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REMOTE MDX INC - SB-2/A - 20070104 - TABLE_OF_CONTENTS
TABLE OF CONTENTS
Summary information about RemoteMDx, Inc., and this offering................5
Risk factors...............................................................13
Use of proceeds............................................................22
Determination of offering price............................................22
Description of business....................................................22
Management's discussion and analysis or plan of operation..................33
Forward-looking statements.................................................40
Series C convertible preferred stock.......................................41
Selling shareholders.......................................................41
Plan of distribution.......................................................48
Regulation M...............................................................50
Legal proceedings..........................................................50
Directors, executive officers, promoters and control persons...............52
Commission's position on indemnification for Securities Act
liabilities..............................................................54
Security ownership of certain beneficial owners and management.............55
Description of common stock................................................57
Certain relationships and related transactions.............................61
Market for common equity and related stockholder matters...................62
Executive compensation.....................................................67
Changes in and disagreements with accountants on accounting
and financial disclosure.................................................71
Index to financial statements .............................................71
Experts....................................................................71
Legal matters..............................................................71
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4
Summary information about RemoteMDx, Inc., and this offering
RemoteMDx, Inc.
RemoteMDx, Inc. ("we" or "RemoteMDx" or the "Company") has specialized in
creating a family of products and services, offered under the "PAL Services"
brand, related to the monitoring of individuals no matter where they may be. By
utilizing our locational technologies, our PAL Services response and monitoring
center can locate persons using our products and gather information about them.
SecureAlert Products and Solutions
MobilePAL - The leading product our primary subsidiary, SecureAlert Inc., offers
is the MobilePAL(TM) wireless senior citizen system currently supporting more
than 3,500 subscribers per month. Using state-of-the-art Global Positioning
System (GPS) location technology, MobilePAL enables senior citizens living alone
and others with serious health issues to summon help wherever they are at the
touch of a button 24 hours a day, seven days a week. When activated, the Mobile
PAL device connects its user with their own SecureAlert Personal Assistant via
advanced cellular technology. The assistant not only can refer to the user by
name and can identify their location, but can dispatch emergency response
personnel and provide valuable information such as medical histories, if
necessary.
Roughly the same size and shape as a standard cellular flip phone, the MobilePAL
will soon be available with a companion wristwatch or pendant MobilePAL device
in order to minimize the risk of separation or loss during an emergency. Among
the MobilePAL's available one-button features are the following:
o Emergency 911 assistance,
o Emergency roadside service,
o Notification of loved ones and physicians during an emergency,
o Voice connection to family and friends,
o Full concierge service,
o Driving directions,
o Daily check-up calls to subscribers, and
o Storage of medical records.
TrackerPAL - The TrackerPAL(TM) is designed for federal, state and local
agencies to provide location tracking of select individuals in the criminal
justice system. The TrackerPAL fastens to the offender's ankle and can only be
adjusted or removed by a supervising officer through services provided by
SecureAlert's PAL Monitoring Center. The Center acts as an important link
between the offender and the supervising officer as PAL Operators constantly
track and monitor the offender and initiate contact when the offender is in
violation of any established restrictions. Solidly constructed from Kevlar and
rugged plastic and fiber optics, the TrackerPAL notifies the PAL Operator if any
attempt is made to remove or otherwise tamper with the device. Among its other
features are the following:
o Active tracking,
o 24/7 monitoring,
o Exclusion/inclusion zones and proximity alerts,
o Two-way voice communication,
o Remote access by supervising officer,
o Rechargeable/replaceable batteries, and
o Durable and waterproof design.
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There are approximately 10 million seniors who live alone, many of whom are in
fear of being alone when a medical or physical emergency confronts them.
Conversely, loved ones are constantly worried about the whereabouts and needs of
their elderly parents. According to an article published in 1997 in the New
England Journal of Medicine, when a senior falls or is incapacitated, the
average time before he is found is 15 hours, and such falls typically result in
medical bills and costs of $10,000 or more. Those who are monitored for both a
chronic illness and emergencies can reduce hospital charges substantially by
addressing the problem quickly and decisively. For as little as several dollars
per day, RemoteMDx can provide peace of mind to both the senior and care
providers. We believe that we are the only company that offers a product and
service that addresses this need no matter where the elderly are located. Our
services only begin with the elderly. Currently, according to a Bureau of
Justice Statistics survey, it is estimated that 3.2% of the U.S. population, or
approximately 6,900,000 people, are either incarcerated or on parole. The
average cost of incarcerating an inmate is $65 per day. Since state and federal
budgets are under great strain, alternatives to incarceration are seriously
being considered by the judicial system. For less that 10% of the cost of
incarceration, our TrackerPAL monitoring center and patented devices can monitor
continuously and in real time the location of parolees. No longer do parole
officers have to guess where their parolees are located. In addition, electronic
monitoring has been shown to be an effective tool in rehabilitating criminals,
reducing the re-arrest rate. We believe that our PAL Services is the only
provider that allows constant and instant access to a parolee's location and can
directly put the supervisor in voice contact with the parolee.
Our PAL Services monitoring center has been founded upon cutting edge
technologies in the telematics and telephony arenas. When an alarm or call comes
into the Monitoring Center, the PAL operator can immediately identify who it is
and at the touch of a button can access the following information concerning the
elderly customer: immediate location, medical records, personal doctors, care
providers, insurance provider, and location of nearest emergency personnel and
hospitals. The operators can also access remotely the patient's vital signs and
history, such as glucose and pulse readings, allowing the PAL operator to help
in addressing the problem. The PAL operator can also contact the user in case of
an alarm condition or if others are in need of contacting them. All operators
undergo extensive training and are well versed in 911 emergencies. If the alarm
or request is from the parole system, the operator can immediately pull up the
history of the parolee, all locations where the parolee has been and where he is
currently, identify inclusion and exclusion zones, and contact either the parole
officer or parolee depending upon the alarm condition.
Our family of products and services were developed originally by Battelle (one
of the largest research and development companies in the world), and later
augmented by Wireless Endeavors (a Motorola affiliate). A strategic equity
relationship has been forged between RemoteMDx and Matsushita Electric Works (a
subsidiary of Panasonic) who does all of our contract manufacturing.
Distribution relationships have been created with ADT, Radio Shack, Universal
American Financial Corporation (parent of Penn Life), the Canadian Veteran's
Administration, Medicaid (approved in 6 states), Carolina Community Services,
and the Georgia Parole System.
Our patents, technologies, and services are brought together at our monitoring
center known as the "PAL Services Network."
Our address is 150 West Civic Center Drive, Suite 400, Sandy, Utah 84070, and
our telephone number is 801-451-6141.
This offering
Series C Convertible Preferred Stock
Between March 2006, and June 2006, we sold a total of 5,357,143 shares
of our Series C Convertible Preferred Stock, par value $0.0001 per share (the
"Preferred Stock") in a private offering (the "Preferred Stock Offering"). We
sold 617,352 shares of Preferred Stock in connection with the conversion of
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$1,037,151 of previously existing debt instruments, and 4,739,791 shares for
cash proceeds of $7,962,849. The purchase price for the Preferred Stock was
$1.68 per share. At the closing of the Preferred Stock Offering, we had
5,357,143 shares of Series C Preferred Stock outstanding.
A total of 142 entities or individuals purchased shares of Preferred
Stock in the Preferred Stock Offering. Three investors converted debt
instruments into shares of Preferred Stock, and 139 investors purchased shares
for cash. Collectively, these investors are referred to in this Registration
Statement as the Preferred Stockholders.
The minimum subscription in the Preferred Stock Offering was $50,000.
The Preferred Stockholders represented that they were all accredited investors,
pursuant to Regulation D, and the offering was made pursuant to Section 4(2) of
the Securities Act of 1933, as amended (the "1933 Act"), and Regulation D
promulgated thereunder.
We used approximately $1,000,000 of the cash proceeds from the
Preferred Stock Offering to repay certain debt instruments. The remaining cash
proceeds were used for working capital and general corporate purposes, in our
discretion.
The Preferred Stock is convertible into shares of our common stock.
Initially, each share of Preferred Stock is convertible into three shares of
common stock, subject to adjustment. As such, the 5,532,369 shares of Preferred
Stock were convertible, as of December 12, 2006, into 16,597,107 shares of our
common stock.
In connection with the Preferred Stock Offering, we granted to the
Preferred Stockholders registration rights, pursuant to which we agreed to
register the resale by the Preferred Stockholders of shares of our common stock
issued to the Preferred Stockholders in connection with conversions of the
Preferred Stock. We filed this registration statement to register the resale of
up to 16,071,429 shares of our common stock by the Preferred Stockholders.
August 2006 Common Stock Private Placement
On August 4, 2006, we closed a private placement (the "August Private
Offering") of shares of our common stock. We sold 5,300,000 shares of our common
stock (the "August Shares"), at a purchase price of $1.30 per share, for
aggregate proceeds to us of $6,890,000. Subsequent to September 30, 2006, we
also issued an additional 265,000 shares to the investors in the August Private
Offering as a penalty for the untimely filing of this registration statement.
This penalty was incurred subsequent to September 30, 2006. We intend to use the
proceeds from the sale of the Shares for general corporate purposes.
The investors in the private offering were EGI Fund (05-07) Investors,
LLC; Robert A. Naify Living Trust Dtd. February 8, 1991; Gimmel Partners, LP;
Ninth Street Partners, Ltd.; Bernard Osher Trust U/A DTD 3-8-88, Bernard Osher
Trustee; Will K. Weinstein Revocable Trust UTA dtd 2/27/90; HHS Partnership;
Andy Blank Revocable Living Trust U/A dtd 12/27/1999; 2005 Blickman Family
Trust; and Taube Investment Partners, LP. Taube Investment Partners, LP ("TIP")
designated five individuals or entities to receive the shares purchased by TIP.
Those designees, who are among the Selling Shareholders under this registration
statement, are Taube Family Trust; TFT Partners, LLC; Diane M. Taube; Taube 2002
Irrevocable Trust; and Belmont Partners, LLC.
In connection with the sale of the August Shares, we granted
registration rights to the purchasers, in connection with which we agreed to
file a registration statement to register the resale of the August Shares by the
purchasers within 60 days of the closing. We also agreed to use our best efforts
to have the registration statement declared effective within 120 days of the
filing. In the event that the registration statement is not filed within 60 days
of the closing, or effective within 120 days of the filing, we are required to
pay a 5% penalty to the investors. The Company has issued 265,000 shares
associated with the late filing of the registration statement.
Option Holders
Four of our Selling Shareholders received or may receive up to 801,934
shares of common stock upon the exercise of options.
7
October 2005 Private Placement Transaction
In October 2005, we conducted a private offering (the "October 2005
Offering") of shares of our common stock. We sold an aggregate of 1,000,000
shares of common stock at a per share price of $0.70 per share, for gross
proceeds of $700,000. In connection with the October 2005 Offering, we issued
50,000 shares of our common stock in payment of a commission to the placement
agent, and paid the placement agent a consulting fee of 300,000 additional
shares of our common stock for future consulting services.
In connection with the October 2005 Offering, we granted piggy-back
registration rights to the participants in that offering. Nineteen of the
Selling Shareholders in this registration statement received their shares in the
October 2005 Offering, and their resales are being registered pursuant to the
registration rights granted.
Letter of Credit Transaction
In July 2006, we arranged with three entities (the David S. Pottruck
Revocable Trust; the Klapper Family Trust; and Clydesdale Partners, LLC), and
three individuals (Stuart J. Kahn, John C. Walsey, and William B. Stevenson), to
provide letters of credit to serve as collateral to secure the repayment of a
line of credit from Citizens Bank to RemoteMDx (the "Citizens LOC"), providing
for loans from Citizens Bank to us of up to $10 million. Each entity established
a letter of credit in the amount of $1,000,000, and the three individuals
collectively arranged for a letter of credit in the amount of $1,000,000.
As consideration for arranging for the letters of credit, we agreed to
issue 100,000 shares of common stock to each of the entities and to the three
individuals collectively. Additionally, we agreed to pay to each letter of
credit provider an amount equal to eleven percent (11%) per annum of the total
amount of the letter of credit until the letter of credit is terminated, with
such payments being made on a monthly basis in arrears on the first day of each
month. Further, we agreed to pay to each letter of credit provider the amount of
$10,000, upon the funding of the initial $1 million of the Citizens LOC, against
the fees and costs incurred by the letter of credit provider to establish the
letter of credit.
Accordingly, six of our investors, the three entities and the three
individuals named above, received the shares being resold under this
registration statement in connection with the letters of credit discussed above.
Other Consulting Agreements and Loans
In a series of transactions between March 2005 and January 2006, we
paid off loans, accounts payable, and consulting contracts by issuing 4,379,000
shares of common stock, with the commitment to register the resale of such
shares. This registration statement includes the shares to be resold by sixteen
individuals or entities who received their shares in these transactions.
The Selling Shareholders and the transactions in which they received
shares are identified below and in the "Selling Shareholders" Section of this
registration statement.
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Name Transaction
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EGI Fund (05-07) Investors, LLC August Private Offering
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Robert A. Naify Living Trust Dtd. February August Private Offering
8, 1991
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Gimmel Partners, LP August Private Offering
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Ninth Street Partners, Ltd. August Private Offering
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Bernard Osher Trust U/A DTD 3-8-88, Bernard August Private Offering
Osher Trustee
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Will K. Weinstein Revocable Trust UTA dtd August Private Offering
2/27/90
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HHS Partnership August Private Offering
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Andy Blank Revocable Living Trust U/A dtd August Private Offering
12/27/1999
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Diane M. Taube August Private Offering
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Taube Family Trust August Private Offering
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TFT Partners, LLC August Private Offering
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Taube 2002 Irrevocable Trust August Private Offering
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Belmont Partners, LLC August Private Offering
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2005 Blickman Family Trust August Private Offering
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David Salamon Exercise of Options
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Simon Rapps Exercise of Options
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Sharon Sycoff Exercise of Options
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Joel Gold Exercise of Options
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2005 Blickman Family Trust Series C Preferred Stock Offering
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Aaron Fricke IRA Series C Preferred Stock Offering
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Adrienne Baker Series C Preferred Stock Offering
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Alan Sycoff Series C Preferred Stock Offering
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American Pension Services, Inc./FUB Series C Preferred Stock Offering
Custodian for (Mark Hesterman) Three G.
Financial LLC Roth 401(k)
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Anasazi Partners II LLC Series C Preferred Stock Offering
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Anasazi Partners III LLC Series C Preferred Stock Offering
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Anasazi Partners III LLC - Offshore Series C Preferred Stock Offering
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Azasazi Partners III LLC - Domestic Series C Preferred Stock Offering
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Banyan Investment Company Series C Preferred Stock Offering
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Benjamin Rodriguez Series C Preferred Stock Offering
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Blackhawk Properties Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Brandon Wood Series C Preferred Stock Offering
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Brent Ryhlick Series C Preferred Stock Offering
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Brian Hobbs IRA Series C Preferred Stock Offering
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Brian Peterson Series C Preferred Stock Offering
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Brian Peterson Roth IRA Series C Preferred Stock Offering
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Butternut Partners Series C Preferred Stock Offering
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C. Eugene Gronning Roth IRA Series C Preferred Stock Offering
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Carl Edward Wilson Series C Preferred Stock Offering
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Charles MacQuiddy Series C Preferred Stock Offering
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Chris Baker Series C Preferred Stock Offering
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David P. Hanlon Series C Preferred Stock Offering
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Cimarolo Partners Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Clark Johnston Series C Preferred Stock Offering
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Clydesdale Partners LLC PFK Management Series C Preferred Stock Offering
Group, LLC, Manager
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Craig Langhamer Series C Preferred Stock Offering
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Dallin Bagley Series C Preferred Stock Offering
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Damon Mungo Series C Preferred Stock Offering
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Daniel Dzegar Series C Preferred Stock Offering
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David Krieger Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
David Pottruck Revocable Trust Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Debra Langhamer Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Dennis Kirk Series C Preferred Stock Offering
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Devin Mungo Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Douglas Evans Series C Preferred Stock Offering
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Evans Bower Series C Preferred Stock Offering
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Gerd Konig Series C Preferred Stock Offering
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Gina Wood IRA Series C Preferred Stock Offering
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Gordan Milar Series C Preferred Stock Offering
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Gregory & Andrea Hughsam Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Harvey and Gloria Zaretzky Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Helen Reichberg Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Hume & Associates Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Irene Langhamer-Revocable Trust Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Irene McGrath Series C Preferred Stock Offering
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Ivars Bars Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
J. Lee Barton Series C Preferred Stock Offering
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James Wood Series C Preferred Stock Offering
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Jeff Peterson Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Jeff Peterson IRA Series C Preferred Stock Offering
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Jeffrey Davidson Series C Preferred Stock Offering
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Jeffrey L. Roberson Revocable Trust Series C Preferred Stock Offering
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Jeffrey Halbert Series C Preferred Stock Offering
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Jerry Gilmore Series C Preferred Stock Offering
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John Horstkoetter IRA Series C Preferred Stock Offering
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John Prather Series C Preferred Stock Offering
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John Sheridan IRA Series C Preferred Stock Offering
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John Walsey Series C Preferred Stock Offering
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Jon Vincitore Series C Preferred Stock Offering
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Jonathan C. Peterson Series C Preferred Stock Offering
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Jonathan Peterson Series C Preferred Stock Offering
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Jonathan Peterson Roth IRA Series C Preferred Stock Offering
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Joyce Sycoff Series C Preferred Stock Offering
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Joyce Sycoff IRA Series C Preferred Stock Offering
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Julian Kemble Series C Preferred Stock Offering
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Karen Spence Series C Preferred Stock Offering
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Keith Grubb IRA Series C Preferred Stock Offering
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Keith Langhamer Series C Preferred Stock Offering
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Kelly Nelson Series C Preferred Stock Offering
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Kenneth Velleman Series C Preferred Stock Offering
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Kent Dinsdale IRA Series C Preferred Stock Offering
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Key Stone Partners Series C Preferred Stock Offering
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Kimberly L. Blake-Datson Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Kirk Benson Series C Preferred Stock Offering
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Larry and Harriet Winsten Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Larry Hobbs Series C Preferred Stock Offering
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Lee Zaretzky Series C Preferred Stock Offering
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Liberty Capital Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Marc Langhamer Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Mark Muchow Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Mark Peterson Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Matthew Milar Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Maurice Alfermann Trust Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Maxim Management Corp. Series C Preferred Stock Offering
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Michael Chase Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Michael Jenkins Series C Preferred Stock Offering
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Michael Maldonado IRA Series C Preferred Stock Offering
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Michelle Mamby Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Michelle Richards/John Sheridan Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Michelle Squitieri & Andria Chan Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
NOB Hill Capital Partners Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Noel Tomlinson Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Orinda Global Investments Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Patricia Marriott IRA Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Rachel & Brian Hobbs, JTWROS Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Rachel Hobbs IRA Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Randy Langhamer Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Redrock Trust Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Revan Schwartz Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Richard & Pearl Pink Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Richard Hahner Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Richard Pecora Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Richard Reynolds Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Robert Naify Living Trust Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Rodriguez Amar Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Ronald Zaretzky Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Royal Ranney Rev Trust Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
SAAL Revocable Living Trust Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Saal-Bovee Management Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Salomon Mikel Series C Preferred Stock Offering
--------------------------------------------- ---------------------------------
Scott Langhamer Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Sharon Madden Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Stacey Lee/Beatrice Lee Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Stephanie Adam Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Steven Berecz IRA Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Steven Cook Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Stuart Kahn Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Susan Alder Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Tassainer Properties Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Thomas Nancoo Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Todd & Terry Miller Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Todd Groskreutz IRA Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
V. Mark Peterson Roth IRA Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
VATAS Holding Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Vernelle Braun Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Victor Squitieri Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Whisper Investment Co. Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
William Harnish Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
William McCartney Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
William Ryan Tevis IRA Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Willian Ryan Tevis Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Winston Williams Series C Preferred Stock Offering
--------------------------------------------- ----------------------------------
Bada Financial Third Party Resale
--------------------------------------------- ----------------------------------
Charles Alberta Third Party Resale
--------------------------------------------- ----------------------------------
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Cobble Creek Consulting Third Party Resale
--------------------------------------------- ----------------------------------
Congregation of Judah & Israel Third Party Resale
--------------------------------------------- ----------------------------------
Ed Tennenhaus Third Party Resale
--------------------------------------------- ----------------------------------
Gary Gelbfish Third Party Resale
--------------------------------------------- ----------------------------------
Harborview Master Fund L.P. Third Party Resale
--------------------------------------------- ----------------------------------
Hyman Sitko Third Party Resale
--------------------------------------------- ----------------------------------
Jason Jack Third Party Resale
--------------------------------------------- ----------------------------------
Jim Carter Third Party Resale
--------------------------------------------- ----------------------------------
John Thompson Third Party Resale
--------------------------------------------- ----------------------------------
Michael Sargenti Third Party Resale
--------------------------------------------- ----------------------------------
Robert Sargenti, Jr. Third Party Resale
--------------------------------------------- ----------------------------------
Robert Sargenti, Sr. Third Party Resale
--------------------------------------------- ----------------------------------
Salem Al Dhaheri Third Party Resale
--------------------------------------------- ----------------------------------
Sol Tennenhaus Third Party Resale
--------------------------------------------- ----------------------------------
Stephen Sargenti Third Party Resale
--------------------------------------------- ----------------------------------
Tyler Jack Third Party Resale
--------------------------------------------- ----------------------------------
Premier Asset Management Consulting Agreement
--------------------------------------------- ----------------------------------
Todd Vowell Consulting Agreement
--------------------------------------------- ----------------------------------
Bill Stevenson Letter of Credit Transaction
--------------------------------------------- ----------------------------------
Clydesdale Partners Letter of Credit Transaction
--------------------------------------------- ----------------------------------
David Pottruck Trust Letter of Credit Transaction
--------------------------------------------- ----------------------------------
John Walsey Letter of Credit Transaction
--------------------------------------------- ----------------------------------
Klapper Family Trust Letter of Credit Transaction
--------------------------------------------- ----------------------------------
Stuart Kahn Letter of Credit Transaction
--------------------------------------------- ----------------------------------
V. Mark Peterson October 2005 Private Offering
--------------------------------------------- ----------------------------------
Jeffrey Peterson October 2005 Private Offering
--------------------------------------------- ----------------------------------
Whisper Investment Company October 2005 Private Offering
--------------------------------------------- ----------------------------------
Delaware Charter Trust FBO Jeffrey Peterson October 2005 Private Offering
--------------------------------------------- ----------------------------------
Jonathan Peterson October 2005 Private Offering
--------------------------------------------- ----------------------------------
Banyan Investment Co., LLC October 2005 Private Offering
--------------------------------------------- ----------------------------------
Redrock Trust October 2005 Private Offering
--------------------------------------------- ----------------------------------
Blackhawk Properties LLC October 2005 Private Offering
--------------------------------------------- ----------------------------------
Liberty Capital, LLC October 2005 Private Offering
--------------------------------------------- ----------------------------------
Mark N. Schneider October 2005 Private Offering
--------------------------------------------- ----------------------------------
Jonathan Peterson October 2005 Private Offering
--------------------------------------------- ----------------------------------
Mark Peterson Roth IRA October 2005 Private Offering
--------------------------------------------- ----------------------------------
Butternut Partners, LLC October 2005 Private Offering
--------------------------------------------- ----------------------------------
W. Reed Jensen October 2005 Private Offering
--------------------------------------------- ----------------------------------
Brian Reed Jensen October 2005 Private Offering
--------------------------------------------- ----------------------------------
Bridgewater Ventures, LLC October 2005 Private Offering
--------------------------------------------- ----------------------------------
Tidewater Trust October 2005 Private Offering
--------------------------------------------- ----------------------------------
Matthew Te Milar October 2005 Private Offering
--------------------------------------------- ---------------------------------
Alpine Securities October 2005 Private Offering
--------------------------------------------- ----------------------------------
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12
Risk Factors
Caution Regarding Forward-looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements made by us or on our behalf. We may from time to time
make written or oral statements that are forward-looking, including statements
contained in this registration statement and other filings with the Securities
and Exchange Commission and in reports to our shareholders. Such statements may,
for example, express expectations or projections about future actions that we
may take, including restructuring or strategic initiatives or about developments
beyond our control. The terms "anticipate," "believe," "estimate," "expect,"
"objective," "plan," "might," "should," "may," "project," and similar
expressions are intended to identify forward-looking statements. These
forward-looking statements are subject to inherent risks and uncertainties that
may cause actual results or events to differ materially from those contemplated
by the forward-looking statements. These statements are made on the basis of
management's views and assumptions as of the time the statements are made and we
expressly disclaim any intention or obligation to update these statements. There
can be no assurance that our expectations will necessarily come to pass. The
factors that could materially affect future developments and performance include
those set forth below.
Risks related to our operations
The financial statements contained in our annual report on Form 10-KSB for the
year ended September 30, 2006 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 2006, we incurred a net loss of $23,797,745, negative cash flow
from operating activities of $11,397,627, and an accumulated deficit of
$106,726,375.
These factors, 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 sales of the TrackerPAL product. There can be no
assurance that revenues will increase rapidly enough to pay back operating
losses and debts. Likewise, there can be no assurance that the debt holders will
be willing to convert their 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 revenues or obtain additional
financing, we will be unable to continue the development of our products and may
have to cease operations.
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 relatively recent change in 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, we must accomplish the following, among other
things:
o Develop and introduce functional and attractive products and
services;
o Increase awareness of our brand and develop consumer loyalty;
o Respond to competitive and technological developments;
o Build an operational structure to support our business; and
o 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 new products and services is new and evolving, it is
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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.
Our management group owns or controls a significant number of our outstanding
shares.
Certain of our directors, executives and principal shareholders or persons
associated with them beneficially own approximately 23% of our outstanding
common stock. In addition, these individuals are the beneficial owners of
preferred stock convertible into a significant number of additional shares of
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 disapproval 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 9
"Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act," and Item 11 "Security Ownership of Certain
Beneficial Owners and Management."
There is no certainty that the market will accept our new products and services.
Our targeted markets may never accept our new products or services. Insurance
companies, physicians, nurses, patients, and consumers and correctional agencies
and administrators may not use our products unless they determine, based on
experience, clinical data, advertising or other factors, that those products are
a preferable alternative to currently available methods of monitoring. In
addition, decisions to adopt new medical 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 or third party
payors will accept our new products, which could have a material adverse effect
on our business, financial condition and results of operations.
Our relationships with our majority shareholders present potential conflicts of
interest, which may result in decisions that favor them over our other
shareholders.
Our principal beneficial owners, David Derrick and James J. Dalton, provide
management and financial services and assistance to RemoteMDx. When their
personal investment interests diverge from our interests, they and their
affiliates may exercise their influence in their own best interests. Some
decisions concerning our operations or finances may present conflicts of
interest between us and these shareholders and their affiliated entities.
During the two most recent fiscal years we have has been dependent upon certain
major customers, the loss of which would adversely affect our results of
operations and business condition.
During fiscal year 2006, one customer, Fisher Scientific, accounted for
approximately 21% ($228,437) of sales. The loss of this customer would result in
lower revenues and limit the cash available to grow our business and to achieve
profitability. We have no arrangements or contracts with this customer that
would require them to purchase a specific amount of product from us.
We also rely on significant suppliers for other 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 had in the past, which would reduce revenues and could
adversely affect our results of operations or financial condition.
During the fall of 2001, we entered into a cellular switching access agreement
under which we purchase substantially all of our cellular access requirements.
That agreement expired in 2004. However, we have entered into an agreement with
a national cellular access company for these services. If any of these
significant suppliers were to cease providing product or services to us, we
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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.
Our proposed business plan subjects our research, development and ultimate
marketing activities to current and possibly to future government regulation.
The cost of compliance or the failure to comply with this regulation could
adversely affect our business, results of operations and financial condition.
The products we currently distribute and sell are not subject to specific
approvals from any governmental agency, although our products using cellular and
global positioning satellite ("GPS") products must be manufactured in compliance
with applicable rules and regulations of the Federal Communications Commission.
The U.S. Food and Drug Administration ("FDA") requires governmental clearance of
all medical devices and drugs before they can be marketed in the United States.
Similar approvals are required from other regulatory agencies in most foreign
countries. The regulatory processes established by these government agencies are
lengthy, expensive, and uncertain and may require extensive and expensive
clinical trials. There can be no assurance that any future products developed by
us that are subject to the FDA's authority will prove to be safe and effective
and meet all of the applicable regulatory requirements necessary to be marketed.
The results of testing activities could be susceptible to varied interpretations
that could delay, limit or prevent required regulatory approvals. In addition,
we may encounter delays or denials of approval based on a number of factors,
including future legislation, administrative action or changes in FDA policy
made during the period of product development and FDA regulatory review. We may
encounter similar delays in foreign countries. Furthermore, approval may entail
ongoing requirements for, among other things, post-marketing studies. Even if we
obtain regulatory approval of a marketed product, our manufacturer and its
manufacturing facility are subject to on-going regulation and inspections.
Discovery of previously unknown problems with a product, manufacturer or
facility could result in FDA sanctions, restrictions on a product or
manufacturer, or an order to withdraw and/or recall a specific product from the
market. 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 also be required to comply with FDA 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 have greater financial resources, 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.
15
Many of the companies currently in the remote medical monitoring and diagnostic
market, or in the criminal justice offender tracking market, may have
significantly greater financial resources and expertise in research and
development, marketing, manufacturing, pre-clinical and clinical testing,
obtaining regulatory approvals, and marketing, than those available to us.
Smaller companies may also prove to be significant competitors, particularly
through collaborative arrangements with large third parties. Academic
institutions, governmental agencies, and public and private research
organizations also conduct research, seek patent protection, and establish
collaborative arrangements for product and clinical development and marketing in
the offender tracking and mobile medical alert arenas. 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, the timing and scope of
regulatory approvals, availability of supply, marketing and sales capability,
reimbursement coverage, 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.
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 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.
We are dependent upon our strategic alliances, the loss of which would limit our
success.
