Citron Research comments on RemoteMDX (OTCBB:RMDX)

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We are not going to beat around the bush on this one.  It is the opinion of Citron Research that RemoteMDX is nothing more than a brazen stock promotion.  There are too many red flags to be uncovered in one report, so Citron will do its best to deliver a “Readers Digest” version of a modern day promotion.

RemoteMDX  is a Utah-based remote offender monitoring company.  To understand RemoteMDX, you have to understand Biomune.  RemoteMDX was once a division of Biomune.  Most of the senior management at RMDX once came from Biomune, including CEO and Chairman David Derrick.

http://www.remotemdx.com/about/management-team.html

Biomune was a small cap public company that at one time claimed they had a unique technology that gave people the immune system of a cow.  After a brief run up, the company was exposed in Barron’s for what it was.

Question Of Immunity (PDF)

Biomume was then the subject of a fraud lawsuit that made the following 3 claims among others.

“action arises from a fraud of massive proportions,” generally consisting of a “scheme to obtain Biomune’s listing on NASDAQ, manipulate Biomune’s finances and inflate the price of Biomune stock in order to dump thousands of Biommune shares on the market and earn million[s] of dollars in profits.”

The Plaintiff alleges that a “fraud network,” consisting of relatives and friends of Solomon and Derrick, effectuated a “cleanup” of Biomune’s balance sheet.

Plaintiff further alleges that during 1993 and 1994, Defendants made false and misleading statements regarding the financial stability and commercial success of Biommune.
http://ca10.washburnlaw.edu/cases/1998/09/97-4074.htm

After a quick 1 for 5 split, the company quickly got delisted from Nasdaq leaving shareholders without immunity from losing their investments.

Enter RemoteMDX.  Before we even go into the business or lack thereof of RemoteMDX let us first look at the capital structure.

Share Fully Diluted: 123 million Up over 50% in the last year
Market cap at recent stock price  $479 million
Cash $ 2 million Down from $4.8 million as of March qtr end
Working capital deficit $2.9 million 
Tangible equity $2.9 million  Down from $4.5 million as of March qtr end
Revenues – $3.2 million most recent quarter * Appx 80% below guidance from Sept 2006
* 79% of SecureAlert’s sales during the June quarter were booked to Quest Guard. Quest Guard maintains its headquarters in a fireplace supply store. 
Profit/loss from operations ($5.04 million loss) most recent quarter
Profit/loss 9 months year to date ($20.1 million )
  (Compare to $21.7 loss prior year period)

The only thing this company has earned is a “going concern” warning from its auditors.

SG&A, which includes the direct expense of sales, exceeded net revenues by over 50% during the last quarter.   This is not a promising statistic on the path to earning a profit.

Comparable valuation points

Isecuretrack (OTCBB:  ISEC, 10MM mkt cap, $2.2MM revenues last quarter)

Pro Tech (a subsidiary of Dmatek (LSE: DTK, mkt cap ~$50MM, sales ~$20MM)
Pro Tech was acquired in January for $12.5 million

Ok, lets give RemoteMDX the benefit of the doubt and and value it 100% higher than these comparables.  At a generous $25 million enterprise value, the stock would be worth 20c.

Managements Unfounded Bold Claims.

CEO Derrick is not shy about making claims that he cannot live up to (as shown in the Barrons Article)

In a press release dated 9/19/06:

“By the end of 2006, it is anticipated that 20,000 parolees will be monitored by SecureAlert, which represents approximately $58 million in annualized revenues.”

http://www.remotemdx.com/newsroom/pressrelease91906.asp

Stated in letter from Chairman in Jan 07 that they are manufacturing 400 units/day six days a week with 38,000 units in the sales pipeline.  “…as of December 12th have deployed over 10,000 units to customers with that number growing at the rate of 500 per day, 5 days per week…”

3rd quarter 2007 revenue was $3.1 million.  Boy was he off the mark.

Interesting to note that Biomune was not the only time Derrick was sued for stock fraud.  He was also sued for Bioxide Corp.  With this company, he was going to sterilize airplane cabins.

http://www.highbeam.com/doc/1G1-120509643.html

Questionable Sales

As little sales that are done by RemoteMDX, Citron still questions the quality and validity of their largest customers.

Security Investment Holdings, LLC accounted for 48% of their sales in the 3 months ending Dec 31, 2006.  Hmmm.  They didn’t seem to mention that Security Investment was not registered as a corporation until Dec 12.

https://secure.utah.gov/bes/action/searchresults

For that matter, it was registered to a man named C Eugene Gronning.  Mr. Gronning happens to be a shareholder of RemoteMDX (undisclosed of course) and Mr. Gronning owns a public “shell company” in which his bio never states anything about Security Investment Holdings.

Were these sham transactions?

Most recently, Quest Guard has become the largest customer accounting for 79% of the Secure Alert sales.  No other customer was even 10%.  Quest Guard is a local Utah based company who does not seem to have much of a detailed history.  Because they serve as a distributor and not an end user, we will never know if this transaction is “real”.  The only thing we know about Quest Guard is that they share offices with a fireplace distributor.

Financial Health of  RemoteMDX

The only thing keeping the EPS loss to a single digit number is the ballooning share count, up over 50% from the comparables a year ago.  Lest there be any worry of the supply of shares running out anytime soon, the company has an overhang of warrants and convertible commitments totaling nearly another 20 million shares.

It has a $5,000,000 related party line of credit bearing interest at a whopping 11%.  Then 6 million restricted shares were sold to an “investor at less than the current fair market value of the common stock” in order to “induce the investor to enlarge their commitment to the Company, and to further develop a concentrated active investor base”.  Sounds like stock promotion to us.  The price of that sale was $1.30 per share.  The counterparty ADP Management is owned by officers of the company. 

Offshore Shareholders.

It is the experience of Citron Research that whenever we see unknown entities in the Bahamas with stock, it is a red flag that should never go unnoticed.

Coval Investment of Nassau – an entity unknown in any other public filing, appearing within the last 6 weeks with a stake going from 8 million to an eye-popping 12.7 m shares, and then down to just 682,465 shares.   What could possibly explain this transaction?  Citron observes that it would be very convenient for Coval to have transferred 12.1 million shares to nominees now, so subsequent transactions won’t trigger filings.  Not just any nominees, but “IIU Nominees LTD”, as we see in a recent filing.

And yet the company was moved to issue another 2.71 million shares via a blank check S-8 in September
 

Conclusion

At the risk of being overly harsh or exaggerating or at least guilty of using a cliché, Citron will state that we do not believe RemoteMDX stock is worth the paper they are printed on.  The related party transactions along with management with a history of dubious stock deals surrounded by offshore shareholders create an investing environment that all investors/shareholders should be conscious of. 

Cautious Investing To All