Greetings, ladies and gentlemen and welcome to Star Equity Holdings Third Quarter 2022 Results Conference Call. Please be advised that the discussions on today’s call may include forward-looking statements.

Such forward-looking statements involve certain risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements.

Please refer to Star Equity’s most recent 10-K and 10-Q filings and also third quarter 10-Q, which we expect to file on Monday, November 14, 2022 for a more complete description of risk factors that could affect these projections and assumptions.

The company assumes no obligation to update forward-looking statements as a result of new information, future events or otherwise.

Please also note that on this call, management will reference non-GAAP financial measures, including EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share, which are all financial measures not recognized under U.S. GAAP.

As required by SEC rules and regulations, these non-GAAP financial measures are reconciled to their most comparable GAAP financial measures in our earnings release issued this morning.

If you did not receive a copy of the earnings release and would like one after the call, please contact Star Equity at 203-489-9500 or its Investor Relations representative, Lena Cati of the Equity Group at 212-836-9611. Also, this call is being broadcast live over the Internet and maybe accessed at Star Equity’s website via www.starequity.com.

Shortly after the call, a replay will also be available on the company’s website. It is now my pleasure to introduce Rick Coleman, Chief Executive Officer of Star Equity. Please go ahead, sir..

Thank you, Maria. Good morning and thanks for joining us today for our third quarter 2022 results conference call. On the call with me today are Executive Chairman, Jeff Eberwein; and Chief Financial Officer, Dave Noble. I am pleased to report significant progress in both our Construction and Healthcare businesses this quarter.

On a consolidated basis, despite an overall 16% decrease in revenue, we grew gross profit by 54.8% versus the third quarter of last year. Gross profit was driven predominantly by substantially increased profitability at our Construction division and strong operating discipline in our Healthcare division.

Our Healthcare division revenue decreased by 11.3% compared to the third quarter of last year, and gross margin decreased by 1 percentage point to 20.7%. Both results were primarily impacted by the continued effect of labor market tightness on our scanning service utilization.

Late in the quarter, we began to see modest improvement in the availability of nuclear medicine technologist applicants which we are hopeful will continue to provide staffing relief and allow more patient study hours.

Despite the labor-driven reduction in our activity, our Healthcare division delivered $1 million of adjusted EBITDA in the quarter due to strong cost controls and organizational improvements from our second quarter restructuring.

Our Construction division revenue decreased by 21% due primarily to the timing of revenue recognition on certain projects, which had a positive impact in the prior quarter.

Specifically, contract terms and accelerated performance allowed a higher percentage of revenue for a large New England pilot project to be recognized in the second quarter for a project that was successfully completed in August.

Similar to last quarter, gross margin improved substantially to 28.2% due to increased pricing, improved operations and commodity price risk mitigation.

Despite quarterly variations due to the timing of profit recognition, particularly on large projects, we expect our Construction division to continue performing over time against our 20% gross margin target. Our Q3 results indicate that our geographic and industrial diversification strategy is playing out as expected and showing balanced results.

In Q3, our Construction segment accounted for 45.8% of Star Equity’s consolidated revenue and for the first 9 months of 2022, our Construction segment accounted for 49.4% of total revenue.

Finally, we continue to be optimistic about the overall performance of our operating portfolio and about our ability to identify and integrate future acquisitions either as bolt-ons for existing divisions or entry into a new business sector.

Now, I will turn the call over to our CFO, Dave Noble, to provide more detail on our operating results and provide additional third quarter financial highlights. Dave, please go ahead..

Thank you, Rick and good morning. Let me first address the strong underlying performance of the Healthcare division. As Rick mentioned, revenue was a bit softer due to external conditions in the labor market. While gross margin was 20.7% in Q3 versus 22.0% in Q3 of 2021, year-to-date gross margin is higher than the prior 9-month period at 23.7%.

Excluding the legal costs, mostly for a single large case, non-GAAP adjusted EBITDA for Healthcare was $1.0 million in Q3 versus $1.3 million in Q3 of 2021. For the first 9 months of 2022, non-GAAP adjusted EBITDA for Healthcare was $3.9 million versus $3.0 million in the first 9 months of 2021.

These numbers are segment-level numbers before allocating any public company expenses. Let me next touch on the strong turnaround performance of our Construction division. Q3 construction revenue was $11.1 million versus $14.1 million in Q3 of 2021.

The 21% year-over-year quarterly decrease relates to the timing of revenue recognition for a large KBS project, as Rick mentioned, Additionally, we experienced some project delays at our EdgeBuilder business, but fully expect those projects to have a positive fourth quarter impact. Our year-to-date results and Q4 outlook remained quite strong.

For the first 9 months of 2022, Construction revenues were $39.5 million versus $34.0 million in the first 9 months of 2021. This represents a 16.2% growth in revenues year-to-date. Construction gross margin was 28.2% for a gross profit of $3.1 million in Q3 versus just 3.8% or $0.5 million in the prior year Q3.

For the first 9 months of 2022, Construction gross margin was 18.2% or $7.2 million versus a negative 2.2% or negative $0.8 million in the first 9 months of 2021.

The significant increases in gross margin percentages were due to the increased pricing levels on both residential and commercial projects as well as a better risk management around building materials price volatility. Our construction backlog and sales pipeline both remained strong. Let us now turn to Star Equity’s consolidated results.

In Q3 2022, SG& A increased by 31.9% versus Q3 2021. The increase was driven primarily by the $1. 2 million in one-time litigation costs and secondarily by $0.3 million in severance and retention-related expenses associated with restructuring at Digirad Health.

