UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
|
or
|
|
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
|
Commission file number: 001-33297
VERICHIP CORPORATION
(Exact name of registrant as specified in its charter)
|
|
|
DELAWARE
|
|
06-1637809
|
(State or other jurisdiction of incorporation or organization)
|
|
(I.R.S. Employer Identification No.)
|
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
(Address of principal executive offices) (Zip code)
(561) 805-8008
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
|
|
Common Stock, par value $0.01 per share
|
|
The NASDAQ Stock Market LLC
|
(Title of each class)
|
|
(Name of each exchange on which registered)
|
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes
o
No
þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes
o
No
þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
|
|
|
|
|
|
|
Large accelerated filer
o
|
|
Accelerated filer
o
|
|
Non-accelerated filer
o
|
|
Smaller reporting company
þ
|
|
|
|
|
(Do not check if smaller reporting company)
|
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes
o
No
þ
The aggregate market value of the registrants common stock held by non-affiliates of the
registrant computed by reference to the price at which the common stock was last sold on the Nasdaq
Stock Market on June 30, 2008 was $8,852,459. For purposes of this calculation, shares of common
stock held by each officer and director and by each person who owns 10% or more of the outstanding
common stock have been excluded in that such persons may be deemed to be affiliates. The
determination of affiliate status is not necessarily a conclusive determination for other purposes.
At
February 4, 2009, 11,730,209 shares of our common stock were outstanding.
Documents Incorporated by Reference: Parts of the definitive Proxy Statement for the 2009 Annual
Meeting of Stockholders, which the Registrant will file with the Securities and Exchange Commission
within 120 days after the end of the Registrants fiscal year ended December 31, 2008, are
incorporated by reference in Part III of this Annual Report on Form 10-K to the extent described
herein.
Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements, within the meaning of
Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of
the Securities Exchange Act of 1934, as amended (the Exchange Act), that reflect our current
estimates, expectations and projections about our future results, performance, prospects and
opportunities. Forward-looking statements include, without limitation, statements about our market
opportunities, our business and growth strategies, our projected revenue and expense levels,
possible future consolidated results of operations, the adequacy of our available cash resources,
our financing plans, our competitive position and the effects of competition and the projected
growth of the industries in which we operate. This Annual Report on Form 10-K also contains
forward-looking statements attributed to third parties relating to their estimates regarding the
size of the future market for products and systems such as our products and systems, and the
assumptions underlying such estimates. Forward-looking statements include all statements that are
not historical facts and can be identified by forward-looking statements such as may, might,
should, could, will, intends, estimates, predicts, projects, potential, continue,
believes, anticipates, plans, expects and similar expressions. Forward-looking statements
are only predictions based on our current expectations and projections, or those of third parties,
about future events and involve risks and uncertainties.
Although we believe that the expectations reflected in the forward-looking statements
contained in this Annual Report on Form 10-K are based upon reasonable assumptions, no assurance
can be given that such expectations will be attained or that any deviations will not be material.
In light of these risks, uncertainties and assumptions, the forward-looking statements, events and
circumstances discussed in this Annual Report on Form 10-K may not occur and actual results could
differ materially and adversely from those anticipated or implied in the forward-looking
statements. Important factors that could cause our actual results, level of performance or
achievements to differ materially from those expressed or forecasted in, or implied by, the
forward-looking statements we make in this Annual Report on Form 10-K are discussed under Item 1A.
Risk Factors, Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operation and elsewhere in this Annual Report on Form 10-K and include:
|
|
|
our ability to continue listing our common stock on the Nasdaq Stock Market (Nasdaq);
|
|
|
|
|
our ability to successfully consider, review, and if appropriate, implement other strategic
opportunities;
|
|
|
|
|
our expectation that we will incur losses, on a consolidated basis, for the foreseeable future;
|
|
|
|
|
our ability to fund our operations;
|
|
|
|
|
we may become subject to costly product liability claims and claims that our products infringe
the intellectual property rights of others;
|
|
|
|
|
our ability to comply with current and future regulations relating to our businesses;
|
|
|
|
|
uncertainty as to whether a market for our VeriMed system will develop and whether we will be
able to generate more than a nominal level of revenue from this business;
|
|
|
|
|
the potential for patent infringement claims to be brought against us asserting that we hold
no rights for the use of the implantable microchip technology and that we are violating
another partys intellectual property rights. If such a claim is successful, we could be
enjoined from engaging in activities to market the systems that utilize the implantable
microchip and be required to pay substantial damages;
|
|
|
|
|
market acceptance of our VeriMed system, which will depend in large part on the future
availability of insurance reimbursement for the VeriMed system microchip implant procedure
from government and private insurers, and the timing of such reimbursement, if it, in fact,
occurs;
|
|
|
|
|
our ability to provide uninterrupted, secure access to the VeriMed database; and
|
|
|
|
|
our ability to establish and maintain proper and effective internal accounting and financial
controls.
|
You should not place undue reliance on any forward-looking statements. In addition, past
financial or operating performance is not necessarily a reliable indicator of future performance,
and you should not use our historical performance to anticipate future results or future period
trends. Except as otherwise required by federal securities laws, we disclaim any obligation or
undertaking to disseminate any updates or revisions to any forward-looking statement contained in
this Annual Report on Form 10-K to reflect any change in our expectations or any change in events,
conditions or circumstances on which any such statement is based. All forward-looking statements
attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by
the cautionary statements included in this Annual Report on Form 10-K.
3
PART I
ITEM 1. BUSINESS
The Company
We were formed as a Delaware corporation by Digital Angel Corporation, or Digital Angel, in
November 2001. In January 2002, we began our efforts to create a market for radio frequency
identification, or RFID, systems that utilize our human implantable microchip. On February 14,
2007, we completed our initial public offering in which we sold 3,100,000 shares of our common
stock at $6.50 per share.
On
July 18, 2008, we completed the sale of all of the outstanding
capital stock of Xmark Corporation, our wholly-owned Canadian
subsidiary (Xmark), which was principally all of our
operations, to Stanley Canada Corporation, a wholly-owned subsidiary of The
Stanley Works. The sale
transaction was closed for $47.9 million in cash, which consisted of the $45 million purchase price
plus a balance sheet adjustment of approximately $2.9 million. Under the terms of the stock
purchase agreement, $4.5 million of the proceeds will be held in escrow for a period of 12 months
to provide for indemnification obligations under the stock purchase agreement, if any. As a result,
we recorded a gain on the sale of Xmark of $6.2 million, with $4.5 million of that gain deferred
until the escrow is settled. The financial position, results of operations and cash flows of Xmark have
been reclassified as discontinued operations in 2008 and 2007.
Following the completion of the sale of Xmark to Stanley Canada, we retired all of our
outstanding debt for a combined payment of $13.5 million and settled all contractual payments to
Xmarks and our officers and management for $9.1 million.
On August 28, 2008, we paid a special
dividend to stockholders of $15.8 million.
Our principal executive offices are located at 1690 South Congress Avenue, Suite 200, Delray
Beach, Florida 33445. Our telephone number is (561) 805-8008. Unless the context provides
otherwise, when we refer to the Company, we, our, or us in this Annual Report on Form 10-K,
we are referring to VeriChip Corporation and its consolidated subsidiaries.
BioBond is our registered trademark, and VeriMed, VeriChip, and VeriTrace are our trademarks.
This Annual Report on
Form 10-K
contains trademarks and trade names of other organizations and
corporations.
Available Information
We file or furnish with or to the Securities and Exchange Commission, or SEC, our quarterly
reports on Form 10-Q, annual reports on Form 10-K, current reports on Form 8-K, annual reports to
stockholders and annual proxy statements and amendments to such filings. Our SEC filings are
available to the public on the SECs website at http://www.sec.gov. These reports are also
available free of charge from our website at http://www.verichipcorp.com as soon as reasonably
practicable after we electronically file or furnish such material with or to the SEC. The
information on our website is not incorporated by reference into this Annual Report on Form 10-K or
any registration statement that incorporates this Annual Report on Form 10-K by reference.
4
Overview
We have historically developed, marketed and sold radio frequency identification, frequently
referred to as RFID, systems used for the identification of people in the healthcare market. We are
currently focused on the options for the Company including the possible development of the glucose
sensing microchip and are considering and will review other strategic opportunities. As a result of
our sale of Xmark, our only remaining business is our VeriMed Health Link system, formerly known as the VeriMed
patient identification system, which uses an implantable passive RFID microchip that is used in
patient identification applications. Each implantable microchip contains a unique verification
number that is read when it is scanned by our scanner. In October 2004, the U.S. Food and Drug
Administration, or FDA, cleared our VeriMed Health Link system for use in medical applications in
the United States. As of December 31, 2008, we have generated nominal revenue from sales of our
Health Link system. The key components of the Health Link system are a passive microchip, which is
approximately the size of a grain of rice, a fixed location or a wireless handheld scanner used to
read the 16-digit identification number contained on the microchip, and a secure, web-enabled
database containing a patients personal health record.
Recent Events
Continued Listing on Nasdaq Stock Market
On October 21, 2008, we received a letter from Nasdaq indicating that we are not in compliance
with the Nasdaqs requirements for continued listing because, for the 30 consecutive business days
prior to October 16, 2008, the bid price of our common stock closed below the minimum $1.00 per
share price requirement for continued listing under Nasdaq Marketplace Rule 4450(a) (the Rule)
and, our common stock had not maintained a minimum market value of publicly held shares (MVPHS)
of $5 million as required for continued inclusion by the Rule. On November 17, 2008, we received a
notice from Nasdaq indicating that our stockholders equity at September 30, 2008 was less than the
$10 million in stockholders equity required for continued listing on The Nasdaq Global Market
under Marketplace Rule 4450(a)(3). In its notice, Nasdaq requested that we provide our plan to
achieve and sustain compliance with the continued listing requirements of The Nasdaq Global Market,
including the minimum stockholders equity requirement, before
December 2, 2008, which we provided. If Nasdaq determines that we have not presented a definitive plan to achieve compliance in
the short term and sustain compliance in the long term, it will provide us with a written
notification that our securities will be delisted from Nasdaq Global
Market. If we receive a
notification, we may then apply to move to The Nasdaq Capital Market or appeal Nasdaqs delisting
determination to a Nasdaq Listing Qualifications Panel.
Given the current market conditions, Nasdaq suspended enforcement of the bid price and market
value of publicly held shares requirements for all companies listed on Nasdaq through Sunday, April
19, 2009. Following the reinstatement of these rules, and in accordance with Marketplace
Rule 4450(e)(2), we have 180 calendar days from Monday, April 20, 2009, or until October 19, 2009,
to regain compliance with the bid price requirement. Following the reinstatement of these rules,
and in accordance with Marketplace Rule 4450(e)(1), we have 90 calendar days from April 20, 2009,
or until July 20, 2009, to regain compliance with the market value requirements.
5
Transactions with Digital Angel
On November 12, 2008, we entered into an Asset Purchase Agreement (APA) with Digital Angel
and Destron Fearing Corporation, a wholly-owned subsidiary of Digital Angel, which collectively are
referred to as, Digital Angel. The terms of the APA included the sale to us of patents related to
an embedded bio-sensor system for use in humans, and the assignment of any rights of Digital Angel
under a development agreement associated with the development of an implantable glucose sensing
microchip. We also received covenants from Digital Angel and Destron Fearing that will permit the
use of intellectual property of Digital Angel related to our VeriMed Health Link business without
payment of ongoing royalties, as well as inventory and a limited period of technology support by
Digital Angel for $500 thousand. Management determined that the value paid was entirely
attributable to the glucose
sensing microchip. As such the entire purchase price was recorded as
an expense as of December 31, 2008.
Also pursuant to the APA, on November 12, 2008, the parties terminated the May 2008 Agreement,
except for certain provision relating to indemnification in connection with the stock purchase
agreement with The Stanley Works. Additionally, the Supply Agreement was terminated, except that
product warranties continue to apply to products sold to us under that agreement subject to certain
limitations, and the indemnification provisions survive through March 4, 2013 for claims associated
with the products purchased under the Supply Agreement (for more information on the May 2008
Agreement and the Supply Agreement, see Note 11 Related Party Transactions).
On November 12, 2008, Digital Angel sold the 5.4 million shares of our common stock that it
owned to R & R Consulting Partners, LLC, an entity owned and controlled by Scott R. Silverman, in a
private transaction. As a result of the transaction, R & R Consulting Partners, LLC and
Mr. Silverman now own 53% of our outstanding common stock, and Mr. Silverman was
re-appointed
as
chairman of our board effective November 12, 2008.
On November 14, 2008, we purchased from Digital Angel the remaining inventory owned by Digital
Angel related to our VeriMed Health Link business for $161 thousand which were written off to cost
of sales.
In connection with the APA, effective November 12, 2008, Mr. Grillo resigned as chairman of
the board of directors, and our board of directors appointed
Mr. Silverman as chairman of the board of directors.
Effective November 13, 2008, Paul Green resigned as our director, and our board of directors appointed Michael Krawitz as one of our directors.
On November 12, 2008, we also announced our intention to continue to explore potential
strategic transactions with third parties, while continuing to develop our VeriMed Health Link
business.
Industry Overview
RFID and the Healthcare Industry
We believe that RFID technology may be used to address the need of emergency room personnel
and other first responder medical practitioners to identify uncommunicative patients and rapidly
access their personal health records, and we believe that use of such technology has the potential
to improve patient care, enhance productivity and lower costs. The IDTechEx report refers to a
study performed by the U.S. Institute of Medicine that estimated that preventable medical errors in
the United States cause between 44,000 and 98,000 deaths each year, due in part to mistaken patient
identification and lack of information on a patients medical history, and results in losses, other
than the loss of human life, of $17 billion to $29 billion annually. These losses include the
expense of additional care needed because of mistakes, disability, and lost productivity and
income. One factor that can contribute to the occurrence of preventable medical errors is the
inability to identify a patient and/or access his or her health records. Recognizing the problem of
patient identification and access to medical records, the United States government is currently
attempting to address certain inefficiencies in the healthcare system related to information
technology. In particular, the current administration has developed a plan to move, in the next
five years, toward broad adoption of standards-based electronic health information systems,
including the computerization of the nations health records.
6
Our Health Link System
Our Health Link system is designed to rapidly and accurately identify people who are
unconscious, confused or unable to communicate at the time of medical treatment, for example, upon
arrival at a hospital emergency room. Our Health Link system provides emergency room physicians and
staff who use our scanner, linking a patient to the Health Link Registry to have access to patient
pre-approved information, including the patients name, primary care physician, emergency contact
information, advance directives and, if the patient elects, other pertinent data, such as personal
health records. In addition, we believe that our wireless handheld scanner could make the Health
Link system an important identification tool for EMTs and other emergency personnel outside the
hospital emergency room setting. The components of our system include:
|
|
|
a glass-encapsulated microchip-equipped transponder, antenna, and capacitor;
|
|
|
|
|
a fixed location, or a wireless handheld, scanner; and
|
|
|
|
|
a secure, web-enabled database containing patient-approved information.
|
The microchip used in the Health Link system is a passive RFID microchip, approximately the
size of a grain of rice, which is implanted under the skin in a patients upper right arm under the
supervision of a physician. The capsule is coated with a polymer, BioBond
TM
to form
adherence to human tissue, thereby preventing migration in the body. Each microchip contains a
unique 16-digit identification number. The identification number can be read by one of our handheld
scanners. When the scanner is placed within a few inches of the microchip, a small amount of radio
frequency energy passes from the scanner, energizing the dormant microchip, which then emits a
radio frequency signal transmitting the identification number. With that identification number,
emergency room personnel or EMTs can securely obtain from our or a third partys database the
patients pre-approved information, including the patients name, primary care physician, emergency
contact information, advance directives and, if the patient elects, other pertinent data, such as
personal health records.
Patients using the Health Link system are responsible for inputting all of his or her
information into our database, including personal health records, as physicians offices are not yet
typically involved in this process primarily because of liability concerns and because they are
not generally paid for this service.
An individual implanted with our microchip whose information is included in our database may
grant access to such information to any of the following categories of persons, at the sole
discretion of the patient:
|
|
|
public safety personnel, including local police, fire and rescue workers;
|
|
|
|
|
emergency medical personnel, including EMTs and paramedics;
|
|
|
|
|
medical facilities, including hospitals, urgent care centers and physician offices; and
|
|
|
|
|
law enforcement personnel, including sheriffs departments, state police and the FBI.
|
Unless a patient decides otherwise, such persons will have read-only access to a patients
information.
There are a number of risks associated with our VeriMed business, including without
limitation:
|
|
|
uncertainty as to whether a market for the Health Link system will
develop and whether we will be able to generate more than a nominal
level of revenue from the sale of such systems;
|
|
|
|
|
uncertainty as to the future availability of insurance reimbursement
for the microchip implant procedure from government and private
insurers; and
|
|
|
|
|
possible third-party claims asserting that we hold no rights for the
use of the implantable microchip technology and are violating the
third partys intellectual property rights. If such a claim were
successful, we could be enjoined from marketing this technology and
could be required to pay substantial damages.
|
The Health Link System and Other Applications for Our Implantable Microchip
We believe that our Health Link system, which utilizes our implantable microchip, may make a
significant contribution to our revenue in the future. As part of our growth strategy, we are
dedicating the operating cash flows generated by our healthcare security systems and industrial
products, as well as a significant portion of the proceeds of our initial public offering, to our
efforts to create markets for the Health Link system, as well as our other systems that utilize the
implantable microchip.
7
Healthcare Application
We believe our Health Link system will prove of use to emergency room personnel and other
first responder medical practitioners in identifying uncommunicative patients and rapidly accessing
their personal health records at the time of initial treatment. The primary target market for our
Health Link system consists of people who are more likely to require emergency medical care,
persons with cognitive impairment, persons with chronic diseases and related conditions, and
persons with implanted medical devices. According to a study we commissioned by Fletcher Spaght,
Inc. in 2005, there were approximately 45 million patients in the United States alone who fit this
profile. Through use of our Health Link system, currently a person can be scanned for the unique,
16-digit identification number on the implanted microchip, enabling access to our Health Link
Registry and that persons pre-approved information, including the persons name, primary care
physician, emergency contact information, advance directives, and if the person elects, other
pertinent data, such as personal health records. See Item 1A. Risk FactorsRisks Related to Our
Businesses Which Utilize the Implantable Microchip.
Our sales and marketing strategy for our Health Link system is to contemporaneously market our
system to hospitals, hospital networks, third-party emergency department management companies and
nursing homes, as well as to physicians who treat at-risk patients: persons with diabetes, cancer,
coronary heart disease, chronic obstructive pulmonary disease, cerebrovascular disease (stroke),
congestive heart failure, Alzheimers, epilepsy and other diseases or conditions, including persons
with implanted medical devices. This approach is intended to accelerate the adoption of the Health
Link system by healthcare facilities, as well as by physicians and patients.
In the initial phase of our efforts to create a market for the Health Link system, we have
focused on getting hospitals and third-party emergency room management companies to adopt the
Health Link system protocol in their emergency rooms. This focus reflects our recognition that
physicians who treat patients within our target market may be disinclined to discuss with their
patients, and patients may not be persuaded by, the benefits of the Health Link system in the
absence of some or all of the hospital emergency rooms in their immediate geographic area having
become part of our network. To build out our network, we have been providing our scanners, at no
charge, to hospitals and third-party emergency room companies. As of December 31, 2008, more than
200 hospitals and other medical facilities have adopted our Health Link system protocol in their
emergency rooms. The facilities that have adopted the Health Link protocol have received training
in the use of our system and, as part of the standard protocol, are scanning patients who arrive in
their emergency rooms unconscious, confused or unable to communicate. We expect to continue this
seeding process for the foreseeable future, as we endeavor to build out the network across the
United States and overseas.
Physicians whose patients fit within our target market are the focus of the second phase of
our commercialization efforts. At present, our sales and marketing strategy for physicians who
treat patients who fit the profile for which our Health Link system is intended to benefit includes
using our sales force to directly market to and educate such physicians in those geographic regions
surrounding hospitals that have adopted the Health Link system as part of their standard protocol.
We are distributing marketing materials, such as brochures and posters, intended to be displayed in
physicians offices. Our focus on physicians reflects our belief that, as with all medical
treatments and procedures, it is the physician who is responsible for discussing and recommending a
particular course of action, knowing the particular circumstances of the individual patient.
As of February 4, 2009, 616 people have received our VeriMed microchip and have enrolled in
the VeriMed patient registry, of which 40 are paying subscribers. We attribute the modest number of
people who have undergone the microchip implant procedure to a number of factors:
|
|
|
A lack of direct to consumer advertising to educate the patient
population to the benefits of the Health Link system.
|
|
|
|
|
Many people who fit the profile for which the Health Link system was
designed may not be willing to have a microchip implanted in their
upper right arms.
|
|
|
|
|
Physicians may be reluctant to discuss the implant procedure with
their patients until a greater number of hospital emergency rooms have
adopted the Health Link system as part of their standard protocol.
|
|
|
|
|
The media has from time to time reported, and may continue to report,
on the Health Link system in an unfavorable and, on occasion, an
inaccurate manner. For example, there have been articles published
asserting, despite at least one study to the contrary, that the
implanted microchip is not MRI compatible. There have also been
articles published asserting, despite numerous studies to the
contrary, that the implanted microchip causes malignant tumor
formation in animals.
|
8
|
|
|
Privacy concerns may influence individuals to refrain from undergoing
the implant procedure or dissuade physicians from recommending the
Health Link system to their patients. Misperceptions that a
microchip-implanted person can be tracked and that the microchip
itself contains a persons basic information and personal health
records may contribute to such concerns.
|
|
|
|
|
Misperceptions and/or negative publicity may prompt legislative or
administrative efforts by politicians or groups opposed to the
development and use of human-implantable RFID microchips. In that
regard, in 2007 and 2008, a number of states have introduced, and at
least three states have enacted, legislation that would prohibit any
requirement that an individual undergo a microchip-implant procedure.
While we support all pending and enacted legislation that would
preclude anything other than voluntary implantation, legislative
bodies or government agencies may determine to go further, and their
actions may have the effect, directly or indirectly, of delaying,
limiting or preventing the use of human-implantable RFID microchips or
the sale, manufacture or use of RFID systems utilizing such
microchips.
|
|
|
|
|
The cost of the microchip implant procedure is not covered by
Medicare, Medicaid or private health insurance.
|
|
|
|
|
No studies to assess the impact of the Health Link system on the
quality of emergency department care have been completed and publicly
released.
|
With respect to the last two factors listed above, we are in the process of facilitating and,
in one case, providing product and de minimus funding clinical studies that we believe may demonstrate the efficacy of the Health
Link system. We believe that once this is established, government and private insurers may be more
likely to cover the cost of the microchip implant process. In any event, these studies are likely
to be of considerable interest to physicians who treat at-risk patients.
In June 2006, we began a study with Horizon Blue Cross Blue Shield of New Jersey, the largest
health insurer in the State of New Jersey (Horizon BCBSNJ), the Hackensack University Medical
Center Independent Physicians Association (IPA) and the Hackensack University Medical Center, under
which Hackensack University Medical Center and its physicians have the right to test the Health
Link system over a period of approximately two years. Together with BCBSNJ, we have enrolled in the
study 30 members of Horizon BCBSNJ who were treated for an episode of care by a Hackensack IPA
physician between January 1, 2004 and December 31, 2006. Each participant in the program was to be
tested for a period of two years after receiving the microchip implant. The objective of this
clinical study was to assess the impact of the Health Link system on emergency department care
provided to patients with specified chronic medical conditions. This included an assessment of: the
insertion technique; patient data selection and input; staff acceptance and use of the technology;
frequency of database access; the time involved for information gathering with current methods
compared to the Health Link System; the impact of the Health Link system on clinical presentation
and treatment; and the functionality of the Health Link system in an application environment.
The Institutional Review Board approved a clinical study to be performed by the American
Medical Directors Association (AMDA) to assess the efficacy of the Health Link system in improving
patient outcomes and improving access to patient medical information while patients are in route to
emergency rooms from long-term care facilities, both skilled nursing facilities and assisted living
facilities. The proposed study would involve 10 facilities, either skilled nursing facilities or
assisted living facilities, with an estimated study population of 100 people. The inclusion
criteria for the study participants would include being age 65 or above and having two or more of
the following conditions: dementia, stroke, diabetes, chronic obstructive pulmonary disease,
congestive heart failure, coronary heart disease and epilepsy. No patient or third party will be
billed for use of the Health Link system during the study.
9
In early 2007, we entered into a partnership with Alzheimers Community Care, or ACC, of West
Palm Beach, Florida, in which VeriChip and ACC will conduct a study of the effectiveness of the
VeriMed Health Link System in managing the records of Alzheimers patients and their caregivers. In
the two-year, 200 patient study, participating individuals suffering from Alzheimers disease and
other forms of dementia, as well as their caregivers, would receive the VeriMed implantable
microchip to provide emergency department staff easy access to those patients identification and
medical information. Alzheimers disease is one of several medical conditions we identify as being
ideally suited for the benefits of the Health Link system since individuals with the disease or
other forms of dementia are often unable to give necessary identifying information or critical
medical history upon being admitted to a hospital. ACC also believes it is important for caregivers
to obtain the implantable Health Link. If a caregiver becomes ill, the Health Link database will
inform medical personnel that he or she is the caregiver for someone unable to care for themselves.
All participants in the study will be voluntary. The legally designated responsible party of an
Alzheimers patient unable to make medical decisions must give permission for the patient to
participate. As of December 31, 2008, more than 100 patients and caregivers have received the
Health Link microchip as part of this study.
We believe that if the results of these and other clinical studies that may be undertaken are
sufficiently compelling, the Center for Medicare and Medicaid Services may determine that the
Health Link microchip implant procedure is reimbursable under Medicare and Medicaid. If this were
to occur, we believe many private insurers would follow suit. We can provide no assurance as to if
and when government or private insurers will decide to take such action. It may take a considerable
period of time for this to occur, if, in fact, it does occur. If government and private insurers do
not determine to reimburse the cost of the implant procedure, we would not expect to realize the
currently anticipated level of sales of our implantable microchip and the database subscription
fees.
Other Applications
We have also developed another system that utilizes the implantable microchip, our VeriTrace
system.
Our VeriTrace system was conceived of in the wake of Hurricane Katrina, when we donated
implantable microchips to FEMAs Department of Mortuary Services in Mississippi and Louisiana to
help with FEMAs efforts to identify corpses. Our implantable microchips were used to provide an
end-to-end tagging solution for the accurate tracking and identification of human remains and
associated evidentiary items. We began marketing of our VeriTrace system in 2006.
Sales, Marketing and Distribution
Our end-use customers have consisted of healthcare facilities, such as hospitals and long-term
care facilities, healthcare professionals, such as physicians and individual patients.
We have historically marketed our systems primarily by attending trade shows and medical
conferences and by advertising in publications.
Until June 2007, our marketing efforts with respect to our Health Link system had been to
provide our scanners to hospitals and third-party emergency room management companies at no charge
in order to build out the geographic footprint of the healthcare facilities that were able to use
our Health Link system as part of their standard protocol. We expected to continue this seeding
process for the foreseeable future as we endeavored to build out our network across the United
States and overseas. In addition, we marketed our Health Link system to physicians, who treated
patients who fit the profile for which our Health Link system was intended to benefit, in those
geographic areas surrounding hospitals that have adopted the Health Link system.
With respect to our Health Link system, we do not believe any other company currently offers a
human implantable microchip-based patient identification system. Various alternative patient
identification solutions are currently available, such as bracelets sold by MedicAlert, health
information wallet cards, biometric systems and key fobs that store personal health records.
We are currently focused on the options for the Company, including the possible development of
the glucose sensing microchip and are considering and will review other strategic opportunities.
10
Manufacturing; Supply Arrangements
We have historically outsourced the manufacturing of all the hardware components of our active
RFID systems to
third-party
contractors, but conduct final assembly, testing and quality control
functions internally. As of February 4, 2009, we have not had material difficulties obtaining system components.
We believe that if any of our manufacturers or suppliers were to cease supplying us with system
components, we would be able to procure alternative sources without material disruption to our
business.
Digital Angel was our sole supplier of the implantable microchips, which it obtained from
Raytheon Microelectronics España, a subsidiary of Raytheon Company, or RME, under the terms of a
separate supply agreement which was terminated on November 12, 2008.
Environmental Regulation
We must comply with local, state, federal, and international environmental laws and
regulations in the countries in which we do business, including laws and regulations governing the
management and disposal of hazardous substances and wastes. We expect our operations and products
will be affected by future environmental laws and regulations, but we cannot predict the effects of
any such future laws and regulations at this time. Our distributors who place our products on the
market in the European Union are required to comply with EU Directive 2002/96/EC on waste
electrical and electronic equipment, known as the WEEE Directive. Noncompliance by our distributors
with EU Directive 2002/96/EC may adversely affect the success of our business in that market.
Additionally, we are investigating the applicability of EU Directive 2002/95/EC on the restriction
of the use of certain hazardous substances in electrical and electronic equipment, known as the
RoHS Directive which took effect on July 1, 2006. We do not expect the RoHS Directive will have a
significant impact on our business.
Government Regulation
Laws and Regulations Pertaining to RFID Technologies
Our active RFID systems, as well as our RFID systems that use our implantable microchip, rely
on low-power, localized use of radio frequency spectrum to operate. As a result, we must comply
with U.S. Federal Communications Commission, or FCC, and Industry Canada regulations, as well as
the laws and regulations of other jurisdictions where we sell our products, governing the design,
testing, marketing, operation and sale of RFID devices. Accordingly, all of our products and
systems have a paired FCC and Industry Canada equipment authorization.
U.S. Federal Communications Commission Regulations
Under FCC regulations and Section 302 of the Communications Act, RFID devices, including those
we market and sell, must be authorized and comply with all applicable technical standards and
labeling requirements prior to being marketed in the United States. The FCCs rules prescribe
technical, operational and design requirements for devices that operate on the electromagnetic
spectrum at very low powers. The rules ensure that such devices do not cause interference to
licensed spectrum services, mislead consumers regarding their operational capabilities or produce
emissions that are harmful to human health. Our RFID devices are intentional radiators, as defined
in the FCCs rules. As such, our devices may not cause harmful interference to licensed services
and must accept any interference received. We must construct all equipment in accordance with good
engineering design as well as manufacturers practices.
11
Manufacturers of RFID devices must submit testing results and/or other technical information
demonstrating compliance with the FCCs rules in the form of an application for equipment
authorization. The FCC processes each application when it is in a form acceptable for filing and,
upon grant, issues an equipment identification number. Each of our RFID devices must bear a label
which displays the equipment authorization number, as well as specific language set forth in the
FCCs rules. In addition, each device must include a user manual cautioning users that changes or
modifications not expressly approved by the manufacturer could void the equipment authorization. As
a condition of each FCC equipment authorization, we warrant that each of our devices marked under
the grant and bearing the grant identifier will conform to all the technical and operational
measurements submitted with the application. RFID devices used and/or sold in interstate commerce
must meet these requirements or the equipment authorization may be revoked, the devices may be
seized and a forfeiture may be assessed against the equipment authorization grantee. The FCC
requires all holders of equipment authorizations to maintain a copy of each authorization together
with all supporting documentation and make these records available for FCC inspection upon request.
The FCC may also conduct periodic sampling tests of equipment to ensure compliance. We believe we
are in substantial compliance with all FCC requirements applicable to our products and systems.
Regulation by the FDA
Our VeriMed microchip is a medical device subject to regulation by the FDA, as well as other
federal and state regulatory bodies in the United States and comparable authorities in other
countries. In October 2004, the Health Link system received classification as a Class II medical
device by the FDA for patient identification and health information purposes. The FDA also permits
us to market and sell the Health Link system in the United States.
FDA Premarket Clearance and Approval Requirements
. Generally speaking, unless an exemption
applies, each medical device we wish to distribute commercially in the United States will require
either prior clearance under Section 510(k) of the Federal Food, Drug, and Cosmetic Act, or FFDCA,
or a premarket approval application, or PMA, from the FDA. Medical devices are classified into one
of three classes Class I, Class II or Class III depending on the degree of risk to the patient
associated with the medical device and the extent of control needed to ensure safety and
effectiveness. Devices deemed to pose lower risks are placed in either Class I or II. The
manufacturer of a Class II device is typically required to submit to the FDA a premarket
notification requesting permission to commercially distribute the device and demonstrating that the
proposed device is substantially equivalent to a previously cleared and legally marketed 510(k)
device or a device that was in commercial distribution before May 28, 1976 for which the FDA has
not yet called for the submission of a PMA. This process is known as 510(k) clearance. Devices
deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting implantable
devices, or devices deemed not substantially equivalent to a previously cleared 510(k) device, are
generally placed in Class III, requiring premarket approval.
In October 2004, we received classification of our VeriMed system as a Class II device. In
granting this classification, the FDA created a new device category for implantable radiofrequency
transponder systems for patient identification and health information. The FDA also determined
that devices that meet this description will be exempt from 510(k) premarket clearance so long as
they comply with the FFDCA, its implementing regulations and the provisions of an FDA guidance
document issued by the FDA in December 2004, entitled
Guidance for Industry and FDA Staff, Class
II Special Controls Guidance Document: Implantable Radiofrequency Transponder System for Patient
Identification and Health Information
, that establishes special controls for this type of device.
The special controls, which are intended to ensure that the device is safe and effective for its
intended use, include the following: biocompatibility testing, information security procedures,
performance standard verification, software validation, electro-magnetic compatibility and
sterility testing. We believe that we are in compliance with FFDCA, its implementing regulations
and the December 2004 guidance document. Similarly, a company that wishes to market products that
will compete with the VeriMed system will not be required to submit a 510(k) premarket clearance
application to the FDA if they comply with the requirements of the special controls guidance
document as well as a full spectrum of FDA regulations, described more fully below.
In January, 2007, the FDA published a Draft Guidance entitled
Radio-Frequency Wireless
Technology in Medical Devices.
This document includes the FDAs current recommendations regarding
specific risks and limitations to be considered when developing and implementing a Quality System
for medical devices using radio frequency wireless technology, as well as additional information to
be included in the labeling for such devices. We believe our Quality System and labeling for our
VeriMed System meet the recommendations outlined in the draft guidance.
12
Pervasive and Continuing Regulation
. After a medical device is placed on the market, numerous
regulatory requirements continue to apply. These include:
|
|
|
quality system regulations, or QSR, which require manufacturers,
including third-party manufacturers, to follow stringent design,
testing, control, documentation and other quality assurance procedures
during all aspects of the manufacturing process;
|
|
|
|
|
labeling regulations and FDA prohibitions against the promotion of
regulated products for uncleared, unapproved or off-label uses;
|
|
|
|
|
clearance or approval of product modifications that could
significantly affect safety or effectiveness or that would constitute
a major change in intended use;
|
|
|
|
|
medical device reporting, or MDR, regulations, which require that a
manufacturer report to the FDA if the manufacturers device may have
caused or contributed to a death or serious injury or malfunctioned in
a way that would likely cause or contribute to a death or serious
injury if the malfunction were to recur; and
|
|
|
|
|
post-market surveillance regulations, which apply when necessary to
protect the public health or to provide additional safety and
effectiveness data for the device.
|
Fraud and Abuse
We are subject to various federal and state laws pertaining to healthcare fraud and abuse,
including anti-kickback laws and false claims laws. Violations of these laws are punishable by
criminal and/or civil sanctions, including, in some instances, imprisonment and exclusion from
participation in federal and state healthcare programs, including Medicare, Medicaid and Veterans
Affairs health programs. We have never been challenged by a government authority under any of these
laws and believe that our operations are in material compliance with such laws. However, because of
the far-reaching nature of these laws, there can be no assurance that we would not be required to
alter one or more of our practices to be in compliance with these laws. In addition, there can be
no assurance that the occurrence of one or more violations of these laws would not result in a
material adverse effect on our financial condition and results of operations.
Anti-Kickback Laws
We may directly or indirectly be subject to various federal and state laws pertaining to
healthcare fraud and abuse, including anti-kickback laws. In particular, the federal healthcare
program Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering,
receiving or providing remuneration, directly or indirectly, in exchange for or to induce either
the referral of an individual, or the furnishing, arranging for or recommending a good or service,
for which payment may be made in whole or part under federal healthcare programs, such as the
Medicare and Medicaid programs. Penalties for violations include criminal penalties and civil
sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other
federal healthcare programs.
Federal False Claims Act
We may become subject to the Federal False Claims Act, or FCA. The FCA imposes civil fines and
penalties against anyone who knowingly submits or causes to be submitted to a government agency a
false claim for payment. The FCA contains so-called whistle-blower provisions that permit a
private individual to bring a claim, called a qui tam action, on behalf of the government to
recover payments made as a result of a false claim. The statute provides that the whistle-blower
may be paid a portion of any funds recovered as a result of the lawsuit. Even though the VeriMed
system is not reimbursed by federal healthcare programs, it is still possible that we may be liable
for violations of the FCA, for instance, if a sales representative were to assist or instruct a
physician to bill a government program for microchip implantation by listing on the claim form some
other service that is reimbursable.
