PositiveID
VeriChip CORP (Form: 10-Q, Received: 08/13/2009 17:30:58)
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 June 30, 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 August 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 10.4
  Exhibit 10.5
  Exhibit 10.6
  Exhibit 10.7
  Exhibit 10.8
  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)
                 
    June 30,     December 31,  
    2009     2008  
    (unaudited)          
Assets
               
Current Assets:
               
Cash
  $ 1,165     $ 3,229  
Restricted Cash
    4,434        
Prepaid expenses and other current assets
    232       275  
 
           
Total Current Assets
    5,831       3,504  
 
               
Equipment, net of accumulated depreciation
    30       39  
Restricted cash
          4,543  
Investment in Steel Vault — Warrant
    62        
Note Receivable from Steel Vault
    468        
 
           
 
  $ 6,391     $ 8,086  
 
           
Liabilities and Stockholders’ Equity
               
Current Liabilities:
               
Accounts payable
  $ 251     $ 72  
Accrued expenses and other current liabilities
    948       1,094  
 
           
Total Current Liabilities
    1,199       1,166  
Deferred gain
          4,500  
 
           
Total Liabilities
  $ 1,199     $ 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 13,760 and 11,730 shares at June 30, 2009 and December 31, 2008, respectively
    137       117  
Additional paid-in capital
    44,996       44,410  
Accumulated deficit
    (39,965 )     (42,107 )
Other Comprehensive Income
    24        
 
           
Total Stockholders’ Equity
    5,192       2,420  
 
           
 
  $ 6,391     $ 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     For the Six Months Ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
 
                               
Revenue
  $ 49     $ 32     $ 57     $ 35  
Cost of goods sold
    19       61       19       61  
 
                       
Gross profit (loss)
    30       (29 )     38       (26 )
 
                               
Operating expenses:
                               
Selling, general and administrative
    935       3,497       2,304       6,746  
Research and development
          50             212  
 
                       
Total operating expenses
    935       3,547       2,304       6,958  
 
                               
Operating loss
    (905 )     (3,576 )     (2,266 )     (6,984 )
 
                               
Interest and other income
    11       (835 )     24       (980 )
Gain on sale of Xmark Corporation
    4,385             4,384        
Interest expense
          (478 )           (839 )
 
                       
Total other income (expense)
    4,396       (1,313 )     4,408       (1,819 )
 
                               
Income (loss) from continuing operations
    3,491       (4,889 )     2,142       (8,803 )
Income from discontinued operations
          1,682             2,753  
 
                       
Net income (loss)
  $ 3,491     $ (3,207 )   $ 2,142     $ (6,050 )
 
                       
 
                               
Earnings per common share — Basic
                               
Net income (loss) per common share from continuing operations
  $ 0.28     $ (0.50 )   $ 0.18     $ (0.90 )
Net income per common share from discontinued operations
          0.17             0.28  
 
                       
Net income (loss) per common share
  $ 0.28     $ (0.33 )   $ 0.18     $ (0.62 )
 
                       
Weighted average number of shares outstanding
    12,436       9,803       12,240       9,703  
 
                       
 
                               
Earnings per common share — Diluted
                               
Net income (loss) per common share from continuing operations
  $ 0.27     $ (0.50 )   $ 0.17     $ (0.90 )
Net income per common share from discontinued operations
          0.17             0.28  
 
                       
Net income (loss) per common share
  $ 0.27     $ (0.33 )   $ 0.17     $ (0.62 )
 
                       
Weighted average number of shares outstanding
    12,894       9,803       12,563       9,703  
 
                       
 
                               
Net income
  $ 3,491     $     $ 2,142     $  
Other Comprehensive Income
    24             24        
 
                       
Comprehensive income
  $ 3,515     $     $ 2,166     $  
 
                       
See accompanying notes to unaudited condensed consolidated financial statements.

 

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VERICHIP CORPORATION
Condensed Consolidated Statement of Stockholders’ Equity
For the Six Months Ended June 30, 2009
(In thousands)
(Unaudited)
                                                 
                                    Accumulated        
                    Additional             Other     Total  
    Common Shares     Paid-in     Accumulated     Comprehensive     Stockholders’  
    Number     Amount     Capital     Deficit     Income     Equity  
 
                                               
Balance December 31, 2008
    11,730     $ 117     $ 44,410     $ (42,107 )   $     $ 2,420  
Net income
                      2,142             2,142  
Unrealized gain on available for sale securities
                                    24       24  
Stock based compensation
    1,520       15       341                   356  
Issuance of shares for settlement of litigation expense
    510       5       245                   250  
 
                                   
 
                                               
Balance June 30, 2009
    13,760     $ 137     $ 44,996     $ (39,965 )   $ 24     $ 5,192  
 
                                   
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 Six Months Ended  
    June 30,  
    2009     2008  
 
               
Cash flows from operating activities:
               
Net income (loss)
  $ 2,142     $ (6,050 )
Adjustments to reconcile net loss to net cash used in operating activities
               
Depreciation and amortization
    15       35  
Stock based compensation
    356       1,754  
Accrued interest
          505  
Gain on sale of Xmark Corporation
    (4,385 )      
Asset impairment
          44  
Allowance for inventory excess
          53  
Issuance of shares for settlement of litigation expense
    250        
Non cash interest income
    (11 )      
Changes in operating assets and liabilities:
               
Decrease in accounts receivable
          32  
Increase in inventories
          (11 )
Decrease in prepaid expenses and other current assets
    44       384  
Increase in accounts payable and accrued expenses
    91       131  
Net cash used in discontinued operations
    (60 )     (712 )
 
           
Net cash used in operating activities
    (1,560 )     (3,835 )
 
               
Cash flows from investing activities:
               
Purchase of equipment
    (9 )     (12 )
Proceeds from sale of equipment
    5        
Investment in note receivable
    (500 )      
Net cash used in discontinued operations
          (58 )
 
           
Net cash provided by (used in) investing activities
    (504 )     (70 )
 
               
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
          48  
Stock issuance costs
          (9 )
Net cash used in discontinued operations
          (1,515 )
 
           
Net cash provided by financing activities
          429  
 
               
Net decrease in cash
    (2,064 )     (3,476 )
Cash, beginning of period
    3,229       7,250  
 
           
Cash, end of period
  $ 1,165     $ 3,774  
 
           
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.
On July 18, 2008, the Company completed the sale of all of the outstanding capital stock of Xmark Corporation, its wholly-owned Canadian subsidiary (“Xmark”), to Stanley Canada Corporation (“Stanley”) for $47.9 million in cash, which consisted of the $45 million purchase price plus a balance sheet adjustment of $2.9 million. Under the terms of the stock purchase agreement, $4.5 million of the proceeds were held in escrow for a period of 12 months to provide for indemnification obligations under the stock purchase agreement, if any. As a result, the Company recorded a gain on the sale of Xmark of $6.2 million, with $4.5 million of that gain deferred until the escrow was settled. The Xmark business included all of the operations of our previously reported healthcare security and industrial segments. The financial position, results of operations and cash flows of Xmark for 2008 have been reclassified as a discontinued operation.
During the quarter ended June 30, 2009 the Company finalized the process related to the indemnification obligations supported by the $4.5 million escrow. On July 20, 2009 the Company received $4.4 million of the previously escrowed funds, which was net of a $115 thousand payment to Stanley as the final settlement of the final balance sheet adjustment. As a result, the Company recognized a $4.4 million previously deferred gain in its statement of operations for the three and six months ended June 30, 2009.
Following the completion of the sale of Xmark to Stanley, the Company retired all of its outstanding debt for a combined payment of $13.5 million and settled all contractual payments to officers and management of the Company and Xmark for $9.1 million. In addition, the Company issued a special dividend of $15.8 million on August 28, 2008.
The Company has historically developed, marketed, and sold radio frequency identification (frequently referred to as RFID) systems used for the identification and protection of people in the healthcare market. The 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.
The accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries as of June 30, 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 and six months ended June 30, 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 June 30, 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.

 

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VERICHIP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
The unaudited condensed consolidated statements of operations for the three and six months ended June 30, 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.
Fair Value of Financial Instruments
The carrying values of financial instruments including cash and accounts payable approximate fair value due to the relatively short term nature of these instruments.
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements.” SFAS 157 defines fair value and establishes a framework for measuring fair value in accordance with U.S. GAAP. The statement also expands the disclosures related to the fair value measurements used to value assets and liabilities. SFAS 157 was effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company adopted SFAS 157 on January 1, 2008. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This standard is now the single source in U.S. GAAP for the definition of fair value, except for the fair value of leased property as defined in SFAS 13. SFAS 157 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs), (2) assumptions that are other than quoted prices which are either directly or indirectly observable for the asset or liability through correlation with market data and (3) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The three levels of the fair value hierarchy under SFAS 157 are described below:
   
Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
 
   
Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
 
   
Level 3—Inputs that are both significant to the fair value measurement and unobservable.
The Company’s investment in the common stock purchase warrant to purchase 333 thousand common shares of Steel Vault Corporation (“Steel Vault”), as further discussed in Note 4, are classified as Level 2 under SFAS 157 hierarchy. The warrant investment in the Company is valued monthly using a black-scholes model with observable market inputs.
Investments are classified within Level 3 of the fair value hierarchy because they trade infrequently (or not at all) and therefore have little or no readily available pricing. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available. The note receivable is classified within Level 3 of the fair value hierarchy.

 

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VERICHIP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
Valuations for Level 3 investments are adjusted when changes to inputs and assumptions are corroborated by evidence such as transactions in similar instruments, convertible offerings in the equity or debt, and changes in financial ratios or cash flows of the borrower and the guarantor’s financial ability to repay the obligation in the event of a default. The note receivable is guaranteed by the Company’s acting chief financial officer who is the chief executive officer of Steel Vault, the borrower.
For positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability and such adjustments are generally based on available market information. In the absence of such evidence, management’s best estimate is used.
The values assigned to investments and any unrealized gains or losses reported are based on available information and do not necessarily represent amounts that might be realized if a ready market existed and such difference could be material. Furthermore the ultimate realization of such amounts depends on future events and circumstances and therefore valuation estimates may differ from the value realized upon disposition of individual positions.
The following table sets forth information about the level within the fair value hierarchy at which the Company’s investments are measured at June 30, 2009 (expressed in thousands):
                 
            Fair Value  
    Fair Value     Hierarchy  
Assets
               
Warrant
  $ 64       2  
Note receivable
  $ 468       3  
 
           
 
               
Total
  $ 532          
 
             
The following summarizes changes in fair value of the Company’s Level 3 assets for the six months ended June 30, 2009. The information reflects gains and losses for the period for assets categorized as Level 3 as of June 30, 2009 (expressed in thousands):
         
    Level 3  
    Note Receivable  
 
       
Balance — December 31, 2008
  $  
 
       
Unrealized gains — (representing accretion of debt discount)
  $ 2  
Purchases
  $ 466  
 
     
 
       
Balance — June 30, 2009
  $ 468  
 
     
 
       
Change in unrealized gains
  $ 2  
 
     
Recent Accounting Pronouncements
In April 2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1”) and (“APB 28-1”). FSP FAS 107-1 amends FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments" , to require disclosures about fair value of financial instruments in interim as well as in annual financial statements and amends APB Opinion No. 28 “Interim Financial Reporting”, to require those disclosures in interim financial statements. FSP FAS 107-1 and APB 28-1 were adopted by the Company on April 1, 2009. These staff positions did not have a material impact on our Condensed Consolidated Financial Statements.

 

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VERICHIP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
In May 2009, the FASB issued SFAS No. 165 “Subsequent Events” (“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 sets forth (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS 165 was effective for the Company’s interim financial periods ending June 30, 2009. The adoption of this standard did not have a material impact on our Condensed Consolidated Financial Statements.
In June 2009, the FASB issued SFAS No. 168 “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162”. The FASB Accounting Standards Codification (“Codification”) will be the single source of authoritative nongovernmental U.S. generally accepted accounting principles. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS 168 is effective for interim and annual periods ending after September 15, 2009. All existing accounting standards are superseded as described in SFAS 168. All other accounting literature not included in the Codification is nonauthoritative. The adoption of this standard is not expected to have a material impact on our Condensed Consolidated Financial Statements.
Stock-Based Compensation
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 $0.3 million and $0.4 million for the three and six months ended June 30, 2009, respectively, and approximately $0.9 million and $1.8 million for the three and six months ended June 30, 2008, respectively.
In December 2008, the Company issued approximately 518 thousand 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 approximately $22 thousand and $168 thousand was recorded in the three and six months ended June 30, 2009, respectively, for these shares.
In December 2008, the Company issued approximately 602 thousand 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 approximately $55 thousand and $110 thousand was recorded in the three and six months ended June 30, 2009, respectively, for these shares.
In December 2008, the Company issued 400 thousand 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 thousand 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. Compensation expense of approximately $37 thousand and $73 thousand was recorded in the three and six months ended June 30, 2009, respectively, for these shares.

 

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VERICHIP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
In January and December 2008, the Company issued 25 thousand and 170 thousand options, respectively, to a director, employees and consultants, which vest on January 18, 2011 and December 31, 2011, respectively. The Company determined the value of the option to be approximately $43 thousand based on the value of its common stock on the dates of grant. The value of the outstanding options is being amortized as compensation expense over the vesting period. Compensation expense of approximately $2 thousand and $4 thousand was recorded in the three and six months ended June 30, 2009, respectively, for these options.
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
                 
    June 30,     December 31,  
    2009     2008  
Raw materials
  $ 161     $ 161  
Work in process
           
Finished goods
    52       52  
 
           
 
    213       213  
Allowance for excess and obsolescence
    (213 )     (213 )
 
           
 
  $     $  
 
           
4. Note Receivable
On June 4, 2009, the Company invested $500 thousand in Steel Vault pursuant to a secured convertible promissory note (the “Note”). The two year Note is collectible on demand on or after June 4, 2010, accrues at a rate of twelve percent and is secured by substantially all of Steel Vault’s assets, including the assets of National Credit Report.com, LLC, a wholly-owned subsidiary of Steel Vault. The security interest held by the Company on the assets is senior to any other security interest on the assets pursuant to a Subordination and Intercreditor Agreement between the Company and Blue Moon Energy Partners LLC, a Florida limited liability company (“Blue Moon”). The Note can be prepaid at any time without penalty and matures on June 4, 2011. The unpaid principal and accrued and unpaid interest under the Note can be converted at any time into common stock of Steel Vault at a price of $0.30 per share.
The investment included a common stock purchase warrant given to VeriChip to purchase 333 thousand common shares of the Company at a price of $0.30 per share. The fair market value at issuance was $34. Interest receivable as of June 30, 2009 was $2.
The Company valued each component of the investment as of the investment period and allocated the $500 thousand investment proportionately to the Note and common stock purchase warrant based on their respective fair values on June 4, 2009.
The financing transaction also included a guaranty of collection given by William J. Caragol for the benefit of the Company. See Note 9 — Related Party Transactions.

 

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VERICHIP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
5. 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 June 30, 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 June 30, 2009, all of which are fully vested. As of June 30, 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 June 30, 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 June 30, 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 June 30, 2009, approximately 2.4 million options and shares have been granted. As of June 30, 2009, no SARs have been granted and 0.6 million shares may still be granted under the VeriChip 2007 Plan.
In addition, as of June 30, 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 six months ended June 30, 2009, no options were granted. In the six months ended June 30, 2008, 25 thousand options and 0.7 million shares were granted.
A summary of option activity under the Company’s option plans as of June 30, 2009, and changes during the six months then ended is presented below (in thousands, except per share amounts):
                 
    Number of Options     Weighted Average Exercise Price Per Share  
 
               
Outstanding on January 1, 2009
    1,225     $ 4.52  
Granted
           
Exercised
           
Forfeited
    221       0.57  
 
             
Outstanding on June 30, 2009
    1,004       5.39  
 
             
Exercisable on June 30, 2009 (1)
    834       6.41  
 
             
 
               
Shares available on June 30, 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 $0.46 at June 30, 2009. As of June 30, 2009, the aggregate intrinsic value of all options outstanding was $21 thousand.

 

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VERICHIP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
The following table summarizes information about stock options at June 30, 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       8.2     $ 0.55       56     $ 1.10  
$4.0501 to $6.0750
    348       7.1       5.59       348       5.59  
$6.0751 to $8.1000
    318       4.3       7.08       318       7.08  
$8.1001 to $10.1250
    106       5.5       9.24       106       9.24  
$18.2251 to $20.2500
    6       3.5       20.25       6       20.25  
 
                             
 
                                       
 
    1,004       6.3     $ 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.

 

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VERICHIP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
6. Loss per Common Share
A reconciliation of the numerator and denominator of basic and diluted loss per common share is provided as follows (in thousands, except per share amounts):
                                 
    For the Three Months Ended     For the Six Months Ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
 
                               
Numerator:
                               
Numerator for basic and diluted loss per share:
                               
Income (loss) from continuing operations
    3,491       (4,889 )     2,142       (8,803 )
Net income from discontinued operations
          1,682             2,753  
 
                       
Net income (loss)
  $ 3,491     $ (3,207 )   $ 2,142     $ (6,050 )
 
                       
 
                               
Denominator:
                               
Denominator for basic income (loss) per share:
                               
Weighted average shares outstanding — basic
    12,436       9,803       12,240       9,703  
 
                       
Net income (loss) per common share from continuing operations — basic
  $ 0.28     $ (0.50 )   $ 0.18     $ (0.90 )
Net income per common share from discontinued operations — basic
          0.17             0.28  
 
                       
Basic income (loss) per share
  $ 0.28     $ (0.33 )   $ 0.18     $ (0.62 )
 
                       
 
                               
Denominator for diluted income (loss) per share:
                               
Weighted average shares outstanding — diluted
    12,894       9,803       12,563       9,703  
 
                       
Net income (loss) per common share from continuing operations — diluted
  $ 0.27     $ (0.50 )   $ 0.17     $ (0.90 )
Net income per common share from discontinued operations — diluted
          0.17             0.28  
 
                       
 
                               
Diluted income (loss) per share
  $ 0.27     $ (0.33 )   $ 0.17     $ (0.62 )
 
                       

 

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VERICHIP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
The following stock options and restricted stock outstanding as of June 30, 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     For the Six Months Ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
 
                               
Stock options
          1,815             1,815  
Restricted common stock
          1,297             1,297  
 
                       
 
          3,112             3,112  
 
                       
Securities excluded from the diluted earnings (loss) per share calculation because the exercise prices were greater than the average market price
                               
Stock Options (1)
    809             809        
     
(1)   These options represent the number outstanding at the end of the respective period. At the point that the exercise price is less than the average market price, these options have the potential to be dilutive and application of the treasury method would reduce this amount.
7. Income Taxes
The Company had an effective tax rate of nil for the three and six months ended June 30, 2009 and 2008. However, it 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.
During the three and six months ended June 30, 2009, the Company recognized a gain of $4.4 million from the sale of Xmark in 2008. This gain resulted in taxable income in 2008, which resulted in the Company utilizing a portion of its net operating loss carryforward through the release of the valuation allowance against those tax attributes.
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 and six months ended June 30, 2009 and 2008, there was no such interest or penalty.

 

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VERICHIP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
8. 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.
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.
9. 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 July 31, 2009, Mr. Silverman owned, directly or indirectly, approximately 59% of Steel Vault’s outstanding common stock, including 2,570,000 shares that are directly owned by 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 and acting treasurer, is also a manager and member of Blue Moon and is the Chief Executive Officer of Steel Vault.
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 $6,500 a month. During the six and three months ended June 30, 2009, the Company recorded $45,000 and $21,000, respectively, for shared services fees from Steel Vault. The Company did not record any payments for shared services fees from Steel Vault for the six and three months ended June 30, 2008.
As discussed in Note 4 above, on June 4, 2009, the Company closed a debt financing transaction with Steel Vault for $500 thousand pursuant to a secured convertible promissory note (the “Note”). The two year Note is collectible on demand on or after June 4, 2010, accrues at a rate of twelve percent and is secured by substantially all of Steel Vault’s assets, including the assets of National Credit Report.com, LLC, a wholly-owned subsidiary of Steel Vault. The Note can be prepaid at any time without penalty and matures on June 4, 2011. The unpaid principal and accrued and unpaid interest under the Note can be converted at any time into common stock of Steel Vault at a price of $0.30 per share.

 

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VERICHIP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
The financing transaction included a common stock purchase warrant sold to VeriChip to purchase 333 thousand common shares of Steel Vault at a price of $0.30 per share. The fair market value of the warrants at issuance was $34 thousand. Interest accrued as of June 30, 2009 was $2.
The financing transaction also included a guaranty of collection given by William J. Caragol, the Company’s acting chief financial officer, for the benefit of the Company, for which Mr. Caragol received a common stock purchase warrant from Steel Vault to purchase 500 thousand common shares of Steel Vault at a price of $0.30 per share. The fair market value at issuance was $45 thousand.
10. Events Occurring After Reporting Date
The Company has evaluated events and transactions that occurred between June 30, 2009 and August 13, 2009, which is the date the financial statements were issued for possible disclosure and recognition in the financial statements. The Company has determined that there were no such events or transactions that warrant disclosure and recognition in the financial statements.

 

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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, as supplemented by “Item 1A. Risk Factors” of our Quarterly Reports for the periods ended March 31, 2009 and June 30, 2009, and include:
    our ability to continue listing our common stock on the Nasdaq Stock Market (“Nasdaq”);
 
    our ability to successfully consider, review, and if appropriate, implement other strategic opportunities;
 
    our expectation that we will incur losses, on a consolidated basis, for the foreseeable future;
 
    our ability to fund our operations;
 
    we may become subject to costly product liability claims and claims that our products infringe the intellectual property rights of others;
 
    our ability to comply with current and future regulations relating to our businesses;
 
    uncertainty as to whether a market for our VeriMed 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.

 

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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, as supplemented by “Item 1A. Risk Factors” of our Quarterly Reports for the periods ended March 31, 2009 and June 30, 2009. 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 the Company’s 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.
The Company 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 our VeriMed Health Link system for use in medical applications in the United States.
On July 18, 2008, the Company completed the sale of all of the outstanding capital stock of Xmark to Stanley for $47.9 million in cash, which consisted of the $45 million purchase price plus a balance sheet adjustment of $2.9 million. The Xmark business included all of the operations of our previously reported healthcare security and industrial segments. The financial position, results of operations and cash flows of Xmark for 2008 have been reclassified as a discontinued operation.
Recent Developments
On May 6, 2009, the Company and its development partner Receptors LLC, announced plans to develop surveillance and point-of-care sensor systems that will efficiently detect and identify the presence of a particular biological threat such as influenza virus, Methicillin-resistant Staphylococcus aureus (MRSA) or other illnesses.
On May 12, 2009, the Company completed the development of a new, smaller human-implantable RFID microchip measuring approximately 8 millimeters by 1 millimeter.
On May 27, 2009, that the Nasdaq Hearings Panel granted the Company’s request to remain listed on The Nasdaq Stock Market and the Company’s request to transfer to The Nasdaq Capital Market, effective May 29, 2009. On July 24, 2009, the Company received a letter from the Nasdaq advising that the Company is in compliance with all applicable continued listing standards. For more information, see Item 1A. “Risk Factors.”
On June 4, 2009, the Company closed a debt financing transaction with Steel Vault for $500 thousand pursuant to a secured convertible promissory note. See Note 4 — Note Receivable, for more information.
The Company continues to focus on both its healthcare business including its VeriMed Health Link business, and the possible development of the glucose sensing microchip, and strategic opportunities in the healthcare, identification and clean and alternative energy sectors.
Results of Operations
Through June 30, 2009, the Company has recorded nominal revenue from sales of its VeriMed Health Link system.
During the six months ended June 30, 2009, the Company focused its resources on the process of evaluating the timing and nature of its future investments and expenditures related to its VeriMed Health Link, VeriTrace and VeriGreen businesses. During this time the Company has undertaken a cost reduction program to maximize the amount of capital that it will have available to pursue business opportunities in the healthcare and energy sectors.

 

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Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008
Revenue
Revenue for the three months ended June 30, 2009 and 2008 were $49,000 and $32,000, respectively, primarily from the sale of the Company’s VeriTrace systems.
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 $2.6 million to $0.9 million for the three months ended June 30, 2009 as compared to $3.5 million for the three months ended June 30, 2008. The decrease was a result of staff reductions and reduction in other overhead costs most significantly in the areas of sales and marketing as the Company continues to evaluate strategic growth opportunities.
During the three months ended June 30, 2009 and 2008, the Company incurred stock-based compensation expense of $0.3 million and $0.9 million, respectively.
Interest Expense
Interest expense was nil and $0.5 million for the three months ended June 30, 2009 and 2008, respectively. The interest expense in 2008 was a result of loan agreements in 2008 which were retired upon the sale of Xmark.
Gain on Sale
During the three months ended June 30, 2009 and 2008, respectively, there was a gain on sale of $4.4 million and nil. The gain in 2009 was a result of the recognition of previously deferred gain from the sale of Xmark.
Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
Revenue
Revenue for the six months ended June 30, 2009 and 2008 were $57,000 and $35,000, respectively, primarily from the sale of the Company’s VeriTrace systems.
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 $4.4 million to $2.3 million for the six months ended June 30, 2009 as compared to $6.7 million for the six months ended June 30, 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 six months ended June 30, 2009, the Company 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 six months ended June 30, 2009 and 2008, the Company incurred stock-based compensation expense of $0.4 million and $1.8 million, respectively.

 

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Interest Expense
Interest expense was nil and $0.8 million for the six months ended June 30, 2009 and 2008, respectively. The interest expense in 2008 was a result of loan agreements in 2008 which were retired upon the sale of Xmark.
Gain on Sale
During the six months ended June 30, 2009 and 2008, respectively, there was a gain on sale of $4.4 million and nil. The gain in 2009 was a result of the recognition of previously deferred gain from the sale of Xmark.
Liquidity and Capital Resources
As of June 30, 2009, cash totaled $1.2 million compared to unrestricted cash of approximately $3.2 million at December 31, 2008.
Cash Flows Used in Operating Activities
Net cash used in operating activities totaled $1.6 million and $3.8 million during the six months ended June 30, 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 in 2008.
Cash Flows from Investing Activities
Investing activities used cash of $504 thousand and $70 thousand during the six months ended June 30, 2009 and 2008, respectively. In the six months ended June 2009, cash was primarily used to purchase a $0.5 million secured convertible promissory note from Steel Vault. In the six months ended June 30 2008, cash was used to purchase equipment, partially offset by cash inflows related to discontinued operations investing activity.
Cash Flows from Financing Activities
Financing activities used cash of nil and provided cash of $0.4 million during the six months ended June 30, 2009 and 2008, respectively. In the six months ended June 30, 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 its discontinued operations. Cash of $5.6 million, net of borrowings of $1.3 million, was paid to Digital Angel in the six months ended June 30, 2008 to repay long term debt.
Financial Condition
As of June 30, 2009, the Company had working capital of approximately $4.6 million and an accumulated deficit of approximately $39.9 million compared to a working capital of approximately $2.4 million and an accumulated deficit of approximately $42.1 million as of December 31, 2008. The increase in working capital was primarily due to the release of $4.4 million from the escrow agreement between the Company and Stanley, stemming from the Company’s sale of Xmark, offset by operating losses, described above.
The Company believes that with the cash we have on hand and the restricted cash, it will have sufficient funds available to cover our cash requirements through the next twelve months.

 

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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.
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 June 30, 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. The adoption of SFAS 163 did not have any impact on our consolidated financial position or results of operations.
In April 2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1”) and (“APB 28-1”). FSP FAS 107-1 amends FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments" , to require disclosures about fair value of financial instruments in interim as well as in annual financial statements and amends APB Opinion No. 28 “Interim Financial Reporting”, to require those disclosures in interim financial statements. FSP FAS 107-1 and APB 28-1 were adopted by the Company on April 1, 2009. These staff positions did not have a material impact on our Condensed Consolidated Financial Statements.
In May 2009, the FASB issued SFAS No. 165 “Subsequent Events” (“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 sets forth (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009. The adoption of this standard did not have a material impact on our Condensed Consolidated Financial Statements.
In June 2009, the FASB issued SFAS No. 168 “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162”. The FASB Accounting Standards Codification (“Codification”) will be the single source of authoritative nongovernmental U.S. generally accepted accounting principles. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS 168 is effective for interim and annual periods ending after September 15, 2009. All existing accounting standards are superseded as described in SFAS 168. All other accounting literature not included in the Codification is nonauthoritative. The adoption of this standard is not expected to have a material impact on our Condensed Consolidated Financial Statements.

 

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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 June 30, 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 acting chief executive officer (“CEO”) and acting 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 June 30, 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 June 30, 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 June 30, 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 8 to the Condensed Consolidated Financial Statements in Part I, Item 1 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 did not meet the requirements for continued listing on The Nasdaq Capital Market because our stockholders’ equity at December 31, 2008 of $2.4 million was 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 took place on April 23, 2009 and temporarily stayed the delisting of our common stock. On May 27, 2009, the Nasdaq Hearings Panel granted our request to remain listed on The Nasdaq Stock Market and our request to transfer to The Nasdaq Capital Market, effective May 29, 2009. On July 24, 2009, we received a letter from Nasdaq advising that we are in compliance with all applicable continued listing standards, which is due to the release of the $4.4 million from the Stanley escrow. Additionally, we currently meet The Nasdaq Capital Market MVPHS requirement of $1 million, but we have not achieved compliance with the bid price requirement of $1.00 per share.
Given the current market conditions, Nasdaq suspended enforcement of the bid price requirement for all companies listed on Nasdaq through and including July 31, 2009. Following the reinstatement of these rules, and in accordance with Marketplace Rule 5810(c)(3), we have 180 calendar days from Monday, August 3, 2009, or until January 29, 2010, to regain compliance with the bid price requirement.
If, at anytime before January 29, 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 29, 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 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.
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: August 13, 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 *  
Secured Convertible Promissory Note, dated June 4, 2009, between Steel Vault Corporation and VeriChip Corporation
  10.2 *  
Common Stock Purchase Warrant, dated June 4, 2009, between Steel Vault Corporation and VeriChip Corporation
  10.3 *  
Convertible Note and Warrant Subscription Agreement, dated June 4, 2009, between Steel Vault Corporation and VeriChip Corporation
  10.4 *  
Security Agreement, dated June 4, 2009, between Steel Vault Corporation and VeriChip Corporation
  10.5 *  
Security Agreement, dated June 4, 2009, between National Credit Report.com, LLC and VeriChip Corporation
  10.6 *  
Subordination and Intercreditor Agreement, dated June 4, 2009, between Blue Moon Energy Partners LLC and VeriChip Corporation
  10.7 *  
Common Stock Purchase Warrant, dated June 4, 2009, between Steel Vault Corporation and William J. Caragol
  10.8 *  
Guaranty of Collection, dated June 4, 2009, among Steel Vault Corporation, William J. Caragol and VeriChip Corporation
  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.
 
(1)   Incorporated by reference to the Registration Statement on Form S-1 previously filed by VeriChip Corporation (Registration No. 333-130754).

