Track Group, Inc. - Annual Report: 2008 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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(Mark
One)
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For
the fiscal year ended September 30, 2008
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OR
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For
the transition period from
to
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Commission file number:
0-23153
REMOTEMDX,
INC.
(Exact
name of registrant as specified in its charter)
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Utah
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87-0543981
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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150
West Civic Center Drive, Suite 400, Sandy, Utah 84070
(Address
of principal executive offices, Zip Code)
(801)
451-6141
(Registrant's
telephone number, including area code)
Securities registered pursuant to
Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: Common Stock, $0.0001 par
value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d)
of the Act. Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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 o
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
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Large accelerated
filer o
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Accelerated
filer x
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Non-accelerated
filer o
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Smaller reporting
company o
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Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No x
There
were 159,231,260 shares of the registrant's common stock outstanding as of
December 22, 2008. The aggregate market value of common stock held by
non-affiliates of the registrant as of December 22, 2008 was approximately
$46,708,276.
FORM
10-K
For the
Fiscal Year Ended September 30, 2008
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Page
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Part I
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Item 1
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Business
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3
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Item 1A
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Risk
Factors
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10
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Item 1B
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Unresolved
Staff Comments
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15
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Item 2
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Properties
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15
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Item 3
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Legal
Proceedings
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15
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Item 4
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Submission
of Matters to a Vote of Security Holders
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16
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Part II
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Item 5
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Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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17
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Item 6
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Selected
Financial Data
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20
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Item 7
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Management's
Discussion and Analysis of Financial Condition and Results of
Operation
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Item 7A
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Quantitative
and Qualitative Disclosures About Market Risk
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35
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Item 8
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Financial
Statements and Supplementary Data
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35
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Item 9
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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35
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Item 9A
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Controls
and Procedures
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35
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Item 9B
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Other
Information
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Part III
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Item 10
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Directors,
Executive Officers and Corporate Governance
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Item 11
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Executive
Compensation
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42
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Item 12
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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48
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Item 13
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Certain
Relationships and Related Transactions, and Director
Independence
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50
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Item 14
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Principal
Accounting Fees and Services
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52
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Part IV
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Item 15
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Exhibits,
Financial Statement Schedules
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53
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Signatures
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The
statements contained in this Report on Form 10-K that are not purely
historical are considered to be "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These
statements represent our expectations, beliefs, anticipations, commitments,
intentions, and strategies regarding the future, and include, but are not
limited to the risks and uncertainties outlined in item 1A Risk Factors,
and item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operation. Readers are cautioned that actual results could differ
materially from the anticipated results or other expectations that are expressed
in forward-looking statements within this Report.
2
General
RemoteMDx,
Inc. (“RemoteMDx” or the “Company”) markets and deploys offender management
programs, combining patented GPS (Global Positioning System)
tracking technologies, fulltime 24/7/365 intervention-based monitoring
capabilities and case management services. We believe that we
currently deliver the only offender management technology which integrates GPS,
RF (Radio Frequency)
and an interactive 3-way voice communication system into a single device,
deployable on offenders worldwide. Through our patented electronic monitoring
technologies and services, we empower law enforcement, corrections and
rehabilitation professionals with offender, defendant, probationer and parolee
programs, which grant convicted criminals and pre-trial suspects an accountable
opportunity to be “free from prison”, while providing for greater
public safety at a lower cost to incarceration or traditional resource-intensive
alternatives.
TrackerPAL I & II – The
TrackerPAL™ portfolio of products, e-Arrest beacons and monitoring services are
designed to create “Jails
without Walls,” customizable by offender types (e.g., domestic abusers,
sexual predators, gang members, pre-trial defendants, juvenile offenders, etc.).
Additionally, our proprietary software and device firmware support the dynamic
accommodation of agency-established monitoring protocols, victim protection
imperatives, geographic boundaries, work environments, school attendance,
rehabilitation programs and sanctioned home restrictions. TrackerPAL
is designed for federal, state and local agencies to provide location tracking
of select individuals in the criminal justice system. The TrackerPAL
device fastens to the offender's ankle with a tamper resistant strap (steel
cabling with optic fiber) that can only be adjusted or removed without detection
by a supervising officer through services provided by the Company’s SecureAlert
Monitoring Center (or other monitoring centers). The Company’s center acts as an
important link between the offender and the supervising officer as monitoring
center specialists persistently track and monitor the offender, initiating
contact at the direction of the supervising agency and/or when the offender is
in violation of any established restrictions or protocols. An
intelligent device with integrated computer circuitry and constructed from
case-hardened plastics, the TrackerPAL unit promptly notifies the monitoring
center if any attempt is made to remove or otherwise tamper with the device or
optical strap housing.
According
to the Bureau of Justice Statistics (2007), it is estimated that approximately
7,235,728 people are now either incarcerated on parole or on probation. The
average cost of incarcerating an inmate ranges from $65 to $175 per day
dependent upon facility type, security level, amenities and jurisdiction. And
with ever-growing economic pressures, it is widely recognized that these costs
are unsustainable with ongoing state and federal budget reductions,
facility-specific overcrowding concerns, increased rehabilitation imperatives
and politicized re-socialization agendas. Thus, electronic monitoring
alternatives to incarceration for low and moderate risk offenders (adult and
juveniles), early release for good behavior initiatives, work release programs,
sentencing diversions and accelerated halfway house deployments are now strongly
encouraged and seriously considered by legislative and judicial branches of
government in many jurisdictions. For between 10% to 15% of the
traditional costs of incarceration, the Company’s TrackerPAL monitoring center
and patented devices can monitor offenders continuously, providing real-time
location tracking, interactive voice access and intervention-biased contact,
reducing the potential for subsequent or repeat offenses.
Many
jurisdictions are also embracing “offender pay”, “parent pay” and/or “partial
pay” programs shifting the burden of the tracking and monitoring costs in whole
or part to the offender directly, defraying the cost to the public. We estimate
that approximately 20% of our gross revenues come from offender payments
directly under court order and threat of re-incarceration for non-payment; the
majority of these accounts remain in compliance because of the severe
consequences of non-payment. This aspect of our business is growing
significantly and we expect that it will outpace traditional tax-payer obligated
payment programs.
Strategically,
and in support of ever-growing rehabilitation and re-socialization efforts, the
Company has adopted a broader services charter to support and encourage many
evolving rehabilitation initiatives. Our “C.A.R.E.” programs support
Corrections and Accountability objectives in concert with Rehabilitation and
Empowerment agendas. Specifically, our technology facilitates a stringent
protocol enforcement capability, incorporating restricted movement provisions,
coupled with enablement of positive reinforcement communications, all in support
of social worker interactions, ongoing ministry options and proactive access by
authorized counselors and/or sponsors. We believe that our programs
are uniquely positioned to allow for regular, frequent, and positive
interactions and daily affirmations with offenders, as they strive to again
become responsible and contributing members of society, while living within the
virtual “electronic fence” boundaries established through our proprietary
technologies.
The
offender marketplace today provides significant opportunity for growth, as local
agencies, county governments and state legislators are confronted with
ever-growing offender populations, pre-trial overcrowding, resource limitations
and economic crises. Importantly, the company is strategically positioned to
capitalize on these public sector challenges, while enhancing reduced resource
effectiveness and coverage through our offender offerings, which act as a force
multiplier for impaired agencies. We are also attracting new customers to the
industry, who historically have only leveraged now obsolete “home arrest”
technologies, and are now seeking GPS tracking and fulltime monitoring
alternatives. Additionally, we are very encouraged by the interest and expansion
of many rehabilitation initiatives, which will avail themselves to our program
offerings in a mutual pursuit to reduce recidivism, encourage re-socialization
and to facilitate the earlier release of qualified candidates.
3
During
fiscal year 2008 and in response to these evolving market factors, the Company
restructured and right-sized our direct sales force throughout the United
States, while embracing an expanded and growing distributorship model
domestically and internationally. We believe that this will help to
ensure localized market knowledge, relationship leverage and enhanced ability to
respond effectively to requests for sole-sourced and/or competitive proposals.
This model has also allowed us to better focus on expanded market sectors,
judicial branch contacts and legislature interfaces in ongoing efforts to work
from both the bottom up at agencies, as well as from the top down in county and
state governments, securing multi-level commitments to embed our programs into
ongoing probation, parole and policing efforts. We also completed acquisitions
which we believe will enable us to increase our revenues in target
markets. Although acquisitions require the commitment of capital,
both to consummate the acquisition as well as to integrate the acquired
businesses, we believe that we will be able to integrate these entities and
increase our revenues, although there can be no guarantee that revenues will
increase as projected or anticipated.
The
assimilation of these acquired entities is subject to uncertainties and
risks. There can be no assurance that we will successfully integrate
these companies into our operations without incurring significant unanticipated
costs or experiencing unexpected operational problems. Some of the
potential risks include:
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Management
of expanded inventory base.
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Control
of operations that are more geographically diverse than our prior
operations.
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Account
collections of added customer
accounts.
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The
need to secure additional operating and working
capital.
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The
ability to reduce overhead costs and streamline
operations.
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Potential
conflicts arising from the distribution of products or services from
providers who are or may be competitors of the
Company.
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Availability
of trained support personnel.
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In
summary, during the year ended September 30, 2008, we were case managing and/or
electronically monitoring approximately 12,700 offenders and sold 4,000
TrackerPAL devices internationally, with recurring daily revenues expected to
begin during the fiscal quarter ending March 31, 2009. We have worked to build
our sales force and to identify new markets and opportunities. We
have entered into monitoring agreements with approximately 400 law enforcement
and bail bond agencies throughout the United States. We acquired two
businesses to further our efforts to increase our revenues and market
development and now maintain 10 expanding distributorships. Although there can
be no guarantee that we will be able to continue these efforts or be able to
implement our business plan as anticipated, management believes that the Company
is in a good position to move forward and continue the growth of the business
and to take advantage of the market opportunities open to it.
Our
Strategy
Our strategy is to empower law
enforcement, corrections and rehabilitation professionals with sole-sourced
offender management programs, which grant offenders accountable opportunity,
while providing for greater public safety at a lower cost. We will accomplish
our strategy through the deployment of our SecureAlert GPS/RF Tracking,
Intervention Monitoring and Rehabilitation Technologies to corrections,
probation, law enforcement and rehabilitation services agencies worldwide, all
in support of offender reformation and re-socialization initiatives. Our
exclusive portfolio of products and services balance the need to dynamically
track and monitor offenders with the opportunity to positively encourage and
transform offenders, thus reducing recidivism through our proprietary C.A.R.E.™
(Correction, Accountability, Rehabilitation, Empowerment) programs and
client-adapted initiatives. We will continue to develop and deploy adaptive,
cost-effective products and services, which meet the ever-changing needs of our
clients, while providing enhanced public safety at a lower cost. Importantly,
while there are no ongoing warranties of our business model and no assurances of
our capabilities to continue to raise necessary expansion capital, we will
endeavor to ensure our ongoing viability through diligent, margin-centric
imperatives and operational efficiency gains through prioritized management
initiatives.
Background
RemoteMDx was originally formed to
manufacture and market medical diagnostic stains, solutions and related
equipment. Through the acquisition of SecureAlert, Inc.
(“SecureAlert”) in July 2001, the Company expanded its product sales and
monitoring services related to the Personal Emergency Response Systems
(“PERS”).
In 2006,
the Company developed the GPS tracking technology and monitoring business
currently conducted by our subsidiary SecureAlert. SecureAlert’s business
involves manufacturing, distributing, and monitoring mobile emergency and GPS
tracking products, worn on the body, that focus on the defendant and offender
tracking and monitoring market.
4
To complement our own offerings and
obtain additional means to capture position in the offender management market,
in January of 2008, we completed the acquisition of a majority interest in the
Court Programs Inc. group of companies (“Court Programs”), headquartered in
Gulfport, Mississippi; and Midwest Monitoring and Surveillance, Inc. (“Midwest
Monitoring”) which is based in Fairmont, Minnesota. These
acquisitions brought the Company solid business relationships with ongoing
revenue streams, as well as the possibility of expanding SecureAlert’s presence
into the existing accounts of the acquired companies. Furthermore,
they brought business processes and practices in the area of case management,
offender pay programs and attendant services that could be leveraged and
integrated into SecureAlert.
In order to focus on such integration
and leverage potential, during the fiscal year ended September 30, 2008 we
divested ourselves of our majority ownership interest of the diagnostic stain
business conducted by our former subsidiary Volu-Sol Reagents Corporation
(“Volu-Sol”). We are in the process of completing the divestiture and
expect to complete the distribution to RemoteMDx shareholders of our remaining
interest (approximately 17% of the common stock) in Volu-Sol during the fiscal
quarter ending March 31, 2009.
Marketing
According to the latest figures from
the United States Department of Justice, Bureau of Justice Statistics (2007),
over 7.2 million people were in prison, in jail, or on probation or parole in
the United States. This represents approximately 3.2% of the U.S.
population or about 1 in every 31 adults. Of these, approximately 5
million adult men and women are on supervised probation or parole and a
total of 798,202 adult men and women are on parole or mandatory conditional
release following a prison term. These numbers are expected to
continue to grow as state and county budget deficits hinder the development and
staffing of new prisons and jails, which are already under significant
pressure. We expect that this pressure will not be relieved any time
soon with the deepening economic crisis in the United States. The
tandem issues of reduced budgets and the increasing number of overcrowded jails
and prisons should drive governmental agencies to technology solutions,
including those offered by the Company.
The Company has worked to strengthen
its foundation to meet the increased demand anticipated by the above market
drivers. In addition to the acquisition and integration of Court
Programs and Midwest Monitoring and the divesture of Volu-Sol to tighten
industry focus, through SecureAlert the Company introduced its second generation
TrackerPAL device, TrackerPAL IITM, and
the eArrest BeaconTM. TrackerPAL
II expands upon the best features of the predecessor TrackerPAL I. It
maintains a single unit design which integrates GPS, expanded waterproofing,
95-decibal siren, cell-based data transmission, and industry-unique cell-based
voice capability. New features include the capability to interface
with the eArrest Beacon to provide indoor tracking, and water-proof as opposed
to water-resistant design.
As with
TrackerPAL I, TrackerPAL II provides the ability to electronically track a
wearer’s location by transmitting the device’s location to the Company’s
Monitoring Center as it receives GPS signals and transmits that information
through its cellular technology. However, a device’s ability to
receive GPS signals is not always possible if it is in a location that impedes
those signals, such as a high-rise apartment building or a concrete-wall
workplace. It is with these situations in mind that the eArrest
Beacon was developed. For these situations, TrackerPAL II can be
combined with the eArrest Beacon, to establish a radio frequency
tether. So long as the wearer is within range of an eArrest Beacon
when he or she is scheduled to be, the Monitoring Center is able to receive and
record that information, and no alarm is created. However, if the
wearer goes out of range, an alarm is created and the Monitoring Center responds
according to pre-established protocols. In addition, the Beacon can
be associated with multiple Tracker PAL II devices allowing for utilization in
settings such as half-way houses, detention centers and prisons; providing the
ability to monitor the presence of multiple individuals
simultaneously.
Under our
current business model, the majority of customers lease our TrackerPAL devices
and eArrest Beacons. The equipment is leased under a contractual arrangement
(usually at least one year) which may effectively be cancelled at any time by
either party with 30 days notice. We may also pay a monthly fee to
distributors for each monitoring contract originated through that
distributor.
In
addition to this “agency pay” model, our subsidiaries Court Programs and Midwest
Monitoring brought “offender pay” programs to the Company. This model
was integrated into SecureAlert. A benefit of offender pay is that it
calls for payment in advance of service, which improves cash
flow. Also, given the budget constraints discussed, it is anticipated
that the demand for offender pay programs will continue to grow and the Company
has positioned itself well to address this increased requirement.
5
Research
and Development Program
General
Information
GPS technology utilizes highly accurate
clocks on 24 satellites orbiting the earth owned and operated by the U.S.
Department of Defense. These satellites are designed to transmit
their identity, orbital parameters and the correct time to earthbound GPS
receivers at all times. Supporting the satellites are several
radar-ranging stations maintaining exact orbital parameters for each satellite
and transmitting that information to the satellites for rebroadcast at
frequencies between 1500 and 1600 MHz.
A GPS receiver (or engine) scans the
frequency range for GPS satellite transmissions. If the receiver can detect
three satellite transmissions, algorithms within the engine deduce its location,
usually in terms of longitude and latitude, on the surface of the earth as well
as the correct time. If the receiver can detect four or more GPS satellite
transmissions, it can also deduce its own elevation above sea
level. The effectiveness of GPS technology is limited by obstructions
between the device and the satellites and, therefore, service can be interrupted
or may not be available at all if the user is located in the lower floors of
high-rise buildings or underground.
During the year ended September 30,
2008, we spent $4,811,128 on research and development, compared to research and
development expenditures of $4,564,121 in the year ended September 30, 2007 and
$2,087,802 for the year ended September 30, 2006. During the years
ended September 30, 2007 and 2006, the Company disposed of monitoring equipment
with a net book value of $1,454,784 and $0, respectively, that was initially
used as test units and that had served its useful life. In fiscal year
2008, we disposed of units with a net book value of $570,948. This
expense was classified as cost of revenues.
Monitoring
Center
As we developed prior product lines, we
simultaneously worked to create the SecureAlert monitoring center. In contrast
with a typical monitoring center, our monitoring center is equipped with
hardware and software that pinpoints the location of the incoming caller by
utilizing GPS technology. This capability is referred to as
telematic. The operator’s computer screen can identify the caller as
well as locate the caller’s precise location on a detailed map. The
Company believes the monitoring center is the cornerstone of our
business. An operator goes through extensive training to insure
professional service is provided to the supervising parole officer and
individuals wearing the TrackerPAL™ portfolio of products.
In order to prepare for an increase in
TrackerPAL devices to be monitored, the Company is continuing to build up the
monitoring center to effectively manage these devices. In order to
increase the efficiencies in the monitoring center, the Company is developing
software to further expand service automation in the processing of alarms and
operational events resulting in increased operator efficiency and ability to
manage more devices. The automation of alarms includes
pre-recorded responses to inform the offender of the alarm and to resolve the
issue. If the issue is not timely resolved, an operator will become
involved and take the additional necessary actions according to protocols set up
by the customer. The Company anticipates one operator will be able to
manage over 230 active devices after the software is fully
developed.
Strategic
Relationships
We believe one of our strengths is the
high quality of our strategic alliances. Our two primary alliances
are described below.
Puracom,
Inc.
Puracom, Inc. (“Puracom”) is a Canadian
firm that specializes in hardware and software development in the areas of GPS,
GSM and GPRS. It is the preferred distributor of GPS chip sets manufactured by
Motorola and is recognized for its rapid development cycles and expertise in
both the cellular and GPS areas. Puracom performs research and
development for the Company on a contract basis.
Dynamic
Source Manufacturing
Dynamic Source Manufacturing (“DSM”)
located in Calgary, Alberta, Canada, is an electronics manufacturing company
that delivers a full range of services to its clients. DSM currently
manufactures the Company’s TrackerPAL product.
Competition
in Offender Management Markets
In fiscal
year 2008, we encountered various levels of GPS, house arrest and case
management competition from seven traditional and evolving competitors, as
identified below:
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Pro Tech Monitoring Inc., Odessa, FL – This company has satellite tracking software technology that operates in conjunction with GPS and wireless communication networks. | |
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iSECUREtrac Corp., Omaha, NE – This company supplies electronic monitoring equipment for tracking and monitoring persons on pretrial release, probation, parole, or work release. | |
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Sentinel Security and Communications, Inc., Rochester NY– This company supplies monitoring and supervision solutions for the offender population. | |
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Omnilink Systems, Inc., Alpharetta, GA – This company provides a one-piece device combined with GPS and Sprint cellular networks to electronically track an individual. | |
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BI
Incorporated, Boulder, CO – This company has been providing intensive
community supervision services and technologies for more than 20 years to
criminal justice agencies throughout the United
States.
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6
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G4S
plc – Crawley, Sussex, England – This international company is the world’s
leading international security solutions group. In the United
States, they provide electronic monitoring of offenders, prison and
detention center management and transitional support
services. Currently, G4S resells Omnilink’s active GPS
device.
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Satellite
Tracking of People, LLC – Houston, TX – This company provides GPS tracking
systems and services to government
agencies.
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The
Company also faces competition from small and regional companies that provide
electronic monitoring technology along with localized case management and/or
monitoring services. Some of these entities utilize less well-known
technologies or are resellers of the above competitor’s products. The
Company saw an increase in these types of businesses in 2008. We do
not believe there is reliable publicly available information to indicate the
relative market share of the Company.
Dependence
on Major Customers
In fiscal year 2008, no customer
accounted for more than 10% of the Company’s revenues. During the fiscal year
ended September 30, 2007, we had revenues from QuestGuard of $3,229,760 or
approximately 49% of total revenues and from Seguridad Satelital Vehicular of
$928,800 or approximately 14% of total revenues. We have no
arrangements or contracts with these customers that would require them to
purchase a specific amount of product or services from us.
Dependence
on Major Suppliers
The Company purchases cellular services
from a variety of providers. The costs to the Company for these
services during the fiscal years ended September 30, 2007 and 2006 were
approximately $2,592,951 and $290,000, respectively. During the year ended
September 30, 2008, cellular service expense totaled $2,939,790.
The Company has established a
relationship with Dynamic Source Manufacturing (DSM) to manufacture the
TrackerPAL device. All monitoring equipment that has been leased or
sold to date by the Company has been manufactured by DSM. Should the
relationship between DSM and the Company cease, the Company would need to find
another vendor to manufacture the device which could limit the ability to lease
additional monitoring equipment.
Product
Returns
Our first generation TrackerPAL device
experienced significantly high in-field failure rates. These problems
involved: (1) water ingression; (2) low battery and charger life and
functionality; (3) weak GPS signal strength; and (4) scratching and other
aesthetic damage when the device was removed from an
offender. Remediating these problems required that the Company
refurbish products that had been delivered and products in
inventory. The process was largely completed during the year ended
September 30, 2008. Steps taken to address the problems included the
following:
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Waterproofing the device by applying a chemical-based ‘weld’ around the back panel seam and augmenting the seal integrity of the rear hatch of the device | |
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Improving electrical connectivity between the battery and the device | |
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Replacing the Integrated Circuit (“IC”) chip installed in the battery chargers | |
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Redesigning and installing a new cellular antenna that improves coverage and enhances GPS tracking | |
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Enhancing the cosmetic cap design to avoid the early potential to scar outer housing of the device when being removed from the ankle and using different screws to mitigate the stripping of screws and damaging of the device when it is being removed. |
The problems encountered and corrected
in the first TrackerPAL devices led to significant improvements in the new
TrackerPAL II device now being distributed by the Company.
Intellectual
Property
Trademarks. We
have developed and use registered trademarks in our business, particularly
relating to our corporate and product names. We own eight trademarks that are
registered with the United States Patent and Trademark Office and one trademark
registered in Mexico. Federal registration of a trademark in the United States
enables the registered owner of the mark to bar the unauthorized use of the
registered mark in connection with a similar product in the same channels of
trade by any third-party anywhere in the United States, regardless of whether
the registered owner has ever used the trademark in the area where the
unauthorized use occurs. We have one application for registration pending
approval in the state of California and one application in the United States
that has been approved and is awaiting the filing of a statement of
use. We may file additional applications for the registration of our
trademarks in foreign jurisdictions as our business expands under current and
planned distribution arrangements. Protection of registered
trademarks in some jurisdictions may not be as extensive as the protection in
the United States.
7
The following table summarizes our
trademark registrations and applications:
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Mark
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Application
Number
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Registration
Number
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Status/Next
Action
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MOBILE911
|
75/615,118
|
2,437,673
|
Registered
|
|
MOBILE911
SIREN WITH 2-WAY VOICE
COMMUNICATION
& DESIGN
|
76/013,886
|
2,595,328
|
Registered
|
|
WHEN
EVERY SECOND MATTERS
|
76/319,759
|
2,582,183
|
Registered
|
|
MOBILEPAL
|
78/514,031
|
3,035,577
|
Registered
|
|
HOMEPAL
|
78/514,093
|
3,041,055
|
Registered
|
|
PAL
SERVICES
|
78/514,514
|
3,100,192
|
Registered
|
|
REMOTEMDX
|
78/561,796
|
Allowed-Awaiting
Statement of Use
|
|
|
TRACKERPAL
|
78/843,035
|
3,345,878
|
Registered
|
|
MOBILE911
|
78/851,384
|
3,212,937
|
Registered
|
|
TRACKERPAL
|
CA
1,315,487
|
Pending
|
|
|
TRACKERPAL
|
MX
805,365
|
960954
|
Registered
|
Patents. We have four
patents in the United States and one patent in China and we have seven patents
pending in the United States and ten pending internationally. The following
tables contain information regarding our patents and patent applications; there
can be no assurance given that the applications will be granted or that they
will, if granted, contain all of the claims currently
included.
|
Domestic
Patents:
|
||||
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Patent
Title
|
Application/Patent
Number
|
Filing/Issue
Dates
|
Status
|
|
|
Remote
Tracking and Communication Device
|
7,330,122
|
2/12/08
|
Issued
|
|
|
Remotely
Controllable Thermostat
|
6,260,765
|
7/17/01
|
Issued
|
|
|
Interference
Structure for Emergency Response System Wristwatch
|
6,366,538
|
4/2/02
|
Issued
(Reacquired)
|
|
|
Multiple
Emergency Response Services Combination Emergency Phone and Personal Audio
Device
|
6,285,867
|
9/4/01
|
Issued
|
|
|
Alarm
and Alarm Management System for Remote Tracking Devices
|
11/489,992
|
7/14/06
|
Pending
|
|
|
A
Remote Tracking Device and a System and Method for Two-Way Voice
Communication Between Device and a Monitoring Center
|
11/486,989
|
7/14/06
|
Pending
|
|
|
A
Remote Tracking System with a Dedicated Monitoring Center
|
11/486,976
|
7/14/06
|
Pending
|
|
|
Remote
Tracking System and Device with Variable Sampling
|
11/486,991
|
7/14/06
|
Pending
|
|
|
Methods
for Establishing Emergency Communications Between a Communications Device
and a Response Center
|
11/830,398
|
7/30/07
|
Pending
|
|
|
Remote
Tracking and Communications Device
|
12/028,088
|
2/8/08
|
Pending
|
|
|
A
System and Method for Monitoring Individuals Using a Beacon and
Intelligent Remote Tracking Device
|
US
61/034,720
|
3/7/08
|
Pending
|
|
8
|
International
Patents:
|
|||
|
Patent
Title
|
Application/Patent
Number
|
Filing/Issue
Dates
|
Status
|
|
Emergency
Phone with Single-Button Activation
|
ZL
01807350.6
|
10/5/05
|
Issued
|
|
Remote
Tracking and Communication Device
|
Brazil
PI0614742.9
|
8/4/06
|
Pending
|
|
Remote
Tracking and Communication Device
|
Canada
2617923
|
8/4/06
|
Pending
|
|
Remote
Tracking and Communication Device
|
Europe
06836098.1
|
8/4/06
|
Pending
|
|
Remote
Tracking and Communication Device
|
Mexico
a/2008/001932
|
8/4/06
|
Pending
|
|
Emergency
Phone with Single-Button Activation
|
EP
01924386.4
|
3/28/01
|
Pending
|
|
Emergency
Phone with Single-Button Activation
|
JP
2001-571568
|
3/28/01
|
Pending
|
|
Alarm
and Alarm Management System for Remote Tracking Devices
|
PCT/US2007/072736
|
7/3/07
|
Pending
|
|
A
Remote Tracking Device and a System and Method for Two-Way Communication
Between the Device and a Monitoring Center
|
PCT/US2007/072740
|
7/3/07
|
Pending
|
|
A
Remote Tracking System with a Dedicated Monitoring Center
|
PCT/US2007/072743
|
7/3/07
|
Pending
|
|
Remote
Tracking System and Device with Variable Sampling and Sending Capabilities
Based on Environmental Factors
|
PCT/US2007/072746
|
7/3/07
|
Pending
|
During
the year ended September 30, 2008, the Company reacquired Patent Number
6,366,538 which was previously sold in exchange for Patent Number 7,092,695 and
Patent Number 7,251,471. Patent Number 6,226,510 and Patent Number
6,044,257 were originally sold subject to terminal disclaimers requiring common
ownership with patents owned (Patent Number 7,092,695 and Patent Number
7,251,471) by RemoteMDx but not assigned to purchaser. A terminal
disclaimer is used to link two patents filed by the same inventors and claiming
the same invention. In order to get the additional patent rights
desired by the purchaser, the two patents are linked using a terminal disclaimer
that specifies that they have the same term and must be commonly
assigned.
We intend
to protect our legal rights concerning intellectual property by all appropriate
legal action. Consequently, we may become involved from time to time in
litigation to determine the enforceability, scope, and validity of any of the
foregoing proprietary rights. Any patent litigation could result in substantial
cost and divert the efforts of management and technical personnel.
Trade
Secrets. We own certain intellectual property, including trade
secrets that we seek to protect, in part, through confidentiality agreements
with employees and other parties, although some employees who are involved in
research and development activities have not entered into these agreements. Even
where these agreements exist, there can be no assurance that these agreements
will not be breached, that we would have adequate remedies for any breach, or
that our trade secrets will not otherwise become known to or independently
developed by competitors.
Seasonality
Given the continued and steady increase
in revenues throughout 2008, no revenue seasonality, if it existed, could be
detected. However, as in previous years, incremental deployment
opportunities were found to be slower in the months of July and August. This was
due to the unavailability of many judges, probation directors and other key
parole officials, who observe a traditional vacation season.
Backlog
With the
commercial availability of TrackerPAL II in August 2008, the Company has
realized intermittent weekly manufacturing and shipping backlogs, ranging from
75 to 125 units for these devices through December 1, 2008. This
backlog is primarily related to (1) orders for the replacement of TrackerPAL I
units, (2) the addition of incremental units within existing accounts and (3)
the fulfillment of new orders for new accounts. The Company views backlogs as
undesirable, as they impair deployments, which necessarily reduce available
recurring revenue streams. The Company continues to work on mitigating backlogs
in an ongoing effort to maximize demand fulfillment and to capitalize on all
available recurring revenue opportunities.
9
Environment
We are
not aware of any instance in which we have contravened federal, state, or local
laws relating to protection of the environment or in which we otherwise may be
subject to liability for environmental conditions that could materially affect
operations.
Employees
As of
December 1, 2008, the Company had 160 full time employees and 33 part-time
employees. None of the employees are represented by a labor union or
subject to a collective bargaining agreement. The Company has never
experienced a work stoppage and management believes that the relations with
employees are good. After September 30, 2008, the Company downsized
its monitoring center and other headquarters staff by approximately 13% (26
persons) as part of a restructuring intended to improve operating margins and
reduce overhead. Additional reductions in force and cost-saving
measures will also be considered in the next six months as the Company
implements its strategic plan to improve operating results by reducing operating
losses.
Additional
Available Information
We
maintain executive offices and principal facilities at 150 West Civic Center
Drive, Suite 400, Sandy, Utah 84070. Our telephone number is
(801) 451-6141. We maintain a World Wide Web site at
www.remotemdx.com. The information on our web site should not be
considered part of this Report on Form 10-K.
We make
available, free of charge at our corporate web site, copies of our annual
reports filed with the Securities and Exchange Commission (“SEC”) on
Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, proxy statements, and all amendments to these reports, as soon as
reasonably practicable after such material is electronically filed with or
furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange
Act. This information may also be obtained from the SEC’s on-line database,
which is located at www.sec.gov.
Risks and uncertainties that may affect
our business, financial condition, performance, development, and results of
operations include the following:
The financial
statements contained in this annual report on Form 10-K for the year ended
September 30, 2008 have been prepared on the basis that the Company will
continue as a going concern, notwithstanding the fact that its financial
performance and condition during the past few years raise substantial doubt as
to its ability to do so. There is no assurance the Company will ever be
profitable. In fiscal year 2008, the Company incurred a net loss of
$49,587,050, negative cash flows from operating activities of $9,672,744, and as
of September 30, 2008 has an accumulated deficit of
$182,683,996. These factors raise substantial doubt about the
Company’s ability to continue as a going concern. The financial statements
included in this Report do not include any adjustments that might result from
the outcome of this uncertainty. Our plan with respect to this
uncertainty is to focus on increasing the number of TrackerPAL devices in the
market place from which we will generate monitoring service
revenue. There can be no assurance that revenues will increase
rapidly enough to offset operating losses and repay
indebtedness. Likewise, there can be no assurance that the debt
holders will be willing to convert the debt obligations to equity securities or
that the Company will be successful in raising additional capital from the sale
of equity or debt securities. If the Company is unable to increase
cash flows from operating activities or obtain additional financing, it will be
unable to continue the development of its products and will likely cease
operations.
The Company has a
history of losses and anticipates significant future losses and may be unable to
project its revenues and expenses accurately. The Company will incur
significant expenses associated with the development and deployment of its new
products and promoting its brand. It intends to enter into additional
arrangements through current and future strategic alliances that may require it
to pay consideration in various forms and in amounts that may significantly
exceed current estimates and expectations. The Company may also be
required to offer promotional packages of hardware and software to end-users at
subsidized prices in order to promote its brand, products and services. These
guaranteed payments, promotions and other arrangements will result in
significant expense. If the Company does achieve profitability, it cannot be
certain that it will be able to sustain or increase profitability in the
future. In addition, because of its limited operating history in its
newly targeted markets, the Company may be unable to project revenues or
expenses with any degree of certainty. Management expects expenses to increase
significantly in the future as the Company continues to incur significant sales
and marketing, product development and administrative expenses. The
Company cannot guarantee that it will be able to generate sufficient revenues to
offset operating expenses or the costs of the promotional packages or subsidies
described above, or that it will be able to achieve or maintain profitability.
If revenues fall short of projections, our business, financial condition and
operating results would be materially adversely affected.
10
General economic
conditions may affect our revenue and harm our business. As widely
reported, financial markets in the United States, Europe and Asia have been
experiencing extreme disruption in recent months. Unfavorable changes in
economic conditions, including declining consumer confidence, inflation,
recession or other changes, may lead our customers to delay or reduce purchases
of our products and our results of operations and financial condition could be
adversely affected thereby. Challenging economic conditions also may impair the
ability of our customers or distributors to pay for products they have
purchased, and as a result, our reserves for doubtful accounts and write-offs of
accounts receivable could increase. Our cash flows may be adversely affected by
delayed payments or underpayments by our customers. We are unable to predict the
duration and severity of the current disruption in financial markets and adverse
economic conditions in the U.S. and other countries.
As a result of
our increased focus on a new business market, our business is subject to many of
the risks of a new or start-up venture. The change in 2008 of our
business goals and strategy subjects us to the risks and uncertainties usually
associated with start-ups. Our business plan involves risks, uncertainties and
difficulties frequently encountered by companies in their early stages of
development. If the Company is to be successful in this new business
direction, it must accomplish the following, among other things:
|
·
Develop and introduce functional and attractive product and service
offerings;
|
|
·
Increase awareness of our brand and develop consumer
loyalty;
|
|
·
Respond to competitive and technological developments;
·
Increase gross profit margins;
·
Build an operational structure to support our business;
and
·
Attract, retain and motivate qualified
personnel.
|
If the
Company fails to achieve these goals, that failure would have a material adverse
effect on its business, prospects, financial condition and operating
results. Because the market for its new product and service offerings
is new and evolving, it is difficult to predict with any certainty the size of
this market and its growth rate, if any. There is no assurance that a
market for these products or services will ever develop or that demand for our
products and services will emerge or be sustainable. If the market fails to
develop, develops more slowly than expected or becomes saturated with
competitors, our business, financial condition and operating results would be
materially adversely affected.
Groups own or
control a significant number of our outstanding
shares. Certain groups or persons associated with them
beneficially own a substantial number of shares of our outstanding common
stock. As a result, these persons have the ability, acting as a
group, to effectively control our affairs and business, including the election
of our directors and, subject to certain limitations, approval or preclusion of
fundamental corporate transactions. This concentration of ownership may also
have the effect of delaying or preventing a change of control or making other
transactions more difficult or impossible without their support. See
Item 10 “Directors, Executive Officers and Corporate Governance,” and Item 12
“Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.”
There is no
certainty that the market will accept our new products and
services. Our targeted markets may never accept our products
or services. Governmental organizations may not use our products
unless they determine, based on experience, advertising or other factors, that
those products are a preferable alternative to currently available methods of
tracking. In addition, decisions to adopt new tracking devices can be
influenced by government administrators, regulatory factors, and other factors
largely outside our control. No assurance can be given that key
decision-makers will accept our new products, which could have a material
adverse effect on our business, financial condition and results of
operations.
Our relationship
with our certain stockholders presents potential conflicts of interest, which
may result in decisions that favor them over our other
shareholders. Two of our principal beneficial owners and
founders, David Derrick and James J. Dalton, provide management and/or financial
services and assistance to the Company. When their personal
investment interests diverge from our interests, they and their affiliates may
exercise their influence in their own best interests. Some decisions concerning
our operations or finances may present conflicts of interest between us and
these stockholders and their affiliated entities.
The Company
relies on significant suppliers for key products and cellular
access. If the Company does not renew these agreements
when they expire it may not continue to have access to these suppliers’ products
or services at favorable prices or in volumes as it has in the past, which would
reduce revenues and could adversely affect results of operations or financial
condition. The Company has entered into an agreement with a
national cellular access company for cellular services. We also rely currently
on a single manufacturer for the manufacture of our TrackerPAL
devices. If any of these significant suppliers were to cease
providing product or services to us, we would be required to seek alternative
sources. There is no assurance that alternate sources could be located or that
the delay or additional expense associated with locating alternative sources for
these products or services would not materially and adversely affect our
business and financial condition.
11
Our business
subjects our research, development and ultimate marketing activities to current
and possibly to future government regulations. The cost of compliance or the
failure to comply with these regulations could adversely affect our business,
results of operations and financial condition. Our monitoring device
products are not subject to specific approvals from any governmental agency,
although our products using cellular and GPS technologies must be manufactured
in compliance with applicable rules and regulations of the Federal
Communications Commission (“FCC”). There can also be no assurance that
changes in the legal or regulatory framework or other subsequent developments
will not result in limitation, suspension or revocation of regulatory approvals
granted to us. Any such events, were they to occur, could have a material
adverse effect on our business, financial condition and results of
operations. We may be required to comply with FCC regulations for
manufacturing practices, which mandate procedures for extensive control and
documentation of product design, control and validation of the manufacturing
process and overall product quality. Foreign regulatory agencies have similar
manufacturing standards. Any third parties manufacturing our products or
supplying materials or components for such products may also be subject to these
manufacturing practices and mandatory procedures. If we, our management or our
third-party manufacturers fail to comply with applicable regulations regarding
these manufacturing practices, we could be subject to a number of sanctions,
including fines, injunctions, civil penalties, delays, suspensions or
withdrawals of market approval, seizures or recalls of product, operating
restrictions and, in some cases, criminal prosecutions. Our products
and related manufacturing operations may also be subject to regulation,
inspection and licensing by other governmental agencies, including the
Occupational Health and Safety Administration.
The Company faces
intense competition, including competition from entities that are more
established and may have greater financial resources than we do, which may make
it difficult for us to establish and maintain a viable market
presence. Our current and expected markets are rapidly
changing. Existing products and services and emerging products and
services will compete directly with the products we are seeking to develop and
market. Our technology will compete directly with other technology,
and, although we believe our technology has or will have advantages over these
competing systems, there can be no assurance that our technology will have
advantages that are significant enough to cause users to adopt its
use. Competition is expected to increase. Many of these
competitors have products or techniques approved or in development and operate
large, well-funded research and development programs in the
field. Moreover, these companies and institutions may be in the
process of developing technology that could be developed more quickly or be
ultimately more effective than our planned products. We face
competition based on product efficacy, availability of supply, marketing and
sales capability, price and patent position. There can be no
assurance that our competitors will not develop more effective or more
affordable products, or achieve earlier patent protection or product
commercialization.
Our business plan
is subject to the risks of technological uncertainty, which may result in our
products failing to be competitive or readily accepted by our target
markets. We may not realize revenues from the sale of any of
our new products or services for several years, if at all. Some of
the products we are currently evaluating likely will require further research
and development efforts before they can be commercialized. There can be no
assurance that our research and development efforts will be successful or that
we will be successful in developing any commercially successful
products. In addition, the technology which we integrate or that we
may expect to integrate with our product and service offerings is rapidly
changing and developing. We face risks associated with the
possibility that our technology may not function as intended and the possible
obsolescence of our technology and the risks of delay in the further development
of our own technologies. Cellular coverage is not uniform throughout our current
and targeted markets and GPS technology depends upon “line-of-sight” access to
satellite signals used to locate the user. This limits the
effectiveness of GPS if the user is in the lower floors of a tall building,
underground or otherwise located where the signals have difficulty
penetrating. Other difficulties and uncertainties normally associated
with new industries or the application of new technologies in new or existing
industries also threaten our business, including the possible lack of consumer
acceptance, difficulty in obtaining financing for untested technologies,
increasing competition from larger or smaller well-funded competitors, advances
in competing or other technologies, and changes in laws and regulations
affecting the development, marketing or use of our new products and related
services.
Our business plan
anticipates significant growth through monitoring revenues and acquisitions. To
manage the expected growth the Company will require capital and there is no
assurance it will be successful in obtaining necessary additional
funding. If we are successful in implementing our business
plan, we may be required to raise additional capital to manage anticipated
growth. Our actual capital requirements will depend on many factors,
including but not limited to, the costs and timing of our ongoing development
activities the success of our development efforts, the cost and timing of
establishing or expanding our revenues, marketing and manufacturing activities,
the extent to which our products gain market acceptance, our ability to
establish and maintain collaborative relationships, competing technological and
market developments, the progress of our commercialization efforts and the
commercialization efforts of our marketing alliances, the costs involved in
preparing, filing, prosecuting, maintaining and enforcing and defending patent
claims and other intellectual property rights, developments related to
regulatory issues, and other factors, including many that are outside our
control. To satisfy our capital requirements, we may seek to raise funds through
public or private financings, collaborative relationships or other arrangements.
Any arrangement that includes the issuance of equity securities or securities
convertible into our equity securities may be dilutive to stockholders
(including the purchasers of the shares), and debt financing, if available, may
involve significant restrictive covenants that limit our ability to raise
capital in other transactions. Collaborative arrangements, if necessary to raise
additional funds, may require that we relinquish or encumber our rights to
certain of our technologies, products or marketing territories. Any
inability or failure to raise capital when needed could also have a material
adverse effect on our business, financial condition and results of operations.
There can be no assurance that any such financing, if required, will be
available on terms satisfactory to us, if at all.
12
Our products are
subject to the risks and uncertainties associated with the protection of
intellectual property and related proprietary rights. We
believe that our success depends in part on our ability to obtain and enforce
patents, maintain trade secrets and operate without infringing on the
proprietary rights of others in the United States and in other
countries. We have received several patents; we have also applied for
several additional patents and those applications are awaiting action by the
U.S. Patent Office. There is no assurance those patents will issue or
that when they do issue they will include all of the claims currently included
in the applications. Even if they do issue, those new patents and our
existing patents must be protected against possible infringement. The
enforcement of patent rights can be uncertain and involve complex legal and
factual questions. The scope and enforceability of patent claims are
not systematically predictable with absolute accuracy. The strength
of our own patent rights depends, in part, upon the breadth and scope of
protection provided by the patent and the validity of our patents, if
any. Our inability to obtain or to maintain patents on our key
products could adversely affect our business. We own five patents and
have filed and intend to file additional patent applications in the United
States and in key foreign jurisdictions relating to our technologies,
improvements to those technologies and for specific products we may
develop. There can be no assurance that patents will issue on any of
these applications or that, if issued, any patents will not be challenged,
invalidated or circumvented. The prosecution of patent applications
and the enforcement of patent rights are expensive, and the expense may
adversely affect our profitability and the results of our
operations. In addition, there can be no assurance that the rights
afforded by any patents will guarantee proprietary protection or competitive
advantage. Our success will also depend, in part, on our ability to
avoid infringing the patent rights of others. We must also avoid any
material breach of technology licenses we may enter into with respect to our new
products and services. Existing patent and license rights may require
us to alter the designs of our products or processes, obtain licenses or cease
certain activities. In addition, if patents have been issued to
others that contain competitive or conflicting claims and such claims are
ultimately determined to be valid and superior to our own, we may be required to
obtain licenses to those patents or to develop or obtain alternative
technology. If any licenses are required, there can be no assurance
that we will be able to obtain any necessary licenses on commercially favorable
terms, if at all. Any breach of an existing license or failure to
obtain a license to any technology that may be necessary in order to
commercialize our products may have a material adverse impact on our business,
results of operations and financial condition. Litigation that could
result in substantial costs may also be necessary to enforce patents licensed or
issued to us or to determine the scope or validity of third-party proprietary
rights. If our competitors prepare and file patent applications in
the United States that claim technology also claimed by us, we may have to
participate in proceedings declared by the U.S. Patent and Trademark Office to
determine priority of invention, which could result in substantial costs, even
if we eventually prevail. An adverse outcome could subject us to
significant liabilities to third parties, require disputed rights to be licensed
from third parties or require that we cease using such technology.
We also
rely on trade secrets laws to protect portions of our technology for which
patent protection has not yet been pursued or is not believed to be appropriate
or obtainable. These laws may protect us against the unlawful or
unpermitted disclosure of any information of a confidential and proprietary
nature, including but not limited to our know-how, trade secrets, methods of
operation, names and information relating to vendors or suppliers and customer
names and addresses. We intend to protect this unpatentable and
unpatented proprietary technology and processes, in addition to other
confidential and proprietary information in part, by entering into
confidentiality agreements with employees, collaborative partners, consultants
and certain contractors. There can be no assurance that these
agreements will not be breached, that we will have adequate remedies for any
breach, or that our trade secrets and other confidential and proprietary
information will not otherwise become known or be independently discovered or
reverse-engineered by competitors.
The existence of
certain anti-dilution rights applicable to our Series B Preferred Stock might
result in increased dilution inasmuch as the Company has offered and sold shares
of common stock or securities convertible into shares of common stock at prices
below the initial conversion rate of $3.00 per common share, unless those rights
are waived. The investors in our Series B preferred stock have
the right to an automatic adjustment of the conversion price of the Series B
preferred shares held by them in the event we sell shares of common stock or
securities convertible into common stock at a price below the original
conversion price of $3.00 per share. Certain holders of the Series B preferred
stock have waived their right to receive the adjustment but there is no
assurance that any holder of Series B preferred stock will waive those rights as
to issuances of common stock. Accordingly, we may be required to
issue additional shares of common stock to comply with anti-dilution adjustments
to the conversion rights of present or former preferred
shareholders. Any increase in the number of shares of common stock
issued upon conversion of Series B preferred shares would compound the risks of
dilution to existing stockholders. As of September 30, 2008, the
total outstanding shares of Series B Preferred stock of 10,999 could convert
into a maximum of 113,783 shares of common stock.
The obligation to
issue shares of common stock upon the exercise of outstanding options and
warrants or upon conversion of outstanding shares of preferred stock increases
the potential for short sales. Downward pressure on the market price of
our common stock that likely would result from issuances of common stock upon
conversion of preferred stock or convertible debentures, or upon the exercise of
options and warrants, could encourage short sales of common stock by the holders
of the preferred stock or others. A significant amount of short
selling could place further downward pressure on the market price of the common
stock, reducing the market value of the securities held by our
shareholders.
Payment of
dividends in additional shares of Series A preferred stock or in shares of
common stock will result in further dilution. Under the terms of the
Series A preferred stock, our board of directors may elect to pay dividends by
issuing additional shares of Series A preferred stock or common
stock. Dividends accrue from the date of the issuance of the
preferred stock, subject to any intervening payments in cash. Each share of
Series A preferred stock is convertible into 370 shares of common
stock. The issuance of additional shares of Series A preferred stock
or common stock as dividends could result in a substantial increase in the
number of shares issued and outstanding and could result in a decrease of the
relative voting control of the holders of the common stock issued and
outstanding prior to such payment of dividends and interest. As of
September 30, 2008, the total outstanding shares of Series A Preferred stock of
19 could convert into a maximum of 7,178 shares of common stock.
13
The Company has
had and will continue to have significant capital needs and there is no
assurance it will be successful in obtaining necessary additional funding.
We will be required to raise additional capital to fully implement our
business plan. Our actual capital requirements will depend on many
factors, including but not limited to, the costs and timing of our ongoing
development activities, the success of our development efforts, the cost and
timing of establishing or expanding our sales, marketing and manufacturing
activities, the extent to which our products gain market acceptance, our ability
to establish and maintain collaborative relationships, competing technological
and market developments, the progress of our commercialization efforts and the
commercialization efforts of our marketing alliances, the costs involved in
preparing, filing, prosecuting, maintaining and enforcing and defending patent
claims and other intellectual property rights, developments related to
regulatory issues, and other factors, including many that are outside our
control. To satisfy our capital requirements, we may seek to raise funds through
public or private financings, collaborative relationships or other arrangements.
Any arrangement that includes the issuance of equity securities or securities
convertible into our equity securities may be dilutive to stockholders
(including the purchasers of the shares), and debt financing, if available, may
involve significant restrictive covenants that limit our ability to raise
capital in other transactions. Collaborative arrangements, if necessary to raise
additional funds, may require that we relinquish or encumber our rights to
certain of our technologies, products or marketing territories. Any
inability or failure to raise capital when needed could also have a material
adverse effect on our business, financial condition and results of operations.
There can be no assurance that any such financing, if required, will be
available on terms satisfactory to us, if at all.
Penny stock
regulations may impose certain restrictions on marketability of the Company’s
securities. The SEC has adopted
regulations which generally define a “penny stock” to be any equity security
that has a market price (as defined) of less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to certain exceptions. As
a result, the common stock is subject to rules that impose additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors (generally those with
assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000
together with their spouse). For transactions covered by these rules,
the broker-dealer must make a special suitability determination for the purchase
of such securities and have received the purchaser’s written consent to the
transaction prior to the purchase. Additionally, for any transaction
involving a penny stock, unless exempt, the rules require the delivery, prior to
the transaction, of a risk disclosure document mandated by the SEC relating to
the penny stock market. The broker-dealer must also disclose the
commission payable to both the broker-dealer and the registered representative,
current quotations for the securities and, if the broker-dealer is the sole
market maker, the broker-dealer must disclose this fact and the broker-dealer’s
presumed control over the market. Finally, monthly statements must be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks. Consequently,
the “penny stock” rules may restrict the ability of broker-dealers to sell the
Company’s securities and may affect the ability of investors to sell the
Company’s securities in the secondary market and the price at which such
purchasers can sell any such securities.
Investors
should be aware that, according to the SEC, the market for penny stocks has
suffered in recent years from patterns of fraud and abuse. Such
patterns include:
|
|
·
|
Control
of the market for the security by one or a few broker-dealers that are
often related to the promoter or
issuer;
|
|
|
·
|
Manipulation
of prices through prearranged matching of purchases and sales and false
and misleading press releases;
|
|
|
·
|
“Boiler
room” practices involving high pressure sales tactics and unrealistic
price projections by inexperienced sales
persons;
|
|
|
·
|
Excessive
and undisclosed bid-ask differentials and markups by selling
broker-dealers; and
|
|
|
·
|
The
wholesale dumping of the same securities by promoters and broker-dealers
after prices have been manipulated to a desired level, along with the
inevitable collapse of those prices with consequent investor
losses.
|
The
Company’s management is aware of the abuses that have occurred historically in
the penny stock market.
The holders of
our Series B preferred stock have voting rights that are the same as the voting
rights of holders of our common stock, which effectively dilutes the voting
power of the holders of the common 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. Therefore, without converting the
shares of Series B preferred stock, the holders thereof enjoy the same voting
rights as if they held an equal number of shares of common stock, as well as the
liquidation preference described above. In addition, without the
approval of holders of a majority of the outstanding shares of Series B
preferred stock voting as a class, we are 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. As of
September 30, 2008, the total outstanding shares of Series B Preferred stock of
10,999 could convert into a maximum of 113,783 shares of common
stock.
14
We
received no written comments from the Commission staff that remain unresolved
regarding periodic or current reports under the Exchange Act in the
180 days prior to September 30, 2008.
Our
headquarters and monitoring facility are housed in 11,400 square feet of space
located at 150 West Civic Center Drive, Sandy, Utah. Monthly lease
payments are approximately $17,600 per month. We moved into these
facilities during the fourth fiscal quarter of 2005. During November 2008,
the Company renewed 8,106 square feet this lease which will expire on November
30, 2013. The lease payment will decrease from approximately $17,600
to $15,400 per month. In addition, the Company signed an additional
lease to provide 6,152 square feet of warehousing and pallet shipping functions
and capabilities. The facility is located at 9716 South 500 West,
Sandy, Utah 84070. Monthly lease payments are approximately $5,200
per month. Management believes that these facilities are sufficient
to meet our needs for the foreseeable future.
Item 3. Legal
Proceedings
Satellite Tracking of
People, L.L.C. (a/k/a STOP, LLC) and Michelle Enterprises, LLC v. Pro Tech
Monitoring, Inc., Omnilink Systems, Inc., and SecureAlert: A patent
infringement suit was filed against the Company and other defendants in the
United States District Court for the Eastern District of Texas on March 19,
2008. Plaintiffs have alleged that the defendants infringe United States
Patent No. RE39,909 ('909 Patent), Tracking System for Locational
Tracking of Monitored Persons. On May 14, 2008, the Company
answered the complaint, denying Plaintiffs allegations and asserting various
affirmative defenses. The Company also asserted a counterclaim for declaratory
judgment that the Company has not infringed the '909 Patent and that the patent
is invalid. The Company intends to vigorously defend the case and prosecute its
counterclaim. The Company has not accrued any potential loss as the probability
of incurring a material loss is deemed remote by management, after consultation
with legal counsel.
RemoteMDx, Inc. v. Satellite
Tracking of People, L.L.C. (a/k/a STOP, LLC): The Company
filed a patent infringement suit against STOP in the United States District
Court for the Central District of California on May 2, 2008. The
Company has asserted that STOP infringes United States Patent No. 7,330,122 for
a remote tracking and communication device and method for processing data from
the device ("'122 patent"), in which the Company holds all rights and
interests. STOP moved to dismiss the original complaint and also
filed an answer and counterclaim. The motion to dismiss was granted
with leave to amend. The Company filed an amended complaint on August
5, 2008. The amended complaint seeks damages for infringement
according to proof, treble damages, injunctive relief enjoining the
infringement, and costs and attorney's fees. STOP's counterclaim is
for declaratory relief, seeking a declaration that STOP has not infringed the
'122 patent and that the '122 patent is invalid. The Company filed an answer to
the counterclaim. The Company intends to vigorously prosecute its
claims and defend against the counterclaim. The Company has not accrued any
potential loss as the probability of incurring a material loss is deemed remote
by management, after consultation with legal counsel.
Strategic Growth
International, Inc., v. RemoteMDx. In December 2008, the
Company verbally agreed to settle a lawsuit with Strategic Growth International,
Inc. in consideration of the issuance of 1,200,000 restricted shares of the
Company’s common stock valued at $360,000, or $0.30 per share and $25,000 in
cash. The shares will have piggyback registration rights and be
protected against any potential reverse stock splits. The Company has
accrued $385,000 to settle this lawsuit.
Frederico and Erica
Castellanos, v. Volu-Sol, Inc. On August 15, 2008, plaintiffs
Frederico and Erica Castellanos filed a lawsuit in the Superior Court of the
State of California, Los Angeles County. The complaint names
twenty-four defendants and one hundred unnamed Doe defendants. The
complaint asserts claims for negligence, strict liability - failure to warn,
strict liability - design defect, fraudulent concealment, breach of implied
warranties, and loss of consortium based on Mr. Castellanos' alleged exposure to
certain chemicals during the course of his employment. One of the
original named defendants was Logos Scientific, Inc. On September 4,
2008, Plaintiffs amended their complaint to substitute "Volu-Sol, Inc. as
successor in interest to Logos Scientific, Inc." for the previously unnamed Doe
1. Volu-Sol, Inc. was the original name of RemoteMDx,
Inc. The Company intends to vigorously defend itself against
Castellanos’ claims. The Company has not accrued any potential loss
as the probability of incurring a material loss is deemed remote by management,
after consultation with legal counsel.
Thomas Natale, et al. v.
RemoteMDx. This suit was filed against the Company and other
defendants, including ADP Management Corp., James Dalton and David Derrick in
the United States District Court for the Eastern District of Tennessee on August
18, 2008 for non-payment of certain obligations. The Plaintiff has
alleged that the Defendants owe him certain back amounts of bonuses, interest
and note payables. Management has been advised that a similar action has been
filed by Edward Boling. The Company has answered the complaint and discovery is
ongoing. The Company intends to vigorously defend the case and prosecute its
counterclaim. The Company has not accrued any potential loss as the probability
of incurring a material loss is deemed remote by management, after consultation
with legal counsel.
15
SecureAlert, v. David Ezell,
et al. The Company has filed a claim against David Ezell and
several related entities for breach of contract, unjust enrichment, conversion,
and punitive damages, and seeks approximately $290,810 in damages, as well as
other amounts to be proven at trial. The case is in the discovery
stage. After consultation with legal counsel, the Company has not
accrued for any potential recovery or any material loss associated with this
claim.
Informal
Inquiry. As voluntarily disclosed in prior reports filed by
the Company with the SEC commencing with its quarterly report for the fiscal
quarter ended March 31, 2008, the Company was advised by letter from the SEC,
Salt Lake District Office in March 2008, that the SEC had begun an informal
inquiry regarding the Company. The SEC has advised the Company in its
correspondence that this informal inquiry should not be construed as an
indication that any violation of law has occurred, nor should it be considered a
reflection upon any person, entity, or security. There were no
material developments in this matter during the most recent fiscal quarter ended
September 30, 2008.
No
matters were submitted to a vote of shareholders during the quarter ended
September 30, 2008. Subsequent to the year-end, as previously
reported in a Current Report on Form 8-K, the Company held its annual
shareholder meeting on October 28, 2008. At this meeting, the
following matters were considered and voted upon by the shareholders of the
Company:
|
|
·
|
Election
of six directors;
|
|
|
·
|
Approval
of an amendment to the Articles of Incorporation of the Company, changing
the name of the Company to SecureAlert,
Inc.;
|
|
|
·
|
Ratification
of the selection of Hansen Barnett & Maxwell, P.C. as the Company’s
independent registered public accounting firm for the fiscal year ended
September 30, 2008.
|
A total
of 87,229,775 shares (approximately 58%) of the issued and outstanding shares of
the Company were represented by proxy or in person at the meeting. These shares
were voted on the matters described above as follows:
1. For
the directors as follows:
|
Name
|
Number of
Shares
For
|
Number of Shares
Abstaining/Withheld
|
|
David
Derrick
|
87,016,137
|
213,638
|
|
James
Dalton
|
87,008,148
|
221,627
|
|
Robert
Childers
|
87,016,148
|
213,627
|
|
David
Hanlon
|
87,016,148
|
213,627
|
|
Peter
McCall
|
86,968,098
|
261,677
|
|
Larry
Schafran
|
86,976,098
|
253,677
|
|
|
2.
|
For
the amendment to the Articles of Incorporation changing the corporate name
to SecureAlert, Inc., as follows:
|
|
Number of
Shares
For
|
Number of
Shares
Against
|
Number of Shares
Abstaining/Withheld
|
|
85,677,576
|
77,446
|
1,474,753
|
The
Company intends to file the amendment effecting the change of name to
SecureAlert, Inc. as soon as practical.
|
3.
|
For
the ratification of the audit committee of the Board’s selection of Hansen
Barnett & Maxwell, P.C. as the independent certified public
accountants of the Company for fiscal year 2008 as
follows:
|
|
Number of
Shares
For
|
Number of
Shares
Against
|
Number of Shares
Abstaining/Withheld
|
|
87,093,497
|
81,945
|
54,333
|
16
Item 5. Market for Registrant's
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market
Information
Our
common stock is traded on the OTC Bulletin Board of the National Association of
Securities Dealers, Inc., under the symbol “RMDX.OB.” The following
table sets forth the range of high and low bid prices of our common stock as
reported on the OTC Bulletin Board of the National Association of Securities
Dealers, Inc., for the periods indicated. The sales information is
available online at http://otcbb.com.
|
High
|
Low
|
|||||||
|
Fiscal Year
2007
|
||||||||
|
First
Quarter
|
$
|
1.63
|
$
|
1.51
|
||||
|
Second
Quarter
|
$
|
1.54
|
$
|
1.40
|
||||
|
Third
Quarter
|
$
|
1.69
|
$
|
1.60
|
||||
|
Fourth
Quarter
|
$
|
2.84
|
$
|
2.40
|
||||
|
Fiscal Year
2008
|
||||||||
|
First
Quarter
|
$
|
4.22
|
$
|
2.72
|
||||
|
Second
Quarter
|
$
|
4.09
|
$
|
1.00
|
||||
|
Third
Quarter
|
$
|
1.84
|
$
|
1.47
|
||||
|
Fourth
Quarter
|
$
|
1.52
|
$
|
1.11
|
||||
Holders
As of
December 1, 2008, there were approximately 3,000 holders of record of the common
stock and 155,881,260 shares of common stock outstanding. We also have 19 shares
of Series A preferred stock outstanding, held by one stockholder, convertible
into a minimum of approximately 7,178 shares of common stock, as well as 10,999
shares of Series B preferred stock outstanding held by six stockholders, that at
present are convertible into approximately 113,783 shares of common
stock. We also have granted options and warrants for the purchase of
approximately 21,725,451 shares of common stock. As discussed
elsewhere in this Report, we may be required to issue additional shares of
common stock or preferred stock to pay accrued dividends, or to comply with
anti-dilution adjustments to the conversion rights of present or former
preferred stockholders.
Dividends
Since
incorporation, we have not declared any cash dividends on our common
stock. We do not anticipate declaring cash dividends on our common
stock for the foreseeable future. The Series A Preferred Stock
accrues dividends at the rate of 10% annually, which may be paid in cash or
additional shares of preferred or common stock, at our option. To
date all such dividends have been paid by issuance of preferred stock, valued at
$200 per share of preferred. We are not required to pay and do not
pay dividends with respect to the Series B Preferred Stock. During
the years ended September 30, 2008 and 2007, the Company recorded $345,356 and
$550,603 in stock dividends paid on Series A and C Preferred Stock,
respectively.
Dilution
We have a
large number of shares of common stock authorized in comparison to the number of
shares issued and outstanding. The board of directors determines when
and under what conditions and at what prices to issue stock. In
addition, a significant number of shares of common stock are reserved for
issuance upon exercise of purchase or conversion rights.
The
issuance of any shares of common stock for any reason will result in dilution of
the equity and voting interests of existing stockholders.
Transfer
Agent and Registrar
The
transfer agent and registrar for our common stock is American Stock Transfer
& Trust Company, 59 Maiden Lane, Plaza Level, New York, NY
11219.
Authorized
Capital Increased
As of
September 30, 2008, the Company was authorized to issue 175,000,000 shares of
common stock. Subsequent to the fiscal year 2008, the holders of a
majority of the issued and outstanding shares of the Company’s common stock
consented in writing to an increase of the authorized shares from 175,000,000 to
250,000,000. The Company intends to file Amended Articles of
Incorporation for the Company to effect the increase in the number of authorized
shares as soon as reasonably practical.
17
Stock
Performance Graph
The following Performance Graph and
related information shall not be deemed “soliciting material” or to be “filed”
with the Securities and Exchange Commission, nor shall such information be
incorporated by reference into any future filing under the Securities Act of
1933 or Securities Exchange Act of 1934, each as amended, except to the extent
that the Company specifically incorporates it by reference into such
filing.
The RemoteMDx,
Inc. Common Stock Performance Graph compares total shareholder returns of
the Company since July 10, 2004, to two indices: the NASDAQ Composite
Index and the RDG SmallCap Technology Index. The total return
calculations assume the reinvestment of dividends, although dividends have never
been declared for the Company’s common stock, and are based on the returns
of the component companies weighted according to their capitalizations as of the
end of each monthly period.
The
Company’s common stock is traded on the Over-the-counter Bulletin
Board. The Company’s stock price on the last trading day of its fiscal year,
September 30, 2008, was $1.20.
Recent
Sales of Unregistered Securities
During the year ended September 30,
2008, we issued 28,541,175 shares of common stock without registration of the
offer and sale of the securities under the Securities Act, as
follows:
Shares Issued Pursuant to
Acquisitions
|
|
·
|
650,000
shares valued at $2,599,500 were issued in December 2007 pursuant to
acquisitions. The recipients of these shares represented in the
original acquisition agreements that they were accredited investors as
defined in Rule 501 under the Securities Act. These shares of
common stock were issued without registration under the Securities Act in
reliance on Section 4(2) of the Securities Act and the rules and
regulations promulgated thereunder, including Regulation D and Rule
506. There were no non-accredited investors involved in this
issuance.
|
18
Shares Issued in Connection
with Line of Credit Agreement
|
|
·
|
360,000
shares were issued in March 2008 to certain entities who provided letters
of credit in connection with the Company’s line of credit with Citizen
National Bank. These shares of common stock were issued without
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act and the rules and regulations promulgated
thereunder. The entities and their respective owners, officers
and directors were accredited investors. There were no non-accredited
investors involved in this issuance of
shares.
|
Shares Issued to Employees,
Consultants and Vendors for Products and Services
|
|
·
|
6,710,000
shares valued at $10,552,300 were approved for issuance to employees and
officers of the Company as consideration for services rendered to the
Company during fiscal year 2008. Additionally, 1,000,000 shares
of restricted common stock valued at $1,520,000, or $1.52 per share were
issued to an officer for deferred compensation. These shares of
common stock were issued without registration under the Securities Act in
reliance on Section 4(2) of the Securities Act and the rules and
regulations promulgated thereunder. The recipients of these
shares were officers or employees of the Company at the time of the
issuance and each was an accredited
investor.
|
|
|
·
|
400,000
shares valued at $704,000 were issued in May 2008 to an independent
consultant for consulting services provided to the
Company. These consulting services consisted of aiding in the
settlement of a vendor dispute. These shares of common stock
were issued without registration under the Securities Act in reliance on
Section 4(2) of the Securities Act and the rules and regulations
promulgated thereunder.
|
|
|
·
|
1,025,000
shares valued at $3,068,285 were issued in April 2007 to seven
unaffiliated entities for product design services. These shares
of common stock were issued without registration under the Securities Act
in reliance on Section 4(2) of the Securities Act and the rules and
regulations promulgated thereunder.
|
Shares Issued in
Settlement
|
|
·
|
325,000
shares valued at $572,000 were issued in May 2008 to Onyx Consulting Group
(“Onyx”) to settle amounts owed due to a public relations contract. These
shares of common stock were issued without registration under the
Securities Act in reliance on Section 4(2) of the Securities Act and the
rules and regulations promulgated thereunder. These shares were
issued pursuant to a privately negotiated transaction in settlement of
amounts owed or that may be owed as royalty payments, and there was no
public offering of securities. Onyx is an accredited
investor. No general solicitation or general advertising was
made or done in connection with the issuance of the
shares.
|
Shares Issued Upon the
Conversion of Preferred Stock
|
|
·
|
15,000
shares of common stock were issued upon conversion of the Company’s Series
B Preferred stock in October 2007. 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 is determined by
dividing the original purchase price paid per share of Series B Preferred
stock, namely $3.00, by the conversion price. These shares of
common stock were issued without registration under the Securities Act in
reliance on Sections 3(a)(9) and 4(2) of the Securities Act and the rules
and regulations promulgated thereunder. The recipients of the
common shares were accredited investors and were already security holders
of the Company. The common shares were issued pursuant to the
terms of the rights and preferences of the preferred class of securities
that were converted, and there was no public offering of
securities. Additionally, no general solicitation or general
advertising was made or done in connection with the issuances, and no cash
consideration was paid in connection with the conversion of the preferred
stock.
|
Shares Issued Upon the
Conversion of SecureAlert Series A Preferred Stock
|
|
·
|
7,434,249
shares of common stock were issued upon redemption of SecureAlert Series A
Preferred stock in March 2008. In addition, 825,893 shares of common stock
were issued for SecureAlert Series A Preferred stock
dividends. These shares of common stock were issued without
registration under the Securities Act in reliance on Sections 3(a)(9) and
4(2) of the Securities Act and the rules and regulations promulgated
thereunder. The shares of common stock were issued to
individuals who were already security holders of the Company and were
issued pursuant to the terms of the rights and preferences of the
preferred class of securities being converted. These shares
were issued pursuant to a privately negotiated
transaction. There was no public offering of securities, and no
general solicitation or general advertising was made or done in connection
with the issuances. No cash consideration was paid in
connection with the conversion of the preferred
stock.
|
19
Shares Issued on Revalue
Rights
|
|
·
|
100,000
shares of Common stock were issued as a penalty to Borinquen Container
Corp. (“Borinquen”) for the Company’s failure to register shares Borinquen
purchased in a private placement. These shares of common stock were issued
without registration under the Securities Act in reliance on Section
3(a)(9) and 4(2) of the Securities Act and the rules and regulations
promulgated thereunder. Borinquen represented to the Company that it was
an accredited investor and was already a security holder of the
Company.
|
Shares Issued in Private
Placements
|
|
·
|
In
March and September 2008, 6,077,219 shares were issued to Futuristic
Medical Devices, LLC, Advance Technology Investors, LLC, and Borinquen
investors for $5,057,914 in cash in a private placement of common stock.
The initial issuance of the shares of common stock and the warrants were
effected without registration under the Securities Act in reliance on
Section 4(2) of the Securities Act and the rules and regulations
promulgated thereunder. Each investor signed a purchase
agreement in which the investor made representations to the Company that
included being an accredited investor, and purchasing for the investor’s
own account and not with a view to distribute the shares. There
was no public offering of securities. No general solicitation
or general advertising was made or done in connection with the issuance,
and the shares and warrants were issued in paper certificate form, with
appropriate restrictive legends prominently affixed on the
certificates.
|
Shares Issued Upon Exercise
of Warrants
|
|
·
|
3,618,814
shares were issued upon the exercise of options and warrants between
October 2007 and September 2008. The exercise prices ranged
from $0.54 to $1.73 per share. The warrants had been granted in
connection with services rendered to the Company. These
shares of common stock were issued without registration under the
Securities Act in reliance on Section 4(2) of the Securities Act and the
rules and regulations promulgated thereunder. These shares were
issued pursuant to privately negotiated transactions with individuals and
entities that had provided services to the
Company.
|
In
addition to the information provided above, the Company notes that the
recipients of the shares in each of the above transactions were accredited
investors and/or current stockholders, affiliates, employees, or service
providers to the Company. Each had a pre-existing relationship with
the Company, was provided with the information available in the Company’s public
filings and, where indicated, represented itself to be an accredited
investor. The transactions described above did not involve any public
solicitation or similar activity by the Company and each transaction was a
private transaction in which the recipient was advised that the shares issued
were restricted shares, not freely transferable, and subject to the restrictions
against resale of federal and applicable state securities laws. The
certificates issued representing the shares in each case contained a restrictive
legend, advising that the resale of the securities was subject to registration
under the Securities Act or an exemption from the registration provisions of
such act. In entering into these transactions the Company relied on
exemptions available for offers and sales of securities not involving a public
offering, including, without limitation, the exemptions from the registration
requirements provided under Section 4(2) of the Securities Act and rules and
regulations promulgated thereunder.
Item 6. Selected
Financial Data
Due to the divestiture of our medical
stains and solutions business during fiscal year 2008, we now operate as one
reportable business segment, offender tracking and monitoring. Our financial
results have been adjusted to reflect the reclassification of sales and related
expenses in our former stains and solutions segment to "discontinued operations"
for all periods presented. Further information on this can be found in
Note (2) to the Consolidated Financial Statements herein under
"Discontinued Operations."
20
|
Fiscal
Year Ended September 30,
|
|||||||||||||||||||
|
2004
|
2005
|
2006
|
2007
|
2008
|
|||||||||||||||
|
Consolidated
Statements of Operations:
|
|||||||||||||||||||
|
Revenues
|
|||||||||||||||||||
|
TrackerPAL
device sales
|
$
|
-
|
$
|
-
|
$
|
32,751
|
$
|
2,866,432
|
$
|
2,300,000
|
|||||||||
|
Monitoring
services
|
-
|
-
|
89,914
|
3,687,935
|
10,013,311
|
||||||||||||||
|
Home
and personal security systems and other
|
556,338
|
289,236
|
268,935
|
60,842
|
90,366
|
||||||||||||||
|
Total
Revenues
|
556,338
|
289,236
|
391,600
|
6,615,209
|
12,403,677
|
||||||||||||||
|
Cost
of revenues
|
(796,565)
|
(437,224)
|
(569,664)
|
(13,396,163)
|
(13,108,990
|
) | |||||||||||||
|
Negative
margin
|
(240,227)
|
(147,988)
|
(178,064)
|
(6,780,954)
|
(705,313
|
) | |||||||||||||
|
Selling,
general and administrative
|
(4,051,350)
|
(7,080,573)
|
(15,649,099)
|
(15,586,852)
|
(36,466,678
|
) | |||||||||||||
|
Research
and development
|
(205,341)
|
(1,766,791)
|
(2,087,802)
|
(4,564,121)
|
(4,811,128
|
) | |||||||||||||
|
Impairment
of inventory
|
(30,358)
|
-
|
-
|
-
|
-
|
||||||||||||||
|
Impairment
of goodwill
|
(1,321,164)
|
-
|
-
|
-
|
-
|
||||||||||||||
|
Loss
from operations
|
(5,848,440)
|
(8,995,352)
|
(17,914,965)
|
(26,931,927)
|
(41,983,119
|
) | |||||||||||||
|
Other
income (expense)
|
(742,682)
|
(2,024,792)
|
(5,814,558)
|
900,038
|
(7,189,819
|
) | |||||||||||||
|
Net
loss from continuing operations
|
(6,591,122)
|
(11,020,144)
|
(23,729,523)
|
(26,031,889)
|
(49,172,938
|
)
|
|||||||||||||
|
Discontinued
operations
|
184,411
|
36,455
|
(68,222)
|
(338,682)
|
(414,112
|
) | |||||||||||||
|
Net
loss
|
(6,406,711)
|
(10,983,689)
|
(23,797,745)
|
(26,370,571)
|
(49,587,050
|
) | |||||||||||||
|
Dividends
on Series A Preferred stock
|
(525,800)
|
(512,547)
|
(642,512)
|
(550,603)
|
(345,356
|
) | |||||||||||||
|
Net
loss attributable to common stockholders
|
$ |
(6,932,511)
|
$ |
(11,496,236)
|
$ |
(24,440,257)
|
$ |
(26,921,174)
|
$
|
(49,932,406
|
) | ||||||||
|
Net
loss per common share, basic and diluted
|
$ |
(0.25)
|
$ |
(0.33)
|
$ |
(0.44)
|
$ |
(0.26)
|
$
|
(0.36
|
) | ||||||||
|
Weighted
average common shares outstanding
|
28,217,000
|
34,318,000
|
55,846,000
|
102,826,000
|
140,092,000
|
||||||||||||||
|
As
of September 30,
|
||||||||||||||||||||
|
2004
|
2005
|
2006
|
2007
|
2008
|
||||||||||||||||
|
Consolidated
Balance Sheets:
|
||||||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Cash
|
$ | 52,342 | $ | 289,680 | $ | 5,870,040 | $ | 4,803,871 | $ | 2,782,953 | ||||||||||
|
Accounts
receivable
|
180,000 | 8,672 | 88,289 | 4,396,093 | 1,441,853 | |||||||||||||||
|
Inventory
|
40,850 | 12,811 | - | - | - | |||||||||||||||
|
Prepaid
expenses
|
11,821 | 26,754 | 2,492,994 | 290,922 | 224,842 | |||||||||||||||
|
Other
current assets
|
176,361 | 180,103 | 15,604 | 605,174 | 555,385 | |||||||||||||||
|
Other
current assets from discontinued operations
|
129,283 | 262,832 | 194,410 | 933,755 | - | |||||||||||||||
|
Total
current assets
|
590,657 | 780,852 | 8,661,337 | 11,029,815 | 5,005,033 | |||||||||||||||
|
Property
and equipment, net of depreciation
|
110,531 | 377,610 | 1,321,995 | 1,380,192 | 1,581,558 | |||||||||||||||
|
Leased
equipment, net of depreciation
|
- | - | 2,139,685 | 3,739,474 | 1,349,146 | |||||||||||||||
|
Other
assets
|
2,701 | 33,505 | 46,641 | 36,632 | 5,074,960 | |||||||||||||||
|
Other
assets from discontinued operations
|
4,915 | 4,477 | 22,408 | 50,576 | - | |||||||||||||||
|
Total
assets
|
$ | 708,804 | $ | 1,196,444 | $ | 12,192,066 | $ | 16,236,689 | $ | 13,010,697 | ||||||||||
21
|
Liabilities
and Stockholders’ Equity
|
|||||||||||||||||||
|
Line
of credit
|
$ | 175,000 | $ | 174,898 | $ | 3,897,111 | $ | 3,858,985 | $ | 3,462,285 | |||||||||
|
Accounts
payable
|
656,043 | 1,333,620 | 1,681,040 | 3,032,223 | 2,059,188 | ||||||||||||||
|
Accrued
liabilities
|
429,555 | 642,181 | 361,753 | 1,288,513 | 1,781,267 | ||||||||||||||
|
Redeemable
common stock payable
|
196,000 | 96,000 | - | - | - | ||||||||||||||
|
Convertible
debentures, current portion
|
- | 1,262,366 | - | - | - | ||||||||||||||
|
Embedded
derivative liability
|
- | 1,860,626 | - | - | - | ||||||||||||||
|
SecureAlert
Series A Preferred stock redemption obligation
|
- | - | - | - | 3,244,758 | ||||||||||||||
|
Related-party
notes and line of credit, current portion
|
- | 255,472 | 44,549 | - | 792,804 | ||||||||||||||
|
Other
current liabilities
|
539,234 | 17,539 | 38,694 | 1,314,247 | 21,343 | ||||||||||||||
|
Notes
payable, current portion
|
789,176 | 287,343 | 169,676 | 169,676 | 465,664 | ||||||||||||||
|
Current
liabilities from discontinued operations
|
73,490 | 68,273 | 58,043 | 69,186 | - | ||||||||||||||
|
Total
current liabilities
|
2,858,498 | 5,998,318 | 6,250,866 | 9,732,830 | 11,827,309 | ||||||||||||||
|
Convertible
debentures, long-term portion
|
1,106,412 | 421,570 | - | - | - | ||||||||||||||
|
Related-party
notes and line of credit, long-term portion
|
222,546 | - | - | 239,763 | - | ||||||||||||||
|
Notes
payable, long-term portion
|
- | - | - | - | 1,147,382 | ||||||||||||||
|
Total
liabilities
|
4,187,456 | 6,419,888 | 6,250,866 | 9,972,593 | 12,974,691 | ||||||||||||||
|
Minority
interest
|
- | - | - | 1,396,228 | - | ||||||||||||||
|
SecureAlert
Series A Preferred stock
|
- | 2,990,000 | 3,590,000 | 3,590,000 | - | ||||||||||||||
|
Common
stock
|
3,140 | 4,513 | 8,013 | 12,734 | 15,588 | ||||||||||||||
|
Preferred
stock, Series A
|
2 | 3 | 2 | 1 | 1 | ||||||||||||||
|
Preferred
stock, Series B
|
184 | 137 | 5 | 1 | 1 | ||||||||||||||
|
Preferred
stock, Series C
|
- | - | 553 | - | - | ||||||||||||||
|
Additional
paid in capital
|
66,329,339 | 76,113,623 | 111,718,090 | 142,238,576 | 186,203,084 | ||||||||||||||
|
Deferred
compensation
|
(331,312 | ) | (3,363,126 | ) | (2,649,088 | ) | (7,468,998 | ) | (3,498,672 | ) | |||||||||
|
Subscription
receivable
|
- | (504,900 | ) | - | (407,500 | ) | - | ||||||||||||
|
Retained
earnings
|
(63,073,294 | ) | (69,480,005 | ) | (82,928,630 | ) | (106,726,375 | ) | (133,096,946 | ) | |||||||||
|
Current
earnings
|
(6,406,711 | ) | (10,983,689 | ) | (23,797,745 | ) | (26,370,571 | ) | (49,587,050 | ) | |||||||||
|
Total
stockholders’ equity
|
(3,478,652 | ) | (8,213,444 | ) | 2,351,200 | 1,277,868 | 36,006 | ||||||||||||
|
Total
liabilities and stockholders’ equity
|
$ | 708,804 | $ | 1,196,444 | $ | 12,192,066 | $ | 16,236,689 | $ | 13,010,697 | |||||||||
The
following discussion should be read in conjunction with our consolidated
financial statements and notes thereto included elsewhere in this
Report.
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operation (“MD&A”) is intended to help the reader better
understand RemoteMDx, our operations and our present business
environment. This MD&A is provided as a supplement to, and should
be read in conjunction with, our consolidated financial statements for the
fiscal years ended September 30, 2008 and 2007 and the accompanying notes
thereto contained in this Report. This introduction summarizes MD&A, which
includes the following sections:
22
|
|
·
|
Overview
- a general description of our business and the markets in which we
operate; our objectives; our areas of focus; and challenges and risks of
our business.
|
|
|
·
|
Recent
Developments – a brief description of business developments occurring
after the year ended September 30, 2008 and prior to the filing of this
Report.
|
|
|
·
|
Results
of Operations - an analysis of our consolidated results of operations for
the last two fiscal years presented in our consolidated financial
statements.
|
|
|
·
|
Liquidity
and Capital Resources - an analysis of cash flows; off-balance sheet
arrangements and aggregate contractual obligations; an overview of
financial position; and the impact of inflation and changing
prices.
|
|
|
·
|
Critical
Accounting Policies - a discussion of accounting policies that require
critical judgments and estimates.
|
We intend
for this discussion to provide the reader with information that will assist in
understanding our financial statements, the changes in certain key items in
those financial statements from year to year, and the primary factors that
accounted for those changes, as well as how certain accounting principles affect
our financial statements. The discussion also provides information about the
financial results of the two segments of our business to provide a better
understanding of how those segments and their results affect the financial
condition and results of operations of the Company as a whole.
Overview
The
Company markets and deploys what it believes to be the most advanced offender
management programs available in the global marketplace today, combining
patented GPS (Global
Positioning System) tracking technologies, fulltime 24/7/365
intervention-based monitoring capabilities and comprehensive case management
services. We believe that we deliver the only offender management
technology which effectively integrates GPS, RF (Radio Frequency) and an
interactive 3-way voice communication system into a single device, deployable on
offenders in any country worldwide. Through our patented electronic monitoring
technologies and services, we empower law enforcement, corrections and
rehabilitation professionals alike with offender, defendant, probationer and
parolee programs, which grant convicted criminals and pre-trial suspects
accountable opportunities “free from prison” while providing for greater public
safety at a lower cost to incarceration or traditional resource-intensive
monitoring alternatives.
TrackerPAL I & II – The
TrackerPAL™ portfolio of products, e-Arrest beacons and monitoring services are
uniquely designed to create “Jails without Walls,”
customizable by offender types such as domestic abusers, sexual predators, gang
members, pre-trial defendants, and juvenile offenders. Our
proprietary software and device firmware also support the dynamic accommodation
of agency-established monitoring protocols, 95-decibal siren, victim protection
imperatives, geographic boundaries, work environments, school attendance,
rehabilitation programs and sanctioned home restrictions. TrackerPAL
is designed for use by federal, state and local agencies to provide location
tracking of select individuals in the criminal justice system. The
TrackerPAL device fastens to the offender's ankle with a tamper resistant strap
(steel cabling with optic fiber) that can only be adjusted or removed without
detection by a supervising officer through services provided by our SecureAlert
Monitoring Center (or other monitoring centers). The Company’s center acts as an
important link between the offender and the supervising officer as monitoring
center specialists persistently track and monitor the offender, initiating
contact at the direction of the supervising agency and/or when the offender is
in violation of any established restrictions or protocols. An
intelligent device with integrated computer circuitry and constructed from
case-hardened plastics, the TrackerPAL unit promptly notifies the monitoring
center if any attempt is made to remove or otherwise tamper with the device or
optical strap housing.
According
to the latest available Bureau of Justice Statistics (2007), it is estimated
that approximately 7,235,728 people were either incarcerated, on parole or on
probation. The report also indicates that the average cost of incarcerating an
inmate ranges from $65 to $175 per day dependent upon facility type, security
level, amenities and jurisdiction. Moreover, with ever-growing
economic pressures, we believe that these costs are unsustainable with ongoing
state and federal budget reductions, facility-specific overcrowding concerns,
increased rehabilitation imperatives and politicized re-socialization agendas.
Thus, electronic monitoring alternatives to incarceration for low to moderate
risk offenders (adult and juveniles), early release for good behavior
initiatives, work release programs, sentencing diversions and accelerated
halfway house deployments are all being strongly encouraged and seriously
considered by most legislative and judicial branches of
government. For approximately 10% to 15% of the traditional costs of
incarceration, our TrackerPAL monitoring center and patented devices can monitor
offenders continuously, while providing real-time location tracking, interactive
voice access and intervention-biased contact, thus reducing the potential for
subsequent or repeat offenses. A growing number of jurisdictions are
also embracing “offender pay,” “parent pay” and/or “partial pay” programs
wherein the burden of the tracking and monitoring costs is shifted in whole or
part directly to the offender or a responsible party, and thus permanently
defrayed from tax payer obligation. We estimate that approximately
20% of our gross revenues currently derive from offender payments directly under
court order and threat of re-incarceration for non-payment; with the cost of
non-compliance being reincarceration, the majority of these accounts remain in
compliance. This aspect of our business is growing significantly and we expect
that it will continue to outpace traditional tax-payer obligated payment
programs.
23
Strategically,
and in support of ever-growing rehabilitation and re-socialization efforts, the
Company has adopted a broader services charter to further support and encourage
many evolving rehabilitation initiatives. Our “C.A.R.E.” programs support
Corrections and Accountability objectives in concert with Rehabilitation and
Empowerment agendas. Specifically, our technology facilitates a stringent
protocol enforcement capability, incorporating restricted movement provisions,
coupled with enablement of positive reinforcement communications, all in support
of social worker interactions, ongoing ministry options and proactive access by
authorized counselors and/or sponsors. We believe that our programs
are uniquely positioned to allow for regular, frequent, and positive
interactions and daily affirmations with offenders, as they strive to again
become responsible and contributing members of society, while living within the
virtual “electronic fence” boundaries established through our proprietary
technologies.
Recent
Developments
Subsequent
to the year ended September 30, 2008, we entered into several material
transactions that are not reflected in the results of operations for fiscal year
2008, as follows:
|
|
On
November 17, 2008, the Company’s Chief Financial Officer and Chief
Operating Officer Blake Rigby resigned from his positions with the Company
to pursue other interests. He had served in the position since
June 2008. No severance or other obligations were incurred by the Company
in connection with the departure of Mr.
Rigby.
|
|
|
·
|
Effective
November 20, 2008, the Board of Directors of the Company appointed John L.
Hastings, III to the additional position of Chief Operating Officer,
recently vacated by Mr. Rigby. Mr. Hastings also continues to serve
as the Company’s President. No change was made in the
compensation of Mr. Hastings in connection with this expanded
role.
|
|
|
·
|
Also
effective November 20, 2008, the Board of Directors of the Company
appointed Michael G. Acton to the position of Chief Financial
Officer. He previously served as the Company’s Chief Financial
Officer from March 2001 until June 2008. From 1999 until
present, Mr. Acton serves as the Company’s
Secretary-Treasurer. He is a Certified Public Accountant in the
State of Utah. Mr. Acton also is the Chief Financial Officer of
Volu-Sol, a former subsidiary of the
Company.
|
|
|
·
|
The
Company’s subsidiary SecureAlert down-sized its workforce by
approximately 21% (26 persons) during the first two weeks of November 2008
as part of a restructuring plan which began in October 2008. The Company
implemented this restructuring with the goal of increasing operating
efficiencies while reducing operating expenses and improving gross
margins and cash flows during the fiscal year ending September 30,
2009.
|
|
|
·
|
On
November 21, 2008, the Company borrowed $1,000,000 from its Chief
Executive Officer and Chairman, David G. Derrick, pursuant to a Promissory
Note (the “Note”). This unsecured loan is intended to bridge the device
procurement, accelerated and expanded manufacturing and short-term
financial needs of the Company until the completion of a private round of
debt financing, which is presently being conducted by the
Company. Terms of the transaction are consistent with the terms
offered to third-party financing sources in recent
transactions. The Note bears interest at an annual percentage
rate of 15% and is due and payable the earlier of the receipt of a minimum
of $1,000,000 in new financing, or seventy-five (75) days from
origination. Net proceeds to the Company after payment of a 5%
initiation fee paid to Mr. Derrick were $950,000. The Company
also agreed to issue 100,000 shares of common stock to Mr. Derrick as
additional consideration for extending the loan to the
Company. As of the date of this Report, the 100,000 shares of
common stock had not yet been issued. The Company may prepay
the Note at any time without penalty or further interest
obligation. The transaction was reviewed and approved by the
Audit Committee of the Company’s Board of
Directors.
|
|
|
·
|
On
November 21, 2008, the Company received AT&T certification allowing
the TrackerPAL product to be used on the AT&T
network.
|
|
|
·
|
In
December 2008, the Company verbally agreed to settle a lawsuit with
Strategic Growth International, Inc. for 1,200,000 restricted shares of
the Company’s common stock valued at $360,000, or $0.30 per share and
$25,000 in cash. The shares have piggyback registration rights
and are protected against any potential reverse stock
splits.
|
|
|
·
|
In
December 2008, the Company received written consents from the holders of a
majority of the issued and outstanding shares of the Company’s capital
stock required to increase the number of authorized shares of the Company
from 175,000,000 to 250,000,000.
|
|
|
·
|
The
Company issued 350,000 shares of restricted common stock for cash proceeds
of $100,000, or approximately $0.29 per share. Additionally,
the Company issued 1,800,000 shares of restricted common stock to settle
or satisfy accounts payable balances with two
vendors.
|
24
|
|
·
|
On
December 22, 2008, Mr. Derrick rescinded 1,500,000 shares of common stock
which were granted in April 2008 valued at
$2,325,000. Additionally, Mr. Derrick also rescinded 1,000,000
warrants that were vested during the fiscal year ending September 30, 2008
valued at $1,934,162.
|
|
|
·
|
On
December 22, 2008, Mr. Hastings rescinded 250,000 shares of common stock
which were granted in June 2008 valued at
$387,500. Additionally, Mr. Hastings also rescinded 250,000
warrants that were vested during the fiscal year ending September 30, 2008
valued at $337,113.
|
Results
of Operations
The
following table summarizes our consolidated operating results as a percentage of
net sales, respectively, for the periods indicated:
|
Fiscal
Year Ended September 30,
|
|||||
|
Consolidated
Statements of Operations Data:
|
2006
|
2007
|
2008
|
||
|
Net
revenues
|
100%
|
100%
|
100%
|
||
|
Cost
of revenues
|
(145)%
|
(203)%
|
(106)%
|
||
|
Negative
margin
|
(45)%
|
(103)%
|
(6)%
|
||
|
Operating
expenses:
|
|||||
|
Selling,
general and administrative expenses
|
(3,997)%
|
(236)%
|
(294)%
|
||
|
Research
and development
|
(533)%
|
(69)%
|
(39)%
|
||
|
Loss
from operations
|
(4,575)%
|
(408)%
|
(339)%
|
||
|
Other
income (expense):
|
(1,485)%
|
14%
|
(58)%
|
||
|
Loss from continuing operations
|
(6,060)%
|
(394)%
|
(397)%
|
||
|
Discontinued
operations
|
(17)%
|
(5)%
|
(3)%
|
||
|
Net
Loss
|
(6,077)%
|
(399)%
|
(400)%
|
||
Fiscal
Year 2008 compared to Fiscal Year 2007
[Note:
during the year ended September 30, 2008, the Company divested itself of its
subsidiary Volu-Sol Reagents Corporation (“Volu-Sol”). As a result, the Company
now operates in one segment. Unless otherwise indicated, the results
of operations for all periods in this Report have been adjusted to reflect
continuing operations only. See Note (2) – Discontinued Operations in
the Company’s Consolidated Financial Statements included in this
Report.]
Revenues
During
the fiscal year ended September 30, 2008, the Company had net revenues of
$12,403,677 compared to net revenues of $6,615,209 for the fiscal year ended
September 30, 2007. This increase of approximately 88% is due
primarily to increased revenues from the lease of our TrackerPAL products and
related monitoring services.
During
the year ended September 30, 2008, our SecureAlert subsidiary provided net
revenues of $7,333,659 compared to net revenues of $6,615,209 for the year ended
September 30, 2007, an increase of approximately 11%. These fiscal
year ended 2008 revenues from SecureAlert of $7,333,659 consisted of $2,300,000
from the sale of offender tracking devices, $4,943,293 from monitoring services,
and $90,366 from home and personal security systems and other miscellaneous
revenues. The first units of TrackerPAL I began to be delivered
during the second quarter of fiscal year 2006. Delivery of TrackerPAL
II devices were introduced in August 2008.
On
December 1, 2007, the Company acquired Midwest Monitoring. For the
year ended September 30, 2008, Midwest Monitoring had revenues of
$2,799,914. These revenues consisted of $2,522,314 from the
monitoring of offender tracking devices and $277,600 from the sale of
equipment.
On
December 1, 2007, the Company acquired Court Programs. For the ten months ended
September 30, 2008, Court Programs had revenues of $2,270,104 from the
monitoring of offender tracking devices and parolee services.
25
During
the year ended September 30, 2007, the Company delivered TrackerPAL devices to
distributors with a sales value of $1,300,000 in transactions that did not meet
the requirements of EITF 00-21 and SAB 104 for revenue
recognition. This revenue was deferred and recognized during the year
ended September 30, 2008, when all revenue recognition criteria were
met.
Cost
of Revenues
During
the fiscal year ended September 30, 2008, cost of revenues totaled $13,108,990,
compared to cost of revenues in fiscal 2007 of $13,396,163. This
decrease is due primarily to a royalty expense incurred during the fiscal year
2007 that was terminated in July and August 2007. SecureAlert’s cost
of revenues totaled $10,007,725 or approximately 136% of SecureAlert’s revenues
in fiscal year 2008, compared to $13,396,163, or 203%, of SecureAlert’s revenues
in 2007. SecureAlert’s cost of revenues in fiscal year 2008 consisted
of communication costs of $2,939,790, monitoring center costs of $2,042,774,
device costs of $1,675,212, amortization of $745,894, disposal of units of
$570,948, utilization costs of $470,227, commissions of $434,285, tools and
accessories of $298,706, device enhancements of $148,515, warranty of $220,758,
freight of $222,034, lease of $72,965, battery related issues of $70,638,
location of $52,895, other electronic monitoring costs of $29,031,and home
security and PERS costs of $13,053. The disposal of units with a cost
of $570,948 relates primarily to the water ingression and strap design problems
experienced by the Company.
The
Company expects the cost of revenues as a percentage of revenues to decrease in
the foreseeable future due to the following reasons: (1) The Company
has attained AT&T certification which is expected to result in lower
communication costs, and (2) Further development of the Company’s proprietary
software will enable each operator to monitor more devices resulting in lower
monitoring center costs.
Midwest
Monitoring’s cost of revenues totaled $1,630,823, or 58%, of Midwest
Monitoring’s revenues for the ten months ended September 30,
2008. Court Program’s cost of revenues totaled $1,470,442, or 65%, of
Court Program’s revenues for the ten months ended September 30,
2008.
The
Company recognized $952,341 of costs during the year ended September 30, 2008
that related to deferred costs from deferred device sales.
Amortization
of $745,894 recorded during the year ended September 30, 2008 is based on a
three-year useful life for TrackerPAL devices. Devices that are
leased or remain in the Company’s possession because they have not been sold are
amortized over three years. The Company believes this three-year life
is appropriate due to rapid changes in electronic monitoring technology and the
corresponding potential for obsolescence. Management periodically
assesses the useful life of the devices for appropriateness.
Communication
costs of $2,939,790 primarily refer to the costs associated with Subscriber
Identity Modules (“SIM”). Embedded in each TrackerPAL device is a
SIM, which enables the device to transfer voice and data information to a
monitoring center. We incur a monthly charge for each SIM, regardless
of whether or not the associated device generates revenue because the SIM cards
are ordered and inserted into devices before the devices are sold or
leased.
Research
and Development Expenses
During
the fiscal year ended September 30, 2008, the Company incurred research and
development expenses of $4,811,128 compared to similar expenses in fiscal year
2007 totaling $4,564,121. This increase is due primarily to expenses associated
with the development of the TrackerPAL II device for the parolee
market. We anticipate research and development expenses to decrease
in future periods.
Selling,
General and Administrative Expenses
During
the fiscal year ended September 30, 2008, the Company’s selling, general and
administrative expenses totaled $36,466,678, compared to $15,586,852 for the
fiscal year ended September 30, 2007. This increase of $20,879,826 is the result
of an increase in advertising and marketing of $54,062, amortization of $45,200,
automobile of $103,466, consulting of $17,339,667, depreciation of $164,167,
insurance of $108,541, legal of $738,729, office expense of $36,800, payroll and
taxes of $1,716,849, postage of $28,992, rent and storage of $125,088, telephone
of $143,585 travel of $715,455, and utilities of $45,117 and other selling,
general and administrative expenses of $144,514. These increases in
selling, general and administrative expenses were offset, in part, by decreases
in the following: bad debt expense of $43,448, contract labor of $105,296,
investment relations of $91,514, lease of $116,041, outside services of
$173,538, training of $46,262, and other selling, general and administrative
expenses of $54,307. Consulting expense for the year ended September
30, 2008 was $23,608,063 compared to $6,268,396 for the year ended September 30,
2007, an increase in consulting expense of $17,339,667. Consulting
expense for the year ended September 30, 2008 of $23,608,063 consisted of
$1,138,628 in cash and $22,469,435 in non-cash compensation. Non-cash
compensation of the $22,469,435 consisted of stock and warrants issued to
vendors of $2,155,331, board of directors of $3,468,084, executive officers and
employees of $15,185,020, and settlement of lawsuits of $1,661,000.
26
Gain
on Sale of Intellectual Property
During
the fiscal year ended September 30, 2007, the Company sold three patents for a
total of $2,400,000. These patents were as
follows: Interference Structure for Emergency Response System
Wristwatch (No. 6,366,538 issued on April 2, 2002), Emergency Phone for
Automatically Summoning (No. 6,226,510 issued on May 1, 2001), and Panic Button
Phone (No. 6,044,257 issued on March 28, 2000). During the fiscal
year ended September 30, 2008, the Company sold Patent Number 6,636,732,
Emergency Phone with Single Button Activation, to an unrelated party for cash
proceeds of $2,400,000.
Other
Income and Expense
For the
fiscal year ended September 30, 2008, interest expense was $1,566,542, compared
to $1,198,573 for fiscal year 2007. This amount includes non-cash interest
expense of approximately $865,568 related to amortization of deferred financing
costs associated with warrants and shares of common stock issued for prepaid
interest.
During
the year ended September 30, 2008, the Company redeemed all outstanding shares
of SecureAlert Series A in exchange for 7,434,249 shares of RemoteMDx common
stock for a value of $8,372,566.
Net
Loss
The
Company had a net loss for the year ended September 30, 2008 totaling
$49,587,050, compared to a net loss of $26,370,571 for fiscal year
2007. This increase is due primarily to expenses associated with the
development of the TrackerPAL device for parolees, and related increases in cost
of revenues, and non-cash compensation expense issued to vendors, board of
directors, officers and employees, and in connection with the settlement of
lawsuits.
Fiscal
Year 2007 compared to Fiscal Year 2006
Revenues
During
the fiscal year ended September 30, 2007, the Company had net revenues of
$6,615,209 compared to net revenues of $391,600 for the fiscal year ended
September 30, 2006, an increase of $6,223,609. This increase is due
primarily to increased revenues from the sale or lease of our TrackerPAL
products and related monitoring services. The first units were
delivered during the first quarter of fiscal year 2007. During the
year ended September 30, 2007, our SecureAlert subsidiary provided net revenues
of $6,615,209 compared to net revenues of $391,600 for the year ended September
30, 2006, an increase of approximately 1,589%. These revenues
consisted of $2,866,432 from the sale of offender tracking devices, $3,687,935
from monitoring services, and $60,842 from home and personal security
systems.
During
the year ended September 30, 2007, the Company delivered TrackerPAL devices to
distributors with a sales value of $1,300,000 in transactions that did not meet
the requirements of EITF 00-21 and SAB 104 for revenue
recognition. This revenue was deferred and recognized in future
periods.
Cost
of Revenues
During
the fiscal year ended September 30, 2007, cost of revenues totaled $13,396,163,
compared to cost of revenues in fiscal 2006 of $569,664. This increase is
due primarily to the increase in revenues from TrackerPAL commencing in the
first quarter of fiscal year 2007. SecureAlert’s cost of revenues
totaled $13,396,163, or 203%, of its revenues in 2007, compared to $569,664, or
145%, for fiscal 2006. SecureAlert’s cost of revenues consisted of
device costs of $2,957,787, monitoring center costs of $1,782,490, communication
costs of $3,088,283, disposal of units of $472,132, commissions of $262,655,
device enhancements of $194,704, home security and PERS costs of $139,162,
royalty settlement expense of $2,767,010, amortization of $1,286,401,
accessories of $80,904, and location and other costs of $364,635. The
disposal of units with a cost of $472,132 relates primarily to the water
ingression and strap design problems experienced by the
Company.
As
indicated above, $1,300,000 of device deliveries did not meet the requirements
of EITF 00-21 and SAB104 for revenue recognition. The corresponding
cost of revenues is $952,341. These costs were recognized during
fiscal year 2008.
The
Company previously had entered into two agreements requiring it to pay royalties
on devices in service with customers. During the year ended September
30, 2007, the Company terminated these agreements and settled past and future
royalty obligations under these agreements for a total of 1,788,520 shares of
common stock valued at $2,647,010 and $120,000 in cash, for total consideration
of $2,767,010. The terms of each agreement and the termination
thereof are discussed below.
27
Futuristic Medical Devices,
LLC (“Futuristic”). On January 8, 2007, the Company entered
into an agreement with Futuristic under which the Company agreed to pay a
royalty of $0.057 per day for each device in service with a customer through
June 30, 2009. On July 18, 2007, the Company and Futuristic
terminated the agreement and settled all obligations. In
consideration of the termination of the agreement, the Company issued to
Futuristic a total of 1,188,520 shares of common stock valued at $1,759,010, or
$1.48 per share (based on the quoted market price of the Company’s common stock
on that date). Of the 1,188,520 shares of common stock issued, 88,520
were issued to settle royalty obligations incurred by the Company through July
18, 2007. The remaining 1,100,000 shares of common stock were issued
to settle future royalty obligations that may be owed by the
Company.
PFK Development Group, Ltd.
(“PFK”). On February 1, 2006, the Company entered into a
consulting agreement with PFK under which the Company agreed to pay a royalty of
$0.10 per day for each device in service with a customer that PFK introduced to
the Company through January 31, 2009. On July 18, 2007, the Company
and PFK terminated the agreement and settled all obligations
thereunder. The Company issued 600,000 shares of common stock valued
at $888,000, or $1.48 per share (based on the quoted market price of the
Company’s common stock on that date) and $120,000 in cash.
During the year ended September 30,
2007, we incurred amortization expense of $826,425 and communication expense of
$2,266,627 for non-billable units. A non-billable unit is a
TrackerPAL device that did not generate any revenue for the
period. We have recorded these expenses as cost of revenues because
the non-billable units do not directly meet the definition of research and
development assets, they are not promotional assets, and they are not used by
the Company for internal purposes. Amortization is based on a
three-year useful life for TrackerPAL devices. Devices that are
leased or remain in the Company’s possession because they have not been sold are
amortized over three years. The Company believes this three-year life
is appropriate due to rapid changes in electronic monitoring technology and the
corresponding potential for obsolescence. Management periodically
assesses the useful life of the devices for appropriateness.
Communication costs primarily refer to
the costs associated with Subscriber Identity Modules
(“SIM”). Embedded in each TrackerPAL device is a SIM, which enables
the device to transfer voice and data information to a monitoring
center. We incur a monthly charge for each SIM, regardless of whether
or not the associated device generates revenue because the SIM cards are ordered
and inserted into devices before the devices are sold or leased.
Research
and Development Expenses
During the fiscal year ended September
30, 2007, the Company incurred research and development expenses of $4,564,121
compared to similar expenses in 2006 totaling $2,087,802. This increase is due
primarily to expenses associated with the development of the TrackerPAL device
for the parolee market. In addition, research and development
expenses for the year ended September 30, 2007 include $1,454,784 in monitoring
equipment disposed of that was initially used as test units and had served its
useful life. The Company does not expect to dispose of a significant
number of test units in the future. We expect research and
development expenses to continue in the future due to ongoing research and
development related to our TrackerPAL device and accessories.
Selling,
General and Administrative Expenses
During the fiscal year ended September
30, 2007, the Company’s selling, general and administrative expenses totaled
$15,586,852, compared to $15,649,099 for the fiscal year ended September 30,
2006. This decrease of $62,247 is the result of an increase in advertising of
$38,858, automobile of $54,677, bad debt expense of $313,949, board of directors
fees paid in shares of common stock valued at $110,000, depreciation of
$351,809, insurance of $323,953, equipment lease expense of $154,709, office
expense of $70,784, outside services of $62,566, payroll and payroll taxes of
$1,278,647, rent of $91,101, supplies of $24,952, telephone of $133,866,
training of $70,561, travel of $580,652, and other selling, general and
administrative expenses of $131,670. These increases in selling,
general and administrative expenses were offset, in part, by decreases in the
following: commissions of $56,250, consulting expense of $3,223,396, investment
relations and banking fees of $411,934, legal fees of $114,538, and other
selling, general and administrative expenses of $48,883. Selling,
general and administrative expenses of $15,586,852 for the year ended September
30, 2007 included $8,074,126 of non-cash expense primarily related to the
issuance of warrants and shares to consultants for services provided to the
Company.
Gain
on Sale of Intellectual Property
During the fiscal year ended September
30, 2007, the Company sold three patents for a total of
$2,400,000. The patents are as follows: Interference
Structure for Emergency Response System Wristwatch (No. 6,366,538 issued on
April 2, 2002), Emergency Phone for Automatically Summoning (No. 6,226,510
issued on May 1, 2001), and Panic Button Phone (No. 6,044,257 issued on March
28, 2000).
Other
Income and Expense
For the
fiscal year ended September 30, 2007, interest expense was $1,198,573, compared
to $6,541,074 for fiscal year 2006. The $1,198,573 includes non-cash interest
expense of approximately $396,019 related to amortization of deferred financing
costs associated with warrants and shares of common stock issued for prepaid
interest.
28
Net
Loss
The Company had a net loss for the year
ended September 30, 2007, totaling $26,370,571, compared to a net loss of
$23,797,745 for fiscal year 2006. This increase is due primarily to
expenses associated with the development of the TrackerPAL device for parolees,
and related increases in cost of revenues, selling, general and administrative
expenses, and interest expense.
Quarterly
Financial Information (Unaudited)
The following tables set forth
unaudited quarterly operating results for each of the last eight fiscal
quarters. This information is consistent with the Consolidated Financial
Statements herein and includes normally recurring adjustments that management
considers to be necessary for a fair presentation of the data. Due to the
divestiture of control of Volu-Sol during the year ended September 30, 2008, we
now operate as one reportable business segment. Our financial results have been
adjusted to reflect the reclassification of revenues and related expenses in our
former diagnostic stains business to "discontinued operations" for all periods
presented. Further information on this can be found in Note (2) to the
Consolidated Financial Statements herein under—"Discontinued Operations."
Quarterly results are not necessarily indicative of future results of
operations. This information should be read in conjunction with the audited Consolidated Financial
Statements and notes thereto that are included elsewhere in this
Report.
|
Quarter
Ended
|
||||||||||||||||||||||||||||||||
|
December
31,
|
March
31,
|
June
30,
|
Sept. 30,
|
December 31,
|
March
31,
|
June 30,
|
Sept.
30,
|
|||||||||||||||||||||||||
|
2006
|
2007
|
2007
|
2007
|
2007
|
2008
|
2008
|
2008
|
|||||||||||||||||||||||||
|
Consolidated
Statements of Operations Data:
|
||||||||||||||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||||||||||||||
|
TrackerPAL
device sales
|
$ | 33,333 | $ | 962,733 | $ | 1,837,033 | $ | 33,333 | $ | 1,033,333 | $ | 33,333 | $ | 1,033,334 | $ | 200,000 | ||||||||||||||||
|
Monitoring
services
|
380,188 | 533,121 | 1,136,813 | 1,637,813 | 2,416,045 | 2,434,013 | 2,425,657 | 2,737,596 | ||||||||||||||||||||||||
|
Home,
personal security systems, other
|
21,862 | 13,307 | 12,241 | 13,432 | 19,908 | 21,101 | 28,666 | 20,691 | ||||||||||||||||||||||||
|
Total
revenues
|
$ | 435,383 | $ | 1,509,161 | $ | 2,986,087 | $ | 1,684,578 | $ | 3,469,286 | $ | 2,488,447 | $ | 3,487,657 | $ | 2,958,287 | ||||||||||||||||
|
Cost
of revenues
|
(1,837,181 | ) | (2,056,548 | ) | (3,429,626 | ) | (6,072,808 | ) | (2,742,786 | ) | (3,205,178 | ) | (3,389,497 | ) | (3,771,529 | ) | ||||||||||||||||
|
Gross
Profit (Loss)
|
(1,401,798 | ) | (547,387 | ) | (443,539 | ) | (4,388,230 | ) | 726,500 | (716,731 | ) | 98,160 | (813,242 | ) | ||||||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||||||||||||||
|
Selling,
general, and administrative
|
(5,070,834 | ) | (3,573,184 | ) | (3,707,225 | ) | (3,235,609 | ) | (4,152,714 | ) | (7,284,214 | ) | (16,597,728 | ) | (8,432,022 | ) | ||||||||||||||||
|
Research
and development
|
(1,219,659 | ) | (1,932,302 | ) | (731,498 | ) | (680,662 | ) | (865,344 | ) | (2,848,036 | ) | (646,335 | ) | (451,413 | ) | ||||||||||||||||
|
Loss
from operations
|
(7,692,291 | ) | (6,052,873 | ) | (4,882,262 | ) | (8,304,501 | ) | (4,291,558 | ) | (10,848,981 | ) | (17,145,903 | ) | (9,696,677 | ) | ||||||||||||||||
|
Other
income (expense), net
|
(179,908 | ) | (855,758 | ) | (316,540 | ) | 2,252,244 | 2,048,568 | (9,168,053 | ) | (303,245 | ) | 232,911 | |||||||||||||||||||
|
Loss
from continuing operations
|
(7,872,199 | ) | (6,908,631 | ) | (5,198,802 | ) | (6,052,257 | ) | (2,242,990 | ) | (20,017,034 | ) | (17,449,148 | ) | (9,463,766 | ) | ||||||||||||||||
|
Discontinued
operations
|
(66,722 | ) | (124,985 | ) | (75,457 | ) | (71,518 | ) | (98,954 | ) | (101,046 | ) | (53,670 | ) | (160,442 | ) | ||||||||||||||||
|
Net
loss
|
$ | (7,938,921 | ) | $ | (7,033,616 | ) | $ | (5,274,259 | ) | $ | (6,123,775 | ) | $ | (2,341,944 | ) | $ | (20,118,080 | ) | $ | (17,502,818 | ) | $ | (9,624,208 | ) | ||||||||
|
(Loss)
per common share*:
|
||||||||||||||||||||||||||||||||
|
Basic
and diluted
|
||||||||||||||||||||||||||||||||
|
Continuing
operations
|
$ | (0.09 | ) | $ | (0.08 | ) | $ | (0.05 | ) | $ | (0.06 | ) | $ | (0.02 | ) | $ | (0.15 | ) | $ | (0.12 | ) | $ | (0.06 | ) | ||||||||
|
Discontinued
operations
|
(0.01 | ) | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | |||||||||||||||||||||||
|
Net
loss
|
$ | (0.10 | ) | $ | (0.08 | ) | $ | (0.05 | ) | $ | (0.06 | ) | $ | (0.02 | ) | $ | (0.15 | ) | $ | (0.12 | ) | $ | (0.06 | ) | ||||||||
|
Weighted
average shares outstanding:
|
83,018,000 | 90,618,000 | 104,583,000 | 102,826,000 | 129,617,000 | 132,661,000 | 146,085,000 | 151,947,000 | ||||||||||||||||||||||||
29
|
*
|
Earnings
per common share is computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share amounts
does not necessarily equal the total for the
year.
|
|
|
·
|
New
product introductions;
|
|
|
·
|
The
acceptance of GPS tracking and monitoring as an alternative to aid case
management of offenders
|
|
|
·
|
The
integration and operation of new information technology
systems;
|
|
|
·
|
Entry
into one or more of our markets by competitors;
|
|
|
·
|
General
conditions in the criminal justice industry;
and
|
|
|
·
|
Customer
and public perceptions of our products and
services.
|
As a result of these and other factors,
quarterly revenues, expenses, and results of operations could vary significantly
in the future, and period-to-period comparisons should not be relied upon as
indications of future performance. There can be no assurance that we will be
able to increase revenues in future periods or be able to sustain the level of
revenue or rate of revenue growth on a quarterly or annual basis that we have
sustained in the past. Due to the foregoing factors, future results of
operations could be below the expectations of public market analysts and
investors. If that occurred, the market price of our common stock would likely
decline.
Liquidity
and Capital Resources
The
Company has not historically financed operations entirely from cash flows from
operating activities. During the year ended September 30, 2008, the
Company funded its operating and investing activities through the sale of equity
securities and the exercise of options and warrants. See “Recent
Sales of Unregistered Securities,” on page 18 of this Report. The
cash provided by these transactions was used by the Company to (i) pay operating
expenses, including the costs associated with its monitoring center, (ii)
purchase TrackerPAL devices, (iii) pay down debt and accounts payable, including
amounts owed on a line of credit and bank debt, and (iv) pay general and
administrative expenses, including the salaries of employees, officers, and
consultants of the Company and other expenses as described below.
At
September 30, 2008, the Company had unrestricted cash of $2,782,953, compared to
unrestricted cash of $4,803,871 at September 30, 2007. At September 30, 2008,
the Company had working capital deficit of $6,822,276, compared to working
capital of $1,296,985 at September 30, 2007. The decrease in working
capital primarily resulted from the increase in our accounts payable, accrued
liabilities and notes payable balances at September 30, 2008.
During
fiscal year 2008, the Company’s operating activities used cash of $9,672,744,
compared to $13,408,266 of cash used in 2007. This decrease in cash
used from operating activities of $3,735,522 is the result of an increase in
common stock issued for services and settlement of lawsuits of $10,058,394,
stock options and warrants issued for services and debt of $2,244,765,
amortization of deferred consulting and financing costs of $5,018,086,
redemption of SecureAlert Series A Preferred stock of $8,205,922,
deconsolidation of subsidiary of $414,112, accrued liabilities of $371,413,
accounts receivable of $7,528,478, and inventory of $952,341, receivable from
sale of intellectual property of $600,000. These increases in cash
used from operating activities were offset, in part, by decreases in the
following: net of loss of $23,555,161, depreciation and amortization
of $324,627, registration payment arrangement expense of $533,000, impairment of
monitoring equipment of $883,836, loss on sale of asset of $228,800,
related-party services of $80,091, deposit held in escrow of $500,000, prepaid
and other assets of $1,487,894, interest receivable of $23,094, accounts payable
of $2,724,674, and deferred revenue of $1,316,812
Investing
activities for the year ended September 30, 2008, used cash of $526,447,
compared to $4,221,548 of cash used by investing activities in the year ended
September 30, 2007. The decrease in cash used during fiscal year 2008
resulted primarily from the decrease in purchasing additional monitoring
equipment. The Company purchased $192,221 and $3,684,216 of
monitoring equipment during the years ended September 30, 2008 and 2007,
respectively. In addition, the Company purchased $334,226 and
$537,332 of property and equipment during the years ended September 30, 2008 and
2007, respectively.
Financing
activities for the year ended September 30, 2008, provided $8,178,273 of net
cash compared to $16,563,645 of net cash for the year ended September 30,
2007.
30
The
Company made net payments of $315,392 on a related-party line of credit,
$336,133 on notes payable, $2,176,821 related to acquisitions, and $396,700 on a
bank line of credit. In fiscal year 2008, the Company had proceeds of
$5,058,014 from the issuance of common stock, $2,772,381 from the exercise of
options and warrants, $2,400,000 from the sale of warrants and subsidiary stock,
$975,578 from related-party notes, $163,002 of cash received upon acquisitions,
and $34,344 from notes payable.
During
fiscal year 2008, the Company incurred a net loss of $49,587,050 and negative
cash flows from operating activities of $9,672,744, compared to a net loss of
$26,370,571 and negative cash flows from operating activities of $13,408,266 for
the year ended September 30, 2007. As of September 30, 2008, the
Company’s working capital deficit was $6,822,276 and the Company had
stockholders’ equity of $36,006 and an accumulated deficit of
$182,683,996.
Going
Concern
The
factors described above, as well as the risk factors set out elsewhere in this
Report raise substantial doubt about the Company’s ability to continue as a
going concern. The financial statements included in this Report do not include
any adjustments that might result from the outcome of this
uncertainty. Our plan with respect to this uncertainty is to focus on
increasing the leasing of the TrackerPAL product. There can be no
assurance that revenues will increase rapidly enough to offset operating losses
and repay debts. Likewise, there can be no assurance that the
Company’s debt holders will be willing to convert the debt obligations to equity
securities or that the Company will be successful in raising additional capital
from the sale of equity or debt securities. If the Company is unable
to increase cash flows from operating activities or obtain additional financing,
it will be unable to continue the development of its products and would likely
cease operations.
Contractual
Obligations and Commercial Contingencies
The
following table summarizes the Company’s contractual obligations as of September
30, 2008:
|
Years
|
Total
|
SecureAlert
|
Midwest
Monitoring
|
Court
Programs
|
||||||||||||
|
2009
|
$ | 533,493 | $ | 402,509 | $ | 14,128 | $ | 116,856 | ||||||||
|
2010
|
354,027 | 262,894 | 11,124 | 80,009 | ||||||||||||
|
2011
|
308,825 | 267,173 | 3,744 | 37,908 | ||||||||||||
|
2012
|
279,162 | 268,362 | - | 10,800 | ||||||||||||
|
2013
|
267,882 | 267,882 | - | - | ||||||||||||
|
2014
|
60,537 | 60,537 | - | - | ||||||||||||
|
Total
|
$ | 1,803,926 | $ | 1,529,357 | $ | 28,996 | $ | 245,573 | ||||||||
The total
contractual obligations of $1,803,926 consist of the following: $1,554,667 from
facilities operating leases and $249,259 from equipment
leases. During the years ended 2006, 2007 and 2008, the Company paid
approximately $191,000, $284,000, and $536,000 in lease payment obligations,
respectively.
Inflation
We do not
believe that inflation has had a material impact on our historical operations or
profitability.
Critical
Accounting Policies
In Note
(3) to the audited financial statements for the fiscal year ended September 30,
2008 included in this Report, the Company discusses those accounting policies
that are considered to be significant in determining the results of operations
and its financial position.
The
preparation of 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 estimates and judgments are
subject to an inherent degree of uncertainty. On an on-going basis, we evaluate
our estimates, including those related to bad debts, inventories, intangible
assets, warranty obligations, product liability, revenue, and income taxes. We
base our 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, impairment of long-lived
assets and allowance for doubtful accounts receivables, the Company applies the
following critical accounting policies in the preparation of its financial
statements:
31
Inventory
Reserves
The nature of the Company’s business
requires maintenance of 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 cost (first-in, first-out
method) or market. Raw materials are stated at the lower of cost
(first-in, first-out method), 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 reserves, management analyzes the following, among
other things:
|
|
·
|
Current
inventory quantities on hand;
|
|
|
·
|
Product
acceptance in the marketplace;
|
|
|
·
|
Customer
demand;
|
|
|
·
|
Historical
sales;
|
|
|
·
|
Forecast
sales;
|
|
|
·
|
Product
obsolescence; and
|
|
|
·
|
Technological
innovations.
|
Any modifications to these estimates of
reserves are reflected in cost of revenues within the statement of operations
during the period in which such modifications are determined necessary by
management.
Revenue
Recognition
The Company’s revenue has historically
been from three sources: (i) monitoring services; (ii) monitoring device
and other product sales; and (iii) medical diagnostic stains
sales. With the divestiture of Volu-Sol, the Company no longer has
revenues from this third source.
Monitoring
Services
Monitoring
services include two components: (i) contracts in which the Company provides
monitoring services and leases devices to distributors or end users and the
Company retains ownership of the leased devices; and (ii) monitoring services
purchased by distributors or end users who have previously purchased devices and
have opted to use the Company’s monitoring services.
The
Company leases its devices under one-year contracts with customers that opt to
use the Company’s monitoring services. However, these contracts may
be cancelled by either party at anytime with 30 days notice. Under
the Company’s standard leasing contract, the leased device becomes billable on
the date of activation or 21 days from the date the device is assigned to the
lessee, and remains billable until the device is returned to the
Company. The Company recognizes revenue on leased devices at the end
of each month that monitoring services have been provided. In those
circumstances in which the Company receives payment in advance, the Company
records these payments as deferred revenue.
Monitoring Device Product
Sales
Although
not the focus of the Company’s business model, the Company sells its monitoring
devices in certain situations. In addition, the Company sells to a
very small degree home security and Personal Emergency Response
Systems. The Company recognizes product sales revenue when persuasive
evidence of an arrangement with the customer exists, title passes to the
customer and the customer cannot return the devices, prices are fixed or
determinable and collection is reasonably assured. When purchasing products
(such as TrackerPAL devices) from the Company, customers may, but are not
required to, enter into monitoring service contracts. The Company
recognizes revenue on monitoring services for customers that have previously
purchased devices at the end of each month that monitoring services have been
provided.
Multiple Element
Arrangements
The
majority of the Company’s revenue transactions do not have multiple elements. On
occasion, the Company has revenue transactions that have multiple elements (such
as product sales and monitoring services). For revenue arrangements
that have multiple elements, the Company considers whether: (i) the delivered
devices have stand alone value to the customer; (ii) there is objective and
reliable evidence of the fair value of the undelivered monitoring services,
which is generally determined by surveying the price of competitors’ comparable
monitoring services; and (iii) the customer does not have a general right of
return. Based on these criteria, the Company recognizes revenue from
the sale of devices separately from the monitoring services to be provided to
the customer. In accordance with EITF 00-21, if the fair value of the
undelivered element exists, but the fair value does not exist for one or more
delivered elements, then revenue is recognized using the residual method. Under
the residual method as applied to these particular transactions, the fair value
of the undelivered element (the monitoring services) is deferred and the
remaining portion of the arrangement (the sale of the device) is recognized as
revenue when the device is delivered and all other revenue recognition criteria
are met.
32
Medical Diagnostic Stain
Sales
The
Company recognizes medical diagnostic stains revenue when persuasive evidence of
an arrangement with the customer exists, title passes to the customer and the
customer cannot return the products, prices are fixed or determinable and
collection is reasonably assured. As of September 30, 2008, this
segment of operations was discontinued.
Other
Matters
The
Company considers an arrangement with payment terms longer than the Company’s
normal terms not to be fixed or determinable, and revenue is recognized when the
fee becomes due. Normal payment terms for the sale of monitoring
services are 30 days, and normal payment terms for device sales are between 120
and 180 days. The Company sells its devices and services directly to
end users and to distributors. Distributors do not have general
rights of return. Distributors have no price protection or stock
protection rights with respect to devices sold to them by the
Company. Generally, title and risk of loss pass to the buyer upon
delivery of the devices. The collection terms for the diagnostic stains and
reagent product sales are net 30 days. The Company estimates its
product returns based on historical experience and maintains an allowance for
estimated returns, which is recorded as a reduction to accounts receivable and
revenue.
Shipping
and handling fees are included in net revenues. The related freight
costs and supplies directly associated with shipping products to customers are
included as a component of cost of revenues.
Impairment
of Long-lived Assets
The Company reviews its long-lived
assets, other than goodwill, for impairment when events or changes in
circumstances indicate the book value of an asset may not be
recoverable. An evaluation is made at each balance sheet date, to
determine whether events and circumstances have occurred which indicate possible
impairment. An estimate is made of future undiscounted net cash flows of the
related asset or group of assets over its estimated remaining life in measuring
whether the assets are recoverable. During the years ended September 30, 2008
and 2007, the Company disposed of $570,948 and $1,454,784,
respectively. The $570,948 was recorded as cost of
revenues.
Allowance
for Doubtful Accounts
The Company must make estimates of the
collectability of accounts receivable. In doing so, we 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.
Recent Accounting
Pronouncements
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and SFAS
No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS No.
141(R) requires an acquirer to measure the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree at their
fair values on the acquisition date, with goodwill being the excess value over
the net identifiable assets acquired. SFAS No. 160 clarifies that a
non-controlling interest in a subsidiary should be reported as equity in the
consolidated financial statements, consolidated net income shall be adjusted to
include the net income attributed to the non-controlling interest, and
consolidated comprehensive income shall be adjusted to include the comprehensive
income attributed to the non-controlling interest. The calculation of earnings
per share will continue to be based on income amounts attributable to the
parent. SFAS No. 141(R) and SFAS No. 160 are effective for financial statements
issued for fiscal years beginning after December 15, 2008. Early adoption is
prohibited. Management does not currently believe adoption will have a material
impact on the Company's financial condition or operating results, if any, upon
adoption of SFAS No. 141(R) or SFAS No. 160.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which defines fair value, provides a framework for measuring fair value, and
expands the disclosures required for fair value measurements. SFAS No. 157
applies to other accounting pronouncements that require fair value measurements;
it does not require any new fair value measurements. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007, and is
required to be adopted by the Company beginning in the first quarter of fiscal
2009. Although the Company will continue to evaluate the application of SFAS
No. 157, management does not currently believe adoption will have a
material impact on the Company's financial condition or operating
results.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities-including an amendment of FASB
Statement No. 115 ("SFAS No. 159"). SFAS No. 159 allows companies
to choose to elect measuring eligible financial instruments and certain other
items at fair value that are not required to be measured at fair value. SFAS No. 159 requires that unrealized gains and losses on
items for which the fair value option has been elected be reported in earnings
at each reporting date. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007 and is required to be adopted by the
Company beginning in the first quarter of fiscal 2009. Although the Company will
continue to evaluate the application of SFAS No. 159, management does not
currently believe adoption will have a material impact on the Company's
financial condition or operating results.
33
In May
2008, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
162, The Hierarchy of
Generally Accepted Accounting Principles. SFAS No. 162
identifies the sources of accounting principles and provides entities with a
framework for selecting the principles used in preparation of financial
statements that are presented in conformity with GAAP. The current
GAAP hierarchy has been criticized because it is directed to the auditor rather
than the entity, it is complex, and it ranks FASB Statements of Financial
Accounting Concepts, which are subject to the same level of due process as FASB
Statements of Financial Accounting Standards, below industry practices that are
widely recognized as generally accepted but that are not subject to due
process. The Board believes the GAAP hierarchy should be directed to
entities because it is the entity (not its auditors) that is responsible for
selecting accounting principles for financial statements that are presented in
conformity with GAAP. The adoption of FASB 162 is not expected to
have a material impact on the Company’s financial position.
Effective
October 1, 2006, the Company adopted Statement of Financial Accounting Standards
(“SFAS”) No. 123R, using the modified prospective method. SFAS No. 123R requires
the recognition of the cost of employee services received in exchange for an
award of equity instruments in the financial statements and is measured based on
the grant date fair value of the award. SFAS No. 123R also requires the stock
option compensation expense to be recognized over the period during which an
employee is required to provide service in exchange for the award (the vesting
period). Prior to adopting SFAS No. 123R, the Company accounted for its
stock-based compensation plans under Accounting Principles Board Opinion ("APB")
No. 25, Accounting for Stock
Issued to Employees. Under APB No. 25, generally no compensation expense
is recorded when the terms of the award are fixed and the exercise price of the
employee stock option equals or exceeds the fair value of the underlying stock
on the date of grant. The Company adopted the disclosure-only provisions of SFAS
No. 123, Accounting for
Stock-Based Compensation.
For the
years ended September 30, 2008 and 2007, the Company calculated compensation
expense of $214,251 and $900,664, respectively related to the vesting of
previously granted stock options and additional options granted.
The fair
value of each stock option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. The Company granted 1,725,000 and 320,000
stock options to employees during the years ended September 30, 2008 and 2007,
respectively. In addition, 390,000 stock options issued to employees
in prior years vested during the year ended September 30, 2008. The
weighted average fair value of stock options at the date of grant during the
years ended September 30, 2008 and 2007, was $1.34 and $1.43, respectively. The
expected life of stock options represents the period of time that the stock
options granted are expected to be outstanding based on historical exercise
trends. The expected volatility is based on the historical price volatility of
common stock. The risk-free interest rate represents the U.S. Treasury bill rate
for the expected life of the related stock options. The dividend yield
represents the Company’s anticipated cash dividends over the expected life of
the stock options.
The
following are the weighted-average assumptions used for options granted during
the years ended September 30, 2008 and 2007, respectively:
|
September
30, 2008
|
September
30, 2007
|
|
|
Risk
free interest rate
|
3.12%
|
4.57%
|
|
Expected
life
|
5
Years
|
5
Years
|
|
Cash
dividend yield
|
-
|
-
|
|
Volatility
|
136%
|
142%
|
A summary of stock option activity for
the year ended September 30, 2008, is presented below:
|
Shares
Under
Option
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Life
|
||||||||
|
Aggregate
Intrinsic
Value
|
||||||||||
|
Outstanding
as of September 30, 2007
|
3,295,000
|
$
|
0.64
|
|||||||
|
Granted
|
1,725,000
|
$
|
1.54
|
|||||||
|
Exercised
|
(1,375,000)
|
$
|
0.63
|
|||||||
|
Forfeited
|
(45,000)
|
$
|
0.86
|
|||||||
|
Expired
|
-
|
-
|
||||||||
|
Outstanding
as of September 30, 2008
|
3,600,000
|
$
|
1.08
|
3.34
years
|
$
|
1,062,000
|
||||
|
Exercisable
as of September 30, 2008
|
421,667
|
$
|
1.35
|
3.30
years
|
$
|
37,000
|
||||
34
Our
business is extending to several countries outside the United States, and we
intend to continue to expand our foreign operations. As a result, our
revenues and results of operations are affected by fluctuations in currency
exchange rates, interest rates, and other uncertainties inherent in doing
business in more than one currency. In addition, our operations are
exposed to risks that are associated with changes in social, political, and
economic conditions in the foreign countries in which we operate, including
changes in the laws and policies that govern foreign investment, as well as, to
a lesser extent, changes in United States laws and regulations relating to
foreign trade and investment.
Foreign Currency Risks.
Revenues from sources outside the United States represented 8% and 29% of
our total revenues for the fiscal years ended September 30, 2008 and 2007,
respectively. Sales of monitoring equipment during the periods
indicated were transacted in U.S. dollars and, therefore, the Company did not
experience any effect from foreign currency exchange in connection with these
international sales. Changes in currency exchange rates affect the
relative prices at which we sell our products. Given the uncertainty
of exchange rate fluctuations, we cannot estimate the effect of these
fluctuations on our future business, product pricing, results of operations, or
financial condition.
We do not use foreign currency exchange
contracts or derivative financial instruments for trading or speculative
purposes. To the extent foreign sales become a more significant part
of our business in the future, we may seek to implement strategies which make
use of these or other instruments in order to minimize the effects of foreign
currency exchange on our business.
Interest Rate
Risks. As of September 30, 2008, we had $3,462,285 of
borrowings outstanding on a line of credit with a weighted-average interest rate
of 18%. In addition, we had $48,500 of borrowings outstanding on a
line of credit with two banks with a weighted average interest rate of
10.05%. The interest rates on these lines of credit are subject to
change from time to time based on changes in an independent index which is the
Prime Rate as published in The
Wall Street Journal.
The
Financial Statements and Supplementary Data required by this Item are set forth
at the pages indicated at Item 15 below.
None.
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of
1934 (the “Exchange Act”)). Based upon that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that, as of the end of the
period covered by this report, our disclosure controls and procedures were not
effective. We and our auditors identified material weaknesses
discussed below in the Report of management on internal control over financial
reporting.
Report
of Management on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) under the
Exchange Act. Our internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles. Our internal control over
financial reporting includes those policies and procedures
that:
35
|
|
(i)
|
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of our
assets;
|
|
|
(ii)
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that our receipts and expenditures are
being made only in accordance with authorizations of our management and
directors; and
|
|
|
(iii)
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of assets that could have a
material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.
Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement to the Company's annual or
interim financial statements will not be prevented or detected.
In the
course of the management's assessment, it has identified the following material
weaknesses in internal control over financial reporting:
|
|
·
|
Control
Environment – We did not maintain an effective control environment
for internal control over financial reporting. Specifically, we concluded
that we did not have appropriate controls in the following
areas:
|
|
|
o
|
Segregation of Duties –
As a result of limited resources and the addition of multiple majority
owned subsidiaries, we did not maintain proper segregation of incompatible
duties. The effect of the lack of segregation of duties potentially
affects multiple processes and
procedures.
|
|
|
o
|
Implementation of Effective
Controls – We failed to complete the implementation of effective
internal controls over our newly acquired majority owned subsidiaries as
of September 30, 2008 due to limited
resources.
|
|
|
·
|
Application
of GAAP – We did not maintain effective internal controls relating
to the application of generally accepted accounting principles to include
improper revenue recognition, classification of expenses, and accounting
for equity transactions.
|
|
|
·
|
Financial
Reporting Process – We did
not maintain an effective financial reporting process to prepare financial
statements in accordance with generally accepted accounting principles.
Specifically, we initially failed to appropriately disclose in the
financial statements and related notes to the financial statements the
effects of the spin-off of
Volu-Sol.
|
|
|
·
|
Tracking
of Leased Equipment – We failed to maintain effective internal
controls over the tracking of leased equipment as it relates to the
assignment and leasing of monitoring
equipment.
|
We
restated our September 30, 2007 financial statements as a result of errors that
were not detected due to several of the above mentioned material weaknesses,
which have not been mitigated as of September 30, 2008. Accordingly, management
has determined the Company's internal control over financial reporting as of
September 30, 2008 was not effective. These material weaknesses have
been disclosed to our audit committee.
We are in
the process of improving our internal control over financial reporting in an
effort to eliminate these material weaknesses through improved supervision and
training of our staff, but additional effort is needed to fully remedy these
deficiencies. Our management, audit committee, and directors will continue to
work with our auditors and outside advisors to ensure that our controls and
procedures are adequate and effective.
36
|
HANSEN, BARNETT& MAXWELL,
P.C.
|
||
|
A
Professional Corporation
|
Registered
with the Public Company
|
|
|
CERTIFIED
PUBLIC ACCOUNTANTS
|
Accounting
Oversight Board
|
|
|
5
Triad Center, Suite 750
|
||
|
Salt
Lake City, UT 84180-1128
|
||
|
Phone:
(801) 532-2200
Fax:
(801) 532-7944
|
 |
|
|
www.hbmcpas.com
|
A
Member of the Forum of Firms
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Stockholders
of RemoteMDx, Inc.
We have
audited RemoteMDx Inc.’s internal control over financial reporting as of
September 30, 2008, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). RemoteMDx Inc.’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Report of Management on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A
material weakness is a control deficiency, or combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Company’s annual or interim
financial statements will not be prevented or detected on a timely basis. The
following material weaknesses have been identified and included in management’s
assessment:
|
|
·
|
Control
Environment – The Company did not maintain an effective control
environment for internal control over financial reporting. Specifically,
the Company concluded that they did not have appropriate controls in the
following areas:
|
|
|
o
|
Segregation of Duties –
As a result of limited resources and the addition of multiple majority
owned subsidiaries, the Company did not maintain proper segregation of
incompatible duties. The effect of the lack of segregation of duties
potentially affects multiple processes and
procedures.
|
|
|
o
|
Implementation of Effective
Controls – The Company failed to complete the implementation of
effective internal controls over its newly acquired majority owned
subsidiaries as of September 30, 2008 due to limited
resources.
|
37
|
|
·
|
Application
of GAAP – The Company did not maintain effective internal controls
relating to the application of generally accepted accounting principles to
include improper revenue recognition, classification of expenses, and
accounting for equity transactions.
|
|
|
·
|
Financial
Reporting Process – The
Company did not maintain an effective financial reporting process to
prepare financial statements in accordance with generally accepted
accounting principles. Specifically, the Company initially failed to
appropriately disclose in the financial statements and related notes to
the financial statement the effects of the spin-off of
Volu-Sol.
|
|
|
·
|
Tracking
of Leased Equipment – The Company failed to maintain effective
internal controls over the tracking of leased equipment as it relates to
the assignment and leasing of monitoring
equipment.
|
These
material weaknesses were considered in determining the nature, timing, and
extent of audit tests applied in our audit of the 2008 financial statements, and
this report does not affect our report dated December 23, 2008 on those
financial statements.
In our
opinion, because of the effect of the material weaknesses described above on the
achievement of the objectives of the control criteria, RemoteMDx has not
maintained effective internal control over financial reporting as of September
30, 2008, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the balance sheets and the related statements
of income, stockholders’ equity and comprehensive income, and cash flows of
RemoteMDx, Inc., and our report dated December 23, 2008 expressed an unqualified
opinion.
HANSEN,
BARNETT & MAXWELL, P.C.
Salt Lake
City, Utah
December
23, 2008
38
Item 9B. Other
Information
None.
The
following table sets forth information concerning our executive officers and
directors as of September 30, 2008:
|
Name
|
Age
|
Position
|
|||
|
David
G. Derrick
|
55
|
Chief
Executive Officer and Chairman
|
|||
|
John
L. Hastings, III
|
45
|
President
|
|||
|
Blake
T. Rigby*
|
51
|
Chief
Financial and Chief Operating Officer
|
|||
|
Bruce
G. Derrick
|
50
|
Chief
Technology Officer
|
|||
|
Bernadette
Suckel
|
52
|
Managing
Director of Sales & Marketing
|
|||
|
James
J. Dalton
|
65
|
Director
|
|||
|
Peter
McCall
|
50
|
Director
|
|||
|
Robert
E. Childers
|
63
|
Director
|
|||
|
David
P. Hanlon
|
63
|
Director
|
|||
|
Larry
G. Schafran
|
70
|
Director
|
|
*
|
Mr.
Rigby resigned from his positions with the Company on November 17, 2008 to
pursue other interests. The Company brought back Michael G. Acton who had
previously served as the Chief Financial Officer of the Company from March
2001 until June 2008. Mr. Acton’s biographical information is
included below. The position of Chief Operating Officer was given to Mr.
Hastings upon Mr. Rigby’s
resignation.
|
David Derrick,
CEO and Chairman. Mr. Derrick has been our CEO and Chairman since
February 2001. Prior to joining us, Mr. Derrick occupied directorship
and management positions in other companies, including Biomune Systems Inc.
(“Biomune”), the former parent of the Company, and Purizer
Corporation. From 1979 to 1982, Mr. Derrick was a faculty member at
the University of Utah College of Business. Mr. Derrick graduated
from the University of Utah with a Bachelor of Arts degree in Economics and a
Masters in Business Administration degree with an emphasis in
Finance.
John Hastings,
President and Chief Operating Officer. Mr. Hastings became
President of the Company on June 19, 2008 and Chief Operating Officer on
November 20, 2008. Mr. Hastings has worked for Nestle/Stouffer’s,
Kraft/General Foods, Nissan Motor Acceptance Corp., NCR/Teradata, Unisys Corp.
and VNU/AC Nielsen during his career. He has also served on the
boards of small entrepreneurial companies. From 1998 through 2006,
Mr. Hastings worked with VNU – AC Nielsen in several executive posts, last
serving as its Senior Vice President and General Manager of Global Business
Intelligence, reporting directly to the company’s Chief Executive
Officer. Upon acquisition and privatization of VNU in 2006, and until
his appointment as President of RemoteMDx, Mr. Hastings served as the interim
President and CEO of Klever Marketing, Inc., a Utah-based retail marketing
company. Mr. Hastings received a BA from Cal State University,
Fullerton CA (1985) and an MBA from Pepperdine University, Malibu CA
(1987).
Michael Acton,
Secretary, Treasurer and Chief Financial Officer. Mr. Acton
joined us as Chief Financial Officer on November 20, 2008. Previously
he had served as Chief Financial Officer from March 1999 until June 2008. He has
served as the Company’s Secretary/Treasurer since March 1999. Since
June 2008 he has also served as the Chief Financial Officer of Volu-Sol Reagents
Corporation, a former subsidiary of the Company. He is a Certified
Public Accountant in the State of Utah.
Bernadette
Suckel, Managing Director of Sales & Marketing. Ms. Suckel
served as the VP/Solution and Client Principal, for The Nielsen
Company/ACNielsen from 2000 through April 2008. From November 2006
through April 2008, she consulted on a part-time basis to Klever Marketing, Inc.
to focus on cost reduction strategies. Ms. Suckel also worked
previously for Cogit.com and NCR/AT&T GIS/Teradata. She received
a BS in Business Administration, Marketing Option, from California State
University, Fresno.
Bruce G.
Derrick, Chief Technology Officer. Mr. Derrick has extensive
experience in management of custom solutions development and customer management
in the wireless telecom marketplace. From 2001 to 2004 was a senior
product development manager for WatchMark Corporation. WatchMark
collects cellular network performance data for quality assurance and capacity
planning. Prior to joining WatchMark, Mr. Derrick was responsible for
forming and managing the Professional Services team for Marconi’s MSI
division. Mr. Derrick also worked in management positions at Boeing
and Western Wireless, built and managed the Corporate Computer and Network
Operations department for Avaya’s Mosaix division. He was a Senior
Programmer in applied research at the University of Utah’s Department of Medical
Informatics where he developed and implemented medical informatics and
physiological monitoring services for ICU care and participated in development
of IEEE standards for automated physiological monitoring for NASA’s Space
Station program. Mr. Derrick holds a Bachelor’s Degree in Computer
Science from the University of Utah. Bruce Derrick is the brother of
David Derrick, the Chairman and CEO of the Company.
39
James Dalton,
Director. Mr. Dalton joined us as
a director in 2001. Since June 2008 he has served as the Chief
Executive Officer and Chairman of Volu-Sol Reagents Corporation. He
was President of the Company from August 2003 until June 2008. Prior
to joining the Company, Mr. Dalton was the owner and President of Dalton
Development, a real estate development company. He served as the
President and coordinated the development of The Pinnacle, an 86-unit
condominium project located at Deer Valley Resort in Park City,
Utah. Mr. Dalton served as the President and equity owner of Club Rio
Mar in Puerto Rico, a 680-acre beach front property that includes 500
condominiums, beach club, numerous restaurants, pools and a Fazio-designed golf
course. He was a founder and owner of the Deer Valley Club, where he
oversaw the development of a high-end, world-class ski project. From
1996 to 2000, Mr. Dalton served as an officer and director of
Biomune.
Peter McCall,
Director. Mr. McCall joined our board of directors in July
2001. Mr. McCall began his career in the mortgage finance business in
1982. As a Vice President of GE Mortgage Securities, he oversaw the
first mortgage securities transactions between GE Capital Corporation and
Salomon Brothers. For fifteen years, Mr. McCall structured and sold
both mortgage and asset backed security transactions. In 1997 Mr.
McCall founded McCall Partners LLC. McCall Partners is an investment
vehicle for listed and non-listed equity securities. Mr. McCall is
also a member of the Board of Directors of Premium Power Corporation of North
Andover, MA. Mr. McCall is a member of the Audit Committee, Compensation
Committee and the Nominating Committee of the Company’s Board of
Directors.
Robert Childers,
Director. Mr. Childers joined our
board in July 2001. Since 1977, he has served as the Chief Executive
Officer of Structures Resources Inc., a firm which he founded in 1972, and has
more than 30 years of business experience in construction and real estate
development. Mr. Childers has served or is currently serving as
General Partner in 16 Public Limited Partnerships in the Middle Atlantic
States. Partners include First Union Bank and Fannie
Mae. Structures Resources has successfully completed over 300
projects (offices, hotels, apartments, and shopping centers) from New York to
North Carolina. Recently Mr. Childers has been a partner for various
projects in Baltimore and Philadelphia. He is a co-founder of Life Science
Group, a boutique biotech investment-banking firm. Mr. Childers was the founding
President of Associated Building Contractors for the State of West Virginia and
served as a director of The Twentieth Street Bank until its merger with City
Holding Bank. He is a former naval officer serving in Atlantic fleet
submarines. Mr. Childers is a member of the Compensation Committee
and the Nominating Committee of the Company’s Board of Directors.
Larry G.
Schafran, Director. Larry G. Schafran, Director. Mr.
Schafran is associated with Providence Capital, Inc. (“PCI”) as a Managing
Director. PCI is a New York City-based investment and advisory firm.
Mr. Schafran is also a director of Tarragon Corporation. Additionally, Mr.
Schafran was Lead Director and Audit Committee Chairman and later a Consultant
to the Chairman of WorldSpace, Inc. In addition, Mr. Schafran is also a
Director of the following publicly traded U. S. corporations: ElectroEnergy,
Inc., Sulphco, Inc., New Frontier Energy, Inc. and National Patent Development
Corporation. In recent years, Mr. Schafran served in several capacities,
including, as a Director of PubliCard, Inc., Trustee,
Chairman/Interim-CEO/President and Co-Liquidating Trustee of Special Liquidating
Trust of Banyan Strategic Realty Trust; Director and/or Chairman of the
Executive Committees of Dart Group Corporation, Crown Books Corporation,
TrakAuto Corporation, and Shoppers Food Warehouse, Inc. (Vice-Chairman);
Director and Member of the Strategic Planning and Finance Committees of COMSAT
Corporation, and Managing General Partner of L. G. Schafran & Partners, LP,
a real estate investment and development firm. Mr. Schafran is Chairman of
the Audit and Nominating Committees and a Member the Compensation Committee of
the Company’s Board of Directors.
David
P. Hanlon, Director. Mr. Hanlon is Chief Executive Officer
and President of Empire Resorts, Inc., a public company in the gaming
industry. Prior to starting his own gaming consulting business in
2000, in which he advised a number of Indian and international gaming ventures,
Mr. Hanlon was President and Chief Operating Officer of Rio Suites Hotel &
Casino from 1996-1999, a period in which the Rio Suites Hotel & Casino
underwent a major expansion. From 1994-1995, Mr. Hanlon served as President and
Chief Executive Officer of International Game Technology, the world's leading
manufacturer of microprocessor gaming machines. From 1988-1993, Mr. Hanlon
served as President and Chief Executive Officer of Merv Griffin's Resorts
International, and prior to that, Mr. Hanlon served as President of Harrah's
Atlantic City (Harrah's Marina and Trump Plaza). Mr. Hanlon's education includes
a B.S. in Hotel Administration from Cornell University, an M.S. in Accounting, an M.B.A. in
Finance from the Wharton School, University of Pennsylvania, and he completed the Advanced
Management Program at the Harvard Business School. Mr. Hanlon is a member of the Audit
Committee of the Company’s Board of Directors.
40
Board
of Directors
Election
and Meetings
Directors
hold office until the next annual meeting of the stockholders and until their
successors have been elected or appointed and duly
qualified. Executive officers are elected by the board of directors
and hold office until their successors are elected or appointed and duly
qualified. Vacancies on the board which are created by the
retirement, resignation or removal of a director may be filled by the vote of
the remaining members of the board, with such new director serving the remainder
of the term or until his successor shall be elected and qualify.
The Board
of Directors is elected by and is accountable to the shareholders of the
Company. The Board establishes policy and provides strategic direction,
oversight, and control of the Company. The Board met six times during fiscal
year 2008 and acted on five occasions by written consents. All directors
attended at least 75% of the meetings of the Board and the Board Committees of
which they are members.
Director
Independence
We assess director independence on an
annual basis. The Board has determined, after careful review that Mr. Childers,
Mr. Hanlon, Mr. McCall and Mr. Schafran are independent based on the applicable
regulations of the SEC.
If the
Company receives correspondence from its shareholders that is addressed to the
Board of Directors, we forward it to every director or to the individual
director to whom it is addressed. Shareholders who wish to communicate with the
directors may do so by sending their correspondence to the directors c/o
RemoteMDx, Inc., 150 West Civic Center Drive, Suite 400, Sandy, Utah
84070.
Committees
of the Board of Directors
The Board of Directors has a
separately-designated standing Audit Committee, Compensation Committee, and
Nominating Committee. All members of the Audit Committee, Compensation
Committee, and Governance and Nominating Committee meet the definition of
"independent," described above.
Audit
Committee. The Audit Committee of the Board of Directors (the
"Audit Committee") is a standing committee of the Board, which has been
established as required by the Securities Exchange Act of 1934 (“Exchange Act”).
The Audit Committee met four times during fiscal year 2008. Members of the Audit
Committee during fiscal year 2008 and at the date of this Report are Larry
Schafran (Chairman), Peter McCall, and David Hanlon. The Board has determined
that Mr. Schafran is an "audit committee financial expert," as defined by
the applicable regulations promulgated by the SEC under the Exchange
Act. The Board also believes that each member of the Audit Committee
meets the Nasdaq composition requirements, including the requirements regarding
financial literacy and financial sophistication.
The
primary purpose of the Audit Committee is to oversee the Company's financial
reporting process on behalf of the Board of Directors. The Audit
Committee meets with our Chief Financial Officer and with our independent
registered public accounting firm and evaluates the responses by the Chief
Financial Officer both to the facts presented and to the judgments made by our
independent registered public accounting firm.
In April
8, 2004, our Board adopted a Charter for the Audit Committee. The
Charter establishes the independence of our Audit Committee and sets forth the
scope of the Audit Committee's duties. The purpose of the Audit
Committee is to conduct continuing oversight of our financial
affairs. A copy of the Charter of the Audit Committee can be found on
the Company’s website at www.remotemdx.com. The Audit Committee
conducts an ongoing review of our financial reports and other financial
information prior to their being filed with the Securities and Exchange
Commission, or otherwise provided to the public. The Audit Committee
also reviews our systems, methods and procedures of internal controls in the
areas of: financial reporting, audits, treasury operations, corporate finance,
managerial, financial and SEC accounting, compliance with law, and ethical
conduct. The Audit Committee is objective, and reviews and assesses
the work of our independent registered public accounting firm and our internal
audit department.
The Audit
Committee reviewed and discussed the matters required by SAS 114 and our audited
financial statements for the fiscal year ended September 30, 2008 with
management and our independent registered public accounting firm. The
Audit Committee has received the written disclosures and the letter from our
independent registered public accounting firm required by Independence Standards
Board No. 1, and the Audit Committee has discussed with the independent
registered public accounting firm the independent registered public accounting
firm's independence. The Audit Committee recommended to the Board of
Directors that the Company's audited financial statements for the fiscal year
September 30, 2008 be included in this Report.
41
Compensation
Committee. The Compensation Committee was restructured during
the year ended September 30, 2008, with Robert Childers, a director of the
Company, appointed by the Board of Directors to serve as the head of the
compensation committee. In addition, Peter McCall and Larry Schafran
serve as members of the Compensation Committee. The Compensation
Committee met two times during fiscal year 2008. The Committee has
responsibility for developing and maintaining an executive compensation policy
that creates a direct relationship between pay levels and corporate performance
and returns to stockholders. The Committee monitors the results of such policy
to assure that the compensation payable to the Company’s executive officers
provides overall competitive pay levels, creates proper incentives to enhance
stockholder value, rewards superior performance, and is justified by the returns
available to stockholders.
Nominating
Committee. During the year ended September 30, 2008, Larry
Schafran, a director of the Company, was appointed as the head of the Nominating
Committee. The Committee has the responsibility for identifying and
recommending candidates to fill vacant and newly created board positions,
setting corporate governance guidelines regarding director qualifications and
responsibilities, and planning for CEO and senior management
succession. In addition, Peter McCall and Robert Childers serve as
members of the Nominating Committee.
Code of
Ethics. The Company has established a Code of Business Ethics
that applies to its officers, directors and employees. The Code of Business
Ethics contains general guidelines for conducting the business of the Company
consistent with the highest standards of business ethics, and is intended to
qualify as a “code of ethics” within the meaning of Section 406 of the
Sarbanes-Oxley Act of 2002 and the rules promulgated
thereunder.
There
have been no material changes to the procedures by which security holders may
recommend nominees to the Company’s Board of Directors.
COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The
Compensation Committee during fiscal 2008 was composed of Robert Childers, Peter
McCall and Larry Schafran. All members of the Compensation Committee are
independent directors. No member of the Company's Compensation Committee is a
current or former officer or employee of the Company or any of its subsidiaries,
and no director or executive officer of the Company is a director or executive
officer of any other corporation that has a director or executive officer who is
also a director of the Company.
Compensation
Discussion and Analysis
The
following is a discussion of the Company’s program for compensation of its named
executive officers and directors. The Company’s Compensation Committee had
responsibility for developing and maintaining an executive compensation policy
that creates a direct relationship between pay levels and corporate performance
and returns to stockholders. The Committee monitors the results of such policy
to assure that the compensation payable to the Company’s executive officers
provides overall competitive pay levels, creates proper incentives to enhance
stockholder value, rewards superior performance, and is justified by the returns
available to stockholders.
Compensation
Program Objectives
The
Company’s compensation program is designed to encompass several factors in
determining the compensation of the Company’s named executive
officers. The following are the main objectives of the compensation
program for the Company’s named executive officers:
|
|
·
|
Retain
qualified officers.
|
|
|
·
|
Provide
overall corporate direction for the officers and also to provide direction
that is specific to the officer’s respective areas of
authority. The level of compensation amongst the officer group,
in relation to one another, is also considered in order to maintain a high
level of satisfaction within the leadership group. We consider the
relationship that the officers maintain to be one of the most important
elements of the leadership group.
|
|
|
·
|
Provide
a performance incentive for the
officers.
|
42
The
Company’s compensation program is designed to reward the officers in the
following areas:
|
|
·
|
achievement
of specific goals;
|
|
|
·
|
professional
education and development;
|
|
|
·
|
creativity
in the form of innovative ideas and analysis for new programs and
projects;
|
|
|
·
|
new
program implementation;
|
|
|
·
|
attainment
of company goals, budgets, and
objectives;
|
|
|
·
|
results
oriented determination and
organization;
|
|
|
·
|
positive
and supportive direction for company personnel;
and
|
|
|
·
|
community
involvement.
|
As of the
date of this Report, there were four principal elements of named executive
officer compensation. The Compensation Committee determines the
portion of compensation allocated to each element for each individual named
executive officer. The discussions of compensation practices and
policies are of historical practices and policies. Our Compensation
Committee is expected to continue these policies and practices, but will
reevaluate the practices and policies as it considers advisable. The
elements of the compensation program include the following:
|
|
·
|
Base
salary;
|
|
|
·
|
Performance
bonus and commissions;
|
|
|
·
|
Stock
options and stock awards
|
|
|
·
|
Employee
benefits in the form of:
|
|
|
§
|
health
and dental insurance;
|
|
|
§
|
life
insurance;
|
|
|
§
|
paid
parking and auto reimbursement; and
|
|
|
§
|
Other
de minimis benefits.
|
Base
salary
Base
salary is intended to provide competitive compensation for job performance and
to attract and retain qualified named executive officers. The base
salary level is determined by considering several factors inherent in the market
place such as: the size of the company; the prevailing salary levels for the
particular office or position; prevailing salary levels in a given geographic
locale; and the qualifications and experience of the named executive
officer.
Our Chief
Executive Officer, Mr. Derrick, is paid a base salary of $240,000 per
year. The amount of the base salary was determined after negotiations
between Mr. Derrick and the Company’s Compensation Committee. Factors
considered in determining the base salary included Mr. Derrick’s status as a
founder of the Company; his experience and length of service with the Company;
his experience in the industries in which the Company operates; educational and
work background; and reviews of sample salaries at companies of comparable size
and industry. The Compensation Committee also considered the fact
that Mr. Derrick has provided and facilitated credit agreements and other
financing for the Company. The salary payable to Mr. Derrick is paid
by ADP Management out of amounts paid to ADP Management for consulting and other
services. During the year ended September 30, 2008, the Company
issued 1,000,000 shares of common stock valued at $1.52 per share to prepay
services in connection with his base salary. As of September 30,
2008, the outstanding prepaid salary of $1,460,000, reflected as deferred
compensation, will be amortized over future periods.
Our
President and Chief Operating Officer, Mr. Hastings, is paid a base annual
salary of $300,000. The amount of the base salary was determined after
negotiations between Mr. Hastings and the Company’s Compensation
Committee. Factors considered in determining Mr. Hastings’ base
salary included his background in the industries in which the Company operates;
his educational and work background, and reviews of sample salaries at companies
of comparable size and industry.
Mr.
Acton, our Chief Financial Officer is paid an annual salary of
$120,000. Factors considered in determining Mr. Acton’s salary and
additional compensation included his background and experience as a certified
public accountant; his experience working in the accounting industry with a
national and international accounting firm; his background and experience with
the other entities; his educational and work background, and reviews of sample
salaries at companies of comparable size and industry.
Performance
bonus and commissions
Bonuses
are in large part based on Company performance. The most important
determining factors used to calculate the performance bonus for the Chief
Executive Officer, President and Chief Financial Officer are based upon the
terms outlined below. Policy decisions to waive or modify performance goals have
not been a significant factor to date in that there have not been contractual
changes made other than the normal renewal or updating of contracts or
compensation as would be expected as part of an annual review.
43
Recent
Developments
Effective
July 1, 2008, the Compensation Committee approved the issuance of 3,000,000
shares of common stock to James Dalton as severance for his service as the
President of the Company. In addition, the Committee approved, in
lieu of future cash compensation payable to David Derrick, an immediate grant to
Mr. Derrick, effective July 1, 2008 of 1,000,000 shares of common
stock.
With
regard to John Hastings, the Company’s President and Chief Operating Officer,
the Committee approved, effective June 26, 2008, the grant of 1,500,000 shares
of common stock and options to purchase 1,500,000 shares of common stock at
$1.55 per share based on the following vesting schedule:
|
|
250,000
common shares and 250,000 options vested
immediately;
|
|
|
250,000
common shares and 250,000 options will vest upon the Company (including
its subsidiaries, but excluding new acquisitions) achieving an annualized
monitoring revenue run rate of $24,000,000 demonstrated over two fiscal
quarters;
|
|
|
250,000
common shares and 250,000 options will vest upon the Company (including
all majority-owned subsidiaries) achieving an annualized monitoring
revenue run rate of $50,000,000, over of two fiscal
quarters;
|
|
|
250,000
common shares and 250,000 options will vest upon the Company (including
its subsidiaries) achieving an annualized monitoring revenue run rate of
$100,000,000, demonstrated over two fiscal
quarters;
|
|
|
250,000
common shares and 250,000 options will vest upon the Company (including
its subsidiaries) achieving a break-even EBITDA (earnings before interest,
taxes, depreciation and amortization) over two consecutive fiscal
quarters.
|
|
|
250,000
common shares and 250,000 options will vest upon the Company achieving an
annualized EBITDA of $25,000,000 over two consecutive fiscal
quarters.
|
Stock
options and stock awards
Stock
ownership is provided to enable named executive officers and directors to
participate in the success of the Company. The direct or potential
ownership of stock will also provide the incentive to expand the involvement of
the named executive officer to include, and therefore be mindful of, the
perspective of stockholders of the Company. Stock options and stock
awards were approved by the Board of Directors and the Compensation Committee
and are based, in part, upon the placement of activated TrackerPAL devices in
the market place. As noted above, bonuses may be issued in the form
of stock options.
On August
29, 2007, the Board of Directors approved the issuance of options to each of Mr.
Derrick and Mr. Dalton for the purchase of 1,000,000 shares of common stock at
an exercise price of $2.15 per share for services rendered during the 2008
fiscal year.
Employee
benefits
Several
of the employee benefits for the named executive officers are selected to
provide security for the named executive officers. Most notably,
insurance coverage for health, life, and liability are intended to provide a
level of protection that will enable the named executive officers to function
without having the distraction of having to manage undue risk. The
health insurance also provides access to preventative medical care which will
help the named executive officers function at a high energy level and manage job
related stress, and contribute to the overall well being of the named executive
officers, all of which contribute to enhance job performance in the opinion of
the Compensation Committee.
Other
de minimis benefits
Other de
minimis employee benefits such as cell phones, parking, and auto usage
reimbursements are directly related to job functions but contain a personal use
element which is considered to be a goodwill gesture that contributes to
enhanced job performance.
As
discussed above, the Board of Directors determines the portion of compensation
allocated to each element for each individual named executive
officer. As a general rule, salary is competitively based while
giving consideration to employee retention, qualifications, performance, and
general market conditions. Typically, stock options are based on the
current market value of the option and how that will contribute to the overall
compensation of the named executive officer. Consideration is also
given to the fact that the option has the potential for an appreciated future
value. As such, the future value may be the most significant factor
of the option, but it is also more difficult to quantify as a benefit to the
named executive officer.
Accordingly,
in determining the compensation program for the Company, as well as setting the
compensation for each named executive officer, the Board of Directors attempts
to attract the interest of the named executive officer within in the constraints
of a compensation package that is fair and equitable to all parties
involved.
44
REPORT
OF THE COMPENSATION COMMITTEE
The
Compensation Committee of the Board of Directors has reviewed and discussed the
Compensation Discussion and Analysis required by Item 402(b) of
Regulation S-K with management. Based on this review and discussion, the
Compensation Committee recommended to the Board that the Compensation Discussion
and Analysis be included in this Proxy Statement.
Respectfully
submitted by the members of the Compensation Committee:
|
Robert
Childers (Chair)
Peter
McCall
Larry
Schafran
|
The
following table summarizes all compensation paid to our named executive officers
in each of the two most recently completed fiscal years.
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
||||||||||||||||||||||||
|
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
awards
($)
|
Option/warrants
awards
($)
|
Non-equity
incentive
plan
compensation
($)
|
Change
in
pension
value
and
non-qualified
deferred
compensation
earnings
($)(5)
|
All
other
compensation
($)
|
Total
($)
|
||||||||||||||||||||||||
|
David
G. Derrick (1)
|
2008
|
$ | 240,000 | $ | - | $ | 2,325,000 | $ | 1,934,162 | $ | - | $ | - | $ | 13,020 | $ | 4,512,182 | ||||||||||||||||
|
Chairman &
CEO
|
2007
|
$ | 240,000 | $ | - | $ | - | $ | 441,461 | $ | - | $ | - | $ | 94,370 | $ | 775,831 | ||||||||||||||||
|
John
L. Hastings III (2)
|
2008
|
$ | 200,000 | $ | - | $ | 387,500 | $ | 337,113 | $ | - | $ | - | $ | 3,879 | $ | 928,492 | ||||||||||||||||
|
President
and Chief Operating Officer
|
2007
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
|
Blake
Rigby (3)
|
2008
|
$ | 40,000 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 4,197 | $ | 44,197 | ||||||||||||||||
|
Chief
Operating Officer & Chief Financial Officer
|
2007
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
|
Michael
G. Acton (4)
|
2008
|
$ | 113,231 | $ | 25,000 | $ | 477,250 | $ | 137,340 | $ | - | $ | - | $ | 13,074 | $ | 765,895 | ||||||||||||||||
|
Chief
Financial Officer
|
2007
|
$ | 100,000 | $ | 25,000 | $ | - | $ | - | $ | - | $ | - | $ | 18,313 | $ | 143,313 | ||||||||||||||||
|
James
Dalton (5)
|
2008
|
$ | 180,000 | $ | - | $ | 6,975,000 | $ | 1,934,162 | $ | - | $ | - | $ | 9,183 | $ | 9,098,345 | ||||||||||||||||
|
President
|
2007
|
$ | 240,000 | $ | - | $ | - | $ | 441,461 | $ | - | $ | - | $ | 12,130 | $ | 693,591 | ||||||||||||||||
|
Scott
Horrocks (6)
|
2008
|
$ | 197,788 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 10,468 | $ | 208,256 | ||||||||||||||||
|
President
of Volu-Sol
|
2007
|
$ | 200,000 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 14,730 | $ | 214,730 |
|
|
(1) Column
(i) includes additional compensation for health, dental, life, and vision
insurance paid on Mr. Derrick’s behalf by the Company. In
addition, country club dues are also included. Amounts shown do
not include consideration and fees paid to ADP Management in connection
with a line of credit agreement. Stock awards of $2,325,000
during the fiscal year ended September 30, 2008 resulted from 1,500,000
shares of restricted common stock valued at $1.55 per share for a total of
$2,325,000. Additionally, option/warrant awards of $1,934,162
resulted from the issuance of 1,000,000 unregistered warrants at an
exercise price of $2.15 per share. These warrants were issued
in August 2007, but vested during the fiscal year ended September 30,
2008. Subsequent to year ended September 30, 2008,
Mr. Derrick returned to the Company 1,500,000 shares of common stock
valued at $2,325,000, or $1.55 per share and rescinded 1,000,000 vested
warrants previously granted at an exercise price of $2.15 per share valued
at $1,934,162. The net impact of this change is that Mr.
Derrick effectively received $253,020 in compensation for the year ended
September 30, 2008.
|
|
|
(2) Mr.
Hastings became our President in June 2008 and Chief Operating Officer in
November 2008. He holds similar positions in SecureAlert,
Inc. Column (i) includes additional compensation for health,
dental, and vision insurance paid on his behalf. Stock awards
of $387,500 during the fiscal year ended September 30, 2008 resulted from
250,000 shares of restricted common stock valued at $1.55 per share for a
total of $387,500. Additionally, option/warrant awards of
$337,113 resulted from the issuance and vesting of 250,000 unregistered
warrants at an exercise price of $2.15 per share. Subsequent to
year ended September 30, 2008, Mr. Hastings returned to the Company
250,000 shares of common stock valued at $387,500, or $1.55 per share and
rescinded the 250,000 vested warrants previously granted at an exercise
price of $1.55 per share valued at $337,113. The net impact of
this change is that Mr. Hastings effectively received $203,879 in
compensation for the year ended September 30,
2008.
|
45
|
|
(3) Mr.
Rigby served as Chief Operating Officer and Chief Financial Officer from
June 19 through November 17, 2008. Column (i) includes
additional compensation for health, dental, and vision insurance paid on
his behalf.
|
|
|
(4) Mr.
Acton was Chief Financial Officer from 2001 through June 19, 2008 and from
November 20, 2008 to present. Column (i) includes additional compensation
for health, dental, life, and vision insurance paid on Mr. Acton’s behalf
by the Company. Stock awards of $477,250 during the fiscal year
ended September 30, 2008 resulted from 250,000 shares of restricted common
stock valued at $1.55 per share for a total of $387,500 and 25,000 shares
of restricted common stock valued at $3.59 per share for a total of
$89,750. As of the date of this Report, these shares have not
yet been sold. As of December 17, 2008 the approximate market
value of these shares is $55,000, or $0.20 per
share. Additionally, option/warrant awards of $137,340 resulted
from the vesting of 250,000 warrants previously granted during fiscal year
2007 at an exercise price of $0.60 per share. During the fiscal
year ended September 30, 2008, Mr. Acton exercised 600,000 warrants by
paying $370,000 to the Company. During the fiscal year ended
September 30, 2007, Mr. Acton exercised 100,000 warrants by paying $54,000
to the Company.
|
|
|
(5) Mr.
Dalton was President until June 19, 2008. Amounts shown do not include
consideration and fees paid to ADP Management in connection with the
credit line agreement. Column (i) includes amounts paid for health,
dental, and vision insurance. Stock awards of $6,975,000 during
the fiscal year ended September 30, 2008 resulted from 1,500,000 shares of
restricted common stock valued at $1.55 per share for a total of
$2,325,000 and 3,000,000 shares of restricted common stock valued at $1.55
per share for severance given for service as President of the Company for
a total of $4,650,000. As of the date of this Report, these
shares have not yet been sold. As of December 17, 2008 the
market value of these shares is approximately $900,000, or $0.20 per
share. Additionally, option/warrant awards of $1,934,162
resulted from the issuance of 1,000,000 unregistered warrants at an
exercise price of $2.15 per share. These warrants were issued
in August 2007, but vested during the fiscal year ended September 30,
2008. During the fiscal year ended September 30, 2008, Mr.
Dalton did not exercise any warrants. During the fiscal year
ended September 30, 2007, Mr. Dalton exercised 4,750,000 warrants by
paying $3,730,000 to the Company.
|
|
|
(6) Mr.
Horrocks was President of Volu-Sol Reagents Corporation, a former
subsidiary of the Company, until September 5, 2008. Column (i) includes
amounts paid for health, dental, and vision
insurance.
|
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
|
Option
awards
|
Stock
Awards
|
||||||||||||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
||||||||||||
|
Name
|
Number
of
securities
underlying
unexercised
options
(#)
exercisable
|
Number
of
securities
underlying
unexercised
options
(#)
unexercisable
|
Equity
incentive
plan
awards:
Number
of
securities
underlying
unexercised
unearned
options
(#)
|
Option
exercise
price
($)
|
Option
expiration
date
|
Number
of
shares
or
units
of
stock
that
have
not
vested
(#)
|
Market
value
of
shares
or
units
of
stock
that
have
not
vested
($)
|
Equity
incentive
plan
awards:
Number
of
unearned
shares,
units
or
other
rights
that
have
not
vested
(#)
|
Equity
incentive
plan
awards:
Market
or
payout
value
of
unearned
shares,
units
or
other
rights
that
have
not
vested
($)
|
||||||||||||
|
|
|||||||||||||||||||||
|
David
G. Derrick
|
1,000,000 (1)
|
-
|
-
|
$2.15
|
8/28/2012
|
-
|
$ -
|
-
|
$ -
|
||||||||||||
|
John
L. Hastings, III
|
250,000 (2)
|
1,250,000
|
1,250,000
|
$1.55
|
6/25/2013
|
1,250,000
|
$1,500,000
|
1,250,000
|
$1,500,000
|
||||||||||||
|
Michael
G. Acton
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||
|
Blake
Rigby*
|
-
|
100,000
|
100,000
|
$1.55
|
6/08/2013
|
-
|
-
|
-
|
-
|
||||||||||||
*Mr. Rigby was CFO from June 19, 2008 through November 17, 2008. Mr. Acton served as CFO from October 1, 2007 through June 19, 2008 and again from November 20, 2008 to the present.
Notes: Market
value is based on the fair market value of our common stock on September 30,
2008 in the amount of $1.20 per share based on current market
price.
|
(1)
|
Subsequent
to year ended September 30, 2008, Mr. Derrick rescinded 1,000,000 vested
warrants previously granted at an exercise price of $2.15 per share valued
at $1,934,162.
|
|
(2)
|
Subsequent
to year ended September 30, 2008, Mr. Hastings rescinded 250,000 vested
warrants previously granted at an exercise price of $1.55 per share valued
at $337,113.
|
46
|
Option
awards
|
Stock
awards
|
||||||||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
|||||||||||||
|
Name
|
Number
of shares
acquired
on exercise
(#)
|
Value
realized
on
exercise
($)
|
Number
of shares
acquired
on vesting
(#)
|
Value
realized
on
vesting
($)
|
|
||||||||||||
|
|
|||||||||||||||||
|
David
G. Derrick
|
- | $ | - | 1,500,000 | $ | 2,325,000 | (1) | ||||||||||
|
John
L. Hastings
|
- | $ | - | 250,000 | $ | 387,500 | (2) | ||||||||||
|
Blake
Rigby
|
- | $ | - | - | $ | - | |||||||||||
|
Michael
G. Acton
|
600,000 | $ | 1,069,000 | 275,000 | $ | 477,250 | (3) | ||||||||||
| (1) |
Stock
awards of $2,325,000 during the fiscal year ended September 30, 2008
resulted from 1,500,000 shares of restricted common stock valued at $1.55
per share for a total of $2,325,000. Subsequent to year ended
September 30, 2008, Mr. Derrick returned to the Company 1,500,000 shares
of common stock.
|
|
|
|
(2)
|
Stock
awards of $387,500 during the fiscal year ended September 30, 2008
resulted from 250,000 shares of restricted common stock valued at $1.55
per share for a total of $387,500. Subsequent to year ended
September 30, 2008, Mr. Hastings returned to the Company 250,000 shares of
common stock.
|
|
|
(3)
|
Stock
awards of $477,250 during the fiscal year ended September 30, 2008
resulted from 250,000 shares of restricted common stock valued at $1.55
per share for a total of $387,500 and 25,000 shares of restricted common
stock valued at $3.59 per share for a total of $89,750. As of
the date of this Report, these shares have not yet been sold and as of
December 17, 2008 the value of these shares is $55,000, or $0.20 per
share.
|
Employment
Agreements
We have
no employment agreements with any executive officers at this time. By
agreement, however, the salary of Mr. Derrick is paid by ADP Management from the
proceeds of a management fee paid by the Company to ADP Management.
COMPENSATION
OF DIRECTORS
The table
below summarizes the compensation paid by the Company to non-employee Directors
for the fiscal year ended September 30, 2008.
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
|||
|
Name
|
Fees
earned or
paid
in cash
($)
|
Stock
awards
($)
|
Option
awards
($)
|
Non-equity
incentive
plan
compensation
($)
|
Change
in
pension
value
and
nonqualified
compensation
earnings
($)
|
All
other
compensation
($)
|
Total
($)
|
|||
|
|
||||||||||
|
David
Hanlon
|
$ 60,000
|
$ |
-
|
$ 666,625
|
$ -
|
$ -
|
$ -
|
$ 726,625
|
||
|
Robert
Childers
|
$ 60,000
|
$ |
-
|
$ 919,008
|
$ -
|
$ -
|
$ -
|
$ 979,008
|
||
|
Peter
McCall
|
$ 60,000
|
$ |
-
|
$ 666,625
|
$ -
|
$ -
|
$ -
|
$ 726,625
|
||
|
Larry
Schafran
|
$ 60,000
|
$ |
193,800
|
(1)
|
$ 1,102,617
|
$ -
|
$ -
|
$ -
|
$1,356,417
|
|
Note:
|
(1)
|
The
Company granted 60,000 shares of restricted common stock to Mr. Schafran
valued at $193,800, or $3.23 per share. As of December 17,
2008, these shares have not been sold and are currently valued at $12,000,
or $0.20 per share
|
Compensation
of $5,000 per month is accrued each month to non-employee
directors. We also reimburse travel expenses of members for their
attendance at board and meetings.
47
The table
below outlines the option awards that were granted to the Board of Directors for
services rendered during the year ended September 30, 2008:
|
Name
|
Grant
Date
|
Expiration
Date
|
Exercise
Price
|
Number
of
Options
|
Total
($)
|
||||||||||
|
|
|||||||||||||||
|
David
Hanlon
|
|||||||||||||||
|
8/29/07
|
8/28/2012
|
$ | 2.15 | 100,000 | $ | 193,416 | (1 | ) | |||||||
|
7/14/08
|
7/14/2013
|
$ | 1.22 | 459,000 | $ | 473,209 | |||||||||
| $ | 666,625 | ||||||||||||||
|
Robert
Childers
|
|||||||||||||||
|
8/29/07
|
8/28/2012
|
$ | 2.15 | 150,000 | $ | 290,124 | (1 | ) | |||||||
|
7/14/08
|
7/14/2013
|
$ | 1.22 | 610,000 | $ | 628,884 | |||||||||
| $ | 919,008 | ||||||||||||||
|
Peter
McCall
|
|||||||||||||||
|
8/29/07
|
8/28/2012
|
$ | 2.15 | 100,000 | $ | 193,416 | (1 | ) | |||||||
|
7/14/08
|
7/14/2013
|
$ | 1.22 | 459,000 | $ | 473,209 | |||||||||
| $ | 666,625 | ||||||||||||||
|
Larry
Schafran
|
|||||||||||||||
|
8/29/07
|
8/28/2012
|
$ | 2.15 | 150,000 | $ | 290,124 | (1 | ) | |||||||
|
12/5/07
|
12/5/2012
|
$ | 4.05 | 50,000 | $ | 183,610 | |||||||||
|
7/14/08
|
7/14/2013
|
$ | 1.22 | 610,000 | $ | 628,883 | |||||||||
| $ | 1,102,617 | ||||||||||||||
Note:
|
(1)
|
In
August 2007, the company granted 500,000 warrants to non-employee members
of the Board of Directors for services rendered and expensed over the
fiscal year September 30, 2008.
|
As of the
date of this Report, these options are all “out-of-money” and thus, if
exercised these options would not have any net value to the holder.
During
the year ended September 30, 2007, the independent members of the Board of
Directors received an additional 50,000 options at fair market
value.
During
fiscal year 2008, our two non-independent directors, Messrs. Derrick and Dalton
received no additional compensation for their service as directors.
Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
This section
sets forth information known to us with respect to the beneficial ownership of
our common stock as of December 22, 2008. We have determined
beneficial ownership in accordance with the rules of the Securities and Exchange
Commission. In computing the number of shares beneficially owned by a person and
the percentage ownership of that person, we include shares of common stock
subject to options and warrants held by that person that are currently
exercisable or will become exercisable within 60 days after December 1, 2008,
while those shares are not included for purposes of computing percentage
ownership of any other person. Unless otherwise indicated, the
persons and entities named in the table are believed by the Company to have sole
voting and investment power with respect to all shares beneficially owned,
subject to community property laws where applicable.
48
Security
Ownership of Certain Beneficial Owners
The
following table sets forth information for any person (including any “group”)
who is known to us to be the beneficial owner of more than 5% of our common
stock, other than the named executive officers or directors of the
Company.
|
Title
of Class
|
Name
and Address of Beneficial Owner
|
Amount
and nature of beneficial ownership
|
Percent
of Class
|
|
Common
|
Winfried
Kill
Parkstrasse
32A
Bergisch-Gladbach
2M, 51427
Germany
|
31,924,000
|
20.48%
|
|
Common
|
VATAS
Holdings GmbH(1)
Friedrichstrasse
95
10117
Berlin, Germany
|
16,774,926
|
10.76%
|
__________
|
(1)
|
Includes
10,774,926 shares of common stock, and 6,000,000 shares issuable upon
exercise of warrants.
|
Security Ownership of
Management
We have
two classes of voting equity securities, the common stock and Series B preferred
stock. In addition, we have a class of nonvoting Series A preferred
stock that is convertible into common stock. The following table sets
forth information as of December 22, 2008, regarding the voting securities
beneficially owned by all directors, each of the named executive officers, and
directors and executive officers as a group.
|
Title of
Class
|
Name of Beneficial
Owner
|
Amount
and nature of
beneficial ownership
|
Percent of
Class
|
||
|
Common
|
David
G. Derrick (1)
|
6,219,108
|
3.91%
|
||
|
James
Dalton (2)
|
10,637,831
|
6.68%
|
|||
|
John
L. Hastings, III
|
-
|
*
|
|||
|
Michael
G. Acton (3)
|
927,043
|
*
|
|||
|
Bernadette
Suckel
|
-
|
*
|
|||
|
Peter
McCall (4)
|
1,273,400
|
*
|
|||
|
Robert
Childers (5)
|
1,700,657
|
1.07%
|
|||
|
Larry
Schafran (6)
|
970,000
|
*
|
|||
|
David
Hanlon (7)
|
720,702
|
*
|
|||
|
Officers
and Directors as a Group (8 persons) (9)
|
18,219,347
|
11.44%
|
|||
________________
*Less
than 1% ownership percentage.
|
(1)
|
Mr.
Derrick is the Chief Executive Officer and Chairman of the Board of
Directors. Includes 1,989,714 shares of common stock owned of
record by Mr. Derrick and 4,229,394 shares of common stock in the name of
ADP Management, an entity controlled by Messrs. Derrick and Dalton, are
included.
|
|
(2)
|
Mr.
Dalton is the former President of RemoteMDx and currently serves as a
director. Includes 5,408,437 shares of common stock and
1,000,000 warrants that have been vested. In addition, 4,229,394 shares of
common stock in the name of ADP Management, an entity controlled by
Messrs. Derrick and Dalton, are
included.
|
|
(3)
|
Mr.
Acton is the Chief Financial Officer of the
Company.
|
|
(4)
|
Mr.
McCall is a director. Includes 664,400 shares of common stock
owned of record by McCall Capital Holdings, LLC and 14,451 shares owned of
record by Mr. McCall. In addition, 594,549 shares issuable upon
exercise of warrants held by Mr.
McCall.
|
|
(5)
|
Mr.
Childers is a director. Includes 343,143 shares of common stock
owned of record by the Robert E. Childers Living Trust and 546,647 shares
owned of record by Mr. Childers. In addition, 810,867 shares
issuable upon exercise of stock warrants held by Mr. Childers have been
included.
|
|
(6)
|
Mr.
Schafran is a director. Includes 106,100 shares of common stock
owned of record by Mr. Schafran. In addition, 863,900 shares of
common stock issuable upon exercise of stock warrants held by Mr. Schafran
have been included.
|
|
(7)
|
Mr.
Hanlon is a director. Includes 111,702 shares of common stock
owned of record by Mr. Hanlon. In addition, 609,000 shares of
common stock issuable upon exercise of stock warrants held by Mr. Schafran
have been included.
|
|
(8)
|
Duplicate
entries eliminated.
|
49
Securities
Authorized for Issuance under Equity Compensation Plans
The
following table sets forth information as of September 30, 2008, our most
recently completed fiscal year, with respect to compensation plans (including
individual compensation arrangements) under which equity securities are
authorized for issuance. No equity securities have been authorized
for issuance under plans that were not previously approved by security
holders.
Equity
Compensation Plan Information
|
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
|
Weighted
average exercise price of outstanding options, warrants and
rights
|
Number
of securities remaining available for future issuance
|
|
Equity
compensation plans approved by security holders
|
10,000,000
|
$1.53
|
8,130,000
|
The
2006 RemoteMDx, Inc. Stock Incentive Plan
On July
10, 2006, the Board of Directors approved the 2006 RemoteMDx, Inc Stock
Incentive Plan (“2006 Plan”). The stockholders approved the 2006 Plan on July
10, 2006. Under the 2006 Plan, the Company may issue stock options, stock
appreciation rights, restricted stock awards and other incentives to our
employees, officers and directors. The 2006 Plan provides for the award of
incentive stock options to our key employees and directors and the award of
nonqualified stock options, stock appreciation rights, bonus rights, and other
incentive grants to employees and certain non-employees who have important
relationships with us or our subsidiaries. A total of 10,000,000 shares are
authorized for issuance pursuant to awards granted under the 2006
Plan. During the years ended September 30, 2008 and 2007, 1,725,000
and 145,000 options were granted under this plan to employees,
respectively.
Item 13. Certain
Relationships and Related Transactions, and Director Independence
Compliance
with Section 16(a) of the Exchange Act
Section 16(a)
of the Exchange Act requires our officers, directors, and persons who
beneficially own more than 10% of the Company’s common stock to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors, and greater-than-ten-percent shareholders are also required
by the SEC to furnish us with copies of all Section 16(a) forms that they
file.
Based
solely upon a review of these forms that were furnished to the Company, and
based on representations made by certain persons who were subject to this
obligation that such filings were not required to be made, the Company believes
that all reports that are required to be filed by these individuals and persons
under Section 16(a) were filed on time in fiscal year 2008, except the
following:
|
|
·
|
Mr.
Derrick filed two late Forms 4;
|
|
|
·
|
Mr.
Dalton filed one late Forms 4;
|
|
|
·
|
Mr.
McCall filed one late Form 4;
|
|
|
·
|
Mr.
Childers filed two late Forms 4;
|
|
|
·
|
Mr.
Hanlon filed one late Form 4;
|
|
|
·
|
Mr.
Hastings filed one late Form 4;
|
|
|
·
|
Mr.
Schafran filed two late Forms 4;
and
|
|
|
·
|
ADP
Management filed one late Form 4.
|
Related
Transactions
Our Board
of Directors has adopted a policy that our business affairs will be conducted in
all respects by standards applicable to publicly held corporations and that we
will not enter into any future transactions and/or loans between us and our
officers, directors and 5% stockholders unless the terms are no less favorable
than could be obtained from independent, third parties and will be approved by a
majority of our independent and disinterested directors. In our view, all of the
transactions described below meet this standard.
The
following discussion summarizes transactions between the Company and related
parties during the fiscal years ended September 30, 2008 and
2007.
50
ADP Management, David Derrick and James
Dalton
As of
September 30, 2008, the Company owed $542,804 under a line-of-credit agreement
to ADP Management, an entity owned and controlled by two of the Company’s
directors, Mr. Derrick and Mr. Dalton. Mr. Derrick is also an
executive officer of the Company. Mr. Dalton served as the Company’s
president until June 2008. Outstanding amounts on the line of credit
accrue interest at 11% per annum and are due on August 31,
2009. During the year ended September 30, 2008, the line of credit
increased $1,318,433 due to a monthly management fee owed to ADP Management,
including salaries for Mr. Derrick and Mr. Dalton, expenses incurred by ADP
Management that are reimbursable by the Company of $618,433, and $700,000 in
cash. The Company made cash repayments during the year of $975,641.
As of
September 30, 2007, the Company owed $239,763 to ADP Management under the
line-of-credit agreement. During the year ended September 30, 2007,
the line of credit increased by $698,524 due to a monthly management fee,
including Mr. Derrick and Mr. Dalton’s salary, owed to ADP Management and
expenses incurred by ADP Management that are reimbursable by the Company. The
Company made cash repayments during the year totaling $503,311. During the year
ended September 30, 2007, the Company increased the line of credit from $500,000
to $5,000,000, including any guarantees made by ADP Management. As a
result, ADP Management was granted 500,000 restricted shares of the Company’s
common stock and an increase in the annual interest rate from 5% to
11%.
On March
6, 2007, the Board of Directors granted 1,500,000 options for 120 days to each
of Mr. Derrick and Mr. Dalton with an exercise price of $1.30 per
share. These options were granted in connection with their assistance
in providing the Company with additional capital.
Unsecured Note Payable to
Randy Olshen
In
September 2008, the Company borrowed $250,000 from Randy Olshen, the former
President of the Company’s subsidiary SecureAlert. The unsecured note
payable accrues interest at 11% and is due and payable upon the earlier of
demand or December 31, 2009. As of September 30, 2008, the Company
owed $250,000 to Randy Olshen.
Note Receivable from Gary
Bengtson
The
Company acquired a 51% ownership in Midwest Monitoring effective December 1,
2007. Prior to the date of acquisition, Midwest Monitoring had
entered into a loan arrangement with Gary Bengtson, the Chief Financial Officer
of Midwest Monitoring. As of September 30, 2008, Mr. Bengtson owed
the Company $55,385. The note accrues interest at 12% per annum and is due and
payable on March 31, 2009.
Director
Independence
As of the
date of this Report, the Company’s common stock traded on the OTC Bulletin Board
(the “Bulletin Board”). The Bulletin Board does not impose on the
Company standards relating to director independence or the makeup of committees
with independent directors, or provide definitions of
independence. Nevertheless, the Company has undertaken to appoint
four individuals to its Board of Directors, Messrs. Schafran, McCall, Childers
and Hanlon, who are independent under the NASDAQ Marketplace Rules and those
standards applicable to companies trading on NASDAQ.
Specifically,
none of Mr. Schafran, Mr. Hanlon, Mr. Childers or Mr. McCall:
|
|
·
|
has
been at any time during the past three years employed by the Company or by
any parent or subsidiary of the
Company;
|
|
|
·
|
has
accepted or has a family member who accepted any compensation from the
Company in excess of $60,000 during any period of twelve consecutive
months within the three years preceding the determination of independence,
other than compensation for board or board committee
service;
|
|
|
·
|
is
a family member of an individual who is, or at any time during the past
three years was, employed by the Company as an executive
officer;
|
|
|
·
|
is,
or has a Family Member who is, a partner in, or a controlling stockholder
or an executive officer of, any organization to which the Company made, or
from which the company received, payments for property or services in the
current or any of the past three fiscal years that exceed 5% of the
recipient's consolidated gross revenues for that year, or $200,000,
whichever is more:
|
|
|
·
|
is,
or has a family member who is, employed as an executive officer of another
entity where at any time during the past three years any of the executive
officers of the Company serve on the compensation committee of such other
entity; or
|
|
|
·
|
is,
or has a family member who is, a current partner of the Company's outside
auditor, or was a partner or employee of the Company's outside auditor who
worked on the Company's audit at any time during any of the past three
years.
|
51
Audit
Fees
Audit
services consist of the audit of the annual consolidated financial statements of
the Company, and other services related to filings and registration statements
filed by the Company and its subsidiaries and other pertinent
matters. Audit fees paid to Hansen Barnett & Maxwell for fiscal
years 2008 and 2007 totaled approximately $166,000 and $98,000,
respectively.
Tax
Fees, Audit Related Fees, and All Other Fees
Hansen
Barnett & Maxwell has not provided any consulting services (including tax
consulting and compliance services or any financial information systems design
and implementation services to the Company in fiscal years 2008 and
2007.
The Audit
Committee of the Board of Directors considered and authorized all services
provided by Hansen Barnett & Maxwell.
Auditor
Independence
Our Audit
Committee considered that the work done for us in fiscal 2008 by Hansen Barnett
& Maxwell was compatible with maintaining Hansen Barnett & Maxwell's
independence.
REPORT
OF THE AUDIT COMMITTEE
The Audit
Committee oversees the Company's financial reporting process on behalf of the
Board of Directors. Management has the primary responsibility for the financial
statements and the reporting process, including the systems of internal
controls. The directors who serve on the Audit Committee are all independent for
purposes of applicable SEC Rules.
The Audit
Committee operates under a written charter that has been adopted by the Board of
Directors.
We have
reviewed and discussed with management the Company's audited financial
statements as of and for the year ended September 30, 2008.
We have
discussed with the independent registered public accountant of the Company,
Hansen Barnett & Maxwell, P.C., the matters that are required to be
discussed by Statement on Auditing Standards No. 114, The Auditors Communication with Those Charged
with Governance, as amended, by the Auditing Standards Board of the
American Institute of Certified Public Accountants, which includes a review of
the findings of the independent registered public accountant during its
examination of the Company's financial statements.
We have
received and reviewed written disclosures and the letter from Hansen Barnett
& Maxwell, P.C., which is required by Independence Standard No. 1,
Independence Discussions with
Audit Committees, as amended, by the Independence Standards Board, and we
have discussed with Hansen Barnett & Maxell, P.C. their independence under
such standards. We have concluded that the independent registered public
accountant is independent from the Company and its management.
Based on
our review and discussions referred to above, we have recommended to the Board
of Directors that the audited financial statements of the Company be included in
the Company's Annual Report on Form 10-K for the year ended September 30,
2008, for filing with the Securities and Exchange Commission.
Respectfully
submitted by the members of the Audit Committee:
|
Larry
Schafran, Chair
Peter
McCall
David
Hanlon
|
52
PART
IV
(a) The following documents
are filed as part of this Form:
1. Financial
Statements
|
Reports of Independent Registered
Public Accounting Firms
|
F-3
|
|
|
Consolidated Balance
Sheets
|
F-4
|
|
|
Consolidated Statements of
Earnings
|
F-6
|
|
|
Consolidated Statements of
Stockholders' Equity and Comprehensive Income
|
F-7
|
|
|
Consolidated Statements of Cash
Flows
|
F-18
|
|
|
Notes to the Consolidated
Financial Statements
|
F-20
|
2. Financial Statement
Schedules. [Included in the Consolidated Financial
Statements or Notes thereto.]
|
|
3.
Exhibits.
|
The
following exhibits are filed herewith or are incorporated by reference to
exhibits previously filed with the
Commission:
|
|
Exhibit
Number
|
Title
of Document
|
||
|
3.01
|
Articles
of Incorporation (incorporated by reference to the Company's Registration
Statement and Amendments thereto on Form 10-SB, effective December 1,
1997).
|
||
|
3.01(1)
|
Amendment
to Articles of Incorporation for Change of Name (previously filed as
Exhibit on Form 10-KSB for the year ended September 30, 2001)
|
||
|
3.01(2)
|
Amendment
to Articles of Incorporation Amending Rights and Preferences of Series A
Preferred Stock (previously filed as Exhibit on Form 10-KSB for the year
ended September 30, 2001)
|
||
|
3.01(3)
|
Amendment
to Articles of Incorporation Adopting Designation of Rights and
Preferences of Series B Preferred Stock (previously filed as Exhibit on
Form 10-QSB for the six months ended March 31, 2002)
|
||
|
3.01(4)
|
Certificate
of Amendment to the Designation of Rights and Preferences Related to
Series A 10% Cumulative Convertible Preferred Stock of RemoteMDx, Inc.
(incorporated by reference to the Company’s annual report on Form 10-KSB
for the year ended September 30, 2001)
|
||
|
3.01(5)
|
Certificate
of Amendment to the Designation of Rights and Preferences Related to
Series C 8% Convertible Preferred Stock of RemoteMDx, Inc. (incorporated
by reference to the Company’s Current Report on Form 8-K, filed with the
Commission on March 24, 2006)
|
||
|
3.01(6)
|
Articles
of Amendment to Articles of Incorporation filed July 12, 2006 (previously
filed as exhibits to the Company’s current report on Form 8-K filed July
18, 2006, and incorporated herein by reference).
|
||
|
3.02
|
Bylaws
(incorporated by reference to the Company’s Registration Statement on Form
10-SB, effective December 1, 1997)
|
||
|
3.03
|
Articles
of Amendment to the Fourth Amended and Restated Designation of Right and
Preferences of Series A 10% Convertible Non-Voting Preferred Stock of
RemoteMDx, Inc. (previously filed as Exhibit on Form 10-QSB for the nine
months ended June 30, 2007, filed in August 2007).
|
||
|
3.04
|
Articles
of Amendment to the Designation of Right and Preferences of Series A
Convertible Redeemable Non-Voting Preferred Stock of SecureAlert, Inc.
(previously filed as Exhibit on Form 10-QSB for the nine months ended June
30, 2007, filed in August 2007).
|
||
| 4.01 |
2006
Equity Incentive Award Plan (previously filed in August 2006 the Form
10-QSB for the nine months ended June 30, 2006)
|
|
9.01
|
Voting
Trust Agreement (see Exhibit 10.24)
|
||
|
10.01
|
Distribution
and Separation Agreement (incorporated by reference to the Company's
Registration Statement and Amendments thereto on Form 10-SB, effective
December 1, 1997).
|
||
|
10.02
|
1997
Stock Incentive Plan of the Company, (incorporated by reference to the
Company’s Registration Statement and Amendments thereto on Form 10-SB,
effective December 1, 1997).
|
||
|
10.03
|
1997
Transition Plan (incorporated by reference to the Company’s Registration
Statement and Amendments thereto on Form 10-SB, effective December 1,
1997).
|
||
|
10.04
|
Securities
Purchase Agreement for $1,200,000 of Series A Preferred Stock
(incorporated by reference to the Company’s Registration Statement and
Amendments thereto on Form 10-SB, effective December 1, 1997)
|
||
|
10.05
|
Loan
Agreement (as amended) dated June 2001 between ADP Management and the
Company (incorporated by reference to the Company’s annual report on Form
10-KSB for the year ended September 30, 2001)
|
||
53
|
10.06
|
Loan
Agreement (as amended and extended) dated March 5, 2002 between ADP
Management and the Company, effective December 31, 2001 (filed as an
exhibit to the Company’s quarterly report on Form 10-QSB for the quarter
ended December 31, 2001)
|
||
|
10.07
|
Agreement
with ADP Management, Derrick and Dalton (April 2003) (previously filed as
Exhibit on Form 10-QSB for the six months ended March 31,
2003)
|
||
|
10.08
|
Security
Agreement between Citizen National Bank and the Company (previously filed
on Form 8-K in July 2006).
|
||
|
10.09
|
Promissory
Note between Citizen National Bank and the Company (previously filed on
Form 8-K in July 2006).
|
||
|
10.10
|
Common
Stock Purchase Agreement dated as of August 4, 2006 (previously filed as
an exhibit to the Company’s current report on Form 8-K filed August 7,
2006 and incorporated herein by reference).
|
||
|
10.11
|
Change
in Terms Agreement between Citizen National Bank and the Company
(previously filed as Exhibit on Form 10-KSB for the year ended September
30, 2006)
|
||
|
10.12
|
Securities
Purchase Agreement between the Company and VATAS Holding GmbH, a German
limited liability company (previously filed on Form 8-K in November
2006).
|
||
|
10.13
|
Common
Stock Purchase Warrant between the Company and VATAS Holding GmbH dated
November 9, 2006 (previously filed as Exhibit on Form 10-QSB for the three
months ended December 31, 2006, filed in February 2007).
|
||
|
10.14
|
Settlement
Agreement and Mutual Release between the Company and Michael Sibbett and
HGR Enterprises, LLC, dated as of February 1, 2007 (previously filed as
Exhibit on Form 10-QSB for the three months ended December 31, 2006, filed
in February 2007).
|
||
|
10.15
|
Distributor
Sales, Service and License Agreement between the Company and Seguridad
Satelital Vehicular S.A. de C.V., dated as of February 5, 2007 (previously
filed as Exhibit on Form 10-QSB for the three months ended December 31,
2006, filed in February 2007).
|
||
|
10.16
|
Distributor
Agreement between the Company and QuestGuard, dated as May 31,
2007. Portions of this exhibit were redacted pursuant to a
request for confidential treatment filed with the Securities and Exchange
Commission (previously filed as Exhibit on Form 10-QSB for the nine months
ended June 30, 2007, filed in August 2007).
|
||
|
10.17
|
Stock
Purchase Agreement between the Company and Midwest Monitoring &
Surveillance, Inc., dated effective December 1, 2007 (previously filed as
Exhibit on Form 10-KSB for the year ended September 30, 2007, filed in
January 2008).
|
||
|
10.18
|
Stock
Purchase Agreement between the Company and Court Programs, Inc., Court
Programs of Florida Inc., and Court Programs of Northern Florida, Inc.,
dated effective December 1, 2007 (previously filed as Exhibit on Form
10-KSB for the year ended September 30, 2007, filed in January
2008).
|
||
|
10.19
|
Sub-Sublease
Agreement between the Company and Cadence Design Systems, Inc., a Delaware
corporation, dated March 10, 2005 (previously filed as Exhibit on Form
10-KSB/A for the year ended September 30, 2007, filed in June
2008).
|
||
|
10.20
|
Patent
Assignment Agreement between Futuristic Medical Devices, LLC, dated
September 14, 2007 (previously filed as Exhibit on Form 10-KSB/A for the
year ended September 30, 2007, filed in June 2008).
|
||
|
10.21
|
Patent
Assignment Agreement between Futuristic Medical Devices, LLC, dated
September 14, 2007 (previously filed as Exhibit on Form 10-KSB/A for the
year ended September 30, 2007, filed in June 2008).
|
||
|
10.22
|
Patent
Assignment Agreement between Futuristic Medical Devices, LLC, dated
September 14, 2007 (previously filed as Exhibit on Form 10-KSB/A for the
year ended September 30, 2007, filed in June 2008).
|
||
|
10.23
|
Patent
Assignment Agreement between Futuristic Medical Devices, LLC, dated
December 20, 2007 (previously filed as Exhibit on Form 10-KSB/A for the
year ended September 30, 2007, filed in June 2008).
|
||
|
10.24
|
Stock
Purchase Agreement (sale of Volu-Sol Reagents Corporation shares to
Futuristic Medical, LLC), dated January 15, 2008, including voting
agreement (previously filed as Exhibit on Form 10-KSB/A for the year ended
September 30, 2007, filed in June 2008).
|
||
|
10.25
|
Change
in Terms Agreement between Citizen National Bank and the Company, dated
March 14, 2008 (previously filed as Exhibit on Form 10-KSB/A for the year
ended September 30, 2007, filed in June 2008).
|
||
|
10.26
|
Statement
of Work from Wireless Endeavors (a/k/a/ neXaira or Puracom), dated January
8, 2005 (previously filed as Exhibit on Form 10-KSB/A for the year ended
September 30, 2007, filed in June 2008).
|
||
|
10.27
|
Terms
and Conditions of the agreement between Spectrum Design Solutions, Inc.
and the Company, dated April 30, 2007 (previously filed as Exhibit on Form
10-KSB/A for the year ended September 30, 2007, filed in June
2008).
|
||
|
10.28
|
Contract
Agreement between Dyanmic Source Manufacturing and the Company, dated
September 18, 2006 (previously filed as Exhibit on Form 10-KSB/A for the
year ended September 30, 2007, filed in June 2008).
|
||
|
10.29
|
Distribution
Agreement between Electronic Monitoring Services Corporation and the
Company, dated September 20, 2007 (previously filed as Exhibit on Form
10-KSB/A for the year ended September 30, 2007, filed in June
2008).
|
||
|
10.30
|
Distribution
Agreement between Security Investment Holdings, LLC and the Company, dated
December 28, 2006 (previously filed as Exhibit on Form 10-KSB/A for the
year ended September 30, 2007, filed in June 2008).
|
||
54
|
10.31
|
Patent
Assignment Agreement between Futuristic Medical Devices, LLC, dated June
30, 2008.
|
|
|
10.32
|
Patent
Assignment Agreement between Futuristic Medical Devices, LLC, dated June
30, 2008.
|
|
|
10.33
|
Patent
Assignment Agreement between Futuristic Medical Devices, LLC, dated June
30, 2008.
|
|
|
14
|
Code
of Business Conduct and Ethics (previously filed as Exhibit on Form 10-KSB
for the year ended September 30, 2007, filed in January
2008).
|
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm
|
|
|
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)
|
55
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
RemoteMDx,
Inc.
|
||
|
By:
|
/s/ David
G. Derrick
|
|
|
David
G. Derrick, Chief Executive Officer
|
||
|
(Principal
Executive Officer)
|
||
Date:
December 23, 2008
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
|
|
/s/
David G. Derrick
|
Director,
Chairman, and
|
December
23, 2008
|
|
|
David
G. Derrick
|
Chief
Executive Officer
|
||
|
(Principal
Executive Officer)
|
|||
|
Director
|
December
23, 2008
|
||
|
James
Dalton
|
|||
|
/s/ Robert
E. Childers
|
Director
|
December
23, 2008
|
|
|
Robert
E. Childers
|
|||
|
/s/ Peter
McCall
|
Director
|
December
23, 2008
|
|
|
Peter
McCall
|
|||
|
/s/ Larry
G. Schafran
|
Director
|
December
23, 2008
|
|
|
Larry
G. Schafran
|
|||
|
/s/ David
P. Hanlon
|
Director
|
December
23, 2008
|
|
|
David
P. Hanlon
|
|||
|
/s/ Michael
G. Acton
|
Chief
Financial Officer
|
December
23, 2008
|
|
|
Michael
G. Acton
|
(principal
financial officer)
|
||
|
/s/ Chad
D. Olsen
|
Controller
|
December
23, 2008
|
|
|
Chad
D. Olsen
|
(principal
accounting officer)
|
56
RemoteMDx,
Inc.
Consolidated
Financial Statements
September 30, 2008 and
2007
F -
1
Index
to Consolidated Financial Statements
|
Page
|
||
|
Report
of Independent Registered Public Accounting Firm
|
F-3
|
|
|
Consolidated
Balance Sheets
|
F-4
|
|
|
Consolidated
Statements of Operations
|
F-6
|
|
|
Consolidated
Statements of Stockholders’ Equity
|
F-7
|
|
|
Consolidated
Statements of Cash Flows
|
F-18
|
|
|
Notes
to Consolidated Financial Statements
|
F-20
|
F -
2
|
HANSEN, BARNETT& MAXWELL,
P.C.
|
||
|
A
Professional Corporation
|
Registered
with the Public Company
|
|
|
CERTIFIED
PUBLIC ACCOUNTANTS
|
Accounting
Oversight Board
|
|
|
5
Triad Center, Suite 750
|
||
|
Salt
Lake City, UT 84180-1128
|
||
|
Phone:
(801) 532-2200
Fax:
(801) 532-7944
|
|
|
|
www.hbmcpas.com
|
A
Member of the Forum of Firms
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Stockholders
of RemoteMDx, Inc.
We have
audited the accompanying consolidated balance sheets of RemoteMDx, Inc. and
subsidiaries (collectively, the Company) as of September 30, 2008 and 2007, and the
related consolidated statements of operations, stockholders’ equity, and cash
flows for each of the years in the three-year period ended September 30,
2008. The Company’s management is responsible for these financial
statements. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe our audits provide a reasonable basis for our
opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of RemoteMDx, Inc. as of
September 30, 2008 and 2007, and the consolidated results of its operations and
its cash flows for each of the years in the three-year period ended September
30, 2008 in conformity with accounting principles generally accepted in the
United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has incurred losses and has an
accumulated deficit. These conditions raise substantial doubt about
its ability to continue as a going concern. Management’s plans
regarding those matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of RemoteMDx, Inc.’s internal
control over financial reporting as of September 30, 2008, based on criteria
established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated December
23, 2008 expressed an adverse opinion.
HANSEN,
BARNETT & MAXWELL, P.C.
Salt Lake
City, Utah
December
23, 2008
F -
3
REMOTEMDX,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
September
30,
|
||||||||
|
Assets
|
2008
|
2007
|
||||||
|
Current
assets:
|
||||||||
|
Cash
|
$ | 2,782,953 | $ | 4,803,871 | ||||
|
Deposit
held in escrow
|
500,000 | - | ||||||
|
Accounts
receivable, net of allowance for doubtful accounts of $312,000
and $160,000, respectively
|
1,441,853 | 4,996,093 | ||||||
|
Receivables
from related-party
|
55,385 | - | ||||||
|
Prepaid
expenses and other
|
224,842 | 296,096 | ||||||
|
Current
assets from discontinued operations
|
- | 933,755 | ||||||
|
Total
current assets
|
5,005,033 | 11,029,815 | ||||||
|
Property
and equipment, net of accumulated depreciation and amortization of
$1,937,710 and $671,611, respectively
|
1,581,558 | 1,380,192 | ||||||
|
Monitoring
equipment, net of accumulated depreciation of $3,061,321 and $1,388,515,
respectively
|
1,349,146 | 3,739,474 | ||||||
|
Goodwill
|
4,811,834 | - | ||||||
|
Intangible
assets, net of amortization of $16,500 and zero,
respectively
|
216,500 | - | ||||||
|
Other
assets
|
46,626 | 36,632 | ||||||
|
Other
assets from discontinued operations
|
- | 50,576 | ||||||
|
Total
assets
|
$ | 13,010,697 | $ | 16,236,689 | ||||
See
accompanying notes to consolidated financial statements.
F -
4
REMOTEMDX,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS (Continued)
|
September
30,
|
||||||||
|
Liabilities
and Stockholders’ Equity
|
2008
|
2007
|
||||||
|
Current
liabilities:
|
||||||||
|
Bank
line of credit
|
$ | 3,462,285 | $ | 3,858,985 | ||||
|
Accounts
payable
|
2,059,188 | 3,032,223 | ||||||
|
Accrued
liabilities
|
1,781,267 | 1,288,513 | ||||||
|
Deferred
revenue
|
21,343 | 1,314,247 | ||||||
|
Related-party
note payable and line of credit
|
792,804 | - | ||||||
|
SecureAlert
Series A Preferred stock redemption obligation
|
3,244,758 | - | ||||||
|
Current
portion of long-term debt
|
465,664 | 169,676 | ||||||
|
Current
liabilities from discontinued operations
|
- | 69,186 | ||||||
|
Total
current liabilities
|
11,827,309 | 9,732,830 | ||||||
|
Related-party
line of credit
|
- | 239,763 | ||||||
|
Long-term
debt, net of current portion
|
1,147,382 | - | ||||||
|
Total
liabilities
|
12,974,691 | 9,972,593 | ||||||
|
Commitments
and Contingencies (Note 16)
|
||||||||
|
Minority
interest
|
- | 1,396,228 | ||||||
|
SecureAlert
Series A Preferred stock
|
- | 3,590,000 | ||||||
|
Stockholders’
equity:
|
||||||||
|
Preferred
stock:
|
||||||||
|
Series
A 10% dividend, convertible, non-voting, $0.0001 par value: 40,000 shares
designated; 19 shares outstanding (aggregate liquidation preference of
$875)
|
1 | 1 | ||||||
|
Series
B convertible, $0.0001 par value: 2,000,000 shares designated; 10,999 and
12,999 shares outstanding, respectively (aggregate liquidation preference
of $32,997)
|
1 | 1 | ||||||
|
Series
C convertible, $0.0001 par value: 7,357,144 shares designated; no shares
outstanding (aggregate liquidation preference of $0)
|
- | - | ||||||
|
Common
stock, $0.0001 par value: 175,000,000 shares authorized;
155,881,260 and 127,340,085 shares outstanding,
respectively
|
15,588 | 12,734 | ||||||
|
Additional
paid-in capital
|
186,203,084 | 142,238,576 | ||||||
|
Deferred
compensation
|
(3,498,672 | ) | (7,468,998 | ) | ||||
|
Subscription
receivable
|
- | (407,500 | ) | |||||
|
Accumulated
deficit
|
(182,683,996 | ) | (133,096,946 | ) | ||||
|
Total
stockholders’ equity
|
36,006 | 1,277,868 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 13,010,697 | $ | 16,236,689 | ||||
See
accompanying notes to consolidated financial statements.
F -
5
REMOTEMDX,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
Years
Ended September 30,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Revenues:
|
||||||||||||
|
Products
|
$ | 2,577,600 | $ | 1,533,100 | $ | - | ||||||
|
Monitoring
services
|
9,826,077 | 5,082,109 | 391,600 | |||||||||
|
Total
revenues
|
12,403,677 | 6,615,209 | 391,600 | |||||||||
|
Cost
of revenues:
|
||||||||||||
|
Products
|
1,675,212 | 3,298,783 | - | |||||||||
|
Monitoring
services
|
11,433,778 | 10,097,380 | 569,664 | |||||||||
|
Total
cost of revenues
|
13,108,990 | 13,396,163 | 569,664 | |||||||||
|
Negative
margin
|
(705,313 | ) | (6,780,954 | ) | (178,064 | ) | ||||||
|
Operating
expenses:
|
||||||||||||
|
Selling,
general and administrative (including $26,324,358, $8,074,126 and
$8,453,840, respectively, of compensation expense paid in stock or stock
options / warrants)
|
36,466,678 | 15,586,852 | 15,649,099 | |||||||||
|
Research
and development (including $1,045,285, $301,800, and $0, respectively,
paid in stock or stock options / warrants)
|
4,811,128 | 4,564,121 | 2,087,802 | |||||||||
|
Loss
from operations
|
(41,983,119 | ) | (26,931,927 | ) | (17,914,965 | ) | ||||||
|
Other
income (expense):
|
||||||||||||
|
Gain
on sale of intellectual property
|
2,400,000 | 2,400,000 | - | |||||||||
|
Redemption
of SecureAlert Series A Preferred
|
(8,372,566 | ) | - | - | ||||||||
|
Interest
income
|
35,230 | 105,972 | 30,051 | |||||||||
|
Interest
expense (including $865,568, $396,019, and $2,787,221, respectively, paid
in stock or stock options / warrants)
|
(1,566,542 | ) | (1,198,573 | ) | (6,541,074 | ) | ||||||
|
Derivative
valuation gain
|
- | - | 629,308 | |||||||||
|
Loss
on revalued registration rights
|
- | (663,000 | ) | - | ||||||||
|
Loss
on sale of asset
|
- | (228,800 | ) | - | ||||||||
|
Other
income (expense), net
|
314,059 | 484,439 | 67,157 | |||||||||
|
Net
loss from continuing operations
|
(49,172,938 | ) | (26,031,889 | ) | (23,729,523 | ) | ||||||
|
Discontinued
operations
|
(414,112 | ) | (338,682 | ) | (68,222 | ) | ||||||
|
Net
loss
|
(49,587,050 | ) | (26,370,571 | ) | (23,797,745 | ) | ||||||
|
Dividends
on Series A Preferred stock
|
(345,356 | ) | (550,603 | ) | (642,512 | ) | ||||||
|
Net
loss attributable to common stockholders
|
$ | (49,932,406 | ) | $ | (26,921,174 | ) | $ | (24,440,257 | ) | |||
|
Net
loss per common share from continuing operations, basic and
diluted
|
$ | (0.35 | ) | $ | (0.25 | ) | $ | (0.43 | ) | |||
|
Net
loss per common share from discontinued operations, basic and
diluted
|
$ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) | |||
|
Net
loss per common, basic and diluted
|
$ | (0.36 | ) | $ | (0.26 | ) | $ | (0.44 | ) | |||
|
Weighted
average common shares outstanding, basic and diluted
|
140,092,000 | 102,826,000 | 55,846,000 | |||||||||
See
accompanying notes to consolidated financial statements.
F -
6
RemoteMDx,
Inc.
Consolidated
Statements of Stockholders’ Equity
Years
Ended September 30, 2006, 2007 and 2008
|
Preferred
Stock
|
||||||||||||||||
|
Series
A
Shares
|
Series
A
Amount
|
Series
B
Shares
|
Series
B
Amount
|
|||||||||||||
|
Balance
at October 1, 2005
|
26,007 | $ | 3 | 1,369,157 | $ | 137 | ||||||||||
|
Issuance
of common stock for:
|
||||||||||||||||
|
Conversion
of Series A Preferred stock
|
(10,843 | ) | (1 | ) | - | - | ||||||||||
|
Conversion
of Series B Preferred stock
|
- | - | (1,315,825 | ) | (132 | ) | ||||||||||
|
Services
|
- | - | - | - | ||||||||||||
|
Cash
|
- | - | - | - | ||||||||||||
|
Debt
and accrued interest
|
- | - | - | - | ||||||||||||
|
Exercise
of options and warrants
|
- | - | - | - | ||||||||||||
| Issuance
of Series C Preferred stock for
Debt
and accrued interest
|
- | - | - | - | ||||||||||||
|
Issuance
of warrants for services
|
||||||||||||||||
|
Debt
|
- | - | - | - | ||||||||||||
|
Services
|
- | - | - | - | ||||||||||||
|
Amortization
of deferred consulting and financing fees
|
- | - | - | - | ||||||||||||
|
Issuance
of RemoteMDx Series C Preferred stock for cash
|
- | - | - | - | ||||||||||||
|
Record
beneficial conversion feature on notes
|
- | - | - | - | ||||||||||||
|
Issuance
of Series A and C Preferred stock for dividends
|
2,146 | - | - | - | ||||||||||||
|
Preferred
stock dividend on SecureAlert Series A Preferred stock
|
- | - | - | - | ||||||||||||
|
Subscription
receivable
|
- | - | - | - | ||||||||||||
|
Net
loss
|
- | - | - | - | ||||||||||||
|
Balance
of September 30, 2006
|
17,310 | $ | 2 | 53,332 | $ | 5 | ||||||||||
See
accompanying notes to consolidated financial statements.
F -
7
RemoteMDx,
Inc.
Consolidated
Statements of Stockholders’ Equity
Years
Ended September 30, 2006, 2007 and 2008
|
Preferred
Stock
|
||||||||||||||||
|
Series
C
Shares
|
Series
C
Amount
|
Common
Shares
|
Common
Amount
|
|||||||||||||
|
Balance
at October 1, 2005
|
- | $ | - | 45,129,042 | $ | 4,513 | ||||||||||
|
Issuance
of common stock for:
|
||||||||||||||||
|
Conversion
of Series A Preferred stock
|
- | - | 4,014,916 | 401 | ||||||||||||
|
Conversion
of Series B Preferred stock
|
- | - | 7,171,380 | 717 | ||||||||||||
|
Services
|
- | - | 5,846,428 | 585 | ||||||||||||
|
Cash
|
- | - | 6,883,334 | 688 | ||||||||||||
|
Debt
and accrued interest
|
- | - | 10,739,753 | 1,074 | ||||||||||||
|
Exercise
of options and warrants
|
- | - | 350,000 | 35 | ||||||||||||
|
Issuance
of Series C Preferred stock for
|
||||||||||||||||
|
Debt
and accrued interest
|
617,352 | 62 | ||||||||||||||
| - | - | |||||||||||||||
|
Issuance
of warrants for services
|
||||||||||||||||
|
Debt
|
- | - | - | - | ||||||||||||
|
Services
|
- | - | - | - | ||||||||||||
|
Amortization
of deferred consulting and financing fees
|
- | - | - | - | ||||||||||||
|
Issuance
of RemoteMDx Series C Preferred stock for cash
|
4,739,788 | 474 | - | - | ||||||||||||
|
Record
beneficial conversion feature on notes
|
- | - | - | - | ||||||||||||
|
Issuance
of Series A and C Preferred stock for dividends
|
175,226 | 17 | - | - | ||||||||||||
|
Preferred
stock dividend on SecureAlert Series A Preferred stock
|
- | - | - | - | ||||||||||||
|
Subscription
receivable
|
- | - | - | - | ||||||||||||
|
Net
loss
|
- | - | - | - | ||||||||||||
|
Balance
of September 30, 2006
|
5,532,366 | $ | 553 | 80,134,853 | $ | 8,013 | ||||||||||
See
accompanying notes to consolidated financial statements.
F -
8
RemoteMDx,
Inc.
Consolidated
Statements of Stockholders’ Equity
Years
Ended September 30, 2006, 2007 and 2008
|
Additional
Paid-In Capital
|
Deferred
Financing and Consulting
|
Preferred
Stock Subscriptions Receivable
|
Accumulated
Deficit
|
|||||||||||||
|
Balance
at October 1, 2005
|
$ | 76,113,623 | $ | (3,363,126 | ) | $ | (504,900 | ) | $ | (80,463,694 | ) | |||||
|
Issuance
of common stock for:
|
||||||||||||||||
|
Conversion
of Series A Preferred stock
|
(400 | ) | - | - | - | |||||||||||
|
Conversion
of Series B Preferred stock
|
(586 | ) | - | - | - | |||||||||||
|
Services
|
3,983,022 | (1,935,000 | ) | - | - | |||||||||||
|
Cash
|
7,909,312 | - | - | - | ||||||||||||
|
Debt
and accrued interest
|
6,855,629 | (1,434,550 | ) | - | - | |||||||||||
|
Exercise
of options and warrants
|
251,965 | - | - | - | ||||||||||||
|
Issuance
of Series C Preferred stock for
|
||||||||||||||||
|
Debt
and accrued interest
|
1,037,090 | - | - | |||||||||||||
|
Issuance
of warrants for services
|
||||||||||||||||
|
Debt
|
255,012 | - | - | - | ||||||||||||
|
Services
|
5,108,869 | (2,776,889 | ) | - | - | |||||||||||
|
Amortization
of deferred consulting and financing fees
|
- | 6,860,477 | - | - | ||||||||||||
|
Issuance
of RemoteMDx Series C Preferred stock for cash
|
7,439,085 | - | (1,712,565 | ) | - | |||||||||||
|
Record
beneficial conversion feature on notes
|
2,786,364 | - | - | (2,464,936 | ) | |||||||||||
|
Issuance
of Series A and C Preferred stock for dividends
|
(18 | ) | - | - | - | |||||||||||
|
Preferred
stock dividend on SecureAlert Series A Preferred stock
|
(20,877 | ) | - | - | - | |||||||||||
|
Subscription
receivable
|
- | - | 2,217,465 | - | ||||||||||||
|
Net
loss
|
- | - | - | (23,797,745 | ) | |||||||||||
|
Balance
of September 30, 2006
|
$ | 111,718,090 | $ | (2,649,088 | ) | $ | - | $ | (106,726,375 | ) | ||||||
See
accompanying notes to consolidated financial statements.
F -
9
RemoteMDx,
Inc.
Consolidated
Statements of Stockholders’ Equity
Years
Ended September 30, 2006, 2007 and 2008
|
Total
|
||||
|
Balance
at October 1, 2005
|
$ | (8,213,444 | ) | |
|
Issuance
of common stock for:
|
||||
|
Conversion
of Series A Preferred stock
|
- | |||
|
Conversion
of Series B Preferred stock
|
(1 | ) | ||
|
Services
|
2,048,607 | |||
|
Cash
|
7,910,000 | |||
|
Debt
and accrued interest
|
5,422,153 | |||
|
Exercise
of options and warrants
|
252,000 | |||
|
Issuance
of Series C Preferred stock for
|
||||
|
Debt
and accrued interest
|
1,037,152 | |||
|
Issuance
of warrants for services
|
||||
|
Debt
|
255,012 | |||
|
Services
|
2,331,980 | |||
|
Amortization
of deferred consulting and financing fees
|
6,860,477 | |||
|
Issuance
of RemoteMDx Series C Preferred stock for cash
|
5,726,994 | |||
|
Record
beneficial conversion feature on notes
|
321,428 | |||
|
Issuance
of Series A and C Preferred stock for dividends
|
(1 | ) | ||
|
Preferred
stock dividend on SecureAlert Series A Preferred stock
|
(20,877 | ) | ||
|
Subscription
receivable
|
2,217,465 | |||
|
Net
loss
|
(23,797,745 | ) | ||
|
Balance
of September 30, 2006
|
$ | 2,351,200 | ||
See
accompanying notes to consolidated financial statements.
F -
10
RemoteMDx,
Inc.
Consolidated
Statements of Stockholders’ Equity
Years
Ended September 30, 2006, 2007 and 2008
|
Preferred
Stock
|
||||||||||||||||
|
Series
A
Shares
|
Series
A
Amount
|
Series
B
Shares
|
Series
B
Amount
|
|||||||||||||
|
Balance
at October 1, 2006
|
17,310 | $ | 2 | 53,332 | $ | 5 | ||||||||||
|
Issuance
of common stock for:
|
||||||||||||||||
|
Conversion
of Series A Preferred stock
|
(18,093 | ) | (1 | ) | - | - | ||||||||||
|
Conversion
of Series B Preferred stock
|
- | - | (40,333 | ) | (4 | ) | ||||||||||
|
Conversion
of Series C Preferred stock
|
- | - | - | - | ||||||||||||
|
Registration
rights penalty
|
- | - | - | - | ||||||||||||
|
Extension
of related-party line of credit
|
- | - | - | - | ||||||||||||
|
Services
|
- | - | - | - | ||||||||||||
|
Cash
|
- | - | - | - | ||||||||||||
|
Exercise
of options and warrants
|
- | - | - | - | ||||||||||||
|
Issuance
of warrants for services
|
- | - | - | - | ||||||||||||
|
Amortization
of deferred consulting and financing fees
|
- | - | - | - | ||||||||||||
|
Issuance
of Series A and C Preferred stock for dividends
|
802 | - | - | - | ||||||||||||
|
Preferred
stock dividend on SecureAlert Series A Preferred stock
|
- | - | - | - | ||||||||||||
|
Subscription
receivable
|
- | - | - | - | ||||||||||||
|
Net
loss
|
- | - | - | - | ||||||||||||
|
Balance
of September 30, 2007
|
19 | $ | 1 | 12,999 | $ | 1 | ||||||||||
See
accompanying notes to consolidated financial statements.
F -
11
RemoteMDx,
Inc.
Consolidated
Statements of Stockholders’ Equity
Years
Ended September 30, 2006, 2007 and 2008
|
Series
C
|
||||||||||||||||
|
Preferred
Stock
|
Common
Stock
|
|||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||
|
Balance
at October 1, 2006
|
5,532,366 | $ | 553 | 80,134,853 | $ | 8,013 | ||||||||||
|
Issuance
of common stock for:
|
||||||||||||||||
|
Conversion
of Series A Preferred stock
|
- | - | 6,694,329 | 670 | ||||||||||||
|
Conversion
of Series B Preferred stock
|
- | - | 351,824 | 35 | ||||||||||||
|
Conversion
of Series C Preferred stock
|
(5,764,488 | ) | (576 | ) | 17,293,463 | 1,729 | ||||||||||
|
Registration
rights penalty
|
- | - | 750,000 | 75 | ||||||||||||
|
Extension
of related-party line of credit
|
- | - | 500,000 | 50 | ||||||||||||
|
Services
|
- | - | 3,067,853 | 307 | ||||||||||||
|
Cash
|
- | - | 3,081,000 | 308 | ||||||||||||
|
Exercise
of options and warrants
|
- | - | 15,466,763 | 1,547 | ||||||||||||
|
Issuance
of warrants for services
|
- | - | - | - | ||||||||||||
|
Amortization
of deferred consulting and financing fees
|
- | - | - | - | ||||||||||||
|
Issuance
of Series A and C Preferred stock for dividends
|
232,122 | 23 | - | - | ||||||||||||
|
Preferred
stock dividend on SecureAlert Series A Preferred stock
|
- | - | - | - | ||||||||||||
|
Subscription
receivable
|
- | - | - | - | ||||||||||||
|
Net
loss
|
- | - | - | - | ||||||||||||
|
Balance
of September 30, 2007
|
- | $ | - | 127,340,085 | $ | 12,734 | ||||||||||
See
accompanying notes to consolidated financial statements.
F -
12
RemoteMDx,
Inc.
Consolidated
Statements of Stockholders’ Equity
Years
Ended September 30, 2006, 2007 and 2008
|
Additional Paid-In |
Deferred
Financing
and
Consulting
|
Subscription Receivable |
||||||||||
|
Balance
at October 1, 2006
|
$ | 111,718,090 | $ | (2,649,088 | ) | $ | - | |||||
|
Issuance
of common stock for:
|
||||||||||||
|
Conversion
of Series A Preferred stock
|
(668 | ) | - | - | ||||||||
|
Conversion
of Series B Preferred stock
|
(31 | ) | - | - | ||||||||
|
Conversion
of Series C Preferred stock
|
(1,153 | ) | - | - | ||||||||
|
Registration
rights penalty
|
662,925 | - | - | |||||||||
|
Extension
of related-party line of credit
|
799,950 | (800,000 | ) | - | ||||||||
|
Services
|
4,837,883 | - | - | |||||||||
|
Cash
|
6,161,692 | - | - | |||||||||
|
Exercise
of options and warrants
|
11,377,486 | - | (6,081,024 | ) | ||||||||
|
Issuance
of warrants for services
|
6,988,864 | (4,970,162 | ) | - | ||||||||
|
Amortization
of deferred consulting and financing fees
|
- | 950,252 | - | |||||||||
|
Issuance
of Series A and C Preferred stock for dividends
|
(220 | ) | - | - | ||||||||
|
Preferred
stock dividend on SecureAlert Series A Preferred stock
|
(306,242 | ) | - | - | ||||||||
|
Subscription
receivable
|
- | - | 5,673,524 | |||||||||
|
Net
loss
|
- | - | - | |||||||||
|
Balance
of September 30, 2007
|
$ | 142,238,576 | $ | (7,468,998 | ) | $ | (407,500 | ) | ||||
See
accompanying notes to consolidated financial statements.
F -
13
RemoteMDx,
Inc.
Consolidated
Statements of Stockholders’ Equity
Years
Ended September 30, 2006, 2007 and 2008
|
Accumulated
|
||||||||
|
Deficit
|
Total
|
|||||||
|
Balance
at October 1, 2006
|
$ | (106,726,375 | ) | $ | 2,351,200 | |||
|
Issuance
of common stock for:
|
||||||||
|
Conversion
of Series A Preferred stock
|
- | 1 | ||||||
|
Conversion
of Series B Preferred stock
|
- | - | ||||||
|
Conversion
of Series C Preferred stock
|
- | - | ||||||
|
Registration
rights penalty
|
- | 663,000 | ||||||
|
Extension
of related-party line of credit
|
- | - | ||||||
|
Services
|
- | 4,838,190 | ||||||
|
Cash
|
- | 6,162,000 | ||||||
|
Exercise
of options and warrants
|
- | 5,298,009 | ||||||
|
Issuance
of warrants for services
|
- | 2,018,702 | ||||||
|
Amortization
of deferred consulting and financing fees
|
- | 950,252 | ||||||
|
Issuance
of Series A and C Preferred stock for dividends
|
- | (197 | ) | |||||
|
Preferred
stock dividend on SecureAlert Series A Preferred stock
|
- | (306,242 | ) | |||||
|
Subscription
receivable
|
- | 5,673,524 | ||||||
|
Net
loss
|
(26,370,571 | ) | (26,370,571 | ) | ||||
|
Balance
of September 30, 2007
|
$ | (133,096,946 | ) | $ | 1,277,868 | |||
See
accompanying notes to consolidated financial statements.
F -
14
RemoteMDx,
Inc.
Consolidated
Statements of Stockholders’ Equity
Years
Ended September 30, 2006, 2007 and 2008
|
Preferred
Stock
|
||||||||||||||||
|
Series
A
Shares
|
Series
A
Amount
|
Series
B
Shares
|
Series
B
Amount
|
|||||||||||||
|
Balance
at October 1, 2007
|
19 | $ | 1 | 12,999 | $ | 1 | ||||||||||
|
Issuance
of common stock for:
|
||||||||||||||||
|
Conversion
of Series B Preferred stock
|
- | - | (2,000 | ) | - | |||||||||||
|
Settlement
of lawsuit
|
- | - | - | - | ||||||||||||
|
Debt
|
- | - | - | - | ||||||||||||
|
Services
|
- | - | - | - | ||||||||||||
|
Cash
|
- | - | - | - | ||||||||||||
|
Acquisition
of subsidiaries
|
- | - | - | - | ||||||||||||
|
Exercise
of options and warrants
|
- | - | - | - | ||||||||||||
|
Issuance
of warrants for:
|
||||||||||||||||
|
Debt
|
- | - | - | - | ||||||||||||
|
Services
|
- | - | - | - | ||||||||||||
|
Amortization
of deferred consulting
|
- | - | - | - | ||||||||||||
|
Amortization
of financing costs
|
- | - | - | - | ||||||||||||
|
Issuance
of SecureAlert Series A Preferred stock
|
- | - | - | - | ||||||||||||
|
Issuance
of Series A Preferred stock for accrued dividends
|
- | - | - | - | ||||||||||||
|
Subscription
receivable
|
- | - | - | - | ||||||||||||
|
SecureAlert
Series A Preferred stock redemption
|
- | - | - | - | ||||||||||||
|
Deconsolidation
of subsidiary
|
- | - | - | - | ||||||||||||
|
Net
loss
|
- | - | - | - | ||||||||||||
|
Balance
of September 30, 2008
|
19 | $ | 1 | 10,999 | $ | 1 | ||||||||||
See
accompanying notes to consolidated financial statements.
F -
15
RemoteMDx,
Inc.
Consolidated
Statements of Stockholders’ Equity
Years
Ended September 30, 2006, 2007 and 2008
|
Additional
|
||||||||||||||||
|
Common
Stock
|
Paid-In
|
Deferred
|
||||||||||||||
|
Shares
|
Amount
|
Capital
|
Compensation
|
|||||||||||||
|
Balance
at October 1, 2007
|
127,340,085 | $ | 12,734 | $ | 142,238,576 | $ | (7,468,998 | ) | ||||||||
|
Issuance
of common stock for:
|
||||||||||||||||
|
Conversion
of Series B Preferred stock
|
15,000 | 2 | (2 | ) | - | |||||||||||
|
Settlement
of lawsuit
|
325,000 | 33 | 571,967 | - | ||||||||||||
|
Debt
|
360,000 | 36 | 403,164 | (403,200 | ) | |||||||||||
|
Services
|
9,135,000 | 914 | 15,843,671 | (1,520,000 | ) | |||||||||||
|
Cash
|
6,177,219 | 618 | 5,187,296 | - | ||||||||||||
|
Acquisition
of subsidiaries
|
650,000 | 65 | 2,599,435 | - | ||||||||||||
|
Exercise
of options and warrants
|
3,618,814 | 361 | 2,509,520 | - | ||||||||||||
|
Issuance
of warrants for:
|
||||||||||||||||
|
Debt
|
- | - | 1,872,000 | - | ||||||||||||
|
Services
|
- | - | 4,398,279 | (134,812 | ) | |||||||||||
|
Amortization
of deferred consulting
|
- | - | - | 5,162,770 | ||||||||||||
|
Amortization
of financing costs
|
- | - | - | 865,568 | ||||||||||||
|
Issuance
of SecureAlert Series A Preferred stock
|
825,893 | 82 | 825,810 | - | ||||||||||||
|
Issuance
of Series A Preferred stock for accrued dividends
|
- | - | (345,356 | ) | - | |||||||||||
|
Subscription
receivable
|
- | - | - | - | ||||||||||||
|
SecureAlert
Series A Preferred stock redemption
|
7,434,249 | 743 | 8,548,643 | - | ||||||||||||
|
Deconsolidation
of subsidiary
|
- | - | 1,550,081 | - | ||||||||||||
|
Net
loss
|
- | - | - | - | ||||||||||||
|
Balance
of September 30, 2008
|
155,881,260 | $ | 15,588 | $ | 186,203,084 | $ | (3,498,672 | ) | ||||||||
See
accompanying notes to consolidated financial statements.
F -
16
RemoteMDx,
Inc.
Consolidated
Statements of Stockholders’ Equity
Years
Ended September 30, 2006, 2007 and 2008
|
Subscription
Receivable
|
Accumulated
Deficit
|
Total
|
||||||||||
|
Balance
at October 1, 2007
|
$ | (407,500 | ) | $ | (133,096,946 | ) | $ | 1,277,868 | ||||
|
Issuance
of common stock for:
|
||||||||||||
|
Conversion
of Series B Preferred stock
|
- | - | - | |||||||||
|
Settlement
of lawsuit
|
- | - | 572,000 | |||||||||
|
Debt
|
- | - | - | |||||||||
|
Services
|
- | - | 14,324,585 | |||||||||
|
Cash
|
- | - | 5,187,914 | |||||||||
|
Acquisition
of subsidiaries
|
- | - | 2,599,500 | |||||||||
|
Exercise
of options and warrants
|
- | - | 2,509,881 | |||||||||
|
Issuance
of warrants for:
|
||||||||||||
|
Debt
|
- | - | 1,872,000 | |||||||||
|
Services
|
- | - | 4,263,467 | |||||||||
|
Amortization
of deferred consulting
|
- | - | 5,162,770 | |||||||||
|
Amortization
of financing costs
|
- | - | 865,568 | |||||||||
|
Issuance
of SecureAlert Series A Preferred stock
|
- | - | 825,892 | |||||||||
|
Issuance
of Series A Preferred stock for accrued dividends
|
- | - | (345,356 | ) | ||||||||
|
Subscription
receivable
|
407,500 | - | 407,500 | |||||||||
|
SecureAlert
Series A Preferred stock redemption
|
- | - | 8,549,386 | |||||||||
|
Deconsolidation
of subsidiary
|
- | - | 1,550,081 | |||||||||
|
Net
loss
|
- | (49,587,050 | ) | (49,587,050 | ) | |||||||
|
Balance
of September 30, 2008
|
$ | - | $ | (182,683,996 | ) | $ | 36,006 | |||||
See
accompanying notes to consolidated financial statements.
F -
17
REMOTEMDX,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
For
Years Ended September 30,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
loss
|
$ | (49,587,050 | ) | $ | (26,370,571 | ) | $ | (23,797,745 | ) | |||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
1,736,492 | 2,061,119 | 229,441 | |||||||||
|
Common
stock issued for services
|
13,620,584 | 4,641,390 | 2,048,606 | |||||||||
|
Common
stock issued for interest
|
- | - | 88,100 | |||||||||
|
Common stock issued to settle lawsuit
|
1,276,000 | 196,800 | - | |||||||||
|
Amortization
of debt discount
|
- | - | 1,223,092 | |||||||||
|
Amortization
of deferred financing and consulting costs
|
5,968,338 | 950,252 | 6,826,077 | |||||||||
|
Amortization
of interest expense related to debt
|
- | - | 1,809,643 | |||||||||
|
Beneficial
conversion feature recorded as interest expense
|
- | - | 321,429 | |||||||||
|
Derivative
liability valuation
|
- | - | (629,308 | ) | ||||||||
|
Registration
payment arrangement expense
|
130,000 | 663,000 | - | |||||||||
|
Stock
options and warrants issued during the period for services
|
4,263,467 | - | - | |||||||||
|
Redemption
of SecureAlert Series A Preferred stock
|
8,205,922 | - | - | |||||||||
|
Increase
in related-party line of credit for services
|
618,433 | 698,524 | 662,007 | |||||||||
|
Common stock options and warrants issued to board of
directors
|
- | 235,116 | - | |||||||||
|
Options
and warrants issued to consultants for services
|
- | 900,664 | 2,366,378 | |||||||||
|
Options
and warrants issued to related party for services
|
- | 882,922 | - | |||||||||
|
Impairment
of monitoring equipment
|
570,948 | 1,454,784 | - | |||||||||
|
Loss
on sale of receivables
|
- | 228,800 | - | |||||||||
|
Interest income on restricted cash
|
- | - | 5,628 | |||||||||
|
Loss
from discontinued operations
|
414,112 | 338,682 | 68,222 | |||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Accounts
receivable, net
|
3,293,050 | (4,235,428 | ) | (107,578 | ) | |||||||
|
Interest
receivable (payable)
|
(9,068 | ) | 14,026 | (15,604 | ) | |||||||
|
Inventories
|
- | (952,341 | ) | 12,811 | ||||||||
|
Deposit
held in escrow
|
(500,000 | ) | - | - | ||||||||
|
Prepaid
expenses and other assets
|
720,591 | 1,608,485 | (2,479,376 | ) | ||||||||
|
Accounts
payable
|
(1,373,491 | ) | 1,351,183 | 345,185 | ||||||||
|
Accrued
liabilities
|
999,310 | 627,897 | (271,518 | ) | ||||||||
|
Deferred
revenue
|
(20,382 | ) | 1,296,430 | 278 | ||||||||
|
Net
cash used in operating activities
|
(9,672,744 | ) | (13,408,266 | ) | (11,294,232 | ) | ||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchase
of property and equipment
|
(334,226 | ) | (537,332 | ) | (1,071,711 | ) | ||||||
|
Purchase
of monitoring equipment
|
(192,221 | ) | (3,684,216 | ) | (2,241,800 | ) | ||||||
|
Net
cash used in investing activities
|
(526,447 | ) | (4,221,548 | ) | (3,313,511 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Payment
of accrued SecureAlert Series A Preferred stock dividends
|
- | (28,452 | ) | - | ||||||||
|
Net
payments on related-party line of credit
|
(315,392 | ) | (503,310 | ) | (635,073 | ) | ||||||
|
Net
principal proceeds (reductions) in bank line of credit
borrowings
|
(396,700 | ) | (38,126 | ) | 3,896,688 | |||||||
|
Payments
on notes payable
|
(336,133 | ) | - | (2,043,623 | ) | |||||||
|
Net
borrowings on related-party notes payable
|
975,578 | - | - | |||||||||
|
Principal
payments on notes payable related to acquisitions
|
(2,176,821 | ) | - | - | ||||||||
|
Cash
acquired through acquisitions
|
163,002 | - | - | |||||||||
|
Decrease
in subscriptions receivable
|
- | - | 504,900 | |||||||||
|
Proceeds
from the issuance of Series C Preferred stock
|
- | - | 7,439,558 | |||||||||
|
Proceeds
from issuance of debt
|
- | - | 1,746,153 | |||||||||
|
Proceeds
from the issuance of SecureAlert Series A Preferred stock
|
- | - | 600,000 | |||||||||
|
Proceeds
from sale of common stock
|
5,058,014 | 6,162,000 | 7,910,000 | |||||||||
|
Proceeds
from sale of warrants and subsidiary stock
|
2,400,000 | - | - | |||||||||
|
Proceeds
from issuance of notes payable
|
34,344 | - | 517,500 | |||||||||
|
Proceeds
from exercise of options and warrants
|
2,772,381 | 10,971,533 | 252,000 | |||||||||
|
Net
cash provided by financing activities
|
8,178,273 | 16,563,645 | 20,188,103 | |||||||||
|
Net
decrease in cash
|
(2,020,918 | ) | (1,066,169 | ) | 5,580,360 | |||||||
|
Cash,
beginning of year
|
4,803,871 | 5,870,040 | 289,680 | |||||||||
|
Cash,
end of year
|
$ | 2,782,953 | $ | 4,803,871 | $ | 5,870,040 | ||||||
See
accompanying notes to consolidated financial statements.
F -
18
|
For
Years Ended September 30,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Cash
paid for interest
|
$ | 700,974 | $ | 802,554 | $ | 311,592 | ||||||
|
Supplemental
schedule of non-cash investing and financing activities:
|
||||||||||||
|
Issuance
of zero, 6,694,329 and 4,014,916 common shares, respectively, in exchange
for zero, 18,093 and 10,843 shares of Series A Preferred stock,
respectively
|
$ | - | $ | 670 | $ | 401 | ||||||
|
Issuance
of 2,000, 351,824 and 7,171,380 common shares, respectively, in
exchange for 15,000, 40,333 and 1,315,825 shares of Series B Preferred
stock, respectively
|
2 | 35 | 717 | |||||||||
|
Issuance
of zero, 17,293,463 and zero common shares, respectively, in exchange for
zero, 5,764,488 and zero shares of Series C Preferred stock,
respectively
|
- | 1,729 | - | |||||||||
|
Issuance
of 360,000, 500,000 and 4,057,500 common shares, respectively for deferred
consulting services and financing services
|
403,200 | 800,000 | 3,369,550 | |||||||||
|
Preferred
Series A and C stock dividends
|
423 | 550,603 | 642,512 | |||||||||
|
SecureAlert
Series A Preferred stock dividends accrued
|
480,537 | 298,667 | 20,877 | |||||||||
|
Options
exercised for subscription receivable
|
- | 407,500 | - | |||||||||
|
Notes payable and accrued interest converted into zero, zero and 7,586,299
shares of common stock respectively
|
- | - | 2,671,653 | |||||||||
|
Notes
payable and accrued interest converted into zero, zero and 736,400 shares
of Series C Preferred stock, respectively
|
- | - | 1,037,152 | |||||||||
|
Issuance of zero, zero and 400,000 common shares, respectively, for
establishing letters of credit to secure a line of credit
|
- | - | 656,000 | |||||||||
|
Series B and C debentures converted into zero, zero and 2,030,184 shares
of common stock, respectively
|
- | - | 913,583 | |||||||||
|
Shares issued prepaid services
|
1,520,000 | - | - | |||||||||
|
Fair value of assets acquired in purchase of Court Programs through the
issuance of common stock
|
1,316,338 | - | - | |||||||||
|
Fair value of liabilities assumed in purchase of Court Programs through
the issuance of common stock
|
468,837 | - | - | |||||||||
|
Issuance of common stock in acquisition of Court Programs,
Inc., Court Programs of Florida, Inc., and Court Programs of Northern
Florida, Inc.
|
847,500 | - | - | |||||||||
|
Settlement of SecureAlert Series A Preferred stock
|
3,590,000 | - | - | |||||||||
|
Deconsolidation of Volu-Sol
|
607,869 | - | - | |||||||||
|
Fair value of assets acquired in purchase of Midwest Monitoring through
the issuance of common stock
|
2,974,666 | - | - | |||||||||
|
Fair value of liabilities assumed in purchase of Midwest Monitoring
through the issuance of common stock
|
1,222,666 | - | - | |||||||||
|
Issuance
of common stock in acquisition of Midwest Monitoring & Surveillance,
Inc.
|
1,752,000 | - | - | |||||||||
See
accompanying notes to consolidated financial statements.
F -
19
REMOTEMDX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
(1)
|
Organization
and Nature of Operations
|
General
RemoteMDx,
Inc. and subsidiaries (collectively, the “Company”) market, monitor and sell the
TrackerPAL device. The TrackerPAL is used to monitor convicted
offenders that are on probation or parole in the criminal justice
system. The TrackerPAL device utilizes GPS and cellular technologies
in conjunction with a monitoring center that is staffed 365 days a
year. The Company believes that its technologies and services benefit
law enforcement officials by allowing them to respond immediately to a problem
involving the monitored offender. The TrackerPAL is targeted to meet
the needs of this market as well as the international market.
Going
Concern
The
Company has incurred recurring net losses and negative cash flows from operating
activities for the years ended September 30, 2008, 2007 and 2006. In
addition, the Company has an accumulated deficit of $182,683,996 as of September
30, 2008. 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.
In order
for the Company to continue as a going concern, the Company must generate
positive cash flows from operating activities and obtain the necessary funding
to meet its projected capital investment requirements. Management’s
plans with respect to this uncertainty include raising additional capital from
the exercise of warrants and issuance of a convertible debenture and expanding
its market for its tracking products. There can be no assurance that
revenues will increase rapidly enough to offset operating losses and repay
debts. If the Company is unable to increase cash flows from operating
activities or obtain additional financing, it will be unable to continue the
development of its products and may have to cease operations.
|
(2)
|
Discontinued
Operations
|
During
the fiscal year ended September 30, 2008, the Company divested its majority
ownership interest of the diagnostic stain business conducted by a former
subsidiary Volu-Sol Reagents Corporation (“Volu-Sol”). The Company is
in the process of completing the divestiture and expects to complete the
distribution of its remaining interest (approximately 17% of the common stock)
in Volu-Sol during the fiscal second quarter ending March 31,
2009. This transaction was treated as a pro-rata nonreciprocal
transfer to owners in according to Accounting Principles Board (APB) Opinion No.
29. This resulted in $1,550,081 recorded as additional paid in
capital to the Company.
The
Company’s consolidated financial statements have been reclassified to segregate
operating results of the discontinued operations for all periods
presented. Prior to reclassification, the discontinued operations
were reported in the stain operating segment. The summary of net
sales and operating results from discontinued operations for the years ended
September 30, 2008 and 2007, respectively are as follows:
|
2008
|
2007
|
2006
|
||||||||||
|
Net
sales
|
$ | 608,024 | $ | 655,331 | $ | 678,541 | ||||||
|
Loss
from discontinued operations
|
$ | (414,112 | ) | $ | (338,682 | ) | $ | (68,222 | ) | |||
F -
20
|
(3)
|
Summary
of Significant Accounting Policies
|
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of
RemoteMDx, Inc. and its subsidiaries, SecureAlert, Inc., Volu-Sol Reagents
Corporation (“Volu-Sol”) Midwest Monitoring & Surveillance, Inc., Court
Programs, Inc., Court Programs of Florida, Inc., and Court Programs of Northern
Florida, Inc. (collectively, the “Company”). All intercompany
balances and transactions have been eliminated in consolidation. As
discussed in Note 2, the Company divested its ownership of Volu-Sol during the
year ended September 30, 2008; therefore, Volu-Sol is part of the consolidated
financial statements as discontinued operations through September 30, 2007, but
no longer consolidated at September 30, 2008.
Use
of Estimates in the Preparation of Financial Statements
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Fair
Value of Financial Statements
The
carrying amounts reported in the accompanying consolidated financial statements
for cash, accounts receivable, accounts payable, accrued liabilities, and other
debt obligations approximate fair values because of the immediate or short-term
maturities of these financial instruments. The carrying amounts of
the Company’s debt obligations approximate fair value as the interest rates
approximate market interest rates.
Concentration
of Credit Risk
The
Company has cash in bank accounts that, at times, may exceed federally insured
limits. The Company has not experienced any losses in such
accounts.
In the
normal course of business, the Company provides credit terms to its customers
and requires no collateral. Accordingly, the Company performs ongoing credit
evaluations of its customers' financial condition.
Based
upon the expected collectability of its accounts receivable, the Company
maintains an allowance for doubtful accounts receivable.
Listed
below is a table reporting entities which represented more than 10% of the
Company’s total revenues for the year ended September 30, 2008, 2007 and
2006:
|
2008
|
2007
|
2006
|
||||||||||
|
Company
A
|
$ | - | $ | 3,229,760 | $ | - | ||||||
|
Company
B
|
- | 928,800 | - | |||||||||
Listed
below is a table reporting entities which represented more than 10% of the
Company’s total accounts receivable for the year ended September 30, 2008, 2007
and 2006:
|
2008
|
2007
|
2006
|
||||||||||
|
Company
A
|
$ | 360,257 | $ | 2,764,324 | $ | - | ||||||
|
Company
B
|
- | 1,000,000 | - |
Cash
Equivalents
Cash
equivalents consist of investments with original maturities to the Company of
three months or less.
F -
21
Accounts
Receivable
Accounts
receivable are carried at original invoice amount less an estimate made for
doubtful receivables based on a review of all outstanding amounts on a monthly
basis. Specific reserves are estimated by management based on certain
assumptions and variables, including the customer’s financial condition, age of
the customer’s receivables and changes in payment histories. Trade
receivables are written off when deemed uncollectible. Recoveries of
trade receivables previously written off are recorded when cash is
received. A trade receivable is considered to be past due if any
portion of the receivable balance has not been received by the Company within
its normal terms. Interest income is not recorded on trade
receivables that are past due, unless that interest is collected.
Property
and Equipment
Property
and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are determined using the
straight-line method over the estimated useful lives of the assets, typically
three to seven years. Leasehold improvements are amortized over the
shorter of the estimated useful lives of the asset or the term of the
lease. Expenditures for maintenance and repairs are expensed while
renewals and improvements are capitalized. When property and
equipment are disposed of, any gains or losses are included in the results of
operations.
Property
and equipment consisted of the following as of September 30, 2008 and 2007,
respectively:
|
2008
|
2007
|
|||||||
|
Equipment,
software and tooling
|
$ | 2,472,076 | 1,757,878 | |||||
|
Automobiles
|
287,736 | - | ||||||
|
Building
and land
|
377,555 | - | ||||||
|
Leasehold
improvements
|
102,190 | 96,532 | ||||||
|
Furniture
and fixtures
|
279,711 | 197,393 | ||||||
| 3,519,268 | 2,051,803 | |||||||
|
Accumulated
depreciation
|
(1,937,710 | ) | (671,611 | ) | ||||
|
Property
and equipment, net of accumulated depreciation
|
$ | 1,581,558 | 1,380,192 | |||||
Depreciation
expense for the years ended September 30, 2008 and 2007 was $638,138 and
$479,135, respectively.
Monitoring
Equipment
Monitoring
equipment at September 30, 2008 and 2007 is as follows:
|
2008
|
2007
|
|||||||
|
Monitoring
equipment
|
$ | 4,410,467 | $ | 5,127,989 | ||||
|
Less
accumulated depreciation
|
(3,061,321 | ) | (1,388,515 | ) | ||||
|
Monitoring
Equipment, net
|
$ | 1,349,146 | $ | 3,739,474 | ||||
The
Company began leasing monitoring equipment to agencies for offender tracking in
April 2006 under operating lease arrangements. The monitoring
equipment is depreciated using the straight-line method over an estimated useful
life of 3 years.
Amortization
expense for the years ended September 30, 2008, 2007 and 2006 was $1,082,648,
$1,581,985 and $102,115, respectively. These expenses were classified
as a cost of revenues.
F -
22
Impairment
of Long-Lived Assets and Goodwill
The
Company reviews its long-lived assets for impairment when events or changes in
circumstances indicate that the book value of an asset may not be recoverable
and in the case of goodwill, at least annually, The Company evaluates, at each
balance sheet date, whether events and circumstances have occurred which
indicate possible impairment. The Company uses an estimate of future
undiscounted net cash flows of the related asset or group of assets over the
estimated remaining life in measuring whether the assets are
recoverable. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized for the amount by which
the carrying amount exceeds the estimated fair value of the
asset. Impairment of long-lived assets is assessed at the lowest
levels for which there are identifiable cash flows that are independent of other
groups of assets. As of September 30, 2008, the Company did not deem
necessary any impairment costs associated with goodwill or other intangible
assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value, less the estimated costs to
sell. During the years ended September 30, 2008 and 2007, the Company
disposed of lease monitoring equipment of $570,948 and $1,454,784,
respectively.
Revenue
Recognition
The
Company’s revenue has historically been from three sources: (i) monitoring
services; (ii) monitoring device and other product sales; and (iii) medical
diagnostic stains sales.
Monitoring
Services
Monitoring
services include two components: a) contracts in which the Company provides
monitoring services and leases devices to distributors or end users in which the
Company retains ownership of the leased devices; and b) monitoring services
purchased by distributors or end users who have previously purchased devices and
have opted to use the Company’s monitoring services.
The
Company leases its devices under one-year contracts with customers that opt to
use the Company’s monitoring services. However, these contracts may
be cancelled by either party at anytime with 30 days notice. Under
the Company’s standard leasing contract, the leased device becomes billable on
the date of activation or 21 days from the date the device is assigned to the
lessee, and remains billable until the device is returned to the
Company. The Company recognizes revenue on leased devices at the end
of each month that monitoring services have been provided. In those
circumstances in which the Company receives payment in advance, the Company
records these payments as deferred revenue.
Monitoring Device Product
Sales
Although
not the focus of the Company’s business model, the Company sells its monitoring
devices in certain situations. In addition, the Company to a very
small degree sells home security and Personal Emergency Response
Systems. The Company recognizes product sales revenue when persuasive
evidence of an arrangement with the customer exists, title passes to the
customer and the customer cannot return the devices, prices are fixed or
determinable (including sales not being made outside the normal payment terms)
and collection is reasonably assured. When purchasing products (such as
TrackerPAL devices) from the Company, customers may, but are not required to,
enter into monitoring service contracts. The Company recognizes
revenue on monitoring services for customers that have previously purchased
devices at the end of each month that monitoring services have been
provided.
Multiple Element
Arrangements
The
majority of the Company’s revenue transactions do not have multiple elements. On
occasion, the Company has revenue transactions that have multiple elements (such
as product sales and monitoring services). For revenue arrangements
that have multiple elements, the Company considers whether: (i) the delivered
devices have stand alone value to the customer; (ii) there is objective and
reliable evidence of the fair value of the undelivered monitoring services,
which is generally determined by surveying the price of competitors’ comparable
monitoring services; and (iii) the customer does not have a general right of
return. Based on these criteria, the Company recognizes revenue from
the sale of devices separately from the monitoring services to be provided to
the customer. In accordance with EITF 00-21, if the fair value of the
undelivered element exists, but the fair value does not exist for one or more
delivered elements, then revenue is recognized using the residual method. Under
the residual method as applied to these particular transactions, the fair value
of the undelivered element (the monitoring services) is deferred and the
remaining portion of the arrangement (the sale of the device) is recognized as
revenue when the device is delivered and all other revenue recognition criteria
are met.
F -
23
Medical Diagnostic Stain
Sales
The
Company recognizes medical diagnostic stains revenue when persuasive evidence of
an arrangement with the customer exists, title passes to the customer and the
customer cannot return the products, prices are fixed or determinable and
collection is reasonably assured. As of September 30, 2008, this
segment of operations was discontinued.
Other
Matters
The
Company considers an arrangement with payment terms longer than the Company’s
normal terms not to be fixed or determinable, and revenue is recognized when the
fee becomes due. Normal payment terms for the sale of monitoring
services are 30 days, and normal payment terms for device sales are between 120
and 180 days. The Company sells its devices and services directly to
end users and to distributors. Distributors do not have general
rights of return. Distributors have no price protection or stock
protection rights with respect to devices sold to them by the
Company. Generally, title and risk of loss pass to the buyer upon
delivery of the devices. The collection terms for the diagnostic stains and
reagent product sales are net 30 days. The Company estimates its
product returns based on historical experience and maintains an allowance for
estimated returns, which is recorded as a reduction to accounts receivable and
revenue.
Shipping
and handling fees are included in net revenues. The related freight
costs and supplies directly associated with shipping products to customers are
included as a component of cost of revenues.
Research
and Development Costs
All
expenditures for research and development are charged to expense as incurred.
These expenditures in 2008, 2007 and 2006, were for the development of
SecureAlert’s TrackerPAL device and associated services. For the years ended
September 30, 2008, 2007and 2006, research and development expenses were
$4,811,128, $4,564,121, and $2,087,802 respectively.
Advertising
Costs
The
Company expenses advertising costs as incurred. Advertising expense
for the years ended September 30, 2008, 2007 and 2006, was $209,389, $155,327
and $116,469, respectively.
Stock-Based
Compensation
Effective
October 1, 2006, the Company adopted Statement of Financial Accounting Standards
(“SFAS”) No. 123R, using the modified prospective method. SFAS No. 123R requires
the recognition of the cost of employee services received in exchange for an
award of equity instruments in the financial statements and is measured based on
the grant date fair value of the award. SFAS No. 123R also requires the stock
option compensation expense to be recognized over the period during which an
employee is required to provide service in exchange for the award (the vesting
period). Prior to adopting SFAS No. 123R, the Company accounted for its
stock-based compensation plans under Accounting Principles Board Opinion ("APB")
No. 25, Accounting for Stock
Issued to Employees. Under APB No. 25, generally no compensation expense
is recorded when the terms of the award are fixed and the exercise price of the
employee stock option equals or exceeds the fair value of the underlying stock
on the date of grant. The Company adopted the disclosure-only provisions of SFAS
No. 123, Accounting for
Stock-Based Compensation.
For the
years ended September 30, 2008 and 2007, the Company calculated compensation
expense of $214,251 and $900,664, respectively related to the vesting of
previously granted stock options and additional options granted.
The fair
value of each stock option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. The Company granted 1,725,000 and 320,000
stock options to employees during the years ended September 30, 2008 and 2007,
respectively. In addition, 390,000 stock options issued to employees
in prior years vested during the year ended September 30, 2008. The
weighted average fair value of stock options at the date of grant during the
year ended September 30, 2008 and 2007 was $1.34 and $1.43, respectively. The
expected life of stock options represents the period of time that the stock
options granted are expected to be outstanding based on historical exercise
trends. The expected volatility is based on the historical price volatility of
common stock. The risk-free interest rate represents the U.S. Treasury bill rate
for the expected life of the related stock options. The dividend yield
represents the Company’s anticipated cash dividends over the expected life of
the stock options.
F -
24
The following
are the weighted-average assumptions used for options granted during the years
ended September 30, 2008 and 2007, respectively:
|
Years
Ended
September
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Expected
cash dividend yield
|
- | - | ||||||
|
Expected
stock price volatility
|
136 | % | 142 | % | ||||
|
Risk-free
interest rate
|
3.12 | % | 4.57 | % | ||||
|
Expected
life of options
|
5
years
|
5
years
|
||||||
A summary
of stock option activity for the year ended September 30, 2008 and 2007 is
presented below:
|
Shares
Under
Option
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Life
|
||||||||
|
Aggregate
Intrinsic
Value
|
||||||||||
|
Outstanding
as of September 30, 2006
|
3,607,500
|
$
|
0.63
|
|||||||
|
Granted
|
320,000
|
$
|
1.58
|
|||||||
|
Exercised
|
(462,500)
|
$
|
1.06
|
|||||||
|
Forfeited
|
(100,000)
|
$
|
0.60
|
|||||||
|
Expired
|
(70,000)
|
$
|
1.46
|
|||||||
|
Outstanding
as of September 30, 2007
|
3,295,000
|
$
|
0.64
|
3.97
years
|
$
|
7,015,700
|
||||
|
Exercisable
as of September 30, 2007
|
1,140,000
|
$
|
0.69
|
3.98
years
|
$
|
2,365,649
|
||||
|
Outstanding
as of September 30, 2007
|
3,295,000
|
$
|
0.64
|
|||||||
|
Granted
|
1,725,000
|
$
|
1.54
|
|||||||
|
Exercised
|
(1,375,000)
|
$
|
0.63
|
|||||||
|
Forfeited
|
(45,000)
|
$
|
0.86
|
|||||||
|
Expired
|
-
|
-
|
||||||||
|
Outstanding
as of September 30, 2008
|
3,600,000
|
$
|
1.08
|
3.34
years
|
$
|
1,062,000
|
||||
|
Exercisable
as of September 30, 2008
|
421,667
|
$
|
1.35
|
3.30
years
|
$
|
37,000
|
||||
F -
25
Income
Taxes
The
Company recognizes deferred income tax assets or liabilities for the expected
future tax consequences of events that have been recognized in the financial
statements or income tax returns. Deferred income tax assets or liabilities are
determined based upon the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates expected to apply when
the differences are expected to be settled or realized. Deferred
income tax assets are reviewed periodically for recoverability and valuation
allowances are provided as necessary.
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
attributable to common stockholders by the sum of the weighted-average number of
common shares outstanding and the weighted-average dilutive common share
equivalents 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, and shares issuable upon conversion of preferred
stock. As of September 30, 2008, 2007 and 2006, there were
21,846,412, 19,029,546 and 45,132,452 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.
Recent Accounting
Pronouncements
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and SFAS
No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS No.
141(R) requires an acquirer to measure the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree at their
fair values on the acquisition date, with goodwill being the excess value over
the net identifiable assets acquired. SFAS No. 160 clarifies that a
non-controlling interest in a subsidiary should be reported as equity in the
consolidated financial statements, consolidated net income shall be adjusted to
include the net income attributed to the non-controlling interest, and
consolidated comprehensive income shall be adjusted to include the comprehensive
income attributed to the non-controlling interest. The calculation of earnings
per share will continue to be based on income amounts attributable to the
parent. SFAS No. 141(R) and SFAS No. 160 are effective for financial statements
issued for fiscal years beginning after December 15, 2008. Early adoption is
prohibited. Management does not currently believe adoption will have a material
impact on the Company's financial condition or operating results, if any, upon
adoption of SFAS No. 141(R) or SFAS No. 160.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which defines fair value, provides a framework for measuring fair value, and
expands the disclosures required for fair value measurements. SFAS No. 157
applies to other accounting pronouncements that require fair value measurements;
it does not require any new fair value measurements. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007, and is
required to be adopted by the Company beginning in the first quarter of fiscal
2009. Although the Company will continue to evaluate the application of SFAS
No. 157, management does not currently believe adoption will have a
material impact on the Company's financial condition or operating
results.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities-including an amendment of FASB
Statement No. 115 ("SFAS No. 159"). SFAS No. 159 allows companies
to choose to elect measuring eligible financial instruments and certain other
items at fair value that are not required to be measured at fair value. SFAS No. 159 requires that unrealized gains and losses on
items for which the fair value option has been elected be reported in earnings
at each reporting date. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007 and is required to be adopted by the
Company beginning in the first quarter of fiscal 2009. Although the Company will
continue to evaluate the application of SFAS No. 159, management does not
currently believe adoption will have a material impact on the Company's
financial condition or operating results.
In May
2008, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
162, The Hierarchy of
Generally Accepted Accounting Principles. SFAS No. 162
identifies the sources of accounting principles and provides entities with a
framework for selecting the principles used in preparation of financial
statements that are presented in conformity with GAAP. The current
GAAP hierarchy has been criticized because it is directed to the auditor rather
than the entity, it is complex, and it ranks FASB Statements of Financial
Accounting Concepts, which are subject to the same level of due process as FASB
Statements of Financial Accounting Standards, below industry practices that are
widely recognized as generally accepted but that are not subject to due
process. The Board believes the GAAP hierarchy should be directed to
entities because it is the entity (not its auditors) that is responsible for
selecting accounting principles for financial statements that are presented in
conformity with GAAP. The adoption of FASB 162 is not expected to
have a material impact on the Company’s financial position.
F -
26
|
(4)
|
Goodwill
and Other Intangible Assets
|
Midwest Monitoring &
Surveillance
Effective
December 1, 2007, the Company purchased a 51% ownership interest, including a
voting interest, of Midwest Monitoring & Surveillance (“Midwest”) for
$1,800,000 in notes payable and up to 438,000 shares of the Company’s common
stock. The notes payable of $1,800,000 were paid off on January 18,
2008. The RemoteMDx shares issued as part of the consideration for
the Midwest shares were placed in escrow and were released by the Company in
March 2008.
Midwest
provides electronic monitoring for individuals on parole. The primary
reason for the acquisition of Midwest was the expansion of Company’s technology
and name recognition throughout the midwest, central and eastern United
States. The total consideration for the purchase of Midwest was
$4,400,427 comprised of notes payable of $1,800,000, shares of common stock
valued at $1,752,000 (438,000 shares valued at $4.00 per share), transaction
costs of $31,497, and long-term liabilities assumed of $816,930.
The total
consideration of $4,400,427 less the tangible assets acquired of $674,679
resulted in an excess over net book value of $3,725,748. The excess
over net book value was allocated as follows:
|
Goodwill
and Other Intangible Assets
|
||||
|
Goodwill
|
$ | 3,603,748 | ||
|
Trade
name
|
120,000 | |||
|
Non-compete
agreements
|
2,000 | |||
|
Excess
over net book value
|
$ | 3,725,748 | ||
As of
September 30, 2008, amortization expense for the intangible assets was $7,500
resulting in net intangible assets of $114,500.
Court
Programs
Effective
December 1, 2007, the Company purchased a 51% ownership interest, including a
voting interest, of Court Programs, Inc., a Mississippi corporation, Court
Programs of Northern Florida, Inc., a Florida corporation, and Court Programs of
Florida, Inc., a Florida corporation (collectively, “Court Programs”) for
$300,000 in a note payable and up to 212,000 shares of the Company’s common
stock. The RemoteMDx shares issued as part of the consideration for
the purchase of Court Programs were placed in escrow and were released by the
Company in August 2008.
Court
Programs is a distributor of electronic monitoring devices to courts providing a
solution to monitor individuals on parole. The primary reasons to
acquire Court Programs are to expand the Company’s technology and to increase
the Company’s name recognition throughout the eastern United
States. The total consideration for the purchase of Court Programs
was $1,527,743 delineated as follows: note payable of $300,000, shares of common
stock valued at $847,500 (212,000 shares valued at approximately $4.00 per
share), transaction costs of $45,324, and long-term liabilities assumed of
$334,919.
The total
consideration of $1,527,743 less the tangible assets acquired of $208,658
resulted in an excess over net book value of $1,319,086. The excess
over net book value was allocated as follows:
|
Goodwill
and Other Intangible Assets
|
||||
|
Goodwill
|
$ | 1,208,086 | ||
|
Trade
name
|
99,000 | |||
|
Customer
relationships
|
6,000 | |||
|
Non-compete
agreements
|
6,000 | |||
|
Excess
over net book value
|
$ | 1,319,086 | ||
F -
27
As of
September 30, 2008, amortization expense for the intangible assets was $9,000
resulting in net intangible assets of $102,000.
In
connection with the acquisitions of Midwest and Court Programs, the Company
recorded goodwill and other intangible assets. The table below shows
the allocation of the goodwill and identified intangibles for each
company:
|
Goodwill
and other intangible assets, net of amortization
|
||||
|
Goodwill
|
||||
|
Midwest
|
$ | 3,603,748 | ||
|
Court
Programs
|
1,208,086 | |||
|
Other
intangible assets
|
||||
|
Midwest, net of amortization of $7,500
|
114,500 | |||
|
Court Programs, net of amortization of $9,000
|
102,000 | |||
|
Total
goodwill and other intangible assets, net of amortization
|
$ | 5,028,334 | ||
The
estimated amortization expense associated with other intangible assets for the
five years subsequent to September 30, 2008 by entity is as
follows:
|
Years
|
Total
|
Midwest
|
Court
Programs
|
|||||||||
|
2009
|
$ | 18,600 | $ | 9,000 | $ | 9,600 | ||||||
|
2010
|
15,267 | 8,167 | 7,100 | |||||||||
|
2011
|
14,600 | 8,000 | 6,600 | |||||||||
|
2012
|
14,600 | 8,000 | 6,600 | |||||||||
|
2013
|
14,600 | 8,000 | 6,600 | |||||||||
|
Total
|
$ | 77,667 | $ | 41,167 | $ | 36,500 | ||||||
Supplemental
Pro Forma Results of Operations
The
following tables present the pro forma results of operations for the years ended
September 30, 2008 and 2007, as though the Midwest and Court Programs
acquisitions had been completed as of the beginning of each period
presented:
|
Years
Ended
September
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Revenues:
|
||||||||
|
Products
|
$ | 2,593,925 | $ | 1,705,402 | ||||
|
Monitoring
services
|
11,322,201 | 10,368,116 | ||||||
|
Total
revenues
|
13,916,126 | 12,073,518 | ||||||
|
Cost
of revenues:
|
||||||||
|
Products
|
(1,675,212 | ) | (3,298,783 | ) | ||||
|
Monitoring
services
|
(12,832,087 | ) | (13,602,827 | ) | ||||
|
Total
cost of revenues
|
(14,507,299 | ) | (16,901,610 | ) | ||||
|
Gross margin (deficit)
|
(591,173 | ) | (4,828,092 | ) | ||||
|
Operating
expenses:
|
||||||||
|
Selling,
general and administrative
|
(36,602,040 | ) | (17,873,362 | ) | ||||
|
Research
and development
|
(4,811,128 | ) | (4,564,121 | ) | ||||
|
Loss from
operations
|
(42,004,341 | ) | (27,265,575 | ) | ||||
|
Other
income (expense):
|
||||||||
|
Gain
on sale of intellectual property
|
2,400,000 | 2,400,000 | ||||||
|
Loss
on revalued registration rights
|
- | (663,000 | ) | |||||
|
Loss
on sale of asset
|
- | (228,800 | ) | |||||
|
Redemption
of SecureAlert Series A Preferred stock
|
(8,372,566 | ) | - | |||||
|
Other
income (loss)
|
314,059 | 484,439 | ||||||
|
Interest
income
|
35,230 | 110,697 | ||||||
|
Interest
expense
|
(1,588,073 | ) | (1,350,441 | ) | ||||
|
Net
loss from continuing operations
|
(49,215,691 | ) | (26,512,680 | ) | ||||
|
Discontinued
operations
|
(414,112 | ) | (338,682 | ) | ||||
|
Net
loss
|
(49,629,803 | ) | (26,851,362 | ) | ||||
|
Dividends
on Series A and C Preferred stock
|
(345,356 | ) | (550,603 | ) | ||||
|
Net
loss attributable to common stockholders
|
$ | (49,975,159 | ) | $ | (27,401,965 | ) | ||
|
Net
loss per common share – basic and diluted
|
$ | (0.36 | ) | $ | (0.27 | ) | ||
|
Weighted
average common shares outstanding – basic and diluted
|
140,092,000 | 102,826,000 | ||||||
F -
28
|
(5)
|
Accrued
Expenses
|
Accrued
expenses consisted of the following as of September 30, 2008:
|
Accrued
payroll and payroll taxes
|
$ | 451,485 | ||
|
Accrued
lawsuit liability
|
385,000 | |||
|
Accrued
warranty and manufacturing costs
|
291,423 | |||
|
Accrued
board of directors fees
|
205,000 | |||
|
Accrued
outside services costs
|
118,665 | |||
|
Accrued
interest
|
97,383 | |||
|
Accrued
legal and consulting fees
|
91,720 | |||
|
Accrued
bonuses
|
83,763 | |||
|
Accrued
commissions and other costs
|
56,828 | |||
|
Total
accrued expenses
|
$ | 1,781,267 |
|
(6)
|
Bank
Line of Credit
|
During
the year ended September 30, 2008, the Company paid off a $4,000,000 line of
credit and established a new line of credit for $3,600,000 with the same
bank. The interest rate is 7% and the line of credit matures on March
1, 2009. The line of credit is secured by letters of credit for a
total of $3,600,000 and SecureAlert’s assets including TrackerPAL
products. The letters of credit were provided as collateral by four
unrelated entities. The entities received a total of 360,000
restricted shares of the Company’s common stock valued at $403,200 and were
reimbursed approximately $33,000 in cash for expenses related to establishing
the letters of credit. In addition, the Company pays 11% annual
interest rate, paid monthly, on the line of credit to the entities that provided
the letters of credit. As of September 30, 2008, the outstanding
balance of the line of credit was $3,462,285 and was due and payable on March 1,
2009.
|
(7)
|
Related
Party Transactions
|
The
Company has entered into certain transactions with related parties. These
transactions consist mainly of financing transactions and consulting
arrangements.
Related-Party
Line of Credit
As of
September 30, 2008, the Company owed $542,804 to ADP Management, an entity owned
and controlled by two of the Company’s officers and directors, Mr. Derrick and
Mr. Dalton, under a line-of-credit agreement. Outstanding amounts on
the line of credit accrue interest at 11% per annum and are due on August 31,
2009. During the year ended September 30, 2008, the line of credit
increased $1,318,433 due to a monthly management fee owed to ADP Management,
including salaries for Mr. Derrick and Mr. Dalton, expenses incurred by ADP
Management that are reimbursable by the Company of $618,433, and $700,000 in
cash. The Company made cash repayments during the year of $975,641.
Related-Party
Note Payable
In
September 2008, the Company borrowed $250,000 from Randy Olshen, the former
President of SecureAlert. The unsecured note payable accrues interest
at 11% and is due and payable on December 31, 2009 or upon demand whichever
comes first. As of September 30, 2008, the Company owed $250,000 to
Randy Olshen.
Note
Receivable from Gary Bengtson
The
Company acquired a 51% ownership in Midwest Monitoring & Surveillance, Inc.
(“Midwest”) effective December 1, 2007. Prior to the date of
acquisition, Midwest had entered into a loan arrangement with Gary Bengtson, the
Chief Financial Officer of Midwest. As of September 30, 2008, Mr.
Bengtson owed the Company $55,385. The note receivable accrues interest at 12%
and is due and payable on March 31, 2009.
F -
29
Consulting
Arrangements
In March
2000, the Company agreed to pay consulting fees to ADP Management for assisting
the Company to develop its new business direction and business plan and to
provide introductions to strategic technical and financial
partners. Under the terms of this agreement, ADP Management was paid
a consulting fee of $40,000 per month and the Company agreed to reimburse the
expenses incurred by ADP Management in the course of performing services under
the consulting arrangement.
The ADP
Management agreement also requires ADP Management to pay the salaries of Mr.
Derrick as Chief Executive Officer and Chairman of the Board of Directors of the
Company and Mr. Dalton as president and Vice-Chairman of the Board of Directors
of the Company. The Board of Directors, which at the time did not
include either of these individuals, approved both of these
arrangements.
Effective
April 1, 2008, ADP Management allocated the $40,000 consulting fee between
Volu-Sol and the Company resulting in a monthly charge of $20,000 for each
company. Therefore, beginning October 1, 2008, the Company will be charged
$20,000 per month and reimbursable expenses as provided under the consulting
arrangement.
During
the year ended September 30, 2008, the Company issued 1,000,000 shares valued at
$1.52 per share to prepay services to ADP Management which will be reflected in
future periods. As of September 30, 2008, the remaining deferred
compensation was $1,460,000.
(8) Debt
Obligations
Debt
obligations as of September 30, 2008 and 2007 consisted of the
following:
|
September
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
SecureAlert,
Inc.
|
||||||||
|
Unsecured
note payable to a former subsidiary bearing interest at 5%. The
note matures on December 31, 2009.
|
$ | 598,793 | $ | - | ||||
|
Unsecured
notes payable to former SecureAlert stockholders, with interest at 5.00%,
payable in installments of $80,000 per month until paid in
full. These notes are currently in default, although these
notes are subject to an offset provision which has never been provided to
the Company.
|
169,676 | 169,676 | ||||||
|
Court
Programs
|
||||||||
|
Note
payable due to the Small Business Administration (“SBA”). Note
bears interest at 6.04% and matures on April 6, 2037. The note
is secured by monitoring equipment.
|
229,100 | - | ||||||
F -
30
|
September
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Unsecured
revolving lines of credit with two banks, with interest rates between 6.60
% and 13.49%.
|
48,499 | - | ||||||
|
Unsecured
notes payable with interest rates between 7% and 8%.
|
16,028 | - | ||||||
|
Midwest
|
||||||||
|
Notes
payable to a financial institution bearing interest at
8.41%. Notes mature in July 2011 and July 2016. The
notes are secured by property.
|
247,675 | - | ||||||
|
Notes
payable for monitoring equipment. Interest rates range between
7.8% to 18.5% and mature September 2008 through November
2011. The notes are secured by monitoring
equipment.
|
199,747 | - | ||||||
|
Automobile
loans with several financial institutions secured by the
vehicles. Interest rates range between 6.9% and 8.5%, due
between January 2009 and October 2011.
|
43,570 | - | ||||||
|
Note
payable to a stockholder of Midwest. The note bears interest at
5% maturing on February 2013.
|
59,958 | - | ||||||
|
Total
debt obligations
|
$ | 1,613,046 | $ | 169,676 | ||||
|
Less
current portion
|
(465,664 | ) | (169,676 | ) | ||||
|
Long-term
debt, net of current portion
|
$ | 1,147,382 | $ | - | ||||
(9) Preferred
Stock
The
Company is authorized to issue up to 20,000,000 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 10 % Convertible Non-Voting Preferred Stock
The
Company has designated 40,000 shares of preferred stock as Series A 10%
Convertible Non-Voting Preferred stock ("Series A Preferred stock"). As of
September 30, 2008, there were 19 shares of Series A Preferred Stock
outstanding, which represent 7,178 common stock equivalents at a conversion rate
of 370 for 1.
Dividends
The
remaining holder of the Series A Preferred stock, is entitled to dividends at
the rate of 10% per year on the stated value of the Series A Preferred stock (or
$200 per share), payable in cash, additional shares of Series A Preferred stock,
or common shares of RemoteMDx at the discretion of the Board of Directors.
Dividends are fully cumulative and accrue from the date of original issuance to
the holders of record as recorded on the books of the Company at the record date
or date of declaration if no record date is set. During the years
ended September 30, 2008 and 2007, the Company recorded $423 and $160,638 in
dividends on Series A Preferred stock, respectively.
Convertibility
Series A
Preferred Stock is convertible at 370 shares of common stock for each share of
Series A Preferred stock. During the year ended September 30, 2008,
no shares of Series A Preferred stock were converted into shares of common
stock. During the year ended September 30, 2007, 18,093 shares of
Series A Preferred stock were converted into 6,694,329 shares of common
stock. As of September 30, 2008, there were 19 shares of Series A
Preferred stock outstanding, which may convert into 7,178 shares of common
stock.
F -
31
Voting Rights and
Liquidation Preference
The
holders of Series A Preferred stock have no voting rights and are entitled to a
liquidation preference of $2.00 per share plus unpaid dividends multiplied by
133%.
Optional
Redemption
The
Company may, at its option, redeem up to two-thirds of the total number of
shares of Series A Preferred stock at any time. As of September 30, 2008, the
redemption price was 133% of the conversion price of Series A Preferred stock;
however, the Company may designate a different and lower conversion price for
all shares of Series A Preferred stock called for redemption by the Company.
Through September 30, 2008, the Company has not exercised its option to redeem
shares of Series A Preferred stock.
Issuances of Series A
Preferred Stock
During
the years ended September 30, 2008, 2007 and 2006, the Company had recorded and
issued 0, 802 and 2,146 shares, respectively, of Series A Preferred stock for
payment of Series A accrued dividends.
Series
B Convertible Preferred Stock
On June
7, 2001, the holders of the Company's Series A Preferred stock approved the
designation of 2,000,000 shares of a preferred stock, the Series B Convertible
Preferred stock ("Series B Preferred stock") previously approved by the
Board of Directors.
Dividends
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 dividends to common stock, and subject to the preferences of the
holders of the Series A Preferred stock.
Convertibility
Each
share of Series B Preferred stock is convertible at any time into shares of
common stock at an initial rate of $3.00 per share of common. 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. The Company has issued shares of common stock or securities
convertible into common stock for consideration per share less than $3.00 per
share. 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 issued. During the year ended
September 30, 2008, 2007 and 2006, 2,000, 40,333 and 1,315,825 shares converted
into 15,000, 351,824 and 7,171,380 shares of common stock. As of September 30,
2008, there were 10,999 shares of Series B Preferred stock outstanding, which
may convert into 113,783 shares of common stock.
Voting Rights and
Liquidation Preference
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 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.
Optional
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.
Series
C Convertible Preferred Stock
The
Company has designated 7,357,144 shares of preferred stock as Series C
Convertible Preferred stock, $.0001 par value per share. During the
year ended September 30, 2006, the Company issued 5,357,143 shares of Series C
Preferred stock for $7,439,558 in cash and $1,037,152 from conversion of debt
and accrued interest.
Convertibility
One share
of Series C Preferred stock is convertible into three shares of the Company’s
common stock, subject to adjustments. During the years ended September 30, 2008,
2007 and 2006, the holders of Series C Preferred stock converted 0, 5,764,488
and 0 shares of Series C Preferred stock into 0, 17,293,463 and 0 shares of
common stock.
F -
32
Dividends
The stock
has an 8% dividend that may be paid in cash or additional shares of Series C
Preferred stock at the option of the Company. During the years ended
September 30, 2008, 2007 and 2006, the Company recorded $0, $389,965 and
$294,379 in dividends on Series C Preferred stock, respectively. For
the years ended September 30, 2008, 2007, and 2006 the Company issued 0, 232,122
and 175,226 shares, respectively of Series C Preferred stock for
dividends.
Voting Rights and
Liquidation Preference
Holders
of shares of Series C Preferred stock are entitled to one vote per share of
Series C Preferred stock on all matters upon which holders of the common stock
of the Company are entitled to vote. Generally the holders of Series C Preferred
stock are entitled to a liquidation preference of $1.68 per share, plus all
accrued and unpaid dividends. For purposes of this liquidation
preference, the Series C Preferred stock ranks on a parity with the Series B
Preferred stock.
Optional
Redemption
The
Company may redeem the Series C Preferred stock at its option at any
time. The redemption price payable by the Company shall be equal to
the greater of (a) $4.00 plus any and all accrued dividends or (b) 110% of the
current Conversion Price per share at the time of the redemption, as adjusted
for stock dividends, stock splits, stock combinations, other dividends or
distributions, reclassifications, exchanges, or substitutions plus any and all
accrued dividends.
During
the year ended September 30, 2007, the Company sent out a letter to all Series C
Preferred stockholders giving them notice to redeem all Series C Preferred
stock. The holders were required to convert their shares of Series C
Preferred stock into common stock or redeem them for $4 per
share. During the year ended September 30, 2007, 5,764,488 shares of
Series C Preferred shares converted into 17,293,463 shares of common
stock. As of September 30, 2008, there were no shares of Series C
Preferred stock outstanding.
|
(10)
|
SecureAlert
Preferred Stock
|
SecureAlert,
Inc. Series A Preferred Shares
During
the year ended September 30, 2007, and pursuant to Board of Directors approval,
the Company amended the articles of incorporation of its subsidiary,
SecureAlert, Inc. to establish 3,590,000 shares of preferred stock designated as
Series A Convertible Redeemable Non-Voting Preferred stock (“SecureAlert Series
A Preferred stock”).
Dividends
The
holders of shares of SecureAlert Series A Preferred stock shall be entitled to
receive quarterly dividends out of any of SecureAlert’s assets legally available
therefore, prior and in preference to any declaration or payment of any dividend
on the common stock of SecureAlert, at the rate of $1.54 per day times the
number of SecureAlert’s parolee contracts calculated in days during the
quarter. For example, if there were an average of 10,000 parolee
contracts outstanding during the quarter, the total dividend would be $1,386,000
($1.54 x 90 days x 10,000 contracts) or $0.386 per share of SecureAlert Series A
Preferred stock. In no case will a dividend be paid if the gross
revenue per contract per day to SecureAlert averages less than
$4.50. Dividends will be paid in cash to the holders of record of
shares of SecureAlert Series A Preferred stock as they appear on the books and
records of SecureAlert on such record dates not less than ten (10) days nor more
than sixty (60) days preceding the payment dates thereof, as may be fixed by the
Board of Directors of the Company.
During
the years ended September 30, 2008 and 2007, the Company recorded $344,933 and
$306,242 in dividends on SecureAlert Series A Preferred stock.
Convertibility
As a
group, all SecureAlert Series A Preferred stock may be converted at the holder’s
option at any time into an aggregate of 20% ownership of the common shares of
SecureAlert, Inc.
As of
September 30, 2007, the total outstanding SecureAlert Series A Preferred shares
were 3,590,000. Because the preferred stock sold was Series A
Preferred stock of the Company’s subsidiary, SecureAlert, Inc., the
consideration received from the sale has been recorded similar to minority
interest as a separate component of the balance sheet outside of permanent
equity.
On March
24, 2008, SecureAlert redeemed all outstanding shares of SecureAlert Series A in
exchange for 7,434,249 shares of RemoteMDx common stock for a value of
$8,549,386. The former SecureAlert Series A stockholders are entitled
to receive quarterly contingency payments through March 23, 2011 based on a rate
of $1.54 per day times the number of SecureAlert’s parolee contracts calculated
in days during the quarter. As of September 30, 2008, the Company has
estimated and accrued $3,244,758 for future contingency
payments. This can be paid in either cash or common stock at the
Company’s option. The Company will make quarterly adjustments as necessary to
reflect the difference between the estimated and actual contingency payments to
the former SecureAlert Series A stockholders. During the year ended
September 30, 2008, RemoteMDx issued 825,893 shares of common stock as
consideration for dividends due to the former SecureAlert Series A stockholders,
and recorded a net expense of $8,372,566 from the initial redemption and
subsequent quarterly adjustments.
F -
33
|
(11)
|
Minority
Interest
|
In
January 2007, Messrs. Derrick and Dalton exercised their previously granted
right (which was granted in February 2006) to purchase from the Company
1,250,000 shares of Volu-Sol common stock for cash proceeds of $400,000 or $0.32
per share. Prior to the sale, the Company owned 100% of Volu-Sol
common stock. The sale decreased the Company’s ownership to
70%. During the year ended September 30, 2007, the Volu-Sol had a
forward stock split at a ratio of 8.333 to 1 per share of common
stock.
During
the year ended September 30, 2007, the Company issued 1,687,500 shares of common
stock, with a three year anti-dilution provision, for net cash proceeds of
$1,150,000, or $0.68 per share, to various stockholders. These
transactions decreased the Company’s ownership of Volu-Sol to 50%.
During
the year ended September 30, 2008, Volu-Sol issued 2,690,972 shares of its
common stock for net cash proceeds of $2,198,333. In addition,
Volu-Sol issued 437,500 shares of its common stock for services valued at
$350,000, or $0.80 per share. As of September 30, 2008, Volu-Sol had
a total of 8,982,639 shares outstanding. As of September 30, 2008,
RemoteMDx owned 1,416,667 shares of Volu-Sol’s common stock, or 16% of the
outstanding shares. During the year ended September 30, 2008, the
Volu-Sol had a reverse stock split at a ratio of 2 to 1 per share of common
stock.
In
September 2008, Volu-Sol filed a Form S-1with the Securities and Exchange
Commission reporting the Company’s intent to spin-off Volu-Sol by distributing
Volu-Sol shares still held by the Company to existing RemoteMDx stockholders. As
a result, minority interest for Volu-Sol was $0 at the year ended September 30,
2008.
|
(12)
|
Common
Stock
|
Authorized
Shares
The
Company is authorized to issue up to 175,000,000 shares of common
stock.
Common
Stock Issuances
During
the year ended September 30, 2008, the Company issued 28,541,175 shares of
common stock. Of these shares, 15,000 shares were issued upon
conversion of 2,000 shares of Series B Preferred stock; 325,000 shares were
issued upon settlement of a lawsuit; 360,000 shares were issued for debt;
9,235,000 shares were issued for services in the amount of $15,974,585;
6,077,219 shares were issued for cash proceeds of $5,057,914; 650,000 shares
were issued in connection with the acquisition of Midwest and Court Programs;
825,893 shares were issued for SecureAlert Series A Preferred stock dividends;
7,434,249 shares were issued to redeem SecureAlert Series A Preferred stock; and
3,618,814 shares were issued from the exercise of options and
warrants.
During
the year ended September 30, 2007, the Company issued 47,205,232 shares of
common stock. Of these shares, 6,694,329 shares were issued upon
conversion of 18,093 shares of Series A Preferred stock; 351,824 shares were
issued upon conversion of 40,333 shares of Series B Preferred stock; 17,293,463
shares were issued upon conversion of 5,764,488 shares of Series C Preferred
stock; 750,000 shares were issued pursuant to a registration payment
arrangement; 500,000 shares were issued to a related party to increase the line
of credit; 3,067,853 shares were issued for services in the amount of
$4,837,883; 3,081,000 shares were issued for cash proceeds of $6,162,000; and
15,466,763 shares were issued from the exercise of options and
warrants.
During
the year ended September 30, 2006, the Company issued 35,005,811 shares of
common stock. 5,846,428 shares were issued for services in the amount
of $3,983,607, 4,014,916 shares were issued upon the conversion of 10,843 shares
of Series A Preferred Stock, 7,171,380 shares were issued upon the conversion of
1,315,825 shares of Series B Preferred Stock, 10,739,753 shares were issued for
debt and accrued interest of $7,893,782, 350,000 were issued from the exercise
of options and warrants, and the remaining 6,883,334 were issued for
cash.
As of
September 30, 2008, the Company was authorized to issue 175,000,000 shares of
common stock. Subsequent to the fiscal year 2008, holders of a
majority of the issued and outstanding shares of the Company’s common stock
consented to the increase of the number of authorized shares of common stock
from 175,000,000 to 250,000,000 shares. Amended Articles of
Incorporation for the Company to increase the authorized shares will be filed as
soon as reasonably practical.
F -
34
|
(13)
|
Options
and Warrants
|
Stock
Incentive Plan
During
the year ended September 30, 2006, the stockholders approved the 2006 Equity
Incentive Award Plan (the “2006 Plan”). The 2006 Plan provides for
the grant of incentive stock options and nonqualified stock options, restricted
stock, stock appreciation rights, performance shares, performance stock units,
dividend equivalents, stock payments, deferred stock, restricted stock units,
other stock-based awards and performance-based awards to employees and certain
non-employees who have important relationships with the Company. A
total of 10,000,000 shares are authorized for issuance pursuant to awards
granted under the 2006 Plan. During the year ended September 30,
2008, the Company granted 6,752,869 options under this plan.
|
Number
of
Options
and
Warrants
|
Exercise
Price
Per
Share
|
|||||||
|
Outstanding
as of September 30, 2006
|
21,597,392 | $ | .54 to 3.00 | |||||
|
Granted
|
13,509,000 |
1.23
to 2.15
|
||||||
|
Expired
or cancelled
|
(751,733 | ) |
.60
to 3.00
|
|||||
|
Exercised
|
(15,466,763 | ) |
.50
to 1.85
|
|||||
|
Outstanding
as of September 30, 2007
|
18,887,896 |
.54
to 3.00
|
||||||
|
Granted
|
6,752,869 |
.59
to 4.05
|
||||||
|
Expired
or cancelled
|
(296,500 | ) |
.60
to 3.00
|
|||||
|
Exercised
|
(3,618,814 | ) |
.54
to 1.73
|
|||||
|
Outstanding
as of September 30, 2008
|
21,725,451 | $ | .56 to 4.05 | |||||
The
following table summarizes information about stock options and warrants
outstanding as of September 30, 2008:
|
Options
and Warrants
|
Options
and Warrants
|
||||||||||||||||||
|
Outstanding
|
Exercisable
|
||||||||||||||||||
|
Weighted
|
|||||||||||||||||||
|
Average
|
|
||||||||||||||||||
|
Remaining
|
|
Weighted
|
|
Weighted
|
|||||||||||||||
|
Range
of
|
Contractual
|
Average
|
Average
|
||||||||||||||||
|
Exercise
|
Number
|
Life
|
Exercise
|
Number
|
Exercise
|
||||||||||||||
|
Prices
|
Outstanding
|
(Years)
|
Price
|
Exercisable
|
Price
|
||||||||||||||
|
$0.00
- $0.60
|
4,008,135
|
3.48
|
$
0.58
|
2,299,802
|
$
0.56
|
||||||||||||||
|
0.61
– 1.20
|
2,670,000
|
2.43
|
1.00
|
2,070,000
|
|
|
1.00
|
||||||||||||
|
1.21
– 4.05
|
15,047,316
|
2.84
|
1.81
|
13,535,649
|
|
1.83
|
|||||||||||||
As of
September 30, 2008, 17,905,451 of the 21,725,451 outstanding options and
warrants were vested.
During
the year ended September 30, 2008, the Company issued 6,752,869 common stock
options and warrants as follows: 1,670,000 in connection with the sale of common
stock, 1,725,000 to employees (275,000 have vested and 1,450,000 are unvested),
1,169,869 to consultants, and 2,188,000 to the Board of
Directors. The exercise prices range from $0.59 to $4.05 per
share. The exercise price for the options granted during the year
ended September 30, 2008 were based upon the quoted market price of the
Company’s shares on the date of grant.
During
the year ended September 30, 2007, the Company issued 13,509,000 common stock
options and warrants as follows: 7,189,000 in connection with the sale of common
stock, 320,000 to employees, 350,000 to consultants, 650,000 to the Board of
Directors, and 5,000,000 to related parties (David Derrick and James
Dalton). The exercise prices range from $1.23 to $2.15 per
share. The exercise price for the options granted during the year
ended September 30, 2007 were based upon the quoted market price of the
Company’s shares on the date of grant.
F -
35
|
(14)
|
Income
Taxes
|
The
Company recognizes deferred income tax assets or liabilities for the expected
future tax consequences of events that have been recognized in the financial
statements or income tax returns. Deferred income tax assets or liabilities are
determined based upon the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates expected to apply when
the differences are expected to be settled or realized. Deferred
income tax assets are reviewed periodically for recoverability and valuation
allowances are provided as necessary. Interest and penalties related
to income tax liabilities, when incurred, are classified in interest expense and
income tax provision, respectively.
For the
years ended September 30, 2008, 2007 and 2006, the Company incurred net losses
of $49,587,050, $26,370,571 and $23,797,745, respectively, for income tax
purposes. The amount and ultimate realization of the benefits from
the net operating losses is dependent, in part, upon the tax laws in effect, the
Company's future earnings, and other future events, the effects of which cannot
be determined. The Company has established a valuation allowance for
all deferred income tax assets not offset by deferred income tax liabilities due
to the uncertainty of their realization. Accordingly, there is no
benefit for income taxes in the accompanying statements of
operations.
At
September 30, 2008, the Company had net carryforwards available to offset future
taxable income of approximately $136,045,000 which will begin to expire in
2018. The utilization of the net loss carryforwards is dependent upon
the tax laws in effect at the time the net operating loss carryforwards can be
utilized. The Internal Revenue Code contains provisions that likely
could reduce or limit the availability and utilization of these net operating
loss carryforwards. For example, limitations are imposed on the
utilization of net operating loss carryforwards if certain ownership changes
have taken place or will take place. The Company will perform an
analysis to determine whether any such limitations have occurred as the net
operating losses are utilized.
Deferred
income taxes are determined based on the estimated future effects of differences
between the financial statement and income tax reporting bases of assets and
liabilities given the provisions of currently enacted tax laws and the tax rates
expected to be in place.
The
deferred income tax assets (liabilities) were comprised of the following at
September 30:
|
2008
|
2007
|
2006
|
||||||||||
|
Net
loss carryforwards
|
$ | 42,560,000 | $ | 32,524,000 | $ | 22,923,000 | ||||||
|
Depreciation
and reserves
|
20,000 | 490,000 | 7,000 | |||||||||
|
Accruals
and reserves
|
4,000 | 54,000 | 53,000 | |||||||||
|
Valuation
allowance
|
(42,536,000 | ) | (33,068,000 | ) | (22,863,000 | ) | ||||||
|
|
$ | - | $ | - | $ | - | ||||||
Reconciliations
between the benefit for income taxes at the federal statutory income tax rate
and the Company's benefit for income taxes for the years ended September 30,
2008, 2007 and 2006 are as follows:
|
2008
|
2007
|
2006
|
||||||||||
|
Federal
income tax benefit at statutory
rate
|
$ | 7,438,000 | $ | 8,966,000 | $ | 8,092,000 | ||||||
|
State
income tax benefit, net of federal
income tax effect
|
2,107,000 | 1,318,000 | 1,190,000 | |||||||||
|
Loss
on non-deductible expenses
|
(77,000 | ) | (79,000 | ) | (118,000 | ) | ||||||
|
Change
in valuation allowance
|
(9,468,000 | ) | (10,205,000 | ) | (9,164,000 | ) | ||||||
|
|
||||||||||||
|
Benefit
for income taxes
|
$ | - | $ | - | $ | - | ||||||
F -
36
|
(15)
|
Commitment
and Contingencies
|
Legal
Matters
Satellite Tracking of
People, L.L.C. (a/k/a STOP, LLC) and Michelle Enterprises, LLC v. Pro Tech
Monitoring, Inc., Omnilink Systems, Inc., and SecureAlert: A patent
infringement suit was filed against the Company and other defendants in the
United States District Court for the Eastern District of Texas on March 19,
2008. Plaintiffs have alleged that the Defendants infringe United States
Patent No. RE39,909 ('909 Patent), Tracking System for Locational
Tracking of Monitored Persons. On May 14, 2008, the Company
answered the complaint, denying Plaintiffs allegations and asserting various
affirmative defenses. The Company also asserted a counterclaim for declaratory
judgment that the Company has not infringed the '909 Patent and that the patent
is invalid. The Company intends to vigorously defend the case and prosecute its
counterclaim. The Company has not accrued any potential loss as the probability
of incurring a material loss is deemed remote by management, after consultation
with legal counsel.
RemoteMDx, Inc. v. Satellite
Tracking of People, L.L.C. (a/k/a STOP, LLC): The Company
filed a patent infringement suit against STOP in the United States District
Court for the Central District of California on May 2, 2008. The
Company has asserted that STOP infringes United States Patent No. 7,330,122 for
a remote tracking and communication device and method for processing data from
the device ("'122 patent"), in which the Company holds all rights and
interests. STOP moved to dismiss the original complaint and also
filed an answer and counterclaim. The motion to dismiss was granted
with leave to amend. The Company filed an amended complaint on August
5, 2008. The amended complaint seeks damages for infringement
according to proof, treble damages, injunctive relief enjoining the
infringement, and costs and attorney's fees. STOP's counterclaim is
for declaratory relief, seeking a declaration that STOP has not infringed the
'122 patent and that the '122 patent is invalid. The Company filed an answer to
the counterclaim. The Company intends to vigorously prosecute its
claims and defend against the counterclaim. The Company has not accrued any
potential loss as the probability of incurring a material loss is deemed remote
by management, after consultation with legal counsel.
Strategic Growth
International, Inc., v. RemoteMDx: This action was filed in
response to an action previously filed by the Company against Strategic Growth
International, Inc. ("SGI") in Utah. The action arises out of a
contract between SGI and the Company for certain investor relations related
services to be performed by SGI. SGI and its principals' original
complaint alleged a single claim for Breach. On October 29, 2007, the
Company amended its Answer and Counterclaims to assert an additional claim
against SGI for fraudulent inducement, seeking rescission of its contract with
SGI and the return of amounts the Company paid SGI under the
contract. On December 31, 2007, the Company filed a motion for
summary judgment on its fraudulent inducement claim. On January 18,
2008, SGI filed a cross-motion for partial summary judgment. On April
17, 2008, SGI amended its complaint to assert a claim for conversion with
respect to the options and shares which are the subject of SGI's breach of
contract claim. On May 2, 2008, the Company filed a motion to dismiss
the conversion claim. On April 23, 2008, SGI sought an order
permitting the attachment of the Company's assets in the State of New
York. In December 2008, the Company has verbally agreed to settle
this lawsuit for 1,200,000 restricted shares of the Company’s common stock
valued at $360,000, or $0.30 per share and $25,000 in cash. The
shares have piggyback registration rights and are protected against any
potential reverse stock splits. The Company has accrued $385,000 to
settle this lawsuit.
Frederico and Erica
Castellanos, v. Volu-Sol, Inc. On August 15, 2008, plaintiffs
Frederico and Erica Castellanos filed a lawsuit in the Superior Court of the
State of California, Los Angeles County. The complaint names
twenty-four Defendants and one hundred unnamed Doe Defendants. The
complaint asserts claims for negligence, strict liability - failure to warn,
strict liability - design defect, fraudulent concealment, breach of implied
warranties, and loss of consortium based on Mr. Castellanos' alleged exposure to
certain chemicals during the course of his employment. One of the
original named Defendants was Logos Scientific, Inc. On September 4,
2008, Plaintiffs amended their complaint to substitute "Volu-Sol, Inc. as
successor in interest to Logos Scientific, Inc." for the previously unnamed Doe
1. Volu-Sol, Inc. was the original name of RemoteMDx,
Inc. The Company intends to vigorously defend itself against
Castellanos’ claims. The Company has not accrued any potential loss
as the probability of incurring a material loss is deemed remote by management,
after consultation with legal counsel.
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Thomas Natale v.
RemoteMDx. This non-payment of certain obligations suit was
filed against the Company and other defendants, including ADP Management Corp.,
James Dalton and David Derrick in the United States District Court for the
Eastern District of Tennessee on August 18, 2008. The Plaintiff has
alleged that the Defendants owe him certain back amounts of bonuses, interest
and note payables. Management has been advised that a similar action has been
filed by Edward Boling. The Company has answered the complaint and discovery is
ongoing. The Company intends to vigorously defend the case and prosecute its
counterclaim. The Company has not accrued any potential loss as the probability
of incurring a material loss is deemed remote by management, after consultation
with legal counsel.
SecureAlert, v. David Ezell,
et al. The Company has filed a claim against David Ezell and
several related entities for breach of contract, unjust enrichment, conversion,
and punitive damages, and seeks approximately $290,810 in damages, as well as
other amounts to be proven at trial. The case is in the discovery
stage. After consultation with legal counsel, the Company has not
accrued for any potential recovery or any material loss associated with this
claim.
Lease
Obligations
The
following table summarizes the Company’s contractual obligations as of September
30, 2008:
|
Years
|
Total
|
SecureAlert
|
Midwest
|
Court
Programs
|
||||||||||||
|
2009
|
$ | 533,493 | $ | 402,509 | $ | 14,128 | $ | 116,856 | ||||||||
|
2010
|
354,027 | 262,894 | 11,124 | 80,009 | ||||||||||||
|
2011
|
308,825 | 267,173 | 3,744 | 37,908 | ||||||||||||
|
2012
|
279,162 | 268,362 | - | 10,800 | ||||||||||||
|
2013
|
267,882 | 267,882 | - | - | ||||||||||||
|
2014
|
60,537 | 60,537 | - | - | ||||||||||||
|
Total
|
$ | 1,803,926 | $ | 1,529,357 | $ | 28,996 | $ | 245,573 | ||||||||
The total
contractual obligations of $1,803,926 consist of the following: $1,554,667 from
facilities operating leases and $249,259 from equipment
leases. During the years ended 2006, 2007 and 2008, the Company paid
approximately $191,000, $284,000, and $536,000 in lease payment obligations,
respectively.
Indemnification
Agreements
In
November 2001, the Company's Board of Directors agreed that the Company would
indemnify officers and directors of the Company against personal liability
incurred by them in the conduct of their duties for the Company. In the event
that any of the officers or directors of the Company are sued or claims or
actions are brought against them in connection with the performance of their
duties and the individual is required to pay an amount, the Company will
immediately repay the obligation together with interest thereon at the greater
of 10% per year or the interest rate of any funds borrowed by the individual to
satisfy their liability.
Cellular
Access Agreement
During
the year ended September 30, 2006, the Company entered into several agreements
with cellular organizations to provide communication services. The cost to the
Company during the years ended September 30, 2008, 2007 and 2006 was
approximately $2,940,000, $2,593,000 and $290,000, respectively.
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|
(16)
|
Subsequent
Events
|
Subsequent
to September 30, 2008, the following events occurred:
|
1)
|
On
November 17, 2008, the Company’s Chief Financial Officer and Chief
Operating Officer Blake Rigby resigned. Mr. Rigby indicated he was
stepping down to pursue other interests. He had served in the
position since June 2008. No severance or other obligations were incurred
by the Company in connection with the departure of Mr.
Rigby.
|
|
Effective
November 20, 2008, the Board of Directors of the Company appointed John L.
Hastings, III to the additional position of Chief Operating Officer,
recently vacated by Mr. Rigby. Mr. Hastings also will continue to serve as
the Company’s President. No change will be made in the
compensation of Mr. Hastings in connection with this expanded role in the
Company.
|
|
|
Also
effective November 20, 2008, the Board of Directors of the Company
appointed Michael G. Acton to the position of Chief Financial
Officer. Mr. Acton also is the Chief Financial Officer of
Volu-Sol Reagents Corporation, a former subsidiary of the
Company. From 1999 until June 2008, Mr. Acton was
Secretary-Treasurer of the Company; he served as the Company’s Chief
Financial Officer from March 2001 until June 2008. He is a
Certified Public Accountant in the State of
Utah.
|
|
|
2)
|
The
Company’s subsidiary SecureAlert down-sized its workforce by
approximately 21% (26 persons) during the first two weeks of November 2008
as part of a restructuring plan, which began in October 2008. The Company
implemented this restructuring with the goal of increasing operating
efficiencies while reducing operating expenses and improving gross margins
and cash flows during the fiscal year ending September 30,
2009.
|
|
3)
|
On
November 21, 2008, the Company borrowed $1,000,000 from its Chief
Executive Officer and Chairman, David G. Derrick, pursuant to a Promissory
Note (the “Note”). This unsecured loan is intended to bridge the device
procurement, accelerated and expanded manufacturing and short-term
financial needs of the Company until the completion of a private round of
debt financing, which is presently being conducted by the
Company. Terms of the transaction are consistent with the terms
offered to third-party financing sources in recent
transactions. The Note bears interest at an annual percentage
rate of 15% and is due and payable the earlier of the receipt of a minimum
of $1,000,000 in new financing, or seventy-five (75) days from
origination. Net proceeds to the Company after payment of a 5%
initiation fee paid to Mr. Derrick were $950,000. The Company
also agreed to issue 100,000 shares of common stock to Mr. Derrick as
additional consideration for extending the loan to the
Company. As of the date of this Report, the 100,000 shares of
common stock have not yet been issued. The Company may prepay
the Note at any time without penalty or further interest
obligation. The transaction was reviewed and approved by the
Audit Committee of the Company’s Board of Directors.
|
|
4)
|
In
December 2008, the Company verbally agreed to settle a lawsuit with
Strategic Growth International, Inc. for 1,200,000 restricted shares of
the Company’s common stock valued at $360,000, or $0.30 per share and
$25,000 in cash. The shares will have piggyback registration
rights and be protected against any potential reverse stock
splits.
|
|
5)
|
As
of September 30, 2008, the Company was authorized to issue 175,000,000
shares of common stock. Subsequent to the fiscal year 2008, the
holders of a majority of issued and outstanding shares of the Company
consented to increase the authorized shares from 175,000,000 to
250,000,000. Amended Articles of Incorporation for the Company
to increase the authorized shares will be filed as soon as reasonably
practical.
|
|
6)
|
The
Company issued 350,000 shares of restricted common stock for cash proceeds
of $100,000, or approximately $0.29 per share. Additionally,
the Company issued 1,800,000 shares of restricted common stock to settle
payoff accounts payable balances with two vendors in the amount of
$440,000.
|
|
7)
|
On
December 22, 2008, Mr. Derrick rescinded 1,500,000 shares of common stock
which were granted in April 2008 valued at
$2,325,000. Additionally, Mr. Derrick also rescinded 1,000,000
warrants that were vested during the fiscal year ending September 30, 2008
valued at $1,934,162.
|
|
8)
|
On
December 22, 2008, Mr. Hastings rescinded 250,000 shares of common stock
which were granted in June 2008 valued at
$387,500. Additionally, Mr. Hastings also rescinded 250,000
warrants that were vested during the fiscal year ending September 30, 2008
valued at $337,113.
|
F -
39