Star Equity Holdings, Inc. (NASDAQ:STRR) Q4 2021 Earnings Conference Call March 22, 2022 10:00 AM ET Company Participants Jeff Eberwein - Executive Chairman Matt Molchan - Chief Executive Officer, Digirad Health David Noble - Chief Financial Officer Conference Call Participants Theodore O'Neill - Litchfield Hills Research Tate Sullivan - Maxim Group Operator Greetings, ladies and gentlemen, and welcome to Star Equity Holdings Inc. Fourth Quarter and Year-End 2021 Results Conference Call. Please be advised t ...

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 September 30, 2021 ☐ 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 Ju ...

Star Equity Holdings, Inc. (NASDAQ:STRR) Q3 2021 Results Conference Call November 12, 2021 11:00 AM ET Company Participants Jeff Eberwein - Executive Chairman Matt Molchan - CEO, Digirad Health David Noble - CFO and COO Conference Call Participants Tate Sullivan - Maxim Group Theodore O’Neill - Litchfield Hills Research Adam Waldo - Lismore Partners, LLC Jeff Kobylarz - Diamond Bridge Capital Operator Greetings, ladies and gentlemen, and welcome to the Star Equity Holdings, Inc. Third Quarter 2021 Results C ...

[PART I. FINANCIAL INFORMATION](index=5&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This section provides unaudited financial statements, management's analysis of financial condition, and disclosures on internal controls [Item 1. Financial Statements (Unaudited)](index=5&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) Unaudited financial statements for Q2 and H1 2021 show revenue growth, reduced gross profit, and a net income primarily from discontinued operations [Consolidated Statements of Operations](index=5&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20OPERATIONS) Total revenues significantly increased for both the three and six months ended June 30, 2021, but gross profit declined due to rising costs, leading to operating losses, partially offset by income from discontinued operations Consolidated Statements of Operations Summary (Thousands of US Dollars) | Financial Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | **Total Revenues** | $25,806 | $14,510 | $48,160 | $33,700 | | **Gross Profit** | $1,504 | $3,174 | $4,581 | $6,417 | | **Loss from Operations** | $(4,510) | $(1,055) | $(6,078) | $(3,251) | | **Loss from Continuing Operations** | $(1,791) | $(811) | $(2,379) | $(3,179) | | **Net (Loss) Income** | $(1,856) | $(1,287) | $3,576 | $(4,240) | | **Net (Loss) Income per Share** | $(0.37) | $(0.42) | $0.72 | $(1.66) | [Consolidated Balance Sheets](index=7&type=section&id=CONSOLIDATED%20BALANCE%20SHEETS) As of June 30, 2021, total assets and liabilities decreased primarily due to the DMS Health sale, while cash and stockholders' equity increased Consolidated Balance Sheets Summary (Thousands of US Dollars) | Balance Sheet Item | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | **Total Current Assets** | $35,127 | $48,936 | | **Total Assets** | $75,386 | $88,293 | | **Total Current Liabilities** | $28,161 | $42,726 | | **Total Liabilities** | $31,574 | $48,364 | | **Total Stockholders' Equity** | $21,833 | $18,429 | [Consolidated Statements of Cash Flows](index=9&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20CASH%20FLOWS) For the six months ended June 30, 2021, cash was primarily used in operations and financing, while investing activities provided significant cash due to the sale of discontinued operations Consolidated Statements of Cash Flows Summary (Thousands of US Dollars) | Cash Flow Activity | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | **Net Cash (Used in) Provided by Operating Activities** | $(7,599) | $49 | | **Net Cash Provided by (Used in) Investing Activities** | $18,021 | $(202) | | **Net Cash (Used in) Provided by Financing Activities** | $(7,534) | $7,372 | | **Net Increase in Cash** | $2,935 | $7,293 | [Notes to Consolidated Financial Statements](index=13&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail the financial statement basis, the impact of the DMS Health divestiture, debt structure, and liquidity, including covenant non-compliance and PPP loan forgiveness - On March 31, 2021, the company completed the sale of DMS Health Technologies, Inc. for **$18.75 million** in cash. The results of DMS Health's operations are presented as discontinued operations[27](index=27&type=chunk) - The company incurred net losses from operations of **$4.5 million** for Q2 2021 and **$6.1 million** for the six months ended June 30, 2021. Net cash used in operations was **$7.6 million** for the six-month period[36](index=36&type=chunk) - As of June 30, 2021, the company was not in compliance with all borrowing covenants for its Construction revolvers with Gerber but obtained waivers for the measurement period[38](index=38&type=chunk) - During Q2 2021, all remaining Paycheck Protection Program (PPP) loans were forgiven. As of June 30, 2021, the company has no PPP loans outstanding[137](index=137&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=42&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's diversified structure, growth strategy, and financial performance, highlighting revenue growth, declining gross profit due to material costs, and liquidity challenges with debt covenant waivers [Overview and Strategy](index=42&type=section&id=Overview%20and%20Strategy) Star Equity operates as a diversified holding company across healthcare, construction, and investments, pursuing growth through organic expansion, new services, and strategic acquisitions - The company is a diversified holding company with operating businesses in two key sectors: healthcare and construction[181](index=181&type=chunk) - Star Equity's growth strategy includes: organic growth from core businesses, introduction of new services in both Healthcare and Construction divisions, and acquisition of complementary businesses through a financially disciplined approach[187](index=187&type=chunk)[192](index=192&type=chunk) [Results of Operations](index=46&type=section&id=Results%20of%20Operations) For Q2 and H1 2021, total revenues significantly increased, driven by both Healthcare and Construction segments, but gross profit declined sharply due to increased costs, particularly in Construction, leading to larger operating losses Results of Operations Summary - Three Months Ended June 30 (Thousands of US Dollars) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Change (%) | | :--- | :--- | :--- | :--- | | **Total Revenues** | $25,806 | $14,510 | 77.8% | | Healthcare Revenue | $14,870 | $9,473 | 57.0% | | Construction Revenue | $10,936 | $5,035 | 117.2% | | **Gross Profit** | $1,504 | $3,174 | (52.6)% | | Construction Gross (Loss) | $(1,844) | $1,053 | (275.1)% | | **Loss from Operations** | $(4,510) | $(1,055) | 327.5% | Results of Operations Summary - Six Months Ended June 30 (Thousands of US Dollars) | Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | Change (%) | | :--- | :--- | :--- | :--- | | **Total Revenues** | $48,160 | $33,700 | 42.9% | | Healthcare Revenue | $28,177 | $23,148 | 21.7% | | Construction Revenue | $19,983 | $10,519 | 90.0% | | **Gross Profit** | $4,581 | $6,417 | (28.6)% | | Construction Gross (Loss) | $(1,300) | $1,456 | (189.3)% | | **Loss from Operations** | $(6,078) | $(3,251) | 87.0% | [Liquidity and Capital Resources](index=51&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity is supported by cash and credit facilities, with cash used in operations offset by proceeds from the DMS sale, despite non-compliance with certain debt covenants for which waivers were obtained - As of June 30, 2021, the company had **$6.3 million** in cash, cash equivalents, and restricted cash, with an additional **$2.5 million** available under its Sterling revolving line of credit[236](index=236&type=chunk) - For the six months ended June 30, 2021, cash used in operations was **$7.6 million**, cash from investing was **$18.0 million** (from the DMS sale), and cash used in financing was **$7.5 million** (for debt repayment)[235](index=235&type=chunk)[245](index=245&type=chunk) - The company was not in compliance with all borrowing covenants for its Construction revolvers with Gerber as of June 30, 2021, but has historically received waivers and obtained one for this period[239](index=239&type=chunk)[266](index=266&type=chunk) - All Paycheck Protection Program (PPP) loans, totaling **$6.7 million**, were forgiven as of Q2 2021, and no PPP loans remain outstanding[281](index=281&type=chunk)[286](index=286&type=chunk) [Item 4. Controls and Procedures](index=58&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were ineffective as of June 30, 2021, due to a material weakness in debt classification accounting, with a remediation plan in progress - Management concluded that disclosure controls and procedures were not effective as of June 30, 2021[291](index=291&type=chunk) - The ineffectiveness is due to a material weakness related to improperly designed controls over the review of new debt agreements and the application of GAAP, which led to errors in debt classification[294](index=294&type=chunk) - A remediation plan is in place, focusing on more detailed reviews of debt contracts to ensure proper accounting treatment[295](index=295&type=chunk) [PART II. OTHER INFORMATION](index=60&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section provides updates on risk factors, defaults on senior securities, and other material information, including the adoption of an executive incentive bonus plan [Item 1A. Risk Factors](index=60&type=section&id=Item%201A.