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spk02: Greetings, ladies and gentlemen, and welcome to the Star Equity Holdings Inc. Third Quarter 2021 Results Conference Call. Some discussions made today may include forward-looking statements. Actual results could differ materially from the statements made today. Please refer to Star's most recent 10-K and 10-Q filings for a more complete description of risk factors that could affect these projections and assumptions. The company assumes no obligations to update forward-looking statements as a result of new information, future events, or otherwise. Please also note that on this call, management may reference to non-GAAP financial measures including EBITDA, adjusted EBITDA, adjusted net income, or 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 didn't receive a copy of this press release and would like one, please contact STAR at 203-489-9500 after the call or its investor relations representative Lena Caddy of the Equity Group at 212-836-9611. Also, this call is being broadcasted live over the Internet and may be accessed at STAR'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 Jeff Eberwein, Executive Chairman of STAR Equity.
spk05: Thank you, Operator. Good morning, and thank you all for joining us today for our third quarter 2021 results conference call. On the call with me today are Matt Mulchin, CEO of DigiRad Health, and David Noble, Chief Financial and Chief Operating Officer. In Q3 2021, our healthcare division continued to rebound to more normal levels with revenue increasing 16% versus the prior year quarter. Our construction division grew revenue about 65% due to higher output at both KBS and Edge Builder and pricing increases we implemented to mitigate the impact of higher raw material costs. Although the gross margin percentage at our construction division remained below normal levels in Q3, it did improve versus the first half of 2021 and is expected to continue to improve in the fourth quarter of 2021 due to steps we've taken to increase pricing and improve operations. With the asset sales completed at the end of Q1 2021, we substantially improved our balance sheet by reducing net debt from $18.9 million a year ago to $8.3 million at the end of Q3 2021. We're now better positioned to fund high return internal growth investments and pursue acquisitions, which we have previously discussed, could be either bolt-ons for our healthcare or construction division or entry into a new business sector. With that, I'll turn it over to our healthcare CEO, Matt Mulchen. Matt, please go ahead.
spk07: Thanks, Jeff. Revenue from our healthcare division in Q3 2021 increased by 16.1% to $14.8 million over the same period in the prior year. This division has largely recovered from the COVID-19 pandemic-related downturns and is now operating at full capacity. Gross profit for the Q3 2021 reporting period increased by 31.6% and gross profit margin increased by 2.6% over the same period last year. In diagnostic services, revenue and gross margin percentage for the third quarter of 2021 were 11.1 million and 17.3% compared to 10.7 million than 19.4% in last year's third quarter. The increase in diagnostic services revenue compared to the prior year was primarily due to the several new service contracts. The decrease in diagnostic services gross margin percentage was mainly due to an increase in material costs and the mix of our services. In diagnostic imaging business, we did see significant improvement in the quarter. Revenue and gross margin percentage for the third quarter of 2021 was 3.7 million and 35.9%, respectively, compared to 2 million and 19.5%, respectively, in the prior year third quarter. The increase in diagnostic imaging revenue is related to increased camera sales, which is a good indication that hospitals and physician practices are recovering from the initial impact of COVID-19. Now I'm turning the call to David Noble, our CFO and COO, who will provide additional financial highlights for the third quarter. Dave, please go ahead.
spk13: Thank you, Matt, and good morning. Firstly, I'll briefly discuss the performance of the construction division. I'll then move on to our consolidated results. Third quarter construction division revenue was $14.1 million. This compares to $8.5 million in the third quarter of last year. which is about a 65% increase, as Jeff mentioned in the beginning of the call. Gross margin was 3.8% in the past quarter compared to 14.7% in the prior year third quarter. The significant increase in revenues for the construction division on a year-over-year basis was due to both higher production levels and increased pricing on both residential and commercial projects at both our KBS and Edge Builder businesses. The decrease in gross margin percentage was due to the lingering adverse effects of a rapid rise in raw materials costs in the first half, which reached historic levels. Despite implementing price increases, higher input prices affected some of our contracted work produced in the third quarter. We do expect gross margin percentages in our construction division to gradually return to more normal levels by the end of this year. Turning to company-wide results, for Q3 2021, SG&A increased by $0.7 million compared to Q3 2020. This was due in part to a $0.3 million increase at the construction businesses as a result of increased sales commissions and higher headcount as we bolstered our senior team at both KBS and Edge Builder. Also, we experienced a $0.3 million increase in corporate administrative expenses due to additional headcount and $0.1 million increase in IT and outside service fees. Moving on to consolidated bottom line results for the third quarter, we incurred a net loss from continuing operations of $2.1 million compared to a net loss from continuing operations of $1.6 million in the same period of 2020. Non-GAAP adjusted net loss from continuing operations in the third quarter of 2021 was $1.5 million or $0.29 per share compared to an adjusted net loss of $1 million or $0.21 per share in the third quarter of last year. Non-GAAP adjusted EBITDA was a negative 0.6 million for the third quarter compared to negative 0.1 million in the third quarter of last year. The single largest driver of losses in the quarter continued to be the lingering impact of the rapid rise in raw materials cost during the first half, which impacted our COGS on the construction side of the business. This was partially offset by an increase in adjusted EBITDA from the healthcare division. For the third quarter of 2021, we registered an operating cash outflow of 0.6 million compared to an operating cash outflow of 1.9 million in the third quarter of 2020. As of September 30th, 2021, the outstanding balance on our credit facilities was $14 million. Our overall net debt position, taking into account the 5.7 million we hold in cash and cash equivalents, was 8.3 million at the end of September 2021, This compares to $18.9 million in net debt at the end of September 30, 2020. We've been able to reduce our overall debt significantly year over year. Now I'd like to turn the call back to the operator for questions.
