UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2003
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number 0-23153
REMOTEMDX, INC.
(Exact name of small business issuer as specified in its charter)
Utah 87-0543981
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
5095 West 2100 South
Salt Lake City, Utah 84120
(Address of principal executive offices)
(801) 908-7766
(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or 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. Yes [X] No [
]
As of February 13, 2004, the issuer had issued and outstanding 25,968,239 shares
of common stock, par value $0.0001.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
TABLE OF CONTENTS
Page
No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheet as of
December 31, 2003 3
Unaudited Condensed Consolidated Statements of Operations for
the three months ended December 31, 2003 and 2002 4
Unaudited Condensed Consolidated Statements of Cash Flows for
the three months ended December 31, 2003 and 2002 5
Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operation 12
Item 3. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 18
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REMOTEMDX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
December 31,
2003
------------------
Assets
Current assets:
Cash $ 480,307
Restricted Cash 552,458
Accounts receivable, net of allowance for
doubtful accounts of $45,000 91,115
Inventories 314,790
Prepaid expenses 1,925
------------------
Total current assets 1,440,595
Property and equipment, net 29,301
Other Assets 5,819
Core technology, net 105,000
Goodwill 1,321,164
------------------
Total assets $ 2,901,879
==================
Liabilities and Stockholders' (Deficit)
Current liabilities:
Notes payable $ 798,647
Bank line of credit 550,733
Related-party convertible notes payable 169,676
Related-party line of credit 507,471
Accounts payable 450,334
Accrued liabilities 297,614
Dividends payable 140,243
Deferred revenue 13,285
Common stock subject to mandatory redemption 2,024,666
-----------------
Total current liabilities $ 4,952,669
-----------------
Commitments and contingencies
Redeemable common stock (See Note 8) 6
------------------
Stockholders' deficit:
Preferred stock:
Series A; 10% dividend, convertible, non-voting;
$0.0001 par value; 40,000 shares designated; 27,114
shares outstanding (aggregate liquidation preference
of $194,471) 3
Series B; convertible; $0.0001 par value; 2,000,000
shares designated; 1,835,824 shares outstanding
(aggregate liquidation preference of $5,687,820) 184
Common stock; $0.0001 par value; 50,000,000 shares
authorized, 25,872,239 shares outstanding 2,587
Additional paid-in capital 62,395,172
Deferred consulting costs (67,500)
Series A preferred stock subscription receivable - due from
related party (300,000)
Accumulated deficit (64,081,242)
------------------
Total stockholders' deficit (2,050,796)
------------------
Total liabilities and stockholders' deficit $ 2,901,879
==================
See accompanying notes to unaudited condensed consolidated financial statements.
3
REMOTEMDX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
December 31,
2003 2002
------------------ -------------
Net sales $ 201,941 $ 178,737
Cost of goods sold 203,274 254,518
------------------ -------------
Gross profit (loss) (1,333) (75,781)
Research and development expenses 49,532 105,119
Selling, general and administrative expenses 702,911 1,023,190
Amortization of core technology 35,000 46,667
------------------ -------------
Loss from operations (788,776) (1,250,757)
Other income (expense):
Other income 36,463 -
Interest income 2,631 1,179
Interest expense (357,781) (252,911)
------------------ -------------
Loss before income taxes and discontinued operations (1,107,463) (1,502,489)
Income tax benefit - -
------------------ -------------
Loss before discontinued operations (1,107,463) (1,502,489)
Income (loss) on discontinued operations, net of tax 99,515 (372,134)
------------------ -------------
Net loss (1,007,948) (1,874,623)
Dividends on Series A preferred stock (140,243) (157,080)
Net loss attributable to common stockholders $ (1,148,191) $ (2,031,703)
================== =============
Net loss per common share from continuing operations - basic and diluted $ (0.05) $ (0.13)
================== =============
Net income (loss) per common share from discontinued operations - basic and
diluted $ .00 $ (0.03)
================== =============
Net loss per common share - basic and diluted $ (0.05) $ (0.16)
================== =============
Weighted average shares - basic and diluted 24,708,000 12,859,000
================== =============
See accompanying notes to unaudited condensed consolidated financial statements.