%20Risk%20Factors) The company reports no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2020 - There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2020[301](index=301&type=chunk) [Item 3. Defaults Upon Senior Securities](index=61&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reports a **$3.0 million** arrearage in cumulative cash dividends on its 10.0% Series A Cumulative Perpetual Preferred Stock - As of the filing date, the company is in arrears by **$3.0 million** for cash dividends due on its Series A Cumulative Perpetual Preferred Stock[303](index=303&type=chunk) [Item 5. Other Information](index=61&type=section&id=Item%205.%20Other%20Information) The Board of Directors approved the 2021 Executive Incentive Bonus Plan, linking executive cash bonuses to consolidated EBITDA performance for fiscal 2021 - The Board of Directors adopted the 2021 Executive Incentive Bonus Plan on August 4, 2021[305](index=305&type=chunk) - Cash bonuses for certain executives are tied to achieving a consolidated EBITDA threshold for fiscal 2021, with payouts ranging from **50% to 150%** of the target bonus based on performance[308](index=308&type=chunk)

Financial Data and Key Metrics Changes - In Q2 2021, the company reported a net loss from continuing operations of $1.8 million, compared to a net loss of $0.8 million in the same period in 2020 [14] - Non-GAAP adjusted net loss from continuing operations was $3.7 million or $0.74 per share, compared to an adjusted net income of $0.2 million or $0.06 per share in Q2 2020 [14] - Operating cash outflow for Q2 2021 was $5.4 million, compared to $0.6 million in Q2 2020 [15] - Net debt decreased from $14.3 million a year ago to $6.8 million at the end of Q2 2021 [6] Business Line Data and Key Metrics Changes - Healthcare division revenue increased by 57% to $14.9 million compared to the same period last year [8] - Construction division revenue grew by 117% to $10.9 million, up from $5.0 million in Q2 2020 [12] - Gross margin for the construction division was negative 16.9% in Q2 2021, down from a positive 20.9% in the prior year [12] Market Data and Key Metrics Changes - Diagnostic services revenue was $11.7 million with a gross margin of 20.4%, compared to $7.1 million and 13.3% in the prior year [9] - Diagnostic imaging revenue was $3.1 million with a gross margin of 32.5%, compared to $2.3 million and 52.8% in the prior year [9] Company Strategy and Development Direction - The company aims to improve gross margins in the construction division to a target range of 20% to 25% [20] - Management is focused on increasing product pricing and improving operations to counteract rising raw material costs [5] - The company is well-positioned to pursue acquisitions and internal growth investments following asset sales that improved its balance sheet [6] Management's Comments on Operating Environment and Future Outlook - Management noted that the healthcare division has rebounded to pre-pandemic levels, operating at full capacity [8] - The construction division is experiencing strong demand, with a robust sales pipeline and backlog despite price increases [30] - Management expects that input costs will normalize in the second half of the year, leading to improved margins [19] Other Important Information - The company resumed paying dividends on preferred stock in June 2021, with future payments to be determined by the board [39] - Management indicated that they are working on reducing SG&A costs while increasing pricing to improve profitability [51] Q&A Session Summary Question: Impact of falling lumber prices on construction business - Management indicated that a six-month backlog means it would take time to see benefits from falling lumber prices, but they expect average input costs to decline significantly in the second half of the year [18][19] Question: Sustainability of healthcare margins - Management stated that the gross margin for diagnostic services is expected to remain steady, while diagnostic imaging margins may fluctuate based on camera sales [27][28] Question: Demand for construction business amid raw material cost swings - Management reported strong demand and a robust backlog, although some larger projects have been delayed due to rising costs [30][31] Question: Future of preferred stock dividends - Management confirmed that the board will decide on future dividends, with discussions ongoing about the preferred stock dividend strategy [40][41] Question: Guidance on construction gross margins for upcoming quarters - Management anticipates improved gross margins in the second half of the year, with a target of achieving 20% or higher [42][44]

```markdown [Important Information Regarding Forward-Looking Statements](index=4&type=section&id=IMPORTANT%20INFORMATION%20REGARDING%20FORWARD-LOOKING%20STATEMENTS) This section highlights forward-looking statements, subject to risks and uncertainties, which could cause actual results to differ materially - This section highlights that the report contains forward-looking statements based on current beliefs, expectations, and projections, particularly in '**Item 2 — Management's Discussion and Analysis of Financial Condition and Results of Operations**'. These statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially, as described in '**Item 1A — Risk Factors**'[7](index=7&type=chunk) [Part I. Financial Information](index=5&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This part presents the company's unaudited consolidated financial statements and management's discussion and analysis [Item 1. Financial Statements (Unaudited)](index=5&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS) Presents unaudited consolidated financial statements for Q1 2021, including operations, balance sheets, cash flows, and equity changes [Consolidated Statements of Operations](index=5&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20OPERATIONS) The company reported significant improvement in net income and EPS for Q1 2021, driven by discontinued operations and Construction division growth Consolidated Statements of Operations (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change (2021 vs 2020) | % Change | | :-------------------- | :-------------------------------- | :-------------------------------- | :-------------------- | :------- | | **Revenues:** | | | | | | Healthcare | $13,307 | $13,675 | $(368) | (2.7)% | | Construction | $9,047 | $5,484 | $3,563 | 65.0% | | Investments | $— | $31 | $(31) | (100.0)% | | Total revenues | $22,354 | $19,190 | $3,164 | 16.5% | | **Gross profit** | $3,077 | $3,243 | $(166) | (5.1)% | | **Loss from operations** | $(1,569) | $(2,196) | $627 | (28.6)% | | **Net income (loss)** | $5,432 | $(2,953) | $8,385 | 283.9% | | **Net income (loss) attributable to common shareholders** | $4,953 | $(3,437) | $8,390 | 244.1% | | **Net income (loss) per share—basic and diluted** | $1.10 | $(1.44) | $2.54 | 176.4% | | **Net income (loss) per share, attributable to common shareholders—basic and diluted** | $1.01 | $(1.67) | $2.68 | 160.5% | [Consolidated Balance Sheets](index=6&type=section&id=CONSOLIDATED%20BALANCE%20SHEETS) The balance sheet reflects the DMS Health sale, with increased cash, decreased total assets and liabilities, and improved stockholders' equity Consolidated Balance Sheets (in thousands) | Metric (in thousands) | March 31, 2021 | December 31, 2020 | Change (2021 vs 2020) | % Change | | :-------------------- | :------------- | :---------------- | :-------------------- | :------- | | **Assets:** | | | | | | Cash and cash equivalents | $13,175 | $3,225 | $9,950 | 308.5% | | Assets held for sale | $— | $20,756 | $(20,756) | (100.0)% | | Total current assets | $40,805 | $48,936 | $(8,131) | (16.6)% | | Total assets | $81,391 | $88,293 | $(6,902) | (7.8)% | | **Liabilities:** | | | | | | Short-term debt and current portion of long-term debt | $12,548 | $18,362 | $(5,814) | (31.7)% | | Liabilities held for sale | $— | $7,871 | $(7,871) | (100.0)% | | Total current liabilities | $30,551 | $42,726 | $(12,175) | (28.5)% | | Total liabilities | $35,411 | $48,364 | $(12,953) | (26.8)% | | **Stockholders' Equity:** | | | | | | Total stockholders' equity | $24,001 | $18,429 | $5,572 | 30.2% | [Consolidated Statements of Cash Flows](index=8&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20CASH%20FLOWS) Operating cash flow shifted to net use, investing activities provided significant cash from asset sales, and financing activities used more cash for debt repayment Cash Flow Activity (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change (2021 vs 2020) | | :-------------------- | :-------------------------------- | :-------------------------------- | :-------------------- | | Net cash (used in) provided by operating activities | $(2,232) | $623 | $(2,855) | | Net cash provided