digirad-20220630

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


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

Commission file number: 001-35947

Star Equity Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware

33-0145723

(State or Other Jurisdiction of Incorporation or Organization)

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

53 Forest Ave., Suite 101,

Old Greenwich

06870

(Address of Principal Executive Offices)

(Zip Code)

(203) 489-9500

(Registrant’s Telephone Number, Including Area Code)

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


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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	o	Accelerated filer	o

Non-accelerated filer	☒	Smaller reporting company	☒

		Emerging growth company	☐

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

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

As of August 5, 2022, the registrant had 15,082,155 shares of Common Stock ($0.0001 par value) outstanding.

STAR EQUITY HOLDINGS, INC.

TABLE OF CONTENTS


IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS			4

PART I. FINANCIAL INFORMATION			5
Item 1. Financial Statements (Unaudited)			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			36
Item 3. Quantitative and Qualitative Disclosures about Market Risk			48
Item 4. Controls and Procedures			48

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

Important Information Regarding Forward-Looking Statements

Portions of this Quarterly Report on Form 10-Q (including information incorporated by reference) include “forward-looking statements” based on our current beliefs, expectations, and projections regarding our business strategies, market potential, future financial performance, industry, and other matters. This includes, in particular, “Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q, as well as other portions of this Quarterly Report on Form 10-Q. The words “believe,” “expect,” “anticipate,” “project,” “could,” “would,” and similar expressions, among others, generally identify “forward-looking statements,” which speak only as of the date the statements were made. The matters discussed in these forward-looking statements are subject to risks, uncertainties, and other factors that could cause our actual results to differ materially from those projected, anticipated, or implied in the forward-looking statements. The most significant of these risks, uncertainties, and other factors are described in “Item 1A — Risk Factors” of this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the U.S. Securities and Exchange Commission on March 31, 2022. Except to the limited extent required by applicable law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

PART I. FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

STAR EQUITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Revenues:
Healthcare	$	13,912	$	14,870	$	27,330	$	28,177
Construction	16,806		10,936		28,437		19,983

Total revenues	30,718		25,806		55,767		48,160

Cost of revenues:
Healthcare	10,234		11,461		20,476		22,170
Construction	14,321		12,780		24,366		21,283
Investments	64		61		163		126
Total cost of revenues	24,619		24,302		45,005		43,579

Gross profit	6,099		1,504		10,762		4,581

Operating expenses:
Selling, general and administrative	6,867		5,584		13,655		10,638
Amortization of intangible assets	430		430		860		868


Gain on sale of MD Office Solutions	—		—		—		(847)
Total operating expenses	7,297		6,014		14,515		10,659

Loss from operations	(1,198)		(4,510)		(3,753)		(6,078)

Other (expense) income:
Other (expense) income, net	(416)		2,950		(422)		4,205
Interest expense, net	(289)		(199)		(479)		(472)

Total other (expense) income	(705)		2,751		(901)		3,733

Loss from continuing operations before income taxes	(1,903)		(1,759)		(4,654)		(2,345)
Income tax benefit (provision)	327		(32)		(623)		(34)
Loss from continuing operations, net of tax	(1,576)		(1,791)		(5,277)		(2,379)
(Loss) income from discontinued operations, net of tax	—		(65)		—		5,955
Net (loss) income	(1,576)		(1,856)		(5,277)		3,576
Deemed dividend on Series A perpetual preferred stock	(479)		(479)		(958)		(958)
Net (loss) income attributable to common shareholders	$	(2,055)	$	(2,335)	$	(6,235)	$	2,618

Net (loss) income per share—basic and diluted
Net loss per share, continuing operations	$	(0.10)	$	(0.36)	$	(0.38)	$	(0.48)
Net (loss) income per share, discontinued operations	$	—	$	(0.01)	$	—	$	1.20
Net (loss) income per share—basic and diluted*	$	(0.10)	$	(0.37)	$	(0.38)	$	0.72
Deemed dividend on Series A cumulative perpetual preferred stock per share	$	(0.03)	$	(0.10)	$	(0.07)	$	(0.19)
Net (loss) income per share, attributable to common shareholders—basic and diluted*	$	(0.13)	$	(0.46)	$	(0.44)	$	0.53
Weighted-average shares outstanding—basic and diluted	15,379		5,039		14,031		4,978

Dividends declared per Series A perpetual preferred stock	$	0.25	$	0.25	$	0.50	$	0.25

*Earnings per share may not add due to rounding

See accompanying notes to the unaudited condensed consolidated financial statements.

STAR EQUITY HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)


	June 30, 2022 (unaudited)		December 31, 2021
Assets:
Current assets:
Cash and cash equivalents	$	13,657	$	4,538
Restricted cash	847		278
Investments in equity securities	2,550		47
Lumber derivative contracts	—		666
Accounts receivable, net of allowances of $1.0 million and $0.8 million, respectively	15,208		15,811
Inventories, net	11,217		8,525
Other current assets	2,672		1,998

Total current assets	46,151		31,863
Property and equipment, net	8,764		8,918
Operating lease right-of-use assets, net	4,980		4,494
Intangible assets, net	14,212		15,072
Goodwill	6,046		6,046

Other assets	1,495		1,659
Total assets	$	81,648	$	68,052

Liabilities, Mezzanine Equity and Stockholders’ Equity:
Current liabilities:
Accounts payable	$	6,244	$	4,277
Accrued liabilities	4,316		2,445
Accrued compensation	3,046		3,051
Accrued warranty	344		569
Lumber derivative contracts	482		—
Billings in excess of costs and estimated profit	2,181		312
Deferred revenue	3,840		2,457
Short-term debt	11,568		12,869
Operating lease liabilities	1,406		1,253
Finance lease liabilities	527		588

Total current liabilities	33,954		27,821
Deferred tax liabilities	667		72
Operating lease liabilities, net of current portion	3,651		3,299
Finance lease liabilities, net of current portion	548		706
Other liabilities	360		412
Total liabilities	39,180		32,310

Commitments and contingencies (Note 9)

Preferred stock, $0.0001 par value: 10,000,000 shares authorized: Series A Preferred Stock, 8,000,000 shares authorized, liquidation preference ($10.00 per share), 1,915,637 shares issued and outstanding at December 31, 2021. (Liquidation preference: $18,988,390 as of December 31, 2021.)	—		18,988

Stockholders’ Equity:
Preferred stock, $0.0001 par value: 10,000,000 shares authorized: Series A Preferred Stock, 8,000,000 shares authorized, liquidation preference ($10.00 per share), 1,915,637 shares issued and outstanding at June 30, 2022. (Liquidation preference: $18,988,390 as of June 30, 2022.)	—		—
Preferred stock, $0.0001 par value: 25,000 shares authorized; Series C Preferred stock, no shares issued or outstanding	—		—


Common stock, $0.0001 par value: 30,000,000 shares authorized; 15,082,155 and 5,805,916 shares issued and outstanding (net of treasury shares) at June 30, 2022 and December 31, 2021, respectively	1		—
Treasury stock, at cost; 258,849 shares at June 30, 2022 and December 31, 2021, respectively	(5,728)		(5,728)
Additional paid-in capital	181,441		150,451

Accumulated deficit	(133,246)		(127,969)
Total stockholders’ equity	42,468		16,754
Total liabilities, mezzanine equity and stockholders’ equity	$	81,648	$	68,052

See accompanying notes to the unaudited condensed consolidated financial statements.

STAR EQUITY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Six Months Ended June 30,
	2022		2021
Operating activities
Net (loss) income	$	(5,277)	$	3,576
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Depreciation of property and equipment	922		903
Amortization of intangible assets	860		868
Non-cash lease expense	536		785
Provision for bad debt, net	289		31
Stock-based compensation	216		265

Gain on disposal of discontinued operations	—		(5,159)
Amortization of loan issuance costs	71		100
Write-off of borrowing costs	—		130
Gain on disposal of MD Office Solutions	—		(847)
(Gain) loss on sale of assets	(44)		(117)
Gain on Paycheck Protection Program loan forgiveness	—		(4,179)
Deferred income taxes	594		34
Unrealized loss (gain) of equity securities and lumber derivatives	1,380		289
Changes in operating assets and liabilities:
Accounts receivable	318		(1,340)
Inventories	(2,692)		(2,233)
Other assets	(529)		(636)
Accounts payable	1,967		(197)
Accrued compensation	(4)		64
Deferred revenue and billings in excess of costs and estimated profit	3,253		970
Operating lease liabilities	(520)		(795)
Other liabilities	1,597		(111)
Net cash provided (used) by operating activities	2,937		(7,599)

Investing activities
Purchases of property and equipment	(754)		(383)
Proceeds from sale of discontinued operations	—		18,750
Proceeds from sale of property and equipment	121		48
Purchases of equity securities	(2,764)		(394)
Proceeds from sales of equity securities	26		—
Net cash provided (used) by investing activities	(3,371)		18,021

Financing activities
Proceeds from borrowings	53,458		63,583
Repayment of debt	(54,811)		(70,739)



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

Proceeds from exercise of warrants	—		567

Fees paid on issuance of rights agreement	—		(28)
Taxes paid related to net share settlement of equity awards	(3)		(18)
Repayment of obligations under finance leases	(312)		(420)
Preferred stock dividends paid	(958)		(479)
Net cash provided (used) by financing activities	10,122		(7,534)
Net increase in cash, cash equivalents, and restricted cash including cash classified within current assets held for sale	9,688		2,888


Less: net increase in cash classified within current assets held for sale	—		(47)
Net increase in cash, cash equivalents, and restricted cash	9,688		2,935
Cash, cash equivalents, and restricted cash at beginning of period	4,816		3,393
Cash, cash equivalents, and restricted cash at end of period	$	14,504	$	6,328

Reconciliation of cash, cash equivalents, and restricted cash at end of year
Cash and cash equivalents	$	13,657	$	6,160
Restricted cash	847		168
Cash, cash equivalents, and restricted cash at end of period	$	14,504	$	6,328




Non-Cash Investing Activities
MD Office Solutions Promissory Note Receivable	$	—	$	1,385
Non-Cash Financing Activities
Gain on Paycheck Protection Program Loan Forgiveness	$	—	$	4,179
Noncash property, plant, and equipment obtained in exchange for finance lease liabilities	$	90	$	—
Noncash right-of-use assets obtained in exchange for operating lease liabilities	$	1,229	$	—

See accompanying notes to the unaudited condensed consolidated financial statements.

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

(Unaudited)

(In thousands)


	Perpetual Redeemable Preferred Stock			Perpetual Preferred Stock			Common stock			Treasury Stock		Additional paid-in capital		Accumulated deficit		Total stockholders’ equity
	Shares	Amount		Shares	Amount		Shares	Amount
Balance at December 31, 2021	1,916	$	18,988	—	$	—	5,805	$	—	$	(5,728)	$	150,451	$	(127,969)	$	16,754
Stock-based compensation	—	—		—	—		—	—		—		144		—		144
Shares issued under stock incentive plans, net of shares withheld for employee taxes	—	—		—	—		49	—		—		(3)		—		(3)
Accrued dividends on redeemable preferred stock	—	479		—	—		—	—		—		(479)		—		(479)
Preferred stock dividends paid	—	(479)		—	—		—	—		—		—		—		—
Equity issuance costs	—	—		—	—		—	—		—		(450)		—		(450)
Proceeds from the sale of common stock, warrants, and exercise of over allotment options	—	—		—	—		9,175	1		—		13,197		—		13,198
Net loss	—	—		—	—		—	—		—		—		(3,701)		(3,701)
Balance at March 31, 2022	1,916	$	18,988	—	$	—	15,029	$	1	$	(5,728)	$	162,860	$	(131,670)	$	25,463
Stock-based compensation	—	$	—	—	$	—	—	$	—	$	—	$	72	$	—	$	72
Shares issued under stock incentive plans, net of shares withheld for employee taxes	—	—		—	—		53	—		—		—		—		—
Accrued dividends on redeemable preferred stock	—	—		—	479		—	—		—		(479)		—		(479)
Preferred stock dividends paid	—	—		—	(479)		—	—		—		—		—		—


Reclassification of preferred stock to permanent equity (See Note 1)	(1,916)	(18,988)		1,916	—		—	—		—		18,988		—		18,988
Net loss	—	—		—	—		—	—		—				(1,576)		(1,576)
Balance at June 30, 2022	—	$	—	1,916	$	—	15,082	$	1	$	(5,728)	$	181,441	$	(133,246)	$	42,468


	Perpetual Preferred Stock			Common stock			Treasury Stock		Additional paid-in capital		Accumulated deficit		Total stockholders’ equity
	Shares	Amount		Shares	Amount
Balance at December 31, 2020	1,916	$	21,500	4,798	$	—	$	(5,728)	$	149,143	$	(124,986)	$	18,429
Stock-based compensation	—	—		—	—		—		131		—		131
Shares issued under stock incentive plans, net of shares withheld for employee taxes	—	—		3	—		—		(5)		—		(5)
Accrued dividend on redeemable preferred stock	—	479		—	—		—		(479)		—		(479)
Proceeds from the exercise of warrants	—	—		220	—		—		493		—		493
Net income	—	—		—	—		—		—		5,432		5,432
Balance at March 31, 2021	1,916	$	21,979	5,021	$	—	$	(5,728)	$	149,283	$	(119,554)	$	24,001
Stock-based compensation	—	$	—	—	$	—	$	—	$	134	$	—	$	134
Shares issued under stock incentive plans, net of shares withheld for employee taxes	—	—		20	—		—		(13)		—		(13)
Accrued dividends on perpetual preferred stock	—	479		—	—		—		(479)		—		(479)
Preferred stock dividends paid	—	(479)		—	—		—		—		—		—
Fees paid on issuance of rights agreement	—	—		—	—		—		(28)		—		(28)
Proceeds from exercise of warrants	—	—		33	—		—		74		—		74
Net loss	—	—		—	—		—		—		(1,856)		(1,856)
Balance at June 30, 2021	1,916	$	21,979	5,074	$	—	$	(5,728)	$	148,971	$	(121,410)	$	21,833

See accompanying notes to unaudited condensed consolidated financial statements.

