3(i)(14) | Articles of Amendment to the Articles of Incorporation of SecureAlert, Inc., filed April 11, 2013 (previously filed as Exhibit on Form 10-Q filed May 15, 2013). | | 3(ii) | | Bylaws (incorporated by reference to our Registration Statement on Form 10-SB, effective December 1, 1997). | 3(iii) | | 3(iii) | Amended and Restated Bylaws (previously filed in February 2011 as an Exhibit to the Form 10-Q for the three months ended December 31, 2010). |
4.01 | | 2006 Equity Incentive Award Plan (previously filed in August 2006 as an Exhibit to the Form 10-QSB10- QSB for the nine months ended June 30, 2006). | 10.01 | | Distribution and Separation Agreement (incorporated by reference to our Registration Statement and Amendments thereto on Form 10-SB, effective December 1, 1997). | 10.024.02 | | 1997 Stock2012 Equity Incentive Award Plan of the Company, (incorporated by reference to our Registration Statement and Amendments thereto on Form 10-SB, effective December 1, 1997). | 10.03 | | 1997 Transition Plan (incorporated by reference to our 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 our Registration Statement and Amendments thereto on Form 10-SB, effective December 1, 1997). | 10.05 | | Loan Agreement (as amended) dated June 2001 between ADP Management and the Company (incorporated by reference to our annual report on Form 10-KSB for the fiscal year ended September 30, 2001). | 10.06 | | 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 our quarterly report on Form 10-QSB for the quarter ended December 31, 2001). | 10.07 | | Agreement with ADP Management, Derrick and Dalton (April 2003) (previously filed as Exhibit on Form 10-QSB for the six months ended March 31, 2003)to Definitive Proxy Statement, filed October 25, 2011). | 10.08 | | Security10.1 | Patent Assignment Agreement between Citizen National Bank and the Company (previously filed on Form 8-K in July 2006). | 10.09 | | Promissory Note between Citizen National Bank and the Company (previously filed on Form 8-K in July 2006). | 10.10 | | Common Stock Purchase Agreement dated as of August 4, 2006 (previously filed as an exhibit to our current report on Form 8-K filed August 7, 2006 and incorporated herein by reference). | 10.11 | | Change in Terms Agreement between Citizen National Bank and the Company (previously filed as Exhibit on Form 10-KSB for the fiscal year ended September 30, 2006) | 10.12 | | Securities Purchase Agreement between the Company and VATAS Holding GmbH, a German limited liability company (previously filed on Form 8-K in November 2006). | 10.13 | | Common Stock Purchase Warrant between the Company and VATAS Holding GmbH dated November 9, 2006 (previously filed as Exhibit on Form 10-QSB for the three months ended December 31, 2006, filed in February 2007). | 10.14 | | Settlement Agreement and Mutual Release between the Company and Michael Sibbett and HGR Enterprises,Futuristic Medical Devices, LLC, dated as of February 1,September 14, 2007 (previously filed as Exhibit on Form 10-QSB for the three months ended December 31, 2006, filed in February 2007). | 10.15 | | Distributor Sales, Service and License Agreement between the Company and Seguridad Satelital Vehicular S.A. de C.V., dated as of February 5, 2007 (previously filed as Exhibit on Form 10-QSB for the three months ended December 31, 2006, filed in February 2007). | 10.16 | | Distributor Agreement between the Company and QuestGuard, dated as May 31, 2007. Portions of this exhibit were redacted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission (previously filed as Exhibit on Form 10-QSB for the nine months ended June 30, 2007, filed in August 2007). | 10.17 | | Stock Purchase Agreement between the Company and Midwest Monitoring & Surveillance, Inc., dated effective December 1, 2007 (previously filed as Exhibit on Form 10-KSB for the fiscal year ended September 30, 2007, filed in January 2008). | 10.18 | | Stock Purchase Agreement between the Company and Court Programs, Inc., Court Programs of Florida Inc., and Court Programs of Northern Florida, Inc., dated effective December 1, 2007 (previously filed as Exhibit on Form 10-KSB for the fiscal year ended September 30, 2007, filed in January 2008). |
10.19 | | Sub-Sublease Agreement between the Company and Cadence Design Systems, Inc., a Delaware corporation, dated March 10, 2005 (previously(previously filed as Exhibit on Form 10-KSB/A for the fiscal year ended September 30, 2007, filed in June 2008). | 10.20 | | 10.2 | Patent Assignment Agreement between Futuristic Medical Devices, LLC, dated September 14, 2007 (previously(previously filed as Exhibit on Form 10-KSB/A for the fiscal year ended September 30, 2007, filed in June 2008). | 10.21 | | 10.3 | Patent Assignment Agreement between Futuristic Medical Devices, LLC, dated September 14, 2007 (previously(previously filed as Exhibit on Form 10-KSB/A for the fiscal year ended September 30, 2007, filed in June 2008). | 10.22 | | 10.4 | Patent Assignment Agreement between Futuristic Medical Devices, LLC, dated September 14,December 20, 2007 (previously(previously filed as Exhibit on Form 10-KSB/A for the fiscal year ended September 30, 2007, filed in June 2008). |
10.2310.5 | | Patent Assignment Agreement between Futuristic Medical Devices, LLC, dated December 20, 2007 (previously filed as Exhibit on Form 10-KSB/A for the fiscal year ended September 30, 2007, filed in June 2008). | 10.24 | | Stock Purchase Agreement (sale of Volu-Sol Reagents Corporation shares to Futuristic Medical, LLC), dated January 15, 2008, including voting agreement (previously filed as Exhibit on Form 10-KSB/A for the fiscal year ended September 30, 2007, filed in June 2008). | 10.25 | | Distribution and License Agreement between euromicron AG, a German corporation, and the Company, dated May 28, 2009 (previously filed as Exhibit on Form 10-Q for the nine months ended June 30, 2009, filed in August 2009). | 10.26 | | 10.6 | Agreement for Monitoring & Associated Services among I.C.S. of the Bahamas Co., Ltd., SecureAlert, Inc., International Surveillance Services Corp and The Ministry of National Security, dated November 19, 2010 (previously(previously filed onwith Form 8-K in November 2010). | 10.27 | | 10.7 | Agreement and Royalty Agreement between Borinquen Container Corporation and SecureAlert, effective July 1, 2011 (previously filed with Form 8-K in August 2011). | | | 10.8 | Addendum to the Royalty Agreement between Borinquen Container Corporation and SecureAlert, effective July 1, 2011 (previously filed as Exhibit on Form 10-Q for the six months ended March 31, 2012, filed in May 2012). | | | 10.9 | Stock Purchase Agreement between Gary Shelton, Larry and Sue Gardner and SecureAlert, effective October 1, 2012 (previously filed on Form 8-K in December 2012). | | | 10.10 | Loan and Security Agreement between Sapinda Asia Limited and SecureAlert, effective December 3, 2012 (previously filed on Form 8-K in December 2012). | | | 10.11 | Stock Purchase Agreement between David Rothbart and SecureAlert, effective February 8, 2013 (previously filed on Form 10-Q in February 2012). | | | 10.12 | Settlement and Royalty and Share Buy Back among Borinquen Container Corporation, Sapinda Asia Limited, and SecureAlert, effective February 4, 2013 (previously filed on Form 8-K in February 2013). | | | 10.13 | Acknowledgement and Agreement between Sapinda Asia Limited, and SecureAlert, dated August 2011)13, 2013 (previously filed on Form 10-Q in August 2013). | | | 10.14 | Notice of Conversion from Sapinda Asia Limited, dated September 24, 2013 (filed herewith). |
10.15 | Facility Agreement between Tetra House Pte. Ltd. and SecureAlert, Inc., dated January 3, 2014 (previously filed on Form 8-K in January 2014). | | | 14.1 | Code of Ethics (filed herewith). | 31(i) | | 21 | Subsidiaries of the Registrant (filed herewith). | | | 31(i) | Certification of Chief Executive Officer under Section 302 of Sarbanes-Oxley Act of 2002.2002 (filed herewith). | | | 31(ii) | | Certification of Chief Financial Officer under Section 302 of Sarbanes-Oxley Act of 2002.2002 (filed herewith). | | | 32 | | Certifications under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (filed herewith). | 101.ins | | XBRL Instance Document99.1 | Insider Trading Policy Adopted, dated April 16, 2013 (filed herewith). | 101.sch | | XBRL Taxonomy Extension Schema Document | 101.cal99.2 | | XBRL Taxonomy Extension Calculation Linkbase Document | 101.def | | XBRL Taxonomy Extension Definition Linkbase Document | 101.lab | | XBRL Taxonomy Extension Label Linkbase Document | 101.pre | | XBRL Taxonomy Extension Presentation Linkbase DocumentEmployment agreement between SecureAlert, Inc. and Chief Financial Officer, dated November 14, 2013 (filed herewith). |
101.INS* | XBRL INSTANCE DOCUMENT | | | 101.SCH* | XBRL TAXONOMY EXTENSION SCHEMA | | | 101.CAL* | XBRL TAXONOMY EXTENSION CALCULATION LINKBASE | | | 101.DEF* | XBRL TAXONOMY EXTENSION DEFINITION LINKBASE | | | 101.LAB* | XBRL TAXONOMY EXTENSION LABEL LINKBASE | | | 101.PRE* | XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| SecureAlert, Inc. | | | | | | By: /s/ John L. Hastings, III
| | John L. Hastings, III, Chief Executive Officer | | (Principal Executive Officer) | SecureAlert, Inc.
By: /s/Guy Dubois Guy Dubois, Member Executive Committee (Acting Principal Executive Officer)
Date: January 14, 2014 Date: December 29, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature | | Title | | | Signature | | Title | | Date | /s/ John L. Hastings, III
John L. Hastings, III
| | Director, Chief Executive Officer and President (Principal Executive Officer)
| | December 29, 2011
| | | | | | /s/ Chad D. Olsen
Chad D. Olsen /s/ Guy Dubois
| | Chief Financial Officer and (Principal Financial Officer and Principal Accounting Officer) Director, Member of Executive Committee | | December 29, 2011 January 14, 2014 | /s/ David S. Boone
David S. Boone Guy Dubois | | Director (Acting Principal Executive Officer) | | December 29, 2011
| | | | | | /s/ David P. Hanlon
David P. Hanlon /s/ Chad D. Olsen
| | Chief Financial Officer and (Principal Financial | | January 14, 2014 | Chad D. Olsen | | Officer and Principal Accounting Officer) | | | | | | | | Director /s/ David S. Boone
| | December 29, 2011 Director, Member of Executive Committee | | January 14, 2014 | David S. Boone | | | | | | | | | | /s/ Rene Klinkhammer
Rene Klinkhammer /s/ Winfried Kunz
| | Director | | January 14, 2014 | Winfried Kunz | | | | | | | | | | Director /s/ Rene Klinkhammer
| | December 29, 2011 Director | | January 14, 2014 | Rene Klinkhammer | | | | | | | | | | /s/ Winfried Kunz
Winfried Kunz /s/ Dan L. Mabey
| | Director | | January 14, 2014 | Dan L. Mabey | | | | | | | | | | Director /s/ George F. Schmitt
| | December 29, 2011
| /s/ Dan Mabey
Dan Mabey Director | | Director January 14, 2014 | George F. Schmitt | | December 29, 2011
| /s/ Antonio J. Rodriquez
Antonio J. Rodriquez
| | Director
| | December 29, 2011
| /s/ Larry G. Schafran
Larry G. Schafran
| | Director
| | December 29, 2011
| /s/ George F. Schmitt
George F. Schmitt
| | Director
| | December 29, 2011
|
SecureAlert, Inc. Consolidated Financial Statements September 30, 20112013 and 20102012
Index to Consolidated Financial Statements
| | Page | | | | | Report of Independent Registered Public Accounting FirmEide Bailly | 4643 | | | | | Report of Hansen, Barnett & Maxwell, P.C. | 44 | | | | | Consolidated Balance Sheets as of September 30, 20112013 and 20102012 | 4745 | | | | | Consolidated Statements of Operations for the fiscal years ended September 30, 20112013 and 20102012 | 4846 | | | | | Consolidated Statements of Stockholders’ Equity for the fiscal years ended September 30, 20102012 and 20112013 | 4947 | | | | | Consolidated Statements of Cash Flows for the fiscal years ended September 30, 20112013 and 20102012 | 5149 | | | | | Notes to Consolidated Financial Statements | 5351 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and StockholdersShareholders of SecureAlert, Inc.
We have audited the accompanying consolidated balance sheetssheet of SecureAlert, Inc. and Subsidiaries (collectively the Company) as of September 30, 2011 and 20102013 and the related consolidated statementsstatement of operations, stockholders’ equity, and cash flows for the yearsyear then ended. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.audit.
We conducted our auditsaudit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our auditsaudit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidences supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SecureAlert, Inc. as of September 30, 2013 and the consolidated results of its operations, and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
Eide Bailly LLP
Salt Lake City, Utah January 14, 2014 5 Triad Center, Ste. 750 | Salt Lake City, UT 84180-1128 | T 801.532.2200 | F 801.532.7944 | EOE
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of SecureAlert, Inc. We have audited the accompanying consolidated balance sheets of SecureAlert, Inc. and Subsidiaries (collectively the Company) as of September 30, 2012 and the related consolidated statement of operations, stockholders’ equity, and cash flows for the year then ended. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidenceevidences supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statementsstatement presentation. We believe that our auditsaudit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SecureAlert, Inc. as of September 30, 2011 and 2010,2012, and the consolidated results of its operations, and its cash flows for the yearsyear then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements (not presented herein), the Company has incurred losses, negative cash flows from operating activities, notes payable in default and has an accumulated deficit. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are also described in Note 1.1 (not presented herein). The consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.
| HANSEN, BARNETT & MAXWELL, P.C. | HANSEN, BARNETT & MAXWELL, P.C.Salt Lake City, Utah December 27, 2011 January 10, 2013
SECUREALERT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 20112013 AND 20102012 Assets | | 2013 | | | 2012 | | Current assets: | | | | | | | Cash | | $ | 3,382,428 | | | $ | 458,029 | | Accounts receivable, net of allowance for doubtful accounts of $3,968,000 and $772,000, respectively | | | 3,721,964 | | | | 2,411,701 | | Note receivable, current portion | | | 176,205 | | | | 74,801 | | Prepaid expenses and other | | | 1,783,805 | | | | 1,760,579 | | Inventory, net of reserves of $148,043 and $192,000, respectively | | | 467,101 | | | | 630,566 | | Current assets from discontinued operations | | | - | | | | 989,905 | | Total current assets | | | 9,531,503 | | | | 6,325,581 | | Property and equipment, net of accumulated depreciation of $2,092,222 and $1,879,540, respectively | | | 318,201 | | | | 504,491 | | Monitoring equipment, net of accumulated amortization of $1,183,346 and $669,929, respectively | | | 1,236,696 | | | | 3,171,947 | | Note receivable, net of current portion | | | 28,499 | | | | 112,492 | | Intangible assets, net of accumulated amortization of $1,256,647 and $327,540, respectively | | | 15,413,920 | | | | 15,494,598 | | Other assets | | | 170,172 | | | | 65,597 | | Non-current assets from discontinued operations, net of accumulated depreciation of $0 and $2,837,498, respectively | | | - | | | | 859,019 | | Total assets | | $ | 26,698,991 | | | $ | 26,533,725 | | | | | | | | | | | Liabilities and Stockholders’ Equity | | | | | | | | | Current liabilities: | | | | | | | | | Accounts payable | | | 348,074 | | | | 1,830,075 | | Accrued liabilities | | | 2,180,791 | | | | 2,439,451 | | Dividends payable | | | 9,427 | | | | 630,528 | | Deferred revenue | | | 8,674 | | | | 354,570 | | Current portion of long-term related-party debt | | | 60,000 | | | | 12,654,701 | | Current portion of long-term debt | | | 88,095 | | | | 339,151 | | Current liabilities from discontinued operations | | | - | | | | 1,677,450 | | Total current liabilities | | | 2,695,061 | | | | 19,925,926 | | Long-term related-party debt, net of current portion | | | - | | | | 1,730,712 | | Long-term debt, net of current portion | | | 40,588 | | | | 85,680 | | Long-term liabilities