spk02: Thank you. And at this time, we will be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Tate Sullivan with Maxim Group. Please proceed with your question.
spk06: Hi. Hi. Thank you. Good day, all. If I may start with the construction division. with $34 million of revenue in the first nine months compared to, I think it was about $9 million for the key contract wins from 2020. Can you just talk, have you worked through most of those wins for my both U.S. Army facilities and mixed-use buildings, or those out of backlog, so to speak, for the construction business now?
spk13: Yes, those two contracts you're referring to that we signed in 2020, did lead into this year, but we are fully delivered on all of those projects. We have a little bit of onsite work that we're still doing in Tachi, but we expect to wrap that up within the next couple of weeks. But essentially, we're delivered on those contracts.
spk06: Were there, did you complete all the phases that were in those contracts, or did they have any ability to upsize those deals, or are those repeat customers as well, who are potentially going forward?
spk13: Well, we hope they will be repeat going forward. I mean, Tachi is a very large construction manager, and we are definitely talking to them about other projects that they're working on. But all phases were complete. If you remember, during 2020, towards the end, they announced an increase in that contract awarded from the government, and then they did give us that additional work, which we did produce and complete during this year. And, Tate, this is a
spk05: Jeff, one thing I'd say we're excited about is our demand is really strong, and we have a lot of other projects that are in the works. So even though those projects are completed, our backlog and our sales pipeline remain really, really strong. So we've replaced those projects with other projects. So that's what makes us excited. You know, when you have a large project like that, there's a risk that your backlog will decline as you get those produced, and our backlog has stayed constant, which speaks to strong demand.
spk06: Great. And on inventory, I saw inventory decrease slightly from 12 million in June to 10 million. Was that some of that with construction and with some of that strategic to wait to purchase inventory for construction due to higher prices, or can you talk a little bit about that? And, and should I not, it sounds like I should not look at that decreases indicative of a decline in project backlog or opportunities.
spk13: No, in fact, I wouldn't, I'd more look at our AR and see that that's increased and we're collecting. It's not that we're not collecting. We're just have higher business levels across the piece from healthcare through to construction. Yeah, but some of that decrease is likely in the construction division for a couple of reasons. You know, we've completed some large projects that we had accumulated materials for, and also the price of materials has come down a bit since the peak in June. And so for those two reasons, you know, that's come down. But that is not an indicator of business levels. We are operating, you know, at elevated business levels across the piece.
spk06: Great, thank you. And moving on to healthcare, can you remind, on your comments, remind me the difference between medical imaging service contracts versus the camera sales? Are they completely separate sales processes? I thought when you made a sale, it was connected to signing a service contract too. Can you just give a little more background there, please?
spk22: Yeah, I'll let Matt get into detail on that. Yeah.
spk07: Yeah, so there's two different divisions, right? The diagnostic services business is that business where we use our camera to go out to different doctor's offices and provide that as a service compared to providing post warranty support on a sold camera. So my comment was related to our diagnostic services and the growth, you know, and bringing in more of those types of what we call mobile imaging contracts. Okay, great.
spk24: Okay. Thank you. That's all I had.
spk06: Thank you for all the details.
spk02: Our next question comes from the line of Theodore O'Neill with Litchfield Hills Research. Please proceed with your question.
spk04: Thank you very much. So I want to explore the construction site a little bit more. I've got a small sample size here, but I have talked to several builders here in New England, as well as some of their customers. And I'm hearing about some significant shortages in materials and labor and continuing to see prices going up on materials. And I'm also hearing from some high-end residential customers that because of this, they're pushing off any construction projects until the spring. I think we're going to end up with the same issue in the spring that they're having now. But can you just give us a little more granularity on the labor and material issue, where you're seeing issues, and if you are also hearing from potential clients on the construction side that they're going to wait and see what happens in the spring?
spk13: Thanks. Yeah, that's a lot. Let me see if I can start to attack that. On the labor issue, You know, labor has been challenging for onsite construction for some time and getting enough crews to do framing, et cetera, on the onsite side of things. We operate a factory in Maine where, you know, there's probably fewer alternatives. I'm not saying that labor's not challenging at times, but we have a labor force that comes to the same plant every day and does the same job. And so I actually think that it's a benefit to us when labor is short on the conventional side, right? And so that has not been too much of an issue. I would say it's a little tougher to build the labor force today maybe than a year ago, but we still are able to get new workforce participants when we need to. So that's one thing. On the materials side, you know, there are some supply chain disruptions, especially in the sort of value-added area. So we see some challenges in getting windows, for example, and cabinets on time. But we're not having a problem getting them. They just have longer lead times, which we have to adjust our production schedule to meet. So those materials prices are probably, you know, they've gone up over the last year and they're still up. But, you know, on the commodity side, we've seen prices come down quite a bit from the peak in mid-June. So, you know, there's a lot of things at hand. But I'd say on labor, you know, that's one benefit of what we do. In terms of projects, our pipeline is as large as it's ever been. So there's two things at play, right? I mean, you may see some projects get postponed, although we haven't seen that, but the market share of modular in the entire new home market is growing. So we're not seeing that. Our pipeline is as strong as it's been. We saw some potential of that during COVID where people were slowing down and delaying things, but we have a number of large projects that we're pursuing and we haven't really felt what you're suggesting.
spk03: Okay. Well, great. Thanks very much. Thank you.
spk02: Our next question comes from the line of Adam Waldo with Lismore Partners, LLC. Please proceed with your question.
spk15: Good day, Jeff, Dave, and Matt. Thanks very much for taking my questions. I hope you can hear me okay.
spk08: Yeah, we can.