STAR EQUITY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation and Significant Policies

Basis of Presentation

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

The Company and Discontinued Operations

On March 31, 2021, Star Equity Holdings, Inc. (“Star Equity,” the “Company,” “we,” or “our”), a diversified holding company with three divisions: Healthcare, Construction, and Investments, announced the completion of the sale of DMS Health Technologies, Inc., a North Dakota corporation and wholly owned indirect subsidiary of Star Equity (“DMS Health”), for $18.75 million in cash, as originally announced on November 3, 2020 (the “DMS Sale Transaction”). The assets and liabilities of DMS Health were previously classified as held for sale and the results of DMS Health’s operations were presented as a discontinued operations in our previously issued financial statements. Unless otherwise noted, discussion within these notes to the condensed consolidated financial statements relates to continuing operations. Refer to Note 2. Discontinued Operations for additional information.

Mezzanine and Permanent Equity

Pursuant to the Certificate of Designations, Rights and Preferences of 10% Series A Cumulative Perpetual Preferred Stock (the “Series A Preferred Stock”) of Star Equity (formerly Digirad Corporation) (the “Certificate of Designations”), upon a Change of Control Triggering Event, as defined in the Certificate of Designations, holders of the Series A Preferred Stock had the ability to require the Company to redeem the Series A Preferred Stock at a price of $10.00 per share, plus any accumulated and unpaid dividends (a “Change of Control Redemption”). As this redemption feature of the shares was not solely within the control of the Company, the Series A Preferred Stock did not qualify as permanent equity and was classified as mezzanine or temporary equity. The Series A Preferred Stock was not redeemable and it was not probable that our Series A Preferred Stock would become redeemable as of December 31, 2021. Therefore, we were not previously required to accrete the Series A Preferred Stock to its redemption value.

On June 2, 2022, the Certificate of Designations was amended to include a “Special Optional Redemption Right” at the Company’s discretion and to extinguish the option of preferred stockholders to redeem preferred shares upon a Change of Control Triggering Event, as defined in the Certificate of Designations, as amended. As the redemption features of the Series A Preferred Stock are now solely within the control of the Company, the Series A Preferred Stock qualifies as permanent equity and has been reclassified to permanent equity effective June 2, 2022.

In addition to the foregoing redemption features, the Certificate of Designations also provides that we may redeem (at our option, in whole or in part) the Series A Preferred Stock following the fifth anniversary of issuance of the Series A Preferred Stock, at a cash redemption price of $10.00 per share, plus any accumulated and unpaid dividends.

On February 25, 2022 and May 19, 2022, our board of directors declared cash dividends to holders of our Series A Preferred Stock of $0.25 per share, for an aggregate amount of approximately $1.0 million. The record dates for these dividends were March 1, 2022 and June 1, 2022, respectively, and the payment dates were March 10, 2022 and June 10, 2022, respectively Refer to preferred stock dividends discussed in Note 13. Perpetual Preferred Stock.

Going Concern

The accompanying condensed consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and settlement of obligations in the normal course of business. We incurred losses from continuing operations, net of income taxes, of approximately $1.6 million and $5.3 million for the three and six months ended June 30, 2022, respectively, and $1.8 million and $2.4 million for the three and six months ended June 30, 2021, respectively. We have an accumulated deficit of $133.2 million and $128.0 million as of June 30, 2022 and December 31, 2021, respectively. As of June 30, 2022, cash and cash equivalents increased to $13.7 million from $4.5 million as of December 31, 2021, primarily as a result of an underwritten public offering (the “2022 Public Offering”) which closed on January 24, 2022. Refer to Note 14. Equity Transactions for details.

At June 30, 2022, we had approximately $11.6 million in debt outstanding. All of our debt is categorized as short-term on our condensed Consolidated Balance Sheets. For more detail, see Note 8. Debt. The Company’s loan pursuant to the Webster Loan Agreement (as defined below) (the “Webster Loan”) with Webster Bank, N.A., a national banking association as lender (“Webster”), as successor in interest to Sterling National Bank, with a loan balance of approximately $8.1 million, supports our Healthcare business. While the Webster Loan matures in 2024, GAAP rules require that the outstanding balance be classified as short-term debt. This is due to both the automatic sweep feature embedded in the traditional lockbox arrangement and the subjective acceleration clause in the Webster Loan Agreement.

As of June 30, 2022, we were not in compliance with covenants in the Webster Loan Agreement related to our Healthcare division and we have not yet obtained a waiver from Webster for these financial covenant breaches. Upon the occurrence and during the continuation of an event of default under the Webster Loan Agreement, Webster may, among other things, declare the loans and all other obligations under the Webster Loan Agreement immediately due and payable and increase the interest rate at which loans and obligations under the Webster Loan Agreement bear interest. We are currently in negotiations to avoid a default. While we do not believe we will be required to pay down the current balance, our current cash is sufficient to repay the Webster Loan in full.

Management has historically concluded that this forecasted violation raises substantial doubt about our ability to continue as a going concern within twelve months. In consideration of the cash flow results for the six months ended June 30, 2022, our current balance of cash and cash equivalents of $13.7 million and our projected use of cash for the next twelve months, management believes that the Company's existing cash and current free cash flow generation expectations will allow the Company to continue its operations for at least the next 12 months from the date these unaudited condensed financial statements are issued, even in the event that we are requested to pay some or all of the outstanding Webster Loan balance. Therefore, the conditions that led us to conclude substantial doubt in prior periods have been alleviated. As a result of recurring losses, the continued viability of the Company beyond August 2023 may be dependent on its ability to continue to raise additional capital to finance its operations.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and disclosures made in the accompanying notes to the condensed consolidated financial statements. Significant estimates and judgments include those related to revenue recognition, goodwill valuation, and income taxes. Actual results could materially differ from those estimates.

Revenue Recognition

We recognize revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606 and Topic 842.

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

The Company has elected to use the practical expedient under ASC 606 to exclude disclosures of unsatisfied remaining performance obligations for (i) contracts having an original expected length of one year or less or (ii) contracts for which the practical expedient has been applied to recognize revenue at the amount for which it has a right to invoice.

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

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

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

Our products are generally not sold with a right of return and the Company does not provide significant credits or incentives, which may be variable consideration when estimating the amount of revenue to be recognized.

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

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

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

Construction Revenue Recognition. Our Construction division is made up of three operating businesses, KBS Builders, Inc. (“KBS”), EdgeBuilder, Inc. (“EdgeBuilder”), and Glenbrook Building Supply, Inc. (“Glenbrook”)—with the latter two managed together and referred to jointly as “EBGL”. KBS, EdgeBuilder and Glenbrook are wholly owned subsidiaries of Star Equity and are referred to collectively herein, and together with ATRM Holdings, Inc. (“ATRM”), as the “Construction Subsidiaries.” Within the Construction division, we service residential and commercial construction projects by manufacturing modular housing units and other products and supply general contractors with building materials. KBS manufactures modular buildings for both single-family residential homes and larger, commercial building projects. EdgeBuilder manufactures structural wall panels, permanent wood foundation systems and other engineered wood products, and Glenbrook is a retail supplier of lumber and other building supplies. Retail sales at Glenbrook are recognized at the point of sale. For bill and hold sales, we determine when the customer obtains control of the product on a case-by-case basis to determine the amount of revenue to recognize each period. Revenue is generally recognized at point in time upon delivery of product or over time by measuring progress towards completion

Billings in excess of costs and estimated profit. We recognize billings in excess of costs and estimated profit on uncompleted contracts within current liabilities. Such amounts relate to fixed-price contracts recognized over time, and represents payments in advance of performing the related contract work. Billings in excess of costs and estimated profit on uncompleted contracts are not considered to be a significant financing component because they are generally used to meet working capital demands that can be higher in the early stages of a contract. Contract liabilities are classified in deferred revenue in the condensed Consolidated Balance Sheets. Contract liabilities are reduced when the associated revenue from the contract is recognized, which is generally within one year.

Contract Assets. We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. The Company applies a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period would have been one year or less. These costs mainly include the internal sales commissions; under the terms of these programs these are generally earned and the costs are recognized at the time the revenue is recognized.

Deferred Revenue

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

Leases

Lessee Accounting

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities, and operating lease liabilities, net of current portion in our condensed consolidated balance sheets. Finance leases are included in property and equipment, finance lease liabilities, net of current portion, and finance lease liabilities in our condensed Consolidated Balance Sheets.

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

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

Lessor Accounting

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

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

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

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

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

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

Concentration of Credit Risk

Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of cash and cash equivalents and accounts receivable. We limit our exposure to credit loss by generally placing cash in high credit quality financial institutions. Cash balances are maintained primarily at major financial institutions in the United States and a portion of which exceed the regulatory limit of $250,000 insured by the Federal Deposit Insurance Corporation (FDIC). We have not experienced any credit losses associated with our cash balances. Additionally, we have established guidelines regarding diversification of our investments and their maturities, which are designed to maintain principal and maximize liquidity.

Variable Interest Entities

We determine at the inception of each arrangement whether an entity in which we have made an investment or in which we have other variable interests is considered a variable interest entity (“VIE”). We consolidate VIEs when we are the primary beneficiary. We are the primary beneficiary of a VIE when we have the power to direct activities that most significantly affect the economic performance of the VIE and have the obligation to absorb the significant losses or benefits. If we are not the primary beneficiary in a VIE, we account for the investment or other variable interests in a VIE in accordance with applicable GAAP.

Periodically, we assess whether any changes in our interest or relationship with the entity affect our determination of whether the entity is a VIE and, if so, whether we are the primary beneficiary.

Reclassification

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

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

Other reclassifications have been made to the current period financial statement presentation of the condensed Consolidated Balance Sheets. These changes did not impact previously reported net loss, loss per share, stockholders’ equity, total assets or the condensed Consolidated Statements of Cash Flows.

New Accounting Standards To Be Adopted

No new accounting standards were issued in the quarter ended June 30, 2022 that are expected to have a material impact on our financial statements.

Recently Adopted Accounting Standards

No accounting standards were adopted in the quarter ended June 30, 2022 that are expected to have a material impact on our financial statements.

Note 2. Discontinued Operations

On October 30, 2020, Star Equity entered into a Stock Purchase Agreement (the “DMS Purchase Agreement”) between the Company (“Seller”), DMS Health, and Knob Creek Acquisition Corp., a Tennessee corporation (“Buyer”), pursuant to which the Buyer purchased all of the issued and outstanding common stock of DMS Health, which operated our Mobile Healthcare business unit, from Seller. The purchase price under the DMS Purchase Agreement was $18.75 million in cash, subject to certain adjustments, including a working capital adjustment. The transactions closed effective March 31, 2021.

We deemed the disposition of the Mobile Healthcare business unit to represent a strategic shift that will have a major effect on our operations and financial results. For the year ended December 31, 2021, the Mobile Healthcare business met the criteria to be classified as held for sale.