4
REMOTEMDX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
December 31,
2003 2002
------------------ -------------
Cash flows from operating activities:
Net loss $ (1,007,948) $ (1,874,623)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 37,411 77,127
Amortization of discount on purchase obligation to former
SecureAlert shareholders - 5,825
Amortization of deferred consulting costs - 273,000
Amortization of deferred financing costs 52,500 -
Accretion of interest expense related to redeemable common stock 263,666 -
Common stock issued for services - 59,999
Loss on disposal of equipment charged to cost of sales - 86,514
Changes in operating assets and liabilities:
Increase in restricted cash (2,432) -
Accounts receivable, net (6,199) 527,828
Inventories 49,647 163,624
Prepaid expenses 7,204 4,228
Other assets - 984
Increases in advances payable to related party for consulting
services and expenses 182,646 -
Accounts payable 64,540 (144,773)
Accrued liabilities (15,419) 67,985
Deferred revenue (1,157) (62,949)
------------------ -------------
Net cash used in operating activities (375,541) (815,231)
------------------ -------------
Cash flows used in investing activities - purchase of property and equipment (1,040) -
------------------ -------------
Cash flows from financing activities:
Net borrowings under related-party line of credit 615,953 41,276
Net borrowings (payments) on bank line of credit (53) 223,033
Payments on related party notes (98,794) (25,000)
Proceeds from related party notes - 85,807
Proceeds from issuance of common stock, net of $25,000 commissions 225,000 -
Proceeds from issuance of notes payable - 550,000
Payments on notes payable (22,112) (89,517)
------------------ -------------
Net cash provided by financing activities 719,994 785,599
------------------ -------------
Net increase (decrease) in cash 343,413 (29,632)
Cash, beginning of period 136,894 51,390
------------------ -------------
Cash, end of period $ 480,307 $ 21,758
================== =============
See accompanying notes to unaudited condensed consolidated financial statements.
5
REMOTEMDX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
December 31,
2003 2002
------------------ -------------
Cash paid for interest and taxes:
Cash paid for income taxes $ - $ -
Cash paid for interest 41,615 57,801
Supplemental schedule of non-cash investing and financing activities:
Issuance of shares of common stock in exchange for shares of Series A
preferred stock 124 26
Reduction of related party line-of-credit in exchange for exercise of common
stock options 373,804 46,063
Accrual of Preferred Series A stock dividends 140,243 157,080
Deferred financing costs paid for by issuance of redeemable common shares - 45,000
Restricted cash issued for debt - 300,000
Series A preferred stock issued for accrued dividends - 17,374
Conversion of debt and accrued interest converted into shares of common
stock 33,640 -
Reduction of subscription receivable 400,000 -
Sales of net assets for assumption of liabilities and return of common shares
detailed as follows:
Accounts payable and accrued liabilities assumed - (488,410)
Bank line-of-credit assumed - (300,000)
Obligation to SecureAlert relieved - (400,000)
Accounts receivable sold - 370,501
Inventory sold - 539,706
Property and equipment, net of $80,331 accumulated depreciation sold - 183,484
Common stock returned (401,959 shares) - 94,719
See accompanying notes to unaudited condensed consolidated financial statements.
6
REMOTEMDX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) ORGANIZATION AND NATURE OF OPERATIONS
RemoteMDx, Inc. was originally incorporated in Utah in July 1995 under the name
Volu-Sol, Inc. ("Volu-Sol"), as a wholly owned subsidiary of Biomune Systems,
Inc. ("Biomune"). Biomune spun off Volu-Sol by distributing shares of Volu-Sol's
common stock as a stock dividend to the holders of the common stock of Biomune
(the "Distribution"). As a consequence of the Distribution, Volu-Sol commenced
operations as a separate, independent company in October 1997. Effective July
27, 2001, Volu-Sol changed its name to RemoteMDx, Inc. RemoteMDx, Inc. and its
subsidiaries are collectively referred to as the "Company".
The Company is a medical, technology-based remote personal safety, health
monitoring and diagnostic services company. The Company creates solutions for
real-time monitoring of personal safety, security, and health needs in
conjunction with national monitoring centers.
Historically, the Company's strategy was to capitalize on the global medical
diagnostic industry by providing "building block" stains and reagents. Although
the Company continues to conduct its medical stains and solutions business, over
the past two years, management has begun to pursue a more expanded role in the
medical diagnostic industry by researching innovative ways to manage patient
medical information as well as linking patients, physicians and payors through
remote health monitoring products. Additionally, through its acquisition of
SecureAlert II, Inc. ("SecureAlert") in July 2001, the Company is engaged in the
business of manufacturing and marketing mobile emergency and personal security
systems, and distributing consumer electronics products. The Company's revenues
for the three months ended December 31, 2003 and 2002 were generated primarily
from the sale of consumer electronics and personal security products and to a
lesser extent from medical stains and reagents.
Basis of Presentation
The accompanying condensed consolidated financial statements of the Company have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations. These condensed
consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments) that, in the opinion of management, are necessary
to present fairly the results of operations of the Company for the periods
presented. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Form 10-KSB for the year ended September 30, 2003. The
results of operations for the three months ended December 31, 2003 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 2004.
