10-Q Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-looking Statements
This report contains information that constitutes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and
Section 21E of the Securities Exchange Act. Generally, the statements contained in this report that are not purely historical can be considered to be "forward-looking statements." These statements represent our expectations, hopes, beliefs, anticipations, commitments, intentions, and strategies regarding the future. They may be identified by the use of words or phrases such as "believes," "expects," "intends," "anticipates," "should," "plans," "estimates," "potential," and "will," among others. Forward-looking statements include, but are not limited to, statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations regarding our Company's financial performance, revenue, and expense levels in the future and the sufficiency of our existing assets to fund future operations and capital spending needs. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our Company's historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in "Risk Factors" in our most recent Annual Report on Form 10-K, and those described from time to time in our future reports filed with the Securities and Exchange Commission.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes thereto that are contained in this Report, as well as Management's Discussion and Analysis and Plan of Operation in our Annual Report on Form 10-K for the year ended September 30, 2008, and Current Reports on Form 8-K that have been filed with the SEC through the date of this Report.
General
RemoteMDx and subsidiaries (collectively, the "Company") market, monitor and sell the TrackerPAL device. The TrackerPAL is used to monitor convicted offenders that are on probation or parole in the criminal justice system. The TrackerPAL device utilizes GPS and cellular technologies in conjunction with a monitoring center that is staffed 365 days a year. The Company believes that its technologies and services benefit law enforcement officials by allowing them to respond immediately to a problem involving the monitored offender. The parole and probation population consists of approximately 4.9 million adults in the United States of America criminal justice system at any given time. The TrackerPAL is targeted to meet the needs of this market as well as the international market.
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.
Critical Accounting Policies
In Notes 1 through 3 to the consolidated financial statements for the fiscal year ended September 30, 2008 included in the Company's Form 10-K, the Company discusses those accounting policies that are considered to be significant in determining its 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 judgments are subject to an inherent degree of uncertainty. We assess the reasonableness of 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 as well as available current information on a regular basis. Management uses this information to form the basis for making judgments about the carrying value of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
Recent Developments
Subsequent to March 31, 2009, the Company entered into the following transactions:
1) The Company received $100,000 in cash from an entity in connection with the issuance of the Series A 15% debentures
2) The Company received $250,000 in cash from a related party from the issuance of Series A 15% debenture. As additional inducement, the Company granted 2,200,000 one-year warrants with an exercise price of $0.25 per share.
3) Effective April 1, 2009, the Company and the seller agreed to extend the period for the Company to complete its acquisition of the remaining 49% ownership of Court Programs to April 15, 2010. In consideration of the extension of time, the Company gave the following to the buyer: 1) forgiveness of $94,154 in outstanding charges and expenses, 2) an increase of salary of $18,000 to the seller, who is an employee of the Company and an executive officer of Court Programs, and 3) payment of $15,000 in automobile expenses on behalf of the same employee and officer.
Results of Operations
Three months ended March 31, 2009, compared to three months ended March 31, 2008
Revenues
For the three months ended March 31, 2009, the Company had revenues from continuing operations of $3,047,714 compared to $2,488,447 for the three months ended March 31, 2008, an increase of $559,267. The increase in revenues resulted primarily from the monitoring of offender tracking devices and providing probation services to individuals on parole. The operating results of our subsidiaries, SecureAlert, Midwest and Court Programs, are described in the following paragraphs.
SecureAlert had revenues of $1,465,732 during the three months ended March 31, 2009, compared to revenues of $1,119,713 for the three months ended March 31, 2008. The increase of $346,019 resulted primarily from increased monitoring of offender tracking devices. Revenues from monitoring services increased from $1,065,279 to $1,446,842 for the three months ended March 31, 2009 over the same period in 2008. SecureAlert's revenues for the three months ended March 31, 2009 also included $10,460 from devices sales compared to $33,333 in the same period in 2008. Since the Company's focus is on monitoring of tracking devices attached to individuals on parole, revenues from home and personal security systems decreased from $21,101 to $8,430 for the three months ended March 31, 2009 compared to the same period in 2008. No SecureAlert customer accounted for 10% or more of SecureAlert's revenues during the three months ended March 31, 2009 or 2008.
Midwest had revenues of $975,317 during the three months ended March 31, 2009, compared to revenues of $807,342 in the prior year period. The increase of $167,975 resulted primarily from increased monitoring of offender tracking devices and probation services. During the three months ended March 31, 2009, the Rock County Sheriff accounted for $175,562, or 18% of Midwest's revenues. No other customer accounted for 10% or more on Midwest's revenues.
Court Programs had revenues of $603,255 during the three months ended March 31, 2009, compared to revenues of $561,392 in the prior year quarter. The increase of $41,863 resulted primarily from increased monitoring of offender tracking devices and probation services. No Court Program customer accounted for 10% or more of Court Program's revenues during the three months ended March 31, 2009 or 2008.
On January 14, 2009, the Company purchased Bishop Rock Software. During the three months ended March 31, 2009, revenues from Bishop Rock Software were $3,410.
Cost of Revenues
For the three months ended March 31, 2009, cost of revenues for continuing operations declined to $2,759,258 compared to $3,205,178 during the three months ended March 31, 2008, a decrease of $445,920. Even though the number of SecureAlert's average billable devices increased during the three months ended March 31, 2009 by 1,330 devices, compared to the same period in 2008, cost of revenues decreased due to a $550,200 reduction of expenses associated with impairment of devices resulting from water ingress problems with the Company's older device, savings of monitoring center labor costs of $92,149 resulting from an increase in software automation, and lower communication costs of $58,547 resulting in reduced SIM coverage plans.
SecureAlert's cost of revenues for the three months ended March 31, 2009 was $1,721,715, or 117% of revenues. The largest components of these costs were communication costs of $604,506, monitoring center costs of $424,581, and amortization of $380,929. During the three months ended March 31, 2008, cost of revenues was $2,361,108 or 211% of revenues and the principal components included commissions of $106,736, communication costs of $663,053, monitoring center costs of $516,730, amortization of $221,662, warranty reserve expense of $105,742, impairment of TrackerPAL devices of $550,200, and other TrackerPAL costs of $154,533.
Midwest's cost of revenues totaled $633,565, or 65% of revenues for the three months ended March 31, 2009, compared to $549,107 for the same period in 2008. Court Program's cost of revenues totaled $403,978, or 67% of revenues for the three months ended March 31, 2009, compared to $294,963 for the three months ended March 31, 2008.
Research and Development Expenses
During the three months ended March 31, 2009 and 2008, research and development expense from continuing operations was $353,498 and $2,848,036, respectively, and consisted primarily of expenses associated with the development of SecureAlert's TrackerPAL device and related services. The research and development expense in the 2008 quarter included $2,128,000 attributable to the issuance 745,000 shares of common stock (valued at an average of $2.86 per share) for software and engineering associated with the development of the TrackerPAL device.
Selling, General and Administrative Expenses
During the three months ended March 31, 2009, selling, general and administrative expenses from continuing operations were $3,810,452 compared to $7,634,214 during the three months ended March 31, 2008. The improvement of $3,823,762 is primarily the result of decreases in the following expenses:
consulting expense of $3,106,258 related to stock and warrant issuance for services rendered to the Company, travel of $354,814, and payroll and taxes of $255,604. These improvements were offset in part by increased legal expenses of $246,574 during the same period to settle two lawsuits.
Interest Income and Expense
During the three months ended March 31, 2009, interest expense related to continuing operations totaled $1,055,157 compared to $398,238 in the three months ended March 31, 2008. The increase of $656,919 resulted primarily from non-cash expense of $608,195 from the issuance of stock and warrants in connection with debt obligations.
