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 June 30, 2022 53 Forest Ave., Suite 101, Old Greenwich CT 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 ea ...

Star Equity Holdings, Inc. (NASDAQ:STRR) Q2 2022 Earnings Conference Call August 12, 2022 10:00 AM ET Company Participants Rick Coleman - Chief Executive Officer David Noble - Chief Financial Officer Conference Call Participants Tate Sullivan - Maxim Group Adam Waldo - Lismore Partners Operator Greetings, ladies and gentlemen, and welcome to Star Equity Holdings Inc. Second Quarter 2022 Results Conference Call. Please be advised that the discussion on today's call may include forward-looking statements. Suc ...

[Important Information Regarding Forward-Looking Statements](index=4&type=section&id=Important%20Information%20Regarding%20Forward-Looking%20Statements) This section clarifies the nature and inherent risks of forward-looking statements, which are based on current expectations and subject to material differences - This Quarterly Report on Form 10-Q contains forward-looking statements based on current beliefs, expectations, and projections regarding business strategies, market potential, future financial performance, and industry matters[8](index=8&type=chunk) - Forward-looking statements are identified by words such as 'believe,' 'expect,' 'anticipate,' 'project,' 'could,' 'would,' and similar expressions, and are subject to risks, uncertainties, and other factors that could cause actual results to differ materially[8](index=8&type=chunk) - The most significant risks are described in 'Item 1A — Risk Factors' of this report and the Annual Report on Form 10-K for the fiscal year ended December 31, 2021[8](index=8&type=chunk) [PART I. FINANCIAL INFORMATION](index=5&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [ITEM 1. FINANCIAL STATEMENTS](index=5&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS) This section presents the unaudited condensed consolidated financial statements for Star Equity Holdings, Inc., including statements of operations, balance sheets, cash flows, and changes in equity, along with detailed notes explaining the basis of presentation, significant accounting policies, and specific financial items for the quarter ended March 31, 2022 [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Condensed Consolidated Statements of Operations (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------- | :-------------------------------- | :-------------------------------- | | Total revenues | $25,049 | $22,354 | | Gross profit | $4,663 | $3,077 | | Loss from operations | $(2,555) | $(1,569) | | Net (loss) income | $(3,701) | $5,432 | | Net (loss) income attributable to common shareholders | $(4,180) | $4,953 | | Net (loss) income per share—basic and diluted | $(0.29) | $1.10 | | Weighted-average shares outstanding—basic and diluted | 12,669 | 4,916 | - Net loss from continuing operations significantly increased to **$(3.701) million** in Q1 2022 from **$(0.588) million** in Q1 2021, primarily due to the absence of income from discontinued operations which contributed **$6.020 million** in Q1 2021[12](index=12&type=chunk) [Condensed Consolidated Balance Sheets](index=7&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Condensed Consolidated Balance Sheets (in thousands) | Metric | March 31, 2022 | December 31, 2021 | | :------------------------------------- | :------------- | :---------------- | | Total assets | $81,191 | $68,052 | | Total current assets | $44,776 | $31,863 | | Cash and cash equivalents | $15,035 | $4,538 | | Total liabilities | $36,740 | $32,310 | | Total current liabilities | $30,721 | $27,821 | | Total stockholders' equity | $25,463 | $16,754 | - Total assets increased by **$13.1 million** from December 31, 2021, to March 31, 2022, driven by a significant increase in cash and cash equivalents from **$4.5 million** to **$15.0 million**[14](index=14&type=chunk) - Stockholders' equity increased by **$8.7 million**, primarily due to proceeds from the sale of common stock and warrants[15](index=15&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2022 | Three Months Ended March 31, 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) | | Net increase in cash, cash equivalents, and restricted cash | $10,604 | $9,950 | - Net cash provided by financing activities significantly increased to **$12.55 million** in Q1 2022 from a net cash used of **$6.18 million** in Q1 2021, primarily due to proceeds from the 2022 Public Offering[17](index=17&type=chunk) - Net cash used in investing activities was **$(1.310) million** in Q1 2022, a substantial decrease from **$18.315 million** provided in Q1 2021, which included proceeds from the sale of discontinued operations[17](index=17&type=chunk) [Condensed Consolidated Statements of Mezzanine Equity and Stockholders' Equity](index=11&type=section&id=Condensed%20Consolidated%20Statements%20of%20Mezzanine%20Equity%20and%20Stockholders%27%20Equity) Condensed Consolidated Statements of Mezzanine Equity and Stockholders' Equity (in thousands) | Metric | Balance at Dec 31, 2021 | Balance at Mar 31, 2022 | | :------------------------------------- | :---------------------- | :---------------------- | | Perpetual Preferred Stock Amount | $18,988 | $18,988 | | Common stock Shares | 5,805 | 15,029 | | Additional paid-in capital | $150,451 | $162,860 | | Accumulated deficit | $(127,969) | $(131,670) | | Total stockholders' equity | $16,754 | $25,463 | - Total stockholders' equity increased by **$8.7 million** from December 31, 2021, to March 31, 2022, primarily due to **$13.198 million** in proceeds from the sale of common stock and warrants, partially offset by a net loss of **$3.701 million**[21](index=21&type=chunk) [Note 1. Basis of Presentation and Significant Policies](index=12&type=section&id=Note%201.%20Basis%20of%20Presentation%20and%20Significant%20Policies) - The unaudited condensed consolidated financial statements are prepared in accordance with SEC instructions for Form 10-Q and U.S. GAAP, with all material adjustments for fair presentation included[23](index=23&type=chunk) - The Company operates as a diversified holding company with Healthcare, Construction, and Investments divisions. DMS Health Technologies, Inc. (Mobile Healthcare business unit) was sold on March 31, 2021, and its results are presented as discontinued operations[24](index=24&type=chunk) - The Series A Preferred Stock is classified as mezzanine equity due to a redemption feature not solely within the Company's control, though redemption was not probable as of March 31, 2022[25](index=25&type=chunk) - The Company incurred losses from continuing operations of **$3.7 million** for the three months ended March 31, 2022, and has an accumulated deficit of **$131.7 million**, raising substantial doubt about its ability to continue as a going concern without additional financing or covenant restructuring[29](index=29&type=chunk)[31](index=31&type=chunk) - Revenue is recognized when a customer obtains control of promised goods or services, applying a five-step model. The majority of contracts have a single performance obligation, satisfied over time or at a point in time[38](index=38&type=chunk)[41](index=41&type=chunk)[42](index=42&type=chunk) - The Company early adopted ASU 2020-06 on January 1, 2021, with no cumulative-effect transition adjustment, and expects to adopt ASU 2016-13 (Credit Losses) in Q1 2023, which is not expected to have a material financial impact[64](index=64&type=chunk)[66](index=66&type=chunk) [Note 2. Discontinued Operations](index=17&type=section&id=Note%202.