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 June 30, 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 August 15, 2005, the issuer had a total of 36,228,207 shares of common stock
issued and outstanding. The issuer also had a total of 24,752 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 9,158,321 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
TABLE OF CONTENTS
Page
No.
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheet as of June 30, 2005..............3
Unaudited Condensed Consolidated Statements of Operations for
the three and nine months ended June 30, 2005 and 2004..........................4
Unaudited Condensed Consolidated Statements of Cash Flows for
the nine months ended June 30, 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)
June 30, 2005
-------------------
Assets
Current assets:
Cash $ 319,276
Restricted cash 178,739
Accounts receivable, net of allowance for doubtful accounts of $27,000 115,870
Inventories, net of reserve of $145,050 49,228
Prepaid expenses 37,768
-------------------
Total current assets 700,881
Property and equipment, net of accumulated depreciation of $489,737 247,805
Other assets 34,877
-------------------
Total assets $ 983,563
===================
Liabilities and Stockholders' Deficit
Current liabilities:
Bank line of credit $ 175,000
Notes payable 829,006
Related party note payable, net of debt discount of $6,427 248,573
Accounts payable 1,173,910
Accrued liabilities 401,806
Deferred revenue 14,475
Dividends payable 123,930
Common stock subject to mandatory redemption 196,000
-------------------
Total current liabilities 3,162,700
Long Term Liabilities:
Convertible debentures, net of debt discount of $83,173 1,235,366
Notes payable, net of debt discount of $204,444 295,556
Related party line of credit 45,281
-------------------
Total liabilities 4,738,903
-------------------
Commitments and contingencies (Note 9) 2,990,000
-------------------
Series A Preferred stock of SecureAlert, Inc.
Stockholders' deficit:
Preferred stock:
Series A; 10% dividend, convertible, non-voting; $0.0001 par value;
40,000 shares designated; 3
24,752 shares outstanding (aggregate liquidation preference of $67,489)
Series B; convertible; $0.0001 par value; 2,000,000 shares designated;
1,835,824 shares outstanding (aggregate liquidation preference of 184
$5,687,820)
Common stock; $0.0001 par value; 50,000,000 shares authorized, 36,228,207 3,623
shares outstanding
Additional paid-in capital 70,819,298
Deferred consulting costs (781,284)
Accumulated deficit (76,787,164)
-------------------
Total stockholders' deficit (6,745,340)
-------------------
Total liabilities and stockholders' deficit $ 983,563
===================
See accompanying notes to unaudited condensed
consolidated financial statements.
3
REMOTEMDX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Nine months ended
June 30, June 30,
2005 2004 2005 2004
------------------------------------------------------------------
Net sales $ 234,249 $ 407,249 $ 635,935 $ 908,758
Cost of goods sold 99,454 355,232 486,661 817,275
------------------------------------------------------------------
Gross profit 134,795 52,017 149,274 91,483
Research and development expenses 482,229 - 1,084,043 49,532
Selling, general and administrative expenses 3,466,895 1,547,169 5,505,561 3,047,730
Amortization of core technology - 35,000 - 105,000
------------------------------------------------------------------
Loss from operations (3,814,329) (1,530,152) (6,440,330) (3,110,779)
Other income (expense):
Other income (46) 10,062 5,071 57,667
Interest income 1,063 1,077 2,739 6,289
Interest expense (152,297) (307,852) (874,639) (758,965)
------------------------------------------------------------------
Loss before income taxes and
discontinued operations (3,965,609) (1,826,865) (7,307,159) (3,805,788)
Income tax benefit - - - -
------------------------------------------------------------------
Loss before discontinued operations (3,965,609) (1,826,865) (7,307,159) (3,805,788)
Income (loss) on discontinued operations,
net of tax - - - 99,515
------------------------------------------------------------------
Net loss (3,965,609) (1,826,865) (7,307,159) (3,706,273)
Dividends on Series A preferred stock (123,930) (118,577) (385,519) (400,289)
------------------------------------------------------------------
Net loss attributable to
common stockholders $ (4,089,539) $ (1,945,442) $ (7,692,678) $ (4,106,562)
==================================================================
Net loss per common share from continuing
operations - basic and diluted $ (.12) $ (.07) $ (.24) $ (.15)
Net income (loss) per common share from
discontinued operations - basic and diluted $ 0.00 $ 0.00 $ 0.00 $ -
Net loss per common share - basic and diluted $ (.12) $ (.07) $ (.24) $ (.15)
==================================================================
Weighted average shares - basic and diluted 34,280,000 28,556,000 32,354,000 26,598,000
==================================================================
See accompanying notes to unaudited condensed
consolidated financial statements.
