U.S. 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, 2001
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) (Zip Code)
(801) 974-9474
(Issuer's telephone number)
VOLU-SOL, INC.
(Former name, if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No __
As of August 20, 2001, the issuer had issued and outstanding 4,503,754 shares of
common stock, par value $0.0001.
Transitional Small Business Disclosure Format (Check One): Yes __ No X
---
1
TABLE OF CONTENTS
Page
PART I. - FINANCIAL INFORMATION
1. Financial Statements
Unaudited Condensed Consolidated Balance Sheet as of June 30, 2001............3
Unaudited Condensed Consolidated Statements of Operations for
the Three and Nine Months Ended June 30, 2001 and 2000...................4
Unaudited Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended June 30, 2001 and 2000.............................5
Notes to Unaudited Condensed Consolidated Financial Statements................6
2. Management's Discussion and Analysis or Plan of Operation....................11
PART II. - OTHER INFORMATION
2. Changes in Securities and Use of Proceeds....................................15
4. Submission of Matters to a Vote of Security Holders..........................15
5. Other Information............................................................17
6. Exhibits and Reports on Form 8-K.............................................18
2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
REMOTEMDX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30,
2001
--------------
ASSETS
Current assets:
Cash and cash equivalents $ 76,016
Accounts receivable, less allowance for doubtful accounts of 63,272
$31,000
Inventories
48,684
Total current assets 187,972
Property and equipment, net 42,266
Deposits 3,074
Advances to SecureAlert II, Inc.
501,420
Total assets $ 734,732
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Convertible line of credit with related party $ 750,000
Convertible debentures 545,000
Accounts payable 253,861
Accrued liabilities 90,399
Preferred stock dividends payable
210,270
Total current liabilities
1,849,530
Stockholders' deficit:
Series A 10% convertible preferred stock, $0.0001 par value,
30,000
shares authorized, 22,288 shares outstanding (aggregate 2
liquidation
preference of $300,689)
Common stock, $0.0001 par value; 50,000,000 share authorized,
3,820,421 shares outstanding 382
Additional paid-in capital 14,524,902
Accumulated deficit (15,251,784)
Preferred stock subscriptions receivable (338,300)
Deferred consulting expense
(50,000)
Total stockholders' deficit
(1,114,798)
Total liabilities and stockholders' deficit $ 734,732
=============
The accompanying notes are an integral part of this unaudited
condensed consolidated balance sheet.
3
REMOTEMDX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
--------------- -------------- ------------- ---------------
2001 2000 2001 2000
---- ---- ---- ----
Sales $ 128,500 $ 119,724 $ 384,265 $ 376,458
Cost of goods sold 108,969 44,944 267,544 210,088
--------------- -------------- ------------- ---------------
Gross margin 19,531 74,780 116,721 166,370
Research and development 81,043 1,053,670 263,612 1,053,670
Selling, general and administrative 802,785 465,504 2,796,845 1,714,805
--------------- -------------- ------------- ---------------
Loss from operations (864,297) (1,444,394) (2,943,736) (2,602,105)
Other income (expense):
Interest income 1,389 9,798 5,294 11,759
Interest expense (670,619) - (1,138,419) -
--------------- -------------- ------------- ---------------
Net loss (1,533,527) (1,434,596) (4,076,861) (2,590,346)
Dividends and beneficial conversion features on Series A (57,350) (75,691) (2,660,303) (192,778)
--------------- -------------- ------------- ---------------
Net loss applicable to common stockholders $ (1,590,877) $ (1,510,287) $ (6,737,164) $ (2,783,124)
=============== ============== ============= ===============
Net loss per common share - basic and diluted $ (0.45) $ (1.00) $ (2.08) $ (2.87)
=============== ============== ============= ===============
Weighted average common shares outstanding - basic and diluted 3,573,165 1,510,877 3,236,716 970,561
=============== ============== ============= ===============
The accompanying notes are an integral part of these
unaudited condensed consolidated statements.
4
REMOTEMDX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months
Ended June 30,
--------------------------------------
2001 2000
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,076,861) $ (2,590,346)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 20,576 51,859
Non-cash consulting and compensation expense related to
the issuance of preferred stock, common stock and stock
options 1,307,799 953,845
Non-cash interest expense related to the issuance of
convertible debt 1,092,250
-
Increase (decrease) in:
Accounts receivable, net 14,833 (19,674)
Inventories 2,206 5,448
Other assets 198 525
Accounts payable 63,231 106,997
Accrued liabilities 51,310 (2,534)
----------------- -----------------
Net cash used in operating activities (1,524,458) (1,493,880)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Equipment purchases (6,527) -
Advances to SecureAlert II, Inc. (501,420) -
Note receivable - (200,000)
----------------- -----------------
Net cash used in investing activities (507,947) (200,000)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit with related party 1,285,000 -
Proceeds from convertible debentures 545,000 -
Proceeds from the sale of preferred stock - 266,000
Proceeds from sale of common stock - 1,900,000
-----------------
Net cash provided by financing activities 1,830,000 2,166,000
----------------- -----------------
Net increase (decrease) in cash (202,405) 472,120
Cash, beginning of the period 278,421 44,123
----------------- -----------------
Cash, end of the period $ 76,016 $ 516,243
================= =================
The accompanying notes are an integral part of these unaudited
condensed consolidated statements.
5
REMOTEMDX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) ORGANIZATION AND BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements include RemoteMDx,
Inc. (formerly Volu-Sol, Inc.), a Utah corporation, and its wholly owned
subsidiaries, Volu-Sol Reagents Corporation and SecureAlert Incorporated.
RemoteMDx, Inc. and its subsidiaries are referred to collectively as the
"Company". In June 2001, the Company incorporated SecureAlert Incorporated for
the purpose of acquiring SecureAlert II, Inc., a Tennessee corporation (see Note
10). SecureAlert Incorporated had no operations through June 30, 2001.
The Company currently engages in the manufacturing, marketing and distribution
of medical diagnostic stains and, upon completion of the acquisition of
SecureAlert II, Inc., expects to engage in the business of marketing and
distributing mobile emergency and security products.
The accompanying interim condensed consolidated financial statements have been
prepared by the Company consistent with U.S. generally accepted accounting
principles for interim financial information in accordance with the instructions
to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, these unaudited
financial statements do not include all of the information and footnotes
required by U.S. generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial
position, results of operations and cash flows of the Company for the interim
periods presented, have been included. Operating results for the three and nine
months ended June 30, 2001 are not necessarily indicative of the results that
may be expected for the year ending September 30, 2001. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-KSB for
the year ended September 30, 2000.
Certain reclassifications have been made in the prior period condensed
consolidated financial statements to conform with the current period
presentation.
(2) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market value. Inventories consist of the following as of June 30, 2001:
Raw materials, packaging and supplies $26,566
Instruments, biological stains and reagents 22,118
--------
$48,684
(3) ADVANCES TO SECUREALERT II, INC.
--------------------------------
As of June 30, 2001, the Company had made advances of $501,420 to SecureAlert
II, Inc. in connection with a pending acquisition (see Note 10). Of the
advances, $200,000 was used as the initial payment due to the stockholders of
Secure Alert II, Inc. upon the signing of a definitive agreement on July 2, 2001
to acquire SecureAlert II, Inc.
(4) LINE OF CREDIT WITH RELATED PARTY
During the nine months ended June 30, 2001, the Company borrowed $1,285,000
under a line of credit arrangement with an entity controlled by an individual
who is a major stockholder and a director. The Company may borrow up to
$3,000,000 under this line of credit arrangement. Through June 1, 2001,
borrowings bore interest at 12% per year. Subsequent to June 1, 2001, borrowings
bear interest at the prime rate (7 percent at June 30, 2001). Borrowings and
related interest are due December 31, 2001. Borrowings, excluding any accrued
interest, are convertible at the option of the holder at any time into shares of
Series A preferred stock at a rate of one share of Series A preferred stock for
each $200 of the outstanding loan balance converted. In addition, the Series A
6
preferred stock is immediately converted into common stock at an amount which
results in a beneficial conversion feature (see Note 6). During the three and
nine months ended June 30, 2001, the Company recorded non-cash interest expense
of $637,500 and $1,092,250, respectively, related to this beneficial conversion
feature. During the nine months ended June 30, 2001, borrowings of $535,000 were
converted into 2,675 shares of Series A preferred stock.
(5) CONVERTIBLE DEBENTURES
During the nine months ended June 30, 2001, the Company issued 15% Convertible
Debentures, due on or before August 1, 2001. The debentures and related interest
are convertible into shares of common stock at an initial conversion rate of
$3.00 per share. Total debentures outstanding and related accrued interest at
June 30, 2001 were $545,000 and $23,695, respectively.
The Company failed to pay off the debentures on or before August 1, 2001 and is
in default. The Company is currently negotiating the conversion, extension or
payment of these debentures.
(6) PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of preferred stock, $0.0001
par value per share. The Company's Board of Directors has the authority to amend
the Company's Articles of Incorporation, without further stockholder approval,
to designate and determine, in whole or in part, the preferences, limitations
and relative rights of the preferred stock before any issuance of the preferred
stock and to create one or more series of preferred stock.
Series A Preferred Stock
The Company initially designated 20,000 shares of preferred stock as Series A
10% Convertible Non-Voting Preferred Stock. As of June 30, 2001, there are
22,288 shares of Series A preferred stock outstanding including 1,692 shares
under a subscription receivable. 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
$200 per share, payable in cash or in additional shares of Series A preferred
stock at the discretion of the Board of Directors; provided, that if accrued
dividends are paid in additional shares of Series A preferred stock, no
dividends shall accrue on these shares. Dividends are cumulative and accrue from
the date of original issuance. The Series A preferred stock is entitled to a
liquidation preference of $2.00 per share plus unpaid dividends multiplied by
133 percent.
On March 30, 2001, the Board of Directors approved an amendment of the rights
and preferences of the Series A preferred stock to revise the conversion rate to
be a fixed rate of 370 shares of common stock for each share of Series A
preferred stock from a previous formula-based conversion ratio. This revision in
the conversion ratio resulted in the Company recording a beneficial commission
amount of $1,859,283. Additionally the Board of Directors increased the
designated number of shares of Series A preferred stock from 20,000 shares to
30,000 shares.
During the nine months ended June 30, 2001, the Company issued 6,150 shares of
Series A preferred stock. Of these shares, 2,675 were issued in connection with
the conversion of $535,000 of borrowings under a line of credit arrangement (see
Note 4), 2,475 were issued to two directors of the Company in connection with
the extinguishment of $495,000 in operating liabilities and 1,000 were issued
for services provided to the Company by two directors of the Company. During the
nine months ended June 30, 2001, the Company recorded $590,750 related to the
beneficial conversion feature of the Series A preferred stock issued in
connection with the extinguishment of certain operating liabilities and services
provided to the Company. The beneficial conversion feature associated with the
shares issued in connection with the extinguishment of borrowings under a line
of credit arrangement was recorded as interest expense at the time of the
borrowings.
Series B Preferred Stock
On June 7, 2001, the holders of the Company's Series A preferred stock approved
the designation of a new series of preferred stock, the Series B Convertible
preferred stock, previously approved by the Board of Directors. Because the
7
Series B preferred stock carries voting rights as described below, the approval
of the holders of a majority of the issued and outstanding shares of the
Company's Series A preferred stock was required.
The Company will not pay dividends on the Series B preferred stock unless
dividends are declared by the Board of Directors in which case the Series B
preferred stock would be paid dividends prior and in preference to any
declaration or payment of any dividend on the common stock, and subject to the
preferences of the holders of the Series A preferred stock. The holders of
Series B preferred stock are entitled to a liquidation preference of $3.00 per
share, plus all accrued and unpaid dividends. For purposes of this liquidation
preference, the Series A preferred stock ranks on a parity with the Series B
preferred stock. Holders of shares of Series B preferred stock are entitled to
one vote per share of Series B preferred stock on all matters upon which holders
of the common stock of the Company are entitled to vote. The Company may redeem
the Series B preferred stock at its option at any time. The redemption price
will be a minimum of 110% of the conversion price at the date of redemption.
Each share of Series B preferred stock is convertible at any time at the option
of the holder into shares of common stock at an initial rate of $3.00 per share
of common stock. Each share of Series B preferred stock will automatically
convert into shares of common stock at the then effective conversion rate on the
closing of a firm commitment underwritten public offering with an aggregate
public offering price of not less than $20,000,000. If, with certain limited
exceptions, the Company issues any shares of common stock or securities
convertible into common stock without consideration or for a consideration per
share less than the conversion rate in effect immediately prior to the issuance
of those shares, the conversion rate will automatically be adjusted to a price
equal to the aggregate consideration received by the Company for that issuance
divided by the number of shares of common stock so issued.
(7) COMMON STOCK, COMMON STOCK OPTIONS AND WARRANTS
-----------------------------------------------
During the nine months ended June 30, 2001, the Company issued 650,000 shares of
common stock for services provided to the Company. Of this amount, 200,000
shares were issued to a director and 450,000 shares were issued to third
parties.
During the nine months ended June 30, 2001, the Company issued an additional
229,175 shares of common stock in satisfaction of requirements of the original
divestiture of the Company from Biomune Systems, Inc.
During the nine months ended June 30, 2001, the Company issued options to
purchase 1,960,000 shares of common stock at a weighted average exercise price
of $1.61 per share. The options expire five years from the date of issuance and
1,660,000 vested on the date of issuance. Of the options issued, 350,000 were
issued to third parties for services and have a weighted average exercise price
of $4.43 per share. The remaining 1,610,000 options were granted to individuals
who were either employees or directors of the Company and have a weighted
average exercise price of $1.00 per share, the estimated fair market value of
the Company's common stock on the date of grant.
At June 30, 2001, there were outstanding options and warrants to purchase
4,120,500 shares of common stock. Approximately 500,500 of the options were
granted in connection with options to purchase Biomune common stock outstanding
at the time of the Company's divestiture from Biomune Systems, Inc. The holders
of the Biomune options were also granted options to purchase RemoteMDx common
stock.
8
(8) NET LOSS PER COMMON SHARE
Basic net loss per common share ("Basic EPS") excludes dilution and is computed
by dividing net loss by the weighted average number of common shares outstanding
during the period. Diluted net loss per common share ("Diluted EPS") reflects
the potential dilution that could occur if stock options or other contracts to
issue common stock including convertible preferred stock were exercised or
converted into common stock. The computation of Diluted EPS does not assume
exercise or conversion of securities that would have an anti-dilutive effect on
net loss per common share. As of June 30, 2001, there were outstanding common
stock equivalents for 14,180,430 shares of common stock that were not included
in the computation of Diluted EPS as their effect would have been anti-dilutive,
thereby decreasing the net loss per common share.
(9) SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the nine months ended June 30, 2001, the Company recorded dividends on
and beneficial conversion features of preferred stock of $2,660,303 and issued
2,675 shares of Series A preferred stock in exchange for an extinguishment of
$535,000 of borrowings under a line of credit.
During the nine months ended June 30, 2000, the Company recorded preferred stock
dividends of $192,778 and reduced notes payable by $276,149 and accrued interest
by $30,051 in satisfaction of a preferred stock subscription.
(10) SUBSEQUENT EVENTS
Acquisition of SecureAlert II, Inc.
Effective July 1, 2001, the Company entered into a merger agreement to acquire
SecureAlert II, Inc. (SecureAlert), a Tennessee corporation engaged in the
business of manufacturing and selling home and personal security devices and
other communication devices. Under the merger agreement, SecureAlert merged with
and into SecureAlert Incorporated, a wholly owned subsidiary of the Company. The
fixed consideration for the acquisition consisted of an aggregate of 1,433,333
shares of common stock and a total of $1,400,000 in cash. Of the fixed
consideration, 233,333 shares and $200,000 in cash were delivered upon signing
the merger agreement on July 2, 2001. The remaining 1,200,000 shares and
$1,200,000 in cash will be delivered on the last day of each of six successive
calendar quarters beginning September 30, 2001. As contingent consideration for
the acquisition, the Company agreed to grant warrants to purchase up to an
aggregate of 1,000,000 shares of common stock to four former officers and
directors of SecureAlert. The warrants have an exercise price of $3.00 per share
and are exercisable over five years from the date of vesting. Vesting will occur
on the date that SecureAlert Incorporated achieves $20,000,000 in aggregate
gross revenues for the two-year period commencing on July 1, 2001. The number of
shares issuable upon exercise of the warrants will be decreased by the amount
that gross revenues are less that $20,000,000 divided by $3.00 per share. In
addition, if SecureAlert Incorporated has a loss for the two-year period, the
number of shares issuable upon exercise of the warrants will be decreased at the
rate of one share for every $3.00 of loss incurred.
