures. Currently, the major types of non-invasive diagnostic imaging technologies available are: ultrasound and nuclear imaging. The most widely used imaging acquisition technology utilizing gamma cameras is single photon emission computed tomography, or “SPECT”. All our current internally-developed cardiac gamma cameras employ SPECT technology.

Diagnostic imaging is the standard of care in diagnosis of diseases and disorders. We offer, through our businesses, the majority of these diagnostic imaging modalities. All of the diagnostic imaging modalities that we offer (both from provision of services and product sales) have been consistently utilized in clinical applications for many years, and are stable in their use and need. By offering a wide array of these modalities, we believe that we have strategically diversified our operations in possible changing trends of utilization of one diagnostic imaging modality from another.

Construction Services and Products

In the construction business, KBS markets its modular homes products through a direct sales organization and through inside sales, outside sales, a network of independent dealers, builders, and contractors in the New England states (Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont). KBS’s direct sales organization is responsible for all commercial building projects, and works with developers, architects, owners, and general contractors to establish the scope of work, terms of payment, and general requirements for each project. KBS’s sales people also work with independent dealers, builders, and contractors to accurately configure and place orders for residential homes for their end customers. KBS’s network of independent dealers and contractors do not work with it exclusively, although many have KBS model homes on display at their retail centers. KBS does not assign exclusive territories to its independent dealers and contractors, but they tend to sell in areas of New England where they will not be competing against another KBS dealer or contractor. KBS’s backlog and pipeline, along with its market initiatives to build more workforce housing, are expected to position KBS for continued growth.

EBGL markets its engineered structural wall panels and permanent wood foundation systems through direct sales people and a network of builders, contractors and developers in and around Minneapolis and St. Paul areas. EBGL’s direct sales organization is responsible for both residential and commercial projects and it works with general contractors, developers and builders to provide bids and quotes for specific projects. Our marketing efforts include participation in industry trade shows, production of product literature, and sales support tools. These efforts are designed to generate sales leads for our independent builders and dealers, and direct salespeople.

Critical Accounting Policies and Estimates

In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our revenue and net income or loss, as well as on the value of certain assets and liabilities on our condensed Consolidated Balance Sheets. We believe that the estimates, assumptions, and judgments involved in the accounting policies described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates.

Results of Operations

Comparison of the Three Months Ended March 31, 2022 and 2021

The following table summarizes our results for the three months ended March 31, 2022 and 2021 (in thousands):


	Three Months Ended March 31,
	2022		Percent of Revenues		2021		Percent of Revenues		Change from Prior Year
									Dollars		Percent *
Total revenues	$	25,049	100.0	%	$	22,354	100.0	%	$	2,695	12.1	%
Total cost of revenues	20,386		81.4	%	19,277		86.2	%	1,109		5.8	%
Gross profit	4,663		18.6	%	3,077		13.8	%	1,586		51.5	%
Total operating expenses	7,218		28.8	%	4,646		20.8	%	2,572		55.4	%
Loss from operations	(2,555)		(10.2)	%	(1,569)		(7.0)	%	(986)		62.8	%
Total other (expense) income	(196)		(0.8)	%	983		4.4	%	(1,179)		(119.9)	%
Loss before income taxes	(2,751)		(11.0)	%	(586)		(2.6)	%	(2,165)		369.5	%
Income tax provision	(950)		(3.8)	%	(2)		—	%	(948)		47,400.0	%
Net loss from continuing operations	(3,701)		(14.8)	%	(588)		(2.6)	%	(3,113)		529.4	%
Net income from discontinued operations	—		—	%	6,020		26.9	%	(6,020)		(100.0)	%
Net (loss) income	$	(3,701)	(14.8)	%	$	5,432	24.3	%	$	(9,133)	(168.1)	%

*Percentage may not add due to rounding

Revenues

Healthcare

Healthcare revenue is summarized as follows (in thousands):


	Three Months Ended March 31,
	2022		2021		Change		% Change
Healthcare	$	13,418	$	13,307	$	111	0.8	%
Healthcare Revenue	$	13,418	$	13,307	$	111	0.8	%

Healthcare revenue increased 0.8% compared to the prior year quarter, partially driven by an increase in revenue from radiopharmaceuticals contracts. This increase was partially offset by fewer camera sales and fewer total scanning days.

