UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2003
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number 0-23153
REMOTEMDX, INC.
(Exact name of small business issuer as specified in its charter)
Utah 87-0543981
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
5095 West 2100 South
Salt Lake City, Utah 84120
(Address of principal executive offices)
(801) 974-9474
(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No []
This report is prepared for the period ended June 30, 2003, but is filed as of
November 3, 2003. As of October 15, 2003, the issuer had issued and outstanding
25,256,975 shares of common stock, par value $0.0001.
Transitional Small Business Disclosure Format (Check One): Yes __ No X
---
TABLE OF CONTENTS
Page
No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheet as of June 30, 2003..............................3
Unaudited Condensed Consolidated Statements of Operations for
the three and nine months ended June 30, 2003 and 2002..........................................4
Unaudited Condensed Consolidated Statements of Cash Flows for
the nine months ended June 30, 2003 and 2002....................................................5
Notes to Unaudited Condensed Consolidated Financial Statements..................................7
Item 2. Management's Discussion and Analysis or Plan of Operation......................................16
Item 3. Controls and Procedures........................................................................21
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds......................................................22
Item 6. Exhibits and Reports on Form 8-K...............................................................22
Signatures..............................................................................................24
2
PART I
Item 1 - Financial Statements
REMOTEMDX, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, 2003
----------------
Assets
Current assets:
Cash $ 90,263
Restricted cash 550,000
Accounts receivable, net of allowance for doubtful accounts of $233,000 80,457
Inventories 449,609
Prepaid expenses and other assets 14,103
----------------
Total current assets 1,184,432
Property and equipment, net of accumulated depreciation and amortization of $444,810 33,436
Core technology, net of accumulated amortization of $373,334 186,666
Goodwill 3,569,164
Other assets 1,372
----------------
Total assets $ 4,975,070
================
Liabilities and Stockholders' Deficit
Current liabilities:
Notes payable $ 807,942
Bank line of credit 551,475
Related-party convertible notes payable 402,620
Accounts payable 389,874
Accrued liabilities 376,411
Dividends payable 928,005
Deferred revenue 14,268
----------------
Total current liabilities $ 3,470,595
----------------
Commitments and contingencies
Redeemable common stock (See Note 7) 1,536,000
Stockholders' deficit:
Preferred stock:
Series A; 10% dividend, convertible, non-voting; $0.0001 par value; 30,000 shares
designated; 24,454 shares outstanding (aggregate liquidation preference of $1,299,443) 3
Series B; convertible; $0.0001 par value; 2,000,000 shares designated; 1,835,824 shares
outstanding (aggregate liquidation preference of $5,507,472) 184
Common stock; $0.0001 par value; 50,000,000 shares authorized, 23,151,859 shares outstanding
2,315
Additional paid-in capital 60,698,369
Deferred financing costs (165,000)
Series A preferred stock subscription receivable - due from related party (700,000)
Accumulated deficit (59,867,396)
----------------
Total stockholders' deficit (31,525)
----------------
Total liabilities and stockholders' deficit $ 4,975,070
================
See accompanying notes to unaudited condensed
consolidated financial statements.
3
REMOTEMDX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Nine months ended
June 30, June 30,
-------------------------------------------------------------------
2003 2002 2003 2002
----------------- ------------ ----------------- ----------------
Net sales $ 421,026 $ 3,029,664 $ 3,852,832 $ 7,919,434
Cost of goods sold 172,689 2,617,258 3,496,819 6,711,146
----------------- ------------ ----------------- ----------------
Gross profit 248,337 412,406 356,013 1,208,288
Research and development expenses 3,145 119,921 101,206 399,329
Selling, general and administrative expenses 1,668,966 3,329,761 4,080,754 24,243,601
Amortization of core technology 46,667 46,667 140,000 140,000
----------------- ------------ ----------------- ----------------
Loss from operations (1,470,441) (3,083,943) (3,965,947) (23,574,642)
Other income (expense):
Interest income 367 4,029 1,761 9,398
Interest expense (307,916) (654,801) (719,253) (3,540,671)
----------------- ------------ ----------------- ----------------
Net loss (1,777,990) (3,734,715) (4,683,439) (27,105,915)
Dividends on Series A preferred stock (147,080) (127,026) (452,183) (371,859)
----------------- ------------ ----------------- ----------------
Net loss attributable to common
stockholders $ (1,925,070) $(3,861,741) $ (5,135,622) $ (27,477,774)
================= ============ ================= ================
Net loss per common share - basic and diluted $ (.09) $ (.41) $ (.32) $ (3.05)
================= ============ ================= ================
Weighted average shares - basic and diluted 22,086,000 9,360,000 15,893,000 9,018,000
================= ============ ================= ================
See accompanying notes to unaudited condensed
consolidated financial statements.
4
REMOTEMDX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
June 30,
------------------------------------
2003 2002
----------------- -----------------
Cash flows from operating activities:
Net loss $ (4,683,439) $ (27,477,744)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 191,784 228,741
Amortization of discount on purchase obligation to former 5,825 66,753
SecureAlert shareholders
Amortization of deferred consulting and financing costs 385,000 384,929
Interest expense related to preferred stock issuances associated
with borrowings under related-party line of credit - 2,341,465
Common stock issued for services 1,180,961 528,107
Preferred stock issued to related party for services - 2,324,341
Redeemable common stock issued for services - 315,000
Common stock options issued for services primarily to related party 274,777 16,755,871
Loss on production equipment charged to research costs 70,761 -
Changes in operating assets and liabilities:
Accounts receivable, net 539,689 (582,521)
Inventories 391,048 (696,864)
Prepaid expenses (1,991) (10,210)
Accounts payable (292,452) 1,289
Accrued liabilities 122,945 (510,515)
Deferred revenue (67,162) (15,731)
----------------- -----------------
Net cash used in operating activities (1,882,254) (5,975,260)
----------------- -----------------
Cash flows used in investing activities:
purchase of property and equipment (2,345) (87,452)
----------------- -----------------
----------------- -----------------
Cash flows from financing activities:
Payments on purchase obligations to former SecureAlert shareholders - (800,000)
Net (payments) borrowings under related-party line of credit (644,065) 1,328,150
Net borrowings on bank line of credit 254,862 1,256,413
Borrowings under short-term notes payable 1,440,908 3,168,974
Payment on short-term notes payable (217,853) (1,389,042)
Payment on related party convertible notes payable (97,380) -
Proceeds from issuance of redeemable common stock 250,000 96,000
Proceeds from issuance of common stock 937,000 -
Proceeds from issuance of Series B preferred stock, net of cash offering costs - 3,366,273
----------------- -----------------
Net cash provided by financing activities 1,923,472 7,026,768
----------------- -----------------
Net increase in cash 38,873 964,056
Cash, beginning of period 51,390 59,977
----------------- -----------------
Cash, end of period $ 90,263 $ 1,024,033
================= =================
See accompanying notes to unaudited condensed
consolidated financial statements.
