SB-2 1 remotemdxsb2.htm REMOTEMDX, INC. FORM SB-2 remotemdxsb2.htm



U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 


FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933


 
REMOTEMDX, INC.
(Name of small business issuer in its charter)
 

 
Utah
3600
87-0543981
(State of incorporation)
(Primary Standard Industrial Classification Code Number)
(I.R.S. Employer Identification No.)

150 WEST CIVIC CENTER DRIVE, SUITE 400
SANDY, UTAH 84070
(801) 451-6141
(Address and telephone number of registrant's principal executive offices
and principal place of business)
 

 
DAVID DERRICK
150 WEST CIVIC CENTER DRIVE, SUITE 400
SANDY, UTAH 84070
(801) 451-6141
(Name, Address and telephone number of agent for service)
 

 
With copies to
WAYNE D. SWAN
C. PARKINSON LLOYD
DURHAM JONES & PINEGAR, P.C.
111 EAST BROADWAY, SUITE 900
SALT LAKE CITY, UTAH 84111
(801) 415-3000


APPROXIMATE DATE PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.

 



 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ]


CALCULATION OF REGISTRATION FEE

Title of Class of Securities to be Registered
 
 
Amount to be
Registered (1)
 
Proposed Maximum Aggregate Price Per Share
 
Proposed Maximum Aggregate Offering Price
 
 
Amount of Registration Fee
Common Stock, $0.0001 par value per share
 
3,750,000 (2)
 
$1.60 (3)
 
6,000,000 (3)
 
$ 184 (3)
Common Stock, $0.0001 par value per share
 
7,087,500 (4)
 
$1.60 (3)
 
11,340,000 (3)
 
$ 349 (3)
Common Stock, $0.0001 par value per share
 
12,110,714 (5)
 
$1.60 (3)
 
19,377,142 (3)
 
$596 (3)
TOTAL
 
             22,948,214
     
36,717,142 (3)
 
$ 1,129 (3)
 

(1)
All shares offered for resale by the Selling Shareholders.

(2)
Consisting of 3,000,000 shares of common stock issued in connection with a private placement by RemoteMDx, Inc. and 750,000 additional shares issued as a late filing penalty, to one selling shareholder.

(3)
The fee was estimated pursuant to Rule 457(c) under the Act on the basis of the average of the bid and asked prices of the common stock of RemoteMDx, Inc. as reported on the OTC Bulletin Board on July 24, 2007.

(4)
Consisting of 7,000,000 shares underlying warrants issued in connection with a private placement by RemoteMDx, Inc., and 87,500 options issued to an employee.

(5)
Consisting of shares of common stock held by twelve selling shareholders.



THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.


2


REMOTEMDX, INC.
a Utah corporation

22,948,214 Shares of Common Stock
$0.0001 par value per share

This prospectus relates to the resale of up to 22,948,214 shares (the "Shares") of common stock of RemoteMDx, Inc., a Utah corporation.  Ten of our shareholders (the “Selling Shareholders”) are offering all of the Shares covered by this prospectus.  The Selling Shareholders have received certain of the Shares from us, and may receive additional Shares in connection with exercises of warrants issued sold to the Selling Shareholders, as discussed in more detail herein.  The Selling Shareholders may elect to exercise the warrants at their option, into shares of our common stock at an exercise price discussed in more detail herein.  The Selling Shareholders will receive all of the proceeds from the sale of the Shares and we will receive none of those proceeds.  The Selling Shareholders may be deemed to be underwriters of the Shares.


 
Investment in the Shares involves a high degree of risk.  You should consider carefully the risk factors beginning on page 8 of this prospectus before purchasing any of the Shares offered by this prospectus.


 
Our common stock is quoted on the OTC Bulletin Board and trades under the symbol "RMDX".   The last reported sale price of our common stock on the OTC Bulletin Board on August 3, 2007, was approximately $1.70 per share.  Nevertheless, the Selling Shareholder does not have to sell the Shares in transactions reported on the OTC Bulletin Board, and may offer its Shares through any type of public or private transactions.

We currently have a concurrent offering of our shares that will have a dilutive effect on any purchaser of shares under this prospectus and the registration statement of which it is a part.  A registration statement on Form SB-2 (SEC File Number 333-137814) covers sales by other selling shareholders of up to 28,527,363 shares of our common stock issued in connection with several transactions described in that registration statement.  As such, there are a total of 51,475,577 shares registered for resale under this and the other registration statement referred to above, although there is no guarantee that all of the shares will be sold.


 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities, or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.




August 7, 2007



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REMOTEMDX HAS NOT REGISTERED THE SHARES FOR SALE BY THE SELLING SHAREHOLDER UNDER THE SECURITIES LAWS OF ANY STATE.  BROKERS OR DEALERS EFFECTING TRANSACTIONS IN THE SHARES SHOULD CONFIRM THAT THE SHARES HAVE BEEN REGISTERED UNDER THE SECURITIES LAWS OF THE STATE OR STATES IN WHICH SALES OF THE SHARES OCCUR AS OF THE TIME OF SUCH SALES, OR THAT THERE IS AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES LAWS OF SUCH STATES.

THIS PROSPECTUS IS NOT AN OFFER TO SELL ANY SECURITIES OTHER THAN THE SHARES.  THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH AN OFFER IS UNLAWFUL.

REMOTEMDX HAS NOT AUTHORIZED ANYONE, INCLUDING ANY SALESPERSON OR BROKER, TO GIVE ORAL OR WRITTEN INFORMATION ABOUT THIS OFFERING, REMOTEMDX, OR THE SHARES THAT IS DIFFERENT FROM THE INFORMATION INCLUDED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS.  YOU SHOULD NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS, OR ANY SUPPLEMENT TO THIS PROSPECTUS, IS ACCURATE AT ANY DATE OTHER THAN THE DATE INDICATED ON THE COVER PAGE OF THIS PROSPECTUS OR ANY SUPPLEMENT TO IT.  IN THIS PROSPECTUS, REFERENCES TO "REMOTEMDX," "THE COMPANY," "WE," "US," AND "OUR," REFER TO REMOTEMDX, INC. AND ITS SUBSIDIARIES.

TABLE OF CONTENTS

Summary information about RemoteMDx, Inc., and this offering
5
Risk factors
8
Use of proceeds
17
Determination of offering price
18
Description of business
18
Management's discussion and analysis or plan of operation
30
Forward-looking statements
41
Selling shareholders
41
Plan of distribution
46
Regulation M
47
Legal proceedings
48
Directors, executive officers, promoters and control persons
48
Commission’s position on indemnification for Securities Act liabilities
51
Security ownership of certain beneficial owners and management
52
Description of Securities
55
Certain relationships and related transactions
58
Market for common equity and related stockholder matters
59
Executive compensation
62
Index to financial statements
70
Experts
70
Legal matters
70









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Summary information about RemoteMDx, Inc., and this offering

RemoteMDx, Inc.

RemoteMDx, Inc. (“RemoteMDx” 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. The RemoteMDx 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™, which can locate persons in distress, no matter where they may be, and dispatch the closest emergency service to their location.  The Company has developed a tracking device, TrackerPAL, which is being used to monitor convicted offenders in the criminal justice system.  The Company believes that its 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.

TrackerPAL– The TrackerPAL™ 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:

 
·
Active tracking,
 
·
24/7 monitoring,
 
·
Exclusion/inclusion zones and proximity alerts,
 
·
Two-way voice communication,
 
·
Remote access by supervising officer,
 
·
Rechargeable/replaceable batteries, and
 
·
Durable and waterproof design.



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.


5


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

The Selling Shareholders under this prospectus and the registration statement of which it is a part received or will receive their shares in the following transactions:

November Private Offering

On November 9, 2006, we closed a private placement (the “Offering”) of 3,000,000 shares of our Common Stock (the “Common Stock”) to VATAS Holding GmbH (“VATAS”) at a purchase price of $2.00 per share.  Additionally, we issued warrants (the “Warrants”) to VATAS to purchase up to an additional 7,000,000 shares of our Common Stock at a purchase price of $2.00 per share.  This prospectus, and the registration statement of which it is a part, registers the resale of the shares underlying and issuable upon VATAS’s exercises of the Warrants.

In connection with the Offering, we granted registration rights to VATAS, pursuant to which we agreed to file a registration statement (the “Registration Statement”) to register the resale of the Common Stock, as well as the shares of Common Stock underlying the Warrants not later than 10 days after we filed (the “Filing Deadline”) our annual report for the year ended September 30, 2006 (the “Filing”).  We also agreed to use our 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 we do 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, we were required to pay a 5% penalty to VATAS.

