UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2006
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)
150 West Civic Center Drive
Suite 400
Sandy, Utah 84070
(Address of principal executive offices)
(801) 563-7171
(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 May 2, 2006, the issuer had a total of 64,544,342 shares of common stock
issued and outstanding. The issuer also had a total of 20,431 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 7,559,470 shares, 268,332
shares of Series B Preferred Stock outstanding, convertible at any time at the
option of the holders thereof into approximately 789,212 shares of common stock,
and 1,099,285 shares of Series C Preferred Stock outstanding, convertible at any
time at the option of the holders thereof into approximately 3,297,855 shares of
common stock.
Transitional Small Business Disclosure Format (Check One): Yes __ No X
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the exchange Act) ___Yes X No
1
TABLE OF CONTENTS
Page
No.
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of
March 31, 2006 (Unaudited)..................................3
Condensed Consolidated Statements of Operations for
the three and six months ended March 31, 2006 and 2005
(Unaudited).................................................4
Condensed Consolidated Statements of Cash Flows for
the six months ended March 31, 2006 and 2005
(Unaudited).................................................5
Notes to Unaudited Condensed Consolidated Financial
Statements (Unaudited)......................................7
Item 2. Management's Discussion and Analysis or Plan of
Operation..................................................15
Item 3. Controls and Procedures....................................21
PART II. OTHER INFORMATION
Item 2. Unregistered Sales Equity Securities and Use of
Proceeds...................................................21
Item 5. Other Information..........................................22
Item 6. Exhibits...................................................22
Signatures..........................................................24
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
REMOTEMDX, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, 2006
-----------------
Assets
Current assets:
Cash $ 227,397
Accounts receivable, net of allowance for
doubtful accounts of $4,500 129,771
Inventories 56,962
Prepaid expenses 93,471
------------------
Total current assets 507,601
Restricted cash 183,027
Property and equipment, net of accumulated depreciation
and amortization of $529,844 367,061
Other assets 48,013
------------------
Total assets $ 1,105,702
==================
Liabilities and Stockholders' Deficit
Current liabilities:
Bank line of credit $ 174,475
Notes payable net of debt discount of $291 (note 4) 1,419,056
Related party line of credit and note, net of debt
discount of $4,000 (note 7) 273,509
Accounts payable 1,707,087
Accrued liabilities 985,615
Embedded derivative liability (note 10) 731,669
Deferred revenue 16,050
Dividends payable 223,330
Convertible debentures (note 8) 1,318,539
Redeemable SecureAlert Series A Preferred Stock
(note 9) 600,000
Common stock subject to mandatory redemption 96,000
------------------
Total current liabilities 7,545,330
------------------
Long Term Liabilities:
Convertible debentures, net of debt discount of
$365,833 (note 4) 114,167
------------------
Total liabilities 7,659,497
------------------
SecureAlert Series A Preferred Stock
2,990,000
Stockholders' deficit:
Preferred stock:
Series A; 10% dividend, convertible, non-voting; 2
$0.0001 par value; 40,000 shares designated;
20,431 shares outstanding (aggregate liquidation
preference of $57,317)
Series B; convertible; $0.0001 par value; 2,000,000 27
shares designated; 268,332 shares
outstanding (aggregate liquidation preference of
$804,996)
Series C; convertible; $0.0001 par value; 7,357,144 110
shares designated; 1,099,285 shares outstanding
(aggregate liquidation preference of $1,883,735)
Common stock; $0.0001 par value; 100,000,000 shares 6,159
authorized, 61,589,258 shares outstanding
Additional paid-in capital 87,405,718
Deferred compensation (2,863,595)
Subscription receivable (925,680)
Accumulated deficit (93,166,536)
------------------
Total stockholders' deficit (9,543,795)
------------------
Total liabilities and stockholders'
deficit $ 1,105,702
==================
See accompanying notes to unaudited condensed
consolidated financial statements.
3
REMOTEMDX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Six months ended
March 31, March 31,
2006 2005 2006 2005
---------------------------------------------------------------------
Net sales $ 252,415 $ 194,167 $ 471,908 $ 401,686
Cost of goods sold 119,318 240,123 226,461 387,207
---------------------------------------------------------------------
Gross profit (loss) 133,097 (45,956) 245,447 14,479
Research and development expenses 424,239 397,084 1,154,172 601,814
Selling, general and administrative expenses
(including $2,270,705 and $2,655,444 of
compensation expense paid in stock or stock
options / warrants, respectively) 4,297,817 955,181 6,041,429 1,888,516
---------------------------------------------------------------------
Loss from operations (4,588,959) (1,398,221) (6,950,154) (2,475,851)
Other income (expense):
Derivative valuation gain (loss) 388,540 - (102,361) -
Other income 324 5,147 2,324 5,117
Interest income 1,995 859 3,248 1,676
Interest expense (5,058,988) (633,509) (5,655,898) (872,492)
---------------------------------------------------------------------
Loss before income taxes (9,257,088) (2,025,724) (12,702,841) (3,341,550)
Income tax benefit - - - -
---------------------------------------------------------------------
Net loss (9,257,088) (2,025,724) (12,702,841) (3,341,550)
Dividends on Series A preferred stock (98,869) (132,940) (223,330) (261,589)
---------------------------------------------------------------------
Net loss attributable to common stockholders $ (9,355,957) $ (2,158,664) $ (12,926,171) $ (3,603,139)
=====================================================================
Net loss per common share basic and diluted $ (0.17) $ (.07) $ (0.26) $ (.11)
=====================================================================
Weighted average shares - basic and diluted 56,683,000 31,546,000 49,969,000 31,498,000
=====================================================================
See accompanying notes to unaudited condensed
consolidated financial statements.
