Slide 1: Digirad Corporation (DRAD) Presentation to ISS
Digirad Corporation (DRAD) Presentation to ISS April 15, 2013 Red Oak Partners LLC.
Slide 2: Red Oak Partners background and governance record
David Sandberg founded Red Oak Partners, LLC in 2003 to focus on investments in micro cap public companies employing a private equity diligence approach with a long-term bias. Red Oak has acquired large ownership positions across numerous public companies. In certain portfolio companies with poor co
Slide 3: Red Oak has done this before
Red Oak has done this before - Red Oak nominees have created significant shareholder value since assuming control of Asure Software board in Aug. 2009. Asure Software Relative Performance since new Board assumed charge (Aug. 28, 2009 to April 4, 2013) 600 500 400 Source: FactSet. Data as of 4/5/2013
Slide 4: Red Oak and RF Industries
Red Oak and RF Industries -RF Industries has significantly outperformed the benchmark indices since Red Oak filed its Sch. 13D on 12/20/2010. Red Oak nominees, David Sandberg and Randall Waterfield were appointed to the Board in Sept 2011. -Red Oak nominees resigned on 26 March 2013 after RF Industr
Slide 5: Business Overview
Business Overview Q Digirad Corporation (‘DRAD’ or “Company”) sells SPECT digital imaging systems, largely to the cardiac market. The Company has historically generated revenue within two primary operating segments: — Digirad Imaging Solutions (“DIS”), a hub and spoke model providing in-office nucle
Slide 6: Red Oak has been a large shareholder of DRAD
Red Oak has been a large shareholder of DRAD for most of the time since 2008. In November 2011, Red Oak issued a nominating letter and sought to contest elections so as to replace mis-aligned insiders with qualified and energized Directors who would pro-actively create value for shareholders, includ
Slide 7: Timeline (contd.)
Timeline (contd.) — hold the 2013 annual meeting no later than May 5, 2013, — ensure that any new Directors are independent of current Directors; - rotate long-time Chairman King Nelson out of his role as Chair; — conduct a comprehensive review with such purpose to reduce costs; - curb dilution to u
Slide 8: Why Change is Needed? DRAD's share price and operating performance
DRAD’s share price and operating performance have suffered greatly over the past five years. Aggregate revenue is down 37% since FY08, with significant deterioration in both business segments. Profitability has remained depressed, with the Company incurring losses in 16 of the last 20 quarters and e
Slide 9: Why Change is Needed? (contd.)
Why Change is Needed? (contd.) QO We believe that the sustained underperformance is indicative of the Board’s lack of necessary experience needed to turnaround DRAD. Last year, Red Oak conducted extensive due diligence on then-proposed (and now current) Board members: Charles Gillman, Jeffrey Eberwe
Slide 10: Why Change is Needed? (contd.)
Why Change is Needed? (contd.) QO According to DRAD’s proxy statement, of the five current independent directors, two were appointed to the Board at Mr. Gillman’s recommendation while Gillman owned no stock. We believe that with his two appointees, Mr. Gillman controls DRAD’s Board. Interestingly, M
Slide 11: Why Change is Needed? (contd.)
Why Change is Needed? (contd.) Lastly, as shareholders, we are extremely worried about Mr. Gillman and Eberwein’s track record. Last year, through a proxy contest, Messrs. Gillman and Eberwein along with their slate of directors, took control of On Track Innovations Ltd. (OTIV) board. Since their el
Slide 12: Share price has underperformed
Share price has underperformed - DRAD share price has consistently under-performed its peer group and benchmark index over the past five years. 1140.0 5-year Total Shareholder Return as of 31 Dec. 2012 120.0 soo || 60.0 40.0 | Source: FactSet. Data as of 4/5/2013 Peer Group comprises of ATEC, BIOL,
Slide 13: Failed strategy has led to declining revenue
Failed strategy has led to declining revenue - Since FY08, DRAD’s revenue has declined by 37%. - Both operating segments have suffered during the review period. 60.0 USS million 30.0 00 Declining revenue across all business segments on 80.4 2.6 362 S28 _ ed «50.5 ass 378 aa | 373 16% 160 14.4 2008 2
Slide 14: Subpar Financial Metrics
Subpar Financial Metrics.... - DRAD has one of lowest profitability metrics among its peer group. - Such subpar performance is indicative of management/Board’s failure in not only bolstering revenue but also their inability to manage operating costs. ‘ross Pott Margin(FY2012) EBITDA Margin (FY2012)
Slide 15: Inability to generate Return on Investment
Inability to generate Return on Investment - The Company has consistently failed to generate positive Return on Investment (ROI). Since FY08, the company has earned a cumulative net income of $1.1 million on revenue of $310 million, with losses in 16 of the last 20 quarters. Net Income 2.00 | 050 "H
Slide 16: Misaligned executive compensation
Misaligned executive compensation - Since FY07, the Board has paid NEOs in excess of $8 million in total compensation for destroying $27 million of shareholder value. - Meanwhile, the Board received total compensation of $2.2 million during FYO08-FY12. Total Compensation to NEOs vs. Shareholder Valu
Slide 17: Is the Board really independent?