 

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Exhibit 10.1
NEITHER THIS NOTE NOR THE STOCK INTO WHICH THIS NOTE IS CONVERTIBLE (COLLECTIVELY, THE “SECURITIES”) HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”). THE SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, OR AN OPINION OF COUNSEL SATISFACTORY TO BORROWER THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SUCH ACT.
SECURED CONVERTIBLE PROMISSORY NOTE
     
$500,000.00   June 4, 2009
FOR VALUE RECEIVED, Steel Vault Corporation, a Delaware corporation located at 1690 South Congress Avenue, Suite 200, Delray Beach, Florida 33445 (the “Borrower”), promises to pay to VeriChip Corporation, a Delaware Corporation, or any subsequent holder upon a permitted assignment of this Note (the “Lender”), located at 1690 South Congress Avenue, Suite 200, Delray Beach, Florida 33445, or at such other location designated by the Lender, the principal amount of FIVE HUNDRED THOUSAND U.S. DOLLARS (U.S.$500,000.00) (the “Principal Amount”), upon the terms and conditions specified below. Notwithstanding the foregoing, no payment of principal or interest shall be required to the extent that such principal and interest has been converted into equity securities of the Borrower pursuant to the terms hereof.
1. Repayment or Conversion .
(a)  Repayment . Unless the Principal Amount and all accrued but unpaid interest thereon is converted pursuant to the provisions of Section 1(b) below, the entire unpaid Principal Amount under this Note and all accrued and unpaid interest thereon shall be due and payable on the earlier to occur of the following (the “Maturity Date”):
(i) on or before June 4, 2011;
(ii) ON DEMAND of the Lender, which demand may be made at any time on or after June 4, 2010, in which case Borrower will have ninety days to pay the unpaid Principal Amount and all accrued and unpaid interest thereon; or
(iii) within ten days after a Change in Control of Borrower (as defined in Borrower’s 2009 Stock Incentive Plan).

 

 


 

(b) Conversion .
(i)  By Lender . Lender shall have the right, at any time, in its sole discretion to convert all of the unpaid Principal Amount and accrued and unpaid interest thereon into that number of shares of the Borrower’s common stock (the “Conversion Shares”) determined as follows (the “Conversion Formula”):
The unpaid Principal Amount and accrued and unpaid interest on the date of conversion divided by the Price (as defined below) rounded upward to the nearest whole share, subject to equitable adjustment for any stock split, combination, recapitalization, reorganization or other similar event. For example, if Lender elects to convert this Note into shares of Borrower’s common stock on July 1, 2009 and the unpaid Principal Amount and accrued and unpaid interest on such date is $50,000, Borrower shall issue 166,667 Conversion Shares to Lender.
(ii)  By Borrower . Borrower shall not have the right to convert any of the unpaid Principal Amount or accrued and unpaid interest thereon at any time or otherwise effect a conversion hereunder.
(iii) In the event that Lender elects to effect a conversion hereunder, Lender shall deliver to Borrower the original of this Note, and Borrower shall deliver to Lender a certificate representing the Conversion Shares into which this Note was converted.
(iv) For purposes herein, “Price” means $0.30.
2.  Prepayment . This Note may be prepaid in whole (the entire unpaid Principal Amount under this Note and all accrued and unpaid interest) without penalty at any time, provided that Borrower provides Lender with at least ten days prior written notice during which time the Lender may elect to effect a conversion under Section 1(b).
3.  Interest . This Note shall accrue interest at a rate equal to twelve percent (12%) per annum, payable on the first anniversary of the Note and thereafter payable on September 4, 2010, December 4, 2010, March 4, 2011 and June 4, 2011.
4.  Events of Default . The entire unpaid Principal Amount and all accrued and unpaid interest shall become immediately due and payable upon (i) admission by the Borrower of its inability to pay its debts generally as they become due or otherwise acknowledges its insolvency, (ii) the filing of a petition in bankruptcy by the Borrower, (iii) the execution by the Borrower of a general assignment for the benefit of creditors, (iv) the filing against the Borrower of a petition in bankruptcy or a petition for relief under the provisions of the federal bankruptcy code or another state or federal law for the relief of debtors and the continuation of such petition without dismissal for a period of ninety (90) days or more, or (v) in the event that the Principal Amount and all accrued and unpaid interest thereon shall not have been paid in full on or before the Maturity Date.
5.  Collection . If action is instituted to collect this Note, the Borrower promises to pay to the Lender all reasonable costs and expenses (including reasonable attorneys’ fees) incurred in connection with such action.
6.  Security . This Note and the obligations hereunder are secured by that certain security agreement of even date herewith in the form attached hereto as Exhibit A , between Lender and Borrower, which encumbers Borrower’s real and personal property as more particularly described therein, and that certain security agreement of even date herewith in the form attached hereto as Exhibit B , between Lender and National Credit Report.com, LLC, which encumbers National Credit Report.com, LLC’s real and personal property as more particularly described therein.
7.  Waivers . No delay on the part of the Lender in exercising any right or remedy hereunder shall operate as a waiver of such right or remedy. No single or partial exercise of a right or remedy shall preclude other or further exercise of that or any other right or remedy. The failure of the Lender to insist upon the strict performance of any term of this Note, or to exercise any right or remedy hereunder, shall not be construed as a waiver or relinquishment by the Lender for the future of that term, right or remedy. No waiver of any right of the Lender hereunder shall be effective unless in writing executed by the Lender.

 

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8.  Severability . The unenforceability or invalidity of any provision or provisions of this Note as to any persons 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.
9.  Warrant . The Borrower shall, simultaneous with the execution of this Note, execute and deliver to Lender a common stock purchase warrant in the form attached hereto as Exhibit B (the “Warrant”) for 333,334 shares (the “Warrant Shares”).
10.  Registration . If at any time Borrower proposes to register shares of its common stock under the Securities Act, in connection with the public offering of such shares for cash (a “Proposed Registration”) other than a registration statement on Form S-8 or Form S-4 or any successor or other forms promulgated for similar purposes, Borrower shall, at such time, promptly give Lender written notice of such Proposed Registration. Lender shall have ten (10) days from its receipt of such notice to deliver to Borrower a written request specifying the amount of Registrable Securities that Lender intends to sell and Lenders’ intended method of distribution. Upon receipt of such request, Borrower shall use its commercially reasonable efforts to cause all Registrable Securities which Borower has been requested to register to be registered under the Securities Act to the extent necessary to permit their sale or other disposition in accordance with the intended methods of distribution specified in the request of Lender; provided , however , that the Company shall have the right to postpone or withdraw any registration effected pursuant to this Section 10 without obligation to Lender. If, in connection with any underwritten public offering for the account of Borrower or for stockholders of Borrower that have contractual rights to require Borrower to register shares of common stock, the managing underwriter(s) thereof shall impose a limitation on the number of shares of common stock which may be included in a registration statement because, in the judgment of such underwriter(s), marketing or other factors dictate such limitation is necessary to facilitate such offering, then Borrower shall be obligated to include in the registration statement only such limited portion of the Registrable Securities with respect to which Lender has requested inclusion hereunder as such underwriter(s) shall permit. For purposes herein, “Registrable Securities” means the Conversion Shares and the Warrant Shares and any other shares of common stock issuable pursuant to the exercise of the Warrants (without regard to any limitation on such exercise), and any shares of capital stock issued or issuable from time to time (with any adjustments) in replacement of, in exchange for or otherwise in respect of the Conversion Shares or the Warrant Shares; provided , however , that “Registrable Securities” shall not include any such shares that have been sold pursuant to Rule 144 of the Securities Act.
11.  Amendment . This Note and the Warrant shall not be amended without the express written consent of Borrower and Lender.
12.  No Impairment . The Borrower will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of capital stock or assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms set forth herein or in the Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of Lender hereunder.

 

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13.  Interest Savings Clause . If any interest payment (or other payment which is deemed by law to be interest) due hereunder is determined to be in excess of the then legal maximum rate, then that portion of each interest payment representing an amount in excess of the then legal maximum rate shall instead be deemed a payment of principal and applied against the principal of the obligations evidenced by this Note.
14.  Assignment . This Note may not be assigned, by operation of law or otherwise, as a whole or in part, by the Lender without the prior written consent of the Borrower, such consent not to be unreasonably withheld. Any assignment purported to be made without such consent shall be null and void. The rights and obligations of the Borrower and the Lender of this Note shall be binding upon and benefit the successors, assigns, heirs, administrators and transferees of the parties.
15.  Notices . All notices, demands and requests of any kind to be delivered to any party in connection with this Note shall be in writing and shall be deemed to have been duly given if personally delivered, sent by facsimile or if sent by nationally-recognized overnight courier or by registered or certified mail, return receipt requested and postage prepaid, to the address set forth herein or to such other address as the party to whom notice is to be given may have furnished to the other parties hereto in writing in accordance with the provisions of this Section 15. Any such notice or communication shall be deemed to have been received (i) in the case of personal delivery, on the date of such delivery, (ii) in the case of facsimile, when receipt is confirmed, (iii) in the case of nationally-recognized overnight courier, on the next business day after the date when sent and (iv) in the case of mailing, on the third business day following that on which the piece of mail containing such communication is posted.
16.  Legal Matters . The validity, construction, enforcement, and interpretation of this Note are governed by the laws of the State of Florida and the federal laws of the United States of America, excluding the laws of those jurisdictions pertaining to resolution of conflicts with laws of other jurisdictions. The parties hereby expressly waive presentment, demand for payment, dishonor, notice of dishonor, protest, notice of protest, and any other formality. The Borrower and the Lender (a) consent to the personal jurisdiction of the state and federal courts having jurisdiction in Palm Beach County, Florida, (b) stipulate that the proper, exclusive, and convenient venue for any legal proceeding arising out of this Note is Palm Beach County, Florida, for state court proceedings, and the Southern District of Florida, for federal district court proceedings, and (c) waive any defense, whether asserted by a motion or pleading, that Palm Beach County, Florida, or the Southern District of Florida, is an improper or inconvenient venue.
17.  Further Assurances . From time to time, the Lender, at the Borrower’s reasonable request, shall execute and deliver such other instruments and do and perform such other acts and things in connection with the exercise of this Note.
[Remainder of page intentionally left blank; signature page follows]

 

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IN WITNESS WHEREOF, this Note has been executed by the Borrower and delivered to the Lender as of the date first above written.
         
  BORROWER:

STEEL VAULT CORPORATION
 
 
  By:   /s/ William J. Caragol    
    Name:   William J. Caragol   
    Title:   CEO   

 

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Exhibit 10.2
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW. NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF NOR ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN MAY BE SOLD, ASSIGNED, PLEDGED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT OF 1933 AND ALL STATE SECURITIES LAWS AND THE TERMS AND CONDITIONS HEREOF.
COMMON STOCK PURCHASE WARRANT
Void After June 4, 2014
     
No. 002   Date of Issuance: June 4, 2009
This is to certify that, for value received, VeriChip Corporation, a Delaware corporation, or registered assigns thereof (the “Holder”), is entitled to purchase from Steel Vault Corporation, a Delaware corporation (the “Corporation”), at a price of $0.30 per share (the “Warrant Price”) at any time on or before June 4, 2014, all or any part of 333,334 shares of common stock, par value $0.01 per share, of the Corporation (“Common Stock”), on the terms and subject to the conditions hereinafter set forth.
The Corporation is issuing, selling and delivering this Warrant to the Holder in connection with the private placement of securities offered pursuant to that certain Convertible Note and Warrant Subscription Agreement, Secured Convertible Promissory Note and this Warrant (collectively, the “Transaction Documents”). The Holder takes this Warrant subject to the terms and restrictions set forth in the Transaction Documents and shall be entitled to certain rights and privileges set forth in the Transaction Documents.
1. This Warrant will become void, and all rights of the Holder will expire, at 5:00 P.M., EST, on June 4, 2014.
2. This Warrant may be exercised by the Holder as to all or any portion of the shares of Common Stock covered hereby, by surrender of this Warrant to the Corporation at its principal office, with the form of Election to Purchase attached hereto duly executed and accompanied by the Warrant Price for the shares so purchased in cash or by certified check or bank draft. The Election to Purchase shall state the name of the person or entity exercising the Warrant (with address and such further information as may be required by the Corporation) and the certificate or certificates for shares of Common Stock shall be issued in this name. Thereupon this Warrant shall be deemed to have been exercised and the person or entity exercising the Warrant shall be deemed to have become a holder of record of shares of Common Stock purchased hereunder for all purposes and thereafter the Holder may exercise all rights and be entitled to all benefits of a shareholder of record of the Corporation, and a certificate or certificates for such shares so purchased shall be delivered to the person or entity exercising the Warrant within a reasonable time after this Warrant shall have been exercised as set forth hereinabove. In the event that, prior to the exercise of this Warrant and issuance of the underlying shares, there shall be an increase or decrease in the number of issued shares of Common Stock of the Corporation as a result of a subdivision or consolidation of shares or other capital adjustment, or the payment of a stock dividend or other increase or decrease in such shares, effected without receipt of consideration by the Corporation, the remaining number of shares shall be adjusted so that the adjusted number of shares subject to this Warrant and the adjusted Warrant Price shall be the substantial equivalent of the remaining number of shares still subject to the Warrant and the Warrant Price thereof prior to such change.

 

 


 

3. This Warrant is exchangeable by the Holder, upon the surrender of the Warrant at the principal office of the Corporation, for new Warrants of like tenor and date representing in the aggregate the right to subscribe for and purchase the number of shares of Common Stock which may be subscribed for and purchased hereunder.
4. The Corporation covenants and agrees that all shares of Common Stock which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be validly issued, fully paid and non-assessable and free from all taxes, liens and charges with respect to the issue thereof except for any taxes required in connection with the transfer thereof. The Corporation further covenants and agrees that, during the period within which the rights represented by this Warrant may be exercised, the Corporation will at all times have authorized and reserved a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant.
5. The Holder of this Warrant, by acceptance hereof, agrees that such holder will not sell, hypothecate or otherwise transfer or dispose of this Warrant or the shares of Common Stock issuable on the exercise hereof without giving prior written notice to the Corporation of such holder’s intention to do so, describing briefly the manner of any such proposed transfer. Upon the request of the Corporation, the Holder shall be required to also deliver to the Corporation an opinion of to counsel for the Holder stating that the proposed transfer described in the notice given by the Holder may be effected without registration of this Warrant or the shares of Common Stock issuable on the exercise hereof under the Securities Act of 1933, as then in effect, or any similar federal statute (the “Securities Act”).
6. The restrictions in Section 5 hereof shall be binding upon any transferee who has received this Warrant or shares of Common Stock issuable on exercise hereof. A legend in substantially the following form shall be typed, printed or stamped on the face and back of all certificates issued on exercise of this Warrant and on the face and back of all certificates issued in substitution or exchange thereof:
“THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. IT HAS BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT WITH RESPECT THERETO UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF COUNSEL THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT.”

