UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2006
OR
( ) TRANSITION REPORT UNDER 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 small business issuer as specified in its charter)
Utah 87-0543981
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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(801) 563-7171
(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or 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 [ ]
On July 18, 2006, the issuer had a total of 71,878,237 shares of common stock issued and outstanding. The issuer also had a total of 17,650 shares of Series A Preferred Stock outstanding, convertible at any time at the option of the holders thereof into common stock at the rate of 370 shares of common stock for each share of Series A Preferred Stock, or a total of 6,530,500 shares, 268,332 shares of Series B Preferred Stock outstanding, convertible at any time at the option of the holders thereof into approximately 2,367,635 shares of common stock, and 5,357,143 shares of Series C Preferred Stock outstanding, convertible at any time at the option of the holders thereof into approximately 16,071,429 shares of common stock. On August 4, 2006, the Company sold an additional 5,300,000 shares of Common Stock in a private placement. See Note 13 to the Financial Statements.
Transitional Small Business Disclosure Format (Check One): Yes No X
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Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the exchange Act)
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TABLE OF CONTENTS
Page
No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of June 30, 2006
(Unaudited)........................................................3
Condensed Consolidated Statements of Operations for
the three and nine months ended June 30, 2006 and 2005
(Unaudited)........................................................4
Condensed Consolidated Statements of Cash Flows for
the nine months ended June 30, 2006 and 2005 (Unaudited)...........5
Notes to Unaudited Condensed Consolidated Financial
Statements (Unaudited).............................................7
Item 2. Management's Discussion and Analysis or Plan of Operation.........15
Item 3. Controls and Procedures...........................................21
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PART II. OTHER INFORMATION
Item 2. Unregistered Sales Equity Securities and Use of Proceeds..........22 Item 5. Other Information.................................................22 Item 6. Exhibits..........................................................23 Signatures.................................................................25 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
REMOTEMDX, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, 2006
--------------
Assets
Current assets:
Cash $ 1,517,269
Accounts receivable, net of allowance
for doubtful accounts of $6,500 147,859
Inventories 122,667
Prepaid inventory 665,652
Prepaid expenses 230,035
--------------
Total current assets 2,683,482
Property and equipment, net of accumulated
depreciation and amortization of $573,083 652,942
Other assets 48,013
--------------
Total assets $ 3,384,437
==============
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 1,767,501
Notes payable net of debt discount of $59 (note 4) 173,587
Related party line of credit and note, net
of debt discount of $4,000 (note 7) 266,643
Accrued liabilities 446,594
Deferred revenue 17,284
Dividends payable 406,894
Convertible debentures (note 8) 17,947
Redeemable SecureAlert Series A Preferred Stock
(note 9) 600,000
Common stock subject to mandatory redemption 96,000
--------------
Total current liabilities 3,792,450
--------------
Total liabilities 3,792,450
--------------
SecureAlert Series A Preferred Stock
2,990,000
Stockholders' deficit:
Preferred stock:
Series A; 10% dividend, convertible,
non-voting; $0.0001 par value; 40,000
shares designated; 2
17,650 shares outstanding (aggregate
liquidation preference of $50,813)
Series B; convertible; $0.0001 par value;
2,000,000 shares designated; 268,332 shares 27
outstanding (aggregate liquidation preference
of $804,996)
Series C; convertible; $0.0001 par value;
7,357,144 shares designated; 5,357,143 536
shares outstanding (aggregate liquidation
preference of $9,116,340)
Common stock; $0.0001 par value; 100,000,000
shares authorized, 71,878,237 shares outstanding 7,188
Additional paid-in capital 105,963,011
Deferred compensation (3,910,860)
Subscription receivable (786,885)
Accumulated deficit (104,671,032)
--------------
Total stockholders' deficit (3,398,013)
--------------
Total liabilities and stockholders' deficit $ 3,384,437
==============
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See accompanying notes to unaudited condensed consolidated financial statements.
REMOTEMDX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Nine months ended
June 30, June 30,
2006 2005 2006 2005
-------------------------------------------------------------------
Net sales $ 237,496 $ 234,249 $ 709,404 $ 635,935
Cost of goods sold 119,408 99,454 345,869 486,661
-------------------------------------------------------------------
Gross profit 118,088 134,795 363,535 149,274
Research and development expenses 876,646 482,229 2,030,818 1,084,043
Selling, general and administrative expenses
(including $6,437,105 and $9,092,549 of
compensation expense paid in stock or stock
options / warrants, for the three and nine
months ended 2006 respectively) 8,325,307 3,466,895 14,366,736 5,505,561
-------------------------------------------------------------------
Loss from operations (9,083,865) (3,814,329) (16,034,019) (6,440,330)
Other income (expense):
Derivative valuation gain 731,669 - 629,308 -
Other income (expense) (1) (46) 2,323 5,071
Interest income 531 1,063 3,779 2,739
Interest expense (687,895) (152,297) (6,343,793) (874,639)
-------------------------------------------------------------------
Loss before income taxes (9,039,561) (3,965,609) (21,742,402) (7,307,159)
Income tax benefit - - - -
-------------------------------------------------------------------
Net loss (9,039,561) (3,965,609) (21,742,402) (7,307,159)
Dividends on Series A and C preferred stock (2,648,500) (123,930) (2,871,830) (385,519)
-------------------------------------------------------------------
Net loss attributable to common stockholders $ (11,688,061) $ (4,089,539) $ (24,614,232) $ (7,692,678)
Net loss per common share - basic and diluted $ (.17) $ (.12) $ (.48) $ (.24)
===================================================================
Weighted average shares - basic and diluted 66,875,000 34,280,000 51,817,000 32,354,000
===================================================================
See accompanying notes to unaudited condensed consolidated financial statements.
-4-
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REMOTEMDX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
June 30,
-------------------------------
2006 2005
-------------------------------
Cash flows from operating activities:
Net loss $ (21,742,402) $ (7,307,159)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 76,170 26,293
Beneficial conversion feature recorded as interest
expense 321,429 280,000
Stock options and warrants issued for services 4,543,997 1,344,798
Derivative valuation liability (629,308) -
Amortization on debt discount 1,234,034 100,129
Amortization of deferred consulting and financing costs 5,200,804 596,404
Accretion of interest expense related to redeemable
common stock 1,779,166 -
Common stock issued for services and interest 2,037,207 939,099
Interest income on restricted cash 5,628 (2,378)
Increases in related party line of credit for service 503,754 579,273
Changes in operating assets and liabilities:
Accounts receivable, net (51,078) 144,605
Inventories (76,091) 29,059
Prepaid expenses and other assets (867,467) (55,141)
Accounts payable 412,451 467,902
Accrued liabilities (297,163) 153,064
Deferred revenue (255) 1,041
-------------------------------
Net cash used in operating activities (7,549,124) (2,703,011)
-------------------------------
Cash flows used in investing activities:
Purchase of property and equipment (348,397) (162,416)
Disposal of fixed assets - 2,392
-------------------------------
Net cash used in investing activities (348,397) (160,024)
-------------------------------
Cash flows from financing activities:
Net payments from related-party line of credit (505,726) (581,538)
Net payments on bank line of credit (423) -
Decrease in subscription receivable 1,430,580 -
Proceeds from issuance of Series C Preferred Stock 5,818,877 -
Proceeds from common stock 1,020,000 -
Proceeds from the issuance of SecureAlert Preferred Stock 600,000 2,607,746
Proceeds from issuance of notes payable 2,321,153 1,258,000
Payments on Series B and C Debentures (387,008) -
Payments on notes payable (1,298,699) (164,000)
-------------------------------
Net cash provided by financing activities 8,998,754 3,120,208
-------------------------------
Net increase (decrease) in cash 1,101,233 257,173
Cash, beginning of period 416,036 62,103
-------------------------------
Cash, end of period $ 1,517,269 $ 319,276
===============================
See accompanying notes to unaudited condensed consolidated financial statements.
-5-
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REMOTEMDX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
Nine Months ended
June 30,
--------------------------
2006 2005
(Unaudited) (Unaudited)
--------------------------
Cash paid for interest and taxes:
Cash paid for income taxes $ - $ -
Cash paid for interest $ 152,678 $ 96,342
Supplemental schedule of non-cash investing and
financing activities:
Issuance of shares of common stock in exchange
for shares of Series A Preferred Stock 317 1
Issuance of shares of common stock in exchange
for shares of Series B Preferred Stock 110 -
Issuance of shares of common stock in exchange
for deferred consulting services and
financing costs 5,840,439 159,300
Accrual of Series A and C Preferred Stock
dividends 406,894 261,589
Issuance of shares of common stock in exchange
for convertible debt with embedded
derivative features 2,581,319 -
SecureAlert preferred stock issued in exchange
for decrease in related party line of credit - 175,000
Payment of accrued preferred stock dividends
through the issuance of Series A preferred
stock 212 787,389
Issuance of SecureAlert Series A Preferred
Stock for note payable and accrued interest - 207,253
Payment on SecureAlert line of credit from
restricted cash 174,475 -
Issuance of shares of Series C Preferred
Stock from conversion of debt and accrued
interest 1,037,152 -
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See accompanying notes to unaudited condensed consolidated financial statements.
REMOTEMDX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The accompanying condensed consolidated financial statements of the Company have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary to present fairly the results of operations of the Company for the periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Form 10-KSB for the year ended September 30, 2005. The results of operations for the three and nine months ended June 30, 2006, are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2006.
Going Concern
The Company has recurring net losses and negative cash flows from operating activities, a working capital deficit, a stockholders' deficit and an accumulated deficit. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Management's plans with respect to this uncertainty include converting debt obligations to equity and raising additional capital from the sale of equity securities, obtaining debt financing and enhancing revenues and cash flows from its operations by increasing selling and marketing efforts related to new and existing products and services.
There can be no assurance that the Company will be able to raise sufficient capital to meet its working capital needs. In addition, there can be no assurance that the operations will generate positive cash flows and that the Company will be economically successful at increasing selling and marketing efforts to introduce new products into the market. Further, the Company may be unable to complete the development and successful commercialization of any new remote offender monitoring products.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly or majority-owned subsidiaries. All significant inter-company transactions have been eliminated in consolidation.
Stock-Based Compensation
The Company accounts for its stock-based compensation issued to employees and directors under Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Under APB No. 25, compensation related to stock options, if any, is recorded if an option's exercise price on the measurement date is below the fair value of the Company's common stock and amortized to expense over the vesting period.
An alternative method to the intrinsic value method of accounting for stock-based compensation is the fair value based method prescribed by Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." If the Company used the fair value based method, the Company would be required to record deferred compensation based on the fair value of the stock option at the date of grant as computed using an option-pricing model, such as the Black-Scholes option pricing model. The deferred compensation calculated under the fair value based method would then be amortized over the vesting period of the stock option. The Company awarded stock options to employees during the periods ended June 30, 2006 and 2005.
The following table illustrates the effect on net loss and basic and diluted loss per share had the Company adopted SFAS 123:
Three months ended Nine months ended
June 30, June 30,
2006 2005 2006 2005
----------------------------------------------------------
Net loss attributable to common
stockholders - as reported $ (11,688,061) $ (4,089,539) $ (24,614,232) $ (7,692,678)
Deduct total stock based employee
compensation expense determined
under fair value based method for
all awards, net of related taxes
Net loss - pro forma (1,386,290) (1,400,148) (11,194)
----------------------------------------------------------
$ (13,074,351) $ (4,089,539) $ (26,014,380) $ (7,703,872)
----------------------------------------------------------
Basic and diluted net loss per common
share - as reported $ (.17) $ (.12) $ (.48) $ (.24)
----------------------------------------------------------
Basic and diluted net loss per common
share - pro forma $ (.20) $ (.12) $ (.50) $ (.24)
----------------------------------------------------------
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The fair value of the option grants was estimated as of the date of grant using the Black-Scholes option pricing model with the following assumptions:
Nine Months Ended
June 30,
---------------------------
2006 2005
---------------------------
Expected dividend yield - -
Expected stock price volatility 140% 106%
Risk-free interest rate 4.80% 3.72%
Expected life of options 5 years 5 years
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The weighted average fair value per share using the Black-Scholes Option Pricing Model of options and warrants granted during the nine months ended June 30, 2006 and 2005, was $0.64 and $0.44, respectively.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment when events or changes in circumstances indicate that the book value of an asset may not be recoverable. The Company evaluates, at each balance sheet date, whether events and circumstances have occurred which indicate possible impairment. The Company uses an estimate of future undiscounted net cash flows of the related asset or group of assets over the estimated remaining life in measuring whether the assets are recoverable.
Net Loss Per Common Share
Basic net loss per common share ("Basic EPS") is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per common share ("Diluted EPS") is computed by dividing net loss by the sum of the weighted-average number of common shares outstanding and the weighted-average dilutive common share equivalents then outstanding. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect.
Common share equivalents consist of shares issuable upon the exercise of common stock options and warrants, the conversion of the convertible debentures and related accrued interest, and shares issuable upon conversion of preferred stock. As of June 30, 2006 and 2005, there were approximately 46,958,698 and 20,436,000 outstanding common share equivalents, respectively, that were not included in the computation of diluted net loss per common share as their effect would be anti-dilutive. The common share equivalents outstanding at June 30, 2006, consisted of 6,530,500 shares of common stock underlying Series A Preferred Stock, 2,367,635 shares of common stock underlying Series B Preferred Stock, 16,071,429 shares of common stock underlying Series C Preferred Stock, 38,409 shares of common stock underlying the Series B and C debentures, and 21,850,725 shares underlying options and warrants. Of the 21,850,725 shares underlying options and warrants, 17,250,357 shares underlie options and warrants which have vested and 4,600,368 shares underlie options and warrants which have not yet vested.
Revenue Recognition
The Company derives its revenue primarily from the sale of mobile emergency and personal security systems and reagent stains.
The sale of mobile emergency and personal security systems may include the security device, such as the MobilePal phone, and the related monitoring service. If the sale includes both the device and the monitoring service, revenue from the sale of the device is deferred and recognized ratably over the life of the monitoring service contract. Revenue from the monitoring service contract is recognized monthly as earned in accordance with the monitoring service contract. If the sale is for the device only and does not include the monitoring services, revenue, less reserves for returns, is recognized upon shipment to the customer. The Company records reserves for estimated returns of defective product. Amounts received in advance of shipment are recorded as deferred revenue. Shipping and handling fees are included as part of net sales. The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of goods sold.
The sale of reagent stains is recognized when an agreement with the buyer exists, the price is fixed or determinable, the product has been shipped, and collection is reasonably assured.
Substantially all items included in inventory are finished goods and consisted of the following as of June 30, 2006:
Offender tracking devices and accessories $ 88,392
Reagent stains, net of reserve for obsolescence 34,275
of $65,204
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Total $ 122,667
==========
(3) ACCRUED LIABILITIES
-------------------
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Accrued liabilities consisted of the following at June 30, 2006:
Accrued tooling $ 116,000
Accrued interest 84,140
Accrued bonuses and director fees 30,000
Accrued payroll and employee benefits 125,954
Accrued commissions 4,500
Other accrued expenses 86,000
----------------
Total $ 446,594
================
-10-
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(4) NOTES PAYABLE
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Notes payable at June 30, 2006 consisted of the following:
Current liabilities:
Unsecured notes payable to former SecureAlert
shareholders, with interest at 5%, payable in
installments of $80,000 per month until paid in full.
These notes are currently in default. $ 169,676
Unsecured note payable to an entity. The note has
a monthly payment of $1,985. The loan bears no
interest, but has been imputed at 12%. The note is
due September 18, 2006. The note is collateralized
by the furniture purchased with the note. As of
June 30, 2006, the unamortized debt discount was $59. 3,911
------------
Total $ 173,587
============
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As of June 30, 2006, the Company had no outstanding balance under a line of credit with Zion's First National Bank. The line of credit was paid off in April 2006 with the certificates of deposits.
On July 5, 2006, the Company opened a $4 million line of credit with Citizen National Bank. The interest rate is 8% and the line of credit matures on June 30, 2008. The line of credit is secured by letters of credit for a total of $4 million and SecureAlert's assets excluding TrackerPAL products. This note can be expanded up to $10 million under certain terms and conditions. The letters of credit were provided as collateral by four entities. The entities received a total of 400,000 shares of the Company's common stock and were reimbursed $40,000 in cash for expenses related to establishing the letters of credit. In addition, the Company will pay 11% annual interest rate, paid monthly, on the line of credit to the entities who provided and arranged for the letters of credit. As of August 9, 2006, the outstanding balance of the line of credit was approximately $1,900,000.
As of June 30, 2006, the Company had 32,000 common shares outstanding that are redeemable at the option of the holder with a redeemable value of $96,000. The Company had not yet been released from the $96,000 obligation. In accordance with SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, the redemption value of the redeemable shares has been recorded as a liability.
As of June 30, 2006, the Company owed to ADP Management, an entity owned and controlled by two of the Company's officers and directors, $15,643 under a line of credit agreement. Outstanding amounts on the line of credit accrue interest at 5.0% and were due in July 2006. Subsequent to June 30, 2006, the related-party line of credit was extended to July 2007. During the nine months ended June 30, 2006, the net decrease in the related party line of credit was $1,972. The net decrease consisted of net cash repayments during the nine months ended June 30, 2006, of $505,726 and net increases of $503,754 related to a monthly management fee owed to ADP Management, and expenses incurred by ADP Management that are reimbursable by the Company. Mr. Derrick's and Mr. Dalton's respective salaries are paid to ADP Management which in turn pays Messrs. Derrick and Dalton. If the Company is unable to pay the management fee and the reimbursable expenses in cash, the related party line of credit is increased for the amount owed to ADP Management.
The Company entered into a loan with an entity controlled by an employee of the Company. The loan bears interest at 17%. An origination fee of $10,000 was added to the principal balance owed under the note. Principal and interest were due November 13, 2005. The first four months are interest only and the last three months are interest and principal. This loan is secured by the stock and assets of Volu-Sol Reagents Corporation, a wholly-owned subsidiary of RemoteMDx, Inc. As of June 30, 2006, the balance, net of the debt discount, was $251,000. Subsequent to June 30, 2006, the note was paid off.
During the year ended September 30, 2004, the Company sold $1,450,000 of Series B Convertible Debentures and $350,000 of Series C Convertible Debentures. The Debentures are convertible automatically into shares of the Company's common stock upon the closing of a qualified equity or debt offering with gross proceeds of at least $5,000,000. Under the terms, the conversion price will equal 80% of the fair value prior to closing the offering. The Debentures bear interest at an annual rate of 10%, not including any original issue discount, with interest during the first six months of $47,954 added to the principal amount. Thereafter, interest payments will be made monthly in cash or, at the sole option of the Company, in shares of Common Stock at a price of $0.54 per share. The Debentures mature and are payable two years from each closing, subject to the conversion as indicated above. During the nine months ended June 30, 2006, 2,030,184 shares of common stock were issued to repay $913,583 of the Series B and C Convertible Debentures. In addition, during the nine months ended June 30, 2006, $387,008 of the Series B and C Convertible Debentures were paid off in cash. Subsequent to June 30, 2006, all Series B Convertible Debentures were paid off.
Series A 10 % Convertible Non-Voting Preferred Stock
Each share of Series A Preferred Stock is convertible into 370 shares of common stock. During the nine months ended June 30, 2006, a total of 8,568 shares of Series A Preferred Stock were converted into 3,173,299 shares of common stock. As of June 30, 2006, there were 17,650 shares of Series A Preferred Stock outstanding, which represents 6,530,500 common stock equivalents at a conversion rate of 370 for 1. Subsequent to June 30, 2006, and through August 10, 2006, no additional shares of Series A Preferred Stock had been converted into shares of common stock.
The holders of the Series A Preferred Stock are entitled to dividends at the rate of 10 percent per year on the stated value of the Series A Preferred Stock (or $200 per share), payable in cash or in additional shares of Series A Preferred Stock at the discretion of the board of directors. Dividends are fully cumulative and accrue from the date of original issuance. During the nine months ended June 30, 2006 and 2005, the Company recorded $290,554 and $385,519, respectively, in dividends on Series A Preferred Stock.
The Company may, at its option, redeem up to two-thirds of the total number of shares of Series A Preferred Stock at a redemption price of 133 percent of the stated value of Series A Preferred Stock; however, the Company may designate a different and lower redemption price for all shares of Series A Preferred Stock called for redemption by the Company. Through June 30, 2006, the Company had not exercised its option to redeem shares of Series A Preferred Stock.
During the nine months ended June 30, 2006, the Company issued 212 shares of Series A preferred stock in satisfaction of accrued dividends on Series A preferred stock of $42,314.
Series B Convertible Preferred Stock
During the nine months ended June 30, 2006, a total of 1,100,825 shares of Series B Preferred Stock were converted into 5,656,381 shares of common stock. As of June 30, 2006, there were 268,332 shares of Series B Preferred Stock outstanding convertible into approximately 2,367,635 common shares. Subsequent to June 30, 2006, 205,001 shares of Series B Preferred Stock were converted into 1,505,000 shares of common stock.
Series C Convertible Preferred Stock
During the nine months ended June 30, 2006, the Company received subscriptions for 5,357,143 shares of Series C Convertible Preferred Stock at $1.68 per share for proceeds of $9,000,000. One share of Series C Convertible Preferred Stock is convertible into three shares of the Company's common stock, subject to adjustments. The stock has an 8% dividend that may be paid in cash or additional shares of Series C Convertible Preferred Stock at the option of the Company. The Company issued 5,357,143 shares of Series C Preferred Stock for $7,175,964 in cash, $1,037,151 from conversion of debt and accrued interest, and $786,885 in subscription receivables. Subsequent to June 30, 2006, the subscription receivables of $786,885 were collected. The holders of shares of Common underlying the Series C Convertible Preferred Stock shall be entitled to registration rights. For the nine months ended June 30, 2006, a beneficial conversion feature of $2,464,935 was recorded as a distribution to the Series C Preferred shareholders to reflect the difference between the market value of the underlying common stock and the conversion price.
SecureAlert, Inc., Preferred Shares
During the year ended September 30, 2005, and pursuant to Board of Director approval, the Company amended the articles of incorporation of its wholly owned subsidiary, SecureAlert, Inc., to establish 3,500,000 shares of preferred stock designated as Series A Convertible Redeemable Non-Voting Preferred Stock. The holders of shares of Series A Preferred Stock shall be entitled to receive quarterly dividends out of any of SecureAlert's assets legally available therefor, prior and in preference to any declaration or payment of any dividend on the Common Stock of SecureAlert, at the rate of $1.50 per day times the number of SecureAlert's parolee contracts calculated in days during the quarter. For example, if there were an average of 10,000 parolee contracts outstanding during the quarter, the total dividend would be $1,350,000 ($1.50 X 90 days X 10,000 contracts) or $.385 per share of Series A Preferred Stock. In no case will a dividend be paid if the gross revenue per contract per day to SecureAlert averages less than $4.50. Dividends will be paid in cash to the holders of record of shares of Series A Preferred Stock as they appear on the books and records of SecureAlert on such record dates not less than ten (10) days nor more than sixty (60) days preceding the payment dates thereof, as may be fixed by the Board of Directors of SecureAlert. As a group, all Series A Preferred Stock may be converted at the holder's option at any time into an aggregate of 20% ownership of the common shares of SecureAlert, Inc. During the nine months ended June 30, 2006, the Company sold 600,000 of these shares for $600,000. As of June 30, 2006, there were 3,590,000 shares of SecureAlert Series A Preferred Stock outstanding.