If and whenever during the two year period following July 1, 2001, the Company
issues or sells any shares of common stock for consideration which is less than
$3.00 per share, then immediately after any such issue or sale, the number of
shares issuable to the former SecureAlert stockholders as part of the merger
consideration shall be adjusted. The adjustment shall be that the price per
share of the shares included in the merger consideration shall be reduced to an
amount equal to the per share consideration received by the Company upon the
issue or sale, and additional shares shall be issued so that the aggregate fair
market value of the shares issued as merger consideration shall equal
$4,299,999.
At the time of closing, the Company assumed two promissory notes payable to two
individuals each in the original principal amount of $250,000. The note holders
individually have the right at any time until July 2, 2002, to convert their
individual notes into 83,333 shares of the Company's common stock, or to be paid
$250,000 on July 2, 2002. The Company will pay interest on the promissory notes
until July 2, 2002 or the date the notes are converted into shares of the
Company's common stock, whichever occurs first.
9
The acquisition will be accounted for in accordance with Statement of Financial
Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS No. 142
"Goodwill and Other Intangible Assets," both of which were issued in June 2001.
SFAS No. 141 requires that all acquisitions after June 30, 2001 be accounted for
as purchases and SFAS No. 142 requires that goodwill not be amortized, but be
subject to a periodic test of impairment.
Following the merger, the Company entered into employment agreements with three
of the former SecureAlert officers and directors.
On August 3, 2001, the Company repaid $1,700,000 on a Secure Alert line of
credit with Sun Trust Bank East Tennessee and issued 200,000 shares of common
stock to the stockholders of Secure Alert II, Inc.
Corporate Name Change
On July 27, 2001, the stockholders approved an amendment to the articles of
incorporation to change the corporate name of the Company from Volu-Sol, Inc. to
RemoteMDx, Inc.
Series B Preferred Stock
On July 31, 2001, the Company closed the minimum of 666,667 shares ($2,000,000
gross proceeds) under a private placement of up to $5,000,000 of its Series B
preferred stock. Of the minimum amount, $1,200,000 was invested by affiliates of
the Company, including officers and directors, in exchange for 400,000 shares.
The Company paid placement agent fees of $210,000 and granted warrants to the
placement agent for the purchase of 53,333 shares of Series B preferred stock at
a price of $3.00 per share in connection with the private placement.
Option Exercises
On August 6, 2001, two directors and executive officers of the Company each
exercised options previously granted to them, to purchase 225,000 shares of
common stock of the Company for $1.00 per share. The exercise price was paid by
reduction of the line of credit to an entity owned and controlled by an
individual who is a major stockholder and a director.
10
Item 2 - Management's Discussion and Analysis or Plan of Operation
Introduction
The Company was incorporated in Utah on July 27, 1995, as a wholly
owned subsidiary of Biomune Systems, Inc., a Nevada corporation ("Biomune").
RemoteMDx engages in the business of manufacturing and marketing medical
diagnostic stains and solutions and related equipment. Through the fiscal year
ended September 30, 1995, RemoteMDx operated out of leased facilities in
Henderson, Nevada. In October 1995, the Company relocated to West Valley City,
Utah, where its manufacturing facility and corporate offices are presently
located.
A total of 422,244 shares of the Company's common stock were initially
distributed pro rata as a stock dividend to the holders of the common stock of
Biomune in 1997 (the "Distribution"). Subsequent to 1997, through June 30,
2001, the Company issued an additional 832,225 shares of common stock as part
of the Distribution, in satisfaction of the requirements of the divestiture. As
a consequence of the Distribution, RemoteMDx ceased to be a subsidiary of
Biomune and commenced operations as a separate, independent company. RemoteMDx
continues to conduct the operations it conducted as a subsidiary of Biomune.
The Company's management has recently developed a new business plan to broaden
the business emphasis of the Company to include remote medical diagnostics and
medical alert technologies and services.
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 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," "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, 2000.
Business Strategy
Until recently, RemoteMDx's primary business strategy has been to
capitalize on the global medical diagnostic industry by providing "building
block" stains and reagents and to grow through the selective acquisition of
complimentary businesses, devices and product lines. Management recently
determined to pursue a more expanded role in the medical diagnostic industry.
The new business strategy of the Company is outlined in greater detail below.
New Business Direction
RemoteMDx's management has determined to expand the scope of the
Company's operations to develop products that provide a powerful way to manage
patient medical information and to link patients, physicians and payors. The
Company will continue to conduct its medical stains and solutions business under
the Volu-Sol(TM) name and will operate its remote health monitoring and
diagnostic business under the name RemoteMDx(TM).
The Company believes that its management team has a breadth of
experience and knowledge in the medical diagnostic arena needed to pursue
development of new technologies in the medical device and electronics fields.