Our strategy for the identification, development, testing, manufacture,
marketing and commercialization of our products and services includes entering
into various collaborations through corporate alliances. We have entered into
collaborative relationships with a significant engineering and product
commercialization firm and a multi-national manufacturing corporation, and we
believe that these relationships provide us with strong strategic alliances for
the design and engineering of our products. There can be no assurance, however,
that these relationships will succeed or that we will be able to negotiate
strategic alliances with other parties on acceptable terms, if at all, or that
any of these collaborative arrangements will be successful. To the extent we
choose or are unable to establish or continue such arrangements we could
experience increased capital requirements as a result of undertaking such
activities. In addition, we may encounter significant delays in introducing
products currently under development into the marketplace or find that the
development, manufacture or sale of our proposed products is adversely affected
by the absence of successful collaborative agreements.
We have a history of losses and anticipate significant future losses, and we may
be unable to project our revenues and expenses accurately.
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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 would result in
significant expense. If we it do achieve profitability, we 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.
Our business plan anticipates significant growth through sales and acquisitions;
to manage the expected growth we will require capital and there is no assurance
we 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 number and type of
tests we may be required to conduct in seeking government or agency approval of
these products, 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 shareholders
(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.
We currently lack experienced sales and marketing capability for all of our
product and service lines.
We currently have limited staff with experience in sales, marketing or
distribution in our intended markets. We will be required to develop and expand
our marketing and sales force with technical expertise and with supporting
distribution capability. Alternatively, we may obtain the assistance of other
companies with established distribution and sales forces, in which case we would
be required to enter into agreements regarding the use and maintenance of these
distribution systems and sales forces. There can be no assurance that we will be
able to establish or expand our in-house sales and distribution capabilities, or
that we will be successful in gaining market acceptance for our products through
the use of third parties. There can be no assurance that we will be able to
recruit, train and maintain successfully the necessary sales and marketing
personnel, or that the efforts of such personnel will be successful.
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 applied for several patents and those applications are awaiting action by
17
the 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 can 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 rely on trade secrets laws to protect portions of our technology for which
patent protection has not yet been pursued or is not believed to be appropriate
or obtainable. These laws may protect us against the unlawful or unpermitted
disclosure of any information of a confidential and proprietary nature,
including but not limited to our know-how, trade secrets, methods of operation,
names and information relating to vendors or suppliers and customer names and
addresses.
We intend to protect this unpatentable and unpatented proprietary technology and
processes, in addition to other confidential and proprietary information in
part, by entering into confidentiality agreements with employees, collaborative
partners, consultants and certain contractors. There can be no assurance that
these agreements will not be breached, that we will have adequate remedies for
any breach, or that our trade secrets and other confidential and proprietary
information will not otherwise become known or be independently discovered or
reverse-engineered by competitors.
The existence of certain anti-dilution rights applicable to our Series B
Preferred Stock might result in increased dilution inasmuch as we have offered
and sold shares of common stock or securities convertible into shares of common
stock at prices below the initial conversion rate of $3.00 per common share,
unless those rights are waived.
The investors in our Series B preferred stock have the right to an automatic
adjustment of the conversion price of the Series B preferred shares held by them
in the event we sell shares of common stock or securities convertible into
common stock at a price below the original conversion price of $3.00 per share.
18
We have issued shares and options to purchase shares to certain creditors to
convert debt to equity at prices that are below the $3.00 conversion price. We
have also issued promissory notes that are convertible into shares of common
stock at conversion prices below the original Series B conversion price of
$3.00. Accordingly, we may be required to issue additional shares of common
stock to comply with anti-dilution adjustments to the conversion rights of
present or former preferred shareholders. Any increase in the number of shares
of common stock issued upon conversion of Series B preferred shares would
compound the risks of dilution to existing shareholders.
The obligation to issue shares of common stock upon the exercise of outstanding
options and warrants or upon conversion of outstanding shares of preferred stock
increases the potential for short sales.
Downward pressure on the market price of our common stock that likely would
result from issuances of common stock upon conversion of preferred stock, or
upon the exercise of options and warrants, could encourage short sales of common
stock by the holders of the preferred stock or others. A significant amount of
short selling could place further downward pressure on the market price of the
common stock, reducing the market value of the securities held by our
shareholders.
Payment of dividends in additional shares of Series A preferred stock or in
shares of common stock will result in further dilution.
Under the terms of the Series A preferred stock, our board of directors may
elect to pay dividends by issuing additional shares of Series A preferred stock
or common stock. Dividends accrue from the date of the issuance of the preferred
stock, subject to any intervening payments in cash. Each share of Series A
preferred stock is convertible into 370 shares of common stock. The issuance of
additional shares of Series A preferred stock or common stock as dividends could
result in a substantial increase in the number of shares issued and outstanding
and could result in a decrease of the relative voting control of the holders of
the common stock issued and outstanding prior to such payment of dividends and
interest.
Payment of dividends in additional shares of Series C preferred stock or in
shares of common stock will result in further dilution.
Under the terms of the Series C preferred stock, our board of directors may
elect to pay dividends by issuing additional shares of Series C preferred stock
or common stock. Dividends accrue from the date of the issuance of the preferred
stock, subject to any intervening payments in cash. Each share of Series C
preferred stock is initially convertible into 3 shares of common stock. The
issuance of additional shares of Series C preferred stock or common stock as
dividends could result in a substantial increase in the number of shares issued
and outstanding and could result in a decrease of the relative voting control of
the holders of the common stock issued and outstanding prior to such payment of
dividends and interest.
We have and will continue to have significant future capital needs and there is
no assurance we will be successful in obtaining necessary additional funding.
We will be required to raise additional capital to fully implement our business
plan. Our actual capital requirements will depend on many factors, including but
not limited to, the costs and timing of our ongoing development activities, the
number and type of clinical or other tests we may be required to conduct in
seeking government or agency approval of these products, 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
19
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 debt or equity 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 shareholders (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.
We rely on third parties to manufacture our products. Therefore, we do not have
direct control over the quality or other aspects of the manufacturing process,
which could result in a loss of customer acceptance of our products and
increased expense related to warranty claims or defective product returns.
We do not directly control the manufacturing facilities where our products are
made and we must depend on third parties to make our products according to our
standards for quality and reliability. We do not own any manufacturing
facilities or equipment and do not employ any manufacturing personnel. We use
third parties to manufacture our products on a contract basis. There is no
assurance that we will be able to retain qualified contract manufacturing
services on reasonable terms. In addition, the manufacture of our products
involves complex and precise processes. Changes in manufacturing processes by
our contract manufacturer or our suppliers, or the use of defective components
or materials, could significantly reduce our manufacturing yields and product
reliability. For example, during the year ended September 30, 2003, we
voluntarily recalled approximately 200 GPS devices that contained a defect
causing the battery to drain power at an unacceptable rate. The problem was
quickly resolved and the units replaced at the expense of our manufacturer.
There is no assurance, however, that similar problems will not arise in the
future with these other products.
Penny stock regulations may impose certain restrictions on marketability of our
securities.
The Securities and Exchange Commission (the "Commission") 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 Commission 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 Commission, the market for
penny stocks has suffered in recent years from patterns of fraud and abuse. Such
patterns include:
o Control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer;
o Manipulation of prices through prearranged matching of purchases
and sales and false and misleading press releases;
o "Boiler room" practices involving high pressure sales tactics and
unrealistic price projections by inexperienced sales persons;
o Excessive and undisclosed bid-ask differentials and markups by
selling broker-dealers; and
20
o 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.
RemoteMDx's management is aware of the abuses that have occurred historically in
the penny stock market.
The holders of our Series B and Series C preferred stock have voting rights that
are the same as the voting rights of holders of our common stock, which
effectively dilutes the voting power of the holders of the common stock.
Holders of shares of Series B preferred stock are entitled to one vote per share
of Series B preferred stock on all matters upon which holders of our common
stock are entitled to vote. Therefore, without converting the shares of Series B
preferred stock, the holders thereof enjoy the same voting rights as if they
held an equal number of shares of common stock, as well as the liquidation
preference described above. In addition, without the approval of holders of a
majority of the outstanding shares of Series B preferred stock voting as a
class, we are prohibited from (i) authorizing, creating or issuing any shares of
any class or series ranking senior to the Series B preferred stock as to
liquidation rights; (ii) amending, altering or repealing our Articles of
Incorporation if the powers, preferences or special rights of the Series B
preferred stock would be materially adversely affected; or (iii) becoming
subject to any restriction on the Series B preferred stock other than
restrictions arising solely under the Utah Act or existing under our Articles of
Incorporation as in effect on June 1, 2001.
Holders of shares of Series C Convertible Preferred Stock are entitled to one
vote per share of Series C Convertible Preferred Stock on all matters upon which
holders of our common stock are entitled to vote. Therefore, without converting
the shares of Series C Convertible Preferred Stock, the holders thereof enjoy
the same voting right as is if they held an equal number of shares of our common
stock.
Risks Related to the Offering
Holders of our common stock are subject to the risk of additional and
substantial dilution to their interests as a result of issuances of common stock
in connection with the Series C Preferred Stock.
As of the date of this prospectus, 5,532,369 shares of our outstanding Series C
Preferred Stock are convertible into 16,597,107 shares of our common stock.
There can be no guaranty of conversion or other action by holders of such
convertible preferred stock. Regardless, holders of our common stock may
experience substantial dilution of their interests to the extent that the
holders of the Series C Preferred Stock convert their shares of Series C
Preferred Stock into shares of our common stock.
Our issuances of shares in connection with conversions of the Series C Preferred
Stock likely will result in overall dilution to market value and relative voting
power of previously issued common stock, which could result in substantial
dilution to the value of shares held by shareholders prior to sales under this
prospectus.
The issuance of common stock in connection with conversions of the Series C
Preferred Stock by the Series C Holders may result in substantial dilution to
the equity interests of holders of RemoteMDx common stock other than the Series
C Holders. Specifically, the issuance of a significant amount of additional
common stock will result in a decrease of the relative voting control of our
common stock issued and outstanding prior to the issuance of common stock in
connection with conversions of the Series C Preferred Stock. Furthermore, public
resales of our common stock by the Selling Shareholders following the issuance
of common stock in connection with conversions of the Series C Preferred Stock
likely will depress the prevailing market price of our common stock. Even prior
to the time of actual conversions and public resales, the market "overhang"
resulting from the mere existence of our obligation to honor such conversions or
exercises could depress the market price of our common stock.
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The trading market for our common stock is limited, and investors who purchase
shares from the Selling Shareholders may have difficulty selling their shares.
The public trading market for our common stock is limited. On July 27, 2005, our
common stock was listed on the OTC Bulletin Board. Nevertheless, an established
public trading market for our common stock may never develop or, if developed,
it may not be able to be sustained. The OTCBB is an unorganized, inter-dealer,
over-the-counter market that provides significantly less liquidity than other
markets. Purchasers of our common stock therefore may have difficulty selling
their shares should they desire to do so.
It may be more difficult for us to raise funds in subsequent stock offerings as
a result of the sales of our common stock by the Selling Shareholders in this
offering.
As noted above, sales by the Selling Shareholders likely will result in
substantial dilution to the holdings and interest of current and new
shareholders. Additionally, as noted above, the volume of shares sold by the
Selling Shareholders could depress the market price of our stock. These factors
could make it more difficult for us to raise additional capital through
subsequent offerings of our common stock, which could have a material adverse
effect on our operations.
There may be additional unknown risks which could have a negative effect on us
and our business.
The risks and uncertainties described in this section are not the only ones
facing RemoteMDx. Additional risks and uncertainties not presently known to us
or that we currently deem immaterial may also impair our business operations. If
any of the foregoing risks actually occur, our business, financial condition, or
results of operations could be materially adversely affected. In such case, the
trading price of our common stock could decline.
Use of Proceeds
All of the shares of common stock issued in the August Private Placement, in
connection with conversions of the Series C Preferred Stock, and in connection
with the other offerings discussed in the Summary section above, if and when
sold, are being offered and sold by the Selling Shareholders or their pledgees,
donnees, transferees, or other successors in interest. We will not receive any
proceeds from those sales.
In connection with the sales of the August Shares and the Series C Preferred
Stock, we used the proceeds for research and development, distribution and
marketing, and general working capital, after paying certain costs associated
with the offerings.
Determination of Offering Price
The Selling Shareholders may sell our common stock at prices then prevailing or
related to the then-current market price, or at negotiated prices. The offering
price may have no relationship to any established criteria or value, such as
book value or earnings per share. Additionally, because we have not generated
any profits for several years, the price of our common stock is not based on
past earnings, nor is the price of the shares of our common stock indicative of
current market value for the assets we own. No valuation or appraisal has been
prepared for our business or possible business expansion.
DESCRIPTION OF BUSINESS
General
RemoteMDx, Inc. ("We" or the "Company") markets and sells patented wireless
location technologies and related monitoring services, and develops, markets and
sells personal security, senior supervision, and monitoring services. Our
products and monitoring services feature wireless products that utilize GPS and
cellular technologies in conjunction with a monitoring center. These devices
include a mobile emergency response device, MobilePAL(TM), which can locate
persons in distress, no matter where they may be, and dispatch the closest
emergency service to their location. We have has developed a tracking device,
22
TrackerPAL, which is being used to monitor convicted offenders in the criminal
justice system. We believe that our technologies and services will benefit the
healthcare and penal system as they allow both care providers and law
enforcement officials to respond immediately to a medical event or criminal
activity respectively. Our medical monitoring customers will be able to better
monitor and manage their own chronic disease and medical conditions, giving
peace of mind to them and their loved ones and care providers. Similarly, law
enforcement officials will be able to monitor the location of offenders and
parolees wearing the TrackerPAL product.
Our primary health monitoring market consists of approximately 35 million
Americans over the age of sixty-five. Of these 35 million seniors, it is
estimated that approximately 9.7 million currently live alone. However, in most
cases, we anticipate that the senior customers will not purchase our products
for themselves. Instead, based on our experience, we believe that it would be
more effective to target the children or caregivers of these seniors. Therefore,
the primary target market is children, friends, and spouses of these
individuals.
Additionally, we have identified a growing need in the parole/probation market,
which in 2003, consisted of 4.9 million adults in the criminal justice system at
any given time. In order to meet the needs of this growing demand, we have
developed TrackerPAL that works in conjunction with our monitoring center. To
date, we have not received any revenue from this market.
We derive our revenues from the following sources:
o Medical Diagnostic Stains - We sell medical diagnostic stains and
equipment to laboratories throughout the United States. We
anticipate that these sales will decrease in the future as a
percentage of total sales.
o Monitoring Activation - We sell our MobilePAL(TM) and anticipate
leasing our TrackerPAL devices as part of a monitoring contract,
with prepaid activation charges.
o Monitoring Services - Following activation, our MobilePAL and
TrackerPAL customers pay a monthly monitoring fee and fees for
additional services offered by our contract providers or by us.
In addition to the foregoing sources, we have contractual rights to receive
royalty revenues from a license agreement with Matsushita Electric Works ("MEW")
and from sales of telematic products and services under marketing agreements.
"Telematic" means any wireless communication system designed for the collection
and dissemination of data. To date these royalty agreements have not produced
any royalty income.
Our Strategy
Our goal is to establish the Company as a significant marketer and distributor
of leading technology and services we have developed for the mobile personal
emergency market, the parolee and probation market, and the health monitoring
industries.
Background
We have been engaged in our original business of manufacturing and marketing
medical diagnostic stains, solutions and related equipment for over 10 years.
Since 1997 this business has been conducted through a wholly-owned subsidiary,
Volu-Sol Reagents Corporation. Our remote health monitoring and diagnostic
business is conducted under the names "Remote Medical Diagnostics" and
"RemoteMDx." In July 2001, we acquired and now operate the business conducted by
SecureAlert. SecureAlert's business involves manufacturing and marketing mobile
emergency and personal health monitoring systems, and also will focus on the
parolee and probation market.
Our primary founders and owners are David Derrick ("Derrick") and James Dalton
("Dalton"), who are identified in this registration statement under Item 9,
Directors and Executive Officers.
In April 2000, we entered into a research agreement with Battelle Memorial
Institute ("Battelle"), a large research and development firm, to assist us in
developing our technology for remote monitoring and personal medical
diagnostics. Although the agreement with Battelle expired in November 2002, it
resulted in the development of design and technologies included in our current
MobilePAL and TrackerPAL products today.
23
In July 2001, we acquired SecureAlert and added its patents and technology to
our business plan. In October 2001, we began developing our telematic monitoring
center in conjunction with Bishop Engineering ("Bishop"), an innovator in
telematic and GPS technologies. By July 2002, this collaboration with Bishop
culminated in the development of a monitoring center jointly operated with
Aradiant Corp ("Aradiant"). In July 2004, we moved the monitoring center from
its location in the San Diego area to our headquarters in Salt Lake City. This
move allows us to better manage and control the monitoring center and our
employees. This monitoring center enables our PAL Services Network to offer
location, concierge services, medical triage advice, emergency response, call
switching and health monitoring to our subscribers. This monitoring center and
its related services will also help us serve our customers in the criminal
justice industry. To date we have not sold any products or services to the
criminal justice industry. There can be no assurance that our products will be
accepted or that we will be able to obtain customers in this industry.
In April 2002, we entered into a manufacturing and product development agreement
with MEW. This strategic alliance included an equity investment in the Company
by MEW and an arrangement under which MEW was designated our preferred
manufacturer, and the Company agreed to act as MEW's preferred worldwide service
provider for GPS products. During 2002 and 2003, working with MEW and another
manufacturer, we successfully designed and began to market products that combine
cellular technology, including our patented single-button emergency feature, and
GPS, allowing the two systems to work simultaneously in a single unit. No
services were performed by MEW during fiscal year 2006.
Marketing
Over the past three years, we have developed our menu of services and core
technology, which we refer to as the Personal Assistant Link ("PAL(TM)")
Services Network. Gross revenues for the year ended September 30, 2006, were
$1,070,141. We look to expand our sales of these products and services by
relying on and establishing our distribution network. In fiscal year 2004,
approximately 49% of our revenues were derived from the sale of PAL products and
services. In fiscal year 2005, approximately 34% of our revenues were derived
from the sale of PAL products and services. In fiscal year 2006, approximately
37% of our revenues were derived from the sale of MobilePAL and TrackerPAL
products and services. We expect to see this percentage increase in the future
as we pursue our business plan to emphasize these services. This sales effort
will be focused on the homebound Personal Emergency Response System ("PERS")
industry and the parole/probation market.
During the fiscal year ended September 30, 2004, we began to implement a
direct-to-consumer marketing strategy, which we have since abandoned. This
campaign employed a variety of media including radio, print, online marketing,
and direct mail to reach our target customers. Our target market was the
estimated 35 million Americans that are over the age of sixty-five. Of these 35
million seniors, we estimate that approximately 9.7 million currently live
alone, with approximately 1.3 million of these homebound. Our experience with
direct-to-consumer marketing shows that the senior customers do not personally
make the decision to purchase our products and services. Instead, we have
learned that the children or caregivers of these seniors make the purchase
decisions. We have also learned that a direct to consumer marketing campaign is
very expensive and that our efforts would be better rewarded by focusing on
distributors and dealers selling our products and services.
Under our current business model, our customers own our devices. We hope to
implement in the future a model where customers do not own the devices. The
customer would rent our device on a month-to-month contract. The customer can
terminate the service by simply returning the device to us. We charge the
customer a one-time activation fee and a monthly monitoring fee for as long as
the customer keeps the device. We may also pay a monthly fee to the dealer or
distributor for each contract originated through that dealer or distributor.
To further expand the viability of our distribution and marketing plan, we are
working with state Medicaid agencies, insurance companies, and correctional
agencies to pursue reimbursement for our products and services. The MobilePAL
24
product is Medicaid-approved in Colorado and Maryland and we hope to replicate
this success in other states. In addition, we are working with insurers to
obtain private reimbursement approval. There can be no assurance that these
efforts will be successful.
In addition to the PERS market, we will also focus our efforts in the parole and
probation market. According to 2003 Bureau of Justice Statistics, in the United
States there are a record number 4.9 million adult men and women who are on
supervised probation or parole. This number is expected to continue to grow as
state budget deficits are requiring prisons to be closed, putting additional
pressure on the already swelling parole and probation market. In 2003 the total
adult correctional population, including those incarcerated and those being
supervised in the community, was 6.9 million and growing at the rate of 2.4% per
year. This equaled 3.2% of the U.S. population or about 1 in every 32 adults.
This increase has strained the ability of parole officers and supervisors to
manage the burgeoning growth in parolees. RemoteMDx has created a product and
service to answer this problem called PAL Services Offender Tracking Network
(the "Network").
We believe the Network and its accompanying products that will be marketed and
sold by RemoteMDx will create a shift in the parole/probation market. The
Network strategy transforms the current market to one that provides offender
monitoring products and services. The Network allows a supervisor to manage
dozens of parolees simultaneously. Under the Network program, a parolee is
required to wear the device twenty-four hours a day, seven days a week, which
allows the PAL monitoring center to track where the parolee is in real time
(active monitoring). The computer at the monitoring center automatically checks
to make sure that the parolee is within inclusion areas and does not enter any
exclusionary zones. At any sign of problems, the monitoring center can contact
directly the parolee and if necessary put the parole officer in direct contact
with the parolee. The parole officer can also access a secured web site that
shows where the parolee is and where he has been, allowing the supervisor to
better manage the parolee.
The PAL Operator can provide a multitude of services for the offender and the
supervising officer. The various services offered are as follows:
o 24/7 nationwide two-way voice communication;
o Automated reporting of location and alarms (breadcrumbs);
o Inclusion and exclusion alarms;
o Proximity alarm;
o Automated alert notification;
o Tamper resistant band and alarm;
o Battery status alerts (rechargeable/replaceable);
o Web-based real-time tracking;
o Active monitoring; and
o Enhanced GPS/GSM locate.
Research and Development Program
The PAL Products
In 2000, as a direct result of our strategic relationship with Battelle, we
began our efforts to develop a mobile solution to the PERS market. We eventually
determined that combining cellular and GPS technologies could expand the PERS
market from approximately 1.3 million homebound patients to more than 10 million
seniors living alone in the United States. We began by reviewing patents and
products previously developed that might be utilized in this market. Our
research led us to SecureAlert, owner of patents and circuitry that we believed
could help accelerate our move into the market.
Our first product line utilizing these patents was MobilePAL, a cellular-based
emergency and concierge device with one-button access to our PAL Services
Operators. The first version of the MobilePAL unit was an analog cell device. We
used analog technology because of its more expansive coverage in North America
25
at that time. Our first unit could be configured to call 911 Emergency only, or
could accept a Mobile Identification Number (MIN) and make outbound calls to
either of two predetermined phone numbers.
Our second version of the MobilePAL device incorporates GPS technology. GPS
technology utilizes the 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 satellites, the 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
inside a building or underground.
Shortly after commencing sales of the new GPS-enabled MobilePAL, MEW began
working with us to develop an improved MobilePAL device complete with an
improved GPS engine, speakerphone, and cellular chipset. The result was the
MobilePAL GPS2000. The GPS2000 has several advantages over the earlier versions.
The first is the improved quality of the GPS engine. MEW partnered with Sirf, a
leading GPS technology company, to create a new, smaller GPS device with greater
sensitivity and acquisition times of less than one minute. The GPS2000 is able
to use the GPS engine concurrently with the cellular circuitry in the device,
unlike the GPS1000 which temporarily drops the cellular signal during the time
that the GPS engine is operating, and then automatically redials the PAL
Services Center once the location data has been obtained. Using the GPS2000, the
PAL Services Center operators are able to continuously communicate with the
subscriber while simultaneously determining the caller's location.
Recently, we have developed two working prototypes of our next generation of the
MobilePAL, the GPS 3000. This device has several improvements over the GPS 2000.
The device is always powered on and it can receive incoming calls. No launch
date has been set for this device, and the device is not yet ready for
commercial distribution.
During the year ended September 30, 2006, we spent $2,087,802 on research and
development. This compares to $1,766,791 spent on research and development for
the year ended September 30, 2005.
TrackerPAL
We have worked with nexAira, Inc. ("nexAira") to develop our TrackerPAL product.
nexAira 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. nexAira is recognized for its rapid development
cycles and expertise in both the cellular and GPS areas.
In addition, we are working with Dynamic Source Manufacturing ("DSM") located in
Calgary, Alberta, Canada. DSM is an electronics manufacturing company which
delivers a full range of services to its clients. From quickturn prototyping to
high volume turnkey manufacturing, DSM has the resources available to
manufacture all types of printed circuit boards. DSM manufactures the Company's
TrackerPAL product.
The Parolee Tracking Device ("PTD") System requires the design and development
of four devices:
o Ankle electronics, a wireless body worn tracking device;
o PTD-Cuff, a single use band used to fasten the ankle electronics
to the offender;
o Fixture for charging up to 2 batteries at once; and
o Rechargeable battery pack, a custom tooled battery used to power
the ankle device.
26
The PTD allows a monitoring center to detect the location of an offender and the
offender's attempts to tamper with the device. When the device is attached to an
offender's ankle and activated, it makes use of a GPS receiver to determine the
offender's position and a cellular wireless link to communicate these
coordinates to the monitoring center. The center can contact an offender
whenever the device has adequate cellular signal, using the integrated cellular
speakerphone. Automatic alerts can be sent to the server when the wearer travels
outside a specified area or attempts to enter an "off limits" area. The PTD will
be water resistant to 3 meters.
The ankle strap or PTD-Cuff is a reinforced band used to secure the device to
the offender. The strap is permanently fixed to the offender and requires the
destruction of the strap for removal. The strap incorporates a metal strip to
ensure the strap does not shrink or stretch as well as electrical and optic
continuity detection circuits/paths for tamper detection. The strap is made to
be inexpensive yet strong while the optical continuity assists in making it very
difficult to circumvent and remove without detection.
Development of PAL Services Network
As we developed the MobilePAL product line, we simultaneously worked to create
the PAL Services Center. In contrast to a typical PERS monitoring center, the
PAL Services Center is equipped with hardware and software that pinpoints the
location of the incoming caller by utilizing GPS technology. This capability is
referred to as telematic. The operator's computer screen can identify the caller
as well as locate the caller's precise location on a detailed map. In addition,
the computer must be able to give directions to various sites from the caller's
location, such as directions to the nearest hospital, police station, or
emergency service and also be able to guide emergency services to the caller's
location.
With the MobilePAL products developed and the PAL Services Center in place, we
have the ability to offer the following services:
o 24/7 nationwide one-button access to a live Personal Assistant;
o Mobile access to immediate dispatch of police, fire or ambulance
services;
o Access and dispatch of roadside assistance such as tow trucks,
etc.;
o Location of nearest hospital and veterinary services;
o Auto-accident assistance including direct connection to the
client's insurance company;
o Nurse triage service in case of medical questions or concerns;
o Personal calling to any phone number of customer's choosing
including family, friends, caregivers, etc.;
o Mobile directory assistance to any U.S. phone number;
o Step-by-step driving instructions to virtually anywhere in the
United States;
o Location services;
27
o Medical Data Link to store customer's critical personal medical
information and communicate the customer's needs to emergency
personnel;
o Daily monitoring of chronically ill customers with data and
compliance information forwarded to care providers and loved ones;
o Location of lost or injured loved ones;
o Ability to immediately notify insurers and care providers during a
medical emergency;
o Ability of monitoring center to initiate a call to the subscriber
to check the subscriber's condition;
o Update immediate caregiver weekly on status of subscriber and any
calls the operators may have received that week;
o Ability to track device online;
o Waterproof;
o Active Monitoring;
o Enhanced GPS/GSM location;
o Web based real-time tracking;
o Inclusion and exclusion alarms; and
o Proximity alarms.
MobilePAL Development
We believe that the next generation of MobilePAL products will revolutionize the
PERS market. This next generation product further miniaturizes the technology,
making MobilePAL a wearable device (such as a watch or pendant). nexAira is in
the process of designing and developing for us a watch-type device that contains
a single button and fall detection mechanism that communicates with a pager-size
companion device. Activated manually by pushing a button on the watch or
automatically by sensing a sudden movement such as a fall, the device
immediately transmits a radio frequency ("RF") signal that is picked up by the
companion device that then triggers a call to the monitoring center. From there,
the wearer can talk to the center on the speakerphone while the GPS system
pinpoints his or her location.
While the capabilities of MobilePAL will grow with each development cycle, we
anticipate that all models of future generations of MobilePAL, including the
watch/pendant device, will have the following features:
o Wearable watch or pendant with an emergency button for contacting
the PAL Services Operator regardless of the location of the
wearer.
o GPS engine for locating the subscriber.
o Fall detection that will alert the service in the event of a fall.
o Communication with small pager size device that talks to the
customer and the PAL Services Center.
o Dual band cellular technology utilizing GSM and AMPS.
o Rechargeable units.
o Alarm when not in proximity of base unit.
Although no functioning prototypes yet exist for this watch/pendant device, the
research and development of this next generation of MobilePAL is currently
underway and is being performed by nexAira. Continuation of this research by
nexAira on our behalf is contingent upon our obtaining adequate funding. There
can be no assurances given that we will obtain the necessary funding.
28
WatchPAL Development Program
We are working to combine remote health monitoring services with mobile
communication and security services by launching the WatchPAL line of products.
Each WatchPAL product will be specifically designed to monitor a specific
chronic illness. The first chronic disease we have targeted for the WatchPAL
product is diabetes. This WatchPAL product is designed to monitor diabetic
patients remotely and unobtrusively. The patient wears a watch that will not
only act as a fall detection device, but will also monitor on a preprogrammed
basis the glucose level of the patient. This is done unobtrusively and without
the patient's participation. The information is then transmitted to the
monitoring center. If the monitoring center detects that the glucose reading is
outside of that patient's given parameters, it will immediately contact the
patient or care provider. If there is an emergency, the monitoring center can
locate the user and respond by sending assistance.
The WatchPAL line of products is in the early phases of research and
development. We have not yet developed a working prototype of this product. Our
ability to develop a working line of products in this area is largely contingent
on our ability to obtain the necessary funding for the research and development.
There can be no assurance that we will be able to obtain the funding necessary
to design, develop, and manufacture this line of products.
Intellectual Property
We own seven patents and we have five patents pending and four applications in
process to be filed. The following table contains information regarding our
patents and patent applications; there is no assurances that the applications
will be granted or that they will, if granted, contain all of the claims
currently included.
