Exhibit 10.40
DIGITAL ANGEL CORPORATION
SECURITY AGREEMENT

To:  
Applied Digital Solutions, Inc.
1690 South Congress Avenue
Suite 200
Delray Beach, FL 33445

Date: August 31, 2007
To Whom It May Concern:
Grant of Security Interest. To secure the payment of all Obligations (as
hereafter defined), DIGITAL ANGEL CORPORATION, a Delaware corporation (the
“Digital Angel”), and each party listed on Exhibit A attached hereto (the
“Subsidiaries”) Digital Angel and each Subsidiary, each a “Assignor” and
collectively, the “Assignors”), and APPLIED DIGITAL SOLUTIONS, INC., a Delaware
corporation (“Assignee”) hereby assigns and grants to Assignee a continuing
security interest in all of the following property now owned or at any time
hereafter acquired by Assignors, or in which Assignors now have or at any time
in the future may acquire any right, title or interest (the “Collateral”): all
cash, cash equivalents, accounts, accounts receivable, deposit accounts,
inventory, equipment, goods, fixtures, documents, instruments (including,
without limitation, promissory notes), contract rights, general intangibles
(including, without limitation, payment intangibles and an absolute right to
license on terms no less favorable than those current in effect among Assignors’
affiliates), chattel paper, supporting obligations, investment property
(including, without limitation, all partnership interests, limited liability
company membership interests and all other equity interests owned by Assignors
(other than interests owned by Assignors in non-domestic subsidiaries),
letter-of-credit rights, trademarks, trademark applications, tradestyles,
patents, patent applications, copyrights, copyright applications and other
intellectual property in which Assignors now have or hereafter may acquire any
right, title or interest, all proceeds and products thereof (including, without
limitation, proceeds of insurance) and all additions, accessions and
substitutions thereto or therefore, subject to Permitted Liens. Except as
otherwise defined herein, all capitalized terms used herein shall have the
meanings provided such terms in the Note referred to below. All items of
Collateral which are defined in the UCC shall have the meanings set forth in the
UCC. For purposes hereof, the term "UCC” means the Uniform Commercial Code as
the same may, from time to time, be in effect in the State of Florida; provided,
that in the event that, by reason of mandatory provisions of law, any or all of
the attachment, perfection or priority of, or remedies with respect to,
Assignee’s security interest in any Collateral is governed by the Uniform
Commercial Code as in effect in a jurisdiction other than the State of Florida,
the term “UCC” shall mean the Uniform Commercial Code as in effect in such other
jurisdiction for purposes of the provisions of this Agreement relating to such
attachment, perfection, priority or remedies and for purposes of definitions
related to such provisions; provided further, that to the extent that the UCC is
used to define any term herein and such term is defined differently in different
Articles of the UCC, the definition of such term contained in Article 9 shall
govern.
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1. Definitions.
(a) The term “Obligations” as used herein shall mean and include all debts,
liabilities and obligations owing by Assignors to Assignee arising under, out
of, or in connection with: (i) that certain Secured Term Note dated as of the
date hereof in favor of Assignee (the “Note”) as it may be amended, modified,
restated or supplemented from time to time, and in connection with any
documents, instruments or agreements relating to or executed in connection with
the Note or any documents, instruments or agreements referred to therein or
otherwise, and in connection with any other indebtedness, obligations or
liabilities of Assignors to Assignee, whether now existing or hereafter arising,
direct or indirect, liquidated or unliquidated, absolute or contingent, due or
not due and whether under, pursuant to or evidenced by a note, agreement,
guaranty, instrument or otherwise, including, without limitation, obligations
and liabilities of Assignors for post-petition interest, fees, costs and charges
that accrue after the commencement of any case by or against Assignors under any
bankruptcy, insolvency, reorganization or like proceeding (collectively, the
“Debtor Relief Laws”) in each case, irrespective of the genuineness, validity,
regularity or enforceability of such Obligations, or of any instrument
evidencing any of the Obligations or of any collateral therefor or of the
existence or extent of such collateral, and irrespective of the allowability,
allowance or disallowance of any or all of the Obligations in any case commenced
by or against Assignors under any Debtor Relief Law. Notwithstanding anything to
the contrary contained herein, upon payment of the Obligations under the Note in