%20Discontinued%20Operations) - The sale of DMS Health Technologies, Inc. (Mobile Healthcare business unit) was completed on March 31, 2021, for **$18.75 million** in cash, with an immaterial net escrow settlement received in January 2022[67](index=67&type=chunk) - The disposition of the Mobile Healthcare business unit was deemed a strategic shift with a major effect on operations and financial results, thus classified as discontinued operations[67](index=67&type=chunk) Discontinued Operations (in thousands) | Metric | Three Months Ended March 31, 2021 | | :------------------------------------- | :-------------------------------- | | Total revenues | $9,490 | | Gross profit | $2,517 | | Income from discontinued operations | $1,048 | | Gain on sale of discontinued operations | $5,224 | | Income from discontinuing operations | $6,020 | - There were no activities for discontinued operations for the three months ended March 31, 2022[69](index=69&type=chunk) [Note 3. Revenue](index=19&type=section&id=Note%203.%20Revenue) Revenue by Segment/Type (in thousands) | Segment/Type | Q1 2022 Revenue | Q1 2021 Revenue | | :------------------------------------- | :-------------- | :-------------- | | Healthcare | $13,418 | $13,307 | | Construction | $11,631 | $9,047 | | Total Revenues | $25,049 | $22,354 | | Services and goods transferred over time | $12,751 | $13,823 | | Services and goods transferred at a point in time | $12,298 | $8,531 | - Total revenues increased by **$2.695 million (12.1%)** year-over-year, with Construction revenue growing significantly by **28.6% ($2.584 million)** and Healthcare revenue showing a slight increase of **0.8% ($0.111 million)**[70](index=70&type=chunk) - Healthcare revenue is primarily from mobile imaging services, camera sales, and camera support contracts, with services recognized over time and product sales at a point in time[71](index=71&type=chunk)[73](index=73&type=chunk)[75](index=75&type=chunk) - Construction revenue is generated from manufacturing modular housing units, structural wall panels, and supplying building materials, recognized either at a point in time (delivery) or over time (progress towards completion)[78](index=78&type=chunk) Deferred Revenue (in thousands) | Deferred Revenue | Balance at Dec 31, 2021 | Balance at Mar 31, 2022 | | :------------------------------------- | :---------------------- | :---------------------- | | Deferred revenue | $2,869 | $3,361 | | Billings in excess of costs and estimated profit | $312 | $15 | [Note 4. Basic and Diluted Net Income (Loss) Per Share](index=22&type=section&id=Note%204.%20Basic%20and%20Diluted%20Net%20Income%20%28Loss%29%20Per%20Share) - Net loss per share attributable to common shareholders was **$(0.33)** for the three months ended March 31, 2022, compared to net income per share of **$1.01** for the same period in 2021[82](index=82&type=chunk) - In periods of net loss, diluted loss per common share equals basic loss per common share, as common stock equivalents are antidilutive[81](index=81&type=chunk) Net Income (Loss) Per Share Calculation (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------- | :-------------------------------- | :-------------------------------- | | Net (loss) income attributable to common shareholders | $(4,180) | $4,953 | | Weighted average common shares outstanding | 12,434 | 4,916 | | Weighted average shares outstanding - basic and diluted | 12,669 | 4,916 | | Net (loss) income per share - basic and diluted | $(0.29) | $1.10 | - Antidilutive common stock equivalents, including stock options, restricted stock units, and stock warrants, totaled **9,638 thousand** in Q1 2022, significantly higher than **959 thousand** in Q1 2021[82](index=82&type=chunk) [Note 5. Supplementary Balance Sheet Information](index=23&type=section&id=Note%205.%20Supplementary%20Balance%20Sheet%20Information) Inventories (in thousands) | Inventories | 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, net | $10,287 | $8,525 | Property and Equipment (in thousands) | Property and Equipment | March 31, 2022 | December 31, 2021 | | :------------------------------------- | :------------- | :---------------- | | Gross property and equipment | $32,964 | $32,896 | | Accumulated depreciation | $(24,111) | $(23,978) | | Total property and equipment, net | $8,853 | $8,918 | - Depreciation expense for the three months ended March 31, 2022 and 2021 was **$0.5 million** for both periods[84](index=84&type=chunk) Warranty Reserve (in thousands) | Warranty Reserve | 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](index=23&type=section&id=Note%206.%20Leases) - The Company has operating and finance leases for corporate offices, vehicles, and equipment, with remaining lease terms ranging from 1 to 10 years[88](index=88&type=chunk) Lease Cost (in thousands) | Lease Cost | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------- | :-------------------------------- | :-------------------------------- | | Operating lease cost | $396 | $334 | | Total finance lease cost | $140 | $127 | Lease Metrics | Lease Metrics | March 31, 2022 | December 31, 2021 | | :------------------------------------- | :------------- | :---------------- | | Weighted average remaining lease term (Operating) | 4.2 years | 3.9 years | | Weighted average discount rate (Operating) | 3.82% | 4.23% | Future Minimum Lease Payments (in thousands) | Future Minimum Lease Payments | Operating Leases | Finance Leases | | :------------------------------------- | :--------------- | :------------- | | Total future minimum lease payments | $5,868 | $1,273 | | Present value of lease obligations | $5,418 | $1,198 | - In the Healthcare division, lease income is generated from equipment rentals, primarily month-to-month contracts, accounted for as operating leases[90](index=90&type=chunk) [Note 7. Fair Value Measurements](index=25&type=section&id=Note%207.%20Fair%20Value%20Measurements) Assets Measured at Fair Value (in thousands) | Assets Measured at Fair Value | March 31, 2022 (Total) | December 31, 2021 (Total) | | :------------------------------------- | :--------------------- | :------------------------ | | Equity securities | $1,195 | $47 | | Lumber derivative contracts | $(13) | $666 | | VIE Investments | $337 | $337 | | Total | $1,519 | $1,050 | - The Company recorded an unrealized gain of **$92 thousand** on equity securities in Q1 2022, compared to an unrealized loss of **$23 thousand** in Q1 2021[91](index=91&type=chunk) - A net loss of **$0.2 million** from lumber derivative contracts was recorded in cost of goods sold for Q1 2022, reflecting volatility in lumber prices[92](index=92&type=chunk)[93](index=93&type=chunk) - VIE investments, valued at **$0.3 million**, are based on unobservable inputs (Level 3) and are not consolidated as the Company is not the primary beneficiary[94](index=94&type=chunk)[163](index=163&type=chunk)[164](index=164&type=chunk) [Note 8. Debt](index=26&type=section&id=Note%208.%20Debt) Debt Type (in thousands) | Debt Type | March 31, 2022 Amount | March 31, 2022 Weighted Average Interest Rate | December 31, 2021 Amount | December 31, 2021 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% | | Gerber - Star Loan Principal, net | $998 | 6.50% | $1,070 | 6.25% | | Total Short-term debt | $13,334 | 4.45% | $12,869 | 4.17% | - All debt is classified as short-term due to subjective acceleration clauses and lockbox arrangements, despite some loans having longer maturities[30](index=30&type=chunk)[98](index=98&type=chunk)[104](index=104&type=chunk)[116](index=116&type=chunk)[118](index=118&type=chunk)[219](index=219&type=chunk)[231](index=231&type=chunk)[237](index=237&type=chunk)[245](index=245&type=chunk) - As of March 31, 2022, the Company was not in compliance with covenants under the SNB Loan Agreement for its Healthcare division and had not obtained a waiver, raising substantial doubt about its going concern ability[30](index=30&type=chunk)[102](index=102&type=chunk)[219](index=219&type=chunk)[232](index=232&type=chunk) - The Construction division had **$5.0 million** outstanding on two Gerber revolvers, with waivers obtained for bi-annual covenant non-compliance as of December 31, 2021, covering the period ending June 30, 2022[32](index=32&type=chunk)[103](index=103&type=chunk)[106](index=106&type=chunk)[221](index=221&type=chunk)[234](index=234&type=chunk)[236](index=236&type=chunk) - All Paycheck Protection Program (PPP) loans, totaling **$6.7 million**, were forgiven in fiscal years 2020 and 2021, resulting in a gain of **$4.2 million** in 2021 and **$2.5 million** in 2020, with no outstanding PPP loans[132](index=132&type=chunk)[249](index=249&type=chunk) [Note 9. Commitments and Contingencies](index=31&type=section&id=Note%209.