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, 2004
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 []
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 December
31, 2004 3
Unaudited Condensed Consolidated Statements of Operations for
the three months ended December 31, 2004 and 2003 4
Unaudited Condensed Consolidated Statements of Cash Flows for
the three months ended December 31, 2004 and 2003 5
Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operation 14
Item 3. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 21
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REMOTEMDX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
December 31,
2004
----------------
Assets
Current assets:
Cash $ 116,547
Accounts receivable, net of allowance
for doubtful accounts of $23,000 104,741
Inventories 89,285
Prepaid expenses 11,716
---------------
Total current assets 322,289
Property and equipment, net 112,229
Restricted cash 177,114
Other assets 4,073
---------------
Total assets $ 615,705
===============
Liabilities and Stockholders' (Deficit)
Current liabilities:
Notes payable $ 1,144,676
Accounts payable 847,327
Accrued liabilities 515,522
Dividends payable 654,449
Deferred revenue 12,930
Common stock subject to mandatory
redemption 196,000
---------------
Total current liabilities 3,370,904
---------------
Long term liabilities
Bank line of credit 175,000
Convertible debentures, net of
discount of $137,173 1,133,412
Related party line of credit 338,544
---------------
Total liabilities 5,017,860
---------------
Stockholders' deficit:
Preferred stock:
Series A; 10% dividend, convertible,
non-voting; $0.0001 par value;
40,000 shares designated; 23,316 shares
outstanding (aggregate liquidation
preference of $194,471) 2
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; 100,000,000
shares authorized, 31,422,737 shares
outstanding 3,142
Additional paid-in capital 66,602,185
Deferred consulting costs (211,837)
Accumulated deficit (70,795,831)
Total stockholders' deficit (4,402,155)
---------------
Total liabilities and stockholders' deficit $ 615,705
===============
See accompanying notes to unaudited condensed consolidated
financial statements.
3
REMOTEMDX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
December 31,
2004 2003
------------------- ---------------
Net sales $ 207,519 $ 201,941
Cost of goods sold 147,084 203,274
------------------- ---------------
Gross profit (loss) 60,435 (1,333)
Research and development expenses 204,730 49,532
Selling, general and administrative expenses 933,335 702,911
Amortization of core technology - 35,000
------------------- ---------------
Loss from operations (1,077,630) (788,776)
Other income (expense):
Other income (expense) (30) 36,463
Interest income 817 2,631
Interest expense (238,983) (357,781)
------------------- ---------------
Loss before income taxes and discontinued operations (1,315,826) (1,107,463)
Income tax benefit - -
------------------- ---------------
Loss before discontinued operations (1,315,826) (1,107,463)
Income from discontinued operations, net of tax - 99,515
------------------- ---------------
Net loss (1,315,826) (1,007,948)
Dividends on Series A preferred stock (128,649) (140,243)
------------------- ---------------
Net loss attributable to common stockholders $ (1,444,475) $ (1,148,191)
=================== ===============
Net loss per common share from continuing operations - basic and diluted $ (0.05) $ (0.05)
=================== ===============
Net income per common share from discontinued operations - basic and
diluted $ - $ (.05)
=================== ===============
Net loss per common share - basic and diluted $ (0.05) $ (0.05)
=================== ===============
Weighted average common shares outstanding - basic and diluted 31,455,000 24,708,000
=================== ===============
See accompanying notes to unaudited condensed consolidated
financial statements.
4
REMOTEMDX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
December 31,
2004 2003
----------------- --------------
Cash flows from operating activities:
Net loss $ (1,315,826) $ (1,007,948)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 6,065 37,411
Amortization of deferred financing and consulting costs 127,575 52,500
Accretion of interest expense related to redeemable common stock - 263,666
Amortization of debt discount 27,000 -
Stock options issued for services 133,397 -
Increase in related party line of credit for services 128,594 182,646
Changes in operating assets and liabilities:
Increase in restricted cash (753) (2,432)
Accounts receivable, net 155,734 (6,199)
Inventories (10,998) 49,647
Prepaid expenses 1,715 7,204
Accounts payable 141,319 64,540
Accrued liabilities 62,442 (15,419)
Deferred revenue (504) (1,157)
----------------- --------------
Net cash used in operating activities (544,240) (375,541)
----------------- --------------
Cash flows used in investing activities - purchase of property and equipment (4,220) (1,040)
----------------- --------------
Cash flows from financing activities:
Net (repayments) borrowings under related-party line of credit (12,596) 615,953
Net borrowings (payments) on bank line of credit - (53)
Payments on related party notes - (98,794)
Proceeds from issuance of common stock, net of $25,000 commissions - 225,000
Proceeds from the issuance of subsidiary Preferred Stock 260,000 -
Proceeds from issuance of notes payable 500,000 -
Payments on notes payable (144,500) (22,112)
----------------- --------------
Net cash provided by financing activities 602,904 719,994
----------------- --------------
Net increase in cash 54,444 343,413
Cash, beginning of period 62,103 136,894
----------------- --------------
Cash, end of period $ 116,547 $ 480,307
=================== ================
See accompanying notes to unaudited condensed consolidated
financial statements.