full in immediately available funds, this Agreement shall automatically
terminate and be without further force or effect.
(b) The term “Kallina Security Agreement” means that certain Security Agreement,
dated as of August 31, 2007, by and among Kallina Corporation, the Company and
certain of the Company’s domestic subsidiaries.
(c) The term “Lien” means any mortgage, security deed, deed of trust, pledge,
hypothecation, assignment, security interest, lien (whether statutory or
otherwise), charge, claim or encumbrance, or preference, priority or other
security agreement or preferential arrangement held or asserted in respect of
any asset of any kind or nature whatsoever including any conditional sale or
other title retention agreement, any lease having substantially the same
economic effect as any of the foregoing, and the filing of, or agreement to
give, any financing statement under the UCC or comparable law of any
jurisdiction.
(d) The term “Permitted Liens” means (a) Liens of carriers, warehousemen,
artisans, bailees, mechanics and materialmen incurred in the ordinary course of
business securing sums not overdue; (b) Liens incurred in the ordinary course of
business in connection with worker’s compensation, unemployment insurance or
other forms of governmental insurance or benefits, relating to employees,
securing sums (i) not overdue
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or (ii) being diligently contested in good faith provided that adequate reserves
with respect thereto are maintained on the books of the Assignors, as
applicable, in conformity with generally accepted accounting principles;
(c) Liens in favor of Assignee; (d) Liens for taxes (i) not yet due or
(ii) being diligently contested in good faith by appropriate proceedings,
provided that adequate reserves with respect thereto are maintained on the books
of the Assignors, as applicable, in conformity with GAAP; and which have no
effect on the priority of Liens in favor of Assignee or the value of the assets
in which Assignee has a Lien; (e) Purchase Money Liens securing Purchase Money
Indebtedness to the extent permitted in this Security Agreement and (f) Liens
specified on Schedule 1 hereto or any replacement of such Lien associated with
any refinancing.
(e) The term “Purchase Money Indebtedness” means (a) any indebtedness incurred
for the payment of all or any part of the purchase price of any fixed asset,
including indebtedness under capitalized leases, (b) any indebtedness incurred
for the sole purpose of financing or refinancing all or any part of the purchase
price of any fixed asset, and (c) any renewals, extensions or refinancings
thereof (but not any increases in the principal amounts thereof outstanding at
that time).
(f) The term “Purchase Money Lien” means any Lien upon any fixed assets that
secures the Purchase Money Indebtedness related thereto but only if such Lien
shall at all times be confined solely to the asset the purchase price of which
was financed or refinanced through the incurrence of the Purchase Money
Indebtedness secured by such Lien and only if such Lien secures only such
Purchase Money Indebtedness.
2. Representations, Warranties and Covenants in favor of Assignee. Each Assignor
hereby represents, warrants and covenants to Assignee that:
(a) it is a corporation validly existing, in good standing and formed under the
laws of the state of its formation and it will provide Assignee thirty
(30) days’ prior written notice of any change in any its jurisdiction of
formation;
(b) it is the lawful owner of its Collateral and it has the sole right to grant
a security interest therein and will defend the Collateral against all claims
and demands of all persons and entities, subject to Permitted Liens;
(c) it will keep its Collateral free and clear of all attachments, levies,
taxes, liens, security interests and encumbrances of every kind and nature
(“Encumbrances”), except (i) Permitted Liens, (ii) Encumbrances securing the
Obligations, (iii) Encumbrances securing indebtedness of each Assignor not to
exceed $250,000 in the aggregate, (iv) Encumbrances related to intercompany
liabilities, (v) Encumbrances outstanding as of the Closing Date, and
(vi) Encumbrances that are expressly subordinated to the Obligations to the
reasonable satisfaction of Assignee;
(d) it will, at its cost and expense keep the Collateral in good state of repair
(ordinary wear and tear excepted) and will not waste or destroy the same or any
part thereof other than ordinary course discarding of items no longer used or
useful in its business;
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(e) it will not, without Assignee’s prior written consent, sell, exchange, lease
or otherwise dispose of any Collateral, whether by sale, lease or otherwise
(unless the proceeds of such sale, exchange, lease or disposal shall be used to
repay then outstanding Obligations), except for (A) assignments, transfers or