by (used in) investing activities | $18,315 | $(135) | $18,450 | | Net cash used in financing activities | $(6,180) | $(957) | $(5,223) | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $9,950 | $(577) | $10,527 | | Cash, cash equivalents, and restricted cash at end of period | $13,343 | $1,410 | $11,933 | - Proceeds from the sale of **discontinued operations** amounted to **$18,750 thousand** in Q1 2021, significantly boosting investing cash flow[16](index=16&type=chunk) [Consolidated Statements of Mezzanine Equity and Stockholders' Equity](index=10&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20MEZZANINE%20EQUITY%20AND%20STOCKHOLDERS'%20EQUITY) Details changes in preferred stock, common stock, paid-in capital, and accumulated deficit, showing increased equity from net income and warrant exercises Consolidated Statements of Mezzanine Equity and Stockholders' Equity (in thousands) | Metric (in thousands) | Balance at December 31, 2020 | Stock-based compensation | Accrued dividend on redeemable preferred stock | Proceeds from exercise of warrants | Net income | Balance at March 31, 2021 | | :-------------------- | :--------------------------- | :----------------------- | :--------------------------------------------- | :--------------------------------- | :--------- | :------------------------ | | Perpetual Preferred Stock | $21,500 | — | $479 | — | — | $21,979 | | Treasury Stock | $(5,728) | — | — | — | — | $(5,728) | | Additional paid-in capital | $149,143 | $131 | $(479) | $493 | — | $149,283 | | Accumulated deficit | $(124,986) | — | — | — | $5,432 | $(119,554) | | Total stockholders' equity | $18,429 | $131 | $(479) | $493 | $5,432 | $24,001 | [Notes to Consolidated Financial Statements](index=11&type=section&id=NOTES%20TO%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) These notes provide detailed disclosures on accounting policies, discontinued operations, revenue, debt, related parties, and segment information [Note 1. Basis of Presentation](index=11&type=section&id=Note%201.%20Basis%20of%20Presentation) Outlines the basis for financial statement preparation, details the DMS Health sale, COVID-19 impact, preferred stock classification, and liquidity outlook - The company completed the sale of **DMS Health Technologies, Inc. for $18.75 million in cash** on March 31, 2021, with its operations presented as discontinued[23](index=23&type=chunk) - COVID-19 impact: Healthcare division revenue decreased by **$0.4 million**, while Construction division revenue increased by **$3.6 million** for the three months ended March 31, 2021, compared to the prior year[24](index=24&type=chunk) - As of March 31, 2021, the company had **$13.3 million in cash and cash equivalents** and **$4.5 million in borrowing capacity** under its Healthcare division's credit facility. **Related party notes of $2.3 million** were paid off on April 1, 2021[33](index=33&type=chunk) [Note 2. Discontinued Operations](index=15&type=section&id=Note%202.%20Discontinued%20Operations) Details the $18.75 million sale of DMS Health, presenting its results as discontinued operations and recognizing a pre-tax gain of $5.224 million - **The DMS Sale Transaction** was completed on March 31, 2021, for **$18.75 million in cash**, leading to the classification of the Mobile Healthcare business as **discontinued operations**[54](index=54&type=chunk) Discontinued Operations Financial Summary (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Total revenues | $9,490 | $9,667 | | Gross profit | $2,517 | $1,198 | | Income (loss) from discontinued operations | $1,048 | $(409) | | Gain on sale of discontinued operations | $5,224 | $— | | Income (loss) from discontinuing operations | $6,020 | $(585) | - A pre-tax **gain of $5,224 thousand** was recognized on the disposition of DMS Health[58](index=58&type=chunk) [Note 3. Revenue](index=18&type=section&id=Note%203.%20Revenue) Details revenue recognition policies, disaggregating revenue by major source and timing across Healthcare, Construction, and Investments segments Revenue by Segment (in thousands) | Segment (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--------------------- | :-------------------------------- | :-------------------------------- | | Diagnostic Services | $10,239 | $10,814 | | Diagnostic Imaging | $3,068 | $2,861 | | Construction | $9,047 | $5,484 | | Investments | $— | $31 | | Total Revenues | $22,354 | $19,190 | Revenue by Timing of Recognition (in thousands) | Timing of Revenue Recognition (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------------------- | :-------------------------------- | :-------------------------------- | | Services and goods transferred over time | $14,460 | $12,385 | | Services and goods transferred at a point in time | $7,894 | $6,805 | | Total Revenues | $22,354 | $19,190 | - Deferred revenue for continuing operations increased from **$2,352 thousand** at December 31, 2020, to **$2,660 thousand** at March 31, 2021[77](index=77&type=chunk) [Note 4. Basic and Diluted Net Income (Loss) Per Share](index=22&type=section&id=Note%204.%20Basic%20and%20Diluted%20Net%20Income%20(Loss)%20Per%20Share) Explains EPS computation using the two-class method, showing significant improvement for common shareholders in Q1 2021 Net Income (Loss) Per Share (in thousands, except per share) | Metric (in thousands, except per share) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Net income (loss) attributable to common shareholders | $4,953 | $(3,437) | | Weighted average shares outstanding - basic and diluted | 4,916 | 2,055 | | Net income (loss) per share, attributable to common shareholders - basic and diluted | $1.01 | $(1.67) | - Antidilutive common stock equivalents, including stock options, restricted stock units, and stock warrants, totaled **959 thousand** in Q1 2021, compared to **67 thousand** in Q1 2020[82](index=82&type=chunk) [Note 5. Supplementary Balance Sheet Information](index=23&type=section&id=Note%205.%20Supplementary%20Balance%20Sheet%20Information) Provides a breakdown of inventories and property and equipment, net, as of March 31, 2021, and December 31, 2020 Inventories (in thousands) | Inventories (in thousands) | March 31, 2021 | December 31, 2020 | | :------------------------- | :------------- | :---------------- | | Raw materials | $6,170 | $5,489 | | Work-in-process | $2,879 | $2,821 | | Finished goods | $1,108 | $1,876 | | Total inventories, net | $9,838 | $9,787 | Property and Equipment (in thousands) | Property and Equipment (in thousands) | March 31, 2021 | December 31, 2020 | | :------------------------------------ | :------------- | :---------------- | | Land | $805 | $805 | | Buildings and leasehold improvements | $4,771 | $4,771 | | Machinery and equipment | $28,635 | $29,375 | | Total property and equipment, net | $9,383 | $9,762 | [Note 6. Leases](index=23&type=section&id=Note%206.%20Leases) Details operating and finance leases, including expenses, cash flow impacts, ROU assets, lease liabilities, terms, and discount rates Lease Expense (in thousands) | Lease Expense (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--------------------------- | :-------------------------------- | :-------------------------------- | | Operating lease cost | $334 | $328 | | Total finance lease cost | $127 | $148 | Lease Balances (in thousands) | Lease Balances (in thousands) | March 31, 2021 | December 31, 2020 | | :---------------------------- | :------------- | :---------------- | | Operating lease right-of-use assets, net | $2,848 | $1,769 | | Total operating lease liabilities | $2,899 | $1,839 | | Finance lease assets, net | $1,437 | $1,974 | | Total finance lease liabilities | $1,302 | $1,531 | - The weighted average remaining lease term for operating leases is **3.1 years** (**2.3 years** at Dec 31, 2020) and for finance leases is **2.7 years** (**2.8 years** at Dec 31, 2020)[87](index=87&type=chunk) [Note 7. Financial Instruments](index=25&type=section&id=Note%207.%20Financial%20Instruments) Provides information on financial instruments measured at fair value, specifically equity securities, and mentions occasional lumber derivative contracts Financial Assets Fair Value (in thousands) | Financial Assets (in thousands) | Fair Value as of March 31, 2021 | Fair Value as of December 31, 2020 | | :------------------------------ | :------------------------------ | :--------------------------------- | | Equity securities | $114 | $90 | - The company recorded a net unrealized **loss of $23 thousand** in Q1 2021 (compared to a **gain of $26 thousand** in Q1 2020) from equity securities[91](index=91&type=chunk) [Note 8. Debt](index=26&type=section&id=Note%208.