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

Larry Haimovitch - HMTC Juan Molta - B. Riley & Company.

Greetings and welcome to Digirad Corporation First 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..

Thank you, Chris. 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’d 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 statements about the company’s revenues, costs and expenses, margin, operations, financial results, restructuring efforts, 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 first 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..

mobile healthcare, which includes mobile, fixed-site and provisional diagnostic imaging and mobile healthcare solutions throughout the United States, with their biggest concentration of customers in the Upper Midwest; and medical equipment sales and service, selling and servicing primarily Philips medical equipment through their exclusive relationship with Philips Healthcare.

We remain very excited about the incorporation of DMS Health operations and employees into Digirad and we are progressing very well with our operational integration plan. Now, for a quick business-by-business update.

Our Diagnostic Services business, which includes our in-office mobile diagnostic imaging activities, Digirad Imaging Solutions or DIS and our cardiac monitoring business, Telerhythmics, continue to perform very well. DIS performed well year-over-year benefiting from high volume from existing customers, as well as volume from new customers.

Overall, our Diagnostic Services revenue increased 14% year over year in the first quarter from the favorable volume I mentioned, as well as the impact of a full quarter of revenue from the MD Office Solutions acquisition that was completed in March of 2015.

Still, as we have mentioned in the past, we are seeing challenges with some competition and with the overall market in general at DIS.

But we are continuing to deploy other value-added services and pricing structures into these markets that we believe over the long-term will address these challenges and allow us to continue to grow organically as we move forward. I can say we are seeing some near-term positive results from these initiatives.

Our Diagnostic Imaging business performed well during the quarter, increasing its year-over-year revenue by 9% and ending the quarter with a good pipeline of business and forward outlook.

As we move forward, we’ll continue to put effort in international markets as well as aligning ourselves with larger purchasing opportunities by being part of high-quality buying organizations. In addition, we are conducting small enhancements to certain cameras in our product line to allow them to gain higher reach in the marketplace.

These initiatives are being deployed over several quarters and will take some time before they gain full traction. Therefore, in the meantime, we’ll continue to manufacture and sell our existing high-quality nuclear imaging cameras in our current markets. Our Mobile Healthcare business performed very well for the first quarter under Digirad ownership.

And I’m very excited with the management team that is running that business for Digirad. As a reminder, Mobile Healthcare provides mobile healthcare solutions to small and regional size hospitals throughout the United States.

Mobile Healthcare currently offers MRI, CT, PET/CT and other mobile diagnostic solutions and has ability to provide a variety of other mobile healthcare solutions over time to leverage its relationships, infrastructure and logistical backbone.

As we move forward, we’re going to be exploring some of these other mobile healthcare solutions and believe some might be able to be integrated within the business over time, providing potential new revenue streams. Our medical sales and services business, also new to Digirad from the DMS Health acquisition, performed well in the first quarter.

They have an existing - they have an exciting pipeline of future product sales. Also as a reminder, our medical sales and service business has an exclusive relationship with Philips Healthcare to provide product sales, installation, warranty and product support within a specific geographical area in the upper Midwest region of the United States.

They primarily sell imaging systems, patient monitoring systems, and provide support to imaging systems within that same general region. We generate revenues from commissions from these product sales and also generate revenue by directly servicing Philips products in the region.

The acquisition of DMS Health is certainly a transformational event for Digirad. As we remain grounded in our legacy and the new businesses we have today, we also set our sights on our future, as we continually work to grow, add value and transform our company into an even more diverse healthcare solutions company.

This dovetails into our overall corporate strategy at Digirad, which is to focus on three main areas for growth.

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

Though most of our current efforts are spent running our businesses in integrating DMS Health, Jeff and I continue to spend time, looking at possible acquisitions. Right now, we are primarily spending our time on potential deals, where owners are motivated and they are looking for potential transaction relatively soon.

However, as we stated before, the timing and size of these deals vary and we’ll only get involved in deals that we believe we can secure at the right financial metrics and add overall value to our company. 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?.

a line of credit that has a borrowing base of up to $12.5 million and bears interest of LIBOR plus 2%; a tranche A, as a borrowing base of $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 March 31, 2016, our weighted average interest rate on our credit facility was 3.41% and the total principal balance outstanding was $32 million. Our net debt position left all cash, cash equivalents, available sale of securities and restricted cash was $18.4 million.

Moving forward, we expect to utilize most of our excess available cash to be applied against our credit facility to help reduce overall interest expense. And finally, we announced today our regular quarterly cash dividend of $0.05 per share that will be paid on May 27 to shareholders of record on May 30.

Now, I would like to turn the call over to the operator to take questions..

Thank you, everyone. At this time, ladies and gentlemen, we will be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Larry Haimovitch from HMTC. Please proceed with your question..

Good morning, gentlemen, and congrats on another good quarter..

Thanks. Good morning, Larry..

Hi, Larry..

Hey, Matt. Once again, this is the third or fourth quarter. I think you’ve mentioned the word competition and how you’re dealing with it. I keep wondering about, if you could provide little more color on that, since you proactively bring up the competitive aspect of the business..

Really, it’s just a fundamental aspect that we’re running into in certain of our markets, where we do have small mom-and-pop competitors that are competing on price. And as that occurs that does - obviously, as we’ve spoken about in previous quarters that still has a downward effect on the DMS operating performance - the DIS operating performance.