from discontinued operations | | | - | | | | 364,270 | | Total liabilities | | | 2,735,649 | | | | 22,106,588 | | | | | | | | | | | Stockholders’ equity: | | | | | | | | | Preferred stock: | | | | | | | | | Series D 8% dividend, convertible, voting, $0.0001 par value: 85,000 shares designated; 468 and 48,763 shares outstanding, respectively (aggregate liquidation preference of $467,507) | | | 1 | | | | 5 | | Common stock, $0.0001 par value: 15,000,000 shares authorized; 9,805,503 and 3,096,641 shares outstanding, respectively | | | 980 | | | | 310 | | Additional paid-in capital | | | 290,391,698 | | | | 252,940,448 | | Accumulated deficit | | | (266,429,337 | ) | | | (248,513,626 | ) | Total equity | | | 23,963,342 | | | | 4,427,137 | | Total liabilities and stockholders’ equity | | $ | 26,698,991 | | | $ | 26,533,725 | |
| | | | | | | Assets | | 2011 | | | 2010 | | Current assets: | | | | | | | Cash | | $ | 949,749 | | | $ | 1,126,232 | | Accounts receivable, net of allowance for doubtful accounts of $996,122 and $366,800, respectively | | | 4,150,427 | | | | 1,339,513 | | Notes receivable, current portion | | | 90,000 | | | | - | | Prepaid expenses and other | | | 1,082,581 | | | | 791,986 | | Inventory, net of reserves of $127,016 and $47,118, respectively | | | 579,779 | | | | 345,529 | | Total current assets | | | 6,852,536 | | | | 3,603,260 | | Property and equipment, net of accumulated depreciation of $2,530,591 and $2,235,683, respectively | | | 1,086,633 | | | | 1,485,322 | | Monitoring equipment, net of accumulated depreciation of $3,608,388 and $2,788,309, respectively | | | 3,461,985 | | | | 1,683,356 | | Notes receivable, net of current portion | | | 125,000 | | | | - | | Goodwill | | | 5,889,395 | | | | 3,910,063 | | Intangible assets, net of amortization of $485,393 and $274,159, respectively | | | 5,191,191 | | | | 398,842 | | Other assets | | | 78,509 | | | | 107,618 | | Total assets | | $ | 22,685,249 | | | $ | 11,188,461 | | | | | | | | | | | | | | | | | | | | Liabilities and Stockholders’ Equity | | | | | | | | | Current liabilities: | | | | | | | | | Bank line of credit | | $ | - | | | $ | 1,000,000 | | Accounts payable (including $505,977 due to a related party, see Note 6) | | | 2,840,845 | | | | 2,059,896 | | Accrued liabilities | | | 2,713,230 | | | | 1,904,295 | | Dividends payable | | | 541,797 | | | | 555,110 | | Deferred revenue | | | 162,331 | | | | 80,890 | | SecureAlert Monitoring Series A Preferred stock redemption obligation | | | - | | | | 114,032 | | Current portion of long-term related-party debt | | | 754,896 | | | | 150,000 | | Current portion of long-term debt | | | 1,041,392 | | | | 1,133,969 | | Total current liabilities | | | 8,054,491 | | | | 6,998,192 | | Long-term related-party debt, net of current portion | | | 116,852 | | | | - | | Long-term debt, net of current portion | | | 898,598 | | | | 1,060,418 | | Total liabilities | | | 9,069,941 | | | | 8,058,610 | | | | | | | | | | | Stockholders’ equity: | | | | | | | | | Preferred stock: | | | | | | | | | Series D 8% dividend, convertible, voting, $0.0001 par value: 85,000 shares designated; 44,845 and 35,407 shares outstanding, respectively (aggregate liquidation preference of $26,517,086) | | | 5 | | | | 4 | | Common stock, $0.0001 par value: 1,250,000,000 shares authorized; 503,623,428 and 280,023,255 shares outstanding, respectively | | | 50,362 | | | | 28,002 | | Additional paid-in capital | | | 242,620,460 | | | | 222,501,863 | | Subscription receivable | | | - | | | | (50,000 | ) | Accumulated deficit | | | (229,055,519 | ) | | | (219,164,945 | ) | Total SecureAlert, Inc. stockholders’ equity | | | 13,615,308 | | | | 3,314,924 | | Non-controlling interest | | | - | | | | (185,073 | ) | Total equity | | | 13,615,308 | | | | 3,129,851 | | Total liabilities and stockholders’ equity | | $ | 22,685,249 | | | $ | 11,188,461 | |
See accompanying notes to consolidated financial statements.
