UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2009
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission file number:
000-26020
DIGITAL ANGEL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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43-1641533
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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490 Villaume Avenue
South Saint Paul, Minnesota 55075
(Address of principal executive offices, including zip code)
(651) 455-1621
Registrants telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
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(Title of each class)
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(Name of each exchange on which registered)
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Common Stock, $0.01 par value
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NASDAQ Capital Market
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Securities registered pursuant to Section 12(g) of the Act: Not applicable
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes
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No
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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
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No
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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
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No
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Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files).
Yes
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) 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.
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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 definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
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No
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At June 30, 2009, the aggregate market value of the voting and non-voting common stock held by
non-affiliates was approximately $25.1 million, computed by reference to the price at which the
stock was last sold on that date of $1.44 per share reported on the National Association of
Securities Dealers Automated Quotation System.
Indicate the number of shares outstanding of each of the registrants classes of common stock, as
of the latest practicable date:
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Class
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Outstanding at March 30, 2010
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Common Stock, $.01 par value per share
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27,576,381 shares
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Documents Incorporated by Reference: Parts of the definitive Proxy Statement for the 2010 Annual
Meeting of Stockholders which the Registrant intends to file with the Securities and Exchange
Commission within 120 days after the end of the Registrants fiscal year ended December 31, 2009,
are incorporated by reference in Part III of this Annual Report on Form 10-K to the extent
described herein. If the Registrant does not file its Proxy Statement with the Commission on or
before 120 days after the end of its 2009 fiscal year, the Registrant will file the required
information in an amendment to this Annual Report on Form 10-K.
DIGITAL ANGEL CORPORATION
TABLE OF CONTENTS
2
PART 1
ITEM 1. BUSINESS
Unless the context otherwise provides, when we refer to the Company, we, Digital Angel, or
us, we are referring to Digital Angel Corporation and its subsidiaries (either wholly- or
majority-owned).
Overview
As of December 31, 2009, our business operations consisted primarily of the operations of our
wholly-owned subsidiary, Destron Fearing Corporation and its wholly-owned subsidiaries, which
collectively we refer to in this Annual Report as Destron Fearing, and our 98.5% owned subsidiary,
Signature Industries Limited (Signature). Currently we operate in two business segments: Animal
Identification, which comprises the operations of Destron Fearing; and Emergency Identification,
which comprises the operations of Signature.
We currently engage in the following principal business activities:
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Our Animal Identification segment develops, manufactures and markets visual and electronic
identification tags and implantable radio frequency identification (RFID) microchips, primarily
for identification, tracking and location of companion pets, livestock (e.g., cattle and hogs),
horses, fish and wildlife worldwide, and, more recently, for animal bio-sensing applications, such
as temperature reading for companion pet and livestock applications; and
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Our Emergency Identification segment develops, manufactures and markets global position
systems (GPS) and GPS-enabled products used for emergency location and tracking of pilots,
aircraft and maritime vehicles in remote locations as well as sound horn alarms.
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Discontinued Operations
During the years ended December 31, 2009 and 2008, we sold several non-core businesses and we
discontinued one business, Thermo Life Energy Corp. (Thermo Life), which was sold on January 21,
2010. On November 12, 2008, we sold all of the common stock that we owned in PositiveID
Corporation, formerly, VeriChip Corporation, (PSID) (Nasdaq:PSID), which was approximately 45.6%
of PSIDs then issued and outstanding shares of common stock. In addition, on November 20, 2009, we
sold the assets and equity of one of Signatures business units, McMurdo Limited (McMurdo).
Accordingly, the financial results of these businesses are now classified as discontinued
operations for all periods presented in this Annual Report. Our decision to sell/discontinue these
businesses was a result of managements strategy to streamline operations. Going forward, our
strategy is to focus our efforts on the business operations of our Animal Identification segment.
Discontinued operations are more fully discussed in Note 14 to our consolidated financial
statements.
Internet Website
Our Internet website address is
www.digitalangel.com
. Our segments internet website
addresses are:
www.destronfearing.com
and
www.signatureindustries.com
. The
information on these websites is not incorporated by reference into this Annual Report on Form
10-K. We make available free of charge through our website annual reports on Form 10-K, quarterly
reports on
Form 10-Q,
current reports on Form 8-K, Forms 3, 4 and 5 filings, and all amendments to
those reports and filings as soon as reasonably practicable after such material is electronically
filed with, or furnished to, the Securities and Exchange Commission (SEC).
**************
Effective April 20, 2007, we became a Delaware corporation. We initially incorporated in the state
of Missouri on May 11, 1993. Currently, our principal executive offices are located at 490 Villaume
Avenue, South Saint Paul, Minnesota 55075 (651-455-1621).
Recent Events
Notice of Nasdaq Delisting
On December 10, 2009, we received a letter from the Nasdaq Stock Market (the Nasdaq) indicating
that we are not in compliance with Nasdaqs requirements for continued listing because, for the
previous 30 consecutive business days, the bid price of our common stock closed below the minimum
$1.00 per share price requirement for continued inclusion under Nasdaq Marketplace Rule 4310(c)(4)
(the Rule). In accordance with the Nasdaq Marketplace Rules, we have been provided 180 calendar
days, or until June 8, 2010, to regain compliance with the Rule.
If, at any time before June 8, 2010, the bid price of our common stock closes at $1.00 per share or
more for a minimum of 10 consecutive business days, the Nasdaq staff will provide us written
notification that we are in compliance with the Rule. However, if we do not regain compliance with
the Rule by June 8, 2010, the Nasdaq staff will determine whether we meet the Nasdaq Capital Market
initial listing criteria set forth in Marketplace Rule 4310(c), except for the bid price
requirement, and if we do, we will be granted an additional 180 calendar day compliance period.
Since December 10, 2009, our stock has traded below $1.00. Presently,
we believe that we meet all of the initial listing criteria except
for the minimum bid price requirement based on the closing price of our common stock on March 31,
2010.
3
Repayment of Existing Term Debt Obligations
On December 14, 2009, we, and certain of our subsidiaries, entered into an amendment to a letter
agreement with Laurus Master Fund, Ltd. and certain of its affiliates, including, Kallina
Corporation and LV Administrative Services, Inc., (the Lenders), to amend, among other things,
the repayment schedule of all amounts owed pursuant to certain existing term debt obligations.
Under the terms of the amended letter amendment, we were obligated to pay $3.8 million of the
existing term debt obligations to the Lenders, of which $3.0 million was paid in cash (which
included the November 2009 monthly payment) and $0.8 million was paid within three days of the date
of the letter agreement through the issuance of approximately 1.4 million shares of our common
stock in accordance with the terms of a previous 2008 agreement. After the prepayment, the balance
of the existing debt obligations, which was approximately $1.4 million, was payable in full to the
Lenders on or before the original maturity date of February 1, 2010. On February 1, 2010, the
outstanding principal and interest due under the existing debt obligations were paid in full.
Registered Direct Offering and Sale of Common Stock and Warrants
On February 9, 2010, we sold, in a registered direct offering, 3,385,000 shares of our common stock
and warrants to purchase 1,354,000 shares of common stock to two institutional investors pursuant
to the terms of a securities purchase agreement we entered into on February 3, 2010. The purchase
price of the securities was $1.7 million in the aggregate. The exercise price of the warrants is
$0.50 per share and the warrants may be immediately exercised and expire seven years from the date
of issuance. The warrants are not exercisable by a holder to the extent that such holder or any of
its affiliates would beneficially own in excess of 4.9% of our common stock. We entered into a
placement agent agreement with Chardan Capital Markets, LLC (Chardan) relating to our registered
direct offering where we agreed to pay Chardan a placement agent fee of 6.0% of the gross proceeds
from the sale. The net proceeds from the sale, after deducting the placement agent fee and other
offering expenses, were approximately $1.6 million and were used primarily to replenish the funds
used for the repayment of existing term debt obligations as discussed above. The terms of the
warrants are more fully described in Note 23 to our consolidated financial statements.
Termination of Standby Equity Distribution Agreement
On July 10, 2009, we entered into a Standby Equity Distribution Agreement (the SEDA) with YA
Global Master SPV Ltd. (YA SPV), an affiliate of Yorkville Advisors, for the sale of up to $5.0
million of shares of our common stock over a two-year commitment period. Under the terms of the
SEDA, we could from time to time, at our discretion, sell newly-issued shares of our common stock
to YA SPV. We issued shares of our common stock under the SEDA pursuant to a Registration Statement
on Form S-3 (Registration No. 333-159880), declared effective by the SEC on July 9, 2009 wherein we
registered 3.0 million shares of our common stock.
The SEDA required payment of a commitment fee payable to YA SPV in an amount equal to $125,000. We
delivered approximately 88 thousand shares of common stock under the Registration Statement to pay
the commitment fee. The price of the shares delivered was the average of the daily Volume Weighted
Average Price (VWAP) for the three trading days after the date of the Agreement. During the year
ended December 31, 2009, we issued approximately 2.9 million shares of our common stock and
received approximately $2.8 million in cash under the SEDA. On January 19, 2010, we issued an
additional 0.1 million shares of our common stock and received approximately $0.1 million in cash
under the SEDA. In connection with the registered direct offering, we terminated the SEDA effective
February 4, 2010.
Industry Overview
Our principal activities encompass the development and marketing of RFID and GPS-enabled
identification and location products.
RFID technology continues to grow in its importance to the animal identification industry. RFID
systems identify objects using radio frequency transmissions, typically achieved with communication
between a microchip or tag and a scanner or reader. Historically, RFID has been used to identify
objects in retail, transportation and logistics industries, as well as to identify and locate
livestock and companion pets. Prior to the adoption of RFID, users identified and tracked objects
manually as well as through the use of bar code technology. These solutions were limited because of
the need for ongoing human intervention and the lack of instantaneous location capabilities. RFID
technology possesses greater range, accuracy, speed and lower line-of-sight requirements than bar
code technology.
Our RFID businesses focus on companion pet and equine identification and safeguarding,
livestock/fish identification tracking and food safety and traceability (e.g., livestock tracking).
The basic components of an RFID system consist of:
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a tag, containing a microchip-equipped transponder, an antenna and a capacitor, attached
to the item to be identified, located or tracked, which wirelessly transmits stored information to
a receiver;
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one or more receivers, also referred to as readers or scanners, which are devices that
read the tag by sending out an RF signal to which a tag, in the range of the signal, responds; and
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the equipment, cabling, computer network and software applications to use the processed data
for one or more applications.
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Most RFID systems use either active or passive tags, with the choice reflecting the different
characteristics of the tags and the nature of the RFID system application. The key difference in
the technology is that active RFID systems deploy tags with battery-powered microchips that emit a
signal at regular intervals or continuously and do not rely on power from the reader to operate,
while passive RFID systems deploy tags with microchips that have no attached power supply and
receive an activating charge from the readers signal. Applications that require receipt of signals
between the tag and the reader beyond approximately 10 meters in range usually require a battery in
the tags. Currently, we sell passive RFID tags.
Pet Identification and Safeguarding
Pet identification and safeguarding systems involve the insertion of a microchip with identifying
information in the animal. Readers at animal shelters, veterinary clinics and other locations can
determine the animals owner and other information through RFID scanners. The pet identification
and safeguarding market is expanding at accelerated levels. In the USA, more and more shelters
promote the use of microchipping as a way to insure that a lost pet can be reunited with its owner.
With only an estimated 10% of pets chipped, the U.S. pet market has significant growth potential.
As a result of the recent expansion of the capabilities of the electronic chips (e.g., providing
feedback on the health of the animal, such as a temperature reading), we believe the market will
expand even further. In Europe, microchips are required for any pets traveling across borders.
These
pet passports
allow the animal to travel freely throughout Europe without quarantine, and
in some European countries, as many as 40% of the pets have electronic identification.
Livestock/Fish Identification and Tracking and Food Safety and Traceability
The use
of RFID technology in the tracking of livestock in the U.S. is currently limited to
utilization for herd management (breeding, performance, etc), USDA disease control programs
(Brucellosis, Tuberculosis, etc.) and Marketing programs (Non-Hormone Treated Cattle and limited
use for the Beef Export Verification Program). Recently the US federal government announced that it
would discontinue the USDAs National Animal Identification System (NAIS), moving traceability
responsibilities to the state and tribal levels. The USDA will work with the states to establish a
common system for animals transported across state lines. While NAIS at the federal level has been
discontinued, 48-hour trace-back, and age and source verification will remain a central part of the
livestock industrys processes. Destron Fearing products have been widely adopted for these
requirements, and we continue to see more opportunities from growth in these segments. At Destron
Fearing, our business model has always been to develop and sell innovative herd management products
to producers that add value to their businesses. We have developed programs that make it easier for
producers to do business with us, and to provide them with products that enhance their productivity
and business success. Our RFID products are focused on gaining information, such as monitored
animal behavior, and yielding data that can achieve early detection of potential illnesses in their
herds.
Internationally, the market place for electronic identification tags continues to grow. The need to
combat animal disease has the European Union (EU) focusing on improved traceability of livestock.
Beginning on December 31, 2009, the EU has mandated the use of electronic tags for all sheep and
goats, which is a forerunner to eventually requiring all large animal livestock to have electronic
tags in the future. It is planned to be implemented in the entire European herd over the next few
years. In South America, Brazil, with approximately 200 million cattle, has implemented a mandatory
electronic identification of all feed lot cattle on January 1, 2010. Effective December 31, 2010,
all new born cattle in Brazil will be required to have electronic tags, with the objective to move
the entire herd to electronic tags over the next three years. Similar implementations are occurring
in other South American countries, such as Colombia and Chile. These are all favorable signs for
our Animal Identification segment, and the outlook shows signs of growth.
Emergency Identification
Global Navigation Satellite System (GNSS) is the standard generic term for satellite navigation
systems that provide autonomous geospatial positioning with global coverage. The Navigation
Satellite Timing and Ranging Global Position System (NAVSTAR GPS), which was developed by the
U.S. Department of Defense, is the only fully operational GNSS. The satellite constellation is
managed by the U.S. Air Force 50th Space Wing. Although the cost of maintaining the system is
approximately $400 million per year, including the replacement of aging satellites, GPS is free for
civilian use as a public good. In addition to NAVSTAR GPS, there is some indication that other
nations may begin deploying GNSS. The Russian GLONASS is a GNSS in the process of being restored to
full operation. The European Union Galileo positioning system is a next generation GNSS in the
initial deployment phase, scheduled to be operational in a few years, and China has indicated it
may expand its regional Beidou navigation system into a global system.
A GPS receiver calculates its position by measuring the distance between itself and three or more
GPS satellites. Measuring the time delay between transmission and reception of each GPS radio
signal gives the distance to each satellite, since the signal travels at a known speed. The signals
also carry information about the satellites location. By determining the position of, and distance
to, at least three satellites, the receiver can compute its position using trilateration. Receivers
typically do not have perfectly accurate clocks and, therefore, track one or more additional
satellites to correct the receivers clock error.
The original motivation for satellite navigation was for military applications. Today, GNSS systems
have a wide variety of civilian uses such as:
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navigation, ranging from personal hand-held devices for trekking, to devices fitted to cars,
trucks, ships and aircraft;
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synchronization;
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location-based services such as enhanced 911;
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surveying;
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entering data into a geographic information system;
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search and rescue;
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geophysical sciences; and
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tracking devices used in wildlife management.
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Our focus is in the areas of search and rescue and locator beacons and tracking systems which
include mobile satellite data communications service and software for messaging for a variety of
markets including the military, law enforcement and energy market. We believe that there is
excellent growth potential in each of our markets and particularly, for us, in sales of our
military personal location beacons due to recent technology improvements. However, each market in
which we compete is highly competitive.
Operating Segments
Financial Information About Our Segments
Revenues from our two segments over the past two years were as follows:
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For the years ended December 31,
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2009
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2008
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(in thousands)
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Animal Identification
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$
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30,774
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$
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38,501
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Emergency Identification
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18,689
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23,759
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Total
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$
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49,463
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$
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62,260
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Refer to the segment information in Note 19 to our consolidated financial statements.
Animal Identification Segment
Principal Products and Services
Our Animal Identification segment develops, manufactures and markets visual and electronic
identification tags and implantable RFID microchips, primarily for identification, tracking and
location of companion pets, livestock (e.g., cattle and hogs), horses, fish and wildlife worldwide,
and, more recently, for animal bio-sensing applications, such as temperature reading for companion
pet and livestock applications. Our Animal Identification segments proprietary products focus on
pet identification and safeguarding, as well as the positive identification and tracking of
livestock and fish, which 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, livestock, horses, fish and
wildlife industries.
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The Animal Identification segment consists of Destron Fearings operations located in Minnesota and
its wholly-owned subsidiaries: DSD Holding A/S and Destron Fearing A/S and its subsidiaries, which
have operations in Denmark and Poland (collectively referred to as Destron Fearing A/S); and
Digital Angel International, Inc. and its subsidiaries located in Argentina, Brazil, Chile,
Paraguay and Uruguay.
We hold patents on our syringe-injectable microchip for use in animals. Each microchip is
individually inscribed and programmed to store a unique, permanent 10 to 16-digit alphanumeric
identification code. These microchips are tiny, passive electronic devices ranging in size from 8
to 28 millimeters in length and 2.1 to 3.5 millimeters in diameter. The smallest microchip is about
the size of a grain of rice. The microchip is coupled with an antenna and placed either in a
two-piece plastic e.Tag or in a glass-like injectable capsule. The e.Tag is typically affixed to
the ear of the animal. The implantable microchip is injected under the skin using a hypodermic
syringe, without requiring surgery. Each capsule is coated with a polymer, BioBond
TM
, to
form adherence to tissue, thereby preventing migration in the hosts body. An associated scanner
device uses radio frequency to interrogate the microchips and read the code. Our patented
Bio-Thermo
®
implantable microchip product provides temperature readings of animals by
simply passing an RFID handheld scanner over the animal or by having the animal walk through a
portal scanner.
Our pet identification and location system involves the insertion of a microchip, with identifying
information, in the animal. Scanners located at animal shelters, veterinary clinics and other
locations can determine the animals owner and other information. Presently, there is an
established infrastructure with RFID scanners placed in approximately 70,000 global animal shelters
and veterinary clinics. We believe that approximately 4.0 million companion animals in the U.S.
have been enrolled in our distributors database, and a pet is recovered in the U.S. by that system
approximately every six minutes.
Our miniature RFID microchips are also used for the tagging of fish, especially salmon, for
identification by biologists and governments in environmental programs and studies, migratory
studies and other purposes. These microchips are accepted as a safe, reliable alternative to
traditional identification methods because once the fish are implanted with the microchips, they
can be identified without recapturing or sacrificing the fish. In 2006, we installed what is
believed to be the worlds largest RFID ready system, a 16-foot by 16-foot RFID antenna designed to
electronically track
indigenous salmon populations. In addition, we launched our second generation unitary core
transponders. These updated transponders are designed to provide greater reader reliability while
increasing reader range.
6
In addition to pursuing the market for permanent identification of companion animals and tracking
microchips for fish, we also produce visual and RFID identification products, for livestock
producers. The tracking of cattle and hogs is crucial in order to provide security both for asset
management and for disease control and food safety. Destron Fearing has marketed visual
identification products for livestock since the 1940s. Visual identification products typically
include numbered ear tags. Electronic identification products for livestock are currently being
utilized by livestock producers and as part of various pilot studies for the USDAs and other state
and governmental cattle identification programs. Currently, sales of visual products represent a
substantial percentage of our sales to livestock producers.
Growth Strategy
The principal components of our Animal Identification segments growth strategy are to:
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focus on animal identification products in the growing livestock, fish and wildlife
industries;
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become a major player in the food source traceability and safety tracking systems arena; and
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increase our market share in the pet identification and equine markets with enhanced
products such as our temperature-sensing Bio-Thermo
®
product.
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Through our Animal Identification segment, we are one of the leading suppliers in the U.S. of
RFID-enabled implantable microchip products for companion animals, laboratory animals, wildlife,
and visual identification tags for livestock. The chipping of companion pets has increased in
Europe, in part, because in 2004, several European countries began requiring that all pets crossing
their borders be identified with a either a tattoo or a microchip. In addition, world-wide
standardization of the frequency on which the microchips operate will most likely lead to higher
world-wide chipping rates. Our chips can be read by the world standard, which is 134.2 kilohertz.
During 2006, we began a national initiative to target the use of our microchips to address the more
than $100 million estimated U.S. equine market for identification products. There are approximately
9.2 million horses in the U.S. We believe that approximately 6.0 million are competition horses
requiring identification by local and state equine animal health rules and regulations. In
addition, USDAs NAIS business plan categorizes equines as medium priority for permanent
identification. Since late 2005, the California Horseracing Board, a division of the California
Department of Agriculture, has been implanting all new, in-coming young horses entering their
racing career with our microchips, which we call LifeChips
®
. The State of Louisiana has also been
utilizing our LifeChips
®
to identify horses that have been Coggins tested which checks for Equine
Infectious Anemia. The New York State Horse Health Assurance Program implemented a comprehensive
health campaign that utilizes our microchips, and other state agencies are expected to launch
similar programs. In addition, in March 2008, we entered into a non-exclusive distribution
agreement with The Jockey Club, the official registry for North American Thoroughbred horses. The
coming of the 2010 World Equestrian Games in October is expected to boost LifeChip sales both
domestically and abroad. Additional growth in LifeChip sales is expected to come from the recent
requirement in Mexico, where all horses entering their country must have microchips.
New Products
In July 2009, we introduced the DTR-4 handheld reader enhancing the feature set of the already
robust DTR-3 reader. The DTR-4 reader added an LCD display, providing easy to read ID numbers, and
body temperatures when coupled with our Bio-Thermo
®
tags. Useful in cattle, swine, and
equine applications, the display provides the user with the ability to see tag data without having
to communicate with a host computer.
In December of 2009, we finished phase three of the development of the new reader for the fisheries
business. This reader advances the ability for stream and river applications, replacing older
multiplexing technologies providing communication with multiple antennas designed from low cost
materials that can be found at a local hardware store, reducing the overall cost to monitor fish
migrations in all conditions. Field testing begins during the spawning season in early 2010.
We also introduced in 2009 our Rapid Response program, where customers can place orders for
identification tags in the morning and we will ship that same afternoon, eliminating long waiting
periods when tags are urgently needed. Various other sales programs were introduced to make it easy
for customers to do business with us. Examples include on-line order capabilities and credit card
ordering.
Sales, Marketing and Distribution
Our companion pet identification and location system is marketed in the U.S. by Schering-Plough
Animal Health Corporation (Schering-Plough) under the brand name Home Again
®
Pet
Recovery Service. In February 2007, we signed an exclusive product supply and distribution
agreement with Schering-Plough Home Again LLC, a wholly owned subsidiary of Schering-Plough, to
provide electronic identification microchips and scanners as part of the Home Again
®
Proactive Pet Recovery Network. Schering-Ploughs network, which markets the complete electronic
pet identification system under the brand name HomeAgain
®
, is the nations first
comprehensive system to assist in the search for lost pets. In January, 2010, we entered into an
amendment to the February 2007 agreement, which extends our agreement to provide Schering-Plough
electronic identification microchips and scanners as part of the Home Again
®
Proactive
Pet Recovery Network through June 2010. During the term of the amended agreement, we will
exclusively manufacture, supply and sell to Schering-Plough and Schering-Plough will exclusively
purchase from us certain products (as defined in the amended agreement). The amended agreement
contains, among other things, minimum purchase requirements by Schering-Plough. The amended
agreement also prohibits us from manufacturing, supplying or selling the products to any other
person, governmental
authority or entity in the territory (as defined in the amended agreement). The amended agreement
also grants to Schering-Plough exclusive distribution, marketing and sale rights to our RFID
products in the companion animal market in the U.S. and non-exclusive distribution, marketing and
sale rights to our RFID Bio Thermo product in the designated animal markets and territories,
subject to a maximum amount of units of such RFID Bio Thermo products.
7
Currently our companion pet/equine product is also marketed by various other companies, including,
but not limited to, (i) in some countries in Europe by Merial Pharmaceutical under the
Indexel
®
brand; (ii) in the United Kingdom (U.K.) and Ireland by Animalcare under the
idENTICHIP
®
brand; and (iii) in other European countries and in Australia, New Zealand
and Japan by various distributors under the LifeChip
®
brand.
BioMark, Inc. is our exclusive U.S. distributor for our fish and wildlife RFID microchip products.
Electronic identification products for livestock are sold directly to our customers under the
Destron brand. We have multi-year supply and distribution agreements with certain of our customers,
which have varying expiration dates. The remaining terms of such agreements are between one and
eight years. The supply and distribution agreements describe products, delivery and payment terms
and distribution territories. Our agreements generally do not have minimum purchase requirements
and can be terminated without penalty. 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 either of these customers could have a material adverse
effect on our financial condition and results of operations.
Competition
The animal identification market is highly competitive. The principal competitors in the U.S.
visual identification market are Allflex USA, Inc. and Y-Tex Corporation, and the principal
competitors in the U.S. RFID identification market are Allflex, USA, Inc., Datamars SA and Avid
Identification Systems, Inc. We believe that our intellectual property position and our reputation
for high quality products are our competitive advantages.
Our principal competitor in Europe is Allflex, with the remainder of the market quite fragmented
with regional players. We believe that our efficient low cost production, reputation for high
quality ear tags and our clear focus on the market are our competitive advantages. We expect our
competitors to continue to improve the performance of and support for their current products. We
also expect that, like us, they will introduce new products, technologies or services. Our
competitors new or upgraded products could adversely affect sales of our current and future
products.
Manufacturing; Supply Arrangements
Our Animal Identification segment has not been materially or adversely affected by the inability to
obtain raw materials or products during the past three years. We rely on a production arrangement
with Raytheon Microelectronics Espana (RME), a subsidiary of Raytheon Company, for the assembly
of certain of our patented syringe-injectable transponders. The term of that agreement ends 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. Under the
agreement, RME is our preferred supplier of the glass encapsulated, syringe-implantable
transponders, provided that RMEs pricing remains market competitive. Certain of the automated
equipment and tooling used in the production of the transponders is owned by us; other automated
equipment and tooling is owned by RME. We are currently in discussions to establish a new long term
agreement with RME.
Besides RME, our Animal Identification segments other principal suppliers are TSI Molding, Inc.,
Feature Products and Creation Technologies. We generally do not enter into contracts with these
suppliers.
Emergency Identification Segment
Principal Products and Services
Our Emergency Identification segments proprietary products provide emergency location and tracking
of pilots, aircraft and maritime vehicles in remote locations as well as sound horn alarms. 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
TM
brand which
serves commercial and military markets; and
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alarm sounders for industrial use and other electronic components.
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GPS Enabled Search and Rescue Equipment and Intelligent Communications Products
Our personal locator beacons (PLBs) are sold under the SARBE brand name. SARBE products are
primarily used by military air crew in the event of an ejection or other event requiring emergency
evacuation of an aircraft in a remote, possibly hostile location. SARBE equipment is also used by
land and naval forces. Signature is based in the U.K. and has been developing and manufacturing
PLBs for five decades. Reports of Second World War airmen and sailors at sea awaiting rescue with
little more than the faint hope that a passing ship would find them was the catalyst that inspired
Signature to develop a new way of saving lives by making the search part of search and rescue more
effective. Today, we believe that we are a world-leading supplier of PLBs and our SARBE trademark
is a common term for these devices, which are now found on ships, aircraft and submarines in the
armed forces of over 40 countries. U.K. airmen were among the first to carry these lifesaving
devices. Today every U.K. Royal Air Force, Royal Navy and Army airman carries a SARBE. PLBs are
also packed in the survival packs of life rafts on military ships. Our latest generation SARBE for
military personnel is the software programmable SARBE G2R, which provides true global reach and
recovery. This flexible radio features peacetime and combat modes. As with previous PLBs, G2R can
be configured to operate with any fast jet ejection seat and
incorporates a specially designed system that automatically activates the beacon and deploys the
antenna to the optimum position. This ensures that even if aircrew are unconscious or injured, the
SARBE transmission will be initiated immediately as no human intervention is required, reducing the
time it takes to initiate a search. Our SARBE
TM
G2R has been approved to operate on the
COSPAS-SARSAT Satellite System. COSPAS-SARSAT is the internationally funded satellite system
operator that detects activated search and rescue beacons and is responsible for approving all
rescue beacons. Beginning February 1, 2009, COSPAS-SARSAT no longer monitored beacons using 121.5
MHz and 243 MHz satellite frequencies. The outdated beacons need to be replaced by the new
generation of 406 MHz beacons, such as our SARBE G2R. We anticipate that this new requirement will
have a favorable impact on our revenue in 2010 and beyond.
8
We are also a distributor of two-way communications equipment in the U.K. Our products range from
conventional radio systems for the majority of radio users, for example, safety and security,
construction, manufacturing, to trunked radio systems for large scale users, such as local
authorities and public utilities. We also offer marine radios, air band radios and satellite
communication equipment for use on a global basis.
Alarm Sounders
We manufacture electronic alarm sounders under the Clifford & Snell name. These products are used
to provide audible and or visual signals, which alert personnel in hazardous areas, including the
oil and petrochemical industry, and in the fire and security market. Our recent Yodalex explosion
proof sounders and strobes include an omni-directional, high-sound output with sounder/strobe
combination all sharing a common explosion proof enclosure.
Growth Strategy
We believe that our SARBE PLBs offer the greatest source of growth for our Emergency Identification
segment. COSPAS-SARSAT forecasts that the global population of the new generation of digital
beacons will grow from 400,000 today, to 900,000 by 2012, providing us with opportunities to
upgrade existing customers equipment and sell into new markets. We expect to see an increase in
the demand for our beacons as air forces upgrade their PLBs to new digital standards. Air forces in
the U.K. and the U.S. will be required to replace their existing beacons with the new generation
406 MHz beacons in the future. SARBE has developed a specific new product, the AAPLB, for the USAF
and UK Ministry of Defense (MoD). In September 2008, the UK MoD selected our AAPLB for
tri-service use. We expect to begin shipping our AAPLBs to the MoD in the latter part of 2010.
Sales and Distribution
We sell our PLBs directly to our customers worldwide through a direct sales force of approximately
four personnel and through supply and distribution agreements, which have varying expiration dates.
The remaining terms of such agreements are between one and three years.
We sell our alarm sounders through various distributors located in Europe, Australia, New Zealand,
Hong Kong, Japan, South Africa, Singapore and the U.S. We are also a distributor of two-way
communication equipment in the U.K.. Our agreements with these distributors have varying expiration
dates.
Competition
Principal methods of competition in our Emergency Identification segment include geographic
coverage, service and product performance. The principal competitors for our PLBs are Boeing North
American Inc., General Dynamics Decision Systems, Tadiran, Spectralink Ltd., Becker Avionic
Systems, and ACR Electronics, Inc. We believe that introducing new leading edge products in the
search and rescue beacon market and the use of our search and rescue beacons in over forty
countries are competitive advantages. In addition, the barriers to entry in this market are high
due to the technical demands of the market.
Manufacturing; Supply Arrangements
Our Emergency Identification segment has not been materially or adversely affected by the inability
to obtain raw materials or products during the past three years. This segments principal suppliers
are Contact Components Ltd., Motorola Ltd., and Delta Impact Ltd. We generally do not enter into
contracts with these suppliers.
Government Regulation
Animal Identification Laws and Regulations
Our passive RFID systems rely on low-power, localized use of the radio frequency spectrum to
operate. As a result, we must comply with U.S. Federal Communications Commission (FCC) and
Industry Canada (IC) regulations, as well as the laws and regulations of other jurisdictions in
which we sell our products, governing the design, testing, marketing, operation and sale of RFID
devices. Accordingly, all of our products and systems have the FCC equipment authorization, the IC
equipment authorization, or other jurisdictions authorizations, as appropriate.
U.S. Federal Communications Commission Regulations
Under FCC rules and 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 U.S. The FCCs rules prescribe technical,
operational and design requirements for devices that operate on the electromagnetic spectrum at
very low power levels. 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. Additionally,
we must construct all equipment in accordance with good engineering design and manufacturers
practices. The FCC rules also establish standards for labeling, user manuals, recordkeeping and
testing. We believe that we are in substantial compliance with all FCC requirements applicable to
our products and systems.
9
Industry Canada Regulations
Industry Canada regulates the design, sale and use of radio communications devices in accordance
with its Radio Standards Specifications (RSS) and Radio Standards Procedures (RSP). As
intentional emitters, our RFID devices are subject to Industry Canadas RSP-100, which establishes
the procedures by which RFID communications equipment receives certification by Industry Canada.
The RSP-100 certification procedure and RSS standards ensure that RFID radio devices do not cause
interference to licensed spectrum services and that the devices do not produce emissions that are
harmful to human health.
Manufacturers of RFID devices must demonstrate compliance with RSP-100 and RSS-210, which establish
standards for obtaining certification of services, obtaining unique certification/registration
numbers, display and label requirements on the equipment, user manuals, recordkeeping and testing.
We believe we are in substantial compliance with all Industry Canada requirements applicable to our
products and systems.
Emergency Identification Laws and Regulations
The manufacture and distribution of our emergency identification products are subject to compliance
with applicable regulatory requirements in both the country of manufacture and in those countries
where these products are sold. We must comply with local, state, federal/national, and
international laws and regulations in the countries in which we do business, including
environmental, technical, communications, and other laws and regulations governing the manufacture
of our products, their technical specifications, their labeling and communications protocols, user
manuals, and recordkeeping and testing. We believe that we are in substantial compliance with all
FCC requirements applicable to our emergency identification products and systems.
Intellectual Property
In both our Animal Identification and Emergency Identification segments, we rely on a combination
of patents, copyrights, trademarks, trade secrets (including know-how), employee intellectual
property agreements, and third-party agreements to establish and protect proprietary rights in our
products and technologies. It is our practice to seek protections in all jurisdictions where such
protections are deemed useful and desirable to our business and competitive interests.
We believe our global patent portfolio will continue to provide a competitive advantage in
protecting innovation, although our competitors in each business are actively seeking patent
protection as well.
In the Animal Identification segment, some of our more important patents and intellectual property
rights include those relating to the design and manufacture of RFID tags and readers, including
their communications protocols, reader scanning algorithms, reader self testing methods,
manufacturing methods for unitary antenna cores, improved antenna designs, injection molding
techniques, and temperature sensing and communication capabilities. No one patent is considered
material to this business segment.
In the Emergency Identification segment, some of our more important patents and intellectual
property rights include those relating to the design and manufacture of locator beacons, sensing
and alarm devices, and their communications protocols. No one patent is considered material to this
business segment.
Our trademarks include the following: Digital Angel, Destron Fearing, Bio-Thermo and SARBE.
Seasonality
No significant portion of our business is considered to be seasonal; however, our Animal
Identification and Emergency Identification segments revenue, while not considered to be seasonal,
may vary significantly based on government procurement cycles and technological development, and
our Animal Identification segments revenues and operating income can be affected by the timing of
animal reproduction cycles.