4
REMOTEMDX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
March 31,
-------------------------------------
2006 2005
-------------------------------------
Cash flows from operating activities:
Net loss $ (12,702,841) $ (3,341,550)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 32,932 12,132
Derivative liability valuation 102,362 -
Beneficial conversion feature recorded as interest expense 321,429 280,000
Stock options and warrants issued for services 873,915 148,859
Accretion of interest expense related to redeemable common stock and debt 1,413,333 -
Amortization on debt discount 1,233,802 54,000
Amortization of deferred consulting and financing costs 3,182,946 237,412
Common stock issued for services and interest 1,106,565 170,331
Interest income on restricted cash (2,924) (1,613)
Increases in related party line of credit for service 338,740 390,031
Changes in operating assets and liabilities:
Accounts receivable, net (32,990) 171,945
Inventories (10,386) 26,246
Prepaid expenses and other assets (65,251) (43,566)
Accounts payable 352,037 340,867
Accrued liabilities 204,705 110,724
Deferred revenue (1,489) 545
-------------------------------------
Net cash used in operating activities (3,653,115) (1,443,637)
-------------------------------------
Cash flows used in investing activities:
Purchase of property and equipment (19,278) (4,220)
-------------------------------------
Net cash used in investing activities (19,278) (4,220)
-------------------------------------
Cash flows from financing activities:
Net advances from related-party line of credit (333,846) (190,535)
Net payments on bank line of credit (423) -
Decrease in subscription receivable 504,900
Proceeds from issuance of Series C Preferred Stock 921,120 -
Proceeds from sale of common stock 700,000 -
Proceeds from the issuance of SecureAlert Preferred Stock 600,000 1,722,746
Proceeds from issuance of notes payable 1,718,915 793,500
Payments on notes payable (626,912) (154,500)
-------------------------------------
Net cash provided by financing activities 3,483,754 2,171,211
-------------------------------------
Net increase (decrease) in cash (188,639) 723,354
Cash, beginning of period 416,036 62,103
-------------------------------------
Cash, end of period $ 227,397 $ 785,457
=====================================
See accompanying notes to unaudited condensed
consolidated financial statements.
5
REMOTEMDX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
Six Months ended
March 31,
---------------------------------------------
2006 2005
(Unaudited) (Unaudited)
---------------------------------------------
Cash paid for interest and taxes:
Cash paid for income taxes $ - $ -
Cash paid for interest $ 111,778 $ 96,342
Supplemental schedule of non-cash investing and financing activities:
Issuance of shares of common stock in exchange
for shares of Series A preferred stock 208 1
Issuance of shares of common stock in exchange for shares of Series
B Preferred Stock 566 -
Issuance of shares of common stock in exchange
for deferred consulting services and financing costs 932,500 159,300
Accrual of Preferred Series A stock dividends 223,330 261,589
SecureAlert preferred stock issued in exchange for decrease in related
party line of credit - 175,000
Payment of accrued preferred stock dividends through the
issuance of Series A preferred stock 44 787,389
Issuance of SecureAlert Series A preferred stock for note
payable and accrued interest - 207,253
See accompanying notes to unaudited condensed
consolidated financial statements.
6
REMOTEMDX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) 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, 2005. The
results of operations for the three and six months ended March 31, 2006 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 2006.
Going Concern
The Company has recurring net losses and negative cash flows from operating
activities, 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 at 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 accounts for its 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.
An alternative method to the intrinsic value method of accounting for
stock-based compensation is the fair value based method prescribed by Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." If the Company used the fair value
based method, the Company would be required to record deferred compensation
based on the fair value of the stock option at the date of grant as computed
using an option-pricing model, such as the Black-Scholes option pricing model.
The deferred compensation calculated under the fair value based method would
then be amortized over the vesting period of the stock option. The Company
awarded stock options to employees during the periods ended December 31, 2005
and 2004.
7
Three months ended Six months ended
March 31, March 31,
2006 2005 2006 2005
-----------------------------------------------------------------------------
Net loss - as reported (9,257,088) $ (2,025,724) (12,702,841) $ (3,341,550)
Deduct total stock-based employee
compensation expense determined
under fair-value-based method for
all awards, net of related taxes (13,858) (11,194) (13,858) (11,194)
-----------------------------------------------------------------------------
Net loss - pro forma $ (9,270,946) $ (2,036,918) (12,716,699) $ (3,352,744)
-----------------------------------------------------------------------------
Basic and diluted net loss per common
share - as reported $ (0.17) $ (0.07) $ (0.26) $ (0.11)
-----------------------------------------------------------------------------
Basic and diluted net loss per common
share - pro forma $ (0.17) $ (0.07) $ (0.26) $ (0.11)
-----------------------------------------------------------------------------
The fair value of the option grants was estimated as of the date of grant using
the Black-Scholes option pricing model with the following assumptions:
Six Months Ended
March 31,
------------------------------
2006 2005
------------------------------
Expected dividend yield - -
Expected stock price volatility 116% 117%
Risk-free interest rate 4.69% 4.18%
Expected life of options 5 years 5 years
The weighted average fair value using the Black-Scholes Option Pricing Model of
options and warrants granted during the six months ended March 31, 2006 and
2005, were $0.70 and $0.45, respectively.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment when events or changes
in circumstances indicate that the book value of an asset may not be
recoverable. The Company evaluates, at each balance sheet date, whether events
and circumstances have occurred which indicate possible impairment. The Company
uses an estimate of future undiscounted net cash flows of the related asset or
group of assets over the estimated remaining life in measuring whether the
assets are recoverable.
8
Net Loss Per Common Share
Basic net loss per common share ("Basic EPS") is computed by dividing net loss
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted net loss per common share ("Diluted EPS")
is computed by dividing net loss by the sum of the weighted-average number of
common shares outstanding and the weighted-average dilutive common share
equivalents then outstanding. The computation of Diluted EPS does not assume
exercise or conversion of securities that would have an anti-dilutive effect.
Common share equivalents consist of shares issuable upon the exercise of common
stock options and warrants, the conversion of the convertible debentures and
related accrued interest, and shares issuable upon conversion of preferred
stock. As of March 31, 2006 and 2005, there were approximately 27,300,920 and
19,886,000 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 . The common share equivalents outstanding at March 31,
2006, consisted of 7,559,463 shares of Series A Preferred Stock, 789,212 shares
of Series B Preferred Stock, 3,297,855 shares of Series C Preferred Stock,
2,930,084 shares of Series B and C debentures, and 12,724,299 shares from
options and warrants.
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 device, such as the MobilePal phone, and the related monitoring
service. If the sale includes both the device and the monitoring service,
revenue from the sale of the device 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 device only and does not include the
monitoring services, revenue, less reserves for returns, is recognized upon
shipment to the customer. The Company records reserves for estimated returns of
defective product. Amounts received in advance of shipment are recorded as
deferred revenue. Shipping and handling fees are included as part of net sales.
The related freight costs and supplies directly associated with shipping
products to customers are included as a component of cost of goods sold.
The sale of reagent stains is recognized when an agreement with the buyer
exists, the price is fixed or determinable, the product has been shipped, and
collection is reasonably assured.
(2) INVENTORIES
-----------
Substantially all items included in inventory are finished goods and consisted
of the following as of March 31, 2006:
Mobile emergency and personal security systems, $27,486
net of reserve for obsolescence of $45,557
Reagent stains 29,476
-----------------
$56,962
=================
(3) ACCRUED LIABILITIES
-------------------
Accrued liabilities consisted of the following at March 31, 2006:
Accrued tooling $ 335,085
Accrued interest 117,172
Accrued bonuses and director fees 295,000
Accrued payroll and employee benefits 73,971
Accrued commissions 96,385
Other accrued expenses 68,002
------------------
$ 985,615
==================
9
(4) NOTES PAYABLE
-------------
Notes payable at March 31, 2006 consisted of the following:
Current liabilities:
Unsecured notes payable to a corporation with interest
at 8% maturing on July 4, 2006, and August 13, 2006. $ 143,915
Unsecured note payable to a corporation with interest at
5%. The note was due December 20, 2005. This
note is in default. 95,830
Unsecured notes payable to former SecureAlert
shareholders, with interest at 5%, payable in
installments of $80,000 per month until paid in full.
These notes are currently in default. 169,676
Unsecured note payable to an entity. The note has
a monthly payment of $1,985. The loan bears no
interest, but has been imputed at 12%. The note is
due September 18, 2006. As of March 31, 2006,
the unamortized debt discount was $291. 9,635
Convertible notes payable to entities with interest at
8%. The notes were due on February 28, 2006.
Subsequent to March 31, 2006, these notes
converted into shares of Series C Preferred Stock. 1,000,000
----------------
$ 1,419,056
----------------
Long term liabilities:
Unsecured convertible notes payable with interest
at 18% (effective interest rate of 39.72%), and
maturity dates of June 15, 2008 and September
15, 2008. Three years of prepaid interest has been
paid through the issuance of 1,280,000 shares of
restricted common stock valued at $883,600. The
holder of the note may convert any portion of the
outstanding balance at 50% of the fair value of the
Company's common. During the quarter ended March
31, 2006, $600,000 was paid down on the loan bringing
the outstanding balance to $480,000. As of March
31, 2006, the unaccreted balance was $365,833. These
notes have conversion features that are considered
embedded derivatives and therefore, are subject to
derivative accounting. (See Note 10.) 114,167
----------------
$ 114,167
----------------
10
(5) BANK LINE OF CREDIT
-------------------
As of March 31, 2006, the Company had $174,475 outstanding under a line of
credit with Zions First National Bank. The line of credit bears interest at
prime plus .25% (7.75% at March 31, 2006), matured on April 15, 2006, is limited
to $175,000 plus fees, and is secured by certificates of deposit which the
Company holds as restricted cash of $183,027. Subsequent to March 31, 2006, the
line of credit was paid off with the certificates of deposits.
(6) COMMON STOCK SUBJECT TO MANDATORY REDEMPTION
--------------------------------------------
As of March 31, 2006 the Company had 32,000 common shares outstanding that are
redeemable at the option of the holder with a redeemable value of $96,000. The
Company had not yet been released from the $96,000 obligation. In accordance
with SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, the redemption value of the
redeemable shares has been recorded as a liability.
