10-K 1 remotemdx10k093008.htm REMOTEMDX, INC. FORM 10-K SEPTEMBER 30, 2008 remotemdx10k093008.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
 
x 
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2008
OR
 
o  
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                            to                           
 
Commission file number: 0-23153

REMOTEMDX, INC.
(Exact name of registrant as specified in its charter)
Utah
 
87-0543981
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
150 West Civic Center Drive, Suite 400, Sandy, Utah 84070
(Address of principal executive offices, Zip Code)
 
(801) 451-6141
(Registrant's telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.0001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o      No x 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o      No x 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No o  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o  
 
Accelerated filer x 
 
Non-accelerated filer o  
 
Smaller reporting company o  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o      No x 

There were 159,231,260 shares of the registrant's common stock outstanding as of December 22, 2008. The aggregate market value of common stock held by non-affiliates of the registrant as of December 22, 2008 was approximately $46,708,276.

 
 

 
 
 
FORM 10-K
 
For the Fiscal Year Ended September 30, 2008
 
 
       
Page
   
Part I
   
Item 1
 
Business
 
3
Item 1A
 
Risk Factors
 
10
Item 1B
 
Unresolved Staff Comments
 
15
Item 2
 
Properties
 
15
Item 3
 
Legal Proceedings
 
15
Item 4
 
Submission of Matters to a Vote of Security Holders
 
16
   
 
Part II
   
Item 5
 
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
 
17
Item 6
 
Selected Financial Data
 
20
Item 7
 
Management's Discussion and Analysis of Financial Condition and Results of Operation
 
 
22
Item 7A
 
Quantitative and Qualitative Disclosures About Market Risk
 
35
Item 8
 
Financial Statements and Supplementary Data
 
35
Item 9
 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
 
35
Item 9A
 
Controls and Procedures
 
35
Item 9B
 
Other Information
 
39
   
 
Part III
   
Item 10
 
Directors, Executive Officers and Corporate Governance
 
39
Item 11
 
Executive Compensation
 
42
Item 12
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
 
48
Item 13
 
Certain Relationships and Related Transactions, and Director Independence
 
50
Item 14
 
Principal Accounting Fees and Services
 
52
   
 
Part IV
   
Item 15
 
Exhibits, Financial Statement Schedules
 
53
 
Signatures
   
 
        The statements contained in this Report on Form 10-K that are not purely historical are considered to be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements represent our expectations, beliefs, anticipations, commitments, intentions, and strategies regarding the future, and include, but are not limited to the risks and uncertainties outlined in item 1A Risk Factors, and item 7 Management's Discussion and Analysis of Financial Condition and Results of Operation. Readers are cautioned that actual results could differ materially from the anticipated results or other expectations that are expressed in forward-looking statements within this Report.
 

 
2

 
 
 
 
General

RemoteMDx, Inc. (“RemoteMDx” or the “Company”) markets and deploys offender management programs, combining patented GPS (Global Positioning System) tracking technologies, fulltime 24/7/365 intervention-based monitoring capabilities and case management services.  We believe that we currently deliver the only offender management technology which integrates GPS, RF (Radio Frequency) and an interactive 3-way voice communication system into a single device, deployable on offenders worldwide. Through our patented electronic monitoring technologies and services, we empower law enforcement, corrections and rehabilitation professionals with offender, defendant, probationer and parolee programs, which grant convicted criminals and pre-trial suspects an accountable opportunity  to be “free from prison”, while providing for greater public safety at a lower cost to incarceration or traditional resource-intensive alternatives.

TrackerPAL I & II – The TrackerPAL™ portfolio of products, e-Arrest beacons and monitoring services are designed to create “Jails without Walls,” customizable by offender types (e.g., domestic abusers, sexual predators, gang members, pre-trial defendants, juvenile offenders, etc.). Additionally, our proprietary software and device firmware support the dynamic accommodation of agency-established monitoring protocols, victim protection imperatives, geographic boundaries, work environments, school attendance, rehabilitation programs and sanctioned home restrictions.  TrackerPAL is designed for federal, state and local agencies to provide location tracking of select individuals in the criminal justice system.  The TrackerPAL device fastens to the offender's ankle with a tamper resistant strap (steel cabling with optic fiber) that can only be adjusted or removed without detection by a supervising officer through services provided by the Company’s SecureAlert Monitoring Center (or other monitoring centers). The Company’s center acts as an important link between the offender and the supervising officer as monitoring center specialists persistently track and monitor the offender, initiating contact at the direction of the supervising agency and/or when the offender is in violation of any established restrictions or protocols.  An intelligent device with integrated computer circuitry and constructed from case-hardened plastics, the TrackerPAL unit promptly notifies the monitoring center if any attempt is made to remove or otherwise tamper with the device or optical strap housing. 

According to the Bureau of Justice Statistics (2007), it is estimated that approximately 7,235,728 people are now either incarcerated on parole or on probation. The average cost of incarcerating an inmate ranges from $65 to $175 per day dependent upon facility type, security level, amenities and jurisdiction. And with ever-growing economic pressures, it is widely recognized that these costs are unsustainable with ongoing state and federal budget reductions, facility-specific overcrowding concerns, increased rehabilitation imperatives and politicized re-socialization agendas. Thus, electronic monitoring alternatives to incarceration for low and moderate risk offenders (adult and juveniles), early release for good behavior initiatives, work release programs, sentencing diversions and accelerated halfway house deployments are now strongly encouraged and seriously considered by legislative and judicial branches of government in many jurisdictions.  For between 10% to 15% of the traditional costs of incarceration, the Company’s TrackerPAL monitoring center and patented devices can monitor offenders continuously, providing real-time location tracking, interactive voice access and intervention-biased contact, reducing the potential for subsequent or repeat offenses.

Many jurisdictions are also embracing “offender pay”, “parent pay” and/or “partial pay” programs shifting the burden of the tracking and monitoring costs in whole or part to the offender directly, defraying the cost to the public. We estimate that approximately 20% of our gross revenues come from offender payments directly under court order and threat of re-incarceration for non-payment; the majority of these accounts remain in compliance because of the severe consequences of non-payment. This aspect of our business is growing significantly and we expect that it will outpace traditional tax-payer obligated payment programs.

Strategically, and in support of ever-growing rehabilitation and re-socialization efforts, the Company has adopted a broader services charter to support and encourage many evolving rehabilitation initiatives.  Our “C.A.R.E.” programs support Corrections and Accountability objectives in concert with Rehabilitation and Empowerment agendas. Specifically, our technology facilitates a stringent protocol enforcement capability, incorporating restricted movement provisions, coupled with enablement of positive reinforcement communications, all in support of social worker interactions, ongoing ministry options and proactive access by authorized counselors and/or sponsors.  We believe that our programs are uniquely positioned to allow for regular, frequent, and positive interactions and daily affirmations with offenders, as they strive to again become responsible and contributing members of society, while living within the virtual “electronic fence” boundaries established through our proprietary technologies.

The offender marketplace today provides significant opportunity for growth, as local agencies, county governments and state legislators are confronted with ever-growing offender populations, pre-trial overcrowding, resource limitations and economic crises. Importantly, the company is strategically positioned to capitalize on these public sector challenges, while enhancing reduced resource effectiveness and coverage through our offender offerings, which act as a force multiplier for impaired agencies. We are also attracting new customers to the industry, who historically have only leveraged now obsolete “home arrest” technologies, and are now seeking GPS tracking and fulltime monitoring alternatives. Additionally, we are very encouraged by the interest and expansion of many rehabilitation initiatives, which will avail themselves to our program offerings in a mutual pursuit to reduce recidivism, encourage re-socialization and to facilitate the earlier release of qualified candidates.

 
3

 
 
During fiscal year 2008 and in response to these evolving market factors, the Company restructured and right-sized our direct sales force throughout the United States, while embracing an expanded and growing distributorship model domestically and internationally.  We believe that this will help to ensure localized market knowledge, relationship leverage and enhanced ability to respond effectively to requests for sole-sourced and/or competitive proposals. This model has also allowed us to better focus on expanded market sectors, judicial branch contacts and legislature interfaces in ongoing efforts to work from both the bottom up at agencies, as well as from the top down in county and state governments, securing multi-level commitments to embed our programs into ongoing probation, parole and policing efforts. We also completed acquisitions which we believe will enable us to increase our revenues in target markets.  Although acquisitions require the commitment of capital, both to consummate the acquisition as well as to integrate the acquired businesses, we believe that we will be able to integrate these entities and increase our revenues, although there can be no guarantee that revenues will increase as projected or anticipated.

The assimilation of these acquired entities is subject to uncertainties and risks.  There can be no assurance that we will successfully integrate these companies into our operations without incurring significant unanticipated costs or experiencing unexpected operational problems.  Some of the potential risks include:
 
·
Management of expanded inventory base.
 
·
Control of operations that are more geographically diverse than our prior operations.
 
·
Account collections of added customer accounts.
 
·
The need to secure additional operating and working capital.
 
·
The ability to reduce overhead costs and streamline operations.
 
·
Potential conflicts arising from the distribution of products or services from providers who are or may be competitors of the Company.
 
·
Availability of trained support personnel.

In summary, during the year ended September 30, 2008, we were case managing and/or electronically monitoring approximately 12,700 offenders and sold 4,000 TrackerPAL devices internationally, with recurring daily revenues expected to begin during the fiscal quarter ending March 31, 2009. We have worked to build our sales force and to identify new markets and opportunities.  We have entered into monitoring agreements with approximately 400 law enforcement and bail bond agencies throughout the United States.  We acquired two businesses to further our efforts to increase our revenues and market development and now maintain 10 expanding distributorships. Although there can be no guarantee that we will be able to continue these efforts or be able to implement our business plan as anticipated, management believes that the Company is in a good position to move forward and continue the growth of the business and to take advantage of the market opportunities open to it.
 
Our Strategy
 
Our strategy is to empower law enforcement, corrections and rehabilitation professionals with sole-sourced offender management programs, which grant offenders accountable opportunity, while providing for greater public safety at a lower cost. We will accomplish our strategy through the deployment of our SecureAlert GPS/RF Tracking, Intervention Monitoring and Rehabilitation Technologies to corrections, probation, law enforcement and rehabilitation services agencies worldwide, all in support of offender reformation and re-socialization initiatives. Our exclusive portfolio of products and services balance the need to dynamically track and monitor offenders with the opportunity to positively encourage and transform offenders, thus reducing recidivism through our proprietary C.A.R.E.™ (Correction, Accountability, Rehabilitation, Empowerment) programs and client-adapted initiatives. We will continue to develop and deploy adaptive, cost-effective products and services, which meet the ever-changing needs of our clients, while providing enhanced public safety at a lower cost. Importantly, while there are no ongoing warranties of our business model and no assurances of our capabilities to continue to raise necessary expansion capital, we will endeavor to ensure our ongoing viability through diligent, margin-centric imperatives and operational efficiency gains through prioritized management initiatives.

Background

RemoteMDx was originally formed to manufacture and market medical diagnostic stains, solutions and related equipment.  Through the acquisition of SecureAlert, Inc. (“SecureAlert”) in July 2001, the Company expanded its product sales and monitoring services related to the Personal Emergency Response Systems (“PERS”).

In 2006, the Company developed the GPS tracking technology and monitoring business currently conducted by our subsidiary SecureAlert.  SecureAlert’s business involves manufacturing, distributing, and monitoring mobile emergency and GPS tracking products, worn on the body, that focus on the defendant and offender tracking and monitoring market.

 
4

 

To complement our own offerings and obtain additional means to capture position in the offender management market, in January of 2008, we completed the acquisition of a majority interest in the Court Programs Inc. group of companies (“Court Programs”), headquartered in Gulfport, Mississippi; and Midwest Monitoring and Surveillance, Inc. (“Midwest Monitoring”) which is based in Fairmont, Minnesota.  These acquisitions brought the Company solid business relationships with ongoing revenue streams, as well as the possibility of expanding SecureAlert’s presence into the existing accounts of the acquired companies.  Furthermore, they brought business processes and practices in the area of case management, offender pay programs and attendant services that could be leveraged and integrated into SecureAlert.

In order to focus on such integration and leverage potential, during the fiscal year ended September 30, 2008 we divested ourselves of our majority ownership interest of the diagnostic stain business conducted by our former subsidiary Volu-Sol Reagents Corporation (“Volu-Sol”).  We are in the process of completing the divestiture and expect to complete the distribution to RemoteMDx shareholders of our remaining interest (approximately 17% of the common stock) in Volu-Sol during the fiscal quarter ending March 31, 2009.
 
Marketing

According to the latest figures from the United States Department of Justice, Bureau of Justice Statistics (2007), over 7.2 million people were in prison, in jail, or on probation or parole in the United States.  This represents approximately 3.2% of the U.S. population or about 1 in every 31 adults.  Of these, approximately 5 million adult men and women are on supervised probation or parole and a total of 798,202 adult men and women are on parole or mandatory conditional release following a prison term.  These numbers are expected to continue to grow as state and county budget deficits hinder the development and staffing of new prisons and jails, which are already under significant pressure.  We expect that this pressure will not be relieved any time soon with the deepening economic crisis in the United States.  The tandem issues of reduced budgets and the increasing number of overcrowded jails and prisons should drive governmental agencies to technology solutions, including those offered by the Company.

The Company has worked to strengthen its foundation to meet the increased demand anticipated by the above market drivers.  In addition to the acquisition and integration of Court Programs and Midwest Monitoring and the divesture of Volu-Sol to tighten industry focus, through SecureAlert the Company introduced its second generation TrackerPAL device, TrackerPAL IITM, and the eArrest BeaconTM.  TrackerPAL II expands upon the best features of the predecessor TrackerPAL I.  It maintains a single unit design which integrates GPS, expanded waterproofing, 95-decibal siren, cell-based data transmission, and industry-unique cell-based voice capability.  New features include the capability to interface with the eArrest Beacon to provide indoor tracking, and water-proof as opposed to water-resistant design.

As with TrackerPAL I, TrackerPAL II provides the ability to electronically track a wearer’s location by transmitting the device’s location to the Company’s Monitoring Center as it receives GPS signals and transmits that information through its cellular technology.  However, a device’s ability to receive GPS signals is not always possible if it is in a location that impedes those signals, such as a high-rise apartment building or a concrete-wall workplace.  It is with these situations in mind that the eArrest Beacon was developed.  For these situations, TrackerPAL II can be combined with the eArrest Beacon, to establish a radio frequency tether.  So long as the wearer is within range of an eArrest Beacon when he or she is scheduled to be, the Monitoring Center is able to receive and record that information, and no alarm is created.  However, if the wearer goes out of range, an alarm is created and the Monitoring Center responds according to pre-established protocols.  In addition, the Beacon can be associated with multiple Tracker PAL II devices allowing for utilization in settings such as half-way houses, detention centers and prisons; providing the ability to monitor the presence of multiple individuals simultaneously.

Under our current business model, the majority of customers lease our TrackerPAL devices and eArrest Beacons. The equipment is leased under a contractual arrangement (usually at least one year) which may effectively be cancelled at any time by either party with 30 days notice.  We may also pay a monthly fee to distributors for each monitoring contract originated through that distributor.

In addition to this “agency pay” model, our subsidiaries Court Programs and Midwest Monitoring brought “offender pay” programs to the Company.  This model was integrated into SecureAlert.  A benefit of offender pay is that it calls for payment in advance of service, which improves cash flow.  Also, given the budget constraints discussed, it is anticipated that the demand for offender pay programs will continue to grow and the Company has positioned itself well to address this increased requirement.    

 
5

 
Research and Development Program
 
General Information
 
GPS technology utilizes highly accurate clocks on 24 satellites orbiting the earth owned and operated by the U.S. Department of Defense.  These satellites are designed to transmit their identity, orbital parameters and the correct time to earthbound GPS receivers at all times.  Supporting the satellites are several radar-ranging stations maintaining exact orbital parameters for each satellite and transmitting that information to the satellites for rebroadcast at frequencies between 1500 and 1600 MHz.
 