Construction

Construction revenue is summarized as follows (in thousands):


	Three Months Ended March 31,
	2022		2021		Change		% Change
Construction	$	11,631	$	9,047	$	2,584	28.6	%
Construction Revenue	$	11,631	$	9,047	$	2,584	28.6	%

The increase in revenue for the Construction division was predominately driven by large commercial projects at our EBGL business, partially offset by a $0.6 million decrease in revenues for KBS business.

Gross Profit

Healthcare Gross Profit

Healthcare gross profit and gross margin is summarized as follows (in thousands):


	Three Months Ended March 31,
	2022			2021			% Change
Healthcare gross profit	$	3,176		$	2,598		22.2	%
Healthcare gross margin	23.7		%	19.5		%

The increase in Healthcare gross margin percentage was mainly due to the increased percentage of high margin radiopharmaceuticals contracts for the three months ended March 31, 2022, compared to the same period in the prior year.

Construction Gross Profit

Construction gross profit and margin is summarized as follows (in thousands):


	Three Months Ended March 31,
	2022			2021			% Change
Construction gross profit	$	1,586		$	544		191.5	%
Construction gross margin	13.6		%	6.0		%

The increase in Construction gross profit was predominately due to significantly increased pricing levels during 2022 to offset higher input costs in both residential and commercial projects, slightly offset by net loss of $0.2 million from lumber derivatives. Our backlog and sales pipeline remain at record levels due to newly signed contracts.

Investments Gross Loss

Investments gross loss is summarized as follows (in thousands):


	Three Months Ended March 31,
	2022		2021		% Change

Real Estate and Investments gross loss	$	(99)	$	(65)	52.3	%

The gross loss relates to depreciation expense associated with the three manufacturing facilities acquired in April 2019.

Operating Expenses

Operating expenses are summarized as follows (in thousands):


	Three Months Ended March 31,								Percent of Revenues
	2022		2021		Change				2022		2021
					Dollars		Percent
Selling, general and administrative	$	6,788	$	5,055	$	1,733	34.3	%	27.1	%	22.6	%
Amortization of intangible assets	430		438		(8)		(1.8)	%	1.7	%	2.0	%
Gain on sale of MD Office Solutions	—		(847)		847		(100.0)	%	—	%	(3.8)	%
Total operating expenses	$	7,218	$	4,646	$	2,572	55.4	%	28.8	%	20.8	%

On a consolidated basis, there was a $1.7 million increase in sales, general and administrative expenses. Most of the increase in SG&A was primarily associated with a $0.3 million increase in Construction due to headcount and consulting service expenses, a $0.2 million increase in corporate administrative expenses due to headcount, a $0.8 million increase in legal expenses and a $0.4 million increase in outside services expenses. SG&A as a percentage of revenue increased to 27.1% of revenue, versus 22.6% in the prior year period.

Total Other Income (Expense)

Total other income (expense) is summarized as follows (in thousands):


	Three Months Ended March 31,
	2022		2021
Other (expenses) income, net	$	(6)	$	35
Interest expense, net	(190)		(272)
Gain on forgiveness of PPP loans	—		1,220

Total other (expense) income	$	(196)	$	983

Other (expenses) income, net, for the three months ended March 31, 2022 and 2021 are predominately comprised of unrealized gain from available for sale securities, and finance costs.

Interest expense, net, for the three months ended March 31, 2022 and 2021 are predominantly comprised of interest costs and the related amortization of deferred issuance costs on our debt, respectively.