13
State Laws and Regulations
Many states have enacted laws similar to the federal Anti-Kickback Statute and FCA. The
Deficit Reduction Act of 2005 contains provisions that give monetary incentives to states to enact
new state false claims acts. The state Attorneys General are actively engaged in promoting the
passage and enforcement of these laws. While the Federal Anti-Kickback Statute and FCA apply only
to federal programs, many similar state laws apply both to state funded and to commercial health
care programs. In addition to these laws, all states have passed various consumer protection
statutes. These statutes generally prohibit deceptive and unfair marketing practices, including
making untrue or exaggerated claims regarding consumer products. There are potentially a wide
variety of other state laws, including state privacy laws, to which we might be subject. We have
not conducted an exhaustive examination of these state laws.
Privacy Laws and Regulations
Our VeriMed business is subject to various federal and state laws regulating the protection of
consumer privacy. We have never been challenged by a governmental authority under any of these laws
and believe that our operations are in material compliance with such laws. However, because of the
far-reaching nature of these laws, there can be no assurance that we would not be required to alter
one or more of our systems and data security procedures to be in compliance with these laws. Our
failure to protect health information received from customers could subject us to liability and
adverse publicity and could harm our business and impair our ability to attract new customers.
U.S. Federal Trade Commission Oversight
An increasing focus of the United States Federal Trade Commissions (FTCs) consumer
protection regulation is the impact of technological change on protection of consumer privacy.
Under the FTCs statutory authority to prosecute unfair or deceptive acts and practices, the FTC
vigorously enforces promises a business makes about how personal information is collected, used and
secured. Since 1999, the FTC has taken enforcement action against companies that do not abide by
their representations to consumers of electronic security and privacy. More recently, the FTC has
found that failure to take reasonable and appropriate security measures to protect sensitive
personal information is an unfair practice violating federal law. In the consent decree context,
offenders are routinely required to adopt very specific cybersecurity and internal compliance
mechanisms, as well as submit to twenty years of independent compliance audits. Businesses that do
not adopt reasonable and appropriate data security controls have been found liable for as much as
$10 million in civil penalties and $5 million in consumer redress.
The FTC continues to actively consider the potential impact of RFID on consumer protection
issues. In 2006, the FTC launched a new initiative, Protecting Consumers in the Next Tech-ade and
convened public hearings on November 6-8, 2006 that brought together experts from the business,
government and technology sectors as well as consumer advocates, academics and law enforcement
officials to explore ways in which convergence and the globalization of commerce impact consumer
protection. Panelists examined changes in marketing and technology over the past decade and
challenges facing consumers, business and government. One of the panels, entitled RFID Technology
in the Next Tech-ade, focused on the role of RFID in the healthcare and retail sectors.
State Legislation
During
2008, four state legislatures (Georgia, Maryland, Missouri and Pennsylvania)
considered but did not pass legislation addressing implantable chips and consumer privacy concerns.
The states of California, North Dakota and Wisconsin have adopted laws prohibiting chip
implantation without the recipients prior consent. A number of states also introduced legislation
focusing on the consumer privacy implications of RFID use in government identification documents,
prescription drug tracking, retail sales, healthcare records and tracking of one individual by
another. As of December 31, 2008, none of this legislative activity restricts our current or
planned operations.
Many states have privacy laws relating specifically to the use and disclosure of healthcare
information. Federal healthcare privacy laws preempt state laws that are less restrictive than the
federal law, but more restrictive state laws still may apply to us. Therefore, we may be required
to comply with one or more of these multiple state privacy laws. Statutory penalties for violation
of these state privacy laws varies widely. Violations also may subject us to lawsuits for invasion
of privacy claims.
14
The European Union
In the European Union (EU), promotion of RFID technology is viewed as a critical economic
issue. It is established that insofar as RFID is a technology involving collection, sharing and
storage of personally identifiable information, the mandates of
Directive 95/46/EC of the European
Parliament and of the Council of 24 October 1995 on the Protection of Individuals With Regard to
the Processing of Personal Data and On the Free Movement of Such Data
(EU Data Directive)
applies. All 25 EU member countries have implemented the EU data directive. At issue today is
whether additional privacy protection laws beyond those prescribed by the EU data directive and its
country-specific laws are needed for privacy issues raised by RFID technology. On January 19, 2005,
the EUs Working Party 29, charged with interpretation and expansion of EU data protection law and
policy, and adopted Working Document 105, addressing data protection issues related to RFID
technology. That document reinforced the need to comply with the basic principles of the EU data
directive and related documents whenever personal data is collected via RFID technology. Guidance
to RFID manufacturers was also provided regarding responsibilities to design privacy compliant
technology.
On March 15, 2007, the Commission of the European Communities adopted a Communication from the
Commission to the European Parliament, the Council, the European Economic and Social Committee and
the Committee of the Regions, entitled
Radio Frequency Identification (RFID) in Europe: Steps
Towards a Policy Framework
(SEC(2007)312). The Communication highlights the need for legal
certainty for both users and investors in the context of a policy framework that will address:
ethical implications; the need to protect privacy and security; governance of the RFID identity
databases; availability of radio spectrum; the establishment of harmonized international standards;
and concerns over the health and environmental implications. Over the next two years the
Commission plans to analyze its options for responding to these concerns through discussions with
relevant stakeholders. The Commission will also strengthen its international contacts with other
countries, including the United States, with the objective of striving for global interoperability
on the basis of open, fair and transparent international standards. The Communication is advisory
in nature. While no affirmative regulatory action has been taken by the EU on the specific of
these RFID regulatory concerns, working through them in the coming years appears to provide both
challenges and opportunities.
Health Insurance Portability and Accountability Act of 1996
We are not a health care provider, health plan or health care clearinghouse. Therefore, we are
not subject to the Health Insurance Portability and Accountability Act of 1996, or HIPAA. To the
extent required by HIPAA, we have entered into business associate agreements with certain health
care providers and health plans relating to the privacy and security of protected health
information. We have implemented policies and procedures to enable us to comply with these HIPAA
business associate agreements.
Employees
As of February 4, 2009, we had 7 employees, of whom 3 in management, finance and accounting, 2
in medical and business development, and 2 in support. We consider our relationship with our
employees to be satisfactory and have not experienced any interruptions of our operations as a
result of labor disagreements. None of our employees are represented by labor unions or covered by
collective bargaining agreements.
ITEM 1A. RISK FACTORS
The following risks and the risks described elsewhere in this Annual Report on
Form 10-K
,
including the section entitled Managements Discussion and Analysis of Financial Condition and
Results of Operations, could materially affect our business, prospects, financial condition,
operating results and cash flows. If any these risks materialize, the trading price of our common
stock could decline, and you may lose all or part of your investment.
15
Risks Occasioned by the Xmark Transaction
We will be unable to compete with Xmarks business for four years from the date of closing.
We have agreed that, for a period of four years after the closing of the Xmark Transaction, or
July 2012, we will not (i) directly or indirectly participate with, control or own an interest in
any entity that is engaged in the business of manufacturing, selling, financing, supplying,
marketing or distributing infant security systems, wander prevention systems, asset/personnel and
identification systems, and vibration monitoring instruments anywhere in the world or (ii) solicit,
induce, encourage or attempt to persuade any employee of Xmark to terminate his or her employment
relationship with Xmark, or offer to hire any Xmark employee. Our remaining business, the VeriMed
Health Link business, is not deemed to compete with Xmarks business. However, the non-compete
provisions will restrict our ability to engage in any business that competes with Xmarks business
until July 2012.
We will continue to incur the expenses of complying with public company reporting requirements.
We have an obligation to continue to comply with the applicable reporting requirements of the
Securities Exchange Act of 1934, or the Exchange Act, which includes the filing with the SEC of
periodic reports, proxy statements and other documents relating to our business, financial
conditions and other matters, even though compliance with such reporting requirements is
economically burdensome.
Risks Related to Our VeriMed Health Link Business Which Utilizes the Implantable Microchip
We may never achieve market acceptance or significant sales of this system.
Through December 31, 2008, we had generated nominal revenue from sales of the microchip
inserter kits. We may never achieve market acceptance or more than nominal or modest sales of this
system.
We attribute the modest number of people who, through December 31, 2008, have undergone the
microchip implant procedure to the following factors:
|
|
|
Many people who fit the profile for which the VeriMed Health Link
system was designed may not be willing to have a microchip implanted
in their upper right arm.
|
|
|
|
|
Physicians may be reluctant to discuss the implant procedure with
their patients until a greater number of hospital emergency rooms have
adopted the VeriMed Health Link system as part of their standard
protocol.
|
|
|
|
|
Physicians may be reluctant to discuss the implant procedure with
their patients because of the cost to their patients.
|
|
|
|
|
The media has from time to time reported, and may continue to report,
on the VeriMed Health Link system in an unfavorable and, on occasion,
an inaccurate manner. For example, there have been articles published
asserting, despite at least one study to the contrary, that the
implanted microchip is not magnetic resonance imaging, or MRI,
compatible. There have also been articles published asserting, despite
numerous studies to the contrary, that the implanted microchip causes
malignant tumor formation in laboratory animals.
|
|
|
|
|
Privacy concerns may influence individuals to refrain from undergoing
the implant procedure or dissuade physicians from recommending the
VeriMed Health Link system to their patients. Misperceptions that a
microchip-implanted person can be tracked and that the microchip
itself contains a persons basic information, such as name, contact
information, and personal health records, may contribute to such
concerns.
|
16
|
|
|
Misperceptions and/or negative publicity may prompt legislative or
administrative efforts by politicians or groups opposed to the
development and use of human-implantable RFID microchips. In 2007 and
2008, a number of states introduced, and at least four states
(Wisconsin, California, Oklahoma and North Dakota) have enacted,
legislation that would prohibit any requirement that an individual
undergo a microchip-implant procedure. While we support all pending
and enacted legislation that would preclude anything other than
voluntary implantation, legislative bodies or government agencies may
determine to go further, and their actions may have the effect,
directly or indirectly, of delaying, limiting or preventing the use of
human-implantable RFID microchips or the sale, manufacture or use of
RFID systems utilizing such microchips.
|
|
|
|
|
At present, the cost of the microchip implant procedure is not covered
by Medicare, Medicaid or private health insurance.
|
|
|
|
|
At present, no studies to assess the impact of the VeriMed Health Link
system on the quality of emergency department care have been completed
and publicly released.
|
We
do not expect to generate more than nominal revenue form our VeriMed
Health Link business over the next 12 to 18 months, and we cannot
assure you that our VeriMed Health Link business will achieve
profitability in the near term. Our VeriMed Health Link business
generated gross sales of $76,000 in 2007 and $43,000 in 2008. We are
currently focused on the options for the Company, including the
possible development of the glucose sensing microchip, and are
considering and will review other strategic opportunities.
We believe that sales of our implantable microchip, and the extent to which our VeriMed Health Link
system achieves market acceptance, will depend, in part, on the availability of insurance
reimbursement from third-party payers, including federal and state governments under programs, such
as Medicare and Medicaid, and private insurance plans. Insurers may not determine to cover the cost
of the implant procedure, or it may take a considerable period of time for this to occur.
We believe that sales of our implantable microchip, and the extent to which our VeriMed
Health Link system achieves market acceptance, will depend, in part, on the availability of
insurance reimbursement from third-party payers, including federal and state government programs,
such as Medicare and Medicaid, private health insurers, managed care organizations and other
healthcare providers. Both governmental and private third-party payers are increasingly challenging
the coverage and prices of medical products and services, and require proven efficacy and cost
effectiveness for reimbursement. If patients undergoing the microchip implant procedure, or health
institutions and doctors using the VeriMed Health Link system, are not able to obtain adequate
reimbursement for the cost of using these products and services, they may forego or reduce their
use. While we are in the process of facilitating and, in one case, funding clinical studies that
may demonstrate the efficacy of the VeriMed Health Link system, which we believe will make it more
likely that government and private insurers will cover the cost of the microchip implant process,
it may take a considerable period of time for this to occur, if, in fact, it does occur. If
government and private insurers do not determine to reimburse the cost of the implant process, we
would not expect to realize the anticipated level of future sales of our implantable microchip and
the database subscription fees.
17
Implantation of our implantable microchip may be found to cause risks to a persons health, which
could adversely affect sales of our systems which incorporate the implantable microchip.
The implantation of our implantable microchip may be found, or be perceived, to cause risks
to a persons health. Potential or perceived risks include adverse tissue reactions, migration of
the microchip and infection from implantation. There have been articles published asserting,
despite numerous studies to the contrary, that the implanted microchip causes malignant tumor
formation in laboratory animals. As more people are implanted with our implantable microchip, it is
possible that these and other risks to health will manifest themselves. Actual or perceived risks
to a persons health associated with the microchip implantation process could constrain our sales
of the VeriMed Health Link system or result in costly and expensive litigation. Further, the
potential resultant negative publicity could damage our business reputation, leading to loss in
sales of our other systems targeted at the healthcare market which would harm our business and
negatively affect our prospects.
If we are required to effect a recall of our implantable microchip, our reputation could be
materially and adversely affected and the cost of any such recall could be substantial, which could
adversely affect our results of operations and financial condition.
From time to time, implanted devices have become subject to recall due to safety, efficacy,
product failures or other concerns. To date, we have not had to recall any of our implantable
microchips. However, if, in the future, we are required to effect such a recall, the cost of the
recall, and the likely related loss of system sales, could be substantial and could materially and
adversely affect our results of operations and financial condition. In addition, any such recall
could materially adversely affect our reputation and our ability to sell our systems that make use
of the implantable microchip which would harm our business and negatively affect our prospects.
Interruptions in access to, or the hacking into, our VeriMed Health Link patient information
database may have a negative impact on our revenue, damage our reputation and expose us to
litigation.
Reliable access to the VeriMed Health Link patient information database is a key component of
the functionality of our VeriMed Health Link system. Our ability to provide uninterrupted access to
the database, whether operated by us or one or more third parties with whom we contract, will
depend on the efficient and uninterrupted operation of the computer and communications systems
involved. Although certain elements of technological, power, communications, personnel and site
redundancy are maintained, the database may not be fully redundant. Further, the database may not
function properly if certain necessary third-party systems fail, or if some other unforeseen act or
natural disaster should occur. In the past, we have experienced short periods during which the
database was inaccessible as a result of development work, system maintenance and power outages.
Any disruption of the database services, computer systems or communications networks, or those of
third parties that we rely on, could result in the inability of users to access the database for an
indeterminate period of time. This, in turn, could cause us to lose the confidence of the
healthcare community and persons who have undergone the microchip implant procedure, resulting in a
loss of revenue and possible litigation.
In addition, if the firewall software protecting the information contained in our database
fails or someone is successful in hacking into the database, we could face damage to our business
reputation and litigation.
Regulation of products and services that collect personally-identifiable information or otherwise
monitor an individuals activities may make the provision of our services more difficult or
expensive and could jeopardize our growth prospects.
Certain technologies that we currently, or may in the future, support are capable of
collecting personally-identifiable information. A growing body of laws designed to protect the
privacy of personally-identifiable information, as well as to protect against its misuse, and the
judicial interpretations of such laws, may adversely affect the growth of our business. In the
U.S., these laws include the Health Insurance Portability and Accountability Act, or HIPAA, the
Federal Trade Commission Act, the Electronic Communications Privacy Act, the Fair Credit Reporting
Act, and the Gramm-Leach-Bliley Act, as well as various state laws and related regulations.
Although we are not a covered entity under HIPAA, we have entered into agreements with certain
covered entities in which we are considered to be a business associate under HIPAA. As a business
associate, we are required to implement policies, procedures and reasonable and appropriate
security measures to protect individually identifiable health information we receive from covered
entities. Our failure to protect health information received from customers could subject us to
liability and adverse publicity, and could harm our business and impair our ability to attract new
customers.
18
In addition, certain governmental agencies, like the U.S. Department of Health and Human
Services and the Federal Trade Commission, have the authority to protect against the misuse of
consumer information by targeting companies that collect, disseminate or maintain personal
information in an unfair or deceptive manner. We are also subject to the laws of those foreign
jurisdictions in which we operate, some of which currently have more protective privacy laws. If we
fail to comply with applicable regulations in this area, our business and prospects could be
harmed.
Certain regulatory approvals generally must be obtained from the governments of the countries
in which our foreign distributors sell our systems. However, any such approval may be subject to
significant delays or may not be obtained. Any actions by regulatory agencies could materially and
adversely affect our growth plans and the success of our business.
If we fail to comply with anti-kickback and false claims laws, we could be subject to costly and
time-consuming litigation and possible fines or other penalties.
We are, or may become subject to, various federal and state laws designed to address
healthcare fraud and abuse, including anti-kickback laws and false claims laws. The federal
anti-kickback statute prohibits the offer, payment, solicitation or receipt of any form of
remuneration in return for referring items or services payable by Medicare, Medicaid or any other
federally-funded healthcare program. This statute also prohibits remuneration in return for
purchasing, leasing or ordering or arranging, or recommending the purchasing, leasing or ordering,
of items or services payable by Medicare, Medicaid or any other federally-funded healthcare
program. The anti-kickback laws of various states apply more broadly to prohibit remuneration in
return for referrals of business payable by payers other than federal healthcare programs.
False claims laws prohibit anyone from knowingly presenting, or causing to be presented, for
payment to third-party payers, including Medicare and Medicaid, which currently do not provide
reimbursement for our microchip implant procedure, claims for reimbursed drugs or services that are
false or fraudulent, claims for items or services not provided as claimed, or claims for medically
unnecessary items or services. Our activities relating to the reporting of wholesale or estimated
retail prices of our VeriMed Health Link system, the reporting of Medicaid rebate information, and
other information affecting federal, state and third-party payment for the VeriMed Health Link
system, if such payment becomes available, will be subject to scrutiny under these laws.
The anti-kickback statute and other fraud and abuse laws are very broad in scope, and many of
their provisions have not been uniformly or definitively interpreted by existing case law or
regulations. Violations of the anti-kickback statute and other fraud and abuse laws may be
punishable by criminal and/or civil sanctions, including fines and civil monetary penalties, as
well as the possibility of exclusion from federal healthcare programs, including Medicare and
Medicaid, which currently do not provide reimbursement for our microchip implant procedure. We have
not been challenged by a governmental authority under any of these laws and believe that our
operations are in compliance with such laws. However, because of the far-reaching nature of these
laws, we may be required to alter one or more of our practices to be in compliance with these laws.
Healthcare fraud and abuse regulations are complex and even minor, inadvertent irregularities in
submissions can potentially give rise to claims that the statute has been violated. If we are found
to have violated these laws, or are charged with violating them, our business, financial condition
and results of operations could suffer, and our management team could be required to dedicate
significant time and resources addressing the actual or alleged violations.
19
If we are found liable in lawsuits that have been brought against us or if we are found liable
in other litigation to which we may become subject in the future, we may be forced to pay
substantial damages, which could have a material adverse effect on our business.
We are currently involved in a few legal proceedings. We have accrued our estimate of the
probable costs for the resolution of these claims. It is possible, however, that future results of
operations for any particular quarterly or annual period could be materially affected by changes in
these estimates. If we are unsuccessful in the defense against any of the legal proceedings, we may
be forced to pay substantial damages, which could have a material adverse effect on our business.
If we fail to continue to meet all applicable Nasdaq Stock Market requirements, our stock
could be delisted by the Nasdaq Stock Market. If delisting occurs, it would adversely affect the
market liquidity of our common stock and harm our businesses.
On October 21, 2008, we received a letter from Nasdaq indicating that we are not in compliance
with the Nasdaqs requirements for continued listing because, for the 30 consecutive business days
prior to October 16, 2008, the bid price of our common stock closed below the minimum $1.00 per
share price requirement for continued listing under Nasdaq Marketplace Rule 4450(a) (the Rule)
and, our common stock had not maintained a minimum market value of publicly held shares (MVPHS)
of $5 million as required for continued inclusion by the Rule. On November 17, 2008, we received a
notice from Nasdaq indicating that our stockholders equity at September 30, 2008 was less than the
$10 million in stockholders equity required for continued listing on The Nasdaq Global Market
under Marketplace Rule 4450(a)(3). In its notice, Nasdaq requested that we provide our plan to
achieve and sustain compliance with the continued listing requirements of The Nasdaq Global Market,
including the minimum stockholders equity requirement, before December 2, 2008, which we complied
with. If Nasdaq determines that we have not presented a definitive plan to achieve compliance in
the short term and sustain compliance in the long term, it will provide us with a written
notification that our securities will be delisted from Nasdaq Global
Market. If we receive a
notification, we may then apply to move to The Nasdaq Capital Market or appeal Nasdaqs delisting
determination to a Nasdaq Listing Qualifications Panel.
Given the current market conditions, Nasdaq suspended enforcement of the bid price and market
value of publicly held shares requirements for all companies listed on Nasdaq through Sunday, April
19, 2009. Following the reinstatement of these rules, and in accordance with Marketplace
Rule 4450(e)(2), we have 180 calendar days from Monday, April 20, 2009, or until October 19, 2009,
to regain compliance with the bid price requirement. Following the reinstatement of these rules,
and in accordance with Marketplace Rule 4450(e)(1), we have 90 calendar days from April 20, 2009,
or until July 20, 2009, to regain compliance with the market value requirements.
If, at anytime before October 19, 2009, including during the suspension period, the bid price
of our common stock closes at $1.00 per share or more for a minimum of ten (10) consecutive
business days, the Nasdaq staff will provide written notification that we have achieved compliance
with the Rule. However, if we do not regain compliance with the Rule by October 19, 2009, the
Nasdaq staff will provide written notification that our securities will be delisted. At that time,
we may appeal the Nasdaq staffs determination to delist our securities to a Listing Qualifications
Panel.
If, at anytime before July 20, 2009, the MVPHS of our common stock is $5,000,000 or greater
for a minimum of ten (10) consecutive trading days, the Nasdaq staff will provide written
notification that we comply with the Rule. If compliance with the Rule cannot be demonstrated by
July 20, 2009, the Nasdaq staff will provide written notification that our securities will be
delisted. At that time, we may appeal the Nasdaq staffs determination to a Listing Qualifications
Panel.
If our common stock is delisted from the Nasdaq Stock Market, trading of our common stock most
likely will be conducted in the over-the-counter market on an electronic bulletin board established
for unlisted securities, such as the Pink Sheets or the OTC Bulletin Board. Delisting would
adversely affect the market liquidity of our common stock and harm our business. Such delisting
could also adversely affect our ability to obtain financing for the continuation of our operations
and could result in the loss of confidence by investors, suppliers and employees.
20
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters is located in Delray Beach, Florida, where we occupy approximately
4,000 square feet of office space. We occupy the space pursuant to a sublease with IFTH Acquisition
Corp. (IFTH), which expires on June 30, 2010. Our portion of the rent for the entire
twenty-one month term of the sublease is $78,750, which was prepaid in one lump sum.
We
are under common control with IFTH. R & R Consulting Partners, LLC,
an entity owned and controlled by Scott R. Silverman, and Mr.
Silverman currently own 53% of our outstanding common stock. As of
February 11, 2009, R & R Consulting Partners, LLC and Mr.
Silverman owned 46.8% of IFTHs outstanding common stock,
including the 2,570,000 shares that are directly owned by Blue
Moon Energy Partners, LLC (Blue Moon). Mr. Silverman, our
executive chairman of the board, is a manager and controls a member
of Blue Moon (i.e., R & R Consulting Partners, LLC). William J.
Caragol, our acting chief financial officer, acting treasurer and
secretary, is a manager and member of Blue Moon.
ITEM 3. LEGAL PROCEEDINGS
On January 10, 2005, we commenced an action in the Circuit Court for Palm Beach County,
Florida, against Metro Risk Management Group, LLC, or Metro Risk. In this suit, we have claimed
that Metro Risk breached the parties three international distribution agreements by failing to
meet required minimum purchase obligations and by repudiating the agreements. On July 1, 2005,
Metro Risk asserted a counterclaim against us for breach of contract and fraud in the inducement.
Specifically, in its claim for breach of contract, Metro Risk alleged that we breached the
exclusivity provision of the parties three international distribution agreements by later signing
a different distribution agreement with a large distributor of medical supplies. Metro Risk alleged
that the distribution agreement with this other distributor included the same areas covered in our
three international distribution agreements with Metro Risk. Moreover, regarding its claim for
fraud in the inducement, Metro Risk alleged that we fraudulently induced Metro Risk into signing
the three international distribution agreements by promising millions of dollars in profits, only
later to sign another distribution agreement with a competitor for the same countries. By virtue of
its counterclaim, Metro Risk seeks reliance damages in the amount of approximately $0.2 million,
which allegedly represents the amount of money advanced by Metro Risk for the project, lost
profits, and attorneys fees.
On July 23, 2008, the court granted a motion for summary judgment filed by us on Metro Risks
counterclaim, and thus denied Metro Risks counterclaim. Metro Risk may appeal the decision. The
Court has also previously granted summary judgment on the issue of Metro Risks liability for
breaching the three international distribution agreements. Therefore, at present, the remaining
issue in the lawsuit is our damages resulting from Metro Risks breach of the three international
distribution agreements. The parties have taken minimal discovery at the present time. Metro Risk
has propounded no discovery on us, and we have propounded a request for production and a request
for admissions on Metro Risk. The parties have not taken any depositions. Given the potential for
an appeal, counsel is currently unable to assess the ultimate outcome.
We have received demand letters from attorneys for several former employees and/or consultants
of us and Digital Angel, asserting claims related to stock options to acquire approximately 500
thousand shares of our common stock that management believes that such employees and/or consultants
had forfeited when they ceased their employment or relationship with us and/or Digital Angel. We
believe that all of these potential claims are without merit and intends to vigorously defend them
in the event the claims are asserted or litigated.
On July 8, 2008, a lawsuit was filed against us and Digital Angel by one of the
above-referenced former employees, Jerome C. Artigliere, a former executive of us and Digital
Angel. The lawsuit was filed in the Circuit Court of the 15th Judicial Circuit in Palm Beach
County, Florida, and alleges that Mr. Artigliere holds options to acquire 950,000 shares of our
common stock at an exercise price of $0.05 per share and that he has been denied the right to
exercise those options. The complaint alleges causes of action for breach of contract against us
and Digital Angel, seeks declaratory judgments clarifying Mr. Artiglieres alleged contractual
rights, and sought an injunction enjoining the vote of the stockholders at special meeting of our
shareholders that took place on July 17, 2008, on the sale of Xmark. On September 12, 2008,
Mr. Artigliere amended his complaint to add a claim for unpaid wages against us and Digital Angel
and to add related claims against several former officers and directors of us and Digital Angel. We
believe that Mr. Artiglieres claim for 950,000 of our stock options is factually incorrect and, at
best, he would be entitled to only 211,111 of our stock options due to our 2-for-3 reverse stock
split that occurred in December of 2005 and the 1-for-3 reverse stock split that occurred in
December of 2006. We believe the amended complaint includes multiple inaccuracies, is without merit
and intends to defend the lawsuit. On October 7, 2008, we, along with our co-defendants, filed a
motion to dismiss seven of the nine counts asserted in the amended
complaint. By agreement, the motion to dismiss was temporarily taken
off the courts calendar.
21
We are a party to various legal actions, as either plaintiff or defendant, including the
matters identified above, arising in the ordinary course of business, none of which is expected to
have a material adverse effect on our business, financial condition or results of operations.
However, litigation is inherently unpredictable, and the costs and other effects of pending or
future litigation, governmental investigations, legal and administrative cases and proceedings,
whether civil or criminal, settlements, judgments and investigations, claims or charges in any such
matters, and developments or assertions by or against us relating to us or to our intellectual
property rights and intellectual property licenses could have a material adverse effect on our
business, financial condition and operating results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual meeting of our stockholders was held on December 16, 2008 to:
(1) Elect five directors to hold office until the 2009 Annual Meeting of Stockholders and
until their successors have been duly elected and qualified. The results of the vote to elect five
directors were as follows:
|
|
|
|
|
|
|
|
|
Name of Director
|
|
For
|
|
|
Withheld
|
|
Scott R. Silverman
|
|
|
9,365,722
|
|
|
|
200,309
|
|
Jeffrey S. Cobb
|
|
|
9,370,065
|
|
|
|
195,966
|
|
Barry M. Edelstein
|
|
|
9,368,683
|
|
|
|
197,348
|
|
Steven R. Foland
|
|
|
9,370,365
|
|
|
|
195,666
|
|
Michael E. Krawitz
|
|
|
9,365,220
|
|
|
|
200,811
|
|
(2) To ratify the appointment of Eisner LLP as independent auditors of the Company for the
year ending December 31, 2008. The proposal received 9,429,040 votes for, 54,780 votes against,
82,210 abstentions and no broker non-votes;
(3) To approve an amendment to and restatement of the Companys 2007 Stock Incentive Plan to
increase the number of authorized shares of common stock issuable under the plan from 1,000,000 to
3,000,000 shares. The proposal received 6,634,626 votes for, 549,525 votes against and 10,343
abstentions.
Each of the three proposals was approved by the Companys stockholders.
22
PART II
|
|
|
ITEM 5.
|
|
MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our common stock is traded on the Nasdaq Stock Market under the symbol CHIP. Trading of our
common stock commenced on February 9, 2007. Prior to that date, there was no public market for our
common stock. The Company plans to file an application to transfer
the listing of its common stock from the Nasdaq Global Market to the
Nasdaq Capital Market. The following table presents the high and low closing sales price for our common
stock for the periods indicated:
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31, 2008
|
|
High
|
|
|
Low
|
|
Quarter ended December 31, 2008
|
|
$
|
0.86
|
|
|
$
|
0.25
|
|
Quarter ended September 30, 2008
|
|
$
|
2.22
|
|
|
$
|
0.35
|
|
Quarter ended June 30, 2008
|
|
$
|
2.50
|
|
|
$
|
1.53
|
|
Quarter ended March 31, 2008
|
|
$
|
2.77
|
|
|
$
|
1.89
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31, 2007
|
|
High
|
|
|
Low
|
|
Quarter ended December 31, 2007
|
|
$
|
4.34
|
|
|
$
|
2.25
|
|
Quarter ended September 30, 2007
|
|
$
|
10.35
|
|
|
$
|
3.49
|
|
Quarter ended June 30, 2007
|
|
$
|
9.20
|
|
|
$
|
4.28
|
|
Quarter ended March 31, 2007
|
|
$
|
6.50
|
|
|
$
|
4.86
|
|
Holders
According to the records of our transfer agent, as of February 4, 2009, there were
approximately 20 holders of record of our common stock, which number does not reflect beneficial
stockholders who hold their stock in nominee or street name through various brokerage firms.
Dividend Policy
In July 2008, we declared and in August 2008, we paid a special cash dividend of $15.8 million
on our capital stock. Any future determination with respect to the payment of dividends will be at
the discretion of our Board of Directors and will be dependent upon our financial condition,
results of operations, capital requirements, general business conditions, terms of financing
arrangements and other factors that our Board of Directors may deem relevant.
23
Equity Compensation Plan Information
The following table presents information regarding options and rights outstanding under our
compensation plans as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
|
|
|
|
|
|
|
|
|
remaining
|
|
|
|
(a)
|
|
|
(b)
|
|
|
available for
|
|
|
|
Number of
|
|
|
Weighted-
|
|
|
future issuance
|
|
|
|
securities to be
|
|
|
average
|
|
|
under equity
|
|
|
|
issued upon
|
|
|
exercise price
|
|
|
compensation
|
|
|
|
exercise of
|
|
|
per share of
|
|
|
plans
|
|
|
|
outstanding
|
|
|
outstanding
|
|
|
(excluding
|
|
|
|
options,
|
|
|
options,
|
|
|
securities
|
|
|
|
warrants and
|
|
|
warrants and
|
|
|
reflected in
|
|
Plan Category
(1)
|
|
rights
|
|
|
rights
|
|
|
column (a))
|
|
Equity compensation plans approved by security holders
|
|
|
912,285
|
|
|
$
|
3.73
|
|
|
|
135,940
|
|
Equity compensation plans not approved by security
holders
(2)
|
|
|
313,122
|
|
|
$
|
6.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,225,407
|
|
|
$
|
4.52
|
|
|
|
135,940
|
|
|
|
|
(1)
|
|
A narrative description of the material terms of our equity compensation plans is set forth in Note 5 to our
consolidated financial statements for the year ended December 31, 2008.
|
|
(2)
|
|
In addition, we have made grants outside of our equity plans and have outstanding options exercisable for
313,122 shares of our common stock. These options were granted as an inducement for employment or for the
rendering of consulting services.
|
Recent Sales of Unregistered Securities
None.
ITEM 6. SELECTED FINANCIAL DATA
As a Smaller Reporting Company, we are not required to provide the information required by
this item.
ITEM
7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF
OPERATIONS
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our audited annual financial statements and the notes to those
financial statements included elsewhere in this Annual Report on
Form 10-K
.
Overview
As a result of our sale of Xmark, our only business is our VeriMed Health Link business, which
uses an implantable passive RFID microchip that is used in patient identification applications.
Each implantable microchip contains a unique verification number that is read when it is scanned by
our scanner. In October 2004, the FDA cleared our Health Link system for use in medical
applications in the United States. Since the sale of Xmark, we are currently focused on the options
for the Company, including the possible development of the glucose sensing microchip and are
considering and will review other strategic opportunities.
24
VeriMed Patient Identification System
Through December 31, 2008, we have generated less than $0.1 million in revenue from our
VeriMed system, primarily from the sale of the implantable microchip inserter kits.
Over the past several years, we have provided scanners to hospitals and third party emergency
room management companies at no charge in order to build out the geographic footprint of the
healthcare facilities that can and will use our VeriMed system as part of their standard protocol.
Our cost of the scanners, which were utilized for marketing and
advertising purposes, was approximately $119 thousand in 2008 and approximately $46
thousand in 2007, is included as selling, general and administrative expense in our consolidated
statements of operations included elsewhere in this Annual Report on Form 10-K.
Systems Incorporating the Implantable Microchip for Other Applications
During 2007 and 2008 we marketed our VeriTrace system which uses our implantable microchip and
wirelessly integrates with a Ricoh
®
digital camera for accurate tagging and
identification of human remains and associated evidentiary items.
Since our VeriTrace system, like our VeriMed system, incorporates our implantable microchip,
many of the risks associated with the VeriMed system apply to VeriTrace system, including the risk
of possible third-party claims asserting we are violating rights with respect to certain patented
intellectual property underlying each of these systems.
Basis of Presentation
Efforts to Create Markets for Our Systems that Utilize the Implantable Microchip
If the decision is made to invest capital in the commercialization of the VeriMed Health Link
business we expect that we would generate significant operating losses in connection with our
efforts to create markets for our systems that utilize the implantable microchip. Our expectations
in this regard reflect our belief that revenue derived from sales of our VeriMed system will remain
at a nominal level or show only modest growth in revenue from the sale of the system prior to
government and private insurers determinations to reimburse the cost of the microchip implant
procedure. However, we can provide no assurance as to when or if government or private insurers
will decide to take such action. The expected significant operating losses from our systems which
utilize the implantable microchip, and in particular, the VeriMed system, also reflect an
anticipated increase in our selling, general and administrative expenses as we augment our direct
sales force, seek to develop a distribution network for the VeriMed system, enhance our marketing
efforts directed toward physicians and patients, and fund or otherwise facilitate clinical studies
of the VeriMed system that we hope prove successful in demonstrating the efficacy of the system to
fulfill its intended functions.
Results of Operations
Through December 31, 2008, we have recorded nominal revenue from sales of our VeriMed system.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Revenue
Revenue was $43,000 for the year ended December 31, 2008 compared to $76,000 for the year
ended December 31, 2007.
25
Gross Profit and Gross Profit Margin
Our cost of sales consists of finished goods and inventory valuation charges. The implantable
microchips used in our VeriMed Health Link system are purchased as finished goods under the terms
of our former agreement with Digital Angel.
Our gross loss decreased from $0.3 million in 2007 to $0.2 million in 2008. The loss is
attributable to inventory valuation reserves and impairment due to
the lower of cost or market.
Selling, General and Administrative Expense
Selling, general and administrative expense consists primarily of compensation for employees
in executive, sales, marketing and operational functions, including finance and accounting, and
corporate development. Other significant costs include depreciation and amortization, professional
fees for accounting and legal services, consulting fees and facilities costs.
