Washington, D.C. 20549
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and reports required by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
REMOTE DYNAMICS, INC. AND SUBSIDIARIES
REMOTE DYNAMICS, INC. AND SUBSIDIARY
The consolidated financial statements presented are those of Remote Dynamics, Inc. and its wholly-owned subsidiary, BounceGPS, Inc. (formerly known as Huron Holdings, Inc.).
Remote Dynamics, Inc., a Delaware Corporation (“Remote Dynamics”, “Company” and/or “We”) was originally incorporated on February 3, 1994. We market, sell and support automatic vehicle location (“AVL”) and mobile resource management solutions targeting companies that operate private vehicle fleets. The REDIview™ family of solutions is designed for metro, short-haul vehicles and assets within diverse industry vertical markets such as field services, construction, distribution, courier, limousine, electrical/plumbing, waste management, and government. Our core technology, telematics, combines wireless communications, GPS location technology, geospatial solutions and data acquisition with an easy-to-use web-accessible application that aids in the optimization of remote business solutions. We believe our fleet management solution contributes to increased operator efficiency by improving the productivity of mobile workers through real-time position reports, route-traveled information, and exception based reporting designed to highlight mobile workforce inefficiencies. This in-depth reporting enables our customers to correct those inefficiencies and deliver cost savings.
We commercially launched our current product offering, REDIview, during January of 2005. REDIview is an Internet and service bureau-based software application that provides an extensive array of real-time and accurate mapping, trip replay, and vehicle activity reports. REDIview includes a series of exception-based reports designed to highlight inefficiencies in the operations of a fleet. Utilizing GSM GPRS technology and our network service center, customers may access their information securely through the Internet from any personal computer or certain other devices.
REDIview incorporates technologies that allow for fast and effective integration into legacy applications operated by companies with vehicle fleets, distributed assets, and mobile workers. This design allows companies to easily extend their existing supply chain management systems to the mobile workforce for transaction processing and customer fulfillment. REDIview was also designed to be hardware and network agnostic to provide the maximum flexibility in designing solutions that best fit the customer’s specific needs.
Our REDIview product line forms the basis of our business plan for 2007 and beyond and is the foundation for expected growth in revenues and ultimately profitability. In implementing our business plan, we have completed a significant cost and operational-based restructuring, including rightsizing the workforce. We are focusing our efforts on enhancing the existing REDIview product line.
On November 30, 2006, Remote Dynamics entered into a Share Exchange Agreement with Bounce Mobile Systems, Inc. (“BMSI”). Pursuant to the Share Exchange Agreement, Remote Dynamics agreed to acquire from BMSI 100% of the capital stock of BounceGPS, a provider of mobile asset management solutions, in exchange for 5,000 shares of Remote Dynamics’ newly authorized series C convertible preferred stock, a Series B Note in the principal amount of $660,000, a Series B OID Note in the principal amount of $264,000, an E-7 Warrant to purchase 30,937,500 shares of Remote Dynamics common stock and, a F-4 Warrant to purchase 30,937,500 shares of Remote Dynamics common stock.
As a result of the securities issued to BMSI in the Share Exchange Agreement and Note and Warrant Purchase Agreement transactions, BMSI obtained and currently has effective control of Remote Dynamics board of directors, management, 97.1% of the voting power of Remote Dynamics common stock outstanding, and beneficial ownership of approximately 62.2% of Remote Dynamics common stock (on a as-converted, fully diluted basis). Accordingly, our financial statements reflect the historical operations of BounceGPS as the acquisition has been treated as a reverse merger in accordance with FAS 141 “Accounting for Business Combinations” with BounceGPS considered the accounting acquirer. Accordingly, BounceGPS is deemed to be the purchaser and surviving company for accounting purposes and its net assets are included in the balance sheet at their historical book values and the results of operations of BounceGPS have been presented for the comparative prior period. The statement of stockholder's deficit is that of BounceGPS with an increase in the number of shares outstanding of 59,955,408 that represents the shares retained by the Remote Dynamics stockholders.
The results of operations of Remote Dynamics are included in our financial statements subsequent to December 4, 2006 with the purchase price allocated to the acquired assets and liabilities of Remote Dynamics as of December 4, 2006. On December 4, 2006, Remote Dynamics consummated the Share Exchange Agreement and acquired 100% of the capital stock of BounceGPS commensurate with Remote Dynamics receiving a capital infusion from BMSI and other third parties.
We have incurred significant operating losses since our inception, and these losses will continue for the near future. We may not ever achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profits on a quarterly or annual basis. We do not expect to achieve profitability or positive cash flow for fiscal year 2007. Our plans for 2007 include increasing our sales staff and sales channel development in an effort to build recurring revenue and continuing to identify additional operating cost reductions. However, there can be no assurance that we will achieve our sales targets for 2007. Failure to do so may have a material adverse effect on our business, financial condition and results of operations. Moreover, despite actions to increase revenue, to reduce operating costs and to improve profitability and cash flow, our operating losses and net operating cash outflows will continue through the remainder of 2007.
Critical success factors in our plans to achieve positive cash flow from operations include:
There can be no assurances that any of these success factors will be realized or maintained.
We currently are not in compliance with certain of our obligations relating to our secured convertible notes and our convertible preferred stock, including our failure to maintain sufficient authorized shares to permit conversion of the securities and our failure to register the resale of the shares of common stock issuable upon conversion of the securities. Although, to date, no security holder has sent us a notice of acceleration of amounts owed under or redemption of these securities, there can be no assurance that the security holders will not take such action in the future. Our failure to comply with our obligations relating to these securities also exposes us to liquidated damages claims by the security holders. In the event of an acceleration of amounts owed under or redemption of these securities (or a claim for liquidated damages), or if we are unable to raise enough money to cover the amounts payable, we may be forced to restructure, file for bankruptcy, sell assets or cease operations.
Our consolidated financial statements include our accounts and those of our wholly owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
We recognize revenue when earned in accordance with the applicable accounting literature including: EITF No. 00-21, “Revenue Arrangements With Multiple Deliverables”, Statement of Position 97-2, “Software Revenue Recognition”, and Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements”, as amended by Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements”. Revenue is recognized when the following criteria are met: there is persuasive evidence that an arrangement exists, delivery has occurred and all obligations under such arrangement have been fulfilled, the price is fixed and determinable and collectibility is reasonably assured.
We provide lease financing to certain customers of our REDIview and legacy products. Leases under these arrangements are classified as sales-type leases or operating leases. These leases typically have terms of one to five years, and all sales type leases are discounted at interest rates ranging from 14% to 18% depending on the customer’s credit risk. The net present value of the lease payments for sales-type leases is recognized as product revenue and deferred under our revenue recognition policy described above. Income from operating leases is recognized ratably over the term of the leases.
The following table summarizes the HFS Note Payable as of September 30, 2007 (000’s):
On February 24, 2006, Remote Dynamics closed a Note and Warrant Purchase Agreement with certain institutional investors pursuant to which Remote Dynamics sold $5.75 million of its series A senior secured convertible notes and original issue discount series A notes (collectively, “Series A Notes”) in a private placement transaction. In the private placement, Remote Dynamics received proceeds of approximately $4.1 million in cash (after deducting brokers’ commission but before payment of legal and other professional fees, the 15% original issue discount of $750,000 and the tendering of 50 shares of their 650 shares Series B preferred convertible stock with an aggregate face value of $500,000 by our sole series B preferred convertible stockholder).
