Greetings ladies and gentlemen, welcome to the Digirad Corporation First Quarter 2020 Results 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 report 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.

In the earnings release today and in its comments manages -- management makes references to both GAAP results as well as adjusted results. The adjusted results are non-GAAP and do not include non-recurring charges.

Also adjusted EBITDA, which is a non-GAAP measure that further excludes depreciation, amortization, interest taxes, and stock-based compensation. Finally, free cash flow, which is a non-GAAP measure, taking operating cash flow and subtracting paid cash for capital expenditures.

Management believes that the presentation of these non-GAAP measures along with GAAP financial statements and reconciliations provide a more thorough analysis of ongoing financial performance. Investors can find the reconciliation of results on the GAAP versus non-GAAP basis in the earnings release.

If you do not receive a copy of today's press release, and would like one, please contact, Digirad at 858-726-1600 after the call 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 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. It is now my pleasure to introduce Jeff Eberwein, Chairman of Digirad..

Thank you, operator. Good morning. And thank you for joining us today for our first quarter 2020 results conference call. On the call with me today are Matt Molchan, our CEO; and David Noble, our COO and CFO.

Since September of 2019, Digirad has been operating as a diversified holding company with three business divisions, Healthcare, Building & Construction and Real Estate & Investments. Digirad's Q1, 2020 results include financial and operational data, two newly created divisions Building & Construction and Real Estate & Investments.

There are no operational or financial data recorded in 2019 -- in the 2019 period for these two new divisions. During the first quarter of 2020, we continue to execute on our HoldCo growth strategy and value enhancement initiatives, which we believe will increase revenue, cash flow earnings, and ultimately stockholder value.

We expect to fund -- use our cash flow going forward to fund internal growth investments and we'll also start looking for bolt-on acquisitions. Eventually, we'll also look to create new business divisions through the disciplined acquisition of additional operating companies that might fit well with our holding company structure.

In addition, we're exploring the potential divestiture of non-core assets.

To finance our expansion strategy and growth opportunities, especially for commercial projects in our Building & Construction division, on April 30, 2020, we filed a registration statement with the SEC relating to a public offering of the company's common stock for potential gross proceeds of up to $5 million.

Turning to our company's growth strategy. For our Healthcare division, we'll be focusing on higher margin segments, specifically our camera sales and mobile scanning services. In our Diagnostic Services and Mobile Healthcare businesses, we continue to maintain a solid core customer base with growing prospective client pipeline.

We aim to increase the utilization of our fleet and improve the density of our route based businesses. In Diagnostic Imaging, our sales pipeline is solid and growing. We continue to focus on the sale of our unique Ergo and X-ACT cameras and our as needed when needed and where needed camera rental programs.

For our Building & Construction division, we're targeting the expansion of the commercial construction business at KBS. And as previously announced, KBS is currently involved in multiple discussions for several large commercial projects for the construction of multifamily housing units in the greater Boston area.

If even a few of these projects are awarded, they will require a significantly higher utilization rate for KBS' manufacturing plant in South Paris, Maine, and an increased investment in working capital. Three of these projects are in advanced stages of negotiation and are expected to start production in the coming months.

These three projects alone are expected to generate revenue of over $10 million for KBS and result in the production of nearly 250 building modules. In 2019, by way of comparison, KBS generated approximately $12 million of revenue and produced approximately 230 building modules.

And that was entirely for the residential market, and we only used our South Paris, Maine plant. We believe that this plant at full capacity can produce 500 to 600 building modules per year. KBS has a potential sales pipeline of more than $60 million, which is greater than a thousand building modules.

So, if this sales pipeline is fully materialized, we could eventually reopen our currently idle plant in Oxford, Maine, which also has production capacity of 500 to 600 building modules per year. So, our total manufacturing capacity is well over a 1,000 building modules per year, and that compares to production of only 230 modules last year.

Finally, as part of our strategy, our Real Estate & Investment division currently owns the three manufacturing plants in Maine that are operated by KBS.

And this division completed the financing in Q1 via commercial mortgages for these three plants with the proceeds used for working capital requirements for the Building & Construction division in 2020.

In addition, EdgeBuilder and Glenbrook Building Supply, which are part of our Building & Construction division based in the Minneapolis area completed a refinancing of their credit facilities in Q1. Turning to the COVID-19 virus.