 

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7. The issue of any stock or other certificate upon the exercise of this Warrant shall be made without charge to the registered holder hereof for any tax in respect of the issue of such certificate.
8. This Warrant and all rights hereunder are transferable on the books of the Corporation (subject, however, to the provisions of Sections 5 and 6 hereof), upon surrender of this Warrant, with the form of Transfer of Warrant attached hereto duly executed by the registered holder hereof or by his attorney duly authorized in writing, to the Corporation at its principal office, and thereupon there shall be issued in the name of the transferee or transferees, in exchange for this Warrant, a new Warrant or Warrants of like tenor and date, representing in the aggregate the right to subscribe for and purchase the number of shares of Common Stock which may be subscribed for and purchased hereunder.
9. The Corporation may deem and treat the registered holder of this Warrant as the absolute owner of this Warrant for all purposes and shall not be affected by any notice to the contrary.
10. This Warrant shall not entitle the Holder to any rights of a stockholder of the Corporation, either at law or in equity, including, without limitation, the right to vote, to receive dividends and other distributions, to exercise any preemptive rights or to receive any notice of meetings of stockholders or of any other proceedings of the Corporation.
11. The validity, construction, enforcement, and interpretation of this Warrant are governed by the laws of the State of Florida and the federal laws of the United States of America, excluding the laws of those jurisdictions pertaining to resolution of conflicts with laws of other jurisdictions. The Corporation and the Holder (a) consent to the personal jurisdiction of the state and federal courts having jurisdiction in Palm Beach County, Florida, (b) stipulate that the proper, exclusive, and convenient venue for any legal proceeding arising out of this Warrant is Palm Beach County, Florida, for state court proceedings, and the Southern District of Florida, for federal district court proceedings, and (c) waive any defense, whether asserted by a motion or pleading, that Palm Beach County, Florida, or the Southern District of Florida, is an improper or inconvenient venue.
(Remainder of page intentionally left blank; signature page follows)

 

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Dated: June 4, 2009
         
  STEEL VAULT CORPORATION
 
 
  By:   /s/ William J. Caragol    
    Name:   William J. Caragol   
    Title:   CEO   

 

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TRANSFER OF WARRANT
For value received                                           hereby sells, assigns and transfers unto                                           the right to purchase                      shares of Common Stock, par value $ _____  per share, of                                           , which rights are represented by the attached Warrant, and does hereby irrevocably constitute and appoint                      attorney to transfer said rights on the books of such Corporation.
Dated:                      ,  _____ 
In the Presence of
                                                                             

 

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ELECTION TO PURCHASE
Date:                      , _____
TO:
The undersigned hereby subscribes for                      shares of the Common Stock of the Corporation covered by the attached Warrant and tenders payment herewith in the amount of $                      in accordance with the terms hereof.
         
Issue Certificate(s) for said stock to
      Deliver certificate(s)                      by mail  _____  against counter receipt to
 
       
 
       
(Name)
      (Name)
 
       
 
       
(Street and Number)
      (Street and Number)
 
       
 
       
City                           State
      City                          State
 
       
 
       
Social Security or Tax
Identification Number
      Social Security or Tax
Identification Number
The undersigned registered holder of this Warrant hereby represents and warrants to and agrees with the Corporation that, if the shares of Common Stock which the undersigned hereby subscribes for have not been effectively registered under the Securities Act of 1933, or any similar Federal Statute in effect at the date of this Election to Purchase, the undersigned is purchasing said shares of Common Stock for his or its own account for investment, and not with a view to, or for sale in connection with, any distribution of such shares and without any present intention of distributing or selling such shares and that a legend to such extent may be placed on all certificates for shares of such Common Stock.
     
 
  Very truly yours,
 
   
 
  (Signature of Subscriber or Agent)

 

6

Exhibit 10.3
STEEL VAULT CORPORATION
CONVERTIBLE NOTE AND WARRANT SUBSCRIPTION AGREEMENT
This Convertible Note and Warrant Subscription Agreement (this “Agreement”), dated as of June 4, 2009 (the “Effective Date”), is made and entered into between Steel Vault Corporation, a Delaware corporation (the “Company”), and VeriChip Corporation, a Delaware corporation (the “Investor”).
This Agreement sets forth the terms under which the Investor will purchase from the Company (i) a Secured Convertible Promissory Note in the principal amount of five hundred thousand dollars ($500,000.00) in the form attached hereto as Appendix A (the “Note”), and (ii) a Warrant to purchase common stock, par value $0.01 per share, of the Company (the “Common Stock”), in the form attached hereto as Appendix B (the “Warrant,” and together with the Note hereafter collectively referred to as, the “Securities”), for a purchase price of five hundred thousand dollars ($500,000.00) (the “Purchase Price”) as set forth below.
The Securities are part of an offering of securities made by the Company to various investors, pursuant to which the Company will issue and sell to the investors and the investors will purchase, for a minimum of $500,000 and a maximum of $700,000 in the aggregate, Secured Convertible Promissory Notes (the “Offering Notes”) and Warrants to purchase Common Stock (the “Offering”).
NOTICE TO INVESTOR: THE SECURITIES PURCHASED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAWS. SUCH SECURITIES MAY BE NOT OFFERED, SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS OR EXEMPTION THEREFROM. FURTHER RESTRICTIONS ON TRANSFERABILITY OF THE SECURITIES ARE CONTAINED IN THIS AGREEMENT.
1.  Subscription . Subject to the terms of this Agreement, the Investor hereby subscribes for the Securities, and the Investor’s delivery of this Agreement will be accompanied by payment of the Purchase Price for the Securities subscribed for hereunder, payable in United States Dollars, as set forth in the instructions attached hereto as Exhibit A . This Agreement is not enforceable by the Investor unless it has been accepted by the Company, and the Investor acknowledges and agrees that the Company reserves the right to reject any subscription for any reason.

 

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2.  Representations and Warranties of Investor . The Investor is making the following representations, warranties and agreements with the intent that they be relied upon in determining the Investor’s suitability to purchase the Securities, and the Investor agrees that such representations, warranties and agreements shall survive the date of this Agreement and the Investor’s purchase of the Securities. The Investor hereby represents and warrants to, and agrees with, the Company, and each of its officers, directors, persons who control the Company and affiliates of the foregoing, as follows:
2.1 The Investor is (i) if a natural person, at least twenty-one (21) years of age, and (ii) a bona fide permanent resident of and is domiciled in the state shown in the address line of the Investor’s signature page to this Agreement, and has no present intention of becoming a resident of any other state or jurisdiction.  The Investor is, and on each date on which the Investor continues to own restricted securities from the Offering will be, an “Accredited Investor” as defined in Rule 501(a) under the Securities Act. In general, an “Accredited Investor” is deemed to be an institution with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with his or her spouse.
2.2 The Investor acknowledges careful review of this Agreement and all exhibits and appendices hereto and hereby represents that: (i) the Company has provided the Investor during the course of this transaction with all information regarding the Company that the Investor has requested and (ii) the Investor has been afforded access to and the opportunity to ask questions of and receive answers from duly authorized officers of the Company concerning the Company, the terms and conditions of the Offering of the Securities, and any additional information that the Investor has requested. The Investor acknowledges that it has access to the periodic reports, proxy statements and other information that the Company has filed, or will in the future file with the SEC until the termination of the Offering (the “SEC Filings”), without charge at the Public Reference Room of the SEC, 100 F Street, N.E., Washington, D.C. 20549 or on the Internet at http://www.sec.gov. The Investor acknowledges that it has read the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K filed with the SEC on December 24, 2008.
2.3 The Investor has such knowledge and experience in financial and business matters that the Investor is capable of evaluating the merits and risks of an investment in the Securities and of making an informed investment decision, and is not utilizing any other person to be the Investor’s representative in connection with evaluating such merits and risks.  The Investor’s overall commitment to investments that are not readily marketable is not disproportionate to the Investor’s net worth, and an investment in the Securities will not cause such overall commitment to become excessive.
2.4 The Investor is acquiring the Securities for the Investor’s own account, for investment purposes only, and not with a view toward the resale, resyndication, distribution, subdivision or fractionalization thereof, and has no present intention of selling or transferring or otherwise distributing the same. The Investor at the present time and in the foreseeable future (i) has no need for liquidity in this investment, (ii) has the ability to bear the economic risk of this investment, (iii) can afford a complete loss of this investment, (iv) can hold the Securities for an indefinite period of time, and (v) this investment constitutes an appropriate investment for and is not in violation of any investment restrictions (whether by statute, contract or otherwise) binding upon the Investor.

 

2


 

2.5 In making an investment in the Securities, the Investor acknowledges that no oral representations or warranties have been made to the Investor. In making the decision to invest in the Securities, the Investor has relied solely on the information in the SEC Filings. The Investor has been advised that no person is authorized to give any information or make any statement not contained in the SEC Filings, and that any information or statement not contained therein must not be relied upon as having been authorized by the Company, its officers, directors, affiliates or persons who control the Company.
2.6 The Investor is not relying on the Company or any of its employees, agents, or advisors with respect to the legal, tax, economic and related considerations of an investment in the Securities. The Investor has consulted such legal, financial and tax advisers as have been necessary to evaluate the merits and risks of this investment.
2.7 The Investor agrees that the Securities (including any interest therein) will not be sold or otherwise disposed of by the Investor unless either (i) the sale or other disposition will be pursuant to a registration statement under the 1933 Act, and any applicable securities laws of any state or other jurisdiction or (ii) the Investor shall have notified the Company in writing of any desire on the part of the Investor to sell or dispose of all or part of the such Securities and of the manner and terms of the proposed transaction, and the Company shall have been advised in writing by counsel acceptable to it that no registration of such Securities under the 1933 Act, or the rules and regulations then in effect thereunder, or any applicable state securities laws, is required in connection with the proposed sale or other disposition. Except as provided in Section 5 hereof, the Investor acknowledges that the Company is under no obligation whatsoever in connection with any such registration or exemption.
2.8 The Investor understands and agrees that all certificates evidencing ownership of the Securities, or any replacement thereof, shall bear an appropriate legend to the effect that the securities evidenced by such certificate or instruments have not been registered under the 1933 Act and setting forth or referring to the restrictions on transferability and sale of the securities.
2.9 All information provided by the Investor to the Company is true and correct in all respects as of the date hereof, and if there should be any material change in such information either prior to the Company accepting the Investor’s subscription or thereafter, the Investor will immediately furnish such revised or corrected information to the Company.
2.10 The Investor understands that no federal or state agency has passed on or made any recommendation or endorsement of the Securities and that the Company is relying on the truth and accuracy of the representations warranties and agreements made by the Investor in Offering the Securities for sale to the Investor without having first registered the same under the 1933 Act.
2.11 The Investor acknowledges that there have been no representations, guarantees or warranties made to the Investor by the Company, its officers, directors, controlling persons, agents or employees or any other person, expressly or by implication, with respect to the amount of or type of consideration, profit or loss (including tax benefits) to be realized, if any, as a result of the Investor’s investment.

 

3


 

2.12 The Investor is unaware of, is in no way relying on, and did not become aware of the Offering of the Securities through or as a result of, any form of general solicitation or general advertising including, without limitation, any article, notice, advertisement or other communication published in any newspaper, magazine or similar media or broadcast over television or radio, or electronic mail over the Internet, and is not subscribing for Securities and did not become aware of the Offering of the Securities through or as a result of any seminar or meeting to which the Investor was invited by, or any solicitation of a subscription by, a person not previously known to the Investor in connection with investments in securities generally.
2.13 The Investor acknowledges that the purchase of the Securities involves a high degree of risk in that (i) the Company may need additional capital but has no assurance of additional necessary capital, (ii) an investment in the Company is highly speculative and only investors who can afford the loss of their entire investment should consider investing in the Company and the Securities, (iii) an investor may not be able to liquidate its investment, (iv) transferability of the Securities is extremely limited, (v) an investor could sustain the loss of its entire investment, and (vi) the Company is and will be subject to numerous other risks and uncertainties, including without limitation, significant and material risks relating to the business and operations of the Company, and the industries and markets in which the Company competes, all as more fully set forth in the SEC Filings.
2.14 The Investor agrees that:
(i) the subscription hereunder is irrevocable, and that this Agreement and any agreements of the Investor hereunder shall survive the death or disability of the Investor and shall be binding upon and inure to the benefit of the parties and their heirs, executors, administrators, successors, legal representatives and assigns. If the Investor is more than one person, the obligations of the Investor hereunder shall be joint and several and the agreements, representations, warranties and acknowledgments herein contained shall be deemed to be made by and be binding upon each such Investor and the Investor’s heirs, executors, administrators, successors, legal representatives and assigns;
(ii) this subscription may be accepted or rejected, in whole or in part, by the Company, without giving any reason therefore; and
(iii) in the event the Offering of Securities is oversubscribed, the Company may, in its sole discretion, reject certain subscriptions or allocate Securities among subscribers, or a combination thereof based upon the number shares owned by such subscriber in relation to the total number of shares owned by all subscribers whose subscriptions have been accepted by the Company (as determined prior to the purchase of any Securities).
2.15 If the Investor is a partnership, corporation, trust or other entity, such partnership, corporation, trust or other entity further represents and warrants that:  (i) it was not formed for the purpose of investing in the Company, (ii) it is authorized and otherwise duly qualified to purchase and hold the Securities, (iii) this Agreement has been duly and validly authorized, executed and delivered and constitutes the legal, binding and enforceable obligation of the undersigned, and (iv) the execution and delivery of this Agreement will not result in any violation of, or be in conflict with, or constitute default under, the organizational documents of such entity, any agreement or instrument to which such entity is a party or by which such entity or its respective properties are bound, or any judgment, decree, order or, to its knowledge, any statute, rule or regulation applicable to such entity.

 

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2.16  If the Investor is not a United States person, the Investor hereby represents and warrants that it or he has satisfied itself as to the full observance of the laws of its jurisdiction in connection with any invitation to subscribe for the Securities or any use of this Agreement, including (i) the legal requirements within its jurisdiction for the purchase of the Securities, (ii) any foreign exchange restrictions applicable to such purchase, (iii) any governmental or other consents that may need to be obtained, and (iv) the income tax and other tax consequences, if any, that may be relevant to the purchase, holding, redemption, sale or transfer of the Securities.  The Investor’s subscription and payment for, and its or his continued beneficial ownership of the Securities, will not violate any applicable securities or other laws of the Investor’s jurisdiction.
3.  Indemnification . The Investor agrees to indemnify and hold harmless the Company and its directors and officers, their affiliates or anyone acting on behalf of the Company from and against any and all damages, losses, costs and expenses (including reasonable attorneys’ fees) that they may incur by reason of the failure of Investor to fulfill any of the terms or conditions of this Agreement, or by reason of any breach of the representations and warranties made by the Investor herein, or in any document provided by the Investor to the Company.
4.  Transferability . The Investor agrees that the Investor shall not transfer or assign this Agreement or any interest herein, and any such transfer or assignment purported to be made shall be null and void and of no effect.
5. Registration Rights.
5.1 The Company agrees to file a registration statement (the “Registration Statement”) covering the public resale of all the shares of Common Stock issuable (i) pursuant to conversion of the Note (the “Conversion Shares”) and (ii) pursuant to exercise of the Warrant (together with the Conversion Shares, the “Registrable Shares”) not later than the ninetieth (90) day following the day the Company has received written notice that the holder or holders of 50% or more of the Common Stock issuable pursuant to the conversion of the Offering Notes elect to convert all or part of the Offering Notes issued to such investors in the Offering, and the Company agrees to use commercially reasonable efforts to cause the Registration Statement to be declared effective by the United States Securities and Exchange Commission (the “SEC”) as soon as practicable thereafter. The Company will use commercially reasonable efforts to keep the Registration Statement continuously effective under the Securities Act of 1933, as amended (the “1933 Act”), (x) for an Investor who is not an affiliate, as defined in Rule 144 promulgated by the SEC pursuant to the 1933 Act (an “Affiliate”), of the Company, until the date that is one year after the date that the Registration Statement is declared effective by the SEC or such earlier date when all Registrable Shares may be sold pursuant to an exemption from registration pursuant to Rule 144 promulgated by the SEC pursuant to the 1933 Act, and (y) for an Investor who is an Affiliate of the Company, until the date that the Investor has ceased to be an Affiliate of the Company for three months and can sell all Registrable Shares pursuant to Rule 144(b)(1) promulgated by the SEC pursuant to the 1933 Act.