Six months ended March 31, 2009, compared to six months ended March 31, 2008
Revenues
For the six months ended March 31, 2009, the Company had revenues from continuing operations of $6,270,012 compared to $5,957,732 for the six months ended March 31, 2008, an increase of $312,280. The increase in revenues resulted primarily from increased monitoring of offender tracking devices. The operating results of our subsidiaries are summarized in the following paragraphs.
SecureAlert had revenues of $2,948,812 during the six months ended March 31, 2009, compared to revenues of $3,917,884 for the six months ended March 31, 2008. The decrease in SecureAlert's revenues of $969,072 resulted primarily from a decrease in offender tracking device sales of $1,066,666 during the six months ended March 31, 2008, compared to $18,210 for the three months ended March 31, 2009. The decrease in revenues from lower device sales was offset in part by increases in monitoring revenues during the period as described below.
SecureAlert's monitoring service revenues increased to $2,913,509 during the six months ended March 31, 2009, compared to $2,831,544 for the six months ended March 31, 2008. The principal component of SecureAlert's revenues for the six months ended March 31, 2009 was monitoring services of $2,913,509. The balance of revenues of $35,303 was derived from device sales and home and personal security systems. By comparison, during the six months ended March 31, 2008, SecureAlert's revenues were derived primarily from monitoring services of $2,831,544 and devices sales of $1,066,666. Since the Company's focus is on monitoring of tracking devices attached to individuals on parole, revenues from home and personal security systems decreased from $19,674 to $17,093 in the six months ended March 31, 2009, compared to the same period in 2008. No SecureAlert customer accounted for 10% or more of SecureAlert's revenues during the six months ended March 31, 2009 or 2008.
Midwest's revenues for the six months ended March 31, 2009 were $2,145,993. The primary components of Midwest's revenues were monitoring and probation services of $1,839,639 and prison equipment sales of $335,750. On December 1, 2007, the Company acquired Midwest. For the four months ended March 31, 2008, Midwest had revenues of $1,158,925, including $1,116,964 from the monitoring of offender tracking devices and $41,961 from the sale of devices. During the six months ended March 31, 2009, St. Peter Regional Treatment Center accounted for $333,000, or 16%, and Rock County Sheriff accounted for $321,855, or 15% of Midwest's revenues. No other customer accounted for 10% or more on Midwest's revenues.
Court Program's revenues for the six months ended March 31, 2009 were $1,171,797, derived from monitoring and probation services. On December 1, 2007, the Company acquired Court Programs. For the four months ended March 31, 2008, Court Programs had revenues of $880,923.
On January 14, 2009, the Company purchased Bishop Rock Software. During the period following the acquisition through March 31, 2009, revenues from Bishop Rock Software were $3,410.
Cost of Revenues
For the six months ended March 31, 2009, cost of revenues from continuing operations was $5,874,714 compared to $5,947,963 during the six months ended March 31, 2008, a decrease of $73,249. Even though the number of SecureAlert's average billable devices during the six months ended March 31, 2009 increased by 1,260 devices, cost of revenues decreased due to a reduction of $563,653 in expense related to impairment of devices resulting from water ingress problems with the Company's older device. Additionally, monitoring center labor costs decreased in the amount of $74,155 as a result of increased software automation.
SecureAlert's cost of revenues totaled $3,712,004, or 126%, of SecureAlert's revenues during the six months ended March 31, 2009, compared to $4,792,366, or 122%, of SecureAlert's revenues during the six months ended March 31, 2008. The primary components of these costs were communication costs of $1,392,231, monitoring center costs of $898,893, amortization of $521,362, utilization rental fees of $336,562, shipping of $174,244 and commissions of $173,598, as well as other TrackerPAL costs of $152,136. During the six months ended March 31, 2008, SecureAlert's cost of revenues was $4,792,366. The primary components of those costs in 2008 included communication costs of $1,365,186, monitoring center costs of $973,047, device costs of $727,653, impairment of TrackerPAL devices of $563,653, amortization of $486,782, commissions of $226,913, freight of $110,765, warranty reserve expense of $105,742, and other TrackerPAL costs of $136,610.