Is the Board really independent? QO According to DRAD’s proxy statement (pages 6-7): — “Jeffrey E. Eberwein was identified to the corporate governance committee by Mr. Gillman.” “John M. Climaco was identified to the corporate governance committee by Messrs. Eberwein and Gillman.” Q As such of the f
Slide 18: Compensation and audit cost concerns
QO Compensation: It is unclear as to why DRAD — during a strategic alternatives process — signed new employment agreements, including one in which a change in the board could trigger change of control payments (Jeff Keyes, new CFO). The new Board should not have adopted a change of control policy co
Slide 19: Red Oak opposed the appointment of new directors last year
O Red Oak opposed the appointment of new directors last year based on the result of its due diligence, which revealed the following: Mir. Gillman, Mr. Eberwein, and Mr. Climaco lacked the turnaround, mergers and acquisitions, micro cap/ small company, and Board experience sufficient to drive the imp
Slide 20: Current director experience comparison
Jeffrey Eberwein (Director since 2012) John Climaco (Director since 2012) Charles Gillman (Director since 2012) James Hawkins (Director since 2012) John Sayward (Directors since 2008) None (Investment Management) Limited (Media and Healthcare) None (Investment Management) None None None None None No
Slide 21: Operating performance has deteriorated since 2QFY2012
- Despite 2.4% increase in revenue, operating performance has deteriorated— gross profit is down 29.3%, EBITDA 279% and Net Income 108% since 2QFY2012 - Similarly, revenue for the DIS segment — the main focus of the new Board - is down 9% since 2QFY2012. Additionally, DIS segment incurred operating
Slide 22: Board strategic plan and open questions
- Focus on DIS cash flow generation - Eliminate $3-$4 million of costs - Relocation of Corporate Headquarters - Shareholder value will be increased by Reducing costs/focusing on cash flow + acquiring financially disciplined, cash generating business + share repurchase = Shareholder value - How does
Slide 23: Same Team Different Result?
Same Team Different Result? Q Pursuant to its restructuring initiative, DRAD announced several management changes. — Todd Clyde, current President and CEO, would transition out of that role by July 1, 2013. — Matthew G. Molchan became President in February 2013. He was previously President, DRAD Ima
Slide 24: If elected, Red Oak nominees would undertake the following
If elected, Red Oak nominees would undertake the following: Review the strategic alternatives process and possibly re-open it pending the review. Oversee a 382 NOL study to understand what type of structural flexibility may exist towards utilizing the NOL assets to create additional shareholder valu
Slide 25: Our Plan (contd.)
Our Plan (contd.) O Operationally: — Review SPECT Imaging Demand — DRAD specializes in Cardiac SPECT, which is just 7-15% of hospital demand. Further, the DIS business is keyed on physician practices, which is pressured by increases in costs and reductions in reimbursement rates. We estimate DRAD’s
Slide 26: Red Oak nominees — more experienced and qualified
Red Oak nominees — Unquestionably more Experienced and Qualified Nominee Anthony Snow Christopher lorillo David Sandberg Randall Waterfield Raymond Brooks Industry/ Other Experience None (Investment Management) Yes (Healthcare Co. VP of Ops) None (except as long- term DRAD investor) Yes (>$1 Billion
Slide 27: Red Oak nominee highlights
Raymond Brooks Christopher lorillo David Sandberg Tony Snow Randall Waterfield - Significant experience in both running and turning around underperforming companies (working inside companies). - Directly oversaw numerous hospital financings where the proceeds purchased and installed digital imaging
Slide 28: Raymond J. Brooks, Jr.
RAYMOND J. BROOKS, JR. — Mr. Brooks has over fifteen years of leadership experience as a CEO, with industry experience as well as expertise in restructuring, asset recovery, and liability management. During this span he has completed over ten acquisitions representing more than $10 billion. Previoul
Slide 29: Christopher Iorillo
CHRISTOPHER IORILLO — Mr. lorillo is the Managing Partner and Founder of CounterPoint Capital Partners, LLC, a private equity fund focused on investing in operationally and financially challenged businesses in the lower-middle market. Through July 2010, Mr. lorillo was the Vice President of Strategi
Slide 30: David Sandberg
DAVID SANDBERG — Mr. Sandberg is the Founder and managing member of Red Oak Partners, LLC. Previously, Mr. Sandberg co-managed JH Whitney & Co's Green River Fund from 1998-2002. Mr. Sandberg has invested nearly $1 billion across his 17 year investment career, with a focus on correcting conflicts of
Slide 31: Tony Snow
TONY SNOW - Mr. Snow is a private investor. He was previously employed at Soros Fund Management LLC where he was a part of a two man team that managed a $250 million global long/short equity portfolio. Prior to Soros, Mr. Snow also focused on investments in global equities at both Ardea Capital Mana
Slide 32: J. Randall Waterfield
J. RANDALL WATERFIELD - Mr. Waterfield is the Chairman of Waterfield Group, a diversified financial services holding company. Mr. Waterfield is also an owner and member of the Board of Directors of Cappello Waterfield & Co., an investment banking concern with over $100 billion in aggregate M&A and o
Slide 33: Conclusion
The new Board, majority of which took charge in April 2012, has failed to stem the decline in revenue and profitability. For example, Gross Profit is down 29.3%, EBITDA is down 279%, Net Income is down 108%, and revenue for the DIS segment — the main focus of the new board — has declined 9% - all si
Slide 34: Conclusion (contd.)
Conclusion (contd.) QO Notwithstanding the deteriorating operating performance, the Board is trying to take credit for recent corporate governance improvements — all of which were advocated by Red Oak and adopted by the previous board as part of settlement agreement. QO Red Oak believes that the Str