Star Equity - Q2 2024

Transcript

Operator (participant)

Greetings, ladies and gentlemen, and welcome to Star Equity Holdings second quarter 2024 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, 10-Q, and other filings 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 US 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, at The Equity Group at 212-836-9611. Also, this call is being broadcast live over the internet and may be 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. If you require operator assistance, please press star, then zero. It is now my pleasure to introduce Richard Coleman, Chief Executive Officer of Star Equity.

Richard Coleman (CEO)

Thank you, Drew. Good morning, everyone. We appreciate you joining us today for our second quarter 2024 results conference call. On the call today with me are our Executive Chairman, Jeffrey Eberwein, and our Chief Financial Officer, David Noble. I'll start today by providing an overview of our recent business developments and financial highlights. Then Dave will provide additional details on our consolidated financial results. Jeff will then discuss our Enservco investment announced yesterday morning. Before turning to second quarter highlights, I want to comment on a couple of recent transactions. On May seventeenth, we closed the acquisition of Timber Technologies. I'm pleased to report that the integration of that business into our Building Solutions division and the acquisition of its associated real estate assets are substantially complete.

Although Timber Technologies, like EdgeBuilder and KBS, is a wood-based construction company, its distribution channels and end products vary in important ways. As a result, we believe its revenue streams are less prone to interest rate fluctuations and the general market softness we're experiencing in the rest of the segment. It also generates healthy cash flow and substantially improves our overall profitability. We continue to believe this was a valuable and accretive acquisition for our shareholders, both in the near and long terms. Additionally, in July, we closed two sale leaseback transactions for our South Paris, Maine and Big Lake, Minnesota facilities, totaling approximately $7.2 million in net proceeds. Simultaneously, we entered into long-term lease agreements to continue to operate those facilities. Importantly, these financings should have no impact on operations at either business.

The closing of these sale leasebacks aligns with Star's commitment to strategic capital allocation and the prioritization of EBITDA-generating assets. We seek to make high-grade additions to our asset portfolio and optimize the cost of capital with the goal of growing net asset value per share over the long term. Accordingly, we announced this morning a $1 million share buyback program to capitalize on what we believe is a dislocation in the market value of our common stock. Moving on to the financial and operating highlights for the second quarter of 2024. Our second quarter revenue increased 51.6% over the second quarter of 2023, while gross margin declined by 14.9%, primarily due to a one-time purchase price adjustment related to the Timber Technologies acquisition.

The revenue increase was driven by the inclusion of Timber Technologies revenue beginning May 17, and the inclusion of a full quarter of revenue from our Q4 2023 acquisition of Big Lake Lumber. The decline in Building Solutions performance on an organic basis reflects the continued customer impact of credit tightening on project funding and timing. While our sales pipeline remains strong, the conversion of these opportunities to signed backlog has been slower than historical norms. However, I want to emphasize that generally, we're not seeing large project cancellations, only delays and timeline extensions. We believe our reputation as a reliable and high-quality partner in the markets we serve gives us a unique and sustainable position, which we will continue to leverage as the construction sector regains strength....

Furthermore, we continue to focus on all elements of our growth strategy, including Building Solutions division expansion, acquisitions that would mark our entry into new industries, and exploring new opportunities at our Investments division. As exemplified by our acquisition and integration of Timber Technologies, identifying, evaluating, and completing accretive acquisitions remains an important pillar of our holding company strategy for delivering long-term growth and shareholder value. Now, I'll turn the call over to Dave Noble, our CFO, to provide additional second quarter consolidated financial highlights. Dave, please go ahead.

David Noble (CFO)

Thank you, Rick, and good morning. Let's now turn to Star Equity's consolidated financial results. I'd like to note that due to our sale of the healthcare business on May 4, 2023, all results and historical comparisons relate only to continuing operations, which include construction and investments. Digirad Health is now reported as part of our discontinued operations and does not appear at all in our 2024 results. In Q2 2024, SG&A increased by 26.8% versus Q2 of 2023. This was largely attributable to a one-time $1.3 million impairment related to our cost method equity investment in TTG, which we acquired through a rollover equity stake as part of the Digirad sale last year. We reported this impairment after analyzing the financial performance of TTG and considered comparable company EBITDA valuation multiples.