4
REMOTEMDX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
June 30,
----------------------------------
2005 2004
----------------------------------
Cash flows from operating activities:
Net loss $ (7,307,159) $ (3,706,273)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 26,293 117,250
Beneficial conversion feature recorded as interest expense 280,000 -
Stock options and warrants issued for services 1,344,798 -
Amortization on debt discount 100,129 26,229
Amortization of deferred consulting and financing costs 596,404 149,363
Accretion of interest expense related to redeemable common stock - 483,659
Common stock issued for services and interest 939,099 637,583
Interest income on restricted cash (2,378) (1,352)
Increases in related party line of credit for service 579,273 478,252
Changes in operating assets and liabilities:
Accounts receivable, net 144,605 (179,077)
Inventories 29,059 147,864
Prepaid expenses and other assets (55,141) (44,815)
Accounts payable 467,902 303,909
Accrued liabilities 153,064 71,662
Deferred revenue 1,041 (1,254)
----------------------------------
Net cash used in operating activities (2,703,011) (1,517,000)
----------------------------------
Cash flows used in investing activities:
Purchase of property and equipment (162,416) (95,511)
Disposal of fixed assets 2,392 -
----------------------------------
Net cash used in investing activities (160,024) (95,511)
----------------------------------
Cash flows from financing activities:
Payments on purchase obligations to former SecureAlert shareholders - (98,794)
Net advances (payments) from related-party line of credit (581,538) 245,303
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 - 1,239,888
Proceeds from the issuance of SecureAlert Preferred Stock 2,607,746 -
Proceeds from issuance of notes payable 1,258,000 -
Payments on notes payable (164,000) (45,759)
----------------------------------
Net cash provided by financing activities 3,120,208 1,565,533
----------------------------------
Net increase (decrease) in cash 257,173 (46,978)
Cash, beginning of period 62,103 136,894
----------------------------------
Cash, end of period $ 319,276 $ 89,916
==================================
See accompanying notes to unaudited condensed
consolidated financial statements.
5
REMOTEMDX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
Nine Months ended
June 30,
----------------------------------
2005 2004
(Unaudited) (Unaudited)
----------------------------------
Cash paid for interest and taxes:
Cash paid for income taxes $ - $ -
Cash paid for interest 104,376 93,554
Supplemental schedule of non-cash investing and financing activities:
Issuance of shares of common stock in exchange
for shares of Series A Preferred Stock 94 273
Issuance of Series A Preferred Stock as payment
of accrued dividends 796,174 -
Issuance of shares of common stock in exchange
for deferred consulting services and financing costs 1,260,000 143,100
Reduction of related party line-of-credit in exchange for
exercise of common stock options - 1,620
Use of restricted cash to pay debts - 375,681
Accrual of Preferred Series A Stock dividends 385,519 400,289
SecureAlert preferred stock issued to settle liabilities 382,254 -
Conversion of debt and accrued interest converted into shares of
stock 437,330 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, 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.
Our TrackerPAL device is still under development; therefore as of
June 30, 2005 we did not have any activated TrackerPAL accounts or
monitoring contracts.
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 nine months ended June 30, 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 enhancing 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 Nine months ended
June 30, June 30,
2005 2004 2005 2004
--------------------------------------------------------------
Net loss - as reported $ (3,965,609) $ (1,826,865) $ (7,307,159) $ (3,706,273)
Deduct total stock based employee
compensation expense determined
under fair value based method
for all awards, net of related
taxes - (102,771) (11,194) (112,647)
--------------------------------------------------------------
Net loss - pro forma $ (3,965,609) $ (1,929,636) $ (7,318,353) $ (3,818,920)
--------------------------------------------------------------
Basic and diluted net loss per common
share - as reported $ (.12) $ (0.07) $ (.22) $ (0.14)
--------------------------------------------------------------
Basic and diluted net loss per common
share - pro forma $ (.12) $ (0.07) $ (.22) $ (0.14)
--------------------------------------------------------------
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:
Nine Months Ended
June 30,
--------------------------------
2005 2004
--------------------------------
Expected dividend yield - -
Expected stock price volatility 106% 93%
Risk-free interest rate 3.72% 3.87%
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 nine months ended June 30, 2005 and 2004
were $0.44 and $0.40, 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.
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 June 30, 2005 and 2004, there were approximately 20,436,000 and
20,146,000 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.
9
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 consisted
of the following as of June 30, 2005:
Mobile emergency and personal security systems,
net of reserve for obsolescence of $145,050 $ 15,429
Reagent stains 33,799
----------------
$ 49,228
=================
(3) ACCRUED LIABILITIES
-------------------
Accrued liabilities consist of the following at June 30, 2005:
Accrued tooling $ 116,000
Accrued interest 87,441
Accrued bonuses and director fees 126,250
Accrued payroll and employee benefits 26,315
Accrued property taxes 25,800
Other accrued expenses 20,000
-----------------
$ 401,806
=================
(4) NOTES PAYABLE
-------------
Notes payable consist of the following at June 30, 2005:
Note payable to a corporation, which
is a Series B Preferred stockholder, for
tooling expense incurred on the
development of the MobilPAL device. This
note bears interest at 5% and has
payments of $10,000 due monthly; matures
December 20, 2005. $ 95,830
Note payable to an individual with
interest at 5%, due April 25, 2005. This
note is currently in default. This note
was assumed by ADP Management, however the
Company has not been fully released by
the note holder. 100,000
10
Notes payable to two individuals due
December 28, 2004. These notes are
currently in default. The interest
associated includes an expense for the
issuance of 200,000 warrants to each
lender for a total expense of $133,399,
resulting in an effective interest rate
of 76%. 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,
however the Company has not been fully
released by the note holder. 100,000
Note payable to an individual with
interest at 12% due March 31, 2005. This
note is currently in default. This amount
was assumed by ADP Management, however
the Company has not been fully released
by the note holder. 313,500
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 was
due April 25, 2005. This note is
currently in default. This note was
assumed by ADP Management, however
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 $ 829,006
=================
In addition to the short-term notes payable listed above, the Company also has a
long-term note payable of $500,000 to two entities with interest at 18%, due in
March and April 2008. The interest for the three year period was prepaid through
the issuance of 500,000 shares of common stock. $220,000 of these notes payable
are convertible at 50% of the market price, resulting in a beneficial conversion
feature of $220,000. This beneficial conversion feature was recorded as debt
discount and is being amortized over the life of the notes. As of June 30, 2005,
the remaining discount was $204,444.
(5) BANK LINE OF CREDIT
-------------------
As of June 30, 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% (6% at June 30, 2005), matures on April 11, 2006, is limited to $175,000
plus fees, and is secured by certificates of deposit which the Company holds as
restricted cash of $178,739.
(6) COMMON STOCK SUBJECT TO MANDATORY REDEMPTION
--------------------------------------------
As of June 30, 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.
11
(7) RELATED-PARTY LINE OF CREDIT AND NOTE
-------------------------------------
As of June 30, 2005, the Company had borrowed $45,281 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 nine months ended June 30, 2005, the net decrease in
the related party line of credit was $177,265. The net decrease of $177,265
consisted of net cash repayments during the nine months of $581,538, net
increases of $579,273 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 (PAL Services)
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.