spk15: Yes. Okay. Great. So, thank you. Look, when we talked last quarter, the linchpin, obviously, of getting the whole enterprise back to being moderately free cash flow generated is improving the margin structure of the construction business at the risk of staying the obvious. And, you know, you made some progress here in the third quarter, just under a 4% gross margin. A year ago, we were, you know, around 14, 15. As you're seeing here, the monthly close for October here in the fourth quarter. Can you comment on what the gross margin structure is looking like so far in the fourth quarter? And do you remain confident as you were last quarter that you thought you could get gross margins back to that sort of target 15 to 20 percent range by early 2022 on the construction business?
spk13: Yeah. Well, we can't say much about October, obviously, but we are confident that gross margins are continuing to approach more normal levels we have worked through our backlog where we had projects that were priced before materials prices spiked so we don't have any projects that we believe are loss making in the pipeline right now and as you can imagine we sign a deal and then you know it might project and it might be produced four or five months later and so we're exposed unless we buy those materials up front which in some cases we're now doing But we do feel that margins are going to continue to approach more normal levels for two reasons. Our production levels are higher, right, so we're able to spread our fixed costs better. And also, we have implemented a number of price increases. In fact, with materials having actually slightly come down, we have not seen a lot of pushback, if any, on pricing. So, we actually think we're going to have a very, you know, good fourth quarter. And don't forget, we do have two businesses in that construction division. One of them is in Maine that does modular, which is quite a complex business. The other one in the Midwest is wall panels. And, you know, we're seeing some differences in terms of how fast each of those businesses recovers. And without, you know, getting into too much detail because we report them as one segment, you know, it's been a little bit tougher to get KBS back to profitability, probably because those projects are larger and more complex and So we're seeing Edge Builder respond very, very favorably in the second half in general. But yeah, we feel pretty confident that things are going to continue to get better. I mean, anything can happen, but we feel that third quarter was quite a turning point in general for the construction division, and we think that the fourth quarter will be better than the third by a reasonable amount.
spk15: That's really helpful. Yeah, that's really helpful perspective, Dave. Thank you. I don't know whether this question really is for Dave or Jeff, but... you know, you have pretty good size accounts receivable balance. Do you have a factoring, um, or some sort of, uh, sort of, um, let's call it main street cause you're a little bit too small to securitize, but let's call it a factoring, um, structure in place for your receivables so that you could tap those in some fashion for working capital, um, as needed.
spk13: Well, we do, what we do have is we have two asset based, uh, revolving credit facilities. We have one at, um, KBS, which is a $4 million line. We're borrowing anywhere from two to three typically on that, maybe a little bit more right now because our AR is up. So we do essentially borrow against AR with Gerber Finance of New York. It's a non-bank lender. We also have a $4 million facility. It was $3 million, but we increased it to four over at Edge Builder in the Midwest. We're actually borrowing a little bit less on that because, as I said, that's turned a little quicker. But we do have those facilities, and they also allow us to borrow against our inventory at a slightly lower rate and with a sublimit not up to that $4 million. So we feel like those are two good facilities that allow us to kind of scale up and down as business levels necessitate that.
spk05: And then on the healthcare business, we have a revolving credit line with Sterling National Bank, and there's a table in our press release that shows the balances and the interest rate, and that one's at a very attractive rate. It's below 3%, but as Dave said, those are all asset-based lending facilities, and so AR is collateral, and we feel like that's a cheaper way to finance the business than factoring would be.
spk15: That was really, really helpful. Thank you, both Dave and Jeff. Final one for Jeff, I think, as executive chairman. You know, obviously, you've reinstated the preferred stock dividend at the board level last couple of quarters. Construction business is improving at a moderate pace in terms of the margin structure. Sequentially here, things are looking even better for the fourth quarter. Is it reasonable to think that, you know, we'll be continuing to pay the preferred stock dividend here as we go into 2022, especially as that part of the capital stack is a key component of potential future acquisition currency?
spk05: Yeah, I think that's a reasonable assumption. The board sets that policy, not management, but the board wouldn't have started paying dividends on the preferred stock if it wasn't comfortable that that was a prudent thing to do. And we do see the construction business returning to more normal levels and in the fourth quarter and then into 2022, we've invested significantly in the construction business. And, you know, now we're looking forward to seeing that business perform and generate positive income and positive cash flow.
spk15: Well, thank you very much and best of luck for a strong start to 2022. Thank you.
spk02: And as a reminder, if anyone has any questions, you may press star 1 on your telephone keypad to join the question and answer queue. Our next question comes from the line of Jeff Kobularz with Diamond Bridge Capital. Please proceed with your question. Hi, good morning.
spk14: Curious about what you just said, Jeff, about investing in the construction segment and seeing good results from that. Can you elaborate on what those investments have been?
spk05: Sure. You know, when we merged together, the thesis, the vision was that the construction business was doing something like $30 million in revenue, maybe less than that, and we had a vision of investing in it and doubling the revenue, getting it up to more like a $60 million rate with the goal of also having a 10% EBITDA margins in that business. And we have injected working capital to fund the growth. And that was the reason, one of the primary reasons for the equity offering we did last year was to really fund the growth in the construction business. And so a lot of it was a working capital investment that was needed to grow the business. We've also added a significant amount of talent in the sales and marketing side of the business, grown our sales pipeline, grown our backlog, and we've also added management personnel to match or to help manage the higher production level. So we think we're really seeing that on the revenue side with revenue growing 65% year over year. We weren't planning for lumber to go from, I think, 300 at the lows to 1,800 in such a short period of time. And with the six-month backlog, you know, it's taken us a while to kind of work that through the system. But we have increased our prices significantly this year. Those price increases have stuck, which really speaks to strong demand. And as Dave talked about, raw material, the more commodity items, raw material prices have declined. we do see that business recovering strongly. We do think that's going to be an important growth engine for the company. So that's what I meant when I talked about, you know, seeing the benefits of the investments we've made in that segment.