Under the RemoteMDx brand, the Company will introduce the "ROSE System(TM)"-- a
family of healthcare monitoring and remote diagnostic products and services,
which will position the Company in a market with high growth and profitability
potential. The Company is developing the ROSE System TM to compete in the home
healthcare and telemedicine markets. The Company estimates this market to be
approximately $100 billion annually, based on industry publications. The ROSE
System TM combines innovative hardware and software technologies with a powerful
medical data capture and communication network.
11
The new business model is based on providing solutions to some of the
most substantial problems in healthcare today. This new product is intended to
provide patients power to decide when and where they have their "examination"
while providing physicians with increased flexibility and efficiency in
diagnosis.
The healthcare market provides a significant opportunity for the
Company to create new products and services that improve the quality and cost of
care given. According to industry reports, total healthcare expenditures in the
United States for 1998 were in excess of $1 trillion (14% of the gross domestic
product). Expenditures are projected to grow to $2 trillion by 2007 (17% of the
gross domestic product).
The Company has formed a strategic alliance with Battelle Memorial
Institute ("Battelle"), a not-for-profit research organization, to collaborate
with the Company to develop the ROSE Acute Diagnostic System. The Company
anticipates that it will continue to use Battelle to collaborate on development
and design for the foreseeable future. The Company anticipates that after its
products have been introduced it will continue to refine and develop
enhancements to the products, as well as look for opportunities for future
product offerings.
Battelle has completed a demonstration unit with core components of the
ROSE Acute Diagnostic system. The Company will continue to revise the
demonstration model as product development continues.
Collaborative Relationships
In addition to its relationship with Battelle, the Company intends to
continue to form strategic alliances with industry leaders to achieve and
fulfill its business plan. The Company has two additional areas in which the
Company believes strategic alliances will enhance its ability to compete. These
areas include, (1) product marketing, distribution and access to patient markets
and (2) data transfer and processing.
In order to enhance its marketing strength and augment its distribution
channels, the Company is in the process of developing marketing and distribution
alliance partners for its products and services. The Company is currently in
contact with Veterans Affairs and regional HMO/PPO organizations with
significant networks of physicians and patients. The Company is exploring an
alliance with HMO/PPO organizations and other organizations for testing and
receiving input on the final technology design of its products. RemoteMDx is
also in the process of evaluating acquisitions that would fit strategically with
the product development and distribution plans of the Company.
The Company anticipates that these additional strategic alliance
partners would provide the following:
o A consortium of providers, specific to chronically ill care,
to act as a focus group on product definition matched to
specific care areas.
o The opportunity to conduct prototype review and gain
decision-making input into final technology design for test
markets.
o Sites to conduct trials, to establish protocols, to track
outcomes and to act as early-adopter organizations for
acquiring the technology.
o Access to significant channels of distribution.
Results of Operations
Comparison of the Three Months Ended June 30, 2001 to the Three Months Ended
June 30, 2000.
During the three months ended June 30, 2001, the Company's revenues
totaled $128,500 compared to $119,724 for the three months ended June 30, 2000.
Revenues have remained constant due to maintaining a customer base similar to
that in the prior year period. The Company is not aggressively marketing its
reagent product line, which accounts for substantially all revenues, due to the
focus on its new business direction.
12
Cost of revenues for the three months ended June 30, 2001 totaled
$108,969 compared to $44,944 for the three months ended June 30, 2000. The
overall gross margin for the quarter ended June 30, 2001 was approximately 15%
of revenues compared to 62% of revenues for the comparable quarter in 2000. This
deterioration of gross margin on sales is primarily the result of increased
salaries, wages and related expenses. The decrease in the gross margin is also a
result of an increase in allocable overhead expenses.
Research and development expenses totaled $81,043 for the three months
ended June 30, 2001 compared to $1,053,670 for the three months ended June 30,
2000, an overall decrease of $972,627. Prior years research and development
expenditures were a result of management's decision to enter a new market. The
result of this decision was unusually large expenditures in the research and
development area. Current year research and development expenditures reflect a
more consistent and predictive approach to research and development as compared
to prior years costs.
Selling, general and administrative expenses totaled $802,785 for the
three months ended June 30, 2001, compared to $465,504 for the three months
ended June 30, 2000, an overall increase of $337,281. The increase is due to the
increase in the number of employees and related expenses as the Company pursues
a more expanded role in the medical diagnostic market.
Interest expense totaled $670,619 during the three months ended June
30, 2001. Of this amount, $637,500 related to the beneficial conversion feature
of borrowings under a line of credit agreement with an entity controlled by an
individual who is a major stockholder and a director.
The Company incurred a net loss applicable to common stockholders of
$1,590,877 ($0.45 per share) for the three months ended June 30, 2001, compared
to a net loss applicable to common stockholders of $1,510,287 ($1.00 per share)
for the three months ended June 30, 2000. This increase in net loss is
attributable to selling, general and administrative expenses and; interest
expenses as discussed above.
Comparison of the Nine Months Ended June 30, 2001 to the Nine Months Ended June
30, 2000.
During the nine months ended June 30, 2001, the Company's revenues
totaled $384,245, compared to $376,458 for the nine months ended June 30, 2000.
Revenues have remained constant due to maintaining a customer base similar to
that in the prior year period. The Company is not aggressively marketing its
reagent product line, which accounts for substantially all revenues, due to the
focus on its new business direction.
Cost of revenues for the nine months ended June 30, 2001, totaled
$267,544 compared to $210,088 for the nine months ended June 30, 2000. The
overall gross margin for the nine months ended June 30, 2001, was approximately
30% of revenues compared to 44% of revenues for the comparable period in fiscal
year 2000. The deterioration in the gross margin on sales is primarily the
result of increased salaries, wages, and related overhead expenses.