The Series A Notes are secured by substantially all of the Company’s assets. The Series A Notes mature 24 months from issuance and are convertible at the option of the holder into our common stock at a fixed conversion price of $0.20 per share (which adjusted to $0.016 per share upon the issuance of series B subordinated secured convertible notes discussed below). The conversion price adjusted to $0.0064 effective June 30, 2007 as the Company did not meet certain financial and operating milestones specified in its Series B Notes, as discussed below. Beginning on September 1, 2006 and continuing thereafter on the first business day of each month, Remote Dynamics must pay an amount to each holder of a Series A Note equal to 1/18th of the original principal payment of the note; provided, that if on any principal payment date the outstanding principal amount of the note is less than such principal installment amount, then Remote Dynamics must pay to the holder of the note the lesser amount. Remote Dynamics may make such principal installment amounts in cash or in registered shares of its common stock. If paid in common stock, certain conditions must be satisfied, and the number of registered shares to be paid to the holder must be an amount equal to the principal installment amount divided by eighty percent (80%) of the average of the closing bid price for the ten (10) trading days immediately preceding the principal payment date.
The purchasers of the Series A Notes (and the placement agent in the transaction) received the following common stock purchase warrants:
The Company currently is not in compliance with certain of its obligations relating to the Series A Notes, including its failure to maintain sufficient authorized shares to permit conversion of the notes and related warrants and its failure to register the resale of the shares of common stock issuable upon conversion of the notes and related warrants. The Company has obtained waivers of compliance of these obligations from certain of the note holders. Although no note holder has sent the Company a notice of acceleration of amounts owed under the secured convertible notes, there can be no assurance that the note holders will not take such action in the future. In the event of any acceleration of these obligations, or if the Company is unable to raise enough money to cover the amounts payable, it may be forced to restructure, file for bankruptcy, sell assets or cease operations. The Company has accrued $873,000 for liquidated damages as of September 30, 2007.
The following table summarizes the Series A Notes as of September 30, 2007 (000’s):
On November 30, 2006, Remote Dynamics entered into a Note and Warrant Purchase Agreement with BMSI and other accredited investors. Pursuant to the Note and Warrant Purchase Agreement, Remote Dynamics will receive up to $1,754,000 in gross proceeds (of which BMSI has committed to provide $1,200,000) from the sale of up to (i) $1,754,000 principal amount of its series B subordinated secured convertible promissory notes (“Series B Notes’), (ii) $701,600 principal amount of its original issue discount series B subordinated secured convertible promissory notes (“Series B OID Notes”), (iii) its series E-7 warrants (“E-7 Warrants”) to purchase 82,218,750 shares of the Company’s common stock and (iv) its series F-4 warrants (“F-4 Warrants”) to purchase 82,218,750 shares of the Company’s common stock.
The Series B Note financing is structured to occur in four closings, each providing $438,500 in gross proceeds to us. The first closing occurred on December 4, 2006. The second closing occurred on January 10, 2007. The third closing occurred on March 26, 2007. The third round closing conditions of filing an amendment to our Certificate of Incorporation increasing the number of our authorized shares of common stock to 575,000,000 and a one-for-fifty reverse stock split of our common stock were both waived by BMSI and the other accredited investors. The fourth closing will occur within five business days after the date that an initial resale registration statement for the shares underlying the notes and warrants issued in the private placement is declared effective by the Securities and Exchange Commission. Each closing is subject to certain other conditions being satisfied, including (i) the Company’s representations and warranties in the agreement being true and correct in all material respects as of each closing date, (ii) the Company having performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by the agreement to be performed, satisfied or complied with by us at or prior to each closing date, and (iii) no material adverse effect on the business, operations, properties, prospects, or financial condition of the Company and its subsidiaries having occurred.
The first closing occurred on December 4, 2006. Gross proceeds provided by the first closing totaled $438,500, accordingly, the Company issued (i) $438,500 principal amount of Series B Notes, (ii) $175,400 principal amount of Series B OID Notes, (iii) E-7 Warrants to purchase 20,554,688 shares of our common stock and (iv) F-4 Warrants to purchase 20,554, 688 shares of our common stock.
On January 10, 2007, the Company closed on the second round of the Series B Note financing. Gross proceeds provided by the second closing totaled $438,500, accordingly, the Company issued (i) $438,500 principal amount of Series B Notes, (ii) $175,400 principal amount of Series B OID Notes, (iii) E-7 Warrants to purchase 20,554,688 shares of our common stock and (iv) F-4 Warrants to purchase 20,554, 688 shares of our common stock.
On March 26, 2007, the Company closed on the third round of funding. Gross proceeds provided by the third closing totaled $438,500; accordingly, the Company issued (i) $438,500 principal amount of Series B Notes, (ii) $175,400 principal amount of Series B OID Notes, (iii) E-7 Warrants to purchase 20,554,688 shares of our common stock and (iv) F-4 Warrants to purchase 20,554,688 shares of our common stock.
In October 2007, the Company closed on a portion of the fourth round of Series B Note financing, whereby BMSI funded $200,000 of its $300,000 obligation. BMSI waived the fourth round closing conditions with respect to the amounts funded. The Company issued to BMSI (i) $200,000 principal amount of Series B Notes, (ii) $80,000 principal amount of Series B OID Notes, (iii) E-7 Warrants to purchase 9,375,000 shares of our common stock and (iv) F-4 Warrants to purchase 9,375,000 shares of our common stock.
As a result of the financing and pursuant to the terms of "most favored nations" rights granted to investors in the Company’s February 2006 private placement of the Series A Notes, the Company agreed to issue certain of our February 2006 private placement investors, in exchange for $1,013,755 principal amount of the Series A Notes, an additional (i) $1,146,755 principal amount of Series B Notes, (ii) $458,702 principal amount of Series B OID Notes, (iii) E-7 Warrants to purchase 77,191,646 shares of the Company’s common stock and (iv) F-4 Warrants to purchase 77,191,646 shares of the Company’s common stock. Remote Dynamics will receive no additional proceeds from the exchange. Only a portion of the above exchanged notes occurred during the year ended December 31, 2006, with the remaining exchanges occurring over the second, third, and fourth closings. As of December 31, 2006, Remote Dynamics had issued (i) $716,672 principal amount of Series B Notes, (ii) $286,669 principal amount of Series B OID Notes, (iii) E-7 Warrants to purchase 33,594,000 shares of its common stock and (iv) F-4 Warrants to purchase 33,594,000 shares of its common stock, in exchange for $675,922 principal amount of the Series A Notes. In conjunction with the fair value adjustments required under purchase accounting, the $675,922 principal amount of Series A Notes was valued at $158,699. Accordingly, the Company recorded a loss on extinguishment of debt totaling $557,973 during the year ended December 31, 2006.
On January 10, 2007, the Company issued (i) $143,361 principal amount of Series B Notes, (ii) 57,344 principal amount of Series B OID Notes, (iii) E-7 Warrants to purchase 6,720,047 shares of the Company’s common stock and (iv) F-4 Warrants to purchase 6,720,047 shares of the Company’s common stock, in exchange for $112,611 principal amount of the Series A Notes. In conjunction with the fair value adjustments required under purchase accounting, the $112,611 principal amount of Series A Notes were valued at $26,440. Accordingly, the Company recorded a loss on extinguishment of debt totaling $116,922 during the first quarter of fiscal year 2007 in relation to this exchange.
