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STAR EQUITY HOLDINGS, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (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, 2020, which were included
in our Form 10-K, filed with the SEC on March 29, 2021.
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, known prior to January 1, 2021 as Digirad Corporation, has operated
as a multi-industry holding company since the acquisition of ATRM in September
2019. With that merger, we added two construction businesses to what had
historically 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, provides products and
services in the area of nuclear medical imaging with a focus on cardiac health.
Digirad Health operates across the U.S. The healthcare business involves two
reporting segments, Diagnostic Services, which offers imaging services to
healthcare providers using a fleet of our proprietary solid-state gamma cameras
and Diagnostic Imaging, which manufactures, distributes and maintains our
proprietary solid-state gamma cameras.

Our Construction division is a single reporting segment but is made up of three
operating business, KBS, EdgeBuilder and Glenbrook. KBS is based in Maine and
manufactures modular buildings for installation throughout the New England
market. EdgeBuilder and Glenbrook, referred to together as "EBGL" internally and
based in the Minneapolis-Saint Paul area, together manufacture and deliver
structural wall panels and other engineered wood-based products as well as
distribute building materials to professional builder customers in the Upper
Midwest.

Currently, our Investments division is an internally-focused unit that is
directly supervised by Star Equity management and is primarily responsible for
the management of our real estate and investments, which currently includes our
three manufacturing facilities in Maine that are leased to KBS.
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,
management of our real estate and investments, and other public company
activities. Our structure will free up our operating Chief Executive Officers to
manage their respective businesses, improve operations, and look for organic and
bolt-on growth opportunities, with fewer distractions and less administrative
burden.

We continue to explore strategic alternatives to improve the market position and
profitability of our product offerings in the marketplace, generate additional
liquidity, and enhance our valuation. We may pursue our goals through organic
growth or through strategic transactions. Some of these strategic transactions
have included, and could continue to include, selective acquisitions of business
segments or entire businesses, divestitures of assets or divisions, or a
restructuring of our company.

We seek to grow our business by, among other things:
•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.
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•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. 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 by adding a structural wall panel line. Other areas might include
logistics, installation on site, and manufacturing of sub-components or
enhancements that create even more complete modules, such as full HVAC
installation.
•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 targets that can be acquired over time and integrated into
our platform. We will also look at larger, more transformational acquisitions
(public or private) if we believe the appropriate mix of value, risk and return
is present for our shareholders. The timing of these potential acquisitions will
always depend on market conditions, available capital, and the value for each
transaction. 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
shareholders.

Current Market Conditions
Since the second quarter of 2020, navigating the COVID-19 pandemic has proved to
be challenging year for the vast majority of businesses across many sectors of
the economy. As the vaccine rollout expanded through the second quarter of this
year, we have seen our businesses return substantially to pre-COVID levels. We
believe the uncertainty surrounding the pandemic will continue to decrease as we
progress through the fourth quarter of 2021. On the healthcare side, we see
imaging volume stabilize at pre-pandemic levels. In construction, we expect that
continued recovery in employment and a strong housing market will underpin a
period of secular growth.
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, have a need
for cardiac event monitoring, or have interest in purchasing a diagnostic
imaging products. Our diagnostic services businesses currently operate in
approximately 25 states. The overriding challenge during 2020 was the drop in
imaging volume due to the COVID-19 pandemic. During the nine months ended
September 30, 2021, we have seen a return to a more normal pre-COVID volume of
imaging.
The target market for our construction division includes residential home
builders, general contractors, owners or developers of commercial buildings, and
individual retail customers. While housing demand and home improvement activity
continues to be very strong, this demand and supply disruptions resulting from
the COVID-19 pandemic caused a historic increase in the price of building
materials during second half of 2020 and through the second quarter of 2021.
While revenues have tracked the robust activity in the housing sector, our
bottom line has been impacted by this rapid price increase in materials. As the
third quarter 2021 came to a close, prices continue to decline and are
significantly lower than at the peak. We believe this will bode well for the
fourth quarter of 2021 as our pricing levels have increased due to adjustments
made in the first half of 2021.
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.
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COVID-19 Pandemic
We continued to recover from the economic effects of the COVID-19 pandemic and
made our way back to pre-COVID-19 levels of business activity. During the three
and nine months ended September 30, 2021, we had a $2.0 million and $7.1 million
increase in Healthcare division revenue, respectively and a $5.5 million and
$15.0 million increase, respectively, in Construction division revenue, as
compared to the same period of the prior year. The Healthcare division continued
to rebound to more normal levels versus the third quarter of last year with
revenue increasing 16.1%. Our Construction division grew revenue by 64.5% due to
increased output at both KBS and EBGL coupled with pricing increases associated
with higher raw materials costs. The current COVID-19 pandemic, which is
impacting worldwide economic activity, poses the risk that the Company or its
employees, contractors, suppliers, and other partners may be prevented from
conducting business activities for an indefinite period of time, including due
to shutdowns that may be requested or mandated by governmental authorities. The
extent to which the COVID-19 pandemic will impact the Company's business will
depend on future developments that are highly uncertain and cannot be predicted
at this time.
Discontinued Operations
The DMS Sale Transaction was completed on March 31, 2021, for $18.75 million in
cash, subject to certain adjustments, including a working capital adjustment.
The divestiture of DMS Health, which operated our Mobile Healthcare segment, met
the definition of a strategic shift that has a significant effect on our
operations and financial results; therefore, the results of operations for the
Mobile Healthcare segment have been presented as discontinued operations in
accordance with ASC 205-20, Presentation of Financial Statements-Discontinued
Operations for all periods presented. Additionally, Mobile Healthcare's assets
and liabilities as of December 31, 2020 are separately presented as held for
sale on the unaudited consolidated balance sheet. Unless otherwise noted,
discussion within these notes to the unaudited consolidated financial statements
relates to continuing operations.
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. We begin 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 September
30, 2021, we performed qualitative trigger events analysis and concluded that if
we are not able to achieve projected performance levels, future impairments
could be possible, which could negatively impact our earnings.
Business Segments
As of September 30, 2021, our business is organized into four reportable
segments:
•Diagnostic Services
•Diagnostic Imaging
•Construction
•Investments
Diagnostic Services
Through this segment, 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.
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Diagnostic Imaging
Through this segment, 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 Diagnostic Imaging 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 SNB Credit Facility. Since that time, we have secured a
new facility from Gerber 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 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.
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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 balance
sheet. 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, 2020 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, 2021 and 2020
The following table summarizes our results for the three months ended September
30, 2021 and 2020 (in thousands):
                                                                                          Three Months Ended September 30,
                                                                      Percent of                                 Percent of                   Change from Prior Year
                                                2021                    Revenues               2020                Revenues               Dollars              Percent *
Total revenues                           $    28,859                         100.0  %       $ 21,318                    100.0  %       $     7,541                   35.4  %
Total cost of revenues                        25,112                          87.0  %         17,638                     82.7  %             7,474                   42.4  %
Gross profit                                   3,747                          13.0  %          3,680                     17.3  %                67                    1.8  %
Total operating expenses                       5,631                          19.5  %          5,089                     23.9  %               542                   10.7  %
Loss from operations                          (1,884)                         (6.5) %         (1,409)                    (6.6) %              (475)                  33.7  %
Total other expense                             (257)                         (0.9) %           (174)                    (0.8) %               (83)                  47.7  %
Loss before income taxes                      (2,141)                         (7.4) %         (1,583)                    (7.4) %              (558)                  35.2  %
Income tax expense                                 -                             -  %            (11)                    (0.1) %                11                 (100.0) %
Net loss from continuing
operations                                    (2,141)                         (7.4) %         (1,594)                    (7.5) %              (547)                  34.3  %
Net loss from discontinued
operations                                         -                             -  %           (166)                    (0.8) %               166                 (100.0) %
Net loss                                 $    (2,141)                         (7.4) %       $ (1,760)                    (8.3) %       $      (381)                  21.6  %