Research and development expenses totaled $263,612 for the nine months ended
June 30, 2001 compared to $1,053,670 for the nine months ended June 30, 2000, an
overall decrease of $790,058. Prior year's research and development expenditures
were a result of management's decision to enter a new market. The result of this
decision was unusually large expenditures in the research and development area
Selling, general and administrative expenses totaled $2,796,845 for the
nine months ended June 30, 2001, compared to $1,714,805 for the nine months
ended June 30, 2000, an overall increase of $1,082,040. The increase is due to
the increase in the number of employees and related expenses as the Company
pursues a more expanded role in the medical diagnostic industry.
Interest expense totaled $1,138,419 during the three months ended June
30, 2001. Of this amount, $1,092,250 related to the beneficial conversion
feature of borrowings under a line of credit agreement with an entity controlled
by an individual who is a major stockholder and a director.
13
The Company incurred a net loss applicable to common stockholders of
$6,737,164 ($2.08 per share) for the nine months ended June 30, 2001, compared
to a net loss applicable to common stockholders of $2,783,124 ($2.87 per share)
for the nine months ended June 30, 2000.
During the nine months ended June 30, 2001, the Company amended the
conversion rights and preferences of the Series A Preferred Stock. The amendment
was approved by the board of directors of the Company and by vote of a majority
of the outstanding shares of Series A Preferred Stock. Under the amendment,
holders of the Series A Preferred Stock may convert, at their option, one share
of Series A Preferred Stock to 370 shares of common stock. Based on the new
conversion rate, a beneficial conversion feature of $1,859,283 was recorded as a
preferred stock dividend.
Liquidity and Capital Resources
The Company is unable to finance its operations solely from its cash
flows from operating activities. From October 1, 1993 through June 30, 1999,
Biomune financed the Company's operations through a series of loans and other
capital contributions totaling approximately $2,900,000. The Company also sold
shares of Series A Preferred Stock to provide additional working capital.
The Company believes that cash generated by operating activities,
together with the proceeds from additional sales of its debt or equity
securities will be sufficient to meet its capital requirements for a minimum of
twelve months. However funds from debt or equity sales may not be available.
As of June 30, 2001, the Company had cash of $76,016 and a working
capital deficit of $1,661,558, compared to cash of $516,243 and a working
capital deficit of $560,667 as of September 30, 2000.
During the nine months ended June 30, 2001, the Company's operating
activities used cash of $1,524,458 much of which was funded by the issuance of
convertible debentures and a related-party note payable. During the nine months
ended June 30, 2000, the Company's operating activities used cash in the amount
of $1,493,880, which was funded by the sale of Series A Preferred Stock.
The Company has no credit facility with any commercial lending
institution. In the past, the Company borrowed and received capital from time to
time from Biomune, but the Company has no continuing arrangement with Biomune.
During the nine months ended June 30, 2001, the Company entered into a line of
credit arrangement with ADP Management, an entity controlled by a major
stockholder, by which the Company may borrow up to $3,000,000. Borrowings bear
interest at prime, which was 7% at June 30, 2001, mature December 31, 2001, and
are convertible into shares of Series A Preferred Stock at a rate of one share
of Series A Preferred Stock for each $200 of outstanding loan balance converted.
The Company was required to pay off the $545,000l of convertible
debentures on or before August 1, 2001, but was uable to do so. The Company is
currently negotiation the conversion, esxtension or payment of these debentures.
Subsequent to June 30, 2001, the Company raised approximately $2,000,000
under a private placement of preferred stock. lIn addition, the Company closed
on its acquisition of Secure Alert II, Inc. and repaid $1,700,000 on a Secure
Alert II, line of credit (See Item 5. Other Information).
The unaudited condensed consolidated financial statements of the
Company have been prepared on the assumption that the Company will continue as a
going concern. The Company's product line is limited and the Company has relied
upon borrowings and financing from the sale of its debt and equity securities to
sustain operations. Additional financing will be required if the Company is to
continue as a going concern. If such additional funding cannot be obtained, the
Company may be required to scale back or discontinue its operations. Even if
such additional financing is available to the Company, there can be no assurance
that it will be on terms favorable to the Company. In any event, such financing
will result in immediate and substantial dilution to existing stockholders.
Forward-looking Statements and Certain Risk Factors
Statements which are not historical facts contained in this report are
forward-looking statements. Section 27A of the Securities Act of 1933, as
amended, provides a safe harbor for forward-looking statements. In order to
comply with the terms of the safe harbor, the Company cautions that a variety of
factors could cause its actual results to differ materially from anticipated
results or other expectations expressed in this report. The forward-looking
statements contained in this Management's Discussion and Analysis or Plan of
14
Operation also contemplate a number of risks and uncertainties that could cause
actual results to differ from projected or anticipated results. The risk factors
discussed in Part I, Item 1 ("Business") and in "Management's Discussion and
Analysis or Plan of Operation" (Item 6) of the Company's Annual Report on Form
10-KSB for the fiscal year ended September 30, 2000, may also affect actual
operating results.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The following information sets forth certain data for all securities of
the Company sold during the quarter ended June 30, 2001, without registration
under the Securities Act. During the quarter ended June 30, 2001, the Company
issued 259,823 shares of common stock for services. The offer and sale of these
securities were believed exempt from registration under the Securities Act and
state "blue sky" laws and regulations pursuant to exemptions under those laws
relating to offers and sales made to accredited investors in private
transactions. These shares were restricted shares and their sale or transfer by
the recipients are subject to restrictions under applicable federal and state
securities laws, including the registration requirements of those laws.
