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Prospectus Supplement No. 1
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Filed pursuant to Rule 424(b)(2)
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(to Prospectus dated July 8, 2009)
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Registration Statement No. 333-159880
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DIGITAL ANGEL CORPORATION
Up to $5,000,000
Shares of Common Stock
We have entered into a Standby Equity Distribution Agreement, or the SEDA, with YA Global
Master SPV Ltd., or YA Global, for the offer and sale of up to $5,000,000 of shares of our common
stock, par value $0.01 per share, offered by this prospectus supplement and the accompanying base
prospectus. We may from time to time issue all or a portion of these shares to YA Global at 96% of
the market price at the time of such issuance determined in accordance with the terms of the SEDA.
We have been advised by YA Global that the resale of any shares of common stock by YA Global
will be made by means of ordinary brokers transactions on the Nasdaq Capital Market or otherwise
at market prices prevailing at the time of sale or at prices related to the prevailing market
prices. For additional information on the methods of sale that may be used by YA Global, see the
section entitled Plan of Distribution on page S
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4.
Our common stock is quoted on the Nasdaq Capital Market under the symbol DIGA. On July 14,
2009, the last reported sale price of our common stock on the Nasdaq Capital Market was $1.44 per
share. The aggregate market value of our outstanding common stock held by non-affiliates is
$23,793,898 based on 16,523,540 shares of common stock held by non-affiliates, out of a total of
17,891,495 shares outstanding, and a per share price of $1.44 based on the last reported sale price
of our common stock on July 14, 2009. As of the date hereof, we have not offered securities
pursuant to General Instruction I.B.6. of Form S-3 during the prior 12 calendar month period.
Investing in our securities involves a high degree of risk.
See Risk Factors beginning on page S-2 of this prospectus supplement.
In connection with the resale of shares of our common stock, YA Global may be deemed to be an
underwriter within the meaning of the Securities Act of 1933, as amended, and the compensation of
YA Global may be deemed to be underwriting commissions or discounts.
Neither the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or passed upon the adequacy or accuracy of this
prospectus supplement or the accompanying base prospectus. Any representation to the contrary is a
criminal offense.
YA Global Master SPV Ltd.
The date of this prospectus supplement is July 16, 2009.
TABLE OF CONTENTS
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PROSPECTUS SUPPLEMENT
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S-1
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S-3
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S-12
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S-12
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S-15
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BASE PROSPECTUS
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Prospectus Summary
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4
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Risk Factors
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5
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Special Note Regarding Forward-Looking Statements
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13
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Information We Have Incorporated By Reference
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14
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Where You Can Find More Information
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Use of Proceeds
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General Description of Securities We May Offer
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16
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Description of Capital Stock
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16
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Plan of Distribution
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19
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Legal Matters
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20
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Experts
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You should rely only on the information contained or incorporated by reference in this
prospectus supplement and the accompanying base prospectus. We have not authorized anyone to
provide you with different information. If anyone provides you with different or inconsistent
information, you should not rely on it. We are not making an offer to sell these securities in any
jurisdiction where the offer and sale is not permitted.
You should not assume that the information appearing in this prospectus supplement or the base
prospectus is accurate as of any date other than the date on the front cover of the respective
documents. You should not assume that the information contained in the documents incorporated by
reference in this prospectus supplement or the base prospectus is accurate as of any date other
than the respective dates of those documents. Our business, financial condition, results of
operations, and prospects may have changed since that date.
ii
PROSPECTUS SUMMARY
About This Prospectus Supplement
This prospectus supplement and the accompanying base prospectus are part of a registration
statement on Form S-3 (Registration No. 333-159880) that we filed with the Securities and Exchange
Commission using a shelf registration process. Under this shelf process, we may offer to sell
any combination of the securities described in the base prospectus in one or more offerings up to a
total dollar amount of $6,000,000. The base prospectus provides you with a general description of
the securities we may offer. Each time we sell securities under this shelf registration, we will
provide a prospectus supplement that will contain specific information about the terms of that
offering. The prospectus supplement may also add, update or change information contained in the
base prospectus. You should read both this prospectus supplement and the accompanying base
prospectus, including all documents incorporated by reference.
This prospectus supplement provides specific details regarding the issuance of up to
$5,000,000 of shares of our common stock pursuant to the SEDA. To the extent there is a conflict
between the information contained in this prospectus supplement and the base prospectus, you should
rely on the information in this prospectus supplement. This prospectus supplement, the base
prospectus and the documents we incorporate by reference herein and therein include important
information about us and our common stock, and other information you should know before investing.
You should read both this prospectus supplement and the base prospectus, together with the
additional information described in the base prospectus under the heading Where You Can Find More
Information.
Our Business
We develop innovative identification, location and software products for consumer, commercial
and government sectors worldwide. Our unique and often proprietary products provide safety for
people, animals, food chains, government/military assets, and commercial assets. Included in this
diverse product line are applications for radio frequency identification systems, commonly known as
RFID, end-to-end food safety systems and global positioning satellite communications systems
(GPS).
We operate in two business segments: Animal Identification and Emergency Identification.
Animal Identification
Our Animal Identification segment focuses on developing, manufacturing and marketing of visual
and electronic identification tags and implantable RFID microchips, primarily for identification,
tracking and location of companion pets, horses, livestock (e.g., cattle and hogs), fish and
wildlife worldwide, and, more recently, for animal bio-sensing applications, such as temperature
reading for companion pet, equine and livestock applications. Our Animal Identification segments
proprietary products focus on pet identification and safeguarding and the positive identification
and tracking of livestock and fish, which we believe is crucial for asset management and for
disease control and food safety.
This segments principal products are:
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visual and electronic ear tags for livestock; and
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implantable microchips and RFID scanners for the companion pet, horse, livestock, and fish and wildlife industries.
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Emergency Identification
Our Emergency Identification segment focuses on developing and marketing GPS and GPS-enabled
products used for location tracking and message monitoring of pilots, aircraft, maritime vehicles
and outdoor adventurers in remote locations. Our Emergency Identification segment consists of our
98.5% owned subsidiary, Signature Industries Limited (Signature). Signature is based in the
United Kingdom and has been developing and manufacturing personal locator beacons (PLBs) for five
decades.
This segments principal products are:
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GPS enabled search and rescue equipment and intelligent communications
products and services for mobile data and radio communications
applications, including our SARBE and McMurdo brands, which serve
commercial and military markets; and
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alarm sounders for industrial use and other electronic components.