*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):
                                             Three Months Ended September 30,
                                       2021                2020        Change       % Change
Diagnostic Services           $     11,098              $ 10,711      $   387          3.6  %

Diagnostic Imaging                   3,709                 2,048        1,661         81.1  %
Total Healthcare Revenue      $     14,807              $ 12,759      $ 2,048         16.1  %



Diagnostic Services revenue increased 3.6% compared to the prior year quarter
due to an increase in revenue from several large select contracts. This business
has recovered from COVID-19 and is now performing at pre-pandemic levels. Most
doctor offices have reopened and hospitals are now performing non-emergency
procedures.
The increase in Diagnostic Imaging is due to higher number of cameras sold
compared to the prior year quarter.
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Construction

Construction turnover can be summarized as follows (in thousands):

                                          Three Months Ended September 30,
                                    2021                2020        Change       % Change
Construction               $     14,052               $ 8,542      $ 5,510         64.5  %
Construction Revenue       $     14,052               $ 8,542      $ 5,510         64.5  %


The increase in revenues of the Construction division is mainly due to higher production levels and higher prices in the residential and commercial projects of the KBS and EBGL activities.

Investments

Investment income is summarized as follows (in thousands):

                                           Three Months Ended September 30,
                                       2021                  2020      Change      % Change
Investments                $      -                         $ 17      $  (17)      (100.0) %

Investments Revenue        $      -                         $ 17      $  (17)      (100.0) %


The decrease in investments revenue was due to the wind down of investment
vehicles from Lone Star Value Management, LLC ("LSVM").
Gross Profit
Healthcare Gross Profit
Healthcare gross profit and gross margin by segments is summarized as follows
(in thousands):
                                                                           

Three months ended September 30,

                                                                    2021                 2020               % Change
Diagnostic Services gross profit                             $        1,923           $  2,076                    (7.4) %
Diagnostic Services gross margin                                       17.3   %           19.4  %

Diagnostic Imaging gross profit                              $        1,333           $    399                   234.1  %
Diagnostic Imaging gross margin                                        35.9   %           19.5  %

Total healthcare gross profit                                $        3,256           $  2,475                    31.6  %
Total healthcare gross margin                                          22.0   %           19.4  %


The decrease in Diagnostic Services gross margin percentage was mainly due to an
increase in raw material costs.
The increase in Diagnostic Imaging gross margin percentage was mainly due to the
increased percentage of high margin new cameras sold for the three months ended
September 30, 2021, 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 September 30,
                                       2021                               2020        % Change
Construction gross profit        $        541                          $ 1,253         (56.8) %
Construction gross margin                 3.8    %                        14.7  %


The decrease in Construction gross profit was predominately due to higher
material costs at KBS and EBGL for large commercial projects. The decrease in
gross margin percentage is due to the adverse impact of a rapid and historic
rise in raw materials costs during the first half of the year. We have
significantly increased prices during 2021 to offset these higher input costs
and expect to see further benefit from these increases on our margins in the
fourth quarter of this year. Our backlog and sales pipeline remain at record
levels.
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Investments Gross Loss
Investments gross loss is summarized as follows (in thousands):
                                                                              Three Months Ended September 30,
                                                                       2021                    2020               % Change

Real Estate and Investments gross loss                       $           (50)               $    (48)                    4.2  %


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 September 30,                                   Percent of Revenues
                                                                                            Change
                                             2021                2020            Dollars             Percent                2021                  2020
Selling, general and
administrative                          $      5,201          $ 4,528          $    673                  14.9  %               18.0  %              21.2  %
Amortization of intangible assets                430              561              (131)                (23.4) %                1.5  %              

2.6%

Total operating expenses                $      5,631          $ 5,089          $    542                  10.7  %               19.5  %              

23.8%


On a consolidated basis, there was a $0.7 million increase in sales, general and
administrative expenses. Most of the increase in SG&A was primarily associated
with a $0.3 million increase in KBS headcount, a $0.3 million increase in
corporate administrative expenses due to headcount and a $0.1 million increase
in IT and outside services fees. However, SG&A as a percentage of revenue
decreased to 18.0% of revenue, versus 21.2% in the prior year periods.
Total Other Income (Expense)
Total other income (expense) is summarized as follows (in thousands):
                                    Three Months Ended September 30,
                                            2021                        2020
Other income, net          $               3                          $  135
Interest expense, net                   (260)                           (309)

Total other expense        $            (257)                         $ (174)


Interest expense, net, for the three months ended September 30, 2021 and 2020
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 September 30, 2021, there were no income tax expense
from continuing operations. See Note 10, Income Taxes, within the notes to our
unaudited consolidated financial statements for further information related to
the income taxes.
Income from Discontinued Operations
See Note 2, Discontinued Operations of the unaudited condensed consolidated
financial statements for information regarding discontinued operations.

