Greetings, ladies and gentlemen, and welcome to Digirad Corporation's Third Quarter 2019 Earnings Conference Call.

As a reminder, 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, 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 and changes in the Company's market and competition. For 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.

It is now my pleasure to introduce Jeff Eberwein, Chairman of Digirad. Mr. Eberwein, please go ahead..

Thank you, operator. Good morning. And thank you all for joining us today for our 2019 third quarter results conference call. On the call with me today are Matt Molchan, our CEO; [Dan Cook], Executive Chairman of our Building and Construction Division; and our Chief Operating and Chief Financial Officer, David Noble.

During this call, we will discuss the 2019 third quarter financial results, provide an update on the Company's strategy and comment on the Company's outlook. A question-and-answer period will then follow.

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, or call our Investor Relations Representative, Lena Cati of the Equity Group, at 212-836-9611, 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. In the earnings release today, and in our comments, we make references to both GAAP results as well as adjusted results.

The adjusted results are non-GAAP and exclude non-recurring charges. We 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, we will 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 the reconciliation of our results on a GAAP versus non-GAAP basis in the earnings release. We believe that we made great strides in the third quarter towards the implementation of our previously announced strategy, which we call HoldCo. On September 10, we completed the acquisition of ATRM.

And following that merger, we are now operating as a diversified holding company with three business divisions. First is healthcare. Second is building and construction. And third is real estate and investments.

The mandate of HoldCo is to maximize long-term stockholder value through high return internal investments that promote revenue growth, operating efficiencies, and cash flow generation.

In that regard, we have established a Shared Services Center, which when fully operational, will provide cost savings to HoldCo and we believe these cost savings will likely grow over time with additional acquisitions.

Our two-fold growth strategy is to first organically grow our existing business divisions by focusing on higher margin segments, such as camera sales and mobile scanning services in our healthcare division, and increase the utilization rate at existing factories and opening idle factories in our building and construction division, so we can fully take advantage of the significant opportunities available in those markets.

Second, is to seek attractive acquisition opportunities in two categories. One is bolt-on acquisitions for existing platform companies, and second would be acquisition that create new platform companies for HoldCo. This new strategy is designed to transform Digirad Corporation into a profitably growing entity.

We plan to use our free cash flow for debt reduction, internal growth initiatives and acquisitions. Now I'm turning the call over to Matt Molchan, our CEO. Matt, please go ahead..

Thanks Jeff. Total revenue for the third quarter of 2019 was $28.3 million compared to $25.7 million for the same period last year. Our overall gross margin in the third quarter of 2019 was 18.3% compared to 17.0% in last year's third quarter. Total revenue for the nine months of 2019 was $78 million, compared to $78.3 million for 2018.

Our overall gross margin for the same period in 2019 was 18.2%, compared to 18.6% for the same period in 2018. Our healthcare division segments core business remains strong, with higher revenues from sales of cameras and from scanning services.

Although revenue for this division for both Q3 and nine-month periods of 2019, slightly decreased from respective periods of 2018. This was due to the sale of the Telerhythmics business in October of 2018.

However, the increase of the gross profit in Q3 was mainly due to higher camera sales, higher utilization of our mobile imaging equipment and lower equipment maintenance costs spent in mobile healthcare.

In diagnostic services, revenue and gross margin percentages for the third quarter was $11.7 million and 18.5% percent compared to $12.4 million and 19.4% in last year's third quarter. Revenue and gross margin percentage for the nine months of 2019 were $35.7 million and 21.1% compared to $37.7 million and 20.2% last year, same period.

The decrease in diagnostic services revenue and the increase in gross margin percentage compared to the prior year was primarily due to the sale of our Telerhythmics business in October 2018, resulting in a loss of revenues going forward. However, DIS' core revenue was at 1.1% in the quarter compared to a year ago, and is up 3.1% year-to-date.

