Greetings, ladies and gentlemen, and welcome to Star Equity Holdings, Inc. Fourth Quarter 2023 Results Conference Call. Please be advised the discussions on today's call may include forward-looking statements. Such forward-looking statements involve certain risks and uncertainties that could 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 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 the 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. You may access 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.

Thank you, operator. Good morning and thank you all for joining us today for our fourth quarter 2023 results conference call. On the call with me today are Executive Chairman, Jeff Eberwein; and Chief Financial Officer, Dave Noble. In the fourth quarter of 2023, our construction revenue and gross profit declined compared to the fourth quarter of 2022. However, for the full year 2023, strong pricing discipline and an improved business mix resulted in year-over-year construction gross margin improvement from 21.6% to 26%. Credit tightening in the second half of 2023 was a contributing factor and caused delays in some commercial projects pushing revenue into 2024 and, in some cases, indefinitely. However, single-family residential activity and our overall backlog and sales pipeline indicate continued pent-up demand. Although the timing continues to be impacted by ongoing interest rate sensitivity, we believe this is a temporary situation and are continuing our focus on the niche markets where we’ve built significant expertise and a strong reputation, including affordable and workforce housing, educational buildings and dormitories, and environmentally sustainable housing. In these markets, we feel our experience and reputation give us a sustainable competitive advantage. Based on our sales pipeline, we believe demand in all of these sectors will remain strong. We also have continued conviction in the ongoing growth of factory-built construction in the United States, which according to the Modular Building Institute's most recent report now accounts for 6% of all new construction starts in North America, having tripled from 2% in 2015. Despite lower revenue in 2023 versus 2022, we achieved and continued to maintain our mid-20s gross margin target for our construction division. Sustained execution quality has contributed to the division's ability to maintain pricing levels and has contributed to the division's gross margin improvement. We remain confident in the division's ability to maintain strong gross margins as revenues recover amid a stronger macroeconomic backdrop. Lastly, we closed the accretive Big Lake Lumber bolt-on acquisition in the fourth quarter and have successfully integrated it into our Glenbrook operation. As Dave will discuss, our balance sheet is strong, and we have ample cash to expand our business. During the coming quarters, we will continue to evaluate construction division acquisition opportunities to augment our focus on sustainable organic growth. We will also examine potential acquisitions in new industries and explore opportunities in our investments division. Now I'll turn the call over to Dave Noble, our CFO, who will provide additional fourth quarter consolidated financial highlights.

Thank you, Rick, and good morning. Let's move on to Star Equity's consolidated results. In Q4 2023, SG&A decreased by $1 million or 23.8% versus Q2 in '22. As a percentage of revenue, SG&A decreased in Q4 22.8% versus 23.9% in Q4 of 2022. In Q4, we generated net income from continuing operations of $1.8 million versus net income from continuing operations of $0.9 million in Q4 of '22. Non-GAAP adjusted net income from continuing operations in Q4 was a negative $0.4 million. This compares to adjusted net income of $0.5 million in Q4 of 2022. Non-GAAP adjusted EBITDA from continuing operations decreased to negative $0.1 million in Q4 from a positive $0.9 million in Q4 of '22. Segment non-GAAP adjusted EBITDA at our construction division decreased $0.7 million in Q4 this year, down from $2.9 million in Q4 of '22. Despite some economic headwinds, which impacted our construction revenue all year, we continue to make progress across this operating segment in 2023. For the full year, our construction gross margins were 26.5% versus 22.2% in 2022. We also closed a bolt-on acquisition in this segment in Q4 as Rick mentioned, which will bolster revenues in 2024. Construction non-GAAP adjusted EBITDA for 2023 was $4.4 million versus $6.3 million in 2022. As of December 31, 2023, our consolidated balance sheet and liquidity were strong. The outstanding balance on our interest-bearing debt was $2 million, while our cash balance stood at $18.3 million. Now I'd like to turn the call over to the operator for questions.

The first question today comes from Tate Sullivan with Maxim Group. Please go ahead.

Hi, thank you. Good morning. Can you talk about the lumber yard acquisition a bit more? Are you selling the products mostly to outside customers and both your legacy Glenbrook operations? And if so, what is the relative mix if you can address?

Sure. Yes, I'll take that. So that acquisition was, as you mentioned, in the lumber yard arena. So it's a building products distribution business mainly for professional builders. And it's very similar to the existing Glenbrook piece of our EdgeBuilder business, right. So our EdgeBuilder business already had a distribution business and also manufactures wall panels. So we're just expanding the geography of coverage for our building products distribution business. It's just tucked into that, and that's called Glenbrook. That's the brand name. So we no longer have the Big Lake brand name. We've merged that into Glenbrook and just expanded that distribution business.

Okay. Regarding the other income of about $1.4 million, is that primarily related to mark-to-market adjustments for your investments? I believe it also includes gains.

Yes, there's a gain. We sold a factory that we were not using mid-year last year. And we also got some one-time sort of rebates on some prior year insurance policies.

Okay. That's a lot about cash flow. You mentioned your niche markets, including affordable housing and student housing. Is the strength you referred to focused in specific areas of New England or spread throughout the region?