Item 4. Submission of Matters to a Vote of Security Holders
Series B Preferred Stock
On June 7, 2001, the holders of the Company's Series A Preferred Stock
approved the designation of a new series of preferred stock, the Series B
preferred stock. The board of directors previously had approved the Series B
preferred stock. Because the Series B preferred stock carries voting rights as
described below, the approval of the holders of a majority of the issued and
outstanding shares of the Company's Series A Preferred Stock was required. No
approval of holders of the Company's common stock is required to designate new
series of preferred stock or to amend the rights and preferences of existing
series of preferred stock. The Board submitted the matter to the holders of the
Series A Preferred Stock and requested their written consent to the measure. A
total of 15,567.19 shares (approximately 70%) of the total number of issued and
outstanding Series A Preferred Stock consented and voted in favor of
ratification of the designation of the Series B preferred stock. No shares were
voted against the measure.
The following summary should be read together with the information
contained in the exhibits to this report for a complete description of the
rights and preferences of the Series B Preferred Stockholders.
Dividends. The Company will not pay dividends on the Series B preferred
stock unless dividends are declared by the board of directors out of legally
available assets, in which case the Series B preferred stock would be paid
dividends prior and in preference to any declaration or payment of any dividend
on the common stock, and subject to the preferences of the holders of the Series
A Preferred Stock.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of Series B
preferred stock are entitled to receive out of the assets of the Company
available for distribution to stockholders before any distribution or payment is
made to holders of shares of common stock, or to holders of any other shares of
the Company ranking junior upon liquidation to the Series B preferred stock,
liquidation distributions in the amount of $3.00 per share, plus all accrued and
unpaid dividends, if any, before any payment is made to holders of shares of the
Company's equity securities that are junior to the Series B preferred stock. If
upon any voluntary or involuntary liquidation, dissolution or winding up of the
Company, the assets of the Company are insufficient to pay in full the
liquidation preference of the Series B preferred stock and any other class of
shares ranking on a parity with the Series B preferred stock upon liquidation,
then the holders of the Series B preferred stock and any such other class of
shares will share ratably in any such distribution of assets of the Company in
proportion to the full respective distributable amounts to which they are
entitled. For purposes of this liquidation preference, the Series A Preferred
Stock ranks on a parity with the Series B preferred stock.
15
After payment to the holders of the Series B preferred stock of the
amounts set forth above, the entire remaining assets and funds of the Company
legally available for distribution, if any, shall be distributed first to the
holders of common stock then actually outstanding at the rate of $3.00 per
share, with the remainder being distributed to the holders of Series B preferred
stock and the holders of common stock then actually outstanding, with the Series
B preferred stockholders participating on the basis of the number of shares they
would be entitled to receive if they were to convert their shares of preferred
stock into shares of common stock at that time; subject, however, to the prior
distribution to the holders of any senior series of preferred stock of amounts
owing under the terms of the rights and preferences governing such senior
securities.
A consolidation or merger of the Company with or into any other
corporation or corporations, or a sale of all or substantially all of the
assets of the Company that does not involve a distribution by the Company of
cash or other property to the holders of shares of common stock, will be deemed
to be a liquidation, dissolution or winding up of the Company for purposes of
the liquidation preference.
Voting Rights. Holders of shares of Series B preferred stock are
entitled to one vote per share of Series B preferred stock on all matters upon
which holders of the common stock of the Company are entitled to vote. In
addition, without the approval of holders of a majority of the outstanding
shares of Series B preferred stock voting as a class, the Company is prohibited
from (i) authorizing, creating or issuing any shares of any class or series
ranking senior to the Series B preferred stock as to liquidation rights; (ii)
amending, altering or repealing our articles of incorporation if the powers,
preferences or special rights of the Series B preferred stock would be
materially adversely affected; or (iii) becoming subject to any restriction on
the Series B preferred stock other than restrictions arising solely under the
Utah Act or existing under our articles of incorporation as in effect on June 1,
2001.
Conversion. Each share of Series B Preferred Stock is convertible at
any time into shares of common stock. The number of shares of common stock into
which each share of Series B Preferred Stock may be converted (the "Conversion
Rate") is determined by dividing the original purchase price paid per share of
Series B Preferred Stock, namely $3.00, by the "Conversion Price," which will
initially be $3.00 but is subject to antidilution adjustment (see below). Each
share of Series B Preferred Stock will automatically convert into shares of
common stock at the then effective Conversion Rate on the closing of a firm
commitment underwritten public offering with an aggregate public offering price
of not less than $20,000,000.
Antidilution Protections. If, with certain limited exceptions, the
Company issues any shares of common stock or securities convertible into common
stock without consideration or for a consideration per share less than the
Conversion Price in effect immediately prior to the issuance of those shares,
the Conversion Price in effect immediately prior to each such issuance will
automatically be adjusted to a price equal to the aggregate consideration
received by the Company for that issuance divided by the number of shares of
common stock so issued.
If the number of shares of common stock outstanding is increased by a
stock dividend payable in shares of common stock or by a subdivision or split-up
of shares of common stock, or is decreased by a combination of the outstanding
shares of common stock, the Conversion Price will be appropriately adjusted.