A GPS receiver (or engine) scans the frequency range for GPS satellite transmissions. If the receiver can detect three satellite transmissions, algorithms within the engine deduce its location, usually in terms of longitude and latitude, on the surface of the earth as well as the correct time. If the receiver can detect four or more GPS satellite transmissions, it can also deduce its own elevation above sea level.  The effectiveness of GPS technology is limited by obstructions between the device and the satellites and, therefore, service can be interrupted or may not be available at all if the user is located in the lower floors of high-rise buildings or underground.
 
During the year ended September 30, 2008, we spent $4,811,128 on research and development, compared to research and development expenditures of $4,564,121 in the year ended September 30, 2007 and $2,087,802 for the year ended September 30, 2006.  During the years ended September 30, 2007 and 2006, the Company disposed of monitoring equipment with a net book value of $1,454,784 and $0, respectively, that was initially used as test units and that had served its useful life. In fiscal year 2008, we disposed of units with a net book value of $570,948.  This expense was classified as cost of revenues.
 
Monitoring Center
 
As we developed prior product lines, we simultaneously worked to create the SecureAlert monitoring center. In contrast with a typical monitoring center, our monitoring center is equipped with hardware and software that pinpoints the location of the incoming caller by utilizing GPS technology.  This capability is referred to as telematic.  The operator’s computer screen can identify the caller as well as locate the caller’s precise location on a detailed map.  The Company believes the monitoring center is the cornerstone of our business.  An operator goes through extensive training to insure professional service is provided to the supervising parole officer and individuals wearing the TrackerPAL™ portfolio of products.
 
In order to prepare for an increase in TrackerPAL devices to be monitored, the Company is continuing to build up the monitoring center to effectively manage these devices.  In order to increase the efficiencies in the monitoring center, the Company is developing software to further expand service automation in the processing of alarms and operational events resulting in increased operator efficiency and ability to manage more devices.   The automation of alarms includes pre-recorded responses to inform the offender of the alarm and to resolve the issue.  If the issue is not timely resolved, an operator will become involved and take the additional necessary actions according to protocols set up by the customer.  The Company anticipates one operator will be able to manage over 230 active devices after the software is fully developed.
 
Strategic Relationships
 
We believe one of our strengths is the high quality of our strategic alliances.  Our two primary alliances are described below.
 
Puracom, Inc.
 
Puracom, Inc. (“Puracom”) is a Canadian firm that specializes in hardware and software development in the areas of GPS, GSM and GPRS. It is the preferred distributor of GPS chip sets manufactured by Motorola and is recognized for its rapid development cycles and expertise in both the cellular and GPS areas.  Puracom performs research and development for the Company on a contract basis.  
 
Dynamic Source Manufacturing
 
Dynamic Source Manufacturing (“DSM”) located in Calgary, Alberta, Canada, is an electronics manufacturing company that delivers a full range of services to its clients.  DSM currently manufactures the Company’s TrackerPAL product.
 
Competition in Offender Management Markets
 
In fiscal year 2008, we encountered various levels of GPS, house arrest and case management competition from seven traditional and evolving competitors, as identified below:
 
 
·
Pro Tech Monitoring Inc., Odessa, FL – This company has satellite tracking software technology that operates in conjunction with GPS and wireless communication networks.
     
 
·
iSECUREtrac Corp., 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.
     
 
·
Omnilink Systems, Inc., Alpharetta, GA – This company provides a one-piece device combined with GPS and Sprint cellular networks to electronically track an individual.
     
 
·
BI Incorporated, Boulder, CO – This company has been providing intensive community supervision services and technologies for more than 20 years to criminal justice agencies throughout the United States.
 
6

 
 
· 
G4S plc – Crawley, Sussex, England – This international company is the world’s leading international security solutions group.  In the United States, they provide electronic monitoring of offenders, prison and detention center management and transitional support services.  Currently, G4S resells Omnilink’s active GPS device.
     
 
·
Satellite Tracking of People, LLC – Houston, TX – This company provides GPS tracking systems and services to government agencies.
 
The Company also faces competition from small and regional companies that provide electronic monitoring technology along with localized case management and/or monitoring services.  Some of these entities utilize less well-known technologies or are resellers of the above competitor’s products.  The Company saw an increase in these types of businesses in 2008.  We do not believe there is reliable publicly available information to indicate the relative market share of the Company.
 
Dependence on Major Customers
 
In fiscal year 2008, no customer accounted for more than 10% of the Company’s revenues. During the fiscal year ended September 30, 2007, we had revenues from QuestGuard of $3,229,760 or approximately 49% of total revenues and from Seguridad Satelital Vehicular of $928,800 or approximately 14% of total revenues.  We have no arrangements or contracts with these customers that would require them to purchase a specific amount of product or services from us.
 
Dependence on Major Suppliers
 
The Company purchases cellular services from a variety of providers.  The costs to the Company for these services during the fiscal years ended September 30, 2007 and 2006 were approximately $2,592,951 and $290,000, respectively. During the year ended September 30, 2008, cellular service expense totaled $2,939,790.

The Company has established a relationship with Dynamic Source Manufacturing (DSM) to manufacture the TrackerPAL device.  All monitoring equipment that has been leased or sold to date by the Company has been manufactured by DSM.  Should the relationship between DSM and the Company cease, the Company would need to find another vendor to manufacture the device which could limit the ability to lease additional monitoring equipment.

Product Returns

Our first generation TrackerPAL device experienced significantly high in-field failure rates.  These problems involved:  (1) water ingression; (2) low battery and charger life and functionality; (3) weak GPS signal strength; and (4) scratching and other aesthetic damage when the device was removed from an offender.  Remediating these problems required that the Company refurbish products that had been delivered and products in inventory.  The process was largely completed during the year ended September 30, 2008.  Steps taken to address the problems included the following:
 
 
·
Waterproofing the device by applying a chemical-based ‘weld’ around the back panel seam and augmenting the seal integrity of the rear hatch of the device
     
 
·
Improving electrical connectivity between the battery and the device
     
 
·
Replacing the Integrated Circuit (“IC”) chip installed in the battery chargers
     
 
·
Redesigning and installing a new cellular antenna that improves coverage and enhances GPS tracking
     
 
· 
Enhancing the cosmetic cap design to avoid the early potential to scar outer housing of the device when being removed from the ankle and using different screws to mitigate the stripping of screws and damaging of the device when it is being removed.
 
The problems encountered and corrected in the first TrackerPAL devices led to significant improvements in the new TrackerPAL II device now being distributed by the Company.
 
Intellectual Property
 
Trademarks.  We have developed and use registered trademarks in our business, particularly relating to our corporate and product names. We own eight trademarks that are registered with the United States Patent and Trademark Office and one trademark registered in Mexico. Federal registration of a trademark in the United States enables the registered owner of the mark to bar the unauthorized use of the registered mark in connection with a similar product in the same channels of trade by any third-party anywhere in the United States, regardless of whether the registered owner has ever used the trademark in the area where the unauthorized use occurs. We have one application for registration pending approval in the state of California and one application in the United States that has been approved and is awaiting the filing of a statement of use.  We may file additional applications for the registration of our trademarks in foreign jurisdictions as our business expands under current and planned distribution arrangements.  Protection of registered trademarks in some jurisdictions may not be as extensive as the protection in the United States.
 

 
7

 
 
The following table summarizes our trademark registrations and applications:
 
 
Mark
 
Application Number
Registration
Number
 
Status/Next Action
 
MOBILE911
 
75/615,118
 
2,437,673
 
Registered
       
MOBILE911 SIREN WITH 2-WAY VOICE
COMMUNICATION & DESIGN
76/013,886
2,595,328
Registered
       
WHEN EVERY SECOND MATTERS
76/319,759
2,582,183
Registered
       
MOBILEPAL
78/514,031
3,035,577
Registered
       
HOMEPAL
78/514,093
3,041,055
Registered
       
PAL SERVICES
78/514,514
3,100,192
Registered
       
REMOTEMDX
78/561,796
 
Allowed-Awaiting Statement of Use
       
TRACKERPAL
78/843,035
3,345,878
Registered
       
MOBILE911
78/851,384
3,212,937
Registered
       
TRACKERPAL
CA 1,315,487
 
Pending
       
TRACKERPAL
MX 805,365
960954
Registered
 
Patents. We have four patents in the United States and one patent in China and we have seven patents pending in the United States and ten pending internationally. The following tables contain information regarding our patents and patent applications; there can be no assurance given that the applications will be granted or that they will, if granted, contain all of the claims currently included. 

Domestic Patents:
     
Patent Title
Application/Patent Number
Filing/Issue Dates
Status
Remote Tracking and Communication Device
7,330,122
2/12/08
Issued
       
Remotely Controllable Thermostat
6,260,765
7/17/01
Issued
       
Interference Structure for Emergency Response System Wristwatch
6,366,538
4/2/02
Issued (Reacquired)
       
Multiple Emergency Response Services Combination Emergency Phone and Personal Audio Device
6,285,867
9/4/01
Issued
       
Alarm and Alarm Management System for Remote Tracking Devices
11/489,992
7/14/06
Pending
       
A Remote Tracking Device and a System and Method for Two-Way Voice Communication Between Device and a Monitoring Center
 
11/486,989
7/14/06
Pending
       
A Remote Tracking System with a Dedicated Monitoring Center
11/486,976
7/14/06
Pending
       
Remote Tracking System and Device with Variable Sampling
11/486,991
7/14/06
Pending
       
Methods for Establishing Emergency Communications Between a Communications Device and a Response Center
11/830,398
7/30/07
Pending
       
Remote Tracking and Communications Device
12/028,088
2/8/08
Pending
       
A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking Device
US 61/034,720
3/7/08
Pending
 
 
8

 

International Patents:
     
 
Patent Title
Application/Patent Number
Filing/Issue Dates
Status
Emergency Phone with Single-Button Activation
ZL 01807350.6
10/5/05
Issued
       
Remote Tracking and Communication Device
Brazil PI0614742.9
8/4/06
Pending
       
Remote Tracking and Communication Device
Canada 2617923
8/4/06
Pending
       
Remote Tracking and Communication Device
Europe 06836098.1
8/4/06
Pending
       
Remote Tracking and Communication Device
Mexico a/2008/001932
8/4/06
Pending
       
Emergency Phone with Single-Button Activation
EP 01924386.4
3/28/01
Pending
       
Emergency Phone with Single-Button Activation
JP 2001-571568
3/28/01
Pending
       
Alarm and Alarm Management System for Remote Tracking Devices
PCT/US2007/072736
7/3/07
Pending
       
A Remote Tracking Device and a System and Method for Two-Way Communication Between the Device and a Monitoring Center
PCT/US2007/072740
7/3/07
Pending
       
A Remote Tracking System with a Dedicated Monitoring Center
PCT/US2007/072743
7/3/07
Pending
       
Remote Tracking System and Device with Variable Sampling and Sending Capabilities Based on Environmental Factors
PCT/US2007/072746
7/3/07
Pending
 
During the year ended September 30, 2008, the Company reacquired Patent Number 6,366,538 which was previously sold in exchange for Patent Number 7,092,695 and Patent Number 7,251,471.  Patent Number 6,226,510 and Patent Number 6,044,257 were originally sold subject to terminal disclaimers requiring common ownership with patents owned (Patent Number 7,092,695 and Patent Number 7,251,471) by RemoteMDx but not assigned to purchaser.  A terminal disclaimer is used to link two patents filed by the same inventors and claiming the same invention.  In order to get the additional patent rights desired by the purchaser, the two patents are linked using a terminal disclaimer that specifies that they have the same term and must be commonly assigned.

We intend to protect our legal rights concerning intellectual property by all appropriate legal action. Consequently, we may become involved from time to time in litigation to determine the enforceability, scope, and validity of any of the foregoing proprietary rights. Any patent litigation could result in substantial cost and divert the efforts of management and technical personnel.

 Trade Secrets.  We own certain intellectual property, including trade secrets that we seek to protect, in part, through confidentiality agreements with employees and other parties, although some employees who are involved in research and development activities have not entered into these agreements. Even where these agreements exist, there can be no assurance that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known to or independently developed by competitors.
 
Seasonality
 
Given the continued and steady increase in revenues throughout 2008, no revenue seasonality, if it existed, could be detected.  However, as in previous years, incremental deployment opportunities were found to be slower in the months of July and August. This was due to the unavailability of many judges, probation directors and other key parole officials, who observe a traditional vacation season.
 
Backlog
 
With the commercial availability of TrackerPAL II in August 2008, the Company has realized intermittent weekly manufacturing and shipping backlogs, ranging from 75 to 125 units for these devices through December 1, 2008.  This backlog is primarily related to (1) orders for the replacement of TrackerPAL I units, (2) the addition of incremental units within existing accounts and (3) the fulfillment of new orders for new accounts. The Company views backlogs as undesirable, as they impair deployments, which necessarily reduce available recurring revenue streams. The Company continues to work on mitigating backlogs in an ongoing effort to maximize demand fulfillment and to capitalize on all available recurring revenue opportunities.
 
9

 
 
Environment
 
We are not aware of any instance in which we have contravened federal, state, or local laws relating to protection of the environment or in which we otherwise may be subject to liability for environmental conditions that could materially affect operations.
 
Employees
 
As of December 1, 2008, the Company had 160 full time employees and 33 part-time employees.  None of the employees are represented by a labor union or subject to a collective bargaining agreement.  The Company has never experienced a work stoppage and management believes that the relations with employees are good.  After September 30, 2008, the Company downsized its monitoring center and other headquarters staff by approximately 13% (26 persons) as part of a restructuring intended to improve operating margins and reduce overhead.  Additional reductions in force and cost-saving measures will also be considered in the next six months as the Company implements its strategic plan to improve operating results by reducing operating losses.
 
Additional Available Information
 
We maintain executive offices and principal facilities at 150 West Civic Center Drive, Suite 400, Sandy, Utah 84070.  Our telephone number is (801) 451-6141. We maintain a World Wide Web site at www.remotemdx.com.  The information on our web site should not be considered part of this Report on Form 10-K.
 
We make available, free of charge at our corporate web site, copies of our annual reports filed with the Securities and Exchange Commission (“SEC”) on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and all amendments to these reports, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act. This information may also be obtained from the SEC’s on-line database, which is located at www.sec.gov.
 
 
Risks and uncertainties that may affect our business, financial condition, performance, development, and results of operations include the following:
 
The financial statements contained in this annual report on Form 10-K for the year ended September 30, 2008 have been prepared on the basis that the Company will continue as a going concern, notwithstanding the fact that its financial performance and condition during the past few years raise substantial doubt as to its ability to do so. There is no assurance the Company will ever be profitable. In fiscal year 2008, the Company incurred a net loss of $49,587,050, negative cash flows from operating activities of $9,672,744, and as of September 30, 2008 has an accumulated deficit of $182,683,996.  These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements included in this Report do not include any adjustments that might result from the outcome of this uncertainty.  Our plan with respect to this uncertainty is to focus on increasing the number of TrackerPAL devices in the market place from which we will generate monitoring service revenue.  There can be no assurance that revenues will increase rapidly enough to offset operating losses and repay indebtedness.  Likewise, there can be no assurance that the debt holders will be willing to convert the debt obligations to equity securities or that the Company will be successful in raising additional capital from the sale of equity or debt securities.  If the Company is unable to increase cash flows from operating activities or obtain additional financing, it will be unable to continue the development of its products and will likely cease operations.