 

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 5.2 The Investor agrees to:
(i) timely furnish to the Company in writing such information regarding itself and the intended method of disposition of the Registrable Shares as the Company shall reasonably request in order to effect the registration thereof or to comply with applicable law;
(ii) to the extent required by applicable law, deliver a preliminary and definitive prospectus to the purchaser of the Registrable Shares sold under any Registration Statement;
(iii) notify the Company when it has sold all of the Registrable Shares held by it;
(iv) notify the Company promptly in the event that any information supplied by the Investor 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 Registrable Shares 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 the Company with updates on such information as may be appropriate to make such amendment or supplement effective for such purpose;
(v) otherwise use commercially reasonable efforts to assist the Company and the underwriters, if any, in the preparation of documentation reasonably necessary or desirable to effectuate the resale of the Registrable Shares pursuant to any Registration Statement filed in accordance herewith;
(vi) upon receipt of a notice from the Company of the occurrence of a Discontinuation Event (as defined below), the Investor will and the Investor agrees to discontinue forthwith any disposition of such Registrable Shares under the applicable Registration Statement until the Investor’s receipt of the copies of the supplemented prospectus and/or amended Registration Statement or until it is advised in writing by the Company 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. The Company may provide appropriate stop orders to enforce the provisions of this paragraph.

 

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(vii) For purposes of this Agreement, a “Discontinuation Event” shall mean (a) when the SEC notifies the Company whether there will be a “review” of such Registration Statement and whenever the SEC comments in writing on such Registration Statement (the Company shall provide true and complete copies thereof and all written responses thereto to the Investor); (b) 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; (c) the issuance by the SEC of any stop order suspending the effectiveness of such Registration Statement covering any or all of the Registrable Shares or the initiation of any proceedings for that purpose; (d) the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Shares for sale in any jurisdiction, or the initiation or threatening of any proceeding for such purpose; and/or (e) 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.
6. General Provisions .
6.1 Other than the Mutual Non-Disclosure Agreement entered into between the Company and the Investor, this Agreement and the exhibits and appendices attached hereto constitute the entire agreement between the parties and supersede and cancel any other agreements, or representations or communications, whether oral or written, between the parties relating to the transactions contemplated herein or the subject matter hereof.
6.2 This Agreement may be executed in more than one counterpart which shall, in the aggregate, be deemed to be the original instrument and agreement between the parties, and copies signed and transmitted electronically in a form readable by the recipient or by facsimile are as binding as if the original was signed in person.
6.3 Any and all notices or other communications required or permitted by this Agreement or by law to be served on or given to any party hereto by any other party hereto shall be, unless otherwise required by law, in writing and deemed duly served and given when actually received either when delivered by facsimile or when delivered by hand, by recognized express delivery services or via the United States mail, certified or registered, return, receipt requested, postage prepaid, addressed to the Company at its principal offices at 1690 South Congress Avenue, Suite 200, Delray Beach, Florida 33445, and to the Investor at its address as set forth on the signature page to this Agreement or otherwise transmitted to the Company from time to time.
6.4 No term hereof may be changed, waived, discharged or terminate orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought.
6.5 The headings in this Agreement are for the purposes and convenience of reference only and shall not be deemed to constitute a part hereof.

 

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6.6 The validity, construction, enforcement, and interpretation of this Agreement are governed by the laws of the State of Florida and the federal laws of the United States of America, excluding the laws of those jurisdictions pertaining to resolution of conflicts with laws of other jurisdictions. The Company and Investor (a) consent to the personal jurisdiction of the state and federal courts having jurisdiction in Palm Beach County, Florida, (b) stipulate that the proper, exclusive, and convenient venue for any legal proceeding arising out of this Agreement is Palm Beach County, Florida, for state court proceedings, and the Southern District of Florida, for federal district court proceedings, and (c) waive any defense, whether asserted by a motion or pleading, that Palm Beach County, Florida, or the Southern District of Florida, is an improper or inconvenient venue.
6.7 The benefits of this Agreement shall inure, and the obligations of this Agreement shall be binding upon, the personal representatives, heirs, legatees, permitted successors and assigns of the parties hereto.
6.8 The Investor agrees that the Investor may not cancel, terminate, or revoke this Agreement or any agreement of the Investor made hereunder.
6.9 Except as otherwise provided in this Agreement, each party to this Agreement shall pay any and all fees and expenses that such party may incur in connection with the negotiation, execution and closing of the transactions contemplated by this Agreement.
(Signatures start on next page)

 

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STEEL VAULT CORPORATION
CONVERTIBLE NOTE AND WARRANT SUBSCRIPTION AGREEMENT
SIGNATURE PAGE
IN WITNESS WHEREOF, the Investor has executed this Agreement on the date indicated below.
         
VERICHIP CORPORATION    
 
       
By: 
/s/ Scott R. Silverman            
 
     
 
Name:  Scott R. Silverman    
 
Title: Chairman    
 
       
Date Signed: June 4, 2009    
 
       
1690 South Congress Avenue, Suite 200    
     
Address    
 
       
Delray Beach, Florida 33445    
     
City
                                State                    Zip    
 
       
(561) 805-8008    
     
Business Telephone    
 
       
(561) 805-8001    
     
Business Fax    
 
       
06-1637809    
     
Employer Identification Number    
     
*  
If the Investor is a corporation, partnership, trust or other entity, or is otherwise acting as a fiduciary, the name and capacity (title) of the individual executing this Agreement on the Investor’s behalf should be printed or typed below the signature.

 

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PLEASE SUPPLY THE FOLLOWING INFORMATION:
Manner in which title is to be held; (Check one)
             
 
  Individual Ownership       Partnership*
 
           
 
           
 
  Individual Retirement Account       Trust *
 
           
 
           
 
  Qualified Retirement Plan     Corporation*
 
           
 
  Other:       Limited Liability Company*
 
           
 
           
         
(Please indicate)        
     
*  
In the case of a partnership, state names of all partners and attach a copy of the partnership agreement. In the case of a corporation, attach a copy of the articles of incorporation together with the resolution of the board of directors authorizing this investment. In the case of a limited liability company, attach a copy of the articles of organization and operating agreement and a copy of any required member or manager resolutions authorizing this investment. In the case of a trust, attach a copy of the trust agreement.

 

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ACCEPTANCE
Steel Vault Corporation hereby accepts and agrees to be bound by the foregoing subscription subject to the terms and conditions hereof as of the date indicated below.
         
 
STEEL VAULT CORPORATION
 
 
  By:   /s/ William J. Caragol      
    Name:   William J. Caragol   
    Title:   CEO  
    Date Signed: June 4, 2009  

 

11

Exhibit 10.4
SECURITY AGREEMENT
This is a Security Agreement (the “Security Agreement”) between Steel Vault Corporation, a Delaware corporation (“Debtor”), and the holder of the Note (defined below) signatory hereto (the “Secured Party”), and is dated as of June 4, 2009.
BACKGROUND
Debtor has issued a Secured Convertible Promissory Note to the Secured Party in the aggregate principal amount of $500,000.00 (the “Note”). This Security Agreement secures the Note.
Accordingly, in consideration of the mutual covenants and agreements set forth below, the parties agree as follows:
TERMS
1.  Grant of Security Interest. For good and valuable consideration received, the sufficiency of which is hereby acknowledged and agreed, in order to secure payment of (collectively, the “Liabilities”): (a) the Note; (b) all costs and expenses, including attorneys’ fees, incurred in collecting amounts due under the Note following an Event of Default; (c) all costs and expenses, including attorney’s fees, incurred in connection with realizing upon the value of the security provided by this Security Agreement following an Event of Default; and (d) all other liabilities and obligations of Debtor to the Secured Party, however and whenever incurred or evidenced, whether primary, secondary, direct, indirect, absolute, contingent, sole, joint, or several, arising prior to the date of this Security Agreement or in connection herewith, or which may be hereafter contracted or acquired, or incurred directly or indirectly in respect thereof, and all extensions or renewals thereof; Debtor grants to the Secured Party a lien and security interest in all of Debtor’s accounts receivable, chattel paper, instruments, documents, inventory, equipment, general intangibles, intellectual property, investment property, and all other tangible and intangible property of Debtor, whether now owned or existing or hereafter acquired or arising, wherever located, and all cash and non-cash proceeds and products thereof (collectively, the “Collateral”). This security interest shall also attach to all replacements and proceeds of the Collateral.
2. Assurances; Covenants. Debtor hereby agrees that:
a. Except for the security interest granted to Blue Moon Energy Partners LLC, a Florida limited liability company (the “Subordinated Creditor”), the security interest granted to the Secured Party by this Security Agreement and any security interested granted to purchasers of notes in a subsequent offering issued by Debtor in an aggregate amount not to exceed $200,000, which notes would be pari passu with the Note (the “Permitted Pari Passu Notes”): (i) the Collateral is and will be free of all liens and security interests of every kind and nature, except as may have been the result of actions of the Secured Party; (ii) Debtor will not assign, transfer, sell, convey, hypothecate, pledge, or in any other way dispose of or encumber the Collateral while this Security Agreement is in effect; and (iii) Debtor will warrant and defend the Collateral and the Secured Party’s security interest against the claims and demands of all persons.

 

 


 

b. Except for the Permitted Pari Passu Notes, Debtor will not, without the prior written consent of the Secured Party, borrow from anyone on the security of the Collateral, or otherwise permit any liens, encumbrances, security interests, or adverse claims against the Collateral, and will not permit the Collateral to be levied upon under any legal process.
c. Debtor authorizes the Secured Party to file financing statements, including amendments or continuations thereof, describing the Collateral, and from time to time at the request of the Secured Party, will execute such other documents, and will do such other acts and things, all as the Secured Party may reasonably request, to establish and maintain a valid perfected security interest in the Collateral and to enable the Secured Party to enforce its rights and remedies hereunder with respect to the Collateral.
3 . Representations and Warranties. Debtor represents and warrants to the Secured Party as follows:
a. Debtor is a corporation duly organized, validly existing, and in good standing and active status under the laws of the state of Delaware;
b. Debtor has all requisite power to own and operate its properties and to carry on its business as now being conducted, and has all necessary rights to conduct its business;
c. Debtor has the power, authority, and legal right to execute and deliver this Security Agreement, and to perform its obligations hereunder, and has taken all action necessary to authorize the execution, delivery, and performance of this Security Agreement and to authorize the transactions contemplated hereby;
d. The execution, delivery, and performance by Debtor of this Security Agreement will not (i) contravene, conflict with, result in the breach of, or constitute a violation of or default under the organizational documents of Debtor, any applicable law, rule, regulation, judgment, order, writ, injunction, or decree of any court or governmental authority, or any agreement or instrument to which Debtor is a party or by which Debtor or its property may be bound or affected, or (ii) result in the creation of any lien, charge, or encumbrance upon any property or assets of Debtor pursuant to any of the foregoing, except the liens created by this Security Agreement;
e. This Security Agreement constitutes a legal, valid, and binding agreement enforceable against Debtor and the Collateral in accordance with its terms and, without limiting the foregoing, this Security Agreement grants the Secured Party a valid, perfected security interest in the Collateral; and
f. Debtor is the owner of the Collateral free and clear of all liens, encumbrances, security interests, and adverse claims whatsoever, except for the security interest granted to the Subordinated Creditor and in respect of the security interest granted in this Security Agreement.

 

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4.  Default. Each of the following shall, after receipt by Debtor of written notice from the Secured Party and after a cure period of five (5) business days with respect to Section 4a. below, and thirty (30) days with respect to Sections 4b. through 4d. below, constitute an event of default under this Security Agreement (each, an “Event of Default”):
a. The occurrence of a default under the Note, or a breach of the assurances set forth in Section 2 of this Security Agreement, or any other Liability is not paid when due (and such nonpayment continues beyond the expiration of any applicable grace or cure period);
b. Any representation or warranty made by any Debtor under this Security Agreement or any report, certificate, financial statement, or other information provided by Debtor to the Secured Party in connection herewith is false or misleading in any material respect when made or deemed made; and
c. Debtor fails to fully and promptly perform when due any agreement or covenant under this Security Agreement or any related document (and such failure continues beyond the expiration of any applicable grace or cure period).
In the event that Debtor substantially cures such default within the applicable cure period, such default shall not constitute an Event of Default.
5. Remedies upon the occurrence of an Event of a Default.
a. Upon the occurrence and continuance of an Event of Default under this Security Agreement, the Secured Party will have the right at any time and from time to time, without further notice or demand to Debtor to exercise the rights and remedies upon default that are granted to a secured party under the Uniform Commercial Code and/or that are otherwise available to the Secured Party under this Security Agreement, the Note, or otherwise available to secured creditors at law and/or in equity under applicable law, including without limitation:
(i) Enforce Debtor’s rights against account debtors and notify any and all account debtors or other parties against which Debtor has a claim under the Collateral that such Collateral has been assigned by Debtor and that the Secured Party has a security interest therein and, if desired by the Secured Party, that all payments should be made to the Secured Party;
(ii) Receive and endorse the name of Debtor upon any instruments of payment (including payments made under any policy of insurance) that may come into the possession of the Secured Party;
(iii) Sell, assign, demand, sue for, collect, compromise, or settle payment of all or any part of the Collateral in the name of Debtor or in its own name, or make any other disposition of the Collateral, or any part thereof, which disposition may be for cash, credit, or any combination thereof, or make exchanges, substitutions, surrenders, or discharges of any of the Collateral;

 

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(iv) Purchase all or any part of the Collateral at public or, if permitted by law, private sale, and in lieu of actual payment of such purchase price, to set off the amount of such price against the Liabilities; and
(v) Do all things that the Secured Party may reasonably deem necessary or advisable to accomplish the purposes of this Security Agreement;
granting to the Secured Party, as the attorney-in-fact of Debtor, full power of substitution and full power to do any and all things necessary to be done in and about the premises as fully and effectually as Debtor might or could do but for this appointment, and hereby ratifying all that said attorney-in-fact shall lawfully do or cause to be done by virtue of this Security Agreement. This power of attorney is coupled with an interest and shall be irrevocable until the Liabilities have been paid in full.
b. Upon the occurrence and continuance of an Event of Default:
(i) the Secured Party may direct the disposition of the Collateral and any other collateral for the Liabilities, in such order or manner as the Secured Party may in its sole discretion determine;
(ii) the Secured Party shall have the right to enter and remain upon the premises of Debtor, without any obligation to pay rent to Debtor or others, or any other place or places where any of the Collateral is located or kept, and: (1) remove Collateral therefrom, in order to maintain, sell, collect, and liquidate the Collateral; or (2) use such premises, together with materials, supplies, books, and records of Debtor, to maintain possession of and the condition of the Collateral, and to prepare the Collateral for selling, liquidating, or collecting.
(iii) the Secured Party may require Debtor, at Debtor’s expense, to assemble the Collateral and make it available to the Secured Party at a place to be designated by the Secured Party, which is reasonable and convenient to all parties.
c. The net proceeds realized by the Secured Party upon a sale or other disposition of the Collateral, or any part thereof, after deduction of the expenses of retaking, holding, preparing for sale, selling or the like, and reasonable attorneys’ fees and other expenses incurred by the Secured Party, shall be applied to payment of (or held as a reserve against) the Liabilities, whether or not then due, and in such order of application as the Secured Party may from time to time elect.
6.  Termination. This Security Agreement and the security interest granted pursuant to this Security Agreement shall terminate when all the Liabilities have been paid in full. Upon such termination, the Secured Party’s consent to the filing by Debtor of all documents necessary to terminate all effective financing statements in the Secured Party’s favor that are then on file or recorded with respect to the Collateral described in this Security Agreement.
7.  Right to Inspect. If Debtor is in default under this Security Agreement, Debtor will permit representatives of the Secured Party to have full access to all premises, properties, books, records, tax records, or documents of or pertaining to the Collateral in order to enable the Secured Party to have access to the Collateral and the premises, properties, books, records, tax records and documents related thereto.