In addition, the Company entered into a loan with an entity controlled by an
employee of the Company. The terms are 17% interest, a loan origination fee of
$10,000,with principle and interest due November 13, 2005. The first four months
are interest only and the last three months are interest and principle. This
loan is secured by the stock and assets of Volu-Sol Reagents, a wholly-owned
subsidiary of RemoteMDx, Inc. As of June 30, 2005, the balance net of the debt
discount was $248,573.
(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. In addition, the first six months of
interest on both the Series B & C debentures were added to the debentures. As of
June 30, 2005, the balance of the debt discount was $83,173, thus resulting in a
net balance of convertible debentures of $1,235,366 at June 30, 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) COMMITMENTS AND CONTINGENCIES
-----------------------------
During April 2005, a note holder converted a $250,000 note payable into 600,000
shares of commons stock. Pursuant to the terms of the associated conversion
agreement, if certain circumstances occur after December 31, 2005, the former
note holder may require the Company's CEO and President to personally repurchase
all or a portion of the 600,000 shares of common stock at $.50 per share. Due to
the relationship of the CEO and President to the Company, the Company may
provide the funding to repurchase these shares from the former note holder
should the certain circumstances occur and the former note holder require the
repurchase of all or a portion of the shares.
12
(10) 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 nine months ended June 30, 2005, a total of 2,544 shares of
Series A Preferred Stock were converted into 941,396 shares of common stock. As
of June 30, 2005, there were 24,752 shares of Series A Preferred Stock
outstanding, which represents 9,158,321 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 nine months
ended June 30, 2005 and 2004, the Company recorded $385,519 and $400,289,
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 June 30, 2005, the Company had not
exercised its option to redeem shares of Series A Preferred Stock.
o During the nine months ended June 30, 2005, the Company issued
3,981 shares of Series A preferred stock in satisfaction of
accrued dividends on Series A preferred stock of $796,174.
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 June 30, 2005, the Company had
not exercised its option to redeem shares of Series B Preferred Stock.
SecureAlert, Inc. (PAL Services) Preferred Shares
During the nine months ended June 30, 2005, and pursuant to Board of Director
approval, the Company amended the articles of incorporation of its wholly-owned
subsidiary, SecureAlert, Inc., (PAL Services) 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 (PAL
Services) assets legally available therefore, prior and in preference to any
declaration or payment of any dividend on the Common Stock of SecureAlert, (PAL
Services) at the rate of $1.50 per day times the number of the SecureAlert's
(PAL Services) 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 (PAL Services) 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 (PAL Services) 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
13
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. (PAL Services).
During the nine months ended June 30, 2005, the Company sold 2,990,000 of these
shares for consideration of $2,990,000. Included in the total consideration was
$382,254 issued as settlement of liabilities and cash proceeds of $2,607,746.
The Company is currently in the process of closing approximately $500,000 to
complete this offering. Because the preferred stock sold was Series A Preferred
Stock of the Company's subsidiary, SecureAlert, Inc., the consideration received
from the sale in the amount of $2,990,000 has been recorded similar to minority
interest as a separate component of the balance sheet outside of permanent
equity.
(11) COMMON STOCK
------------
During the nine months ended June 30, 2005, the Company issued 4,832,969 shares
of common stock as follows:
o 2,362,111 shares were issued for services performed.
o 953,895 shares were issued from Series A Preferred stock
conversions.
o 500,000 shares were issued for prepaid interest on a note payable.
o 640,000 shares were issued from conversion of debts and extending
maturity date on a note and put option.
o 376,963 shares were issued as payment of interest on the Series B
and Series C Debentures.
Common Stock Subject to Redemption
Of the shares of common stock outstanding at June 30, 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 9,441,043 shares of common stock
were outstanding at June 30, 2005 with a weighted average exercise price of
$0.68 per share.