spk20: Sure.
spk14: Okay. That's very clear. Thank you. And the volume at KBS, can you say what kind of output per week or so? I think eight to 10 was was the hoped-for target?
spk13: Yeah, you know, we're not there yet, and part of that is, you know, operational challenge internally, which, as Jeff said, we've hired some management to help get us there, and the other part of that is the supply chain disruption, which, you know, the variable and lengthening lead times in certain items or longer lead times in certain items makes it hard, right, because it's an assembly line. So we're sort of at, you know, somewhere in the $7 On average, although the last few weeks it's been higher than that, I still think we'll get to higher levels as some of the external challenges abate and we, you know, improve our processes internally. But, you know, the revenues have climbed ahead of our original budget for the year, and part of that is, well, all of that is the ASPs are higher. But the ASPs are higher for two reasons. They're higher because we've raised pricing, and they're also higher because we're pursuing you know, higher level business, which we believe has more margin in it. So yeah, we're not where we want to be in units, but we're doing more complex units. So in a sense, you know, no two units are the same, right? So more labor goes into more complex units. We can charge more for complex units. We're taking a lot more focus on what the value off the line is in a given week. You know, we like the number sort of half a million. So you know, if that's six boxes or 10, it doesn't really, it matters, but it doesn't matter that much, right? We're looking a lot more at some other metrics like value off the line because we bring the same labor force to the, you know, to the factory every week, right? And so, yeah, that's what I would say about that. So we're happy with the revenue growth there and the amount of production and the types of work that we're doing. Right. Okay, good.
spk11: We are focused on making it more profitable, yeah. Sure.
spk14: And then about the healthcare side, you all have changed your accounting by the segment and also with the sale of one of the healthcare assets. I'm just wondering if you can give some perspective about profitability in the healthcare businesses now versus 2019. Any way to give a comparison there?
spk05: Yeah, I would say this is Jeff. You know, we've returned to more normal levels on the revenue side. And what might be confusing is on the corporate costs line, we've kind of separated that between the public company corporate and the corporate associated with the healthcare business. That could be what you're referring to. But when We think about on a pro forma basis, revenue has returned back to pre-COVID levels, which is about $60 million a year, $15 million a quarter. That's about where we were in Q3. And this is a business that we expect to have gross profit in the 20% plus range. And that's where it was in 2019. And I think in Q3, it was 22%. So that's it's kind of what we, what we view to be normal levels. Um, Matt, I don't know if you had anything to add to that.
spk07: No, I would, I would say you're right. You're spot on, you know, I mean, we're, you know, we're, we're back, back from, uh, on the services side in terms of, um, revenue and, um, you know, have a little bit of a, um, you know, as Jeff said, you know, a little bit of a downturn in the, um, close margin, some of that's due to, you know, labor costs and whatnot, but, um, camera sales are back up and they're strong and that's really helping us, especially over 2020, but very similar to what we saw in 2019 when you take out all the one-timers and everything like that.
spk14: Okay, so for the two continuing businesses from 2019 to now, can you say what the EBITDA of those two businesses were in 2019? And just I know it's like $1.3 million before corporate. By the division, it's $1.3 million in the third quarter and the second quarter. So I just wanted to just get some kind of comparison.
spk07: Yeah, like what Jeff was saying is that, you know, what was difficult is that there was differences. And that $1.3 is after DigiRAD helped corporate. but does not include Star Equity Corporate. 2019, we didn't have those separations. So that's what makes it difficult to kind of compare apples to apples. But it would be very similar for those two divisions, DI and DIS, 2019 versus 2021. Okay, thanks.
spk14: And then just lastly about acquisitions, Jeff, can you say just Where you stand, are you getting any closer? Do you think sometime in the next six months you may announce an acquisition, or are you just going to be patient and just wait for really the right one?
spk05: Yeah, no, it's a good question. We see a lot of benefit from being in the market and looking at things, but at the same time, we don't – feel forced to do anything. Both of our businesses are growing and we do have some pretty interesting internal growth opportunities. And so we are looking at all those things, the internal growth opportunities as well as acquisitions. And I think the most likely would be something that's more of a bolt-on type of acquisition. for one of our two business segments, either construction or healthcare, with construction maybe being more likely of the two. But over time, we would like to add more legs to the stool, and we do think there's a lot of benefits from combining several other companies that aren't really big enough to be standalone public companies. By combining with us, we can obviously reduce all the public company costs on day one, like we did with the construction business that we acquired. But we can also reduce the corporate costs, or said another way, spread them over a much bigger base. And another very significant benefit that's hard to quantify is that a lot of these small companies, you really want the management team 100% focused on the operations of the business and maximizing the business, looking at organic growth projects, bolt-on acquisitions, and you really don't want them distracted by all of the things involved in running a public company. And that's a real benefit with another business or company joining with us and becoming another leg to the stool.
spk14: Sure, that makes sense. All right, thanks for your help.
spk02: And again, with a quick reminder, if anyone has any questions, you may press star 1 on your telephone keypad to join the queue. And it looks like we have reached the end of the question and answer session. I'll now turn the call over to Jeff Eberwein for closing remarks.
spk05: Thank you, Operator. Before concluding the call, I just want to note that David, Matt, and I are always available to take your questions. So give us a call or send us an email if you do have any more questions. And we appreciate all of our stockholders and your feedback and your support. So thank you for your time today.