Selling, general and administrative expense increased by $6.6 million to $19.8 million for the
year ended December 31, 2008 compared to the year ended December 31, 2007. This increase was
primarily driven by contractual payments of $7.0 million to our management as a result of the sale
of Xmark to The Stanley Works. The remainder of the increase was due to transactional expenses
associated with our sale of Xmark, the marketing of our VeriMed Health Link business and the costs
resulting from equity based compensation. Additionally, during the
process of marketing the Company for sale, sales and marketing expenditures have been reduced
by approximately $0.3 million.
During 2008 and 2007, we incurred stock-based compensation expense of $5.0 million and
$3.4 million, respectively. On July 18, 2008, as a result of our sale of Xmark Corporation, all
outstanding unvested options and restricted shares became fully vested. As a result, we recorded
$3.2 million as an expense, reflecting the unamortized balance at July 18, 2008.
Included in selling, general and administrative expense was $0.1 million and $0.4 million of
certain general and administrative services provided to us by Digital Angel, including accounting,
finance and legal services, insurance, telephone, rent and other miscellaneous items in 2008 and
2007, respectively.
Selling, general and administrative expense included depreciation and amortization expense of
approximately $52,000 and $73,000 in 2008 and 2007, respectively.
Research and Development
Our research and development expense consists primarily of costs associated with various
projects, including testing, developing prototypes and related expenses.
Research and development expense was $0.7 million for 2008 compared to $0.1 million in 2007.
Our research and development costs represent payments to our project
partner and acquisition of project development.
Interest Expense
Interest expense was $0.9 million and $1.7 million for the years ended December 31, 2008 and
2007, respectively. The decrease in interest expense was due to the higher amount owed in 2007
under our loan agreement with Digital Angel which was satisfied in July 2008.
26
Liquidity and Capital Resources
As of December 31, 2008, cash totaled $3.2 million compared to cash of approximately $7.2
million at December 31, 2007.
Cash Flows Used in Operating Activities
Net
cash used in operating activities totaled $18.7 million and $7.3 million during the years
ended December 31, 2008 and 2007, respectively. For each of the periods presented, cash was used to
fund operating losses, primarily resulting from the marketing expenses of our VeriMed Health Link
business. In addition, the approximately $11.4 million increase from 2007 to 2008 in our net cash
used in operating activities was primarily attributable to the $9.1 million for contractual
payments to management of us and Xmark that we
paid in conjunction with the July 18, 2008 sale of our Xmark subsidiary to The Stanley Works.
Historically, our Xmark business generated significant operating cash flows, a portion of
which was used to fund the operating expenditures for marketing and other development costs related
to the VeriMed Health Link business. On November 12, 2008 we announced our intention to continue to
explore potential strategic transactions with third parties, while continuing to operate our
VeriMed Health Link business.
Cash Flows from Investing Activities
Investing
activities provided (used) cash of $43.2 million and $(17,000) during the years
ended December 31, 2008 and 2007, respectively. Cash provided by investing activities during 2008
primarily consists of the $47.9 million of proceeds from the sale of Xmark, net of the $4.5 million
of the proceeds that will be held in escrow for twelve months following the close of the
transaction to provide for indemnification obligations, if any.
Cash Flows from Financing Activities
Financing activities (used) provided cash of $(28.5) million and $13.5 million during the
years ended December 31, 2008 and 2007, respectively. During 2008 we borrowed $8.0 million from
Valens Offshore SPV II, Corp. (the Lender), a portion of which was used to repay Digital Angel
and the Royal Bank of Canada, which had previously provided a working capital line to our
subsidiary, Xmark. In conjunction with the sale of Xmark, we retired all of our outstanding debt to
Digital Angel and to the Lender. On August 28, 2008, we paid a special dividend of $15.8 million,
or $1.35 per share, to all stockholders of record on August 18, 2008. In 2007 we raised net
proceeds from our initial public offering of $15.5 million, net of costs, a portion of which was
used to repay principal to Digital Angel and to pay costs of financing.
Credit Facilities
Prior to the date of our initial public offering, which was consummated on February 14, 2007,
we financed a significant portion of our operations and investing activities primarily through
funds that Digital Angel provided. As of December 31, 2008, we had satisfied our outstanding
obligations to Digital Angel.
Through October 5, 2006, our loan with Digital Angel bore interest at the prevailing prime
rate of interest as published by
The Wall Street Journal
, which as of September 30, 2006 was 8.25%
per annum. On October 6, 2006, we entered into an amendment to the loan agreement which increased
the principal amount available thereunder to $13.0 million and we borrowed an additional $2.0
million under the agreement to make the second purchase price payment with respect to our
acquisition of Instantel Inc. In connection with that amendment, the interest rate was also changed
to a fixed rate of 12% per annum. That amendment further provided that the loan matured on July 1,
2008, but could be extended at the option of Digital Angel through December 27, 2010.
27
On January 19, 2007, February 8, 2007 and February 13, 2007, we entered into further
amendments to the loan documents which increased the maximum principal amount of indebtedness that
we may incur to $14.5 million. A portion of this increase was used to cover approximately $0.7
million of intercompany advances made to us by Digital Angel during the first week of January 2007.
Upon the consummation of our initial public offering in February 2007, the loan ceased to be a
revolving line of credit, and we have no ability to incur additional indebtedness under the loan
documents. The interest continues to accrue on the outstanding indebtedness at a rate of 12% per
annum. On February 14, 2007, the closing date of our initial public offering, we were indebted to
Digital Angel in the amount of $15.1 million, including $1.0 million of accrued interest. In
accordance with the terms of the loan agreement as most recently amended on February 13, 2007, we
used $3.5 million of the net proceeds of our initial public offering to repay a portion of our
indebtedness to Digital Angel upon consummation of our initial public offering. Effective with the
payment of the $3.5 million, all interest which accrued on the loan as of the last day of each
month, commencing with February 2007, was added to the principal amount. A final balloon payment
equal to the outstanding principal amount then due under the loan plus all accrued and unpaid
interest was to be due and payable on February 1, 2010.
The loan with Digital Angel was subordinated to our obligations under our credit agreement
with Valens Offshore SPV II, Corp., which is discussed below, and was collateralized by security
interests in all of our property and assets, except as otherwise encumbered by the rights of Valens
Offshore SPV II, Corp.
We entered into the December 2007 Letter Agreement, which was subsequently amended February
29, 2008, as is discussed below, with Digital Angel pursuant to which we prepaid $0.5 million of
principal and in exchange received an option, through October 2008, to prepay the Digital Angel
indebtedness for $10.0 million, less the $0.5 million paid and less any additional principal
payments made subsequent to October 1, 2007, plus any accrued and unpaid interest.
On February 29, 2008, we closed an $8.0 million debt financing (the Agreement) with Valens
Offshore SPV II, Corp. (the Lender). Under the terms of the Agreement, the Lender extended
financing to us in the form of an $8.0 million secured term note (the Note). The Note accrues
interest at a rate of 12% per annum, and has a maturity date of March 31, 2009. The terms of the
Note allow for optional redemption by paying 100% of the principal amount plus $120,000, if such
amounts are paid prior to the six month anniversary of February 29, 2008, or $240,000, if such
amounts are paid on or after the six month anniversary of February 29, 2008. In addition, pursuant
to the Agreement, we issued to the Lender 120,000 shares of our common stock.
We used part of the proceeds of the financing with the Lender to prepay $5.3 million of debt
owed to Digital Angel. In connection with the financing, we entered into a letter agreement with
Digital Angel, dated February 29, 2008, under which we agreed, among other things, to prepay the
$5.3 million to Digital Angel, and to amend the December 2007 Letter Agreement, to provide that we
would have until October 30, 2008 to prepay in full the entire outstanding principal amount to
Digital Angel by paying to Digital Angel $10 million, less the $500,000 paid pursuant to the
December 2007 Letter Agreement, less the $5.3 million paid in connection with this financing, less
other principal payments made to reduce the outstanding principal amount between the date of the
December 2007 Letter Agreement and the date of such prepayment, plus any accrued and unpaid
interest between October 1, 2007 and the date of such prepayment. As a result of the $5.3 million
payment, we were not required to make any further debt service payments to Digital Angel until
September 1, 2009.
On July 18, 2008, we paid $4.8 million to Digital Angel to satisfy our obligations under the
loan agreement and $8.2 million to the Lender to satisfy the Note, which included a prepayment fee
of $120,000. As a result of the satisfaction of the Note, the Lender released all of its security
interests in our assets.
Financial Condition
As of December 31, 2008, we had working capital of approximately $2.4 million and an
accumulated deficit of $42.1 million compared to a working capital of approximately $6.7 million
and an accumulated deficit of approximately $29.0 million as of December 31, 2007. The decrease in
working capital was primarily due to the sale of our Canadian subsidiary.
We
believe that with the cash we have on hand, plus the funds being held in escrow until
July 2009, we will have sufficient funds available to cover our cash requirements, including
capital expenditures, through 2009. We are currently focused on
the options for the Company, including the possible development of the glucose sensing microchip
and are considering and will review other strategic opportunities.
28
Critical Accounting Policies and Estimates
The following is a description of the accounting policies that our management believes involve
a high degree of judgment and complexity, and that, in turn, could materially affect our
consolidated financial statements if various estimates and assumptions made in connection with the
application of such policies were changed significantly. The preparation of our consolidated
financial statements requires that we make certain estimates and judgments that affect the amounts
reported and disclosed in our consolidated financial statements and related notes. We base our
estimates on historical experience and on other assumptions that we believe to be reasonable under
the circumstances. Actual results may differ from these estimates. For more detailed information on
our significant accounting policies, see Note 1 to our audited consolidated financial statements as
of and for the year ended December 31, 2008, included elsewhere in this Annual Report on Form 10-K.
Revenue Recognition
Our revenue recognition policies provide very specific and detailed guidelines in measuring
revenue; however, certain estimates and judgments affect the application of our revenue recognition
policies. The complexity of the estimation process and all issues related to the assumptions, risks
and uncertainties inherent in our revenue recognition policies affect the amounts reported in our
financial statements. A number of internal and external factors affect the timing of our revenue
recognition, including estimates of customer returns and the timing of customer acceptance.
Revenue Recognition Policy for Systems Using Our Implantable Microchip
Revenue from the sale of systems using our implantable microchip are recorded at gross
amounts. As we are in the initial process of commercializing these systems, the level of
distributor or physician returns cannot yet be reasonably estimated. Accordingly, we do not
recognize revenues until the following criteria are met:
|
|
|
a purchase order has been received or a contract has been executed;
|
|
|
|
|
the product is shipped;
|
|
|
|
|
title has transferred;
|
|
|
|
|
the price is fixed or determinable;
|
|
|
|
|
there are no uncertainties regarding customer acceptance;
|
|
|
|
|
collection of the sales proceeds is reasonably assured; and
|
|
|
|
|
the period during which the distributor or physician has a right to
return the product has elapsed.
|
We intend to recognize revenue from consignment sales, if any, when all of the criteria listed
above have been met and after the receipt of notification of such product sales from the
distributors customers (e.g., physicians). Once the level of returns can be reasonably estimated,
revenues (net of expected returns) will be recognized when all of the criteria above are met for
either direct or consignment sales.
Revenue Recognition Policy for VeriMed Services
The services for maintaining subscriber information on our VeriMed database will be sold on a
stand-alone contract basis, separate and apart from the implant procedure itself, and treated
according to the terms of the contractual arrangements then in effect. Revenue from the database
service will be recognized over the term of the subscription period or the terms of the contractual
arrangements then in effect.
29
With respect to the sales of products whose functionality is dependent on services (e.g.,
database records maintenance), the revenue recognition policy will follow the ultimate
arrangements, subject to the aforementioned revenue recognition criteria and determining whether
there is VSOE.
Inventory
Estimates are used in determining the likelihood that inventory on hand can be sold.
Historical inventory usage and current revenue trends are considered in estimating both
obsolescence and slow-moving inventory. Inventory is stated at the lower of cost or market,
determined by the first-in, first-out method, net of any reserves for obsolete or slow-moving
inventory. As of December 31, 2008 and 2007, inventory reserves were $0.2 million and $0.1 million,
respectively. The estimated market value of our inventory is based upon assumptions about future
demand and market conditions.
Intangible Assets
We account for goodwill and other intangible assets in accordance with Statement of Financial
Accounting Standard (FAS) No. 142,
Goodwill and Other Intangible Assets
, or FAS 142. FAS 142
eliminated the amortization of goodwill and other intangible assets with indefinite lives and
instead requires that goodwill and other intangible assets with indefinite lives be tested for
impairment at least annually. Intangible assets with finite lives are amortized over their useful
lives.
In
accordance with FAS 144, we are required to test our goodwill and intangible assets with
indefinite lives for impairment annually. We test our goodwill and intangible assists with
indefinite lives annually as part of our business planning cycle during the fourth quarter of each
fiscal year. The determination of the value of our intangible assets requires management to make
estimates and assumptions about the future operating results of our reporting units, as that term
is defined in FAS 142. Our reporting units are those businesses for which discrete financial
information is available and upon which segment management makes
operating decisions. During the years ended December 31, 2008 and
2007, the Company did not have any impairment goodwill or intangible
assets.
Stock-Based Compensation
Effective January 1, 2006, we adopted FAS 123R, using the modified prospective transition
method. Under this method, stock-based compensation expense is recognized using the fair-value
based method for all awards granted on or after the date of adoption. Compensation expense for new
awards granted after January 1, 2006 is recognized over the requisite service period based on the
grant-date fair value of those options.
Prior to the adoption of FAS 123R, we used the intrinsic value method under APB 25 and
Financial Accounting Standards Board Interpretation No. 44, Accounting for Certain Transactions
Involving Stock Compensationan Interpretation of APB Opinion No. 25, and provided the pro forma
and disclosure information required by FAS 123. Under the intrinsic value method, no stock-based
compensation was recognized in our consolidated statements of operations for options granted to our
employees and directors because the exercise price of such stock options granted to employees and
directors equaled or exceeded the fair value of the underlying stock on the dates of grant.
30
FAS 123R requires forfeitures of stock-based grants to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In
our pro forma information required under FAS 123 for the periods prior to January 1, 2006, we
accounted for forfeitures as they occurred.
Stock-based compensation expense is reflected in the condensed consolidated statement of
operations in selling, general and administrative expense.
Prior to the initial public offering, our management determined the value of our common stock
principally based upon internal valuation estimates, as well as arms-length transactions involving
the fair value of the businesses we acquired. Due to managements familiarity with discounted cash
flow analyses and the readily available values of the businesses we acquired during the first half
of 2005, management chose not to obtain contemporaneous valuations by an unrelated valuation
specialist. The assumptions used by management during this period related to:
|
|
|
our projected operating performance;
|
|
|
|
|
risk of non-achievement of projected operating performance;
|
|
|
|
|
the purchase prices of the two businesses acquired during the first
half of 2005, including the risk that the acquisitions might not have
been completed at certain interim valuation dates; and
|
|
|
|
|
trends and comparable valuations in the broad market for
privately-held and publicly-traded technology and medical device
companies.
|
Managements valuation methodology, including terminal and enterprise values, was based on the
following factors:
|
|
|
Unlevered free cash flows for our implantable microchip business were
projected for five years, which was deemed to be the appropriate
valuation period.
|
|
|
|
|
Earnings before interest, taxes, depreciation and amortization, or
EBITDA, was used to estimate terminal value.
|
|
|
|
|
Management considered the relevant multiples for RFID and medical
device companies to determine the appropriate terminal value multiple.
|
|
|
|
|
A discount rate was applied to the net free cash flows and terminal
value. The rate was determined based on the risk-free rate of the
10-year U.S. Treasury Bond plus an applicable market risk premium and
the specific risk premium associated with our facts and circumstances.
The discount rate utilized by us was the rate of return expected from
the market or the rate of return for a similar investment with similar
risks.
|
|
|
|
|
The purchase prices of the acquired businesses, adjusted for the risk
that the acquisitions might not have been completed at certain interim
valuation dates, were added to the value of the implantable microchip
business to determine enterprise value.
|
|
|
|
|
Management computed the fully diluted value of each share of our
common stock in order to factor in the dilutive effect of reflecting
in-the-money stock options and warrants at each valuation date.
|
There are inherent uncertainties in forecasting future operating results and identifying
comparable companies and transactions that may be indicative of the fair value of our common stock.
We believe that the estimates of the fair value of our common stock at each option grant date
occurring prior to our initial public offering were reasonable under the circumstances.
31
The Black-Scholes option pricing model, which we use to value our stock options, requires us
to make several key judgments including:
|
|
|
the estimated value of our common stock;
|
|
|
|
|
the expected life of issued stock options;
|
|
|
|
|
the expected volatility of our stock price;
|
|
|
|
|
the expected dividend yield to be realized over the life of the stock options; and
|
|
|
|
|
the risk-free interest rate over the expected life of the stock options.
|
Our computation of the expected life of issued stock options was determined based on
historical experience of similar awards giving consideration to the contractual terms of the
stock-based awards, vesting schedules and expectations about employees future length of service.
The interest rate was based on the U.S. Treasury yield curve in effect at the time of grant.
Historically, our computation of expected volatility was based on the historical volatility of
Digital Angels common stock. Now that we are a public company, our computation of volatility will
be based on the historical volatility of our common stock, or comparable public companies in our
industry.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to
estimate our income tax liability in each of the jurisdictions in which we do business. This
process involves estimating our actual current tax expense together with assessing temporary
differences resulting from differing treatment of items, such as deferred revenues, for tax and
accounting purposes. These differences result in deferred tax assets and liabilities, which are
included in our consolidated balance sheet. We must then assess the likelihood that our net
deferred tax assets in each tax jurisdiction will be recovered from future taxable income in the
applicable jurisdiction and, to the extent we believe that recovery is not more likely than not or
is unknown, we must establish a valuation allowance.
Significant management judgment is required in determining the provision for income taxes,
deferred tax assets and liabilities and any valuation allowance recorded against the deferred tax
assets. As of December 31, 2008 and 2007, we had recorded a full valuation allowance against our
U.S. net deferred tax assets due to uncertainties related to our ability to utilize these deferred
tax assets, primarily consisting of net operating loss carryforwards. The valuation allowance was
based on our historical operating performance and estimates of taxable income in the United States
and the period over which our deferred tax assets will be recoverable.
If we continue to incur U.S. operating losses we will continue to provide a full valuation
allowance against our U.S. net deferred tax assets. Conversely, if our U.S. operations become
profitable in the future, we may reduce some or all of our valuation allowance, which could result
in a significant tax benefit, subject to applicable limitations, and a favorable impact on our financial condition and operating
results.
Effective January 1, 2007, we adopted the provisions of the Financial Accounting Standards
Board (FASB) Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109. FIN 48 contains a two-step approach to recognizing and
measuring uncertain tax positions accounted for in accordance with SFAS No. 109, Accounting for
Income Taxes. The first step is to evaluate the tax position for recognition by determining if the
weight of available evidence indicates it is more likely than not that the position will be
sustained on audit, including resolution of related appeals or litigation processes, if any. The
second step is to measure the tax benefit as the largest amount which is more than 50% likely of
being realized upon ultimate settlement. We consider many factors when evaluating and estimating
our tax positions and tax benefits, which may require periodic adjustments and which may not
accurately anticipate actual outcomes. Accordingly, we report a liability for unrecognized tax
benefits resulting from the uncertain tax positions taken or expected to be taken in a tax return
and recognizes interest and penalties, if any, related to uncertain tax positions in income tax
expense. There was no impact relating to the adoption of FIN 48 on our financial position. In
connection with the adoption of FIN 48, we have elected an accounting policy to classify interest
and penalties related to unrecognized tax benefits as interest expense.
32
Impact of Recently Issued Accounting Standards
In February 2008, the FASB issued Staff Position No. FAS 157-1 (FSP FAS 157-1),
Application
of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or Measurement Under Statement 13
and
Staff Position No. FAS 157-2 (FSP FAS 157-2),
Effective Date of FASB Statement No. 157
. FSP FAS
157-1 excludes Statement of Financial Accounting Standards No. 13 (SFAS 13),
Accounting for
Leases
, as well as other accounting pronouncements that address fair value measurements on lease
classification or measurement under SFAS 13 from the scope of SFAS 157. FSP FAS 157-2 delays the
effective date of SFAS 157 for all nonrecurring fair value measurements of nonfinancial assets and
nonfinancial liabilities until fiscal years beginning after November 15, 2008. Both FSP FAS 157-1
and FSP FAS 157-2 are effective upon an entitys initial adoption of SFAS 157, which was our first
quarter of fiscal year 2008. There was no impact on our financials from the adoption of FSP FAS
157-1 and FSP FAS 157-2.
In March 2008, FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities
(FAS 161). FAS 161 requires enhanced disclosures about an entitys derivative and
hedging activities and thereby improves the transparency of financial reporting. Entities are
required to provide enhanced disclosures about: (1) how and why an entity uses derivative
instruments, (2) how derivative instruments and related hedged items are accounted for under SFAS
No. 133,
Accounting for Derivative Instruments and Hedging Activities
, and its related
interpretations, and (3) how derivative instruments and related hedged items affect an entitys
financial position, financial performance and cash flows. This statement is effective for financial
statements issued for fiscal years and interim periods beginning after November 15, 2008, however,
early application is encouraged. Comparative disclosures for earlier periods at initial adoption is
encouraged, but not required. We do not expect the adoption of FAS 161 to have a material impact to
our consolidated results of operations and financial position.
In
May 2008, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position No.
APB 14-a,
Accounting for Convertible Debt Instruments That May
Be Settled in Cash Upon Conversion (Including Partial Cash
Settlement)
(FSP APB 14-a). Under the new
rules for convertible debt instruments that may be settled entirely or
partially in cash upon conversion, an entity should separately
account for the liability and equity components of the instrument in
a manner that reflects the issuers economic interest cost.
FSP APB 14-a will be effective for fiscal years beginning
after December 15, 2008, and for interim periods within those
fiscal years, with retrospective application required. For
instruments subject to the scope of FSP APB 14-a, higher
interest expense will result through the accretion of the discounted
carrying value of the convertible debt instruments to their face
amount over their term. Prior period interest expense will also be
higher than previously reported due to retrospective application.
Early adoption is not permitted. The adoption of
FSP APB 14-a is not expected to have any impact on the
Companys consolidated financial statements.
In
May 2008, FASB issued Statement 163, Accounting for Financial
Guarantee Insurance Contracts. This new standard clarifies how
FAS Statement No. 60,
Accounting and Reporting by Insurance
Enterprises
, applies to financial guarantee insurance contracts
issued by insurance enterprises, including the recognition and
measurement of premium revenue and claim liabilities. It also
requires expanded disclosures about financial guarantee insurance
contracts. The Statement is effective for financial statements issued
for fiscal years beginning after December 15, 2008. The Company
does not expect the adoption of SFAS 163 to have any impact on
its consolidated financial position or results of operations.
On
October 10, 2008, the FASB issued FSP FAS 157-3,
Determining the Fair Value of a Financial Asset in a Market
That Is Not Active. The FSP was effective upon issuance,
including periods for which financial statements have not been
issued. The FSP clarified the application of SFAS 157 in an
inactive market and provided an illustrative example to demonstrate
how the fair value of a financial asset is determined when the market
for that financial asset is inactive. The adoption of this FSP did
not have a material impact on the Companys consolidated
financial position and the results of operations.
In February 2007, FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities
including an amendment of FAS 115, or FAS 159. This statement provided
companies with an option to report selected financial assets and liabilities at fair value. This
statement was effective for fiscal years beginning after November 15, 2007 with early adoption
permitted. We adopted SFAS 159 beginning in the first quarter of fiscal year 2008 and SFAS 159 did
not have a material impact to our consolidated results of operations and financial condition.
In December 2007, FASB issued SFAS No. 160, Non-controlling Interests in Consolidated
Financial Statements an amendment of ARB No. 51 (FASB 160). This statement amends ARB 51 to
establish accounting and reporting standards for the non-controlling interest in a subsidiary and
for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a
subsidiary is an ownership interest in the consolidated entity that should be reported as equity in
the consolidated financial statements. In addition, FASB 160 changes the way the consolidated
income statement is presented by requiring consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the non-controlling interest. This
statement also establishes a single method of accounting for changes in a parents ownership
interest in a subsidiary that do not result in deconsolidation and requires that a parent recognize
a gain or loss in net income when a subsidiary is deconsolidated. This statement is effective for
fiscal years, and interim periods within those fiscal years, beginning on or after December 15,
2008 and earlier adoption is prohibited. FASB 160 shall be applied prospectively as of the
beginning of the fiscal year in which this statement is initially applied, except for the
presentation and disclosure requirement which shall be applied retrospectively for all periods
presented. We have not yet determined the impact that this requirement may have on our condensed
consolidated financial position, results of operations, cash flows or financial statement
disclosures.
33
In December 2007, FASB issued SFAS No. 141R, Business Combinations (FASB 141R). FASB 141R
replaces FASB Statement No. 141 Business Combinations but retains the fundamental requirements in
FASB 141. This statement defines the acquirer as the entity that obtains control of one or more
businesses in the business combination and establishes the acquisition date as the date that the
acquirer achieves control. FASB 141R also requires that an acquirer recognized the assets acquired,
the liabilities assumed and any non-controlling interest in the acquiree at the acquisition date,
measured at their fair values as of that date. In addition, this statement requires that the
acquirer in a business combination achieved in stages to recognize the identifiable assets and
liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their
fair values. FASB 141R is applied prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008. An entity may not apply the standard before that date. We have not yet
determined the impact that this requirement may have on our condensed consolidated financial
position, results of operations, cash flows or financial statement disclosures.
In December 2007, the FASB ratified EITF Issue No. 07-1,
Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual Property
(EITF
07-1). The EITF concluded that a collaborative arrangement is one in which the participants are
actively involved and are exposed to significant risks and rewards that depend on the ultimate
commercial success of the endeavor. Revenues and costs incurred with third parties in connection
with collaborative arrangements would be presented gross or net based on the criteria in EITF Issue
No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an Agent
, and other accounting
literature. Payments to or from collaborators would be evaluated and presented based on the nature
of the arrangement and its terms, the nature of the entitys business, and whether those payments
are within the scope of other accounting literature. The nature and purpose of collaborative
arrangements are to be disclosed along with the accounting policies and the classification and
amounts of significant financial statement amounts related to the arrangements. Activities in the
arrangement conducted in a separate legal entity should be accounted for under other accounting
literature; however required disclosure under EITF 07-1 applies to the entire collaborative
agreement. This Issue is effective for fiscal years beginning after December 15, 2008, and is to be
applied retrospectively to all periods presented for all collaborative arrangements existing as of
the effective date. We are currently evaluating the impact that this pronouncement may have on our
consolidated financial position and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a Smaller Reporting Company, we are not required to provide the information required by
this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, including supplementary data and the accompanying
report of independent registered public accounting firm filed as part of this Annual Report on Form
10-K, are listed in the Index to Consolidated Financial Statements and Financial Statement
Schedules on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A(T). CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Evaluation of Disclosure Controls
. We evaluated the effectiveness of the design and operation
of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act as
of December 31, 2008. This evaluation (the disclosure controls evaluation) was done under the
supervision and with the participation of management, including our acting chief executive officer
(CEO) and acting chief financial officer (CFO). Rules adopted by the SEC require that in this
section of our Annual Report on Form 10-K we present the conclusions of the CEO and CFO about the
effectiveness of our disclosure controls and procedures as of December 31, 2008 based on the
disclosure controls evaluation.
34
Objective of Controls.
Our disclosure controls and procedures are designed so that information
required to be disclosed in our reports filed under the Exchange Act, such as this Annual Report on
Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the
SECs rules and forms. Our disclosure controls and procedures are also intended to ensure that such
information is accumulated and communicated to our management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure. There are inherent limitations
to the effectiveness of any system of disclosure controls and procedures, including the possibility
of human error and the circumvention or overriding of the controls and procedures. Accordingly,
even effective disclosure controls and procedures can only provide reasonable assurance of
achieving their control objectives, and management necessarily is required to use its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and procedures.
Conclusion
. Based upon the disclosure controls evaluation, our CEO and CFO have concluded
that, as of December 31, 2008, our disclosure controls and procedures were effective to provide
reasonable assurance that the foregoing objectives are achieved.
Changes in Internal Control Over Financial Reporting
As described above, we reviewed our internal controls over financial reporting and there were
no changes in our internal control over financial reporting identified in connection with the
evaluation required by paragraph (d) of Rule 13a-15 under the Exchange Act that occurred during the
fourth quarter of our last fiscal year and have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Managements Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control
system is designed to provide reasonable assurance to our management and Board of Directors
regarding the preparation and fair presentation of published financial statements. All internal
control systems, no matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
Under the supervision and with the participation of management, including the CEO and CFO, we
conducted an evaluation of the effectiveness of our internal control over financial reporting, as
of December 31, 2008, based upon the framework in Internal Control Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation
under the framework in Internal Control Integrated Framework, management concluded that our
internal control over financial reporting was effective as of December 31, 2008.
This Annual Report does not include an attestation report of the our registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by our registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit us to provide only managements report in this
Annual Report.
ITEM 9B. OTHER INFORMATION
None.
35
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Our directors and executive officers, and their ages and positions, as of February 5, 2009,
are set forth below:
|
|
|
Name
|
|
Positions with the Company
|
|
|
|
Scott R. Silverman
|
|
Chairman of the Board, Executive Chairman
|
|
|
|
William J. Caragol
|
|
Acting Chief Financial Officer, Acting Treasurer and Secretary
|
|
|
|
Jeffrey S. Cobb
|
|
Director
|
|
|
|
Barry M. Edelstein
|
|
Director
|
|
|
|
Steven R. Foland
|
|
Director
|
|
|
|
Michael E. Krawitz
|
|
Director
|
The following is a summary of the background and business experience of our directors and
executive officers as of February 5, 2009:
Scott R. Silverman, 44, served as our acting president from March 2007 through May 4, 2007, as
our chief executive officer from December 5, 2006 through July 18, 2008, as chairman of our Board
of Directors from March 2003 through July 18, 2008 and as a member of our Board of Directors from
February 2002 through July 18, 2008. On November 12, 2008, he was again appointed to our Board of
Directors, to serve as chairman. He also served as our chief executive officer from April 2003 to
June 2004. He served as the chairman of the Board of Directors of Digital Angel from March 2003
through July 3, 2007, and served as chief executive officer of Digital Angel from March 2003 to
December 5, 2006, and as acting president of Digital Angel from April 2005 to December 5, 2006.
Mr. Silverman has served as the chairman of IFTH Acquisition Corp since January 2006. Mr. Silverman
is an attorney licensed to practice in New Jersey and Pennsylvania.
Jeffrey S. Cobb, 47, has served as a member of our Board of Directors since March 2007.
Mr. Cobb is the chief operating officer of IT Resource Solutions, Inc. Prior to April 2004,
Mr. Cobb was the executive vice president and chief operating officer of SCB Computer Technology
Inc. Mr. Cobb served as a member on the Board of Directors of IFTH from March 2004 through July 22,
2008. Mr. Cobb earned his Bachelor of Science in Marketing and Management from Jacksonville
University.
Barry M. Edelstein, 45, has served as a member of our Board of Directors since January 2008.
Mr. Edelstein serves as managing partner of Structured Growth Capital, LLC, a boutique investment
banking firm. Mr. Edelstein served as acting president and chief executive officer of Destron
Fearing Corporation (formerly known as Digital Angel Corporation), or Destron Fearing, from
August 2007 until December 2007. Mr. Edelstein has served as president and chief executive officer
of ScentSational Technologies, Inc. since January 2002, and is currently its chairman. From 2000 to
2002, Mr. Edelstein was vice president of sales and sales operations for Comcast Business
Communications Inc., where he managed the integration of Comcast Telecommunications Inc. with two
other subsidiaries and led a team that oversaw the sales, marketing, customer care, billing
operations and supplier management function of the company. Mr. Edelstein has a bachelors degree
in business administration from Drexel University and received his law degree from Widener
University School of Law.
Steven R. Foland, 49, has served as a member of our Board of Directors since February 2008.
Mr. Foland is currently a partner with Gold Mountain Partners a private advisory firm, and has
served as a managing director and head of investment banking for Merriman Curhan Ford & Co. from
September 2005 until February 2008 and as the senior managing director and head of west coast
investment banking for ThinkEquity Partners from September 2003 until July 2005. He was previously
with Morgan Stanley and Credit Suisse in New York and Hong Kong. Mr. Foland has a bachelors degree
in political science from the University of Michigan and received his law degree from the
University of Notre Dame.
36
Michael E. Krawitz, 39, has served as a member of our Board of Directors since November 2008.
He currently serves as the managing partner of Business Mediation Group, LLC, a mediation services
firm. He previously served as the chief executive officer and president of Digital Angel
Corporation from December 2006 to December 2007. Prior to that, during his time at Digital Angel
Corporation, he served as assistant vice president and general counsel beginning in April 1999, and
was appointed vice president and assistant secretary in December 1999, senior vice president in
December 2000, secretary in March 2003, executive vice president in April 2003 and chief privacy
officer in November 2004. From 1994 to April 1999, Mr. Krawitz was an attorney with Fried, Frank,
Harris, Shriver & Jacobson in New York. Mr. Krawitz has served as a member on the Board of
Directors of IFTH since July 23, 2008. Mr. Krawitz earned a bachelor of arts degree from Cornell
University in 1991 and a juris doctorate from Harvard Law School in 1994.
Audit Committee
Our audit committee currently consists of Steven R. Foland, Jeffrey S. Cobb and Barry M.
Edelstein. Mr. Foland chairs the audit committee. Our Board of Directors has determined that each
of the members of our audit committee is independent, as defined under, and required by, the
federal securities laws and the rules of the SEC, including Rule 10A-3(b)(i) under the Securities
and Exchange Act of 1934, as amended, or the Exchange Act, as well as the listing standards of the
Nasdaq Global Market. Our Board of Directors has determined that Mr. Foland qualifies as an audit
committee financial expert under applicable federal securities laws and regulations, and has the
financial sophistication required under the listing standards of the Nasdaq Global Market. A
copy of the current audit committee charter is available on our website at
www.verichipcorp.com
.
The audit committee assists our Board of Directors in its oversight of:
|
|
|
our accounting, financial reporting processes, audits and the integrity of our
financial statements;
|
|
|
|
our independent auditors qualifications, independence and performance;
|
|
|
|
our compliance with legal and regulatory requirements;
|
|
|
|
our internal accounting and financial controls; and
|
|
|
|
our audited financial statements and reports, and the discussion of the statements and
reports with management, including any significant adjustments, management judgments and
estimates, new accounting polices and disagreements with management.
|
The audit committee has the sole and direct responsibility for appointing, evaluating and
retaining our independent auditors and for overseeing their work. All audit and non-audit services
to be provided to us by our independent auditors must be approved in advance by our audit
committee, other than de minimis non-audit services that may instead be approved in accordance with
applicable rules of the Securities and Exchange Commission, or SEC.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires that our officers and directors and persons who own
more than 10% of our common stock file reports of ownership and changes in ownership with the SEC
and furnish us with copies of all such reports. We believe, based on our stock transfer records and
written representations from certain reporting persons, that all reports required under Section
16(a) were timely filed during 2008 with the exception of one Form 4 filed jointly by Austin Marxe
and David Greenhouse with the SEC on February 1, 2008 for one transaction reporting the disposition
of beneficial ownership of our shares of common stock.
Code of Business Conduct and Ethics
Our Board of Directors has approved and we have adopted a Code of Business Conduct and Ethics,
or the Code of Conduct, which applies to all of our directors, officers and employees. Our Board of
Directors has also approved and we have adopted a Code of Ethics for Senior Financial Officers, or
the Code for SFO, which applies to our chief executive officer and chief financial officer. The
Code of Conduct and the Code for SFO are available upon written request to VeriChip Corporation,
Attention: Secretary, 1690 South Congress Avenue, Suite 200, Delray Beach, Florida 33445. The audit
committee of our Board of Directors is responsible for overseeing the Code of Conduct and the Code
for SFO. Our audit committee must approve any waivers of the Code of Conduct for directors and
executive officers and any waivers of the Code for SFO.
37
Item 11. Executive Compensation
COMPENSATION DISCUSSION AND ANALYSIS
General
In July 2008, we sold all of the outstanding stock of our wholly-owned subsidiary, Xmark, to
Stanley Corporation Canada. As a result of such transaction, our management team was reduced to one
member. However, for the first half of 2008, we had an executive compensation program, which was
governed by our compensation committee, and was designed to (i) attract and retain a senior
management team that could direct the achievement of our corporate goals and strategic objectives,
(ii) motivate the team to achieve profitability and growth, (iii) maintain stability by retaining
the key executives in their leadership capacity, and (iv) better align executive interests with
stockholder interests. Our guiding philosophy was to establish compensation plans or programs that
rewarded our senior management team for their role in achieving our operating performance goals and
milestones, while aligning
the team members interests with those of our stockholders and, in the process, encouraging
the teams continued association with us. Therefore, we endeavored to implement policies designed
to link pay with performance, which, in turn, helped to align the interests of our executive
officers with our stockholders. Our compensation philosophy also reflected the unique nature of our
business, which consisted of a mix of operating-company and development-company features. Our
compensation policies and practices were shaped accordingly, and, in many ways, mirrored those of a
start-up biotechnology company, with an emphasis on compensation components that were contingent on
achieving operational milestones.