(12) 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 June 30, 2005 and
2004:
14
Three Months
Ended June 30,
--------------------------------------
2005 2004
--------------------------------------
Net sales:
RemoteMDx Royalty $ 2,926 $ -
SecureAlert (PAL Services):
Mobile emergency and personal
security systems 78,290 267,898
Reagents 153,033 139,351
------------------- ------------------
$ 234,249 $ 407,249
=================== ==================
Net income (loss):
SecureAlert (PAL Services) (992,447) (73,312)
Reagents 27,550 15,469
Other (unallocated) (3,000,712) (1,769,022)
------------------- ------------------
$ (3,965,609) $ (1,826,865)
=================== ==================
The following table reflects certain financial information relating to each
reportable segment for each of the nine-month periods ended June 30, 2005 and
2004:
Nine Months
Ended June 30,
--------------------------------------
2005 2004
--------------------------------------
Net sales:
RemoteMDx Royalty $ 5,786 $ -
SecureAlert (PAL Services):
Mobile emergency and personal
security systems 210,840 485,191
Reagents 419,309 423,567
------------------ -------------------
$ 635,935 $ 908,758
================== ===================
Net income (loss):
SecureAlert (PAL Services) $ (2,398,551) $ (134,871)
Reagents 30,060 72,832
Other (unallocated) (4,938,668) (3,644,234)
------------------ -------------------
$ (7,307,159) $ (3,706,273)
================== ===================
Identifiable assets:
SecureAlert (PAL Services) 732,080
Reagents
Other (unallocated) 192,055
59,428
---------
$ 983,563
=========
(13) SUBSEQUENT EVENTS
-----------------
Subsequent to the quarter ended June 30, 2005, the Board of Directors authorized
the Company to issue $1.5 million in Series B convertible notes. The terms under
this financing are 18% interest on the three-year notes, prepaid by issuing
common stock. The Notes may be converted at any time from the date of purchase
through June 1, 2008. The conversion price will be 50% of Fair Market Value
("FMV"). FMV will be determined by taking the 20 day average ask quotation on a
National Trading Exchange. Subsequent to June 30, 2005, the Company has received
gross proceeds of $910,000 from the sale of the Series B convertible notes.
15
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 is intended to 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(TM) 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.
16
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") (PAL Services)
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.
Revenue Recognition
The Company derives its revenue primarily from the sale of mobile emergency and
personal security systems and reagent stains.
17
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 June 30, 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.
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 June 30, 2005 compared to three months ended June 30, 2004
Net Sales
For the three months ended June 30, 2005, the Company had net sales of $234,249
compared to $407,249 for the three months ended June 30, 2004, a decrease of
$173,000. The decrease in net sales resulted primarily from SecureAlert's (PAL
Services) bulk sales in the June 30, 2004 time period.
SecureAlert (PAL Services) had net sales of $78,290 during the three months
ended June 30, 2005 compared to net sales of $267,898 for the three months ended
June 30, 2004. These sales consisted of mobile emergency and personal security
systems. No SecureAlert (PAL Services) customer accounted for 10% or more of its
sales.
18
Reagents had revenues for the three months ended June 30, 2005 of $153,033,
compared to $139,351 during the quarter ended June 30, 2004. The Company
anticipates that Reagents' sales will decrease in the future as a percentage of
total sales. Fisher Scientific is 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 June 30, 2005, cost of goods sold totaled $99,454
compared to $355,232 during the three months ended June 30, 2004, a decrease of
$255,778. The decrease in cost of goods sold was due primarily to the decrease
in net sales. SecureAlert's (PAL Services) cost of goods sold totaled $19,687 or
25% of SecureAlert's (PAL Services) net sales during the three months ended June
30, 2005. In addition, during the three months ended June 30, 2004, the Company
recorded an impairment of $6,329 related to the GPS2000 mobile phone inventory
based on the estimated recoverability of the inventory. Reagents' cost of goods
sold was $79,767 or 52% of Reagents' net sales during the three months ended
June 30, 2005, compared to $85,788 or 61% of Reagents' net sales for the same
period during the prior fiscal year. The decrease in cost of goods sold was
primarily due to a decrease in production costs.
