Digital Angel Corporation (DIGA-NASDAQ)

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April 24, 2009 Issue

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Digital Angel Is Focused On Its Two Core Business Segments: Destron Fearing Animal Identification Products And SARBE And McMurdo GPS Emergency Identification Beacons

Company Profile:

Digital Angel Corporation (NASDAQ: DIGA) is an advanced technology company in the field of animal identification and emergency identification solutions. Digital Angel's products are utilized around the world in such applications as pet identification using its patented, FDA-approved implantable microchip; livestock identification and tracking using visual and radio frequency identification (RFID) ear tags; and global positioning systems (GPS) search and rescue beacons for use on aircraft, ships and boats, and by adventure enthusiasts Safeguarding the World.

Joseph J. Grillo
President, CEO and Director

Joseph J. Grillo is Chief Executive Officer and on the Board of Directors of Digital Angel. Mr. Grillo, an RFID industry veteran, is the former President and Chief Executive Officer of the Global Technologies Division of Assa Abloy, AB, a publicly held global manufacturer in the security and lock industry. Prior to being named to head up Assa Abloy’s Global Tech Division, Mr. Grillo formed and was responsible for the sales growth of the Identification Technology business unit, combining several disparate RFID and smart card businesses into an integrated world wide sales leader servicing several vertical markets with security based card, transponder and reader products. Mr. Grillo was a long-time executive and early founder of HID Global Corp., which he joined in 1993 as National Sales Manager. He later went on to assume the positions of VP of Sales, VP of Sales and Marketing and eventually COO in charge of the international sales organizations for HID. This led up to the sale of HID to current owner Assa Abloy in January 2001, upon which Mr. Grillo was named president of HID. During the 1993 to 2000 time period, he led HID sales organization in growing the company from $3 million to $92 million in annual sales. A recognized industry leader, Mr. Grillo has held positions with progressively increasing levels of responsibility at a number of industry leaders. From 1981 to 1993, he held sales and general management roles with major industry players including Security Specialists (acquired by TYCO), National Control Systems (acquired by ITI, now part of GE) and Kidde Automated Systems (eventually acquired by TYCO).

Networking & Communication Devices

Digital Angel Corporation
490 Villaume Avenue
South St. Paul, MN 55075
Phone: 651-552-6301

Interview conducted by: Lynn Fosse, Senior Editor,, Published - April 24, 2009

CEOCFO: Mr. Grillo, you have had a long history in the industry; why are you with Digital Angel today?

Mr. Grillo: “In my prior career I was involved with successful identification industry segment companies. I was in a situation where I had taken a number of months off to see what I wanted to do next in my life and came back in 2007 because of prior knowledge of Digital Angel. I became aware that the Board was looking to recruit someone to come in on an operational basis make significant changes and improvements to the business. I knew that the company was involved in some very good market segments with some very good products that had been around a long time and was well-recognized with name-brand in particular areas of interest, and we just ended up with a good opportunity to move forward.”


CEOCFO: How has Digital Angel changed under your leadership?

Mr. Grillo: “Most importantly, Digital Angel is focused on two very specific businesses; Destron Fearing, which is our animal identification business, and the emergency identification beacon business, under the brands SARBE (Search And Rescue Beacon Equipment) and McMurdo. Prior to my arrival, the parent company’s structure and strategy had been more of a venture capital type of company that invested in a number of different technology businesses, software businesses, tracking businesses, and a number of other things. So the most important change we made was the divesting a number of unprofitable, non-core businesses to raise capital, pay down debt and end up with a very focused company in just two market segments.”


CEOCFO: What are you doing in your two segments?