Like many other businesses, we did start to see an impact to our business from this virus starting in late Q1 and continuing in Q2.

Assuming our business returns to normal levels in the coming months the way we expect, we think our second half 2020 results will be on track with our internal projections that we had at the beginning of the year prior to the COVID-19 virus. And additionally, we've received significant PPP funds to help fund our payroll and other essential expenses.

Our Healthcare business received $5.4 million and the Building & Construction division received $1.2 million. So, it's a total of $6.6 million. So, financially that helps us be in a similar position to what we would have been without the virus. So, with that introduction, I'll turn it over to Matt Molchan, our Healthcare CEO. Matt, please go ahead. .

Thanks, Jeff. For the first quarter of 2020 as compared to the same quarter of 2019, our total revenue increased by 20.7% to $28.9 million and gross profit increased 11.6% to $4.4 million. Our Healthcare division had lower revenues from a decrease in our scanning services.

Revenue for this division in Q1 2020 fell 2.4% to $23.3 million over the same period in the prior year. This is due to the COVID-19 pandemic. As many doctor's offices closed, several hospitals stopped performing non-life threatening procedures, tests and scans during the second half of March.

However, gross profit for Q1, 2020 reporting period did increase by 2.3% over the same period last year. This was driven by an increase in healthcare -- mobile healthcare interim rental services, a favorable mix of services provided and lower equipment maintenance costs.

In Diagnostic Services, revenue and gross margin percentage for the first quarter was $10.8 million and 18.5% compared to $11.7 million and 22% in last year's first quarter.

The decrease in Diagnostic Services revenue and decreased gross margin percentage in the quarter compared to the prior year was primarily due to a decrease in testing days and scans resulting from the impact of the COVID-19 pandemic.

Our mobile healthcare business produced revenue and gross margin percentage in the first quarter of $9.7 million and 12.4% compared to $9.7 million and 6.4% for the same period in the prior year.

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

In our Diagnostic Imaging business, revenue and gross margin for the first quarter 2020 was $2.9 million and 30.4% compared to $2.5 million and 31.2% in the prior year first quarter. The increase in Diagnostic Imaging revenue was due to an increase in the number of camera sales.

Now, I'm going to turn the call over to Dave Noble, our CFO and COO, who will provide additional financial highlights for the first quarter. Dave, please go ahead..

Thank you, Matt. Our first quarter 2020 Building & Construction division revenue and gross margin were $5.5 million and 7.3%, respectively. We just completed the merger with ATRM on September 10, 2019.

Thus, there was no operational or financial data recorded in the 2019 corresponding period from the Building & Construction division, nor from the Real Estate & Investment division.

For the three months of Q1, 2020 SG&A increased by 28.9% compared to Q1 in 2019, due to the $1.4 million in expenses from our new Building & Construction division, and overrun of audit expenses related to the ATRM merger.

During the quarter, we reduced costs for contracted outside services, particularly in the IT and HR areas in an effort to streamline our internal operations.

Over time, we believe the HoldCo structure will allow us to optimize corporate overhead costs by integrating corporate functions and consolidating SG&A to generate cost savings and improve profit margins. We hope to begin to realize some of these benefits during 2020. Moving onto the bottom line results for the first quarter.

We had net loss from continuing operations of $3 million, which included a $0.1 million of merger related expenses. This compared to a net loss from continuing operations of $1.7 million in the same period in the prior year.

Non-GAAP adjusted net loss from continuing operations of $1.7 million or $0.81 adjusted net loss per share compared to adjusted net loss of $1 million or $0.51 adjusted net loss per share in the first quarter of last year.

Non-GAAP adjusted EBITDA decreased $0.5 million for the first quarter of 2020 compared to $0.8 million in the first quarter of last year, driven by the decrease in camera rentals resulting from the COVID-19 pandemic.

For the first quarter, operating cash flow was $0.6 million and free cash flow was also $0.6 million compared to operating cash outflow of $2.2 million and free cash outflow of $2.1 million in the first quarter of last year.

As of March 31, 2020, the outstanding balance on our credit facilities was $20 million and our overall net debt position, including all cash and cash equivalence was $18.4 million.

As disclosed in the company's press release issued on April 7, 2020, as well as in our S-1 issued on April 30, 2020, our business has begun to be adversely impacted by the recent COVID-19 outbreak and the accompanying economic downturn.