%20Commitments%20and%20Contingencies) - The Company is subject to various litigation and administrative proceedings, including claims related to regulatory compliance, customer disputes, employment practices, and product liability[133](index=133&type=chunk) - In December 2021, the Company settled a wrongful death and medical expenses judgment for **$4.96 million**, paying **$0.1 million** and being released from further claims[135](index=135&type=chunk) - On April 1, 2022, the Company entered into a Guaranty Agreement for KBS's obligations under a subcontract, up to **$4.4 million**, decreasing with product deliveries[136](index=136&type=chunk)[251](index=251&type=chunk) [Note 10. Income Taxes](index=31&type=section&id=Note%2010.%20Income%20Taxes) - The Company uses the asset and liability method for income taxes, recognizing deferred tax assets and liabilities and providing a full valuation allowance against deferred tax assets due to uncertainty of realization[137](index=137&type=chunk) - Income tax expense for continuing operations was **$950 thousand** in Q1 2022, significantly higher than **$2 thousand** in Q1 2021, primarily due to an ownership change under IRC Section 382 requiring an additional valuation allowance on net operating losses[139](index=139&type=chunk) - As of March 31, 2022, unrecognized tax benefits related to uncertain tax positions totaled approximately **$2.6 million**, with **$2.1 million** potentially reducing the effective tax rate if recognized[140](index=140&type=chunk) [Note 11. Segments](index=32&type=section&id=Note%2011.%20Segments) - Effective Q1 2022, the Company realigned its internal reporting structure into three reportable segments: Healthcare, Construction, and Investments, combining Diagnostic Imaging and Diagnostic Services into Healthcare[142](index=142&type=chunk)[143](index=143&type=chunk) Segment Performance (in thousands) | Segment Performance | Q1 2022 Revenue | Q1 2021 Revenue | Q1 2022 Gross Profit | Q1 2021 Gross Profit | Q1 2022 Loss from Operations | Q1 2021 Loss from Operations | | :------------------------------------- | :-------------- | :-------------- | :------------------- | :------------------- | :--------------------------- | :--------------------------- | | Healthcare | $13,418 | $13,307 | $3,176 | $2,598 | $78 | $837 | | Construction | $11,631 | $9,047 | $1,586 | $544 | $(759) | $(1,547) | | Investments | $158 | $158 | $59 | $93 | $59 | $234 | | Consolidated | $25,049 | $22,354 | $4,663 | $3,077 | $(2,555) | $(1,569) | - Healthcare segment's income from operations decreased significantly from **$837 thousand** in Q1 2021 to **$78 thousand** in Q1 2022, despite a slight revenue increase[142](index=142&type=chunk) - Construction segment improved its loss from operations from **$(1.547) million** in Q1 2021 to **$(0.759) million** in Q1 2022, driven by strong revenue growth and gross profit improvement[142](index=142&type=chunk) [Note 12. Related Party Transactions](index=33&type=section&id=Note%2012.%20Related%20Party%20Transactions) - Jeffrey E. Eberwein, Executive Chairman, provided limited guarantees for SNB and Gerber loans, with some guarantees discharged or expired[144](index=144&type=chunk)[145](index=145&type=chunk)[146](index=146&type=chunk) - As of March 31, 2022, Mr. Eberwein owned approximately **13.03%** of outstanding common stock and **1,289,772 shares** of Series A Preferred Stock[148](index=148&type=chunk) - In December 2021, Mr. Eberwein participated in a private placement, purchasing **650,000 shares** of common stock for **$3.25 per share**[150](index=150&type=chunk) - Related party promissory notes totaling **$2.3 million**, payable to LSV Co-Invest I and LSVM, were fully repaid in April 2021 using proceeds from the DMS Sale Transaction[152](index=152&type=chunk)[153](index=153&type=chunk)[154](index=154&type=chunk) [Note 13. Perpetual Preferred Stock](index=34&type=section&id=Note%2013.%20Perpetual%20Preferred%20Stock) - Holders of Series A Preferred Stock are entitled to preferential cumulative cash dividends at **10.0% per annum** of the **$10.00 liquidation preference**, payable quarterly[155](index=155&type=chunk) - Series A Preferred Stock is not convertible and has limited voting rights, primarily when dividends are six or more consecutive quarters in arrears[155](index=155&type=chunk) - On February 25, 2022, a cash dividend of **$0.25 per share ($0.5 million aggregate)** was declared and paid on March 10, 2022, with no preferred dividends in arrears as of March 31, 2022[156](index=156&type=chunk) [Note 14. Equity Transactions](index=35&type=section&id=Note%2014.%20Equity%20Transactions) - On January 24, 2022, the Company closed a public offering, issuing **9,175,000 shares** of common stock, **325,000 pre-funded warrants**, and **9,500,000 common stock purchase warrants**, generating net proceeds of **$12.7 million**[157](index=157&type=chunk) - As of March 31, 2022, **1.4 million warrants** from the 2020 Public Offering remained outstanding (**0.7 million common stock equivalents** at **$2.25 exercise price**)[158](index=158&type=chunk) - As of March 31, 2022, **10.9 million warrants** and **0.3 million prefunded warrants** from the 2022 Public Offering were outstanding, with exercise prices of **$1.50** and **$0.01**, respectively[158](index=158&type=chunk) [Note 15. Preferred Stock Rights](index=35&type=section&id=Note%2015.%20Preferred%20Stock%20Rights) - On June 2, 2021, the board adopted a tax benefit preservation plan (Section 382 Rights Agreement) to mitigate the risk of an 'ownership change' limiting net operating loss carryforwards[159](index=159&type=chunk) - Each right entitles holders to purchase one one-thousandth of a Series C Preferred Stock share at an exercise price of **$12.00**, subject to adjustment[159](index=159&type=chunk) - The rights become exercisable following certain events, such as a person or group becoming an Acquiring Person, and could cause substantial dilution to those acquiring **4.99%** or more of common stock without board approval[160](index=160&type=chunk)[161](index=161&type=chunk) [Note 16. Variable Interest Entity](index=35&type=section&id=Note%2016.%20Variable%20Interest%20Entity) - The Company has a **$0.3 million** investment in a Variable Interest Entity (VIE) involved in heart imaging technologies, recorded in Other Assets[163](index=163&type=chunk) - The Company is not the primary beneficiary of this VIE, as its governance structure does not allow it to direct activities significantly affecting economic performance, thus the VIE's financials are not consolidated[164](index=164&type=chunk) - The maximum exposure to this unconsolidated VIE is its **$0.3 million** capital investment, with no impairment indicators identified as of March 31, 2022[165](index=165&type=chunk) [Note 17. Subsequent Events](index=36&type=section&id=Note%2017.%20Subsequent%20Events) - On May 19, 2022, the board declared a cash dividend of **$0.25 per share ($0.5 million aggregate)** for Series A Preferred Stock, payable on June 10, 2022[166](index=166&type=chunk) [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=37&type=section&id=ITEM%202.