The Company has a history of losses and anticipates significant future losses and may be unable to project its revenues and expenses accurately. The Company will incur significant expenses associated with the development and deployment of its new products and promoting its brand. It intends to enter into additional arrangements through current and future strategic alliances that may require it to pay consideration in various forms and in amounts that may significantly exceed current estimates and expectations.  The Company may also be required to offer promotional packages of hardware and software to end-users at subsidized prices in order to promote its brand, products and services. These guaranteed payments, promotions and other arrangements will result in significant expense. If the Company does achieve profitability, it cannot be certain that it will be able to sustain or increase profitability in the future.  In addition, because of its limited operating history in its newly targeted markets, the Company may be unable to project revenues or expenses with any degree of certainty. Management expects expenses to increase significantly in the future as the Company continues to incur significant sales and marketing, product development and administrative expenses.  The Company cannot guarantee that it will be able to generate sufficient revenues to offset operating expenses or the costs of the promotional packages or subsidies described above, or that it will be able to achieve or maintain profitability. If revenues fall short of projections, our business, financial condition and operating results would be materially adversely affected.
 

 
10

 
 
General economic conditions may affect our revenue and harm our business.  As widely reported, financial markets in the United States, Europe and Asia have been experiencing extreme disruption in recent months. Unfavorable changes in economic conditions, including declining consumer confidence, inflation, recession or other changes, may lead our customers to delay or reduce purchases of our products and our results of operations and financial condition could be adversely affected thereby. Challenging economic conditions also may impair the ability of our customers or distributors to pay for products they have purchased, and as a result, our reserves for doubtful accounts and write-offs of accounts receivable could increase. Our cash flows may be adversely affected by delayed payments or underpayments by our customers. We are unable to predict the duration and severity of the current disruption in financial markets and adverse economic conditions in the U.S. and other countries.

As a result of our increased focus on a new business market, our business is subject to many of the risks of a new or start-up venture. The change in 2008 of our business goals and strategy subjects us to the risks and uncertainties usually associated with start-ups. Our business plan involves risks, uncertainties and difficulties frequently encountered by companies in their early stages of development.  If the Company is to be successful in this new business direction, it must accomplish the following, among other things:
 
·     Develop and introduce functional and attractive product and service offerings;
·     Increase awareness of our brand and develop consumer loyalty;
·     Respond to competitive and technological developments;
·     Increase gross profit margins;
·     Build an operational structure to support our business; and
·     Attract, retain and motivate qualified personnel.

If the Company fails to achieve these goals, that failure would have a material adverse effect on its business, prospects, financial condition and operating results.  Because the market for its new product and service offerings is new and evolving, it is difficult to predict with any certainty the size of this market and its growth rate, if any.  There is no assurance that a market for these products or services will ever develop or that demand for our products and services will emerge or be sustainable. If the market fails to develop, develops more slowly than expected or becomes saturated with competitors, our business, financial condition and operating results would be materially adversely affected.
 
Groups own or control a significant number of our outstanding shares.  Certain groups or persons associated with them beneficially own a substantial number of shares of our outstanding common stock.  As a result, these persons have the ability, acting as a group, to effectively control our affairs and business, including the election of our directors and, subject to certain limitations, approval or preclusion of fundamental corporate transactions. This concentration of ownership may also have the effect of delaying or preventing a change of control or making other transactions more difficult or impossible without their support.  See Item 10 “Directors, Executive Officers and Corporate Governance,” and Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
 
There is no certainty that the market will accept our new products and services.  Our targeted markets may never accept our products or services.  Governmental organizations may not use our products unless they determine, based on experience, advertising or other factors, that those products are a preferable alternative to currently available methods of tracking.  In addition, decisions to adopt new tracking devices can be influenced by government administrators, regulatory factors, and other factors largely outside our control.  No assurance can be given that key decision-makers will accept our new products, which could have a material adverse effect on our business, financial condition and results of operations.
 
Our relationship with our certain stockholders presents potential conflicts of interest, which may result in decisions that favor them over our other shareholders.  Two of our principal beneficial owners and founders, David Derrick and James J. Dalton, provide management and/or financial services and assistance to the Company.  When their personal investment interests diverge from our interests, they and their affiliates may exercise their influence in their own best interests. Some decisions concerning our operations or finances may present conflicts of interest between us and these stockholders and their affiliated entities.
 
The Company relies on significant suppliers for key products and cellular access.  If the Company  does not renew these agreements when they expire it may not continue to have access to these suppliers’ products or services at favorable prices or in volumes as it has in the past, which would reduce revenues and could adversely affect results of operations or financial condition.  The Company has entered into an agreement with a national cellular access company for cellular services. We also rely currently on a single manufacturer for the manufacture of our TrackerPAL devices.  If any of these significant suppliers were to cease providing product or services to us, we would be required to seek alternative sources. There is no assurance that alternate sources could be located or that the delay or additional expense associated with locating alternative sources for these products or services would not materially and adversely affect our business and financial condition.

 
11

 
 
Our business subjects our research, development and ultimate marketing activities to current and possibly to future government regulations. The cost of compliance or the failure to comply with these regulations could adversely affect our business, results of operations and financial condition. Our monitoring device products are not subject to specific approvals from any governmental agency, although our products using cellular and GPS technologies must be manufactured in compliance with applicable rules and regulations of the Federal Communications Commission (“FCC”).  There can also be no assurance that changes in the legal or regulatory framework or other subsequent developments will not result in limitation, suspension or revocation of regulatory approvals granted to us. Any such events, were they to occur, could have a material adverse effect on our business, financial condition and results of operations.  We may be required to comply with FCC regulations for manufacturing practices, which mandate procedures for extensive control and documentation of product design, control and validation of the manufacturing process and overall product quality. Foreign regulatory agencies have similar manufacturing standards. Any third parties manufacturing our products or supplying materials or components for such products may also be subject to these manufacturing practices and mandatory procedures. If we, our management or our third-party manufacturers fail to comply with applicable regulations regarding these manufacturing practices, we could be subject to a number of sanctions, including fines, injunctions, civil penalties, delays, suspensions or withdrawals of market approval, seizures or recalls of product, operating restrictions and, in some cases, criminal prosecutions.  Our products and related manufacturing operations may also be subject to regulation, inspection and licensing by other governmental agencies, including the Occupational Health and Safety Administration.
 
The Company faces intense competition, including competition from entities that are more established and may have greater financial resources than we do, which may make it difficult for us to establish and maintain a viable market presence.  Our current and expected markets are rapidly changing.  Existing products and services and emerging products and services will compete directly with the products we are seeking to develop and market.  Our technology will compete directly with other technology, and, although we believe our technology has or will have advantages over these competing systems, there can be no assurance that our technology will have advantages that are significant enough to cause users to adopt its use.  Competition is expected to increase.  Many of these competitors have products or techniques approved or in development and operate large, well-funded research and development programs in the field.  Moreover, these companies and institutions may be in the process of developing technology that could be developed more quickly or be ultimately more effective than our planned products.  We face competition based on product efficacy, availability of supply, marketing and sales capability, price and patent position.  There can be no assurance that our competitors will not develop more effective or more affordable products, or achieve earlier patent protection or product commercialization.
 
Our business plan is subject to the risks of technological uncertainty, which may result in our products failing to be competitive or readily accepted by our target markets.  We may not realize revenues from the sale of any of our new products or services for several years, if at all.  Some of the products we are currently evaluating likely will require further research and development efforts before they can be commercialized. There can be no assurance that our research and development efforts will be successful or that we will be successful in developing any commercially successful products.  In addition, the technology which we integrate or that we may expect to integrate with our product and service offerings is rapidly changing and developing.  We face risks associated with the possibility that our technology may not function as intended and the possible obsolescence of our technology and the risks of delay in the further development of our own technologies. Cellular coverage is not uniform throughout our current and targeted markets and GPS technology depends upon “line-of-sight” access to satellite signals used to locate the user.  This limits the effectiveness of GPS if the user is in the lower floors of a tall building, underground or otherwise located where the signals have difficulty penetrating.  Other difficulties and uncertainties normally associated with new industries or the application of new technologies in new or existing industries also threaten our business, including the possible lack of consumer acceptance, difficulty in obtaining financing for untested technologies, increasing competition from larger or smaller well-funded competitors, advances in competing or other technologies, and changes in laws and regulations affecting the development, marketing or use of our new products and related services.
 
Our business plan anticipates significant growth through monitoring revenues and acquisitions. To manage the expected growth the Company will require capital and there is no assurance it will be successful in obtaining necessary additional funding.  If we are successful in implementing our business plan, we may be required to raise additional capital to manage anticipated growth.  Our actual capital requirements will depend on many factors, including but not limited to, the costs and timing of our ongoing development activities the success of our development efforts, the cost and timing of establishing or expanding our revenues, marketing and manufacturing activities, the extent to which our products gain market acceptance, our ability to establish and maintain collaborative relationships, competing technological and market developments, the progress of our commercialization efforts and the commercialization efforts of our marketing alliances, the costs involved in preparing, filing, prosecuting, maintaining and enforcing and defending patent claims and other intellectual property rights, developments related to regulatory issues, and other factors, including many that are outside our control. To satisfy our capital requirements, we may seek to raise funds through public or private financings, collaborative relationships or other arrangements. Any arrangement that includes the issuance of equity securities or securities convertible into our equity securities may be dilutive to stockholders (including the purchasers of the shares), and debt financing, if available, may involve significant restrictive covenants that limit our ability to raise capital in other transactions. Collaborative arrangements, if necessary to raise additional funds, may require that we relinquish or encumber our rights to certain of our technologies, products or marketing territories.  Any inability or failure to raise capital when needed could also have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that any such financing, if required, will be available on terms satisfactory to us, if at all.  

 
12

 
 
Our products are subject to the risks and uncertainties associated with the protection of intellectual property and related proprietary rights.  We believe that our success depends in part on our ability to obtain and enforce patents, maintain trade secrets and operate without infringing on the proprietary rights of others in the United States and in other countries.  We have received several patents; we have also applied for several additional patents and those applications are awaiting action by the U.S. Patent Office.  There is no assurance those patents will issue or that when they do issue they will include all of the claims currently included in the applications.  Even if they do issue, those new patents and our existing patents must be protected against possible infringement.  The enforcement of patent rights can be uncertain and involve complex legal and factual questions.  The scope and enforceability of patent claims are not systematically predictable with absolute accuracy.  The strength of our own patent rights depends, in part, upon the breadth and scope of protection provided by the patent and the validity of our patents, if any.  Our inability to obtain or to maintain patents on our key products could adversely affect our business.  We own five patents and have filed and intend to file additional patent applications in the United States and in key foreign jurisdictions relating to our technologies, improvements to those technologies and for specific products we may develop.  There can be no assurance that patents will issue on any of these applications or that, if issued, any patents will not be challenged, invalidated or circumvented.  The prosecution of patent applications and the enforcement of patent rights are expensive, and the expense may adversely affect our profitability and the results of our operations.  In addition, there can be no assurance that the rights afforded by any patents will guarantee proprietary protection or competitive advantage.  Our success will also depend, in part, on our ability to avoid infringing the patent rights of others.  We must also avoid any material breach of technology licenses we may enter into with respect to our new products and services.  Existing patent and license rights may require us to alter the designs of our products or processes, obtain licenses or cease certain activities.  In addition, if patents have been issued to others that contain competitive or conflicting claims and such claims are ultimately determined to be valid and superior to our own, we may be required to obtain licenses to those patents or to develop or obtain alternative technology.  If any licenses are required, there can be no assurance that we will be able to obtain any necessary licenses on commercially favorable terms, if at all.  Any breach of an existing license or failure to obtain a license to any technology that may be necessary in order to commercialize our products may have a material adverse impact on our business, results of operations and financial condition.  Litigation that could result in substantial costs may also be necessary to enforce patents licensed or issued to us or to determine the scope or validity of third-party proprietary rights.  If our competitors prepare and file patent applications in the United States that claim technology also claimed by us, we may have to participate in proceedings declared by the U.S. Patent and Trademark Office to determine priority of invention, which could result in substantial costs, even if we eventually prevail.  An adverse outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require that we cease using such technology.
 
We also rely on trade secrets laws to protect portions of our technology for which patent protection has not yet been pursued or is not believed to be appropriate or obtainable.  These laws may protect us against the unlawful or unpermitted disclosure of any information of a confidential and proprietary nature, including but not limited to our know-how, trade secrets, methods of operation, names and information relating to vendors or suppliers and customer names and addresses.  We intend to protect this unpatentable and unpatented proprietary technology and processes, in addition to other confidential and proprietary information in part, by entering into confidentiality agreements with employees, collaborative partners, consultants and certain contractors.  There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, or that our trade secrets and other confidential and proprietary information will not otherwise become known or be independently discovered or reverse-engineered by competitors.
 
The existence of certain anti-dilution rights applicable to our Series B Preferred Stock might result in increased dilution inasmuch as the Company has offered and sold shares of common stock or securities convertible into shares of common stock at prices below the initial conversion rate of $3.00 per common share, unless those rights are waived.  The investors in our Series B preferred stock have the right to an automatic adjustment of the conversion price of the Series B preferred shares held by them in the event we sell shares of common stock or securities convertible into common stock at a price below the original conversion price of $3.00 per share. Certain holders of the Series B preferred stock have waived their right to receive the adjustment but there is no assurance that any holder of Series B preferred stock will waive those rights as to issuances of common stock.  Accordingly, we may be required to issue additional shares of common stock to comply with anti-dilution adjustments to the conversion rights of present or former preferred shareholders.  Any increase in the number of shares of common stock issued upon conversion of Series B preferred shares would compound the risks of dilution to existing stockholders.  As of September 30, 2008, the total outstanding shares of Series B Preferred stock of 10,999 could convert into a maximum of 113,783 shares of common stock.
 
The obligation to issue shares of common stock upon the exercise of outstanding options and warrants or upon conversion of outstanding shares of preferred stock increases the potential for short sales. Downward pressure on the market price of our common stock that likely would result from issuances of common stock upon conversion of preferred stock or convertible debentures, or upon the exercise of options and warrants, could encourage short sales of common stock by the holders of the preferred stock or others.  A significant amount of short selling could place further downward pressure on the market price of the common stock, reducing the market value of the securities held by our shareholders. 
 
Payment of dividends in additional shares of Series A preferred stock or in shares of common stock will result in further dilution. Under the terms of the Series A preferred stock, our board of directors may elect to pay dividends by issuing additional shares of Series A preferred stock or common stock.  Dividends accrue from the date of the issuance of the preferred stock, subject to any intervening payments in cash. Each share of Series A preferred stock is convertible into 370 shares of common stock.  The issuance of additional shares of Series A preferred stock or common stock as dividends could result in a substantial increase in the number of shares issued and outstanding and could result in a decrease of the relative voting control of the holders of the common stock issued and outstanding prior to such payment of dividends and interest.  As of September 30, 2008, the total outstanding shares of Series A Preferred stock of 19 could convert into a maximum of 7,178 shares of common stock.

 
13

 
 
The Company has had and will continue to have significant capital needs and there is no assurance it will be successful in obtaining necessary additional funding. We will be required to raise additional capital to fully implement our business plan.  Our actual capital requirements will depend on many factors, including but not limited to, the costs and timing of our ongoing development activities, the success of our development efforts, the cost and timing of establishing or expanding our sales, marketing and manufacturing activities, the extent to which our products gain market acceptance, our ability to establish and maintain collaborative relationships, competing technological and market developments, the progress of our commercialization efforts and the commercialization efforts of our marketing alliances, the costs involved in preparing, filing, prosecuting, maintaining and enforcing and defending patent claims and other intellectual property rights, developments related to regulatory issues, and other factors, including many that are outside our control. To satisfy our capital requirements, we may seek to raise funds through public or private financings, collaborative relationships or other arrangements. Any arrangement that includes the issuance of equity securities or securities convertible into our equity securities may be dilutive to stockholders (including the purchasers of the shares), and debt financing, if available, may involve significant restrictive covenants that limit our ability to raise capital in other transactions. Collaborative arrangements, if necessary to raise additional funds, may require that we relinquish or encumber our rights to certain of our technologies, products or marketing territories.  Any inability or failure to raise capital when needed could also have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that any such financing, if required, will be available on terms satisfactory to us, if at all.
  