After selling our operating company, Xmark, on November 12, 2008, we purchased certain
intellectual property from Digital Angel that may complement and
enhance our future business,
known as the VeriMed Health Link business. The compensation committee is looking forward to
establishing new compensation policies going forward.
Among other things, our compensation committee, pursuant to the terms of its charter, is
responsible for:
|
|
|
establishing, reviewing and approving our overall executive compensation philosophy
and policies;
|
|
|
|
|
reviewing and approving those corporate goals and objectives that bear on the
compensation of our chief executive officer;
|
|
|
|
|
determining the appropriate compensation for all other executive officers, with input
from other members of senior management;
|
|
|
|
|
evaluating performance target goals for senior executive officers;
|
|
|
|
|
reviewing and approving any annual or long-term cash bonus or incentive plans;
|
|
|
|
|
reviewing and approving executive employment agreements, severance arrangements, and
change-in-control agreements or provisions; and
|
|
|
|
|
administering our equity-based compensation plans, including the grant of stock
options and other equity awards under such plans.
|
Our compensation committee has the authority, to the extent it deems appropriate, to retain
compensation consultants to assist in the evaluation of executive compensation. In the first
quarter of 2008, our compensation committee retained Towers, Perrin, Forster & Crosby, Inc.
(Towers Perrin), a compensation consulting firm, to provide objective analysis, information and
advice to the compensation committee, including competitive market data relating to the
compensation of certain members of our senior management team, in order to assist the compensation
committee in its review of the competitiveness of its current compensation arrangements. Towers
Perrin reports directly to the compensation committee, and does no work for the Company except as
expressly authorized by the compensation committee. Towers Perrin was retained because our
compensation committee believes it is important to be informed regarding the current practices of
similarly-situated companies (e.g., companies with comparable revenue size, comparable
industry/business descriptions, and comparable performance and growth profiles). As part of its
engagement, Towers Perrin was asked to review the cash and equity compensation practices of
companies with similar revenues and those of start-up biotechnology companies.
38
Throughout the year, the compensation committee periodically reported to our Board of
Directors on its actions and recommendations, and met regularly in executive session. On an annual
basis, the compensation committee reviews its charter and assesses its own performance,
particularly with a view towards the effectiveness of our executive compensation program in
obtaining desired results. Furthermore, our nominating and governance committee is responsible for
monitoring the standing committees of our Board of Directors, including the compensation committee,
and for making recommendations regarding any changes (e.g., creation or elimination of committees).
Our compensation arrangements with our executive officers generally reflect the individual
circumstances surrounding the applicable executive officers hiring or appointment. For example,
Daniel A. Gunther, who became one of our executive officers at the time of the acquisition of
Instantel during the first half of 2005, was a party to an employment agreement with Instantel.
Although we subsequently entered into a new employment agreement with Mr. Gunther, which was later
amended, the material terms of his agreement with us, such as base salary level, were influenced by
his former agreement with Instantel. Scott R. Silverman served as our chief executive officer from
December 5, 2006 through July 18, 2008. When referring to the latter period, we refer to Mr.
Silverman as former chief executive officer. The compensation arrangements that were in place for
Mr. Silverman during his time as our former chief executive officer, who previously served as the
chief executive officer of Digital Angel, also closely paralleled the terms of his former
employment agreement with Digital Angel.
Our compensation committee retains discretion to tailor our compensation program to address
individual circumstances, rather than simply aiming for a compensation level that falls within a
specific range of market data. Our compensation committee also retains discretion to materially
increase or decrease compensation. However, certain of our executive officers, including Mr.
Silverman and the former chief executive officer and president of Xmark, have (or had) employment
agreements with us, as described in more detail below. Employment agreements limit the amount of
discretion the compensation committee may exercise in terms of adjusting or modifying compensation.
For example, while serving as our former chief executive officer, any reduction of Mr. Silvermans
base salary or incentive compensation could have been deemed a constructive termination under his
employment agreement.
The foregoing information is intended to provide context for the discussion that follows. In
addition, this Compensation Discussion & Analysis should be read in conjunction with the detailed
tabular and narrative information regarding executive compensation information in this proxy
statement.
Principal Components of Compensation of Our Executive Officers
The principal components of the compensation we have historically paid to our executive
officers have consisted of:
|
|
|
signing or retention bonuses, paid in cash;
|
|
|
|
cash incentive compensation under the terms of individual senior management incentive
compensation plans established for our executive officers; and
|
|
|
|
equity compensation, generally in the form of grants of stock options or restricted
shares.
|
39
Our chief executive officer has historically played a significant role in the determination of
the amounts of base salary, signing or retention bonuses and other forms of cash and equity-based
compensation to be paid other members of senior management. We expect that the compensation
committee of our Board of Directors will continue to solicit input from our chief executive officer
or president with respect to compensation decisions affecting other members of our senior
management.
Allocation of Compensation Among Principal Components
With respect to the mix of base salary, bonus, cash incentive compensation and equity awards
to be paid or awarded to our executive officers, the compensation committee generally believes that
a greater percentage of the compensation of the most senior members of our management should be
performance-based.
Base Salary
Our compensation committee believes that pay should be directly and closely linked to
corporate performance and milestones. As a result, base salary typically constitutes less than half
of our executives total compensation packages.
Our Chairman of the Board
We appointed Scott R. Silverman as our chief executive officer in early December 2006. In
April 2006, our Board of Directors, together with a member of the Board of Directors of Digital
Angel, initiated a search for a new chief executive officer, mindful that the individual who was
serving as our chief executive officer at that time was approaching retirement age. In connection
with this search, an executive search firm was initially consulted, but was not formally retained.
While the search firm advised as to the backgrounds of several potential candidates, our Board
recognized that key qualities our new chief executive officer would need to possess included a
clear, in-depth understanding of the benefits of our VeriMed Health Link business, and the skills,
energy level and zeal to lead our efforts to create a market for the VeriMed Health Link business
a significant component of our growth strategy. After considering the backgrounds and
qualifications of the candidates presented by the search firm, our Board realized that
Mr. Silverman was the ideal candidate for the position given his support, as Digital Angels
then-chief executive officer, of our efforts to create a market for the VeriMed Health Link
business.
When our Board broached the subject with Mr. Silverman of his becoming our chief executive
officer, he indicated a willingness to accept the challenge and perceived reduction in status,
provided it did not entail a financial sacrifice relative to his compensation arrangements as the
chief executive officer of Digital Angel. Based on information provided to our Board by the search
firm at the outset of the search for a chief executive officer, our Board had developed a sense of
the compensation package in terms of base salary, bonus, additional at-risk incentive
compensation and equity interest that would need to be provided to a candidate for the position.
Mr. Silvermans compensation arrangements with Digital Angel were in line with the parameters
identified in our Boards discussions with the search firm. Accordingly, the two members of our
compensation committee at that time other than Mr. Silverman, one of whom then served as the
chairman of the compensation committees of our Board of Directors and the Board of Directors of
Digital Angel, negotiated an employment agreement with Mr. Silverman that closely tracked the
material terms of his prior employment agreement with Digital Angel. The two members of our
compensation committee at that time did not engage in an examination of the compensation
arrangements of chief executive officers of peer companies, other than the consultation with the
search firm described above. However, they and the Board did consider how the terms of
Mr. Silvermans employment agreement compared with those of our prior chief executive officer,
determining that the difference in compensation was justified by the greater than originally
anticipated challenges associated with our efforts to create a market for our VeriMed Health Link
business.
40
Mr. Silvermans employment agreement with us provided for a base salary of $420,000 for fiscal
year 2007, with the base salary being subject to an annual increase of no less than 10% in each of
fiscal year 2008 and fiscal year 2009.
On May 15, 2008, in connection with the Xmark Transaction, we entered into a separation
agreement with Mr. Silverman, which was later amended. Under this separation agreement,
Mr. Silverman and us mutually agreed that Mr. Silvermans employment would be terminated without
cause upon the closing of the Xmark Transaction (i.e., July 18, 2008), and that Mr. Silvermans
employment agreement would be terminated on the same day. We and Mr. Silverman also agreed that he
would resign from his position as our Chairman of the Board upon the closing of the Xmark
Transaction.
On November 12, 2008, in connection with the purchase by R & R Consulting Partners, LLC (an
entity that is owned and controlled by Mr. Silverman) of 45.7% of the outstanding shares of our
common stock from Digital Angel, our board of directors appointed
Mr. Silverman to again serve as chairman of the board.
Absent a fundamental change in the business, such as a major acquisition, Mr. Silverman has agreed
that he will not take cash salary compensation through the end of 2009.
On December 31, 2008, we entered into a letter agreement with Mr. Silverman effective December
1, 2008, which provides that Mr. Silverman will serve as our executive chairman from December 1,
2008 through December 31, 2009 in exchange for 601,852 restricted shares of our common stock, which
will not be issued until we file a registration statement on Form S-8 with the SEC reflecting our
2007 Stock Incentive Plan, as amended and restated (the Amended Plan). The letter agreement also
terminates the separation agreement with the exception of certain provisions, which is more fully
discussed below under the heading Executive Compensation Narrative Disclosure to Summary
Compensation Table and Grants of Plan-Based Awards Table Executive Employment Arrangements -
Scott R. Silverman.
Our Acting Chief Financial Officer
We hired William J. Caragol as our chief financial officer in August 2006. Our employment
agreement with Mr. Caragol provides for an annual base salary of $150,000. On March 2, 2007, the
compensation committee approved an increase in Mr. Caragols base salary to $165,000. Then, on
May 4, 2007, in connection with our Boards decision to appoint Mr. Caragol to also serve as our
president and the expanded responsibilities associated therewith, the compensation committee
approved an increase in Mr. Caragols base salary to $185,000. In 2008, the compensation committee
approved a further increase in Mr. Caragols base salary to $203,500.
In connection with the Xmark Transaction, on May 15, 2008, we entered into a letter agreement
with Mr. Caragol, which, among other things, affirmed that we desired to retain Mr. Caragol as our
president and chief financial officer following the closing of the Xmark Transaction, confirmed
that Mr. Caragols base salary would remain at $203,500 per year, and outlined the bonus
compensation for which Mr. Caragol would be eligible. On December 31, 2008, we entered into a
letter agreement with Mr. Caragol that terminated the May 15, 2008 letter agreement (with the
exception of the waiver/release provisions of such letter), and provides that Mr. Caragol will
serve as our acting chief financial officer effective January 1,
2009 through July 31, 2009 in
exchange for 518,519 restricted shares of our common stock, which will not be issued until we file
a registration statement on Form S-8 with the SEC reflecting our Amended Plan.
The Former Chief Executive Officer and President of Xmark Corporation (and Our Former President)
We appointed Daniel A. Gunther as our president, effective June 10, 2005, concurrent with the
completion of our acquisition of Instantel. Mr. Gunther was serving as the president and chief
executive officer of Instantel at the time of the acquisition. Under the terms of our employment
agreement with Mr. Gunther, effective June 10, 2005, Mr. Gunthers annual base salary was CDN
$210,000.
41
Mr. Gunther served in the capacity of president until March 2, 2007, on which date we
appointed Mr. Gunther as the chief executive officer and president of VeriChip Corporation, a
Canadian company, and VeriChip Holdings Inc., which companies have since been amalgamated and were
known as Xmark Corporation until being sold to Stanley Canada Corporation in July of 2008.
Concurrent with that appointment, Mr. Gunther resigned the title and responsibilities as our
president, and Mr. Silverman assumed the additional title and responsibilities of acting president.
Furthermore, on March 2, 2007, we amended the terms of Mr. Gunthers employment agreement,
increasing his annual base salary to CDN $250,000.
In connection with the Xmark Transaction, The Stanley Works assumed Mr. Gunthers employment
agreement, as amended. As a result, our employment of Mr. Gunther terminated on July 18, 2008.
Bonus Compensation
We have not historically paid any automatic or guaranteed bonuses to our executive officers.
However, we have from time to time paid signing or retention bonuses in connection with our initial
hiring or appointment of an executive officer, or a change in a persons position and
responsibilities with us, as well as transaction bonuses. For example, at the recommendation of our
chief executive officer, and in recognition of his outstanding performance, Mr. Caragol received a
discretionary bonus of $25,000 in March 2007.
Under Mr. Silvermans separation agreement, Mr. Silverman earned a bonus payment in the amount
of $1.2 million upon the closing of the Xmark Transaction, payable in two installments. One
installment was paid on July 18, 2008 in the amount of $1,080,000, and the remaining installment of
$120,000 is scheduled to be paid upon the July 2009 release of the funds that were escrowed in
connection with the Xmark Transaction. The $120,000 was expensed
during the year ended December 31, 2008.
Under Mr. Caragols letter agreement, Mr. Caragol was eligible to receive a bonus of $50,000
if the total distributed cash or equity value to our stockholders following the Xmark Transaction
was at least $21.5 million and, if the total distributed cash or equity value exceeded
$21.5 million, he was eligible to receive an additional cash bonus equal to 4% of the amount over
$21.5 million, up to a maximum of $200,000 in aggregate incentive compensation. On December 31,
2008, we entered into a letter agreement with Mr. Caragol that terminated the May 15, 2008 letter
agreement (with the exception of the waiver/release provisions of such letter).
On February 11, 2008, we entered into a letter agreement with Mr. Gunther, or the February 11,
2008 Letter Agreement, to guarantee a certain bonus/change-in-control payment due to Mr. Gunther
upon the successful completion of the Xmark Transaction. On July 17, 2008, in order to clarify the
aggregate amount due to Mr. Gunther in connection with the Xmark Transaction, under both the
February 11, 2008 Letter Agreement and the Executive Management Change in Control Plan (as
discussed more fully below under Compensation Discussion and Analysis Potential Payments Upon
Termination or Control Executive Management Change in Control Plan), the Company entered into a
letter agreement and release with Mr. Gunther, under which Mr. Gunther received US $815,000.
Our Board considered bonuses paid by similarly situated employers to similarly situated
employees in making its determination.
Compensation under Individual Senior Management Incentive Compensation Plans
As noted above, our compensation committee believes that pay should be directly and closely
linked to corporate performance and milestones. For this reason, the largest component of our
executives total compensation packages generally tends to be non-equity incentive compensation. We
believe that such compensation, in the form of individual senior management incentive compensation
plans, incentivizes our senior management team to advance our corporate performance and provides a
platform for us to recognize an individual team members contributions to our business results.
When our compensation committee established the performance goals that determined the amounts
payable under these individual plans (as detailed below), it assessed the executives leadership
role and level of responsibility in achieving certain business results.
42
During 2007, our compensation committee approved an executive management incentive
compensation plan for fiscal year 2007 for Messrs. Silverman and Caragol and a senior management
incentive compensation plan for fiscal year 2007 with Mr. Gunther. The plans were designed to
recognize and reward the contributions of management that resulted in the achievement of specific
performance goals. In setting these goals, our compensation committee included performance
objectives that were viewed as reasonably achievable and others that were viewed as more of a
challenge to achieve. The intent was to provide a balance between the two to ensure that our
executive officers maintained their level of motivation throughout 2007. For fiscal 2008, we had
no incentive compensation plans in place.
Equity Compensation
Our compensation committees historical practice has been to grant equity-based awards to
attract, retain, motivate and reward our employees, particularly our executive officers, and to
encourage their ownership of an equity interest in us. Through December 31, 2008, such grants have
consisted either of stock options specifically non-qualified stock options, that is, options that
do not qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986,
as amended or restricted shares of our common stock, which shares are generally subject to
forfeiture if the employment agreement with the recipient of such restricted shares is terminated,
by reason of resignation or termination for cause, during the two-year period or three-year period
following the date of grant. Historically, our compensation committee has granted awards of stock
options or restricted shares of our common stock to our executive officers upon their appointment
as executive officers, with the grant award typically
memorialized in the applicable officers offer letter or employment agreement, or an addendum
to employment agreement.
Other than two grants made in January 2006 pursuant to the terms of employment agreements with
former executive officers, all grants of options to our executive officers and other employees, as
well as to our directors, have been granted with exercise prices equal to or exceeding the fair
value of the underlying shares of common stock on the grant date, as determined by our compensation
committee. All equity-based awards have been reflected in our consolidated financial statements,
based upon the applicable accounting guidance. Previously, we accounted for equity compensation
paid to our employees and directors using the intrinsic value method under APB Opinion No. 25 and
FASB Financial Interpretation No. 44,
Accounting for Certain Transactions Involving Stock
Compensation an Interpretation of APB Opinion No. 25
. Under the intrinsic value method, no
stock-based compensation was recognized in our consolidated statements of operations for options
granted to our directors, employees, consultants and others because the exercise price of such
stock options equaled or exceeded the fair value of the underlying stock on the dates of grant.
Effective January 1, 2006, we adopted FAS 123R using the modified prospective transition method.
Under this method, stock-based compensation expense is recognized using the fair-value based method
for all awards granted on or after the date of adoption of FAS 123R. FAS 123R requires us to
estimate and record an expense over the service period of the stock-based award. In 2006, our
compensation committee, conscious of the less favorable accounting treatment for stock options
resulting from adoption of FAS 123R, took a more deliberate approach to the granting of awards of
stock options.
Starting in 2007, we moved away from granting stock options in favor of granting restricted
shares of our common stock. Our compensation committee believes that restricted stock grants offer
advantages, such as a more dependable retention value for us, as well as more predictability of
long-term rewards for our executive officers. Restricted stock also provides the recipient with
immediate value, subject to vesting upon grant. In addition, we believe that the accounting
treatment of grants of restricted stock more reliably reflects executive compensation than the
accounting treatment of stock options. In the case of restricted stock grants, the expense we
record over the vesting period is equal to the market value of the stock at the time of grant. In
the case of stock option grants, the expense we record over the vesting period is arrived at
through the use of a valuation model that is subject to managements estimates and judgments.
We structure cash incentive compensation so that it is taxable to our executive officers at
the time it becomes available to them. We currently intend that any cash compensation paid will be
tax deductible for us. However, with respect to equity-based awards, while any gain recognized by
our executive officers and other employees from non-qualified stock options should be deductible,
to the extent that in the future we grant incentive stock options, any gain recognized by the
optionee related to such options will not be deductible by us if there is no disqualifying
disposition by the optionee. In addition, our grant of shares of restricted stock or restricted
stock units that are not subject to performance vesting provisions may not be fully deductible by
us at the time the grant is otherwise taxable to the grantee.
43
We do not have any program, plan or practice that requires us to grant equity-based awards on
specified dates, and we have not made grants of such awards that were timed to precede or follow
the release or withholding of material non-public information. It is possible that we will
establish programs or policies regarding the timing of equity-based awards in the future. Authority
to make equity-based awards to executive officers rests with our compensation committee, which
considers the recommendations of our chief executive officer, president and other executive
officers. As a Nasdaq-listed company, we are subject to Nasdaq listing standards that, in general,
require stockholder approval of equity-based plans.
Severance and Change in Control Payments
Our Board of Directors believes that companies should provide reasonable severance benefits to
employees, recognizing that it may be difficult for them to find comparable employment within a
short period of time. Our Board also believes it prudent that we should disentangle ourselves from
employees whose employment terminates as soon as practicable. Our historical practice for U.S.
employees has been to make the termination of an employee effective immediately upon the
communication of the termination rather than at the expiration of any required advance notice
period. In such situations, we have continued to pay, on a post-termination basis, base salary
compensation to the terminated employee under his or her employment agreement, if any, for the
specified advance
notice period. For our former Canadian employees, we typically made the termination effective
at the expiration of the required advance notice period as required under Canadian law.
Our employment agreement with Mr. Silverman, which was terminated on July 18, 2008, contained
termination provisions that were more complex than that in place for our other executive officers.
The compensation due Mr. Silverman in the event of the termination of his employment agreement
varied depending on the nature of the termination and, depending on the type and timing of the
termination, provided for substantial compensation payments to Mr. Silverman. Mr. Silvermans
employment agreement also provided for substantial payments to him in the event we underwent a
change in control. Our Board of Directors believes that these termination and change-in-control
provisions, which were substantially the same as the corresponding provisions of Mr. Silvermans
prior employment agreement with Digital Angel, were necessary and appropriate to induce
Mr. Silverman to accept the position as our chief executive officer, as more fully discussed above.
On July 18, 2008, we did undergo a change in control. For information regarding the termination
and change in control payments made to Mr. Silverman upon the consummation of the Xmark Transaction
and provisions currently in effect pursuant to our letter agreement dated December 31, 2008, see
Potential Payments Upon Termination or Change in Control Scott R. Silverman.
On March 2, 2007, our compensation committee approved an Executive Management Change in
Control Plan, which governed the payments due to Messrs. Gunther and Caragol in the event of a
change in control. On the same date, we amended our employment agreement with Mr. Gunther to
outline the compensation due to Mr. Gunther in the event of his termination by Xmark Corporation
for any reason other than for cause. We did undergo a change in control in connection with the
Xmark Transaction. For information regarding the termination and change in control payments Mr.
Gunther received upon the consummation of the Xmark Transaction, see Potential Payments Upon
Termination or Change in Control Daniel A. Gunther.
On May 15, 2008, we entered into a letter agreement with Mr. Caragol, which contained certain
termination provisions in the event we terminate that letter agreement at any time. On December
31, 2008, we entered into a letter agreement with Mr. Caragol that terminated the May 15, 2008
letter agreement (with the exception of the waiver/release provisions of such letter), and provides
that Mr. Caragol will serve as our acting chief financial
officer effective January 1, 2009 through
July 31, 2009 in exchange for 518,519 restricted shares of our common stock. For information
regarding the termination provisions of Mr. Caragols letter agreement, see Potential Payments
Upon Termination or Change in Control William J. Caragol.
44
Other Benefits
We believe establishing competitive benefit packages for our employees is an important factor
in attracting and retaining highly-qualified personnel. Executive officers are eligible to
participate in all of our employee benefit plans, such as medical, dental, vision, group life and
accidental death and dismemberment insurance, in each case on the same basis as other employees.
Mr. Silverman is provided with an individual term life insurance policy. We do not currently
provide retirement benefits. Our former officers and employees in Canada had somewhat different
employee benefit plans than those we offer domestically, typically based on certain legal
requirements in Canada.
Perquisites
Our Board of Directors annually reviews the perquisites that members of senior management
receive. With the exception of the perquisites received by Mr. Silverman, the cost to us of such
perquisites is minimal. Under the terms of Mr. Silvermans employment agreement with us, we were
obligated to reimburse him for all reasonable travel, entertainment and other expenses incurred by
him in connection with the performance of his duties and obligations under the agreement. In
addition, consistent with his former employment agreement with Digital Angel, we were obligated to
pay to Mr. Silverman $45,000 per year during the five-year term of his employment agreement,
payable in two equal installments of $22,500 on each of January 15 and July 15, representing
non-allocable expenses. Among the specific perquisites that Mr. Silverman was receiving at the time
of his termination without cause in connection with the Xmark Transaction were:
|
|
|
an automobile allowance for two automobiles and other automobile expenses, including
insurance, gasoline and maintenance costs;
|
|
|
|
tickets to sporting events used primarily for business entertainment purposes; and
|
|
|
|
a membership at a private club.
|
Pursuant to the terms of the letter agreement entered into with Mr. Silverman on December 31,
2008, Mr. Silverman is now entitled to the use of one car, leased by us, and other automobile
expenses, including insurance, gasoline and maintenance costs.
We were also obligated to pay Mr. Caragol $10,000 per year, payable in two equal installments
of $5,000 on each of January 15 and July 15, representing non-allocable expenses. Effective
January 1, 2009, these payments ceased under the letter agreement we entered into with Mr. Caragol
on December 31, 2008.
Section 162(m) of the Internal Revenue Code
Section 162(m) of the Internal Revenue Code generally does not allow a deduction for annual
compensation in excess of $1,000,000 paid to our named executive officers. This limitation on
deductibility does not apply to certain compensation, including compensation that is payable solely
on account of the attainment of one or more performance goals. Our policy is generally to preserve
the federal income tax deductibility of compensation, and we intend generally to qualify eligible
compensation for the performance-based exception in order for compensation not to be subject to the
limitation on deductibility imposed by Section 162(m) of the Internal Revenue Code; we may,
however, approve compensation that may not be deductible if we determine that the compensation is
in our best interests as well as the best interests of our stockholders.
45
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information regarding compensation earned in or with respect to
our fiscal year 2006, 2007 and 2008 by:
|
|
|
each person who served as our chief executive officer in 2008;
|
|
|
|
each person who served as our chief financial officer in 2008; and
|
|
|
|
one other individual who served as an executive officer during 2008 but was not
serving in such capacity at the end of 2008, for whom disclosure is required under
applicable rules of the Securities and Exchange Commission.
|
We refer to these officers collectively as our named executive officers.
Summary Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
Incentive Plan
|
|
|
All Other
|
|
|
|
|
Name and
|
|
|
|
|
|
Salary
|
|
|
Bonus
|
|
|
Awards
|
|
|
Awards
|
|
|
Compensation
|
|
|
Compensation
|
|
|
Total
|
|
Principal Position
|
|
Year
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($) (1)
|
|
|
($)
|
|
|
($)
|
|
Scott R. Silverman
(2)
Executive Chairman of the
Board of Directors
|
|
|
2008
|
|
|
|
254,101
|
(3)
|
|
|
1,200,000
|
|
|
|
2,351,339
|
(4)
|
|
|
|
|
|
|
|
|
|
|
5,497,592
|
(5)
|
|
|
9,303,032
|
|
|
|
|
2007
|
|
|
|
420,000
|
|
|
|
|
|
|
|
2,097,899
|
(4)
|
|
|
|
|
|
|
800,000
|
|
|
|
104,980
|
(6)
|
|
|
3,422,879
|
|
|
|
|
2006
|
|
|
|
400,323
|
(7)
|
|
|
900,000
|
(8)
|
|
|
154,762
|
(4)
|
|
|
|
|
|
|
|
|
|
|
3,403,016
|
(9)
|
|
|
4,858,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William J.
Caragol(10)
Acting Chief
Financial Officer
|
|
|
2008
|
|
|
|
216,206
|
(11)
|
|
|
|
|
|
|
157,500
|
(13)
|
|
|
|
|
|
|
|
|
|
|
1,276,400
|
(15)
|
|
|
1,650,106
|
|
|
|
|
2007
|
|
|
|
174,808
|
(11)
|
|
|
25,000
|
(12)
|
|
|
119,562
|
(13)
|
|
|
92,692
|
(14)
|
|
|
450,000
|
|
|
|
15,251
|
(16)
|
|
|
877,313
|
|
|
|
|
2006
|
|
|
|
51,923
|
(11)
|
|
|
|
|
|
|
|
|
|
|
62,034
|
(14)
|
|
|
75,000
|
|
|
|
66,029
|
|
|
|
254,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel A. Gunther
(17)
Former Chief
Executive Officer
and President of
Xmark Corporation
|
|
|
2008
|
|
|
|
134,311
|
(18)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171,518
|
|
|
|
815,500
|
(20)
|
|
|
1,121,329
|
|
|
|
|
2007
|
|
|
|
225,309
|
(18)
|
|
|
|
|
|
|
119,562
|
(19)
|
|
|
|
|
|
|
370,370
|
(21)
|
|
|
1,940
|
(22)
|
|
|
717,181
|
|
|
|
|
2006
|
|
|
|
188,354
|
(18)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,490
|
(21)
|
|
|
588
|
|
|
|
389,432
|
|
|
|
|
(1)
|
|
The amounts shown in this column were paid under the terms of our executive management
incentive plan for fiscal year 2007, which were entered into with each of our named executive
officers other than Daniel A. Gunther, for the achievement of specified performance
objectives. Mr. Gunthers senior management incentive compensation plan for fiscal year 2007,
which sets forth performance objectives and related dollar amounts, contain the terms that
govern his receipt of incentive compensation for fiscal year 2007. For a description of the
material terms of each of these plans, see the discussion under Our 2007 Senior Management
Incentive Compensation Plans and Comparable Arrangements.
|
|
(2)
|
|
Mr. Silverman became our chief executive officer as of December 5, 2006. The Company
terminated him without cause on July 18, 2008, in connection with the Xmark Transaction. On
November 12, 2008, in connection with the purchase by R & R Consulting Partners, LLC (an
entity that is owned and controlled by Mr. Silverman) of 45.7% of the outstanding shares of
our common stock from Digital Angel, Mr. Silverman again became the chairman of our Board of
Directors. On December 31, 2008, we entered into a letter agreement with Mr. Silverman
effective December 1, 2008, which provides that Mr. Silverman will serve as our executive
chairman from December 1, 2008 through December 31, 2009.
|
46
|
|
|
|
(3)
|
|
Amount represents 2008 salary paid to Mr. Silverman until his termination on July 18, 2008.
|
|
(4)
|
|
Mr. Silverman received an award of 500,000 restricted shares of our common stock in
December 2006 in connection with his appointment as our chief executive officer and 50,000
restricted shares of our common stock in January 2008. These shares vested on July 18, 2008.
The dollar amount of this award reflected in the table represents the amount recognized in
2006, 2007, and 2008 for financial statement reporting purposes in accordance with FAS 123R
without reduction for assumed forfeitures. The grant date fair value of the awards was
$4,500,000 and $104,000 for the 500,000 and 50,000 shares, respectively, which amount has been
determined in accordance with FAS 123R based on an estimated fair value of our common stock of
$9.00 and $1.04 per share on December 31, 2006, as determined by our Board of Directors and
management. The grant date fair value of each award was determined using the Black Scholes
pricing model. The value realized from this grant will ultimately be determined by the price
of our common stock
when the restricted period ends, which may be less than the value assigned at the time of
the grant. For more information regarding assumptions made in determining the amount under
the Black Scholes pricing model, see Note 5 of our consolidated financial statements.
|
|
(5)
|
|
The amount shown includes (i) $300 in respect of group term life insurance provided to
Mr. Silverman; (ii) a dividend of $1,162,500 paid to Mr. Silverman, which amount was not
factored into the grant date fair value required to be reported for the stock award; (iii)
$38,879 paid as vacation accrued in connection with Mr. Silvermans termination; and (iv)
$4,242,273 paid to Mr. Silverman under a separation agreement. See Compensation of Scott
R. Silverman below for more information regarding the $4,242,273 payment. The amount shown
also includes perquisites and other personal benefits aggregating $53,640, which were as
follows:
|
|
|
|
|
|
|
|
Amount
|
|
|
|
of
|
|
Nature of Expense
|
|
Expense
|
|
Expense allowance
|
|
$
|
45,000
|
|
Automobile allowance for two automobiles, maintenance and gasoline
expenses
|
|
|
8,640
|
|
|
|
|
|
Total
|
|
$
|
53,640
|
|
|
|
|
|
|
|
|
(6)
|
|
The amount shown includes (i) $300 in respect of group term life insurance provided to
Mr. Silverman and (ii) amounts in respect of perquisites and other personal benefits
aggregating $104,680. The perquisites and other personal benefits were as follows:
|
|
|
|
|
|
|
|
Amount
|
|
|
|
of
|
|
Nature of Expense
|
|
Expense
|
|
Expense allowance
|
|
$
|
45,000
|
|
Automobile allowance for two automobiles, maintenance and
gasoline expenses
|
|
|
33,266
|
|
* Other
|
|
|
26,414
|
|
|
|
|
|
Total
|
|
$
|
104,680
|
|
|
|
|
|
|
|
|
*
|
|
Tickets to sporting events primarily provided for business entertainment purposes and
related food and beverages, a club membership, home security monitoring service, and medical
examinations.
|
47
|
|
|
(7)
|
|
Mr. Silvermans salary for 2006 includes $377,799 paid by Digital Angel to Mr. Silverman from
January 1, 2006 through December 4, 2006, during which time he served as the chief executive
officer of Digital Angel. All such amounts were paid or accrued by Digital Angel and do not
affect our financial statements.
|
|
(8)
|
|
In December 2006, Digital Angels Board of Directors determined to fix the amount payable to
Mr. Silverman under the Digital Angel 2006 incentive and recognition policy in order to
resolve and clarify outstanding compensation issues under the policy, given the wide range of
potential payments under the policy and the timing of our initial public offering and how that
would affect such range. Accordingly, Digital Angel fixed Mr. Silvermans bonus for 2006 at
$900,000. The amount is shown in the Bonus column instead of the Non-Equity Incentive
Compensation Plan column as the amount paid was not determined solely by reference to the
performance objectives set forth in the policy. All such amounts were paid or accrued by
Digital Angel and do not affect our financial statements.
|
|
(9)
|
|
The amount shown includes (i) $3.3 million owed to Mr. Silverman under an agreement Digital
Angel entered into with Mr. Silverman dated December 5, 2006 in connection with his agreeing
to waive all of his rights under his employment agreement with Digital Angel (the majority of
this amount was settled in the stock of Digital Angel, the value of which may be less when
realized), (ii) amounts in respect of perquisites and other personal benefits aggregating
$102,716 provided by Digital Angel, and (iii) $300 in respect of
group term life insurance provided to Mr. Silverman. See Compensation of Scott R.
Silverman below for more information regarding the $3.3 million payment. All such amounts
were paid or accrued by Digital Angel and do not affect our financial statements.
|
|
(10)
|
|
Mr. Caragol became our chief financial officer as of August 21, 2006 and our president as of
May 4, 2007. Effective January 1, 2009, Mr. Caragol became our acting chief financial
officer.
|
|
(11)
|
|
Mr. Caragols annual base salary in 2006, as specified in his offer letter with us, was
$150,000. On March 2, 2007, our compensation committee approved an increase to Mr. Caragols
base salary to $165,000. Then, on May 4, 2007, in connection with our Boards decision to
appoint Mr. Caragol to serve as our president, our compensation committee approved an increase
in Mr. Caragols base salary to $185,000. In 2008, our compensation committee approved a
further increase in Mr. Caragols base salary to $203,500. Included in 2008 was vacation paid
in connection with the letter agreement dated December 31, 2008 which terminated the May 15,
2008 letter agreement.
|
|
(12)
|
|
On March 2, 2007, our compensation committee approved a discretionary bonus to Mr. Caragol in
the amount of $25,000.
|
|
(13)
|
|
On March 2, 2007, Mr. Caragol and Mr. Gunther each received a restricted stock award of
50,000 restricted shares of our common stock. On April 28, 2008, Mr. Gunther voluntarily
entered into a termination agreement with us to terminate his restricted stock award of 50,000
restricted shares of our common stock. Mr. Caragols award vested on July 18, 2008. The dollar
amount of each award reflected in the table represents the amount recognized in 2008 and 2007
for financial statement reporting purposes in accordance with FAS 123R without reduction for
assumed forfeitures. The grant date fair value of each award, determined using the Black
Scholes pricing model, is reflected in the Grants of Plan-Based Awards table below. For
information regarding assumptions made in determining the amount under the Black Scholes
pricing model, see Note 5 of our consolidated financial statements.
|
|
(14)
|
|
In connection with Mr. Caragols appointment as our chief financial officer, on August 14,
2006, the compensation committee of our Board of Directors authorized the grant to Mr. Caragol
of options exercisable for 50,000 shares of our common stock. The options were scheduled to
vest equally over a three-year period. The dollar amount of this award reflected in the table
represents the amount recognized in 2006 and 2007 for financial statement reporting purposes
in accordance with FAS 123R, without reduction for assumed forfeitures, determined by
reference to that portion of the vesting period that occurred in 2006 and 2007 based on the
grant date fair value of the award. The grant date fair value of the award was $278,581, which
was determined using the Black Scholes pricing model. For information regarding assumptions
made in determining the amount under the Black Scholes pricing model, see Note 5 of our
consolidated financial statements for the year ended December 31, 2008, included in this
Annual Report on Form 10-K.
|
48
|
|
|
(15)
|
|
The amount represents payments made to to Mr. Caragol (i) related to a change in control
payment received in connection with the Xmark Transaction in the amount of $1,141,400; and
(ii) a dividend payment in the amount of $135,000, which amount was not factored into the
grant date fair value, as the Company had no plans, nor did it
expect, to issue dividend distributions at that time.
|
|
(16)
|
|
The amount represents an expense allowance received by Mr. Caragol for 2007 in the amount of
$10,000 and tickets to sporting events primarily provided for business entertainment purposes
and related food and beverages.
|
|
(17)
|
|
Mr. Gunther served as our president from June 10, 2005 through March 2, 2007. On March 2,
2007, Mr. Gunther resigned his duties as our president and assumed the title and
responsibilities of chief executive officer and president of VeriChip Canada and VHI, which
companies were amalgamated and are now known as Xmark Corporation. In connection with the
Xmark Transaction, The Stanley Works assumed Mr. Gunthers employment agreement, as amended.