----------------------------------------------------------------- ------------------- -------------- -----------------
Application
Patent Title /Patent Number Filing / Status
Issue Dates
----------------------------------------------------------------- ------------------- -------------- -----------------
Emergency Phone With Single Button activation 11/174,191 6/30/05 Responded to
Office Action
----------------------------------------------------------------- ------------------- -------------- -----------------
Remote Tracking and Communication Device 11/202,427 8/10/05 Pending
----------------------------------------------------------------- ------------------- -------------- -----------------
Remotely Controllable Thermostat 6,260,765 7/17/01 Issued
----------------------------------------------------------------- ------------------- -------------- -----------------
Interference Structure for Emergency Response System Wristwatch 6,366,538 4/2/02 Issued
----------------------------------------------------------------- ------------------- -------------- -----------------
Emergency Phone with Single Button Activation 6,636,732 10/21/03 Issued
----------------------------------------------------------------- ------------------- -------------- -----------------
Emergency Phone with Alternate Number Calling Capability 7,092,695 8/15/06 Issued
----------------------------------------------------------------- ------------------- -------------- -----------------
Emergency Phone for Automatically Summoning Multiple Emergency 6,226,510 5/1/01 Issued
Response Services
----------------------------------------------------------------- ------------------- -------------- -----------------
Combination Emergency Phone and Personal Audio Device 6,285,867 9/4/01 Issued
----------------------------------------------------------------- ------------------- -------------- -----------------
Panic Button Phone 6,044,257 3/28/00 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 11/486,989 7/14/06 Pending
Voice Communication Between Device and a Monitoring Center
----------------------------------------------------------------- ------------------- -------------- -----------------
A Remote Tracking System with a Dedicated Monitoring Center 11/486,976 7/14/06 Pending
----------------------------------------------------------------- ------------------- -------------- -----------------
Remote Tracking System and Device with Variable Sampling 11/486,991 7/14/06 Pending
----------------------------------------------------------------- ------------------- -------------- -----------------
|
29
We also own the following trademarks:
-------------------------------- ---------------------- ----------------------- --------------------------------------
Mark Application Number Registration Status/Next Action
Number
-------------------------------- ---------------------- ----------------------- --------------------------------------
MOBILE911 75/615,118 2,437,673 Registered
-------------------------------- ---------------------- ----------------------- --------------------------------------
MOBILE911 76/013,886 2,595,328 Registered
SIREN WITH 2-WAY VOICE
COMMUNICATION & Design
-------------------------------- ---------------------- ----------------------- --------------------------------------
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 Pending
-------------------------------- ---------------------- ----------------------- --------------------------------------
REMOTEMDX 78/561,796 Allowed-Awaiting Statement of Use
-------------------------------- ---------------------- ----------------------- --------------------------------------
TRACKERPAL 78/843,035 Pending
-------------------------------- ---------------------- ----------------------- --------------------------------------
MOBILE911 78/851,384 Pending
-------------------------------- ---------------------- ----------------------- --------------------------------------
|
Strategic Relationships
We believe one of our strengths is the high quality of our strategic alliances.
Our primary alliances are described below.
Matsushita Electric Works, Ltd
MEW grew out of a company founded by Konosuke Matsushita in 1918. This
forerunner of MEW was incorporated as a public company in 1935, as the successor
of the wiring device business initiated by the original firm. MEW shares the
same origin with Matsushita Electric Industrial Co., Ltd. ("MEI"), which also
owns the Panasonic(R) brand name. According to its published reports filed with
the Securities and Exchange Commission, MEI's revenues in 2004 were
approximately $81 billion. The Matsushita Group of companies is recognized as
one of the world's largest corporate groups. This strategic alliance included an
equity investment in RemoteMDx by MEW and an arrangement under which MEW was
designated our preferred manufacturer, and we agreed to act as MEW's preferred
worldwide service provider for GPS products. No services have been provided by
MEW since 2003.
nexAira, Inc.
nexAira, Inc. ("nexAira"), 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. They are recognized for
their rapid development cycles and expertise in both the cellular and GPS areas.
nexAira performs research and development for us on a contractual basis.
30
Dynamic Source Manufacturing
Dynamic Source Manufacturing ("DSM"), located in Calgary, Alberta, Canada, is an
electronics manufacturing company which delivers a full range of services to its
clients. From quickturn prototyping to high volume turnkey manufacturing, DSM
has the resources available to manufacture all types of printed circuit boards.
DSM manufactures the Company's TrackerPAL product.
Competition in PERS Industry
We have identified several companies we believe are developing products and
services that in time could affect, or compete in, the same developing areas of
the PERS industry targeted by RemoteMDx. As these products and services take
hold, we expect our competition likely will increase and intensify. We believe
that we can maintain some advantages over our competition due in large part to
our alliance with MEW and other strategic partners. In addition, we believe that
several components in our product family might enjoy significant intellectual
property protection from competition.
We believe our primary competitors are as follows:
o Lifeline Systems, Inc., Framingham, MA- We believe that Lifeline
may be the largest PERS company in the United States, reporting
over 350,000 subscribers. Lifeline claims that at the touch of a
button, the customer can be connected to help 24 hours a day from
their home or yard. Lifeline is a public company that operates its
own monitoring facility, reportedly handling over 10,000 calls per
day.
o Wherify Wireless, Inc., Redwood City, CA- A publicly held
developer of patented wireless location products and services for
child safety, parental supervision, personal protection,
Alzheimer's and memory loss, supervision, law enforcement,
security, animal identification and property asset tracking.
Competition in Parolee/Probation Market
o ProTech Monitoring Inc., Odessa, FL- This company has satellite
tracking software technology that operates in conjunction with
global positioning system (GPS) and wireless communication
networks.
o ISecuretrac Inc., Omaha, NE - This company supplies electronic
monitoring equipment for tracking and monitoring persons on
pretrial release, probation, parole, or work release.
o Sentinel Security and Communications, Inc., Rochester NY- This
company supplies monitoring and supervision solutions for the
offender population.
We face intense competition, including competition from entities that are more
established and have greater financial resources than it does, which may make it
difficult for it 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 technologies, 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.
31
Many of the companies currently in the remote medical monitoring and
parolee/probation market may have significantly greater financial resources and
expertise in research and development, marketing, manufacturing, pre-clinical
and clinical testing, obtaining regulatory approvals and marketing than those
available to us. Smaller companies may also prove to be significant competitors,
particularly through collaborative arrangements with large third parties.
Academic institutions, governmental agencies, and public and private research
organizations also conduct research, seek patent protection, and establish
collaborative arrangements for product and clinical development and marketing in
the medical diagnostic arena. 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, the timing and scope of
regulatory approvals, availability of supply, marketing and sales capability,
reimbursement coverage, 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.
Dependence on Major Customers
During fiscal year 2006, one customer, Fisher Scientific, accounted for
approximately 21% ($228,437) of our sales. The loss of this customer could
result in lower revenues and limit the cash available to grow our business and
to achieve profitability. We have no arrangements or contracts with this
customer that would require them to purchase a specific amount of product from
us.
Dependence on Major Suppliers
During the year ended September 30, 2004, we cancelled our agreement with our
former cellular organization and entered into an agreement with a new cellular
company. During the year ended September 30, 2006, we entered into several
agreements with other cellular organizations to provide cellular services. Our
costs for these services during fiscal years ended September 30, 2006 and 2005
were approximately $290,000 and $103,900, respectively.
We have established a relationship with Dynamic Source Manufacturing (DSM) to
manufacture the TrackerPAL device. All monitoring leased equipment has been
manufactured by DSM. If our relationship with DSM were to unexpectedly
terminate, we would need to find another company to manufacture the device,
which would limit our ability to lease additional monitoring equipment.
Employees
As of December 12, 2006, we had 97 full time employees and 2 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.
Description of Property
In March 2005, we entered into a 40 month lease with payments of approximately
$17,100 per month, for approximately 11,400 square feet of office space at 150
West Civic Center Drive, Sandy, Utah. This facility will initially serve as our
monitoring center and will eventually serve as corporate headquarters of
SecureAlert, Inc., a subsidiary of RemoteMDx, Inc. We moved into these
facilities during the fourth fiscal quarter of 2005.
We also have leased premises consisting of approximately 11,500 square feet of
laboratory and office facilities located at 5095 West 2100 South, West Valley
City, Utah. These premises also serve as the manufacturing, warehouse and
shipping facilities for Volu-Sol Reagents Corporation. This lease has been
renewed and now expires in November 2010 with monthly base rent of $5,750,
subject to annual adjustments according to changes in the Consumer Price Index.
32
Management believes the facilities described above are adequate to accommodate
presently expected growth and needs of our operations. As we continue to grow,
additional facilities or the expansion of existing facilities likely will be
required. Where to get additional information
Federal securities laws require us to file information with the Commission
concerning our business and operations. Accordingly, we file annual, quarterly,
and special reports, and other information with the Commission. You can inspect
and copy this information at the public reference facility maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549.
You can get additional information about the operation of the Commission's
public reference facilities by calling the Commission at 1-800-SEC-0330. The
Commission also maintains a web site (http://www.sec.gov) at which you can read
or download our reports and other information.
Our internet address is www.remotemdx.com.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with our consolidated
financial statements and notes thereto included elsewhere in this Prospectus.
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS CONTAINS, IN ADDITION TO HISTORICAL
INFORMATION, FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND
UNCERTAINTIES. ALL FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE DEEMED BY
REMOTE MDX TO BE COVERED BY AND TO QUALIFY FOR THE SAFE HARBOR PROTECTION
PROVIDED BY SECTION 21E OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED BY REMOTE
MDX AND DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS
REGISTRATION STATEMENT, WORDS SUCH AS "BELIEVES," "EXPECTS," "INTENDS," "PLANS,"
"ANTICIPATES," "ESTIMATES," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS, ALTHOUGH THERE MAY BE CERTAIN FORWARD-LOOKING
STATEMENTS NOT ACCOMPANIED BY SUCH EXPRESSIONS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES ARE DISCUSSED BELOW IN THE SECTION ENTITLED
"INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS" AND UNDER THE HEADING
"CERTAIN SIGNIFICANT RISK FACTORS" BELOW. REMOTE MDX DISCLAIMS ANY OBLIGATION OR
INTENTION OF UPDATING ANY FORWARD LOOKING STATEMENT.
The following table summarizes our results of operations for the last two
completed fiscal years.
33
Summary Consolidated Statements of Operations Data
Year Ended September 30,
2006 2005
-----------------------------------
Net sales $ 1,070,141 $ 861,868
Cost of goods sold 940,132 823,752
-----------------------------------
Gross profit (loss) 130,009 38,116
Research and development expenses 2,087,802 1,766,791
Selling, general, and administrative
expenses 16,025,373 7,230,222
-----------------------------------
Loss from operations (17,983,166) (8,958,897)
-----------------------------------
Other income (expenses):
Derivative valuation gain
(loss) 629,308 (580,626)
Interest and other income 97,190 4,570
Interest expense (6,541,077) (1,448,736)
-----------------------------------
Net loss $ (23,797,745) $ (10,983,689)
===================================
|
Fiscal Year Ended September 30, 2006, Compared to Fiscal Year Ended September
30, 2005
Results of Operations
Net Sales
During the fiscal year ended September 30, 2006, the Company had net sales of
$1,070,141 compared to net sales of $861,868 for the fiscal year ended September
30, 2005, an increase of $208,273. This increase is due primarily to the Company
beginning to generate revenue from its TrackerPAL product. The Company's
experience is that from the time of deployment of the TrackerPAL unit (the
moment a TrackerPAL unit is delivered to a customer) it may take in excess of 90
days to receive any cash flow from the deployed unit. During the year ended
September 30, 2006, SecureAlert provided net sales of $391,600 compared to net
sales of $289,236 for the year ended September 30, 2005, an increase of
approximately 36%. Net sales by Volu-Sol Reagents Corporation ("Reagents") for
the fiscal year ended September 30, 2006, were $678,541 compared to $572,632 in
fiscal year 2005, an increase of approximately 18%. The increase in sales by
Reagents is due primarily to focusing on existing customers.
Cost of Goods Sold
During the fiscal year ended September 30, 2006, cost of goods sold totaled
$940,132, compared to cost of goods sold in fiscal 2005 of $823,752. This
increase is due primarily to the increase in sales of TrackerPAL. SecureAlert's
cost of goods sold totaled $569,664, or 145% of its net sales in 2006, compared
to $437,224, or 151% for fiscal 2005. Reagents' cost of goods sold totaled
$370,468 in fiscal 2006, compared to $386,528 for the year ended September 30,
2005, a decrease of $16,060 or approximately 4% from the prior fiscal year. The
increase in overall margins of the Company from 4% in fiscal year 2005 to 12% in
fiscal year 2006 is attributable primarily to the Company now having an
established distributor network.
Research and Development Expenses
During the fiscal year ended September 30, 2006, the Company incurred research
and development expenses of $2,087,802 compared to similar expenses in 2005
totaling $1,766,791. This increase is due primarily to expenses associated with
the development of the TrackerPAL device for the parolee market. We expect
research and development expenses to continue in the future due to ongoing
research and development related to our TrackerPAL, WatchPAL, and MobilePAL 3000
products.
Selling, General and Administrative Expenses
During the fiscal year ended September 30, 2006, the Company's selling, general
and administrative expenses totaled $16,025,373, compared to $7,230,222 for the
fiscal year ended September 30, 2005. This increase of $8,795,151 is
attributable primarily to an increase in non-cash compensation expense in
connection with the grant of options and issuance of shares in lieu of cash
compensation to consultants and employees, including officers and directors of
the Company. In fiscal year 2006 these non-cash expense items totaled
34
approximately $8,454,000 compared to approximately $2,750,000 during the fiscal
year 2005. In addition to the non-cash expense associated with the grant of
options and issuance of shares, selling, general and administrative expenses for
fiscal year ended September 30, 2006 primarily consists of the following
expenses: advertising ($118,241), consulting ($1,037,792), insurance ($312,830),
investment banking fees ($517,606), legal, accounting, and professional fees
($983,978), payroll ($2,102,504), rent ($227,181), and travel expenses
($671,542).
Other Income and Expense
During the fiscal year ended September 30, 2006, interest expense was
$6,541,077, compared to $1,448,736 in fiscal year 2005. The increase of
$5,092,341 resulted primarily from the issuance of common stock and options
granted in connection with debt instruments. These debt instrument were
converted throughout the year ended September 30, 2006 and contained unamortized
debt discounts which were fully expensed upon conversion. During the year ended
September 30, 2006, the Company incurred $6,229,485 of non-cash interest
expense. The Company had interest income of $30,051 and other income of $67,139
during fiscal year 2006, compared to interest income of $1,720 and other income
of $2,850 during fiscal year 2005. This increase in other income is due to
settling debts in prior fiscal years at less than the expense incurred.
Net Loss
The Company had a net loss for the year ended September 30, 2006, of
$23,797,745, compared to a net loss of $10,983,689 for fiscal year 2005. This
increase is due primarily to expenses associated with the development of the
TrackerPAL device for parolees, related increase in selling, general and
administrative expenses, and interest expense.
Fiscal Year Ended September 30, 2005 Compared to Fiscal Year Ended September 30,
2004
Results of Operations
Net Sales
In the fiscal year ended September 30, 2005, the Company had net sales of
$861,868 compared to net sales of $1,117,520 for the fiscal year ended September
30, 2004, a decrease of $255,652. This decrease is due primarily to shifting the
Company's focus from selling the MobilePAL to developing the TrackerPAL. During
the year ended September 30, 2005, SecureAlert provided net sales of $289,236
compared to net sales of $556,338 for the year ended September 30, 2004. Net
sales by Volu-Sol Reagents Corporation ("Reagents") for the fiscal year ended
September 30, 2005 were $572,632 compared to $561,182 in fiscal year 2004, an
increase of approximately 2%. As the Company's focus continues to shift to the
monitoring business, the Company anticipates Reagents' sales will decrease in
the future as a percentage of total sales, although there is no assurance that
we will experience an increase in SecureAlert revenues.
Cost of Goods Sold
In the fiscal year ended September 30, 2005, cost of goods sold totaled
$823,752, compared to cost of goods sold in fiscal 2004 of $1,134,535. This
decrease is due primarily to the decrease in net sales. SecureAlert's cost of
goods sold totaled $437,224, or 155% of its net sales in 2005, compared to
$796,565, or 143% for fiscal 2004. Reagents' cost of goods sold totaled $386,528
in fiscal 2005, compared to $337,970 for the year ended September 30, 2004, an
increase of $48,558 or approximately 14% from the prior fiscal year. The
increase in overall margins of the Company from negative 2% in fiscal year 2004
to 4% in fiscal year 2005 is attributable primarily to the Company now having an
established distributor network.
Research and Development Expenses
In the fiscal year ended September 30, 2005, the Company incurred research and
development expenses of $1,766,791 compared to similar expenses in 2004 totaling
$205,341. This increase is due primarily to expenses associated with the
35
development of the TrackerPAL device for the parolee market. We anticipate
higher research and development expenses in the future due to ongoing research
and development related to our TrackerPAL, WatchPAL, and MobilePAL 3000
products.
Selling, General and Administrative Expenses
In the fiscal year ended September 30, 2005, the Company's selling, general and
administrative expenses totaled $7,230,222 compared to $4,189,669 for the fiscal
year ended September 30, 2004. This increase of $3,040,553 is attributable
primarily to an increase in non-cash compensation expense in connection with the
grant of options and issuance of shares in lieu of cash compensation to
consultants and employees, including officers and directors of the Company. In
fiscal year 2005 the non-cash expense items associated with the grant of options
and issuance of shares totaled approximately $2,750,000 compared to
approximately $1,670,000 during the fiscal year 2004. In addition, in fiscal
year 2005 the expense items associated with non-cash compensation and
reimbursement of expenses to related parties totaled approximately $1,811,000
compared to approximately $599,000 during the fiscal year 2004. The $7,230,222
of selling, general and administrative expenses for fiscal year ended September
30, 2005 primarily consists of the following expenses: advertising ($145,400),
consulting ($2,945,000), insurance ($248,000), investment banking fess
($237,000), legal, accounting, and professional fess ($450,000), payroll
($2,053,000), and travel expenses ($395,000).
Other Income and Expense
In the fiscal year ended September 30, 2005, interest expense was $1,448,736,
compared to $817,579 in fiscal year 2004. The increase of $631,157 resulted
primarily from the issuance of common stock and options granted in connection
with debt instruments . During the year ended September 30, 2005, the Company
incurred $1,400,683 of non-cash interest expense. We had interest income of
$1,720 and other income of $2,850 during fiscal year 2005, compared to interest
income of $7,077 and other income of $67,823 during fiscal year 2004. This
decrease in other income is due to settling debts in fiscal year 2004 at less
than the expense incurred and a recovery of bad debt previously allowed for.
During the year ended September 30, 2005, the Company entered into convertible
notes containing embedded derivatives. The Company recognized an initial expense
of $780,733 related to these derivatives. The derivative valuation decreased by
$200,107 for the year ended September 30, 2005, for a net derivative valuation
loss of $580,626.
Net Loss
We had a net loss for the year ended September 30, 2005 totaling $10,983,689,
compared to a net loss of $6,406,711 for fiscal year 2004. This increase is due
primarily to expenses associated with the development of the TrackerPAL device
for parolees.
Liquidity and Capital Resources
September 30, 2006
The Company has not historically financed operations entirely from cash flows
from operating activities. During the year ended September 30, 2006, the Company
supplemented cash flows with funding from the sale of equity securities, and to
a much lesser extent, borrowings from a related party.
At September 30, 2006, the Company had unrestricted cash of $5,872,529, compared
to cash of $416,036 at September 30, 2005. At September 30, 2006, the Company
had a working capital of $2,410,471, compared to a working capital deficit of
$5,217,466 at September 30, 2005. The change in working capital primarily
resulted from the conversion of debt into shares of common stock and from the
sale of common and preferred stock.
36
During fiscal year 2006, the Company's operating activities used cash of
$11,397,627, compared to $3,839,236 cash used in 2006.
Investing activities for the year ended September 30, 2006, used cash of
$3,333,983, compared to $303,273 of cash used by investing activities in the
year ended September 30, 2005. Cash used in 2006 was expended primarily for
property, equipment and monitoring equipment purchases.
Financing activities for the year ended September 30, 2006, provided $20,188,103
of net cash compared to $4,496,442 of net cash provided from those activities in
the year ended September 30, 2005.
The Company had net payments of $635,073 on a related-party line of credit and
payments of $2,047,575 on long and short-term notes payable. The Company had net
proceeds from the sale of SecureAlert Series A preferred stock of $600,000,
$7,439,558 from the issuance of RemoteMDx Series C preferred stock, and
$7,910,000 from the issuance of common stock. In addition, the Company received
$6,164,293 from the issuance of debt and $252,000 from the exercise of options
and warrants.
During the fiscal year 2006, the Company incurred a net loss of $23,797,745 and
negative cash flows from operating activities of $11,397,627, compared to a net
loss of $10,983,689 and negative cash flow of $3,839,236 for the year ended
September 30, 2005. As of September 30, 2006, the Company's working capital was
$2,410,471 and the Company had a net tangible stockholders' equity of $2,351,200
and accumulated deficit of $106,726,375.
These factors, as well as the risk factors set out elsewhere in this report,
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements included in this report do not include any
adjustments that might result from the outcome of this uncertainty. Our plan
with respect to this uncertainty is to focus on sales of the TrackerPAL product.
There can be no assurance that revenues will increase rapidly enough to pay back
operating losses and debts. Likewise, there can be no assurance that the debt
holders will be willing to convert their debt obligations to equity securities
or that the Company will be successful in raising additional capital from the
sale of equity or debt securities. If the Company is unable to increase revenues
or obtain additional financing, it will be unable to continue the development of
its products and may have to cease operations.
The following chart includes principal balances and interest rates applicable to
borrowings (net of any applicable debt discounts) as of September 30, 2006. See
note 16 of the financial statements for a complete discussion of financing
transactions subsequent to September 30, 2006.
Description of Annual Interest Amount
Obligation Rate Maturity Date Owing at 9/30/06
--------------- --------------- ------------- ----------------
Advances from ADP
Management 5% July 31, 2007 $ 44,549(1)
Note to Shareholder 5% January 2004 $ 84,838
Note to Shareholder 5% January 2004 $ 84,838
Bank Line of Credit 8.25% June 30, 2007 $ 3,897,111
-----------------
Totals N/A N/A $ 4,111,336
=================
|
Notes:
(1) By agreement dated August 19, 2004, ADP Management Corporation
("ADP Management"), an entity owned and controlled by Messrs.
Derrick and Dalton, provided a $500,000 line-of-credit to the
Company. During the year ended September 30, 2006, the
line-of-credit increased by $662,007 due to a monthly management
fee (which fee includes the salaries of Mr. Derrick and Mr.
Dalton) owed to ADP Management, and expenses incurred by ADP
Management that are reimbursable by the Company. The Company made
cash repayments during the year of $635,073.
37
Contractual Obligations
The following table summarizes the Company's outstanding borrowings and
long-term contractual obligations at September 30, 2006, and the periods in
which these obligations are scheduled to be paid in cash:
Payments Due By Period
---------------------------------------------------------------------
Less Than 1 1 - 3 3 - 5 More than
Contractual Obligations Total Year Years Years 5 Years
----------------------------- --------------- ------------- ------------- ------------- -----------
Notes from schedule above $ 4,111,336 $4,111,336 $ - $ - $ -
Operating leases 1,310,785 507,959 723,430 79,396 -
--------------- ------------- ------------- ------------- -----------
Total $ 5,422,121 $4,619,295 $ 723,430 $ 79,396 -
=============== ============= ============= ============= ===========
|
Inflation
The Company does not believe inflation has had a material adverse impact on its
business or operating results during the periods presented nor is it expected to
in the next year.
Critical Accounting Policies
In Note 2 to the audited financial statements for the fiscal year ended
September 30, 2006 included in this registration statement, the Company
discusses those accounting policies that are considered to be significant in
determining the results of operations and its financial position. The Company
believes the accounting principles utilized by it conform to generally accepted
accounting principles in the United States of America.
The preparation of consolidated financial statements requires management to make
significant estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. By their nature, these judgments are subject
to an inherent degree of uncertainty. On an on-going basis, 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 accounting for stock-based compensation, the Company
applies the following critical accounting policies in the preparation of its
financial statements:
38
Inventory Reserves
The nature of the Company's business requires maintenance of sufficient
inventory on hand at all times to meet the requirements of its customers. The
Company records finished goods inventory at the lower of standard cost, which
approximates actual costs (first-in, first-out) or market. Raw materials are
stated at the lower of cost (first-in, first-out), or market. General inventory
reserves are maintained for the possible impairment of the inventory. Impairment
may be a result of slow moving or excess inventory, product obsolescence or
changes in the valuation of the inventory. In determining the adequacy of
reserves, management analyzes the following, among other things:
o Current inventory quantities on hand;
o Product acceptance in the marketplace;
o Customer demand;
o Historical sales;
o Forecast sales;
o Product obsolescence; and
o Technological innovations.
Any modifications to these estimates of reserves are reflected in the cost of
goods sold within the statement of operations during the period in which such
modifications are determined necessary by management.
Revenue Recognition
The Company derives revenue primarily from the sale of its mobile medical
emergency products with service contracts, and reagent stains. Under applicable
accounting principles, revenue, less reserves for returns, is recognized upon
shipment to the customer. For the two fiscal years ended September 30, 2006 and
2005 the provision for sales returns was not material. Amounts received in
advance of shipment are recorded as deferred revenue. Shipping and handling fees
are included as part of net sales. The related freight costs and supplies
directly associated with shipping products to customers are included as a
component of cost of goods sold.
Impairment of Long-lived Assets
The Company reviews its long-lived assets, other than goodwill, for impairment
when events or changes in circumstances indicate the book value of an asset may
not be recoverable. An evaluation is made at each balance sheet date, to
determine whether events and circumstances have occurred which indicate possible
impairment. An estimate is made of future undiscounted net cash flows of the
related asset or group of assets over the estimated remaining life of in
measuring whether the assets are recoverable.
Accounting for Stock-based Compensation
The Company accounts for stock-based compensation issued to employees and
directors under Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. Under APB No. 25,
compensation related to stock options, if any, is recorded if an option's
exercise price on the measurement date is below the fair value of the Company's
common stock and amortized to expense over the vesting period. Compensation
expense for stock awards or purchases, if any, is recognized if the award or
purchase price on the measurement date is below the fair value of the common
stock and is recognized on the date of award or purchase. Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based
Compensation," requires pro forma information regarding net loss and net loss
per common share as if the Company had accounted for its stock options granted
under the fair value method. This pro forma disclosure is presented in Note 11
to the audited financial statements.
The Company accounts for stock-based compensation issued to persons other than
employees using the fair value method in accordance with SFAS No. 123 and
related interpretations. Under SFAS No. 123, stock-based compensation is
determined as either the fair value of the consideration received or the fair
39
value of the equity instruments issued, whichever is more reliably measurable.
The measurement date for these issuances is the earlier of either the date at
which a commitment for performance by the recipient to earn the equity
instruments is reached or the date at which the recipient's performance is
complete.
Allowance for Doubtful Accounts
The Company must make estimates of the collectibility of accounts receivables.
In doing so, we analyze accounts receivable and historical bad debts, customer
credit-worthiness, current economic trends and changes in customer payment
patterns when evaluating the adequacy of the allowance for doubtful accounts.
Recent Accounting Pronouncements
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004),
"Shared-Based Payment." Statement 123(R) addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise of (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
Statement 123(R) requires an entity to recognize the grant-date fair value of
stock options and other share-based compensation issued to employees in the
statement of operations. The revised Statement generally requires that an entity
account for those transactions using the fair-value-based method, and eliminates
the intrinsic value method of accounting in APB Opinion No. 25, "Accounting for
Stock Issued to Employee", which was permitted under Statement 123, as
originally issued.
The revised Statement requires entities to disclose information about the nature
of the share-based payment transactions and the effects of those transactions on
the financial statements.
Statement 123(R) is effective as of October 1, 2006 for the Company. All public
companies must use either the modified prospective or the modified retrospective
transition method. The Company has not yet evaluated the impact of adoption of
this pronouncement, but believes it may have a material impact on the
consolidated financial statements.
In November 2004, the FASB issued Statement No. 151, "Inventory Costs", to amend
the guidance in Chapter 4, "Inventory Pricing", of FASB Accounting Research
Bulletin No. 43, "Restatement and Revision of Accounting Research Bulletins."
Statement No. 151 clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). The Statement
requires that those items be recognized as current-period charges. Additionally,
Statement 151 requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. Statement No. 151 is effective for fiscal years beginning after June
15, 2005. The Company is currently evaluating the impact of the adoption of this
Statement which is required to be adopted in the fiscal year 2006.
Forward-looking statements
All statements made in this prospectus, other than statements of historical
fact, which address activities, actions, goals, prospects, or new developments
that we expect or anticipate will or may occur in the future, including such
things as expansion and growth of operations and other such matters, are
forward-looking statements. Any one or a combination of factors could materially
affect our operations and financial condition. These factors include competitive
pressures, success or failure of marketing programs, changes in pricing and
availability of parts inventory, creditor actions, and conditions in the capital
markets. Forward-looking statements made by us are based on knowledge of our
business and the environment in which we currently operate. Because of the
factors listed above, as well as other factors beyond our control, actual
results may differ from those in the forward-looking statements. We expressly
disclaim any intention or obligation to update any forward-looking statement.
40
Selling Shareholders
The various transactions in which the Selling Shareholders received the shares
which are to be resold under this registration statement are described below.
Series C Convertible Preferred Stock
Between March 2006, and June 2006, we sold a total of 5,357,143 shares of our
Series C Convertible Preferred Stock, par value $0.0001 per share (the
"Preferred Stock") in a private offering (the "Preferred Stock Offering"). We
sold 617,352 shares of Preferred Stock in connection with the conversion of
$1,037,151 of previously existing debt instruments, and 4,739,791 shares for
cash proceeds of $7,962,849. The purchase price for the Preferred Stock was
$1.68 per share. At the closing of the Preferred Stock Offering, we had
5,357,143 shares of Series C Preferred Stock outstanding.
A total of 142 entities or individuals purchased shares of Preferred Stock in
the Preferred Stock Offering. Three investors converted debt instruments into
shares of Preferred Stock, and 139 investors purchased shares for cash.
Collectively, these investors are referred to in this Registration Statement as
the Preferred Stockholders.
The minimum subscription in the Preferred Stock Offering was $50,000. The
Preferred Stockholders represented that they were all accredited investors,
pursuant to Regulation D, and the offering was made pursuant to Section 4(2) of
the Securities Act of 1933, as amended (the "1933 Act"), and Regulation D
promulgated thereunder.
We used approximately $1,000,000 of the cash proceeds from the Preferred Stock
Offering to repay certain debt instruments. The remaining cash proceeds were
used for working capital and general corporate purposes, in our discretion.
The Preferred Stock is convertible into shares of our common stock. Initially,
each share of Preferred Stock is convertible into three shares of common stock,
subject to adjustment. As such, the 5,532,367 shares of Preferred Stock were
convertible, as of December 12, 2006, into 16,597,107 shares of our common
stock.
In connection with the Preferred Stock Offering, we granted to the Preferred
Stockholders registration rights, pursuant to which we agreed to register the
resale by the Preferred Stockholders of shares of our common stock issued to the
Preferred Stockholders in connection with conversions of the Preferred Stock. We
filed this registration statement to register the resale of up to 16,071,429
shares of our common stock by the Preferred Stockholders.
August 2006 Common Stock Private Placement
On August 4, 2006, we closed a private placement (the "August Private Offering")
of shares of our common stock. We sold 5,300,000 shares of our common stock (the
"August Shares"), at a purchase price of $1.30 per share, for aggregate proceeds
to us of $6,890,000. Subsequent to September 30, 2006, we also issued an
additional 265,000 shares to the investors in the August Private Offering as a
penalty for the untimely filing of this registration statement. This penalty was
incurred subsequent to September 30, 2006. We intend to use the proceeds from
the sale of the August Shares for general corporate purposes.
The investors in the private offering were EGI Fund (05-07) Investors, LLC;
Robert A. Naify Living Trust Dtd. February 8, 1991; Gimmel Partners, LP; Ninth
Street Partners, Ltd.; Bernard Osher Trust U/A DTD 3-8-88, Bernard Osher
Trustee; Will K. Weinstein Revocable Trust UTA dtd 2/27/90; HHS Partnership;
Andy Blank Revocable Living Trust U/A dtd 12/27/1999; 2005 Blickman Family
Trust; and Taube Investment Partners, LP. Taube Investment Partners, LP ("TIP")
designated five individuals or entities to receive the shares purchased by TIP.
Those designees, who are among the Selling Shareholders under this registration
statement, are Taube Family Trust; TFT Partners, LLC; Diane M. Taube; Taube 2002
Irrevocable Trust; and Belmont Partners, LLC.
In connection with the sale of the August Shares, we granted registration rights
to the purchasers, in connection with which we agreed to file a registration
statement to register the resale of the August Shares by the purchasers within
41
60 days of the closing. We also agreed to use our best efforts to have the
registration statement declared effective within 120 days of the filing. In the
event that the registration statement is not filed within 60 days of the closing
or effective within 120 days of the filing, we are required to pay a 5% penalty
to the investors. The Company issued 265,000 shares associated with the late
filing of the registration statement.
Option Holders
Four of our Selling Shareholders received or may receive up to 801,934 shares
upon the exercise of options.
October 2005 Private Placement Transaction
In October 2005, we conducted a private offering (the "October 2005 Offering")
of our shares of common stock. We sold an aggregate of 1,000,000 shares of
common stock at a per share price of $0.70 per share, for gross proceeds of
$700,000. In connection with the October 2005 Offering, we issued 50,000 shares
of our common stock in payment of a commission to the placement agent, and paid
the placement agent a consulting fee of 300,000 additional shares for future
consulting services.
In connection with the October 2005 Offering, we granted piggy-back registration
rights to the participants in that offering. Nineteen of the Selling
Shareholders in this registration statement received their shares in the October
2005 Offering, their resales are being registered pursuant to the registration
rights granted.
Letter of Credit Transaction
In July 2006, we arranged with three entities (the David S. Pottruck Revocable
Trust; the Klapper Family Trust; and Clydesdale Partners, LLC), and three
individuals (Stuart J. Kahn, John C. Walsey, and William B. Stevenson), to
provide letters of credit to serve as collateral to secure the repayment of a
line of credit from Citizens Bank to RemoteMDx (the "Citizens LOC"), providing
for loans from Citizens Bank to RemoteMDx of up to $10 million. Each entity
established a letter of credit in the amount of $1,000,000, and the three
individuals collectively arranged for a letter of credit in the amount of
$1,000,000.
As consideration for arranging for the letters of credit, we agreed to issue
100,000 shares of common stock to each of the entities and to the three
individuals collectively. Additionally, we agreed to pay to each letter of
credit provider an amount equal to eleven percent (11%) per annum of the total
amount of the letter of credit until the letter of credit LC is terminated, with
such payments being made on a monthly basis in arrears on the first day of each
month. Further, we agreed to pay to each letter of credit provider the amount of
$10,000, upon the funding of the initial $1 million of the Citizens LOC, against
the fees and costs incurred by the letter of credit provider to establish the
letter of credit.
Accordingly, six of our investors, the three entities and the three individuals
named above, received the shares being resold under this registration statement
in connection with the letters of credit discussed above.
Other Consulting Agreements and Loans
In a series of transactions between March 2005 and January 2006, we paid off
loans, accounts payable, and consulting contracts by issuing 4,379,000 shares of
common stock, with the commitment to register the resale of such shares. This
registration statement includes the shares to be resold by sixteen individuals
or entities who received their shares in these transactions.
The Selling Shareholders and the transactions in which they received shares are
identified below in the "Selling Shareholders" Section of this registration
statement.
This prospectus and the registration statement of which it is a part covers the
resale of up to 28,262,363 shares of our common stock issuable to the Selling
Shareholders as described above. The following information is not determinative
42
of any Selling Shareholder's beneficial ownership of our common stock pursuant
to Rule 13d-3 or any other provision under the Securities Exchange Act of 1934,
as amended.
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Shares of Shares of
Common Common
Stock Stock Percentage of Number of
Owned by Issuable to Common Stock Shares of Number of Percentage of
Selling Selling Issuable to Common Shares of Common Stock
Shareholder Shareholder Selling Stock Common Stock Beneficially
Name of Selling Prior to Upon Shareholder Registered Owned After Owned After the
Shareholder Offering Conversion (1) Hereunder Offering Offering
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
EGI Fund (05-07)
Investors, LLC 2,415,000 0 2.98% 2,415,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Robert A. Naify Living
Trust Dtd. February 8,
1991 656,250 0 0.81% 656,250 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Gimmel Partners, LP 420,000 0 0.52% 420,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Ninth Street Partners,
Ltd. 367,500 0 0.45% 367,500 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Bernard Osher Trust
U/A/ DTD 3-8-88,
Bernard Osher Trustee 367,500 0 0.45% 367,500 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Will K Weinstein
Revocable Truste UTA
dtd 2/27/90 236,250 0 0.29% 236,250 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
HHS Partnership 210,000 0 0.26% 210,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Andy Blank Revocable
Living Trust U/A dtd
12/27/99 157,500 0 0.19% 157,500 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
2005 Blickman Family
Trust 105,000 0 0.13% 105,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Taube Family Trust 336,000 0 0.41% 336,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
TFT Partners, LLC 105,000 0 0.13% 105,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Diane M. Taube 78,750 0 0.10% 78,750 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Taube 2002 Irrevocable
Trust 78,750 0 0.10% 78,750 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Belmont Partners, LLC 31,500 0 0.04% 31,500 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Charles Alberta 25,000 0 0.03% 25,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Cobble Creek Consulting 200,000 0 0.26% 200,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Congregation of Judah &
Israel 20,000 0 0.03% 20,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Ed Tennenhaus 250,000 0 0.32% 250,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Gary Gelbfish 960,000 0 1.24% 960,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Chaga Siegfried 40,000 0 0.05% 40,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Harborview Master Fund
L.P. 750,000 0 0.97% 750,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Hyman Sitko 20,000 0 0.03% 20,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Jason Jack 10,000 0 0.01% 10,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Jim Carter 100,000 0 0.13% 100,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
John Thompson 100,000 0 0.13% 100,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Michael Sargenti 25,000 0 0.03% 25,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Robert Sargenti, Jr. 30,000 0 0.04% 30,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Robert Sargenti, Sr. 80,000 0 0.10% 80,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Salem Al Dhaheri 1,000,000 0 1.30% 1,000,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Sol Tennenhaus 64,000 0 0.08% 64,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Stephen Sargenti 20,000 0 0.03% 20,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Tyler Jack 70,000 0 0.09% 70,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
2005 Blickman Family
Trust (3) 0 178,500 0.23% 178,500 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Aaron Fricke IRA (3) 0 42,000 0.05% 42,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Adrienne Baker (3) 0 357,144 0.46% 357,144 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Alan Sycoff (3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
|
43
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
American Pension
Services, Inc./FUB
Custodian for (Mark
Hesterman) Three G.
Financial LLC Roth
401(k) (3) 0 12,000 0.02% 12,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Anasazi Partners II LLC
(3) 0 535,716 0.69% 535,716 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Anasazi Partners III
LLC (3) 0 178,572 0.23% 178,572 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Anasazi Partners III
LLC - Offshore (3) 0 1,283,175 1.66% 1,283,175 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Azasazi Partners III
LLC - Domestic (3) 0 535,719 0.69% 535,719 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Banyan Investment
Company (3) 0 402,000 0.52% 402,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Benjamin Rodriguez (3) 0 50,001 0.06% 50,001 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Blackhawk Properties (3) 0 105,000 0.14% 105,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Brandon Wood (3) 0 27,000 0.03% 27,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Brent Ryhlick (3) 0 44,643 0.06% 44,643 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Brian Hobbs IRA (3) 0 18,300 0.02% 18,300 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Brian Peterson (3) 0 32,001 0.04% 32,001 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Brian Peterson Roth IRA
(3) 0 27,000 0.03% 27,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Butternut Partners (3) 0 117,000 0.15% 117,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
C. Eugene Gronning Roth
IRA (3) 0 27,000 0.03% 27,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Carl Edward Wilson (3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Charles MacQuiddy (3) 0 71,430 0.09% 71,430 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Chris Baker (3) 0 1,253,369 1.61% 1,253,369 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
David Hanlon 0 107,143 .15% 107,143 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Cimarolo Partners (3) 0 178,572 0.23% 178,572 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Clark Johnston (3) 0 18,000 0.02% 18,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Clydesdale Parnters LLC
PFK Management Group,
LLC, Manager (3) 0 926,028 1.20% 926,028 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Craig Langhamer (3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Dallin Bagley (3) 0 18,000 0.02% 18,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Damon Mungo (3) 0 21,429 0.03% 21,429 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Daniel Dzegar (3) 0 71,430 0.09% 71,430 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
David Krieger (3) 0 22,323 0.03% 22,323 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
David Pottruck
Revocable Trust (3) 0 535,716 0.69% 535,716 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Debra Langhamer (3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Dennis Kirk (3) 0 21,429 0.03% 21,429 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Devin Mungo (3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Douglas Evans (3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Evans Bower (3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Gerd Konig (3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Gina Wood IRA (3) 0 20,790 0.03% 20,790 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Gordan Milar (3) 0 27,000 0.03% 27,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Gregory & Andrea
Hughsam (3) 0 89,286 0.12% 89,286 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Harvey and Gloria
Zaretzky (3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Helen Reichberg (3) 0 26,787 0.03% 26,787 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Hume & Associates (3) 0 44,643 0.06% 44,643 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Irene
Langhamer-Revocable
Trust (3) 0 26,787 0.03% 26,787 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Irene McGrath (3) 0 50,001 0.06% 50,001 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Ivars Bars (3) 0 89,286 0.12% 89,286 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
J. Lee Barton (3) 0 892,857 1.16% 892,857 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
James Wood (3) 0 24,000 0.03% 24,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Jeff Peterson (3) 0 162,000 0.21% 162,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Jeff Peterson IRA (3) 0 39,000 0.05% 39,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Jeffery Davidson (3) 0 35,700 0.05% 35,700 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Jeffery L. Roberson
Revocable Trust (3) 0 26,787 0.03% 26,787 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Jeffrey Halbert (3) 0 44,643 0.06% 44,643 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Jerry Gilmore (3) 0 26,787 0.03% 26,787 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
John Horstkoetter IRA
(3) 0 89,286 0.12% 89,286 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
John Prather (3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
John Sheridan IRA (3) 0 45,000 0.06% 45,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
John Walsey (3) 0 360,000 0.47% 360,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Jon Vincitore (3) 0 35,715 0.05% 35,715 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Jonathan C. Peterson (3) 0 60,000 0.08% 60,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Jonathan Peterson (3) 0 54,000 0.07% 54,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Jonathan Peterson Roth
IRA (3) 0 36,000 0.05% 36,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Joyce Sycoff (3) 0 87,501 0.11% 87,501 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
|
44
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Joyce Sycoff IRA (3) 0 46,428 0.06% 46,428 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Julian Kemble (3) 0 44,643 0.06% 44,643 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Karen Spence (3) 0 36,000 0.05% 36,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Keith Grubb IRA (3) 0 357,144 0.46% 357,144 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Keith Langhamer (3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Kelly Nelson (3) 0 27,000 0.03% 27,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Kenneth Velleman (3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Kent Dinsdale IRA (3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Key Stone Partners (3) 0 18,000 0.02% 18,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Kimberly L.
Blake-Datson (3) 0 36,000 0.05% 36,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Kirk Benson (3) 0 18,000 0.02% 18,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Larry and Harriet
Winsten (3) 0 89,286 0.12% 89,286 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Larry Hobbs (3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Lee Zaretzky (3) 0 44,643 0.06% 44,643 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Liberty Capital (3) 0 51,000 0.07% 51,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Marc Langhamer (3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Mark Muchow (3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Mark Peterson (3) 0 450,000 0.58% 450,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Matthew Milar (3) 0 333,000 0.43% 333,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Maurice Alfermann Trust
(3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Maxim Management Corp.
(3) 0 42,000 0.05% 42,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Michael Chase (3) 0 180,000 0.23% 180,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Michael Jenkins (3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Michael Maldonado IRA
(3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Michelle Mamby (3) 0 18,000 0.02% 18,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Michelle Richards/John
Sheridan (3) 0 45,000 0.06% 45,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Michelle Squitieri &
Andria Chan (3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
NOB Hill Capital
Partners (3) 0 600,000 0.78% 600,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Noel Tomlinson (3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Orinda Global
Investments (3) 0 99,999 0.13% 99,999 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Patricia Marriott IRA
(3) 0 63,000 0.08% 63,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Rachel & Brian Hobbs,
JTWROS (3) 0 64,290 0.08% 64,290 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Rachel Hobbs IRA (3) 0 17,859 0.02% 17,859 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Randy Langhamer (3) 0 92,856 0.12% 92,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Redrock Trust (3) 0 75,000 0.10% 75,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Revan Schwartz (3) 0 35,715 0.05% 35,715 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Richard & Pearl Pink (3) 0 53,571 0.07% 53,571 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Richard Hahner (3) 0 35,715 0.05% 35,715 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Richard Pecora (3) 0 18,036 0.02% 18,036 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Richard Reynolds (3) 0 35,715 0.05% 35,715 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Robert Naify Living
Trust (3) 0 180,000 0.23% 180,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Rodriguez Amar (3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Ronald Zaretzky (3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Royal Ranney Rev Trust
(3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
SAAL Revocable Living
Trust (3) 0 44,643 0.06% 44,643 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Saal-Bovee Management
(3) 0 44,643 0.06% 44,643 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Salomon Mikel (3) 0 44,643 0.06% 44,643 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Scott Langhamer (3) 0 33,930 0.04% 33,930 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Sharon Madden (3) 0 9,000 0.01% 9,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Stacey Lee/Beatrice Lee
(3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Stephanie Adam (3) 0 45,000 0.06% 45,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Steven Berecz IRA (3) 0 53,571 0.07% 53,571 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Steven Cook (3) 0 35,715 0.05% 35,715 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Stuart Kahn (3) 0 30,000 0.04% 30,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Susan Alder (3) 0 30,000 0.04% 30,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Tassainer Properties (3) 0 39,000 0.05% 39,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
|
45
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Thomas Nancoo (3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Todd & Terry Miller (3) 0 189,285 0.25% 189,285 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Todd Groskreutz IRA (3) 0 9,000 0.01% 9,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
V. Mark Peterson Roth
IRA (3) 0 45,000 0.06% 45,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
VATAS Holding (3) 0 1,785,714 2.31% 1,785,714 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Vernelle Braun (3) 0 39,285 0.05% 39,285 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Victor Squitieri (3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Whisper Investment Co.
(3) 0 126,000 0.16% 126,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
William Harnish (3) 0 89,286 0.12% 89,286 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
William McCartney (3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
William Ryan Tevis IRA
(3) 0 22,104 0.03% 22,104 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Willian Ryan Tevis (3) 0 18,390 0.02% 18,390 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Winston Williams (3) 0 17,856 0.02% 17,856 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
David Salamon (4) 0 300,000 0.39% 300,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Simon Rapps (4) 0 67,565 .09% 67,565 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Sharon Sycoff (4) 0 333,982 .41% 333,982 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Joel Gold 0 100,387 .14% 100,387 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
V. Mark Peterson 100,000 0 0.13% 100,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Jeffrey Peterson 70,000 0 0.09% 70,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Whisper Investment
Company 100,000 0 0.13% 100,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Delaware Charter Trust
FBO Jeffrey Peterson 15,000 0 0.02% 15,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Jonathan Peterson 15,000 0 0.02% 15,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Banyan Investment Co.,
LLC 100,000 0 0.13% 100,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Redrock Trust 50,000 0 0.06% 50,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Blackhawk Properties LLC 50,000 0 0.06% 50,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Liberty Capital, LLC 50,000 0 0.06% 50,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Mark N. Schneider 20,000 0 0.03% 20,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Jonathan Peterson 50,000 0 0.06% 50,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Mark Peterson , Roth IRA 100,000 0 0.13% 100,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Butternut Partners, LLC 50,000 0 0.06% 50,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
W. Reed Jensen 127,000 0 0.16% 127,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Brian Reed Jensen 43,000 0 0.06% 43,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Bridgewater Ventures,
LLC 20,000 0 0.03% 20,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Tidewater Trust 10,000 0 0.01% 10,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Matthew Te Milar 30,000 0 0.04% 30,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Alpine Securities 350,000 0 0.45% 350,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Bill Stevenson 33,333 0 0.04% 33,333 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Clydesdale Partners 100,000 0 0.13% 100,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
David Pottruck Trust 100,000 0 0.13% 100,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
John Walsey 33,333 0 0.04% 33,333 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Klapper Family Trust 100,000 0 0.13% 100,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Stuart Kahn 33,334 0 0.04% 33,334 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Premier Asset Management 125,000 0 0.16% 125,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
Todd Vowell 450,000 0 0.58% 450,000 0 (2) 0% (2)
------------------------- ------------ ------------- --------------- ------------- --------------- ------------------
|
(1) As noted above, the Preferred Stockholders are prohibited by the
terms of the Preferred Stock from converting shares of the Preferred Stock that
would cause them to beneficially own more than 4.99% of the then outstanding
shares of our common stock following such conversion. The percentages set forth
are not determinative of the Selling Shareholder's beneficial ownership of our
common stock pursuant to Rule 13d-3 or any other provision under the Securities
Exchange Act of 1934, as amended.
(2) Assumes a hypothetical sale of all of the shares of common stock
held by this Selling Shareholder. There is no assurance that this Selling
Shareholder will sell any or all of the shares offered hereby. This number and
46
percentage may change based on this Selling Shareholder's decision to sell or
hold the Shares. If the Selling Shareholder sells all of the common shares
registered hereunder, the number of shares held following such sales would be 0
and the percentage of ownership would be 0%.
(3) Consisting of shares of common stock issuable upon a hypothetical
conversion of the shares of Series C Preferred Stock held by this Selling
Shareholder as of September 27, 2006. This prospectus registers the resale of up
to an aggregate of 16,071,429 shares of common stock issuable to these Selling
Shareholders in connection with conversions of the Preferred Stock. Accordingly,
we may not issue shares in excess of 16,071,429 to the Selling Shareholders upon
conversion of the Preferred Stock unless we file additional registration
statements registering the resale of the additional shares.
(4) Consisting of shares issuable to this Selling Shareholder upon a
hypothetical exercise of options.
The following table lists the natural persons with voting or investment control
of the entity Selling Shareholders:
Robert A. Naify Living Trust Dtd. February 8, 1991 Robert Naify
Gimmel Partners, LP; Alan Weichselbaum
Ninth Street Partners, Ltd. Harvey Heller
Bernard Osher Trust U/A DTD 3-8-88, Bernard Osher Trustee Bernard Osher
Will K. Weinstein Revocable Trust UTA dtd 2/27/90 Will K. Weinstein
HHS Partnership Phil Handy
Andy Blank Revocable Living Trust U/A dtd 12/27/1999 Jerry Blank
2005 Blickman Family Trust Larry Blickman
Taube Family Trust Tad Taube
TFT Partners, LLC Tad Taube
Taube 2002 Irrevocable Trust Tad Taube
Belmont Partners, LLC Tad Taube
Whisper Investment Company Todd Groskrautz
Banyan Investment Company Mark Peterson
Redrock Trust Jeff Peterson
Blackhawk Properties Mark Peterson
Liberty Capital Jeff Peterson
Butternut Partners Reed Jenson
Bridgewater Ventures LLC Jeff Peterson
Tidewater Trust Phillip Blomquist
Alpine Securities Mark Peterson
Vatas Holding GMBH Lars Windhorst
Aaron Fricke IRA Aaron Fricke
American Pension Services, Inc./FUB
Custodian for (Mark Hesterman)
Three G. Financial LLC Roth 401(k) Mark Hesterman
Anasazi Partners II LLC Christopher Baker
Anasazi Partners III LLC Christopher Baker
Anasazi Partners III LLC - Offshore Christopher Baker
Azasazi Partners III LLC - Domestic Christopher Baker
Brian Hobbs IRA Brian Hobbs
Brian Peterson Roth IRA Brian Peterson
C. Eugene Gronning Roth IRA C. Eugene Gronning
Cimarolo Partners Christopher Baker
Clydesdale Parnters LLC PFK
Management Group, LLC, Manager Paul Klapper
David Pottruck Revocable Trust David Pottruck
Gina Wood IRA Gina Wood
|
47
Hume & Associates Carlton L. Hume
Irene Langhamer-Revocable Trust Randy Langhammer
Jeff Peterson IRA Jeffrey Peterson
Jeffrey L. Roberson Revocable Trust Jeffrey L. Roberson
John Horstkoetter IRA John Horstkoetter
John Sheridan IRA John Sheridan
Jonathan Peterson Roth IRA Jonathan Peterson
Joyce Sycoff IRA Joyce Sycoff
Keith Grubb IRA Keith Grubb
Kent Dinsdale IRA Kent Dinsdale
Key Stone Partners Jeff Peterson
Maurice Alfermann Trust Maurice J. Alferman
Maxim Management Corp. E.O. Barlow
Michael Maldonado IRA Michael Maldonado
NOB Hill Capital Partners Steve Mittel
Orinda Global Investments Stuart J. Kahn
Patricia Marriott IRA Patty Marriott
Rachel Hobbs IRA Brian Hobbs
Robert Naify Living Trust John Sherwood
Royal Ranney Rev Trust Royal W. Ranney
SAAL Revocable Living Trust Jeffrey A. Saal
Saal-Bovee Management Joel S. Saal
Steven Berecz IRA Steven Berecz
Tassainer Properties Gary Tassainer
Todd Groskreutz IRA Todd Groskreutz
V. Mark Peterson Roth IRA Mark Peterson
VATAS Holding Lars Windhorst
Whisper Investment Co. Todd Groskreutz
William Ryan Tevis IRA Ryan Tevis
Bada Financial Barry Mintz
Cobble Creek Consulting David Pommerantz
Congregation of Judah & Israel Mendy Erez
Harborview Master Fund L.P. Richard Rosenblum
Premier Asset Management Jason Vowell
Clydesdale Partners James S. Madden
David Pottruck Trust Colleen Bagan McGill
Klapper Family Trust Paul Klapper
Delaware Charter Trust
FBO Jeffrey Peterson Brian Peterson
Redrock Trust Mark Peterson
Blackhawk Properties LLC Mark Peterson
Liberty Capital, LLC Jeff Peterson
Mark Peterson Roth IRA Mark Peterson
|
Plan of Distribution
The Selling Shareholders, their pledgees, donees, transferees or other
successors in interest, may from time to time sell the shares of our Common
Stock directly to purchasers or indirectly to or through underwriters,
48
broker-dealers or agents. The Selling Shareholders may sell all or part of their
shares in one or more transactions at fixed prices, varying prices, prices at or
related to the then-current market price or at negotiated prices. The Selling
Shareholders will determine the specific offering price of the Shares from time
to time that, at that time, may be higher or lower than the market price of our
Common Stock quoted on the OTC Bulletin Board.
The Selling Shareholders and any underwriters, broker-dealers or agents
participating in the distribution of the Shares of our Common Stock may be
deemed to be "underwriters" within the meaning of the Securities Act of 1933,
and any profit from the sale of such shares by the Selling Shareholders and any
compensation received by any underwriter, broker-dealer or agent may be deemed
to be underwriting discounts under the Securities Act. The Selling Shareholders
may agree to indemnify any underwriter, broker-dealer or agent that participates
in transactions involving sales of the Warrants or shares against certain
liabilities, including liabilities arising under the Securities Act.
Because a Selling Shareholder may be deemed to be an "underwriter" within the
meaning of the Securities Act, the Selling Shareholders will be subject to the
prospectus delivery requirements of the Securities Act. We have informed the
Selling Shareholders that the anti-manipulative provisions of Regulation M
promulgated under the Exchange Act may apply to their sales in the market. With
certain exceptions, Regulation M precludes the Selling Shareholders, any
affiliated purchasers, and any broker-dealer or other person who participates in
such distribution from bidding for or purchasing, or attempting to induce any
person to bid for or purchase any security which is the subject of the
distribution until the entire distribution is complete. Regulation M also
prohibits any bids or purchases made in order to stabilize the price of a
security in connection with the distribution of that security.
The method by which the Selling Shareholders, or their pledgees, donees,
transferees or other successors in interest, may offer and sell their Shares may
include, but are not limited to, the following:
o sales on the over-the-counter market, or other securities exchange
on which the Common Stock is listed at the time of sale, at prices
and terms then prevailing or at prices related to the then-current
market price;
o sales in privately negotiated transactions;
o sales for their own account pursuant to this prospectus;
o through the writing of options, whether such options are listed on
an options exchange or otherwise through the settlement of short
sales;
o cross or block trades in which broker-dealers will attempt to sell
the shares as agent, but may position and resell a portion of the
block as a principal in order to facilitate the transaction;
o purchases by broker-dealers who then resell the shares for their
own account;
o brokerage transactions in which a broker solicits purchasers;
o any combination of these methods of sale; and
o any other method permitted pursuant to applicable law.
Any Shares of Common Stock covered by this prospectus that qualify for sale
under Rule 144 or Rule 144A of the Securities Act may be sold under Rule 144 or
Rule 144A rather than under this prospectus. The Shares of our Common Stock may
be sold in some states only through registered or licensed brokers or dealers.
In addition, in some states, the shares of our Common Stock may not be sold
unless they have been registered or qualified for sale or the sale is entitled
to an exemption from registration.
The Selling Shareholders may enter into hedging transactions with broker-dealers
or other financial institutions. In connection with such transactions,
broker-dealers or other financial institutions may engage in short sales of our
securities in the course of hedging the positions they assume with the Selling
Shareholders. The Selling Shareholders may also enter into options or other
transactions with broker-dealers or other financial institutions which require
the delivery to such broker-dealer or other financial institution of the
securities offered hereby, which shares such broker-dealer or other financial
institution may resell pursuant to this prospectus (as supplemented or amended
to reflect such transaction).
49
To our knowledge, there are currently no plans, arrangements or understandings
between the Selling Shareholders and any underwriter, broker-dealer or agent
regarding the sale of Shares of our Common Stock by the Selling Shareholders.
The Selling Shareholders will pay all fees, discounts and brokerage commissions
in connection with any sales, including any fees to finders. We will pay all
expenses of preparing and reproducing this prospectus, including expenses of
compliance with state securities laws and filing fees with the SEC.
Under applicable rules and regulations under Regulation M under the Exchange
Act, any person engaged in the distribution of securities may not simultaneously
engage in market making activities, subject to certain exceptions, with respect
to the securities for a specified period set forth in Regulation M prior to the
commencement of such distribution and until its completion. In addition and with
limiting the foregoing, the Selling Shareholders will be subject to the
applicable provisions of the Securities Act and the Exchange Act and the rules
and regulations thereunder, including, without limitation, Regulation M, which
provisions may limit the timing of purchases and sales of the securities by
Selling Shareholders. The foregoing may affect the marketability of the
securities offered hereby.
A Selling Shareholder may be deemed to be an "underwriter" as such term is
defined in the Securities Act, and any commissions paid or discounts or
concessions allowed to any such person and any profits received on resale of the
securities offered hereby may be deemed to be underwriting compensation under
the Securities Act.
Our Common Stock is quoted on the OTC Bulletin Board under the symbol "RMDX.OB."
Regulation M
We have informed the Selling Shareholders that Regulation M promulgated under
the Securities Exchange Act of 1934 may be applicable to them with respect to
any purchase or sale of our common stock. In general, Rule 102 under Regulation
M prohibits any person connected with a distribution of our common stock from
directly or indirectly bidding for, or purchasing for any account in which it
has a beneficial interest, any of the Shares or any right to purchase the
Shares, for a period of one business day before and after completion of its
participation in the distribution.
During any distribution period, Regulation M prohibits the Selling Shareholders
and any other persons engaged in the distribution from engaging in any
stabilizing bid or purchasing our common stock except for the purpose of
preventing or retarding a decline in the open market price of the common stock.
None of these persons may effect any stabilizing transaction to facilitate any
offering at the market. As the Selling Shareholders will be offering and selling
our common stock at the market, Regulation M will prohibit them from effecting
any stabilizing transaction in contravention of Regulation M with respect to the
Shares.
We also have advised the Selling Shareholders that they should be aware that the
anti-manipulation provisions of Regulation M under the Exchange Act will apply
to purchases and sales of shares of common stock by the Selling Shareholders,
and that there are restrictions on market-making activities by persons engaged
in the distribution of the shares. Under Regulation M, the Selling Shareholders
or their agents may not bid for, purchase, or attempt to induce any person to
bid for or purchase, shares of our common stock while such Selling Shareholders
are distributing shares covered by this prospectus. Regulation M may prohibit
the Selling Shareholders from covering short sales by purchasing shares while
the distribution is taking place, despite any contractual rights to do so under
the Agreement. We have advised the Selling Shareholders that they should consult
with their own legal counsel to ensure compliance with Regulation M.
Legal Proceedings
Michael Sibbet and HGR Enterprises v. RemoteMDx and SecureAlert, Third Judicial
District Court, Salt Lake County, State of Utah, Civil No. 060915336. On
September 20, 2006, Plaintiffs Michael Sibbet and HGR Enterprises brought an
50
action in Utah state court against RemoteMDx and SecureAlert. The suit alleges
that the Company and SecureAlert wrongfully terminated the plaintiffs, and
includes causes of action for breach of contract, breach of the implied covenant
of good faith and fair dealing, tortuous interference with contract and
prospective economic relations, unjust enrichment, and injunctive relief. The
plaintiffs seek damages of approximately $264 million over five years, plus the
value of converting 50% of $264 million into shares of our common sock at $0.60
per share, plus punitive damages of approximately $1 billion. The plaintiffs'
motion for temporary restraining order was denied by the Court in its entirety
on September 28, 2006. SecureAlert's and RemoteMDx's responses to the Complaint
were filed on October 10, 2006. The litigation is at an early stage and
discovery has not yet commenced. The Company has had preliminary settlement
discussions but can make no representations of the possible outcome. The Company
and SecureAlert intend to defend themselves vigorously against this action.
SecureAlert, Inc. v. The Jaxara Group, LLC, et al., Case No. 2:06CV00098, United
States District Court for the District of Utah: On February 1, 2006, plaintiff
SecureAlert, Inc. ("SecureAlert") filed a Complaint against defendants Jaxara
Group, LLC, Daniel Boice and Alexander Petty (collectively, "Jaxara") in the
United States District Court for the District of Utah. The action arises out of
contracts between SecureAlert and Jaxara for certain software programming work
to be performed by Jaxara. Based upon the foregoing, SecureAlert's Complaint
alleges causes of action for: (1) Breach of Contract; (2) Breach of Express
Warranty; (3) Breach of the Implied Covenant of Good Faith and Fair Dealing; (4)
Fraud; (5) Constructive Fraud; (6) Declaratory Relief and (7) Federal Unfair
Competition. Jaxara thereafter on or about April 10, 2006 answered the Complaint
and filed counterclaims against SecureAlert for (1) Breach of Contract; (2)
Breach of the Implied Covenant of Good Faith and Fair Dealing; (3) and Unjust
Enrichment. The litigation is at an early stage of discovery. SecureAlert
intends to vigorously prosecute its claims against Jaxara and to defend itself
against Jaxara's counterclaims.
Strategic Growth International. Inc. et al. v. RemoteMDx, Inc., Case No. 06 Civ.
3915, United States District Court Southern District of New York: On May 23,
2006, plaintiffs Strategic Growth International, Inc., Richard E. Cooper and
Stanley S. Altschuler (collectively, the "SGI Defendants") filed a Complaint
against defendant RemoteMDx, Inc. ("RMDx") in the United States District Court
Southern District of New York. The action arises out of a contract between the
SGI Defendants and RMDx for certain financial relations services to be performed
by SGI. Based upon the foregoing, the SGI Defendants' Complaint alleges a cause
of action for Breach of Contract. On September 29, 2006, RMDX answered the
Complaint and filed counterclaims against SecureAlert for (1) Breach of
Contract, (2) Rescission; and (3) Declaratory Judgment. The litigation is at an
early stage of discovery. RMDx intends to vigorously defend itself against the
SGI Defendants' claim and to prosecute its counterclaims against the SGI
Defendants.
Mr. Joseph L. Markham v. RemoteMDx, Inc. The Company received a demand letter
from counsel for Mr. Joseph L. Markham dated September 25, 2006. Mr. Markham
contends that he entered into an agreement with the Company to provide investor
relation services in exchange for $20,000 and 100,000 shares of RemoteMDx stock.
Mr. Markham further contends that he has fully performed under the purported
agreement and is owed the above amounts. The Company denies that any such
agreement exists, written or otherwise. To date, the Company is unaware of any
lawsuit having been filed regarding this claim. If such a lawsuit is filed, the
Company intends to defend itself vigorously against such action, and we are
unable to express an opinion with respect to the likelihood of an unfavorable
outcome or to estimate the amount or the range of potential loss should the
outcome be unfavorable.
51
Directors, Executive Officers, Promoters and Control Persons
The following table sets forth information concerning our executive officers and
directors and their ages as at September 30, 2006:
Name Age Position
---- --- --------
David G. Derrick 54 Chief Executive Officer and Chairman (Director)
James J. Dalton 64 President and Vice Chairman (Director)
Michael G. Acton 43 Chief Financial Officer, Secretary-Treasurer
Bruce G. Derrick 49 Chief Technology Officer
Randy E. Olshen 43 President of SecureAlert, Inc.
Gary S. Horrocks 45 President of Volu-Sol Reagents, Inc.
Peter McCall 50 Director
Robert E. Childers 62 Director
Larry Schafran 68 Director
David Hanlon 62 Director
|
David Derrick - CEO and Chairman
Mr. Derrick has been our CEO and Chairman since February 2001. Previously he
served as CEO and Chairman of the Board of Directors of Biomune Systems Inc.
between 1989 and 1998. Biomune was a biotechnology company and was the former
parent corporation of RemoteMDx, Inc. From 1996 to 1999, Mr. Derrick was
Chairman of the Board of Directors of Purizer Corporation; during 2000 he served
as a director of 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 in 1975 and a Masters in Business Administration degree with an
emphasis in Finance in 1976. Mr. Derrick has been a principal financier and
driving force in many new businesses. During the early 1980's he helped create
the community of Deer Valley, an exclusive ski resort outside of Park City,
Utah. In 1985 he founded and funded a company that pioneered the Smart Home
concept - the computerized home. The company is known as Vantage Systems and is
today a leader in this field.
James Dalton - President and Vice Chairman
Mr. Dalton joined us as a director in 2001. He was named President of RemoteMDx
in August 2003. From 1987 to 1997, 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
also 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 also a
founder and owner of the Deer Valley Club, where he oversaw the development of a
high-end, world-class ski project that includes 25 condominiums with a "ski-in
and ski-out" feature. From 1996 to 2000, Mr. Dalton served as an officer and
director of Biomune Systems, Inc. Prior to joining us and following his
resignation from Biomune Systems, Mr. Dalton managed his personal investments.
Michael Acton - Secretary, Treasurer and Chief Financial Officer
Mr. Acton joined us as Secretary-Treasurer in March 1999. He has also served as
our CFO since March 2001. From June 1998 until November 2000, Mr. Acton was
Chief Executive Officer of Biomune Systems, Inc., where he also served as
Principal Accounting Officer and Controller from 1994 to 1997. From 1989 through
1994, Mr. Acton was employed by Arthur Andersen, LLP in Salt Lake City, Utah,
where he performed various tax, audit, and business advisory services. He is a
Certified Public Accountant in the State of Utah.
Bruce G. Derrick - Chief Technology Officer
Mr. Derrick has extensive experience in management of custom solutions
development and customer management in the wireless telecom marketplace. From
2001 to 2004 was a senior product development manager for WatchMark Corporation.
WatchMark collects cellular network performance data for quality assurance and
capacity planning. From 1997 to 2001, Mr. Derrick was responsible for forming
and managing the Professional Services team for Marconi's MSI division. From
1996 to 1997, Mr. Derrick provided technical project management of application
scalability testing and quality control at Boeing and Western Wireless. From
52
1989 to 1996, Mr. Derrick built and managed the Corporate Computer and Network
Operations department for Avaya's Mosaix division. From 1983 to 1989, he served
as 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. He also participated in
development of IEEE standards for automated physiological monitoring for NASA's
Space Station program. Mr. Derrick holds a Bachelor's Degree in Computer Science
from the University of Utah. Bruce Derrick is the brother of David Derrick, the
Chairman and CEO of RemoteMDx.
Peter McCall - Director
Mr. McCall joined our board of directors in July 2001. Mr. McCall began his
career in the mortgage finance business in 1982. As a Vice President of GE
Mortgage Securities, he oversaw the first mortgage securities transactions
between GE Capital Corporation and Salomon Brothers. For fifteen years, Mr.
McCall structured and sold both mortgage and asset backed security transactions.
In 1997 Mr. McCall founded McCall Partners LLC. McCall Partners is an investment
vehicle for listed and non-listed equity securities. Mr. McCall is also a member
of the Board of Directors of Premium Power Corporation of North Andover, MA. Mr.
McCall is a member of the Audit Committee and the Compensation Committee of the
board of directors.
Robert Childers - Director
Mr. Childers joined our board in July 2001. Since 1977, he has served as the
Chief Executive Officer of Structures Resources Inc., a firm which he founded in
1972, and has more than 30 years of business experience in construction and real
estate development. Mr. Childers has served or is currently serving as General
Partner in 16 Public Limited Partnerships in the Middle Atlantic States.
Partners include First Union Bank and Fannie Mae. Structures Resources has
successfully completed over 300 projects (offices, hotels, apartments, and
shopping centers) from New York to North Carolina. Recently Mr. Childers has
been a partner for various projects in Baltimore and Philadelphia. He is a
co-founder of Life Science Group, a boutique biotech investment-banking firm.
Mr. Childers was also 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 Audit
Committee and Compensation Committee of the board of directors.
Randy E. Olshen - President SecureAlert, Inc.
Prior to joining SecureAlert, Inc., Mr. Olshen was the Executive Vice President
for Elan Nutrition from 2001 to 2004. From 1998 to 2001, Mr. Olshen was the
President of Optim Nutrition, a wholly-owned subsidiary of Biomune Systems
(NASDAQ: BIME). From 1992 to 1998, Mr. Olshen was the Executive Vice President
of Sales, Marketing and Operations at Nellson Nutraceutical. From 1987 to 1992
Mr. Olshen was the General Manager of the specialty products division of a $500
million pharmaceutical company, McGaw, Inc. He currently serves as a director
and a member of the compensation committee for two companies, Helios Nutrition
and Dr. Soy Nutrition. Mr. Olshen earned his Bachelor's degree from Chapman
College.
Larry G. Schafran - Director
Mr. Schafran is currently associated with Providence Recovery Partners, LP
("PRP, LP") as a Managing General Partner. PRP, LP is a New York City-based
activist investment fund. Mr. Schafran is also currently a Director and Audit
Committee Chairman of PubliCard, Inc. and Tarragon Corporation, both publicly
traded. Additionally, Mr. Schafran was Lead Director and Audit Committee
Chairman and is now a Consultant to the Chairman of WorldSpace, Inc., and a
Director of Glasstech, Inc.
In recent years, Mr. Schafran served in several capacities, including Trustee,
and 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 the Audit Committee
Chairman of the Company.
53
David P. Hanlon - Director
Mr. Hanlon is currently Chief Executive Officer and President of Empire Resorts,
Inc., a public company in the gaming industry. Prior to starting his own gaming
consulting business in 2000, in which he advised a number of Indian and
international gaming ventures, Mr. Hanlon was President and Chief Operating
Officer of Rio Suites Hotel & Casino from 1996-1999, a period in which the Rio
Suites Hotel & Casino underwent a major expansion. From 1994-1995, Mr. Hanlon
served as President and Chief Executive Officer of International Game
Technology, the world's leading manufacturer of microprocessor gaming machines.
From 1988-1993, Mr. Hanlon served as President and Chief Executive Officer of
Merv Griffin's Resorts International, and prior to that, Mr. Hanlon served as
President of Harrah's Atlantic City (Harrah's Marina and Trump Plaza). Mr.
Hanlon's education includes a B.S. in Hotel Administration from Cornell
University, an M.S. in Accounting, and an M.B.A. in Finance from the Wharton
School, University of Pennsylvania. He also completed the Advanced Management
Program at the Harvard Business School.
Indemnification Provisions
Our Bylaws provide, among other things, that our officers or directors are not
personally liable to us or to our stockholders for damages for breach of
fiduciary duty as an officer or director, except in connection with a proceeding
by or in the right of a corporation in which the director was adjudged liable to
the corporation, or in connection with any other proceeding in which he or she
was adjudged liable on the basis that he or she derived an improper personal
benefit. Our Bylaws also authorize us to indemnify our officers and directors
under certain circumstances. We anticipate we will enter into indemnification
agreements with each of our executive officers and directors pursuant to which
we will agree to indemnify each such person for all expenses and liabilities
incurred by such person in connection with any civil or criminal action brought
against such person by reason of their being an officer or director of
RemoteMDx. In order to be entitled to such indemnification, such person must
have acted in good faith and in a manner reasonably believed to be in or not
opposed to our best interests and, with respect to criminal actions, such person
must have had no reasonable cause to believe that his conduct was unlawful.
Commission's Position on Indemnification for Securities Act Liabilities
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to our directors, officers or controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
54
Security Ownership of Certain Beneficial Owners and Management
The table below sets forth information known to us with respect to the
beneficial ownership of our common stock as of December 10, 2006. 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, warrants, or convertible securities held by
that person that are currently exercisable or will become exercisable within 60
days after December 10, 2006, 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 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.
---------------------------------------------------------------- ---------------
Name and Address Percent
Title of Class of Beneficial Owner (1) Amount Owned of Class
---------------------------------------------------------------- ---------------
Common VATAS Holdings GmbH (2) 11,785,717 14.39
Friedrichstrasse 95
10117 Berlin
Germany
---------------------------------------------------------------------- ---------
Common David G. Derrick (3) 11,520,076 14.09%
---------------------------------------------------------------------- ---------
Common James Dalton (4) 11,291,365 13.81%
---------------------------------------------------------------------- ---------
Common J. Lee Barton (5) 7,282,961 8.99%
196 No. Forest Ave.
Hartwell, GA 30643
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Common ADP Management Corp. (6) 6,259,691 7.68%
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(1) Unless otherwise indicated, the business address of the
shareholder is the address of the Company, 150 West Civic Center
Drive, Suite 400, Sandy, Utah 84070.
(2) Includes 3,000,000 shares of common stock, 1,785,717 are issuable
upon conversion of Series C preferred stock, and 7,000,000 shares
issuable upon exercise of warrants.
(3) Includes shares owned of record as follows: 3,278,527 shares held
of record by ADP Management, 1,716,270 shares owned of record by
Mr. Derrick, 1,345,009 shares issuable upon conversion of Series A
preferred stock owned of record by ADP Management, 294,115 shares
issuable upon conversion of Series B preferred stock owned of
record by Mr. Derrick, 1,636,155 shares issuable upon exercise of
stock options held by ADP Management, and 3,250,000 shares
issuable upon exercise of stock options held by Mr. Derrick. Mr.
Derrick is the secretary and treasurer of ADP Management.
(4) Includes shares owned of record as follows: 3,278,527 shares held
of record by ADP Management (by agreement with Mr. Derrick, Mr.
Dalton shares control and beneficial ownership of the shares owned
of record by ADP Management), 1,486,725 shares owned of record by
Mr. Dalton, 294,949 shares issuable upon conversion of Series A
preferred stock owned of record by Mr. Dalton, 1,345,009 shares
issuable upon conversion of Series A preferred stock owned of
record by ADP Management, 1,636,155 shares issuable upon exercise
of stock options held by ADP Management, and 3,250,000 shares
issuable upon exercise of stock options held by Mr. Dalton.
(5) Includes 2,621,347 shares owned directly by Mr. Barton, 3,768,757
shares owned of record by Lintel, Inc., an entity owned and
controlled by Mr. Barton, and 892,857 shares issuable upon
conversion of 297,619 shares of Series C preferred stock owned of
record by Lintel, Inc.
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(6) Includes 3,278,527 shares owned of record, 1,345,009 shares
issuable upon conversion of Series A preferred stock, and
1,636,155 shares issuable upon exercise of stock options held by
ADP Management.
Security Ownership of Management
We have three classes of voting equity securities, including our common stock,
Series B preferred stock and the Series C preferred stock. In addition, we have
a class of nonvoting Series A preferred stock that is convertible into common
stock. The following table sets forth information as of September 30, 2006, as
to the voting securities beneficially owned by all directors and nominees named
therein, each of the named executive officers, and directors and executive
officers as a group.
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Title of Name and Address Amount Owned Percent of Class
Class of Beneficial Owner(9)
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Common David G. Derrick (1) 10,175,067 12.65%
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James Dalton (2) 9,651,407 12.04%
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Michael G. Acton (4) 1,070,507 1.34%
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Peter McCall (5) 720,000 *
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Robert Childers (6) 725,514 *
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Larry Schafran (7) 1,200 *
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Randy Olshen (8) 1,000,000 1.25%
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David Hanlon 0 *
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Officers and Directors as a
Group (6 persons) (9) 22,342,495 21.43%
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(1) Derrick's beneficial ownership of these shares is summarized in
note (2) above.
(2) Dalton's beneficial ownership of these shares is summarized in
note (3) above.
(3) ADP's beneficial ownership of these shares is summarized in note
(5) above.
(4) Mr. Acton is the Chief Financial Officer of the Company. Includes
700,000 shares issuable under options granted to Mr. Acton, and
370,507 shares owned of record by Mr. Acton.
(5) Mr. McCall is a director. Includes 720,000 shares issuable upon
exercise of stock options held by Mr. McCall.
(6) Mr. Childers is a director. Includes (a) 305,514 shares of common
stock owned of record by the Robert E. Childers Living Trust, (b)
420,000 shares issuable upon exercise of stock options held by Mr.
Childers.
(7) Mr. Schafran is a director. Includes 1,200 shares held in Mr.
Schafran's retirement account.
(8) Mr. Olshen is the President of SecureAlert, Inc. Includes
1,000,000 shares issuable under options granted to Mr. Olshen.
(9) Duplicate entries eliminated.
Unless otherwise indicated, the business address of the shareholder is the
address of the Company, 150 West Civic Center Drive, Suite 400, Sandy, Utah
84070.
*Less than 1% ownership percentage.
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Description of Common Stock
Holders of Common Stock are entitled to one vote per share on each matter
submitted to a vote at any meeting of shareholders. There are no cumulative
voting rights, and therefore, subject to the rights of the holders of preferred
stock (if and when issued), holders of a majority of the outstanding shares of
voting Common Stock are able to elect the entire board of directors. The board
of directors has authority, without action by the shareholders, to issue all or
any portion of the authorized but unissued shares of Common Stock (whether
voting or non-voting), which would reduce the percentage ownership by the
present shareholders and which might dilute the book value of outstanding
shares.
Shareholders have no pre-emptive rights to acquire additional shares of Common
Stock. The Common Stock is not subject to redemption and carries no subscription
or conversion rights. In the event of liquidation, the shares of Common Stock
are entitled to share equally in corporate assets after satisfaction of all
liabilities and any preference in liquidation of the preferred stock then
outstanding.
Holders of Common Stock are entitled to receive such dividends, as the board of
directors may from time to time declare out of funds legally available for the
payment of dividends, after payment of any preference on preferred stock then
outstanding. We have not paid dividends on our Common Stock and do not
anticipate that we will pay dividends in the foreseeable future.
We have granted limited piggyback registration rights to certain holders of our
Common Stock and holders of our Series B preferred stock. Those rights grant the
holders of these securities the right to require that we include the Common
Stock held by them or the Common Stock issuable to them upon conversion of the
shares of Series B preferred stock held by them on a registration statement
filed by us. This right is subject to limitations that might be imposed on all
such rights by the underwriter of our Common Stock in an underwritten public
offering and to other restrictions that vary depending on the agreement under
which the rights were granted or created.
We are authorized to issue 175,000,000 shares of our common stock, par value
$0.0001 per share. As of December 12, 2006, approximately 85,642,364 shares of
our common stock were issued and outstanding.
Preferred Stock
General
Our board of directors may designate series of preferred stock to be issued from
time to time, without further action by the shareholders. Preferred stock may be
issued in one or more series with such rights, privileges, preferences, powers,
and restrictions as may be determined in the discretion of the board.
Consequently, any series of preferred stock may carry rights and privileges
superior to those of the Common Stock, including, for example, preferences in
dividends and liquidation, the right to approve or disapprove mergers,
acquisitions and other transactions and the right to elect, as a class, one or
more members of the board of directors. The issuance of preferred stock also may
have the effect of diluting the voting power per share or book value per share
of the holders of Common Stock if the preferred stock includes voting rights or
is convertible into Common Stock.
Series A Convertible Preferred Stock
We have designated 40,000 shares of preferred stock as Series A preferred stock.
As of December 12, 2006, there were 17,310 shares of Series A preferred stock
issued and outstanding. The following is a summary of the rights and preferences
of the Series A preferred stock:
Dividends. The holders of shares of Series A preferred stock are entitled to
receive an annual dividend out of any of our assets legally available therefore,
prior and in preference to any declaration or payment of any dividend on the
Common Stock, at the rate of 10% per annum on the stated value of the Series A
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preferred stock (or $200 per share of Series A preferred stock). Dividends may
be paid either in cash or in additional shares of Series A preferred stock at
the discretion of the board of directors. To date all dividends have been paid
by issuance of additional shares of Series A preferred stock.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up, the holders of Series A preferred stock
are entitled to receive out of the assets available for distribution to
shareholders before any distribution or payment is made to holders of shares of
Common Stock, or to holders of any other shares ranking junior upon liquidation
to the Series A preferred stock, liquidation distributions in the amount of $200
per share plus all accrued and unpaid regular or special dividends, if any,
multiplied by 133%. If upon any voluntary or involuntary liquidation,
dissolution or winding up, the assets are insufficient to make the full payment
on the Series A preferred stock and similar payments on any other class of
shares ranking on a parity with the Series A preferred stock upon liquidation,
then the holders of the Series A preferred stock and of such other class of
shares will share ratably in the distribution of assets in proportion to the
full respective distributable amounts to which they are entitled. After payment
of these amounts to the holders of the Series A preferred stock, they will not
be entitled to any further participation in any distribution or payment, and the
entire remaining assets and funds legally available for distribution, if any,
will be distributed among the holders of shares of Common Stock in proportion to
the shares of Common Stock then held by them.
Voting Rights. Holders of Series A preferred stock are not entitled to voting
rights, except that without the approval of holders of a majority of the
outstanding shares of Series A preferred stock, we are prohibited from (i)
authorizing, creating or issuing any shares of any class or series ranking
senior to the Series A preferred stock as to liquidation rights; (ii) amending,
altering or repealing our Articles of Incorporation if the powers, preferences
or special rights of the Series A preferred stock would be materially adversely
affected; or (iii) becoming subject to any restriction on the Series A preferred
stock other than restrictions arising solely under the Utah Act or existing
under our Articles of Incorporation as in effect on June 12, 2000.
Conversion. Shares of Series A preferred stock may be converted to Common Stock.
Each share of Series A preferred stock may be converted at the holder's option
at any time into 370 shares of Common Stock. If we declare or pay any dividend
on the Common Stock payable in shares of Common Stock or in any right to acquire
shares of Common Stock, or if we effect a subdivision of the outstanding shares
of Common Stock into a greater number of shares (by stock split,
reclassification or otherwise), or in the event the outstanding shares of Common
Stock are combined or consolidated, by reclassification or otherwise, into a
lesser number of shares of Common Stock, then the conversion factor immediately
prior to such event is to be proportionately increased or decreased, as
appropriate.
Antidilution Rights. If we make or issue, or fix a record date for the
determination of holders of Common Stock entitled to receive, a dividend or
other distribution payable in our securities or the securities of any of our
subsidiaries, then in each such event a provision will be made so that the
holders of shares of Series A preferred stock will receive, upon the conversion,
the securities that they would have received had their Series A preferred stock
been converted into shares of Common Stock on the date of that event.
In case of any reorganization or any reclassification of our capital stock, any
consolidation or merger with or into another corporation or corporations, or the
conveyance of all or substantially all of our assets to another corporation,
each share of Series A preferred stock will thereafter be convertible into the
number of shares of stock or other securities or property (including cash) to
which a holder of the number of shares of Common Stock deliverable upon
conversion of such shares of Series A preferred stock would have been entitled
upon the record date (or date of, if no record date is fixed) such
reorganization, reclassification, consolidation, merger or conveyance; any, in
any case, appropriate adjustment (as determined by the board of directors) will
be made in the application of the provisions herein set forth with respect to
the rights and interests thereafter of the holders of such Series A preferred
stock, to the end that the provisions set forth herein will thereafter be
applicable, as nearly as equivalent as is practicable, in relation to any shares
of stock or the securities or property (including cash) thereafter deliverable
upon the conversion of the shares of such Series A preferred stock.
In the case of a transaction or series of related transactions (including,
without limitation, any reorganization, merger or consolidation) that will
result in our shareholders not holding (by virtue of such shares or securities
issued solely with respect thereto) at least 50% of the voting power of the
surviving or continuing entity; or a sale of all or substantially all of our
assets, unless our shareholders immediately prior to the sale will, as a result
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of the sale, hold (by virtue of securities issued as consideration for the sale)
at least 50% of the voting power of the purchasing entity, holders of the Series
A preferred stock of record as of the date of consummation of such a transaction
are entitled to receive, prior and in preference to any payment of consideration
to the holders of Common Stock, in cash or in securities received from the
acquiring corporation, or in a combination thereof, at the closing of the
transaction, at the holder's discretion, an amount per share equal to $200 (as
adjusted for any combinations, consolidations, stock distributions or stock
dividends), plus all declared or accumulated but unpaid dividends.
Redemption. We may redeem up to 66-2/3% of the total number of shares of Series
A preferred stock at our discretion at any time. The redemption price will be a
minimum of 133% of the conversion price at the date of redemption (including any
new conversion price that we may establish).
Series B Convertible Preferred Stock
We have designated 2,000,000 shares of preferred stock as Series B Convertible
Preferred Stock. As of December 12, 2006, there were 53,332 shares of Series B
preferred stock issued and outstanding. The following is a summary of the rights
and preferences of the Series B preferred stock:
Dividends. We will not pay dividends on the Series B preferred stock unless
dividends are declared by our board of directors out of any of our legally
available assets, in which case the holders of the Series B preferred stock
would be paid dividends prior and in preference to any declaration or payment of
any dividend on the Common Stock, and subject to the preferences of the holders
of the Series A preferred stock.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of RemoteMDx, the holders of Series B
preferred stock are entitled to receive out of the assets of RemoteMDx available
for distribution to shareholders before any distribution or payment is made to
holders of shares of Common Stock, or to holders of any other of our shares
ranking junior upon liquidation to the Series B preferred stock, liquidation
distributions in the amount of $3.00 per share, plus all accrued and unpaid
dividends, if any, before any payment is made to holders of shares of the
Company's equity securities that are junior to the Series B preferred stock. If
upon any voluntary or involuntary liquidation, dissolution or winding up of the
Company, our assets are insufficient to pay in full the liquidation preference
of the Series B preferred stock and any other class of shares ranking on a
parity with the Series B preferred stock upon liquidation, then the holders of
the Series B preferred stock and any such other class of shares will share
ratably in any such distribution of our assets in proportion to the full
respective distributable amounts to which they are entitled. For purposes of
this liquidation preference, the Series A preferred stock ranks on parity with
the Series B preferred stock.
After payment to the holders of the Series B preferred stock of the amounts set
forth above, our entire remaining assets and funds legally available for
distribution, if any, shall be distributed first to the holders of Series B
preferred stock then actually outstanding at the rate of $3.00 per share, with
the remainder being distributed to the holders of Series B preferred stock and
the holders of Common Stock then actually outstanding, with the Series B
preferred stock holders participating on the basis of the number of shares they
would be entitled to receive if they were to convert their shares of preferred
stock into shares of Common Stock at that time; subject, however, to the prior
distribution to the holders of any senior series of preferred stock of amounts
owing under the terms of the rights and preferences governing such senior
securities.
A consolidation or merger of RemoteMDx with or into any other corporation or
corporations, or a sale of all or substantially all of our assets that does not
involve a distribution by us of cash or other property to the holders of shares
of Common Stock, will be deemed to be a liquidation, dissolution or winding up
of RemoteMDx for purposes of the liquidation preference.
Voting Rights. Holders of shares of Series B preferred stock are entitled to one
vote per share of Series B preferred stock on all matters upon which holders of
our Common Stock are entitled to vote. In addition, without the approval of
holders of a majority of the outstanding shares of Series B preferred stock
voting as a class, we are prohibited from (i) authorizing, creating or issuing
any shares of any class or series ranking senior to the Series B preferred stock
as to liquidation rights; (ii) amending, altering or repealing our Articles of
Incorporation if the powers, preferences or special rights of the Series B
preferred stock would be materially adversely affected; or (iii) becoming
subject to any restriction on the Series B preferred stock other than
restrictions arising solely under the Utah Act or existing under our Articles of
Incorporation as in effect on June 1, 2001.
Conversion. Each share of Series B preferred stock is convertible at any time
into shares of Common Stock. The number of shares of Common Stock into which
each share of Series B preferred stock may be converted (the "conversion rate")
59
is determined by dividing the original purchase price paid per share of Series B
preferred stock, namely $3.00, by the conversion price. Each share of Series B
preferred stock will automatically convert into shares of Common Stock at the
then effective conversion rate on the closing of a firm commitment underwritten
public offering with an aggregate public offering price of not less than
$20,000,000.