%20Debt) Summarizes debt, including credit facilities, term loans, PPP notes, and related party notes, detailing balances, interest rates, and covenant compliance Debt Summary (in thousands) | Debt Type (in thousands) | March 31, 2021 Amount | March 31, 2021 Weighted Average Interest Rate | December 31, 2020 Amount | December 31, 2020 Weighted Average Interest Rate | | :----------------------- | :-------------------- | :-------------------------------------------- | :----------------------- | :--------------------------------------------- | | Total Short-term Revolving Credit Facility | $9,641 | 4.24% | $15,825 | 3.30% | | Total Short Term Debt | $606 | 5.97% | $681 | 6.13% | | Short-term Paycheck Protection Program Notes | $2,301 | 1.00% | $1,856 | 1.00% | | Short-term debt and current portion of long-term debt | $12,548 | 3.73% | $18,362 | 3.17% | | Long-term debt, net of current portion | $1,967 | 4.41% | $3,700 | 3.06% | | Total Notes Payable To Related Parties | $2,307 | 12.00% | $2,307 | 12.00% | | Total Debt | $16,822 | 4.94% | $24,369 | 3.99% | - The **Sterling Credit Facility** had **$5.0 million outstanding** and **$4.5 million additional borrowing capacity** as of March 31, 2021, with the company in compliance with covenants[98](index=98&type=chunk)[104](index=104&type=chunk) - Construction division loans (KBS, EBGL) had **outstanding revolving lines of credit of approximately $5.4 million** as of March 31, 2021. KBS and EBGL were **not in compliance with financial covenants** as of December 31, 2020, but **obtained waivers** in February 2021[106](index=106&type=chunk)[109](index=109&type=chunk)[125](index=125&type=chunk) - **All Construction division PPP Notes were forgiven in Q1 2021**, while **$3.0 million in PPP loans** for the Healthcare division remained **outstanding** as of March 31, 2021[134](index=134&type=chunk) [Note 9. Commitments and Contingencies](index=32&type=section&id=Note%209.%20Commitments%20and%20Contingencies) States the company is subject to litigation but does not expect a material adverse effect on its financial position or results of operations - The company is involved in various legal and administrative proceedings but does not anticipate a **material adverse effect** on its financial position or results of operations[135](index=135&type=chunk) [Note 10. Income Taxes](index=32&type=section&id=Note%2010.%20Income%20Taxes) Details income tax accounting, deferred tax assets and liabilities, full valuation allowance, and the impact of the CARES Act - The company maintains a **full valuation allowance** against its deferred tax assets[136](index=136&type=chunk) Income Tax Expense (in thousands) | Income Tax Expense (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Continuing operations | $2 | $27 | | Discontinued operations | $72 | $7 | - As of March 31, 2021, unrecognized tax benefits related to uncertain tax positions amounted to approximately **$2.6 million**[139](index=139&type=chunk) [Note 11. Segments](index=34&type=section&id=Note%2011.%20Segments) Provides financial results disaggregated by Diagnostic Services, Diagnostic Imaging, Construction, and Investments segments for Q1 2021 and 2020 Segment Performance (in thousands) | Segment (in thousands) | Revenue 2021 | Revenue 2020 | Gross Profit 2021 | Gross Profit 2020 | Income (Loss) from Operations 2021 | Income (Loss) from Operations 2020 | | :--------------------- | :----------- | :----------- | :---------------- | :---------------- | :--------------------------------- | :--------------------------------- | | Diagnostic Services | $10,239 | $10,814 | $1,608 | $2,005 | $859 | $59 | | Diagnostic Imaging | $3,068 | $2,861 | $990 | $869 | $(22) | $(267) | | Construction | $9,047 | $5,484 | $544 | $403 | $(1,547) | $(1,300) | | Investments | $— | $31 | $(65) | $(34) | $76 | $(54) | | Unallocated corporate and other expenses | — | — | — | — | $(935) | $(634) | | Consolidated | $22,354 | $19,190 | $3,077 | $3,243 | $(1,569) | $(2,196) | - Construction revenue increased by **65.0%** year-over-year, while Diagnostic Services revenue decreased by **5.3%**[148](index=148&type=chunk) - Diagnostic Imaging saw a **13.9% increase in gross profit**, while Diagnostic Services gross profit decreased by **19.8%**[148](index=148&type=chunk) [Note 12. Related Party Transactions](index=35&type=section&id=Note%2012.%20Related%20Party%20Transactions) Details transactions with related parties, including personal guarantees, preferred stock placements, and repayment of ATRM promissory notes - Jeffrey E. Eberwein provided personal guarantees for various company loans, including SNB, Gerber, and Premier facilities, with some guarantees being discharged in February 2021[150](index=150&type=chunk)[151](index=151&type=chunk)[152](index=152&type=chunk)[153](index=153&type=chunk) - ATRM Notes Payable, totaling **$2.3 million**, were repaid in full in April 2021 using proceeds from the DMS Sale Transaction[162](index=162&type=chunk)[163](index=163&type=chunk)[164](index=164&type=chunk)[165](index=165&type=chunk) - The company's SRE subsidiary acquired three manufacturing facilities in Maine from KBS (a wholly-owned subsidiary of ATRM) and leased them back to KBS, which are treated as intercompany transactions[167](index=167&type=chunk)[168](index=168&type=chunk)[169](index=169&type=chunk)[170](index=170&type=chunk)[171](index=171&type=chunk)[172](index=172&type=chunk) [Note 13. Perpetual Preferred Stock](index=38&type=section&id=Note%2013.%20Perpetual%20Preferred%20Stock) Describes 10% Series A Cumulative Perpetual Preferred Stock, including dividend rights, voting rights, redemption features, and cumulative dividends in arrears - Holders of Series A Preferred Stock are entitled to preferential cumulative cash dividends at **10.0% per annum** of the **$10.00 liquidation preference per share**[173](index=173&type=chunk) Cumulative Preferred Dividends in Arrears | Metric | Amount | | :-------------------- | :----- | | Cumulative preferred dividends in arrears | $3,000 | | Per-share amount of cumulative preferred dividends in arrears | $0.60 | [Note 14. Subsequent Events](index=38&type=section&id=Note%2014.%20Subsequent%20Events) States there were no subsequent events requiring disclosure after March 31, 2021 - **no subsequent events requiring disclosure** after March 31, 2021[174](index=174&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=39&type=section&id=ITEM%202.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) Management's perspective on financial condition and results for Q1 2021, discussing transformation, strategy, market conditions, segment performance, and liquidity [Overview](index=39&type=section&id=Overview) Star Equity Holdings transformed into a diversified multi-industry holding company with Healthcare, Construction, and Investments divisions - **Star Equity Holdings, Inc.** operates as a diversified holding company with Healthcare, Construction, and Investments divisions[179](index=179&type=chunk)[180](index=180&type=chunk)[181](index=181&type=chunk)[182](index=182&type=chunk) [Strategy](index=39&type=section&id=Strategy) The company's strategy focuses on capital allocation, leadership, M&A, and capital markets, aiming for organic growth and complementary acquisitions - The company's strategy involves focusing on **capital allocation**, **strategic leadership**, **mergers and acquisitions**, and **capital markets transactions**[183](index=183&type=chunk) - Growth initiatives include **organic growth** from core businesses, introduction of new services (e.g., structural wall panel line in Construction), and **acquisition of complementary businesses**[185](index=185&type=chunk)[190](index=190&type=chunk) [Current Market Conditions](index=40&type=section&id=Current%20Market%20Conditions) Q1 2021 market conditions saw reduced Healthcare imaging volume due to COVID-19, while Construction demand increased despite supply chain issues - Healthcare imaging volume was reduced due to the **COVID-19 pandemic**, but recovery is expected with vaccine rollout[188](index=188&type=chunk) - Construction demand increased due to 'nesting' at home, but faced **supply chain disruption** and rapidly increasing wood-based commodity prices[189](index=189&type=chunk) [Trends and Drivers](index=41&type=section&id=Trends%20and%20Drivers) Diagnostic services and products market faces competition and reimbursement changes, while construction benefits from offsite construction and affordable housing demand - The healthcare market faces **competition** and uncertainty from **reimbursement changes** and legislative reforms, impacting demand for diagnostic services and imaging equipment[191](index=191&type=chunk) - The construction division benefits from the growing adoption of **offsite/prefab construction**, offering benefits like shorter time to market, higher quality, and reduced waste[192](index=192&type=chunk) [Discontinued Operations](index=41&type=section&id=Discontinued%20Operations) The $18.75 million sale of DMS Health (Mobile Healthcare) on March 31, 2021, represents a strategic shift with significant financial impact - **The DMS Sale Transaction**, involving the Mobile Healthcare segment, was completed on March 31, 2021, for **$18.75 million in cash**[194](index=194&type=chunk) - The divestiture is considered a **strategic shift** with **significant impact on the company's operations and financial results**[194](index=194&type=chunk) [Business Segments](index=41&type=section&id=Business%20Segments) The company operates through Diagnostic Services, Diagnostic Imaging, Construction, and Investments segments, offering diverse products and services - Diagnostic Services provides imaging and monitoring services, including imaging systems, personnel, and