Income Tax Expense

For the three months ended March 31, 2022, and 2021 we recorded an income tax expense of $950 thousand and $2 thousand, respectively, within continuing operations. See Note 10. Income Taxes, within the notes to our condensed consolidated financial statements for further information related to the income taxes.

Income from Discontinued Operations

See Note 2. Discontinued Operations of the condensed consolidated financial statements for information regarding discontinued operations.

Liquidity and Capital Resources

Overview

Cash Flows from Operating Activities

For the three months ended March 31, 2022, net cash used in operating activities was $0.6 million, as compared to $2.2 million in 2021, resulting in a decrease in net cash used in operating activities of $1.6 million. The decrease in net cash used in operating activities was attributable to net loss from operations and positive impact on net working capital changes. Additionally, 2021 consolidated net income included discontinued operations from DMS Health Technologies, Inc. (“DMS Health”), the sale of our MD Office Solutions subsidiary, and PPP loan forgiveness.

Cash Flows from Investing Activities

For the three months ended March 31, 2022, net cash used in investing activities was $1.3 million, as compared to $18.3 million of net cash provided by investing activities in 2021. The $19.6 million decrease in net cash used in investing activities was attributable to the proceeds from the sale of discontinued operations of $18.8 million in 2021.

Cash Flows from Financing Activities

For the three months ended March 31, 2022, net cash provided by financing activities was $12.6 million, as compared to net cash used in financing activities of $6.2 million in 2021, resulting in an increase in net cash provided by financing activities of $18.7 million. The increase was attributable to a net proceeds in principal on existing debt of $6.8 million, payment of dividends of $0.5 million, partially offset by proceeds received related to the 2022 Public Offering of $12.7 million.

Summary Cash Flows

The following table shows cash flow information for the three months ended March 31, 2022 and 2021 (in thousands):


	Three Months Ended March 31,
	2022		2021
Net cash used in operating activities	$	(636)	$	(2,232)
Net cash (used in) provided by investing activities	$	(1,310)	$	18,315
Net cash provided by (used in) financing activities	$	12,550	$	(6,180)

Sources of Liquidity

Our principal sources of liquidity are our existing cash and cash equivalents, cash generated from operations, availability on our revolving lines of credit from our credit facility with Webster Bank, N.A. (“Webster”), as successor in interest to Sterling National Bank (“Sterling” or “SNB”), our three credit facilities with Gerber, and cash raised from equity financing. As of March 31, 2022, we had $15.0 million of cash and cash equivalents. The Gerber facilities directly support our Construction businesses. As of March 31, 2022, we were fully drawn in terms of available capacity and at $2.9 million outstanding on the KBS revolver. We were at $2.1 million outstanding balance with approximately $0.4 million in undrawn available capacity on the EBGL revolver. However, those facilities have loan limits of $4.0 million each and we expect to be able to use more of that availability as our borrowing base increases with higher production levels. In January 2022, we successfully completed the 2022 Public Offering with net proceeds of $12.7 million.

Going Concern

The accompanying condensed consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and settlement of obligations in the normal course of business. We incurred losses from continuing operations, net of income taxes, of approximately $3.7 million and $0.6 million for the three months ended March 31, 2022 and 2021, respectively. We have an accumulated deficit of $131.7 million and $128.0 million as of March 31, 2022 and 2021, respectively. Net cash used in operations was $0.6 million for the three months ended March 31, 2022, compared to net cash used in operations of $2.2 million for the same period in 2021. The Company will likely need to secure additional financing in the future to accomplish its business plan over the next several years and there can be no assurance on the availability or terms upon which such financing and capital might be available at that time. As of March 31, 2022, cash and cash equivalents increased to $15.0 million from $4.5 million as of December 31, 2021.