This downturn, as well as the uncertainty regarding the duration spread and intensity of the outbreak, has led to an initial reduction in demand for our services. The expected timeline for this reduction in demand for our services remains uncertain and difficult to predict considering the rapidly evolving landscape.

The company is vigilantly monitoring the situation around COVID-19 and will continue to proactively address the situation as it evolves.

Due to the flexibility of its workforce and the actions it is taking, the company is confident it can continue to efficiently manage its business and mitigate risks in this challenging environment, while retaining the ability to meet client's needs when activity improves.

In fact, the PPP funds we have received financially, we will be in similar place that we were before the pandemic occurred. Now, I'd like to turn the call over to the operator for any questions.

Operator?.

Thank you. [Operator Instructions] Our first question is from Theodore O'Neill with Litchfield Hills. Please proceed. .

Thanks very much. Matt -- I would say, I've got two questions, Matt. The first one is, you mentioned lower equipment maintenance costs in the Healthcare side of the business.

What makes up those costs and why were they lower in the quarter?.

Those costs are made up the -- on the mobile healthcare business. We have contracted - service contracts with the OEM manufacturers of the equipment we use in mobile healthcare. So, that would be with GE, Philips and Siemens. Some of the reasons behind the lower costs are renegotiated.

Some right -- some discounts in those contracts and also compared to last year, we have retired some of our equipment from our fleet..

Okay.

And are there any COVID related restrictions affecting commercial construction in Massachusetts that would you have to wait on, or is that there is construction going on -- ongoing now there?.

Dave?.

I'm sorry.

Can you restate that question?.

Yeah. Sure.

Are there any COVID related restrictions affecting commercial construction in Massachusetts?.

Well, we had heard a month or so back that the Mayor of Boston had halted construction at construction sites. I'm not sure where that stands today. Although, I know there's some gradual reopening guidelines being put into place, but importantly for us, the three projects that are very near term for us, none of those are inside the Boston city limits.

And we've not been made aware of any delays by the local government in terms of getting those on. In fact, we're in active discussions in getting those projects on the line at our factory in Maine..

Okay. Thanks very much.

[Operator Instructions] Our next question is from David Rothschild [ph], Private Investor. Please proceed. .

Yeah. My question is on your preferred stock. You issued it back in September of last year. It's been eight months. You've yet to declare a dividend.

I know you're not in great shape financially, but is there any indication when you think you might start paying that dividend?.

Yeah. That's a good question. We haven't publicly issued guidance on when that will start. But it will start at some point.

If you look at the structure of the preferred in terms of the document that we filed that has all of the description of the preferred and covenants and when dividends are paid, the company has the ability to defer dividend payments for up to six quarters. And we didn't plan on doing this, but we closed the merger in September.

And we have cash trapped in subsidiaries at the company and that we weren't able to upstream to the public parent to do the dividend payment for December or March. So, dividends are accruing and will be paid at some point in the future. So, it is really just a deferral, not a cancellation. And like I said, we have up to six quarters.

We hope to not defer for that long. But as soon as we're able to say something publicly about that, we will..

What happens if you don't pay after the six quarters?.

Then it is in a default. It doesn't put the company in jeopardy. There's no cross default provisions or issues with the bank or anything like that. But then the preferred would start to get Board representation and could push for action, but there would be two representatives appointed to the Board by the preferred holders..

Okay. Thank you. I'm patiently waiting..

Thank you. Thank you for your patience..

[Operator Instructions] Okay. There are no more questions at this time. I would like to turn the conference back over to management for closing remarks..

Okay. Well, thank you, operator. I just want to point out to everybody that on the SEC's website we did file an 8-K today with our press release for this earnings results. And we also filed a few days ago an updated presentation on the S-1 that we filed for our common stock offering.

And we say in there that pricing is expected the week of May 18, which is next week. And so, we do expect to put out a press release next week after completing that offering. But I would refer you to the presentation that we posted on the SEC's website.

And I would just like to say that David, Matt and I are always available to take your call and questions and any discussion you'd like to have. So, please don't hesitate to contact us. And as always, we appreciate our stockholders and we appreciate your feedback and support.

We're looking forward to speaking with you again in early August when we announced our second quarter 2020 results. Thank you..

This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation..