Applied Digital Reports 2006 Fourth Quarter and Full Year Financial Results

  
    
  
  
    
      Applied Digital Solutions, Inc. (the "Company" or "Applied Digital") 
      (NASDAQ: ADSX), a leading provider of identification and security 
      technology, today reported financial results for its fourth quarter 
      ended December 31, 2006, and full year 2006. The Company’s 
      consolidated financial results include the financial position, operating 
      results and cash flows of its majority-owned subsidiaries, VeriChip 
      Corporation ("VeriChip") (NASDAQ: CHIP), Digital Angel Corporation 
      ("Digital Angel") (AMEX: DOC), and InfoTech USA, Inc. ("InfoTech") (OTC: 
      IFTH).
    
    
      The Company’s 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.
      
    
    
      Conference Call
    
    
      The Company will host a conference call today for investors, analysts, 
      business and trade media, and other interested parties at 9:00 a.m. EST 
      to discuss these results. Interested participants should call (866) 
      323-2725 within the United States or [phone] internationally. 
      Please use passcode 1326714. Alternatively, an audio-only, simultaneous 
      Web cast of the live conference call can be accessed through the 
      Investor Relations link on the Company's Web site at www.adsx.com. 
      For persons unable to participate in either the conference call or the 
      Web cast, a digitized replay will be available from March 9 at 
      approximately 11:30 a.m. EST to April 8 at 11.59 p.m. EST. For the 
      replay, dial [phone] (USA) or [phone] (international), 
      using access code 1326714. Alternatively, a replay can be accessed 
      through the Investor Relations section under "Audio Archives" on the 
      Company's Web site at www.adsx.com.
    
    
      About Applied Digital - "The Power of Identification Technology"
    
    
      Applied Digital develops innovative identification and security products 
      for consumer, commercial, and government sectors worldwide. The 
      Company's unique and often proprietary products provide identification 
      and security systems for people, animals, the food supply, 
      government/military arena, and commercial assets. Included in this 
      diversified product line are RFID applications, end-to-end food safety 
      systems, GPS/Satellite communications, and telecomm and security 
      infrastructure, positioning Applied Digital as the leader in 
      identification technology. Applied Digital is the owner of majority 
      positions in Digital Angel Corporation (AMEX: DOC) 
      and VeriChip Corporation (NASDAQ: CHIP).
    
    
      This press release contains certain “forward-looking” 
      statements (as such term is defined in the Private Securities Litigation 
      Reform Act of 1995). Forward-looking statements included in this press 
      release include, without limitation, those concerning expectations for 
      strong revenue growth of our RFID and other businesses, success of the 
      Company’s marketing and sales initiative, and 
      expected growth in sales, earnings and improvement in gross margins. 
      These forward-looking statements are based on the Company's current 
      expectations and beliefs and are subject to a number of risks, 
      uncertainties and assumption. Among the important factors that could 
      cause actual results to differ materially from those expressed in, or 
      implied by, the forward-looking statements are our ability to 
      successfully implement our business strategy; uncertainty as to our 
      working capital requirements over the next 12 to 24 months; our ability 
      to successfully integrate the businesses of acquired companies; our 
      ability to maintain compliance with the covenants of our credit 
      facilities; our expectation regarding future profitability and 
      liquidity; competitive and economic influences; market acceptance of our 
      VeriMed system; our ability to provide uninterrupted, secure access to 
      the VeriMed database; the relative maturity in the U.S. and limited size 
      of the markets for our infant protection and wander prevention systems 
      and vibration monitoring instruments; the degree of success we have in 
      leveraging our brand reputation, reseller network and end-use customer 
      base for our infant protection and wander prevention systems to gain 
      inroads in the emerging market for asset/staff location and 
      identification systems; the rate and extent of the U.S. healthcare 
      industry’s adoption of RFID asset/staff 
      location and identification systems; our ability to complete our efforts 
      to integrate our infant protection, wander prevention and asset/staff 
      location and identification systems on one technology platform; our 
      ability to become a major player in the food source traceability and 
      safety arena; our ability to successfully develop survival and emergency 
      radios for the military and commercial uses; our reliance on third-party 
      dealers and distributors to successfully market and sell our products; 
      our ability to defend against costly product liability claims and claims 
      that our products infringe the intellectual property rights of others; 
      our ability to comply with current and future regulations relating to 
      our businesses; and our ability to maintain proper and effective 
      internal accounting and financial controls. Additional 
      information about these and other factors that could affect the 
      Company's business is set forth in the Company's Form 10-K/A under the 
      caption "Risk Factors" filed with the Securities and Exchange Commission 
      on April 6, 2006. The Company undertakes no obligation to update 
      or release any revisions to these forward-looking statements to reflect 
      events or circumstances after the date of this statement or to reflect 
      the occurrence of unanticipated events, except as required by law.
    
