Attached files
file | filename |
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EX-10.1 - EXHIBIT 10.1 - VERITEQ | c04947exv10w1.htm |
EX-31.2 - EXHIBIT 31.2 - VERITEQ | c04947exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - VERITEQ | c04947exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - VERITEQ | c04947exv32w1.htm |
EX-10.2 - EXHIBIT 10.2 - VERITEQ | c04947exv10w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to ______________
Commission file number: 000-26020
DIGITAL ANGEL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 43-1641533 | |
(State or Other Jurisdiction of | (I.R.S. Employer | |
Incorporation or Organization) | Identification Number) | |
490 Villaume Avenue, South St. Paul, Minnesota | 55075 | |
(Address of Principal Executive Offices) | (Zip Code) |
(651) 455-1621
Registrants Telephone Number, Including Area Code
Registrants Telephone Number, Including Area Code
(Former Name, Former Address and Formal Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
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 (check one).
Rule 12b-2 of the Exchange Act (check one).
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o
(Do not check if smaller reporting company) |
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date:
Class | Outstanding at August 13, 2010 | |
Common Stock, $.01 par value per share
|
28,147,703 shares |
DIGITAL ANGEL CORPORATION
TABLE OF CONTENTS
Page | ||||||||
3 | ||||||||
4 | ||||||||
6 | ||||||||
7 | ||||||||
8 | ||||||||
20 | ||||||||
31 | ||||||||
32 | ||||||||
32 | ||||||||
33 | ||||||||
Exhibit 10.1 | ||||||||
Exhibit 10.2 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
2
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGITAL ANGEL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except par values)
Condensed Consolidated Balance Sheets
(in thousands, except par values)
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 2,903 | $ | 1,895 | ||||
Restricted cash |
| 202 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $847 and $906
at June 30, 2010 and December 31, 2009, respectively |
6,160 | 6,370 | ||||||
Note receivable |
99 | 450 | ||||||
Inventories |
9,127 | 8,980 | ||||||
Other current assets |
2,412 | 2,064 | ||||||
Current assets of discontinued operations |
1,424 | 3,735 | ||||||
Total current assets |
22,125 | 23,696 | ||||||
Property and equipment, net |
6,068 | 6,998 | ||||||
Goodwill |
3,332 | 3,343 | ||||||
Intangible assets, net |
10,578 | 11,447 | ||||||
Note receivable |
347 | 596 | ||||||
Other assets, net |
791 | 599 | ||||||
Other assets of discontinued operations |
| 365 | ||||||
Total Assets |
$ | 43,241 | $ | 47,044 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities |
||||||||
Notes payable and current maturities of long-term debt |
$ | 6,671 | $ | 9,297 | ||||
Accounts payable |
7,395 | 7,905 | ||||||
Advances from factors |
1,229 | 1,240 | ||||||
Accrued expenses |
6,291 | 6,580 | ||||||
Deferred gain on sale |
1,600 | 960 | ||||||
Deferred revenue |
762 | 548 | ||||||
Current liabilities of discontinued operations |
2,345 | 2,734 | ||||||
Total current liabilities |
26,293 | 29,264 | ||||||
Long-term debt and notes payable |
226 | 392 | ||||||
Other liabilities |
1,688 | 1,445 | ||||||
Total Liabilities |
28,207 | 31,101 | ||||||
Commitments and contingencies: |
||||||||
Stockholders Equity: |
||||||||
Digital Angel Corporation stockholders equity: |
||||||||
Preferred shares ($10 par value; shares authorized, 5,000; shares issued, nil) |
| | ||||||
Common shares ($0.01 par value; shares authorized, 50,000; shares issued
and outstanding, 28,087 and 23,479) |
281 | 235 | ||||||
Additional paid-in capital |
590,517 | 588,652 | ||||||
Accumulated deficit |
(574,085 | ) | (571,203 | ) | ||||
Accumulated other comprehensive income (loss) foreign currency translation |
(1,666 | ) | (1,737 | ) | ||||
Total Digital Angel Corporation stockholders equity |
15,047 | 15,947 | ||||||
Noncontrolling interest |
(13 | ) | (4 | ) | ||||
Total Stockholders Equity |
15,034 | 15,943 | ||||||
Total Liabilities and Stockholders Equity |
$ | 43,241 | $ | 47,044 | ||||
See Notes to Condensed Consolidated Financial Statements.
3
Table of Contents
DIGITAL ANGEL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)
For the Three- | For the Three- | |||||||
Months Ended | Months Ended | |||||||
June 30, 2010 | June 30, 2009 | |||||||
Revenue |
$ | 8,678 | $ | 10,297 | ||||
Cost of sales |
5,465 | 6,354 | ||||||
Gross profit |
3,213 | 3,943 | ||||||
Selling, general and administrative expenses |
4,708 | 5,567 | ||||||
Research and development expenses |
235 | 263 | ||||||
Restructuring, severance and separation expenses |
1,074 | 313 | ||||||
Total operating expenses |
6,017 | 6,143 | ||||||
Operating loss |
(2,804 | ) | (2,200 | ) | ||||
Interest and other income (expense), net |
117 | 114 | ||||||
Interest expense |
(318 | ) | (541 | ) | ||||
Loss from continuing operations before income tax provision |
(3,005 | ) | (2,627 | ) | ||||
Provision for income taxes |
(5 | ) | (52 | ) | ||||
Loss from continuing operations |
(3,010 | ) | (2,679 | ) | ||||
Income from discontinued operations, net of income taxes of nil and $7 |
1,240 | 1,786 | ||||||
Net loss |
(1,770 | ) | (893 | ) | ||||
Loss attributable to the noncontrolling interest, continuing operations |
16 | 230 | ||||||
Income attributable to the noncontrolling interest, discontinued operations |
(18 | ) | (247 | ) | ||||
Net loss attributable to Digital Angel Corporation |
$ | (1,772 | ) | $ | (910 | ) | ||
(Loss) income per common share attributable to Digital Angel Corporation
common stockholders basic and diluted: |
||||||||
Loss from continuing operations, net of noncontrolling interest |
$ | (0.10 | ) | $ | (0.14 | ) | ||
Income from discontinued operations, net of noncontrolling interest |
0.04 | 0.09 | ||||||
Net loss |
$ | (0.06 | ) | $ | (0.05 | ) | ||
Weighted average number of common shares outstanding basic and diluted |
28,002 | 17,857 |
See Notes to Condensed Consolidated Financial Statements.
4
Table of Contents
DIGITAL ANGEL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)
For the Six- | For the Six- | |||||||
Months Ended | Months Ended | |||||||
June 30, 2010 | June 30, 2009 | |||||||
Revenue |
$ | 19,592 | $ | 22,726 | ||||
Cost of sales |
11,805 | 14,067 | ||||||
Gross profit |
7,787 | 8,659 | ||||||
Selling, general and administrative expenses |
9,768 | 11,681 | ||||||
Research and development expenses |
509 | 568 | ||||||
Restructuring, severance and separation expenses |
1,215 | 313 | ||||||
Total operating expenses |
11,492 | 12,562 | ||||||
Operating loss |
(3,705 | ) | (3,903 | ) | ||||
Interest and other income (expense), net |
(355 | ) | 135 | |||||
Interest expense |
(671 | ) | (1,068 | ) | ||||
Loss from continuing operations before income tax provision |
(4,731 | ) | (4,836 | ) | ||||
Provision for income taxes |
(15 | ) | (56 | ) | ||||
Loss from continuing operations |
(4,746 | ) | (4,892 | ) | ||||
Income from discontinued operations, net of income taxes of nil and $15 |
1,860 | 2,793 | ||||||
Net loss |
(2,886 | ) | (2,099 | ) | ||||
Loss attributable to the noncontrolling interest, continuing operations |
29 | 233 | ||||||
Income attributable to the noncontrolling interest, discontinued operations |
(25 | ) | (262 | ) | ||||
Net loss attributable to Digital Angel Corporation |
$ | (2,882 | ) | $ | (2,128 | ) | ||
(Loss) income per common share attributable to Digital Angel Corporation
common stockholders basic and diluted: |
||||||||
Loss from continuing operations, net of noncontrolling interest |
$ | (0.18 | ) | $ | (0.28 | ) | ||
Income from discontinued operations, net of noncontrolling interest |
0.07 | 0.16 | ||||||
Net loss |
$ | (0.11 | ) | $ | (0.12 | ) | ||
Weighted average number of common shares outstanding basic and diluted |
26,934 | 17,558 |
See Notes to Condensed Consolidated Financial Statements.
5
Table of Contents
DIGITAL ANGEL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Stockholders Equity (Unaudited)
For the Six-Months Ended June 30, 2010
(in thousands)
Condensed Consolidated Statement of Changes in Stockholders Equity (Unaudited)
For the Six-Months Ended June 30, 2010
(in thousands)
Digital Angel Corporation Shareholders | ||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||
Common Stock | Paid-In | Accumulated | Comprehensive | Noncontrolling | Stockholders | |||||||||||||||||||||||
Number | Amount | Capital | Deficit | Income (Loss) | Interest | Equity | ||||||||||||||||||||||
Balance, December 31, 2009 |
23,479 | $ | 235 | $ | 588,652 | $ | (571,203 | ) | $ | (1,737 | ) | $ | (4 | ) | $ | 15,943 | ||||||||||||
Net loss |
| | | (2,882 | ) | | (4 | ) | (2,886 | ) | ||||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||||||
Foreign currency translation |
| | | | 71 | (5 | ) | 66 | ||||||||||||||||||||
Total comprehensive loss |
(2,882 | ) | 71 | (9 | ) | (2,820 | ) | |||||||||||||||||||||
Issuance of common stock for services |
815 | 8 | 458 | | | | 466 | |||||||||||||||||||||
Issuance of
common stock and cash for price
protection under the terms of a
legal settlement |
314 | 3 | (43 | ) | | | | (40 | ) | |||||||||||||||||||
Sale of common stock |
3,385 | 34 | 1,659 | | | | 1,693 | |||||||||||||||||||||
Sale of common stock under the
Standby Equity Distribution
Agreement |
94 | 1 | 60 | | | | 61 | |||||||||||||||||||||
Financing fees |
| | (165 | ) | | | | (165 | ) | |||||||||||||||||||
Share-based compensation |
| | 493 | | | | 493 | |||||||||||||||||||||
Stock issuance costs |
| | (71 | ) | | | | (71 | ) | |||||||||||||||||||
Issuance of warrants |
| | (526 | ) | | | | (526 | ) | |||||||||||||||||||
Balance, June 30, 2010 |
28,087 | $ | 281 | $ | 590,517 | $ | (574,085 | ) | $ | (1,666 | ) | $ | (13 | ) | $ | 15,034 | ||||||||||||
See Notes to Condensed Consolidated Financial Statements.
6
Table of Contents
DIGITAL ANGEL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
For the Six- | For the Six- | |||||||
Months Ended | Months Ended | |||||||
June 30, 2010 | June 30, 2009 | |||||||
Cash Flows From Operating Activities |
||||||||
Net loss |
$ | (2,886 | ) | $ | (2,099 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
||||||||
Income from discontinued operations |
(1,860 | ) | (2,793 | ) | ||||
Equity compensation and administrative expenses |
505 | 219 | ||||||
Depreciation and amortization |
1,634 | 1,917 | ||||||
Amortization of debt discount and financing costs |
297 | 300 | ||||||
Allowance for doubtful accounts |
(59 | ) | 100 | |||||
Allowance for inventory excess and obsolescence |
(245 | ) | | |||||
Change in fair value of warrant liability |
87 | (4 | ) | |||||
Changes in assets and liabilities: |
||||||||
Decrease (increase) in restricted cash |
172 | (179 | ) | |||||
Decrease in accounts receivable |
147 | 855 | ||||||
Increase in inventories |
(298 | ) | (1,611 | ) | ||||
Decrease in other current assets |
268 | 155 | ||||||
Increase in accounts payable, accrued expenses and other liabilities |
139 | 1,974 | ||||||
Net cash provided by discontinued operations |
3,794 | 2,882 | ||||||
Net Cash Provided by Operating Activities |
1,695 | 1,716 | ||||||
Cash Flows From Investing Activities |
||||||||
Decrease in notes receivable |
594 | 209 | ||||||
Increase in other assets |
(291 | ) | (55 | ) | ||||
Payments for property and equipment |
(11 | ) | (373 | ) | ||||
Net cash used in discontinued operations |
(38 | ) | (145 | ) | ||||
Net Cash Provided by (Used in) Investing Activities |
254 | (364 | ) | |||||
Cash Flows From Financing Activities |
||||||||
Amounts paid on notes payable |
(1,712 | ) | (2,194 | ) | ||||
Net payments of debt |
(730 | ) | (974 | ) | ||||
Sale of common stock |
1,693 | 127 | ||||||
Sale of common stock under the Standby Equity Distribution Agreement |
61 | | ||||||
Stock issuance costs |
(71 | ) | (43 | ) | ||||
Financing costs |
(165 | ) | | |||||
Net cash provided by discontinued operations |
| 864 | ||||||
Net Cash Used in Financing Activities |
(924 | ) | (2,220 | ) | ||||
Net Increase (Decrease) In Cash and Cash Equivalents |
1,025 | (869 | ) | |||||
Effect of Exchange Rate Changes on Cash and Cash Equivalents |
(17 | ) | (4 | ) | ||||
Cash and Cash Equivalents Beginning of Period |
1,895 | 1,414 | ||||||
Cash and Cash Equivalents End of Period |
$ | 2,903 | $ | 542 | ||||
See Notes to Condensed Consolidated Financial Statements.
7
Table of Contents
DIGITAL ANGEL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
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,
government/military assets, and commercial assets. Included in this diverse product line are
applications for radio frequency identification systems (RFID), global positioning systems
(GPS) and satellite communications.
The accompanying condensed consolidated financial statements of the Company have been prepared in
accordance with United States (U.S.) generally accepted accounting principles (GAAP) and with
the instructions to Form 10-Q and Article 8 of Regulation S-X under the Securities Exchange Act of
1934, as amended. Accordingly, they do not include all of the information and footnotes required by
GAAP for complete financial statements. The interim financial information in this report has not
been audited. In the opinion of the Companys management, all adjustments (consisting of normal
recurring adjustments) considered necessary for fair financial statement presentation have been
made. Results of operations reported for interim periods may not be indicative of the results for
the entire year. These condensed consolidated financial statements and notes should be read in
conjunction with the consolidated financial statements and notes included in our Form 10-K for the
year ended December 31, 2009, filed with the Securities and Exchange Commission (SEC) on April 1,
2010.
The preparation of financial statements in conformity with GAAP 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 that 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 and intangible assets, assumptions used in Black-Scholes
valuation models, estimates of the fair value of acquired assets and the determination of whether
any impairment is to be recognized on long-lived and intangible assets, among others.
Currently, we operate in two business segments: Animal Identification, which comprises the
operations of our wholly-owned subsidiary, Destron Fearing Corporation (Destron), and Emergency
Identification, which comprises the operations of our 98.5%-owned subsidiary, Signature Industries
Limited (Signature). Our segments are discussed in Note 6.
Discontinued Operations
In 2008, our board of directors decided to sell our wholly-owned subsidiary Thermo Life Energy
Corp. (Thermo Life) and in 2009, decided to sell our ownership in Signatures business unit,
McMurdo Limited (McMurdo). During the first and second quarter of 2010, we sold our Control
Products business unit (Control Products Group) and Clifford and Snell business unit (Clifford &
Snell), respectively, both of which were divisions of Signature. 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. As a result, these businesses are presented in
discontinued operations for all periods presented. Discontinued operations are more fully discussed
in Note 9.
Related Parties
We have in the past entered into various related party transactions. Each of these transactions is
described in Note 20 to our Annual Report on Form 10-K for the year ended December 31, 2009. During
the six months ended June 30, 2010, we had the following related party transactions:
| On January 21, 2010, we sold the assets of Thermo Life to Ingo Stark, an employee and scientist at Thermo Life. | ||
| On January 25, 2010, we sold our Control Products Group to Gary Lawrence, the former manager of the Control Products Group for the past several years, and another former employee. |
Both sales are more fully discussed in Note 9.
8
Table of Contents
DIGITAL ANGEL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
1. Basis of Presentation (continued)
Liquidity
We believe that we will be able to generate enough cash from operations, our existing revolving
credit facility and factoring lines, the sales and potential sales of certain business units, and
through other investing and financing sources to operate our business for the next twelve months
ending June 30, 2011, including refinancing our revolving credit line, which matures on August 31,
2010 and a mortgage loan which matures on November 1, 2010.
Our goal is to achieve profitability and to generate positive cash flows from operations. During
2008, we restructured our Animal Identification segment which eliminated redundancies, improved
gross margins and decreased expenses. In the second quarter of 2010, we determined to substantially
complete the restructuring of our Corporate segment which will result in the elimination of our
corporate structure and the associated costs of a separate headquarters and several management
positions. 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 our goal of
achieving profitability and improving positive cash flows from operations during 2010 although no
assurance can be given that we will be successful in implementing the plan. Failure to generate
positive cash flow from operations will have a material adverse effect on our business, financial
condition and results of operations.
Our historical sources of liquidity have included proceeds from the sale of common stock and
preferred shares, proceeds from the issuance of debt, proceeds from the sale of businesses, and
proceeds from the exercise of 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
certain of our debt obligations during 2010. As of June 30, 2010, we had a working capital
deficiency, which is primarily due to a number of our debt obligations becoming due or potentially
due within the next twelve months. Specifically, these obligations include: (i) our revolving line
of credit with Kallina Corporation (Kallina), which matures August 31, 2010; (ii) our mortgage
note which matures November 1, 2010; (iii) our factoring lines; and (iv) our credit facility with
Danske Bank, which are more fully discussed in Note 9 to our Annual Report on Form 10-K for the
fiscal year ended December 31, 2009. In addition, our debt obligation to Danske Bank is due on
demand and we are required to make monthly principal payments as more fully discussed in Note 9 to
our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. 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 as a going concern, as we may be unable to generate the funds
necessary to pay our obligations in the ordinary course of business.
The accompanying financial statements do not include any adjustments
related to the recoverability and classification of asset carrying
amounts or the amounts and classification of liabilities that may
result from the outcome of this uncertainty.
2. Impact of Recently Issued Accounting Standards
In February 2010, the Financial Accounting Standards Board (FASB) issued an amendment to the
guidance on subsequent events that removed the requirement for an SEC registrant to disclose the
date through which subsequent events are evaluated. It did not change the accounting for or
disclosure of events that occur after the balance sheet date but before the financial statements
are issued. This amendment was effective upon issuance.
3. Inventories
Inventories, net of writedowns for excess and obsolescence, consist of the following:
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
(in thousands) | ||||||||
Raw materials |
$ | 8,578 | $ | 7,446 | ||||
Work in process |
195 | 738 | ||||||
Finished goods |
354 | 796 | ||||||
Total inventory |
$ | 9,127 | $ | 8,980 | ||||
We had $7.3 million and $7.1 million of our inventory at foreign locations at June 30, 2010
and December 31, 2009, respectively.
9
Table of Contents
DIGITAL ANGEL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
4. 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:
Three-Months Ended | Six-Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Numerator for basic and diluted (loss) income per share attributable
to Digital Angel Corporation: |
||||||||||||||||
Loss from continuing operations, net of noncontrolling interest |
$ | (2,994 | ) | $ | (2,449 | ) | $ | (4,717 | ) | $ | (4,659 | ) | ||||
Income from discontinued operations, net of noncontrolling interest |
1,222 | 1,539 | 1,835 | 2,531 | ||||||||||||
Net loss attributable to common stockholders |
$ | (1,772 | ) | $ | (910 | ) | $ | (2,882 | ) | $ | (2,128 | ) | ||||
Denominator for basic and diluted (loss) income per share
attributable to Digital Angel Corporation: |
||||||||||||||||
Basic and diluted weighted-average shares outstanding (1) |
28,002 | 17,857 | 26,934 | 17,558 | ||||||||||||
(Loss) income per share attributable to Digital Angel Corporation
basic and diluted: |
||||||||||||||||
Continuing operations, net of noncontrolling interest |
$ | (0.10 | ) | $ | (0.14 | ) | $ | (0.18 | ) | $ | (0.28 | ) | ||||
Discontinued operations, net of noncontrolling interest |
0.04 | 0.09 | 0.07 | 0.16 | ||||||||||||
Total basic and diluted |
$ | (0.06 | ) | $ | (0.05 | ) | $ | (0.11 | ) | $ | (0.12 | ) | ||||
(1) | The following stock options and warrants outstanding as of June 30, 2010 and 2009 were not included in the computation of dilutive (loss) income per share because the net effect would have been anti-dilutive: |
June 30, | ||||||||
2010 | 2009 | |||||||
(in thousands) | ||||||||
Stock options |
3,169 | 2,765 | ||||||
Warrants |
1,577 | 314 | ||||||
Restricted stock |
412 | 25 | ||||||
Total |
5,158 | 3,104 | ||||||
5. Financings
We have entered into various financing agreements as more fully described in Note 9 to our
consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31,
2009. The following are descriptions of our financing agreements that have been entered into,
modified or terminated during 2010:
Senior Secured Term Notes
In August 2006, we entered into a term note (2006 Note) with Laurus Master Fund, Ltd. (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. In August
2007, we entered into a $7.0 million term note (2007 Note) with Kallina Corporation (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 the Lenders 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 Debt Obligations) allowed for optional redemption without a
prepayment penalty.
At December 31, 2009, the remaining amount owed under our Debt Obligations was approximately $1.4
million. On February 1, 2010, the maturity date, we paid the final balance of approximately $1.4
million on the Debt Obligations.
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DIGITAL ANGEL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
5. Financings (continued)
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 the
Debt Obligations discussed above.
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 initial 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 is reflected in our consolidated balance sheet as a liability
and the warrants are required to be revalued at each reporting period. Based on the valuation at
June 30, 2010, we recorded other income (expense) of approximately $0.1 million and $(0.1) million
during the three and six-months ended June 30, 2010, respectively. We determined the value at June
30, 2010 to be approximately $0.6 million, based on the Black-Scholes valuation model and using the
following assumptions: dividend yield of 0.0%; volatility of 127.4%; expected life of 6.5 years and
a risk-free rate of 2.4%. Going forward, changes in the value of the warrants will result in
additional 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 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 for the three trading days after the date of
the Agreement. We issued an aggregate of approximately 3.0 million shares of our common stock and
received an aggregate of approximately $2.9 million in cash under the SEDA, of which 0.1 million
shares of our common stock were issued and approximately $0.1 million in cash was received during
the first quarter of 2010. In connection with the registered direct offering discussed above, we
terminated the SEDA effective February 4, 2010.
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DIGITAL ANGEL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
5. Financings (continued)
See Managements Discussion and Analysis of Financial Condition and Results of Operations and
Liquidity and Capital Resources from Continuing Operations, which are presented below, for a
discussion of the availability under our credit facilities.
6. Segment Information
Currently, we operate in two business segments: Animal Identification and Emergency Identification.
Animal Identification
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 equine 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
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. 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 SARBETM brand, which serve
military and commercial markets.
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 and interest expense and interest and other income associated with corporate
activities and functions. Included in the Corporate and Eliminations category as of June 30, 2010
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.
The accounting policies of the segments are the same as those described in the summary of
significant accounting policies in our Annual Report on Form 10-K, except that inter-segment sales
and transfers are generally accounted for as if the sales or transfers were to third parties at
current market prices. It is on this basis that management utilizes the financial information to
assist in making internal operating decisions. We evaluate performance based on segment income as
presented below.
The following is selected segment data as of and for the periods ended (in thousands):
Total From | ||||||||||||||||
Animal | Emergency | Corporate/ | Continuing | |||||||||||||
Identification | Identification | Eliminations | Operations | |||||||||||||
As of and For the Three-Months Ended June 30, 2010 |
||||||||||||||||
Revenue |
$ | 7,385 | $ | 1,293 | $ | | $ | 8,678 | ||||||||
Operating income (loss) |
295 | (1,099 | ) | (2,000 | ) | (2,804 | ) | |||||||||
Income (loss) from continuing operations before income tax provision |
16 | (1,110 | ) | (1,911 | ) | (3,005 | ) | |||||||||
Total assets of continuing operations |
$ | 23,608 | $ | 12,807 | $ | 5,402 | $ | 41,817 | ||||||||
As of and For the Three-Months Ended June 30, 2009 |
||||||||||||||||
Revenue |
$ | 7,499 | $ | 2,798 | $ | | $ | 10,297 | ||||||||
Operating loss |
(503 | ) | (676 | ) | (1,021 | ) | (2,200 | ) | ||||||||
Loss from continuing operations before income tax provision |
(995 | ) | (691 | ) | (941 | ) | (2,627 | ) | ||||||||
Total assets of continuing operations |
$ | 26,876 | $ | 17,103 | $ | 7,897 | $ | 51,876 |
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DIGITAL ANGEL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
6. Segment Information (continued)
Total From | ||||||||||||||||
Animal | Emergency | Corporate/ | Continuing | |||||||||||||
Identification | Identification | Eliminations | Operations | |||||||||||||
As of and For the Six-Months Ended June 30, 2010 |
||||||||||||||||
Revenue |
$ | 16,375 | $ | 3,217 | $ | | $ | 19,592 | ||||||||
Operating income (loss) |
1,428 | (2,001 | ) | (3,132 | ) | (3,705 | ) | |||||||||
Income (loss) from continuing operations before income tax provision |
790 | (2,023 | ) | (3,498 | ) | (4,731 | ) | |||||||||
Total assets of continuing operations |
$ | 23,608 | $ | 12,807 | $ | 5,402 | $ | 41,817 | ||||||||
As of and For the Six-Months Ended June 30, 2009 |
||||||||||||||||
Revenue |
$ | 16,259 | $ | 6,467 | $ | | $ | 22,726 | ||||||||
Operating loss |
(666 | ) | (819 | ) | (2,418 | ) | (3,903 | ) | ||||||||
Loss from continuing operations before income tax provision |
(1,709 | ) | (854 | ) | (2,273 | ) | (4,836 | ) | ||||||||
Total assets of continuing operations |
$ | 26,876 | $ | 17,103 | $ | 7,897 | $ | 51,876 |
7. Stock Options and Restricted Stock
Stock Option Plans
We and our subsidiaries have stock-based employee plans, which were outstanding as of December 31,
2009, and are more fully described in Note 11 to our consolidated financial statements in our
Annual Report on Form 10-K for the year ended December 31, 2009.
During the second quarter of 2010, our shareholders approved an amendment to our 2003 Flexible
Stock Plan to increase the number of authorized shares of common stock issuable under the plan from
2,875,000 to 4,000,000. No other changes were made.
During the three-months ended June 30, 2010 and 2009, we recorded approximately $0.1 million and
$0.1 million, respectively, in compensation expense related to stock options granted to our
employees. During the six-months ended June 30, 2010 and 2009, we recorded approximately $0.2
million and $0.2 million, respectively, in compensation expense related to stock options granted to
our employees.
Stock Option Activity
There were no options granted during the six-months ended June 30, 2010 and 2009. A summary of our
stock option activity as of June 30, 2010, and changes during the six-months then ended, is
presented below (in thousands, except per share amounts):
Weighted | Weighted | |||||||||||||||
Average | Average | Aggregate | ||||||||||||||
Stock | Exercise | Contractual | Intrinsic | |||||||||||||
Options | Price | Term | Value | |||||||||||||
Outstanding at January 1, 2010 |
3,189 | $ | 15.05 | |||||||||||||
Granted |
| | ||||||||||||||
Exercised |
| | ||||||||||||||
Forfeited or expired |
20 | 61.57 | ||||||||||||||
Outstanding at June 30, 2010 |
3,169 | 14.75 | 5.4 | $ | 11 | * | ||||||||||
Vested or expected to vest at June 30, 2010 |
3,029 | $ | 13.88 | 4.5 | $ | 11 | * | |||||||||
Exercisable at June 30, 2010 |
2,349 | $ | 19.44 | 4.1 | $ | 11 | * | |||||||||
* | The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. The market value of our common stock was $0.50 per share at June 30, 2010. |
There were no option exercises during the six-months ended June 30, 2010 and 2009. At June 30,
2010, we had approximately 1.7 million options available for issuance in our plans. The total cash
value of potential option exercises at June 30, 2010 was approximately $20 thousand and would have
a de minimus dilution impact to our stockholders ownership.
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DIGITAL ANGEL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
7. Stock Options and Restricted Stock (continued)
As of June 30, 2010, there was approximately $0.3 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 1.5 years. The total fair
value of shares vested during the three-months ended June 30, 2010 and 2009, was approximately $34
thousand and $34 thousand, respectively. The total fair value of shares vested during the
six-months ended June 30, 2010 and 2009, was approximately $0.2 million and $0.2 million,
respectively.
A summary of the status of our nonvested stock options as of June 30, 2010 and changes during the
six-months ended June 30, 2010, is presented below (in thousands, except per share amounts):
Weighted | ||||||||
Average | ||||||||
Stock | Grant-Date | |||||||
Options | Fair Value | |||||||
Nonvested at January 1, 2010 |
889 | $ | 1.14 | |||||
Granted |
| | ||||||
Vested |
(70 | ) | 2.84 | |||||
Forfeited or expired |
| | ||||||
Nonvested at June 30, 2010 |
820 | $ | 1.00 | |||||
In addition to the stock options presented above, Thermo Life has approximately 4.4 million
fully vested stock options outstanding. These stock options have no intrinsic value as of June 30,
2010 and Thermo Lifes two options plans have been discontinued with respect to future grants. On
January 21, 2010, we sold the assets of Thermo Life as more fully discussed in Note 9.
Restricted Stock
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 $10 thousand
in the three-months ended June 30, 2010 and 2009, respectively, associated with such restricted
stock grants. We recorded compensation expense of approximately $0.2 million and $22 thousand in
the six-months ended June 30, 2010 and 2009, respectively, associated with such restricted stock
grants.
8. Income Taxes
Differences in the effective income tax rates from the statutory federal income tax rate arise from
state and foreign income taxes (benefits), net of federal tax effects, and the increase or
reduction of valuation allowances related to net operating loss carryforwards, non-deductible
intangible amortization associated with acquisitions and other deferred tax assets. At June 30,
2010, we had aggregate net operating loss carryforwards of approximately $276.0 million for income
tax purposes that expire in various amounts from 2013
through 2029. Through December 28, 2007, Destron Fearing filed a separate federal income tax
return. Of the aggregate U.S. net operating loss carryforwards of $266.1 million, $69.2 million
relates to Destron Fearing and approximately $9.9 million relates to foreign loss carryforwards.
These foreign net operating loss carryforwards are available to only offset future taxable income
earned in the home country of the foreign entity. As of June 30, 2010, we have provided a valuation
allowance to fully reserve our U.S. net operating loss carryforwards and our other existing U.S.
net deferred tax assets, primarily as a result of our recent losses and our current projections of
future taxable U.S. income. As a result of fully reserving our U.S. deferred tax assets, we did not
record a benefit related to our net U.S. losses during the six-months ended June 30, 2010 and 2009.
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DIGITAL ANGEL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
8. Income Taxes (continued)
The amount of any benefit from our US net operating losses is dependent on: (1) our ability to
generate future taxable income and (2) the unexpired amount of net operating loss carryforwards
available to offset amounts payable on such taxable income. Any greater than fifty percent change
in ownership under Internal Revenue Code (IRC) section 382 would place significant annual
limitations on the use of such net operating losses to offset any future taxable income we may
generate. Such limitations, in conjunction with the net operating loss expiration provisions, could
effectively eliminate our ability to use a substantial portion of our net operating loss
carryforwards to offset future taxable income. Based on our current cumulative three-year change in
ownership, we exceeded the fifty percent threshold during 2009, thus approximately $192.7 million
is limited under IRC section 382. As a result of this limitation, we estimate that approximately
$18.7 million of these losses will be available to offset future taxable income, with the remainder
being available to offset certain built-in gains, with both amounts subject to expiration
provisions. 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.
We, in combination with our 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 2001. At June 30, 2010, we had a liability for unrecognized tax
benefits of $0.2 million primarily related to state income tax positions.
9. Discontinued Operations
We sold our ownership of McMurdo during the three-months ended December 31, 2009, our Control
Products Group and Thermo Life during the three-months ended March 31, 2010 and Clifford & Snell
during the three-months ended June 30, 2010. McMurdo is a manufacturer of emergency locator
beacons; Thermo Life is a development company with patented rights to a thin-film thermoelectric
generator; Control Products Group manufactures and distributes electronic relay switches for
nuclear power applications; and Clifford & Snell manufactures electronic alarm sounders which 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. 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.
As a result of the board of directors decision and the subsequent sale of the operations of Thermo
Life, McMurdo, Control Products Group and Clifford & Snell, the financial condition, results of
operations and cash flows of each of these businesses have been reported as discontinued operations
in our financial statements, and prior period information has been reclassified accordingly.
Sale of McMurdo
On November 2, 2009, we, together with 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 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 to the
senior notes.
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DIGITAL ANGEL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
9. Discontinued Operations (continued)
In the fourth quarter of 2009, we recorded a gain on the sale of McMurdo of approximately $2.1
million, net of U.K. income taxes of $0.5 million. 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.
Sale of Thermo Life
On January 21, 2010, we entered into agreements with 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 U.K. entity controlled by Gary Lawrence,
the former manager of the Control Products Group for the past several years, and another former
employee. The purchase price of £0.4 million (approximately $0.6 million) was represented, in part,
by a non-interest bearing promissory note in the original principal amount of £0.4 million
(approximately $0.6 million) issued from the buyer to Signature, which calls for monthly cash
payments for approximately 5 years. As of June 30, 2010, approximately $20 thousand has been
collected on the promissory note. The promissory note is secured but subordinated to a £30 thousand
(approximately $45 thousand) working capital loan issued by a third party to the buyers. We have
imputed interest at a rate of 8.0% per annum which represents a discount of £67 thousand
(approximately $0.1 million) which will be amortized as additional interest income as cash is
collected over the life of the promissory note. Based on the small scale of this entity, we believe
that our treatment of this transaction as a sale for accounting purposes is not materially
different from treatment that does not recognize the legal transfer of the ownership of the
business. The gain on sale of approximately $0.1 million was deferred and will be recognized in the
future when circumstances have changed sufficiently to so warrant.
Sale of Clifford & Snell
On April 30, 2010, we entered into a definitive agreement to sell the assets of Clifford & Snell
for £2.3 million in cash (approximately $3.5 million at current exchange rates) (the Clifford &
Snell Purchase Agreement). The purchaser was R.Stahl Ltd., a subsidiary of R.Stahl AG, a public
company based in Waldenburg, Germany (R.Stahl). R.Stahl develops, manufactures and markets
explosion-protection products worldwide for industrial customers. During the three-months ended
March 31, 2010 and 2009, Clifford & Snells revenues were approximately £0.5 million (approximately
$0.8 million) and approximately £1.0 million (approximately $1.4 million), respectively, and did
not represent a significant disposition in accordance with Article 1 of Regulation S-X.
Clifford & Snells assets were sold for a cash consideration of £2.3 million (approximately $3.5
million). The purchase price was structured into two payments; £2.1 million (approximately $3.1
million) upon closing of the Clifford & Snell Purchase Agreement and £0.2 million (approximately
$0.4 million) on October 30, 2010 following a six-month supply agreement during which R.Stahl will
purchase products from Signature. On April 30, 2010, we received approximately £1.2 million
(approximately $1.7 million) in net cash proceeds, which represented the first payment of £2.1
million less £0.3 million (approximately $0.5 million) of repayment on our Bibby invoice
discounting line, £0.2 million (approximately $0.3 million) in closing and transaction costs and
£0.4 million (approximately $0.6 million) which is to be held in escrow and paid out in two equal
installments, net of any claims, on January 30, 2011 and October 30, 2011. Both the Company and
R.Stahl AG issued guarantees of subsidiary performance to the other.
In the second quarter of 2010, we recorded a gain on the sale of Clifford & Snell of approximately
£0.7 million (approximately $1.0 million). Upon the receipt of the funds held in escrow in
connection with the Clifford & Snell sale, if any, such proceeds will be recorded as additional
gain on sale.
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DIGITAL ANGEL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
9. Discontinued Operations (continued)
The following table, in thousands, presents the results of operations of our discontinued
operations, excluding any allocated or common overhead expenses, for the three and six-months ended
June 30, 2010 and 2009:
Three-Months Ended | Six-Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenue |
$ | 1,360 | $ | 6,925 | $ | 2,771 | $ | 12,302 | ||||||||
Cost of sales |
1,025 | 3,797 | 1,601 | 6,637 | ||||||||||||
Gross profit |
335 | 3,128 | 1,170 | 5,665 | ||||||||||||
Selling, general and administrative expenses |
118 | 1,665 | 480 | 3,087 | ||||||||||||
Research and development expenses |
| 184 | | 344 | ||||||||||||
Operating income |
217 | 1,279 | 690 | 2,234 | ||||||||||||
Interest and other income (expense), net |
4 | 500 | 151 | 544 | ||||||||||||
Gain on sale |
1,019 | | 1,019 | | ||||||||||||
Benefit for income taxes |
| 7 | | 15 | ||||||||||||
Income from discontinued operations |
$ | 1,240 | $ | 1,786 | $ | 1,860 | $ | 2,793 | ||||||||
Income from discontinued operations per
common share basic and diluted |
$ | 0.04 | $ | 0.10 | $ | 0.07 | $ | 0.16 | ||||||||
Weighted average number of common shares
outstanding basic and diluted |
28,002 | 17,857 | 26,934 | 17,558 |
The net (liabilities) assets of discontinued operations as of June 30, 2010 and December
31, 2009, which represented the net liabilities of McMurdo, Thermo Life, Control Products Group and
Clifford & Snell, were comprised of the following (in thousands):
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Cash |
$ | | $ | 66 | ||||
Accounts receivable |
731 | 2,813 | ||||||
Inventory |
693 | 856 | ||||||
Total current assets |
1,424 | 3,735 | ||||||
Fixed assets |
| 365 | ||||||
Total assets |
$ | 1,424 | $ | 4,100 | ||||
Accounts payable |
$ | 368 | $ | 478 | ||||
Accrued expenses and other current liabilities |
1,977 | 2,256 | ||||||
Total liabilities |
$ | 2,345 | $ | 2,734 | ||||
Net (liabilities) assets of discontinued operations |
$ | (921 | ) | $ | 1,366 | |||
10. Comprehensive Loss
Comprehensive loss represents all non-owner changes in preferred stock, common stock and other
stockholders equity and consists of the following:
Three-Months Ended | Six-Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(in thousands) | ||||||||||||||||
Net loss |
$ | (1,770 | ) | $ | (893 | ) | $ | (2,886 | ) | $ | (2,099 | ) | ||||
Other comprehensive income, net of tax: |
||||||||||||||||
Foreign currency translation adjustments |
159 | 1,234 | 66 | 1,111 | ||||||||||||
Total comprehensive (loss) income |
$ | (1,611 | ) | $ | 341 | $ | (2,820 | ) | $ | (988 | ) | |||||
17
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DIGITAL ANGEL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
10. Comprehensive Loss (continued)
The other comprehensive (loss) income during the three and six-months ended June 30, 2010 related
to the change in the foreign currency exchange rates of the British Pound, which is Signatures
functional currency, and the Danish Krone, which is Destron Fearing A/Ss functional currency.
Approximately nil and $42 thousand of the foreign currency translation adjustments related to the
noncontrolling interest during the three-months ended June 30, 2010 and 2009, respectively.