Research and Development Expenses
Research and development expenses were $482,229 for the three months ended June
30, 2005. These costs were incurred for the development of SecureAlert (PAL
Services) TrackerPal device and related services.
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 June
30, 2004. This asset was fully amortized during the year ended September 30,
2004.
Selling, General and Administrative Expenses
During the three months ended June 30, 2005, selling, general and administrative
expenses were $3,466,895, compared to selling, general and administrative
expenses in the prior year period of $1,547,169, an increase of $1,919,726. This
increase relates primarily to an increase in travel, consulting and marketing
costs. Travel expense increased from $107,975 during the three months ended June
30, 2004 to $219,611 in the comparable period in 2005. The Company incurs
significant travel expenses in the development and marketing of its products as
well as it continues efforts to raise additional capital through the issuance of
debt or equity instruments. Consulting expense increased from $207,613 in the
three months ended June 30, 2004 to $1,831,371 in the comparable period in 2005.
The majority of the consulting expense for the 2005 period, approximately $1.7
million, is related to stock and stock options issued to the Company's Chief
Executive Officer and President. Approximately $80,000 is related to stock
issued to consultants for the development of the wireless technology in the
Company's products and marketing services. Selling, general, and administrative
expenses for the three months ended June 30, 2005 included non-cash
consideration of approximately $1,823,000 paid in the form of common stock and
options to consultants and creditors in lieu of cash compensation and as
consideration for services provided to the Company as compared to approximately
$824,000 related to such expenses for the three months ended June 30, 2004.
Interest Income and Expense
During the three months ended June 30, 2005, interest expense totaled $152,297
compared to $307,852 paid in the three months ended June 30, 2004. This amount
consists primarily of non-cash interest expense of approximately $145,000
related to the issuance of common stock in settlement of various note
obligations.
19
Nine months ended June 30, 2005 compared to nine months ended June 30, 2004
Net Sales
Net sales during the nine months ended June 30, 2005 were $635,935 compared to
$908,758 in net sales during the nine months ended June 30, 2004, a decrease of
$272,823. The decrease in net sales resulted primarily from SecureAlert's (PAL
Services bulk sales during the June 30, 2004 quarter.
SecureAlert (PAL Services) had net sales of $210,840 during the nine months
ended June 30, 2005 compared to $485,191 during the nine months ended June 30,
2004. Reagents' had sales for the nine months ended June 30, 2005 of $419,309,
compared to $423,567 during the same period in the prior fiscal year, a decrease
of $4,258. 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 nine months ended June 30, 2005, cost of goods sold was $486,661
compared to $817,275 during the nine months ended June 30, 2004, a decrease of
$330,614. The decrease in cost of goods sold resulted primarily to the decrease
in net sales. SecureAlert's (PAL Services) cost of goods sold was $244,639 or
116% of net sales in the nine months ended June 30, 2005, compared to $577,020
or 119% of net sales during the same period one year ago. In addition, during
the nine months ended June 30, 2004, the Company recorded an impairment of
$23,358 related to the GPS2000 mobile phone inventory based on the estimated
recoverability of the inventory. Although the sales of such phones during the
period ended June 30, 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 June 30, 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 $241,972 or 57%
of net sales during the nine months ended June 30, 2005, compared to $240,255 or
57% 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.
Research and Development Expenses
During the nine months ended June 30, 2005 and 2004, research and development
expense was $1,084,043 and $49,532, respectively, and consisted primarily of
expenses associated with the development of SecureAlert's (PAL Services)
TrackerPAL device and related services.
Selling, General and Administrative Expenses
During the nine months ended June 30, 2005, selling, general and administrative
expenses totaled $5,505,561 compared to $3,047,730 during the nine months ended
June 30, 2004, an increase of $2,457,831. This increase relates primarily to an
increase in travel, consulting and marketing expenses. Travel expense increased
from $208,366 during the nine months ended June 30, 2004 to $308,564 in the
comparable period in 2005. The Company incurs significant travel expenses in the
development and marketing of its products as well as it continues efforts to
raise additional capital through the issuance of debt or equity instruments.