logistics, primarily to cardiologists and physicians[195](index=195&type=chunk) - Diagnostic Imaging sells internally developed solid-state gamma cameras, imaging systems, and camera maintenance contracts to physician offices and hospitals[196](index=196&type=chunk) - The Construction segment, through KBS, Glenbrook, and EdgeBuilder, manufactures modular housing units, structural wall panels, and supplies building materials for residential and commercial projects[197](index=197&type=chunk) - The Investments segment holds real estate assets, including three manufacturing facilities in Maine leased to KBS[198](index=198&type=chunk) [Critical Accounting Policies and Estimates](index=43&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section refers to the Annual Report on Form 10-K for detailed discussion of critical accounting policies and estimates - The company's critical accounting policies and estimates are detailed in **Item 7 of its Annual Report on Form 10-K** for the fiscal year ended December 31, 2020[203](index=203&type=chunk) [Results of Operations](index=43&type=section&id=Results%20of%20Operations) Q1 2021 results show 16.5% revenue increase, slight gross profit decrease, improved operating loss, and significant net income from discontinued operations [Revenues](index=43&type=section&id=Revenues) Total revenues increased by 16.5% year-over-year, driven by Construction, while Healthcare revenue slightly decreased and Investments revenue ceased Revenue by Segment (in thousands) | Segment (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | % Change | | :--------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Diagnostic Services | $10,239 | $10,814 | $(575) | (5.3)% | | Diagnostic Imaging | $3,068 | $2,861 | $207 | 7.2% | | Total Healthcare Revenue | $13,307 | $13,675 | $(368) | (2.7)% | | Construction Revenue | $9,047 | $5,484 | $3,563 | 65.0% | | Investments Revenue | $— | $31 | $(31) | (100.0)% | - Construction revenue increase was predominately due to higher production levels at KBS, including **$2.7 million** from a large commercial project[207](index=207&type=chunk) [Gross Profit](index=44&type=section&id=Gross%20Profit) Overall gross profit decreased by 5.1%; Diagnostic Services gross margin declined, Diagnostic Imaging increased, and Construction gross margin decreased due to raw material prices Segment Gross Profit (in thousands) | Segment Gross Profit (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | % Change | | :---------------------------------- | :-------------------------------- | :-------------------------------- | :------- | | Diagnostic Services gross profit | $1,608 | $2,005 | (19.8)% | | Diagnostic Services gross margin | 15.7% | 18.5% | | | Diagnostic Imaging gross profit | $990 | $869 | 13.9% | | Diagnostic Imaging gross margin | 32.3% | 30.4% | | | Construction gross profit | $544 | $403 | 35.0% | | Construction gross margin | 6.0% | 7.3% | | | Investments gross loss | $(65) | $(34) | 91% | - The decrease in Construction gross margin percentage was due to the negative effect of higher raw material prices[211](index=211&type=chunk) [Operating Expenses](index=45&type=section&id=Operating%20Expenses) Total operating expenses decreased by 14.6% due to a gain on asset sale and lower amortization, partially offset by increased SG&A in Construction Operating Expense Summary (in thousands) | Operating Expense (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | % Change | | :------------------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Selling, general and administrative | $5,055 | $4,863 | $192 | 3.9% | | Amortization of intangible assets | $438 | $576 | $(138) | (24.0)% | | Gain on sale of MD Office Solutions | $(847) | $— | $(847) | (100.0)% | | Total operating expenses | $4,646 | $5,439 | $(793) | (14.6)% | - The increase in SG&A was mainly due to a **$0.3 million increase** in the Construction business from increased commissions and headcount, offset by reduced travel in Healthcare[213](index=213&type=chunk) [Total Other Income (Expense)](index=45&type=section&id=Total%20Other%20Income%20(Expense)) Total other income significantly increased to $983 thousand, primarily driven by $1.3 million in PPP loan forgiveness Other Income (Expense) (in thousands) | Other Income (Expense) (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Other income, net | $1,255 | $160 | | Interest expense, net | $(272) | $(305) | | Total other income (expense) | $983 | $(145) | - Other income, net, for Q1 2021 predominantly includes **$1.3 million from PPP loan forgiveness** for KBS and EBGL[215](index=215&type=chunk) [Income Tax Expense](index=45&type=section&id=Income%20Tax%20Expense) The company recorded a minimal income tax expense of $2 thousand from continuing operations for Q1 2021 - Income tax expense from continuing operations was **$2 thousand** for the three months ended March 31, 2021[217](index=217&type=chunk) [Income from Discontinued Operations](index=45&type=section&id=Income%20from%20Discontinued%20Operations) This section refers to Note 2 for detailed information regarding income from discontinued operations, which significantly contributed to net income - Details on income from **discontinued operations** are provided in **Note 2** of the unaudited condensed consolidated financial statements[218](index=218&type=chunk) [Liquidity and Capital Resources](index=46&type=section&id=Liquidity%20and%20Capital%20Resources) Discusses liquidity, including cash, credit facilities, and cash flow activities, highlighting the DMS Health sale impact and debt arrangements [Overview](index=46&type=section&id=Overview) The company used $2.2 million in cash for operations in Q1 2021, with $13.3 million cash and $4.5 million borrowing capacity available - The company used **$2.2 million for operations** during the three months ended March 31, 2021[219](index=219&type=chunk) - As of March 31, 2021, the company had **$13.3 million of cash, cash equivalents and restricted cash**, and **$4.5 million available** under its Sterling revolving line of credit[220](index=220&type=chunk) - Management believes the company has **sufficient liquidity and operations to support the business for the next 12 months**[224](index=224&type=chunk) [Common Stock Equity Offering](index=46&type=section&id=Common%20Stock%20Equity%20Offering) A May 2020 public offering raised $5.2 million net, primarily for construction working capital, with 1.5 million warrants remaining outstanding - A public offering of common stock and warrants in May 2020 raised approximately **$5.5 million in gross proceeds** and **$5.2 million in net proceeds**[225](index=225&type=chunk)[226](index=226&type=chunk)[227](index=227&type=chunk) - Net proceeds were primarily used to fund **working capital needs** at the construction businesses[227](index=227&type=chunk) - As of March 31, 2021, **0.9 million warrants** were exercised, and **1.5 million warrants** remained outstanding at an exercise price of **$2.25**[228](index=228&type=chunk) [Cash Flows](index=47&type=section&id=Cash%20Flows) Operating cash flow shifted to outflow, investing activities generated cash from asset disposition, and financing activities used more cash for debt repayment Cash Flow Activity (in thousands) | Cash Flow Activity (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash (used in) provided by operating activities | $(2,232) | $623 | | Net cash provided by (used in) investing activities | $18,315 | $(135) | | Net cash (used in) provided by financing activities | $(6,180) | $(957) | - The increase in investing cash flow was primarily due to **$18.75 million in proceeds** from the DMS Health disposition[231](index=231&type=chunk) - The decrease in financing cash flow was primarily due to a **$7.9 million pay down** of the SNB Credit Facility[232](index=232&type=chunk) [Sterling Credit Facility](index=47&type=section&id=Sterling%20Credit%20Facility) The $20.0 million SNB credit facility has $5.0 million outstanding and $4.5 million borrowing capacity, with the company in covenant compliance - The **SNB Credit Facility** has a maximum credit amount of **$20.0 million**, maturing in March 2024[234](index=234&type=chunk) - As of March 31, 2021, **$5.0 million was outstanding** and the company had **$4.5 million additional borrowing capacity**[222](index=222&type=chunk)[234](index=234&type=chunk) - The company was **in compliance with all covenants** under the SNB Loan Agreement as of March 31, 2021[241](index=241&type=chunk) [Construction Loan Agreements](index=48&type=section&id=Construction%20Loan%20Agreements) Construction division had $5.4 million in outstanding revolving lines and term loans, with waivers obtained for past covenant breaches but no future assurance - The Construction division had approximately **$5.4 million in outstanding revolving lines of credit and term loans** as of March 31, 2021[242](index=242&type=chunk) - KBS had **$2.7 million outstanding** under its **$4.0 million revolving credit facility** with Gerber, and EBGL had **$2.0 million outstanding** under its **$3.0 million revolving credit facility** and **$0.7 million** with Premier[242](index=242&type=chunk) - KBS and EBGL were **not in