Employees
At March 19, 2010, we and our subsidiaries employed approximately 244 employees, of which 223 are
full-time. Our Animal Identification segments production workforce located in South Saint Paul,
Minnesota is party to a collective bargaining agreement covering wage
rates and benefits for certain union employees, which expires
on April 30, 2010. Upon termination there are no future
obligations other than payments of accrued wages.
Geographic Areas
We have operations and sales in various regions of the world. Additionally, we export and import to
and from other countries. Our operations may, therefore, be subject to volatility because of
currency fluctuations, inflation and changes in political and economic conditions in these
countries. Sales and expenses are denominated in local currencies and may be affected as currency
fluctuations affect our product prices and operating costs or those of our competitors.
10
Currently, we operate in three geographic areas: the U.S. and Europe (both of which comprise the
majority of our operations) and South America. The majority of our revenues and expenses in each
geographic area were generated in the same currencies during the two-years ended December 31, 2009,
and accordingly, we did not incur any significant foreign currency gains or losses during those
years.
Revenues from continuing operations are attributed to geographic areas based on the location of the
assets producing the revenue. Information concerning revenues by principal geographic areas as of
and for the years ended December 31, 2009 and 2008 was as follows (in thousands):
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United
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South
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States
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Europe
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America
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Total
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2009
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Net revenue
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$
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21,694
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$
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27,074
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$
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695
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$
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49,463
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Property and equipment, net
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4,854
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2,390
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119
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7,363
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2008
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Net revenue
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$
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29,275
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$
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31,927
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$
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1,058
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$
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62,260
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Property and equipment, net
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5,764
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2,544
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241
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8,549
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For a discussion of risks associated with our foreign operations, please see Item 1A. Risk Factors.
Each of our segments operating income (loss) is presented below in Managements Discussion and
Analysis of Financial Condition and Results of Operations and each of their assets is presented in
Note 19 to our consolidated financial statements.
ITEM 1A. RISK FACTORS
We have a history of operating losses 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.
We incurred a consolidated loss from continuing operations of $15.4 million and $59.6 million in
the years ended December 31, 2009 and 2008, respectively. Our consolidated operating activities
(used) provided cash of $(3.9) million and $1.3 million during the years ended December 31, 2009
and 2008, respectively. As of December 31, 2009, we had an accumulated deficit of approximately
$571.2 million. 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 maturity of debt have raised concerns about our ability to continue
operations at the current level.
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 especially if we continue to
incur losses. We will be required to generate funds to repay certain of our debt obligations during
2010. We recently used a portion of the proceeds from the sale of our McMurdo business unit, which
we sold on November 30, 2009, as more fully discussed in Note 14 to our consolidated financial
statements, to repay a portion of our term debt and in February 2010, we fully repaid our term debt
obligations with proceeds from the sale of shares of our common stock and warrants. As of December
31, 2009, we had a working capital deficiency, which is partially due to a number of our debt
obligations becoming due or potentially due within the next twelve months, including the maturity
on August 31, 2010 of a revolving line of credit which had a balance of approximately $2.2 million
at December 31, 2009, and a mortgage loan of approximately $2.0 million, which matures on November
1, 2010. Our credit facility with Danske Bank, which is more fully discussed in Note 9 to our
consolidated financial statements, is due on demand and we are required to make monthly principal
payments of approximately $0.1 million. Our factoring lines may also be amended or terminated at
any time by the lenders. These conditions indicate that we may not be able to continue operations
at the current level, as we may be unable to generate the funds necessary to pay our obligations in
the ordinary course of business. Our ability to continue operations at the current level is also
discussed below in Managements Discussion and Analysis of Financial Condition and Results of
Operations.
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 and GPS satellite-based
systems and the technical requirements associated with the manufacture of our GPS products. If
demand for such systems does not reach anticipated levels, or if we fail to manage our cost
structure or to develop technologically viable products, we may not achieve profitability.
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 2010. 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.
11
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 could 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. On
December 10, 2009, we received a letter from Nasdaq indicating that we were not in compliance with
the Nasdaqs requirements for continued listing because, for the previous 30 consecutive business
days, the bid price of our common stock closed below the minimum $1.00 per share price requirement
for continued inclusion under Nasdaq Marketplace Rule 4310(c)(4) (the Rule). In accordance with
the Nasdaq Marketplace Rules, the Company has been provided 180 calendar days, or until June 8,
2010, to regain compliance with the Rule.
If, at any time before June 8, 2010, the bid price of our common stock closes at $1.00 per share or
more for a minimum of 10 consecutive business days, the Nasdaq staff will provide us written
notification that were are in compliance with the Rule. However, if we do not regain compliance
with the Rule by June 8, 2010, the Nasdaq staff will determine whether we meet the Nasdaq Capital
Market initial listing criteria set forth in Marketplace Rule 4310(c), except for the bid price
requirement, and if we do, we will be granted an additional 180 calendar day compliance period.
Presently, we believe that we meet all of the initial listing criteria except for the
minimum bid price requirement, based on the closing price of our common stock on March 31,
2010. However, if the market value of shares of our common stock held by non-affiliates is below the
initial listing criteria on June 8, 2010, we intend to submit an appeal to Nasdaq to allow us an
extension of time to gain compliance. If we are not successful, and Nasdaq delists our common
stock, it would likely trade on the OTC Bulletin Board, an electronic bulletin board established for
unlisted securities. Such delisting could adversely affect the market liquidity, our ability to
obtain financing for the continuation of our operations and could result in the loss of confidence
by investors, suppliers and employees.
In addition, if we fail to meet any of the other 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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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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We have substantial debt and debt service.
As of December 31, 2009, our indebtedness, totaled approximately $9.7 million, and we had advances
on our factoring lines of approximately $1.2 million. As a result, we incur significant interest
expense. In addition, we are obligated to make monthly principal payments on certain of our notes.
Our revolving line of credit, which had an outstanding balance of approximately $2.2 million at
December 31, 2009, matures on August 31, 2010 and our outstanding mortgage debt of approximately
$2.0 million matures on November 1, 2010. In addition, we are obligated to make monthly principal
payments of approximately $0.1 million on our outstanding credit line with Danske Bank. On February
1, 2010, we repaid the remaining outstanding balance of approximately $1.4 million of our term debt
that matured in February 2010. For further discussion on our debt, see Note 9 to the consolidated
financial statements.
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
guaranteed Destron Fearings debt with Kallina Corporation (approximately $2.2 million at December
31, 2009) as well as granted Kallina Corporation a security interest in substantially all of our
U.S. assets, and pledged all of the issued and outstanding capital stock we own in certain of our
subsidiaries to secure such debt.
The degree to which we are leveraged could have important consequences, including the following:
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our ability to obtain additional or replacement 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.
12
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,
if such transactions occur, investments in our common stock will be further diluted.
We currently have a legal settlement and an earn-out obligation aggregating approximately $3.3
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. During 2009,
we sold approximately 2.9 million shares to YA SPV under the SEDA and on February 9, 2010, we sold
approximately 3.4 million shares of our common stock and warrants to purchase approximately 1.4
million shares of our common stock in a registered direct offering. 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 if such transactions occur.
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 shares of our
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 March 19, 2010, there were 1,667,674 outstanding warrants, with exercise prices per share
ranging from $0.50 to $25.443, and 3,188,747 options to acquire additional shares of our common
stock, with exercise prices per share ranging from $0.32 to $216.60. If exercised, these securities
could dilute the value of shares of our common stock. In addition, we have the authority to issue
up to a total of 50,000,000 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 our common stock.
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. If current economic conditions deteriorate or 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, 2007 to March 19, 2010, the price per share of our common stock has ranged from a
high of $18.00 to a low of $0.39. 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 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.
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 negative changes to 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 U.K., 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.
13
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, 2009 and 2008, Schering-Plough accounted for approximately 8% and 19%,
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 could negatively affect future sales. In
January 2010, we amended our exclusive product supply and distribution agreement with
Schering-Plough to extend the agreement through June 2010. There is no assurance that
Schering-Plough and Destron Fearing will extend the contract beyond June 2010. 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 key
senior management and other key personnel. If we lose the services of any key 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.
The loss of any key senior executive could materially adversely affect our financial results. Our
senior executives, in many cases, have strong relationships with our customers, suppliers and
lenders. 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.
If we are not successful in implementing our business model and developing and marketing our
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 stock would likely
decrease.
Management continues to review strategic alternatives to increase shareholder value, which may
result in a further decrease in consolidated revenue and the overall size of our operations.
Management is focusing on various strategic alternatives, which include the possibility of selling
additional business units in our Emergency Identification segment. If we are successful in further
streamlining our business to focus our attention solely on our Animal Identification business
segment, it would, at least in the short term, result in a further 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 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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14
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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.
|
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 certain of 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 the microchip for certain of our products 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. Without patent protection, our competitors may be able to independently develop similar
technology or duplicate our systems, or the value of our products could be diminished 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., and Becker Avionic Systems.
In addition, other companies could enter these lines 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 our competitors, and our 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.
15
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.
|
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 results of operations may be adversely affected if we write-off additional goodwill and other
intangible assets.
During the fourth quarter of 2009, we recorded an impairment charge of $7.1 million for goodwill
and intangible assets associated with our Emergency Identification reporting unit. During the third
quarter and fourth quarter of 2008, we recorded impairment charges of $26.2 million and $4.1
million, respectively, for goodwill associated with our Animal Identification segment. As of
December 31, 2009, we had approximately $14.8 million of goodwill and intangible assets. 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 December 31, 2009, the book value of our inventory was $9.8 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 turn that inventory
rapidly through sales. The failure to turn 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.
Our foreign operations pose additional risks
.
We operate our businesses and market our products internationally. During the years ended December
31, 2009 and 2008, approximately 60% and 55% of our sales were to private and public businesses in
non U.S. 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
foreign corrupt practices act, 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.
16
Currency exchange rate fluctuations could have an adverse effect on our sales and financial
results.
During the years ended December 31, 2009 and 2008, we generated approximately 56% and 53%,
respectively, of our sales and incurred a portion of our expenses in currencies other than U.S.
dollars. We incurred approximately $0.6 million and $(2.3) million of other comprehensive income
(loss) due to fluctuations in foreign currency exchange rates. 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.
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 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.
ITEM 2. PROPERTIES
At December 31, 2009, we were obligated under leases for approximately 82,720 square feet of
facilities, of which 29,931 square feet was for office facilities and 52,789 square feet was for
factory and warehouse space. These leases expire at various dates through 2042. In addition, we own
31,892 square feet of office space and 47,800 square feet of factory and warehouse facilities at
the locations below. Our owned property is subject to a mortgage as discussed in Note 9 to our
consolidated financial statements.
The following table sets forth our owned and leased properties by business segment (amounts in
square feet):
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Factory /
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Office
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Warehouse
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Total
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Owned
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Leased
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Owned
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Leased
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Owned
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Leased
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Animal Identification
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31,892
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4,464
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47,800
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8,005
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|
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79,692
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|
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12,469
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Emergency Identification
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25,467
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|
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|
|
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44,784
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|
|
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|
70,251
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|
|
|
|
|
|
|
|
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Total
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31,892
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29,931
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47,800
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52,789
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|
79,692
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|
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|
82,720
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The following table sets forth the principal locations of our properties (amounts in square feet):
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Factory /
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Office
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Warehouse
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Total
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Owned
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Leased
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Owned
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Leased
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Owned
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Leased
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Europe
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4,416
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8,005
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12,421
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Minnesota
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31,892
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|
|
|
|
|
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47,800
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|
|
|
|
|
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|
79,692
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South America
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48
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48
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Texas
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4,966
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4,966
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United Kingdom
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20,501
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44,784
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65,285
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|
|
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|
|
|
|
|
|
|
|
|
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Total
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31,892
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29,931
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|
|
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47,800
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|
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52,789
|
|
|
|
79,692
|
|
|
|
82,720
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|
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|
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ITEM 3. LEGAL PROCEEDINGS
We are involved in legal proceedings from time to time. We have accrued to the extent practicable
our estimate of the probable costs for the resolution of these claims. Our 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. It is possible, however, that future results of operations or cash flows for any
particular quarterly or annual period could be materially affected by changes in our estimates. See
Note 18 to our consolidated financial statements for a description of certain legal proceedings.
17
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Our common stock is traded on the Nasdaq Capital Market under the symbol DIGA.
The following table shows, for the periods indicated, the high and low sales prices per share of
our common stock based on published financial sources.
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High
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Low
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2009
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First Quarter
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$
|
0.68
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$
|
0.40
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Second Quarter
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1.70
|
|
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|
0.69
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Third Quarter
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1.49
|
|
|
|
1.03
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Fourth Quarter
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1.25
|
|
|
|
0.62
|
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2008
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First Quarter
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$
|
7.36
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|
|
$
|
4.16
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Second Quarter
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|
|
6.88
|
|
|
|
4.88
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Third Quarter
|
|
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6.16
|
|
|
|
2.64
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Fourth Quarter
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2.88
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|
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0.36
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On March 19, 2010, the closing sale price of our common stock on the Nasdaq Capital Market was
$0.46 per share.
On December 10, 2009, we received a letter from Nasdaq indicating that we were not in compliance
with the Nasdaqs requirements for continued listing because, for the previous 30 consecutive
business days, the bid price of our common stock closed below the minimum $1.00 per share price
requirement for continued inclusion under Nasdaq Marketplace Rule 4310(c)(4) (the Rule). In
accordance with the Nasdaq Marketplace Rules, the Company was provided 180 calendar days, or until
June 8, 2010, to regain compliance with the Rule. If, at any time before June 8, 2010, the bid
price of our common stock closes at $1.00 per share or more for a minimum of 10 consecutive
business days, the Nasdaq staff will provide us written notification that were are in compliance
with the Rule. However, if we do not regain compliance with the Rule by June 8, 2010, the Nasdaq
staff will determine whether we meet the Nasdaq Capital Market initial listing criteria set forth
in Marketplace Rule 4310(c), except for the bid price requirement, and if we do, we will be granted
an additional 180 calendar day compliance period. Presently,
we believe that we meet all of the initial listing criteria except
for the minimum bid price requirement based on the closing price of
our common stock on March 31, 2010. However, if the market value of shares of our common stock held by non-affiliates is below the
initial listing criteria on June 8, 2010, we intend to submit an appeal to Nasdaq to allow us an
extension of time to gain compliance. If we are not successful, and Nasdaq delists our common
stock, it will likely trade on the OTC Bulletin Board.
Holders
According to the records of our transfer agent, as of March 19, 2010, there were approximately
1,624 holders of record of our common stock.
Dividends
We have never paid cash dividends on our common stock. We do not anticipate paying any cash
dividends on our common stock in the foreseeable future.
18
Securities Authorized for Issuance Under Equity Compensation Plans
During 2009, we granted 471,033 shares of restricted common stock for executive compensation under
our 2003 Flexible Stock Plan and DAC Stock Option Plan. We granted 498,581 options during 2009
under our equity compensation plans. As of December 31, 2009, the following shares of our common
stock were authorized for issuance under our equity compensation plans:
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Equity Compensation Plan Information
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(c)
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(a)
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(b)
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Number of securities
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Number of securities
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Weighted-average
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remaining available for
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to be issued
|
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exercise price
|
|
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future issuance under
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upon exercise of
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per share of
|
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equity compensation plans
|
|
|
|
outstanding options,
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outstanding options,
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|
(excluding securities
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|
Plan Category
(1)
|
|
warrants and rights
|
|
|
warrants and rights
|
|
|
reflected in column (a))
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Equity compensation plans approved by security holders
|
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3,206,109
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|
$
|
16.32
|
|
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1,199,080
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(2)
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Equity compensation plans not approved by security holders
(3)
|
|
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296,874
|
|
|
|
11.33
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,502,983
|
|
|
|
15.90
|
|
|
|
1,199,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
A narrative description of the material terms of our equity compensation plans is set forth in
Note 11 to our consolidated financial statements.
|
|
(2)
|
|
Includes 119 shares available for future issuance under our 1999 Employees Stock Purchase Plan.
|
|
(3)
|
|
We have made grants outside of our equity plans and have outstanding options exercisable for
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 / Recent Purchases of Securities
On January 11, 2010, we issued 205,479 shares of our restricted common stock to Randolph Geissler
in connection with the payment of a settlement of an employment contract in the amount of $150,000
(based on the closing stock price of $0.73 per share on January 8, 2010). The securities were
issued in a transaction exempt from registration under Section 4(2) of the Securities Act of 1933,
as amended.
We did not repurchase any shares of our common stock during the year ended December 31, 2009.
19
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, and Section 21E of the Securities Exchange Act of
1934, as amended, 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 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 and elsewhere in this Annual Report on Form 10-K and include:
|
|
|
our growth strategies including, without limitation, our ability to deploy our products and
services including Bio-Thermo;
|
|
|
|
|
anticipated trends in our business and demographics;
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|
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|
|
the ability to hire and retain skilled personnel;
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|
relationships with and dependence on technological partners;
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|
our reliance on government contractors;
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|
uncertainties relating to customer plans and commitments;
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|
our future profitability and liquidity;
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|
our ability to maintain compliance with covenants under our credit facilities, including our
ability to make principal and interest payments when due;
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|
our ability to obtain patents, enforce those patents, preserve trade secrets and operate
without infringing on the proprietary rights of third parties;
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|
governmental export and import policies, global trade policies, worldwide political
stability and economic growth;
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|
expectations about the outcome of litigation and asserted claims;
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|
regulatory, competitive or other economic influences;
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|
our ability to successfully mitigate the risks associated with foreign operations;
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|
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|
our ability to successfully implement our business strategy;
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|
our expectation that we can achieve profitability in the future;
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|
our ability to fund our operations;
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|
borrowings under DSD Holdings existing bank and credit facilities as well as Signatures
invoice discounting facility are payable on demand and/or the facilities could be terminated at any
time without notice;
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|
our reliance on third-party dealers to successfully market and sell our products;
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|
our reliance on a single source of supply for our implantable microchip;
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|
we may become subject to costly product liability claims and claims that our products
infringe the intellectual property rights of others;
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|
our ability to comply with current and future regulations relating to our businesses;
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20
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|
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 any 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;
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|
our ability to comply with the obligations in our various registration rights agreements;
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|
the impact of new accounting pronouncements;
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|
our ability to establish and maintain proper and effective internal accounting and financial
controls;
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|
|
our ability to maintain our listing on the Nasdaq Capital Market and the effect of a
delisting;
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|
our ability to continue operations at the current level; and
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|
our actual results may differ materially from those reflected in forward-looking statements
as a result of (i) the risk factors described under the heading Risk Factors beginning on page 12
of this Annual Report and in our other public filings, (ii) general economic, market or business
conditions, (iii) the opportunities (or lack thereof) that may be presented to and pursued by us,
(iv) competitive actions by other companies, (v) changes in laws, and (vi) other factors, many of
which are beyond our control.
|
Forward-looking statements include all statements that are not historical facts and can be
identified by forward-looking words such as will likely result, are expected to, will
continue, is anticipated, projects, target, goal, plans, objective, may, should,
could, would, anticipates, expects, intends, plans, believes, seeks, estimates,
hopes, and similar expressions intended to identify forward-looking statements. These
forward-looking statements are not guarantees of future performance and are subject to risks and
uncertainties (including those described under Risk Factors in this Annual Report) that could
cause actual results to differ materially from estimates or forecasts contained in the
forward-looking statements. Also, these forward-looking statements represent our estimates and
assumptions only as of the date of this Annual Report. Other than as required by law, we do not
undertake any obligation to publicly update or correct any forward-looking statements to reflect
events or circumstances that subsequently occur or of which we hereafter become aware.
The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with the accompanying consolidated financial statements and related notes
included in this Annual Report.
Overview
We currently engage in the following principal business activities:
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|
|
developing, manufacturing and marketing of visual and electronic identification tags and
implantable RFID microchips, primarily for identification, tracking and location of companion pets,
livestock (e.g., cattle and hogs), horses, fish and wildlife worldwide, and, more recently, for
animal bio-sensing applications, such as temperature reading for companion pet and livestock
applications; and
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|
developing, manufacturing and marketing global position systems (GPS) and GPS-enabled
products used for emergency location and tracking of pilots, aircraft and maritime vehicles in
remote locations as well as sound horn alarms.
|
Our discontinued operations presented in the accompanying consolidated financial statements
consisted of the operations of four wholly-owned subsidiaries, Computer Equity Corporation
(Computer Equity), Perimeter Acquisition Corp. (Perimeter), Florida Decision Corporation
(FDC, formerly Pacific Decision Sciences Corporation) and ThermoLife Energy Corp. (Thermo
Life), and two equity investments, IFTH Acquisition Corp. which is now part of PositiveID
Corporation (IFTH) and PositiveID Corporation, formerly, VeriChip Corporation (PSID) (NASDAQ:
PSID). Also included in discontinued operations are the operations of McMurdo Limited (McMurdo)
which was sold by Signature, a subsidiary of our wholly-owned subsidiary Destron Fearing, on
November 20, 2009. As of December 31, 2007, we owned a majority interest in PSID and IFTH. However,
during the first quarter of 2008, our ownership percentages of both companies fell below 50%.
Therefore, during the three-months ended March 31, 2008, we began accounting for PSID and IFTH
under the equity method of accounting. All of our discontinued operations, excluding Thermo Life,
have been sold as of December 31, 2008. Thermo Life was sold on January 21, 2010. Discontinued
operations are more fully discussed in Note 14 to our consolidated financial statements.
Recent and other Significant Events Affecting Our Results of Operations and Financial Condition
Repayment of Existing Term Debt Obligations
On December 14, 2009, we paid $3.8 million of the existing term debt obligations to Laurus Master
Fund Ltd. (Laurus) and Kallina Corporation (Kallina), of which $3.0 million was paid in cash
(which included the November 2009 monthly payment) and $0.8 million was paid through the issuance
of our common stock. After the prepayment, the balance of the existing debt obligations, which was
approximately $1.4 million, was payable in full to the Lenders on or before the original maturity
date of February 1, 2010. On February 1, 2010, the outstanding principal and interest due under the
existing term debt obligations to Laurus and Kallina was paid in full.
21
Registered Direct Offering and Sale of Common Stock and Warrants
On February 9, 2010, we sold, in a registered direct offering, 3,385,000 shares of our common stock
and warrants to purchase 1,354,000 shares of common stock to two institutional investors pursuant
to the terms of a securities purchase agreement we entered into on February 3, 2010. The purchase
price of the securities was $1.7 million in the aggregate. The exercise price of the warrants is
$0.50 per share and the warrants may be immediately exercised and expire seven years from the date
of issuance. The warrants are not exercisable by a holder to the extent that such holder or any of
its affiliates would beneficially own in excess of 4.9% of our common stock. We entered into a
placement agent agreement with Chardan Capital Markets, LLC (Chardan) relating to our registered
direct offering where we agreed to pay Chardan a placement agent fee of 6.0% of the gross proceeds
from the sale. The net proceeds from the sale, after deducting the placement agent fee and other
offering expenses, were approximately $1.6 million and were used primarily to replenish the funds
used for the repayment of existing term debt obligations as discussed above. The terms of the
warrants are more fully described in Note 23 to our consolidated financial statements.
Termination of Standby Equity Distribution Agreement
On July 10, 2009, we entered into a Standby Equity Distribution Agreement (the SEDA) with YA
Global Master SPV Ltd. (YA SPV), an affiliate of Yorkville Advisors, for the sale of up to $5.0
million of shares of our common stock over a two-year commitment period. Under the terms of the
SEDA, we could from time to time, at our discretion, sell newly-issued shares of our common stock
to YA SPV. We issued shares of our common stock under the SEDA pursuant to a Registration Statement
on Form S-3 (Registration No. 333-159880), declared effective by the SEC on July 9, 2009 wherein we
registered 3.0 million shares of our common stock.
The SEDA required payment of a commitment fee payable to YA SPV in an amount equal to $125,000. We
delivered approximately 88 thousand shares of common stock under the Registration Statement to pay
the commitment fee. The price of the shares delivered was the average of the daily VWAP for the
three trading days after the date of the Agreement. During the year ended December 31, 2009, we
issued approximately 2.9 million shares of our common stock and received approximately $2.8 million
in cash under the SEDA. On January 19, 2010, we issued an additional 0.1 million shares of our
common stock and received approximately $0.1 million in cash under the SEDA.
On February 4, 2010, in connection with the registered direct
offering discussed above,
we terminated the SEDA.
Notice of Nasdaq Delisting
On December 10, 2009, we received a letter from the Nasdaq Stock Market (the Nasdaq) indicating
that we are not in compliance with Nasdaqs requirements for continued listing because, for the
previous 30 consecutive business days, the bid price of our common stock closed below the minimum
$1.00 per share price requirement for continued inclusion under Nasdaq Marketplace Rule 4310(c)(4)
(the Rule). In accordance with the Nasdaq Marketplace Rules, we were provided 180 calendar days,
or until June 8, 2010, to regain compliance with the Rule.
If, at any time before June 8, 2010, the bid price of our common stock closes at $1.00 per share or
more for a minimum of 10 consecutive business days, the Nasdaq staff will provide us written
notification that we are in compliance with the Rule. However, if we do not regain compliance with
the Rule by June 8, 2010, the Nasdaq staff will determine whether we meet the Nasdaq Capital Market
initial listing criteria set forth in Marketplace Rule 4310(c), except for the bid price
requirement, and if we do, we will be granted an additional 180 calendar day compliance period.
Since December 10, 2009, our stock has traded below $1.00. Presently,
we believe that we meet all of the initial listing criteria except
for the minimum bid price requirement, based on the closing price of our common stock on March 31,
2010. However, if the market value of shares of our common stock held by non-affiliates is below the
initial listing criteria on June 8, 2010, we intend to submit an appeal to Nasdaq to allow us an
extension of time to gain compliance. If we are not successful, and Nasdaq delists our common
stock, it will likely trade on the OTC Bulletin Board.
Impact of Recently Issued Accounting Standards
For information regarding recent accounting pronouncements and their expected impact on our future
consolidated results of operations or financial condition, see Note 1 to our consolidated financial
statements.
Business Segment Overview
We operate in two business segments: Animal Identification and Emergency Identification.
Our Animal Identification segments revenue decreased to $30.8 million for the year ended December
31, 2009 compared to $38.5 million for the year ended December 31, 2008. The decrease in the Animal
Identification segments revenue was primarily due to decreased sales of our syringe assemblies and
electronic tags. For extended discussion, see the Animal Identification revenue discussion below.
Our Animal Identification segment experienced a smaller operating loss in the year ended December
31, 2009 compared to 2008 and we expect this segment to achieve operating income in 2010. See page
28 for a discussion of our outlook and trends for our Animal Identification segment.
Our Emergency Identification segments revenue decreased to $18.7 million for the year ended
December 31, 2009 compared to $23.8 million for the year ended December 31, 2008. The decrease in
revenue was primarily due to exchange rate variances during 2009 compared to 2008. In local
currency, revenues decreased by approximately £0.9 million, or 6.8%. Signature sales decreased at
our Radio Communications and Clifford and Snell divisions, which were slightly offset by increased
sales at our Sarbe division. Our Emergency Identification segment experienced operating losses for
the years ended December 31, 2009 and 2008. We expect that our Emergency Identification segment
will achieve operating income in 2010. See page 28 for a discussion of our outlook and trends for
our Emergency Identification segment.
22
The tables below provide a percentage breakdown of the significant sources of our consolidated
revenues and gross profits over the past two fiscal years and, as such, reflect certain trends in
the composition of such revenues and gross profits:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Sources of Revenue:
|
|
|
|
|
|
|
|
|
Visual and electronic identification tags and implantable microchips for companion pets, horses,
livestock, fish and wildlife markets from our Animal Identification segment
|
|
|
62.2
|
%
|
|
|
61.8
|
%
|
GPS enabled products used for location tracking and message monitoring of pilots, aircraft and
maritime vehicles in remote locations from our Emergency Identification segment
|
|
|
37.8
|
|
|
|
38.2
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Sources of Gross Profit:
|
|
|
|
|
|
|
|
|
Visual and electronic identification tags and implantable microchips for companion pets, horses,
livestock, fish and wildlife markets from our Animal Identification segment
|
|
|
52.5
|
%
|
|
|
41.9
|
%
|
GPS enabled products used for location tracking and message monitoring of pilots, aircraft and
maritime vehicles in remote locations from our Emergency Identification segment
|
|
|
47.5
|
|
|
|
58.1
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
The table below sets forth data from our consolidated statements of operations for the past two
fiscal years, expressed as a percentage of total revenues from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
59.0
|
|
|
|
68.0
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
41.0
|
|
|
|
32.0
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
49.8
|
|
|
|
48.8
|
|
Research and development expenses
|
|
|
2.4
|
|
|
|
3.2
|
|
Restructuring, severance and separation expenses
|
|
|
1.4
|
|
|
|
5.9
|
|
Goodwill and asset impairment charges
|
|
|
14.9
|
|
|
|
57.0
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
68.5
|
|
|
|
114.9
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(27.5
|
)
|
|
|
(82.9
|
)
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net
|
|
|
0.6
|
|
|
|
4.3
|
|
Interest expense
|
|
|
(4.3
|
)
|
|
|
(17.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
continuing operations before income tax benefit
|
|
|
(31.2
|
)
|
|
|
(96.1
|
)
|
|
|
|
|
|
|
|
|
|
Benefit from income taxes
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(31.2
|
)
|
|
|
(95.8
|
)
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of income taxes
|
|
|
6.1
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(25.1
|
)
|
|
|
(93.2
|
)
|
|
|
|
|
|
|
|
|
|
(Income) loss attributable to the noncontrolling interest, continuing operations
|
|
|
0.2
|
|
|
|
(0.2
|
)
|
(Income) loss attributable to the noncontrolling interest, discontinued operations
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Digital Angel Corporation
|
|
|
(25.0
|
)%
|
|
|
(93.4
|
)%
|
|
|
|
|
|
|
|
Our consolidated operating activities (used) provided cash of $(3.9) million and $1.3 million
during the years ended December 31, 2009 and 2008, respectively. As of December 31, 2009, our cash
and cash equivalents totaled $1.9 million, compared to $1.4 million as of December 31, 2008. As of
December 31, 2009, our stockholders equity was $15.9 million, as compared to $22.7 million as of
December 31, 2008, and as of December 31, 2009, we had an
accumulated deficit of $571.2 million.
Our consolidated operating loss was approximately $13.6 million and $51.6 million for the years
ending December 31, 2009 and 2008, respectively. The decrease in our 2009 operating loss was due,
in large part, to approximately $35.5 million of goodwill and asset impairments, $3.7 million of
restructuring expenses, $1.4 million of inventory reserves related to our restructuring efforts
that were recorded in 2008 as well as an overall reduction in selling, general and administrative
expenses in 2009.
23
Our profitability and liquidity depend on many factors, including the success of our marketing
programs, the maintenance and reduction of expenses, our ability to successfully develop and bring
to market our new products and technologies and the protection of our intellectual property rights.
We have established a management plan intended to guide us in achieving profitability in future
periods. The major components of our plan are as follows:
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|
|
To streamline our segments operations and improve our supply chain management;
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|
|
|
|
To streamline and consolidate our corporate structure and minimize overhead costs;
|
|
|
|
|
To divest of non-core assets and businesses;
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|
|
|
|
To attempt to produce additional cash flow and revenue from our technology products;
|
|
|
|
|
To transition portions of our in-house manufacturing to lower-cost countries;
|
|
|
|
|
To instill a pay for performance culture; and
|
|
|
|
|
To seek growth through strategic acquisitions or partnerships.
|
Our management believes that the above plan can be effectively implemented.
Critical Accounting Policies and Estimates
Listed below are descriptions 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 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
consolidated financial statements.
Revenue Recognition
Our revenue recognition policies, which are listed in Note 1 to our consolidated financial
statements, determine the timing and recognition of certain expenses, such as sales commissions. We
follow specific and detailed guidelines in measuring revenue; however, certain judgments affect the
application of our revenue policy. The complexity of the estimation process and all issues related
to the assumptions, risks and uncertainties inherent with 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 service/warranty periods,
estimates of customer returns and the timing of customer acceptance. Our revenue results are
difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our
operating results to vary significantly from quarter to quarter and year to year.
Goodwill and Other Intangible Assets
As of December 31, 2009, our consolidated goodwill was $3.3 million and our intangible assets were
$11.4 million. We had no intangible assets with indefinite lives. We test our goodwill and
intangible assets for impairment annually as a part of our annual business planning cycle during
the fourth quarter of each fiscal year or earlier depending on specific changes in conditions
surrounding our business units. The determination of the value of our intangible assets requires
management to make estimates and assumptions about the future operating results of our operating
units. In the fourth quarter of 2009, we recorded an impairment charge of approximately $7.1
million related to our Emergency Identification reporting unit; $3.8 million relating to goodwill
and $3.3 million (net of approximately $(1.4) million of related deferred tax liabilities) related
to intangible assets. As a result of the declines in our equity market capitalization, which fell
below our stockholders equity, we performed an interim goodwill assessment in the third quarter of
2008. This assessment resulted in a $25.0 million goodwill impairment charge in the quarter. In
performing our impairment assessments in 2009 and 2008, we placed emphasis on current trading
values, including those of our competitors, as well as higher market-risk discount rates. In the
fourth quarter of 2008, we recorded approximately $4.4 million of impairment charges relating to
our Animal Identification segment of which $4.1 million was related to goodwill and $0.3 million
was related to trademarks and customer relationships. Future events, such as market conditions or
operational performance of our businesses, could cause us to conclude that additional impairment
exists, which could have a material impact on our financial condition and results of operations.
Principles of Consolidation
We consolidate all subsidiaries in which we hold a greater than 50% voting interest, which requires
that we include the revenue, expenses, assets and liabilities of such subsidiaries in our financial
statements. Currently, we own a majority of each of our subsidiaries. However, if in the future we
were to own less than 50% but equal to or more than 20% of the voting interest of any investee, we
will account for such investee under the equity method. All intercompany transactions and balances
between or among us and our subsidiaries have been eliminated in consolidation.
24
Stock-Based Compensation
In accordance with the Compensation Stock Compensation Topic of the Codification, stock-based
awards granted are valued at fair value and compensation cost is recognized on a straight line
basis over the service period of each award. See Note 11 for further information concerning our
stock option plans.
In the years ended December 31, 2009 and 2008, we incurred stock-based compensation expense of
approximately $0.5 million and $0.4 million, respectively. This stock-based compensation expense is
reflected in our consolidated statements of operations in selling, general and administrative
expense.
Inventory Obsolescence
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 lower of cost (determined by the first-in, first-out
method) or market, net of any reserve for obsolete or slow-moving inventory. As of December 31,
2009 and 2008, inventory reserves were $2.2 million and $1.3 million, respectively. The estimated
market value of our inventory is based upon assumptions about future demand and market conditions.
If actual market conditions are less favorable than those projected by management, additional
inventory write-downs may be required, which could have a material adverse affect on our financial
condition and results of operations.
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, 2009 and 2008, 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 losses carried forward. The valuation allowance is
based on our historical operating performance and estimates of taxable income in the U.S. and the
period over which our deferred tax assets will be recoverable. As of December 31, 2009, we have not
provided a valuation allowance against certain of our United Kingdom deferred tax assets as we have
deemed it more likely than not that these assets will be realized.
If we continue to operate at a loss or are unable to generate sufficient future taxable income, or
if there is a material change in the actual effective tax rates or time period within which the
underlying temporary differences become taxable or deductible, we may be required to increase our
valuation allowance against previously recognized deferred tax assets, which could result in a
material adverse impact on our operating results. Conversely, if we become profitable in the
future or if we realize certain built-in-gains, we may reduce a
significant portion of our valuation allowance, which could result in a significant
tax benefit and a favorable impact on our financial condition and operating results. As of December
31, 2009, we had an aggregate valuation allowance against our net deferred tax assets of
approximately $116.4 million.
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 a fifty percent change
in ownership under IRC section 382 places 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, effectively eliminates our ability
to use a substantial portion of our net operating loss carryforwards to offset future taxable
income. Based on our current cumulative three-year change in ownership, we exceeded the fifty
percent threshold during the year ended December 31, 2009. As a
result, approximately $197.9
million of the U.S. net operating loss carryforwards is limited under IRC section 382. Certain
transactions could cause an additional ownership change in the future, including (a) additional
issuances of shares of common stock by us or our subsidiaries or (b) 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. See Note 13 for further
information concerning our income taxes.
25
Results of Operations from Continuing Operations
We evaluate the performance of our two operating segments based on stand-alone segment operating
loss, as presented below. Operating loss from each of our segments during 2009 and 2008 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Animal Identification
|
|
$
|
(757
|
)
|
|
$
|
(41,716
|
)
|
Emergency Identification
|
|
|
(9,207
|
)
|
|
|
(1,257
|
)
|
Corporate
(1)
|
|
|
(3,626
|
)
|
|
|
(8,662
|
)
|
|
|
|
|
|
|
|
Total
|
|
$
|
(13,590
|
)
|
|
$
|
(51,635
|
)
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Our Corporate segment includes all amounts given effect to
in the consolidation of our subsidiaries, such as the
elimination of inter-segment revenues expenses, assets and
liabilities. Corporate also includes certain selling,
general and administrative expense and interest expense and
other expenses associated with corporate activities and
functions.
|
Animal Identification Segment
Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
Change
|
|
|
|
2009
|
|
|
Revenue
|
|
|
2008
|
|
|
Revenue
|
|
|
Increase (Decrease)
|
|
|
|
(dollar amounts in thousands)
|
|
|
Revenue
|
|
$
|
30,774
|
|
|
|
100.0
|
%
|
|
$
|
38,501
|
|
|
|
100.0
|
%
|
|
$
|
(7,727
|
)
|
|
|
(20.1
|
)%
|
|
Gross profit
|
|
|
10,635
|
|
|
|
34.5
|
|
|
|
8,355
|
|
|
|
21.7
|
|
|
|
2,280
|
|
|
|
27.3
|
|
|
Selling, general
and
administrative
expenses
|
|
|
9,492
|
|
|
|
30.8
|
|
|
|
11,550
|
|
|
|
30.0
|
|
|
|
(2,058
|
)
|
|
|
(17.8
|
)
|
Research
and development
expenses
|
|
|
1,206
|
|
|
|
3.9
|
|
|
|
1,993
|
|
|
|
5.2
|
|
|
|
(787
|
)
|
|
|
(39.5
|
)
|
Restructuring,
severance and
separation
expenses
|
|
|
497
|
|
|
|
1.6
|
|
|
|
2,357
|
|
|
|
6.1
|
|
|
|
(1,860
|
)
|
|
|
(78.9
|
)
|
Goodwill
and asset
impairment
charges
|
|
|
197
|
|
|
|
0.6
|
|
|
|
34,171
|
|
|
|
87.2
|
|
|
|
(33,974
|
)
|
|
|
(99.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(757
|
)
|
|
|
(2.4
|
)%
|
|
$
|
(41,716
|
)
|
|
NM
|
%
|
|
$
|
40,959
|
|
|
|
98.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Our Animal Identification segments revenue decreased approximately $7.7 million, or
20.1%, in the year ended December 31, 2009 as compared to the year ended December 31, 2008. The
decrease was primarily due to a decrease in demand for companion animal sales resulting in
approximately 1.4 million less syringe assemblies sold to Schering Plough, our exclusive
distributor in the U.S. of our companion pet implantable microchips. In addition, we experienced
lower electronic tag sales due to the fulfillment of a contract with the U.S. Department of
Agriculture in the first quarter of 2008, decreased electronic tag sales in Canada during the
fourth quarter of 2009 compared to the fourth quarter of 2008 and fewer sales in Europe primarily
due to a lower volume of sales to Austria and a negative exchange rate impact from the prior year.
These decreases were slightly offset by an increase in sales of fish chips due to an increase in
government demand.
Gross Profit and Gross Profit Margin
Our Animal Identification segments gross profit increased
approximately $2.3 million, or 27.3%, in the year ended December 31, 2009 compared to the year
ended December 31, 2008. The increase primarily relates to a lower gross profit margin in 2008
resulting from an inventory provision recorded in 2008 of approximately $1.8 million related to
slow moving and obsolete inventory and inventory identified as a result of our restructuring
activities in 2008 as well as headcount reductions and a reduction in material and freight
expenses. The gross profit margin was 34.5% in the year ended December 31, 2009 compared to 21.7%
in the year ended December 31, 2008. We primarily attribute the increase in gross profit margin to
the causes discussed above.
Selling, General and Administrative Expenses
Our Animal Identification segments selling,
general and administrative expenses decreased approximately $2.1 million, or 17.8% in the year
ended December 31, 2009 compared to the year ended December 31, 2008. This was primarily
attributable to lower sales and marketing costs due to less media and advertising expenses as a
result of our cost control efforts, reduced salaries from headcount reductions resulting from our
restructuring efforts in 2008 as well as decreased legal costs associated with intellectual
property compliance. Selling, general and administrative expenses as a percentage of revenue
remained relatively constant during the years ended December 31, 2009 and 2008.
Research and Development Expenses
Our Animal Identification segments research and development
expenses decreased approximately $0.8 million in the year ended December 31, 2009 compared to the
year ended December 31, 2008. The decrease was primarily due to a reduction of costs
associated with the rTag
TM
development and decreased salary and benefits expenses due to
headcount reductions as a result of our restructuring efforts. Research and development expenses
relate to new product development associated with RFID microchips and related scanners.
Restructuring, Severance and Separation Expenses
Our Animal Identification segments
restructuring, severance and separation expenses were approximately $0.5 million and $2.4 million
in the years ended December 31, 2009 and 2008, respectively. The costs in both 2009 and 2008
primarily related to severance and facilities and production relocation costs at the St. Paul,
Denmark and South American locations.
26
Goodwill and Asset Impairment Charges
Our Animal Identification segment recorded goodwill and
asset impairment charges of $0.2 million and $34.2 million for the years ended December 31, 2009
and 2008, respectively. The goodwill and asset impairment charges in 2009 related to fixed asset
impairments at the St. Paul location. In 2008, as a result of the declines in our equity market
capitalization, which fell below our stockholders equity, we performed an interim goodwill
assessment in the third quarter of 2008. This assessment resulted in a $25.0 million goodwill
impairment charge in the quarter. In performing our assessments, we placed greater emphasis on
current trading values, including those of our competitors, as well as higher market-risk discount
rates. In addition, during our annual impairment review in the fourth quarter of 2008, we recorded
goodwill impairment of approximately $4.1 million related to Geissler Technologies Corporation
(GTC) and recorded an impairment of intangibles at South America of approximately $0.3 million.
The remaining impairment in 2008 related to our restructuring and is due to: (i) fixed asset
impairments of $1.8 million ($0.4 million in St. Paul and $1.4 million in Denmark); (ii) goodwill
impairment in Denmark of $1.9 million; (iii) intangible asset impairments of $0.8 million in
Denmark; and (iv) other asset impairments of $0.2 million. If in the future we fail to perform as
expected, we could face additional goodwill and intangible asset impairment charges.
Outlook and Trends
We anticipate our Animal Identification segments sales and gross profits to remain relatively
constant in 2010 and our operating expenses to decrease slightly in 2010. We believe our investment
in technology and product development, such as the rTag and BioThermo
®
, will enable future growth
for our Animal Identification segment. We also face favorable long-term market trends, such as the
technology migration from visual to electronic identification and increased government regulation
in the area of food safety and traceability.
Emergency Identification Segment
Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
Change
|
|
|
|
2009
|
|
|
Revenue
|
|
|
2008
|
|
|
Revenue
|
|
|
Increase (Decrease)
|
|
|
|
(dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
18,689
|
|
|
|
100.0
|
%
|
|
$
|
23,759
|
|
|
|
100.0
|
%
|
|
$
|
(5,070
|
)
|
|
|
(21.3
|
)%
|
|
Gross profit
|
|
|
9,636
|
|
|
|
51.6
|
|
|
|
11,563
|
|
|
|
48.7
|
|
|
|
(1,927
|
)
|
|
|
(16.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
11,520
|
|
|
|
61.6
|
|
|
|
12,224
|
|
|
|
54.5
|
|
|
|
(704
|
)
|
|
|
(5.8
|
)
|
Restructuring, severance and separation expenses
|
|
|
181
|
|
|
|
1.0
|
|
|
|
596
|
|
|
|
2.5
|
|
|
|
(415
|
)
|
|
|
(69.6
|
)
|
Goodwill and asset impairment
|
|
|
7,142
|
|
|
|
38.3
|
|
|
|
|
|
|
|
|
|
|
|
7,142
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(9,207
|
)
|
|
|
(49.3
|
)%
|
|
$
|
(1,257
|
)
|
|
|
(5.3
|
)%
|
|
$
|
(7,950
|
)
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Our Emergency Identification segments revenue decreased approximately $5.1 million, or
21.3%, in the year ended December 31, 2009 compared to the year ended December 31, 2008. The
decrease in revenue is primarily due to exchange rate variances during 2009 compared to 2008. In
local currency, revenues decreased by approximately £0.9 million, or 6.8%. Signature sales
decreased at our Radio Communications and Clifford and Snell divisions, which were slightly offset
by increased sales at our Sarbe division.
Gross Profit and Gross Profit Margin
Our Emergency Identification segments gross profit
decreased approximately $1.9 million, or 16.7%, in the year ended December 31, 2009 as compared to
the year ended December 31, 2008. The decrease was primarily attributable to exchange rate
variances during 2009 compared to 2008. In local currency, gross profit remained relatively
constant. Gross profit margin was 51.6% in the year ended December 31, 2009 as compared to 48.7%
during the year ended December 31, 2008. The increase in gross profit margin relates primarily to
improved margins at our Sarbe division.
Selling, General and Administrative Expenses
Our Emergency Identification segments selling,
general and administrative expenses decreased approximately $0.7 million, or 5.8%, in the year
ended December 31, 2009 compared to the year ended December 31, 2008. This decrease in selling,
general and administrative expenses is primarily due to exchange rate variances during 2009 and
2008. In local currency, selling, general and administrative expenses increased approximately £0.7
million. The increase relates primarily to an increase in legal and accounting fees due to the
implementation in 2009 of an allocation of such expenses from our corporate division, an increase
in temporary staffing costs and depreciation, as well as an executive compensation and travel cost
allocation from our corporate division in the fourth quarter of 2009. These increases were slightly
offset by decreases in other personnel costs. As a percentage of revenue, selling, general and
administrative expenses increased to 61.6% in the year ended December 31, 2009 from 54.5% in the
year ended December 31, 2008. The increase in selling, general and administrative expenses as a
percentage of revenue resulted primarily from the factors discussed above.
27
Restructuring, Severance and Separation Expenses
Our Emergency Identification segments
restructuring, severance and separation expenses were approximately $0.2 million in the year ended
December 31, 2009 and $0.6 million in the year ended December 31, 2008 and primarily related to
severance at our U.K. locations as we continue our efforts to reduce expenses and streamline
operations.
Goodwill and Asset Impairment
Our Emergency Identification segments goodwill and asset
impairment expense of approximately $7.1 million during the year ended December 31, 2009 related to
impairments of approximately $3.8 million of goodwill and approximately $3.3 million (net of
approximately $(1.4) million of related deferred tax liabilities) related to intangible assets. The
impairments were recorded as a result of our annual testing during the fourth quarter of 2009.
Outlook and Trends
We anticipate our Emergency Identification segments sales and gross profits to increase and our
operating expenses to decrease in 2010. We believe that the future will bring market opportunities
due to increasing demand for recreational PLBs, expansion into the North American market and our
belief that PLBs will become a highly desired product during peacetime for many of our current, and
potentially new, world wide armed forces customers.
Corporate Segment
Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
2009
|
|
|
2008
|
|
|
Increase (Decrease)
|
|
|
|
(dollar amounts in thousands)
|
|
Revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
3,626
|
|
|
|
6,641
|
|
|
|
(3,015
|
)
|
|
|
(45.4
|
)
|
Restructuring expenses
|
|
|
|
|
|
|
725
|
|
|
|
(725
|
)
|
|
|
(100.0
|
)
|
Goodwill and asset impairment charges
|
|
|
|
|
|
|
1,296
|
|
|
|
(1,296
|
)
|
|
|
(100.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(3,626
|
)
|
|
$
|
(8,662
|
)
|
|
$
|
5,036
|
|
|
|
40.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative Expenses
Our Corporate segments selling, general and
administrative expenses decreased approximately $3.0 million in 2009 as compared to 2008. The
decrease primarily relates to lower salary expenses resulting from fewer Corporate employees in
2009, the implementation of the allocation of executive management compensation and audit,
accounting and legal expenses to our Animal Identification and Emergency Identification segments, a
reduction in accrued bonuses, and decreased outside professional fees.
Restructuring Expenses
Our Corporate segments restructuring expense in 2008 consisted of
approximately $0.4 million related to accrued severance and stay bonuses and related payroll
expenses, and approximately $0.3 million related to accrued rent expense for our corporate office
in Florida. As a part of the restructuring plan, we eliminated approximately five headcount in 2008
and we closed our offices in Delray Beach, Florida in September 2008.
Goodwill and Asset Impairment Charges
Our Corporate segments impairment charges of
approximately $1.3 million for the year ended December 31, 2008 was due to $1.2 million impairment
of our investment in PSID and the write off of assets in connection with the closing of our
corporate offices in Florida.
Consolidated
Interest and Other Income, net
Interest and other income, net decreased approximately $2.4 million in the year ended December 31,
2009 compared to the year ended December 31, 2008. The decrease was primarily the result of $3.2
million of income recognized in 2008 from the reversal of liabilities of companies that were sold
or closed in 2001 and 2002, and for which we no longer had a legal obligation to pay, $0.7 million
of gain on sale of patents in 2008 and approximately $0.5 million of interest income recognized on
investments. These increases in 2008 were partially offset by a loss on settlement of PSIDs debt
to us of $2.5 million.
Interest Expense
Interest expense was $2.2 million and $10.9 million for the years ended December 31, 2009 and 2008,
respectively. The decrease in interest expense from 2008 is primarily due to approximately $2.0
million of additional amortization of debt issuance costs and discount on original debt issued as
the result of prepayments of debt during 2008, approximately $1.5 million write-off of the
remaining debt issuance costs and discount on original debt issued and debt modification expense as
a result of the substantial modification of debt during 2008, an additional $1.1 million of
interest expense associated with the re-pricing of common stock warrants during 2008 and an
additional $0.5 million of interest expense related to the issuance of stock in connection with a
$2.0 million note entered into during the fourth quarter of 2008. Interest expense in 2009
primarily relates to interest incurred on our outstanding debt as well as $0.5 million of interest
expense related to Destron Fearings amortization of debt discount and debt issuance costs. Based
on our current level of debt we estimate that our interest expense will be approximately $1 million
for the year ended December 31, 2010.
28
Total cash paid for interest was approximately $1.5 million and $2.1 million, or 68% and 19% of
total interest expense, for the years ended December 31, 2009 and 2008, respectively.
Income Taxes
Differences in the effective income tax rates from the statutory federal income tax rate arise from
state taxes net of federal benefits, the increase or reduction of valuation allowances related to
net operating loss carry forwards and other deferred tax assets. As of December 31, 2009, we have
provided a valuation allowance to fully reserve our U.S. net operating losses carried forward and
our other U.S. existing net deferred tax assets, primarily as a result of our recent losses. Our
tax provisions for 2009 and 2008 were primarily related to our foreign operations.
Net Loss from Continuing Operations
During the years ended December 31, 2009 and 2008, we reported a loss from continuing operations of
approximately $15.4 million and $59.6 million, respectively. The decrease in the loss for the year
ended December 31, 2009 compared to December 31, 2008 principally relates to higher goodwill and
assets impairment charges, additional non-cash interest expense and additional restructuring
expenses and severance charges, in the year ended December 31, 2008 as compared to the amounts
incurred during 2009. Also contributing to the reduction in the loss from continuing operations in
2009 was a reduction in selling, general and administrative expenses of approximately $5.8 million.
Each of these items is more fully discussed above in the context of the appropriate segment.
LIQUIDITY AND CAPITAL RESOURCES FROM CONTINUING OPERATIONS
As of December 31, 2009, cash and cash equivalents totaled $1.9 million, an increase of $0.5
million, or 35.7%, from $1.4 million at December 31, 2008.
Net cash (used in) provided by operating activities totaled $(3.9) million and $1.3 million in 2009
and 2008, respectively. In 2009, cash used by operating activities was primarily the net loss and
the net change in operating assets and liabilities. In 2008, cash was provided primarily by the net
change in operating assets and liabilities.
Adjustments to reconcile operating losses to net cash used in operating activities included the
following:
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Accounts and unbilled receivables, net of allowance for doubtful accounts, were $7.4 million
and $8.9 million at December 31, 2009 and 2008, respectively. The decrease is primarily due to
lower companion animal and electronic tag sales during the fourth quarter of 2009 compared to the
fourth quarter of 2008. We anticipate accounts receivable to decrease slightly during 2010.
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Inventories increased to $9.8 million at December 31, 2009, compared to $7.1 million at
December 31, 2008. The increase was primarily due to our Emergency Identification segment which
continued to build inventory levels during 2009 in preparation for production on a large PELS
contract. The increase is slightly offset by a decrease in inventory at our Animal Identification
segment due to a reduction of transponders. We expect inventory levels to decrease in 2010 as we
fulfill the PELS contract.
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Accounts payable decreased $0.3 million to $8.1 million at December 31, 2009, from $8.4
million at December 31, 2008. The decrease was primarily due to our Emergency Identification
segment resulting from fewer purchases in the fourth quarter of 2009. The decrease was slightly
offset by an increase in accounts payable at our Animal Identification segment due to the general
timing of billings and payments of purchases. We anticipate accounts payable levels to decrease
throughout 2010.
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Accrued expenses decreased $1.2 million to $6.6 million at December 31, 2009, from $7.7
million at December 31, 2008. The decrease was primarily related
to the reclassification of certain bonuses to long-term liabilities
based on our plans and expectations of the timing of the payments as
well as payments of accrued
severance at our Emergency Identification segment during 2009. We expect accrued expenses to
increase in 2010.
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Investing activities provided cash of $8.1 million and $13.3 million in 2009 and 2008,
respectively. In 2009, cash provided by investing activities was primarily related to the sale of
McMurdo. In 2008, cash provided by investing activities was primarily related to proceeds of
approximately $9.5 million received on a note receivable from PSID and approximately $7.2 million
received from PSID as a special dividend, offset slightly by payments on a note receivable and
purchases of equipment.
Financing activities (used) cash of $(3.8) million and $(15.0) million in 2009 and 2008,
respectively. In 2009, we paid a total of approximately $6.6 million on our debt which was slightly
offset by the cash received from the issuance of shares of our common stock under the SEDA. In
2008, we made net payments on our debt of approximately $16.3 million which was offset slightly by
approximately $2.3 million in proceeds from warrant exercises.
29
Financial Condition
Financing Agreements and Debt Obligations
We are party to certain financing agreements and debt obligations, which total approximately $9.7
million as of December 31, 2009, and are discussed in detail in Note 9 to our consolidated
financial statements. The following is a discussion of our liquidity, and therefore, focuses on our
revolving debt and advances from factors which represent approximately $5.1 million and $1.3,
respectively. We do not have any financial covenants under any of our debt agreements. For
discussion of our non-financial covenants and outstanding debt, see Note 9 to our consolidated
financial statements.
Destron Fearings Revolving Facility
On August 31, 2007, Destron Fearing and certain of its wholly-owned subsidiaries, Digital Angel
Technology Corporation, Fearing Manufacturing Co., Inc. and Digital Angel International
(collectively, the Eligible Subsidiaries) entered into a $6.0 million revolving asset-based
financing transaction with Kallina pursuant to the terms of a Security Agreement. Under the terms
of the Security Agreement, Destron Fearing may borrow, from time to time, an amount equal to the
lesser of the amount of availability under the borrowing base and $6.0 million, subject to certain
reserves that Kallina is authorized to take in its reasonable commercial judgment (the Revolving
Facility). The borrowing base is calculated as a percentage of the total amount of eligible
accounts receivable and inventory owned by Destron Fearing and its Eligible Subsidiaries. Amounts
outstanding under the Revolving Facility accrue interest at a rate equal to the prime rate plus
2.0%, but not less than 10.0% at any time. At December 31, 2009, approximately $2.2 million was
outstanding under the Revolving Facility, there was $0.3 million available for borrowing and the
interest rate was 10.0%.
The Revolving Facility matures on August 31, 2010. Destron Fearing and its Eligible Subsidiaries
have pledged all of their respective assets, excluding the stock of all foreign subsidiaries other
than Signature, in support of the obligations under the Revolving Facility. In connection with the
Revolving Facility, Destron Fearing issued to Kallina seven-year warrants, which, as a result of
our acquisition of the minority owners interest in Destron Fearing in 2007, were converted into
warrants to purchase shares of our common stock. The value of the warrants of approximately $1.0
million was recorded as a discount to the Revolving Facility and is being amortized to interest
expense over the life of the Revolving Facility. Destron Fearing paid Kallina an upfront fee equal
to 3.5% of the $6.0 million Revolving Facility, which is also being amortized over the life of the
Revolving Facility as interest expense.
Signatures Invoice Discounting Factoring Agreements
Signature had an Invoice Discounting Agreement, (as amended, the RBS Invoice Discounting
Agreement) with The Royal Bank of Scotland Commercial Services Limited (RBS). The RBS Invoice
Discounting Agreement provided for Signature to sell with full title guarantee most of its
receivables, as defined in the RBS Invoice Discounting Agreement. Under the RBS Invoice Discounting
Agreement, as amended in December 2008, RBS prepaid up to 70% of the receivables sold in the United
Kingdom (U.K.) and up to 70% of the receivables sold in the rest of the world, not to exceed an
outstanding balance of £1.5 million at any given time, subject to restrictions on the use of
proceeds. RBS paid Signature the remainder of the receivable upon collection. Receivables which
remained outstanding 90 days from the end of the invoice month became ineligible and RBS could
require Signature to repurchase the receivable. The discounting charge accrued at an annual rate of
1.5% above the base rate as defined in the RBS Invoice Discounting Agreement. Signature paid a
commission charge to RBS of 0.16% of each receivable balance sold. The RBS Invoice Discounting
Agreement required a minimum commission charge of £833 per month. Discounting charges of $35
thousand and $0.1 million are included in interest expense for the years ended December 31, 2009
and 2008, respectively. In July 2009, we terminated the RBS Invoice Discounting Agreement and
replaced it with the Bibby Invoice Discounting Agreement as discussed below.
In July 2009, Signature entered into an invoice discounting factoring agreement (the Bibby Invoice
Discounting Agreement) with Bibby Financial Services (Bibby), which replaced the RBS Invoice
Discounting Agreement as discussed above. The Bibby Invoice Discounting Agreement provides for
Signature to sell, with full title guarantee, certain of its receivables as defined in the Bibby
Invoice Discounting Agreement. Bibby prepays 80% of the receivables sold in the U.K. and 70% of
receivables sold in the rest of the world, not to exceed a balance of £2.5 million (approximately
$4.0 million at December 31, 2009). Subsequent to continued satisfactory operation of the invoice
discounting facility and Signatures financial progress, Bibby will increase funding in two further
tranches of £500 thousand each (approximately $0.8 million at December 31, 2009), up to a total
balance of £3.5 million (approximately $5.6 million at December 31, 2009), based upon the cash
needs of the business and ability to generate the required level of receivable funding. Bibby
repays Signature the remainder of the receivable upon collection.
Receivables which remain outstanding 90 days from the invoice date become ineligible and Signature
is required to repurchase the receivable. The Bibby Invoice Discounting Agreement requires a fee of
0.25% for each U.K. receivable sold and 0.3% for each receivable sold in the rest of the world. If
the total of the yearly fee is less than £60,000, Signature is required to pay Bibby the amount of
such deficit. Signature is also required to
pay a discounting charge of 2.0% above the higher of Barclays Bank Plc base rate or 3 month LIBOR
subject to a minimum of 3.5% (3.5% at December 31, 2009). Discounting charges of approximately $0.1
million are included in interest expense for the year ended December 31, 2009. Either Signature or
Bibby can terminate the Bibby Invoice Discounting Agreement by providing written notice to the
other party six months prior to the intended termination date but neither party can terminate for
eighteen months following the commencement date. As of December 31, 2009, we had approximately £0.4
million outstanding (approximately $0.6 million) and approximately £0.3 million available
(approximately $0.5 million) for borrowing under the Bibby Invoice Discounting Agreement.
30
Destron Fearing A/Ss Line of Credit
Destron Fearing A/S is party to a credit agreement with Danske Bank (the Credit Facility). On
June 1, 2006, Destron Fearing A/S amended the borrowing availability from DKK 12.0 million to DKK
18.0 million (approximately $3.5 million at December 31, 2009). In connection with the amendment,
Destron Fearing executed a Letter of Support which confirms that it will maintain its holding of
100% of the share capital of Destron Fearing A/S, and will neither sell, nor pledge, nor in any way
dispose of any part of Destron Fearing A/S or otherwise reduce Destron Fearings influence on
Destron Fearing A/S without the prior consent of Danske Bank. Interest is determined quarterly and
is based on the international rates Danske Bank can establish on a loan in the same currency on the
international market plus 2.0%. At December 31, 2009, the annual interest rate on the Credit
Facility was 6.6%. Borrowing availability under the Credit Facility considers guarantees
outstanding. The Credit Facility will remain effective until further notice. Destron Fearing A/S
can terminate the Credit Facility and pay the outstanding balance, or Danske Bank may demand the
credit line be settled immediately at any given time, without prior notice. Beginning in July 2009,
Destron Fearing A/S and Danske Bank agreed to reduce the borrowing availability on the Credit
Facility each month by DKK 500 thousand (approximately $0.1 million). As of December 31, 2009,
total availability had been reduced from DKK 18.0 million (approximately $3.5 million at December
31, 2009) to DKK 15.0 million (approximately $2.9 million at December 31, 2009). DKK 15.2 million
(approximately $2.9 million) was outstanding at December 31, 2009 and there was no availability
under the credit line.
Nordisk Factoring Agreement
In March 2008, our wholly-owned European subsidiary, Destron Fearing A/S, entered into a factoring
agreement (the Nordisk Factoring Agreement) with Nordisk Factoring A/S (Nordisk). Under the
Nordisk Factoring Agreement, Nordisk advances 80% of Destron Fearing A/Ss eligible receivables,
not to exceed a balance of DKK 6.0 million (approximately $1.2 million at December 31, 2009) at any
given time. As security, Destron Fearing A/S assigns all invoice balances to Nordisk, regardless of
whether advances were made on them, and warrants payments by its customers. Destron Fearing A/S
pays a factoring commission charge to Nordisk of 0.15% of the gross volume of receivables factored.
The Nordisk Factoring Agreement requires a minimum commission charge of DKK 36,000 (approximately
$7 thousand) per year. Discounting charges of approximately $34 thousand and $31 thousand are
included in interest expense for the years ended December 31, 2009 and 2008, respectively. As of
December 31, 2009, Destron Fearing A/S had assigned approximately DKK 3.5 million receivables
(approximately $0.7 million) to Nordisk and had no additional availability under the agreement.
Registered Direct Offering and Sale of Common Stock and Warrants
On February 9, 2010, we sold, in a registered direct offering, 3,385,000 shares of our common stock
and warrants to purchase 1,354,000 shares of common stock to two institutional investors pursuant
to the terms of a securities purchase agreement we entered into on February 3, 2010. The purchase
price of the securities was $1.7 million in the aggregate. The exercise price of the warrants is
$0.50 per share and the warrants may be immediately exercised and expire seven years from the date
of issuance. The warrants are not exercisable by a holder to the extent that such holder or any of
its affiliates would beneficially own in excess of 4.9% of our common stock. We entered into a
placement agent agreement with Chardan Capital Markets, LLC (Chardan) relating to our registered
direct offering where we agreed to pay Chardan a placement agent fee of 6.0% of the gross proceeds
from the sale. The net proceeds from the sale, after deducting the placement agent fee and other
offering expenses, were approximately $1.6 million and were used primarily to cover the repayment
of existing term debt obligations as discussed above. The terms of the warrants are more fully
described in Note 23 to our consolidated financial statements.
Standby Equity Distribution Agreement
On July 10, 2009, we entered into a Standby Equity Distribution Agreement (the SEDA) with YA
Global Master SPV Ltd. (YA SPV), an affiliate of Yorkville Advisors, for the sale of up to $5.0
million of shares of our common stock over a two-year commitment period. Under the terms of the
SEDA, we could from time to time, at our discretion, sell newly-issued shares of our common stock
to YA SPV. We issued shares of our common stock under the SEDA pursuant to a Registration Statement
on Form S-3 (Registration No. 333-159880), declared effective by the SEC on July 9, 2009 wherein we
registered 3.0 million shares of our common stock.
The SEDA required payment of a commitment fee payable to YA SPV in an amount equal to $125,000. We
delivered approximately 88 thousand shares of common stock under the Registration Statement to pay
the commitment fee. The price of the shares delivered was the average of the daily VWAP for the
three trading days after the date of the Agreement. During the year ended December 31, 2009, we
issued approximately 2.9 million shares of our common stock and received approximately $2.8 million
in cash under the SEDA. On January 19, 2010, we issued an additional 0.1 million shares of our
common stock and received approximately $0.1 million in cash under the SEDA. In connection with the
registered direct offering, we terminated the SEDA effective February 4, 2010.
Liquidity
As of March 19, 2010, our consolidated cash and cash equivalents totaled approximately $2.2
million. In addition, we had an aggregate of $0.7 million available under our credit facilities.
Although
we had negative working capital at December 31, 2009, 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, as well as our ability to delay
certain bonus payments to senior management until funds are available and to
undertake other cash management initiatives to operate our business for the twelve months ending
December 31,
2010. Our goal is to achieve profitability and to generate positive cash flows from operations. In
addition, during 2008 we restructured our Animal Identification business which eliminated
redundancies, improved gross margins and decreased expenses. Also, we generated positive cash flows
from operations during the year ended December 31, 2008. 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 2010. No assurance can be given that we will be successful in implementing the plan. Failure
to generate positive cash flow from operations might require us to
substantially reduce our level of operations and will have a material adverse effect on our business,
financial condition and results of operations.
31
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/refinance/extend our revolving credit facility and mortgage loan obligations during
2010. As of December 31, 2009, we had a working capital deficiency, which is partially due to
having to classify our revolving line of credit and our mortgage loan as well as our factoring
lines and our credit facility with Danske Bank, which are more fully discussed above and in Note 9
to our consolidated financial statements, as current liabilities on our consolidated balance sheet.
Our debt obligation to Danske Bank is due on demand and we are required to reduce the amount
available on the credit facility by approximately $0.1 million a month. Our factoring lines may
also be amended or terminated by the lenders. These conditions indicate that we may not be able to
continue operations at the current level, as we may be unable to generate the funds necessary to
pay our obligations in the ordinary course of business.
Outlook
We are constantly looking for ways to maximize stockholder value. As such, we are continually
seeking operational efficiencies and synergies within our operating segments as well as evaluating
acquisitions of businesses and customer bases which complement our operations. These strategic
initiatives may include acquisitions, raising additional funds through debt or equity offerings,
refinancing existing debt obligations or the divestiture of business units that are not critical to
our long-term strategy or other restructuring or rationalization of existing operations. We will
continue to review all alternatives to ensure maximum appreciation of our stockholders
investments. However, initiatives may not be found, or if found, they may not be on terms favorable
to us.
ITEM 8. FINANCIAL STATEMENTS
Our consolidated financial statements included in this Annual Report are listed in Item 15 and
begin immediately after the signature pages.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A(T). CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we conducted an evaluation of the effectiveness
of the design and operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period
covered by this report (the Evaluation Date). Based upon the evaluation, our principal executive
officer and principal financial officer concluded as of the Evaluation Date that our disclosure
controls and procedures were effective. Disclosure controls are controls and procedures designed to
reasonably ensure that information required to be disclosed in our reports filed under the Exchange
Act, such as this report, is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms. Disclosure controls include controls and procedures
designed to reasonably ensure that such information is accumulated and communicated to our
management, including our chief executive officer and chief financial officer, as appropriate to
allow timely decisions regarding required disclosure. Our quarterly evaluation of disclosure
controls and procedures includes an evaluation of some components of our internal control over
financial reporting, and internal control over financial reporting is also separately evaluated on
an annual basis for purposes of providing the management report which is set forth below.
Report of Management on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining a comprehensive system of internal
control over financial reporting to provide reasonable assurance of the proper authorization of
transactions, the safeguarding of assets and the reliability of the financial records. Our internal
control system was designed to provide reasonable assurance to our management and board of
directors regarding the preparation and fair
presentation of published financial statements. The system of internal control over financial
reporting provides for appropriate division of responsibility and is documented by written policies
and procedures that are communicated to employees. The framework upon which management relied in
evaluating the effectiveness of our internal control over financial reporting was set forth in
Internal Controls Integrated Framework
published by the Committee of Sponsoring Organizations of
the Treadway Commission.
Our internal control system was designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles in the U.S. Our internal control over
financial reporting includes those policies and procedures that:
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(i)
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pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets;
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32
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(ii)
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provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles generally accepted in
the U.S., and that our receipts and expenditures are being made only in accordance with
authorization of our management and directors; and
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(iii)
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provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on the consolidated
financial statements.
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Based on the results of our evaluation, our management concluded that our internal control over
financial reporting was effective as of December 31, 2009. However, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in our business or other conditions, or that the degree of compliance with our
policies or procedures may deteriorate.
