PositiveID
VeriChip CORP (Form: 10-Q, Received: 05/14/2009 17:11:29)
Table of Contents

 
 
UNITED STATES
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 March 31, 2009
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-33297
VERICHIP CORPORATION
(Exact name of registrant as specified in its charter)
     
DELAWARE   06-1637809
(State or other jurisdiction of incorporation or   (I.R.S. Employer Identification No.)
organization)    
     
1690 South Congress Avenue, Suite 200   (561) 805-8008
Delray Beach, Florida 33445   (Registrant’s telephone number, including area code)
(Address of principal executive offices,    
including zip code)    
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes 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.
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer o   Smaller reporting company þ
        (Do not check if a smaller reporting company)    
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
The number of shares outstanding of each of the issuer’s classes of common stock as of the close of business on May 11, 2009 is as follows:
     
Class   Number of Shares
     
Common Stock: $0.01 Par Value   13,760,628
 
 

 

 


 

VERICHIP CORPORATION
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  Exhibit 10.1
  Exhibit 10.2
  Exhibit 10.3
  Exhibit 31.1
  Exhibit 31.2
  Exhibit 32.1

 

 


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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
VERICHIP CORPORATION
Condensed Consolidated Balance Sheets
(In thousands, except par value)
                 
    March 31,     December 31,  
    2009     2008  
    (unaudited)        
Assets
               
Current Assets:
               
Cash
  $ 2,211     $ 3,229  
Accounts receivable
           
Inventories, net of allowance
           
Prepaid expenses and other current assets
    251       275  
 
           
Total Current Assets
    2,462       3,504  
 
               
Equipment, net of accumulated depreciation
    36       39  
Restricted cash
    4,548       4,543  
 
           
 
  $ 7,046     $ 8,086  
 
           
Liabilities and Stockholders’ Equity
               
Current Liabilities:
               
Accounts payable
  $ 342     $ 72  
Accrued expenses and other current liabilities
    245       634  
Current liabilities from discontinued operations
    400       460  
 
           
Total Current Liabilities
    987       1,166  
Deferred gain
    4,500       4,500  
 
           
Total Liabilities
    5,487       5,666  
 
           
 
               
Commitments and contingencies
               
 
               
Stockholders’ Equity:
               
Capital stock:
               
Preferred stock, Authorized 5,000 shares of $.001 par value; no shares issued or outstanding
           
Common stock, Authorized 40,000 shares, of $.01 par value; issued and outstanding 14,110 and 11,730 shares at March 31, 2009 and December 31, 2008, respectively
    141       117  
Additional paid-in capital
    44,875       44,410  
Accumulated deficit
    (43,457 )     (42,107 )
 
           
Total Stockholders’ Equity
    1,559       2,420  
 
           
 
  $ 7,046     $ 8,086  
 
           
See accompanying notes to unaudited condensed consolidated financial statements.

 

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VERICHIP CORPORATION
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)
                 
    For the Three Months Ended  
    March 31,  
    2009     2008  
 
               
Revenue
    8       4  
 
               
Cost of sales
           
 
           
 
               
Gross profit
    8       4  
 
               
Operating expenses:
               
Selling, general and administrative
    1,370       3,250  
Research and development
          162  
 
           
Total operating expenses
    1,370       3,412  
 
           
 
               
Operating loss
    (1,362 )     (3,408 )
 
           
 
               
Interest income and other income (expense), net
    12       (145 )
Interest expense
          (361 )
 
           
Total other income (expense)
    12       (506 )
 
           
 
               
Loss from continuing operations
    (1,350 )     (3,914 )
Income from discontinued operations
          1,071  
 
           
Net loss
  $ (1,350 )   $ (2,843 )
 
           
 
               
Net loss per common share from continuing operations — basic and diluted
  $ (0.11 )   $ (0.41 )
Net income per common share from discontinued operations — basic and diluted
          0.11  
 
           
Net loss per common share — basic and diluted
  $ (0.11 )   $ (0.30 )
 
           
 
               
Weighted average number of shares outstanding — basic and diluted
    12,043       9,604  
 
           
See accompanying notes to unaudited condensed consolidated financial statements.

 

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VERICHIP CORPORATION
Condensed Consolidated Statement of Stockholders’ Equity
For the Three Months Ended March 31, 2009
(In thousands)
(Unaudited)
                                                 
                                    Accumulated        
                    Additional             Other     Total  
    Common Shares     Paid-in     Accumulated     Comprehensive     Stockholders’  
    Number     Amount     Capital     Deficit     Loss     Equity  
 
                                               
Balance December 31, 2008
    11,730     $ 117     $ 44,410     $ (42,107 )   $     $ 2,420  
Net loss
                      (1,350 )           (1,350 )
Stock based compensation
    1,520       15       224                   239  
Issuance of shares for settlement of litigation
    860       9       241                   250  
 
                                   
 
                                               
Balance March 31, 2009
    14,110     $ 141     $ 44,875     $ (43,457 )   $     $ 1,559  
 
                                   
See accompanying notes to unaudited condensed consolidated financial statements.

 

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VERICHIP CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
                 
    For the Three Months Ended  
    March 31,  
    2009     2008  
 
               
Cash flows from operating activities:
               
Net loss
  $ (1,350 )   $ (2,843 )
Adjustments to reconcile net loss to net cash used in operating activities
               
Depreciation and amortization
    8       18  
Stock based compensation
    239       881  
Accrued interest
          276  
Gain on sale of fixed asset
    (1 )      
Issuance of shares for settlement of litigation
    250        
Non cash interest income
    (5 )      
Changes in operating assets and liabilities:
               
Decrease in accounts receivable
          32  
Increase in inventories
          (11 )
Decrease in prepaid expenses and other current assets
    24       106  
(Decrease) increase in accounts payable and accrued expenses
    (119 )     149  
Net cash used in discontinued operations
    (60 )     (1,241 )
 
           
Net cash used in operating activities
    (1,014 )     (2,633 )
 
               
Cash flows from investing activities:
               
Purchase of equipment
    (9 )     (10 )
Proceeds from sale of equipment
    5        
Net cash used by discontinued operations
          (62 )
 
           
Net cash used in investing activities
    (4 )     (72 )
 
               
Cash flows from financing activities:
               
Debt financing
          8,000  
Deferred financing costs
          (495 )
Principal payments to stockholder on long term debt
          (5,600 )
Issuance of common shares
          29  
Net cash used in discontinued operations
          (1,515 )
 
           
Net cash provided by financing activities
          419  
 
               
Net decrease in cash
    (1,018 )     (2,286 )
Cash, beginning of period
    3,229       7,221  
 
           
Cash, end of period
  $ 2,211     $ 4,935  
 
           
See accompanying notes to unaudited condensed consolidated financial statements.

 

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VERICHIP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
1. Business and Basis of Presentation
VeriChip Corporation (the “Company,” “us,” “we,” or “our”) is a Delaware corporation formed in November 2001. The Company commenced operations in January 2002. On February 14, 2007, the Company completed an initial public offering of its common stock, selling 3,100,000 shares of its common stock at a price of $6.50 per share.
The Company has historically developed, marketed, and sold radio frequency identification (frequently referred to as RFID) systems used for the identification and protection of people in the healthcare market. The Company’s VeriMed Health Link system uses the human-implantable passive RFID microchip that is used in patient identification applications, securely linking a patient to their personal health record as maintained in the Company’s proprietary database. Each implantable Health Link microchip contains a unique verification number that is read when it is scanned by the Company’s scanner. In October 2004, the U.S. Food and Drug Administration, or FDA, cleared the Company’s VeriMed Health Link system for use in medical applications in the United States.
On March 5, 2009, the Company established a new division to evaluate clean and alternative energy companies for potential strategic transactions or investment and as a result established a new subsidiary, VeriGreen Energy Corporation. The Company incurred costs of $0.3 million, primarily consisting of transaction costs related to the evaluation of several strategic opportunities and organization costs.
On March 17, 2009, the Company entered into an exclusive development and supply agreement with Medical Components, Inc. (“Medcomp”). Pursuant to the agreement, the Company will develop and manufacture a new, smaller RFID microchip, and Medcomp will purchase the microchip from the Company for inclusion in Medcomp’s vascular access product lines. The initial term of the agreement is from March 17, 2009 until five years after the later to occur of (i) the microchip being ready for production, or (ii) 510k approval of the microchip by the FDA. The Company will receive a product development fee for the timely development of the new microchip, and Medcomp will have certain minimum purchase requirements during the term of the agreement. If all of the minimum purchase requirements are met, the total value of the contract will exceed $3 million. Additionally, Medcomp will be responsible for obtaining any necessary regulatory approvals for use of the product. Subsequent to March 31, 2009, the Company completed the product development and received the fee relating to the arrangement. The fee, net of incurred expenses, resulted in nominal net cash inflow for the Company.
The accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries as of March 31, 2009 and December 31, 2008 (the December 31, 2008, financial information included in this report has been extracted from the Company’s audited financial statements included in its Annual Report on Form 10-K, as amended, for the year ended December 31, 2008), and for the three months ended March 31, 2009 and 2008 have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company’s management, all adjustments (including normal recurring adjustments) considered necessary to present fairly the unaudited condensed consolidated financial statements have been made. Certain items in the March 31, 2008 periods have been reclassified for comparative purposes.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. Included in these estimates are assumptions about allowances for excess inventory, bad debt reserves, lives of long lived assets, lives of intangible assets, assumptions used in Black-Scholes valuation models, estimates of the fair value of acquired assets and assumed liabilities, the determination of whether any impairment is to be recognized on goodwill or intangibles, among others.
The unaudited condensed consolidated statements of operations for the three months ended March 31, 2009 and 2008 are not necessarily indicative of the results that may be expected for the entire year. These statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

 

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Stock-Based Compensation
(tabular information in thousands)
Effective January 1, 2006, the Company adopted Financial Accounting Standards Board (“FASB”) SFAS No. 123 (revised 2004), Share Based Payment, or FAS 123R using the modified prospective transition method. Under this method, stock-based compensation expense is recognized using the fair-value based method for all awards granted on or after the date of adoption. Compensation expense for new awards granted after January 1, 2006 is recognized over the requisite service period based on the grant-date fair value of those options. Prior to adoption, the Company used the intrinsic value method under Accounting Principles Board 25, and related interpretations and provided the disclosure-only provisions of FAS 123. Under the intrinsic value method, no stock-based compensation had been recognized in our consolidated statement of operations for options granted to the Company’s employees and directors because the exercise price of such stock options equaled or exceeded the fair market value of the underlying stock on the dates of grant.
The Company recorded compensation expense, related to stock options, of approximately $2 and $123 for the three months ended March 31, 2009 and 2008, respectively.
In December 2008, the Company authorized the grant of approximately 518 shares of its restricted common stock to Mr. Caragol, its acting chief financial officer in lieu of salary. The shares vest according to the following schedule: (i) 20% vested on the grant date, and (ii) 80% shall vest on January 1, 2010. In the event of a change in control and if Mr. Caragol is terminated without cause, the shares will immediately vest. The shares are subject to forfeiture in the event Mr. Caragol is terminated for cause. Compensation expense of $146 was recorded in the three months ended March 31, 2009 for these shares.
In December 2008, the Company authorized the grant of 602 shares of its restricted common stock to Mr. Silverman, its executive chairman in lieu of salary. If Mr. Silverman remains involved in the day-to-day management of the Company, the shares will vest upon the earlier to occur of: (i) January 1, 2010, or (ii) a change in control of the Company. The shares are subject to forfeiture in the event that Mr. Silverman fails to remain involved in the day-to-day management of the Company. Compensation expense of $55 was recorded in the three months ended March 31, 2009 for these shares.
In December 2008, the Company issued 400 shares of its restricted common stock to members of the board of directors, which vest on January 1, 2010. The Company determined the value of the stock to be approximately $100 based on the value of its common stock on the dates of grant. The value of the outstanding restricted stock is being amortized as compensation expense over the vesting period. The Company recorded compensation expense of approximately $36 in the three months ended March 31, 2009 associated with this restricted stock.
Stock-based compensation expense is reflected in the condensed consolidated statement of operations in selling, general and administrative expense.
The Company’s computation of expected life was determined based on the simplified method. The interest rate was based on the U.S. Treasury Yield curve in effect at the time of grant. The Company’s computation of expected volatility is based on the historical volatility of the Company’s comparable companies’ average historical volatility.
2. Principles of Consolidation
The financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions and balances had been eliminated in consolidation.
3. Inventories
                 
    March 31,     December 31,  
    2009     2008  
Raw materials
  $ 161     $ 161  
Work in process
           
Finished goods
    52       52  
 
           
 
    213       213  
Allowance for excess and obsolescence
    (213 )     (213 )
 
           
 
  $     $  
 
           

 

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4. Stockholders’ Equity
Stock Option Plans
In April 2002, the Company’s board of directors approved the VeriChip Corporation 2002 Flexible Stock Plan, or the VeriChip 2002 Plan. Under the VeriChip 2002 Plan, the number of shares for which options, SARs or performance shares, may be granted is approximately 2.0 million. As of March 31, 2009, approximately 1.7 million options and restricted shares, net of forfeitures, have been granted to directors, officers and employees under the VeriChip 2002 Plan and 0.3 million of the options or shares granted were outstanding as of March 31, 2009, all of which are fully vested. As of March 31, 2009, no SARs have been granted and 0.3 million shares may still be granted under the VeriChip 2002 Plan.
On April 27, 2005, the board of directors of Digital Angel Corporation (“Digital Angel”), the Company’s former majority stockholder, approved the VeriChip Corporation 2005 Flexible Stock Plan, or the VeriChip 2005 Plan. Under the VeriChip 2005 Plan, the number of shares for which options, SARs or performance shares may be granted is approximately 0.3 million. As of March 31, 2009, approximately 0.3 million options have been granted under the VeriChip 2005 Plan and 0.2 million of the options were outstanding. Approximately 0.2 million of the options are fully vested and expire up to nine years from the vesting date. As of March 31, 2009, no SARs have been granted and 832 shares may still be granted under the VeriChip 2005 Plan.
On June 17, 2007, the Company adopted the VeriChip 2007 Stock Incentive Plan, or the VeriChip 2007 Plan. Under the VeriChip 2007 Plan, the number of shares for which options, SARs or performance shares could be granted was 1.0 million. On December 16, 2008, the Company’s stockholders approved an amendment to the VeriChip 2007 Plan to include an additional 2.0 million shares that may be granted. As of March 31, 2009, approximately 2.4 million options and shares have been granted. As of March 31, 2009, no SARs have been granted and 0.6 million shares may still be granted under the VeriChip 2007 Plan.
In addition, as of March 31, 2009, options exercisable for approximately 0.3 million shares of the Company’s common stock have been granted outside of the Company’s plans. These options were granted at exercise prices ranging from $0.23 to $8.55 per share, are fully vested and are exercisable for a period of up to seven years.
In the three months ended March 31, 2009, no options were granted under the VeriChip 2007 Plan. In the three months ended March 31, 2009, no equity was granted under the VeriChip 2002 Plan or the VeriChip 2005 Plan. In the three months ended March 31, 2008, no options and 0.6 million shares were granted. In the three months ended March 31, 2008, 0.1 million options and 0.2 million options were granted under the VeriChip 2002 Plan and VeriChip 2005 Plan, respectively. In the three months ended March 31, 2008, compensation expense of 0.9 million was recorded.
A summary of option activity under the Company’s option plans as of March 31, 2009, and changes during the three months then ended is presented below (in thousands, except per share amounts):
                 
            Weighted Average  
    Number of     Exercise Price Per  
    Options     Share  
Outstanding on January 1, 2009
    1,225     $ 4.52  
Granted
           
Exercised
           
Forfeited
    221       0.57  
 
             
Outstanding on March 31, 2009
    1,004       5.39  
 
             
Exercisable on March 31, 2009 (1)
    834       6.41  
 
             
 
               
Shares available on March 31, 2009 for options and common shares that may be granted
    836          
     
(1)   The intrinsic value of a stock option is the amount by which the fair value of the underlying stock exceeds the exercise price of the option. Based upon the Company’s closing price on the NASDAQ, the fair value of the underlying stock was $0.42 at March 31, 2009. As of March 31, 2009, the aggregate intrinsic value of all options outstanding was $13,000.

 

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The following table summarizes information about stock options at March 31, 2009 (in thousands, except weighted-average amounts):
                                         
    Outstanding Stock Options     Exercisable Stock Options  
            Weighted-     Weighted-             Weighted-  
            Average     Average             Average  
            Remaining     Exercise             Exercise  
Range of           Contractual     Price Per             Price Per  
Exercise Prices   Shares     Life (years)     Share     Shares     Share  
$0.0000 to $2.0250
    226       8.4     $ 0.55       56     $ 1.10  
$4.0501 to $6.0750
    348       7.4       5.59       348       5.59  
$6.0751 to $8.1000
    318       4.6       7.08       318       7.08  
$8.1001 to $10.1250
    106       5.8       9.24       106       9.24  
$18.2251 to $20.2500
    6       3.8       20.25       6       20.25  
 
                                   
 
                                       
 
    1,004       6.5     $ 5.39       834     $ 6.41  
 
                             
The Black-Scholes model, which the Company used to determine compensation expense, required the Company to make several key judgments including:
    the value of the Company’s common stock;
 
    the expected life of issued stock options;
 
    the expected volatility of the Company’s stock price;
 
    the expected dividend yield to be realized over the life of the stock option; and
 
    the risk-free interest rate over the expected life of the stock options.
The Company prepared these estimates based upon its historical experience, the stock price volatility of comparable publicly-traded companies and its best estimation of future conditions.
5. Loss per Common Share
A reconciliation of the numerator and denominator of basic and diluted loss per common share is provided as follows:
                 
    For the Three Months Ended  
    March 31,  
    2009     2008  
 
               
Numerator:
               
Numerator for basic and diluted loss per share:
               
Loss from continuing operations
    (1,350 )     (3,914 )
Net income from discontinued operations
          1,071  
 
           
Net loss
  $ (1,350 )   $ (2,843 )
 
           
 
               
Denominator:
               
Denominator for basic and diluted loss per share:
               
Weighted average shares outstanding basic and diluted
    12,043       9,604  
 
           
Net loss per common share from continuing operations — basic and diluted
  $ (0.11 )   $ (0.41 )
 
           
Net income per common share from discontinued operations — basic and diluted
          0.11  
 
           
Basic and diluted loss per share
  $ (0.11 )   $ (0.30 )
 
           

 

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The following stock options and restricted stock outstanding as of March 31, 2009 and 2008 were not included in the computation of dilutive loss per share because the net effect would have been anti-dilutive:
                 
    For the Three Months Ended  
    March 31,  
    2009     2008  
 
               
Stock options
    1,004       1,832  
Restricted common stock
    1,417       1,187  
 
           
 
    2,421       3,019  
 
           
6. Income Taxes
The Company had an effective tax rate of nil for the three months ended March 31, 2009 and 2008. The Company incurred losses before taxes for the three months ended March 31, 2009 and 2008. However, its has not recorded a tax benefit for the resulting U.S. net operating loss carryforwards, as the Company has determined that a valuation allowance against its net U.S. deferred tax assets was appropriate based primarily on its historical operating results.
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”) was issued to clarify the requirements of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes , relating to the recognition of income tax benefits.
FIN 48 provides a two-step approach to recognizing and measuring tax benefits when the benefits’ realization is uncertain. The first step is to determine whether the benefit is to be recognized, and the second step is to determine the amount to be recognized:
    income tax benefits should be recognized when, based on the technical merits of a tax position, the entity believes that if a dispute arose with the taxing authority and were taken to a court of last resort, it is more likely than not (i.e., a probability of greater than 50 percent) that the tax position would be sustained as filed; and
 
    if a position is determined to be more likely than not of being sustained, the reporting enterprise should recognize the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority.
The implementation of FIN 48 did not result in any adjustment to the Company’s beginning tax positions. The Company continues to fully recognize its tax benefits, which are offset by a valuation allowance to the extent that it is more likely than not that the deferred tax assets will not be realized.
The Company recognizes any interest accrued related to unrecognized tax benefits or exposures in interest expense and penalties in operating expenses. During the three months ended March 31, 2009 and 2008, there was no such interest or penalty.
7. Legal proceedings
The Company is engaged in certain legal actions and management believes that the ultimate outcome of these actions will not have a material adverse effect on the Company’s operating results, liquidity or financial position.