Penny stock regulations may impose certain restrictions on marketability of the Company’s securities. The SEC has adopted regulations which generally define a “penny stock” to be any equity security that has a market price (as defined) of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions.  As a result, the common stock is subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse).  For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s written consent to the transaction prior to the purchase.  Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market.  The broker-dealer must also disclose the commission payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market.  Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.  Consequently, the “penny stock” rules may restrict the ability of broker-dealers to sell the Company’s securities and may affect the ability of investors to sell the Company’s securities in the secondary market and the price at which such purchasers can sell any such securities. 
 
Investors should be aware that, according to the SEC, the market for penny stocks has suffered in recent years from patterns of fraud and abuse.  Such patterns include:
 
 
·
Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
 
·
Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
 
·
“Boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;
 
·
Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
 
·
The wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.

 The Company’s management is aware of the abuses that have occurred historically in the penny stock market.
 
The holders of our Series B preferred stock have voting rights that are the same as the voting rights of holders of our common stock, which effectively dilutes the voting power of the holders of the common stock.  Holders of shares of Series B preferred stock are entitled to one vote per share of Series B preferred stock on all matters upon which holders of the common stock of the Company are entitled to vote.  Therefore, without converting the shares of Series B preferred stock, the holders thereof enjoy the same voting rights as if they held an equal number of shares of common stock, as well as the liquidation preference described above.  In addition, without the approval of holders of a majority of the outstanding shares of Series B preferred stock voting as a class, we are prohibited from (i) authorizing, creating or issuing any shares of any class or series ranking senior to the Series B preferred stock as to liquidation rights; (ii) amending, altering or repealing our Articles of Incorporation if the powers, preferences or special rights of the Series B preferred stock would be materially adversely affected; or (iii) becoming subject to any restriction on the Series B preferred stock other than restrictions arising solely under the Utah Act or existing under our Articles of Incorporation as in effect on June 1, 2001.  As of September 30, 2008, the total outstanding shares of Series B Preferred stock of 10,999 could convert into a maximum of 113,783 shares of common stock.

 
14

 
 
 
We received no written comments from the Commission staff that remain unresolved regarding periodic or current reports under the Exchange Act in the 180 days prior to September 30, 2008.
 
 
Our headquarters and monitoring facility are housed in 11,400 square feet of space located at 150 West Civic Center Drive, Sandy, Utah.  Monthly lease payments are approximately $17,600 per month. We moved into these facilities during the fourth fiscal quarter of 2005.  During November 2008, the Company renewed 8,106 square feet this lease which will expire on November 30, 2013.  The lease payment will decrease from approximately $17,600 to $15,400 per month.  In addition, the Company signed an additional lease to provide 6,152 square feet of warehousing and pallet shipping functions and capabilities.  The facility is located at 9716 South 500 West, Sandy, Utah 84070.  Monthly lease payments are approximately $5,200 per month.  Management believes that these facilities are sufficient to meet our needs for the foreseeable future.

Item 3.    Legal Proceedings
 
Satellite Tracking of People, L.L.C. (a/k/a STOP, LLC) and Michelle Enterprises, LLC v. Pro Tech Monitoring, Inc., Omnilink Systems, Inc., and SecureAlert: A patent infringement suit was filed against the Company and other defendants in the United States District Court for the Eastern District of Texas on March 19, 2008.  Plaintiffs have alleged that the defendants infringe United States Patent No. RE39,909 ('909 Patent), Tracking System for Locational Tracking of Monitored Persons.  On May 14, 2008, the Company answered the complaint, denying Plaintiffs allegations and asserting various affirmative defenses. The Company also asserted a counterclaim for declaratory judgment that the Company has not infringed the '909 Patent and that the patent is invalid. The Company intends to vigorously defend the case and prosecute its counterclaim. The Company has not accrued any potential loss as the probability of incurring a material loss is deemed remote by management, after consultation with legal counsel.
 
RemoteMDx, Inc. v. Satellite Tracking of People, L.L.C. (a/k/a STOP, LLC):  The Company filed a patent infringement suit against STOP in the United States District Court for the Central District of California on May 2, 2008.  The Company has asserted that STOP infringes United States Patent No. 7,330,122 for a remote tracking and communication device and method for processing data from the device ("'122 patent"), in which the Company holds all rights and interests.  STOP moved to dismiss the original complaint and also filed an answer and counterclaim.  The motion to dismiss was granted with leave to amend.  The Company filed an amended complaint on August 5, 2008.  The amended complaint seeks damages for infringement according to proof, treble damages, injunctive relief enjoining the infringement, and costs and attorney's fees.  STOP's counterclaim is for declaratory relief, seeking a declaration that STOP has not infringed the '122 patent and that the '122 patent is invalid. The Company filed an answer to the counterclaim.  The Company intends to vigorously prosecute its claims and defend against the counterclaim. The Company has not accrued any potential loss as the probability of incurring a material loss is deemed remote by management, after consultation with legal counsel.
 
Strategic Growth International, Inc., v. RemoteMDx.  In December 2008, the Company verbally agreed to settle a lawsuit with Strategic Growth International, Inc. in consideration of the issuance of 1,200,000 restricted shares of the Company’s common stock valued at $360,000, or $0.30 per share and $25,000 in cash.  The shares will have piggyback registration rights and be protected against any potential reverse stock splits.  The Company has accrued $385,000 to settle this lawsuit.

Frederico and Erica Castellanos, v. Volu-Sol, Inc.  On August 15, 2008, plaintiffs Frederico and Erica Castellanos filed a lawsuit in the Superior Court of the State of California, Los Angeles County.  The complaint names twenty-four defendants and one hundred unnamed Doe defendants.  The complaint asserts claims for negligence, strict liability - failure to warn, strict liability - design defect, fraudulent concealment, breach of implied warranties, and loss of consortium based on Mr. Castellanos' alleged exposure to certain chemicals during the course of his employment.  One of the original named defendants was Logos Scientific, Inc.  On September 4, 2008, Plaintiffs amended their complaint to substitute "Volu-Sol, Inc. as successor in interest to Logos Scientific, Inc." for the previously unnamed Doe 1.  Volu-Sol, Inc. was the original name of RemoteMDx, Inc.  The Company intends to vigorously defend itself against Castellanos’ claims.  The Company has not accrued any potential loss as the probability of incurring a material loss is deemed remote by management, after consultation with legal counsel.

Thomas Natale, et al. v. RemoteMDx.  This suit was filed against the Company and other defendants, including ADP Management Corp., James Dalton and David Derrick in the United States District Court for the Eastern District of Tennessee on August 18, 2008 for non-payment of certain obligations.  The Plaintiff has alleged that the Defendants owe him certain back amounts of bonuses, interest and note payables. Management has been advised that a similar action has been filed by Edward Boling. The Company has answered the complaint and discovery is ongoing. The Company intends to vigorously defend the case and prosecute its counterclaim. The Company has not accrued any potential loss as the probability of incurring a material loss is deemed remote by management, after consultation with legal counsel.

 
15

 
 
SecureAlert, v. David Ezell, et al.  The Company has filed a claim against David Ezell and several related entities for breach of contract, unjust enrichment, conversion, and punitive damages, and seeks approximately $290,810 in damages, as well as other amounts to be proven at trial.  The case is in the discovery stage.  After consultation with legal counsel, the Company has not accrued for any potential recovery or any material loss associated with this claim.

Informal Inquiry.  As voluntarily disclosed in prior reports filed by the Company with the SEC commencing with its quarterly report for the fiscal quarter ended March 31, 2008, the Company was advised by letter from the SEC, Salt Lake District Office in March 2008, that the SEC had begun an informal inquiry regarding the Company.  The SEC has advised the Company in its correspondence that this informal inquiry should not be construed as an indication that any violation of law has occurred, nor should it be considered a reflection upon any person, entity, or security.  There were no material developments in this matter during the most recent fiscal quarter ended September 30, 2008.
 
 
 
No matters were submitted to a vote of shareholders during the quarter ended September 30, 2008.  Subsequent to the year-end, as previously reported in a Current Report on Form 8-K, the Company held its annual shareholder meeting on October 28, 2008.  At this meeting, the following matters were considered and voted upon by the shareholders of the Company:
 
 
·
Election of six directors;
 
 
·
Approval of an amendment to the Articles of Incorporation of the Company, changing the name of the Company to SecureAlert, Inc.;
 
 
·
Ratification of the selection of Hansen Barnett & Maxwell, P.C. as the Company’s independent registered public accounting firm for the fiscal year ended September 30, 2008.
 
A total of 87,229,775 shares (approximately 58%) of the issued and outstanding shares of the Company were represented by proxy or in person at the meeting. These shares were voted on the matters described above as follows:
 
1.              For the directors as follows:
 
Name
Number of 
Shares For
Number of Shares
Abstaining/Withheld
David Derrick
87,016,137
213,638
James Dalton
87,008,148
221,627
Robert Childers
87,016,148
213,627
David Hanlon
87,016,148
213,627
Peter McCall
86,968,098
261,677
Larry Schafran
86,976,098
253,677
 
 
2.
For the amendment to the Articles of Incorporation changing the corporate name to SecureAlert, Inc., as follows:

Number of 
Shares For
Number of 
Shares Against
Number of Shares
Abstaining/Withheld
85,677,576
77,446
1,474,753

The Company intends to file the amendment effecting the change of name to SecureAlert, Inc. as soon as practical.

3.  
For the ratification of the audit committee of the Board’s selection of Hansen Barnett & Maxwell, P.C. as the independent certified public accountants of the Company for fiscal year 2008 as follows:
 
Number of 
Shares For
Number of 
Shares Against
Number of Shares
Abstaining/Withheld
87,093,497
81,945
54,333
 

 
16

 
 
 
 
Market Information

Our common stock is traded on the OTC Bulletin Board of the National Association of Securities Dealers, Inc., under the symbol “RMDX.OB.”  The following table sets forth the range of high and low bid prices of our common stock as reported on the OTC Bulletin Board of the National Association of Securities Dealers, Inc., for the periods indicated.  The sales information is available online at http://otcbb.com.
 
   
High
   
Low
 
Fiscal Year 2007
           
First Quarter
 
$
1.63
   
$
1.51
 
Second Quarter
 
$
1.54
   
$
1.40
 
Third Quarter
 
$
1.69
   
$
1.60
 
Fourth Quarter
 
$
2.84
   
$
2.40
 
                 
Fiscal Year 2008
               
First Quarter
 
$
4.22
   
$
2.72
 
Second Quarter
 
$
4.09
   
$
1.00
 
Third Quarter
 
$
1.84
   
$
1.47
 
Fourth Quarter
 
$
1.52
   
$
1.11
 
 
Holders

As of December 1, 2008, there were approximately 3,000 holders of record of the common stock and 155,881,260 shares of common stock outstanding. We also have 19 shares of Series A preferred stock outstanding, held by one stockholder, convertible into a minimum of approximately 7,178 shares of common stock, as well as 10,999 shares of Series B preferred stock outstanding held by six stockholders, that at present are convertible into approximately 113,783 shares of common stock.  We also have granted options and warrants for the purchase of approximately 21,725,451 shares of common stock.  As discussed elsewhere in this Report, we may be required to issue additional shares of common stock or preferred stock to pay accrued dividends, or to comply with anti-dilution adjustments to the conversion rights of present or former preferred stockholders.
 
Dividends

Since incorporation, we have not declared any cash dividends on our common stock.  We do not anticipate declaring cash dividends on our common stock for the foreseeable future.  The Series A Preferred Stock accrues dividends at the rate of 10% annually, which may be paid in cash or additional shares of preferred or common stock, at our option.  To date all such dividends have been paid by issuance of preferred stock, valued at $200 per share of preferred.  We are not required to pay and do not pay dividends with respect to the Series B Preferred Stock.  During the years ended September 30, 2008 and 2007, the Company recorded $345,356 and $550,603 in stock dividends paid on Series A and C Preferred Stock, respectively.

Dilution

We have a large number of shares of common stock authorized in comparison to the number of shares issued and outstanding.  The board of directors determines when and under what conditions and at what prices to issue stock.  In addition, a significant number of shares of common stock are reserved for issuance upon exercise of purchase or conversion rights.
 
The issuance of any shares of common stock for any reason will result in dilution of the equity and voting interests of existing stockholders.
 
Transfer Agent and Registrar

The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company, 59 Maiden Lane, Plaza Level, New York, NY 11219.

Authorized Capital Increased

As of September 30, 2008, the Company was authorized to issue 175,000,000 shares of common stock.  Subsequent to the fiscal year 2008, the holders of a majority of the issued and outstanding shares of the Company’s common stock consented in writing to an increase of the authorized shares from 175,000,000 to 250,000,000.  The Company intends to file Amended Articles of Incorporation for the Company to effect the increase in the number of authorized shares as soon as reasonably practical.

 
17

 
 
Stock Performance Graph
 
The following Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.

The RemoteMDx, Inc. Common Stock Performance Graph compares total shareholder returns of the Company since July 10, 2004, to two indices: the NASDAQ Composite Index and the RDG SmallCap Technology Index.  The total return calculations assume the reinvestment of dividends, although dividends have never been declared for the Company’s common stock, and are based on the returns of the component companies weighted according to their capitalizations as of the end of each monthly period. 
 
The Company’s common stock is traded on the Over-the-counter Bulletin Board. The Company’s stock price on the last trading day of its fiscal year, September 30, 2008, was $1.20.
 
Recent Sales of Unregistered Securities
 
During the year ended September 30, 2008, we issued 28,541,175 shares of common stock without registration of the offer and sale of the securities under the Securities Act, as follows:
 
Shares Issued Pursuant to Acquisitions
 
 
·
650,000 shares valued at $2,599,500 were issued in December 2007 pursuant to acquisitions.  The recipients of these shares represented in the original acquisition agreements that they were accredited investors as defined in Rule 501 under the Securities Act.  These shares of common stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder, including Regulation D and Rule 506.  There were no non-accredited investors involved in this issuance.
 

 
18

 
 
Shares Issued in Connection with Line of Credit Agreement
 
 
·
360,000 shares were issued in March 2008 to certain entities who provided letters of credit in connection with the Company’s line of credit with Citizen National Bank. These shares of common stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder.  The entities and their respective owners, officers and directors were accredited investors. There were no non-accredited investors involved in this issuance of shares.
 
Shares Issued to Employees, Consultants and Vendors for Products and Services
 
 
·
6,710,000 shares valued at $10,552,300 were approved for issuance to employees and officers of the Company as consideration for services rendered to the Company during fiscal year 2008.  Additionally, 1,000,000 shares of restricted common stock valued at $1,520,000, or $1.52 per share were issued to an officer for deferred compensation.  These shares of common stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder.  The recipients of these shares were officers or employees of the Company at the time of the issuance and each was an accredited investor.
 
 
·
400,000 shares valued at $704,000 were issued in May 2008 to an independent consultant for consulting services provided to the Company.  These consulting services consisted of aiding in the settlement of a vendor dispute.  These shares of common stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder.
 
 
·
1,025,000 shares valued at $3,068,285 were issued in April 2007 to seven unaffiliated entities for product design services.  These shares of common stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder.
 
Shares Issued in Settlement
 
 
·
325,000 shares valued at $572,000 were issued in May 2008 to Onyx Consulting Group (“Onyx”) to settle amounts owed due to a public relations contract. These shares of common stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder.  These shares were issued pursuant to a privately negotiated transaction in settlement of amounts owed or that may be owed as royalty payments, and there was no public offering of securities.  Onyx is an accredited investor.  No general solicitation or general advertising was made or done in connection with the issuance of the shares.
 
