Risa Lindsay - Investor Relations Matt Molchan - President and Chief Executive Officer Jeffry Keyes - Chief Financial Officer and Corporate Secretary.

Juan Molta - B. Riley & Company Mitra Ramgopal - Sidoti & Co Larry Haimovitch - HMTC.

Greetings and welcome to Digirad Corporation Second Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms.

Risa Lindsay. Thank you, Ms. Lindsay. You may begin..

[Technical Difficulty] a replay will also be available on the company’s website. I would like to remind everyone that certain statements made during this conference call, including the question-and-answer period are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws.

These forward-looking statements include statements about the company’s revenues, costs and expenses, margin, operations, financial results, acquisitions and other topics related to Digirad’s business strategy, and outlook.

These forward-looking statements are based on current assumptions and expectations and involve risks and uncertainties that could cause actual events and financial performance to differ materially.

Risks and uncertainties include, but are not limited to business and economic conditions, technological change, industry trends, changes in the company’s market and competition. More information about the risks and uncertainties is available in the company’s filings with the U.S.

Securities and Exchange Commission including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K as well as today’s press release.

The information discussed on this morning’s conference call should be used in conjunction with the consolidated financial statements and notes included in those reports and speak only as of the date of this call. The company undertakes no obligation to update these forward-looking statements.

Hosting the call today from Digirad is President and CEO, Matt Molchan. Joining Matt this morning is Jeff Keyes, Digirad’s CFO. Matt and Jeff will discuss the 2016 second quarter financial results, update us on the company’s strategy, and comment on the company’s outlook. A question-and-answer period will then follow.

With that, I’d like to turn the call over to Matt Molchan. Good morning, Matt..

area number one, acquisitions, our goal is to acquire companies that fit within our business model of providing healthcare solutions on an as needed, when needed and where needed basis and in a very financially disciplined manger; area number two, adding new services to our portfolio that we can provide through our current distribution channels; and area number, organic growth within our existing portfolio of services and channels.

So most of our current efforts are spent running our business in integration DMS health. Jeff and I continue to spend time looking at possible acquisitions. The right opportunities present themselves, are great value for our shareholders then we’ll move on these opportunities.

If they are not and we’ll continue to do our core purposes to run our great business, generate cash and create shareholder value. Now, I’d like to turn the call over to Jeff to give other comments and a more detailed financial update for the quarter and year.

Jeff?.

Thanks Matt. Good morning, everyone. In the earnings release today and in my comments, I make references to both GAAP results as well as adjusted results. The adjusted results are non-GAAP and do not include non-recurring charges such as those associated with acquisition integration charges and purchased intangible asset amortization.

In addition, I will make reference to adjusted EBITDA which is also a non-GAAP major that further excludes depreciation, amortization, interest, taxes and stock based compensation.

We believe the presentation of these non-GAAP measures along with our GAAP financial statements and reconciliations provide a more thorough analysis of our ongoing financial performance. You can find the reconciliation of our results on a GAAP versus non-GAAP basis in the earnings news release today.

As we previously discussed, we closed on DMS Health on January 1st, 2016 and result of DMS operations are included in our results for the entire quarter and for the year-to-date period since January 1, 2016. Next I’ll give a brief summary of the quarter’s activity.

Total revenue for the second quarter of 2016 was 32.1 million compared to 15.6 million for the same period last year with the largest impact being the inclusion of DMS Health business units, mobile healthcare and medical device sales and service within our results.

Revenues from these new business units contributed a total of 12.2 million and 4 million respectively to our overall revenue for the quarter. Revenues for diagnostic services were 12.5 million compared to 12.2 million for the second quarter of last year.

And revenues from diagnostic imaging were 3.4 million, which was a slight increase from the prior year’s second quarter. Our overall gross profit percentage in the second quarter of 2016 was 30.4% compared to 30.7% in last year’s second quarter.

In Diagnostic Services, the gross profit percentage for the second quarter was 23.3% compared to 24.4% in last year’s second quarter. And our Diagnostic Imaging business, the gross profit percentage was 34.2% compared to 33.5% in the prior year’s second quarter.

Overall, the revenue increase on our Diagnostic Services business was positively impacted by higher volume and service days ran in the second quarter of 2016 compared to the prior year both from new business activity as well as less cancellation in 2016 compared to the prior year.

The slight decrease in gross margin year-over-year was impacted by the timing of some expenses in the quarter and as a result of the onetime in Medicaid adjustment for our Telerhythmics business which impacted revenue, margin and out bottom line by 200,000 that Matt previously mentioned.

In Diagnostic Imaging, our overall revenue and gross margin was impacted by the timing and mix of cameras sell as well as the higher release of prior reserved inventory of Q2 of 2015 versus Q2 of 2016.