Approximately $5 thousand and $2 thousand of the foreign currency translation adjustments related
to the noncontrolling interest during the six-months ended June 30, 2010 and 2009, respectively.
11. Supplemental Cash Flow Information
In the six-months ended June 30, 2010 and 2009, we had the following non-cash financing activities:
Six-Months Ended June, | ||||||||
2010 | 2009 | |||||||
(in thousands) | ||||||||
Non-cash
operating activities: |
||||||||
Issuance of
shares of common stock for settlement of payables |
$ | 454 | $ | | ||||
Non-cash financing activities: |
||||||||
Issuance of shares of common stock for purchase of equipment |
$ | | $ | 186 | ||||
Cash paid for: |
||||||||
Interest |
$ | 400 | $ | 768 | ||||
Taxes |
15 | 42 |
12. Restructuring Accrual
During the second quarter of 2008, we initiated restructuring efforts to develop a strategic
long-range plan focusing on restoring growth and profitability. With our restructuring, we sought
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 reducing headcount. Our
purpose in taking these actions was to increase profitability at the gross margin level, which
management believes is necessary to competitively price products and achieve positive earnings. Our
restructuring plan has been substantially implemented. Restructuring activities were recorded in
accordance with the Exit or Disposal Cost Obligation Topic and the Compensation Nonretirement
Postemployment Benefit Topic of the Codification. During the three and six-months ended June 30,
2010, we recorded approximately $1.1 million and $1.2 million, respectively, of severance expenses.
During the three and six-months ended June 30, 2009, we recorded approximately $0.2 million of
severance expenses and $0.1 million of contract termination costs.
As of June 30, 2010, our restructuring accrual was as follows (in thousands):
Lease and | ||||||||||||
Severance | Building Costs | Total | ||||||||||
Balance, January 1, 2010 |
$ | 303 | $ | 232 | $ | 535 | ||||||
Additional expense |
1,215 | | 1,215 | |||||||||
Cash payments |
(511 | ) | (128 | ) | (639 | ) | ||||||
Balance, June 30, 2010 |
$ | 1,007 | $ | 104 | $ | 1,111 | ||||||
We anticipate that cash covering the remaining restructuring costs will be expended over the next
eighteen months.
18
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DIGITAL ANGEL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
13. Legal Proceedings
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.
Additionally, we are 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
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with the accompanying financial statements and related notes included in
Item 1 of this report as well as our Annual Report on Form 10-K for the year ended December 31,
2009.
Overview
We currently operate in two business segments and engage in the following principal business
activities:
Animal Identification We develop, manufacture and market visual and radio frequency
identification (RFID) products under the brand name Destron Fearing to customers worldwide.
Destron Fearing products include visual and electronic tags and implantable RFID microchips that
identify, track and locate animals, including bio-sensing chips that measure an animals
temperature. These products promote recovery of lost pets, livestock herd management, environmental
protection, and animal health while fulfilling the requirements of certain government regulations
aimed at insuring the safety of food supplies throughout the world. Our Animal Identification
business is headquartered in Minnesota, with direct and indirect, wholly and majority-owned
subsidiaries located in Europe and South America.
Emergency Identification We develop, manufacture and market emergency identification products
that are enabled through global positioning system (GPS) technology, and sold worldwide under the
brand name SARBE. This segments principal products are search and rescue beacons that safeguard
people and high-value assets utilizing intelligent communications and emergency messaging services
for telemetry, mobile data and satellite radio communications. SARBE safety products are sold to
government and military customers worldwide. The Emergency Identification segment includes our
98.5% owned subsidiary, Signature Industries Limited (Signature), which is headquartered in the
United Kingdom.
Our business segments are more fully discussed in Note 6 to our accompanying condensed consolidated
financial statements.
Summary of our Results of Continuing Operations
During the three-months ended June 30, 2010, as compared to the three-months ended June 30, 2009,
our consolidated revenue decreased approximately $1.6 million, or 15.7%, to $8.7 million. The
decrease is primarily due to our Emergency Identification segment discussed further below. Our
consolidated operating loss was $2.8 million in the three-months ended June 30, 2010 as compared to
$2.2 million in the three-months ended June 30, 2009. Excluding approximately $1.1 million of
restructuring, severance and separation expenses, our consolidated operating loss was $1.7 million
for the three-months ended June 30, 2010. Excluding approximately $0.3 million of restructuring,
severance and separation expenses, our consolidated operating loss was $1.9 million for the
three-months ended June 30, 2009. We primarily attribute the improvement in our consolidated
operating loss to the decrease in selling, general and administrative expenses company wide. During
the six-months ended June 30, 2010, as compared to the six-months ended June 30, 2009, our
consolidated revenue decreased approximately $3.1 million, or 13.8%, to $19.6 million. The decrease
in consolidated revenue is primarily due to our Emergency Identification segment discussed further
below. Our consolidated operating loss was $3.7 million in the six-months ended June 30, 2010 as
compared to $3.9 million in the six-months ended June 30, 2009. Excluding approximately $1.2
million of restructuring, severance and separation expenses, our consolidated operating loss was
$2.5 million for the six-months ended June 30, 2010. Excluding approximately $0.3 million of
restructuring, severance and separation expenses, our consolidated operating loss was $3.6 million
for the six-months ended June 30, 2009. We primarily attribute the improvement to the decrease in
selling, general and administrative expenses company wide.
Critical Accounting Policies
Our Annual Report on Form 10-K for the year ended December 31, 2009 contains further information
regarding our critical accounting policies.
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 2 to our accompanying condensed
consolidated financial statements.
20
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Consolidated Results of Operations
The following table summarizes our results of operations as a percentage of net operating revenues
and is derived from the accompanying unaudited condensed consolidated statements of operations in
Part I, Item 1 of this quarterly report (in thousands except percentages).
For the Three-Months Ended | For the Six-Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenue |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of sales |
63.0 | 61.7 | 60.3 | 61.9 | ||||||||||||
Gross profit |
37.0 | 38.3 | 39.7 | 38.1 | ||||||||||||
Selling, general and administrative expenses |
54.2 | 54.1 | 49.9 | 51.4 | ||||||||||||
Research and development expenses |
2.7 | 2.6 | 2.5 | 2.5 | ||||||||||||
Restructuring, severance and separation expenses |
12.4 | 3.0 | 6.2 | 1.4 | ||||||||||||
Operating loss |
(32.3 | ) | (21.4 | ) | (18.9 | ) | (17.2 | ) | ||||||||
Interest and other (expense) income, net |
1.4 | 1.1 | (1.8 | ) | 0.6 | |||||||||||
Interest expense |
(3.7 | ) | (5.2 | ) | (3.4 | ) | (4.7 | ) | ||||||||
Loss from continuing operations before income
tax provision |
(34.6 | ) | (25.5 | ) | (24.1 | ) | (21.3 | ) | ||||||||
Provision for income taxes |
(0.1 | ) | (0.5 | ) | (0.1 | ) | (0.2 | ) | ||||||||
Loss from continuing operations |
(34.7 | ) | (26.0 | ) | (24.2 | ) | (21.5 | ) | ||||||||
Income from discontinued operations |
14.3 | 17.3 | 9.5 | 12.3 | ||||||||||||
Net loss |
(20.4 | ) | (8.7 | ) | (14.7 | ) | (9.2 | ) | ||||||||
Loss attributable to the noncontrolling interest,
continuing operations |
0.2 | 2.3 | 0.1 | 1.0 | ||||||||||||
Income attributable to the noncontrolling
interest, discontinued operations |
(0.2 | ) | (2.4 | ) | (0.1 | ) | (1.2 | ) | ||||||||
Net loss attributable to Digital Angel Corporation |
(20.4 | )% | (8.8 | )% | (14.7 | )% | (9.4 | )% | ||||||||
Results of Operations by Segment
Three-Months Ended June 30, 2010 Compared to Three-Months Ended June 30, 2009
Animal Identification
Three-Months Ended June 30, | ||||||||||||||||||||||||
% of | % of | |||||||||||||||||||||||
2010 | Revenue | 2009 | Revenue | Change | ||||||||||||||||||||
(in thousands, except percentages) | ||||||||||||||||||||||||
Revenue |
$ | 7,385 | 100.0 | % | $ | 7,499 | 100.0 | % | $ | (114 | ) | (1.5 | )% | |||||||||||
Cost of sales |
4,823 | 65.3 | 4,915 | 65.5 | (92 | ) | (1.9 | ) | ||||||||||||||||
Gross profit |
2,562 | 34.7 | 2,584 | 34.5 | (22 | ) | (0.9 | ) | ||||||||||||||||
Selling, general and administrative expenses |
2,018 | 27.3 | 2,511 | 33.5 | (493 | ) | (19.6 | ) | ||||||||||||||||
Research and development expenses |
235 | 3.2 | 263 | 3.5 | (28 | ) | (10.6 | ) | ||||||||||||||||
Restructuring, severance and separation
expenses |
14 | 0.2 | 313 | 4.2 | (299 | ) | (95.5 | ) | ||||||||||||||||
Operating income (loss) |
$ | 295 | 4.0 | % | $ | (503 | ) | (6.7 | )% | $ | 798 | (158.6 | ) | |||||||||||
21
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Revenues
Our Animal Identification segments revenue decreased approximately $0.1 million for the
three-months ended June 30, 2010 compared to the three-months ended June 30, 2009. The decrease was
primarily due to lower volumes of our fish chips sold compared to the first quarter of 2009 as well
as decreased livestock sales in South America. The decrease was slightly offset by higher sales of
our LifeChip product and electronic tag sales.
Gross Profit and Gross Profit Margin
Our Animal Identification segments gross profit decreased approximately $22 thousand in the
three-months ended June 30, 2010 compared to the three-months ended June 30, 2009. The slight
decrease in gross profit was primarily due to lower sales levels. The gross profit margin remained
relatively constant at 34.7% in the three-months ended June 30, 2010 as compared to 34.5% in the
three-months ended June 30, 2009.