%20MANAGEMENT%27S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) This section provides management's perspective on the Company's financial condition and results of operations for the three months ended March 31, 2022, discussing key financial performance, strategic initiatives, market conditions, and liquidity. It highlights the Company's multi-industry holding structure, segment performance, and ongoing challenges related to debt covenants and market volatility [Overview](index=37&type=section&id=Overview) - Star Equity Holdings, Inc. operates as a diversified multi-industry holding company with three divisions: Healthcare, Construction, and Investments[170](index=170&type=chunk) - The Healthcare division (Digirad Health, Inc.) provides nuclear medical imaging products and services, focusing on cardiac health, including imaging services and camera manufacturing/maintenance[171](index=171&type=chunk) - The Construction division comprises KBS Builders, Inc. (modular buildings) and EBGL (structural wall panels, engineered wood products, building materials)[172](index=172&type=chunk) - The Investments division is an internally focused unit holding corporate-owned real estate (leased to KBS) and managing minority investments[173](index=173&type=chunk) [Strategy](index=37&type=section&id=Strategy) - Star Equity's strategy focuses on capital allocation, strategic leadership, M&A, capital markets, investor relations, and Investments division management, allowing operating companies to focus on their core businesses[174](index=174&type=chunk) - The Company explores strategic alternatives like organic growth, selective acquisitions, divestitures, equity offerings, debt financings, or restructuring to improve market position and profitability[175](index=175&type=chunk) - Key growth elements include organic growth in existing markets, introduction of new services (e.g., new imaging technologies in Healthcare, logistics/installation in Construction), and acquisition of complementary businesses with a financially disciplined approach[176](index=176&type=chunk)[177](index=177&type=chunk) [Current Market Conditions](index=38&type=section&id=Current%20Market%20Conditions) - The Healthcare business has returned to pre-COVID levels, with diagnostic imaging volumes normalizing in Q1 2022[178](index=178&type=chunk)[179](index=179&type=chunk) - The Construction division benefits from strong housing demand but faces challenges from a tight labor market and continued supply chain disruptions, leading to volatile building material prices[178](index=178&type=chunk)[180](index=180&type=chunk) - The Company has implemented price increases and margin protection measures in Construction to offset higher input costs, expecting a positive effect on 2022 profitability[180](index=180&type=chunk) [Trends and Drivers](index=38&type=section&id=Trends%20and%20Drivers) - The diagnostic services and products market is highly competitive, facing uncertainties from reimbursement changes (Deficit Reduction Act, Healthcare Reform laws), COVID-19, and legislative changes[181](index=181&type=chunk) - Competitive factors include budget availability, reimbursement qualifications, pricing, ease-of-use, reliability, and mobility, which the Company addresses by modifying business models and assisting customers with regulations[181](index=181&type=chunk) - In construction, there's increasing adoption of offsite/prefab construction due to benefits like shorter time-to-market, higher quality, reduced waste, and labor availability, presenting opportunities for factory-built housing[182](index=182&type=chunk) - Risks from global economic instability, conflicts, wars, and health crises, along with inflation, could impact demand and costs[183](index=183&type=chunk) [COVID-19 Pandemic](index=38&type=section&id=COVID-19%20Pandemic) - The Company continues to recover from COVID-19's economic effects, with Healthcare revenue increasing **0.8%** and Construction revenue growing **28.6%** in Q1 2022 compared to the prior year[184](index=184&type=chunk)[185](index=185&type=chunk) - Construction division's growth was driven by increased output at KBS and EBGL, coupled with pricing increases to offset higher raw material costs[185](index=185&type=chunk) - The extent of future COVID-19 impact remains uncertain and dependent on future developments[185](index=185&type=chunk) [Discontinued Operations](index=39&type=section&id=Discontinued%20Operations) - The sale of DMS Health Technologies, Inc. (Mobile Healthcare business unit) was completed on March 31, 2021, for **$18.75 million** in cash, with an immaterial net escrow settlement received in January 2022[186](index=186&type=chunk) [Goodwill valuation](index=39&type=section&id=Goodwill%20valuation) - Goodwill is reviewed annually for impairment during Q4, and when circumstances indicate a reduction in carrying value may not be recoverable, by assessing qualitative factors[187](index=187&type=chunk) - As of March 31, 2022, qualitative analysis indicated that future impairments could be possible if projected performance levels are not achieved, potentially impacting earnings[188](index=188&type=chunk) [Business Segments](index=39&type=section&id=Business%20Segments) - Effective Q1 2022, the Company reorganized into three reportable segments: Healthcare, Construction, and Investments, to align with how the Chief Operating Decision Maker assesses performance[189](index=189&type=chunk)[191](index=191&type=chunk) - The Healthcare segment provides diagnostic imaging services (staffing, systems, radiopharmaceuticals) and sells/maintains solid-state gamma cameras, primarily for cardiac health[190](index=190&type=chunk) - The Construction segment manufactures modular housing units, structural wall panels, permanent wood foundation systems, and supplies building materials through KBS, Glenbrook, and EdgeBuilder[192](index=192&type=chunk) - The Investments segment holds corporate-owned real estate (leased to KBS) and manages other future investments[193](index=193&type=chunk) [Healthcare Services and Products](index=40&type=section&id=Healthcare%20Services%20and%20Products) - Diagnostic imaging, primarily using SPECT technology for gamma cameras, is standard for disease diagnosis, minimizing invasive procedures[194](index=194&type=chunk) - The Company offers various diagnostic imaging modalities (ultrasound, nuclear imaging) through services and product sales, diversifying operations against changing utilization trends[195](index=195&type=chunk) [Construction Services and Products](index=40&type=section&id=Construction%20Services%20and%20Products) - KBS markets modular homes through direct sales and a network of independent dealers/contractors in New England, focusing on customization and commercial projects[196](index=196&type=chunk) - EBGL markets engineered structural wall panels and permanent wood foundation systems via direct sales to builders, contractors, and developers in the Minneapolis-St. Paul area[197](index=197&type=chunk) - Marketing efforts include industry trade shows, product literature, and sales support tools to generate leads[197](index=197&type=chunk) [Critical Accounting Policies and Estimates](index=40&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) - The preparation of financial statements involves significant estimates and judgments impacting revenue, net income/loss, and asset/liability values[198](index=198&type=chunk) - Critical accounting policies and estimates are detailed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021[198](index=198&type=chunk) [Results of Operations](index=41&type=section&id=Results%20of%20Operations) Results of Operations (in thousands) | Metric | Q1 2022 | Q1 2021 | Change | % Change | | :------------------------------------- | :------ | :------ | :----- | :------- | | Total revenues | $25,049 | $22,354 | $2,695 | 12.1% | | Gross