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S-1
Company Information
We were incorporated on May 11, 1993 in Missouri and reincorporated on April 20, 2007 in
Delaware. Our principal executive offices are located at 490 Villaume Avenue, South St. Paul,
Minnesota 55075, and our telephone number is (651) 455-1621. Our website is www.digitalangel.com.
The information contained on our website is not a part of this prospectus. We have included our
website address in this prospectus as an inactive textual reference only.
S-2
RISK FACTORS
An investment in our securities involves a high degree of risk and should be considered only
by those persons who are able to afford a loss of their entire investment. There are important
factors that could cause our actual results, level of activity, performance or achievements to
differ materially from the results, level of activity, performance or achievements expressed or
implied by any forward-looking statement. In particular, you should consider the numerous risks
outlined below. Those risk factors are not exhaustive. Other sections of this prospectus, any
prospectus supplement and the documents incorporated by reference may include additional factors
which could adversely impact our business and financial performance. Moreover, we operate in a very
competitive and rapidly changing environment. New risk factors emerge from time to time, and it is
not possible for our management to predict all risk factors, nor can we assess the impact of all
factors on our business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking statements. In
evaluating our business, prospective investors should carefully consider the risk factors in
addition to the other information included or incorporated by reference in this prospectus.
We have a history of operating losses and negative cash flows and we may not become profitable in
the future, which could ultimately result in our inability to continue operations in the normal
course of business.
Historically, we have incurred losses and, in 2007 and prior years, we did not generate
positive cash flows from operations. We incurred a consolidated loss from continuing operations of
$1.2 million, $58.3 million, $34.8 million and $16.3 million in the three months ended March 31,
2009 and the years ended December 31, 2008, 2007 and 2006, respectively, and our consolidated
operating activities provided (used) cash of $0.3 million, $1.4 million and $(18.5) million during
the three months ended March 31, 2009 and the years ended December 31, 2008 and 2007, respectively.
As of March 31, 2009, we had an accumulated deficit of approximately $560.1 million. We have funded
our operating cash requirements, as well as our capital needs, with the proceeds from investing
and/or financing activities. There is no assurance that our operating activities will be able to
fund our cash requirements in the future if our investing and/or financing activities cannot.
Historical losses and negative cash flows from operations raise concerns about our ability to
continue operations at the current level.
Our ability in the future to achieve or sustain profitability is based on a number of factors,
many of which are beyond our control, including the future demand for our RFID, GPS and
satellite-based systems. If demand for such systems does not reach anticipated levels, or if we
fail to manage our cost structure, we may not achieve profitability. We believe that we will be
able to generate enough cash from operations, our existing revolving credit facility and factoring
lines, the sales of certain business units and through other investing and financing sources to
operate our business for the next twelve months ending March 31, 2010, including generating the
cash required to repay our debt obligations, of which approximately $5.8 million is due in February
2010.
Our capital requirements depend on a variety of factors, including but not limited to, the
rate of increase or decrease in our existing business base, the success, timing, and amount of
investment required to bring new products on-line, revenue growth or decline, and potential
acquisitions or divestitures. We have established a management plan to guide us in achieving
profitability and positive cash flows from operations during 2009. No assurance can be given that
we will be successful in implementing the plan. Failure to generate positive cash flow from
operations will have a material adverse effect on our business, financial condition and results of
operations.
Our historical sources of liquidity have included proceeds from the sale of common stock and
preferred shares, proceeds from the issuance of debt, proceeds from the sale of businesses, and
proceeds from the exercise of stock options and warrants. In addition to these sources, other
sources of liquidity may include the raising of capital through additional private placements or
public offerings of debt or equity securities. However, going forward some of these sources may not
be available, or if available, they may not be on favorable terms. We will be required to generate
funds to repay our term notes and certain of our other debt obligations during 2009 and 2010,
including approximately $4.9 million that will be due under the terms of our Laurus term debt on
February 1, 2010. As of March 31, 2009, we had a working capital deficiency, which is due in part
to having to classify our term debt, which matures in February 2010, our revolving line of credit,
our factoring lines and our credit facility with Danske Bank, which are more fully discussed in
Note 9 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, as current
liabilities on our consolidated balance sheet. In addition, our credit facility with Danske Bank,
which currently does not require us to make principal payments, is due on demand and we are
currently in negotiations with Danske Bank to begin making payments on the credit facility during
the second half of 2009. If we are unable to generate the funds necessary to pay our obligations in
the ordinary course of business, we may be unable to continue operations at the current level.
These conditions indicate that we may be unable to continue as a going concern.
S-3
The current volatility in economic conditions and the financial markets may adversely affect our
industry, business and financial performance.
We have witnessed unprecedented disruptions in financial markets, including volatility in
asset values and constraints on the availability of credit. In response to these developments, the
U.S. government has taken, and may take further, steps designed to stabilize markets generally and
strengthen financial institutions in particular. The impact, if any, that these financial market
events or these governmental actions might have on us and our business is uncertain and cannot be
estimated at this time.
Currently, there has been a general weakening of the U.S. economy. To the extent these
economic developments continue to worsen, and to the extent legislation or regulatory action
adversely affects the U.S. economy, there could be an adverse impact on our access to capital and
to our results of operations.
Our stock price has reflected a great deal of volatility, including a significant decrease over the
past few years. The volatility may mean that, at times, our stockholders may be unable to resell
their shares at or above the price at which they acquired them.
From January 1, 2005 to July 6, 2009, the price per share of our common stock has ranged from
a high of $57.20 to a low of $0.39, on a split adjusted basis. The price of our common stock has
been, and may continue to be, highly volatile and subject to wide fluctuations. The market value of
our common stock has declined in the past, in part, due to our operating performance. In the
future, broad market and industry factors may decrease the market price of our common stock,
regardless of our actual operating performance. Recent declines in the market price of our common
stock and in broad capital markets could affect our access to capital, and may, if continuing,
impact our ability to continue operations at the current level. In addition, any continuation of
the recent declines in the price of our common stock may harm employee morale and retention,
curtail investment opportunities presented to us, and negatively impact other aspects of our
business. As a result of any such declines, many stockholders have been or may become unable to
resell their shares at or above the price at which they acquired them.
If we fail to continue to meet all applicable Nasdaq Capital Market requirements, our stock could
be delisted by the Nasdaq Capital Market. If delisting occurs, it would adversely affect the
market liquidity of our common stock and harm our businesses.