At March 31, 2022, we had approximately $13.3 million in debt outstanding. All of our debt is categorized as short-term on our condensed Consolidated Balance Sheets. For more detail, see Note 8. Debt. The Company’s loan pursuant to the SNB Loan Agreement (as defined below) (the “SNB Loan”), which has a current balance owed of $7.3 million, supports our Healthcare business. While the SNB Loan matures in 2024, GAAP rules require that the outstanding balance be classified as short-term debt. This is due to both the automatic sweep feature embedded in the traditional lockbox arrangement and the subjective acceleration clause in the SNB Loan Agreement. As of March 31, 2022, we were not in compliance with covenants in the SNB Loan Agreement related to our Healthcare division and we have not obtained a waiver from the Webster for these financial covenant breaches. However, we have enough cash to pay down the SNB Loan.

accordance with the terms therein (the “Star Loan”). We currently have $1.0 million outstanding on the Star Loan, on which we are and historically have been making timely payments in full compliance with all covenants. Related party notes of $2.3 million that were outstanding as of December 31, 2020 were fully paid off on April 1, 2021 using proceeds from the sale of DMS Health. In addition, as of March 31, 2022, we had cash and cash equivalents of $15.0 million.

In the first quarter of 2022, we declared and made a $0.5 million preferred stock dividend payment. In the second quarter of 2022, we declared a $0.5 million preferred stock dividend payment. Refer to Note 13. Perpetual Preferred Stock and Note 17. Subsequent Events for details.

Common Stock Equity Offering

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 $5.5 million and net proceeds were $5.2 million.

As noted above, on January 24, 2022, we closed the 2022 Public Offering pursuant to an underwriting agreement with Maxim Group LLC, as representative of the underwriters. The 2022 Public Offering was for 9,500,000 shares of common stock (or pre-funded warrants to purchase shares of common stock in lieu thereof) and warrants to purchase up to 9,500,000 shares of common stock (the “common warrants”). Each share of common stock (or pre-funded warrant in lieu thereof) was sold together with one common warrant to purchase one share of common stock at a price of $1.50 per share and common warrant. Gross proceeds, before deducting underwriting discounts and offering expenses and excluding any proceeds we may receive upon exercise of the common warrants, were $14.3 million and net proceeds were $12.7 million.

As of March 31, 2022, of the warrants issued through the 2020 Public Offering, 1.0 million warrants were exercised and 1.4 million warrants remained outstanding, which represents 0.7 million shares of common stock equivalents, at an exercise price of $2.25. As of March 31, 2022, of the warrants issued through the 2022 Public Offering, there were 10.9 million of warrants and 0.3 million of prefunded warrants outstanding at an exercise price of $1.50 and $0.01, respectively.

See Note 14. Equity Transactions in the accompanying notes to the condensed consolidated financial statements for further details.

Credit Facilities

SNB Credit Facility

On March 29, 2019, we entered into a Loan and Security Agreement (the “SNB Loan Agreement”) by and among certain subsidiaries of the Company, as borrowers (collectively, the “SNB Borrowers”); the Company, as guarantor; and Sterling. On February 1, 2022, Sterling became part of Webster, and Webster became the successor in interest to the SNB Loan Agreement. The SNB Loan Agreement is a five-year credit facility maturing in March 2024, with a maximum credit amount of $20.0 million for revolving loans (the “SNB Credit Facility”). Under the SNB Credit Facility, the SNB Borrowers can request the issuance of letters of credit in an aggregate amount not to exceed $0.5 million at any one time outstanding.

The borrowings under the SNB Loan Agreement were classified as short-term obligations under GAAP as the agreement contained a subjective acceleration clause and required a lockbox arrangement whereby all receipts within the lockbox are swept daily to reduce borrowings outstanding. As of March 31, 2022, the Company had $0.1 million of letters of credit outstanding and had additional borrowing capacity of $1.1 million.