I mean, throughout New England, I mean, a lot of the activity as you can imagine, is in and around the Boston area, that's the most density of population. But we operate all across New England, primarily Massachusetts, New Hampshire, Maine, but we will produce projects in any of the New England states.

Okay. Thank you, Dave.

The next question comes from Theodore O'Neill with Litchfield Hills Research. Please go ahead.

Oh, thanks very much, and congratulations on a good quarter. Rick, this question I've been meaning to ask for months, about the workforce housing project on Nantucket. Are you building housing and shipping it to the island? How does that work?

Go ahead, Rick.

Dave, you want to take that one?

Okay. Yes, I mean, yes, it's modular housing. So we build it in our factory in Maine, and we truck it down to a port, put it on a barge, and then move it over to the island. And then it's trucked to the site, and the local developer or local general contractor will button it up and finish the project.

This is Jeff. I would add that we're seeing a trend where there's really strong focus on solving workforce housing problems. Nantucket, Cape Cod, Martha's Vineyard, parts of Boston, it's gotten very expensive for their workforce, and there's no place for them to live. So they have to travel a really long way to work. Workforce housing solutions have really gotten the attention of developers and policymakers. In some cases, groups will get together, form a nonprofit, people will donate to the nonprofit, buy land, and they'll want to use that land for workforce housing. But those organizations, for all their wonderful intentions, don't really have experience doing construction projects. And that's where we come in; we've partnered with several of them. We have designs, solutions, and several other projects that we can show them where they can do a tour of the finished project. We've gotten some really good traction in this segment of development.

That's really interesting. Is it a nonprofit on Nantucket that you're talking about here that's doing the same thing?

I think so. I sometimes get the projects confused. Most of them have been nonprofit. In other cases, there may be some local programs where a developer receives credits, expedited zoning, and similar incentives specifically for workforce housing.

Okay. And …

We conducted a similar project on Martha's Vineyard, I believe it was in 2022. That project was definitely a nonprofit organization that received some funding from the state of Massachusetts.

Okay. I would just add, Theo, that that's a nationwide trend, and a lot of municipalities are actually forming committees and subcommittees to communicate with other parts of the country on how they go about building those solutions. We think that trend is entirely sustainable, and it's just a problem that we are able to solve.

Oh, yes, I am seeing that in other places as well, which is part of the reason I asked the question. The other was just the logistics of getting built house over to the island.

Well, I think that's …

I believe that might be the only time we've transported units over, but I'm not completely sure about that.

Yes, well, if you think about it, it's much easier. I know it sounds complicated. It's much easier to barge a finished product over and install it than it is to get all the materials there, all the workers there to build it on site that's much more expensive and much more difficult. So that's what makes our solution a really great solution for those expensive hard-to-reach places. Oh, yes, absolutely. Understand. I was wondering if you can just give us some qualitative discussion about the backlog. And of the business that you mentioned here in the prepared remarks moving from Q4 into 2024, is that still being pushed out? Just give us some color on that.

Yes, this is Jeff. What I would say is, credit conditions have gotten tighter. That's pretty well known in the marketplace. And the developers that we work with, a lot of times, they'll want to get financing in place or need to get financing in place. And by financing, I'm talking about a construction loan, that's typically refinanced when the construction project is over, and they have a finished product that's making rent income. What we're seeing is that it's just taking longer, and it's more difficult for them to get the financing in place. So what used to take, say, 3 months, a couple years ago, is now taking 6 months or 9 months. And so there's been several instances that we saw in 2023, where everything is on track, projects approved, they give us the order, but we don't start on it until we get those first payments. It's just taking them longer to get the financing in place. And so it just shifts production in the future. So I think the shortest way to say it is that it's kind of a one-time shift to the right. Some of the things we thought would be produced in Q4 have moved into Q1. Things that we thought would be produced in Q1 has gotten shifted to Q2 and Q3. It's something that we've adjusted to, and we think will get better over time. But in general, the tone in the marketplace is better than it was 6 months ago, projects are going forward. It's just a very different situation than if projects were getting canceled because of a weak economy or because demand wasn't there; we're not seeing that. It's an odd thing to say, but our sales pipeline, our backlog hasn't declined at all; it's remained really strong. If anything, it's stronger than it was 6 months ago, it's just that the timing of when we would be starting some of these projects has gotten shifted out a quarter or two.

Is that because there's an expectation that the rates will come down so that things are getting pushed out a bit?

No, it's not that so much as credit's tighter, so it's just taking longer to get the financing in place.

Okay. And my last question here. In the non-GAAP reconciliation, there's a reference to approximately $1.2 million bargain purchase gain related to the acquisition of Big Lake Lumber. Maybe I'm the only one who doesn't know what that is. Would you mind enlightening me?

Yes, it took us some time to understand. We acquired Big Lake Lumber at a very favorable price. From an accounting perspective, we needed to conduct a third-party valuation, which confirmed our belief that it was a great deal. This situation results in a negative goodwill. We had to recognize that in the profit and loss statement as a gain since we paid less than the actual value of the company. Typically, companies are often purchased for more than their asset value, which is recorded as goodwill. In this case, I see it as a negative goodwill that impacts our profit and loss statement and leads to a noncash gain.

