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)

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) ```

Star Equity Holdings, Inc. (NASDAQ:STRR) Q1 2021 Earnings Conference Call May 14, 2021 10:00 AM ET Company Participants Jeff Eberwein - Executive Chairman Matt Molchan - President and CEO, Digirad Health David Noble - CFO and Chief Operating Officer Matt Sullivan - Vice President of Business Development, KBS Builders Conference Call Participants Tate Sullivan - Maxim Group Theodore O'Neill - Litchfield Hills Research Adam Waldo - Lismore Partners Jeff Kobylarz - Diamond Bridge Capital Zach Liggett - Desmon ...

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 ...