Our Mobile Healthcare business produced revenue and gross margin percentage in the third quarter of $10.6 million and 13.6%, compared to $10.5 million and 7.6% for the same period in the prior year. Revenue and gross margin percentage for the nine months of 2019 were $30.7 million and 10.9% compared to $32.1 million and 10.1% last year same period.

The quarter-over-quarter gross profit increase in the Mobile Healthcare business was primarily due to a favorable mix of services provided and higher utilization of mobile equipment, combined with lower equipment maintenance costs.

In our Diagnostic Imaging business, revenue and gross margin for the third quarter 2019 was $3.4 million and 35% compared to $2.8 million and 41.2% in the prior year third quarter. Revenue and gross margin percentage for the nine months of 2019 were $9 million and 34.1%, compared to $8.4 million and 43.6% last year, same period.

The increase in Diagnostic Imaging revenue was due to an increase in the number of camera sales partially offset by higher material costs.

Building and Construction division revenue and gross profit were $2.7 million and $0.5 million respectively, for both third quarter and nine-month 2019 periods, reflecting the completion of the merger with ATRM on September 10, 2019.

Thus, there were no operational or financial data recorded in the 2018 corresponding periods for Building and Construction division, nor the Real Estate and Investments division. Now, I'm turning the call over to Dave Noble, our CFO and COO, who will take you through further details on the quarter. Dave, please go ahead..

Thank you, Matt, and good morning.

For the first nine months of 2019, marketing sales general and administrative expenses decreased by 6.3%, compared to the same period of 2018, due in part to lower salaries and benefits resulting from lower headcount following the sale of our Telerhythmics business, as well as reduced cost per contract outside services, particularly in IT and HR, as a result of steps we took to streamline our internal operations.

And this is despite absorbing $0.5 million in ATRM related merger expenses. The HoldCo structure and the Shared Service Center will allow Digirad to further reduce corporate overhead costs over time by consolidating marketing sales and administrative functions, thus generating additional savings and improved earnings.

The Company expects to begin realizing meaningful benefits of the HoldCo structure in 2020. Moving on to the bottom line results for the third quarter, we had net loss from continuing operations of $1.5 million.

This included $1.1 million of merger related expenses and investments and compares to a net loss from continuing operations of $1.2 million in the same period in the prior year.

Non-GAAP adjusted net income from continuing operations was $14,000 or $0.01 and an adjusted net income per share, compared to an adjusted net loss of $0.6 million or $0.31 of adjusted net loss per share in the third quarter of last year.

Non-GAAP adjusted EBITDA increased to $2 million for the third quarter of 2019, compared to $1.6 million in the third quarter of last year, due to higher revenues from the sale of cameras and from our high margin mobile scanning services.

For the first nine months of 2019, net loss from continuing operations was $4.6 million, which included $2 million of merger related expenses and investments. This compared to a net loss from continuing operations of $2.9 million in the same period in the prior year.

Non-GAAP adjusted net loss from continuing operations was $0.9 million or $0.46 adjusted net loss per share, compared to adjusted net loss of $1.6 million or $0.78 per share during the same period in 2018.

Non-GAAP adjusted EBITDA was $4.9 million for 2019 year-to-date, compared to $5.2 million in 2018, reflecting slightly higher equipment materials costs.

For the third quarter, operating cash flow was $1.1 million and free cash Flow was $0.4 million, compared to operating cash flow of $0.8 million and free cash outflow of $0.4 million in the third quarter of last year. For the first nine months of 2019, free cash flow was $1.6 million, compared to $2.1 million in the same period last year.

As of September 30, 2019, the outstanding balance in our credit facilities was $21.2 million, and our overall net debt position including all cash and cash equivalents was $19.5 million. Now I'd like to turn over the call to the operator for any questions..

[Operator Instructions] Our first question comes from the line of [Steve Krueger with Foresight Investing]. Please proceed with your question..

