VeriChip Corp., a provider of RFID systems for health-care and asset-tracking applications, has hired investment banking firm Kaufman Bros. to assist in the sale of its VeriMed Health Link business, as well as the possible sale of the entire company.
Jay McKeage, VeriChip’s VP of business development, believes Kaufman will “shop the VeriMed business around widely,” and that if the VeriMed business sells, another buyer could purchase the remainder of the company, which would then be “a shell of a quoted company.” The buyer could then operate as a public company, he says, or “buy it and stop filing with the SEC.”
Last week, VeriChip announced a $45 million definitive stock purchase agreement with tool and security firm The Stanley Works for the sale of VeriChip’s wholly owned Canadian subsidiary, Xmark, which sells RFID-based products and services designed to help track infants in hospitals, as well as other patients and physical assets. The deal is currently pending approval from VeriChip shareholders, and is expected to be completed by midyear.
Applied Digital Solutions (doing business as Digital Angel) owns 48.2 percent of VeriChip’s stock, and has stated its intention to approve the Xmark deal. According to McKeage, the Xmark business has been “nicely profitable” to VeriChip, as well as for Digital Angel, and has generated cash flow that funds the other half of VeriChip’s operations—VeriMed Health Link. “That [VeriMed] business has a substantial cash burn,” he says, “so once Xmark is sold, [VeriMed] is not sustainable on its own.”
According to McKeage, Stanley approached VeriChip with the cash offer to purchase Xmark. While the specifics of the negotiations between the two companies will not be revealed until the proxy statement is issued, McKeage notes that given that the Stanley offer was for a cash transaction and represented a substantial premium, VeriChip was obliged to its shareholders to take the offer. “We would have been courting exposure to turn this down,” he says.
Digital Angel manufactures RFID tags that are implanted in pets and wildlife for tracking purposes, as well as GPS-based active transponders for search-and-rescue applications (see Personal Location Beacons Usage Grows). In 2004, the U.S. Food and Drug Administration (FDA) gave its approval for VeriChip’s implantable tag to be used for human patient identification and medical records tracking. VeriChip utilizes the implantable tag as part of its VeriMed Health Link services, through which doctors administer the implants, which are encoded with a unique 16-digit code that is associated, via a secure database, with the carrier’s medical records.
Some U.S. hospitals have the RFID interrogators required to access the tag data, as well as access to the database (more than 900 facilities in the United States have agreed to carry the readers). The system is designed to enable health-care workers to gain quick access to a patient’s medical history, even in the event that person cannot communicate due to illness or some other reason. The implantable tags are also employed in an emergency management system known as VeriTrace, designed to help identify and track the remains of deceased individuals—particularly during large-scale disasters with hundreds or thousands of fatalities (see VeriChip’s VeriTrace Platform Sees Sales Boost).
Last month, VeriChip rebranded its VeriMed system, renaming it Health Link, and launched a three-month advertising campaign to market its services directly to potential end users in southern Florida (see VeriChip Markets Its Implantable RFID Tags and Services Direct to Consumers). According to Scott Silverman, VeriChip’s CEO and chairman, the initiative included a partnership with hearing care provider HearUSA, with a goal of signing up 1,000 new customers.
“Assuming we reach our goal of 1,000, we are prepared to expand,” Silverman told RFID Journal in April, noting that HearUSA has locations throughout the country. “If, three months from now, nobody gets the chip, we will have to look at our business model.”
Apparently, VeriChip’s board of directors decided not to wait the three months to re-examine that model. At the closing of the Xmark transaction, Silverman will no longer serve as an officer or director of the company; instead, Joseph Grillo, Digital Angel’s president and CEO, will replace him as a board member of the company, to become its chairman.
After VeriChip went public in February (see VeriChip Launches IPO), VeriTrace generated the first revenue for the company’s implantable division. And in its financial report for the first quarter of 2008, the Delray Beach, Fla., firm indicated that its losses shrank. It lost $2.8 million, or 30 cents per share, on revenue of $8.6 million. In the prior-year quarter, it lost $3.3 million, or 47 cents a share, on revenue of $7.1 million. What’s more, its gross profit was up by 5.4 percent.
VeriChip’s implantable business, however, only generated $3,000 in revenue in the quarter ending March 31, 2008, during which the company saw a $1.9 million loss. According to a press statement released by Stanley, Xmark generates annual revenues in excess of $30 million, so without that revenue, VeriChip’s implantable business would be unsustainable.
When the Xmark sale is complete, VeriChip plans to use the $45 million from Stanley to pay outstanding debt, then utilize $15 million of the remaining $21.4 million to pay shareholders a special dividend. If the firm sells the VeriMed business or the whole of VeriChip, it plans to propose a second, special dividend to its stockholders consisting of all remaining distributable cash then held by VeriChip.
Privacy advocates have long complained that VeriChip’s implantable tag could put consumers’ personal privacy at risk, proposing that the tags could be read without a carrier’s knowledge. A news report released last fall, linking implanted RFID transponders to tumors in lab mice, caused additional public relations hurdles for the company (see VeriChip Defends the Safety of Implanted RFID Tags).
VeriChip has also been involved in research to develop an RFID-enabled sensor tag that could make it easier for diabetics to monitor blood-sugar levels (see VeriChip, Digital Angel Partner With Receptors LLC to Develop Glucose Sensor). While Digital Angel, along with Receptors LLC, are funding that research, McKeage says it would be up to the VeriMed buyer whether or not to continue such funding.
Xmark sells three types of branded RFID-based security products: infant security systems (under the Hugs and Halo brands), wander protection systems (under the RoamAlert brand) and hospital asset-tracking systems (under the Assetrac brand). Stanley has three main business divisions: construction tools, industrial tools and security (which comprises electrical and mechanical door locks). The Xmark products will be integrated into its security business.