On March 26, 2007, the Company issued (i) $143,361 principal amount of Series B Notes, (ii) 57,344 principal amount of Series B OID Notes, (iii) E-7 Warrants to purchase 6,720,047 shares of the Company’s common stock and (iv) F-4 Warrants to purchase 6,720,047 shares of the Company’s common stock, in exchange for $112,611 principal amount of the Series A Notes. In conjunction with the fair value adjustments required under purchase accounting, the $112,611 principal amount of Series A Notes were valued at $26,440. Accordingly, the Company recorded a loss on extinguishment of debt totaling $116,922 during the first quarter of fiscal year 2007 in relation to this exchange.
In addition, the Company agreed to issue, in exchange for 50 shares of its Series B convertible preferred stock with an aggregate face value of $500,000 (held by SDS Capital Group SPC, Ltd. ) an additional (i) $500,000 principal amount of Series B Notes, (ii) $200,000 principal amount of Series B OID Notes, (iii) E-7 Warrants to purchase 23,437,500 shares of the Company’s common stock and (iv) F-4 Warrants to purchase 23,437,500 shares of the Company’s common stock. Only a portion of the exchange occurred during the year ended December 31, 2006, and the remaining exchanges occurred over the second and third closings. As of December, 31, 2006, the Company had issued (i) $125,000 principal amount of Series B Notes, (ii) $50,000 principal amount of Series B OID Notes, (iii) E-7 Warrants to purchase 5,859,375 shares of its common stock and (iv) F-4 Warrants to purchase 5,859,375 shares of its common stock, in exchange for 12.5 shares of Series B convertible preferred stock. In conjunction with the fair value adjustments required under purchase accounting, the 12.5 shares of Series B convertible preferred stock were valued at $3,970. Accordingly, the Company recorded a loss on extinguishment of convertible preferred stock of $121,031 during the year ended December 31, 2006.
On January 10, 2007, the Company issued (i) $125,000 principal amount of Series B Notes, (ii) $50,000 principal amount of Series B OID Notes, (iii) E-7 Warrants to purchase 5,859,375 shares of the Company’s common stock and (iv) F-4 Warrants to purchase 5,859,375 shares of the Company’s common stock, in exchange for 12.5 shares of Series B convertible preferred stock. In conjunction with the fair value adjustments required under purchase accounting, the 12.5 shares of Series B convertible preferred stock were valued at $3,970. Accordingly, the Company recorded a loss on extinguishment of convertible preferred stock of $121,031 during the first quarter of fiscal year 2007 in relation to this exchange.
On March 26, 2007, the Company issued (i) $250,000 principal amount of Series B Notes, (ii) $100,000 principal amount of Series B OID Notes, (iii) E-7 Warrants to purchase 11,718,750 shares of the Company’s common stock and (iv) F-4 Warrants to purchase 11,718,750 shares of the Company’s common stock, in exchange for 25 shares of Series B convertible preferred stock. In conjunction with the fair value adjustments required under purchase accounting, the 25 shares of Series B convertible preferred stock were valued at $7,940. Accordingly, the Company recorded a loss on extinguishment of convertible preferred stock of $242,060 during the first quarter of fiscal year 2007 in relation to this exchange.
In connection with the private placement, the Company agreed to pay to the placement agent for the transaction consideration consisting of (a) a cash sales commission of $150,480 (b) warrants to purchase 16,443,750 shares of the Company’s common stock, with each warrant having an exercise price of $0.016 per share (which adjusted to $0.0064 per share as discussed above) and being exercisable for ten years, (c) E-7 Warrants to purchase 12,332,813 shares of the Company’s common stock, and (d) F-4 Warrants to purchase 12,332,813 shares of the Company’s common stock. The above fees are earned and to be paid over the four closings, accordingly only a portion of the placement agent fees were paid as of September 30, 2007. Fees paid as of September 30, 2007, included a cash sales commission of $112,860, warrants to purchase 12,332,814 shares of the Company’s common stock, E-7 Warrants to purchase 9,249,609 shares of the Company’s common stock, and F-4 Warrants to purchase 9,249,609 shares of the Company’s common stock. The Company also agreed to pay $60,000 ($15,000 per closing) to Monarch Bay Management Company for consulting work as well as $59,816 in legal counsel fees as part of the private placement.
The issuance of the Series B Notes triggered anti-dilution adjustments to the conversion price of the Series A Notes and the exercise price of the common stock purchase warrants issued in connection with the Series A Notes as follows: (a) the conversion price of the Series A Notes changed from $0.20 to $0.016 per share, (b) the exercise price of the Series A-7 warrants changed from $0.40 to $0.016 per share, (c) the exercise price of the Series B-4 warrants changed from $0.90 to $0.016, and (d) the exercise price of our Series C-3 warrants changed from $0.21 to $0.016 per share. In addition, the transaction triggered an anti-dilution adjustment to certain warrants issued to SDS in September 2005 in connection with the Series B preferred stock transaction, by changing the exercise price from $1.75 to $0.09 per share and increasing the number of shares of common stock for which the warrants can be exercised from 700,000 to 13,053,378.
Effective June 30, 2007, the Company failed to meet certain financial and operating milestones specified in the Series B Notes and, as a result, the conversion price of the series B Notes was reduced from $0.016 per share to $0.0064 per share. The reduction in the conversion price of the Series B Notes triggered further anti-dilution adjustments to the conversion price of the Series A Notes and the exercise price of the common stock purchase warrants issued in connection with the Series A Notes as follows: (a) the conversion price of the Series A Notes changed from $0.016 to $0.0064 per share, (b) the exercise price of the Series A-7 warrants changed from $0.016 to $0.0064 per share, (c) the exercise price of the Series B-4 warrants changed from $0.016 to $0.0064 per share, and (d) the exercise price of our Series C-3 warrants changed from $0.016 to $0.0064 per share. In addition, the conversion price adjustment triggered an anti-dilution adjustment to certain warrants issued to SDS in September 2005 in connection with the Series B preferred stock transaction, by changing the exercise price from $0.09 to $.06 per share and increasing the number of shares of common stock for which the warrants can be exercised from 13,053,378 to 19,794,332.
Under the terms of the Series B Note and Warrant Purchase Agreement, the Company has agreed to use its commercially reasonable efforts to obtain stockholder approval for an increase in the number of its authorized shares of common stock to at least 575,000,000 and a one-for-fifty reverse stock split of its common stock. The Company also has agreed to prepare and file one or more resale registration statements with the SEC for the shares of common stock underlying the notes and warrants issued in the private placement. Specifically, the Company is obligated to (a) file an initial registration statement with the SEC on or before the earlier of (i) March 4, 2007 and (ii) the 30th day following the date the Company’s stockholders approve the increase in authorized shares and reverse stock split described above and (b) have the initial registration statement declared effective not later than the 60th day after the registration statement is filed (or 90 days if the registration statement receives a full review by the SEC). If the initial registration statement is not filed or declared effective within these time frames or the Company fails to meet other specified deadlines, the investors will be entitled to monetary liquidated damages equal to 1.5% of the total amount invested by such investor in the private placement, plus an additional 1.5% liquidated damages for each 30-day period thereafter, up to a maximum liquidated damages amount of not more than 9% of the amount invested by each investor. The Company is obligated to maintain the effectiveness of the registration statements until the earlier of (a) the date when the underlying securities have been sold or (b) the date on which the underlying shares of common stock can be sold without restriction under Rule 144(k), or the effectiveness period.