You've completed the acquisition of ATRM partway through the third quarter.

And I'm just wondering if you could give us a sense of what the pro forma results would have looked like in the third quarter if ATRM had been part of the Company, part of the consolidated results for the entire quarter?.

We closed it on September 10th. And so as our press release talks about, it only included three weeks or less than three weeks of that business.

And in the merger document that was filed with the SEC over the summer, I think there are some pro forma information there that could be helpful to you, that has a lot of the historical results of both companies and also has some pro forma results of the combined company..

Well, that's historical.

I'm just wondering about for the third quarter, what the pro formas would look like?.

Matt Molchan:.

- :.

I would refer you to the 10-Q that we're going to file today. That'll have some additional information..

Yes, I noticed that the 10-Q isn't up on the SEC website yet. Well, in the results that you released, you show revenues for the three months for Building and Construction --.

Three weeks..

Unidentified Analyst:.

- :.

I mean, that's a good starting point. That's not going to be exactly what the results are. Because they fluctuate month-to-month. But you could do that exercise and make a rough estimate for what the full quarter would have been..

And how seasonal is the building and construction business? Is second and third quarters seasonally, significantly higher than Q4 and Q1?.

That's a really good question. And as Dave pointed out, there's two different businesses there, and they're both in cold weather areas. And so the KBS business is based in Maine. And right now, it mainly does residential projects. And as you might guess, residential projects tend to be very slow in Q1 in Maine.

Commercial projects were getting back into the commercial business, which we're very excited about, are much less seasonal. You can pretty much build those year around. And so the goal that we have going forward is to get some significant commercial projects in Q1 of every year, so that we can offset that seasonal weakness in the residential side.

Very, very interesting. The other business, EdgeBuilder, that's based in Minnesota, in an odd way has reverse seasonality.

Because they make wall panels in a factory, and because of the harsh winter weather in that area, we have seen periods were actually the business does better in the winter than it does in Q2 or Q3, because the weather is so bad outside that people prefer to have it built in a factory and then shift on site.

And then a lot of times in Q2 and Q3 you can have a lot rain that can delay projects. So we've had periods where in the winter, the EdgeBuilder business is really strong and the businesses in Maine is weak. And then they kind of trade places in Q2 and Q3. So, each year is different. But those are some of the patterns that we've seen..

And the only thing I would add is case in point for the first nine months for EdgeBuilder, which you can see these results; January was the biggest month and we've had a great year since then. But that was a big month where we've seen the opposite cycle with KBS, where it's gotten stronger through the summer months..

And there's information on those two divisions in the financial filings of ATRM. And you can see pretty big differences between the performance of those two businesses even between Q1 and Q2 of this year..

Preferred dividends, am I correct in my understanding, 10% cumulative preferred dividends are going to amount to approximately $2 million a year as things currently stand?.

That's correct. There's 1.9 million shares outstanding. So the math would be 1.9 million..

Yes.

And did you accrue for that in the third quarter?.

Yes, we accrued for it. It was three weeks, I believe, from when the merger closed on September 10th..

But that doesn't appear in the financial statements, at least the ones you've published so far..

That's a good point. We'll look into that. I've seen companies report it in different ways. This is our first quarter as a combined company. So bear with us as we fine tune, but that's good input. We'll take that into consideration for future reports..

And so you've got liability of 1.9 million a year for preferred dividends, and that far exceeds, far-far exceeds free cash flow at this point, and you've got a lot of debt; so where does that leave the common stock shareholders in terms of seeing any kind of earnings anytime soon?.

Good question. You can look at the guidance that Digirad put out before the merger for 2019. And that guidance is free cash flow of $3 million to $4 million, and that's for the traditional Digirad business. And then we also put out a preliminary outlook for 2020 right after the merger closed. So we issued that in September.

And you can look at that press release and it shows the combined company generating significant free cash flow..

