STAR EQUITY HOLDINGS, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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”) is a
multi-industry diversified holding company with three divisions which include
operating businesses in two key industry sectors of the economy, Healthcare and
Construction, and an Investments division.

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

35
——————————————————————————–

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 nine months ended
September 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 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 Healthcare 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, including shorter time to market, higher quality, reduced waste,
readily available labor and potential cost savings. 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 nine months ended September 30, 2022, we had decreases of
$1.7 million and $2.5 million, respectively, in Healthcare division revenue and
a decrease of $2.9 million and an increase of $5.5 million, respectively, in
Construction division revenue as compared to the same period of the prior year.
The Healthcare division continued to operate at lower levels versus last year
with revenue decreasing 11.3% and 5.9% for the three and nine months ended
September 30, 2022, primarily due to the national shortage of Nuclear

36
——————————————————————————–

Medicine Technologists. Our Construction division revenue decreased by 21.0% for
the three months ended September 30, 2022 and increased by 16.2% for the nine
months ended September 30, 2022 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 2 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. In each quarter in 2022 we assess
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
September 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

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. We offer a convenient and
economically efficient cardiac imaging services program as an alternative to
purchasing equipment or outsourcing the procedure to an imaging center.

In addition, we manufacture and sell our internally developed solid-state gamma
cameras and imaging systems, as well as provide field services through camera
maintenance contracts. Our imaging systems include nuclear cardiac imaging
systems, as well as general purpose nuclear imaging systems. We sell our imaging
systems and service contracts 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).

37
——————————————————————————–

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.

Construction

Through this segment, we service residential and commercial construction
projects through our KBS, EdgeBuilder and Glenbrook brands, through which we
manufacture modular housing units, structural wall panels, permanent wood
foundation systems and other engineered wood products, as well as supply general
contractors with building materials.

KBS is a Maine-based manufacturer that started operations 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. We market our
modular homes 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 us exclusively, although
some have KBS model homes on display at their retail centers. KBS’s backlog and
pipeline, along with its market initiatives to build more workforce housing, are
expected to position KBS for continued growth, particularly in the multi-family
arena.

EdgeBuilder is a manufacturer of structural wall panels, permanent wood
foundation systems and other engineered wood products and conducts its
operations in Prescott, Wisconsin. EdgeBuilder 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. EdgeBuilder’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.

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 and Glenbrook operate as one
business with a single management team and we refer to them together as EBGL.

Investments

We have begun to expand our investments activities and have established minority
positions in the equity securities of a small number of publicly traded
companies. We also hold 3 real estate assets in our portfolio, all of which we
lease to our construction subsidiary, KBS. These include their principal
production facility in South Paris, ME.

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 September 30, 2022 and 2021

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

38
——————————————————————————–

Three Months Ended September 30,
Percent of Percent of Change from Prior Year
2022 Revenues 2021 Revenues Dollars Percent *
Total revenues $ 24,244 100.0 % $ 28,859 100.0 % $ (4,615) (16.0) %
Total cost of revenues 18,445 76.1 % 25,112 87.0 % (6,667) (26.5) %
Gross profit 5,799 23.9 % 3,747 13.0 % 2,052 54.8 %
Total operating expenses 7,290 30.1 % 5,631 19.5 % 1,659 29.5 %
Loss from operations (1,491) (6.1) % (1,884) (6.5) % 393 (20.9) %
Total other expense (760) (3.1) % (257) (0.9) % (503) 195.7 %
Loss before income taxes (2,251) (9.3) % (2,141) (7.4) % (110) 5.1 %
Income tax benefit (provision) 367 1.5 % – – % 367 – %
Net loss from continuing operations (1,884) (7.8) % (2,141) (7.4) % 257 (12.0) %
Net loss from discontinued
operations – – % – – % – – %
Net loss $ (1,884) (7.8) % $ (2,141) (7.4) % $ 257 (12.0) %

*Percentage may not add due to rounding

Revenues

Healthcare

Healthcare revenue is summarized as follows (in thousands):

Three Months Ended September 30,
2022 2021 Change % Change
Healthcare $ 13,137$ 14,807$ (1,670) (11.3) %
Healthcare Revenue $ 13,137$ 14,807$ (1,670) (11.3) %

Healthcare revenue decreased 11.3% compared to the prior year quarter, driven
primarily by a decrease in revenue from fewer camera sales in 2022 and fewer
total scanning days due to the national shortage of Nuclear Medicine
Technologists, partially offset by pricing increases in Diagnostic Services in
2022.

Construction

Construction revenue is summarized as follows (in thousands):

Three Months Ended September 30,
2022 2021 Change % Change
Construction $ 11,107$ 14,052$ (2,945) (21.0) %
Construction Revenue $ 11,107$ 14,052$ (2,945) (21.0) %

The decrease in revenue for the Construction division was predominately driven
by the timing of revenue recognition at our KBS business.

