**Exhibit 10.32****SECURITY AGREEMENT**This Security Agreement is made as of August 31, 2007 by and among KALLINA CORPORATION, aDelaware corporation (“Lender”), DIGITAL ANGEL CORPORATION, a Delaware corporation (the“Parent”), and each party listed on Exhibit A attached hereto (each an“Eligible Subsidiary” and collectively, the “Eligible Subsidiaries”) the Parent andeach Eligible Subsidiary, each a “Company” and collectively, the “Companies”).**BACKGROUND**The Companies have requested that Lender make advances available to the Companies; andLender has agreed to make such advances on the terms and conditions set forth in thisAgreement.**AGREEMENT**NOW, THEREFORE, in consideration of the mutual covenants and undertakings and the terms andconditions contained herein, the parties hereto agree as follows:1. General Definitions and Terms; Rules of Construction.(a) General Definitions. Capitalized terms used in this Agreement shall have themeanings assigned to them in Annex A.(b) Accounting Terms. Any accounting terms used in this Agreement which are notspecifically defined shall have the meanings customarily given them in accordance with GAAP andall financial computations shall be computed, unless specifically provided herein, in accordancewith GAAP consistently applied.(c) Other Terms. All other terms used in this Agreement and defined in the UCC,shall have the meaning given therein unless otherwise defined herein.(d) Rules of Construction. All Schedules, Addenda, Annexes and Exhibits hereto orexpressly identified to this Agreement are incorporated herein by reference and taken togetherwith this Agreement constitute but a single agreement. The words “herein”, “hereof” and“hereunder” or other words of similar import refer to this Agreement as a whole, including theExhibits, Addenda, Annexes and Schedules thereto, as the same may be from time to time amended,modified, restated or supplemented, and not to any particular section, subsection or clausecontained in this Agreement. Wherever from the context it appears appropriate, each term statedin either the singular or plural shall include the singular and the plural, and pronouns stated inthe masculine, feminine or neuter gender shall include the masculine, the feminine and the neuter.The term “or” is not exclusive. The term “including” (or any form thereof) shall not be limitingor exclusive. All references to statutes and related regulations
 
 

 
shall include any amendments of same and any successor statutes and regulations. Allreferences in this Agreement or in the Schedules, Addenda, Annexes and Exhibits to this Agreementto sections, schedules, disclosure schedules, exhibits, and attachments shall refer to thecorresponding sections, schedules, disclosure schedules, exhibits, and attachments of or to thisAgreement. All references to any instruments or agreements, including references to any of thisAgreement or the Ancillary Agreements shall include any and all modifications or amendmentsthereto and any and all extensions or renewals thereof.2. Loan Facility.(a) Loans.(i) Subject to the terms and conditions set forth herein and in the Ancillary Agreements,Lender may make loans (the “Loans”) to the Companies from time to time during the Termwhich, in the aggregate at any time outstanding, will not exceed the lesser of (x) (I) the CapitalAvailability Amount minus (II) such reserves as Lender may deem proper and necessary from time totime in its commercially reasonable judgment (the “Reserves”) and (y) an amount equal to(I) the Accounts Availability plus (II) the Inventory Availability, minus (III) the Reserves. Theamount derived at any time from Section 2(a)(i)(y)(I) plus Section 2(a)(i)(y)(II) minus2(a)(i)(y)(III) shall be referred to as the “Formula Amount.” The Companies shall, jointlyand severally, execute and deliver to Lender on the Closing Date the Note evidencing the Loansfunded on the Closing Date. The Companies hereby each acknowledge and agree that Lender’sobligation to purchase the Note from the Companies on the Closing Date shall be contingent upon thesatisfaction (or waiver by Lender) of the items and matters set forth in the closing checklistprovided by Lender to the Companies on or prior to the Closing Date. The Companies hereby eachfurther acknowledge and agree that, immediately prior to each borrowing hereunder and immediatelyafter giving effect thereto, the Companies shall be deemed to have certified to Lender that at thetime of each such proposed borrowing and also after giving effect thereto (i) there shall exist noEvent of Default, (ii) all representations, warranties and covenants made by the Companies inconnection with this Agreement and the Ancillary Agreements are true, correct and complete in allmaterial respects and (iii) all of each Company’s and its respective Subsidiaries’ covenantrequirements under this Agreement and the Ancillary Agreements have been met in all materialrespects. The Companies hereby agree to provide a certificate confirming the foregoingconcurrently with each request for a borrowing hereunder.(ii) Notwithstanding the limitations set forth above, if requested by any Company, Lenderretains the right to lend to such Company from time to time such amounts in excess of suchlimitations as Lender may determine in its sole discretion (each, a “PermittedOveradvance”). In connection with each such request by one or more Companies, the Companiesshall be deemed to have certified, as of the time of such proposed borrowing and immediately aftergiving effect thereto, to the satisfaction of all Overadvance Conditions. For purposes hereof,“Overadvance Conditions” means (i) no Event of Default shall exist and be continuing as of suchdate; (ii) all representations, warranties and covenants made by the Companies in connection withthe Security Agreement and the Ancillary Agreements shall be true, correct and complete in allmaterial respects as of such date; and (iii) the Companies and their respective Subsidiaries shallhave taken all action necessary to grant Lender “control” over all of the Companies’ and theirrespective Subsidiaries’ Deposit Accounts (the “Control 
 
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Accounts”), with any agreements establishing “control” to be in form and substancesatisfactory to Lender. “Control” over such Control Accounts shall be released upon theindefeasible repayment in full and termination of the Permitted Overadvance (together with allaccrued interest and fees which remain unpaid in respect thereof). The Companies hereby agree toprovide a certificate confirming the satisfaction of the Overadvance Conditions concurrently withthe request for same.(iii) If any interest, fees, costs or charges payable to Lender hereunder are not paid whendue, each of the Companies shall thereby be deemed to have requested, and Lender is herebyauthorized at its discretion to make and charge to the Companies’ account, a Loan as of such datein an amount equal to such unpaid interest, fees, costs or charges.(iv) If any Company at any time fails to perform or observe any of the covenants contained inthis Agreement or any Ancillary Agreement, Lender may, but need not, perform or observe suchcovenant on behalf and in the name, place and stead of such Company (or, at Lender’s option, inLender’s name) and may, but need not, take any and all other actions which Lender may deemnecessary to cure or correct such failure (including the payment of taxes, the satisfaction ofLiens, the performance of obligations owed to Account Debtors, lessors or other obligors, theprocurement and maintenance of insurance, the execution of assignments, security agreements andfinancing statements, and the endorsement of instruments). The amount of all monies expended andall costs and expenses (including attorneys’ fees and legal expenses) incurred by Lender inconnection with or as a result of the performance or observance of such agreements or the taking ofsuch action by Lender shall be charged to the Companies’ account as a Loan and added to theObligations. To facilitate Lender’s performance or observance of such covenants by each Company,each Company hereby irrevocably appoints Lender, or Lender’s delegate, acting alone, as suchCompany’s attorney in fact (which appointment is coupled with an interest) with the right (but notthe duty) from time to time to create, prepare, complete, execute, deliver, endorse or file in thename and on behalf of such Company any and all instruments, documents, assignments, securityagreements, financing statements, applications for insurance and other agreements and writingsrequired to be obtained, executed, delivered or endorsed by such Company.(v) Lender will account to Company Agent monthly with a statement of all Loans and otheradvances, charges and payments made pursuant to this Agreement, and such account rendered by Lendershall be deemed final, binding and conclusive unless Lender is notified by Company Agent in writingto the contrary within thirty (30) days of the date each account was rendered specifying the itemor items to which objection is made.(vi) During the Term, the Companies may borrow and prepay Loans in accordance with the termsand conditions hereof.(vii) (x) If any Eligible Account is not paid by the Account Debtor within ninety (90) daysafter the date that such Eligible Account was invoiced or within 180 days if such Eligible Accountis covered by credit default insurance acceptable to the Lender or (y) if any Account Debtorasserts a deduction, dispute, contingency, set-off, or counterclaim with respect to any EligibleAccount, (each, a “Delinquent Account”), the Companies shall jointly and severally (i)reimburse Lender for the amount of the Loans made with respect to such DelinquentAccount or (ii) immediately replace such Delinquent Account with an otherwise EligibleAccount.
 
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3. Repayment of the Loans. The Companies (a) may prepay the Obligations from time totime in accordance with the terms and provisions of the Note (and Section 17 hereof if suchprepayment is due to a termination of this Agreement); (b) shall repay on the expiration of theTerm (i) the then aggregate outstanding principal balance of the Loans together with accrued andunpaid interest, fees and charges and; (ii) all other amounts owed Lender under this Agreement andthe Ancillary Agreements; and (c) absent approval of Permitted Overadvance by Lender pursuant toSection 2(a)(ii), shall repay on any day on which the then aggregate outstanding principal balanceof the Loans are in excess of the Formula Amount at such time, Loans in an amount equal to suchexcess and (d) shall repay any Permitted Overadvance on the date specified by Lender upon approvalof such Permitted Overadvance. Any payments of principal, interest, fees or any other amountspayable hereunder or under any Ancillary Agreement shall be made prior to 12:00 noon (New Yorktime) on the due date thereof in immediately available funds.4. Procedure for Loans. Company Agent may by written notice request a borrowing ofLoans prior to 12:00 noon (New York time) on the Business Day of its request to incur, on the nextBusiness Day, a Loan. Together with each request for a Loan (or at such other intervals as Lendermay request), Company Agent shall deliver to Lender a Borrowing Base Certificate in the form ofExhibit B attached hereto, which shall be certified as true and correct by the ChiefExecutive Officer or Chief Financial Officer, Corporate Controller or Animal Applications SegmentCorporate Controller of Company Agent together with all supporting documentation relating thereto.All Loans shall be disbursed from whichever office or other place Lender may designate from time totime and shall be charged to the Companies’ account on Lender’s books. The proceeds of each Loanmade by Lender shall be made available to Company Agent on the Business Day following the BusinessDay so requested in accordance with the terms of this Section 4 by way of credit to the applicableCompany’s operating account maintained with such bank as Company Agent designated to Lender. Anyand all Obligations due and owing hereunder may be charged to the Companies’ account and shallconstitute Loans.5. Interest and Payments.(a) Interest.(i) Except as modified by Section 5(a)(iii) below, the Companies shall jointly and severallypay interest at the Contract Rate on the unpaid principal balance of each Loan until such time assuch Loan is collected in full in good funds in dollars of the United States of America.(ii) Interest and payments shall be computed on the basis of actual days elapsed in a year of360 days. At Lender’s option, Lender may charge the Companies’ account for said interest.(iii) Effective upon the occurrence of any Event of Default and for so long as any Event ofDefault shall be continuing, the Contract Rate shall automatically beincreased as set forth in the Note (such increased rate, the “Default Rate”), and alloutstanding Obligations, including unpaid interest, shall continue to accrue interest from the dateof such Event of Default at the Default Rate applicable to such Obligations.
 
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(iv) In no event shall the aggregate interest payable hereunder or under the Note exceed themaximum rate permitted under any applicable law or regulation, as in effect from time to time (the“Maximum Legal Rate”), and if any provision of this Agreement or any Ancillary Agreement isin contravention of any such law or regulation, interest payable under this Agreement and eachAncillary Agreement shall be computed on the basis of the Maximum Legal Rate (so that such interestwill not exceed the Maximum Legal Rate).(v) The Companies shall jointly and severally pay principal, interest and all other amountspayable hereunder, or under any Ancillary Agreement, without any deduction whatsoever, includingany deduction for any set-off or counterclaim.(b) Payment; Certain Closing Conditions.(i) Payment. Upon execution of this Agreement by each Company and Lender, theCompanies shall jointly and severally pay to Laurus Capital Management, LLC, the investment managerof Lender (“LCM”), a non-refundable payment in an amount equal to $237,692.30 plus outside counselfees, which payment is intended to defray certain of LCM’s due diligence, legal and other expensesincurred in connection with the entering into of this Agreement and the Ancillary Agreements andall related matters. All amounts required to be paid under this Section 5(b)(i) will be paid onthe Closing Date.(ii) Overadvance Payment. Without affecting Lender’s rights hereunder in the eventthe Loans exceed the Formula Amount and such excess is not a Permitted Overadvance (each suchevent, an “Unpermitted Overadvance”), the amounts which the Unpermitted Overadvance exceedsthe Formula Amount (the “Overadvance Amount”) all such Overadvances shall bear additional interestat a rate equal to two percent (2%) per annum for all times that the Overadvance Amount shall bein excess of the Formula Amount. All interest amounts that are incurred pursuant to this Section5(b)(ii) shall be due and payable by the Companies monthly, in arrears, on the first business dayof each calendar month and upon expiration of the Term.(iii) Financial Information Default. Without affecting Lender’s other rights andremedies, in the event any Company fails to deliver the financial information required by Section11 on or before the date required by this Agreement, the Companies shall jointly and severally payLender an aggregate fee in the amount of $500.00 per week (or portion thereof) for each suchfailure until such failure is cured to Lender’s satisfaction or waived in writing by Lender. Allamounts that are incurred pursuant to this Section 5(b)(iii) shall be due and payable by theCompanies monthly, in arrears, on the first business of each calendar month and upon expiration ofthe Term.
 
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6. Security Interest.(a) To secure the prompt payment to Lender of the Obligations, each Company hereby assigns,pledges and grants to Lender a continuing security interest in andLien upon all of the Collateral. All of each Company’s Books and Records relating to theCollateral shall, until delivered to or removed by Lender, be kept by such Company in trust forLender until all Obligations have been paid in full. Each confirmatory assignment schedule orother form of assignment hereafter executed by each Company shall be deemed to include theforegoing grant, whether or not the same appears therein.(b) Each Company hereby (i) authorizes Lender to file any financing statements, continuationstatements or amendments thereto that (x) indicate the Collateral (1) as all assets and personalproperty of such Company or words of similar effect, regardless of whether any particular assetcomprised in the Collateral falls within the scope of Article 9 of the UCC of such jurisdiction,or (2) as being of an equal or lesser scope or with greater detail, and (y) contain any otherinformation required by Part 5 of Article 9 of the UCC for the sufficiency or filing officeacceptance of any financing statement, continuation statement or amendment and (ii) ratifies itsauthorization for Lender to have filed any initial financial statements, or amendments thereto iffiled prior to the date hereof. Each Company acknowledges that it is not authorized to file anyfinancing statement or amendment or termination statement with respect to any financing statementwithout the prior written consent of Lender and agrees that it will not do so without the priorwritten consent of Lender, subject to such Company’s rights under Section 9-509(d)(2) of the UCC.(c) Upon termination of this Agreement for an Event of Default (taking into consideration anyperiod for the cure of any breach or Event of Default), each Company hereby grants to Lender anirrevocable, non-exclusive license (exercisable only during the continuance of an Event of Defaultwithout payment of royalty or other compensation to such Company) to use, transfer, license orsublicense any Intellectual Property now owned, licensed to, or hereafter acquired by suchCompany, and wherever the same may be located, and including in such license access to all mediain which any of the licensed items may be recorded or stored and to all computer and automaticmachinery software and programs used for the compilation or printout thereof, and represents,promises and agrees, subject to the proviso below, that any such license or sublicense is not andwill not be in conflict with the contractual or commercial rights of any third Person; provided,that such license is subject to and expressly excludes any Intellectual Property that is thesubject of the exclusive licenses and international distributorship agreements and any third partyIntellectual Property to which the Companies do not have the right to sublicense; and providedthat such license or other transfer will terminate on the termination of this Agreement and thepayment in full of all Obligations under the Note.7. Representations, Warranties and Covenants Concerning the Collateral. Each Companyrepresents, warrants (each of which such representations and warranties shall be deemed to be trueand correct in all material respects upon the making of each request for a Loan and as of the timeof each and every Loan hereunder, subject to the terms of this Agreement) and covenants as follows:(a) Except as set forth in Schedule 7(a), all of the Collateral (i) is owned by it free andclear of all Liens (including any claims of infringement) except those in Lender’s favor andPermitted Liens and (ii) is not subject to any agreement prohibiting the granting of a Lien orrequiring notice of or consent to the granting of a Lien.
 