Shares Issued Upon the Conversion of Preferred Stock
 
 
·
15,000 shares of common stock were issued upon conversion of the Company’s Series B Preferred stock in October 2007.  Each share of Series B Preferred stock is convertible at any time into shares of common stock.  The number of shares of common stock into which each share of Series B Preferred stock may be converted is determined by dividing the original purchase price paid per share of Series B Preferred stock, namely $3.00, by the conversion price.  These shares of common stock were issued without registration under the Securities Act in reliance on Sections 3(a)(9) and 4(2) of the Securities Act and the rules and regulations promulgated thereunder.  The recipients of the common shares were accredited investors and were already security holders of the Company.  The common shares were issued pursuant to the terms of the rights and preferences of the preferred class of securities that were converted, and there was no public offering of securities.  Additionally, no general solicitation or general advertising was made or done in connection with the issuances, and no cash consideration was paid in connection with the conversion of the preferred stock.
 
Shares Issued Upon the Conversion of SecureAlert Series A Preferred Stock
 
 
·
7,434,249 shares of common stock were issued upon redemption of SecureAlert Series A Preferred stock in March 2008. In addition, 825,893 shares of common stock were issued for SecureAlert Series A Preferred stock dividends.  These shares of common stock were issued without registration under the Securities Act in reliance on Sections 3(a)(9) and 4(2) of the Securities Act and the rules and regulations promulgated thereunder.  The shares of common stock were issued to individuals who were already security holders of the Company and were issued pursuant to the terms of the rights and preferences of the preferred class of securities being converted.  These shares were issued pursuant to a privately negotiated transaction.  There was no public offering of securities, and no general solicitation or general advertising was made or done in connection with the issuances.  No cash consideration was paid in connection with the conversion of the preferred stock.
 

 
19

 
 
Shares Issued on Revalue Rights
 
 
·
100,000 shares of Common stock were issued as a penalty to Borinquen Container Corp. (“Borinquen”) for the Company’s failure to register shares Borinquen purchased in a private placement. These shares of common stock were issued without registration under the Securities Act in reliance on Section 3(a)(9) and 4(2) of the Securities Act and the rules and regulations promulgated thereunder. Borinquen represented to the Company that it was an accredited investor and was already a security holder of the Company.
 
Shares Issued in Private Placements
 
 
·
In March and September 2008, 6,077,219 shares were issued to Futuristic Medical Devices, LLC, Advance Technology Investors, LLC, and Borinquen investors for $5,057,914 in cash in a private placement of common stock. The initial issuance of the shares of common stock and the warrants were effected without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder.  Each investor signed a purchase agreement in which the investor made representations to the Company that included being an accredited investor, and purchasing for the investor’s own account and not with a view to distribute the shares.  There was no public offering of securities.  No general solicitation or general advertising was made or done in connection with the issuance, and the shares and warrants were issued in paper certificate form, with appropriate restrictive legends prominently affixed on the certificates.
 
Shares Issued Upon Exercise of Warrants
 
 
·
3,618,814 shares were issued upon the exercise of options and warrants between October 2007 and September 2008.  The exercise prices ranged from $0.54 to $1.73 per share.  The warrants had been granted in connection with services rendered to the Company.   These shares of common stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder.  These shares were issued pursuant to privately negotiated transactions with individuals and entities that had provided services to the Company.
 
In addition to the information provided above, the Company notes that the recipients of the shares in each of the above transactions were accredited investors and/or current stockholders, affiliates, employees, or service providers to the Company.  Each had a pre-existing relationship with the Company, was provided with the information available in the Company’s public filings and, where indicated, represented itself to be an accredited investor.  The transactions described above did not involve any public solicitation or similar activity by the Company and each transaction was a private transaction in which the recipient was advised that the shares issued were restricted shares, not freely transferable, and subject to the restrictions against resale of federal and applicable state securities laws.  The certificates issued representing the shares in each case contained a restrictive legend, advising that the resale of the securities was subject to registration under the Securities Act or an exemption from the registration provisions of such act.  In entering into these transactions the Company relied on exemptions available for offers and sales of securities not involving a public offering, including, without limitation, the exemptions from the registration requirements provided under Section 4(2) of the Securities Act and rules and regulations promulgated thereunder.
 
Item 6.    Selected Financial Data
 
Due to the divestiture of our medical stains and solutions business during fiscal year 2008, we now operate as one reportable business segment, offender tracking and monitoring. Our financial results have been adjusted to reflect the reclassification of sales and related expenses in our former stains and solutions segment to "discontinued operations" for all periods presented. Further information on this can be found in Note (2) to the Consolidated Financial Statements herein under "Discontinued Operations."
 

 
20

 

   
Fiscal Year Ended September 30,
 
   
2004
 
2005
 
2006
 
2007
 
2008
 
Consolidated Statements of Operations:
                               
     
Revenues
                               
     
TrackerPAL device sales
 
$
-
 
$
-
 
$
32,751
 
$
2,866,432
 
$
2,300,000
 
     
Monitoring services
   
-
   
-
   
89,914
   
3,687,935
   
10,013,311
 
     
Home and personal security systems and other
   
556,338
   
289,236
   
268,935
   
60,842
   
90,366
 
     
Total Revenues
   
556,338
   
289,236
   
391,600
   
6,615,209
   
12,403,677
 
     
Cost of revenues
   
(796,565)
   
(437,224)
   
(569,664)
   
(13,396,163)
   
(13,108,990
        Negative margin
 
(240,227)
 
(147,988)
 
(178,064)
 
(6,780,954)
 
(705,313
     
Selling, general and administrative
   
(4,051,350)
   
(7,080,573)
   
(15,649,099)
   
(15,586,852)
   
(36,466,678
     
Research and development
   
(205,341)
   
(1,766,791)
   
(2,087,802)
   
(4,564,121)
   
(4,811,128
     
Impairment of inventory
   
(30,358)
   
-
   
-
   
-
   
-
 
     
Impairment of goodwill
   
(1,321,164)
   
-
   
-
   
-
   
-
 
        Loss from operations
 
(5,848,440)
 
(8,995,352)
 
(17,914,965)
 
(26,931,927)
 
(41,983,119
     
Other income (expense)
   
(742,682)
   
(2,024,792)
   
(5,814,558)
   
900,038
   
(7,189,819
        Net loss from continuing operations
 
 
(6,591,122)
 
 
(11,020,144)
 
 
(23,729,523)
 
 
(26,031,889)
 
 
(49,172,938
 
     
Discontinued operations
   
184,411
   
36,455
   
(68,222)
   
(338,682)
   
(414,112
        Net loss
 
(6,406,711)
 
(10,983,689)
 
(23,797,745)
 
(26,370,571)
 
(49,587,050
     
Dividends on Series A Preferred stock
   
(525,800)
   
(512,547)
   
(642,512)
   
(550,603)
   
(345,356
     
Net loss attributable to common stockholders
  $
(6,932,511)
  $
(11,496,236)
  $
(24,440,257)
  $
(26,921,174)
 
 $
(49,932,406
)
     
Net loss per common share, basic and diluted
  $
(0.25)
  $
(0.33)
  $
(0.44)
  $
(0.26)
 
 $
   (0.36
)
     
Weighted average common shares outstanding
   
28,217,000
   
34,318,000
   
55,846,000
   
102,826,000
   
140,092,000
 
 
   
As of September 30,
 
   
2004
 
   
2005
 
   
2006
 
   
2007
 
   
2008
 
 
Consolidated Balance Sheets:
                             
 Assets
     
   Cash
  $ 52,342     $ 289,680     $ 5,870,040     $ 4,803,871     $ 2,782,953  
   Accounts receivable
    180,000       8,672       88,289       4,396,093       1,441,853  
   Inventory
    40,850       12,811       -       -       -  
   Prepaid expenses
    11,821       26,754       2,492,994       290,922       224,842  
   Other current assets
    176,361       180,103       15,604       605,174       555,385  
   Other current assets from discontinued operations
    129,283       262,832       194,410       933,755       -  
      Total current assets
    590,657       780,852       8,661,337       11,029,815       5,005,033  
   Property and equipment, net of depreciation
    110,531       377,610       1,321,995       1,380,192       1,581,558  
   Leased equipment, net of depreciation
    -       -       2,139,685       3,739,474       1,349,146  
    Other assets
    2,701       33,505       46,641       36,632       5,074,960  
    Other assets from discontinued operations
    4,915       4,477       22,408       50,576       -  
        Total assets
  $ 708,804     $ 1,196,444     $ 12,192,066     $ 16,236,689     $ 13,010,697  
 
 
21

 

Liabilities and Stockholders’ Equity
                           
    Line of credit
  $ 175,000     $ 174,898     $ 3,897,111   $ 3,858,985     $ 3,462,285  
    Accounts payable
    656,043       1,333,620       1,681,040     3,032,223       2,059,188  
    Accrued liabilities
    429,555       642,181       361,753     1,288,513       1,781,267  
    Redeemable common stock payable
    196,000       96,000       -     -       -  
    Convertible debentures, current portion
    -       1,262,366       -     -       -  
    Embedded derivative liability
    -       1,860,626       -     -       -  
    SecureAlert Series A Preferred stock redemption obligation
    -       -       -     -       3,244,758  
    Related-party notes and line of credit, current portion
    -       255,472       44,549      -       792,804  
    Other current liabilities
    539,234       17,539       38,694     1,314,247       21,343  
    Notes payable, current portion
    789,176       287,343       169,676     169,676       465,664  
    Current liabilities from discontinued operations
    73,490       68,273       58,043     69,186       -  
       Total current liabilities
    2,858,498       5,998,318       6,250,866     9,732,830       11,827,309  
    Convertible debentures, long-term portion
    1,106,412       421,570       -     -       -  
    Related-party notes and line of credit, long-term portion
    222,546       -       -     239,763       -  
    Notes payable, long-term portion
    -       -       -     -       1,147,382  
       Total liabilities
    4,187,456       6,419,888       6,250,866     9,972,593       12,974,691  
                                       
    Minority interest
    -       -       -     1,396,228       -  
                                       
    SecureAlert Series A Preferred stock
    -       2,990,000       3,590,000     3,590,000       -  
                                       
    Common stock
    3,140       4,513       8,013     12,734       15,588  
    Preferred stock, Series A
    2       3       2     1       1  
    Preferred stock, Series B
    184       137       5     1       1  
    Preferred stock, Series C
    -       -       553     -       -  
    Additional paid in capital
    66,329,339       76,113,623       111,718,090     142,238,576       186,203,084  
    Deferred compensation
    (331,312 )     (3,363,126 )     (2,649,088 )    (7,468,998     (3,498,672 )
    Subscription receivable
    -       (504,900 )     -     (407,500     -  
    Retained earnings
    (63,073,294 )     (69,480,005 )     (82,928,630 )   (106,726,375     (133,096,946 )
    Current earnings
    (6,406,711 )     (10,983,689 )     (23,797,745 )   (26,370,571     (49,587,050 )
       Total stockholders’ equity
    (3,478,652 )     (8,213,444 )     2,351,200     1,277,868       36,006  
         Total liabilities and stockholders’ equity
  $ 708,804     $ 1,196,444     $ 12,192,066   $ 16,236,689     $ 13,010,697  
 
 
The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Report.
 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operation (“MD&A”) is intended to help the reader better understand RemoteMDx, our operations and our present business environment.  This MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements for the fiscal years ended September 30, 2008 and 2007 and the accompanying notes thereto contained in this Report. This introduction summarizes MD&A, which includes the following sections:

 
22

 
 
 
·
Overview - a general description of our business and the markets in which we operate; our objectives; our areas of focus; and challenges and risks of our business.

 
·
Recent Developments – a brief description of business developments occurring after the year ended September 30, 2008 and prior to the filing of this Report.

 
·
Results of Operations - an analysis of our consolidated results of operations for the last two fiscal years presented in our consolidated financial statements.

 
·
Liquidity and Capital Resources - an analysis of cash flows; off-balance sheet arrangements and aggregate contractual obligations; an overview of financial position; and the impact of inflation and changing prices.

 
·
Critical Accounting Policies - a discussion of accounting policies that require critical judgments and estimates.

We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. The discussion also provides information about the financial results of the two segments of our business to provide a better understanding of how those segments and their results affect the financial condition and results of operations of the Company as a whole.

Overview

The Company markets and deploys what it believes to be the most advanced offender management programs available in the global marketplace today, combining patented GPS (Global Positioning System) tracking technologies, fulltime 24/7/365 intervention-based monitoring capabilities and comprehensive case management services.  We believe that we deliver the only offender management technology which effectively integrates GPS, RF (Radio Frequency) and an interactive 3-way voice communication system into a single device, deployable on offenders in any country worldwide. Through our patented electronic monitoring technologies and services, we empower law enforcement, corrections and rehabilitation professionals alike with offender, defendant, probationer and parolee programs, which grant convicted criminals and pre-trial suspects accountable opportunities “free from prison” while providing for greater public safety at a lower cost to incarceration or traditional resource-intensive monitoring alternatives.

TrackerPAL I & II – The TrackerPAL™ portfolio of products, e-Arrest beacons and monitoring services are uniquely designed to create “Jails without Walls,” customizable by offender types such as domestic abusers, sexual predators, gang members, pre-trial defendants, and juvenile offenders.  Our proprietary software and device firmware also support the dynamic accommodation of agency-established monitoring protocols, 95-decibal siren, victim protection imperatives, geographic boundaries, work environments, school attendance, rehabilitation programs and sanctioned home restrictions.  TrackerPAL is designed for use by federal, state and local agencies to provide location tracking of select individuals in the criminal justice system.  The TrackerPAL device fastens to the offender's ankle with a tamper resistant strap (steel cabling with optic fiber) that can only be adjusted or removed without detection by a supervising officer through services provided by our SecureAlert Monitoring Center (or other monitoring centers). The Company’s center acts as an important link between the offender and the supervising officer as monitoring center specialists persistently track and monitor the offender, initiating contact at the direction of the supervising agency and/or when the offender is in violation of any established restrictions or protocols.  An intelligent device with integrated computer circuitry and constructed from case-hardened plastics, the TrackerPAL unit promptly notifies the monitoring center if any attempt is made to remove or otherwise tamper with the device or optical strap housing. 

According to the latest available Bureau of Justice Statistics (2007), it is estimated that approximately 7,235,728 people were either incarcerated, on parole or on probation. The report also indicates that the average cost of incarcerating an inmate ranges from $65 to $175 per day dependent upon facility type, security level, amenities and jurisdiction.  Moreover, with ever-growing economic pressures, we believe that these costs are unsustainable with ongoing state and federal budget reductions, facility-specific overcrowding concerns, increased rehabilitation imperatives and politicized re-socialization agendas. Thus, electronic monitoring alternatives to incarceration for low to moderate risk offenders (adult and juveniles), early release for good behavior initiatives, work release programs, sentencing diversions and accelerated halfway house deployments are all being strongly encouraged and seriously considered by most legislative and judicial branches of government.  For approximately 10% to 15% of the traditional costs of incarceration, our TrackerPAL monitoring center and patented devices can monitor offenders continuously, while providing real-time location tracking, interactive voice access and intervention-biased contact, thus reducing the potential for subsequent or repeat offenses.  A growing number of jurisdictions are also embracing “offender pay,” “parent pay” and/or “partial pay” programs wherein the burden of the tracking and monitoring costs is shifted in whole or part directly to the offender or a responsible party, and thus permanently defrayed from tax payer obligation.  We estimate that approximately 20% of our gross revenues currently derive from offender payments directly under court order and threat of re-incarceration for non-payment; with the cost of non-compliance being reincarceration, the majority of these accounts remain in compliance. This aspect of our business is growing significantly and we expect that it will continue to outpace traditional tax-payer obligated payment programs.
 

 
23

 

Strategically, and in support of ever-growing rehabilitation and re-socialization efforts, the Company has adopted a broader services charter to further support and encourage many evolving rehabilitation initiatives. Our “C.A.R.E.” programs support Corrections and Accountability objectives in concert with Rehabilitation and Empowerment agendas. Specifically, our technology facilitates a stringent protocol enforcement capability, incorporating restricted movement provisions, coupled with enablement of positive reinforcement communications, all in support of social worker interactions, ongoing ministry options and proactive access by authorized counselors and/or sponsors.  We believe that our programs are uniquely positioned to allow for regular, frequent, and positive interactions and daily affirmations with offenders, as they strive to again become responsible and contributing members of society, while living within the virtual “electronic fence” boundaries established through our proprietary technologies.
 
Recent Developments
 
Subsequent to the year ended September 30, 2008, we entered into several material transactions that are not reflected in the results of operations for fiscal year 2008, as follows:
 
 
On November 17, 2008, the Company’s Chief Financial Officer and Chief Operating Officer Blake Rigby resigned from his positions with the Company to pursue other interests.  He had served in the position since June 2008. No severance or other obligations were incurred by the Company in connection with the departure of Mr. Rigby.

 
·
Effective November 20, 2008, the Board of Directors of the Company appointed John L. Hastings, III to the additional position of Chief Operating Officer, recently vacated by Mr. Rigby.  Mr. Hastings also continues to serve as the Company’s President.  No change was made in the compensation of Mr. Hastings in connection with this expanded role.

 
·
Also effective November 20, 2008, the Board of Directors of the Company appointed Michael G. Acton to the position of Chief Financial Officer.  He previously served as the Company’s Chief Financial Officer from March 2001 until June 2008.  From 1999 until present, Mr. Acton serves as the Company’s Secretary-Treasurer.  He is a Certified Public Accountant in the State of Utah. Mr. Acton also is the Chief Financial Officer of Volu-Sol, a former subsidiary of the Company.  

 
·
The Company’s subsidiary SecureAlert down-sized its workforce by approximately 21% (26 persons) during the first two weeks of November 2008 as part of a restructuring plan which began in October 2008. The Company implemented this restructuring with the goal of increasing operating efficiencies while reducing operating expenses and improving gross margins and cash flows during the fiscal year ending September 30, 2009.

 
·
On November 21, 2008, the Company borrowed $1,000,000 from its Chief Executive Officer and Chairman, David G. Derrick, pursuant to a Promissory Note (the “Note”). This unsecured loan is intended to bridge the device procurement, accelerated and expanded manufacturing and short-term financial needs of the Company until the completion of a private round of debt financing, which is presently being conducted by the Company.  Terms of the transaction are consistent with the terms offered to third-party financing sources in recent transactions.  The Note bears interest at an annual percentage rate of 15% and is due and payable the earlier of the receipt of a minimum of $1,000,000 in new financing, or seventy-five (75) days from origination.  Net proceeds to the Company after payment of a 5% initiation fee paid to Mr. Derrick were $950,000.  The Company also agreed to issue 100,000 shares of common stock to Mr. Derrick as additional consideration for extending the loan to the Company.  As of the date of this Report, the 100,000 shares of common stock had not yet been issued.  The Company may prepay the Note at any time without penalty or further interest obligation.  The transaction was reviewed and approved by the Audit Committee of the Company’s Board of Directors.

 
·
On November 21, 2008, the Company received AT&T certification allowing the TrackerPAL product to be used on the AT&T network.

 
·
In December 2008, the Company verbally agreed to settle a lawsuit with Strategic Growth International, Inc. for 1,200,000 restricted shares of the Company’s common stock valued at $360,000, or $0.30 per share and $25,000 in cash.  The shares have piggyback registration rights and are protected against any potential reverse stock splits.

 
·
In December 2008, the Company received written consents from the holders of a majority of the issued and outstanding shares of the Company’s capital stock required to increase the number of authorized shares of the Company from 175,000,000 to 250,000,000.

 
·
The Company issued 350,000 shares of restricted common stock for cash proceeds of $100,000, or approximately $0.29 per share.  Additionally, the Company issued 1,800,000 shares of restricted common stock to settle or satisfy accounts payable balances with two vendors.
 
 
24

 

 
·
On December 22, 2008, Mr. Derrick rescinded 1,500,000 shares of common stock which were granted in April 2008 valued at $2,325,000.  Additionally, Mr. Derrick also rescinded 1,000,000 warrants that were vested during the fiscal year ending September 30, 2008 valued at $1,934,162.

 
·
On December 22, 2008, Mr. Hastings rescinded 250,000 shares of common stock which were granted in June 2008 valued at $387,500.  Additionally, Mr. Hastings also rescinded 250,000 warrants that were vested during the fiscal year ending September 30, 2008 valued at $337,113.
 
Results of Operations
 
The following table summarizes our consolidated operating results as a percentage of net sales, respectively, for the periods indicated:
 
Fiscal Year Ended September 30,
       
Consolidated Statements of Operations Data:
2006
2007
2008
           
Net revenues
100%
100%
100%
Cost of revenues
(145)%
(203)%
(106)%
 
Negative margin
(45)%
(103)%
(6)%
       
Operating expenses:
     
   Selling, general and administrative expenses
(3,997)%
(236)%
(294)%
   Research and development
(533)%
(69)%
(39)%
 
Loss from operations
(4,575)%
(408)%
(339)%
       
Other income (expense):
(1,485)%
14%
(58)%
          Loss from continuing operations
(6,060)%
(394)%
(397)%
Discontinued operations
(17)%
(5)%
(3)%
 
Net Loss
(6,077)%
(399)%
(400)%
 
Fiscal Year 2008 compared to Fiscal Year 2007
 
[Note: during the year ended September 30, 2008, the Company divested itself of its subsidiary Volu-Sol Reagents Corporation (“Volu-Sol”). As a result, the Company now operates in one segment.  Unless otherwise indicated, the results of operations for all periods in this Report have been adjusted to reflect continuing operations only.  See Note (2) – Discontinued Operations in the Company’s Consolidated Financial Statements included in this Report.]
 
Revenues
 
During the fiscal year ended September 30, 2008, the Company had net revenues of $12,403,677 compared to net revenues of $6,615,209 for the fiscal year ended September 30, 2007.  This increase of approximately 88% is due primarily to increased revenues from the lease of our TrackerPAL products and related monitoring services.  

During the year ended September 30, 2008, our SecureAlert subsidiary provided net revenues of $7,333,659 compared to net revenues of $6,615,209 for the year ended September 30, 2007, an increase of approximately 11%.  These fiscal year ended 2008 revenues from SecureAlert of $7,333,659 consisted of $2,300,000 from the sale of offender tracking devices, $4,943,293 from monitoring services, and $90,366 from home and personal security systems and other miscellaneous revenues.  The first units of TrackerPAL I began to be delivered during the second quarter of fiscal year 2006.  Delivery of TrackerPAL II devices were introduced in August 2008.

On December 1, 2007, the Company acquired Midwest Monitoring.  For the year ended September 30, 2008, Midwest Monitoring had revenues of $2,799,914.  These revenues consisted of $2,522,314 from the monitoring of offender tracking devices and $277,600 from the sale of equipment.

On December 1, 2007, the Company acquired Court Programs. For the ten months ended September 30, 2008, Court Programs had revenues of $2,270,104 from the monitoring of offender tracking devices and parolee services.
 

 
25

 
 
During the year ended September 30, 2007, the Company delivered TrackerPAL devices to distributors with a sales value of $1,300,000 in transactions that did not meet the requirements of EITF 00-21 and SAB 104 for revenue recognition.  This revenue was deferred and recognized during the year ended September 30, 2008, when all revenue recognition criteria were met.
 
Cost of Revenues
 
During the fiscal year ended September 30, 2008, cost of revenues totaled $13,108,990, compared to cost of revenues in fiscal 2007 of $13,396,163.  This decrease is due primarily to a royalty expense incurred during the fiscal year 2007 that was terminated in July and August 2007.  SecureAlert’s cost of revenues totaled $10,007,725 or approximately 136% of SecureAlert’s revenues in fiscal year 2008, compared to $13,396,163, or 203%, of SecureAlert’s revenues in 2007.  SecureAlert’s cost of revenues in fiscal year 2008 consisted of communication costs of $2,939,790, monitoring center costs of $2,042,774, device costs of $1,675,212, amortization of $745,894, disposal of units of $570,948, utilization costs of $470,227, commissions of $434,285, tools and accessories of $298,706, device enhancements of $148,515, warranty of $220,758, freight of $222,034, lease of $72,965, battery related issues of $70,638, location of $52,895, other electronic monitoring costs of $29,031,and home security and PERS costs of $13,053.  The disposal of units with a cost of $570,948 relates primarily to the water ingression and strap design problems experienced by the Company.  

The Company expects the cost of revenues as a percentage of revenues to decrease in the foreseeable future due to the following reasons:  (1) The Company has attained AT&T certification which is expected to result in lower communication costs, and (2) Further development of the Company’s proprietary software will enable each operator to monitor more devices resulting in lower monitoring center costs.

Midwest Monitoring’s cost of revenues totaled $1,630,823, or 58%, of Midwest Monitoring’s revenues for the ten months ended September 30, 2008.  Court Program’s cost of revenues totaled $1,470,442, or 65%, of Court Program’s revenues for the ten months ended September 30, 2008.

The Company recognized $952,341 of costs during the year ended September 30, 2008 that related to deferred costs from deferred device sales.
 
Amortization of $745,894 recorded during the year ended September 30, 2008 is based on a three-year useful life for TrackerPAL devices.  Devices that are leased or remain in the Company’s possession because they have not been sold are amortized over three years.  The Company believes this three-year life is appropriate due to rapid changes in electronic monitoring technology and the corresponding potential for obsolescence.  Management periodically assesses the useful life of the devices for appropriateness.
 
Communication costs of $2,939,790 primarily refer to the costs associated with Subscriber Identity Modules (“SIM”).  Embedded in each TrackerPAL device is a SIM, which enables the device to transfer voice and data information to a monitoring center.  We incur a monthly charge for each SIM, regardless of whether or not the associated device generates revenue because the SIM cards are ordered and inserted into devices before the devices are sold or leased.
 
Research and Development Expenses
 
During the fiscal year ended September 30, 2008, the Company incurred research and development expenses of $4,811,128 compared to similar expenses in fiscal year 2007 totaling $4,564,121. This increase is due primarily to expenses associated with the development of the TrackerPAL II device for the parolee market.  We anticipate research and development expenses to decrease in future periods.
 
Selling, General and Administrative Expenses
 
           During the fiscal year ended September 30, 2008, the Company’s selling, general and administrative expenses totaled $36,466,678, compared to $15,586,852 for the fiscal year ended September 30, 2007. This increase of $20,879,826 is the result of an increase in advertising and marketing of $54,062, amortization of $45,200, automobile of $103,466, consulting of $17,339,667, depreciation of $164,167, insurance of $108,541, legal of $738,729, office expense of $36,800, payroll and taxes of $1,716,849, postage of $28,992, rent and storage of $125,088, telephone of $143,585 travel of $715,455, and utilities of $45,117 and other selling, general and administrative expenses of $144,514.  These increases in selling, general and administrative expenses were offset, in part, by decreases in the following: bad debt expense of $43,448, contract labor of $105,296, investment relations of $91,514, lease of $116,041, outside services of $173,538, training of $46,262, and other selling, general and administrative expenses of $54,307.  Consulting expense for the year ended September 30, 2008 was $23,608,063 compared to $6,268,396 for the year ended September 30, 2007, an increase in consulting expense of $17,339,667.  Consulting expense for the year ended September 30, 2008 of $23,608,063 consisted of $1,138,628 in cash and $22,469,435 in non-cash compensation.  Non-cash compensation of the $22,469,435 consisted of stock and warrants issued to vendors of $2,155,331, board of directors of $3,468,084, executive officers and employees of $15,185,020, and settlement of lawsuits of $1,661,000.
 

 
26

 
 
Gain on Sale of Intellectual Property

During the fiscal year ended September 30, 2007, the Company sold three patents for a total of $2,400,000.  These patents were as follows:  Interference Structure for Emergency Response System Wristwatch (No. 6,366,538 issued on April 2, 2002), Emergency Phone for Automatically Summoning (No. 6,226,510 issued on May 1, 2001), and Panic Button Phone (No. 6,044,257 issued on March 28, 2000).  During the fiscal year ended September 30, 2008, the Company sold Patent Number 6,636,732, Emergency Phone with Single Button Activation, to an unrelated party for cash proceeds of $2,400,000.
 
Other Income and Expense
 
For the fiscal year ended September 30, 2008, interest expense was $1,566,542, compared to $1,198,573 for fiscal year 2007. This amount includes non-cash interest expense of approximately $865,568 related to amortization of deferred financing costs associated with warrants and shares of common stock issued for prepaid interest.

During the year ended September 30, 2008, the Company redeemed all outstanding shares of SecureAlert Series A in exchange for 7,434,249 shares of RemoteMDx common stock for a value of $8,372,566.

Net Loss
 
The Company had a net loss for the year ended September 30, 2008 totaling $49,587,050, compared to a net loss of $26,370,571 for fiscal year 2007.  This increase is due primarily to expenses associated with the development of the TrackerPAL device for parolees, and related increases in cost of revenues, and non-cash compensation expense issued to vendors, board of directors, officers and employees, and in connection with the settlement of lawsuits.
 
Fiscal Year 2007 compared to Fiscal Year 2006
 
Revenues
 
During the fiscal year ended September 30, 2007, the Company had net revenues of $6,615,209 compared to net revenues of $391,600 for the fiscal year ended September 30, 2006, an increase of $6,223,609.  This increase is due primarily to increased revenues from the sale or lease of our TrackerPAL products and related monitoring services.  The first units were delivered during the first quarter of fiscal year 2007.  During the year ended September 30, 2007, our SecureAlert subsidiary provided net revenues of $6,615,209 compared to net revenues of $391,600 for the year ended September 30, 2006, an increase of approximately 1,589%.  These revenues consisted of $2,866,432 from the sale of offender tracking devices, $3,687,935 from monitoring services, and $60,842 from home and personal security systems.

During the year ended September 30, 2007, the Company delivered TrackerPAL devices to distributors with a sales value of $1,300,000 in transactions that did not meet the requirements of EITF 00-21 and SAB 104 for revenue recognition.  This revenue was deferred and recognized in future periods.
 
Cost of Revenues
 
During the fiscal year ended September 30, 2007, cost of revenues totaled $13,396,163, compared to cost of revenues in fiscal 2006 of $569,664. This increase is due primarily to the increase in revenues from TrackerPAL commencing in the first quarter of fiscal year 2007.  SecureAlert’s cost of revenues totaled $13,396,163, or 203%, of its revenues in 2007, compared to $569,664, or 145%, for fiscal 2006.  SecureAlert’s cost of revenues consisted of device costs of $2,957,787, monitoring center costs of $1,782,490, communication costs of $3,088,283, disposal of units of $472,132, commissions of $262,655, device enhancements of $194,704, home security and PERS costs of $139,162, royalty settlement expense of $2,767,010, amortization of $1,286,401, accessories of $80,904, and location and other costs of $364,635.  The disposal of units with a cost of $472,132 relates primarily to the water ingression and strap design problems experienced by the Company.  

As indicated above, $1,300,000 of device deliveries did not meet the requirements of EITF 00-21 and SAB104 for revenue recognition.  The corresponding cost of revenues is $952,341.  These costs were recognized during fiscal year 2008.
 
The Company previously had entered into two agreements requiring it to pay royalties on devices in service with customers.  During the year ended September 30, 2007, the Company terminated these agreements and settled past and future royalty obligations under these agreements for a total of 1,788,520 shares of common stock valued at $2,647,010 and $120,000 in cash, for total consideration of $2,767,010.  The terms of each agreement and the termination thereof are discussed below.
 

 
27

 
 
Futuristic Medical Devices, LLC (“Futuristic”).  On January 8, 2007, the Company entered into an agreement with Futuristic under which the Company agreed to pay a royalty of $0.057 per day for each device in service with a customer through June 30, 2009.  On July 18, 2007, the Company and Futuristic terminated the agreement and settled all obligations.  In consideration of the termination of the agreement, the Company issued to Futuristic a total of 1,188,520 shares of common stock valued at $1,759,010, or $1.48 per share (based on the quoted market price of the Company’s common stock on that date).  Of the 1,188,520 shares of common stock issued, 88,520 were issued to settle royalty obligations incurred by the Company through July 18, 2007.  The remaining 1,100,000 shares of common stock were issued to settle future royalty obligations that may be owed by the Company.
 