As a result, the Companys employment of Mr. Gunther terminated on July 18, 2008.
|
|
(18)
|
|
Mr. Gunthers annual base salary was paid in Canadian dollars. The 2006 base salary
reported has been converted to U.S. dollars using the average exchange rate for 2006 of
1.136 Canadian dollars for each U.S. dollar. The 2007 base salary reported has been
converted to U.S. dollars using the average exchange rate for 2007 of 1.08 Canadian dollars
for each U.S. dollar. The 2008 base salary reported has been converted to U.S. dollars
using the average exchange rate for 2008 of 1.01 for each U.S. dollar.
|
|
(19)
|
|
The amount reported in the table has been converted to U.S. dollars using the average
exchange rate for 2006, 2007 and 2008 of 1.136, 1.08 and 1.01, respectively, Canadian
dollars for each U.S. dollar.
|
|
(20)
|
|
Represents amount paid to Mr. Gunther in satisfaction of any amounts due to Mr.
Gunther under both the February 11, 2008 Letter Agreement and the Executive Management Change
in Control Plan in connection with the Xmark Transaction, as well as
the cost of group term life insurance we maintained on behalf of Mr.
Gunther.
|
|
(21)
|
|
The amount reported in the table has been converted to U.S. dollars using the average
exchange rate for 2006, 2007 and 2008 of 1.136, 1.08 and 1.01, respectively, Canadian dollars for each
U.S. dollar.
|
|
(22)
|
|
This amount represents the cost of group term life insurance we maintained on behalf of
Mr. Gunther and home internet service.
|
2008 Grants of Plan-Based Awards
Set forth in the table below is information regarding stock awards granted by the compensation
committee of our Board of Directors to our named executive officers in 2008, reflected on an
individual grant basis.
These represent all of the grants of awards by us to our named executive officers under any
plan during or with respect to 2008.
49
2008 Grants of Plan-Based Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
Awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
Exercise or
|
|
|
Grant Date
|
|
|
|
|
|
|
|
Shares of
|
|
|
Securities
|
|
|
Base Price of
|
|
|
Fair Value of
|
|
|
|
|
|
|
|
Stock or
|
|
|
Underlying
|
|
|
Option
|
|
|
Stock and
|
|
|
|
|
|
|
|
Units
|
|
|
Options
|
|
|
Awards
|
|
|
Option
|
|
Name
|
|
Grant Date
|
|
|
(#)
|
|
|
(#)
|
|
|
($/Sh)
|
|
|
Awards
(1)
|
|
Scott R. Silverman
|
|
|
1/24/2008
|
|
|
|
50,000
|
(2)
|
|
|
|
|
|
|
|
|
|
$
|
104,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William J. Caragol
|
|
|
1/24/2008
|
|
|
|
50,000
|
(2)
|
|
|
|
|
|
|
|
|
|
$
|
104,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel A. Gunther
|
|
|
1/24/2008
|
|
|
|
50,000
|
(3)
|
|
|
|
|
|
|
|
|
|
$
|
104,000
|
|
|
|
|
(1)
|
|
The grant date fair value of the equity award was determined under the Black Scholes pricing
model in accordance with FAS 123R. For information regarding assumptions made in determining the
amount under the Black Scholes pricing model, see Note 5 to our consolidated financial statements
for the year ended December 31, 2008, included in this Annual Report on Form 10-K.
|
|
(2)
|
|
The restricted stock vested on July 18, 2008 upon the closing of the Xmark Transaction.
|
|
(3)
|
|
On April 28, 2008, Mr. Gunther voluntarily entered into a termination agreement with us to
terminate his restricted stock award of 50,000 restricted shares of our common stock.
|
Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table
Executive Employment Arrangements
Scott R. Silverman
Scott R. Silverman was appointed as our chief executive officer effective December 5, 2006 and
entered into an employment and non-compete agreement with us dated December 5, 2006. The employment
agreement provided for an initial base salary of $420,000 per year, with the base salary being
subject to an annual increase of no less than 10% in each of the second and third years of the term
of the agreement. The term of the agreement was five years from the effective date. However, the
agreement was terminated on July 18, 2008 when we terminated Mr. Silverman without cause in
connection with the Xmark Transaction. Under his employment agreement, Mr. Silverman was entitled
to all benefits for which our salaried employees are generally eligible under either compensation
or employee benefit plans and programs, on the same basis as our similarly situated executive
employees. During his employment, Mr. Silverman participated in our then 401(k) plan and
Company-paid health insurance. He was reimbursed for reasonable business expenses and was provided
the use of automobiles leased by us. In addition, annual dues relating to Mr. Silvermans
membership at a private club were paid for by us. The membership dues at the private club were
approximately $3,198 per year. He also received a Company-paid $2,000,000 executive term life
policy, under which we were the beneficiary of $1,750,000. In addition, we were obligated to pay to
Mr. Silverman $45,000 per year during the term of the agreement, payable in two equal installments
of $22,500 on or before January 15 and July 15, representing non-allocable expenses that were
deemed to be additional compensation to Mr. Silverman.
The employment agreement specified that Mr. Silverman was eligible to receive incentive bonus
compensation for each calendar year during the term of the agreement in an amount to be reasonably
determined by our Board of Directors. Our Board had to consider bonuses paid by similarly situated
employers to similarly situated employees in making its determination. On April 2, 2007, our
compensation committee approved an executive management incentive compensation plan for fiscal year
2007 for Mr. Silverman. Under the plan, Mr. Silverman was able to earn up to $1,550,000 and earned
$800,000. The employment agreement contemplated similar plans for each year of its term.
50
Under the employment agreement, Mr. Silverman received 500,000 shares of restricted common
stock. The shares were subject to substantial risk of forfeiture in the event that Mr. Silverman
resigned or we terminated his employment for cause on or before December 31, 2008. Since we
terminated Mr. Silverman without cause in connection with the Xmark Transaction, this forfeiture
restriction lifted on July 18, 2008.
Under the separation agreement between Mr. Silverman and us, dated May 15, 2008, Mr. Silverman
was prohibited, for a period of two years from the closing of the Xmark Transaction (in other
words, through July 18, 2010), from competing with us or any of our affiliates by directly or
indirectly engaging in our business within the radio-frequency identification technology market
space or by engaging in any business comparable to ours or to that of our affiliates at any
location at which we or our affiliates conduct business or provide any services. However, if
(1) our VeriMed Health Link business was not sold or transferred to a third party, or (2) our
VeriMed Health Link business was sold or transferred to Mr. Silverman or one of his affiliates,
Mr. Silverman would not be subject to the portion of this restriction that applies to our VeriMed
Health Link business; but, in either such event, he would remain subject to all portions of the
restriction that do not apply to our VeriMed Health Link business. The separation agreement also
included a provision relating to non-disclosure of proprietary information.
On December 31, 2008, we and Mr. Silverman entered into a letter agreement pursuant to which,
effective December 1, 2008 through December 31, 2009, he serves as our executive chairman, unless
the term is amended or the letter agreement is terminated. Mr. Silverman will receive 601,852
Shares on the later to occur of (i) stockholder approval of our Amended and Restated 2007 Stock
Incentive Plan (the Amended Plan) or (ii) the filing of the Form S-8, as amended, to reflect the
Amended Plan (hereinafter, the Grant Date). If Mr. Silverman remains involved in our day-to-day
management (as determined by our board of directors), the shares will vest upon the earlier to
occur of (i) January 1, 2010 or (ii) a Change in Control. The shares are subject to forfeiture in
the event that Mr. Silverman fails to remain involved in our day-to-day management (as determined
by our board of directors) until the earlier to occur of (i) January 1, 2010 or (ii) a Change in
Control.
In the event of a Change in Control during 2009, if Mr. Silverman (i) becomes or remains a
director of the acquiring company, or in the case of a merger, the surviving entity, and (ii) does
not voluntarily resign as a director for 12 months from the closing of the Change in Control
transaction, Mr. Silverman will receive $25,000 per month for a period of not less than 12 months
from the closing of the Change in Control transaction.
The term Change in Control is defined below under the heading, Potential Payments Upon
Termination or Change in Control Scott R. Silverman.
Mr. Silverman is entitled to the use of one car through December 31, 2009 and will no longer
be entitled to receive any form of bonus or incentive compensation for services rendered to us
during fiscal years ended December 31, 2008 and 2009. The letter agreement also provides for the
termination of the separation agreement, dated May 15, 2008, as amended, between us and Mr.
Silverman, provided that sections I.B.(regarding the transaction bonus payment for the Xmark
Transaction), I.E. (regarding discharge of our obligations to Mr. Silverman), II.B. (regarding
cooperation by Mr. Silverman in connection with business matters) and II.C. (regarding Mr.
Silvermans waiver and release of certain rights, claims and actions) of the separation agreement
will survive.
For a more detailed description of the termination and change in control provisions of this
letter agreement, see Potential Payments Upon Termination or Change in Control Scott R.
Silverman below.
William J. Caragol
William J. Caragol was appointed as our chief financial officer effective August 21, 2006 and
entered into an offer letter with us dated August 2, 2006. The offer letter provides for an initial
base salary of $150,000 per year and other benefits generally available for similarly situated
employees, such as participation in the Companys 401(k) plan and Company-paid health insurance. In
addition, pursuant to the offer letter, certain of the moving and related expenses associated with
the relocation of Mr. Caragol and his family from Northern Virginia to Florida were paid or
reimbursed by the Company. On March 2, 2007, the compensation committee approved an increase in
Mr. Caragols base salary to $165,000. Then, on May 4, 2007, in connection with our Boards
decision to appoint Mr. Caragol to serve as our president, the compensation committee approved an
increase in Mr. Caragols base salary to $185,000. In 2008, the compensation committee approved a
further increase in Mr. Caragols base salary to $203,500.
51
The offer letter includes provisions relating to ownership of proprietary information,
disclosure and ownership of inventions and non-solicitation of customers. Mr. Caragol has agreed
that, while our employee and for the one-year period following the end of his employment, he will
not, directly or indirectly, attempt to solicit or in any other way disturb or service any person,
firm or corporation that has been a customer, employee or vendor of ours, or that of our current or
future affiliates, at any time within one year prior to the end of his employment. On April 2,
2007, our compensation committee approved an executive management incentive compensation plan for
fiscal year 2007 for Mr. Caragol. Under the plan, Mr. Caragol was able to earn up to $875,000 and
earned $450,000.
In connection with the Xmark Transaction, on May 15, 2008, we entered into a letter agreement
with Mr. Caragol, which affirmed that we desired to retain Mr. Caragol as our president and chief
financial officer following the closing of the Xmark Transaction, confirmed that Mr. Caragols base
salary would remain at $203,500 per year, and outlined the bonus compensation for which Mr. Caragol
would be eligible.
On December 31, 2008, we and Mr. Caragol entered into a letter agreement pursuant to which,
effective January 1, 2009, Mr. Caragol serves as our acting chief financial officer. Unless the
term is amended or the letter agreement is terminated, the letter agreement is in effect until
July 31, 2009. Mr. Caragol ceased receiving salary and health benefits on January 1, 2009.
Compensation due to Mr. Caragol under the letter agreement is in the form of shares of
restricted common stock in the amount of 518,519. The grant of the shares will take place on the
Grant Date. The shares will vest according to the following schedule: (i) 20% shall vest on the
Grant Date; (ii) 40% shall vest on April 1, 2009; and (iii) 40% shall vest on July 31, 2009.
However, in the event of a Change in Control and if Mr. Caragol is terminated without cause (as
defined below), the shares will immediately vest. The shares are subject to forfeiture in the event
Mr. Caragol is terminated for cause, which is defined as (i) Mr. Caragols conviction of a
felony; (ii) Mr. Caragols being prevented from providing services to us under the letter agreement
as a result of Mr. Caragols violation of any law, regulation and/or rule; or (iii) Mr. Caragols
non-performance or non-observance in any material respect of any requirement with respect to Mr.
Caragols obligations under the letter agreement.
The term Change in Control is defined below under the heading, Potential Payments Upon
Termination or Change in Control William J. Caragol.
The letter agreement also provides for the termination of all compensation-related plans
currently in place between Mr. Caragol and us, including the letter agreement, dated May 15, 2008,
between Mr. Caragol and us, provided that the waiver/release provisions of such letter will
survive.
For a description of the termination and change in control provisions of Mr. Caragols letter
agreement, see Potential Payments Upon Termination or Change in Control William J. Caragol
below.
Daniel A. Gunther
Daniel A. Gunther was appointed as our president effective June 10, 2005. Mr. Gunther entered
into an employment agreement with us dated August 11, 2005, with an effective date of June 10,
2005, which provided for an initial base salary of CDN $210,000 per year and other benefits
generally available for similarly situated employees, such as company-paid health insurance. On
March 2, 2007, the employment agreement was amended to increase Mr. Gunthers annual salary to CDN
$250,000 as a result of his appointment as president and chief executive officer of the Canadian
subsidiaries.
52
The employment agreement included provisions relating to ownership of proprietary information,
disclosure and ownership of inventions and non-solicitation of customers. In the last regard,
Mr. Gunther agreed that, while our employee and for the one-year period following the end of his
employment, he would not, directly or indirectly, attempt to solicit or in any other way disturb or
service any person, firm or corporation that has been a customer, employee or vendor of the
Company, or that of its current or future affiliates, at any time within one year prior to the end
of his employment by us.
In connection with the Xmark Transaction, The Stanley Works assumed Mr. Gunthers employment
agreement, as amended. As a result, our employment of Mr. Gunther terminated on July 18, 2008.
Outstanding Equity Awards as Of December 31, 2008
The following table provides information as of December 31, 2008 regarding unexercised stock
options outstanding held by Messrs. Caragol and Gunther. Mr. Silverman did not have any equity
awards outstanding as of December 31, 2008.
Outstanding Equity Awards as Of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
|
|
|
Awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
Market
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
or Payout
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
|
|
|
Value of
|
|
|
|
|
|
|
|
|
|
|
|
Plan
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
Unearned
|
|
|
Unearned
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Market
|
|
|
Shares,
|
|
|
Shares,
|
|
|
|
Number of
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
or Units
|
|
|
Value of
|
|
|
Units or
|
|
|
Units or
|
|
|
|
Securities
|
|
|
Number of
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
|
of Stock
|
|
|
Shares or
|
|
|
Other
|
|
|
Other
|
|
|
|
Underlying
|
|
|
Securities
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
|
|
That
|
|
|
Units of
|
|
|
Rights
|
|
|
Rights
|
|
|
|
Unexercised
|
|
|
Underlying
|
|
|
Unexercised
|
|
|
Option
|
|
|
|
|
|
|
Have
|
|
|
Stock That
|
|
|
That
|
|
|
That
|
|
|
|
Options
|
|
|
Unexercised
|
|
|
Unearned
|
|
|
Exercise
|
|
|
Option
|
|
|
Not
|
|
|
Have Not
|
|
|
Have Not
|
|
|
Have Not
|
|
|
|
(#)
|
|
|
Options(#)
|
|
|
Options
|
|
|
Price
|
|
|
Expiration
|
|
|
Vested
|
|
|
Vested
|
|
|
Vested
|
|
|
Vested
|
|
Name
|
|
Exercisable(1)
|
|
|
Unexercisable
|
|
|
(#)
|
|
|
($)(2)
|
|
|
Date
|
|
|
(#)
|
|
|
($)
|
|
|
(#)
|
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel A.
Gunther
|
|
|
55,556
|
|
|
|
|
|
|
|
|
|
|
$
|
7.425
|
|
|
|
8/11/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William J.
Caragol
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
$
|
9.990
|
|
|
|
8/21/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
On July 18, 2008, all stock option awards and restricted stock awards
that had previously been granted under our 2002 Flexible Stock Plan,
our 2005 Flexible Stock Plan, and our 2007 Stock Incentive Plan vested
upon the closing of Xmark Transaction.
|
|
(2)
|
|
The exercise price of VeriChip stock options reflected in the table
represents the estimated fair market value of our common stock on the
date of grant, as determined by our management and Board of Directors.
|
53
2008 Option Exercises and Stock Vested
The following table provides information on stock options exercised and restricted stock
vested during our last completed fiscal year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
Number of
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
Acquired on
|
|
|
Value Realized
|
|
|
Acquired on
|
|
|
Value Realized
|
|
|
|
Exercise
|
|
|
on Exercise
|
|
|
Vesting
|
|
|
on Vesting
|
|
Name
|
|
(#)
|
|
|
($)(1)
|
|
|
(#)
|
|
|
($)(2)
|
|
Scott R. Silverman
|
|
|
|
|
|
|
|
|
|
|
550,000
|
|
|
$
|
924,000
|
|
|
|
|
111,111
|
|
|
$
|
163,889
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
$
|
147,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William J. Caragol
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
$
|
168,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel A. Gunther
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents the aggregate dollar amount realized by determining the difference between the
market price of the underlying securities at exercise and the exercise price of the options.
|
|
(2)
|
|
Represents the aggregate dollar amount realized upon vesting by multiplying the number of
shares of stock by the market value of the underlying shares on the vesting date of July 18, 2008,
or $1.68.
|
Pension Benefits
None of our named executive officers are covered by a pension plan or other similar benefit
plan that provides for payments or other benefits at, following, or in connection with retirement.
Nonqualified Deferred Compensation
None of our named executive officers are covered by a defined contribution or other plan that
provides for the deferral of compensation on a basis that is not tax-qualified.
Potential Payments Upon Termination or Change in Control
Scott R. Silverman
Mr. Silverman was terminated without cause on July 18, 2008, the day on which the Xmark
Transaction closed. Under the separation agreement between Mr. Silverman and us, dated May 15,
2008, we paid him a separation payment in the amount of approximately $3.2 million and incentive
compensation in the amount of approximately $1.0 million, less all deductions and withholdings, in
full and final satisfaction of the amounts due to Mr. Silverman pursuant to the terms of his
employment agreement.
On December 31, 2008, we and Mr. Silverman entered into a letter agreement pursuant to which,
effective December 1, 2008 through December 31, 2009, he serves as our executive chairman, unless
the term is amended or the letter agreement is terminated. Pursuant to the letter agreement, if a
Change in Control (as defined below) had been effective as of December 31, 2008, Mr. Silverman
would have received no cash benefit and his 601,852 restricted shares of our common stock would
have vested assuming the restricted shares had been issued. In the event Mr. Silvermans
employment with us was terminated (with or without cause) as of December 31, 2008, he would not be
entitled to any cash payment and if the 601,852 restricted shares of our common stock were not yet
vested, they would be forfeited.
54
If a Change in Control occurs during 2009, and if Mr. Silverman (i) becomes or remains a
director of the acquiring company, or in the case of a merger, the surviving entity, and (ii) does
not voluntarily resign as a director for 12 months from the closing of the Change in Control
transaction, Mr. Silverman will receive $25,000 per month for a period of not less than 12 months
from the closing of the Change in Control transaction, for a total of $300,000. In addition, upon
the Change in Control, the 601,852 restricted shares of our common stock Mr. Silverman is eligible
to receive in connection with the execution of the letter agreement will vest provided that Mr.
Silverman is involved in the day-to-day management of the Company and assuming the restricted
shares will be issued. In the event Mr. Silvermans employment with us is terminated (with or
without cause)in 2009, he would not be entitled to any cash payment and if the 601,852 restricted
shares of our common stock were not yet vested, they would be forfeited.
Change in Control means the happening of any of the following:
(i) the consummation of any transaction (including, without limitation, any merger or
consolidation) the result of which is that any person as such term is used in Section 13(d) and
14(d) of the Exchange Act (other than any trustee or other fiduciary holding securities under any
employee benefit plan of ours, or any company owned, directly or indirectly, by our shareholders in
substantially the same proportions as their ownership of our stock), is or becomes the beneficial
owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of our securities
representing more than 50% of the combined voting power of our then outstanding securities entitled
generally to vote in the election of the Board (other than the occurrence of any contingency);
(ii) our stockholders approve a merger or consolidation of us with any other corporation or
entity, which is consummated, other than a merger or consolidation which would result in our voting
securities outstanding immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving entity) more than 50% of
the combined voting power of our voting securities or such surviving entity outstanding immediately
after such merger or consolidation; or
(iii) the effective date of a complete liquidation of us or the consummation of an agreement
for the sale or disposition by us of all or substantially all of our assets, which in both cases
are approved by our stockholders as may be required by law.
William J. Caragol
On December 31, 2008, we and Mr. Caragol entered into a letter agreement pursuant to which,
effective January 1, 2009, Mr. Caragol serves as our acting chief financial officer. Unless the
term is
amended or the letter agreement is terminated, the letter agreement is in effect until
July 31, 2009. Mr. Caragol ceased receiving salary and health benefits on January 1, 2009.
Pursuant to the letter agreement, if a Change in Control had become effective on December 31,
2008 and if Mr. Caragol had been terminated without cause on December 31, 2008, the 518,519
restricted shares of our common stock would have vested immediately, assuming the restricted stock
had been issued. If Mr. Caragol had been terminated for cause on December 31, 2008, the shares
would have been forfeited. No other payments would be due under the letter agreement to Mr. Caragol
in the event of a Change in Control or termination (with or without cause).
The term Change in Control has the same meaning as provided above under the description of
Mr. Silvermans potential termination and Change in Control payments. The term cause is defined
above under the heading, Narrative Disclosure to Summary Compensation Table and Grants of
Plan-Based Awards Table Executive Employment Arrangements William J. Caragol.
55
Daniel A. Gunther
In connection with the Xmark Transaction, The Stanley Works assumed Mr. Gunthers employment
agreement, as amended. As a result, our employment of Mr. Gunther terminated on July 18, 2008.
Alongside the termination of his employment and in accordance with the letter agreement and release
between Mr. Gunther and us, dated July 17, 2008, we paid Mr. Gunther US$815,000 in full and final
satisfaction of any and all amounts due to Mr. Gunther under both the February 11, 2008 Letter
Agreement and the Executive Management Change in Control Plan.
Director Compensation
The following table provides compensation information for persons serving as members of our
Board of Directors during 2008.
2008 Director Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Value
|
|
|
|
|
|
|
|
|
|
Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
|
|
|
Earned
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
Nonqualified
|
|
|
|
|
|
|
|
|
|
or Paid
|
|
|
Stock
|
|
|
Option
|
|
|
Incentive Plan
|
|
|
Deferred
|
|
|
All Other
|
|
|
|
|
|
|
in Cash
|
|
|
Awards
|
|
|
Awards
|
|
|
Compensation
|
|
|
Compensation
|
|
|
Compensation
|
|
|
Total
|
|
Name
|
|
($)
|
|
|
($)(1)
|
|
|
($) (1)
|
|
|
($)
|
|
|
Earnings
|
|
|
($)
|
|
|
($)
|
|
Jeffrey S. Cobb(2)
|
|
|
60,000
|
|
|
|
208,000
|
|
|
|
50,676
|
|
|
|
|
|
|
|
|
|
|
|
135,000
|
|
|
|
110,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barry M. Edelstein (3)
|
|
|
65,000
|
|
|
|
208,000
|
|
|
|
20,883
|
|
|
|
|
|
|
|
|
|
|
|
135,000
|
|
|
|
85,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven R. Foland(4)
|
|
|
57,500
|
|
|
|
121,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,500
|
|
|
|
57,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul C. Green(5)
|
|
|
61,000
|
|
|
|
208,000
|
|
|
|
153,297
|
|
|
|
|
|
|
|
|
|
|
|
135,000
|
|
|
|
214,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph J. Grillo(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael E. Krawitz (7)
|
|
|
7,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145,000
|
|
|
|
152,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel E. Penni(8)
|
|
|
5,000
|
|
|
|
|
|
|
|
55,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Constance K. Weaver(9)
|
|
|
5,000
|
|
|
|
|
|
|
|
55,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,187
|
|
|
|
|
(1)
|
|
The dollar amount of this award reflected in the table represents the
amount recognized in 2008 for financial statement reporting purposes
in accordance with FAS 123R. For information regarding assumptions
made in determining the amount under the Black Scholes pricing model,
see Note 5 of our consolidated financial statements for the year ended
December 31, 2008, included in this Annual Report on Form 10-K.
|
|
(2)
|
|
As of December 31, 2008, Mr. Cobb held options to purchase 25,000
shares of our common stock. Mr. Cobb was awarded 100,000 shares of
restricted stock on January 24, 2008, which vested on July 18, 2008.
On August 28, 2008, Mr. Cobb received a dividend of $135,000.
|
|
(3)
|
|
As of December 31, 2008, Mr. Edelstein held options to purchase 25,000
shares of our common stock. Mr. Edelstein was awarded 100,000 shares
of restricted stock on January 24, 2008, which vested on July 18,
2008. On August 28, 2008, Mr. Edelstein received a dividend of
$135,000.
|
|
(4)
|
|
As of December 31, 2008, Mr. Foland held no options to purchase shares
of our common stock. Mr. Foland was awarded 50,000 shares of
restricted stock on February 21, 2008, which vested on July 18, 2008.
On August 28, 2008, Mr. Edelstein received a dividend of $67,500.
|
56
|
|
|
(5)
|
|
As of December 31, 2008, Mr. Green held options to purchase 69,444
shares of our common stock. On November 13, 2008, Mr. Green resigned
from our board of directors. Mr. Green was awarded 100,000 shares of
restricted stock on January 24, 2008, which vested on July 18, 2008.
On August 28, 2008, Mr. Green received a dividend of $135,000.
|
|
(6)
|
|
As of December 31, 2008, Mr. Grillo held no options to purchase shares
of our common stock. Mr. Grillo resigned from our board of directors
effective July 18, 2008.
|
|
(7)
|
|
As of December 31, 2008, Mr. Krawitz held no options to purchase
shares of our common stock. From January to October 2008, Mr. Krawitz
received $70,000 in consulting fees. On August 28, 2008, Mr. Green
received a dividend of $75,000.
|
|
(8)
|
|
As of December 31, 2008, Mr. Penni held options to purchase 25,000
shares of our common stock. On January 11, 2008, Mr. Penni resigned
from our board of directors.
|
|
(9)
|
|
As of December 31, 2008, Ms. Weaver held options to purchase 69,444
shares of our common stock. On January 11, 2008, Ms. Weaver resigned
from our board of directors.
|
Our Board of Directors approved that each of our non-employee directors would receive cash
compensation for his or her service as a director, effective upon our becoming a public company in
February 2007, as follows:
|
|
|
a quarterly fee of $5,000; and
|
|
|
|
an additional quarterly fee of $1,000 to the chairperson of our audit committee.
|
On February 21, 2008, our Board of Directors increased non-employee director compensation from
$5,000 to $7,500 per quarter. A non-employee director serving as chairman of a committee will
receive an additional $2,500 per quarter. Our non-employee directors will also continue to be
reimbursed for out-of-pocket expenses incurred in attending Board and board committee meetings. In
2009, directors may elect to receive their fees in the form of restricted stock.
On December 31, 2008, our board of directors approved a grant of 100,000 shares of restricted
stock to each of Messrs. Cobb, Edelstein, Foland and Krawitz when we file a Form S-8 registering
the Amended Plan. If granted, the shares will vest on the earlier to occur of January 1, 2010 or a
Change in Control (as defined in the Amended Plan).
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
See Part II, Item 5, under the heading, Equity Compensation Plan Information for information
on compensation plans under which our equity securities are authorized for issuance.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information known to us regarding beneficial ownership
of shares of our common stock as of February 5, 2009, by:
|
|
each of our directors;
|
|
|
|
each of our named executive officers;
|
|
|
|
all of our executive officers and directors as a group; and
|
|
|
|
each person, or group of affiliated persons, known to us to be the
beneficial owner of more than 5% of our outstanding shares of common
stock.
|
57
Beneficial ownership is determined in accordance with the rules and regulations of the SEC and
includes voting and investment power with respect to the securities. In computing the number of
shares beneficially owned by a person and the percentage ownership of that person, shares of common
stock subject to options or warrants held by that person that are currently exercisable or
exercisable within 60 days of February 5, 2009 are deemed outstanding. Such shares, however, are
not deemed outstanding for purposes of computing the percentage ownership of any other person. To
our knowledge, except as indicated in the footnotes to this table and subject to community property
laws where applicable, the persons named in the table have sole voting and investment power with
respect to all shares of our common stock shown opposite such persons name. The percentage of
beneficial ownership is based on 11,730,209 shares of our common stock outstanding as of February
5, 2009. Unless otherwise noted below, the address of the persons and entities listed in the table
is c/o VeriChip Corporation, 1690 South Congress Avenue, Suite 200, Delray Beach, Florida 33445.
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Shares
|
|
|
Percent of
|
|
|
|
Beneficially
|
|
|
Outstanding
|
|
Name and Address of Beneficial Owner
|
|
Owned(#)
|
|
|
Shares(%)
|
|
Five percent stockholders:
|
|
|
|
|
|
|
|
|
Scott R. Silverman
(1)
|
|
|
6,221,667
|
|
|
|
53.0
|
%
|
Austin W. Marxe
(2)
|
|
|
|
|
|
|
|
|
527 Madison Avenue, Suite 2600
|
|
|
|
|
|
|
|
|
New York, New York 10022
|
|
|
1,034,099
|
|
|
|
8.8
|
%
|
David M. Greenhouse
(2)
|
|
|
|
|
|
|
|
|
527 Madison Avenue, Suite 2600
|
|
|
|
|
|
|
|
|
New York, New York 10022
|
|
|
1,034,099
|
|
|
|
8.8
|
%
|
|
|
|
|
|
|
|
|
|
Named Executive Officers and Directors:
|
|
|
|
|
|
|
|
|
Scott R. Silverman
(1)
|
|
|
6,221,667
|
|
|
|
53.0
|
%
|
William J. Caragol
(3)
|
|
|
153,000
|
|
|
|
1.3
|
%
|
Jeffrey S. Cobb
(4)
|
|
|
125,000
|
|
|
|
1.1
|
%
|
Barry M. Edelstein
(5)
|
|
|
125,000
|
|
|
|
1.1
|
%
|
Steven R. Foland
(6)
|
|
|
55,600
|
|
|
|
*
|
|
Daniel A. Gunther
(7)
|
|
|
55,556
|
|
|
|
*
|
|
Michael E. Krawitz
|
|
|
|
|
|
|
*
|
|
Executive Officers and Directors as a group (6 persons)
(8)
|
|
|
6,680,267
|
|
|
|
56.5
|
%
|
|
|
|
*
|
|
Less than 1%
|
|
(1)
|
|
5,355,556 shares of our common stock are owned by R & R Consulting
Partners, LLC. Mr. Silverman is the managing member of R & R
Consulting Partners, LLC. The parties share voting and investment
control over the 5,355,556 shares of our common stock. The number
reflected in the table also includes 866,111 shares of our common
stock, which Mr. Silverman holds in his personal capacity.
|
58
|
|
|
(2)
|
|
Austin W. Marxe and David M. Greenhouse share voting and investment
control over all securities owned by Special Situations Technology
Fund, L.P. (Tech), Special Situations Technology Fund II, L.P.
(Tech II), Special Situations Fund III L.P. (Fund III), and
Special Situations Fund III QP, L.P. (QP). 64,179 shares of our
common stock are owned by Tech, 392,398 shares of our common stock are
owned by Tech II, 15,000 shares of our common stock are owned by Fund
III, and 562,522 shares of our common stock are owned by QP. The
interest of Messrs. Marxe and Greenhouse in the shares of our common
stock owned by Tech, Tech II, Fund III and QP is limited to the extent
of their pecuniary interest. The information included in the table is
based solely on the Schedule 13G/A filed jointly with the SEC on
February 13, 2008 by Messrs. Marxe and Greenhouse.
|
|
(3)
|
|
Includes 103,000 shares of our common stock and 50,000 shares of our
common stock issuable upon the exercise of stock options that are
currently exercisable or exercisable within 60 days of February 5,
2009.
|
|
(4)
|
|
Includes 100,000 shares of our common stock and 25,000 shares of our
common stock issuable upon the exercise of stock options that are
currently exercisable or exercisable within 60 days of February 5,
2009.
|
|
(5)
|
|
Includes 100,000 shares of our common stock and 25,000 shares of our
common stock issuable upon the exercise of stock options that are
currently exercisable or exercisable within 60 days of February 5,
2009.
|
|
(6)
|
|
Includes 55,600 shares of our common stock.
|
|
(7)
|
|
Includes 55,556 shares of our common stock issuable upon the exercise
of stock options that are currently exercisable or exercisable within
60 days of February 5, 2009.
|
|
(8)
|
|
Includes shares of our common stock beneficially owned by current
executive officers and directors and shares issuable upon the exercise
of stock options that are currently exercisable or exercisable within
60 days of February 5, 2009, in each case as set forth in the
footnotes to this table.
|
All stock option awards and restricted stock awards that had previously been granted under our
2002 Flexible Stock Plan, our 2005 Flexible Stock Plan, and our 2007 Stock Incentive Plan vested
upon the closing of Xmark Transaction. As no stock option awards or restricted stock awards have
been granted to our named executive officers or directors since that closing, all such stock option
awards are currently exercisable, and all restrictions applicable to such restricted stock awards
have lapsed.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Since the beginning of our fiscal year 2007, there has not been, and there is not currently
proposed any transaction or series of similar transactions in which the amount involved exceeded or
will exceed the lesser of $120,000 or one percent of the average of our total assets at year end
for the last two completed fiscal years and in which any related person, including any director,
executive officer, holder of more than 5% of our capital stock during such period, or entities
affiliated with them, had a material interest, other than as described in the transactions set
forth below.
Director and Officer Roles and Relationships with Digital Angel and Its Other Affiliates
Several of our current and former directors and executive officers have served as directors
and officers of Digital Angel, which held 45.7% of our stock at the time it sold such stock to R &
R Consulting Partners, LLC (an entity owned and controlled by Mr. Silverman) on November 12, 2008,
and its other affiliates. By virtue of the relationships described below, certain of our current
and former directors and executive officers may face situations in which there are actual or
apparent conflicts of interest that could interfere, or appear to interfere, with their ability to
act in a manner that is in our best business interests.
59
At the Board level:
|
|
|
Our executive chairman, Scott R. Silverman, served on the Board of Directors of
Digital Angel from March 2002 until July 2007, and, from March 2003 until the end of his
term of service, in the capacity of chairman.
|
|
|
|
Mr. Silverman served on the Board of Directors of Destron Fearing from July 2003 until
December 2007 and, from February 2004 until the end of his term of service, in the
capacity of chairman.
|
|
|
|
Mr. Silverman currently serves as chairman of the Board of Directors of IFTH, in which
Digital Angel held a 49.9% ownership interest until August 1, 2008 and is a manager of
Blue Moon, which holds 2,570,000 shares of IFTH common stock.
|
|
|
|
Mr. Silverman is the managing member of R & R Consulting Partners, LLC, which holds
5,355,556 shares of our common stock.
|
|
|
|
Barry M. Edelstein served as interim chief executive officer and president of Destron
Fearing from August 2007 through December 2007, as well as a member of the Board of
Directors of Destron Fearing from June 2005 until January 2008.
|
|
|
|
Jeffrey S. Cobb serves as a member of our compensation, audit, and nominating and
governance committees and served as a member of the compensation, audit, and nominating
committees of IFTH until his resignation on July 22, 2008.
|
|
|
|
In 2008 Michael E. Krawitz provided legal services to us on a consulting basis in
2008 and received approximately $70,000 in fees. Mr. Krawitz currently serves on the
Board of Directors of IFTH. Mr. Krawitz served as the chief executive officer and
president of Digital Angel from September 2006 to December 2007. Prior to that, during
his time at Digital Angel, he served as assistant vice president and general counsel
beginning in April 1999, and was appointed vice president and assistant secretary in
December 1999, senior vice president in December 2000, secretary in March 2003, executive
vice president in April 2003 and chief privacy officer in November 2004.
|
At the officer level:
|
|
|
Mr. Silverman served as president of Digital Angel from March 2002 to March 2003,
acting president of Digital Angel from April 2005 to December 2006, and as the chief
executive officer of Digital Angel from March 2003 to December 2006, until he assumed the
position of our chief executive officer on December 5, 2006.
|
|
|
|
Mr. Silverman also served as the chief executive officer of Thermo Life, a subsidiary
of Digital Angel.
|
|
|
|
William J. Caragol, our acting chief financial officer, currently serves as chief
executive officer, president, acting chief financial officer and director of IFTH and is
a manager of Blue Moon, which holds 2,570,000 shares of IFTH common
stock.
|
In their various capacities with Digital Angel and its other affiliates, Messrs. Silverman,
Edelstein, Cobb and Krawitz have been granted stock option awards by Digital Angel and, in certain
cases, one or more of such other affiliates. Messrs. Silverman, Caragol and Krawitz have been
granted equity awards by IFTH.