5
REMOTEMDX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
Three Months Ended
December 31,
2004 2003
----------------- --------------
Cash paid for interest and taxes:
Cash paid for income taxes $ - $ -
Cash paid for interest 14,649 41,615
Supplemental schedule of non-cash investing and financing activities:
Issuance of shares of common stock in exchange for shares of Series A
preferred stock 1 124
Reduction of related party line-of-credit in exchange for exercise of common
stock options - 373,804
Accrual of Preferred Series A stock dividends 128,649 140,243
Common stock issued for deferred financing costs 8,100
Conversion of debt and accrued interest converted into shares of common
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 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 months ended December 31, 2004 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. The Company awarded no stock options to
employees and had no employee stock options vest during the periods ended
December 31, 2004 and 2003.
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.
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, 2004 and 2003, there were approximately 18,335,000 and
18,394,000 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.
8
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.
(2) INVENTORIES
-----------
Substantially all items included in inventory are finished goods and consist of
the following as of December 31, 2004:
Mobile emergency and personal security systems,
net of reserve of $101,030 $ 52,674
Reagent stains 36,611
---------------
$ 89,285
===============
(3) ACCRUED LIABILITIES
-------------------
Accrued liabilities consist of the following at December 31, 2004:
Accrued tooling $ 231,610
Accrued interest 167,392
Accrued bonuses and director fees 39,000
Accrued payroll and employee benefits 26,717
Accrued property taxes 19,800
Other accrued expenses 31,003
---------------
$ 515,522
===============
(4) NOTES PAYABLE
-------------
Notes payable consist of the following at December 31, 2004:
Note payable to an individual with interest
at 5%, due April 25, 2005, subsequent to
December 31, 2004, 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 December 31, 2004, and has
since been settled by ADP Management through
the issuance of 111,600 shares of the
Company's common shares owned by ADP to each
lender 100,000
9
Note payable to an individual with interest
at 12% due March 31, 2005. This note was
settled subsequent to December 31, 2004,
by ADP Management issuing 470,000 shares of
common stock ADP Management owned 300,000
Note payable to a company with interest at
8%, payable by February 25, 2005.
Subsequent to December 31, 2004, this
note was converted into 600,000 shares of
common stock 250,000
Note payable to an individual with interest
at 12%; subsequent to December 31, 2004,
this note was converted into preferred
shares of the Company's wholly-owned
subsidiary, SecureAlert 175,000
Note payable to an individual with interest
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 December 31, 2004, 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 $ 1,144,676
===============
(5) BANK LINE OF CREDIT
-------------------
As of December 31, 2004, 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%), matures on March 11, 2005, is limited to $175,000 plus
fees, and is secured by certificates of deposit which the Company holds as
restricted cash of $177,426. Subsequent to December 31, 2004, the Company
extended this line of credit, for 1 year or until March 2006, with the same
terms and conditions.
(6) RELATED PARTY LINE OF CREDIT
----------------------------
As of December 31, 2004, the Company had borrowed $338,544 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 in July 2006. During the three months ended December 31, 2004, the net
increase in the related party line of credit was $115,998. The net increase of
$115,998 consisted of net cash repayments during the quarter of $12,596 and net
increases of $128,594 related to a monthly management fee owed to ADP Management
and expenses incurred by ADP Management that are reimbursable by the Company. 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.
(7) 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
10
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 December 31, 2004, the balance
of the debt discount was $137,173, thus resulting in a net balance of
convertible debentures of $1,133,412 at December 31, 2004. 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.
(8) 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, 2004, a total of 34 shares of
Series A Preferred Stock were converted into 12,499 shares of common stock. As
of December 31, 2004, there were 23,316 shares of Series A Preferred Stock
outstanding, which represents 8,626,813 common stock equivalents at a conversion
rate of 370 for 1.
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, 2004 and 2003, the Company recorded $128,649 and
$140,243, 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 December 31, 2004, 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"). The series B shareholders were
granted anti-dilution right on the common stock conversion feature of the Series
B shares 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 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. However, should
the other Series B shareholders not waive this provision, the Company will be
required to issue additional shares. 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,
2004, the Company had not exercised its option to redeem shares of Series B
Preferred Stock.