Our Mobile Healthcare business produced revenues at 12.2 million with a gross profit percentage of 21.2% while Medical Device sales and services has revenue of 4.0 million for the gross profit percentage of 60.6%.

As I stated last quarter, moving forward, we generally expect a gross profit percentage for Mobile Healthcare to be in the mid-20% range and for Medical Device sales and services in the mid-30% range.

Though Medical Device sales and services can vary somewhat depending on the timing of product sales and commission revenues related to our exclusive Philips relationship.

We do experience some seasonality in our business and notwithstanding other factors; the fourth and first quarters are slower quarter with the second and third quarters being our higher revenue quarters.

Further, we also expect the seasonality trend to be consistent with the inclusion of the DMS Health as we move forward, the Mobile Healthcare business experiences most of the same seasonality comes with Diagnostic Services and Medical Equipment sales and service business we experience this timing concuss based on the timing of equipment sold similar to diagnostic imaging.

Notwithstanding acquisitions, we would expect this trend to continue as we move forward. During the second quarter, we incurred closing and integration related cost from DMS Health of around $200,000, we expect to incur approximately $300,000 for remaining portion of 2016.

Moving on to the bottom line results for the second quarter, adjusted net income was 1.8 million or $0.09 per diluted share compared to 1.4 million or $0.07 per diluted share in the second quarter last year. Adjusted EBITDA was 4.2 million for the second quarter of 2016, an increase of 2.2 million from the second quarter of last year.

Today we also reaffirmed our 2016 financial guidance which is to produce revenues of between 125 million and 130 million. Adjusted diluted earnings per share between $0.30 and $0.35 per share and adjusted EBITDA between 17 million and 18 million.

As a reminder, we have a credit facility with Wells Fargo that was used to help fund the acquisition of DMS Health.

This credit facility has three components, a revolving line of credit that has borrowings base up to 12.5 million and bears interest of LIBOR plus 2%; a tranche A, as a borrowing base up to $20 million and bears interest at LIBOR plus 2.5% and amortizes over seven years; and a tranche B, that has a borrowing base of $7.5 million and bears interest at LIBOR plus 5% and amortizes over three years.

At June 30, 2016, our weighted average interest rate on overall credit facility tranches with 3.6% and a total principal balance outstanding of 25.3 million. Our net debt position left all cash, cash equivalents, and related restricted cash requirements was $17.6 million.

Also at June 30th, our line of credit was completely paid down leaving availability for our credit agreement at 5.9 million. And finally, we announced today our regularly quarterly cash dividend of $0.05 per share that will be paid on August 29th to shareholders of record on August 17th. Now I’d like to turn the call over to operator for questions..

[Operator Instructions] Thank you. Our first question is coming from the line of Juan Molta with B. Riley & Company. Please proceed with your question..

Hi, good morning, guys. Thanks for taking the question.

First one is on the services gross margin which was down sequentially in year-over-year, you attributed some of that I guess to true up on Medicaid, is there anything else you can comment on perhaps pricing or cost?.

Hey Juan, good morning.

How are you?.

Good. Thank you very much..

Great. Yes, I think the majority of hit was related to that onetime Medicaid true up that we incurred. In the quarter, we really did not see any pricing pressure. So we attribute the majority of that to our true up that occurred in Telerhythmics. And as Jeff said that was pretty significant hit that actually cause the issues to our gross margin..

Yeah, and I would follow-up by one thing, that was the difference year-over-year otherwise our gross profit actually would have been a little bit higher.

So this to be clear and for everybody’s understanding, this is a onetime adjustment we had found that there is one provider that have been reimbursing it as slightly too high of a level, so there is a accumulative adjustment for that, we don’t expect that type of activity going forward..

Okay, perfect.

And so in the past we have talked about and has been mentioned before about some selected pricing pressure and geographic activity in certain geographies for DIS, so I guess that’s in the past?.

Yes..

Okay, perfect. Regarding reimbursement, and since we had earlier this month as DMS proposes for 2017 understanding you bill directly to the hospital and mobile healthcare into the physician office in DIS.

But could you comment at least you expect what type of impact you expected any for next year?.

Based on the current proposals, we are not expecting a large - we are expecting an impact at this point that would affect our DIS or mobile healthcare businesses.

As you know those businesses lot of them are based on multiple year, one year to multiple year contracts, but at this point even ones that are coming up for renewals, we are not in 2017, we are expecting these changes that we are seeing, the fluctuations that we are seeing in reimbursement are going to have a significant impact in 2017 to Digirad..

Okay, prefect.

Next question, regarding actual test of other services, new tests, are there any that you have in plans in the next 6-12 months in implementing that made of other revenue opportunities that you can talk about at this time?.

One year that we’re very excited is - within our Mobile Healthcare business is our mobile healthcare solutions that we are working with large organizations and particularly with a VA to create mobile healthcare solutions along the lines of providing for women veterans.