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Results of Operations
Comparison of the Nine Months Ended September 30, 2021 and 2020
The following table summarizes our results for the nine months ended September
30, 2021 and 2020 (in thousands):
                                                                                          Nine Months Ended September 30,
                                                                    Percent of                                 Percent of                   Change from Prior Year
                                               2021                   Revenues               2020                Revenues               Dollars              Percent *
Total revenues                           $    77,019                       100.0  %       $ 55,018                    100.0  %       $   22,001                    40.0  %
Total cost of revenues                        68,691                        89.2  %         44,921                     81.6  %           23,770                    52.9  %
Gross profit                                   8,328                        10.8  %         10,097                     18.4  %           (1,769)                  (17.5) %
Total operating expenses                      16,290                        21.2  %         14,757                     26.8  %            1,533                    10.4  %
Loss from operations                          (7,962)                      (10.3) %         (4,660)                    (8.4) %           (3,302)                   70.9  %
Total other expense                            3,476                         4.5  %            (41)                    (0.1) %            3,517                (8,578.0) %
Loss before income taxes                      (4,486)                       (5.7) %         (4,701)                    (8.5) %              215                    (4.6) %
Income tax expense                               (34)                          -  %            (72)                    (0.1) %               38                   (52.8) %
Net loss from continuing
operations                                    (4,520)                       (5.9) %         (4,773)                    (8.6) %              253                    (5.3) %
Net income (loss) from
discontinued operations                        5,955                         7.7  %         (1,227)                    (2.2) %            7,182                  (585.3) %
Net income (loss)                        $     1,435                         2.0  %       $ (6,000)                   (10.8) %       $    7,435                  (123.9) %


*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):
                                             Nine Months Ended September 30,
                                      2021                2020        Change       % Change
Diagnostic Services           $     33,080             $ 28,665      $ 4,415         15.4  %
Diagnostic Imaging                   9,904                7,242        2,662         36.8  %
Total Healthcare Revenue      $     42,984             $ 35,907      $ 7,077         19.7  %



Diagnostic Services revenue increased 15.4% compared to prior year quarter. This
business has recovered and is now performing at pre-pandemic levels. Doctor's
offices have reopened and hospitals are now performing non-emergency procedures.
The increase in Diagnostic Imaging is due to higher number of cameras sold
compared to the same period in the prior year.
Construction
Construction revenue is summarized as follows (in thousands):
                                                Nine Months Ended September 30,
                                        2021               2020         Change       % Change
Building and Construction        $    34,035            $ 19,061      $ 14,974         78.6  %
Total Construction Revenue       $    34,035            $ 19,061      $ 14,974         78.6  %

The increase in the turnover of the Construction division is mainly due to a higher number of completed projects and to an increase in prices at KBS and EBGL.

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Real estate and Real Estate Investments and Investment income is summarized as follows (in thousands):

Nine months ended September 30,

                                                            2021             2020            Change            % Change
Real Estate and Investments                              $      -          $   50          $   (50)               (100.0) %
Real Estate and Investments Revenue                      $      -          $   50          $   (50)               (100.0) %


The decrease in investments revenue was due to the wind down of investment
vehicles from LSVM.
Gross Profit
Healthcare Gross Profit
Healthcare gross profit and gross margin by segments is summarized as follows
(in thousands):
                                                     Nine Months Ended September 30,
                                             2021                            2020        % Change
Diagnostic Services gross profit       $       5,923                      $ 5,034          17.7  %
Diagnostic Services gross margin                17.9   %                    

17.6%

Diagnostic Imaging gross profit                3,340                        2,500          33.6  %
Diagnostic Imaging gross margin                 33.7   %                     34.5  %

Total healthcare gross profit          $       9,263                      $ 7,534          22.9  %
Total healthcare gross margin                   21.5   %                     21.0  %



The increase in Diagnostic Services gross margin percentage was mainly due to
increased sales as the business recovered from the COVID-19 pandemic. Our fixed
costs such as employee costs, insurance, workers compensation, rents, utilities,
repairs, and maintenance remained fairly constant.
The decrease in Diagnostic Imaging gross margin percentage was mainly due to
product mix of new and used cameras sold for the nine months ended September 30,
2021, compared to the same period in the prior year.

Construction gross profit (loss) Construction gross profit and margin can be summarized as follows (in thousands):

Nine months ended September 30,

                                                                   2021                2020               % Change
Building and Construction gross (loss) profit                $       (759)          $  2,709                  (128.0) %
Building and Construction gross margin                               (2.2)  %           14.2  %


The decrease in Construction gross profit was predominately due to higher
material costs at KBS and EBGL for large commercial projects. The decrease in
gross margin percentage is due to the adverse impact of a rapid and historic
rise in raw materials costs. We have significantly increased prices during 2021
to offset these higher input costs and expect to see further benefit from these
increases on our margins in the fourth quarter of this year. Our backlog and
sales pipeline remain at record levels.
Real Estate and Investments Gross Profit
Real Estate and Investments gross profit and margin is summarized as follows (in
thousands):
                                                                           

Nine months ended September 30,

                                                                    2021                 2020               % Change
Real Estate and Investments gross loss                       $          (176)         $   (146)                   20.5  %


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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):
                                                            Nine Months Ended September 30,                                    Percent of Revenues
                                                                                            Change
                                            2021                2020            Dollars             Percent                 2021                  2020
Selling, general and
administrative expenses                $     15,839          $ 13,061          $ 2,778                   21.3  %               20.6  %              23.7  %
Amortization of intangible
assets                                        1,298             1,696             (398)                 (23.5) %                1.7  %               3.1  %
Gain on sale of MD Office
Solutions                                      (847)                -             (847)                (100.0) %               (1.1) %                 -  %
Total operating expenses               $     16,290          $ 14,757          $ 1,533                   10.4  %               21.2  %              

26.8%


The $2.8 million increase in sales, general and administrative expenses was
primarily associated with a $1 million increase in KBS as a result of increased
headcount and commissions, a $0.3 million increase in external and internal
auditors review fees, a $0.8 million increase in corporate administrative
department due to headcount and a $0.6 million increase in IT and outside
services fees. However, SG&A as a percentage of revenue decreased from 23.7% to
20.6%, respectively.
On February 1, 2021, we completed the sale of 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):
                                      Nine Months Ended September 30,
                                             2021                         2020
Other income, net          $             4,208                         $    967
Interest expense, net                     (732)                          (1,008)

Total other expense        $             3,476                         $    (41)