60
Transactions with Digital Angel
Transition Services Agreement
During the years ended December 31, 2005, 2004 and 2003, Digital Angel provided certain
general and administrative services to us, including accounting, finance, payroll and legal
services, telephone, rent and other miscellaneous items. The costs of these services were
determined based on our use of such services. On December 27, 2005, we entered into a transition
services agreement with Digital Angel, under which Digital Angel agreed to continue to provide us
with certain administrative transition services, including payroll, legal, finance, accounting,
information technology, tax services, and services related to our initial public offering. As
compensation for these services, we agreed to pay Digital Angel approximately $62,000 per month for
fixed costs allocable to these services, among other reimbursable expenses. On December 21, 2006,
we and Digital Angel entered into an amended and restated transition services agreement, which
became effective on February 14, 2007, the date of completion of our initial public offering.
The services provided by Digital Angel under the amended and restated transition services
agreement were the same as those provided under the initial agreement. In connection with the
December 21, 2006 amendment, the estimated monthly charge for the fixed costs allocable to these
services was increased to approximately $72,000 per month, primarily as a result of an increased
allocation for office space. Effective April 1, 2007, the estimated monthly charge for the fixed
costs allocable to these services was reduced to $40,000 per month, primarily as a result of a
reduction in allocable accounting fees and accounting and legal services. Effective January 1,
2008, the monthly cost was further reduced to $10,000 per month.
The terms of the transition services agreement and the amendment and restatement of the
agreement were negotiated between certain of Digital Angels executive officers and certain of our
executive officers. These executive officers were independent of one another, and the terms of the
agreement were based upon historical amounts incurred by Digital Angel for payment of such services
to third parties. However, these costs may not necessarily be indicative of the costs which would
be incurred by us as an independent stand alone entity.
The cost of these services to us was $0.5 million, $0.8 million and $0.5 million in the years
ended December 31, 2007, 2006 and 2005, respectively. The cost of these services to us during 2008
was $0.1 million.
On August 20, 2008, Digital Angel and the Company agreed to terminate the amended and restated
transition services agreement, with such termination being effective as of September 30, 2008.
Loan Agreement with Digital Angel
Until our initial public offering, we financed a significant portion of our operations and
investing activities primarily through funds that Digital Angel provided. On December 27, 2005, we
and Digital Angel entered into a loan agreement to memorialize the terms of existing advances to us
and provide the terms under which Digital Angel would lend additional funds to us. We refer to this
loan as the Digital Angel Loan. Through October 5, 2006, Digital Angels loan to us bore interest
at the prevailing prime rate of interest as published by The Wall Street Journal. On October 6,
2006, we entered into an amendment to the loan agreement, which increased the principal amount
available thereunder to $13.0 million, and we borrowed an additional $2.0 million under the
agreement to make the second purchase price payment with respect to our acquisition of a
wholly-owned subsidiary. In connection with that amendment, the interest
rate was also changed to a fixed rate of 12% per annum. That amendment further provided that
the loan matured on July 1, 2008, but could be extended at Digital Angels sole option through
December 27, 2010.
On January 19, 2007, February 8, 2007, February 13, 2007 and February 29, 2008, we entered
into further amendments to the Digital Angel Loan documents, which increased the maximum principal
amount of indebtedness that we may incur to $14.5 million. On February 9, 2007, the effective date
of our initial public offering, the loan ceased to be a revolving line of credit, and we have no
ability to incur additional indebtedness under the Digital Angel Loan documents. The interest
continues to accrue on the outstanding indebtedness at a rate of 12% per annum. Under the terms of
the loan agreement, as amended, we were required to repay Digital Angel $3.5 million of principal
and accrued interest upon the consummation of our initial offering. Accordingly, we paid Digital
Angel $3.5 million on February 14, 2007. We were not obligated to repay an additional amount of the
indebtedness until January 1, 2008. Effective with the payment of the $3.5 million, all interest
which has accrued on the loan as of the last day of each month, commencing with the month in which
such payment is made, will be added to the principal amount. A final balloon payment equal to the
outstanding principal amount then due under the loan, plus all accrued and unpaid interest, is due
on February 1, 2010.
61
On December 20, 2007, we entered into a letter agreement with Digital Angel, or the
December 2007 Letter Agreement, which was amended on February 29, 2008, whereby we were required to
pay $0.5 million to Digital Angel by December 21, 2007. In addition, we could prepay the
outstanding principal amount before October 30, 2008 by providing Digital Angel with $10 million,
plus (i) any accrued and unpaid interest between October 1, 2007 and the date of such prepayment,
less (ii) the $0.5 million payment and any other principal payments made to reduce the outstanding
principal amount between the date of the December 2007 Letter Agreement and the date of such
prepayment. We were also required to register for resale all shares of our common stock that
Digital Angel owned with the SEC and all applicable states within 120 days following the prepayment
of outstanding principal amount. If prepayment of the outstanding principal amount was not made by
5:00 p.m. on October 30, 2008, the December 2007 Letter Agreement would expire.
On July 18, 2008, we used a portion of the proceeds of the Xmark Transaction to satisfy all of
our outstanding obligations under the Digital Angel Loan.
Valens Financing
On February 29, 2008, we obtained financing in the form of a $8.0 million secured term note,
or the Valens Note, with Valens Offshore SPV II, Corp., or the Lender. The Lender is an affiliate
of Kallina Corporation and Laurus Master Fund, Ltd., which are Digital Angels lenders. The Note
accrued interest at a rate of 12% per annum and had a maturity date of March 31, 2009. The terms of
the Valens Note allowed for optional redemption by paying 100% of the principal amount, plus any
amounts then owing under the Valens Note, plus $120,000, if such amounts were paid prior to the
six-month anniversary of February 29, 2008, or $240,000, if such amounts were paid on or after the
six-month anniversary of February 29, 2008. Pursuant to the corresponding securities purchase
agreement among , we issued to the Lender 120,000 shares of our common stock.
On July 18, 2008, we used a portion of the proceeds of the Xmark Transaction to repay all of
our outstanding obligations under the Valens Note.
February 2008 Letter Agreement with Digital Angel
We used part of the proceeds of the financing with the Lender to prepay $5.3 million of debt
owed to Digital Angel pursuant to the Digital Angel Loan. In connection with the financing
transaction with the Lender, we entered into a letter agreement with Digital Angel, dated
February 29, 2008, under which we agreed, among other things, (i) to prepay the $5.3 million to
Digital Angel, (ii) to amend the Digital Angel Loan documents to reduce the grace period from
thirty days to five business days, (iii) to include a cross-default provision, under which an event
of default under the Valens Note, if not cured within the greater of the applicable cure period or
ten days after the occurrence thereof, is an event of default under the Digital
Angel Loan, and (iv) to amend the December 2007 Letter Agreement. As a result of the
$5.3 million payment, we are not required to make any further debt service payments to Digital
Angel until September 1, 2009.
As consideration for providing financing to us, which in turn enabled us to make the
$5.3 million prepayment to Digital Angel, Digital Angel issued to the Lender 230,000 shares of
Digital Angel common stock. On July 18, 2008, we used a portion of the proceeds of the Xmark
Transaction to repay all of our outstanding obligations under the Digital Angel Loan.
62
Tax Allocation Agreement with Digital Angel
From our inception and through February 14, 2007, the date of completion of our initial public
offering, we were included in Digital Angels federal consolidated income tax group, and our
federal income tax liability, if any, was included in Digital Angels consolidated federal income
tax liability. Effective February 14, 2007, we are no longer part of Digital Angels consolidated
income tax group under applicable provisions of the Internal Revenue Code of 1986, as amended, and
regulations thereunder, and will file separate tax returns.
We and Digital Angel entered into a tax allocation agreement providing for each of the
parties obligations concerning various tax liabilities. Under the agreement, effective
February 14, 2007, we are generally liable for, and will indemnify Digital Angel if necessary, with
respect to federal income taxes and any state taxes measured by net income, and any interest or
penalties thereon or additions to such tax, that are either (i) imposed on or incurred by us for
any taxable period ending prior to February 14, 2007 or (ii) equitably apportioned to us by Digital
Angel for all tax periods beginning before and ending on or after February 14, 2007. We are also
liable for any other taxes (and any interest or penalties thereon or additions to such taxes)
attributable to us or our subsidiaries for any period. Likewise, Digital Angel will remain
responsible for all prior period taxes attributable to the other members of the consolidated group
and will indemnify us with respect to such liabilities.
Each member of a consolidated group for U.S. federal income tax purposes is jointly and
severally liable for the federal income tax liability of each other member of the consolidated
group. Accordingly, although the tax allocation agreement has allocated tax liabilities between
Digital Angel and us, for any period in which we were included in Digital Angels consolidated
group, we could be liable in the event that any federal tax liability was incurred, but not
discharged, by any other member of the group. Digital Angel will indemnify us for such liability,
to the extent that such liability is not attributable to us, as described above.
Certain states may require that we be included in a unitary or other combined tax return with
Digital Angel after February 14, 2007. If that occurs, Digital Angel will file such returns, and
Digital Angels share of the actual tax liability will be allocated to us in a manner consistent
with the methodology historically followed by Digital Angel and us.
The tax allocation agreement was terminated on November 12, 2008 , in connection with our
purchase of certain intellectual property from Digital Angel. For additional information regarding
this purchase, see Asset Purchase Agreement with Digital Angel below.
Supply and Development Agreement
We and Digital Angel executed a supply and development agreement dated March 4, 2002, as
amended and restated on December 27, 2005 and as amended on May 9, 2007, or the supply and
development agreement. Under this agreement, Digital Angel is our sole supplier of
human-implantable microchips. Our purchases of product under the supply and development agreement
were approximately $0.1 million, $0.4 million and $0.7 million for the years ended December 31,
2007, 2006 and 2005, respectively. The amount due to Digital Angel from us as of December 31, 2007
under the supply and development agreement was nil.
63
Under the terms of the May 9, 2007 amendment, the term of the agreement was extended from
March 2013 to March 2014. Also, under the May 9, 2007 amendment, the annual minimum purchase
requirements were each extended one year and, accordingly, there is no minimum purchase requirement
in 2007. The approximately $0.9 million (net of 2006 purchases) originally required to be purchased
in 2007 is now required to be purchased in 2008. Our purchases of product under the supply and
development agreement were approximately nil, $0.4 million, $0.7 million for years ended
December 31, 2007, 2006 and 2005 respectively. As long as we meet the minimum purchase
requirements, the agreement will automatically renew annually under its terms until the expiration
of the last of the patents covering any of the supplied products. The supply and development
agreement may be terminated prior to its stated term under specified events, including as a result
of a bankruptcy event of either party or an uncured default. In addition, Digital Angel may sell
the microchips to third parties if we do not take delivery and pay for a minimum number of
microchips as specified in the supply and development agreement. Further, the supply and
development agreement provides that Digital Angel shall, at our option, furnish and operate a
computer database to provide data collection, storage and related services for our customers for a
fee, as provided. We do not currently utilize this service, nor do we plan to use this service at
any time in the future. The terms of the predecessor supply and development agreement and the
amended and restated supply and development agreement were negotiated by the executive officers of
the respective companies and approved by the independent members of each companys Board of
Directors.
Digital Angel relies solely on a production agreement with RME, a subsidiary of Raytheon
Company, for the manufacture of its human-implantable microchip products. The subsidiary utilizes
Digital Angels equipment in the production of the microchips. On April 28, 2006, Digital Angel
entered into a new production agreement with RME related to the manufacture and distribution of
glass-encapsulated syringe-implantable transponders, including the human-implantable microchip
products sold by us. This new agreement expires on June 30, 2010. The technology underlying these
systems is covered, in part, by U. S. Patent No. 5,211,129, Syringe-Implantable Identification
Transponders. In 1994, Destron/IDI, Inc., a predecessor company to Digital Angel, granted a
co-exclusive license under this patent, other than for certain specified fields of use related to
Digital Angels Animal Applications segment, which were retained by the predecessor company, to
Hughes Aircraft Company, or Hughes, and its then wholly-owned subsidiary, Hughes Identification
Devices, Inc., or HID. The specified fields of use retained by the predecessor company do not
include human identification or security applications. The rights licensed to Hughes and HID were
freely assignable, and we do not know which party or parties currently have these rights or whether
these rights have been assigned, conveyed or transferred to any third party.
In October 2007, Digital Angel and the successor to HID executed a cross-license, which
includes Digital Angel obtaining a royalty-free, non-exclusive license to HIDs rights to the
implantable human applications of the 129 patent, to which it purports certain ownership rights.
Digital Angel has, in turn, sublicensed those rights to us.
The supply and development agreement was terminated on November 12, 2008, in connection with
our purchase of certain intellectual property from Digital Angel, except that product warranties
continue to apply to products sold to the Company under that agreement subject to certain
limitations, and the indemnification provisions survive through March 4, 2013 for claims associated
with the products purchased under that agreement. For additional information regarding this
purchase, see Asset Purchase Agreement with Digital Angel below.
May 2008 Letter Agreement with Digital Angel
In connection with the Xmark Transaction, on May 15, 2008, we and Digital Angel entered into a
letter agreement. Under this letter agreement, the stock purchase agreement underlying the Xmark
Transaction and the transactions contemplated thereby do not constitute an event of default under
the Digital Angel Loan.
This letter agreement allowed Digital Angel to designate, from and after the date of the
closing of the Xmark Transaction or upon a breach of the letter agreement, up to three (3) members
of the Companys Board of Directors, all of which shall be independent with the exception of Joseph
J. Grillo, Digital Angels
president and chief executive officer. Accordingly, upon the closing of the Xmark Transaction,
Digital Angel designated Mr. Grillo to join our Board of Directors as the chairman. The letter
agreement also provided that the Company pay to Digital Angel, upon the closing of the Xmark
Transaction, (i) $250,000 as consideration for the execution of the guarantee between Digital Angel
and The Stanley Works, and (ii) up to $250,000 for Digital Angels actual expenses, incurred or
reasonably expected to be incurred by Digital Angel in connection
with the Xmark Transaction. These amounts were expensed and included
in determining the gain on sale of Xmark for the year ended
December 31, 2008.
64
In addition, the letter agreement provided, among other things, that (i) the Company would
limit all bonus and other special payments to those scheduled as of May 15, 2008, with any changes
or new payments to be pre-approved by Digital Angel, (ii) Mr. Silverman would enter into a
separation agreement with the Company, and (iii) Digital Angel would have access to the Companys
financial information.
On July 18, 2008, we a used a portion of the proceeds of the Xmark Transaction to pay
$5.3 million in order to satisfy all outstanding monetary obligations under this letter agreement.
On November 12, 2008, this letter agreement was terminated in connection with our purchase of
certain intellectual property from Digital Angel, except for certain provisions relating to
indemnification in connection with the stock purchase agreement with The Stanley Works. For
additional information regarding this purchase, see Asset Purchase Agreement with Digital Angel
below.
Asset Purchase Agreement with Digital Angel
On November 12, 2008, we entered into an asset purchase agreement with Digital Angel and
Destron Fearing, a wholly-owned subsidiary of Digital Angel. The terms of the asset purchase
agreement included the sale to us of patents related to an embedded bio-sensor system for use in
humans, and the assignment of any rights of Digital Angel and Destron Fearing under a development
agreement associated with the development of an implantable glucose sensing microchip. We also
received covenants from Digital Angel and Destron Fearing that will permit the use of intellectual
property of Digital Angel and Destron Fearing related to our VeriMed Health Link business without
payment of ongoing royalties, as well as inventory and a limited period of technology support by
Digital Angel and Destron Fearing. We paid Digital Angel and Destron Fearing $500,000 at the
closing of the asset purchase agreement.
Also, pursuant to the asset purchase agreement, on November 12, 2008, Mr. Grillo resigned as
our director.
Purchase Order with Digital Angel
On November 14, 2008, we purchased from Digital Angel the remaining inventory owned by Digital
Angel related to our VeriMed Health Link business for approximately $162,000.
Review, Approval or Ratification of Transactions with Related Parties
Our audit committees charter requires review and discussion of any transactions or courses of
dealing with parties related to us that are significant in size or involve terms or other aspects
that differ from those that would be negotiated with independent parties. Our nominating and
governance committees charter requires review of any proposed related party transactions,
conflicts of interest and any other transactions for which independent review is necessary or
desirable to achieve the highest standards of corporate governance. It is also our unwritten
policy, which policy is not otherwise evidenced, for any related party transaction that involves
more than a de minimis obligation, expense or payment, to obtain approval by our Board of Directors
prior to our entering into any such transaction. In conformity with our various policies on related
party transactions, each of the above transactions discussed in this Certain Relationships and
Related Transactions section has been reviewed and approved by our Board of Directors.
Director Independence
Subject to certain exceptions, under the listing standards of the Nasdaq Global Market, within
one year of the effectiveness of a registration statement filed with the SEC in connection with a
public offering of securities, a listed companys Board of Directors must consist of a majority of
independent directors. Our Board of Directors has determined that each of our current directors
besides Scott R. Silverman and Michael E. Krawitz, or three of five directors, is independent under
such standards. For transactions, relationships or arrangements that were considered by the Board
of Directors in determining whether each director was independent, please see Certain
Relationships and Related Transactions Director and Officer Roles and Relationships with Digital
Angel and Its Other Affiliates above.
65
Item 14. Principal Accounting Fees and Services
For the fiscal years ended December 31, 2008 and 2007, fees for services provided by Eisner
LLP were as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Audit Fees
|
|
$
|
451,143
|
|
|
$
|
391,414
|
|
|
|
|
|
|
|
|
|
|
Audit Related Fees (review of registration
statements and other SEC filings)
|
|
$
|
44,320
|
|
|
$
|
35,881
|
|
|
|
|
|
|
|
|
|
|
Tax Fees (tax-related services, including income
tax advice regarding income taxes within the United
States)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other fees (acquisition due diligence services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fees
|
|
$
|
495,463
|
|
|
$
|
427,295
|
|
|
|
|
|
|
|
|
Pre-Approval Policies and Procedures
The audit committee has a policy for the pre-approval of all auditing services and any
provision by the independent auditors of any non-audit services the provision of which is not
prohibited by the Exchange Act or the rules of the SEC under the Exchange Act. Unless a type of
service to be provided by the independent auditor has received general pre-approval, it will
require specific pre-approval by the audit committee, if it is to be provided by the independent
auditor. All fees for independent auditor services will require specific pre-approval by the audit
committee. Any fees for pre-approved services exceeding the pre-approved amount will require
specific pre-approval by the audit committee. The audit committee will consider whether such
services are consistent with the SECs rules on auditor independence.
All services provided by and all fees paid to Eisner LLP in fiscal 2008 and 2007 were
pre-approved by our audit committee, in accordance with its policy. None of the services described
above were approved pursuant to the exception provided in Rule 2-01(c)(7)(i)(C) of Regulations S-X
promulgated by the SEC.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this Annual Report on Form 10-K:
|
|
|
(a)(1)
|
|
List of Financial Statements Filed as Part of this Annual Report on Form 10-K:
|
|
|
|
|
|
A list of the consolidated financial statements, notes to consolidated
financial statements, and accompanying report of independent registered
public accounting firm appears on page F-1 of the Index to Consolidated
Financial Statements and Financial Statement Schedules, which is filed as
part of this Annual Report on Form 10-K.
|
|
|
|
(a)(2)
|
|
Financial Statement Schedules:
|
|
|
|
|
|
All other schedules are omitted because they are not applicable, the amounts
are not significant, or the required information is shown in our consolidated
financial statements or the notes thereto.
|
|
|
|
(a)(3)
|
|
Exhibits:
|
|
|
|
|
|
See the Exhibit Index filed as part of this Annual Report on Form 10-K.
|
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
VERICHIP CORPORATION
|
|
Date: February 12, 2009
|
By:
|
/s/ Scott R. Silverman
|
|
|
|
Scott R. Silverman
|
|
|
|
Chairman of the Board
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Scott R. Silverman
Scott R. Silverman
|
|
Chairman of the Board
|
|
February 12, 2009
|
|
|
|
|
|
/s/ William J. Caragol
William J. Caragol
|
|
Acting Chief Executive
Officer,
Acting Chief
Financial Officer
(Principal Financial Officer
and
Principal Accounting Officer)
|
|
February 12, 2009
|
|
|
|
|
|
/s/ Jeffrey S. Cobb
Jeffrey S. Cobb
|
|
Director
|
|
February 12, 2009
|
|
|
|
|
|
/s/ Barry M. Edelstein
Barry M. Edelstein
|
|
Director
|
|
February 12, 2009
|
|
|
|
|
|
|
|
Director
|
|
February 12, 2009
|
Steven R. Foland
|
|
|
|
|
|
|
|
|
|
/s/ Michael E. Krawitz
|
|
Director
|
|
February 12, 2009
|
Michael E. Krawitz
|
|
|
|
|
67
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
VERICHIP CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
|
|
|
|
|
F-4
|
|
|
|
|
|
|
|
|
|
F-5
|
|
|
|
|
|
|
|
|
|
F-6
|
|
|
|
|
|
|
|
|
|
F-7
|
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
VeriChip Corporation
We have audited the accompanying consolidated balance sheets of VeriChip Corporation and
subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders equity and cash flows
for the years then ended. These consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated financial statements
on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and schedule are free of
material misstatement. We were not engaged to perform an audit of the Companys internal control
over financial reporting. Our audits include consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all material
respects, the consolidated financial position of VeriChip Corporation and subsidiaries as of
December 31, 2008 and 2007, and the consolidated results of their operations and their consolidated
cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States.
As
discussed in Note 12 to the consolidated financial statements, the
Company sold Xmark Corporation in 2008 and classified it as discontinued
operations for the years ended December 31, 2008 and 2007.
As discussed in Note 1 to the consolidated financial statements, the Company adopted Financial
Accounting Standards Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes an interpretation of FASB No. 109
, effective January 1, 2007.
Eisner LLP
New York, New York
February 11, 2009
F-2
VERICHIP CORPORATION
Consolidated Balance Sheets
(In thousands, except par value)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,229
|
|
|
$
|
7,221
|
|
Accounts receivable
|
|
|
|
|
|
|
47
|
|
Inventories, net of allowance
|
|
|
|
|
|
|
95
|
|
Prepaid expenses and other current assets
|
|
|
275
|
|
|
|
953
|
|
Current assets from discontinued operations
|
|
|
|
|
|
|
8,202
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
3,504
|
|
|
|
16,518
|
|
|
|
|
|
|
|
|
|
|
Equipment, net of accumulated depreciation
|
|
|
39
|
|
|
|
112
|
|
Restricted cash
|
|
|
4,543
|
|
|
|
|
|
Other assets from discontinued operations
|
|
|
|
|
|
|
33,368
|
|
|
|
|
|
|
|
|
|
|
$
|
8,086
|
|
|
$
|
49,998
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
72
|
|
|
$
|
338
|
|
Accrued expenses and other current liabilities
|
|
|
634
|
|
|
|
632
|
|
Note payable to stockholder, current portion
|
|
|
|
|
|
|
2,167
|
|
Current liabilities from discontinued operations
|
|
|
460
|
|
|
|
6,708
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
1,166
|
|
|
|
9,845
|
|
Note payable to stockholder, less current portion
|
|
|
|
|
|
|
10,753
|
|
Deferred gain
|
|
|
4,500
|
|
|
|
|
|
Other liabilities of discontinued operations
|
|
|
|
|
|
|
3,809
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
5,666
|
|
|
|
24,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Capital stock:
|
|
|
|
|
|
|
|
|
Preferred stock, Authorized 5,000 shares of $.001 par value; no
shares issued or outstanding
|
|
|
|
|
|
|
|
|
Common stock, Authorized 40,000 shares, of $.01 par value; issued
and outstanding 11,730 and 10,144 shares at December 31, 2008 and
2007, respectively
|
|
|
117
|
|
|
|
101
|
|
Additional paid-in capital
|
|
|
44,410
|
|
|
|
54,486
|
|
Accumulated deficit
|
|
|
(42,107
|
)
|
|
|
(28,959
|
)
|
Accumulated other comprehensive loss foreign currency translation
|
|
|
|
|
|
|
(37
|
)
|
Total Stockholders Equity
|
|
|
2,420
|
|
|
|
25,591
|
|
|
|
|
|
|
|
|
|
|
$
|
8,086
|
|
|
$
|
49,998
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
VERICHIP CORPORATION
Consolidated Statements of Operations
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
43
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
275
|
|
|
|
361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
(232
|
)
|
|
|
(285
|
)
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
19,775
|
|
|
|
13,184
|
|
Research and development
|
|
|
712
|
|
|
|
106
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
20,487
|
|
|
|
13,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(20,719
|
)
|
|
|
(13,575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale
|
|
|
6,174
|
|
|
|
|
|
Gain on settlement of debt
|
|
|
1,823
|
|
|
|
|
|
Interest income and other (expense), net
|
|
|
(334
|
)
|
|
|
281
|
|
Interest expense
|
|
|
(879
|
)
|
|
|
(1,673
|
)
|
|
|
|
|
|
|
|
Total other income
|
|
|
6,784
|
|
|
|
1,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(13,935
|
)
|
|
|
(14,967
|
)
|
Income from discontinued operations (net of tax expense
(benefit) of $233 and $(1,056))
|
|
|
787
|
|
|
|
3,057
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(13,148
|
)
|
|
$
|
(11,910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share from continuing operations basic and
diluted
|
|
$
|
(1.31
|
)
|
|
$
|
(1.71
|
)
|
Net income per common share from discontinued operations basic
and diluted
|
|
|
0.07
|
|
|
|
0.35
|
|
|
|
|
|
|
|
|
Net loss per common share basic and diluted
|
|
$
|
(1.24
|
)
|
|
$
|
(1.36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding basic and diluted
|
|
|
10,597
|
|
|
|
8,756
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
VERICHIP CORPORATION
Consolidated Statement of Stockholders Equit
y
(In thousands)
For the Years Ended December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Common Shares
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Number
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2006
|
|
|
6,056
|
|
|
$
|
61
|
|
|
$
|
39,371
|
|
|
$
|
(17,049
|
)
|
|
$
|
(37
|
)
|
|
$
|
22,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,910
|
)
|
|
|
|
|
|
|
(11,910
|
)
|
Issuance of shares in
public offering, net of
costs of $8,033
|
|
|
3,100
|
|
|
|
31
|
|
|
|
12,076
|
|
|
|
|
|
|
|
|
|
|
|
12,107
|
|
Issuance of restricted stock
|
|
|
100
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant exercise
|
|
|
395
|
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
shares from option exercises
|
|
|
536
|
|
|
|
5
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
375
|
|
Stock issuance costs
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
Stock based compensation
|
|
|
138
|
|
|
|
1
|
|
|
|
3,445
|
|
|
|
|
|
|
|
|
|
|
|
3,446
|
|
Repurchase of shares
|
|
|
(181
|
)
|
|
|
(2
|
)
|
|
|
(760
|
)
|
|
|
|
|
|
|
|
|
|
|
(762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2007
|
|
|
10,144
|
|
|
|
101
|
|
|
|
54,486
|
|
|
|
(28,959
|
)
|
|
|
(37
|
)
|
|
|
25,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,148
|
)
|
|
|
|
|
|
|
(13,148
|
)
|
Stock based compensation
|
|
|
622
|
|
|
|
6
|
|
|
|
5,026
|
|
|
|
|
|
|
|
|
|
|
|
5,032
|
|
Issuance of shares to lender
|
|
|
120
|
|
|
|
2
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
302
|
|
Issuance of shares from option exercises
|
|
|
844
|
|
|
|
8
|
|
|
|
434
|
|
|
|
|
|
|
|
|
|
|
|
442
|
|
Dividend to
stockholders
|
|
|
|
|
|
|
|
|
|
|
(15,836
|
)
|
|
|
|
|
|
|
|
|
|
|
(15,836
|
)
|
Sale of Xmark Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2008
|
|
|
11,730
|
|
|
$
|
117
|
|
|
$
|
44,410
|
|
|
$
|
(42,107
|
)
|
|
$
|
|
|
|
$
|
2,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
VERICHIP CORPORATION
Consolidated Statements of Cash Flows
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(13,148
|
)
|
|
$
|
(11,910
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
52
|
|
|
|
73
|
|
Stock based compensation
|
|
|
5,032
|
|
|
|
3,446
|
|
Bad debt expense
|
|
|
14
|
|
|
|
|
|
Impairment of PP&E
|
|
|
44
|
|
|
|
|
|
Non cash interest income
|
|
|
(43
|
)
|
|
|
|
|
Gain on settlement of debt
|
|
|
(1,823
|
)
|
|
|
|
|
Gain on sale of Xmark Corporation
|
|
|
(6,174
|
)
|
|
|
|
|
Accrued interest
|
|
|
|
|
|
|
1,491
|
|
Allowance for inventory excess
|
|
|
213
|
|
|
|
258
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable
|
|
|
32
|
|
|
|
(39
|
)
|
Decrease (increase) in inventories
|
|
|
(117
|
)
|
|
|
155
|
|
Increase (decrease) in prepaid expenses and other current assets
|
|
|
344
|
|
|
|
(832
|
)
|
Increase in accounts payable and accrued expenses
|
|
|
(225
|
)
|
|
|
(316
|
)
|
|
|
|
|
|
|
|
Net cash used in continuing operations
|
|
|
(15,799
|
)
|
|
|
(7,674
|
)
|
Net cash (used in) provided by discontinued operations
|
|
|
(2,887
|
)
|
|
|
403
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(18,686
|
)
|
|
|
(7,271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from sale of Xmark Corporation
|
|
|
43,363
|
|
|
|
|
|
Payments for equipment and other assets
|
|
|
(22
|
)
|
|
|
(59
|
)
|
Net cash (used in) provided by discontinued operations
|
|
|
(114
|
)
|
|
|
42
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
43,227
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Short-term borrowing
|
|
|
8,000
|
|
|
|
|
|
Repayment of short-term borrowing
|
|
|
(8,000
|
)
|
|
|
|
|
Financing costs
|
|
|
(701
|
)
|
|
|
|
|
Principal
payments to former stockholder
|
|
|
(10,423
|
)
|
|
|
(3,500
|
)
|
Guarantee
fee paid to former stockholder
|
|
|
(500
|
)
|
|
|
|
|
Borrowings from stockholder
|
|
|
|
|
|
|
1,293
|
|
Initial public offering costs
|
|
|
|
|
|
|
(2,879
|
)
|
Issuance of common shares from the exercise of stock options
|
|
|
442
|
|
|
|
363
|
|
Proceeds from initial public offering, net of underwriter fees
|
|
|
|
|
|
|
18,336
|
|
Payment of dividend
|
|
|
(15,836
|
)
|
|
|
|
|
Share repurchase
|
|
|
|
|
|
|
(762
|
)
|
Net cash (used in) provided by discontinued operations
|
|
|
(1,515
|
)
|
|
|
662
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(28,533
|
)
|
|
|
13,513
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
(3,992
|
)
|
|
|
6,225
|
|
Cash,
beginning of year
|
|
|
7,221
|
|
|
|
996
|
|
|
|
|
|
|
|
|
Cash, end of
year
|
|
$
|
3,229
|
|
|
$
|
7,221
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
VERICHIP CORPORATION
Notes to Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
1 Basis of Presentation
VeriChip Corporation is a Delaware corporation formed in November 2001. The Company commenced
operations in January 2002. On February 14, 2007, the Company completed an initial public offering
of its common stock, selling 3,100,000 shares of its common stock at a price of $6.50 per share.
On July 18, 2008, the Company completed the sale of all of the outstanding
capital stock of Xmark Corporation, its wholly-owned Canadian
subsidiary (Xmark), to Stanley Canada Corporation for $47.9 million in cash, which consisted of
the $45 million purchase price plus a balance sheet adjustment of $2.9 million. Under the terms of
the stock purchase agreement, $4.5 million of the proceeds will be held in escrow for a period of
12 months to provide for indemnification obligations under the stock purchase agreement, if any. As
a result, the Company recorded a gain on the sale of Xmark of $6.2 million, with $4.5 million of
that gain deferred until the escrow is settled. The Xmark business includes all of the operations
of our previously reported healthcare security and industrial segments. The financial position,
results of operations and cash flows of Xmark for 2007 have been reclassified as a discontinued
operation.
Following the completion of the sale of Xmark to Stanley Canada, the Company retired all of
its outstanding debt for a combined payment of $13.5 million and settled all contractual payments
to officers and management of the Company and Xmark for
$9.1 million. In addition, the Company issued a special dividend
of $15.8 million on August 28, 2008.
The Company has historically developed, marketed, and sold radio frequency identification
(frequently referred to as RFID) systems used for the identification and protection of people in
the healthcare market. The Companys VeriMed Health Link system uses the implantable microchip, a
human-implantable passive RFID microchip that is used in patient identification applications,
securely linking a patient to their personal health record as maintained in the Companys
proprietary database. Each implantable Health Link microchip contains a unique verification number
that is read when it is scanned by the Companys scanner. In October 2004, the U.S. Food and Drug
Administration, or FDA, cleared the Companys VeriMed Health Link system for use in medical
applications in the United States.
Prior to November 12, 2008, the Company obtained the implantable microchip from a wholly-owned
subsidiary of Digital Angel Corporation, the Companys former stockholder, under the terms of an
amended and restated supply agreement. The supply agreement is
discussed in Note 11, Related Party
Transactions.
On November 12, 2008, the Company entered into an Asset Purchase Agreement (APA) with
Digital Angel and Destron Fearing Corporation, a wholly-owned subsidiary of Digital Angel, which
collectively are referred to as, Digital Angel. The terms of the APA included the sale to the
Company of patents related to an embedded bio-sensor system for use in humans, and the assignment
of any rights of Digital Angel under a development agreement associated with the development of an
implantable glucose sensing microchip. The Company also received covenants from Digital Angel and
Destron Fearing that will permit the use of intellectual property of Digital Angel related to the
Companys VeriMed Health Link business without payment of ongoing royalties, as well as inventory
and a limited period of technology support by Digital Angel. The Company paid Digital Angel
$500,000 at the closing of the APA, which was recorded on the financials as research and
development expense.
F-7
Also pursuant to the APA, on November 12, 2008, the parties terminated the May 2008 Agreement,
except for certain provision relating to indemnification in connection with the stock purchase
agreement with The Stanley Works. Additionally, the Supply Agreement was terminated,
except that product warranties continue to apply to products sold to the Company under that
agreement subject to certain limitations, and the indemnification provisions survive through
March 4, 2013 for claims associated with the products purchased under the Supply Agreement (for
more information on the May 2008 Agreement and the Supply
Agreement, see Note 11 Related Party
Transactions).
On November 12, 2008, Digital Angel sold the 5.4 million shares of the Companys common stock
it owned to R & R Consulting Partners, LLC, an entity owned and controlled by Scott R. Silverman,
the Companys chairman and former chief executive officer, in a private transaction. As a result of
the transaction, R & R Consulting Partners, LLC and Mr. Silverman now own 53% of the Companys
outstanding common stock, and Mr. Silverman was re-appointed as chairman of the Companys board
effective November 12, 2008.
On November 14, 2008, the Company purchased from Digital Angel the remaining inventory owned
by Digital Angel related to VeriMed Health Link business for $161 thousand, which was fully written
off as of December 31, 2008.
On November 12, 2008, the Company announced its intention to continue to explore potential
strategic transactions with third parties, while continuing to operate our VeriMed Health Link
business.
The Company is currently focused on its options, including the possible development of the
glucose sensing microchip and is considering and will review other strategic opportunities.
As
discussed in Note 11 to our Consolidated Financial Statements, the supply agreement with
Digital Angel was terminated on November 12, 2008.
Accounting Policies
Principles of Consolidation
The financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant inter-company transactions and balances had been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America, requires management to make certain estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes.
Although these estimates are based on the knowledge of current events and actions the Company may
undertake in the future, they may ultimately differ from actual results. Included in these
estimates are assumptions about allowances for excess inventory and obsolescence, lives of long- lived assets,
lives of intangible asset, assumptions used in Black-Scholes valuation models, estimates of the
fair value of acquired assets and assumed liabilities and the determination of whether any
impairment is to be recognized on intangibles, among others.
Concentration of Credit Risk
The Company maintained its cash in one financial institution during the years ended December 31,
2008 and 2007. Balances were insured up to Federal Deposit Insurance Corporation (FDIC) limits of
$250,000 per institution. Cash exceeded the federally insured limits.
The Companys trade receivables are potentially subject to credit risk. The Company extends credit
to its customers based upon an evaluation of the customers financial condition and credit history.