Our common stock is currently traded on the Nasdaq Capital Market under the symbol DIGA. If
we fail to meet any of the continued listing standards of the Nasdaq Capital Market, our common
stock could be delisted from the Nasdaq Capital Market. These continued listing standards include
specifically enumerated criteria, such as:
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a $1.00 minimum closing bid price;
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shareholders equity of $2.5 million, market value of publicly-held shares of $35
million, or net income from continuing operations of $500,000 in the most recently
completed fiscal year or in two of the last three most recently completed fiscal years;
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500,000 shares of publicly-held common stock with a market value of at least $1 million;
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300 round-lot stockholders; and
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compliance with Nasdaqs corporate governance requirements, as well as additional or
more stringent criteria that may be applied in the exercise of Nasdaqs discretionary
authority.
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In the future, if our common stock were to fail to meet the minimum bid price requirement or
any of the other listing requirements it could be delisted from the Nasdaq Capital Market. In that
case trading of our common stock most likely will be conducted in the over-the-counter market,
(OTC) Bulletin Board market, an electronic bulletin board established for unlisted securities.
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.
We have substantial debt and debt service and our debt agreements contain certain events of
default.
As of March 31, 2009, our indebtedness totaled approximately $14.9 million, and we had
advances on our factoring lines of approximately $2.0 million. As a result, we incur significant
interest expense. In addition, we are obligated to make monthly principal payments on certain of
our notes. As of March 31, 2009 we had $5.8 million of outstanding term debt that matures in
February 2010, plus a deferred financing fee obligation of $0.8 million, also approximately $2.6
million of our outstanding revolver debt at March 31, 2008 matures in August 2010 and approximately
$2.0 million of mortgage debt matures on November 1, 2010. In addition, we are in negotiation with
one of our lenders, Danske Bank, to begin to make principal payments on our outstanding credit line
with them during the second half of 2009.
S-4
Our debt agreements contain certain events of default, including, among other things, failure
to pay, violation of covenants, and certain other expressly enumerated events. Additionally, we
granted Laurus Master Fund Limited (Laurus) a first priority security interest and granted
Kallina Corporation (Kallina, an affiliate of Laurus) a security interest in substantially all of
our assets, and we pledged all of the issued and outstanding capital stock we own in certain of our
wholly-owned subsidiaries.
The degree to which we are leveraged could have important consequences, including the
following:
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our ability to obtain additional financing in the future for
operations, capital expenditures, potential acquisitions, and other
purposes may be limited, or financing may not be available on terms
favorable to us or at all;
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a substantial portion of our cash flows from operations must be used
to pay our interest expense and repay our debt, which reduces the
funds that would otherwise be available to us for our operations and
future business opportunities; and
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our ability to continue operations at the current level could be
negatively affected if we cannot refinance our obligations before
their due date.
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A default under any of our debt agreements could result in acceleration of debt payments and
it could permit the lender to foreclose on our assets and the stock we have pledged in our
subsidiaries. We cannot assure you that we will be able to maintain compliance with these
covenants. Failure to maintain compliance could have a material adverse impact on our financial
position, results of operations and cash flow.
We have effected or entered into (and will likely continue to effect or enter into) capital raising
transactions, acquisitions, legal settlements and contracts for services that involve the issuance
of shares of our common stock (or securities convertible into or exchangeable for such shares) and,
as a result, your investment in our common stock will be further diluted.
We currently have a legal settlement and an earn out obligation aggregating approximately $4.1
million, both of which we currently intend to settle in shares of our common stock. The legal
settlement may be settled in unregistered shares of our common stock and the earn out obligation
(to the extent we owe any) must be settled in registered shares of our common stock. Such share
issuances have in the past been and we expect will in the future be dilutive to the value of our
common stock. As a result, your investment in our common stock will be further diluted.
Certain events over which you will have no control could result in the issuance of additional
shares of our common stock or other securities, which could dilute the value of your shares of
common stock. We may issue additional shares of common stock:
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to raise additional capital;
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upon the exercise of outstanding options and stock purchase warrants
or additional options and warrants issued in the future;
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in connection with severance agreements;
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in connection with loans or other capital raising transactions; and
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in connection with acquisitions of other businesses or assets.
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As of July 6, 2009, there were 313,674 outstanding warrants and 2,765,260 options to acquire
additional shares of our common stock with weighted average exercise prices of $30.29 per share and
$17.80 per share, respectively. If exercised, these securities could dilute the value of the shares
of common stock. In addition, we have the authority to issue up to a total of 35,000,000 shares of
common stock and up to 5,000,000 shares of preferred stock without further shareholder approval,
including shares that could be convertible into our common stock, subject to applicable Nasdaq
requirements for issuing additional shares of stock. Were we to issue any such shares, or enter
into any other financing transactions, the terms may have the effect of significantly diluting or
adversely affecting the holdings or the rights of the holders of the common stock.
We may issue preferred stock, which will rank senior to the shares of our common stock and which
may delay or prevent a change in control of us.
Preferred stock may be created and issued from time to time by our board of directors, with
such rights and preferences as our board of directors may determine. Because of our board of
directors broad discretion with respect to the creation and issuance of any series of preferred
stock without shareholder approval, our board of directors could adversely affect the voting power
of our common stock. The issuance of preferred stock may also have the effect of delaying,
deferring or preventing a change in control of us.
S-5
There is no guarantee that we will sell the maximum number of shares offered.
We currently intend to offer up to 3,000,000 shares of our common stock under this prospectus.
There can be no assurance that any of the shares being offered by this prospectus will be sold or
that we will receive all of the estimated net proceeds generated from a sale of all of such shares.
If all of the 3,000,000 shares offered are not sold, we may be unable to fund all of the intended
uses for the net proceeds anticipated from this offering without obtaining funds from alternative
sources or using working capital generated by our operations. Alternative sources of funds may not
be available to us at a reasonable cost. In addition, since our shares are being offered on a
best-efforts basis and there is no minimum number of shares that must be sold, the proceeds from
the offering, if any, may not be sufficient to cover the offering expenses.
There is no assurance that the Company will receive $5,000,000 in gross proceeds under the SEDA.
Currently, the Company can only sell up to 3,000,000 shares of common stock under this
Prospectus and only 3,578,299 shares of common stock (or 20% of the outstanding number of shares as
of the date of this Prospectus) under the SEDA. Sale of shares under the SEDA at a price below
$1.39 could result in proceeds below the $5,000,000 total dollar amount available under the SEDA.
Additionally, sale of more than 20% of the outstanding shares of common stock would require
stockholder approval, which may not be obtained.
Because we will not pay dividends on our common stock for the foreseeable future, shareholders must
rely on stock appreciation for any return on their investment in the common stock.
We have never declared or paid dividends on our common stock, and we cannot assure you that
any dividends will be paid in the foreseeable future. Our outstanding debt agreements place
restrictions on the declaration and payment of dividends. We intend to use any earnings that we
generate to finance our operations and to repay debt obligations, and, we do not anticipate paying
cash dividends in the future. As a result, only appreciation of the price of our common stock will
provide a return to our shareholders.