So we just want to point that out. Although we have been - as I also stated, we’ve been working on new initiatives that have been combating that type of price pressure and we are seeing some small benefits from these new programs.

And I think as we see increases as we saw in DIS in the first quarter, so we saw some organic growth less the acquisition over 5%. So we are starting to see some benefit from those initiatives to combat that. But it’s still in certain areas that we are running into some of these mom-and-pops, and we are experiencing some price pressure..

Great, a follow-up question, Matt, it sounds like overall the acquisition has gone very, very well, and it’s as expected.

Were there any issues or disappointments, as you started integrating the two companies that you might want to share with us?.

We have not experienced any disappointments at all. Very excited about the company, very excited about the people and the relationships they have with their customers. It has definitely - now, lot of work, integrating, mainly the operational aspects of the back-office, the HR, the IT, the finance departments.

But for in general, we have not had any surprises to this point and it has gone very smoothly..

Great. Thank you, Matt..

Thank you, Larry..

Ladies and gentlemen, our next question comes from the line of Juan Molta from B. Riley & Company. Please proceed with your question..

Hi, Juan..

Juan?.

Mr. Molta, your line is live..

Yes. Sorry, I had on mute, sorry, sorry. Good morning, guys..

Good morning, Juan..

Hi, how are you? First question is on the 2016 guidance. Do you see like - given this quarter’s results and the strength you had this quarter was above our estimate you could have potentially increased that guidance on. I was wondering if you’re just being conservative for the balance of the year.

Is there something in particular that you are seeing the may marginally reduce results in the nine months?.

No, Juan. There’s nothing in particular, but at the same time we just acquired a company that essentially doubled the size of Digirad. And we’re coming out for the first quarter. So there’s seasonality and activity within the businesses.

As we mentioned we don’t have concerns or any thoughts on the full year that would cause us deep concern as we go forward. But in time, we think the guidance range that we provided is appropriate. And, obviously, each quarter we’ll take a look at it and we’ll update everyone as needed.

But right now, we think the full year guidance range is appropriate based on, how we are seeing the year coming together..

Okay, very good. And regarding a couple of questions on product sales, the product sales was about 20% stronger than we had forecasted.

Was that due mainly to DMS or is that the core nuclear imaging product there?.

[Multiple Speakers] I don’t have in front of me the - your estimate on how you calculate that.

But we have two separate divisions now that are selling product, our traditional diagnostic imaging business, which was up about 9% over last year quarter-over-quarter, and then our medical equipment sales and services business, which obviously as I said performed well in the first quarter.

But maybe - and I apologize, I don’t have year forecast right directly in front of me. So I am not sure, if which one have had - where you forecasted on those sales. But both divisions are performing very well, both have very strong backlogs and we’re very excited about their performance in 2016..

Okay, very good. Then the next question is on product margins, which is almost 50%, you already mentioned, you expect that level of margins for the balance of the year. And I was wondering about the previously marked-down inventory that you had going through the cost of goods sold line.

Is that not going to be an issue here going forward that may reduce product margins?.

So let me just clarify a little bit between the businesses, obviously, diagnostic imaging for product sales, we manufacture and sell those products. So the actual product cost is part of the margin and then for medical equipment sales and services, we generate revenues based on a commission off a product that is sold via Philips.

We’re not actually running the cost of the product through COGS and the ultimate margin. So, having said that, your other question was about inventory releases, there was a minor amount of inventory releases within margin in the first quarter of 2016 for diagnostic imaging. But we do not expect any more of that.

And it was definitely less than it was in the first quarter of 2015. That actually took margin down year over year comparatively for that one concept one. But we don’t expect any more margin benefit going through for the course for inventory releases, just normal inventory activity.

So, yes, we are aware of that and we would expect margins to be in the same general level as a combined product and equipment sales business across the new DMS business unit in the - our Digirad diagnostic imaging business units..

Okay, very good.

Regarding pricing in the services side, have you seen any change now that we’re working with the 2016 reimbursements off of Medicare, have you seen benefits or just has it been neutral?.

I mean, overall, I would say, it’s been neutral. I mean, certain sections of our business did benefit actually from some increases, but it’s a very small portion of our business. So for the most part, in general, it’s been very neutral..

Okay. And you mentioned in your - I was going to ask about future acquisitions, but most of your efforts right now are going to be spent on integrating DMS from running the business as it is.

So we shouldn’t expect too much in terms of acquisitions in the next 12 months that are meaningful or maybe a little more color there?.

Well, obviously, we’re definitely going to be opportunistic. In terms of deals that would come across our table that with the right financial metrics will make sense for Digirad. So we’ll continue to have our eye opened on that. But you’re correct. For the most part we are concentrating on integrating this business.

And as those opportunities come up, we will obviously address them, and buy the proper resources to execute them if we feel like they will be beneficial to Digirad..

Okay, very good. That’s all I have. Thank you very much guys..

All right..

All right. Thank you, Juan..

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

Thanks, Chris. As always, we appreciate all our shareholders and your continued feedback and support. We are very excited about our business model and our future. And we believe that there are many more good things to come. Jeff and I look forward to discussing our results and business update with you next quarter for our second quarter results.

Thank you..

Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your time and participation. You may disconnect your lines at this time. And have a wonderful rest of your day..