The Company currently is not in compliance with certain of its obligations relating to the Series B Notes, including its failure to register the resale of the shares of common stock issuable upon conversion of the notes and related warrants. Although no note holder has sent the Company a notice of acceleration of amounts owed under the secured convertible notes, there can be no assurance that the note holders will not take such action in the future. In the event of any acceleration of these obligations, or if the Company is unable to raise enough money to cover the amounts payable, it may be forced to restructure, file for bankruptcy, sell assets or cease operations. The Company has accrued $592,000 for liquidated damages as of September 30, 2007.
On November 14, 2007, the Company completed an increase in the number of its authorized shares of common stock to 750,000,000 and a one-for-fifty reverse stock split of its common stock. The share information disclosed within this Form 10Q is pre-split.
As a result of the one-for-fifty reverse stock split, the conversion price of the Series A Notes and Series B Notes will change from $0.0064 per share to $0.32 per share and the exercise price of the Series A-7 warrants, Series B-4 warrants, and Series C-3 warrants will change from $0.0064 per share to $0.32 per share. In addition, the exercise price for certain warrants issued to SDS in September 2005 in connection with the Series B preferred stock transaction will change from $0.06 per share to $3.00 per share.
BounceGPS Acquisition
On November 30, 2006, Remote Dynamics entered into a Share Exchange Agreement with BMSI. Pursuant to the Share Exchange Agreement, the Company agreed to acquire from BMSI 100% of the capital stock of BounceGPS, Inc., a provider of mobile asset management solutions. As part of the consideration for the acquisition, the Company issued to BMSI a Series B Note in the principal amount of $660,000 and a Series B OID Note in the principal amount of $264,000.
The following table summarizes the Series B Notes as of September 30, 2007 (000’s):
| | | | | Less | | Carrying | |
| | | Principal | | Discount | | Amount | |
| Total Series B Notes - December 31, 2006 | | $ | 2,716 | | $ | 1,019 | | $ | 1,698 | |
| | | | | | | | | | | |
| Issuance of Series B Notes - January 10, 2007 | | | 614 | | | 184 | | | 429 | |
| | | | | | | | | | | |
| Exchange of Series A Notes to Series B Notes - January 10, 2007 | | | 201 | | | 60 | | | 140 | |
| | | | | | | | | | | |
| Exchange of Series B Preferred Stock to Series B Notes - January 10, 2007 | | | 175 | | | 53 | | | 122 | |
| | | | | | | | | | | |
| Issuance of Series B Notes - March 26, 2007 | | | 614 | | | 181 | | | 433 | |
| | | | | | | | | | | |
| Exchange of Series A Notes to Series B Notes - March 26, 2007 | | | 201 | | | 59 | | | 141 | |
| | | | | | | | | | | |
| Exchange of Series B Preferred Stock to Series B Notes - March 26, 2007 | | | 350 | | | 103 | | | 247 | |
| | | | | | | | | | | |
| HFS Conversion - May 8, 2007 | | | 1,400 | | | 414 | | | 986 | |
| | | | | | | | | | | |
| Accretion of Series B Notes from January 1, 2007 to September 30, 2007 | | | - | | | (465 | ) | | 465 | |
| | | | | | | | | | | |
| Total Series B Notes - September 30, 2007 | | $ | 6,270 | | $ | 1,609 | | $ | 4,662 | |
The following table summarizes the Company’s convertible notes payable by maturity dates as of September 30, 2007 (as the Company currently is not in compliance with certain of its obligations relating to the Series A and B Notes , the Company is classifying the convertible notes payable as a current liability on the balance sheet):
| | | | | Less | | Carrying | |
| | | Principal | | Discount | | Amount | |
| Fiscal Year ending December 31, 2007 | | $ | 4,425 | | $ | 1,109 | | $ | 3,316 | |
| Fiscal Year ending December 31, 2008 | | | 3,253 | | | 831 | | | 2,422 | |
| Fiscal Year ending December 31, 2009 | | | 2,787 | | | 715 | | | 2,073 | |
| | | $ | 10,464 | | $ | 2,655 | | $ | 7,809 | |
Accounting for Series B Notes and Warrant Purchase Agreement
In connection with the convertible Series B Notes and OID Notes, we issued warrants to the Note holders to purchase approximately 345 million shares of our common stock at exercise prices noted above. The fair value of the warrants was estimated to be approximately $367,000 using the Black-Scholes pricing model. The fair value of the warrants allocated to the warrants on a relative fair value basis was determined to be approximately $246,000 and was recorded as additional paid-in-capital and a debt discount. The debt discount will be amortized to interest expense over the terms of the notes.
Additionally, the Series B Notes and OID Notes were considered to have a beneficial conversion feature because they permitted the holders to convert their interest in the Series B Notes and OID Notes into shares of our common stock at a deemed effective fair value conversion price of $0.014 per share, which on the date of issuance, was lower than the price of our common stock of $0.015 per share. The total amount of the beneficial conversion feature was approximately $51,000. This amount was recorded as additional paid-in-capital and will be amortized to interest expense from the date of issuance to the earlier of the maturity of the Series B Notes or to the date of the conversion.
We recorded $217,676 of transaction costs as deferred financing fees. We also recorded $62,169 as deferred financing fees for the fair value of the placement agent warrants which were valued using the Black-Scholes pricing model. The deferred financing fees will be amortized to interest expense from the date of the Series B Notes to the earlier of the maturity of the Series B Notes or the date of conversion. During the three and nine months ended September 30, 2007, $25,000 and $67,000 of the deferred financing fees was amortized to interest expense, respectively.
4. Inventories
Inventories consist of the following (in thousands):
| | | September 30, | | December 31, | |
| | | 2007 | | 2006 | |
| Complete systems | | $ | 186 | | $ | 205 | |
| Component parts | | | 127 | | | 194 | |
| Reserve for obsolescence - systems | | | (26 | ) | | (65 | ) |
| Reserve for obsolescence - parts | | | (14 | ) | | (47 | ) |
| | | $ | 273 | | $ | 287 | |
5. Goodwill and Other Intangible Assets
Goodwill and other intangible assets consist of the following as of September 30, 2007 and December 31, 2006 (in thousands):
| | | | | | | | | | | | | Remaining | |
| | | Balance at | | | | | | | | Balance at | | Amortization | |
| | | December 31, | | | | | | | | Sept 30, | | Period | |
| | | 2006 | | Additions | | Amortization | | Impairment | | 2007 | | (in months) | |
| Goodwill | | $ | 616 | | $ | - | | $ | - | | $ | - | | $ | 616 | | | n/a | |
| | | | | | | | | | | | | | | | | | | | |
| Other intangibles: | | | | | | | | | | | | | | | | | | | |
| Customer lists | | | 2,714 | | | - | | | (414 | ) | | - | | | 2,300 | | | 50 | |
| VMI License Right | | | 57 | | | - | | | (57 | ) | | - | | | - | | | 0 | |
| Software | | | 846 | | | - | | | (129 | ) | | - | | | 717 | | | 50 | |
| Tradenames | | | 74 | | | - | | | (11 | ) | | - | | | 63 | | | 50 | |
Total amortization expense for the other intangible assets for the three and nine months ended September 30, 2007 was approximately $184,000 and $611,000, respectively.