PFK Development Group, Ltd. (“PFK”).  On February 1, 2006, the Company entered into a consulting agreement with PFK under which the Company agreed to pay a royalty of $0.10 per day for each device in service with a customer that PFK introduced to the Company through January 31, 2009.  On July 18, 2007, the Company and PFK terminated the agreement and settled all obligations thereunder.  The Company issued 600,000 shares of common stock valued at $888,000, or $1.48 per share (based on the quoted market price of the Company’s common stock on that date) and $120,000 in cash.
 
During the year ended September 30, 2007, we incurred amortization expense of $826,425 and communication expense of $2,266,627 for non-billable units.  A non-billable unit is a TrackerPAL device that did not generate any revenue for the period.  We have recorded these expenses as cost of revenues because the non-billable units do not directly meet the definition of research and development assets, they are not promotional assets, and they are not used by the Company for internal purposes.  Amortization is based on a three-year useful life for TrackerPAL devices.  Devices that are leased or remain in the Company’s possession because they have not been sold are amortized over three years.  The Company believes this three-year life is appropriate due to rapid changes in electronic monitoring technology and the corresponding potential for obsolescence.  Management periodically assesses the useful life of the devices for appropriateness.
 
Communication costs primarily refer to the costs associated with Subscriber Identity Modules (“SIM”).  Embedded in each TrackerPAL device is a SIM, which enables the device to transfer voice and data information to a monitoring center.  We incur a monthly charge for each SIM, regardless of whether or not the associated device generates revenue because the SIM cards are ordered and inserted into devices before the devices are sold or leased.
 
Research and Development Expenses
 
During the fiscal year ended September 30, 2007, the Company incurred research and development expenses of $4,564,121 compared to similar expenses in 2006 totaling $2,087,802. This increase is due primarily to expenses associated with the development of the TrackerPAL device for the parolee market.  In addition, research and development expenses for the year ended September 30, 2007 include $1,454,784 in monitoring equipment disposed of that was initially used as test units and had served its useful life.  The Company does not expect to dispose of a significant number of test units in the future.  We expect research and development expenses to continue in the future due to ongoing research and development related to our TrackerPAL device and accessories.
 
Selling, General and Administrative Expenses
 
During the fiscal year ended September 30, 2007, the Company’s selling, general and administrative expenses totaled $15,586,852, compared to $15,649,099 for the fiscal year ended September 30, 2006. This decrease of $62,247 is the result of an increase in advertising of $38,858, automobile of $54,677, bad debt expense of $313,949, board of directors fees paid in shares of common stock valued at $110,000, depreciation of $351,809, insurance of $323,953, equipment lease expense of $154,709, office expense of $70,784, outside services of $62,566, payroll and payroll taxes of $1,278,647, rent of $91,101, supplies of $24,952, telephone of $133,866, training of $70,561, travel of $580,652, and other selling, general and administrative expenses of $131,670.  These increases in selling, general and administrative expenses were offset, in part, by decreases in the following: commissions of $56,250, consulting expense of $3,223,396, investment relations and banking fees of $411,934, legal fees of $114,538, and other selling, general and administrative expenses of $48,883.  Selling, general and administrative expenses of $15,586,852 for the year ended September 30, 2007 included $8,074,126 of non-cash expense primarily related to the issuance of warrants and shares to consultants for services provided to the Company.
 
Gain on Sale of Intellectual Property
 
During the fiscal year ended September 30, 2007, the Company sold three patents for a total of $2,400,000.  The patents are as follows:  Interference Structure for Emergency Response System Wristwatch (No. 6,366,538 issued on April 2, 2002), Emergency Phone for Automatically Summoning (No. 6,226,510 issued on May 1, 2001), and Panic Button Phone (No. 6,044,257 issued on March 28, 2000).
 
Other Income and Expense
 
For the fiscal year ended September 30, 2007, interest expense was $1,198,573, compared to $6,541,074 for fiscal year 2006. The $1,198,573 includes non-cash interest expense of approximately $396,019 related to amortization of deferred financing costs associated with warrants and shares of common stock issued for prepaid interest.
 

 
28

 
 
Net Loss
 
The Company had a net loss for the year ended September 30, 2007, totaling $26,370,571, compared to a net loss of $23,797,745 for fiscal year 2006.  This increase is due primarily to expenses associated with the development of the TrackerPAL device for parolees, and related increases in cost of revenues, selling, general and administrative expenses, and interest expense.

Quarterly Financial Information (Unaudited)

The following tables set forth unaudited quarterly operating results for each of the last eight fiscal quarters. This information is consistent with the Consolidated Financial Statements herein and includes normally recurring adjustments that management considers to be necessary for a fair presentation of the data. Due to the divestiture of control of Volu-Sol during the year ended September 30, 2008, we now operate as one reportable business segment. Our financial results have been adjusted to reflect the reclassification of revenues and related expenses in our former diagnostic stains business to "discontinued operations" for all periods presented. Further information on this can be found in Note (2) to the Consolidated Financial Statements herein under—"Discontinued Operations." Quarterly results are not necessarily indicative of future results of operations. This information should be read in conjunction with the audited Consolidated Financial Statements and notes thereto that are included elsewhere in this Report.

   
Quarter Ended
 
                                                 
   
December 31,
   
March 31,
   
June 30,
   
Sept. 30,
   
December 31,
   
March 31,
   
June 30,
   
Sept. 30,
 
   
2006
   
2007
   
2007
   
2007
   
2007
   
2008
   
2008
   
2008
 
                                                 
Consolidated Statements of Operations Data:
                                                 
Revenues:
                                               
    TrackerPAL device sales
  $ 33,333     $ 962,733     $ 1,837,033     $ 33,333     $ 1,033,333     $ 33,333     $ 1,033,334     $ 200,000  
    Monitoring services
    380,188       533,121       1,136,813       1,637,813       2,416,045       2,434,013       2,425,657       2,737,596  
    Home, personal security systems, other
    21,862       13,307       12,241       13,432       19,908       21,101       28,666       20,691  
Total revenues
  $ 435,383     $ 1,509,161     $ 2,986,087     $ 1,684,578     $ 3,469,286     $ 2,488,447     $ 3,487,657     $ 2,958,287  
Cost of revenues
    (1,837,181 )     (2,056,548 )     (3,429,626 )     (6,072,808 )     (2,742,786 )     (3,205,178 )     (3,389,497 )     (3,771,529 )
Gross Profit (Loss)
    (1,401,798 )     (547,387 )     (443,539 )     (4,388,230 )     726,500       (716,731 )     98,160       (813,242 )
Operating expenses:
                                                               
    Selling, general, and administrative
    (5,070,834 )     (3,573,184 )     (3,707,225 )     (3,235,609 )     (4,152,714 )     (7,284,214 )     (16,597,728 )     (8,432,022 )
    Research and development
    (1,219,659 )     (1,932,302 )     (731,498 )     (680,662 )     (865,344 )     (2,848,036 )     (646,335 )     (451,413 )
    Loss from operations
    (7,692,291 )     (6,052,873 )     (4,882,262 )     (8,304,501 )     (4,291,558 )     (10,848,981 )     (17,145,903 )     (9,696,677 )
Other income (expense), net
    (179,908 )     (855,758 )     (316,540 )     2,252,244       2,048,568       (9,168,053 )     (303,245 )     232,911  
Loss from continuing operations
    (7,872,199 )     (6,908,631 )     (5,198,802 )     (6,052,257 )     (2,242,990 )     (20,017,034 )     (17,449,148 )     (9,463,766 )
    Discontinued operations
    (66,722 )     (124,985 )     (75,457 )     (71,518 )     (98,954 )     (101,046 )     (53,670 )     (160,442 )
Net loss
  $ (7,938,921 )   $ (7,033,616 )   $ (5,274,259 )   $ (6,123,775 )   $ (2,341,944 )   $ (20,118,080 )   $ (17,502,818 )   $ (9,624,208 )
(Loss) per common share*:
                                                               
Basic and diluted
                                                               
    Continuing operations
  $ (0.09 )   $ (0.08 )   $ (0.05 )   $ (0.06 )   $ (0.02 )   $ (0.15 )   $ (0.12 )   $ (0.06 )
    Discontinued operations
    (0.01 )     0.00       0.00       0.00       0.00       0.00       0.00       0.00  
    Net loss
  $ (0.10 )   $ (0.08 )   $ (0.05 )   $ (0.06 )   $ (0.02 )   $ (0.15 )   $ (0.12 )   $ (0.06 )
Weighted average shares outstanding:
    83,018,000       90,618,000       104,583,000       102,826,000       129,617,000       132,661,000       146,085,000       151,947,000  
 
 
29

 


*
Earnings per common share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share amounts does not necessarily equal the total for the year.
 
 
 
·
New product introductions;
 
·
The acceptance of GPS tracking and monitoring as an alternative to aid case management of offenders
 
·
The integration and operation of new information technology systems;
 
·
Entry into one or more of our markets by competitors;
 
·
General conditions in the criminal justice industry; and
 
·
Customer and public perceptions of our products and services.
 
As a result of these and other factors, quarterly revenues, expenses, and results of operations could vary significantly in the future, and period-to-period comparisons should not be relied upon as indications of future performance. There can be no assurance that we will be able to increase revenues in future periods or be able to sustain the level of revenue or rate of revenue growth on a quarterly or annual basis that we have sustained in the past. Due to the foregoing factors, future results of operations could be below the expectations of public market analysts and investors. If that occurred, the market price of our common stock would likely decline.
 
Liquidity and Capital Resources
 
The Company has not historically financed operations entirely from cash flows from operating activities.  During the year ended September 30, 2008, the Company funded its operating and investing activities through the sale of equity securities and the exercise of options and warrants.  See “Recent Sales of Unregistered Securities,” on page 18 of this Report.  The cash provided by these transactions was used by the Company to (i) pay operating expenses, including the costs associated with its monitoring center, (ii) purchase TrackerPAL devices, (iii) pay down debt and accounts payable, including amounts owed on a line of credit and bank debt, and (iv) pay general and administrative expenses, including the salaries of employees, officers, and consultants of the Company and other expenses as described below.
 
At September 30, 2008, the Company had unrestricted cash of $2,782,953, compared to unrestricted cash of $4,803,871 at September 30, 2007. At September 30, 2008, the Company had working capital deficit of $6,822,276, compared to working capital of $1,296,985 at September 30, 2007.  The decrease in working capital primarily resulted from the increase in our accounts payable, accrued liabilities and notes payable balances at September 30, 2008.
 
During fiscal year 2008, the Company’s operating activities used cash of $9,672,744, compared to $13,408,266 of cash used in 2007.  This decrease in cash used from operating activities of $3,735,522 is the result of an increase in common stock issued for services and settlement of lawsuits of $10,058,394, stock options and warrants issued for services and debt of $2,244,765, amortization of deferred consulting and financing costs of $5,018,086, redemption of SecureAlert Series A Preferred stock of $8,205,922, deconsolidation of subsidiary of $414,112, accrued liabilities of $371,413, accounts receivable of $7,528,478, and inventory of $952,341, receivable from sale of intellectual property of $600,000.  These increases in cash used from operating activities were offset, in part, by decreases in the following:  net of loss of $23,555,161, depreciation and amortization of $324,627, registration payment arrangement expense of $533,000, impairment of monitoring equipment of $883,836, loss on sale of asset of $228,800, related-party services of $80,091, deposit held in escrow of $500,000, prepaid and other assets of $1,487,894, interest receivable of $23,094, accounts payable of $2,724,674, and deferred revenue of $1,316,812
 
Investing activities for the year ended September 30, 2008, used cash of $526,447, compared to $4,221,548 of cash used by investing activities in the year ended September 30, 2007.  The decrease in cash used during fiscal year 2008 resulted primarily from the decrease in purchasing additional monitoring equipment.  The Company purchased $192,221 and $3,684,216 of monitoring equipment during the years ended September 30, 2008 and 2007, respectively.  In addition, the Company purchased $334,226 and $537,332 of property and equipment during the years ended September 30, 2008 and 2007, respectively.
 
Financing activities for the year ended September 30, 2008, provided $8,178,273 of net cash compared to $16,563,645 of net cash for the year ended September 30, 2007.

 
 
30

 
 
The Company made net payments of $315,392 on a related-party line of credit, $336,133 on notes payable, $2,176,821 related to acquisitions, and $396,700 on a bank line of credit.  In fiscal year 2008, the Company had proceeds of $5,058,014 from the issuance of common stock, $2,772,381 from the exercise of options and warrants, $2,400,000 from the sale of warrants and subsidiary stock, $975,578 from related-party notes, $163,002 of cash received upon acquisitions, and $34,344 from notes payable.

During fiscal year 2008, the Company incurred a net loss of $49,587,050 and negative cash flows from operating activities of $9,672,744, compared to a net loss of $26,370,571 and negative cash flows from operating activities of $13,408,266 for the year ended September 30, 2007.  As of September 30, 2008, the Company’s working capital deficit was $6,822,276 and the Company had stockholders’ equity of $36,006 and an accumulated deficit of $182,683,996.

Going Concern
 
The factors described above, as well as the risk factors set out elsewhere in this Report raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements included in this Report do not include any adjustments that might result from the outcome of this uncertainty.  Our plan with respect to this uncertainty is to focus on increasing the leasing of the TrackerPAL product.  There can be no assurance that revenues will increase rapidly enough to offset operating losses and repay debts.  Likewise, there can be no assurance that the Company’s debt holders will be willing to convert the debt obligations to equity securities or that the Company will be successful in raising additional capital from the sale of equity or debt securities.  If the Company is unable to increase cash flows from operating activities or obtain additional financing, it will be unable to continue the development of its products and would likely cease operations.

Contractual Obligations and Commercial Contingencies

The following table summarizes the Company’s contractual obligations as of September 30, 2008:

 
Years
 
Total
   
SecureAlert
   
Midwest
Monitoring
   
Court Programs
 
                         
2009
  $ 533,493     $ 402,509     $ 14,128     $ 116,856  
2010
    354,027       262,894       11,124       80,009  
2011
    308,825       267,173       3,744       37,908  
2012
    279,162       268,362       -       10,800  
2013
    267,882       267,882       -       -  
2014
    60,537       60,537       -       -  
                                 
Total
  $ 1,803,926     $ 1,529,357     $ 28,996     $ 245,573  

The total contractual obligations of $1,803,926 consist of the following: $1,554,667 from facilities operating leases and $249,259 from equipment leases.  During the years ended 2006, 2007 and 2008, the Company paid approximately $191,000, $284,000, and $536,000 in lease payment obligations, respectively.
 
Inflation
 
We do not believe that inflation has had a material impact on our historical operations or profitability.
 
Critical Accounting Policies
 
In Note (3) to the audited financial statements for the fiscal year ended September 30, 2008 included in this Report, the Company discusses those accounting policies that are considered to be significant in determining the results of operations and its financial position.
 
The preparation of financial statements requires management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, warranty obligations, product liability, revenue, and income taxes. We base our estimates on historical experience and other facts and circumstances that are believed to be reasonable, and the results form the basis for making judgments about the carrying value of assets and liabilities.  The actual results may differ from these estimates under different assumptions or conditions.
 