Consulting expense increased from $380,346 in the nine months ended June 30,
2004 to $2,165,794 in the comparable period in 2005. The majority of the
consulting expense for the 2005 period, approximately $1.7 million, is related
to stock and stock options issued to the Company's Chief Executive Officer and
President. Approximately $300,000 is related to stock issued to consultants for
the development of the wireless technology in the Company's products and
marketing services. Selling, general, and administrative expenses for the nine
months ended June 30, 2005 included non-cash consideration of approximately
$2,519,000 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 $1,278,000 paid during the
nine months ended June 30, 2004.
20
Interest Income and Expense
During the nine months ended June 30, 2005, interest expense totaled $874,639.
This amount consists primarily of non-cash interest expense of approximately
$540,000 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 nine
months ended June 30, 2005 or the three months ended June 30, 2004. During the
nine months ended June 30, 2004, the Company recorded 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 nine months ended June 30, 2005, the
Company financed its operations primarily through the sale of SecureAlert Series
A Preferred Stock and from borrowings from third parties.
As of June 30, 2005, the Company had unrestricted cash of $319,276 and a working
capital deficit of $2,461,819, compared to unrestricted cash of $62,103 and a
working capital deficit of $2,269,202 at September 30, 2004.
During the nine months ended June 30, 2005, the Company's operating activities
used cash of $2,703,011, compared to $1,517,000 of cash used during the nine
months ended June 30, 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 (PAL Services) TrackerPal device.
The Company used cash of $160,024 for investing activities during the nine
months ended June 30, 2005.
The Company's financing activities during the nine months ended June 30, 2005
provided cash of $3,120,208 compared to $1,565,533 during the nine months ended
June 30, 2004. During the nine months ended June 30, 2005, the Company had net
proceeds of $1,258,000 from the issuance of debt, as well as net cash proceeds
of $2,607,746 from the sale of SecureAlert Series A Preferred Stock. Because the
preferred stock sold was Series A Preferred Stock of the Company's subsidiary,
SecureAlert, Inc., the consideration received from the sale in the amount of
$2,990,000 has been recorded similar to minority interest as a separate
component of the balance sheet outside of permanent equity. Cash was decreased
by $164,000 in payments to notes payable, and $581,538 in net payments on the
related party line of credit.
The Company incurred a net loss of $7,307,159 during the nine months ended June
30, 2005. As of June 30, 2005, the Company had a net tangible stockholders'
deficit of $6,745,340 and an accumulated deficit of $76,787,164. 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.
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.
Subsequent to the quarter ended June 30, 2005, the Board of Directors authorized
the Company to issue $1.5 million in Series B convertible notes. The terms under
this financing are 18% interest on the three-year notes, prepaid by issuing
common stock. The Notes may be converted at any time from the date of purchase
through June 1, 2008. The conversion price will be 50% of Fair Market Value
("FMV"). FMV will be determined by taking the 20 day average ask quotation on a
National Trading Exchange. Subsequent to June 30, 2005, the Company has received
gross proceeds of $910,000 from the sale of the Series B convertible notes.
21
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 June 30, 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 account for and 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 matter 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 June 30, 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 June 30, 2005, the Company issued 4,210,043 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 2,312,111 shares for services rendered or to be rendered.
o 941,396 shares were issued from Series A Preferred stock
conversions.
o 220,000 shares issued to prepay interest on a note.
o 625,000 shares were issued from conversion of debts and extending
maturity date on a note.
o 111,536 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
22
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).
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)
23
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 June 30, 2005, the Company filed no reports on Form
8-K.
24
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: August 17, 2005 By: /s/ David G. Derrick
---------------------------------
David G. Derrick,
Chief Executive Officer
Date: August 17, 2005 By: /s/ Michael G. Acton
----------------------------------
Michael G. Acton,
Principal Accounting Officer
25