**Exhibit10.4**

 

THIS WARRANT AND THESHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEENREGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS WARRANT AND THECOMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD,OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVEREGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT OR AN OPINION OFCOUNSEL REASONABLY SATISFACTORY TO DIGITAL ANGEL CORPORATION THAT SUCHREGISTRATION IS NOT REQUIRED.

 
|   |   | Right  to Purchase 125,000 Shares of Common Stock of Digital Angel Corporation  (subject to adjustment as provided herein) |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------|

 

**COMMON STOCK PURCHASE WARRANT**

 
| No. 2003-1 |   | Issue Date:   July 31, 2003 |
|------------|--------|---------------------------------------|

 

DIGITAL ANGELCORPORATION, a corporation organized under the laws of the State of Delaware(the “Company”), hereby certifies that, for value received, LAURUS MASTER FUND,LTD., or its assigns (the “Holder”), is entitled, subject to the terms setforth below, to purchase from the Company from and after the Issue Date of thisWarrant and at any time or from time to time before 5:00 p.m., New York time,through five (5) years after such date (the “Expiration Date”), up to 125,000fully paid and nonassessable shares of Common Stock (as hereinafter defined),$.005 par value, of the Company, at the Exercise Price (as defined below). Thenumber and character of such shares of Common Stock and the Exercise Price aresubject to adjustment as provided herein.

 

As used herein thefollowing terms, unless the context otherwise requires, have the followingrespective meanings:

 

(a)                                  Theterm “Company” shall include Digital Angel Corporation and any corporationwhich shall succeed or assume the obligations of Digital Angel Corporationhereunder.

 

(b)                                 Theterm “Common Stock” includes (a) the Company’s Common Stock, par value $.005per share, and (b) any other securities into which or for which any of thesecurities described in (a) may be converted or exchanged pursuant to a plan ofrecapitalization, reorganization, merger, sale of assets or otherwise.

 

(c)                                  Theterm “Other Securities” refers to any stock (other than Common Stock) and othersecurities of the Company or any other person (corporate or otherwise) whichthe holder of the Warrant at any time shall be entitled to receive, or shallhave received, on the exercise of the Warrant, in lieu of or in addition toCommon Stock, or which at any time shall be issuable or shall have been issuedin exchange for or in replacement of Common Stock or Other Securities pursuantto Section 4 or otherwise.

 

(d)                                 Theterm “Exercise Price” shall be as follows:

 

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a.                                       75,000shares at $2.68 per share;

 

b.                                      35,000shares at $2.91 per share; and

 

c.                                       15,000shares at $3.38 per share.

 

# 1.                                       **Exercise ofWarrant**.

 

## 1.1                                 Numberof Shares Issuable upon Exercise. From and after the date hereof and through and including the ExpirationDate, the Holder shall be entitled to receive, upon exercise of this Warrant,in whole or in part, by delivery of an original or fax copy of the exercisenotice attached hereto as Exhibit A (the “Exercise Notice”), shares of CommonStock of the Company, subject to adjustment pursuant to Section 4.

 

## 1.2                                 FairMarket Value.  Fair Market Value ofa share of Common Stock as of a particular date (the “Determination Date”)shall mean:

##  

#### (a)                                  Ifthe Company’s Common Stock is traded on an exchange or is quoted on theNational or SmallCap Market of The Nasdaq Stock Market, Inc. (“Nasdaq”), thenthe closing or last sale price, respectively, reported for the last businessday immediately preceding the Determination Date.

####  

#### (b)                                 Ifthe Company’s Common Stock is not traded on an exchange or on the Nasdaq but istraded on the NASD OTC Bulletin Board or BBX Exchange, then the mean of theaverage of the closing bid and asked prices reported for the last business dayimmediately preceding the Determination Date.

####  

#### (c)                                  Exceptas provided in clause (d) below, if the Company’s Common Stock is not publiclytraded, then as the Holder and the Company agree or in the absence of agreementby arbitration in accordance with the rules then in effect of the AmericanArbitration Association, before a single arbitrator to be chosen from a panelof persons qualified by education and training to pass on the matter to bedecided.

####  

#### (d)                                 Ifthe Determination Date is the date of a liquidation, dissolution or winding up,or any event deemed to be a liquidation, dissolution or winding up pursuant tothe Company’s charter, then all amounts to be payable per share to holders ofthe Common Stock pursuant to the charter in the event of such liquidation,dissolution or winding up, plus all other amounts to be payable per share inrespect of the Common Stock in liquidation under the charter, assuming for thepurposes of this clause (d) that all of the shares of Common Stock thenissuable upon exercise of the Warrant are outstanding at the DeterminationDate.