 

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8.  Assignment. Neither this Security Agreement nor any of the rights, interests, or obligations arising under this Security Agreement may be assigned by Debtor without the prior written consent of the Secured Party.
9.  Binding Effect. Subject to Section 8, this Security Agreement shall be binding upon and inure to the benefit of the Secured Party, its respective successors and assigns, and shall be binding upon Debtor and its successors and assigns and shall bind all persons who become bound as a Debtor to this Security Agreement.
10.  Severability. Any provision of this Security Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction only, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Security Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. If any provision of this Security Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only as broad as is enforceable.
11.  Titles. The titles and headings preceding the text of the sections of this Security Agreement have been inserted solely for convenience of reference and do not constitute a part of this Security Agreement or affect its meaning, interpretation, or effect.
12.  Waiver. The failure of any party to insist in any one or more instances upon performance of any terms or conditions of this Security Agreement shall not be construed as a waiver of future performance of any such term, covenant, or condition, and the obligations of either party with respect to such term, covenant, or condition shall continue in full force and effect.
13.  Entire Agreement. This Security Agreement contains the final, complete, and exclusive expression of the understanding of Debtor and the Secured Party with respect to the transactions contemplated in this Security Agreement, and supersedes any prior or other contemporaneous agreement or representation by or among the parties related to the subject matter of this Security Agreement.
14.  Amendment. This Security Agreement may not be amended, modified, or changed in any respect and no waiver of any requirement hereof will be effective except by an agreement in writing signed by Debtor and the Secured Party.

 

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15.  Notices. All notices, requests, demands, claims and other communications under this Security Agreement will be in writing. Any notice, request, demand, claim or other communication under this Security Agreement shall be deemed duly given if it is sent: (a) by personal delivery, or (b) by commercial delivery or overnight courier service that requires a signature as evidence of delivery, and, in each case, addressed to the intended recipient as set forth below, or to any other or additional persons and addresses as the Parties may from time to time designate in a writing delivered in a writing in accordance with this Section 15:
If to the Secured Party:
As set forth below the signature of such Secured Party on the signature pages hereof
If to Debtor:
Steel Vault Corporation
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
Attn: William J. Caragol
16.  Governing Law/Venue. The validity, construction, enforcement, and interpretation of this Security Agreement are governed by the laws of the State of Florida and the federal laws of the United States of America, excluding the laws of those jurisdictions pertaining to resolution of conflicts with laws of other jurisdictions. The Debtor and the Secured Party (a) consent to the personal jurisdiction of the state and federal courts having jurisdiction in Palm Beach County, Florida, (b) stipulate that the proper, exclusive, and convenient venue for any legal proceeding arising out of this Security Agreement is Palm Beach County, Florida, for state court proceedings, and the Southern District of Florida, for federal district court proceedings, and (c) waive any defense, whether asserted by a motion or pleading, that Palm Beach County, Florida, or the Southern District of Florida, is an improper or inconvenient venue.
17.  Relationship. This Security Agreement does not create or evidence a partnership or joint venture between Debtor and the Secured Party.
18.  Interpretation. Neither this Security Agreement nor any uncertainty or ambiguity in this Security Agreement shall be construed or resolved against any party, whether under any rule of construction or otherwise. No party to this Security Agreement shall be considered the draftsman. The parties acknowledge and agree that this Security Agreement has been reviewed, negotiated, and accepted by all the parties and their attorneys and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of the parties.

 

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19.  Time. Time shall be of the essence with respect to all of the provisions of this Security Agreement.
20.  Counterparts. This Security Agreement may be executed (including by facsimile transmission) in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument.
21.  Enforcement of Security Agreement. The parties agree that irreparable damage will occur if any of the provisions of this Security Agreement are not performed in accordance with its specific terms or are otherwise breached. It is therefore agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Security Agreement and to specifically enforce the terms and provisions of this Security Agreement in any court of the United States or any state having jurisdiction, in addition to any other remedy to which they are entitled.
22.  Remedies Cumulative. The rights and remedies provided in this Security Agreement are cumulative and not exclusive of any rights or remedies provided by law, and the warranties, representations, covenants, and other provisions of this Security Agreement shall be cumulative.
[The next page is the signature page.]

 

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IN WITNESS WHEREOF, the undersigned have executed this Security Agreement as of the date and year first above written.
         
  STEEL VAULT CORPORATION
 
 
  By:   /s/ William J. Caragol    
    William J. Caragol, Chief Executive Officer   
       
  VERICHIP CORPORATION
 
 
  By:   /s/ Allison Tomek    
    Name:   Allison Tomek   
    Title:   Secretary   
 
  Address for Notices:
1690 South Congress Avenue
Suite 200
Delray Beach, Florida 33445
Attn: William J. Caragol
 

 

8

Exhibit 10.5
SECURITY AGREEMENT
This is a Security Agreement (the “Security Agreement”) between National Credit Report.com, LLC, a Florida limited liability company (“Debtor”), and the holder of the Note (defined below) signatory hereto (the “Secured Party”), and is dated as of June 4, 2009.
BACKGROUND
WHEREAS , Steel Vault Corporation, a Delaware corporation and the 100% owner of Debtor (“Steel Vault”), has issued a Secured Convertible Promissory Note to the Secured Party in the aggregate principal amount of $500,000.00 (the “Note”); and
WHEREAS , Steel Vault will contribute all or part of the proceeds from the Note to Debtor, for use by Debtor for working capital purposes. In exchange for the receipt of such proceeds, Debtor has agreement to enter into this Security Agreement.
Accordingly, in consideration of the mutual covenants and agreements set forth below, the parties agree as follows:
TERMS
1.  Grant of Security Interest. For good and valuable consideration received, the sufficiency of which is hereby acknowledged and agreed, in order to secure payment of (collectively, the “Liabilities”): (a) the Note; (b) all costs and expenses, including attorneys’ fees, incurred in collecting amounts due under the Note following an Event of Default; (c) all costs and expenses, including attorney’s fees, incurred in connection with realizing upon the value of the security provided by this Security Agreement following an Event of Default; and (d) all other liabilities and obligations of Debtor to the Secured Party, however and whenever incurred or evidenced, whether primary, secondary, direct, indirect, absolute, contingent, sole, joint, or several, arising prior to the date of this Security Agreement or in connection herewith, or which may be hereafter contracted or acquired, or incurred directly or indirectly in respect thereof, and all extensions or renewals thereof; Debtor grants to the Secured Party a lien and security interest in all of Debtor’s accounts receivable, chattel paper, instruments, documents, inventory, equipment, general intangibles, intellectual property, investment property, and all other tangible and intangible property of Debtor, whether now owned or existing or hereafter acquired or arising, wherever located, and all cash and non-cash proceeds and products thereof (collectively, the “Collateral”). This security interest shall also attach to all replacements and proceeds of the Collateral.
2. Assurances; Covenants. Debtor hereby agrees that:
a. Except for the security interest granted to the Secured Party by this Security Agreement: (i) the Collateral is and will be free of all liens and security interests of every kind and nature, except as may have been the result of actions of the Secured Party; (ii) Debtor will not assign, transfer, sell, convey, hypothecate, pledge, or in any other way dispose of or encumber the Collateral while this Security Agreement is in effect; and (iii) Debtor will warrant and defend the Collateral and the Secured Party’s security interest against the claims and demands of all persons.

 

 


 

b. Debtor will not, without the prior written consent of the Secured Party, borrow from anyone on the security of the Collateral, or otherwise permit any liens, encumbrances, security interests, or adverse claims against the Collateral, and will not permit the Collateral to be levied upon under any legal process.
c. Debtor authorizes the Secured Party to file financing statements, including amendments or continuations thereof, describing the Collateral, and from time to time at the request of the Secured Party, will execute such other documents, and will do such other acts and things, all as the Secured Party may reasonably request, to establish and maintain a valid perfected security interest in the Collateral and to enable the Secured Party to enforce its rights and remedies hereunder with respect to the Collateral.
3 . Representations and Warranties. Debtor represents and warrants to the Secured Party as follows:
a. Debtor is a limited liability company duly organized, validly existing, and in good standing and active status under the laws of the state of Florida;
b. Debtor has all requisite power to own and operate its properties and to carry on its business as now being conducted, and has all necessary rights to conduct its business;
c. Debtor has the power, authority, and legal right to execute and deliver this Security Agreement, and to perform its obligations hereunder, and has taken all action necessary to authorize the execution, delivery, and performance of this Security Agreement and to authorize the transactions contemplated hereby;
d. The execution, delivery, and performance by Debtor of this Security Agreement will not (i) contravene, conflict with, result in the breach of, or constitute a violation of or default under the organizational documents of Debtor, any applicable law, rule, regulation, judgment, order, writ, injunction, or decree of any court or governmental authority, or any agreement or instrument to which Debtor is a party or by which Debtor or its property may be bound or affected, or (ii) result in the creation of any lien, charge, or encumbrance upon any property or assets of Debtor pursuant to any of the foregoing, except the liens created by this Security Agreement;
e. This Security Agreement constitutes a legal, valid, and binding agreement enforceable against Debtor and the Collateral in accordance with its terms and, without limiting the foregoing, this Security Agreement grants the Secured Party a valid, perfected security interest in the Collateral; and
f. Debtor is the owner of the Collateral free and clear of all liens, encumbrances, security interests, and adverse claims whatsoever, except for the security interest granted in this Security Agreement.

 

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4.  Default. Each of the following shall, after receipt by Debtor of written notice from the Secured Party and after a cure period of five (5) business days with respect to Section 4a. below, and thirty (30) days with respect to Sections 4b. through 4d. below, constitute an event of default under this Security Agreement (each, an “Event of Default”):
a. The occurrence of a default under the Note, or a breach of the assurances set forth in Section 2 of this Security Agreement, or any other Liability is not paid when due (and such nonpayment continues beyond the expiration of any applicable grace or cure period);
b. Any representation or warranty made by Debtor under this Security Agreement or any report, certificate, financial statement, or other information provided by Debtor to the Secured Party in connection herewith is false or misleading in any material respect when made or deemed made; and
c. Debtor fails to fully and promptly perform when due any agreement or covenant under this Security Agreement or any related document (and such failure continues beyond the expiration of any applicable grace or cure period).
In the event that Debtor substantially cures such default within the applicable cure period, such default shall not constitute an Event of Default.
5. Remedies upon the occurrence of an Event of a Default.
a. Upon the occurrence and continuance of an Event of Default under this Security Agreement, the Secured Party will have the right at any time and from time to time, without further notice or demand to Debtor to exercise the rights and remedies upon default that are granted to a secured party under the Uniform Commercial Code and/or that are otherwise available to the Secured Party under this Security Agreement, the Note, or otherwise available to secured creditors at law and/or in equity under applicable law, including without limitation:
(i) Enforce Debtor’s rights against account debtors and notify any and all account debtors or other parties against which Debtor has a claim under the Collateral that such Collateral has been assigned by Debtor and that the Secured Party has a security interest therein and, if desired by the Secured Party, that all payments should be made to the Secured Party;
(ii) Receive and endorse the name of Debtor upon any instruments of payment (including payments made under any policy of insurance) that may come into the possession of the Secured Party;
(iii) Sell, assign, demand, sue for, collect, compromise, or settle payment of all or any part of the Collateral in the name of Debtor or in its own name, or make any other disposition of the Collateral, or any part thereof, which disposition may be for cash, credit, or any combination thereof, or make exchanges, substitutions, surrenders, or discharges of any of the Collateral;

 

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(iv) Purchase all or any part of the Collateral at public or, if permitted by law, private sale, and in lieu of actual payment of such purchase price, to set off the amount of such price against the Liabilities; and
(v) Do all things that the Secured Party may reasonably deem necessary or advisable to accomplish the purposes of this Security Agreement;
granting to the Secured Party, as the attorney-in-fact of Debtor, full power of substitution and full power to do any and all things necessary to be done in and about the premises as fully and effectually as Debtor might or could do but for this appointment, and hereby ratifying all that said attorney-in-fact shall lawfully do or cause to be done by virtue of this Security Agreement. This power of attorney is coupled with an interest and shall be irrevocable until the Liabilities have been paid in full.
b. Upon the occurrence and continuance of an Event of Default:
(i) the Secured Party may direct the disposition of the Collateral and any other collateral for the Liabilities, in such order or manner as the Secured Party may in its sole discretion determine;
(ii) the Secured Party shall have the right to enter and remain upon the premises of Debtor, without any obligation to pay rent to Debtor or others, or any other place or places where any of the Collateral is located or kept, and: (1) remove Collateral therefrom, in order to maintain, sell, collect, and liquidate the Collateral; or (2) use such premises, together with materials, supplies, books, and records of Debtor, to maintain possession of and the condition of the Collateral, and to prepare the Collateral for selling, liquidating, or collecting.
(iii) the Secured Party may require Debtor, at Debtor’s expense, to assemble the Collateral and make it available to the Secured Party at a place to be designated by the Secured Party, which is reasonable and convenient to all parties.
c. The net proceeds realized by the Secured Party upon a sale or other disposition of the Collateral, or any part thereof, after deduction of the expenses of retaking, holding, preparing for sale, selling or the like, and reasonable attorneys’ fees and other expenses incurred by the Secured Party, shall be applied to payment of (or held as a reserve against) the Liabilities, whether or not then due, and in such order of application as the Secured Party may from time to time elect.
6.  Termination. This Security Agreement and the security interest granted pursuant to this Security Agreement shall terminate when all the Liabilities have been paid in full. Upon such termination, the Secured Party’s consent to the filing by Debtor of all documents necessary to terminate all effective financing statements in the Secured Party’s favor that are then on file or recorded with respect to the Collateral described in this Security Agreement.
7.  Right to Inspect. If Debtor is in default under this Security Agreement, Debtor will permit representatives of the Secured Party to have full access to all premises, properties, books, records, tax records, or documents of or pertaining to the Collateral in order to enable the Secured Party to have access to the Collateral and the premises, properties, books, records, tax records and documents related thereto.

 

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8.  Assignment. Neither this Security Agreement nor any of the rights, interests, or obligations arising under this Security Agreement may be assigned by Debtor without the prior written consent of the Secured Party.
9.  Binding Effect. Subject to Section 8, this Security Agreement shall be binding upon and inure to the benefit of the Secured Party, its respective successors and assigns, and shall be binding upon Debtor and its successors and assigns and shall bind all persons who become bound as a Debtor to this Security Agreement.
10.  Severability. Any provision of this Security Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction only, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Security Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. If any provision of this Security Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only as broad as is enforceable.
11.  Titles. The titles and headings preceding the text of the sections of this Security Agreement have been inserted solely for convenience of reference and do not constitute a part of this Security Agreement or affect its meaning, interpretation, or effect.
12.  Waiver. The failure of any party to insist in any one or more instances upon performance of any terms or conditions of this Security Agreement shall not be construed as a waiver of future performance of any such term, covenant, or condition, and the obligations of either party with respect to such term, covenant, or condition shall continue in full force and effect.
13.  Entire Agreement. This Security Agreement contains the final, complete, and exclusive expression of the understanding of Debtor and the Secured Party with respect to the transactions contemplated in this Security Agreement, and supersedes any prior or other contemporaneous agreement or representation by or among the parties related to the subject matter of this Security Agreement.
14.  Amendment. This Security Agreement may not be amended, modified, or changed in any respect and no waiver of any requirement hereof will be effective except by an agreement in writing signed by Debtor and the Secured Party.