conveyances of intellectual property or interests therein in the ordinary course
of business, (B) the payment of obligations of Assignors in the ordinary course
of business, and (C) the sale of inventory in the ordinary course of business
and for the disposition or transfer in the ordinary course of business during
any fiscal year of obsolete and worn-out equipment or equipment no longer
necessary for its ongoing needs, having an aggregate fair market value of not
more than $250,000 and only to the extent that:
(i) the proceeds of each such disposition are used to acquire replacement
Collateral which is subject to Assignee’s perfected security interest (subject
to Permitted Liens, to repay obligations outstanding under the Kallina Security
Agreement), to repay then outstanding Obligations, or to pay general corporate
expenses; or
(ii) following the occurrence of an Event of Default which continues to exist
the proceeds of which are remitted to Assignee to be held as cash collateral for
obligations outstanding under the Kallina Security Agreement and/or the
Obligations;
(f) it will insure or cause the Collateral to be insured in Assignee’s name (as
an additional insured and lender loss payee) against loss or damage by fire,
theft, burglary, pilferage, loss in transit and such other hazards as Assignee
shall specify in amounts and under policies by insurers acceptable to Assignee
and all premiums thereon shall be paid by Assignors and the policies delivered
to Assignee. If Assignors fail to do so, Assignee may procure such insurance and
the cost thereof shall be promptly reimbursed by the Assignors and shall
constitute Obligations;
(g) it will at all reasonable times allow Assignee or Assignee’s representatives
reasonable access to and the right of inspection of the Collateral; and
(h) it hereby indemnifies and saves Assignee harmless from all loss, costs,
damage, liability and/or expense, including reasonable attorneys’ fees, that
Assignee may sustain or incur to enforce payment, performance or fulfillment of
any of the Obligations and/or in the enforcement of this Security Agreement or
in the prosecution or defense of any action or proceeding either against
Assignee or Assignors concerning any matter growing out of or in connection with
this Security Agreement, and/or any of the Obligations and/or any of the
Collateral except to the extent caused by Assignee’s own negligence or willful
misconduct (as determined by a court of competent jurisdiction in a final and
nonappealable decision).
3. Events of Default. The occurrence of either of the following events shall
constitute an event of default under this Security Agreement (each, an “Event of
Default”): (a) (i) the occurrence of an Event of Default (as defined in the
Note); or (b) any material portion of the Collateral shall be damaged, destroyed
or otherwise lost and such damage, destruction or loss is not covered by
insurance.
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4. Remedies. In case an Event of Default shall have occurred and is continuing,
Assignee may: (i) transfer any or all of the Collateral into its name, or into
the name of its nominee or nominees; (ii) exercise all corporate rights with
respect to the Collateral including, without limitation, all rights of
conversion, exchange, subscription or any other rights, privileges or options
pertaining to any shares of the Collateral as if it were the absolute owner
thereof, including, but without limitation, the right to exchange, at its
discretion, any or all of the Collateral upon the merger, consolidation,
reorganization, recapitalization or other readjustment of Assignors, or upon the
exercise by Assignors of any right, privilege or option pertaining to any of the
Collateral, and, in connection therewith, to deposit and deliver any and all of
the Collateral with any committee, depository, transfer agent, registrar or
other designated agent upon such terms and conditions as it may determine, all
without liability except to account for property actually received by it; and
(iii) subject to any requirement of applicable law, sell, assign and deliver the
whole or, from time to time, any part of the Collateral at the time held by
Assignee, at any private sale or at public auction, with or without demand,
advertisement or notice of the time or place of sale or adjournment thereof or
otherwise (all of which are hereby waived, except such notice as is required by
applicable law and cannot be waived), for cash or credit or for other property
for immediate or future delivery, and for such price or prices and on such terms
as Assignee in its sole discretion may determine, or as may be required by
applicable law. Each Assignor hereby waives and releases any and all right or
equity of redemption, whether after sale hereunder. At any such sale, unless
prohibited by applicable law, Assignee may bid for and purchase the whole or any
part of the Collateral so sold free from any such right or equity of redemption.