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

The following table presents financial results of DMS Health for the three and six months ended June 30, 2021. There have been no activities for the six months ended June 30, 2022 (in thousands):


	Three Months Ended June 30,		Six Months Ended June 30,
	2021		2021
Total revenues	$	—	$	9,490
Total cost of revenues	—		6,973
Gross profit	—		2,517

Operating expenses:
Selling, general and administrative	—		1,469

Total operating expenses	—		1,469

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

(Loss) Gain on sale of discontinued operations	(65)		5,159
(Loss) Income from discontinuing operations before income taxes	(65)		6,027
Income tax expense	—		(72)
(Loss) Income from discontinuing operations	$	(65)	$	5,955

The following table presents the significant non-cash operating, investing and financing activities from discontinued operations for the six months ended June 30, 2021 (in thousands):


	Six Months Ended June 30,
		2021
Operating activities

Depreciation		$	7

Non-cash lease expense		256
Write-off of borrowing costs		130
Gain on sale of DMS discontinued operations		(5,159)













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

Following is the reconciliation of purchase price to the gain recognized in income from discontinued operations for the six months ended June 30, 2021 (in thousands):



Estimated proceeds of the disposition, net of transaction costs	$	18,750
Assets of the businesses	(20,920)
Liabilities of the businesses	7,712
Transaction expenses	(383)
Pre-tax gain on the disposition	$	5,159

In April 2021, DMS Health contracted Digirad Imaging Solutions for a term of three years to purchase radiopharmaceuticals doses, resulting in $0.7 million of revenues for the six months ended June 30, 2022.

Note 3. Revenue

Disaggregation of Revenue

The following tables present our revenues for the three and six months ended June 30, 2022 and 2021, disaggregated by major source (in thousands):


	Three Months Ended June 30, 2022
	Healthcare		Construction		Total
Major Goods/Service Lines
Mobile Imaging	$	10,711	$	—	$	10,711
Camera	1,461		—		1,461
Camera Support	1,667		—		1,667
Healthcare Revenue from Contracts with Customers	13,839		—		13,839
Lease Income	73		—		73
Construction	—		16,806		16,806

Total Revenues	$	13,912	$	16,806	$	30,718

Timing of Revenue Recognition
Services and goods transferred over time	$	10,801	$	5,856	$	16,657
Services and goods transferred at a point in time	3,111		10,950		14,061
Total Revenues	$	13,912	$	16,806	$	30,718


	Three Months Ended June 30, 2021
	Healthcare		Construction		Total
Major Goods/Service Lines
Mobile Imaging	$	11,686	$	—	$	11,686
Camera	1,464		—		1,464
Camera Support	1,663		—		1,663
Healthcare Revenue from Contracts with Customers	14,813		—		14,813
Lease Income	57		3		60
Construction	—		10,933		10,933

Total Revenues	$	14,870	$	10,936	$	25,806

Timing of Revenue Recognition
Services and goods transferred over time	$	12,053	$	217	$	12,270
Services and goods transferred at a point in time	2,817		10,719		13,536
Total Revenues	$	14,870	$	10,936	$	25,806


	Six Months Ended June 30, 2022
	Healthcare		Construction		Total
Major Goods/Service Lines
Mobile Imaging	$	21,229	$	—	$	21,229
Camera	2,593		—		2,593
Camera Support	3,346		—		3,346
Healthcare Revenue from Contracts with Customers	27,168		—		27,168
Lease Income	162		—		162
Construction	—		28,437		28,437

Total Revenues	$	27,330	$	28,437	$	55,767

Timing of Revenue Recognition
Services and goods transferred over time	$	21,655	$	7,753	$	29,408
Services and goods transferred at a point in time	5,675		20,684		26,359
Total Revenues	$	27,330	$	28,437	$	55,767


	Six Months Ended June 30, 2021
	Healthcare		Construction		Total
Major Goods/Service Lines
Mobile Imaging	$	21,867	$	—	$	21,867
Camera	2,886		—		2,886
Camera Support	3,309		—		3,309
Healthcare Revenue from Contracts with Customers	28,062		—		28,062
Lease Income	115		41		156
Construction	—		19,942		19,942

Total Revenues	$	28,177	$	19,983	$	48,160

Timing of Revenue Recognition
Services and goods transferred over time	$	23,145	$	2,948	$	26,093
Services and goods transferred at a point in time	5,032		17,035		22,067
Total Revenues	$	28,177	$	19,983	$	48,160

We have corrected an immaterial disclosure error in the previously disclosed disaggregated revenue balances relating to the timing of revenue for the six months ended June 30, 2021. For the six months ended June 30, 2021, the amount of $1.9 million was revised from over time to point in time related to revenue recognition in the table above. Healthcare for goods transferred over time decreased by $1.9 million, with a corresponding increase to revenue recognized for goods and services transferred at a point in time. The adjustments did not impact the total amount of revenue or the period in which it was recognized, therefore, they had no effect on the condensed Consolidated Balance Sheets, Statements of Operations and Cash Flows for the periods presented.

Nature of Goods and Services

Mobile Imaging

Within our Healthcare segment, our sales are derived from providing services and materials to our customers, primarily physician practices and hospitals that allow them to perform diagnostic services at their site. We typically bundle our services in providing staffing, our imaging systems, licensing, radiopharmaceuticals, and supplies depending on our customers’ needs. Our contracts with customers are typically entered into annually and are billed on a fixed rate per-day or per-scan basis, depending on terms of the contract. For the majority of these contracts, we have the right to invoice the customer in an amount that directly corresponds with the value to the customer as we perform the services. We use the practical expedient to recognize revenue corresponding with amounts we have the right to invoice for services performed.

Camera

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

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

Camera Support

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

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

Lease Income

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

Construction

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

Deferred Revenue

Changes in the deferred revenue for six months ended June 30, 2022, is as follows (in thousands):


Balance at December 31, 2021	$	2,869
Revenue recognized that was included in balance at beginning of the year	(1,664)
Deferred revenue, net, related to contracts entered into during the year	2,995
Balance at June 30, 2022	$	4,200

As of June 30, 2022 and December 31, 2021, non-current deferred revenue was $360 thousand and $412 thousand, respectively, in other liabilities within our condensed Consolidated Balance Sheets, which is expected to be recognized over a period of 2-4 years.

Billings in Excess of Costs and Estimated Profit

Changes in the billings in excess of costs and estimated profit for six months ended June 30, 2022 is as follows (in thousands):


Balance at December 31, 2021	$	312
Revenue recognized that was included in balance at beginning of the year	(312)
Billings in excess of costs, related to contracts entered into during the year	2,181
Balance at June 30, 2022	$	2,181

Contract Assets

There were no contract assets as of June 30, 2022 and December 31, 2021.

Note 4. Basic and Diluted Net Income (Loss) Per Share

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

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Numerator:
Loss from continuing operations, net of tax	$	(1,576)	$	(1,791)	$	(5,277)	$	(2,379)
(Loss) income from discontinued operations, net of tax	—		(65)		—		5,955
Net (loss) income	(1,576)		(1,856)		(5,277)		3,576
Deemed dividend on Series A perpetual preferred stock	(479)		(479)		(958)		(958)
Net (loss) income attributable to common shareholders	$	(2,055)	$	(2,335)	$	(6,235)	$	2,618

Denominator:
Weighted average common shares outstanding	15,054		5,039		13,751		4,978
Weighted average prefunded warrants outstanding	325		—		280		—
Weighted average shares outstanding - basic and diluted	15,379		5,039		14,031		4,978






Net (loss) income per share—basic and diluted
Net loss per share, continuing operations	$	(0.10)	$	(0.36)	$	(0.38)	$	(0.48)
Net (loss) income per share, discontinued operations	$	—	$	(0.01)	$	—	$	1.20
Net (loss) income per share—basic and diluted*	$	(0.10)	$	(0.37)	$	(0.38)	$	0.72
Deemed dividend on Series A cumulative perpetual preferred stock per share	$	(0.03)	$	(0.10)	$	(0.07)	$	(0.19)
Net (loss) income per share, attributable to common shareholders—basic and diluted*	$	(0.13)	$	(0.46)	$	(0.44)	$	0.53

*Earnings per share may not add due to rounding

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


	Three Months Ended June 30,		Six Months Ended June 30,
	2022	2021	2022	2021
Stock options	6	20	6	22
Restricted stock units	187	75	208	74
Stock warrants	12,567	756	11,025	810
Total	12,760	851	11,239	906

Note 5. Supplementary Balance Sheet Information

Inventories

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


	June 30, 2022		December 31, 2021
Raw materials	$	7,754	$	5,870
Work-in-process	2,807		2,145
Finished goods	972		830
Total inventories	11,533		8,845
Less reserve for excess and obsolete inventories	(316)		(320)
Total inventories, net	$	11,217	$	8,525

Property and Equipment

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


	June 30, 2022		December 31, 2021
Land	$	805	$	805
Buildings and leasehold improvements	5,225		4,823
Machinery and equipment	24,838		24,881
Computer hardware and software	2,451		2,387
Gross property and equipment	33,319		32,896
Accumulated depreciation	(24,555)		(23,978)
Total property and equipment, net	$	8,764	$	8,918

As of June 30, 2022, the non-operating land and building, held for investments, had a carry value of $1.9 million and was included within property and equipment on the condensed Consolidated Balance Sheet.

Warranty Reserves

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

Within our Construction division, KBS provides a limited assurance warranty on its residential homes that covers substantial defects in materials or workmanship for a period of 12 months after delivery to the owner. EBGL provides a limited warranty on the sale of its wood foundation products that covers leaks resulting from defects in workmanship for a period of twenty-five years. Estimated warranty costs are accrued in the period that the related revenue is recognized.

The activities related to our warranty reserve for the quarter ended June 30, 2022 and year ended December 31, 2021 are as follows (in thousands):


	June 30, 2022		December 31, 2021
Balance at the beginning of year	$	569	$	214
Charges to cost of revenues	65		963
Applied to liability	(290)		(608)
Balance at the end of period	$	344	$	569

Note 6. Leases

Lessee

We have operating and finance leases for corporate offices, vehicles, and certain equipment. Our leases have remaining lease terms of 1 year to 10 years, some of which include options to extend the leases and some of which include options to terminate the leases within 1 year. Operating leases and finance leases are included separately in the condensed Consolidated Balance Sheets.

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Operating lease cost	$	401	$	359	$	797	$	694

Finance lease cost:
Amortization of finance lease assets	$	101	$	170	$	224	$	276
Interest on finance lease liabilities	14		23		31		44
Total finance lease cost	$	115	$	193	$	255	$	320

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


	Six Months Ended June 30,
	2022		2021
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	536	$	539
Operating cash flows from finance leases	$	31	$	44
Financing cash flows from finance leases	$	312	$	318

Right-of-use assets obtained in exchange for lease obligations
Operating leases	$	1,229	$	2,158

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


	June 30, 2022		December 31, 2021














Weighted average remaining lease term (in years)
Operating leases	4.0		3.9
Finance leases	2.5		2.6

Weighted average discount rate
Operating leases	4.60	%	4.23	%
Finance leases	5.98	%	5.05	%

We are committed to making future cash payments on non-cancelable operating leases and finance leases (including interest). The future minimum lease payments due under both non-cancelable operating leases and finance leases having initial or remaining lease terms in excess of one year as of June 30, 2022 were as follows (in thousands):


	Operating Leases		Finance Leases
2022 (excludes the six months ended June 30, 2022)	$	813	$	314
2023	1,514		428
2024	1,352		274
2025	827		106
2026 and thereafter	951		17
Total future minimum lease payments	5,457		1,139
Less amounts representing interest	400		64
Present value of lease obligations	$	5,057	$	1,075

Lessor

We generate lease income in the Healthcare segment from equipment rentals to customers. Rental contracts are structured as either a weekly or monthly payment arrangement and are accounted for as operating leases. Revenues are recognized on a straight-line basis over the term of the rental. During the six months ended June 30, 2022 and 2021, our lease contracts were mainly month-to-month contracts.

