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.

Good morning, Risa. Thank you. Good morning, everyone, and thank you all for joining us today for our first quarter 2016 results conference call. It’s great to be talking with you all today at the close of another excellent quarter for Digirad. This quarter is the first quarter reporting results that include our recent acquisition of DMS Health, which transacted on January 1. Our revenues for the first quarter were $31.2 million, a year-over-year increase of 125%. And our adjusted EBITDA for the first quarter was $3.7 million, a year-over-year increase of 345%. Obviously, the DMS Health acquisition has elevated Digirad to the next level in terms of revenue, size, scale and geographical coverage. As a reminder, DMS Health is an integrated healthcare services company that is headquartered in Fargo, North Dakota, that operates in two primary business segments: 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…

Good morning, everyone. In the earnings release today and in my comments, I will 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 that are associated with acquisition integration and purchase intangible asset amortization. In addition, I will make references to adjusted EBITDA, which also is a non-GAAP measure 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 reconciliations of our results on a GAAP versus non-GAAP basis in the earnings release today. As we have previously discussed, we closed on DMS Health on January 1, 2016 and the results of DMS operations are included in our results for the entire quarter. Now, for a brief financial summary of this quarter’s activity, total revenues for the first quarter 2016 was $31.2 million compared to $13.8 million for the same period last year., but the largest impact being the inclusion of the DMS Health business units, mobile health care and medical equipment sales and services in our results. Revenue for these new business segments contributed a total of $15.6 million to our overall revenue for the quarter. Revenues for Diagnostic Services were $12 million compared to $10.6 million for the first quarter of last year. And revenues for Diagnostic Imaging were $3.6 million compared to $3.3 million in the first quarter of last year. Our overall gross profit percentage in the first quarter of 2016 was 29.1% compared to 26.4% in last year’s first quarter. In Diagnostic Services, the gross profit percentage for the first quarter was 21.2% compared to 19.5% in last year’s…

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.