That’s one area that we are doing a lot of work in that in conjunction with the VA to help. So that’s an area where those mobile healthcare solutions are very flexible and what we could offer in the mobile setup, where we could offer mobile mammography, we could offer simple checkups, we can even offer a verity of other needs.

As you might be aware, the women veteran is severely unreserved in the VA hospitals and we feel that there is an opportunity. So to our relationships that DMS has with the VA, we are looking to exploit that in the upcoming next six to 12 months and we’ll be looking forward to reporting further on that as that progresses..

Okay and then last question and I’ll hope back in the queue.

You had mentioned I believe before joining buying organizations GPOs, can you provide an update there?.

Yes, we continue - that continues to be especially within our Diagnostic Imaging business continues to be one of our key objectives for this year to join other GPOs, we are currently a member of two different GPOs with goals to add more to that. So yeah that project and that initiative really is progressing very well.

And at this point, the ones that we have joined are new and we are starting to get our information out but it’s a great place, a great way to get our unique product especially our Ergo camera and our XACT camera out in front of thousands of different hospitals that are members of this GPO.

So we’re very excited about those opportunities continue be and that continues to be one of our key initiatives in 2016..

Okay, perfect. And I’ll hope back in the queue. Thank you very much, guys..

Thank you, Juan..

[Operator Instructions] Our next question is coming from the line of Mitra Ramgopal with Sidoti. Please proceed with your question..

Yes, good morning. I am just wondering if you could press it a little more in terms of the integration with DMS, how does come along if you are starting to see any of the potential synergies you might be anticipating over next 12 months..

Hey, good morning, Mitra, how are you?.

Oh, fine, thanks..

Good, good. Yes, the integration is going very well. Our goals in 2016 for the integration really are mostly found in our back officer with HR, IT and finance. We have a verity of different milestones that we are either on schedule or ahead of schedule in accomplishing.

So from that standpoint, we are seeing systems that we have to move DMS to or Digirad to or the whole Digirad to or payroll systems those types of things, all that integration is going very well. Your question is specifically on the sales side looking for customer opportunities.

We are really beginning that process where we are looking at opportunity specially on the strategic standpoint, looking low handing fruit if you will where we might existing relationships within our DIS business for example that might correspond to opportunities for our Mobile Healthcare business and what not.

And so we are looking at that, we’re looking at things within Diagnostic Imaging. I can tell you there is still work to be done there. There is still needs to accomplished. We are very specific this year that as we looked at the integration of these two companies, both companies have their goal set for them.

We have specific targets that we’re looking to ahead. And as a part of the second half of this year as we’ve done a great job so far in the first half of the year and we are on our loose side of the fact of the target that we set in front of ourselves, but we are now beginning the process of looking for those low hanging fruit.

And we are going to start seeing more and more ability for us to go in front of our special or larger strategic accounts and offer them now we call the full Digirad solution which includes multiple modalities of imaging, multiple solutions, multiple products and we’re very excited about the prospects that the combine companies will be able to deliver to these customers..

And do you already significant for this low spending to help generate of these opportunities or you can pretty much build off of what you have right now?.

Yeah, we are not anticipating any significant incremental expenses related to that the sale when we call further sales and marketing integration..

Okay.

And is it fair to assume given you are still working on DMS, you have a lot of opportunities there that we should really be looking for to do anything on your acquisition front in a near term?.

I think that’s a fair statement, Mitra, I really do believe that. And we’re going to continue like we say we have our eyes open, looking for other opportunities as opportunities present themselves based on meeting the criteria that we have set. It’s within our means to execute. We will do that. But you are correct.

The majority of our time is spent calling the opportunities that these - the combined companies now present themselves with. So we’re - but we definitely have our eyes open and we’ll continue to look for those.

And you know as we’ve always said in the past, those opportunities are really subject to time, right, the timing has to be right in order for us to execute and - because the financial numbers need to make sense for us more than anything else. So we’re going to continue to look I would say in the short term. Yeah, your statement is correct..

Okay, thanks.

And final question just to be clear I guess on the guidance, it doesn’t assume any synergies that on a revenue side or anything on the cost side as it relates to DMS?.

That’s correct Mitra..

Okay, thanks again to taking the question..

Alright, thank you..

Thanks..

[Operator Instructions] Our next question is coming from the line of Larry Haimovitch of HMTC Please proceed with your question..

Good morning, gentlemen and congrats on your progress..

Thank you, Larry, good morning..

Hi Larry..

Good morning, Jeff.

So just wanted to clarify, Jeff, you ran through a lots of numbers, what were this that’s kind of the same store sales or what was the growth of the legacy business before the acquisition numbers are thrown in there?.