All moneys received by Assignee hereunder, whether upon sale of the Collateral
or any part thereof or otherwise, shall be held by Assignee and applied by it in
repayment of the Obligations. No failure or delay on the part of Assignee in
exercising any rights hereunder shall operate as a waiver of any such rights nor
shall any single or partial exercise of any such rights preclude any other or
future exercise thereof or the exercise of any other rights hereunder. Assignee
shall have no duty as to the collection or protection of the Collateral or any
income thereon nor any duty as to preservation of any rights pertaining thereto,
except to apply the funds in accordance with the requirements of Section 8
hereof. Assignee may exercise its rights with respect to property held hereunder
without resort to other security for or sources of reimbursement for the
Obligations. In addition to the foregoing, Assignee shall have all of the
rights, remedies and privileges of a secured party under the Uniform Commercial
Code of Florida regardless of the jurisdiction in which enforcement hereof is
sought.
5. Additional Remedies. If any Assignor defaults in the performance or
fulfillment of any of the terms, conditions, promises, covenants, provisions or
warranties on such Assignor’s part to be performed or fulfilled under or
pursuant to this Security Agreement, Assignee may, at its option without waiving
its right to enforce this Security Agreement according to its terms, immediately
or at any time thereafter and without notice to such Assignor, perform or
fulfill the same or cause the performance or fulfillment of the same for such
Assignor’s account and at such Assignor’s cost and expense, and the cost and
expense thereof (including reasonable attorneys’ fees) shall be added to the
Obligations and shall be payable on demand with interest thereon at the highest
rate permitted by law, or, at Assignee’s option, debited by Assignee from any
other deposit accounts in the name of such Assignor and controlled by Assignee.
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6. Power of Attorney. Upon the occurrence and during the continuance of an Event
of Default, each Assignor hereby appoints Assignee, or any other Person whom
Assignee may designate as such Assignor’s attorney, with power to: (a)(i)
execute any security related documentation on such Assignor’s behalf and to
supply any omitted information and correct patent errors in any documents
executed by such Assignor or on such Assignor’s behalf; (ii) to file financing
statements against such Assignor covering the Collateral (and, in connection
with the filing of any such financing statements, describe the Collateral as
“all assets and all personal property, whether now owned and/or hereafter
acquired” (or any substantially similar variation thereof)); (iii) sign such
Assignor’s name on any invoice or bill of lading relating to any accounts
receivable, drafts against account debtors, schedules and assignments of
accounts receivable, notices of assignment, financing statements and other
public records, verifications of accounts receivable and notices to or from
account debtors; and (iv) to do all other things Assignee deems necessary to
reasonably carry out the terms of Section 1 of this Security Agreement; and
(b) upon the occurrence and during the continuance of an Event of Default;
(v) endorse such Assignor’s name on any checks, notes, acceptances, money
orders, drafts or other forms of payment or security that may come into
Assignee’s possession; (vi) sign such Assignor’s name on any invoice or bill of
lading relating to any accounts receivable, drafts against account debtors,
schedules and assignments of accounts receivable, notices of assignment,
financing statements and other public records, verifications of accounts
receivable and notices to or from account debtors; (vii) verify the validity,
amount or any other matter relating to any accounts receivable by mail,
telephone, telegraph or otherwise with account debtors; (viii) do all other
things necessary to carry out this Agreement and all other related documents;
and (ix) notify the post office authorities to change the address for delivery
of such Assignor’s mail to an address designated by Assignee, and to receive,
open and dispose of all mail addressed to such Assignor. Each Assignor hereby
ratifies and approves all acts of the attorney and neither Assignee nor the
attorney will be liable for any acts of commission or omission, nor for any
error of judgment or mistake of fact or law other than gross negligence or
willful misconduct (as determined by a court of competent jurisdiction in a
final and non-appealable decision). This power being coupled with an interest,
is irrevocable so long as any Obligations remains unpaid.
7. Proceeds of Sale. The proceeds of any collection, recovery, receipt,
appropriation, realization or sale of the Collateral shall be applied by the