Other income, net for nine months ended September 30, 2021 is predominantly
comprised of $4.2 million PPP loan forgiveness from the Diagnostic Services and
Construction business. As of September 30, 2021, the Company has no PPP loans
outstanding.
Interest expense, net, for the nine months ended September 30, 2021 and 2020 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, 2021, we recorded an income tax expense
of $34 thousand. See Note 10, Income Taxes, within the notes to our unaudited
condensed consolidated financial statements for further information related to
the income taxes.
Income from Discontinued Operations
See Note 2, Discontinued Operations of the unaudited condensed consolidated
financial statements for information regarding discontinued operations.
Liquidity and Capital Resources
Overview
We used cash of $8.2 million of cash in operations during the nine months ended
September 30, 2021, predominately from an increase in net working capital. Cash
flow used in operations primarily consist of our overall net income (adjusted
for depreciation, amortization, and other non-cash items), and the net effect of
changes in working capital. Cash flow provided by investing activities from the
DMS Sale Transaction was used primarily for a $9.9 million reduction in debt,
$1.0 million preferred dividend payment and general use in net working capital.
Cash flow from financing activities primarily consisted of our net payments of
borrowings on various revolving facilities and the receipt of cash from the
conversion of cash warrants converted into common stock, offset by the
repayments of finance leases and dividends.
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Our principal sources of liquidity include our existing cash and cash
equivalents, cash generated from operations, and funds available under various
credit facilities and proceeds from sale of DMS Health. As of September 30,
2021, we had $5.7 million of cash, cash equivalents and restricted cash and $1.7
million available under our Sterling revolving line of credit.
We require capital, principally for capital expenditures, acquisition activity,
dividend payments and to finance accounts receivable and inventory. Our working
capital requirements vary from period to period depending on inventory
requirements, the timing of deliveries, and the payment cycles of our customers.
Our capital expenditures consist primarily of medical imaging and diagnostic
devices utilized in the delivery of our services, equipment used for
construction projects, as well as vehicles and information technology hardware
and software.
Regarding our debt, we had approximately $14.0 million in short term debt due to
our borrowings which is classified as short term as disclosed in Note 8. Debt.
The $7.4 million SNB debt primarily supports our healthcare business and matures
in 2024, but GAAP rules require that the outstanding balance be classified as
short-term debt, due to the automatic sweep feature embedded in the traditional
lockbox arrangement along with a subjective acceleration clause in the SNB Loan
and Security Agreement. In practice, we have the ability to immediately borrow
back these daily sweeps to fund our working capital. As of September 30, 2021,
we were in compliance with all borrowing arrangements related to our Healthcare
division. As of September 30, 2021, we had $1.7 million of borrowing capacity to
fund the operations of these divisions.
As of September 30, 2021, we have $5.5 million outstanding on our Construction
revolvers with Gerber and were not in compliance with all bi-annual borrowing
covenants for Gerber, but obtained waivers for the bi-annual measurement period
ended June 30, 2021. While Gerber has historically provided us with waivers,
there is no assurance that we will be able to receive waivers for covenant
violations in the future, or that we will meet compliance with covenants in the
future. We have $1.1 million outstanding on our Star term loan, on which we have
been making timely payments and are in compliance with the borrowing
arrangements. Related party notes of $2.3 million that were outstanding as of
December 31, 2020 were fully paid off on April 1, 2021, using proceeds from the
DMS Sale Transaction. In addition, as of September 30, 2021, we had cash and
cash equivalents of $5.7 million.
The Company is forecasting SNB Loan covenant violations within twelve months
after the date that financial statements are issued. Management believes that
this forecasted violation raises substantial doubt about the Company's ability
to continue as a going concern within twelve months after the date that
financial statements are issued. The Company's financial statements do not
reflect any adjustments that might result from the outcome of this uncertainty.
Management is taking steps to provide the Company with the opportunity to
continue as a going concern, including but not limited to increased pricing,
improvements in operations, and obtaining additional financing. There can be no
assurance that we will be successful in procuring of such efforts. Our abilities
to continue as a going concern maybe dependent on our ability to implement our
plans.
Common Stock Equity Offering
On May 28, 2020, we closed a public offering (the "Offering") of 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 Offering price was
$2.24 per share of common stock and $0.01 per accompanying Warrant (for a
combined Offering price of $2.25), initially raising $5.0 million in gross
proceeds before underwriter discounts and offering-related expenses. The
underwriting agreement (the "Underwriting Agreement") we entered into with Maxim
Group LLC ("Maxim"), as representative of the underwriters, for the Offering
contained customary representations, warranties, and agreements by the Company,
customary conditions to closing, indemnification obligations of the Company and
Maxim and certain other obligations.
Pursuant to the terms of the Underwriting Agreement, we granted to Maxim an
option for a period of 45 days (the "Over-Allotment Option") to purchase up to
225,000 additional shares of our common stock and 225,000 Warrants to purchase
up to an additional 112,500 shares of our common stock. Effective as of the
closing of the Offering, Maxim exercised the Over-Allotment Option for the
purchase of 225,000 Warrants for a price of $0.01 per Warrant. On June 10, 2020,
Maxim exercised the Over-Allotment Option for the purchase of 225,000 shares of
our common stock for a price of $2.24 per share, before underwriting discounts.
The closing of the sale of the over-allotment shares brought the total number of
shares of common stock we sold in the Offering to 2,450,000 shares, and total
gross proceeds to approximately $5.5 million. In addition, the Company received
$2.2 million million from investors in the Offering throughout the balance of
September 30, 2021, due to the exercise of a portion of the Warrants sold in the
Offering, bringing the total gross proceeds from equity issuance to $7.7
million. .