Note 7. Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Financial Accounting Standards Board’s authoritative guidance for fair value measurements establishes a three-level hierarchy based upon the inputs to the valuation model of an asset or liability. Level 1 inputs are quoted prices in active markets for identical assets; Level 2 inputs are inputs other than quoted prices that are significant and observable; and Level 3 inputs are significant unobservable inputs to be used in situations where markets do not exist or illiquid. The following table presents information about our financial assets that are measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques we utilize to determine such fair value at June 30, 2022 and December 31, 2021 (in thousands):


	Fair Value as of June 30, 2022
	Level 1		Level 2		Level 3		Total
Assets (Liabilities):
Equity securities	$	2,550	$	—	$	—	$	2,550
Lumber derivative contracts	(482)		—		—		(482)
VIE Investments	—		—		337		337
Total	$	2,068	$	—	$	337	$	2,405


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

The investment in equity securities consists of common stock of publicly traded companies. The fair value of these securities is based on the closing prices observed on June 30, 2022 and December 31, 2021, respectively, and recorded in Investments in the Consolidated Balance Sheets. During the six months ended June 30, 2022 and 2021, we recorded an unrealized gain of $235 thousand and unrealized loss of $33 thousand, respectively, recorded in other (expense) income, net in the condensed Consolidated Statements of Operations.

We may enter into lumber derivative contracts in order to protect our gross profit margins from fluctuations caused by volatility in lumber price, recorded within current assets or liabilities in the Consolidated Balance Sheets. For the six months ended June 30, 2022 and 2021, we recorded a net loss of $1.1 million and $0.3 million, respectively, in the cost of goods sold in the condensed Consolidated Statements of Operations. As of June 30, 2022, we had a net long (buying) position of 3,630,000 board feet under 33 lumber derivatives contracts. As of December 31, 2021, we had a net long (buying) position of 2,420,000 board feet under 22 lumber derivatives contracts.

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


	June 30, 2022		June 30, 2021
	Amount		Amount
Unrealized loss on lumber derivatives	$	1,145	$	241
Realized (gain) loss on lumber derivatives	(17)		62
Total loss on lumber derivatives	$	1,128	$	303

The fair value of VIE investments of $0.3 million recorded in Other Assets in the Consolidated Balance Sheets is based on unobservable inputs evaluated on June 30, 2022 and December 31, 2021, respectively. During the six months ended June 30, 2022 and 2021, there were no realized or unrealized gains, losses, or impairments recorded in the condensed Consolidated Statements of Operations. See Note 16. Variable Interest Entity for further details.

Note 8. Debt

A summary of debt as of June 30, 2022 and December 31, 2021 is as follows (dollars in thousands):


	June 30, 2022			December 31, 2021
	Amount		Weighted-Average Interest Rate	Amount		Weighted-Average Interest Rate
Revolving Credit Facility - eCapital KBS	$	—	7.50%	$	3,131	6.00%

Revolving Credit Facility - eCapital EBGL	2,537		7.50%	1,652		6.00%
Revolving Credit Facility - Webster	8,094		4.29%	7,016		2.60%
Total Short-term Revolving Credit Facilities	$	10,631	5.05%	$	11,799	3.98%
eCapital - Star Loan Principal, net	$	937	7.75%	$	1,070	6.25%

Short Term Loan	$	937	7.75%	$	1,070	6.25%

Total Short-term debt	$	11,568	5.27%	$	12,869	4.17%

Webster Credit Facility

On March 29, 2019, the Company entered into a Loan and Security Agreement (the “Webster Loan Agreement”) by and among certain subsidiaries of the Company, as borrowers (collectively, the “Webster Borrowers”); the Company, as guarantor; and Sterling National Bank (“Sterling”). On February 1, 2022, Sterling became part of Webster, and Webster became the successor in interest to the Webster Loan Agreement. The Webster Loan Agreement is also subject to a limited guarantee by Mr. Eberwein, the Executive Chairman of our board of directors.

The Webster Loan Agreement is a five-year credit facility maturing in March 2024, with a maximum credit amount of $20.0 million for revolving loans (the “Webster Credit Facility”). Under the Webster Credit Facility, the Webster Borrowers can request the issuance of letters of credit in an aggregate amount not to exceed $0.5 million at any one time outstanding. The borrowings under the Webster Loan Agreement were classified as short-term obligations under GAAP as the agreement contained a subjective acceleration clause and required a lockbox arrangement whereby all receipts within the lockbox are swept daily to reduce borrowings outstanding. As of June 30, 2022, the Company had $0.1 million of letters of credit outstanding and had additional borrowing capacity of $0.1 million under the Webster Credit Facility.

At the Webster Borrowers’ option, the Webster Credit Facility will bear interest at either (i) a Floating LIBOR Rate, as defined in the Webster Loan Agreement, plus a margin of 2.50% per annum; or (ii) a Fixed LIBOR Rate, as defined in the Webster Loan Agreement, plus a margin of 2.25% per annum. Our floating rate on this facility at June 30, 2022 was 4.29%. The Webster Loan Agreement also provides for unused line fees and restricts the usage of borrowings under the line solely to support the Healthcare businesses, subject to certain limitations.

The Webster Credit Facility is secured by the assets of the Digirad Health businesses.

Financial covenants require that the Webster Borrowers maintain (a) a Fixed Charge Coverage Ratio as of the last day of a fiscal quarter of not less than 1.25 to 1.0 and (b) a Leverage Ratio as of the last day of such fiscal quarter of no greater than 3.50 to 1.0. As of June 30, 2022, the Company was not in compliance with the covenants under the Webster Loan Agreement and had not yet obtained a waiver from Webster for these financial covenant breaches.

eCapital Credit Facilities

EdgeBuilder and Glenbrook (the “EBGL Borrowers”) are a party to a revolving credit facility with eCapital Asset Based Lending Corp., formerly known as Gerber Finance Inc. (“eCapital”) (the “EBGL Loan Agreement”). The facility, as amended, provides for borrowings up to $4.0 million, subject to certain borrowing base limitations. As of June 30, 2022, EBGL was fully drawn in terms of available borrowing capacity available under the facility. Amounts outstanding bear interest, payable monthly, at the prime rate plus 2.75% and payments of outstanding principal are due in full upon maturity. The facility is subject to annual renewal and is currently set to mature on the earlier of January 31, 2023 or upon repayment of the Star Loan (see below). The facility is secured by substantially all of the assets of EBGL and borrowings under the line are restricted for use to finance the operations of EBGL. As of June 30, 2022, $2.5 million was outstanding under the EBGL Loan Agreement.

As of June 30, 2022, EBGL was not in compliance with the bi-annual financial covenants under the EBGL Loan Agreement measured as of June 30, 2022. As of June 30, 2022, we obtained a waiver from eCapital for financial covenant breaches. However, there can be no assurance that we will be able to obtain such waivers in the event of future financial covenant violations.

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

KBS is a party to a revolving credit facility with eCapital (“KBS Loan Agreement”). The facility, as amended, provides for borrowings up to $4.0 million, subject to certain borrowing base limitations. As of June 30, 2022, KBS was fully drawn in terms of available borrowing capacity under the facility. Amounts outstanding bear interest, payable monthly, at the prime rate plus 2.75% and payments of outstanding principal are due in full upon maturity. The facility is subject to annual renewal and is currently set to mature on February 22, 2023. The facility is secured by the assets of KBS and borrowings under the line are restricted for use to finance the operations of KBS. As of June 30, 2022, no amount was outstanding under the KBS Loan Agreement. As of June 30, 2022, KBS was in compliance with the bi-annual financial covenants under the KBS Loan Agreement.

The eCapital credit facilities contain cross-default provisions and subjective acceleration clauses which may, in the event of a material adverse event, as determined by eCapital, allow eCapital to declare the loans immediately due and payable or increase the interest rate. The facilities are also subject to a guaranty by the Company and the Company is responsible for certain facility and other fees.

Borrowings under the eCapital credit facilities are classified as short-term obligations as the agreements contain a subjective acceleration clauses and require a lockbox arrangement whereby all receipts within the lockbox are swept daily to reduce borrowings outstanding.

On March 8, 2022, the borrowers under the KBS Loan Agreement entered into the Nineteenth Amendment to the KBS Loan Agreement to amend the financial covenants to require that KBS maintain (a) net cash income (as defined in the KBS Loan Agreement) of at least equal to no less than $0 for the trailing 6-month period ending June 30, 2022 and be no less than $500,000 for the trailing fiscal year end and (b) a minimum EBITDA (as defined in the KBS Loan Agreement) no less than $0 as of June 30, 2022 and no less than $850,000 as of the fiscal year end, as well as a waiver of certain covenants as of December 31, 2021.

Term Loan

We and certain of our Investments subsidiaries (collectively, the “Star Borrowers”) are party to a Loan and Security Agreement with eCapital, as successor in interest to Gerber Finance, Inc. (as amended, the “Star Loan Agreement”), which provides for a credit facility with borrowing availability of up to $2.5 million, bearing interest at the prime rate plus 3.5% per annum, and matures on January 1, 2025, unless terminated in accordance with the terms therein (the “Star Loan”). The following table presents the Star Loan balance, net of unamortized debt issuance costs as of June 30, 2022 (in thousands):


	June 30, 2022		December 31, 2021
	Amount		Amount
eCapital - Star Loan Principal	$	1,060	$	1,246


Unamortized debt issuance costs	(123)		(176)
eCapital - Star Loan Principal, net	$	937	$	1,070

The Star Loan, as amended, requires monthly payments of principal of $33 thousand plus interest at the prime rate plus 3% per annum through the earlier of maturity in January 2025 or the termination, maturity or repayment of the EBGL credit facility.

The Star Loan is secured by the assets of SRE, 947 Waterford Road, LLC, 300 Park Street, LLC and 56 Mechanic Falls Road, LLC and guaranteed by the Company. The Star loan is subject to certain financial covenants. The financial covenants under the Star Loan Agreement include maintenance of a Debt Service Coverage Ratio of not less than 1:00 to 1:00, as defined in the Star Loan Agreement. The occurrence of any event of default under the Star Loan Agreement may result in the obligations of the Star Borrowers becoming immediately due and payable. As of June 30, 2022, no event of default was deemed to have occurred and the Star Borrowers were in compliance with the bi-annual financial covenants under the Star Loan Agreement measured as of June 30, 2022.

The outstanding balance is classified as a short-term obligation as a result of the acceleration clauses within the EBGL and KBS credit facility and the cross-default provisions. As of June 30, 2022, the short-term loan includes $0.9 million of the Star Loan, net of issuance costs.

Paycheck Protection Program

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

During the fiscal years ended 2020 and 2021, the Company applied for forgiveness on all PPP loans. As of December 31, 2021, all PPP loans were forgiven, resulting in a gain of $4.2 million in 2021 and $2.5 million in 2020.

Note 9. Commitments and Contingencies

In the normal course of business, we have been and will likely continue to be subject to other litigation or administrative proceedings incidental to our business, such as claims related to compliance with regulatory standards, customer disputes, employment practices, wage and hour disputes, product liability, professional liability, malpractice liability, commercial disputes, licensure restrictions or denials, and warranty or patent infringement. Responding to litigation or administrative proceedings, regardless of whether they have merit, can be expensive and disruptive to normal business operations. We are not able to predict the timing or outcome of these matters and currently do not expect that the resolution of these matters will have a material adverse effect on our financial position or results of operations.

The outcome of litigation and the amount or range of potential loss at different points in time may be difficult to ascertain. Among other things, uncertainties can include how trial and appellate courts will apply the law and interpret facts, as well as the contractual and statutory obligations of other indemnifying and insuring parties. The estimated range of reasonably possible losses, and their effect on our financial position is based upon currently available information and is subject to significant judgment and a variety of assumptions, as well as known and unknown uncertainties.

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

Note 10. Income Taxes

We provide for income taxes under the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of differences between the tax basis of assets or liabilities and their carrying amounts in the financial statements. We provide a valuation allowance for deferred tax assets if it is more likely than not that these items will expire before we are able to realize their benefit. We calculate the valuation allowance in accordance with the authoritative guidance relating to income taxes, which requires an assessment of both positive and negative evidence regarding the realizability of these deferred tax assets, when measuring the need for a valuation allowance. Significant judgment is required in determining any valuation allowance against deferred tax assets. We continue to record a full valuation allowance against our deferred tax assets and intend to maintain a valuation allowance until sufficient positive evidence exists to support its reversal.

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

For the three months ended June 30, 2022, we recorded an income tax benefit of $327 thousand within continuing operations and zero income tax expense within discontinued operations. For the three months ended June 30, 2021, we recorded an income tax expense of $32 thousand within continuing operations and zero income tax expense within discontinued operations.

For the six months ended June 30, 2022, we recorded an income tax expense of $623 thousand within continuing operations and zero income tax expense within discontinued operations. For the six months ended June 30, 2021, we recorded an income tax expense of $34 thousand within continuing operations and an income tax expense of $72 thousand within discontinued operations. The tax expense for the six months ended June 30, 2022 primarily relates to an ownership change under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”) that occurred in January 2022 which required us to establish an additional valuation allowance on net operating losses that the Company cannot utilize in the future.