 

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15.  Notices. All notices, requests, demands, claims and other communications under this Security Agreement will be in writing. Any notice, request, demand, claim or other communication under this Security Agreement shall be deemed duly given if it is sent: (a) by personal delivery, or (b) by commercial delivery or overnight courier service that requires a signature as evidence of delivery, and, in each case, addressed to the intended recipient as set forth below, or to any other or additional persons and addresses as the Parties may from time to time designate in a writing delivered in a writing in accordance with this Section 15:
If to the Secured Party:
As set forth below the signature of such Secured Party on the signature pages hereof
If to Debtor:
National Credit Report.com, LLC
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
Attn: William J. Caragol
16.  Governing Law/Venue. The validity, construction, enforcement, and interpretation of this Security Agreement are governed by the laws of the State of Florida and the federal laws of the United States of America, excluding the laws of those jurisdictions pertaining to resolution of conflicts with laws of other jurisdictions. The Debtor and the Secured Party (a) consent to the personal jurisdiction of the state and federal courts having jurisdiction in Palm Beach County, Florida, (b) stipulate that the proper, exclusive, and convenient venue for any legal proceeding arising out of this Security Agreement is Palm Beach County, Florida, for state court proceedings, and the Southern District of Florida, for federal district court proceedings, and (c) waive any defense, whether asserted by a motion or pleading, that Palm Beach County, Florida, or the Southern District of Florida, is an improper or inconvenient venue.
17.  Relationship. This Security Agreement does not create or evidence a partnership or joint venture between Debtor and the Secured Party.
18.  Interpretation. Neither this Security Agreement nor any uncertainty or ambiguity in this Security Agreement shall be construed or resolved against any party, whether under any rule of construction or otherwise. No party to this Security Agreement shall be considered the draftsman. The parties acknowledge and agree that this Security Agreement has been reviewed, negotiated, and accepted by all the parties and their attorneys and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of the parties.

 

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19.  Time. Time shall be of the essence with respect to all of the provisions of this Security Agreement.
20.  Counterparts. This Security Agreement may be executed (including by facsimile transmission) in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument.
21.  Enforcement of Security Agreement. The parties agree that irreparable damage will occur if any of the provisions of this Security Agreement are not performed in accordance with its specific terms or are otherwise breached. It is therefore agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Security Agreement and to specifically enforce the terms and provisions of this Security Agreement in any court of the United States or any state having jurisdiction, in addition to any other remedy to which they are entitled.
22.  Remedies Cumulative. The rights and remedies provided in this Security Agreement are cumulative and not exclusive of any rights or remedies provided by law, and the warranties, representations, covenants, and other provisions of this Security Agreement shall be cumulative.
[The next page is the signature page.]

 

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IN WITNESS WHEREOF, the undersigned have executed this Security Agreement as of the date and year first above written.
         
  NATIONAL CREDIT REPORT.COM, LLC
 
 
  By:   /s/ William J. Caragol    
       
  VERICHIP CORPORATION
 
 
  By:   /s/ Allison Tomek    
    Name:   Allison Tomek   
    Title:   Secretary   
 
  Address for Notices:
1690 South Congress Avenue
Suite 200
Delray Beach, Florida 33445
Attn: William J. Caragol
 

 

8

Exhibit 10.6
SUBORDINATION AND INTERCREDITOR AGREEMENT
This Subordination and Intercreditor Agreement (this “Agreement”) is between Blue Moon Energy Partners LLC, a Florida limited liability company (the “Subordinate Creditor”), and the holder of the Senior Note (defined below) signatory hereto (the “Senior Creditor”), and is dated as of June 4, 2009.
BACKGROUND
The Senior Creditor desires to purchase from Steel Vault Corporation, a Delaware corporation (the “Issuer”), a Secured Convertible Promissory Note to be issued in the aggregate principal amount of $500,000.00 (collectively, the “Senior Note”), which Senior Note will be secured by all personal property of the Issuer pursuant to a Security Agreement entered into on the date hereof.
Subordinate Creditor has previously purchased from Issuer a Secured Convertible Promissory Note in the principal amount of $190,000.00 (the “Subordinate Note”), which Subordinate Note is secured by all personal property of the Issuer pursuant to a Security Agreement entered into on March 20, 2009.
Subordinate Creditor is an affiliate of the Issuer and will derive a substantial benefit from the purchase of the Senior Note by the Senior Creditor.
The Senior Creditor is unwilling to purchase the Senior Note unless the Subordinate Note is subordinated to the Senior Note and to all of the Issuer’s obligations thereunder in the manner hereinafter set forth.
Accordingly, in consideration of the mutual covenants and agreements set forth below, the parties agree as follows:
TERMS
1.  Payment Subordination. Upon the occurrence and during the continuance of any monetary default or any event of default under the Senior Note, the Subordinate Creditor will not accept any payment made by the Issuer in respect of the Subordinate Note until the Senior Note has been fully paid and satisfied. Senior Creditor will have no right to demand payments already made to Subordinate Creditor prior to any such default or event of default. The Subordinate Creditor will not be deemed to have any knowledge of any such default or event of default until it receives written notice thereof from the Senior Creditor.
2.  Lien Subordination. Notwithstanding the terms or provisions of any agreement or arrangement which any party may now or hereafter have with the Issuer or any rule of law and irrespective of the time, order or method or attachment or perfection of any security interest or the recordation or other filing in any public record of any financing statement, any lien, encumbrance or security interest in the collateral granted to the Senior Creditor by the Issuer, whether or not perfected, or any other right, title or interest of the Senior Creditor in such collateral now or hereafter held by the Senior Creditor or Subordinate Creditor, are and will remain at all times senior to any lien, encumbrance or security interest in the collateral granted to the Subordinate Creditor by the Issuer, whether or not perfected, or any other right, title or interest of the Subordinate Creditor in the collateral now or hereafter held by the Subordinate Creditor.

 

 


 

3.  Priority of Payments. In case of any assignment by the Issuer for the benefit of its creditors, any bankruptcy proceedings instituted by or against the Issuer’s assets, and any dissolution or other winding up of the affairs of the Issuer or of the Issuer’s business, and in all such cases respectively, the authorized representatives and owners of the Issuer and any assignee, trustee in bankruptcy, receiver, and other person or persons in charge are hereby directed to pay the Senior Creditor the full amount owed under the Senior Note before making any payments owed to Subordinate Creditor under the Subordinate Note.
4.  Conversion Right; Effect of Conversion. The Senior Creditor agrees that nothing herein will prevent Subordinate Creditor from exercising its conversion rights under the Subordinate Note. Upon either (a) the conversion of the Subordinate Note or (b) the conversion of the Senior Note, this Agreement will terminate.
5 . Covenants of Subordinate Creditor. The Subordinate Creditor hereby agrees that so long as any sum remains outstanding on the Subordinate Note:
a. The Subordinate Creditor will simultaneously send to the Senior Creditor due notice of all defaults under the Subordinate Note. The Senior Creditor will have the right, but not the obligation, to cure any such default within ten (10) days after the expiration of the applicable grace period permitted to the Issuer under the Subordinate Note.
b. The Subordinate Creditor will not, without the prior written consent of the Senior Creditor, take any Enforcement Action (hereinafter defined). For the purposes of this Agreement, the term “Enforcement Action” will mean with respect to the Subordinate Note, (i) the acceleration of all or any part of the indebtedness evidenced by the Subordinate Note, (ii) the commencement of any foreclosure proceedings, the exercise of any power of sale, or the obtaining of a receiver with respect to, or the taking of possession or control of, any of the Issuer’s property, (iii) the exercise of any rights of set-off or recoupment, (iv) the commencement or joining in of any bankruptcy, reorganization or insolvency proceedings against the Issuer under any federal or state law, or (v) the taking of any other enforcement action against the Issuer.
c. The Subordinate Creditor will hold any collateral and proceeds thereof which may come into Subordinate Creditor’s possession in trust for the Senior Creditor, and will immediately turn over any such collateral and/or proceeds to the Senior Creditor.
d. The Subordinate Creditor will not pledge, assign, hypothecate, transfer, convey or sell the Subordinate Note or any interest in the Subordinate Note or modify, waive or amend any of the terms or provisions of the Subordinate Note Documents, without the prior written consent of the Senior Creditor.
6.  Further Assurances. Each party hereto will cooperate fully with each other in order to promptly and fully carry out the terms and provisions of this Agreement. Each party hereto will from time to time execute and deliver such other agreements, documents or instruments and take such other actions as may be reasonably necessary or desirable to effectuate the terms of this Agreement.

 

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7.  No Waiver. The failure of any party to insist in any one or more instances upon performance of any terms or conditions of this Agreement will not be construed as a waiver of future performance of any such term, covenant, or condition, and the obligations of either party with respect to such term, covenant, or condition will continue in full force and effect.
8.  Right to Specific Performance. Each party hereto acknowledges that to the extent that no adequate remedy at law exists for breach of its obligations under this Agreement, in the event either party fails to comply with its obligations hereunder, the other party will have the right to obtain specific performance of the obligations of such defaulting party, injunctive relief or such other equitable relief as may be available.
9.  No Third Party Beneficiaries. No person, including, without limitation, the Issuer, other than the parties hereto and their successors and permitted assigns will have any rights under this Agreement.
10.  Binding Effect. This Agreement will be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.
11.  Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction will, as to such jurisdiction only, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision will be interpreted to be only as broad as is enforceable.
12.  Titles. The titles and headings preceding the text of the sections of this Agreement have been inserted solely for convenience of reference and do not constitute a part of this Agreement or affect its meaning, interpretation, or effect.
13.  Entire Agreement. This Agreement contains the final, complete, and exclusive expression of the understanding of the parties hereto with respect to the transactions contemplated in this Agreement, and supersedes any prior or other contemporaneous agreement or representation by or among the parties related to the subject matter of this Agreement.
14.  Amendment. This Agreement may not be amended, modified, or changed in any respect and no waiver of any requirement hereof will be effective except by an agreement in writing signed by the Subordinate Creditor and the Senior Creditor.

 

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15.  Notices. All notices, requests, demands, claims and other communications under this Agreement will be in writing. Any notice, request, demand, claim or other communication under this Agreement will be deemed duly given if it is sent: (a) by personal delivery, or (b) by commercial delivery or overnight courier service that requires a signature as evidence of delivery, and, in each case, addressed to the intended recipient as set forth below, or to any other or additional persons and addresses as the parties may from time to time designate in a writing delivered in a writing in accordance with this Section 15:
If to the Senior Creditor:
As set forth below the signature of the Senior Creditor on the signature page hereof
If to the Subordinate Creditor:
Blue Moon Energy Partners LLC
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
Attn: Scott R. Silverman
16.  Governing Law/Venue. The validity, construction, enforcement, and interpretation of this Agreement are governed by the laws of the State of Florida and the federal laws of the United States of America, excluding the laws of those jurisdictions pertaining to resolution of conflicts with laws of other jurisdictions. The Subordinate Creditor and the Senior Creditor (a) consent to the personal jurisdiction of the state and federal courts having jurisdiction in Palm Beach County, Florida, (b) stipulate that the proper, exclusive, and convenient venue for any legal proceeding arising out of this Agreement is Palm Beach County, Florida, for state court proceedings, and the Southern District of Florida, for federal district court proceedings, and (c) waive any defense, whether asserted by a motion or pleading, that Palm Beach County, Florida, or the Southern District of Florida, is an improper or inconvenient venue.
17.  Interpretation. Neither this Agreement nor any uncertainty or ambiguity in this Agreement will be construed or resolved against any party, whether under any rule of construction or otherwise. No party to this Agreement will be considered the draftsman. The parties acknowledge and agree that this Agreement has been reviewed, negotiated, and accepted by all the parties and their attorneys and will be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of the parties.
18.  Counterparts. This Agreement may be executed (including by facsimile transmission) in two or more counterparts, each of which will be deemed to be an original, but all of which together will constitute one and the same instrument.
19.  Enforcement of Agreement. The parties agree that irreparable damage will occur if any of the provisions of this Agreement are not performed in accordance with its specific terms or are otherwise breached. It is therefore agreed that the parties will be entitled to an injunction or injunctions to prevent breaches of this Agreement and to specifically enforce the terms and provisions of this Agreement in any court of the United States or any state having jurisdiction, in addition to any other remedy to which they are entitled.
[The next page is the signature page.]

 

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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date and year first above written.
         
  SUBORDINATE CREDITOR:

BLUE MOON ENERGY PARTNERS, LLC
 
 
  By:   /s/ William J. Caragol    
    Its: Manager   
       
  SENIOR CREDITOR:

VERICHIP CORPORATION
 
 
  By:   /s/ Allison Tomek    
    Its: Secretary   
       
  Address for Notices:
1690 South Congress Avenue
Suite 200
Delray Beach, Florida 33445
Attn: William J. Caragol
 

 

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Exhibit 10.7
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW. NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF NOR ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN MAY BE SOLD, ASSIGNED, PLEDGED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT OF 1933 AND ALL STATE SECURITIES LAWS AND THE TERMS AND CONDITIONS HEREOF.
COMMON STOCK PURCHASE WARRANT
Void After June 4, 2014
     
No. 003   Date of Issuance: June 4, 2009
This is to certify that, for value received, William J. Caragol, an individual residing in the State of Florida, or registered assigns thereof (the “Holder”), is entitled to purchase from Steel Vault Corporation, a Delaware corporation (the “Corporation”), at a price of $0.30 per share (the “Warrant Price”) at any time on or before June 4, 2014, all or any part of 500,000 shares of common stock, par value $0.01 per share, of the Corporation (“Common Stock”), on the terms and subject to the conditions hereinafter set forth.
1. This Warrant will become void, and all rights of the Holder will expire, at 5:00 P.M., EST, on June 4, 2014.
2. This Warrant may be exercised by the Holder as to all or any portion of the shares of Common Stock covered hereby, by surrender of this Warrant to the Corporation at its principal office, with the form of Election to Purchase attached hereto duly executed and accompanied by the Warrant Price for the shares so purchased in cash or by certified check or bank draft. The Election to Purchase shall state the name of the person or entity exercising the Warrant (with address and such further information as may be required by the Corporation) and the certificate or certificates for shares of Common Stock shall be issued in this name. Thereupon this Warrant shall be deemed to have been exercised and the person or entity exercising the Warrant shall be deemed to have become a holder of record of shares of Common Stock purchased hereunder for all purposes and thereafter the Holder may exercise all rights and be entitled to all benefits of a shareholder of record of the Corporation, and a certificate or certificates for such shares so purchased shall be delivered to the person or entity exercising the Warrant within a reasonable time after this Warrant shall have been exercised as set forth hereinabove. In the event that, prior to the exercise of this Warrant and issuance of the underlying shares, there shall be an increase or decrease in the number of issued shares of Common Stock of the Corporation as a result of a subdivision or consolidation of shares or other capital adjustment, or the payment of a stock dividend or other increase or decrease in such shares, effected without receipt of consideration by the Corporation, the remaining number of shares shall be adjusted so that the adjusted number of shares subject to this Warrant and the adjusted Warrant Price shall be the substantial equivalent of the remaining number of shares still subject to the Warrant and the Warrant Price thereof prior to such change.

 

 


 

3. This Warrant is exchangeable by the Holder, upon the surrender of the Warrant at the principal office of the Corporation, for new Warrants of like tenor and date representing in the aggregate the right to subscribe for and purchase the number of shares of Common Stock which may be subscribed for and purchased hereunder.
4. The Corporation covenants and agrees that all shares of Common Stock which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be validly issued, fully paid and non-assessable and free from all taxes, liens and charges with respect to the issue thereof except for any taxes required in connection with the transfer thereof. The Corporation further covenants and agrees that, during the period within which the rights represented by this Warrant may be exercised, the Corporation will at all times have authorized and reserved a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant.
5. The Holder of this Warrant, by acceptance hereof, agrees that such holder will not sell, hypothecate or otherwise transfer or dispose of this Warrant or the shares of Common Stock issuable on the exercise hereof without giving prior written notice to the Corporation of such holder’s intention to do so, describing briefly the manner of any such proposed transfer. Upon the request of the Corporation, the Holder shall be required to also deliver to the Corporation an opinion of to counsel for the Holder stating that the proposed transfer described in the notice given by the Holder may be effected without registration of this Warrant or the shares of Common Stock issuable on the exercise hereof under the Securities Act of 1933, as then in effect, or any similar federal statute (the “Securities Act”).
6. The restrictions in Section 5 hereof shall be binding upon any transferee who has received this Warrant or shares of Common Stock issuable on exercise hereof. A legend in substantially the following form shall be typed, printed or stamped on the face and back of all certificates issued on exercise of this Warrant and on the face and back of all certificates issued in substitution or exchange thereof:
“THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. IT HAS BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT WITH RESPECT THERETO UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF COUNSEL THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT.”
7. The issue of any stock or other certificate upon the exercise of this Warrant shall be made without charge to the registered holder hereof for any tax in respect of the issue of such certificate.