The net proceeds to the Company from the Offering and Warrant exercises in 2020
were approximately $5.2 million (inclusive of the exercise of the over-allotment
option), after deducting underwriter fees and offering-related expenses
estimated at $0.8 million. We used a significant portion of the net proceeds
from the Offering to fund working capital needs at our construction businesses,
particularly related to modular housing projects which we produced at KBS
Builders, Inc. ("KBS") for the Boston-area projects. The remainder of the net
proceeds is being used for working capital and for other general corporate
purposes. We have broad discretion in determining how the proceeds of the
Offering is used, and our discretion is not limited by the aforementioned
possible uses.
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As of September 30, 2021, 1.0 million warrants were exercised and 1.5 million
warrants remained outstanding at an exercise price of $2.25.
Cash Flows
The following table shows cash flow information for the nine months ended
September 30, 2021 and 2020 (in thousands):
                                                                     Nine 

Ended months September 30,

                                                                        2021                    2020
Net cash used in operating activities                            $         (8,176)         $    (1,880)
Net cash provided by (used in) investing activities              $         17,794          $      (490)
Net cash (used in) provided by financing activities              $         

(7,317) $ 4,745


Operating Activities
The increase in cash used compared to the prior year period was primarily due to
operating losses due to increased material prices in the Construction division.
Investing Activities
The increase in investing activities positive cash flow compared to the prior
year period was primarily attributable to $18.75 million proceeds received from
DMS Health disposition.
Financing Activities
The decrease in cash flow from financing activities is primarily due to a
$7.9 million pay down of the SNB Credit Facility, $2.3 million pay down of the
ATRM Promissory Notes, and $0.7 million pay down of the EBGL Premier Note,
$1.0 million pay down of preferred stock dividends, using the proceeds from the
sale of the DMS Health business.
Sterling Credit Facility
On March 29, 2019, the Company entered into a Loan and Security Agreement (the
"SNB Loan Agreement") by and among certain subsidiaries of the Company, as
borrowers (collectively, the "SNB Borrowers"); the Company, as guarantor; and
Sterling National Bank, a national banking association, as lender ("Sterling" or
"SNB").
The SNB 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 "SNB
Credit Facility"). Under the SNB Credit Facility, the SNB 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 SNB 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 September 30, 2021, the Company had $0.1 million of letters of credit
outstanding and had additional borrowing capacity of $1.7 million.
At the Borrowers' option, the SNB Credit Facility will bear interest at either
(i) a Floating LIBOR Rate, as defined in the Loan Agreement, plus a margin of
2.50% per annum; or (ii) a Fixed LIBOR Rate, as defined in the Loan Agreement,
plus a margin of 2.25% per annum. As our largest single debt outstanding, our
floating rate on this facility at September 30, 2021 was 2.58%.
The SNB Loan Agreement includes certain representations, warranties of SNB
Borrowers, as well as events of default and certain affirmative and negative
covenants by the SNB Borrowers that are customary for loan agreements of this
type. These covenants include restrictions on borrowings, investments and
dispositions by SNB Borrowers, as well as limitations on the SNB Borrowers'
ability to make certain distributions. Upon the occurrence and during the
continuation of an event of default under the SNB Loan Agreement, SNB may, among
other things, declare the loans and all other obligations under the SNB Loan
Agreement immediately due and payable and increase the interest rate at which
loans and obligations under the SNB Loan Agreement bear interest. The SNB Credit
Facility is secured by a first-priority security interest in substantially all
of the assets of the Company and the SNB Borrowers and a pledge of all shares of
the SNB Borrowers.
On March 29, 2019, in connection with the Company's entry into the SNB Loan
Agreement, Jeffery E. Eberwein, the Executive Chairman of the Company's board of
directors, entered into Limited Guaranty Agreement (the "SNB Eberwein Guaranty")
with SNB pursuant to which he guaranteed the prompt performance of all the
Borrowers' obligations under the SNB Loan Agreement. The SNB Eberwein Guaranty
is limited in the aggregate to the amount of (a) $1.5 million, plus (b)
reasonable costs and expenses of SNB incurred in connection with the SNB
Eberwein Guaranty. Mr. Eberwein's obligations under the SNB Eberwein Guaranty
terminate upon the Company and Borrowers achieving certain milestones set forth
therein.
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On February 1, 2021, in connection with the closing of the Company's sale of MD
Office Solutions, the Company entered into a First Amendment to the SNB Loan
Agreement pursuant to which, among other things, Sterling consented to the sale
of MD Office Solutions and the Company's name change from Digirad Corporation to
Star Equity Holdings, Inc.
On March 31, 2021, in connection with completing the sale of DMS Health, the
Company, certain subsidiaries of the Company, and Sterling entered into a Second
Amendment to the SNB Loan Agreement pursuant to which, among other things,
Sterling consented to the sale of DMS Health and its subsidiaries, removed DMS
Health and its subsidiaries as borrowers under the SNB Loan Agreement, and
required the principle to be paid down to $7.0 million.
At September 30, 2021, the Company was in compliance with the covenants under
the SNB Loan Agreement.
Construction Loan Agreements
As of September 30, 2021, the Construction division had outstanding revolving
lines of credit and term loans of approximately $5.5 million. This debt
includes: (i) $3.5 million principal outstanding on KBS's $4.0 million revolving
credit facility under a Loan and Security Agreement, dated February 23, 2016,
(as amended, the "KBS Loan Agreement"), with Gerber and (ii) $2.0 million
principal outstanding on EBGL's $3.0 million revolving credit facility under a
Revolving Credit Loan Agreement, which was increased from $3.0 million to $4.0
million on July 30, 2021. The Construction division was at the maximum borrowing
capacity under both revolving lines of credit, based on the inventory and
accounts receivable on September 30, 2021 which fluctuates weekly.
KBS Loan Agreement
On February 23, 2016, ATRM, KBS and Main Modular Haulers, Inc. (a former
subsidiary of ATRM) entered into a Loan and Security Agreement, (as amended, the
"KBS Loan Agreement"), with Gerber. The KBS Loan Agreement provides KBS with a
revolving line of credit with borrowing availability of up to $4.0 million.
Availability under the line of credit is based on a formula tied to KBS's
eligible accounts receivable, inventory and other collateral. The KBS Loan
Agreement, which was scheduled to expire on February 22, 2018, has been
automatically extended for successive one (1) year periods in accordance with
its terms and is now scheduled to expire on February 22, 2022. The KBS Loan
Agreement will be automatically extended for another one (1) year period unless
a party thereto provides prior written notice of termination. As of