As of June 30, 2022, we had unrecognized tax benefits of approximately $2.6 million related to uncertain tax positions. Included in the unrecognized tax benefits were $2.1 million of tax benefits that, if recognized, would reduce our annual effective tax rate, subject to the valuation allowance.

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

Note 11. Segments

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

1. Healthcare

2. Construction

3. Investments

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021 (1)		2022		2021 (1)
Revenue by segment:
Healthcare	$	13,912	$	14,870	$	27,330	$	28,177
Construction	16,806		10,936		28,437		19,983
Investments	158		158		316		316
Intersegment elimination	(158)		(158)		(316)		(316)
Consolidated revenue	$	30,718	$	25,806	$	55,767	$	48,160

Gross profit (loss) by segment:
Healthcare	$	3,678	$	3,409	$	6,854	$	6,007
Construction	2,485		(1,844)		4,071		(1,300)
Investments	94		97		153		190
Intersegment elimination	(158)		(158)		(316)		(316)
Consolidated gross profit	$	6,099	$	1,504	$	10,762	$	4,581

Income (loss) from operations by segment:
Healthcare	$	5	$	835	$	83	$	1,672
Construction	290		(3,837)		(469)		(5,385)
Investments	80		78		139		155
Star equity corporate and intersegment elimination	(1,573)		(1,586)		(3,506)		(2,520)
Segment loss from operations	$	(1,198)	$	(4,510)	$	(3,753)	$	(6,078)

Depreciation and amortization by segment:
Healthcare	$	322	$	320	$	637	$	677
Construction	495		481		982		961
Investments	64		61		163		126
Total depreciation and amortization	$	881	$	862	$	1,782	$	1,764

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

Note 12. Related Party Transactions

Eberwein Guarantees

Star Equity Holdings, Inc.

On December 10, 2021, the Company entered into a securities purchase agreement with its Executive Chairman, Jeffrey E. Eberwein, relating to the issuance and sale of 650,000 shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”) at a purchase price of $3.25 per share pursuant to a private placement. As of June 30, 2022, Mr. Eberwein owned 2,466,784 shares of Common Stock, representing approximately 16.36% of our outstanding Common Stock. In addition, as of June 30, 2022, Mr. Eberwein owned 1,275,467 shares of Series A Preferred Stock.

ATRM Notes Payable

ATRM had a total of $2.3 million of outstanding related party promissory notes payable to Lone Star Value Co-Invest I, LP and Lone Star Value Management as of December 31, 2020. These amounts were repaid in full during April 2021. Mr. Eberwein was the general partner of these entities.

Note 13. Perpetual Preferred Stock

Holders of shares of our Series A Preferred Stock are entitled to receive, when, as and if, authorized by the Company’s board of directors (or a duly authorized committee of the Company’s board of directors) and declared by the Company out of funds legally available for the payment of dividends, preferential cumulative cash dividends at the rate of 10.0% per annum of the liquidation preference of $10.00 per share. Dividends are payable quarterly, in arrears, on the last calendar day of March, June, September and December to holders of record at the close of business on the first day of each payment month. The Series A Preferred Stock is not convertible and does not have any voting rights, except when dividends are in arrears for six or more consecutive quarters, then the holders of those shares together with holders of all other series of preferred stock equal in rank will be entitled to vote separately as a class for the election of two additional directors to board of directors, until all dividends accumulated on such shares of Series A Preferred Stock for the past dividend periods and the dividend for the current dividend period shall have been fully paid or declared and a sum sufficient for the payment thereof set apart for payment. Under change of control or other conditions, the Series A Preferred Stock may be subject to redemption. The Company may redeem the Series A Preferred Stock upon the occurrence of a change of control, subject to certain conditions. The Company may also voluntarily redeem some or all of the Series A Preferred Stock on or after September 10, 2024.

Note 14. Equity Transactions

On January 24, 2022, we closed the 2022 Public Offering pursuant to an underwriting agreement with Maxim Group LLC (“Maxim”), as representative of the underwriters. Company issued and sold (A)(i) 9,175,000 shares of the Company’s Common Stock, (ii) an aggregate of 325,000 pre-funded warrants to purchase up to an aggregate of 325,000 shares of Common Stock, and (iii) an aggregate of 9,500,000 common stock purchase warrants (the “Firm Purchase Warrants”) to purchase up to 9,500,000 shares of Common Stock and (B) at the election of Maxim, (i) up to an additional 1,425,000 shares of Common Stock and/or (ii) up to an additional 1,425,000 shares of common stock purchase warrants (the “Option Purchase Warrants”, and together with the Firm Purchase Warrants, the “Warrants”). Maxim partially exercised its over-allotment option for the purchase of 1,425,000 Warrants for a price of $0.01 per Warrant. Each share of common stock (or pre-funded warrant in lieu thereof) was sold together with one common warrant to purchase one share of common stock at a price of $1.50 per share and common warrant. Gross proceeds, before deducting underwriting discounts and offering expenses and excluding any proceeds we may receive upon exercise of the Warrants, were $14.3 million and net proceeds were $12.7 million.

In addition, as part of the 2022 Public Offering, the Company issued to Maxim 237,500 common stock purchase warrants (the “Underwriter’s Warrants”) to purchase up to 237,500 shares of Common Stock at an exercise price of $1.65 per common warrant. The Underwriter’s Warrants have an initial exercise date beginning July 19, 2022, and therefore, no proceeds had been received as of June 30, 2022.

As of June 30, 2022, of the warrants issued through the public offering we closed on May 28, 2020 (the “2020 Public Offering”), 1.0 million warrants were exercised and 1.4 million warrants remained outstanding, which represents 0.7 million shares of common stock equivalents, at an exercise price of $2.25. As of June 30, 2022, of the Warrants issued through the 2022 Public Offering, there were 10.9 million Warrants and 0.3 million prefunded warrants outstanding at an exercise price of $1.50 and $0.01, respectively. The Underwriter’s Warrants have not been exercised.

Note 15. Preferred Stock Rights

On June 2, 2021, the board of directors adopted a tax benefit preservation plan in the form of a Section 382 Rights Agreement (the “382 Agreement”). The 382 Agreement is intended to diminish the risk that our ability to use our net operating loss carryforwards to reduce future federal income tax obligations may become substantially limited due to an “ownership change,” as defined in Section 382 of the Code. The board of directors authorized and declared a dividend distribution of one right for each outstanding share of common stock, par value $0.0001 per share, to stockholders of record as of the close of business on June 14, 2021. Each right entitles the registered holder to purchase from the one one-thousandth of a share of Series C Participating Preferred Stock, par value $0.0001 per share (the “Series C Preferred Stock”), at an exercise price of $12.00 per one one-thousandth of a share of Series C Preferred Stock, subject to adjustment.

The rights will become exercisable following (i) 10 days after a public announcement that a person or group has become an Acquiring Person (as defined in the 382 Agreement); and (ii) 10 business days (or a later date determined by the board of directors) after a person or group begins a tender or an exchange offer that, if completed, would result in that person or group becoming an Acquiring Person.

In addition, upon the occurrence of certain events, the exercise price of the rights would be adjusted and holders of the rights (other than rights owned by an acquiring person or group) would be entitled to purchase common stock at approximately half of market value. Given the potential adjustment of the exercise price of the rights, the rights could cause substantial dilution to a person or group that acquires 4.99% or more of common stock on terms not approved by the board of directors.

No rights were exercisable at June 30, 2022. There is no impact to financial results as a result of the adoption of the rights plan for the six months ended June 30, 2022.

Note 16. Variable Interest Entity

VIE in which we are not the Primary Beneficiary

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

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

The potential maximum exposure of this unconsolidated VIE is generally based on the current carrying value of the investments and any future funding commitments based on the milestone agreement and board approval. We have determined that the single source of our exposure to the VIE is our capital investment in them. The carrying value and maximum exposure of the unconsolidated VIE were $0.3 million as of June 30, 2022. As of June 30, 2022, we performed a qualitative assessment on the carrying value via inquiries with the board of directors and a review of the entity’s financial statements and determined that there have not been any impairment indicators to the carrying value.

Note 17. Subsequent Events

On August 11, 2022, the EBGL Borrowers entered into the Eighth Amendment to the EBGL Loan Agreement with eCapital to amend the lender name to eCapital Asset Based Lending Corp. formerly known as Gerber Finance, Inc. and to provide a waiver of certain covenants violated as of June 30, 2022.

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

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

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

Overview

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

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

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

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

Strategy

Star Equity

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

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

Operating Businesses

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

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

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

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

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

Current Market Conditions

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

The target market for our Healthcare products and services is comprised of cardiologists, internal medicine physicians, family practice physicians, hospitals, integrated delivery networks, and federal institutions in the United States that perform or could perform a diagnostic imaging procedure or have interest in purchasing diagnostic imaging products. Our Healthcare businesses currently operate in approximately 25 states. During the six months ended June 30, 2022, we have seen a return to a more normal pre-COVID volume of imaging.

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

Trends and Drivers

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

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

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

COVID-19 Pandemic

We continue to recover from the economic effects of the COVID-19 pandemic. During the three and six months ended June 30, 2022, we had decreases of $1.0 million and $0.8 million, respectively, in Healthcare division revenue and increases of $5.9 million and $8.5 million, respectively, in Construction division revenue as compared to the same period of the prior year.

The Healthcare division continued to operate at normal levels versus last year with revenue decreasing 6.4% and 3.0% for the three and six months ended June 30, 2022, primarily related to fewer total scanning days due to the national shortage of Nuclear Medicine Technologists. Our Construction division grew revenue by 53.7% and 42.3%, respectively, due to increased output at both KBS and EBGL coupled with pricing increases associated with higher raw materials costs. Nevertheless, the current COVID-19 pandemic continues to impact worldwide economic activity, and the extent to which the COVID-19 pandemic will impact our business will depend on future developments that are highly unpredictable.

Discontinued Operations

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

Goodwill valuation

We review goodwill for impairment on an annual basis during the fourth quarter, and when events or changes in circumstances indicate that a reduction in the carrying value may not be recoverable. During the three and six months ended June 30, 2022, we began the process by assessing qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. Upon review of the results of such assessment, we may begin performing impairment analysis by quantitatively comparing the fair value of the reporting unit to the carrying value of the reporting unit, including goodwill. An impairment charge for goodwill is recognized for the amount by which the carrying value of the reporting unit exceeds its fair value and such loss should not exceed the total goodwill allocated to the reporting unit.

There are numerous factors that may cause the fair value of a reporting unit to fall below its carrying amount and/or that may cause the value of long-lived assets to not be recoverable, which could lead to the measurement and recognition of goodwill and/or long-lived asset impairment charges. These factors include, but are not limited to, significant negative variances between actual and expected financial results, lowered expectations of future financial results, failure to realize anticipated synergies from acquisitions, adverse changes in the business climate, and the loss of key personnel. As of June 30, 2022, we performed a qualitative assessment and did not identify any triggering events that would lead to the performance of a quantitative analysis.

Business Segments

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

•Healthcare

•Construction

•Investments

Healthcare

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

Construction

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

Investments

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

Healthcare Services and Products

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

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

Construction Services and Products

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

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

Critical Accounting Policies and Estimates

In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our revenue and net income or loss, as well as on the value of certain assets and liabilities on our condensed Consolidated Balance Sheets. We believe that the estimates, assumptions, and judgments involved in the accounting policies described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on

Form 10-K for the fiscal year ended December 31, 2021 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates.

Results of Operations

Comparison of the Three Months Ended June 30, 2022 and 2021

The following table summarizes our results for the three months ended June 30, 2022 and 2021 (in thousands):


	Three Months Ended June 30,
	2022		Percent of Revenues		2021		Percent of Revenues		Change from Prior Year
									Dollars		Percent *
Total revenues	$	30,718	100.0	%	$	25,806	100.0	%	$	4,912	19.0	%
Total cost of revenues	24,619		80.1	%	24,302		94.2	%	317		1.3	%
Gross profit	6,099		19.9	%	1,504		5.8	%	4,595		305.5	%
Total operating expenses	7,297		23.8	%	6,014		23.3	%	1,283		21.3	%
Loss from operations	(1,198)		(3.9)	%	(4,510)		(17.5)	%	3,312		(73.4)	%
Total other (expense) income	(705)		(2.3)	%	2,751		10.7	%	(3,456)		(125.6)	%
Loss before income taxes	(1,903)		(6.2)	%	(1,759)		(6.8)	%	(144)		8.2	%
Income tax benefit (provision)	327		1.1	%	(32)		(0.1)	%	359		(1,121.9)	%
Net loss from continuing operations	(1,576)		(5.1)	%	(1,791)		(6.9)	%	215		(12.0)	%
Net loss from discontinued operations	—		—	%	(65)		(0.3)	%	65		(100.0)	%
Net (loss) income	$	(1,576)	(5.1)	%	$	(1,856)	(7.2)	%	$	280	(15.1)	%

*Percentage may not add due to rounding

Revenues

Healthcare

Healthcare revenue is summarized as follows (in thousands):


	Three Months Ended June 30,
	2022		2021		Change		% Change
Healthcare	$	13,912	$	14,870	$	(958)	(6.4)	%
Healthcare Revenue	$	13,912	$	14,870	$	(958)	(6.4)	%

Healthcare revenue decreased 6.4% compared to the prior year quarter, driven by a decrease in revenue from fewer total scanning days due to the national shortage of Nuclear Medicine Technologists.