Antidilution Protections. The conversion rate is adjustable when changes occur
in our outstanding securities. For example, at the time of the original offering
of the Series B preferred stock that if, with certain limited exceptions, we
issued any shares of Common Stock or securities convertible into common without
consideration or for a consideration per share less than the conversion price in
effect immediately prior to the issuance of those shares, the conversion price
in effect immediately prior to each such issuance will automatically be adjusted
for the shares purchased in the offering to a price equal to the aggregate
consideration received by us for that issuance divided by the number of shares
of Common Stock so issued. Similar rights were granted to MEW in connection with
1,000,000 shares purchased by it in connection with the licensing of our
technology to MEW. In addition, if the number of shares of Common Stock
outstanding is increased by a stock dividend payable in shares of Common Stock
or by a subdivision or split-up of shares, or is decreased by a combination of
the outstanding shares, the conversion price will be appropriately adjusted.
Adjustment will also be made if we make a dividend or other distribution payable
in securities of RemoteMDx other than shares of Common Stock, the holders of the
Series B preferred stock will be entitled to receive upon conversion, in
addition to shares of Common Stock to which they are otherwise entitled, the
amount of other securities of RemoteMDx that they would have received had the
Series B preferred stock been converted into Common Stock on the date of
distribution and had they thereafter, during the period from the date of that
event to and including the conversion date, retained those securities. If the
Common Stock is changed into the same or a different number of shares of any
class or classes of stock, whether by recapitalization, reclassification or
otherwise (other than a subdivision or combination of shares or stock dividend
or a reorganization, merger or consolidation of the sort referred to in the
following paragraph), each holder of Series B preferred stock will be entitled
to convert those shares into the kind and amount of stock and other securities
or property receivable in connection with that recapitalization,
reclassification or other change with respect to the maximum number of shares of
Common Stock into which those shares of Series B preferred stock could have been
converted immediately prior to that recapitalization, reclassification or
change.
Redemption. We may redeem the Series B preferred stock at our option at any
time. The redemption price is a minimum of 110% of the conversion price at the
date of redemption.
Series C Convertible Preferred Stock
We have designated 7,357,144 shares of preferred stock as Series C Convertible
Preferred Stock. As December 12, 2006, there were 5,532,369 shares of Series C
preferred stock issued and outstanding. The following is a summary of the rights
and preferences of the Series C preferred stock:
Conversion. Each share of Series C Preferred Stock is convertible into Common
Stock, subject to adjustment, at the option of the holder, at any time.
The number of shares of Common Stock into which each share of Series C Preferred
Stock is convertible is determined by dividing the Series C Original Price per
share ($1.68) by the Conversion Price, which initially shall be $0.56. The
Conversion Price may be adjusted as described under "Antidilution Adjustments."
Upon conversion, holders of Series C Preferred Stock shall be entitled to
receive cash payment of any accrued dividends.
Voting Rights. Holders of shares of Series C Preferred Stock are entitled to one
vote for each share of Common Stock into which the shares of Series C Preferred
Stock would then be convertible. Holders of shares of Series C Preferred Stock
are entitled to vote on all matters upon which holders of our Common Stock are
entitled to vote.
Holders of Series C Preferred Stock are entitled to elect, as a class, two
directors to our Board of Directors, which directors may be removed without
cause only by the vote of the holders of the Series C Preferred Stock.
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Holders of shares of Series C Preferred Stock are entitled to one vote as a
separate class on any matter affecting the Series C Preferred Stock as a class.
Holders of Series C Preferred Stock shall be entitled to notice of any meeting
of shareholders in accordance with our bylaws.
Protective Provisions. Without the affirmative vote or consent of the holders of
at least a simple majority of the outstanding shares of Series C Preferred
Stock, we may not:
- increase the size of our Board of Directors beyond seven members;
- complete a "sales transaction" (as defined in the Designation);
- amend, change, or reclassify the rights or preferences of the
Series C Preferred Stock;
- amend our Articles of Incorporation or Bylaws in a way that would
have a material adverse impact on the rights or preferences of the
Series C Preferred Stock;
- create a class of securities on parity with or senior to the
Series C Preferred Stock;
- redeem or repurchase any of our equity securities; or
- sell or issue any shares of the Series C Preferred Stock other
than those sold or issued in connection with the original offering
of the Series C Preferred Stock.
Dividends. An annual dividend of 8% of the original purchase price, plus all
other accrued dividends, accrues annually, whether or not declared and is
cumulative. Dividends are payable quarterly in arrears, and are payable either
in cash or in additional shares of Series C Preferred Stock, at our exclusive
option. Upon conversion of shares of Series C Preferred Stock, the holder is
entitled to receive, in cash, payment of any accrued and unpaid dividends on the
shares of Series C Preferred Stock converted.
Liquidation. The holders of the Series C Preferred Stock rank pari passu with
our Series A Preferred Stock and senior to our Series B Preferred Stock and the
Common Stock in the event of a liquidation, dissolution or winding up (a
"Liquidation") and will be entitled to the amount of $1.68 per share of Series C
Preferred Stock plus any accrued but unpaid dividends before any distributions
to the holders of Common Stock and Series B or any future newly created series
of preferred stock.
A consolidation or merger (except where shareholders owning a majority of our
voting rights continue to own a majority of the voting rights of the surviving
entity) or a sale of all or substantially all of our assets, or a transaction or
series of related transactions in which more than 50% of our voting power is
disposed of, will be deemed to be a Liquidation for these purposes.
Redemption. We may redeem the Series C Preferred Stock at any time by giving
holders of the Series C Preferred Stock at least 14 days written notice of
redemption, subject to the rights of the holders to convert their Series C
Preferred Stock into Common Stock prior to the date of redemption contained in
the notice. The redemption price is the greater of (a) $4.00 per share or (b)
110% of the applicable conversion price of the Series C Preferred Stock on the
date of redemption and is payable in cash under the terms established in the
notice of redemption, consistent with the terms contained in the designation of
rights and preferences of the Series C Preferred Stock.
Antidilution Adjustments. The Conversion Price will be adjusted for stock
splits, combinations, recapitalizations, stock dividends, mergers or
consolidations in which we are not the surviving company and other similar
events. In addition, if we issue shares of Common Stock ("Additional Shares")
without consideration or for consideration per share less than the Conversion
Price in effect immediately prior to the issuance of such Additional Shares, the
Conversion Price in effect immediately prior to each such issuance will
automatically be adjusted to a price equal to the aggregate consideration
received by us for such issuance divided by the number of Additional Shares so
issued.
Certain Relationships and Related Transactions
The following discussion summarizes transactions during the last two fiscal
years between RemoteMDx and related parties.
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ADP Management Line of Credit Arrangement
As of September 30, 2006, the Company owed $44,549 to ADP Management, an entity
owned and controlled by two of the Company's officers and directors, under a
line-of-credit agreement. Outstanding amounts on the line of credit accrue at 5%
and are due on July 31, 2007. During the year ended September 30, 2006, the line
of credit increased $662,007 due to a monthly management fee owed to ADP
Management, including salaries for Mr. Derrick and Mr. Dalton and expenses
incurred by ADP Management that are reimbursable by the Company. The Company
made cash repayments during the year of $635,073. The note is due and payable on
July 31, 2007.
Market for Common Equity and Related Stockholder Matters
Market Information. Our common stock is traded on the OTC Bulletin Board of the
National Association of Securities Dealers, Inc., under the symbol "RMDX.OB."
The following table sets forth, for the fiscal periods indicated, the high and
low bid information for our common stock, based on available information, which
reflect inter-dealer prices, without retail mark-up, mark-down, or commission,
and may not represent actual transactions. The sales information is available
online at http://otcbb.com.
2005 Low High
---- --- ----
Quarter ended 12/31/04 N/A* N/A*
Quarter ended 3/31/05 N/A* N/A*
Quarter ended 6/30/05 N/A* N/A*
Quarter ended 9/30/05 $0.70 $1.42
2006
----
Quarter ended 12/31/05 $0.80 $1.14
Quarter ended 3/31/05 $0.52 $0.92
Quarter ended 6/30/06 $0.50 $1.75
Quarter ended 9/30/06 $1.01 $2.24
2007
----
Quarter ended 12/31/06** $1.18 $2.13
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* The Company's common stock began trading on August 25, 2005.
** Through December 19, 2006.
Holders. As of December 12, 2006, there were approximately 1,300 holders of
record of the common stock and approximately 85,642,364 shares of common stock
outstanding. We also have 17,310 shares of Series A preferred stock outstanding,
held by 27 shareholders, convertible into a minimum of approximately 6,404,633
shares of common stock, as well as 53,332 shares of Series B preferred stock
outstanding held by 11 shareholders, that at present are convertible into
approximately 533,320 shares of common stock; and 5,532,369 shares of Series C
preferred stock outstanding, held by approximately 126 shareholders, convertible
into approximately 16,597,107 shares of common stock. We also have granted
options and warrants for the purchase of approximately 21,597,392 shares of
common stock. As discussed elsewhere in this report, we may be required to issue
additional shares of common stock or preferred stock to pay accrued dividends,
or to comply with anti-dilution adjustments to the conversion rights of present
or former preferred shareholders.
Dividends. Since incorporation, we have not declared any dividends on our common
stock. We do not anticipate declaring a dividend on the common stock for the
foreseeable future. The Series A Preferred Stock accrues dividends at the rate
of 10% annually, which may be paid in cash or additional shares of preferred or
common stock, at our option. To date all such dividends have been paid by
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issuance of preferred stock, valued at $200 per share of preferred. We are not
required to pay and do not pay dividends with respect to the Series B Preferred
Stock. Series C preferred stock has an 8% dividend that may be paid in cash or
additional shares of Series C Convertible Preferred Stock at the option of the
Company. During the years ended September 30, 2006 and 2005, the Company
recorded $642,512 and $512,547 in dividends on Series A and C Preferred Stock,
respectively.
Dilution. We have a large number of shares of common stock authorized in
comparison to the number of shares issued and outstanding. The board of
directors determines when and under what conditions and at what prices to issue
stock. In addition, a significant number of shares of common stock are reserved
for issuance upon exercise of purchase or conversion rights.
The issuance of any shares of common stock for any reason will result in
dilution of the equity and voting interests of existing shareholders.
Transfer Agent and Registrar. The transfer agent and registrar for our common
stock is American Stock Transfer & Trust Company, 40 Wall Street, New York City,
NY 10005.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information as of the September 30, 2006, our
most recently completed fiscal year, with respect to compensation plans
(including individual compensation arrangements) under which equity securities
are authorized for issuance, aggregated as follows:
o All compensation plans previously approved by security holders;
and
o All compensation plans not previously approved by security
holders.
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Equity Compensation Plan Information
Number of securities to Weighted average
be issued upon exercise exercise price of Number of securities
of outstanding options, outstanding options, remaining available for
Plan category warrants and rights warrants and rights future issuance
Equity compensation plans
approved by
security holders 0 $0.00 10,000,000
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Recent Sales of Unregistered Securities
The following information summarizes certain information for all securities we
have sold during the past two fiscal years without registration under the
Securities Act.
In each of these transactions, the securities were issued to individuals or
entities that were "accredited investors" as that term is defined in Rule 501
under Regulation D of the Securities Act, and the issuance of the securities was
accomplished without registration under the Securities Act in reliance on the
exemptions from the registration requirements of the Securities Act afforded by
Section 4(2), including Rule 506 of Regulation D under the Securities Act.
Subsequent to September 30, 2006, the Company entered into various transactions.
These transactions are described in the Current Report on Form 8-K of the
Company filed with the Commission on November 9, 2006.
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On November 9, 2006, RemoteMDx,Inc. (the"Company"), closed a private placement
of shares of its common stock. The Company sold 3,000,000 shares of its common
stock (the "Shares"), at a purchase price of $2.00 per share, for aggregate
proceeds to the Company of $6,000,000. The Company also issued warrants (the
"Warrants") to purchase up to an additional 7,000,000 shares of the Company's
common stock. The investor was VATAS Holding GmbH.
The Company intends to use the proceeds from the sale of the Shares and the
Warrants for general corporate and working capital purposes.
In connection with the sale of the Shares and the Warrants, the Company granted
registration rights to the purchaser, in connection with which the Company
agreed to file a registration statement to register the resale of the Shares and
shares underlying the Warrants by the purchaser not later than 10 days after the
Company files its annual report for the year ended September 30, 2006. The
Company also agreed to use its best efforts to have the registration statement
declared effective within 30 days of the filing, and to respond within ten days
to any comments from the Securities and Exchange Commission. In the event that
the Company does not (a) have the registration statement filed by the filing
deadline, (b) respond within ten days to any SEC comments, or (c) have the
registration statement effective within 100 days of the filing, the Company is
required to pay a 5% penalty to the investor.
Fiscal Year 2006
During the year ended September 30, 2006, we issued 35,005,811 shares of common
stock without registration of the offer and sale of the securities under the
Securities Act of 1933, as amended, as follows:
o 10,739,753 shares were exchanged for debt and accrued interest of
$7,893,782;
o 5,846,428 shares were issued for services in the amount of
$3,983,607;
o 4,014,916 shares were issued upon the conversion of 10,843 shares
of Series A Preferred Stock of the Company; and
o 7,171,380 shares were issued upon the conversion of 1,315,825
shares of Series B Preferred Stock of the Company;
o 6,883,334 shares were issued for $7,910,000 in cash;
o 350,000 shares were issued from the exercise of options.
See note 16 to the financial statements for a discussion of financing activities
subsequent to September 30, 2006.
In each of these transactions the securities were issued to individuals or
entities that were "accredited investors" as that term is used in Rule 501 under
Regulation D of the Securities Act, and the issuance of the securities was
accomplished without registration under the Securities Act in reliance on the
exemptions from the registration requirements of the Securities Act afforded by
Section 4(2), including Rule 506 of Regulation D under the Securities Act.
Fiscal Year 2005
During the year ended September 30, 2005, we issued 13,733,804 shares of common
stock without registration of the offer and sale of the securities under the
Securities Act of 1933, as amended, as follows:
- 3,995,154 shares were exchanged for debt and accrued interest of
$2,626,522;
- 1,043,519 shares were issued in consideration of reduction in
related-party debt of $563,500 plus $77,554 of accrued interest;
- 5,148,641 shares were issued for services in the amount of
$2,822,911;
- 953,895 shares were issued upon the conversion of 2,578 shares of
our Series A Preferred Stock; and
65
- 2,592,595 shares were issued upon the conversion of 466,667 shares
of our Series B Preferred Stock.
- See footnote 16 to the financial statements for a discussion of
financing activities subsequent to September 30, 2005.
Fiscal Year 2004
During the year ended September 30, 2004, we issued 6,514,873 shares of common
stock without registration of the offer and sale of the securities under the
Securities Act of 1933, as amended, as follows:
- 1,271,573 shares were issued for cash proceeds of $591,638;
- 22,427 shares were exchanged for debt and accrued interest of
$33,640;
- 689,229 shares were issued in connection with the exercise of
stock options in the amount of $372,184;
- 740,741 shares were issued upon exercise of options in
consideration of reduction in related-party debt of $400,000;
- 1,157,500 shares were issued for services; and
- 2,633,403 shares were issued upon the conversion of 7,097 shares
of our Series A Preferred Stock.
During the year ended September 30, 2004, we issued $1,106,412 of convertible
debentures. These debentures can be converted at the election of the debenture
holders into approximately 1,400,000 shares of common stock (at an assumed
conversion price of $1.00/share). The conversion price is 80% of the per share
price of the next qualified offering. A qualified offering is an offering
exceeding $5,000,000 of net proceeds to us.
In each of these transactions the securities were issued to individuals or
entities that were "accredited investors" as that term is used in Rule 501 under
Regulation D of the Securities Act, or the issuance of the securities was
accomplished without registration under the Securities Act in reliance on other
exemptions from the registration requirements of the Securities Act afforded by
Section 4(2), including Rule 506 of Regulation D under the Securities Act.
Penny Stock Rules
Our shares of common stock are subject to the "penny stock" rules of the
Securities Exchange Act of 1934 and various rules under this Act. In general
terms, "penny stock" is defined as any equity security that has a market price
less than $5.00 per share, subject to certain exceptions. The rules provide that
any equity security is considered to be a penny stock unless that security is
registered and traded on a national securities exchange meeting specified
criteria set by the SEC, authorized for quotation from the NASDAQ stock market,
issued by a registered investment company, and excluded from the definition on
the basis of price (at least $5.00 per share), or based on the issuer's net
tangible assets or revenues. In the last case, the issuer's net tangible assets
must exceed $3,000,000 if in continuous operation for at least three years or
$5,000,000 if in operation for less than three years, or the issuer's average
revenues for each of the past three years must exceed $6,000,000.
Trading in shares of penny stock is subject to additional sales practice
requirements for broker-dealers who sell penny stocks to persons other than
established customers and accredited investors. Accredited investors, in
general, include individuals with assets in excess of $1,000,000 or annual
income exceeding $200,000 (or $300,000 together with their spouse), and certain
66
institutional investors. For transactions covered by these rules, broker-dealers
must make a special suitability determination for the purchase of the security
and must have received the purchaser's written consent to the transaction prior
to the purchase. Additionally, for any transaction involving a penny stock, the
rules require the delivery, prior to the first transaction, of a risk disclosure
document relating to the penny stock. A broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative,
and current quotations for the security. Finally, monthly statements must be
sent disclosing recent price information for the penny stocks. These rules may
restrict the ability of broker-dealers to trade or maintain a market in our
common stock, to the extent it is penny stock, and may affect the ability of
shareholders to sell their shares.
Executive Compensation
The following table sets forth the compensation paid in each of the past three
fiscal years to all individuals serving as our chief executive officer during
the year ended September 30, 2006, as well as our three most highly compensated
executive officers other than the CEO who were serving as executive officers at
the end of the year ended September 30, 2006, whose total annual salary and
bonus for the year then ended exceeded $100,000 (the "Named Executive
Officers").
Summary Compensation Table
Annual Compensation Long Term
Compensation
Awards
Securities
Underlying All other
Name and Fiscal Other Annual Options/SARs compensation
Principal Position Year Salary ($) Bonus ($) Compensation ($) (#) ($)
-----------------------------------------------------------------------------------------------------------------
David G. Derrick, Chief 2004 $120,000 $ 0 $ 53,910 845,628/0 $ 0
Executive Officer Chairman 2005 $240,000 $300,000(6) $ 0 0/0 $ 0
of the Board of Directors 2006 $240,000 $321,428(6) $ 0 0/0 $ 0
(1)
James J. Dalton 2004 $120,000 $ 0 $ 0 0/0 $ 0
President and Vice Chairman 2005 $240,000 $300,000(6) $ 0 0/0 $ 0
(2) 2006 240,000 $321,428(6) $ 0 0/0 $ 0
Randy Olshen 2006 $149,000 $ 50,000 $ 0 0/0 $60,000(6)
President of SecureAlert,
Inc. (3)
Bryan Dalton 2006 $78,000 $ 50,000 $ 0 0/0 $60,000(6)
Vice President of Sales
(4)
Michael G. Acton 2004 $100,000 $ 25,000 $ 4,192 0/0 $ 0
Chief Financial Officer 2005 $100,000 $ 25,000 $ 0 0/0 $35,000(6)
(5) 2006 $100,000 $ 45,357 $ 0 0/0 $60,000
|
(1) Mr. Derrick became Chief Executive Officer in February 2001.
Amounts reported in the table do not include amounts recorded by
the Company under applicable accounting principles for non-cash
compensation paid to ADP Management, a company controlled by Mr.
Derrick, in connection with financing transactions that were
entered into by the Company and ADP Management during the years
2004, 2005 or 2006. Salary was accrued and included in amounts
owed to ADP Management under various financing agreements. Mr.
Derrick is the principal owner and control person of ADP
Management. See "Certain Relationships and Related Party
Transactions."
67
(2) During 2004, 2005 and 2006, Mr. Dalton was paid $120,000, $240,000
and $240,000 a year under a consulting agreement. Mr. Dalton's
annual salary as President is $240,000. The consulting fees and
salary owed to Dalton have historically been accrued as part of
the ADP Management financing arrangements. Other amounts have been
paid or accrued during 2006. See "Certain Relationships and
Related Transactions."
(3) Mr. Olshen became President of SecureAlert during the 2006 fiscal
year.
(4) Mr. Bryan Dalton became Vice-President of Sales during the 2006
fiscal year.
(5) Mr. Acton has served as an executive officer since March 2001.
(6) These payments were made by issuing restricted common stock.
Employment Agreements
We have no employment agreements with any executive officers at this time.
Stock Option Grants in Fiscal Year 2006
During fiscal year 2006, the Company granted 750,000 warrants to each of Mr.
Derrick and Mr. Dalton with exercise prices ranging from $0.54 to $0.56 per
share. All of these warrants are five-year warrants and expire in 2011. In
addition, 1,250,000 options at $0.54 per share held by each of Messrs. Derrick
and Dalton vested during the fiscal year ended September 30, 2006.
The following table sets forth certain information, including the fiscal
year-end value of unexercised stock options held by the Named Executive
Officers, as of September 30, 2006. We have not granted any stock appreciation
rights ("SAR's").
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-the-Money Options/
Shares At 9/30/2006 SARs At 9/30/2006 ($)
Acquired on Valued Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable (1)
-------------------- ------------ ---------------- ------------------- ---------------------
David G. Derrick (2) - - 4,886,155/0 $6,954,925/$0
James J. Dalton (2) - - 4,886,155/0 $6,954,925/$0
Randy Olshen (3) - - 25,000/975,000 $34,570/$1,355,250
Bryan Dalton (4) - - 25,000/975,000 $34,570/$1,355,250
Michael G. Acton (5) - - 200,000/500,000 $274,000/$695,000
|
(1) Value is based on the fair market value of our common stock on
September 30, 2006 in the amount of $1.99 per share.
68
(2) Mr. Derrick and Mr. Dalton hold 3,250,000 options with exercise
prices ranging from $0.54 to $0.60 per share respectively. In
addition, 1,636,155 options ranging from $0.54 to $0.75 per share
issued to ADP Management are included in both Mr. Derrick and Mr.
Dalton's options in the table above. "Certain Relationships and
Related Transactions."
(3) The exercise price of these options are $0.60 per share.
(4) The exercise price of these options are $0.60 per share.
(5) The exercise prices of these options range from $0.54 to $0.70 per
share.
Stock Option Grants in Fiscal Year 2005
During fiscal year 2005, we granted 2,500,000 warrants to each Mr. Derrick and
Mr. Dalton with an exercise price of $0.54 per share. All of these warrants are
five-year warrants and expire in 2010.
Stock Options Outstanding and Options Exercised in Fiscal Year 2005
The following table sets forth certain information, including the fiscal
year-end value of unexercised stock options held by the Named Executive
Officers, as of September 30, 2005. We have not granted any stock appreciation
rights ("SARs").
69
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-the-Money Options/
Shares At 9/30/2005 SARs At 9/30/2005 ($)
Acquired on Valued Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable (1)
-------------------- ------------ ---------------- ------------------- ---------------------
David G. Derrick (2) - - 2,886,155/1,250,000 $1,275,132/$575,000
James J. Dalton (2) - - 2,886,155/1,250,000 $1,275,132/$575,000
Michael G. Acton (5) - - 246,894/200,000 $113,571/$60,000
|
(1) Value is based on the fair market value of our common stock on
December 15, 2005, estimated to be $1.00 per share. Values
indicated reflect the difference between the exercise price of the
unexercised options and the market value of shares of common stock
on November 30, 2005.
(2) The exercise price of 2,636,155 options is $.54 per share. The
exercise price of 250,000 options is $0.75 per share.
(3) The exercise prices of these options are 146,894 at $1.00 and
100,000 at $0.54 per share.
Stock Option Grants in Fiscal Year 2004
During fiscal year 2004, we granted 500,000 warrants to ADP Management at $0.75
per share and 1,000,000 warrants at $0.54 per share. We also granted to Mr.
Acton 100,000 warrants at $0.54 per share. All of these warrants are five-year
warrants and expire in 2009.
Stock Options Outstanding and Options Exercised in Fiscal Year 2004
The following table sets forth certain information, including the fiscal
year-end value of unexercised stock options held by the Named Executive
Officers, as of September 30, 2004. We have not granted any stock appreciation
rights ("SARs").
70
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-the-Money Options/
Shares At 9/30/2004 SARs At 9/30/2004 ($)
Acquired on Valued Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable (1)
-------------------- ------------ ---------------- ------------------- ---------------------
David G. Derrick (2) - - 1,636,155/00 -
Michael G. Acton - - 246,894/00 -
James J. Dalton - - 1,636,155/00 -
|
(1) Value is based on the fair market value of our common stock on
September 30, 2004, estimated to be $0.54 per share. Values
indicated reflect the difference between the exercise price of the
unexercised options and the market value of shares of common stock
on September 30, 2004.
(2) Options granted to ADP Management in connection with a financing
arrangement. The exercise price of 1,136,155 options is $.54 per
share. The exercise price of 500,000 options is $0.75 per share.
See "Certain Relationships and Related Transactions."
Stock Plans
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 shareholders approved this plan on July 10,
2006. Under the 2006 Plan, the Company may issue stock options, stock
appreciation right, 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. No
grants have been made under this plan.
Changes in and disagreements with accountants on accounting and financial
disclosure
On November 2, 2005, upon the authorization and approval of the audit committee
of our board of directors, we dismissed Tanner LC ("Tanner") as our independent
registered public accounting firm.
The reports of Tanner on the financial statements of RemoteMDx as of and for the
years ended September 20, 2004 and 2003 did not contain an adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope or accounting principles, except for the addition of an explanatory
paragraph expressing substantial doubt about our ability to continue as a going
concern.
During the years ended September 30, 2004 and 2003 and through November 2, 2005,
there were no disagreements with Tanner on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of Tanner, would have
caused Tanner to make reference to the subject matter of the disagreement in its
reports on our financial statements for such periods.
There were no reportable events (as defined in the Regulation S-K Item
304(a)(1)(v)) during the years ended September 30, 2004 and 2003 or the
subsequent interim periods through November 2, 2005, except that Tanner LC
reported in letters to our Audit Committee, dated June 7, 2005 and November 26,
2003, that it had identified deficiencies that existed in the design or
operation of our internal control over financial reporting that it considered to
be "significant deficiencies" and "material weaknesses." These significant
deficiencies and material weakness in our internal controls relate to the
failure to properly disclose equity and debt transactions and the lack of
segregation of incompatible duties. We have disclosed these significant
deficiencies and material weaknesses to our Audit Committee and Board of
Directors. We have authorized Tanner LC to respond fully to any inquiries by
Hansen, Barnett & Maxwell regarding significant deficiencies or material
weaknesses in internal controls.
Additional effort is needed to fully remedy these significant deficiencies and
material weaknesses and we are continuing our efforts to improve and strengthen
our internal controls over accounting and financial reporting. Our Audit
Committee will continue to work with management and outside advisors with the
goal to implement internal controls over financial reporting that are adequate
and effective.
We have requested that Tanner furnish it with a letter addressed to the
Securities and Exchange Commission stating whether or not it agrees with the
above statements. A copy of such letter, dated November 7, 2005 was filed as an
exhibit to the Current Report filed by RemoteMDx to report the dismissal of
Tanner LC.
On November 3, 2005, upon the authorization and approval of the audit committee
of our board of directors, we engaged Hansen, Barnett & Maxwell ("HBM") as our
independent registered public accounting firm.
No consultations occurred between RemoteMDx and HBM during the years ended
September 30, 2004 and 2003 and through November 3, 2005 regarding either (i)
the application of accounting principles to a specific completed or contemplated
transaction, the type of audit opinion that might be rendered on our financial
statements, or other information provided that was an important factor
considered by us in reaching a decision as to an accounting, auditing or
financial reporting issue, or (ii) any matter that was the subject of
disagreement or a reportable event requiring disclosure under Item 304(a)(1)(iv)
of Regulation S-B.
Index to Financial Statements
Page
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of September 30, 2006 and 2005 F-3
Consolidated Statements of Operations for the Years Ended
September 30, 2006 and 2005 F-4
Consolidated Statement of Stockholders' Deficit for the Years
Ended September 30, 2005 and 2006 F-5
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2006 and 2005 F-6
Notes to Consolidated Financial Statements F-8
|
Experts
Our consolidated balance sheet as of September 30, 2006 and the consolidated
statements of operations, stockholders' deficit, and cash flows, for the years
ended September 30, 2006 and 2005, included in this prospectus have been audited
by Hansen, Barnett & Maxwell, independent registered public accounting firm, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of Hansen, Barnett & Maxwell as experts in auditing
and accounting.
Legal matters
The validity of the Shares offered hereby will be passed upon for us by Durham
Jones & Pinegar, P.C., 111 East Broadway, Suite 900, Salt Lake City, Utah 84111.
71
RemoteMDx, Inc.
Consolidated Financial Statements
September 30, 2006 and 2005
Index to Consolidated Financial Statements
Page
----
Report of Independent Registered Public Accounting Firm F - 3
Consolidated Balance Sheet F - 4
Consolidated Statements of Operations F - 6
Consolidated Statements of Stockholders' Deficit F - 7
Consolidated Statements of Cash Flows F - 11
Notes to Consolidated Financial Statements F - 14
|
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
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
We have audited the accompanying consolidated balance sheet as of September 30,
2006 and the related consolidated statements of operations, stockholders'
deficit and cash flows of RemoteMDx, Inc., and subsidiaries (the Company), for
the years ended September 30, 2006 and 2005. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Remote
MDx, Inc. as of September 30, 2006 and the consolidated results of their
operations and cash flows for the years ended September 30, 2006 and 2005 in
conformity with U.S. generally accepted accounting principles.
The accompanying consolidated 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 recurring operating
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 also are described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
December 14, 2006
|
F-3
RemoteMDx, Inc.
Consolidated Balance Sheet
September 30, 2006
Assets
-------------------
Current assets:
Cash $ 5,872,529
Accounts receivable, net of allowance for doubtful
accounts of $8,000 229,428
Interest receivable 15,604
Inventories, net of reserve of $54,977 (note 2) 39,276
Prepaid expenses and other assets (note 3) 2,504,500
---------------
Total current assets 8,661,337
Property and equipment, net of accumulated depreciation
and amortization of $626,581 (note 2) 1,343,031
Monitoring equipment, net of accumulated depreciation
of $102,115 (note 4) 2,139,685
Other assets 48,013
---------------
Total assets $ 12,192,066
===============
|
See accompanying notes to consolidated financial statements. F-4
RemoteMDx, Inc.
Consolidated Balance Sheet
September 30, 2006
Continued
--------------------------------------------------------------------------------
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Bank line of credit (note 6) $ 3,897,111
Accounts payable 1,696,165
Accrued expenses (note 5) 404,671
Deferred revenues 17,817
Related party line of credit (note 7) 44,549
Notes payable (note 8) 169,676
Dividends payable (note 11) 20,877
---------------
Total current liabilities 6,250,866
Total liabilities 6,250,866
Commitments and contingencies (note 15)
Series A Preferred stock of SecureAlert, Inc. (note 11) 3,590,000
Stockholders' deficit:
Series A convertible preferred stock; 10%
dividend, non-voting, non-participating; $.0001
par value, $200 stated value; 40,000 shares
designated; 17,310 shares issued and outstanding
(aggregate liquidation preference of $46,045) 2
Series B convertible preferred stock; $.0001 par
value; 2,000,000 shares designated; 53,332
shares issued and outstanding (aggregate
liquidation preference of $159,996) 5
Series C convertible preferred stock; $.0001
par value; 7,357,144 shares designated;
5,532,369 shares issued and outstanding
(aggregate liquidation preference of $9,294,380) 553
Common stock, $.0001 par value, 175,000,000 shares
authorized; 80,134,853 shares issued and
outstanding 8,013
Additional paid-in capital 111,718,090
Deferred compensation (2,649,088)
Accumulated deficit (106,726,375)
---------------
Total stockholders' deficit: 2,351,200
---------------
Total liabilities and stockholders' deficit $ 12,192,066
---------------
|
See accompanying notes to consolidated financial statements. F-5
RemoteMDx, Inc.
Consolidated Statements of Operations
Years Ended September 30,
--------------------------------------------------------------------------------
2006 2005
-------------------------------
Sales, net $ 1,070,141 $ 861,868
Cost of goods sold 940,132 823,752
-------------------------------
Gross profit 130,009 38,116
-------------------------------
Operating expenses:
Research and development 2,087,802 1,766,791
Selling, general and administrative
(including $8,453,840 and $2,742,837
of compensation expense paid in stock
or stock options / warrants,
respectively) 16,025,373 7,230,222
-------------------------------
Loss from operations (17,983,166) (8,958,897)
-------------------------------
Other income (expense):
Derivative valuation gain (loss) 629,308 (580,626)
Interest income 30,051 1,720
Interest expense
(including $6,229,485 and $1,387,143
paid in stock and warrants,
respectively) (6,541,077) (1,448,736)
Other income 67,139 2,850
-------------------------------
Net loss (23,797,745) (10,983,689)
Series A and C preferred stock dividends (642,512) (512,547)
-------------------------------
Net loss applicable to common shareholders $ (24,440,257) $ (11,496,236)
-------------------------------
Net loss per common share - basic and diluted $ (0.44) $ (0.33)
-------------------------------
Weighted average shares - basic and diluted 55,846,000 34,318,000
|
See accompanying notes to consolidated financial statements. F-6
RemoteMDx, Inc.
Consolidated Statements of Stockholders' Deficit
Years Ended September 30, 2005 and 2006
------------------------------------------------------------------------------------------------------
Preferred Stock
Series A Series B Common Stock
Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------
Balance at October 1, 2004 23,349 $ 2 1,835,824 $ 184 31,395,238 $ 3,140
Issuance of common stock for:
Conversion of Series A preferred
stock (2,578) - - - 953,895 95
Conversion of Series B preferred
stock - - (466,667) (47) 2,592,595 259
Debt and accrued interest - - - - 3,995,154 400
Services - - - - 5,148,641 515
Assumption of $563,500 of debt and
accrued interest by related party - - - - 1,043,519 104
Issuance of warrants for:
Debt - - - - - -
Services - - - - - -
Amortization of deferred consulting
and financing fees - - - - - -
Preferred stock dividend - - - - - -
Record beneficial conversion feature
on notes - - - - - -
Issuance of Series A preferred stock
for accrued dividends - - - - - -
Preferred stock dividends paid with
Series A preferred stock 5,236 1 - - - -
Subscription receivable - - - - - -
Net loss - - - - - -
--------------------------------------------------------------
Balance at September 30, 2005 26,007 $ 3 1,369,157 $ 137 45,129,042 $ 4,513
==============================================================
------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-7
|
RemoteMDx, Inc.
Consolidated Statements of Stockholders' Deficit
Years Ended September 30, 2005 and 2006
Continued
----------------------------------------------------------------------------------------------------------
Deferred Preferred
Financing Stock Consolidated
and Subscriptions Accumulated
APIC Consulting Receivables Deficit
-------------------------------------------------------------
$ 66,329,339 $ (331,312) $ - $ (69,480,005)
Conversion of Series A preferred stock (95) - - -
Conversion of Series B preferred stock (213) - - -
Debt and accrued interest 2,645,499 (1,970,910) - -
Services 2,822,395 (1,755,000) - -
Assumption of $563,500 of debt and accrued
interest by related party 641,054 - - -
Debt 267,174 - - -
Services 1,582,171 (214,776) - -
fees - 908,872 - -
(512,547) - - -
1,300,500 - - -
1,038,346 - - -
- - - -
preferred stock
- - (504,900) -
- - - (10,983,689)
------------------------------------------------------------
$ 76,113,623 $ (3,363,126) $ (504,900) $ (80,463,694)
============================================================
----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-8
|
RemoteMDx, Inc.
Consolidated Statements of Stockholders' Deficit
Years Ended September 30, 2005 and 2006
Continued
------------------------------------------------------------------------------------------------------------------------
Preferred Stock
Series A Series B Series C Common Stock
Shares Amount Shares Amount Shares Amount Shares Amount
-----------------------------------------------------------------------------
Balance at October 1, 2005 26,007 $ 3 1,369,157 $ 137 - - 45,129,042 $ 4,513
Issuance of common stock for:
Conversion of Series A Preferred stock (10,843) (1) - - - - 4,014,916 401
Conversion of Series B Preferred stock - - (1,315,825) (132) - - 7,171,380 717
Services - - - - - - 5,846,428 585
Cash - - - - - - 6,883,334 688
Exercise of options and warrants - - - - - - 350,000 35
Issuance of Series C Preferred Stock for:
Debt and accrued interest - - - - 617,352 62 10,739,753 1,074
Issuance of warrants for:
Debt - - - - - - - -
Services - - - - - - - -
SecureAlert Series A Preferred stock - - - - - - - -
Amortization of deferred consulting
and financing fees - - - - - - - -
Issuance of RemoteMDx Series C Preferred
stock for Cash - - - - 4,739,788 474 - -
Record beneficial conversion feature
on notes - - - - - - - -
Issuance of Series A & C Preferred stock
for dividends 2,146 - - - 175,226 17 - -
Preferred stock dividend on SecureAlert
Series A preferred stock - - - - - - - -
Subscription receivable - - - - - - - -
Net loss - - - - - - - -
-----------------------------------------------------------------------------
Balance at September 30, 2006 17,310 $ 2 53,332 $ 5 5,532,366 $ 553 80,134,853 $ 8,013
=============================================================================
------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-9
|
RemoteMDx, Inc.
Consolidated Statements of Stockholders' Deficit
Years Ended September 30, 2005 and 2006
Continued
----------------------------------------------------------------------------------------------------------
Deferred Preferred
Financing Stock Consolidated
and Subscriptions Accumulated
APIC Consulting Receivables Deficit
-------------------------------------------------------------
Balance at October 1, 2005 $ 76,113,623 $ (3,363,126) $ (504,900) $ (80,463,694)
Issuance of common stock for:
Conversion of Series A Preferred stock (400) - - -
Conversion of Series B Preferred stock (586) - - -
Services 3,983,022 (1,935,000) - -
Cash 7,909,312 - - -
Exercise of options and warrants 251,965 - - -
Issuance of Series C Preferred stock
Debt and accrued interest 7,892,719 (1,434,550) - -
Issuance of warrants for:
Debt 255,012 - - -
Services 5,108,869 (2,776,889) - -
SecureAlert Series A Preferred stock - - - -
Amortization of deferred consulting
and financing fees - 6,860,477 - -
Issuance of Remote MDX Series C
Preferred stock for Cash 7,439,085 - (1,712,565) -
Record beneficial conversion feature
on notes 2,786,364 (2,464,936)
Issuance of Series A & C Preferred
stock for dividends (18) - - -
Preferred stock dividend on SecureAlert
Series A preferred stock (20,877) - - -
Subscription receivable - - 2,217,465 -
Net loss - - - (23,797,745)
-----------------------------------------------------------------
Balance at September 30, 2006 $111,718,090 $ (2,649,088) $ - $ (106,726,375)
=================================================================
--------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-10
|
RemoteMDx, Inc.
Consolidated Statements of Cash Flows
Years Ended September 30,
-------------------------------------------------------------------------------------------------------------
2006 2005
----------------------------------
Cash flows from operating activities:
Net loss $ (23,797,745) $ (10,983,689)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 231,982 36,632
Amortization of debt discount 1,223,092 262,427
Amortization of deferred consulting and financing services 6,826,077 908,872
Amortization of interest expense related to debt 1,809,643 -
Beneficial conversion feature recorded as interest expense 321,429 340,000
Derivative liability valuation (629,308) 580,626
Common stock issued for services 2,048,606 1,347,768
Common stock issued for interest 88,100 -
Common stock options and warrants issued to
board of directors - 170,138
Options and warrants issued to consultants for services 2,366,378 392,380
Options and warrants issued to related party for services - 1,072,051
Interest income on restricted cash 5,628 (3,742)
Increase in related party line of credit for services 662,007 752,708
Changes in operating assets and liabilities:
Accounts receivable (132,647) 163,694
Interest receivable (15,604) -
Inventories 7,300 31,711
Prepaid expenses and other assets (2,476,280) (58,729)
Accounts payable 338,880 649,042
Accrued liabilities (275,443) 494,770
Deferred revenues 278 4,105
----------------------------------
Net cash used in operating activities (11,397,627) (3,839,236)
----------------------------------
Cash flows from investing activities:
Purchase of property and equipment (1,093,690) (311,730)
Purchase of monitoring equipment (2,241,800) -
Proceeds from the disposal of fixed assets 1,507 8,457
----------------------------------
Net cash used in investing activities $ (3,333,983) $ (303,273)
----------------------------------
-------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-11
|
RemoteMDx, Inc.
Consolidated Statements of Cash Flows
For the Years Ended September 30,
Continued
-------------------------------------------------------------------------------------------------------------
2006 2005
----------------------------------
Cash flows from financing activities:
Payments under a related-party line of
credit / advances $ (635,073) $ (782,639)
Payments on a bank line of credit (3,952) (102)
Proceeds from bank line of credit 3,900,640 -
Decrease in subscription receivable 504,900 -
Payment on notes payable (2,043,623) (197,787)
Proceeds form the exercise of options and warrants 252,000 -
Proceeds from note payable 517,500 -
Proceeds from the issuance of SecureAlert Series A
Preferred stock 600,000 2,607,746
Proceeds from the issuance of Series C Preferred stock 7,439,558 -
Proceeds from issuance of debt 1,746,153 2,869,224
Proceeds from sale of common stock 7,910,000 -
---------------------------------
Net cash provided by financing activities 20,188,103 4,496,442
---------------------------------
Net increase in cash 5,456,493 353,933
Cash, beginning of year 416,036 62,103
---------------------------------
Cash, end of year $ 5,872,529 $ 416,036
---------------------------------
Supplemental Cash Flow Information:
2006 2005
----------------------------------
Cash paid for interest and taxes:
Cash paid for income taxes - -
Cash paid for interest $ 311,592 $ 48,053
-------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-12
|
RemoteMDx, Inc.
Consolidated Statements of Cash Flows
For the Years Ended September 30,
Continued
2006 2005
----------------------------
Supplemental schedule of non-cash investing and
financing activities:
Issuance of 4,014,916 and 953,895 common shares,
respectively, in exchange for 10,843 and 2,578
shares of Series A preferred stock, respectively $ 401 $ 95
Issuance of 7,171,380 and zero common shares,
respectively, in exchange for 1,315,825 and zero
shares of Series B preferred stock, respectively 717 -
Issuance of 4,057,500 and 5,870,500 common shares,
respectively, for deferred consulting and
financing services 3,369,550 3,590,910
Preferred Series A and C stock dividends 642,512 512,547
SecureAlert Series A Preferred stock dividends
accrued 20,877 -
Notes payable and accrued interest converted into
7,586,299 and 750,000 shares of common stock,
respectively 2,671,653 318,301
Notes payable and accrued interest converted
into 736,400 and zero shares of Series C
Preferred stock, respectively 1,037,152 -
Series B&C debentures converted into 2,030,184
and zero shares of common stock, respectively 913,583 -
Related party line of credit increased in
exchange for related party consulting services
of $662,007 and $480,000, assumption of Company
notes payable of zero, and $77,658 of accrued
interest - 1,097,988
Series A preferred stock issued in settlement of
related party note - 175,000
Issuance of 400,000 and zero common shares,
respectively, for establishing letters of
credit to secure line of credit 656,000 -
|
See accompanying notes to consolidated financial statements. F-13
RemoteMDx, Inc.
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
1. Organization RemoteMDx, Inc. was originally incorporated in Utah in
and Nature July 1995 under the name Volu-Sol, Inc. ("Volu-Sol"), as
of Operations a wholly owned subsidiary of Biomune Systems, Inc.
("Biomune"). Biomune spun off Volu-Sol by distributing
shares of Volu-Sol's common stock as a stock dividend to
the holders of the common stock of Biomune (the
"Distribution"). As a consequence of the Distribution,
Volu-Sol commenced operations as a separate, independent
company in October 1997. Effective July 27, 2001,
Volu-Sol changed its name to RemoteMDx, Inc. RemoteMDx,
Inc. and its wholly-owned subsidiaries are collectively
referred to as the "Company".
Historically, the Company's strategy was to capitalize
on the global medical diagnostic industry by providing
"building block" stains and reagents. Although the
Company continues to conduct its medical stains and
solutions business, over the past two years, management
has begun to pursue a more expanded role engaging in the
business of manufacturing and marketing mobile emergency
and personal security systems, and tracking devices used
to monitor convicted offenders in the criminal justice
system. The Company's revenues for the year ended
September 30, 2006, were generated primarily from from
the sale of medical stains and reagents.
Going Concern
The Company incurred a net loss and has negative cash
flows from operating activities for the year ended
September 30, 2006. As of September 30, 2006, the
Company has a stockholders' deficit and an accumulated
deficit. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The
financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
In order for the Company to remove substantial doubt
about its ability to continue as a going concern, the
Company must generate positive cash flows from
operations and obtain the necessary funding to meet its
projected capital investment requirements.
--------------------------------------------------------------------------------
F-14
|
RemoteMDx, Inc.
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Going Concern - Continued
and Nature Management's plans with respect to this uncertainty
of Operations include raising additional capital from the sale of
Continued equity securities and expanding its market for its
tracking products. There can be no assurance that
revenues will increase rapidly enough to payback
operating losses and payback debts. Likewise, there can
be no assurance that the debt holders will be willing to
convert the debt obligations to equity securities or
that the Company will be successful in raising
additional capital from the sale of equity or debt
securities. If the Company is unable to increase
revenues or obtain additional financing, it will be
unable to continue the development of its products and
may have to cease operations.
Principles of Consolidation
The accompanying consolidated financial statements
include the accounts of RemoteMDx, Inc. and its
wholly-owned subsidiaries, Volu-Sol Reagents, Inc. and
SecureAlert, Inc. All intercompany balances and
transactions have been eliminated upon consolidation.
2. Summary of Use of Estimates in the Preparation of Financial
Significant Statements
Accounting The preparation of financial statements in conformity
Policies 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.
--------------------------------------------------------------------------------
F-15
|
RemoteMDx, Inc.
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
2. Summary of Concentration of Credit Risk
Significant The Company has cash in bank that, at times, may exceed
Accounting Accounting federally insured limits. The Company has not
Policies experienced any losses in such accounts.
Continued
In the normal course of business, the Company provides
credit terms to its customers. Accordingly, the Company
performs ongoing credit evaluations of its customers'
financial condition and requires no collateral from its
customers. The Company maintains an allowance for
uncollectable accounts receivable based upon the
expected collectability of all accounts receivable.
The Company had sales to entities which represent more
|
than 10% as follows for the years ended September 30:
2006 2005
Company A $ 228,437 $ 148,500
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and
investments with original maturities to the Company of
three months or less.
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 received. A
trade receivable is considered to be past due if any
portion of the receivable balance has not been received
by the contractual pay date. Interest is not charged on
trade receivables that are past due.
Inventories
Inventories are recorded at the lower of cost or market,
cost being determined on a first-in, first-out ("FIFO")
method. Substantially all items included in inventory
are finished goods and consist of the following:
F-16
RemoteMDx, Inc.
Notes to Consolidated Financial Statements
Continued
2. Summary of Reagent stains $ 94,253
Significant Reserve for inventory obsolescence (54,977)
Accounting ------------
Continued Total inventory $ 39,276
------------
|
Provisions, when required, are made to reduce excess and
obsolete inventories to their estimated net realizable
values. Due to competitive pressures and technological
innovation, it is possible that estimates of the net
realizable value could change in the near term.
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 over $500 are
capitalized. When property and equipment are disposed,
any gains or losses are included in the results of
operations.
Property and equipment consisted of the following as of
September 30, 2006:
Equipment $ 956,259
Tooling and dies 500,683
Leasehold improvements 322,845
Furniture and fixtures 189,825
---------------
1,969,612
Accumulated depreciation (626,581)
---------------
$ 1,343,031
---------------
|
Depreciation expense for the years ended September 30,
2006 and 2005 was $129,868 and $36,632, respectively.
F-17
RemoteMDx, Inc.
Notes to Consolidated Financial Statements
Continued
2. Summary of Impairment of Long-Lived Assets and Goodwill
Significant The Company reviews its long-lived assets for impairment
Accounting when events or changes in circumstances indicate that
Policies the book value of an asset may not be recoverable. The
Continued Company evaluates, at each balance sheet date, whether
events and circumstances have occurred which indicate
possible impairment. The Company uses an estimate of
future undiscounted net cash flows of the related asset
or group of assets over the estimated remaining life in
measuring whether the assets are recoverable. If the
carrying amount of an asset exceeds its estimated future
cash flows, an impairment charge is recognized for the
amount by which the carrying amount exceeds the
estimated fair value of the asset. Impairment of
long-lived assets is assessed at the lowest levels for
which there are identifiable cash flows that are
independent of other groups of assets. Assets to be
disposed of are reported at the lower of the carrying
amount or fair value, less the estimated costs to sell.
Revenue Recognition
The Company derives its revenue primarily from the
monitoring of its mobile security products and reagent
stains. Revenue, less reserves for returns, is
recognized upon shipment to the customer. Revenue from
products sold with long-term service contracts are
recognized ratably over the expected life of the
contract. Amounts received in advance of shipment are
recorded as deferred revenue.
Shipping and handling fees are included as part of net
sales. The related freight costs and supplies directly
associated with shipping products to customers are
included as a component of cost of goods sold.
Monitoring equipment revenue is recognized on the
earlier of the activation of the device or 21 days from
receipt by the customer. The customer is charged a daily
monitoring rate and is invoiced monthly.
Research and Development Costs
All expenditures for research and development are
charged to expense as incurred. These expenditures in
both 2006 and 2005 were for the development of
SecureAlert's TrackerPAL device and associated services.
For the years ended September 30, 2006 and 2005 research
and development expenses were $2,087,802 and $1,766,791,
respectively.
--------------------------------------------------------------------------------
F-18
|
RemoteMDx, Inc.
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
2. Summary of Advertising Costs
Significant The Company expenses advertising costs as incurred.
Accounting Advertising expenses for the years ended September 30,
Policies 2006 and 2005 were approximately $118,300 and $145,400
Continued respectively.
Stock-Based Compensation
The Company accounts for its stock-based compensation
issued to employees and directors under Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for
Stock Issued to Employees," and related interpretations.
Under APB No. 25, compensation related to stock options,
if any, is recorded if an option's exercise price on the
measurement date is below the fair value of the
Company's common stock and amortized to expense over the
vesting period.
An alternative method to the intrinsic value method of
accounting for stock-based compensation is the fair
value based method prescribed by Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition
and Disclosure." If the Company used the fair value
based method, the Company would be required to record
deferred compensation based on the fair value of the
stock option at the date of grant as computed using an
option-pricing model, such as the Black-Scholes option
pricing model. The deferred compensation calculated
under the fair value based method would then be
amortized over the vesting period of the stock option.
The following table illustrates the effect on net loss
and net loss per share as if the Company had elected to
use the fair value based method to account for its
employee stock-based compensation.
Years Ended September 30,
-------------------------------
2006 2005
-------------------------------
Net loss applicable to common
shareholders - as reported $ (24,440,257) $ (11,496,236)
Add: intrinsic value of employee
stock based compensation - -
--------------------------------------------------------------------------------
F-19
|
Notes to Consolidated Financial Statements
Continued
2. Summary of Deduct: total stock based
Significant employee compensation expense
Accounting determined under fair value
Policies based method for all awards,
Continued net of related tax effects (1,400,148) (10,835)
-----------------------------
Net loss - pro forma $ (25,840,405) $ (11,507,071)
-----------------------------
Basic and diluted loss per
share - as reported $ (.44) $ ( 0.33)
-----------------------------
Basic and diluted loss per
share - pro forma $ (.46) $ ( 0.34)
-----------------------------
|
The fair value of each option or warrant grant is
estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average
assumptions:
Years Ended
September 30,
-----------------------
2006 2005
-----------------------
Expected dividend yield - -
Expected stock price volatility 129 % 106%
Risk-free interest rate 4.59 % 3.66%
Expected life of options 5 years 5 years
|
The weighted average fair value of options and warrants
granted during the years ended September 30, 2006 and
2005, was $0.76 and $0.47, respectively.
The Company accounts for its stock-based compensation
issued to non-employees, other than members of the
Company's Board of Directors, using the fair value
method in accordance with SFAS No. 123 and related
interpretations. Under SFAS No. 123, stock-based
compensation is determined as either the fair value of
the consideration received or the fair value of the
equity instruments issued, whichever is more reliably
measurable.
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.
F-20
RemoteMDx, Inc.
Notes to Consolidated Financial Statements
Continued
2. Summary of Net Loss Per Common Share
Significant Basic net loss per common share ("Basic EPS") is
Accounting computed by dividing net loss available to common
Policies stockholders by the weighted average number of common
Continued shares outstanding during the period.
Diluted net loss per common share ("Diluted EPS") is
computed by dividing net loss by the sum of the
weighted-average number of common shares outstanding and
the weighted-average dilutive common share equivalents
then outstanding. The computation of Diluted EPS does
not assume exercise or conversion of securities that
would have an anti-dilutive effect.
Common share equivalents consist of shares issuable upon
the exercise of common stock options and warrants, and
shares issuable upon conversion of preferred stock. As
of September 30, 2006 and 2005, there were approximately
45,132,452 and 20,833,000 outstanding common share
equivalents, respectively, that were not included in the
computation of diluted net loss per common share as
their effect would be anti-dilutive. The common share
equivalents listed above do not include the shares
issuable upon conversion of convertible notes and
debentures with embedded conversion features.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards
Board (FASB) issued FASB Statement No. 123 (revised
2004), "Shared-Based Payment." Statement 123(R)
addresses the accounting for share-based payment
transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the
enterprise or (b) liabilities that are based on the fair
value of the enterprise's equity instruments or that may
be settled by the issuance of such equity instruments.
Statement 123(R) requires an entity to recognize the
grant-date fair value of stock options and share based
compensation issued to employees in the statement of
operations. The revised Statement generally requires
that an entity account for those transactions using the
fair value method, and eliminates the intrinsic value
method of accounting in APB Opinion No. 25, which was
permitted under Statement 123, as originally issued. The
revised Statement requires entities to disclose
information about the nature of the share-based payment
transactions and the effects of those transactions on
the financial statements.
--------------------------------------------------------------------------------
F-21
|
RemoteMDx, Inc.
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
2. Summary of Statement 123(R) is effective as of October 1, 2006 for
Significant the Company. All public companies must use either the
Accounting modified prospective or the modified retrospective
Policies transition method. The Company has not yet evaluated the
Continued impact of adoption of this pronouncement, but believes
it may have a material impact on the consolidated
financial statements.
In November 2004, the FASB issued Statement No. 151,
"Inventory Costs", to amend the guidance in Chapter 4,
"Inventory Pricing", of FASB Accounting Research
Bulletin No. 43, "Restatement and Revision of Accounting
Research Bulletins." Statement No. 151 clarifies the
accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material
(spoilage). The Statement requires that those items be
recognized as current-period charges. Additionally,
Statement 151 requires that allocation of fixed
production overheads to the costs of conversion be based
on the normal capacity of the production facilities.
Statement No. 151 is effective for fiscal years
beginning after June 15, 2005. The Company has adopted
this standard during the year ended September 30, 2006,
which had no material impact on the financial
statements.
3. Prepaid For the year ended September 30, 2006, the Company had
Expenses and $2,504,500 of prepaid expenses. Prepaid expenses
Other Assets consisted of the following:
Manufacturing costs $ 2,181,140
Commissions 124,989
Leases 86,420
Insurance 64,660
Interest related to line
of credit 15,069
Consulting 10,000
Other 22,222
---------------
Prepaid expenses and other
assets $ 2,504,500
---------------
--------------------------------------------------------------------------------
F-22
|
Notes to Consolidated Financial Statements
Continued
4. Monitoring Monitoring equipment at September 30, 2006, is as
Equipment follows:
Monitoring equipment $ 2,241,800
Less accumulated depreciation (102,115)
---------------
Monitoring Equipment, net $ 2,139,685
---------------
|
The Company began leasing monitoring equipment to
agencies for offender tracking in April 2006 under the
terms of operating leases. During the year ended
September 30, 2006, the Company had deployed 2,172
TrackerPAL devices. The monitoring equipment is
depreciated on the straight-line method over the
estimated useful lives of the related assets over 3
years.
5. Accrued Accrued expenses consisted of the following at September
Expenses 30, 2006:
Accrued tooling $ 116,000
Accrued interest 69,694
Accrued compensation and
payroll taxes 68,259
Accrued vacation 71,718
Accrued property taxes 9,000
Accrued board of director fees 30,000
Accrued bonuses 30,000
Accrued legal and other costs 10,000
------------
Total accrued expenses $ 404,671
------------
6. Bank Line of During the year ended September 30, 2006, the Company
Credit opened a $4 million line of credit with Citizen National
Bank. The interest rate is 8% and the line of credit
matures on June 30, 2007. The line of credit is secured
by letters of credit for a total of $4 million and
SecureAlert's assets including TrackerPAL products. This
note can be expanded up to $10 million under certain
terms and conditions. The letters of credit were
provided as collateral by four entities. The entities
received a total of 400,000 shares valued at $240,000 of
the Company's common stock and were reimbursed $40,000
in cash for expenses related to establishing the letters
of credit.
In addition the Company will pay 11% annual interest
rate, paid monthly, on the line of credit to the
entities that provided and arranged for the letters of
credit. As of September 30, 2006, the outstanding
balance of the line of credit was $3,897,111 due and
payable on June 30, 2007.
--------------------------------------------------------------------------------
F-23
|
RemoteMDx, Inc.
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
7. Related Party The Company has entered into certain transactions with
Transactions related parties. These transactions consist mainly of
financing transactions and consulting arrangements.
Related Party Advances Payable
As of September 30, 2006, the Company owed $44,549 to
ADP Management, an entity owned and controlled by two of
the Company's officers and directors, under a
line-of-credit agreement. Outstanding amounts on the
line of credit accrue at 5% and are due on July 31,
2007. During the year ended September 30, 2006, the line
of credit increased $662,007 due to a monthly management
fee owed to ADP Management, including salaries for Mr.
Derrick and Mr. Dalton and expenses incurred by ADP
Management that are reimbursable by the Company, The
Company made cash repayments during the year of
$635,073. The note is due and payable on July 31, 2007.
During the year ended September 30, 2005, ADP Management
assumed $563,500 of debt plus $77,554 of accrued
interest from various note holders for 1,043,519 shares
of common stock. All note holders released the Company
from these obligations.
Consulting Arrangements
In March 2000, the Company agreed to pay consulting fees
to ADP Management for assisting the Company to develop
its new business direction and business plan and to
provide introductions to strategic technical and
financial partners. Under the terms of this agreement,
ADP Management was paid a consulting fee of $20,000 per
month and the Company agreed to reimburse the expenses
incurred by ADP Management in the course of performing
services under the consulting arrangement. The ADP
Management agreement also requires ADP Management to pay
the salaries of David Derrick as Chief Executive Officer
and Chairman of the Board of Directors of the Company
and James Dalton as president and Vice-Chairman of the
Board of Directors of the Company. The Board of
Directors, which at the time did not include either of
these individuals, approved both of these arrangements.
In May 2005, the Board of Directors, which then included
David Derrick and James Dalton, approved to increase the
amount of compensation paid to ADP Management from
$20,000 to $40,000 per month effective October 1, 2004
with David Derrick and James Dalton abstaining.
--------------------------------------------------------------------------------
F-24
|
RemoteMDx, Inc.
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
7. Related Party License Agreement
Transactions During the year ended September 30, 2003, the Company
Continued entered into a License Agreement with Matsushita
Electric Works, Ltd., a Japanese corporation ("MEW").
Under the License Agreement, the Company granted MEW a
nontransferable, worldwide, exclusive license under
certain of the Company's patents to use, manufacture,
have manufactured, market, distribute and sell the
Company's one-button emergency wireless telephone
device, with and without global positioning satellite
technology. In connection with the new strategic
alliance created by the execution of the License
Agreement, MEW also made an equity investment in the
|
Company. MEW purchased 1,000,000 shares of Series B
Preferred Stock at a price of $3.00 per share. In
conjunction with the sale of the Series B Preferred
Stock, and as an indication of the parties' mutual
interest in a long-term relationship, the Company also
granted MEW a warrant to purchase 1,000,000 shares of
common stock at a price of $3.00 per share. During the
fiscal year ended September 30, 2006, these warrants
were cancelled. During the fiscal years ended September
30, 2006 and 2005, the Company made no payments to MEW
for GPS products and related services.
8. Notes Payable As of September 30, 2006, the Company had unsecured
notes of $169,676 payable to former SecureAlert
shareholders, with interest at 5%, payable in
installments of $80,000 per month until paid in full.
These notes are currently in default, although these
notes are subject to an offset provision which has never
been provided to the Company
The following schedule shows the principal payments due
under the Company's bank line of credit, related-party
line of credit and notes payable as of September 30,
2006:
Year Ending September 30 Amount
------------------------ ------------------
2007 $ 4,111,336
------------------
$ 4,111,336
==================
|
9. Convertible During the year ended September 30, 2004, the Company
Debentures sold $1,023,527 of Series B Convertible Debentures and
$247,058 of Series C Convertible Debentures in a private
placement. The Debentures were convertible automatically
into shares of the Company's common stock upon the
closing of a qualified equity or debt offering with
gross proceeds of at least $5,000,000. Under the terms,
F-25
RemoteMDx, Inc.
Notes to Consolidated Financial Statements
Continued
9. Convertible the conversion price was equal 80% of the fair value
Debentures prior to closing the offering. The Debentures bear
Continued interest at an annual rate of 10%, not including any
original issue discount, with interest during the first
six months of $47,954 added to the principal amount.
Thereafter, interest payments were made monthly in cash
or, at the sole option of the Company, in shares of
Common Stock at a price of $0.54 per share. The
Debentures mature and were payable two years from each
Closing, subject to the conversion as indicated above.
During the year ended September 30, 2006, $404,956 of
the convertible debentures plus accrued interest was
paid back in cash and $913,583 of the convertibility
debenture plus accrued interest converted into 2,030,184
shares of common stock.
10. Derivatives The Company does not hold or issue derivative
instruments for trading purposes. However, the Company
had convertible notes payable that contained embedded
derivatives that required separate valuation from the
convertible notes. The Company recognized these
derivatives as liabilities in its balance sheet and
measured them at their estimated fair value, and
recognized changes in their estimated fair value in
earnings (losses) in the period of change. The Company
estimated the fair value of these embedded derivatives
using the Black-Scholes model based on the historical
volatility of its common stock over the past three
years. The fair value of derivative instruments were
re-measured each quarter.
During the year ended September 30, 2006, the Company
issued convertible notes payable containing an embedded
|
derivative. The Company received $575,000 from these
convertible notes and issued 575,000 shares of common
stock valued at $655,443 for three years of prepaid
interest. During the year ended September 30, 2006, all
convertible notes payable with an embedded derivative
converted into 1,720,970 shares of common stock. For the
year ended September 30, 2006, the derivative valuation
gain was $629,308.
11. Preferred The Company is authorized to issue up to 20,000,000
Stock 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.
F-26
RemoteMDx, Inc.
Notes to Consolidated Financial Statements
Continued
11. Preferred Series A 10 % Convertible Non-Voting Preferred Stock
Stock The Company has designated 40,000 shares of preferred
Continued stock as Series A 10% Convertible Non-Voting Preferred
Stock ("Series A Preferred Stock"). As of September 30,
|
2006, there were 17,310 shares of Series A Preferred
Stock outstanding 11. Preferred Series A 10 %
Convertible Non-Voting Preferred Stock Stock The Company
has designated 40,000 shares of preferred stock as
Series A 10% Continued Convertible Non-Voting Preferred
Stock ("Series A Preferred Stock"). As of September 30,
2006, there were 17,310 shares of Series A Preferred
Stock outstanding.
Dividends
The holders of the Series A Preferred Stock, some of
which are entities controlled by officers and directors
of the Company, are entitled to dividends at the rate of
10 percent per year on the stated value of the Series A
Preferred Stock (or $200 per share), payable in cash,
additional shares of Series A Preferred Stock, or common
shares at the discretion of the Board of Directors.
Dividends are fully cumulative and accrue from the date
of original issuance to the holders of record as
recorded on the books of the Company at the record date
or date of declaration if no record date is set. During
the years ended September 30, 2006 and 2005, the Company
recorded $348,133 and $512,547 in dividends on Series A
Preferred Stock, respectively.
Convertibility
Series A Preferred Stock is convertible at 370 shares of
common stock for each share of Series A Preferred Stock.
During the year ended September 30, 2006, 10,843 shares
of Series A Preferred Stock were converted into
4,014,916 shares of common stock. During the year ended
September 30, 2005, 2,578 shares of Series A Preferred
Stock were converted into 953,895 shares of common
stock.
Voting Rights and Liquidation Preference
The holders of Series A Preferred Stock have no voting
rights and are entitled to a liquidation preference of
$2.00 per share plus unpaid dividends multiplied by 133
percent.
Optional Redemption
The Company may, at its option, redeem up to two-thirds
of the total number of shares of Series A Preferred
Stock at any time. As of September 30, 2006, the
redemption price was 133 percent of the conversion price
of Series A Preferred Stock; however, the Company may
designate a different and lower conversion price for all
shares of Series A Preferred Stock called for redemption
by the Company. Through September 30, 2006, the Company
has not exercised its option to redeem shares of Series
A Preferred Stock.
F-27
RemoteMDx, Inc.
Notes to Consolidated Financial Statements
Continued
11. Preferred Issuances of Series A Preferred Stock
Stock -------------------------------------
Continued During the year ended September 30, 2006, the Company
had recorded and issued 2,146 shares of Series A
Preferred Stock for payment of Series A accrued
dividends.
Series B Convertible Preferred Stock
On June 7, 2001, the holders of the Company's Series A
Preferred Stock approved the designation of 2,000,000
shares of a new series of preferred stock, the Series B
Convertible Preferred Stock ("Series B Preferred Stock")
previously approved by the Board of Directors.
Dividends
---------
The Company will not pay dividends on the Series B
Preferred Stock unless dividends are declared by the
Board of Directors, in which case the Series B Preferred
Stock would be paid dividends prior and in preference to
any declaration or payment of any dividends on the
common stock, and subject to the preferences of the
holders of the Series A Preferred Stock.
Convertibility
--------------
Each share of Series B Preferred Stock is convertible at
any time into shares of common stock at an initial rate
of $3.00 per share of common. Each share of Series B
Preferred Stock will automatically convert into shares
of common stock at the then effective conversion rate on
the closing of a firm commitment underwritten public
offering with an aggregate public offering price of not
less than $20,000,000. The Company has issued shares of
common stock or securities convertible into common stock
for consideration per share less than $3.00 per share.
The conversion rate will automatically be adjusted to a
price equal to the aggregate consideration received by
the Company for that issuance divided by the number of
shares of common stock issued.
Voting Rights and Liquidation Preference
----------------------------------------
Holders of shares of Series B Preferred Stock are
entitled to one vote per share of Series B Preferred
Stock on all matters upon which holders of the common
stock of the Company are entitled to vote. The holders
of Series B Preferred Stock are entitled to a
liquidation preference of $3.00 per share, plus all
accrued and unpaid dividends. For purposes of this
liquidation preference, the Series A Preferred Stock
ranks on a parity with the Series B Preferred Stock.
--------------------------------------------------------------------------------
F-28
|
RemoteMDx, Inc.
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
11. Preferred Optional Redemption
Stock -------------------
Continued The Company may redeem the Series B Preferred Stock at
its option at any time. The redemption price will be a
minimum of 110 percent of the conversion price at the
date of redemption.
|
Series C Convertible Preferred Stock
The Company has designated 7,357,144 shares preferred
stock as Series C Convertible Preferred Stock, $.0001
par value per share. During the year ended September 30,
2006, the Company received subscriptions for 5,357,143
shares of Series C Convertible Preferred Stock at $1.68
per share for proceeds of $9,000,000. The Company issued
5,357,143 shares of Series C Preferred Stock for
$7,439,558 in cash and $1,037,152 from conversion of
debt and accrued interest. The holders of shares of
Common underlying the Series C Convertible Preferred
Stock shall be entitled to registration rights. For the
year ended September 30, 2006, a beneficial conversion
feature of $2,464,936 was recorded as a distribution to
the Series C Preferred shareholders to reflect the
difference between the market value of the underlying
common stock and the conversion price. During the year
ended September 30, 2006, the Company issued 175,226
shares of Series C Preferred Stock for dividends. As of
September 30, 2006, the outstanding Series C Preferred
shares totaled 5,532,369.
Convertibility
One share of Series C Convertible Preferred Stock is
convertible into three shares of the Company's common
stock, subject to adjustments.
Dividends
The stock has an 8% dividend that may be paid in cash or
additional shares of Series C Convertible Preferred
Stock at the option of the Company. During the years
ended September 30, 2006 and 2005, the Company recorded
$294,379 and $0 in dividends on Series C Preferred
Stock, respectively.
F-29
RemoteMDx, Inc.
Notes to Consolidated Financial Statements
Continued
11. Preferred Voting Rights and Liquidation Preference
Stock ----------------------------------------
Continued Holders of shares of Series C Preferred Stock are
entitled to one vote per share of Series C Preferred
Stock on all matters upon which holders of the common
stock of the Company are entitled to vote. Generally the
holders of Series C Preferred Stock are entitled to a
liquidation preference of $1.68 per share, plus all
accrued and unpaid dividends. For purposes of this
liquidation preference, the Series C Preferred Stock
ranks on a parity with the Series B Preferred Stock.
Optional Redemption
-------------------
The Company may redeem the Series C Preferred Stock at
its option at any time. The redemption price payable by
the Company shall be equal to the greater of (a) $4.00
plus any and all accrued dividends or (b) 110% of the
current Conversion Price per share at the time of the
redemption, as adjusted for stock dividends, stock
splits, stock combinations, other dividends or
distributions, reclassifications, exchanges, or
substitutions plus any and all accrued dividends.
SecureAlert, Inc. (PAL Services) Series A Preferred
Shares
During the year ended September 30, 2005, and pursuant
to Board of Director approval, the Company amended the
articles of incorporation of its wholly-owned
subsidiary, SecureAlert, Inc. (PAL Services) to
establish 3,500,000 shares of preferred stock designated
as Series A Convertible Redeemable Non-Voting Preferred
Stock.
Dividends
The holders of shares of Series A Preferred Stock shall
be entitled to receive quarterly dividends out of any of
the SecureAlert's (PAL Services) assets legally
available therefore, prior and in preference to any
declaration or payment of any dividend on the common
stock of SecureAlert, (PAL Services) at the rate of
$1.50 per day times the number of the SecureAlert's (PAL
Services) parolee contracts calculated in days during
the quarter. For example, if there were an average of
10,000 parolee contracts outstanding during the quarter,
the total dividend would be $1,350,000 ($1.50 x 90 days
x 10,000 contracts) or $0.385 per share of Series A
Preferred Stock. In no case will a dividend be paid if
the gross revenue per contract per day to SecureAlert
(PAL Services) averages less than $4.50. Dividends will
be paid in cash to the holders of record of shares of
Series A Preferred Stock as they appear on the books and
records of SecureAlert (PAL Services) on such record
dates not less than ten (10) days nor more than sixty
(60) days preceding the payment dates thereof, as may be
fixed by the Board of Directors of the Company. During
the years ended September 30, 2006 and 2005, the Company
recorded $20,877 and $0 in dividends on SecureAlert
Series A Preferred Stock.
--------------------------------------------------------------------------------
F-30
|
RemoteMDx, Inc.
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
11. Preferred Convertibility
Stock --------------
Continued As a group, all Series A Preferred Stock may be
converted at the holder's option at any time into an
aggregate of 20% ownership of the common shares of the
SecureAlert, Inc. (PAL Services).
Issuances of SecureAlert Series A Preferred Stock
----------------------------------------------------
During the year ended September 30, 2006, the Company
sold 600,000 of these shares for consideration of
$600,000. As of September 30, 2006, the total
outstanding Series A Preferred shares were 3,590,000.
Because the preferred stock sold was Series A Preferred
Stock of the Company's subsidiary, SecureAlert, Inc.,
the consideration received from the sale has been
recorded similar to minority interest as a separate
component of the balance sheet outside of permanent
equity.
12. Common Authorized Shares
Stock The Company is authorized to issue up to 175,000,000
shares of common stock.
Common Stock Issuances
During the year ended September 30, 2006, the Company
issued 35,005,811 shares of common stock. 5,846,428
shares were issued for services in the amount of
$3,983,607, 4,014,916 shares were issued upon the
conversion of 10,843 shares of Series A Preferred Stock,
7,171,380 shares were issued upon the conversion of
1,315,825 shares of Series B Preferred Stock, 10,739,753
shares were issued for debt and accrued interest of
|
$7,893,782, 350,000 were issued from the exercise of
options and warrants, and the remaining 6,883,334 were
issued for cash.
During the year ended September 30, 2005, the Company
issued 13,733,804 shares of common stock. 5,148,641
shares were issued for services in the amount of
$2,822,911, 953,895 shares were issued upon the
conversion of 2,578 shares of Series A Preferred Stock,
F-31
RemoteMDx, Inc.
Notes to Consolidated Financial Statements
Continued
12. Common 2,592,595 shares were issued upon the conversion of
Stock 466,667 shares of Series B Preferred Stock, 3,995,154
Continued shares were issued for debt and accrued interest of
$2,626,522, and the remaining 1,043,519 were issued to
ADP for assuming $563,500 of debt and $77,554 of accrued
interest.
13. Options and Stock Incentive Plan
Warrants The Company has adopted the 1997 Volu-Sol, Inc. Stock
Incentive Plan (the "1997 Plan"). The 1997 Plan was
approved by action of Biomune, the original stockholder
of the Company, in August 1997. Under the 1997 Plan, the
Company may issue stock options, stock appreciation
rights, restricted stock awards, and other incentives to
employees, officers and directors of the Company and
award nonqualified stock options and other awards to
employees and certain non-employees who have important
relationships with the Company. A total of 5,000,000
shares were initially available for grant under the 1997
Plan. As of September 30, 2006, 1,465,000 shares have
been granted under the 1997 Plan of which 1,015,000 have
expired; thus, 450,000 shares remain outstanding.
On February 17, 2004 the Board of Directors approved the
2004 RemoteMDx, Inc. Stock incentive Plan ("2004 Plan").
The shareholders approved this plan on May 19, 2004.
Under the 2004 Plan, the Company may issue stock
options, stock appreciation rights, restricted stock
awards and other incentives to employees, officers and
directors. The 2004 Plan also provides for 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 the Company. A total of 6,000,000
shares are authorized for issuance pursuant to awards
granted under the 2004 Plan. During the fiscal years
2006 and 2005, 0 and 5,000,000 shares were granted under
this plan respectively.
During the year ended September 30, 2006, the
shareholders approved the 2006 Equity Incentive Award
Plan (the "2006 Plan"). The 2006 Plan replaced the 1997
Plan and the 2004 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
F-32
RemoteMDx, Inc.
Notes to Consolidated Financial Statements
Continued
13. Options and non-employees who have important relationships with the
Warrants Company. A total of 10,000,000 shares are authorized for
Continued issuance pursuant to awards granted under the 2006 Plan.
No grants have been made under this plan.
A summary of stock option and warrant activity,
including stock options and warrants granted inside and
outside the plans discussed above, for the years ended
September 30, 2006 and 2005 is as follows:
Number of Exercise
Options and Price Per
Warrants Share
-----------------------------------
Outstanding at September 30, 2004 7,822,043 $ .54 to 7.00
Granted 7,849,000 .54 to 3.00
Expired or cancelled (1,905,000) .54 to 7.00
Exercised - .54 to 1.00
-----------------------------------
Outstanding at September 30, 2005 13,766,043 .54 to 3.00
Granted 11,529,076 .56 to 1.41
Expired or cancelled (3,347,727) .70 to 3.00
Exercised (350,000) .54 to 0.75
-----------------------------------
Outstanding at September 30, 2006 21,597,392 $ .50 to 3.00
-----------------------------------
|
The Company has adopted the disclosure-only provisions
of Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation.
Accordingly, no compensation cost has been recognized in
the financial statements for employees, except when the
exercise price is below the market price of the stock on
the date of grant. The following table summarizes
information about stock options and warrants outstanding
at September 30, 2006:
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
--------------------------------------------------------------------------------
$ .50 - 1.00 20,589,159 3.94 $ .62 17,009,413 $ .62
3.00 1,008,233 1.04 2.76 1,008,233 2.76
--------------------------------------------------------------------------------
$ .50 - 3.00 21,597,392 3.12 $ 0.72 18,017,646 $ 3.12
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
F-33
|
RemoteMDx, Inc.
Notes to Consolidated Financial Statements
Continued
13. Options and As of September 30, 2006, 18,017,646 of the 21,597,392
Warrants outstanding options and warrants are vested.
Continued
During the year ended September 30, 2006, the Company
|
issued 11,529,076 common stock options as follows:
3,170,000 to employees, 600,000 to SecureAlert Series A
Preferred shareholders, 365,150 for debt, 5,413,926 to
consultants, 480,000 to the Board of Directors, and
1,500,000 to related parties (David Derrick and James
Dalton). The exercise prices range from $0.56 to $1.41
per share.
During the year ended September 30, 2005, the Company
issued 7,849,000 common stock options as follows:
1,450,000 to employees, 599,000 to consultants, 400,000
to the Board of Directors, 5,000,000 to related parties
(David Derrick and James Dalton), and 400,000 for debt.
The exercise prices range from $0.54 to $3.00 per share.
14. Income Taxes For the years ended September 30, 2006 and 2005, the
Company incurred net operating losses of approximately
$23,798,000 and $10,984,000 for income tax purposes. The
amount of 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
consolidated statements of operations.
At September 30, 2006, the Company has net operating
loss carryforwards available to offset future taxable
income of approximately $63,129,000 which will begin to
expire in 2018. The utilization of the net operating
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. Due to the frequency of equity transactions
within the Company, it is likely that the use of net
operating loss carry forwards will be limited. The
Company will perform an analysis to determine whether
any such limitations have occurred as the net operating
losses are utilized.
--------------------------------------------------------------------------------
F-34
|
RemoteMDx, Inc.
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
14. Income Taxes Deferred income taxes are determined based on the
Continued 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) are
comprised of the following at September 30, 2006:
2006
------------
Net operating loss carryforwards $23,547,000
Depreciation and reserves 7,000
Accruals and reserves 53,000
Valuation allowance (23,607,000)
------------
$ -
------------
|
Reconciliations between the benefit for income taxes at
the federal statutory income tax rate and the Company's
benefit for income taxes for the years ended September
30, 2006 and 2005 are as follows:
2006 2005
----------------------------------
Federal income tax benefit at
statutory rate $ 8,092,000 $ 3,740,000
State income tax benefit, net of
federal income tax effect 1,190,000 550,000
Loss on non-deductible expenses (118,000) 30,000
Change in valuation allowance (9,164,000) (4,320,000)
----------------------------------
Benefit for income taxes $ - $ -
----------------------------------
15. Commitment Legal Matters
and On September 20, 2006, former consultants brought an
Contingencies action in Utah state court against the Company. The suit
alleges that the Company wrongfully terminated the
plaintiffs, and includes causes of action for breach of
contract, breach of the implied covenant of good faith
and fair dealing, tortious interference with contract
and prospective economic relations, unjust enrichment,
and injunctive relief. The plaintiffs seek damages of
|
approximately $264 million over five years, plus the
value of converting 50% of $264 million into shares of
F-35
RemoteMDx, Inc.
Notes to Consolidated Financial Statements
Continued
15. Commitment our common stock at $0.60 per share, plus punitive
and damages of approximately $1 billion. The plaintiffs'
Contingencies motion for temporary restraining order was denied by the
Continued Court in its entirety on September 28, 2006. The
litigation is at an early stage and discovery has not
yet commenced. Management has determined that the
probability of a material loss is remote and management
intends to defend themselves vigorously against this
action.
On February 1, 2006, the Company filed a Complaint
against defendants Jaxara Group, LLC, Daniel Boice and
Alexander Petty (collectively, "Jaxara") in the United
States District Court for the District of Utah. The
action arises out contracts between SecureAlert and
Jaxara for certain software programming work to be
performed by Jaxara. Jaxara thereafter on or about April
10, 2006 answered the Complaint and filed counterclaims
against the Company. The litigation is at an early stage
of discovery. Management has determined that probability
of a material loss from the counterclaim is remote. The
Company intends to vigorously prosecute its claims
against Jaxara and to defend itself against Jaxara's
counterclaims.
On May 23, 2006, plaintiffs Strategic Growth
International, Inc., Richard E. Cooper and Stanley S.
Altschuler (collectively, the "SGI Defendants") filed a
Complaint against defendant the Company in the United
States District Court Southern District of New York. The
action arises out of a contract between the SGI
Defendants and the Company for certain financial
relations services to be performed by SGI. the Company
thereafter on September 29, 2006 answered the Complaint
and filed counterclaims against SGI. The litigation is
at an early stage of discovery. Management has
determined that probability of a material loss from the
counterclaim is remote. The Company intends to
vigorously defend itself against the SGI Defendants'
claim and to prosecute its counterclaims against the SGI
Defendants.
In a demand letter from counsel to Joseph Markham, Mr.
Markham contends that he entered into an agreement with
the Company to provide investor relation services in
exchange for $20,000 and 100,000 shares of the Company's
common stock. Mr. Markham further contends that he has
fully performed under the purported agreement and is
owed the above amounts. The Company denies that any such
--------------------------------------------------------------------------------
F-36
|
RemoteMDx, Inc.
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
15. Commitment agreement exists, written or otherwise. To date, the
and Company is unaware of any lawsuit having been filed
Contingencies regarding this claim. If such a lawsuit is filed, the
Continued Company intends to defend itself vigorously against such
action. Management has determined that probability of a
loss is remote.
Lease Obligations
In March 2005, the Company entered into an agreement to
lease a facility under a noncancellable operating lease
that expires in November 2008. Future minimum rental
payments under the non-cancelable operating lease as of
September 30, 2006 are approximately as follows:
Year Ending September 30: Amount
------------------------- ---------------
2007 $ 206,572
2008 212,126
2009 36,049
---------------
$ 454,747
===============
|
Rent expense related to this non-cancelable operating
lease was approximately $122,000 and $45,000 for the
years ended September 30, 2006 and 2005, respectively.
In addition, the Company's wholly-owned subsidiary,
Volu-Sol Reagents Corporation, leases a facility under a
non-cancelable operating lease that expires in November
2010. Future minimum rental payments under the
non-cancelable operating lease as of September 30, 2006
are approximately as follows:
Year Ending September 30: Amount
------------------------- --------------
2007 $ 69,906
2008 71,720
2009 73,584
2010 75,496
2011 12,636
--------------
$ 303,342
==============
|
Rent expense related to this non-cancelable operating
lease was approximately $69,000 and $68,000 for the
years ended September 30, 2006 and 2005 respectively.
F-37
RemoteMDx, Inc.
Notes to Consolidated Financial Statements
Continued
15. Commitment Indemnification Agreements
and In November 2001, the Company's Board of Directors
Contingencies agreed that the Company would indemnify officers and
Continued 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 percent per year or the interest rate
of any funds borrowed by the individual to satisfy their
liability.
Cellular Access Agreement
During the year ended September 30, 2004, the Company
cancelled its agreement with the prior cellular
organization and entered into an agreement with a new
cellular company. During the year ended September 30,
2006, the Company has entered into several agreements
with other cellular organizations to provide cellular
services. The cost to the Company during years ended
September 30, 2006 and 2005 was approximately $290,000
and $103,900 respectively.
16. Segment The Company is organized into two business segments
Information based primarily on the nature of the Company's products.
The Company's Reagents segment is engaged in the
business of manufacturing and marketing medical
diagnostic stains, solutions and related equipment to
hospitals and medical testing labs. The Company's
SecureAlert segment is engaged in the business of
developing, distributing and marketing mobile emergency
and personal security systems to distributors and
consumers, and tracking devices for monitoring offenders
in the criminal justice system. Other (unallocated) loss
consists of research and development, selling, general
and administrative expenses related to the Company's
corporate activities, including remote health monitoring
and market and business development activities.
The accounting policies of the business segments are the
same as those described in the summary of significant
accounting policies (see Note 2).
--------------------------------------------------------------------------------
F-38
|
RemoteMDx, Inc.
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
16. Segment The following table reflects certain financial
Information information relating to each reportable segment for each
Continued of the years ended September
2006 2005
--------------------------------
Net sales:
SecureAlert $ 391,600 $ 289,236
Reagents 678,541 572,632
--------------------------------
$ 1,070,141 $ 861,868
--------------------------------
Operating income (loss):
SecureAlert $ (6,061,427) $ (3,631,458)
Reagents (68,201) 36,455
Other (unallocated) (11,853,538) (5,363,894)
--------------------------------
$ (17,983,166) $ (8,958,897)
--------------------------------
Depreciation and amortization:
SecureAlert $ 218,701 $ 21,144
Reagents 2,542 1,397
Other (unallocated) 10,739 14,091
--------------------------------
$ 231,982 $ 36,632
--------------------------------
Capital expenditures:
SecureAlert $ 1,073,217 $ 310,770
Reagents 20,473 960
Other (unallocated) - -
--------------------------------
$ 1,093,690 $ 311,730
--------------------------------
Interest income:
SecureAlert $ 3,272 $ -
Reagents - -
Other (unallocated) 26,779 1,720
--------------------------------
$ 30,051 $ 1,720
--------------------------------
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F-39
|
Notes to Consolidated Financial Statements
Continued
16. Segment
Information
Continued 2006 2005
--------------------------------
Interest expense:
SecureAlert $ 271,696 $ 13,540
Reagents 3 -
Other (unallocated) 6,269,378 1,435,196
--------------------------------
$ 6,541,077 $ 1,448,736
--------------------------------
Identifiable assets:
SecureAlert $ 6,106,836
Reagents 216,818
Other (unallocated) 5,868,412
---------------
$ 12,192,066
---------------
17. Subsequent Subsequent to September 30, 2006, the Company has
Events entered into several agreements:
a) On November 9, 2006, the Company closed a private
placement of shares of its common stock. The
Company sold 3,000,000 shares of its common stock
at a purchase price of $2.00 per share, for
aggregate proceeds to the Company of $6,000,000.
The Company also issued warrants to purchase up
to an additional 7,000,000 shares of the
Company's common stock at $2.00 per share.
b) The Company issued 2,242,511 shares of common
stock upon the conversion of 5,949 shares of
Series A Preferred Stock and 2,000 share of
Series B Preferred Stock.
c) The Company issued 265,000 shares of common stock
for penalties associated with the late filing of
the registration statement.
--------------------------------------------------------------------------------
F-40
|
Table of Contents
Summary about RemoteMDx Inc.
and this offering 5
Risk factors 13
Use of proceeds 22
Determination of offering price 22
Description of business 22 RemoteMDx, Inc.
Management's discussion and analysis
or plan of operation 33 28,527,363
Forward-looking statements 40 SHARES
Series C Convertible Preferred Stock 41
Selling Shareholders 41 COMMON STOCK
Plan of distribution 48
Regulation M 50 ____________________
Legal Proceedings 50
Directors, executive officers, promoters PROSPECTUS
and control persons 52
Commission's position on indemnification ___________________
for Securities Act liabilities 54
Security ownership of certain beneficial January __, 2007
owners and management 55
Description of common stock 57
Certain relationships and related
Transactions 61
Market for common equity and related
stockholder matters 62
Executive compensation 67
Changes in and disagreements with
accountants on accounting and
financial disclosure 71
Index to financial statements 71
Experts 71
Legal matters 71
____________________
|
Dealer Prospectus Delivery Obligation. Until
[a date which is 90 days from the effective
date of this prospectus], all dealers that
effect transactions in these securities,
whether or not participating in this
offering, may be required to deliver a
prospectus. This is in addition to the
dealers' obligation to deliver a prospectus
when acting as underwriters and with respect
to their unsold allotments or subscriptions.
II-1
PART II. Information Not Required in the Prospectus
Item 24. Indemnification of Directors and Officers
Our Bylaws provide, among other things, that our officers or directors are not
personally liable to us or to our stockholders for damages for breach of
fiduciary duty as an officer or director, except for damages for breach of such
duty resulting from (a) acts or omissions which involve intentional misconduct,
fraud, or a knowing violation of law, or (b) the unlawful payment of dividends.
Our Bylaws also authorize us to indemnify our officers and directors under
certain circumstances. We anticipate we will enter into indemnification
agreements with each of our executive officers and directors pursuant to which
we will agree to indemnify each such person for all expenses and liabilities
incurred by such person in connection with any civil or criminal action brought
against such person by reason of their being an officer or director of
RemoteMDx. In order to be entitled to such indemnification, such person must
have acted in good faith and in a manner reasonably believed to be in or not
opposed to our best interests and, with respect to criminal actions, such person
must have had no reasonable cause to believe that his conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to our directors, officers or controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
Item 25. Other Expenses of Issuance And Distribution
We will pay all expenses in connection with the registration and sale of the
common stock by the selling shareholders. The estimated expenses of issuance and
distribution are set forth below.
Registration Fees $ 5,793.00
Transfer Agent Fees 1,000.00
Costs of Printing and Engraving 5,000.00
Legal Fees 30,000.00
Accounting Fees 30,000.00
----------------
Total Estimated Costs of Offering $ 71,793.00
|
Item 26. Recent Sales of Unregistered Securities
Recent Sales of Unregistered Securities
The following information summarizes certain information for all securities we
have |
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