6. Other Commitments and Contingencies
Product Warranty Guarantees
We provide a limited warranty on all REDIview product sales, at no additional cost to the customer, which provides for replacement of defective parts for one year after the product is sold. We provide a limited warranty on certain legacy product sales, at no additional cost to the customer, which provides for replacement of defective parts during the contract term, typically ranging from one to five years. We establish an estimated liability for expected future warranty commitments based on a review of historical warranty expenditures associated with these products and other similar products. The product warranty liability, which is included in “Accrued expenses and other current liabilities” and “Other non-current liabilities” in the accompanying Consolidated Balance Sheets, totaled approximately $73,000 at September 30, 2007.
Purchase Obligations
We had purchase obligations of approximately $1.1 million primarily related to the purchase of inventory as of September 30, 2007.
Other Commitments and Contingencies
From time to time, we may be subject to legal proceedings and claims that arise in the ordinary course of business or are incidental to our business. We may suffer an unfavorable outcome as a result of one or more these claims. We do not expect the final resolution of such claims, individually or in the aggregate, to have a material adverse effect on our financial position. However, depending on the amount and timing of unfavorable resolutions of claims against us, or the costs of settlement or litigation, our future results of operations or cash flows could be materially adversely affected.
7. Earnings Per Share
We compute earnings per share in accordance SFAS No. 128, “Earnings Per Share.” Net loss per basic share was computed by dividing net loss by the weighted average number of shares outstanding during the respective periods. Diluted earnings per share is computed using the “Treasury Stock Method.” Our potentially dilutive securities have been excluded from the weighted average number of shares outstanding, since their effect would be anti-dilutive.
The securities listed below were not included in the computation of diluted earnings per share as the effect from their conversion/exercise would have been antidilutive:
| | | For the Three and Nine Months | |
| | | Ended September 30, | |
| | | 2007 | | 2006 | |
| Convertible notes payable | | | 1,637,546,563 | | | 657,788,594 | |
| Convertible preferred stock | | | 2,452,682,785 | | | 3,367,742 | |
| Outstanding warrants to purchase common stock | | | 557,814,347 | | | 107,085,999 | |
8. Related Party Transactions
In connection with our November 2006 private placement, we agreed to pay $60,000 ($15,000 per closing) to Monarch Bay Management Company, LLC (“MBMC”) for consulting work. David Walters (our Chairman) and Keith Moore (a member of our Board of Directors) are managing members of MBMC and each own 50% of MBMC. As of December 31, 2006, the Company owed $15,000 to MBMC for these services. The Company made payments totaling $45,000 during the nine months ended September 30, 2007.
Additionally, we agreed to pay a $20,000 documentation fee to BMSI in connection with our December 2006 acquisition of BounceGPS from BMSI. David Walters (our Chairman) is the Chairman and Chief Executive Officer of BMSI and beneficially owns a majority of the outstanding common stock of BMSI. This payment was made in January 2007.
BounceGPS has an agreement with Monarch Bay Capital Group, LLC (“MBCG”) for corporate development and chief financial officer services. David Walters (our Chairman) is the managing member of MBCG and beneficially owns 100% of MBCG. The agreement was entered into prior to our December 2006 acquisition of BounceGPS and prior to Mr. Walters joining our Board of Directors. Under the agreement with MBCG, BounceGPS will pay to MBCG a monthly fee of $20,000 in cash. The initial term of the agreement expires on December 31, 2007 and continues thereafter on a month-to-month basis unless terminated by either party. Fees paid to MBCG totaled $20,000 and $60,000 for the three and six months ended June 30, 2007, respectively. On May 1, 2007, this agreement was terminated by mutual consent. Amounts due to MBCG totaled $40,000 as of September 30, 2007.
On May 1, 2007, we entered into a Support Services Agreement with MBMC. David Walters, our Chairman, and Keith Moore, our director, each are members of, and each own 50% of the ownership interests in MBMC. Under the Support Services Agreement, MBMC will provide us with financial management services, facilities and administrative services, business development services, creditor resolution services and other services as agreed by the parties. We will pay to MBMC monthly cash fees of $22,000 for the services. In addition, MBMC will receive fees equal to (a) 6% of the revenue generated from any business development transaction with a customer or partner introduced to us by MBMC and (b) 20% of the savings to the Company from any creditor debt reduction resolved by MBMC on behalf of the Company. The initial term of the Support Services Agreement expires May 1, 2008. Fees paid to MBMC totaled $75,000 and $133,000 for the three and nine months ended September 30, 2007, respectively.
On May 1, 2007, we entered into a Placement Agency and Advisory Services Agreement with Monarch Bay Associates, LLC (“MBA”). (MBA is a NASD member firm.) David Walters, our Chairman, and Keith Moore, our director, each are members of, and each owns 50% of the ownership interests in MBA. Under the agreement, MBA will act as the Company’s placement agent on an exclusive basis with respect to private placements of our capital stock and as our exclusive advisor with respect to acquisitions, mergers, joint ventures and similar transactions. MBA will receive fees equal to (a) 9% of the gross proceeds raised by us in any private placement (plus warrants to purchase 9% of the number of shares of common stock issued or issuable by us in connection with the private placement) and (b) 3% of the total consideration paid or received by us or our stockholders in an acquisition, merger, joint venture or similar transaction. The initial term of the Placement Agency and Advisory Services Agreement expires May 1, 2008.
9. Subsequent Events
In October 2007, the Company closed on a portion of the fourth round of Series B Note financing, whereby BMSI funded $200,000 of its $300,000 obligation. BMSI waived the fourth round closing conditions with respect to the amounts funded. The Company issued to BMSI (i) $200,000 principal amount of Series B Notes, (ii) $80,000 principal amount of Series B OID Notes, (iii) E-7 Warrants to purchase 9,375,000 shares of our common stock and (iv) F-4 Warrants to purchase 9,375,000 shares of our common stock.
On November 14, 2007, the Company completed an increase in the number of its authorized shares of common stock to 750,000,000 and a one-for-fifty reverse stock split of its common stock. The share information disclosed within this Form 10Q is pre-split.
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements and related notes and the other financial information included elsewhere in this report and in our Annual Report on Form 10-KSB for the year ended December 31, 2006.
Information Regarding Forward-Looking Statements
Except for the historical information and discussions contained herein, statements contained in this Form 10-QSB may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
The forward-looking statements generally include our management's plans and objectives for future operations, including plans, objectives and expectations relating to our future economic performance, business prospects, revenues, working capital, liquidity, ability to obtain financing, generation of income and actions of secured parties not to foreclose on our assets. The forward-looking statements may also relate to our current beliefs regarding revenues we might earn if we are successful in implementing our business strategies. The forward-looking statements generally can be identified by the use of the words "believe," "intend," "plan," "expect," "forecast," "project,” "may," "should," "could," "seek," "pro forma," "estimate," "continue," "anticipate" and similar words. The forward-looking statements and associated risks may include, relate to, or be qualified by other important factors, including, without limitation:
| | · | anticipated trends in our financial condition and results of operations; |
| | · | our ability to finance our working capital and other cash requirements; |
| | · | our business strategy for expanding our presence in the markets we serve; and |
| | · | our ability to distinguish ourselves from our current and future competitors. |
We do not undertake to update, revise or correct any forward-looking statements. The forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements.