Midwest's cost of revenues totaled $1,397,261 for the six months ended March 31, 2009, with the principal components being monitoring and probation services of $1,182,109 and prison equipment sales of $215,152. On December 1, 2007, the Company acquired Midwest, resulting in cost of revenues of $723,022 for the four months ended March 31, 2008.
Court Programs' cost of revenues totaled $765,449 for the six months ended March 31, 2009. The cost of revenues of $765,449 resulted from monitoring and probation services. On December 1, 2007, the Company acquired Court Programs, resulting in cost of revenues of $432,575 for the four months ended March 31, 2008.
Research and Development Expenses
During the six months ended March 31, 2009 and 2008, research and development expense from continuing operations was $845,901 and $3,713,380, respectively, and consisted primarily of expenses associated with the development of SecureAlert's TrackerPAL device and related services. In 2008, the primary component of research and development expense was $2,555,285 for the issuance of 815,000 shares of common stock (valued at an average of $3.14 per share) for software and engineering associated with the development of the TrackerPAL device.
Selling, General and Administrative Expenses
During the six months ended March 31, 2009, selling, general and administrative expenses related to continuing operations were $7,899,726 compared to $11,786,929 during the six months ended March 31, 2008. The decrease in selling, general and administrative expense in 2009 was the result primarily of a reduction in consulting expense of $3,841,242 and reduced travel expense of $709,775, offset by increased legal expenses of $625,053 incurred in connection with the settlement of two lawsuits.
Interest Income and Expense
During the six months ended March 31, 2009, interest expense related to continuing operations totaled $1,534,903 compared to $773,748 in the six months ended March 31, 2008. The increase of $761,155 resulted primarily from non-cash expense of $829,599 from the issuance of stock and warrants in connection with debt obligations.
Liquidity and Capital Resources
The Company is presently unable to finance its business solely from cash flows from operating activities. During the six months ended March 31, 2009, the Company financed its business primarily from the issuance of debt providing cash proceeds of $5,027,494.
As of March 31, 2009, the Company had unrestricted cash of $738,194 and working capital deficit of $12,202,352, compared to unrestricted cash of $2,782,953 and working capital deficit of $6,822,276 as of September 30, 2008. For the six months ended March 31, 2009, the Company's operating activities used cash of $4,993,267, compared to $1,084,790 of cash used in operating activities for the six months ended March 31, 2008.
The Company used cash of $960,468 for investing activities during the six months ended March 31, 2009, compared to $311,251 of cash used in investing activities in the six months ended March 31, 2008.
The Company's financing activities for the six months ended March 31, 2009, provided cash of $3,908,976 compared to $379,890 for the six months ended March 31, 2008. For the six months ended March 31, 2009, the Company had net proceeds of $5,027,494 from the issuance of debt instruments, $100,000 from the sale of common stock, and net advances from the line of credit of $87,346. Cash decreased by $189,312 due to payments on notes payable and $1,116,552 in net payments on the related-party line of credit and note. Cash provided by financing activities was used to fund operating activities and upgrade monitoring equipment.
The Company incurred a net loss of $9,005,149 for the six months ended March 31, 2009 and a loss from operations of $8,350,329. In addition, the Company has an accumulated deficit of $191,689,145. These factors, as well as the risk factors set out in the Company's annual report on Form 10-K for the year ended September 30, 2008 raise substantial doubt about the Company's ability to continue as a going concern. The condensed consolidated financial statements included in this Report do not include any adjustments that might result from the outcome of this uncertainty. The Company's plans with respect to this uncertainty are to increase leases of the TrackerPAL product and to increase monitoring services revenues. There can be no assurance that revenues will increase rapidly enough to deliver profitable operating results and pay the Company's debts as they come due. 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 business and may have to cease operations.