Gross Profit

Healthcare Gross Profit

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

Three Months Ended September 30,
2022 2021 $ Change % Change
Healthcare gross profit $ 2,725$ 3,256$ (531) (16.3) %
Healthcare gross margin 20.7 % 22.0 %

The decrease in Healthcare gross margin percentage was mainly driven by lower
camera sales and lower scanning revenue for the three months ended September 30,
2022, compared to the same period in the prior year.

Construction Gross Profit

39
——————————————————————————–

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

Three Months Ended September 30,
2022 2021 $ Change % Change
Construction gross profit $ 3,132$ 541$ 2,591 478.9 %
Construction gross margin 28.2 % 3.8 %

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. Our backlog and sales pipeline remain
relatively strong despite economic headwinds.

Operating Expenses

Operating expenses are summarized as follows (in thousands):

Three Months Ended September 30, Percent of Revenues
Change
2022 2021 Dollars Percent 2022 2021
Selling, general and
administrative $ 6,860$ 5,201$ 1,659 31.9 % 28.3 % 18.0 %
Amortization of intangible assets 430 430 – – % 1.8 % 1.5 %

Total operating expenses $ 7,290$ 5,631$ 1,659 29.5 % 30.1 % 19.5 %

On a consolidated basis, there was a $1.7 million increase in sales, general and
administrative expenses. The major drivers of the increase in selling, general
and administrative expenses (“SG&A”) were a $1.2 million increase in legal
expenses and $0.3 million in severance and retention costs, both attributed to
our healthcare segment. As a percentage of revenue, SG&A increased to 28.3% for
the three months ended September 30, 2022, versus 18.0% in the prior year
period.

Total Other Income (Expense)

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

Three Months Ended September 30,
2022

2021

Other income (expense), net $ (575) $ 3
Interest expense, net (185)

(260)

Total other income (expense) $ (760)

$ (257)

Other (expenses) income, net, for the three months ended September 30, 2022 and
2021 are predominately comprised of unrealized losses and gains from available
for sale securities recorded in our investments division, and finance costs.

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

Income Tax Expense

For the three months ended September 30, 2022 and 2021 we recorded an income tax
benefit of $367 thousand and zero income tax expense 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.

40
——————————————————————————–

Results of Operations

Comparison of the Nine Months Ended September 30, 2022 and 2021

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

Nine Months Ended September 30,
Percent of Percent of Change from Prior Year
2022 Revenues 2021 Revenues Dollars Percent *
Total revenues $ 80,011 100.0 % $ 77,019 100.0 % $ 2,992 3.9 %
Total cost of revenues 63,450 79.3 % 68,691 89.2 % (5,241) (7.6) %
Gross profit 16,561 20.7 % 8,328 10.8 % 8,233 98.9 %
Total operating expenses 21,805 27.3 % 16,290 21.2 % 5,515 33.9 %
Loss from operations (5,244) (6.6) % (7,962) (10.3) % 2,718 (34.1) %
Total other income (expense) (1,661) (2.1) % 3,476 4.5 % (5,137) (147.8) %
Loss before income taxes (6,905) (8.6) % (4,486) (5.8) % (2,419) 53.9 %
Income tax provision (256) (0.3) % (34) – % (222) 652.9 %
Net loss from continuing
operations (7,161) (9.0) % (4,520) (5.9) % (2,641) 58.4 %
Net income from discontinued
operations – – % 5,955 7.7 % (5,955) (100.0) %
Net income (loss) $ (7,161) (9.0) % $ 1,435 1.9 % $ (8,596) (599.0) %

*Percentage may not add due to rounding

Revenues

Healthcare

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

Nine Months Ended September 30,
2022 2021 Change % Change
Healthcare $ 40,467$ 42,984$ (2,517) (5.9) %
Total Healthcare Revenue $ 40,467$ 42,984$ (2,517) (5.9) %

Healthcare revenue decreased 5.9% compared to the prior year period, primarily
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):

Nine Months Ended September 30,
2022 2021 Change % Change
Construction $ 39,544$ 34,035$ 5,509 16.2 %
Total Construction Revenue $ 39,544$ 34,035$ 5,509 16.2 %

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 approximately $9 million.

41
——————————————————————————–

Gross Profit

Healthcare Gross Profit

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

Nine Months Ended September 30,
2022 2021 Change % Change
Healthcare gross profit $ 9,579$ 9,263$ 316 3.4 %
Healthcare gross margin 23.7 % 21.5 %

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):

Nine Months Ended September 30,
2022 2021 Change % Change
Construction gross profit (loss) $ 7,203$ (759)$ 7,962 1,049.0 %
Construction gross margin 18.2 % (2.2) %

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 strong
despite economic headwinds.