The Company generally does not require collateral.
F-8
Trade Account Receivable
Trade account receivable consist primarily of receivables from implantable microchip kits and
scanners sales. The Company records a provision for doubtful receivables to allow for any amounts
which may be unrecoverable and is based upon an analysis of the Companys prior collection
experience, customer creditworthiness, and current economic trends.
Inventories
Inventories consist of raw materials, work in process, and finished goods. Inventory is valued
at the lower of cost, determined by the first-in, first-out method, or market. The Company monitors
and analyzes inventory for potential obsolescence and slow-moving items based upon the aging of the
inventory and the inventory turns by product. Inventory items designated as slow moving are reduced
to net realizable value. Inventory items designated as obsolete are written off. The allowance for
inventory excess and obsolescence was approximately $0.2 million and $0.6 million as of
December 31, 2008 and 2007, respectively.
Equipment
Equipment is carried at cost less accumulated depreciation, computed using the straight-line
method over the estimated useful lives. Leasehold improvements are depreciated over the life of the
lease, software is depreciated over 2 years, and equipment is depreciated over periods ranging from
3 to 5 years. Repairs and maintenance, which do not extend the useful life of the asset, are
charged to expense as incurred. Gains and losses on sales and retirements are reflected in the
consolidated statements of operations.
Intangible Assets
The Company follows Statement of Financial Accounting Standards, No. 142,,
Goodwill and
Intangible Assets
,(SFAS 142). Goodwill represents the excess of purchase price over the fair
values assigned to the net assets acquired in business combinations. Goodwill is allocated to
reporting units as of the acquisition date for the purpose of goodwill impairment testing. The
Companys reporting units are those businesses for which discrete financial information is
available and upon which segment management makes operating decisions. Goodwill of a reporting unit
is tested for impairment at least once a year, or between testing dates if an impairment condition
or event is determined to have occurred.
The Company has other intangible assets consisting of patented and non-patented technologies.
These intangible assets are amortized over their expected economic lives. The lives are determined
based upon the expected use of the asset, the estimated average life of the replacement parts of
the reporting units products, the stability of the industry, expected changes in and replacement
value of distribution networks and other factors deemed appropriate.
In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets,
the Company continually evaluates whether events or circumstances have occurred that
indicate the remaining estimated useful lives of its definite-lives intangible assets may warrant
revision or that the remaining balance of such assets may not be recoverable. The Company uses an
estimate of the related undiscounted cash flows over the remaining life of the asset in measuring
whether the asset is recoverable. There was no impairment recorded on
definite-lived intangible assets and other
long-lived assets during 2008 and 2007.
F-9
Revenue Recognition
The Company follows the revenue recognition guidance in Staff Accounting Bulletin (SAB),
101, and SAB 104. The Companys revenue recognition policy is as follows:
The Companys VeriMed Health Link patient identification system includes the implantable
microchip, scanners, insertion kits and patient registration forms. These items can be sold
directly and through distributors with a limited warranty period. The Company also generally indemnifies
its distributors against third party claims of intellectual property infringement. In conjunction
with the implantation of a microchip, the patient completes a registration form enrolling the
patient in the VeriMed Health Link Patient Registry.
Product Revenue
Revenue from the sale of the implantable microchip kits and scanners are recorded at gross
amounts. Until the amount of returns can be reasonably estimated, the Company does not recognize
revenue until after the products are shipped to customers and title has transferred, provided that
a purchase order has been received or a contract has been executed, the price is fixed or
determinable, there are no uncertainties regarding customer acceptance, the period of time in which
the distributor or physician has to return the product has elapsed and collection of the sales
proceeds is reasonably assured. Once the level of returns can be reasonably estimated, revenue (net
of expected returns) will be recognized at the time of shipment and the passage of title, assuming
there are no uncertainties regarding customer acceptance. If uncertainties regarding customer
acceptance exist, revenue will not be recognized until such uncertainties are resolved. The Company
has one distribution arrangement that provides for sales on a consignment basis. The Company
intends to recognize revenue from consignment sales to this distributor after receipt of
notification from the distributor of product sales to the distributors customers, provided that a
purchase order has been received or a contract has been executed with the distributor, the sales
price is fixed or determinable, the period of time the distributor has to return the product as
provided in its distributor agreement has elapsed and collectability is reasonably assured.
Management believes the product sales are multiple deliverables that can be divided into
separate units of accounting under the guidance provided in EITF 00-21 and SOP 97-2. The sale of
scanners, one of the deliverables, is considered a separate product sale and, thus, is considered a
separate unit of accounting. However, the software included in this product is not considered a
separate product sale. The software is bundled with the scanner, which allows the number on the
implantable microchip to be read. This software is not sold separately, the scanner has no value
without it, there are no post contract support agreements or after sale services, upgrades,
customization or training services. Management believes that the scanner and software are not
separate deliverables as defined in EITF 00-21 because they have no value to the customer on a
stand-alone basis, there is no objective and reliable evidence of fair value of undelivered
elements since they are never delivered independently and the arrangement does not include a
general right of return. The implantable microchip and insertion kits are another deliverable,
however, they are accounted for as a separate unit of accounting because they have value to
customers on a stand-alone basis. The microchips, which are a component of the insertion kits, are
sold separately from the scanners and have independent usefulness.
Management also believes that SOP 97-2 is not relevant for these same reasons.
Services Revenue
The services for maintaining subscriber information on a database maintained by the Company
are sold as a stand-alone contract and treated according to the terms of the contractual
arrangements then in effect. Revenue from this service will generally be recognized over the term
of the subscription period or the terms of the contractual arrangements then in effect.
With respect to the sales of products whose functionality is dependent on services (e.g.,
database records maintenance), the revenue recognition policy will follow the underlying
contractual arrangements, subject to the aforementioned revenue recognition criteria and
determining whether there is vendor-specific objective evidence.
F-10
Stock-Based Compensation
Effective January 1, 2006, the Company adopted Financial Accounting Standards Board (FASB)
SFAS No. 123 (revised 2004),
Share Based Payment
(FAS 123R), using the modified prospective
transition method. Under this method, stock-based compensation expense is recognized using the
fair-value based method for all awards granted on or after the date of adoption. Compensation
expense for new awards granted after January 1, 2006, is recognized over the requisite service
period based on the grant-date fair value of those options. Prior to adoption, the Company used the
intrinsic value method under Accounting Principles Board (APB) 25, and related interpretations
and provided the disclosure-only provisions of FAS 123R. Under the intrinsic value method, no
stock-based compensation had been recognized in the Companys Consolidated Statement of Operations
for options granted to the Companys employees and directors because the exercise price of such
stock options equaled or exceeded the fair market value of the underlying stock on the dates of
grant.
FAS 123R requires forfeitures to be estimated at the time of grant and requires the estimates
to be revised, if necessary, in subsequent periods if actual forfeitures differ from those
estimates. In the Companys pro forma information required under FAS 123 for the periods prior to
January 1, 2006, the Company accounted for forfeitures as they occurred.
During 2008 and 2007, compensation expense of $21,000 and $0.4 million, respectively, was
recorded from 0.2 million and 0.4 million options granted to employees in 2008 and 2007,
respectively.
In December 2006, the Company issued 0.5 million shares of its restricted common stock to Mr.
Silverman, its then chairman and chief executive officer, who has since been reappointed as
chairman, which shares were subject to forfeiture in the event that Mr. Silverman terminated his
employment or the Company terminated his employment for cause on or before December 31, 2008. As a
result of a separation agreement entered into between the Company and Mr. Silverman, dated May 15,
2008 (the Silverman Separation Agreement), Mr. Silvermans restricted stock vested on the closing
of the sale of Xmark. The Company determined the value of the stock to be $4.5 million based on the
estimated value of its common stock on the date of grant. The value of the restricted stock was
being amortized as compensation expense over the vesting period. As a result of the sale of Xmark
on July 18, 2008, a charge of $2.2 million was recorded for the remaining unvested cost of these
restricted shares. The Company recorded compensation expense of approximately $2.3 million and $2.1
million in 2008 and 2007, respectively, associated with the restricted stock.
In March 2007, the Company issued 0.1 million shares of its restricted common stock to two
officers, which shares will vest on March 2, 2009. The Company determined the value of the stock to
be $0.6 million based on the value of its common stock of $5.75 per share on the date of grant. The
value of the restricted stock is being amortized as compensation expense over the vesting period.
The Company recorded compensation expense of approximately $0.2 million and $0.2 million in 2008
and 2007, respectively, associated with this restricted stock.
In August 2007, the Company entered into a consulting agreement with an individual who was the
former chief executive officer of Digital Angel, with respect to identifying, contacting and
introducing strategic partners to the Company, identifying potential merger and/or acquisition
opportunities for the Company and participating with the Company in its efforts to develop certain
products related to an implantable glucose bio-sensor microchip. Under the consulting agreement,
the Company issued 107,000 common shares, which resulted in an equity based compensation charge of
$0.6 million in 2007.
In October 2007, the Company issued 29,000 shares of its common stock to various parties for
services performed, which resulted in an equity based compensation charge of $0.1 million in 2007.
In January, February, and May 2008, the Company issued 0.7 million shares of its restricted
common stock to certain employees and members of the Board of Directors. One grant of 50,000 shares
of restricted stock was terminated on April 28, 2008 and the remaining balance of the restricted
stock fully vested upon the closing of the Xmark transaction. The Company determined the value of
the stock to be $1.4 million based on the value of its common stock on the dates of grant. The
value of the outstanding restricted stock was amortized as compensation expense over the vesting
period. As a result of the sale of Xmark on July 18, 2008, the remaining unvested cost of these
restricted shares was recorded in July 2008. The Company recorded compensation expense of
approximately $1.4 million in 2008 associated with this restricted stock.
F-11
On December 31, 2008, the Company authorized the grant of 0.5 million shares of its restricted
common stock to Mr. Caragol, its acting chief financial officer under a letter agreement. The
shares will vest according to the following schedule: (i) 20% shall vest on the Grant Date,
(ii) 40% shall vest on April 1, 2009, and (iii) 40% shall vest on July 31, 2009. However, in the
event of a change in control and if Mr. Caragol is terminated without cause, the shares will
immediately vest. The shares are subject to forfeiture in the event Mr. Caragol is terminated for
cause. No compensation expense was recorded in 2008 for these shares.
On December 31, 2008, the Company authorized the grant of 0.6 million shares of its restricted
common stock to Mr. Silverman, its executive chairman under a letter agreement. If Mr. Silverman
remains involved in the day-to-day management of the Company, the shares will vest upon the earlier
to occur of: (i) January 1, 2010, or (ii) a change in control of the Company. The shares are
subject to forfeiture in the event that Mr. Silverman fails to remain involved in the day-to-day
management of the Company. Compensation expense of $22,000 was recorded in 2008 for these shares.
As a result of the sale of Xmark on July 18, 2008, the vesting of the options and restricted
shares was accelerated. Therefore, compensation expense for the remaining unvested balance of $3.2
million was recorded in July 2008.
Stock-based compensation expenses are reflected in the Consolidated Statement of Operations
under selling, general and administrative expenses.
The Companys computation of expected life is determined based on the simplified method as the
Company does not have sufficient historical exercise data to provide a reasonable basis upon which
the estimate the expected term due to the limited period of time its equity shares have been
publicly traded. The interest rate is based on the U.S. Treasury Yield curve in effect at the time
of grant. Prior to its initial public offering, the Companys computation of expected volatility
was based on the historical volatility of Digital Angels common stock. Effective February 9, 2007,
the Companys computation of expected volatility is based on the historical volatility of
comparable companies average historical volatility.
Income Taxes
The Company accounts for income taxes under the asset and liability approach for the financial
accounting and reporting of income taxes. Deferred taxes are recorded based upon the tax impact of
items affecting financial reporting and tax filings in different periods. A valuation allowance is
provided against net deferred tax assets when the Company determines realization is not currently
judged to be more likely than not. Income taxes are more fully discussed in Note 11 to the
Consolidated Financial Statements.
Effective January 1, 2007, the Company adopted the provisions of the Financial Accounting
Standards Board (FASB) Interpretation , No. 48, Accounting for Uncertainty in Income Taxes (FIN
48) an interpretation of FASB Statement No. 109. FIN 48 contains a two-step approach to
recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109,
Accounting for Income Taxes. The first step is to evaluate the tax position for recognition
purposes by determining if the weight of available evidence that indicates it is more likely than
not that the position will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step is to measure the tax benefit as the largest amount
which is more than 50% likely of being realized upon ultimate settlement. The Company considers
many factors when evaluating and estimating its tax positions and tax benefits, which may require
periodic adjustments and which may not accurately anticipate actual outcomes. The impact of FIN 48
on the Companys financial position is discussed in Note 11 Income Taxes. Accordingly, the
Company reports a liability for
unrecognized tax benefits resulting from the uncertain tax positions taken or expected to be
taken on a tax return and recognizes interest and penalties, if any, related to uncertain tax
positions as an income tax expense. In connection with the adoption of FIN 48, the Company has
elected an accounting policy to classify interest and penalties related to unrecognized tax
benefits as interest expense.
F-12
Loss Per Common Share and Common Share Equivalent
Basic and diluted loss per common share is computed by dividing the loss by the weighted
average number of common shares outstanding for the period. Diluted earnings per common share is
computed by giving effect to all potentially dilutive common shares that were outstanding during
the period. Dilutive common shares consist of incremental shares issuable upon exercise of stock
options and warrants to the extent that the average fair value of the Companys common stock for
each period is greater than the exercise price of the potential common shares, options and
warrants, except where there is a loss attributable to the common stockholder. As of December 31,
2008 and December 31, 2007, stock options and warrants exercisable for approximately 1.3 million
and 2.0 million common shares, respectively, were outstanding. In addition, nil and 0.6 million
shares of restricted stock were outstanding as of December 31, 2008 and December 31, 2007,
respectively.
Impact of Recently Issued Accounting Standards
In February 2008, the FASB issued Staff Position No. FAS 157-1 (FSP FAS 157-1),
Application
of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or Measurement Under Statement 13
and
Staff Position No. FAS 157-2 (FSP FAS 157-2),
Effective Date of FASB Statement No. 157
. FSP FAS
157-1 excludes Statement of Financial Accounting Standards No. 13 (SFAS 13),
Accounting for
Leases
, as well as other accounting pronouncements that address fair value measurements on lease
classification or measurement under SFAS 13 from the scope of SFAS 157. FSP FAS 157-2 delays the
effective date of SFAS 157 for all nonrecurring fair value measurements of nonfinancial assets and
nonfinancial liabilities until fiscal years beginning after November 15, 2008. Both FSP FAS 157-1
and FSP FAS 157-2 are effective upon an entitys initial adoption of SFAS 157, which is the
Companys first quarter of fiscal year 2008. The adoption of FSP SFAS 157-1 did not have a material
impact to the Companys consolidated results of operations and financial position.
In March 2008, FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities
(FAS 161). FAS 161 requires enhanced disclosures about an entitys derivative and
hedging activities and thereby improves the transparency of financial reporting. Entities are
required to provide enhanced disclosures about: (1) how and why an entity uses derivative
instruments, (2) how derivative instruments and related hedged items are accounted for under SFAS
No. 133,
Accounting for Derivative Instruments and Hedging Activities
, and its related
interpretations, and (3) how derivative instruments and related hedged items affect an entitys
financial position, financial performance and cash flows. This statement is effective for financial
statements issued for fiscal years and interim periods beginning after November 15, 2008, however,
early application is encouraged. Comparative disclosures for earlier periods at initial adoption is
encouraged, but not required. The Company does not expect the adoption of FAS 161 to have a
material impact to the Companys consolidated results of operations and financial position.
In
May 2008, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position No.
APB 14-a,
Accounting for Convertible Debt Instruments That May
Be Settled in Cash Upon Conversion (Including Partial Cash
Settlement)
(FSP APB 14-a). Under the new
rules for convertible debt instruments that may be settled entirely or
partially in cash upon conversion, an entity should separately
account for the liability and equity components of the instrument in
a manner that reflects the issuers economic interest cost.
FSP APB 14-a will be effective for fiscal years beginning
after December 15, 2008, and for interim periods within those
fiscal years, with retrospective application required. For
instruments subject to the scope of FSP APB 14-a, higher
interest expense will result through the accretion of the discounted
carrying value of the convertible debt instruments to their face
amount over their term. Prior period interest expense will also be
higher than previously reported due to retrospective application.
Early adoption is not permitted. The adoption of
FSP APB 14-a is not expected to have any impact on the
Companys consolidated financial statements.
In
May 2008, FASB issued Statement 163, Accounting for Financial
Guarantee Insurance Contracts. This new standard clarifies how
FAS Statement No. 60,
Accounting and Reporting by Insurance
Enterprises
, applies to financial guarantee insurance contracts
issued by insurance enterprises, including the recognition and
measurement of premium revenue and claim liabilities. It also
requires expanded disclosures about financial guarantee insurance
contracts. The Statement is effective for financial statements issued
for fiscal years beginning after December 15, 2008. The Company
does not expect the adoption of SFAS 163 to have any impact on
its consolidated financial position or results of operations.
On
October 10, 2008, the FASB issued FSP FAS 157-3,
Determining the Fair Value of a Financial Asset in a Market
That Is Not Active. The FSP was effective upon issuance,
including periods for which financial statements have not been
issued. The FSP clarified the application of SFAS 157 in an
inactive market and provided an illustrative example to demonstrate
how the fair value of a financial asset is determined when the market
for that financial asset is inactive. The adoption of this FSP did
not have a material impact on the Companys consolidated
financial position and the results of operations.
In February 2007, FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities
including an amendment of FAS 115, or FAS 159. This statement provides
companies with an option to report selected financial assets and liabilities at fair value. This
statement is effective for fiscal years beginning after November 15, 2007 with early adoption
permitted. The Company adopted SFAS No. 159
during the first quarter of 2008. The adoption did not have a material
impact to the Companys consolidated results of operations and
financial position.
F-13
In December 2007, FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements (FASB 160). This statement amends ARB 51, which establishes accounting and reporting
standards for the non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the consolidated financial
statements. In addition, FASB 160 changes the way the consolidated income statement is presented by
requiring consolidated net income to be reported at amounts that include the amounts attributable
to both the parent and the non-controlling interest. This statement also establishes a single
method of accounting for changes in a parents ownership interest in a subsidiary that do not
result in deconsolidation and requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. This statement is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008, and earlier adoption is
prohibited. FASB 160 shall be applied prospectively as of the beginning of the fiscal year in which
this statement is initially applied, except for the presentation and disclosure requirement, which
shall be applied retrospectively for all periods presented. We have not yet determined the impact
that this requirement may have on our condensed consolidated financial position, results of
operations, cash flows or financial statement disclosures.
In December 2007, FASB issued SFAS No. 141R, Business Combinations (FASB 141R). FASB 141R
replaces FASB Statement No. 141 Business Combinations but retains the fundamental requirements in
FASB 141. This statement defines the acquirer as the entity that obtains control of one or more
businesses in a business combination and establishes the acquisition date as the date that the
acquirer achieves control. FASB 141R also requires that an acquirer recognized the assets acquired,
the liabilities assumed and any non-controlling interest in the acquiree at the acquisition date,
measured at their fair values as of that date. In addition, this statement requires that the
acquirer in a business combination achieved in stages to recognize the identifiable assets and
liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their
fair values. FASB 141R is applied prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period, beginning on or after
December 15, 2008. An entity may not apply the standard before that date. We have not yet
determined the impact that this requirement may have on our condensed consolidated financial
position, results of operations, cash flows or financial statement disclosures.
In December 2007, the FASB ratified EITF Issue No. 07-1,
Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual Property
(EITF
07-1). The EITF concluded that a collaborative arrangement is one in which the participants are
actively involved and are exposed to significant risks and rewards that depend on the ultimate
commercial success of the endeavor. Revenues and costs incurred by third parties in connection with
collaborative arrangements would be presented gross or net based on the criteria in EITF Issue
No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an Agent
, and other accounting
literature. Payments to or from collaborators would be evaluated and presented based on the nature
of the arrangement and its terms, the nature of the entitys business, and whether those payments
are within the scope of other accounting literature. The nature and purpose of collaborative
arrangements are to be disclosed along with the accounting policies and the classification and
amounts of significant financial statement amounts related to the arrangements. Activities in the
arrangement conducted in a separate legal entity should be accounted for under other accounting
literature; however, required disclosure under EITF 07-1 applies to the entire collaborative
agreement. This issue is effective for fiscal years beginning after December 15, 2008, and is to be
applied retrospectively to all periods presented for all collaborative arrangements existing as of
the effective date. The Company is currently evaluating the impact that this pronouncement may have
on its consolidated financial position and results of operations.
Research and Development
Research and development costs are expensed as incurred and consist of development work
associated with the Companys existing and potential products. The Companys research and
development expenses relate primarily to payroll costs for engineering personnel, costs associated
with various projects, including testing, developing prototypes and related expenses.
F-14
2 Inventories
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Raw materials
|
|
$
|
161
|
|
|
$
|
|
|
Work in process
|
|
|
|
|
|
|
|
|
Finished goods
|
|
|
52
|
|
|
|
808
|
|
|
|
|
|
|
|
|
|
|
|
213
|
|
|
|
808
|
|
Allowance for excess and obsolescence
|
|
|
(213
|
)
|
|
|
(713
|
)
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
95
|
|
|
|
|
|
|
|
|
3 Equipment
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Equipment
|
|
$
|
292
|
|
|
$
|
308
|
|
Hardware
|
|
|
76
|
|
|
|
75
|
|
Software
|
|
|
57
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
425
|
|
|
|
447
|
|
Less accumulated depreciation
|
|
|
(386
|
)
|
|
|
(335
|
)
|
|
|
|
|
|
|
|
|
|
$
|
39
|
|
|
$
|
112
|
|
|
|
|
|
|
|
|
Depreciation expense charged against income amounted to approximately $52,000 and
$73,000 million for the years ended December 31, 2008 and 2007, respectively.
4 Financing Agreements and Liquidity
On February 29, 2008, the Company entered into an $8.0 million debt financing (the
Agreement) with Valens Offshore SPV II, Corp. (the Lender). Under the terms of the Agreement,
the Lender extended financing to the Company in the form of an $8.0 million secured term note (the
Note). The Note accrued interest at a rate of 12% per annum, and had a maturity date of March 31,
2009. The terms of the Note allowed for optional redemption by paying 100% of the principal amount
plus $120,000, if such amounts were paid prior to the six month anniversary of February 29, 2008,
or $240,000, if such amounts were paid on or after the six month anniversary of February 29, 2008.
Pursuant to the Agreement, the Company issued to the Lender 120,000 shares of its common stock. The
cost of this issuance was $0.3 million, which was to be amortized over the period of the Note. As a
result of the repayment of this debt on July 18, 2008, the unamortized cost of $0.5 million of this
issuance was expensed in July 2008.
See
Note 11, Related Party Transactions to
our condensed consolidated financial statements for more information.
5 Stockholders Equity
On February 14, 2007, the Company completed an initial public offering of its common stock. In
connection with its initial public offering, the Company sold 3,100,000 shares of its common stock
at a price of $6.50 per share.
On September 20, 2007, the Companys board of directors approved a stock repurchase program
authorizing the purchase of $1.5 million of its common stock through the end of 2007. In 2007,
181,000 shares were repurchased at a cost of approximately $0.8 million and in 2008 there were no
repurchases.
F-15
Stock Option Plans
In April 2002, the Companys Board of Directors approved the VeriChip Corporation 2002
Flexible Stock Plan (the VeriChip 2002 Plan). Under the VeriChip 2002 Plan, the number of shares
for which options, SARs or performance shares may be granted is approximately 2.0 million. As of
December 31, 2007, approximately 1.9 million options and restricted shares, net of forfeitures,
have been granted to directors, officers and employees under the VeriChip 2002 Plan, and
1.4 million of the options or shares granted were outstanding as of December 31, 2007.
Approximately 1.2 million options are fully vested and do not expire until nine years from the
vesting date and 0.2 million options vest ratably over three years. As of December 31, 2008, no
SARs have been granted and 22,000 shares may still be granted under the VeriChip 2002 Plan.
On April 27, 2005, Digital Angels board of directors approved the VeriChip Corporation 2005
Flexible Stock Plan (the VeriChip 2005 Plan). Under the VeriChip 2005 Plan, the number of shares
for which options, SARs or performance shares may be granted is approximately 0.3 million. As of
December 31, 2007, approximately 0.3 million options have been granted under the VeriChip 2005
Plan. All of the options are fully vested and do not expire until nine years from the vesting date.
As of December 31, 2008, no SARs have been granted and 832 shares may still be granted under the
VeriChip 2005 Plan.
On June 17, 2007, the Company adopted the VeriChip 2007 Stock Incentive Plan, or the VeriChip
2007 Plan, which was amended and restated on December 16, 2008. Under the VeriChip 2007 Plan, the
number of shares for which options, restricted shares, SARs or performance shares may be granted is
3.0 million. As of December 31, 2008, approximately 1.0 million options and shares have been
granted under the VeriChip 2007 Plan. As of December 31, 2008, no SARs have been granted and 2.0
million shares may be granted under the VeriChip 2007 Plan.
In addition, as of December 31, 2008, options exercisable for approximately 0.4 million shares
of the Companys common stock have been granted outside of the Companys plans, and 0.3 million of
the options or shares granted were outstanding as of December 31, 2008. These options were granted
at exercise prices ranging from $0.23 to $8.55 per share, are fully vested and are exercisable for
a period of up to seven years.
In the year ended December 31, 2008, 0.2 million options were granted under the 2007 Plan. In
the year ended December 31, 2007, 0.2 million, 0.3 million, and 0.2 million options and shares have
been granted under the VeriChip 2002 Plan, the VeriChip 2005 Plan, and the VeriChip 2007 Plan,
respectively.
A summary of stock options for 2008 and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Number
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
|
of
|
|
|
Exercise
|
|
|
of
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
Outstanding on January 1
|
|
|
1,963
|
|
|
$
|
3.26
|
|
|
|
2,099
|
|
|
$
|
2.10
|
|
Granted
(1)
|
|
|
195
|
|
|
|
0.58
|
|
|
|
417
|
|
|
|
5.88
|
|
Exercised
|
|
|
(844
|
)
|
|
|
0.54
|
|
|
|
(536
|
)
|
|
|
0.70
|
|
Cancelled and forfeited
|
|
|
(87
|
)
|
|
|
5.88
|
|
|
|
(17
|
)
|
|
|
5.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding on December 31
|
|
|
1,225
|
|
|
|
4.52
|
|
|
|
1,963
|
|
|
|
3.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable on December 31
(2)
|
|
|
1,055
|
|
|
|
5.24
|
|
|
|
1,530
|
|
|
|
2.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares available on December 31 for
options that may be granted
|
|
|
2,022,832
|
|
|
|
|
|
|
|
865
|
|
|
|
|
|
|
|
|
(1)
|
|
The total compensation expense associated with the options granted in 2008 and 2007 was approximately $21,000 and $0.3
million, respectively. As of December 31, 2008 and 2007, the remaining amount of the compensation expense to be recorded over
the remaining vesting period of the options was approximately $31,000 and $0.9 million, respectively.
|
|
(2)
|
|
The intrinsic value of a stock option is the amount by which the fair value of the underlying stock exceeds the exercise
price of the option. The fair value of the Companys common stock was estimated to be $0.37 and $2.25 at December 31, 2008
and 2007, respectively, based upon its closing price on the NASDAQ. As of December 31, 2008 and 2007, the intrinsic value for
all options outstanding was approximately $34,000 and
$0.6 million, respectively.
|
F-16
The following table summarizes information about stock options at December 31, 2008 (in
thousands, except weighted-average amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Stock Options
|
|
|
Exercisable Stock Options
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
Range of
|
|
|
|
|
|
Contractual
|
|
|
Exercise
|
|
|
|
|
|
|
Exercise
|
|
Exercise Prices
|
|
Shares
|
|
|
Life
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
$0.0000 to $1.9900
|
|
|
438
|
|
|
|
5.3
|
|
|
$
|
0.39
|
|
|
|
268
|
|
|
$
|
0.41
|
|
$4.9500 to $5.7500
|
|
|
348
|
|
|
|
7.6
|
|
|
|
5.59
|
|
|
|
348
|
|
|
|
5.59
|
|
$6.9300 to $7.6500
|
|
|
328
|
|
|
|
4.9
|
|
|
|
7.09
|
|
|
|
328
|
|
|
|
7.09
|
|
$8.5500 to $10.0000
|
|
|
105
|
|
|
|
6.0
|
|
|
|
9.24
|
|
|
|
105
|
|
|
|
9.24
|
|
$10.001to $20.2500
|
|
|
6
|
|
|
|
4.0
|
|
|
|
20.25
|
|
|
|
6
|
|
|
|
20.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,225
|
|
|
|
5.9
|
|
|
$
|
4.52
|
|
|
|
1,055
|
|
|
$
|
5.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected
to vest
|
|
|
1,225
|
|
|
|
5.9
|
|
|
$
|
4.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average per share fair value of grants made in 2008 and 2007 for the Companys
incentive plans were $0.22 and $3.13, respectively.
There are inherent uncertainties in making estimates about forecasts of future operating
results and identifying comparable companies and transactions that may be indicative of the fair
value of the Companys securities. The Company believes that the estimates of the fair value of its
common stock at each option grant date were reasonable under the circumstances.
The Black-Scholes model, which the Company used to determine compensation expense, required
the Company to make several key judgments including:
|
|
|
the estimated value of the Companys common stock;
|
|
|
|
|
the expected life of issued stock options;
|
|
|
|
|
the expected volatility of the Companys stock price;
|
|
|
|
|
the expected dividend yield to be realized over the life of the stock option; and
|
|
|
|
|
the risk-free interest rate over the expected life of the stock options.
|
The Company prepared these estimates based upon its historical experience, the stock price
volatility of comparable publicly-traded companies, including Digital Angel, and its best
estimation of future conditions.
The fair values of the options granted were
estimated on the grant date using the Black-Scholes valuation model based on the following
weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
Expected stock price volatility
|
|
|
35
|
%
|
|
|
50
|
%
|
Risk-free interest rate
|
|
|
1.79-3.44
|
%
|
|
|
4.51
|
%
|
Expected term (in years)
|
|
|
6.0
|
|
|
|
6.0
|
|
F-17
6 Selling, general and administrative expense:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Salaries and benefits (1)
|
|
$
|
14,567
|
|
|
$
|
8,166
|
|
Depreciation and amortization
|
|
|
52
|
|
|
|
73
|
|
Legal and accounting
|
|
|
2,226
|
|
|
|
1,517
|
|
Sales and marketing
|
|
|
1,424
|
|
|
|
1,699
|
|
Travel and entertainment
|
|
|
280
|
|
|
|
619
|
|
Insurance
|
|
|
217
|
|
|
|
119
|
|
Consulting
|
|
|
255
|
|
|
|
156
|
|
Other
|
|
|
754
|
|
|
|
835
|
|
|
|
|
|
|
|
|
|
|
$
|
19,775
|
|
|
$
|
13,184
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Included in salaries and benefits is $5.0 million and
$3.4 million of equity compensation expense for the years
2008 and 2007, respectively, associated with stock
compensation (includes stock options and restricted stock).
See Note 1 to the Consolidated Financial Statements.
|
7 Income taxes:
The Companys income taxes as presented are calculated on a separate tax return basis,
although until the Companys initial public offering on February 9, 2007, the Companys U.S.
operations were included in Digital Angels consolidated federal income tax return. The Company
accounts for income taxes under the asset and liability approach. Deferred taxes are recorded based
upon the tax impact of items affecting financial reporting and tax filings in different periods. A
valuation allowance is provided against net deferred tax assets where the Company determines
realization is not currently judged to be more likely than not.
The tax effects of temporary differences and carryforwards that give rise to significant
portions of deferred tax assets and liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Liabilities and reserves
|
|
$
|
228
|
|
|
$
|
70
|
|
Stock-based compensation
|
|
|
4,162
|
|
|
|
2,644
|
|
Property and equipment
|
|
|
12
|
|
|
|
516
|
|
Net operating loss carryforwards
|
|
|
11,361
|
|
|
|
9,142
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
15,764
|
|
|
|
12,372
|
|
Valuation allowance
|
|
|
(15,764
|
)
|
|
|
(12,372
|
)
|
|
|
|
|
|
|
|
Net deferred taxes
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
F-18
The valuation
allowance for U.S. deferred tax assets increased by approximately $3.4 million
and $5.0 million in 2008 and 2007, respectively, due mainly to the generation of U.S. net operating
losses. The valuation allowance at December 31, 2008 and 2007, has primarily been provided for in
U.S. net deferred tax assets that exceeded the level of existing U.S. deferred tax liabilities.
Loss before provision for income taxes consists of domestic operations.
The provision or (benefit) for income taxes consists of:
|
|
|
|
|
|
|
|
|
|
|
For
the Years Ended
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Current:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
|
|
|
$
|
|
|
Canada
|
|
|
233
|
|
|
|
248
|
|
|
|
|
|
|
|
|
Current income tax provision
|
|
|
233
|
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Deferred:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
|
|
|
$
|
|
|
Canada
|
|
|
|
|
|
|
(1,305
|
)
|
|
|
|
|
|
|
|
Deferred income tax benefit
|
|
|
|
|
|
|
(1,305
|
)
|
|
|
|
|
|
|
|
|
|
$
|
233
|
|
|
$
|
(1,055
|
)
|
|
|
|
|
|
|
|
Income tax provision or (benefit) is included in the financial statements as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
|
|
|
$
|
|
|
Discontinued operations
|
|
|
233
|
|
|
|
(1,055
|
)
|
|
|
|
|
|
|
|
|
|
$
|
233
|
|
|
|
(1,055
|
)
|
|
|
|
|
|
|
|
The difference between the effective rate reflected in the provision for income taxes on loss
before taxes from continuing operations and the amounts determined by applying the applicable
statutory U.S. tax rate are analyzed below:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
%
|
|
|
%
|
|
Statutory tax benefit
|
|
|
(34
|
)
|
|
|
(34
|
)
|
State income taxes, net of federal benefits
|
|
|
(6
|
)
|
|
|
(6
|
)
|
Tax basis difference in stock of subsidiary
|
|
|
(12
|
)
|
|
|
|
|
Change in deferred tax asset valuation allowance
|
|
|
52
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On February 14, 2007, the Company completed an initial public offering of its common stock,
which reduced Digital Angels ownership to less than 80%. Therefore, in 2007, the Company was
required to file a separate federal income tax return. On December 31, 2008, the Company had U.S.
federal net operating loss carryforwards of approximately $28.4 million for income tax purposes
that expire in various amounts through 2028. The net operating losses were allocated in accordance
with Treasury Regulation § 1.1502-21T(b)(2)(iv), at the point that the Company ceased to be a part
of the consolidated tax return of Digital Angel.
F-19
Based upon the change of ownership rules under IRC Section 382 in December 2007, the Company
experienced a change of ownership exceeding the 50% limitation threshold imposed by IRC Section
382. The Company experienced a subsequent change in ownership during November 2008. As a result
the Companys future utilization of its net operating loss carryforwards may be significantly
limited as to the amount of use in any particular year.
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) was issued
to clarify the requirements of SFAS No. 109, Accounting for Income Taxes, relating to the
recognition of income tax benefits. FIN 48 provides a two-step approach to recognizing and
measuring tax benefits when the benefits realization is uncertain. The first step is to determine
whether the benefit is to be recognized. The second step is to determine the amount to be
recognized. The two-step approach is outlined below:
|
|
|
Income tax benefits should be recognized when, based on the technical
merits of a tax position, the company believes that if a dispute arose
with the taxing authority and were taken to a court of last resort, it
is more likely than not (i.e., a probability of greater than
50 percent) that the tax position would be sustained as filed; and
|
|
|
|
|
If a position is determined to be more likely than not of being
sustained, the reporting company should recognize the largest amount
of tax benefit that is greater than 50 percent likely of being
realized upon ultimate settlement with the taxing authority.
|
The Company adopted
FIN 48 on January 1, 2007, and there was no impact upon adoption
or during the year ended December 31, 2008.