Mr. Grillo: “The first business is animal identification. This is a business that goes under the name of Destron Fearing, which is a strong historical name brand. Fearing was a 1940’s era company, in the stockyards in the Midwest and in Minnesota, that was one of the pioneers of putting tags on animals for livestock purposes and tracking animals in the food chain, which today has become a very important and highly visible topic in the media. The Destron group were pioneers in bringing electronic identification and radio frequency identification or RFID technology to the animal business, so after these companies were combined they became Destron Fearing. We are a market leader in providing both visual and radio frequency identification RFID technology to animals in the food chain, and as well we are the market leader worldwide in applying RFID technology to companion pets, such as cats and dogs. Through our partnership with Schering-Plough (NYSE: SGP), we supply their Home Again® product.


“We also put similar technology to work with wildlife, such as wild salmon, to track their movement through the dams in the Pacific Northwest of the United States. That is the animal ID business; it is a good and focused business. It is growing even in a tough economic environment because of a stronger regulatory environment and the need to have greater tracing of food products through the supply chain.


“The other side of our business is the emergency identification business; it is headquartered in the UK although it sells worldwide. There are two primary brands, SARBE, which is a defense-military type emergency Beacon product, and McMurdo, which produces similar technology, packaged differently for commercial and recreational applications. The products that we make at SARBE McMurdo are emergency Beacons, which summon search and rescue missions when there are emergency situations that require a rescue. SARBE has been around since WWII. We sell our products to 41 different defense ministries worldwide, and they are used on navy ships, on pilots, on aircraft and on the ground forces. McMurdo is the personal and recreational brand that uses the same technology for commercial vessels such as cargo ships, tugboats, other types of boats, and recreational boats. The latest McMurdo products are smaller and more miniaturized hand-held devices for use by outdoor enthusiasts who travel where their cell phone or other additional radio type products wouldn’t work.”


CEOCFO: How do the segments break down in terms of revenue and where is the growth coming from?

Mr. Grillo: “The two businesses are approximately equal in size, with revenues of about $40 million each. It is difficult to be very specific because of the movement in currencies in the world, particularly the pound to the US dollar exchange rate. Because we are an American company, quoted on NASDAQ, we report in US dollars, and there are some swings in the revenue due to currency movements, but approximately half-and-half between the two segments.


“Growth is coming across all areas. On the animal identification side there is a greater regulatory influence on tracking of food in the supply chain for safety purposes. In the companion pet market there has just been a growth rate of approximately 8% to 10% in the number of pets that are chipped each year. The purpose of chipping a pet is that if a pet is lost and brought to a shelter, the fact that it has a unique identification in a little chip embedded in it, allows pets to be reunited with their owners; that is a nice thing to have. In some cases, particularly in Europe, for example, there is an influence of stronger regulatory requirements to have pets chipped as they move around from country to country. We are seeing growth in all areas of the animal identification business.


“In the emergency identification business there has been strong recent growth because of an upgrade in the technology of the satellite system that GPS rescue beacons operate on. The satellite system that all of our beacons operate on is called COSPAS-SARSAT, which is an acronym of a satellite system that is supported by the United Nations, so it is free to use for anyone with a beacon. That satellite system is in the process of being upgraded to a different frequency and deploying a digital technology that replaces an older analog technology. This is a satellite system upgrade is strong driver for our business, as all the different beacons that have been involved need to be upgraded so they will function with a new satellite system as well with an introduction with newer, smaller less expensive beacons for outdoor enthusiasts. McMurdo just released the FAST FIND, a new beacon, which sells for under $300 retail in the US. So there is a lot of growth in the market for hikers, fly fishermen, backpackers, campers and other outdoor enthusiasts that travel around and would use one of those devices in their backpack or jacket pocket when they venture out into the wilderness, so to speak.”


CEOCFO: What is the competitive landscape for you in the two different areas?

Mr. Grillo: “We have a lot of competitors in both areas. In the animal ID business there is a very large competitor known as the industry leader called AllFlex, a French company, and a very good competitor. We feel like we are well positioned in some very specific markets to be a strong #2. The other thing that is important is that animal ID is a very fragmented industry, so there may be opportunities for consolidation.