 

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Artigliere
On July 8, 2008, a lawsuit was filed against the Company and Digital Angel by Jerome C. Artigliere, a former executive of the Company and Digital Angel. The lawsuit was filed in the Circuit Court of the 15th Judicial Circuit in Palm Beach County, Florida, and alleged that Mr. Artigliere held options to acquire 950,000 shares of the Company’s common stock at an exercise price of $0.05 per share and that he was denied the right to exercise those options. The complaint alleged causes of action for breach of contract against the Company and Digital Angel, sought declaratory judgments clarifying Mr. Artigliere’s alleged contractual rights, and sought an injunction enjoining the vote of the stockholders at special meeting of our shareholders that took place on July 17, 2008, on the sale of Xmark. On September 12, 2008, Mr. Artigliere amended his complaint to add a claim for unpaid wages against the Company and Digital Angel and to add related claims against several former officers and directors of the Company and Digital Angel.
On March 3, 2009, the Company entered into a settlement agreement and general release related to the Artigliere lawsuit. Under the settlement agreement, the Company agreed, among other things, to issue shares of its common stock to Mr. Artigliere or his designees valued at $250,000. Additionally, the Company’s obligation under the settlement agreement includes a payment to Mr. Artigliere of $275,000. The Company previously accrued $0.3 million in conjunction with this matter at December 31, 2008. The settlement agreement also contains a confidentiality clause, which if breached could give the Company the ability to reclaim amounts from Plaintiff.
Metro Risk
On January 10, 2005, the Company commenced an action in the Circuit Court for Palm Beach County, Florida, against Metro Risk Management Group, LLC, or Metro Risk. In this suit, the Company has claimed that Metro Risk breached the parties’ three international distribution agreements by failing to meet required minimum purchase obligations and by repudiating the agreements. On July 1, 2005, Metro Risk asserted a counterclaim against the Company for breach of contract and fraud in the inducement. Specifically, in its claim for breach of contract, Metro Risk alleged that the Company breached the exclusivity provision of the parties’ three international distribution agreements by later signing a different distribution agreement with a large distributor of medical supplies. Metro Risk alleged that the distribution agreement with this other distributor included the same areas covered in the Company’s three international distribution agreements with Metro Risk. Moreover, regarding its claim for fraud in the inducement, Metro Risk alleged that the Company fraudulently induced Metro Risk into signing the three international distribution agreements by promising millions of dollars in profits, only later to sign another distribution agreement with a competitor for the same countries. By virtue of its counterclaim, Metro Risk seeks reliance damages in the amount of $155,000, which allegedly represents the amount of money advanced by Metro Risk for the project, lost profits, and attorneys’ fees. On July 23, 2008, the court granted a motion for summary judgment filed by the Company on Metro Risk’s counterclaim, and thus denied Metro Risk’s counterclaim. Metro Risk may appeal the decision. The Court has also previously granted summary judgment on the issue of Metro Risk’s liability for breaching the three international distribution agreements. Therefore, at present, the remaining issue in the lawsuit is the Company’s damages resulting from Metro Risk’s breach of the three international distribution agreements. The parties have taken minimal discovery at the present time. Metro Risk has propounded no discovery on the Company, and the Company has propounded a request for production and a request for admissions on Metro Risk. The parties have not taken any depositions. Given the potential for an appeal, counsel is currently unable to assess the ultimate outcome.
The Company is a party to various legal actions, as either plaintiff or defendant, including the matters identified above, arising in the ordinary course of business, none of which is expected to have a material adverse effect on its business, financial condition or results of operations. However, litigation is inherently unpredictable, and the costs and other effects of pending or future litigation, governmental investigations, legal and administrative cases and proceedings, whether civil or criminal, settlements, judgments and investigations, claims or charges in any such matters, and developments or assertions by or against the Company relating to it or to its intellectual property rights and intellectual property licenses could have a material adverse effect on the Company’s business, financial condition and operating results.
8. Related Party Transactions
Agreements with Steel Vault
The Company shares a common ownership, or control group, with Steel Vault Corporation (“Steel Vault”) a public company, formerly known as IFTH Acquisition Corp. R & R Consulting Partners, LLC, a holding company owned and controlled by Scott R. Silverman, and Mr. Silverman currently own on a combined basis, approximately 50% of the Company’s outstanding common stock. As of May 7, 2009, R & R Consulting Partners, LLC and Mr. Silverman owned, directly or indirectly, approximately 43% of Steel Vault’s outstanding common stock, including the 2,570,000 shares that are directly owned by Blue Moon Energy Partners LLC (“Blue Moon”). Mr. Silverman, the Company’s executive chairman of the board, is a manager and controls a member of Blue Moon (i.e., R & R Consulting Partners, LLC). William J. Caragol, the Company’s acting chief financial officer, acting treasurer and secretary, is also a manager and member of Blue Moon.

 

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On October 8, 2008, Steel Vault entered into a sublease with Digital Angel for its corporate headquarters located in Delray Beach, Florida, consisting approximately 7,911 feet of office space, which space the Company shares with Steel Vault. The rent for the entire twenty-one-month term of the sublease is $158,000, which Steel Vault paid in one lump sum upon execution of the sublease. The Company reimbursed Steel Vault for one-half of the sublease payment, representing the Company’s share of the total cost of the sublease. In addition, in order to account for certain shared services and resources, the Company and Steel Vault operate under a shared services agreement, in connection with which Steel Vault currently pays the Company $8,000 a month.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, without limitation, statements about our market opportunities, our business and growth strategies, our projected revenue and expense levels, possible future consolidated results of operations, the adequacy of our available cash resources, our financing plans, our competitive position and the effects of competition and the projected growth of the industries in which we operate. This Quarterly Report on Form 10-Q also contains forward-looking statements attributed to third parties relating to their estimates regarding the size of the future market for products and systems such as our products and systems, and the assumptions underlying such estimates. Forward-looking statements include all statements that are not historical facts and can be identified by forward-looking statements such as “may,” “might,” “should,” “could,” “will,” “intends,” “estimates,” “predicts,” “projects,” “potential,” “continue,” “believes,” “anticipates,” “plans,” “expects” and similar expressions. Forward-looking statements are only predictions based on our current expectations and projections, or those of third parties, about future events and involve risks and uncertainties.
Although we believe that the expectations reflected in the forward-looking statements contained in this Quarterly Report on Form 10-Q are based upon reasonable assumptions, no assurance can be given that such expectations will be attained or that any deviations will not be material. In light of these risks, uncertainties and assumptions, the forward-looking statements, events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Important factors that could cause our actual results, level of performance or achievements to differ materially from those expressed or forecasted in, or implied by, the forward-looking statements we make in this Quarterly Report on Form 10-Q are discussed under “Item 1A. Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2008 and include:
    our ability to continue listing our common stock on the Nasdaq Stock Market (“Nasdaq”);
 
    our ability to successfully consider, review, and if appropriate, implement other strategic opportunities;
 
    our expectation that we will incur losses, on a consolidated basis, for the foreseeable future;
 
    our ability to fund our operations;
 
    we may become subject to costly product liability claims and claims that our products infringe the intellectual property rights of others;
 
    our ability to comply with current and future regulations relating to our businesses;

 

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    uncertainty as to whether a market for our VeriMed Heath Link system will develop and whether we will be able to generate more than a nominal level of revenue from this business;
 
    the potential for patent infringement claims to be brought against us asserting that we hold no rights for the use of the implantable microchip technology and that we are violating another party’s intellectual property rights. If such a claim is successful, we could be enjoined from engaging in activities to market the systems that utilize the implantable microchip and be required to pay substantial damages;
 
    market acceptance of our VeriMed Health Link system, which will depend in large part on the future availability of insurance reimbursement for the VeriMed Health Link system microchip implant procedure from government and private insurers, and the timing of such reimbursement, if it, in fact, occurs;
 
    our ability to provide uninterrupted, secure access to the VeriMed database; and
 
    our ability to establish and maintain proper and effective internal accounting and financial controls.
You should not place undue reliance on any forward-looking statements. In addition, past financial or operating performance is not necessarily a reliable indicator of future performance, and you should not use our historical performance to anticipate future results or future period trends. Except as otherwise required by federal securities laws, we disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q to reflect any change in our expectations or any change in events, conditions or circumstances on which any such statement is based. All forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q and under the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008. These are factors that could cause our actual results to differ materially from expected results. Other factors besides those listed could also adversely affect us.

 

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Item 2. Management’s 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 Quarterly Report on Form 10-Q as well as our Annual Report on Form 10-K for the year ended December 31, 2008.
We have historically developed, marketed, and sold radio frequency identification (frequently referred to as RFID) systems used for the identification and protection of people in the healthcare market. Our VeriMed Health Link system uses the human-implantable passive RFID microchip that is used in patient identification applications, securely linking a patient to their personal health record as maintained in the our proprietary database. Each implantable Health Link microchip contains a unique verification number that is read when it is scanned by our scanner. In October 2004, the U.S. Food and Drug Administration, or FDA, cleared our VeriMed Health Link system for use in medical applications in the United States.
Recent Developments
In March 2009, the Company established a new division to evaluate clean and alternative energy companies for potential strategic transactions or investment and as a result established a new subsidiary, VeriGreen Energy Corporation (“VeriGreen”).
On March 17, 2009, we entered into an exclusive development and supply agreement with Medcomp. Pursuant to the agreement, we will develop and manufacture a new, smaller RFID microchip, and Medcomp will purchase the microchip from us for inclusion in Medcomp’s vascular access product lines. The initial term of the agreement is from March 17, 2009 until five years after the later to occur of (i) the microchip being ready for production, or (ii) 510k approval of the microchip by the FDA. We received a product development fee for the timely development of the new microchip, and Medcomp will have certain minimum purchase requirements during the term of the agreement. If all of the minimum purchase requirements are met, the total value of the contract will exceed $3 million. Additionally, Medcomp will be responsible for obtaining any necessary regulatory approvals for use of the product.
We continue to focus on both our healthcare business including our VeriMed Health Link business, and the possible development of the glucose sensing microchip, and strategic opportunities in the clean and alternative energy sectors.
Results of Operations
Through March 31, 2009, we have recorded nominal revenue from sales of our VeriMed Health Link system. Over time, we expect that sales of our VeriMed Health Link system may become a significant part of our revenue, although there can be no assurance that they will.
During 2008 and 2009, we marketed our VeriTrace system, which uses our implantable microchip and wirelessly integrates with a Ricoh ® digital camera for accurate identification of human and associated evidentiary items.
During the three months ended March 31, 2009, we focused our resources on the process of evaluating the timing and nature of our future investments and expenditures related to our VeriMed Health Link, VeriTrace and VeriGreen businesses. During this time we have undertaken a cost reduction program to maximize the amount of capital that we will have available to pursue business opportunities in the healthcare and energy sectors.
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
Revenue
Revenue for the three months ended March 31, 2009 and 2008 were $8,000 and $4,000, respectively primarily from the sale of our VeriTrace systems.

 

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Selling, General and Administrative Expense
Selling, general and administrative expense consists primarily of compensation for employees in executive, sales, marketing and operational functions, including finance and accounting, and corporate development. Other significant costs include depreciation and amortization, professional fees for accounting and legal services, consulting fees and facilities costs.
Selling, general and administrative expense decreased $1.9 million to $1.4 million for the three months ended March 31, 2009 as compared to $3.3 million for the three months ended March 31, 2008. The decrease was a result of staff reductions and reduction in other overhead costs most significantly in the areas of sales and marketing. During the three months ended March 31, 2009, we incurred $0.3 million related to legal settlements and $0.2 million related to transactional costs related to the evaluation of several strategic opportunities.
During the three months ended March 31, 2009 and 2008, we incurred stock-based compensation expense of $0.2 million and $0.9 million, respectively.
Liquidity and Capital Resources
As of March 31, 2009, unrestricted cash totaled $2.2 million compared to unrestricted cash of approximately $3.2 million at December 31, 2008. As of March 31, 2009, we also had restricted cash of $4.5 million, which supports a twelve month escrow agreement with The Stanley Works, stemming from our sale of Xmark Corporation, our wholly-owned Canadian subsidiary. The escrow period expires July 18, 2009.
Cash Flows Used in Operating Activities
Net cash used in operating activities totaled $1.0 million and $2.6 million during the three months ended March 31, 2009 and 2008, respectively. For each of the periods presented, cash was used primarily to fund operating losses, and payments of accounts payable and accrued expenses, as well as cash used to fund discontinued operations.
Cash Flows from Investing Activities
Investing activities used cash of $4,000 and $72,000 during the three months ended March 31, 2009 and 2008, respectively, which was used to purchase equipment, partially offset in 2008 by cash inflows related to discontinued operations investing activity.
Cash Flows from Financing Activities
Financing activities provided cash of nil and $0.4 million during the three months ended March 31, 2009 and 2008, respectively. In the three months ended March 31, 2008, cash of $6.5 million was provided from net borrowings, primarily from an $8.0 million financing, offset by $1.5 million used to pay debt for our discontinued operations. Cash of $5.6 million, net of borrowings of $1.3 million, was paid to Digital Angel in the three months ended March 31, 2008 to repay long term debt.
Financial Condition
As of March 31, 2009, we had working capital of approximately $1.4 million and an accumulated deficit of $43.5 million compared to a working capital of approximately $2.3 million and an accumulated deficit of approximately $42.1 million as of December 31, 2008. The decrease in working capital was primarily due to operating losses, described above.
We believe that with the cash we have on hand and the restricted cash, we will have sufficient funds available to cover our cash requirements through the next twelve months.
Impact of Recently Issued Accounting Standards
In December 2007, FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51 (“SFAS 160”). This statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. In addition, SFAS 160 changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. This statement also establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation and requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 and earlier adoption is prohibited. SFAS 160 shall be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, except for the presentation and disclosure requirement which shall be applied retrospectively for all periods presented. The adoption of SFAS 160 had no impact on the Company’s condensed financial position, results of operations, cash flows or financial statement disclosures.

 

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In December 2007, FASB issued SFAS No. 141R, Business Combinations (“SFAS 141R”). SFAS 141R replaces SFAS Statement No. 141 Business Combinations but retains the fundamental requirements in FASB 141. This statement defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. SFAS 141R also requires that an acquirer recognized the assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. In addition, this statement requires that the acquirer in a business combination achieved in stages to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values. SFAS 141R is applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply the standard before that date. SFAS 141R will be applied prospectively for acquisitions beginning in 2009 or thereafter. The Company expensed $0.2 million of due diligence costs relating to a potential acquisition target during the period ended March 31, 2009.
In May 2008, FASB issued Statement 163, “Accounting for Financial Guarantee Insurance Contracts”. This new standard clarifies how FAS Statement No. 60, Accounting and Reporting by Insurance Enterprises , applies to financial guarantee insurance contracts issued by insurance enterprises, including the recognition and measurement of premium revenue and claim liabilities. It also requires expanded disclosures about financial guarantee insurance contracts. The Statement is effective for financial statements issued for fiscal years beginning after December 15, 2008. We do not expect the adoption of SFAS 163 to have any impact on our consolidated financial position or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As a “Smaller Reporting Company,” we are not required to provide the information required by this item.
Item 4T. Controls and Procedures.
Disclosure Controls and Procedures
Evaluation of Disclosure Controls . We evaluated the effectiveness of the design and operation of our “disclosure controls and procedures” as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of March 31, 2009. This evaluation (the “disclosure controls evaluation”) was done under the supervision and with the participation of management, including the person(s) performing the function of our chief executive officer (“CEO”) and chief financial officer (“CFO”). Rules adopted by the SEC require that in this section of our Quarterly Report on Form 10-Q we present the conclusions of the CEO and CFO about the effectiveness of our disclosure controls and procedures as of March 31, 2009 based on the disclosure controls evaluation.
Objective of Controls. Our disclosure controls and procedures are designed so that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives, and management necessarily is required to use its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.
Conclusion . Based upon the disclosure controls evaluation, our CEO and CFO have concluded that, as of March 31, 2009, our disclosure controls and procedures were effective to provide reasonable assurance that the foregoing objectives are achieved.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 under the Exchange Act that occurred during the quarter ended March 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
The information set forth in Note 7 to the Condensed Financial Statements in Part I, Item I is incorporated herein by reference.
Item 1A. Risk Factors.
We have failed to meet applicable Nasdaq Stock Market requirements. As a result, our stock could be delisted by the Nasdaq Stock Market. If delisting occurs, it would adversely affect the market liquidity of our common stock and harm our businesses.
On October 21, 2008, we received a letter from Nasdaq indicating that we are not in compliance with the Nasdaq’s requirements for continued listing because, for the 30 consecutive business days prior to October 16, 2008, the bid price of our common stock closed below the minimum $1.00 per share price requirement for continued listing under Nasdaq Marketplace Rule 5450 (the “Rule”) and, our common stock had not maintained a minimum market value of publicly held shares (“MVPHS”) of $5 million as required for continued inclusion by the Rule. On November 17, 2008, we received a notice from Nasdaq indicating that our stockholders’ equity at September 30, 2008 was less than the $10 million in stockholders’ equity required for continued listing on The Nasdaq Global Market under Marketplace Rule 5450(b)(1)(A). In its notice, Nasdaq requested that we provide our plan to achieve and sustain compliance with the continued listing requirements of The Nasdaq Global Market, including the minimum stockholders’ equity requirement, before December 2, 2008, which we complied with. On February 27, 2009, we filed an application to transfer the listing of our common stock from the Nasdaq Global Market to the Nasdaq Capital Market.
On March 5, 2009, we received a notice from Nasdaq indicating that we had not evidenced compliance with the $10 million in stockholders’ equity requirement for continued listing on the Nasdaq Global Market under Marketplace Rule 5450(b)(1)(A), and that we do not currently meet the requirements for continued listing on The Nasdaq Capital Market because our stockholders’ equity at December 31, 2008 of $2.4 million is below the $2.5 million requirement under Marketplace Rule 5550(b). As a result, our securities are subject to delisting. We appealed the Nasdaq staff’s determination and requested an oral hearing before a Nasdaq Listing Qualifications Panel, which temporarily stayed the delisting of our common stock. Our hearing took place on April 23, 2009 and we expect to receive a determination from the Nasdaq within approximately 30 days regarding whether we can transfer our listing to the Nasdaq Capital Market, based primarily on the $4.5 million deferred gain, expected to be recognized in the next ninety days, currently recorded on our balance sheet resulting from our sale of Xmark in July 2008.
Given the current market conditions, Nasdaq suspended enforcement of the bid price and market value of publicly held shares requirements for all companies listed on Nasdaq through and including Sunday, July 19, 2009. Following the reinstatement of these rules, and in accordance with Marketplace Rule 5810(c)(3), we have 180 calendar days from Monday, July 20, 2009, or until January 16, 2010, to regain compliance with the bid price requirement. Following the reinstatement of these rules, and in accordance with Marketplace Rule 5810(c)(3), we have 90 calendar days from July 20, 2009, or until October 18, 2009, to regain compliance with the market value requirements. The Nasdaq has extended the suspension of the rules three times in the last twelve months and may decide to extend the suspended bid price and market cap requirements, given current market conditions.
If, at anytime before January 16, 2010, including during the suspension period, the bid price of our common stock closes at $1.00 per share or more for a minimum of ten (10) consecutive business days, the Nasdaq staff will provide written notification that we have achieved compliance with the Rule. However, if we do not regain compliance with the Rule by January 16, 2010, the Nasdaq staff will provide written notification that our securities will be delisted. At that time, we may appeal the Nasdaq staff’s determination to delist our securities to a Listing Qualifications Panel.
If, at anytime before October 18, 2009, the MVPHS of our common stock is $5,000,000 or greater for a minimum of ten (10) consecutive trading days, the Nasdaq staff will provide written notification that we comply with the Rule. If compliance with the Rule cannot be demonstrated by October 18, 2009, the Nasdaq staff will provide written notification that our securities will be delisted. At that time, we may appeal the Nasdaq staff’s determination to a Listing Qualifications Panel.

 

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If our common stock is delisted from the Nasdaq Stock Market, trading of our common stock most likely will be conducted in the over-the-counter market on an electronic bulletin board established for unlisted securities, such as the OTC Bulletin Board. Delisting would adversely affect the market liquidity of our common stock and harm our business and may hinder or delay our ability to consummate potential strategic transactions or investments. Such delisting could also adversely affect our ability to obtain financing for the continuation of our operations and could result in the loss of confidence by investors, suppliers and employees.
We intend to develop a renewable energy business, a line of business in which we have limited experience, from which we may never recover our investment or realize a profit.
After several months of examining a variety of opportunities in the energy sector, we established a new division to evaluate clean and alternative energy companies for potential strategic transactions or investment and as a result established a new subsidiary, VeriGreen. Following the enactment of the American Recovery and Reinvestment Act of 2009, which will invest nearly $79 billion in renewable energy, energy efficiency and green transportation, we intend to invest in clean and alternative energy businesses to complement our existing healthcare initiatives.
We have limited experience in the renewable energy sector. In addition to our capital investment, our management’s focus will also be directed towards this new business. We are presently, and will likely continue to be for some time, able to rely only upon our current management and directors for assistance in executing our business plan. While these individuals are highly experienced in business generally they have limited experience in the renewable energy industry. This lack of experience may hinder our ability to fully implement our business plan in a timely and cost efficient manner, which, in turn, may adversely affect our potential success and profitability. There can be no assurance that we will recover our investment in this new business, that we will realize a profit from this new business or that diverting our management’s attention to this new business will not have an adverse effect on our existing VeriMed Health Link business, any of which results may have an adverse effect on our results of operations, financial condition and prospects.
Item 5. Other Information.
On May 8, 2009, we, as the sole stockholder of VeriGreen, and the board of directors of VeriGreen approved and adopted the VeriGreen Energy Corporation 2009 Flexible Stock Plan (the “VeriGreen Plan”), under which employees, including officers and directors, and consultants of VeriGreen or an affiliate, including VeriChip, may receive awards. Awards under the VeriGreen Plan include incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock and cash awards. The purposes of the VeriGreen Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to employees and consultants, to promote the success of our and VeriGreen’s businesses and to link participants directly to stockholder interests through increased stock ownership in VeriGreen.
The VeriGreen Plan may be administered by the entire VeriGreen board of directors or by a compensation committee of the board of directors (the “Administrator”). Subject to the provisions of the VeriGreen Plan, the Administrator has the power to determine the terms of each award granted, including the exercise price, the number of VeriGreen shares subject to the award and the exercisability thereof.
The aggregate number of shares of VeriGreen common stock that may be subject to awards under the VeriGreen Plan, subject to adjustment upon a change in capitalization, is 3,000,000 shares. Such shares of common stock may be authorized, but unissued, or reacquired shares of common stock. Shares of common stock that were subject to VeriGreen Plan awards that expire or become unexercisable without having been exercised in full shall become available for future awards under the VeriGreen Plan.
The foregoing description of the VeriGreen Plan is qualified in its entirety by reference to the actual terms of the VeriGreen Plan, which are filed with this Quarterly Report as Exhibit 10.3.
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 hereunto duly authorized.
         
 
VERICHIP CORPORATION
(Registrant)
 
 
Date: May 14, 2009  By:   /s/ William J. Caragol    
    William J. Caragol    
    Acting Chief Financial Officer
(Duly Authorized Officer) 
 

 

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Exhibit Index
         
Exhibit    
Number   Description
  3.1    
Second Amended and Restated Certificate of Incorporation of VeriChip Corporation filed with the Secretary of State of Delaware on December 18, 2006 (1)
  3.2    
Amended and Restated By-laws of VeriChip Corporation adopted as of December 12, 2005 (1)
  4.1    
Form of Specimen Common Stock Certificate (1)
  10.1 *  
Settlement Agreement and General Release, dated March 3, 2009, among VeriChip Corporation, Jerome C. Artigliere, Clark & Martino, P.A., Baker & Hostetler, LLP, Digital Angel Corporation, Scott Silverman, Michael Krawitz and Kevin McLaughlin
  10.2 *†  
Development and Supply Agreement, dated March 17, 2009, between VeriChip Corporation and Medical Components, Inc.
  10.3 *  
VeriGreen Energy Corporation 2009 Flexible Stock Plan
  10.4    
Letter Agreement, dated December 31, 2008, between VeriChip Corporation and William J. Caragol (2)
  10.5    
Letter Agreement, dated March 27, 2009, between VeriChip Corporation and William J. Caragol (3)
  31.1 *  
Certification by Chief Executive Officer, pursuant to Exchange Act Rules 13A-14(a) and 15d-14(a)
  31.2 *  
Certification by 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.
 
  Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
 
(1)   Incorporated by reference to the Registration Statement on Form S-1 previously filed by VeriChip Corporation (Registration No. 333-130754).
 
(2)   Incorporated by reference to the Form 8-K previously filed by VeriChip Corporation on January 6, 2009.
 
(3)   Incorporated by reference to the Form 8-K previously filed by VeriChip Corporation on March 30, 2009.

 

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Exhibit 10.1
SETTLEMENT AGREEMENT AND GENERAL RELEASE
This Settlement Agreement and General Release (the “Agreement”) is entered into as of March 3, 2009, by and among Jerome C. Artigliere (“Artigliere” or “Plaintiff”), Artigliere, Clark & Martino, P.A. (“C&M”) and Baker & Hostetler, LLP (“B&H”; each a “Stock Recipient” and collectively, the “Stock Recipients”), Digital Angel Corporation f/k/a Applied Digital Solutions, Inc. (“DIGA”), VeriChip Corporation (“VeriChip”), Scott Silverman (“Silverman”), Michael Krawitz (“Krawitz”) , and Kevin McLaughlin (“McLaughlin,” together with DIGA, VeriChip, Silverman and Krawitz, collectively, the “Defendants”), and Baker & Hostetler, LLP (“Escrow Agent”).
RECITALS
A. On or about July 8, 2008, Plaintiff filed a lawsuit against DIGA and VeriChip entitled Artigliere v. VeriChip Corporation, et al. , in the Circuit Court of the Fifteenth Judicial District in and for Palm Beach County, Florida, and on September 12, 2008, Plaintiff amended his complaint to add, among other things, claims against Silverman, Krawitz, and McLaughlin (collectively, the “Action”).
B. The parties, through their counsel, reached a settlement of the Action on February 12, 2009 during a voluntary mediation in the Action.
C. The parties entered into a Settlement Agreement, dated February 12, 2009 (the “Original Agreement”) and now desire to enter into this Agreement in furtherance of their settlement.

 

 


 

AGREEMENT
In consideration of the recitals and mutual promises contained in this Agreement, the adequacy of which are hereby acknowledged, the parties agree to settle their disputes on the following terms.
1.  Consideration .
a. Cash . The Cash Component of the settlement amounts to Three Hundred Fifty Thousand Dollars (US$350,000.00) payable as follows: Two Hundred Seventy-Five Thousand Dollars (US$275,000.00) from VeriChip and Seventy-Five Thousand Dollars (US$75,000.00) from its insurer, XL Specialty Insurance Company (“XL”). XL shall pay $75,000; and VeriChip shall pay the sum of One Hundred Ninety Four Thousand Five Hundred Fifty Three and Twenty One Cents(US$194,553.21) via wire transfer pursuant to the wire transfer instructions attached hereto as Exhibit A or delivery of a check made payable to the Baker & Hostetler, LLP Trust Account (“Cash Consideration”), within ten (10) calendar days of the execution of this Agreement by all parties hereto (the “Execution Date”). The $75,000 of the Cash Consideration payable by XL Specialty Insurance Company is in settlement of claims asserted in the Action unrelated to any wages or compensation purportedly due to Artigliere as payment for such wages or compensation is excluded from coverage under the policy. One Hundred Twenty Eight Thousand Two Hundred Twelve Dollars and Eighty Four Cents (US$128,212.84) of the Cash Component represents attorneys’ fees and costs payable to C&M and B&H for litigating this Action (“Law Firm Cash Consideration”). One Hundred Forty Six Thousand Seven Hundred Eighty Seven Dollars and Sixteen Cent (US$146,787.16) of the Cash Component shall be transferred to Artigliere from the Baker & Hostetler LLP Trust Account in settlement of the claims asserted by him in this Action involving his purported entitlement to certain options to purchase VeriChip common stock (“Artigliere Cash Consideration”).
b. DIGA Promissory Note . DIGA shall execute and deliver to Plaintiff, or Plaintiff’s assignee or designee, a promissory note in the principal sum of Two Hundred Fifty Thousand Dollars (US$250,000.00) in the form attached hereto as Exhibit B (“Note Consideration”). The Note Consideration represents payment solely for the claims asserted in this Action involving the purported failure of DIGA to timely register the DIGA shares Artigliere claimed he was entitled to and not any wages or compensation to Artigliere.

 

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c. VeriChip Stock . VeriChip agrees to give Plaintiff, or Plaintiff’s assignee or designee, in the manner specified in Section 3 below, unregistered shares of VeriChip common stock (the “VeriChip Common Stock”) which, as of the dates specified below, shall be worth Two Hundred Fifty Thousand Dollars (US$250,000.00) (the “Stock Consideration”). Plaintiff may direct that the shares be issued in three (3) separate certificates, each to be issued to a different person or entity, with the total shares not to exceed the number of shares set forth above. $75,000 of the Stock Consideration represents attorneys’ fees and costs payable to C&M and B&H for litigating this Action (“Law Firm Stock Consideration”). $175,000 of the Stock Consideration represents the settlement of the claims asserted by Artigliere in this Action involving his purported entitlement to certain options to purchase VeriChip stock (“Artigliere Stock Consideration”).
d. Sole Consideration . The consideration set forth in Sections 1(a)-(c) above shall be the only payments, in cash or otherwise, now or in the future, due to Plaintiff or his successors, heirs and assigns, from the Defendants or any other Defendant Released Parties (as defined below). The Defendants obligations under this Agreement shall be several and not joint.
2.  Dismissal of the Action . Within ten (10) days from the Execution Date, Plaintiff shall file with the court a dismissal with prejudice (the “Dismissal”) of the Action.
3. Stock Consideration .
a. Name . The stock certificates evidencing the shares for the Stock Consideration shall be issued to Stock Recipients in the percentage and number of shares opposite such Stock Recipient’s name on Exhibit C .

 

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b. Delivery of Stock Consideration . Within five (5) business days of the Execution Date (the “Issuance Date”), VeriChip shall cause its transfer agent to issue and deliver to Escrow Agent duly authorized, validly issued, fully paid and non-assessable shares of VeriChip Common Stock (the “Restricted Shares”) valued at Three Hundred Thousand Dollars (US$300,000.00) in the name of the Stock Recipients in accordance with Exhibit C (the “Escrow”). The Restricted Shares to be placed in Escrow shall be determined by dividing the sum of Three Hundred Thousand Dollars ($300,000.00) by the VeriChip Average Trading Price (as defined below) preceding the Execution Date. For example, if the calculation of the VeriChip Average Trading Price is forty cents ($0.40) per share on the Execution Date, the number of unregistered shares to be deposited into Escrow shall be Seven Hundred Fifty Thousand (750,000) shares. Notwithstanding anything herein to the contrary, VeriChip shall not be required to issue Stock Consideration to Stock Recipients if the aggregate Stock Consideration issued hereunder would exceed 19.9% of the common stock of VeriChip outstanding on any of the following dates: the Issuance Date or any Escrow Release Date (as defined below).
c. Restrictive Legend . The stock certificates representing the Restricted Shares or Additional Shares (as defined below) will bear a legend stating that they have not been registered and that they are subject to the restrictions set forth in this Agreement. VeriChip agrees to issue certificates without the legend representing the Restricted Shares, upon resale subject to an effective registration statement after such Restricted Shares are registered under the Securities Act of 1933, as amended (the “Securities Act”). VeriChip agrees to issue certificates without the legend representing the Additional Shares, after the date which is six (6) months from the date such Additional Shares were issued to Stock Recipients in compliance with Rule 144.
d. Delivery Of Unrestricted Stock Certificates . Within forty-five (45) days of the Execution Date, VeriChip will cause to be filed with the Securities and Exchange Commission (“SEC”) a registration statement (each a “Registration Statement”) covering the Restricted Shares issued so as to insure that those shares are registered for resale on or before September 3, 2009 (the “Registration Deadline). Upon the effectiveness of the Registration Statement (the “Effective Date”), the Escrow Agent may request on behalf of the Stock Recipients that VeriChip remove the restrictive legend thereon; provided such shares are registered and sold pursuant to an effective Registration Statement.

 

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e. Average Trading Price . As used herein, “VeriChip Average Trading Price” shall mean the volume weighted average price per share of the VeriChip Common Stock as reported on The NASDAQ Global Market (or, if the Common Stock is not then listed or quoted and traded on The NASDAQ Global Market, then the NASDAQ Capital Market or over-the-counter or other market on which the VeriChip Common Stock is traded) for the 10 consecutive trading day period preceding the applicable measurement date.
f. Amount of Stock Payment Prior to the Registration Deadline . In the event the Registration Statement is declared effective by the SEC on or prior to the Registration Deadline, the Escrow Agent shall be promptly notified of the effective date of the Registration Statement. Within one (1) business day of being provided notice of the Effective Date, Escrow Agent shall notify VeriChip of the proposed number of shares of VeriChip Common Stock to be released from Escrow (the “Escrow Agent Notice”) that have a value, based on the VeriChip Average Trading Price preceding the Effective Date, of Two Hundred Fifty Thousand Dollars (US$250,000.00) (the “Target Value”). If on or before 5:00 p.m. on the date which is two (2) business days following VeriChip’s receipt of the Escrow Agent Notice, VeriChip shall object to the number of shares of VeriChip Common Stock to be released to Stock Recipients (“VeriChip Objection Notice”), then Escrow Agent shall not disburse the shares to Stock Recipients which exceed the number of undisputed shares to which VeriChip has no objection until the dispute is resolved. However, if VeriChip does not deliver a VeriChip Objection Notice to Escrow Agent on or before 5:00 p.m. on the date which is four (4) business days following VeriChip’s receipt the Escrow Agent Notice, then Escrow Agent may disburse that number of shares equaling the Target Value to Stock Recipients in accordance with their percentage interests set forth in Exhibit C.

 

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g. Amount of Stock Payment after the Registration Deadline . In the event the Registration Statement is not declared effective by the SEC by the Registration Deadline, the Escrow Agent shall within one (1) business day after the Registration Deadline provide VeriChip with an Escrow Agent Notice notifying VeriChip of the proposed number of shares of VeriChip Common Stock to be released from Escrow that have a value based on the VeriChip Average Trading Price preceding the Escrow Release Date, of Three Hundred Thousand Dollars (US$300,000.00) (the “Penalty Value” and the Target Value, each an “Applicable Value”). The date(s) the Escrow Agent releases the Restricted Shares or any Additional Shares to the Stock Recipients shall be known as an “Escrow Release Date.” If on or before 5:00 p.m. on the date which is two (2) business days following VeriChip’s receipt of the Escrow Agent Notice, VeriChip provides the Escrow Agent with VeriChip Objection Notice, then Escrow Agent shall not disburse the shares to Stock Recipients which exceed the number of undisputed shares to which VeriChip has no objection until the dispute is resolved. However, if VeriChip does not deliver a VeriChip Objection Notice to Escrow Agent on or before 5:00 p.m. on the date which is four (4) business days following VeriChip’s receipt the Escrow Agent Notice, then Escrow Agent may disburse that number of shares equaling the Penalty Value to Stock Recipients. After the Registration Deadline, VeriChip’s obligations to have the Registration Statement declared effective shall terminate on the earlier of the date (i) any Stock Recipient is able to sell the Restricted Shares pursuant to an exemption from registration under Rule 144 or (ii) that is twelve (12) months following the issuance of the Restricted Shares.
h. Difference In Value . If the aggregate number of Restricted Shares in the Escrow is less than the Applicable Value on the Escrow Release Date, then VeriChip shall cause its transfer agent to issue in each Stock Recipient’s name (in accordance with their percentage interests set forth on Exhibit C) stock certificates representing such number of additional shares of VeriChip Common Stock (“Additional Shares”) that have a value, based on the VeriChip Average Trading Price

 

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preceding the Effective Date, equal to the difference between the value of the Restricted Shares held in the Escrow and the Applicable Value. Such Additional Shares shall be delivered to the Escrow Agent to be held for the benefit of the Stock Recipients. If the value of the Restricted Shares held in the Escrow exceeds the Applicable Value on the Escrow Release Date, those shares representing the excess value (the “Excess Shares”) shall be immediately returned to VeriChip for cancellation. The certificate(s) representing Excess Shares must be returned bearing the such Stock Recipient’s endorsement(s) with Medallion signature guarantee(s), or with stock power(s) bearing such Stock Recipient’s signature with Medallion signature guarantee(s), as required by VeriChip’s transfer agent to allow cancellation of the Restricted Shares. The Stock Recipients or their assigns will reasonably assist in paperwork required by VeriChip’s transfer agent required to cancel the shares.
4.  Sale of VeriChip Common Stock by Plaintiff or Stock Recipients . Plaintiff, Stock Recipients and their designees and assignees agree that in the aggregate they, he or it will not sell on the open market in any one day a number of shares of VeriChip Common Stock which exceeds the average daily trading volume of the VeriChip Common Stock for the 10 consecutive trading day period preceding the Execution Date.
5.  VeriChip Option To Pay Cash . Notwithstanding anything herein to the contrary, in its sole and absolute discretion, VeriChip shall have the option of paying the Applicable Value, in whole or in part, through a payment by a check, wire transfer of funds or other cash equivalent.
6.  Merger, Etc . If there occurs any merger of VeriChip with or into another Person (other than a merger or consolidation of VeriChip in which VeriChip is the continuing entity and which does not result in any reorganization or reclassification of VeriChip’s outstanding Common Stock) or the sale or conveyance of all or substantially all of the assets of VeriChip to another person, then, the Stock Recipients will be entitled to receive upon surrender of the Restricted Shares the same kind and amounts of securities or other assets, or both, that are issuable or distributable to the holders of outstanding VeriChip Common Stock upon such merger, sale or conveyance. “Person” means and includes an individual, bank, partnership, joint venture, limited liability company, corporation, trust, unincorporated organization and government or any department or agency thereof.