We did not file the registration statement filed by the Filing Deadline nor effective within 100 days of the Filing, and as such, we were required to pay a penalty.  We agreed with VATAS to pay the penalty in the form of additional shares of our Common Stock.  We entered into an agreement with VATAS whereby we issued 750,000 shares of our Common Stock as payment of the penalty for not having the registration statement filed by the Filing Deadline.  The resale of those shares is covered by this prospectus.

6


Private Purchases from Officers

Additionally, VATAS entered into a private sale agreement with David Derrick and James Dalton, two officers of the Company, and ADP Management, Inc. (“ADP”), an entity owned and controlled by Messrs. Derrick and Dalton, pursuant to which Messrs. Derrick and Dalton and ADP sold 2,100,000 restricted shares of our common stock to Lintel, Inc. at $0.95 on April 5, 2007, and 1,000,000 shares of our common stock to Hector Gonzalez at $1.05 on July 1, 2007, and 6,000,000 restricted shares of our common stock to VATAS at $1.30 per share on July 25, 2007.
Settlement of Litigation

We issued shares to HGR Enterprises, LLC (“HGR”), in connection with the settlement of a lawsuit between HGR and Michael Sibbett on the one hand, and the Company and SecureAlert, Inc. on the other hand, and agreed to register the resale of those shares by HGR.  We also issued shares to Liberty Capital, LLC (“Liberty”) for services in connection with settling the lawsuit.

Warrant Exercises

Seven selling shareholders, Chad Olsen, Futuristic Medical Devices LLC, Advance Technology Investors LLC, Technology Financing LLC, Wilford Kirton, David Metzger, and Judd Odzer, received shares upon exercise of warrants issued to them.

Options issued for Services

We issued options to one of the Selling Shareholders who is an employee of the Company.  The resale of those shares is covered by this prospectus.
























7


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:

 
·
Develop and introduce functional and attractive products and services;
 
·
Increase awareness of our brand and develop consumer loyalty;
 
·
Respond to competitive and technological developments;
 
·
Build an operational structure to support our business; and
 
·
Attract, retain and motivate qualified personnel.


8


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 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.

As of July 5, 2007, certain of our directors, executives and principal shareholders or persons associated with them beneficially own approximately 10.03% 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 been dependent upon certain major customers, the loss of which would adversely affect our results of operations and business condition.  Certain of these customers now purchase product from distributors owned and controlled by our former executives and consultants, which will reduce our revenues from consumer electronics in future operating periods.

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 it 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 in the past, which would reduce our revenues and could adversely affect our results of operations or financial condition.

9

 
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 various agreements with several other national cellular access companies for these services.  These agreements expire between June 2008 and July 2009.  If any of these significant suppliers were to cease providing product or services to us, we would be required to seek alternative sources. There is no assurance that alternate sources could be located or that the delay or additional expense associated with locating alternative sources for these products or services would not materially and adversely affect our business and financial condition.
 
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.


10


Our current and expected markets are rapidly changing.  Existing products and services and emerging products and services will compete directly with the products we are seeking to develop and market.  Our technology will compete directly with other technology, and, although we believe our technology has or will have advantages over these competing systems, there can be no assurance that our technology will have advantages that are significant enough to cause users to adopt its use.  Competition is expected to increase.

Many of 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.

11


We have a history of losses and anticipate significant future losses, and we may be unable to project our revenues and expenses accurately.

We will incur significant expenses associated with the development and deployment of our new products and promoting our brand.  We intend to enter into additional arrangements through current and future strategic alliances that may require us to pay consideration in various forms and in amounts that may significantly exceed current estimates and expectations.  We may also be required to offer promotional packages of hardware and software to end-users at subsidized prices in order to promote our brand, products and services. These guaranteed payments, promotions and other arrangements 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.


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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 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.


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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. 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.

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 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.


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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:

 
·
Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
 
·
Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
 
·
“Boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;
 
·
Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and

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·
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 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.

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 the issuances of common stock in connection with exercises of the Warrants.

As of the date of this prospectus, two of the Selling Shareholders had warrants to purchase up to 7,087,500 shares of our common stock.  There can be no guaranty of exercise by these Selling Shareholders of the Warrants.  Nevertheless, holders of our common stock may experience substantial dilution of their interests to the extent that the Selling Shareholders exercise the Warrants into shares of our common stock and sell the shares pursuant to this prospectus.

The trading market for our common stock is limited, and investors who purchase shares from the Selling Shareholder 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 (“OTCBB”).  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 Shareholder 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.


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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 various private transactions and in connection with exercises of the Warrants, 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.






































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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. (“RemoteMDx” 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. The RemoteMDx 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™, which can locate persons in distress, no matter where they may be, and dispatch the closest emergency service to their location.  The Company has developed a tracking device, TrackerPAL, which is being used to monitor convicted offenders in the criminal justice system.  The Company believes that its 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:
 
 
 
·
Monitoring Activation – We sell our MobilePAL™ and anticipate leasing our TrackerPAL devices as part of a monitoring contract, with prepaid activation charges.
 
 
 
·
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.
 
 
 
·
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.
 
 
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.
 

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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.

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™”) 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.


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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 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:


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·
24/7 nationwide two-way voice communication;
 
·
Automated reporting of location and alarms (breadcrumbs);
 
·
Inclusion and exclusion alarms;
 
·
Proximity alarm;
 
·
Automated alert notification;
 
·
Tamper resistant band and alarm;
 
·
Battery status alerts (rechargeable/replaceable);
 
·
Web-based real-time tracking;
 
·
Active monitoring; and
 
·
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 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.

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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 who is an electronics manufacturing company which delivers a full range of services to its clients.  From quick turn prototyping to high volume turnkey manufacturing, DSM has the resources available to manufacture all types of printed circuit boards.  DSM manufactures of the Company’s TrackerPAL product.
 
The Parolee Tracking Device (“PTD”) System requires the design and development of four devices:

 
·
Ankle electronics, a wireless body worn tracking device;
 
·
PTD-Cuff, a single use band used to fasten the ankle electronics to the offender;
 
·
Fixture for charging up to 2 batteries at once; and
 
·
Rechargeable battery pack, a custom tooled battery used to power the ankle device.

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.
 

22

 
With the MobilePAL products developed and the PAL Services Center in place, we have the ability to offer the following services:
 
 
·
24/7 nationwide one-button access to a live Personal Assistant;
 
 
·
Mobile access to immediate dispatch of police, fire or ambulance services;
 
 
·
Access and dispatch of roadside assistance such as tow trucks, etc.;
 
 
·
Location of nearest hospital and veterinary services;
 
 
·
Auto-accident assistance including direct connection to the client’s insurance company;
 
 
·
Nurse triage service in case of medical questions or concerns;
 
 
·
Personal calling to any phone number of customer’s choosing including family, friends, caregivers, etc.;
 
 
·
Mobile directory assistance to any U.S. phone number;
 
 
·
Step-by-step driving instructions to virtually anywhere in the United States;
 
 
·
Location services;
 
 
·
Medical Data Link to store customer’s critical personal medical information and communicate the customer’s needs to emergency personnel;
 
 
·
Daily monitoring of chronically ill customers with data and compliance information forwarded to care providers and loved ones;
 
 
·
Location of lost or injured loved ones;
 
 
·
Ability to immediately notify insurers and care providers during a medical emergency;
 
 
·
Ability of monitoring center to initiate a call to the subscriber to check the subscriber’s condition;
 
 
·
Update immediate caregiver weekly on status of subscriber and any calls the operators may have received that week;
 
 
·
Ability to track device online;
 
 
·
Waterproof;
 
 
·
Active Monitoring;
 
 
·
Enhanced GPS/GSM location;
 
 
·
Web based real-time tracking;
 
 
·
Inclusion and exclusion alarms; and
 
 
·
Proximity alarms.
 

23

 
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:

 
 
·
Wearable watch or pendant with an emergency button for contacting the PAL Services Operator regardless of the location of the wearer.
 
 
 
·
GPS engine for locating the subscriber.
 
 
 
·
Fall detection that will alert the service in the event of a fall.
 
 
 
·
Communication with small pager size device that talks to the customer and the PAL Services Center.
 
 
 
·
Dual band cellular technology utilizing GSM and AMPS.
 
 
 
·
Rechargeable units.
 
 
 
·
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.
 
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.

