Rica Lindsey - Executive Assistant Matt Molchan - President, CEO and Interim CFO Jeff Eberwein - Chairman of the Board David Noble - COO.

Analysts:.

Greetings, and welcome to the Digirad Corporation Third Quarter 2018 Results Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to your host, Rica Lindsey..

Thank you, Wilmer, and thank you all for joining us this morning. If you didn't receive a copy of our press release and would like one, please contact our office at 858-726-1600 after the call, and we'll be happy to get you one. Also, this call is being broadcast live over the Internet and may be accessed at Digirad's website via www.digirad.com.

Shortly after the call, 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, but are not limited to, statements about the Company's revenues, costs and expenses, margins, 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, CEO, and Interim CFO, Matt Molchan. Also on the call today is Digirad's Chairman of the Board, Jeff Eberwein; and its COO, David Noble. They will discuss the 2018 third 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..

Good morning and thank you, Rica. Good morning, everyone, and thank you all for joining us today for our third quarter 2018 results conference call. 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 nonrecurring charges.

I will also make references to adjusted EBITDA, which is a non-GAAP measure that further excludes depreciation, amortization, interest, taxes and stock-based compensation. Finally, I'll make references to free cash flow, which is a non-GAAP measure, taking operating cash flow and subtracting cash paid for capital expenditures.

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 a reconciliation of our results on a GAAP versus non-GAAP basis in the earnings release.

We had a very busy last few months as we positioned our Company in anticipation of the formation and implementation of our previously announced HoldCo strategy. In addition to running the business we created a new stock repurchase plan, we made the strategic decision to eliminate our quarterly dividend, and we sold our Telerhythmics business.

All these moves were done to prepare us for our eventual transformation into HoldCo, which we believe will give our Company its best opportunity to grow and maximize value per share over the long run. In terms of our current operating businesses, we're faced with many challenges during the quarter which we expect to be temporary in nature.

Despite these challenges we were still able to keep overall revenue basically flat on a year-over-year basis, with Diagnostic Services revenue outperforming over the prior year.

Our Digirad Imaging Solutions or DIS unit within Diagnostic Services did suffer weather related issues due to storms in the southeast but still managed to outperform the prior year quarter by 6%. Mobile Healthcare's performance in the quarter was impacted by higher than normal equipment and trailer maintenance costs.

However, interim rental revenue continued to outperform increasing by 24% over the prior year's quarter. Camera sales again impacted our top line in Diagnostic Imaging, but a strong September bodes well for a good finish to the year as budgets for hospital systems capital expenditures are being funded.

As we discussed on recent calls, we sold our MDSS service contract to Philips Healthcare earlier this year. The transaction closed on February 1, 2018. As a result, our MDSS reportable segment is being reported as discontinued operations within our financial statements presented for the third quarter and year-to-date results.

Continuing operations include our go-forward core business units Diagnostic Imaging, Diagnostic Services, and Mobile Healthcare. Now here's a more detailed summary of the quarter’s activity. Total revenue for the third quarter of 2018 was $25.7 million compared to $25.8 million for the same period last year.

Our overall gross margin in the third quarter of 2018 was 17% compared to 20.8% in the last year's third quarter. In Diagnostic Services, revenue and gross margin percentage for the third quarter was $12.4 million and 19.4% compared to $12.2 million and 21.2% in last year's third quarter.

Diagnostic Services suffered weather related issues due to storms in the Southeast but still managed to grow revenue from the prior year's third quarter. Our Mobile Healthcare revenue and gross margin percentage in the third quarter was $10.5 million and 7.6% compared to $10.6 million and 13.8% for the same period in the prior year.

The revenue decrease was mostly due to scan volume, which was mostly offset by an increase in interim rental sales compared to the prior year. The year-over-year gross profit decrease in the Mobile Healthcare business was primarily due to lower scan volume and increased maintenance expenses.

As discussed in previous calls, we made several changes in leadership, operations, and by adding additional resources to improve our Mobile Healthcare interim sales efforts. We believe that these efforts have been successful, as evidenced by the performance this quarter, and will continue throughout the year.

Additionally we sold three office buildings in Fargo for approximately $1 million in cash in the quarter. These buildings were used by our MDSS business and were no longer needed for our continuing operations.

In our Diagnostic Imaging business, revenue and gross margin for the third quarter 2018 was $2.8 million and 41.2% compared to $3 million and 44.3% in the prior year third quarter. Our revenue in the business was slightly lower compared to the previous year with slightly lower camera sales and camera support revenue during the quarter.

Moving on to the bottom line results for the quarter, we had an adjusted net loss of $0.6 million, or $0.03 adjusted net loss per share, compared to adjusted net income of $0.1 million or $0.01 adjusted net income per share in the third quarter last year.

Adjusted EBITDA was $1.6 million for the third quarter of 2018 compared to $2.4 million in the third quarter of last year. The third quarter operating cash flow was negative $0.8 million and free cash was negative $0.4 million. The third quarter of 2018 we had delivered $2.2 million of operating cash flow and $2.1 million of free cash flow.

As of September 30, 2018, the outstanding balance on our credit facility was $13.6 million, and our overall net debt position, including all cash and cash equivalents was $12.6 million. As discussed previously and announced on September 10, 2018, we intend to merge with ATRM Holdings, Incorporated to form HoldCo.

We anticipate this to close during the spring of 2019. As part of our new go-forward strategy, we have decided to eliminate our normal quarterly dividend in favor of a new stock repurchase program given the attractive valuation of our current stock price.

HoldCo, once it is formed, expects to make high-return internal investments as well as look for attractive acquisition opportunities in addition to repurchasing shares.

Our HoldCo mission will be to grow and maximize value per share over the long-term, and we believe opportunistic share repurchases will better achieve this goal rather than continuing to pay dividends given our current stock price.

Under the new stock repurchase program, authorized by the Board of Directors, the Company may purchase up to 2 million shares of its common stock, which represents approximately 10% of its current shares outstanding. After completing this repurchase program, the Board will consider authorizing an additional share repurchase plan.

The Company intends to repurchase shares through the authorized Rule 10b5-1 plans, open market purchases, privately-negotiated transactions, block purchases or otherwise in accordance with applicable federal security laws, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended.

Share repurchases will be evaluated against organic growth investments and acquisitions, and the Company expects to continually allocate capital to its highest and best use. Also, we sold our Telerhythmics business to G Medical Innovations USA, Incorporated, for $1.95 million in cash.

This sale will allow my team to put even more focus on our cash generating imaging businesses and it will allow the Telerhythmics business to merge with a company in G Medical that is focused in the cardiac event monitoring space with exciting new technology on the horizon. We'll use the proceeds of this deal to further pay down our debt.

Finally, as we had announced in the press release, we have reaffirmed our previously announced 2018 fiscal year guidance from continuing operations to generate revenue in the range of $100 million to $105 million and free cash flow in the range of $4 million and $5 million.

The Company has updated guidance for non-GAAP adjusted EBITDA, lowering it from $8.5 million and $9.5 million to approximately $7 million. Now I'd like to turn the call over to the operator for questions..

Operator:.

Thank you, Wilmer. As always, we appreciate all our shareholders and your continued feedback and support. We're looking forward to our next update call..

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