5
REMOTEMDX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
Nine Months Ended
June 30,
-------------------------------------------
2003 2002
(Unaudited) (Unaudited)
-------------------------------------------
Cash paid for interest and taxes:
Cash paid for income taxes $ - $ -
Cash paid for interest $ 127,930 $ 243,750
Supplemental schedule of non-cash investing and financing activities:
Issuance of shares of common stock in exchange
for shares of Series A preferred stock 65 226
Common stock exchanged for redeemable common stock - 120,000
Debt exchanged for redeemable common stock 725,000 -
Common stock issued for deferred consulting and financing services 150,000 348,000
Common stock issued for conversion of debt and accrued interest 442,750 -
Reduction of related party line-of-credit in exchange for
exercise of common stock options 73,279 434,700
Accrual of Preferred Series A stock dividends 452,182 371,859
Deferred financing costs paid for by issuance of redeemable
common shares 45,000 375,000
Series A convertible debentures and related interest of
$12,314 converted into shares of common stock - 107,314
Series A preferred stock issued for accrued dividends 17,374 -
Sale of assets in exchange for assumption of liabilities and return
of common shares detailed as follows:
Accounts payable and accrued liabilities assumed (488,410) -
Bank line-of-credit assumed (300,000) -
Obligation to SecureAlert relieved (400,000) -
Accounts receivable sold 370,501 -
Inventory sold 539,706 -
Property and equipment, net of $80,331 accumulated
Depreciation sold 183,484 -
Common stock returned (401,952 shares) 94,719 -
Assumption of debt and liabilities by related party for common stock:
Short-term notes payable assumed by related party (800,000) -
Subscription receivable assumed by related party (361,700) -
Related party line-of-credit assumed by related party (2,374,231) -
Common stock issued 4,381,289 -
Consulting expense recognized (845,358) -
Refinancing of short-term debt into related party line of credit
detailed as follows:
Short-term notes payable refinanced into related party line of credit (1,086,628) -
Bank line-of-credit refinanced into related party line of credit (503,387) -
Related party line-of-credit increase 2,140,015 -
Restricted cash received in exchange for increase in related
party line of credit 550,000 -
See accompanying notes to unaudited condensed
consolidated financial statements.
6
REMOTEMDX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RemoteMDx, Inc. was originally incorporated in Utah in July 1995 under the name
Volu-Sol, Inc. ("Volu-Sol"), as a wholly owned subsidiary of Biomune Systems,
Inc. ("Biomune"). Biomune spun off Volu-Sol by distributing shares of Volu-Sol's
common stock as a stock dividend to the holders of the common stock of Biomune
(the "Distribution"). As a consequence of the Distribution, Volu-Sol commenced
operations as a separate, independent company in October 1997. Effective July
27, 2001, Volu-Sol changed its name to RemoteMDx, Inc. RemoteMDx, Inc. and its
subsidiaries are collectively referred to as the "Company".
The Company is a medical, technology-based remote personal safety, health
monitoring and diagnostic services company. The Company creates solutions for
real-time monitoring of personal safety, security, and health needs in
conjunction with national monitoring centers.
Historically, the Company's strategy was to capitalize on the global medical
diagnostic industry by providing "building block" stains and reagents. Although
the Company continues to conduct its medical stains and solutions business, over
the past two years, management has begun to pursue a more expanded role in the
medical diagnostic industry by researching innovative ways to manage patient
medical information as well as linking patients, physicians and payors through
remote health monitoring products. Additionally, through its acquisition of
SecureAlert II, Inc. ("SecureAlert") in July 2001, the Company is engaged in the
business of manufacturing and marketing mobile emergency and personal security
systems, and distributing consumer electronics products. The Company's revenues
for the nine months ended June 30, 2003 and 2002 were generated primarily from
the sale of consumer electronics and personal security products and to a lesser
extent from medical stains and reagents.
On January 1, 2003, the Company entered into an agreement with SecureAlert
Entertainment LLC ("SAE") granting it exclusive distribution rights to the
Company's consumer electronics products to the manufactured homes marketing
channel in North America. SAE is barred from marketing or distributing products
to the Personal Emergency Response System ("PERS") and home medical or personal
health monitoring markets and is bound by a five-year post-termination covenant
against competing with the Company in any market. The agreement was subsequently
amended in June 2003 to clarify the pricing of products as well as policies
regarding the Company's responsibility for warranty service, returns, and
delivery of product; purchases are made only by submission of orders to the
Company and title to products passes upon shipment. The agreement expires
December 31, 2003. Prior to entering into this agreement, the Company recorded
sales and related cost of sales of its consumer electronics products on a gross
basis. As a result of this agreement in January 2003, the Company began
receiving a commission for all sales by SAE; therefore, from January 2003 to
June 2003, revenues were recorded on a net basis, rather than on a gross basis,
equal to the commission received. As a result of this change, the gross sales
and related cost of sales recorded from January to June 2003 declined
significantly.
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, 2002. The
results of operations for the three and nine months ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 2003.
Going Concern
The Company has reoccurring net losses, has negative cash flows from operating
activities and has a working capital deficit, a stockholders' deficit and an
7
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 and plans to enhance revenues and cash flows from its operations by
increasing selling and marketing efforts related to new and existing products
and services.
There can be no assurance that the Company will be able to raise sufficient
capital to meet its working capital needs. In addition, there can be no
assurance that the operations will generate positive cash flows and that the
Company will be economically successful from increasing selling and marketing
efforts to introduce new products into the market. Further, the Company may be
unable to complete the development and successful commercialization of any new
remote health monitoring products.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly or majority-owned subsidiaries. All significant inter-company
transactions have been eliminated in consolidation.
Stock-Based Compensation
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation.
Accordingly, no compensation cost has been recognized in the financial
statements for employees, except when the exercise price is below the market
price of the stock on the date of grant. Had compensation cost for the Company's
stock option plans been determined based on the fair value at the grant date for
awards in the periods ended June 30, 2003 and 2002 consistent with the
provisions of SFAS No. 123, the Company's approximate net loss and loss per
share would have been the pro forma amounts indicated below:
Three months ended Nine months ended
June 30, June 30,
2003 2002 2003 2002
--------------- -------------- -------------- ----------------
Net loss - as reported $ (1,777,990) $ (3,734,715) $ (4,683,439) $ (27,105,915)
Deduct total stock based
employee compensation expense
determined under fair value
based method for all awards,
net of related taxes (68,310) (2,145,814) (68,310) (3,191,011)
--------------- -------------- -------------- ----------------
Net loss - pro forma $ (1,846,300) $ (5,880,529) $ (4,643,147) $ (30,668,785)
--------------- -------------- -------------- ----------------
Basic and diluted net loss per common share -
as reported $ (0.09) $ (0.41) $ (0.32) $ (3.05)
--------------- -------------- -------------- ----------------
Basic and diluted net loss per common share -
pro forma $ (0.09) $ (0.63) $ (0.32) $ (3.40)
--------------- -------------- -------------- ----------------
8
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes Option Pricing Model with the following assumptions:
Three and Nine Months Ended
June 30,
----------------------------------
2003 2002
---------------- ----------------
Expected dividend yield - -
Expected stock price volatility 146% 110%
Risk-free interest rate 4.75% 6%
Expected life of options 5 years 5 years
The weighted average fair value of options and warrants granted during the nine
months ended June 30, 2003 and 2002, were $2.14 and $1.58, respectively.
Impairment of Long-Lived Assets
Goodwill is not amortized but is subject to an impairment test, which is
performed at least annually. Goodwill is related to the acquisition of
SecureAlert in July 2001. The Company tests goodwill for impairment at least
annually or when changes in circumstances may indicate impairment. Impairment is
measured by comparing the carrying value of the component unit to which goodwill
is assigned, namely the assets of its wholly owned subsidiary SecureAlert, Inc.
to the estimated fair value of the component unit using an income approach
method of estimated future cash flows. The estimated future cash flows include
those primarily related from mobile medical alert devices of the component unit.
If the carrying amount of the component unit including goodwill is determined to
exceed the estimated fair value of the component unit then an impairment is
recorded as the difference between the carrying value and the fair market value.