If the Company makes a dividend or other distribution payable in
securities of the Company other than shares of common stock (and excluding the
payment of dividends on the Series A Preferred Stock and the Series B Preferred
Stock that are paid by issuing additional shares of the same series), the
holders of the Series B Preferred Stock will be entitled to receive upon
conversion, in addition to shares of common stock to which they are otherwise
entitled, the amount of other securities of the Company that they would have
received had the Series B Preferred Stock been converted into common stock on
the date of distribution and had they thereafter, during the period from the
date of that event to and including the conversion date, retained those
securities.
If the common stock is changed into the same or a different number of
shares of any class or classes of stock, whether by recapitalization,
reclassification or otherwise (other than a subdivision or combination of shares
or stock dividend or a reorganization, merger or consolidation of the sort
referred to in the following paragraph), each holder of Series B Preferred Stock
will be entitled to convert those shares into the kind and amount of stock and
other securities or property receivable in connection with that
recapitalization, reclassification or other change with respect to the maximum
16
number of shares of common stock into which those shares of Series B Preferred
could have been converted immediately prior to that recapitalization,
reclassification or change.
Redemption. The Company may redeem the Series B Preferred Stock at its
option at any time. The redemption price will be a minimum of 110% of the
conversion price at the date of redemption.
Corporate Name Change
On June 12, 2001, the board of directors approved an amendment to the
articles of incorporation to change the corporate name of the Company from
Volu-Sol, Inc. to RemoteMDx, Inc. The board also recommended the name change to
the stockholders of the Company and requested written consents to approve the
measure. On July 27, 2001, the name change amendment was approved by the written
consent of stockholders holding 2,472,894 shares of the Company's common stock,
or approximately 65% of the 3,820,421 shares outstanding. No shares were voted
against the measure.
Amendment to Rights and Preferences of Series A Preferred Stock
On June 12, 2001, the directors and holders of a majority of the issued
and outstanding Series A Preferred Stock approved an amendment to the
designation of rights and preferences of the Series A Preferred Stock, fixing
the conversion rate at 370 shares of common stock for each share of Series A
Preferred Stock. The amendment was consented to by the current holders of
11,928.76 shares (approximately 54% of the 22,288 shares issued and outstanding
including 1,692 shares under a subscription receivable).
Item 5. Other Information
Recent Developments
On July 31, 2001, the Company closed the minimum of 666,667 shares
($2,000,000 gross proceeds) under a private placement of up to $5,000,000 of its
Series B Preferred Stock. Of the minimum amount, $735,000 was invested by
affiliates of the Company, including officers and directors, in exchange for
245,000 shares. The rights and preferences of the Series B Preferred Stock are
described in greater detail under Item 4, above. The Company paid its placement
agent, Investec Ernst & Co., fees of $210,000 and granted warrants to Investec
for the purchase of 53,333 shares of Series B Preferred Stock at a price of
$3.00 per share in connection with the offering.
Effective August 2, 2001, the Company changed its certifying
independent accountant from Tanner + Co. to Arthur Andersen LLP. This change was
approved by the Company's board of directors, as it was determined that Arthur
Andersen LLP could better serve the Company on a national and international
basis. Neither Tanner + Co.'s report on the Company's financial statements for
the year ended September 30, 2000, nor its report for the year ended September
30, 1999, contained an adverse opinion or a disclaimer of opinion, and neither
report was qualified or modified as to uncertainty, audit scope or accounting
principles, except that both reports were modified as to uncertainty regarding
the ability of the Company to continue as a going concern. During the years
ended September 30, 2000 and September 30, 1999, and the subsequent interim
periods preceding Tanner + Co.'s dismissal, there were no disagreements with
Tanner + Co. on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure which disagreements, if not
resolved to the satisfaction of Tanner + Co., would have caused Tanner + Co. to
make reference to the subject matter of the disagreement in connection with its
report.
Effective July 1, 2001, the Company closed its acquisition of
SecureAlert II, Inc., a Tennessee corporation and issued 233,333 shares to the
SecureAlert II, Inc. stockholders and made a cash payment to the stockholders of
$200,000. On August 3, 2001, the Company repaid $1,700,000 on a line of credit
with SunTrust Bank East Tennessee. Additional cash payments of $200,000 each
will be made to the stockholders on the last day of each of the next successive
six calendar quarters, beginning September 30, 2001. At the time of those cash
payments, the Company also will deliver 200,000 shares of common stock to the
stockholders, until the total cash paid to the stockholders equals $1,400,000
and the total number of shares issued to them is 1,433,333.
17
On August 6, 2001, two directors and executive officers of the Company,
James Dalton and David Derrick, each exercised options previously granted to
them, to purchase 225,000 shares of common stock of the Company for $1.00 per
share. The exercise price was paid by reduction of a note payable to an entity
owned and controlled by Mr. Derrick, ADP Management, Inc., in the amount of the
exercise price. The transaction reduced the amount outstanding on the line of
credit agreement to $300,000 as of August 20, 2001.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed with this report or incorporated
herein by reference.
Exhibit No. Description of Exhibit
3(i)(1) Amendment to Articles of Incorporation (incorporated
by reference to Definitive Proxy filed July 16, 2001.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
REMOTEMDX, INC.
Date: August 20, 2001 By: /s/ David G. Derrick
----------------------------------------
David G. Derrick, Chief Executive Officer
Date: August 20, 2001 By: /s/ Michael G. Acton
---------------------------------------
Michael G. Acton, Chief Financial Officer
S:\PINEGAR\K TO S\R\REMOTEMDX\2001 10-Q\10-Q 6-30-01\10QSB3312001.DRAFT81601.DOC