We rely heavily on revenues derived from sales to various governmental agencies, and the loss of,
or a significant reduction in, orders from government agencies could result in significant losses
and deficits in cash flows from operations.
Our principal customers for electronic identification devices for fish are Pacific States
Marine, a government contractor that relies on funding from the U.S. government, and the U.S. Army
Corps of Engineers. Our Emergency Identification segment is heavily dependent on contracts with
domestic government agencies and foreign governments, including the United Kingdom, primarily
relating to military applications. Because we rely on revenues and cash flows generated from
contracts, directly or indirectly, with governmental agencies, the loss of any such contract would
result in a decrease in revenues and cash flows, and such a decrease may be significant and thereby
have a material adverse effect on our financial condition and results of operations.
Our Animal Identification segment relies heavily on revenue from a principal distributor and two
customers and the loss of the principal distributor and customers could negatively affect our
revenue, cash flows and results of operations.
Our pet identification and location system is marketed in the U.S. by Schering-Plough. For the
years ended December 31, 2008, 2007 and 2006, Schering-Plough accounted for approximately 19%, 34%
and 15%, respectively, of our Animal Identification segments revenues. It may be difficult and
time-consuming for us to arrange for distribution of the implantable microchip by a third party.
The loss of Schering-Plough as our exclusive distributor may negatively affect future sales. Our
contract with Schering-Plough was due to expire on February 13, 2009 but has been extended to June
30, 2009. There is no assurance that Schering-Plough and Destron Fearing will extend the contract
beyond June 30, 2009. Our principal customers for electronic identification devices for fish are
Pacific States Marine and the U.S. Army Corps of Engineers. The loss of, or a significant reduction
in, orders from these customers could have a material adverse effect on our financial condition and
results of operations.
We depend on a small team of senior management and key employees, and we may have difficulty
attracting and retaining additional personnel.
Our future success will depend in large part upon the continued services and performance of
senior management and other key personnel. If we lose the services of any member of our senior
management team, our overall operations could be materially and adversely affected. In addition,
our future success will depend on our ability to identify, attract, hire, train, retain and
motivate other highly skilled technical, managerial, marketing, purchasing and customer service
personnel when they are needed. Competition for qualified individuals to fill these positions is
intense. We cannot ensure that we will be able to successfully attract, integrate or retain
sufficiently qualified personnel when the need arises. Any failure to attract and retain the
necessary technical, managerial, marketing, purchasing and customer service personnel could have a
material adverse effect on our financial condition and results of operations.
S-6
The loss of any senior executive could materially adversely affect our financial results. Our
senior executives, in many cases, have strong relationships with our customers and suppliers.
Therefore, the loss of the services of such senior executives or any general instability in the
composition of our senior management could have a negative impact on our relationship with these
customers and suppliers.
Over the past few years, we have made significant changes in the nature and scope of our businesses
and we have expanded into different product lines, including new and unproven technologies.
If we are not successful in implementing our business model and developing and marketing these
products or if these products do not gain sufficient market acceptance, we may not be able to
achieve or sustain profitable operations. In that case, the market price of our common stock would
likely decrease.
Management continues to review strategic alternatives to increase shareholder value, which may
result in a decrease in consolidated revenue and the overall size of our operations.
Management is focusing on various strategic alternatives, which include the possibility of
selling one or more of our business units and/or segments. If we decide in the future to further
streamline our business to focus our attention on only one business segment, it would, at least in
the short term, result in a decrease in our revenue and the size of our operations. Such a decrease
could negatively impact the price of our common stock.
Technological change could cause our products and technology to become obsolete or require the
redesign of our products, which could have a material adverse effect on our businesses.
Technological changes within the industries in which we conduct business may require us to
expend substantial resources in an effort to develop new products and technology. We may not be
able to anticipate or respond to technological changes in a timely manner, and our response may not
result in successful product development and timely product introductions. If we are unable to
anticipate or respond to technological changes, our businesses could be adversely affected.
We may be subject to costly product liability claims from the use of our systems, which could
damage our reputation, impair the marketability of our systems and force us to pay costs and
damages that may not be covered by adequate insurance.
Manufacturing, marketing, selling, testing and operation of our systems entail a risk of
product liability. We could be subject to product liability claims in the event our systems fail to
perform as intended. Even unsuccessful claims against us could result in the expenditure of funds
in litigation, the diversion of management time and resources, damage to our reputation and
impairment in the marketability of our systems. While we maintain liability insurance, it is
possible that a successful claim could be made against us, that the amount of our insurance
coverage would not be adequate to cover the costs of defending against or paying such a claim, or
that damages payable by us would harm our business.
If others assert that our products infringe their intellectual property rights, we may be drawn
into costly disputes and risk paying substantial damages or losing the right to sell our products.
We face the risk of adverse claims and litigation alleging our infringement of the
intellectual property rights of others. If infringement claims are brought against us or our
suppliers, these assertions could distract management and necessitate our expending potentially
significant funds and resources to defend or settle such claims. We cannot be certain that we will
have the financial resources to defend ourselves against any patent or other intellectual property
litigation. If we or our suppliers are unsuccessful in any challenge to our rights to market and
sell our products, we may, among other things, be required to:
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pay actual damages, royalties, lost profits and/or increased damages
and the third partys attorneys fees, which may be substantial;
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cease the development, manufacture, use and/or sale of products that
use the intellectual property in question through a court-imposed
sanction called an injunction;
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expend significant resources to modify or redesign our products,
manufacturing processes or other technology so that it does not
infringe others intellectual property rights or to develop or acquire
non-infringing technology, which may not be possible; or
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obtain licenses to the disputed rights, which could require us to pay
substantial upfront fees and future royalty payments and may not be
available to us on acceptable terms, if at all, or to cease marketing
the challenged products.
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Ultimately, we could be prevented from selling a product or otherwise be forced to cease some
aspect of our business operations as a result of any intellectual property litigation. Even if we
or our suppliers are successful in defending an infringement claim, the expense, time delay, and
burden on management of litigation and negative publicity could have a material adverse effect on
our business.
We obtain the implantable microchip used in our Animal Identification segments products from a
single supplier, making us vulnerable to supply disruptions that could constrain our sales of such
systems and/or increase the per-unit cost of production of the microchip.
At present, we source our implantable microchip from Raytheon Microelectronics España S.A.
