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 March 31, 2005
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) 974-9474
(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 []
On June 10, 2005, the issuer had a total of 33,312,512 shares of common stock
issued and outstanding. The issuer also had a total of 27,253 shares of Series A
Preferred Stock outstanding, convertible at any time at the option of the
holders thereof into common stock at the rate of 370 shares of common stock for
each share of Series A Preferred Stock, or a total of 10,083,484 shares, and
1,835,824 shares of Series B Preferred Stock outstanding, convertible at any
time at the option of the holders thereof into common stock at the rate of one
share of common stock for each share of Series B Preferred Stock.
Transitional Small Business Disclosure Format (Check One): Yes __ No X
---
1
TABLE OF CONTENTS
Page
No.
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheet
as of March 31, 2005......................................3
Unaudited Condensed Consolidated Statements of
Operations for the three and six months ended
March 31, 2005 and 2004....................................4
Unaudited Condensed Consolidated Statements
of Cash Flows for the six months ended March 31,
2005 and 2004..............................................5
Notes to Unaudited Condensed Consolidated
Financial Statements.......................................7
Item 2. Management's Discussion and Analysis or Plan of
Operation..................................................15
Item 3. Controls and Procedures....................................19
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds..................20
Item 6. Exhibits and Reports on Form 8-K...........................20
Signatures..........................................................22
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
REMOTEMDX, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, 2005
-------------------
Assets
Current assets:
Cash $ 785,457
Accounts receivable, net of allowance for
doubtful accounts of $25,486 88,530
Inventories 52,041
Prepaid expenses 26,193
-------------------
Total current assets 952,221
Restricted cash 177,974
Property and equipment, net of accumulated
depreciation 106,162
Other assets 34,877
-------------------
Total assets $ 1,271,234
===================
Liabilities and Stockholders' Deficit
Current liabilities:
Notes payable $ 1,089,006
Accounts payable 1,046,875
Accrued liabilities 415,721
Deferred revenue 13,979
Common stock subject to mandatory redemption 196,000
-------------------
Total current liabilities 2,761,581
-------------------
Long Term Liabilities:
Bank line of credit 175,000
Convertible debentures, net of debt
discount of $110,173 1,160,412
Notes payable 280,000
Related party line of credit 247,042
-------------------
Total liabilities 4,624,035
-------------------
Stockholders' deficit:
Preferred stock:
Series A; 10% dividend, convertible, non-voting;
$0.0001 par value; 40,000 shares designated;
27,253 shares outstanding (aggregate liquidation
preference of $72,492) 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, 32,018,164 shares outstanding 3,202
Additional paid-in capital 69,471,565
Deferred consulting costs (253,200)
Accumulated deficit (72,821,555)
-------------------
Total stockholders' deficit (3,352,801)
-------------------
Total liabilities and stockholders'
deficit $ 1,271,234
===================
See accompanying notes to unaudited condensed consolidated
financial statements.
3
REMOTEMDX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Six months ended
March 31, March 31,
2005 2004 2005 2004
------------------------------------------------------------------
Net sales $ 194,167 $ 299,568 $ 401,686 $ 501,509
Cost of goods sold 240,123 258,770 387,207 462,043
------------------------------------------------------------------
Gross profit (loss) (45,956) 40,798 14,479 39,466
Research and development expenses 397,084 - 601,814 49,532
Selling, general and administrative expenses 955,181 797,649 1,888,516 1,500,561
Amortization of core technology - 35,000 - 70,000
------------------------------------------------------------------
Loss from operations (1,398,221) (791,851) (2,475,851) (1,580,627)
Other income (expense):
Other income 5,147 11,142 5,117 47,605
Interest income 859 2,581 1,676 5,212
Interest expense (633,509) (93,332) (872,492) (451,113)
------------------------------------------------------------------
Loss before income taxes and (2,025,724) (871,460) (3,341,550) (1,978,923)
discontinued operations
Income tax benefit - - - -
------------------------------------------------------------------
Loss before discontinued operations (2,025,724) (871,460) (3,341,550) (1,978,923)
Income (loss) on discontinued operations, net
of tax - - - 99,515
------------------------------------------------------------------
Net loss (2,025,724) (871,460) (3,341,550) (1,879,408)
Dividends on Series A preferred stock (132,940) (141,468) (261,589) (281,711)
------------------------------------------------------------------
Net loss attributable to
common stockholders $ (2,158,664) $ (1,012,928) $ (3,603,139) $ (2,161,119)
==================================================================
Net loss per common share from continuing $ (.07) $ (.04) $ (.11) $ (.08)
operations - basic and diluted
Net income (loss) per common share from $ - $ - $ - $ -
discontinued operations - basic and diluted
Net loss per common share - basic and diluted $ (.07) $ (.04) $ (.11) $ (.08)
==================================================================
Weighted average shares - basic and diluted 31,546,000 26,376,000 31,498,000 25,619,000
==================================================================
See accompanying notes to unaudited condensed consolidated
financial statements.
4
REMOTEMDX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
March 31,
---------------------------------
2005 2004
---------------------------------
Cash flows from operating activities:
Net loss $ (3,341,550) $ (1,879,408)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 12,132 76,460
Beneficial conversion feature recorded as interest expense 280,000 -
Stock options and warrants issued for services 148,859 -
Amortization on debt discount 54,000 -
Amortization of deferred consulting and financing costs 237,412 111,750
Accretion of interest expense related to redeemable common stock - 263,666
Common stock issued for services and interest 170,331 (30,000)
Interest income on restricted cash (1,613) (4,626)
Increases in related party line of credit for service 390,031 349,667
Changes in operating assets and liabilities:
Accounts receivable, net 171,945 (110,405)
Inventories 26,246 45,973
Prepaid expenses and other assets (43,566) (41,350)
Accounts payable 340,867 19,354
Accrued liabilities 110,724 (5,888)
Deferred revenue 545 (2,181)
----------------------------------
Net cash used in operating activities (1,443,637) (1,208,788)
----------------------------------
Cash flows used in investing activities:
Purchase of property and equipment (4,220) (32,369)
----------------------------------
Net cash used in investing activities (4,220) (32,369)
----------------------------------
Cash flows from financing activities:
Payments on purchase obligations to former SecureAlert shareholders - (98,794)
Net advances from related-party line of credit (190,535) 269,062
Net payments on bank line of credit - (105)
Proceeds from issuance of redeemable common stock - 225,000
Proceeds from sale of debentures and common stock - 884,209
Proceeds from the issuance of SecureAlert Preferred Stock 1,722,746 -
Proceeds from issuance of notes payable 793,500 -
Payments on notes payable (154,000) (45,759)
----------------------------------
Net cash provided by financing activities 2,171,211 1,233,613
----------------------------------
Net increase (decrease) in cash 723,354 (7,544)
Cash, beginning of period 62,103 136,894
----------------------------------
Cash, end of period $ 785,457 $ 129,350
==================================
See accompanying notes to unaudited condensed consolidated
financial statements.
5
REMOTEMDX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
Six Months ended
March 31,
--------------------------------
2005 2004
(Unaudited) (Unaudited)
--------------------------------
Cash paid for interest and taxes:
Cash paid for income taxes $ - $ -
Cash paid for interest $ 96,342 $ 82,447
Supplemental schedule of non-cash investing and financing activities:
Issuance of shares of common stock in exchange
for shares of Series A preferred stock 1 108
Issuance of shares of common stock in exchange
for deferred consulting services and financing costs 159,300 54,000
Reduction of related party line-of-credit in exchange for
exercise of common stock options - 1,620
Accrual of Preferred Series A stock dividends 261,589 281,711
SecureAlert preferred stock issued in exchange for decrease in related
party line of credit 175,000
Payment of accrued preferred stock dividends through the
issuance of Series A preferred stock 787,389
Issuance of SecureAlert Series A preferred stock for note
payable and accrued interest 207,253
Reclassification of accrued expenses to note payable 115,830
Conversion of debt and accrued interest converted into shares of
Stock - 33,640
Reduction of subscription receivable
- 400,000
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".
RemoteMDx, Inc. ("RemoteMDx" or the "Company") markets and sells patented
wireless location technologies and the related monitoring services, and
develops, markets and sells personal security, senior supervision, offender
tracking, and health monitoring devices and monitoring services. The RemoteMDx
products and monitoring services feature wireless products that utilize GPS and
cellular technologies in conjunction with a monitoring center. The products are
manufactured by the Company's equity and technology partner, Matsushita Electric
Works ("MEW"). These devices include a mobile emergency response device,
MobilePAL(TM), which can locate persons in distress, no matter where they may
be, and dispatch the closest emergency service to their location, and a tracking
device, TrackerPAL, used to monitor convicted offenders in the criminal justice
system. The Company believes that its technologies and services will benefit the
healthcare and penal system as they allow both care providers and law
enforcement officials to respond immediately to a medical event or criminal
activity. Our customers will be able to better monitor and manage their own
chronic disease and medical conditions, giving peace of mind to them and their
loved ones and care providers.
The Company's primary health monitoring products and service market consists of
approximately 35 million Americans that are over the age of sixty-five. Of these
35 million seniors, it is estimated that 9.7 million seniors currently live
alone. However, in most cases, the Company anticipates that the senior customer
will not purchase the Company's products for themselves. Instead, in RemoteMDx's
analysis and experience, it would be more effective to target the children or
caregivers of these seniors. Therefore, the primary target market is children,
friends, and spouses of these individuals.
Additionally, the Company has identified a growing need in the parole/probation
market, which in 2003, consisted of 4.9 million adults in the criminal justice
system at any given time. In order to meet the needs of this growing demand, the
Company is developing a mobile monitoring device that works in conjunction with
our monitoring center.
We derive our revenues from the following sources:
o Medical Diagnostic Stains - We sell medical diagnostic stains and
equipment to laboratories throughout the United States. The
Company anticipates that these sales will decrease in the futures
as a percentage of total sales.
o Monitoring Activation - We lease our MobilePAL(TM) and anticipate
leasing our TrackerPAL devices as part of a monitoring contract,
with prepaid activation charges.
o Monitoring Services - Following activation, our MobilePAL(TM) and
TrackerPAL customers pay a monthly monitoring fee and fees for
additional services offered by our contract providers or by us.
In addition to the foregoing sources, we have contractual rights to receive
royalty revenues from a license agreement with MEW and from sales of telematics
products and services under marketing agreements. "Telematics" means any
wireless communication system designed for the collection and dissemination of
data. To date these royalty agreements have not produced any royalty income.
7
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, 2004. The
results of operations for the three and six months ended March 31, 2005 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 2005.
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.
Principles of Consolidation
The condensed 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. Had compensation cost for the Company's
stock option plans been determined based on the fair value at the grant date for
awards in fiscal year 2005 and 2004 consistent with the provisions of SFAS No.
123, the Company's approximate net loss and loss per share would have been the
pro forma amounts indicated below:
8
Three months ended Six months ended
March 31, March 31,
2005 2004 2005 2004
----------------------------------------------------------
Net loss - as reported $ (2,025,724) (871,460) (3,341,550) (1,879,408)
Deduct total stock based
employee compensation
expense determined under fair
value based method for all
awards, net of related taxes (11,194) (9,876) (11,194) (9,876)
----------------------------------------------------------
Net loss - pro forma (2,036,918) $ (881,336) $ (3,352,744) $ (1,889,284)
----------------------------------------------------------
Basic and diluted net loss per common
share - as reported $ (0.07) $ (0.04) $ (0.11) $ (0.08)
----------------------------------------------------------
Basic and diluted net loss per common
share - pro forma $ (0.07) $ (0.04) $ (0.11) $ (0.08)
----------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
Six Months Ended
March 31,
----------------------------------
2005 2004
----------------------------------
Expected dividend yield - -
Expected stock price volatility 117% 45%
Risk-free interest rate 4.18% 2.72%
Expected life of options 5 years 5 years
The weighted average fair value using the Black-Scholes Option Pricing Model of
options and warrants granted during the six months ended March 31, 2005 and
2004, were $0.45 and $0.45, respectively.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets 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.
As of September 30, 2004, goodwill was completely written off.
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 March 31, 2005 and 2004, there were approximately 19,886,000 and
16,769,000 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.
9
The sale of mobile emergency and personal security systems may include the
security devise, such as the MobilePal phone, and the related monitoring
service. If the sale includes both the devise and the monitoring service,
revenue from the sale of the devise is deferred and recognized ratably over the
life of the monitoring service contract. Revenue from the monitoring service
contract is recognized monthly as earned in accordance with the monitoring
service contract. If the sale is for the devise only and does not include the
monitoring services, 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.
The sale of reagent stains is recognized when an agreement with the buyer
exists, the price is fixed or determinable, the product has been shipped, and
collection is reasonably assured.
(2) INVENTORIES
-----------
Substantially all items included in inventory are finished goods and
consisted of the following as of March 31, 2005:
Mobile emergency and personal security systems, $ 15,108
net of reserve for obsolescence of $117,247
Reagent stains 36,933
------------
$ 52,041
============
(3) ACCRUED LIABILITIES
-------------------
Accrued liabilities consist of the following at March 31, 2004:
Accrued tooling $ 116,000
Accrued interest 138,015
Accrued bonuses and director fees 96,250
Accrued payroll and employee benefits 32,656
Accrued property taxes 22,800
Other accrued expenses 10,000
------------
$ 415,721
============
(4) NOTES PAYABLE
-------------
Notes payable consist of the following at March 31, 2004:
Note payable to a corporation for tooling
expense incurred on the development of
the MobliePAL device. This note bears
interest at 5% and has payments of
$10,000 due monthly; due December 20, 2005 $ 105,830
Note payable to an individual with interest
at 5%, due April 25, 2005, subsequent to
March 31, 2005, this note was assumed by
ADP Management, however the Company has
not yet been fully released 100,000
Notes payable to two individuals due
December 28, 2004. The interest associated
includes an expense for the issuance of
200,000 warrants to each lender for a
total expense of $133,399. The warrants
have an exercise price of $1.00 per share
expiring in 5 years from the date of
issuance. This amount was assumed by ADP
Management subsequent to March 31, 2005,
and has since been settled by ADP
Management for 111,600 shares of common
shares to each lender 100,000
10
Note payable to an individual with
interest at 12% due March 31, 2005.
This note was settled subsequent to March
31, 2005, by ADP Management issuing
470,000 shares of common stock ADP
Management owned 313,500
Note payable to a company with interest
at 8%, payable by February 25, 2005.
Subsequent to March 31, 2005, this
note was converted into 600,000 shares
of common stock 250,000
Note payable to an individual withinterst
at 6%, with an option to convert the
loan into common shares at a price equal
to $0.54 per share. The note is due
April 25, 2005. Subsequent to March 31,
2005, ADP Management assumed this note,
but the Company has not been fully
released by the note holder 50,000
Notes payable to former SecureAlert
shareholders, with interest at 5%,
convertible into common stock of the
Company at $3.00 per share, payable in
installments of $80,000 per month until
paid in full. These notes are currently
in default. 169,676
------------
Total notes payable $ 1,089,006
============
In addition to the short-term notes payable listed above, the Company also has a
long-term note payable of $280,000 to an individual with interest at 18%, due on
March 8, 2008. The interest for the three year period was prepaid through the
issuance of 280,000 shares of common stock. Subsequent to March 31, 2005, the
Company received an additional $220,000 under identical terms.
(5) BANK LINE OF CREDIT
-------------------
As of March 31, 2005, the Company had $175,000 outstanding under a line of
credit with Zions First National Bank. The line of credit bears interest at
prime plus .25% (4.25% at March 31, 2005), matures on April 15, 2006, is limited
to $175,000 plus fees, and is secured by certificates of deposit which the
Company holds as restricted cash of $179,241.
(6) COMMON STOCK SUBJECT TO MANDATORY REDEMPTION
--------------------------------------------
As of March 31, 2005, the Company had 217,185 shares subject to a mandatory
redemption feature at prices ranging from $0.54 to $3.00 per share. The total
redemption value of $196,000 is included in current liabilities. ADP Management
has assumed $96,000 of this amount, however, to date, the Company has not been
released of this obligation by the holder of the redeemable shares. The
mandatory redemption feature terminates when the Company's common stock is
listed on a national exchange.
(7) RELATED-PARTY LINE OF CREDIT
----------------------------
As of March 31, 2005, the Company had borrowed $247,042 from ADP Management, an
entity owned and controlled by two of the Company's officers and directors,
under a line of credit agreement. These advances bear interest at 5.0% and are
due on demand. During the six months ended March 31, 2005, the net increase in
the related party line of credit was $24,496. The net increase of $24,496
consisted of net cash repayments during the six months of $190,535, net
increases of $390,031 related to a monthly management fee owed to ADP Management
and expenses incurred by ADP Management that are reimbursable by the Company,
and a decrease of $175,000 for the purchase of SecureAlert preferred stock. If
the Company is unable to pay the management fee and the reimbursable expenses in
cash, the related party line of credit is increased for the amount owed to ADP
Management. During the three months ended March 31, 2005, the Company reduced
the related party line of credit for $175,000 for the issuance of 175,000 shares
of SecureAlert preferred stock.