Important factors to consider in evaluating forward-looking statements include:
| | · | changes in external competitive market factors or in our internal budgeting process that might impact trends in our results of operations; |
| | · | changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the markets; and |
| | · | various other factors that may prevent us from competing successfully in the marketplace. |
Executive Summary
We market, sell and support automatic vehicle location (“AVL”) and mobile resource management solutions targeting companies that operate private fleets. Our AVL solutions are designed for metro, short-haul vehicles and assets within diverse industry vertical markets such as field services, construction, distribution, courier, limousine, electrical/plumbing, waste management, and government. Our core technology, telematics, combines wireless communications, GPS location technology, geospatial solutions and vehicle data integration with a web-accessible application that aids in the optimization of remote business solutions. We believe our fleet management solution contributes to increased operator efficiency by improving the productivity of mobile workers through real-time position reports, route-traveled information, and exception based reporting designed to highlight mobile workforce inefficiencies. This in-depth reporting enables our customers to correct those inefficiencies and deliver cost savings to the bottom line.
We commercially introduced REDIview in January of 2005. REDIview was designed with a flexible architecture to accommodate expected additional functional requirements that will be required to effectively compete in the marketplace.
Our REDIview product line forms the basis of our business plan for 2007 and beyond. We expect this product line to provide the foundation for a growth in revenues and, if our revenues grow as we anticipate, ultimately profitability. In implementing our business plan, we have completed a significant cost and operational-based restructuring, including rightsizing the workforce. We are focusing our efforts on enhancing the existing REDIview product line by adding new functionality in the areas of dispatching, security, and maintenance.
We have expanded our direct sales force to seven people at the end of the third quarter up from two people as of December 31, 2006. We also are in the process of implementing an indirect sales channel strategy. As a result of these sales efforts, we expect to achieve additional gains in our units in service for the fourth quarter of 2007.
As a result of the securities issued to BMSI in our November 2006 Share Exchange Agreement and Note and Warrant Purchase Agreement transactions, BMSI obtained and currently has effective control of our board of directors, management, 97.1% of the voting power of our common stock outstanding, and beneficial ownership of approximately 62.2% of our common stock (on a as-converted, fully diluted basis) as of September 30, 2007. Accordingly, our financial statements reflect the historical operations of BounceGPS as the acquisition has been treated as a reverse merger in accordance with FAS 141 “Accounting for Business Combinations” with BounceGPS considered the accounting acquirer. Accordingly, BounceGPS is deemed to be the purchaser and surviving company for accounting purposes and its net assets are included in the balance sheet at their historical book values and the results of operations of BounceGPS have been presented for the comparative prior period. The results of operations of Remote Dynamics, Inc. are included in our financial statements subsequent to December 4, 2006 with the purchase price allocated to the acquired assets and liabilities of Remote Dynamics, Inc. as of December 4, 2006.
Results of Operations - Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006
Total revenue for the three months ended September 30, 2007 totaled $1.2 million compared to $0.08 million during the three months ended September 30, 2006. This increase is attributable to the reverse merger transaction on December 4, 2006. The 2007 results include operations of Remote Dynamics, Inc. as well as BounceGPS. The 2006 results only include the operations of BounceGPS. In accordance with our revenue recognition policies, REDIview unit sales and the associated cost of sales are deferred and recognized over the customer’s contract life. Our future revenues will be solely dependent upon sales of our REDIview product line. The failure of the marketplace to accept our REDIview product line would have a material adverse effect on the Company’s business, financial condition and results of operations.
As shown in the table below, we ended the third quarter of 2007with 9,057 units in service representing a 1.8% decrease from the 9,226 units in service we had as of the end of the second quarter of 2007, and an 11.5% increase from the 8,122 units in service we had as of December 31, 2006. Net additions in the third quarter of 2007 were negative primarily due to the expiration of a 528 unit customer contract.
| | | December 31, | | March 31, | | June 30, | | September 30, | |
| | | 2006 | | 2007 | | 2007 | | 2007 | |
Ending REDIview units | | | 8,122 | | | 8,838 | | | 9,226 | | | 9,057 | |
Total gross profit margin was 56% for the three months ended September 30, 2007 compared to negative 40% for the three months ended September 30, 2006. This increase is attributable to the reverse merger transaction on December 4, 2006. The 2006 results only include operations of BounceGPS. The company expects gross profit margins of greater than 50% to continue at least through fiscal year 2008.
Total operating expenses totaled $.9 million for the three months ended September 30, 2007 compared to $0.3 million for the three months ended September 30, 2006. This increase is attributable to the reverse merger transaction on December 4, 2006. The 2006 results only include operations of BounceGPS.
Interest expense totaled $1.4 million for the three months ended September 30, 2007 compared to $-0- for the same period during 2006. The current period interest expense primarily relates to the accretion of the Series A Notes and the Series B Notes in the amounts of $655,000 and $188,000, respectively.
Total operating expenses totaled $.9 million for the three months ended September 30, 2007 compared to $1.1 million for the three months ended June 30, 2007. This decrease is attributable to the Company’s efforts to reduce operational costs.
Adjusted EBITDA Presentation
EBITDA represents net income (loss) before interest, taxes, depreciation and amortization, and in the case of Adjusted EBITDA, before goodwill impairment, gains or losses on the extinguishment of debt and preferred stock, restructuring charges and other non-operating costs. EBITDA is not a measurement of financial performance under GAAP. However, we have included data with respect to EBITDA because we evaluate and project the performance of our business using several measures, including EBITDA. The computations of Adjusted EBITDA for the quarters ended September 30, 2007 and 2006 were as follows.
| | | Three Months Ended | |
| | | September 30, | |
| | | 2007 | | 2006 | |
| Net loss | | $ | (1,597 | ) | $ | (279 | ) |
| Add non-EBITDA items included in net results: | | | | | | | |
| Depreciation and amortization | | | 213 | | | 8 | |
| Interest expense, net | | | 1,357 | | | (7 | ) |
| Loss on debt extinguishment | | | - | | | - | |
| Loss on redeemable preferred stock extinguishment | | | - | | | - | |
| Adjusted EBITDA | | $ | (27 | ) | $ | (278 | ) |
The comparison of Adjusted EBITDA for the quarter ended September 30, 2007 versus the previous quarters of the 2007 fiscal year is as follows:
| | | Three Months Ended | |
| | | March 31, | | June 30, | | September 30, | |
| | | 2007 | | 2007 | | 2007 | |
| Net loss | | $ | (2,164 | ) | $ | (1,888 | ) | $ | (1,597 | ) |
| Add non-EBITDA items included in net results: | | | | | | | | | | |
| Depreciation and amortization | | | 262 | | | 260 | | | 213 | |
| Interest expense, net | | | 1,425 | | | 1,379 | | | 1,357 | |
| Non-recurring reversal of legal accrual | | | (230 | ) | | - | | | - | |
| Loss on debt extinguishment | | | 234 | | | 107 | | | - | |
| Loss on redeemable preferred stock extinguishment | | | 363 | | | - | | | - | |
| | | | | | | | | | | |
| Adjusted EBITDA | | $ | (110 | ) | $ | (142 | ) | $ | (27 | ) |
We consider adjusted EBITDA to be an important supplemental indicator of our operating performance, particularly as compared to the operating performance of our competitors, because this measure eliminates many differences among companies in financial, capitalization and tax structures, capital investment cycles and ages of related assets, as well as certain recurring non-cash and non-operating items. We believe that consideration of EBITDA should be supplemental, because EBITDA has limitations as an analytical financial measure. These limitations include the following: EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments; EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness; although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements; EBITDA does not reflect the effect of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations; and not all of the companies in our industry may calculate EBITDA in the same manner in which we calculate EBITDA, which limits its usefulness as a comparative measure.