This annual report does not include an attestation report of 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 SEC that
permit us to provide only managements report in this annual report.
Inherent Limitations of Disclosure Controls and Procedures and Internal Control over Financial
Reporting
There are inherent limitations to the effectiveness of any control system. A control system, no
matter how well conceived and operated, can provide only reasonable assurance that its objectives
are met. No evaluation of controls can provide absolute assurance that all control issues and
instances of fraud, if any, within the Company have been detected. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or because the degree of compliance with the policies
and procedures may deteriorate.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Exchange Act
Rule 13a-15(f)) during the quarter ended December 31, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting. There were
no significant deficiencies or material weaknesses, and therefore no corrective actions were taken.
PART III
The information required in Item 10 (Directors, Executive Officers and Corporate Governance), Item
11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters), Item 13 (Certain Relationships and Related
Transactions, and Director Independence), and Item 14 (Principal Accountant Fees and Services) will
be filed by amendment to this Annual Report on or before April 30, 2010 or incorporated by
reference to our definitive proxy statement for the 2010 Annual Meeting of Stockholders to be filed
with the SEC.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS
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(a)(1)
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The financial statements listed below are included in this report
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Report of Independent Registered Public Accounting Firm
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Financial Statements
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Consolidated Balance Sheets
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Consolidated Statements of Operations
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Consolidated Statements of Stockholders Equity
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Consolidated Statements of Cash Flows
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Notes to Consolidated Financial Statements
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(a)(3)
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Exhibits
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See the Exhibit Index filed as part of this Annual Report on Form 10-K.
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33
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.
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DIGITAL ANGEL CORPORATION
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Date: April 1, 2010
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By:
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/s/ Joseph J. Grillo
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Joseph J. Grillo
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President and Chief Executive Officer
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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.
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Signature
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Title
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Date
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/s/ Joseph J. Grillo
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President, Chief Executive
Officer and Director
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April 1, 2010
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(Joseph J. Grillo)
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(Principal Executive Officer)
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/s/ Lorraine M. Breece
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Senior Vice President and Chief
Financial Officer
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April
1, 2010
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(Lorraine M. Breece)
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(Principal Accounting Officer)
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/s/ Daniel E. Penni
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Chairman of the Board of Directors
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April
1, 2010
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(Daniel E. Penni)
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/s/ John R. Block
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Director
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April
1, 2010
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(John R. Block)
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/s/ Dennis G. Rawan
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Director
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April
1, 2010
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(Dennis G. Rawan)
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/s/ Michael S. Zarriello
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Director
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April
1, 2010
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(Michael S. Zarriello)
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34
DIGITAL ANGEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
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Page
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F-2
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F-3
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F-4
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F-5
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F-7
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F-8
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F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Digital Angel Corporation
We have audited the accompanying consolidated balance
sheets of Digital Angel Corporation and subsidiaries (the Company) as of December 31, 2009 and 2008, and the
related consolidated statements of operations, stockholders equity and cash flows for each of 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 based 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 are free of material misstatement.
We were not engaged to perform an audit of the Companys internal control over financial reporting as of
December 31, 2009. 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 Digital Angel Corporation
and subsidiaries as of December 31, 2009 and 2008, and the consolidated results of their operations and their
consolidated cash flows for each of the years then ended, in conformity with accounting principles generally
accepted in the United States.
/s/ Eisner LLP
New York, New York
March 31, 2010
F-2
Digital Angel Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except par value)
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December 31,
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2009
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2008
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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1,895
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$
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1,413
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Restricted cash
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202
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Accounts receivable, net of allowance for doubtful accounts of $906 in 2009 and $476 in 2008
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7,396
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8,875
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Note receivable
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450
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450
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Inventories
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9,836
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|
7,143
|
|
Deferred taxes
|
|
|
|
|
|
|
130
|
|
Other current assets
|
|
|
2,064
|
|
|
|
1,433
|
|
Current assets of discontinued operations
|
|
|
1,853
|
|
|
|
4,345
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
23,696
|
|
|
|
23,789
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
7,363
|
|
|
|
8,549
|
|
Goodwill, net
|
|
|
3,343
|
|
|
|
6,848
|
|
Intangibles, net
|
|
|
11,447
|
|
|
|
18,508
|
|
Note receivable
|
|
|
596
|
|
|
|
1,015
|
|
Other assets, net
|
|
|
599
|
|
|
|
322
|
|
Other assets of discontinued operations
|
|
|
|
|
|
|
5,175
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
47,044
|
|
|
$
|
64,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Notes payable and current maturities of long-term debt
|
|
$
|
9,297
|
|
|
$
|
8,581
|
|
Accounts payable
|
|
|
8,124
|
|
|
|
8,385
|
|
Advances from factors
|
|
|
1,241
|
|
|
|
1,494
|
|
Accrued expenses
|
|
|
6,580
|
|
|
|
7,737
|
|
Deferred gain on sale
|
|
|
960
|
|
|
|
|
|
Deferred revenue
|
|
|
548
|
|
|
|
840
|
|
Current liabilities of discontinued operations
|
|
|
2,514
|
|
|
|
2,705
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
29,264
|
|
|
|
29,742
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies:
|
|
|
|
|
|
|
|
|
Long-term debt and notes payable
|
|
|
392
|
|
|
|
6,942
|
|
Deferred taxes
|
|
|
|
|
|
|
1,227
|
|
Other liabilities
|
|
|
1,445
|
|
|
|
2,223
|
|
Other liabilities of discontinued operations
|
|
|
|
|
|
|
1,367
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
31,101
|
|
|
|
41,501
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Digital Angel Corporation stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred shares ($10 par value; shares authorized, 5,000; shares issued, nil)
|
|
|
|
|
|
|
|
|
Common shares ($.01 par value; shares authorized 50,000; shares issued, 23,479 and 16,080;
shares outstanding, 23,479 and 15,950)
|
|
|
235
|
|
|
|
161
|
|
Additional paid-in-capital
|
|
|
588,652
|
|
|
|
584,466
|
|
Accumulated deficit
|
|
|
(571,203
|
)
|
|
|
(558,839
|
)
|
Accumulated other comprehensive (loss) income foreign currency translation
|
|
|
(1,737
|
)
|
|
|
(2,308
|
)
|
|
|
|
|
|
|
|
Subtotal
|
|
|
15,947
|
|
|
|
23,480
|
|
Treasury stock (carried at cost, nil and 130 shares)
|
|
|
|
|
|
|
(820
|
)
|
|
|
|
|
|
|
|
Total Digital Angel Corporation stockholders equity
|
|
|
15,947
|
|
|
|
22,660
|
|
Non-controlling interest
|
|
|
(4
|
)
|
|
|
45
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
15,943
|
|
|
|
22,705
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
47,044
|
|
|
$
|
64,206
|
|
|
|
|
|
|
|
|
See the accompanying notes to consolidated financial statements.
F-3
Digital Angel Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
For the years ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Revenue
|
|
$
|
49,463
|
|
|
$
|
62,260
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
29,192
|
|
|
|
42,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
20,271
|
|
|
|
19,918
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
24,638
|
|
|
|
30,415
|
|
Research and development expenses
|
|
|
1,206
|
|
|
|
1,993
|
|
Restructuring, severance and separation expenses
|
|
|
678
|
|
|
|
3,678
|
|
Goodwill and asset impairments
|
|
|
7,339
|
|
|
|
35,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(13,590
|
)
|
|
|
(51,635
|
)
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net
|
|
|
319
|
|
|
|
2,722
|
|
Interest expense
|
|
|
(2,176
|
)
|
|
|
(10,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax benefit
|
|
|
(15,447
|
)
|
|
|
(59,805
|
)
|
|
|
|
|
|
|
|
|
|
Benefit from income taxes
|
|
|
24
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(15,423
|
)
|
|
|
(59,640
|
)
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of income taxes of $608 and $0 (attributable to Digital Angel Corporation)
|
|
|
2,993
|
|
|
|
1,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(12,430
|
)
|
|
|
(58,011
|
)
|
|
|
|
|
|
|
|
|
|
Loss (income) attributable to the noncontrolling interest, continuing operations
|
|
|
110
|
|
|
|
(102
|
)
|
Income attributable to the noncontrolling interest, discontinued operations
|
|
|
(44
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Digital Angel Corporation
|
|
$
|
(12,364
|
)
|
|
$
|
(58,133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income per common share attributable to Digital Angel Corporation common stockholders basic and diluted:
|
|
|
|
|
|
|
|
|
Loss from
continuing operations, net of noncontrolling interest
|
|
$
|
(0.82
|
)
|
|
$
|
(3.94
|
)
|
Income from discontinued operations, net of noncontrolling interest
|
|
|
0.16
|
|
|
|
0.11
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(0.66
|
)
|
|
$
|
(3.83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding basic and diluted
|
|
|
18,768
|
|
|
|
15,156
|
|
See the accompanying notes to consolidated financial statements.
F-4
Digital Angel Corporation and Subsidiaries
Consolidated Statements of Stockholders Equity
For the Years Ended December 31, 2009 and 2008
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital Angel Corporation Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Noncontrolling
|
|
|
Stockholders
|
|
|
|
Number
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Stock
|
|
|
Interest
|
|
|
Equity
|
|
|
Balance, December 31, 2007
|
|
|
13,135
|
|
|
$
|
131
|
|
|
$
|
573,565
|
|
|
$
|
(500,706
|
)
|
|
$
|
428
|
|
|
$
|
(2,423
|
)
|
|
$
|
13,365
|
|
|
$
|
84,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58,133
|
)
|
|
|
|
|
|
|
|
|
|
|
122
|
|
|
|
(58,011
|
)
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,736
|
)
|
|
|
|
|
|
|
53
|
|
|
|
(2,683
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58,133
|
)
|
|
|
(2,736
|
)
|
|
|
|
|
|
|
175
|
|
|
|
(60,694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Geissler Technologies Corporation
|
|
|
1,488
|
|
|
|
15
|
|
|
|
6,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,879
|
|
Issuance of common stock for services
|
|
|
262
|
|
|
|
3
|
|
|
|
1,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,446
|
|
Issuance of common stock for financing
|
|
|
216
|
|
|
|
2
|
|
|
|
742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
744
|
|
Issuance of restricted stock and stock options for services
|
|
|
31
|
|
|
|
|
|
|
|
441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
441
|
|
Issuance of shares in connection with warrants exercised
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for legal settlement
|
|
|
162
|
|
|
|
2
|
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500
|
|
Re-pricing of common stock warrants
|
|
|
|
|
|
|
|
|
|
|
1,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,112
|
|
Exercise of common stock warrants
|
|
|
778
|
|
|
|
8
|
|
|
|
2,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,315
|
|
Stock issuance costs
|
|
|
|
|
|
|
|
|
|
|
(73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(73
|
)
|
Treasury shares issued to affiliate
|
|
|
|
|
|
|
|
|
|
|
(646
|
)
|
|
|
|
|
|
|
|
|
|
|
646
|
|
|
|
|
|
|
|
|
|
Retirement of treasury shares
|
|
|
|
|
|
|
|
|
|
|
(1,777
|
)
|
|
|
|
|
|
|
|
|
|
|
1,777
|
|
|
|
|
|
|
|
|
|
Treasury shares acquired under severance agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(820
|
)
|
|
|
|
|
|
|
(820
|
)
|
Partial share repurchase
|
|
|
(14
|
)
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
Changes in noncontrolling interest as a result of other
capital transactions by subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,495
|
)
|
|
|
(13,495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
16,080
|
|
|
$
|
161
|
|
|
$
|
584,466
|
|
|
$
|
(558,839
|
)
|
|
$
|
(2,308
|
)
|
|
$
|
(820
|
)
|
|
$
|
45
|
|
|
$
|
22,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to consolidated financial statements.
F-5
Digital Angel Corporation and Subsidiaries
Consolidated Statements of Stockholders Equity (continued)
For the Years Ended December 31, 2009 and 2008
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital Angel Corporation Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Noncontrolling
|
|
|
Stockholders
|
|
|
|
Number
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Stock
|
|
|
Interest
|
|
|
Equity
|
|
|
Balance, December 31, 2008 (brought forward)
|
|
|
16,080
|
|
|
$
|
161
|
|
|
$
|
584,466
|
|
|
$
|
(558,839
|
)
|
|
$
|
(2,308
|
)
|
|
$
|
(820
|
)
|
|
$
|
45
|
|
|
$
|
22,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,364
|
)
|
|
|
|
|
|
|
|
|
|
|
(66
|
)
|
|
|
(12,430
|
)
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
571
|
|
|
|
|
|
|
|
17
|
|
|
|
588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,364
|
)
|
|
|
571
|
|
|
|
|
|
|
|
(49
|
)
|
|
|
(11,842
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under the Standby Equity
Distribution Agreement
|
|
|
2,880
|
|
|
|
29
|
|
|
|
2,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,805
|
|
Issuance of common stock for equipment purchase
|
|
|
296
|
|
|
|
3
|
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
186
|
|
Issuance of common stock in a private placement sale
|
|
|
255
|
|
|
|
2
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127
|
|
Issuance of common stock for price protection under the terms
of a legal settlement
|
|
|
960
|
|
|
|
10
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under the terms of a legal settlement
|
|
|
357
|
|
|
|
4
|
|
|
|
396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400
|
|
Issuance of common stock for Geissler Technologies
Corporation earn out
|
|
|
330
|
|
|
|
3
|
|
|
|
297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300
|
|
Retirement of treasury stock
|
|
|
295
|
|
|
|
3
|
|
|
|
(823
|
)
|
|
|
|
|
|
|
|
|
|
|
820
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for services
|
|
|
101
|
|
|
|
1
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126
|
|
Issuance of common stock for financing
|
|
|
1,393
|
|
|
|
14
|
|
|
|
786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
800
|
|
Issuance of restricted stock and stock options for services
|
|
|
453
|
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partial share repurchase
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of common stock
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
519
|
|
Stock issuance costs
|
|
|
|
|
|
|
|
|
|
|
(129
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(129
|
)
|
Issuance of common stock for SEDA commitment fee
|
|
|
88
|
|
|
|
1
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125
|
|
Amortization of SEDA commitment fee
|
|
|
|
|
|
|
|
|
|
|
(125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(125
|
)
|
Reclassification of warrant as liability per EITF 07-5
|
|
|
|
|
|
|
|
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
23,479
|
|
|
$
|
235
|
|
|
$
|
588,652
|
|
|
$
|
(571,203
|
)
|
|
$
|
(1,737
|
)
|
|
$
|
|
|
|
$
|
(4
|
)
|
|
$
|
15,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to consolidated financial statements.
F-6
Digital Angel Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(12,430
|
)
|
|
$
|
(58,011
|
)
|
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
(2,993
|
)
|
|
|
(1,629
|
)
|
Equity compensation and administrative expenses
|
|
|
645
|
|
|
|
1,875
|
|
Depreciation and amortization
|
|
|
4,068
|
|
|
|
4,010
|
|
Amortization of debt discount and financing costs
|
|
|
595
|
|
|
|
8,049
|
|
Allowance for doubtful accounts
|
|
|
430
|
|
|
|
334
|
|
Provision for inventory excess and obsolescence
|
|
|
(138
|
)
|
|
|
2,049
|
|
Loss on settlement of debt
|
|
|
|
|
|
|
2,512
|
|
Impairment of goodwill and assets
|
|
|
7,339
|
|
|
|
35,467
|
|
Change in fair value of warrant liability
|
|
|
(49
|
)
|
|
|
|
|
Other
|
|
|
|
|
|
|
221
|
|
(Increase) decrease in restricted cash
|
|
|
(202
|
)
|
|
|
90
|
|
Net change in operating assets and liabilities
|
|
|
(2,517
|
)
|
|
|
4,648
|
|
Net cash provided by discontinued operations
|
|
|
1,352
|
|
|
|
1,689
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(3,900
|
)
|
|
|
1,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Decrease (increase) in notes receivable
|
|
|
419
|
|
|
|
(1,452
|
)
|
Proceeds from note receivable with PSID
|
|
|
|
|
|
|
9,500
|
|
Payment for investment in subsidiary
|
|
|
|
|
|
|
(241
|
)
|
Proceeds from special dividend received
|
|
|
|
|
|
|
7,230
|
|
Payments for property and equipment
|
|
|
(420
|
)
|
|
|
(2,080
|
)
|
Payment for costs of business acquisition
|
|
|
|
|
|
|
(261
|
)
|
Increase in other assets
|
|
|
(134
|
)
|
|
|
(416
|
)
|
Net cash
provided by discontinued operations (including cash of $8,260 in 2009
from sale of McMurdo)
|
|
|
8,260
|
|
|
|
1,051
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
8,125
|
|
|
|
13,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net amounts paid on notes payable
|
|
|
(1,217
|
)
|
|
|
(1,341
|
)
|
Net payments of long-term debt
|
|
|
(5,343
|
)
|
|
|
(15,001
|
)
|
Proceeds from warrant exercise
|
|
|
|
|
|
|
2,315
|
|
Treasury stock acquired from Rabbi Trust
|
|
|
|
|
|
|
(820
|
)
|
Issuance of common shares and warrants
|
|
|
127
|
|
|
|
|
|
Sale of common shares under the Standby Equity Distribution Agreement
|
|
|
2,805
|
|
|
|
|
|
Payments of dividends to subsidiarys noncontrolling shareholder
|
|
|
|
|
|
|
(34
|
)
|
Stock issuance costs
|
|
|
(129
|
)
|
|
|
(83
|
)
|
Net cash used in discontinued operations
|
|
|
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(3,757
|
)
|
|
|
(14,989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
468
|
|
|
|
(354
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
14
|
|
|
|
(9
|
)
|
Cash and cash equivalents Beginning of year
|
|
|
1,413
|
|
|
|
1,776
|
|
|
|
|
|
|
|
|
Cash and cash equivalents End of year
|
|
$
|
1,895
|
|
|
$
|
1,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
58
|
|
|
$
|
113
|
|
Interest paid
|
|
|
1,487
|
|
|
|
2,070
|
|
See the accompanying notes to consolidated financial statements.
F-7
Digital Angel Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except per share data)
1. Organization and Summary of Significant Accounting Policies
Digital Angel Corporation, a Delaware corporation, and its subsidiaries, (referred to together as,
Digital Angel, the Company, we, our, and us) develops innovative identification and
security products for consumer, commercial and government sectors worldwide. Our unique and often
proprietary products provide identification and security for people, animals, food chains and
government/military assets. Included in this diverse product line are applications for radio
frequency identification systems (RFID), global positioning systems (GPS) and satellite
communications.
On November 10, 2008, we effected a one-for-eight reverse stock split. As a result, all per share
amounts and market price information have been adjusted to reflect the reverse stock, except where
otherwise stated.
Business Segments
We operate in two business segments: Animal Identification and Emergency Identification. Our Animal
Identification segment comprises the operations of our wholly-owned subsidiary, Destron Fearing
Corporation (Destron Fearing) and our Emergency Identification segment comprises the operations
of our 98.5%-owned subsidiary, Signature Industries Limited (Signature).
Animal Identification Segment
Our Animal Identification segment develops, manufactures and markets visual and electronic
identification tags and implantable RFID microchips, primarily for identification, tracking and
location of companion pets, livestock (e.g., cattle and hogs), horses, fish and wildlife worldwide,
and, more recently, for animal bio-sensing applications, such as temperature reading for companion
pet 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 are crucial for asset management and for disease control and food safety.
This segments principal products are:
|
|
|
visual and electronic ear tags for livestock; and
|
|
|
|
|
implantable microchips and RFID scanners for the companion pet, livestock, horses, fish and wildlife industries.
|
Emergency Identification Segment
Our Emergency Identification segment develops, manufactures and markets GPS and GPS-enabled
products used for emergency location and tracking of pilots, aircraft and maritime vehicles in
remote locations as well as sound horn alarms. This segments principal products are:
|
|
|
GPS enabled search and rescue equipment and intelligent communications
products and services for telemetry, mobile data and radio
communications applications, including our SARBE
TM
brand,
which serve military and commercial markets;
|
|
|
|
|
alarm sounders for industrial use and other electronic components.
|
Corporate and Eliminations
Our Corporate and Eliminations category includes all amounts recognized upon consolidation of our
subsidiaries, such as the elimination of inter-segment expenses, assets and liabilities. This
category also includes certain selling, general and administrative expenses associated with
corporate activities, other expense reductions associated with companies whose assets were sold or
closed in 2001 and 2002, and interest expense and interest and other income associated with
corporate activities and functions. Included in Corporate and Eliminations as of December 31, 2009
are approximately $0.8 million of liabilities related to companies that we sold or closed in 2001
and 2002. It is expected that these liabilities will be reversed during 2011 to 2016, as they will
no longer be considered our legal obligations.
Discontinued Operations
During the years ended December 31, 2009 and 2008, we sold several non-core businesses and we
discontinued one business, Thermo Life Energy Corp. (Thermo Life), which was sold on January 21,
2010. On November 20, 2009, we sold the assets of our business unit, McMurdo Limited (McMurdo)
which is more fully discussed in Note 14. In addition, on November 12, 2008, we sold all of the
common stock that we owned in PositiveID Corporation, formerly known as VeriChip Corporation,
(PSID) (Nasdaq:PSID), which was approximately 45.6% of PSIDs then issued and outstanding shares
of common stock. Accordingly, the financial results of these businesses are now classified as
discontinued operations for all periods presented in this Annual Report. Our decision to
sell/discontinue these businesses was a result of managements strategy to streamline operations in
order to focus our efforts on our Animal Identification business. Discontinued operations are more
fully discussed in Note 14.
F-8
Summary of Significant Accounting Policies
Liquidity
Our consolidated operating
activities used cash of $3.9 million and provided cash of $1.3 million during
the years ended December 31, 2009 and 2008, respectively. As of December 31, 2009, our cash and
cash equivalents totaled $1.9 million, compared to $1.4 million as of December 31, 2008. As of
December 31, 2009, we had an accumulated deficit of $571.2 million.
Although
we had negative working capital at December 31, 2009, 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 as well as our ability to delay
certain bonus payments to senior management until funds are available
and to undertake other cash manager initiatives to operate our business for the twelve months ending December 31,
2010. In addition, during 2008 we restructured our Animal Identification business which eliminated
redundancies, improved gross margins and decreased expenses. Also, we generated positive cash flows
from operations during the year ended December 31, 2008. 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 2010. Failure to generate positive cash flow from operations
might require us to substantially reduce our level of operations and 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/refinance our revolving credit facility and mortgage loan obligations during 2010.
As of December 31, 2009, we had a working capital deficiency, which is partially due to having to
classify our revolving line of credit and our mortgage loan as well as our factoring lines and our
credit facility with Danske Bank, which are more fully discussed in Note 9, as current liabilities
on our consolidated balance sheet. In addition, our debt obligation to Danske Bank is due on demand
and we are required to make $0.1 million a month in principal payments to reduce the credit
facility. Our factoring lines may also be amended or terminated by the lenders. These conditions
indicate that we may not be able to continue operations at the current level, as we may be unable
to generate the funds necessary to pay our obligations in the ordinary course of business.
Principles of Consolidation
The financial statements include our accounts and the accounts of our wholly-owned and
majority-owned subsidiaries. The non-controlling interest represents the outstanding voting stock
of the subsidiaries not wholly-owned by us. All significant intercompany accounts and transactions
have been eliminated in consolidation.
In December 2007, the Financial Accounting Standards Board (FASB) modified certain requirements
of the Business Combination Topic of the Accounting Standards Codification (Codification). The
changes provided new guidance that 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. It also requires that an acquirer recognize 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, the guidance 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.
We adopted the new requirements on January 1, 2009 and in order to conform, we have restated our
consolidated statement of operations for the year ended December 31, 2008 to include the income
attributable to the noncontrolling interest in consolidated net income, our consolidated balance
sheet at December 31, 2008 to include the noncontrolling interest in equity, our consolidated
statements of stockholders equity for the year ended December 31, 2008 to include the
noncontrolling interest in equity and the applicable notes to the consolidated financial
statements.
A summary of the changes to our financial statements to reflect the retrospective application of
the modified requirements of the Business Combination Topic of the Codification is presented below.
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2008
|
|
|
|
(in thousands)
|
|
Statement of Operations Data as Restated to Reflect the Adoption of the Modified
Requirements of the Business Combination Topic of the Codification:
|
|
|
|
|
Loss from
continuing operations, as previously reported on form 10-K
|
|
$
|
(58,391
|
)
|
Reclassify McMurdo results to discontinued operations
|
|
|
(1,371
|
)
|
Remove minority interest (to present below as noncontrolling interest)
|
|
|
122
|
|
|
|
|
|
Loss from continuing operations, restated
|
|
|
(59,640
|
)
|
Income from discontinued operations, net of income taxes of $0
|
|
|
1,629
|
|
|
|
|
|
Net loss, restated
|
|
|
(58,011
|
)
|
Income attributable to noncontrolling interest, continuing and discontinued operations
|
|
|
(122
|
)
|
|
|
|
|
Net loss attributable to common stockholders of Digital Angel Corporation
|
|
$
|
(58,133
|
)
|
|
|
|
|
F-9
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Balance Sheet Data Restated to Reflect the Adoption of the Modified Requirements of
the Business Combination Topic of the Codification:
|
|
|
|
|
Stockholders equity attributable to Digital Angel Corporation, as previously reported
|
|
$
|
22,660
|
|
Stockholders equity attributable to noncontrolling interest
|
|
|
45
|
|
|
|
|
|
Stockholders equity, restated
|
|
$
|
22,705
|
|
|
|
|
|
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles
(GAAP) in the United States of America (U.S.) 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 we may undertake
in the future, they may ultimately differ from actual results. Included in these estimates are
assumptions about allowances for inventory obsolescence, bad debt reserves, lives of long lived
assets, lives of intangible assets, 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 goodwill or intangibles, among others.
Foreign Currencies
We operate foreign subsidiaries in Europe and South America. Our subsidiaries domiciled in Europe
and South America use their local currencies as their functional currency. Results of operations
and cash flow are translated at average exchange rates during the period, and assets and
liabilities are translated at end of period exchange rates. Translation adjustments resulting from
this process are included in accumulated other comprehensive income (loss) in the statement of
stockholders equity.
Other transaction gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than a subsidiaries functional currency are included in our
results of operations as incurred. These amounts are not material to the consolidated financial
statements.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from outstanding
balances. Management provides for probable uncollected amounts through a charge to earnings and a
credit to a valuation account based on its assessment of the current status of individual accounts.
Concentration of Credit Risk
We maintained our domestic cash in one financial institution during the years ended December 31,
2009 and 2008. Balances were insured up to Federal Deposit Insurance Corporation limits of $250,000
per institution. Cash may from time to time exceed the federally insured limits.
Our trade receivables are potentially subject to credit risk. We extend credit to our customers
based upon an evaluation of the customers financial condition and credit history and generally do
not require collateral.
Inventories
Inventories consist of raw materials, work in process and finished goods. The majority of the
components are plastic ear tags, electronic microchips, electronic readers and components and GPS
search and rescue equipment. Inventory is valued at the lower of cost (determined by the first-in,
first-out method) or market. We monitor and analyze 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 obsolete or slow moving are reduced to net realizable value.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and amortization computed
using the straight-line method. Building and leasehold improvements are depreciated and amortized
over their estimated useful lives ranging from 10 to 40 years and equipment is depreciated over
their estimated useful lives ranging from 3 to 10 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.
F-10
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price over the fair value 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. Our reporting units are those businesses for
which financial information is available and upon which segment management makes operating
decisions. We account for goodwill and intangible assets in accordance with the Intangibles
Goodwill and Other Topic of the Codification. Intangible assets deemed to have an indefinite life,
such as goodwill, are reviewed at least annually for impairment. Intangible assets with finite
lives are amortized over their estimated useful lives. Other than goodwill, we do not have any
intangible assets with indefinite lives. Annually, we test our goodwill and intangible assets for
impairment as a part of our annual business planning cycle. Goodwill and intangible assets are also
tested between testing dates if an impairment condition or event is determined to have occurred.
During the fourth quarter of 2009, we recorded approximately $3.8 million of goodwill impairment
related to our Emergency Identification reporting unit. In 2008, as a result of the declines in our
equity market capitalization, which fell below our stockholders equity, we performed an interim
goodwill assessment in the third quarter of 2008 which resulted in a $25.0 million goodwill
impairment charge. In performing our assessment, we placed emphasis on current trading values,
including those of our competitors, as well as higher market-risk discount rates. We also recorded
approximately $1.9 million of goodwill impairment related to restructuring efforts at our Destron
Fearing European business unit in 2008. During the fourth quarter of 2008, we performed our annual
impairment testing which resulted in an additional $4.1 million goodwill impairment which related
to Geissler Technologies Corporation (GTC), one of Destron Fearings subsidiaries.
Future events, such as market conditions or operational performance of our acquired businesses,
could cause us to conclude that additional impairment exists, which could have a material impact on
our financial condition and results of operations. See Notes 6, 7 and 12 for more information.
We have other intangible assets consisting of trademarks, tradenames, patented and non-patented
technologies and customer relationships. These intangible assets are amortized over their expected
economic lives ranging from 2 to 20 years. The lives were determined based upon the expected use of
the asset, the ability to extend or renew patents, trademarks and other contractual provisions
associated with 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. We continually evaluate whether events
or circumstances have occurred that indicate the remaining estimated useful lives of our
definite-lived intangible assets warrant revision or that the remaining balance of such assets may
not be recoverable. We use an estimate of the related undiscounted cash flows over the remaining
life of the asset in measuring whether the asset is recoverable. In the fourth quarter of 2009, we
recorded an impairment charge of approximately $3.3 million (net of approximately $(1.4) million of
deferred tax liability impairment) related to intangible assets at our Emergency Identification
reporting unit. In conjunction with our restructuring efforts at our Destron Fearing European
business unit during 2008, we recorded approximately $0.8 million of impairments related to certain
trademarks and tradenames. In addition, during our annual review in the fourth quarter of 2008, we
recorded an impairment of approximately $0.3 million of our South American intangible assets.
The total
impairments of goodwill and intangible assets recorded in the fourth
quarter of 2009 were approximately $7.1 million. These impairments
are more fully discussed in Notes 6, 7 and 12.
Advertising Costs
We expense production costs of print advertisements on the first date the advertisements take
place. Other advertising costs are expensed when incurred. Advertising expense included in selling,
general and administrative expense was $0.4 million and $0.6 million in 2009 and 2008,
respectively.
Revenue Recognition
We follow the revenue recognition guidance in the Revenue Recognition Topic of the Codification.
Our Animal Identification and Emergency Identification segments recognize product revenue at the
time product is shipped and title has transferred, provided that a purchase order has been received
or a contract has been executed, there are no uncertainties regarding customer acceptance, the
sales price is fixed and determinable and collectability is deemed probable. If uncertainties
regarding customer acceptance exist, revenue is recognized when such uncertainties are resolved.
There are no significant post-contract support obligations at the time of revenue recognition. Our
accounting policy regarding vendor and post contract support obligations is based on the terms of
the customers contracts and is billable upon occurrence of the post-sale support. Costs of
products sold and services provided are recorded as the related revenue is recognized. For
non-fixed and fixed fee jobs, service revenue is recognized based on the actual direct labor hours
in the job multiplied by the standard billing rate and adjusted to net realizable value, if
necessary. Other revenue is recognized at the time services or goods are provided. It is our policy
to record contract losses in their entirety in the period in which such losses are foreseeable. We
enter into bill and hold arrangements with certain customers at our Emergency Identification
segment. Revenue for these arrangements is recognized when the following criteria are met; (i) the
arrangement is requested by the buyer who has a substantial business purpose for ordering the
goods, (ii) risks of ownership have passed to the buyer, (iii) there is a fixed, written commitment
to purchase these goods, (iv) there is a fixed schedule (consistent with the buyers business
purpose) for delivery of the goods, (v) we do not retain any specific performance obligations, (vi)
the ordered goods are kept segregated from our other inventory and are not subject to being used to
fill other orders and (vii) the equipment is complete and ready for shipment.
We offer a warranty on our Animal Identification and Emergency Identification segments products
and record a liability for product warranties at the time it is probable that a warranty liability
has been incurred and the amount of loss can reasonably be estimated. The warranty expense incurred
during the years ended December 31, 2009 and 2008 was $0.2 million and $43 thousand, respectively.
It is our policy to approve all customer returns before issuing credit to the customer. We incurred
returns of approximately $0.1 million and $0.5 million in 2009 and 2008, respectively.
F-11
Stock-Based Compensation
At December 31, 2009, we had seven stock-based employee compensation plans (four of which have been
terminated with respect to any new stock option grants) and Destron Fearing had two stock-based
employee compensation plans (one of which has been terminated with respect to any new stock option
grants), which are described more fully in Note 11. In addition, Thermo Life has two employee
compensation plans, which are described in Note 14.
In accordance with the Compensation Stock Compensation Topic of the Codification, awards granted
are valued at fair value and compensation cost is recognized on a straight line basis over the
service period of each award. See Note 11 for further information concerning our stock option
plans.
Research and Development
Research and development expense consists of personnel costs, supplies, payments to consultants,
other direct costs and indirect overhead costs of developing new products and technologies and is
charged to expense as incurred.
Restructuring, Severance and Separation Expenses
During 2008, we initiated a comprehensive review of our businesses to develop a strategic
long-range plan focusing on restoring growth and profitability. In connection with this review, we
recorded estimated expenses for severance, lease payments and other restructuring costs. In
accordance with the Exit or Disposal Cost Obligations Topic of the Codification, generally costs
associated with restructuring activities are recognized when they are incurred rather than at the
date of a commitment to an exit or disposal plan. However, in the case of leases, the expense is
estimated and accrued when the property is vacated. Given the significance of, and the timing of
the execution of such activities, this process is complex and involves periodic reassessments of
estimates made at the time the original decisions were made, including evaluating real estate
market conditions for expected vacancy periods and sub-lease rents. In addition, post-employment
benefits accrued for workforce reductions related to restructuring activities are accounted for
under the Compensation Nonretirement Postemployment Benefits Topic of the Codification. A
liability for post-employment benefits is recorded when payment is probable, the amount is
reasonably estimable, and the obligation relates to rights that have vested or accumulated. We
continually evaluate the adequacy of the liabilities under our restructuring efforts. During the
years ended December 31, 2009 and 2008, we incurred approximately $0.7 million and $3.7 million of
restructuring, severance and separation expenses, respectively, and as of December 31, 2009, we had
an accrued liability for restructuring, severance and separation expenses of $0.5 million.