11
(8) CONVERTIBLE DEBENTURES
----------------------
During the year ended September 30, 2004, the Company completed an offering of
Series B 10% Convertible Debentures and Series C 10% Convertible Debentures. In
connection with this offering, the Company also issued 980,406 shares of common
stock at $.54 per share. In addition, in connection with the offering, the
Company issued 291,168 shares of common stock as origination shares, or as
incentive to the investors. Net proceeds received from the offering, after
paying commissions, legal fees, and other accrued expenses were approximately
$1,522,000. The gross amount of the offering of $1,800,000 was allocated between
the debentures and common shares issued as follows: $1,270,584 allocated to the
debentures and $529,416 allocated to the common shares issued. The 291,168
origination shares were valued at $157,231 based on the fair market value of the
common stock of $.54 per share. Of the $157,231 total value of the incentive
shares issued, $110,986, or 205,530 shares, was allocated to the debentures and
recorded as a discount and the remaining $46,245, or 85,638 shares, was
allocated to the common shares issued and netted against the amount recorded for
the issuance. These allocations were determined based on the percentage of gross
proceeds allocated to the debentures (70.59%) and common stock issued (29.41%).
The total discount recorded on the debentures at issuance consisted of the
incentive shares noted above of $110,986 and additional offering costs of
$105,939 for a total discount of $216,925. As of March 31, 2005, the balance of
the debt discount was $110,173, thus resulting in a net balance of convertible
debentures of $1,160,412 at March 31, 2005. The Debentures are convertible
automatically into Common Stock upon the closing of an equity or debt offering
by the Company with gross proceeds of at least $5,000,000 Qualified Offering at
a conversion price equal to 80% of the pre-money valuation of the Common Stock
immediately prior to the closing of the qualified Offering; provided, however,
that the gross proceeds raised pursuant to this Offering may be counted toward,
at the sole discretion of the Company, such Qualified Offering amount, solely
for the purposes of determining such Qualified Offering amount. The Debentures
bear interest at an annual rate of 10%, not including any original issue
discount, with interest during the first six months capitalized and due in
February 2007; thereafter, interest payments will be made monthly in cash or, at
the sole option of the Company, in shares of Common Stock at a price of $0.54
per share. The Debentures mature and are payable two years from each Closing,
subject to the conversion as indicated above.
(9) 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 six months ended March 31, 2005, a total of 34 shares of
Series A Preferred Stock were converted into 12,499 shares of common stock. As
of March 31, 2005, there were 27,253 shares of Series A Preferred Stock
outstanding, which represents 10,083,484 common stock equivalents at a
conversion rate of 370 for 1. Subsequent to March 31, 2005, a total of 2,293
shares of Series A Preferred Stock were converted into 848,348 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 six months
ended March 31, 2005 and 2004, the Company recorded $261,589 and $281,711,
respectively, in dividends on Series A Preferred Stock.
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 March 31, 2005, the Company had
not exercised its option to redeem shares of Series A Preferred Stock.
o During the quarter ended March 31, 2005, the Company issued 3,937
shares of Series A preferred stock in satisfaction of accrued
dividends on Series A preferred stock of $787,389.
12
Series B Convertible Preferred Stock
In April 2002, the Company sold 1,835,824 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"). The Series B preferred stock
shareholders were granted an anti-dilution right on the common stock conversion
feature of the Series B shares purchased. If the Company should at any time
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 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 March 31, 2005, the Company
had not exercised its option to redeem shares of Series B Preferred Stock.
SecureAlert, Inc. Preferred Shares
During the six months ended March 31, 2005, and pursuant to Board of Director
approval, the Company amended the articles of incorporation of its wholly-owned
subsidiary, SecureAlert, Inc., to establish 3,500,000 shares of preferred stock
designated as Series A Convertible Redeemable Non-Voting Preferred Stock. The
holders of shares of Series A Preferred Stock shall be entitled to receive
quarterly dividends out of any of the SecureAlert's assets legally available
therefore, prior and in preference to any declaration or payment of any dividend
on the Common Stock of SecureAlert, at the rate of $1.50 per day times the
number of the SecureAlert's parolee contracts calculated in days during the
quarter. For example, if there were an average of 10,000 parolee contracts
outstanding during the quarter, the total dividend would be $1,350,000 ($1.50 X
90 days X 10,000 contracts) or $.385/Series A Preferred Stock. In no case will a
dividend be paid if the gross revenue per contract per day to SecureAlert
averages less than $4.50. Dividends will be paid in cash to the holders of
record of shares of Series A Preferred Stock as they appear on the books and
records of SecureAlert on such record dates not less than ten (10) days nor more
than sixty (60) days preceding the payment dates thereof, as may be fixed by the
Board of Directors of the Company. As a group, all Series A Preferred Stock may
be converted at the holder's option at any time into an aggregate of 20%
ownership of the common shares of the SecureAlert, Inc. During the six months
ended March 31, 2005, the Company sold 2,105,000 of these shares for cash
proceeds of approximately $1,723,000, settlement of debt and accrued interest of
approximately $207,000, and exchange of 58,333 common shares. Subsequent to
March 31, 2005, the Company sold an additional 600,000 of these shares for
$600,000. The Company is currently in the process of closing approximately
$700,000 to complete this offering.