profit | $4,663 | $3,077 | $1,586 | 51.5% | | Total operating expenses | $7,218 | $4,646 | $2,572 | 55.4% | | Loss from operations | $(2,555) | $(1,569) | $(986) | 62.8% | | Net loss from continuing operations | $(3,701) | $(588) | $(3,113) | 529.4% | | Net (loss) income | $(3,701) | $5,432 | $(9,133) | (168.1)% | - Total revenues increased by **12.1%** year-over-year, driven by strong performance in the Construction division[199](index=199&type=chunk) - Gross profit increased by **51.5%**, but total operating expenses rose by **55.4%**, leading to a higher loss from operations[199](index=199&type=chunk) - Net loss from continuing operations increased significantly by **529.4%**, primarily due to higher operating expenses and income tax provision, and the absence of income from discontinued operations[199](index=199&type=chunk) [Revenues](index=41&type=section&id=Revenues) Revenues by Segment (in thousands) | Segment | Q1 2022 Revenue | Q1 2021 Revenue | Change | % Change | | :------------------------------------- | :-------------- | :-------------- | :----- | :------- | | Healthcare | $13,418 | $13,307 | $111 | 0.8% | | Construction | $11,631 | $9,047 | $2,584 | 28.6% | - Healthcare revenue increased slightly by **0.8%**, driven by radiopharmaceuticals contracts, partially offset by fewer camera sales and scanning days[200](index=200&type=chunk) - Construction revenue increased significantly by **28.6%**, primarily due to large commercial projects at EBGL, partially offset by a **$0.6 million** decrease in KBS revenues[201](index=201&type=chunk) [Gross Profit](index=42&type=section&id=Gross%20Profit) Gross Profit by Segment (in thousands) | Segment | Q1 2022 Gross Profit | Q1 2021 Gross Profit | % Change | | :------------------------------------- | :------------------- | :------------------- | :------- | | Healthcare | $3,176 | $2,598 | 22.2% | | Healthcare gross margin | 23.7% | 19.5% | | | Construction | $1,586 | $544 | 191.5% | | Construction gross margin | 13.6% | 6.0% | | | Investments gross loss | $(65) | $(99) | 52.3% | - Healthcare gross margin percentage increased due to a higher percentage of high-margin radiopharmaceuticals contracts[202](index=202&type=chunk) - Construction gross profit significantly increased by **191.5%**, driven by increased pricing to offset higher input costs, despite a net loss from lumber derivatives[203](index=203&type=chunk) - Investments gross loss relates to depreciation expense from manufacturing facilities[204](index=204&type=chunk) [Operating Expenses](index=43&type=section&id=Operating%20Expenses) Operating Expenses (in thousands) | Expense Type | Q1 2022 | Q1 2021 | Change | % Change | | :------------------------------------- | :------ | :------ | :----- | :------- | | Selling, general and administrative | $6,788 | $5,055 | $1,733 | 34.3% | | Amortization of intangible assets | $430 | $438 | $(8) | (1.8)% | | Gain on sale of MD Office Solutions | $0 | $(847) | $847 | (100.0)% | | Total operating expenses | $7,218 | $4,646 | $2,572 | 55.4% | - Consolidated selling, general and administrative (SG&A) expenses increased by **$1.7 million (34.3%)**, primarily due to increased headcount and consulting in Construction, corporate administrative expenses, legal expenses, and outside services[206](index=206&type=chunk) - SG&A as a percentage of revenue increased to **27.1%** in Q1 2022 from **22.6%** in Q1 2021[206](index=206&type=chunk) [Total Other Income (Expense)](index=43&type=section&id=Total%20Other%20Income%20%28Expense%29) Total Other Income (Expense) (in thousands) | Item | Q1 2022 | Q1 2021 | | :------------------------------------- | :------ | :------ | | Other (expenses) income, net | $(6) | $35 | | Interest expense, net | $(190) | $(272) | | Gain on forgiveness of PPP loans | $0 | $1,220 | | Total other (expense) income | $(196) | $983 | - Total other (expense) income shifted from a gain of **$983 thousand** in Q1 2021 to an expense of **$(196) thousand** in Q1 2022, primarily due to the absence of a **$1.22 million** gain on PPP loan forgiveness[207](index=207&type=chunk) - Interest expense, net, decreased from **$(272) thousand** in Q1 2021 to **$(190) thousand** in Q1 2022[208](index=208&type=chunk) [Income Tax Expense](index=43&type=section&id=Income%20Tax%20Expense) - Income tax expense for continuing operations was **$950 thousand** in Q1 2022, a significant increase from **$2 thousand** in Q1 2021[209](index=209&type=chunk) - The increase in tax expense is mainly due to an ownership change under IRC Section 382 in January 2022, requiring an additional valuation allowance on net operating losses[139](index=139&type=chunk)[209](index=209&type=chunk) [Income from Discontinued Operations](index=43&type=section&id=Income%20from%20Discontinued%20Operations) - There was no income from discontinued operations in Q1 2022, compared to **$6.02 million** in Q1 2021, following the sale of DMS Health Technologies, Inc. in March 2021[12](index=12&type=chunk)[210](index=210&type=chunk) [Liquidity and Capital Resources](index=44&type=section&id=Liquidity%20and%20Capital%20Resources) Cash Flow Activity (in thousands) | Cash Flow Activity | Q1 2022 | Q1 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) | - Net cash used in operating activities decreased by **$1.6 million** in Q1 2022, primarily due to positive working capital changes[212](index=212&type=chunk) - Net cash used in investing activities was **$1.3 million** in Q1 2022, a **$19.6 million** decrease from Q1 2021, which included **$18.8 million** from the sale of discontinued operations[213](index=213&type=chunk) - Net cash provided by financing activities increased by **$18.7 million** in Q1 2022, driven by **$12.7 million** net proceeds from the 2022 Public Offering[214](index=214&type=chunk) - As of March 31, 2022, the Company had **$15.0 million** in cash and cash equivalents, and **$13.3 million** in short-term debt outstanding[217](index=217&type=chunk)[219](index=219&type=chunk) - The Company was not in compliance with SNB Loan Agreement covenants for its Healthcare division as of March 31, 2022, raising substantial doubt about its ability to continue as a going concern without waivers or restructuring[219](index=219&type=chunk)[220](index=220&type=chunk) - The Construction division had **$5.0 million** outstanding on Gerber revolvers, with waivers obtained for prior covenant non-compliance covering the period ending June 30, 2022[221](index=221&type=chunk) - The 2022 Public Offering generated net proceeds of **$12.7 million**, significantly boosting liquidity[224](index=224&type=chunk)[227](index=227&type=chunk) - The Company entered into a Guaranty Agreement on April 1, 2022, to guarantee KBS's obligations up to **$4.4 million** under a subcontract[251](index=251&type=chunk) [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=48&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 reporting period [ITEM 4. CONTROLS AND PROCEDURES](index=49&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) This section details the Company's disclosure controls and procedures, identifying a material weakness in internal control over financial reporting due to insufficient accounting resources and imprecise management review controls. It outlines management's plan to remediate this weakness [Disclosure Controls and Procedures](index=49&type=section&id=Disclosure%20Controls%20and%20Procedures) - The Company's disclosure controls and procedures were deemed not effective as of March 31, 2022, due to a material weakness in internal control over financial reporting[254](index=254&type=chunk) - The material weakness stems from insufficient accounting resources to address complex accounting matters and ensure timely completion of financial reporting, including sufficiently precise management review controls[256](index=256&type=chunk) - Despite