Foreign Currency Adjustment of Intercompany Loans
In accordance with the Foreign Currency Matters Topic of the Codification, when intercompany
foreign currency transactions between entities included in the consolidated financial statements
are of a long-term investment nature (i.e., those for which settlement is not planned or
anticipated in the foreseeable future) foreign currency transaction adjustments should not produce
gains or losses that affect consolidated earnings. Gains and losses on such transactions are
included in equity in the accumulated other comprehensive income (loss) foreign currency
translation account in consolidation. However, when intercompany transactions are deemed to be of a
short-term nature, such gain and losses are required to affect consolidated earnings. Until July 6,
2009, management concluded that the intercompany loan from Destron Fearing to Signature was of a
long-term nature. This was appropriate because management had no plans to require repayment of the
intercompany loan. The funds were provided to Signature for new product development and the
acquisition of McMurdo. Management of both entities verbally agreed that the intention was that the
loan was not anticipated to be repaid in the foreseeable future and no loan agreement was
documented. The historical and projected cash flows of Signature did not support repayment of the
loan and Signatures invoice discount facility did not permit repayment of the loan. Accordingly,
included in accumulated other comprehensive loss as of December 31, 2008 is approximately $1.7
million of losses associated with the intercompany loan between Destron Fearing and Signature. On
July 7, 2009, upon entering into the Bibby Invoice Discounting Agreement, which is more fully
discussed in Note 2, Destron Fearing and Signature entered into a loan agreement, which requires
Signature to make quarterly principal payments. Management determined at this time that it was
appropriate to treat the intercompany loan as short-term in nature because of several factors: (i)
the Bibby Invoice Discount Agreement provided Signature additional working capital; (ii) the terms
of the Bibby Invoice Discount Agreement allowed for the repayment of the loan per the terms of the
intercompany loan agreement; and (iii) the planned sale of McMurdo would provide the funds
necessary for Signature to repay the loan. Therefore, we determined that effective July 7, 2009, it
was appropriate to begin recording transaction adjustments as gains/losses in the statement of
operations and, accordingly, we recorded approximately $8 thousand of foreign currency transaction
losses during the year ended December 31, 2009. Going forward, changes in the foreign currency
exchange rates between the U.S. dollar and the English pound will result in additional gains or
losses in our consolidated earnings.
Income Taxes
We account for income taxes under the asset and liability approach for the financial accounting and
reporting for 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 where we determine realization is not currently judged to
be more likely than not. Income taxes include U.S. and international taxes. We and our U.S.
subsidiaries file a consolidated federal income tax return. Income taxes are more fully discussed
in Note 13.
We recognize and measure uncertain tax positions through a two step process in accordance with the
Income Taxes Topic of the Codification. 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 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 recognize interest and penalties, if any, related
to uncertain tax positions in income tax expense.
F-12
Compliance with income tax regulations requires us to make decisions relating to the transfer
pricing of revenue and expenses between each of our legal entities that are located in several
countries. Our determinations include many decisions based on our knowledge of the underlying
assets of the business, the legal ownership of these assets, and the ultimate transactions
conducted with customers and other third-parties. The calculation of our tax liabilities involves
dealing with uncertainties in the application of complex tax regulations in multiple tax
jurisdictions. We are periodically reviewed by domestic and foreign tax authorities regarding the
amount of taxes due. These reviews include questions regarding the timing and amount of deductions
and the allocation of income among various tax jurisdictions. In evaluating the exposure associated
with various filing positions, we record estimated reserves for probable exposures. Such estimates
are subject to change.
(Loss) Income Per Common Share and Common Share Equivalent
Basic and diluted (loss) income per common share is computed by dividing the (loss) income by the
weighted average number of common shares outstanding for the period and has been retroactively
adjusted for the reverse stock split effected on November 10, 2008. Since we have incurred losses
attributable to common stockholders during each of the two years ended December 31, 2009 and 2008,
diluted loss per common share has not been computed by giving effect to all potentially dilutive
common shares that were outstanding during the period. Dilutive common shares consist of restricted
stock and incremental shares issuable upon exercise of stock options and warrants to the extent
that the average fair value of our common stock for each period is greater than the exercise price
of the derivative securities. See note 15.
Comprehensive Income (Loss)
Our comprehensive accumulated other income (loss) consists of foreign currency translation
adjustments and is reported in the consolidated statements of stockholders equity.
Impact of Recently Issued Accounting Standards
In June 2009, FASB released the Codification which became the source of authoritative GAAP
recognized by FASB to be applied by nongovernmental entities. Rules and interpretive releases of
the Securities and Exchange Commission (SEC) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. For all financial statements issued after
September 15, 2009, the Codification superseded all then-existing non-SEC accounting and reporting
standards. All other nongrandfathered non-SEC accounting literature not included in the
Codification has become nonauthoritative. The Codification does not change how we account for our
transactions or the nature of related disclosures made. However, when referring to guidance issued
by the FASB, we are required to refer to topics in the Codification rather than the superseded
standards. The adoption of the Codification did not impact our consolidated financial position,
results of operations, cash flows or financial statement disclosures.
In April 2009, FASB established general standards of accounting for, and the disclosure of, events
that occur after the balance sheet date but before financial statements are issued or are available
to be issued. In particular, the Subsequent Event Topic of the Codification sets forth: (1) the
period after the balance sheet date during which management of a reporting entity should evaluate
events or transactions that may occur for potential recognition or disclosure in the financial
statements, (2) the circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and (3) the disclosures that an
entity should make about events or transactions that occurred after the balance sheet date. We
adopted this standard as of June 30, 2009, which did not have a material impact on our consolidated
financial position, results of operations or cash flows.
In June 2008, FASB established that an entity should use a two step approach to evaluate whether an
equity-linked financial instrument (or embedded feature) is indexed to its own stock, including
evaluating the instruments contingent exercise and settlement provisions. It also clarified the
impact of foreign currency denominated strike prices and market-based employee stock option
valuation instruments on the evaluation. The standard was effective as of January 1, 2009. We
adopted the Contracts in Entitys Own Equity Subtopic of the Derivatives and Hedging Topic of the
Codification on January 1, 2009 and as a result we have a liability associated with outstanding
warrants of approximately $4 thousand at December 31, 2009 and have recorded other income of
approximately $53 thousand during the year ended December 31, 2009 due to the change in values.
In March 2008, FASB required enhanced disclosures about an entitys derivative and hedging
activities. 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, and (3) how derivative instruments and related hedged items affect an entitys financial
position, financial performance and cash flows. This standard was effective for financial
statements issued as of January 1, 2009. Comparative disclosures for earlier periods at initial
adoption was encouraged but not required. We adopted the applicable requirements of the Derivative
and Hedging Topic of the Codification on January 1, 2009, which did not have a material impact on
our consolidated financial position, results of operations, cash flows or financial statement
disclosures.
In December 2007, FASB modified certain requirements of the Business Combination Topic of the
Codification. The changes provided new guidance that 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. It also requires that an acquirer
recognize 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, the
guidance 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. The guidance of modified sections is applied prospectively
to business combinations for which the acquisition date is on or after January 1, 2009. An entity
may not apply the standard before that date. We adopted these requirements effective
January 1, 2009, which did not have any impact on our consolidated financial position, results of
operations, cash flows or financial statement disclosures as we have not had any acquisitions since
adopting the standard.
F-13
In December 2007, FASB established new accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. It clarified 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, the modified
Consolidation Topic of the Codification 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 also established 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. The modified sections are effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008 and earlier adoption is
prohibited. Noncontrolling interests should be accounted for and presented as equity if material,
rather than as a liability or mezzanine equity and significant changes in accounting related to
noncontrolling interests; specifically, increases and decreases in our controlling financial
interests in consolidated subsidiaries will be reported in equity similar to treasury stock
transactions. If a change in ownership of a consolidated subsidiary results in loss of control and
deconsolidation, any retained ownership interests are remeasured with the gain or loss reported in
net earnings. We adopted these requirements on January 1, 2009 and as such, we have presented our
statement of operations for the year ended December 31, 2008 to include the income attributable to
the noncontrolling interest in consolidated net income and our balance sheet at December 31, 2008
to include the noncontrolling interest in stockholders equity. The effect of the adoption of these
requirements on our financial statements for the year ended December 31, 2008 is presented above
under the heading
Principles of Consolidation
.
Uncertain Nasdaq Listing
On December 10, 2009, we received a letter from the Nasdaq Stock Market (the Nasdaq) indicating
that we are not in compliance with Nasdaqs requirements for continued listing because, for the
previous 30 consecutive business days, the bid price of our common stock closed below the minimum
$1.00 per share price requirement for continued inclusion under Nasdaq Marketplace Rule 4310I(4)
(the Rule). In accordance with the Nasdaq Marketplace Rules, we have been provided 180 calendar
days, or until June 8, 2010, to regain compliance with the Rule.
2. Accounts Receivable
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Receivables assigned to factors
|
|
$
|
1,241
|
|
|
$
|
1,494
|
|
Unfactored accounts receivable
|
|
|
7,061
|
|
|
|
7,857
|
|
Allowance for doubtful accounts
|
|
|
(906
|
)
|
|
|
(476
|
)
|
|
|
|
|
|
|
|
|
|
$
|
7,396
|
|
|
$
|
8,875
|
|
|
|
|
|
|
|
|
Factoring Agreements
Descriptions of our borrowing agreements, which are reflected on our consolidated balance sheet as
advances from factors, are as follows:
RBS Invoice Discounting Agreement
Signature had an Invoice Discounting Agreement, (as amended, the RBS Invoice Discounting
Agreement) with The Royal Bank of Scotland Commercial Services Limited (RBS). The RBS Invoice
Discounting Agreement provided for Signature to sell with full title guarantee most of its
receivables, as defined in the RBS Invoice Discounting Agreement. Under the RBS Invoice Discounting
Agreement, as amended in December 2008, RBS prepaid up to 70% of the receivables sold in the United
Kingdom (U.K.) and up to 70% of the receivables sold in the rest of the world, not to exceed an
outstanding balance of £1.5 million at any given time, subject to restrictions on the use of
proceeds. RBS paid Signature the remainder of the receivable upon collection. Receivables which
remained outstanding 90 days from the end of the invoice month became ineligible and RBS could
require Signature to repurchase the receivable. The discounting charge accrued at an annual rate of
1.5% above the base rate as defined in the RBS Invoice Discounting Agreement. Signature paid a
commission charge to RBS of 0.16% of each receivable balance sold. The RBS Invoice Discounting
Agreement required a minimum commission charge of £833 per month. Discounting charges of $35
thousand and $0.1 million are included in interest expense for the years ended December 31, 2009
and 2008, respectively. In July 2009, we terminated the RBS Invoice Discounting Agreement and
replaced it with the Bibby Invoice Discounting Agreement as discussed below.
Bibby Invoice Discounting Factoring Agreement
In July 2009, Signature entered into an invoice discounting factoring agreement (the Bibby Invoice
Discounting Agreement) with Bibby Financial Services (Bibby), which replaced the RBS Invoice
Discounting Agreement as discussed above. The Bibby Invoice Discounting Agreement provides for
Signature to sell, with full title guarantee, certain of its receivables as defined in the Bibby
Invoice Discounting Agreement. Bibby prepays 80% of the receivables sold in the U.K. and 70% of
receivables sold in the rest of the world, not to exceed a balance of £2.5 million (approximately
$4.0 million at December 31, 2009). Subsequent to continued satisfactory operation of the invoice
discounting facility and Signatures financial progress, Bibby will increase funding in two further
tranches of £500 thousand each (approximately $0.8 million at December 31, 2009), up to a total
balance of £3.5 million (approximately $5.6 million at December 31, 2009), based upon the cash
needs of the business and ability to generate the required level of receivable funding. Bibby
repays Signature the remainder of the receivable upon collection.
F-14
Receivables which remain outstanding 90 days from the invoice date become ineligible and Signature
is required to repurchase the receivable. The Bibby Invoice Discounting Agreement requires a fee of
0.25% for each U.K. receivable sold and 0.3% for each receivable sold in the rest of the world. If
the total of the yearly fee is less than £60,000, Signature is required to pay Bibby the amount of
such deficit. Signature is also required to pay a discounting charge of 2.0% above the higher of
Barclays Bank Plc base rate or 3 month LIBOR subject to a minimum of 3.5% (3.5% at
December 31, 2009). Discounting charges of approximately $0.1 million are included in interest
expense for the year ended December 31, 2009. Either Signature or Bibby can terminate the Bibby
Invoice Discounting Agreement by providing written notice to the other party six months prior to
the intended termination date but neither party can terminate for eighteen months following the
commencement date. As of December 31, 2009, we had approximately £0.4 million outstanding
(approximately $0.6 million) and approximately £0.3 million available (approximately $0.5 million)
for borrowing under the Bibby Invoice Discounting Agreement.
Nordisk Factoring Agreement
In March 2008, our wholly-owned European subsidiary, Destron Fearing A/S, entered into a factoring
agreement (the Nordisk Factoring Agreement) with Nordisk Factoring A/S (Nordisk). Under the
Nordisk Factoring Agreement, Nordisk advances 80% of Destron Fearing A/Ss eligible receivables,
not to exceed a balance of DKK 6.0 million (approximately $1.2 million at December 31, 2009) at any
given time. As security, Destron Fearing A/S assigns all invoice balances to Nordisk, regardless of
whether advances were made on them, and warrants payments by its customers. Destron Fearing A/S
pays a factoring commission charge to Nordisk of 0.15% of the gross volume of receivables factored.
The Nordisk Factoring Agreement requires a minimum commission charge of DKK 36,000 (approximately
$7 thousand) per year. Discounting charges of approximately $34 thousand and $31 thousand are
included in interest expense for the years ended December 31, 2009 and 2008, respectively. As of
December 31, 2009, Destron Fearing A/S had assigned approximately DKK 3.5 million receivables
(approximately $0.7 million) to Nordisk and had no additional availability under the agreement.
3. Acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
Other Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Assets
|
|
|
|
|
|
|
Date
|
|
|
Acquisition
|
|
|
Intangibles
|
|
|
And
|
|
|
|
|
Company Acquired
|
|
Acquired
|
|
|
Price
|
|
|
Acquired
|
|
|
Liabilities
|
|
|
Business Description
|
(in thousands)
|
Geissler Technologies Corporation
|
|
|
1/14/08
|
|
|
$
|
7,147
|
|
|
$
|
7,430
|
|
|
$
|
(283
|
)
|
|
Develops e.tag technology for customer interface and herd management
|
Geissler Technologies Corporation
On January 14, 2008, we entered into an Agreement and Plan of Merger (the GTC Merger Agreement)
with GT Acquisition Sub, Inc. (our wholly-owned subsidiary), GTC and the four shareholders of GTC
(the Holders), pursuant to which GTC merged with and into GT Acquisition Sub, Inc. with GT
Acquisition Sub, Inc. continuing as our wholly-owned subsidiary (the GTC Merger). Upon the
closing of the GTC Merger, we assigned the ownership of GT Acquisition Sub, Inc. to Destron
Fearing, such that GT Acquisition Sub, Inc. became a wholly-owned subsidiary of Destron Fearing.
Upon the closing of the GTC Merger, we paid approximately 1.3 million shares of our common stock,
valued at approximately $6.2 million to the Holders on January 14, 2008. In addition, upon the
satisfaction of criteria contained in an earn-out provision of the GTC Merger Agreement, as of
December 31, 2009, we have paid the Holders approximately 0.5 million shares of our common stock
valued at approximately $1.1 million. The number of shares issued was based on a weighted average
stock price for the ten days prior to the date the earn-out amounts were achieved. As of December
31, 2009, we may be required to pay the Holders up to an additional $2.7 million of potential
earn-out payments if certain gross profit levels on sales of GTC-related products are achieved
through January 2011. Any additional payout may be made in either cash or in shares of our common
stock or a combination of both at our option. Earn-out amounts are recorded as additional goodwill.
The total purchase price of GTC was allocated as follows (in thousands):
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
$
|
317
|
|
Intangibles:
|
|
|
|
|
|
|
|
|
Patented and non-patented proprietary technology
|
|
|
|
|
|
|
2,000
|
|
Trademarks and tradenames
|
|
|
|
|
|
|
390
|
|
Software
|
|
|
|
|
|
|
500
|
|
Customer relationships and non-compete
|
|
|
|
|
|
|
375
|
|
Goodwill
|
|
|
|
|
|
|
4,165
|
|
Current liabilities
|
|
|
|
|
|
|
(600
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
7,147
|
|
|
|
|
|
|
|
|
|
The estimated fair value of the acquired intangible assets of GTC was determined on the basis of
customer relationships, patents and other proprietary rights for technologies and contract lives
and revenue and using discounted cash flow methodology. Under this method, we estimated the cash
flows that each of these intangible assets are expected to generate over the course of their
expected economic lives. Actual cash flows may differ significantly from these estimates. The
expected economic lives of these intangible assets were determined based upon the expected use of
the asset, the ability to extend or renew patents and other contractual provisions associated with
the asset, the estimated average life of the associated products, the stability of the industry and
other factors deemed appropriate.
During the fourth quarter of 2008, we impaired $4.1 million of the goodwill acquired in the GTC
acquisition as more fully discussed in Note 12.
F-15
In determining the purchase price for GTC, we considered various factors including: (i) historical
and projected revenue streams and operating cash flows of the company; (ii) the complementary
nature of each of our product offerings as an extension of the offerings of our existing
businesses; and
(iii) the opportunity for expanded research and development of the combined product offerings and
the potential for new product offerings. Based on our assessments, we determined that it was
appropriate to offer a purchase price for the business that resulted in the recognition of
goodwill.
The results of GTC have been included in the consolidated statements of operations since the date
of acquisition. Unaudited pro forma results of operations for the year ended December 31, 2008 are
included below. Such pro forma information assumes that the above acquisitions had occurred as of
January 1, 2008, and revenue is presented in accordance with our accounting policies. This summary
is not necessarily indicative of what our result of operations would have been had these been
consolidated entities during such periods, nor does it purport to represent results of operations
for any future periods.
|
|
|
|
|
|
|
For the year ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Net operating revenue
|
|
$
|
62,288
|
|
Net loss from continuing operations attributable to common
shareholders basic and diluted
|
|
|
(59,641
|
)
|
Net loss from continuing operations per common share basic and diluted
|
|
|
(3.93
|
)
|
Dispositions
For a discussion regarding our discontinued operations, see Note 14.
4. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Raw materials
|
|
$
|
8,088
|
|
|
$
|
5,581
|
|
Work in process
|
|
|
762
|
|
|
|
614
|
|
Finished goods
|
|
|
986
|
|
|
|
948
|
|
|
|
|
|
|
|
|
|
|
$
|
9,836
|
|
|
$
|
7,143
|
|
|
|
|
|
|
|
|
5. Property and Equipment
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Land
|
|
$
|
278
|
|
|
$
|
278
|
|
Building and leasehold improvements
|
|
|
6,768
|
|
|
|
6,676
|
|
Equipment
|
|
|
15,152
|
|
|
|
14,223
|
|
|
|
|
|
|
|
|
|
|
|
22,198
|
|
|
|
21,177
|
|
Less: Accumulated depreciation
|
|
|
(14,835
|
)
|
|
|
(12,628
|
)
|
|
|
|
|
|
|
|
Total property and equipment
|
|
$
|
7,363
|
|
|
$
|
8,549
|
|
|
|
|
|
|
|
|
Included above are vehicles and equipment acquired under capital lease obligations in the amount of
$1.7 million and $2.1 million at December 31, 2009 and 2008, respectively. Related accumulated
depreciation amounted to $0.7 million and $0.4 million as of December 31, 2009 and 2008,
respectively.
Depreciation expense charged against income amounted to $1.8 million and $2.1 million for the years
ended December 31, 2009 and 2008, respectively. Accumulated depreciation related to disposals of
property and equipment amounted to $0.1 million and $0.1 million in 2009 and 2008, respectively.
During the year ended December 31, 2009, we impaired approximately $0.2 million of our fixed assets
at our Animal Identification segment. During the year ended December 31, 2008, we recognized an
impairment charge of approximately $2.1 million of our fixed assets as a result of our
restructuring efforts at our Animal Identification and Corporate segments as more fully discussed
in Note 21.
F-16
6. Goodwill
Goodwill consists of the excess of cost over fair value of net tangible and identifiable intangible
assets of companies purchased. We apply the principles of the Intangibles Goodwill and Other
Topic of the Codification and use the purchase method of accounting for acquisitions of
wholly-owned and majority-owned subsidiaries.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
6,848
|
|
|
$
|
33,947
|
(1)
|
Acquisition
|
|
|
|
|
|
|
4,165
|
|
Adjustment to purchase price allocation
|
|
|
|
|
|
|
(141
|
)
|
Earn-out payment
|
|
|
300
|
|
|
|
|
|
Impairment
|
|
|
(3,816
|
)
|
|
|
(31,006
|
)
|
Foreign currency and other adjustments
|
|
|
11
|
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
3,343
|
|
|
$
|
6,848
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Balance represents the beginning balance as previously reported on Form 10-K of
approximately $35.2 million less $1.3 million reclassified to discontinued operations in 2009.
|
Method of Accounting for Goodwill
In accordance with the principles of the Intangibles Goodwill and Other Topic of the
Codification, we do not amortize goodwill. Instead, we are required to test goodwill for impairment
annually as part of our annual business planning cycle during the fourth quarter of each year or
earlier depending on specific changes in conditions surrounding our business units.
We allocate goodwill to our reporting business units. At December 31, 2009 and 2008, our reporting
units were Animal Identification segment and Emergency Identification segment. Our reporting units
are those businesses for which discrete financial information is available and upon which segment
management makes operating decisions. The business operations of our current reporting units are
described in Note 1. We tested the goodwill for each of our reporting units during the fourth
quarters of 2009 and 2008. In addition, we tested goodwill in the third quarter of 2008 as a result
of the declines in our equity market capitalization, which fell below our stockholders equity. If
the fair value of a reporting unit exceeded its carrying value, then no further testing was
required. However, if the carrying value of a reporting unit exceeded its fair value, then an
impairment charge was recorded. The assumptions used in the comparable company and discounted cash
flow analyses are described in Note 12. Based upon our goodwill testing, we recorded impairment
charges related to our Emergency Identification reporting unit of approximately $3.8 million during
the fourth quarter of 2009, and approximately $25.0 million and $4.1 million related to our Animal
Identification reporting unit during the third quarter and fourth quarters of 2008, respectively.
As a result of our decision on June 30, 2008 to restructure our European operations, we recorded an
impairment charge of $1.9 million in 2008 associated with goodwill assigned to our Destron Fearing
A/S business. The restructuring is more fully described in Note 21.
Refer to Note 19 for our goodwill by reporting unit.
7. Intangibles, net
Intangibles and other assets consist of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Average Lives
|
|
|
|
|
|
|
|
|
|
|
|
(in years) at
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
Trademark, net of accumulated amortization of $113 and nil
(1)
|
|
$
|
|
|
|
$
|
2,306
|
|
|
|
N/A
|
|
Trademarks, net of accumulated amortization of $222 and $189
|
|
|
980
|
|
|
|
1,281
|
|
|
|
7.3
|
|
Patents and non-patented proprietary technology, net of accumulated
amortization of $771 and $613
|
|
|
4,219
|
|
|
|
6,654
|
|
|
|
10.5
|
|
Customer relationships, net of accumulated amortization of $987 and $941
|
|
|
5,916
|
|
|
|
7,755
|
|
|
|
9.9
|
|
Tradenames and non compete, net of accumulated amortization of $41 and $23
|
|
|
28
|
|
|
|
90
|
|
|
|
2.0
|
|
Software, net of accumulated amortization of $118 and $78
|
|
|
304
|
|
|
|
422
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,447
|
|
|
$
|
18,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
During 2008, management reviewed the nature of our intangible assets with
indefinite lives and decided to change the lives to 20 years. Effective January 1, 2009, we began
to amortize these intangibles. As of December 31, 2009, these trademarks were fully impaired.
|
F-17
The following is a rollforward of our intangible assets for the years ending December 31, 2009 and
2008.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
18,508
|
|
|
$
|
17,737
|
(1)
|
Acquisition
|
|
|
|
|
|
|
3,348
|
|
Amortization
|
|
|
(2,253
|
)
|
|
|
(1,610
|
)
|
Impairment
|
|
|
(4,692
|
)
|
|
|
(1,070
|
)
|
Foreign currency and other adjustments
|
|
|
(116
|
)
|
|
|
103
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
11,447
|
|
|
$
|
18,508
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Balance represents the beginning balance as previously reported on Form 10-K of
approximately $22.2 million less $4.5 million reclassified to discontinued operations in 2009.
|
Estimated amortization expense of the definite-lived assets for the years ending December 31, is as
follows (in thousands):
|
|
|
|
|
2010
|
|
$
|
1,759
|
|
2011
|
|
|
1,612
|
|
2012
|
|
|
1,606
|
|
2013
|
|
|
1,466
|
|
2014
|
|
|
1,461
|
|
Thereafter
|
|
|
3,543
|
|
|
|
|
|
|
|
$
|
11,447
|
|
|
|
|
|
Amortization of intangibles charged against income amounted to $2.3 million and $1.9 million for
the years ended December 31, 2009 and 2008, respectively.
During our annual impairment review in the fourth quarter of 2009, we recorded an impairment charge
of approximately $3.3 million (net of a deferred tax liability of approximately $(1.4) million)
associated with trademarks, patents and customer relationships at our Emergency Identification
reporting unit. During our annual impairment review in the fourth quarter of 2008, we recorded an
impairment charge of approximately $0.2 million associated with trademarks and customer
relationships to Destron Fearings South American business. As a result of our decision on June 30,
2008 to restructure our European operations, we recorded an impairment charge of approximately $0.3
million associated with trademarks and $0.5 million associated with tradenames assigned to our
Destron Fearing A/S business during 2008. The restructuring is more fully described in Note 21.
8.
Accrued Expenses and Other Liabilities
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Accrued salary, wages and payroll expenses
|
|
$
|
1,741
|
|
|
$
|
1,697
|
|
Accrued bonuses
|
|
|
929
|
|
|
|
1,261
|
|
Accrued liabilities of companies whose assets were sold
|
|
|
849
|
|
|
|
|
|
Accrued litigation reserve and legal settlement
|
|
|
637
|
|
|
|
318
|
|
Accrued professional fees
|
|
|
850
|
|
|
|
374
|
|
Other accrued expenses
|
|
|
1,574
|
|
|
|
4,087
|
|
|
|
|
|
|
|
|
|
|
$
|
6,580
|
|
|
$
|
7,737
|
|
|
|
|
|
|
|
|
Other
liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Accrued
bonuses (long-term)
|
|
$
|
950
|
|
|
|
|
|
Accrued
legal settlement
|
|
|
118
|
|
|
|
625
|
|
Accrued tax
obligations
|
|
|
243
|
|
|
|
244
|
|
Accrued
financing fee
|
|
|
|
|
|
|
800
|
|
Other
|
|
|
134
|
|
|
|
554
|
|
|
|
|
|
|
|
|
|
|
$
|
1,445
|
|
|
$
|
2,223
|
|
|
|
|
|
|
|
|
The
accrued bonuses (long-term) reflect amounts due to certain members of
senior management, including our chief executive officer and chief
operating officer, that are not due and payable until April 1,
2011. We have the right to pay some or all of such bonuses prior to
April 1, 2011 at our sole discretion and contingent upon cash
availability. No interest is due on the bonuses unless required by
law and, if so required, will be accrued at the minimum legally
required rate.
F-18
9. Notes Payable and Other Financings
Notes payable and long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Revolving facility, bears interest at prime plus 2.0% but not
less than 10.0% (10.0% at December 31, 2009), net of discount of
$232 and $580
|
|
$
|
1,994
|
|
|
$
|
2,024
|
|
Senior secured, non-convertible term note, bears interest at 12.0%
|
|
|
79
|
|
|
|
1,103
|
|
Senior secured, non-convertible term note, bears interest at 12.0%
|
|
|
1,164
|
|
|
|
3,067
|
|
Senior secured, non-convertible term note, bears interest at 12.0%
|
|
|
134
|
|
|
|
2,000
|
|
Mortgage notes payable, collateralized by Destron Fearings land
and building, payable in monthly installments of principal and
interest totaling $20 thousand, bearing interest at 8.2%, due
through November 2010.
|
|
|
2,034
|
|
|
|
2,103
|
|
Line of credit, bears interest at the international rates Danske
Bank can establish on a loan in DKK in the international market
plus 2.0% (6.6% at December 31, 2009) and is determined
quarterly. The agreement shall remain effective until further
notice.
|
|
|
2,925
|
|
|
|
3,417
|
|
Equipment loan, collateralized by Destron Fearing A/Ss
production equipment, payable in quarterly installments of
principal and interest totaling $64 thousand, bearing interest at
variable rates (6.6% at December 31, 2009, due through July
2010).
|
|
|
274
|
|
|
|
497
|
|
Notes payable other and capital lease obligations
|
|
|
1,085
|
|
|
|
1,312
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
9,689
|
|
|
|
15,523
|
|
Less: current maturities
|
|
|
9,297
|
|
|
|
8,581
|
|
|
|
|
|
|
|
|
Total long term notes payable and debt
|
|
$
|
392
|
|
|
$
|
6,942
|
|
|
|
|
|
|
|
|
The scheduled payments due based on maturities of current and long-term debt as of December 31,
2009 are presented in the following table (in thousands):
|
|
|
|
|
Year:
|
|
|
|
|
2010
|
|
$
|
9,529
|
|
2011
|
|
|
304
|
|
2012
|
|
|
88
|
|
Total payments
|
|
|
9,921
|
|
Debt discount, net
|
|
|
(232
|
)
|
|
|
|
|
Total debt outstanding
|
|
$
|
9,689
|
|
|
|
|
|
Interest expense on the long and short-term notes amounted to $2.2 million and $10.9 million for
the years ended December 31, 2009 and 2008, respectively. The weighted average interest rate was
13.7% and 14.1% for the years ended December 31, 2009 and 2008, respectively. The weighted average
interest rates exclude interest expense related to certain amortization and accretion of debt
discount and issue costs, share issuances and legal expenses related to financing activities,
revaluation of certain warrants and obligation to Laurus Master Fund, Ltd (Laurus).
In addition to the debt discount of $232 thousand reflected in the table above, as of December 31, 2009, we had approximately $0.1 million of unamortized debt issuance costs.
$6.0 Million Revolving Asset-Based Facility with Kallina
On August 31, 2007, Destron Fearing and certain of its wholly-owned subsidiaries, Digital Angel
Technology Corporation, Fearing Manufacturing Co., Inc. and Digital Angel International,
(collectively, the Eligible Subsidiaries) entered into a $6.0 million revolving asset-based
financing transaction with Kallina Corporation (Kallina) pursuant to the terms of a Security
Agreement. Under the terms of the Security Agreement, Destron Fearing may borrow, from time to
time, an amount equal to the lesser of the amount of availability under the borrowing base and $6.0
million, subject to certain reserves that the lender is authorized to take in its reasonable
commercial judgment (the Revolving Facility). The borrowing base is calculated as a percentage of
the total amount of eligible accounts and inventory owned by Destron Fearing and its Eligible
Subsidiaries. Amounts outstanding under the Revolving Facility accrue interest at a rate equal to
the prime rate plus 2.0%, but not less than 10.0% at any time. At December 31, 2009, approximately
$2.2 million was outstanding under the Revolving Facility, there was $0.3 million available for
borrowing and the interest rate was 10.0%.
The Revolving Facility matures on August 31, 2010. Destron Fearing and its Eligible Subsidiaries
have pledged all of their respective assets, excluding the stock of all foreign subsidiaries other
than Signature, in support of the obligations under the Revolving Facility. In connection with the
Revolving Facility, Destron Fearing issued to Kallina seven-year warrants, which, as a result of
our acquisition of the minority owners interest in Destron Fearing in 2007, were converted into
warrants to purchase shares of our common stock. The value of the warrants of approximately $1.0
million was recorded as a discount to the Revolving Facility and is being amortized to interest
expense over the life of the Revolving Facility. Destron Fearing paid Kallina an upfront fee equal
to 3.5% of the $6.0 million Revolving Facility, which is also being amortized over the life of the
Revolving Facility as interest expense.
F-19
Senior Secured Non-Convertible Term Notes
In August 2006, we entered into a convertible term note (2006 Note) with Laurus in the original
principal amount of $13.5 million. The 2006 Note, as amended, accrued interest at a rate of 12% per
annum, was payable monthly and had a maturity date of February 1, 2010. Concurrent with the closing
of the Revolving Facility discussed above, we entered into a $7.0 million non-convertible term note
(2007 Note) with Kallina pursuant to the terms of a Securities Purchase Agreement between us and
Kallina. The 2007 Note, as amended, accrued interest at a rate of 12% per annum, was payable
monthly and had a maturity date of February 1, 2010. In October 2008 we entered into a letter
agreement with Laurus, Kallina, Valens U.S. SPV I, LLC, Valens Offshore SPV I Ltd., Valens Offshore
SPV II Corp and PSource Structured Debt Limited (collectively referred to as the Lenders) and
issued a $2.0 million senior secured, non-convertible term note (the 2008 Note) to Valens which
accrued interest at a rate equal to 12% and was due in full on February 1, 2010. The 2006 Note, the
2007 Note and the 2008 Note (collectively the Existing Debt Obligations) allowed for optional
redemption without a prepayment penalty.
In connection with the 2006 Note, we issued Laurus a warrant for the purchase of approximately 0.2
million shares of our common stock. In connection with the 2007 Note, we issued Laurus 200,000
shares of the PSID common stock that we owned valued at approximately $1.2 million on August 31,
2007 and repriced approximately 0.2 million warrants that we had previously issued to Laurus in
August 2006. The value of the PSID common stock and the repricing of the warrants, which totaled
approximately $1.3 million, were recorded as debt issue costs and were being amortized over the
life of the 2007 Note as additional interest expense. In addition, we paid Kallina an upfront fee
equal to 3.5% of the 2007 Note, which was also being amortized over the life of the 2007 Note as
interest expense. In connection with the 2008 Note, we issued Valens approximately 0.2 million
shares of our common stock.
In connection with a 2007 amendment of the 2006 Note and 2007 Note, we issued warrants to the
Lenders to purchase a total of 0.4 million shares of our common stock. The value of the warrants of
approximately $1.7 million was recorded as debt discount and was being amortized to interest
expense over the life of the Notes. In connection with a 2008 amendment of the 2006 Note and the
2007 Note, we issued Valens Offshore SPV II, Corp., an affiliate of Laurus and Kallina,
approximately 29 thousand shares of our common stock valued at approximately $0.2 million. The
value of the common stock was recorded as interest expense in 2008.
In February 2008, we entered into an Amendment of Warrants and Conditional Consent to Asset Sales
with the Lenders which, among other things, reduced the exercise price of three warrant tranches
(collectively exercisable for a total of approximately 0.5 million shares of our common stock)
previously issued to the Lenders from exercise prices ranging from $8.00 to $10.80 per share to an
exercise price of $5.60 per share. As a result of the repricing, we recorded additional interest
expense of approximately $0.5 million in 2008. In July 2008, we entered into an Omnibus Amendment
with the Lenders and LV Administrative Services, Inc., the administrative and collateral agent for
the Lenders. Under the Omnibus Amendment, we reduced the exercise price of previously issued and
outstanding warrants (collectively exercisable for a total of approximately 0.8 million shares of
our common stock at a weighted average exercise price of $6.56 per share) to an exercise price of
$3.20 per share on condition that the Lenders exercise such warrants in full in cash. Accordingly,
the Lenders exercised all of their outstanding warrants to purchase shares of our common stock for
approximately $2.3 million in net cash.