Going Concern
The Company has reoccurring net losses, has negative cash flows from operating
activities and has a working capital deficit, a stockholders' deficit and an
accumulated deficit. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Management's plans with respect to this uncertainty include converting debt
obligations to equity and raising additional capital from the sale of equity
securities, obtaining debt financing and enhance revenues and cash flows from
its operations by increasing selling and marketing efforts related to new and
existing products and services.
There can be no assurance that the Company will be able to raise sufficient
capital to meet its working capital needs. In addition, there can be no
assurance that the operations will generate positive cash flows and that the
Company will be economically successful from increasing selling and marketing
efforts to introduce new products into the market. Further, the Company may be
unable to complete the development and successful commercialization of any new
remote health monitoring products.
7
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly or majority-owned subsidiaries. All significant inter-company
transactions have been eliminated in consolidation.
Stock-Based Compensation
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation.
Accordingly, no compensation cost has been recognized in the financial
statements for employees, except when the exercise price is below the market
price of the stock on the date of grant. The Company awarded no options during
the periods ended December 31, 2003 and 2002.
Impairment of Long-Lived Assets
Goodwill is not amortized but is subject to an impairment test, which is
performed at least annually. Goodwill is related to the acquisition of
SecureAlert in July 2001. The Company tests goodwill for impairment at least
annually or when changes in circumstances may indicate impairment. Impairment is
measured by comparing the carrying value of the component unit to which goodwill
is assigned, namely the assets of its wholly owned subsidiary SecureAlert, Inc.
to the estimated fair value of the component unit using an income approach
method of estimated future cash flows. The estimated future cash flows include
those primarily related from mobile medical alert devices of the component unit.
If the carrying amount of the component unit including goodwill is determined to
exceed the estimated fair value of the component unit then an impairment is
recorded as the difference between the carrying value and the fair market value.
The Company reviews its long-lived assets, other than goodwill, for impairment
when events or changes in circumstances indicate that the book value of an asset
may not be recoverable. The Company evaluates, at each balance sheet date,
whether events and circumstances have occurred which indicate possible
impairment. The Company uses an estimate of future undiscounted net cash flows
of the related asset or group of assets over the estimated remaining life in
measuring whether the assets are recoverable.
Net Loss Per Common Share
Basic net loss per common share ("Basic EPS") is computed by dividing net loss
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted net loss per common share ("Diluted EPS")
is computed by dividing net loss by the sum of the weighted-average number of
common shares outstanding and the weighted-average dilutive common share
equivalents then outstanding. The computation of Diluted EPS does not assume
exercise or conversion of securities that would have an anti-dilutive effect.
Common share equivalents consist of shares issuable upon the exercise of common
stock options and warrants, the conversion of the convertible debentures and
related accrued interest, and shares issuable upon conversion of preferred
stock. As of December 31, 2003 and 2002, there were approximately 18,394,000 and
18,194,000 outstanding common share equivalents, respectively, that were not
included in the computation of diluted net loss per common share as their effect
would be anti-dilutive.
Revenue Recognition
The Company derives its revenue primarily from the sale of mobile emergency and
personal security systems and reagent stains. Revenue, less reserves for
returns, is recognized upon shipment to the customer. The Company records
reserves for estimated returns of defective product. Amounts received in advance
of shipment are recorded as deferred revenue. Shipping and handling fees are
included as part of net sales. The related freight costs and supplies directly
associated with shipping products to customers are included as a component of
cost of goods sold.
(2) INVENTORIES
Substantially all items included in inventory are finished goods and consist of
the following as of December 31, 2003:
8
Mobile emergency and personal security systems,
net of reserve of $337,438 $ 277,693
Reagent stains 37,097
-----------
$ 314,790
(3) NOTES PAYABLE
Notes payable outstanding at December 31, 2003 were $798,647. The Company did
not issue any additional notes during the quarter ended December 31, 2003. On
December 31, 2003, the Company converted debt of $25,000 plus accrued interest
into 22,427 shares of common stock at a price of $1.50 per share.
(4) BANK LINE OF CREDIT
As of December 31, 2003, the Company had $550,733 outstanding under a line of
credit with Zions First National Bank. The line of credit bears interest at
prime plus .25% (4.25% at December 31, 2003), matures on March 11, 2004, is
limited to $550,000 plus fees, and is secured by certificates of deposit which
the Company holds as restricted cash of $552,457.
(5) RELATED-PARTY ADVANCES
As of December 31, 2003, the Company had related party advances payable to ADP
Management, an entity owned and controlled by two of the Company's officers and
directors, totaling $507,471. These advances bear interest at 4.75% and are due
on demand. During the three months ended December 31, 2003, the net cash
borrowings from ADP Management were $615,953. ADP Management paid $182,646 of
the Company's expenses related to payroll, consulting, and other general and
administrative expenses in exchange for an increase in advances due to ADP.