(RME), the actual manufacturer, under a supply agreement between us and RME for use in our Animal
Identification segments products. The term of that agreement expires on June 30, 2010, subject to
earlier termination by either party if, among other things, the other party breaches the agreement
and does not remedy the breach within 30 days of receiving notice. We and RME each own certain of
the automated equipment and tooling used in the manufacture of the microchip. Accordingly, it would
be difficult for us to arrange for a third party other than RME to manufacture the implantable
microchip to satisfy our requirements. Even if we were able to arrange to have the implantable
microchip manufactured in another facility, we believe that making such arrangements and
commencement of production could take at least three to six months. A supply disruption of this
length could cause customers to cancel orders, negatively affect future sales and damage our
business reputation. In addition, the per-unit cost of production at another facility could be more
than the price per unit that we currently pay.
The expiration or invalidation of patents covering products and technologies in our Animal
Identification segment could expose us to potential competition that may have a material adverse
effect on our sales and results of operations.
We rely on various patents covering microchip and reader products used in our Animal
Identification segment that expire from 2015 through 2021. Without patent protection, our
competitors may be able to independently develop similar technology or duplicate our systems, which
could have a material adverse effect on our sales and results of operations.
Our inability to safeguard our intellectual property may adversely affect our business by causing
us to lose a competitive advantage or by forcing us to engage in costly and time-consuming
litigation to defend or enforce our rights.
We rely on copyrights, trademarks, trade secret protections, know-how and contractual
safeguards to protect our non-patented intellectual property, including our software technologies.
Our employees, consultants and advisors are required to enter into confidentiality agreements that
prohibit the disclosure or use of our confidential information. We also have entered into
confidentiality agreements to protect our confidential information delivered to third parties for
research and other purposes. There can be no assurance that we will be able to effectively enforce
these agreements, the confidential information will not be disclosed, others will not independently
develop substantially equivalent confidential information and techniques or otherwise gain access
to our confidential information, or that we can meaningfully protect our confidential information.
Costly and time-consuming litigation could be necessary for enforcement, and failure to maintain
the confidentiality of our confidential information could adversely affect our business by causing
us to lose a competitive advantage maintained through such confidential information.
Disputes may arise in the future with respect to the ownership of rights to any technology
developed with third parties. These and other possible disagreements could lead to delays in the
collaborative research, development or commercialization of our systems, or could require or result
in costly and time-consuming litigation that may not be decided in our favor. Any such event could
have a material adverse effect on our business, financial condition and results of operations by
delaying our ability to commercialize innovations or by diverting our resources away from
revenue-generating projects.
We compete with other companies in the visual and electronic identification and locator markets,
and the products sold by our competitors could become more popular than our products or render our
products obsolete.
The markets for visual and electronic identification and beacon products are highly
competitive. We believe that our principal competitors in the visual identification market for
livestock are AllFlex USA and Y-Tex Corporation, that our principal competitors in the electronic
identification market are AllFlex USA, Datamars SA and Avid Identification Systems, Inc., and that
our principal competitors in the beacon market are Boeing North American Inc., General Dynamics
Decision Systems, Tadiran Spectralink Ltd., Becker Avionic Systems, and ACR Electronics, Inc.
In addition, other companies could enter this line of business in the future. Many of our
competitors have substantially greater financial and other resources than us. We may not be able to
compete successfully with these competitors, and those competitors may develop or market
technologies and products that are more widely accepted than our products or that would render our
products obsolete or noncompetitive.
S-8
Infringement by third parties on our intellectual property or development of substantially
equivalent proprietary technology by our competitors could negatively affect our businesses.
Our success depends significantly on our ability to:
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maintain patent and trade secret protection;
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obtain future patents and licenses; and
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operate without infringing on the proprietary rights of third parties.
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There can be no assurance that the measures we have taken to protect our intellectual property
will prevent the misappropriation or circumvention of our intellectual property. In addition, there
can be no assurance that any patent application, when filed, will result in an issued patent, or
that our existing patents, or any patents that may be issued in the future, will provide us with
significant protection against competitors. Moreover, there can be no assurance that any patents
issued to or licensed by us will not be infringed upon or circumvented by others. Litigation to
establish the validity of patents and to assert infringement claims against others can be expensive
and time-consuming, even if the outcome, which is often uncertain, is in our favor. Infringement of
our intellectual property or the development of substantially equivalent technology by competitors
could have a material adverse effect on our business.
Our efforts to protect our intellectual property may be less effective in some foreign countries
where intellectual property rights are not as well protected as in the U.S.
The laws of some foreign countries do not protect intellectual property to as great an extent
as do the laws of the U.S. Policing unauthorized use of the intellectual property utilized in our
systems and system components is difficult, and there is a risk that our means of protecting our
intellectual property may prove inadequate in these countries. Our competitors in these countries
may independently develop similar technology or duplicate our systems, which would likely reduce
our sales in these countries. Furthermore, some of our patent rights may be limited in
enforceability to the U.S. or certain other select countries, which may limit our intellectual
property protection abroad.
Domestic and foreign government regulation and other factors could impair our ability to develop
and sell our products in certain markets.
The electronic animal identification market can be negatively affected by such factors as food
safety concerns, price, consumer perceptions regarding cost and efficacy, international technology
standards, government regulation and slaughterhouse removal of microchips.
We are also subject to federal, state and local regulation in the U.S., including regulation
by the FDA, the FCC and the USDA, and similar regulatory bodies in other countries. We cannot
predict the extent to which we may be affected by further legislative and regulatory developments
concerning our products and markets. We are required to obtain regulatory approval before marketing
most of our products. The regulatory process can be very time-consuming and costly, and there is no
assurance that we will receive the regulatory approvals necessary to sell our products under
development. Regulatory authorities also have the authority to revoke approval of previously
approved products for cause, to request recalls of products and to close manufacturing plants in
response to violations. Any such regulatory action, including the failure to obtain such approval,
could prevent us from selling, or materially impair our ability to sell, our products in certain
markets and could negatively affect our businesses.
Our foreign operations pose additional risks
.
We operate our businesses and market our products internationally. During the years ended
December 31, 2008 and 2007, approximately 64% and 55% of our sales were to both private and public
businesses in foreign countries. Our foreign operations are subject to the risks described herein,
as well as risks related to compliance with foreign laws and other economic or political
uncertainties. International sales are subject to risks related to general economic conditions,
currency exchange rate fluctuations, imposition of tariffs, quotas, trade barriers and other
restrictions, enforcement of remedies in foreign jurisdictions and compliance with applicable
foreign laws, and other economic and political uncertainties. All of these risks could result in
increased costs or decreased revenues, which could have an adverse effect on our financial results.
Our results of operations may be adversely affected if we write-off additional goodwill and other
intangible assets.