At the bottom line, Star Equity had a net loss from continuing operations of $1.9 million in Q3 compared to a net loss from continuing operations of $2.1 million in Q3 of 2021. Non-GAAP adjusted net income from continuing operations was a positive $0.8 million in Q3. This compares very favorably to the adjusted net loss of $1.5 million in Q3 of 2021.

Non-GAAP adjusted EBITDA was $1.5 million in Q3 compared to a negative $0.6 million in Q3 of 2021. For the first 9 months of 2022, adjusted EBITDA was $2.9 million versus a negative $4.5 million in the first 9 months of 2021.

This substantial improvement in non-GAAP adjusted EBITDA was driven by a successful operational turnaround in our Construction division where segment non-GAAP adjusted EBITDA swung from a negative $3.9 million in the first month of – first 9 months of 2021 to a positive $3.5 million in the first 9 months of 2022.

These numbers are before allocating any public company expenses. At a consolidated level, net cash used by operating activities in the first 9 months of 2022 was $0.2 million versus net cash used of $8.2 million in the first 9 months of 2021.

As of September 30, 2022, our balance sheet and liquidity remains strong, the combined outstanding balances on our interest-bearing credit facilities was $11.9 million, while cash and cash equivalents on our balance sheet stood at $8.5 million. Now I’ll turn the call back to Rick for some additional comments..

Thanks, Dave. Without going into detail, I want to comment on the litigation Dave mentioned earlier. We strongly believe the litigation was completely without merit.

Our defense against the action contributed over $1 million to this quarter’s expenses, including the settlement of payment, but I’m happy to report that the litigation was dismissed by agreement on the first day of trial. The final settlement documents are well underway and should be completed in the fourth quarter.

The expected settlement cost was less than the anticipated cost of continuing litigation, and we expect any fourth quarter costs associated with the trial to be relatively insignificant. Now I’ll turn the call back to the operator for any questions..

Thank you. [Operator Instructions] Our first question comes from Theodore O’Neill with Litchfield Hills Research. Please proceed with your question..

Thanks very much. My first question is about I understand that you had some project delays that are probably going to help out, I guess, construction in Q4.

But could you give us an idea about the pipeline for construction projects?.

Sure.

Do you mean the pipeline for the rest of this year or for next year or both?.

For the next 12 months?.

Well, that’s quite a ways out. But obviously, there is some headwinds in the economy with respect to interest rates and housing demand. What I would say is that Northeast has held up relatively better. And secondarily, the market for multifamily, new multi-families probably held up – has held up better than single family.

So we are seeing some headwinds, but we’re really focusing where we’re strong and where we think there’ll be less impact in the market. So our production schedule is full through this year and into early next year, and we continue to see good demand.

But we would expect there could be some softness, but I think we’re well positioned this year relative to any prior year to weather that..

Okay. And you did mention in your remarks that the litigation costs, if there is more in the fourth quarter, it won’t be very – it won’t be anything like this quarter.

Does that also include the severance and retention, or will we see that also in the fourth quarter?.

No, we don’t anticipate any significant severance or retention. There may be one or two people here and there, but nothing significant..

Okay. Thank you very much..

Our next question comes from Tate Sullivan with Maxim Group. Please proceed with your question..

Thank you.

And on the construction revenue, and you gave details on the project timing recognition, did you just review, did you say a project that you finished in 3Q, you had previously recognize the revenue for that completion in 2Q? And going back to Theodore question too, I mean the backlog happened to increase in the quarter in construction versus the decline – quarter-over-quarter decline in revenue, please?.

Yes. Tate thanks. There were some unique aspects of that project. It was an incredibly large project on an accelerated schedule. The contract terms were different than normal, allowed us to recognize some revenue earlier than we otherwise would have..

Okay. Thank you. And then you also mentioned a restructuring in 2Q ‘22.

Is that in just one part of the healthcare business, what was that specifically, please?.

Yes. That was restructuring in the healthcare division associated with the departure of the previous CEO of that group. Subsequent to that, we had some realignment and some personnel reduction costs associated with it. That’s all settled out at this point, and the team is operating very effectively..

Great. And then can you remind – or it comes after that – those strategic events in 2Q, the margin profile for healthcare moving forward. Do you think it can still – it’s still above 20%.

Will it still probably be a low-20% gross profit margin business or maybe some changes there, please?.

I think as I mentioned in the call, I think we are still on target to remain above 20%, but there may be some ups and downs quarter-to-quarter..

Okay. Thank you.

And then was the litigation that you mentioned also related to healthcare versus or whether in construction, too?.

That was healthcare related..

Okay. And then last one to David, if you could comment on working capital management too. I mean I have noticed that the inventory has increased for one quarter, two quarters, three quarters or four quarters in a row.

Is that mostly related to the Construction segment, or is it cameras or both?.

Yes. I mean a little bit of that is just for some camera builds in the fourth quarter. But yes, it’s really driven by the construction backlog. We have a lot of projects, as we mentioned, especially on the EdgeBuilder side that have been pushed into the fourth quarter. So, it’s really an accumulation of inventory to satisfy that pipeline..

Thank you both..

It appears that there are no further questions at this time. I would now like to turn the floor back over to Rick Coleman for closing comments..

Thank you, operator. Before concluding this call, I just want to thank all of our employees for their strong performance and dedication, and our shareholders for your continuing support. We are always available to take your call and discuss any additional questions you might have. So, please don’t hesitate to contact us.

We will continue to share our story with existing and potential investors in the coming weeks and months. And as always, we appreciate your continued feedback and support. Thank you..

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation..