Q3 2020 Digirad Corp Earnings Call

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A reminder, certain statements made during this conference call, including the question and our superior on forward looking statements within the meaning of the private Securities Litigation Reform Act on line.

95, and other federal Securities Law.

These forward looking statements include but are not limited to emitted from statements about the company's revenue costs and expenses margin.

For patients financial results acquisitions, and other topics related to the U.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 for different mature.

Risks and uncertainties include but are not limited to business and economic conditions technological change and.

You see trends and changes in the company's market and competition.

More information about the risks and uncertainties is available in the Companys 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.

Well, that's today's press release there.

The information discussed on this mornings conference call should be used in conjunction with the consolidated financial statements and notes included in DC those reports and speak only other data on this call.

The company undertakes no obligation to update these forward looking statements.

In the earnings release today and his comments on it makes reference to both GAAP results as well as adjusted results.

Adjusted results on a non-GAAP and do not include non recurring charges also adjusted EBITDA, which is a non-GAAP measure for the exclude depreciation amortization interest taxes and stock based compensation finally free cash flow, which other non-GAAP measures taken for operating cash flow, it's attracting cash paid for capital expenses.

Management believes the presentation on these non-GAAP measures on along with GAAP financial statements and reconciliations provide a more thorough analysis of ongoing financial performance for your questions can find a reconciliation of GAAP results on a GAAP versus non-GAAP basis nerve injuries.

If you didn't receive a copy of the press release and would like one please contact Erad <unk> eight seven to 616 years, you after the call or EPS congratulation to represent.

Okay. Other equity group at 212836961 on one.

Also this call is being broadcast live over the Internet and may be accessed at.

Maybe could rise website at Www Dot did you add back on.

Yeah for the call a replay will also be available on the company's website you didn't on my pleasure to introduce Jeff Eberwein chairman of the right.

Thank you operator, good morning, and thank you all for joining us today for our third quarter 2020 result conference call.

On the call within a day or Matt Molchan, our CEO and David Noble our chief operating on Chief Financial Officer.

Our Q3 2020 operating and financial results continued to be impacted by the slowdown due to cope at 19.

Other doctor offices, and hospitals started to return to normal operations in Q3 activity levels remain below normal in the quarter, causing our health care divisions revenue on gross profit to be lower than the prior quarter.

Our diagnostic services business has begun to rebound, but our diagnostic imaging business has seen a slowdown of camera sales due to purchase delays related to capital funding decisions driven by the pandemic.

Our building and construction division has significant momentum as shown by Q3 revenue increasing 70% versus the prior the previous quarter.

KBS builders Inc., a KBS are met our modular building manufacturing business focused on the northeast increased production at South Paris main plant in Q3 due to recently won commercial projects.

In addition, KBS recently reopened and ancillary building at its previously idle, Oxford main plant to manufacture wall panels for the new England markets, creating a new business line for KBS.

Because of the strong demand outlook for KBS, we're studying ways to increase our production capacity and are excited about the outlook for this business.

We continue to execute on our Holdco gross strategy and value enhancement initiatives to maximize stockholder value.

For Holdco structure allows division Ceos to focus on operations and organic growth.

Well hold could manage for that focuses on corporate strategy on capital allocation.

In addition to looking for attractive bolt on acquisitions for our existing operating businesses. We're also looking to create new business divisions and the future through the discipline on the acquisition of business is complimentary to our holdco structure.

In addition, we recently announced the sale of Dms health.

Which will substantially improve our balance sheet and better position us to fund high return internal growth investments.

Pursue acquisitions.

With that I will turn it over to our health care CEO, Matt Molchan, Matt. Please go ahead.

Thanks, Jeff.

Revenue from our health care Division in Q3, 2020 fell by 14.9% to 21.8 million over the same period in the prior year. This was due to a slowdown associated with the COVID-19 pandemic, although many doctor offices every opened in many hospitals that started to once again performed non emergency procedures.

Overall activity remains below pre COVID-19 levels and as a result gross profit for the Q3 2020 reporting period decreased by 24% over the same period last year due to these lower activity levels and led the low lower overall revenue and lower lower overall volume in the core.

Sure.

In diagnostic services revenue and gross margin percentage for the third quarter of 2020 was 10.7 million and 19.4 per cent compared to 11.7 million an 18.5% in last years third quarter. The decrease in diagnostic services revenue compared to the prior year.

Was primarily due to a decrease in testing days and scans, resulting from the impact of the cobot Nike bad debt. The increase in diagnostic services gross margin percentage was due to lower healthcare expenses and improved labor efficiency. During the Q3 2020 reporting period. In addition, we want to point out.

On the non-GAAP adjusted EBITDA for diagnostic services increased from 1.674 million to 1.736 million in the quarter.

Compared to last year's third quarter. This is mainly attributed to a tight control over operating expenses during the 2020 quarter for.

For mobile health care business produced revenue on gross margin that third quarter of 9 million and 12.8%, respectively compared to 10.6 million and 13.6% respectively for the same period in the prior year quarter over quarter revenue and gross profit decreases in the mobile health care business was primarily due to a slowdown.

On an overall volume due to the Cobi 19 pandemic and the associated public health measures that our customers are put in place.

In our diagnostic imaging business revenue on gross margin for the third quarter of 2020 was 2 million and 19.5%, respectively compared to 3.4 million and 35% respectively. In the prior year third quarter. The decrease in diagnostic imaging revenue and gross margin was due to the slowdown of camera sales.

Sales associated with the capital funding delays and uncertainty because of the Cobi 19 pandemic now I'm going to turn the call over to Dave Noble, our CEO and our CFO, who will provide additional financial highlights for the third quarter. Dave. Please go ahead.

Oh, Thanks, Matt and good morning, third quarter, 2020 building and construction division revenue and gross margin were eight and a half million and 14.7% respectively compared to 2.7 million in 17, and a half percentage in the prior year third quarter.

Much of this increase in revenue was due to our ownership of the business for the full third quarter. This year compared to just 20 days in the same period last year. However, we did experience a significant increase in KBS activity levels as Jeff mentioned and 2.2 million of the third quarter revenue or almost 25% came from two recently one commercial.

Projects in the Boston area.

For Q3, 2020, SGN eight increased by 12.5% company wide compared to Q3 2019 again. This was due to the reporting of a full quarter of building and construction expenses in the three months ended September Thirtyth 2020, compared to just 20 days of expenses that were recognized on the same period last year.

Here as the acquisition closed on September 10th of 2019.

Moving on to company wide bottom line results for the third quarter of 2020, we had a net loss from continuing operations of 1.8 million compared to a net loss from continuing operations of 1.5 million in the same period in 2019 net.

Non-GAAP adjusted net loss from continuing operations in the third quarter of 2020 $1.9 million or 19 cents per share compared to on adjusted net income of $14000 or one penny of share in the third quarter of last year.

As a reminder, in Q2, we completed a public offering through the issuance of 2.45 million shares of common stock, which includes the exercise of the overallotment option, raising five and a half million dollars before fees and expenses come.

Concurrently we issued warrants to purchase up to an additional 1 million 112500 shares at some of these warrants have already been exercised.

Therefore per share amounts for the Q3 2020 period reflect a new share count on 4.8 million.

Non-GAAP adjusted EBITDA decreased to 1.1 million for the third quarter of 2020 compared to 2.0 million in the third quarter last year and this was driven by the decrease in revenue and gross profit, resulting from the COVID-19 pandemic.

For the third quarter of 2020, we registered registered an operating cash outflow of 1.9 million and a free cash outflow of 2.2 million compared to on operating cash flow outflow of 1.1 million and a free cash inflow of 365000 in the third quarter of last year.

The main driver of this outflow was a onetime injection of cash into working capital of caveats to support higher production levels as that business gross steadily.

As of September Thirtyth 2020, the outstanding balance on our credit facilities was 23.3 million and this includes 6.6 million and P. P. P funds, which we fully anticipate will be completely forgiven in the coming months.

Our overall net debt position, including around 4 million in cash and cash equivalents was 18.9 million at the end of the quarter.

In addition to obtaining forgiveness on the 6.6 million of PPP loans in the coming months. We will also use some of the proceeds from the sale of our Dms business to further pay down debt in early January now.

Now I'd like to turn the call over to the operating for any questions.

Operator.

At this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad. The confirmation tone will indicate your line is into question. Keith You May Press Star two if you like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before Christmas Turkey.

One moment, please while we pull for questions [laughter].

And on the first question is from theater or new with Israel, who.

Please proceed with your question thank.

Thank you very much.

Jeff I asked about this on <unk> on the last call about whether you're seeing any lumber prices going up and I and the assets again because were I live here, we're still seeing construction activity that weve.

Never seen before so I'm wondering if you could comment on that and also now that you've opened up the Oxford main plant can you talk about capacity utilization and for you and if you're at 100% are headed there give us some characterization on that.

Sure so lumber prices as.

Most people know it can be very volatile.

And we had and incredible spike this year.

There I was just looking at it earlier day I think the year started at around $400 on the futures market and got down to.

250 at the end that in the depths of the Covidien sell off and then went above a thousand towards the end of the summer and has more recently settled on a five 600 range. So it is hard to manage the business and have a smooth.

Profits.

When there's so much volatility in the input and I.

I think I mentioned last time that with the proceeds on the equity offering we did pre buy quite a bit of materials for the large commercial construction projects that we that we had one.

We didn't buy on a per cent of materials that we needed for the whole rest for the year.

And we we are increasing prices so I guess in short what what we've.

We've seen is that lumber prices have settled back down to a more reasonable range and we have been increasing prices. So.

Margins improve with a lag other than our experience.

And price.

Prior periods, where you have such a big.

Big Spike in a in input prices and then on our capacity utilization I guess, there's there are several ways to look at it our south Paris plan right now is pretty fully.

Utilized and the Oxford plant.

It has several buildings on it and we opened up an ancillary building to produce a wall panels and we are studying ways to be able to increase our output and we have a goal of.

Being able to go from 10 boxes, a week, which is 500 boxes a year to a first step would be to get to 15 boxes, a week and then as far as our backlog on sales pipeline continue to grow we'd ultimately.

I'd like to go to 20, plus but we're studying various ways to increase that capacity and it could be a.

Expanding the south Paris plan for it could be fully reopening the oxide plant for both of those things.

Okay. Thanks very much.

And our next question is from Tate Sullivan with Maxim Group. Please proceed with your question.

Hi, Thank you for that caught the oldest tail on that lumber on <unk>.

Questions well too for the gross profit margin on building and construction understanding the 15% gross profit margin in Threeq. You 20 was indicated by lumber, but can you talk about.

Consistent lumber prices and sales price visibility, where you would like that gross profit margin for the longer term we yeah.

Yeah above above 20% certainly.

And we think we'll get there.

And.

On a.

Normal lumber price environment, I think we get there fairly quickly.

Okay, Great and then on post the Dms sale as well and I think at the higher capital required business, but I could you declined overhead expenses does well in 5.6 million in the quarter for overhead expenses on a run rate for does not include some expenses that we should not model on.

For.

Yeah, Dave you want to start with you have to look at that number I don't know what number you're pulling from but to answer. The first question, we will be cutting some of our overhead expenses with the sale of that business there'll be day, one some expenses that actually go with that business and then on some of the remaining expenses will cut in ensuing months.

We will be reducing a couple of head count and some of the.

Corporate areas, but it will be significant savings on on overhead along with the sale of that business.

Okay. Thank you, Matt and you've commented on cameras cameras on the decisions from hospitals getting delayed can you just remind us what abroad.

Brock average price of each camera sales.

Yeah. This was day, but I'll turn that over to Matt.

Yeah Yeah.

Yeah, so on our SP across.

Across the different varieties of cameras that we sell is around the 225 to 35.

225000 to $235000.

Thank you and then my last one to oppose the Dms sale to dot to Jeff If I may on.

I mean with the PPP forgiveness.

Cash flow you like to hold on to to have more flexibility for acquisitions or you pay down debt the new debt capacity or can you just talk about that strategy going forward.

Sure.