During the third quarter of 2008, we recorded an impairment charge of $26.2 million for
goodwill associated with our Animal Identification segment and an impairment of our investment in
VeriChip Corporation. In the fourth quarter of 2008, we recorded an impairment charge of $4.1
million for goodwill associated with our Animal Identification segment. During the fourth
S-9
quarter of 2007, we recorded an impairment charge of approximately $4.6 million for goodwill
associated with our DSD Holding business. In addition, during 2007 and 2006, we recorded an
impairment charge of approximately $9.5 million and $6.6 million, respectively, for goodwill and
other intangible assets associated with our discontinued companies, Computer Equity and OuterLink,
which are included in our results from discontinued operations. As of March 31, 2009, we had
approximately $14.5 million in goodwill. We assess the fair value of our goodwill and other
intangible assets annually or earlier if events occur or circumstances change that would more
likely than not reduce the fair value of these assets below their carrying value. If we determine
that significant additional impairment has occurred, we will be required to write off the impaired
portion of goodwill and our other intangible assets. Additional impairment charges could have a
material adverse effect on our operating results and financial condition.
We face the risk that the value of our inventory may decline before it is sold or that our
inventory may not be able to be sold at anticipated prices.
On March 31, 2009, the book value of our inventory was $9.0 million. Our inventory could
decline in value as a result of technological obsolescence or a change in the product. Our success
depends in part on our ability to minimize the cost to purchase/produce inventory and sell that
inventory rapidly. The failure to sell such inventory may require us to sell such inventory at a
discount or at a loss or write down its value, which could result in significant losses and
decreases in our cash flows.
Currency exchange rate fluctuations could have an adverse effect on our sales and financial
results.
During the years ended December 31, 2008 and 2007, we generated approximately 62% and 52%,
respectively, of our sales and incurred a portion of our expenses in currencies other than U.S.
dollars. During the years ended December 31, 2008 and 2007, we recorded foreign currency gains of
approximately $0.3 million and $0.4 million, respectively. In prior years, we have not incurred
material amounts of foreign currency gains or losses. During 2008, we saw significant fluctuations
in foreign currency exchange rates which resulted in approximately $2.3 million of other
comprehensive loss.
To the extent that going forward we are unable to match revenues received in foreign
currencies with costs paid in the same currency, exchange rate fluctuations in any such currency
could have an adverse effect on our financial results.
Should we issue in excess of approximately 1,110,000 additional shares of our common stock through
various means, such as in an offering pursuant to this prospectus, any prospectus supplement,
issuances under our stock option plans as well as any other shares we may issue, it will result in
a change of ownership under Internal Revenue Code section 382 and, thereby, limit our use of
certain net operating losses to offset future U.S. taxable income.
At March 31, 2009, we had aggregate net operating loss carryforwards of approximately $272.5
million for income tax purposes that expire in various amounts from 2013 through 2028. Through
December 28, 2007, Destron Fearing filed a separate federal income tax return. Of the aggregate
U.S. net operating loss carryforwards of $263.4 million, of which $69.3 million relates to Destron
Fearing, and approximately $9.1 million relates to foreign loss carryforwards. These net operating
loss carryforwards are available to only offset future taxable income earned in the home country of
the foreign entity. As of March 31, 2009, we have provided a valuation allowance to fully reserve
our U.S. net operating loss carryforwards and our other existing U.S. net deferred tax assets,
primarily as a result of our recent losses and our current projections of future taxable U.S.
income. As a result of fully reserving our U.S. deferred tax assets, we have not recognized a
benefit related to our net U.S. losses.
The amount of any benefit from our US tax net operating losses is dependent on: (1) our
ability to generate future taxable income and (2) the unexpired amount of net operating loss
carryforwards available to offset amounts payable on such taxable income. Any greater than fifty
percent change in ownership under Internal Revenue Code (IRC) section 382 would place significant
annual limitations on the use of such net operating losses to offset any future taxable income we
may generate. Such limitations, in conjunction with the net operating loss expiration provisions,
could effectively eliminate our ability to use a substantial portion of our net operating loss
carryforwards to offset future taxable income. Based on current cumulative three-year change in
ownership, we could exceed the fifty percent threshold upon the issuance of an additional 1.1
million shares of our common stock in which case, approximately $194.1 million of the $263.4
million of available U.S. net operating losses would be limited under IRC section 382. Certain
additional transactions could cause an ownership change, including (a) additional issuances of
shares of common stock by us or (2) acquisitions or sales of shares by certain holders of our
shares, including persons who have held, currently hold, or accumulate in the future five percent
or more of our outstanding stock.
If we fail to maintain proper and effective internal controls, our ability to produce accurate
financial statements could be impaired, which could adversely affect our operating results, our
ability to operate our business and our stock price.
During the course of our testing of our internal controls, we may identify, and have to
disclose, material weaknesses or significant deficiencies in our internal controls that will have
to be remediated. Implementing any appropriate changes to our internal controls may require
specific compliance training of our directors, officers and employees, entail substantial costs in
order to modify
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our existing accounting systems, and take a significant period of time to complete. Such
changes may not, however, be effective in maintaining the adequacy of our internal controls, and
any failure to maintain that adequacy, or consequent inability to produce accurate financial
statements on a timely basis, could increase our operating costs and could materially impair our
ability to operate our business. In addition, investors perceptions that our internal controls are
inadequate or that we are unable to produce accurate financial statements may negatively affect our
stock price.
S-11
USE OF PROCEEDS
We may receive up to $5,000,000 in proceeds from the sale of shares of common stock to YA
Global pursuant to the SEDA. For each share of common stock purchased under the SEDA, YA Global
will pay ninety-six percent (96%) of the lowest daily volume weighted average price, or VWAP,
during the five (5) consecutive trading days after the date that we deliver an advance notice.
Each such advance may be for an amount not to exceed the lesser of (1) $500,000 worth or (2) 125%
of the average of the daily value traded for each of the 10 trading days prior to the Advance
Notice date (where daily value traded is the product obtained by multiplying the daily trading
volume for such day by the daily volume weighted average price of the common stock for such day
(VWAP)), or other amount mutually agreed to by the parties. The amount also cannot cause the
aggregate number of shares of common stock beneficially owned by YA Global and its affiliates to
exceed 4.99% of the then outstanding common stock. If an Advance Notice requests the purchase of
shares exceeding any of the amounts described above, that portion of the Advance Notice will be
deemed as automatically withdrawn. We anticipate, and have represented to YA Global in the SEDA,
that the proceeds received under the SEDA will be utilized for working capital, outsourcing and
other manufacturing improvements including capital expenditures, and repayment of debt.