(10) COMMON STOCK
------------
During the three months ended March 31, 2005, the Company issued 595,427 shares
of common stock as follows: o 50,000 shares were issued for services performed.
o 280,000 shares were issued for prepaid interest on a note payable.
o 265,427 shares were issued as accrued interest from the Company's
Series B and Series C Debentures.
Common Stock Subject to Redemption
Of the shares of common stock outstanding at March 31, 2005, a total of 217,185
shares are subject to redemption. These shares are redeemable by the Company for
$196,000.
Common Stock Options and Warrants
Options and warrants to purchase a total of 7,966,043 shares of common stock
were outstanding at March 31, 2005 with a weighted average exercise price of
$2.31 per share.
13
(11) 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 (PAL
services) segment is engaged in the business of developing, distributing and
marketing mobile emergency and personal security systems to distributors and
consumers. 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 March 31, 2005 and
2004:
Three Months
Ended March 31,
----------------------------------
2005 2004
---------------- -----------------
Net sales:
SecureAlert (PAL Services):
Consumer electronics $ - $ -
Mobile emergency and personal
security systems 66,465 159,341
---------------- -----------------
159,341
Reagents 127,702 140,227
---------------- -----------------
$ 194,167 $
299,568
================ =================
Net income (loss):
SecureAlert (PAL Services) (853,433) (66,484)
Reagents (11,804) 13,424
Other (unallocated) (1,160,487) (818,400)
---------------- -----------------
$ (2,025,724) $ (871,460)
---------------- -----------------
The following table reflects certain financial information relating to each
reportable segment for each of the six-month periods ended March 31, 2005 and
2004:
Six Months
Ended March 31,
-----------------------------------
2005 2004
------------------ ------------------
Net sales:
SecureAlert (PAL Services):
Mobile emergency and personal
security systems $ 135,410 $ 217,293
------------------ ------------------
Reagents 266,276 284,216
------------------ ------------------
$ 401,686 $ 501,509
================== ==================
Net income (loss):
SecureAlert (PAL Services) $ (1,406,104) $ (130,234)
Reagents 2,510 38,226
Other (unallocated) (1,937,956) (1,886,915)
------------------ ------------------
$ (3,341,550) $ (1,978,923)
Identifiable assets:
SecureAlert (PAL Services) 739,750
Reagents 158,069 5
Other (unallocated) 373,415
$ 1,271,234
14
(12) SUBSEQUENT EVENTS
-----------------
Subsequent to March 31, 2005, the Company has entered into several debt
obligations:
a) The Board of Directors authorized the Company to raise $1.5
million in debt financing. The terms under this financing are 18%
interest on the three-year notes, prepaid by issuing common stock.
As of March 31, 2005, the Company has entered into agreements with
these terms for a total of $280,000. Subsequent to March 31, 2005,
the Company has raised an additional $220,000 for a total of
$500,000.
b) The Company borrowed $245,000 from an entity in April 2005. The
terms are 17% interest, a loan origination fee of $10,000, and the
loan would be paid back over 7 months. The first four months is
interest only and the last three months is interest and principal.
This loan is secured by the stock and assets of Volu-Sol Reagents,
a wholly-owned subsidiary of RemoteMDx, Inc.
c) During the quarter ended December 31, 2004, the Company borrowed
$250,000 from an entity with an 8% interest rate payable by
February 25, 2005. In May 17, 2005 as additional consideration,
the Company agreed to re-price 571,428 options from $3.00 per
share to $1.00 per share with an expiration date of December 10,
2009. Subsequent to March 31, 2005, this note has been converted
into 600,000 shares of common.
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, 2004.
General
- -------
RemoteMDx, Inc. ("RemoteMDx" or the "Company") markets and sells patented
wireless location technologies and the related monitoring services, and
develops, markets and sells personal security, senior supervision, and health
monitoring devices and monitoring services. The RemoteMDx products and
monitoring services feature wireless products that utilize GPS and cellular
technologies in conjunction with a monitoring center. The products are
manufactured by the Company's equity and technology partner, Matsushita Electric
Works ("MEW"). These devices include a mobile emergency response device,
MobilePAL(TM), which can locate persons in distress, no matter where they may
be, and dispatch the closest emergency service to their location. The Company
has recently developed and has several working prototypes of a tracking device,
TrackerPAL, which will be used to monitor convicted offenders in the criminal
justice system. The Company believes that its technologies and services will
benefit the healthcare and penal system as they allow both care providers and
law enforcement officials to respond immediately to a medical event or criminal
activity. Our customers will be able to better monitor and manage their own
chronic disease and medical conditions, giving peace of mind to them and their
loved ones and care providers.
The Company's primary health monitoring products and service market consists of
approximately 35 million Americans that are over the age of sixty-five. Of these
35 million seniors, it is estimated that 9.7 million seniors currently live
alone. However, in most cases, the Company anticipates that the senior customer
will not purchase the Company's products for themselves. Instead, in RemoteMDx's
analysis and experience, it would be more effective to target the children or
caregivers of these seniors. Therefore, the primary target market is children,
friends, and spouses of these individuals.
15
Additionally, the Company has identified a growing need in the parole/probation
market, which in 2003, consisted of 4.9 million adults in the criminal justice
system at any given time. In order to meet the needs of this growing demand, the
Company is developing a mobile monitoring device that works in conjunction with
our monitoring center. To date the company has not received any revenue from
this market.
We derive our revenues from the following sources:
o Medical Diagnostic Stains - We sell medical diagnostic stains and
equipment to laboratories throughout the United States. The
Company anticipates that these sales will decrease in the futures
as a percentage of total sales.
o Monitoring Activation - We sell our MobilePAL(TM) and anticipate
leasing our TrackerPAL devices as part of a monitoring contract,
with prepaid activation charges.
o Monitoring Services - Following activation, our MobilePAL and
TrackerPAL customers may pay a monthly monitoring fee and fees for
additional services offered by our contract providers or by us.