Selling, General and Administrative Expenses
Our Animal Identification segments selling, general and administrative expenses decreased
approximately $0.5 million in the three-months ended June 30, 2010 compared to the three-months
ended June 30, 2009. The decrease in selling, general and administrative expenses was primarily the
result of decreased salaries, legal and accounting costs, depreciation and amortization and travel.
Selling, general and administrative expenses as a percentage of revenue decreased from 33.5% to
27.3% primarily due to the items discussed above.
Research and Development Expenses
Our Animal Identification segments research and development expenses remained relatively constant
during the three-months ended June 30, 2010 as compared to the three-months ended June 30, 2009.
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 recorded in
the second quarter of 2010 related to additional severance expenses and the expenses recorded in
the second quarter of 2009 related to approximately $0.2 million of severance expenses and $0.1
million of contract termination costs.
Outlook and Trends
We anticipate our Animal Identification segments sales and profits to increase in 2010 as compared
to 2009. We expect to achieve higher gross profits and to reduce selling, general and
administrative expenses as we continue to control costs and implement cost savings measures.
However, we are unable to quantify such possible operating efficiencies at this time.
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 believe that we 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.
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Emergency Identification
Three-Months Ended June 30, | ||||||||||||||||||||||||
% of | % of | |||||||||||||||||||||||
2010 | Revenue | 2009 | Revenue | Change | ||||||||||||||||||||
(in thousands, except percentages) | ||||||||||||||||||||||||
Revenue |
$ | 1,293 | 100.0 | % | $ | 2,798 | 100.0 | % | $ | (1,505 | ) | (53.8 | )% | |||||||||||
Cost of sales |
642 | 49.6 | 1,439 | 51.4 | (797 | ) | (55.4 | ) | ||||||||||||||||
Gross profit |
651 | 50.4 | 1,359 | 48.6 | (708 | ) | (52.1 | ) | ||||||||||||||||
Selling, general
and administrative
expenses |
1,750 | 135.4 | 2,035 | 72.7 | (285 | ) | (14.0 | ) | ||||||||||||||||
Operating loss |
$ | (1,099 | ) | (85.0 | )% | $ | (676 | ) | (24.1 | )% | $ | (423 | ) | (62.6 | ) | |||||||||
Revenues
Our Emergency Identification segments revenue decreased approximately $1.5 million in the
three-months ended June 30, 2010 compared to the three-months ended June 30, 2009. The decrease in
revenue was primarily due to a decrease in sales at our Sarbe division of approximately $1.4
million due to lower PELS and G2R sales resulting from the mandatory transition to higher
satellite frequency beacons in the prior year. In addition, we experienced lower sales at our
Communications division.
Gross Profit and Gross Profit Margin
Our Emergency Identification segments gross profit decreased approximately $0.7 million in the
three-months ended June 30, 2010 compared to the three-months ended June 30, 2009. The decrease was
primarily due to the related decrease in sales during the second quarter of 2010. Second quarter
gross profit margin was 50.4% in the three-months ended June 30, 2010 as compared to 48.6% in the
second quarter of 2009. Gross profit margin increased due to slightly higher margins at our Sarbe
and Glasgow Communications divisions which were slightly offset by lower margins at our Aberdeen
Communications division.
Selling, General and Administrative Expenses
Our Emergency Identification segments selling, general and administrative expenses decreased
approximately $0.3 million in the three-months ended June 30, 2010 compared to the three-months
ended June 30, 2009. This decrease in selling, general and administrative expenses relates
primarily to a decrease in personnel costs as a result of the restructuring implemented in the
prior year, lower audit and legal fees, decreased engineering consumables and lower marketing
expenses. As a percentage of revenue, selling, general and administrative expenses increased to
135.4% in the three-months ended June 30, 2010 from 72.7% in the three-months ended June 30, 2009.
The increase in selling, general and administrative expenses as a percentage of revenue resulted
primarily from the decrease in sales discussed above.
Outlook and Trends
We anticipate our Emergency Identification segments sales to decrease in 2010 as compared to 2009
primarily due to a reduction in sales of Sarbe products. Prior years sales were positively
impacted by the required transition to higher satellite frequency beacons. Some of this reduction
may be offset by late year sales of products to the U.K. Ministry of Defense, which sales have been
delayed as a result of extended testing and certification requirements. However, we expect
operating profits to improve in 2010 as compared to 2009 primarily as a result of reduced asset
impairments and selling, general and administrative expenses. However, we are unable to quantify
such possible operating efficiencies at this time.
We believe that the future will bring both military and commercial market opportunities. However,
going forward, we intend to focus on growing our Animal Identification business.
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Corporate/Eliminations
Three-Months Ended June 30, | ||||||||||||||||
2010 | 2009 | Change | ||||||||||||||
(in thousands, except percentages) | ||||||||||||||||
Revenue |
$ | | $ | | $ | | | % | ||||||||
Cost of sales |
| | | | ||||||||||||
Gross profit |
| | | | ||||||||||||
Selling, general and administrative expenses |
940 | 1,021 | (81 | ) | (7.9 | ) | ||||||||||
Restructuring, severance and separation expenses |
1,060 | | 1,060 | NM | ||||||||||||
Operating loss |
$ | (2,000 | ) | $ | (1,021 | ) | $ | (979 | ) | (95.9 | ) | |||||
NM Not meaningful
Selling, General and Administrative Expenses
Corporates selling, general and administrative expenses decreased approximately $0.1 million for
the three-months ended June 30, 2010 compared to the three-months ended June 30, 2009. The decrease
was primarily due to the result of a decrease in the bonus accrual and lower insurance expense
during the second quarter of 2010. Slightly offsetting the decrease was an increase in printing and
other professional service fees due to the annual shareholders meeting taking place in the second
quarter of 2010 compared to the third quarter of 2009 as well as an increase in non-cash
compensation expense resulting from the granting of options and restricted stock to certain
executives and management in October 2009.
Restructuring, Severance and Separation Expenses
Corporates severance and separation expenses in the three-months ended June 30, 2010 related to
the accrual of costs associated with certain headcount reductions.
Consolidated
Interest and Other Income (Expense), Net
Interest and other income (expense) was approximately $0.1 million in the three-months ended June
30, 2010 compared to $0.1 million in the three-months ended June 30, 2009. The income in the
three-months ended June 30, 2010 was due to recording income of approximately $0.1 million as a
result of revaluing our outstanding warrants in accordance with the Contracts in Entitys Own
Equity Subtopic of the Derivatives and Hedging Topic of the Codification. The income in the
three-months ended June 30, 2009 resulted from royalty payments received by our Animal
Identification segment.
Interest Expense
Interest expense was $0.3 million and $0.5 million for the three-months ended June 30, 2010 and
2009, respectively. The decrease was primarily due to the final payment of $1.4 million of our Term
Debt Obligations with Laurus and affiliates on February 1, 2010.
Income Taxes
We had an income tax provision of $5 thousand for the three-months ended June 30, 2010 compared to
a provision of $52 thousand in the same period of 2009. We have recorded certain state and foreign
income taxes during the three-months ended June 30, 2010 and 2009. Differences in the effective
income tax rates from the statutory federal income tax rate arise from state taxes (benefits) net
of federal tax effects, and the increase or reduction of valuation allowances related to net
operating loss carry forwards, non-deductible intangible amortization associated with acquisitions
and other deferred tax assets. As of June 30, 2010, we have provided a valuation allowance to fully
reserve our U.S. net operating loss carryforwards and our other existing U.S. net deferred tax
assets, primarily as a result of our recent losses and our current projections of future taxable
U.S. income. As a result of fully reserving our U.S. deferred tax assets, we did not record a
benefit related to our net U.S. losses during the three-months ended June 30, 2010.
24
Table of Contents
Loss from Continuing Operations
During the three-months ended June 30, 2010 and 2009, we reported a loss from continuing operations
of approximately $3.0 million and $2.7 million, respectively. The increase in the loss for the
three-months ended June 30, 2010 compared to June 30, 2009 relates primarily to the decrease in
gross margin at our Emergency Identification segment and increase in restructuring, severance and
separation expenses. These increases were slightly offset by the company-wide reduction in selling,
general and administrative expenses. Each of these items is more fully discussed above in the
context of the appropriate segment.
Six-Months Ended June 30, 2010 Compared to Six-Months Ended June 30, 2009
Animal Identification
Six-Months Ended June 30, | ||||||||||||||||||||||||
% of | % of | |||||||||||||||||||||||
2010 | Revenue | 2009 | Revenue | Change | ||||||||||||||||||||
(in thousands, except percentages) | ||||||||||||||||||||||||
Revenue |
$ | 16,375 | 100.0 | % | $ | 16,259 | 100.0 | % | $ | 116 | 0.7 | % | ||||||||||||
Cost of sales |
10,169 | 62.1 | 10,896 | 67.0 | (727 | ) | (6.7 | ) | ||||||||||||||||
Gross profit |
6,206 | 37.9 | 5,363 | 33.0 | 843 | 15.7 | ||||||||||||||||||
Selling, general and
administrative expenses |
4,255 | 26.0 | 5,148 | 31.7 | (893 | ) | (17.3 | ) | ||||||||||||||||
Research and development expenses |
509 | 3.1 | 568 | 3.5 | (59 | ) | (10.4 | ) | ||||||||||||||||
Restructuring, severance and
separation expenses |
14 | 0.1 | 313 | 1.9 | (299 | ) | (95.5 | ) | ||||||||||||||||
Operating income (loss) |
$ | 1,428 | 8.7 | % | $ | (666 | ) | (4.1 | )% | $ | 2,094 | (314.9 | ) | |||||||||||
Revenues
Our Animal Identification segments revenue increased approximately $0.1 million for the six-months
ended June 30, 2010 compared to the six-months ended June 30, 2009. The increase was primarily due
to higher sales of our LifeChip product and electronic tags. The increase was slightly offset by
lower fish and wildlife sales compared to the prior year as well as decreased sales in South
America primarily due to a lower volume of sales in Argentina.