Moving on to the bottom line results for Star Equity, we reported a net loss from continuing operations of $3.8 million in Q2 of 2024, compared to a net loss from continuing operations of $1.4 million in Q2 last year. Non-GAAP adjusted net loss from continuing operations in Q2 was $0.9 million, which is roughly the same as in Q2 of 2023. Non-GAAP adjusted EBITDA from continuing operations was a loss of $0.5 million in Q2, versus a loss of $0.8 million in the same period last year. Consolidated cash flow from continuing operations for Q2 was an outflow of $4.3 million, versus an inflow of $1.9 million in Q2 of 2023.

The negative cash flow from operating activities is attributable to weaker operating performance, as gross margins were lower than in the previous year, despite higher revenues. As of June 30, 2024, our consolidated balance sheet and liquidity reflect a considerable cash outlay associated with our acquisition of Timber Technologies and its related real estate. At the end of our second quarter, our consolidated unrestricted cash balance stood at $2.5 million, as compared to $21.4 million a year ago. As Rick mentioned, in July, we closed two sale leaseback transactions which added approximately $7.2 million in cash to our balance sheet. Turning to our Investments division, our holdings in public securities at the end of the quarter amounted to $3.8 million, versus $4.8 million a year ago.

Our private common equity investment and note receivable from the sale of Digirad to TTG were valued at $4.7 million and $7.8 million, respectively. Now, I'd like to turn the call back over to Jeff for some additional remarks regarding our recent Enservco investment.

Jeffrey Eberwein (Executive Chairman)

Thank you, Dave. We were excited to announce yesterday our investment in Enservco. This investment advances Star's expansion strategy by further diversifying our portfolio beyond Building Solutions, marking our initial entry into the energy services and transportation and logistics sectors. We believe the strength of Enservco's management team and its ongoing reorganization position it well for long-term growth. We look forward to participating in Enservco's future success and believe this investment will be highly accretive to our shareholders. Creating value in microcap companies undergoing change has been a core tenet of Star's public holding company strategy since inception, and we're excited to partner with Enservco on this investment to further validate this strategy. I'll now turn the call over to operator for questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Tate Sullivan with Maxim Group. Please go ahead.

David Noble (CFO)

Thank you. Good morning, all. Jeff, starting with Enservco, can you talk about the benefits of how you structured the acquisition of the share interest versus to buy the entire company?

Jeffrey Eberwein (Executive Chairman)

Yeah. We think our common stock is significantly undervalued, which is why we announced the $1 million stock repurchase program. So we just had a creative discussion about how to help them close the transaction that they're working on with the acquisition of Buckshot and also boost their shareholder equity. And what we came up with is taking an initial stake in the company to around 20% to start a board seat. And so we got a common equity interest in exchange for our preferred stock. We get to monitor the transition, so we're not ruling anything in, we're not ruling anything out at this time.

But we strongly believe in the walk, run, sprint philosophy, and this gives us a chance to observe and help and learn about these two sectors.

Richard Coleman (CEO)

Great. Okay, thank you. And then Dave, going forward, will you mark to market the share interest in Servco? It will be within the investments division. Will it work that way, or how will the accounting treatment work?

Jeffrey Eberwein (Executive Chairman)

Dave, do you want to take that?

David Noble (CFO)

Yeah, it will, it will fit in the investments division. I mean, there's 2 pieces of this, and we're still working out the accounting of a loan that was given to them to help finance the acquisition of Buckshot. But yeah, it will, it will. It's not gonna be consolidated. We don't have control of the entity, so it's you know, it's a, it's a mark-to-market position.

Richard Coleman (CEO)

Okay.

Jeffrey Eberwein (Executive Chairman)

But we-

Richard Coleman (CEO)

Okay.

Jeffrey Eberwein (Executive Chairman)

We do show the numbers both ways. So any unrealized gains, losses we have on equity securities or lumber derivatives that we use to hedge, we back those out of Adjusted EBITDA, so investors can look at it. We give them the data to look at it both ways.

Richard Coleman (CEO)

Perfect. Okay. Okay, thank you.

Operator (participant)

Again, if you have a question, please press star, then one. The next question comes from Theodore O'Neill with Litchfield Hills Research. Please go ahead.

Theodore O'Neill (Analyst)

Okay, thanks very much. First question I have is about gross profit. In the prepared statement here, it says it's impacted by the Timber Technologies acquisition, and then, further on, it says the impact was $574,000. Is that the entire amount that impacted cost of goods in the quarter?