Financial covenants required that the SNB Borrowers maintain (a) a Fixed Charge Coverage Ratio as of the last day of a fiscal quarter of not less than 1.25 to 1.0 and (b) a Leverage Ratio as of the last day of such fiscal quarter of no greater than 3.50 to 1.0. As of March 31, 2022, we were not in compliance with covenants related to our Healthcare division and we have not obtained a waiver from Webster for these financial covenant breaches. While we do not believe Webster will require us to pay down our balance on this facility, we have sufficient cash to do so if necessary.

Construction Loan Agreements

As of March 31, 2022, the Construction division had outstanding revolving lines of credit and term loans of approximately $5.0 million. This debt includes: (i) $2.9 million principal outstanding on KBS’s $4.0 million revolving credit facility under a Loan and Security Agreement, dated February 23, 2016, (as amended, the “KBS Loan Agreement”), with Gerber and (ii) $2.1 million principal outstanding on EBGL’s $4.0 million revolving credit facility under a Revolving Credit Loan Agreement, collectively known as the “Construction Loan Agreements” with Gerber. The Construction division had a borrowing capacity under both revolving lines of credit of $0.4 million, based on the inventory and accounts receivable on March 31, 2022 which fluctuates weekly. The Construction Loan Agreements contain cross-default provisions and subjective acceleration clauses which may, in the event of a material adverse event, as determined by Gerber, allow Gerber to declare the loans and all other obligations under the Construction Loan Agreements immediately due and payable or increase the interest rate at which loans and obligations under the Construction Loan Agreements bear interest. Each of the two Gerber credit facilities are backed by the assets of their respective borrower (KBS or EBGL), which serve as collateral support. Therefore, distributions from each facility are restricted in their use, as they must be used solely to finance the operations of their respective borrower.

KBS Loan Agreement

The KBS Loan Agreement provides KBS with a revolving line of credit with borrowing availability of up to $4.0 million which matures on February 22, 2023. Availability under the line of credit is based on a formula tied to KBS’s eligible accounts receivable, inventory and other collateral.

Financial covenants required that KBS maintain (a) a net cash income (as defined in the KBS Loan Agreement) of at least equal to no less than $0 for the trailing 6-month period ending June 30, 2022 and be no less than $500,000 for the trailing fiscal year ending December 31, 2022 and (b) a minimum EBITDA (as defined in the KBS Loan Agreement) no less than $0 as of June 30, 2022 and no less than $850,000 as of the fiscal year ending December 31, 2022. As of March 31, 2022, we are not required to measure financial covenants. The December 31, 2021 Gerber covenants waivers last until the next measurement period.

The borrowings under the KBS Loan Agreement were classified as short-term obligations under GAAP as the agreement contained a subjective acceleration clause and required a lockbox arrangement whereby all receipts are swept daily to reduce borrowings outstanding. At March 31, 2022, approximately $2.9 million was outstanding under the KBS Loan Agreement.

EBGL Premier Note

All obligations under the Revolving Credit Loan Agreement (as amended, the “Premier Loan Agreement” with Premier Bank (“Premier”)) were repaid in full on May 26, 2021 and no amount remains outstanding as of March 31, 2022. In exchange, Premier terminated all of its security interests in the assets of EBGL.

Gerber Star Loan

SRE, 947 Waterford Road, LLC (“947 Waterford”), 300 Park Street, LLC (“300 Park”), and 56 Mechanic Falls Road, LLC (“56 Mechanic” and together with SRE, 947 Waterford, and 300 Park, (the “Star Borrowers”), each an Investments subsidiary, and the Company, ATRM, KBS, EdgeBuilder, and Glenbrook (collectively, the “Star Credit Parties”), have a credit facility with Gerber providing the Star Borrowers with borrowing availability of up to $2.5 million, of which, $2.0 million was advanced to KBS and $0.5 million was advanced to EBGL (the “Star Loan”). The advance of $2.0 million to KBS is to be repaid in monthly installments of sixty (60) consecutive equal payments. The advance of $0.5 million to EBGL, which has been temporarily increased by $0.3 million due to be repaid on April 30, 2020, was to be repaid in monthly installments of twelve (12) consecutive equal payments. The Star Loan matures on the earlier of (a) January 1, 2025 or (b) the termination, the maturity or repayment of the EBGL Loan (as defined below). Availability under the Star Loan Agreement was based on a formula tied to the value of real estate owned by the Star Borrowers, and borrowings bear interest at the prime rate plus 3.5% per annum. The Star Loan also provides for certain fees payable to Gerber during its term, including a 1.5% annual facilities fee and a 0.10% monthly collateral monitoring fee.