DESCRIPTION OF COMMON STOCK
The following is a description of our capital stock, including our common stock, and other
securities and the material provisions of our certificate of incorporation, bylaws and other
agreements. The following is only a summary and is qualified by applicable law and by the
provisions of our certificate of incorporation, bylaws and other agreements, copies of which are
available as set forth under the captions Where You Can Find More Information and Information We
Have Incorporated by Reference.
General
Under our certificate of incorporation, we have 40,000,000 shares of authorized capital stock,
of which 35,000,000 shares have been classified as common stock and 5,000,000 shares have been
classified as preferred stock, $0.01 per share par value and $10.00 per share par value,
respectively. As of July 6, 2009, there were 17,891,495 shares of common stock outstanding and no
outstanding shares of preferred stock.
Common Stock
Subject to the rights of the preferred stock, holders of common stock are entitled to receive
such dividends as are declared by our board of directors out of funds legally available for the
payment of dividends. We presently intend to retain any earnings to fund the development of our
business. Accordingly, we do not anticipate paying any dividends on our common stock for the
foreseeable future. Any future determination as to declaration and payment of dividends will be
made at the discretion of our board of directors and subject to approval by our lenders.
In the event of the liquidation, dissolution, or winding up of Digital Angel, each outstanding
share of our common stock will be entitled to share equally in any of our assets remaining after
payment of or provision for our debts and other liabilities.
Holders of common stock are entitled to one vote per share on matters to be voted upon by
stockholders. There is no cumulative voting for the election of directors, which means that the
holders of shares entitled to exercise more than 50% of the voting rights in the election of
directors are able to elect all of the directors.
Holders of common stock have no preemptive rights to subscribe for or to purchase any
additional shares of common stock or other obligations convertible into shares of common stock
which we may issue after the date of this prospectus.
All of the outstanding shares of common stock are fully paid and non-assessable. Holders of
our common stock are not liable for further calls or assessments.
Undesignated Preferred Stock
Our certificate of incorporation authorizes 5,000,000 shares of preferred stock. Our board of
directors is authorized, without further stockholder action, to establish various series of such
preferred stock from time to time and to determine the rights, preferences and privileges of any
unissued series including, among other matters, any dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund
terms, the number of shares constituting any such series, and the description thereof and to issue
any such shares. Although there is no current intent to do so, our board of directors may, without
stockholder approval, issue shares of a class or series of preferred stock with voting and
conversion rights which could adversely affect the voting power of the holders of the common stock.
As of the date of this prospectus, there were no shares of preferred stock designated or
outstanding.
S-12
Options and Warrants
As of July 6, 2009, there were options held by our employees and others to purchase an
aggregate of 2,765,260 shares of common stock. Of the outstanding options, 2,216,181 options are
now exercisable at a weighted average exercise price of $21.72 per share, and the rest become
exercisable at various times over the next three years. We currently have 106,248 options available
for grant under our option plans. As of July 6, 2009, the average weighted exercise price of all
outstanding options was $17.80 per share.
As of July 6, 2009, there were 313,674 shares subject to outstanding warrants. The average
weighted exercise price of all outstanding warrants was $30.29 per share. All of the warrants are
currently exercisable.
The warrant agreements provide for anti-dilution provisions that require that the exercise
price be adjusted if we issue certain securities at a price below the exercise price then in effect
and the number of warrants and the exercise price is required to be adjusted upon the declaration
or payment of a dividend or other distribution of our common stock. The total number of shares that
can be issued under such provisions is subject to a ceiling.
The exercise price of the warrants may be paid in cash, in shares of common stock or by
surrendering other warrants.
Limitations on Directors Liability
Our certificate of incorporation and bylaws contain provisions indemnifying our directors and
officers to the fullest extent permitted by Delaware law.
In addition, as permitted by Delaware law, our certificate of incorporation provides that no
director will be liable to us or our stockholders for monetary damages for breach of the directors
fiduciary duty as a director. The effect of this provision is to restrict our rights and the rights
of our stockholders in derivative suits to recover monetary damages against a director for breach
of the directors fiduciary duty as a director, except that a director will be personally liable
for:
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any breach of his or her duty of loyalty to us or our stockholders;
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acts or omissions not in good faith which involve intentional misconduct or a knowing violation of law;
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the payment of dividends or the redemption or purchase of stock in violation of Delaware law; or
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any transaction from which the director derived an improper personal benefit.
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This provision does not affect a directors liability under the federal securities laws.
To the extent that our directors, officers and controlling persons are indemnified under the
provisions contained in our certificate of incorporation or Delaware law against liabilities
arising under the Securities Act of 1933, we have been advised that in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities Act of 1933 and is
therefore unenforceable.
Provisions of Our Certificate of Incorporation and Delaware Law that May Have an Anti-Takeover
Effect
Certain provisions set forth in our certificate of incorporation and Delaware law, which are
summarized below, may have an anti-takeover effect and may delay, deter or prevent a tender offer
or takeover attempt that a stockholder might consider to be in the stockholders best interests,
including attempts that might result in a premium being paid over the market price for the shares
held by stockholders.
Delaware Takeover Statute
Section 203 of the Delaware General Corporation Law (DGCL) prohibits a Delaware corporation
that is a public company from engaging in any business combination (as defined below) with any
interested stockholder (defined generally as an entity or person beneficially owning 15% or more
of the outstanding voting stock of the corporation and any entity or person affiliated with such
entity or person) for a period of three years following the date that such stockholder became an
interested stockholder, unless:
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before such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in
the stockholder becoming an interested stockholder;
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upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining
the number of shares outstanding those shares owned:
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by persons who are directors and also officers, and
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by employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or
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on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting
of stockholders, and not by written consent, by the affirmative vote
of at least 66-2
¤
3% of the outstanding voting stock that is not
owned by the interested stockholder.
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Section 203 of the Delaware General Corporation Law defines business combination to include:
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any merger or consolidation involving the corporation and the interested stockholder;
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any sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder;
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subject to certain exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the interested
stockholder;
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any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or
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the receipt by the interested stockholder of the benefit of any loans, advances,
guarantees, pledges or other financial benefits provided by or through the
corporation.
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Undesignated Preferred Stock
Our certificate of incorporation contains provisions that permit our board of directors to
issue, without any further vote or action by our stockholders, up to 5,000,000 shares of preferred
stock in one or more series and, with respect to each such series, to fix the number of shares
constituting the series and the designation of the series, any voting powers of the shares of the
series, and any preferences and relative, participating, optional and other special rights and any
qualifications, limitations or restrictions, of the shares of such series. Our board could
authorize the issuance of shares of preferred stock that could have the effect of delaying,
deferring or preventing a transaction or change in control that might involve a premium price for
shares of our common stock or otherwise be in their interests.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Registrar and Transfer Company, whose
address is 10 Commerce Drive, Cranford, New Jersey 07016.