The Company reviews its long-lived assets, other than goodwill, for impairment
when events or changes in circumstances indicate that the book value of an asset
may not be recoverable. The Company evaluates, at each balance sheet date,
whether events and circumstances have occurred which indicate possible
impairment. The Company uses an estimate of future undiscounted net cash flows
of the related asset or group of assets over the estimated remaining life in
measuring whether the assets are recoverable
Net Loss Per Common Share
Basic net loss per common share ("Basic EPS") is computed by dividing net loss
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted net loss per common share ("Diluted EPS")
is computed by dividing net loss by the sum of the weighted-average number of
common shares outstanding and the weighted-average dilutive common share
equivalents then outstanding. The computation of Diluted EPS does not assume
exercise or conversion of securities that would have an anti-dilutive effect.
Common share equivalents consist of shares issuable upon the exercise of common
stock options and warrants, the conversion of the convertible debentures and
related accrued interest, and shares issuable upon conversion of preferred
stock. As of June 30, 2003 and 2002, there were approximately 18,086,000 and
19,732,000 outstanding common share equivalents, respectively, that were not
included in the computation of diluted net loss per common share as their effect
would be anti-dilutive.
Revenue Recognition
The Company derives its revenue primarily from the sale of consumer electronics
and reagent stains. 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.
9
(2) INVENTORIES
Substantially all items included in inventory are finished goods and consist of
the following as of June 30, 2003:
Mobile emergency and personal security systems $ 413,923
Reagent stains 35,685
----------------
$ 449,609
================
(3) NOTES PAYABLE
Notes payable outstanding at June 30, 2003 were $807,942 due to individuals.
Significant activity related to notes payable during the nine months ended June
30, 2003 were as follows:
The Company issued notes payable of $725,000 to a financing company bearing
interest in the amount of 12% and secured by the assets of the Company.
On June 30, 2003 the Company converted the notes into 483,333 common shares (at
$1.50 per share), which are redeemable at the option of the holder at $2.00 per
share after December 31, 2003 based on certain conditions.
Additional significant borrowings under short-term obligations were $335,807
from a financing company, which is also a significant shareholder, bearing
interest at 12% and unsecured; $300,000 from a relative of the Chief Financial
Officer of the Company, bearing interest at 12% and secured by 500,000 shares of
common stock. During the quarter ended June 30, 2003, these obligations were
assumed by ADP Management and converted into common stock. (See note 5.)
On April 2, 2003 in connection with a raising of equity funds for the Company,
the Company entered into an agreement with Mr. David G. Derrick ("Derrick"), the
Company's Chief Executive Officer and Chairman of the Board of Directors, and
James Dalton ("Dalton"), the Company's President and Vice Chairman of the Board
of Directors, and ADP Management Corporation (ADP Management), a company
controlled by Derrick and Dalton, whereby Dalton, Derrick and ADP Management
agreed to continue to assist the Company in its financing activities and assume
short-notes and related accrued interest of $2,613,975, including $700,000 of
which the Company has not yet been released by the holder of the note. In
addition, the Company has guaranteed $800,000 of the short-term notes assumed by
ADP Management, Dalton and Derrick (see note 5).
During the nine months ended June 30, 2003, the Company converted $400,000 of
its notes payable along with accrued interest of $42,750 into 302,668 shares of
the Company's common stock.
(4) BANK LINE OF CREDIT
During the nine months ended June 30, 2003, the Company entered into an
agreement with the former shareholders of SecrueAlert in which $300,000 of the
line of credit was assumed by them. In addition, ADP Management assumed $503,387
of the Sun Trust line of credit balance. On March 11, 2003, the remaining
balance of the SunTrust line of credit was refinanced through a note due to
Zions First National Bank. The new note bears interest at prime plus .25%,
matures on March 11, 2004, and is secured by certificates of deposit. The
balance due on the line of credit as of June 30, 2003 is $551,475.
(5) RELATED-PARTY LINE OF CREDIT
During the nine months ended June 30, 2003, in connection with a raising of
equity funds for the Company, the Company entered into an agreement with
Derrick, Dalton, and ADP Management wherein ADP Management agreed to continue to
assist the Company in its financing activities and convert all existing debt
owed to ADP Management to common stock. This debt consisted of the following:
o $709,986 of amounts owed under the ADP Management line of credit
o $550,000 in restricted cash received in exchange for an increase in
the related party line of credit
o assumption of $2,613,975 of short-term notes payable including accrued
liabilities and interest, $700,000 of which the Company has not yet
been released by the original creditor; and $800,000 of which the
Company has remained a guarantor
10
o assumption of the contingent liability for 483,333 shares of
redeemable common stock at $2.00 per share, however, the Company has
not been released by the shareholder for this obligation.
In exchange for these assumptions and conversions, the Company assigned a
subscription receivable of $338,300 due from MK financial to ADP Management, and
issued 8,113,999 shares of the Company's common stock. In association with the
issuance of stock in this transaction the Company recorded a subscription
receivable for the unreleased debt of $700,000 and recognized an expense for ADP
Management services of approximately $846,000 based on the excess of the value
of the stock issued over the debt and interest relieved. The number of shares
ultimately retained by ADP Management is not known at this time as ADP
Management will continue to negotiate settlement of debts and obligations
assumed by it and use the shares allocated to it as consideration for such
settlements.
(6) PREFERRED STOCK
Series A 10 % Convertible Non-Voting Preferred Stock
During the nine months ended June 30, 2003, holders of Series A shares converted
1,763 Series A shares into 652,352 shares of the Company's common stock. The
Company issued 87 shares of Series A Preferred Stock related to payment of
$17,374 of Series A dividends. During the nine months ended June 30, 2002, 6,117
shares of Series A Preferred Stock were converted into 2,258,547 shares of
common stock.
During the nine months ended June 30, 2002, the Company issued 8,782 shares of
Series A Preferred Stock to ADP Management. Of these shares 6,688 were issued in
connection with a cashless exercise of Series A warrants received from providing
loans through the ADP Management related party line-of-credit. This cashless
exercise resulted in additional compensation expense of $5,416,812 based on the
common stock conversion rate of Series A shares and a $3.00 per common share
price. An additional 2,094 Series A shares were also issued to ADP Management as
payment for consulting services and in connection with obtaining financing for
the Company. These shares resulted in $2,324,340 of compensation expense based
on the common stock conversion rate of Series A shares and a $3.00 per common
share price.
Warrants to Purchase Series A Preferred Stock
Effective in the first quarter of fiscal year 2002 under the line of credit
agreement with ADP Management the Company was to grant ADP Management the right
to purchase one share of Series A Preferred Stock at an exercise price of $200
per share for each $200 advanced under the line of credit. The warrants were to
expire on December 31, 2002. The Series A Preferred Stock warrants included a
cashless exercise provision. This arrangement was amended by the Company and ADP
Management in March 2002, at which time all unexercised warrants at December 31,
2001 were terminated and the number of shares issuable upon the exercise of
warrants at December 31, 2001 was capped at 6,688 shares of Series A Preferred
Stock. The Company issued 7,228 Series A warrants during the three months ended
December 31, 2001, as part of this arrangement. These warrants were valued based
on the Black Scholes Option Pricing Model at $3.00 per common share, which
resulted in an expense of $1,778,013, of which $1,445,525 was allocated to
interest expense under the line of credit, and $332,488 was allocated to
compensation expense. In connection with the amendment to the line-of-credit
agreement, ADP Management was allowed to exercise 8,158 Series A Preferred Stock
warrants on a cashless method into 6,688 Shares of Series A Preferred Stock
during the nine months ended June 30, 2002. This cashless exercise resulted in
$5,416,812 of additional compensation expense during the period. All remaining
warrants resulting from the line of credit agreement that were outstanding as of
December 31, 2001 were terminated.
Series B Convertible Preferred Stock
During the nine months ended June 30, 2002, the Company sold 1,135,823 shares of
Series B Preferred Stock for $3,366,273. Of these issuances 1,000,000 were sold
to Matsushita Electric Works, Ltd., a Japanese corporation ("MEW"). MEW was
granted an anti-dilution right on the common stock conversion feature of the
1,000,000 Series B shares it purchased. If the Company shall at any time during
a two-year period (beginning April 2002) issue or sell its common stock or any
security exercisable into common stock for an equivalent value of less than
$3.00 per share, then the conversion price of the 1,000,000 Series B shares into
common stock will be adjusted to the common stock equivalent value of those
securities sold. These anti-dilution rights are expected by management to be
waived, but no assurance can be given that management will be successful in
obtaining a waiver from MEW.
11
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. As of June 30, 2003, the Company had not exercised its
option to redeem shares of Series B Preferred Stock.
(7) COMMON STOCK
During the nine months ended June 30, 2003, the Company issued 10,936,416 shares
of common stock as follows:
o 1,498,149, shares were issued for cash proceeds of $937,000
o 234,047 shares were issued for services rendered or to be rendered of
$485,334
o 652,352 shares were issued upon the conversion of 1,763 shares of
Series A Preferred Stock (see note 6)
o 302,668 shares were issued for conversion of $442,750 of short-term
notes payable including $42,750 of accrued interest
o 135,701 shares were issued for conversion of $73,279 of related party
line of credit in connection with the exercise of 135,701 common stock
options by ADP Management at $.54 per share
o 8,113,499 shares were issued in connection with debt of $3,873,961 and
contingencies assumed by ADP Management and compensation expense of
$845,628, offset by an assumption of a subscription receivable of
$338,300 by ADP Management (see note 5).
o The Company reacquired 401,952 shares of its common stock from former
SecureAlert Shareholders (see note 8)
During the nine months ended June 30, 2002, the Company issued 3,431,319 shares
of common stock as follows:
o 292,036 shares were issued for services rendered or to be rendered of
$876,108
o 2,258,547 shares were issued upon the conversion of 6,117 shares of
Series A Preferred Stock
o 35,735 shares were issued as the result of the conversion of
convertible debentures of $107,314
o 40,000 shares were issued in exchange for redeemable common stock, and
o 805,001 shares were issued upon exercising of options.
Common Stock Subject to Redemption
Of the shares of common stock outstanding at June 30, 2003, 955,518 shares of
common stock are subject to redemption as follows: (1) the holder of 32,000 of
these shares has the option to require the repurchase of these shares at a price
of $3.00 per share by giving notice of exercise of this option in writing to the
Company within a 60-day period commencing at the end of nine months from date of
issuance. This option automatically expires if it is not exercised within the
60-day period. This option has been extended until August 5, 2003; (2) the
holder of 155,000 shares has the option, subsequent to June 30, 2003, to require
the repurchase of these shares at a price of $3.00 per share, however, if the
common stock is then traded in the over-the-counter market or on a recognized
exchange and the holder can readily and efficiently sell the shares at $3.00 or
more per share, this put option will terminate on December 31, 2003; and (3) the
holder of 100,000 shares has the option to require the Company to repurchase
these shares between December 31, 2003 and January 15, 2004 if the Company is
not listed on a national stock exchange and is not trading at a price per share
equal to or greater than $1.50. The Company will have thirty days from date that
written notice is received to fulfill its obligation to repurchase the shares at
$1.50; (4) the holder of 483,333 shares has the option to require the Company to
repurchase these shares at $2.00 after December 31, 2003 if not all of the
following conditions are met: a) the Company is not listed on a national stock
exchange, b) the closing market price for a period of at least 15 consecutive
trading days is not at $2.00 or higher, and c) the shares are not registered,
fully tradable with no restrictions; (5) The holder of 185,185 shares has the
option to require the Company to repurchase these shares at $0.54 per share
between September 30, 2003 and January 15, 2004 if the Company is not listed on
a national stock exchange and if the shares have not been registered or
otherwise made freely tradable.
12
Common Stock Options and Warrants
During the nine months ended June 30, 2003, the Company granted options to: (1)
employees for the purchase of a total of 25,000 shares of common stock; (2)
consultants or third parties for the purchase of 242,500 shares of common stock.
All of the options described above have an exercise price of $3.00 per share,
expire five years from the date of grant and are immediately exercisable. As of
June 30, 2002, options and warrants to purchase a total of 2,690,227 shares of
common stock with a weighted average exercise price of $3.95 per share remain
outstanding During the nine months ended June 30, 2002, the Company issued
3,450,000 options at an exercise price of $.54 to ADP Management. The options
were issued in connection with a $2 million line of credit provided to the
Company, and extension of current debts owed by the Company to ADP Management.
The issuance of these options resulted in $895,940 of interest expense and
$8,770,499 of compensation expense to ADP Management based on the Black Scholes
Option Pricing Model with an estimated common share price of $3.00. During the
nine months ended June 30, 2002 the Company issued 920,361 options to purchase
the Company's common stock to consultants or outside parties for services. The
Company recognized approximately $2,236,000 of expense related to these
issuances based on a $3.00 common share price.
(8) REACQUISITION OF COMMON STOCK AND EXTINGUISHMENT OF SECUREALERT PURCHASE
OBLIGATION
On December 31, 2002 the Company entered into an agreement with the former
shareholders of SecureAlert which terminated all employment and consulting
agreements with former employees, shareholders, and officers of SecureAlert. In
addition, the purchase obligation due to former SecureAlert shareholders was
extinguished in the amount of $400,000. The former SecureAlert shareholders
agreed to modify the terms of the notes due in the aggregate of $500,000 (see
Note 6) in which payments of $40,000 per month are required beginning March 11,
2003 until the notes are paid in full. In addition, the former shareholders of
SecureAlert agreed to waive their rights to the anti-dilution provision in
connection with the Company's original purchase of SecureAlert (see Note 3). The
Company has an obligation to pay an entity, in which a former SecureAlert
shareholder is a shareholder, $180,000. This amount was secured by inventory of
the Company valued at approximately $180,000 and was paid in full subsequent to
the end of the quarter.
Corresponding with the termination of the former employees and shareholders of
SecureAlert, the Company modified its approach to its consumer electronics
business. Under its modified approach, on January 1, 2003 the Company entered
into a consumer electronics distribution agreement with SAE.
Under the distribution agreement the Company granted SAE a distribution right it
holds under an agreement with Philips and MemCorp to sell and distribute
consumer electronic products. The initial term of the agreement is for one year,
ending December 31, 2003, after which SAE may directly approach Philips and
MemCorp to obtain direct distribution rights for Magnavox-branded home security
products. Under the distribution agreement SAE assumed payables and accrued
liabilities in the amount of $488,410; assumed $300,000 of the Sun Trust line of
credit; acquired receivables due from prior sales of consumer electronic
products in the amount of $370,501; acquired consumer electronic inventory in
the amount of $539,706 and acquired equipment with a net book value of $183,484.
In exchange the Company received 401,952 shares of the Company's common stock
held by the former SecureAlert shareholders and extinguished the remaining
purchase obligation in connection with the original purchase of SecureAlert in
the amount of $400,000. These transactions resulted in a net reacquisition
contribution to the Company in the amount of $94,759.
(9) 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, and
distributing consumer electronics products to the manufactured home market.