During 2008, we prepaid approximately $7.9 million of the 2006 Note and approximately $5.8 million
on the 2007 Note. As a result of the prepayments, we amortized approximately $1.4 million and $0.4
million of debt issue costs and original debt issue discount associated with the 2006 Note and 2007
Note, respectively, during the year ended December 31, 2008, which was recorded as interest
expense.
In connection with a November 2008 amendment of certain terms of our 2006 Note and 2007 Note, we
agreed to pay the Laurus, Kallina and the Lenders a combined deferred fee of $0.8 million either on
the maturity date of the notes or when the notes were prepaid in full or accelerated upon default.
The fee was payable either in cash, shares of our common stock or a combination of both at our
option. If the fee was paid with shares of common stock, the fee was based on a 20% discount to the
then-current market price of the common stock. The changes effected by the November 2008 amendment
were considered substantial modifications in accordance with Debt Modifications and
Extinguishments Topic of the Codification. Therefore, all remaining fees, debt discounts and debt
issuance costs were required to be expensed during the fourth quarter of 2008. The total
unamortized amount was approximately $0.7 million and was reflected in interest expense in 2008.
In December 2009, we prepaid $3.0 million on the Existing Debt Obligations and we issued
approximately 1.4 million shares of our common stock in payment of the deferred fee. On February 1,
2010, the maturity date, we paid the final balance of approximately $1.4 million on the Existing
Debt Obligations.
Destron Fearing A/Ss Line of Credit
Destron Fearing A/S is party to a credit agreement with Danske Bank (the Credit Facility). On
June 1, 2006, Destron Fearing A/S amended the borrowing availability from DKK 12.0 million to DKK
18.0 million. In connection with the amendment, Destron Fearing executed a Letter of Support which
confirms that it will maintain its holding of 100% of the share capital of Destron Fearing A/S, and
will neither sell, nor pledge, nor in any way dispose of any part of Destron Fearing A/S or
otherwise reduce Destron Fearings influence on Destron Fearing A/S without the prior consent of
Danske Bank. Interest is determined quarterly and is based on the international rates Danske Bank
can establish on a loan in the same currency on the international market plus 2.0%. At December 31,
2009, the annual interest rate on the Credit Facility was 6.6%. Borrowing availability under the
Credit Facility considers guarantees outstanding. The Credit Facility will remain effective until
further notice. Destron Fearing A/S can terminate the Credit Facility and pay the outstanding
balance, or Danske Bank may demand the credit line be settled immediately at any given time,
without prior notice. Beginning in July 2009, Destron Fearing A/S and Danske Bank agreed to reduce
the borrowing availability on the Credit Facility each month by DKK 500 thousand (approximately
$0.1 million). As of December 31, 2009, total availability had been reduced from DKK 18.0 million
(approximately $3.5 million) to DKK 15.0 million (approximately $2.9 million). DKK 15.2 million
(approximately $2.9 million) was outstanding at December 31, 2009 and there was no availability
under the credit line.
F-20
10. Fair Value of Financial Instruments
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short maturity of those instruments.
Notes Payable and Long-Term Debt
The carrying amount approximates fair value because of the short-term nature of the debt, its
underlying collateral and certain interest rates which are reset periodically to reflect current
market conditions.
Accounts Payable and Accrued Expenses
The carrying amount approximates fair value.
11. Stockholders Equity
On October 30, 2008, our stockholders approved a one-for-eight reverse stock split of our common
stock by proportionately decreasing the authorized number of shares of common stock without
changing the par value of our common stock. The reverse stock split was effective on November 10,
2008 and all shares and options amounts have been adjusted accordingly for all periods.
Warrants
We have issued warrants convertible into shares of common stock for consideration, as follows (in
thousands, except exercise price):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised/
|
|
|
December 31,
|
|
|
Exercise
|
|
|
Date of
|
|
Date of
|
Class of Warrants
|
|
Authorized
|
|
|
Issued
|
|
|
Forfeited
|
|
|
2009
|
|
|
Price
|
|
|
Issue
|
|
Expiration
|
Series B
|
|
|
83
|
|
|
|
83
|
|
|
|
|
|
|
|
83
|
|
|
$
|
16.910
|
|
|
April 2004
|
|
April 2010
|
Series D
|
|
|
83
|
|
|
|
83
|
|
|
|
|
|
|
|
83
|
|
|
$
|
25.443
|
|
|
October 2004
|
|
October 2010
|
Series E
|
|
|
122
|
|
|
|
122
|
|
|
|
|
|
|
|
122
|
|
|
$
|
20.759
|
|
|
June 2005
|
|
June 2010
|
Series E
|
|
|
25
|
|
|
|
25
|
|
|
|
|
|
|
|
25
|
|
|
$
|
19.104
|
|
|
June 2005
|
|
June 2010
|
Destron Fearing Warrants Class D
|
|
|
71
|
|
|
|
71
|
|
|
|
71
|
|
|
|
|
|
|
$
|
15.086
|
|
|
February 2004
|
|
February 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
384
|
|
|
|
384
|
|
|
|
|
|
|
|
313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Series B warrant was issued in connection with a securities purchase agreement effective April
16, 2004. The Series B warrant is exercisable for approximately 83 thousand shares of our common
stock. The exercise price of the Series B warrant, which was originally $26.40 per share, was
reduced to $16.91 per share as a result of our issuances of common stock for financings and
severance payments, which triggered the anti-dilution provisions in the Series B warrant agreement.
The Series B warrant vested on April 16, 2005 and expires on April 16, 2010. The Series B warrant
agreement provides 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 Series D warrants were issued in connection with a securities purchase agreement effective
October 21, 2004. The Series D warrant is exercisable into approximately 83 thousand shares of our
common stock. The exercise price of the Series D warrant, which was originally $40.40 per share,
was reduced to $25.443 per share as a result of our issuances of common stock for financings and
severance payments, which triggered the anti-dilution provisions in the warrant agreement. The
Series D warrant vested on October 21, 2005 and expires on October 21, 2010. The Series D warrant
agreement provides for anti-dilution provisions similar to those outlined above for the Series B
warrant and the total number of shares that can be issued under such provisions is also subject to
a ceiling.
The Series E warrants were issued in connection with a financing completed on June 10, 2005.
Warrants to acquire approximately 92 thousand and 55 thousand shares of our common stock were
issued to two investors, respectively. The warrants are exercisable at any time at exercise prices
ranging from $29.632 to $32.28 per share. The exercise prices of the warrants were reduced to
prices ranging from $19.104 to $20.759 per share as a result of our issuances of common stock for
financings and severance payments, which triggered the anti-dilution provisions in the warrant
agreements. The warrants vested on June 10, 2005 and expire on June 10, 2010. The Series E warrant
agreement provides for anti-dilution provisions similar to those outlined above for the Series B
warrant and the total number of shares that can be issued under such provisions is also subject to
a ceiling.
The Destron Fearing warrants were converted into warrants to acquire shares of our common stock in
connection with our acquisition of the minority owners interest in Destron Fearing in December
2007 and expired in February 2009.
The valuation of warrants utilized the following assumptions in the Black-Scholes valuation model:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
|
|
|
|
|
|
|
Expected
|
|
|
Risk-Free
|
|
|
Date of the
|
|
Class of Warrant
|
|
Yield
|
|
|
Volatility
|
|
|
Lives (Yrs.)
|
|
|
Rate
|
|
|
Assumptions
|
|
Series B
|
|
|
0.00
|
%
|
|
|
69.00
|
%
|
|
|
6.00
|
|
|
|
3.38
|
%
|
|
April 5, 2004
|
|
Series D
|
|
|
0.00
|
%
|
|
|
50.00
|
%
|
|
|
6.00
|
|
|
|
3.31
|
%
|
|
October 21, 2004
|
|
Series E
|
|
|
0.00
|
%
|
|
|
50.00
|
%
|
|
|
5.00
|
|
|
|
3.75
|
%
|
|
June 10, 2005
|
|
F-21
In addition to the warrants described above, in February 2010, we issued warrants to acquire
approximately 1.7 million shares of our common stock to certain investors. The warrants are
exercisable at any time at an exercise price of $0.50 per share and expire in February 2017. See
Note 23 for further discussion.
Stock Option Plans
In accordance with the Compensation Stock Compensation Topic of the Codification, awards granted
are valued at fair value and compensation cost is recognized on a straight line basis over the
service period of each award. We currently use the Black-Scholes option pricing model to calculate
the compensation cost to be recognized. During the year ended December 31, 2009, we recorded
approximately $0.4 million in compensation expense related to stock options granted to our and our
subsidiary employees, directors and consultants.
A summary of the status of our and our subsidiarys stock options as of December 31, 2009, and
changes during the two years then ended, is presented below.
During 1996, we adopted a nonqualified stock option plan (1996 Option Plan). During 2000, we
adopted the 1999 Flexible Stock Plan. With the 2000 acquisition of Destron Fearing Corporation, we
acquired one additional stock option plan referred to as the 1999 Employees Stock Purchase Plan.
During 2003, we adopted the 2003 Flexible Stock Plan. With the acquisition of the minority owners
interest in Destron Fearing in December 2007, we acquired two additional stock option plans,
referred to as the Destron Fearing MAS Plan and the Destron Fearing Stock Option Plan. Upon
consummation of the merger between Destron Fearing and us, all outstanding Destron Fearing stock
options became fully vested and each of Destron Fearings stock options existing on the effective
date were converted into options to acquire shares of our common stock at the effective exchange
rate of 1.4.
The Destron Fearing MAS Plan, was terminated on February 23, 2006. No new options can be granted
under the terminated plan. However, all outstanding options will remain in effect until they are
exercised, forfeited or expired. As of December 31, 2009, awards consisting of options to purchase
approximately 82 thousand shares were outstanding under the Destron Fearing MAS Plan.
As of December 31, 2009, the Destron Fearing Stock Option Plan had approximately 1.9 million shares
of common stock reserved for issuance, of which approximately 1.9 million shares have been issued
and approximately 5 thousand remain available for issuance, subject to certain restrictions
regarding eligible participants. As of December 31, 2009, awards consisting of options to purchase
approximately 1.5 million shares were outstanding under the Destron Fearing Stock Option Plan.
Option awards are generally granted with exercise prices between market price and 110% of the
market price of our stock at the date of grant, generally vest over three to nine years and have
ten-year contractual terms.
Under the 1996 Option Plan, options for approximately 0.1 million common shares were authorized for
issuance to certain of our officers, directors and employees. As of December 31, 2009,
approximately 0.1 million options have been issued, net of forfeitures, and approximately 2
thousand are outstanding under the 1996 Option Plan. The options vest as determined by our board of
directors and are exercisable over a period of five years. The 1996 Option Plan has been
discontinued with respect to any future grant of options.
Under the 1999 Flexible Plan, the number of shares which may be issued or sold, or for which
options, Stock Appreciation Rights (SARs), or Performance Shares may be granted to our officers,
directors and employees is approximately 0.5 million. As of December 31, 2009, 0.4 million options
have been granted, net of forfeitures and 65 thousand are outstanding. The options vest as
determined by our board of directors and are exercisable over a period of five years.
Under the 2003 Flexible Plan, the number of shares which may be issued or sold, or for which
options, SARs, or performance shares may be granted to our officers, directors and employees is
approximately 2.9 million. As of December 31, 2009, 1.7 million options have been granted and 1.2
million are outstanding and 1.2 million shares are available for future issuances. The options vest
as determined by our board of directors and are exercisable over a period of three to ten years.
The 1999 Employees Stock Purchase Plan authorizes the grant of options to employees who purchase
shares of common stock. As of December 31, 2009, approximately 0.2 million options have been
granted, 0.1 million are outstanding and a de minimus amount of shares are available for grant.
We have three additional plans that we acquired in connection with previous acquisitions. As of
December 31, 2009, there was approximately 1 thousand options outstanding under the plans. These
plans have been discontinued with respect to future grants.
In addition, as of December 31, 2009, we have granted approximately 0.3 million options, net of
forfeitures, and have outstanding approximately 0.3 million options which were granted outside of
the above plans as an inducement to employment.
F-22
A summary of the stock option activity for our stock options plans for 2009 and 2008 is as follows
(in thousands, except per share price data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
|
|
of Options
|
|
|
Price
|
|
|
of Options
|
|
|
Price
|
|
|
Outstanding on January 1
|
|
|
2,863
|
|
|
$
|
18.02
|
|
|
|
2,405
|
|
|
$
|
22.44
|
|
Granted
|
|
|
499
|
|
|
|
0.97
|
|
|
|
629
|
|
|
|
2.59
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(173
|
)
|
|
|
23.60
|
|
|
|
(171
|
)
|
|
|
23.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31
|
|
|
3,189
|
|
|
|
15.05
|
|
|
|
2,863
|
|
|
|
18.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31
(1)
|
|
|
2,300
|
|
|
|
20.25
|
|
|
|
2,245
|
|
|
|
22.33
|
|
Vested or expected to vest at December 31
|
|
|
3,024
|
|
|
|
14.27
|
|
|
|
2,833
|
|
|
|
16.59
|
|
Shares available on December 31 for options that may be granted
|
|
|
1,199
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
(1)
|
|
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 our common stock was $0.75 at December 31, 2009 based upon the closing price on the
Nasdaq Capital Market. As of December 31, 2009 and 2008, the aggregate intrinsic value of options outstanding, exercisable
and vested or expected to vest was $0.1 million and $0.1 million, respectively.
|
As of December 31, 2009, there was approximately $0.6 million of total unrecognized compensation
cost related to unvested share-based compensation arrangements granted under our plans. That cost
is expected to be recognized over a weighted-average period of approximately 1.9 years.
The following table summarizes information about our stock options at December 31, 2009 (in
thousands, except per share price data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
Exercisable Stock
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Options
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Contractual
|
|
|
Exercise
|
|
|
|
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
Shares
|
|
|
Life in Years
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
$0.0000 to $2.0000
|
|
|
913
|
|
|
|
8.9
|
|
|
$
|
0.75
|
|
|
|
196
|
|
|
$
|
0.46
|
|
$2.0001 to $4.0000
|
|
|
40
|
|
|
|
7.2
|
|
|
|
2.91
|
|
|
|
19
|
|
|
|
3.20
|
|
$4.0001 to $6.0000
|
|
|
227
|
|
|
|
8.2
|
|
|
|
5.23
|
|
|
|
76
|
|
|
|
5.23
|
|
$6.0001 to $8.0000
|
|
|
18
|
|
|
|
7.6
|
|
|
|
7.44
|
|
|
|
18
|
|
|
|
7.44
|
|
$8.0001 to $10.0000
|
|
|
22
|
|
|
|
7.6
|
|
|
|
8.97
|
|
|
|
22
|
|
|
|
8.97
|
|
$10.0001 and over
|
|
|
1,969
|
|
|
|
4.1
|
|
|
|
23.20
|
|
|
|
1,969
|
|
|
|
23.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock options
|
|
|
3,189
|
|
|
|
5.8
|
|
|
|
15.05
|
|
|
|
2,300
|
|
|
|
20.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average per share fair values of grants made in 2009 and 2008 under our incentive
plans was $0.97 and $1.33, respectively. The weighted average per share fair value of options
granted or modified by us was estimated on the grant date using the Black-Scholes option-pricing
model based on the following weighted average assumptions.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Estimated option life
|
|
6 years
|
|
|
5 years
|
|
Risk free interest rate
|
|
2.34%
|
|
|
1.55 3.57%
|
|
Expected volatility
|
|
130.00%
|
|
|
60.00 91.51%
|
|
Expected dividend yield
|
|
%
|
|
|
%
|
|
Restricted Stock Grants
The stock-based compensation charges associated with restricted stock are included in the
consolidated statements of operations in selling, general and administrative expense.
In June 2009, we issued approximately 14 thousand shares of our restricted stock to a consultant.
We determined the value of the stock to be approximately $16 thousand based on the closing price of
our stock on the date of the grant. The value of the restricted stock, which was fixed as a result of price protection provisions, was amortized as consulting
expense over the vesting period of six months.
F-23
In August 2009, we issued approximately 0.1 million shares of our restricted stock to a consultant.
We determined the value of the stock to be approximately $0.1 million based on the closing price of
our stock on the date of the grant. The value of the restricted stock, which was fixed as a result of price protection provisions, is being amortized as
consulting expense over the vesting period of six months.
In October 2009, we issued approximately 0.5 million shares of our restricted common stock to our
directors and executive and senior management. We determined the value of the stock to be
approximately $0.5 million based on the closing price of our stock on the date of the grant. The
value of the restricted stock is being amortized as compensation expense over the vesting period
which is three years. In January 2008, we issued approximately 31 thousand shares of our restricted
common stock to our directors. We determined the value of the stock to be approximately $0.2
million based on the closing price of our stock on the date of the grant. The value of the
restricted stock is being amortized as compensation expense over the vesting period which is five
years. As a result, we recorded compensation expense of approximately $0.1 million and $0.1 million
in 2009 and 2008, respectively, associated with such restricted stock grants.
In August 2008, we issued approximately 40 thousand shares of our restricted common stock to a
consultant which fully vested on December 31, 2008. We recorded compensation expense of
approximately $0.2 million in 2008 associated with the restricted stock.
12. Asset Impairment Testing
As of December 31, 2009, the net carrying value of our goodwill was $3.3 million. We test our
goodwill and intangible assets for impairment as a part of our annual business planning cycle.
Goodwill and intangible assets are also tested between testing dates if an impairment condition or
event is determined to have occurred. Based upon our annual testing, we recorded a goodwill
impairment charge of approximately $3.8 million in the fourth quarter of 2009 at our Emergency
Identification reporting unit. We recorded approximately $26.9 million in the second and third
quarters of 2008; $25.0 million impairment of goodwill at our Animal Identification reporting unit,
which was a result of declines in our equity market capitalization; and $1.9 million impairment of
goodwill at Destron Fearings European business unit as a result of our restructuring efforts. In
the fourth quarter of 2008, we recorded approximately $4.1 million of goodwill impairment which
related to GTC.
During the fourth quarters of 2009 and 2008 and the third quarter of 2008, we determined the fair
value of our reporting units using discounted cash flow analyses and a company comparable analysis.
If the fair value of a reporting unit exceeded its carrying value, then no further testing was
required. However, if the carrying value of a reporting unit exceeded its fair value, then an
impairment charge was recorded. Management compiled the revenue forecasts, growth rates, gross
margin, corporate overhead and tax rates, among other data and assumptions related to the financial
projections upon which the valuations were based. The methodology used to determine the residual or
terminal enterprise values included the following factors: current leverage, risk premium, cost of
equity, after-tax cost of debt, and weighted average cost of capital, which were used in the
discount rate calculations. The assumptions used in the determination of fair value using
discounted cash flows were as follows:
|
|
|
Earnings before interest, taxes, depreciation and amortization were used as the measure of cash flow;
|
|
|
|
|
Cash flows were projected for five years and added to the present value of the terminal value; and
|
|
|
|
|
Discount rate used was 20%. The rate was determined based on the level of risk associated with a
reporting units operations and the related degree of certainty of generating future cash flows.
|
The company comparable analysis was performed utilizing financial and market information on
publicly traded companies that are considered to be generally comparable to our reporting units.
Each analysis provided a benchmark to compare to the values of each business unit.
Future goodwill impairment reviews may result in write-downs. Such determination involves the use
of estimates and assumptions, which may be difficult to accurately measure or value.
During the year ended December 31, 2009, we recorded approximately $7.3 million of goodwill and
asset impairments; $3.8 million impairment of goodwill and $3.3 million impairment (net of a
deferred tax liability of approximately $1.4 million) of intangible assets at our Emergency
Identification reporting unit as well as approximately $0.2 million related to the impairment of
fixed assets at our Animal Identification segment. During the year ended December 31, 2008, we
recorded approximately $31.1 million in goodwill and asset impairments. Of this amount, $26.9
million was related to goodwill, as discussed above, $0.8 million related to intangible assets at
our Destron Fearing European business unit, $1.9 million related to the impairment of fixed assets
throughout our Animal Identification segment, $0.3 million impairment of other assets in our South
American business and $1.2 million related to the impairment of our investment in PSID. See Notes
5, 6 and 7 for further discussion.
13. Income Taxes
The benefit (provision) for income taxes consists of:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Current:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
4
|
|
|
$
|
(78
|
)
|
International
|
|
|
(54
|
)
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
Current income tax provision
|
|
|
(50
|
)
|
|
|
(118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
International
|
|
|
74
|
|
|
|
283
|
|
|
|
|
|
|
|
|
Deferred income taxes benefit
|
|
|
74
|
|
|
|
283
|
|
|
|
|
|
|
|
|
Total income tax benefit
|
|
$
|
24
|
|
|
$
|
165
|
|
|
|
|
|
|
|
|
In addition to the income tax benefit above, which related primarily to the amortization of deferred tax liabilities arising from acquisitions, we
recorded income tax expense in 2009 associated with our discontinued operations. See Note 14.
F-24
Destron Fearing has operations in Europe and South America. We consider earnings from our foreign
entities to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state
income taxes has been made for these earnings. Upon distribution of foreign subsidiary earnings, we
may be subject to U.S. income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the foreign jurisdiction.
The tax effects of temporary differences and carryforwards that give rise to significant portions
of deferred tax assets and liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Liabilities and reserves
|
|
$
|
1,381
|
|
|
$
|
1,584
|
|
Stock-based compensation
|
|
|
4,300
|
|
|
|
3,672
|
|
Property and equipment
|
|
|
382
|
|
|
|
825
|
|
Net operating loss carryforwards
|
|
|
110,341
|
|
|
|
107,555
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
116,404
|
|
|
|
113,636
|
|
Valuation allowance
|
|
|
(116,404
|
)
|
|
|
(113,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
|
|
|
|
30
|
|
Intangible assets
|
|
|
|
|
|
|
1,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Liabilities
|
|
$
|
|
|
|
$
|
(1,097
|
)
|
|
|
|
|
|
|
|
The deferred tax assets and liabilities are included in the following balance sheet captions:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Current deferred tax assets
|
|
$
|
|
|
|
$
|
130
|
|
Long-term deferred tax liability
|
|
|
|
|
|
|
(1,227
|
)
|
|
|
|
|
|
|
|
Net Deferred Tax Liabilities
|
|
$
|
|
|
|
$
|
(1,097
|
)
|
|
|
|
|
|
|
|
The valuation allowance for deferred tax asset increased by $2.8 million and $8.6 million in 2009
and 2008, respectively, due primarily to the generation of net operating losses. The valuation
allowance was provided for net deferred tax assets that exceeded the level of existing deferred tax
liabilities and our projected pre-tax income. Our goodwill is not deductible for tax purposes.
Approximate domestic and international (loss) income from continuing operations before provision
for income taxes consists of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Domestic
|
|
$
|
(6,326
|
)
|
|
$
|
(51,794
|
)
|
International
|
|
|
(9,121
|
)
|
|
|
(8,011
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(15,447
|
)
|
|
$
|
(59,805
|
)
|
|
|
|
|
|
|
|
At December 31, 2009, we had aggregate net operating loss carryforwards of approximately $278.6
million for income tax purposes that expire in various amounts from 2014 through 2029. Of the
aggregate U.S. net operating loss carryforwards of $268.7 million, $69.2 million relate to Destron
Fearing.
Based upon the change of ownership rules under IRC section 382, approximately $197.9 million of our
separate U.S. net operating loss carryforwards experienced a more than 50% ownership change during
the year and therefore are significantly limited as to the amount of use in any particular year.
The ownership change was due to the issuance of sufficient common stock which resulted in our
ownership change exceeding the 50% limitation threshold imposed by
that section. The $69.2 million of operating loss carryforwards related to Destron Fearing were not impacted by this ownership change and are not currently subject to limitation under IRC section 382.
Of the total aggregate net operating loss carryforwards, foreign loss carryforwards are
approximately $9.9 million. These net operating loss carryforwards are available to only offset
future taxable income earned in the home country of the foreign entity and do not expire.
F-25
The reconciliation of the effective tax rate with the statutory federal income tax (benefit) rate
is as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
%
|
|
|
%
|
|
Statutory tax/(benefit) rate
|
|
|
(35
|
)
|
|
|
(35
|
)
|
Nondeductible intangibles amortization/impairment
|
|
|
11
|
|
|
|
20
|
|
State income taxes, net of federal benefits
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Foreign tax differences
|
|
|
4
|
|
|
|
|
|
Shares issued for services
|
|
|
(4
|
)
|
|
|
|
|
Change in deferred tax asset valuation allowance
(1)
|
|
|
18
|
|
|
|
15
|
|
Impact of discontinued operations
|
|
|
8
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Substantially attributed to net operating losses.
|
Liabilities for Uncertain Tax Positions
A reconciliation of the beginning and ending balances of gross unrecognized tax benefits for 2009
and 2008 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Gross unrecognized tax benefits at January 1
|
|
$
|
201
|
|
|
$
|
193
|
|
Increases in tax positions for current year
|
|
|
17
|
|
|
|
74
|
|
Lapse in statute of limitations
|
|
|
(11
|
)
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
Gross unrecognized tax benefits at December 31
|
|
$
|
207
|
|
|
$
|
201
|
|
|
|
|
|
|
|
|
Included in the balance of unrecognized tax benefits at December 31, 2009 and 2008 are $0.2 and
$0.2 million, respectively, of tax benefits that, if recognized, would affect the effective tax
rate. We recognize interest and penalties related to uncertain tax positions in income tax expense.
As of January 1 and December 31, 2009, we had accrued $7 thousand and $24 thousand of interest
related to uncertain tax positions, respectively and have accrued no penalties. Our unrecognized
tax benefits are largely related to certain state filing positions and are included in other
long-term liabilities.
We, in combination with our consolidated subsidiary, Destron Fearing, file income tax returns in
the U.S. federal jurisdiction and various state and foreign jurisdictions in which we operate. In
general, we and Destron Fearing are no longer subject to U.S. federal, state or local income tax
examinations for years before 2005, Danish tax examinations for years before 2005 and U.K. tax
examinations for years before 2005. During 2008, we completed an Internal Revenue Service
examination of 2005. The results of the examination were not material to the financial statements
and did not cause a material change to any unrecognized tax position. We do not currently have any
examinations ongoing.
14. Discontinued Operations
During the three-months ended March 31, 2008, our board of directors agreed to sell two of our
wholly-owned subsidiaries: Florida Decision Corporation (FDC, formerly known as Pacific Decision
Sciences Corporation) and Thermo Life. During the three-months ended December 31, 2008, our board
of directors decided to sell our ownership of PSID. During the three-months ended December 31,
2009, our board of directors decided to sell our ownership of McMurdo. Prior to 2008, we had
discontinued the operations of Computer Equity Corporation (Computer Equity), Perimeter
Acquisition Corp. (Perimeter) and IFTH Acquisition Corp. (IFTH). IFTH provided computer
hardware and IT services; Computer Equity provided voice, data and video telecommunications
products and services; Perimeter sold call center software and related services; FDC provided
service relationship management software; Thermo Life was a development company with patented
rights to a thin-film thermoelectric generator; PSID developed and marketed RFID systems used to
identify, locate and protect people and their assets; and McMurdo was a manufacturer of emergency
locator beacons. The decisions to sell these businesses were made as part of managements strategy
to streamline our operations to focus our efforts on the Animal Identification segment. With the
exception of Thermo Life (which was sold on January 21, 2010 as
more fully discussed in Note 20), each of these businesses had been
sold as of December 31, 2009.
Sale of FDC
Effective June 2, 2008, we sold all of the assets of FDC pursuant to an Asset Purchase Agreement
among us, FDC and Customer Service Delivery Platform Corporation (the Buyer). The purchase price
for the assets was $2.0 million, of which $1.8 million is payable in 48 equal monthly installments
pursuant to the terms of a non-interest bearing promissory note, and $0.2 million was related to
amounts owed to the buyer and, therefore, credited against the purchase price. The promissory note
is secured by all of the assets of the Buyer, including the FDC assets acquired in the transaction.
On February 24, 2010, we entered into a letter agreement with the Buyer whereby the Buyer agreed to
pay the remaining balance of the promissory note of approximately $0.7 million on March 8, 2010, as
more fully discussed in Note 23.
Sale of Computer Equity
On July 10, 2008, we entered into a Stock Purchase Agreement with Sterling Hallmark, Inc., a
California corporation (Sterling), whereby we sold all the issued and outstanding stock of
Computer Equity, which had previously been classified as a discontinued operation, to Sterling (the
Sale).
As a result of the Sale, Sterling also indirectly acquired Computer Equitys wholly-owned
subsidiary, Government Telecommunications, Inc. (GTI).
F-26
Under the terms of the agreement, Sterling paid us $0.6 million $0.4 million in cash and a
secured promissory note in the principal amount of $0.2 million. The secured promissory note was
collected in full on August 1, 2008. Intercompany loans between Computer Equity, GTI and us were
forgiven by the parties.
In addition, in connection with the Sale, GTI, the Company and Verizon Federal Inc. entered into an
amendment (Amendment) to the Confidential Settlement Agreement and Release entered into by the
same parties on December 19, 2007 (Settlement Agreement). The Amendment, among other things,
released us from our guaranty of GTIs obligations under the Settlement Agreement. Therefore, as a
result of the Sale and the Amendment, we are no longer liable for GTIs obligations under the
Settlement Agreement, as amended. In addition, we and Sterling entered into a Noncompetition and
Confidentiality Agreement, whereby we are prohibited, among other things, from engaging in certain
competing business activities and soliciting Sterlings customers and employees for a period of two
years.
Sale of 49.94% ownership in IFTH
On July 31, 2008, pursuant to a Stock Purchase Agreement between us and Blue Moon Energy Partners
LLC, we sold 2,570,000 shares of IFTH which constitutes all of the shares of IFTH owned by us, to
Blue Moon. The consideration paid by Blue Moon to us under the Agreement was $0.4 million. Blue
Moon is managed by Scott R. Silverman and William J. Caragol, former and current executive officers
and director of PSID and, therefore, this was a related party transaction.
Sale of 45.6% ownership in PSID (f/k/a VeriChip Corporation)
On November 12, 2008, we entered into a Stock Purchase Agreement with R&R Consulting Partners, LLC
(a company controlled by Scott Silverman) and Scott Silverman (a past executive officer and
director of us and the current chairman of the board of PSID) (collectively, the Stock Buyers),
whereby we sold all 5,355,556 shares of PSID we owned to the Stock Buyers for approximately $0.8
million in cash.
Sale of McMurdo
On November 2, 2009, we, together with our subsidiaries Signature and McMurdo, entered into a
definitive agreement to sell substantially all of the assets of Signatures U.K.-based McMurdo
business unit for $10.0 million in cash (the McMurdo Purchase Agreement). The purchaser was
France-based Orolia Group (Orolia), a high-technology firm specializing in positioning,
navigation and timing solutions for critical operations.
On November 20, 2009, pursuant to the terms of the McMurdo Purchase Agreement, we completed the
sale of McMurdo. At closing, the parties amended the McMurdo Purchase Agreement to reduce the
amount to be held in escrow to $1.0 million, to assign to the buyer the obligation for certain
trade and vendor payables in existence at the time of closing, and to exclude certain product lines
and related assets from the transaction (which product lines and assets were retained by Signature
in exchange for a $250,000 credit against the purchase price). As a result of these amendments and
the adjustment for actual inventory levels at the time of closing, the consideration paid at
closing totaled approximately $9.6 million, of which approximately $8.8 million was paid to
Signature in cash and approximately $0.8 million was retained by the buyer to pay the retained
trade and vendor payables. The remaining $1.0 million of the proceeds will be held in escrow for up
to 12 months. The proceeds were used to pay debt obligations and to fund working capital. Both the
Company and Orolia guaranteed performance to the other, thus we have guaranteed Signatures
obligations under the McMurdo Purchase Agreement, on a fully subordinated basis.
The financial condition, results of operations and cash flows of the businesses discussed above
have been reported as discontinued operations in our financial statements, and prior period
information has been reclassified accordingly. We no longer owned a majority of the outstanding
stock of IFTH and PSID beginning in the first quarter of 2008. Therefore, IFTH and PSIDs
summarized operating data and changes in assets and liabilities are presented below under the
equity method of accounting during 2008.
F-27
Results of discontinued operations for each of the years ended December 31, 2009 and 2008 are
presented below.
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Revenue
|
|
$
|
14,534
|
|
|
$
|
24,860
|
|
Cost of sales
|
|
|
8,634
|
|
|
|
14,955
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5,900
|
|
|
|
9,905
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
3,852
|
|
|
|
6,750
|
|
Research and development expenses
|
|
|
710
|
|
|
|
1,297
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,338
|
|
|
|
8,047
|
|
|
|
|
|
|
|
|
|
|
Gain on sale
|
|
|
1,769
|
|
|
|
3,174
|
|
Interest and other income (expense), net
|
|
|
585
|
|
|
|
4
|
|
Interest expense
|
|
|
(91
|
)
|
|
|
(144
|
)
|
Equity in loss of affiliates
|
|
|
|
|
|
|
(3,263
|
)
|
|
|
|
|
|
|
|
Income from discontinued operations before income taxes
|
|
|
3,601
|
|
|
|
1,629
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
(608
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
2,993
|
|
|
|
1,629
|
|
|
|
|
|
|
|
|
|
|
Income attributable to the non-controlling interest
|
|
|
(44
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations attributable to Digital Angel Corporation
|
|
$
|
2,949
|
|
|
$
|
1,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations per common share basic and diluted
|
|
$
|
0.16
|
|
|
$
|
0.11
|
|
Weighted average number of common shares outstanding basic and diluted
|
|
|
18,768
|
|
|
|
15,156
|
|
The results above do not include any allocated or common overhead expenses. In 2009, we recorded a
gain on the sale of McMurdo of approximately $2.1 million, net of UK income taxes of $0.5 million.
In 2008, we recorded a gain on the sale of Computer Equity of approximately $3.4 million, which was
partially offset by a write off of investment of approximately $0.2 million. The gain on the sale
of Computer Equity did not result in a provision for income taxes due to federal and state net
operating losses and carry forwards.
In January 2010, we sold Thermo Life with the sale having a de minimus effect on our results of
operations for the first quarter of 2010. Upon the receipt of the funds held in escrow in
connection with the McMurdo sale, if any, such proceeds will be recorded as additional gain on
sale.