Assignee as follows:
(a) First, to the payment of all costs, reasonable expenses and charges of the
Assignee and to the reimbursement of the Assignee for the prior payment of such
costs, reasonable expenses and charges incurred in connection with the care and
safekeeping of the Collateral (including, without limitation, the reasonable
expenses of any sale or any other disposition of any of the Collateral),
attorneys’ fees and reasonable expenses, court costs, any other fees or expenses
incurred or expenditures or advances made by Assignee in the protection,
enforcement or exercise of its rights, powers or remedies hereunder;
(b) Second, to the payment of the Obligations, in whole or in part, in such
order as the Assignee may elect, whether or not such Obligations is then due;
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(c) Third, to such persons, firms, corporations or other entities as required by
applicable law including, without limitation, Section 679.615(1)(c) of the UCC;
and
(d) Fourth, to the extent of any surplus, to the applicable Assignor or as a
court of competent jurisdiction may direct.
In the event that the proceeds of any collection, recovery, receipt,
appropriation, realization or sale are insufficient to satisfy the Obligations,
the Assignors shall be liable for the deficiency plus the costs and fees of any
attorneys employed by Assignee to collect such deficiency
8. No Waiver. No delay or failure on Assignee’s part in exercising any right,
privilege or option hereunder shall operate as a waiver of such or of any other
right, privilege, remedy or option, and no waiver whatever shall be valid unless
in writing, signed by Assignee and then only to the extent therein set forth,
and no waiver by Assignee of any default shall operate as a waiver of any other
default or of the same default on a future occasion. Assignee’s books and
records containing entries with respect to the Obligations shall be admissible
in evidence in any action or proceeding. Assignee shall have the right to
enforce any one or more of the remedies available to Assignee, successively,
alternately or concurrently. Each Assignor agrees to join with Assignee in
executing such documents or other instruments to the extent required by the UCC
in form satisfactory to Assignee and in executing such other documents or
instruments as may be required or deemed necessary by Assignee for purposes of
affecting or continuing Assignee’s security interest in the Collateral.
9. Expenses. Each Assignor shall pay all of Assignee’s out-of-pocket costs and
expenses, including reasonable fees and disbursements of in-house or outside
counsel and appraisers, in connection with the preparation, execution and
delivery of the Loan Documents as set forth in the Note, and in connection with
the prosecution or defense of any action, contest, dispute, suit or proceeding
concerning any matter in any way arising out of, related to or connected with
any Loan Document. Each Assignor shall also pay all of Assignee’s reasonable
fees, charges, out-of-pocket costs and expenses, including fees and
disbursements of counsel and appraisers, in connection with (a) the preparation,
execution and delivery of any waiver, any amendment thereto or consent proposed
or executed in connection with the transactions contemplated by the Loan
Documents, (b) Assignee’s obtaining performance of the Obligations under the
Loan Documents, including, but not limited to the enforcement or defense of
Assignee’s security interests, assignments of rights and liens hereunder as
valid perfected security interests, (c) any attempt to inspect, verify, protect,
collect, sell, liquidate or otherwise dispose of any Collateral, (d) any
appraisals or re-appraisals of any property (real or personal) pledged to
Assignee by any Assignor as Collateral for, or any other Person as security for,
the Obligations hereunder and (e) any consultations in connection with any of
the foregoing. Each Assignor shall also pay Assignee’s customary bank charges
for all bank services (including wire transfers) performed or caused to be
performed by Assignee for Assignor at such Assignor’s request or in connection
with such Assignor’s loan account (if any) with Assignee. All such costs and
expenses together with all filing, recording and search fees, taxes and interest
payable by such Assignor to Assignee shall be payable on demand and shall be
secured by the Collateral. If any tax by any nation or government, any state or
other political subdivision thereof, and any agency, department or other entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government (each, a “Governmental Authority”) is
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or may be imposed on or as a result of any transaction between any Assignor, on
the one hand, and Assignee on the other hand, which Assignee is or may be
required to withhold or pay, Each Assignor hereby indemnifies and holds Assignee