Management compensates for these limitations by relying primarily on its GAAP results to evaluate its operating performance and by considering independently the economic effects of the foregoing items that are not reflected in EBITDA. As a result of these limitations, EBITDA should not be considered as an alternative to net income (loss), as calculated in accordance with generally accepted accounting principles, as a measure of operating performance, nor should it be considered as an alternative to cash flows as a measure of liquidity.
Further, we realize that effective analysis of our operations with an approach of comparing results for a current period with the results of a corresponding prior period may be difficult due to our December 2006 reverse merger transaction and security issuances that we have completed.
Results of Operations - Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
Total revenue for the nine months ended September 30, 2007 totaled $3.6 million compared to $0.1 million during the nine months ended September 30, 2006. This increase is attributable to the reverse merger transaction on December 4, 2006. The 2007 results include operations of Remote Dynamics, Inc. as well as BounceGPS. The 2006 results only include the operations of BounceGPS.
Total gross profit margin was 57% for the nine months ended September 30, 2007 compared to 1% for the nine months ended September 30, 2006. This decrease is attributable to the reverse merger transaction on December 4, 2006. The 2006 results only include operations of BounceGPS.
Total operating expenses totaled $3.2 million for the nine months ended September 30, 2007 compared to $0.3 million for the nine months ended September 30, 2006. This increase is attributable to the reverse merger transaction on December 4, 2006. The 2006 results only include operations of BounceGPS.
Interest expense totaled $4.2 million for the nine months ended September 30, 2007 compared to $-0- for the same period during 2006. The interest expense primarily relates to the accretion of the Series A Notes, Series B Notes, and the HFS Note in the amounts of $1,974,000, $465,000, and $618,000, respectively. We recorded a loss on the extinguishment of debt totaling $341,000 for the nine months ended September 30, 2007 for the exchange of Series A Notes into Series B Notes and the exchange of the HFS Note into Series B Notes. We also recorded a loss on the extinguishment of redeemable preferred stock totaling $363,000 for the nine months ended September 30, 2007 for the exchange of Series B preferred stock into Series B Notes.
Adjusted EBITDA Presentation
EBITDA represents net income (loss) before interest, taxes, depreciation and amortization, and in the case of Adjusted EBITDA, before goodwill impairment, gains or losses on the extinguishment of debt and preferred stock, restructuring charges and other non-operating costs. EBITDA is not a measurement of financial performance under GAAP. However, we have included data with respect to EBITDA because we evaluate and project the performance of our business using several measures, including EBITDA. The computations of Adjusted EBITDA for the nine months ended September 30, 2007 and 2006 were as follows.
| | | Nine Months Ended September 30, | |
| | | 2007 | | 2006 | |
| Net loss | | $ | (5,649 | ) | $ | (290 | ) |
| Add non-EBITDA items included in net results: | | | | | | | |
| Depreciation and amortization | | | 735 | | | 8 | |
| Interest expense, net | | | 4,161 | | | (7 | ) |
| Loss on debt extinguishment | | | 341 | | | - | |
| Loss on redeemable preferred stock extinguishment | | | 363 | | | - | |
| | | | | | | | |
| Adjusted EBITDA | | $ | (49 | ) | $ | (289 | ) |
We consider adjusted EBITDA to be an important supplemental indicator of our operating performance, particularly as compared to the operating performance of our competitors, because this measure eliminates many differences among companies in financial, capitalization and tax structures, capital investment cycles and ages of related assets, as well as certain recurring non-cash and non-operating items. We believe that consideration of EBITDA should be supplemental, because EBITDA has limitations as an analytical financial measure. These limitations include the following: EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments; EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness; although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements; EBITDA does not reflect the effect of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations; and not all of the companies in our industry may calculate EBITDA in the same manner in which we calculate EBITDA, which limits its usefulness as a comparative measure.
Management compensates for these limitations by relying primarily on its GAAP results to evaluate its operating performance and by considering independently the economic effects of the foregoing items that are not reflected in EBITDA. As a result of these limitations, EBITDA should not be considered as an alternative to net income (loss), as calculated in accordance with generally accepted accounting principles, as a measure of operating performance, nor should it be considered as an alternative to cash flows as a measure of liquidity.
Further, we realize that effective analysis of our operations with an approach of comparing results for a current period with the results of a corresponding prior period may be difficult due to our December 2006 reverse merger transaction and security issuances that we have completed.
Liquidity and Capital Resources
We have incurred significant operating losses since our inception and have limited financial resources until such time that we are able to generate positive cash flow from operations. We had cash and cash equivalents of $34,000 as of September 30, 2007, compared to $121,000 as of December 31, 2006.
Net cash used in operations for the nine months ended September 30, 2007 was $874,000, primarily due to a net loss of $5,649,000 partially offset by a loss on extinguishment of debt of $341,000, loss on extinguishment of redeemable preferred stock of $363,000, accretion of notes payable of $3,057,000, and amortization of customer lists and other intangibles of $611,000. Net cash provided by operations for the nine months ended September 30, 2006 was $154,000.
Net cash provided by financing activities for the nine months ended September 30, 2007 was $788,000, primarily due to the net proceeds from the Series B debt offering. Net cash provided by financing activities during the nine months ended September 30, 2006 was $973,000.
We do not expect to achieve profitability or positive cash flow for 2007. Key to achieving profitability is to obtain a REDIview customer base that provides monthly recurring revenues and corresponding gross margins that exceed operating costs and expenses to support the REDIview customer base. Our plans for 2007 include increasing our sales staff and sales channel development in an effort to build recurring revenue and continuing to identify additional operating cost reductions. However, there can be no assurance that we will achieve our sales targets for 2007. Failure to do so may have a material adverse effect on our business, financial condition and results of operations. Moreover, despite actions to increase revenue, to reduce operating costs and to improve profitability and cash flow, our operating losses and net operating cash outflows will continue through the remainder of 2007.
We currently are not in compliance with certain of our obligations relating to our secured convertible notes and our convertible preferred stock, including our failure to maintain sufficient authorized shares to permit conversion of the securities and our failure to register the resale of the shares of common stock issuable upon conversion of the securities. Although, to date, no security holder has sent us a notice of acceleration of amounts owed under or redemption of these securities, there can be no assurance that the security holders will not take such action in the future. Our failure to comply with our obligations relating to these securities also exposes us to liquidated damages claims by the security holders. As of September 30, 2007, we had accrued $1,465,000 in respect of such liquidated damages. In the event of an acceleration of amounts owed under or redemption of these securities (or a claim for liquidated damages), if we are unable to raise enough money to cover the amounts payable, we may be forced to restructure, file for bankruptcy, sell assets or cease operations.