Gross Profit and Gross Profit Margin
Our Animal Identification segments gross profit increased approximately $0.8 million in the
six-months ended June 30, 2010 compared to the six-months ended June 30, 2009. The increase in
gross profit was primarily due to lower material costs for companion animal transponders and
readers as well as lower overhead costs relating to decreased salaries and brokerage, slightly
offset by an increase in inbound freight costs. The gross profit margin increased to
37.9% in the six-months ended June 30, 2010 as compared to 33.0% in the six-months ended June 30,
2009. We primarily attribute the increase in gross profit margin to
the items discussed above. Gross profit margin may vary
period-to-period because of changes in the product mix and in the
ratio of fixed and variable costs.
Selling, General and Administrative Expenses
Our Animal Identification segments selling, general and administrative expenses decreased
approximately $0.9 million in the six-months ended June 30, 2010 compared to the six-months ended
June 30, 2009. The decrease in selling, general and administrative expenses was primarily the
result of decreased salaries, legal and accounting costs, depreciation and amortization and travel.
Selling, general and administrative expenses as a percentage of revenue decreased from 31.7% to
26.0% primarily due to the decrease in the aforementioned expenses.
Research and Development Expenses
Our Animal Identification segments research and development expenses remained relatively constant
during the six-months ended June 30, 2010 as compared to the six-months ended June 30, 2009.
Research and development expenses relate to new product development associated with RFID microchips
and related scanners.
25
Table of Contents
Restructuring, Severance and Separation Expenses
Our Animal Identification segments restructuring, severance and separation expenses recorded in
the six-months ended June 30, 2010 related to severance expenses and the expenses recorded in the
six-months ended June 30, 2009 related to severance expenses of $0.2 million and $0.1 million of
contract termination costs at the St. Paul, Minnesota location.
Emergency Identification
Six-Months Ended June 30, | ||||||||||||||||||||||||
% of | % of | |||||||||||||||||||||||
2010 | Revenue | 2009 | Revenue | Change | ||||||||||||||||||||
(in thousands, except percentages) | ||||||||||||||||||||||||
Revenue |
$ | 3,217 | 100.0 | % | $ | 6,467 | 100.0 | % | $ | (3,250 | ) | (50.3 | )% | |||||||||||
Cost of sales |
1,636 | 50.9 | 3,171 | 49.0 | (1,535 | ) | (48.4 | ) | ||||||||||||||||
Gross profit |
1,581 | 49.1 | 3,296 | 51.0 | (1,715 | ) | (52.0 | ) | ||||||||||||||||
Selling, general
and administrative
expenses |
3,582 | 111.3 | 4,115 | 63.6 | (533 | ) | (13.0 | ) | ||||||||||||||||
Operating loss |
$ | (2,001 | ) | (62.2 | )% | $ | (819 | ) | (12.6 | )% | $ | (1,182 | ) | 144.3 | ||||||||||
Revenues
Our Emergency Identification segments revenue decreased approximately $3.3 million in the
six-months ended June 30, 2010 compared to the six-months ended June 30, 2009. The decrease in
revenue was primarily due to a decrease in sales at our Sarbe division of approximately $2.8
million due to lower PELS and G2R sales as well as decreased sales to the U.S. Air Force. The Sarbe
product sales decrease was primarily related to the mandatory transition to higher satellite
frequency beacons in the prior year. In addition, we experienced lower sales at our Communications
division due to market conditions.
Gross Profit and Gross Profit Margin
Our Emergency Identification segments gross profit decreased approximately $1.7 million in the
six-months ended June 30, 2010 compared to the six-months ended June 30, 2009. The decrease was
primarily due to the related decrease in sales during the six-months ended June 30, 2010. The gross
profit margin was 49.1% in the six-months ended June 30, 2010 as compared to 51.0% in six-months
ended June 30, 2009. Gross profit margin decreased
primarily due to the write off of approximately $0.1 million of costs associated with a U.S. Air
Force contract which was slightly offset by higher margins at our Sarbe division.
Selling, General and Administrative Expenses
Our Emergency Identification segments selling, general and administrative expenses decreased
approximately $0.5 million in the six-months ended June 30, 2010 compared to the six-months ended
June 30, 2009. This decrease in selling, general and administrative expenses relates primarily to a
decrease in personnel costs as a result of the restructuring implemented in the prior year. In
addition, there were decreases in engineering consumables, advertising costs as well as audit and
legal fees. As a percentage of revenue, selling, general and administrative expenses increased to
111.3% in the six-months ended June 30, 2010 from 63.6% in the six-months ended June 30, 2009. The
increase in selling, general and administrative expenses as a percentage of revenue resulted
primarily from the decrease in sales as discussed above.
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Corporate/Eliminations
Six-Months Ended June 30, | ||||||||||||||||
2010 | 2009 | Change | ||||||||||||||
(in thousands, except percentages) | ||||||||||||||||
Revenue |
$ | | $ | | $ | | | % | ||||||||
Cost of sales |
| | | | ||||||||||||
Gross profit |
| | | | ||||||||||||
Selling, general and administrative expenses |
1,931 | 2,418 | (487 | ) | (20.1 | ) | ||||||||||
Restructuring, severance and separation expenses |
1,201 | | 1,201 | NM | ||||||||||||
Operating loss |
$ | (3,132 | ) | $ | (2,418 | ) | $ | (714 | ) | (29.5 | ) | |||||
NM Not meaningful
Selling, General and Administrative Expenses
Corporates selling, general and administrative expenses decreased approximately $0.5 million for
the six-months ended June 30, 2010 compared to the six-months ended June 30, 2009. The decrease was
primarily due to the result of a decrease in the bonus accrual, lower insurance expense and
accounting fees during the six-months ended June 30, 2010. Slightly offsetting the decrease was an
increase in legal fees, consulting expenses, printing fees due to the annual shareholders meeting
taking place in the second quarter of 2010 compared to the third quarter of 2009 as well as an
increase in non-cash compensation expense resulting from the granting of options and restricted
stock to certain executives and management in October 2009.
Restructuring, Severance and Separation Expenses
Corporates severance and separation expenses in the six-months ended June 30, 2010 related to the
accrual of costs associated with certain headcount reductions.
Consolidated
Interest and Other Income (Expense), Net
Interest and other income (expense) was approximately $(0.4) million in the six-months ended June
30, 2010 compared to $0.1 million in the six-months ended June 30, 2009. The expense in the
six-months ended June 30, 2010 was due to recording an expense of approximately $0.1 million as a
result of revaluing our outstanding warrants in accordance with the Contracts in Entitys Own
Equity Subtopic of the Derivatives and Hedging Topic of the Codification. We also recorded
approximately $0.2 million of other expense due to the write off of the discounted portion of a
note receivable during the first quarter of 2010. The income in the six-months ended June 30, 2009
resulted from royalty payments received by our Animal Identification segment.
Interest Expense
Interest expense was $0.7 million and $1.1 million for the six-months ended June 30, 2010 and 2009,
respectively. The decrease was primarily due to final payment of $1.4 million of our Term Debt
Obligations with Laurus and affiliates on February 1, 2010.
Income Taxes
We had an income tax provision of $15 thousand for the six-months ended June 30, 2010 compared to a
provision of $56 thousand in the same period of 2009. We have recorded certain state and foreign
income taxes during the six-months ended June 30, 2010 and 2009. Differences in the effective
income tax rates from the statutory federal income tax rate arise from state taxes (benefits) net
of federal tax effects, and the increase or reduction of valuation allowances related to net
operating loss carry forwards, non-deductible intangible amortization associated with acquisitions
and other deferred tax assets. As of June 30, 2010, we have provided a valuation allowance to fully
reserve our U.S. net operating loss carryforwards and our other existing U.S. net deferred tax
assets, primarily as a result of our recent losses and our current projections of future taxable
U.S. income. As a result of fully reserving our U.S. deferred tax assets, we did not record a
benefit related to our net U.S. losses during the six-months ended June 30, 2010.
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Loss from Continuing Operations
During the six-months ended June 30, 2010 and 2009, we reported a loss from continuing operations
of approximately $4.7 million and $4.9 million, respectively. The decrease in the loss for the
six-months ended June 30, 2010 compared to June 30, 2009 relates primarily to the slight increase
in gross margin at our Animal Identification segment as well as the company-wide reduction in
selling, general and administrative expenses and interest expense. Slightly offsetting these
changes was a decrease in gross margin at our Emergency Identification segment and an increase in
restructuring, severance and separation expenses. Each of these items is more fully discussed above
in the context of the appropriate segment.
Liquidity and Capital Resources from Continuing Operations
Cash and cash equivalents totaled $2.9 million and $1.9 million at June 30, 2010 and December 31,
2009, respectively.
Operating activities provided cash of $1.7 million during the six-months ended June 30, 2010 and
2009. During the six-months ended June 30, 2010, cash was primarily provided by discontinued
operations. During the six-months ended June 30, 2009, cash was primarily provided by the increase
in accounts payable and discontinued operations.
Adjustments to reconcile operating losses to net cash used in operating activities included the
following:
| Accounts and unbilled receivables, net of allowance for doubtful accounts, decreased $0.2 million, or 3.3%, to $6.2 million at June 30, 2010, from $6.4 million at December 31, 2009. The decrease was primarily due to the payment on the U.S. Air Force contract. We anticipate our accounts receivable to increase going forward as we begin shipping on a large PELS contract. | ||
| Inventories increased 1.6% to $9.1 million at June 30, 2010 from $9.0 million at December 31, 2009. The increase was principally due to our Emergency Identification segment related to general inventory level fluctuations. We expect our inventory levels to decrease due to the shipments on a large PELS contract. | ||
| Accounts payable decreased $0.5 million, or 6.5%, to $7.4 million at June 30, 2010, from $7.9 million at December 31, 2009. Our accounts payable decreased due to the general timing of billings and payments. We anticipate our accounts payable to decrease during 2010. | ||
| Accrued expenses decreased 4.4% to $6.3 million at June 30, 2010 from $6.6 million at December 31, 2009. Accrued expenses decreased at both our Animal Identification and Emergency Identification segments due to payment of accrued wages and legal and professional fees, respectively. The decrease was slightly offset by an increase in accrued severance expenses at our Corporate segment. We expect our accrued expenses to decrease in 2010 as we make payments for accrued bonuses, severance and other accrued liabilities. |
Investing activities provided (used) cash of $0.3 million and $(0.4) million during the six-months
ended June 30, 2010 and 2009, respectively. The amounts provided (used) in 2010 and 2009 were
primarily from the decrease of notes receivable and payments for purchases of fixed assets,
respectively.