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(b) it shall not encumber, mortgage, pledge, assign or grant any Lien in any Collateral orany other assets to anyone other than Lender and except for Permitted Liens.(c) the Liens granted pursuant to this Agreement, upon due completion of the filings of UCC-1financing statements in respect of each grantor of such Liens in the applicable filing offices ofthe states of organization of such grantor and the completion of the other filings and actionslisted on Schedule 7(c) (which, in the case of all filings and other documents referred toin said Schedule, have been delivered to Lender in duly executed form) constitute valid perfectedsecurity interests in all of the Collateral in favor of Lender as security for the prompt andcomplete payment and performance of the Obligations, enforceable in accordance with the termshereof against any and all of its creditors and purchasers and such security interest is prior toall other Liens in existence on the date hereof, other than Permitted Liens.(d) no effective security agreement, mortgage, deed of trust, financing statement, equivalentsecurity or Lien instrument or continuation statement covering all or any part of the Collateralis or will be on file or of record in any public office, except those relating to Permitted Liens.(e) it shall not dispose of any of the Collateral whether by sale, lease or otherwise exceptfor the sale of Inventory in the ordinary course of business and for the disposition or transferin the ordinary course of business during any fiscal year of obsolete and worn-out Equipmenthaving an aggregate fair market value of not more than $100,000 and only to the extent that (i)the proceeds of any such disposition are used to acquire replacement Equipment which is subject toLender’s first priority security interest (subject to Permitted Liens) or are used to repay Loansor to pay general corporate expenses, or (ii) following the occurrence of an Event of Defaultwhich continues to exist the proceeds of which are remitted to Lender to be held as cashcollateral for the Obligations.(f) it shall defend the right, title and interest of Lender in and to the Collateral againstthe claims and demands of all Persons whomsoever, and take such actions, including (i) all actionsnecessary to grant Lender “control” of any Investment Property, Deposit Accounts, Letter-of-CreditRights or electronic Chattel Paper owned by it, with any agreements establishing control to be inform and substance satisfactory to Lender, (ii) the prompt (but in no event later than five (5)Business Days following Lender’s request therefor) delivery to Lender of all original Instruments,Chattel Paper, negotiable Documents and certificated Stock owned by it (in each case, accompaniedby stock powers, allonges or other instruments of transfer executed in blank), (iii) notificationof Lender’s interest in Collateral at Lender’s request, and (iv) the institution of litigationagainst third parties as shall be prudent in order to protect and preserve its and/or Lender’srespective and several interests in the Collateral.(g) it shall promptly, and in any event within five (5) Business Days after the same isacquired by it, notify Lender of any commercial tort claim (as defined in the UCC) acquired by itand unless otherwise consented by Lender, it shall enter into a supplement to this Agreementgranting to Lender a Lien in such commercial tort claim.
 
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(h) it shall place notations upon its Books and Records and any of its financial statementsto disclose Lender’s Lien in the Collateral.(i) if it retains possession of any Chattel Paper or Instrument with Lender’s consent, uponLender’s request such Chattel Paper and Instruments shall be marked with the following legend:“This writing and obligations evidenced or secured hereby are subject to the security interest ofKallina Corporation” Notwithstanding the foregoing, upon the reasonable request of Lender, suchChattel Paper and Instruments shall be delivered to Lender.(j) it shall perform in a reasonable time all other steps requested by Lender to create andmaintain in Lender’s favor a valid perfected first Lien in all Collateral subject only toPermitted Liens.(k) it shall notify Lender promptly and in any event within three (3) Business Days afterobtaining knowledge thereof (i) of any event or circumstance that, to its knowledge, would causeLender to consider any then existing Account and/or Inventory as no longer constituting anEligible Account or Eligible Inventory, as the case may be; (ii) of any material delay in itsperformance of any of its obligations to any Account Debtor; (iii) of any assertion by any AccountDebtor of any material claims, offsets or counterclaims; (iv) of any allowances, credits and/ormonies granted by it to any Account Debtor; (v) of all material adverse information relating tothe financial condition of an Account Debtor; (vi) of any material return of goods; and (vii) ofany loss, damage or destruction of any of the Collateral.(l) all Eligible Accounts (i) represent complete bona fide transactions which require nofurther act under any circumstances on its part to make such Accounts payable by the AccountDebtors, (ii) are not subject to any present, future contingent offsets or counterclaims, and(iii) do not represent bill and hold sales, consignment sales, guaranteed sales, sale or return orother similar understandings or obligations of any Affiliate or Subsidiary of such Company. Ithas not made, nor will it make, any agreement with any Account Debtor with respect to any EligibleAccount for any extension of time for the payment of any Eligible Account, any compromise orsettlement for less than the full amount thereof, any release of any Account Debtor from liabilitytherefor, or any deduction therefrom except a discount or allowance for prompt or early paymentallowed by it in the ordinary course of its business consistent with historical practice and aspreviously disclosed to Lender in writing.(m) it shall keep and maintain its Equipment in good operating condition, except for ordinarywear and tear, and shall make all necessary repairs and replacements thereof so that the value andoperating efficiency shall at all times be maintained and preserved. It shall not permit any suchitems to become a Fixture to real estate or accessions to other personal property.(n) it shall maintain and keep all of its Books and Records concerning the Collateral at itsexecutive offices listed in Schedule 12(aa).
 
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(o) it shall maintain and keep the tangible Collateral at the addresses listed inSchedule 12(aa), provided, that it may change such locations or open a new location,provided that it provides Lender at least thirty (30) days prior written notice of such changes ornewlocation and (ii) prior to such change or opening of a new location where Collateral having avalue of more than $250,000 will be located, it executes and delivers to Lender such agreementsdeemed reasonably necessary or prudent by Lender, including landlord agreements, mortgageeagreements and warehouse agreements, each in form and substance satisfactory to Lender, toadequately protect and maintain Lender’s security interest in such Collateral.(p) Schedule 7(p) lists all banks and other financial institutions at which itmaintains deposits and/or other accounts, and such Schedule correctly identifies the name, addressand telephone number of each such depository, the name in which the account is held, a descriptionof the purpose of the account, and the complete account number. It shall not establish anydepository or other bank account with any financial institution (other than the accounts set forthon Schedule 7(p)) without Lender’s prior written consent.(q) All Inventory manufactured by it in the United States of America shall be produced inaccordance with the requirements of the Federal Fair Labor Standards Act of 1938, as amended andall rules, regulations and orders related thereto or promulgated thereunder.8. Payment of Accounts.(a) Each Company will irrevocably direct all of its present and future Account Debtors andother Persons obligated to make payments constituting Collateral to make such payments directly tothe lockboxes maintained by such Company (the “Lockboxes”) with [North Fork] Bank or suchother financial institution accepted by Lender in writing as may be selected by such Company (the“Lockbox Bank”) pursuant to the terms of the certain agreements among one or moreCompanies, Lender and/or the Lockbox Bank dated as of [ _____ , 200 _____ ]. On or prior to theClosing Date, each Company shall and shall cause the Lockbox Bank to enter into all suchdocumentation acceptable to Lender pursuant to which, among other things, the Lockbox Bank agreesto: (a) sweep the Lockbox on a daily basis and deposit all checks received therein to an accountdesignated by Lender in writing and (b) comply only with the instructions or other directions ofLender concerning the Lockbox. All of each Company’s invoices, account statements and otherwritten or oral communications directing, instructing, demanding or requesting payment of anyAccount of any Company or any other amount constituting Collateral shall conspicuously direct thatall payments be made to the Lockbox or such other address as Lender may direct in writing. If,notwithstanding the instructions to Account Debtors, any Company receives any payments, suchCompany shall immediately remit such payments to Lender in their original form with all necessaryendorsements. Until so remitted, such Company shall hold all such payments in trust for and asthe property of Lender and shall not commingle such payments with any of its other funds orproperty.(b) At Lender’s election, following the occurrence of an Event of Default which iscontinuing, Lender may notify each Company’s Account Debtors of Lender’s security interest in theAccounts, collect them directly and charge the collection costs and expenses thereof to Company’sand the Eligible Subsidiaries joint and several account.
 
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9. Collection and Maintenance of Collateral.(a) Lender may verify each Company’s Accounts from time to time, but not more often than onceevery three (3) months, unless an Event of Default has occurred and is continuing, utilizing anaudit control company or any other agent of Lender.(b) Proceeds of Accounts received by Lender will be deemed received on the Business Day afterLender’s receipt of such proceeds in good funds in dollars of the United States of America to anaccount designated by Lender. Any amount received by Lender after 12:00 noon (New York time) onany Business Day shall be deemed received on the next Business Day.(c) As Lender receives the proceeds of Accounts of any Company, it shall (i) apply suchproceeds, as required, to amounts outstanding under the Note, and (ii) remit all such remainingproceeds (net of interest, fees and other amounts then due and owing to Lender hereunder) toCompany Agent (for the benefit of the applicable Companies) upon request (but no more often thantwice a week). Notwithstanding the foregoing, following the occurrence and during the continuanceof an Event of Default, Lender, at its option, may (a) apply such proceeds to the Obligations insuch order as Lender shall elect, (b) hold all such proceeds as cash collateral for theObligations and each Company hereby grants to Lender a security interest in such cash collateralamounts as security for the Obligations and/or (c) do any combination of the foregoing.10. Inspections and Appraisals. At all times during normal business hours, Lender,and/or any agent of Lender shall have the right to (a) have access to, visit, inspect, review,evaluate and make physical verification and appraisals of each Company’s properties and theCollateral, (b) inspect, audit and copy (or take originals if necessary) and make extracts fromeach Company’s Books and Records, including management letters prepared by the Accountants, and (c)discuss with each Company’s directors, principal officers, and independent accountants, eachCompany’s business, assets, liabilities, financial condition, results of operations and businessprospects. Each Company will deliver to Lender any instrument necessary for Lender to obtainrecords from any service bureau maintaining records for such Company. If any internally preparedfinancial information, including that required under this Section is unsatisfactory in any mannerto Lender, Lender may request that the Accountants review the same.11. Financial Reporting. Company Agent will deliver, or cause to be delivered, toLender each of the following, which shall be in form and detail acceptable to Lender:(a) As soon as available, and in any event within ninety (90) days after the end of eachfiscal year of the Parent the Parent’s audited financial statements with a report of independentcertified public accountants of recognized standing selected by the Parent and reasonablyacceptable to Lender (the “Accountants”), which annual financial statements shall bewithout qualification and shall include each of the Parent’s and each of its Subsidiaries’ balancesheet as at the end of such fiscal year and the related statements of each of the Parent’s andeach of its Subsidiaries’ income, retained earnings and cash flows for the fiscal year then ended,prepared on a consolidating and consolidated basis to include the Parent, each Subsidiary of theParent and each of their respective affiliates, prepared in accordance with
 
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GAAP, together with (i) if and when available, copies of any management letters prepared bythe Accountants; and (ii) a certificate of the Parent’s President, Chief Executive Officer orChief Financial Officer stating that such financial statements have been prepared in accordancewith GAAP and whether or not such officer has knowledge of the occurrence of any Default or Eventof Default hereunder and, if so, stating in reasonable detail the facts with respect thereto;provided, however that if the ADSX Merger is consummated, then the Company shall deliver auditedannual financials statements of Applied Digital which shall include consolidated and consolidatingbalance sheets as at the end of such fiscal year and results of operations for the fiscal yearthen ended for each of the Applied Digital subsidiaries, including the Parent, with a report ofindependent certified public accountants of recognized standing selected by Applied Digital andreasonably acceptable to Lender which annual financial statements shall be without qualification,all in reasonable detail and prepared in accordance with GAAP, together with (i) if and whenavailable, copies of any management letters prepared by the Accountants; and (ii) a certificate ofthe Applied Digital’s President, Chief Executive Officer or Chief Financial Officer stating thatsuch financial statements have been prepared in accordance with GAAP and whether or not suchofficer has knowledge of the occurrence of any Default or Event of Default hereunder and, if so,stating in reasonable detail the facts with respect thereto(b) As soon as available and in any event within forty five (45) days after the end of eachfiscal quarter of the Parent, an unaudited/internal balance sheet and statements of income,retained earnings and cash flows of each of the Parent’s and each of its Subsidiaries’ as at theend of and for such quarter and for the year to date period then ended, prepared on aconsolidating and consolidated basis to include the Parent, each Subsidiary of the Parent and eachof their respective affiliates, all prepared in accordance with GAAP, subject to year-endadjustments and accompanied by a certificate of the Parent’s President, Chief Executive Officer orChief Financial Officer, stating (i) that such financial statements have been prepared inaccordance with GAAP, subject to year-end audit adjustments, and (ii) whether or not such officerhas knowledge of the occurrence of any Default or Event of Default hereunder not theretoforereported and remedied and, if so, stating in reasonable detail the facts with respect thereto; ;provided, however that if the ADSX Merger is consummated, then the Company shall deliverunaudited/internal balance sheet and statements of income, retained earnings and cash flows ofApplied Digital which shall include consolidated and consolidating balance sheets as at the end ofsuch fiscal quarter and results of operations for the fiscal quarter then ended for each of theApplied Digital subsidiaries, including the Parent, in reasonable detail and stating incomparative form the figures for the corresponding date and periods in the previous year, allprepared in accordance with GAAP, subject to year-end adjustments and accompanied by a certificateof Applied Digital’s President, Chief Executive Officer or Chief Financial Officer, stating (i)that such financial statements have been prepared in accordance with GAAP, subject to year-endaudit adjustments, and (ii) whether or not such officer has knowledge of the occurrence of anyDefault or Event of Default hereunder not theretofore reported and remedied and, if so, stating inreasonable detail the facts with respect thereto;(c) As soon as available and in any event within thirty (30) days after the end of eachcalendar month, an unaudited/internal balance sheet and statements of income, retained earnings ofeach of the Parent and its Eligible Subsidiaries as at the end of and for such month and for theyear to date period then ended, prepared on a consolidating and consolidated basis to include theParent, each Subsidiary of the Parent and each of their respective affiliates, all
 
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prepared in accordance with GAAP, subject to year-end adjustments and accompanied by acertificate of the Parent’s President, Chief Executive Officer or Chief Financial Officer, stating(i) that such financial statements have been prepared in accordance with GAAP, subject to year-endaudit adjustments, and (ii) whether or not such officer has knowledge of the occurrence of anyDefault or Event of Default hereunder not theretofore reported and remedied and, if so, stating inreasonable detail the facts with respect thereto;(d) Within thirty (30) days after the end of each month (or more frequently if Lender sorequests, provided that, so long as there is no Event of Default, the Company shall not berequired to produce such report more than twice per month), agings of each Company’s Accounts,unaudited trial balances and their accounts payable and a calculation of each Company’s Accounts,Eligible Accounts, Inventory and/or Eligible Inventory, provided, however, that if Lender shallrequest the foregoing information more often than as set forth in the immediately precedingclause, each Company shall have fifteen (15) days from each such request to comply with Lender’sdemand;(e) Promptly after (i) the filing thereof, copies of the Parent’s most recent registrationstatements and annual, quarterly, monthly or other regular reports which the Parent files with theSecurities and Exchange Commission (the “SEC”), and (ii) the issuance thereof, copies ofsuch financial statements, reports and proxy statements as the Parent shall send to itsstockholders.(f) The Parent shall deliver, or cause the applicable Subsidiary of the Parent to deliver,such other information as Lender shall reasonably request.12. Additional Representations and Warranties. Each Company hereby represents andwarrants to Lender as follows:(a) Organization, Good Standing and Qualification. (i) It and each of its EligibleSubsidiaries is a corporation, partnership or limited liability company, as the case may be, dulyorganized, validly existing and in good standing under the laws of its jurisdiction oforganization. It and each of its Eligible Subsidiaries has the corporate, limited liabilitycompany or partnership, as the case may be, power and authority to own and operate itsproperties and assets and, insofar as it is or shall be a party thereto, to (i) execute anddeliver this Agreement and the Ancillary Agreements, (ii) to issue and sell the Note, (iii) toissue and sell the Warrants and the shares of Common Stock issuable upon exercise of the Warrants(the “Warrant Shares”), and to (iv) carry out the provisions of this Agreement and theAncillary Agreements and to carry on its business as presently conducted. It and each of itsEligible Subsidiaries is duly qualified and is authorized to do business and is in good standingas a foreign corporation, partnership or limited liability company, as the case may be, in alljurisdictions in which the nature or location of its activities and of its properties (both ownedand leased) makes such qualification necessary, except for those jurisdictions in which failure todo so has not had, or could not reasonably be expected to have, individually or in the aggregate,a Material Adverse Effect.
 
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(ii) Holdings is a limited liability company duly organized, validly existing and ingood standing under the laws of its jurisdiction of organization. Holdings has thelimited liability company power and authority to own and operate its properties andassets and, insofar as it is or shall be a party thereto and to carry on its business aspresently conducted. Holdings It and each of its Eligible Subsidiaries is duly qualifiedand is authorized to do business and is in good standing as a limited liability company inall jurisdictions in which the nature or location of its activities and of its properties(both owned and leased) makes such qualification necessary, except for those jurisdictionsin which failure to do so has not had, or could not reasonably be expected to have,individually or in the aggregate, a Material Adverse Effect(b) Subsidiaries. Each of its direct and indirect Subsidiaries, the direct owner ofeach such Subsidiary and its percentage ownership thereof, is set forth on Schedule 12(b).No Inactive Subsidiary owns any assets (other than immaterial assets) or has any significantoperations.(c) Capitalization; Voting Rights.(i) The authorized capital stock of the Parent, as of the date hereof consists of 96,000,000shares, of which 95,000,000 are shares of Common Stock, par value $0.005 per share,44,641,388shares of which are issued and outstanding, and 1,000,000 are shares of preferred stock,par value $1.75 per share of which no shares are issued and outstanding. The authorized, issuedand outstanding capital stock of each Subsidiary of each Company is set forth on Schedule12(c).(ii) Except as disclosed on Schedule 12(c), other than: (i) the shares reserved forissuance under the Parent’s stock option plans; and (ii) shares which may be issued pursuant tothis Agreement and the Ancillary Agreements, there are no outstanding options, warrants, rights(including conversion or preemptive rights and rights of first refusal), proxy or stockholderagreements, or arrangements or agreements of any kind for the purchase or acquisition from theParent of any of its securities. Except as disclosed on Schedule 12(c), neither the offeror issuance of any of the Note or the Warrants, or the issuance of any of the Warrant Shares, northe consummation of any transaction contemplated hereby will result in a change in the price ornumber of any securities of the Parent outstanding, under anti-dilution or other similar provisionscontained in or affecting any such securities.(iii) All issued and outstanding shares of the Parent’s Common Stock: (i) have been dulyauthorized and validly issued and are fully paid and nonassessable; and (ii) were issued incompliance with all applicable state and federal laws concerning the issuance of securities.(iv) The rights, preferences, privileges and restrictions of the shares of the Common Stockare as stated in the Parent’s Certificate of Incorporation (the “Charter”). The WarrantShares have been duly and validly reserved for issuance. When issued in compliance with theprovisions of this Agreement and the Parent’s Charter, the Securities will be validly issued, fullypaid and nonassessable, and will be free of any liens or encumbrances; provided,however, that the Securities may be subject to restrictions on transfer under state and/orfederalsecurities laws as set forth herein or as otherwise required by such laws at the time atransfer is proposed.
 
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(d) Authorization; Binding Obligations. All corporate, partnership or limitedliability company, as the case may be, action on its and its Eligible Subsidiaries’ part(including their respective officers and directors) necessary for the authorization of thisAgreement and the Ancillary Agreements, the performance of all of its and its EligibleSubsidiaries’ obligations hereunder and under the Ancillary Agreements on the Closing Date and,the authorization, issuance and delivery of the Note and the Warrants has been taken or will betaken prior to the Closing Date. This Agreement and the Ancillary Agreements, when executed anddelivered and to the extent it is a party thereto, will be its and its Eligible Subsidiaries’valid and binding obligations enforceable against each such Person in accordance with their terms,except:(i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other lawsof general application affecting enforcement of creditors’ rights; and(ii) general principles of equity that restrict the availability of equitable or legalremedies.The issuance of the Note is not and will not be subject to any preemptive rights or rights of firstrefusal that have not been properly waived or complied with. The issuance of the Warrants and thesubsequent exercise of the Warrants for Warrant Shares are not and will not be subject to anypreemptive rights or rights of first refusal that have not been properly waived or complied with.(e) Liabilities; Solvency. (i) Except as set forth in Schedule 12(e),neither it nor any of its Eligible Subsidiaries has any liabilities, except current liabilitiesincurred in the ordinary course of business and liabilities disclosed in any Exchange Act Filings.(ii) Both before and after giving effect to (a) the Loans incurred on the Closing Date or suchother date as Loans requested hereunder are made or incurred, (b) the disbursement of the proceedsof, or the assumption of the liability in respect of, such Loans pursuant to the instructions oragreement of any Company and (c) the payment and accrual of all transaction costs in connectionwith the foregoing, each Company and each Eligible Subsidiary of each Company, is and will be,Solvent.(f) Agreements; Action. Except as set forth on Schedule 12(f) or asdisclosed in any Exchange Act Filings:(i) There are no agreements, understandings, instruments, contracts, proposed transactions,judgments, orders, writs or decrees to which it or any of its Eligible Subsidiaries is a party orto its knowledge by which it is bound which may involve: (i) obligations (contingent or otherwise)of, or payments to, it or any of its Eligible Subsidiaries in excess of $250,000 (other thanobligations of, or payments to, it or any of its Eligible Subsidiaries arising from purchase orsale agreements entered into in the ordinary course of business); or (ii) the transfer of anypatent, copyright, trademark, trade secret or the transfer or license of any other proprietaryright material to the business of the Parent to or from it (other than licenses arising from thepurchase of “off the shelf” or other standard products or licenses that would not materially impairthe security interest granted to Lender pursuant to the IPSecurity Agreement); or (iii) provisions restricting the development, manufacture ordistribution of its or any of its Eligible Subsidiaries’ products or services; or (iv)indemnification by it or any of its Eligible Subsidiaries with respect to infringements ofproprietary rights.
 
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(ii) Since June 30, 2007 (the “Balance Sheet Date”) neither it nor any of its EligibleSubsidiaries has: (i) declared or paid any dividends, or authorized or made any distribution uponor with respect to any class or series of its capital stock; (ii) incurred any indebtedness formoney borrowed or any other liabilities (other than ordinary course obligations) individually inexcess of $250,000 or, in the case of indebtedness and/or liabilities individually less than$250,000, in excess of $500,000 in the aggregate; (iii) made any loans or advances to any Personnot in excess, individually or in the aggregate, of $100,000, other than ordinary advances fortravel expenses; or (iv) sold, exchanged or otherwise disposed of any of its assets or rights,other than the sale of its Inventory in the ordinary course of business.(iii) For the purposes of subsections (i) and (ii) of this Section 12(f), all indebtedness,liabilities, agreements, understandings, instruments, contracts and proposed transactions involvingthe same Person (including Persons it or any of its applicable Subsidiaries has reason to believeare affiliated therewith or with any Subsidiary thereof) shall be aggregated for the purpose ofmeeting the individual minimum dollar amounts of such subsections; provided, however that forpurposes of subsections (i) and (ii) indebtedness, liabilities, agreements, understandings,instruments, contracts and proposed transactions of the Non-Eligible Subsidiaries shall not beconsolidated with the Parent.(iv) the Parent maintains disclosure controls and procedures (“Disclosure Controls”)designed to ensure that information required to be disclosed by the Parent in the reports that itfiles or submits under the Exchange Act is recorded, processed, summarized, and reported, withinthe time periods specified in the rules and forms of the SEC.(v) The Parent makes and keeps books, records, and accounts, that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of its assets. It maintainsinternal control over financial reporting (“Financial Reporting Controls”) designed by, orunder the supervision of, its principal executive and principal financial officers, and effected byits board of directors, management, and other personnel, to provide reasonable assurance regardingthe reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with GAAP, including that:(1) transactions are executed in accordance with management’s general or specificauthorization;(2) unauthorized acquisition, use, or disposition of the Parent’s assets that could have amaterial effect on the financial statements are prevented or timely detected;(3) transactions are recorded as necessary to permit preparation of financial statements inaccordance with GAAP, and that its receipts and expenditures are being made only in accordance withauthorizations of the Parent’s management and board of directors;
 
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(4) transactions are recorded as necessary to maintain accountability for assets; and(5) the recorded accountability for assets is compared with the existing assets at reasonableintervals, and appropriate action is taken with respect to any differences.(vi) There is no weakness in any of its Disclosure Controls or Financial Reporting Controlsthat is required to be disclosed in any of the Exchange Act Filings, except as so disclosed.(g) Obligations to Related Parties. Except as set forth on Schedule 12(g),neither it nor any of its Eligible Subsidiaries has any obligations to their respective officers,directors, stockholders or employees other than:(i) for payment of salary for services rendered and for bonus payments;(ii) reimbursement for reasonable expenses incurred on its or its Eligible Subsidiaries’behalf;(iii) for other standard employee benefits made generally available to all employees(including stock option agreements outstanding under any stock option plan approved by its and itsEligible Subsidiaries’ Board of Directors, as applicable); and(iv) obligations listed in its and each of its Subsidiary’s financial statements or disclosedin any of the Parent’s Exchange Act Filings.Except as described above or set forth on Schedule 12(g), none of its officers, directorsor, to the best of its knowledge, key employees or stockholders, any of its Eligible Subsidiariesor any members of their immediate families, are indebted to it or any of its Eligible Subsidiaries,individually or in the aggregate, in excess of $50,000 or have any direct or indirect ownershipinterest in any Person with which it or any of its Eligible Subsidiaries is affiliated or withwhich it or any of its Eligible Subsidiaries has a business relationship, or any Person whichcompetes with it or any of its Eligible Subsidiaries, other than passive investments in publiclytraded companies (representing less than one percent (1%) of such company) which may compete withit or any of its Eligible Subsidiaries. Except as described above, none of its officers, directorsor stockholders, or any member of their immediate families, is, directly or indirectly, interestedin any material contract with it or any of its Eligible Subsidiaries and no agreements,understandings or proposed transactions are contemplated between it or any of its EligibleSubsidiaries and any such Person. Except as set forth on Schedule 12(g), neither it norany of its Eligible Subsidiaries is a guarantor or indemnitor of any indebtedness of any otherPerson.
 
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(h) Changes. Except as set forth on Schedule 12(h), since the Balance SheetDate, except as disclosed in any Exchange Act Filing or in any Schedule to this Agreement or toany of the Ancillary Agreements, there has not been:(i) any change in its or any of its Eligible Subsidiaries’ business, assets, liabilities,condition (financial or otherwise), properties, operations or prospects, which, individually or inthe aggregate, has had, or could reasonably be expected to have, a Material Adverse Effect;(ii) any resignation or termination of any of its or its Eligible Subsidiaries’ officers, keyemployees or groups of employees;(iii) any material change, except in the ordinary course of business, in its or any of itsEligible Subsidiaries’ contingent obligations by way of guaranty, endorsement, indemnity, warrantyor otherwise;(iv) any damage, destruction or loss, whether or not covered by insurance, which has had, orcould reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect;(v) any waiver by it or any of its Eligible Subsidiaries of a valuable right or of a materialdebt owed to it;(vi) any direct or indirect material loans made by it or any of its Eligible Subsidiaries toany of its or any of its Eligible Subsidiaries’ stockholders, employees, officers or directors,other than advances made in the ordinary course of business;(vii) any material change in any compensation arrangement or agreement with any employee,officer, director or stockholder;(viii) any declaration or payment of any dividend or other distribution of its or any of itsEligible Subsidiaries’ assets;(ix) any labor organization activity related to it or any of its Eligible Subsidiaries;(x) any debt, obligation or liability incurred, assumed or guaranteed by it or any of itsEligible Subsidiaries, except those for immaterial amounts and for current liabilities incurred inthe ordinary course of business;(xi) any sale, assignment or transfer of any Intellectual Property or other intangible assets;(xii) any change in any material agreement to which it or any of its Eligible Subsidiaries isa party or by which either it or any of its Eligible Subsidiaries is bound which, eitherindividually or in the aggregate, has had, or could reasonably be expected to have, individually orin the aggregate, a Material Adverse Effect;
 
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(xiii) any other event or condition of any character that, either individually or in theaggregate, has had, or could reasonably be expected to have, individually or in the aggregate, aMaterial Adverse Effect; or(xiv) any arrangement or commitment by it or any of its Eligible Subsidiaries to do any of theacts described in subsection (i) through (xiii) of this Section 12(h).(i) Title to Properties and Assets; Liens, Etc. Except as set forth on Schedule12(i), it and each of its Eligible Subsidiaries has good and marketable title to theirrespective properties and assets, and good title to its leasehold interests, in each case subjectto no Lien, other than Permitted Liens.All facilities, Equipment, Fixtures, vehicles and other properties owned, leased or used by it orany of its Eligible Subsidiaries are in good operating condition and repair and are reasonably fitand usable for the purposes for which they are being used. Except as set forth on Schedule12(i), it and each of its Eligible Subsidiaries is in compliance with all material terms ofeach lease to which it is a party or is otherwise bound.(j) Intellectual Property.(i) To its knowledge, except as set forth in Schedule 12(j), it and each of its EligibleSubsidiaries owns or possesses sufficient legal rights to all Intellectual Property necessary fortheir respective businesses as now conducted and, to its knowledge as presently proposed to beconducted, without any known infringement of the rights of others. With the exception of thelicenses and distributor agreements set forth in Schedules I, II and III of the IntellectualProperty Security Agreement, , there are no outstanding options, licenses or agreements of any kindrelating to its or any of its Eligible Subsidiary’s Intellectual Property, nor is it or any of itsEligible Subsidiaries bound by or a party to any options, licenses or agreements of any kind, thatare material to its business or operations, with respect to the Intellectual Property of any otherPerson other than such licenses or agreements arising from the purchase of “off the shelf” orstandard products.(ii) Except as set forth in Schedule 12(j), neither it nor any of its Eligible Subsidiarieshas received any communications alleging that it or any of its Eligible Subsidiaries has violatedany of the Intellectual Property or other proprietary rights of any other Person, nor is it or anyof its Eligible Subsidiaries aware of any basis therefor.(iii) Except as set forth in Schedule 12(j), neither it nor any of its Eligible Subsidiariesbelieves it is or will be necessary to utilize any inventions, trade secrets or proprietaryinformation of any of its employees made prior to their employment by it or any of its EligibleSubsidiaries, except for inventions, trade secrets or proprietary information that have beenrightfully assigned to it or any of its Eligible Subsidiaries.(k) Compliance with Other Instruments. Except as set forth on Schedule12(k), neither it nor any of its Eligible Subsidiaries is in violation or default of (x) anyterm of its Charter or any material term of its Bylaws, or (y) any provision of any indebtedness,mortgage, indenture, contract, agreement or instrument to which it is party or by which it isbound or of any judgment, decree, order or writ, which violation or default, in the case of this
 
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clause (y), has had, or could reasonably be expected to have, either individually or in theaggregate, a Material Adverse Effect. The execution, delivery and performance of and compliancewith this Agreement and the Ancillary Agreements to which it is a party, and the issuance of theNote and the other Securities each pursuant hereto and thereto, will not, with or without thepassage of time or giving of notice, result in any such material violation, or be in conflict withor constitute a default under any such term or provision, or result in the creation of any Lienupon any of its or any of its Eligible Subsidiary’s properties or assets or the suspension,revocation, impairment, forfeiture or nonrenewal of any permit, license, authorization or approvalapplicable to it or any of its Eligible Subsidiaries, their businesses or operations or any oftheir assets or properties.(l) Litigation. Except as set forth on Schedule 12(l), there is no action,suit, proceeding or investigation pending or, to its knowledge, currently threatened against it orany of its Eligible Subsidiaries that prevents it or any of its Eligible Subsidiaries fromentering into this Agreement or the Ancillary Agreements, or from consummating the transactionscontemplated hereby or thereby, or which has had, or could reasonably be expected to have, eitherindividually or in the aggregate, a Material Adverse Effect, or could result in any change in itsor any of its Eligible Subsidiaries’ current equity ownership, nor is it aware that there is anybasis to assert any of the foregoing. Neither it nor any of its Eligible Subsidiaries is a partyto or subject to the provisions of any order, writ, injunction, judgment or decree of any court orgovernment agency or instrumentality. There is no action, suit, proceeding or investigation by itor any of its Eligible Subsidiaries currently pending or which it or any of its EligibleSubsidiaries intends to initiate.(m) Tax Returns and Payments. Except as set forth on Schedule 12(m), it andeach of its Eligible Subsidiaries has timely filed all tax returns (federal, state and local)required to be filed by it. All taxes shown to be due and payable on such returns, anyassessments imposed, and all other taxes due and payable by it and each of its EligibleSubsidiaries on or before the Closing Date, have been paid or will be paid prior to the time theybecome delinquent. Except as set forth on Schedule 12(m), neither it nor any of itsEligible Subsidiaries has been advised:(i) that any of its returns, federal, state or other, have been or are being audited as of thedate hereof; or(ii) of any adjustment, deficiency, assessment or court decision in respect of its federal,state or other taxes.Neither it nor any of its Eligible Subsidiaries has any knowledge of any liability of any tax to beimposed upon its properties or assets as of the date of this Agreement that is not adequatelyprovided for.(n) Employees. Except as set forth on Schedule 12(n), neither it nor any ofits Eligible Subsidiaries has any collective bargaining agreements with any of its employees.There is no labor union organizing activity pending or, to its knowledge, threatened with respectto it or any of its Eligible Subsidiaries. Except as disclosed in the Exchange Act Filings or onSchedule 12(n), neither it nor any of its Eligible Subsidiaries is a party to or bound byany
 
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currently effective employment contract, deferred compensation arrangement, bonus plan,incentive plan, profit sharing plan, retirement agreement or other employee compensation plan oragreement. To its knowledge, none of its or any of its Eligible Subsidiaries’ employees, nor anyconsultant with whom it or any of its Eligible Subsidiaries has contracted, is in violation of anyterm of any employment contract, proprietary information agreement or any other agreement relatingto the right of any such individual to be employed by, or to contract with, it or any of itsEligible Subsidiaries because of the nature of the business to be conducted by it or any of itsEligible Subsidiaries; and to its knowledge the continued employment by it and its EligibleSubsidiaries of their present employees, and the performance of its and its Eligible Subsidiariescontracts with its independent contractors, will not result in any such violation. Neither it norany of its Eligible Subsidiaries is aware that any of its or any of its Eligible Subsidiaries’employees is obligated under any contract (including licenses, covenants or commitments of anynature) or other agreement, or subject to any judgment, decree or order of any court oradministrative agency that would interfere with their duties to it or any of its EligibleSubsidiaries. Neither it nor any of its Eligible Subsidiaries has received any notice allegingthat any such violation has occurred. Except for employees who have a current effectiveemployment agreement with it or any of its Eligible Subsidiaries, none of its or any of itsEligible Subsidiaries’ employees has been granted the right to continued employment by it or anyof its Eligible Subsidiaries or to any material compensation following termination of employmentwith it or any of its Eligible Subsidiaries. Except as set forth on Schedule 12(n),neither it nor any of its Eligible Subsidiaries is aware that any officer, key employee or groupof employees intends to terminate his, her or their employment with it or any of its EligibleSubsidiaries, as applicable, nor does it or any of its Eligible Subsidiaries have a presentintention to terminate the employment of any officer, key employee or group of employees.(o) Registration Rights and Voting Rights. Except as set forth on Schedule12(o) and except as disclosed in Exchange Act Filings, neither it nor any of its EligibleSubsidiaries is presently under any obligation, and neither it nor any of its EligibleSubsidiaries has granted any rights, to register any of its or any of its Eligible Subsidiaries’presently outstanding securities or any of its securities that may hereafter be issued. Except asset forth on Schedule 12(o) and except as disclosed in Exchange Act Filings, to itsknowledge, none of its or any of its Eligible Subsidiaries’ stockholders has entered into anyagreement with respect to its or any of its Eligible Subsidiaries’ voting of equity securities.(p) Compliance with Laws; Permits. Neither it nor any of its Eligible Subsidiariesis in violation of the Sarbanes-Oxley Act of 2002 or any SEC related regulation or rule or anyrule of the Principal Market promulgated thereunder or any other applicable statute, rule,regulation, order or restriction of any domestic or foreign government or any instrumentality oragency thereof in respect of the conduct of its business or the ownership of its properties whichhas had, or could reasonably be expected to have, either individually or in the aggregate, aMaterial Adverse Effect. No governmental orders, permissions, consents, approvals orauthorizations are required to be obtained and no registrations or declarations are required to befiled in connection with the execution and delivery of this Agreement or any Ancillary Agreementand the issuance of any of the Securities, except such as have been duly and validly obtained orfiled, or with respect to any filings that must be made after the Closing Date, as will be filedin a timely manner. It and each of its Eligible Subsidiaries has all material franchises,permits, licenses and any similar authority necessary for the conduct of its businessas now being conducted by it, the lack of which could, either individually or in theaggregate, reasonably be expected to have a Material Adverse Effect.
 
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(q) Environmental and Safety Laws. Neither it nor any of its Eligible Subsidiariesis in violation of any applicable statute, law or regulation relating to the environment oroccupational health and safety, and to its knowledge, no material expenditures are or will berequired in order to comply with any such existing statute, law or regulation. Except as setforth on Schedule 12(q), no Hazardous Materials (as defined below) are used or have beenused, stored, or disposed of by it or any of its Eligible Subsidiaries or, to its knowledge, byany other Person on any property owned, leased or used by it or any of its Eligible Subsidiaries.For the purposes of the preceding sentence, “Hazardous Materials” shall mean:(i) materials which are listed or otherwise defined as “hazardous” or “toxic” under anyapplicable local, state, federal and/or foreign laws and regulations that govern the existenceand/or remedy of contamination on property, the protection of the environment from contamination,the control of hazardous wastes, or other activities involving hazardous substances, includingbuilding materials; and(ii) any petroleum products or nuclear materials.(r) Valid Offering. Assuming the accuracy of the representations and warranties ofLender contained in this Agreement, the offer and issuance of the Securities will be exempt fromthe registration requirements of the Securities Act of 1933, as amended (the “SecuritiesAct”), and will have been registered or qualified (or are exempt from registration andqualification) under the registration, permit or qualification requirements of all applicablestate securities laws.(s) Full Disclosure. It and each of its Subsidiaries has provided Lender with allinformation requested by Lender in connection with Lender’s decision to enter into this Agreement,including all information each Company and its Subsidiaries believe is reasonably necessary tomake such investment decision. Neither this Agreement, the Ancillary Agreements nor the exhibitsand schedules hereto (including, where referenced therein, when read in conjunction with Parent’sExchange Act Filings) and thereto nor any other document delivered by it or any of itsSubsidiaries to Lender or its attorneys or agents in connection herewith or therewith or with thetransactions contemplated hereby or thereby, contain any untrue statement of a material fact noromit to state a material fact necessary in order to make the statements contained herein ortherein, in light of the circumstances in which they are made, not misleading. Any financialprojections and other estimates provided to Lender by it or any of its Subsidiaries were based onits and its Subsidiaries’ experience in the industry and on assumptions of fact and opinion as tofuture events which it or any of its Subsidiaries, at the date of the issuance of such projectionsor estimates, believed to be reasonable.(t) Insurance. It and each of its Eligible Subsidiaries has general commercial,product liability, fire and casualty insurance policies with coverages which it believes arecustomary for companies similarly situated to it and its Eligible Subsidiaries in the same orsimilar business.
 
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(u) SEC Reports and Financial Statements. Except as set forth on Schedule12(u), it and each of its Eligible Subsidiaries has filed all proxy statements, reports andother documents required to be filed by it under the Exchange Act. The Parent has furnishedLender with copies of: (i) its Annual Report on Form 10-K for its fiscal year ended December 31,2006; and (ii) its Quarterly Reports on Form 10-Q for its fiscal quarters ended March 31, 2007 andJune 30, 2007, and the Form 8-K filings which it has made during its fiscal year 2007 to date(collectively, the “SEC Reports”). Except as set forth on Schedule 12(u), eachSEC Report was, at the time of its filing, in substantial compliance with the requirements of itsrespective form and none of the SEC Reports, nor the financial statements (and the notes thereto)included in the SEC Reports, as of their respective filing dates, contained any untrue statementof a material fact or omitted to state a material fact required to be stated therein or necessaryto make the statements therein, in light of the circumstances under which they were made, notmisleading. Such financial statements have been prepared in accordance with GAAP applied on aconsistent basis during the periods involved (except (i) as may be otherwise indicated in suchfinancial statements or the notes thereto or (ii) in the case of unaudited interim statements, tothe extent they may not include footnotes or may be condensed) and fairly present in all materialrespects the financial condition, the results of operations and cash flows of the Parent and itsSubsidiaries, on a consolidated basis, as of, and for, the periods presented in each such SECReport.(v) Listing. The Parent’s Common Stock is listed or quoted, as applicable, on thePrincipal Market and satisfies all requirements for the continuation of such listing or quotation,as applicable, and until such time as the ADSX Merger is consummated pursuant to the terms of theADSX Agreement, the Parent shall do all things necessary for the continuation of such listing orquotation, as applicable. The Parent has not received any notice that its Common Stock will bedelisted from, or no longer quoted on, as applicable, the Principal Market or that its CommonStock does not meet all requirements for such listing or quotation, as applicable.(w) No Integrated Offering. Neither it, nor any of its Subsidiaries nor any of itsAffiliates, nor any Person acting on its or their behalf, has directly or indirectly made anyoffers or sales of any security or solicited any offers to buy any security under circumstancesthat would cause the offering of the Securities pursuant to this Agreement or any AncillaryAgreement to be integrated with prior offerings by it for purposes of the Securities Act whichwould prevent it from issuing the Securities pursuant to Rule 506 under the Securities Act, or anyapplicable exchange-related stockholder approval provisions, nor will it or any of its Affiliatesor Subsidiaries take any action or steps that would cause the offering of the Securities to beintegrated with other offerings.(x) Stop Transfer. The Securities are restricted securities as of the date of thisAgreement. Neither it nor any of its Subsidiaries will issue any stop transfer order or otherorder impeding the sale and delivery of any of the Securities at such time as the Securities areregistered for public sale or an exemption from registration is available, except as required bystate and federal securities laws.(y) Dilution. It specifically acknowledges that the Parent’s obligation to issue the shares of Common Stock upon exercise of the Warrants is binding upon the Parent andenforceable regardless of the dilution such issuance may have on the ownership interests ofother shareholders of the Parent.
 
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(z) Patriot Act. It certifies that, to the best of its knowledge, neither it nor anyof its Subsidiaries has been designated, nor is or shall be owned or controlled, by a “suspectedterrorist” as defined in Executive Order 13224. It hereby acknowledges that Lender seeks tocomply with all applicable laws concerning money laundering and related activities. Infurtherance of those efforts, it hereby represents, warrants and covenants that: (i) none of thecash or property that it or any of its Subsidiaries will pay or will contribute to Lender has beenor shall be derived from, or related to, any activity that is deemed criminal under United Stateslaw; and (ii) no contribution or payment by it or any of its Subsidiaries to Lender, to the extentthat they are within its or any such Subsidiary’s control shall cause Lender to be in violation ofthe United States Bank Secrecy Act, the United States International Money Laundering Control Actof 1986 or the United States International Money Laundering Abatement and Anti-Terrorist FinancingAct of 2001. It shall promptly notify Lender if any of these representations, warranties andcovenants ceases to be true and accurate regarding it or any of its Subsidiaries. It shallprovide Lender with any additional information regarding it and each Subsidiary thereof thatLender deems necessary or convenient to ensure compliance with all applicable laws concerningmoney laundering and similar activities. It understands and agrees that if at any time it isdiscovered that any of the foregoing representations, warranties and covenants are incorrect, orif otherwise required by applicable law or regulation related to money laundering or similaractivities, Lender may undertake appropriate actions to ensure compliance with applicable law orregulation, including but not limited to segregation and/or redemption of Lender’s investment init. It further understands that Lender may release confidential information about it and itsSubsidiaries and, if applicable, any underlying beneficial owners, to proper authorities ifLender, in its sole discretion, determines that it is in the best interests of Lender in light ofrelevant rules and regulations under the laws set forth in subsection (ii) above.(aa) Company Name; Locations of Offices, Records and Collateral. Schedule12(aa) sets forth each Company’s name as it appears in official filings in the state of itsorganization, the type of entity of each Company, the organizational identification number issuedby each Company’s state of organization or a statement that no such number has been issued, eachCompany’s state of organization, and the location of each Company’s chief executive office,corporate offices, warehouses, other locations of Collateral and locations where records withrespect to Collateral are kept (including in each case the county of such locations) and, exceptas set forth in such Schedule 12(aa), such locations have not changed during the precedingtwelve months. As of the Closing Date, during the prior five years, except as set forth inSchedule 12(aa), no Company has been known as or conducted business in any other name(including trade names). Each Company has only one state of organization.(bb) ERISA. Based upon the Employee Retirement Income Security Act of 1974(“ERISA”), and the regulations and published interpretations thereunder: (i) neither itnor any of its Subsidiaries has engaged in any Prohibited Transactions (as defined in Section 406of ERISA and Section 4975 of the Code); (ii) it and each of its Subsidiaries has met allapplicable minimum funding requirements under Section 302 of ERISA in respect of its plans; (iii)neither it nor any of its Subsidiaries has any knowledge of any event or occurrence which wouldcause
 
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the Pension Benefit Guaranty Corporation to institute proceedings under Title IV of ERISA toterminate any employee benefit plan(s); (iv) neither it nor any of its Subsidiaries has anyfiduciary responsibility for investments with respect to any plan existing for the benefit ofpersons other than its or such Subsidiary’s employees; and (v) neither it nor any of itsSubsidiaries has withdrawn, completely or partially, from any multi-employer pension plan so as toincur liability under the Multiemployer Pension Plan Amendments Act of 1980.(cc) Holdings. (i) For purposes of Section 12(b), 12(c), and 12(e) — 12(bb) of thisAgreement, Holdings shall be deemed to be an Eligible Subsidiary.(ii) Holdings hereby represents and warrants that (i) it is not permitted pursuant tothe terms of its articles of organization to incur any indebtedness (other than unsecuredtrade debt), guarantee the debt of a third party or pledge any assets as long as any amountsare outstanding under the Mortgage, and (ii) Holdings was created as a special purposeentity with powers limited to owning the Premises and incurring the Mortgage.13. Covenants. Each Company, as applicable, covenants and agrees with Lender asfollows:(a) Stop-Orders. The Parent shall advise Lender, promptly after it receives noticeof issuance by the SEC, any state securities commission or any other regulatory authority of anystop order or of any order preventing or suspending any offering of any securities of the Parent,or of the suspension of the qualification of the Common Stock of the Parent for offering or salein any jurisdiction, or the initiation of any proceeding for any such purpose.(b) Listing. The Parent shall promptly secure the listing or quotation, asapplicable, of the shares of Common Stock issuable upon exercise of the Warrants on the PrincipalMarket upon which shares of Common Stock are listed or quoted, as applicable, (subject to officialnotice of issuance) and shall maintain such listing or quotation, as applicable, so long as anyother shares of Common Stock shall be so listed or quoted, as applicable. Until such time as theADSX Merger is consummated pursuant to the terms of the ADSX Agreement, the Parent shall maintainthe listing or quotation, as applicable, of its Common Stock on the Principal Market, and willcomply in all material respects with the Parent’s reporting, filing and other obligations underthe bylaws or rules of the National Association of Securities Dealers (“NASD”) and suchexchanges, as applicable.(c) Market Regulations. The Parent shall notify the SEC, NASD and applicable stateauthorities, in accordance with their requirements, of the transactions contemplated by thisAgreement, and shall take all other necessary action and proceedings as may be required andpermitted by applicable law, rule and regulation, for the legal and valid issuance of theSecurities to Lender and promptly provide copies thereof to Lender.(d) Reporting Requirements. The Parent shall timely file with the SEC all reportsrequired to be filed pursuant to the Exchange Act and the Company shall refrain from terminatingits status as an issuer required by the Exchange Act to file reports thereunder evenif the Exchange Act or the rules or regulations thereunder would permit such terminationuntil such time as the ADSX Merger is consummated pursuant to the terms of the ADSX Agreement.
 
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(e) Use of Funds. It shall use the proceeds of the Loans for general working capitalpurposes and repayment of outstanding indebtedness only.(f) Access to Facilities. It shall, and shall cause each of its EligibleSubsidiaries to, permit any representatives designated by Lender (or any successor of Lender),upon reasonable notice and during normal business hours, at Company’s expense and accompanied by arepresentative of Company Agent (provided that no such prior notice shall be required to be givenand no such representative shall be required to accompany Lender in the event Lender believes suchaccess is necessary to preserve or protect the Collateral or following the occurrence and duringthe continuance of an Event of Default), to:(i) visit and inspect any of its or any such Eligible Subsidiary’s properties;(ii) examine its or any such Eligible Subsidiary’s corporate and financial records (unlesssuch examination is not permitted by federal, state or local law or by contract) and make copiesthereof or extracts therefrom; and(iii) discuss its or any such Eligible Subsidiary’s affairs, finances and accounts with its orany such Eligible Subsidiary’s directors, officers and Accountants.Notwithstanding the foregoing, neither it nor any of its Subsidiaries shall provide any material,non-public information to Lender unless Lender signs a confidentiality agreement and otherwisecomplies with Regulation FD, under the federal securities laws.(g) Taxes. It shall, and shall cause each of its Eligible Subsidiaries to, promptlypay and discharge, or cause to be paid and discharged, when due and payable, all lawful taxes,assessments and governmental charges or levies imposed upon it and its Eligible Subsidiaries’income, profits, property or business, as the case may be; provided, however, that any such tax,assessment, charge or levy need not be paid currently if (i) the validity thereof shall currentlyand diligently be contested in good faith by appropriate proceedings, (ii) such tax, assessment,charge or levy shall have no effect on the Lien priority of Lender in the Collateral, and (iii) ifit and/or such Eligible Subsidiary, as applicable, shall have set aside on its and/or suchEligible Subsidiary’s books adequate reserves with respect thereto in accordance with GAAP; andprovided, further, that it shall, and shall cause each of its Eligible Subsidiaries to, pay allsuch taxes, assessments, charges or levies forthwith upon the commencement of proceedings toforeclose any lien which may have attached as security therefor.(h) Insurance. (i) It shall bear the full risk of loss from any loss of any naturewhatsoever with respect to the Collateral and it and each of its Eligible Subsidiaries will,jointly and severally, bear the full risk of loss from any loss of any nature whatsoever withrespect to the assets pledged to Lender as security for the Obligations. Furthermore,it will insure or cause the Collateral to be insured in Lender’s name as an additional insured andlender loss payee, with an appropriate loss payable endorsement in form and substance satisfactoryto Lender, against loss or damage by fire, flood, sprinkler leakage, theft, burglary, pilferage,loss
 
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in transit and other risks customarily insured against by companies in similar businesssimilarly situated as it and its Eligible Subsidiaries including but not limited to workerscompensation, public and product liability and business interruption, and such other hazards asLender shall specify in amounts and under insurance policies and bonds by insurers acceptable toLender and all premiums thereon shall be paid by such Company and the policies delivered toLender. If any such Company fails to obtain the insurance and in such amounts of coverage asotherwise required pursuant to this Section (h), Lender may procure such insurance and the costthereof shall be promptly reimbursed by the Companies, jointly and severally, and shall constituteObligations.(ii) No Company’s insurance coverage shall be impaired or invalidated by any act or neglect ofany Company or any of its Eligible Subsidiaries and the insurer will provide Lender with no lessthan thirty (30) days notice prior of cancellation;(iii) Lender, in connection with its status as a lender loss payee, will be assigned at alltimes to a first lien position until such time as all Obligations have been indefeasibly satisfiedin full.(i) Intellectual Property. It shall, and shall cause each of its EligibleSubsidiaries to, maintain in full force and effect its corporate existence, rights and franchisesand all licenses and other rights to use Intellectual Property owned or possessed by it andreasonably deemed to be necessary to the conduct of its business.(j) Properties. It shall, and shall cause each of its Eligible Subsidiaries to, keepits properties in good repair, working order and condition, reasonable wear and tear excepted, andfrom time to time make all needful and proper repairs, renewals, replacements, additions andimprovements thereto; and it shall, and shall cause each of its Eligible Subsidiaries to, at alltimes comply with each provision of all leases to which it is a party or under which it occupiesproperty if the breach of such provision could reasonably be expected to have a Material AdverseEffect.(k) Confidentiality. It shall not, and shall not permit any of its EligibleSubsidiaries to, disclose, and will not include in any public announcement, the name of Lender orany of its Affiliates, unless expressly agreed to by Lender or unless and until such disclosure isrequired by law or applicable regulation, and then only to the extent of such requirement.Notwithstanding the foregoing, each Company and its Eligible Subsidiaries may disclose Lender’sidentity and the terms of this Agreement and the Ancillary Agreements to its current andprospective debt and equity financing sources. Lender shall be permitted to discuss, distributeor otherwise transfer any non-public information of the Companies and their respective EligibleSubsidiaries in Lender’s possession now or in the future to potential or actual (i) direct orindirect investors in Lender and (ii) third party assignees or transferees of all or a portion ofthe obligations of any Company and/or any of its respective Eligible Subsidiaries hereunder andunder the Ancillary Agreement, to the extent that such investor or assignee or transferee entersinto a confidentiality agreement for the benefit of the Parent in such form as may be necessary toaddresses the Parent’s Regulation FD requirements.
 
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(l) Required Approvals. It shall not, and shall not permit any of its EligibleSubsidiaries to, without the prior written consent of Lender, (i) create, incur, assume or sufferto exist any indebtedness, except for (x) trade debt and debt incurred to finance the purchase ofequipment, (y) intercompany indebtedness incurred in the ordinary course of business between oramong Eligible Subsidiaries and (z) indebtedness set forth in Schedule 13(l); (ii) cancel any debtowing to it in excess of $100,000 in the aggregate during any 12 month period, except forintercompany indebtedness incurred in the ordinary course of business between or among EligibleSubsidiaries and up to $500,000 of currently existing intercompany indebtedness between DigitalAngel International and Digital Angel S.A. that could be capitalized as an investment in theForeign Subsidiary; (iii) assume, guarantee, endorse or otherwise become directly or contingentlyliable in connection with any obligations of any other Person, except the endorsement ofnegotiable instruments by it or its Eligible Subsidiaries for deposit or collection or similartransactions in the ordinary course of business; (iv) directly or indirectly declare, pay or makeany dividend or distribution on any class of its Stock or apply any of its funds, property orassets to the purchase, redemption or other retirement of any of its or its Eligible Subsidiaries’Stock, or issue any preferred stock; (v) purchase or hold beneficially any Stock or othersecurities or evidences of indebtedness of, make or permit to exist any loans or advances to, ormake any investment or acquire any interest whatsoever in, any other Person, including anypartnership or joint venture, except (A) travel advances, (B) loans to its and its EligibleSubsidiaries’ (other than Inactive Subsidiaries’ and Foreign Subsidiaries’) officers and employeesnot exceeding at any one time an aggregate of $10,000, (C) loans to or investments in any existingEligible Subsidiaries or another Domestic Subsidiary so long as such entity is designated aseither a co-borrower hereunder or has entered into such guaranty and security documentationrequired by Lender, including, without limitation, to grant to Lender a first priority perfectedsecurity interest in substantially all of such Eligible Subsidiary’s assets to secure theObligations, (D) intercompany loans to Foreign Subsidiaries made in the ordinary course consistentwith past practices and not exceeding $750,000 , net of payments received on intercompanyindebtedness from Foreign Subsidiaries individually or in the aggregate and (E) investments inForeign Subsidiaries not exceeding $500,000 individually or in the aggregate; (vi) create orpermit to exist any Subsidiary, other than any Subsidiary in existence on the date hereof andlisted in Schedule 12(b) unless such new Subsidiary is a wholly-owned Subsidiary and isdesignated by Lender as either a co-borrower or guarantor hereunder and such Subsidiary shall haveentered into all such documentation required by Lender, including, without limitation, to grant toLender a first priority perfected security interest in substantially all of such Subsidiary’sassets to secure the Obligations; (vii) directly or indirectly, prepay any indebtedness (otherthan to Lender and in the ordinary course of business), or repurchase, redeem, retire or otherwiseacquire any indebtedness (other than to Lender and in the ordinary course of business) except tomake scheduled payments of principal and interest thereof or any prepayment that is in connectionwith a refinancing of existing indebtedness on similar terms; (viii) enter into any merger,consolidation or other reorganization with or into any other Person or acquire all or a portion ofthe assets or Stock of any Person or permit any other Person to consolidate with or merge with it(other than (i) the ADSX Merger, or (ii) with the consent of Lender, which shall not beunreasonably withheld, a transaction between Eligible Subsidiaries), unless (1) such Company isthe surviving entity of such merger or consolidation, (2) no Event of Default shall existimmediately prior to and after giving effect to such merger or consolidation, (3) such Companyshall have provided Lender copies of all documentation
 
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relating to such merger or consolidation and (4) such Company shall have provided Lender withat least thirty (30) days’ prior written notice of such merger or consolidation; (ix) materiallychange the nature of the business in which it is presently engaged; (x) become subject to(including, without limitation, by way of amendment to or modification of) any agreement orinstrument which by its terms would (under any circumstances) restrict its or any of its EligibleSubsidiaries’ right to perform the provisions of this Agreement or any of the Ancillary Agreementsor any of the agreements contemplated hereby or thereby; (xi) change its fiscal year or make anychanges in accounting treatment and reporting practices without prior written notice to Lenderexcept as permitted by GAAP or in the tax reporting treatment or except as required by law; (xii)bill Accounts under any name except the present name of such Company; (xiii) sell, lease, transferor otherwise dispose of any of its properties or assets, or any of the properties or assets of itsEligible Subsidiaries, except for (1) sales, leases, transfer or dispositions by any Company toany other Company, (2) the sale of Inventory in the ordinary course of business, (3) assignments,transfers or conveyances of Intellectual Property or interests therein in the ordinary course ofbusiness that do not materially impair the security interests granted to Lender pursuant to the IPSecurity Agreement and (4) the disposition or transfer in the ordinary course of business duringany fiscal year of obsolete and worn-out Equipment and only to the extent that (x) the proceeds ofany such disposition are used to acquire replacement Equipment which is subject to Lender’s firstpriority security interest, subject to Permitted Liens or are used to repay Loans or to paygeneral corporate expenses, or (y) following the occurrence of an Event of Default which continuesto exist, the proceeds of which are remitted to Lender to be held as cash collateral for theObligations; or (xv) except as otherwise set forth in this Section 13(l), invest in, lend to,contribute and/or transfer any assets to and/or provide any other form of financial assistance to,whether directly or indirectly, Holdings, any Inactive Subsidiary and/or any Foreign Subsidiary.(m) Reissuance of Securities. The Parent shall reissue certificates representing theSecurities without the legends set forth in Section 39 below at such time as:(i) the holder thereof is permitted to dispose of such Securities pursuant to Rule 144(k)under the Securities Act; or(ii) upon resale subject to an effective registration statement after such Securities areregistered under the Securities Act.The Parent agrees to cooperate with Lender in connection with all resales pursuant to Rule 144(d)and Rule 144(k) and provide legal opinions necessary to allow such resales provided the Parent andits counsel receive reasonably requested representations from Lender and broker, if any.(n) Opinion. On the Closing Date, it shall deliver to Lender an opinion acceptableto Lender from each Company’s legal counsel. Each Company will provide, at the Companies’ jointand several expense, such other legal opinions in the future as are reasonably necessary for theexercise of the Warrants.
 
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(o) Legal Name, etc. It shall not, without providing Lender with 30 days priorwritten notice, change or amend (i) its name as it appears in the official filings in the stateof its organization, (ii) the type of legal entity it is, (iii) its organizationidentification number, if any, issued by its state of organization, (iv) its state oforganization. and (v) the Parent’s certificate of incorporation, or any organizational documentof any Company in any material way. It shall not, without providing Lender with 5 days priorwritten notice, change or amend any provision of its bylaws in any material way (B) thecertificate of incorporation of any Company other than the Parent, or other organizationaldocument of any Company other than the Parent, in any way not material to Lender.(p) Compliance with Laws. The operation of each of its and each of its EligibleSubsidiaries’ business is and shall continue to be in compliance in all material respects with allapplicable federal, state and local laws, rules and ordinances, including to all laws, rules,regulations and orders relating to taxes, payment and withholding of payroll taxes, employer andemployee contributions and similar items, securities, employee retirement and welfare benefits,employee health and safety and environmental matters.(q) Notices. It and each of its Eligible Subsidiaries shall promptly inform Lenderin writing of: (i) the commencement of all proceedings and investigations by or before and/or thereceipt of any notices from, any governmental or nongovernmental body and all actions andproceedings in any court or before any arbitrator against or in any way concerning any event whichcould reasonably be expected to have singly or in the aggregate, a Material Adverse Effect; (ii)any change which has had, or could reasonably be expected to have, a Material Adverse Effect;(iii) any Event of Default or Default; and (iv) any default or any event which with the passage oftime or giving of notice or both would constitute a default under any agreement for the payment ofmoney to which it or any of its Eligible Subsidiaries is a party or by which it or any of itsEligible Subsidiaries or any of its or any such Eligible Subsidiary’s properties may be bound thebreach of which would have a Material Adverse Effect.(r) Margin Stock. It shall not permit any of the proceeds of the Loans madehereunder to be used directly or indirectly to “purchase” or “carry” “margin stock” or to repayindebtedness incurred to “purchase” or “carry” “margin stock” within the respective meanings ofeach of the quoted terms under Regulation U of the Board of Governors of the Federal ReserveSystem as now and from time to time hereafter in effect.(s) Offering Restrictions. Except as previously disclosed in the SEC Reports or inthe Exchange Act Filings, or stock or stock options granted to its employees or directors, neitherit nor any of its Eligible Subsidiaries shall, prior to the full repayment of the Note (togetherwith all accrued and unpaid interest and fees related thereto) and termination of this Agreement,(x) enter into any equity line of credit agreement or similar agreement with a floorless pricingfeature or (y) issue, or enter into any agreement to issue, any securities with a floorlessvariable/floating conversion and/or pricing feature which are or could be (by conversion orregistration) free-trading securities (i.e. common stock subject to a registration statement).(t) Authorization and Reservation of Shares. The Parent shall at all times haveauthorized and reserved a sufficient number of shares of Common Stock to provide for the exerciseof the Warrants.
 
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(u) FIRPTA. Neither it, nor any of its Subsidiaries, is a “United States realproperty holding corporation” as such term is defined in Section 897(c)(2) of the Code andTreasury Regulation Section 1.897-2 promulgated thereunder and it and each of its Subsidiariesshall at no time take any action or otherwise acquire any interest in any asset or property to theextent the effect of which shall cause it and/or such Subsidiary, as the case may be, to be a“United States real property holding corporation” as such term is defined in Section 897(c)(2) ofthe Code and Treasury Regulation Section 1.897-2 promulgated thereunder.(v) Board Observation Rights. For so long as fifty percent (50%) of the principalamount of the Note is outstanding, the Purchaser will be entitled to the following boardobservation rights (“Board Observation Rights”): The Company shall permit one representative ofthe Lender to attend all in-person and telephonic meetings of the board of directors (excludingany committee meetings of the Board of Directors) of the Company (the “Board of Directors”) in anon-voting observer capacity, which observation right shall include the ability to observediscussions of the Board of Directors, and shall provide such representative with copies of allnotices, minutes, written consents, and other materials that it provides to members of the Boardof Directors, at the time it provides them to such members. The observation right may be exercisedin person or via telephone or videophone participation. The Lender agrees, on behalf of itself andany representative exercising the observation rights set forth herein, that so long as it shallexercise its observation right (i) it shall hold in strict confidence pursuant to aconfidentiality and non-disclosure agreement (in form and substance satisfactory to the Lender)all information and materials that it may receive or be given access to in connection withmeetings of the Board of Directors and to act in a fiduciary manner with respect to allinformation so provided (provided that this shall not limit its ability to discuss such matterswith its officers, directors or legal counsel, as necessary), and (ii) the Board of Directors maywithhold from it certain information or material furnished or made available to the Board ofDirectors or exclude it from certain confidential “closed sessions” of the Board of Directors ifthe furnishing or availability of such information or material or its presence at such “closedsessions” would jeopardize such Company’s attorney-client privilege or if the Board of Directorsotherwise reasonably so requires. The Board Observation Rights set forth in this Section 6.17shall automatically terminate and be of no further force or effect upon the earlier of (A) theindefeasibly payment in full of all Obligations (as defined in the Master Security Agreement) forindebtedness, or (B) until less than fifty percent (50%) of the principal amount of the Note isoutstanding.(w) Inactive Subsidiaries. Neither it nor any of its Subsidiaries will permit anyInactive Subsidiary to hold significant assets or liabilities or engage in any businessactivities.(x) Holdings. For purposes of Section 13(a) — (w) of this Agreement, Holdings shall bedeemed to be an Eligible Subsidiary.
 
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14. Further Assurances. At any time and from time to time, upon the written requestof Lender and at the sole expense of Companies, each Company shall promptly and duly execute anddeliver any and all such further instruments and documents and take such further action as Lendermay request (a) to obtain the full benefits of this Agreement and the Ancillary Agreements, (b) toprotect, preserve and maintain Lender’s rights in the Collateral and under this Agreement or anyAncillary Agreement, and/or (c) to enable Lender to exercise all or any of the rights and powersherein granted or any Ancillary Agreement.15. Representations, Warranties and Covenants of Lender. Lender hereby represents,warrants and covenants to each Company as follows:(a) Requisite Power and Authority. Lender has all necessary power and authorityunder all applicable provisions of law to execute and deliver this Agreement and the AncillaryAgreements and to carry out their provisions. All corporate action on Lender’s part required forthe lawful execution and delivery of this Agreement and the Ancillary Agreements have been or willbe effectively taken prior to the Closing Date. Upon their execution and delivery, this Agreementand the Ancillary Agreements shall be valid and binding obligations of Lender, enforceable inaccordance with their terms, except (a) as limited by applicable bankruptcy, insolvency,reorganization, moratorium or other laws of general application affecting enforcement ofcreditors’ rights, and (b) as limited by general principles of equity that restrict theavailability of equitable and legal remedies.(b) Investment Representations. Lender understands that the Securities are beingoffered pursuant to an exemption from registration contained in the Securities Act based in partupon Lender’s representations contained in this Agreement, including, without limitation, thatLender is an “accredited investor” within the meaning of Regulation D under the Securities Act.Lender has received or has had full access to all the information it considers necessary orappropriate to make an informed investment decision with respect to the Note to be issued to itunder this Agreement and the Securities acquired by it upon the exercise of the Warrants.(c) Lender Bears Economic Risk. Lender has substantial experience in evaluating andinvesting in private placement transactions of securities in companies similar to the Parent sothat it is capable of evaluating the merits and risks of its investment in the Parent and has thecapacity to protect its own interests. Lender must bear the economic risk of this investmentuntil the Securities are sold pursuant to (i) an effective registration statement under theSecurities Act, or (ii) an exemption from registration is available.(d) Investment for Own Account. The Securities are being issued to Lender for itsown account for investment only, and not as a nominee or agent and not with a view towards or forresale in connection with their distribution.(e) Lender Can Protect Its Interest. Lender represents that by reason of its, or ofits management’s, business and financial experience, Lender has the capacity to evaluate themerits and risks of its investment in the Note, and the Securities and to protect its owninterests in connection with the transactions contemplated in this Agreement, and the AncillaryAgreements. Further, Lender is aware of no publication of any advertisement in connectionwith the transactions contemplated in the Agreement or the Ancillary Agreements.
 
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(f) Accredited Investor. Lender represents that it is an accredited investor withinthe meaning of Regulation D under the Securities Act.(g) Shorting. Neither Lender nor any of its Affiliates or investment partners has,will, or will cause any Person, to directly engage in “short sales” of the Parent’s Common Stockas long as any amounts under the Note shall remain outstanding.(h) Patriot Act. Lender certifies that, to the best of Lender’s knowledge, Lenderhas not been designated, and is not owned or controlled, by a “suspected terrorist” as defined inExecutive Order 13224. Lender seeks to comply with all applicable laws concerning moneylaundering and related activities. In furtherance of those efforts, Lender hereby represents,warrants and covenants that: (i) none of the cash or property that Lender will use to make theLoans has been or shall be derived from, or related to, any activity that is deemed criminal underUnited States law; and (ii) no disbursement by Lender to any Company to the extent within Lender’scontrol, shall cause Lender to be in violation of the United States Bank Secrecy Act, the UnitedStates International Money Laundering Control Act of 1986 or the United States International MoneyLaundering Abatement and Anti-Terrorist Financing Act of 2001. Lender shall promptly notify theCompany Agent if any of these representations ceases to be true and accurate regarding Lender.Lender agrees to provide the Company any additional information regarding Lender that the Companydeems necessary or convenient to ensure compliance with all applicable laws concerning moneylaundering and similar activities. Lender understands and agrees that if at any time it isdiscovered that any of the foregoing representations are incorrect, or if otherwise required byapplicable law or regulation related to money laundering similar activities, Lender may undertakeappropriate actions to ensure compliance with applicable law or regulation, including but notlimited to segregation and/or redemption of Lender’s investment in the Parent. Lender furtherunderstands that the Parent may release information about Lender and, if applicable, anyunderlying beneficial owners, to proper authorities if the Parent, in its sole discretion,determines that it is in the best interests of the Parent in light of relevant rules andregulations under the laws set forth in subsection (ii) above.(i) Limitation on Acquisition of Common Stock. Notwithstanding anything to thecontrary contained in this Agreement, any Ancillary Agreement, or any document, instrument oragreement entered into in connection with any other transaction entered into by and between Lenderand any Company (and/or Subsidiaries or Affiliates of any Company), Lender shall not acquire stockin the Parent (including, without limitation, pursuant to a contract to purchase, by exercising anoption or warrant, by converting any other security or instrument, by acquiring or exercising anyother right to acquire, shares of stock or other security convertible into shares of stock in theParent, or otherwise, and such options, warrants, conversion or other rights shall not beexercisable) to the extent such stock acquisition would cause any interest (including any originalissue discount) payable by any Company to Lender not to qualify as portfolio interest (to theextent a portfolio interest exemption is otherwise available to Lender), within the meaning ofSection 881(c)(2) of the Internal Revenue Code of 1986, as amended (the “Code”) by reasonof Section 881(c)(3) of the Code, taking into account
 
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the constructive ownership rules under Section 871(h)(3)(C) of the Code (the “StockAcquisition Limitation”). The Stock Acquisition Limitation shall automatically become nulland void without any notice to any Company upon the earlier to occur of the existence of an Eventof Default at a time when the average closing price of the Common Stock as reported by Bloomberg,L.P. on the Principal Market for the immediately preceding five trading days is greater than orequal to 200% of the Exercise Price (as defined in the Warrants).16. Power of Attorney. Each Company hereby appoints Lender, or any other Person whomLender may designate as such Company’s attorney, with power to: (a)(i) execute any securityrelated documentation on such Company’s behalf and to supply any omitted information and correctpatent errors in any documents executed by such Company or on such Company’s behalf; (ii) to filefinancing statements against such Company covering the Collateral (and, in connection with thefiling of any such financing statements, describe the Collateral as “all assets and all personalproperty, whether now owned and/or hereafter acquired” (or any substantially similar variationthereof)); (iii) sign such Company’s name on any invoice or bill of lading relating to anyAccounts, drafts against Account Debtors, schedules and assignments of Accounts, notices ofassignment, financing statements and other public records, verifications of Account and notices toor from Account Debtors; and (iv) to do all other things Lender deems necessary to carry out theterms of Section 6 of this Security Agreement and (b) upon the occurrence and during thecontinuance of an Event of Default; (v) endorse such Company’s name on any checks, notes,acceptances, money orders, drafts or other forms of payment or security that may come into Lender’spossession; (vi) verify the validity, amount or any other matter relating to any Account by mail,telephone, telegraph or otherwise with Account Debtors; (vii) do all other things necessary tocarry out this Agreement, any Ancillary Agreement and all related documents; and (viii) notify thepost office authorities to change the address for delivery of such Company’s mail to an addressdesignated by Lender, and to receive, open and dispose of all mail addressed to such Company. EachCompany hereby ratifies and approves all acts of the attorney. Neither Lender, nor the attorneywill be liable for any acts or omissions or for any error of judgment or mistake of fact or law,except for gross negligence or willful misconduct. This power, being coupled with an interest, isirrevocable so long as Lender has a security interest and until the Obligations have been fullysatisfied.17. Term of Agreement. Lender’s agreement to make Loans and extend financialaccommodations under and in accordance with the terms of this Agreement or any Ancillary Agreementshall continue in full force and effect until the expiration of the Term. At Lender’s electionfollowing the occurrence of an Event of Default, Lender may terminate this Agreement. Thetermination of the Agreement shall not affect any of Lender’s rights hereunder or any AncillaryAgreement and the provisions hereof and thereof shall continue to be fully operative until alltransactions entered into, rights or interests created and the Obligations have been irrevocablydisposed of, concluded or liquidated. Notwithstanding the foregoing, Lender shall release itssecurity interests at any time after thirty (30) days notice upon irrevocable payment to it of allObligations if each Company shall have provided Lender with an executed release of any and allclaims which such Company may have or thereafter have under this Agreement and all AncillaryAgreements.
 
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18. Termination of Lien. The Liens and rights granted to Lender hereunder and anyAncillary Agreements and the financing statements filed in connection herewith ortherewith shall continue in full force and effect, notwithstanding the termination of thisAgreement or the fact that any Company’s account may from time to time be temporarily in a zero orcredit position, until all of the Obligations under the Note have been indefeasibly paid orperformed in full and this Agreement has been terminated in accordance with the terms of thisAgreement. Lender shall not be required to send termination statements to any Company, or to filethem with any filing office, unless and until this Agreement and the Ancillary Agreements (otherthan the Warrant or the Registration Rights Agreement) shall have been terminated in accordancewith their terms and all Obligations indefeasibly paid in full in immediately available funds.19. Events of Default. The occurrence of any of the following shall constitute an“Event of Default”:(a) Failure by any Company to make payment of any of the monetary Obligations when requiredhereunder, and, in any such case, such failure shall continue for a period of five (5) businessdays following the date upon which any such payment was due;(b) failure by any Company or Holdings to pay any material amount of taxes when due unlesssuch taxes are being contested in good faith by appropriate proceedings and with respect to whichadequate reserves have been provided on such Company’s and/or such Eligible Subsidiary’s books;(c) failure by any Company or Holdings to perform under, and/or committing any breach of, inany material respect, this Agreement or any covenant contained herein in any material respect,which failure or breach shall continue without remedy for a period of twenty (20) days after theoccurrence thereof;(d) any representation, warranty or statement made by any Company, Holdings or any of itsEligible Subsidiaries hereunder, in any Ancillary Agreement (other than the Registration RightsAgreement) should prove to be false or misleading in any material respect on the date as of whichmade or deemed made pursuant to the terms of this Agreement or such Ancillary Agreement;(e) the occurrence of any material default (or similar term) in the observance or performanceof any other agreement or condition relating to any indebtedness or contingent obligation of anyCompany or Holdings beyond the period of grace (if any), that is not waived by the other party tosuch agreement or condition, the effect of which default is to cause, or permit the holder orholders of such indebtedness or beneficiary or beneficiaries of such contingent obligation tocause, such indebtedness to become due prior to its stated maturity or such contingent obligationto become payable;(f) attachments or levies in excess of $500,000 in the aggregate are made upon any Company’sor Holdings’ assets or a judgment is rendered against any of the property of the Company orHoldings involving a liability of more than $500,000 which shall not have been paid, vacated,discharged, stayed or bonded within thirty (30) days from the entry thereof;(g) any change in any material Company’s or any of its material Eligible Subsidiary’scondition or affairs (financial or otherwise) which in Lender’s reasonable, goodfaith opinion, could reasonably be expected to have a Material Adverse Effect any Liencreated hereunder or under any Ancillary Agreement for any reason ceases to be or is not a validand perfected Lien and any Lien that had a first priority interest for any reason ceases to have afirst priority interest;
 
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(h) any Company or Holdings shall (i) apply for, consent to or suffer to exist theappointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator ofitself or of all or a substantial part of its property, (ii) make a general assignment for thebenefit of creditors, (iii) commence a voluntary case under the federal bankruptcy laws (as now orhereafter in effect), (iv) be adjudicated a bankrupt or insolvent, (v) file a petition seeking totake advantage of any other law providing for the relief of debtors, (vi) acquiesce to withoutchallenge within ten (10) days of the filing thereof, or failure to have dismissed within thirty(30) days, any petition filed against it in any involuntary case under such bankruptcy laws, or(vii) take any action for the purpose of effecting any of the foregoing;(i) any Company or Holdings shall admit in writing its inability, or be generally unable, topay its debts as they become due or cease operations of its present business;(j) any Company or Holdings directly or indirectly sells, assigns, transfers, conveys, orsuffers or permits to occur any sale, assignment, transfer or conveyance of any Collateral of suchCompany or Holdings or any interest therein, other than assignments, transfers or conveyances ofIntellectual Property or interests therein in the ordinary course of business that do notmaterially impair the security interests granted to the Lender pursuant to the IP SecurityAgreement, except as permitted herein;(k) A Change of Control (as defined below) shall occur with respect to any Company, unlessLender shall have expressly consented to such Change of Control in writing. A “Change of Control”shall mean (i) any “Person” or “group” (as such terms are defined in Sections 13(d) and 14(d) ofthe Exchange Act, as in effect on the date hereof), other than the Holder, is or becomes the“beneficial owner” (as defined in Rules 13(d)-3 and 13(d)-5 under the Exchange Act), directly orindirectly, of more than 50% on a fully diluted basis of the then outstanding voting equityinterest of the Parent, or (ii) the consolidation, merger or other business combination of suchCompany with or into any other entity, immediately following which the prior stockholders of theCompany fail to own, directly or indirectly, at least fifty-one percent (51%) of the survivingentity; (iii) the Board of Directors of the Parent shall cease to consist of a majority of theBoard of Directors of the Parent on the date hereof (or directors appointed by a majority of theboard of directors in effect immediately prior to such appointment) or (iv) the Parent or any ofits Eligible Subsidiaries merges or consolidates with, or sells all or substantially all of itsassets to, any other person or entity. Notwithstanding the foregoing, a “Change of Control” shallnot be deemed to have occurred if (X) (i) any Company enters into a consolidation, merger, shareexchange or other business combination with an affiliate or subsidiary of the Company reasonablyacceptable to Lender; (ii) the surviving entity assumes all of the obligations of such Companyunder this Security Agreement and the Ancillary Agreements; and (iii) after assuming all of theobligations under the Security Agreement and the Ancillary Agreements, the surviving entity is andwould be Solvent untilsuch obligations are paid in full or otherwise discharged or (Y) the Parent consummates theADSX Merger substantially in accordance with the terms in the ADSX Agreement;
 
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(l) the indictment of any Company or any of its Eligible Subsidiaries or Holdings or anyexecutive officer of any Company or any of its Eligible Subsidiaries or Holdings for a felonyunder any criminal statute, or commencement of criminal or civil proceeding against any Company orany of its Eligible Subsidiaries or Holdings or any executive officer of any Company or any of itsEligible Subsidiaries or Holdings pursuant to which statute or proceeding penalties or remediesreasonably available include forfeiture of any of a material portion of the property of anyCompany or any of its Eligible Subsidiaries or Holdings;(m) an Event of Default shall occur under and as defined in the Note or in any otherAncillary Agreement (other than the Registration Rights Agreement);(n) any Company or Holdings shall breach any term or provision of any Ancillary Agreement towhich it is a party (other than the Registration Rights Agreement), in any material respect whichbreach, if capable of cure, is not cured within the time frame specified therein, if any, and ifnot within fifteen (15) days after the occurrence thereof, provided that such 15-day period doesnot have a material adverse effect on Lender’s rights and remedies hereunder or thereunder.(o) any proceeding shall be brought by any Company or any of its Eligible Subsidiaries orHoldings attempting to terminate, challenges the validity of, or its liability under thisAgreement or any Ancillary Agreement, or any proceeding shall be brought to challenge thevalidity, binding effect of any Ancillary Agreement or any Ancillary Agreement ceases to be avalid, binding and enforceable obligation of such Company or any of its Eligible Subsidiaries orHoldings (to the extent such Persons are a party thereto);(p) the occurrence of an Event of Default under and as defined in (1) the Secured Term Note,issued as of the date hereof by Applied Digital Solutions, Inc. (“ADSX”) to the Lender pursuant tothe terms of the Securities Purchase Agreement, dated as of the date hereof by and between ADSXand the Lender (as amended, modified and/or supplemented from time to time, the PurchaseAgreement) and/or (2) any Related Agreement referred to in the Purchase Agreement (other than theRegistration Rights Agreement) and such Event of Default, if capable of cure continues unremediedfor a period of five (5) days after the occurrence thereof.(q) Holdings shall breach any term or provision of the Mortgage in any material respectwhich breach, if capable of cure, is not cured within the time frame specified therein.20. Remedies. Following the occurrence of an Event of Default, Lender shall have theright to demand repayment in full of all Obligations, whether or not otherwise due. Until allObligations have been fully and indefeasibly satisfied, Lender shall retain its Lien in allCollateral. Lender shall have, in addition to all other rights provided herein and in eachAncillary Agreement, the rights and remedies of a secured party under the UCC, and under other
 
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applicable law, all other legal and equitable rights to which Lender may be entitled,including the right to take immediate possession of the Collateral, to require each Company toassemble the Collateral, at Companies’ joint and several expense, and to make it available toLender at a place designated by Lender which is reasonably convenient to both parties and to enterany of the premises of any Company or wherever the Collateral shall be located, with or withoutforce or process of law, and to keep and store the same on said premises until sold (and if saidpremises be the property of any Company, such Company agrees not to charge Lender for storagethereof), and the right to apply for the appointment of a receiver for such Company’s property.Further, Lender may, at any time or times after the occurrence of an Event of Default, sell anddeliver all Collateral held by or for Lender at public or private sale for cash, upon credit orotherwise, at such prices and upon such terms as Lender, in Lender’s sole discretion, deemsadvisable or Lender may otherwise recover upon the Collateral in any commercially reasonable manneras Lender, in its sole discretion, deems advisable. The requirement of reasonable notice shall bemet if such notice is mailed postage prepaid to Company Agent at Company Agent’s address as shownin Lender’s records, at least ten (10) days before the time of the event of which notice is beinggiven. Lender may be the purchaser at any sale, if it is public. In connection with the exerciseof the foregoing remedies, Lender is granted permission to use all of each Company’s IntellectualProperty. The proceeds of sale shall be applied first to all costs and expenses of sale, includingattorneys’ fees, and second to the payment (in whatever order Lender elects) of all Obligations.After the indefeasible payment and satisfaction in full of all of the Obligations, and after thepayment by Lender of any other amount required by any provision of law, including Section9-608(a)(1) of the UCC (but only after Lender has received what Lender considers reasonable proofof a subordinate party’s security interest), the surplus, if any, shall be paid to Company Agent(for the benefit of the applicable Companies) or its representatives or to whosoever may belawfully entitled to receive the same, or as a court of competent jurisdiction may direct. TheCompanies shall remain jointly and severally liable to Lender for any deficiency. Each Company andLender acknowledge that the actual damages that would be incurred by Lender after the occurrence ofan Event of Default would be difficult to quantify and that such Company and Lender have agreedthat the fees and obligations set forth in this Section and in this Agreement would constitute fairand appropriate liquidated damages in the event of any such termination. The parties hereto eachhereby agree that the exercise by any party hereto of any right granted to it or the exercise byany party hereto of any remedy available to it (including, without limitation, the issuance of anotice of redemption, a borrowing request and/or a notice of default), in each case, hereunder orunder any Ancillary Agreement shall not constitute confidential information and no party shall haveany duty to the other party to maintain such information as confidential.21. Waivers. To the full extent permitted by applicable law, each Company herebywaives (a) presentment, demand and protest, and notice of presentment, dishonor, intent toaccelerate, acceleration, protest, default, nonpayment, maturity, release, compromise, settlement,extension or renewal of any or all of this Agreement and the Ancillary Agreements or any othernotes, commercial paper, Accounts, contracts, Documents, Instruments, Chattel Paper and guarantiesat any time held by Lender on which such Company may in any way be liable, and hereby ratifies andconfirms whatever Lender may do in this regard; (b) all rights to notice and a hearing prior toLender’s taking possession or control of, or to Lender’s replevy, attachment or levy upon, anyCollateral or any bond or security that might be required by any court prior to allowing Lender toexercise any of its remedies; and (c) the benefit of all valuation,appraisal and exemption laws. Each Company acknowledges that it has been advised by counselof its choices and decisions with respect to this Agreement, the Ancillary Agreements and thetransactions evidenced hereby and thereby.
 
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22. Expenses. The Companies shall jointly and severally pay Lender, less any amountspaid to Lender by Applied Digital, (i) due diligence fees of $20,000 plus any prior approved out-ofpocket costs of any reasonably required third-party appraisers or other extraordinary diligencecosts associated with the preparation, execution and delivery of this Agreement and the AncillaryAgreements and (ii) structuring fees of $40,000, and shall pay directly to Lender’s outsidecounsel, if any, all reasonable fees and disbursements of such outside counsel, in connection withthe preparation, execution and delivery of this Agreement and the Ancillary Agreements. TheCompanies shall jointly and severally pay all of Lender’s out-of-pocket costs and expenses,including reasonable fees and disbursements of outside counsel and appraisers, in connection withthe prosecution or defense of any action, contest, dispute, suit or proceeding concerning anymatter in any way arising out of, related to or connected with this Agreement or any AncillaryAgreement. The Companies shall also jointly and severally pay all of Lender’s reasonable fees,charges, out-of-pocket costs and expenses, including fees and disbursements of counsel andappraisers, in connection with (a) the preparation, execution and delivery of any waiver, anyamendment thereto or consent proposed or executed in connection with the transactions contemplatedby this Agreement or the Ancillary Agreements, (b) Lender’s obtaining performance of theObligations under this Agreement and any Ancillary Agreements, including, but not limited to, theenforcement or defense of Lender’s security interests, assignments of rights and Liens hereunder asvalid 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 anyproperty (real or personal) pledged to Lender by any Company or any of its Eligible Subsidiaries asCollateral for, or any other Person as security for, the Obligations hereunder and (e) anyconsultations in connection with any of the foregoing. The Companies shall also jointly andseverally pay Lender’s customary bank charges for all bank services (including wire transfers)performed or caused to be performed by Lender for any Company or any of its Eligible Subsidiariesat any Company’s or such Eligible Subsidiary’s request or in connection with any Company’s loanaccount with Lender. All such costs and expenses together with all filing, recording and searchfees, taxes and interest payable by the Companies to Lender shall be payable on demand and shall besecured by the Collateral. If any tax by any Governmental Authority is or may be imposed on or asa result of any transaction between any Company and/or any Eligible Subsidiary thereof, on the onehand, and Lender on the other hand, which Lender is or may be required to withhold or pay(including, without limitation, as a result of a breach by any Company or any of its EligibleSubsidiaries of Section 13(u) herein), the Companies hereby jointly and severally indemnifies andholds Lender harmless in respect of such taxes, and the Companies will repay to Lender the amountof any such taxes which shall be charged to the Companies’ account; and until the Companies shallfurnish Lender with indemnity therefor (or supply Lender with evidence satisfactory to it that dueprovision for the payment thereof has been made), Lender may hold without interest any balancestanding to each Company’s credit and Lender shall retain its Liens in any and all Collateral.
 