harmless in respect of such taxes, and each Assignor will repay to Assignee the
amount of any such taxes which shall be charged to such Assignor’s account; and
until such Assignor shall furnish Assignee with indemnity therefor (or supply
Assignee with evidence satisfactory to it that due provision for the payment
thereof has been made), Assignee may hold without interest any balance standing
to such Assignor’s credit (if any) and Assignee shall retain its liens in any
and all Collateral.
10. Governing Law. THIS SECURITY AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF FLORIDA APPLICABLE TO
CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAWS. All of the rights, remedies, options, privileges and
elections given to Assignee hereunder shall inure to the benefit of Assignee’s
successors and assigns. The term “Assignee” as herein used shall include
Assignee, any parent of Assignee, any of Assignee’s subsidiaries and any
co-subsidiaries of Assignee’s parent, whether now existing or hereafter created
or acquired, and all of the terms, conditions, promises, covenants, provisions
and warranties of this Agreement shall inure to the benefit of each of the
foregoing, and shall bind the representatives, successors and assigns of each
Assignor.
11. Jurisdiction. Each Assignor hereby consents and agrees that the state or
federal courts located in the County of Palm Beach, State of Florida shall have
exclusive jurisdiction to hear and determine any claims or disputes between
Assignors, on the one hand, and Assignee, on the other hand, pertaining to this
Security Agreement or to any matter arising out of or related to this Security
Agreement, provided, that Assignee and Assignors acknowledge that any appeals
from those courts may have to be heard by a court located outside of the County
of Palm Beach, State of Florida, and further provided, that nothing in this
Security Agreement shall be deemed or operate to preclude Assignee from bringing
suit or taking other legal action in any other jurisdiction to collect, the
Obligations, to realize on the Collateral or any other security for the
Obligations, or to enforce a judgment or other court order in favor of Assignee.
Each Assignor expressly submits and consents in advance to such jurisdiction in
any action or suit commenced in any such court, and each Assignor hereby waives
any objection which it may have based upon lack of personal jurisdiction,
improper venue or forum non conveniens. Each Assignor hereby waives personal
service of the summons, complaint and other process issues in any such action or
suit and agrees that service of such summons, complaint and other process may be
made by registered or certified mail addressed to such Assignor at the address
set forth on the signature lines hereto and that service so made shall be deemed
completed upon such Assignor’s actual receipt thereof.
The parties desire that their disputes be resolved by a judge applying such
applicable laws. Therefore, to achieve the best combination of the benefits of
the judicial system and of arbitration, the parties hereto waive all rights to
trial by jury in any action, suite, or proceeding brought to resolve any
dispute, whether arising in contract, tort, or otherwise between Assignee,
and/or Assignors arising out of, connected with, related or incidental to the
relationship established between them in connection with this Security Agreement
or the transactions related hereto.
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12. Notices. All notices from Assignee to Assignors shall be sufficiently given
if mailed or delivered to Assignor’s address set forth below.
13. Counterparts. This Security Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which when
taken together shall constitute one and the same agreement. Any signature
delivered by a party by facsimile transmission shall be deemed an original
signature hereto.

            Very truly yours,

DIGITAL ANGEL CORPORATION
      By:   /s/ Barry Edelstein         Name:   Barry Edelstein        Title:  
Pres. & CEO       Address:

 

 
        DIGITAL ANGEL TECHNOLOGY CORPORATION
      By:   /s/ Barry Edelstein         Name:   Barry Edelstein        Title:  
Pres. & CEO        FEARING MANUFACTURING CO., INC.
      By:   /s/ Barry Edelstein         Name:   Barry Edelstein        Title:  
Pres. & CEO        DIGITAL ANGEL INTERNATIONAL
      By:   /s/ Barry Edelstein         Name:   Barry Edelstein        Title:  
Pres. & CEO     

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            ACKNOWLEDGED:

APPLIED DIGITAL SOLUTIONS, INC.
      By:   /s/ Michael Krawitz         Name:   Michael Krawitz        Title:  
CEO     

 

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EXHIBIT A

Eligible Subsidiaries

Digital Angel Technology Corporation, a Minnesota corporation

Fearing Manufacturing Co., Inc., a Minnesota corporation

Digital Angel International, a Minnesota corporation