September 30, 2021 neither party has provided notice of termination. Upon the
final expiration of the term of the KBS Loan Agreement, the outstanding
principal balance is payable in full. Borrowings bear interest at the prime rate
plus 2.75%, equating to 6.00% at September 30, 2021, with interest payable
monthly. The KBS Loan Agreement also provides for certain fees payable to Gerber
during its term, including a 1.5% annual facilities fee and a 0.10% monthly
collateral monitoring fee. KBS's obligations under the KBS Loan Agreement are
secured by all of its assets and are guaranteed by ATRM. Unsecured promissory
notes issued by KBS and ATRM are subordinate to KBS's obligations under the KBS
Loan Agreement. The KBS Loan Agreement contains representations, warranties,
affirmative and negative covenants, defined events of default and other
provisions customary for financings of this type. Financial covenants require
that KBS maintain a maximum leverage ratio (as defined in the KBS Loan
Agreement) and KBS not incur a net annual post-tax loss in any fiscal year
during the term of the KBS Loan Agreement. The borrowings under the KBS Loan
Agreement were classified as short-term obligations under GAAP as the agreement
contained a subjective acceleration clause and required a lockbox arrangement
whereby certain receipts are swept daily to reduce borrowings outstanding. At
September 30, 2021, approximately $3.5 million was outstanding under the KBS
Loan Agreement.
On September 10, 2019, the parties to the KBS Loan Agreement entered into the
twelfth amendment to the KBS Loan Agreement (the "Twelfth KBS Amendment"),
pursuant to which the Company agreed to guarantee amounts borrowed by certain
ATRM's subsidiaries from Gerber.
On January 31, 2020, the Company, ATRM, KBS and Gerber entered into a thirteenth
amendment to the KBS Loan Agreement (the "Thirteenth KBS Amendment") to amend
the terms of the KBS Loan Agreement, in order to, among other things (a) amend
the definitions of "Ancillary Credit Parties," "Guarantor," "Obligations," and
"Subordinated Lender" to address the obligations of the Star Borrowers, the EBGL
Borrowers, the Star Credit Parties, and the EBGL Credit Parties under the Star
Loan Agreement, EBGL Loan Agreement and the Subordination Agreements (each as
defined below) to which they are a party and (b) add a new cross default
provision.
On March 5, 2020, in connection with the First EBGL Amendment, Gerber, KBS, ATRM
and the Company entered into a fourteenth amendment to the KBS Loan Agreement in
order to, among other things consent to the First EBGL Amendment and remove cash
and cash collateral from the borrowing base.
On April 1, 2020, Gerber and KBS entered into a fifteenth amendment to the KBS
Loan Agreement pursuant to which the "Minimum Average Monthly Loan Amount" was
decreased to twenty-five percent (25%) of the Maximum Revolving Amount.
On January 5, 2021, Gerber and KBS entered into a sixteenth amendment to the KBS
Loan Agreement in order to, among other things, amend certain definitions under
the KBS Loan Agreement and to increase the inventory assets against which funds
can be borrowed.
                                       55
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On February 26, 2021 Gerber and KBS entered into a seventeenth amendment to the
KBS Loan Agreement in order to provide the waiver to the 2020 covenant breach
and amended the financial covenants. The financial covenants under the KBS Loan
Agreement, as amended, provide that (i) KBS shall make no distribution,
transfer, payment, advance, or contribution of cash or property which would
constitute a restricted payment as such term is defined in the agreement; (ii)
KBS shall report annual post-tax net income at least equal to (a) $385 thousand
for the trailing 6-month period ending June 30, 2021 and (b) $500 thousand for
the trailing fiscal year end December 31, 2021; and (iii) a minimum EBITDA at
June 30, 2021 of more than $880 thousand or at December 31, 2021 of more than
$1.5 million.
On March 31, 2021, the parties to the KBS Loan Agreement amended the KBS Loan
Agreement to provide for increased availability under the KBS Loan Agreement to
KBS under certain circumstances, including for new equipment additions, and
certain other changes, as well as a waiver of certain covenants.
As of June 30, 2021 and December 31, 2020, KBS was not in compliance with the
bi-annual financial covenants requiring no net annual post-tax income for KBS of
at least $385 thousand, during the nine months ended September 30, 2021. So long
as EBITDA for the year ended December 31, 2021 is at least $1.5 million, KBS may
nevertheless comply with the covenant for the year, but as of June 30, 2021, KBS
was not in compliance with the bi-annual financial requirement requiring EBITDA
to equal at least $880 thousand. The occurrence of any event of default under
the KBS Loan Agreement may result in KBS's obligations under the KBS Loan
Agreement becoming immediately due and payable. Subsequently, we obtained a
waiver from Gerber for these events.
On July 30, 2021 in connection with the Fourth EBGL Amendment, Gerber, KBS, ATRM
and the Company entered into an eighteenth amendment to the KBS Loan Agreement
in order to, among other things, (a) confirm the cancellation of certain
subordination agreements with Lone Star Value Management, LLC ("LSVM") and Lone
Star Value Co-Invest I, LP ("LSV Co-Invest I"), after the LSVM Note and LSV
Co-Invest June Note and January Note were paid by the Company, (b) amend the
terms of the KBS Loan Agreement, including the definitions of "Ancillary and
"Subordinated Lender" to include SRE and remove LSVM and LSV Co-Invest I, and
(c) add confirm certain cross-default provisions
EBGL Premier Note
On June 30, 2017, EdgeBuilder and Glenbrook (together, EBGL) entered into a
Revolving Credit Loan Agreement (as amended, the "Premier Loan Agreement") with
Premier providing EBGL with a working capital line of credit of up to
$3.0 million. The Premier Loan Agreement replaced the prior revolving credit
facility.
Availability under the Premier Loan Agreement is based on a formula tied to
EBGL's eligible accounts receivable, inventory and equipment, and borrowings
bear interest at the prime rate plus 1.50%, with interest payable monthly and
the outstanding principal balance payable upon expiration of the term of the
Premier Loan Agreement. The Premier Loan Agreement also provides for certain
fees payable to Premier during its term. The initial term of the Premier Loan
Agreement was scheduled to expire on June 30, 2018, but was extended multiple
times by Premier until January 31, 2023. EBGL's obligations under the Premier
Loan Agreement are secured by all of their inventory, equipment, accounts and
other intangibles, fixtures and all proceeds of the foregoing.
On January 31, 2020, Glenbrook and EdgeBuilder entered into an Extension and
Modification Agreement (the "Modification Agreement") with Premier that modified
the terms of the Revolving Credit Promissory Note made by Glenbrook and
EdgeBuilder. The Modification Agreement reduced the outstanding borrowings to
$1.0 million, extended the final maturity date to January 31, 2023, and set the
interest rate to at 5.75% per annum. Mr. Eberwein executed a guaranty in favor
of Premier, which had been extended through January 1, 2023, under which ATRM
and Mr. Eberwein absolutely and unconditionally guaranteed all of EBGL's
obligations under the Premier Loan Agreement.
All obligations under the Premier Loan Agreement have been repaid in full in
second quarter and no amount remains outstanding as of September 30, 2021. In
exchange Premier terminated all of its security interests in the assets of EBGL.