24




Patent Title
Application /Patent
Number
Filing / Issue
Dates
Status
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 Response Services
6,226,510
5/1/01
Issued
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 Voice Communication Between Device and a Monitoring Center
11/486,989
7/14/06
Pending
A Remote Tracking System with a Dedicated Monitoring Center
11/486,976
7/14/06
Pending
Remote Tracking System and Device with Variable Sampling
11/486,991
7/14/06
Pending

We also own the following trademarks:

Mark
Application Number
Registration Number
Status/Next Action
MOBILE911
75/615,118
2,437,673
Registered
MOBILE911
SIREN WITH 2-WAY VOICE COMMUNICATION & Design
76/013,886
2,595,328
Registered
 
WHEN EVERY SECOND MATTERS
76/319,759
2,582,183
Registered
MOBILEPAL
78/514,031
3,035,577
Registered
HOMEPAL
78/514,093
3,041,055
Registered
PAL SERVICES
78/514,514
 
Pending
REMOTEMDX
78/561,796
 
Allowed-Awaiting Statement of Use
TRACKERPAL
78/843,035
 
Pending
MOBILE911
78/851,384
 
Pending


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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® 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.
 
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 quick turn 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:
 
 
·
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.
 
 
·
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.
 


26


Competition in Parolee/Probation Market

 
·
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.

 
·
ISecuretrac Inc., Omaha, NE – This company supplies electronic monitoring equipment for tracking and monitoring persons on pretrial release, probation, parole, or work release.

 
·
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.
 
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, Fisher Scientific, accounted for more than 10% of sales.  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 the fiscal years ended September 30, 2006 and 2005 were approximately $290,000 and $103,900, respectively.
 

27

 
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 could limit the ability to lease additional monitoring equipment.
 
Employees
 
As of July 5, 2007, we had 112 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.
 




































28


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.

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.























29


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.


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 )

 
Three months ended March 31, 2007, compared to three months ended March 31, 2006
 
Net Sales
 
For the three months ended March 31, 2007, the Company had net sales of $1,649,931 compared to $252,415 for the three months ended March 31, 2006, an increase of $1,397,516. The increase in net sales resulted primarily from the sale and monitoring of offender tracking devices.
 

30

 
SecureAlert (PAL Services) had net sales of $1,475,829 during the three months ended March 31, 2007, compared to net sales of $75,872 for the three months ended March 31, 2006. These sales consisted of $1,462,522 from the sale and monitoring of offender tracking devices and $13,307 from mobile emergency and personal security systems.  Seguridad Satelital Vehicular accounted for 63% of purchases from SecureAlert sales during the period.
 
Reagents had revenues for the three months ended March 31, 2007, of $174,102, compared to $176,543 during the quarter ended March 31, 2006. The Company anticipates that Reagents' sales will decrease in the future as a percentage of total sales.  Fisher Scientific and Thermo Shandon were significant customers of Reagents, accounting for 34% and 10% of Reagents' sales during the period, respectively.
 
Cost of Goods Sold
 
For the three months ended March 31, 2007, cost of goods sold was $2,145,872 compared to $119,318 during the three months ended March 31, 2006, an increase of $2,026,554.  SecureAlert's cost of goods sold totaled $2,033,654 or 138% of SecureAlert's net sales during the three months ended March 31, 2007. The largest portion of the cost of goods sold for the three months ended March 31, 2007, is related to $798,773 in device costs for offender tracking devices sold to Seguridad Satelital Vehicular.  In addition, the Company recorded $221,979 in communication costs, $418,118 for payroll to increase the monitoring center staff and $469,293 for the amortization of the TrackerPAL device.  Reagents' cost of goods sold was $112,218 or 64% of Reagent's net sales during the three months ended March 31, 2007, compared to $85,714 or 49% of Reagent's net sales for the same period during the prior fiscal year. The increase as a percentage of net sales was primarily due to an increase in material and labor costs.
 
Research and Development Expenses
 
Research and development expenses were $1,934,392 for the three months ended March 31, 2007.  Of these costs, approximately $520,148 was incurred for software and firmware enhancements of SecureAlert’s TrackerPAL device.  The balance of these expenses ($1,414,244) consisted of TrackerPAL units disposed of during the quarter that were initially test units that had served their useful life.
 
Selling, General and Administrative Expenses
 
During the three months ended March 31, 2007, selling, general and administrative expenses were $3,782,843 compared to $4,297,817 during the three months ended March 31, 2006. The decrease of $514,974 relates primarily to a decrease of $1,275,200 in consulting services and an increase of depreciation ($102,633), insurance ($72,577), payroll and contract labor ($274,540), and travel expenses ($97,584).  The Company incurs significant travel expenses in the development and marketing of its products as well as its continued efforts to raise additional capital through the issuance of debt or equity instruments.  Consulting expense decreased from $2,813,843 in the three months ended March 31, 2006, to $1,538,643 in the comparable period in 2007.  The majority of the consulting expense for the 2007 period is related to stock and stock options issued to employees and consultants for the development of the wireless technology in the Company’s products and marketing services.
 
Interest Income and Expense
 
During the three months ended March 31, 2007, interest expense totaled $272,965 compared to $5,058,988 paid in the three months ended March 31, 2006. This amount consisted primarily of non-cash interest expense of $82,406 related to unamortized financing costs associated with shares of common stock issued for prepaid interest.  The decrease of $4,786,023 is due primarily from the issuance of common stock in settlement of various note obligations and $321,429 to record a beneficial conversion feature.
 
Six months ended March 31, 2007, compared to six months ended March 31, 2006
 
Net Sales
 
Net sales during the six months ended March 31, 2007 were $2,638,168 compared to $471,908 in net sales during the six months ended March 31, 2006, an increase of $2,166,260.  The increase in net sales resulted primarily from the sale and monitoring of offender tracking devices.
 

31

 
SecureAlert (PAL Services) had net sales of $2,311,212 during the six months ended March 31, 2007, compared to $152,932 during the six months ended March 31, 2006.  Reagents had sales for the six months ended March 31, 2007, of $326,956, compared to $318,976 during the same period in the prior fiscal year, an increase of $7,980.  This increase is due to increasing Reagents’ customer base.
 
Cost of Goods Sold
 
For the six months ended March 31, 2007, cost of goods sold was $4,351,265 compared to $226,461 during the six months ended March 31, 2006, an increase of $4,124,804.  SecureAlert's cost of goods sold totaled $4,145,563 or 179% of SecureAlert's net sales during the six months ended March 31, 2007. The largest portion of the cost of goods sold for the six months ended March 31, 2007, is related to $1,116,826 in communication costs associated with the launch of the parolee product.  The Company paid cellular costs on all SIMS embedded in the TrackerPAL units that were deployed. During the six months ended March 31, 2007, the Company negotiated with the cellular companies to be charged for SIMS in devices that are monitored.  In addition, $830,472 was included in SecureAlert’s cost of good sold for payroll to increase the monitoring center staff, $841,782 for the amortization of the TrackerPAL device and $1,143,799 of device costs for offender monitoring equipment sold to customers.  Reagents' cost of goods sold was $205,702 or 63% of Reagent's net sales during the six months ended March 31, 2007, compared to $158,359 or 50% of Reagent's net sales for the same period during the prior fiscal year. The increase as a percentage of net sales was primarily due to an increase in material and labor costs.
 
Research and Development Expenses
 
During the six months ended March 31, 2007 and 2006, research and development expense was $3,154,051 and $1,154,172, respectively.  Of these costs, approximately $1,739,807 consisted of expenses associated with software and firmware enhancements of SecureAlert’s TrackerPAL device.  The balance of these expenses ($1,414,244) consisted of TrackerPAL units disposed of during the quarter that were initially test units that had served their useful life.
 
Selling, General and Administrative Expenses
 
During the six months ended March 31, 2007, selling, general and administrative expenses were $8,979,769 compared to $6,041,429 during the six months ended March 31, 2006. The increase of $2,938,340 relates primarily to an increase of payroll and contract labor costs ($593,551), consulting services ($505,463), depreciation expense ($185,391), insurance ($134,148), legal costs ($268,908), outside services ($203,252), shipping costs ($173,843), and travel expenses ($199,179).  The Company incurs significant travel expenses in the development and marketing of its products as well as its continued efforts to raise additional capital through the issuance of debt or equity instruments.  Consulting expense increased from $3,528,524 in the six months ended March 31, 2006, to $4,033,987 in the comparable period in 2007.  The majority of the consulting expense for the 2007 period is related to stock and stock options issued to employees and consultants for the development of the wireless technology in the Company’s products and marketing services.
 