The net assets of discontinued operations as of December 31, 2009 and 2008 were comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
66
|
|
|
$
|
394
|
|
Accounts receivable
|
|
|
1,787
|
|
|
|
2,070
|
|
Inventory
|
|
|
|
|
|
|
1,779
|
|
Other current assets
|
|
|
|
|
|
|
102
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,853
|
|
|
|
4,345
|
|
Property and equipment, net
|
|
|
|
|
|
|
318
|
|
Goodwill and intangibles, net
|
|
|
|
|
|
|
4,857
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,853
|
|
|
$
|
9,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
259
|
|
|
$
|
1,319
|
|
Advances from factors
|
|
|
|
|
|
|
(20
|
)
|
Accrued expenses and other current liabilities
|
|
|
2,255
|
|
|
|
1,406
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,514
|
|
|
|
2,705
|
|
Deferred taxes
|
|
|
|
|
|
|
1,367
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
2,514
|
|
|
$
|
4,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (liabilities) assets of discontinued operations
|
|
$
|
(661
|
)
|
|
$
|
5,448
|
|
|
|
|
|
|
|
|
F-28
In addition, Thermo Life has granted options under its two plans which have been discontinued with
respect to future grants. As of December 31, 2009, 9 thousand options have been granted net of
forfeitures and all are outstanding. These stock options have no intrinsic value as of December 31,
2009.
15. Loss Per Share
A reconciliation of the numerator and denominator of basic and diluted (loss) income per share is
provided as follows, in thousands, except per share amounts:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Numerator for basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(15,313
|
)
|
|
$
|
(59,742
|
)
|
Income from discontinued operations
|
|
|
2,949
|
|
|
|
1,609
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(12,364
|
)
|
|
$
|
(58,133
|
)
|
|
|
|
|
|
|
|
Denominator for basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted weighted-average shares outstanding
(1)
|
|
|
18,768
|
|
|
|
15,156
|
|
(Loss) Income per share basic and diluted
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.82
|
)
|
|
$
|
(3.94
|
)
|
Discontinued operations
|
|
|
0.16
|
|
|
|
0.11
|
|
|
|
|
|
|
|
|
Total basic and diluted
|
|
$
|
(0.66
|
)
|
|
$
|
(3.83
|
)
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The following stock options and warrants outstanding as of December 31, 2009 and 2008
were not included in the computation of dilutive loss per share because the net effect would
have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Stock options
|
|
|
3,189
|
|
|
|
2,863
|
|
Warrants
|
|
|
313
|
|
|
|
384
|
|
Restricted stock
|
|
|
461
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
3,963
|
|
|
|
3,278
|
|
|
|
|
|
|
|
|
16. Commitments and Contingencies
Rentals of space, vehicles, and office equipment under operating leases amounted to approximately
$0.8 million and $1.6 million for the years ended December 31, 2009 and 2008, respectively. The
approximate minimum payments required under operating leases that have initial or remaining terms
in excess of one year at December 31, 2009, are as follows (in thousands):
|
|
|
|
|
|
|
Minimum
|
|
|
|
Rental
|
|
|
|
Payments
|
|
Year:
|
|
|
|
|
2010
|
|
$
|
853
|
|
2011
|
|
|
576
|
|
2012
|
|
|
510
|
|
2013
|
|
|
484
|
|
2014
|
|
|
463
|
|
Thereafter
|
|
|
12,712
|
|
|
|
|
|
|
|
$
|
15,598
|
|
|
|
|
|
We have written employment arrangements with several of our officers, some of which provide for
bonus, severance and change of control payments. Salaries under the agreements amounted to $1.2
million for 2009. All of our employment agreements are for at will employment.
Annual Incentive Plan
The Compensation Committee of our board establishes the Annual Targets for fiscal years for our
Annual Incentive Plan (the Plan). The targets are based on the following metrics: revenue,
operating income, cash generation and achievement of individual targets outlined in a Management By
Objectives record for each participant. Under the Plan, the Compensation Committee determines the
participants entitled to participate in the Plan. The category of eligible participants remains the
same as previous years, except the CEO, Joseph Grillo, is not eligible to participate, his
incentive compensation determined instead by reference to his contract terms. Each participants
bonus amount is calculated based on an analysis of performance based on the established targets and
individual performance objectives and is subject to the discretion of the CEO. The maximum award
under the Plan varies based upon the participants level and performance. Target bonuses have been
set for the various senior executives participating in the Plan at 60% of their base salary, and
executives participating in the Plan at 15% to 30% of their base salary. In no event can amounts
awarded under the Plan exceed 200% of each executives target bonus. Under the Plan, determination
of awards and actual performance is the responsibility of the Compensation Committee, which
reserves the right, in its sole discretion, to increase or decrease awards to participants. We have
not yet finalized the incentive compensation to be paid under the Plan for 2009; however, the bonus
accrual was estimated based on the achievement of the various targets. In addition, we have not yet
determined the parameters of our 2010 Annual Incentive Plan.
F-29
Amendment to Schering-Plough Supply and Distribution Agreement
On January 5, 2008, Destron Fearing entered into Amendment No. 1 to the Product Supply and
Distribution Agreement dated February 13, 2007 (the Amended Agreement), by and between Destron
Fearing and Schering-Plough Home Again LLC (Schering-Plough). The Amended Agreement governs the
terms pursuant to which Destron Fearing has agreed to provide Schering-Plough electronic
identification microchips and scanners as part of the Home Again
®
Proactive Pet Recovery
Network. During the term of the Amended Agreement, Destron Fearing will exclusively manufacture,
supply and sell to Schering-Plough and Schering-Plough will exclusively purchase from Destron
Fearing certain Products (as defined in the Amended Agreement). The Amended Agreement contains,
among other things, minimum purchase requirements by Schering-Plough. The Amended Agreement
prohibits Destron Fearing from manufacturing, supplying or selling the Products to any other
person, governmental authority or entity in the Territory (as defined in the Amended Agreement).
The initial term began February 13, 2007 for a period of 24 months with an option for
Schering-Plough to extend the term for an additional 12 months. The Amended Agreement also grants
to Schering-Plough exclusive distribution, marketing and sale rights to Destron Fearings RFID
products in the Companion Animal market in the Territory and non-exclusive distribution, marketing
and sale rights to Destron Fearings RFID Biothermo Product in certain markets subject to a maximum
amount of units. In March 2009, the Amended Agreement was extended to June 30, 2009 and in January
2010, the Amended Agreement was extended until June 2010. There were no material modifications in
the extensions.
Destron Fearings RME Supply Agreement
Destron Fearing relies on a sole source production agreement with RME, a subsidiary of Raytheon
Company for the manufacture of certain of its microchip products. The subsidiary utilizes both
Destron Fearings and its own equipment in the production of the microchips. On April 28, 2006,
Destron Fearing entered into a new production agreement with RME related to the manufacture and
distribution of certain of its glass-encapsulated syringe-implantable transponders. This agreement
expires on June 30, 2010.
17. Profit Sharing Plan
We have a retirement savings plan under section 401(k) of the Internal Revenue Code for the benefit
of eligible United States employees. Our employees are eligible to participate in this plan and may
elect to contribute a percentage of their salaries. In 2008, we began providing matching
contributions to the 401(k) Plan of up to 4% of our employees contributions for a total of
approximately $0.2 million during the year ended December 31, 2008. Destron Fearing provided a
discretionary employer match up to 4% of its employees contributions. Destron Fearings expense
related to the plan was approximately $0.1 million for the year ended December 31, 2008. In 2009,
we and Destron Fearing discontinued the employer match but have the option of reinstating it when
deemed appropriate.
Signature has a defined contribution pension plan. The expense relating to the plan was
approximately nil and $0.2 million for the years ended December 31, 2009 and 2008, respectively.
18. Legal Proceedings
For pending legal matters, we have accrued our estimate of the probable costs for the resolution of
these 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. We do not believe the outcome of these proceedings will
have a material adverse effect on our consolidated financial position.
Former Officer
On June 19, 2009, Michael Krawitz, a former executive officer of ours, filed a lawsuit (Michael
Krawitz v. Digital Angel Corporation Case No. 09-80910-CIV-RYSKAMP/VITUNAC in the U.S. District
Court for the Southern District of Florida) against us and several members of our board of
directors. The lawsuit alleged a variety of claims relating to the amounts owed to him under his
employment agreement. We filed a Motion to Dismiss all claims except the breach of contract claim,
which we are prepared to defend on the merits. In December 2009, the federal court granted our
Motion to Dismiss in its entirety and granted Mr. Krawitz leave to re-file his lawsuit in light of
the courts decision. In January 2010, Mr. Krawitz amended his Complaint to re-file the breach of
contract claim against us and filed notice that he voluntarily dismissed all other claims against
us and the members of our board of directors. On the remaining breach of contract claim, we intend
to vigorously defend against his claims, which we believe are frivolous and without merit.
Chemring Suit
In July 2008, our subsidiary Signature filed a claim (number 2008 FOLIO 687 in the London
Mercantile Court, Royal Courts of Justice) against Chemring, the seller of the McMurdo business,
which was acquired by Signature in April 2007. The claim falls into three parts: an indemnity claim
in relation to the costs of repairing faulty McMurdo products sold under Chemrings ownership,
claims for breach of warranty, and a claim that had Chemring disclosed concerns being raised by a
major customer for the particular McMurdo product, Signature would not have agreed to waive a
minimum purchase obligation on the requirement. We then did not pay the final deferred purchase
price payment of approximately £0.5 million on the McMurdo acquisition pending resolution on these
warranty claims. Chemring counterclaimed against both Signature and us (as the parent of Signature)
(number 2008 FOLIO 718 in the Commercial Court, Royal Courts of Justice), for the deferred purchase
price, plus costs and interest, claiming that there is no right to set off warranty claims against
the deferred purchase price. In June 2009, the parties agreed upon a mutually satisfactory
settlement of this dispute, and a definitive settlement agreement was finalized. As a result of the
resolution, the warranty claims were offset against the deferred purchase price and we recorded
approximately $0.5 million of other income included in our results from discontinued operations
during the year ended December 31, 2009.
F-30
Additionally, we are a party to various legal actions, as either plaintiff or defendant, 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.
19. Segment Information
We currently operate in two business segments: Animal Identification and Emergency Identification.
For further information on our segments and their principal products and services, refer to Note 1.
The accounting policies of our operating segments are the same as those described in the summary of
significant accounting policies, except that intersegment sales and transfers are generally
accounted for as if the sales or transfers were to third parties at current market. It is on this
basis that management utilizes the financial information to assist in making internal operating
decisions. We evaluate performance based on stand-alone segment operating income as presented
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from
|
|
|
|
Animal
|
|
|
Emergency
|
|
|
|
|
|
|
Continuing
|
|
|
|
Identification
|
|
|
Identification
|
|
|
Corporate
|
|
|
Operations
|
|
|
Revenues
|
|
$
|
30,774
|
|
|
$
|
18,689
|
|
|
$
|
|
|
|
$
|
49,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
(1)
|
|
$
|
3,011
|
|
|
$
|
1,058
|
|
|
$
|
|
|
|
$
|
4,069
|
|
Interest and other income
|
|
|
202
|
|
|
|
|
|
|
|
117
|
|
|
|
319
|
|
Interest expense
|
|
|
(1,246
|
)
|
|
|
(177
|
)
|
|
|
(753
|
)
|
|
|
(2,176
|
)
|
Operating loss
|
|
|
(757
|
)
|
|
|
(7,672
|
)
|
|
|
(5,161
|
)
|
|
|
(13,590
|
)
|
Loss from continuing operations before provision for income taxes
|
|
|
(2,766
|
)
|
|
|
(7,850
|
)
|
|
|
(4,831
|
)
|
|
|
(15,447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, net
|
|
|
3,343
|
|
|
|
|
|
|
|
|
|
|
|
3,343
|
|
Segment assets from continuing operations
|
|
|
23,954
|
|
|
|
13,635
|
|
|
|
7,602
|
|
|
|
45,191
|
|
Expenditures for property and equipment
|
|
|
55
|
|
|
|
365
|
|
|
|
|
|
|
|
420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from
|
|
|
|
Animal
|
|
|
Emergency
|
|
|
|
|
|
|
Continuing
|
|
|
|
Identification
|
|
|
Identification
|
|
|
Corporate
|
|
|
Operations
|
|
|
Revenues
|
|
$
|
38,501
|
|
|
$
|
23,759
|
|
|
$
|
|
|
|
$
|
62,260
|
|
|
Depreciation and amortization
(1)
|
|
$
|
3,129
|
|
|
$
|
855
|
|
|
$
|
26
|
|
|
$
|
4,010
|
|
Interest and other income (expense)
|
|
|
1,015
|
|
|
|
|
|
|
|
1,707
|
|
|
|
2,722
|
|
Interest expense
|
|
|
(3,248
|
)
|
|
|
(157
|
)
|
|
|
(7,487
|
)
|
|
|
(10,892
|
)
|
Operating loss
|
|
|
(41,716
|
)
|
|
|
(1,257
|
)
|
|
|
(8,662
|
)
|
|
|
(51,635
|
)
|
Loss from continuing operations before provision for income taxes
|
|
|
(43,949
|
)
|
|
|
(1,415
|
)
|
|
|
(14,441
|
)
|
|
|
(59,805
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, net
|
|
|
3,310
|
|
|
|
3,538
|
|
|
|
|
|
|
|
6,848
|
|
Segment assets from continuing operations
|
|
|
28,809
|
|
|
|
17,976
|
|
|
|
7,901
|
|
|
|
54,686
|
|
Expenditures for property and equipment
|
|
|
580
|
|
|
|
1,533
|
|
|
|
|
|
|
|
2,113
|
|
|
|
|
(1)
|
|
Depreciation and amortization includes $1.7 million and $1.9 million included in cost of
sales in 2009 and 2008, respectively.
|
For the years ended December 31, 2009 and 2008, Destron Fearing had one customer, Schering Plough
Animal Health, Inc., which accounted for approximately 8% and 19% of its revenues, respectively.
Goodwill by segment for the years ended December 31, 2009 and 2008 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Animal
|
|
|
Emergency
|
|
|
|
|
|
|
Identification
|
|
|
Identification
|
|
|
Total
|
|
|
Balance December 31, 2007
|
|
$
|
30,010
|
|
|
$
|
3,937
|
|
|
$
|
33,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
4,165
|
|
|
|
|
|
|
|
4,165
|
|
Adjustment to purchase price allocation
|
|
|
(141
|
)
|
|
|
|
|
|
|
(141
|
)
|
Impairment
|
|
|
(31,006
|
)
|
|
|
|
|
|
|
(31,006
|
)
|
Foreign currency and other adjustments
|
|
|
282
|
|
|
|
(399
|
)
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2008
|
|
|
3,310
|
|
|
|
3,538
|
|
|
|
6,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GTC earn-out payment
|
|
|
300
|
|
|
|
|
|
|
|
300
|
|
Impairment
|
|
|
|
|
|
|
(3,816
|
)
|
|
|
(3,816
|
)
|
Foreign currency and other adjustments
|
|
|
(267
|
)
|
|
|
278
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2009
|
|
$
|
3,343
|
|
|
$
|
|
|
|
$
|
3,343
|
|
|
|
|
|
|
|
|
|
|
|
F-31
Revenues are attributed to geographic areas based on the location of the assets producing the
revenue. Information concerning principal geographic areas as of and for the years ended December
31, was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
|
|
|
|
South
|
|
|
|
|
|
|
States
|
|
|
Europe
|
|
|
America
|
|
|
Total
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
21,694
|
|
|
$
|
27,074
|
|
|
$
|
695
|
|
|
$
|
49,463
|
|
Property and equipment, net
|
|
|
4,854
|
|
|
|
2,390
|
|
|
|
119
|
|
|
|
7,363
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
29,275
|
|
|
$
|
31,927
|
|
|
$
|
1,058
|
|
|
$
|
62,260
|
|
Property and equipment, net
|
|
|
5,764
|
|
|
|
2,544
|
|
|
|
241
|
|
|
|
8,549
|
|
20. Related Party Transactions
The following related party transactions are eliminated in consolidation of ours and our
subsidiaries results of operations.
Intercompany Loan Agreement with PSID
PSID financed a significant portion of its operations and investing activities primarily through
funds that we provided. On December 27, 2005, we and PSID entered into the PSID Loan to memorialize
the terms of existing advances to PSID and provide the terms under which we would lend additional
funds to PSID. Through October 5, 2006, our loan to PSID bore interest at the prevailing prime rate
of interest. 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 PSID borrowed an additional $2.0
million under the agreement to make the second purchase price payment with respect to its
acquisition of a company called Instantel. In connection with that amendment, the interest rate was
also changed to a fixed rate of 12% per annum and further provided that the loan matured on July 1,
2008, but could be extended at our sole option through December 27, 2010.
On January 19, 2007, February 8, 2007 and February 13, 2007, we entered into further amendments to
the PSID documents, which increased the maximum principal amount of indebtedness that PSID could
incur to $14.5 million. On February 9, 2007, the effective date of PSIDs initial public offering,
the loan ceased to be a revolving line of credit, and PSID had no ability to incur additional
indebtedness under the loan documents. The interest continued to accrue on the outstanding
indebtedness at a rate of 12% per annum. Under the terms of the loan agreement, as amended, PSID
was required to repay us $3.5 million of principal and accrued interest upon the consummation of
their initial public offering. Accordingly, PSID paid us $3.5 million on February 14, 2007. PSID
was not obligated to repay any additional amount of the indebtedness until January 1, 2008.
Effective with the payment of the $3.5 million, all interest which had accrued on the loan as of
the last day of each month, commencing with the month in which such payment was made, 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.
On December 20, 2007, we entered into a letter agreement with PSID, (the December 2007 Letter
Agreement), which was amended on February 29, 2008, which is more fully discussed below, whereby
PSID was required to pay $0.5 million to us by December 21, 2007. In addition, PSID could prepay
the outstanding principal amount before October 30, 2008 by providing us with $10.0 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 letter agreement and the date of such prepayment.
On February 29, 2008, PSID obtained financing in the form of an $8.0 million secured term note (the
PSID Note), with Laurus. In connection with the PSID financing, we entered into a Subordination
Agreement with Laurus, dated February 29, 2008, under which security provided by PSID to us to
secure the PSID Loan was subordinated in right of payment and priority to the payment in full due
to Laurus by PSID. PSID used part of the proceeds of the financing with Laurus to prepay $5.3
million of debt owed to us, which included PSIDs February 2008 installment payment of $0.3
million, pursuant to the PSID Loan. In connection with the PSID financing, PSID entered into a
letter agreement with us, dated February 29, 2008, under which PSID agreed, among other things, (i)
to prepay the $5.0 million to us, (ii) to amend the PSID 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 PSID 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 PSID Loan, and (iv) to
amend the December 2007 Letter Agreement. As a result of the $5.0 million payment, PSID was not
required to make any further debt service payments to us until September 1, 2009.
As consideration for providing financing to PSID, which in turn enabled PSID to make the $5.0
million prepayment us, we issued to Laurus 28,750 shares of our common stock. We used $3.0 million
of the $5.0 million prepayment to repay a portion of the 2006 Note and the 2007 Note due to Laurus
and certain of its affiliates in 2008, as more fully discussed in Note 9.
On July 18, 2008, in connection with the sale of PSIDs Xmark Corporation (Xmark) business, PSID
repaid in full its obligations to us under the loan, pursuant to the terms of the December 2007
Letter Agreement, as amended on February 29, 2008.
PSIDs Stock Purchase Agreement
On May 15, 2008, PSID entered into a stock purchase agreement (the PSID SPA) to sell its
wholly-owned subsidiary Xmark to The Stanley Works (Stanley) for $45 million in cash (the
Transaction). In connection with the Transaction, we entered into the three following agreements
with Stanley:
|
|
|
A Voting Agreement (the Voting Agreement) in which we granted an irrevocable proxy in favor of the Transaction and
against any alternative proposal. The Voting Agreement limited our ability to transfer shares of stock we held in PSID
or vote for any alternative deal during the period prior to the consummation of the Transaction.
|
F-32
|
|
|
A Guarantee (the Guarantee) in favor of Stanley holding Stanley harmless from certain liabilities under the PSID SPA.
|
|
|
|
|
A Non-Competition Agreement (the Non-Competition Agreement) in which we agreed that we would not compete with Xmark
for 3 years following the consummation of the Transaction. We do not operate in any of these businesses today. The
Non-Competition Agreement terminates upon a Change in Control Effective Date (as defined in the Non-Competition
Agreement).
|
On May 15, 2008, we also entered into a letter agreement (the Intercompany Letter Agreement) with
PSID, in which we and PSID agreed, among other things, that (i) we were permitted to name up to
three designees to the board of directors of PSID after the closing of the Transaction, all of
which were required to be independent with the exception of Joseph J. Grillo, our president and
chief executive officer; (ii) PSID agreed to pay up to $250,000 of our expenses related to the
Transaction and to pay us a Guarantee Fee of $250,000; (iii) PSID limited all bonus payments to
those scheduled, with any changes or new payments to be pre-approved by us; (iv) Scott Silverman,
the chairman of the board and chief executive officer of PSID, entered into a separation agreement;
and (v) we were to have access to PSIDs financial information. The Intercompany Letter Agreement
provided that the PSID SPA and the transactions contemplated thereby did not constitute an event of
default under the (i) Commercial Loan Agreement dated December 27, 2005, as amended, between us and
PSID, (ii) Security Agreement dated December 27, 2005, as amended, between us and PSID, and (iii)
Third Amended and Restated Revolving Line of Credit Note dated as of February 8, 2007, as amended,
from PSID in favor of us.
On the same date, we entered into a Consent and Waiver Agreement (the Consent and Waiver
Agreement) with Laurus, Kallina and certain of their affiliates, in which they gave their consent
to our entrance into the Guarantee and the Voting Agreement. The Consent and Waiver Agreement set
forth changes to our term loan agreements with the lenders and also provided that we prepay a
portion of our debt held by the lenders from the proceeds of the Transaction.
On July 18, 2008, PSID completed the transactions contemplated by the PSID SPA and sold Xmark for
$47.9 million in cash including the $2.9 million of excess working capital. From the proceeds of
the sale, PSID paid us approximately $5.3 million on July 18, 2008, $4.8 million of which was to
prepay all of PSIDs outstanding obligations to us under the PSID Loan, as amended, and $0.5
million was the reimbursement of transaction expenses and the guarantee fee per the terms of the
Intercompany Letter Agreement. The $4.8 million debt repayment reflects the prepayment discount as
discussed above. As a result of the prepayment discount granted by us, we recorded a loss on
settlement of debt of approximately $2.5 million. In addition, pursuant to the Intercompany Letter
Agreement, our chief executive officer, Joseph Grillo was appointed chairman of the board of
directors of PSID effective July 18, 2008, replacing Scott R. Silverman, a position he held until
December 2008. We repaid $3.2 million of our debt with Laurus with the funds received.
On September 2, 2008, we received a special dividend of approximately $7.2 million in cash from
PSID. Approximately $5.8 million of the cash received was applied to debt repayment. See Note 9 for
further discussion.
Transition Services Agreement
On December 27, 2005, we entered into a transition services agreement, as amended from time to
time, with PSID under which we agreed to continue to provide PSID with certain administrative
transition services, including payroll, legal, finance, accounting, information technology, tax
services, and services related to PSIDs initial public offering. The term of the amended and
restated agreement was to continue until such time as VeriChip requested that we cease performing
the transition services, provided that we were not obligated to continue to provide the transition
services for more than twenty-four months following the initial effective date. The cost of these
services to PSID was $0.1 million in the year ended December 31, 2008. Effective November 12, 2008,
the transition services agreement, as amended, was terminated.
The terms of the transition services agreement and the amendment and restatement of the agreement
were negotiated between certain of PSIDs executive officers and certain executive officers of
ours. These executive officers were independent of one another and the terms of the agreement were
based upon historical amounts incurred by us for payment of such services to third parties.
However, these costs may not necessarily be indicative of the costs which would have been incurred
by PSID as an independent stand alone entity.
The following related party transactions are not eliminated in the consolidation of ours and our
subsidiaries results of operations:
Sale of PSID Shares
On November 12, 2008, we entered into a Stock Purchase Agreement (Stock Purchase Agreement) with
R&R Consulting Partners, LLC (a company controlled by Scott Silverman) and Scott Silverman (a past
executive officer and director of the Company and the current chairman of the board of PSID)
(collectively, the Stock Buyers), whereby we sold all 5,355,556 shares of PSID we owned to the
Stock Buyers for approximately $0.8 million in cash. The stock sold represented approximately 45.6%
of PSIDs issued and outstanding shares of common stock. The proceeds from the sale, less expenses,
were used for debt repayment.
In addition, we entered into an Asset Purchase Agreement with PSID (Asset Purchase Agreement),
whereby PSID acquired certain assets used or useful in the operation of the business of
human-implantable passive radio-frequency products (Human RFID Business) in exchange for $0.5
million in cash. Under this agreement, among other things, PSID was assigned certain patents,
obtained the right not to be sued by us for use of certain other patents held by us, was granted a
license to use certain trade secrets and business know-how related to the Human RFID Business and
was assigned our rights in the Glucose Sensor Development Agreement dated January 1, 2008 between
us, PSID and Receptors, LLC. The proceeds from the sale, less expenses, were used for debt
repayment.
F-33
Pursuant to the terms of the Asset Purchase Agreement, Joseph J. Grillo, our Chief Executive
Officer and President, resigned as the chairman of the board of directors of PSID. In addition,
several agreements were terminated including the 2006 Tax Allocation Agreement dated as of December
21,
2006 between us and PSID, the Letter Agreements dated May 15, 2008 and December 17, 2007 between us
and PSID and an Amended and Restated Supply, License and Development Agreement dated as of December
27, 2005, as amended, between Destron Fearing and PSID.
In connection with these transactions, we entered into a sublease with IFTH and a former affiliate
of ours, whereby IFTH subleased from us our former headquarters located in Delray Beach, FL and
purchased lease prepayments made by us for approximately $0.2 million in cash. Blue Moon Energy
Partners, LLC, which is managed by Scott Silverman and William J. Caragol, a current executive
officer of PSID, was a majority owner of IFTH. On November 14, 2008, we also entered into a
purchase order with PSID whereby they acquired certain inventory related to the Human RFID Business
for approximately $0.2 million in cash. The proceeds from these two transactions were used for
working capital.
Purchase Agreement with Blue Moon
In July 2008, we entered into a purchase agreement with Blue Moon, whereby we sold all our shares
of IFTH. The partners of Blue Moon are current or former PSID executives or directors. See Note 16
for a further discussion.
Private Placement Sale with Certain Directors
On January 19, 2009, several of our directors agreed to purchase an aggregate of approximately 0.3
million shares of our common stock in exchange for an aggregate of approximately $0.1 million in
cash in accordance with the terms of a Private Placement. The purchase price of the shares was
$0.50 per share, based on the closing price of our common stock on the prior business day, which
was January 16, 2009. The sales were closed on January 20, 2009.
Destron Fearing A/Ss Leased Facility
Destron Fearing A/S leased a 13,600 square foot building located in Hvidovre, Denmark. The building
was occupied by Destron Fearing A/Ss administrative and production operations. Destron Fearing A/S
leased the building from LANO Holding Aps. LANO Holding Aps is 100% owned by Lasse Nordfjeld,
Destron Fearing A/Ss former CEO. The rent expense was $0.2 million for the year ended December 31,
2008. The lease agreement had no expiration but included a three month termination notice that was
utilized by Destron Fearing A/S in October, 2008.
Sale of Thermo Life
On January 21, 2010, we entered into a purchase agreement and licensing agreement with Mr. Ingo
Stark, the employee and scientist who was chiefly responsible for the development of Thermo Lifes
patented technology, to sell him the remaining assets of Thermo Life for nil and granting him a
license on the patents in exchange for any future royalty payments on any products that become
commercialized using the patents. Thermo Life has never generated any revenue and has been included
in our discontinued operations since 2008. The loss on this
transaction was not significant.
Sale
of Control Products Group
On January 25, 2010, we entered into an agreement to sell substantially all of the assets of a
small division known as the Control Products Group, a group within the Clifford & Snell business
unit of Signature. The buyer, C&S Controls Limited, is a UK entity controlled by Gary Lawrence,
the manager of the Control Products division for the past several years. The purchase price of
£400,000 was represented, in part, by a secured promissory note in the original principal amount of
£374,000 issued from the buyer to Signature, which calls for monthly cash payments for
approximately 5 years. Gain recognition may be deferred based on
applicable accounting guidance.
21. Restructuring, Severance and Separation Expenses
During 2008, we initiated restructuring efforts to develop a strategic long-range plan focusing on
restoring growth and profitability. With our restructuring, we seek to generate annual costs
savings by exiting some costly facilities, outsourcing some manufacturing to lower cost suppliers,
moving some operations to lower cost countries and headcount reductions. Our purpose in taking
these actions is to increase profitability at the gross margin level, which management believes is
necessary to competitively price products and achieve positive earnings. Restructuring activities
were recorded in accordance with the Exit or Disposal Cost Obligation Topic and the Compensation
Nonretirement Postemployment Benefit Topic of the Codification.
Restructuring charges and asset impairments were (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Animal
|
|
|
Emergency
|
|
|
|
|
|
|
|
|
|
Identification
|
|
|
Identification
|
|
|
Corporate
|
|
|
Total
|
|
Year Ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and workforce reduction charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
$
|
347
|
|
|
$
|
181
|
|
|
$
|
|
|
|
$
|
528
|
|
Contract termination
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
497
|
|
|
$
|
181
|
|
|
$
|
|
|
|
$
|
678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and workforce reduction charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
$
|
1,903
|
|
|
$
|
597
|
|
|
$
|
371
|
|
|
$
|
2,871
|
|
Contract termination
|
|
|
|
|
|
|
|
|
|
|
354
|
|
|
|
354
|
|
Facility closing
|
|
|
453
|
|
|
|
|
|
|
|
|
|
|
|
453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,356
|
|
|
$
|
597
|
|
|
$
|
725
|
|
|
$
|
3,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
$
|
1,971
|
|
|
$
|
|
|
|
$
|
146
|
|
|
$
|
2,117
|
|
Other assets
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,215
|
|
|
$
|
|
|
|
$
|
146
|
|
|
$
|
2,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the charges listed above, included in cost of goods sold for the year ended December
31, 2008 was approximately $1.5 million of inventory write-offs associated with the restructuring.
F-34
As of December 31, 2009, our restructuring accrual was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
|
|
|
|
|
|
|
|
and Facility
|
|
|
|
|
|
|
Severance
|
|
|
Closing Costs
|
|
|
Total
|
|
|
Balance January 1, 2009
|
|
$
|
1,066
|
|
|
$
|
478
|
|
|
$
|
1,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional expense
|
|
|
528
|
|
|
|
150
|
|
|
|
678
|
|
Cash payments
|
|
|
(1,291
|
)
|
|
|
(396
|
)
|
|
|
(1,687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2009
|
|
$
|
303
|
|
|
$
|
232
|
|
|
$
|
535
|
|
|
|
|
|
|
|
|
|
|
|
22. Supplemental Cash Flow Information
The changes in operating assets and liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the years ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Decrease in accounts receivable and unbilled receivables
|
|
$
|
1,304
|
|
|
$
|
385
|
|
(Increase) decrease in inventories
|
|
|
(2,166
|
)
|
|
|
730
|
|
Decrease in other current assets
|
|
|
392
|
|
|
|
666
|
|
(Decrease) increase in accounts payable, accrued expenses and other liabilities
|
|
|
(2,047
|
)
|
|
|
2,867
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,517
|
)
|
|
$
|
4,648
|
|
|
|
|
|
|
|
|
We had the following non-cash investing and financing activities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the years ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Issuance of common stock, warrants, and options for business acquisition
|
|
$
|
|
|
|
$
|
6,879
|
|
Issuance of common stock for purchase of equipment
|
|
|
186
|
|
|
|
|
|
Issuance of common stock for legal settlement
|
|
|
400
|
|
|
|
500
|
|
Issuance of common stock for SEDA commitment fee
|
|
|
125
|
|
|
|
|
|
Issuance of common stock for deferred financing fee
|
|
|
800
|
|
|
|
|
|
Issuance of warrants in connection with financings
|
|
|
|
|
|
|
744
|
|
Assets acquired for long-term debt and capital leases
|
|
|
|
|
|
|
330
|
|
23. Subsequent Events
Registered Direct Offering
On February 9, 2010, we sold, in a registered direct offering, 3,385,000 shares of our common stock
and warrants to purchase 1,354,000 shares of common stock to two institutional investors pursuant
to the terms of a securities purchase agreement we entered into on February 3, 2010. The purchase
price of the securities was $1.7 million in the aggregate. We entered into a placement agent
agreement with Chardan Capital Markets, LLC (Chardan) relating to our registered direct offering
where we agreed to pay Chardan a placement agent fee of 6.0% of the gross proceeds from the sale.
The net proceeds from the sale, after deducting the placement agent fee and other offering
expenses, were approximately $1.6 million and were used primarily to cover the repayment of
existing term debt obligations as discussed above.
F-35
The exercise price of the warrants is $0.50 per share and the warrants may be immediately exercised
and expire seven years from the date of issuance. The warrants are not exercisable by a holder to
the extent that such holder or any of its affiliates would beneficially own in excess of 4.9% of
our common stock. If at the time of exercise, the registration statement relating to the shares
underlying the warrants is not effective, or if the related prospectus is not available for use,
then a holder of warrants may elect to exercise warrants using a net exercise (i.e., cashless
exercise) mechanism. The warrants are entitled to full-ratchet anti-dilution protection. If we
grant, issue or sell any options, convertible securities or rights to purchase stock, warrants,
other securities or other property pro rata to the record holders of any class of the shares of
common stock (the Purchase Rights), the holders of warrants are entitled to acquire such Purchase
Rights which the holders could have acquired if the holders had held the number of shares of Common
Stock acquirable upon the complete exercise of the holders warrants. We may not enter into certain
fundamental transactions, such as a merger, consolidation, sale of substantially all assets, tender
offer or exchange offer with respect to our common stock or reclassification of our common stock,
unless the successor entity assumes in writing all of our obligations under the warrants. If
certain fundamental transactions occur with respect to us or our significant subsidiaries as
defined by Rule 1-02 of Regulation S-X, at the holders request within fifteen days after each
fundamental transaction (Holder Option Period), we or the successor entity shall purchase the
warrants from the holder for an amount equal to the value of the unexercised portion of the
warrants that remain as of the time of such fundamental transaction based on the Black Scholes
Option Pricing Model obtained from the OV function on Bloomberg, L.P. If such redemption option
is not exercised by the holder during the Holding Option Period, we have an option to repurchase
the unexercised portion of the warrants for the same amount within ten days after the
expiration of the Holder Option Period. We have estimated the value of the warrants to be
approximately $0.5 million based on the Black-Scholes valuation model and using the following
assumptions: dividend yield of 0.0%; volatility of 124.14%; expected life of seven years; and a
risk-free rate of 3.08%. The value of the warrants will be reflected in our consolidated balance
sheet beginning in February 2010 as a liability and the warrants will be required to be revalued at
each reporting period. Going forward, changes in the value of the warrants will result in increases
or decreases in other income (expense) in our consolidated statement of operations.