    
      
        
          
            APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
          
          
            CONSOLIDATED BALANCE SHEETS DATA
          
          
            (In thousands, except par value)
          
        
      
      
        
        
        
        
        
           
        
      
      
        
          ASSETS
        
        
        
        
          
            December 31,
          
        
      
      
        
        
        
        
        
          2006 
        
        
           
        
        
          2005 
        
      
      
        
          CURRENT ASSETS
        
        
        
        
        
        
        
        
        
      
      
        
          Cash and cash equivalents
        
        
        
        
          $ 7,404 
        
        
        
        
          $ 22,417 
        
      
      
        
          
            Restricted cash
          
        
        
        
        
          81 
        
        
        
        
          310 
        
      
      
        
          
            Accounts receivable and unbilled receivables (net of allowance for 
            doubtful accounts of $1,045 in 2006 and $838 in 2005)
          
        
        
        
        
          22,855 
        
        
        
        
          26,236 
        
      
      
        
          Inventories
        
        
        
        
          14,331 
        
        
        
        
          12,317 
        
      
      
        
          Deferred taxes
        
        
        
        
          697 
        
        
        
        
          392 
        
      
      
        
          Other current assets
        
        
           
        
        
          4,792 
        
        
           
        
        
          3,232 
        
      
      
        
          TOTAL CURRENT ASSETS
        
        
        
        
          50,160 
        
        
        
        
          64,934 
        
      
      
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          PROPERTY AND EQUIPMENT, NET
        
        
        
        
          12,131 
        
        
        
        
          11,120 
        
      
      
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          GOODWILL, NET
        
        
        
        
          82,385 
        
        
        
        
          86,231 
        
      
      
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          INTANGIBLES, NET
        
        
        
        
          20,200 
        
        
        
        
          21,568 
        
      
      
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          DEFERRED OFFERING COSTS
        
        
        
        
          5,079 
        
        
        
        
          1,140 
        
      
      
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          OTHER ASSETS, NET
        
        
           
        
        
          1,395 
        
        
           
        
        
          995 
        
      
      
        
        
        
        
        
        
        
        
        
           
        
      
      
        
           
        
        
           
        
        
          $ 171,350 
        
        
           
        
        
          $ 185,958 
        
      
      
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          LIABILITIES AND STOCKHOLDERS’ EQUITY
        
      
      
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          CURRENT LIABILITIES
        
        
        
        
        
        
        
        
        
      
      
        
          Notes payable and current maturities of long-term debt
        
        
        
        
          $ 7,326 
        
        
        
        
          $ 3,645 
        
      
      
        
          Accounts payable
        
        
        
        
          18,741 
        
        
        
        
          12,465 
        
      
      
        
          Accrued expenses
        
        
        
        
          19,121 
        
        
        
        
          22,311 
        
      
      
        
          Deferred revenue
        
        
        
        
          4,356 
        
        
        
        
          2,765 
        
      
      
        
          Net liabilities of discontinued operations
        
        
           
        
        
          5,407 
        
        
           
        
        
          5,499 
        
      
      
        
          TOTAL CURRENT LIABILITIES
        
        
        
        
          54,951 
        
        
        
        
          46,685 
        
      
      
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          LONG-TERM DEBT AND NOTES PAYABLE
        
        
        
        
          14,211 
        
        
        
        
          15,692 
        
      
      
        
          DEFERRED TAXES
        
        
        
        
          5,803 
        
        
        
        
          5,614 
        
      
      
        
          OTHER LONG-TERM LIABILITIES
        
        
           