In addition to the foregoing sources, we have contractual rights to receive
royalty revenues from a license agreement with MEW and from sales of telematic
products and services under marketing agreements. "Telematic" means any wireless
communication system designed for the collection and dissemination of data. To
date these royalty agreements have not produced any royalty income.
Our Strategy
Our goal is to establish the Company as a significant marketer and distributor
of leading technology and services we have developed for the mobile personal
emergency, the parolee and probation market, and the health monitoring
industries. Until the beginning of calendar 2003, most of our revenues were
provided by the distribution of consumer electronics through a business acquired
by a wholly owned subsidiary, SecureAlert, Inc. ("SecureAlert") in July 2001. As
of January 1, 2004, we discontinued the consumer electronics business. All
revenues and operations related to the sale of the consumer electronics have
been reflected in the financial statements as discontinued operations. With our
decision to refocus our business and product development efforts on the mobile
health and emergency monitoring and law enforcement industries, which previously
comprised a smaller part of our business, we discontinued the distribution of
consumer electronics and automotive telematic products during 2003.
Critical Accounting Policies
In Note 1 to the audited financial statements for the fiscal year ended
September 30, 2004 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:
16
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.
Revenue Recognition
The Company derives its revenue primarily from the sale of mobile emergency and
personal security systems and reagent stains.
The sale of mobile emergency and personal security systems may include the
security devise, such as the MobilePal phone, and the related monitoring
service. If the sale includes both the devise and the monitoring service,
revenue from the sale of the devise is deferred and recognized ratably over the
life of the monitoring service contract. Revenue from the monitoring service
contract is recognized monthly as earned in accordance with the monitoring
service contract. If the sale is for the devise only and does not include the
monitoring services, 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.
The sale of reagent stains is recognized when an agreement with the buyer
exists, the price is fixed or determinable, the product has been shipped, and
collection is reasonably assured.
Impairment of Long-lived Assets
The Company reviews its long-lived assets 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. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized for the amount by which
the carrying amount exceeds the estimated fair value of the asset. Impairment of
long-lived assets is assessed at the lowest levels for which there are
identifiable cash flows that are independent of other groups of assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value, less the estimated costs to sell. In addition, depreciation of the asset
ceases. During the periods ended March 31, 2005 and 2004, no impairment of
long-lived assets was recorded.
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.
17
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 analyzes 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.
Three months ended March 31, 2005 Compared to Three months ended March 31, 2004
Net Sales
For the three months ended March 31, 2005, the Company had net sales of $194,167
compared to $299,568 for the three months ended March 31, 2004, a decrease of
$105,401. The decrease in net sales resulted primarily from Reagent's largest
customer ordering less product and one-time sells in the March 31, 2004, time
period.
SecureAlert (PAL Services) had net sales of $66,465 during the three months
ended March 31, 2005 compared to net sales of $159,341 for the three months
ended March 31, 2004. These sales consisted of mobile emergency and personal
security systems. No SecureAlert (PAL Services) customer accounted for 10% or
more of its sales.
Reagents had revenues for the three months ended March 31, 2005 of $127,702,
compared to $140,227 during the quarter ended March 31, 2004. 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 26% 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 March 31, 2005, cost of goods sold totaled $240,123
compared to $258,770 during the three months ended March 31, 2004, a decrease of
$18,647. The decrease in cost of sales was due primarily to the decrease in net
sales. SecureAlert's (PAL Services) cost of goods sold totaled $150,017 or 225%
of SecureAlert's (PAL Services) net sales during the three months ended March
31, 2005. In addition, during the fiscal year ended September 30, 2004, the
Company recorded an impairment of the GPS2000 mobile phone inventory based on
the estimated recoverability of the inventory. Although the sales of such phones
during the period ended March 31, 2005, resulted in a lower cost of goods sold
per unit based on the impairment at September 30, 2004, the actual margin on the
sales for the period ended March 31, 2005 was still negative. The mobile
emergency and personal security products are sold below cost in an effort to
receive recurring revenues under future monitoring agreements. The Company has
certain fixed costs associated with cost of goods sold such as the personnel and
equipment required to maintain the monitoring service. As volume increases cost
of goods sold as a percentage should decrease. Therefore, the Company incurs a
negative gross margin on SecureAlert's (PAL Services) products. Reagents' cost
of goods sold was $90,106 or 70% of Reagents' net sales during the three months
ended March 31, 2005, compared to $85,788 or 61% of Reagents' net sales for the
same period during the prior fiscal year. The increase in cost of sales was
primarily due to an increase in production costs.
Research and Development Expenses
Research and development expenses were $397,084 for the three months ended March
31, 2005. These costs were incurred for the development of SecureAlert
TrackerPal device and related services.
18
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 (PAL Services).
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 March
31, 2004. This asset was fully amortized during the year ended September 30,
2004.
Selling, General and Administrative Expenses
During the three months ended March 31, 2005, selling, general and
administrative expenses were $955,181, compared to selling, general and
administrative expenses in the prior year period of $797,649, an increase of
$157,532. This increase relates primarily to an increase in travel, consulting
and marketing costs. In addition, amounts allocated to selling, general, and
administrative expenses in the three months ended March 31, 2004 included
non-cash consideration of approximately $197,000 paid in the form of common
stock, consultants and creditors in lieu of cash compensation and as
consideration for services provided to the Company as compared to approximately
$304,000 related to such expenses for the three months ended March 31, 2005.