compliance with financial covenants** as of December 31, 2020, but **obtained waivers** in February 2021. Future compliance or waivers are not assured[245](index=245&type=chunk)[250](index=250&type=chunk)[260](index=260&type=chunk) [Paycheck Protection Program](index=51&type=section&id=Paycheck%20Protection%20Program) All Construction division PPP loans were forgiven in Q1 2021, while $3.0 million in Healthcare division PPP loans remained outstanding - The company received a total of **$6.7 million in PPP loans**, with **$5.5 million** for Construction and **$1.2 million** for Healthcare[262](index=262&type=chunk) - **All Construction division PPP Notes were forgiven in Q1 2021**[269](index=269&type=chunk) - As of March 31, 2021, **$3.0 million in PPP loans** for the Healthcare division remained **outstanding**[269](index=269&type=chunk) [Off-Balance Sheet Arrangements](index=52&type=section&id=Off-Balance%20Sheet%20Arrangements) Off-balance sheet arrangements primarily consist of guarantees, including for KBS's obligations under its loan agreement and a subcontract - The company guarantees amounts borrowed by certain ATRM subsidiaries from Gerber under the **KBS Loan Agreement**[270](index=270&type=chunk) - The company provided a Guaranty Agreement to Tocci Building Corporation, limiting its liability to **$2.0 million** for KBS's obligations under a subcontract[271](index=271&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=52&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) This section states that there are no applicable quantitative and qualitative disclosures about market risk for the company - **This item is not applicable** to the company[272](index=272&type=chunk) [Item 4. Controls and Procedures](index=52&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) Disclosure controls were not effective as of March 31, 2021, due to a material weakness in debt contract review and GAAP application, leading to a restatement - **Disclosure controls and procedures were not effective** as of March 31, 2021[274](index=274&type=chunk) - A **material weakness** was identified related to ineffectively designed controls over the review of debt contracts and the proper application of GAAP, which resulted in a restatement of previously issued financial statements[277](index=277&type=chunk) - A remediation plan has been developed, including a more detailed review of debt contracts and GAAP application[278](index=278&type=chunk) [Part II. Other Information](index=54&type=section&id=PART%20II.%20OTHER%20INFORMATION) This part covers legal proceedings, risk factors, equity sales, defaults, mine safety, and other disclosures [Item 1. Legal Proceedings](index=54&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) This section refers to Note 9 of the consolidated financial statements for a summary of legal proceedings, indicating no new material information beyond what is disclosed there - Legal proceedings information is summarized in **Note 9** of the unaudited consolidated financial statements[283](index=283&type=chunk) [Item 1A. Risk Factors](index=54&type=section&id=ITEM%201A.%20RISK%20FACTORS) This section directs readers to the risk factors disclosed in the company's Annual Report on Form 10-K, stating these risks have not materially changed - Risk factors are detailed in **Item 1A of the Annual Report on Form 10-K** for the fiscal year ended December 31, 2020, and have **not materially changed**[284](index=284&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=55&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS) This section states that there were no unregistered sales of equity securities or use of proceeds to report for the period - **There were no unregistered sales of equity securities or use of proceeds to report**[285](index=285&type=chunk) [Item 3. Defaults Upon Senior Securities](index=55&type=section&id=ITEM%203.%20DEFAULTS%20UPON%20SENIOR%20SECURITIES) The board has not declared a dividend on Series A Preferred Stock, resulting in a total arrearage of $3.0 million in cumulative cash dividends - The company's board of directors has **not declared a dividend** on the Series A Cumulative Perpetual Preferred Stock[286](index=286&type=chunk) Series A Preferred Stock Dividend Arrearage (in millions) | Metric | Amount | | :----- | :----- | | Total arrearage of cash dividends due on Series A Preferred Stock | $3.0 million | [Item 4. Mine Safety Disclosures](index=55&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) This section states that mine safety disclosures are not applicable to the company - **This item is not applicable** to the company[287](index=287&type=chunk) [Item 5. Other Information](index=55&type=section&id=ITEM%205.%20OTHER%20INFORMATION) This section indicates that there is no other information to report for the period - **There is no other information to report**[288](index=288&type=chunk) [Item 6. Exhibits](index=56&type=section&id=ITEM%206.%20EXHIBITS) This section lists all exhibits filed as part of the Form 10-Q, including various amendments to loan and security agreements, certifications, and XBRL-related documents - The report includes **exhibits** such as amendments to loan and security agreements (e.g., Sterling National Bank, Gerber Finance Inc.), and certifications from executive officers[291](index=291&type=chunk) ```

Financial Data and Key Metrics Changes - In Q1 2021, the company reported a net loss from continuing operations of $0.6 million, an improvement from a net loss of $2.4 million in the same period in 2020 [15] - Non-GAAP adjusted net loss from continuing operations was $1.7 million or $0.35 per share, compared to adjusted net income of $1.3 million or $0.65 per share in Q1 2020 [15] - Operating cash outflow was $2.2 million in Q1 2021, compared to an inflow of $0.6 million in Q1 2020 [17] Business Line Data and Key Metrics Changes - Healthcare division revenue fell by 2.7% to $13.3 million compared to Q1 2020, with gross profit decreasing by 9.6% [10] - Construction division revenue grew by 65% to $9 million, with gross margin decreasing to 6% from 7.3% due to rising raw material prices [14][7] - Diagnostic Services revenue was $10.2 million with a gross margin of 15.7%, down from $10.8 million and 18.5% in the prior year [11] Market Data and Key Metrics Changes - The Construction division now accounts for 40% of consolidated revenues, indicating a shift in revenue contribution [14] - The company completed the sale of DMS Health Technologies for $18.75 million, improving its balance sheet and liquidity [8] Company Strategy and Development Direction - The company is focused on a holdco growth strategy, allowing division CEOs to concentrate on operations while management focuses on corporate strategy and capital allocation [8] - Plans include pursuing bolt-on acquisitions in Healthcare and Construction, as well as creating new business divisions through disciplined acquisitions [8] - The long-term goal for the Construction business is to achieve 20% gross margins and at least 10% EBITDA margin [23] Management Comments on Operating Environment and Future Outlook - Management expects the Healthcare division to return to normal levels as vaccination rates increase [10] - There is optimism about the Construction division's strong sales pipeline, which is reported to be over $50 million [35] - Management anticipates EBITDA positivity in the second half of the year, driven by revenue growth and improved margins [30] Other Important Information - The company’s net debt decreased from $20.4 million a year ago to $13.5 million at the end of Q1 2021 [8] - The company is exploring opportunities in affordable housing and other segments within the Construction business [24] Q&A Session Summary Question: Update on raw material price pressures - Management indicated that raw material price pressures affect both Construction businesses, with significant impacts on margins due to increased wood commodity prices [20] Question: Normalized gross profit levels for Building & Construction - Management aims to significantly increase margins in the second half of the year, targeting long-term gross margins of 20% [22] Question: Progress in affordable housing segment - The company is actively pursuing opportunities in affordable housing, among other segments [24] Question: Acquisition strategy and funding - Management is open to both expanding existing operations and pursuing acquisitions, focusing on increasing shareholder value [26] Question: Preferred stock dividend payments - The decision regarding preferred stock dividends is under board consideration, with a focus on debt repayment first [33] Question: Sales pipeline details - The sales pipeline for KBS is reported to be over $50 million, with strong demand in various sectors [35][36]

A Diversified Holding Company Common Stock: Nasdaq: STRR Series A 10% Preferred Stock: Nasdaq: STRRP Growing shareholder value through excellence in operations and disciplined capital allocation Investor Presentation April 2021 Forward-looking Statements "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: This presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements in this presentation that ar ...