Termination of Standby Equity Distribution Agreement
On July 10, 2009, we entered into a Standby Equity Distribution Agreement (the SEDA) with YA
Global Master SPV Ltd. (YA SPV), an affiliate of Yorkville Advisors, for the sale of up to $5.0
million of shares of our common stock over a two-year commitment period. Under the terms of the
SEDA, we could from time to time, at our discretion, sell newly-issued shares of our common stock
to YA SPV. We issued shares of our common stock under the SEDA pursuant to a Registration Statement
on Form S-3 (Registration No. 333-159880), declared effective by the SEC on July 9, 2009 wherein we
registered 3.0 million shares of our common stock.
The SEDA required payment of a commitment fee payable to YA SPV in an amount equal to $125,000. We
delivered approximately 88 thousand shares of common stock under the Registration Statement to pay
the commitment fee. The price of the shares delivered was the average of the daily VWAP for the
three trading days after the date of the Agreement. During the year ended December 31, 2009, we
issued approximately 2.9 million shares of our common stock and received approximately $2.8 million
in cash under the SEDA. On January 19, 2010, we issued an additional 0.1 million shares of our
common stock and received approximately $0.1 million in cash under the SEDA. In connection with the
registered direct offering discussed above, we terminated the SEDA effective February 4, 2010.
Sale
of Thermo Life
On
January 21, 2010, we sold the assets of Thermo Life to Ingo
Stark, an employee and scientist at Thermo Life, as more fully
discussed in Note 20.
Sale
of Control Products Group
On
January 25, 2010, we sold our Control Products Group division to
Gary Lawrence, the manager of the Control Products division for the
past several years. This sale is more fully discussed in
Note 20.
Settlement of Note Receivable
On February 24, 2010, we entered into a letter amendment to the Secured Promissory Note (the
Note) between Customer Service Delivery Platform Corporation (CSDP) and Florida Decision
Corporation (FDC, formerly known as Pacific Decision Sciences Corporation) dated as of June 2,
2008. In accordance with the amendment, CSDP made a payment of approximately $0.7 million on March
8, 2010 which represented payment in full of all remaining amounts due on the Note. The discounted
book value of the note on the payment date was approximately $0.9 million. As a result, we will
record a loss on the settlement during the first quarter of 2010 of approximately $0.2 million.
Upon final payment, FDC delivered a security interest release to CSDP which confirmed the release
of all security interests granted by CSDP to FDC pursuant to the terms of the Note.
We have evaluated subsequent events through the date the Form 10-K was filed.
F-36
Exhibit Index
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
|
|
|
2.1
|
|
|
Agreement and Plan of Merger dated January 14, 2008 among the Company, GT Acquisition Sub, Inc., Geissler
Technologies Corporation and the individuals named therein (incorporated by reference to Exhibit 2.1 to the
registrants Current Report on Form 8-K filed with the Commission on January 17, 2008)
|
|
|
|
|
|
|
2.2
|
|
|
Asset Purchase Agreement among the Company, Pacific Decision Sciences Corporation and Customer Service Delivery
Platform Corporation dated June 2, 2008 (incorporated by reference to Exhibit 2.1 to the registrants Current
Report on Form 8-K filed with the Commission on June 6, 2008)
|
|
|
|
|
|
|
2.3
|
|
|
Stock Purchase Agreement between the Company and Blue Moon Energy Partners LLC dated August 1, 2008 (incorporated
by reference to Exhibit 2.1 to the registrants Current Report on Form 8-K filed with the Commission on August 4,
2008)
|
|
|
|
|
|
|
3.1
|
|
|
Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on March 7, 2007
(incorporated by reference to Exhibit 3.1 to the registrants Current Report on Form 8-K filed with the
Commission on April 25, 2007)
|
|
|
|
|
|
|
3.2
|
|
|
Certificate of Elimination to Certificate of Designations filed with the Secretary of State of Missouri on April
5, 2007 (incorporated by reference to Exhibit 3.4 to the registrants Annual Report on Form 10-K/A filed with the
Commission on April 6, 2007)
|
|
|
|
|
|
|
3.3
|
|
|
Certificate of Amendment of Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.2
to the registrants Quarterly Report on Form 10-Q filed with the Commission on May 12, 2008)
|
|
|
|
|
|
|
3.4
|
|
|
Certificate of Amendment of Certificate of Incorporation of the Company dated December 21, 2007 (incorporated by
reference to Annex A to the registrants Definitive Proxy Statement on Schedule 14(a) filed with the Commission
on April 28, 2008)
|
|
|
|
|
|
|
3.5
|
|
|
Certificate of Amendment of Certificate of Incorporation of the Company dated October 31, 2008 (incorporated by
reference to Exhibit 3.1 to the registrants Quarterly Report on Form 10-Q filed with the Commission on August
11, 2008)
|
|
|
|
|
|
|
3.6
|
|
|
Certificate of Amendment of Certificate of Incorporation of the Company dated November 10, 2008 (incorporated by
reference to Exhibit 3.1 to the registrants Quarterly Report on Form 10-Q filed with the Commission on November
12, 2008)
|
|
|
|
|
|
|
3.7
|
|
|
Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.3 to the registrants
Quarterly Report on Form 10-Q filed with the Commission on August 9, 2007)
|
|
|
|
|
|
|
3.8
|
|
|
Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 10.3 to the registrants Current
Report on Form 8-K filed with the Commission on September 28, 2009)
|
|
|
|
|
|
|
10.1
|
|
|
Voting Agreement by and between Applied Digital Solutions, Inc. and The Stanley Works dated as of May 15, 2008
(incorporated by reference to Exhibit 10.1 to the registrants Current Report on Form 8-K filed with the
Commission on May 16, 2008)
|
|
|
|
|
|
|
10.2
|
*
|
|
1996 Non-Qualified Stock Option Plan of Applied Cellular Technology, Inc., as amended through June 13, 1998
(incorporated herein by reference to Exhibit 4.1 to the registrants Registration Statement on Form S-8 (File No.
333-11294) filed with the Commission on December 2, 1999)
|
|
|
|
|
|
|
10.3
|
*
|
|
Applied Digital Solutions, Inc. 1999 Flexible Stock Plan, as amended (incorporated herein by reference to Exhibit
4.2 to the registrants Registration Statement on Form S-8 (File No. 333-118776) filed with the Commission on
September 3, 2004)
|
|
|
|
|
|
|
10.4
|
*
|
|
Amended and Restated Digital Angel Corporation Transition Stock Option Plan, as amended (incorporated herein by
reference to Exhibit 4.1 to the registrants Registration Statement on Form S-8 (file No. 333-148958) filed with
the Commission on January 31, 2008)
|
|
|
|
|
|
|
10.5
|
*
|
|
Applied Digital Solutions, Inc. 1999 Employees Stock Purchase Plan, as amended (incorporated by reference to
Exhibit 4.2 to the registrants Registration Statement on Form S-8 (File No. 333-126229) filed with the
Commission on June 29, 2005)
|
|
|
|
|
|
|
10.6
|
*
|
|
Form of Stock Award Agreement in connection with the Applied Digital Solutions, Inc. 1999/2003 Flexible Stock Plan
(incorporated by reference to Exhibit 10.110 to the registrants Annual Report on Form 10-K filed with the
Commission on March 15, 2007)
|
|
|
|
|
|
|
10.7
|
*
|
|
Applied Digital Solutions, Inc. 1999 Employees Stock Purchase Plan, as amended (incorporated by reference to
Exhibit 4.2 to the registrants Registration Statement on Form S-8 (File No. 333-126229) filed with the
Commission on June 29, 2005)
|
|
|
|
|
|
|
10.8
|
*
|
|
Form of Stock Award Agreement in connection with the Applied Digital Solutions, Inc. 1999/2003 Flexible Stock Plan
(incorporated by reference to Exhibit 10.110 to the registrants Annual Report on Form 10-K filed with the
Commission on March 15, 2007)
|
35
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
|
|
|
10.9
|
*
|
|
Incentive and Recognition Policy dated April 2, 2007 (incorporated
by reference to Exhibit 10.112 to the registrants Annual Report
on Form 10-K/A filed with the Commission on April 6, 2007)
|
|
|
|
|
|
|
10.10
|
*
|
|
Employment Agreement effective as of January 1, 2008 between
Applied Digital Solutions, Inc. and Joseph J. Grillo (incorporated
by reference to Exhibit 10.1 to the registrants Current Report on
Form 8-K filed with the Commission on January 4, 2008)
|
|
|
|
|
|
|
10.11
|
*
|
|
Form of Non-Qualified Stock Option Agreement (incorporated herein
by reference to Exhibit 4.2 to the registrants Registration
Statement on Form S-8 (file No. 333-148958) filed with the
Commission on January 31, 2008)
|
|
|
|
|
|
|
10.12
|
*
|
|
Employment Agreement, dated March 24, 2008, by and between the
registrant and Parke H. Hess (incorporated by reference to Exhibit
10.1 to the registrants Amendment No. 1 to the Quarterly Report
on Form 10-Q/A filed with the Commission on July 9, 2008)
|
|
|
|
|
|
|
10.13
|
*
|
|
Applied Digital Solutions, Inc. 2003 Flexible Stock Plan, as
Amended and Restated through June 20, 2008 (incorporated by
reference to Exhibit 10.1 to the registrants Quarterly Report on
Form 10-Q filed with the Commission on August 11, 2008)
|
|
|
|
|
|
|
10.14
|
*
|
|
Form of Amendment to the Option Agreements issued to Joseph Grillo
and Parke Hess (incorporated by reference to Exhibit 10.1 to the
registrants Current Report on Form 8-K filed with the Commission
on September 24, 2008)
|
|
|
|
|
|
|
10.15
|
*
|
|
Form of Stock Option Agreement under the 2003 Flexible Stock Plan (incorporated by reference
to Exhibit 10.102 to the registrants Annual Report on Form 10-K filed with
the Commission on March 31, 2009)
|
|
|
|
|
|
|
10.16
|
*
|
|
Digital Angel Corporation 2003 Flexible Stock Plan, as Amended
(incorporated by reference to Exhibit 4.1 to the registrants
Registration Statement Under The Securities Act of 1933 on Form
S-8 filed with the Commission on October 16, 2009)
|
|
|
|
|
|
|
10.17
|
|
|
Form of Series B Warrant to Purchase Common Stock of Applied
Digital Solutions, Inc. (incorporated herein by reference to
Exhibit 10.3 to the registrants Current Report on Form 8-K filed
with the Commission on April 15, 2004)
|
|
|
|
|
|
|
10.18
|
|
|
Form of Series D Warrant to Purchase Common Stock of Applied
Digital Solutions, Inc., in favor of Satellite Strategic Finance
Associates, LLC dated October 21, 2004 (incorporated herein by
reference to Exhibit 10.3 to the registrants Current Report on
Form 8-K filed with the Commission on October 22, 2004)
|
|
|
|
|
|
|
10.19
|
|
|
Form of Series E Warrant to Purchase Common Stock of Applied
Digital Solutions, Inc. dated as of June 10, 2005 (incorporated by
reference to Exhibit 10.8 to the registrants Current Report on
Form 8-K/A filed with the Commission on June 13, 2005)
|
|
|
|
|
|
|
10.20
|
|
|
Supply Agreement between Digital Angel Corporation and Raytheon
Microelectronics España, S.A. dated April 26, 2006 (incorporated
by reference to Exhibit 10.1 to the registrants Quarterly Report
on Form 10-Q filed with the Commission on May 9, 2006)
|
|
|
|
|
|
|
10.21
|
|
|
Amended Credit Facility between Danske Bank and Daploma
International A/S dated June 1, 2006 (incorporated by reference to
Exhibit 10.1 to the registrants Current Report on Form 8-K filed
with the Commission on June 5, 2006)
|
|
|
|
|
|
|
10.22
|
|
|
Letter of Support Issued to Danske Bank A/SM (incorporated by
reference to Exhibit 10.2 to the registrants Current Report on
Form 8-K filed with the Commission on June 5, 2006)
|
|
|
|
|
|
|
10.23
|
|
|
Letter Agreement regarding Amendment of $13,500,000 Note dated as
of February 29, 2008 among Applied Digital Solutions, Inc., Laurus
Master Fund, Ltd., Valens U.S. SPV I, LLC, Valens Offshore SPV I,
Ltd. and PSource Structured Debt Limited (incorporated by
reference to Exhibit 10.10 to the registrants Current Report on
Form 8-K filed with the Commission on March 5, 2008)
|
|
|
|
|
|
|
10.24
|
|
|
Master Security Agreement between Applied Digital Solutions, Inc.
and Laurus Master Fund, Ltd., dated August 24, 2006 (incorporated
by reference to Exhibit 10.3 to the registrants Current Report on
Form 8-K filed with the Commission on August 25, 2006)
|
|
|
|
|
|
|
10.25
|
|
|
Stock Pledge Agreement between Applied Digital Solutions, Inc. and
Laurus Master Fund, Ltd., dated August 24, 2006 (incorporated by
reference to Exhibit 10.4 to the registrants Current Report on
Form 8-K filed with the Commission on August 25, 2006)
|
|
|
|
|
|
|
10.26
|
|
|
Registration Rights Agreement between Applied Digital Solutions,
Inc. and Laurus Master Fund, Ltd., dated August 24, 2006
(incorporated by reference to Exhibit 10.6 to the registrants
Current Report on Form 8-K filed with the Commission on August 25,
2006)
|
|
|
|
|
|
|
10.27
|
|
|
Omnibus Amendment and Waiver dated as of October 31, 2007 among
Applied Digital Solutions, Inc., VeriChip Corporation, Laurus
Master Fund, Ltd., Kallina Corporation, Valens U.S. SPV I, LLC,
Valens Offshore SPV II, Corp. and PSource Structured Debt Limited
(incorporated by reference to Exhibit 10.1 to the registrants
Current Report on Form 8-K filed with the Commission on November
6, 2007)
|
36
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
|
|
|
10.28
|
|
|
Omnibus Amendment Agreement dated February 29, 2008
among Applied Digital Solutions, Inc., Laurus Master
Fund, Ltd., Kallina Corporation, Valens U.S. SPV I,
LLC, Valens Offshore SPV II, Corp., Valens Offshore SPV
I, Ltd. and PSource Structured Debt Limited
(incorporated by reference to Exhibit 10.141 to the
registrants Annual Report on Form 10-K filed with the
Commission on March 17, 2008)
|
|
|
|
|
|
|
10.29
|
|
|
Securities Purchase Agreement dated August 31, 2007
between Applied Digital Solutions, Inc. and Kallina
Corporation (incorporated by reference to Exhibit 10.1
to the registrants Current Report on Form 8-K/A filed
with the Commission on November 7, 2007)
|
|
|
|
|
|
|
10.30
|
|
|
Secured Term Note dated August 31, 2007 between Applied
Digital Solutions, Inc. and Kallina Corporation
(incorporated by reference to Exhibit 10.2 to the
registrants Current Report on Form 8-K/A filed with
the Commission on November 7, 2007)
|
|
|
|
|
|
|
10.31
|
|
|
Letter Agreement regarding Amendment of $7,000,000 Note
dated as of February 29, 2008 among Applied Digital
Solutions, Inc., Kallina Corporation, Valens U.S. SPV
I, LLC, Valens Offshore SPV I, Ltd. and Valens Offshore
SPV II, Corp. (incorporated by reference to Exhibit
10.9 to the registrants Current Report on
Form 8-K
filed with the Commission on March 5, 2008)
|
|
|
|
|
|
|
10.32
|
|
|
Subordination Agreement dated as of February 29, 2008
among Applied Digital Solutions, Inc., VeriChip
Corporation and LV Administrative Services, Inc.
(incorporated by reference to Exhibit 10.11 to the
registrants Current Report on Form 8-K filed with the
Commission on March 5, 2008)
|
|
|
|
|
|
|
10.33
|
|
|
Amendment of Warrants and Conditional Consent to Asset
Sales dated as of February 29, 2008 among Applied
Digital Solutions, Inc., Laurus Master Fund, Ltd.,
Kallina Corporation, Valens U.S. SPV I, LLC, Valens
Offshore SPV I, Ltd., Valens Offshore SPV II, Corp. and
PSource Structured Debt Limited (incorporated by
reference to Exhibit 10.12 to the registrants Current
Report on Form 8-K filed with the Commission on March
5, 2008)
|
|
|
|
|
|
|
10.34
|
|
|
Master Security Agreement dated August 31, 2007 between
Applied Digital Solutions, Inc. and Kallina Corporation
(incorporated by reference to Exhibit 10.3 to the
registrants Current Report on Form 8-K/A filed with
the Commission on November 7, 2007)
|
|
|
|
|
|
|
10.35
|
|
|
Stock Pledge Agreement dated August 31, 2007 among
Applied Digital Solutions, Inc., Kallina Corporation,
Computer Equity Corporation, Digital Angel Corporation
and Digital Angel Technology Corporation (incorporated
by reference to Exhibit 10.4 to the registrants
Current Report on Form 8-K/A filed with the Commission
on November 7, 2007)
|
|
|
|
|
|
|
10.36
|
|
|
Intellectual Property Security Agreement dated August
31, 2007 between Applied Digital Solutions, Inc. and
Kallina Corporation (incorporated by reference to
Exhibit 10.5 to the registrants Current Report on Form
8-K/A filed with the Commission on November 7, 2007)
|
|
|
|
|
|
|
10.37
|
|
|
Intercreditor Agreement dated August 31, 2007 among
Applied Digital Solutions, Inc., Kallina Corporation,
Laurus Master Fund, Ltd., Valens U.S. SPV I, LLC and
Valens Offshore SPV II, Corp. (incorporated by
reference to Exhibit 10.6 to the registrants Current
Report on Form 8-K/A filed with the Commission on
November 7, 2007)
|
|
|
|
|
|
|
10.38
|
|
|
Guaranty by Applied Digital Solutions, Inc. in favor of
Kallina Corporation dated August 31, 2007 (incorporated
by reference to Exhibit 10.7 to the registrants
Current Report on Form 8-K/A filed with the Commission
on November 7, 2007)
|
|
|
|
|
|
|
10.39
|
|
|
Amendment and Partial Assignment of Loans, Liens and
Documents dated August 31, 2007 among Kallina
Corporation, Valens U.S. SPV I, LLC, and certain other
parties named therein (incorporated by reference to
Exhibit 10.8 to the registrants Current Report on Form
8-K/A filed with the Commission on November 7, 2007)
|
|
|
|
|
|
|
10.40
|
|
|
Amendment and Partial Assignment of Loans, Liens and
Documents dated August 31, 2007 among Kallina
Corporation, Valens Offshore SPV II, Corp., and certain
other parties named therein (incorporated by reference
to Exhibit 10.9 to the registrants Current Report on
Form 8-K/A filed with the Commission on November 7,
2007)
|
|
|
|
|
|
|
10.41
|
|
|
Intellectual Property Security Agreement dated August
31, 2007 between Applied Digital Solutions, Inc. and
Laurus Master Fund, Ltd. (incorporated by reference to
Exhibit 10.11 to the registrants Current Report on
Form 8-K/A filed with the Commission on November 7,
2007)
|
|
|
|
|
|
|
10.42
|
|
|
Secured Term Note dated August 31, 2007 among Digital
Angel Corporation, Digital Angel Technology
Corporation, Fearing Manufacturing Co., Inc. and
Digital Angel International in favor of Applied Digital
Solutions, Inc. (incorporated by reference to Exhibit
10.13 to the registrants Current Report on Form 8-K/A
filed with the Commission on November 7, 2007)
|
37
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
|
|
|
10.43
|
|
|
Digital Angel Corporation Security Agreement dated
August 31, 2007 among Applied Digital Solutions, Inc.,
Digital Angel Corporation, Digital Angel Technology
Corporation, Fearing Manufacturing Co., Inc. and
Digital Angel International (incorporated by reference
to Exhibit 10.14 to the registrants Current Report on
Form 8-K/A
filed with the Commission on November 7,
2007)
|
|
|
|
|
|
|
10.44
|
|
|
Subordination Agreement dated August 31, 2007 among
Applied Digital Solutions, Inc., Kallina Corporation,
Valens Offshore SPV II, Corp. and Valens U.S. SPV I,
LLC (incorporated by reference to Exhibit 10.15 to the
registrants Current Report on Form 8-K/A filed with
the Commission on November 7, 2007)
|
|
|
|
|
|
|
10.45
|
|
|
Secured Revolving Note dated August 31, 2007 among
Digital Angel Corporation, Digital Angel Technology
Corporation, Fearing Manufacturing Co., Inc., and
Digital Angel International in favor of Kallina
Corporation (incorporated by reference to Exhibit 10.16
to the registrants Current Report on Form 8-K/A filed
with the Commission on November 7, 2007)
|
|
|
|
|
|
|
10.46
|
|
|
Security Agreement dated August 31, 2007 among Digital
Angel Corporation, Digital Angel Technology
Corporation, Fearing Manufacturing Co., Inc., Digital
Angel International, and Kallina Corporation
(incorporated by reference to Exhibit 10.17 to the
registrants Current Report on Form 8-K/A filed with
the Commission on November 7, 2007)
|
|
|
|
|
|
|
10.47
|
|
|
Stock Pledge Agreement dated August 31, 2007 among
Digital Angel Corporation, Digital Angel Technology
Corporation and Kallina Corporation (incorporated by
reference to Exhibit 10.18 to the registrants Current
Report on Form 8-K/A filed with the Commission on
November 7, 2007)
|
|
|
|
|
|
|
10.48
|
|
|
Intellectual Property Security Agreement dated August 31, 2007
among Digital Angel Corporation, Digital Angel Technology
Corporation, Fearing Manufacturing Co., Inc., and Kallina
Corporation (incorporated by reference to Exhibit 10.19 to the
registrants Current Report on Form 8-K/A filed with the
Commission on November 7, 2007)
|
|
|
|
|
|
|
10.49
|
|
|
Registration Rights Agreement dated August 31, 2007 between
Destron Fearing Corporation (formerly Digital Angel Corporation)
and Kallina Corporation (incorporated by reference to Exhibit
10.20 to the registrants Current Report on Form 8-K/A filed with
the Commission on November 7, 2007)
|
|
|
|
|
|
|
10.50
|
|
|
Subsidiary Guaranty by Digital Angel Corporation, Digital Angel
Technology Corporation, Fearing Manufacturing Co., Inc., and
Digital Angel International in favor of Kallina Corporation dated
August 31, 2007 (incorporated by reference to Exhibit 10.22 to the
registrants Current Report on Form 8-K/A filed with the
Commission on November 7, 2007)
|
|
|
|
|
|
|
10.51
|
|
|
Settlement Agreement and General Release dated September 28, 2007
among Hark M. Vasa, H&K Vasa 1999 Family Limited Partnership, H&K
Vasa 2000 Family Limited Partnership, Applied Digital Solutions,
Inc. and Pacific Decision Sciences Corporation (f/k/a PDS
Acquisition Corporation) (incorporated by reference to Exhibit
10.1 to the registrants Quarterly Report on Form 10-Q filed with
the Commission on November 9, 2007)
|
|
|
|
|
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10.52
|
|
|
Letter Agreement dated December 20, 2007 between
PositiveID Corporation and Applied Digital Solutions,
Inc. (incorporated by reference to Exhibit 10.4 to the
registrants Current Report on Form 8-K filed with the
Commission on December 21, 2007)
|
|
|
|
|
|
|
10.53
|
|
|
Joinder Agreement dated January 14, 2008 between GT
Acquisition Sub, Inc. and Kallina Corporation
(incorporated by reference to Exhibit 10.1 to the
registrants Current Report on Form 8-K filed with the
Commission on January 17, 2008)
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|
|
|
|
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10.54
|
|
|
Joinder Agreement dated January 14, 2008 among GT
Acquisition Sub, Inc., Kallina Corporation, Valens
Offshore SPV I, Ltd., Valens Offshore SPV II, Corp.,
Valens U.S. SPV I, LLC and PSource Structured Debt
Limited (incorporated by reference to Exhibit 10.2 to
the registrants Current Report on Form 8-K filed with
the Commission on January 17, 2008)
|
|
|
|
|
|
|
10.55
|
|
|
Letter Agreement dated as of February 29, 2008 between
PositiveID Corporation and Applied Digital Solutions,
Inc. (incorporated by reference to Exhibit 10.6 to the
registrants Current Report on Form 8-K filed with the
Commission on March 5, 2008)
|
|
|
|
|
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|
10.56
|
|
|
Amendment No. 1, dated January 5, 2008, to the Product
Supply and Distribution Agreement dated February 13,
2007 between Digital Angel Corporation and
Schering-Plough Home Again LLC (incorporated by
reference to Exhibit 10.1 to the registrants Quarterly
Report on Form 10-Q filed with the Commission on May
12, 2008)
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|
|
|
|
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10.57
|
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|
Guarantee by Applied Digital Solutions, Inc. in favor
of The Stanley Works dated as of May 15, 2008
(incorporated by reference to Exhibit 10.2 to the
registrants Current Report on Form 8-K filed with the
Commission on May 16, 2008)
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|
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10.58
|
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|
Non-Competition Agreement by and between Applied
Digital Solutions, Inc. and The Stanley Works dated as
of May 15, 2008 (incorporated by reference to Exhibit
10.3 to the registrants Current Report on Form 8-K
filed with the Commission on May 16, 2008)
|
38
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Exhibit
|
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|
Number
|
|
Description
|
|
|
|
|
|
|
10.59
|
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|
Intercompany Letter Agreement by and between Applied
Digital Solutions, Inc. and PositiveID Corporation
dated as of May 15, 2008 (incorporated by reference to
Exhibit 10.4 to the registrants Current Report on Form
8-K filed with the Commission on May 16, 2008)
|
|
|
|
|
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|
10.60
|
|
|
Consent and Waiver Agreement by and among Laurus Master
Fund, Ltd., Kallina Corporation, Valens U.S. SPV I,
LLC, Valens Offshore SPV I, Ltd., Valens Offshore SPV
II, Corp., PSource Structured Debt Limited, and Applied
Digital Solutions, Inc. dated as of May 15, 2008
(incorporated by reference to Exhibit 10.5 to the
registrants Current Report on Form 8-K filed with the
Commission on May 16, 2008)
|
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|
|
|
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10.61
|
|
|
Secured Promissory Note from Customer Service Delivery
Platform Corporation dated June 2, 2008 (incorporated
by reference to Exhibit 2.2 to the registrants Current
Report on Form 8-K filed with the Commission on June 6,
2008)
|
|
|
|
|
|
|
10.62
|
|
|
Security Agreement between Customer Service Delivery
Platform Corporation and Applied Digital Solutions,
Inc. dated June 2, 2008 (incorporated by reference to
Exhibit 2.3 to the registrants Current Report on Form
8-K filed with the Commission on June 6, 2008)
|
|
|
|
|
|
|
10.63
|
|
|
Stock Purchase Agreement between Digital Angel
Corporation and Sterling Hallmark, Inc. dated July 10,
2008 (incorporated by reference to Exhibit 10.1 to the
registrants Current Report on Form 8-K filed with the
Commission on July 16, 2008)
|
|
|
|
|
|
|
10.64
|
|
|
Noncompetition and Confidentiality Agreement between
Digital Angel Corporation and Sterling Hallmark, Inc.
dated July 10, 2008 (incorporated by reference to
Exhibit 10.3 to the registrants Current Report on Form
8-K filed with the Commission on July 16, 2008)
|
|
|
|
|
|
|
10.65
|
|
|
Omnibus Amendment between Digital Angel Corporation,
Laurus Master Fund, Ltd., Kallina Corporation, Valens
Offshore SPV I, Ltd., Valens Offshore SPV II Corp,
Valens US SPV I, LLC, Psource Structured Debt Limited
and LV Administrative Services, Inc. dated July 21,
2008 (incorporated by reference to Exhibit 10.1 to the
registrants Current Report on Form 8-K filed with the
Commission on July 24, 2008)
|
|
|
|
|
|
|
10.66
|
|
|
Letter Agreement dated September 30, 2008 between
Digital Angel Corporation, Laurus Master Fund, LTD,
Kallina Corporation, Valens U.S. SPV I, LLC, Valens
Offshore SPV I Ltd., Valens Offshore SPV II Corp. and
Psource Structured Debt Limited and consented to by
Destron Fearing Corporation, Digital Angel Technology
Corporation, Digital Angel International, Inc. and
Fearing Manufacturing Co. Inc. (incorporated by
reference to Exhibit 10.1 to the registrants Current
Report on Form 8-K filed with the Commission on October
3, 2008)
|
|
|
|
|
|
|
10.67
|
|
|
Secured Term Note dated September 30, 2008 payable by
Digital Angel Corporation to Valens Offshore SPV II
Corp. (incorporated by reference to Exhibit 10.2 to the
registrants Current Report on Form 8-K filed with the
Commission on October 3, 2008)
|
|
|
|
|
|
|
10.68
|
|
|
Agreement dated September 30, 2008 between Digital
Angel Corporation and Valens Offshore SPV II Corp.
(incorporated by reference to Exhibit 10.3 to the
registrants Current Report on Form 8-K filed with the
Commission on October 3, 2008)
|
|
|
|
|
|
|
10.69
|
|
|
Stock Purchase Agreement dated November 12, 2008
between Digital Angel Corporation, Scott Silverman and
R&R Consulting Partners, LLC (incorporated by reference
to Exhibit 10.2 to the registrants Current Report on
Form 8-K filed with the Commission on November 18,
2008)
|
|
|
|
|
|
|
10.70
|
|
|
Asset Purchase Agreement dated November 12, 2008
between Digital Angel Corporation and Positive ID
Corporation (incorporated by reference to Exhibit 10.1
to the registrants Current Report on Form 8-K filed
with the Commission on November 18, 2008)
|
|
|
|
|
|
|
10.71
|
|
|
Letter Agreement dated November 26, 2008 between
Digital Angel Corporation, Destron Fearing Corporation,
Digital Angel Technology Corporation, Digital Angel
International, Inc., Laurus Master Fund, Ltd, Kallina
Corporation, Valens Offshore SPV I, Ltd., Valens
Offshore SPV II Corp, Valens US SPV I, LLC, Psource
Structured Debt Limited and LV Administrative Services,
Inc. (incorporated by reference to Exhibit 10.101
to the registrants Annual Report on Form 10-K
filed with the Commission on March 31, 2009
|
|
|
|
|
|
|
10.72
|
|
|
Recourse Invoice Discounting Agreement
between Bibby Financial Services and
Signature Industries Limited on July 7,
2009 (incorporated by reference to Exhibit
10.1 to the registrants Current Report on
Form 8-K filed with the Commission on July
10, 2009)
|
|
|
|
|
|
|
10.73
|
|
|
Standard Conditions for the Purchase of
Debts (Edition A/2004) Incorporated into
the Confidential Invoice Discounting
Agreement Made between Bibby Financial
Services and Signature Industries Limited
on July 7, 2009 (incorporated by reference
to Exhibit 10.2 to the registrants
Current Report on Form 8-K filed with the
Commission on July 10, 2009)
|
|
|
|
|
|
|
10.74
|
|
|
Standby Equity Distribution Agreement
dated as of July 10, 2009 by and between
YA Global Master SPV Ltd. and Digital
Angel Corporation (incorporated by
reference to Exhibit 4.1 to the
registrants Current Report on Form 8-K
filed with the Commission on July 14, 2009
|
|
|
|
|
|
|
10.75
|
|
|
Amendment No. 1 to the
Standby Equity
Distribution Agreement
(incorporated by reference
to Exhibit 10.3 to the
registrants Quarterly
Report on Form 10-Q filed
with the Commission on
August 7, 2009)
|
39
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
|
|
|
10.76
|
|
|
Form of Letter Agreement dated November 5, 2009 between Digital Angel Corporation, Laurus Master Fund, Ltd, Kallina
Corporation, Valens U.S. SPV I LLC, Valens Offshore SPV I Ltd, Valens Offshore SPV II Corp. and PSource Structured Debt Limited
and consented to by Destron Fearing Corporation, Digital Angel Technology Corporation, Digital Angel International, Inc. and
Fearing Manufacturing Co. Inc. (incorporated by reference to Exhibit 10.1 to the registrants Current Report on Form 8-K filed
with the Commission on November 12, 2009)
|
|
|
|
|
|
|
10.77
|
|
|
Amendment to Letter Agreement dated December 14, 2009 between Digital Angel Corporation, Laurus Master Fund, LTD, Kallina
Corporation, Valens U.S. SPV I, LLC, Valens Offshore SPV I, Ltd., Valens Offshore SPV II, Corp., Psource Structured Debt
Limited, LV Administrative Services, Inc., Destron Fearing Corporation, Digital Angel Technology Corporation, Digital Angel
International, Inc., Fearing Manufacturing Co. Inc. and Florida Decision Corporation (incorporated by reference to Exhibit 10.1
to the registrants Current Report on Form 8-K filed with the Commission on December 15, 2009)
|
|
|
|
|
|
|
10.78
|
|
|
Securities Purchase Agreement by and among Digital Angel Corporation and Iroquois Master Fund Ltd. and Alpha Capital Anstalt
dated February 4, 2010 (incorporated by reference to Exhibit 10.1 to the registrants Current Report on Form 8-K filed with the
Commission on February 4, 2010)
|
|
|
|
|
|
|
10.79
|
|
|
Digital Angel Corporations Form of Warrant to Purchase Common Stock (incorporated by reference to Exhibit 10.2 to the
registrants Current Report on Form 8-K filed with the Commission on February 4, 2010)
|
|
|
|
|
|
|
10.80
|
|
|
Placement Agency Agreement with Chardan Capital Markets, LLC dated February 3, 2010 (incorporated by reference to the
registrants Current Report on Form 8-K filed with the Commission on February 4, 2010)
|
|
|
|
|
|
|
10.81
|
**
|
|
Asset Sale and Purchase Agreement Relating to Certain Assets of Signature Industries Limiteds marine business McMurdo
between Signature Industries Limited, McMurdo Limited, Digital Angel Corporation and Orolia SA dated November 20, 2009
|
|
|
|
|
|
|
21.1
|
**
|
|
List of Subsidiaries of Digital Angel Corporation
|
|
|
|
|
|
|
23.1
|
**
|
|
Consent of Eisner LLP
|
|
|
|
|
|
|
31.1
|
**
|
|
Certification by Joseph J. Grillo, Chief Executive Officer and President, pursuant to Exchange Act Rules
13A-14(a)
and 15d-14(a)
|
|
|
|
|
|
|
31.2
|
**
|
|
Certification by Lorraine M. Breece, Senior Vice President and Chief Financial Officer, pursuant to Exchange Act Rules
13A-14(a) and 15d-14(a)
|
|
|
|
|
|
|
32.1
|
**
|
|
Certification by Joseph J. Grillo Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
|
|
|
32.2
|
**
|
|
Certification by Lorraine M. Breece Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
*
|
|
- Management contract or compensatory plan.
|
|
**
|
|
- Filed herewith.
|
40
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