But if I heard you correctly, free cash flow in the third quarter was only hundred thousand dollars?.

Well, that's just one quarter. There's seasonality there. If you look back at last year, we had some quarters where we had little to no free cash flow and then other quarters where we had substantial free cash flow. So like the fourth quarter of last year, for the Digirad business, we had a phenomenal free cash flow quarter.

And that often has to do with the timing of working capital swings going up and down, also the timing of capital expenditures. So, we look at it on a smoother 12 month average basis. And the guidance we've always given is for the whole year, not quarter-by-quarter. So, I wouldn't extrapolate - I wouldn't over extrapolate from Q3.

I mean, we're a company in transition. We completed a merger on September 10th. We had a lot of one-time merger related expenses that go away next year, and the Digirad business traditionally has been a very solid cash generator and free cash generator.

And we're very excited about the growth potential that we see in the Building and Construction businesses that were acquired in September..

So can you give us any sense of when you might see or when we might see positive earnings after preferred dividends?.

Very good question. We know earnings are important. We want to generate positive earnings. We look at a lot of different financial metrics and we want to show investors a lot of different financial metrics, both GAAP and non-GAAP.

I would just kind of point you to the way Digirad has historically given guidance is on revenues, adjusted EBITDA and free cash flow. Those are the three metrics that the Company historically has chosen to give guidance on. We also provide adjusted net income, which is a non-GAAP measure. That's a cleaner result because it excludes non-recurring items.

And our idea is to give investors more information rather than less, and different investor's focus on different financial metrics..

But that doesn't really answer the question.

Can you give us any sense of when we might see on a GAAP basis, positive earnings after preferred dividends?.

Well, I can't give you an exact time. But I would say we're all united to have a very-very strong goal of growing revenues, cash flow and earnings. So, I'm confident we'll get there. But it would be premature to give an exact date..

How about like even to the nearest year? Would we see that next year or five years out? Even to the nearest year, what kind of expectations should we have?.

Well, I just said, I'm not going to give an exact date. So we're - it's a very strong goal of ours. The Board owns a lot of stock. We feel very aligned with the stockholders. We want to grow revenues, cash flow and earnings. We want to generate positive earnings on a GAAP basis. I'm confident we'll get there. But I can't give you an exact date..

[Operator Instructions] Our next question comes from line of [Dennis Bonilla] with [Lapin Partners]. Please proceed with your question..

Majority of my questions are already answered by the previous caller. So I guess I just have one last concern or thought concerning valuation. Right now, you guys have a market capital of what, about $7 million? And you projected to generate $8 million to $9 million in free cash flow next year, $150 million in revenues.

Boy, I missed to say that, seeing a company so misvalues or is just so undervalued; are you guys planning on doing a roadshow, institutional roadshows or anything to get your story out into the public?.

Yes, that's a great question. We have started to do more of that. We recently partnered with Equity Group, who specializes in that. And so that is a goal of ours. My own - this is Jeff speaking. My own observation just talking to stockholders is that we're a Company in transition.

We used to be a healthcare pure play, and there were many stockholders who were healthcare investors, or who owned Digirad because it fit into the healthcare portion of their overall portfolio. And when we decided to change the strategy to diversify at holding company, that's been very interesting to a lot of people.

There's a lot of people who have it on their radar screen. They want to see how we do. They're very-very curious to see how the strategy works. But that's a different shareholder base than our previous shareholder base. And other companies have gone through this, where there's a transition in the shareholder base. It can be frustrating.

But we're confident that we'll get there..

Yes, because I mean, like you said earlier, you're interested in [indiscernible] the Management team owns quite a bit of shares. And so obviously it's beneficial to get the word out to help the stock do well, I'm sure you want to enhance shareholder value. So I look forward to seeing the - see more of you guys..

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Eberwein, for any final comments..

Thank you, operator. As always, we appreciate all of our stockholders and your continued feedback and support. We look forward to our next update call..

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