####  

# 2.                                       **Procedurefor Exercise**.

#  

## 2.1                                 Deliveryof Stock Certificates, etc. on Exercise. The Company agrees that the sharesof Common Stock purchased upon exercise of this Warrant shall be deemed to beissued to the Holder as the record owner of such shares as of the close ofbusiness on the date on which this Warrant shall have been surrendered andpayment made for such shares as aforesaid. As soon as practicable after theexercise of this Warrant in whole or in part, and in any event

 

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within 3 business days thereafter, the Company at its expense(including the payment by it of any applicable issue taxes) will cause to beissued in the name of and delivered to the Holder, or as such Holder (uponpayment by such holder of any applicable transfer taxes) may direct incompliance with applicable securities laws, a certificate or certificates forthe number of duly and validly issued, fully paid and nonassessable shares ofCommon Stock (or Other Securities) to which such Holder shall be entitled onsuch exercise, plus, in lieu of any fractional share to which such holder wouldotherwise be entitled, cash equal to such fraction multiplied by the then FairMarket Value of one full share, together with any other stock or othersecurities and property (including cash, where applicable) to which such Holderis entitled upon such exercise pursuant to Section 1 or otherwise.

##  

## 2.2                                 Exercise.

##  

#### (a)                                  Paymentmay be made either in (i) cash or by certified or official bank check payableto the order of the Company equal to the applicable aggregate Exercise Price,(ii) by delivery of the Warrant, Common Stock and/or Common Stock receivableupon exercise of the Warrant in accordance with Section (b) below, or (iii) bya combination of any of the foregoing methods, for the number of Common Sharesspecified in such form (as such exercise number shall be adjusted to reflectany adjustment in the total number of shares of Common Stock issuable to theholder per the terms of this Warrant), and the Holder shall thereupon beentitled to receive the number of duly authorized, validly issued, fully-paidand non-assessable shares of Common Stock (or Other Securities) determined as providedherein.

####  

#### (b)                                 Notwithstandingany provisions herein to the contrary, if the Fair Market Value of one share ofCommon Stock is greater than the Exercise Price (at the date of calculation asset forth below), in lieu of exercising this Warrant for cash, the Holder mayelect to receive shares equal to the value (as determined below) of thisWarrant (or the portion thereof being exercised) by surrender of this Warrantat the principal office of the Company together with the properly endorsedExercise Notice in which event the Company shall issue to the Holder a numberof shares of Common Stock computed using the following formula:

####  

| X=Y (A-B) |
|----------------|
| A              |   |

 
| Where X | =      | the number of  shares of Common Stock to be issued to the Holder                                                                                                                                            |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                        |   |   |
| Y       | =      | the number of  shares of Common Stock purchasable under the Warrant or, if only a portion of  the Warrant is being exercised, the portion of the Warrant being exercised  (at the date of such calculation) |
|    |   |                                                                                                                                                                                                        |   |   |
| A       | =      | the Fair Market Value  of one share of the Company’s Common Stock (at the date of such calculation)                                                                                                    |
|    |   |                                                                                                                                                                                                        |   |   |
| B       | =      | Exercise Price (as  adjusted to the date of such calculation)                                                                                                                                               |

 

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# 3.                                       **Effect ofReorganization, etc.; Adjustment of Exercise Price**.

#  

## 3.1                                 Reorganization,Consolidation, Merger, etc.  In caseat any time or from time to time, the Company shall (a) effect areorganization, (b) consolidate with or merge into any other person, or (c)transfer all or substantially all of its properties or assets to any otherperson under any plan or arrangement contemplating the dissolution of theCompany, then, in each such case, as a condition to the consummation of such atransaction, proper and adequate provision shall be made by the Company wherebythe Holder of this Warrant, on the exercise hereof as provided in Section 1 atany time after the consummation of such reorganization, consolidation or mergeror the effective date of such dissolution, as the case may be, shall receive,in lieu of the Common Stock (or Other Securities) issuable on such exerciseprior to such consummation or such effective date, the stock and othersecurities and property (including cash) to which such Holder would have beenentitled upon such consummation or in connection with such dissolution, as thecase may be, if such Holder had so exercised this Warrant, immediately priorthereto, all subject to further adjustment thereafter as provided in Section 4.

##  

## 3.2                                 Dissolution.  In the event of any dissolution of theCompany following the transfer of all or substantially all of its properties orassets, the Company, prior to such dissolution, shall at its expense deliver orcause to be delivered the stock and other securities and property (includingcash, where applicable) receivable by the Holder of the Warrant after theeffective date of such dissolution pursuant to Section 3.1 to a bank or trustcompany having its principal office in New York, NY, as trustee for the Holderof the Warrant.