SecureAlert, Inc. Preferred Shares
During the quarter ended December 31, 2004, 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
11
holders of shares of Series A Preferred Stock shall be entitled to receive
quarterly dividends out of any of SecureAlert's assets legally available
therefore, prior and in preference to any declaration or payment of any dividend
on the Common Stock of the SecureAlert, at the rate of $1.50 per day times the
number of 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 SecureAlert. 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 quarter ended December 31, 2004, the
Company sold 260,000 of these shares for $260,000. Subsequent to December 31,
2004, the Company sold an additional 2,445,000 of these shares for cash proceeds
of approximately $2,063,000. The remaining $382,000 of preferred stock issued
was for the conversion of $207,000 of debt and accrued interest, and to redeem
58,333 shares of common stock based on a stock repurchase obligation of
$175,000. The Company is currently in the process of closing approximately
$700,000 to complete this offering.
(9) COMMON STOCK
------------
During the three months ended December 31, 2004, the Company issued 12,499
shares of common stock from the conversion of 34 shares of Series A Preferred
stock.
Common Stock Subject to Redemption
Of the shares of common stock outstanding at December 31, 2004, a total of
217,185 shares are subject to redemption. These shares are redeemable by the
Company for a total of $196,000. ADP Management has assumed $96,000 of these
obligations, however the Company has not yet been released from the obligation
from the holder of the redeemable shares.
Common Stock Options and Warrants
Options and warrants to purchase a total of 7,872,043 shares of common stock
were outstanding at December 31, 2004 with a weighted average exercise price of
$2.46 per share.
(10) 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. 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, 2004
and 2003:
12
Three Months Ended
December 31,
-------------------- -----------------
2004 2003
-------------------- -----------------
Net sales:
SecureAlert:
Mobile emergency and personal security systems 68,945 57,952
Reagents 138,574 143,989
-------------------- -----------------
$ 207,519 $ 201,941
-------------------- -----------------
Net (loss) income from continuing operations:
SecureAlert $ (552,671) $ (63,750)
Reagents 14,314 4,802
Other (unallocated) (777,469) (1,048,515)
-------------------- -----------------
$ (1,315,826) $ (1,107,463)
-------------------- -----------------
Identifiable assets:
SecureAlert 150,998
Reagents 162,813
Other (unallocated) 301,894
--------------------
$ 615,705
====================
(11) VARIABLE INTEREST ENTITY
------------------------
Effective December 31, 2001, RemoteMDx, Inc. (the Company) provided certain
financial support (referred to as variable interests) to ADP Management
Corporation (ADP), a company affiliated to the Company through common ownership.
Sources of support made to ADP included the Company's reimbursement of all of
ADP's management related expenses and payment of management fees.
ADP is a provider of various operational and investment management services.
Selected information from ADP's unaudited, cash basis balance sheet as of
December 31, 2004, and its results of the operations for the year then ended
follow:
Total assets $ 8,214,786
Total liabilities 2,716,364
Stockholders equity 5,498,422
Net revenues $ 940,206
Net income 559,623
The balance sheet of ADP and the results of its operations are not consolidated
in the financial statements of the Company because the Company is not considered
to be the primary beneficiary of ADP. Expenses and fees of $188,594 paid to ADP
during the three months ended December 31, 2004 have been included in the
Company's statement statement of operations and represent the Company's maximum
exposure to loss.
(12) RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets,
which amends Accounting Principles Board (APB) Opinion No. 29, Accounting for
Nonmonetary Transactions. The guidance in APB Opinion 29 is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. The guidance in APB Opinion 29, however,
included certain exceptions to that principle. SFAS 153 amends APB Opinion 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS 153 is effective for fiscal
periods beginning after June 15, 2005. We do not expect that the adoption of
SFAS 153 will have a material impact on our financial position or results of
operations.
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
published Statement of Financial Accounting Standards No.123 (Revised 2004),
Share Based Payment ("SFAS 123R"). SFAS 123R requires that compensation cost
related to share-based payment transactions be recognized in the financial
statements. Share-based payment transactions within the scope of SFAS 123R
include stock options, restricted stock plans, performance-based awards, stock
appreciation rights, and employee share purchase plans. The provisions of SFAS
123R are effective as of the first interim period that begins after December 15,
2005. Accordingly, the Company will implement the revised standard in the first
quarter of fiscal year 2006. Currently, the Company accounts for its share-based
payment transactions under the provisions of APB 25, which does not necessarily
require the recognition of compensation cost in the financial statements.
Management is assessing the implications of this revised standard and the effect
of the adoption of SFAS 123R will have on our financial position, results of
operations, or cash flow.
(13) SUBSEQUENT EVENTS
-----------------
Subsequent to December 31, 2004, 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 note prepaid in advance by issuing
common stock. Subsequent to December 31, 2004, the Company raised
$500,000 under these terms.
B) The Company borrowed $245,000 from an entity controlled by an
employee of the Company 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 stock.
13
In addition, subsequent to December 31, 2004, the Company sold an additional
2,445,000 of SecureAlert Series A preferred shares for cash proceeds of
approximately $2,063,000, settlement of debt and accrued interest of
approximately $207,000, and decrease of the related party line of credit of
$175,000.