Construction

Construction revenue is summarized as follows (in thousands):


	Three Months Ended June 30,
	2022		2021		Change		% Change
Construction	$	16,806	$	10,936	$	5,870	53.7	%
Construction Revenue	$	16,806	$	10,936	$	5,870	53.7	%

The increase in revenue for the Construction division was predominately driven by large commercial projects at our KBS business. This increase is primarily related to a large contract entered into during 2022 that has resulted in recognized revenue of $5.3 million.

Gross Profit

Healthcare Gross Profit

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


	Three Months Ended June 30,
	2022			2021			$ Change		% Change
Healthcare gross profit	$	3,678		$	3,409		$	269	7.9	%
Healthcare gross margin	26.4		%	22.9		%

The increase in Healthcare gross margin percentage was mainly driven by an improved mix of product and service revenues for the three months ended June 30, 2022, compared to the same period in the prior year.

Construction Gross Profit

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


	Three Months Ended June 30,
	2022			2021			$ Change		% Change
Construction gross profit	$	2,485		$	(1,844)		$	4,329	234.8	%
Construction gross margin	14.8		%	(16.9)		%

The increase in Construction gross profit was predominately due to significantly increased pricing levels during 2022 to offset higher input costs in both residential and commercial projects, slightly offset by net loss of $1.1 million from lumber derivatives. Our backlog and sales pipeline remain at record levels due to newly signed contracts.

Investments Gross Loss

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


	Three Months Ended June 30,
	2022		2021		$ Change		% Change

Real Estate and Investments gross loss	$	(64)	$	(61)	$	(3)	4.9	%

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

Operating Expenses

Operating expenses are summarized as follows (in thousands):


	Three Months Ended June 30,								Percent of Revenues
	2022		2021		Change				2022		2021
					Dollars		Percent
Selling, general and administrative	$	6,867	$	5,584	$	1,283	23.0	%	22.4	%	21.6	%
Amortization of intangible assets	430		430		—		—	%	1.4	%	1.7	%

Total operating expenses	$	7,297	$	6,014	$	1,283	21.3	%	23.8	%	23.3	%

On a consolidated basis, there was a $1.3 million increase in sales, general and administrative expenses. The major drivers of the increase in selling, general and administrative expenses (“SG&A”) was a $0.9 million increase in legal expenses and a $0.4 million severance cost, both attributed to our healthcare segment. As a percentage of revenue, SG&A increased modestly to 22.4% for the three months ended June 30, 2022, versus 21.6% in the prior year period.

Total Other Income (Expense)

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


	Three Months Ended June 30,
	2022		2021
Other (expenses) income, net	$	(416)	$	2,950
Interest expense, net	(289)		(199)


Total other (expense) income	$	(705)	$	2,751

Other (expenses) income, net, for the three months ended June 30, 2022 and 2021 are predominately comprised of unrealized gain from available for sale securities, and finance costs.

Interest expense, net, for the three months ended June 30, 2022 and 2021 are predominantly comprised of interest costs and the related amortization of deferred issuance costs on our debt, respectively.

Income Tax Expense

For the three months ended June 30, 2022 and 2021 we recorded an income tax benefit of $327 thousand and expense of $32 thousand, respectively, within continuing operations. See Note 10. Income Taxes, within the notes to our condensed consolidated financial statements for further information related to the income taxes.

Income from Discontinued Operations

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

Results of Operations

Comparison of the Six Months Ended June 30, 2022 and 2021

The following table summarizes our results for the six months ended June 30, 2022 and 2021 (in thousands):


	Six Months Ended June 30,
	2022		Percent of Revenues		2021		Percent of Revenues		Change from Prior Year
									Dollars		Percent *
Total revenues	$	55,767	100.0	%	$	48,160	100.0	%	$	7,607	15.8	%
Total cost of revenues	45,005		80.7	%	43,579		90.5	%	1,426		3.3	%
Gross profit	10,762		19.3	%	4,581		9.5	%	6,181		134.9	%
Total operating expenses	14,515		26.0	%	10,659		22.1	%	3,856		36.2	%
Loss from operations	(3,753)		(6.7)	%	(6,078)		(12.6)	%	2,325		(38.3)	%
Total other expense	(901)		(1.6)	%	3,733		7.8	%	(4,634)		(124.1)	%
Loss before income taxes	(4,654)		(8.3)	%	(2,345)		(4.9)	%	(2,309)		98.5	%
Income tax provision	(623)		(1.1)	%	(34)		(0.1)	%	(589)		1,732.4	%
Net loss from continuing operations	(5,277)		(9.5)	%	(2,379)		(4.9)	%	(2,898)		121.8	%
Net income (loss) from discontinued operations	—		—	%	5,955		12.4	%	(5,955)		(100.0)	%
Net income (loss)	$	(5,277)	(9.5)	%	$	3,576	7.4	%	$	(8,853)	(247.6)	%

*Percentage to revenue were computed independently for each discrete item presented. Therefore, the sum of the individual items may not equal the total.

Revenues

Healthcare

Healthcare revenue by segments is summarized as follows (in thousands):


	Six Months Ended June 30,
	2022		2021		Change		% Change
Healthcare	$	27,330	$	28,177	$	(847)	(3.0)	%
Total Healthcare Revenue	$	27,330	$	28,177	$	(847)	(3.0)	%

Healthcare revenue decreased 3.0% compared to the prior year period, driven by a decrease in revenue from fewer total scanning days due to the national shortage of Nuclear Medicine Technologists.

Construction

Construction revenue is summarized as follows (in thousands):


	Six Months Ended June 30,
	2022		2021		Change		% Change
Construction	$	28,437	$	19,983	$	8,454	42.3	%
Total Construction Revenue	$	28,437	$	19,983	$	8,454	42.3	%

The increase in revenue for the Construction division was predominately due to a higher number of projects completed of varying sizes and increased pricing at KBS and EBGL, including a large contract entered into during 2022 that has resulted in recognized revenue of $5.3 million.

Gross Profit

Healthcare Gross Profit

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


	Six Months Ended June 30,
	2022			2021			Change		% Change
Healthcare gross profit	$	6,854		$	6,007		$	847	14.1	%
Healthcare gross margin	25.1		%	21.3		%

The increase in Healthcare gross margin percentage was mainly driven by an improved mix of product and service revenues.

Construction Gross Profit (Loss)

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


	Six Months Ended June 30,
	2022			2021			Change		% Change
Construction gross (loss) profit	$	4,071		$	(1,300)		$	5,371	413.2	%
Construction gross margin	14.3		%	(6.5)		%

The increase in Construction gross profit was predominately due to an increase in revenues at KBS and EBGL for large commercial projects. We have significantly increased prices to offset higher input costs and have seen an improvement in our gross margin overall in 2022. Our backlog and sales pipeline remain at record levels.

Investments Gross Loss

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


	Six Months Ended June 30,
	2022		2021		Change		% Change
Investments gross loss	$	(163)	$	(126)	$	(37)	29.4	%

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

Operating Expenses

Operating expenses are summarized as follows (in thousands):


	Six Months Ended June 30,								Percent of Revenues
	2022		2021		Change				2022		2021
					Dollars		Percent
Selling, general and administrative expenses	$	13,655	$	10,638	$	3,017	28.4	%	24.5	%	22.1	%
Amortization of intangible assets	860		868		(8)		(0.9)	%	1.5	%	1.8	%
Gain on sale of MD Office Solutions	—		(847)		847		(100.0)	%	—	%	(1.8)	%
Total operating expenses	$	14,515	$	10,659	$	3,856	36.2	%	26.0	%	22.1	%

On a consolidated basis, there was a $3.0 million increase in sales, general and administrative expenses. Two major drivers of the increase in SG&A were a $1.8 million increase in legal expenses and a $0.4 million increase in severance costs, both attributed to our healthcare segment. We also had a $0.5 million SG&A increase in Construction due to increases in headcount and commissions and a $0.2 million increase at the corporate level related to external and internal auditors review fees. As a percentage of revenue, SG&A increased to 24.5%, versus 22.1% in the prior year period.

On February 1, 2021, we completed the sale of our MD Office Solutions business and recognized $0.8 million in gain upon sale.

Total Other Income (Expense)

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


	Six Months Ended June 30,
	2022		2021
Other (expense) income, net	$	(422)	$	4,205
Interest expense, net	(479)		(472)


Total other (expense) income	$	(901)	$	3,733

Other income, net for six months ended June 30, 2022 is predominantly comprised of gains and losses from equity securities and sales of assets, whereas the six months ended June 30, 2021 comprised of primarily $4.2 million in PPP loan forgiveness from the Healthcare and Construction businesses. As of June 30, 2022, the Company has no PPP loans outstanding.

Interest expense, net, for the six months ended June 30, 2022 and 2021 is predominantly comprised of interest costs and the related amortization of deferred issuance costs on our debt.

Income Tax Expense

For the six months ended June 30, 2022 and 2021, we recorded income tax expense of $623 thousand and $34 thousand, respectively. See Note 10, Income Taxes, within the notes to our condensed consolidated financial statements for further information related to the income taxes.

Income from Discontinued Operations

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

Liquidity and Capital Resources

Overview

Cash Flows from Operating Activities

For the six months ended June 30, 2022, net cash provided by operating activities was $2.9 million, as compared to $7.6 million net cash used in operating activities in 2021, resulting in an increase in net cash provided by operating activities of $10.5 million. The increase in net cash provided by operating activities was attributable to a positive impact on net working capital changes. Additionally, in 2021 consolidated net income included discontinued operations from DMS Health Technologies, Inc. (“DMS Health”), the sale of our MD Office Solutions subsidiary, and PPP loan forgiveness.

Cash Flows from Investing Activities

For the six months ended June 30, 2022, net cash used in investing activities was $3.4 million, as compared to $18.0 million of net cash provided by investing activities in 2021. The $21.4 million decrease in net cash used in investing activities was attributable to the purchase of securities of $2.8 million in 2022 and the proceeds from the sale of discontinued operations of $18.8 million in 2021.

Cash Flows from Financing Activities

For the six months ended June 30, 2022, net cash provided by financing activities was $10.1 million, as compared to net cash used in financing activities of $7.5 million in 2021, resulting in an increase in net cash provided by financing activities of $17.7 million. The increase in financing activities was due to lower net repayments of existing debt by $5.8 million, net proceeds received related to the 2022 Public Offering of $12.7 million and partially offset by payment of dividends of $1.0 million.

Summary Cash Flows

The following table shows cash flow information for the six months ended June 30, 2022 and 2021 (in thousands):


	Six Months Ended June 30,
	2022		2021
Net cash provided by (used in) operating activities	$	2,937	$	(7,599)
Net cash (used in) provided by investing activities	$	(3,371)	$	18,021
Net cash provided by (used in) financing activities	$	10,122	$	(7,534)

Sources of Liquidity

Our principal sources of liquidity are our existing cash and cash equivalents, cash generated from operations, availability on our revolving lines of credit from our credit facility with Webster Bank, N.A., a national banking association (“Webster”), as successor in interest to Sterling National Bank (“Sterling”), our three credit facilities with eCapital, and cash raised from equity financing. As of June 30, 2022, we had $13.7 million of cash and cash equivalents. The eCapital facilities directly support our Construction businesses. As of June 30, 2022, we were fully drawn in terms of available capacity and no amount outstanding on the KBS revolver. We were at $2.5 million outstanding balance and were fully drawn in terms of available capacity on the EBGL revolver. However, those facilities have loan limits of $4.0 million each and we expect to be able to use more of that availability as our borrowing base increases with higher production levels. In January 2022, we successfully completed the 2022 Public Offering with net proceeds of $12.7 million.