Yes, the accounting is what it is, but under the accounting rules, we are required to list it on our balance sheet at market value, which is determined by a third-party valuation firm. Since the market value they provided was higher than what we paid, there is a gain. According to the accounting rules, we had to include that gain in our P&L in the fourth quarter.

Okay. Well, just one of those a quarter would be great.

Well, I would emphasize it was noncash. No one wrote us a check.

The important thing is we believe we've obtained good value for that acquisition. So that's the good news.

Yes, I understood. Okay. That’s it for me. Thanks very much.

The next question comes from John Oberholzer, a Private Investor. Please go ahead.

Good day everybody. My questions are about Firsthand Tech and how do you pronounce it. What is the value in buying those equities?

Yes. This is Jeff. I will handle that. We are a multi-industry holding company. We have our construction business, which is wholly owned and is one division. We used to have a health care division, and there are a lot of public microcaps out there that we think are cheap. They're below NAV, and in many cases, we think they just shouldn't be public companies. Over time, we would like more size and scale as a company, not just to be bigger, but it costs quite a bit to be public. If we can spread those public company costs and those corporate overhead costs over a bigger base, we think that will create a tremendous amount of shareholder value. Our strategy with those companies is to make an investment, encourage them to sell themselves in most cases. In some cases, we could be the ultimate buyer, and it could be a new division of Star. In other cases, maybe it's more valuable to somebody else than it is to us. In those cases, maybe somebody comes along and buys it. We had one recently where we had a position in a very small company, really good product, but it's way too small to be a public company. We encouraged them to sell themselves to somebody bigger, and they did make a public announcement that they were hiring a banker. They just announced recently that they were selling themselves to somebody bigger. That's the strategy with that. I think about it as seed corn for future divisions of Star.

Okay. That's very good. Any thought given to a buyback of Star's shares?

Yes. We think our stock is very, very cheap. We are value investors. We like buying things when they're cheap. An issue we have is just lack of scale as a public company. So in general, we're big fans of buybacks, especially when things are below NAV like we are today. I would say our #1 priority right now is to get more scale. We think that will create a tremendous amount of shareholder value. We are working on additional acquisitions predominantly in our construction division that we think will create a tremendous amount of value. So I would say be patient on that front, but we are constantly focused on what is the highest and best use of our cash and if we can do more acquisitions at what we think are really attractive prices and that are immediately accretive. For right now, we think that will create a tremendous amount of shareholder value.

All right. That’s great. I love your construction vision. I think it's amazing. Thank you. That’s all I have.

Thank you.

The next question comes from Al Hill, a Private Investor. Please go ahead.

Good morning, everyone. I have a question regarding the book value. Your stock price is $0.91 per share, and your book value is nearly three times that amount. Have you considered selling the company or making it available for acquisition instead of focusing on expansion? You mentioned that your company's fundamental worth is around $14 million to $17 million, but you remain quite small. Why not explore the option of someone acquiring your company instead of you pursuing acquisitions?

Yes, that's a great question. This is Jeff. I hold a significant amount of stock personally. We assure you that we consider shareholder value every single day; it influences all our decisions. That option is definitely on the table. Our top priority is to enhance shareholder value. We are open to merging with another company or selling ourselves. Last year, our healthcare division successfully merged with another entity, which we believe added substantial shareholder value, although this wasn't fully reflected in the stock price. In summary, we are open to all possibilities that could create shareholder value, including going private, selling ourselves, or merging with another company. These are all options we consider.

Okay. And then I saw where NASDAQ's got you in the penalty box and possibly delisting. Is that still going to happen going forward?

Yes. That's not something to worry about. We are dedicated to keeping our NASDAQ listing. We did get shareholder approval at last year's annual meeting to do a reverse stock split. If we need to do that to maintain our listing, we will do that.

Yes, in response to the previous comment, why not buy back shares to increase the stock price instead of opting for a reverse stock split?

Yes. That's — we will consider that. That is another way to go.

Yes, because reverse stock splits always have a negative connotation in my mind. That's just my opinion. And then last question, do you continue to declare preferred dividends even though you're losing money?

We have a strong cash position, which allows us to pay the dividend. The losses are just a temporary situation due to the sale of our health care business. To remain a public company, we need to grow significantly in size and scale. Successfully executing some acquisitions will resolve this issue. Additionally, preferred stock could serve as a valuable currency for acquisitions. Some targets we’ve approached have shown interest in accepting preferred stock, particularly if it pays dividends, as this increases their willingness to consider it.

Sure. That’s the only questions I got, guys. Thank you.

Thank you.

That concludes today's question-and-answer session. I will now turn the call back over to Rick Coleman for closing remarks.

Thank you, operator. Thanks, everyone, for the good questions today. Before concluding this call, I'd like to note that we are always available to take your call and discuss any additional questions you might have. So don't hesitate to contact us. We are looking forward to sharing our story with our current investors and potential investors in the coming weeks and months. As always, we appreciate all of our shareholders and your continued feedback and support. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.