Financing activities used cash of $0.9 million and $2.2 million during the six-months ended June
30, 2010 and 2009, respectively. In 2010, cash was primarily used for payments on debt which was
slightly offset by the sale of common stock to two investors for approximately $1.7 million. The
use of cash in 2009 was primarily due to payments on debt.
Financial Condition
As of June 30, 2010, we had a working capital deficit of approximately $4.2 million. However,
included in current liabilities are approximately $0.8 million of liabilities associated with
subsidiaries we closed in 2001 and 2002 and other liabilities that were not guaranteed by us and
which we believe we will not be required to pay.
In addition to our cash on hand, at June 30, 2010 we had approximately $0.2 million available for
borrowing under our revolving credit, invoice discount, factoring and line of credit agreements.
These credit facilities consist of a (i) a $6.0 million revolving asset-based facility with
Kallina; (ii) an invoice discounting agreement with Bibby; (iii) a factoring agreement with Nordisk
Factoring A/S; and (iv) a line of credit with Danske Bank. Each of these facilities are more fully
described in Note 9 to our consolidated financial statements in our Annual Report on Form 10-K for
the year ended December 31, 2009.
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As of June 30, 2010, the amount of borrowings and availability under these facilities was as
follows:
Outstanding | Availability | |||||||
(in thousands) | ||||||||
Revolving facility |
$ | 2,156 | $ | 85 | ||||
Bibby invoice discounting agreement |
833 | 62 | ||||||
Nordisk factoring agreement |
395 | | ||||||
Danske Bank line of credit |
1,961 | 7 | ||||||
$ | 5,345 | $ | 154 | |||||
Our credit agreements provide for certain events of default, including, among others (i) failure to
pay principal and interest when due; (ii) violation of covenants; (iii) any material
misrepresentation made in the note or a related agreements; (iv) bankruptcy or insolvency; and (v)
a change of control as defined, among others. The covenants in our agreement include, among others,
(i) the maintenance of listing or quotation of our common stock on a principal market; (ii)
monthly, quarterly and annual financial reporting requirements; (iii) maintenance of adequate
insurance; and (iv) approvals for certain events such as declaring dividends, and creating new
indebtedness not specifically allowed under the terms of the agreements, among others. We can
terminate the Dankse Bank line of credit and pay the outstanding balance, or Danske Bank may demand
the credit line be settled immediately, at any given time,
without prior notice. Our Nordisk factoring agreement provides that either party may terminate the
agreement by giving a three month notice. During the term of notice, Nordisk is entitled to reduce
the financing availability at its discretion. As of June 30, 2010, we were in compliance with the
covenants under our credit agreements.
The foregoing discussion of our credit facilities and related agreements is a summary of the
material terms of those agreements and is qualified in its entirety by reference to the terms and
provisions of those agreements.
Liquidity
We believe that we will be able to generate enough cash from operations, our existing revolving
credit facility and factoring lines, the sales and potential sales of certain business units, and
through other investing and financing sources to operate our business for the next twelve months
ending June 30, 2011, including refinancing our revolving credit line, which matures August 31,
2010 and a mortgage loan which matures November 1, 2010.
Our goal is to achieve profitability and to generate positive cash flows from operations. During
2008, we restructured our Animal Identification segment which eliminated redundancies, improved
gross margins and decreased expenses. In the second quarter of 2010, we determined to substantially
complete the restructuring of our Corporate segment which will result in the elimination of our
corporate structure and the associated costs of a separate headquarters and several management
positions. 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 our goal of
achieving profitability and improving positive cash flows from operations during 2010 although no
assurance can be given that we will be successful in implementing the plan. Failure to generate
positive cash flow from operations will have a material adverse effect on our business, financial
condition and results of operations.
Our historical sources of liquidity have included proceeds from the sale of common stock and
preferred shares, proceeds from the issuance of debt, proceeds from the sale of businesses, and
proceeds from the exercise of 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
certain of our debt obligations during 2010. As of June 30, 2010, we had a working capital
deficiency, which is primarily due to a number of our debt obligations becoming due or potentially
due within the next twelve months. Specifically, these obligations include: (i) our revolving line
of credit with Kallina, which matures August 31, 2010; (ii) our mortgage note which matures
November 1, 2010; (iii) our factoring lines; and (iv) our credit facility with Danske Bank, which
are more fully discussed in Note 9 to our Annual Report on Form 10-K for the fiscal year ended
December 31, 2009. In addition, our debt obligation to Danske Bank is due on demand and we are
required to make monthly principal payments as more fully discussed in Note 9 to our Annual Report
on Form 10-K for the fiscal year ended December 31, 2009. 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 as a going concern, as we may be unable to generate the funds necessary to pay
our obligations in the ordinary course of business. The accompanying financial statements do not include any adjustments
related to the recoverability and classification of asset carrying
amounts or the amounts and classification of liabilities that may
result from the outcome of this uncertainty.
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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 and strategic focus.
These strategic initiatives may include acquisitions, raising additional funds through debt or
equity offerings, 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.
Cautionary Note Regarding Forward-Looking Statements
This quarterly report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements
concern expectations, beliefs, projections, future plans and strategies, anticipated events or
trends and similar expressions concerning matters that are not historical facts. Specifically, this
quarterly report contains forward-looking statements including, but not limited to:
| our growth strategies including, without limitation, our ability to deploy our products and services including rTag and Bio-Thermo; | ||
| anticipated trends in our business and demographics; | ||
| the ability to hire and retain skilled personnel; | ||
| relationships with and dependence on technological partners; | ||
| our reliance on government contractors; | ||
| uncertainties relating to customer plans and commitments; | ||
| our future profitability and liquidity; | ||
| our ability to refinance our revolving credit facility and mortgage note, both of which mature in 2010; | ||
| our ability to maintain compliance with covenants under our credit facilities, including our ability to make principal and interest payments when due; | ||
| our ability to obtain patents, enforce those patents, preserve trade secrets, and operate without infringing on the proprietary rights of third parties; | ||
| governmental export and import policies, global trade policies, worldwide political stability and economic growth; | ||
| expectations about the outcome of litigation and asserted claims; | ||
| regulatory, competitive or other economic influences; | ||
| our ability to successfully mitigate the risks associated with foreign operations; | ||
| our ability to successfully implement our business strategy; | ||
| our expectation that we can achieve profitability in the future; | ||
| our ability to fund our operations; | ||
| our expectations for the borrowings under the Danske Bank line of credit, the Nordisk Factoring Agreement as well as the Bibby invoice discounting agreement, which are payable on demand and/or 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; | ||
| our reliance on a single source of supply for certain of our implantable microchips; | ||
| we may become subject to costly product liability claims and claims that our products infringe the intellectual property rights of others; | ||
| our ability to comply with current and future regulations relating to our businesses; | ||
| 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; | ||
| our ability to comply with the obligations in various registration rights and price protection agreements; | ||
| the impact of new accounting pronouncements; | ||
| our ability to establish and maintain proper and effective internal accounting and financial controls; | ||
| our ability to maintain our listing on the Nasdaq Capital Market and the effect of a delisting; | ||
| our ability to continue operations at the current level; and | ||
| 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 in our Annual Report on Form 10-K filed with the SEC on April 1, 2010 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. |
In some cases, you can identify forward-looking statements by terms such as may, should,
could, would, anticipates, expects, attempt, intends, plans, hopes, believes,
seeks, estimates 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 that could cause actual results to differ materially from estimates or forecasts
contained in the forward-looking statements. Some of these risks and uncertainties are beyond our
control. Also, these forward-looking statements represent our estimates and assumptions only as of
the date the statement was made.
The information in this quarterly report is as of June 30, 2010, or, where clearly indicated, as of
the date of this filing. We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise. We also may make
additional disclosures in our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K that we may file from time to time with the SEC. Please also note that
we provide a cautionary discussion of risks and uncertainties under the section entitled Risk
Factors in our Annual Report on Form 10-K for the year ended December 31, 2009. These are factors
that could cause our actual results to differ materially from expected results and they should be
reviewed carefully. Other factors besides those listed could also adversely affect us.
ITEM 4T. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the
effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 240.13a -
15(e) and 240.15d - 15(e)) as of the end of the quarter ended June 30, 2010. Based on that
evaluation, they have concluded that our disclosure controls and procedures as of the end of the
period covered by this report are effective in timely providing them with material information
relating to us required to be disclosed in the reports we file or submit under the Exchange Act.
Our disclosure controls and procedures are designed to provide reasonable assurances of achieving
our objectives and our Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures are effective in reaching that level of reasonable assurance.
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Change in Internal Control Over Financial Reporting
There have not been any changes in our internal controls over financial reporting identified in
connection with an evaluation thereof that occurred during our second fiscal quarter of 2010 that
have materially affected, or are reasonable 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 II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 13 to the Condensed Consolidated Financial Statements in Part I,
Item I is incorporated herein by reference.
ITEM 6. EXHIBITS
We have listed the exhibits by numbers corresponding to the Exhibit Table of Item 601 in Regulation
S-K on the Exhibit list attached to this report.
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SIGNATURES
Pursuant to the requirements 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.
DIGITAL ANGEL CORPORATION (Registrant) |
||||
Date: August 16, 2010 | By: | /s/ Jason G. Prescott | ||
Name: | Jason G. Prescott | |||
Title: | Chief Financial Officer (Duly Authorized Officer) |
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INDEX TO EXHIBITS
Exhibit No. | Description of Exhibit | |
10.1
|
Position Elimination Letter to Lorraine Breece | |
10.2
|
Form of General Release and Waiver | |
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 Jason G. Prescott, Chief Financial Officer, pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a)* | |
32.1
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
* | Filed herewith |
34