On February 26, 2021, the Star Borrowers entered into the Third Star Amendment with Gerber that amended the contract rate to prime rate plus 3% and discharged the $2.5 million Gerber Eberwein Guaranty.

The financial covenants under the Star Loan Agreement include maintenance of a Debt Service Coverage Ratio of not less than 1:00 to 1:00, as defined in the Star Loan Agreement, as of December 31, 2021. The occurrence of any event of default under the Star Loan Agreement may result in the obligations of the Star Borrowers becoming immediately due and payable. As of March 31, 2022, no event of default was deemed to have occurred and the Star Borrowers were in compliance with the bi-annual financial covenants under the Star Loan Agreement as of December 31, 2021.

Gerber EBGL Loans

EdgeBuilder and Glenbrook (the “EBGL Borrowers”), each a Construction Subsidiary, and the Company, 947 Waterford, 300 Park, 56 Mechanic, ATRM, and KBS (collectively, the “EBGL Credit Parties”) have a credit facility with Gerber providing the EBGL Borrowers with a credit facility with borrowing availability of up to $4.0 million (the “EBGL Loan”), pursuant to a Loan and Security Agreement (the “EBGL Loan Agreement”) with Gerber, which matures on January 1, 2023. As of March 31, 2022, $2.1 million was outstanding under the EBGL Loan. Availability under the EBGL Loan Agreement was also based on a formula tied to the EBGL Borrowers’ eligible accounts receivable and inventory.

The borrowings under the EBGL Loan Agreement were classified as short-term obligations under GAAP as the agreement contained a subjective acceleration clause and required a lockbox arrangement whereby all receipts are swept daily to reduce borrowings outstanding.

Financial covenants to require that EBGL maintain (a) a lower net cash income (as defined in the EBGL Loan Agreement) at least equal to no less than $0 for the trailing 6-month period ending June 30, 2022 and no less than $1,000,000 for the trailing fiscal year end December 31, 2022 and (b) a reduced minimum EBITDA (as defined in the EBGL Loan Agreement) to be no less than $0 as of June 30, 2022 and no less than $1,000,000 as of the fiscal year ending December 31, 2022. As of March 31, 2022, no event of default was deemed to have occurred and EBGL was in compliance with the bi-annual financial covenants under the EBGL Loan Agreement as of December 31, 2021.

Paycheck Protection Program

From April 2020 through May 2020, the Company and its subsidiaries received $6.7 million, of loans under the Paycheck Protection Program (“PPP”). Total PPP loans received the Construction division and Healthcare division were $5.5 million and $1.2 million, respectively.

The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). The loans evidenced by the Construction Notes were made through Bremer Bank (“Bremer”) as lender, and the loans evidenced by the Healthcare Notes were made through Sterling as lender.

The loans evidenced by the PPP Notes (the “PPP Loans”) have two-year terms and bear interest at a rate of 1.00% per annum. Monthly principal and interest payments under the PPP Loans are deferred until repaid.

During the fiscal years ended 2020 and 2021, the Company applied for forgiveness on all PPP Loans. All PPP Loans were forgiven, resulting in a gain of $4.2 million in 2021 and $2.5 million in 2020, thus, the Company has no PPP Loans outstanding.

See Note 8. Debt in the accompanying notes to the financial statements for further details.