Operating Expenses

Operating expenses are summarized as follows (in thousands):

Nine Months Ended September 30, Percent of Revenues
Change
2022 2021 Dollars Percent 2022 2021
Selling, general and
administrative expenses $ 20,515$ 15,839$ 4,676 29.5 % 25.6 % 20.6 %
Amortization of intangible
assets 1,290 1,298 (8) (0.6) % 1.6 % 1.7 %
Gain on sale of MD Office
Solutions – (847) 847 (100.0) % – % (1.1) %
Total operating expenses $ 21,805$ 16,290$ 5,515 33.9 % 27.2 % 21.2 %

On a consolidated basis, there was a $4.7 million increase in sales, general and
administrative expenses. Two major drivers of the increase in SG&A were a $3
million increase in legal expenses and a $0.7 million increase in severance and
retention costs, both attributed to our healthcare segment. We also had a $0.8
million increase at the corporate level related to corporate finance costs. As a
percentage of revenue, SG&A increased to 25.6%, versus 20.6% 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 Income (expense) is summarized as follows (in thousands):

Nine Months Ended September 30,
2022 2021
Other income (expense), net $ (997) $ 4,208
Interest expense, net (664) (732)

Total other income (expense) $ (1,661) $ 3,476

Other income, net for nine months ended September 30, 2022 is predominantly
comprised of gains and losses from equity securities and sales of assets,
whereas the nine months ended September 30, 2021 comprised of primarily $4.2
million in PPP

42
——————————————————————————–

loan forgiveness from the Healthcare and Construction businesses. As of
September 30, 2022, the Company has no PPP loans outstanding.

Interest expense, net, for the nine months ended September 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 nine months ended September 30, 2022 and 2021, we recorded income tax
expenses of $256 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

Summary Cash Flows

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

Nine

Months Ended September 30,

2022 2021
Net cash provided by (used in) operating activities $ (234) $ (8,176)
Net cash provided by (used in) investing activities $ (4,982) $ 17,794
Net cash provided by (used in) financing activities $

9,749 $ (7,317)

Cash Flows from Operating Activities

For the nine months ended September 30, 2022, net cash used in operating
activities was $0.2 million, as compared to $8.2 million in net cash used in
operating activities in 2021. The decrease in net cash used in operating
activities is attributable to better operating performance, particularly at our
Construction Division. In 2021 consolidated net income included non-cash items
related to the gain on sale of our DMS Health Technologies, Inc. (“DMS Health”)
and MD Office Solutions businesses, and PPP loan forgiveness.

Cash Flows from Investing Activities

For the nine months ended September 30, 2022, net cash used in investing
activities was $5.0 million, which principally consists of $4.0 million in
purchases of equity securities as we expanded our Investments Division. In 2021,
net cash provided by investing activities was $17.8 million, which was primarily
attributable to the proceeds we received from the sale of DMS for $18.75
million.

Cash Flows from Financing Activities

For the nine months ended September 30, 2022, net cash provided by financing
activities was $9.7 million, as compared to net cash used in financing
activities of $7.3 million in 2021. The increase in cash provided by financing
activities was primarily due to net proceeds of $12.7 million raised in our 2022
public equity offering.

Sources of Liquidity

Our principal sources of liquidity are our existing cash and cash equivalents,
cash generated from operations, cash available 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
financings. As of September 30, 2022, we had $8.5 million of cash and cash
equivalents. The eCapital facilities directly support our Construction
businesses. As of September 30, 2022, we have additional borrowing capacity
of $0.2 million and $0.9 million outstanding on the KBS revolver. We were at
$2.6 million outstanding balance and were fully drawn in terms of available
capacity on the EBGL revolver. We were at $7.5 million outstanding balance and
an additional borrowing capacity of $0.6 million on the Webster credit facility.
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

43
——————————————————————————–

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 $1.9 million and $7.2 million for the three and nine months ended
September 30, 2022, respectively, and $2.1 million and $4.5 million for the
three and nine months ended September 30, 2021, respectively. We have an
accumulated deficit of $135.1 million and $128.0 million as of September 30,
2022 and December 31, 2021, respectively. As of September 30, 2022, cash and
cash equivalents increased to $8.5 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 September 30, 2022, we had approximately $11.9 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 $7.5 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 September 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 nine months ended
September 30, 2022, our current balance of cash and cash equivalents of
$8.5 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
November 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.

As of September 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 September 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.

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

44
——————————————————————————–

Webster Credit Facility

We have a $20.0 million credit facility with Webster, which matures in March
2024. As of September 30, 2022, the Company had $0.1 million of letters of
credit outstanding and had additional borrowing capacity of $0.6 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
September 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 September 30, 2022,
EBGL was fully drawn in terms of available borrowing capacity is available under
the facility. As of September 30, 2022, $2.6 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 the
bi-annual 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 September 30, 2022, KBS had additional borrowing capacity of $0.2
million under the facility. As of September 30, 2022, $0.9 million 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 September 30, 2022, the short term loan
includes $0.9 million of the Star Loan, net of issuance costs.

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 annual 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 December 31, 2021, no event of default was deemed to have
occurred and the Star Borrowers were in compliance with the annual financial
covenants under the Star Loan Agreement measured as of December 31, 2021.

Paycheck Protection Program

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

As of September 30, 2022, there were no off balance sheet arrangements.

45

——————————————————————————–

© Edgar Online, source Glimpses