The the sale of Dms.

Well.

Will substantially improve our liquidity and financial flexibility to pursue acquisitions. So on day, one a week we will.

Pay down a lot of debt.

The the vision and we'll we'll have more cash than debt after that.

Transaction closes and so we will be on a net cash position.

But that.

It will give us a more more fire power and more credibility to pursue acquisitions, because we'll be able to.

Close on things and not.

Have to raise any capital or or have any.

Funding contingency when we're when we're talking to.

Potential acquisition candidates.

And.

We're looking at as we've talked about for a bolt on acquisitions for the building on construction business.

And also bolt ons for the health care business and then we'll also start to look at potential.

New legs to the stool, but we've been very internally focused for the last.

12 to 18 months, just executing the merger and.

Improving the operations on a building on construction side, improving sales and that that is well under way. We certainly have more work to do and we see a lot more upside just from our organic initiatives, but debt.

That assets asset sale closing the sale of Dms is really going to be a game changer for us in terms of our ability to start to be outward looking and look for other ways to grow the company.

Okay. Thank you everyone have a have agreements for the day.

Thanks, Dave.

Your next question is from Jeff will be losses would Diamond Bridge capital. Please proceed with your question.

Hi, Good morning, guys, just wanted to drill down a little bit more into other gross margin and the building segment. So the gross margin in the second quarter was 21% and the third quarter was below 15% so was that.

Oh lumber or were there other.

Issues that true gross margin down.

For me to take that Yeah, I would just say alternatives this over to Dave but the two quick bullet points are input prices rose massively in a short period of time and although we are increasing prices. It just takes a while to.

Total to pass that along ultimately it does get passed longer that that takes a while and then another thing is that we significantly increased our workforce, particularly KBS and it just takes a while to get the efficiencies and have a super efficient well oil.

Production line.

Yeah, and I would just say just add a little more color I mean, when you think about the different businesses within building and construction the modular business.

We price projects with a gross margin target, but that presupposes a certain utilization of the plant.

And we achieved that level of utilization on a third quarter. So we're achieving those margins in other words, we my quote something at a 20, 25% gross margin, but that assumes the plant is operating at eight to 10 units a week. So for operating at half that obviously, we're not going to hit that margin, but I will say, we are hitting the margins that were targeting.

For the third quarter as activities really expanded on that and that plant. The other piece of the business out in the Midwest. We have two parts of that business, we have a retail business, where we can actually raise prices on the retail product multiple times a week, if we have to maintain those margins and we do do that.

But then we also have a wall panel businesses out there where you might quote a project in June.

And produce it in November and so if material skyrocket as they did this past year than that projects not going to be terribly profitable we.

We do attempt to have a.

Fixed shelf life for those quotes and we try to pass on some of that increase but suffice. It to say you know there is some projects that were not making money on in the last few months in that business, having said that lumber prices have come down quite a bit since mid September and were buying lumber for some other projects that were that.

That we've won and that are in our backlog and those projects will restore you on top.

On a gross margins to where we're where we want them to be so yeah. I would just say this is back to digest the strongest thing I'd say about that as we see continued strong revenue growth in that segment and we see gross margins above 20%.

Okay, Great. Yeah, I just was curious on so if you could comment about the pipeline it sounds like you're looking to expand so is there any big picture number you quoted $50 million in the past a pipeline of orders you're evaluating bidding on.

Yes in income and you can make.

Data you know that pipeline has remained pretty static, but we're producing at a pretty good range. So were definitely refilling that pipeline and I think you know we have a number of large projects you know.

In that pipeline that we think we will close our weighted pipeline and that is if we weighted according to the probability that we think.

That each sales person associates with their various leads is about 15 million and that number's been creeping up so I think that we're seeing we're starting to see some acceleration.

Anecdotally on the KBS side, we're getting looks at projects that you know six months ago, we would never get to look at and so we feel that we're sort of on the cost of you know.

Bringing that business to the next level and we were executing on the two large projects that we announced in June.

One of them is completely built the other one we're in the midst of phase two and we've just want to phase three as we've put out in our press release and so.

You know, we're very optimistic about that pipeline and the growth on those right now.