                                       56
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Gerber Star and EBGL Loans
On January 31, 2020, SRE, 947 Waterford Road, LLC ("947 Waterford"), 300 Park
Street, LLC ("300 Park"), and 56 Mechanic Falls Road, LLC ("56 Mechanic" and
together with SRE, 947 Waterford, and 300 Park, (the "Star Borrowers"), each an
Investments Subsidiary, and the Company, ATRM, KBS, EdgeBuilder, and Glenbrook
(collectively, the "Star Credit Parties"), entered into a Loan and Security
Agreement (as amended, the "Star Loan Agreement") with Gerber providing the Star
Borrowers with a credit facility with borrowing availability of up to
$2.5 million ($2.0 million and $0.5 million to KBS and EBGL, respectively) (the
"Star Loan"). The advance of $2.0 million to KBS is to be repaid in monthly
installments of sixty (60) consecutive equal payments. The advance of
$0.5 million to EBGL, which has been temporarily increased by $0.3 million due
to be repaid on April 30, 2020, is to be repaid in monthly installments of
twelve (12) consecutive equal payments. On February 20, 2020, the Star Borrowers
entered into a first amendment to the Star Loan Agreement (the "First Star
Amendment") in order to (i) temporarily advance $0.3 million to EBGL, which
amount is to be repaid to Gerber on or before April 30, 2020; (ii) clarify that
Gerber can make multiple advances under the Star Loan Agreement, and (iii) to
correct the maturity date of the Star Loan. On April 30, 2020, the Star
Borrowers entered into a second amendment to the Star Loan Agreement (the
"Second Star Amendment") to change terms of repayment for the advance of
$0.3 million to EBGL to provide for repayment in three consecutive equal monthly
installments, commencing on May 30, 2020, with a final installment on or before
July 31, 2020. EBGL paid off approximately $0.5 million of the advance in 2020
and $1.1 million was outstanding, net with deferred financing costs, under the
Star Loan Agreement as of September 30, 2021.

On January 31, 2020, EdgeBuilder and Glenbrook (the "EBGL Borrowers"), each a
Construction subsidiary, and the Company, Star, 947 Waterford, 300 Park, 56
Mechanic, ATRM, and KBS (collectively, the "EBGL Credit Parties"), entered into
a Loan and Security Agreement (the "EBGL Loan Agreement") with Gerber providing
the EBGL Borrowers with a credit facility with borrowing availability of up to
$3.0 million (the "EBGL Loan"). On March 5, 2020, the EBGL Borrowers entered
into a first amendment to the EBGL Loan Agreement (the "First EBGL Amendment")
with Gerber that amended the EBGL Loan Agreement and the KBS Loan Agreement to
include a pledge $0.3 million of cash collateral by LSVI under the EBGL Loan
Agreement which, prior to the First EBGL Amendment, was pledged by LSVI in
connection with the KBS Loan Agreement. On July 1, 2020, the EBGL Borrowers
entered into a second amendment to the EBGL Loan Agreement to terminate the
pledge of $0.3 million in cash collateral. On February 26, 2021, the EBGL
Borrowers entered into a third amendment to the EBGL Loan Agreement (the "Third
EBGL Amendment") pursuant to which the Company and Gerber agreed to, among other
things, eliminate the minimum leverage ratio covenant, lower the minimum EBITDA,
and require the borrowers to not incur a net operating loss on bi-annual basis.
The Third EBGL Amendment also discharged the EBGL Eberwein Guaranty described
below. As of September 30, 2021, approximately $2.0 million was outstanding
under the EBGL Loan Agreement.
Availability under the Star Loan Agreement is based on a formula tied to the
value of real estate owned by the Star Borrowers, and borrowings bear interest
at the prime rate plus 3.5% per annum. Availability under the EBGL Loan
Agreement is based on a formula tied to the EBGL Borrowers' eligible accounts
receivable and inventory, and borrowings bear interest at the prime rate plus
2.75% per annum. The Loan Agreements also provide for certain fees payable to
Gerber during their respective terms. The Star Loan matures on the earlier of
(a) January 1, 2025 or (b) the termination, the maturity or repayment of the
EBGL Loan. The EBGL Loan matures on the earlier of (a) January 1, 2022, unless
extended, or (b) the termination, the maturity or repayment of the Star Loan.
The maturity of the EBGL Loan is automatically extended for successive periods
of one (1) year each unless terminated by Gerber or the EBGL Borrowers. The
borrowings under the EBGL 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 are swept daily
to reduce borrowings outstanding.