With respect to inventory reserves, revenue recognition, impairment of long-lived assets and allowance for doubtful accounts receivables, the Company applies the following critical accounting policies in the preparation of its financial statements:
 

 
31

 
 
Inventory Reserves
 
The nature of the Company’s business requires maintenance of sufficient inventory on hand at all times to meet the requirements of its customers. The Company records finished goods inventory at the lower of standard cost, which approximates actual cost (first-in, first-out method) or market.  Raw materials are stated at the lower of cost (first-in, first-out method), or market.  General inventory reserves are maintained for the possible impairment of the inventory.  Impairment may be a result of slow moving or excess inventory, product obsolescence or changes in the valuation of the inventory. In determining the adequacy of reserves, management analyzes the following, among other things:

 
·
Current inventory quantities on hand;
 
·
Product acceptance in the marketplace;
 
·
Customer demand;
 
·
Historical sales;
 
·
Forecast sales;
 
·
Product obsolescence; and
 
·
Technological innovations.
 
Any modifications to these estimates of reserves are reflected in cost of revenues within the statement of operations during the period in which such modifications are determined necessary by management.
 
Revenue Recognition
 
The Company’s revenue has historically been from three sources: (i) monitoring services; (ii) monitoring device and other product sales; and (iii) medical diagnostic stains sales.  With the divestiture of Volu-Sol, the Company no longer has revenues from this third source.
 
Monitoring Services

Monitoring services include two components: (i) contracts in which the Company provides monitoring services and leases devices to distributors or end users and the Company retains ownership of the leased devices; and (ii) monitoring services purchased by distributors or end users who have previously purchased devices and have opted to use the Company’s monitoring services.

The Company leases its devices under one-year contracts with customers that opt to use the Company’s monitoring services.  However, these contracts may be cancelled by either party at anytime with 30 days notice.  Under the Company’s standard leasing contract, the leased device becomes billable on the date of activation or 21 days from the date the device is assigned to the lessee, and remains billable until the device is returned to the Company.  The Company recognizes revenue on leased devices at the end of each month that monitoring services have been provided.  In those circumstances in which the Company receives payment in advance, the Company records these payments as deferred revenue.

Monitoring Device Product Sales
 
Although not the focus of the Company’s business model, the Company sells its monitoring devices in certain situations.  In addition, the Company sells to a very small degree home security and Personal Emergency Response Systems.  The Company recognizes product sales revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer and the customer cannot return the devices, prices are fixed or determinable and collection is reasonably assured. When purchasing products (such as TrackerPAL devices) from the Company, customers may, but are not required to, enter into monitoring service contracts.  The Company recognizes revenue on monitoring services for customers that have previously purchased devices at the end of each month that monitoring services have been provided.
 
Multiple Element Arrangements
 
The majority of the Company’s revenue transactions do not have multiple elements. On occasion, the Company has revenue transactions that have multiple elements (such as product sales and monitoring services).  For revenue arrangements that have multiple elements, the Company considers whether: (i) the delivered devices have stand alone value to the customer; (ii) there is objective and reliable evidence of the fair value of the undelivered monitoring services, which is generally determined by surveying the price of competitors’ comparable monitoring services; and (iii) the customer does not have a general right of return.  Based on these criteria, the Company recognizes revenue from the sale of devices separately from the monitoring services to be provided to the customer.  In accordance with EITF 00-21, if the fair value of the undelivered element exists, but the fair value does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method as applied to these particular transactions, the fair value of the undelivered element (the monitoring services) is deferred and the remaining portion of the arrangement (the sale of the device) is recognized as revenue when the device is delivered and all other revenue recognition criteria are met.
 

 
32

 
 
Medical Diagnostic Stain Sales

The Company recognizes medical diagnostic stains revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer and the customer cannot return the products, prices are fixed or determinable and collection is reasonably assured.  As of September 30, 2008, this segment of operations was discontinued.

Other Matters
 
The Company considers an arrangement with payment terms longer than the Company’s normal terms not to be fixed or determinable, and revenue is recognized when the fee becomes due.  Normal payment terms for the sale of monitoring services are 30 days, and normal payment terms for device sales are between 120 and 180 days.  The Company sells its devices and services directly to end users and to distributors.  Distributors do not have general rights of return.  Distributors have no price protection or stock protection rights with respect to devices sold to them by the Company.  Generally, title and risk of loss pass to the buyer upon delivery of the devices. The collection terms for the diagnostic stains and reagent product sales are net 30 days.  The Company estimates its product returns based on historical experience and maintains an allowance for estimated returns, which is recorded as a reduction to accounts receivable and revenue.
 
Shipping and handling fees are included in net revenues.  The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of revenues.
 
Impairment of Long-lived Assets
 
The Company reviews its long-lived assets, other than goodwill, for impairment when events or changes in circumstances indicate the book value of an asset may not be recoverable.  An evaluation is made at each balance sheet date, to determine whether events and circumstances have occurred which indicate possible impairment. An estimate is made of future undiscounted net cash flows of the related asset or group of assets over its estimated remaining life in measuring whether the assets are recoverable. During the years ended September 30, 2008 and 2007, the Company disposed of $570,948 and $1,454,784, respectively.  The $570,948 was recorded as cost of revenues.
 
Allowance for Doubtful Accounts
 
The Company must make estimates of the collectability of accounts receivable. In doing so, we analyze accounts receivable and historical bad debts, customer credit-worthiness, current economic trends and changes in customer payment patterns when evaluating the adequacy of the allowance for doubtful accounts.
 
Recent Accounting Pronouncements 
 
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS No. 141(R) requires an acquirer to measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS No. 160 clarifies that a non-controlling interest in a subsidiary should be reported as equity in the consolidated financial statements, consolidated net income shall be adjusted to include the net income attributed to the non-controlling interest, and consolidated comprehensive income shall be adjusted to include the comprehensive income attributed to the non-controlling interest. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. SFAS No. 141(R) and SFAS No. 160 are effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. Management does not currently believe adoption will have a material impact on the Company's financial condition or operating results, if any, upon adoption of SFAS No. 141(R) or SFAS No. 160.
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, provides a framework for measuring fair value, and expands the disclosures required for fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require fair value measurements; it does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and is required to be adopted by the Company beginning in the first quarter of fiscal 2009. Although the Company will continue to evaluate the application of SFAS No. 157, management does not currently believe adoption will have a material impact on the Company's financial condition or operating results.
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 115 ("SFAS No. 159"). SFAS No. 159 allows companies to choose to elect measuring eligible financial instruments and certain other items at fair value that are not required to be measured at fair value. SFAS No. 159 requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings at each reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 and is required to be adopted by the Company beginning in the first quarter of fiscal 2009. Although the Company will continue to evaluate the application of SFAS No. 159, management does not currently believe adoption will have a material impact on the Company's financial condition or operating results.
 

 
33

 
 
In May 2008, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 162, The Hierarchy of Generally Accepted Accounting Principles.  SFAS No. 162 identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in preparation of financial statements that are presented in conformity with GAAP.  The current GAAP hierarchy has been criticized because it is directed to the auditor rather than the entity, it is complex, and it ranks FASB Statements of Financial Accounting Concepts, which are subject to the same level of due process as FASB Statements of Financial Accounting Standards, below industry practices that are widely recognized as generally accepted but that are not subject to due process.  The Board believes the GAAP hierarchy should be directed to entities because it is the entity (not its auditors) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP.  The adoption of FASB 162 is not expected to have a material impact on the Company’s financial position.
 
Effective October 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, using the modified prospective method. SFAS No. 123R requires the recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements and is measured based on the grant date fair value of the award. SFAS No. 123R also requires the stock option compensation expense to be recognized over the period during which an employee is required to provide service in exchange for the award (the vesting period). Prior to adopting SFAS No. 123R, the Company accounted for its stock-based compensation plans under Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees. Under APB No. 25, generally no compensation expense is recorded when the terms of the award are fixed and the exercise price of the employee stock option equals or exceeds the fair value of the underlying stock on the date of grant. The Company adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation.
 
For the years ended September 30, 2008 and 2007, the Company calculated compensation expense of $214,251 and $900,664, respectively related to the vesting of previously granted stock options and additional options granted.
 
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Company granted 1,725,000 and 320,000 stock options to employees during the years ended September 30, 2008 and 2007, respectively.  In addition, 390,000 stock options issued to employees in prior years vested during the year ended September 30, 2008.  The weighted average fair value of stock options at the date of grant during the years ended September 30, 2008 and 2007, was $1.34 and $1.43, respectively. The expected life of stock options represents the period of time that the stock options granted are expected to be outstanding based on historical exercise trends. The expected volatility is based on the historical price volatility of common stock. The risk-free interest rate represents the U.S. Treasury bill rate for the expected life of the related stock options. The dividend yield represents the Company’s anticipated cash dividends over the expected life of the stock options.
 
The following are the weighted-average assumptions used for options granted during the years ended September 30, 2008 and 2007, respectively: 
 
 
September 30, 2008
September 30, 2007
     
Risk free interest rate
3.12%
4.57%
Expected life
5 Years
5 Years
Cash dividend yield
-
-
Volatility
136%
142%

A summary of stock option activity for the year ended September 30, 2008, is presented below:
 
 
Shares
Under
Option
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life
   
 
Aggregate
Intrinsic
Value
 
 
 
 
Outstanding as of September 30, 2007
3,295,000
 
$
0.64
           
     Granted
1,725,000
 
$
1.54
           
     Exercised
(1,375,000)
 
$
0.63
           
     Forfeited
(45,000)
 
$
0.86
           
     Expired
-
   
-
           
Outstanding as of  September 30, 2008
3,600,000
 
$
1.08
 
3.34 years
 
$
1,062,000
 
Exercisable as of  September 30, 2008
421,667
 
$
1.35
 
3.30 years
 
$
37,000
 


 
34

 
 

Our business is extending to several countries outside the United States, and we intend to continue to expand our foreign operations.  As a result, our revenues and results of operations are affected by fluctuations in currency exchange rates, interest rates, and other uncertainties inherent in doing business in more than one currency.  In addition, our operations are exposed to risks that are associated with changes in social, political, and economic conditions in the foreign countries in which we operate, including changes in the laws and policies that govern foreign investment, as well as, to a lesser extent, changes in United States laws and regulations relating to foreign trade and investment.

Foreign Currency Risks.  Revenues from sources outside the United States represented 8% and 29% of our total revenues for the fiscal years ended September 30, 2008 and 2007, respectively.  Sales of monitoring equipment during the periods indicated were transacted in U.S. dollars and, therefore, the Company did not experience any effect from foreign currency exchange in connection with these international sales.  Changes in currency exchange rates affect the relative prices at which we sell our products.  Given the uncertainty of exchange rate fluctuations, we cannot estimate the effect of these fluctuations on our future business, product pricing, results of operations, or financial condition.

We do not use foreign currency exchange contracts or derivative financial instruments for trading or speculative purposes.  To the extent foreign sales become a more significant part of our business in the future, we may seek to implement strategies which make use of these or other instruments in order to minimize the effects of foreign currency exchange on our business.

Interest Rate Risks.  As of September 30, 2008, we had $3,462,285 of borrowings outstanding on a line of credit with a weighted-average interest rate of 18%.  In addition, we had $48,500 of borrowings outstanding on a line of credit with two banks with a weighted average interest rate of 10.05%.  The interest rates on these lines of credit are subject to change from time to time based on changes in an independent index which is the Prime Rate as published in The Wall Street Journal.
 
 
The Financial Statements and Supplementary Data required by this Item are set forth at the pages indicated at Item 15 below.
 
 
None.
 

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective.  We and our auditors identified material weaknesses discussed below in the Report of management on internal control over financial reporting.

Report of Management on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

 
35

 

 
(i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
 
 
(ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 
(iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement to the Company's annual or interim financial statements will not be prevented or detected.

In the course of the management's assessment, it has identified the following material weaknesses in internal control over financial reporting:
 
 
·
Control Environment – We did not maintain an effective control environment for internal control over financial reporting. Specifically, we concluded that we did not have appropriate controls in the following areas:
 
 
o
Segregation of Duties – As a result of limited resources and the addition of multiple majority owned subsidiaries, we did not maintain proper segregation of incompatible duties. The effect of the lack of segregation of duties potentially affects multiple processes and procedures.
 
 
o
Implementation of Effective Controls – We failed to complete the implementation of effective internal controls over our newly acquired majority owned subsidiaries as of September 30, 2008 due to limited resources.
 
 
·
Application of GAAP – We did not maintain effective internal controls relating to the application of generally accepted accounting principles to include improper revenue recognition, classification of expenses, and accounting for equity transactions.
 
 
·
Financial Reporting Process – We did not maintain an effective financial reporting process to prepare financial statements in accordance with generally accepted accounting principles. Specifically, we initially failed to appropriately disclose in the financial statements and related notes to the financial statements the effects of the spin-off of Volu-Sol.
 
 
·
Tracking of Leased Equipment – We failed to maintain effective internal controls over the tracking of leased equipment as it relates to the assignment and leasing of monitoring equipment.
 
We restated our September 30, 2007 financial statements as a result of errors that were not detected due to several of the above mentioned material weaknesses, which have not been mitigated as of September 30, 2008. Accordingly, management has determined the Company's internal control over financial reporting as of September 30, 2008 was not effective.  These material weaknesses have been disclosed to our audit committee.

We are in the process of improving our internal control over financial reporting in an effort to eliminate these material weaknesses through improved supervision and training of our staff, but additional effort is needed to fully remedy these deficiencies. Our management, audit committee, and directors will continue to work with our auditors and outside advisors to ensure that our controls and procedures are adequate and effective.


 
36

 
HANSEN, BARNETT& MAXWELL, P.C.
   
A Professional Corporation
 
Registered with the Public Company
CERTIFIED PUBLIC ACCOUNTANTS
 
Accounting Oversight Board
5 Triad Center, Suite 750
   
Salt Lake City, UT 84180-1128
   
Phone: (801) 532-2200
Fax: (801) 532-7944
 
 
www.hbmcpas.com
 
A Member of the Forum of Firms

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
To the Board of Directors and
Stockholders of RemoteMDx, Inc.
 
We have audited RemoteMDx Inc.’s internal control over financial reporting as of September 30, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). RemoteMDx Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
A material weakness is a control deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment:
 
 
·
Control Environment – The Company did not maintain an effective control environment for internal control over financial reporting. Specifically, the Company concluded that they did not have appropriate controls in the following areas:
 
 
o
Segregation of Duties – As a result of limited resources and the addition of multiple majority owned subsidiaries, the Company did not maintain proper segregation of incompatible duties. The effect of the lack of segregation of duties potentially affects multiple processes and procedures.
 
 
o
Implementation of Effective Controls – The Company failed to complete the implementation of effective internal controls over its newly acquired majority owned subsidiaries as of September 30, 2008 due to limited resources.
 
 
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·
Application of GAAP – The Company did not maintain effective internal controls relating to the application of generally accepted accounting principles to include improper revenue recognition, classification of expenses, and accounting for equity transactions.
 
 
·
Financial Reporting Process – The Company did not maintain an effective financial reporting process to prepare financial statements in accordance with generally accepted accounting principles. Specifically, the Company initially failed to appropriately disclose in the financial statements and related notes to the financial statement the effects of the spin-off of Volu-Sol.
 
 
·
Tracking of Leased Equipment – The Company failed to maintain effective internal controls over the tracking of leased equipment as it relates to the assignment and leasing of monitoring equipment.
 
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2008 financial statements, and this report does not affect our report dated December 23, 2008 on those financial statements.
 
In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, RemoteMDx has not maintained effective internal control over financial reporting as of September 30, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets and the related statements of income, stockholders’ equity and comprehensive income, and cash flows of RemoteMDx, Inc., and our report dated December 23, 2008 expressed an unqualified opinion.
 



HANSEN, BARNETT & MAXWELL, P.C.
Salt Lake City, Utah
December 23, 2008

 

 
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Item 9B.    Other Information
 
None.
 
 
 
 
The following table sets forth information concerning our executive officers and directors as of September 30, 2008:
 
Name
 
Age
 
Position
 
           
David G. Derrick
 
55
 
Chief Executive Officer and Chairman
 
John L. Hastings, III
 
45
 
President
 
Blake T. Rigby*
 
51