(7) RELATED-PARTY LINE OF CREDIT AND NOTE
-------------------------------------
As of March 31, 2006, the Company owed to ADP Management, an entity owned and
controlled by two of the Company's officers and directors $22,509 under a line
of credit agreement. Outstanding amounts on the line of credit accrue interest
at 5.0% and are due in July 2006. During the six months ended March 31, 2006,
the net increase in the related party line of credit was $4,894. The net
increase consisted of net cash repayments during the quarter of $333,313 and net
increases of $338,207 related to a monthly management fee owed to ADP
Management, and expenses incurred by ADP Management that are reimbursable by the
Company. Mr. Derrick's and Mr. Dalton's respective salaries are paid to ADP
Management who intern pays Derrick and Dalton. 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.
The Company entered into a loan with an entity controlled by an employee of the
Company. The loan bears interest at 17%. An origination fee of $10,000 was added
to the principal balance owed under the note. Principal and interest were due
November 13, 2005. The first four months are interest only and the last three
months are interest and principal. This loan is secured by the stock and assets
of Volu-Sol Reagents Corporation, a wholly-owned subsidiary of RemoteMDx, Inc.
As of March 31, 2006, the balance, net of the debt discount, was $251,000. The
note has been extended for cash payments of $10,000 per month.
(8) CONVERTIBLE DEBENTURES
----------------------
During the year ended September 30, 2004, the Company sold $1,450,000 of Series
B Convertible Debentures and $350,000 of Series C Convertible Debentures. The
Debentures are convertible automatically into shares of the Company's common
stock upon the closing of a qualified equity or debt offering with gross
proceeds of at least $5,000,000. Under the terms, the conversion price will
equal 80% of the fair value prior to closing the offering. The Debentures bear
interest at an annual rate of 10%, not including any original issue discount,
with interest during the first six months of $47,954 added to the principal
amount. 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. As of March 31, 2006, the
convertible debentures totaled $1,318,539, of this amount $1,067,284 were in
default. Subsequent to March 31, 2006, $913,583 of these debentures converted
into 1,968,780 shares of common stock and $145,850 repaid in cash. It is
anticipated that the balance of $259,105 will also be repaid in cash in the
third quarter 2006.
(9) PREFERRED STOCK
---------------
Series A 10 % Convertible Non-Voting Preferred Stock
Each share of Series A Preferred Stock is convertible into 370 shares of common
stock. During the six months ended March 31, 2006, a total of 5,620 shares of
Series A Preferred Stock were converted into 2,082,360 shares of common stock.
As of March 31, 2006, there were 20,431 shares of Series A Preferred Stock
outstanding, which represents 7,559,470 common stock equivalents at a conversion
rate of 370 for 1. Subsequent to March 31, 2006, and through the filing of this
report, no shares of Series A Preferred Stock had been converted into shares of
common stock.
11
The holders of the Series A Preferred Stock are entitled to dividends at the
rate of 10 percent per year on the stated value of the Series A Preferred Stock
(or $200 per share), payable in cash or in additional shares of Series A
Preferred Stock at the discretion of the board of directors. Dividends are fully
cumulative and accrue from the date of original issuance. During the six months
ended March 31, 2006 and 2005, the Company recorded $223,330 and $261,588,
respectively, in dividends on Series A Preferred Stock.
The Company may, at its option, redeem up to two-thirds of the total number of
shares of Series A Preferred Stock at a redemption price of 133 percent of the
stated value of Series A Preferred Stock; however, the Company may designate a
different and lower redemption price for all shares of Series A Preferred Stock
called for redemption by the Company. Through March 31, 2006, the Company had
not exercised its option to redeem shares of Series A Preferred Stock.
During the quarter ended March 31, 2006, the Company issued 44 shares of Series
A preferred stock in satisfaction of accrued dividends on Series A preferred
stock of $8,726.
Series B Convertible Preferred Stock
During the six months ended March 31, 2006, a total of 1,100,825 shares of
Series B Preferred Stock were converted into 5,656,381 shares of common stock.
As of March 31, 2006, there were 268,332 shares of Series B Preferred Stock
outstanding convertible into approximately 789,212 common shares.
Series C Convertible Preferred Stock
During the six months ended March 31, 2006, the Company sold 1,099,285 shares of
Series C Convertible Preferred Stock at $1.68 per share for proceeds of
$1,846,800. One share of Series C Convertible Preferred Stock is convertible
into 3 shares of the Company's common stock. The stock has a 8% dividend that
may be paid in cash or additional shares of Series C Convertible Preferred Stock
at the option of the Company. Subsequent to March 31, 2006, the Company issued
1,999,090 shares of Series C Preferred Stock for $2,321,320 in exchange for cash
and $1,037,151 from conversion of debt and accrued interest.
SecureAlert, Inc. Preferred Shares
During the year ended September 30, 2005, and pursuant to Board of Director
approval, the Company amended the articles of incorporation of its wholly owned
subsidiary, SecureAlert, Inc., to establish 3,500,000 shares of preferred stock
designated as Series A Convertible Redeemable Non-Voting Preferred Stock. The
holders of shares of Series A Preferred Stock shall be entitled to receive
quarterly dividends out of any of SecureAlert's assets legally available
therefor, 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 six ended March 31, 2006, the Company
sold 600,000 of these shares for $600,000. As of March 31, 2006, there were
3,590,000 shares of SecureAlert Series A Preferred Stock outstanding.