spk02: And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
spk22: Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.
spk02: Greetings, ladies and gentlemen, and welcome to the Star Equity Holdings Inc. Third Quarter 2021 Results Conference Call. Some discussions made today may include forward-looking statements. Actual results could differ materially from the statements made today. Please refer to Star's most recent 10-K and 10-Q filings for a more complete description of risk factors that could affect these projections and assumptions. The company assumes no obligations to update forward-looking statements as a result of new information, future events, or otherwise. Please also note that on this call, management may reference to non-GAAP financial measures, including EBITDA, adjusted EBITDA, adjusted net income, or 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 didn't receive a copy of this press release and would like one, please contact STAR at 203-489-9500 after the call or its investor relations representative, Lena Caddy of the Equity Group at 212- Also, this call is being broadcasted live over the internet and may be accessed at STAR'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 Jeff Eberwine, Executive Chairman of STAR Equity.
spk05: Thank you, Operator. Good morning and thank you all for joining us today for our third quarter 2021 results conference call. On the call with me today are Matt Mulchin, CEO of DigiRad Health, and David Noble, Chief Financial and Chief Operating Officer. In Q3 2021, our healthcare division continued to rebound to more normal levels with revenue increasing 16% versus the prior year quarter. Our construction division grew revenue about 65% due to higher output at both KBS and Edge Builder and pricing increases we implemented to mitigate the impact of higher raw material costs. Although the gross margin percentage at our construction division remained below normal levels in Q3, it did improve versus the first half of 2021 and is expected to continue to improve in the fourth quarter of 2021 due to steps we've taken to increase pricing and improve operations. With the asset sales completed at the end of Q1 2021, we substantially improved our balance sheet by reducing net debt from 18.9 million a year ago to 8.3 million at the end of Q3 2021. We're now better positioned to fund high-return internal growth investments and pursue acquisitions, which we have previously discussed, could be either bolt-ons for our healthcare or construction division or entry into a new business sector. With that, I'll turn it over to our healthcare CEO, Matt Mulchen. Matt, please go ahead.
spk07: Thanks, Jeff. Revenue from our healthcare division in Q3 2021 increased by 16.1% to $14.8 million over the same period in the prior year. This division has largely recovered from the COVID-19 pandemic-related downturn and is now operating at full capacity. Gross profit for the Q3 2021 reporting period increased by 31.6%, and gross profit margin increased by 2.6% over the same period last year. In diagnostic services, revenue and gross margin percentage for the third quarter of 2021 were 11.1 million and 17.3%, compared to 10.7 million and 19.4% in last year's third quarter. The increase in diagnostic services revenue compared to the prior year was primarily due to the several new service contracts. The decrease in diagnostic services gross margin percentage was mainly due to an increase in material costs and the mix of our services. In diagnostic imaging business, we did see significant improvement in the quarter. Revenue and gross margin percentage for the third quarter of 2021 was 3.7 million and 35.9% respectively. compared to 2 million and 19.5% respectively in the prior year third quarter. The increase in diagnostic imaging revenue is related to increased camera sales, which is a good indication that hospitals and physician practices are recovering from the initial impact of COVID-19. Now I'm turning the call to David Noble, our CFO and COO, who will provide additional financial highlights for the third quarter. Dave, please go ahead.
spk13: Thank you, Matt, and good morning. Firstly, I'll briefly discuss the performance of the construction division. I'll then move on to our consolidated results. Third quarter construction division revenue was $14.1 million. This compares to $8.5 million in the third quarter of last year, which is about a 65% increase, as Jeff mentioned in the beginning of the call. Gross margin was 3.8% in the past quarter compared to 14.7% in the prior year third quarter. The significant increase in revenues for the construction division on a year-over-year basis was due to both higher production levels and increased pricing on both residential and commercial projects at both our KBS and Edge Builder businesses. The decrease in gross margin percentage was due to the lingering adverse effects of a rapid rise in raw materials costs in the first half, which reached historic levels. Despite implementing price increases, higher input prices affected some of our contracted work produced in the third quarter. We do expect gross margin percentages in our construction division to gradually return to more normal levels by the end of this year. Turning to company-wide results, for Q3 2021, SG&A increased by 0.7 million compared to Q3 2020. This was due in part to a 0.3 million increase at the construction businesses as a result of increased sales commissions and higher headcount as we bolstered our senior team at both KBS and Edge Builder. Also, we experienced a $0.3 million increase in corporate administrative expenses due to additional headcount and $0.1 million increase in IT and outside service fees. Moving on to consolidated bottom line results for the third quarter, we incurred a net loss from continuing operations of $2.1 million compared to a net loss from continuing operations of $1.6 million in the same period of 2020. Non-GAAP adjusted net loss from continuing operations in the third quarter of 2021 was 1.5 million or 29 cents per share compared to an adjusted net loss of $1 million or 21 cents per share in the third quarter of last year. Non-GAAP adjusted EBITDA was a negative 0.6 million for the third quarter compared to negative 0.1 million in the third quarter of last year. The single largest driver of losses in the quarter continued to be the lingering impact of the rapid rise in raw materials costs during the first half, which impacted our COGS on the construction side of the business. This was partially offset by an increase in adjusted EBITDA from the healthcare division. For the third quarter of 2021, we registered an operating cash outflow of 0.6 million compared to an operating cash outflow of 1.9 million in the third quarter of 2020. As of September 30th, 2021, the outstanding balance on our credit facilities was $14 million. Our overall net debt position, taking into account the $5.7 million we hold in cash and cash equivalents, was $8.3 million at the end of September 2021. This compares to $18.9 million in net debt at the end of September 30, 2020. We've been able to reduce our overall debt significantly year over year. Now I'd like to turn the call back to the operator for questions.
