Applied Digital Revenue Increased to $122.7 Million in 2006

DELRAY BEACH, Fla. - Applied Digital Solutions’ revenue increased to approximately $31.4 million for the 2006 fourth quarter, compared to revenue of $29.0 million for the 2006 third quarter. Digital Angel’s revenue increased to approximately $15.0 million for the 2006 fourth quarter, compared to approximately $13.2 million for the 2006 third quarter, while VeriChip generated revenue of approximately $7.0 million for the 2006 fourth quarter, compared to revenue of $6.8 million in the 2006 third quarter.

Gross profit increased to approximately $12.8 million in the 2006 fourth quarter, compared to approximately $12.4 million in the 2006 third quarter primarily as a result of increased gross profit at InfoTech and Digital Angel. Gross profit margin decreased to 40.7% in the 2006 fourth quarter, compared to approximately 42.6% in the 2006 third quarter.

The loss from continuing operations attributable to common stockholders for the 2006 fourth quarter was approximately $17.4 million, or ($0.26) per share, compared to a loss from continuing operations attributable to common stockholders for the 2006 third quarter of approximately $3.6 million, or ($0.05) per share. The additional loss was primarily a result of the impact of payments to the Company’s former chief executive officer, who is now the chief executive officer of VeriChip, and a non-cash goodwill impairment charge of approximately $6.6 million in the fourth quarter of 2006.

Revenue for the 2006 full year was $122.7 million, an increase of 7.9%, compared to 2005 full year revenue of $113.7 million. VeriChip generated 2006 full year revenue of $27.3 million, compared to 2005 revenue of $15.9 million, primarily attributable to two RFID businesses acquired during the first half of 2005. Sales of Pacific Decision Sciences Corporation’s (“PDSC”) service automation software increased to approximately $6.1 million for the 2006 full year, from $2.3 million for the 2005 full year. Digital Angel reported 2006 full year revenue of approximately $57.0 million, compared to 2005 full year revenue of approximately $56.8 million.

Gross profit increased to approximately $51.1 million for the 2006 full year from approximately $44.9 million for the 2005 full year, and gross profit margins increased to 41.7% for the 2006 full year from 39.5% for the 2005 full year. The improvement in both gross profit and gross profit margins was primarily a result of a more favorable mix of business, including higher overall sales from VeriChip, and sales of higher margin products and services at PDSC.

The loss from continuing operations attributable to common stockholders for the 2006 full year was approximately $27.2 million, or $0.40 per share, compared to a loss from continuing operations attributable to common stockholders for the 2005 full year of approximately $12.4 million, or $0.20 per share. The increase in the loss was primarily due to payments to the Company’s former chief executive officer, increased interest expense, increased sales and marketing costs at VeriChip related to its investment in its VeriMed Patient Identification System, increased amortization expense related to VeriChip’s intangible assets, which it acquired in connection with two business acquisitions in the first half of 2005, and increased compensation and legal expense at Digital Angel. Digital Angel has incurred significant legal expenses defending its intellectual property.

The Company ended 2006 with cash and cash equivalents totaling approximately $7.4 million.

Michael Krawitz, Chief Executive Officer of the Company, commented, “In 2006, we worked to accomplish the most critical element of our business model: the IPO of VeriChip, which began trading in February 2007. VeriChip’s healthcare security products for maternity wards and nursing homes grew at more than 11%, providing cash flow and growth while the VeriMed Patient Identification System network is being established. We believe that the combination of the existing healthcare business lines and the VeriMed Patient Identification System makes for good prospects for VeriChip, and therefore a good investment for Applied Digital.

“Moving forward, we’ll benefit from the fact that VeriChip and Digital Angel have positioned themselves as leaders in RFID for people (VeriChip) and RFID for animals (Digital Angel). With those two investments and the strong operational performance of our software programming team at PDSC, we believe we are able to undertake strategic initiatives from a position of strength.”

2006 fourth quarter and full year highlights include:

VeriChip reached record sales of its infant protection products across all product platforms and multiple geographies, focused in North America. Management of VeriChip estimates that one in three U.S. hospitals and birthing centers now use a VeriChip infant protection system.
VeriChip had a total of 392 medical facilities, 80 of which were protocol adopted, enrolled in the VeriMed Patient Identification System as of December 31, 2006. During the six-month period from July to December 2006, VeriChip recorded a 266% increase in the number of medical facilities that enrolled in the VeriMed network.
Digital Angel entered into an agreement to acquire the assets of McMurdo Marine Electronics Business, the U.K.’s manufacturer of emergency location beacons, for approximately $6.1 million (USD), with additional deferred payments up to $3 million (USD), depending upon performance of the business following the acquisition.
In February 2007, VeriChip completed its initial public offering, offering 3.1 million shares of its common stock at $6.50 per share.