8 Loss per Share
The following stock options and warrants were outstanding as of December 31, 2008 and 2007,
and were not included in the computation of dilutive loss per share because the net effect would
have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
1,225
|
|
|
|
1,963
|
|
Warrants
|
|
|
|
|
|
|
33
|
|
Restricted common stock
|
|
|
|
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
|
1,225
|
|
|
|
2,596
|
|
|
|
|
|
|
|
|
9 Unasserted ClaimPotential Intellectual Property Conflict
The Company obtains the implantable microchip from a wholly-owned subsidiary of Digital Angel,
under the terms of an amended and restated supply agreement. The supply agreement is discussed in
Note 11 to the Consolidated Financial Statements. Digital Angel
obtained the implantable microchip,
a component of the VeriMed microchip, from a subsidiary of Raytheon Company, under a separate
supply agreement. The technology underlying these systems is covered, in part, by U.S. Patent
No. 5,211,129 Syringe-Implantable Identification Transponders. In 1994, Destron/IDI, Inc., a
predecessor company to Digital Angel, granted a co-exclusive license under this patent, other than
for certain specified fields of use retained by the predecessor company, Hughes Aircraft Company
(Hughes), and its then wholly-owned subsidiary, Hughes Identification Devices, Inc. (HID). The
specified fields of use retained by Hughes and HID do not include human identification or security
applications. The rights licensed to Hughes and HID were freely assignable, and the Company does
not know which party or parties currently has these rights or whether these rights have been
assigned, conveyed or transferred to any third party. Digital Angel sources the implantable microchip
indirectly from a subsidiary of Raytheon Company, with which Hughes, then known as HE Holdings,
Inc. was merged with in 1997. However, the Company has no documentation that establishes its right
to use the patented technology for human identification or security applications. Through
December 31, 2008, no intellectual property claims against the
Company have been asserted.
F-20
Either of the two companies to whom Digital Angel granted licenses, any of their respective
successors in interest, or any party to whom any of the foregoing parties may have assigned their
rights under the 1994 license agreement may commence a claim against the Company asserting that the
Company is violating their rights. If such a claim is successful, sales of the Companys
implantable microchip could be enjoined and the Company could be required to cease its efforts to
create a market for its implantable microchip until the patent expired in April 2008. In addition,
the Company could be required to pay damages, which may be substantial.
If the Company or Digital Angel was denied use of the patented technology in applications
involving the identification of human beings, the Company would not have been able to purchase or
sell any of its products that incorporate the implantable microchip before the patent expired. The
Company may be required to pay royalties and other damages to third parties on products it has
already purchased.
The Company has been publicly marketing and selling the implantable microchip for human
identification and security applications for approximately five years. Through December 31, 2008,
there are no pending or threatened intellectual property claims challenging the Companys marketing
or selling activities. In October 2007, Digital Angel and the successor to one of Digital Angels
two licensees executed a cross-license which includes Digital Angel obtaining a royalty free
non-exclusive license to its rights to the implantable human applications of the 5,211,129 patent.
Digital Angel has, in turn, conveyed those rights to the Company.
Under the circumstances, the accompanying financial statements make no provision with respect
to the unasserted claim described above.
10 Commitments and Contingencies
Employment Contract
Effective December 5, 2006, the Company and Mr. Silverman entered into the VeriChip
Corporation Employment and Non-Compete Agreement (the VeriChip Employment Agreement). The
VeriChip Employment Agreement terminates five years from the effective date. The VeriChip
Employment agreement provides for an annual base salary of $420,000 with minimum annual increases
for the first two years of 10% of the base salary and a discretionary annual increase thereafter.
Mr. Silverman is also entitled to a discretionary annual bonus and other fringe benefits. In
addition, the VeriChip Employment Agreement provides for the grant of 500,000 shares of restricted
stock of the Company. The Company is required to register the shares as soon as practicable. The
stock is restricted and is accordingly subject to substantial risk of forfeiture in the event that
Mr. Silverman terminates his employment or the Company terminates his employment for cause on or
before December 31, 2008. If Mr. Silvermans employment is terminated prior to the expiration of
the term of the VeriChip Employment Agreement, certain significant payments become due to
Mr. Silverman. The amount of such significant payments depends on the nature of the termination. In
addition, the VeriChip Employment Agreement contains a change of control provision that provides
for the payment of five times the then current base salary and five times the average bonus paid to
Mr. Silverman for the three full calendar years immediately prior to the change of control, or the
number of years that were completed commencing on the effective date of the agreement and ending on
the date of the change of control if less than three calendar years. Any outstanding stock options
held by Mr. Silverman as of the date of his termination or a change of control become vested and
exercisable as of such date, and remain exercisable during the remaining life of the option. All
severance and change of control payments made in connection with the VeriChip Employment Agreement
must be paid in cash, except for termination due to Mr. Silvermans total disability, death, a
constructive termination, or termination without cause, which may be paid in shares of the
Companys common stock, subject to necessary approvals, or in cash, at Mr. Silvermans option.
F-21
In connection with the Xmark transaction, on May 15, 2008, the Company entered into the
Silverman Separation Agreement, which provided that upon the closing of the Xmark transaction, Mr.
Silvermans employment would be terminated, as would the Employment and Non-Compete Agreement dated
December 5, 2006, between the Company and Mr. Silverman.
In connection with the Silverman Separation Agreement, Mr. Silverman received a payment in the
amount of approximately $4.3 million from the Company in full and final satisfaction of the amounts
due to him pursuant to the terms of the VeriChip Employment Agreement. Mr. Silverman also received
a bonus payment for the completion of the Xmark transaction in the amount of $1.2 million.
On
December 31, 2008, the Company and Mr. Silverman entered into a letter agreement, pursuant
to which Mr. Silverman will serve as the Companys chairman from December 1, 2008 through December
31, 2009, unless the term is amended or the letter agreement is
terminated. The terms and conditions were agreed on December 26,
2008, which is the accounting grant date. The letter agreement
also provides for the termination of certain provisions of the separation agreement, dated May 15,
2008, as amended, between the Company and Mr. Silverman. Under
the letter agreement, Mr. Silverman is due to receive 601,852 shares of our common stock, which will not be
issued until we file a
registration statement on Form S-8 with the SEC reflecting our Amended Plan. The
shares will vest upon the earlier to occur of (i) January 1, 2010 or (ii) a Change in Control (as
defined in the Amended Plan). The shares are subject to forfeiture in the event that Mr. Silverman
fails to remain involved in the day-to-day management of the Company (as determined by our board of
directors) until the earlier to occur of (i) January 1, 2010 or (ii) a Change in Control (as
defined in the Amended Plan).
On December 31, 2008, the Company and Mr. Caragol, entered into a letter agreement pursuant to
which, effective January 1, 2009, Mr. Caragol serves as the Companys acting chief financial
officer. Unless the term is amended or the letter agreement is terminated, the letter agreement is
in effect until July 31, 2009. Compensation due to Mr. Caragol under the letter agreement is in the
form of shares of restricted common stock in the amount of 518,519, which will not be issued until
we file a registration statement on Form S-8 with the SEC reflecting
our Amended Plan (theGrant Date). The shares will vest according to the following schedule: (i) 20% shall vest on the
Grant Date; (ii) 40% shall vest on April 1, 2009; and (iii) 40% shall vest on July 31, 2009. Mr.
Caragol will serve as our acting chief financial officer effective
January 1, 2009 through July 31,
2009 in exchange for 518,519 restricted shares of our common stock.
The compensation expense will be recognized over the requisite service period.
Legal proceedings
The Company is engaged in certain legal actions in the ordinary course of business and we
believe that the ultimate outcome of these actions will not have a material adverse effect on our
operating results, liquidity or financial position. The Company has accrued an estimate of the
probable costs for the resolution of these claims, and as of December 31, 2008, the Company has
recorded a $0.2 million reserve with respect to such claims. This estimate has been developed in
consultation with outside counsel handling our defense in these matters and is based upon an
analysis of potential results, assuming a combination of litigation and settlement strategies.
Metro Risk
On January 10, 2005, the Company commenced an action in the Circuit Court for Palm Beach
County, Florida, against Metro Risk Management Group, LLC, or Metro Risk. In this suit, the Company
has claimed that Metro Risk breached the parties three international distribution agreements by
failing to meet required minimum purchase obligations and by repudiating the agreements. On July 1,
2005, Metro Risk asserted a counterclaim against the Company for breach of contract and fraud in
the inducement. Specifically, in its claim for breach of contract, Metro Risk alleged that the
Company breached the exclusivity provision of the parties three international distribution
agreements by later signing a different distribution agreement with a large distributor of medical
supplies. Metro Risk alleged that the distribution agreement with this other distributor included
the same areas covered in the Companys three international distribution agreements with Metro
Risk. Moreover, regarding its
claim for fraud in the inducement, Metro Risk alleged that the Company fraudulently induced
Metro Risk into signing the three international distribution agreements by promising millions of
dollars in profits, only later to sign another distribution agreement with a competitor for the
same countries. By virtue of its counterclaim, Metro Risk seeks reliance damages in the amount of
$155,000, which allegedly represents the amount of money advanced by Metro Risk for the project,
lost profits, and attorneys fees.
F-22
On July 23, 2008, the court granted a motion for summary judgment filed by the Company on
Metro Risks counterclaim, and thus denied Metro Risks counterclaim. Metro Risk may appeal the
decision. The Court has also previously granted summary judgment on the issue of Metro Risks
liability for breaching the three international distribution agreements. Therefore, at present, the
remaining issue in the lawsuit is the Companys damages resulting from Metro Risks breach of the
three international distribution agreements. The parties have taken minimal discovery at the
present time. Metro Risk has propounded no discovery on the Company, and the Company has propounded
a request for production and a request for admissions on Metro Risk. The parties have not taken any
depositions. Given the potential for an appeal, counsel is currently unable to assess the ultimate
outcome.
Stock Option Plans
The Company has received demand letters from attorneys for several former employees and/or
consultants of the Company and Digital Angel, asserting claims related to stock options to acquire
approximately 455 thousand shares of the Companys common stock that management believes that such
employees and/or consultants had forfeited when they ceased their employment or relationship with
the Company and/or Digital Angel. The Company believes that all of these potential claims are
without merit and intends to vigorously defend them in the event the claims are asserted or
litigated.
On July 8, 2008, a lawsuit was filed against the Company and Digital Angel by one of the
above-referenced former employees, Jerome C. Artigliere, a former executive of the Company and
Digital Angel. The lawsuit was filed in the Circuit Court of the 15th Judicial Circuit in Palm
Beach County, Florida, and alleges that Mr. Artigliere holds options to acquire 950,000 shares of
common stock of the Company at an exercise price of $0.05 per share and that he has been denied the
right to exercise those options. The complaint alleges causes of action for breach of contract
against the Company and Digital Angel, seeks declaratory judgments clarifying Mr. Artiglieres
alleged contractual rights, and sought an injunction enjoining the vote of the stockholders at
special meeting of Company shareholders that took place on July 17, 2008, on the sale of Xmark. On
September 12, 2008, Mr. Artigliere amended his complaint to add a claim for unpaid wages against
the Company and Digital Angel and to add related claims against several former officers and
directors of the Company and Digital Angel. The Company believes that Mr. Artiglieres claim for
950,000 Company stock options is factually incorrect and, at best, he would be entitled to only
211,111 Company stock options due to the Companys 2-for-3 reverse stock split that occurred in
December of 2005 and the 1-for-3 reverse stock split that occurred in December of 2006. The Company
believes the amended complaint includes multiple inaccuracies, is without merit and intends to
defend the lawsuit. On October 7, 2008, the Company and its co-defendants filed a motion to dismiss
seven of the nine counts asserted in the amended complaint. By
agreement, the motion to dismiss was temporarily taken off the
courts calendar.
The Company is a party to various legal actions, as either plaintiff or defendant, including
the matter identified above, arising in the ordinary course of business, none of which is expected
to have a material adverse effect on our business, financial condition or results of operations.
However, litigation is inherently unpredictable, and the costs and other effects of pending or
future litigation, governmental investigations, legal and administrative cases and proceedings,
whether civil or criminal, settlements, judgments and investigations, claims or charges in any such
matters, and developments or assertions by or against us relating to us or to our intellectual
property rights and intellectual property licenses could have a material adverse effect on our
business, financial condition and operating results.
F-23
11 Related Party Transactions
Agreements
with IFTH
We are
under common control with IFTH. R & R Consulting Partners, LLC,
an entity owned and controlled by Scott R. Silverman, and Mr.
Silverman currently own 53% of our outstanding common stock. As
of February 11, 2009, R & R Consulting Partners, LLC
and Mr. Silverman owned 46.8% of IFTHs outstanding
common stock, including the 2,570,000 shares that are directly
owned by Blue Moon. Mr. Silverman, our executive chairman of the
board, is a manager and controls a member of Blue Moon (i.e., R &
R Consulting Partners, LLC). William J. Caragol, our acting chief
financial officer, acting treasurer and secretary, is a manager and
member of Blue Moon.
On
October 8, 2008, IFTH entered into a sublease with Digital
Angel for its corporate headquarters located in Delray Beach,
Florida, consisting approximately 7,911 feet of office space,
which space we share with IFTH. The rent for the entire
twenty-one-month term of the sublease is $158,000, which was paid in
one lump sum upon execution of the sublease. We reimbursed IFTH for
one-half of the sublease payment, representing our share of the total
cost of the sublease. In addition, in order to account for certain
shared services and resources, we and IFTH operate under a shared
services agreement, in connection with which IFTH pays us $8,000 a
month.
Payments
to Michael Krawitz
From
January to October 2008, prior to his service on our board of
directors, we paid Mr. Krawitz $70,000 in consulting fees for legal
services provided to the Company.
Transition Services Agreement
On December 27, 2005, the Company entered into a transition services agreement with Digital
Angel under which Digital Angel agreed to provide the Company with certain administrative
transition services, including payroll, legal, finance, accounting, information technology, tax
services, and services related to this offering. As compensation for these services, the Company
agreed to pay Digital Angel; (i) approximately $62,000 per month for fixed costs allocable to these
services, (ii) Digital Angels reasonable out-of-pocket direct expenses incurred in connection with
providing these services that are not included in the agreement as a monthly fixed cost,
(iii) Digital Angels expenses incurred in connection with services provided to the Company in
connection with the initial public offering of the Companys common stock, and (iv) any charges by
third party service providers that may or may not be incurred as part of the offering and that are
attributable to transition services provided to or for the Company.
On December 21, 2006, the Company and Digital Angel entered into an amended and restated
transition services agreement, which became effective on February 14, 2007, the date of completion
of the Companys initial public offering of the Companys common stock. Prior to that time, the
initial transition services agreement remained in effect. The term of the amended and restated
agreement will continue until such time as the Company requests Digital Angel to cease performing
transition services, provided that Digital Angel is not obligated to continue to provide the
transition services for more than twenty-four months following the effective date. Except for any
request by the Company for Digital Angel to cease the performance of such transition services,
subject to certain notice provisions, the agreement may not be terminated by either party except in
the event of a material default in Digital Angels delivery of the transition services or in the
Companys payment for those services. The services provided by Digital Angel under the amended and
restated transition services agreement are the same as those provided under the initial agreement.
The estimated monthly charge for the fixed costs allocable to these services was increased, in
early 2007, to approximately $72,000 per month, primarily as the result of an increased allocation
for office space. In April 2007, the monthly charge was reduced to $40,000, primarily as the result
of reductions in shared personnel costs. Effective January 1, 2008, the monthly cost was further
reduced to $10,000 per month.
The terms of the transition services agreement and the amendment and restatement of the
agreement were negotiated between certain of the Companys executive officers and certain executive
officers of Digital Angel. The Companys and Digital Angels executive officers were independent of
one another and the terms of the agreement were based upon historical amounts incurred by Digital
Angel for payment of such services to third parties. Accordingly, the Company believes that it
negotiated the best terms and conditions under the circumstances, however, these costs are not
necessarily indicative of the costs which would be incurred by the Company as an independent stand-
alone entity.
Management believes that the fees charged for these services are reasonable and consistent
with what the expenses would have been on a stand-alone basis. The aggregate costs of these
services to the Company were $0.1 million and $0.4 million in 2008 and 2007, respectively.
On August 20, 2008, the transition services agreement was terminated, effective as of
September 30, 2008, with the Company making a final payment of $45,000 to Digital Angel, with no
further obligation by either party.
Loan Agreement with Digital Angel
Prior to the date of our initial public offering, which was consummated on February 14, 2007,
we financed a significant portion of our operations and investing activities primarily through
funds that Digital Angel provided.
Through October 5, 2006, our loan with Digital Angel bore interest at the prevailing prime
rate of interest as published by
The Wall Street Journal
, which as of September 30, 2006 was 8.25%
per annum. On October 6, 2006, we entered into an amendment to the loan agreement which increased
the principal amount available thereunder to $13.0 million and we borrowed an additional
$2.0 million under the agreement to make the second purchase price payment for our acquisition of Instantel
Inc. In connection with that amendment, the interest rate was also changed to a fixed rate of 12%
per annum. That amendment further provided that the loan matured on July 1, 2008, but could be
extended at the option of Digital Angel through December 27, 2010.
F-24
On January 19, 2007, February 8, 2007 and February 13, 2007, we entered into further
amendments to the loan documents, which increased the maximum principal amount of indebtedness to
$14.5 million. A portion of this increase was used to cover approximately $0.7 million of
intercompany advances made to us by Digital Angel during the first week of January 2007. Upon the
consummation of our initial public offering in February 2007, the loan ceased to be a revolving
line of credit, and we have no ability to incur additional indebtedness under the loan documents.
The interest accrued on the outstanding indebtedness at a rate of 12% per annum. On February 14,
2007, the closing date of our initial public offering, we were indebted to Digital Angel in the
amount of $15.1 million, including $1.0 million of accrued interest and, in accordance with the
terms of the loan agreement as most recently amended on February 13, 2007, we used $3.5 million of
the net proceeds of our initial public offering to repay a portion of our indebtedness to Digital
Angel. Effective with the payment of the $3.5 million, all interest which accrued on the loan as of
the last day of each month, commencing with February 2007, was added to the principal amount. A
final balloon payment equal to the outstanding principal amount then due under the loan plus all
accrued and unpaid interest was due and payable on February 1, 2010.
The loan with Digital Angel was subordinated to our obligations under our credit agreement
with the Lender and was collateralized by security interests in all of our property and
assets, except as otherwise encumbered by the rights of the Lender.
In connection with the financing, the Company entered into a letter agreement with Digital
Angel, dated February 29, 2008, under which the Company agreed, among other things, to prepay
$5.3 million to Digital Angel, and to amend that certain letter agreement between the Company and
Digital Angel dated as of December 20, 2007 (the December 2007 Letter Agreement). The December
2007 Letter Agreement provides that the Company will have until October 30, 2008 to prepay in full
the entire outstanding principal amount to Digital Angel by paying to Digital Angel $10 million,
less the $500,000 paid pursuant to the December 2007 Letter Agreement, less the $5.3 million paid
in connection with this financing, less other principal payments made to reduce the outstanding
principal amount between the date of the December 2007 Letter Agreement and the date of such
prepayment, plus any accrued and unpaid interest between October 1, 2007, and the date of such
prepayment. As a result of the $5.3 million payment, the Company was not required to make any
further debt service payments to Digital Angel until September 1, 2009. The remaining outstanding
principal after the $5.8 million paid (including the application of the $0.5 million paid pursuant
to the December 2007 Letter Agreement), was $7.3 million.
On July 18, 2008, the Company paid $4.8 million to Digital Angel to satisfy the Companys
obligations under the loan agreement. As a result of this payment in July 2008, the Company
recognized a $2.5 million gain on settlement of debt for the
year ended December 31, 2008 and Digital Angel
released all security interests it had in the assets of the Company.
An interest expense was incurred under the loan for $0.5 million in 2008 and $1.1 million in
2007.
F-25
Supply Agreement
The Company executed a supply and development agreement dated March 4, 2002 with Digital Angel
covering the manufacture and supply of its implantable microchip.
On December 27, 2005, the Company entered into an amended and restated supply and development
agreement with Digital Angel, which was further amended on May 9, 2007. Under this agreement,
Digital Angel was the Companys sole supplier of human implantable microchips.
On November 12, 2008, the Company entered into an Asset Purchase Agreement (APA) with
Digital Angel. The terms of the APA included the sale to the Company of patents related to an
embedded bio-sensor system for use in humans, and the assignment of any rights of Digital Angel
under a development agreement associated with the development of an implantable glucose sensing
microchip. The Company also received covenants from Digital Angel and Destron Fearing that will
permit the use of intellectual property of Digital Angel related to the Companys VeriMed Health
Link business without payment of ongoing royalties, as well as inventory and a limited period of
technology support by Digital Angel. The Company paid Digital Angel $500,000 at the closing of the
APA, which was recorded to research and development expense. Pursuant to the APA, the supply
agreement discussed above was terminated.
Letter Agreement with Digital Angel
On May 15, 2008, the Company entered into a Letter Agreement (the May 2008 Agreement) with
Digital Angel under which the Company agreed, in exchange for Digital Angels consent to a voting
agreement and guarantee agreement with The Stanley Works, to pay $250,000 as a fee for Digital
Angels guarantee of certain obligations under the Stock Purchase Agreement and $250,000 for
reimbursement of transactional costs incurred by Digital Angel in connection with the Xmark
transaction. These costs were accounted for as transactional costs which were netted against the
gain on the sale of Xmark in the year ended December 31, 2008.
The May 2008 Agreement with Digital Angel was terminated on November 12, 2008.
Pledge Agreement of Digital Angel
On August 24, 2006, Digital Angel pledged 65% of its ownership in the Companys common stock
to its lender under the terms of a note and pledge agreement. The note is due in February 2010.
This note replaced a previous note issued by Digital Angel, which was due in June 2007. On
August 31, 2007 and October 2, 2008, Digital Angel pledged 80% and 100%, respectively, of its
ownership in the Companys common stock to its lender under the terms two separate notes entered
into with its lender. Each note is due in February 2010.
As a result of Digital Angels sale of all of its shares of the Company to R & R Consulting
Partners, LLC, on November 12, 2008, Digital Angels lender released the shares of the Company
owned by Digital Angel from the pledge agreements between Digital Angel and its lender.
12 Discontinued Operations
On July 18, 2008, pursuant to the terms of the stock purchase agreement between the Company
and The Stanley Works, the Company completed the sale of all of the outstanding capital stock of
Xmark to Stanley Canada for approximately $47.9 million in cash, which consists of the $45 million
purchase price plus a balance sheet adjustment of approximately $2.9 million. Under the terms of
the stock purchase agreement, $4.5 million of the proceeds will be held in escrow for a period of
12 months to provide for indemnification obligations under the stock purchase agreement, if any.
As a result of the sale of Xmark, the financial condition, results of operations and cash
flows of Xmark have been reported as discontinued operations in our financial statements and prior
period information has been reclassified accordingly.
F-26
The condensed results of operations of the Companys discontinued operations for the years
ended December 31, 2008 (which include the operations of Xmark through July 18, 2008) and
December 31, 2007, were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
Revenue
|
|
$
|
20,002
|
|
|
$
|
32,030
|
|
Cost of sales
|
|
|
8,289
|
|
|
|
14,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
11,713
|
|
|
|
17,431
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
9,093
|
|
|
|
10,329
|
|
Research and development expenses
|
|
|
2,277
|
|
|
|
4,573
|
|
Other (income) expense
|
|
|
(650
|
)
|
|
|
502
|
|
Interest (income) expense
|
|
|
(27
|
)
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,020
|
|
|
|
2,002
|
|
|
|
|
|
|
|
|
|
|
Provision for (benefit from) income taxes
|
|
|
233
|
|
|
|
(1,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
$
|
787
|
|
|
$
|
3,057
|
|
|
|
|
|
|
|
|
The condensed balance sheets of the Companys discontinued operations as of December 31, 2008
and 2007 were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
|
|
|
$
|
|
|
Accounts receivable
|
|
|
|
|
|
|
5,391
|
|
Deferred tax asset
|
|
|
|
|
|
|
216
|
|
Inventory
|
|
|
|
|
|
|
2,247
|
|
Other current assets
|
|
|
|
|
|
|
348
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
8,202
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
|
|
840
|
|
Intangibles, net
|
|
|
|
|
|
|
16,752
|
|
Goodwill
|
|
|
|
|
|
|
15,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
|
|
|
$
|
41,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
|
|
|
$
|
1,515
|
|
Accounts payable
|
|
|
|
|
|
|
1,517
|
|
Accrued expenses and other current liabilities
|
|
|
227
|
|
|
|
3,120
|
|
Income taxes payable
|
|
|
233
|
|
|
|
300
|
|
Deferred revenue
|
|
|
|
|
|
|
256
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
460
|
|
|
|
6,708
|
|
|
|
|
|
|
|
|
|
|
Deferred taxes
|
|
|
|
|
|
|
3,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
460
|
|
|
$
|
10,517
|
|
|
|
|
|
|
|
|
Net (liabilities) assets from discontinued operations
|
|
$
|
(460
|
)
|
|
$
|
31,053
|
|
|
|
|
|
|
|
|
F-27
13 Supplementary Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Income taxes paid
|
|
$
|
|
|
|
$
|
|
|
Interest paid
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
285
|
|
|
$
|
|
|
|
|
|
|
|
|
|
In the years ended December 31, 2008 and 2007, the Company had the following non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Non-cash financing and investing activities:
|
|
|
|
|
|
|
|
|
Offering costs
|
|
$
|
|
|
|
$
|
440
|
|
Debt financing costs
|
|
|
331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
331
|
|
|
$
|
440
|
|
|
|
|
|
|
|
|
F-28
EXHIBIT INDEX
|
|
|
|
|
Exhibit
No.
|
|
Description
|
|
|
|
|
|
|
2.1
|
|
|
Stock Purchase Agreement, dated May 15, 2008, between VeriChip Corporation and The Stanley Works
(12)
|
|
|
|
|
|
|
2.2
|
|
|
Voting Agreement, dated May 15, 2008, between Applied Digital Solutions, Inc. and The Stanley Works
(12)
|
|
|
|
|
|
|
2.3
|
|
|
Voting Agreement, dated May 15, 2008, between Scott R. Silverman and The Stanley Works
(12)
|
|
|
|
|
|
|
3.1
|
|
|
Second Amended and Restated Certificate of Incorporation of VeriChip Corporation filed with the Secretary of State of
Delaware on December 18, 2006
(1)
|
|
|
|
|
|
|
3.2
|
|
|
Amended and Restated By-laws of VeriChip Corporation adopted as of December 12, 2005
(1)
|
|
|
|
|
|
|
4.1
|
|
|
Form of Specimen Common Stock Certificate
(1)
|
|
|
|
|
|
|
10.1
|
*
|
|
VeriChip Corporation 2002 Flexible Stock Plan, as amended through December 21, 2006
(4)
|
|
|
|
|
|
|
10.2
|
*
|
|
VeriChip Corporation 2005 Flexible Stock Plan, as amended through December 21, 2006
(4)
|
|
|
|
|
|
|
10.3
|
*
|
|
Form of Restricted Stock Award Agreement
(4)
|
|
|
|
|
|
|
10.4
|
*
|
|
Form of Non-Qualified Stock Option Award Agreement
(4)
|
|
|
|
|
|
|
10.5
|
|
|
Commercial Loan Agreement dated as of December 27, 2005 between VeriChip Corporation and Digital Angel
Corporation
(1)
|
|
|
|
|
|
|
10.6
|
|
|
Revolving Line of Credit Note Working Capital of VeriChip Corporation dated as of December 27, 2005
(1)
|
|
|
|
|
|
|
10.7
|
|
|
Security Agreement dated as of December 27, 2005 between VeriChip Corporation and Digital Angel Corporation
(1)
|
|
|
|
|
|
|
10.8
|
|
|
First Amendment to Commercial Loan Agreement dated as of October 6, 2006 between Digital Angel Corporation and VeriChip
Corporation
(1)
|
|
|
|
|
|
|
10.9
|
|
|
First Amendment to Security Agreement dated as of October 6, 2006 between Digital Angel Corporation and VeriChip
Corporation
(1)
|
|
|
|
|
|
|
10.10
|
|
|
Second Amendment to Commercial Loan Agreement dated as of January 19, 2007 between Digital Angel Corporation and VeriChip
Corporation
(1)
|
|
|
|
|
|
|
10.11
|
|
|
Second Amendment to Security Agreement dated as of January 19, 2007 between Digital Angel Corporation and VeriChip
Corporation
(1)
|
|
|
|
|
|
|
10.12
|
|
|
Third Amendment to Commercial Loan Agreement dated as of February 8, 2007 between Digital Angel Corporation and VeriChip
Corporation
(1)
|
|
|
|
|
|
|
10.13
|
|
|
Third Amended and Restated Revolving Line of Credit Note dated as of February 8, 2007 between Digital Angel Corporation
and VeriChip Corporation
(1)
|
|
|
|
|
|
|
10.14
|
|
|
Amendment to Third Amended and Restated Revolving Line of Credit Note dated as of February 29, 2008 between VeriChip
Corporation and Digital Angel Corporation
(11)
|
|
|
|
|
|
Exhibit
No.
|
|
Description
|
|
|
|
|
|
|
10.15
|
|
|
Third Amendment to Security Agreement dated as of February 8, 2007 between Digital Angel Corporation and VeriChip
Corporation
(1)
|
|
|
|
|
|
|
10.16
|
|
|
Fourth Amendment to Commercial Loan Agreement and Security Agreement dated as of February 13, 2007 between Digital Angel
Corporation and VeriChip Corporation
(2)
|
|
|
|
|
|
|
10.17
|
|
|
Amended and Restated Supply, License and Development Agreement dated as of December 27, 2005 between VeriChip Corporation
and Digital Angel Corporation
(1)
|
|
|
|
|
|
|
10.18
|
|
|
First Amendment to Amended and Restated Supply, License and Development Agreement dated as of May 9, 2007 between the
Registrant and Digital Angel Corporation.
(5)
|
|
|
|
|
|
|
10.19
|
*
|
|
Letter Agreement dated as of August 11, 2005 between VeriChip Corporation and Daniel A. Gunther
(1)
|
|
|
|
|
|
|
10.20
|
*
|
|
Amendment to Letter Agreement dated as of March 2, 2007 between VeriChip Corporation and Daniel A. Gunther
(3)
|
|
|
|
|
|
|
10.21
|
*
|
|
2007 Senior Management Incentive Plan for Daniel A. Gunther dated as of March 2, 2007
(3)
|
|
|
|
|
|
|
10.22
|
*
|
|
VeriChip Corporation Executive Management Change in Control Plan dated March 2, 2007
(3)
|
|
|
|
|
|
|
10.23
|
*
|
|
VeriChip Corporation Executive Management Incentive Plan dated April 2, 2007
(4)
|
|
|
|
|
|
|
10.24
|
*
|
|
VeriChip Corporation 2007 Stock Incentive Plan, as amended and restated
|
|
|
|
|
|
|
10.25
|
*
|
|
Form of Non-Qualified Option Award Agreement under the VeriChip Corporation 2007 Stock Incentive Plan
(7)
|
|
|
|
|
|
|
10.26
|
|
|
Consulting Agreement dated as of August 8, 2007 between VeriChip Corporation and Randolph K. Geissler
(7)
|
|
|
|
|
|
|
10.27
|
|
|
Registration Rights Agreement between VeriChip Corporation and Kallina Corporation, dated August 31, 2007
(8)
|
|
|
|
|
|
|
10.28
|
*
|
|
Form of Stock Award Agreement
(9)
|
|
|
|
|
|
|
10.29
|
|
|
Letter Agreement, dated December 20, 2007, between VeriChip Corporation and Digital Angel Corporation
(10)
|
|
|
|
|
|
|
10.30
|
|
|
Securities Purchase Agreement dated as of February 29, 2008 among VeriChip Corporation, Xmark Corporation, Valens Offshore
SPV II, Corp. and LV Administrative Services, Inc.
(11)
|
|
|
|
|
|
|
10.31
|
|
|
Secured Term Note dated as of February 29, 2008 by VeriChip Corporation and Xmark Corporation in favor of Valens Offshore
SPV II, Corp.
(11)
|
|
|
|
|
|
|
10.32
|
|
|
Master Security Agreement dated as of February 29, 2008 among VeriChip Corporation, Xmark Corporation and LV
Administrative Services, Inc.
(11)
|
|
|
|
|
|
|
10.33
|
|
|
Stock Pledge Agreement dated as of February 29, 2008 among VeriChip Corporation, Xmark Corporation and LV Administrative
Services, Inc.
(11)
|
|
|
|
|
|
|
10.34
|
|
|
Intellectual Property Security Agreement dated as of February 29, 2008 among VeriChip Corporation, Xmark Corporation and
LV Administrative Services, Inc.
(11)
|
|
|
|
|
|
|
10.35
|
|
|
Letter Agreement dated as of February 29, 2008 between VeriChip Corporation and Digital Angel Corporation
(11)
|
|
|
|
|
|
|
10.36
|
|
|
Guarantee, dated May 15, 2008, between Digital Angel Corporation and The Stanley Works
(12)
|
|
|
|
|
|
Exhibit
No.
|
|
Description
|
|
|
|
|
|
|
10.37
|
|
|
Letter Agreement, dated May 15, 2008, between VeriChip Corporation and Digital Angel Corporation
(12)
|
|
|
|
|
|
|
10.38
|
|
|
Separation Agreement, dated May 15, 2008, between VeriChip Corporation and Scott R. Silverman
(12)
|
|
|
|
|
|
|
10.39
|
|
|
Letter Agreement, dated May 15, 2008, between VeriChip Corporation and William J. Caragol
(12)
|
|
|
|
|
|
|
10.40
|
|
|
Amendment to Separation Agreement, dated July 9, 2008, between VeriChip Corporation and Scott R. Silverman
(13)
|
|
|
|
|
|
|
10.50
|
|
|
Asset Purchase Agreement, dated November 12, 2008, among VeriChip Corporation, Digital Angel Corporation and
Destron Fearing Corporation
(14)
|
|
|
|
|
|
|
10.51
|
*
|
|
Letter Agreement, dated December 31, 2008, between VeriChip Corporation and William J. Caragol
(15)
|
|
|
|
|
|
|
10.52
|
*
|
|
Letter Agreement, dated December 31, 2008, between VeriChip Corporation and Scott R. Silverman
(15)
|
|
|
|
|
|
|
21.1
|
|
|
List of Subsidiaries of VeriChip Corporation
|
|
|
|
|
|
|
23.1
|
|
|
Consent of Eisner LLP
|
|
|
|
|
|
|
31.1
|
|
|
Certification by William J. Caragol, Acting Chief Executive Officer, pursuant to Exchange Act Rules
13A-14(a)
and 15d-14(a)
|
|
|
|
|
|
|
31.2
|
|
|
Certification by William J. Caragol, Acting Chief Financial Officer, pursuant to Exchange Act Rules
13A-14(a)
and 15d-14(a)
|
|
|
|
|
|
|
32.1
|
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
(1)
|
|
Incorporated by reference to the Registration Statement on Form S-1 previously filed by VeriChip Corporation (Registration No. 333-130754).
|
|
(2)
|
|
Incorporated by reference to the Form 8-K previously filed by VeriChip Corporation on February 15, 2007.
|
|
(3)
|
|
Incorporated by reference to the Form 8-K previously filed by VeriChip Corporation on March 8, 2007.
|
|
(4)
|
|
Incorporated by reference to the Annual Report on Form 10-K previously filed by VeriChip Corporation on April 2, 2007.
|
|
(5)
|
|
Incorporated by reference to the Quarterly Report on Form 10-Q previously filed by VeriChip Corporation on May 15, 2007.
|
|
(6)
|
|
Incorporated by reference to the Form 8-K previously filed by VeriChip Corporation on June 20, 2007.
|
|
(7)
|
|
Incorporated by reference to the Quarterly Report on Form 10-Q previously filed by VeriChip Corporation on August 8, 2007.
|
|
(8)
|
|
Incorporated by reference to the Form 8-K previously filed by VeriChip Corporation on September 7, 2007.
|
|
(9)
|
|
Incorporated by reference to the Quarterly Report on Form 10-Q previously filed by VeriChip Corporation on November 8, 2007.
|
|
(10)
|
|
Incorporated by reference to the Form 8-K previously filed by VeriChip Corporation on December 21, 2007.
|
|
(11)
|
|
Incorporated by reference to the Form 8-K previously filed by VeriChip Corporation on March 5, 2008.
|
|
(12)
|
|
Incorporated by reference to the Form 8-K previously filed by VeriChip Corporation on May 16, 2008.
|
|
(13)
|
|
Incorporated by reference to the Form 10-Q filed by VeriChip Corporation on August 14, 2008.
|
|
(14)
|
|
Incorporated by reference to the Form 10-Q filed by VeriChip Corporation on November 14, 2008.
|
|
(15)
|
|
Incorporated by reference to the Form 8-K previously filed by VeriChip Corporation on January 6, 2009.
|
|
*
|
|
Management contract or compensatory plan.
|
|
|
|
Confidential treatment has been obtained with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
|
Verichip (MM) (NASDAQ:CHIP)
과거 데이터 주식 차트
부터 6월(6) 2024 으로 7월(7) 2024
Verichip (MM) (NASDAQ:CHIP)
과거 데이터 주식 차트
부터 7월(7) 2023 으로 7월(7) 2024