spk02: Thank you. And at this time, we will be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Tate Sullivan with Maxim Group. Please proceed with your question.
spk06: Hi. Hi. Thank you. Good day, all. If I may start with the construction division, with $34 million of revenue in the first nine months compared to, I think it was about $9 million for the key contract wins from 2020, can you just talk, have you worked through most of those Wins for my both U.S. Army facilities and mixed-use buildings are those out of backlog, so to speak, for the construction business now.
spk13: Yes, those two contracts you're referring to that we signed in 2020 did lead into this year, but we are fully delivered on all of those projects. We have a little bit of on-site work that we're still doing at Tachi, but we expect to wrap that up within the next couple of weeks. Essentially, we were delivered on those contracts.
spk06: Did you complete all the phases that were in those contracts, or did they have any ability to upsize those deals, or are those repeat customers as well who are potentially going forward?
spk13: Well, we hope they will be repeat going forward. I mean, Tachi is a very large construction manager, and we are definitely talking to them about other projects that they're working on. But all phases were completed, if you remember, during 2020. Towards the end, they announced an increase in that contract awarded from the government, and then they did give us that additional work, which we did produce and complete during this year.
spk05: And, Tate, this is Jeff. One thing I'd say we're excited about is our demand is really strong, and we have a lot of other projects that are in the works. Even though those projects are completed, our backlog and our sales pipeline remain really, really strong. So we've replaced those projects with other projects. So that's what makes us excited. When you have a large project like that, there's a risk that your backlog will decline as you get those produced. And our backlog has stayed constant, which speaks to strong demand.
spk06: rate and and on inventory i saw inventory decreased slightly from 12 million in june to 10 million i was that some of that with construction and with some of that strategic to wait to purchase inventory for construction due to higher prices or can you talk a little bit about that and and should i not it sounds like i should not look at that decrease as indicative of a decline in project backlog or opportunities?
spk13: No, in fact, I'd more look at our AR and see that that's increased, and we're collecting. It's not that we're not collecting. We just have higher business levels across the piece from healthcare through to construction. Yeah, but some of that decrease is likely in the construction division for a couple of reasons. We've completed some large projects that we had accumulated materials for, and also the price of materials has come down a bit since the peak in June. So for those two reasons,
spk06: know that's come down but that that is not an indicator of business levels um we are operating you know at elevated business levels across the piece great thank you and moving on to health care and can can you remind i on your comments remind me the difference between medical imaging service contracts versus the camera sales are they set completely separate sales processes i i thought when you made a sale was connected to signing a service contract too. Can you just give a little more background there please?
spk22: Yeah, I'll let Matt get into detail on that. Yeah.
spk07: Yeah. So there's two different divisions, right? The diagnostic services business is that business where we use our camera to go out to different doctor's offices and provide that as a service compared to providing post warranty support on a sold camera. So my comment was related to our diagnostic services and the growth and bringing in more of those types of what we call mobile imaging contracts. Okay, great.
spk24: Okay, thank you. That's all I had.
spk06: Thank you for all the details.
spk24: You're welcome.
spk02: Our next question comes from the line of Theodore O'Neill with Litchfield Hills Research. Please proceed with your question.
spk04: Thank you very much. So I want to explore the construction side a little bit more. I've got a small sample size here, but I have talked to several builders here in New England, as well as some of their customers. And I'm hearing about some significant shortages in materials and labor and continuing to see prices going up on materials. And also hearing from some high-end residential customers that because of this, they're pushing off any construction projects until the spring. I think we're going to end up with the same issue in the spring that they're having now, but can you just give us a little more granularity on the labor and material issue, where you're seeing issues, and if you are also hearing from potential clients on the construction side that they're going to wait and see what happens in the spring. Thanks.
spk13: Yeah, that's a lot. Let me see if I can start to attack that. On the labor issue, you know, labor has been challenging for on-site construction for some time and getting enough crews to do framing, et cetera, on the on-site side of things. We operate a factory in Maine where, you know, there's probably fewer alternatives. I'm not saying that labor is not challenging at times, but we have a labor force that comes to the same plant every day and does the same job. And so I actually think that it's a benefit to us when labor is short on the conventional side, right? And so that has not been too much of an issue. I would say it's a little tougher to build a labor force today maybe than a year ago, but we still are able to get new workforce participants when we need to. So that's one thing. On the materials side, you know, there are some supply chain disruptions, especially in the sort of value added area. So we see some challenges in getting windows, for example, and cabinets on time. But we're not having a problem getting them. They just have longer lead times, which we have to adjust our production schedule to meet. So those materials prices are probably, you know, You know, they've gone up over the last year, and they're still up. But, you know, on the commodity side, we've seen prices come down quite a bit from the peak in mid-June. So, you know, there's a lot of things at hand. But I'd say on labor, you know, that's one benefit of what we do. In terms of projects, our pipeline is as large as it's ever been. So there's two things at play, right? I mean, you may see some projects get postponed, although we haven't seen that. But the market share of modular in the entire, you know, new home market is growing. So we're not seeing that. Our pipeline is as strong as it's been. We saw some potential of that during COVID where people were slowing down and delaying things, but we have a number of large projects that we're pursuing, and we haven't really felt what you're suggesting.
spk03: Okay. Well, great. Thanks very much. Thank you.
spk02: Our next question comes from the line of Adam Waldo with Lismore Partners, LLC. Please proceed with your question.
spk15: Good day, Jeff, Dave, and Matt. Thanks very much for taking my questions. I hope you can hear me okay.
spk08: Yeah, we can.