One thing I would add this is Jeff I would just add to that that we think is very very positive. When we first started talking about those projects and we have the very first time, we mentioned, having a sales pipeline of 50 million included those commercial projects. So other one in Natick mall.

Massachusetts was 6.7 million or the other one the veterans housing one was around 2 million. So you add that together, that's almost $9 million of projects and so once we when something it actually disappears from our backlog because it goes into guidance.

Production after we've replaced that with with with new projects that we're bidding on and the and the weighted weighted average.

So probability that adjusting for it our pipeline hasn't declined which is a pretty strong statement given that.

We took 9 million out and is being produced and replaced it. So all that said another way I mean, the factory is a sold out for the rest of this year and is getting pretty fully sold out.

For the for Q1, we still have some slots left and we're starting to bookings for April production and our experience with this business over several years.

We haven't seen that before I because Q1 typically is the slowest period of the year by far.

And that our manufacturing operations are in Maine, and there was virtually a there's very little residential construction.

In the northeast and Q1.

Okay. So yeah I was going to ask that question too about seasonality just so we can understand what to expect as far as you.

The seasonality in new England area. So are you, saying that there won't be a seasonal decline from the third quarter run rate.

[noise] not nearly if there is it's not it's not nearly like previous years.

Okay, and you know the commercial getting into the commercial space has really helped us with that seasonality. For example, we won we put this in a press release, a third phase to the Tachy project in Natick, Massachusetts that third phase will be produced during the month of January. So we're that's a typically slow month as Jeff said is on the residential side, we've pretty much filled every.

On slot with with boxes that are going to that project in natick for that.

Okay, all right and as far as the EBITDA margin in the building segment. It dropped on a 2% in this third quarter on.

Because of the volatility you said of the inputs.

And the second quarter EBITDA margin was 14% on a lower on just five on into revenue.

Is there any kind of big picture range of EBITDA, you can share with us that we could expect.

Well, there's probably some timing elements to that but we think on an annualized basis. If we can keep you know between 20 and 25% gross margins on our EBITDA margin should be 10% plus yep yep, 10% to 15% I think is a good range and yes, it will be volatile quarter to quarter depending on.

Material prices and just the mix the product mix of what we happen to be producing that particular quarter and as you pointed out there is some seasonality, but overtime. We think we think it's a business that should do in that 10% to 15% range in terms of EBITDA margin.

Hi, Thanks, very much GAAP.

As a reminder, if anyone has any questions you made for star one on your total keypad.

And our next question is from a.

Private Investor. Please proceed with your question.

Hi.

The day after the sale of Dms, what is the book value per share.

Of the company.

Find any data on that.

You know we.

We don't have that exact number in our financial statements on just looking at our balance sheet right now so at the end of September our book value was a 19.1 million and we had about 4.7 million of shares outstanding.

And then the ended the year, we'll still have the Dms business because the target is to close it in January.

But I would just say the debt.

Selling price is above book value so it will be accretive.

Accretive to book value per share when we when we sell that business.

Okay, we will have that in January.

Well, we'll complete the sale in January I'm, not sure exactly what we'll we'll publish in terms of financials.

The latest you would see that is on our Q1.

Q1 financials, you'll you'll see what the new book value is post the sale of that business.

So just to day I'm just doing some rough math in my head, so thats basically somewhere near four to $5 a share a common stock book value as of today.

That's right.

Okay.

That's all I had.

And again as a quick reminder, if anyone has any questions you May press star one on your telephone keypad.

Then we have reached the end of our question and answer session. I will now turn the call on which is just the line for closing remarks.

Well, thanks, again, operator, and I just like to note that Dave Matt and I are always available to take your take your calls and discuss any questions. You might have so please don't hesitate to contact us.

We're going to continue to share our story with existing and potential investors in the coming weeks and months, we're very excited about our future and very excited to tell our story or scheduled to present at a two conferences next week. One is the Craig Hallum Conference on November 17th and the second one is that.

Benchmark for conference on November 18th as always we appreciate all of our stockholders and your continued feedback and support so thank you very much for your time today.

And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.

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