Interest Income and Expense
 
During the six months ended March 31, 2007, interest expense totaled $557,250 compared to $5,655,898 paid in the six months ended March 31, 2006.  This amount consisted primarily of non-cash interest expense of $169,857 related to unamortized financing costs associated with shares of common stock issued for prepaid interest.  The decrease of $5,098,648 is due primarily from the issuance of common stock in settlement of various note obligations and $321,429 to record a beneficial conversion feature.
 
Fiscal Year Ended September 30, 2006, Compared to Fiscal Year Ended September 30, 2005
 
Results of Operations
 

32

 
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 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 instruments 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.
 

33

 
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 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).


34


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
 
March 31, 2007
 
The Company is presently unable to finance its operations solely from cash flows from operating activities. During the six months ended March 31, 2007, the Company financed its operations primarily through borrowings from a related party, exercise of options and warrants, and from the sale of equity securities of the Company for net proceeds of $10,520,712.
 
As of March 31, 2007, the Company had unrestricted cash of $4,859,282 and a working capital deficit of $3,517,969, compared to unrestricted cash of $5,872,529 and a working capital deficit of $2,410,471 at September 30, 2006.
 
During the six months ended March 31, 2007, the Company's operating activities used cash of $3,092,334, compared to $3,653,115 of cash used during the six months ended March 31, 2006. The decrease was primarily a result of a decrease in interest expense related to accretion on redeemable common stock and debt
 
The Company used cash of $8,441,625 for investing activities during the six months ended March 31, 2007.  The increase was primarily a result of purchasing offender monitoring equipment.
 
The Company's financing activities during the six months ended March 31, 2007, provided cash of $10,520,712 compared to $3,483,754 during the six months ended March 31, 2006. During the six months ended March 31, 2007, the Company had net proceeds of $6,162,000 from the sale of common stock, $4,355,464 from the exercise of warrants, and $400,000 from the sale of Volu-Sol Reagents common stock.  Cash was decreased by $268,839 in payments on the bank line of credit, $28,452 in payments to SecureAlert Series A Preferred stockholders for dividends, and $99,461 in net payments on the related party line of credit.
 

35

 
The Company incurred a net loss of $14,857,704 during the six months ended March 31, 2007. As of March 31, 2007, the Company had a net tangible stockholders' equity of $544,864 and an accumulated deficit of $121,584,079.  These factors, as well as the risk factors set out in the Company's annual report on Form 10-KSB for the year ended September 30, 2006, raise substantial doubt about the Company's ability to continue as a going concern. The unaudited condensed consolidated financial statements included in this report do not include any adjustments that might result from the outcome of this uncertainty.
 
The Company’s 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 payback operating losses and payback debts.  Likewise, there can be no assurance 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.
 
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.
 
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 the indebt 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.
 

36

 
The following chart includes principal balances and interest rates applicable to borrowings as of March 31, 2007.
 
 
Description of Obligation
 
Annual Interest Rate
 
Maturity Date
 
Amount
Owing at 3/31/07
 
Advances from ADP Management
   
5%
 
July 31, 2009
  $ 78,580 (1)
Note to Shareholder
   
5%
 
January 2004
  $
84,838
 
Note to Shareholder
   
5%
 
January 2004
  $
84,838
 
Bank Line of Credit
   
8%
 
March  1, 2008
  $
3,797,650
 
Totals
 
N/A
 
N/A
  $
4,045,906
 
 
 
Notes:
 
 
(1)
As of March 31, 2007, the Company owed $78,580 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, 2009.  During the six months ended March 31, 2007, the net increase on the related party line of credit was $34,031.  The net increase consisted of net cash repayments during the six months ended March 31, 2007, of $268,839 and net increases of $302,870 related to a monthly management fee owed to ADP Management, and expenses incurred by ADP Management that are reimbursable by the Company.  Mr. Derrick’s and Mr. Dalton’s respective salaries are paid to ADP Management which in turn pays Messrs. Derrick and Dalton.  If the Company is unable to pay the management fee and the reimbursable expenses in cash, the related party line of credit is increased for the amount owed to ADP Management.
 

Contractual Obligations
 
The following table summarizes the Company’s outstanding borrowings and long-term contractual obligations at March 31, 2007, and the periods in which these obligations are scheduled to be paid in cash:

   
Payments Due By Period
 
                               
Contractual Obligations
 
Total
   
Less Than 1 Year
   
1 - 3 Years
   
4 - 5 Years
   
More than 5 Years
 
                               
Notes from schedule above
  $
4,045,906
    $
3,967,326
    $
78,580
    $
-
    $
-
 
Operating leases
   
1,116,110
     
448,689
     
588,307
     
76,265
     
2,849
 
                                         
Total
  $
5,162,016
    $
4,416,015
    $
666,887
    $
76,265
    $
2,849
 



37


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:

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:

 
·
Current inventory quantities on hand;
 
·
Product acceptance in the marketplace;
 
·
Customer demand;
 
·
Historical sales;
 
·
Forecast sales;
 
·
Product obsolescence; and
 
·
Technological innovations.

Any modifications to these estimates of reserves are reflected in 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.

38


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

Effective October 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123R, using the modified prospective method. SFAS 123R requires the recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements and is measured based on the grant date fair value of the award. SFAS 123R also requires the stock option compensation expense to be recognized over the period during which an employee is required to provide service in exchange for the award (the vesting period). Prior to our adopting SFAS 123R, the Company accounted for its stock-based compensation plans under Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25, generally no compensation expense is recorded when the terms of the award are fixed and the exercise price of the employee stock option equals or exceeds the fair value of the underlying stock on the date of grant. The Company adopted the disclosure-only provision of SFAS No. 123,"Accounting for Stock-Based Compensation" ("SFAS 123").

For the six months ended March 31, 2007, the Company calculated compensation expense of $893,164 related to the vesting of previously granted stock options and additional options granted during the period.

For options granted subsequent to October 1, 2006, the fair value of each stock option grant has been and will be estimated on the date of grant using the Black-Scholes option pricing model. The Company granted 275,000 stock options to employees during the six months ended March 31, 2007.  The Company granted 1,025,000 to employees during the six months ended March 31, 2006. The weighted average fair value of stock options at the date of grant during the six months ended March 31, 2007 and 2006 was $1.44 and $0.70, respectively.

The expected life of stock options represents the period of time that the stock options granted are expected to be outstanding based on historical exercise trends. The expected volatility is based on the historical price volatility of common stock. The risk-free interest rate represents the U.S. Treasury bill rate for the expected life of the related stock options. The dividend yield represents the Company’s anticipated cash dividend over the expected life of the stock options.

The following are the weighted-average assumptions used for options granted during the six months ended March 31, 2007 and 2006, respectively:

 
March 31, 2007
 
March 31, 2006
       
Risk free interest rate
4.54%
 
4.40%
Expected life
5 Years
 
5 Years
Dividend yield
n/a
 
n/a
Volatility
145%
 
113%



39


A summary of stock option activity for the six months ended March 31, 2007, is presented below:

 
Shares Under Option
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Life
 
Aggregate Intrinsic Value
               
Outstanding at September 30, 2006
3,607,500
 
 $        0.63
       
Granted
275,000
 
           1.59
       
Exercised
(225,000)
 
            0.58
       
Forfeited
(100,000)
 
            0.60
       
      Expired -   -        
Outstanding at March 31, 2007
   3,557,500
 
 $        0.71
 
 3.94 Years
 
      2,997,525
Exercisable at March 31, 2007
    3,557,500
 
 $        0.71
 
 3.94 Years
 
      2,997,525
 

 
Prior to October 1, 2006, the Company determined the value of stock-based compensation arrangements under the provisions of APB 25 and made pro forma disclosures required under SFAS 123.  Had compensation expense for stock option grants been determined based on the fair value at the grant dates consistent with the method prescribed in FASB 123, the Company's net loss and net loss per share would have been adjusted to the proforma amounts below for six months ended March 31, 2006, as indicated below:

   
March 31, 2006
 
       
Net loss applicable to common shareholders – as reported
  $ (12,926,171 )
         
Add:  intrinsic value of employee stock based compensation
   
-
 
Deduct:  total stock based employee compensation expense determined under fair value based method for all awards, net of related tax effects
    (13,858 )
         
Net loss – pro forma
  $ (12,940,029 )
         
Basic and diluted loss per share – as reported
  $ (0.26 )
         
Basic and diluted loss per share – pro forma
  $ (0.26 )


40


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.

Selling Shareholders

The Selling Shareholders under this prospectus and the registration statement of which it is a part received or will receive their shares in the following transactions:


41


November Private Offering

On November 9, 2006 we closed a private placement (the “November Offering”) of 3,000,000 shares of our Common Stock (the “Common Stock”) to VATAS Holding GmbH (“VATAS”) at a purchase price of $2.00 per share.  Additionally, we issued warrants (the “Warrants”) to VATAS to purchase up to an additional 7,000,000 shares of our Common Stock at a purchase price of $2.00 per share.  This prospectus, and the registration statement of which it is a part, registers the resale of the shares underlying and issuable upon VATAS’s exercises of the Warrants.

In connection with the Offering, we granted registration rights to VATAS, pursuant to which we agreed to file a registration statement (the “Registration Statement”) to register the resale of the Common Stock, as well as the shares of Common Stock underlying the Warrants not later than 10 days after we filed (the “Filing Deadline”) our annual report for the year ended September 30, 2006 (the “Filing”).  We also agreed to use our 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 we do 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, we were required to pay a 5% penalty to VATAS.

We did not file the registration statement filed by the Filing Deadline nor have it declared effective within 100 days of the Filing, and as such, we were required to pay a penalty.  We agreed with VATAS to pay the penalty in the form of additional shares of our Common Stock.  We entered into an agreement with VATAS whereby we issued 750,000 shares (the “Penalty Shares”) of our Common Stock as payment of the penalty for not having the registration statement filed by the Filing Deadline.  The resale of the Penalty Shares is covered by this prospectus.

Private Purchases from Officers

Additionally, VATAS entered into a private sale agreement with David Derrick and James Dalton, two officers of the Company, and ADP Management, Inc. (“ADP”), an entity owned and controlled by Messrs. Derrick and Dalton, pursuant to which Messrs. Derrick and Dalton and ADP sold 2,100,000 restricted shares of our common stock to Lintel, Inc. at $0.95 on April 5, 2007, and 1,000,000 shares of our common stock to Hector Gonzalez at $1.05 on July 1, 2007, and 6,000,000 restricted shares of our common stock to VATAS at $1.30 per share on July 25, 2007.

Settlement of Litigation

We issued 160,000 shares to HGR Enterprises, LLC (“HGR”), in connection with the settlement of a lawsuit between HGR and Michael Sibbett on the one hand, and the Company and SecureAlert, Inc. on the other hand, and agreed to register the resale of those shares by HGR.  We also issued 40,000 shares to Liberty Capital, LLC (“Liberty”) for services in connection with settling the lawsuit.

Warrant Exercises

Seven Selling Shareholders, Chad Olsen, Wilford Kirton, Futuristic Medical Devices LLC, Advance Technology Investors LLC, Technology Financing LLC, David Metzger, and Judd Odzer, received or will receive shares upon exercise of warrants issued to them.  Mr. Kirton has exercised warrants to purchase 100,000 shares, Futuristic Medical Devices LLC has exercised warrants to purchase 171,428 shares, Advance Technology Investors LLC has exercised warrants to purchase 114,286 shares, Technology Financing LLC have exercised warrants to purchase 1,300,000 shares, and Mr. Metzger and Mr. Odzer each have exercised warrants to purchase 200,000 shares of our common stock.  Mr. Olsen has options to purchase 87,500 shares of common stock which had not been exercised as of the date of this prospectus.


42


This prospectus and the registration statement of which it is a part covers the resale of up to 22,948,214 shares of our common stock issued or issuable to the Selling Shareholders as described above. The following information is 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.


Name of Selling Shareholder
 
Shares of Common Stock Owned by Selling Shareholder Prior to Offering
 
Shares of Common Stock Issuable to Selling Shareholder Upon Exercise of Warrants
 
Total Shares Issued or Issuable to Selling Shareholder
 
Percentage of Common Stock Issuable to Selling Shareholder
 
Number of Shares of  Common Stock Registered Hereunder
 
Number of Shares of Common Stock Owned After Offering
 
Percentage of Common Stock Beneficially Owned After the Offering
VATAS
 
9,750,000
 
7,000,000
 
16,750,000 (1)
 
13.71%
 
16,750,000
 
0 (2)
 
0%(2)
                             
Judd Odzer
 
200,000
 
0
 
200,000 (3)
 
0.16%
 
200,000
 
0 (4)
 
0% (4)
                             
David Metzger
 
200,000
 
0
 
200,000 (5)
 
0.16%
 
200,000
 
0 (4)
 
0% (4)
                             
Wilford Kirton III
 
100,000
 
0
 
100,000 (6)
 
0.08%
 
100,000
 
0 (4)
 
0% (4)
                             
HGR Enterprises, LLC
 
160,000
 
0
 
160,000 (7)
 
0.13%
 
160,000
 
0 (4)
 
0% (4)
                             
Liberty Capital
 
40,000
 
0
 
40,000 (8)
 
0.03%
 
40,000
 
0 (4)
 
0% (4)
                             
Hector Gonzalez
 
1,000,000
 
0
 
1,000,000 (10)
 
0.82%
 
1,000,000
 
0 (4)
 
0% (4)
                             
Lintel, Inc.
 
2,700,000
 
0
 
2,700,000(11)
 
2.21%
 
2,700,000
 
0 (4)
 
0% (4)
                             
Chad Olsen
 
125,000
 
87,500
 
212,500(12)
 
0.17%
 
212,500
 
0 (4)
 
0% (4)
                             
Technology Financing LLC
 
1,300,000
 
0
 
1,300,000 (13)
 
1.07%
 
1,300,000
 
0 (4)
 
0% (4)
                             
Advance Technology Investors LLC
 
114,286
 
0
 
114,286(14)
 
0.09%
 
114,286
 
0 (4)
 
0% (4)
                             
Futuristic Medical LLC
 
171,428
 
0
 
171,428(15)
 
0.14%
 
171,428
 
0 (4)
 
0% (4)
                             
TOTALS
 
15,860,714
 
7,087,500
 
22,948,214
 
17.78%
 
22,948,214
 
0 (4)
 
0% (4)
 
 

 
 
(1)           Consisting of 3,000,000 shares of our common stock issued to the Selling Shareholder in connection with the November Offering; 750,000 Penalty Shares; 6,000,000 shares purchased from Messrs. Derrick and Dalton and ADP Management; and 7,000,000 shares of common stock issuable to the Selling Shareholder upon exercise of Warrants issued in connection with the November Offering.  There can be no guarantee that the Selling Shareholder will sell any of the shares or exercise any or all of the Warrants.  The information in the table assumes a hypothetical sale of all of the shares of common stock held by Selling Shareholder, as well as a hypothetical exercise of all of the Warrants and the sale of all shares of common stock issued upon such exercise.  There is no assurance that Selling Shareholder will sell any or all of the shares offered hereby.  This number and percentage may change based on Selling Shareholder’s decision to sell or hold the Common Stock.  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%.  VATAS Holding GmbH is an entity controlled by Lars Windhorst.


43


(2)           Assumes a hypothetical sale of all of the shares of common stock held by Selling Shareholder, as well as a hypothetical exercise of all of the Warrants and the sale of all shares of common stock issued upon such exercise.  There is no assurance that Selling Shareholder will sell any or all of the shares offered hereby.  This number and percentage may change based on Selling Shareholder’s decision to sell or hold the Common Stock.  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 exercise of Warrants held by this Selling Shareholder.  There can be no guarantee that the Selling Shareholder will exercise any or all of the Warrants or sell any of the underlying shares.

(4)           Assumes a hypothetical sale of all of the shares of common stock held by this Selling Shareholder.  There is no assurance that this or any Selling Shareholder will sell any or all of the shares offered hereby.  This number and percentage may change based on each Selling Shareholder’s decision to sell or hold the common stock.  If the Selling Shareholder sells all of the shares of common stock registered hereunder, the number of shares held following such sales would be 0 and the percentage of ownership would be 0%.

(5)           Consisting of shares of common stock issuable upon a hypothetical exercise of Warrants held by this Selling Shareholder.  There can be no guarantee that the Selling Shareholder will exercise any or all of the Warrants or sell any of the underlying shares.

(6)           Consisting of shares of common stock issuable upon a hypothetical exercise of Warrants held by this Selling Shareholder.  There can be no guarantee that the Selling Shareholder will exercise any or all of the Warrants or sell any of the underlying shares.

(7)           Consists of shares of our common stock.  There can be no guarantee that the Selling Shareholder will sell any of the shares.  HGR Enterprises is an entity controlled by Kevin Howard.

(8)           Consists of shares of our common stock.  There can be no guarantee that the Selling Shareholder will sell any of the shares.  Liberty Capital LLC is an entity controlled by Jeff Peterson.

(9)           Consists of shares of our common stock.  There can be no guarantee that the Selling Shareholder will sell any of the shares.

(10)         Consists of shares of our common stock.  There can be no guarantee that the Selling Shareholder will sell any of the shares.

(11)         Consists of shares of our common stock.  There can be no guarantee that the Selling Shareholder will sell any of the shares.

(12)         Consists of shares of our common stock issuable upon a hypothetical exercise of Warrants held by this Selling Shareholder.  There can be no guarantee that the Selling Shareholder will exercise any or all of the Warrants or sell any of the underlying shares.

(13)         Consisting of shares of common stock issued upon exercise of warrants held by this Selling Shareholder.  There can be no guarantee that the Selling Shareholder will exercise any or all of the Warrants or sell any of the shares.

(14)         Consisting of shares of common stock issued upon exercise of warrants held by this Selling Shareholder.  There can be no guarantee that the Selling Shareholder will sell any of the shares.
 
 
 
44

 
(15)         Consisting of shares of common stock issued upon exercise of warrants held by this Selling Shareholder.  There can be no guarantee that the Selling Shareholder will exercise any or all of the Warrants or sell any of the shares.


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
45


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, 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 Shareholder 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 shares against certain liabilities, including liabilities arising under the Securities Act.

Because the Selling Shareholders may be deemed to be “underwriters” 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:

 
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;
 
sales in privately negotiated transactions;
 
sales for their own account pursuant to this prospectus;
 
through the writing of options, whether such options are listed on an options exchange or otherwise through the settlement of short sales;
 
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;
 
purchases by broker-dealers who then resell the shares for their own account;
 
brokerage transactions in which a broker solicits purchasers;
 
any combination of these methods of sale; and
 
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.


46


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 Shareholder. 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).
To our knowledge, there are currently no plans, arrangements or understandings between the Selling Shareholder 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 it 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 Shareholder, 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 Shareholder is 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.


47


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 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.  This case was dismissed in early March 2007.

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.  This case has been settled by Jaxara and Jaxara will pay the Company $25,000.

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 and RMDx answered the Complaint and filed counterclaims against SGI for (1) Breach of Contract, (2) Rescission; (3) and 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.

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:

48

 
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.


49


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 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.


50


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.

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

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.


51


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.

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 July 5, 2007.  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 July 5, 2007, 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.

Title of Class
 
Name and Address of Beneficial Owner (1)
 
Amount Owned
 
Percent of Class
Common
 
VATAS Holdings GmbH (2)
Friedrichstrasse 95
10117 Berlin
Germany
 
17,678,926
 
13.71%
Common
 
David G. Derrick (3)
 
8,202,736
 
6.65%
Common
 
James Dalton (4)
 
7,651,212
 
6.20%
Common
 
J. Lee Barton (5)
196 No. Forest Ave.
Hartwell, GA 30643
 
6,390,104
 
5.24%
Common
 
ADP Management Corp. (6)
 
6,572,102
 
5.33%

 

 
 
(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 10,678,926 shares of common stock and 7,000,000 shares issuable upon exercise of warrants.
 
(3)
Includes shares owned of record as follows:  5,184,262 shares held of record by ADP Management,  1,601,270 shares owned of record by Mr. Derrick, 1,387,840 shares issuable upon conversion of Series A preferred stock owned of record by ADP Management and 29,364 shares issuable upon conversion of Series A preferred stock owned of record by MK Financial.  Mr. Derrick is the secretary and treasurer of ADP Management and the owner of MK Financial.
 
(4)
Includes shares owned of record as follows:  5,184,262 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), 931,169 shares owned of record by Mr. Dalton, 147,941 shares issuable upon conversion of Series A preferred stock owned of record by Mr. Dalton and  1,387,840 shares issuable upon conversion of Series A preferred stock owned of record by ADP Management
 

52

 
(5)
Includes 2,096,347 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 525,000 shares owned by Mr. Barton’s wife.
 
(6)
Includes 5,184,262 shares owned of record, 1,387,840 shares issuable upon conversion of Series A preferred stock.
 
 
Security Ownership of Management
 
We have two classes of voting equity securities, including our common stock and Series B preferred stock.  In addition, we have a class of nonvoting Series A preferred stock that is convertible into common stock.  The following table sets forth information as of July 5, 2007, 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.


Title of Class
 
Name and
Address of Beneficial Owner(9)
 
Amount Owned
 
Percent of Class
Common
 
David G. Derrick (1)
 
8,202,736
 
6.65%
   
James Dalton (2)
 
  7,651,212
 
6.20%
   
Michael G. Acton (4)
 
1,070,507
 
*
   
Peter McCall (5)
 
1,014,400
 
*
   
Robert Childers (6)
 
1,018,657
 
*
   
Larry Schafran (7)
 
101,200
 
*
   
Randy Olshen (8)
 
1,000,000
 
*
   
David Hanlon
 
161,702
 
*
   
Officers and Directors as a Group (6 persons) (9)
 
12,385,409
 
9.98%
 
 

 
 
(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 600,000 shares issuable under options granted to Mr. Acton, and 470,507 shares owned of record by Mr. Acton.
 
(5)
Mr. McCall is a director.  Includes 544,400 shares of common stock owned of record by Mr. McCall and 470,000 shares issuable upon exercise of stock options held by Mr. McCall.
 
(6)
Mr. Childers is a director.  Includes (a) 343,143 shares of common stock owned of record by the Robert E. Childers Living Trust, (b) 255,514 shares of common stock owned  of  record by Mr. Childers, (c)  420,000 shares issuable upon exercise of stock options held by Mr. Childers.
 
(7)
Mr. Schafran is a director.  Includes 101,200 shares held directly by  Mr. Schafran.
 

53

 
(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.
 







































54


DESCRIPTION OF SECURITIES

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 July 20, 2007, approximately 123,580,645 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 July 20, 2007, there were 101 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 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.
 

55


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 $2.00 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 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.
 

56


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 July 20, 2007, there were 12,999 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.
 

57


Conversion. Each share of Series B preferred stock is convertible at any time into shares of Common Stock.  The number of shares of Common Stock into which each share of Series B preferred stock may be converted (the “conversion rate”) is determined by dividing the original purchase price paid per share of Series B preferred stock, namely $3.00, by the conversion price.  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
 
As July 20, 2007, there were no shares of Series C preferred stock issued and outstanding.  All had been converted to common stock.

Certain Relationships and Related Transactions

The following discussion summarizes transactions during the last two fiscal years between RemoteMDx and related parties.
 
ADPManagement Line of Credit Arrangement
 
As of March 31, 2007, the Company owed $78,580 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, 2009.  During the six months ended March 31, 2007, the net increase on the related party line of credit was $34,031.  The net increase consisted of net cash repayments during the six months ended March 31, 2007, of $268,839 and net increases of $302,870 related to a monthly management fee owed to ADP Management, and expenses incurred by ADP Management that are reimbursable by the Company.  Mr. Derrick’s and Mr. Dalton’s respective salaries are paid to ADP Management which in turn pays Messrs. Derrick and Dalton.  If the Company is unable to pay the management fee and the reimbursable expenses in cash, the related party line of credit is increased for the amount owed to ADP Management.


58


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
 
Quarter ended 3/31/07
  $
1.07
    $
1.57
 
Quarter ended 6/3/07
  $
1.35
    $
2.06
 
Quarter ended 9/30/07**
  $
1.46
    $
1.68
 
                 
*   The Company’s common stock began trading on August 25, 2005.
               
** Through July 20, 2007.
               
 
Holders.  As of July 20, 2007, there were approximately 1,350 holders of record of the common stock and approximately 123,580,645 shares of common stock outstanding. We also have 101 shares of Series A preferred stock outstanding, held by 3 shareholders, convertible into a minimum of approximately 37,370 shares of common stock, as well as 12,999 shares of Series B preferred stock outstanding held by 9 shareholders, that at present are convertible into approximately 134,472 shares of common stock. We also have granted options and warrants for the purchase of approximately 17,552,243 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 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.  In addition, the Company recorded $448,724 in dividends on Series A and C Preferred Stock for the six months ended March 31, 2007.


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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:
 
 
·
All compensation plans previously approved by security holders; and
 
 
 
·
All compensation plans not previously approved by security holders.
 
Equity Compensation Plan Information
 
Plan category
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights
 
Weighted average exercise price of outstanding options, warrants and rights
 
Number of securities remaining available for future issuance
Equity compensation plans approved by security holders
 
0
 
$0.00
 
10,000,000
 

 
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.

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.


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The Company used 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.

Six Months Ended March 31, 2007

During the six months ended March 31, 2007, the Company issued 16,567,065 shares of common stock as follows:
 
 
·
478,333 shares were issued for services performed for a value of $791,850.
 
 
 
·
3,829,408 shares were issued in connection with Series A, B and C Preferred Stock conversions.
 
 
 
·
7,549,603 shares were issued in connection with the exercise of warrants.
 
 
 
·
3,081,000 shares were issued for $6,162,000 in cash.
 

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:

 
·
10,739,753 shares were exchanged for debt and accrued interest of $7,893,782;
 
·
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 of the Company; and
 
·
7,171,380 shares were issued upon the conversion of 1,315,825 shares of Series B Preferred Stock of the Company;
 
·
6,883,334 shares were issued for $7,910,000 in cash;
 
·
350,000 shares were issued from the exercise of options.

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:

61


 
-      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
 
 
 
-
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.
 

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 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

Compensation Discussion and Analysis

The following is a discussion of the Company’s program for compensation of its named executive officers and directors.  As of the date of this registration statement, the Company’s Compensation Committee had responsibility for developing and maintaining an executive compensation policy that creates a direct relationship between pay levels and corporate performance and returns to shareholders. The Committee monitors the results of such policy to assure that the compensation payable to the Company’s executive officers provides overall competitive pay levels, creates proper incentives to enhance shareholder value, rewards superior performance, and is justified by the returns available to shareholders.


62


Compensation Program Objectives

The Company’s compensation program is designed to encompass several factors in determining the compensation of the Company’s named executive officers.  The following are the main objectives of the compensation program for the Company’s named executive officers:

-           Retain qualified officers.
 
-
Provide overall corporate direction for the officers and also to provide direction that is specific to officer’s respective areas of authority.  The level of compensation amongst the officer group, in relation to one another, is also considered in order to maintain a high level of satisfaction within the leadership group. We consider the relationship that the officers maintain to be one of the most important elements of the leadership group.
-           Provide a performance incentive for the officers.

The Company’s compensation program is designed to reward the officers in the following areas:

-           achievement of specific goals;
-           professional education and development;
 
-
creativity in the form of innovative ideas and analysis for new programs and projects;
-           new program implementation;
-           attainment of company goals, budgets, and objectives;
-           results oriented determination and organization;
-           positive and supportive direction for company personnel; and
-           community involvement.

As of the date of this Report, there were four principal elements of named executive officer compensation.  The Compensation Committee determines the portion of compensation allocated to each element for each individual named executive officer.  The discussions of compensation practices and policies are of historical practices and policies.  Our Compensation Committee is expected to continue these policies and practices, but will reevaluate the practices and policies as it considers advisable.

The elements of the compensation program include:

 
-
Base salary;
 
-
Performance bonus and commissions;
 
-
Stock options and stock awards
 
-
Employee benefits in the form of:
 
-
health and dental insurance;
 
-
life insurance;
 
-
paid parking and auto reimbursement; and
 
-
Other de minimis benefits.

Base salary

Base salary is intended to provide competitive compensation for job performance and to attract and retain qualified named executive officers.  The base salary level is determined by considering several factors inherent in the market place such as: the size of the company; the prevailing salary levels for the particular office or position; prevailing salary levels in a given geographic locale; and the qualifications and experience of the named executive officer.


63


Performance bonus and commissions

Bonuses are in large part based on company performance.  The most important determining factor used to calculate the performance bonus for the Chief Executive Officer and Chief Operating Officer is based upon the placement of activated TrackerPAL units in the market place.

The Chief Financial Officer receives a performance bonus based is based upon the placement of activated TrackerPAL units in the market place.

Policy decisions to waive or modify performance goals have not been a significant factor to date in that there have not been contractual changes made other than the normal renewal or updating of contracts as would be expected as part of an annual review.

Stock options and stock awards

Stock ownership is provided to enable named executive officers and directors to participate in the success of the Company.  The direct or potential ownership of stock will also provide the incentive to expand the involvement of the named executive officer to include, and therefore be mindful of, the perspective of stockholders of the Company.  Stock options and stock awards are based upon the placement of activated TrackerPAL units in the market place.

Employee benefits

Several of the employee benefits for the named executive officers are selected to provide security for the named executive officers.  Most notably, insurance coverage for health, life, and liability are intended to provide a level of protection to that will enable the named executive officers to function without having the distraction of having to manage undue risk.  The health insurance also provides access to preventative medical care which will help the named executive officers function at a high energy level, to manage job related stress, and contribute to the overall well being of the named executive officers, all of which contribute to an enhanced job performance.

Other de minimis benefits

Other de minimis employee benefits such as cell phones, parking, and auto usage reimbursements are directly related to job functions but contain a personal use element which is considered to be a goodwill gesture that contributes to enhanced job performance.

As discussed above, the Board of Directors determines the portion of compensation allocated to each element for each individual named executive officer.  As a general rule, salary is competitively based while giving consideration to employee retention, qualifications, performance, and general market conditions.  Typically, stock options are based on the current market value of the option and how that will contribute to the overall compensation of the named executive officer.  Consideration is also given to the fact that the option has the potential for an appreciated future value.  As such, the future value may be the most significant factor of the option, but it is also more difficult to quantify as a benefit to the named executive officer.

Accordingly, in determining the compensation program for the Company, as well as setting the compensation for each named executive officer, the Board of Directors attempts to attract the interest of the named executive officer within in the constraints of a compensation package that is fair and equitable to all parties involved.


64


SUMMARY COMPENSATION TABLE

Name and Principal Position
Year
Salary
Bonus
 
 
Or Commission
(C)
Stock Awards
Option Grants
Non-Equity Incentive Plan Compensation
Change in Pension Value and Nonqualified Deferred Compensation Earnings
All Other Compensation
Total
 
 
 $
   
 
 
 
 $
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
David Derrick – CEO
2006
 $240,000
 $0
$321,428
$1,016,198
$0
$0
$16,134
$1,593,760
 
Michael Acton - CFO
 
2006
 
$100,000
 
$45,357
 
$0
 
$0
 
$0
 
$0
 
$14,643
 
$160,000
 
Jim Dalton – President of RemoteMDx, Inc.
 
2006
 
$240,000
 
$0
 
$321,428
 
$1,016,198
 
$0
 
$0
 
$16,674
 
$1,594,300
 
Randy Olshen – President of SecureAlert, Inc.
 
2006
 
$149,000
 
$50,000
 
$60,000
 
$549,370
 
$0
 
$0
 
$14,643
 
$823,013
Bryan Dalton – Vice President of Sales
2006
 
$78,000
 
$50,000
 
$60,000
 
$549,370
 
$0
 
$0
 
$3,678
 
$741,048

1)
During the year ended September 30, 2006, the Company issued 535,714 shares of the Company’s common stock to Mr. Derrick valued at $321,428.  Mr. Derrick received the following warrants for the year ended September 30, 2006:

Name
 
Grant Date
 
Exp. Date
 
Exercise Price
 
# of Options
David Derrick
 
2/16/06
 
2/15/11
 
$0.56
 
  500,000
David Derrick
 
5/18/06
 
5/17/11
 
$0.60
 
  250,000
Totals
           
  750,000

In addition, Mr. Derrick had 1,250,000 warrants vested during the year ended September 30, 2006.  The value of the warrants granted and the warrants vested during the year ended September 30, 2006 were valued at $1,016,198 using the Black-Scholes method.

Mr. Derrick received additional compensation of $16,134 for health, dental, and vision insurance paid on his behalf.

2)
Mr. Acton received bonuses in the amount of $45,357.  In  addition, Mr. Acton received additional compensation of $14,643 for health, dental, and vision insurance paid on his behalf.

3)
During the year ended September 30, 2006, the Company issued 535,714 shares of the Company’s common stock to Mr. Dalton valued at $321,428.  Mr. Dalton received the following warrants for the year ended September 30, 2006:

65

 
Name
 
Grant Date
 
Exp. Date
 
Exercise Price
 
# of Options
Jim Dalton
 
2/16/06
 
2/15/11
 
$0.56
 
  500,000
Jim Dalton
 
5/18/06
 
5/17/11
 
$0.60
 
  250,000
Totals
 
  
           750,000

In addition, Mr. Dalton had 1,250,000 warrants vested during the year ended September 30, 2006.  The value of the warrants granted and the warrants vested during the year ended September 30, 2006 were valued at $1,016,198 using the Black-Scholes method.

Mr. Dalton received additional compensation of $16,674 for health, dental, and vision insurance paid on his behalf.

4)
Mr. Olshen received cash bonuses of $50,000, 100,000 shares of common stock valued at $60,000, and options to purchase 1,000,000 shares of the Company’s common stock at $0.60 per share valued at $549,370 using the Black-Scholes Method.  In addition, Mr. Olshen received additional compensation of $14,643 for health, dental, and vision insurance paid on his behalf.