(6) RELATED-PARTY CONVERTIBLE PROMISSORY NOTES
In connection with the acquisition of SecureAlert in July 2001 the Company
assumed two promissory notes payable to former SecureAlert shareholders each
with a principal balance of $250,000, and the Company granted each of the note
holders the right, at any time prior to July 2, 2002, to convert their note into
83,333 shares of the Company's common stock, or to be paid $250,000 on July 2,
2002. The promissory notes were amended during the three months ended December
31, 2002 to provide for payments of principal and accrued interest at a rate of
$20,000 per month until paid in full, commencing March 25, 2003; the remaining
balance on the notes of $169,676 at December 31, 2003, continues to be
convertible at the option of the holder at a rate of $3.00 per share. The notes
continue to bear interest at a rate of five percent per year. During the three
months ended December 31, 2003, the Company recorded interest expense of $3,088
on these promissory notes.
(7) PREFERRED STOCK
Series A 10 % Convertible Non-Voting Preferred Stock
Each share of Series A Preferred Stock is convertible into 370 shares of common
stock. During the three months ended December 31, 2003, a total of 3,363 shares
of Series A Preferred Stock were converted into 1,240,554 shares of common
stock. As of December 31, 2003, there were 27,114 shares of Series A Preferred
Stock outstanding, which represents 10,032,180 common stock equivalents at a
conversion rate of 370 for 1. Subsequent to December 31, 2003, a total of 665
shares of Series A Preferred Stock were converted into 246,000 shares of common
stock.
The holders of the Series A Preferred Stock are entitled to dividends at the
rate of 10 percent per year on the stated value of the Series A Preferred Stock
(or $200 per share), payable in cash or in additional shares of Series A
Preferred Stock at the discretion of the board of directors. Dividends are fully
cumulative and accrue from the date of original issuance. During the three
months ended December 31, 2003 and 2002, the Company recorded $140,243 and
$157,080, respectively, in dividends on Series A Preferred Stock.
9
The Company may, at its option, redeem up to two-thirds of the total number of
shares of Series A Preferred Stock at a redemption price of 133 percent of the
stated value of Series A Preferred Stock; however, the Company may designate a
different and lower redemption price for all shares of Series A Preferred Stock
called for redemption by the Company. Through December 31, 2003, the Company had
not exercised its option to redeem shares of Series A Preferred Stock.
Series B Convertible Preferred Stock
In April 2002, the Company sold 1,135,823 shares of Series B Preferred Stock for
$3,366,273. Of these issuances 1,000,000 shares were sold to Matsushita Electric
Works, Ltd., a Japanese corporation ("MEW"). MEW was granted an anti-dilution
right on the common stock conversion feature of the 1,000,000 Series B shares it
purchased. If the Company shall at any time during a two-year period (beginning
April 2002) issue or sell its common stock or any security exercisable into
common stock for an equivalent value of less than $3.00 per share, then the
conversion price of the 1,000,000 Series B shares into common stock will be
adjusted to the common stock equivalent value of those securities sold. On
December 12, 2003, the holders of a majority of the outstanding shares of Series
B Preferred Stock, including MEW, waived their rights under the anti-dilution
provisions of the Series B Preferred Stock designation of rights and preferences
and under other agreements with the Company through that date. The Company may
redeem the Series B Preferred Stock at any time. The redemption price will be a
minimum of 110 percent of the conversion price at the date of redemption. As of
December 31, 2003, the Company had not exercised its option to redeem shares of
Series B Preferred Stock.
(8) COMMON STOCK
During the three months ended December 31, 2003, the Company issued 1,955,207
shares of common stock as follows:
o 22,427 shares were in exchange for the conversion of debt and
accrued interest in the amount of $33,640.
o 1,240,551 shares were issued upon the conversion of 3,353 shares
of Series A Preferred Stock
o 692,229 shares were issued for reduction of $373,804 of the
related party line of credit in connection with the exercise of
692,229 common stock warrants
Common Stock Subject to Redemption
Of the shares of common stock outstanding at December 31, 2003, a total of
58,338 shares are subject to redemption. In December 2003, the Company amended
its agreement with the holder of these shares. The Company granted the holder
the option to put back the shares at a price of $3.00 per share beginning April
30, 2004 and ending May 31, 2004. This option will not be exercisable if the
closing market price of the Company's common stock is at least $3.00 per share
on April 27, 28, and 29, 2004 and listed on a national stock exchange.
Common Stock Options and Warrants
Options and warrants to purchase a total of 6,526,814 shares of common stock
were outstanding at December 31, 2003 with a weighted average exercise price of
$3.00 per share.