```markdown Part I [Business](index=5&type=section&id=Item%201.%20Business) Star Equity Holdings operates as a diversified holding company across healthcare, building & construction, and real estate, with its Mobile Healthcare business classified as discontinued operations - Star Equity Holdings operates as a **diversified holding company** with three main divisions: Digirad Health, Star Building & Construction, and Star Real Estate & Investments[15](index=15&type=chunk)[16](index=16&type=chunk) Revenue Contribution by Segment (Continuing Operations) | Segment | 2020 Revenue % | 2019 Revenue % | | :--- | :--- | :--- | | **Healthcare** | **63.0%** | **84.5%** | | Diagnostic Services | 50.3% | 65.5% | | Diagnostic Imaging | 12.7% | 19.0% | | **Building & Construction** | **36.9%** | **15.4%** | | **Real Estate & Investments** | **0.1%** | **0.1%** | - The company's strategy focuses on **organic growth**, new service introduction, and **value-driven acquisitions** of complementary businesses[21](index=21&type=chunk)[23](index=23&type=chunk) - On October 30, 2020, the company agreed to sell its Mobile Healthcare business (DMS Health), now classified as **discontinued operations**[78](index=78&type=chunk) [Risk Factors](index=17&type=section&id=Item%201A.%20Risk%20Factors) The company faces diverse risks including business integration, IT reliance, reimbursement declines, supply chain vulnerabilities, debt covenants, stock volatility, and a material weakness in internal controls [Risks Related to Our Business and Industry](index=19&type=section&id=Risks%20Related%20to%20Our%20Business%20and%20Industry) Business and industry risks include acquisition integration failures, IT threats, healthcare reimbursement declines, supply chain vulnerabilities, and ongoing COVID-19 impacts - The company's conversion to a diversified holding company and related acquisitions involve **unknown risks** that could harm the business[88](index=88&type=chunk) - Revenues may decline due to **reductions in Medicare and Medicaid reimbursement rates**, directly impacting healthcare customer viability[95](index=95&type=chunk)[96](index=96&type=chunk) - Operating results in both healthcare and construction are susceptible to changes in **costs and availability of key supplies** like radiopharmaceuticals and lumber[100](index=100&type=chunk)[101](index=101&type=chunk)[102](index=102&type=chunk) - The **COVID-19 pandemic** has disrupted business and could materially adversely affect future operations and financial results[127](index=127&type=chunk) [Risks Related to our Indebtedness](index=28&type=section&id=Risks%20Related%20to%20our%20Indebtedness) Indebtedness risks include restrictive loan covenants, potential default from breaches, pledged assets, and the risk of PPP loans not being fully forgiven - The company's loan agreements contain **restrictive covenants** limiting its ability to incur debt, sell assets, and pay dividends, restricting operating flexibility[141](index=141&type=chunk)[142](index=142&type=chunk) - Substantially all company assets are **pledged as collateral** for its debt, risking seizure upon default[149](index=149&type=chunk) - Subsidiaries KBS and EBGL were **not in compliance with financial covenants** as of December 31, 2020, but obtained waivers[150](index=150&type=chunk) - The company received **$6.7 million in PPP loans** and faces the risk of non-forgiveness or impermissible application[145](index=145&type=chunk)[148](index=148&type=chunk) [Risks Related to our Common Stock and our Company Preferred Stock](index=31&type=section&id=Risks%20Related%20to%20our%20Common%20Stock%20and%20our%20Company%20Preferred%20Stock) Risks include volatile stock prices, common stock dividend restrictions due to preferred stock arrears, potential preferred stockholder board election rights, and an anti-takeover "Protective Amendment" impacting liquidity - Payment of **common stock dividends is prohibited** until full accumulated dividends on Company Preferred Stock are paid, with none paid to date[158](index=158&type=chunk) - If preferred stock dividends are in arrears for **six or more consecutive quarters**, preferred stockholders can elect two additional directors[155](index=155&type=chunk) - As a **"smaller reporting company,"** scaled disclosure requirements may challenge investor analysis of prospects[164](index=164&type=chunk) - A **"Protective Amendment"** in the certificate of incorporation, intended to preserve NOLs, restricts stock transfers and may have an anti-takeover effect[175](index=175&type=chunk)[177](index=177&type=chunk)[178](index=178&type=chunk) [Risks Related to Our Material Weakness and Restatements](index=35&type=section&id=Risks%20Related%20to%20Our%20Material%20Weakness%20and%20Restatements) A material weakness in internal control over financial reporting, related to debt agreement review and GAAP application, led to financial statement restatements and risks future misstatements - A **material weakness** was identified in internal controls over financial reporting regarding new debt agreement review and GAAP application[182](index=182&type=chunk)[585](index=585&type=chunk) - This material weakness resulted in the **restatement of financial statements** for periods after March 31, 2019[182](index=182&type=chunk) [Unresolved Staff Comments](index=35&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company has no unresolved staff comments from the SEC - None[183](index=183&type=chunk) [Properties](index=36&type=section&id=Item%202.%20Properties) The company's principal executive offices are in Old Greenwich, CT, with leased operational facilities in Poway, CA, and owned manufacturing facilities in Maine - The company's principal executive offices are in **Old Greenwich, CT**. Key operational facilities include a leased **21,300 sq ft facility** in Poway, CA for Diagnostic Imaging, and **three owned manufacturing facilities** in Maine for the Building & Construction segment[184](index=184&type=chunk) [Legal Proceedings](index=36&type=section&id=Item%203.%20Legal%20Proceedings) Information regarding legal proceedings is provided in Note 11 of the consolidated financial statements - For a summary of legal proceedings, refer to **Note 11, Commitments and Contingencies**, within the notes to the accompanying consolidated financial statements[186](index=186&type=chunk) [Mine Safety Disclosures](index=36&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[187](index=187&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=37&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common and preferred stock trade on NASDAQ, with a stock repurchase program approved in 2018 under which no shares have been repurchased - Common stock and preferred stock are traded on the **NASDAQ Global Market** under symbols **"STRR"** and **"STRRP"**[190](index=190&type=chunk) - A stock repurchase program for up to **200,000 shares** of common stock was approved in October 2018, with no repurchases as of December 31, 2020[195](index=195&type=chunk) [Selected Consolidated Financial Data](index=37&type=section&id=Item%206.%20Selected%20Consolidated%20Financial%20Data) This item is not applicable - Not applicable[194](index=194&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=38&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In 2020, revenues from continuing operations increased to $78.2 million, driven by the Building & Construction segment, while net loss widened to $5.3 million due to increased expenses and amortization 2020 Financial Highlights (Continuing Operations) | Metric | 2020 | 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $78.2 million | $72.9 million | +$5.2 million | +7.2% | | Gross Profit | $14.0 million | $17.2 million | -$3.2 million | -18.5% | | Operating Expenses | $21.2 million | $19.1 million | +$2.1 million | +11.1% | | Net Loss | ($5.3 million) | ($2.7 million) | ($2.5 million) | +92.9% | - The **2020 revenue increase** was primarily due to a **$17.6 million** contribution from the Building and Construction segment, offsetting declines in Diagnostic Services and Imaging due to COVID-19[219](index=219&type=chunk) - The company's liquidity was strengthened by a May 2020 public offering of common stock and warrants, raising approximately **$5.2 million in net proceeds**[251](index=251&type=chunk)[253](index=253&type=chunk) - Despite a net loss and significant short-term debt, management believes the company has **sufficient liquidity** to continue as a going concern for the next 12 months, supported by cash, credit, and Executive Chairman's support[245](index=245&type=chunk)[250](index=250&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=55&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is exposed to interest rate risk from $15.8 million in variable-rate debt, where a 100 basis point increase would raise annual interest expense