We had a working capital deficit of $11.5 million as of September 30, 2007. We believe that with the expected proceeds from our November 2006 private placement, we will have sufficient capital to fund our ongoing operations through the remainder of 2007, assuming that we are able to meet our sales targets and operating cost reduction plans and to negotiate acceptable payment arrangements with our senior security holders, vendors and other creditors. The sufficiency of our cash resources also depends to a certain extent on general economic, financial, competitive or other factors beyond our control.
We have historically relied on a series of financings and asset sales to fund our ongoing operations. In October 2007, we closed on a portion of the fourth round of our Series B Note financing, whereby, BMSI funded $200,000 of its $300,000 obligation. BMSI waived the fourth round closing conditions with respect to the amounts funded. We issued to BMSI (i) $200,000 principal amount of Series B Notes, (ii) $80,000 principal amount of Series B OID Notes, (iii) E-7 Warrants to purchase 9,375,000 shares of our common stock and (iv) F-4 Warrants to purchase 9,375,000 shares of our common stock.
We do not currently have any arrangements for additional financing (other than completion of the remaining $238,500 of the fourth round of our Series B Note financing) and we may not be able to secure additional debt or equity financing on terms acceptable to us, or at all, at the time when we need such financing. Further, our ability to secure certain types of additional financings is restricted under the terms of our existing financing arrangements. There can be no assurance that we will be able to consummate a transaction for additional capital prior to substantially depleting our available cash reserves, and our failure to do so may force us to restructure, file for bankruptcy, sell assets or cease operations.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to product returns, bad debts, inventories, income taxes, warranty obligations, maintenance contracts and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The significant accounting policies and estimates, which we believe to be the most critical to aid in fully understanding and evaluating reported financial results, are stated in Management’s Discussion and Analysis of Financial Condition and Results of Operations reported in our Annual Report on Form 10-KSB for our fiscal year ended December 31, 2006.
ITEM 3: CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures, which we have designed to ensure that material information related to us, including our consolidated subsidiaries, is made known to our disclosure committee on a regular basis. Our disclosure committee consists of members of our senior management.
Under the supervision, and with the participation of our senior management, including our Chief Executive Officer and principal financial officer (the “Certifying Officer”), an evaluation of the effectiveness of our disclosure controls and procedures was performed as of September 30, 2007. Based on this evaluation, the Certifying Officers have concluded that, as of the end of the period covered by this Form 10QSB, our Disclosure Controls are not effective to provide reasonable assurance that our financial statements are fairly presented in conformity with generally accepted accounting principles for the reasons discussed below.
These matters are with regard to insufficient personnel resources within the company, based on the size and complexity of the organization, to affect timely financial close process and to effectively evaluate and resolve certain non-routine and/or complex accounting transactions. A significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected is considered a material weakness. Significant deficiencies are control issues that could have a significant adverse effect on the ability to record, process, summarize and report financial data in the financial statements.
To remediate this internal control weakness, management has commenced implementation of the following measures: The Company will continue to add sufficient personnel to properly segregate duties and to effect a timely, accurate preparation of the financial statements. The Company will also implement additional control procedures for non-routine and/or complex accounting transactions and provide additional training programs for technical accounting issues. The Company plans to have this implemented during 2007.
There were no changes in our internal controls over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the three months ended September 30, 2007, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. In the estimation of our senior management, none of the following changes in the composition of management have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting:
| | (i) | | On May 31, 2006, J. Raymond Bilbao resigned the office of President, Chief Operating Officer and Secretary; |
| | | | |
| | (ii) | | On June 18, 2006, Mathew Petzold resigned from his position as director; |
| | | | |
| | (iii) | | On June 30, 2006, Dennis R. Casey resigned the office of Chief Executive Officer and resigned from his position as Chairman of our Board of Directors; |
| | | | |
| | (iv) | | On June 30, 2006, Gregg J. Pritchard resigned from his position as director; |
| | | | |
| | (v) | | On June 30, 2006, Thomas W. Honeycutt resigned from his position as director; |
| | | | |
| | (vi) | | On June 30, 2006, Marshall G. Saffer joined our Board of Directors; |
| | | | |
| | (vii) | | On July 8, 2006, Phillip K. Hunter joined our Board of Directors; |
| | | | |
| | (viii) | | On July 11, 2006, Christopher D. Phillips joined our Board of Directors; |
| | | | |
| | (ix) | | On December 5, 2006, David Walters joined our Board of Directors and was appointed Chairman of the Board; |
| | | | |
| | (x) | | On December 5, 2006, Keith Moore joined our Board of Directors and was appointed Secretary of the Board; |
| | | | |
| | (xi) | | On December 5, 2006, Christopher D. Phillips resigned from his position as director; and, |
| | | | |
| | (xii) | | On December 22, 2006, Phillip K. Hunter resigned from his position as director. |
| | | | |
| | (xiii) | | On February 16, 2007, Gary Hallgren was appointed as Chief Executive Officer and Greg Jones was appointed as Senior Vice President, Operations |
| | | | |
| | (xiv) | | On February 23, 2007, Neil Read resigned from his position as Chief Financial Officer. |
| | | | |
| | (xv) | | On April 3, 2007, Marshall G. Saffer resigned from his position as director. |
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None.
ITEM 2: RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
We currently are not in compliance with certain of our obligations relating to our secured convertible notes and our convertible preferred stock, including (a) with respect to our series A senior secured convertible notes, our failure to make required amortization payments, to maintain sufficient authorized shares to permit conversion of the notes and to register the resale of the shares of common stock issuable upon conversion of the notes, and (b) with respect to our series B senior secured convertible notes, our failure to file a registration statement with respect to the resale of the shares of common stock issuable upon conversion of the notes. Although, to date, no security holder has sent us a notice of acceleration of amounts owed under or redemption of these securities, there can be no assurance that the security holders will not take such action in the future. Our failure to comply with our obligations relating to these securities also exposes us to liquidated damages claims by the security holders. In the event of an acceleration of amounts owed under or redemption of these securities (or a claim for liquidated damages), or if we are unable to raise enough money to cover the amounts payable, we may be forced to restructure, file for bankruptcy, sell assets or cease operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5: OTHER INFORMATION
None.
ITEM 6: EXHIBITS
See the attached Index to Exhibits.
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | |
| | REMOTE DYNAMICS, INC. |
|
|
|
| Date: November 14, 2007 | By: | /s/ Gary Hallgren |
|
Gary HallgrenChief Executive Officer (Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature | | Title | | Date |
| | | | | |
| | | | | |
/s/ GARY HALLGREN
Gary Hallgren | | Chief Executive Officer | | November 14, 2007 |
| | | |
| | | | | November 14, 2007 |
/s/ DAVID WALTERS
| | Chairman and Director (Principal Financial and Accounting Officer) | | |
| | | |
| | | | | |
/s/ DENNIS ACKERMAN
Dennis Ackerman | | Director | | November 14, 2007 |
| | | | |
| | | | | |
/s/ KEITH MOORE
Keith Moore | | Director and Secretary | | November 14, 2007 |
INDEX TO EXHIBITS
Exhibit No. Identification of Exhibit
| 31.1 | | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934 |
| 32.1 | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