Interest Income and Expense
During the three months ended March 31, 2005, interest expense totaled $633,509
compared to $93,332 paid in the three months ended March 31, 2004. This amount
consists primarily of non-cash interest expense of approximately $260,000
related to the issuance of common stock in settlement of various note
obligations and $280,000 to record a beneficial conversion feature.
Six months ended March 31, 2005 Compared to Six months ended March 31, 2004
Net Sales
Net sales during the six months ended March 31, 2005 were $401,686 compared to
$501,509 in net sales during the six months ended March 31, 2004, a decrease of
$99,823. The decrease in net sales resulted primarily from Reagent's largest
customer ordering less product and one-time sales during the March 31, 2004
quarter.
SecureAlert (PAL Services) had net sales of $135,410 during the six months ended
March 31, 2005 compared to $217,293 during the six months ended March 31, 2004.
Reagents' had sales for the six months ended March 31, 2005 of $266,276,
compared to $284,216 during the same period in the prior fiscal year, a decrease
of $17,940. This decrease is due to Reagent's largest customer ordering less
products. The Company anticipates that Reagents' sales will decrease in the
future as a percentage of total sales.
Cost of Goods Sold
During the six months ended March 31, 2005, cost of goods sold was $387,207
compared to $462,043 during the six months ended March 31, 2004, a decrease of
$74,836. The decrease in cost of sales resulted primarily from having written
off a large portion of the Company's inventory at September 30, 2004.
SecureAlert's (PAL Services) cost of goods sold was $225,003 or 166% of net
sales in the six months ended March 31, 2005, compared to $294,683 or 135% of
net sales during the same period one year ago. In addition, during the fiscal
year ended September 30, 2004, the Company recorded an impairment of the GPS2000
mobile phone inventory based on the estimated recoverability of the inventory.
Although the sales of such phones during the period ended March 31, 2005,
resulted in a lower cost of goods sold per unit based on the impairment at
September 30, 2004, the actual margin on the sales for the period ended March
31, 2005 was still negative. The mobile emergency and personal security products
are sold below cost in an effort to receive recurring revenues under future
monitoring agreements. The Company has certain fixed costs associated with cost
of goods sold such as the personnel and equipment required to maintain the
monitoring service. As volume increases cost of goods sold as a percentage
should decrease. Reagents' cost of goods sold totaled $162,204 or 61% of net
sales during the six months ended March 31, 2005, compared to $167,360 or 59% of
net sales during the same period in the prior fiscal year. The increase as a
percentage of net sales was primarily due to an increase in material and wages.
19
Research and Development Expenses
During the six months ended March 31, 2005 and 2004, research and development
expense was $601,814 and $49,532, respectively, and consisted primarily of
expenses associated with the development of SecureAlert's TrackerPAL device and
related services.
Selling, General and Administrative Expenses
During the six months ended March 31, 2005, selling, general and administrative
expenses totaled $1,888,516 compared to $1,500,561 during the six months ended
March 31, 2004, an increase of $387,955. This increase relates primarily to an
increase in travel, consulting and marketing expenses. In addition, amounts
allocated to selling, general, and administrative expenses in the six months
ended March 31, 2004 included non-cash consideration of approximately $696,000
paid in the form of common stock and options granted to consultants and
creditors in lieu of cash compensation and as consideration for services
provided to the Company compared to approximately $440,600 paid during the six
months ended March 31, 2005.
Interest Income and Expense
During the six months ended March 31, 2005, interest expense totaled $872,492.
This amount consists primarily of non-cash interest expense of $460,000 related
to common stock issuances and common stock warrants under various debt
obligations and $280,000 to record a beneficial conversion feature.
Discontinued Operations
The Company was previously engaged in the distribution of consumer electronics.
Because of the Company's decision to pursue a business model to sell and service
mobile security devices, and the significant market expansion costs required to
continue its consumer electronic products distribution the Company discontinued
the consumer electronics operations as of January 1, 2004. No revenues or income
(loss) was recorded from discontinued operations during the three and six months
ended March 31, 2005 or the three months ended March 31, 2004. During the six
months ended March 31, 2004, the Company recorded revenues and net income from
discontinued operations of $99,515.
Liquidity and Capital Resources
The Company is presently unable to finance its operations solely from cash flows
from operating activities. During the six months ended March 31, 2005, the
Company financed its operations primarily through borrowings from a related
party and third parties and from the sale of debt and equity securities of the
Company for net proceeds of $2,171,211.
As of March 31, 2005, the Company had unrestricted cash of $785,457 and a
working capital deficit of $1,809,360, compared to unrestricted cash of $62,103
and a working capital deficit of $2,269,202 at September 30, 2004.
During the six months ended March 31, 2005, the Company's operating activities
used cash of $1,443,637, compared to $1,208,788 of cash used during the six
months ended March 31, 2004. The increase was primarily a result of an increase
in selling, general and administrative expenses and research and development
costs related to SecureAlert's TrackerPal device.
The Company used cash of $4,220 for investing activities during the six months
ended March 31, 2005.
The Company's financing activities during the six months ended March 31, 2004
provided cash of $2,171,211 compared to $1,233,613 during the six months ended
March 31, 2004. During the six months ended March 31, 2005, the Company had net
proceeds of $793,500 from the issuance of debt, as well as net cash proceeds of
$1,722,746 from the sale of its debentures and equity securities. Cash was
decreased by $154,000 in payments to notes payable, and $190,535 in net payments
on the related party line of credit.
The Company incurred a net loss of $3,341,550 during the six months ended March
31, 2005. As of March 31, 2005, the Company had a net tangible stockholders'
deficit of $3,352,801 and an accumulated deficit of $72,821,555. 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, 2004, 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 raising capital from
the sale of the Company's common stock or other debt and equity securities.
20
There is no assurance that the Company will be successful in its plans to raise
capital 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.