Listing
Our common stock is listed on the Nasdaq Capital Market under the symbol DIGA. We have not
applied to list our common stock on any other exchange or quotation system.
S-14
PLAN OF DISTRIBUTION
On July 10, 2009, we entered into a Standby Equity Distribution Agreement, or SEDA, with YA
Global. The SEDA provides that, upon the terms and subject to the conditions set forth therein, YA
Global is committed to purchase up to $5,000,000 of shares of our common stock over a two-year
commitment period. From time to time, and at our sole discretion, we may present YA Global with
advance notices to purchase shares of our common stock.
As provided in the Agreement, periodically the Company will be able to issue advance notices
to YA Global requesting YA Global to purchase a certain number of the Companys common stock
(Advance Notices). The amount of shares the Company can request YA Global to purchase under each
Advance Notice cannot exceed the lesser of (1) $500,000 worth or (2) 125% of the average of the
daily value traded for each of the 10 trading days prior to the Advance Notice date (where daily
value traded is the product obtained by multiplying the daily trading volume for such day by the
daily volume weighted average price of the common stock for such day (VWAP)), or other amount
mutually agreed to by the parties. The amount also cannot cause the aggregate number of shares of
common stock beneficially owned by YA Global and its affiliates to exceed 4.99% of the then
outstanding common stock. If an Advance Notice requests the purchase of shares exceeding any of the
amounts described above, that portion of the Advance Notice will be deemed as automatically
withdrawn.
The purchase price of the shares of common stock will equal 96% of the market price. Market
price is based on the lowest daily VWAP during the five consecutive trading days after the date the
Advance Notice is delivered to YA Global (Pricing Period). After the expiration of the Pricing
Period, YA Global will purchase the appropriate number of shares subject to the Company meeting
certain conditions. Afterwards, the Company can deliver an additional Advance Notice, and may
continue until the commitment amount is purchased or the expiration of the two year period.
For each Advance Notice, the Company may indicate a minimum acceptable price (Minimum
Price), which cannot be more than 90% of the last closing price of the common stock on Nasdaq
Capital Market before delivery of the Advance Notice. If during the Pricing Period for an Advance
Notice, the VWAP for the common stock is below the Minimum Price, the amount of shares requested to
be purchased under such Advance Notice will be reduced by 20% for each day it is below the Minimum
during the Pricing Period (Excluded Day). In addition, each Excluded Day will be excluded from
the Pricing Period for purposes of determining the market price.
In addition, the Agreement provides that the Commitment Fee of $125,000 payable to YA may be
paid either in cash, shares of common stock or some combination thereof. If this fee, or a portion
of the fee, is paid in shares of common stock, the number of shares will equal the dollar amount of
the portion of the fee to be paid in stock divided by the average daily VWAP for the 3 trading day
immediately after the date of the Agreement.
The aggregate commitment amount plus any shares paid to YA Global as part of the commitment
fee cannot equal or exceed 20% of the number of outstanding shares of the Companys common stock as
of the date of the Agreement unless the Companys shareholders approve the issuance as required by
Nasdaq.
Delivery of the shares against payment therefor in respect of each advance notice shall be
settled on the third trading day following each sale pursuant to the SEDA, or on such earlier date
as we and YA Global may mutually agree. There is no arrangement for funds to be received in an
escrow, trust, or similar arrangement. In connection with any Advance Notice, if any portion of an
advance would cause the beneficial ownership of our then outstanding common stock by YA Global to
exceed 4.99%, then such portion shall automatically be deemed to be withdrawn by us with no further
action required by us. We may terminate the SEDA upon fifteen (15) trading days of prior notice to
YA Global, as long as there are no advances outstanding and we have paid to YA Global all amounts
then due. A copy of the SEDA is attached as Exhibit 4.1 to our Current Report on Form 8-K as filed
with the SEC on July 13, 2009.
In addition to our issuance of common stock to YA Global pursuant to the SEDA, this prospectus
supplement also covers the resale of those shares from time to time by YA Global to the public. In
connection with YA Globals sale of our common stock, YA Global may be deemed to be an
underwriter within the meaning of the Securities Act and the compensation paid to YA Global may
be deemed to be underwriting commissions or discounts. We have agreed in the SEDA to provide
indemnification to YA Global against certain civil liabilities.
YA Global has informed us that it will use an unaffiliated broker-dealer to effectuate any
sales of common stock that it may purchase from us pursuant to the SEDA. Such sales will be made
on the Nasdaq Capital Market or otherwise at prices and at terms then prevailing or at prices
related to the then current market price. Each such unaffiliated broker-dealer may be an
underwriter within the meaning of Section 2(a)(11) of the Securities Act. YA Global has informed us
that each such broker-dealer will receive commissions from YA Global which will not exceed
customary brokerage commissions.
S-15
Shares of our common stock may be sold in one or more of the following manners:
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ordinary brokerage transactions and transactions in which the broker solicits purchasers;
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a block trade in which the broker or dealer so engaged will attempt to sell the shares
as agent, but may position and resell a portion of the block as principal to facilitate
the transaction;
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to a broker-dealer as principal and resale by the broker-dealer for its account; or
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a combination of any such methods of sale.
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YA Global has agreed that, during the term of the SEDA, neither YA Global or its affiliates
will engage in any short sales or hedging transactions with respect to our common stock, provided
that upon receipt of an advance notice YA Global may sell shares that it is obligated to purchase
under such advance notice prior to taking possession of such shares.
YA Global and any unaffiliated broker-dealer will be subject to liability under the federal
securities laws and must comply with the requirements of the Securities Act and the Exchange Act,
including without limitation, Rule 10b5 and Regulation M under the Exchange Act. These rules and
regulations may limit the timing of purchases and sales of common stock by YA Global or any
unaffiliated broker-dealer. Under these rules and regulations, YA Global and any unaffiliated
broker-dealer:
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may not engage in any stabilization activity in connection with our securities;
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must furnish each broker which offers shares of our common stock covered by
the prospectus that is a part of our Registration Statement with the number of
copies of such prospectus and any prospectus supplement which are required by
each broker; and
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may not bid for or purchase any of our securities or attempt to induce any
person to purchase any of our securities other than as permitted under the
Exchange Act.
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These restrictions may affect the marketability of the common shares by YA Global and any
unaffiliated broker-dealer.
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