Track Group, Inc. - Annual Report: 2009 (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, 2009
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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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o 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
definitions 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 o
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Non-accelerated
filer o
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Smaller
reporting company x
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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 211,765,988 shares of the registrant's common stock outstanding as of
December 29, 2009. The aggregate market value of common stock held by
non-affiliates of the registrant as of December 29, 2009 was approximately
$28,530,000.
FORM
10-K
For the
Fiscal Year Ended September 30, 2009
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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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11
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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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16
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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
7
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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21
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Item
8
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Financial
Statements and Supplementary Data
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30
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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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30
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Item
9A(T)
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Controls
and Procedures
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30
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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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31
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Item
11
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Executive
Compensation
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34
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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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40
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Item
13
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Certain
Relationships and Related Transactions, and Director
Independence
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41
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Item
14
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Principal
Accounting Fees and Services
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43
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Part
IV
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Item
15
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Consolidated
Financial Statements and Exhibits
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44
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Signatures
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2
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
Operations.” 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.
General
Unless
the context otherwise requires, all references in this report to "registrant,"
"we," "us," "our," "RemoteMDx" or the "Company" refer to RemoteMDx, Inc., a Utah
corporation and its subsidiary corporations.
RemoteMDx
and subsidiaries market and deploy offender management programs, combining
patented GPS (Global
Positioning System) tracking technologies, fulltime 24/7/365
intervention-based monitoring capabilities and case management
services. Our vision is to be the market leader for delivering
offender management solutions that integrate interaction
technologies. 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™
II and TrackerPAL™ IIe (“enhanced”), now manufactured in the USA – 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™ IIe is designed for federal, state and
local agencies to provide location tracking of select individuals in the
criminal justice system. The TrackerPAL™ IIe 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). This monitoring and intervention center acts as
an important link between the offender and the supervising officer as
intervention 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™ IIe unit promptly notifies the
monitoring center if any attempt is made to breach protocols or to remove or
otherwise tamper with the device or optical strap housing.
According
to the Bureau of Justice Statistics annual report March 2009 (available online
at http://bjs.ojp.usdoj.gov/), it is currently estimated that over 2.3 million
inmates, or one in every 131 U.S. residents, were held in custody in state or
federal prisons or in local jails. Nearly 5.1 million adults were under
community supervision at year-end 2008—the equivalent of about 1 in every 45
adults in the United States. Probationers (4,270,917) represented the
majority (84%) of the community supervision population in 2008; parolees
(828,169) accounted for a smaller share (16%). Sadly, approximately
7.4 million people are now either incarcerated (State or Federal prisons or
local jails) or on parole or probation. The average cost of
incarcerating an inmate ranges from $65 to $175 (plus) per day dependent upon
facility type, security level, amenities and jurisdiction. But this
annualized “equivalency” number pales in comparison to actual populations. The
Bureau of Justice Statistics also reports that over one-third of all inmates
held in custody at midyear 2008 were in local jails. More than half
(52%) were housed in the 180 largest jail facilities, with average daily
populations of 1,000 inmates or more. Overall, an estimated 13.6
million inmates were admitted to local jails during the 12-month period ending
June 30, 2008. Statistics for 2009 have not been published, but we
believe this number continues to grow and to push capacity and resource
levels.
Due to
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 or for roughly (1/3) one-third the variable
costs (inmate daily food, laundry, uniforms, medical, guard overtime, etc.), our
TrackerPAL™ monitoring and intervention center and patented TrackerPAL™ IIe
devices can monitor offenders continuously, providing real-time location
tracking, interactive voice access and intervention-based contact, thus reducing
the potential for subsequent or repeat offenses (recidivism).
3
The
ongoing budget crisis and the “Great Recession” have forced many jurisdictions
to embrace or reconsider embracing “offender pay”, “parent pay” and/or “partial
pay” programs, and in doing so, 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 30% of our gross
revenues (up from 20% in 2008) 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 continued support of ever-growing rehabilitation and re-socialization
efforts, we embrace a broader services charter, necessary 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. As it
stands, according to the Bureau of Justice Statistics’ report on recidivism, 65%
of offenders recommit a violation within three years of release and re-entry
(recidivism), which we believe can be dramatically reduced through the
utilization of monitoring services, intervention and interaction
technologies.
Critically,
we must focus on a reduction in recidivism and leveraging our technologies and
services to provide frameworks and foundations for stopping repeat and new
offenses of those offenders on our programs. For example, according
to the Bureau of Justice Statistics’ report on recidivism, of the 272,111
persons released from prisons in 15 states in 1994, an estimated 67.5% were
rearrested for a felony or serious misdemeanor within 3 years, 46.9% were
reconvicted, and 25.4% resentenced to prison for a new crime. Incredibly, after
15 years, the 272,111 offenders discharged in 1994 accounted for nearly
4,877,000 arrest charges over their recorded careers. Society simply
cannot sustain these financial costs or the victimization or re-victimization of
the public, which is why our programs are strategically and tactically
positioned to impact this number measurably.
As
identified, 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, we are
strategically positioned to capitalize on these public sector challenges. We
offer offender service offerings and tools to provide enhanced effectiveness and
coverage for agencies with reduced resources. This results in a force multiplier
effect that allows smaller or understaffed agencies to grow while reducing the
number of offenders using valuable resources. 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 of our program offerings in a mutual pursuit to reduce recidivism,
encourage re-socialization and to facilitate the earlier release of qualified
candidates.
During
fiscal year 2009, in response to these evolving market factors, we 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
hold a majority interest in two subsidiaries, which we believe will enable us to
increase our revenues in target markets. In addition, we extended the
exercise period of our options to acquire the remaining shares of both entities
into 2010. 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. 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 our
competitors
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Availability
of trained support personnel
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4
In
summary, during the fiscal year ended September 30, 2009, we were case managing
and/or electronically monitoring approximately 14,000 offenders domestically,
while also expanding our sales capabilities and initiatives
internationally. We have worked to build our domestic and
international direct sales force, while solidifying distributors and local
business partners opportunistically. We have entered into monitoring
agreements with approximately 450 law enforcement, judiciaries and bail bond
agencies throughout the United States. We continue to hold a majority
interest in two related businesses to further our efforts to increase our
revenues and market development and we now maintain 12 expanded
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 we are in a good position to move forward and to
continue the growth of the business and to take advantage of the market
opportunities open to us.
Our
Strategy
Our strategy is to empower law
enforcement, corrections and rehabilitation professionals with sole-sourced
offender management solutions that integrate reliable interaction technologies
in support of intervention and re-socialization initiatives. We will
grant offenders accountable opportunity, while providing for greater public
safety at a lower cost to incarceration or other service offerings.
We will
accomplish our strategy through the “value-driven”, yet profitable deployment of
a portfolio of proprietary and non-proprietary GPS/RF and/or alcohol and/or drug
tracking, real-time monitoring and intervention products and services to
corrections, probation, law enforcement and rehabilitation personnel 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 rates 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 and interactive
technology products and services, which meet the ever-changing needs of our
clients, while providing value-driven and enhanced public safety.
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, we expanded our product sales and monitoring
services related to the Personal Emergency Response Systems
(“PERS”).
In 2006,
we 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 interactive GPS
tracking products, worn on the body, that focus on the defendant and offender
tracking, monitoring and intervention marketplace.
To complement our own offerings and to
drive additional means of capturing a growth position in the offender management
market, in December of 2007, we acquired 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 us
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,
which remains an ongoing initiative.
5
Marketing
The sales momentum which started with
the release of TrackerPAL™ and the eArrest Beacon in 2008 continued in
2009. As anticipated, the number of agencies facing budget
constraints, while at the same time being required to take on increased case
loads, grew. These conflicting demands fueled the need of many
agencies to look at GPS monitoring as a solution.
A
particularly strong sector was juvenile corrections, including juvenile
probation departments and juvenile detention centers. It is widely
recognized that incarcerating juveniles can start a life-long pattern of
recidivism. This is created by first time and minor crime offenders’
affiliation with more seasoned offenders who have the means and contacts to
encourage and enable repeat crimes. Those in charge of juvenile law
enforcement and corrections recognize that in many cases, keeping youth at home
and in school is a better option. However, with reduced staff and
increased case loads, probation officers and other support staff find it harder,
if not impossible, to be effective. Many are recognizing that the
visibility that GPS monitoring provides can be a powerful
solution. Moreover, TrackerPAL’s unique two and three way on-device
calling feature takes that visibility to the next level by enabling supervisory
staff to communicate with the user wearing the device, any place, any
time. For many offenders, this feature is the only phone
communication available to them, not being able to afford either land or cell
phones and without the TrackerPAL™, officers would have far less contact with
their offenders. Also, the incarceration of juveniles costs
considerably more than adult incarceration – exceeding $500 per day in some
areas – so putting offenders on GPS monitoring instead of incarceration makes
financial sense as well. During the fiscal year ended September 30,
2009, we acquired several new juvenile corrections clients.
As
critical as our Intervention
Active Monitoring is for monitoring high risk and other offenders that
require intensive monitoring, less intense monitoring levels may be more
appropriate to address lower risk offenders and budget
constraints. To address this, we introduced two new service
offerings. These offerings, Passive Monitoring and Standard Active Monitoring,
utilize the same TrackerPAL™ devices as the flagship Intervention Active
Monitoring. Intervention Monitoring utilizes our SecureAlert
Monitoring Center to communicate with offenders and officers on a real-time
basis when an offender has a violation such as entering an exclusion zone (a
designated restricted area the offender is prohibited to enter under the terms
of his sentence). Like virtually all other active monitoring
offerings, the Standard Active level still provides real-time communications to
officers, but only through emails and texts. No live operators call
offenders or officers. The Passive level captures locations and
alarms on a real-time basis, and like other passive offerings, sends a report of
them each night. However, unlike competitors’ passive and basic
active monitoring products which only post location traces every few hours, all
of our monitoring options utilize the GPS technology in the TrackerPAL™ II
device to continuously track offenders’ movements and post them real time for
viewing anytime through the TrackerPAL™ II software. The eArrest
Beacon option is also available for all service levels. In addition,
unlike some competitive systems, no docking stations or landlines are required
for any of the levels. Conveniently, officers can transition
offenders to different monitoring levels via the TrackerPAL™ software; no
equipment change is required. This is a huge advantage as it
dramatically reduces the number of devices an agency has to keep on hand to be
proficient. Several existing as well as new customers have signed up
for the new service offerings.
Fiscal
year 2009 also saw many enhancements to our production and distribution
capabilities. In January 2009, we moved our final assembly and
distribution activities to a 6,152 foot warehouse and distribution
center. The new facility allowed us to bring all device refurbishment
activities in-house, saving not only time, but money in processing devices that
come back for stock rotation or refurbishment. The facility also
positions us for the growth we have planned over the next several
years.
We also
moved our manufacturing from Canada to contract manufacturer, Inovar Inc.
(“Inovar”), in Logan, Utah. Inovar is a provider of quality
electronic manufacturing services for the electronics, medical, military and
aerospace industries. In addition to facilitating design and testing
collaboration with us due to its proximity, Inovar provides other value added
services from which we will benefit. Inovar’s services include
materials procurement, printed circuit assembly, test and system build. This
complete offering of services will enable us to receive high quality at reduced
costs. Inovar’s location near the campus of Utah State University
also provides significant benefits. Inovar’s relationship with the
University provides it with a steady stream of labor, as well as access to one
of the most respected engineering schools in the world. Inovar is ISO
9001:2000 and ISO 13485:2003 certified.
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 fiscal year ended September
30, 2009, we spent $1,777,873 on research and development, compared to research
and development expenditures of $4,811,128 in the fiscal year ended September
30, 2008. These costs of $1,777,873 were to further develop our
TrackerPAL™ portfolio of products.
6
Monitoring
Center
As we developed prior product lines, we
simultaneously worked to create the SecureAlert Monitoring Center. In contrast
to 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, in real time, the caller’s precise location on a detailed
map. We believe 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™.
In order to prepare for an increase in
the number of TrackerPAL™ devices to be monitored, we are continuing to build up
the Monitoring Center to effectively manage these devices. To
increase the efficiencies in the Monitoring Center, we are 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. We
anticipate 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.
Inovar,
Inc.
Inovar,
located in Logan Utah, is a leading contract electronics manufacturer dedicated
to providing flexible solutions to OEMs (original equipment manufacturers) in
the fastest growing segments of the electronics, medical, and aerospace
industries and the military. We are ISO 9001-:2000 and ISO 13485:2003
certified to provide the most comprehensive and value-added services to our
customers. Inovar currently manufactures our TrackerPAL™ product.
euromicron
AG
euromicron
AG is an all-round
solution provider for communications, data and security networks. Its network
infrastructures integrate voice, video and data transport wirelessly, via copper
cable and by means of fiber-optic technologies. euromicron builds its leading
applications, such as e-health, security, control or surveillance systems, on
the basis of these network infrastructures. Founded on its expertise
as a developer and producer of fiber-optic components, euromicron AG is a
strongly growing, profitable group that is listed on the XETRA and Frankfurt,
Germany (FRA) stock markets and focuses on operational growth, integration and
further market penetration, internationalization and expansion.
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 us on a contract
basis.
Competition
In fiscal
year 2009, we encountered various levels of GPS, house arrest and case
management competition from the following traditional and evolving
competitors:
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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
Offender Services, LLC, Augusta GA – 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.
|
|
|
·
|
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.
|
|
|
·
|
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.
|
|
|
·
|
Satellite
Tracking of People, LLC – Houston, TX – This company provides GPS tracking
systems and services to government
agencies.
|
We also
face 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 competitors’ products. We observed an
increase in these types of businesses in 2009. We do not believe
there is reliable publicly available information to indicate our relative market
share or that of our competitors.
7
Dependence
on Major Customers
No customer represented more than 10%
of our total revenues for the fiscal year ended September 30,
2009. One non-repeat customer represented 16% of our total revenues
for the fiscal year ended September 30, 2008.
Dependence
on Major Suppliers
We purchase cellular services from a
variety of providers. The cost to us for these services during the
fiscal years ended September 30, 2009 and 2008 was approximately $2,422,541 and
$2,939,790, respectively. We reduced cellular costs while increasing revenues
from monitoring services we successfully negotiated new and existing
contracts.
During the fiscal year ended September
30, 2009, we switched manufacturing of the TrackerPAL™ devices from Dynamic
Source Manufacturing to Inovar. The change in manufacturers was made
to increase the reliability of the TrackerPAL™ and reduce our cost per
device. Should the relationship with Inovar cease, we would need to
find another vendor to manufacture the device which could limit the ability to
lease additional monitoring equipment.
Product
Returns
During
the fiscal year ended September 30, 2009, we replaced the majority of
TrackerPAL™ I devices with our next generation TrackerPAL™ II device to remedy
problems incurred with the first generation product. These problems
included:
|
|
·
|
low
battery and charger life and
functionality
|
|
|
·
|
weak
GPS signal strength
|
|
|
·
|
water
ingression; and
|
|
|
·
|
scratching
and other aesthetic damage when the device was removed from an
offender.
|
Subsequent
to September 30, 2009, we began manufacturing an improved TrackerPAL™ device
dubbed the “TrackerPAL™ IIe” (for “enhanced”) to further improve the performance
and functionality of the product. We achieved significant improvement
in GPS signal strength by incorporating the latest available GPS technology into
the enhanced device. Additionally, the battery life has improved,
realizing over 30 hours of life on a single two hour daily charge.
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.
8
The following table summarizes our
trademark registrations and applications:
|
Mark
|
Application
Number
|
Registration
Number
|
Status/Next
Action
|
|
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
|
pending
|
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
|
Pending
|
|
TRACKERPAL™
|
MX
805,365
|
960954
|
Registered
|
Patents. We have five
patents in the United States and one patent in China. In addition, 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:
|
|||
|
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
|
|
Multiple
Emergency Response Services Combination Emergency Phone and Personal Audio
Device
|
6,285,867
|
9/4/01
|
Issued
|
|
Remote
Tracking System and Device with Variable Sampling
|
11/486,991
|
6/9/09
|
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
|
|
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
|
|
Beacon
|
12/394.151
|
9/2009
|
Pending
|
9
|
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, we 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 2009, no apparent
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
transformation of our supply chain operations and manufacturing capabilities
during July through December 2009, the commercial availability of our newly
modified and enhanced TrackerPAL™ IIe devices (now manufactured in the United
States) created an intermittent backlog of units. Monthly backlogs
for organic growth and new account implementation have averaged 150 devices from
July through December 2009 as we have implemented and improved our internal
repair and refurbishment capabilities in conjunction with our new world-class
manufacturing partner and production capabilities at Inovar.
We view
backlogs as undesirable, as they impair deployments, which necessarily reduces
revenue. We continue to work on mitigating backlogs, maximizing
demand fulfillment, and capitalizing on all available opportunities to secure
recurring revenue streams. In a significant development after
September 30, 2009, we authorized the initial manufacture of our first 3,000
TrackerPAL™ IIe units, which we began delivering in mid-December 2009 and expect
to continue to deliver over the next few months. We will use these units to
replace any remaining TrackerPAL™ I units, as well as to support growth in
existing accounts and in support of new domestic and international
opportunities.
10
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 11, 2009, we had 170 full time employees and 35 part-time
employees. None of the employees are represented by a labor union or
subject to a collective bargaining agreement. We have never
experienced a work stoppage and management believes that the relations with
employees are good.
Additional
Available Information
We
maintain our principal executive offices and 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. Reference to our website is not intended to
incorporate information on our web site as 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. We also provide copies of our Forms 8-K, 10-K, 10-Q, Proxy Statement
and Annual Report at no charge to investors upon request.
All
reports filed by RemoteMDx with the SEC are available free of charge via EDGAR
through the SEC website at www.sec.gov. In addition, the public may read and
copy materials we have filed with the SEC at the SEC's public reference room
located at 450 Fifth St., N.W., Washington, D.C.
20549.
We have identified the following
important factors that could cause actual results to differ materially from
those projected in any forward looking statements we may make from time to time.
We operate in a continually changing business environment in which new risk
factors emerge from time to time. We can neither predict these new risk factors,
nor can we assess the impact, if any, of these new risk factors on our business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those projected in any forward looking
statement. If any of these risks, or combination of risks, actually occurs,
our business, financial condition and results of operations could be seriously
and materially harmed, and the trading price of our common stock could
decline.
The financial
statements contained in this annual report on Form 10-K for the fiscal year
ended September 30, 2009 have been prepared on the basis that we will continue
as a going concern, notwithstanding the fact that our financial performance and
condition during the past few years raise substantial doubt as to our ability to
do so. There is no assurance we will ever be profitable. In fiscal
year 2009, we incurred a net loss of $23,081,500, negative cash flows from
operating activities of $8,521,326, and as of September 30, 2009 have an
accumulated deficit of $205,765,496. These factors raise substantial
doubt about our 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 we will be successful in raising additional capital from the sale of equity
or debt securities. If we are unable to increase cash flows from
operating activities or obtain additional financing, it will be unable to
continue the development of our products and will likely cease
operations.
We have a history
of losses and anticipate significant future losses and may be unable to project
our revenues and expenses accurately. We will incur significant
expenses associated with the development and deployment of our new products and
promoting our brand. We intend to enter into additional arrangements through
current and future strategic alliances that may require us to pay consideration
in various forms and in amounts that may significantly exceed current estimates
and expectations. We may also be required to offer promotional
packages of hardware and software to end-users at subsidized prices in order to
promote our brand, products and services. These guaranteed payments, promotions
and other arrangements will result in significant expense. If we do achieve
profitability, it cannot be certain that we will be able to sustain or increase
profitability in the future. In addition, because of our limited
operating history in our newly targeted markets, we may be unable to project
revenues or expenses with any degree of certainty. Management expects expenses
to increase significantly in the future as we continue to incur significant
sales and marketing, product development and administrative
expenses. We cannot guarantee that we will be able to generate
sufficient revenues to offset operating expenses or the costs of the promotional
packages or subsidies described above, or that we 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.
11
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 services, adversely affecting our results of operations and
financial condition. Challenging economic conditions also may impair the ability
of our customers or distributors to pay for products or services 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 2009 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 we are 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 we
fail to achieve these goals, that failure would have a material adverse effect
on our business, prospects, financial condition and operating
results. Because the market for our 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 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 certain of our stockholders presents potential conflicts of interest, which
may result in decisions that favor them over our other
shareholders. Our principal beneficial owner and founder,
David Derrick, provides management and/or financial services and assistance to
us. When his personal investment interests diverge from our
interests, he and his 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.
We rely on
significant suppliers for key products and cellular access. If
we do not renew these agreements when they expire we may not continue to
have access to these suppliers’ products or services at favorable prices or in
volumes as we have in the past, which would reduce revenues and could adversely
affect results of operations or financial condition. We have
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.
12
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.
We face 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 we 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.
13
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.
We have had and
will continue to have significant capital needs and there is no assurance we
will be successful in obtaining necessary additional funding. 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.
14
Penny stock
regulations may impose certain restrictions on marketability of our
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, our 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 our
securities and may affect the ability of investors to sell our 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.
|
Our
management is aware of the abuses that have occurred historically in the penny
stock market.
Our board of
directors may authorize the issuance of preferred stock and designate rights and
preferences that will dilute the ownership and voting interests of existing
stockholders without their approval. Our Articles of
Incorporation authorize us to issue up to 20,000,000 shares of preferred stock,
at par value $0.0001. The board of directors is authorized to determine the
rights and preferences of any series or class of preferred stock. The board of
directors may, without stockholder approval, issue shares of preferred stock
with dividend, liquidation, conversion, voting or other rights which are senior
to the common stock or which could adversely affect the voting power or other
rights of the existing holders of outstanding shares of preferred stock or
common stock. Additionally, the issuance of preferred stock may have the effect
of decreasing the market price of the common stock and may adversely affect the
voting power of holders of common stock and reduce the likelihood that common
stockholders will receive dividend payments and payments upon liquidation. The
issuance of additional shares of preferred stock may also adversely affect an
acquisition or change in control of the Company.
Subsequent
to the year ended September 30, 2009, the board of directors designated 50,000
shares of preferred stock as our Series D Preferred stock. Each share
of Series D Preferred stock is convertible into 6,000 shares of common
stock. Holders of the Series D Preferred stock may vote their shares
on an as-converted basis on any issue presented for a vote of the stockholders,
including the election of directors and the approval of certain transactions
such as a merger or other business combination of the Company. In
addition, on the issues of an increase in the number of shares of common stock
the Company is authorized to issue and on the proposal of a reduction in the
number of issued and outstanding shares (a reverse split) of the Company’s
common stock, holders of the Series D Preferred stock may vote as a class
holding the equivalent of 60 percent of the issued and outstanding shares of the
common stock, regardless of the number of shares then outstanding. As
of the date of this report, there were 25,186 shares of Series D Preferred stock
outstanding. As a consequence of these voting rights, the holders of
the Series D Preferred stock may exercise control over these issues regardless
of the interests of the remaining stockholders.
Item 2. Properties
Our
headquarters and monitoring facility are housed in 8,106 square feet of space
located at 150 West Civic Center Drive, Sandy, Utah. Monthly lease
payments are approximately $16,200. This lease expires on November 30,
2013. In addition, we signed an additional lease to provide 6,152
square feet of warehousing and pallet shipping functions and capabilities in a
facility located at 9716 South 500 West, Sandy, Utah 84070. Monthly
lease payments are approximately $5,300. Management believes that
these facilities are sufficient to meet our needs for the foreseeable future.
15
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. On February 17, 2009 the United States Patent and Trademark Office
("USPTO") granted a request for reexamination of the '909 Patent. The
USPTO is now in the process of reexamining the claims of the '909 Patent. Briefs
have been submitted on the issue of claim construction, and the case is
currently in discovery. The Markman hearing is scheduled
for May of 2011, and trial is set for late 2011. We have 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. STOP subsequently filed a
motion for summary judgment of non-infringement, which was
denied. STOP’s subsequent motion for reconsideration was also
denied. The parties are currently working on claim construction and
discovery issues. The Markman hearing is currently
set for March of 2010. No trial date has yet been set. The
Company intends to vigorously prosecute its claims and defend against the
counterclaim.
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 corporate name of RemoteMDx,
Inc. We intend to vigorously defend against Castellanos’
claims. We have 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. We have filed a claim against David Ezell and several
related entities for breach of contract, unjust enrichment, conversion, and
punitive damages, and seek 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, we have not accrued for
any potential recovery or any material loss associated with this
claim.
Informal
Inquiry. As voluntarily disclosed in our prior reports filed
with the SEC commencing with our quarterly report for the fiscal quarter ended
March 31, 2008, we were advised by letter from the SEC, Salt Lake District
Office in March 2008, that the SEC had begun an informal inquiry regarding
us. The SEC has advised us 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 fiscal year ended September 30, 2009.
No
matters were submitted to a vote of our stockholders during the fiscal quarter
ended September 30, 2009.
16
PART
II
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 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 for the periods
indicated. The sales information is available online at http://otcbb.com.
|
High
|
Low
|
|||||||
|
Fiscal
Year
Ended September 30,
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
|
||||
|
Fiscal
Year
Ended September 30,
2009
|
||||||||
|
First
Quarter
|
$
|
1.20
|
$
|
0.18
|
||||
|
Second
Quarter
|
$
|
0.27
|
$
|
0.10
|
||||
|
Third
Quarter
|
$
|
0.26
|
$
|
0.14
|
||||
|
Fourth
Quarter
|
$
|
0.20
|
$
|
0.11
|
||||
Holders
As of
December 23, 2009, there were approximately 3,500 holders of record of our
common stock and 211,765,988 shares of common stock outstanding. We also have
granted options and warrants for the purchase of approximately 25,248,165 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 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. To date all shares of preferred
stock have converted into shares of common stock and all dividends have been
paid by issuance of preferred stock. During the fiscal years ended
September 30, 2009 and 2008, we recorded $175 and $345,356 in stock dividends,
respectively.
Dilution
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 to be Increased
As of
September 30, 2009, we were authorized to issue 250,000,000 shares of common
stock. We intend to seek stockholder approval by written consent of
the holders of a majority of the issued and outstanding shares of our common
stock to increase the authorized shares from 250,000,000 to
600,000,000. If consent is obtained, we will file Amended Articles of
Incorporation to effect the increase in the number of authorized shares as soon
as reasonably practical.
Securities
Authorized for Issuance under Equity Compensation Plans
The
following table sets forth information as of September 30, 2009, 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
|
$1.06
|
7,487,286
|
17
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,
we 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 fiscal years ended September
30, 2009 and 2008, 1,517,714 and 1,725,000 options were granted under this plan
to employees, respectively.
Recent
Sales of Unregistered Securities
During the two years ended September
30, 2009, we issued the following securities without registration under the
Securities Act of 1933, as amended (the “Securities Act”).
Fiscal
Year 2008
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 transaction.
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 our 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 certain of our
employees and officers for services rendered 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
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. 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 during fiscal year 2008 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.
18
Shares Issued Upon the
Conversion of Preferred Stock
15,000
shares of common stock were issued upon conversion of our 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 was
converted was 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. 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 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.
Shares Issued on Revalue
Rights
100,000
shares of common stock were issued as a penalty to Borinquen Container Corp.
(“Borinquen”) for our 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 that it was an accredited investor; in addition, Borinquen already
owned shares of our common stock at the time of this transaction.
Shares Issued in Private
Placements
In March and September 2008, 6,077,219
shares were issued to Futuristic, Advance Technology Investors, LLC, and
Borinquen for gross proceeds of $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 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. 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.
Fiscal
Year 2009
Shares Issued Pursuant to
Acquisitions
2,857,286
shares valued at $657,176 were issued in January 2009 pursuant to an acquisition
of Bishop Rock Software. 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.
150,000
shares valued at $19,500 were issued in March 2009 pursuant to an agreement to
extend an option to purchase the remaining 49% ownership of Midwest
Monitoring.
19
Shares Issued in Connection
with Debt
100,000
shares were issued in November 2008 to a related-party for entering into a
promissory note with us. 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.
4,506,750
shares were issued during the fiscal year ended September 30, 2009 to 13
entities in connection with the issuance of Series A 15% debentures for cash
proceeds of $4,496,750. 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.
3,549,630
shares were issued in March 2009 to six entities in connection with the issuance
of Senior Secured Convertible notes. 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.
8,000,000
shares were issued in July 2009 for additional consideration to enter into a
promissory note and to resolve prior investments. 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.
9,796,636
shares were issued in January 2009 for additional consideration to enter into a
debenture and to resolve prior investments. 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,
Directors, and Consultants
737,500
shares valued at $169,625 were issued to our employees and officers as
consideration for services rendered to us during fiscal year
2009. 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.
400,000
shares valued at $120,000 were issued in March and August 2009 to directors from
the conversion of fees for services provided to us. 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.
2,875,000
shares valued at $639,250 were throughout the fiscal year to four unaffiliated
entities for legal and consulting 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 to Settled
Lawsuits and Obligations
1,200,000
shares valued at $240,000 were issued in February 2009 to Strategic Growth
International (“SGI”) 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. SGI is an accredited investor. No general
solicitation or general advertising was made or done in connection with the
issuance of the shares.
2,000,000
shares valued at $240,000 were issued in March 2009 to Thomas Natale, Edward
Boling, and Boling Enterprises, LP (“Boling”) to settle amounts owed due to an
unresolved disputed debt. Natale and Boling were former officers of
SecureAlert. 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. Boling is an accredited investor. No general
solicitation or general advertising was made or done in connection with the
issuance of the shares.
2,200,000
shares valued at $550,000 were issued in May 2009 to Fulbright and Jaworski, LLP
(“Fulbright”) to settle amounts owed for legal 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. 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. Fulbright is an accredited investor. No
general solicitation or general advertising was made or done in connection with
the issuance of the shares.
20
Shares Issued Upon the
Conversion of Preferred Stock
10,999
shares of common stock were issued upon conversion of our Series B Preferred
stock in February 2009. Each share of Series B Preferred stock was
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 was
converted was 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 our security holders. 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.
9,306
shares of common stock were issued upon conversion of 19 shares of our Series A
Preferred stock in February 2009. Each share of Series A Preferred
stock is convertible at any time into shares of common stock. One
share of Series A Preferred stock may convert into 370 shares of common stock.
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 our security
holders. 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 in Private
Placements
In
December 2008, March 2009, and May 2009, 17,850,000 shares were issued to
Solomon Tennenhaus, Kofler Ventures, and euromicron AG investors for $3,250,000
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 us 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.
During
the fiscal year ended September 30, 2009, we also cancelled 1,758,379 shares of
common stock previously issued in prior years.
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“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, 2009 and 2008 and the accompanying notes
thereto contained in this report. This introduction summarizes MD&A, which
includes the following sections:
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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.
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Recent
Developments – a brief description of business developments occurring
after the fiscal year ended September 30, 2009 and prior to the filing of
this Report.
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Results
of Operations - an analysis of our consolidated results of operations for
the last two fiscal years presented in our consolidated financial
statements.
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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.
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Critical
Accounting Policies - a discussion of accounting policies that require
critical judgments and
estimates.
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21
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 our financial
condition and results of operations as a whole.
Overview
RemoteMDx
and subsidiaries market and deploy offender management programs, combining
patented GPS (Global
Positioning System) tracking technologies, fulltime 24/7/365
intervention-based monitoring capabilities and case management
services. Our vision is to be the market leader for delivering
offender management solutions that integrate interaction
technologies. 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™
II and TrackerPAL™ IIe (“enhanced”), now manufactured in the USA – 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™ IIe is designed for federal, state and
local agencies to provide location tracking of select individuals in the
criminal justice system. The TrackerPAL™ IIe 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). This monitoring and intervention center acts as
an important link between the offender and the supervising officer as
intervention 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™ IIe unit promptly notifies the
monitoring center if any attempt is made to breach protocols or to remove or
otherwise tamper with the device or optical strap housing.
Recent
Developments
Subsequent
to the fiscal year ended September 30, 2009, we entered into several material
transactions that are not reflected in the results of operations for fiscal year
2009, as follows:
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In
October 2009, we issued 1,400,000 shares of common stock to several former
holders of SecureAlert Series A Preferred to settle a dispute and an
outstanding liability in connection with contingency payments due to the
holders.
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On
November 2, 2009, our board of directors designated 50,000 shares of
authorized but previously undesignated and unissued preferred stock as
Series D Convertible Preferred stock. The shares accrue
dividends at a rate of 8% per annum and may be paid in cash or additional
shares of Series D Preferred stock. Subsequent to September 30, 2009, we
issued 15,986 shares of Series D Convertible Preferred stock upon the
conversion of $15,723,204 in debt, accrued liabilities and interest and an
additional 12,200 shares from securities purchase agreements totaling
$6,100,000 of which $4,600,000 has been received in cash as of the date of
this Report, resulting in a total of 28,186 shares of Series D Preferred
stock.
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Results
of Operations
Fiscal
Year 2009 compared to Fiscal Year 2008
[Note:
during the fiscal year ended September 30, 2008, we divested our subsidiary
ActiveCare. As a result, we now operate 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 our Consolidated Financial Statements included
in this Report.]
Revenues
During
the fiscal year ended September 30, 2009, we had net revenues of $12,625,908
compared to net revenues of $12,403,677 for the fiscal year ended September 30,
2008, an increase of $222,231 (2%). Revenues from monitoring services
for the fiscal year ended September 30, 2009 totaled $12,055,159, compared to
$9,826,077 for the same period ended 2008, resulting in an increase of
$2,229,082 (23%). Revenues from product sales for the fiscal year ended
September 30, 2009 were $570,749, compared to $2,577,600 for the same period
ended 2008, resulting in a decrease of $2,006,851. This decrease of
$2,006,851 is primarily due to a shift in focus to leasing monitoring equipment
instead of device sales.
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During
the fiscal year ended September 30, 2009, our SecureAlert subsidiary provided
net revenues of $5,322,191 compared to net revenues of $7,333,659 during the
fiscal year ended September 30, 2008, a decrease of $2,011,468
(27%). Revenues from monitoring services for the fiscal year ended
September 30, 2009 were $5,131,655, compared to $5,033,659 for the prior year,
resulting in an increase of $97,996 (2%). Revenues from product sales for the
fiscal year ended September 30, 2009 were $190,536, compared to $2,300,000 for
the fiscal year 2008, resulting in a decrease of $2,109,464. This
decrease of $2,109,464 is primarily due to our focus on leasing monitoring
equipment instead of device sales.
During
the fiscal year ended September 30, 2009, our Midwest Monitoring subsidiary
provided net revenues of $4,213,972 compared to net revenues of $2,799,914
during the fiscal year ended September 30, 2008, an increase of $1,414,058
(51%). This increase is related to revenues in the amount of $514,744
that Midwest Monitoring recognized during the period from October 1, 2007
through November 30, 2007 that we were not required to
consolidate. The remaining increase of $899,314 is related to an
increase of $86,288 in device sales and $813,026 of monitoring
services.
During
the fiscal year ended September 30, 2009, our Court Programs subsidiary provided
net revenues of $3,086,335 compared to net revenues of $2,270,104 during the
fiscal year ended September 30, 2008, an increase of $816,231
(36%). This increase is related to revenues in the amount of $540,935
that Court Programs recognized during the period from October 1, 2007 through
November 30, 2007 that we were not required to consolidate. The
remaining increase is related to an increase of $275,296 in monitoring
services.
On
January 14, 2009, we purchased Bishop Rock Software. During the
fiscal year ended September 30, 2009, Bishop Rock Software had $3,410 of
revenue.
Cost
of Revenues
During
the fiscal year ended September 30, 2009, cost of revenues totaled $10,138,613,
compared to cost of revenues during the fiscal year ended September 30, 2008 of
$13,108,990, a decrease of $2,970,377 (23%). The decrease in cost of
revenues resulted primarily from reduced communication and direct labor cost
initiatives, device cost of goods and software enhancements, offset by a minor
increase in equipment amortization.
Communication
costs, $2,422,541 for the fiscal year ended September 30, 2009, primarily refers
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.
Amortization,
$1,300,783 for the fiscal year ended September 30, 2009, is based on a
three-year useful life for TrackerPAL™ devices. Devices that are
leased or retained by us for future deployment or sale are amortized over three
years. We believe 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.
We expect
the cost of revenues as a percentage of revenues to decrease in the foreseeable
future due to (a) further attempts to lower communication costs, and (b) further
development of our proprietary software enabling each operator to monitor more
devices resulting in lower monitoring center costs.
SecureAlert’s
cost of revenues totaled $5,583,841 (105% of SecureAlert net revenue) for the
fiscal year ended September 30, 2009 compared to $10,007,725 (136% of
SecureAlert net revenue) for the fiscal year ended September 30, 2008, a
decrease of $4,423,884 (44%). This is related to decreases of
$1,626,018 in device costs, $521,716 in communication costs, $454,374 in
monitoring center costs, and $1,538,129 in other TrackerPAL™ and miscellaneous
costs.
Midwest
Monitoring’s cost of revenues totaled $2,735,276 (65% of Midwest Monitoring’s
revenue) for the fiscal year ended September 30, 2009 compared to $1,630,823
(58% of Midwest Monitoring’s revenue) for the fiscal year ended September 30,
2008, an increase of $1,104,453 (68%). This increase is related to
revenues in the amount of $330,504 that Midwest Monitoring recognized during the
period from October 1, 2007 through November 30, 2007 that we were not required
to consolidate. The remaining increase of $773,949 is primarily
related to the growth in revenues.
Court
Program’s cost of revenues totaled $1,819,496 (59% of Court Program’s revenue)
for the fiscal year ended September 30, 2009 compared to $1,470,442 (65% of
Court Program’s revenue) for the fiscal year ended September 30, 2008, an
increase of $349,054 (24%). This increase is related to revenues in
the amount of $311,868 that Court Programs recognized during the period from
October 1, 2007 through November 30, 2007 that we were not required to
consolidate. The remaining increase of $37,186 is primarily related
to the growth in revenues.
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Gross
Margin
During
the fiscal year ended September 30, 2009, gross margin totaled $167,765,
compared to negative margin during the fiscal year ended September 30, 2008 of
$705,313, an improvement of $873,078. Included in cost of revenues
are costs attributable to impairment of inventory and monitoring equipment of
$2,319,530 and $570,948 for the years ended September 30, 2009 and 2008,
respectively. These impairment costs from disposal of obsolete
monitoring equipment were expenses not expected in future periods. Excluding
impairment costs, adjusted gross margin for the fiscal year ended September 30,
2009 was $2,487,295, compared to a negative margin of $134,365 for the same
period in 2008, an improvement of $2,621,660 while increasing revenues from
monitoring services.
Research
and Development Expenses
During
the fiscal year ended September 30, 2009, we incurred research and development
expenses of $1,777,873 compared to similar expenses recognized during fiscal
year 2008 totaling $4,811,128. This decrease of $3,033,255 is due primarily to
management’s decision to bring software enhancements and product design in-house
as opposed to using third-party vendors. We anticipate research and
development expenses to continue to decrease in future periods.
Selling,
General and Administrative Expenses
During
the fiscal year ended September 30, 2009, our selling, general and
administrative expenses totaled $16,540,645, compared to $36,466,678 for the
fiscal year ended September 30, 2008. The improvement of $19,926,033 is the
result of decreases in the following expenses: consulting ($19,362,378), travel
($1,297,363), advertising and marketing ($132,596), bad debt expense ($68,775),
meals and entertainment ($64,677), postage ($43,636), office ($28,895), employee
benefits ($25,519), outside services ($23,181), and other selling, general and
administrative ($99,090). These decreases in selling, general and
administrative expense were offset by an increase in payroll and taxes
($457,921), legal ($441,611), amortization ($64,955), investment relations
($54,554), contract labor ($40,081), board of director fees ($35,000),
depreciation ($33,714), insurance ($26,625), and other selling, general and
administrative expenses ($65,616). Consulting expense for the fiscal
year ended September 30, 2009 was $4,245,685 compared to $23,608,063 for the
fiscal year ended September 30, 2008, a decrease of $19,362,378. This
decrease is primarily due to a significant reduction of non-cash compensation
totaling $18,603,062 through options and warrants issued to board of directors,
executive officers and employees. Cash compensation also decreased by
$759,316 since we settled fewer lawsuits related to consulting and brought a lot
of consulting in-house.
Other
Income and Expense
For the
fiscal year ended September 30, 2009, interest expense was $5,012,803, compared
to $1,566,542 for the fiscal year ended September 30, 2008. This amount includes
non-cash interest expense of approximately $2,595,933 related to amortization of
deferred financing costs associated with warrants, debentures and shares of
common stock issued for interest.
During
the fiscal year ended September 30, 2008, we 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
We had a
net loss for the fiscal year ended September 30, 2009 totaling $23,081,500,
compared to a net loss of $49,587,050 for the fiscal year ended September 30,
2008. This decrease of $26,505,550 is due primarily to reductions in
communication and device costs, bringing software enhancements and product
design in-house as opposed to using high priced third-party vendors, and the
reduced use of consulting services by bringing these services in-house.
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Liquidity
and Capital Resources
We have
not historically financed operations entirely from cash flows from operating
activities. During the fiscal year ended September 30, 2009, we
funded our operating and investing activities by taking on new debt, sales of
equity securities and the exercise of options and warrants. See the
accompanying Notes (8, 9, 12, 15 and 16) to Consolidated Financial Statements of
this report. The cash provided by these transactions was used by us
to (i) pay operating expenses, including the costs associated with our
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 our
employees, officers, and consultants and other expenses as described
below.
As of
September 30, 2009, we had unrestricted cash of $602,321, compared to
unrestricted cash of $2,782,953 as of September 30, 2008. As of September 30,
2009, we had a working capital deficit of $16,476,897, compared to a working
capital deficit of $6,822,276 as of September 30, 2008. The decrease
in working capital primarily resulted from increases in our accrued liabilities
and notes payable balances and decrease in cash balances offset by an increase
in our inventory and decrease in our lines of credit during the fiscal year
ended September 30, 2008.
During
fiscal year 2009, our operating activities used cash of $8,521,326, compared to
$9,672,744 used during fiscal year 2008. This decrease in cash used
from operating activities of $1,151,418 is primarily the result of decreases in
the net income (loss) of $26,505,550, common stock issued for services of
$12,891,708, common stock issued to settle lawsuits of $1,014,479, amortization
of deferred financing and consulting costs of $3,372,405, derivative liability
valuation of $1,867,007, stock options and warrants issued for services of
$3,917,629, and net accounts receivable of $3,316,540. These
decreases were offset, in part, by increases in the amortization of debt
discount of $2,030,504, impairment of monitoring equipment of $1,748,582,
impairment of goodwill of $2,804,580, deposit held in escrow of $1,000,000 and
accounts payable of $2,119,121.
Investing
activities during the fiscal year ended September 30, 2009, used cash of
$1,676,467, compared to $526,447 of cash used by investing activities during the
fiscal year ended September 30, 2008. The increase in cash used
during fiscal year 2009 resulted primarily from an increase in purchases of
additional monitoring equipment. We purchased $1,312,397 and $192,221
of monitoring equipment during the fiscal years ended September 30, 2009 and
2008, respectively.
Financing
activities during the fiscal year ended September 30, 2009, provided $8,017,161
of net cash compared to $8,178,273 during the fiscal year ended September 30,
2008.
We made
net payments of $739,063 on a related-party line of credit and $1,115,237 on
notes payable. During fiscal year 2009, we had proceeds of $4,496,750
from the issuance of Series A 15% Convertible Debentures, $3,250,000 from the
issuance of common stock, $1,055,889 from the issuance of debt, $680,229 from
the issuance of related-party notes and $388,593 from bank lines of
credit.
During
the fiscal year ended September 30, 2009, we incurred a net loss of $23,081,500
and negative cash flows from operating activities of $8,521,326, compared to a
net loss of $49,587,050 and negative cash flows from operating activities of
$9,672,744 for the fiscal year ended September 30, 2008. As of
September 30, 2009, our working capital deficit was $16,476,897 and we had
stockholders’ deficit of $12,372,821 and an accumulated deficit of
$205,765,496.
Going
Concern
The
factors described above, as well as the risk factors set out elsewhere in this
report raise substantial doubt about our 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 our debt holders will
be willing to convert the debt obligations to equity securities or that we will
be successful in raising additional capital from the sale of equity or debt
securities. If we are unable to increase cash flows from operating
activities or obtain additional financing, we will be unable to continue the
development of our products and would likely cease operations.
To lessen
our cash burden and to raise additional capital, subsequent to September 30,
2009, the Company issued 15,986 shares of Series D Convertible Preferred stock
from the conversion of $15,723,204 in debt, accrued liabilities and interest and
an additional 12,200 shares from securities purchase agreements totaling
$6,100,000 of which $4,600,000 has been received in cash as of the date of this
Report, resulting in a total of 28,186 shares of Series D Preferred
stock.
Inflation
We do not
believe that inflation has had a material impact on our historical operations or
profitability.
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Critical
Accounting Policies
In Note
(3) to the audited financial statements for the fiscal year ended September 30,
2009 included in this report, we discusses those accounting policies that are
considered to be significant in determining the results of operations and our
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, we apply the following
critical accounting policies in the preparation of our financial
statements:
Inventory
Reserves
The nature of our business requires
maintenance of sufficient inventory on hand at all times to meet the
requirements of our customers. We record 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:
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Current
inventory quantities on hand;
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Product
acceptance in the marketplace;
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Customer
demand;
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Historical
sales;
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Forecast
sales;
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Product
obsolescence; and
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Technological
innovations.
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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
Our revenue has historically been from
two sources: (i) monitoring services; (ii) monitoring device and other
product sales.
Monitoring
Services
Monitoring
services include two components: (a) lease contracts in which we provide
monitoring services and lease devices to distributors or end users and we retain
ownership of the leased device; and (b) monitoring services purchased by
distributors or end users who have previously purchased monitoring devices and
opt to use our monitoring services.
We
typically lease our devices under one-year contracts with customers that opt to
use our monitoring services. However, these contracts may be
cancelled by either party at anytime with 30 days notice. Under our
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 us. We recognize
revenue on leased devices at the end of each month that monitoring services have
been provided. In those circumstances in which we receive payment in
advance, we record these payments as deferred revenue.
Monitoring Device Product
Sales
Although
not the focus of our business model, we sell our monitoring devices in certain
situations. In addition, we sell home security and Personal Emergency Response
Systems (“PERS”) units. We recognize 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 us, customers may, but are not required to, enter into
monitoring service contracts with us. We recognize 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 our revenue transactions do not have multiple elements. On occasion,
we have revenue transactions that have multiple elements (such as product sales
and monitoring services). For revenue arrangements that have multiple
elements, we consider whether: (i) the delivered devices have standalone 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, we recognize revenue from the sale of devices separately from the
monitoring services to be provided to the customer. In accordance
with FASB ASC Subsection 605-25, 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.
26
Other
Matters
We
consider an arrangement with payment terms longer than our 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. We sell our devices and services directly to end users and to
distributors. Distributors do not have general rights of
return. Also, distributors have no price protection or stock
protection rights with respect to devices sold to them by
us. Generally, title and risk of loss pass to the buyer upon delivery
of the devices.
We
estimate our product returns based on historical experience and maintain an
allowance for estimated returns, which is recorded as a reduction to accounts
receivable and revenue.
Shipping
and handling fees are included as part of 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
We review our 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 our
estimated remaining life in measuring whether the assets are recoverable. During
the fiscal years ended September 30, 2009 and 2008, we disposed of $2,319,530
and $570,948, respectively.
Allowance
for Doubtful Accounts
We 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
Effective
for December 2008, new accounting guidance was added relating to business
combinations. The objective of this topic is to enhance the information that an
entity provides in our financial reports about a business combination and its
effects. The Topic mandates: (i) how the acquirer recognizes and measures the
assets acquired, liabilities assumed and any non-controlling interest in the
acquiree; (ii) what information to disclose in our financial reports and; (iii)
recognition and measurement criteria for goodwill acquired. This Topic is
effective for any acquisitions made on or after December 15, 2008. The adoption
of this Topic is not expected to have a material impact on our financial
statements and disclosures.
In May
2009, the Financial Accounting Standards Board (“FASB”) issued guidance which
establishes general standards of accounting and disclosure of events that occur
after the balance sheet date but before financial statements are issued or are
available to be issued. In particular, this Topic sets forth: (i) the period
after the balance sheet date during which management of a reporting entity
should evaluate events or transactions that may occur for potential recognition
or disclosure in the financial statements, (ii) the circumstances under which an
entity should recognize events or transactions occurring after the balance sheet
date in our financial statements, (iii) the disclosures that an entity should
make about events or transactions that occurred after the balance sheet date.
This Topic should be applied to the accounting and disclosure of subsequent
events. This Topic does not apply to subsequent events or transactions that are
within the scope of other applicable accounting standards that provide different
guidance on the accounting treatment for subsequent events or transactions. This
Topic was effective for interim and annual periods ending after June 15, 2009,
which was September 30, 2009 for us. The adoption of this Topic did not have a
material impact on our financial statements and disclosures.
In June
2009, the FASB issued guidance which became the source of authoritative GAAP
recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. On the effective date of
this Topic, the Codification will supersede all then-existing non-SEC accounting
and reporting standards. All other non-SEC accounting literature not included in
the Codification will become non-authoritative. This Topic identifies the
sources of accounting principles and the framework for selecting the principles
used in preparing the financial statements of nongovernmental entities that are
presented in conformity with GAAP and arranged these sources of GAAP in a
hierarchy for users to apply accordingly. This Topic is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. The adoption of this topic did not have a material impact on our
disclosure of the financial statements.
27
In June
2009, the FASB issued additional guidance which improves the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in our financial statements about a transfer of
financial assets; the effects of a transfer on our financial position, financial
performance, and cash flows; and a transferor’s continuing involvement, if any,
in transferred financial assets. This additional guidance requires that a
transferor recognize and initially measure at fair value all assets obtained
(including a transferor’s beneficial interest) and liabilities incurred as a
result of a transfer of financial assets accounted for as a sale. Enhanced
disclosures are required to provide financial statement users with greater
transparency about transfers of financial assets and a transferor’s continuing
involvement with transferred financial assets. This additional guidance must be
applied as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period and for interim and annual reporting periods
thereafter. Earlier application is prohibited. This additional guidance must be
applied to transfers occurring on or after the effective date. The adoption of
this Topic is not expected to have a material impact on our financial statements
and disclosures.
In
September 2009, the FASB added implementation guidance on accounting for
uncertainty in income taxes. For entities that are currently applying the
standards for accounting for uncertainty in income taxes, the guidance and
disclosure amendments are effective for financial statements issued for interim
and annual periods ending after September 15, 2009. The adoption of this Update
did not have a material impact on our financial statements and
disclosures.
In
September 2009, the FASB issued guidance that changes the existing
multiple-element revenue arrangements guidance currently included under its
Revenue Arrangements with Multiple Deliverables codification. The revised
guidance primarily provides two significant changes: 1) eliminates the need for
objective and reliable evidence of the fair value for the undelivered element in
order for a delivered item to be treated as a separate unit of accounting, and
2) eliminates the residual method to allocate the arrangement consideration. In
addition, the guidance also expands the disclosure requirements for revenue
recognition. This will be effective for the first annual reporting period
beginning on or after June 15, 2010, with early adoption permitted provided that
the revised guidance is retroactively applied to the beginning of the year of
adoption. We are currently assessing the future impact of this new accounting
update to our financial statements.
In
October 2009, the FASB issued accounting guidance which changes the accounting
model for revenue arrangements that include both tangible products and software
elements. Under this guidance, tangible products containing software components
and non-software components that function together to deliver the tangible
product's essential functionality are excluded from the software revenue
recognition guidance given prior to this new guidance. In addition, hardware
components of a tangible product containing software components are always
excluded from the software revenue guidance. This guidance is
effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. Early adoption is
permitted. We are currently assessing the future impact of this new
accounting update to our financial statements.
In April
2008, the FASB issued an amendment for determination of the useful life of
intangible assets. This guidance amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under authoritative accounting guidance for
goodwill and other intangible assets. This guidance is intended to improve the
consistency between the useful life of an intangible asset determined under the
guidance for goodwill and other intangible assets and the period of expected
cash flows used to measure the fair value of the asset under ASC 805 “Business
Combinations” and other principles under GAAP. This guidance is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early adoption is prohibited.
This guidance will be effective for us in fiscal year 2010. The adoption of this
guidance is not expected to significantly impact our results of operations and
financial position.
In
September 2006, the FASB issued enhanced guidance for using fair value to
measure assets and liabilities. This guidance also provides for expanded
information about the extent to which companies measure assets and liabilities
at fair value, the information used to measure fair value and the effect of fair
value measurements on earnings. ASC 820 applies whenever other guidance require
or permit assets or liabilities to be measured at fair value. ASC 820 does not
expand the use of fair value in any new circumstances. In February 2008, the
FASB issued additional guidance to exclude ASC 840 “Accounting for Leases” and
delays the effective date of ASC 820 by one year for nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at fair value in the
financial statements on a nonrecurring basis. In October 2008, the FASB issued
additional guidance for determining the fair value of a financial asset when the
market for that asset is not active to clarify the application of the provisions
of the guidance for fair value measurements in an inactive market and how an
entity would determine fair value in an inactive market. This additional
guidance is effective immediately. We adopted ASC 820 for financial assets and
financial liabilities at the beginning of fiscal year 2009. The adoption of this
guidance for financial assets and financial liabilities did not impact our
results of operations and financial position. The guidance is effective for
nonfinancial assets and liabilities in financial statements issued for fiscal
years beginning after November 15, 2008, which is our fiscal year 2010. The
adoption of this guidance for nonfinancial assets and nonfinancial liabilities
is not expected to significantly impact our results of operations and financial
position.
In June
2009, the FASB issued accounting guidance on the consolidation of variable
interest entities (VIEs). This new guidance revises previous guidance by
eliminating the exemption for qualifying special purpose entities, by
establishing a new approach for determining who should consolidate a
variable-interest entity and by changing when it is necessary to reassess who
should consolidate a variable-interest entity. This guidance will be
effective at the beginning of the first fiscal year beginning after November 15,
2009. Early application is not permitted. The adoption of this
guidance is not expected to significantly impact our results of operations and
financial position.
28
In
September 2009, the FASB issued guidance updates and provided amendments to its
Fair Value Measurements and Disclosure requirements which permit a reporting
entity to measure the fair value of certain investments on the basis of the net
asset value per share of the investment (or its equivalent). This guidance also
requires new disclosures, by major category of investments, about the attributes
of investments, such as the nature of any restriction on the ability to redeem
an investment on the measurement date. This guidance is effective for
interim and annual periods ending after December 15, 2009. Early application is
permitted in financial statements for earlier interim and annual periods that
have not been issued. The adoption of this guidance is not expected
to significantly impact our results of operations and financial
position.
In
October 2009, the FASB issued guidance on share-lending arrangements entered
into on an entity's own shares in contemplation of a convertible debt offering
or other financing. This guidance is effective for fiscal years
beginning on or after December 15, 2009, and fiscal years within those fiscal
years for arrangements outstanding as of the beginning of those years.
Retrospective application is required for such arrangements. This guidance is
effective for arrangements entered into on (not outstanding) or after the
beginning of the first reporting period that begins on or after June 15, 2009.
Certain transition disclosures are also required. Early application is not
permitted. The adoption of this guidance is not expected to
significantly impact our results of operations and financial
position.
Accounting
for Stock-Based Compensation
For the
fiscal years ended September 30, 2009 and 2008, the Company calculated
compensation expense of $67,406 and $214,251, respectively related to the
vesting of stock options granted in prior years
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 1,517,714 and 1,725,000
stock options to employees during the fiscal years ended September 30, 2009 and
2008 valued $274,650 and $359,946, respectively. In addition, 390,000
stock options issued to employees in prior years vested during the fiscal year
ended September 30, 2008. The weighted average fair value of stock
options at the date of grant during the fiscal year ended September 30, 2009 and
2008 was $0.18 and $1.34, 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 fiscal years ended September 30, 2009 and 2008, respectively:
|
Fiscal
years Ended
September
30,
|
||||||||
|
2009
|
2008
|
|||||||
|
Expected
cash dividend yield
|
- | - | ||||||
|
Expected
stock price volatility
|
121 | % | 136 | % | ||||
|
Risk-free
interest rate
|
1.16 | % | 3.12 | % | ||||
|
Expected
life of options
|
3.7
years
|
5
years
|
||||||
A summary
of stock option activity for the fiscal year ended September 30, 2009 and 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 | |||||||
|
Shares
Under
Option
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Life
|
Aggregate
Intrinsic
Value
|
||||||||||
|
Outstanding
as of September 30, 2008
|
3,600,000 | $ | 1.08 | ||||||||||
|
Granted
|
1,517,714 | $ | 0.21 | ||||||||||
|
Exercised
|
- | $ | - | ||||||||||
|
Forfeited
|
- | $ | - | ||||||||||
|
Expired
|
(408,500 | ) | $ | 1.45 | |||||||||
|
Outstanding
as of September 30, 2009
|
4,709,214 | $ | 0.76 |
2.05 years
|
$ | 12,854 | |||||||
|
Exercisable
as of September 30, 2009
|
1,719,880 | $ | 0.32 |
2.97
years
|
$ | 12,854 | |||||||
29
Item 8. Financial
Statements and Supplementary Data
The
Financial Statements and Supplementary Data required by this Item are set forth
at the pages indicated at Item 15 below.
Item 9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Item 9A(T). Evaluation
of Disclosure Controls and Procedures
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:
|
|
(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 our annual or interim
financial statements will not be prevented or detected.
30
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, 2009 due to limited
resources.
|
|
|
·
|
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 account for and
disclose the effects of issuing
derivatives.
|
|
|
·
|
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.
|
|
|
·
|
Inventory – We failed to
maintain effective internal controls over the tracking of inventory and
adjusting its’ corresponding cost to reflect lower of cost or
market.
|
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 and staffing 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.
Item 9B. Other
Information
None.
PART
III
Item 10. Directors,
Executive Officers and Corporate Governance
The
following table sets forth certain information concerning our executive officers
and directors as of September 30, 2009:
|
Name
|
Age
|
Position
|
|
David
G. Derrick
|
56
|
Chief
Executive Officer and Chairman
|
|
John
L. Hastings, III
|
46
|
President
and Chief Operating Officer
|
|
Michael
G. Acton
|
46
|
Chief
Financial Officer
|
|
Bernadette
Suckel
|
53
|
Managing
Director of Sales & Marketing
|
|
Bruce
G. Derrick
|
51
|
Chief
Technology Officer
|
|
James
J. Dalton
|
66
|
Director
|
|
Robert
E. Childers
|
64
|
Director
|
|
Larry
G. Schafran
|
71
|
Director
|
|
David
P. Hanlon
|
64
|
Director
|
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”), our former parent, 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 our
President 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 our 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).
31
Michael Acton,
Secretary, Treasurer and Chief Financial Officer. Mr. Acton
became our Chief Financial Officer on November 20, 2008. Previously
he had served as the Company’s Chief Financial Officer from March 1999 until
June 2008. He has served as our Secretary/Treasurer since March
1999. Since June 2008 he has also served as the Chief Financial
Officer of ActiveCare, our former subsidiary. He is a Certified
Public Accountant in the State of Utah.
Bernadette
Suckel, Managing Director of Sales & Marketing. Ms. Suckel
joined us on April 24, 2008. Prior to coming to RemoteMDx, 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 been our Chief
Technology Officer since November 21, 2004. He 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, our Chairman and CEO.
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 ActiveCare. He was our President
from August 2003 until June 2008. Prior to joining us, 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. Effective November 2, 2009, Mr. Dalton resigned
from the board of directors to focus on his opportunities at
ActiveCare.
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 founded a new company providing construction services to major companies
developing gas wells in the Marcellus shale. 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 our 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: Sulphco, Inc., New
Frontier Energy, Inc., DollarDays International, Inc., Subaye Corp. and National
Patent Development Corporation. In recent years, Mr. Schafran served in
several capacities, including, as a Director of PubliCard, Inc. and
ElectroEnergy, and 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 our board of directors.
David
P. Hanlon, Director. Mr. Hanlon resigned as Chief Executive
Officer and President of Empire Resorts, Inc., a public company in the gaming
industry in May 2009. 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 our board of
directors.
32
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 our shareholders. The board
establishes policy and provides our strategic direction, oversight, and control.
The board met 11 times during fiscal year 2009. All directors attended at least
70% 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, and Mr. Schafran are independent based on the applicable regulations
of the SEC.
Shareholder
Communications with Directors
If we
receive correspondence from our 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 2009. Members of the Audit
Committee during fiscal year 2009 and at the date of this Report are Larry
Schafran (Chairman) 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 our 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
our 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, 2009 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 our audited financial statements for the fiscal year September
30, 2009 be included in this Report.
33
Compensation
Committee. The Compensation Committee was restructured during
the fiscal year ended September 30, 2009, with Robert Childers, one of our
directors, appointed by the board of directors to serve as the chair. In
addition, Larry Schafran serves as a member of the Compensation
Committee. The Compensation Committee met three times during fiscal
year 2009. 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 our 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 fiscal year ended September 30, 2009,
Larry Schafran, one of our directors, was appointed as the chair 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, Robert Childers serves as a member of the
Nominating Committee.
Code of Ethics. We
have established a Code of Business Ethics that applies to our officers,
directors and employees. The Code of Business Ethics contains general guidelines
for conducting our business 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.
Compensation
Committee Interlocks and Insider Participation
The
Compensation Committee during fiscal 2009 was composed of Robert Childers and
Larry Schafran. All members of the Compensation Committee are independent
directors. No member of our Compensation Committee is a current or former
officer or employee of RemoteMDx or any of our subsidiaries, and no director or
executive officer of RemoteMDx is a director or executive officer of any other
corporation that has a director or executive officer who is also a director of
RemoteMDx.
Item 11. Executive
Compensation
Compensation
Discussion and Analysis
The
following is a discussion of our program for compensation of our named executive
officers. Our 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 our 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
Our
compensation program is designed to encompass several factors in determining the
compensation of our named executive officers. The following are the
main objectives of the compensation program for our 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.
|
Our
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.
|
34
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 our Compensation Committee. Factors
considered in determining the base salary included Mr. Derrick’s status as one
of our founders; his experience and length of service with us; his experience in
the industries in which he 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 us. 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 fiscal year ended September 30, 2008, we issued
1,000,000 shares of common stock valued at $1.52 per share to prepay services in
connection with his base salary. Although, these shares have not yet
been sold and had a market value of $110,000 as of September 30, 2009, we
recorded $240,000 and $60,000 of expense during the fiscal years ended September
30, 2009 and 2008, respectively, in connection with the 1,000,000 shares issued
in fiscal year 2008. As of September 30, 2009, the outstanding
prepaid salary of $1,220,000, 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 our Compensation
Committee. Factors considered in determining Mr. Hastings’ base
salary included his background in the industries in which we operate; 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 our 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.
35
Recent
Developments
Effective
December 4, 2009, the Compensation Committee approved the
following:
|
|
·
|
767
shares of Series D Preferred stock for a value of $644,000 were issued to
Mr. Derrick for guaranteeing loans, pledge of certificates of deposit to
secure a line of credit, his efforts in connection with the conversion of
existing debt into shares of Series D Preferred stock, and the raise of
additional capital.
|
|
|
·
|
1,250,000
warrants to purchase common stock held by Mr. Hastings were vested and
re-priced from $1.55 to $0.13 per share. Additionally, $250,000
warrants granted to Mr. Hastings were re-priced from $0.30 to $0.13 per
share.
|
|
|
·
|
4,283,767
vested warrants previously granted to the members of the board of
directors were re-priced to $0.13 per
share.
|
In the
repricing of the warrants described above, the new exercise price is equal to
the price at which our common stock was traded on December 4, 2009, the date the
repricing was approved by the committee.
Stock
options and stock awards
Stock
ownership is provided to enable named executive officers and directors to
participate in our success. 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
our stockholders. 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. Bonuses may be issued in the form of stock options or stock
awards.
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 us, 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.
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)
Larry
Schafran
|
36
Summary
Compensation Table
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
($)
|
Stock
awards
($)
|
Options/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)
|
2009
|
$ | 240,000 | $ | 300,000 | $ | - | $ | 185,571 | $ | - | $ | - | $ | 5,929 | $ | 731,500 | ||||||||||||||||
|
Chairman &
CEO
|
2008
|
$ | 240,000 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 13,020 | $ | 253,020 | ||||||||||||||||
|
John
L. Hastings III (2)
|
2009
|
$ | 302,885 | $ | 94,330 | $ | - | $ | 46,393 | $ | - | $ | - | $ | 18,868 | $ | 462,476 | ||||||||||||||||
|
President
and Chief Operating Officer
|
2008
|
$ | 200,000 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 3,879 | $ | 203,879 | ||||||||||||||||
|
Bernadette
Suckel (3)
|
2009
|
$ | 126,161 | $ | - | $ | 11,500 | $ | 104,520 | $ | - | $ | - | $ | - | $ | 242,181 | ||||||||||||||||
|
Managing
Director of Sales and Marketing
|
2008
|
$ | 55,846 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 55,846 |
|
(1)
|
Column
(i) includes additional compensation for health, dental, life, and vision
insurance paid on Mr. Derrick’s behalf by us. 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. During the fiscal year ended
September 30, 2009, we accrued a $300,000 bonus granted by the board of
directors that was subsequently converted into 300 shares of Series D
Preferred stock subsequent to September 30, 2009. Additionally,
options/warrant awards of $185,571 resulted from the issuance of 1,000,000
unregistered warrants at an exercise price of $0.30 per
share. These options/warrants were issued and vested on January
16, 2009 and have not yet been exercised as of the date of this
Report.
|
During
the fiscal year ended September 30, 2008, we issued 1,000,000 shares of
restricted common stock valued at $1.52 per share to prepay services in
connection with Mr. Derrick’s base salary. Although, these shares
have not yet been sold and had a market value of $110,000 as of September 30,
2009, we recorded $240,000 and $60,000 of expense during the fiscal year ended
September 30, 2009 and 2008, respectively, in connection with the 1,000,000
prepaid shares issued in fiscal year 2008.
To
summarize, Mr. Derrick was paid $5,929 and $193,020 in cash and $725,571 and
$60,000 in equity instruments for the fiscal years ended September 30, 2009 and
2008, respectively.
|
(2)
|
Mr.
Hastings became our President in June 2008 and Chief Operating Officer in
November 2008. He holds similar positions in SecureAlert.
Column (i) includes additional compensation for health, dental, and vision
insurance paid on his behalf. Options/warrant awards of $46,393
resulted from the issuance of 250,000 unregistered warrants at an exercise
price of $0.30 per share.
|
|
(3)
|
Mrs.
Suckel has served as Managing Director of Offender Management Solutions
since June 2008. Options/warrants awards of $37,114 resulted
from the issuance of 200,000 unregistered warrants at an exercise price of
$0.30 per share and $67,406 resulted from the vesting of 100,000
unregistered warrants with an exercise price of $1.55 per share previously
issued for a total of $104,520. Additionally, we granted 50,000 shares of
restricted common stock valued at $11,500 upon the date of
grant.
|
37
Outstanding
Equity Awards at Fiscal Year-End
|
Option
awards
|
Stock
Awards
|
||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
||
|
Name
|
Number
of
securities
underlying
unexercised
options
(#)
exercisable
|
Number
of
securities
underlying
unexercised
options
(#)
unexercisable
|
Equity
incentive
plan
awards:
Number
of
securities
underlying
unexercised
unearned
options
(#)
|
Option
exercise
price
($)
|
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
|
-
|
-
|
$0.30
|
1/15/2014
|
-
|
$ -
|
-
|
$ -
|
||
|
John
L. Hastings, III
|
250,000
|
-
|
-
|
$0.30
|
1/15/2014
|
-
|
$ -
|
-
|
$ -
|
||
|
Bernadette
Suckel
|
200,000
|
-
|
-
|
$0.30
|
1/15/2014
|
-
|
$ -
|
-
|
$ -
|
||
Notes: Market
value is based on the fair market value of our common stock on September 30,
2009 in the amount of $0.11 per share based on current market
price.
Option
Exercises and Stock Vested
|
Option
awards
|
Stock
awards
|
|||||||||||||||
| (a) |
(b)
|
(c)
|
(d)
|
(e)
|
||||||||||||
|
Name
|
Number
of shares
acquired
on exercise
(#)
|
Value
realized
on
exercise
($)
|
Number
of shares
acquired
on vesting
(#)
|
Value
realized
on
vesting
($)
|
||||||||||||
|
David
G. Derrick
|
- | $ | - | - | $ | - | ||||||||||
|
John
L. Hastings, III
|
- | $ | - | - | $ | - | ||||||||||
|
Bernadette
Suckel
|
- | $ | - | 50,000 | $ | 11,500 | (1) | |||||||||
Notes:
|
(1)
|
Stock
awards of $11,500 during the fiscal year ended September 30, 2009 resulted
from 50,000 shares of restricted common stock valued at $0.23 per share
for a total of $11,500.
|
Employment
Agreements
We have
no employment agreements with any executive officers at this time. By
agreement, however, the salary of Mr. Derrick is paid by ADP Management from the
proceeds of a management fee paid by us to ADP Management.
Compliance
with Section 16(a) of the Exchange Act
Section 16(a)
of the Exchange Act requires our officers, directors, and persons who
beneficially own more than 10% of our common stock to file reports of ownership
and changes in ownership with the Securities and Exchange Commission. Officers,
directors, and greater-than-ten-percent shareholders are also required by the
SEC to furnish us with copies of all Section 16(a) forms that they
file.
Based
solely upon a review of these forms that were furnished to us, and based on
representations made by certain persons who were subject to this obligation that
such filings were not required to be made, we believe that all reports required
to be filed by these individuals and persons under Section 16(a) were filed
on time in fiscal year 2009, except the following:
|
|
·
|
Mr.
Derrick filed one late Form 4;
|
|
|
·
|
ADP
Management filed one late Form
4.
|
38
Compensation
of Directors
The table
below summarizes the compensation paid by us to non-employee directors for the
fiscal year ended September 30, 2009.
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
||||||||||||||||
|
Name
|
Fees
earned or
paid
in cash
($)
|
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
|
(1)
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ 60,000
|
|||||||||||||||
|
Robert
Childers
|
$ 60,000
|
(2)
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ 60,000
|
|||||||||||||||
|
Peter
McCall
|
$ 20,000
|
(3)
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ 20,000
|
|||||||||||||||
|
Larry
Schafran
|
$ 60,000
|
(1)
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ 60,000
|
|||||||||||||||
|
James
Dalton
|
$ 60,000
|
(4)
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ 60,000
|
|||||||||||||||
Note:
|
|
(1)
|
We
accrued $60,000 in fees during the fiscal year ended September 30, 2009.
Subsequent to the fiscal year end, Mr. Hanlon and Mr. Schafran converted
these fees and all other outstanding fees earned in prior years totaling
$225,000 into 225 shares of Series D Preferred stock subsequent to
September 30, 2009.
|
|
|
(2)
|
Mr.
Childers converted $60,000 in fees into 200,000 shares of common stock or
$0.30 per share. Subsequent to the fiscal year end, Mr. Childers converted
$50,000 of fees accrued in prior years into 50 shares of Series D
Preferred stock.
|
|
|
(3)
|
Mr.
McCall resigned from the board of directors effective February 1, 2009.
The $20,000 in fees were earned, but not paid during the fiscal year ended
September 30, 2009.
|
|
|
(4)
|
Mr.
Dalton converted $15,000 in fees into 15 shares of Series D Preferred
stock and was paid $45,000 in cash subsequent to September 30,
2009. Also subsequent to the fiscal year end, Mr. Dalton
resigned from the board of
directors.
|
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.
No
options or warrants were granted to the board of directors for services rendered
during the fiscal year ended September 30, 2009. Subsequent to the fiscal year
end, we re-priced the following warrants shown in the table below to $0.13 per
share:
|
Name
|
Grant
Date
|
Expiration
Date
|
Exercise
Price
|
Number
of
Options
|
|
David
Hanlon
|
9/8/06
|
9/7/11
|
$1.41
|
50,000
|
|
7/14/08
|
7/13/13
|
$1.22
|
459,000
|
|
|
8/29/07
|
8/28/12
|
$2.15
|
100,000
|
|
|
Robert
Childers
|
10/5/06
|
10/4/11
|
$1.73
|
50,867
|
|
8/29/07
|
8/28/12
|
$2.15
|
150,000
|
|
|
7/14/08
|
7/13/13
|
$1.22
|
610,000
|
|
|
Larry
Schafran
|
9/8/06
|
9/7/11
|
$1.41
|
53,900
|
|
8/29/07
|
8/28/12
|
$2.15
|
150,000
|
|
|
12/5/07
|
12/4/12
|
$4.05
|
50,000
|
|
|
7/14/08
|
7/13/13
|
$1.22
|
610,000
|
During
fiscal year 2009, our two non-independent directors, Messrs. Derrick and
Hastings, received no additional compensation for their service as
directors.
39
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 29, 2009. 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
29, 2009, 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 us to have sole
voting and investment power with respect to all shares beneficially owned,
subject to community property laws where applicable.
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 our named executive officers or directors.
|
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
|
15.08%
|
|
Common
|
Kofler
Ventures (1)
R.C.S.
Luxembourg B-0090554
412F,
route d’ Esch, L-2086
Luxembourg,
Germany
|
17,000,000
|
8.03%
|
|
Common
|
Borinquen
Container Corporation
P.O.
Box 145170
Arecibo,
Puerto Rico 00614
|
13,005,759
|
6.14%
|
|
Common
|
Advance
Technology Investors, LLC (2)
154
Rock Hill Road
Spring
Valley, NY 10977
|
13,005,222
|
6.14%
|
|
Common
|
euromicron
AG
Speicherstrasse
1
D-60327
Frankfurt am Main
Germany
|
12,500,000
|
5.90%
|
|
Common
|
Mara
Holdings Limited (3)
2/3
B Horse Barrack Lane
Gibraltar
|
12,000,000
|
5.67%
|
|
Common
|
VATAS
Holdings GmbH (4)
Friedrichstrasse
95
10117
Berlin, Germany
|
11,500,000
|
5.43%
|
__________
|
(1)
|
Includes
5,000,000 shares of common stock, and 2,000 shares of Series D Preferred
stock convertible into 12,000,000 shares of common
stock.
|
|
(2)
|
Includes
11,135,222 shares of common stock, and 1,670,000 shares issuable upon
exercise of warrants. Also includes 100,000 shares of common stock owned
of record by Dina Weidman and 100,000 shares of common stock owned of
record by U/W Mark Weidman Trust.
|
|
(3)
|
Includes
2,000 shares of Series D Preferred stock convertible into 12,000,000
shares of commons stock.
|
|
(4)
|
Includes
5,500,000 shares of common stock, and 6,000,000 shares issuable upon
exercise of warrants.
|
40
We have
two classes of voting equity securities, the common stock and Series D Preferred
stock. The following table sets forth information as of December 29,
2009, 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
|
|
|
Common
|
David
G. Derrick (1)
|
26,249,063
|
12.40%
|
|
James
Dalton (2)
|
9,607,786
|
4.54%
|
|
|
John
L. Hastings, III
|
1,500,000
|
*
|
|
|
Michael
G. Acton (3)
|
1,202,043
|
*
|
|
|
Bernadette
Suckel
|
325,000
|
*
|
|
|
Robert
Childers (4)
|
2,100,657
|
*
|
|
|
Larry
Schafran (5)
|
1,630,000
|
*
|
|
|
David
Hanlon (6)
|
1,410,702
|
*
|
|
|
Officers
and Directors as a Group (9 persons) (7)
|
32,890,422
|
15.41%
|
________________
*Less
than 1% ownership percentage.
|
(1)
|
Mr.
Derrick is our Chief Executive Officer and Chairman of the board of
directors. Includes 1,204,000 shares of common stock owned of
record by Mr. Derrick, 2,645,063 shares of common stock in the name of ADP
Management, an entity controlled by Messrs. Derrick and Dalton, and
2,000,000 vested warrants. Additionally, includes 2,567 shares of Series D
Preferred stock convertible into 15,400,000 shares of common stock owned
of record by Mr. Derrick and 833 shares of Series D Preferred stock in the
name of ADP Management convertible into 5,000,000 shares of common
stock.
|
|
(2)
|
Mr.
Dalton is the former President of RemoteMDx and currently served as a
director until November 2009. Includes 1,872,723 shares of
common stock and 2,645,063 shares of common stock in the name of ADP
Management, an entity controlled by Messrs. Derrick and Dalton.
Additionally, includes 833 shares of Series D Preferred stock in the name
of ADP Management convertible into 5,000,000 shares of common stock and 15
shares of Series D Preferred stock in the name of Mr. Dalton convertible
into 90,000 shares of common stock.
|
|
(3)
|
Mr.
Acton is our Chief Financial Officer. Includes 1,002,043 shares
of common stock owned of record by Mr. Acton and 200,000 shares of common
stock issuable upon exercise of stock
warrants.
|
|
(4)
|
Mr.
Childers is a director. Includes 443,143 shares of common stock
owned of record by the Robert E. Childers Living Trust and 546,647 shares
owned of record by Mr. Childers. Includes 50 shares of Series D
Preferred stock in the name of Mr. Childers convertible into 300,000
shares of common stock. In addition, 810,867 shares issuable upon exercise
of stock warrants held by Mr. Childers have been
included.
|
|
(5)
|
Mr.
Schafran is a director. Includes 106,100 shares of common stock
owned of record by Mr. Schafran. Includes 110 shares of Series
D Preferred stock in the name of Mr. Schafran convertible into 660,000
shares of common stock. In addition, 863,900 shares of common stock
issuable upon exercise of stock warrants held by Mr. Schafran have been
included.
|
|
(6)
|
Mr.
Hanlon is a director. Includes 111,702 shares of common stock
owned of record by Mr. Hanlon. Includes 115 shares of Series D
Preferred stock in the name of Mr. Hanlon convertible into 690,000 shares
of common stock. In addition, 609,000 shares of common stock issuable upon
exercise of stock warrants held by Mr. Schafran have been
included.
|
|
(7)
|
Duplicate
entries eliminated.
|
Item 13. Certain
Relationships and Related Transactions, and Director Independence
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.
41
Related-Party
Line of Credit
As of
September 30, 2009, we owed $76,022 under a line-of-credit agreement with ADP
Management, an entity owned and controlled by Mr. Derrick, our Chief Executive
Officer. Outstanding amounts on the line of credit accrue interest at
11% per annum and are due upon demand. During the fiscal year ended
September 30, 2009, the net decrease under this line of credit was $466,782.
This decrease consisted of cash repayments of $739,063 offset, in part, by
$272,281 of expenses owed to ADP Management that are reimbursable by
us.
Related-Party
Notes Payable
In
November 2008, we borrowed $1,000,000 from Mr. Derrick, our Chief Executive
Officer. The unsecured note payable accrues interest at 15% and was
due and payable upon our receiving cash proceeds of $1,000,000 or more from the
sale of common stock or other additional financing activities or February 4,
2009, whichever comes first. We paid to Mr. Derrick a loan
origination fee of $50,000 in cash and 100,000 shares of restricted common
stock. In February 2009, Mr. Derrick loaned us an additional $500,000
resulting in a total of $1,500,000 due to Mr. Derrick. We and Mr.
Derrick agreed to extend the due date of the full obligation to February 26,
2010. As of September 30, 2009, we owed $1,500,000 plus $12,197 in
accrued interest to Mr. Derrick. Subsequent to September 30, 2009, we and Mr.
Derrick agreed to convert the note of $1,500,000 into 1,500 shares of Series D
Preferred stock.
In
September 2008, we borrowed $250,000 from Randy Olshen, the former President of
SecureAlert. The unsecured note payable accrued interest at 11% and
was due and payable on December 31, 2009 or upon demand whichever occurs
first. As of September 30, 2009, this note was paid in
full.
Foreclosure
Liability
In July
2009, we entered into a promissory note with an unrelated entity in the amount
of $1,000,000 payable on December 31, 2010. The note bears interest
at a rate of 15% per annum paid quarterly. As additional
consideration for the loan to settle a registration right dispute and to induce
the lender to loan the money, we granted the lender 8,000,000 shares of
common. Additionally, a related-party entity, ADP Management,
collateralized this note with 5,000,000 shares of the Company’s common stock. In
August 2009, we defaulted on the loan because we failed to register the
8,000,000 shares of common stock within 30 days of entering into the agreement
resulting in the lender foreclosing on the 5,000,000 shares of common stock held
as collateral. As of September 30, 2009, we accrued $775,000 as a “foreclosure
liability” to record our obligation to repay the 5,000,000 shares of common
stock to ADP Management. Subsequent to September 30, 2009, we agreed
to issue 833 shares of Series D Preferred stock to ADP Management as payment
this liability.
Related-Party
Series A 15% Debenture
On May 1,
2009, we issued a Series A 15% debenture due and payable on November 1, 2010 to
an entity controlled by an employee of the Company for $250,000 in cash. In
addition to the rights and terms of the debenture, the entity received one-year
warrants to purchase 2,200,000 shares of our common stock at an exercise price
of $0.25 per share valued at $43,926. As of September 30, 2009, the outstanding
balance owed on the debenture was $250,000 plus $9,452 in accrued interest.
Subsequent to September 30, 2009, we agreed to issue 250 shares of Series D
Preferred stock in exchange for the debenture of $250,000.
Consulting
Arrangements
We agreed
to pay consulting fees to ADP Management for assisting us to develop our 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 we agreed to
reimburse the expenses incurred by ADP Management (including the salaries of
certain of our officers) in the course of performing services under the
consulting arrangement. Effective April 1, 2008, ADP Management reduced the
consulting fee from $40,000 to $20,000 per month to reflect the resignation of
Mr. Dalton as our President.
The ADP
Management agreement also requires ADP Management to pay the salary of Mr.
Derrick as our Chief Executive Officer and Chairman of the board of
directors. The board of directors, which at the time did not include
Mr. Derrick, approved both of these arrangements.
During
the fiscal year ended September 30, 2008, we issued 1,000,000 shares of common
stock valued at $1.52 per share to prepay consulting fees to ADP Management
which will be reflected in future periods. We recorded $240,000 and
$60,000 of expense associated with the issuance of these shares during the
fiscal years ended September 30, 2009 and September 30, 2008,
respectively. As of September 30, 2009, the remaining deferred
compensation was $1,220,000.
42
Director
Independence
As of the
date of this report, our common stock is traded on the OTC Bulletin Board (the
“Bulletin Board”). The Bulletin Board does not impose on us standards
relating to director independence or the makeup of committees with independent
directors, or provide definitions of independence. Nevertheless, we
have undertaken to appoint three individuals to our board of directors, Messrs.
Schafran, 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, or Mr. Childers:
|
|
·
|
has
been at any time during the past three years employed by us or by any of
our parent or subsidiary;
|
|
|
·
|
has
accepted or has a family member who accepted any compensation from us 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 us 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 we made, or from
which we 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 our executive
officers serve on the compensation committee of such other entity;
or
|
|
|
·
|
is,
or has a family member who is, a current partner of our outside auditor,
or was a partner or employee of our outside auditor who worked on our
audit at any time during any of the past three
years.
|
Item 14. Principal
Accounting Fees and Services
Audit
Fees
Audit services consist of the audit of
the annual consolidated financial statements of us, and other services related
to filings and registration statements filed by us and our subsidiaries and
other pertinent matters. Audit fees paid to Hansen Barnett &
Maxwell for fiscal years 2009 and 2008 totaled approximately $168,000 and
$166,000, 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 us in fiscal years 2009 and 2008.
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 2009 by Hansen Barnett
& Maxwell was compatible with maintaining Hansen Barnett & Maxwell's
independence.
Report
of the Audit Committee
The Audit
Committee oversees our 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 our audited financial statements as of
and for the fiscal year ended September 30, 2009.
We have
discussed with our independent registered public accountant, 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 our 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 us and our management.
Based on
our review and discussions referred to above, we have recommended to the board
of directors that our audited financial statements be included in our Annual
Report on Form 10-K for the fiscal year ended September 30, 2009, for
filing with the Securities and Exchange Commission.
Respectfully
submitted by the members of the Audit Committee:
|
Larry
Schafran, Chair
David
Hanlon
|
43
PART
IV
Item 15. Consolidated
Financial Statements and Exhibits
(a) The following documents
are filed as part of this Form:
1. Financial
Statements
|
Report
of Independent Registered Public Accounting Firm
|
50
|
|
|
Consolidated
Balance Sheets
|
51
|
|
|
Consolidated
Statements of Operations
|
53
|
|
|
Consolidated
Statements of Stockholders' Equity (Deficit) and Comprehensive
Income
|
54
|
|
|
Consolidated
Statements of Cash Flows
|
60
|
|
|
Notes
to the Consolidated Financial Statements
|
62
|
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(i)(1)
|
Articles
of Incorporation (incorporated by reference to our Registration Statement
and Amendments thereto on Form 10-SB, effective December 1,
1997).
|
|
3(i)(2)
|
Amendment
to Articles of Incorporation for Change of Name (previously filed as
Exhibit on Form 10-KSB for the fiscal year ended September 30,
2001).
|
|
3(i)(3)
|
Amendment
to Articles of Incorporation Amending Rights and Preferences of Series A
Preferred Stock (previously filed as Exhibit on Form 10-KSB for the fiscal
year ended September 30, 2001).
|
|
3(i)(4)
|
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(i)(5)
|
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 our annual report on Form 10-KSB for the
fiscal year ended September 30, 2001).
|
|
3(i)(6)
|
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 our Current Report on Form 8-K, filed with the Commission
on March 24, 2006).
|
|
3(i)(7)
|
Articles
of Amendment to Articles of Incorporation filed July 12, 2006 (previously
filed as exhibits to our current report on Form 8-K filed July 18, 2006,
and incorporated herein by reference).
|
|
3(i)(8)
|
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(i)(9)
|
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).
|
|
3(i)(10)
|
Articles
of Amendment to the Articles of Incorporation and Certificate of Amendment
to the Designation of Rights and Preferences Related to Series D 8%
Convertible Preferred Stock of RemoteMDx, Inc.
|
|
3(ii)
|
Bylaws
(incorporated by reference to our Registration Statement on Form 10-SB,
effective December 1, 1997).
|
44
|
4.01
|
2006
Equity Incentive Award Plan (previously filed in August 2006 the Form
10-QSB for the nine months ended June 30, 2006).
|
|
10.01
|
Distribution
and Separation Agreement (incorporated by reference to our 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 our
Registration Statement and Amendments thereto on Form 10-SB, effective
December 1, 1997).
|
|
10.03
|
1997
Transition Plan (incorporated by reference to our 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 our 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 our annual report on Form 10-KSB for
the fiscal year ended September 30, 2001).
|
|
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 our 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 our 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 fiscal 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 fiscal 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 fiscal year ended September 30, 2007, filed in January
2008).
|
45
|
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 fiscal 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
fiscal 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
fiscal 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
fiscal 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
fiscal 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 fiscal
year ended September 30, 2007, filed in June 2008).
|
|
10.25
|
Distribution
and License Agreement between euromicron AG, a German corporation, and the
Company, dated May 28, 2009 (previously filed as an Exhibit on Form 10-Q
for the nine months ended June 30, 2009, filed in August
2009).
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm.
|
|
31(i)
|
Certification
of Chief Executive Officer under Section 302 of Sarbanes-Oxley Act of
2002.
|
|
31(ii)
|
Certification
of Chief Financial Officer under Section 302 of Sarbanes-Oxley Act of
2002.
|
|
32
|
Certifications
under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
1350).
|
46
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:
January 13, 2010
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
|
January
13, 2010
|
||
|
David
G. Derrick
|
Chief
Executive Officer
|
|||
|
(Principal
Executive Officer)
|
||||
|
/s/ John
L. Hastings, III
|
President
and Chief Operating Officer
|
January
13, 2010
|
||
|
John
L. Hastings, III
|
||||
|
/s/ Robert
E. Childers
|
Director
|
January
13, 2010
|
||
|
Robert
E. Childers
|
||||
|
/s/ Larry
G. Schafran
|
Director
|
January
13, 2010
|
||
|
Larry
G. Schafran
|
||||
|
/s/ David
P. Hanlon
|
Director
|
January
13, 2010
|
||
|
David
P. Hanlon
|
||||
|
/s/ Michael
G. Acton
|
Chief
Financial Officer
|
January
13, 2010
|
||
|
Michael
G. Acton
|
(principal
financial officer)
|
|||
|
/s/ Chad
D. Olsen
|
Corporate
Controller
|
January
13, 2010
|
||
|
Chad
D. Olsen
|
(principal
accounting officer)
|
|||
47
RemoteMDx,
Inc.
Consolidated
Financial Statements
September
30, 2009 and 2008
48
Index
to Consolidated Financial Statements
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
50
|
|
Consolidated
Balance Sheets as of September 30, 2009 and 2008
|
51
|
|
Consolidated
Statements of Operations for the fiscal years ended September 30, 2009 and
2008
|
53
|
|
Consolidated
Statements of Stockholders’ Equity (Deficit) for the fiscal years ended
September 30, 2008 and 2009
|
54
|
|
Consolidated
Statements of Cash Flows for the fiscal years ended September 30, 2009 and
2008
|
60
|
|
Notes
to Consolidated Financial Statements
|
62
|
49
|
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
|
|
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, 2009 and 2008, and the
related consolidated statements of operations, stockholders’ equity (deficit),
and cash flows for each of the years in the two-year period ended September 30,
2009. 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. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit also 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, 2009 and 2008, and the consolidated results of its operations and
its cash flows for each of the years in the two-year period ended September 30,
2009 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.
HANSEN,
BARNETT & MAXWELL, P.C.
Salt Lake
City, Utah
January
12, 2010
50
REMOTEMDX,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS
OF SEPTEMBER 30, 2009 AND 2008
|
Assets
|
2009
|
2008
|
||||||
|
Current
assets:
|
||||||||
|
Cash
|
$ | 602,321 | $ | 2,782,953 | ||||
|
Deposit
held in escrow
|
- | 500,000 | ||||||
|
Accounts
receivable, net of allowance for doubtful accounts of $266,000
and $312,000, respectively
|
1,441,648 | 1,441,853 | ||||||
|
Receivables
from related-party
|
- | 55,385 | ||||||
|
Prepaid
expenses and other
|
275,390 | 224,842 | ||||||
|
Inventory,
net of reserves of $83,092 and $0, respectively
|
603,329 | - | ||||||
|
Total
current assets
|
2,922,688 | 5,005,033 | ||||||
|
Property
and equipment, net of accumulated depreciation of $2,525,180 and
$1,937,710, respectively
|
1,313,306 | 1,581,558 | ||||||
|
Monitoring
equipment, net of accumulated depreciation of $2,944,197 and $3,061,321,
respectively
|
1,316,493 | 1,349,146 | ||||||
|
Goodwill
|
2,468,081 | 4,811,834 | ||||||
|
Intangible
assets, net of amortization of $126,655 and $16,500,
respectively
|
496,346 | 216,500 | ||||||
|
Other
assets
|
76,675 | 46,626 | ||||||
|
Total
assets
|
$ | 8,593,589 | $ | 13,010,697 | ||||
See
accompanying notes to consolidated financial statements.
51
REMOTEMDX,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS (Continued)
AS
OF SEPTEMBER 30, 2009 AND 2008
|
Liabilities
and Stockholders’ Equity
|
||||||||
|
2009
|
2008
|
|||||||
|
Current
liabilities:
|
||||||||
|
Bank
line of credit
|
$ | 252,600 | $ | 3,462,285 | ||||
|
Accounts
payable
|
2,339,786 | 2,059,188 | ||||||
|
Accrued
liabilities
|
3,506,680 | 1,781,267 | ||||||
|
Deferred
revenue
|
56,858 | 21,343 | ||||||
|
Related-party
note payable and line of credit
|
1,576,022 | 792,804 | ||||||
|
SecureAlert
Series A Preferred stock redemption obligation
|
3,148,943 | 3,244,758 | ||||||
|
Derivative
liability (Note 11)
|
1,219,426 | - | ||||||
|
Promissory
notes payable, net of debt discount of $41,556 and $0,
respectively
|
2,008,444 | - | ||||||
|
Senior
secured note payable, net of debt discount of $529,109 and $0,
respectively
|
2,890,522 | - | ||||||
|
Current
portion of Series A 15% debentures, net of debt discount of $1,272,189 and
$0, respectively
|
2,127,811 | - | ||||||
|
Current
portion of long-term debt
|
272,493 | 465,664 | ||||||
|
Total
current liabilities
|
19,399,585 | 11,827,309 | ||||||
|
Series
A 15% debentures net of current portion, net of debt discount of $549,531
and $0, respectively
|
557,219 | - | ||||||
|
Long-term
debt, net of current portion, net of debt discount of $525,665 and $0,
respectively
|
1,009,606 | 1,147,382 | ||||||
|
Total
liabilities
|
20,966,410 | 12,974,691 | ||||||
|
Stockholders’
equity (deficit):
|
||||||||
|
Preferred
stock:
|
||||||||
|
Series
A 10% dividend, convertible, non-voting, $0.0001 par value: 40,000 shares
designated; zero and 19 shares outstanding, respectively (aggregate
liquidation preference of $0)
|
- | 1 | ||||||
|
Series
B convertible, $0.0001 par value: 2,000,000 shares designated; zero and
10,999 shares outstanding, respectively (aggregate liquidation preference
of $0)
|
- | 1 | ||||||
|
Common
stock, $0.0001 par value: 250,000,000 shares authorized;
210,365,988 and 155,881,260 shares outstanding,
respectively
|
21,037 | 15,588 | ||||||
|
Additional
paid-in capital
|
194,659,044 | 186,203,084 | ||||||
|
Deferred
compensation
|
(1,287,406 | ) | (3,498,672 | ) | ||||
|
Accumulated
deficit
|
(205,765,496 | ) | (182,683,996 | ) | ||||
|
Total
stockholders’ equity (deficit)
|
(12,372,821 | ) | 36,006 | |||||
|
Total
liabilities and stockholders’ equity
|
$ | 8,593,589 | $ | 13,010,697 | ||||
See
accompanying notes to consolidated financial statements.
52
REMOTEMDX,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE FISCAL YEARS ENDED SEPTEMBER 30, 2009 AND 2008
|
2009
|
2008
|
|||||||
|
Revenues:
|
||||||||
|
Products
|
$ | 570,749 | $ | 2,577,600 | ||||
|
Monitoring
services
|
12,055,159 | 9,826,077 | ||||||
|
Total
revenues
|
12,625,908 | 12,403,677 | ||||||
|
Cost
of revenues:
|
||||||||
|
Products
|
275,688 | 1,675,212 | ||||||
|
Monitoring
services
|
9,862,925 | 10,862,830 | ||||||
|
Impairment
of monitoring equipment and parts (Note 3)
|
2,319,530 | 570,948 | ||||||
|
Total
cost of revenues
|
12,458,143 | 13,108,990 | ||||||
|
Gross
(negative) margin
|
167,765 | (705,313 | ) | |||||
|
Operating
expenses:
|
||||||||
|
Selling,
general and administrative (including $3,315,716 and $26,324,358,
respectively, of compensation expense paid in stock or stock options /
warrants)
|
16,540,645 | 36,466,678 | ||||||
|
Research
and development (including $0 and $1,045,285, respectively, paid in stock
or stock options / warrants)
|
1,777,873 | 4,811,128 | ||||||
|
Impairment
of goodwill (Note 4)
|
2,804,580 | - | ||||||
|
Loss
from operations
|
(20,955,333 | ) | (41,983,119 | ) | ||||
|
Other
income (expense):
|
||||||||
|
Gain
on sale of intellectual property
|
- | 2,400,000 | ||||||
|
Redemption
of SecureAlert Series A Preferred
|
95,816 | (8,372,566 | ) | |||||
|
Interest
income
|
18,187 | 35,230 | ||||||
|
Interest
expense (including $2,695,759 and $865,568, respectively, paid in stock or
stock options / warrants)
|
(5,012,803 | ) | (1,566,542 | ) | ||||
|
Derivative
valuation gain (Note 11)
|
1,867,007 | - | ||||||
|
Other
income (expense), net
|
905,626 | 314,059 | ||||||
|
Net
loss from continuing operations
|
(23,081,500 | ) | (49,172,938 | ) | ||||
|
Discontinued
operations
|
- | (414,112 | ) | |||||
|
Net
loss
|
(23,081,500 | ) | (49,587,050 | ) | ||||
|
Dividends
on Series A Preferred stock
|
(175 | ) | (345,356 | ) | ||||
|
Net
loss attributable to common stockholders
|
$ | (23,081,675 | ) | $ | (49,932,406 | ) | ||
|
Net
loss per common share from continuing operations, basic and
diluted
|
$ | (0.13 | ) | $ | (0.35 | ) | ||
|
Net
loss per common share from discontinued operations, basic and
diluted
|
$ | (0.00 | ) | $ | (0.01 | ) | ||
|
Net
loss per common, basic and diluted
|
$ | (0.13 | ) | $ | (0.36 | ) | ||
|
Weighted
average common shares outstanding, basic and diluted
|
182,188,000 | 140,092,000 | ||||||
See
accompanying notes to consolidated financial statements.
53
REMOTEMDX,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR
THE FISCAL YEARS ENDED SEPTEMBER 30, 2008 AND 2009
|
Preferred
Stock
|
||||||||||||||||
|
Series
A
Shares
|
Series
A
Amount
|
Series
B
Shares
|
Series
B
Amount
|
|||||||||||||
|
Balance
as of October 1, 2007
|
19 | $ | 1 | 12,999 | $ | 1 | ||||||||||
|
Issuance
of common stock for:
|
||||||||||||||||
|
Conversion
of Series B Preferred stock
|
- | - | (2,000 | ) | - | |||||||||||
|
Settlement
of lawsuit
|
- | - | - | - | ||||||||||||
|
Related
provisions of debt
|
- | - | - | - | ||||||||||||
|
Services
|
- | - | - | - | ||||||||||||
|
Cash
|
- | - | - | - | ||||||||||||
|
Acquisition
of subsidiaries
|
- | - | - | - | ||||||||||||
|
Exercise
of options and warrants
|
- | - | - | - | ||||||||||||
|
Issuance
of warrants for:
|
||||||||||||||||
|
Related
provisions of 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
as of September 30, 2008
|
19 | $ | 1 | 10,999 | $ | 1 | ||||||||||
See
accompanying notes to consolidated financial statements.
54
REMOTEMDX,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)
FOR
THE FISCAL YEARS ENDED SEPTEMBER 30, 2008 AND 2009
|
Additional
|
||||||||||||||||
|
Common
Stock
|
Paid-In
|
Deferred
|
||||||||||||||
|
Shares
|
Amount
|
Capital
|
Compensation
|
|||||||||||||
|
Balance
as of 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
as of September 30, 2008
|
155,881,260 | $ | 15,588 | $ | 186,203,084 | $ | (3,498,672 | ) | ||||||||
See
accompanying notes to consolidated financial statements.
55
REMOTEMDX,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)
FOR
THE FISCAL YEARS ENDED SEPTEMBER 30, 2008 AND 2009
|
Subscription
Receivable
|
Accumulated
Deficit
|
Total
|
||||||||||
|
Balance
as of 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
as of September 30, 2008
|
$ | - | $ | (182,683,996 | ) | $ | 36,006 | |||||
See
accompanying notes to consolidated financial statements.
56
REMOTEMDX,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)
FOR
THE FISCAL YEARS ENDED SEPTEMBER 30, 2008 AND 2009
|
Preferred
Stock
|
||||||||||||||||
|
Series
A
Shares
|
Series
A
Amount
|
Series
B
Shares
|
Series
B
Amount
|
|||||||||||||
|
Balance
as of October 1, 2008
|
19 | $ | 1 | 10,999 | $ | 1 | ||||||||||
|
Issuance
of common stock for:
|
||||||||||||||||
|
Conversion
of Series A Preferred stock
|
(19 | ) | (1 | ) | - | - | ||||||||||
|
Conversion
of Series B Preferred stock
|
- | - | (10,999 | ) | (1 | ) | ||||||||||
|
Settlement
of lawsuit
|
- | - | - | - | ||||||||||||
|
Related
issuances of debt
|
- | - | - | - | ||||||||||||
|
Services
|
- | - | - | - | ||||||||||||
|
Cash
|
- | - | - | - | ||||||||||||
|
Acquisition
of subsidiaries
|
- | - | - | - | ||||||||||||
|
Acquisition
extension
|
- | - | - | - | ||||||||||||
|
Issuance
of warrants for:
|
||||||||||||||||
|
Related
issuances of debt
|
- | - | - | - | ||||||||||||
|
Services
|
- | - | - | - | ||||||||||||
|
Acquisition
of subsidiary
|
- | - | - | - | ||||||||||||
|
Amortization
of deferred consulting
|
- | - | - | - | ||||||||||||
|
Amortization
of financing costs
|
- | - | - | - | ||||||||||||
|
Beneficial
conversion feature recorded as interest expense on notes
|
- | - | - | - | ||||||||||||
|
Forgiveness
of debt from related party
|
- | - | - | - | ||||||||||||
|
Issuance
of RemoteMDx Series A Preferred stock for accrued
dividends
|
- | - | - | - | ||||||||||||
|
Net
loss
|
- | - | - | - | ||||||||||||
|
Balance
as of September 30, 2009
|
- | $ | - | - | $ | - | ||||||||||
See accompanying notes to consolidated financial
statements.
57
REMOTEMDX,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)
FOR
THE FISCAL YEARS ENDED SEPTEMBER 30, 2008 AND 2009
|
Additional
|
Deferred
|
|||||||||||||||
|
Common
Stock
|
Paid-In
|
Financing
and
|
||||||||||||||
|
Shares
|
Amount
|
Capital
|
Consulting
|
|||||||||||||
|
Balance
as of October 1, 2008
|
155,881,260 | $ | 15,588 | $ | 186,203,084 | $ | (3,498,672 | ) | ||||||||
|
Issuance
of common stock for:
|
||||||||||||||||
|
Conversion
of Series A Preferred stock
|
9,306 | 1 | - | - | ||||||||||||
|
Conversion
of Series B Preferred stock
|
10,999 | 1 | - | - | ||||||||||||
|
Settlement
of lawsuits
|
5,400,000 | 540 | 1,029,460 | - | ||||||||||||
|
Related
issuances of debt
|
25,953,016 | 2,595 | 1,767,955 | (138,000 | ) | |||||||||||
|
Services
|
2,254,121 | 226 | 928,648 | (200,000 | ) | |||||||||||
|
Cash
|
17,850,000 | 1,785 | 3,248,215 | - | ||||||||||||
|
Acquisition
of subsidiaries
|
2,857,286 | 286 | 656,890 | - | ||||||||||||
|
Acquisition
extension
|
150,000 | 15 | 19,485 | - | ||||||||||||
|
Issuance
of warrants for:
|
||||||||||||||||
|
Related
issuances of debt
|
- | - | 96,844 | - | ||||||||||||
|
Services
|
- | - | 392,506 | (46,667 | ) | |||||||||||
|
Acquisition
of subsidiary
|
- | - | 114,383 | - | ||||||||||||
|
Amortization
of deferred consulting
|
- | - | - | 1,930,678 | ||||||||||||
|
Amortization
of financing costs
|
- | - | - | 665,255 | ||||||||||||
|
Beneficial
conversion feature recorded as interest expense on notes
|
- | - | 122,727 | - | ||||||||||||
|
Forgiveness
of debt from related party
|
- | - | 79,022 | - | ||||||||||||
|
Issuance
of RemoteMDx Series A Preferred stock for accrued
dividends
|
- | - | (175 | ) | - | |||||||||||
|
Net
loss
|
- | - | - | - | ||||||||||||
|
Balance
as of September 30, 2009
|
210,365,988 | $ | 21,037 | $ | 194,659,044 | $ | (1,287,406 | ) | ||||||||
58
REMOTEMDX,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)
FOR
THE FISCAL YEARS ENDED SEPTEMBER 30, 2008 AND 2009
|
Accumulated
Deficit
|
Total
|
|||||||
|
Balance
as of October 1, 2008
|
$ | (182,683,996 | ) | $ | 36,006 | |||
|
Issuance
of common stock for:
|
||||||||
|
Conversion
of Series A Preferred stock
|
- | - | ||||||
|
Conversion
of Series B Preferred stock
|
- | - | ||||||
|
Settlement
of lawsuits
|
- | 1,030,000 | ||||||
|
Related
issuances of debt
|
- | 1,632,550 | ||||||
|
Services
|
- | 728,874 | ||||||
|
Cash
|
- | 3,250,000 | ||||||
|
Acquisition
of subsidiaries
|
- | 657,176 | ||||||
|
Acquisition
of extension
|
- | 19,500 | ||||||
|
Issuance
of warrants for:
|
||||||||
|
Related
issuances of debt
|
- | 96,844 | ||||||
|
Services
|
- | 345,839 | ||||||
|
Acquisition
of subsidiary
|
- | 114,383 | ||||||
|
Amortization
of deferred consulting
|
- | 1,930,678 | ||||||
|
Amortization
of financing costs
|
- | 665,255 | ||||||
|
Beneficial
conversion feature recorded as interest expense on notes
|
- | 122,727 | ||||||
|
Forgiveness
of debt from related party
|
- | 79,022 | ||||||
|
Issuance
of RemoteMDx Series A Preferred stock for accrued
dividends
|
- | (175 | ) | |||||
|
Net
loss
|
(23,081,500 | ) | (23,081,500 | ) | ||||
|
Balance
as of September 30, 2009
|
$ | (205,765,496 | ) | $ | (12,372,821 | ) | ||
59
REMOTEMDX,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE FISCAL YEARS ENDED SEPTEMBER 30, 2009 AND 2008
|
|
2009
|
2008
|
||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (23,081,500 | ) | $ | (49,587,050 | ) | ||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
|
Depreciation
and amortization
|
2,087,949 | 1,736,492 | ||||||
|
Common
stock issued for services
|
728,876 | 13,620,584 | ||||||
|
Common
stock issued to settle lawsuit
|
261,521 | 1,276,000 | ||||||
|
Amortization
of debt discount
|
2,030,504 | - | ||||||
|
Amortization
of deferred financing and consulting costs
|
2,595,933 | 5,968,338 | ||||||
|
Derivative
liability valuation
|
(1,867,007 | ) | - | |||||
|
Registration
payment arrangement expense
|
- | 130,000 | ||||||
|
Stock
options and warrants issued during the period for services
|
345,838 | 4,263,467 | ||||||
|
Redemption
of SecureAlert Series A Preferred stock
|
(95,816 | ) | 8,205,922 | |||||
|
Impairment
of goodwill
|
2,804,580 | - | ||||||
|
Common
stock issued for acquisition option extension cost
|
19,500 | - | ||||||
|
Increase
in related-party line of credit for services
|
272,281 | 618,433 | ||||||
|
Impairment
of monitoring equipment and parts
|
2,319,530 | 570,948 | ||||||
|
Loss
from discontinued operations
|
- | 414,112 | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable, net
|
(23,490 | ) | 3,293,050 | |||||
|
Interest
receivable (payable)
|
- | (9,068 | ) | |||||
|
Deposit
held in escrow
|
500,000 | (500,000 | ) | |||||
|
Prepaid
expenses and other assets
|
(25,212 | ) | 720,591 | |||||
|
Accounts
payable
|
745,630 | (1,373,491 | ) | |||||
|
Accrued
liabilities
|
1,824,042 | 999,310 | ||||||
|
Deferred
revenue
|
35,515 | (20,382 | ) | |||||
|
Net
cash used in operating activities
|
(8,521,326 | ) | (9,672,744 | ) | ||||
|
Cash
flows from investing activities:
|
||||||||
|
Purchase
of property and equipment
|
(380,647 | ) | (334,226 | ) | ||||
|
Purchase
of monitoring equipment and parts
|
(1,312,397 | ) | (192,221 | ) | ||||
|
Proceeds
from sale of equipment
|
16,577 | - | ||||||
|
Net
cash used in investing activities
|
(1,676,467 | ) | (526,447 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Payments
on related-party line of credit
|
(739,063 | ) | (315,392 | ) | ||||
|
Net
principal proceeds (reductions) in bank line of credit
borrowings
|
388,593 | (396,700 | ) | |||||
|
Payments
on notes payable
|
(1,115,237 | ) | (336,133 | ) | ||||
|
Borrowings
on related-party notes payable
|
680,229 | 975,578 | ||||||
|
Principal
payments on notes payable related to acquisitions
|
- | (2,176,821 | ) | |||||
|
Cash
acquired through acquisitions
|
- | 163,002 | ||||||
|
Proceeds
from the issuance of Series A 15% debentures
|
4,496,750 | - | ||||||
|
Proceeds
from sale of common stock
|
3,250,000 | 5,058,014 | ||||||
|
Proceeds
from sale of warrants and subsidiary stock
|
- | 2,400,000 | ||||||
|
Proceeds
from issuance of notes payable
|
1,055,889 | 34,344 | ||||||
|
Proceeds
from exercise of options and warrants
|
- | 2,772,381 | ||||||
|
Net
cash provided by financing activities
|
8,017,161 | 8,178,273 | ||||||
|
Net
decrease in cash
|
(2,180,632 | ) | (2,020,918 | ) | ||||
|
Cash,
beginning of year
|
2,782,953 | 4,803,871 | ||||||
|
Cash,
end of year
|
$ | 602,321 | $ | 2,782,953 | ||||
See
accompanying notes to consolidated financial statements.
60
REMOTEMDX,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
FOR
THE FISCAL YEARS ENDED SEPTEMBER 30, 2009 AND 2008
|
2009
|
2008
|
|||||||
|
Cash
paid for interest
|
$ 1,963,200
|
$ |
700,974
|
|||||
|
Supplemental
schedule of non-cash investing and financing activities:
|
||||||||
|
Issuance
of 9,306 and zero common shares, respectively, in exchange for
19 and zero shares of Series A Preferred stock,
respectively
|
$ 1
|
$ |
-
|
|||||
|
Issuance
of 10,999 and 2,000 common shares, respectively, in exchange
for 10,999 and 15,000 shares of Series B Preferred stock,
respectively
|
1
|
2
|
||||||
|
Issuance
of 2,000,000 and 360,000 common shares, respectively for deferred
consulting services and financing services
|
384,667
|
403,200
|
||||||
|
Preferred
Series A and C stock dividends
|
175
|
423
|
||||||
|
SecureAlert
Series A Preferred stock dividends accrued
|
-
|
480,537
|
||||||
|
Forgiveness
of debt from related-party debt
|
79,022
|
-
|
||||||
|
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
|
-
|
847,500
|
||||||
|
Settlement
of SecureAlert Series A Preferred stock
|
-
|
3,590,000
|
||||||
|
Deconsolidation
of ActiveCare
|
-
|
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
|
-
|
1,752,000
|
||||||
|
Issuance
of common stock and stock options to acquire the assets and
liabilities of Bishop Rock Software
|
856,522
|
-
|
||||||
|
Stock
issued in connection with debt (as discount)
|
1,739,393
|
-
|
||||||
|
Beneficial
conversion feature recorded
|
122,727
|
-
|
||||||
|
Debt
issued to settle line of credit
|
3,549,631
|
-
|
||||||
|
Common
stock cancelled
|
175
|
-
|
||||||
|
Acquisition
of monitoring equipment through issuance of note payable
|
2,887,987
|
-
|
||||||
|
Stock
issued to settle related-party note payable and accrued
interest
|
218,479
|
-
|
||||||
|
Issuance
of common stock to settle accounts payables
|
550,000
|
-
|
||||||
|
Acquisition
of property and equipment through issuance of note payable
|
38,991
|
-
|
||||||
|
Reclassification
of monitoring equipment to inventory from recovery of
parts
|
1,450,803
|
-
|
See
accompanying notes to consolidated financial statements.
61
REMOTEMDX,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
(1)
|
Organization
and Nature of Operations
|
General
RemoteMDx,
Inc. and subsidiaries (collectively, the “Company”) markets, monitors and leases
TrackerPAL™ devices. 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 domestically as well as internationally.
Going
Concern
The
Company has incurred recurring net losses and negative cash flows from operating
activities for the fiscal years ended September 30, 2009 and 2008. In
addition, the Company has accumulated deficits of $205,765,496 and $182,683,996
as of September 30, 2009 and 2008, respectively. 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, it 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 issuance
of preferred stock and expanding its market for its TrackerPAL™ portfolio of
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.
To lessen
the Company’s cash burden and to raise additional capital, subsequent to
September 30, 2009, the Company entered into agreements to issue 15,986 shares
of Series D Convertible Preferred stock in exchange for conversion of
$15,723,204 in debt, accrued liabilities and interest and issued an additional
12,200 shares from securities purchase agreements totaling $6,100,000 of which
$4,600,000 has been received in cash as of the date of this Report, resulting in
a total of 28,186 shares of Series D Preferred stock.
|
(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 ActiveCare, Inc., formerly known as Volu-Sol Reagents Corporation
(“ActiveCare”). The Company completed the divestiture by distributing
its remaining interest (approximately 17% of the common stock) in ActiveCare
during the fiscal year ended September 30, 2009. This transaction was
treated as a pro-rata nonreciprocal transfer to owners as required by the
nonmonetary transactions topic of the Financial Accounting Standards Board
Accounting Standards Codification (FASB ASC). 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 fiscal years
ended September 30, 2009 and 2008, respectively, are as follows:
|
2009
|
2008
|
|||||||
|
Net
sales
|
$ | - | $ | 608,024 | ||||
|
Loss
from discontinued operations
|
$ | - | $ | (414,112 | ) | |||
62
|
(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., Midwest Monitoring
& Surveillance, Inc., Bishop Rock Software, 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 completely divested its ownership of ActiveCare during the
year ended September 30, 2009.
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.
No
customer represented more than 10% of the Company’s total revenues for the
fiscal year ended September 30, 2009. One non-repeat customer
represented 16% of the Company’s total revenues for the fiscal year ended
September 30, 2008.
No
customer represented more than 10% of the Company’s total accounts receivable
for the fiscal year ended September 30, 2009. One customer accounted
for $360,257 (25%) of the Company’s total accounts receivable for the fiscal
year ended September 30, 2008.
Cash
Equivalents
Cash
equivalents consist of investments with original maturities to the Company of
three months or less. The Company had $15,670 and $0 of cash deposits
in excess of federally insured limits as of September 30, 2009 and 2008,
respectively.
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.
63
Inventory
Inventory
is valued at the lower of the cost or market. Cost is determined
using the first-in, first-out (“FIFO”) method. Market is determined
based on the estimated net realizable value, which generally is the item selling
price. Inventory is periodically reviewed in order to identify
obsolete or damaged items or impaired values.
Inventory
consists of products that are available for sale and raw materials used in the
manufacturing of TrackerPAL™ devices. Completed TrackerPAL™ devices
are reflected in Monitoring Equipment. As of September 30, 2009 and
2008, respectively, inventory consisted of the following:
|
2009
|
2008
|
|||||||
|
Raw
materials
|
$ | 686,421 | $ | - | ||||
|
Reserve
for damaged or obsolete inventory
|
(83,092 | ) | - | |||||
|
Total
inventory, net of reserves
|
$ | 603,329 | $ | - | ||||
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, 2009 and 2008,
respectively:
|
2009
|
2008
|
|||||||
|
Equipment,
software, tooling, and other fixed assets
|
$ | 2,742,537 | $ | 2,472,076 | ||||
|
Automobiles
|
305,658 | 287,736 | ||||||
|
Building
and land
|
377,555 | 377,555 | ||||||
|
Leasehold
improvements
|
127,912 | 102,190 | ||||||
|
Furniture
and fixtures
|
284,824 | 279,711 | ||||||
|
Total
property and equipment
|
3,838,486 | 3,519,268 | ||||||
|
Accumulated
depreciation
|
(2,525,180 | ) | (1,937,710 | ) | ||||
|
Property
and equipment, net of accumulated depreciation
|
$ | 1,313,306 | $ | 1,581,558 | ||||
Depreciation
expense for the fiscal years ended September 30, 2009 and 2008 was $677,016 and
$638,138, respectively.
Monitoring
Equipment
Monitoring
equipment as of September 30, 2009 and 2008 is as follows:
|
2009
|
2008
|
|||||||
|
Monitoring
equipment
|
$ | 4,260,690 | $ | 4,410,467 | ||||
|
Less
accumulated depreciation
|
(2,944,197 | ) | (3,061,321 | ) | ||||
|
Monitoring
Equipment, net
|
$ | 1,316,493 | $ | 1,349,146 | ||||
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 fiscal years ended September 30, 2009 and 2008 was $1,300,783
and $1,082,648, respectively. These expenses were classified as a
cost of revenues.
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 fiscal years ended
September 30, 2009 and 2008, the Company disposed of lease monitoring equipment
and parts of $2,319,530 and $570,948, respectively.
64
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 whether
events and circumstances have occurred which indicate possible impairment as of
each balance sheet date. The Company uses an equity vs. fair market value method
of the related asset or group of assets in measuring whether the assets are
recoverable. If the carrying amount of an asset exceeds its fair
market value, 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 is an identifiable fair market value that is independent
of other groups of assets. As of September 30, 2009, the Company
impaired goodwill from Midwest Monitoring & Surveillance, Inc. by $2,343,753
and from Bishop Rock Software by $460,827, Inc. for a total impairment expense
of $2,804,580.
Revenue
Recognition
The
Company’s revenue has historically been from two sources: (i) monitoring
services; (ii) monitoring device and other product sales.
Monitoring
Services
Monitoring
services include two components: (a) lease contracts in which the Company
provides monitoring services and leases devices to distributors or end users and
the Company retains ownership of the leased device; and (b) monitoring services
purchased by distributors or end users who have previously purchased monitoring
devices and opt to use the Company’s monitoring services.
The
Company typically 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 home security and
Personal Emergency Response Systems (“PERS”) units. 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 with the
Company. 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 standalone 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 FASB ASC subtopic addressing
multiple deliverables, 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.
65
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. Also, 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
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 as part of 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 2009 and 2008 were for the development of SecureAlert’s
TrackerPAL™ device and associated services. For the fiscal years ended September
30, 2009 and 2008, research and development expenses were $1,777,873 and
$4,811,128, respectively.
Advertising
Costs
The
Company expenses advertising costs as incurred. Advertising expense
for the fiscal years ended September 30, 2009, and 2008, was $76,793 and
$209,389, respectively.
Stock-Based
Compensation
For the
fiscal years ended September 30, 2009 and 2008, the Company calculated
compensation expense of $67,406 and $214,251, respectively related to the
vesting of stock options granted in prior years.
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 1,517,714 and 1,725,000
stock options to employees during the fiscal years ended September 30, 2009 and
2008 valued $274,650 and $359,946, respectively. In addition, 390,000
stock options issued to employees in prior years vested during the fiscal year
ended September 30, 2008. The weighted average fair value of stock
options at the date of grant during the fiscal year ended September 30, 2009 and
2008 was $0.18 and $1.34, 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 fiscal years ended September 30, 2009 and 2008, respectively:
|
Fiscal
years Ended
September
30,
|
||||||||
|
2009
|
2008
|
|||||||
|
Expected
cash dividend yield
|
- | - | ||||||
|
Expected
stock price volatility
|
121 | % | 136 | % | ||||
|
Risk-free
interest rate
|
1.16 | % | 3.12 | % | ||||
|
Expected
life of options
|
3.7
years
|
5
years
|
||||||
66
A summary
of stock option activity for the fiscal years ended September 30, 2008 and 2009
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 | |||||||
|
Shares
Under
Option
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Life
|
Aggregate
Intrinsic
Value
|
||||||||||
|
Outstanding
as of September 30, 2008
|
3,600,000 | $ | 1.08 | ||||||||||
|
Granted
|
1,517,714 | $ | 0.21 | ||||||||||
|
Exercised
|
- | $ | - | ||||||||||
|
Forfeited
|
- | $ | - | ||||||||||
|
Expired
|
(408,500 | ) | $ | 1.45 | |||||||||
|
Outstanding
as of September 30, 2009
|
4,709,214 | $ | 0.76 |
2.05 years
|
$ | 12,854 | |||||||
|
Exercisable
as of September 30, 2009
|
1,719,880 | $ | 0.32 |
2.97
years
|
$ | 12,854 | |||||||
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, 2009 and 2008, there were 75,789,348 and
21,846,412 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.
67
Recent
Accounting Pronouncements
Effective
for December 2008, new accounting guidance was added relating to business
combinations. The objective of this Topic is to enhance the information that an
entity provides in our financial reports about a business combination and its
effects. The Topic mandates: (i) how the acquirer recognizes and measures the
assets acquired, liabilities assumed and any non-controlling interest in the
acquiree; (ii) what information to disclose in our financial reports and; (iii)
recognition and measurement criteria for goodwill acquired. This Topic is
effective for any acquisitions made on or after December 15, 2008. The adoption
of this Topic is not expected to have a material impact on our financial
statements and disclosures.
In May
2009, the FASB issued guidance which establishes general standards of accounting
and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. In particular,
this Topic sets forth: (i) the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements, (ii)
the circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in our financial statements, (iii) the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. This Topic should be applied to the
accounting and disclosure of subsequent events. This Topic does not apply to
subsequent events or transactions that are within the scope of other applicable
accounting standards that provide different guidance on the accounting treatment
for subsequent events or transactions. This Topic was effective for interim and
annual periods ending after June 15, 2009, which was September 30, 2009 for us.
The adoption of this Topic did not have a material impact on our financial
statements and disclosures.
In June
2009, the FASB issued guidance which became the source of authoritative GAAP
recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. On the effective date of
this Topic, the Codification will supersede all then-existing non-SEC accounting
and reporting standards. All other non-SEC accounting literature not included in
the Codification will become non-authoritative. This Topic identifies the
sources of accounting principles and the framework for selecting the principles
used in preparing the financial statements of nongovernmental entities that are
presented in conformity with GAAP and arranged these sources of GAAP in a
hierarchy for users to apply accordingly. This Topic is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. The adoption of this Topic did not have a material impact on our
disclosure of the financial statements.
In June
2009, the FASB issued additional guidance which improves the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in our financial statements about a transfer of
financial assets; the effects of a transfer on our financial position, financial
performance, and cash flows; and a transferor’s continuing involvement, if any,
in transferred financial assets. This additional guidance requires that a
transferor recognize and initially measure at fair value all assets obtained
(including a transferor’s beneficial interest) and liabilities incurred as a
result of a transfer of financial assets accounted for as a sale. Enhanced
disclosures are required to provide financial statement users with greater
transparency about transfers of financial assets and a transferor’s continuing
involvement with transferred financial assets. This additional guidance must be
applied as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period and for interim and annual reporting periods
thereafter. Earlier application is prohibited. This additional guidance must be
applied to transfers occurring on or after the effective date. The adoption of
this Topic is not expected to have a material impact on our financial statements
and disclosures.
In
September 2009, the FASB added implementation guidance on accounting for
uncertainty in income taxes. For entities that are currently applying the
standards for accounting for uncertainty in income taxes, the guidance and
disclosure amendments are effective for financial statements issued for interim
and annual periods ending after September 15, 2009. The adoption of this Update
did not have a material impact on our financial statements and
disclosures.
In
September 2009, the FASB issued guidance that changes the existing
multiple-element revenue arrangements guidance currently included under its
Revenue Arrangements with Multiple Deliverables codification. The revised
guidance primarily provides two significant changes: 1) eliminates the need for
objective and reliable evidence of the fair value for the undelivered element in
order for a delivered item to be treated as a separate unit of accounting, and
2) eliminates the residual method to allocate the arrangement consideration. In
addition, the guidance also expands the disclosure requirements for revenue
recognition. This will be effective for the first annual reporting period
beginning on or after June 15, 2010, with early adoption permitted provided that
the revised guidance is retroactively applied to the beginning of the year of
adoption. We are currently assessing the future impact of this new accounting
update to our financial statements.
68
In
October 2009, the FASB issued accounting guidance which changes the accounting
model for revenue arrangements that include both tangible products and software
elements. Under this guidance, tangible products containing software components
and non-software components that function together to deliver the tangible
product's essential functionality are excluded from the software revenue
recognition guidance given prior to this new guidance. In addition, hardware
components of a tangible product containing software components are always
excluded from the software revenue guidance. This guidance is
effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. Early adoption is
permitted. We are currently assessing the future impact of this new
accounting update to our financial statements.
In April
2008, the FASB issued an amendment for determination of the useful life of
intangible assets. This guidance amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under authoritative accounting guidance for
goodwill and other intangible assets. This guidance is intended to improve the
consistency between the useful life of an intangible asset determined under the
guidance for goodwill and other intangible assets and the period of expected
cash flows used to measure the fair value of the asset under ASC 805 “Business
Combinations” and other principles under GAAP. This guidance is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early adoption is prohibited.
This guidance will be effective for us in fiscal year 2010. The adoption of this
guidance is not expected to significantly impact our results of operations and
financial position.
In
September 2006, the FASB issued enhanced guidance for using fair value to
measure assets and liabilities. This guidance also provides for expanded
information about the extent to which companies measure assets and liabilities
at fair value, the information used to measure fair value and the effect of fair
value measurements on earnings. ASC 820 applies whenever other guidance requires
or permit assets or liabilities to be measured at fair value. ASC 820 does not
expand the use of fair value in any new circumstances. In February 2008, the
FASB issued additional guidance to exclude ASC 840 “Accounting for Leases” and
delays the effective date of ASC 820 by one year for nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at fair value in the
financial statements on a nonrecurring basis. In October 2008, the FASB issued
additional guidance for determining the fair value of a financial asset when the
market for that asset is not active to clarify the application of the provisions
of the guidance for fair value measurements in an inactive market and how an
entity would determine fair value in an inactive market. This additional
guidance is effective immediately. We adopted ASC 820 for financial assets and
financial liabilities at the beginning of fiscal year 2009. The adoption of this
guidance for financial assets and financial liabilities did not impact our
results of operations and financial position. The guidance is effective for
nonfinancial assets and liabilities in financial statements issued for fiscal
years beginning after November 15, 2008, which is our fiscal year 2010. The
adoption of this guidance for nonfinancial assets and nonfinancial liabilities
is not expected to significantly impact our results of operations and financial
position.
In June
2009, the FASB issued accounting guidance on the consolidation of variable
interest entities (VIEs). This new guidance revises previous guidance by
eliminating the exemption for qualifying special purpose entities, by
establishing a new approach for determining who should consolidate a
variable-interest entity and by changing when it is necessary to reassess who
should consolidate a variable-interest entity. This guidance will be
effective at the beginning of the first fiscal year beginning after November 15,
2009. Early application is not permitted. The adoption of this
guidance is not expected to significantly impact our results of operations and
financial position.
In
September 2009, the FASB issued guidance updates and provided amendments to its
Fair Value Measurements and Disclosure requirements which permit a reporting
entity to measure the fair value of certain investments on the basis of the net
asset value per share of the investment (or its equivalent). This guidance also
requires new disclosures, by major category of investments, about the attributes
of investments, such as the nature of any restriction on the ability to redeem
an investment on the measurement date. This guidance is effective for
interim and annual periods ending after December 15, 2009. Early application is
permitted in financial statements for earlier interim and annual periods that
have not been issued. The adoption of this guidance is not expected
to significantly impact our results of operations and financial
position.
In
October 2009, the FASB issued guidance on share-lending arrangements entered
into on an entity's own shares in contemplation of a convertible debt offering
or other financing. This guidance is effective for fiscal years
beginning on or after December 15, 2009, and fiscal years within those fiscal
years for arrangements outstanding as of the beginning of those years.
Retrospective application is required for such arrangements. This guidance is
effective for arrangements entered into on (not outstanding) or after the
beginning of the first reporting period that begins on or after June 15, 2009.
Certain transition disclosures are also required. Early application is not
permitted. The adoption of this guidance is not expected to
significantly impact our results of operations and financial
position.
69
|
(4)
|
Goodwill
and Other Intangible Assets
|
As of
September 30, 2009, the Company had recorded goodwill and intangible assets
related to the acquisition of controlling interest of Midwest, Court Programs,
and Bishop Rock Software as follows:
|
Midwest
Monitoring
&
Surveillance
|
Court
Programs,
Inc.
|
Bishop
Rock
Software
|
Total
|
|||||||||||||
|
Goodwill
|
$ | 1,259,995 | $ | 1,208,086 | $ | - | $ | 2,468,081 | ||||||||
|
Other
Intangible Assets
|
||||||||||||||||
|
Trade
name
|
120,000 | 99,000 | 10,000 | 229,000 | ||||||||||||
|
Software
|
- | - | 380,001 | 380,001 | ||||||||||||
|
Customer
relationships
|
- | 6,000 | - | 6,000 | ||||||||||||
|
Non-compete
agreements
|
2,000 | 6,000 | - | 8,000 | ||||||||||||
|
Total
Other Intangible Assets
|
122,000 | 111,000 | 390,001 | 623,001 | ||||||||||||
|
Accumulated
other intangible asset amortization
|
(16,500 | ) | 19,800 | ) | (90,355 | ) | (126,655 | ) | ||||||||
|
Total
goodwill and other intangible assets, net of amortization
|
$ | 1,365,495 | $ | 1,299,286 | $ | 299,646 | $ | 2,964,427 | ||||||||
Midwest Monitoring &
Surveillance
Effective
December 1, 2007, the Company purchased a 51% ownership interest, including a
voting interest, of Midwest Monitoring & Surveillance
(“Midwest”). Like the Company’s operations prior to the acquisition
of interest, Midwest provides electronic monitoring for individuals on
parole. 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 Company
recorded impairment of $2,343,753 for the fiscal year ended September 30, 2009,
resulting in a net goodwill of $1,259,995, as noted in the table
above.
The
Company recorded $9,000 of amortization expense for Midwest intangible assets
during the fiscal year ended September 30, 2009 resulting in a total accumulated
amortization of $16,500 and net intangible assets of $105,500.
During
March 2009, the parties extended the option period for the purchase of the
remaining 49% ownership of Midwest to April 15, 2010. The Company
agreed to give the following consideration to Midwest minority owners to extend
this option:
|
|
1)
|
150,000
shares of RemoteMDx common stock valued at $0.13 per share for a total of
$19,500.
|
|
|
2)
|
$75,000
in cash upon execution of the
agreement.
|
|
|
3)
|
$105,000
in cash paid in ten equal payments of $10,500 beginning April 15, 2009
through January 15, 2010.
|
The
expense totaling $199,500 was reported as an acquisition option extension cost
under other income (expense) for the fiscal year ended September 30,
2009.
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”). Similar to the Company’s operations prior to the
acquisition of interest, Court Programs is a distributor of electronic
monitoring devices to courts providing a solution to monitor individuals on
parole. The total consideration for the purchase of Court Programs
was $1,527,743 comprised of a 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 noted in
the table above.
70
The
Company recorded $10,800 of amortization expense on intangible assets for Court
Programs during the fiscal year ended September 30, 2009 resulting in a total
accumulated amortization of $19,800 and net intangible assets of
$91,200.
Effective
April, 1, 2009, the Company and Court Programs agreed to release Court Programs
from an obligation to repay expenses paid on its behalf by the Company in the
amount of $147,566 as consideration to extend the option period for the purchase
of the remaining 49% ownership of Court Programs to April 15, 2010. The expense
of $147,566 was reported as an acquisition option extension cost under other
income (expense) for the fiscal year ended September 30, 2009.
Bishop Rock
Software
Effective
January 14, 2009, the Company purchased a 100% ownership interest, including a
voting interest, of Bishop Rock Software, Inc., a California corporation,
(“Bishop Rock”) for 2,857,286 shares of the Company’s common stock valued at
$0.23 per share valued at $657,176, options to purchase 642,714 shares of the
Company’s common stock with an exercise price of $0.09 per share for a value of
$114,383 using the Black-Scholes calculation, and $79,268 in debt for a total
purchase price of $850,827. The total consideration of $850,827 less
crime-scene correlation software recorded as an asset for $390,001 resulted in
goodwill of $460,827. During the fiscal year ended September 30,
2009, the Company recorded an impairment expense of $460,827, resulting in no
more remaining goodwill.
The
Company recorded $90,355 of amortization expense on intangible assets for Bishop
Rock Software during the fiscal year ended September 30, 2009 resulting in a
total accumulated amortization of $90,355 and net intangible assets of
$299,646.
Supplemental
Pro Forma Results of Operations
The
following tables present the pro forma results of operations for the fiscal
years ended September 30, 2009 and 2008, as though the Midwest, Court Programs,
and Bishop Rock Software acquisitions had been completed as of the beginning of
each period presented:
|
Fiscal
years Ended
September
30,
|
||||||||
|
2009
|
2008
|
|||||||
|
Revenues:
|
||||||||
|
Products
|
$ | 570,749 | $ | 2,593,925 | ||||
|
Monitoring
services
|
12,055,841 | 11,322,201 | ||||||
|
Total
revenues
|
12,626,590 | 13,916,126 | ||||||
|
Cost
of revenues:
|
||||||||
|
Products
|
(275,688 | ) | (1,675,212 | ) | ||||
|
Monitoring
services
|
(9,862,925 | ) | (12,261,139 | ) | ||||
|
Impairment
of monitoring equipment and parts
|
(2,319,530 | ) | (570,948 | ) | ||||
|
Total
cost of revenues
|
(12,458,143 | ) | (14,507,299 | ) | ||||
|
Gross
margin (deficit)
|
168,447 | (591,173 | ) | |||||
|
Operating
expenses:
|
||||||||
|
Selling,
general and administrative
|
(16,701,374 | ) | (36,777,665 | ) | ||||
|
Research
and development
|
(1,777,873 | ) | (4,811,128 | ) | ||||
|
Impairment
of goodwill
|
(2,804,580 | ) | - | |||||
|
Loss
from operations
|
(21,115,380 | ) | (42,179,966 | ) | ||||
|
Other
income (expense):
|
||||||||
|
Gain
on sale of intellectual property
|
- | 2,400,000 | ||||||
|
Redemption
of SecureAlert Series A Preferred stock
|
- | (8,372,566 | ) | |||||
|
Interest
income
|
18,187 | 35,230 | ||||||
|
Interest
expense
|
(5,012,803 | ) | (1,588,073 | ) | ||||
|
Derivative
valuation gain
|
1,867,007 | - | ||||||
|
Change
from estimate to actual on Series A
|
95,816 | - | ||||||
|
Other
income (loss)
|
905,626 | 314,059 | ||||||
|
Net
loss from continuing operations
|
(23,241,547 | ) | (49,391,316 | ) | ||||
|
Discontinued
operations
|
- | (414,112 | ) | |||||
|
Net
loss
|
(23,241,547 | ) | (49,805,428 | ) | ||||
|
Dividends
on Series A and C Preferred stock
|
(175 | ) | (345,356 | ) | ||||
|
Net
loss attributable to common stockholders
|
$ | (23,241,722 | ) | $ | (50,150,784 | ) | ||
|
Net
loss per common share – basic and diluted
|
$ | (0.13 | ) | $ | (0.36 | ) | ||
|
Weighted
average common shares outstanding – basic and diluted
|
182,188,000 | 140,092,000 | ||||||
71
|
(5)
|
Bank
Line of Credit
|
During
the fiscal year ended September 30, 2008, the Company paid off a $4,000,000 line
of credit and established a line of credit for $3,600,000 with the same
bank. As of September 30, 2008, the outstanding balance of the line
of credit was $3,462,285 and it matured on March 1, 2009. The line of
credit was secured by letters of credit for a total of $3,600,000 and
SecureAlert’s assets, excluding TrackerPAL™ products. The letters of credit were
provided as collateral by six unrelated parties. During the fiscal
year ended September 30, 2009, the Company and the six unrelated parties
mutually agreed to pay off the line of credit by calling upon the letters of
credit and converting into a senior secured convertible note. (See Note
9)
Additionally,
the Company established a new line of credit for $1,000,000 with a bank during
the fiscal year ended September 30, 2009. The interest rate is 3.28%
and the line of credit matures on September 22, 2010. The line of
credit is secured by certificates of deposit pledged by the Company’s Chief
Executive Officer, Mr. David Derrick. Interest on the line of credit
is due monthly. As of September 30, 2009, the Company owed
$252,600. Subsequent to September 30, 2009, the Company borrowed the
remaining $747,400 available under the line of credit.
|
(6)
|
Accrued
Expenses
|
Accrued
expenses consisted of the following as of September 30, 2009:
|
Accrued
foreclosure liability (see Note 7)
|
$ | 775,000 | ||
|
Accrued
payroll, taxes and employee benefits
|
561,898 | |||
|
Accrued
officer compensation
|
492,280 | |||
|
Accrued
consulting
|
436,054 | |||
|
Accrued
interest
|
382,424 | |||
|
Accrued
board of directors fees
|
300,000 | |||
|
Accrued
warranty and manufacturing costs
|
246,622 | |||
|
Accrued
legal and settlement costs
|
80,208 | |||
|
Accrued
research and development costs
|
45,000 | |||
|
Accrued
acquisition extension costs
|
42,000 | |||
|
Accrued
outside services
|
38,132 | |||
|
Accrued
indigent fees
|
34,130 | |||
|
Accrued
cellular costs
|
27,144 | |||
|
Accrued
commissions and other costs
|
45,788 | |||
|
Total
accrued expenses
|
$ | 3,506,680 |
Subsequent
to September 30, 2009, the Company entered into agreements to exchange
approximately 2,099 shares of Series D Preferred stock for the conversion of
$1,857,280 of existing accrued expenses shown above.
|
(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, 2009, the Company owed $76,022 under a line-of-credit agreement
with ADP Management, an entity owned and controlled by Mr. Derrick, the
Company’s Chief Executive Officer. Outstanding amounts on the line of
credit accrue interest at 11% per annum and are due upon
demand. During the fiscal year ended September 30, 2009, the net
decrease under this line of credit was $466,782. This decrease consisted of cash
repayments of $739,063 offset, in part, by $272,281 of expenses owed to ADP
Management that are reimbursable by the Company.
As of
September 30, 2008, the Company owed $542,804 to ADP Management under a
line-of-credit agreement. 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.
72
Related-Party
Notes Payable
In
November 2008, the Company borrowed $1,000,000 from Mr. Derrick, the Chief
Executive Officer of the Company. The unsecured note payable accrues
interest at 15% and was due and payable upon the Company receiving cash proceeds
of $1,000,000 or more from the sale of common stock or other additional
financing activities or February 4, 2009, whichever comes first. The
Company paid to Mr. Derrick a loan origination fee of $50,000 in cash and
100,000 shares of restricted common stock. In February 2009, Mr.
Derrick loaned an additional $500,000 to the Company resulting in a total of
$1,500,000 due to Mr. Derrick. The Company and Mr. Derrick agreed to
extend the due date of the full obligation to February 26, 2010. As
of September 30, 2009, the Company owed $1,500,000 plus $12,197 in accrued
interest to Mr. Derrick. Subsequent to September 30, 2009, the Company and Mr.
Derrick agreed to convert the note of $1,500,000 into 1,500 shares of Series D
Preferred stock.
In
September 2008, the Company borrowed $250,000 from Randy Olshen, the former
President of SecureAlert. The unsecured note payable accrued interest
at 11%. As of September 30, 2009, this note was paid in
full.
Foreclosure
Liability
In July
2009, the Company entered into a promissory note with an unrelated entity in the
amount of $1,000,000 payable on December 31, 2010. The note bears
interest at a rate of 15% per annum paid quarterly. As additional
consideration for the loan to settle a registration rights dispute, the Company
granted the lender 8,000,000 shares of common. Additionally, a
related-party entity, ADP Management, collateralized this note with 5,000,000
shares of the Company’s common stock it owns. In August 2009, the Company
defaulted on the loan because it failed to register the 8,000,000 shares of
common stock within 30 days of entering into the agreement resulting in the
lender foreclosing on the 5,000,000 shares of common stock held as collateral.
As of September 30, 2009, the Company accrued $775,000 as a “foreclosure
liability” to record the Company’s obligation to repay the 5,000,000 shares of
common stock to ADP Management. Subsequent to September 30, 2009, the
Company agreed to issue 833 shares of Series D Preferred stock to ADP Management
as payment this liability.
Related-Party
Series A 15% Debenture
On May 1,
2009, the Company issued a Series A 15% debenture due and payable on November 1,
2010 to an entity controlled by an employee of the Company for $250,000 in cash.
In addition to the rights and terms of the debenture, the entity received
one-year warrants to purchase 2,200,000 shares of the Company common stock at an
exercise price of $0.25 per share valued at $43,926. As of September 30, 2009,
the outstanding balance owed on the debenture was $250,000 plus $9,452 in
accrued interest. Subsequent to September 30, 2009, the Company agreed to issue
250 shares of Series D Preferred stock in exchange for the debenture of
$250,000.
Consulting
Arrangements
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 (including the salaries of certain of our officers) in the course of
performing services under the consulting arrangement. Effective April 1, 2008,
ADP Management reduced the consulting fee from $40,000 to $20,000 per month to
reflect the resignation of Mr. Dalton as the Company’s President.
The ADP
Management agreement also requires ADP Management to pay the salary of Mr.
Derrick as Chief Executive Officer and Chairman of the Board of Directors of the
Company. The Board of Directors, which at the time did not include
Mr. Derrick, approved both of these arrangements.
During
the fiscal year ended September 30, 2008, the Company issued 1,000,000 shares of
common stock valued at $1.52 per share to prepay consulting fees to ADP
Management. The Company recorded $240,000 and $60,000 of expense
associated with the issuance of these shares during the fiscal years ended
September 30, 2009 and September 30, 2008, respectively. As of
September 30, 2009, the remaining deferred compensation was
$1,220,000.
|
(8)
|
Convertible
Promissory Note
|
On
January 15, 2009, the Company entered into an unsecured convertible promissory
note for $2,700,000 in order to purchase TrackerPAL™ units. The note,
at the lender’s option, may convert into shares of the Company’s common stock at
a conversion price of $0.22 per share. The note bears interest at 8%
per annum and matures on January 15, 2010. Interest is due monthly and the
principal is due at maturity. The fair market value of the common stock was
$0.23 per share on the date the Company entered into the agreement resulting in
a beneficial conversion feature of $122,727. This was recorded as a
debt discount and will be expensed over the life of the note. As of September
30, 2009, the outstanding balance due was $2,050,000 with a remaining debt
discount balance of $41,556. Subsequent to September 30, 2009, the holders of
the convertible promissory note of $2,050,000 agreed to convert the note and the
total outstanding accrued interest of $98,414 into 2,149 shares of Series D
Preferred stock.
73
|
(9)
|
Senior
Secured Convertible Notes
|
During
the year ended September 30, 2009, the Company issued senior secured convertible
notes of $3,549,631 to unrelated parties. The proceeds were used to pay off the
Company’s line of credit. The interest rate is 15% per annum and the notes
mature on March 13, 2010. Interest is due monthly and the principal
is due at maturity. These notes may convert into shares of the
Company’s common stock at a conversion price of $0.20 per share or into shares
at a reduced conversion rate should the Company issue any equity security at a
price less than $0.20 per share., or into shares of the SecureAlert’s common
stock at the fair market value of the stock at the conversion
date. The Company determined that the embedded conversion features of
the notes were subject to derivative accounting treatment (see Note 11). This
resulted in a debt discount valued at $853,166. Additionally, with the issuance
of these notes, the Company issued 3,549,630 shares of common stock valued at
$226,853 recorded as a debt discount. The value of $1,080,019 recorded as a debt
discount will be expensed over the life of these notes. As of
September 30, 2009, the outstanding balance of the notes was $3,419,631 with a
remaining debt discount balance of $529,109. Subsequent to September 30, 2009,
the holders of $2,270,000 of this debt agreed to convert the debt into 2,270
shares of Series D Preferred stock and the remaining debt discount of $529,109
was expensed.
|
(10)
|
Series
A 15% Debentures
|
During
the fiscal year ended September 30, 2009, the Company received $4,400,000 in
cash from the issuance of Series A 15% debentures. Additionally, the Company
issued debentures to a consultant in the principal amount of $106,750 for
services rendered to the Company. As of September 30, 2009, the total
outstanding balance of the debentures was $4,506,750. The terms of
these debentures are as follows: 1) 15% interest per annum. Interest
is due quarterly and principal is due at maturity, 2) 18-month maturity, 3) for
every $1 invested into the debenture the holder received 1 share of the
Company’s common stock, and 4) at the holder’s option, the debenture may be
converted into shares of common stock at a conversion rate of $0.20 per share or
into shares at a reduced conversion rate should the Company issue any equity
security at a price less than $0.20 per share. The Company determined that the
embedded conversion features of the notes were subject to derivative accounting
treatment (see Note 11). This resulted in a debt discount valued at
$3,130,423. Additionally, with the issuance of these notes, the
Company issued 4,506,750 shares of common stock valued at $265,982 and 2,200,000
warrants valued at $43,926 recorded as a debt discount. This discount will be
expensed over the life of the debentures.