spk15: Yes. Okay. Great. So, thank you. Look, when we talked last quarter, the ledge pin, obviously, of getting the whole enterprise back to being moderately free cash flow generative is improving the margin structure of the construction business at the risk of stating the obvious. And, you know, you made some progress here in the third quarter, just under a 4% gross margin. A year ago, we were, you know, around 14, 15. As you're seeing the monthly close for October here in the fourth quarter, can you comment on what the gross margin structure is looking like so far in the fourth quarter? And do you remain confident as you were last quarter that you thought you could get gross margins back to that sort of target 15 to 20% range by early 2022 on the construction business?
spk13: Yeah. Well, we can't say much about October, obviously, but we are confident that gross margins are continuing to approach more normal levels. We have worked through our backlog where we had projects that were priced before materials prices spiked. So we don't have any projects that we believe are loss making in the pipeline right now. And as you can imagine, we sign a deal and then, you know, a project and it might be produced four or five months later. And so we're exposed unless we buy those materials up front, which in some cases we're now doing. But we do feel that margins are going to continue to approach more normal levels for two reasons. Our production levels are higher, right? So we're able to spread our fixed costs better. And also, we have implemented a number of price increases. In fact, with materials having actually slightly come down, we have not seen a lot of pushback, if any, on pricing. So we actually think we're going to have a very good fourth quarter. And don't forget, we do have two businesses in that construction division. One of them is in Maine that does modular, which is quite a complex business. The other one in the Midwest is wall panels. And we're seeing some differences in terms of how fast each of those businesses recovers. without getting into too much detail because we report them as one segment, it's been a little bit tougher to get KBS back to profitability, probably because those projects are larger and more complex. And so we're seeing Edge Builder respond very, very favorably in the second half in general. But yeah, we feel pretty confident that things are going to continue to get better. I mean, anything can happen, but we feel that third quarter was quite a turning point in general for the construction division. And we think that the fourth quarter will, better than the third by, you know, a reasonable amount.
spk15: That's really helpful. Yeah, that's really helpful perspective, Dave. Thank you. I don't know whether this question really is for Dave or Jeff, but, you know, you have pretty good size accounts receivable balance. Do you have a factoring or some sort of what's called mainstream because you're a little bit too small to securitize, but let's call it a factoring structure in place for your receivables so that you could tap those in some fashion for working capital as needed?
spk13: Well, what we do have is we have two asset-based revolving credit facilities. We have one at KBS, which is a $4 million line. We're borrowing anywhere from two to three typically on that, maybe a little bit more right now because our AR is up. So we do essentially borrow against AR with Gerber Finance of New York. It's a non-bank lender. We also have a $4 million facility. It was $3 million, but we increased it to $4 million over at Edge Builder in the Midwest. We're actually borrowing a little bit less on that because, as I said, that's turned a little quicker. But we do have those facilities, and they also allow us to borrow against our inventory at a slightly lower rate and with a sublimit not up to that $4 million. So, you know, we feel like those are two good facilities that allow us to kind of scale up and down as business levels necessitate that.
spk05: And then on the healthcare business, we have a revolving credit line with Sterling National Bank, and there's a table in our press release that shows the balances and the interest rate, and that one's at a very attractive rate. It's below 3%, but as Dave said, those are all asset-based lending facilities, and so AR is collateral, and we feel like that's a cheaper way to finance the business than factoring would be.
spk15: That was really, really helpful. Thank you, both Dave and Jeff. Final one for Jeff, I think, as executive chairman. You know, obviously, you've reinstated the preferred stock dividend at the board level last couple of quarters. Construction business is improving at a moderate pace in terms of the margin structure. Sequentially here, things are looking even better for the fourth quarter. Is it reasonable to think that we'll be continuing to pay the preferred stock dividend here as we go into 2022, especially as that part of the capital stack is a key component of potential future acquisition currency?
spk05: Yeah, I think that's a reasonable assumption. The board sets that policy, not management, but the board wouldn't have... started paying dividends on the preferred stock if uh it wasn't um comfortable that that was a prudent thing to do and um you know we do see uh the construction business returning to more normal levels and um in the fourth quarter and then into 2022 we've invested significantly in the um in the construction business And, you know, now we're looking forward to seeing that business perform and generate positive income and positive cash flow.
spk15: Well, thank you very much, and best of luck for a strong start to 2022.
spk13: Thank you.
spk02: And as a reminder, if anyone has any questions, you may press star 1 on your telephone keypad to join the question and answer queue. Our next question comes from the line of Jeff Bezos. with Diamond Bridge Capital. Please proceed with your question. Hi, good morning.
spk14: Curious about what you just said, Jeff, about investing in the construction segment and seeing good results from that. Can you elaborate on what those investments have been? Sure.
spk05: You know, when we merged together The thesis, the vision was that the construction business was doing something like $30 million in revenue, maybe less than that, and we had a vision of investing in it and doubling the revenue, getting it up to more like a $60 million rate with the goal of also having 10% EBITDA margins in that business. And we have injected working capital to fund the growth. And that was the reason, one of the primary reasons for the equity offering we did last year was to really fund the growth in the construction business. And so a lot of it was a working capital investment that was needed to grow the business. We've also added a significant amount of talent in the sales and marketing side of the business, grown our sales pipeline, grown our backlog, and we've also added management personnel to match or to help manage the higher production level. So we think we're really seeing that on the revenue side with revenue growing 65% year over year. We weren't planning for lumber to go from, I think, 300 at the lows to 1,800 in such a short period of time. And with the six-month backlog, you know, it's taken us a while to kind of work that through the system. But we have increased our prices significantly this year. Those price increases have stuck, which really speaks to strong demand. And as Dave talked about, raw material, the more commodity items, raw material prices have declined. we do see that business recovering strongly. We do think that's going to be an important growth engine for the company. So that's what I meant when I talked about, you know, seeing the benefits of the investments we've made in that segment.