The 600,000 shares of SecureAlert Series A Preferred Stock issued during the
quarter have an additional feature where the Company will buy back the
SecureAlert Series A Preferred Shares and pay the investor 15% interest should
the Company not have contracts for a total of 7,000 parolee units by March 31,
2006. Because the Company did not secure 7,000 parolee contracts by March 31,
2006 and in accordance with SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, the redemption
value of the redeemable shares has been recorded as a liability. The Company has
committed to collateralize these instruments with 600,000 free trading shares of
the Company's common stock. In addition, each holder received an option to
purchase 1 share of common stock with an exercise price of $1.00 per share for
each share of SecureAlert Series A Preferred Shares received. The Black-Scholes
model was used to determine the value for the 600,000 options issued. The value
of the options was $443,515. The detachable warrants were valued at $443,515 and
the debt discount was prorated. As of March 31, 2006, there was no more
unamortized debt discount. To date none of the shareholders that have this
additional feature have exercised their respective rights under this agreement.
12
(10) DERIVATIVES
-----------
The Company does not hold or issue derivative instruments for trading purposes.
However, the Company has convertible notes payable that contain embedded
derivatives that require separate valuation from the convertible notes. The
Company recognizes these derivatives as liabilities in its balance sheet and
measures them at their estimated fair value, and recognizes changes in their
estimated fair value in earnings (losses) in the period of change. The Company
has estimated the fair value of these embedded derivatives using the
Black-Scholes model based on the historical volatility of its common stock over
the past three years. The fair value of derivative instruments are re-measured
each quarter. During the six months ended March 31, 2006 and the year ended
September 30, 2005, the Company issued convertible notes payable containing
embedded derivatives. The Company received $1,855,000 from these convertible
notes and issued 1,855,000 shares of common stock valued at $1,539,100 for three
years of prepaid interest.
During the three months ended March 31, 2006, the Company paid $600,000 toward
these convertible notes. In addition, $200,000 of these notes converted into
563,381 shares of common stock. As of March 31, 2006, the remaining convertible
notes payable was $480,000. The carrying value of these convertible notes
payable as of March 31, 2006, was $114,167. The carrying value will be accreted
each quarter over the remaining life of the notes until the carrying value
equals the face value of $480,000. As of March 31, 2006, the derivative
instruments had a total fair value of $731,669.
(11) COMMON STOCK
------------
During the six months ended March 31, 2006, the Company issued 16,460,216 shares
of common stock as follows:
o 1,550,000 shares were issued for services performed.
o 6,121,475 shares were issued for debt and accrued interest.
o 7,738,741 shares were issued from Series A and B Preferred Stock
conversions.
o 1,050,000 shares were issued for $700,000 in cash, net commission
of $35,000.
Common Stock Subject to Redemption
Of the shares of common stock outstanding at March 31, 2006, a total of 32,000
shares are subject to redemption. These shares are redeemable by the Company for
$96,000.
Common Stock Options and Warrants
As of March 31, 2006, 12,724,299 of the 17,099,299 outstanding options and
warrants were vested with a weighted average exercise price of $0.61 per share.
During the six months ended March 31, 2006, 4,490,150 options were issued with
an exercise price range of $0.56 and $1.00 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 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.
13
The following table reflects certain financial information relating to each
reportable segment for each of the three-month periods ended March 31, 2006 and
2005:
Three Months Ended
March 31,
----------------- -----------------
2006 2005
----------------- -----------------
Sales to external customers:
SecureAlert $ 75,872 $ 66,465
Reagents 127,702
176,543
----------------- -----------------
$ 252,415 $ 194,167
----------------- -----------------
Net (loss) income from operations :
SecureAlert $ (1,313,022) $ (853,433)
Reagents (11,804)
(9,279)
Other (unallocated) (1,160,487)
(7,934,787)
----------------- -----------------
$ (9,257,088) $ (2,025,724)
----------------- -----------------
The following table reflects certain financial information relating to each
reportable segment for each of the six-month periods ended March 31, 2006 and
2005:
Six Months Ended
March 31,
------------------ -----------------
2006 2005
------------------ -----------------
Sales to external customers:
SecureAlert $ 152,932 $ 135,410
Reagents 318,976 266,276
------------------ -----------------
$ 471,908 $ 401,686
------------------ -----------------
Net (loss) income from operations :
SecureAlert $ (2,662,642) $ (1,406,104)
Reagents 14,551 2,510
Other (unallocated) (10,054,750) (1,937,956)
------------------ -----------------
$ (12,702,841) $ (3,341,550)
------------------ -----------------
Identifiable assets:
SecureAlert 800,993
Reagents 190,872
Other (unallocated) 113,837
------------------
$ 1,105,702
==================
14
(13) SUBSEQUENT EVENTS
-----------------
Subsequent to March 31, 2006, the Company has issued additional shares of stock
for cash and repayment of debt::
A. The Company issued 2,138,971 shares of Series C Preferred Stock in
exchange for $2,556,320 in cash and $1,037,151 from conversion of
debt and accrued interest. One share of Series C Convertible
Preferred Stock is convertible into 3 shares of the Company's
common stock. The Series C Preferred Stock has an 8% dividend that
may be paid in cash or additional shares of Series C Convertible
Preferred Stock at the option of the Company.