Off-Balance Sheet Arrangements

On April 1, 2022, the Company entered into a Guaranty Agreement to guarantee the obligations of KBS to Consigli Construction Co., Inc. under a subcontract in the event of a material breach by KBS in an amount up to $4.4 million, with such amount decreasing as product deliveries occur.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934 (the “Exchange Act”) reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our executive chairman and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As further discussed below, we carried out an evaluation, under the supervision and with the participation of our management, including our executive chairman and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, our executive chairman and chief financial officer concluded that our disclosure controls and procedures were not effective as of March 31, 2022 as a result of the material weakness discussed below.

As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2021 due to the material weaknesses as described below.

Our management identified a material weakness in our internal control over financial reporting as we do not have a sufficient complement of accounting resources to address complex accounting matters across all operating entities and to allow timely completion of financial reporting and accounting activities, including sufficiently precise management review controls. The material weakness did not result in any material identified misstatements to the financial statements, and there were no material changes to previously released financial results.

A “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all errors and fraud. Any internal control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

Plan for Remediation of the Material Weakness in Internal Control Over Financial Reporting

Management intends to increase the skills and experience of our accounting and financial reporting staff over time and to make future investments in the continuing education and public company accounting training of our accounting and financial professionals. We may also retain additional outside financial consultants to conduct technical accounting reviews, when necessary.

Controls will also be added to increase the precision of management review controls, including the review of key inputs used in the preparation and review process. Our management is committed to remediation of the material weakness described above.

Changes in Internal Control over Financial Reporting

Other than in connection with implementing a plan to remediate the material weakness described above, there has been no change in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 under the Exchange Act that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

See Note 9. Commitments and Contingencies, within the notes to our condensed consolidated financial statements for a summary of legal proceedings.

ITEM 1A.RISK FACTORS

In evaluating us and our common stock, we urge you to carefully consider the risks and other information in this Quarterly Report on Form 10-Q, as well as the risk factors disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, which we filed with the SEC on March 31, 2022. Except as noted below, the risks and uncertainties described in “Item 1A - Risk Factors” of our Annual Report on Form 10-K have not materially changed. Any of the risks discussed in this Quarterly Report on Form 10-Q or any of the risks disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, could materially and adversely affect our results of operations or financial condition.

Risks Related to our Common Stock and our Company Preferred 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.

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. As of May 23, 2022, our common stock had closed below $1.00 per share for twelve consecutive trading days. 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. 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 further.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.OTHER INFORMATION

None.

ITEM 6.EXHIBITS


Exhibit Number						Description

10.1*						Employment Agreement, dated as of March 31, 2022 between Star Equity Holdings, Inc. and Richard K. Coleman, Jr. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 4, 2022).
10.2*						Separation Agreement and Release between the Company and Matthew G. Molchan, dated April 19, 202 2 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 22 , 2022).
4.1*						Form of Pre-Funded Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the Commission on January 25, 2022).
4.2*						Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed with the Commission on January 25, 2022).
4.3*						Warrant Agent Agreement, dated January 10, 2022, between Star Equity Holdings, Inc. and American Stock Transfer & Trust Company, LLC (incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed with the Commission on January 25, 2022).
31.1*						Certification of the Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated pursuant to the Securities Exchange Act of 1934, as amended.
31.2*						Certification of the Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated pursuant to the Securities Exchange Act of 1934, as amended.
32.1**						Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**						Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*						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 Extension 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).

_________________

* Filed herewith.

** This certification is being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of Star Equity Holdings, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing.

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

STAR EQUITY HOLDINGS, INC.

Date:

May 23, 2022

By:

/s/ JEFFREY E. EBERWEIN

Jeffrey E. Eberwein

Executive Chairman

(Principal Executive Officer)

/s/ DAVID J. NOBLE

David J. Noble

Chief Financial Officer

(Principal Financial and Accounting Officer)