the material weakness, no material misstatements were identified in the financial statements, and no material changes to previously released financial results occurred[256](index=256&type=chunk) [Plan for Remediation of the Material Weakness in Internal Control Over Financial Reporting](index=49&type=section&id=Plan%20for%20Remediation%20of%20the%20Material%20Weakness%20in%20Internal%20Control%20Over%20Financial%20Reporting) - Management plans to increase the skills and experience of its accounting and financial reporting staff through continuing education and public company accounting training[259](index=259&type=chunk) - Additional outside financial consultants may be retained for technical accounting reviews when necessary[259](index=259&type=chunk) - Controls will be added to enhance the precision of management review controls, including the review of key inputs in the preparation and review process[260](index=260&type=chunk) [Changes in Internal Control over Financial Reporting](index=49&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) - No changes in internal control over financial reporting occurred during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting, other than those related to the remediation plan for the identified material weakness[261](index=261&type=chunk) [PART II. OTHER INFORMATION](index=50&type=section&id=PART%20II.%20OTHER%20INFORMATION) [ITEM 1. LEGAL PROCEEDINGS](index=50&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) This section refers to Note 9 of the condensed consolidated financial statements for a summary of legal proceedings - Information regarding legal proceedings is summarized in Note 9. Commitments and Contingencies of the condensed consolidated financial statements[263](index=263&type=chunk) [ITEM 1A. RISK FACTORS](index=50&type=section&id=ITEM%201A.%20RISK%20FACTORS) This section highlights risks related to the Company's common stock and preferred stock, specifically the potential for delisting from the Nasdaq Global Market if compliance with listing standards is not maintained, which could harm the business and stock liquidity - The Company's common stock could be delisted from the Nasdaq Global Market if it fails to satisfy continued listing standards, such as maintaining a minimum **$1.00** bid price[265](index=265&type=chunk)[266](index=266&type=chunk) - As of May 23, 2022, the common stock had closed below **$1.00 per share** for twelve consecutive trading days, potentially leading to a Nasdaq notice and a 180-day period to regain compliance[266](index=266&type=chunk) - Delisting could harm the business, trading price, ability to raise capital, and liquidity of the common stock[265](index=265&type=chunk)[266](index=266&type=chunk) [ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=51&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 [ITEM 3. DEFAULTS UPON SENIOR SECURITIES](index=51&type=section&id=ITEM%203.%20DEFAULTS%20UPON%20SENIOR%20SECURITIES) This section indicates that there were no defaults upon senior securities to report for the period [ITEM 4. MINE SAFETY DISCLOSURES](index=51&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) This section states that mine safety disclosures are not applicable to the Company [ITEM 5. OTHER INFORMATION](index=51&type=section&id=ITEM%205.%20OTHER%20INFORMATION) This section indicates that there is no other information to report for the period [ITEM 6. EXHIBITS](index=52&type=section&id=ITEM%206.%20EXHIBITS) This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including employment agreements, separation agreements, warrant forms, and certifications - Exhibits include employment agreements, separation agreements, forms of pre-funded and common stock purchase warrants, and certifications by the Principal Executive and Financial Officers[272](index=272&type=chunk)

Star Equity Holdings, Inc. (NASDAQ:STRR) Q1 2022 Earnings Conference Call May 23, 2022 10:00 AM ET Company Participants Jeff Eberwein - Executive Chairman Richard Coleman - Chief Executive Officer 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 the Star Equity Holdings Inc. First Quarter 2022 Results Conference Call. Please be advised that discussions on today' ...

Company Overview - Star Equity Holdings is a diversified holding company with three divisions[5] - The company closed the sale of non-continuing healthcare businesses for over $20 million in 2021[5] - As of September 30, 2021, the pro forma cash balance was $17 million, positioning the company for acquisitions[5] - The company issued tax-efficient Series A 10% Preferred Stock in September 2019 as part of an acquisition[5] - As of January 31, 2022, the common stock price was $1.36 with 15.3 million shares outstanding, and the Series A Preferred Stock price was $10.00 with 1.92 million shares outstanding[7] Financial Performance - Consolidated revenue for the first nine months of 2021 was $77 million, a 40% increase compared to the same period in 2020[11] - Healthcare revenue for the first nine months of 2021 was $43 million, a 19.7% increase compared to the same period in 2020[11] - Construction revenue for the first nine months of 2021 was $34 million, a 78.6% increase compared to the same period in 2020[11] Growth Strategy - The company aims to increase KBS's modular manufacturing output to 750-1000 modular units per year[53] - The company sold DMS Health Technologies, Inc business unit for $18.8 million and MD Office Solutions ("MDOS") for $1.4 million[55] - The company completed a $14.3 million public offering in January 2022 to fund organic growth initiatives and potential acquisitions[55]

Part I [Business](index=4&type=section&id=Item%201.%20Business) Star Equity Holdings is a diversified holding company operating in Healthcare, Construction, and Investments - Star Equity operates as a multi-industry holding company with divisions in Healthcare (Digirad Health), Construction (KBS and EBGL), and Investments[15](index=15&type=chunk)[16](index=16&type=chunk) - The company's strategy involves organic growth, introducing new services, acquiring complementary businesses, and focusing on capital allocation at the holding company level[21](index=21&type=chunk)[22](index=22&type=chunk)[24](index=24&type=chunk) - In 2021, the company completed the sale of its DMS Health Technologies Inc. subsidiary (Mobile Healthcare segment) and its MD Office Solutions (MDOS) subsidiary[69](index=69&type=chunk)[70](index=70&type=chunk)[71](index=71&type=chunk) Revenue Contribution by Division (Continuing Operations) | Division | 2021 Revenue % | 2020 Revenue % | | :--- | :--- | :--- | | **Healthcare** | **55.0%** | **63.0%** | | - Diagnostic Services | 41.1% | 50.3% | | - Diagnostic Imaging | 13.9% | 12.7% | | **Construction** | **45.0%** | **36.9%** | [Business Segments](index=5&type=section&id=Business%20Segments) The company operates three distinct business segments: Healthcare, Construction, and Investments - The Healthcare division, operating as Digirad Health, provides nuclear medical imaging products and services, split into Diagnostic Services (imaging services using proprietary cameras) and Diagnostic Imaging (manufacturing and sales of cameras)[17](index=17&type=chunk) - The Construction division comprises KBS Builders, Inc. (modular buildings in New England) and EBGL (structural wall panels and building materials in the Upper Midwest)[18](index=18&type=chunk) - The Investments division holds corporate-owned real estate, including three manufacturing facilities in Maine leased to KBS, and other minority investments[19](index=19&type=chunk)[34](index=34&type=chunk) [Competition](index=9&type=section&id=Competition) The company faces competition in Healthcare from local and large medical device providers, and in Construction from regional and retail suppliers - In Diagnostic Services, the company