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23. Assignment. Upon notice to the Company Agent, Lender may assign any or all of theObligations together with any or all of the security therefor to any Person and anysuch assignee shall succeed to all of Lender’s rights with respect thereto; provided thatLender shall not be permitted to effect any such assignment to a competitor of any Company unlessan Event of Default has occurred and is continuing. Notwithstanding the foregoing, no notice shallbe required to the Parent, the Companies or to Company Agent in the event that such assignment isto a party that is an affiliate, or under common control with, Lender. Upon such assignment,Lender shall be released from all responsibility for the Collateral to the extent same is assignedto any transferee. Lender may from time to time sell or otherwise grant participations in any ofthe Obligations and the holder of any such participation shall, subject to the terms of anyagreement between Lender and such holder, be entitled to the same benefits as Lender with respectto any security for the Obligations in which such holder is a participant. Each Company agreesthat each such holder may exercise any and all rights of banker’s lien, set-off and counterclaimwith respect to its participation in the Obligations as fully as though such Company were directlyindebted to such holder in the amount of such participation. No Company may assign any of itsrights or obligations hereunder without the prior written consent of Lender. All of the terms,conditions, promises, covenants, provisions and warranties of this Agreement shall inure to thebenefit of each of the undersigned, and shall bind the representatives, successors and permittedassigns of each Company.24. No Waiver; Cumulative Remedies. Failure by Lender to exercise any right, remedyor option under this Agreement, any Ancillary Agreement or any supplement hereto or thereto or anyother agreement between or among any Company and Lender or delay by Lender in exercising the same,will not operate as a waiver; no waiver by Lender will be effective unless it is in writing andthen only to the extent specifically stated. Lender’s rights and remedies under this Agreement andthe Ancillary Agreements will be cumulative and not exclusive of any other right or remedy whichLender may have.25. Application of Payments. Each Company irrevocably waives the right to direct theapplication of any and all payments at any time or times hereafter received by Lender from or onsuch Company’s behalf and each Company hereby irrevocably agrees that Lender shall have thecontinuing exclusive right to apply and reapply any and all payments received at any time or timeshereafter against the Obligations hereunder in such manner as Lender may deem advisablenotwithstanding any entry by Lender upon any of Lender’s books and records.26. Indemnity. Each Company hereby jointly and severally indemnifies and holdsLender, and its respective affiliates, employees, attorneys and agents (each, an “IndemnifiedPerson”), harmless from and against any and all suits, actions, proceedings, claims, damages,losses, liabilities and expenses of any kind or nature whatsoever (including attorneys’ fees anddisbursements and other costs of investigation or defense, including those incurred upon anyappeal) which may be instituted or asserted against or incurred by any such Indemnified Person asthe result of credit having been extended, suspended or terminated under this Agreement or any ofthe Ancillary Agreements or with respect to the execution, delivery, enforcement, performance andadministration of, or in any other way arising out of or relating to, this Agreement, the AncillaryAgreements or any other documents or transactions contemplated by or referred to herein or thereinand any actions or failures to act with respect to any of the foregoing, except to the extent thatany such indemnified liability is finally determined by a court of competent jurisdiction to haveresulted solely from such Indemnified Person’s gross negligence or willful misconduct. NOINDEMNIFIED PERSON SHALL BE RESPONSIBLEOR LIABLE TO ANY COMPANY OR TO ANY OTHER PARTY OR TO ANY SUCCESSOR, ASSIGNEE OR THIRD PARTYBENEFICIARY OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT,PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING BEENEXTENDED, SUSPENDED OR TERMINATED UNDER THIS AGREEMENT OR ANY ANCILLARY AGREEMENT OR AS A RESULT OFANY OTHER TRANSACTION CONTEMPLATED HEREUNDER OR THEREUNDER.
 
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27. Revival. The Companies further agree that to the extent any Company makes apayment or payments to Lender, which payment or payments or any part thereof are subsequentlyinvalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to atrustee, receiver or any other party under any bankruptcy act, state or federal law, common law orequitable cause, then, to the extent of such payment or repayment, the obligation or part thereofintended to be satisfied shall be revived and continued in full force and effect as if said paymenthad not been made.28. Borrowing Agency Provisions.(a) Each Company hereby irrevocably designates Company Agent to be its attorney and agent andin such capacity to borrow, sign and endorse notes, and execute and deliver all instruments,documents, writings and further assurances now or hereafter required hereunder, on behalf of suchCompany, and hereby authorizes Lender to pay over or credit all loan proceeds hereunder inaccordance with the request of Company Agent.(b) The handling of this credit facility as a co-borrowing facility with a borrowing agent inthe manner set forth in this Agreement is solely as an accommodation to the Companies and at theirrequest. Lender shall not incur any liability to any Company as a result thereof. To induceLender to do so and in consideration thereof, each Company hereby indemnifies Lender and holdsLender harmless from and against any and all liabilities, expenses, losses, damages and claims ofdamage or injury asserted against Lender by any Person arising from or incurred by reason of thehandling of the financing arrangements of the Companies as provided herein, reliance by Lender onany request or instruction from Company Agent or any other action taken by Lender with respect tothis Paragraph 28.(c) All Obligations shall be joint and several, and the Companies shall make payment upon thematurity of the Obligations by acceleration or otherwise, and such obligation and liability on thepart of the Companies shall in no way be affected by any extensions, renewals and forbearancegranted by Lender to any Company, failure of Lender to give any Company notice of borrowing or anyother notice, any failure of Lender to pursue to preserve its rights against any Company, therelease by Lender of any Collateral now or thereafter acquired from any Company, and suchagreement by any Company to pay upon any notice issued pursuant thereto is unconditional andunaffected by prior recourse by Lender to any Company or any Collateral for such Company’sObligations or the lack thereof.(d) Each Company expressly waives any and all rights of subrogation, reimbursement,indemnity, exoneration, contribution or any other claim which such Companymay now or hereafter have against the other or other Person directly or contingently liablefor the Obligations, or against or with respect to any other’s property (including, withoutlimitation, any property which is Collateral for the Obligations), arising from the existence orperformance of this Agreement, until all Obligations have been indefeasibly paid in full and thisAgreement has been irrevocably terminated.
 
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(e) Each Company represents and warrants to Lender that (i) Companies have one or more commonshareholders, directors and officers, (ii) the businesses and corporate activities of Companiesare closely related to, and substantially benefit, the business and corporate activities ofCompanies, (iii) the financial and other operations of Companies are performed on a combined basisas if Companies constituted a consolidated corporate group, (iv) Companies will receive asubstantial economic benefit from entering into this Agreement and will receive a substantialeconomic benefit from the application of each Loan hereunder, in each case, whether or not suchamount is used directly by any Company and (v) all requests for Loans hereunder by the CompanyAgent are for the exclusive and indivisible benefit of the Companies as though, for purposes ofthis Agreement, the Companies constituted a single entity.29. Notices. Any notice or request hereunder may be given to any Company, CompanyAgent or Lender at the respective addresses set forth below or as may hereafter be specified in anotice designated as a change of address under this Section. Any notice or request hereunder shallbe given by registered or certified mail, return receipt requested, hand delivery, overnight mailor telecopy (confirmed by mail). Notices and requests shall be, in the case of those by handdelivery, deemed to have been given when delivered to any officer of the party to whom it isaddressed, in the case of those by mail or overnight mail, deemed to have been given three (3)Business Days after the date when deposited in the mail or with the overnight mail carrier, and, inthe case of a telecopy, when confirmed.Notices shall be provided as follows:   If to Lender: Kallina Corporation  874 Walker Road  Suite C  Dover, DE 19904  Facsimile: 914-949-9618   With a copy to: Laurus Capital Management, LLC  335 Madison Avenue, 10th Fl.New York, New York 10017  Attention: Portfolio Services  Telephone: (212) 541-5800  Telecopier: (212) 581-5037
 
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   If to any Company,  or Company Agent: Digital Angel Corporation  1690 S. Congress Avenue  Suite 201  Delray Beach, FL 33445  Attention: Chief Financial Officer/Patricia Petersen  Facsimile: 561-276-0977   With a copy to: Holland & Knight LLP  701 Brickell Avenue, Suite 3000  Miami, Florida 33131  Attention: Kara L. MacCullough  Facsimile: 305-789-7789or such other address as may be designated in writing hereafter in accordance with this Section 29by such Person.30. Governing Law, Jurisdiction and Waiver of Jury Trial.(a) THIS AGREEMENT AND THE ANCILLARY AGREEMENTS SHALL BE GOVERNED BY AND CONSTRUED ANDENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE ANDPERFORMED IN SUCH STATE, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.(b) EACH COMPANY AND HOLDINGS HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTSLOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR ANDDETERMINE ANY CLAIMS OR DISPUTES BETWEEN ANY COMPANY, ON THE ONE HAND, AND LENDER, ON THE OTHERHAND, PERTAINING TO THIS AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS OR TO ANY MATTER ARISING OUTOF OR RELATED TO THIS AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS; PROVIDED, THAT LENDERAND EACH COMPANY AND HOLDINGS ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARDBY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND FURTHERPROVIDED, THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE LENDERFROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT THEOBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCEA JUDGMENT OR OTHER COURT ORDER IN FAVOR OF LENDER. EACH COMPANY AND HOLDINGS EXPRESSLY SUBMITSAND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT,AND EACH COMPANY AND HOLDINGS HEREBY WAIVES ANY OBJECTION THAT IT MAY HAVE BASED UPON LACK OFPERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS. EACH COMPANY AND HOLDINGSHEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCHACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHERPROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO COMPANY AGENT AT THE ADDRESSSET FORTH IN SECTION 29 AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OFCOMPANY AGENT’S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPERPOSTAGE PREPAID.
 
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(c) THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLELAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OFARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, ORPROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEENLENDER, AND/OR ANY COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THERELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT, ANY ANCILLARY AGREEMENTOR THE TRANSACTIONS RELATED HERETO OR THERETO.31. Limitation of Liability. Each Company acknowledges and understands that in orderto assure repayment of the Obligations hereunder Lender may be required to exercise any and all ofLender’s rights and remedies hereunder and agrees that, except as limited by applicable law,neither Lender nor any of Lender’s agents shall be liable for acts taken or omissions made inconnection herewith or therewith except for actual bad faith.32. Entire Understanding; Maximum Interest. This Agreement and the AncillaryAgreements contain the entire understanding among each Company, Holdings and Lender as to thesubject matter hereof and thereof and any promises, representations, warranties or guarantees notherein contained shall have no force and effect unless in writing, signed by each Company’s andLender’s respective officers. Neither this Agreement, the Ancillary Agreements, nor any portion orprovisions thereof may be changed, modified, amended, waived, supplemented, discharged, cancelledor terminated orally or by any course of dealing, or in any manner other than by an agreement inwriting, signed by the party to be charged. Nothing contained in this Agreement, any AncillaryAgreement or in any document referred to herein or delivered in connection herewith shall be deemedto establish or require the payment of a rate of interest or other charges in excess of the maximumrate permitted by applicable law. In the event that the rate of interest or dividends required tobe paid or other charges hereunder exceed the maximum rate permitted by such law, any payments inexcess of such maximum shall be credited against amounts owed by the Companies to Lender and thusrefunded to the Companies.33. Severability. Wherever possible each provision of this Agreement or the AncillaryAgreements shall be interpreted in such manner as to be effective and valid under applicable law,but if any provision of this Agreement or the Ancillary Agreements shall be prohibited by orinvalid under applicable law such provision shall be ineffective to the extent of such prohibitionor invalidity, without invalidating the remainder of such provision or the remaining provisionsthereof.
 
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34. Survival. The representations, warranties, covenants and agreements made hereinshall survive any investigation made by Lender and the closing of the transactionscontemplated hereby to the extent provided therein. All statements as to factual matterscontained in any certificate or other instrument delivered by or on behalf of the Companiespursuant hereto in connection with the transactions contemplated hereby shall be deemed to berepresentations and warranties by the Companies hereunder solely as of the date of such certificateor instrument. All indemnities set forth herein shall survive the execution, delivery andtermination of this Agreement and the Ancillary Agreements and the making and repaying of theObligations.35. Captions. All captions are and shall be without substantive meaning or content ofany kind whatsoever.36. Counterparts; Telecopier Signatures. This Agreement may be executed in one ormore counterparts, each of which shall constitute an original and all of which taken together shallconstitute one and the same agreement. Any signature delivered by a party via telecopiertransmission shall be deemed to be any original signature hereto.37. Construction. The parties acknowledge that each party and its counsel havereviewed this Agreement and that the normal rule of construction to the effect that any ambiguitiesare to be resolved against the drafting party shall not be employed in the interpretation of thisAgreement or any amendments, schedules or exhibits thereto.38. Publicity. Each Company hereby authorizes Lender to make appropriateannouncements of the financial arrangement entered into by and among each Company and Lender,including, without limitation, announcements which are commonly known as tombstones, in suchpublications and to such selected parties as Lender shall in its sole and absolute discretion deemappropriate, or as required by applicable law.39. Joinder. It is understood and agreed that any Person that desires to become aCompany hereunder, or is required to execute a counterpart of this Agreement after the date hereofpursuant to the requirements of this Agreement or any Ancillary Agreement, shall become a Companyhereunder by (a) executing a Joinder Agreement in form and substance satisfactory to Lender, (b)delivering supplements to such exhibits and annexes to this Agreement and the Ancillary Agreementsas Lender shall reasonably request and (c) taking all actions as specified in this Agreement aswould have been taken by such Company had it been an original party to this Agreement, in each casewith all documents required above to be delivered to Lender and with all documents and actionsrequired above to be taken to the reasonable satisfaction of Lender.40. Legends. The Securities shall bear legends as follows;(a) Any shares of Common Stock issued pursuant to exercise of the Warrants, shall bear alegend which shall be in substantially the following form until such shares are covered by aneffective registration statement filed with the SEC:“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTEREDUNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE,STATE SECURITIES LAWS. THESE SHARES MAY NOT BESOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF ANEFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT ANDAPPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLYSATISFACTORY TO DIGITAL ANGEL CORPORATION THAT SUCH REGISTRATION ISNOT REQUIRED.”
 
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(b) The Warrants shall bear substantially the following legend:“THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THISWARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THIS WARRANTAND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOTBE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OFAN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT OR THEUNDERLYING SHARES OF COMMON STOCK UNDER SAID ACT AND APPLICABLESTATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLYSATISFACTORY TO DIGITAL ANGEL CORPORATION THAT SUCH REGISTRATION ISNOT REQUIRED.”[Balance of page intentionally left blank; signature page follows.]
 
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IN WITNESS WHEREOF, the parties have executed this Security Agreement as of the date firstwritten above.      **DIGITAL ANGEL CORPORATION**