Yeah, so Diagnostic Services grew about 2.5% year-over-year and which diagnostic services includes Digirad Imaging Solutions and Telerhythmics, and then our Diagnostic Imaging business grew just over a percentage point this year right around a percentage point.

Like we mention though Diagnostic Imaging I think was impacted by timing of camera sales, they got a good backlog. But it’s kind of right within the range of the organic growth that we generally expect for the company year-over-year notwithstanding acquisitions and then future potential synergies with DMS..

Yeah.

And so that - yeah, I was also thinking that you organic growth is 1%, 2%, 3% somewhere in that ballpark for that business, correct?.

Yeah, we’ve always said that’s it kind of in - it kind of rub 3% to 5% range and we’re scraping on the lower end of them but that’s are around there..

And second question, there were several questions before me about acquisition side, I want to go overall that again.

But do you - would you have the bandwidth if something large like what came along last year presented itself where is it at this point really just little tuck-ins, little smaller deals that you are looking at and potentially close on later this year?.

Larry, you know first off, it all - that doesn’t make, it’s a business make sense for Digirad first off and it’s a - can we bring value immediately to our shareholders, right. So we’re going to definitely look at from that standpoint. But to answer your question directly, yes we do feel we have the bandwidth.

When we took on the acquisition with DMS, we did bring on some seasoned executives that who’re worked in the imaging business for years. And so we feel like we do have a strong team that can really look at, continue to look at either smaller or larger acquisition opportunities, but they first have to fit within our financial discipline that we set.

But short answer is yes, we feel very capable that we can go after acquisitions of similar size to DMS or larger or both on as well. So we do feel we have the capacity to do that..

And would you be able to finance that I guess I don’t know if something is larger than DMS would come along again, that was obviously an extraordinary opportunity.

But - and Jeff you reviewed the balance sheet a little bit you know in terms of line of credit, how big could you go if you found something that you really, really like to, what’s the financial availability?.

As our balance sheet is strong, we’re definitely paying down our debt quickly. As far as our current credit facility, we have availability within the current facility that likely fund a smaller bolt-on acquisition, that wouldn’t be a problem.

For larger acquisitions, we would have to just look at our total resources and we do a self-registration statement out there. We do have the ability to go out and very likely get low interest rate debt to fund transactions.

So within we have opportunities from a capital standpoint to fund, transactions today as we stand, our credit facility would not be able to absorb a large acquisition but we feel very confident if something came along and it was good value for the company, the shareholders that we wouldn’t have any trouble coming with the capital to finance it..

So one more question on the financial side, Jeff. Given the interest rates are remarkably low levels, it’s kind of boggles my mind when I think about who low rates are, I am true they do to you too.

Have you give some thought about doing a longer term debt deal that wouldn’t be revolving credit that would be really fixed rate, because you know you are going to do acquisitions in the future, whether they be several small tuck-ins or whether it might be something big.

Is the board looked at that all, say let’s go out and raise you know $25 million in long term debt, maybe we don’t need it now but debt is so cheap we could layer in something for a long term and just keep it on the balance sheet if we didn’t use it right away?.

We definitely talk to the board about all scenarios and possibilities form a financing standpoint. I think our current philosophy right now I mean obviously we just doubled the size of the company with DMS coming onboard. We took on I think definitely a reasonable level of debt, but we took on debt and the company hasn’t had debt in the past.

I think we want to make sure that we can continue to pay on this debt and use excess cash to pay down those debt and then address situation does they come up in the future. I don’t think that there is a strong apatite to go out and get debt to have for dry powder for acquisitions.

We’d rather say let’s look at the acquisitions, if there is one that’s compelling enough, that weren’t raising some financing to be able to fund it, then we would go out and look at the debt. I think we don’t see in the future the foreseeable future mass adventures rate changes that are on the horizon.

So I think we’ve been in climb now to paying the debt that we have and address the situation as it comes out..

So raising money of that magnitude that I talked about would be opportunistic and you are not too concerned if you don’t it know because you look at the crystal ball and that looks like the foreseeable future these rates are going to stay friendly..

That’s right. And again we have other means of financing at our disposal from a capital point. We have the self-registration statement. And I think when it comes to it, we want to make sure we don’t have too much access dry powder was rested as the time and the situation as it comes up.

And in the meantime, we want to be really obsession with our interest expense that we have and so we are going to focus on paying the debt we have and address it as it comes up..

Okay, thank you, Jeff..

You bet, Larry..

It is showing no additional questions at this time, so I would like to pass the floor back over to management for any additional or concluding comments. Thanks Jessie. As always we appreciate all our shareholders and the continued feedback and support that we receive. We’re very bullish about our business and our future.

Jeff and I look forward to discussing our results and business update with you next quarter for our third quarter 2016 results. Thank you..

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your participating and you may disconnect your lines at this time..