 

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8. This Warrant and all rights hereunder are transferable on the books of the Corporation (subject, however, to the provisions of Sections 5 and 6 hereof), upon surrender of this Warrant, with the form of Transfer of Warrant attached hereto duly executed by the registered holder hereof or by his attorney duly authorized in writing, to the Corporation at its principal office, and thereupon there shall be issued in the name of the transferee or transferees, in exchange for this Warrant, a new Warrant or Warrants of like tenor and date, representing in the aggregate the right to subscribe for and purchase the number of shares of Common Stock which may be subscribed for and purchased hereunder.
9. The Corporation may deem and treat the registered holder of this Warrant as the absolute owner of this Warrant for all purposes and shall not be affected by any notice to the contrary.
10. This Warrant shall not entitle the Holder to any rights of a stockholder of the Corporation, either at law or in equity, including, without limitation, the right to vote, to receive dividends and other distributions, to exercise any preemptive rights or to receive any notice of meetings of stockholders or of any other proceedings of the Corporation.
11. The validity, construction, enforcement, and interpretation of this Warrant are governed by the laws of the State of Florida and the federal laws of the United States of America, excluding the laws of those jurisdictions pertaining to resolution of conflicts with laws of other jurisdictions. The Corporation and the Holder (a) consent to the personal jurisdiction of the state and federal courts having jurisdiction in Palm Beach County, Florida, (b) stipulate that the proper, exclusive, and convenient venue for any legal proceeding arising out of this Warrant is Palm Beach County, Florida, for state court proceedings, and the Southern District of Florida, for federal district court proceedings, and (c) waive any defense, whether asserted by a motion or pleading, that Palm Beach County, Florida, or the Southern District of Florida, is an improper or inconvenient venue.
(Remainder of page intentionally left blank; signature page follows)

 

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Dated: June 4, 2009
         
  STEEL VAULT CORPORATION
 
 
  By:   /s/ Allison Tomek             
    Name:   Allison Tomek   
    Title:   Secretary   

 

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TRANSFER OF WARRANT
For value received                                              hereby sells, assigns and transfers unto                                             the right to purchase                       shares of Common Stock, par value $                       per share, of                       , which rights are represented by the attached Warrant, and does hereby irrevocably constitute and appoint                       attorney to transfer said rights on the books of such Corporation.
Dated:                                           ,                     
     
In the Presence of
   
 
   
 
   

 

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ELECTION TO PURCHASE
Date:                                           ,                     
TO:
The undersigned hereby subscribes for                      shares of the Common Stock of the Corporation covered by the attached Warrant and tenders payment herewith in the amount of $                      in accordance with the terms hereof.
                 
Issue Certificate(s) for said stock to   Deliver certificate(s)                      by mail
                     against counter receipt to
   
 
               
         
(Name)
      (Name)        
 
               
         
(Street and Number)
      (Street and Number)        
 
               
         
City
  State   City   State    
 
               
         
Social Security or Tax
Identification Number
      Social Security or Tax
Identification Number
       
The undersigned registered holder of this Warrant hereby represents and warrants to and agrees with the Corporation that, if the shares of Common Stock which the undersigned hereby subscribes for have not been effectively registered under the Securities Act of 1933, or any similar Federal Statute in effect at the date of this Election to Purchase, the undersigned is purchasing said shares of Common Stock for his or its own account for investment, and not with a view to, or for sale in connection with, any distribution of such shares and without any present intention of distributing or selling such shares and that a legend to such extent may be placed on all certificates for shares of such Common Stock.
Very truly yours,
(Signature of Subscriber or Agent)

 

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Exhibit 10.8
GUARANTY OF COLLECTION
THIS GUARANTY OF COLLECTION (this “Guaranty”) is made as of June 4, 2009, by WILLIAM J. CARAGOL (the “Guarantor”) to and for the benefit of VERICHIP CORPORATION, a Delaware corporation (“VeriChip”), and solely for purposes of Section 8 hereof, between Guarantor and STEEL VAULT CORPORATION, a Delaware corporation (“Borrower”).
R E C I T A L S :
A. Provided that VeriChip receives a guaranty of collection from the Guarantor with respect to the Liabilities (as defined below), VeriChip is willing to purchase a secured convertible promissory note issued by Borrower in the aggregate principal amount of $500,000 (the “Note”), which is secured by a security agreement, dated as of the date hereof, between Borrower and VeriChip and by a security agreement, dated as of the date hereof, between National Credit Report.com, LLC and VeriChip (collectively, the “Security Agreements”).
B. In exchange for providing this Guaranty, the Guarantor will receive a common stock purchase warrant to purchase 500,000 shares of common stock of Borrower (the “Warrant”).
NOW, THEREFORE, to induce VeriChip to purchase the Note from Borrower and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Guarantor agrees with VeriChip as follows:
1.  Guaranty . The Guarantor guarantees to VeriChip full and prompt collection of up to the principal amount due under the Note of and all accrued and unpaid interest thereon, but not any fees or other amounts of any kind whatsoever that shall be due to VeriChip by Borrower (the “Liabilities”).
2.  Guaranty of Collection . This is a guaranty of collection only, and not a guaranty of payment. Before enforcing this Guaranty, (i) VeriChip first must foreclose upon any collateral securing the Note pursuant to the Security Agreements, (ii) VeriChip must use reasonable efforts to obtain judgment against Borrower, (iii) VeriChip must use reasonable efforts to execute on any judgment obtained against Borrower, and (iv) following execution of any such judgment, a portion of the sums due under the Note constituting liabilities hereunder must remain unpaid; provided, however , if Borrower becomes the debtor in (A) any voluntary or (B) any involuntary bankruptcy case which is not dismissed within 60 days, then VeriChip immediately may enforce this Guaranty against Guarantor.
3.  Termination of Guaranty . This Guaranty shall remain in effect and will not terminate until the Liabilities have been paid in full.
4.  Waivers . The Guarantor waives (i) notice of acceptance of this Guaranty, (ii) all presentments and protests, and (iii) notice of dishonor.
5.  Obligations Absolute . Except as set forth in this Guaranty, the Guarantor’s obligations are in all respects absolute and unconditional and will not be impaired, modified, released or limited by any occurrence or condition whatsoever, including, without limitation,

 

 


 

(i) any modification, discharge, renewal or extension of the Liabilities or the Note, or any amendment, modification or stay of VeriChip’s rights under the Note which may occur in any bankruptcy or reorganization case or proceeding concerning Borrower, whether permanent or temporary and whether or not assented to by VeriChip, (ii) any notice of withdrawal of this Guaranty, at any time and from time to time before, at or after maturity of the Note, (iii) any substitution or exchange, in whole or in part, of any collateral or any security held in connection with the Note, (iv) any furnishing of additional collateral for the Note, (v) any determination that any collateral has become impaired or that any security interest taken by VeriChip to secure the Note is invalid or unperfected, (vi) any determination that any signatures on behalf of Borrower on the Note are not genuine or that the Note is not the legal, valid and binding obligation of Borrower, or (vii) any defenses which Borrower may have as to any sums due under the Note.
6.  Waiver of Subrogation . Until the Liabilities have been paid in full, the Guarantor irrevocably waives, relinquishes and renounces any right of subrogation, contribution, indemnity, reimbursement or any claim whatsoever which the Guarantor may have against Borrower or any other guarantors liable on the Note arising out of, or in any way connected with, the documents evidencing, securing, guaranteeing or otherwise relating to the Note (the “Loan Documents”). The Guarantor will not assert any such claim against Borrower or any such guarantor, in any proceeding, legal or equitable, including any bankruptcy, insolvency or reorganization proceeding, before VeriChip is paid in full for the Liabilities. This provision will inure to the benefit of and will be enforceable by VeriChip, Borrower and any such guarantors, and their successors and assigns, including any trustee in bankruptcy or debtor-in-possession. This provision will not prevent the Guarantor from asserting a claim against Borrower or any such guarantors once the Liabilities have been fully paid to VeriChip. Once the Liabilities have been paid in full, if the Guarantor has made any payment to VeriChip under this Guaranty, then VeriChip will assign to the Guarantor, to the extent of such payment, VeriChip’s interest in the Loan Documents and any judgments against Borrower.
7.  Reinstatement of Guaranteed Liabilities . The Guarantor acknowledges and agrees that the Guarantor’s obligations hereunder shall apply to and continue with respect to any amount paid to VeriChip on the Liabilities which is subsequently recovered from VeriChip for any reason whatsoever (including, without limitation, as a result of any bankruptcy, insolvency or fraudulent conveyance proceeding), notwithstanding the fact that the Liabilities may have been previously paid in full or this Guaranty terminated, or both.
8.  Registration . As consideration for the Guaranty, if at any time Borrower proposes to register shares of its common stock under the Securities Act of 1933, as amended (the “Securities Act”), in connection with the public offering of such shares for cash (a “Proposed Registration”) other than a registration statement on Form S-8 or Form S-4 or any successor or other forms promulgated for similar purposes, Borrower shall, at such time, promptly give Guarantor written notice of such Proposed Registration. Guarantor shall have ten (10) days from its receipt of such notice to deliver to Borrower a written request specifying the amount of Registrable Securities that Guarantor intends to sell and Guarantor’s intended method of distribution. Upon receipt of such request, Borrower shall use its commercially reasonable efforts to cause all Registrable Securities which Borrower has been requested to register to be registered under the Securities Act to the extent necessary to permit their sale or other disposition in accordance with the intended methods of distribution specified in the request of Guarantor;

 

 


 

provided , however , that Borrower shall have the right to postpone or withdraw any registration effected pursuant to this Section 8 without obligation to Guarantor. If, in connection with any underwritten public offering for the account of Borrower or for stockholders of Borrower that have contractual rights to require Borrower to register shares of common stock, the managing underwriter(s) thereof shall impose a limitation on the number of shares of common stock which may be included in a registration statement because, in the judgment of such underwriter(s), marketing or other factors dictate such limitation is necessary to facilitate such offering, then Borrower shall be obligated to include in the registration statement only such limited portion of the Registrable Securities with respect to which Guarantor has requested inclusion hereunder as such underwriter(s) shall permit. For purposes herein, “Registrable Securities” means the shares of common stock issuable pursuant to the exercise of the Warrant (without regard to any limitation on such exercise), and any shares of capital stock issued or issuable from time to time (with any adjustments) in replacement of, in exchange for or otherwise in respect of the shares issued or issuable pursuant to the exercise of the Warrant; provided , however , that “Registrable Securities” shall not include any such shares that have been sold pursuant to Rule 144 of the Securities Act.
9.  Assignment . VeriChip may, from time to time, whether before or after any withdrawal of this Guaranty, without notice to the Guarantor, assign or transfer any or all of the Liabilities or any interest therein; and, notwithstanding any such assignment or transfer or any subsequent assignment or transfer thereof, such Liabilities shall be and remain Liabilities for purposes of this Guaranty, and each and every immediate and successive assignee or transferee of any of the Liabilities or of any interest therein shall, to the extent of the interest of such assignee or transferee in the Liabilities, be entitled to the benefits of this Guaranty to the same extent as if such assignee or transferee were VeriChip; provided, however , that, unless VeriChip shall otherwise consent in writing, VeriChip shall have an unimpaired right, prior and superior to that of any such assignee or transferee, to enforce this Guaranty, for the benefit of VeriChip, as to that portion of the Liabilities which VeriChip has not assigned or transferred.
10.  Cumulative Rights; No Waiver . Each and every right granted to VeriChip hereunder or under any other document delivered hereunder or in connection herewith, or allowed it by law or equity, shall be cumulative and may be exercised from time to time subject only to the limitations set forth in this Guaranty. No failure on the part of VeriChip to exercise, and no delay in exercising, any right shall operate as a waiver thereof, nor shall any single or partial exercise by VeriChip of any right preclude any other or future exercise thereof or the exercise of any other right.
11.  Interpretation and Construction . Each reference herein to VeriChip shall be deemed to include its successors and assigns, and each reference to Borrower and the Guarantor and any pronouns referring thereto as used herein shall be construed in the singular or plural as the context may require and shall be deemed to include the heirs, executors, administrators, legal representatives, successors and assigns of Borrower and the Guarantor, all of whom shall be bound by the provisions hereof. All references herein to Borrower shall be deemed to include any successor or successors, whether immediate or remote, to Borrower.
12.  Continuing Guaranty . This instrument is intended to be a full, complete and continuing guaranty to VeriChip to the extent of and for the Liabilities owing by Borrower to

 

 


 

VeriChip from time to time and to be valid and continuous without other or further notice to the Guarantor, notwithstanding the death, disability or dissolution of Borrower or any other guarantor, until notice in writing of withdrawal of this Guaranty, signed by the parties hereto or any of them or by the legal representative(s) of a deceased party, has actually been given to VeriChip, and then only as to the party or parties signing such notice and to transactions subsequent to the time of such notice; provided, however , that no such notice of withdrawal shall affect or impair any of the agreements and obligations of the Guarantor hereunder with respect to any and all Liabilities existing at the time of actual receipt of such notice by VeriChip until paid in full; and shall not affect or impair VeriChip’s right to recover all expenses paid or incurred by VeriChip endeavoring to enforce this Guaranty against the Guarantor. All of the agreements and obligations of the Guarantor under this Guaranty shall, notwithstanding any such notice of withdrawal, remain in effect until all such Liabilities and all such expenses shall have been paid in full.
13.  Subsequent Guaranties . No subsequent guaranty by the Guarantor or any other person of the Liabilities shall be deemed to be in lieu of or to supersede this Guaranty, unless otherwise expressly provided therein. The obligation under this Guaranty shall be in addition to any obligation of the Guarantor as endorser of any obligations of Borrower.
14.  Governing Law/Venue . The validity, construction, enforcement, and interpretation of this Guaranty are governed by the laws of the State of Florida and the federal laws of the United States of America, excluding the laws of those jurisdictions pertaining to resolution of conflicts with laws of other jurisdictions. The Guarantor (a) consents to the personal jurisdiction of the state and federal courts having jurisdiction in Palm Beach County, Florida, (b) stipulates that the proper, exclusive, and convenient venue for any legal proceeding arising out of this Guaranty is Palm Beach County, Florida, for state court proceedings, and the Southern District of Florida, for federal district court proceedings, and (c) waives any defense, whether asserted by a motion or pleading, that Palm Beach County, Florida, or the Southern District of Florida, is an improper or inconvenient venue.
15.  Entire Agreement . This writing represents the entire agreement of the parties and is intended as a complete and exclusive statement of the terms of this Guaranty. No amendment or modification shall be effective unless made in writing and signed by the parties. No course of dealing, course of performance or trade usage, and no parol evidence of any nature, shall be used to supplement, amend or modify the terms hereof.
16.  Counterparts . This Guaranty may be executed (including by facsimile transmission) in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument.
(remainder of page intentionally left blank; signature page follows)

 

 


 

IN WITNESS WHEREOF, the undersigned have executed this Guaranty as of the date and year first written above.
         
  GUARANTOR
 
 
  By:   /s/ William J. Caragol    
    William J. Caragol   
       
 
         
  Solely for purposes of Section 8 :

STEEL VAULT CORPORATION
 
 
  By:   /s/ Allison Tomek    
    Name:   Allison Tomek   
    Title:   Secretary   
 

 

 

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: August 13, 2009  /s/ William J. Caragol    
  William J. Caragol   
  Acting Chief Executive 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: August 13, 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 June 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William J. Caragol, Acting Chief Executive Officer and 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 Executive Officer and Chief Financial Officer
   
Date: August 13, 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.