SECUREALERT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 20112013 AND 20102012 | | 2011 | | | 2010 | | Revenues: | | | | | | | Products | | $ | 1,551,511 | | | $ | 371,214 | | Monitoring and other related services | | | 16,410,292 | | | | 12,079,757 | | Total revenues | | | 17,961,803 | | | | 12,450,971 | | | | | | | | | | | Cost of revenues: | | | | | | | | | Products | | | 651,113 | | | | 45,131 | | Monitoring and other related services | | | 8,914,846 | | | | 6,933,843 | | Impairment of monitoring equipment and parts (Note2) | | | 464,295 | | | | 590,801 | | Total cost of revenues | | | 10,030,254 | | | | 7,569,775 | | | | | | | | | | | Gross profit | | | 7,931,549 | | | | 4,881,196 | | | | | | | | | | | Operating expenses: | | | | | | | | | Selling, general and administrative (including $1,530,646 and $1,269,427, respectively, | | | | | | | | | of compensation expense paid in stock, stock options / warrants or as a result of | | | | | | | | | amortization of stock-based compensation) | | | 15,652,303 | | | | 12,126,413 | | Research and development | | | 1,453,994 | | | | 1,483,385 | | Settlement expense | | | 276,712 | | | | 1,150,000 | | Impairment of goodwill (Note 2) | | | - | | | | 204,735 | | | | | | | | | | | Loss from operations | | | (9,451,460 | ) | | | (10,083,337 | ) | | | | | | | | | | Other income (expense): | | | | | | | | | Loss on disposal of equipment | | | (300,338 | ) | | | (41,597 | ) | Redemption of SecureAlert Monitoring Series A Preferred | | | 16,683 | | | | (19,095 | ) | Interest income | | | 13,072 | | | | 23,139 | | Interest expense (including $42,351 and $3,087,744, respectively, paid in stock, stock options / warrants) | | | (712,840 | ) | | | (4,146,459 | ) | Derivative valuation gain (Note 10) | | | - | | | | 200,534 | | Other income, net | | | 576,059 | | | | 147,206 | | Net loss | | | (9,858,824 | ) | | | (13,919,609 | ) | Net loss (income) attributable to non-controlling interest | | | (31,750 | ) | | | 135,567 | | Net loss attributable to SecureAlert, Inc. | | | (9,890,574 | ) | | | (13,784,042 | ) | Dividends on Series D Preferred stock | | | (2,029,996 | ) | | | (1,494,481 | ) | Net loss attributable to SecureAlert, Inc. common stockholders | | $ | (11,920,570 | ) | | $ | (15,278,523 | ) | Net loss per common share, basic and diluted | | $ | (0.03 | ) | | $ | (0.07 | ) | Weighted average common shares outstanding, basic and diluted | | | 380,659,000 | | | | 227,321,000 | | | | | | | | | | |
| | | | | | | | | 2013 | | | 2012 | | Revenues: | | | | | | | Products | | $ | 612,437 | | | $ | 1,595,252 | | Monitoring and other related services | | | 15,028,625 | | | | 11,519,727 | | Total revenues | | | 15,641,062 | | | | 13,114,979 | | | | | | | | | | | Cost of revenues: | | | | | | | | | Products | | | 262,022 | | | | 1,353,953 | | Monitoring and other related services | | | 7,554,870 | | | | 5,951,649 | | Impairment of monitoring equipment and parts | | | 213,276 | | | | 1,648,762 | | Total cost of revenues | | | 8,030,168 | | | | 8,954,364 | | | | | | | | | | | Gross profit | | | 7,610,894 | | | | 4,160,615 | | | | | | | | | | | Operating expenses: | | | | | | | | | Selling, general and administrative (including non-cash expenses of $430,618 and $3,576,194, respectively, of compensation expense paid in stock, stock options and warrants or as a result of amortization of stock-based compensation) | | | 7,679,124 | | | | 12,623,114 | | Impairment of goodwill | | | - | | | | 5,514,395 | | Settlement expense | | | 360,000 | | | | 403,678 | | Research and development | | | 987,934 | | | | 1,248,654 | | | | | | | | | | | Loss from continuing operations | | | (1,416,164 | ) | | | (15,629,226 | ) | | | | | | | | | | Other income (expense): | | | | | | | | | Currency exchange rate loss | | | (145,612 | ) | | | (28,358 | ) | Loss on disposal of equipment | | | (2,949 | ) | | | (5,374 | ) | Interest expense (including non-cash expenses of $15,954,355 and $963,233, respectively, paid in stock, stock options and warrants, or amortization of debt discount) | | | (17,048,519 | ) | | | (1,431,416 | ) | Other income (expense), net | | | 279,174 | | | | (55,914 | ) | Net loss from continuing operations | | | (18,334,070 | ) | | | (17,150,288 | ) | Gain on disposal of discontinued operations | | | 424,819 | | | | - | | Net loss from discontinued operations | | | (6,460 | ) | | | (307,819 | ) | Net loss | | | (17,915,711 | ) | | | (17,458,107 | ) | Dividends on Series D Preferred stock | | | (1,042,897 | ) | | | (2,480,298 | ) | Net loss attributable to SecureAlert, Inc. common stockholders | | $ | (18,958,608 | ) | | $ | (19,938,405 | ) | Net loss per common share, basic and diluted from continuing operations | | $ | (3.79 | ) | | $ | (6.27 | ) | Net loss per common share, basic and diluted from discontinued operations | | $ | 0.09 | | | $ | (0.11 | ) | Weighted average common shares outstanding, basic and diluted | | | 4,832,000 | | | | 2,735,170 | |
See accompanying notes to consolidated financial statements.