 

## 3.3                                 Continuationof Terms.  Upon any reorganization,consolidation, merger or transfer (and any dissolution following any transfer)referred to in this Section 3, this Warrant shall continue in full force andeffect and the terms hereof shall be applicable to the shares of stock andother securities and property receivable on the exercise of this Warrant afterthe consummation of such reorganization, consolidation or merger or theeffective date of dissolution following any such transfer, as the case may be,and shall be binding upon the issuer of any such stock or other securities, including,in the case of any such transfer, the person acquiring all or substantially allof the properties or assets of the Company, whether or not such person shallhave expressly assumed the terms of this Warrant as provided in Section 4.  In the event this Warrant does not continuein full force and effect after the consummation of the transactions describedin this Section 3, then only in such event will the Company’s securities andproperty (including cash, where applicable) receivable by the holders of theWarrant be delivered to the Trustee as contemplated by Section 3.2.

##  

# 4.                                       **ExtraordinaryEvents Regarding Common Stock**. In the event that the Company shall (a) issue additional shares of theCommon Stock as a dividend or other distribution on outstanding Common Stock,(b) subdivide its outstanding shares of Common Stock, or (c) combine itsoutstanding shares of the Common Stock into a smaller number of shares of theCommon Stock, then, in each such event, the Exercise Price shall,simultaneously with the happening of such event, be adjusted by multiplying thethen Exercise Price by a fraction, the numerator of which shall be the numberof shares of Common Stock outstanding immediately prior to such event and thedenominator of which shall be the number of shares of Common Stock outstandingimmediately after such event, and the product so obtained shall thereafter bethe Exercise Price then in effect. The Exercise Price, as so adjusted, shall be

 

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readjusted in the same manner upon the happening of any successiveevent or events described herein in this Section 4. The number of shares ofCommon Stock that the holder of this Warrant shall thereafter, on the exercisehereof as provided in Section 1, be entitled to receive shall be increased to anumber determined by multiplying the number of shares of Common Stock thatwould otherwise (but for the provisions of this Section 4) be issuable on suchexercise by a fraction of which (a) the numerator is the Exercise Price thatwould otherwise (but for the provisions of this Section 4) be in effect, and(b) the denominator is the Exercise Price in effect on the date of suchexercise.

#  

# 5.                                       **Certificateas to Adjustments**.  In eachcase of any adjustment or readjustment in the shares of Common Stock (or OtherSecurities) issuable on the exercise of the Warrant, the Company at its expensewill promptly cause its Chief Financial Officer or other appropriate designeeto compute such adjustment or readjustment in accordance with the terms of theWarrant and prepare a certificate setting forth such adjustment or readjustmentand showing in detail the facts upon which such adjustment or readjustment isbased, including a statement of (a) the consideration received or receivable bythe Company for any additional shares of Common Stock (or Other Securities)issued or sold or deemed to have been issued or sold, (b) the number of sharesof Common Stock (or Other Securities) outstanding or deemed to be outstanding,and (c) the Exercise Price and the number of shares of Common Stock to bereceived upon exercise of this Warrant, in effect immediately prior to suchadjustment or readjustment and as adjusted or readjusted as provided in thisWarrant. The Company will forthwith mail a copy of each such certificate to theholder of the Warrant and any Warrant agent of the Company (appointed pursuantto Section 11 hereof).

#  

# 6.                                       **Reservationof Stock, etc. Issuable on Exercise of Warrant**.  The Company will at all times reserve andkeep available, solely for issuance and delivery on the exercise of theWarrant, shares of Common Stock (or Other Securities) from time to timeissuable on the exercise of the Warrant.

#  

# 7.                                       **Assignment;Exchange of Warrant**.  Subjectto compliance with applicable securities laws, this Warrant, and the rightsevidenced hereby, may be transferred by any registered holder hereof (a“Transferor”) with respect to any or all of the Shares. On the surrender forexchange of this Warrant, with the Transferor’s endorsement in the form ofExhibit B attached hereto (the “Transferor Endorsement Form”) and together withevidence reasonably satisfactory to the Company demonstrating compliance withapplicable securities laws, which shall include, without limitation, a legalopinion from the Transferor’s counsel that such transfer is exempt from theregistration requirements of applicable securities laws, the Company at itsexpense but with payment by the Transferor of any applicable transfer taxes)will issue and deliver to or on the order of the Transferor thereof a newWarrant of like tenor, in the name of the Transferor and/or the transferee(s)specified in such Transferor Endorsement Form (each a “Transferee”), calling inthe aggregate on the face or faces thereof for the number of shares of CommonStock called for on the face or faces of the Warrant so surrendered by theTransferor.