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 June 30, 2003 and
2002:
Three Months Ended
2003 2002
------------------ ----------------
Net sales:
SecureAlert:
Consumer electronics $ 132,223 $ 4,527,605
Mobile emergency and personal security systems 148,947 527,583
------------------ ----------------
281,170 5,055,188
Reagents 139,856 262,725
------------------ ----------------
$ 421,026 $ 5,317,913
================== ================
Net income (loss):
SecureAlert (201,498) (1,290,168)
Reagents 14,371 (13,155)
Other (unallocated) (1,590,863) (2,431,392)
------------------ ----------------
$ (1,777,990)$ (3,734,715)
------------------ ----------------
The following table reflects certain financial information relating to each
reportable segment for each of the nine-month periods ended June 30, 2003 and
2002:
Nine Months Ended
2003 2002
------------------- -------------------
Net sales:
SecureAlert
Consumer electronics $ 3,108,750 $ 6,788,496
Mobile emergency and personal security systems 333,731 714,970
------------------- -------------------
3,442,481 7,503,468
Reagents 410,351 415,966
------------------- -------------------
$ 3,852,832 $ 7,919,434
------------------- -------------------
Net income (loss):
SecureAlert $ (1,010,240) $ (1,957,253)
Reagents 33,027 10,002
Other (unallocated) (3,706,226) (25,158,664)
------------------- -------------------
$ (4,683,439) $ (27,105,915)
------------------- -------------------
Identifiable assets:
SecureAlert including goodwill and
Intangibles of 3,755,830 and
7,776,209, respectively (net) $ 4,258,738
Reagents 100,287
Other (unallocated) 616,045
--------------------
$ 4,975,070
--------------------
(10) RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." This statement requires the classification of gains or
losses from the extinguishment of debt to meet the criteria of Accounting
Principles Board Opinion No. 30 before they can be classified as extraordinary
in the income statement. As a result, companies that use debt extinguishment as
part of their risk management cannot classify the gain or loss from that
extinguishment as extraordinary. The statement also requires sale-leaseback
accounting for certain lease modifications that have economic effects similar to
sale-leaseback transactions. The adoption of SFAS No. 145 did not have a
material impact on the Company's financial position or operations.
14
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This standard, which is effective for exit or
disposal activities initiated after December 31, 2002, provides new guidance on
the recognition, measurement and reporting of costs associated with these
activities. The standard requires companies to recognize costs associated with
exit or disposal activities when they are incurred rather than at the date the
Company commits to an exit or disposal plan. The adoption of SFAS No. 146 by the
Company is not expected to have a material impact on the Company's financial
position or future operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Ethics" (FIN No. 46), which addresses consolidation by
business enterprises of variable interest entities. FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements", to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. In the event a variable
interest entity is identified this pronouncement may have a material impact on
its financial condition or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN No. 45). FIN No. 45 requires certain guarantees to
be recorded at fair value, which is different from current practice to record a
liability only when a loss is probable and reasonably estimable, as those terms
are defined in FASB Statement No. 5, "Accounting for Contingencies". FIN No. 45
also requires the Company to make significant new disclosures about guarantees.
The disclosure requirements of FIN No. 45 are effective for the Company in the
first quarter of fiscal year 2003. FIN No. 45's initial recognition and initial
measurement provisions are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The Company's previous accounting
for guarantees issued prior to the date of the initial application of FIN No. 45
will not be revised or restated to reflect the provisions of FIN No. 45. The
Company does not expect the adoption of FIN No. 45 to have a material impact on
its consolidated financial position, results of operations or cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". This
Statement is effective for contracts entered into or modified after June 30,
2003, with certain exceptions, and for hedging relationships designated after
June 30, 2003, with certain exceptions, and for hedging relationships designated
after June 30, 2003. Management is currently evaluating the effect that the
adoption of SFAS No. 149 may have, but believes it will not have a material
effect on its results of operations and financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This new
statement changes the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity or classifications
between liabilities and equity in a section that has been known as "mezzanine
capital." It requires that those certain instruments be classified as
liabilities in balance sheets. Most of the guidance in SFAS 150 is effective for
all financial instruments entered into or modified after May 31, 2003.
Management anticipates that the adoption of SFAS No. 150 may have a material
impact on the Company's consolidated financial statements if in the future the
Company issues mandatorily redeemable preferred or common stock. Such
mandatorily redeemable preferred stock, previously included as "mezzanine
capital", would be included as a liability in accordance with SFAS 150.
(11) SUBSEQUENT EVENT
This report is filed in November 2003. Subsequent to June 30, 2003, in addition
to the issuances of shares and other transactions related to the debt
restructuring and transactions detailed in Notes 3, 4, 5, 7 and 8, above, the
Company entered into a settlement agreement with a creditor pursuant to which it
agreed to pay the principal amount owing under a promissory note in the amount
of $500,000 in two instalments on or before October 31, 2003 and November 15,
2003, respectively, and to issue 168,979 restricted shares of common stock in
lieu of accrued interest through October 31, 2003, as payment in full.
15
The Company also borrowed $475,000 from third party lenders that can be
converted into common stock of the Company at $1.50 per share at the option of
the lenders.
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," "might," "should," 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, 2002.
Critical Accounting Policies
In Note 1 to the audited financial statements for the fiscal year ended
September 30, 2002 included in its Form 10-KSB, the Company discusses those
accounting policies that are considered to be significant in determining the
results of operations and its financial position. The Company believes that the
accounting principles utilized by it conform to generally accepted accounting
principles in the United States of America.
The preparation of consolidated financial statements requires management to make
significant estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. By their nature, these judgments are subject
to an inherent degree of uncertainty. On an on-going basis, the Company
evaluates its estimates, including those related to bad debts, inventories,
intangible assets, warranty obligations, product liability, revenue, and income
taxes. The Company bases its estimates on historical experience and other facts
and circumstances that are believed to be reasonable, and the results form the
basis for making judgments about the carrying value of assets and liabilities.
The actual results may differ from these estimates under different assumptions
or conditions.
With respect to inventory reserves, revenue recognition and allowance for
doubtful accounts, the Company applies the following critical accounting
policies in the preparation of its financial statements:
Inventory Reserves
The nature of the Company's business requires it to maintain sufficient
inventory on hand at all times to meet the requirements of its customers. The
Company 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
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.
16
Revenue Recognition
The Company derives revenue primarily from the sale of consumer electronics and
reagent stains. Under applicable accounting principles, revenue, less reserves
for returns, is recognized upon shipment to the customer. From the date of the
acquisition of SecureAlert in July 2001 through June 30, 2003, and for the year
periods ended June 30, 2003 and 2002, the provision for sales returns was not
material. 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.
Impairment of Long-lived Assets
Under applicable accounting principles, the Company does not amortize goodwill.
Goodwill is subject to an impairment test, which is performed at least annually.
The Company's goodwill is related to the acquisition of SecureAlert in July
2001. During the year ended September 30, 2002 the Company tested goodwill for
impairment by comparing the carrying value of the assets of its wholly owned
subsidiary SecureAlert, to the estimated fair value of those assets. The fair
value was determined using an income approach of estimated future cash flows.
The estimated future cash flows include those primarily related from mobile
medical alert devices. The carrying amount including goodwill was determined to
exceed the estimated fair value. Therefore the Company recognized an impairment
of goodwill in 2002.
The Company reviews its long-lived assets, other than goodwill, 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 of in
measuring whether the assets are recoverable.