B. A total of $913,583 of principal amount (and interest) of our
Series B and C debentures were converted into 1,968,780 shares of
common stock. Additionally, $145,850 of our Series B and C
debentures were repaid. The Company anticipates that $259,105 will
also be repaid in cash in the third quarter 2006.
C. The Company has repaid the line of credit by using the
certificates of deposit classified as restricted cash.
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, 2005. The Company disclaims any obligation or
intention to update any forward-looking statement.
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. 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 numerous
pre-production models 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 market consists of approximately 35
million Americans over the age of sixty-five. Of these 35 million seniors, it is
estimated that approximately 9.7 million currently live alone. However, in most
cases, the Company anticipates that senior customers will not purchase the
Company's products for themselves. Instead, based on the Company's experience,
the Company believes that it is 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 approximately 4.9 million adults in the
criminal justice system. In order to meet the needs of this growing demand, the
Company has developed TrackerPAL, which works in conjunction with our monitoring
center. Through the date of this report, the Company had not received any
revenue from this market.
15
We also sell medical diagnostic stains, solutions, and equipment through a
wholly owned subsidiary, Volu-Sol Reagents Corporation ("Reagents").
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 future
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 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 Matsushita Electric Works ("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 market, the parolee and probation market, and 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.
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, 2005, included in the Company's Annual Report on 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 records 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
16
may be a result of slow moving or excess inventory, product obsolescence or
changes in the valuation of the inventory. In determining the adequacy of its
reserves, the Company analyzes the following, among other things:
o Current inventory quantities on hand;
o Product acceptance in the marketplace;
o Customer demand;
o Historical sales;
o Forecast sales;
o Product obsolescence; and
o Technological innovations.
Any modifications to these estimates of reserves are reflected in the cost of
goods sold within the statement of operations during the period in which such
modifications are determined necessary by management.
Revenue Recognition
The Company derives its revenue primarily from the sale of mobile emergency and
personal security systems and reagent stains.
The sale of mobile emergency and personal security systems may include the
security device, such as the MobilePal phone, and the related monitoring
service. If the sale includes both the device and the monitoring service,
revenue from the sale of the device 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 device only and does not include the
monitoring services, revenue, less reserves for returns, is recognized upon
shipment to the customer. The Company records reserves for estimated returns of
defective product. Amounts received in advance of shipment are recorded as
deferred revenue. Shipping and handling fees are included as part of net sales.
The related freight costs and supplies directly associated with shipping
products to customers are included as a component of cost of goods sold.
The sale of reagent stains is recognized when an agreement with the buyer
exists, the price is fixed or determinable, the product has been shipped, and
collection is reasonably assured.
Impairment of Long-lived Assets
The Company reviews its long-lived assets for impairment when events or changes
in circumstances indicate that the book value of an asset may not be
recoverable. The Company evaluates, at each balance sheet date, whether events
and circumstances have occurred which indicate possible impairment. The Company
uses an estimate of future undiscounted net cash flows of the related asset or
group of assets over the estimated remaining life in measuring whether the
assets are recoverable. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized for the amount by which
the carrying amount exceeds the estimated fair value of the asset. Impairment of
long-lived assets is assessed at the lowest levels for which there are
identifiable cash flows that are independent of other groups of assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value, less the estimated costs to sell. In addition, depreciation of the asset
ceases. During the periods ended March 31, 2006 and 2005, no impairment of
long-lived assets was recorded.
17
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 March 31, 2006, Compared to Three months ended March 31, 2005
Net Sales
For the three months ended March 31, 2006, the Company had net sales of $252,415
compared to $194,167 for the three months ended March 31, 2005, an increase of
$58,248. The increase in net sales resulted primarily the sale of stain and
reagents solutions.
SecureAlert (PAL Services) had net sales of $75,872 during the three months
ended March 31, 2006, compared to net sales of $66,465 for the three months
ended March 31, 2005. These sales consisted of mobile emergency and personal
security systems. No SecureAlert (PAL Services) customer accounted for 10% or
more of its sales.
Reagents had revenues for the three months ended March 31, 2006, of $176,543,
compared to $127,702 during the quarter ended March 31, 2005. 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 30% of Reagents' sales during the period. No other Reagents
customer accounted for 10% or more of its sales.
Cost of Goods Sold
For the three months ended March 31, 2006, cost of goods sold was $119,318
compared to $240,123 during the three months ended March 31, 2005, a decrease of
$120,805. During the fiscal year ended September 30, 2005, the Company recorded
an impairment of the GPS2000 mobile phone inventory based on the estimated
recoverability of the inventory. Therefore, the sales of such phones during the
period ended March 31, 2006, resulted in a lower cost of goods sold per unit
based on the impairment. SecureAlert's cost of goods sold totaled $33,604 or 44%
of SecureAlert's net sales during the three months ended March 31, 2006. 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. Reagents' cost of goods sold was $85,714 or 49% of Reagent's net
sales during the three months ended March 31, 2006, compared to $90,106 or 71%
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
material and labor costs.
Research and Development Expenses
Research and development expenses were $424,239 for the three months ended March
31, 2006. These costs were incurred for the development of SecureAlert
TrackerPAL device and related services.