“In the emergency ID beacon business, there are a number of competitors as well, both on the military side and the commercial and recreational side. It is an industry that I think is also characterized by smaller players and a somewhat fragmented landscape. It also has competitors and geographic segments different from our animal ID side, and there is some specific opportunity as well in emergency ID that we will see in the current economic environment; some consolidation going forward.”


CEOCFO: What is the financial picture like for you today, and what if anything has changed under the current economy?
Mr. Grillo: “It is a tough economic environment for any company operating out there. For us, things have only improved since the new management team came on, including myself in January of 2008. We have taken our debt from about $32 million in total debt to about half of that over the last fifteen, sixteen, months. We have put the company in a position where it is achieving a positive cash flow from continuing operations and expected to be profitable during this calendar year while experiencing growth; if not huge growth, at least good growth. Our economic prospects have improved over the last year and a half and we feel we have very great prospects to continue a better future for the company.”


CEOCFO: Are there geographic areas where you would like to get more penetration?

Mr. Grillo: “Sure; I will take this by segment. In the animal ID segment, there are large opportunities with the amount of cattle in South America to grow that particular geography. There are also opportunities to strengthen our companion pet business outside of North America, where we have the largest amount of our sales, and in some of the wildlife applications.


“On the emergency identification side, because we are a UK-based European company, we get more of our sales from that side of the pond. Therefore, we look at North America and the Americas in general as areas where we have some potential to grow significantly and we are already seeing the signs of that with the new products that we released.”


CEOCFO: What is ahead for Digital Angel?

Mr. Grillo: “The future is bright for Digital Angel. We have, even in a tough economy, been relatively recession-resistant. Nothing is recession-proof, but these are recession-resistant businesses. People will continue to have pets and to wish to care for them, they will continue to eat meat, there is an increasing need for safety and traceability in the food chain. Governments and corporations operating ships and aircraft will still have the need for emergency beacons because of legislation and the need to protect their people and assets, and individual sports enthusiasts will increasingly want them because of their desire to take part in what some might consider risky activities, while being protected by a safety mechanism to make sure they will come home safe from those activities.


“Good growing businesses will continue to strengthen our balance sheet, pay down our debt, and finish turning the company around in terms of becoming profitable on a run-rate business during this year. We’ll look to grow as well through acquisitions when our finances enable us to do so. At some stage we may need to take a look at whether we remain in two ID businesses or whether it makes more sense for shareholders to maximize the company’s value by focusing on one of the two businesses. Those are some of the strategic things that we deal with at Digital Angel, and again there are great prospects ahead for the company.”


CEOCFO: Final thoughts: why should potential investors consider Digital Angel?

Mr. Grillo: “The company has had a tough past and the share price has reflected that along with other micro-caps, particularly in the last year. If you look at the management team that came in a year and a quarter ago, we have turned around the operation and improved growth profit margins, cut costs significantly by over $10 million a year on an SG&A basis, without impacting investments in technology and sales and marketing. In my opinion, many investors have started to take a closer look at us and to track whether management is doing all the things we committed to do. The valuations of the two parts and the two parts together could surely be much higher than is apparent from today’s share price. In addition, if you are involved in operational businesses and you follow the steps that we have been taking establishing good manufacturing companies, and well-established name brands and technological market leaders, there is a bright future for a higher valuation, and a return on investment for new potential shareholders going forward.”


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“We have, even in a tough economy, been relatively recession-resistant. Nothing is recession-proof, but these are recession-resistant businesses. People will continue to have pets and to wish to care for them, they will continue to eat meat, there is an increasing need for safety and traceability in the food chain. Governments and corporations operating ships and aircraft will still have the need for emergency beacons because of legislation and the need to protect their people and assets, and individual sports enthusiasts will increasingly want them because of their desire to take part in what some might consider risky activities, while being protected by a safety mechanism to make sure they will come home safe from those activities.” - Joseph J. Grillo does not purchase or make
recommendation on stocks based on the interviews published.