competes with smaller local and regional providers. In Diagnostic Imaging, it competes with large medical device manufacturers like GE Healthcare, Siemens Healthineers, and Philips, which have greater brand recognition and resources[46](index=46&type=chunk)[47](index=47&type=chunk) - In Construction, KBS competes with regional modular manufacturers in New England and Pennsylvania, while EBGL competes with local lumber yards, regional suppliers, and large retail stores like Home Depot and Lowe's[48](index=48&type=chunk)[49](index=49&type=chunk) [Intellectual Property & Manufacturing](index=10&type=section&id=Intellectual%20Property%20%26%20Manufacturing) The company holds Healthcare patents, faces wood price sensitivity in Construction, and adheres to FDA regulations for Diagnostic Imaging - The company holds **10 non-expired U.S. patents** related to its solid-state radiation detectors and scan technology, expiring between 2022 and 2030. It holds no patents in the Construction business[52](index=52&type=chunk)[53](index=53&type=chunk) - The primary raw materials for the Construction division are dimensional lumber (spruce-pine-fir) and sheathing (OSB and plywood), making the business sensitive to wood commodity price fluctuations[57](index=57&type=chunk) - Diagnostic Imaging manufacturing is subject to FDA Quality System Regulations and is certified to EN ISO 13485:2016. The company has received FDA 510(k) clearance for its nuclear imaging camera product line[59](index=59&type=chunk) [Government Regulation & Human Capital](index=11&type=section&id=Government%20Regulation%20%26%20Human%20Capital) The Healthcare business is subject to extensive government regulations, including FDA medical device classifications, and the company employs 458 individuals - The Healthcare business is subject to extensive regulation, including Anti-Kickback laws, the Stark Law, HIPAA, and FDA medical device regulations. The company's cameras are classified as Class II medical devices[66](index=66&type=chunk)[67](index=67&type=chunk) - As of December 31, 2021, the company had **458 employees**, with **202** in clinical health-related positions and **105** in manufacturing[68](index=68&type=chunk) [Risk Factors](index=16&type=section&id=Item%201A.%20Risk%20Factors) The company faces risks from recurring losses, operational disruptions, debt covenants, and internal control weaknesses - The company has a history of annual net losses attributable to common stockholders, reporting a loss of **$4.9 million** in 2021 and **$8.4 million** in 2020[88](index=88&type=chunk) - Business operations are exposed to risks from health pandemics (like COVID-19), wars, and inflation, which could disrupt operations, supply chains, and financial results[94](index=94&type=chunk) - Loan agreements contain restrictive covenants, and substantially all company assets are pledged as security. As of December 31, 2021, the KBS subsidiary was not in compliance with financial covenants under its loan agreement but obtained a waiver[140](index=140&type=chunk)[144](index=144&type=chunk)[145](index=145&type=chunk) - A material weakness in internal control over financial reporting was identified, related to not having a sufficient complement of accounting resources to address complex accounting matters and ensure timely reporting[87](index=87&type=chunk)[170](index=170&type=chunk) [Unresolved Staff Comments](index=30&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the SEC - Not applicable[171](index=171&type=chunk) [Properties](index=30&type=section&id=Item%202.%20Properties) The company's principal executive offices are in Old Greenwich, CT, with Healthcare operations in Poway, CA, and Investments owning manufacturing facilities leased to Construction - The principal executive offices are leased in Old Greenwich, CT[172](index=172&type=chunk) - The Investments division owns three manufacturing facilities in Maine (South Paris, Oxford, and Waterford) which are leased back to the KBS construction business[174](index=174&type=chunk) - The Diagnostic Imaging operations are housed in a 21,300 sq. ft. leased facility in Poway, CA, and the Diagnostic Services segment leases approximately 24 small hub locations across the U.S[173](index=173&type=chunk) [Legal Proceedings](index=31&type=section&id=Item%203.%20Legal%20Proceedings) Information regarding legal proceedings is detailed in Note 9 of the consolidated financial statements - For a summary of legal proceedings, refer to Note 9, Commitments and Contingencies, within the notes to the consolidated financial statements[177](index=177&type=chunk) [Mine Safety Disclosures](index=31&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section is not applicable to the company's operations - Not applicable[178](index=178&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=32&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 no shares repurchased under its 2018 program as of December 31, 2021 - Common stock and preferred stock trade on the NASDAQ Global Market under symbols "STRR" and "STRRP", respectively[181](index=181&type=chunk) - A stock repurchase program approved in October 2018 allows for the repurchase of up to **200,000 shares** of common stock. As of December 31, 2021, no shares had been purchased under this program[183](index=183&type=chunk)[186](index=186&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=33&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Revenues increased significantly in 2021, but rising costs led to wider losses and raised going concern doubts [2021 Financial Highlights](index=35&type=section&id=2021%20Financial%20Highlights) The company saw significant revenue growth in 2021, driven by Construction and Healthcare, but gross profit growth was modest - The revenue increase was driven by a **$19.1 million (66.2%) increase** in the Construction division and a **$9.3 million (18.9%) increase** in the Healthcare division, reflecting recovery from the COVID-19 pandemic[198](index=198&type=chunk)[203](index=203&type=chunk) 2021 vs. 2020 Financial Performance | Metric | 2021 | 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $106.6 million | $78.2 million | +36.3% | | Gross Profit | $15.2 million | $14.0 million | +9.0% | | Loss from Continuing Operations | ($8.9 million) | ($5.3 million) | +69.0% | | EBITDA from Continuing Operations | ($4.5 million) | $0.07 million | N/A | [Results of Operations](index=36&type=section&id=Results%20of%20Operations) Healthcare saw strong revenue and gross profit growth, while Construction's gross profit declined due to rising raw material costs - The decrease in Construction gross profit was predominantly due to the adverse impact of a rapid and historic rise in raw materials costs[218](index=218&type=chunk) - Operating expenses increased by **$5.6 million**, driven by a **$4.0 million increase** in SG&A and a **$3.4 million goodwill impairment charge** related to the KBS reporting unit, partially offset by a gain on the sale of MDOS[204](index=204&type=chunk)[220](index=220&type=chunk)[222](index=222&type=chunk) Revenue by Segment (in thousands) | Segment | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Diagnostic Services | $43,765 | $39,267 | 11.5% | | Diagnostic Imaging | $14,791 | $9,965 | 48.4% | | **Total Healthcare** | **$58,556** | **$49,232** | **18.9%** | | **Construction** | **$48,003** | **$28,879** | **66.2%** | Gross Profit by Segment (in thousands) | Segment | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Diagnostic Services | $7,364 | $6,758 | 9.0% | | Diagnostic Imaging | $5,095 | $3,391 | 50.3% | | **Total Healthcare** | **$12,459** | **$10,149** | **22.8%** | | **Construction** | **$3,008** | **$4,047** | **(25.7)%** | [Liquidity and Capital Resources](index=39&type=section&id=Liquidity%20and%20Capital%20Resources) The company faces going concern