        
        
          3,447 
        
        
           
        
        
          1,659 
        
      
      
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          TOTAL LIABILITIES
        
        
           
        
        
          78,412 
        
        
           
        
        
          69,680 
        
      
      
        
          COMMITMENTS AND CONTINGENCIES
        
        
           
        
        
           
        
        
           
        
        
           
        
      
      
        
          MINORITY INTEREST
        
        
           
        
        
          49,074 
        
        
           
        
        
          49,762 
        
      
      
        
           
        
        
           
        
        
           
        
        
           
        
        
           
        
      
      
        
          TOTAL STOCKHOLDERS’ EQUITY
        
        
           
        
        
          43,864 
        
        
           
        
        
          66,546 
        
      
      
        
        
        
        
        
        
        
        
        
           
        
      
      
        
           
        
        
           
        
        
          $ 171,350 
        
        
           
        
        
          $ 185,958 
        
      
    
    
    
    
      
        
          
             
          
          
            APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
          
          
            CONSOLIDATED STATEMENTS OF OPERATIONS DATA
          
          
            (In thousands, except per share data)
          
        
      
      
        
        
        
        
        
           
        
      
      
        
        
        
        
        
          For the years ended December 31,
        
      
      
        
        
        
        
        
          2006 
        
        
           
        
        
          2005 
        
        
           
        
        
          2004 
        
      
      
        
          PRODUCT REVENUE
        
        
        
        
          $ 104,206 
        
        
        
        
          $ 97,669 
        
        
        
        
          $ 96,755 
        
      
      
        
          SERVICE REVENUE
        
        
           
        
        
          18,482 
        
        
           
        
        
          16,068 
        
        
           
        
        
          15,244 
        
      
      
        
          TOTAL REVENUE
        
        
        
        
          122,688 
        
        
        
        
          113,737 
        
        
        
        
          111,999 
        
      
      
        
          COST OF PRODUCTS SOLD
        
        
        
        
          63,114 
        
        
        
        
          60,222 
        
        
        
        
          71,851 
        
      
      
        
          COST OF SERVICES SOLD
        
        
           
        
        
          8,474 
        
        
           
        
        
          8,611 
        
        
           
        
        
          7,365 
        
      
      
        
          GROSS PROFIT
        
        
        
        
          51,100 
        
        
        
        
          44,904 
        
        
        
        
          32,704 
        
      
      
        
        
        
        
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          OPERATING COSTS AND EXPENSES:
        
        
        
        
        
        
        
        
        
        
        
        
        
      
      
        
          SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
        
        
        
        
          63,055 
        
        
        
        
          51,101 
        
        
        
        
          38,164 
        
      
      
        
          RESEARCH AND DEVELOPMENT
        
        
        
        
          8,947 
        
        
        
        
          7,202 
        
        
        
        
          3,795 
        
      
      
        
          GOODWILL AND ASSET IMPAIRMENT
        
        
           
        
        
          6,629 
        
        
           
        
        
          7,141 
        
        
           
        
        
          — 
        
      
      
        
          TOTAL OPERATING COSTS AND EXPENSES
        
        
        
        
          78,631 
        
        
        
        
          58,303 
        
        
        
        
          41,959 
        
      
      
        
        
        
        
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          OPERATING LOSS BEFORE OTHER ITEMS
        
        
        
        
          (27,531)
        
        
        
        
          (13,399)
        
        
        
        
          (9,255)
        
      
      
        
        
        
        
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          INTEREST AND OTHER INCOME
        
        
        
        
          1,330 
        
        
        
        
          2,643 
        
        
        
        
          1,896 
        
      
      
        
          INTEREST (EXPENSE) RECOVERY
        
        
           
        
        
          (3,454)
        
        
           
        
        
          1,720 
        
        
           
        
        
          (2,860)
        
      
      
        
          TOTAL OTHER (EXPENSES) INCOME
        
        
        
        
          (2,124)
        
        
        
        
          4,363 
        
        
        
        
          (964)
        
      
      
        
        
        
        
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          LOSS FROM CONTINUING OPERATIONS BEFORE TAXES, MINORITY INTEREST, AND 
          GAINS (LOSSES) ATTRIBUTABLE TO CAPITAL TRANSACTIONS OF SUBSIDIARIES
        