                                       57
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The obligations of the EBGL Borrowers under the EBGL Loan Agreement are
guaranteed by the EBGL Credit Parties and are secured by substantially all the
assets of the EBGL Borrowers and the EBGL Credit Parties. The obligations of the
Star Borrowers under the Star Loan Agreement are guaranteed by the Star Credit
Parties and are secured by substantially all the assets of the Star Borrowers
and the Star Credit Parties. Contemporaneously with the execution and delivery
of the Star Loan Agreement, Jeffrey E. Eberwein, the Executive Chairman of the
Company's board of directors, executed and delivered a Guaranty (the "Gerber
Eberwein Guaranty") to Gerber pursuant to which he guaranteed the performance of
all the Star Borrowers' obligations to Gerber under the Star Loan Agreement,
including the full payment of all indebtedness owing by the Star Borrowers to
Gerber under or in connection with the Star Loan Agreement and related financing
documents. Mr. Eberwein's obligations under the Gerber Eberwein Guaranty are
limited in the aggregate to the amount of (a) $2.5 million, plus (b) costs of
Gerber incidental to the enforcement of the Gerber Eberwein Guaranty or any
guaranteed obligations. On March 5, 2020, contemporaneously with the execution
and delivery of the First EBGL Amendment, Mr. Eberwein, the Executive Chairman
of the Company's board of directors, executed and delivered a Guaranty (the
"EBGL Eberwein Guaranty") to Gerber pursuant to which he guaranteed the
performance of all the EBGL Borrowers' obligations to Gerber under the EBGL Loan
Agreement, including the full payment of all indebtedness owing by the EBGL
Borrowers to Gerber under or in connection with the EBGL Loan Agreement and
related financing documents. Mr. Eberwein's obligations under the EBGL Eberwein
Guaranty are limited in the aggregate to the amount of (a) $0.5 million, plus
(b) costs of Gerber incidental to the enforcement of the EBGL Eberwein Guaranty
or any guaranteed obligations.
On February 26, 2021, the Star Borrowers entered into a third amendment to the
Star Loan Agreement (the "Third Star Amendment") with Gerber that, among other
things, amended the contract rate to prime rate plus 3% and discharged the
$2.5 million Gerber Eberwein Guaranty.
On July 30, 2021, the Star Borrowers entered into a fourth amendment to the Star
Loan Agreement (the "Fourth Star Amendment") with Gerber that, among other
things, amended the terms of the Star Loan Agreement, in order to, among other
things amend the definitions of (a) "Inventory" to increase the eligible
inventory against which Gerber will advance credit, (b) "Maximum Revolving
Amount" to increase the line of credit from $3.0 million to $4.0 million, (c)
"Note" to mean the $4.0 million promissory note between Gerber and EBGL, and (d)
"Subordinated Lender" to include only Star Procurement, Inc., ATRM, and the
Company.
The Star Loan Agreement and EBGL Loan Agreement contain representations,
warranties, affirmative and negative covenants, events of default and other
provisions customary for financings of this type. The financial covenants under
the EBGL Loan Agreement applicable to the EBGL Borrowers include maintenance of
a minimum tangible net worth, a minimum debt service coverage ratio and minimum
net income. The Financial covenants under the Star Loan Agreement applicable to
the Star Borrowers include a minimum debt service coverage ratio. The occurrence
of any event of default under the Loan Agreements may result in the obligations
of the Borrowers becoming immediately due and payable. As of June 30, 2021, EBGL
was not in compliance with the bi-annual financial covenants under the Star Loan
Agreement and EBGL Loan Agreement. The occurrence of any event of default under
the EBGL Loan Agreement may result in EBGL's obligations under the EBGL Loan
Agreement becoming immediately due and payable. In July, 2021, we obtained a
waiver from Gerber for these events and, as part of the Fourth EBGL Amendment
(described above).
As a condition to the extension of credit to the Star Borrowers and EBGL
Borrowers under the Star Loan Agreement and EBGL Loan Agreement, the holders of
certain existing unsecured promissory notes made by ATRM and certain of its
subsidiaries entered into subordination agreements (the "Subordination
Agreements") with Gerber pursuant to which such noteholders (including the
Company and certain of its subsidiaries) agreed to subordinate the obligations
of ATRM and its subsidiaries to such noteholders to the obligations of the Star
Borrowers and EBGL Borrowers to Gerber under the loan agreements.
On October 21, 2021, the Star Borrowers entered into the fifth amendment to the
Star Loan Agreement (the "Fifth Star Amendment") with Gerber to amend the
definition of "Reserves" to include a minimum amount, subsequent to Glenbrook
Building Supply, Inc. entering a new lease for a larger property.
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.
The PPP was established under the Coronavirus Aid, Relief, and Economic Security
Act (the "CARES Act") and is administered by the U.S. Small Business
Administration ("SBA"). PPP loans for the Construction and Healthcare division
were made through Bremer Bank and Sterling as lenders, respectively.
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The PPP loans have two-year terms and bear interest at a rate of 1.00% per
annum. Monthly principal and interest payments under the PPP loans are deferred
for ten months, after the end of covered periods. The PPP loans may be prepaid
at any time prior to maturity with no prepayment penalties.
The promissory notes issued in connection with the PPP loans (the "PPP Notes")
contain customary events of default relating to, among other things, payment
defaults, making materially false and misleading representations to the SBA or
lender, or breaching the terms of the applicable PPP loan documents. Upon an
event of default under a PPP Note, the lender thereunder may, among other
things, require immediate payment of all amounts owing under the applicable PPP
Note, collect all amounts owing from the applicable borrower, or file suit and
obtain judgment.
Under the terms of the CARES Act, recipients of loans under the PPP can apply
for and be granted forgiveness for all or a portion of the loan granted under
the PPP. Such forgiveness is determined, subject to limitations, based on the
use of loan proceeds for payment of payroll costs and certain other eligible
costs. Even if forgiveness is granted the PPP loans may remain subject to review
and audit for up to six (6) years.
During Q4 2020 and January 2021, the Company applied for forgiveness on all PPP
loans. As of Q4 2020, $2.5 million of the Healthcare division PPP Notes were
forgiven. During Q2, 2021, all amounts under the Construction division and
Healthcare division PPP Notes were forgiven. As of September 30, 2021, the
Company has no PPP loans outstanding.
Off-Balance Sheet Arrangements
On September 10, 2019, the parties to the KBS Loan Agreement entered into the
Twelfth KBS Amendment pursuant to which the Company agreed to guarantee amounts
borrowed by certain of ATRM's subsidiaries from Gerber. The Twelfth KBS
Amendment requires the Company to serve as an additional guarantor with the
existing guarantor, ATRM, with respect to the payment, performance and discharge
of each and every obligation of payment and performance by the borrowing
subsidiaries with respect to the loans made by Gerber to them. On January 31,
2020, the Company, ATRM, KBS and Gerber entered into the Thirteenth KBS
Amendment, in order to, among other things (a) amend the definitions of
"Ancillary Credit Parties," "Guarantor," "Obligations," and "Subordinated
Lender" to address the obligations of the Star Borrowers, the EBGL Borrowers,
the Star Credit Parties, and the EBGL Credit Parties under the Star Loan
Agreement, the EBGL Loan Agreement and the Subordination Agreements to which
they are a party and (b) add a new cross default provision. On April 1, 2020,
Gerber and KBS entered into a Fifteenth KBS Amendment pursuant to which the
"Minimum Average Monthly Loan Amount" under the KBS Loan Agreement was decreased
to twenty-five percent (25%) of the Maximum Revolving Amount (as defined in the
KBS Loan Agreement). See Note 8, Debt, within the notes to our unaudited
consolidated financial statements for further detail.

On June 5, 2020, the Company entered into a Guaranty Agreement (the "Tocci
Guaranty") with Tocci Building Corporation ("Tocci") pursuant to which the
Company irrevocably guaranteed all the obligations of KBS under a certain
Subcontract Agreement by and between Tocci and KBS in the event of a material
breach by KBS under the Subcontract. The Company's liability under the Tocci
Guaranty is limited to $2.0 million.

On October 12, 2021, the Company entered into a Guaranty Agreement (the "IHT
Guaranty") to guarantee the obligations of KBS to Cape Built Construction, under
the Subcontract in the event of a material breach by KBS up to $2.3 million with
such amount decreasing as product deliveries occur.

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