(9) SEGMENT INFORMATION
The Company is organized into two business segments based primarily on the
nature of the Company's products. The Reagents segment is engaged in the
business of manufacturing and marketing medical diagnostic stains, solutions and
related equipment to hospitals and medical testing labs. The SecureAlert segment
is engaged in the business of developing, distributing and marketing mobile
emergency and personal security systems to distributors and consumers, and
distributing consumer electronics products to the manufactured home market.
Other (unallocated) loss consists of research and development, selling, general
and administrative expenses related to the Company's corporate activities,
including remote health monitoring and market and business development
activities.
The following table reflects certain financial information relating to each
reportable segment for each of the three-month periods ended December 31, 2003
and 2002:
10
Three Months Ended
December 31,
-------------------- -----------------
2003 2002
-------------------- -----------------
Net sales:
SecureAlert:
Mobile emergency and personal security systems 57,952 51,387
Reagents 143,989 127,350
-------------------- -----------------
$ 201,941 $ 178,737
-------------------- -----------------
Net (loss) income from continuing operations:
SecureAlert $ (63,750) $ (1,144,418)
Reagents 4,802 1,420
Other (unallocated) (1,048,515) (359,491)
-------------------- -----------------
$ (1,107,463) $ (1,502,489)
-------------------- -----------------
Identifiable assets:
SecureAlert (including good will of $1,321,164) 1,724,284
Reagents 138,335
Other (unallocated) 1,039,260
--------------------
$ 2,901,879
(10) RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN No. 46), which addresses consolidation by
business enterprises of variable interest entities. FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements", to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company is attempting to
identify any variable interest entities that must be consolidated. In the event
a variable interest entity is identified, this pronouncement may have a material
impact on the Company's financial condition or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". This
Statement is effective for contracts entered into or modified after June 30,
2003, with certain exceptions, and for hedging relationships designated after
June 30, 2003, with certain exceptions, and for hedging relationships designated
after June 30, 2003. Management is currently evaluating the effect that the
adoption of SFAS No. 149 may have, but believes it will not have a material
effect on its results of operations and financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This new
statement changes the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity or classifications
between liabilities and equity in a section that has been known as "mezzanine
capital." It requires that those certain instruments be classified as
liabilities in balance sheets. Most of the guidance in SFAS 150 is effective for
all financial instruments entered into or modified after May 31, 2003.
Management anticipates that the adoption of SFAS No. 150 may have a material
impact on the Company's consolidated financial statements if in the future the
Company issues mandatorily redeemable preferred stock. Such mandatorily
redeemable preferred stock, previously included as "mezzanine capital", would be
included as a liability in accordance with SFAS 150.
(11) SUBSEQUENT EVENT
There were no material events subsequent to December 31, 2003.
11
Item 2. Management's Discussion and Analysis or Plan of Operation
Special Note Regarding Forward-looking Information
Certain statements in this Item 2 "Management's Discussion and Analysis or Plan
of Operation" are "forward-looking statements" within the meaning of the
Securities Exchange Act of 1934 (the "Exchange Act"). For this purpose, any
statements contained or incorporated in this report that are not statements of
historical fact may be deemed to be forward-looking statements. The words,
"believes," "will," "plans," "anticipates," "expects" and similar expressions
are intended to identify forward-looking statements. A number of important
factors could cause the actual results of the Company to differ materially from
those anticipated by forward-looking statements. These factors include those set
forth under the caption "Risk Factors" in Item 6 - "Management's Discussion and
Analysis or Plan of Operation" in the Company's Annual Report on Form 10-KSB for
the year ended September 30, 2003.
Critical Accounting Policies
In Note 1 to the audited financial statements for the fiscal year ended
September 30, 2003 included in its Form 10-KSB, the Company discusses those
accounting policies that are considered to be significant in determining the
results of operations and its financial position. The Company believes that the
accounting principles utilized by it conform to generally accepted accounting
principles in the United States of America.
The preparation of consolidated financial statements requires management to make
significant estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. By their nature, these judgments are subject
to an inherent degree of uncertainty. On an on-going basis, the Company
evaluates its estimates, including those related to bad debts, inventories,
intangible assets, warranty obligations, product liability, revenue, and income
taxes. The Company bases its estimates on historical experience and other facts
and circumstances that are believed to be reasonable, and the results form the
basis for making judgments about the carrying value of assets and liabilities.
The actual results may differ from these estimates under different assumptions
or conditions.