In
September 2008, the Company sold 4,077,219 shares of common stock at $0.75 per
share to an investor. Shortly following the transaction, the market
price of the Company’s common stock fell to approximately $0.20 per share. The
Company agreed upon the investor’s investment of an additional $3,000,000
(included in the $4,506,750 discussed in the paragraph above) in the Series A
15% debenture that the Company would issue 9,796,636 additional shares of its
common stock to the investor. Furthermore, the Company agreed to
re-price outstanding warrants held by the investor from $1.00 to $0.25 per share
and extend the purchase period an additional two years. The issuance of these
shares and re-pricing of the warrants attributed an additional $587,248 to the
debt discount resulting in a total $3,130,423 in a debt discount to be amortized
over the life of the debentures. During the fiscal year ended
September 30, 2009, the Company amortized $1,308,703 of this debt discount and
recorded it as interest expense. As of September 30, 2009, the debt
discount balance was $1,821,720.
Subsequent
to September 30, 2009, the holders of $4,609,648 of debentures and accrued
interest agreed to convert this debt into a total of 4,614 shares of Series D
Preferred stock and the remaining debt discount of $1,821,720 was
expensed.
|
(11)
|
Derivative
Liability
|
The
Company does not hold or issue derivative instruments for trading
purposes. However, the Company has convertible notes that contain
embedded derivative features that require separate valuation from the
convertible notes payable. The Company recognizes these derivatives
as liabilities in its balance sheet, measures them at their estimated fair
value, and recognizes changes in their estimated fair value in earnings (losses)
in the period of change. As of September 30, 2009, the derivative
instruments had a fair value of $1,219,426 resulting in a derivative valuation
gain of $1,867,007 for the period. The Company did not have any derivatives
during the fiscal year ended September 30, 2008.
74
|
(12)
|
Debt
Obligations
|
Debt
obligations as of September 30, 2009 and 2008 consisted of the
following:
|
September
30,
|
||||||||
|
2009
|
2008
|
|||||||
|
SecureAlert,
Inc.
|
||||||||
|
Unsecured
note payable to a former subsidiary bearing interest at
5%. This note was paid in full during the fiscal year ended
September 30, 2009.
|
$ | - | $ | 598,793 | ||||
|
Unsecured
notes payable to former SecureAlert stockholders, with interest at 5%,
payable in installments of $80,000 per month paid in full as of September
30, 2009.
|
- | 169,676 | ||||||
|
Note
payable for testing equipment with an interest rate of 8%. The
note is secured by testing equipment. The note matures on June 9,
2011.
|
12,228 | - | ||||||
|
Unsecured
note payable with an interest rate of 12%. The note matures on February 1,
2010.
|
8,728 | - | ||||||
|
RemoteMDx,
Inc.
|
||||||||
|
Unsecured
promissory note with an entity bearing an interest rate of
15%. The note matures on December 31, 2010. Interest
is paid quarterly and the principal due at maturity. Debt discount at year
end was $525,665.
|
474,335 | - | ||||||
|
Court Programs,
Inc.
|
||||||||
|
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.
|
225,000 | 229,100 | ||||||
|
Unsecured
revolving lines of credit with two banks, with interest rates between
6.60% and 13.49%.
|
16,500 | 48,499 | ||||||
|
Automobile
loan with a financial institution secured by the vehicle
purchased. Interest rate is 7.09% and is due in June
2014.
|
30,751 | - | ||||||
|
Unsecured
note payable with an interest rate of 8%.
|
1,492 | 16,028 | ||||||
|
Capital
leases with an effective interest rate 14.89% that matures in January
2011.
|
14,898 | - | ||||||
|
Midwest Monitoring
& Surveillance, Inc.
|
||||||||
|
Unsecured
revolving line of credit with a bank, with an interest rate of
6.60%
|
39,224 | - | ||||||
|
Notes
payable to a financial institution bearing interest at
6.37%. Notes mature in July 2011 and July 2016. The
notes are secured by property.
|
185,274 | 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.
|
57,344 | 199,747 | ||||||
|
Automobile
loans with several financial institutions secured by the
vehicles. Interest rates range between 6.9% and 8.5%, due
between January 2010 and October 2011.
|
42,463 | 43,570 | ||||||
|
Note
payable to a stockholder of Midwest. The note bears interest at
5% maturing in February 2013.
|
47,704 | 59,958 | ||||||
|
Capital
leases with effective interest rates that range between 12.9% and
14.7%. Leases mature between June 2014 and September
2014.
|
126,158 | - | ||||||
|
Total
debt obligations
|
1,282,099 | 1,613,046 | ||||||
|
Less
current portion
|
(272,493 | ) | (465,664 | ) | ||||
|
Long-term
debt, net of current portion
|
$ | 1,009,606 | $ | 1,147,382 |
75
|
13)
|
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 designated 40,000 shares of preferred stock as Series A 10% Convertible
Non-Voting Preferred stock ("Series A Preferred stock"). During the year ended
September 30, 2009, all 19 outstanding shares of Series A Preferred Stock
converted into 9,306 shares of the Company’s common stock. There were
no conversions during the year ended September 30, 2008.
Dividends
The
Series A Preferred stock was 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 were fully
cumulative and accrued 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 fiscal years ended
September 30, 2009 and 2008, the Company recorded $175 and $423 in dividends on
Series A Preferred stock, respectively.
Series
B Convertible Preferred Stock
The
Company designated 2,000,000 shares of preferred stock as Series B Convertible
Preferred stock ("Series B Preferred stock"). Each share of Series B Preferred
stock was convertible into shares of common stock at an initial rate of $3.00
per share of common. 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 automatically 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 fiscal years ended
September 30, 2009 and 2008, 10,999 and 2,000 shares of Series B Preferred stock
converted into 10,999 and 15,000 shares of common stock, respectively. As of
September 30, 2009, there were no shares of Series B Preferred stock
outstanding.
Series
D Convertible Preferred Stock
In
November 2009, the Company designated 50,000 shares of preferred stock as Series
D Convertible Preferred stock, $0.0001 par value per share (“Series D Preferred
stock”). Subsequent to the fiscal year ended September 30, 2009, the
Company agreed to issue a total of 15,986 shares of Series D Preferred stock in
consideration for the conversion of $15,723,204 of debt, accrued liabilities and
interest and issued an additional 12,200 shares from securities purchase
agreements totaling $6,100,000 of which $4,600,000 has been received in cash as
of the date of this Report, resulting in a total of 28,186 shares of Series D
Preferred stock.
Dividends
The
Series D Preferred stock is entitled to dividends at the rate equal to eight
percent (8%) per annum calculated on the purchase amount actually paid for the
shares or amount of debt converted. The dividend is payable in cash
or shares of common stock at the sole discretion of the Board of Directors. If a
dividend is paid in shares of common stock of the Company, the number of shares
to be issued is based on the average per share market price of the common stock
for the 14-day period immediately preceding the applicable accrual date (i.e.,
March 31, June 30, September 30, or December 31, as the case may
be). Dividends are payable quarterly, no later than thirty days
following the end of the accrual period.
Convertibility
Each
share of Series D Preferred stock may be converted into 6,000 shares of common
stock commencing after ninety days from the date of issue.
76
Voting Rights and
Liquidation Preference
The
holders of the Series D Preferred stock may vote their shares on an as-converted
basis on any issue presented for a vote of the stockholders, including the
election of directors and the approval of certain transactions such as a merger
or other business combination of the Company. In addition, on the
issues of an increase in the number of shares of common stock the Company is
authorized to issue and on the proposal of a reduction in the number of issued
and outstanding shares (a reverse split) of the Company’s common stock, holders
of the Series D Preferred stock may vote as a class holding the equivalent of 60
percent of the issued and outstanding shares of the common stock, regardless of
the number of shares then outstanding. As of the date of this report,
there were 25,186 shares of Series D Preferred stock outstanding. As
a consequence of these voting rights, the holders of the Series D Preferred
stock may exercise control over these issues regardless of the interests of the
remaining stockholders. Additionally, the holders are entitled to a
liquidation preference equal to their original investment amount.
In the
event of the liquidation, dissolution or winding up of the affairs of the
Company (including in connection with a permitted sale of all or substantially
all of the Company’s assets), whether voluntary or involuntary, the holders of
shares of Series D Preferred Stock then outstanding will be entitled to receive,
out of the assets of the Company available for distribution to its stockholders,
an amount per share equal to original issue price, as adjusted to reflect any
stock split, stock dividend, combination, recapitalization and the like with
respect to the Series D Preferred Stock.
|
(14)
|
SecureAlert
Preferred Stock
|
SecureAlert,
Inc. Series A Preferred Shares
During
the fiscal 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 were 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 days nor more than
sixty days preceding the payment dates thereof, as may be fixed by the Board of
Directors of the Company.
During
the fiscal years ended September 30, 2009 and 2008, the Company recorded $0 and
$344,933 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.
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. 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
fiscal 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. As of September 30,
2009, the Company estimated and accrued $3,148,943 for future and past
contingency payments due to former SecureAlert Series A stockholders. Subsequent
to September 30, 2009, former holders of SecureAlert Series A Preferred stock
agreed to convert an aggregate of $2,261,142 of the future and past contingency
payments otherwise payable with respect to the redemption of the SecureAlert
Series A Preferred stock for 2,263 shares of Series D Preferred
stock.
77
|
(15)
|
Common
Stock
|
Authorized
Shares
The
Company is authorized to issue up to 250,000,000 shares of common
stock.
Common
Stock Issuances
During
the fiscal year ended September 30, 2009, the Company issued 54,484,728 shares
of common stock. Of these shares, 9,306 shares were issued upon
conversion of 19 shares of Series A Preferred stock; 10,999 shares were issued
upon conversion of 10,999 shares of Series B Preferred stock; 5,400,000 shares
were issued to settle lawsuits and obligations; 25,953,016 shares were issued in
connection with debt; 2,254,121 shares were issued for services rendered to the
Company valued at $728,874; 3,007,286 shares were issued to purchase Bishop Rock
and to extend an option to purchase the remaining percentage of ownership of
Midwest; and 17,850,000 shares were issued for net cash proceeds of
$3,250,000.
During
the fiscal 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;
9,135,000 shares were issued for services in the amount of $14,324,585;
6,177,219 shares were issued for cash proceeds of $5,187,914; 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.
As of
September 30, 2009, the Company was authorized to issue 250,000,000 shares of
common stock and 210,365,988 were outstanding.
Subsequent
to the fiscal year 2009, the holders of a majority of the issued and outstanding
voting securities of the Company consented in writing to an increase of the
authorized shares from 250,000,000 to 600,000,000. The Company
intends to file Amended Articles of Incorporation for the Company to the effect
the increase in the number of authorized shares as soon as reasonably
practical.
|
(16)
|
Options
and Warrants
|
Stock
Incentive Plan
During
the fiscal 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 fiscal
year ended September 30, 2009, the Company granted 4,931,214 options under this
plan as described below.
|
Number
of
Options
and
Warrants
|
Exercise
Price
Per
Share
|
|||||||
|
Outstanding
as of September 30, 2007
|
18,887,896 | $ | 0.54 to 3.00 | |||||
|
Granted
|
6,752,869 |
0.59
to 4.05
|
||||||
|
Expired
or cancelled
|
(296,500 | ) |
0.60
to 3.00
|
|||||
|
Exercised
|
(3,618,814 | ) |
0.54
to 1.73
|
|||||
|
Outstanding
as of September 30, 2008
|
21,725,451 |
0.56
to 4.05
|
||||||
|
Granted
|
4,931,214 |
0.09
to 0.30
|
||||||
|
Expired
or cancelled
|
(1,408,500 | ) |
0.60
to 2.15
|
|||||
|
Exercised
|
- | - | ||||||
|
Outstanding
as of September 30, 2009
|
25,248,165 | $ | 0.09 to 4.05 | |||||
78
The
following table summarizes information about stock options and warrants
outstanding as of September 30, 2009:
|
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 | 10,566,849 | 2.36 | $ | 0.37 | 8,886,849 | $ | 0.33 | |||||||||||||
| 0.61 – 1.60 | 5,849,400 | 3.29 | 1.28 | 3,944,400 | 1.24 | ||||||||||||||||
| 1.61 – 4.05 | 8,831,916 | 0.67 | 2.03 | 8,827,582 | 2.03 | ||||||||||||||||
As of
September 30, 2009, 21,658,831 of the 25,248,165 outstanding options and
warrants were vested.
During
the fiscal year ended September 30, 2009, the Company issued 4,931,214 options
and warrants to purchase common stock as follows: 2,200,000 in
connection with the settlement of debt; 1,213,500 granted to consultants for
services; 875,000 to employees; and 642,714 in connection with the purchase of
Bishop Rock. All the options and warrants issued during the year
vested over the year or immediately. The exercise prices range from $0.09 to
$0.30 per share. The exercise price for the options granted during
the fiscal year ended September 30, 2009 were based upon the quoted market price
of the Company’s shares on the date of grant. No options or warrants were
exercised during the fiscal year ended September 30, 2009.
During
the fiscal 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 fiscal
year ended September 30, 2008 were based upon the quoted market price of the
Company’s shares on the date of grant.
|
(17)
|
Deferred
Compensation
|
As of
September 30, 2008, deferred compensation in connection with common stock and
warrants issued in prior years reflected $3,498,672 of expenses to be recorded
in future periods. Of these expenses of $3,498,672, $2,211,266 was recorded as
deferred compensation expense during the fiscal year ended September 30, 2009.
Additionally, the Company recorded deferred compensation expense of $384,667
related to common stock and warrants issued and fully expensed throughout the
fiscal year, resulting in a total of $2,595,933 of deferred compensation expense
recorded during the fiscal year ended September 30, 2009.
The
issuance of common stock and warrants during the fiscal year ended September 30,
2009 valued at $384,667 is outlined as follows:
|
|
·
|
1,000,000
shares of common stock issued to an entity for services valued at $200,000
or $0.20 per share.
|
|
|
·
|
900,000
shares of common stock issued to three individuals for paying down the
Company’s line of credit valued at $108,000, or $0.12 per
share.
|
|
|
·
|
100,000
shares of common stock issued to an officer of the Company in connection
with debt (Note 7: Related-Party Notes Payable) valued at
$30,000, or $0.30 per share.
|
|
|
·
|
213,500
unregistered warrants to an individual for rendering services to the
Company valued at $46,667.
|
As of
September 30, 2009, deferred compensation to be expensed in future periods was
$1,287,406.
79
|
(18)
|
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
fiscal years ended September 30, 2009 and 2008, the Company incurred net losses
of $22,761,102 and $49,339,637, 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, 2009, the Company had net carryforwards available to offset future
taxable income of approximately $158,807,000 which will begin to expire in
2017. 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 as or
September 30:
|
2009
|
2008
|
|||||||
|
Net
loss carryforwards
|
$ | 53,994,000 | $ | 45,367,000 | ||||
|
Accruals
and reserves
|
101,000 | (99,000 | ) | |||||
|
Contributions
|
1,000 | 3,000 | ||||||
|
Valuation
allowance
|
(54,096,000 | ) | (45,271,000 | ) | ||||
| $ | - | $ | - |
Reconciliations
between the benefit for income taxes at the federal statutory income tax rate
and the Company's benefit for income taxes for the fiscal years ended September
30, 2009 and 2008 are as follows:
|
2009
|
2008
|
|||||||
|
Federal
income tax benefit at statutory rate
|
$ | 7,739,000 | $ | 16,755,000 | ||||
|
State
income tax benefit, net of federal income tax effect
|
1,138,000 | 2,464,000 | ||||||
|
Change
in estimated tax rate and gain (loss) on non-deductible
expenses
|
(52,000 | ) | (91,000 | ) | ||||
|
Change
in valuation allowance
|
(8,825,000 | ) | (19,128,000 | ) | ||||
|
Benefit
for income taxes
|
$ | - | $ | - | ||||
The
deferred income tax assets (liabilities) and the federal and state income tax
benefits reflects an adjustment in calculating the valuation allowance using a
tax rate of 15% used in fiscal year ended 2008 to 34% in fiscal year ended
2009.
|
(19)
|
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. On February
17, 2009 the United States Patent and Trademark Office ("USPTO") granted a
request for reexamination of the '909 Patent. The USPTO is now in the
process of reexamining the claims of the '909 Patent. Briefs have been submitted
on the issue of claim construction, and the case is currently in discovery. The
Markman hearing is set for May of 2011, and trial is set for late 2011. We have
not accrued any potential loss as the probability of incurring a material loss
is deemed remote by management, after consultation with legal
counsel.
80
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. STOP subsequently filed a
motion for summary judgment of non-infringement, which was
denied. STOP’s subsequent motion for reconsideration was also
denied. The parties are currently working on claim construction and
discovery issues. The Markman hearing is currently set for March of
2010. No trial date has yet been set. The Company intends to
vigorously prosecute its claims and defend against the
counterclaim.
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 identified as 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.
Informal
Inquiry. In March 2008, the Company was advised by letter from
the U.S. Securities and Exchange Commission (“SEC”), Salt Lake District Office,
that it has begun an informal inquiry regarding the Company. The
inquiry, among other items, relates to the Company’s revenue recognition policy
and documents, relationship with stockholders, and business. 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. The Company voluntarily disclosed this inquiry in its
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
2008. There were no material developments in this matter during the
fiscal year ended September 30, 2009.
Lease
Obligations
The
following table summarizes the Company’s contractual obligations as of September
30, 2009:
|
Fiscal
Year
|
Total
|
SecureAlert
|
Midwest
Monitoring
|
Court
Programs
|
||||||||||||
|
2010
|
$ | 418,151 | $ | 266,691 | $ | 35,555 | $ | 115,905 | ||||||||
|
2011
|
361,588 | 274,095 | 27,771 | 59,722 | ||||||||||||
|
2012
|
336,588 | 278,991 | 22,473 | 35,124 | ||||||||||||
|
2013
|
285,749 | 269,922 | 8,075 | 7,752 | ||||||||||||
|
2014
|
61,018 | 60,564 | 454 | - | ||||||||||||
|
Thereafter
|
- | - | - | - | ||||||||||||
|
Total
|
$ | 1,463,094 | $ | 1,150,263 | $ | 94,328 | $ | 218,503 | ||||||||
The total
contractual obligations of $1,463,094 consist of the following: $1,324,432 from
facilities operating leases and $138,662 from equipment
leases. During the fiscal years ended September 30, 2009 and 2008,
the Company paid approximately $487,000 and $536,000, in lease payment
obligations, respectively.
81
Indemnification
Agreements
In
November 2001, the Company agreed to 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 fiscal year ended September 30, 2009, the Company entered into several
agreements with cellular organizations to provide communication services. The
cost to the Company during the fiscal years ended September 30, 2009 and 2008
was approximately $2,422,541 and $2,940,000, respectively. These
amounts are included in cost of sales.
|
(20)
|
Subsequent
Events
|
Subsequent
to September 30, 2009, the following events occurred:
|
|
1)
|
On
October 30, 2009, the Company issued 1,400,000 shares of common stock to
several former holders of SecureAlert Series A Preferred to settle a
dispute and an outstanding liability in connection with contingency
payments due to the holders.
|
|
|
2)
|
On
November 2, 2009, the Company’s Board of Directors designated 50,000
shares Series D Preferred stock. The shares accrue dividends at
a rate of 8% per annum and may be paid in cash or additional shares of
Series D Preferred stock. See note 13. Subsequent to September 30, 2009,
the Company agreed to issue a total of 15,986 shares of Series D Preferred
stock in exchange for conversion of $15,723,204 in debt, accrued
liabilities and interest and an additional 12,200 shares from securities
purchase agreements totaling $6,100,000 of which $4,600,000 has been
received in cash as of the date of this Report, resulting in a total of
28,186 shares of Series D Preferred
stock.
|
Subsequent
events have been evaluated through January 12, 2010, the date these financial
statements were issued. No events, other than the events described above,
required disclosure.
82