#  

# 8.                                       **Replacementof Warrant**.  On receipt ofevidence reasonably satisfactory to the Company of the loss, theft, destructionor mutilation of this Warrant and, in the case of any such loss, theft ordestruction of this Warrant, on delivery of an indemnity agreement or securityreasonably satisfactory in form and amount to the Company or, in the case ofany such

 

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mutilation, on surrender and cancellation of this Warrant, the Companyat its expense will execute and deliver, in lieu thereof, a new Warrant of liketenor.

#  

# 9.                                       **RegistrationRights**.  The Holder of thisWarrant has been granted certain registration rights by the Company.  These registration rights are set forth in aRegistration Rights Agreement entered into by the Company and Purchaser of theCompany’s Convertible Note (the “Note”) at or prior to the issue date of thisWarrant.

#  

# 10.                                 **MaximumExercise**.  The Holder shallnot be entitled to exercise this Warrant on an exercise date, in connectionwith that number of shares of Common Stock which would be in excess of the sumof (i) the number of shares of Common Stock beneficially owned by the Holderand its affiliates on an exercise date, and (ii) the number of shares of CommonStock issuable upon the exercise of this Warrant with respect to which thedetermination of this proviso is being made on an exercise date, which wouldresult in beneficial ownership by the Holder and its affiliates of more than4.99% of the outstanding shares of Common Stock of the Company on suchdate.  For the purposes of the provisoto the immediately preceding sentence, beneficial ownership shall be determinedin accordance with Section 13(d) of the Securities Exchange Act of 1934, asamended, and Regulation 13d-3 thereunder. Subject to the foregoing, the Holder shall not be limited to aggregateexercises which would result in the issuance of more than 4.99%.  The restriction described in this paragraphmay be revoked upon 75 days’ prior notice from the Holder to the Company and isautomatically null and void upon an Event of Default under the Note.

#  

# 11.                                 **WarrantAgent**.  The Company may, bywritten notice to the each holder of the Warrant, appoint an agent for thepurpose of issuing Common Stock (or Other Securities) on the exercise of thisWarrant pursuant to Section 1, exchanging this Warrant pursuant to Section 7,and replacing this Warrant pursuant to Section 8, or any of the foregoing, andthereafter any such issuance, exchange or replacement, as the case may be,shall be made at such office by such agent.

#  

# 12.                                 **Transfer onthe Company’s Books**.  Untilthis Warrant is transferred on the books of the Company, the Company may treatthe registered holder hereof as the absolute owner hereof for all purposes,notwithstanding any notice to the contrary.

#  

# 13.                                 **Notices, etc**.  All notices and other communications fromthe Company to the Holder of this Warrant shall be mailed by first class registeredor certified mail, postage prepaid, at such address as may have been furnishedto the Company in writing by such holder or, until any such Holder furnishes tothe Company an address, then to, and at the address of, the last Holder of thisWarrant who has so furnished an address to the Company.

#  

# 14.                                 **VoluntaryAdjustment by the Company**. The Company may at any time during the term of this Warrant reduce thethen current Exercise Price to any amount and for any period of time deemedappropriate by the Board of Directors of the Company.

#  

# 15.                                 **Miscellaneous**.  This Warrant and any term hereof may bechanged, waived, discharged or terminated only by an instrument in writingsigned by the party against which enforcement of such change, waiver, dischargeor termination is sought.  This Warrantshall be

 

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governed by and construed in accordance with the laws of State of NewYork without regard to principles of conflicts of laws.  Any action brought by either party concerningthe transactions contemplated by this Warrant shall be brought only in thestate courts of New York or in the federal courts located in the state of NewYork.  The individuals executing thisWarrant on behalf of the Company agree to submit to the jurisdiction of suchcourts and waive trial by jury.  Theprevailing party shall be entitled to recover from the other party itsreasonable attorney’s fees and costs. In the event that any provision of this Warrant is invalid orunenforceable under any applicable statute or rule of law, then such provisionshall be deemed inoperative to the extent that it may conflict therewith andshall be deemed modified to conform with such statute or rule of law.  Any such provision which may prove invalidor unenforceable under any law shall not affect the validity or enforceabilityof any other provision of this Warrant. The headings in this Warrant are forpurposes of reference only, and shall not limit or otherwise affect any of theterms hereof.  The invalidity orunenforceability of any provision hereof shall in no way affect the validity orenforceability of any other provision. The Company acknowledges that legal counsel participated in thepreparation of this Warrant and, therefore, stipulates that the rule ofconstruction that ambiguities are to be resolved against the drafting partyshall not be applied in the interpretation of this Warrant to favor any partyagainst the other party.