Recent Developments
Subsequent to March 31, 2005, the Company has entered into several debt
obligations:
a) The Board of Directors authorized the Company to raise $1.5
million in debt financing. The terms under this financing are
18% interest on the three-year notes, prepaid by issuing
common stock. As of March 31, 2005, the Company has entered
into agreements with these terms for a total of $280,000.
Subsequent to March 31, 2005, the Company has raised an
additional $220,000 for a total of $500,000.
b) The Company borrowed $245,000 from an entity in April 2005.
The terms are 17% interest, a loan origination fee of $10,000,
and the loan would be paid back over 7 months. The first four
months is interest only and the last three months is interest
and principle. This loan is secured by the stock and assets of
Volu-Sol Reagents, a wholly-owned subsidiary of RemoteMDx,
Inc.
c) During the quarter ended December 31, 2004, the Company
borrowed $250,000 from an entity with an 8% interest rate
payable by February 25, 2005. In May 17, 2005 as additional
consideration, the Company agreed to re-price 571,428 options
from $3.00 per share to $1.00 per share with an expiration
date of December 10, 2009. Subsequent to March 31, 2005, this
note has been converted into 600,000 shares of common.
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. We maintain disclosure
controls and procedures designed to ensure that information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934, as
amended (the Exchange Act), is recorded, processed, summarized, and reported
within the required time periods, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow for timely decisions regarding
disclosure.
As required by Rule 13a-15(b) under the Exchange Act, we conducted an
evaluation, under the supervision of our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures as of March 31, 2005. In our evaluation we identified deficiencies
that existed in the design or operation of our internal control over financial
reporting that we and our independent registered public accounting firm
considered to be "material weaknesses." A material weakness is 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 information will not be prevented or detected.
The deficiencies in our internal control over financial reporting related to the
failure to properly disclose equity and debt transactions. The deficiencies were
detected in the evaluation process and the transactions have been appropriately
recorded and disclosed in this Form 10-QSB. In addition, we have not created a
"Disclosure Controls Committee" to monitor and follow up on our processes to
assure disclosures are complete and accurate; however, we intend to have such a
committee in place by October 1, 2005. We are in the process of improving our
internal control over financial reporting in an effort to resolve these
deficiencies through improved supervision and training of our accounting staff,
but additional effort is needed to fully remedy these deficiencies. Our
management, audit committee, and directors will continue to work with our
auditors and outside advisors to ensure that our controls and procedures are
adequate and effective.
Based on the matters identified above, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
were not effective. These deficiencies have been disclosed to our Audit
Committee.
21
Changes in Internal Controls. There has been no change in our internal control
over financial reporting during the quarter ended March 31, 2005 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting. Since the most recent evaluation date, there
have been no significant changes in our internal control structure, policies,
and procedures or in other areas that could significantly affect our internal
control over financial reporting.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
During the three months ended March 31, 2005, the Company issued 595,427 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 50,000 shares for services rendered or to be rendered
o 280,000 shares issued to prepay interest on a note., and
o 265,427 shares were issued to pay accrued interest on Series B and
C debentures.
In each of these transactions the securities were issued without
registration under the Securities Act of 1933, as amended, in reliance upon
exemptions from registration applicable to limited or non-public offers and
sales of securities. The offer and sale of securities in the Company's
private placement of debt and equity were made solely to individuals or
entities that were "accredited investors" as that term is used in Rule 501
under Regulation D of 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
- -------------- -----------------
3.01 Articles of Incorporation (incorporated by reference to the
Company's Registration Statement and Amendments thereto on Form
10-SB, effective December 1, 1997).
3.01(1) Amendment to Articles of Incorporation for Change of Name
(previously filed)
3.01(2) Amendment to Articles of Incorporation Amending Rights and
Preferences of Series A Preferred Stock (previously filed)
3.01(3) Amendment to Articles of Incorporation Adopting Designation of
Rights and Preferences of Series B Preferred Stock (previously
filed)
3.01(4) Certificate of Amendment to the Designation of Rights and
Preferences Related to Series A 10% Cumulative Convertible
Preferred Stock of RemoteMDx, Inc. (incorporated by reference to
the Company's annual report on Form 10-KSB for the year ended
September 30, 2001)
3.02 Bylaws (incorporated by reference to the Company's Registration
Statement on Form 10-SB, effective December 1, 1997)
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).
22
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 (PAL Services))
(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 (PAL Services)), 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 (PAL Services)), 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)
10.10 Amended and Restated Loan and Security Agreement (SunTrust Bank
and SecureAlert (PAL Services)) 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 (PAL Services),
Inc. as licensor and Matsushita Electric Works, Ltd., as licensee,
(April 12, 2002) Agreement with SecureAlert Entertainment, LLC,
with amendments (January and June 2003) (previously filed)
10.13 Agreement with SAE (incorporated by reference to the Company's
quarterly report on Form 10-QSB for the quarter ended December 31,
2002)
10.14 Agreement between the Company and SecureAlert Telematics
(incorporated by reference to the Company's quarterly report on
Form 10-QSB for the quarter ended December 31, 2002)
10.15 Amendments to SAE Agreement (previously filed)
10.16 Agreement with ADP Management, Derrick and Dalton (April 2003)
(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 the Sarbanes-Oxley Act of 2002
(18 U.S.C. SECTION 1350)
(b) Reports on Form 8-K
During the quarter ended March 31, 2005, the Company filed no reports on Form
8-K.
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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: June 15, 2005 By: /s/David G. Derrick
--------------------
David G. Derrick,
Chief Executive Officer
Date: June 15, 2005 By: /s/Michael G. Acton
--------------------
Michael G. Acton,
Principal Accounting Officer
24