5)
Mr. Bryan Dalton received cash bonuses of $50,000, 100,000 shares of common stock valued at $60,000, and options to purchase 1,000,000 shares of the Company’s common stock at $0.60 per share valued at $549,370 using the Black-Scholes Method.  In addition, Bryan Dalton received additional compensation of $3,678 for health, dental, and vision insurance paid on his behalf.


OUTSTANDING EQUITY AWARDS AT FISCAL 2006 YEAR-END

 
Option Awards
Stock Awards
Name
Number of Securities Underlying Unexercised Options (#) Exercisable
Number of Securities Underlying Unexercised Options
(#)
Unexercisable
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options
(#)
Option Exercise Price ($)
Option Expiration Date
Number of Shares or Units of Stock That Have Not Vested (#)
(g)
Market Value of Shares or Units of Stock That Have Not Vested ($)
Equity Incentive Plan Awards: Number of Unearned Shares, Units, or Other Rights That Have Not Vested
(#)
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units, or Other Rights That Have Not Vested
($)
(a)
(b)
(c)
 (d)
(e)
(f)
(g)
(h)
(i)
 (j)
David Derrick - CEO
4,886,155 (1)
0
0
$0.54 to $0.75 (1)
Various Dates (1)
0
0
0
0
Michael Acton - CFO
200,000 (2)
500,000 (2)
500,000 (2)
$0.54 to $0.70 (2)
Various Dates (2)
500,000 (2)
695,000
500,000 (2)
695,000
Jim Dalton – President of RemoteMDx, Inc.
4,886,155 (3)
0
0
$0.54 to $0.75 (3)
Various Dates (3)
0
0
0
0
Randy Olshen – President of SecureAlert, Inc.
25,000
975,000
975,000
$0.60
05/17/11
975,000
1,355,250
975,000
1,355,250
Bryan Dalton – Vice President of Sales
25,000
975,000
975,000
$0.60
05/17/11
975,000
1,355,250
975,000
1,355,250



66


1)                 The following options were issued to David Derrick and an entity controlled by him and Mr. Dalton:

Name
Grant Date
Exp. Date
Exercise Price
# of Options
Vested
Unvested
ADP Management
2/15/02
2/14/07
$0.54
   136,155             
136,155
0
ADP Management
5/18/04
5/17/09
$0.54
1,000,000
1,000,000
0
ADP Management
9/30/04
9/29/09
$0.75
   500,000
500,000
0
David Derrick
5/17/05
5/16/10
$0.54
2,500,000
2,500,000
0
David Derrick
2/16/06
2/15/11
$0.56
   500,000
500,000
0
David Derrick
5/18/06
5/17/11
$0.60
   250,000
250,000
0
         
 
 
Totals
     
4,886,155
4,886,155
0

2)                 The following options were issued to Michael Acton:

Name
Grant Date
Exp. Date
Exercise Price
# of Options
Vested
Unvested
Michael Acton
5/18/04
5/17/09
$0.54
100,000
100,000
0
Michael Acton
8/25/05
8/24/10
$0.70
100,000
100,000
0
Michael Acton
5/18/06
5/17/11
$0.60
500,000
0
500,000
         
 
 
Totals
     
700,000
200,.000
500,000

3)                 The following options were issued to Jim Dalton and an entity controlled by him and Mr. Derrick:

Name
Grant Date
Exp. Date
Exercise Price
# of Options
Vested
Unvested
ADP Management
2/15/02
2/14/07
$0.54
   136,155                     
136,155
0
ADP Management
5/18/04
5/17/09
$0.54
1,000,000
1,000,000
0
ADP Management
9/30/04
9/29/09
$0.75
   500,000
500,000
0
Jim Dalton
5/17/05
5/16/10
$0.54
2,500,000
2,500,000
0
Jim Dalton
2/16/06
2/15/11
$0.56
   500,000
500,000
0
Jim Dalton
5/18/06
5/17/11
$0.60
   250,000
250,000
0
         
 
 
Totals
     
4,886,155
4,886,155
0
         
 
 
Totals
     
4,886,155
4,886,155
0


DIRECTOR COMPENSATION
For Fiscal Year Ended 2006

Name
 
 
 
 
 
 
 
 
(a)
Fees Earned or Paid in Cash
($)
 
 
 
 
 
 
(b)
Stock Awards
($)
 
 
 
 
 
 
 
(c)
Option Awards
($)
 
 
 
 
 
 
 
(d)
Non-Equity Incentive Plan Compensation
($)
 
 
 
 
 
(e)
Change in Pension Value and Nonqualified Deferred Compensation Earnings
($)
 
 
(f)
All Other Compensation
($)
 
 
 
 
 
 
(g)
Total
($)
 
 
 
 
 
 
 
(h)
Robert Childers
$60,000
$80,000
$104,380
$0
$0
$0
$244,380
Peter McCall
$60,000
$0
$76,912
$0
$0
$0
$136,912



67

 
Employment Agreements
 
We have no employment agreements with any executive officers at this time.

 
Stock Option Grants for the Six Months Ended March 31, 2007
 
During the six months ended March 31, 2007, the Company granted 1,500,000 warrants to each of Mr. Derrick and Mr. Dalton, with an exercise price of $1.30 per share.  These warrants had an expiration date of 120 day ending on July 4, 2007.  These warrants were exercised prior to the expiration date.

In addition, the Company granted 50,000 warrants to Peter McCall and 100,000 warrants to Robert Childers with an exercise price of $1.73 for services rendered.  All these warrants are five-year warrants and expire in 2012.

 
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 (“SARs”).
 
 
Aggregated Option Exercises in Last Fiscal Year
And Fiscal Year-End Options Values

Name
 
Shares Acquired
on Exercise (#)
 
Value Realized ($)
 
Number of Securities
Underlying
Unexercised Options
At 9/30/2006
Exercisable/ Unexercisable
 
Value of Unexercised
In-the-Money Options /
SARs At 9/30/06 ($)
Exercisable/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.
 
(2)
Mr. Derrick and Mr. Dalton hold 3,250,000 options with exercise prices ranging from $0.54 to $0.60 per share. 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. See also the discussion above in “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.
 

68

 
(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”).
 
Aggregated Option Exercises in Last Fiscal Year
And Fiscal Year-End Options Values

Name
 
Shares Acquired
on Exercise (#)
 
Value Realized ($)
 
Number of Securities
Underlying
Unexercised Options
At 9/30/2005
Exercisable/ Unexercisable
 
Value of Unexercised
In-the-Money Options /
SARs At 9/30/05 ($)
Exercisable/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 (3)
 
-
 
-
 
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”).
 

69

 
Aggregated Option Exercises in Last Fiscal Year
And Fiscal Year-End Options Values

Name
 
Shares Acquired
on Exercise (#)
 
Value Realized ($)
 
Number of Securities
Underlying
Unexercised Options
At 9/30/2004
Exercisable/Unexercisable(1)
 
Value of Unexercised
In-the-Money Options /
SARs At 9/30/04 ($)
Exercisable/ Unexercisable
                 
David G. Derrick (2)
 
-
 
-
 
1,636,155 / 0
 
-
Michael G. Acton
 
-
 
-
 
246,894 / 0
 
-
James J. Dalton
 
-
 
-
 
1,636,155 / 0
 
-

(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.
 

Index to Financial Statements
 
Page
Report of Independent Certified Public Accountants
71
Consolidated Balance Sheet as of September 30, 2006
72
Consolidated Statements of Operations for the Years Ended September 30, 2006 and 2005
74
Consolidated Statement of Stockholders' Deficit for the Years Ended September 30, 2005 and 2006
75
Consolidated Statements of Cash Flows for the Years Ended September 30, 2006 and 2005
79
Notes to Consolidated Financial Statements
82
Condensed Consolidated Balance Sheet as of March 31, 2007
 109
Condensed Consolidated Statement of Operations for the three and six months ended March 31, 2007 and 2006
 110
Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2007 and 2006
 111
Notes to Unaudited Condensed Consolidated Financial Statements for March 31, 2007
 113


Experts
Our consolidated balance sheet as of September 30, 2006 and the consolidated statements of operations, stockholders’ deficit, and cash flows, for the two years in the period ended September 30, 2006, 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.

 

70

RemoteMDx, Inc.
Consolidated Financial Statements
September 30, 2006 and 2005
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


 
71

                                                                 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.



 
72

                                                                 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.               
73

                                                                 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)