David Noble (CFO)

Yeah, the 574 is purely due to a valuation that we were required to do for Timber Technologies, and allocate that purchase price. So that relates to Timber Technologies. That's a one-time write-up of the finished goods inventory, and they have to write that up to what we could sell it for. So because we purchased that company and that finished goods existed, we had to write that up as part of that. So it's really an accounting adjustment. It's a one-time thing. It's not gonna reappear in future quarters. And then additionally, we did suffer some decrease in gross margins on our legacy business, just given current market conditions, which impacted profitability.

Theodore O'Neill (Analyst)

Okay. And I'm just curious, this is purely an accounting issue, but this is $1.3 million of related to the cost method investment in TTG that impacted SG&A in the quarter. Why isn't that just in other income? Why is that in SG&A?

Jeffrey Eberwein (Executive Chairman)

It's just-

David Noble (CFO)

Yeah.

Jeffrey Eberwein (Executive Chairman)

It's just, it's just US GAAP.

David Noble (CFO)

Yeah.

Jeffrey Eberwein (Executive Chairman)

I asked the same question of our accounting team.

David Noble (CFO)

Yeah.

Jeffrey Eberwein (Executive Chairman)

US GAAP is what it is. I agree, logically, you think it'd be in other income, not SG&A, but the GAAP requirement don't care about my logic.

David Noble (CFO)

You know, and unfortunately, GAAP is one way as well. So we, you know, we took an impairment, should that company, we expect it will, you know, recover over time and produce more EBITDA, we're not ever allowed to write it back up until, you know, at some point, we sell it.

Jeffrey Eberwein (Executive Chairman)

Dave, what we do on that is we just follow whatever the private equity firm does. We're not doing anything higher or lower or different. They do an analysis every quarter, and if they write it down, we write it down.

David Noble (CFO)

We, you know, we did diligence, that calculation-

Jeffrey Eberwein (Executive Chairman)

Sure.

David Noble (CFO)

and we deem, we deem it reasonable.

Jeffrey Eberwein (Executive Chairman)

Sure.

Theodore O'Neill (Analyst)

Just overall on the tone of business, I mean, I understand what it says here in the press release about stuff being pushed in the second half, but is that... Are you comfortable it's going into the second half, or do you think more of it's gonna go into the first half of next year? I mean, what's your-

Jeffrey Eberwein (Executive Chairman)

Yeah.

Theodore O'Neill (Analyst)

What's happening out there?

Jeffrey Eberwein (Executive Chairman)

Rick, why don't you take that one?

Richard Coleman (CEO)

Sure. We're seeing, you know, visibility to the future is getting a little bit hazy in this environment as things are slipping to the right, if you will. But we feel like in the second half, we're gonna see some improvement. We just don't have the ability to say how much, and this is based primarily on the feedback that our customers are giving us about their ability to fund their construction projects and to, you know, to acquire financing where that's required.

Theodore O'Neill (Analyst)

Okay, thanks very much.

Operator (participant)

Again, if you have... Go ahead. Sorry.

Jeffrey Eberwein (Executive Chairman)

Yeah, this is Jeff. I was just gonna add, you know, if there's a silver lining or good news, we're not seeing projects get canceled. It's more, just construction starting later than what the original plan was, and often it's due to delays in getting financing. In some cases, there's been some permitting delays, some weather delays. But there, so there's a general lack of urgency, and then the ones that do want to go fast that are dependent on financing, it's just taking longer to get the financing in place than, say, two years ago. But like I said, if there's good news, it's that we're not, we're not seeing projects get canceled. We're just keep seeing them get pushed to the right.

Operator (participant)

Okay. Again, if you have a question, please press star, then one. That concludes today's question and answer session. I will now turn the call over to Rick Coleman for closing remarks.

Richard Coleman (CEO)

Thanks, Drew. Thanks for your time today, everyone. We appreciate your interest and your continued feedback and support, so don't hesitate to contact us anytime. We're excited about the steps we're taking on your behalf, and we look forward to updating you as our story develops.

Operator (participant)

Thank you for joining the Star Equity Holdings second quarter conference call. Today's call has been recorded and will be available on the investor section of our website, www.starequity.com. Thank you. You may now disconnect your line.