With respect to inventory reserves, revenue recognition and allowance for
doubtful accounts, the Company applies the following critical accounting
policies in the preparation of its financial statements:
Inventory Reserves
The nature of the Company's business requires it to maintain sufficient
inventory on hand at all times to meet the requirements of its customers. The
Company record finished goods inventory at the lower of standard cost, which
approximates actual costs (first-in, first-out) or market. Raw materials are
stated at the lower of cost (first-in, first-out), or market. General inventory
reserves are maintained for the possible impairment of the inventory. Impairment
may be a result of slow moving or excess inventory, product obsolescence or
changes in the valuation of the inventory. In determining the adequacy of its
reserves, the Company analyzes the following, among other things:
o Current inventory quantities on hand;
o Product acceptance in the marketplace;
o Customer demand;
o Historical sales;
o Forecast sales;
o Product obsolescence; and
o Technological innovations.
Any modifications to these estimates of reserves are reflected in the cost of
goods sold within the statement of operations during the period in which such
modifications are determined necessary by management.
12
Revenue Recognition
The Company derives revenue primarily from the sale of consumer electronics and
reagent stains. Under applicable accounting principles, revenue, less reserves
for returns, is recognized upon shipment to the customer. From the date of the
acquisition of SecureAlert in July 2001 through September 30, 2003, and for the
year ended September 30, 2003, the provision for sales returns was not material.
Amounts received in advance of shipment are recorded as deferred revenue.
Shipping and handling fees are included as part of net sales. The related
freight costs and supplies directly associated with shipping products to
customers are included as a component of cost of goods sold.
Impairment of Long-lived Assets
Under applicable accounting principles, the Company does not amortize goodwill.
Goodwill is subject to an impairment test, which is performed at least annually.
The Company reviews its long-lived assets, other than goodwill, for impairment
when events or changes in circumstances indicate that the book value of an asset
may not be recoverable. The Company evaluate, at each balance sheet date,
whether events and circumstances have occurred which indicate possible
impairment. The Company uses an estimate of future undiscounted net cash flows
of the related asset or group of assets over the estimated remaining life in
measuring whether the assets are recoverable.
Accounting for Stock-based Compensation
The Company accounts for stock-based compensation issued to employees and
directors under Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. Under APB No. 25,
compensation related to stock options, if any, is recorded if an option's
exercise price on the measurement date is below the fair value of the company's
common stock and amortized to expense over the vesting period. Compensation
expense for stock awards or purchases, if any, is recognized if the award or
purchase price on the measurement date is below the fair value of the common
stock and is recognized on the date of award or purchase. Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based
Compensation," requires pro forma information regarding net loss and net loss
per common share as if the company had accounted for its stock options granted
under the fair value method.
The Company accounts for stock-based compensation issued to persons other than
employees using the fair value method in accordance with SFAS No. 123 and
related interpretations. Under SFAS No. 123, stock-based compensation is
determined as either the fair value of the consideration received or the fair
value of the equity instruments issued, whichever is more reliably measurable.
The measurement date for these issuances is the earlier of either the date at
which a commitment for performance by the recipient to earn the equity
instruments is reached or the date at which the recipient's performance is
complete.
Allowance for Doubtful Accounts
The Company must make estimates of the collectability of accounts receivable. In
doing so, the Company analyze accounts receivable and historical bad debts,
customer credit-worthiness, current economic trends and changes in customer
payment patterns when evaluating the adequacy of the allowance for doubtful
accounts.
Discontinued Operations
During the three months ended December 31, 2003 management determined to
discontinue its operating activities of consumer electronic distribution. The
Company's activities included wholesale distribution to home manufactures
through December 31, 2002. On January 1, 2003, the Company entered into an
agreement with SecureAlert Entertainment LLC ("SAE"), an unaffiliated company,
granting it exclusive distribution rights to the Company's consumer electronics
products to the manufactured homes marketing channel in North America. In
exchange for this distribution the Company received a 7% royalty fee on consumer
electronic products sold by SAE under the distribution rights. This agreement
expired on December 31, 2003. Because of the Company's business model to sale
and service mobile security devices, and the significant market expansion costs
to continue its consumer electronic products distribution the Company has
discontinued these operations. The discontinued operations for the three months
ended December 31, 2003 and 2002 are as follows:
13
Three Months Ended
December 31,
-------------------------------------
2003 2002
-------------------------------------
Net sales and royalties from consumer
electronics products distribution $ 99,193 $ 2,783,974
Costs associated with consumer
electronics operations - (3,156,108)
-------------------------------------
Net income (loss) from discontinued
operations $ 99,193 $ (372,134)
-------------------------------------
Continued Operations
The Company's focus is on building the mobile emergency and personal security
systems market, rather than the consumer electronics market. The following
discussion and analysis is based upon the continued operations of the Company.