 

IN WITNESS WHEREOF, theCompany has executed this Warrant under seal as of the date first writtenabove.

 
|     |   | DIGITAL  ANGEL CORPORATION |   |
|----------|--------|----------------------------|--------|
|     |   |                       |   |   |
|     |   |                       |   |   |
|     |   | By:                        |   |   |
|     |   |                       |   |   |   |   |
|     |   |                       |   |   |   |   |
| Witness: |   |                       |   |   |   |   |
|     |   |                       |   |   |   |   |
|     |   |                       |   |   |   |   |

 

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**ExhibitA**

 

FORMOF SUBSCRIPTION

 

(To besigned only on exercise of Warrant)

 

TO:                            DigitalAngel Corporation

 

The undersigned, pursuantto the provisions set forth in the attached Warrant(No.        ), hereby irrevocablyelects to purchase (check applicable box):

 

o                            sharesof the Common Stock covered by such Warrant; or

 

o            the maximum number of shares ofCommon Stock covered by such Warrant pursuant to the cashless exerciseprocedure set forth in Section 2.

 

The undersigned herewithmakes payment of the full Exercise Price for such shares at the price per shareprovided for in such Warrant, which is$                 .  Such payment takes the form of (checkapplicable box or boxes):

 

o            $                in lawful money of the United States; and/or

 

o            the cancellation of such portion ofthe attached Warrant as is exercisable for a total of                shares of Common Stock (using a Fair Market Value of$             pershare for purposes of this calculation); and/or

 

o            the cancellation of such number ofshares of Common Stock as is necessary, in accordance with the formula setforth in Section 2, to exercise this Warrant with respect to the maximum numberof shares of Common Stock purchaseable pursuant to the cashless exerciseprocedure set forth in Section 2.

 
| The undersigned  requests that the certificates for such shares be issued in the name of, and  delivered to |   |
|-------------------------------------------------------------------------------------------------------------|--------|
| whose address is                                                                                            |   |
|                                                                                                        |
|                                                                                                             |        |  |

 

The undersignedrepresents and warrants that all offers and sales by the undersigned of thesecurities issuable upon exercise of the within Warrant shall be made pursuantto registration of the Common Stock under the Securities Act of 1933, asamended (the “Securities Act”) or pursuant to an exemption from registrationunder the Securities Act.

 
|   |   |                                                                                |   |
|--------|--------|-------------------------------------------------------------------------------------|--------|
| Dated: |   |                                                                                |   |   |   |
|   |   | (Signature must conform  to name of holder as specified on the face of the Warrant) |   |
|   |   |                                                                                |   |
|   |   |                                                                                |   |
|   |   |                                                                                |   |
|   |   | (Address)                                                                           |   |
|        |        |                                                                                     |        |  |  |

 

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**ExhibitB**

 

FORMOF TRANSFEROR ENDORSEMENT(To be signed only on transfer of Warrant)

 

For value received, theundersigned hereby sells, assigns, and transfers unto the person(s) named belowunder the heading “Transferees” the right represented by the within Warrant topurchase the percentage and number of shares of Common Stock of Digital AngelCorporation to which the within Warrant relates specified under the headings“Percentage Transferred” and “Number Transferred,” respectively, opposite thename(s) of such person(s) and appoints each such person Attorney to transferits respective right on the books of Digital Angel Corporation with full powerof substitution in the premises.

 
| **Transferees** |   | **Percentage  Transferred** |   | **Number  Transferrred** |
|-----------------|--------|-----------------------------|--------|--------------------------|
|            |   |                        |   |                     |
|            |   |                        |   |                     |
|            |   |                        |   |                     |
|            |   |                        |   |                     |
|            |   |                        |   |                     |

 
|                        |   |                                                                                |   |
|-----------------------------|--------|-------------------------------------------------------------------------------------|--------|
| Dated:                      |   |                                                                                |   |   |   |
|                        |   | (Signature must conform  to name of holder as specified on the face of the Warrant) |   |
|                        |   |                                                                                |   |
| Signed in the presence  of: |   |                                                                                |   |
|                        |   |                                                                                |   |
|                        |   |                                                                                |   |
| (Name)                      |   | (address)                                                                           |   |
|                        |   |                                                                                |   |
| ACCEPTED AND AGREED:        |   |                                                                                |   |
| [TRANSFEREE]                |   | (address)                                                                           |   |
|                        |   |                                                                                |   |
|                        |   |                                                                                |   |
| (Name)                      |   |                                                                                |   |
|                             |        |                                                                                     |        |  |  |

 

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