SECUREALERT, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 20102012 AND 20112013 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Preferred Stock | | | Common Stock | | | Additional | | | | | | | | | | | | | | | | | | | | | | | | | Preferred | | | | | | | | | | | | Series D | | | | | | | | | | | | Paid-in | | | Accumulated | | | | | | | Preferred Stock | | | Common Stock | | | Additional | | | Stock | | | | | | Non- | | | | | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Deficit | | | Total | | | | Series D | | | | | | | | | Paid-in | | | Subscription | | | Accumulated | | | Controlling | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Receivable | | | Deficit | | | Interest | | | Total | | | Balance as of October 1, 2009 | | | - | | | $ | - | | | | 210,365,988 | | | $ | 21,037 | | | $ | 193,371,638 | | | $ | - | | | $ | (205,380,903 | ) | | $ | (384,593 | ) | | $ | (12,372,821 | ) | | Balance as of October 1, 2011 | | | | 44,845 | | | $ | 5 | | | | 2,518,117 | | | $ | 252 | | | $ | 244,670,570 | | | $ | (231,055,519 | ) | | $ | 13,615,308 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of common stock for: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Conversion of Series D Preferred stock | | | (9,534 | ) | | | (1 | ) | | | 57,204,000 | | | | 5,720 | | | | (5,719 | ) | | | - | | | | - | | | | - | | | | - | | | | (90 | ) | | | - | | | | 2,700 | | | | - | | | | - | | | | - | | | | - | | Royalty payment | | | | - | | | | - | | | | 71,969 | | | | 7 | | | | 819,965 | | | | - | | | | 819,972 | | Services | | | - | | | | - | | | | 250,000 | | | | 25 | | | | 27,475 | | | | - | | | | - | | | | - | | | | 27,500 | | | | - | | | | - | | | | 4,315 | | | | - | | | | 40,000 | | | | - | | | | 40,000 | | Acquisition of subsidiaries | | | - | | | | - | | | | 150,000 | | | | 15 | | | | 17,985 | | | | - | | | | - | | | | 335,087 | | | | 353,087 | | | Dividends from SMI Series A Preferred stock | | | - | | | | - | | | | 5,434,143 | | | | 543 | | | | 642,023 | | | | - | | | | - | | | | - | | | | 642,566 | | | Debt | | | | - | | | | - | | | | 8,449 | | | | 1 | | | | 118,279 | | | | - | | | | 118,280 | | Dividends from Series D Preferred stock | | | - | | | | - | | | | 7,619,124 | | | | 762 | | | | 938,609 | | | | - | | | | - | | | | - | | | | 939,371 | | | | - | | | | - | | | | 210,689 | | | | 21 | | | | 2,391,547 | | | | - | | | | 2,391,568 | | Cancellation of shares | | | - | | | | - | | | | (1,000,000 | ) | | | (100 | ) | | | 100 | | | | - | | | | - | | | | - | | | | - | | | Employee compensation | | | | - | | | | - | | | | 121,700 | | | | 12 | | | | 732,622 | | | | - | | | | 732,634 | | Board of director fees | | | | - | | | | - | | | | 3,000 | | | | - | | | | 48,060 | | | | - | | | | 48,060 | | Cash | | | | - | | | | - | | | | 155,703 | | | | 17 | | | | 1,032,983 | | | | - | | | | 1,033,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Vesting and re-pricing of stock options | | | - | | | | - | | | | - | | | | - | | | | 1,241,927 | | | | - | | | | - | | | | - | | | | 1,241,927 | | | | - | | | | - | | | | - | | | | - | | | | 1,405,500 | | | | - | | | | 1,405,500 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Beneficial conversion feature recorded as interest expense | | | - | | | | - | | | | - | | | | - | | | | 144,184 | | | | - | | | | - | | | | - | | | | 144,184 | | | Acceleration of vesting and cancellation of stock warrants | | | | - | | | | - | | | | - | | | | - | | | | 1,398,060 | | | | - | | | | 1,398,060 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Beneficial conversion feature recorded as interest