spk20: Sure.
spk14: Okay. That's very clear. Thank you. And the volume at KBS, can you say what kind of output per week or so? I think eight to 10 was was the hoped-for target?
spk13: Yeah, you know, we're not there yet, and part of that is, you know, operational challenge internally, which, as Jeff said, we've hired some management to help get us there, and the other part of that is the supply chain disruption, which, you know, the variable and lengthening lead times in certain items or longer lead times in certain items makes it hard, right, because it's an assembly line. So we're sort of at, you know, somewhere in the $7 On average, although the last few weeks it's been higher than that, I still think we'll get to higher levels as some of the external challenges abate and we improve our processes internally. But the revenues have climbed ahead of our original budget for the year. And part of that is, well, all of that is the ASPs are higher. But the ASPs are higher for two reasons. They're higher because we've raised pricing and they're also higher because we're pursuing you know, higher level business, which we believe has more margin in it. So, yeah, we're not where we want to be in units, but we're doing more complex units. So, in a sense, you know, no two units are the same, right? So, more labor goes into more complex units. We can charge more for complex units. We're taking a lot more focus on what the value off the line is in a given week. You know, we like the number sort of half a million. So, you know, if that's six boxes or 10, it doesn't really, it matters, but it doesn't matter that much, right? We're looking a lot more at some other metrics like value off the line because we bring the same labor force to the, you know, to the factory every week, right? And so, yeah, that's what I would say about that. So we're happy with the revenue growth there and the amount of production and the types of work that we're doing. Right.
spk11: Okay, good. We are focused on making it more profitable, yeah. Sure. Yeah.
spk14: And then about the healthcare side, you all have changed your accounting by the segment and also with the sale of one of the healthcare assets. I'm just wondering if you can give some perspective about profitability in the healthcare businesses now versus 2019. Any way to give a comparison there? Yeah, I would say this is Jeff.
spk05: You know, we've returned to more normal levels on the revenue side. And what might be confusing is on the corporate costs line, we've kind of separated that between the public company corporate and the corporate associated with the healthcare business. That could be what you're referring to. But when We think about, on a pro forma basis, revenue has returned back to pre-COVID levels, which is about $60 million a year, $15 million a quarter. That's about where we were in Q3. And this is a business that we expect to have gross profit in the 20% plus range. And that's where it was in 2019. And I think in Q3, it was 22%. it's kind of what we, what we view to be normal levels. Um, Matt, I don't know if you had anything to add to that.
spk07: No, I would, I would say you're right. You're spot on, you know, I mean, we're, you know, we're, we're back, back from, uh, on the services side in terms of, um, revenue and, um, you know, have a little bit of a, um, you know, as Jeff said, you know, a little bit of a downturn in the, um, close margin, some of that's due to, you know, labor costs and whatnot, but, um, camera sales are back up and they're strong, and that's really helping us, especially over 2020, but very similar to what we saw in 2019 when you take out all the one-timers and everything like that.
spk14: Okay, so for the two continuing businesses from 2019 to now, can you say what the EBITDA of those two businesses were in 2019? And just I know it's like $1.3 million before corporate. By the division, it's $1.3 million in the third quarter and the second quarter. So I just wanted to just get some kind of comparison.
spk07: Yeah, like what Jeff was saying is that, you know, what was difficult is that there was differences. And that $1.3 is after DigiRAD helped corporate. but does not include Star Equity Corporate. 2019, we didn't have those separations. So that's what makes it difficult to kind of compare apples to apples. But it would be very similar for those two divisions, DI and DIS, 2019 versus 2021. Okay, thanks.
spk14: And then just lastly about acquisitions, Jeff, can you say just, Where you stand, are you getting any closer? Do you think sometime in the next six months you may announce an acquisition? Or are you just going to be patient and just wait for the really the right one?
spk05: Yeah, no, it's a good question. We see a lot of benefit from being in the market and looking at things. But at the same time, we don't... feel forced to do anything. Both of our businesses are growing and we do have some pretty interesting internal growth opportunities. And so we are looking at all those things, the internal growth opportunities as well as acquisitions. And I think the most likely would be something that's more of a bolt-on type of acquisition. for one of our two business segments, so either construction or healthcare, with construction maybe being more likely of the two. But over time, we would like to add more legs to the stool, and we do think there's a lot of benefits from combining several other companies that aren't really big enough to be standalone public companies. By combining with us, we can obviously reduce all the public company costs on day one, like we did with the construction business that we acquired. But we can also reduce the corporate costs, or said another way, spread them over a much bigger base. And another very significant benefit that's hard to quantify is that a lot of these small companies, you really want the management team 100% focused on the operations of the business, and maximizing the business, looking at organic growth projects, bolt-on acquisitions. And you really don't want them distracted by all of the things involved in running a public company. And that's a real benefit with another business or company joining with us and becoming another leg to the stool.
spk14: Sure, that makes sense. All right, thanks for your help.
spk02: And again, with a quick reminder, if anyone has any questions, you may press star 1 on your telephone keypad to join the queue. And it looks like we have reached the end of the question and answer session. I'll now turn the call over to Jeff Eberwein for closing remarks.
spk05: Thank you, Operator. Before concluding the call, I just want to note that David, Matt, and I are always available to take your questions. So give us a call or send us an email if you do have any more questions. And we appreciate all of our stockholders and your feedback and your support. So thank you for your time today.
spk02: And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation. Thank you.
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