 

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7.  Release of Escrow . The Escrow Agent agrees to release the Stock Consideration from Escrow as provided in Section 3 above. The parties acknowledge that the only terms and conditions upon which the Stock Consideration is to be released from Escrow is as set forth in Section 3 of this Agreement. Any dispute with respect to the release of the Stock Consideration shall be resolved pursuant to Section 26 or by written agreement among the parties. VeriChip shall be obligated, however, under any circumstance, to authorize the Escrow Agent to release any amounts of undisputed shares to which VeriChip agrees the Stock Recipients are entitled.
8.  Termination of Escrow . The Escrow shall terminate upon the earlier to occur of the following:
a. upon the mutual written consent of VeriChip and Stock Recipients (written notice of which shall be given jointly to the Escrow Agent); or
b. upon the disbursement of all of the Stock Consideration from Escrow.
9. Mutual General Releases .
a. By Plaintiff . Except for obligations under this Agreement, Plaintiff (for himself and his successors in interest, predecessors in interest, heirs, assigns, employees, attorneys, partners, officers and directors) hereby unconditionally remises, releases, acquits, satisfies and forever discharges Defendants and their respective past and present parents, subsidiaries, affiliates, predecessor entities, officers, directors, stockholders, employees, insurers, attorneys, accountants, heirs, predecessors, successors and assigns (collectively, the “Defendant Released Parties”), of and from any and all claims, actions, causes of action, suits, debts, sums of money, accounts, reckonings, contracts, controversies, agreements,

 

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promises, damages, costs, expenses (including but not limited to attorneys’ fees), and demands whatsoever, in law or in equity, which Plaintiff had or now has, or which any successor or assign of Plaintiff hereafter can, shall or may have, against any of the Defendant Released Parties for, upon, or by reason of any matter, cause or thing whatsoever, from the beginning of the world to the date of this Agreement, whether known or unknown, direct or indirect, vested or contingent, suspected or unsuspected, asserted or unasserted (the “Claims”). Without limiting the generality of the foregoing, this release includes the release of any and all Claims which were or could have been raised or asserted by Plaintiff against the Defendant Released Parties in the Action. Notwithstanding the foregoing, Plaintiff expressly excludes from the effect of this release and does not release the Defendant Released Parties from: (a) the terms and conditions of the definitive settlement documents to which reference is made above, and (b) to the extent the Defendant Released Parties have any authority to bind IFTH Acquisition Corp., Plaintiff’s rights to exercise Plaintiff’s options in IFTH Acquisition Corp., formerly known as Infotech and referred to hereafter as “Infotech.” The parties also agree that nothing contained in this Agreement shall have any effect on Plaintiff’s rights to exercise Plaintiff’s options in Infotech, to the extent the Defendant Released Parties have any authority to bind Infotech, they agree that Plaintiff’s options are valid and enforceable through their expiration date.
b. By Defendants . Except for obligations under this Agreement, Defendants (for themselves and their successors in interest, predecessors in interest, heirs, assigns, employees, attorneys, partners, officers and directors) hereby unconditionally remise, release, acquit, satisfy and forever discharge Plaintiff and his past and present agents, attorneys, accountants, insurers, servants, and employees (collectively, the “Plaintiff Released Parties”), of and from any and all Claims. Without limiting the generality of the foregoing, this release includes the release of any and all Claims which were or could have been raised or asserted by Defendants against the Artigliere Released Parties in the Action. Notwithstanding the foregoing, Defendants expressly exclude from the effect of this release and do not release: (i) the Artigliere Released Parties from the terms and conditions of this Agreement including, but not limited to, the indemnification provision in Paragraph 10 (e) herein; or (ii) the Defendant Released Parties from the terms and conditions of this Agreement.

 

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c. Mutual Limited Release Among Defendants . Defendants hereby mutually remise, release, acquit, satisfy, and forever discharge each other (including their respective past and present parent, subsidiary, affiliate or predecessor entities, and any and all of his, her, its and/or their respective past and present officers, directors, agents, attorneys, accountants, insurers, servants, employees, and stockholders, and their respective heirs and personal representatives) of and from any and all, and all manner of, claims, actions, causes of action, suits, debts, sums of money, accounts, reckonings, contracts, controversies, agreements, promises, damages, and demands whatsoever, in law or in equity, which any of one them had or now has, or which any successor or assign of any one of them hereafter can, shall or may have, against each other by reason of the subject matter of the Action, including but not limited to any cross-claims or third-party claims which were or could have been asserted in the Action. It is expressly understood and agreed that this paragraph is not a general release and shall not be construed or interpreted as such. It is further understood that the limited release in this paragraph does not release (a) VeriChip from its indemnification obligations to Krawitz, Silverman and/or McLaughlin in the event of a breach (or purported breach claimed by Artigliere) of this Agreement by VeriChip, or (b) DIGA from its indemnification obligations to Krawitz, Silverman and/or McLaughlin in the event of a breach (or purported breach claimed by Artigliere) of this Agreement by DIGA.
10. Tax Issues .
a. DIGA agrees to provide Clark & Martino, P.A. with a 1099 for the Note Consideration and one-half of the Law Firm Stock Consideration.
b. VeriChip agrees to provide Baker & Hostetler, LLP with a 1099 for the Law Firm Cash Consideration and one-half of the Law Firm Stock Consideration.

 

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c. VeriChip will provide Artigliere with a Form W-2 for the Artigliere Cash Consideration and the Artigliere Stock Consideration.
d. VeriChip will withhold Eighty Thousand Four Hundred Forty Six Dollars and Seventy Nine Cents (US$80,446.79) of the Cash Component for the payment of applicable employee’s tax obligations for Federal Income and other applicable taxes (the “Withholding Amount”) relating to Artigliere. VeriChip agrees to pay the Withholding Amount to the U.S. Treasury or other governmental body when it is due and owing.
e. Artigliere (for himself and his successors in interest, predecessors in interest, heirs, assigns, employees, attorneys, partners, officers and directors) agrees to hold harmless, defend, and indemnify the Defendant Released Parties from and against any and all claims, losses, demands, causes of action, deficiencies, suits, judgments, debts, damages, penalties, audits, expenses or liabilities, including reasonable attorneys’ fees and costs arising from (i) any failure on Artigliere’s part to pay any and all applicable taxes due by him as a result of consideration received as a result of the settlement of this Action; or (ii) any audit by the IRS or any other governmental body relating to the taxes due by Artigliere as a result of consideration received as a result of the settlement of this Action.
11.  Costs . Each party shall bear his or its own attorneys’ fees and costs arising out of or related to the Action and the Claims released herein, and no further Claim shall be made therefor.
12.  Confidentiality . The parties and their respective officers, agents, representatives, successors, assigns, heirs, and attorneys agree that this Agreement shall be confidential, and they will not disclose, disseminate, or publish the existence of this Agreement, or any of its terms, directly or indirectly, specifically or generally, to any person, corporation, association, or other entity, except as necessarily disclosed by the parties hereto: (a) to enforce the terms of this Agreement; (b) for use by their attorneys, boards of directors and/or trustees, or accountants in their capacity as such; (c) to comply with any governmental or law enforcement agency or any regulatory organization having jurisdiction over some or all of the parties; or (d) as required pursuant to any lawfully issued subpoena or other legal process. This provision is tantamount to an injunction issued by a court of competent jurisdiction and will subject the breaching party to sanctions, injunctive relief, or any other equitable or legal right which any party hereto may have hereunder for any failure by a party to perform his or its obligations hereunder.

 

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13.  No Admission of Liability . Each of the parties hereto understands and agrees that by providing the consideration referred to above, and by executing this Agreement, neither they nor or any of them admit any negligence, carelessness, liability, obligation, misconduct or wrongdoing of any kind or nature whatsoever. The settlement is made entirely as a compromise and for the purpose of settling a dispute, and to compromise, settle and extinguish all claims, acts, damages, demands, rights of action and causes of action claimed by any party hereto, or any of them, against any other party hereto, or any of them.
14.  Mutual Non-Disparagement . Each of the parties agrees that it shall not publicly or privately disparage the other or the agents, servants or employees of the other, but rather shall act in good faith to refrain from any conduct or communication which might reasonably be expected to interfere with the business and/or personal interests of the other.
15.  Independent Counsel . Each party acknowledges that he or it has been represented by counsel of his or its own choice throughout all of the negotiations which preceded the execution of this Agreement and in connection with the preparation and execution of this Agreement.
16.  Application To Successors/Predecessors . This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective past and present attorneys, representatives, predecessors, successors and assigns. All of the covenants herein contained in favor of Plaintiff, on the one hand, and the Defendants, on the other hand, are for the express benefit of each and all of said parties.
17. Representations and Warranties of the Parties .
a. Each person executing this Agreement warrants that he or it has the authority to execute this Agreement from the party or parties on whose behalf such person is purporting to execute it.

 

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b. Each party represents and warrants that there has been no grant, sale, assignment, transfer or other conveyance of any interests and/or rights in, to and into the Claims which the parties are releasing in this Agreement. Each party agrees that he will defend and hold harmless any of the other released parties under this Agreement, including payment of those parties’ reasonable costs and attorneys fees, in the event that a third party makes any Claim or other demand based on or arising from any of the Claims which were released in this Agreement.
c. Each party has carefully read and reviewed this Agreement and understands it fully, and each party specifically does not rely upon any statement, representation, legal opinion, accounting opinion or promise of any other party or any person representing such other party, in executing this Agreement or in making the settlement provided for herein, except as expressly stated in this Agreement.
d. Each party has made such an investigation of the law and facts pertaining to this settlement and this Agreement and of all matters pertaining thereto as it deems necessary. Each party has been represented by competent counsel of its own choosing who has provided such party any and all advice on this settlement and this Agreement as it deems necessary. This Agreement has been carefully read by, the contents hereof are known and understood by, and it is signed freely by each party executing this Agreement.
e. This Agreement is the result of arms’ length negotiation between the parties.
f. Each party to this Agreement agrees that, absent and subject to an order from a court of competent jurisdiction or similar compulsion of law, such party will not, either directly or indirectly, take any action which would interfere with the performance of this Agreement by any party hereto, or which would adversely affect any of the rights provided for herein.

 

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g. Each party to this Agreement agrees that the $75,000 of the Cash Consideration payable by XL Specialty Insurance Company is in settlement of claims asserted in the Action unrelated to any wages or compensation purportedly due to Artigliere as payment for such wages or compensation is excluded from coverage under the Policy.
h. Each party to this Agreement agrees that the Note Consideration represents payment solely for the claims asserted in this Action involving the purported failure of DIGA to timely register the DIGA shares Artigliere claimed he was entitled to and not any wages or compensation to Artigliere.
18. Representations and Warranties of Plaintiff and Stock Recipients .
a. The Stock Consideration to be received hereunder by each Stock Recipient will be acquired for his or its own account, not as nominee or agent, for investment purposes and not with a view to, or for offer or sale in connection with directly or indirectly, any distribution in violation of the Securities Act or any other applicable securities law and with no intention of participating in the formulation, determination or direction of the basic business decisions of VeriChip.
b. No Stock Recipient is a registered broker dealer or engaged in the business of being a broker dealer.
c. Each Stock Recipient can bear the economic risk and complete loss of his or its investment in the Stock Consideration and he or it has such knowledge and experience in financial or business matters that he or it is capable of evaluating the merits and risks of the investment contemplated hereby.
d. Each Stock Recipient has had access to all financial and other information concerning VeriChip and the Stock Consideration as he or it wished to examine in order to make a decision regarding the settlement consideration to be received hereunder, including an opportunity to ask questions of and receive information from management of VeriChip.
e. Each Stock Recipient is an accredited investor as defined in Rule 501(a) of Regulation D, as amended, under the Securities Act.

 

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f. The Stock Recipients and Artigliere agree that the Law Firm Cash Consideration represents attorneys’ fees and costs payable to C&M and B&H for litigating this Action.
g. The Stock Recipients and Artigliere agree that the Law Firm Stock Consideration represents attorneys’ fees and costs payable to C&M and B&H for litigating this Action.
19.  Plaintiff’s and Stock Recipients’ Further Obligations . Plaintiff and Stock Recipients agree to:
a. timely furnish to VeriChip in writing such information regarding itself and the intended method of disposition of the Stock Consideration as VeriChip shall reasonably request in order to effect the registration thereof or to comply with applicable law;
b. to the extent required by applicable law, deliver a preliminary and definitive prospectus to the purchaser of the Stock Consideration sold under any Registration Statement;
c. notify VeriChip when it has sold all of the Stock Consideration held by it;
d. notify VeriChip promptly in the event that any information supplied by Plaintiff or any Stock Recipient in writing for inclusion in such Registration Statement or related prospectus is untrue or omits to state a material fact required to be stated therein or necessary to make such information not misleading in light of the circumstances then existing; immediately discontinue any sale or other disposition of the Stock Consideration pursuant to such Registration Statement until the filing of an amendment or supplement to such prospectus as may be necessary so that such prospectus does not contain an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; and provide VeriChip with updates on such information as may be appropriate to make such amendment or supplement effective for such purpose;

 

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e. otherwise use commercially reasonable efforts to assist VeriChip and the underwriters, if any, in the preparation of documentation reasonably necessary or desirable to effectuate the resale of the Stock Consideration pursuant to any Registration Statement filed in accordance herewith;
f. upon receipt of a notice from VeriChip of the occurrence of a Discontinuation Event (as defined below), Plaintiff will direct each Stock Recipient, and Plaintiff and each Stock Recipient agree to discontinue forthwith any disposition of such Stock Consideration under the applicable Registration Statement until the Plaintiff’s and Stock Recipients’ receipt of the copies of the supplemented prospectus and/or amended Registration Statement or until it is advised in writing by VeriChip that the use of the applicable prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such prospectus or Registration Statement. VeriChip may provide appropriate stop orders to enforce the provisions of this paragraph. For purposes of this Agreement, a “Discontinuation Event” shall mean (i) when the SEC notifies VeriChip whether there will be a “review” of such Registration Statement and whenever the SEC comments in writing on such Registration Statement (VeriChip shall provide true and complete copies thereof and all written responses thereto to the Plaintiff); (ii) any request by the SEC or any other Federal or state governmental authority for amendments or supplements to such Registration Statement or prospectus or for additional information; (iii) the issuance by the SEC of any stop order suspending the effectiveness of such Registration Statement covering any or all of the Stock Consideration or the initiation of any proceedings for that purpose; (iv) the receipt by VeriChip of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Stock Consideration for sale in any jurisdiction, or the initiation or threatening of any proceeding for such purpose; and/or (v) the occurrence of any event or passage of time that makes the financial statements included in such Registration Statement ineligible for inclusion therein or any statement made in such Registration Statement or prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to such Registration Statement, prospectus or other documents so that, in the case of such Registration Statement or prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.

 

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20.  Entire Agreement . This Agreement and the Exhibits hereto contain the entire agreement of the parties concerning the subject matter hereof, supersede all prior understandings, discussions and agreements of the parties concerning the subject matter hereof and cannot be altered, modified or amended except by writing dated after the date hereof and signed by each of the parties hereto. This Agreement specifically supersedes and replaces the Original Agreement.
21.  Notices . Except as expressly provided above, all demands, notices and communications under this Agreement shall be sent via overnight or hand delivery as follows (subject to the right of each party to change this notice designation by written notice to the other, delivered by personal courier, overnight delivery or certified mail):
TO PLAINTIFF/STOCK RECIPIENTS:
Jerome C. Artigliere
48 Stumpfield Road
Kensington, NH 03833
With a copy to:

David S. Oliver, Esq.
Baker & Hosteler LLP
SunTrust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32802
and
J. Daniel Clark, Esq.
Clark & Martino, P.A.
3407 W. Kennedy Blvd.
Tampa, FL 33609-2905

 

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TO VERICHIP, SILVERMAN, KRAWITZ and MCLAUGHLIN:
VeriChip Corporation
1690 South Congress Avenue
Suite 200
Delray Beach, Florida 33445
Attention: Mr. William J. Caragol
Acting Chief Financial Officer
TO DIGA:
Digital Angel Corporation
490 Villaume Avenue
South St. Paul, Minnesota 55075Attn:
Attn: Patricia Petersen
General Counsel
In each case, with a copy to:
Louise McAlpin, Esq.
Holland & Knight LLP
701 Brickell Avenue, Suite 3000
Miami, Florida 33131
TO ESCROW AGENT:
David S. Oliver, Esq.
Baker & Hostetler, LLP
SunTrust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32802
22.  Construction of Agreement . This Agreement shall be construed as a whole according to its fair meaning, and as if jointly drafted by all parties. The language of this Agreement shall not be construed for or against any party. No provision of this Agreement shall be construed against any party by virtue of the activities of that party or such party’s attorneys. The headings used in this Agreement are for reference only and shall not affect the construction of the Agreement.

 

18


 

23.  Severability . The parties hereto covenant and agree that in the event that any provision of this Agreement should be held by a court of competent jurisdiction to be void, voidable, illegal or unenforceable in any respect, the remaining portions thereof and provisions hereof shall nevertheless remain in full force and effect as if such void, voidable, illegal or unenforceable provision had never been contained in this Agreement.
24.  Waiver . No breach of any provision hereof can be waived unless in writing. Waiver of any one breach of any provision hereof shall not be deemed to be a waiver of any other breach of the same or any other provision hereof.
25.  Amendments In Writing . This Agreement may be amended only by a written agreement executed by or on behalf of each of the parties hereto.
26.  Governing Law and Venue . This Agreement shall be construed in accordance with, and governed by, the laws of the State of Florida without regard to its conflict of laws provisions. The parties agree that any action to enforce this Agreement shall be brought in the 15 th Judicial Circuit Court in and for Palm Beach County, Florida. Moreover, each party agrees and consents to the exercise of personal jurisdiction in these courts for the purpose of any enforcement action.
27.  Prevailing Party Fees and Costs . In the event of any proceeding to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to recover all reasonable costs thereof, including reasonable attorneys’ fees and fees on appeal.
28.  Execution in Counterparts . This Agreement may be executed and delivered in two or more counterparts, each of which, including but not limited to pages transmitted by facsimile or by electronic transmission, when so executed and delivered, shall be deemed to be an original.
(Remainder of page intentionally left blank; signature page follows)

 

19


 

IN WITNESS WHEREOF, the parties hereto each have approved and executed this Agreement effective as of the date set forth above.
                     
            VERICHIP CORPORATION    
 
                   
By:
  /s/ Jerome C. Artigliere       By:   /s/ William J. Caragol    
 
                   
 
  Jerome C. Artigliere           William J. Caragol    
 
              Acing Chief Financial Officer    
 
                   
            DIGITAL ANGEL CORPORATION    
 
                   
By:
  /s/ Scott Silverman       By:   /s/ Patricia M. Petersen    
 
                   
 
  Scott Silverman           Patricia M. Petersen    
 
              General Counsel    
 
                   
By:
  /s/ Michael Krawitz       By:   /s/ Kevin McLaughlin    
 
                   
 
  Michael Krawitz           Kevin McLaughlin    
 
                   
ESCROW AGENT:                
 
                   
BAKER & HOSTETLER, LLP                
 
                   
By:
  /s/ David S. Oliver
 
Name: David S. Oliver
               
 
  Title:   Partner                
[Additional Signature Page to Follow]

 

 


 

STOCK RECIPIENTS:
             
By:   /s/ Jerome C. Artigliere    
         
    Jerome C. Artigliere    
 
           
BAKER & HOSTETLER, LLP    
 
           
By:   /s/ David S. Oliver    
         
 
  Name:   David S. Oliver    
 
  Title:   Partner    
 
           
CLARK & MARTINO, P.A .    
 
           
By:   /s/ J. Daniel Clark    
         
 
  Name:   J. Daniel Clark    
 
  Title:   Partner/Shareholder    

 

 


 

Exhibit A
Wire Transfer Instructions

 

 


 

Exhibit B
PROMISSORY NOTE
     
 US$250,000.00   South St. Paul, Minnesota
March 3, 2009
FOR VALUE RECEIVED, the undersigned, Digital Angel Corporation, a Delaware corporation (“Maker”), promises to pay to the order of Jerome C. Artigliere or his successors, assigns or designees (“Payee”), at Payee’s address located at the Clark & Martino P.A. Trust Account, c/o J. Daniel Clark, Esq., 3407 W. Kennedy Blvd., Tampa, Florida 33609-2905, the principal sum of Two Hundred Fifty Thousand Dollars and 00/100 (US$250,000.00), with interest thereon as provided below in lawful money of the United States of America.
Interest on this Promissory Note (“Note”) shall accrue on the principal at the prime rate published in the Wall Street Journal on the date of execution of this Note until the Maturity Date (as defined below). Interest shall be calculated and charged daily on the basis of actual days elapsed over a three hundred sixty (360) day banking year, on the unpaid principal balance outstanding from time to time. Commencing on March 31, 2009, and continuing on the last day of each and every month after such date through and including the Maturity Date, the said principal sum, together with interest on said principal sum, shall be paid in equal, consecutive monthly installments of $7,297.88. The outstanding principal balance and all interest on said principal shall be due and payable on or before March 31, 2012 (the “Maturity Date”).
Each payment of principal, interest and expenses to Payee shall be made on a Business Day (as hereinafter defined), and any payment otherwise falling due on a day other than a Business Day shall be payable on the next succeeding Business Day. As used herein, “ Business Day ” shall mean a day other than a Saturday, a Sunday, or a day on which banks located in Delray Beach, Florida are required or permitted by law to remain closed. The aforesaid payments shall be applied first to accrued interest on the unpaid balance at the rate hereinabove specified and lastly to the payment of principal.
The word “holder,” as used in the Note, shall mean the Payee or endorsee of the Note who is in possession of it.
It is further agreed hereby that if any payment of principal or interest shall not be made as and when due and such failure shall continue for a period of five (5) business days following the date upon which such payment was due; or upon the insolvency, bankruptcy or dissolution of the Maker; then, in any or all such events, the entire amount of principal of the Note with all interest then accrued, shall, at the option of the holder of the Note and without notice, become and be due and collectible, time being of the essence for all sums due under the Note. If the Note shall not be paid at maturity, it may be placed in the hands of an attorney at law for collection, and in that event, Maker hereby agrees to pay the holder hereof in addition to the sums above stated, a reasonable sum for attorney’s fees, including appellate fees.
After maturity or default, the Note shall bear interest at eighteen percent (18%) per annum; provided further, however, that in no event shall such rate exceed the highest rate permissible under the applicable law.

 

 


 

THE NOTE MAY BE PREPAID IN WHOLE OR IN PART AT ANY TIME WITHOUT PENALTY UPON NOT LESS THAN FIVE (5) DAYS PRIOR WRITTEN NOTICE TO THE PAYEE. THE PAYMENT OF ANY LARGER OR ADDITIONAL SUM IN ADVANCE OF THE PAYMENTS HEREIN REQUIRED SHALL NOT RELIEVE THE MAKER OF THE PAYMENT OF ANY OTHER SUMS DUE AS HEREIN PROVIDED.
No delay or omission on the part of the Payee in exercising any right, privilege or remedy shall impair such right, privilege or remedy or be construed as a waiver thereof or of any other right, privilege or remedy. No waiver of any right, privilege or remedy or any amendment to the Note shall be effective unless made in writing and signed by the Payee. The acceptance by the Payee hereof of any payment after any default hereunder shall not operate to extend the time of payment of any amount then remaining unpaid hereunder or constitute a waiver of any rights of the Payer hereof under the Note. The unenforceability or invalidity of any provision of this Note as to any person or circumstances shall not render that provision or those provisions unenforceable or invalid as to any other provisions or circumstances, and all provisions hereof, in all other respects, shall remain valid and enforceable. All persons now or at any time liable for payment of the Note hereby waive presentment, protest, notice of protest, and notice of dishonor. The indebtedness evidenced by this Note shall be subordinated in right of payment and priority to the payment in full of the Maker’s obligations to its senior lenders, Laurus Master Fund, Ltd. and its affiliates.
The Note and the provisions hereof shall be binding upon the Maker and the Maker’s successors and assigns and shall inure to the benefit of the Payee, the Payee’s heirs, administrators, executors, successors, legal representatives and assigns. The Maker may not assign its rights or obligations under the Note.
The Note may not be amended, changed or modified in any respect except by a written document that has been executed by each party. The Note is to be construed according to the applicable laws of the State of Florida, without regard to its conflicts of law principles. Any action brought upon the enforcement of this Note is hereby authorized to be instituted and prosecuted in the state and federal courts located in Palm Beach County, Florida.
MAKER AND PAYEE HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT MAKER OR PAYEE, OR ANY OTHER PERSON MAY HAVE TO A TRIAL BY JURY IN RESPECT TO ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THE NOTE AND ANY DOCUMENT CONTEMPLATED TO BE EXECUTED IN CONJUNCTION HEREWITH OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN), OR ACTIONS OF EITHER OR ANY PARTY.

 

 


 

IN WITNESS WHEREOF, the undersigned has executed this Note on the date set forth above.
             
    DIGITAL ANGEL CORPORATION    
 
           
 
  By:    
 
Name:
   
 
      Title:    

 

 


 

Exhibit C
                 
Stock Recipient   % of Restricted Shares Issued     Number of Shares Issued  
 
               
Jerome C. Artigliere
    70 %     601,719  
 
               
Baker & Hostetler, LLP
    15 %     128,940  
 
               
Clark & Martino, P.A.
    15 %     128,940  

 

 

Exhibit 10.2
***CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTION.
DEVELOPMENT AND SUPPLY AGREEMENT
THIS AGREEMENT is between Medical Components, Inc. a Pennsylvania corporation, located at 1499 Delp Drive, Harleysville, PA 19438 (“Medcomp”) and VeriChip Corporation, a Delaware corporation, located at 1690 South Congress Avenue, Suite 200, Delray, FL 33445 (“VeriChip”).
RECITALS
  A.   Medcomp is engaged in the development, manufacture and sale of various medical devices, including venous catheters and infusion ports.
 
  B.   The parties have agreed that VeriChip will seek development and manufacture of an 8mm RFID Microchip similar to its current 12mm RFID Microchip, as described on Exhibit A (the “Product”) for sale to Medcomp in accordance with the specifications, delivery schedules and other requirements referenced in this Agreement.
 
  C.   Medcomp wishes to purchase the Product from VeriChip for implantation into Medcomp’s vascular access product lines.
 
  D.   The parties now desire to enter into an arrangement whereby VeriChip will develop, manufacture and sell the Product and Medcomp will buy the Product for implantation into vascular access medical devices on an exclusive basis.
NOW, THEREFORE, intending to be legally bound, the parties hereto agree as follows:
ARTICLE IA — DEVELOPMENT OF THE PRODUCT
Section 1A.01 Development Efforts. Medcomp and VeriChip acknowledge that they will cooperate in the development of the Product and agree that all prior and future joint development efforts with respect to the Product shall be governed by the terms of this Agreement. Medcomp and VeriChip agree that, during the term of this Agreement, they will cooperate and expend reasonable efforts to jointly develop the Product in a manner which permits the effective use of the Product. Such joint development efforts may include testing, development of prototypes, development and/or refinement of specifications for the Product (the “Specifications”) manufacturing processes and other research efforts. Medcomp shall be responsible for obtaining any necessary regulatory approvals for use of the Product. Medcomp and VeriChip agree to jointly conduct studies, tests, research and other procedures designed to develop the Product and improve the Product. Each party shall assist and coordinate with the other, make its technical personnel and facilities required to perform such research and development available to the other and use its best efforts to successfully complete the development of the Product.

 

 


 

*** CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTION.
Section 1A.02 Development Plan. As soon as possible following the signing of this Agreement, VeriChip will begin development of the Product. VeriChip shall provide Medcomp with a complete and operational prototype of the Product as well as the design history file for the prototype of the Product within ninety (90) days of the commencement of this Agreement. If VeriChip fails to meet this ninety (90) day deadline, Medcomp may terminate this Agreement provided however, that the ninety (90) day deadline may be extended by written agreement.
Section 1A.03 Development Costs and Expenses. Subject to Section 1A.07, each party shall be responsible for payment of all of its own direct costs and expenses for personnel and facilities relating to the development of the prototype and the Product.
Section 1A.04 Specifications and Standards for the Product. Upon completion of the development of the prototype of the Product, such that the parties agree the same is feasible for manufacture and sale, they shall discuss and agree upon the Specifications. The Specifications shall, when adopted, be consistent with Exhibit A, be reduced to writing, be signed by authorized individuals from Medcomp and VeriChip, and by reference be incorporated herein provided, however, that the Specifications may be amended at any time by the written agreement of the parties.
Section 1A.05 Property Rights. Medcomp acknowledges and agrees that VeriChip owns and/or has the right to use and shall retain all of the right, title and interest in and to all of the patents, trademarks, trade names, inventions, copyrights, know-how, trade secrets and other intellectual property rights relating to the design, assembly, manufacture, operation and/or service of its RFID Microchips and the Product. The use by Medcomp of any of these property rights is authorized only for the purposes set forth in this Agreement and upon expiration of termination of this Agreement for any reason such authorization shall cease.
Section 1A.06 Product Development Fee. Medcomp will pay VeriChip a fee to cover its costs relating to completion of the development of the Product in an agreed amount of ***. Medcomp will make this payment in two equal installments of *** each, with the first installment due within ten (10) days of the commencement of this Agreement and the second installment due within forty (40) days of the commencement of this Agreement. Should VeriChip fail to meet the ninety (90) day deadline set forth in Section 1A.02 above, or such extended deadline as is agreed to by the parties, and Medcomp terminates this Agreement as a result, VeriChip shall, within ten (10) days of the termination of this Agreement, repay to Medcomp the Product development fee set forth above.
Section 1A.07 Tooling. All tooling unique to the production of the Product (the “Tooling”) shall be the sole property of VeriChip. VeriChip shall be responsible for the routine maintenance and repairs of the Tooling.

 

2


 

*** CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTION.
ARTICLE I. SUPPLY OF PRODUCTS
Section 1.01 Supply of Product.
(a) VeriChip agrees to sell the Product exclusively to Medcomp during the Term of this Agreement, and agrees that it shall not manufacture or sell the Product, or any product using or incorporating the same, or substantially similar technology, to any other manufacturer, seller or distributor of vascular access products. Notwithstanding the foregoing, VeriChip may use or sell a product substantially equivalent to the Product so long as such use or sale is not in connection with vascular access products (that compete with Medcomp, directly or indirectly). VeriChip agrees that it will seek a similar exclusivity from the manufacturer of the Product. In the event VeriChip becomes insolvent or otherwise ceases operations during the term of this Agreement, and has no successor which is bound by the terms of this Agreement, Medcomp shall be able to maintain said exclusivity with the manufacturer of the Product. Medcomp agrees during the Initial Term of this Agreement, that it will purchase not less than the following number of Products (the “Minimum Purchase Requirements”): (i) *** in the first Product Purchase Year, (ii) *** in the second Product Purchase Year, (iii) *** in the third Product Purchase Year, (iv) *** in the fourth Product Purchase Year and (v) *** in the fifth Product Purchase Year. For the purpose of this Agreement, the “Product Purchase Years” are the five (5) respective consecutive twelve (12) month periods beginning on the date of the last to occur of the following: (i) the Product being ready for production; or (ii) 510k approval of the Product. In the event Medcomp fails to meet the Minimum Purchase Requirements for a Product Purchase Year, Medcomp shall, within thirty (30) days of written demand from VeriChip, make a payment to VeriChip equal to *** times the number of Products by which Medcomp failed to meet the Minimum Purchase Requirement for the Product Purchase Year at issue. Medcomp shall be released from the Minimum Purchase Requirements should the FDA issue a recall of the Product, for more than thirty (30) days.
(b) Medcomp’s original order for the Product shall be submitted within ten (10) days of 510k approval of the Product and Medcomp shall order the Product on a quarterly basis thereafter. All orders for the Product shall be in writing and shall specify (i) the number of units of each of the Product to be purchased (in accordance with the terms and conditions of the Agreement) and (ii) the destination to which the Product is to be shipped. With each order of the Product, Medcomp shall also provide a forecast of the number of Products it will be purchasing for the next six (6) months. VeriChip will deliver no less than ninety percent (90%) of the first order for Products within eight (8) weeks of full production commencing. Thereafter, VeriChip agrees to deliver no less than ninety percent (90%) of the Products ordered by Medcomp within less than thirty (30) days of the order date provided that the number of Products (i) does not exceed one-hundred twenty percent (120%) of the immediately previous order or, (ii) alone, or in conjunction with the immediately previous order, does not exceed the then current six (6) month forecast of Medcomp. If the number of Products ordered (i) does exceed one-hundred twenty percent (120%) of the immediately previous order or, (ii) alone, or in conjunction with the immediately previous order, exceeds the then current six (6) month forecast of Medcomp, VeriChip agrees to deliver no less than ninety percent (90%) ordered within sixty (60) days of the order date. VeriChip shall be permitted a thirty (30) day cure period for any missed delivery deadline. VeriChip shall not be liable for any consequential damages as result of a failure to meet delivery deadlines. Medcomp shall be released from the Minimum Purchase Requirements of any particular year if its inability to meet the minimum purchase requirements of that particular year was due to VeriChip’s inability to make delivery pursuant to the schedule set forth above.
(c) VeriChip agrees, during the Term, to make its other products that are compatible with the Product available to Medcomp on commercially reasonable terms.

 

3


 

***CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTION.
Section 1.02 Pricing. The standard purchase price for the Product will be ***, provided, however, that if Medcomp places an order within the first three (3) months of any Product Purchase Year (i) for not less than *** units for delivery of Product in that Product Purchase Year, the price for those Products will be ***, or (ii) for not less than *** units for delivery in that Product Purchase Year, the price of those Products will be ***. It is understood that all such pricing will be firm for the Initial Tem.
Section 1.03 Delivery Terms. Products will be shipped, FOB Medcomp’s Harleysville, PA, facility. Payment for shipping charges shall be Medcomp’s responsibility.
Section 1.04 Payment. Notwithstanding the Product Development Fee subject to Section 1A.06, unless otherwise agreed by the parties in writing, payment shall be made by Medcomp separately for each shipment of Products. Medcomp shall pay all invoice amounts within thirty (30) days of the date of invoice in U.S. dollars. Any invoices not paid within thirty (30) days shall accrue interest at the rate of one and one-half percent (1-1/2%) per month.
Section 1.05 Inability to Supply. VeriChip expects and intends to supply Medcomp with the Product in accordance with the provisions of this Agreement. If VeriChip determines that it will be unable to supply Medcomp with the Product in the desired quantities for unanticipated reasons such as an Act of God or a long-term shortage of materials, VeriChip shall give Medcomp prompt notice of its inability to timely supply of the Product. If VeriChip is unable to make timely deliveries of the Product for unanticipated reasons such as set forth above, or by reason such as war, civil commotion, embargo, strike or any other act which is beyond the reasonable control of VeriChip, VeriChip shall be excused from meeting said delivery deadlines provided, however, that VeriChip shall continue performance hereunder with reasonable dispatch whenever such causes are removed.

 

4


 

ARTICLE II. — REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 2.01 By VeriChip
VeriChip represents, warrants and covenants to Medcomp as follows:
(a) This Agreement has been duly authorized, executed and delivered by VeriChip and constitutes a valid and binding obligation of VeriChip, enforceable in accordance with its terms.
(b) This Agreement does not conflict with any applicable law, rule or regulation to which VeriChip is subject, or any agreement to which VeriChip is a party.
(c) VeriChip represents and warrants that the Products, when sold to Medcomp, do not infringe or encroach upon any party’s personal, contractual or proprietary rights, including but not limited to, patents, trademarks, copyrights, or trade secrets. VeriChip further represents and warrants that the Products, when sold to Medcomp, (i) are merchantable, (ii) are fit for the purposes for which they were sold, (iii) are free from any and all defects in design, material and workmanship, (iv) conform to the Specifications and Medcomp’s quality standards (v) are fit and safe for use by Medcomp; and (vi) shall have at least eighty percent (80%) of their shelf life remaining when sold to Medcomp, and shall remain in full compliance with the Specifications for the full shelf life period of such Products; and (vii) shall be in compliance with all applicable laws and regulations and all regulatory requirements of the United States Food and Drug Administration (the “ FDA ”), or other appropriate regulatory authority currently in effect, including without limitation the Federal Food, Drug and Cosmetic Act, as amended from time to time (the “ Act ”), the FDA’s then current Good Manufacturing Practices (“ cGMP ”). VeriChip further represents and warrants that they will convey good and merchantable title to Medcomp for the Products and that the Products are free of any security interest or other lien or encumbrance.
(d) No Products constituting or being a part of any shipment hereunder shall at the time of any such shipment be (i) adulterated or misbranded within the meaning of the Act, or regulations promulgated thereunder, as such law or regulation is constituted and in effect at the time of any such shipment, or (ii) an article which may not, under the provisions of Sections 404, 505 or 512 of the Act, be introduced into interstate commerce.
(e) VeriChip agrees that it will attain the manufacturing, processing and packaging of the Products only at specified and approved facility(ies) (the “ Plant ”) and that part of such services may at any time be subcontracted to a third party without prior written approval of Medcomp.
(f) VeriChip shall not make any changes in the Specifications or raw materials, purchased components, packaging materials, labeling, formulations, quality control test methods or manufacturing processes or manufacturing equipment, with regard to the Product, without Medcomp’s prior written agreement.

 

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(g) VeriChip owns or has the right to use all copyright, trademarks, patents, and other intellectual property rights to the intellectual property which they shall use to perform their obligations hereunder.
(h) VeriChip shall provide to Medcomp all documentation and information requested by Medcomp: (i) in order to assist Medcomp in determining whether any delivery complies fully with the Specifications and the requirements of this Agreement (including VeriChip’s calculation of any price adjustments, rebates, loss allowance, credits and/or most favored nations status); (ii) in order to assist Medcomp in obtaining any and all regulatory approvals necessary to market Medcomp’ products which contain the Product; or (iii) to enable Medcomp to comply with any statutory or regulatory requirements, or with a request by any governmental or regulatory authority.
(i)
(i) VeriChip agrees to work with the manufacturer to assure the quality level of the Product through the use of a formal quality assurance program (the “QA Program”) reasonably acceptable to Medcomp. The QA program shall require the manufacturer to prepare and maintain written records sufficient to enable Medcomp to trace the build and inspection history of the Product. VeriChip will require the manufacturer to maintain such records for a period of five (5) years after manufacture. Pursuant to the QA Program, VeriChip shall require the manufacturer to place lot numbers and date codes on all Products to enable the identification and traceability of the Product. During the Term, and upon reasonable notice, Medcomp shall have the right to reasonably audit the QA program, at its expense, during regular business hours.
(ii) VeriChip shall require the manufacturer to conduct and document final inspection and quality control tests in accordance with reasonable Medcomp procedures on the Products prior to shipment to verify that the Product meets and conforms to the Specifications and the QA Program provided, however, that if Medcomp requires a type of inspection or quality control test involving equipment that is not currently owned by manufacturer, that Medcomp shall be responsible for the cost of obtaining such equipment.
(iii) Medcomp will, at its expense, and upon reasonable notice to VeriChip and the manufacturer, have the right to reasonably inspect manufacturer’s facilities to ensure compliance with the terms and conditions of the QA Program. Proprietary VeriChip or manufacturer’s manufacturing process technology shall not be subject to any such inspection.
(iv) VeriChip shall cooperate with, and provide assistance to, Medcomp with respect to customer complaints and product recalls relating to the Product.

 

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(j) VeriChip shall immediately notify Medcomp of any contact which the FDA or any other regulatory or other governmental authority has with it concerning the Product or its manufacturing facilities relating thereto, including, but not limited to, cGMP’s, product registrations and safety and efficacy claims. The parties shall consult with one another in an effort to arrive at a mutually acceptable response; however, should the parties not agree as to a response, Medcomp shall have total discretion to respond appropriately to such regulatory or other governmental authority.
(k) VeriChip shall inform Medcomp within twenty-four (24) hours of any notification to VeriChip of any site visits by the FDA, state or federal regulatory agencies or any other governmental or regulatory agency, relating, directly or indirectly, to the manufacture, storage, disposal and/or transportation of the Product, and shall provide to Medcomp all other materials related thereto or used in connection therewith. VeriChip shall report in writing the results of the visit to Medcomp within thirty (30) days of the occurrence thereof In the event that any such governmental or regulatory agency finds that VeriChip’s operation relating, directly or indirectly, to the manufacture, storage, disposal and/or transportation of the Product is deficient or unsatisfactory in any respect, VeriChip, as is appropriate, shall cure all said deficiencies within the earlier of ninety (90) days or such cure period as ordered by the governmental or regulatory agency.
(l) VeriChip shall make available to Medcomp all records and reports relating to the manufacture, storage, disposal and transportation of the Product, and all other materials related thereto or used in connection therewith, including without limitation those documents relating to analytical data, for Medcomp’s review during normal business hours and upon reasonable prior notice, and Medcomp shall have the right to make and retain copies of these documents as required at Medcomp’s expense. Such records and reports shall be subject to the confidentiality provisions of this Agreement. Medcomp shall have the right to conduct inventory reconciliation audits and other audits as reasonably required for its internal control, at Medcomp’s sole cost and expense.
(m)
(i) In the event (A) any government authority of the United States or other jurisdiction issues a request, directive or order that any of the Product or Medcomp’s products containing the Product be recalled, or (B) a court of competent jurisdiction orders such a recall, or (C) the parties reasonably determine after consultation with each other that any of the Product or Medcomp’s products containing the Product should be recalled (a “Recall”), the parties shall take all appropriate corrective action. Medcomp shall also retain the right to conduct a product recall for safety reasons at Medcomp’s sole discretion.

 

7


 

(ii) In the event a Recall results from the defective manufacture of the Product or any other cause or event solely attributable to VeriChip or the manufacturer of the Product. VeriChip shall be responsible for all out-of-pocket expenses of a Recall. In all other cases, Medcomp shall be responsible for the expenses of a Recall including, but not limited to, responsibility to reimburse VeriChip for its expenses in connection with a Recall. For purposes of this Agreement, Recall expenses shall include, but not be limited to, the expenses of notification and destruction or return of the recalled Products, as the case may be, and Medcomp’s cost
of the recalled Products, as the case may be.
(n) Written notice and an explanation of the circumstances of any claim that the Products are not in conformance with the Specifications or are defective in material or workmanship shall be given promptly by Medcomp to VeriChip. VeriChip shall thereafter notify manufacturer and allow manufacturer to be provided a reasonable opportunity to inspect said Products.
Section 2.02 By Medcomp
Medcomp represents warrants and covenants to VeriChip as follows:
(a) This Agreement has been duly authorized, executed and delivered by Medcomp and constitutes a valid and binding obligation of Medcomp, enforceable in accordance with its terms.
(b) This Agreement does not conflict with any applicable law, rule or regulation to which Medcomp is subject, or any agreement to which Medcomp is a party.
(c) All vascular access products manufactured by Medcomp and the Medcomp trademark do not infringe or encroach upon any parties’ personal, contractual or proprietary rights, including, but not limited to, patents, trademarks, copyrights, or trade secrets.
Section 2.03 Covenants of both parties: co-marketing
(a) Upon FDA 510k approval of the Product, Medcomp will use its best efforts
to:
  (i)   engage in a co-marketing relationship with VeriChip Corporation to market, distribute, sell and promote the sale of the new Medcomp vascular port (with RFID microchip) and the Health Link by VeriMed personal health record system.
 
  (ii)   purchase and/or facilitate the purchase of “Health Link by VeriMed” scanners for distribution to appropriate medical personnel and/or facilities;
 
  (iii)   brand all ports with RFID technology as the brand name of the port with RFID technology (e.g. “Dignity w/RFID”).
 
  (iv)   site VeriChip Corporation on all literature focused on implantation of the device.
 
  (v)   include “Health Link by VeriMed” information on all literature focused on continuous care (Oncology) and diagnosis (CT / Radiology).
 
  (vi)   provide training to all VeriChip Sales and Marketing Staff and sales partners on the details of the port technology.
 
  (vii)   provide VeriChip with sales tracings of facilities and departments where the ports w/RFID have been sold on a quarterly basis. This information will include facility, department and main contact information to focus sales efforts.

 

8


 

  (viii)   hand over all leads or inquiries for Health Link by VeriMed to VeriChip Corporation.
 
  (ix)   work closely with VeriChip Corporation and also agree to not poach employees or partners from VeriChip Corporation without prior consent.
(b) Upon FDA 510k approval of the Product, VeriChip Corporation will use its best efforts to:
  (i)   engage in a co-marketing relationship with Medcomp to market, distribute, sell and promote the sale of the new Medcomp vascular port (with RFID microchip) and the HealthLink by VeriMed personal health record system.
 
  (ii)   provide training to Medcomp Sales and Marketing Staff on the details of the Health Link by VeriMed System.
 
  (iii)   hand over all leads or inquiries for port technology to Medcomp.
 
  (iv)   work closely with Medcomp and also agree to not poach employees or partners from Medcomp without prior consent.
ARTICLE III. — TERM
Section 3.01 Term.
This Agreement shall be deemed to have commenced as of the date this Agreement has been signed by all parties hereto and shall continue in force until the expiration of the fifth Product Purchase Year (the “ Initial Term ”), unless earlier terminated in accordance with Section 3.02. Upon expiration of the Initial Term, this Agreement may be extended as agreed upon in writing by the parties for such term as they agree (“ Renewal Term(s) ”). The Initial Term and any Renewal Term(s) are collectively referred to herein as the “ Term ”.
Section 3.02 Termination.
(a) Either party may terminate this Agreement as follows:
(i) If the other party commits a material breach of any of the provisions of this Agreement and does not cure such breach within sixty (60) days after receipt of written notice thereof; or
(ii) Immediately upon written notice to the other party in the event that proceedings in bankruptcy or insolvency are instituted by or against the other party, or a receiver is appointed, or if any substantial part of the assets of the other party is the object of attachment, sequestration or other type of comparable proceeding, and such proceeding is not vacated or terminated within thirty (30) days after its commencement or institution.

 

9


 

***CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTION.
(iii) Immediately upon written notice to the other if the development of the Product is not completed in accordance with the deadline and any extensions thereof as set forth in paragraph IA.02 provided, however, that such notice is effective only if provided within thirty (30) days of the end of the deadline period.
(b) Medcomp may terminate this Agreement as follows:
(i) Prior to the end of the Initial or any Renewal Term upon thirty (30) days’ written notice, in the event that VeriChip is acquired (whether through merger, sale of stock representing fifty percent (50%) or more of the outstanding voting stock of that party, sale of all or substantially all of that party’s assets or otherwise) by any third party (or by an entity that is a party to a collaboration agreement with a third party) that manufactures, sells or otherwise distributes products which are competitive with vascular ports manufactured, sold or distributed by Medcomp.
(ii) Immediately upon written notice in the event the FDA fails to approve the Product and said failure was not the result of any action or inaction on the part of Medcomp. In the event of such a termination, Medcomp shall still be responsible to pay to VeriChip for any Products ordered and manufactured.
(iii) In the event Medcomp determines, in its sole discretion, that (i) the Product is not commercially feasible due to market preferences, (ii) new technology has made the Product obsolete or non-competitive or (iii) applicable clinical research or FDA findings have made the sale of the Product inadvisable, Medcomp may terminate this Agreement by providing sixty (60) days written notice to VeriChip. In the event Medcomp so terminates this Agreement, Medcomp shall, within thirty (30) days of the date of termination, make a payment to VeriChip of an amount equal to *** times the number of Products by which Medcomp failed to meet the Minimum Purchase Requirement for the Product Purchase Year in which the Agreement is terminated by Medcomp.
(iv) Immediately upon written notice if any governmental or regulatory agency finds that VeriChip’s operation at the site relating, directly or indirectly, to the manufacture, storage, disposal and/or transportation of the Product is deficient or unsatisfactory and VeriChip fails to cure said deficiencies as set forth in Article 2.01(k).
(v) Subject to Section 1.05, immediately upon written notice if VeriChip fails to deliver Product within the time periods set forth in Section 1.01(b) and any cure period set forth therein.
Section 3.03 Effects of Termination.
Following the expiration or termination of this Agreement, all further rights and obligations of the parties shall cease, except that the parties shall not be relieved of (i) their respective obligations set forth in Sections IA.05, 1A.07, 2.01(h), 2.01(j-n), 3.02, 3.03, 7.01, 7.07, Article IV and Article VI of this Agreement; (ii) their respective obligations to pay monies due or which become due as of or subsequent to the date of expiration or termination; and (iii) any other respective obligations under this Agreement which specifically survive or are to be performed after the date of expiration or termination. In addition, following the termination of this Agreement, VeriChip shall, upon the request of Medcomp, within ten (10) days of said request, deliver to Medcomp all items owned by Medcomp that are in VeriChip’s possession.

 

10


 

ARTICLE IV. — INDEMNIFICATION
(a) Medcomp shall indemnify, defend and hold VeriChip, its directors, officers, shareholders, employees, servants and agents (collectively “VeriChip Indemnitees”) harmless from and against any and all liabilities, claims, demands, actions, suits, losses, damages, costs and expenses (including reasonable attorney’s fees and disbursements) based upon any death, actual bodily injury or physical property damage resulting from Medcomp’s negligence or willful misconduct, except to the extent caused by VeriChip’s negligence or willful misconduct.
(b) VeriChip shall indemnify, defend and hold Medcomp and its directors, officers, shareholders, employees, servants and agents (collectively “Medcomp Indemnitees”) harmless from and against any and all liabilities, claims, demands, actions, suits, losses, damages, costs and expenses (including reasonable attorney’ s fees and disbursements) based upon any death, actual bodily injury or physical property damage resulting from any defect in the manufacture of the Product and/or VeriChip’s negligence or willful misconduct, except to the extent caused by Medcomp’s negligence or willful misconduct.
(c) Medcomp shall defend, indemnify and hold harmless the VeriChip Indemnitees from and against all claims, demands, actions, liabilities, losses, damages and expenses, including reasonable attorney’ s fees, arising out of any claim made against VeriChip for infringement of any copyright, patent or other intellectual property right of any kind related to any of Medcomp’s products and the Medcomp trademark. VeriChip shall defend, indemnify and hold harmless the Medcomp Indemnitees from and against all claims, demands, actions, liabilities, losses, damages and expenses, including reasonable attorney’s fees, arising out of any claim made against Medcomp for infringement of any copyright, patent, or other intellectual property right of any kind related to the Product.
(d) Each of the parties shall notify the other of any such claim or potential claim covered by any of the above subparagraphs in this Article and shall include sufficient information to enable the other party to assess the facts. Each of the parties shall cooperate fully with the other party in the defense of all such claims. No settlement or compromise shall be binding on a party hereto without its prior written consent, which shall not be unreasonably withheld or delayed.

 

11


 

(e) Upon the assertion of any third party claim against a party entitled to indemnification hereunder’ (an “ Indemnified Party ”) hereto that may give rise to a right of indemnification of this Agreement, the Indemnified Party shall give prompt notice to a party obligated to provide indemnification hereunder (an “ Indemnifying Party ”) of the existence of such claim and shall give the Indemnifying Party reasonable opportunity to control, defend and/or settle such claim at its own expense and with counsel of its own selection; provided, however, that the Indemnified Party shall, at all times, have the right to fully participate in such defense at its own expense with separate counsel and, provided that both parties shall, to the extent that they are not contractually or legally excluded therefrom, or otherwise prejudiced in a legal position by so doing, cooperate with each other and with their respective insurers in relation to the defense of such third party claim. The Indemnifying Party shall consult with the Indemnified Party with respect to settlement of any claim. The Indemnifying Party shall have the right to settle any claim without the consent of the Indemnified Party, provided that the Indemnified Party is unconditionally released from such claim and is not otherwise prejudiced by the terms of settlement in the sense that the Indemnified Party reasonably believes that such settlement terms may have a material adverse effect on its business.
ARTICLE V. — INSURANCE
Each party shall maintain Commercial General Liability (CGL) insurance (including product liability coverage) and upon such terms (including coverages, deductible limits and self-insured retentions) as is customary for the activity to be conducted by it under this Agreement and is appropriate to cover its indemnification obligations hereunder. VeriChip shall maintain for the entire terms of this Agreement CGL including product liability coverage of $1,000,000 per occurrence and $5,000,000 in the aggregate. Medcomp shall be named as an additional insured on the policy. VeriChip shall provide Medcomp with a certificate of insurance reflecting the same within thirty (30) days from the effective date of this Agreement.
ARTICLE VI. — CONFIDENTIALITY
Section 6.01 Confidential Information.
Confidential Information” and “Proprietary Concept ” shall include any terms normally embraced within such terms (e.g., drawings, specifications, customer lists, patient information, technical data, marketing and financial plans, and production or’ purchasing schedules or forecasts) and, in addition, any information concerning either party’s marketing or pricing of its products, or any information regarding the customers of either party, that enables or would enable that party to obtain a competitive advantage in the marketplace. The existence, subject matter and terms and conditions of this Agreement shall be considered to be included in the Confidential Information. “ Confidential Information ” shall not include information that (i) is in or comes into the public domain without violation of this Agreement, (ii) is known by the receiving party prior to disclosure to it by the other’ party, (iii) is received lawfully and under no obligation of confidentiality by the receiving party from a third party subsequent to this Agreement, (iv) is released by the owner to others without restriction, or (v) is independently developed by the receiving party, provided that the person or persons developing this information have not had exposure to the same information as received from the disclosing party.

 

12


 

Section 6.02 Protection of Confidential Information
Each party agrees: (a) to protect the confidentiality of the other’s Confidential Information to the same extent and in the same manner as it protects its own confidential information; and (b) not to disclose any Confidential Information obtained under the Agreement to any third party except to the extent necessary to serve the purposes of this Agreement and in any event subject to this Agreement, including this Article VI. The party receiving Confidential Information under this Agreement shall disclose that information only to its employees who need to know such information. Each party agrees to provide in all contracts with third parties confidentiality provisions equivalent to those contained in this Agreement. The burden of proving the existence of facts which would negate the obligations of this Agreement under this Article VI shall rest with the party in receipt of the subject information.
Section 6.03 Use of Confidential Information
Both parties shall use the Confidential Information solely for the purpose of furthering the relationship contemplated by this Agreement.
Section 6.04 Ownership
Any trade secrets, confidential information or proprietary concepts received or learned by either party from the other, or any of its employees, servants, or agents, relating to the business or customers of the other party shall be deemed the exclusive property of the disclosing party and shall remain the valuable scientific, trade, and engineering secrets of the disclosing party.
Section 6.05 Disclosure Compelled by Law
In the event either party believes it is required by law (whether pursuant to oral questions, interrogatories, requests for information or documents, subpoena, civil investigative demand or similar process) to disclose any confidential information, it shall provide the disclosing party with prompt notice thereof so that the disclosing party may seek an appropriate protective order and/or waive compliance with this Agreement; provided however, that if, in the absence of a protective order or the receipt of a waiver hereunder, such party is in the reasonable opinion of its counsel compelled to disclose confidential information not otherwise disclosable hereunder to any legislative, judicial or regulatory body, agency or authority or else be exposed to liability for contempt, fine, or penalty, or to other censure, such confidential information may be disclosed.
Section 6.06 Ongoing Confidentiality Obligation
The obligations of VeriChip and Medcomp pursuant to this Article VI shall survive termination of this Agreement.

 

13


 

ARTICLE VII. — MISCELLANEOUS
Section 7.01 Applicable Law and Arbitration
This Agreement, and any claim or controversy relating thereto, shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania and United States of America. All disputes, controversies or differences which may arise between the parties in relation or in connection with this Agreement shall be resolved by arbitration. Arbitration shall take place in Montgomery County, Pennsylvania, United A. States of America, and be conducted as provided under Subchapter B of the Pennsylvania Uniform Arbitration Act. The arbitrators shall be selected as follows: the party demanding arbitration shall do so in writing and, as part of its demand, shall select an arbitrator. The party receiving the demand will select its arbitrator and notify the party demanding arbitration in writing of said election within ten (10) days of service of the demand for arbitration. The two arbitrators will select a third arbitrator. If the two arbitrators chosen by the parties cannot agree on a third arbitrator within fourteen (14) days of the selection of the second arbitrator, the Court of Common Pleas of Montgomery County, Pennsylvania shall select a third arbitrator upon the filing of a petition by either party. Either party will bear the cost of its own arbitrator. The expense of the third arbitrator will be shared equally between the parties. A decision agreed to by two of the three arbitrators shall be binding upon the parties and may be entered as a judgment in the Court of Common Pleas of Montgomery County, Pennsylvania and in any court of competent jurisdiction with the ability to enforce a judgment against the party whom the judgment is rendered. All parties hereby consent to the jurisdiction of the arbitration panel described above and to the jurisdiction of the Court of Common Pleas of Montgomery County, Pennsylvania.
Section 7.02 No Agency
VeriChip shall at all times during the term of this Agreement be an independent contractor, maintaining sole and exclusive control over their personnel and operations. At no time shall any party hold itself out to be the agent, employee, lessee, sub lessee, partner, or joint venture partner of any other. It is understood and agreed between VeriChip and Medcomp that the full and exclusive relationship between them is that of an independent contractor and nothing in this Agreement shall be construed to create any relationship between the parties other than that of independent contractor. No party shall have any express or implied right or authority to assume or create any obligations on behalf of or in the name of any other party or to bind any other party with regard to any other contract, agreement, or undertaking with a third party.
Section 7.03 Titles and Headings
Titles and headings in this Agreement are for the convenience of the parties only, and are not intended to be a part of or affect the meaning or interpretation of this Agreement.

 

14


 

Section 7.04 Severability of Provisions
If any term or provision of this Agreement or the application thereof to any person or circumstance shall to any extent be invalid or unenforceable, the remainder of this Agreement or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable shall not be affected, and each term and provision of this Agreement shall be valid and be enforced to the fullest extent permitted by law.
Section 7.05 Amendment
This Agreement may not be amended, supplemented or, otherwise modified except by an instrument in writing signed by all parties.
Section 7.06 Assignment
This Agreement may not be assigned by any party except to an Affiliate without the prior written consent of the other party. If any such Affiliate has been the assignee of any rights under this Agreement and loses its status as an Affiliate, then immediately and automatically upon the loss of such status as an Affiliate, the assignment of this Agreement to such former Affiliate and all rights under or with respect to this Agreement shall immediately terminate and be of no further force or effect. This Agreement shall be binding upon, and inure to the benefit, of the parties respective heirs, successors, and assigns.
Section 7.07 No Use of Name
Neither party shall employ or use the name of the other party in any publication or promotional materials nor in any form of public distribution nor make any public disclosure of this Agreement without the prior express written consent of the other party, except as may be required for compliance with Governmental obligations.
Section 7.08 Notices
Any notices, waivers, and other communications required or permitted hereunder shall be in writing and shall be deemed to be fully given when delivered by hand or dispatched (with reasonable evidence of receipt) by telex, telegraph or other names of electronic facsimile transmission or by an internationally recognized overnight courier service, addressed to the party to whom the notice is intended to be given at the addresses specified below,
  (a)   If to Medcomp:
 
      Medical Components, Inc.
1499 Delp Drive
Harleysville, Pennsylvania 19438
Attn: Timothy Schweikert
Facsimile No.                                          

 

15


 

  (b)   If to VeriChip:
 
      VeriChip Corporation
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
Attn: William Caragol
Facsimile No. 561-805-8001
or such other address or addresses as a party may from time to time designate for itself by like notice.
Section 7.09 Waiver
No provision of this Agreement shall be deemed to have been waived unless such waiver is in writing, signed by the waiving party. No failure by any party to insist upon the strict performance of any provision of this Agreement, or to exercise any right or remedy consequent upon a breach thereof, shall constitute a waiver of any such breach, of such provision, or of any other provision. No waiver of any provision of this Agreement shall be deemed a waiver of any other provision of this Agreement or a waiver of such provision with respect to any subsequent breach, unless expressly provided in writing.
Section 7.10 No Third-Party Beneficiary Rights
No person not a party to this Agreement is an intended beneficiary of this Agreement, and no person not a party to this Agreement shall have any right to enforce any term of this Agreement.
Section 7.11 Governing Document
The parties contemplate exchanging the usual commercial forms such as purchase orders and invoices in furtherance of this Agreement; provided, however, that any terms and conditions which may appear on such documents, other than those purchase order terms required by Section 1.01(b) of this Agreement and the invoice amounts, shall be of no force or effect.
Section 7.12 Entire Agreement
This Agreement constitutes the entire agreement of the parties relating to the subject matter hereof. There are no promises, terms, conditions, obligations, or warranties other than those contained in this Agreement. This Agreement supersedes all prior communications, representations, or agreements, verbal or written, among the parties, relating to the subject matter hereof.
Section 7.13 Force Majeure
In the event an act of the government, war conditions, strikes, fire, flood, or other act of God (collectively “force majeure”) prevents either party from performance in accordance with the provisions of this Agreement, such non-performance shall be excused and shall not be considered a breach or default for so long as such conditions prevail. The party invoking force majeure shall give prompt written notice thereof to the other party and shall take whatever reasonable steps are necessary to relieve the effect of such cause as rapidly as possible.

 

16


 

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be effective as of the date first written above.
                     
MEDICAL COMPONENTS, INC.       VERICHIP CORPORATION    
 
                   
By:
  /s/ Timothy M. Schweikert
 
Name: Timothy M. Schweikert
      By:   /s/ William J. Caragol
 
Name: William J. Caragol
   
 
  Title:   President           Title:   President    
 
                   
Date: 04/02/09       Date: 3/17/09    

 

17


 

TRANSPONDER SPECIFICATION
     
 
  Injectable
 
  Transponder
 
  TX1400SST
Product Description :
The injectable Transponder is a passive radio-frequency Identification tag, designed to work in conjunction with a compatible radio-frequency ID reading system. The transponder consists of an electromagnetic coil and microchip sealed in a tubular glass enclosure. The chip is pre-programmed with a unique ID code that cannot be altered; over 274 billion individual code numbers are available. When the transponder is activated by a low-frequency radio signal, it transmits the ID code to the reading system.
Although specifically designed for injecting in fish and livestock, this transponder can be used for other animal and non animal applications.
Specifications:
(IMAGE)
Dimensions (nominal): 12.48mm X 2.07mm (0.49134” X 0.08150”)
Antenna type: Ferrite
Operating frequency: 134.2kHz
ISO Conformance: ISO 11784, ISO 11785
Housing: Bio-compatible glass
Weight: 0.1020 gram (0.0036 ounce)
Temperature range : -40 to 70C (-40 to 158F), operating and storage
Read range with the Model FS2001F-ISO Portable Reader :
(In a benign noise environment with optimal orientation of transponder and scanner antenna)
FS2001F-ISO Portable Reader with 2001F-ISO (710060801) Racket Antenna and 2 meter cable (228004502)
Typical: 20.32 cm (8.0 inches)       Minimum: 19.05 cm (7.5 inches)
Read speed : 1 meter per second
Vibration:
Sinusoidal; 1.5 mm (0.06”) peak-to-peak, 10 to 80 Hz, 3 axis
Sinusoidal; 10 g peak-to-peak, 80 Hz to 2 kHz, 3 axis
Injector needle size: About 12 gauge (Destron part #445-0008-00)

 

18

Exhibit 10.3
VERIGREEN ENERGY CORPORATION
2009 FLEXIBLE STOCK PLAN
TABLE OF CONTENTS
         
    Page  
1. NAME AND PURPOSE
       
1.1. Name
    1  
1.2. Purpose
    1  
 
       
2. DEFINITIONS OF TERMS AND RULES OF CONSTRUCTION
       
2.1. General Definitions
    1  
2.1.1. Affiliate
    1  
2.1.2. Agreement
    1  
2.1.3. Benefit
    1  
2.1.4. Board
    1  
2.1.5. Cash Award
    1  
2.1.6. Change of Control
    1  
2.1.7. Code
    2  
2.1.8. Company
    2  
2.1.9. Committee
    2  
2.1.10. Common Stock
    2  
2.1.11. Director
    2  
2.1.12. Effective Date
    2  
2.1.13. Employee
    2  
2.1.14. Employer
    2  
2.1.15. Exchange Act
    2  
2.1.16. Fair Market Value
    2  
2.1.17. Fiscal Year
    2  
2.1.18. ISO
    2  
2.1.19. NQSO
    3  
2.1.20. Option
    3  
2.1.21. Other Stock Based Award
    3  
2.1.22. Parent
    3  
2.1.23. Participant
    3  
2.1.24. Performance Based Compensation
    3  
2.1.25. Performance Share
    3  
2.1.26. Plan
    3  
2.1.27. Reload Option
    3  
2.1.28. Restricted Stock
    3  
2.1.29. Rule 16b-3
    3  
2.1.30. SEC
    3  
2.1.31. Share
    3  
2.1.32. SAR
    4  
2.1.33. Subsidiary
    4  
2.2. Other Definitions
    4  
2.3. Conflicts
    4  
 
       
3. COMMON STOCK
       
3.1. Number of Shares
    4  
3.2. Reusage
    4  
3.3. Adjustments
    4  
 
       
4. ELIGIBILITY
       
4.1. Determined By Committee
    4  

 

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    Page  
5. ADMINISTRATION
       
5.1. Committee
    5  
5.2. Authority
    5  
5.3. Delegation
    5  
5.4. Determination
    5  
 
       
6. AMENDMENT
       
6.1. Power of Board
    5  
6.2. Limitation
    6  
 
       
7. TERM AND TERMINATION
       
7.1. Term
    6  
7.2. Termination
    6  
 
       
8. MODIFICATION OR TERMINATION OF BENEFITS
       
8.1. General
    6  
8.2. Committee’s Right
    6  
8.3. Compliance with Applicable Laws
    6  
 
       
9. CHANGE OF CONTROL
       
9.1. Vesting and Payment
    6  
9.2. Other Action
    7  
 
       
10. AGREEMENTS AND CERTAIN BENEFITS
       
10.1. Grant Evidenced by Agreement
    7  
10.2. Provisions of Agreement
    7  
10.3. Transferability
    7  
 
       
11. REPLACEMENT AND TANDEM AWARDS
       
11.1. Replacement
    7  
11.2. Tandem Awards
    7  
 
       
12. PAYMENT, DIVIDENDS AND WITHHOLDING
       
12.1. Payment
    7  
12.2. Dividend Equivalents
    8  
12.3. Withholding
    8  
 
       
13. OPTIONS
       
13.1. Types of Options
    8  
13.2. Grant of ISOs and Option Price
    8  
13.3. Other Requirements for ISOs
    8  
13.4. NQSOs
    8  
13.5. Determination by Committee
    8  
 
       
14. SARS
       
14.1. Grant and Payment
    8  
14.2. Grant of Tandem Award
    8  
14.3. ISO Tandem Award
    9  
14.4. Payment of Award
    9  
 
       
15. ANNUAL LIMITATIONS
       
15.1. Limitation on Options and SARs
    9  
15.2. Limitation on Performance Shares
    9  
15.3. Computations
    9  

 

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    Page  
16. RESTRICTED STOCK AND PERFORMANCE SHARES
       
16.1. Restricted Stock
    9  
16.2. Cost of Restricted Stock
    9  
16.3. Non-Transferability
    9  
16.4. Performance Shares
    9  
16.5. Grant
    10  
 
       
17. CASH AWARDS
       
17.1. Grant
    10  
17.2. Annual Limits
    10  
17.3. Restrictions
    10  
 
       
18. OTHER STOCK BASED AWARDS AND OTHER BENEFITS
       
18.1. Other Stock Based Awards
    10  
18.2. Other Benefits
    10  
 
       
19. MISCELLANEOUS PROVISIONS
       
19.1. Underscored References
    10  
19.2. Number and Gender
    10  
19.3. Unfunded Status of Plan
    11  
19.4. Termination of Employment
    11  
19.5. Designation of Beneficiary
    11  
19.6. Governing Law
    11  
19.7. Purchase for Investment
    11  
19.8. No Employment Contract
    11  
19.9. No Effect on Other Benefits
    12  
19.10. Limitation on Exercise
    12  

 

iii


 

VERIGREEN ENERGY CORPORATION
2009 FLEXIBLE STOCK PLAN
1. NAME AND PURPOSE
1.1 Name .
The name of this Plan is the “VeriGreen Energy Corporation 2009 Flexible Stock Plan.”
1.2 Purpose .
The Company has established this Plan to attract, retain, motivate and reward Employees and Directors and to encourage ownership of the Company’s Common Stock by them. The Company also intends in appropriate circumstances to grant awards of its common stock in lieu of cash compensation pursuant to the mutual agreement of the Participant and the Company.
2. DEFINITIONS OF TERMS AND RULES OF CONSTRUCTION
2.1 General Definitions .
The following words and phrases, when used in the Plan, unless otherwise specifically defined or unless the context clearly otherwise requires, shall have the following respective meanings:
2.1.1 Affiliate .
A Parent or Subsidiary of the Company.
2.1.2 Agreement .
The document that evidences the grant of any Benefit under the Plan and that sets forth the Benefit and the terms, conditions and provisions of, and restrictions relating to, such Benefit.
2.1.3 Benefit .
Any benefit granted to a Participant under the Plan.
2.1.4 Board .
The Board of Directors of the Company.
2.1.5 Cash Award .
A Benefit payable in the form of cash.
2.1.6 Change of Control .
If any “person” (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes the “beneficial owner” (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company’s then outstanding securities; upon the first purchase of the Common Stock pursuant to a tender or exchange offer (other than a tender or exchange offer made by the Company); upon the approval by the Company’s stockholders of a merger or consolidation, a sale or disposition of all or substantially all of the Company’s assets or a plan of liquidation or dissolution of the Company; or if during a period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election or nomination for the election by the Company’s stockholders of each new director was approved by a vote of at least 2/3 of the Board then still in office who were members of the Board at the beginning of the period. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur if the Company either merges or consolidates with or into another company or sells or disposes of all or substantially all of its assets to another company, if such merger, consolidation, sale or disposition is in connection with a corporate restructuring wherein the stockholders of the Company immediately before such merger, consolidation, sale or disposition own, directly or indirectly, immediately following such merger, consolidation, sale or disposition of at least 80% of the combined voting power of all outstanding classes of securities of the company resulting from such merger or consolidation, or to which the Company sells or disposes of its assets, in substantially the same proportion as their ownership in the Company immediately before such merger, consolidation, sale or disposition.

 

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2.1.7 Code .
The Internal Revenue Code of 1986, as amended. Any reference to the Code includes the regulations promulgated pursuant to the Code.
2.1.8 Company .
VeriGreen Energy Corporation.
2.1.9 Committee .
A Committee described in Section 5.1.
2.1.10 Common Stock .
The Company’s common stock, which presently has a par value of $0.01 per Share.
2.1.11 Director .
A member of the Board or a member of the Board of Directors of an Affiliate.
2.1.12 Effective Date .
The date that the Plan is approved by the shareholders of the Company which was May 8, 2009.
2.1.13 Employee .
Any person employed by the Employer.
2.1.14 Employer .
The Company and all Affiliates.
2.1.15 Exchange Act .
The Securities Exchange Act of 1934, as amended.
2.1.16 Fair Market Value .
The last sale price on the date for which Fair Market Value is being determined or, in case no such sale takes place on such date, the average of the closing bid and asked prices of the Shares on such date, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange, Inc. (the “NYSE”) or, if the Shares are not listed or admitted to trading on the NYSE, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Shares are listed or admitted to trading or, if the Shares are not listed or admitted to trading on any national securities exchange, the last quoted sale price on such date or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market on such date, as reported by the National Association of Securities Dealers, Inc. Automated Quotations System or such other system then in use, or, if on any such date the Shares are not quoted by any such organization, the average of the closing bid and asked prices on such date as furnished by a professional market maker making a market in the Shares selected by the Committee. If the Shares are not publicly held or so listed or publicly traded, the determination of the Fair Market Value per Share shall be made in good faith by the Committee.
2.1.17 Fiscal Year .
The taxable year of the Company, which is the calendar year.
2.1.18 ISO .
An Incentive Stock Option as defined in Section 422 of the Code.

 

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2.1.19 NQSO .
A non-qualified stock Option, which is an Option that does not qualify as an ISO.
2.1.20 Option.
An option to purchase Shares granted under the Plan.
2.1.21 Other Stock Based Award .
An award under Section 3.1 that is valued in whole or in part by reference to, or is otherwise based on, Common Stock.
2.1.22 Parent .
Any corporation (other than the Company or a Subsidiary) in an unbroken chain of corporations ending with the Company, if, at the time of the grant of an Option or other Benefit, each of the corporations (other than the Company) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.
2.1.23 Participant .
An individual who is granted a Benefit under the Plan. Benefits may be granted only to Employees, Directors (including former Employees and former Directors if in connection with their separation from the Company or an Affiliate), employees and owners of entities which are not Affiliates but which have a direct or indirect ownership interest in an Employer or in which an Employer has a direct or indirect ownership interest, individuals who, and employees and owners of entities which, are customers and suppliers of an Employer, individuals who, and employees and owners of entities which, render services to an Employer, and individuals who, and employees and owners of entities which, have ownership or business affiliations with any individual or entity previously described.
2.1.24 Performance Based Compensation .
Compensation that meets the requirements of Section 162(m)(4)(C) of the Code.
2.1.25 Performance Share .
A Share awarded to a Participant under Section 16.4 of the Plan.
2.1.26 Plan .
The VeriGreen Energy Corporation 2009 Flexible Stock Plan and all amendments and supplements to it.
2.1.27 Reload Option .
An Option to purchase the number of Shares used by a Participant to exercise an Option and to satisfy any withholding requirement incident to the exercise of such Option.
2.1.28 Restricted Stock .
Shares issued under Section 16.1 of the Plan.
2.1.29 Rule 16b-3 .
Rule 16b-3 promulgated by the SEC, as amended, or any successor rule in effect from time to time.
2.1.30 SEC .
The Securities and Exchange Commission.
2.1.31 Share .
A share of Common Stock.

 

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2.1.32 SAR .
A stock appreciation right, which is the right to receive an amount equal to the appreciation, if any, in the Fair Market Value of a Share from the date of the grant of the right to the date of its payment.
2.1.33 Subsidiary .
Any corporation, other than the Company, in an unbroken chain of corporations beginning with the Company if, at the time of grant of an Option or other Benefit, each of the corporations, other than the last corporation in the unbroken chain, owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.
2.2 Other Definitions .
In addition to the above definitions, certain words and phrases used in the Plan and any Agreement may be defined in other portions of the Plan or in such Agreement.
2.3 Conflicts .
In the case of any conflict in the terms of the Plan relating to a Benefit, the provisions in the section of the Plan which specifically grants such Benefit shall control those in a different section. In the case of any conflict between the terms of the Plan relating to a Benefit and the terms of an Agreement relating to a Benefit, the terms of the Plan shall control.
3. COMMON STOCK
3.1 Number of Shares .
The number of Shares that may be issued or sold or for which Options, SARs, Restricted Stock or Performance Shares may be granted under the Plan shall be 3,000,000. Such Shares may be authorized but unissued Shares, Shares held in the treasury, or both. The full number of Shares available may be used for any type of Option or other Benefit, including ISOs.
3.2 Reusage .
If an Option or SAR expires or is terminated, surrendered, or canceled without having been fully exercised, if Restricted Shares or Performance Shares are forfeited, or if any other grant results in any Shares not being issued, the Shares covered by such Option or SAR, grant of Restricted Shares, Performance Shares or other grant, as the case may be, shall again be available for use under the Plan. Any Shares which are used as full or partial payment to the Company upon exercise of an Option or for any other Benefit that requires a payment to the Company shall be available for purposes of the Plan.
3.3 Adjustments .
If there is any change in the Common Stock of the Company by reason of any stock dividend, spin-off, split-up, spin-out, recapitalization, merger, consolidation, reorganization, combination or exchange of shares, or otherwise, the number of SARs and number and class of shares available for Options and grants of Restricted Stock, Performance Shares and Other Stock Based Awards and the number of Shares subject to outstanding Options, SARs, grants of Restricted Stock which are not vested, grants of Performance Shares which are not vested, and Other Stock Based Awards, and the price thereof, as applicable, may be appropriately adjusted by the Committee.
4. ELIGIBILITY
4.1 Determined By Committee .
The Participants and the Benefits they receive under the Plan shall be determined solely by the Committee. In making its determinations, the Committee shall consider past, present and expected future contributions of Participants and potential Participants to the Employer, including, without limitation, the performance of, or the refraining from the performance of, services. Unless specifically provided otherwise herein, all determinations of the Committee in connection with the Plan or an Agreement shall be made in its sole discretion.

 

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5. ADMINISTRATION
5.1 Committee .
The Plan shall be administered by the Committee. The Committee shall consist of the entire Board until the time that the Board designates a Compensation Committee of the Board. From the time a Compensation Committee of the Board is designated, the Committee shall consist of the Compensation Committee of the Board.
If the Committee does not include the entire Board, it shall serve at the pleasure of the Board, which may from time to time appoint members in substitution for members previously appointed and fill vacancies, however caused, in the Committee. The Committee may select one of its members as its Chairman and shall hold its meetings at such times and places as it may determine. A majority of its members shall constitute a quorum. All determinations of the Committee made at a meeting at which a quorum is present shall be made by a majority of its members present at the meeting. Any decision or determination reduced to writing and signed by a majority of the members shall be fully as effective as if it had been made by a majority vote at a meeting duly called and held.
5.2 Authority .
Subject to the terms of the Plan, the Committee shall have discretionary authority to:
(a) determine the individuals to whom Benefits are granted, the type and amounts of Benefits to be granted and the date of issuance and duration of all such grants;
(b) determine the terms, conditions and provisions of, and restrictions relating to, each Benefit granted;
(c) interpret and construe the Plan and all Agreements;
(d) prescribe, amend and rescind rules and regulations relating to the Plan;
(e) determine the content and form of all Agreements;
(f) determine all questions relating to Benefits under the Plan;
(g) maintain accounts, records and ledgers relating to Benefits;
(h) maintain records concerning its decisions and proceedings;
(i) employ agents, attorneys, accountants or other persons for such purposes as the Committee considers necessary or desirable;
(j) take, at any time, any action required or permitted by Section 9.1 or 9.2(a), respectively, irrespective of whether any Change of Control has occurred or is imminent;
(k) determine, except to the extent otherwise provided in the Plan, whether and the extent to which Benefits under the Plan will be structured to conform to the requirements applicable to Performance-Based Compensation, and to take such action, establish such procedures, and impose such restrictions at the time such Benefits are granted as the Committee determines to be necessary or appropriate to conform to such requirements; and
(l) do and perform all acts which it may deem necessary or appropriate for the administration of the Plan and carry out the purposes of the Plan.
5.3 Delegation .
Except as required by Rule 16b-3 with respect to grants of Options, Stock Appreciation Awards, Performance Shares, Other Stock Based Awards, or other Benefits to individuals who are subject to Section 16b-3 of the Exchange Act or as otherwise required for compliance with Rule 16b-3 or other applicable law, the Committee may delegate all or any part of its authority under the Plan to any Employee, Employees or committee.
5.4 Determination .
All determinations of the Committee shall be final.
6. AMENDMENT
6.1 Power of Board .
Except as hereinafter provided, the Board shall have the sole right and power to amend the Plan at any time and from time to time.