Accounting for Stock-based Compensation
The Company accounts for stock-based compensation issued to employees and
directors under Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. Under APB No. 25,
compensation related to stock options, if any, is recorded if an option's
exercise price on the measurement date is below the fair value of the company's
common stock and amortized to expense over the vesting period. Compensation
expense for stock awards or purchases, if any, is recognized if the award or
purchase price on the measurement date is below the fair value of the common
stock and is recognized on the date of award or purchase. Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based
Compensation," requires pro forma information regarding net loss and net loss
per common share as if the company had accounted for its stock options granted
under the fair value method.
The Company accounts for stock-based compensation issued to persons other than
employees using the fair value method in accordance with SFAS No. 123 and
related interpretations. Under SFAS No. 123, stock-based compensation is
determined as either the fair value of the consideration received or the fair
value of the equity instruments issued, whichever is more reliably measurable.
The measurement date for these issuances is the earlier of either the date at
which a commitment for performance by the recipient to earn the equity
instruments is reached or the date at which the recipient's performance is
complete.
Allowance for Doubtful Accounts
The Company must make estimates of the collectability of accounts receivables.
In doing so, the Company analyze accounts receivable and historical bad debts,
customer credit-worthiness, current economic trends and changes in customer
payment patterns when evaluating the adequacy of the allowance for doubtful
accounts.
Three months ended June 30, 2003 Compared to Three months ended June 30, 2002
Net Sales
The Company's focus is on building the mobile emergency and personal security
systems market and not on the consumer electronics and reagents markets. As a
result of this new focus management believes that operations and sales of
consumer electronics and reagents will decrease in future operating periods.
17
For the three months ended June 30, 2003, net sales were $421,026 compared to
$3,029,664 for the three months ended June 30, 2002. The decrease in net sales
resulted primarily from the Company's decision to outsource distribution of
consumer electronics and certain telematics products beginning in January 2003.
The Company believes that the net income to the Company under this arrangement
is the same despite the decrease in gross revenues. SecureAlert had net sales of
$281,170 during the three months ended June 30, 2003. These sales consisted of
$132,223 of consumer electronics and $148,947 of mobile emergency and personal
security systems. SecureAlert's significant customers and their approximate
percentage of SecureAlert sales include Fleetwood (54%), Champion (13%), and
Oakwood (11%).
Reagents had revenues for the three months ended June 30, 2003 of $139,856,
relatively unchanged from the prior year fiscal period. 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 25% of
Reagents' sales during the period. No other Reagents customer accounted for 10%
or more of its sales.
Cost of Goods Sold
For the three months ended June 30, 2003, cost of goods sold was $172,689
compared to $2,617,258 for the three months ended June 30, 2002. The decrease in
cost of sales resulted primarily from the Company's decision to outsource
distribution of consumer electronics and certain telematics products beginning
in January 2003. The Company believes that the net income to the Company under
this arrangement is the same despite the decrease in gross revenues.
SecureAlert's cost of goods sold totaled $86,080 or 31% of SecureAlert's net
sales during the three months ended June 30, 2003. Reagents' cost of goods sold
totaled $86,609 or 62% of Reagent's net sales for the three months ended June
30, 2003, compared to $78,773 or 61% of Reagent's net sales for the same period
during the prior fiscal year. The increase as a percentage of net sales was
primarily due to increased materials costs, wages and overhead costs.
Research and Development Expenses
For the three months ended June 30, 2003, research and development expenses were
$3,145 compared to $119,921 for the three months ended June 30, 2002. These
expenses were associated with the development of SecureAlert's personal security
devices.
Amortization of Core Technology
Core technology primarily represents patents in the area of remote security and
medical alert devices received in the acquisition of SecureAlert. Core
technology is amortized using the straight-line method over an estimated useful
life of three years and totaled $46,667 for the three months ended June 30, 2003
and 2002.
Selling, General and Administrative Expenses
During the three months ended June 30, 2003, selling, general and administrative
expenses totaled $1,668,966 compared to $3,329,761 for the three months ended
June 30, 2002, a decrease of $1,660,795. This decrease relates primarily to the
following: 1) Granting of common stock options for consulting services to a
shareholder in 2002. These options were granted to the shareholder and other
consulting fees were paid for financing and raising of capital for the Company,
2) Common stock issued for services was valued at $3.00 per share for the three
months ended June 30, 2002, and $.54 to $1.50 in June 30, 2003, 3) Payroll and
travel expenses were reduced from the Company's decision to outsource
distribution of consumer electronics and certain Telematics products beginning
in January 2003.
Interest Income and Expense
During the three months ended June 30, 2003, interest expense was $307,916
compared to $654,801 for the three months ended June 30, 2002, a decrease of
$346,885. This decrease relates primarily to a reduction in notes payable. This
amount consists primarily of non-cash interest expense of $209,612 related to
common stock issuance relating to debt instruments.
Nine months ended June 30, 2003 Compared to Nine months ended June 30, 2002
Net Sales
For the nine months ended June 30, 2003, net sales were $3,852,832 compared to
$7,919,434 for the nine months ended June 30, 2002. The decrease in net sales
resulted primarily from the outsourcing of consumer products and telematics
18
products distribution commencing in January 2003. The Company believes that the
net income to the Company under this arrangement is the same despite the
decrease in gross revenues. SecureAlert had net sales of $3,442,481 during the
nine months ended June 30, 2003. These sales consisted of $3,108,750 of consumer
electronics and $333,731 of mobile emergency and personal security systems,
compared to $6,917,201 and $586,267, respectively, for the nine months ended
June 30, 2002. The decline in mobile emergency product sales was a result of a
change in the pricing model for these products that now emphasizes monthly
recurring sales. During the nine months ended June 30, 2003, sales to Fleetwood,
Oakwood and Champion totaled approximately 55 percent ($1,418,000), 12 percent
($310,000), and 18 percent ($464,000) of the Company's total sales,
respectively.
Reagents had revenues for the nine months ended June 30, 2003 of $410,351
compared to $415,966 for the nine months ended June 30, 2002, relatively
unchanged from the prior year fiscal period. Fisher Scientific was a significant
customer of Reagents, accounting for 24% of Reagents' sales during the period.
No other Reagents customer accounted for 10% or more of its sales. The Company
anticipates that Reagents' sales will decrease in the future as a percentage of
total sales.
Cost of Goods Sold
For the nine months ended June 30, 2003, cost of goods sold totaled $3,496,819
compared to $6,711,146 for the nine months ended June 30, 2002. The decrease in
cost of sales resulted primarily from lower sales resulting from the outsourcing
of distribution of consumer electronics products beginning in January 2003 as
the Company redirected its efforts to build on its remote personal health and
security products and services business. Cost of goods sold at SecureAlert
totaled $3,244,336 or 94% of SecureAlert's net sales during the nine months
ended June 30, 2003. Reagents' cost of goods sold totaled $252,483 or 62% of
Reagent's net sales for the nine months ended June 30, 2003, compared to
$269,140 or 65% for the nine months ended June 30, 2002.
Research and Development Expenses
For the nine months ended June 30, 2003, research and development expenses were
$101,206, compared to $399,329 in the previous year period. During the nine
months ended June 30, 2003, research and development expenses consisted
primarily of expenses associated with the development of SecureAlert's personal
security devices.
Amortization of Core Technology
Core technology primarily represents patents in the area of remote security and
medical alert devices received in the acquisition of SecureAlert. Core
technology is amortized using the straight-line method over an estimated useful
life of three years and totaled $140,000 for the nine months ended June 30, 2003
and 2002.