Going Concern

At June 30, 2022, we had approximately $11.6 million in debt outstanding. All of our debt is categorized as short-term on our condensed Consolidated Balance Sheets. For more detail, see Note 8. Debt. The Company’s loan pursuant to the Webster Loan Agreement (as defined below) (the “Webster Loan”) with Webster, as successor in interest to Sterling National Bank, with a loan balance of approximately $8.1 million, supports our Healthcare business. While the Webster Loan matures in 2024, GAAP rules require that the outstanding balance be classified as short-term debt. This is due to both the automatic sweep feature embedded in the traditional lockbox arrangement and the subjective acceleration clause in the Webster Loan Agreement.

Management has historically concluded that this forecasted violation raises substantial doubt about our ability to continue as a going concern within twelve months. In consideration of the cash flow results for the six months ended June 30, 2022, our current balance of cash and cash equivalents of $13.7 million and our projected use of cash for the next twelve months. Management believes that the Company's existing cash and current free cash flow generation expectations will allow the Company to continue its operations for at least the next 12 months from the date these unaudited condensed financial statements are issued, even in the event that we are requested to pay some or all of the outstanding Webster Loan balance. Therefore, the conditions that led us to conclude substantial doubt in prior periods have been alleviated. As a result of recurring losses, the continued viability of the Company beyond August 2023 may be dependent on its ability to continue to raise additional capital to finance its operations.

Common Stock Equity Offering

On May 28, 2020, we closed an underwritten public offering (the “2020 Public Offering”) pursuant to an underwriting agreement with Maxim Group LLC, as representative of the underwriters. The 2020 Public Offering was for 2,225,000 shares of our common stock, and 2,225,000 warrants (the “Warrants”) to purchase up to 1,112,500 additional shares of our common stock. The 2020 Public Offering price was $2.24 per share of common stock and $0.01 per accompanying Warrant (for a combined offering price of $2.25). Gross proceeds, before deducting underwriting discounts and offering expenses and excluding any proceeds we may receive upon exercise of the common warrants, were $5.5 million and net proceeds were $5.2 million.

As noted above, on January 24, 2022, we closed the 2022 Public Offering pursuant to an underwriting agreement with Maxim Group LLC, as representative of the underwriters. The 2022 Public Offering was for 9,500,000 shares of common stock (or pre-funded warrants to purchase shares of common stock in lieu thereof) and warrants to purchase up to 9,500,000 shares of common stock (the “common warrants”). Each share of common stock (or pre-funded warrant in lieu thereof) was sold together with one common warrant to purchase one share of common stock at a price of $1.50 per share and common warrant. Additionally, Company issued to Maxim 237,500 common stock purchase warrants (the “Underwriter’s Warrants”) to purchase up to 237,500 shares of Common Stock at an exercise price of $1.65 per common warrant. Gross proceeds, before deducting underwriting discounts and offering expenses and excluding any proceeds we may receive upon exercise of the common warrants, were $14.3 million and net proceeds were $12.7 million.

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

Webster Credit Facility

We have a $20.0 million credit facility with Webster, which matures in March 2024. As of June 30, 2022, the Company had $0.1 million of letters of credit outstanding and had additional borrowing capacity of $0.1 million under the Webster Credit Facility. Financial covenants require that the Webster Borrowers maintain (a) a Fixed Charge Coverage Ratio as of the last day of a fiscal quarter of not less than 1.25 to 1.0 and (b) a Leverage Ratio as of the last day of such fiscal quarter of no greater than 3.50 to 1.0. As of June 30, 2022, the Company was not in compliance with the covenants under the Webster Loan Agreement and had not yet obtained a waiver from Webster for these financial covenant breaches. While we do not believe Webster will require us to pay down our balance on this facility, we have sufficient cash to do so if necessary.

eCapital Credit Facilities

EdgeBuilder and Glenbrook (the “EBGL Borrowers”) have a $4.0 million credit facility with eCapital, which matures in January 2023. As of June 30, 2022, EBGL was fully drawn in terms of available borrowing capacity is available under the facility. As of June 30, 2022, $2.5 million was outstanding under the EBGL Loan Agreement. As of June 30, 2022, EBGL was not in compliance with the bi-annual financial covenants under the EBGL Loan Agreement measured as of June 30, 2022. As of June 30, 2022, we obtained a waiver from Gerber for financial covenant breaches. However, there can be no assurance that we will be able to obtain such waivers in the event of future financial covenant violations.

Financial covenants require that EBGL maintain (a) a lower net cash income (as defined in the EBGL Loan Agreement) at least equal to no less than $0 for the trailing 6-month period ending June 30, 2022 and no less than $1,000,000 for the trailing fiscal year ending December 31, 2022 and (b) a reduced minimum EBITDA (as defined in the EBGL Loan Agreement) to be no less than $0 as of June 30, 2022 and no less than $1,000,000 as of the fiscal year ending December 31, 2022.

KBS has a $4.0 million credit facility with eCapital, which matures in February 2023. As of June 30, 2022, KBS was fully drawn in terms of available borrowing capacity is available under the facility. As of June 30, 2022, no amount was outstanding under the KBS Loan Agreement. As of June 30, 2022, KBS was in compliance with the bi-annual financial covenants under the EBGL Loan Agreement.

Financial covenants require that KBS maintain (a) net cash income (as defined in the KBS Loan Agreement) of at least equal to no less than $0 for the trailing 6-month period ending June 30, 2022 and be no less than $500,000 for the trailing fiscal year end and (b) a minimum EBITDA (as defined in the KBS Loan Agreement) no less than $0 as of June 30 and no less than $850,000 as of the fiscal year end.

Term Loan

We and certain of our Investments subsidiaries (collectively, the “Star Borrowers”) are party to a Loan and Security Agreement with eCapital, as successor in interest to Gerber Finance, Inc. (as amended, the “Star Loan Agreement”), which provides for a credit facility with borrowing availability of up to $2.5 million, bearing interest at the prime rate plus 3.5% per annum, and matures on January 1, 2025, unless terminated in accordance with the terms therein (the “Star Loan”). As of June 30, 2022, As of June 30, 2022, the short term loan includes $0.9 million of the Star Loan, net of issuance costs.

Paycheck Protection Program

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

All PPP loans were forgiven, resulting in a gain of $4.2 million in 2021 and $2.5 million in 2020.

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

Off-Balance Sheet Arrangements

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

As further discussed below, we carried out an evaluation, under the supervision and with the participation of our management, including our executive chairman and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that

evaluation, our executive chairman and chief financial officer concluded that our disclosure controls and procedures were not effective as of June 30, 2022 as a result of the material weakness discussed below.

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

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

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

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

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

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

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

Changes in Internal Control over Financial Reporting

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

PART II. OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

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

ITEM 1A.RISK FACTORS

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

Risks Related to our Common Stock and our Company Preferred Stock

If we cannot continue to satisfy the Nasdaq Global Market continued listing standards and other Nasdaq rules, our Common Stock could be delisted, which would harm our business, the trading price of our Common Stock, our ability to raise additional capital and the liquidity of the market for our Common Stock.

Our Common Stock is currently listed on the Nasdaq Global Market. To maintain the listing of our Common Stock on the Nasdaq Global Market, we are required to meet certain listing requirements, including, among others, either: (i) a minimum closing bid price of $1.00 per share, a market value of publicly held shares (excluding shares held by our executive officers, directors and 10% or more stockholders) of at least $5.0 million and stockholders’ equity of at least $10 million; or (ii) a minimum closing bid price of $1.00 per share, a market value of publicly held shares (excluding shares held by our executive officers, directors and 10% or more stockholders) of at least $15.0 million and total assets of at least $50.0 million and total revenue of at least $50.0 million (in the latest fiscal year or in two of the last three fiscal years).

There is no assurance that we will be able to maintain compliance with the minimum closing price requirement. As of August 11, 2022, our Common Stock had closed above $1.00 per share for twelve consecutive trading days. In the event that our stock price falls below $1.00 per share for 30 consecutive trading days, Nasdaq may send us a notice stating we will be provided a period of 180 days to regain compliance with the minimum bid requirement or else Nasdaq may make a determination to delist our Common Stock. If our Common Stock were to be delisted from Nasdaq and was not eligible for quotation or listing on another market or exchange, trading of our Common Stock could be conducted only in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult to dispose of, or obtain accurate price quotations for, our Common Stock, and there would likely also be a reduction in our coverage by securities analysts and the news media, which could cause the price of our Common Stock to decline further.

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

None.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.OTHER INFORMATION

None.

ITEM 6.EXHIBITS


Exhibit Number						Description

10.1*						Employment Agreement, dated as of March 31, 2022 between Star Equity Holdings, Inc. and Richard K. Coleman, Jr. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 4, 2022).
10.2*						Separation Agreement and Release between the Company and Matthew G. Molchan, dated April 19, 2022 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 22, 2022).
10.3*						eCapital EBGL Eighth Amendment to Loan and Security Agreement, dated August 11, 2022, by and among eCapital Asset Based Lending Corp., EdgeBuilder, Inc., and Glenbrook Building Supply, Inc.
31.1*						Certification of the Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated pursuant to the Securities Exchange Act of 1934, as amended.
31.2*						Certification of the Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated pursuant to the Securities Exchange Act of 1934, as amended.
32.1**						Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**						Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*						XBRL Instance Document
101.SCH*						Inline XBRL Taxonomy Extension Schema
101.CAL*						Inline XBRL Taxonomy Extension Calculation Linkbase
101.LAB*						Inline XBRL Taxonomy Extension Labels Linkbase
101.PRE*						Inline XBRL Taxonomy Extension Presentation Linkbase
101.DEF*						Inline XBRL Taxonomy Extension Definition Linkbase
104.1						Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101).

_________________

* Filed herewith.

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

SIGNATURES

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

STAR EQUITY HOLDINGS, INC.

Date:

August 12, 2022

By:

/s/ RICHARD K. COLEMAN, JR.

Richard K. Coleman, Jr.

Chief Executive Officer

(Principal Executive Officer)

/s/ DAVID J. NOBLE

David J. Noble

Chief Financial Officer

(Principal Financial and Accounting Officer)

Document

Exhibit 10.3

EIGHTH AMENDMENT TO LOAN AND SECURITY AGREEMENT DATED JANUARY 31, 2020

THIS EIGHTH AMENDMENT TO LOAN AND SECURITY AGREEMENT DATED JANUARY 31, 2020 (this "Eighth Amendment") is entered into as of this twelfth day of August 2022 (the "Effective Date"), by and among eCapital Asset Based Lending Corp., formerly known as Gerber Finance Inc., a New York corporation ("Lender") EdgeBuilder, Inc., a Delaware Corporation and Glenbrook Building Supply, Inc., a Delaware corporation (individually, "Initial Borrower") and, collectively, if more than one, the "Initial Borrowers"), and together with each other Person which, on or subsequent to the Closing Date, agrees in writing to become a "Borrower" hereunder, herein called, individually, a "Borrower" and, collectively, the "Borrowers," and pending the inclusion by written agreement of any other such Person, besides each Initial Borrower, as a "Borrower" hereunder, all references herein to "Borrowers," "each Borrower," the "applicable Borrower," "such Borrower" or any similar variations thereof (whether singular or plural) shall all mean and refer to the Initial Borrower or each one of them collectively) and Star Real Estate Holdings USA, Inc., a Delaware corporation, 300 Park Street, LLC, a Delaware limited liability company, 947 Waterford Road, LLC, a Delaware limited liability company, 56 Mechanic Falls Road, LLC, a Delaware limited liability company, ATRM Holdings, Inc., a Minnesota corporation, KBS Builders, Inc., a Delaware corporation, and Star Equity Holdings, Inc., a Delaware corporation, (individually or collectively, as the context may require, "Guarantor"), each Borrower and Guarantor having an address at 53 Forest Ave, Old Greenwich, CT 06870.

RECITALS

A.Lender and Borrowers entered into a Loan and Security Agreement dated as of January 31, 2020, as amended by (i) First Amendment to Loan and Security Agreement dated March 5, 2020 and (ii) Second Amendment to Loan and Security Agreement dated July 1, 2020 and (iii) Third Amendment to Loan and Security Agreement dated February 26, 2021 and (iv) Fourth Amendment to Loan and Security Agreement dated July 30, 2021 and (v) Fifth Amendment to Loan and Security Agreement dated October 21, 2021 and (vi) Sixth Amendment to Loan and Security Agreement dated January 20, 2022 and (vii) Seventh Amendment to Loan and Security Agreement dated March 8, 2022 (as further amended, modified, restated or supplemented from time to time, the "Loan Agreement").