Selling, General and Administrative Expenses
During the three months ended March 31, 2006, selling, general and
administrative expenses were $4,297,817 compared to $955,649 during the three
18
months ended March 31, 2005. The increase of $3,342,168 relates primarily to an
increase of payroll and contract labor costs of ($536,496), consulting services
($2,813,843), and travel expenses ($153,495). The Company incurs significant
travel expenses in the development and marketing of its products as well as its
continued efforts to raise additional capital through the issuance of debt or
equity instruments. Consulting expense increased from $649,190 in the three
months ended March 31, 2005 to $2,813,843 in the comparable period in 2006. The
majority of the consulting expense for the 2006 period is related to stock and
stock options issued to consultants for the development of the wireless
technology in the Company's products and marketing services.
Interest Income and Expense
During the three months ended March 31, 2006, interest expense totaled
$5,058,988 compared to $633,509 paid in the three months ended March 31, 2005.
This amount consists primarily of non-cash interest expense of approximately
$4,669,181 related to the issuance of common stock in settlement of various note
obligations and $321,429 to record a beneficial conversion feature. In addition,
interest expense increased significantly for the three months ended March 31,
2006 because several notes converted during the quarter; thus, recognizing the
unamortized financing costs associated with shares of common stock issued for
three years of prepaid interest.
Six months ended March 31, 2006, Compared to Six months ended March 31, 2005
Net Sales
Net sales during the six months ended March 31, 2006 were $471,908 compared to
$401,686 in net sales during the six months ended March 31, 2005, an increase of
$70,222. The increase in net sales resulted primarily from the sale of stain and
reagents solutions.
SecureAlert (PAL Services) had net sales of $152,932 during the six months ended
March 31, 2006, compared to $135,140 during the six months ended March 31, 2005.
Reagents had sales for the six months ended March 31, 2006, of $318,976,
compared to $266,276 during the same period in the prior fiscal year, an
increase of $52,700. This increase is due to Reagents' largest customer ordering
more products.
Cost of Goods Sold
For the six months ended March 31, 2006, cost of goods sold was $226,461
compared to $387,207 during the six months ended March 31, 2005, a decrease of
$160,746. During the fiscal year ended September 30, 2005, the Company recorded
an impairment of the GPS2000 mobile phone inventory based on the estimated
recoverability of the inventory. Therefore, the sales of such phones during the
period ended March 31, 2006, resulted in a lower cost of goods sold per unit
based on the impairment. SecureAlert's cost of goods sold totaled $68,102 or 45%
of SecureAlert's net sales during the six months ended March 31, 2006. 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. Reagents' cost of goods sold was $158,359 or 50% of Reagent's net
sales during the six months ended March 31, 2006, compared to $162,204 or 61% 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
material and labor costs.
Research and Development Expenses
During the six months ended March 31, 2006 and 2005, research and development
expense was $1,154,172 and $601,814, respectively, and consisted primarily of
expenses associated with the development of SecureAlert's TrackerPAL device and
related services.
Selling, General and Administrative Expenses
During the six months ended March 31, 2006, selling, general and administrative
expenses were $6,041,429 compared to $1,888,516 during the six months ended
March 31, 2005. The increase of $4,152,913 relates primarily to an increase of
payroll and contract labor costs of ($913,009), consulting services
($3,528,524), and travel expenses ($249,971). The Company incurs significant
travel expenses in the development and marketing of its products as well as its
continued efforts to raise additional capital through the issuance of debt or
equity instruments. Consulting expense increased from $334,423 in the six months
19
ended March 31, 2005 to $3,528,524 in the comparable period in 2006. The
majority of the consulting expense for the 2006 period is related to stock and
stock options issued to consultants for the development of the wireless
technology in the Company's products and marketing services.
Interest Income and Expense
During the six months ended March 31, 2006, interest expense totaled $5,655,898.
This amount consists primarily of non-cash interest expense of $5,544,120
related to common stock issuances and common stock warrants under various debt
obligations and $1,174,800 to record a beneficial conversion feature. In
addition, interest expense increased significantly for the six months ended
March 31, 2006 because several notes converted during the quarter; thus,
recognizing the unamortized financing costs associated with shares of common
stock issued for three years of prepaid interest.
Liquidity and Capital Resources
The Company is presently unable to finance its operations solely from cash flows
from operating activities. During the six months ended March 31, 2006, the
Company financed its operations primarily through borrowings from a related
party and third parties and from the sale of debt and equity securities of the
Company for net proceeds of $3,483,754.
As of March 31, 2006, the Company had unrestricted cash of $227,397 and a
working capital deficit of $7,037,729, compared to unrestricted cash of $787,457
and a working capital deficit of $5,517,466 at September 30, 2005.
During the six months ended March 31, 2006, the Company's operating activities
used cash of $3,653,115, compared to $1,443,637 of cash used during the six
months ended March 31, 2005. The increase was primarily a result of an increase
in selling, general and administrative expenses and research and development
costs related to SecureAlert's TrackerPAL device.
The Company used cash of $19,278 for investing activities during the six months
ended March 31, 2006.
The Company's financing activities during the six months ended March 31, 2005,
provided cash of $3,483,754 compared to $2,171,211 during the six months ended
March 31, 2005. During the six months ended March 31, 2006, the Company had net
proceeds of $1,718,915 from the issuance of debt, as well as net cash proceeds
of $2,726,020 from the sale of its debentures and equity securities. Cash was
decreased by $627,335 in payments to notes payable and on the bank line of
credit, and $333,846 in net payments on the related party line of credit.