doubts due to recurring losses and a forecasted loan covenant breach, despite a recent capital raise - The company has incurred recurring losses from continuing operations (**$8.9 million in 2021**, **$5.3 million in 2020**) and is forecasting a covenant breach on its SNB Loan Agreement, which raises substantial doubt about its ability to continue as a going concern[233](index=233&type=chunk)[237](index=237&type=chunk)[327](index=327&type=chunk) - In January 2022, the company closed an underwritten public offering, raising net proceeds of **$12.8 million** to be used for growth initiatives, potential acquisitions, and working capital[239](index=239&type=chunk)[242](index=242&type=chunk)[243](index=243&type=chunk) - As of December 31, 2021, the company had **$12.9 million in outstanding debt**, all of which is classified as short-term. This includes **$7.0 million** under the SNB facility and **$4.8 million** under Construction division revolvers[234](index=234&type=chunk)[235](index=235&type=chunk) Cash Flow Summary (in thousands) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net Cash Used in Operating | $(6,450) | $(4,953) | | Net Cash Provided by (Used in) Investing | $17,802 | $(1,332) | | Net Cash (Used in) Provided by Financing | $(9,975) | $8,060 | [Quantitative and Qualitative Disclosures About Market Risk](index=47&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk exposure is to interest rate fluctuations, as its debt obligations under its credit facilities are subject to variable rates - The company is exposed to interest rate risk as all borrowings under its Company Loan Agreements are at variable rates[295](index=295&type=chunk) - A **100 basis point increase** in the underlying interest rate would result in approximately **$0.1 million** of additional annual interest expense, based on borrowings outstanding at December 31, 2021[294](index=294&type=chunk) [Financial Statements and Supplementary Data](index=48&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) Audited financial statements are presented, with the auditor highlighting going concern uncertainty and goodwill valuation - The independent auditor's report highlights a "Going Concern Uncertainty" due to the company's history of losses and a forecasted potential loan covenant breach[298](index=298&type=chunk) - The valuation of the **$6.0 million goodwill balance** was identified as a Critical Audit Matter, particularly for the construction segment, due to significant management estimates regarding future cash flows and market multiples[303](index=303&type=chunk)[304](index=304&type=chunk) Consolidated Statement of Operations Summary (in thousands) | Line Item | 2021 | 2020 | | :--- | :--- | :--- | | Total Revenues | $106,559 | $78,163 | | Loss from Continuing Operations | $(8,931) | $(5,285) | | Income (Loss) from Discontinued Operations | $5,948 | $(1,172) | | **Net Loss** | **$(2,983)** | **$(6,457)** | | Net Loss Attributable to Common Stockholders | $(4,889) | $(8,373) | Consolidated Balance Sheet Summary (in thousands) | Line Item | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Current Assets | $31,863 | $48,936 | | Goodwill | $6,046 | $9,542 | | **Total Assets** | **$68,052** | **$89,459** | | Total Current Liabilities | $27,821 | $42,993 | | **Total Liabilities** | **$32,310** | **$49,530** | | **Total Stockholders' Equity** | **$16,754** | **$18,429** | [Changes in and Disagreements with Accountants on Accounting and Financial Disclosures](index=94&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosures) The company reports no changes in or disagreements with its accountants on accounting and financial disclosures - None[511](index=511&type=chunk) [Controls and Procedures](index=94&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls were ineffective due to a material weakness in accounting resources, with a remediation plan outlined - Management concluded that disclosure controls and procedures were not effective as of December 31, 2021[513](index=513&type=chunk) - A material weakness was identified in internal control over financial reporting because the company does not have a sufficient complement of accounting resources to address complex accounting matters and allow for timely financial reporting[516](index=516&type=chunk) - The remediation plan includes increasing the skills of the accounting staff, investing in training, and potentially retaining outside consultants[520](index=520&type=chunk) [Other Information](index=95&type=section&id=Item%209B.%20Other%20Information) The company reports no other information in this section - None[523](index=523&type=chunk) [Disclosure Regarding Foreign Jurisdictions That Prevent Inspections](index=95&type=section&id=Item%209C.%20Disclosure%20Regarding%20Foreign%20Jurisdictions%20That%20Prevent%20Inspections) This section is not applicable to the company - Not Applicable[524](index=524&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=96&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 proxy statement, and the company has adopted a Code of Business Ethics and Conduct - Information required by this item is incorporated by reference from the company's 2022 Proxy Statement[526](index=526&type=chunk) - The company has adopted a Code of Business Ethics and Conduct that applies to all officers, directors, and employees, qualifying as a "code of ethics" under Section 406 of the Sarbanes-Oxley Act[527](index=527&type=chunk) [Executive Compensation](index=96&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from the company's definitive proxy statement for its 2022 annual meeting of shareholders - Information required by this item is incorporated by reference from the company's 2022 Proxy Statement[528](index=528&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=96&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information concerning security ownership and related matters is incorporated by reference from the company's definitive proxy statement for its 2022 annual meeting of shareholders - Information required by this item is incorporated by reference from the company's 2022 Proxy Statement[529](index=529&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=96&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information covering related party transactions and director independence is incorporated by reference from the company's definitive proxy statement for its 2022 annual meeting of shareholders - Information required by this item is incorporated by reference from the company's 2022 Proxy Statement[530](index=530&type=chunk) [Principal Accounting Fees and Services](index=96&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information detailing fees paid to the principal accountant, BDO USA, LLP, is incorporated by reference from the "Audit Matters" section of the company's definitive proxy statement for its 2022 annual meeting of shareholders - Information regarding principal accounting fees and services is incorporated by reference from the 2022 Proxy Statement[531](index=531&type=chunk) Part IV [Exhibits, Financial Statement Schedules](index=97&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists the documents filed as part of the Form 10-K report, including consolidated financial statements and an index of all exhibits - This section lists the financial statements filed as part of the report, which are located in Item 8[534](index=534&type=chunk) - An index of all exhibits required by Item 601 of Regulation S-K is provided, referencing various agreements, corporate documents, and certifications[535](index=535&type=chunk) [Form 10-K Summary](index=107&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company has not provided a summary in this section of the Form 10-K - None[550](index=550&type=chunk)

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)