by approximately $0.2 million - The company's primary market risk is **interest rate risk** from its variable-rate debt; a **100 basis point increase** would raise annual interest expense by approximately **$0.2 million** based on **$15.8 million** variable-rate debt outstanding at year-end 2020[309](index=309&type=chunk) [Financial Statements and Supplementary Data](index=56&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) The 2020 consolidated financial statements report a $6.5 million net loss on $78.2 million total revenues, with the auditor's report noting a 2019 restatement and critical audit matters regarding goodwill valuation and going concern Consolidated Statement of Operations Highlights (Year Ended Dec 31) | Metric (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Total Revenues | $78,163 | $72,934 | | Gross Profit | $13,987 | $17,160 | | Loss from Continuing Operations | ($5,285) | ($2,740) | | Loss from Discontinued Operations | ($1,172) | ($1,887) | | **Net Loss** | **($6,457)** | **($4,627)** | Consolidated Balance Sheet Highlights (As of Dec 31) | Metric (in thousands) | 2020 | 2019 (Restated) | | :--- | :--- | :--- | | Total Current Assets | $48,936 | $29,548 | | Total Assets | $88,293 | $90,560 | | Total Current Liabilities | $42,726 | $44,476 | | Total Liabilities | $48,364 | $49,863 | | Total Stockholders' Equity | $18,429 | $21,095 | - The independent auditor's report identifies two **critical audit matters**: goodwill valuation and the company's going concern assessment[319](index=319&type=chunk)[321](index=321&type=chunk) - The **2019 financial statements were restated** to correct a material misstatement in debt classification, reclassifying **$17.0 million** of the SNB revolver balance from long-term to short-term debt[314](index=314&type=chunk)[341](index=341&type=chunk)[344](index=344&type=chunk) [Changes in and Disagreements with Accountants on Accounting and Financial Disclosures](index=112&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosures) The company reported no disagreements with its accountants on accounting principles, financial disclosure, or auditing scope - None[580](index=580&type=chunk) [Controls and Procedures](index=112&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls were ineffective as of December 31, 2020, due to a material weakness in internal control over financial reporting, leading to financial statement restatements - Management concluded that **disclosure controls and procedures were not effective** as of December 31, 2020[582](index=582&type=chunk) - A **material weakness** was identified in controls over new debt agreement review and GAAP application, which resulted in material debt classification errors[585](index=585&type=chunk) - The company has developed a **remediation plan** including a more detailed review of debt contracts and proper GAAP application[586](index=586&type=chunk) [Other Information](index=113&type=section&id=Item%209B.%20Other%20Information) There is no other information to report for this item - None[589](index=589&type=chunk) Part III [Directors, Executive Officers, and Corporate Governance](index=114&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%2C%20and%20Corporate%20Governance) The Board of Directors consists of five members, including the Executive Chairman, with an established Code of Business Ethics and an Audit Committee composed of independent directors - The Board of Directors consists of **five members**, including Jeffrey E. Eberwein (Executive Chairman) and Mitchell I. Quain (Lead Independent Director)[591](index=591&type=chunk)[592](index=592&type=chunk) - The company has adopted a **Code of Business Ethics and Conduct** applicable to all officers, directors, and employees[614](index=614&type=chunk) - The Audit Committee is composed of **three independent directors**, with John W. Sayward qualifying as an **"audit committee financial expert"**[616](index=616&type=chunk)[617](index=617&type=chunk) [Executive Compensation](index=119&type=section&id=Item%2011.%20Executive%20Compensation) In 2020, named executive officers received base salaries and discretionary bonuses, with no new equity awards, while non-employee directors received retainers in RSUs 2020 Summary Compensation Table | Name and Principal Position | Year | Salary ($) | Bonus ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | Matthew G. Molchan (President, CEO of Digirad Health) | 2020 | $405,619 | — | $409,119 | | David J. Noble (CFO & COO) | 2020 | $293,077 | $150,000 | $446,577 | | Martin B. Shirley (President, Diagnostic Imaging) | 2020 | $254,000 | $65,000 | $322,500 | - Due to COVID-19, the 2020 Annual Incentive Plan was **100% discretionary**, with cash bonuses awarded to Mr. Noble (**$150,000**) and Mr. Shirley (**$65,000**)[626](index=626&type=chunk)[628](index=628&type=chunk) - **No new stock awards** were granted to named executive officers in 2020[629](index=629&type=chunk) - In April 2020, non-employee directors elected to receive annual retainer payments in **company RSUs** instead of cash[656](index=656&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=126&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) As of February 22, 2021, no beneficial owners held 5% or more of common stock, while executive officers and directors as a group owned 8.21%, with 368,334 securities available for future issuance under equity plans - As of February 22, 2021, there were **no known beneficial owners of 5% or more** of the company's common stock[663](index=663&type=chunk) - All executive officers and directors as a group beneficially owned **410,759 shares**, representing **8.21%** of the outstanding common stock[663](index=663&type=chunk) - As of December 31, 2020, **368,334 securities** remained available for future issuance under the company's equity compensation plans[666](index=666&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=128&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) The company has multiple related-party transactions with Executive Chairman Jeffrey E. Eberwein and his controlled entities, including personal guarantees, $2.3 million in outstanding promissory notes, and a preferred stock private placement, with a majority of the Board deemed independent - Executive Chairman Jeffrey E. Eberwein has provided **personal guarantees** on the company's credit facilities with Sterling National Bank (SNB), Gerber, and Premier[667](index=667&type=chunk)[669](index=669&type=chunk)[671](index=671&type=chunk) - The company has outstanding related-party promissory notes payable to entities controlled by Mr. Eberwein, totaling approximately **$2.3 million** as of December 31, 2020[549](index=549&type=chunk)[550](index=550&type=chunk)[551](index=551&type=chunk) - Immediately prior to the ATRM Merger, the company issued **300,000 shares** of Company Preferred Stock to Lone Star Value Investors, LP (LSVI) in a private placement for **$3.0 million**[678](index=678&type=chunk) - The Board has determined that a **majority of its directors** are independent under Nasdaq listing standards[699](index=699&type=chunk) [Principal Accounting Fees and Services](index=133&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) BDO USA, LLP served as the independent auditor, with aggregate fees of approximately $1.04 million in 2020 and $0.93 million in 2019, all pre-approved by the Audit Committee Accounting Fees Paid to BDO USA, LLP (in thousands) | Type of Fee | 2020 | 2019 | | :--- | :--- | :--- | | Audit Fees | $733 | $786 | | Tax Fees | $311 | $139 | | **Total** | **$1,044** | **$925** | - All audit and non-audit services provided by BDO were **pre-approved by the Audit Committee**, which ensured auditor independence[707](index=707&type=chunk)[709](index=709&type=chunk) Part IV [Exhibits, Financial Statement Schedules](index=135&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists all financial statements, schedules, and exhibits filed with the Form 10-K report, with financial statements included in Item 8 - This item lists all financial statements, schedules, and exhibits filed with the report; the financial statements are located in **Item 8**[712](index=712&type=chunk) [Form 10-K Summary](index=143&type=section&id=Item%2016.%20Form%2010-K%20Summary) No summary is provided for the Form 10-K in this section - None[723](index=723&type=chunk) ```

Star Equity Holdings, Inc. (NASDAQ:STRR) Q4 2020 Results Conference Call March 9, 2021 10:00 AM ET Company Participants Jeffrey Eberwein - Executive Chairman Matthew Molchan - President and Chief Executive Officer David Noble - Chief Operating Officer and Chief Financial Officer Conference Call Participants Tate Sullivan - Maxim Group Theodore O’Neill - Litchfield Hills Adam Waldo - Lismore Partners Jeffrey Kobylarz - Diamond Bridge Capital Operator Greetings, ladies and gentlemen, and welcome to the Star E ...