The Company incurred a net loss of $12,702,841 during the six months ended March
31, 2006. As of March 31, 2006, the Company had a net tangible stockholders'
deficit of $9,543,795 and an accumulated deficit of $93,166,536. 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, 2005, 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.
Recent Developments
Subsequent to March 31, 2006, the Company has entered into the following
transactions:
A. The Company issued 2,138,971 shares of Series C Preferred Stock in
exchange for $2,556,320 in cash and $1,037,151 from conversion of
debt and accrued interest. One share of Series C Convertible
Preferred Stock is convertible into 3 shares of the Company's
common stock. The Series C Preferred Stock has an 8% dividend that
may be paid in cash or additional shares of Series C Convertible
Preferred Stock at the option of the Company.
B. A total of $913,583 of principal amount (and interest) of our
Series B and C debentures were converted into 1,968,780 shares of
common stock. Additionally, $145,850 of our Series B and C
debentures were repaid. The Company anticipates that $259,105 will
also be repaid in cash in the third quarter 2006.
20
C. The Company has repaid the line of credit by using the
certificates of deposit classified as restricted cash.
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. We maintain disclosure
controls and procedures designed to ensure that information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934, as
amended (the Exchange Act), is recorded, processed, summarized, and reported
within the required time periods, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow for timely decisions regarding
disclosure.
As required by Rule 13a-15(b) under the Exchange Act, we conducted an
evaluation, under the supervision of our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures as of March 31, 2006. 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, 2006. 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 March 31, 2006 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. Unregistered Sales of Equity Securities and Use of Proceeds
During the six months ended March 31, 2006, the Company issued 16,460,216 shares
of common stock as follows:
o 1,550,000 shares were issued for services performed.
o 6,121,475 shares were issued for debt and accrued interest.
o 7,738,741 shares were issued from Series A and B Preferred Stock
conversions.
o 1,050,000 shares were issued for $700,000 in cash, net commission
of $35,000.
21
In addition, the Company issued 1,099,285 shares of Series C Preferred Stock for
$1,846,800 in cash during the six months ended March 31, 2006.
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 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
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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)
3.01(5) Certificate of Amendment to the Designation of Rights and
Preferences Related to Series C 8% Convertible Preferred
Stock of RemoteMDx, Inc. (incorporated by reference to the
Company's Current Report on Form 8-K, filed with the
Commission on March 24, 2006)
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).
22
10.04 Securities Purchase Agreement for $1,200,000 of Series A
Preferred Stock (incorporated by reference to the Company's
Registration Statement and Amendments thereto on Form
10-SB, effective December 1, 1997)
10.05 Securities Purchase Agreements with ADP Management and
James Dalton (previously filed)
10.06 Agreement and Plan of Merger (SecureAlert (PAL Services))
(previously filed as exhibit to Current Report on Form 8-K)
10.07 Loan Agreement (as amended) dated June 2001 between ADP
Management and the Company (incorporated by reference to
the Company's annual report on Form 10-KSB for the year
ended September 30, 2001)
10.08 Amended and Restated Loan and Security Agreement (SunTrust
Bank and SecureAlert (PAL Services)), dated August 3, 2001
(incorporated by reference to the Company's annual report
on Form 10-KSB for the year ended September 30, 2001)
10.09 Amended and Restated Loan and Security Agreement (SunTrust
Bank and SecureAlert (PAL Services)), dated January 24,
2002 (filed as an exhibit to the Company's quarterly report
on Form 10-QSB for the quarter ended December 31, 2001)
10.10 Amended and Restated Loan and Security Agreement (SunTrust
Bank and SecureAlert (PAL Services)) dated March 1, 2002
(filed as an exhibit to the Company's quarterly report on
Form 10-QSB for the quarter ended December 31, 2001)
10.11 Loan Agreement (as amended and extended) dated March 5,
2002 between ADP Management and the Company, effective
December 31, 2001 (filed as an exhibit to the Company's
quarterly report on Form 10-QSB for the quarter ended
December 31, 2001)
10.12 License Agreement between RemoteMDx, Inc. and SecureAlert
(PAL Services), Inc. as licensor and Matsushita Electric
Works, Ltd., as licensee, (April 12, 2002) Agreement with
SecureAlert Entertainment, LLC, with amendments (January
and June 2003) (previously filed)
10.13 Agreement with SAE (incorporated by reference to the
Company's quarterly report on Form 10-QSB for the quarter
ended December 31, 2002)
10.14 Agreement between the Company and SecureAlert Telematics
(incorporated by reference to the Company's quarterly
report on Form 10-QSB for the quarter ended December 31,
2002)
10.15 Amendments to SAE Agreement (previously filed)
10.16 Agreement with ADP Management, Derrick and Dalton (April
2003) (previously filed)
31.1 Certification of President and Chief Executive Officer
under Section 302 of Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer under Section 302
of Sarbanes-Oxley Act of 2002
32 Certification under Section 906 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. SECTION 1350)
23
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: May 15, 2006 By: /s/ David G. Derrick
--------------------
David G. Derrick,
Chief Executive Officer
Date: May 15, 2006 By: /s/ Michael G. Acton
--------------------
Michael G. Acton,
Principal Accounting Officer
24