Selling, General and Administrative Expenses
During the nine months ended June 30, 2003, selling, general and administrative
expenses totaled $4,080,754 compared to $24,243,601 for the nine months ended
June 30, 2002. This decrease relates primarily to non-cash consideration of
approximately $17,250,000 paid in the form of stock options granted to
consultants and creditors in lieu of cash compensation, including expense
related to a cashless exercise of Series A preferred stock warrants, and as
consideration for services provided to the Company as compared to approximately
$1,100,000 for the nine months ended June 30, 2003. Total expense in the prior
year relating to issuances of equity to ADP Management which is included in
general administrative expense was $16,844,139 for the nine months ended June
30, 2002, based on valuation of the equity instruments under the Black Sholes
Option Pricing Model. In addition, during the nine months ended June 30, 2003,
travel expense decreased $406,524 as a result of the outsourcing of the
distribution of consumer electronics and telematics products beginning in
January 2003.
Interest Income and Expense
During the nine months ended June 30, 2003, interest expense totaled $719,253,
compared to $3,540,671 paid in the first nine months of fiscal year 2002.
Amounts paid in 2003 consisted primarily of non-cash interest expense of
$591,323 related to preferred stock issuances and stock option grants made under
a related-party line of credit, together with $5,825 in amortization of a
discount on the purchase obligation to former shareholders of SecureAlert and
approximately $122,105 in interest related to other borrowings compared to
$382,739 for the nine months ended June 30, 2002.
19
Liquidity and Capital Resources
The Company is unable to finance its operations solely from cash flows from
operating activities. During the nine months ended June 30, 2003, the Company
financed its operations primarily through borrowings from a related party and
the sale of equity securities.
As of June 30, 2003, the Company had cash of $90,263 and a working capital
deficit of $2,286,163 compared to cash of $51,390 and a working capital deficit
of $5,150,881 at September 30, 2002. This decrease is a result of the
restructure of debt obligations with ADP Management and certain of the Company's
creditors.
During the nine months ended June 30, 2003, the Company's operating activities
used cash of $1,882,254 compared to cash of $5,975,260 used during the nine
months ended June 30, 2002. The decrease was primarily a result of collection of
receivables, reduction of inventories and reduction in operation costs due to
modification of distribution of consumer of electronic products.
The Company's investing activities for the nine months ended June 30, 2002 used
$2,345, primarily relating to purchase property and equipment.
The Company's financing activities during the nine months ended June 30, 2003
provided cash of $1,923,472 compared to $7,026,768 during the nine months ended
June 30, 2002. During the nine months ended June 30, 2003, the Company received
cash of $250,000 from the issuance of redeemable common stock, $1,440,908 from
net borrowings under short-term notes payable, and $937,000 from the issuance of
common stock. This cash was decreased by $601,315 for payments on a
related-party line of credit, $217,853 for payments on short-term notes payable,
and $97,380 from payments on related party convertible notes payable.
The Company had a net loss of $4,683,439 and had negative cash flows from
operating activities of $1,882,254 during the nine months ended June 30, 2003.
As of June 30, 2003, the Company had a working capital deficit of $2,286,163,
net tangible stockholders' deficit of $3,787,355 and an accumulated deficit of
$59,867,396. 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, 2002, raise
substantial doubt about the Company's ability to continue as a going concern.
The unaudited condensed consolidated financial statements included in this
report do not include any adjustments that might result from the outcome of this
uncertainty. The Company's plans with respect to this uncertainty include the
conversion of a significant portion of its outstanding debt and other
obligations, as well as raising capital from the sale of its common stock and
other debt and equity securities.
There is no assurance that the Company will be successful in its plans to raise
capital, convert debt to equity or meet its current financial obligations. There
has been no adjustment to the financial statements included in this report
should management's plans not be met.
Recent Developments
Agreements with former Employees and Consultants
After determining that the Company would focus its business on remote medical
and personal security monitoring products and services, the Company entered into
an agreement with Brian Boling, Tim Welch, Jim Steinmeyer and Ron Bishop and
their respective affiliates to provide for the termination of employment and
consulting agreements, the assignment of property and other rights. Under this
agreement, effective January 1, 2003, these parties agreed to terminate their
respective consulting agreements with the Company and its affiliates, returned
400,000 shares of common stock issued in the acquisition of SecureAlert,
forfeited payments under the merger agreement totaling $300,000, and forfeited
accrued vacation and sick pay. The Company transferred to a newly formed entity
owned and controlled by these former employees and consultants, equipment and
inventory and the Company assigned accounts receivable to cover assumed
liabilities in connection with the distribution of product under a distribution
agreement described below.
Bishop Agreement
Effective December 31, 2002, the Company entered into an agreement with Ron
Bishop, a former consultant of the Company, to terminate consulting agreements
pursuant to which he had agreed to assist in the development of GPS and
monitoring technology and related services. The Company agreed to issue 65,000
restricted shares of common stock and the Company granted an option to Mr.
Bishop for the purchase of 20,000 common shares at $3.00 per share. Bishop
agreed to complete programming on product interfaces and other products for the
20
Company and granted the Company a perpetual royalty-free license to certain
software used in the Company's GPS products and monitoring centers.
Natale Agreement
On February 28, 2003, the Company entered into an agreement with Tom Natale, who
had been serving as the President of the Company. Under the terms of the
agreement, which was subsequently amended and extended through October 2003, Mr.
Natale and the Company mutually agreed to terminate Mr. Natale's employment
contract. Mr. Natale will be paid a monthly consulting fee of $5,000 and receive
health benefits from the Company through November 2003. A bonus payment of
$30,000 is payable in October 2003. Mr. Natale also entered into a nondisclosure
and confidentiality agreement relating to the Company's technology, including
trade secrets and other intellectual property. In a separate agreement entered
into June 30, 2003, Mr. Natale assigned to the Company a $100,000 certificate of
deposit previously pledged as collateral for the Company's line of credit at a
bank. In consideration of the assignment, the Company agreed to release and
indemnify Mr. Natale from further liability under the line of credit and agreed
to pay back interest of $8,000 and to issue to Mr. Natale 7,500 shares of common
stock and warrants to purchase 7,500 shares of common stock at a price of $3.00
per share. Mr. Natale also received a $100,000 promissory note payable to him
jointly and severally by David Derrick, James Dalton, and ADP Management. ADP
Management assumed this liability and the Company is no longer obligated.
Liady Agreement
In an agreement entered into June 30, 2003, Ms. Liady assigned to the Company a
$100,000 certificate of deposit previously pledged as collateral for the
Company's line of credit at a bank. In consideration of the assignment, the
Company agreed to release and indemnify Ms. Liady from further liability under
the line of credit and agreed to pay back interest of $2,500 and to issue to Ms.
Liady 5,000 shares of common stock and warrants to purchase 5,000 shares of
common stock at a price of $3.00 per share. Ms. Liady also received a $100,000
promissory note payable to her jointly and severally by David Derrick, James
Dalton, and ADP Management. ADP Management assumed this obligation and the
Company has no further liability or obligation to Ms. Liady thereunder.
Consumer Electronics Distribution
On January 1, 2003, the Company entered into an agreement with SecureAlert
Entertainment LLC granting it exclusive distribution rights to the Company's
consumer electronics products to the manufactured homes marketing channel in
North America. In consideration of the grant of exclusive rights in the
agreement, SecureAlert Entertainment agreed to make all payments to Mr. Bishop
under his several agreements with the Company and to purchase inventory from the
Company. In addition, former SecureAlert II shareholders waived their right to
and returned to the Company for cancellation 400,000 shares of common stock
issued in the merger of SecureAlert II. SecureAlert Entertainment is barred from
marketing or distributing products to the PERS and home medical or personal
health monitoring markets and is bound by a five-year post-termination covenant
against competing with the Company in any market. The agreement was subsequently
amended in June 2003 to clarify the pricing of products as well as policies
regarding the Company's responsibility for warranty service, returns, and
delivery of product; purchases are made only by submission of orders to the
Company and title to products passes upon shipment. The agreement expires
December 31, 2003. If the Company does not extend the agreement or enter into a
similar agreement with another distributor, it is expected that revenues from
consumer electronics products after December 31, 2003 will significantly
decline.