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.
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.
14
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:
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.
15
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 December 31, 2004 and 2003, 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.
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.
Three Months Ended December 31, 2004 Compared to Three Months Ended December 31,
2003
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
16
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, 2004 and 2003 are as follows:
Three Months Ended
December 31,
-------------------------------
2004 2003
-------------------------------
Net sales and royalties from
consumer electronics products distribution $ - $ 99,515
Costs associated with consumer electronics
operations - -
-------------------------------
Net income from discontinued operations $ - $ 99,515
===============================
Continuing 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 therefore based upon the continuing operations of the
Company.
Net Sales
For the three months ended December 31, 2004, the Company had net sales of
$207,519, compared to $201,941 for the three months ended December 31, 2003, an
increase of $5,578. The increase in net sales resulted primarily from focusing
on the mobile emergency and personal security systems.
SecureAlert had net sales of $67,176 during the three months ended December 31,
2004 compared with $63,367 during the comparative period of 2003. These sales
consisted of mobile emergency and personal security systems. No customer
accounted for 10% or more of sales by SecureAlert during the period.
Reagents had revenues for the three months ended December 31, 2004 of $138,574,
compared to $143,989 during the quarter ended December 31, 2003. 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 27% 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, 2004, cost of goods sold was $147,084
compared to $203,274 during the three months ended December 31, 2003, a decrease
of $56,190. 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 December 31, 2004, 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 December 31, 2004 was still negative.
SecureAlert's cost of goods sold totaled $74,985 or 110% of SecureAlert's net
sales during the three months ended December 31, 2004. The mobile emergency and
personal security products have generally been sold below cost in an effort to
secure a recurring revenue stream under monthly monitoring contracts. Therefore,
the Company incurs a negative gross margin on the majority of SecureAlert's
product sales. Reagents' cost of goods sold was $72,099 or 52% of Reagent's net
sales during the three months ended December 31, 2004, compared to $81,572 or
57% 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.
17
Research and Development Expenses
For the three months ended December 31, 2004, research and development expenses
were $204,730, compared to $49,532 in the previous year period. During the three
months ended December 31, 2004, research and development expenses consisted
primarily of expenses associated with the development of SecureAlert's
TrackerPAL device.
Selling, General and Administrative Expenses
During the three months ended December 31, 2004, selling, general and
administrative expenses were $933,335 compared to $702,911 during the three
months ended December 31, 2003. This increase relates primarily to an increase
of labor costs and legal fees and other payroll related expenses due to focusing
on the core business of mobile emergency and personal security systems.
Interest Income and Expense
During the three months ended December 31, 2004, interest expense totaled
$238,983, compared to $357,781 in the three months ended December 31, 2003.
Interest expense for the three months ended December 31, 2004 consists mainly of
$133,398 non-cash interest expense from the issuance of warrants in connection
with new debt, $27,000 for the amortization of the debt discount related to the
convertible debentures, and approximately $34,000 related to accrued interest on
the convertible debentures. The 2003 amount consists primarily of non-cash
interest expense of $199,719 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, 2004, the
Company financed its operations primarily through borrowings and the sale of
preferred stock of a wholly-owned subsidiary.
As of December 31, 2004, the Company had unrestricted cash of $ 116,547 and a
working capital deficit of $3,048,615, compared to unrestricted cash of $62,103
and a working capital deficit of $2,491,748 at September 30, 2004.
During the three months ended December 31, 2004, the Company's operating
activities used cash of $544,240, compared to cash of $375,541 used during the
three months ended December 31, 2003. The increase was primarily a result of
research and development costs of SecureAlert's TrackerPal device.
The Company used cash of $4,220 for investing activities during the three months
ended December 31, 2004.
The Company's financing activities during the three months ended December 31,
2004 provided cash of $602,904 compared to $719,994 during the three months
ended December 31, 2003. During the three months ended December 31, 2004, the
Company raised $260,000 through the sale of preferred stock of its wholly-owned
subsidiary, SecureAlert. The Company also received $500,000 in debt financing
during the three months ended December 31, 2004.
The Company incurred a net loss of $1,315,826 during the three months ended
December 31, 2004. As of December 31, 2004, the Company had a net tangible
stockholders' deficit of $4,402,155 and an accumulated deficit of $70,795,831.
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 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. 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.
18
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 December 31, 2004. 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.
Changes in Internal Controls. There has been no change in our internal control
over financial reporting during the quarter ended December 31, 2004 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 December 31, 2004, the Company issued 12,499
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 12,499 shares were issued upon the conversion of 34 shares of
Series A Preferred Stock
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 5. Other Information
None
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)
19
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)
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, 2004, the Company filed no reports on Form
8-K.
20
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
21