Three Months Ended December 31, 2003 Compared to Three Months Ended December 31,
2002
Net Sales
For the three months ended December 31, 2003, the Company had net sales of
$201,941, compared to $178,737 for the three months ended December 31, 2002, an
increase of $23,204. The increase in net sales resulted primarily from focusing
on the core business model of the safety and medical monitoring.
SecureAlert had net sales of $57,952 during the three months ended December 31,
2003. These sales consisted of mobile emergency and personal security systems.
No other customer accounted for 10% or more of sales by SecureAlert during the
period.
Reagents had revenues for the three months ended December 31, 2003 of $143,989,
compared to $127,350 during the quarter ended December 31, 2002. The Company
anticipates that Reagents' sales will decrease in the future as a percentage of
total sales. Fisher Scientific was a significant customer of Reagents,
accounting for 16% of Reagents' sales during the period. No other Reagents
customer accounted for 10% or more of its sales.
Cost of Goods Sold
For the three months ended December 31, 2003, cost of goods sold was $203,274
compared to $254,518 during the three months ended December 31, 2002, a decrease
of $51,244. The decrease in cost of sales resulted from consolidating the
monitoring centers to provide medical monitoring. SecureAlert's cost of goods
sold totaled $121,701 or 210% of SecureAlert's net sales during the three months
ended December 31, 2003. The remote medical products are sold below cost in
order to receive a recurring revenues under a long-term monitoring agreement.
Therefore, the Company incurs a negative gross margin on SecureAlert's products.
Reagents' cost of goods sold was $81,572 or 57% of Reagent's net sales during
the three months ended December 31, 2003, compared to $81,904 or 64% of
Reagent's net sales for the same period during the prior fiscal year. The
decrease as a percentage of net sales was primarily due to a reduction in labor
costs.
Research and Development Expenses
For the three months ended December 31, 2003, research and development expenses
were $49,532, compared to $105,119 in the previous year period. During the three
months ended December 31, 2003, research and development expenses consisted
primarily of expenses associated with the development of SecureAlert's personal
security devices.
Amortization of Core Technology
Core technology primarily represents patents in the area of remote security and
medical alert devices received in the acquisition of SecureAlert. Core
technology is amortized using the straight-line method over an estimated useful
life of three years and totaled $35,000 for the three months ended December 31,
2003.
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Selling, General and Administrative Expenses
During the three months ended December 31, 2003, selling, general and
administrative expenses were $702,911 compared to $1,023,190 during the three
months ended December 31, 2002. This decrease relates primarily to a reduction
of labor costs due to focusing on the core business model of the safety and
medical monitoring.
Interest Income and Expense
During the three months ended December 31, 2003, interest expense totaled
$357,781, compared to $252,911 paid in the three months ended December 31, 2002.
This amount consists primarily of non-cash interest expense of $316,166 related
to the issuance of common stock in settlement of various note obligations.
Liquidity and Capital Resources
The Company is unable to finance its operations solely from cash flows from
operating activities. During the three months ended December 31, 2003, the
Company financed its operations primarily through borrowings from a related
party and third parties.
As of December 31, 2003, the Company had unrestricted cash of $480,307 and a
working capital deficit of $3,512,074, compared to cash of $136,894 and a
working capital deficit of $1,826,996 at September 30, 2003. This change
includes $1,681,666 from the reclassification of mezzanine capital to
liabilities as a result of the adoption of FSAS 150.
During the three months ended December 31, 2003, the Company's operating
activities used cash of $375,541, compared to cash of 815,231 used during the
three months ended December 31, 2002. The decrease was primarily a result of
reducing cash requirements by outsourcing consumer electronic distribution
distributions activities and obtaining only a royalty on those activities.
The Company used cash of $1,040 for investing activities during the three months
ended December 31, 2003.
The Company's financing activities during the three months ended December 31,
2003 provided cash of $719,994 compared to $785,599 during the three months
ended December 31, 2002. During the three months ended December 31, 2003, the
Company received net cash proceeds of $615,953 in net advances from a related
party and net proceeds of $225,000 from the issuance of common stock subject to
mandatory redemption. Cash was decreased by $22,112 in payments to notes
payable, and $98,794 in payments to a related party note.
The Company incurred a net loss of $1,007,948 during the three months ended
December 31, 2003. As of December 31, 2003, the Company had a net tangible
stockholders' deficit of $3,476,960 and an accumulated deficit of $64,081,242.
These factors, as well as the risk factors set out in the Company's annual
report on Form 10-KSB for the year ended September 30, 2003, raise substantial
doubt about the Company's ability to continue as a going concern. The unaudited
condensed consolidated financial statements included in this report do not
include any adjustments that might result from the outcome of this uncertainty.
The Company's plans with respect to this uncertainty include the conversion of a
significant portion of its outstanding debt and other obligations to equity, as
well as raising capital from the sale of the Company's common stock or other
debt and equity securities.