Telematics Distribution
The Company entered into an agreement with SecureAlert Telematics Corporation
for the distribution of the Company's telematics and mobile GPS products. In
connection with this agreement, the Company acknowledged Mr. Bishop's role in
the development of the underlying GPS technology included in the MobilePAL
products and agreed to assign a patent application relating to that technology
to Mr. Bishop (Patent App. 10/202,769). SecureAlert Telematics will pay the
Company a royalty in the amount of 10% of net revenue from all customer sales
and services for a period of seven years from the date of activation of all
products and services sold by SecureAlert Telematics during the three-year term
of the agreement. The parties also agreed that during the first six months of
the agreement SecureAlert Telematics would have use of the Company's monitoring
center without additional charge and that the parties would share in the cost of
the monitoring center thereafter during the balance of the term of the agreement
until such time as SecureAlert Telematics could establish its own center. The
products that are subject to this agreement are the MobilePAL and TravelPAL
products sold to specific channels identified by the agreement. SecureAlert
Telematics is barred from selling in the PERS and personal and home health
monitoring markets.
21
Related Party Debt Restructuring
During the quarter ended June 30, 2003, the Audit Committee of the board of
directors approved a debt-restructuring package proposed by ADP Management,
David Derrick and James Dalton. By agreement dated April 2, 2003, the Company
and ADP Management, Mr. Derrick and Mr. Dalton agreed to the following primary
terms:
o Derrick and Dalton agreed to negotiate with significant creditors of the
Company to restructure outstanding debt.
o The Company would issue a total of 8,900,000 shares of common stock
for the purpose of restructuring its debt under this package.
o The preferred method of restructuring the debt would be the conversion
of the debt into common shares at prices negotiated on behalf of the
Company by Derrick and Dalton.
o If and to the extent that Derrick and Dalton would assume certain debt
held by creditors unwilling to convert such obligations directly into
equity the shares otherwise issuable in conversion of the assumed debt
would be issued to Derrick and Dalton in consideration of their
assumption of the debt and the release of the Company of all liability
for such debt by the creditor.
o ADP Management would convert all amounts owing to it after all other
creditors have either converted or assigned their notes as described
above for the remaining shares, if any.
o The Company would compensate Derrick and Dalton for personal
guarantees and assumptions of corporate debt and obligations.
o Mr. Derrick would assign certificates of deposit to the Company
securing a line of credit with a bank.
As of June 30, 2003, under the provisions of this agreement the Company:
o Converted $1,167,750 of principal and accrued interest into 786,001
shares of common stock at $1.50 per share.
o Was released from debt obligations to third parties totaling
$2,613,975 in principal and accrued interest assumed by ADP
Management, Derrick and Dalton and converted these obligations into
common stock (see note 5)
o Settled all obligations and guarantees of ADP Management, Derrick and
Dalton, including $709,986 of principal and accrued interest owing to
ADP Management and converted these obligations into common stock, (see
note 5), and
o Received assignment of $550,000 of certificates of deposit securing a
line of credit with a bank (see note 5).
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Based upon their review at
September 30, 2003, the Company's principal executive officer and principal
financial officer have concluded that the current disclosure controls and
procedures (as defined in Exchange Act Rules 240.13a-14(c) and 15d-14(c)) are
effective in providing the material information required to be disclosed in the
reports the Company files or submits under the Exchange Act. Their review was
completed as of a date within 90 days before the filing date of this quarterly
report
Changes in Internal Controls. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to the date the Company carried out this
evaluation.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
During the quarter ended June 30, 2003, the Company issued 10,343,316 shares of
common stock without registration of the offer and sale of the securities under
the Securities Act of 1933, as amended, as follows:
22
o 1,498,149 shares were issued for cash proceeds of $937,000
o 137,500 shares were issued for services rendered or to be rendered
o 271,500 shares were issued upon the conversion of 372 shares of Series
A Preferred Stock
o 20,000 shares were issued upon the conversion of 54 shares of Series A
Preferred Stock for payment of related party line-of-credit
o 8,416,167 shares were issued pursuant to a debt-restructuring program
as described in Item 2 of Part I under the caption "Recent
Developments" on page 19 above.
In each of these transactions the issuance of the securities was accomplished
without registration under the Securities Act in reliance on the exemptions from
the registration requirements of the Securities Act afforded by Section 4(2) and
Rule 506 of Regulation D under the Securities Act.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Required by Item 601 of Regulation S-B
Exhibit Number Title of Document
10.01Distribution and Separation Agreement (incorporated by reference to the
Company's Registration Statement and Amendments thereto on Form 10-SB,
effective December 1, 1997).
10.021997 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).
10.031997 Transition Plan (incorporated by reference to the Company's
Registration Statement and Amendments thereto on Form 10-SB, effective
December 1, 1997).
10.04Securities 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)
10.05Securities Purchase Agreements with ADP Management and James Dalton
(previously filed)
10.06Agreement and Plan of Merger (SecureAlert) (previously filed as exhibit to
Current Report on Form 8-K)
10.07Loan 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)
10.08Amended and Restated Loan and Security Agreement (SunTrust Bank and
SecureAlert), dated August 3, 2001 (incorporated by reference to the
Company's annual report on Form 10-KSB for the year ended September 30,
2001)
10.09Amended and Restated Loan and Security Agreement (SunTrust Bank and
SecureAlert), dated January 24, 2002 (filed as an exhibit to the Company's
quarterly report on Form 10-QSB for the quarter ended December 31, 2001)
10.10Amended and Restated Loan and Security Agreement (SunTrust Bank and
SecureAlert) dated March 1, 2002 (filed as an exhibit to the Company's
quarterly report on Form 10-QSB for the quarter ended December 31, 2001)
23
10.11Loan 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)
10.12License Agreement between RemoteMDx, Inc. and SecureAlert, Inc. as
licensor and Matsushita Electric Works, Ltd., as licensee, (April 12, 2002)
(previously filed)
10.13Agreement with SAE (incorporated by reference to the Company's quarterly
report on Form 10-QSB for the quarter ended December 31, 2002)
10.14Agreement between the Company and SecureAlert Telematics, Inc.
(incorporated by reference to the Company's quarterly report on Form 10-QSB
for the quarter ended December 31, 2002)
10.15Amendments to SAE Agreement (incorporated by reference to the Company's
quarterly report on Form 10-QSB for the quarter ended March 31, 2003)
10.16Agreement with ADP Management, Derrick and Dalton (April 2003)
(incorporated by reference to the Company's quarterly report on Form 10-QSB
for the quarter ended March 31, 2003)
31.1 Certification of President and Chief Executive Officer under Section 302 of
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer under Section 302 of
Sarbanes-Oxley Act of 2002
32 Certification under Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. SECTION 1350)
(b) Reports on Form 8-K
During the quarter ended June 30, 2003, the Company filed one report on Form
8-K to report the engagement of Tanner + Co. as its independent public
accountants.
24
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report, as amended, to be signed on its behalf by the undersigned,
thereunto duly authorized.
REMOTEMDX, INC.
Date: October 30, 2003 By: /s/ David G. Derrick
-------------------------------------------------
David G. Derrick,
Chief Executive Officer
Date: October 30, 2003 By: /s/ Michael G. Acton
----------------------------------------
Michael G. Acton,
Principal Accounting Officer