 

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6.2 Limitation .
The Board may not amend the Plan, without approval of the shareholders of the Company:
(a) in a manner which would cause Options which are intended to qualify as ISOs to fail to qualify;
(b) in a manner which would cause the Plan to fail to meet the requirements of Rule 16b-3;
(c) in a manner which would violate applicable law (including applicable rules of any stock exchange on which Common Stock is traded); or
(d) in a manner which would result in:
  (1)  
any material increase in the number of Shares to be issued under the Plan (other than to reflect a reorganization, stock split, merger, spinoff or similar transaction);
 
  (2)  
any material increase in Benefits to Participants, including any material change to permit a repricing (or decrease in exercise price) of outstanding Options, reduce the price at which Shares or Options to purchase Shares may be offered, or extend the duration of the Plan;
 
  (3)  
any material expansion of the class of Participants eligible to participate in the Plan; and
 
  (4)  
any expansion in the types of Options or Benefits provided under the Plan.
7. TERM AND TERMINATION
7.1 Term .
The Plan shall commence as of the Effective Date and, subject to the terms of the Plan, including those requiring approval by the shareholders of the Company and those limiting the period over which ISOs or any other Benefits may be granted, shall continue in full force and effect until the earlier of the tenth anniversary of the Effective Date or the date the Plan is terminated by the Board pursuant to Section 7.2.
7.2 Termination .
The Plan may be terminated at any time by the Board.
8. MODIFICATION OR TERMINATION OF BENEFITS
8.1 General .
Subject to the provisions of Section 8.2, the amendment or termination of the Plan shall not adversely affect a Participant’s right to any Benefit granted prior to such amendment or termination.
8.2 Committee’s Right .
Any Benefit granted may be converted, modified, forfeited or canceled, in whole or in part, by the Committee if and to the extent permitted in the Plan or applicable Agreement or with the consent of the Participant to whom such Benefit was granted. Except as may be provided in an Agreement, the Committee may, in its sole discretion, in whole or in part, waive any restrictions or conditions applicable to, or accelerate the vesting of, any Benefit.
8.3 Compliance with Applicable Laws.
The Plan shall be administered and interpreted in accordance with applicable federal tax laws, including Section 409A of the Code, and the regulations promulgated thereunder.
9. CHANGE OF CONTROL
9.1 Vesting and Payment.
In the event of a Change of Control:
(a) all outstanding Options shall become fully exercisable, except to the extent that the right to exercise the Option is subject to restrictions established in connection with a SAR that is issued in tandem with the Option;
(b) all outstanding SARs shall become immediately payable, except to the extent that the right to exercise the SAR is subject to restrictions established in connection with an Option that is issued in tandem with the SAR;
(c) all Shares of Restricted Stock shall become fully vested;

 

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(d) all Performance Shares shall be deemed to be fully earned and shall be paid out in such manner as determined by the Committee; and
(e) all Cash Awards, Other Stock Based Awards and other Benefits shall become fully vested and/or earned and paid out in such manner as determined by the Committee.
9.2 Other Action.
In the event of a Change of Control, the Committee, in its sole discretion, may, in addition to the provisions of Section 9.1 above and to the extent not inconsistent therewith:
(a) provide for the purchase of any Benefit for an amount of cash equal to the amount which could have been attained upon the exercise or realization of such Benefit had such Benefit been currently exercisable or payable;
(b) make such adjustment to the Benefits then outstanding as the Committee deems appropriate to reflect such transaction or change; and/or
(c) cause the Benefits then outstanding to be assumed, or new Benefits substituted therefor, by the surviving corporation in such change.
10. AGREEMENTS AND CERTAIN BENEFITS
10.1 Grant Evidenced by Agreement .
The grant of any Benefit under the Plan shall be evidenced by an Agreement which shall describe the specific Benefit granted and the terms and conditions of the Benefit. Except as otherwise provided in an Agreement, all capitalized terms used in the Agreement shall have the same meaning as in the Plan, and the Agreement shall be subject to all of the terms of the Plan.
10.2 Provisions of Agreement .
Each Agreement shall contain such provisions that the Committee shall determine to be necessary, desirable and appropriate for the Benefit granted which may include, but not necessarily be limited to, the following with respect to any Benefit: description of the type of Benefit; the Benefit’s duration; its transferability; if an Option, the exercise price, the exercise period and the person or persons who may exercise the Option; the effect upon such Benefit of the Participant’s death, disability, changes of duties or termination of employment; the Benefit’s conditions; when, if, and how any Benefit may be forfeited, converted into another Benefit, modified, exchanged for another Benefit, or replaced; and the restrictions on any Shares purchased or granted under the Plan.
10.3 Transferability .
Unless otherwise specified in an Agreement or permitted by the Committee, each Benefit granted shall be not transferable other than by will or the laws of descent and distribution and shall be exercisable during a Participant’s lifetime only by him.
11. REPLACEMENT AND TANDEM AWARDS
11.1 Replacement .
The Committee may permit a Participant to elect to surrender a Benefit in exchange for a new Benefit.
11.2 Tandem Awards .
Awards may be granted by the Committee in tandem. However, no Benefit may be granted in tandem with an ISO except SARs.
12. PAYMENT, DIVIDENDS AND WITHHOLDING
12.1 Payment .
Upon the exercise of an Option or in the case of any other Benefit that requires a payment by a Participant to the Company, the amount due the Company is to be paid:
(a) in cash, including by means of a so-called “cashless exercise” of an Option;

 

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(b) in other property, rights and credits deemed acceptable by the Committee, including the Participant’s promissory note; or
(c) by any combination of the payment methods specified in (a) and (b) above.
Notwithstanding the foregoing, any method of payment other than (a) may be used only with the consent of the Committee or if and to the extent so provided in an Agreement. The proceeds of the sale of Shares purchased pursuant to an Option and any payment to the Company for other Benefits shall be added to the general funds of the Company and used for the corporate purposes of the Company, as the Board shall determine.
12.2 Dividend Equivalents .
Grants of Benefits in Shares or Share equivalents may include dividend equivalent payments or dividend credit rights.
12.3 Withholding .
To the extent specified in the Agreement, the Company may, at the time any distribution is made under the Plan, whether in cash or in Shares, or at the time any Option is exercised, withhold from such distribution or Shares issuable upon the exercise of an Option, any amount necessary to satisfy federal, state and local income and/or other tax withholding requirements with respect to such distribution or exercise of such Options. The Committee or the Company may require a participant to tender to the Company cash and/or Shares in the amount necessary to comply with any such withholding requirements.
13. OPTIONS
13.1 Types of Options .
It is intended that both ISOs and NQSOs, which may be Reload Options, may be granted by the Committee under the Plan.
13.2 Grant of ISOs and Option Price .
Each ISO must be granted to an Employee and granted within ten years from the earlier of the date of adoption by the Board or the Effective Date. The purchase price for Shares under any ISO shall be no less than the Fair Market Value of the Shares at the time the Option is granted.
13.3 Other Requirements for ISOs .
The terms of each Option which is intended to qualify as an ISO shall meet all requirements of Section 422 of the Code.
13.4 NQSOs .
The terms of each NQSO shall provide that such Option will not be treated as an ISO. The purchase price for Shares under any NQSO shall be no less than 100% of the Fair Market Value of the Shares at the time the Option is granted.
13.5 Determination by Committee .
Except as otherwise provided in Section 13.1 through Section 13.4, the terms of all Options shall be determined by the Committee.
14. SARS
14.1 Grant and Payment .
The Committee may grant SARs. Upon electing to receive payment of a SAR, a Participant shall receive payment in Shares.
14.2 Grant of Tandem Award .
The Committee may grant SARs in tandem with an Option, in which case: the exercise of the Option shall cause a correlative reduction in SARs standing to a Participant’s credit which were granted in tandem with the Option; and the payment of SARs shall cause a correlative reduction of the Shares under such Option.

 

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14.3 ISO Tandem Award .
When SARs are granted in tandem with an ISO, the SARs shall have such terms and conditions as shall be required for the ISO to qualify as an ISO.
14.4 Payment of Award .
SARs shall be paid by the Company to a Participant, to the extent payment is elected by the Participant (and is otherwise due and payable), as soon as practicable after the date on which such election is made.
15. ANNUAL LIMITATIONS
15.1 Limitation on Options and SARs .
The number of (a) Shares covered by Options where the purchase price is no less than the Fair Market Value of the Shares on the date of grant plus (b) SARs which may be granted to any Participant in any Fiscal Year shall not exceed 3,000,000.
15.2 Limitation on Performance Shares
The number of Shares covered by Performance Shares in any Fiscal Year shall not exceed 3,000,000.
15.3 Computations .
For purposes of Section 15.1, Shares covered by an Option that is canceled shall count against the maximum, and, if the exercise price under an Option is reduced, the transaction shall be treated as a cancellation of the Option and a grant of a new Option; and SARs covered by a grant of SARs that is canceled shall count against the maximum; and, if the Fair Market Value of a Share on which the appreciation under a grant of SARs will be calculated is reduced, the transaction will be treated as a cancellation of the SARs and the grant of a new grant of SARs.
16. RESTRICTED STOCK AND PERFORMANCE SHARES
16.1 Restricted Stock .
The Committee may grant Benefits in Shares available under Section 3.1 of the Plan as Restricted Stock. Shares of Restricted Stock shall be issued and delivered at the time of the grant or as otherwise determined by the Committee, but shall be subject to forfeiture until provided otherwise in the applicable Agreement or the Plan. Each certificate representing Shares of Restricted Stock shall bear a legend referring to the Plan and the risk of forfeiture of the Shares and stating that such Shares are nontransferable until all restrictions have been satisfied and the legend has been removed. At the discretion of the Committee, the grantee may or may not be entitled to full voting and dividend rights with respect to all shares of Restricted Stock from the date of grant.
16.2 Cost of Restricted Stock .
Unless otherwise determined by the Committee, grants of Shares of Restricted Stock shall be made at a per Share cost to the Participant equal to par value.
16.3 Non-Transferability .
Shares of Restricted Stock shall not be transferable until after the removal of the legend with respect to such Shares.
16.4 Performance Shares .
Performance Shares are the right of an individual to whom a grant of such Shares is made to receive Shares or cash equal to the Fair Market Value of such Shares at a future date in accordance with the terms and conditions of such grant. The terms and conditions shall be determined by the Committee, in its sole discretion, but generally are expected to be based substantially upon the attainment of targeted profit and/or performance objectives. The Committee shall determine the performance targets which will be applied with respect to each grant of Performance Shares at the time of grant, but in no event later than 90 days after the beginning of the period of service to which the performance targets relate. The performance criteria applicable to Performance Shares will be one or more of the following: (1) stock price; (2) average annual growth in earnings per share; (3) increase in shareholder value; (4) earnings per share; (5) net income; (6) return on assets; (7) return on shareholders’ equity; (8) increase in cash flow; (9) operating profit or operating margins; (10) revenue growth of the Company; and (11) operating expenses. Each performance target applicable to a Performance Share award and the deadline for satisfying each such target shall be stated in the Agreement between the Company and the Employee. The Committee must certify in writing that each such target has been satisfied before the Performance Shares award becomes effective.

 

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16.5 Grant .
The Committee may grant an award of Performance Shares. The number of Performance Shares and the terms and conditions of the grant shall be set forth in the applicable Agreement.
17. CASH AWARDS
17.1 Grant .
The Committee may grant Cash Awards at such times and (subject to Section 17.2) in such amounts as it deems appropriate.
17.2 Annual Limits .
The amount of any Cash Award in any Fiscal Year to any Participant shall not exceed the greater of $100,000 or 100% of his cash compensation (excluding any Cash Award under this Section 17.2) for such Fiscal Year.
17.3 Restrictions .
Cash Awards may be subject or not subject to conditions (such as an investment requirement), restricted or nonrestricted, vested or subject to forfeiture and may be payable currently or in the future or both. The Committee may make grants of Cash Awards that are intended to be Performance Based Compensation and grants of Cash Awards that are not intended to be Performance Based Compensation.
The Committee shall determine the performance targets which will be applied with respect to each grant of Cash Awards that are intended to be Performance Based Compensation at the time of grant, but in no event later than 90 days after the beginning of the period of service to which the performance targets relate. The performance criteria applicable to Performance Based Compensation awards will be one or more of the following: (1) stock price; (2) average annual growth in earnings per share; (3) increase in shareholder value; (4) earnings per share; (5) net income; (6) return on assets; (7) return on shareholders’ equity; (8) increase in cash flow; (9) operating profit or operating margins; (10) revenue growth of the Company; and (11) operating expenses. Each performance target applicable to a Cash Award intended to be Performance Based Compensation and the deadline for satisfying each such target shall be stated in the Agreement between the Company and the Employee. The Committee must certify in writing that each such target has been satisfied before the Performance Based Compensation award is paid.
18. OTHER STOCK BASED AWARDS AND OTHER BENEFITS
18.1 Other Stock Based Awards .
The Committee shall have the right to grant Other Stock Based Awards which may include, without limitation, the grant of Shares based on certain conditions, the payment of cash based on the performance of the Common Stock, and the grant of securities convertible into Shares.
18.2 Other Benefits .
The Committee shall have the right to provide types of Benefits under the Plan in addition to those specifically listed, if the Committee believes that such Benefits would further the purposes for which the Plan was established.
19. MISCELLANEOUS PROVISIONS
19.1 Underscored References .
The underscored references contained in the Plan are included only for convenience, and they shall not be construed as a part of the Plan or in any respect affecting or modifying its provisions.
19.2 Number and Gender .
The masculine and neuter, wherever used in the Plan, shall refer to either the masculine, neuter or feminine; and, unless the context otherwise requires, the singular shall include the plural and the plural the singular.

 

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19.3 Unfunded Status of Plan .
The Plan is intended to constitute an “unfunded” plan for incentive and deferred compensation. With respect to any payments or deliveries of Shares not yet made to a Participant by the Company, nothing contained herein shall give any rights that are greater than those of a general creditor of the Company. The Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Shares or payments hereunder consistent with the foregoing.
19.4 Termination of Employment .
If the employment of a Participant by the Company terminates for any reason, except as otherwise provided in an Agreement, all unexercised, deferred, and unpaid Benefits may be exercisable or paid only in accordance with rules established by the Committee, provided however if a Participant is an Employee and he or she is “Terminated for Cause”, as defined herein below, or violates any of the terms of their employment after they have become vested in any of their rights herein, the Participant’s full interest in such rights shall terminate on the date of such termination of employment and all rights thereunder shall cease. Whether a Participant’s employment is Terminated for Cause shall be determined by the Board. Cause shall include, but not be limited to gross negligence, willful misconduct, flagrant or repeated violations of the Employer’s policies, rules or ethics, a material breach by the Participant of any employment agreement between the Participant and the Employer, intoxication, substance abuse, sexual or other unlawful harassment, disclosure of confidential or proprietary information, engaging in a business competitive with the Employer, or dishonest, illegal or immoral conduct.
19.5 Designation of Beneficiary .
A Participant may file with the Committee a written designation of a beneficiary or beneficiaries (subject to such limitations as to the classes and number of beneficiaries and contingent beneficiaries as the Committee may from time to time prescribe) to exercise, in the event of the death of the Participant, an Option, or to receive, in such event, any Benefits. The Committee reserves the right to review and approve beneficiary designations. A Participant may from time to time revoke or change any such designation of beneficiary and any designation of beneficiary under the Plan shall be controlling over any other disposition, testamentary or otherwise; provided, however, that if the Committee shall be in doubt as to the right of any such beneficiary to exercise any Option or to receive any Benefit, the Committee may determine to recognize only an exercise by the legal representative of the recipient, in which case the Company, the Committee and the members thereof shall not be under any further liability to anyone.
19.6 Governing Law .
This Plan shall be construed and administered in accordance with the laws of the State of Delaware, without regard to any applicable conflicts of law. By accepting an Option, the Employee irrevocably and unconditionally consents to submit to the exclusive jurisdiction of the courts of the State of Florida or of the United States of America, in each case located in Palm Beach County, Florida, for any litigation arising out of or relating to this Plan (and agrees not to commence any litigation relating thereto except in such courts). The Employee also irrevocably and unconditionally waives any objection to the laying of venue of any litigation arising out of or related to the Option or this Plan in the courts of the State of Florida or of the United States of America, in each case located in Palm Beach County, Florida, and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such litigation brought in any such court has been brought in an inconvenient forum.
19.7 Purchase for Investment .
The Committee may require each person purchasing Shares pursuant to an Option or other award under the Plan to represent to and agree with the Company in writing that such person is acquiring the Shares for investment and without a view to distribution or resale. The certificates for such Shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All certificates for Shares delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under all applicable laws, rules and regulations, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate references to such restrictions.
19.8 No Employment Contract .
Neither the adoption of the Plan nor any Benefit granted hereunder shall confer upon any Employee any right to continued employment nor shall the Plan or any Benefit interfere in any way with the right of the Employer to terminate the employment of any of its Employees at any time.

 

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19.9 No Effect on Other Benefits .
The receipt of Benefits under the Plan shall have no effect on any benefits to which a Participant may be entitled from the Employer, under another plan or otherwise, or preclude a Participant from receiving any such benefits.
19.10 Limitation on Exercise.
Notwithstanding anything herein or in the stock option award, no holder of an Option may exercise such Option if the Company’s common stock is not then traded publicly on the bulletin board or on a stock exchange or stock market, except: (i) in connection with a sale of all or part of the Company’s common stock, (ii) within two months prior to the expiration of the Option, as provided in the stock option award, or (iii) as may be extended by the Committee.

 

12

Exhibit 31.1
Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, William J. Caragol, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of VeriChip Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonably assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
Date: May 14, 2009  /s/ William J. Caragol    
  William J. Caragol    
  Acting Chief Financial Officer
(Principal Executive Officer) 
 

 

 

         
Exhibit 31.2
Certification of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, William J. Caragol, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of VeriChip Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonably assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
Date: May 14, 2009  /s/ William J. Caragol    
  William J. Caragol    
  Acting Chief Financial Officer
(Principal Financial Officer) 
 

 

 

         
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of VeriChip Corporation (the “Company”) on Form 10-Q for the period ending March 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William J. Caragol, Acting Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
     
/s/ William J. Caragol
 
William J. Caragol
   
Acting Chief Financial Officer
   
Date: May 14, 2009
   
A signed original of this written statement required by Section 906 has been provided to VeriChip Corporation and will be retained by VeriChip Corporation and furnished to the Securities and Exchange Commission or its staff upon request.