B.The Loans are secured by, among other things, Guarantor's guaranty by its execution of the Loan Agreement as a Corporate Credit Party ("Guaranty").

C.ATRM Holdings, Inc. has executed an Amended and Restated Subordination Agreement dated January 31, 2020 and is a Subordinated Lender as defined in the Loan Agreement.

D.Star Equity Holdings, Inc. has executed an Amended and Restated Subordination Agreement dated July 30, 2021 and is a Subordinated Lender as defined in the Loan Agreement.

E.Star Procurement, LLC has executed an Amended and Restated Subordination Agreement dated January 31, 2020 and is a Subordinated Lender as defined in the Loan Agreement.

F.Borrowers have executed an Amended and Restated Note in the maximum principal amount of$4,000,000 dated July 30, 2021.

G.Lender has changed its name and the parties which to consent and ratify the Credit Documents accordingly.

H.Borrowers have violated a financial covenant in the Loan Agreement and have requested a waiver of the resulting Event of Default.

NOW, THEREFORE, in consideration of the covenants and agreements set forth herein, in consideration of the Recitals above which are incorporated into and made a part of this Eighth Amendment and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

AGREEMENTS

1.Lender, Borrowers and Guarantor reaffirm consent and agree to all of the terms and conditions of the Credit Documents defined in the Loan Agreement as binding, effective and enforceable according to their stated terms, except to the extent that such Credit Documents are hereby expressly modified by this Eighth Amendment.

2.In the case of any ambiguity or inconsistency between the Credit Documents and this Eighth Amendment, the language and interpretation of this Eighth Amendment is to be deemed binding and paramount.

3.The Borrowers' failure to comply with the "'Minimum EBITDA" financial covenant on Schedule III of the Loan Agreement as of June 30, 2022 constitutes an Event of Default under the Loan Agreement. Lender hereby agrees to grant a waiver thereof provided, however, that this waiver does not constitute (i) a modification or an alteration of any of the terms, conditions or covenants of the Loan Agreement or any Credit Documents, all of which remain in full force and effect, or (ii) a waiver, release or limitation upon Lender's exercise of any of its rights and remedies thereunder, all of which are hereby expressly reserved, or (iii) a waiver of compliance with Schedule III for any other period or purpose. This waiver does not relieve or release the Borrowers in any way from any of the other respective duties, obligations, covenants or agreements under the Loan Agreement or the other Credit Documents or from the consequences of any other Event of Default thereunder, except as expressly described above. This waiver does not obligate Lender, or be construed to require Lender, to waive any other Event of Default or defaults, whether now existing or which may occur after the date of this waiver.

4.The Credit Documents are hereby amended to change the name of Lender to "eCapital Asset Based Lending Corp., formerly known as Gerber Finance, Inc.," a New York corporation.

5.The parties agree to sign, deliver and file any additional documents and take any other actions that may reasonably be required by Lender including, but not limited to, affidavits, resolutions, or certificates for a full and complete consummation of the matters covered by this Eighth Amendment

6.Capitalized terms used in this Eighth Amendment which are not otherwise defined herein have the meaning ascribed thereto in the Credit Documents.

7.Each of Borrowers, Guarantor and the Credit Parties on behalf of itself and its affiliates, heirs, successors and assigns (collectively, "Releasing Parties"), hereby releases and forever discharges Lender, any trustee of the Loans, any servicer of the Loans, each of their respective predecessors-in-interest and successors and assigns, together with the officers, directors, partners, employees, investors, certificate holders and agents of each of the foregoing (collectively, the "Lender Parties"), from all debts, accountings, bonds, warranties, representations, covenants, promises, contracts, controversies, agreements, claims, damages, judgments, executions, actions, inactions, liabilities, demands or causes of action of any nature, at law or in equity, known or unknown, which such Releasing Party has or had prior to and including the date hereof relating in any manner whatsoever to matters arising out of: (a) the Loans, including, without

limitation, its funding, administration and servicing; (b) the Credit Documents; or (c) any reserve and/or escrow balances held by Lender or any servicers of the Loans.

8.Borrowers, Guarantor and the Credit Parties, jointly and severally, agree to reimburse, defend, indemnify and hold Lender harmless from and against any and all liabilities, claims, damages, penalties, reasonable expenditures, losses or charges (including, but not limited to, all reasonable legal fees and court costs), which may now or in the future be undertaken, suffered, paid, awarded, assessed or otherwise incurred as a result of or arising out of any fraudulent conduct of Borrowers, Guarantor or any Credit Party in connection with the Credit Documents or of any breach of any of the representations or warranties made in any material respect.

9.This Eighth Amendment is binding upon, inures to the benefit of, and is enforceable by the heirs, personal representatives, successors and assigns of the parties. This Eighth Amendment is not assignable by a Borrower or Guarantor without the prior written consent of Lender.

10.To the extent that any provision of this Eighth Amendment is determined by any court or legislature to be invalid or unenforceable in whole or part either in a particular case or in all cases, such provision or part thereof is to be deemed surplusage. If that occurs, it does not have the effect of rendering any other provision of this Eighth Amendment invalid or unenforceable. This Eighth Amendment is to be construed and enforced as if such invalid or unenforceable provision or part thereof were omitted.

11.This Eighth Amendment may only be changed or amended by a written agreement signed by all of the parties hereto. By the execution of this Eighth Amendment, Lender is not to be deemed to consent to any future renewal or extension of the Loans. This Eighth Amendment is deemed to be part of and integrated into the Credit Documents.

12.THIS EIGHTH AMENDMENT AND THE OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO THE CONTRACTS MADE AND PERFORMED IN SUCH STATE WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF.

13.The parties to this Eighth Amendment acknowledge that each has had the opportunity to consult independent counsel of their own choice, and that each has relied upon such counsel's advice concerning this Eighth Amendment, the enforceability and interpretation of the terms contained in this Eighth Amendment and the consummation of the transactions and matters covered by this Eighth Amendment.

14.Borrowers agree to pay all attorneys' fees and other costs incurred by Lender or otherwise payable in connection with this Eighth Amendment (in addition to those otherwise payable pursuant to the Credit Documents), which fees and costs are to be paid as of the date hereof.

15.This Eighth Amendment may be executed in any number of counterparts, each of which when so executed is deemed to be an original and all of which taken together constitute but one and the same agreement. Delivery of an executed counterpart of this Eighth Amendment by facsimile or other electronic method of transmission shall be equally as effective as delivery of an original executed counterpart of this Eighth Amendment. Any party delivering an executed counterpart of this Eighth Amendment by facsimile or other electronic method of transmission also shall deliver an original executed counterpart of this Eighth Amendment but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Eighth Amendment.

16.BORROWERS, GUARANTOR, EACH OF THE CREDIT PARTIES AND LENDER EACH HEREBY AGREES NOT TO ELECT A TRIAL BY JURY, AND WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST WITH REGARD TO THIS EIGHTH AMENDMENT, THE CREDIT DOCUMENTS, OR ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING IN CONNECTION THEREWITH. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND VOLUNTARILY AND IS INTENDED TO ENCOMPASS INDMDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY JURY WOULD OTHERWISE ACCRUE. LENDER IS HEREBY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER.

[Signatures appear on the following pages]

IN WITNESS WHEREOF, the undersigned have caused this Eighth Amendment to be executed as of the Effective Date.

LENDER:

eCAPITAL ASSET BASED LENDING CORP.,

formerly known as GERBER FINANCE, INC.

By: /s/ Elena Goynatsky

Name: Elena Goynatsky

Title: Senior Vice President

BORROWER: EDGEBUILDER, INC.

By: /s/ Ron Schumacher

Name: Ron Schumacher

Title: Executive Chairman

GLENBROOK BUILDING SUPPLY, INC.

By: /s/ Ron Schumacher

Name: Ron Schumacher

Title: Executive Chairman

GUARANTOR:

STAR REAL ESTATE HOLDINGS USA, INC.

By: /s/ David J. Noble

Name: David J. Noble

Title: President and Chief Executive Officer

Signature Pages to Eighth Amendment to Loan and Security Agreement dated January 21, 2020 (Continued on Next Page)

300 PARK STREET, LLC

By: /s/ David Noble

Name: David J. Noble

Title: President and Chief Executive Officer

947 WATERFORD ROAD, LLC

By: /s/ David Noble

Name: David J. Noble

Title: President and Chief Executive Officer

56 MECHANIC FALLS ROAD, LLC

By: /s/ David Noble

Name: David J. Noble

Title: President and Chief Executive Officer

ATRM HOLDINGS, INC.

By: /s/ David Noble

Name: David J. Noble

Title: President

KBS BUILDERS, INC.

By: /s/ Thatcher Butcher

Name: Thatcher Butcher

Title: President

Signature Pages to Eighth Amendment to Loan and Security Agreement dated January 21, 2020 (Continued from Previous Page)

DocuSign Envelope ID: 017CDD69-1AD3-4DA8-8ED2-90B5C44A9689

STAR EQUITY HOLDINGS, INC.

By: /s/ Richard K. Coleman

Name: Richard K. Coleman

Title: Chief Executive Officer

Signature Pages to Eighth Amendment to Loan and Security Agreement dated January 21, 2020 (Continued from Previous Page)

DocuSign Envelope ID: 017CDD69-1AD3-4DA8-8ED2-90B5C44A9689

CONSENTS TO EIGHTH AMENDMENT

TO LOAN AND SECURITY AGREEMENT DATED JANUARY 31. 2020

We hereby consent and agree to the attached terms of the Eighth Amendment to Loan and Security Agreement dated January 31, 2020.

ATRM HOLDINGS, INC.

(as Creditor pursuant to an Amended and Restated Subordination Agreement dated January 31, 2020)

By: /s/ David Noble

Name: David Noble

Title: President

STAR PROCUREMENT, LLC

(as Creditor pursuant to Amended and Restated Subordination Agreement dated January 31, 2020)

By: /s/ David Noble

Name: David Noble

Title: Manager

STAR EQUITY HOLDINGS, INC.

(as Creditor pursuant to Amended and Restated Subordination Agreement dated July 30, 2021)

By: /s/ Richard K Coleman

Name: Richard K. Coleman

Title: Chief Executive Officer

Signature Page to Consents to Eighth Amendment to Loan and Security Agreement Dated January 31, 2020

Document

EXHIBIT 31.1

CERTIFICATION OF

PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Richard K. Coleman, Jr., certify that:

1.I have reviewed this quarterly report on Form 10-Q of Star Equity Holdings, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

August 12, 2022


/s/ Richard K. Coleman, Jr.
Richard K. Coleman, Jr.
Chief Executive Officer (Principal Executive Officer)

Document

EXHIBIT 31.2

CERTIFICATION OF

PRINCIPAL FINANCIAL OFFICER

PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, David J. Noble, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Star Equity Holdings, Inc.;

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

August 12, 2022


/s/ David J. Noble
David J. Noble
Chief Financial Officer and Chief Operating Officer (Principal Financial and Accounting Officer)

Document

EXHIBIT 32.1

CERTIFICATION OF

PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)

In connection with the accompanying Quarterly Report on Form 10-Q of Star Equity Holdings, Inc. for the period ended June 30, 2022, I, Richard K. Coleman, Jr., Chief Executive Officer of Star Equity Holdings, Inc., hereby certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)such Quarterly Report on Form 10-Q of Star Equity Holdings, Inc. for the period ended June 30, 2022, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)the information contained in such Quarterly Report on Form 10-Q of Star Equity Holdings, Inc. for the period ended June 30, 2022, fairly presents, in all material respects, the financial condition and results of operations of Star Equity Holdings, Inc. at the dates and for the periods indicated.

This certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

August 12, 2022


/s/ Richard K. Coleman, Jr.
Richard K. Coleman, Jr.
Chief Executive Officer (Principal Executive Officer)

A signed copy of this written statement required by Section 906 has been provided to Star Equity Holdings, Inc. and will be retained by Star Equity Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

Document

EXHIBIT 32.2

CERTIFICATION OF

PRINCIPAL FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)

In connection with the accompanying Quarterly Report on Form 10-Q of Star Equity Holdings, Inc. for the period ended June 30, 2022, I, David J. Noble, Chief Financial Officer of Star Equity Holdings, Inc., hereby certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

This certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

August 12, 2022


/s/ David J. Noble
David J. Noble
Chief Financial Officer and Chief Operating Officer (Principal Financial and Accounting Officer)

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