The 600,000 shares of SecureAlert Series A Preferred Stock issued during the nine months ended June 30, 2006, have an additional feature pursuant to which the Company would buy back the SecureAlert Series A Preferred Shares and pay the investor 15% interest should the Company not have contracts for a total of 7,000 parolee units by March 31, 2006. Because the Company did not secure 7,000 parolee contracts by March 31, 2006 and in accordance with SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, the redemption value of the redeemable shares has been recorded as a liability. The Company has committed to collateralize these instruments with 600,000 free-trading shares of the Company's common stock. In addition, each holder received an option to purchase 1 share of common stock with an exercise price of $1.00 per share for each share of SecureAlert Series A Preferred Shares received. The Black-Scholes model was used to determine the value for the 600,000 options issued. The value of the options was $443,515. The detachable warrants were valued at $443,515 and the debt discount was prorated in the first and second quarter 2006. As of June 30, 2006, the debt discount had been fully amortized. To date none of the shareholders with rights to this additional feature have exercised their respective rights under this agreement.
The Company does not hold or issue derivative instruments for trading purposes. However, the Company had convertible notes payable that contain embedded derivatives that require separate valuation from the convertible notes. The Company recognizes these derivatives as liabilities in its balance sheet and measures them at their estimated fair value, and recognizes changes in their estimated fair value in earnings (losses) in the period of change. The Company has estimated the fair value of these embedded derivatives using the Black-Scholes model based on the historical volatility of its common stock over the past three years. The fair value of derivative instruments are re-measured each quarter. During the nine months ended June 30, 2006, and the year ended September 30, 2005, the Company issued convertible notes payable containing embedded derivatives. The Company received a total of $1,855,000 from these convertible notes ($575,000 during the nine months ended June 30, 2006 and $1,280,000 from the prior year ended September 30, 2005). The Company issued 1,855,000 shares of common stock valued at $1,539,100 for three years of prepaid interest.
During the nine months ended June 30, 2006, the Company paid $1,080,000 toward these convertible notes. In addition, $775,000 of these notes converted into 2,284,351 shares of common stock. As of June 30, 2006, all convertible notes payable were paid off.
During the nine months ended June 30, 2006, the Company issued 26,749,195 shares of common stock as follows:
o 5,796,428 shares were issued for services performed for a value of $3,884,107.
o 10,539,753 shares were issued for debt and accrued interest for a value of $7,587,782.
o 8,829,680 shares were issued from Series A and B Preferred Stock conversions.
o 1,583,334 shares were issued for $1,020,000 in cash, net commission of $35,000.
Common Stock Subject to Redemption
Of the shares of common stock outstanding at June 30, 2006, a total of 32,000 shares are subject to redemption. These shares are redeemable by the Company for $96,000.
Common Stock Options and Warrants
As of June 30, 2006, 17,250,357 of the 21,850,725 outstanding options and warrants were vested with a weighted average exercise price of $0.72 per share. During the nine months ended June 30, 2006, 11,379,076 options were issued with an exercise price range of $0.56 and $0.75 per share. Of the 11,379,076 options and warrants, 6,778,708 are vested and 4,600,368 have not yet vested.
The Company is organized into two business segments based primarily on the nature of the Company's products. The Reagents segment is engaged in the business of manufacturing and marketing medical diagnostic stains, solutions and related equipment to hospitals and medical testing labs. The SecureAlert segment is engaged in the business of developing, distributing and marketing mobile emergency and personal security systems to distributors and consumers. Other (unallocated) loss consists of research and development, selling, general and administrative expenses related to the Company's corporate activities, including remote health monitoring and market and business development activities.
The following table reflects certain financial information relating to each reportable segment for each of the three-month periods ended June 30, 2006 and 2005:
Three Months Ended
June 30,
---------------------------------
2006 2005
---------------------------------
Sales to external customers:
SecureAlert $ 80,589 $ 81,216
Reagents 156,907 153,033
---------------------------------
$ 237,496 $ 234,249
---------------------------------
Net (loss) income from operations:
SecureAlert $ (2,086,587) $ (992,447)
Reagents (57,934) 27,550
Other (unallocated) (6,895,040) (3,000,712)
---------------------------------
$ (9,039,561) $ (3,965,609)
---------------------------------
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The following table reflects certain financial information relating to each reportable segment for each of the nine-month periods ended June 30, 2006 and 2005:
Nine Months Ended
June 30,
---------------------------------
2006 2005
---------------------------------
Sales to external customers:
SecureAlert $ 233,521 $ 216,626
Reagents 475,883 419,309
---------------------------------
Total Sales $ 709,404 $ 635,935
---------------------------------
Net (loss) income from operations:
SecureAlert $ (4,749,211) $ (2,398,551)
Reagents (43,382) 30,060
Other (unallocated) (16,949,809) (4,938,668)
---------------------------------
$(21,742,402) $ (7,307,159)
---------------------------------
Identifiable assets:
SecureAlert $ 1,712,770
Reagents 202,950
Other (unallocated) 1,468,717
------------
Total assets $ 3,384,437
============
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Subsequent to June 30, 2006, the Company entered into the following transactions:
A. On August 4, 2006, the Company, closed a private placement of
shares of its common stock. The Company sold 5,300,000 shares of
its common stock (the "Shares"), at a purchase price of $1.30 per
share, for aggregate proceeds to the Company of $6,890,000. In
connection with the sale of the Shares, the Company granted
registration rights to the purchasers, in connection with which
the Company agreed to file a registration statement to register
the resale of the Shares by the purchasers within 60 days of the
closing. The Company also agreed to use its best efforts to have
the registration statement declared effective within 120 days of
the filing. In the event that the registration statement is not
filed within 60 days of the closing or effective within 120 days
of the filing, the Company is required to pay a 5% penalty to the
investors.
B. On July 10, 2006, the shareholders approved increasing the total
authorized shares of the Company's common stock from 100,000,000
to 175,000,000 shares. In addition, the total authorized preferred
stock was increased from 10,000,000 to 20,000,000 shares.
C. On July 5, 2006, the Company entered into a revolving line of
credit arrangement with Citizen's National Bank (the "Lender").
Under this arrangement, the Company and the Lender entered into a
Promissory Note in the principal amount of $4 million (the
"Note"), pursuant to which the Lender may advance $4 million under the Note to the Company upon receipt of satisfactory collateral documents. This Note can be expanded up to $10 million under certain terms and conditions. The Note accrues interest at the Prime Rate as published in the Wall Street Journal (8% per annum as of the date of the Note). The Company must pay all outstanding principal and interest on the Note in one payment on June 30, 2007. The Note may be prepaid in full at any time without penalty, except that the Lender is entitled to a minimum interest charge of $100. The Note is secured by all of the assets of the Company which secures all advances made by the Lender to the Company. SecureAlert, Inc. also granted to the Lender a security interest in all of its assets, excluding TrackerPAL products, which secures all advances made by the Lender to the Company. The Note will also be secured by an Unconditional Irrevocable Letter of Credit to be issued to the Lender on behalf of the Company by United States Trust Company, N.A. in the amount of $4 million (the "USTC LOC"). Under the revolving line of credit arrangement, the Lender has agreed to lend up to an additional $6 million, provided that, among other things, such loans are secured by additional letters of credit in the amount of such loans. As of August 9, 2006 the outstanding balance of the line of credit was approximately $1,900,000.
Item 2. Management's Discussion and Analysis or Plan of Operation
Special Note Regarding Forward-looking Information
Certain statements in this Item 2 "Management's Discussion and Analysis or Plan of Operation" are "forward-looking statements" within the meaning of the Securities Exchange Act of 1934 (the "Exchange Act"). For this purpose, any statements contained or incorporated in this report that are not statements of historical fact may be deemed to be forward-looking statements. The words "believes," "will," "plans," "anticipates," "expects" and similar expressions are intended to identify forward-looking statements. A number of important factors could cause the actual results of the Company to differ materially from those anticipated by forward-looking statements. These factors include those set forth under the caption "Risk Factors" in Item 6 - "Management's Discussion and Analysis or Plan of Operation" in the Company's Annual Report on Form 10-KSB for the year ended September 30, 2005. The Company disclaims any obligation or intention to update any forward-looking statement.
General
RemoteMDx, Inc. ("RemoteMDx" or the "Company"), markets and sells patented
wireless location technologies and the related monitoring services, and
develops, markets and sells personal security, senior supervision, and health
monitoring devices and monitoring services. The RemoteMDx products and
monitoring services feature wireless products that utilize GPS and cellular
technologies in conjunction with a monitoring center. These devices include a
mobile emergency response device, MobilePAL(TM), which can locate persons in
distress, no matter where they may be, and dispatch the closest emergency
service to their location. The Company has recently developed and has numerous
pre-production models of a tracking device, TrackerPAL, which will be used to
monitor convicted offenders in the criminal justice system. The Company believes
that its technologies and services will benefit the healthcare and penal system
as they allow both care providers and law enforcement officials to respond
immediately to a medical event or criminal activity. Our customers will be able
to better monitor and manage their own chronic disease and medical conditions,
giving peace of mind to them and their loved ones and care providers.
The Company's primary health monitoring market consists of approximately 35 million Americans over the age of sixty-five. Of these 35 million seniors, it is estimated that approximately 9.7 million currently live alone. However, in most cases, the Company anticipates that senior customers will not purchase the Company's products for themselves. Instead, based on the Company's experience, the Company believes that it is more effective to target the children or caregivers of these seniors. Therefore, the primary target market is children, friends, and spouses of these individuals.
Additionally, the Company has identified a growing need in the parole/probation market, which in 2003, consisted of approximately 4.9 million adults in the criminal justice system. In order to meet the needs of this growing demand, the Company has developed TrackerPAL, which works in conjunction with our monitoring center. Through the date of this report, the Company had received $7,868 of revenue from this market.
We also sell medical diagnostic stains, solutions, and equipment through a wholly owned subsidiary, Volu-Sol Reagents Corporation ("Reagents").
We derive our revenues from the following sources:
o Medical Diagnostic Stains - We sell medical diagnostic stains and equipment to laboratories throughout the United States. The Company anticipates that these sales will decrease in the future as a percentage of total sales.
o Monitoring Activation - We sell our MobilePAL(TM) and anticipate leasing our TrackerPAL devices as part of a monitoring contract, with prepaid activation charges.
o Monitoring Services - Following activation, our MobilePAL and TrackerPAL customers pay a monthly monitoring fee and fees for additional services offered by our contract providers or by us.
In addition to the foregoing sources, we have contractual rights to receive royalty revenues from a license agreement with Matsushita Electric Works ("MEW") and from sales of telematic products and services under marketing agreements. "Telematic" means any wireless communication system designed for the collection and dissemination of data. To date these royalty agreements have not produced any royalty income.
Our Strategy
Our goal is to establish the Company as a significant marketer and distributor of leading technology and services we have developed for the mobile personal emergency market, the parolee and probation market, and health monitoring industries. Until the beginning of calendar 2003, most of our revenues were provided by the distribution of consumer electronics through a business acquired by a wholly owned subsidiary, SecureAlert, Inc. ("SecureAlert"), in July 2001. With our decision to refocus our business and product development efforts on the mobile health and emergency monitoring and law enforcement industries, which previously comprised a smaller part of our business, we discontinued the distribution of consumer electronics and automotive telematic products during 2003.
Critical Accounting Policies
In Note 1 to the audited financial statements for the fiscal year ended September 30, 2005, included in the Company's Annual Report on Form 10-KSB, the Company discusses those accounting policies that are considered to be significant in determining the results of operations and its financial position. The Company believes that the accounting principles utilized by it conform to generally accepted accounting principles in the United States of America.
The preparation of consolidated financial statements requires management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. By their nature, these judgments are subject to an inherent degree of uncertainty. On an on-going basis, the Company evaluates its estimates, including those related to bad debts, inventories, intangible assets, warranty obligations, product liability, revenue, and income taxes. The Company bases its 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 and allowance for doubtful accounts, the Company applies the following critical accounting policies in the preparation of its financial statements:
Inventory Reserves
The nature of the Company's business requires it to maintain sufficient inventory on hand at all times to meet the requirements of its customers. The Company records finished goods inventory at the lower of standard cost, which approximates actual costs (first-in, first-out) or market. Raw materials are stated at the lower of cost (first-in, first-out), or market. General inventory reserves are maintained for the possible impairment of the inventory. Impairment may be a result of slow moving or excess inventory, product obsolescence or changes in the valuation of the inventory. In determining the adequacy of its reserves, the Company analyzes the following, among other things:
o Current inventory quantities on hand;
o Product acceptance in the marketplace;
o Customer demand;
o Historical sales;
o Forecast sales;
o Product obsolescence; and
o Technological innovations.
Any modifications to these estimates of reserves are reflected in the cost of goods sold within the statement of operations during the period in which such modifications are determined necessary by management.
Revenue Recognition
The Company derives its revenue primarily from the sale of mobile emergency and personal security systems and reagent stains.
The sale of mobile emergency and personal security systems may include the security device, such as the MobilePal phone, and the related monitoring service. If the sale includes both the device and the monitoring service, revenue from the sale of the device is deferred and recognized ratably over the life of the monitoring service contract. Revenue from the monitoring service contract is recognized monthly as earned in accordance with the monitoring service contract. If the sale is for the device only and does not include the monitoring services, revenue, less reserves for returns, is recognized upon shipment to the customer. The Company records reserves for estimated returns of defective product. Amounts received in advance of shipment are recorded as deferred revenue. Shipping and handling fees are included as part of net sales. The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of goods sold.
The sale of reagent stains is recognized when an agreement with the buyer exists, the price is fixed or determinable, the product has been shipped, and collection is reasonably assured.
Impairment of Long-lived Assets
The Company reviews its long-lived assets for impairment when events or changes in circumstances indicate that the book value of an asset may not be recoverable. The Company evaluates, at each balance sheet date, whether events and circumstances have occurred which indicate possible impairment. The Company uses an estimate of future undiscounted net cash flows of the related asset or group of assets over the estimated remaining life in measuring whether the assets are recoverable. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the estimated fair value of the asset. Impairment of long-lived assets is assessed at the lowest levels for which there are identifiable cash flows that are independent of other groups of assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less the estimated costs to sell. In addition, depreciation of the asset ceases. During the periods ended June 30, 2006 and 2005, no impairment of long-lived assets was recorded.
Accounting for Stock-based Compensation
The Company accounts for stock-based compensation issued to employees and directors under Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Under APB No. 25, compensation related to stock options, if any, is recorded if an option's exercise price on the measurement date is below the fair value of the company's common stock and amortized to expense over the vesting period. Compensation
expense for stock awards or purchases, if any, is recognized if the award or purchase price on the measurement date is below the fair value of the common stock and is recognized on the date of award or purchase. Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation," requires pro forma information regarding net loss and net loss per common share as if the company had accounted for its stock options granted under the fair value method.
The Company accounts for stock-based compensation issued to persons other than employees using the fair value method in accordance with SFAS No. 123 and related interpretations. Under SFAS No. 123, stock-based compensation is determined as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The measurement date for these issuances is the earlier of either the date at which a commitment for performance by the recipient to earn the equity instruments is reached or the date at which the recipient's performance is complete.
Three months ended June 30, 2006, Compared to Three months ended June 30, 2005
Net Sales
For the three months ended June 30, 2006, the Company had net sales of $237,496 compared to $234,249 for the three months ended June 30, 2005, an increase of $3,247. The increase in net sales resulted primarily the sale of stain and reagents solutions.
SecureAlert (PAL Services) had net sales of $80,589 during the three months ended June 30, 2006, compared to net sales of $81,216 for the three months ended June 30, 2005. These sales consisted of $72,721 from mobile emergency and personal security systems and $7,868 from monitoring of offender tracking devices. No SecureAlert (PAL Services) customer accounted for 10% or more of its sales.
Reagents had revenues for the three months ended June 30, 2006, of $156,907, compared to $153,033 during the quarter ended June 30, 2005. The Company anticipates that Reagents' sales will decrease in the future as a percentage of total sales. Fisher Scientific is a significant customer of Reagents, accounting for 38% of Reagents' sales during the period. No other Reagents customer accounted for 10% or more of its sales.
Cost of Goods Sold
For the three months ended June 30, 2006, cost of goods sold was $119,408 compared to $99,454 during the three months ended June 30, 2005, an increase of $19,954. SecureAlert's cost of goods sold totaled $34,895 or 43% of SecureAlert's net sales during the three months ended June 30, 2006. The mobile emergency and personal security products have generally been sold below cost in an effort to secure a recurring revenue stream under monthly monitoring contracts. Reagents' cost of goods sold was $84,513 or 54% of Reagent's net sales during the three months ended June 30, 2006, compared to $79,767 or 52% of Reagent's net sales for the same period during the prior fiscal year. The increase as a percentage of net sales was primarily due to an increase in material and labor costs.
Research and Development Expenses
During the three months ended June 30, 2006 and 2005, research and development expense was $876,646 and $1,084,043, respectively, and consisted primarily of expenses associated with the development of SecureAlert's TrackerPAL device and related services.
Selling, General and Administrative Expenses
During the three months ended June 30, 2006, selling, general and administrative expenses were $8,325,307 compared to $3,466,895 during the three months ended June 30, 2005. The increase of $4,858,412 relates primarily to an increase in advertising and marketing of $65,184; an increase in outside services of $231,147; an increase in payroll and payroll taxes of $313,690; an increase in other selling, general and administrative expenses of $297,011; and an increase in consulting costs of $3,951,380. Consulting expense increased due to commissions paid on the Series C preferred stock raise of $2,438,074 (non-cash portion is $2,438,074), expenses related to the issuance of common stock and options issued to employees and the board of directors of $963,069 (non-cash portion is $963,069), and other consulting of $550,237 (non-cash portion is $500,237). The majority of other consulting expense for the three months ended June 30, 2006, is related to the issuance of warrants and shares of common stock issued to consultants for public relations and branding services and to increase the Company's presence in the capital markets.
Interest Income and Expense
During the three months ended June 30, 2006, interest expense totaled $687,895 compared to $152,297 paid in the three months ended June 30, 2005. This amount consists primarily of non-cash interest expense of approximately $646,995 related to unamortized financing costs associated with shares of common stock issued for prepaid interest.
Nine months ended June 30, 2006, Compared to Nine months ended June 30, 2005
Net Sales
Net sales during the nine months ended June 30, 2006 were $709,404 compared to $635,935 in net sales during the nine months ended June 30, 2005, an increase of $73,469. The increase in net sales resulted primarily from the sale of stain and reagents solutions.
SecureAlert (PAL Services) had net sales of $233,521 during the nine months ended June 30, 2006, compared to $216,626 during the nine months ended June 30, 2005. These sales consisted of $225,653 from mobile emergency and personal security systems and $7,868 from monitoring of offender tracking devices. Reagents had sales for the nine months ended June 30, 2006, of $475,883, compared to $419,309 during the same period in the prior fiscal year, an increase of $56,574. This increase is due to Reagents' largest customer ordering more products.
Cost of Goods Sold
For the nine months ended June 30, 2006, cost of goods sold was $345,869 compared to $486,661 during the nine months ended June 30, 2005, a decrease of $140,792. During the fiscal year ended September 30, 2005, the Company recorded an impairment of the GPS2000 mobile phone inventory based on the estimated recoverability of the inventory. Therefore, the sales of such phones during the period ended June 30, 2006, resulted in a lower cost of goods sold per unit based on the impairment. SecureAlert's cost of goods sold totaled $102,997 or 44% of SecureAlert's net sales during the nine months ended June 30, 2006. The mobile emergency and personal security products have generally been sold below cost in an effort to secure a recurring revenue stream under monthly monitoring contracts. Reagents' cost of goods sold was $242,872 or 51% of Reagent's net sales during the nine months ended June 30, 2006, compared to $241,972 or 58% of Reagent's net sales for the same period during the prior fiscal year. The decrease as a percentage of net sales was primarily due to a reduction in material and labor costs.
Research and Development Expenses
During the nine months ended June 30, 2006 and 2005, research and development expense was $2,030,818 and $1,084,043, respectively, and consisted primarily of expenses associated with the development of SecureAlert's TrackerPAL device and related services.
Selling, General and Administrative Expenses
During the nine months ended June 30, 2006, selling, general and administrative expenses were $14,366,736 compared to $5,505,561 during the nine months ended June 30, 2005. The increase of $8,861,175 relates primarily to an increase in legal and professional fees of $234,734; an increase in outside services of $407,993; an increase in payroll and payroll taxes of $510,537; an increase in travel of $179,725; an increase in other selling, general and administrative expenses of $541,461 and an increase in consulting costs of $6,986,725. Consulting expense increased due to one-time finder fees and commissions paid on the Series C preferred stock raise paid in warrants of $2,591,928 (non-cash portion is $2,591,928), tooling costs of $219,084, expenses related to the issuance of common stock and options issued to employees and the board of directors of $2,664,360 (non-cash portion is $2,664,360), and other consulting of $1,511,353 (non-cash portion is $1,209,853). The majority of other consulting expense for the nine months ended June 30, 2006 is related to the issuance of warrants and shares of common stock issued to consultants for public relations and branding services and to increase the Company's presence in the capital markets.
Interest Income and Expense
During the nine months ended June 30, 2006, interest expense totaled $6,343,793. This amount consists primarily of non-cash interest expense of $5,869,686 related to the issuance of common stock in settlement of various note obligations and $321,429 to record a beneficial conversion feature. In addition, interest expense increased significantly for the nine months ended June 30, 2006 because several notes converted during the period; thus, recognizing the unamortized financing costs associated with shares of common stock issued for prepaid interest.
Liquidity and Capital Resources
The Company is presently unable to finance its operations solely from cash flows from operating activities. During the nine months ended June 30, 2006, the Company financed its operations primarily from the sale of debt and equity securities of the Company for net proceeds of $8,998,754.
As of June 30, 2006, the Company had unrestricted cash of $1,517,269 and a working capital deficit of $1,108,968, compared to unrestricted cash of $787,457 and a working capital deficit of $5,517,466 at September 30, 2005.
During the nine months ended June 30, 2006, the Company's operating activities used cash of $7,549,124, compared to $2,703,011 of cash used during the nine months ended June 30, 2005. The increase was primarily a result of an increase in selling, general and administrative expenses and research and development costs related to SecureAlert's TrackerPAL device.
The Company used cash of $348,397 for investing activities during the nine months ended June 30, 2006.
The Company's financing activities during the nine months ended June 30, 2006, provided cash of $8,998,754 compared to $3,120,208 during the nine months ended June 30, 2005. During the nine months ended June 30, 2006, the Company had net proceeds of $2,321,153 from the issuance of debt, as well as net cash proceeds of $8,869,457 from the sale of its debentures and equity securities. Cash was decreased by $1,299,121 in payments to notes payable and on the bank line of credit, and $505,726 in net payments on the related party line of credit.
The Company incurred a net loss of $21,742,402 through the nine months ended June 30, 2006. As of June 30, 2006, the Company had a net tangible stockholders' deficit of $3,398,013 and an accumulated deficit of $104,671,032. These factors, as well as the risk factors set out in the Company's annual report on Form 10-KSB for the year ended September 30, 2005, raise substantial doubt about the Company's ability to continue as a going concern. The unaudited condensed consolidated financial statements included in this report do not include any adjustments that might result from the outcome of this uncertainty. The Company's plans with respect to this uncertainty include raising capital from the sale of the Company's common stock or other debt and equity securities.
There is no assurance that the Company will be successful in its plans to raise capital or meet its current financial obligations. There has been no adjustment to the financial statements included in this report should management's plans not be met.
Recent Developments
Subsequent to June 30, 2006, the Company entered into the following transactions:
A. On August 4, 2006, the Company, closed a private placement of shares of its common stock. The Company sold 5,300,000 shares of its common stock (the "Shares"), at a purchase price of $1.30 per share, for aggregate proceeds to the Company of $6,890,000. In connection with the sale of the Shares, the Company granted registration rights to the purchasers, in connection with which the Company agreed to file a registration statement to register the resale of the Shares by the purchasers within 60 days of the closing. The Company also agreed to use its best efforts to have the registration statement declared effective within 120 days of the filing. In the event that the registration statement is not filed within 60 days of the closing or effective within 120 days of the filing, the Company is required to pay a 5% penalty to the investors.
B. On July 10, 2006, the shareholders approved increasing the total
authorized shares of the Company's common stock from 100,000,000
to 175,000,000. In addition, the total authorized preferred stock
was increased from 10,000,000 to 20,000,000.
C. On July 5, 2006, the Company entered into a revolving line of
credit arrangement with Citizen's National Bank (the "Lender").
Under this arrangement, the Company and the Lender entered into a
Promissory Note in the principal amount of $4 million (the
"Note"), pursuant to which the Lender may advance $4 million under
the Note to the Company upon receipt of satisfactory collateral
documents. This Note can be expanded up to $10 million under
certain terms and conditions. The Note accrues interest at the
Prime Rate as published in the Wall Street Journal (8% per annum
as of the date of the Note). The Company must pay all outstanding
principal and interest on the Note in one payment on June 30,
2007. The Note may be prepaid in full at any time without penalty,
except that the Lender is entitled to a minimum interest charge of
$100. The Note is secured by all of the assets of the Company
which secures all advances made by the Lender to the Company.
SecureAlert, Inc. also granted to the Lender a security interest
in all of its assets which secures all advances made by the Lender
to the Company. The Note will also be secured by an Unconditional
Irrevocable Letter of Credit to be issued to the Lender on behalf
of the Company by United States Trust Company, N.A. in the amount
of $4 million (the "USTC LOC"). Under the revolving line of credit
arrangement, the Lender has agreed to lend up to an additional $6
million, provided that, among other things, such loans are secured
by additional letters of credit in the amount of such loans.
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized, and reported within the required time periods, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding disclosure.
As required by Rule 13a-15(b) under the Exchange Act, the Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2006. In their evaluation, the Chief Executive Officer and Chief Financial Officer identified deficiencies that existed in the design or operation of our internal control over financial reporting that we and our independent registered public accounting firm considered to be "material weaknesses." A material weakness is a significant deficiency or combination of significant deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial information will not be prevented or detected.
The deficiencies in our internal control over financial reporting related to the failure to properly disclose equity and debt transactions. The deficiencies were detected in the evaluation process and the transactions have been appropriately recorded and disclosed in this Form 10-QSB. In addition, we have not created a "Disclosure Controls Committee" to monitor and follow up on our processes to assure disclosures are complete and accurate; however, we intend to have such a committee in place by October 1, 2006. We are in the process of improving our internal control over financial reporting in an effort to resolve these deficiencies through improved supervision and training of our accounting 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.
Based on the matter identified above, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective. These deficiencies have been disclosed to our Audit Committee.
Changes in Internal Controls. There has been no change in our internal control over financial reporting during the quarter ended June 30, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Since the most recent evaluation date, there have been no significant changes in our internal control structure, policies, and procedures or in other areas that could significantly affect our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the nine months ended June 30, 2006, the Company issued 26,749,195 shares of common stock as follows:
o 5,796,428 shares were issued for services performed for a value of $3,884,107.
o 10,539,753 shares were issued for debt and accrued interest for a value of $7,587,782.
o 8,829,680 shares were issued from Series A and B Preferred Stock conversions.
o 1,583,334 shares were issued for $1,020,000 in cash, net commission of $35,000.
Subsequent to June 30, 2006, the Company, closed a private placement of shares of its common stock. The Company sold 5,300,000 shares of its common stock (the "Shares"), at a purchase price of $1.30 per share, for aggregate proceeds to the Company of $6,890,000. In connection with the sale of the Shares, the Company granted registration rights to the purchasers, in connection with which the Company agreed to file a registration statement to register the resale of the Shares by the purchasers within 60 days of the closing. The Company also agreed to use its best efforts to have the registration statement declared effective within 120 days of the filing. In the event that the registration statement is not filed within 60 days of the closing or effective within 120 days of the filing, the Company is required to pay a 5% penalty to the investors.
In each of these transactions the securities were issued without registration under the Securities Act of 1933, as amended, in reliance upon exemptions from registration applicable to limited or non-public offers and sales of securities. The offer and sale of securities in the Company's private placement of debt and equity were made solely to individuals or entities that were "accredited investors" as that term is used in Rule 501 under Regulation D of the Securities Act, in reliance on the exemptions from the registration requirements of the Securities Act afforded by Section 4(2) and Rule 506 of Regulation D under the Securities Act.
Item 5. Other Information
On July 10, 2006, we held our 2006 Annual Meeting of Shareholders at our corporate headquarters. Five proposals were presented for shareholder approval.
The first proposal related to the election of Robert E. Childers, James J. Dalton, David G. Derrick, and Peter McCall as directors. The voting was as follows:
----------------------- ----------------------- --------------------------
Shares in Favor Shares Withheld
----------------------- ----------------------- --------------------------
Robert E. Childers 46,085,385 734,108
----------------------- ----------------------- --------------------------
James J. Dalton 46,280,921 538,572
----------------------- ----------------------- -------------------------
David G. Derrick 46,621,180 198,313
----------------------- ----------------------- --------------------------
Peter McCall 46,817,716 1,777
----------------------- ----------------------- --------------------------
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The second proposal related to the ratification of the Company's selection of Hansen Barnett & Maxwell, as the Company's independent auditors. The voting was as follows: 46,728,809 shares were voted in favor; 501 shares were voted against; and 90,183 shares abstained.
The third proposal was to approve an amendment to the Articles of Incorporation increasing the number of shares of common stock authorized to be issued by the Company. The voting was as follows: 46,432,459 shares were voted in favor; 202,826 shares were voted against; and 172,304 shares abstained.
The fourth proposal was to approve an amendment to the Articles of Incorporation increasing the number of shares of preferred stock authorized to be issued by the Company. The voting was as follows: 30,843,459 shares were voted in favor; 181,699 shares were voted against; and 83,107 shares abstained.
The fifth proposal was to approve the 2006 Equity Incentive Award Plan. The voting was as follows: 30,971,336 shares were voted in favor; 71,825 shares were voted against; and 77,008 shares abstained.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Required by Item 601 of Regulation S-B
Exhibit Number Title of Document
-------------- -----------------
3.01 Articles of Incorporation (incorporated by reference to the
Company's Registration Statement and Amendments thereto on
Form 10-SB, effective December 1, 1997).
3.01(1) Amendment to Articles of Incorporation for Change of Name
(previously filed)
3.01(2) Amendment to Articles of Incorporation Amending Rights and
Preferences of Series A Preferred Stock (previously filed)
3.01(3) Amendment to Articles of Incorporation Adopting Designation
of Rights and Preferences of Series B Preferred Stock
(previously filed)
3.01(4) Certificate of Amendment to the Designation of Rights and
Preferences Related to Series A 10% Cumulative Convertible
Preferred Stock of RemoteMDx, Inc. (incorporated by
reference to the Company's annual report on Form 10-KSB for
the year ended September 30, 2001)
3.01(5) Certificate of Amendment to the Designation of Rights and
Preferences Related to Series C 8% Convertible Preferred
Stock of RemoteMDx, Inc. (incorporated by reference to the
Company's Current Report on Form 8-K, filed with the
Commission on March 24, 2006)
3.01(6) Articles of Amendment to Articles of Incorporation filed
July 12, 2006 (previously filed as exhibits to the Company's
current report on Form 8-K filed July 18, 2006, and
incorporated herein by reference).
3.02 Bylaws (incorporated by reference to the Company's
Registration Statement on Form 10-SB, effective December 1,
1997)
4.01 2006 Equity Incentive Award Plan (July 2006)
10.01 Distribution and Separation Agreement (incorporated by
reference to the Company's Registration Statement and
Amendments thereto on Form 10-SB, effective December 1,
1997).
10.02 1997 Stock Incentive Plan of the Company, (incorporated by
reference to the Company's Registration Statement and
Amendments thereto on Form 10-SB, effective December 1,
1997).
10.03 1997 Transition Plan (incorporated by reference to the
Company's Registration Statement and Amendments thereto on
Form 10-SB, effective December 1, 1997).
10.04 Securities Purchase Agreement for $1,200,000 of Series A
Preferred Stock (incorporated by reference to the Company's
Registration Statement and Amendments thereto on Form 10-SB,
effective December 1, 1997)
10.05 Securities Purchase Agreements with ADP Management and James
Dalton (previously filed)
10.06 Agreement and Plan of Merger (SecureAlert (PAL Services))
(previously filed as exhibit to Current Report on Form 8-K)
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10.07 Loan Agreement (as amended) dated June 2001 between ADP
Management and the Company (incorporated by reference to the
Company's annual report on Form 10-KSB for the year ended
September 30, 2001)
10.08 Amended and Restated Loan and Security Agreement (SunTrust
Bank and SecureAlert (PAL Services)), dated August 3, 2001
(incorporated by reference to the Company's annual report on
Form 10-KSB for the year ended September 30, 2001)
10.09 Amended and Restated Loan and Security Agreement (SunTrust
Bank and SecureAlert (PAL Services)), dated January 24, 2002
(filed as an exhibit to the Company's quarterly report on
Form 10-QSB for the quarter ended December 31, 2001)
10.10 Amended and Restated Loan and Security Agreement (SunTrust
Bank and SecureAlert (PAL Services)) dated March 1, 2002
(filed as an exhibit to the Company's quarterly report on
Form 10-QSB for the quarter ended December 31, 2001)
10.11 Loan Agreement (as amended and extended) dated March 5, 2002
between ADP Management and the Company, effective December
31, 2001 (filed as an exhibit to the Company's quarterly
report on Form 10-QSB for the quarter ended December 31,
2001)
10.12 License Agreement between RemoteMDx, Inc. and SecureAlert
(PAL Services), Inc. as licensor and Matsushita Electric
Works, Ltd., as licensee, (April 12, 2002) Agreement with
SecureAlert Entertainment, LLC, with amendments (January and
June 2003) (previously filed)
10.13 Agreement with SAE (incorporated by reference to the
Company's quarterly report on Form 10-QSB for the quarter
ended December 31, 2002)
10.14 Agreement between the Company and SecureAlert Telematics
(incorporated by reference to the Company's quarterly report
on Form 10-QSB for the quarter ended December 31, 2002)
10.15 Amendments to SAE Agreement (previously filed)
10.16 Agreement with ADP Management, Derrick and Dalton (April
2003) (previously filed)
10.17 Security Agreement between Citizen National Bank and the
Company (July 2006).
10.18 Promissory Note between Citizen National Bank and the
Company (July 2006).
10.19 Common Stock Puchase Agreement dated as of August 4, 2006
(previously filed as an exhibit to the Company's current
report on Form 8-K filed August 7, 2006 and incorporated
herein by reference).
10.20 Change in Terms Agreement between Citizen National Bank and
the Company (August 2006).
31.1 Certification of President and Chief Executive Officer under
Section 302 of Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer under Section 302
of Sarbanes-Oxley Act of 2002
32 Certification under Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. SECTION 1350)
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report, as amended, to be signed on its behalf by the undersigned, thereunto duly authorized.
REMOTEMDX, INC.
Date: August 14, 2006 By: /s/ David G. Derrick
--------------------
David G. Derrick,
Chief Executive Officer
Date: August 14, 2006 By: /s/ Michael G. Acton
--------------------
Michael G. Acton,
Principal Accounting Officer
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REMOTE MDX, INC.
2006 EQUITY INCENTIVE AWARD PLAN
ARTICE 1
PUPOSE
The purposes of the RemoteMDx, Inc., 2006 Equity Incentive Award Plan (the "Plan") are to:
(1) Closely associate the interests of management, employees, directors and consultants of RemoteMDx, Inc., a Utah corporation (the "Company"), with the shareholders of the Company by reinforcing the relationship between participants' rewards and shareholder gains;
(2) Provide management and employees with an equity ownership in the Company commensurate with Company performance, as reflected in increased shareholder value;
(3) Maintain competitive compensation levels; and
(4) Provide an incentive to management and employees to remain in continuing employment with the Company and to put forth maximum efforts for the success of its business.
The Plan is further intended to provide flexibility to the Company in its ability to motivate, attract, and retain the services of members of the Board, Employees and Consultants upon whose judgment, interest, and special effort the successful conduct of the Company's operation is largely dependent.
ARTICLE 2
DEFINITIONS AND CONSTRUCTION
Wherever the following terms are used in the Plan they shall have the meanings specified below, unless the context clearly indicates otherwise. The singular pronoun shall include the plural where the context so indicates.
2.1 "Award" means an Option, a Restricted Stock award, a Stock Appreciation Right award, a Performance Share award, a Performance Unit award, a Dividend Equivalents award, a Stock Payment award, a Deferred Stock award, a Restricted Stock Unit award, an Other Stock-Based Award, or a Performance-Based Award granted to a Participant pursuant to the Plan.
2.2 "Award Agreement" means any written agreement, contract, or other instrument or document evidencing an Award.
2.3 "Board" means the Board of Directors of the Company.
2.4 "Change in Control" means the occurrence of any of the following in one or a series of related transactions: (i) an acquisition after the date hereof by an individual or legal entity or "group" (as described in Rule 13d-5(b)(1) under the Exchange Act) of more than thirty percent (30%) of the voting rights or equity interests in the Company; (ii) a replacement, during a 24-month period, of more than one-half of the members of the Board that is not approved by those individuals who are members of the Board on the date hereof (or other directors previously approved by such individuals); (iii) consummation of a merger or consolidation of the Company or any Subsidiary or a sale of more than one-half of the assets of the Company in one or a series of related transactions, unless following such transaction or series of transactions, the holders of the Company's securities prior to the first such transaction continue to hold at least one-half of the voting rights and equity interests of the surviving entity or acquirer of such assets; (iv) a recapitalization, reorganization or other transaction involving the Company or any Subsidiary that constitutes or results in a transfer of more than one-half of the voting rights or equity interests in the Company; or (v) consummation of a "Rule 13e-3 transaction" as defined in Rule 13e-3 under the Exchange Act with respect to the Company.
2.5 "Code" means the Internal Revenue Code of 1986, as amended.
2.6 "Committee" means the committee of the Board described in Article 12.
2.7 "Consultant" means any consultant or adviser if:
(a) The consultant or adviser renders bona fide services to the Company;
(b) The services rendered by the consultant or adviser are not in connection with the offer or sale of securities in a capital-raising transaction and do not directly or indirectly promote or maintain a market for the Company's securities; and
(c) The consultant or adviser is a natural person who has contracted directly with the Company to render such services.
2.8 "Covered Employee" means an Employee who is, or may be, as determined by the Committee, a "covered employee" within the meaning of Section 162(m) of the Code.
2.9 "Deferred Stock" means a right to receive a specified number of shares of Stock during specified time periods pursuant to Article 8.
2.10 "Disability" means that the Participant qualifies to receive long-term disability payments under the Company's long-term disability insurance program, as it may be amended from time to time.
2.11 "Dividend Equivalents" means a right granted to a Participant pursuant to Article 8 to receive the equivalent value (in cash or Stock) of dividends paid on Stock.
2.12 "Effective Date" shall have the meaning set forth in Section 13.1.
2.13 "Eligible Individual" means any person who is an Employee, a Consultant or a member of the Board, as determined by the Committee.
2.14 "Employee" means any officer or other employee (as defined in accordance with Section 3401(c) of the Code) of the Company or any Subsidiary.
2.15 "Exchange Act" means the Securities Exchange Act of 1934, as amended.
2.16 "Fair Market Value" means, as of any given date, the fair market value of a share of Stock on the date determined by such methods or procedures as may be established from time to time by the Committee. Unless otherwise determined by the Committee, the Fair Market Value of a share of Stock as of any date shall be (i) the mean between the highest and lowest selling price of a share of Common Stock on the principal exchange on which shares of Common Stock are then trading, if any, on such date, or if shares were not traded on such date, then on the closest preceding date on which a trade occurred; or (ii) if Common Stock is not traded on an exchange, the mean between the closing representative bid and asked prices for the Common Stock on such date as reported by NASDAQ or, if NASDAQ is not then in existence, by its successor quotation system; or (iii) if Common Stock is not publicly traded, the Fair Market Value of a share of Common Stock as established by the Committee acting in good faith.
2.17 "Incentive Stock Option" means an Option that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto.
2.18 "Independent Director" means a member of the Board who is not an Employee of the Company.
2.19 "Non-Employee Director" means a member of the Board who qualifies as a "Non-Employee Director" as defined in Rule 16b-3(b)(3) of the Exchange Act, or any successor definition adopted by the Board.
2.20 "Non-Qualified Stock Option" means an Option that is not intended to be an Incentive Stock Option.
2.21 "Option" means a right granted to a Participant pursuant to Article 5 of the Plan to purchase a specified number of shares of Stock at a specified price during specified time periods. An Option may be either an Incentive Stock Option or a Non-Qualified Stock Option.
2.22 "Other Stock-Based Award" means an Award granted or denominated in Stock or units of Stock pursuant to Section 8.7 of the Plan.
2.23 "Participant" means any Eligible Individual who, as a member of the Board or Employee or Consultant, has been granted an Award pursuant to the Plan.
2.24 "Performance-Based Award" means an Award granted to selected Covered Employees pursuant to Articles 6 and 8, but which is subject to the terms and conditions set forth in Article 9. All Performance-Based Awards are intended to qualify as Qualified Performance-Based Compensation.
2.25 "Performance Criteria" means the criteria that the Committee selects for purposes of establishing the Performance Goal or Performance Goals for a Participant for a Performance Period. The Performance Criteria that will be used to establish Performance Goals are limited to the following: net earnings (either before or after interest, taxes, depreciation and amortization), economic value-added (as determined by the Committee), sales or revenue, net income (either before or after taxes), operating earnings, cash flow (including, but not limited to, operating cash flow and free cash flow),
cash flow return on capital, return on net assets, return on stockholders'
equity, return on assets, return on capital, stockholder returns, return on
sales, gross or net profit margin, productivity, expense, margins, operating
efficiency, customer satisfaction, working capital, earnings per share, price
per share of Stock, and market share, any of which may be measured either in
absolute terms or as compared to any incremental increase or as compared to
results of a peer group. The Committee shall, within the time prescribed by
Section 162(m) of the Code, define in an objective fashion the manner of
calculating the Performance Criteria it selects to use for such Performance
Period for such Participant.
2.26 "Performance Goals" means, for a Performance Period, the goals established in writing by the Committee for the Performance Period based upon the Performance Criteria. Depending on the Performance Criteria used to establish such Performance Goals, the Performance Goals may be expressed in terms of overall Company performance or the performance of a division, business unit, or an individual. The Committee, in its discretion, may, adjust or modify the calculation of Performance Goals for such Performance Period in order to prevent the dilution or enlargement of the rights of Participants (a) in the event of, or in anticipation of, any unusual or extraordinary corporate item, transaction, event, or development, or (b) in recognition of, or in anticipation of, any other unusual or nonrecurring events affecting the Company, or the financial statements of the Company, or in response to, or in anticipation of, changes in applicable laws, regulations, accounting principles, or business conditions.
2.27 "Performance Period" means the one or more periods of time, which may be of varying and overlapping durations, as the Committee may select, over which the attainment of one or more Performance Goals will be measured for the purpose of determining a Participant's right to, and the payment of, a Performance-Based Award.
2.28 "Performance Share" means a right granted to a Participant pursuant to Article 8, to receive Stock, the payment of which is contingent upon achieving certain Performance Goals or other performance-based targets established by the Committee.
2.29 "Performance Unit" means a right granted to a Participant pursuant to Article 8, to receive units of value, including dollar value of shares of Stock, the payment of which is contingent upon achieving certain Performance Goals or other performance-based targets established by the Committee.
2.30 "Plan" means this RemoteMDx, Inc., 2006 Equity Incentive Award Plan, as it may be amended from time to time.
2.31 "Qualified Performance-Based Compensation" means any compensation that is intended to qualify as "qualified performance-based compensation" as described in Section 162(m)(4)(C) of the Code.
2.32 "Restricted Stock" means Stock awarded to a Participant pursuant to Article 6 that is subject to certain restrictions and may be subject to risk of forfeiture.
2.33 "Restricted Stock Unit" means an Award granted pursuant to Section 8.6.
2.34 "Section 409A Award" shall have the meaning set forth in Section 15.1.
2.35 "Securities Act" shall mean the Securities Act of 1933, as amended.
2.36 "Stock" means the common stock of the Company, par value $.001 per share, and such other securities of the Company that may be substituted for Stock pursuant to Article 11.
2.37 "Stock Appreciation Right" or "SAR" means a right granted pursuant to Article 7 to receive a payment equal to the excess of the Fair Market Value of a specified number of shares of Stock on the date the SAR is exercised over the Fair Market Value on the date the SAR was granted as set forth in the applicable Award Agreement.
2.38 "Stock Payment" means (a) a payment in the form of shares of Stock, or (b) an option or other right to purchase shares of Stock, as part of any bonus, deferred compensation or other arrangement, made in lieu of all or any portion of the compensation, granted pursuant to Article 8.
2.39 "Subsidiary" means any "subsidiary corporation" as defined in
Section 424(f) of the Code and any applicable regulations promulgated thereunder
or any other entity of which a majority of the outstanding voting stock or
voting power is beneficially owned directly or indirectly by the Company.
ARTICLE 3
SHARES SUBJECT TO THE PLAN
3.1 Number of Shares.
(a) Subject to Article 11 and Section 3.1(b), the aggregate number of shares of Stock which may be issued, transferred or reserved for issuance pursuant to Awards under the Plan shall be ten million (10,000,000) shares. In order that the applicable regulations under the Code relating to Incentive Stock Options be satisfied, the maximum number of shares of Stock that may be delivered upon exercise of Incentive Stock Options shall be the number specified in this Section 3.1(a). Shares of stock that may be issued upon exercise of Options under the Plan shall be authorized and unissued shares of Common Stock, par value $.001 per share, of the Company ("Common Stock"). In the absence of an effective registration statement under the Securities Act of 1933 (the "Act"), all Options granted and shares of Common Stock subject to their exercise will be restricted as to subsequent resale or transfer, pursuant to the provisions of Rule 144, promulgated under the Act.
(b) To the extent that an Award terminates, expires, or lapses for any reason, any shares of Stock subject to the Award shall again be available for the grant of an Award pursuant to the Plan. Additionally, any shares of Stock tendered or withheld to satisfy the grant or exercise price or tax withholding obligation pursuant to any Award shall again be available for the grant of an Award pursuant to the Plan. To the extent permitted by applicable
law or any exchange rule, shares of Stock issued in assumption of, or in substitution for, any outstanding awards of any entity acquired in any form of combination by the Company or any Subsidiary shall not be counted against shares of Stock available for grant pursuant to this Plan. The payment of Dividend Equivalents in conjunction with any outstanding Awards shall not be counted against the shares available for issuance under the Plan.
3.2 Stock Distributed. Any Stock distributed pursuant to an Award may consist, in whole or in part, of authorized and unissued Stock, treasury Stock or Stock purchased on the open market.
3.3 Limitation on Number of Shares Subject to Awards. Notwithstanding any provision in the Plan to the contrary, and subject to Article 11, (a) the maximum number of shares of Stock with respect to one or more Awards that may be granted to any one Participant during a one-year period (measured from the date of any grant) shall be 1,000,000, and (b) the maximum dollar value payable to any one Participant during a one-year period with respect to awards of Performance Units shall be $500,000.
ARTICLE 4
ELIGIBILITY AND PARTICIPATION
4.1 Eligibility. Each Eligible Individual shall be eligible to be granted one or more Awards pursuant to the Plan.
4.2 Participation. Subject to the provisions of the Plan, the Committee may, from time to time, select from among all Eligible Individuals, those to whom Awards shall be granted and shall determine the nature and amount of each Award. No Eligible Individual shall have any right to be granted an Award pursuant to this Plan.
4.3 Foreign Participants. In order to assure the viability of Awards granted to Participants employed in foreign countries, the Committee may provide for such special terms as it may consider necessary or appropriate to accommodate differences in local law, tax policy, or custom. Moreover, the Committee may approve such supplements to, or amendments, restatements, or alternative versions of, the Plan as it may consider necessary or appropriate for such purposes without thereby affecting the terms of the Plan as in effect for any other purpose; provided, however, that no such supplements, amendments, restatements, or alternative versions shall increase the share limitations contained in Sections 3.1 and 3.3 [see comment above regarding Section 3.3] of the Plan.
ARTICLE 5
STOCK OPTIONS
5.1 General. The Committee is authorized to grant Options to Participants on the following terms and conditions:
(a) Exercise Price. The exercise price per share of Stock subject to an Option shall be not less than 100% of the Fair Market Value of a share of Stock on the date of the grant.
(b) Time and Conditions of Exercise. Each Option shall be fully exercisable at any time within the period beginning not earlier than six months after the date of the option grant and ending not later than ten years after the date of such grant (the "Option Term"), unless the Committee specifies otherwise. In no event, however, shall the Option Term extend beyond ten years after the date of the grant. No Option shall be exercisable after the expiration of the Option Term. The Committee shall also determine the performance or other conditions, if any, that must be satisfied before all or part of an Option may be exercised.
(c) Payment The Committee shall determine the methods by which the exercise price of an Option may be paid, the form of payment, including, without limitation: (i) cash, (ii) promissory note bearing interest at no less than such rate as shall preclude the imputation of interest under the Code, (iii) shares of Stock having a Fair Market Value on the date of delivery equal to the aggregate exercise price of the Option or exercised portion thereof, or (iv) other property acceptable to the Committee (including through the delivery of a notice that the Participant has placed a market sell order with a broker with respect to shares of Stock then issuable upon exercise of the Option, and that the broker has been directed to pay a sufficient portion of the net proceeds of the sale to the Company in satisfaction of the Option exercise price; provided that payment of such proceeds is then made to the Company upon settlement of such sale), and the methods by which shares of Stock shall be delivered or deemed to be delivered to Participants. Notwithstanding any other provision of the Plan to the contrary, no Participant who is a member of the Board or an "executive officer" of the Company within the meaning of Section 13(k) of the Exchange Act shall be permitted to pay the exercise price of an Option by means of a personal loan or other credit extended by the Company or in any other method which would violate Section 13(k) of the Exchange Act.
(d) Evidence of Grant. All Options shall be evidenced by a written Award Agreement between the Company and the Participant. The Award Agreement shall include the number of shares of Common Stock subject to the Option, the exercise date, the Option Term, and such additional provisions as may be specified by the Committee.
5.2 Incentive Stock Options. The terms of any Incentive Stock Options granted pursuant to the Plan must comply with the conditions and limitations contained Section 13.2 and this Section 5.2.
(a) Eligibility. The Committee may grant one or more Incentive Stock Options to employees of the Company or any "subsidiary corporation" thereof (within the meaning of Section 424(f) of the Code and the applicable regulations promulgated thereunder). The date an Incentive Stock Option is granted shall mean the date selected by the Committee as of which the Committee shall allot a specific number of shares to a participant pursuant to the Plan.
(b) Individual Dollar Limitation. The aggregate Fair Market Value (determined as of the time the Option is granted) of all shares of Stock with respect to which Incentive Stock Options are first exercisable by a Participant in any calendar year may not exceed $100,000 or such other limitation as imposed by Section 422(d) of the Code, or any successor provision. Multiple Incentive Stock Options may be granted to an Optionee in any calendar year.
(c) Ten Percent Owners. The Committee may determine to grant an Incentive Stock Option to an employee who is also an individual who owns, at the date of grant, directly or indirectly according to the stock ownership attribution rules of Section 424(d) of the Code, stock possessing more than ten percent of the total combined voting power of all classes of Stock of the Company. However, the exercise price of such Option granted shall not be less than 110% of Fair Market Value on the date of grant. Furthermore, the Option may be exercisable for no more than five years from the date of grant.
(d) Notice of Disposition. The Participant shall give the Company prompt notice of any disposition of shares of Stock acquired by exercise of an Incentive Stock Option within (i) two years from the date of grant of such Incentive Stock Option or (ii) one year after the transfer of such shares of Stock to the Participant. In order to obtain the favorable tax treatment available for Incentive Stock Options under Section 422 of the Code, the Optionee is prohibited from the sale, exchange, transfer, pledge, hypothecation, gift or other disposition of the shares of Common Stock underlying the Incentive Stock Options until the later of either two (2) years after the date of grant of the Incentive Stock Option, or one (1) year after the transfer to the Optionee of such underlying Common Stock after the Optionee's exercise of such Incentive Stock Option. Should Optionee choose to make a premature disposition of such underlying Common Stock contrary to such restrictions, the Options related to such Common Stock shall be treated as Non-qualified Stock Options pursuant to the terms of the Plan.
(e) Right to Exercise. During a Participant's lifetime, an Incentive Stock Option may be exercised only by the Participant.
5.3 Substitution of Stock Appreciation Rights. The Committee may provide in the Award Agreement evidencing the grant of an Option that the Committee, in its sole discretion, shall have the right to substitute a Stock Appreciation Right for such Option at any time prior to or upon exercise of such Option, subject to the provisions of Section 7.2 hereof; provided that such Stock Appreciation Right shall be exercisable with respect to the same number of shares of Stock for which such substituted Option would have been exercisable.
5.4 Paperless Exercise. In the event that the Company establishes, for itself or using the services of a third party, an automated system for the exercise of Options, such as a system using an internet website or interactive voice response, then the paperless exercise of Options by a Participant may be permitted through the use of such an automated system.
5.5 Granting of Options to Independent Directors. The Board may from time to time, in its sole discretion, and subject to the limitations of the Plan:
(a) Select from among the Independent Directors (including Independent Directors who have previously been granted Options under the Plan) such of them as in its opinion should be granted Options;
(b) Subject to Section 3.3, determine the number of shares of Stock that may be purchased upon exercise of the Options granted to such selected Independent Directors; and
(c) Subject to the provisions of this Article 5, determine the terms and conditions of such Options, consistent with the Plan.
Options granted to Independent Directors shall be Non-Qualified Stock Options.
ARTICLE 6
RESTRICTED STOCK AWARDS
6.1 Grant of Restricted Stock. The Committee is authorized to make Awards of Restricted Stock to any Participant selected by the Committee in such amounts and subject to such terms and conditions as determined by the Committee. All Awards of Restricted Stock shall be evidenced by a written Restricted Stock Award Agreement.
6.2 Issuance and Restrictions. Restricted Stock shall be subject to such restrictions on transferability and other restrictions as the Committee may impose (including, without limitation, limitations on the right to vote Restricted Stock or the right to receive dividends on the Restricted Stock). These restrictions may lapse separately or in combination at such times, pursuant to such circumstances, in such installments, or otherwise, as the Committee determines at the time of the grant of the Award or thereafter.
6.3 Forfeiture. Except as otherwise determined by the Committee at the time of the grant of the Award or thereafter, upon termination of employment or service during the applicable restriction period, Restricted Stock that is at that time subject to restrictions shall be forfeited; provided, however, that the Committee may (a) provide in any Restricted Stock Award Agreement that restrictions or forfeiture conditions relating to Restricted Stock will be waived in whole or in part in the event of terminations resulting from specified causes, and (b) in other cases waive in whole or in part restrictions or forfeiture conditions relating to Restricted Stock.
6.4 Certificates for Restricted Stock. Restricted Stock granted pursuant to the Plan may be evidenced in such manner as the Committee shall determine. If certificates representing shares of Restricted Stock are registered in the name of the Participant, certificates must bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock, and the Company may, at its discretion, retain physical possession of the certificate until such time as all applicable restrictions lapse.
ARTICLE 7
STOCK APPRECIATION RIGHTS
7.1 Grant of Stock Appreciation Rights. A Stock Appreciation Right may be granted to any Participant selected by the Committee. A Stock Appreciation Right may be granted (a) in connection and simultaneously with the grant of an Option, (b) with respect to a previously granted Option, or (c) independent of an Option. A Stock Appreciation Right shall be subject to such terms and conditions not inconsistent with the Plan as the Committee shall impose and shall be evidenced by an Award Agreement.
7.2 Coupled Stock Appreciation Rights.
(a) A Coupled Stock Appreciation Right ("CSAR") shall be related to a particular Option and shall be exercisable only when and to the extent the related Option is exercisable, provided, however, that the exercise price for
any CSAR shall not be less than 100% of the Fair Market Value on the date of grant; and provided, further, that, the Committee in its sole and absolute discretion may provide that the CSAR may be exercised subsequent to a termination of employment or service, as applicable, or following a Change in Control of the Company, or because of the Participant's retirement, death or disability, or otherwise.
(b) A CSAR may be granted to a Participant for no more than the number of shares subject to the simultaneously or previously granted Option to which it is coupled.
(c) A CSAR shall entitle the Participant (or other person entitled to exercise the Option pursuant to the Plan) to surrender to the Company the unexercised portion of the Option to which the CSAR relates (to the extent then exercisable pursuant to its terms) and to receive from the Company in exchange therefor an amount determined by multiplying the difference obtained by subtracting the Option exercise price from the Fair Market Value of a share of Stock on the date of exercise of the CSAR by the number of shares of Stock with respect to which the CSAR shall have been exercised, subject to any limitations the Committee may impose.
7.3 Independent Stock Appreciation Rights.
(a) An Independent Stock Appreciation Right ("ISAR") shall be unrelated to any Option and shall have a term set by the Committee. An ISAR shall be exercisable in such installments as the Committee may determine. An ISAR shall cover such number of shares of Stock as the Committee may determine. The exercise price per share of Stock subject to each ISAR shall be set by the Committee; provided, however, that the exercise price for any ISAR shall not be less than 100% of the Fair Market Value on the date of grant; and provided, further, that, the Committee in its sole and absolute discretion may provide that the ISAR may be exercised subsequent to a termination of employment or service, as applicable, or following a Change in Control of the Company, or because of the Participant's retirement, death or disability, or otherwise.
(b) An ISAR shall entitle the Participant (or other person entitled to exercise the ISAR pursuant to the Plan) to exercise all or a specified portion of the ISAR (to the extent then exercisable pursuant to its terms) and to receive from the Company an amount determined by multiplying the difference obtained by subtracting the exercise price per share of the ISAR from the Fair Market Value of a share of Stock on the date of exercise of the ISAR by the number of shares of Stock with respect to which the ISAR shall have been exercised, subject to any limitations the Committee may impose.
7.4 Payment and Limitations on Exercise.
(a) Subject to Section 7.4(b) and (c), payment of the amounts determined under Sections 7.2(c) and 7.3(b) above shall be in cash, in Stock (based on its Fair Market Value as of the date the Stock Appreciation Right is exercised) or a combination of both, as determined by the Committee.
(b) To the extent payment for a Stock Appreciation Right is to be made in cash, the Award Agreement shall, to the extent necessary to comply with the requirements of Section 409A of the Code, specify the date of payment, which
may be different than the date of exercise of the Stock Appreciation Right. If the date of payment for a Stock Appreciation Right is later than the date of exercise, the Award Agreement may specify that the Participant be entitled to earnings on such amount until paid.
(c) To the extent any payment under Section 7.2(c) or 7.3(b) is effected in Stock it shall be made subject to satisfaction of any applicable provisions of Article 5 above pertaining to Options.
ARTICLE 8
OTHER TYPES OF AWARDS
8.1 Performance Share Awards. Any Participant selected by the Committee may be granted one or more Performance Share awards which shall be denominated in a number of shares of Stock and which may be linked to any one or more of the Performance Criteria or other specific performance criteria determined appropriate by the Committee, in each case on a specified date or dates or over any period or periods determined by the Committee. In making such determinations, the Committee shall consider (among such other factors as it deems relevant in light of the specific type of award) the contributions, responsibilities and other compensation of the particular Participant.
8.2 Performance Units. Any Participant selected by the Committee may be granted one or more Performance Unit awards which shall be denominated in units of value, including dollar value of shares of Stock, and which may be linked to any one or more of the Performance Criteria or other specific performance criteria determined appropriate by the Committee, in each case on a specified date or dates or over any period or periods determined by the Committee. In making such determinations, the Committee shall consider (among such other factors as it deems relevant in light of the specific type of award) the contributions, responsibilities and other compensation of the particular Participant.
8.3 Dividend Equivalents.
(a) Any Participant selected by the Committee may be granted Dividend Equivalents based on the dividends declared on the shares of Stock that are subject to any Award, to be credited as of dividend payment dates, during the period between the date the Award is granted and the date the Award is exercised, vests or expires, as determined by the Committee. Such Dividend Equivalents shall be converted to cash or additional shares of Stock by such formula and at such time and subject to such limitations as may be determined by the Committee. Note that paying dividend equivalents on exercise of Options or SARs may result in the treatment of the Option or SAR as deferred compensation under IRC 409A.
(b) Dividend Equivalents granted with respect to Options or SARs that are intended to be Qualified Performance-Based Compensation shall be payable, with respect to pre-exercise periods, regardless of whether such Option or SAR is subsequently exercised.
8.4 Stock Payments. Any Participant selected by the Committee may receive Stock Payments in the manner determined from time to time by the Committee. The number of shares shall be determined by the Committee and may be based upon the Performance Criteria or other specific performance criteria determined appropriate by the Committee, determined on the date such Stock Payment is made or on any date thereafter.
8.5 Deferred Stock. Any Participant selected by the Committee may be granted an award of Deferred Stock in the manner determined from time to time by the Committee. The number of shares of Deferred Stock shall be determined by the Committee and may be linked to the Performance Criteria or other specific performance criteria determined to be appropriate by the Committee, in each case on a specified date or dates or over any period or periods determined by the Committee. Stock underlying a Deferred Stock award will not be issued until the Deferred Stock award has vested, pursuant to a vesting schedule or performance criteria set by the Committee. Unless otherwise provided by the Committee, a Participant awarded Deferred Stock shall have no rights as a Company stockholder with respect to such Deferred Stock until such time as the Deferred Stock Award has vested and the Stock underlying the Deferred Stock Award has been issued.
8.6 Restricted Stock Units. The Committee is authorized to make Awards of Restricted Stock Units to any Participant selected by the Committee in such amounts and subject to such terms and conditions as determined by the Committee. At the time of grant, the Committee shall specify the date or dates on which the Restricted Stock Units shall become fully vested and nonforfeitable, and may specify such conditions to vesting as it deems appropriate. At the time of grant, the Committee shall specify the maturity date applicable to each grant of Restricted Stock Units which shall be no earlier than the vesting date or dates of the Award and may be determined at the election of the grantee. On the maturity date, the Company shall, subject to Section 10.5(b), transfer to the Participant one unrestricted, fully transferable share of Stock for each Restricted Stock Unit scheduled to be paid out on such date and not previously forfeited. The Committee shall specify the purchase price, if any, to be paid by the grantee to the Company for such shares of Stock.
8.7 Other Stock-Based Awards. Any Participant selected by the Committee may be granted one or more Awards that provide Participants with shares of Stock or the right to purchase shares of Stock or that have a value derived from the value of, or an exercise or conversion privilege at a price related to, or that are otherwise payable in shares of Stock and which may be linked to any one or more of the Performance Criteria or other specific performance criteria determined appropriate by the Committee, in each case on a specified date or dates or over any period or periods determined by the Committee. In making such determinations, the Committee shall consider (among such other factors as it deems relevant in light of the specific type of Award) the contributions, responsibilities and other compensation of the particular Participant.
8.8 Term. Except as otherwise provided herein, the term of any Award of Performance Shares, Performance Units, Dividend Equivalents, Stock Payments, Deferred Stock, Restricted Stock Units or Other Stock-Based Award shall be set by the Committee in its discretion.
8.9 Exercise or Purchase Price. The Committee may establish the exercise or purchase price, if any, of any Award of Performance Shares, Performance Units, Deferred Stock, Stock Payments, Restricted Stock Units or Other Stock-Based Award; provided, however, that such price shall not be less than the par value of a share of Stock on the date of grant, unless otherwise permitted by applicable state law.
8.10 Exercise Upon Termination of Employment or Service. An Award of Performance Shares, Performance Units, Dividend Equivalents, Deferred Stock, Stock Payments, Restricted Stock Units and Other Stock-Based Award shall only be exercisable or payable while the Participant is an Employee, a Consultant, or a member of the Board, as applicable; provided, however, that the Committee in its sole and absolute discretion may provide that an Award of Performance Shares, Performance Units, Dividend Equivalents, Stock Payments, Deferred Stock, Restricted Stock Units or Other Stock-Based Award may be exercised or paid subsequent to a termination of employment or service, as applicable, or following a Change in Control of the Company, or because of the Participant's retirement, death or disability, or otherwise; provided, however, that any such provision with respect to Performance Shares or Performance Units shall be subject to the requirements of Section 162(m) of the Code that apply to Qualified Performance-Based Compensation.
8.11 Form of Payment. Payments with respect to any Awards granted under this Article 8 shall be made in cash, in Stock or a combination of both, as determined by the Committee.
8.12 Award Agreement. All Awards under this Article 8 shall be subject to such additional terms and conditions as determined by the Committee and shall be evidenced by a written Award Agreement.
ARTICLE 9
PERFORMANCE-BASED AWARDS
9.1 Purpose. The purpose of this Article 9 is to provide the Committee the ability to qualify Awards other than Options and SARs and that are granted pursuant to Articles 6 and 8 as Qualified Performance-Based Compensation. If the Committee, in its discretion, decides to grant a Performance-Based Award to a Covered Employee, the provisions of this Article 9 shall control over any contrary provision contained in Articles 6 or 8; provided, however, that the Committee may in its discretion grant Awards to Covered Employees that are based on Performance Criteria or Performance Goals but that do not satisfy the requirements of this Article 9.
9.2 Applicability. This Article 9 shall apply only to those Covered Employees selected by the Committee to receive Performance-Based Awards. The designation of a Covered Employee as a Participant for a Performance Period shall not in any manner entitle the Participant to receive an Award for the period. Moreover, designation of a Covered Employee as a Participant for a particular Performance Period shall not require designation of such Covered Employee as a Participant in any subsequent Performance Period and designation of one Covered Employee as a Participant shall not require designation of any other Covered Employees as a Participant in such period or in any other period.
9.3 Procedures with Respect to Performance-Based Awards. To the extent necessary to comply with the Qualified Performance-Based Compensation requirements of Section 162(m)(4)(C) of the Code, with respect to any Award granted under Articles 6 and 8 which may be granted to one or more Covered Employees, no later than ninety (90) days following the commencement of any fiscal year in question or any other designated fiscal period or period of service (or such other time as may be required or permitted by Section 162(m) of the Code), the Committee shall, in writing, (a) designate one or more Covered Employees, (b) select the Performance Criteria applicable to the Performance Period, (c) establish the Performance Goals, and amounts of such Awards, as applicable, which may be earned for such Performance Period, and (d) specify the relationship between Performance Criteria and the Performance Goals and the amounts of such Awards, as applicable, to be earned by each Covered Employee for such Performance Period. Following the completion of each Performance Period, the Committee shall certify in writing whether the applicable Performance Goals have been achieved for such Performance Period. In determining the amount earned by a Covered Employee, the Committee shall have the right to reduce or eliminate (but not to increase) the amount payable at a given level of performance to take into account additional factors that the Committee may deem relevant to the assessment of individual or corporate performance for the Performance Period.
9.4 Payment of Performance-Based Awards. Unless otherwise provided in the applicable Award Agreement, a Participant must be employed by the Company or a Subsidiary on the day a Performance-Based Award for such Performance Period is paid to the Participant. Furthermore, a Participant shall be eligible to receive payment pursuant to a Performance-Based Award for a Performance Period only if the Performance Goals for such period are achieved.
9.5 Additional Limitations. Notwithstanding any other provision of the Plan, any Award which is granted to a Covered Employee and is intended to constitute Qualified Performance-Based Compensation shall be subject to any additional limitations set forth in Section 162(m) of the Code (including any amendment to Section 162(m) of the Code) or any regulations or rulings issued thereunder that are requirements for qualification as qualified performance-based compensation as described in Section 162(m)(4)(C) of the Code, and the Plan shall be deemed amended to the extent necessary to conform to such requirements.
ARTICLE 10
PROVISIONS APPLICABLE TO AWARDS
10.1 Stand-Alone and Tandem Awards. Awards granted pursuant to the Plan may, in the discretion of the Committee, be granted either alone, in addition to, or in tandem with, any other Award granted pursuant to the Plan. Awards granted in addition to or in tandem with other Awards may be granted either at the same time as or at a different time from the grant of such other Awards.
10.2 Award Agreement. Awards under the Plan shall be evidenced by written Award Agreements that shall set forth the terms, conditions, limitations
and award type for each Award which may include the term of an Award, the provisions applicable in the event the Participant's employment or service terminates, and the Company's authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind an Award.
10.3 Limits on Transfer. Except as otherwise provided by the Committee, no right or interest of a Participant in any Award may be pledged, encumbered, or hypothecated to or in favor of any party other than the Company or a Subsidiary, or shall be subject to any lien, obligation, or liability of such Participant to any other party other than the Company or a Subsidiary. Except as otherwise provided by the Committee, during the life of the recipient, such award shall be exercisable only by such person or by such person's guardian or legal representative.
10.4 Death of Optionee.
(a) Options. Notwithstanding Section 10.3, upon the death of the Optionee while either in the Company's employ or within six months after termination of Optionee's employment, any rights to the extent exercisable on the date of death may be exercised by the Optionee's estate, or by a person who acquires the right to exercise such Option by bequest or inheritance or by reason of the death of the Optionee, provided that such exercise occurs within both the remaining effective term of the Option and one year after the Optionee's death. A beneficiary, legal guardian, legal representative, or other person claiming any rights pursuant to the Plan is subject to all terms and conditions of the Plan and any Award Agreement applicable to the Participant, except to the extent the Plan and Award Agreement otherwise provide, and to any additional restrictions deemed necessary or appropriate by the Committee. If no beneficiary has been designated or survives the Participant, payment shall be made to the person entitled thereto pursuant to the Participant's will or the laws of descent and distribution. Subject to the foregoing, a beneficiary designation may be changed or revoked by a Participant at any time provided the change or revocation is filed with the Committee.
(b) Incentive Stock Options. Upon the death of the Optionee while in the Company's employ or within not more than 90 days after termination of Optionee's employment, any Incentive Stock Option exercisable on the date of death may be exercised by the Optionee's estate or by a person who acquires the right to exercise such Incentive Stock Option by bequest or inheritance or by reason of the death of the Optionee, provided that such exercise occurs within both the remaining Option Term of the Incentive Stock Option and one year after the Optionee's death.
10.5 Retirement or Disability.
(a) Options. Upon termination of the Optionee's employment by reason of retirement or permanent disability, the Optionee may, within 36 months from the date of termination, exercise any Options to the extent such Options are exercisable during such 36-month period.
(b) Incentive Stock Options. Upon termination of the Optionee's employment by reason of retirement or permanent disability, the Optionee may, within 36 months from the date of termination, exercise any Incentive Stock Options to the extent such Incentive Stock Options are exercisable during such
36-month period. However, the tax treatment available pursuant to Section 422 of the Code will not be available to an Optionee who exercises any Incentive Stock Option more than (i) 12 months after the date of termination of employment due to permanent disability, or (ii) three months after the date of termination of employment due to retirement.
10.6 Termination for Other Reasons. Except as provided herein or except
as otherwise determined by the Committee, all Options shall terminate ninety
(90) days after the termination of the Optionee's employment with the Company.
10.7 Leaves of Absence and Performance Targets. The Committee shall be entitled to make such rules, regulations and determinations as it deems appropriate under the Plan in respect of any leave of absence taken by the recipient of any award. Without limiting the generality of the foregoing, the Committee shall be entitled to determine (i) whether or not any such leave of absence shall constitute a termination of employment within the meaning of the Plan and (ii) the impact, if any, of such leave of absence on awards under the Plan theretofore made to any recipient who takes such leave of absence. The Committee shall also be entitled to make such determination of performance targets, if any, as it deems appropriate.
10.8 Newly Eligible Employees. The Committee shall be entitled to make such rules, regulations, determinations and awards as it deems appropriate in respect of any employee who becomes eligible to participate in the Plan or any portion thereof, after the commencement of an award or incentive period.
10.9 Stock Certificates; Book Entry Procedures. As soon as practicable after receipt of payment, the Company shall deliver to the Optionee a certificate(s) for such shares of Common Stock. Upon receipt of such certificate(s), the Optionee shall become a shareholder of the Company with respect to Common Stock represented by share certificates so issued and as such shall be fully entitled to receive dividends, to vote and to exercise all other rights of a shareholder. All Stock certificates delivered pursuant to the Plan are subject to any stop-transfer orders and other restrictions as the Committee deems necessary or advisable to comply with federal, state, or foreign jurisdiction, securities or other laws, rules and regulations and the rules of any national securities exchange or automated quotation system on which the Stock is listed, quoted, or traded. The Committee may place legends on any Stock certificate to reference restrictions applicable to the Stock. In addition to the terms and conditions provided herein, the Board may require that a Participant make such reasonable covenants, agreements, and representations as the Board, in its discretion, deems advisable in order to comply with any such laws, regulations, or requirements. The Committee shall have the right to require any Participant to comply with any timing or other restrictions with respect to the settlement or exercise of any Award, including a window-period limitation, as may be imposed in the discretion of the Committee.
ARTICLE 11
CHANGES IN CAPITAL STRUCTURE
11.1 Adjustments.
(a) In the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation, spin-off, recapitalization, distribution of Company assets to stockholders (other than normal cash dividends), or any other corporate event affecting the Stock or the share price of the Stock, the Committee may make such proportionate adjustments, if any, as the Committee in its discretion may deem appropriate to reflect such changes with respect to (i) the aggregate number and type of shares that may be issued under the Plan (including, but not limited to, adjustments of the limitations in Sections 3.1 and 3.3); (ii) the terms and conditions of any outstanding Awards (including, without limitation, any applicable performance targets or criteria with respect thereto); and (iii) the grant or exercise price per share for any outstanding Awards under the Plan. Any adjustment affecting an Award intended as Qualified Performance-Based Compensation shall be made consistent with the requirements of Section 162(m) of the Code.
(b) In the event of any transaction or event described in Section 11.1(a) or any unusual or nonrecurring transactions or events affecting the Company, any affiliate of the Company, or the financial statements of the Company or any affiliate (including without limitation any Change in Control), or of changes in applicable laws, regulations or accounting principles, and whenever the Committee determines that action is appropriate in order to prevent the dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to any Award under the Plan, to facilitate such transactions or events or to give effect to such changes in laws, regulations or principles, the Committee, in its sole discretion and on such terms and conditions as it deems appropriate, either by amendment of the terms of any outstanding Awards or by action taken prior to the occurrence of such transaction or event and either automatically or upon the Participant's request, is hereby authorized to take any one or more of the following actions:
(i) To provide for either (A) termination of any such Award
in exchange for an amount of cash and/or other property, if any, equal to the
amount that would have been attained upon the exercise of such Award or
realization of the Participant's rights (and, for the avoidance of doubt, if as
of the date of the occurrence of the transaction or event described in this
Section 11.1(b) the Committee determines in good faith that no amount would have
been attained upon the exercise of such Award or realization of the
Participant's rights, then such Award may be terminated by the Company without
payment) or (B) the replacement of such Award with other rights or property
selected by the Committee in its sole discretion;
(ii) To provide that such Award be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, or shall be substituted for by similar options, rights or awards covering the stock of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices; and
(iii) To make adjustments in the number and type of shares of Stock (or other securities or property) subject to outstanding Awards, and in the number and kind of outstanding Restricted Stock or Deferred Stock and/or in the terms and conditions of (including the grant or exercise price), and the criteria included in, outstanding options, rights and awards and options, rights and awards which may be granted in the future;
(iv) To provide that such Award shall be exercisable or payable or fully vested with respect to all shares covered thereby, notwithstanding anything to the contrary in the Plan or the applicable Award Agreement; and
(v) To provide that the Award cannot vest, be exercised or become payable after such event.
11.2 Outstanding Awards - Other Changes. In the event of any other change in the capitalization of the Company or corporate change other than those specifically referred to in this Article 11, the Committee may, in its absolute discretion, make such adjustments in the number and kind of shares or other securities subject to Awards outstanding on the date on which such change occurs and in the per share grant or exercise price of each Award as the Committee may consider appropriate to prevent dilution or enlargement of rights.
11.3 No Other Rights. Except as expressly provided in the Plan, no Participant shall have any rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any dividend, any increase or decrease in the number of shares of stock of any class or any dissolution, liquidation, merger, or consolidation of the Company or any other corporation. Except as expressly provided in the Plan or pursuant to action of the Committee under the Plan, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Stock subject to an Award or the grant or exercise price of any Award.
ARTICLE 12
ADMINISTRATION
12.1 Committee. Pursuant to Utah Code Annotated Section 16-10a-624, and consistent with the provisions of Section 12.3 below, the Board may appoint a Committee consisting of two or more Non-Employee Directors to administer the Plan, as constituted from time to time.
12.2 Committee Appointee Duration. Once appointed, the Committee shall continue to serve until otherwise directed by the Board. From time to time, the Board may increase or change the size of the Committee, and appoint new members thereof, remove members (with or without cause) and appoint new members in substitution, fill vacancies, however caused, or remove all members of the Committee; provided, however, that at no time shall any person administer the Plan who is not otherwise a Non-Employee Director.
12.3 Action by the Board. Unless and until the Board delegates administration of the Plan to a Committee as set forth below, the Plan shall be administered by the full Board, and for such purposes the term "Committee" as used in this Plan shall be deemed to refer to the Board. The Board, at its discretion or as otherwise necessary to comply with the requirements of Section 162(m) of the Code, Rule 16b-3 promulgated under the Exchange Act or to the
extent required by any other applicable rule or regulation, shall delegate administration of the Plan to a Committee. The Committee shall consist solely of two or more members of the Board each of whom is both an "outside director," within the meaning of Section 162(m) of the Code and any other applicable rules and regulations, and a Non-Employee Director. Notwithstanding the foregoing: (a) the full Board, acting by a majority of its members in office, shall conduct the general administration of the Plan with respect to all Awards granted to Independent Directors and, for purposes of such Awards, the term "Committee" as used in this Plan shall be deemed to refer to the Board and (b) the Committee may delegate its authority hereunder to the extent permitted by Section 12.5. Appointment of Committee members shall be effective upon acceptance of appointment. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. Committee members may resign at any time by delivering written notice to the Board. Vacancies in the Committee may only be filled by the Board.
12.4 Action by the Committee. A majority of the Committee shall constitute a quorum. The acts of a majority of the members present at any meeting at which a quorum is present, and acts approved in writing by a majority of the Committee in lieu of a meeting, shall be deemed the acts of the Committee. Each member of the Committee is entitled to, in good faith, rely or act upon any report or other information furnished to that member by any officer or other employee of the Company or any Subsidiary, the Company's independent certified public accountants, or any executive compensation consultant or other professional retained by the Company to assist in the administration of the Plan.
12.5 Authority of Committee. Subject to any specific designation in the Plan, the Committee has the exclusive power, authority and discretion to:
(a) Designate Participants to receive Awards;
(b) Determine the type or types of Awards to be granted to each Participant;
(c) Determine the number of Awards to be granted and the number of shares of Stock to which an Award will relate;
(d) Determine the terms and conditions of any Award granted pursuant to the Plan, including, but not limited to, the exercise price, grant price, or purchase price, any reload provision, any restrictions or limitations on the Award, any schedule for lapse of forfeiture restrictions or restrictions on the exercisability of an Award, and accelerations or waivers thereof, any provisions related to non-competition and recapture of gain on an Award, based in each case on such considerations as the Committee in its sole discretion determines;
(e) Determine whether, to what extent, and pursuant to what circumstances an Award may be settled in, or the exercise price of an Award may be paid in, cash, Stock, other Awards, or other property, or an Award may be canceled, forfeited, or surrendered;
(f) Prescribe the form of each Award Agreement, which need not be identical for each Participant;
(g) Decide all other matters that must be determined in connection with an Award;
(h) Establish, adopt, or revise any rules and regulations as it may deem necessary or advisable to administer the Plan;
(i) Interpret the terms of, and any matter arising pursuant to, the Plan or any Award Agreement; and
(j) Make all other decisions and determinations that may be required pursuant to the Plan or as the Committee deems necessary or advisable to administer the Plan.
The Committee may delegate to one or more of its members or to one or more agents such administrative duties as it may deem advisable.
12.6 Decisions Binding. The Committee's interpretation of the Plan, any Awards granted pursuant to the Plan, any Award Agreement and all decisions and determinations by the Committee with respect to the Plan are final, binding, and conclusive on all parties.
12.7 Delegation of Authority. To the extent permitted by applicable law, the Committee may from time to time delegate to a committee of one or more members of the Committee or the Board or one or more officers of the Company the authority to grant or amend Awards to Participants other than (a) senior executives of the Company who are subject to Section 16 of the Exchange Act, (b) Covered Employees, or (c) officers of the Company (or members of the Board) to whom authority to grant or amend Awards has been delegated hereunder. Any delegation hereunder shall be subject to the restrictions and limits that the Committee specifies at the time of such delegation, and the Committee may at any time rescind the authority so delegated or appoint a new delegatee. At all times, the delegatee appointed under this Section 12.5 shall serve in such capacity at the pleasure of the Committee.
12.8 Committee Administration. One member of the Committee shall be elected by the Board as chairman. The Committee shall hold its meetings at such times and places as it shall deem advisable. The Committee may appoint a secretary and make such rules and regulations for the conduct of its business as it shall deem advisable, and shall keep minutes of its meetings.
12.9 Liability. No member of the Board or Committee shall be liable for any action taken or decision or determination made in good faith with respect to any Option, the Plan, or any award thereunder.
ARTICLE 13
EFFECTIVE AND EXPIRATION DATE
13.1 Effective Date. The Plan is effective as of the date the Plan is approved by a majority of the Board (the "Effective Date"). The Plan, however, shall be subject to approval by the stockholders. The Plan will be deemed to be approved by the stockholders if it receives the affirmative vote of the holders of a majority of the shares of stock of the Company present or represented and
entitled to vote at a meeting duly held in accordance with the applicable provisions of the Company's Bylaws, but, in any event, held no later than 12 months after adoption on the Effective Date.
13.2 Expiration Date. The Plan will expire on, and no Incentive Stock Option or other Award may be granted pursuant to the Plan after, the tenth anniversary of the Effective Date. Any Awards that are outstanding on the tenth anniversary of the Effective Date shall remain in force according to the terms of the Plan and the applicable Award Agreement.
ARTICLE 14
AMENDMENT, MODIFICATION, AND TERMINATION
14.1 Amendment, Modification, And Termination. The Committee may at any time and from time to time terminate or modify or amend the Plan in any respect, except that (a) to the extent necessary and desirable to comply with any applicable law, regulation, or stock exchange rule, the Company shall obtain shareholder approval of any Plan amendment or any modification of any Options that would be deemed a re-pricing under applicable rules, in such a manner and to such a degree as required, and (b) without shareholder approval the Committee may not (i) increase the maximum number of shares of Common Stock which may be issued under the Plan (other than increases pursuant to Section 4.10), (ii) extend the period during which any Award may be granted or exercised, (iii) amend to the Plan to permit the Committee to grant Options with an exercise price that is below Fair Market Value on the date of grant, or (iv) extend the term of the Plan. The termination or any modification or amendment of the Plan, except as provided in subsection (a), shall not without the consent of a participant, affect his or her other rights under an award previously granted to him or her.
14.2 Awards Previously Granted. No termination, amendment, or modification of the Plan shall adversely affect in any material way any Award previously granted pursuant to the Plan without the prior written consent of the Participant.
ARTICLE 15
COMPLIANCE WITH SECTION 409A OF THE CODE
15.1 Awards subject to Code Section 409A. Any Award that constitutes, or provides for, a deferral of compensation subject to Section 409A of the Code (a "Section 409A Award") shall satisfy the requirements of Section 409A of the Code and this Article 15, to the extent applicable. The Award Agreement with respect to a Section 409A Award shall incorporate the terms and conditions required by Section 409A of the Code and this Article 15.
15.2 Distributions under a Section 409A Award.
(a) Subject to subsection (b), any shares of Stock or other property or amounts to be paid or distributed upon the grant, issuance, vesting, exercise or payment of a Section 409A Award shall be distributed in accordance with the requirements of Section 409A(a)(2) of the Code, and shall not be distributed earlier than:
(i) the Participant's separation from service, as determined by the Secretary of the Treasury;
(ii) the date the Participant becomes disabled;
(iii) the Participant's death;
(iv) a specified time (or pursuant to a fixed schedule) specified under the Award Agreement at the date of the deferral compensation;
(v) to the extent provided by the Secretary of the Treasury, a change in the ownership or effective control of the Company or a Parent or Subsidiary, or in the ownership of a substantial portion of the assets of the Company or a Parent or Subsidiary; or
(vi) the occurrence of an unforeseeable emergency with respect to the Participant.
(b) In the case of a Participant who is a "specified employee," the requirement of paragraph (a)(i) shall be met only if the distributions with respect to the Section 409A Award may not be made before the date which is six months after the Participant's separation from service (or, if earlier, the date of the Participant's death). For purposes of this subsection (b), a Participant shall be a "specified employee" if such Participant is a key employee (as defined in Section 416(i) of the Code without regard to paragraph (5) thereof) of a corporation any stock of which is publicly traded on an established securities market or otherwise, as determined under Section 409A(a)(2)(B)(i) of the Code and the Treasury Regulations thereunder.
(c) The requirement of paragraph (a)(vi) shall be met only if, as determined under Treasury Regulations under Section 409A(a)(2)(B)(ii) of the Code, the amounts distributed with respect to the unforeseeable emergency do not exceed the amounts necessary to satisfy such unforeseeable emergency plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution, after taking into account the extent to which such unforeseeable emergency is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participant's assets (to the extent the liquidation of such assets would not itself cause severe financial hardship).
(d) For purposes of this Section, the terms specified therein shall have the respective meanings ascribed thereto under Section 409A of the Code and the Treasury Regulations thereunder.
15.3 Prohibition on Acceleration of Benefits. The time or schedule of any distribution or payment of any shares of Stock or other property or amounts under a Section 409A Award shall not be accelerated, except as otherwise permitted under Section 409A(a)(3) of the Code and the Treasury Regulations thereunder.
15.4 Elections under Section 409A Awards.
(a) Any deferral election provided under or with respect to an Award to any Eligible Individual, or to the Participant holding a Section 409A Award, shall satisfy the requirements of Section 409A(a)(4)(B) of the Code, to
the extent applicable, and, except as otherwise permitted under paragraph (i) or
(ii) below, any such deferral election with respect to compensation for services
performed during a taxable year shall be made not later than the close of the
preceding taxable year, or at such other time as provided in Treasury
Regulations.
(i) In the case of the first year in which an Eligible Individual or a Participant holding a Section 409A Award, becomes eligible to participate in the Plan, any such deferral election may be made with respect to services to be performed subsequent to the election with thirty days after the date the Eligible Individual, or the Participant holding a Section 409A Award, becomes eligible to participate in the Plan, as provided under Section 409A(a)(4)(B)(ii) of the Code.
(ii) In the case of any performance-based compensation based on services performed by an Eligible Individual, or the Participant holding a Section 409A Award, over a period of at least twelve months, any such deferral election may be made no later than six months before the end of the period, as provided under Section 409A(a)(4)(B)(iii) of the Code.
(b) In the event that a Section 409A Award permits, under a subsequent election by the Participant holding such Section 409A Award, a delay in a distribution or payment of any shares of Stock or other property or amounts under such Section 409A Award, or a change in the form of distribution or payment, such subsequent election shall satisfy the requirements of Section 409A(a)(4)(C) of the Code, and:
(i) such subsequent election may not take effect until at least twelve months after the date on which the election is made,
(ii) in the case such subsequent election relates to a distribution or payment not described in Section 10.2(a)(ii), (iii) or (vi), the first payment with respect to such election may be deferred for a period of not less than five years from the date such distribution or payment otherwise would have been made, and
(iii) in the case such subsequent election relates to a distribution or payment described in Section 10.2(a)(iv), such election may not be made less than twelve months prior to the date of the first scheduled distribution or payment under Section 10.2(a)(iv).
15.5 Compliance in Form and Operation. A Section 409A Award, and any election under or with respect to such Section 409A Award, shall comply in form and operation with the requirements of Section 409A of the Code and the Treasury Regulations thereunder.
ARTICLE 16
GENERAL PROVISIONS
16.1 No Rights to Awards. No Eligible Individual or other person shall have any claim to be granted any Award pursuant to the Plan, and neither the Company nor the Committee is obligated to treat Eligible Individuals, Participants or any other persons uniformly.
16.2 No Stockholders Rights. The recipient of any award under the Plan shall have no rights as a shareholder with respect thereto unless and until certificates for shares of Common Stock are issued to him or her.
16.3 Withholding. The Company or any Subsidiary shall have the authority and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state, local and foreign taxes (including the Participant's FICA obligation) required by law to be withheld with respect to any taxable event concerning a Participant arising as a result of this Plan. The Committee may in its discretion and in satisfaction of the foregoing requirement allow a Participant to elect to have the Company withhold shares of Stock otherwise issuable under an Award (or allow the return of shares of Stock) having a Fair Market Value equal to the sums required to be withheld. Notwithstanding any other provision of the Plan, the number of shares of Stock which may be withheld with respect to the issuance, vesting, exercise or payment of any Award (or which may be repurchased from the Participant of such Award within six months (or such other period as may be determined by the Committee) after such shares of Stock were acquired by the Participant from the Company) in order to satisfy the Participant's federal, state, local and foreign income and payroll tax liabilities with respect to the issuance, vesting, exercise or payment of the Award shall be limited to the number of shares which have a Fair Market Value on the date of withholding or repurchase equal to the aggregate amount of such liabilities based on the minimum statutory withholding rates for federal, state, local and foreign income tax and payroll tax purposes that are applicable to such supplemental taxable income.
16.4 No Right to Employment or Services. Nothing in the Plan or any Award Agreement shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate any Participant's employment or services at any time, nor confer upon any Participant any right to continue in the employ or service of the Company or any Subsidiary.
16.5 Unfunded Status of Awards. The Plan is intended to be an "unfunded" plan for incentive compensation. With respect to any payments not yet made to a Participant pursuant to an Award, nothing contained in the Plan or any Award Agreement shall give the Participant any rights that are greater than those of a general creditor of the Company or any Subsidiary.
16.6 Indemnification. To the extent allowable pursuant to applicable law, each member of the Committee or of the Board shall be indemnified and held harmless by the Company from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by such member in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action or failure
to act pursuant to the Plan and against and from any and all amounts paid by him or her in satisfaction of judgment in such action, suit, or proceeding against him or her; provided he or she gives the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled pursuant to the Company's Certificate of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.
16.7 Relationship to other Benefits. No payment pursuant to the Plan shall be taken into account in determining any benefits pursuant to any pension, retirement, savings, profit sharing, group insurance, welfare or other benefit plan of the Company or any Subsidiary except to the extent otherwise expressly provided in writing in such other plan or an agreement thereunder.
16.8 Expenses. The expenses of administering the Plan shall be borne by the Company and its Subsidiaries.
16.9 Titles and Headings. The titles and headings of the Sections in the Plan are for convenience of reference only and, in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.
16.10 Fractional Shares. No fractional shares of Stock shall be issued and the Committee shall determine, in its discretion, whether cash shall be given in lieu of fractional shares or whether such fractional shares shall be eliminated by rounding up or down as appropriate.
16.11 Limitations Applicable to Section 16 Persons. Notwithstanding any other provision of the Plan, the Plan, and any Award granted or awarded to any Participant who is then subject to Section 16 of the Exchange Act, shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that are requirements for the application of such exemptive rule. To the extent permitted by applicable law, the Plan and Awards granted or awarded hereunder shall be deemed amended to the extent necessary to conform to such applicable exemptive rule.
16.12 Government and Other Regulations. The obligation of the Company to make payment of awards in Stock or otherwise shall be subject to all applicable laws, rules, and regulations, and to such approvals by government agencies as may be required. The Company shall be under no obligation to register pursuant to the Securities Act of 1933, as amended, any of the shares of Stock paid pursuant to the Plan. If the shares paid pursuant to the Plan may in certain circumstances be exempt from registration pursuant to the Securities Act of 1933, as amended, the Company may restrict the transfer of such shares in such manner as it deems advisable to ensure the availability of any such exemption.
16.13 Governing Law. The Plan and all Award Agreements shall be construed in accordance with and governed by the laws of the State of Utah.
* * * * *
I hereby certify that the foregoing Plan was duly adopted by the Board of Directors of RemoteMDx, Inc., on May 18, 2006.
* * * * *
I hereby certify that the foregoing Plan was approved by the stockholders of RemoteMDx, Inc., on July 10, 2006.
Executed on this 12th day of July, 2006.
/s/ Michael Acton ----------------- Corporate Secretary |
Citizens
Bank' Investments 'Trust . Insurance www.citizensnational.net
COMMERCIAL SECURITY AGREEMENT
References in the shaded area are for Lender's use only and do not
limit the applicability of this document to any particular loan or item.
Any item above containing "***" has been omitted due
to text length limitations.
:_ml#___:
Grantor:
REMOTEMDX, INC.
150 W CIVIC CENTER DRIVE SUITE 400 SANDY, UT 84070
lender:
Citizens National Bank Main Office
127 S Side Square P.O. Box 1279 Macomb,IL 61455
11
THIS COMMERCIAL SECURITY AGREEMENT dated June 26, 2006, is made and executed
between REMOTEMDX, INC. ("Grantor") and Citizens National Bank ("Lender").
GRANT OF SECURITY INTEREST. For valuable consideration, Grantor grants to Lender
a security interest in the Collateral to secure the Indebtedness and agrees that
Lender shall have the rights stated in this Agreement with respect to the
Collateral. in addition to all other rights which Lender may have by law.
COLLATERAL DESCRIPTION. The word "Collateral" as used in this Agreement means
the following described property, whether now owned or hereafter acquired,
whether now existing or hereafter arising, and wherever located, in which
Grantor is giving to Lender a security interest for the payment of the
Indebtedness and performance of all other obligations under the Note and this
Agreement:
All Equipment, Inventory, Accounts, Instruments, Documents, Chattel Paper,
Deposit Accounts, Letter of Credit Rights, Supporting Obligations, Investment
Property and General Intangibles, Whether now owned or hereafter acquired.
In addition, the word "Collateral" also includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising, and
wherever located:
(A) All accessions, attachments, accessories, tools, parts, supplies,
replacements of and additions to any of the collateral described herein, whether
added now or later.
(B) All products and produce of any of the property described in this Collateral
section.
(C) All accounts, general intangibles, instruments, rents, monies, payments, and
all other rights, arising out of a sale, lease, consignment or other disposition
of any of the property described in this Collateral section.
(D) All proceeds (including insurance proceeds) from the sale, destruction,
loss, or other disposition of any of the property described in this Collateral
section, and sums due from a third party who has damaged or destroyed the
Collateral or from that party's insurer, whether due to judgment, settlement or
other process.
(E) All records and data relating to any of the property described in this
Collateral section, whether in the form of a writing, photograph, microfilm,
microfiche, or electronic media, together with all of Grantor's right, title,
and interest in and to all computer software required to utilize, create,
maintain, and process any such records or data on electronic media.
FUTURE ADVANCES. In addition to the Note, this Agreement secures all future
advances made by Lender to Grantor regardless of whether the advances are made
a) pursuant to a commitment or b) for the same purposes.
RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Grantor's accounts with Lender (whether checking, savings, or some other account). This includes all accounts Grantor holds jointly with someone else and all accounts Grantor may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Grantor authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the Indebtedness against any and all such accounts.
GRANTOR'S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COLLATERAL. With
respect to the Collateral, Grantor represents and promises to Lender that:
Perfection of Security Interest. Grantor agrees to take whatever actions are requested by Lender to perfect and continue Lender's security interest in the Collateral. Upon request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Grantor will note Lender's interest upon any and all chattel paper and instruments if not delivered to Lender for possession by Lender. This is a continuing Security Agreement and will continue in effect even though all or any part of the Indebtedness is paid in full and even though for a period of time Grantor may not be indebted to Lender.
Notices to Lender. Grantor will promptly notify Lender in writing at Lender's address shown above (or such other addresses as Lender may designate from time to time) prior to any (1) change in Grantor's name; (2) change in Grantor's assumed business name(s); (3) change in the management of the Corporation Grantor; (4) change in the authorized signer(s); (5) change in Grantor's principal office address; (6) change in Grantor's state of organization; (7) conversion of Grantor to a new or different type of business entity; or (8) change in any other aspect of Grantor that directly or indirectly relates to any agreements between Grantor and Lender. No change in Grantor's name or state of organization will take effect until after Lender has received notice.
No Violation. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its certificate or articles of incorporation and bylaws do not prohibit any term or condition of this Agreement.
Enforceability of Collateral. To the extent the Collateral consists of accounts, chattel paper, or general intangibles, as defined by the Uniform Commercial Code, the Collateral is enforceable in accordance with its terms, is genuine, and fully complies with all applicable laws and regulations concerning form, content and manner of preparation and execution, and all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. At the time any account becomes subject to a security interest in favor of Lender, the account shall be a good and valid account representing an undisputed, bona fide indebtedness incurred by the account debtor, for merchandise held subject to delivery instructions or previously shipped or delivered
loan No: 400949881
COMMERCIAL SECURITY AGREEMENT (Continued)
pursuant to a contract of sale, or for services previously performed by Grantor with or for the account debtor. So long as this Agreement remains in effect, Grantor shall not, without Lender's prior written consent, compromise, settle, adjust, or extend payment under or with regard to any such Accounts. There shall be no setoffs or counterclaims against any of the Collateral, and no agreement shall have been made under which any deductions or discounts may be claimed concerning the Collateral except those disclosed to Lender in writing.
Location of the Collateral. Except in the ordinary course of Grantor's business,
Grantor agrees to keep the Collateral (or to the extent the Collateral consists
of intangible property such as accounts or general intangibles, the records
concerning the Collateral) at Grantor's address shown above or at such other
locations as are acceptable to Lender. Upon Lender's request, Grantor will
deliver to Lender in form satisfactory to Lender a schedule of real properties
and Collateral locations relating to Grantor's operations, including without
limitation the following: (1) all real property Grantor owns or is purchasing;
(2) all real property Grantor is renting or leasing; (3) all storage facilities
Grantor owns, rents, leases, or uses; and (4) all other properties where
Collateral is or may be located.
Removal of the Collateral. Except in the ordinary course of Grantor's business, including the sales of inventory, Grantor shall not remove the Collateral from its existing location without Lender's prior written consent. To the extent that the Collateral consists of vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certificates of title for the vehicles outside the State of Utah, without Lender's prior written consent. Grantor shall, whenever requested, advise Lender of the exact location of the Collateral.
Transactions Involving Collateral. Except for inventory sold or accounts collected in the ordinary course of Grantor's business, or as otherwise provided for in this Agreement, Grantor shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor is not in default under this Agreement, Grantor may sell inventory, but only in the ordinary course of its business and only to buyers who qualify as a buyer in the ordinary course of business. A sale in the ordinary course of Grantor's business does not include a transfer in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security interest provided for in this Agreement, without the prior written consent of Lender. This includes security interests even if junior in right to the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this requirement shall not constitute consent by Lender to any sale or other disposition. Upon receipt, Grantor shall immediately deliver any such proceeds to Lender.
Title. Grantor represents and warrants to Lender that Grantor holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except for the lien of this Agreement. No financing statement covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Agreement or to which Lender has specifically consented. Grantor shall defend Lender's rights in the Collateral against the claims and demands of all other persons. Repairs and Maintenance. Grantor agrees to keep and maintain, and to cause others to keep and maintain, the Collateral in good order, repair and condition at all times while this Agreement remains in effect. Grantor further agrees to pay when due all claims for work done on, or services rendered or material furnished in connection with the Collateral so that no lien or encumbrance may ever attach to or be filed against the Collateral.
Inspection of Collateral. Lender and Lender's designated representatives and agents shall have the right at all reasonable times to examine and inspect the Collateral wherever located.
Taxes, Assessments and Liens. Grantor will pay when due all taxes, assessments and liens upon the Collateral, its use or operation, upon this Agreement, upon any promissory note or notes evidencing the Indebtedness, or upon any of the other Related Documents. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized in Lender's sole opinion. If the Collateral is subjected to a lien which is not discharged within fifteen (15) days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond or other security satisfactory to Lender in an amount adequate to provide for the discharge of the lien plus any interest, costs, reasonable attorneys' fees or other charges that could accrue as a result of foreclosure or sale of the Collateral. In any contest Grantor shall defend itself and Lender and shall satisfy any final adverse judgment before enforcement against the Collateral. Grantor shall name Lender as an additional obligee under any surety bond furnished in the contest proceedings. Grantor further agrees to furnish Lender with evidence that such taxes, assessments, and governmental and other charges have been paid in full and in a timely manner. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized.
Compliance with Governmental Requirements. Grantor shall comply promptly with all laws, ordinances, rules and regulations of all governmental authorities, now or hereafter in effect, applicable to the ownership, production, disposition, or use of the Collateral, including all laws or regulations relating to the undue erosion of highly-erodible land or relating to the conversion of wetlands for the production of an agricultural product or commodity. Grantor may contest in good faith any such law, ordinance or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Lender's interest in the Collateral, in Lender's opinion, is not jeopardized.
Hazardous Substances. Grantor represents and warrants that the Collateral never has been, and never will be so long as this Agreement remains a lien on the Collateral, used in violation of any Environmental Laws or for the generation, manufacture, storage, transportation, treatment, disposal, release or threatened release of any Hazardous Substance. The representations and warranties contained herein are based on Grantor's due diligence in investigating the Collateral for Hazardous Substances. Grantor hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any Environmental Laws, and (2) agrees to indemnify, defend, and hold harmless Lender against any and all claims and losses resulting from a breach of this provision of this Agreement. This obligation to indemnify and defend shall survive the payment of the Indebtedness and the satisfaction of this Agreement.
Maintenance of Casualty Insurance. Grantor shall procure and maintain all risks insurance, including without limitation fire, theft and liability coverage together with such other insurance as Lender may require with respect to the Collateral, in form, amounts, coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days' prior written notice to Lender and not including any disclaimer of the insurer's liability for failure to give such a notice. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide Lender with such loss payable or other endorsements as Lender may require. If Grantor at any time fails to obtain or maintain any insurance as required under this Agreement, Lender may (but shall not be obligated to) obtain such insurance as Lender deems appropriate, including if Lender so chooses "single interest insurance," which will cover only Lender's interest in the Collateral.
Application of Insurance Proceeds. Grantor shall promptly notify Lender of any loss or damage to the Collateral, whether or not such casualty or loss is covered by insurance. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty.
Loan No: 400949881
COMMERCIAL SECURITY AGREEMENT (Continued)
All proceeds of any insurance on the Collateral, including accrued proceeds
thereon, shall be held by Lender as part of the Collateral. If Lender consents
to repair or replacement of the damaged or destroyed Collateral, Lender shall,
upon satisfactory proof of expenditure, pay or reimburse Grantor from the
proceeds for the reasonable cost of repair or restoration. If Lender does not
consent to repair or replacement of the Collateral, Lender shall retain a
sufficient amount of the proceeds to pay all of the Indebtedness, and shall pay
the balance to Grantor. Any proceeds which have not been disbursed within six
(6) months after their receipt and which Grantor has not committed to the repair
or restoration of the Collateral shall be used to prepay the Indebtedness.
Insurance Reserves. Lender may require Grantor to maintain with Lender reserves
for payment of insurance premiums, which reserves shall be created by monthly
payments from Grantor of a sum estimated by Lender to be sufficient to produce,
at least fifteen (15) days before the premium due date, amounts at least equal
to the insurance premiums to be paid. If fifteen (15) days before payment is
due, the reserve funds are insufficient, Grantor shall upon demand pay any
deficiency to Lender. The reserve funds shall be held by Lender as a general
deposit and shall constitute a non-interest-bearing account which Lender may
satisfy by payment of the insurance premiums required to be paid by Grantor as
they become due. Lender does not hold the reserve funds in trust for Grantor,
and Lender is not the agent of Grantor for payment of the insurance premiums
required to be paid by Grantor. The responsibility for the payment of premiums
shall remain Grantor's sole responsibility.
Insurance Reports. Grantor, upon request of Lender, shall furnish to Lender
reports on each existing policy of insurance showing such information as Lender
may reasonably request including the following: (1) the name of the insurer; (2)
the risks insured; (3) the amount of the policy; (4) the property insured; (5)
the then current value on the basis of which insurance has been obtained and the
manner of determining that value; and (6) the expiration date of the policy. In
addition, Grantor shall upon request by Lender (however not more often than
annually) have an independent appraiser satisfactory to Lender determine, as
applicable, the cash value or replacement cost of the Collateral.
Financing Statements. Grantor authorizes Lender to file a UCC financing
statement, or alternatively, a copy of this Agreement to perfect Lender's
security interest. At Lender's request, Grantor additionally agrees to sign all
other documents that are necessary to perfect, protect, and continue Lender's
security interest in the Property. Grantor will pay all filing fees, title
transfer fees, and other fees and costs involved unless prohibited by law or
unless Lender is required by law to pay such fees and costs. Grantor irrevocably
appoints Lender to execute documents necessary to transfer title if there is a
default. Lender may file a copy of this Agreement as a financing statement. If
Grantor changes Grantor's name or address, or the name or address of any person
granting a security interest under this Agreement changes, Grantor will promptly
notify the Lender of such change.
GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except
as otherwise provided below with respect to accounts, Grantor may have
possession of the tangible personal property and beneficial use of all the
Collateral and may use it in any lawful manner not inconsistent with this
Agreement or the Related Documents, provided that Grantor's right to possession
and beneficial use shall not apply to any Collateral where possession of the
Collateral by Lender is required by law to perfect Lender's security interest in
such Collateral. Until otherwise notified by Lender, Grantor may collect any of
the Collateral consisting of accounts. At any time and even though no Event of
Default exists, Lender may exercise its rights to collect the accounts and to
notify account debtors to make payments directly to Lender for application to
the Indebtedness. If Lender at any time has possession of any Collateral,
whether before or after an Event of Default, Lender shall be deemed to have
exercised reasonable care in the custody and preservation of the Collateral if
Lender takes such action for that purpose as Grantor shall request or as Lender,
in Lender's sole discretion, shall deem appropriate under the circumstances, but
failure to honor any request by Grantor shall not of itself be deemed to be a
failure to exercise reasonable care. Lender shall not be required to take any
steps necessary to preserve any rights in the Collateral against prior parties,
nor to protect, preserve or maintain any security interest given to secure the
Indebtedness.
LENDER'S EXPENDITURES. If any action or proceeding is commenced that would
materially affect Lender's interest in the Collateral or if Grantor fails to
comply with any provision of this Agreement or any Related Documents, including
but not limited to Grantor's failure to discharge or pay when due any amounts
Grantor is required to discharge or pay under this Agreement or any Related
Documents, Lender on Grantor's behalf may (but shall not be obligated to) take
any action that Lender deems appropriate, including but not limited to
discharging or paying all taxes, liens, security interests, encumbrances and
other claims, at any time levied or placed on the Collateral and paying all
costs for insuring, maintaining and preserving the Collateral. All such
expenditures incurred or paid by Lender for such purposes will then bear
interest at the rate charged under the Note from the date incurred or paid by
Lender to the date of repayment by Grantor. All such expenses will become a part
of the Indebtedness and, at Lender's option, will (A) be payable on demand; (S)
be added to the balance of the Note and be apportioned among and be payable with
any installment payments to become due during either (1) the term of any
applicable insurance policy; or (2) the remaining term of the Note; or (C) be
treated as a balloon payment which will be due and payable at the Note's
maturity. The Agreement also will secure payment of these amounts. Such right
shall be in addition to all other rights and remedies to which Lender may be
entitled upon Default.
DEFAULT. Each of the following shall constitute an Event of Default under this
Agreement: Payment Default. Grantor fails to make any payment when due under the
Indebtedness.
Other Defaults. Grantor fails to comply with or to perform any other term,
obligation, covenant or condition contained in this Agreement or in any of the
Related Documents or to comply with or to perform any term, obligation, covenant
or condition contained in any other agreement between Lender and Grantor.
False Statements. Any warranty, representation or statement made or furnished to
Lender by Grantor or on Grantor's behalf under this Agreement or the Related
Documents is false or misleading in any material respect, either now or at the
time made or furnished or becomes false or misleading at any time thereafter.
Defective Collateralization. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any collateral
document to create a valid and perfected security interest or lien) at any time
and for any reason. Insolvency. The dissolution or termination of Grantor's
existence as a going business, the insolvency of Grantor, the appointment of a
receiver for any part of Grantor's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any proceeding
under any bankruptcy or insolvency laws by or against Grantor.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture
proceedings, whether by judicial proceeding, self-help, repossession or any
other method, by any creditor of Grantor or by any governmental agency against
any collateral securing the Indebtedness. This includes a garnishment of any of
Grantor's accounts, including deposit accounts, with Lender. However, this Event
of Default shall not apply if there is a good faith dispute by Grantor as to the
validity or reasonableness of the claim which is the basis of the creditor or
forfeiture proceeding and if Grantor gives Lender written notice of the creditor
or forfeiture proceeding and deposits with Lender monies or a surety bond for
the creditor or forfeiture proceeding, in an amount determined by Lender, in its
sole discretion, as being an adequate reserve or bond for the dispute.
Events Affecting Guarantor. Any of the preceding events occurs with respect to
any guarantor, endorser, surety, or accommodation party of any of the
Loan No: 400949881
COMMERCIAL SECURITY AGREEMENT (Continued)
1
I
Indebtedness or guarantor, endorser, surety, or accommodation party dies or
becomes incompetent or revokes or disputes the validity of, or liability under,
any Guaranty of the Indebtedness.
Adverse Change. A material adverse change occurs in Grantor's financial
condition, or lender believes the prospect of payment or performance of the
Indebtedness is impaired.
Insecurity. lender in good faith believes itself insecure.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, lender shall have all the rights of a secured
party under the Utah Uniform Commercial Code. In addition and without
limitation, lender may exercise anyone or more of the following rights and
remedies:
Accelerate Indebtedness. lender may declare the entire Indebtedness, including
any prepayment penalty which Grantor would be required to pay, immediately due
and payable, without notice of any kind to Grantor.
Assemble Collateral. lender may require Grantor to deliver to lender all or any
portion of the Collateral and any and all certificates of title and other
documents relating to the Collateral. lender may require Grantor to assemble the
Collateral and make it available to lender at a place to be designated by
lender. lender also shall have full power to enter upon the property of Grantor
to take possession of and remove the Collateral. If the Collateral contains
other goods not covered by this Agreement at the time of repossession, Grantor
agrees lender may take such other goods, provided that lender makes reasonable
efforts to return them to Grantor after repossession.
Sell the Collateral. lender shall have full power to sell, lease, transfer, or
otherwise deal with the Collateral or proceeds thereof in lender's own name or
that of Grantor. lender may sell the Collateral at public auction or private
sale. Unless the Collateral threatens to decline speedily in value or is of a
type customarily sold on a recognized market, lender will give Grantor, and
other persons as required by law, reasonable notice of the time and place of any
public sale, or the time after which any private sale or any other disposition
of the Collateral is to be made. However, no notice need be provided to any
person who, after Event of Default occurs, enters into and authenticates an
agreement waiving that person's right to notification of sale. The requirements
of reasonable notice shall be met if such notice is given at least ten (10) days
before the time of the sale or disposition. All expenses relating to the
disposition of the Collateral, including without limitation the expenses of
retaking, holding, insuring, preparing for sale and selling the Collateral,
shall become a part of the Indebtedness secured by this Agreement and shall be
payable on demand, with interest at the Note rate from date of expenditure until
repaid.
Appoint Receiver. lender shall have the right to have a receiver appointed to
take possession of all or any part of the Collateral, with the power to protect
and preserve the Collateral, to operate the Collateral preceding foreclosure or
sale, and to collect the Rents from the Collateral and apply the proceeds, over
and above the cost of the receivership, against the Indebtedness.Grantor hereby
waives any requirement that the receiver be impartial and disinterested as to
all of the parties and agrees that employment by lender shall not disqualify a
person from serving as a receiver.
Collect Revenues, Apply Accounts. lender, either itself or through a receiver,
may collect the payments, rents, income, and revenues from the Collateral.
lender may at any time in lender's discretion transfer any Collateral into
lender's own name or that of lender's nominee and receive the payments, rents,
income, and revenues therefrom and hold the same as security for the
Indebtedness or apply it to payment of the Indebtedness in such order of
preference as lender may determine. Insofar as the Collateral consists of
accounts, general intangibles, insurance policies, instruments, chattel paper,
choses in action, or similar property, lender may demand, collect, receipt for,
settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as
lender may determine, whether or not Indebtedness or Collateral is then due. For
these purposes, lender may, on behalf of and in the name of Grantor, receive,
open and dispose of mail addressed to Grantor; change any address to which mail
and payments are to be sent; and endorse notes, checks, drafts, money orders,
documents of title, instruments and items pertaining to payment, shipment, or
storage of any Collateral. To facilitate collection, lender may notify account
debtors and obligors on any Collateral to make payments directly to lender.
Obtain Deficiency. If lender chooses to sell any or all of the Collateral,
lender may obtain a judgment against Grantor for any deficiency remaining on the
Indebtedness due to lender after application of all amounts received from the
exercise of the rights provided in this Agreement. Grantor shall be liable for a
deficiency even if the transaction described in this subsection is a sale of
accounts or chattel paper.
Other Rights and Remedies. lender shall have all the rights and remedies of a
secured creditor under the provisions of the Uniform Commercial Code, as may be
amended from time to time. In addition, lender shall have and may exercise any
or all other rights and remedies it may have available at law, in equity, or
otherwise.
Election of Remedies. Except as may be prohibited by applicable law, all of
lender's rights and remedies, whether evidenced by this Agreement, the Related
Documents, or by any other writing, shall be cumulative and may be exercised
singularly or concurrently. Election by lender to pursue any remedy shall not
exclude pursuit of any other remedy, and an election to make expenditures or to
take action to perform an obligation of Grantor under this Agreement, after
Grantor's failure to perform, shall not affect lender's right to declare a
default and exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents, constitutes the
entire understanding and agreement of the parties as to the matters set forth in
this Agreement. No alteration of or amendment to this Agreement shall be
effective unless given in writing and signed by the party or parties sought to
be charged or bound by the alteration or amendment. Attorneys' Fees; Expenses.
Grantor agrees to pay upon demand all of lender's costs and expenses, including
lender's reasonable attorneys' fees and lender's legal expenses, incurred in
connection with the enforcement of this Agreement. lender may hire or pay
someone else to help enforce this Agreement, and Grantor shall pay the costs and
expenses of such enforcement. Costs and expenses include lender's reasonable
attorneys' fees and legal expenses whether or not lender's salaried employee and
whether or not there is a lawsuit, including reasonable attorneys' fees and
legal expenses for bankruptcy proceedings (including efforts to modify or vacate
any automatic stay or injunction). appeals, and any anticipated post-judgment
collection services. Grantor also shall pay all court costs and such additional
fees as may be directed by the court.
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions of
this Agreement.
Governing law. With respect to procedural matters related to the perfection and
enforcement of lender's rights against the Collateral, this Agreement will be
governed by federal law applicable to lender and to the extent not preempted by
federal law, the laws of the State of Utah. In all other respects, this
Agreement will be governed by federal law applicable to lender and, to the
extent not preempted by federal law, the laws of the State of Illinois without
regard to its conflicts of law provisions. However, if there ever is a question
about whether any provision of this Agreement is valid or enforceable, the
provision that is questioned will be governed by whichever state or federal law
would find the provision to be valid and enforceable. The loan transaction that
is evidenced by the Note and this Agreement has been applied for, considered,
loan No: 400949881
COMMERCIAL SECURITY AGREEMENT {Continued}
approved and made, and all necessary loan documents have been accepted by lender in the State of Illinois.
Choice of Venue. If there is a lawsuit, Grantor agrees upon lender's request to submit to the jurisdiction of the courts of McDonough County, State of Illinois.
No Waiver by lender. lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by lender. No delay or omission on the part of lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by lender of a provision of this Agreement shall not prejudice or constitute a waiver of lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by lender, nor any course of dealing between lender and Grantor, shall constitute a waiver of any of lender's rights or of any of Grantor's obligations as to any future transactions. Whenever the consent of lender is required under this Agreement, the granting of such consent by lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of lender.
Notices. Unless otherwise provided by applicable law, any notice required to be
given under this Agreement or required by law shall be given in writing, and
shall be effective when actually delivered in accordance with the law or with
this Agreement, when actually received by telefacsimile (unless otherwise
required by law), when deposited with a nationally recognized overnight courier,
or, if mailed, when deposited in the United States mail, as first class,
certified or registered mail postage prepaid, directed to the addresses shown
near the beginning of this Agreement. Any party may change its address for
notices under this Agreement by giving formal written notice to the other
parties, specifying that the purpose of the notice is to change the party's
address. For notice purposes, Grantor agrees to keep lender informed at all
times of Grantor's current address. Unless otherwise provided by applicable law,
if there is more than one Grantor, any notice given by lender to any Grantor is
deemed to be notice given to all Grantors. Power of Attorney. Grantor hereby
appoints lender as Grantor's irrevocable attorney-in-fact for the purpose of
executing any documents necessary to perfect, amend, or to continue the security
interest granted in this Agreement or to demand termination of filings of other
secured parties. lender may at any time, and without further authorization from
Grantor, file a carbon, photographic or other reproduction of any financing
statement or of this Agreement for use as a financing statement. Grantor will
reimburse lender for all expenses for the perfection and the continuation of the
perfection of lender's security interest in the Collateral.
Severability. If a court of competent jurisdiction finds any provision of this
Agreement to be illegal, invalid, or unenforceable as to any circumstance, that
finding shall not make the offending provision illegal, invalid, or
unenforceable as to any other circumstance. If feasible, the offending provision
shall be considered modified so that it becomes legal, valid and enforceable. If
the offending provision cannot be so modified, it shall be considered deleted
from this Agreement. Unless otherwise required by law, the illegality,
invalidity, or unenforceability of any provision of this Agreement shall not
affect the legality, validity or enforceability of any other provision of this
Agreement.
Successors and Assigns. Subject to any limitations stated in this Agreement on
transfer of Grantor's interest, this Agreement shall be binding upon and inure
to the benefit of the parties, their successors and assigns. If ownership of the
Collateral becomes vested in a person other than Grantor, lender, without notice
to Grantor, may deal with Grantor's successors with reference to this Agreement
and the Indebtedness by way of forbearance or extension without releasing
Grantor from the obligations of this Agreement or liability under the
Indebtedness.
Survival of Representations and Warranties. All representations, warranties, and
agreements made by Grantor in this Agreement shall survive the execution and
delivery of this Agreement, shall be continuing in nature, and shall remain in
full force and effect until such time as Grantor's Indebtedness shall be paid in
full.
Time is of the Essence. Time is of the essence in the performance of this
Agreement.
Waive Jury. All parties to this Agreement hereby waive the right to any jury
trial in any action, proceeding, or counterclaim brought by any party against
any other party.
DEFINITIONS. The following capitalized words and terms shall have the following
meanings when used in this Agreement. Unless specifically stated to the
contrary, all references to dollar amounts shall mean amounts in lawful money of
the United States of America. Words and terms used in the singular shall include
the plural, and the plural shall include the singular, as the context may
require. Words and terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code:
Agreement. The word "Agreement" means this Commercial Security Agreement, as
this Commercial Security Agreement may be amended or modified from time to time,
together with all exhibits and schedules attached to this Commercial Security
Agreement from time to time. Borrower. The word "Borrower" means REMOTEMDX, INC.
and includes all co-signers and co-makers signing the Note and all their
successors and assigns.
Collateral. The word "Collateral" means all of Grantor's right, title and
interest in and to all the Collateral as described in the Collateral Description
section of this Agreement.
Default. The word "Default" means the Default set forth in this Agreement in the
section titled "Default".
Environmental laws. The words "Environmental laws" mean any and all state,
federal and local statutes, regulations and ordinances relating to the
protection of human health or the environment, including without limitation the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended, 42 U.S.C. Section 9601, et seq. ("CERClA"), the Superfund Amendments
and Reauthorization Act of 1986, Pub. l. No. 99-499 ("SARA"), the Hazardous
Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource
Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other
applicable state or federal laws, rules, or regulations adopted pursuant
thereto.
Event of Default. The words "Event of Default" mean any of the events of default
set forth in this Agreement in the default section of this Agreement.
Grantor. The word "Grantor" means REMOTEMDX, INC..
Guaranty. The word "Guaranty" means the guaranty from guarantor, endorser,
surety, or accommodation party to lender, including without limitation a
guaranty of all or part of the Note.
Hazardous Substances. The words "Hazardous Substances" mean materials that,
because of their quantity, concentration or physical, chemical or infectious
characteristics, may cause or pose a present or potential hazard to human health
or the environment when improperly used, treated, stored, disposed of,
generated, manufactured, transported or otherwise handled. The words "Hazardous
Substances" are used in their very broadest sense and include without limitation
any and all hazardous or toxic substances, materials or waste as defined by or
listed under the Environmental laws. The term "Hazardous Substances" also
includes, without limitation, petroleum and petroleum by-products or any
fraction thereof and asbestos.
Loan No: 400949881
COMMERCIAL SECURITY AGREEMENT {Continued}
Indebtedness. The word "Indebtedness" means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Grantor is responsible under this Agreement or under any of the Related Documents. Specifically, without limitation, Indebtedness includes the future advances set forth in the Future Advances provision of this Agreement together with all interest thereon. lender. The word "lender" means Citizens National Bank, its successors and assigns.
Note. The word "Note" means the Note executed by REMOTEMDX, INC. in the principal amount of $2,000,000.00 dated June 26, 2006, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement. Property. The word "Property" means all of Grantor's right, title and interest in and to all the Property as described in the "Collateral Description" section of this Agreement. . Related Documents. The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness.
II
GRANTOR HAS READ AND UNDERSTOOD All THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED JUNE 26. 2006.
GRANTOR:
REMOTEMDX. INC.
By:
DAVID DERRICK, Chief REMOTEMDX. INC.
Executive
Officer
of
LASER PRO """'g. V". 5.32.00.003 Cop,. ",,""' Fi",oo'" So'",io",. '00. 1997.
2006. All Righ" R,,",v,'. . UT/IL G,ICFIILPL\E4Q.FC TR.2194 PR.6
Citizens
Bank' Investments.Trust. Insurance www.citizensnational.net
PROMISSORY NOTE
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations.
Borrower_
REMOTEMDX, INC.
150 W CIVIC CENTER DRIVE SUITE 400 SANDY,UT 84070
lender:
Citizens National Bank Main Office
127 S Side Square P.O. Box 1279 Macomb,IL 61455
Principal Amount: $2,000,000.00 Initial Rate: 8.000% Date of Note: June 26, 2006
PROMISE TO PAY. REMOTEMDX, INC. ("Borrower") promises to pay to Citizens
National Bank ("Lender"), or order, in lawful money of the United States of
America, the principal amount of Two Million & 00/100 Dollars ($2,000,000.00) or
so much as may be outstanding, together with interest on the unpaid outstanding
principal balance of each advance. Interest shall be calculated from the date of
each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding principal
plus all accrued unpaid interest on June 30, 2007. In addition, Borrower will
pay regular monthly payments of all accrued unpaid interest due as of each
payment date, beginning August 1, 2006, with all subsequent interest payments to
be due on the same day of each month after that. Unless otherwise agreed or
required by applicable law, payments will be applied first to any accrued unpaid
interest; and then to principal. Interest on this Note is computed on a 365/365
simple interest basis; that is, by applying the ratio of the annual interest
rate over the number of days in a year, multiplied by the outstanding principal
balance, multiplied by the actual number of days the principal balance is
outstanding. Borrower will pay Lender at Lender's address shown above or at such
other place as Lender may designate in writing.
VARIABLE INTEREST RATE. The interest rate on this Note is 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 "Index"r. The Index is not necessarily
the lowest rate charged by Lender on its loans. If the Index becomes unavailable
during the term of this loan, Lender may designate a substitute index after
notifying Borrower. Lender will tell Borrower the current Index rate upon
Borrower's request. The interest rate change will not occur more often than each
day. Borrower understands that Lender may make loans based on other rates as
well. The Index currently is 8.000% per annum. The interest rate to be applied
to the unpaid principal balance during this Note will be at a rate equal to the
Index, resulting in an initial rate of 8.000% per annum. NOTICE: Under no
circumstances will the interest rate on this Note be more than the maximum rate
allowed by applicable law.
PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and
other prepaid finance charges are earned fully as of the date of the loan and
will not be subject to refund upon early payment (whether voluntary or as a
result of default), except as otherwise required by law. In any event, even upon
full prepayment of this Note, Borrower understands that Lender is entitled to a
minimum interest charge of $100.00. Other than Borrower's obligation to pay any
minimum interest charge, Borrower may pay without penalty all or a portion of
the amount owed earlier than it is due. Early payments will not, unless agreed
to by Lender in writing, relieve Borrower of Borrower's obligation to continue
to make payments of accrued unpaid interest. Rather, early payments will reduce
the principal balance due. Borrower agrees not to send Lender payments marked
"paid in full", "without recourse", or similar language. If Borrower sends such
a payment, Lender may accept it without losing any of Lender's rights under this
Note, and Borrower will remain obligated to pay any further amount owed to
Lender. All written communications concerning disputed amounts, including any
check or other payment instrument that indicates that the payment constitutes
"payment in full" of the amount owed or that is tendered with other conditions
or limitations or as full satisfaction of a disputed amount must be mailed or
delivered to: Citizens National Bank, Main Office, 127 S Side Square, P.O. Box
1279, Macomb, IL 61455.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment or $25.00, whichever is less.
INTEREST AFTER DEFAULT. Upon default, including failure to pay upon final
maturity, the interest rate on this Note shall be increased to 15.000% per
annum. However, in no event will the interest rate exceed the maximum interest
rate limitations under applicable law. DEFAULT. Each of the following shall
constitute an event of default ("Event of Default") under this Note: Payment
Default. Borrower fails to make any payment when due under this Note. Other
Defaults. Borrower fails to comply with or to perform any other term,
obligation, covenant or condition contained in this Note or in any of the
related documents or to comply with or to perform any term, obligation, covenant
or condition contained in any other agreement between Lender and Borrower.
False Statements. Any warranty, representation or statement made or furnished to
Lender by Borrower or on Borrower's behalf under this Note or the related
documents is false or misleading in any material respect, either now or at the
time made or furnished or becomes false or misleading at any time thereafter.
Insolvency. The dissolution or termination of Borrower's existence as a going
business, the insolvency of Borrower, the appointment of a receiver for any part
of Borrower's property, any assignment for the benefit of creditors, any type of
creditor workout, or the commencement of any proceeding under any bankruptcy or
insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture
proceedings, whether by judicial proceeding, self-help, repossession or any
other method, by any creditor of Borrower or by any governmental agency against
any collateral securing the loan. This includes a garnishment of any of
Borrower's accounts, including deposit accounts, with Lender. However, this
Event of Default shall not apply if there is a good faith dispute by Borrower as
to the validity or reasonableness of the claim which is the basis of the
creditor or forfeiture proceeding and if Borrower gives Lender written notice of
the creditor or forfeiture proceeding and deposits with Lender monies or a
surety bond for the creditor or forfeiture proceeding, in an amount determined
by Lender, in its sole discretion, as being an adequate reserve or bond for the
dispute.
Events Affecting Guarantor. Any of the preceding events occurs with respect to
any guarantor, endorser, surety, or accommodation party of any of the
indebtedness or any guarantor, endorser, surety, or accommodation party dies or
becomes incompetent, or revokes or disputes the validity of, or liability under,
any guaranty of the indebtedness evidenced by this Note. In the event of a
loan No: 400949881
PROMISSORY NOTE {Continued}
death, Lender, at its option, may, but shall not be required to, permit the
guarantor's estate to assume unconditionally the obligations arising under the
guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of
Default.
Change In Ownership. Any change in ownership of twenty-five percent (25%) or
more of the common stock of Borrower. Adverse Change. A material adverse change
occurs in Borrower's financial condition, or Lender believes the prospect of
payment or performance of this Note is impaired.
Insecurity. Lender in good faith believes itself insecure.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance under this Note and all accrued unpaid interest immediately due, and
then Borrower will pay that amount.
ATTORNEYS' FEES; EXPENSES. Lender may hire or pay someone else to help collect
this Note if Borrower does not pay. Borrower will pay Lender that amount. This
includes, subject to any limits under applicable law, Lender's attorneys' fees
and Lender's legal expenses, whether or not there is a lawsuit, including
attorneys' fees, expenses for bankruptcy proceedings (including efforts to
modify or vacate any automatic stay or injunction), and appeals. If not
prohibited by applicable law, Borrower also will pay any court costs, in
addition to all other sums provided by law.
JURY WAIVER. Lender and Borrower hereby waive the right to any jury trial in any
action, proceeding, or counterclaim brought by either Lender or Borrower against
the other.
GOVERNING LAW. This Note will be governed by federal law applicable to Lender
and, to the extent not preempted by federal law, the laws of the State of
Illinois without regard to its conflicts of law provisions. This Note has been
accepted by Lender in the State of Illinois.
CHOICE OF VENUE. If there is a lawsuit, Borrower agrees upon Lender's request to
submit to the jurisdiction of the courts of McDonough County, State of Illinois.
RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a
right of setoff in all Borrower's accounts with Lender (whether checking,
savings, or some other account). This includes all accounts Borrower holds
jointly with someone else and all accounts Borrower may open in the future.
However, this does not include any IRA or Keogh accounts, or any trust accounts
for which setoff would be prohibited by law. Borrower authorizes Lender, to the
extent permitted by applicable law, to charge or setoff all sums owing on the
indebtedness against any and all such accounts.
COLLATERAL. Borrower acknowledges this Note is secured by the following
collateral described in the security instruments listed herein:
(A) inventory, chattel paper, accounts, equipment and general intangibles described in Commercial Security Agreements dated June 26, 2006.
(B) deposit accounts described in an Assignment of Deposit Account dated June 26, 2006.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note may be requested only in writing by Borrower or as provided in this
paragraph. All communications, instructions, or directions by telephone or
otherwise to Lender are to be directed to Lender's office shown above. The
following person currently is authorized, except as provided in this paragraph,
to request advances and authorize payments under the line of credit until Lender
receives from Borrower, at Lender's address shown above, written notice of
revocation of his or her authority: DAVID DERRICK, Chief Executive Officer of
REMOTEMDX, INC. Draws to be taken on approved invoices presented to Citizens
National Bank from the following companies: CP Baker Securities, Inc, RemoteMDx,
Inc., Dynamic Source Manufacturing and Advanta Design Group, Inc. Lender may
advance funds under this note to iii pay itself interest, (m make deposits into
the Account (as defined below) if it contains less than the required
compensating balance, and (im to pay itself fees and other amounts that may be
owed to it. Borrower agrees to be liable for all sums either: (A) advanced in
accordance with the instructions of an authorized person or (B) credited to any
of Borrower's accounts with Lender. The unpaid principal balance owing on this
Note at any time may be evidenced by endorsements on this Note or by Lender's
internal records, including daily computer print-outs. Lender will have no
obligation to advance funds under this Note if: (A) Borrower or any guarantor is
in default under the terms of this Note or any agreement that Borrower or any
guarantor has with Lender, including any agreement made in connection with the
signing of this Note; (B) Borrower or any guarantor ceases doing business or is
insolvent; (C) any guarantor seeks, claims or otherwise attempts to limit,
modify or revoke such guarantor's guarantee of this Note or any other loan with
Lender; (D) Borrower has applied funds provided pursuant to this Note for
purposes other than those authorized by Lender; or (E) Lender in good faith
believes itself insecure.
ADDITIONAL REQUIREMENTS. Lender will require borrower to open their operating
deposit account and research and development account at lenders institution.
Lender will require quarterly profit and loss statements, business balance sheet
and annual tax returns from borrower. Lender will require an amount equal to 10%
of the line of credit as compensating balance in the operating account. Lock
Box: Lender will provide a PO Box specifically for borrower lock box purposes.
Lender will provide daily emails including scanned images of all checks being
deposited. In addition to and not in limitation of other rights of Lender to
payment, twenty-five (25) percent of all deposits received into the Account (as
defined in the Assignment of Deposit Account described above) will be applied to
the operating line of credit and seventy-five (75) percent will remain in the
borrowers operating deposit account.
LETTER OF CREDIT. In addition to the other collateral for this Note, Borrower
acknowledges and agrees that this Note is secured by a Letter of Credit issued
to Lender on its behalf by United States Trust Company, N.A. dated June 26, 2006
Lender shall return the letter(s) of credit securing the loan after the
applicable preference period following the occurence of both of the following
(i) payment in full of all amounts payable to Lender under the Note and related
documents and (ii) Borrower's acknowledgment that Lender has no further
obligation to loan amounts to Borrower pursuant to such documents.
SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower, and
upon Borrower's heirs, personal representatives, successors and assigns, and
shall inure to the benefit of Lender and its successors and assigns.
GENERAL PROVISIONS. If any part of this Note cannot be enforced, this fact will
not affect the rest of the Note. Lender may delay or forgo enforcing any of its
rights or remedies under this Note without losing them. Borrower and any other
person who signs, guarantees or endorses this Note, to the extent allowed by
law, waive presentment, demand for payment, and notice of dishonor. Upon any
change in the terms of this Note, and unless otherwise expressly stated in
writing, no party who signs this Note, whether as maker, guarantor,
accommodation maker or endorser, shall be released from liability. All such
parties agree that Lender may renew or extend (repeatedly and for any length of
time) this loan or release any party or guarantor or collateral; or impair, fail
to realize upon or perfect Lender's security interest in the collateral; and
take any other action deemed necessary by Lender without the consent of or
notice to anyone. All such parties also agree that Lender may modify this loan
without the consent of or notice to anyone other than the party with whom the
modification is made. The obligations under this Note are joint and several.
ILLINOIS INSURANCE NOTICE. Unless Borrower provides Lender with evidence of the
insurance coverage required by Borrower's agreement with Lender, Lender may
purchase insurance at Borrower's expense to protect Lender's interests in the
collateral. This insurance may, but need
Loan No: 400949881
PROMISSORY NOTE (Continued)
not, protect Borrower's interests. The coverage that lender purchases may not pay any claim that Borrower makes or any claim that is made against Borrower in connection with the collateral. Borrower may later cancel any insurance purchased by lender, but only after providing lender with evidence that Borrower has obtained insurance as required by their agreement. If lender purchases insurance for the collateral, Borrower will be responsible for the costs of that insurance, including interest and any other charges lender may impose in connection with the placement of the insurance, until the effective date of the cancellation or expiration of the insurance. The costs of the insurance may be added to Borrower's total outstanding balance or obligation. The costs of the insurance may be more than the cost of insurance Borrower may be able to obtain on Borrower's own.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD All THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE. BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COpy OF THIS PROMISSORY NOTE.
BORROWER:
REMOTEMDX, INC.
Executive
Officer
of
LASER PRO l"dl'g, V". 5.52.00.003 Cop,. ""',,d """,1,, SO,"tlo"" ",. 1997, 2006. All Rlgh" R..,,",d. . IL G,ICFlllPlID20.FC TR-2194 PR-6
Citizens
Bank' Investments' Trust. Insurance www.citizensnational.net
CHANGE IN TERMS AGREEMENT
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations.
Borrower:
REMOTEMDX, INC.
150 W CIVIC CENTER DRIVE SUITE 400 SANDY,UT 84070
lender:
Citizens National Bank Main Office
127 S Side Square P.O. Box 1279 Macomb,IL 61455
Principal Amount: $4,000,000.00 Initial Rate: 8.250% Date of Agreement:August 7, 2006
DESCRIPTION OF EXISTING INDEBTEDNESS. ORIGINAL REVOLVING LINE OF CREDIT DATED 6/26/06 IN THE AMOUNT OF $2,000,000,
MONTHLY INTEREST ONLY PAYMENTS, WALL STREET JOURNAL NATIONAL PRIME INTEREST RATE FLOATING DAILY, MATURING 6/30/07.
DESCRIPTION OF COLLATERAL. Borrower acknowledges this Change in Terms Agreement
is secured by the following collateral described in the security instruments
listed within the Promissory Note: (AI inventory, chattel paper, accounts,
equipment and general intangibles described in Commercial Security Agreements
dated June 26, 2006. (BI deposit accounts described in an Assignment of Deposit
Account dated June 26, 2006.
DESCRIPTION OF CHANGE IN TERMS. INCREASE EXISTING CREDIT LINE TO $4,000,000,
ADDITIONAL COLLATERAL OF $1,000,000 LETTER OF CREDIT NO. 306S237082 - UNION BANK
OF CALIFORNIA, NA DATED AUGUST 8, 2006, AND $1,000,000 LETTER OF CREDIT NO.
77-411896-4 --FIRST REPUBLIC BANK, DATED AUGUST 9, 2006. ALL OTHER TERMS REMAIN
THE SAME.
PROMISE TO PAY. REMOTEMDX, INC. ("Borrower") promises to pay to Citizens
National Bank ("Lender"), or order, in lawful money of the United States of
America, the principal amount of Four Million & 00/100 Dollars ($4,000,000.00)
or so much as may be outstanding, together with interest on the unpaid
outstanding principal balance of each advance. Interest shall be calculated from
the date of each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding principal
plus all accrued unpaid interest on June 30, 2007. In addition, Borrower will
pay regular monthly payments of all accrued unpaid interest due as of each
payment date, beginning September 1, 2006, with all subsequent interest payments
to be due on the same day of each month after that. Unless otherwise agreed or
required by applicable law, payments will be applied first to any accrued unpaid
interest; and then to principal. Interest on this loan is computed on a 365/365
simple interest basis; that is, by applying the ratio of the annual interest
rate over the number of days in a year, multiplied by the outstanding principal
balance, multiplied by the actual number of days the principal balance is
outstanding. Borrower will pay Lender at Lender's address shown above or at such
other place as Lender may designate in writing.
VARIABLE INTEREST RATE. The interest rate on this loan is 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 "Index"). The Index is not necessarily
the lowest rate charged by Lender on its loans. If the Index becomes unavailable
during the term of this loan, Lender may designate a substitute index after
notifying Borrower. Lender will tell Borrower the current Index rate upon
Borrower's request. The interest rate change will not occur more often than each
day. Borrower understands that Lender may make loans based on other rates as
well. The Index currently is 8.250% per annum. The interest rate to be applied
to the unpaid principal balance during this loan will be at a rate equal to the
Index, resulting in an initial rate of 8.250% per annum. NOTICE: Under no
circumstances will the interest rate on this loan be more than the maximum rate
allowed by applicable law.
PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of
this Agreement, Borrower understands that Lender is entitled to a minimum
interest charge of $100.00. Other than Borrower's obligation to pay any minimum
interest charge, Borrower may pay without penalty all or a portion of the amount
owed earlier than it is due. Early payments will not, unless agreed to by Lender
in writing, relieve Borrower of Borrower's obligation to continue to make
payments of accrued unpaid interest. Rather, early payments will reduce the
principal balance due. Borrower agrees not to send Lender payments marked "paid
in full", "without recourse", or similar language. If Borrower sends such a
payment, Lender may accept it without losing any of Lender's rights under this
Agreement, and Borrower will remain obligated to pay any further amount owed to
Lender. All written communications concerning disputed amounts, including any
check or other payment instrument that indicates that the payment constitutes
"payment in full" of the amount owed or that is tendered with other conditions
or limitations or as full satisfaction of a disputed amount must be mailed or
delivered to: Citizens National Bank,Main Office, 127 S Side Square, P.O. Box
1279, Macomb, IL 61455. LATE CHARGE. If a payment is 10 days or more late,
Borrower will be charged 5.000% of the regularly scheduled payment or $25.00,
whichever is less.
INTEREST AFTER DEFAULT. Upon default, including failure to pay upon final
maturity, the interest rate on this loan shall be increased to 15.000% per
annum. However, in no event will the interest rate exceed the maximum interest
rate limitations under applicable law.
DEFAULT. Each of the following shall constitute an Event of Default under this
Agreement:
Payment Default. Borrower fails to make any payment when due under the
Indebtedness.
Other Defaults. Borrower fails to comply with or to perform any other term,
obligation, covenant or condition contained in this Agreement or in any of the
Related Documents or to comply with or to perform any term, obligation, covenant
or condition contained in any other agreement between Lender and Borrower. False
Statements. Any warranty, representation or statement made or furnished to
Lender by Borrower or on Borrower's behalf under this Agreement or the Related
Documents is false or misleading in any material respect, either now or at the
time made or furnished or becomes false or misleading at any time thereafter.
Insolvency. The dissolution or termination of Borrower's existence as a going
business, the insolvency of Borrower, the appointment of a receiver for any part
of Borrower's property, any assignment for the benefit of creditors, any type of
creditor workout, or the commencement of any proceeding under any bankruptcy or
insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture
proceedings, whether by judicial proceeding, self-help,
Loan No: 400949881
CHANGE IN TERMS AGREEMENT (Continued)
repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the Indebtedness. This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. Events Affecting Guarantor. Any of the preceding events occurs with respect to any guarantor, endorser, surety, or accommodation party of any of the Indebtedness or any guarantor, endorser, surety, or accommodation party dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness evidenced by this Note. In the event of a death, Lender, at its option, may, but shall not be required to, permit the guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default.
Change In Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired.
Insecurity. Lender in good faith believes itself insecure.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance under this Agreement and all accrued unpaid interest immediately due,
and then Borrower will pay that amount.
ATTORNEYS' FEES; EXPENSES. Lender may hire or pay someone else to help collect
this Agreement if Borrower does not pay. Borrower will pay Lender that amount.
This includes, subject to any limits under applicable law, Lender's attorneys'
fees and Lender's legal expenses, whether or not there is a lawsuit, including
attorneys' fees, expenses for bankruptcy proceedings (including efforts to
modify or vacate any automatic stay or injunction), and appeals. If not
prohibited by applicable law, Borrower also will pay any court costs, in
addition to all other sums provided by law.
JURY WAIVER. Lender and Borrower hereby waive the right to any jury trial in any
action, proceeding, or counterclaim brought by either Lender or Borrower against
the other.
GOVERNING LAW. This Agreement will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of Illinois without regard to its conflicts of law provisions. This Agreement has been accepted by Lender in the State of Illinois.
CHOICE OF VENUE. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of McDonough County, State of Illinois.
RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower's accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the debt against any and all such accounts. C OllATERAL. Collateral securing other loans with Lender may also secure this loan. To the extent collateral previously has been given to Lender by any person which may secure this Indebtedness, whether directly or indirectly, it is specifically agreed that, to the extent prohibited by law, all such collateral consisting of household goods will not secure this Indebtedness. In addition, if any collateral requires the giving of a right of rescission under Truth in Lending for this Indebtedness, such collateral also will not secure this Indebtedness unless and until all required notices of that right have been given.
LINE OF CREDIT. This Agreement evidences a revolving line of credit. Advances
under this Agreement may be requested only in writing by Borrower or as provided
in this paragraph. All communications, instructions, or directions by telephone
or otherwise to Lender are to be directed to Lender's office shown above. The
following persons currently are authorized, except as provided in this
paragraph, to request advances and authorize payments under the line of credit
until Lender receives from Borrower, at Lender's address shown above, written
notice of revocation of their authority: DAVID DERRICK, Chief Executive Officer
of REMOTEMDX, INC.; CHAD OLSEN, Controller of REMOTEMDX, INC.; MICHAEL ACTON,
Chief Financial Officer of REMOTEMDX, INC.; and JAMES DALTON, President of
REMOTEMDX, INC. Draws to be taken on approved invoices presented to Citizens
National Bank from the following companies: CP Baker Securities, Inc, RemoteMDx,
Inc., Dynamic Source Manufacturing and Advanta Design Group, Inc. lender may
advance funds under this note to (i) pay itself interest, (ii) make deposits
into the Account (as defined below) if it contains less than the required
compensating balance, and (iii) to pay itself fees and other amounts that may be
owed to it. Borrower agrees to be liable for all sums either: (A) advanced in
accordance with the instructions of an authorized person or (B) credited to any
of Borrower's accounts with Lender. The unpaid principal balance owing on this
Agreement at any time may be evidenced by endorsements on this Agreement or by
Lender's internal records, including daily computer print-outs. Lender will have
no obligation to advance funds under this Agreement if: (A) Borrower or any
guarantor is in default under the terms of this Agreement or any agreement that
Borrower or any guarantor has with Lender, including any agreement made in
connection with the signing of this Agreement; (B) Borrower or any guarantor
ceases doing business or is insolvent; (C) any guarantor seeks, claims or
otherwise attempts to limit, modify or revoke such guarantor's guarantee of this
Agreement or any other loan with Lender; (D) Borrower has applied funds provided
pursuant to this Agreement for purposes other than those authorized by Lender;
or (E) Lender in good faith believes itself insecure.
CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of
the original obligation or obligations, including all agreements evidenced or
securing the obligation(s), remain unchanged and in full force and effect.
Consent by Lender to this Agreement does not waive Lender's right to strict
performance of the obligation(s) as changed, nor obligate Lender to make any
future change in terms. Nothing in this Agreement will constitute a satisfaction
of the obligation(s). It is the intention of Lender to retain as liable parties
all makers and endorsers of the original obligation(sJ. including accommodation
parties, unless a party is expressly released by Lender in writing. Any maker or
endorser, including accommodation makers, will not be released by virtue of this
Agreement. If any person who signed the original obligation does not sign this
Agreement below, then all persons signing below acknowledge that this Agreement
is given conditionally, based on the representation to Lender that the
non-signing party consents to the changes and provisions of this Agreement or
otherwise will not be released by it. This waiver applies not only to any
initial extension, modification or release, but also to all such subsequent
actions.
lETTER OF CREDIT. In addition to the other collateral for this Note, Borrower
acknowledges and agrees that this Note is secured by a letter of Credit issued
to lender on its behalf by United States Trust Company, N.A. dated June 26,
2006. The Change in Terms Agreement is additionally secured by a letter of
Credit issued to lender on its behalf by Union Bank of California, N.A. dated
August 8, 2006, and Letter of Credit issued to lender on its behalf by First
Republic Bank dated August 9, 2006. Lender shall return the letter(s) of credit
securing the loan after the applicable preference period following the occurence
of both of the following (i) payment in full of all amounts payable to Lender
under the Note and related documents and (ii) Borrower's acknowledgment that
Lender has no further obligation to loan amounts to Borrower pursuant to such
documents.
loan No: 400949881
CHANGE IN TERMS AGREEMENT {Continued}
ADDITIONAL REQUIREMENTS. lender will require borrower to open their operating deposit account and research and development account at lenders institution. lender will require quarterly profit and loss statements, business balance sheet and annual tax returns from borrower. lender will require an amount equal to 5% of the line of credit as compensating balance in the operating account. lock Box: lender will provide a PO Box specifically for borrower lock box purposes. lender will provide daily emails including scanned images of all checks being deposited. In addition to and not in limitation of other rights of lender to payment, twenty-five (25) percent of all deposits received into the Account (as defined in the Assignment of Deposit Account described above) will be applied to the operating line of credit and seventy-five (75) percent will remain in the borrowers operating deposit account.
SUCCESSORS AND ASSIGNS. Subject to any limitations stated in this Agreement on transfer of Borrower's interest, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns. If ownership of the Collateral becomes vested in a person other than Borrower, lender, without notice to Borrower, may deal with Borrower's successors with reference to this Agreement and the Indebtedness by way of forbearance or extension without releasing Borrower from the obligations of this Agreement or liability under the Indebtedness.
MISCELLANEOUS PROVISIONS. If any part of this Agreement cannot be enforced, this fact will not affect the rest of the Agreement. lender may delay or forgo enforcing any of its rights or remedies under this Agreement without losing them. Borrower and any other person who signs, guarantees or endorses this Agreement, to the extent allowed by law, waive presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Agreement, and unless otherwise expressly stated in writing, no party who signs this Agreement, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that lender may renew or extend (repeatedly and for any length of time) this loan or release any party or guarantor or collateral; or impair, fail to realize upon or perfect lender's security interest in the collateral; and take any other action deemed necessary by lender without the consent of or notice to anyone. All such parties also agree that lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Agreement are joint and several.
PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD All THE PROVISIONS OF THIS AGREEMENT, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE AGREEMENT.
BORROWER:
REMOTEMDX, INC.
Executive
Officer
01
LASER PRO L,,"og, Vo<. 5.32.10.003 Cop,. ""'00' FI"",'" SO'""o"" ",. 1997,2006.
All Rlgh" R.."",. . IL G,\CFI\LPL\D20C.FC TR-2625 PR-29
Citizens
Bank' Investments 'Trust. Insurance www.citizensnational.net
CHANGE IN TERMS AGREEMENT
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***,, has been omitted due to text length limitations.
Borrower:
REMOTEMDX, INC.
150 W CIVIC CENTER DRIVE SUITE 400 SANDY,UT 84070
Lender:
Citizens National Bank Main Office
127 S Side Square P.O. Box 1279 Macomb,IL 61455
Principal Amount: $4,000,000.00 Initial Rate: 8.250% Date of Agreement: August 7, 2006
DESCRIPTION OF EXISTING INDEBTEDNESS. ORIGINAL REVOLVING LINE OF CREDIT DATED 6/26/06 IN THE AMOUNT OF $2,000,000, MONTHLY INTEREST ONLY PAYMENTS, WALL STREET JOURNAL NATIONAL PRIME INTEREST RATE FLOATING DAILY, MATURING 6/30/07.
DESCRIPTION OF COLLATERAL. Borrower acknowledges this Change in Terms Agreement is secured by the following collateral described in the security instruments listed within the Promissory Note: (A) inventory, chattel paper, accounts, equipment and general intangibles described in Commercial Security Agreements dated June 26, 2006. (B) deposit accounts described in an Assignment of Deposit Account dated June 26, 2006.
DESCRIPTION OF CHANGE IN TERMS. INCREASE EXISTING CREDIT LINE TO $4,000,000, ADDITIONAL COLLATERAL OF $1,000,000 LETTER OF CREDIT NO. 306S237082 - UNION BANK OF CALIFORNIA, NA DATED AUGUST 8, 2006, AND $1,000,000 LETTER OF CREDIT NO. 77-411896-4 --FIRST REPUBLIC BANK, DATED AUGUST 9, 2006. ALL OTHER TERMS REMAIN THE SAME.
PROMISE TO PAY. REMOTEMDX, INC. ("Borrower") promises to pay to Citizens
National Bank ("Lender"), or order, in lawful money of the United States of
America, the principal amount of Four Million & 00/100 Dollars ($4,000,000.00)
or so much as may be outstanding, together with interest on the unpaid
outstanding principal balance of each advance. Interest shall be calculated from
the date of each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding principal
plus all accrued unpaid interest on June 30, 2007. In addition, Borrower will
pay regular monthly payments of all accrued unpaid interest due as of each
payment date, beginning September 1, 2006, with all subsequent interest payments
to be due on the same day of each month after that. Unless otherwise agreed or
required by applicable law, payments will be applied first to any accrued unpaid
interest; and then to principal. Interest on this loan is computed on a 365/365
simple interest basis; that is, by applying the ratio of the annual interest
rate over the number of days in a year, multiplied by the outstanding principal
balance, multiplied by the actual number of days the principal balance is
outstanding. Borrower will pay Lender at Lender's address shown above or at such
other place as Lender may designate in writing.
VARIABLE INTEREST RATE. The interest rate on this loan is 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 "Index"). The Index is not necessarily
the lowest rate charged by Lender on its loans. If the Index becomes unavailable
during the term of this loan, Lender may designate a substitute index after
notifying Borrower. Lender will tell Borrower the current Index rate upon
Borrower's request. The interest rate change will not occur more often than each
day. Borrower understands that Lender may make loans based on other rates as
well. The Index currently is 8.250% per annum. The interest rate to be applied
to the unpaid principal balance during this loan will be at a rate equal to the
Index, resulting in an initial rate of 8.250% per annum. NOTICE: Under no
circumstances will the interest rate on this loan be more than the maximum rate
allowed by applicable law.
PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of
this Agreement, Borrower understands that Lender is entitled to a minimum
interest charge of $100.00. Other than Borrower's obligation to pay any minimum
interest charge, Borrower may pay without penalty all or a portion of the amount
owed earlier than it is due. Early payments will not, unless agreed to by Lender
in writing, relieve Borrower of Borrower's obligation to continue to make
payments of accrued unpaid interest. Rather, early payments will reduce the
principal balance due. Borrower agrees not to send Lender payments marked "paid
in full", "without recourse", or similar language. If Borrower sends such a
payment, Lender may accept it without losing any of Lender's rights under this
Agreement, and Borrower will remain obligated to pay any further amount owed to
Lender. All written communications concerning disputed amounts, including any
check or other payment instrument that indicates that the payment constitutes
"payment in full" of the amount owed or that is tendered with other conditions
or limitations or as full satisfaction of a disputed amount must be mailed or
delivered to: Citizens NationalBank,Main Office, 127 S Side Square, P.O. Box
1279, Macomb, IL 61455.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment or $25.00, whichever is less.
INTEREST AFTER DEFAULT. Upon default, including failure to pay upon final
maturity, the interest rate on this loan shall be increased to 15.000% per
annum. However, in no event will the interest rate exceed the maximum interest
rate limitations under applicable law.
DEFAULT. Each of the following shall constitute an Event of Default under this
Agreement:
Payment Default. Borrower fails to make any payment when due under the
Indebtedness.
Other Defaults. Borrower fails to comply with or to perform any other term,
obligation, covenant or condition contained in this Agreement or in any of the
Related Documents or to comply with or to perform any term, obligation, covenant
or condition contained in any other agreement between Lender and Borrower. False
Statements. Any warranty, representation or statement made or furnished to
Lender by Borrower or on Borrower's behalf under this Agreement or the Related
Documents is false or misleading in any material respect, either now or at the
time made or furnished or becomes false or misleading at any time thereafter.
Insolvency. The dissolution or termination of Borrower's existence as a going
business, the insolvency of Borrower, the appointment of a receiver for any part
of Borrower's property, any assignment for the benefit of creditors, any type of
creditor workout, or the commencement of any proceeding under any bankruptcy or
insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the Indebtedness. This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of
Loan No: 400949881
CHANGE IN TERMS AGREEMENT (Continued)
the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. Events Affecting Guarantor. Any of the preceding events occurs with respect to any guarantor, endorser, surety, or accommodation party of any of the Indebtedness or any guarantor, endorser, surety, or accommodation party dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness evidenced by this Note. In the event of a death, Lender, at its option, may, but shall not be required to, permit the guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default. Change In Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. Adverse Change. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired.
Insecurity. Lender in good faith believes itself insecure.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance under this Agreement and all accrued unpaid interest immediately due,
and then Borrower will pay that amount.
ATTORNEYS' FEES; EXPENSES. Lender may hire or pay someone else to help collect
this Agreement if Borrower does not pay. Borrower will pay Lender that amount.
This includes, subject to any limits under applicable law, Lender's attorneys'
fees and Lender's legal expenses, whether or not there is a lawsuit, including
attorneys' fees, expenses for bankruptcy proceedings (including efforts to
modify or vacate any automatic stay or injunction), and appeals. If not
prohibited by applicable law, Borrower also will pay any court costs, in
addition to all other sums provided by law.
JURY WAIVER. Lender and Borrower hereby waive the right to any jury trial in any
action, proceeding, or counterclaim brought by either Lender or Borrower against
the other.
GOVERNING LAW. This Agreement will be governed by federal law applicable to
Lender and, to the extent not preempted by federal law, the laws of the State of
Illinois without regard to its conflicts of law provisions. This Agreement has
been accepted by Lender in the State of Illinois.
CHOICE OF VENUE. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of McDonough County, State of Illinois. RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower's accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the debt against any and all such accounts.
COLLATERAL. Collateral securing other loans with Lender may also secure this
loan. To the extent collateral previously has been given to Lender by any person
which may secure this Indebtedness, whether directly or indirectly, it is
specifically agreed that, to the extent prohibited by law, all such collateral
consisting of household goods will not secure this Indebtedness. In addition, if
any collateral requires the giving of a right of rescission under Truth in
Lending for this Indebtedness, such collateral also will not secure this
Indebtedness unless and until all required notices of that right have been
given.
LINE OF CREDIT. This Agreement evidences a revolving line of credit. Advances
under this Agreement may be requested only in writing by Borrower or as provided
in this paragraph. All communications, instructions, or directions by telephone
or otherwise to Lender are to be directed to Lender's office shown above. The
following persons currently are authorized, except as provided in this
paragraph, to request advances and authorize payments under the line of credit
until Lender receives from Borrower, at Lender's address shown above, written
notice of revocation of their authority: DAVID DERRICK, Chief Executive Officer
of REMOTEMDX, INC.; CHAD OLSEN, Controller of REMOTEMDX, INC.; MICHAEL ACTON,
Chief Financial Officer of REMOTEMDX, INC.; and JAMES DALTON, President of
REMOTEMDX, INC. Draws to be taken on approved invoices presented to Citizens
National Bank from the following companies: CP Baker Securities, Inc, RemoteMDx,
Inc., Dynamic Source Manufacturing and Advanta Design Group, Inc. Lender may
advance funds under this note to (i) pay itself interest. (ii) make deposits
into the Account (as defined below) if it contains less than the required
compensating balance, and (iii) to pay itself fees and other amounts that may be
owed to it. Borrower agrees to be liable for all sums either: (A) advanced in
accordance with the instructions of an authorized person or (B) credited to any
of Borrower's accounts with Lender. The unpaid principal balance owing on this
Agreement at any time may be evidenced by endorsements on this Agreement or by
Lender's internal records, including daily computer print-outs. Lender will have
no obligation to advance funds under this Agreement if: (A) Borrower or any
guarantor is in default under the terms of this Agreement or any agreement that
Borrower or any guarantor has with Lender, including any agreement made in
connection with the signing of this Agreement; (B) Borrower or any guarantor
ceases doing business or is insolvent; (C) any guarantor seeks, claims or
otherwise attempts to limit, modify or revoke such guarantor's guarantee of this
Agreement or any other loan with Lender; (D) Borrower has applied funds provided
pursuant to this Agreement for purposes other than those authorized by Lender;
or (E) Lender in good faith believes itself insecure.
CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of
the original obligation or obligations, including all agreements evidenced or
securing the obligation(s), remain unchanged and in full force and effect.
Consent by Lender to this Agreement does not waive Lender's right to strict
performance of the obligation(s) as changed, nor obligate Lender to make any
future change in terms. Nothing in this Agreement will constitute a satisfaction
of the obligation(s). It is the intention of Lender to retain as liable parties
all makers and endorsers of the original obligation(s), including accommodation
parties, unless a party is expressly released by Lender in writing. Any maker or
endorser, including accommodation makers, will not be released by virtue of this
Agreement. If any person who signed the original obligation does not sign this
Agreement below, then all persons signing below acknowledge that this Agreement
is given conditionally, based on the representation to Lender that the
non-signing party consents to the changes and provisions of this Agreement or
otherwise will not be released by it. This waiver applies not only to any
initial extension, modification or release, but also to all such subsequent
actions.
LETTER OF CREDIT. In addition to the other collateral for this Note, Borrower
acknowledges and agrees that this Note is secured by a Letter of Credit issued
to Lender on its behalf by United States Trust Company, N.A. dated June 26,
2006. The Change in Terms Agreement is additionally secured by a Letter of
Credit issued to Lender on its behalf by Union Bank of California, N.A. dated
August 8, 2006, and Letter of Credit issued to Lender on its behalf by First
Republic Bank dated August 9, 2006. Lender shall return the letter(s) of credit
securing the loan after the applicable preference period following the occurence
of both of the following (i) payment in full of all amounts payable to Lender
under the Note and related documents and (ii) Borrower's acknowledgment that
Lender has no further obligation to loan amounts to Borrower pursuant to such
documents.
loan No: 400949881
CHANGE IN TERMS AGREEMENT {Continued}
ADDITIONAL REQUIREMENTS. Lender will require borrower to open their operating
deposit account and research and development account at lenders institution.
Lender will require quarterly profit and loss statements, business balance sheet
and annual tax returns from borrower. Lender will require an amount equal to 5%
of the line of credit as compensating balance in the operating account. Lock
Box: Lender will provide a PO Box specifically for borrower lock box purposes.
Lender will provide daily emails including scanned images of all checks being
deposited. In addition to and not in limitation of other rights of Lender to
payment, twenty-five (25) percent of all deposits received into the Account (as
defined in the Assignment of Deposit Account described above) will be applied to
the operating line of credit and seventy-five (75) percent will remain in the
borrowers operating deposit account.
SUCCESSORS AND ASSIGNS. Subject to any limitations stated in this Agreement on
transfer of Borrower's interest, this Agreement shall be binding upon and inure
to the benefit of the parties, their successors and assigns. If ownership of the
Collateral becomes vested in a person other than Borrower, Lender, without
notice to Borrower, may deal with Borrower's successors with reference to this
Agreement and the Indebtedness by way of forbearance or extension without
releasing Borrower from the obligations of this Agreement or liability under the
Indebtedness.
MISCELLANEOUS PROVISIONS. If any part of this Agreement cannot be enforced, this
fact will not affect the rest of the Agreement. Lender may delay or forgo
enforcing any of its rights or remedies under this Agreement without losing
them. Borrower and any other person who signs, guarantees or endorses this
Agreement, to the extent allowed by law, waive presentment, demand for payment,
and notice of dishonor. Upon any change in the terms of this Agreement, and
unless otherwise expressly stated in writing, no party who signs this Agreement,
whether as maker, guarantor, accommodation maker or endorser, shall be released
from liability. All such parties agree that Lender may renew or extend
(repeatedly and for any length of time) this loan or release any party or
guarantor or collateral; or impair, fail to realize upon or perfect Lender's
security interest in the collateral; and take any other action deemed necessary
by Lender without the consent of or notice to anyone. All such parties also
agree that Lender may modify this loan without the consent of or notice to
anyone other than the party with whom the modification is made. The obligations
under this Agreement are joint and several.
PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS AGREEMENT, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE AGREEMENT.
BORROWER:
REMOTEMDX, INC.
Executive
Officer
of
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CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, David G. Derrick, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of RemoteMDx, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 14, 2006 /s/ David G. Derrick
--------------------
David G. Derrick
Chief Executive Officer
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CERTIFICATION OF CFO
I, Michael G. Acton, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of RemoteMDx, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 14, 2006 /s/ Michael G. Acton
--------------------
Michael G. Acton
Chief Financial Officer
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CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of RemoteMDx, Inc. on Form 10-QSB for the period ended June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), David G. Derrick, Chief Executive Officer and Michael G. Acton, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/ David G. Derrick
---------------------
David G. Derrick
Chief Executive Officer
RemoteMDx, Inc.
/s/ Michael G. Acton
--------------------
Michael G. Acton
Chief Financial Officer
Dated: August 14, 2006
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