There is no assurance that the Company will be successful in its plans to raise
capital, convert debt to equity or meet its current financial obligations. There
has been no adjustment to the financial statements included in this report
should management's plans not be met.
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Based upon their review, the
Company's principal executive officer and principal financial officer have
concluded that the current disclosure controls and procedures (as defined in
Exchange Act Rules 240.13a-14(c) and 15d-14(c)) are effective in providing the
material information required to be disclosed in the reports it file or submit
under the Exchange Act. Their review was completed as of December 31, 2003.
Changes in Internal Controls. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to the date the Company carried out this
evaluation.
15
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
During the three months ended December 31, 2003, the Company issued 1,955,207
shares of common stock without registration of the offer and sale of the
securities under the Securities Act of 1933, as amended, as follows:
o 22,427 shares were issued for conversion of an outstanding debt
and accrued interest of $33,640.
o 1,240,551 shares were issued upon the conversion of 3,353 shares
of Series A Preferred Stock
o 692,229 shares were issued to reduce amounts owed to related
parties
In each of these transactions the securities were issued to individuals or
entities that were "accredited investors" as that term is used in Rule 501 under
Regulation D of the Securities Act of 1933, as amended (the "Securities Act").
The issuance of the securities was accomplished without registration under the
Securities Act in reliance on the exemptions from the registration requirements
of the Securities Act afforded by Section 4(2) and Rule 506 of Regulation D
under the Securities Act.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Required by Item 601 of Regulation S-B
Exhibit Number Title of Document
- -------------- -----------------
10.01 Distribution and Separation Agreement (incorporated by reference
to the Company's Registration Statement and Amendments thereto on
Form 10-SB, effective December 1, 1997)
10.02 1997 Stock Incentive Plan of the Company, (incorporated by
reference to the Company's Registration Statement and Amendments
thereto on Form 10-SB, effective December 1, 1997)
10.03 1997 Transition Plan (incorporated by reference to the Company's
Registration Statement and Amendments thereto on Form 10-SB,
effective December 1, 1997).
10.04 Securities Purchase Agreement for $1,200,000 of Series A Preferred
Stock (incorporated by reference to the Company's Registration
Statement and Amendments thereto on Form 10-SB, effective December
1, 1997)
10.05 Securities Purchase Agreements with ADP Management and James
Dalton (previously filed)
10.06 Agreement and Plan of Merger (SecureAlert) (previously filed as
exhibit to Current Report on Form 8-K)
10.07 Loan Agreement (as amended) dated June 2001 between ADP Management
and the Company (incorporated by reference to the Company's annual
report on Form 10-KSB for the year ended September 30, 2001)
10.08 Amended and Restated Loan and Security Agreement (SunTrust Bank
and SecureAlert), dated August 3, 2001 (incorporated by reference
to the Company's annual report on Form 10-KSB for the year ended
September 30, 2001)
10.09 Amended and Restated Loan and Security Agreement (SunTrust Bank
and SecureAlert), dated January 24, 2002 (filed as an exhibit to
the Company's quarterly report on Form 10-QSB for the quarter
ended December 31, 2001)
16
10.10 Amended and Restated Loan and Security Agreement (SunTrust Bank
and SecureAlert) dated March 1, 2002 (filed as an exhibit to the
Company's quarterly report on Form 10-QSB for the quarter ended
December 31, 2001)
10.11 Loan Agreement (as amended and extended) dated March 5, 2002
between ADP Management and the Company, effective December 31,
2001 (filed as an exhibit to the Company's quarterly report on
Form 10-QSB for the quarter ended December 31, 2001)
10.12 License Agreement between RemoteMDx, Inc. and SecureAlert, Inc. as
licensor and Matsushita Electric Works, Ltd., as licensee, (April
12, 2002) (previously filed)
10.13 Agreement between the Company and SAE, (previously filed)
10.14 Agreement between the Company and SecureAlert Telematics, with
amendments, (previously filed)
31.1 Certification of President and Chief Executive Officer under
Section 302 of Sarbanes- Oxley Act of 2002
31.2 Certification of Chief Financial Officer under Section 302 of
Sarbanes-Oxley Act of 2002
32 Certification under Section 906 of Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
During the quarter ended December 31, 2003, the Company filed no reports on Form
8-K.
17
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report, as amended, to be signed on its behalf by the undersigned,
thereunto duly authorized.
REMOTEMDX, INC.
Date: February 23, 2004 By: /s/David G. Derrick
--------------------------------
David G. Derrick,
Chief Executive Officer
Date: February 23, 2004 By: /s/Michael G. Acton
--------------------------------
Michael G. Acton,
Principal Accounting Officer
18