        
        
        
          (29,655)
        
        
        
        
          (16,177)
        
        
        
        
          (10,219)
        
      
      
        
        
        
        
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          (PROVISION) BENEFIT FOR INCOME TAXES
        
        
           
        
        
          (62)
        
        
           
        
        
          447 
        
        
           
        
        
          (77)
        
      
      
        
          
            LOSS FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST,AND GAIN
          
        
        
        
        
          (29,717)
        
        
        
        
          (15,730)
        
        
        
        
          (10,296)
        
      
      
        
          
            (LOSS) ATTRIBUTABLE TO CAPITAL TRANSACTIONS OF SUBSIDIARIES 
            MINORITY INTEREST
          
        
        
        
        
          3,699 
        
        
        
        
          4,373 
        
        
        
        
          655 
        
      
      
        
          NET GAIN (LOSS) ON CAPITAL TRANSACTIONS OF SUBSIDIARIES
        
        
        
        
          (1,627)
        
        
        
        
          411 
        
        
        
        
          11,090 
        
      
      
        
          GAIN (LOSS) ATTRIBUTABLE TO CHANGES IN MINORITY INTEREST AS A RESULT 
          OF CAPITAL TRANSACTIONS OF SUBSIDIARIES
        
        
           
        
        
          436 
        
        
           
        
        
          
            598 
          
        
        
           
        
        
          (20,203)
        
      
      
        
          LOSS FROM CONTINUING OPERATIONS
        
        
        
        
          (27,209)
        
        
        
        
          (10,348)
        
        
        
        
          (18,754)
        
      
      
        
          
            GAIN (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES OF $0
          
        
        
        
        
          — 
        
        
        
        
          99 
        
        
        
        
          (730)
        
      
      
        
          
            CHANGE IN ESTIMATE ON LOSS ON DISPOSAL AND OPERATING LOSSES DURING 
            THE PHASE OUT PERIOD
          
        
        
           
        
        
          — 
        
        
           
        
        
          84 
        
        
           
        
        
          2,185 
        
      
      
        
          INCOME FROM DISCONTINUED OPERATIONS
        
        
        
        
          — 
        
        
        
        
          183 
        
        
        
        
          1,455 
        
      
      
        
        
        
        
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          NET LOSS
        
        
        
        
          (27,209)
        
        
        
        
          (10,165)
        
        
        
        
          (17,299)
        
      
      
        
          PREFERRED STOCK DIVIDENDS
        
        
        
        
          — 
        
        
        
        
          (1,573)
        
        
        
        
          — 
        
      
      
        
          ACCRETION OF BENEFICIAL CONVERSION FEATURE OF REDEEMABLE PREFERRED 
          STOCK – SERIES D
        
        
           
        
        
          — 
        
        
           
        
        
          
            (474)
          
        
        
           
        
        
          
            — 
          
        
      
      
        
          NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
        
        
           
        
        
          $ (27,209)
        
        
           
        
        
          $ (12,212)
        
        
           
        
        
          $ (17,299)
        
      
      
        
          
            (LOSS) EARNINGS PER COMMON SHARE – 
            BASIC AND DILUTED
          
        
        
        
        
        
        
        
        
        
        
        
        
        
      
      
        
          LOSS FROM CONTINUING OPERATIONS
        
        
        
        
          $ (0.40)
        
        
        
        
          $ (0.20)
        
        
        
        
          $ (0.37)
        
      
      
        
          INCOME FROM DISCONTINUED OPERATIONS
        
        
           
        
        
          — 
        
        
           
        
        
          0.01 
        
        
           
        
        
          0.03 
        
      
      
        
        
        
        
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          NET (LOSS) INCOME PER COMMON SHARE – 
          BASIC AND DILUTED
        
        
           
        
        
          $ (0.40)
        
        
           
        
        
          $ (0.19)
        
        
           
        
        
          $ (0.34)
        
      
      
        
        
        
        
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – 
          BASIC AND DILUTED
        
        
           
        
        
          67,338 
        
        
           
        
        
          62,900 
        
        
           
        
        
          51,291