expense | | | | - | | | | - | | | | - | | | | - | | | | 1,475,000 | | | | - | | | | 1,475,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Series D Preferred dividends | | | - | | | | - | | | | - | | | | - | | | | (1,494,481 | ) | | | - | | | | - | | | | - | | | | (1,494,481 | ) | | | - | | | | - | | | | - | | | | - | | | | (2,480,298 | ) | | | - | | | | (2,480,298 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Conversion effect on derivative liability | | | - | | | | - | | | | - | | | | - | | | | 1,018,892 | | | | - | | | | - | | | | - | | | | 1,018,892 | | | Issuance of common stock warrant to settle a lawsuit | | | | - | | | | - | | | | - | | | | - | | | | 253,046 | | | | - | | | | 253,046 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of Series D Preferred stock for conversion of debt, accrued liabilities and interest | | | 17,174 | | | | 2 | | | | - | | | | - | | | | 16,910,382 | | | | - | | | | - | | | | - | | | | 16,910,384 | | | Issuance of common stock warrants for Board of Director fees | | | | - | | | | - | | | | - | | | | - | | | | 105,042 | | | | - | | | | 105,042 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of common stock warrants for consulting fees | | | | - | | | | - | | | | - | | | | - | | | | 33,357 | | | | - | | | | 33,357 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Repricing of common stock warrants in connection with debt and accrued interest | | | | - | | | | - | | | | - | | | | - | | | | 39,965 | | | | - | | | | 39,965 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of Series D Preferred stock for cash | | | 27,767 | | | | 3 | | | | - | | | | - | | | | 9,688,848 | | | | (50,000 | ) | | | - | | | | - | | | | 9,638,851 | | | | 4,008 | | | | - | | | | - | | | | - | | | | 2,004,000 | | | | - | | | | 2,004,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commission paid in connection with capital raise | | | | - | | | | - | | | | - | | | | - | | | | (1,147,250 | ) | | | - | | | | (1,147,250 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (13,784,042 | ) | | | (135,567 | ) | | | (13,919,609 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (17,458,107 | ) | | | (17,458,107 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of September 30, 2010 | | | 35,407 | | | $ | 4 | | | | 280,023,255 | | | $ | 28,002 | | | $ | 222,501,863 | | | $ | (50,000 | ) | | $ | (219,164,945 | ) | | $ | (185,073 | ) | | $ | 3,129,851 | | | Balance as of September 30, 2012 | | | | 48,763 | | | $ | 5 | | | | 3,096,641 | | | $ | 310 | | | $ | 252,940,448 | | | $ | (248,513,626 | ) | | $ | 4,427,137 | |
See accompanying notes to consolidated financial statements. SECUREALERT, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued) FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 20102012 AND 2011
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Preferred | | | | | | | | | | | | | Preferred Stock | | Common Stock | | | Additional | | | Stock | | | | | | Non- | | | | | | | Series D | | | | | | | | | Paid-in | | | Subscription | | | Accumulated | | | Controlling | | | | | | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Receivable | | | Deficit | | | Interest | | | Total | | Balance as of October 1, 2010 | | | 35,407 | | | $ | 4 | | | | 280,023,255 | | | $ | 28,002 | | | $ | 222,501,863 | | | $ | (50,000 | ) | | $ | (219,164,945 | ) | | $ | (185,073 | ) | | $ | 3,129,851 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of common stock for: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Conversion of Series D Preferred stock | | | (22,735 | ) | | | (2 | ) | | | 136,410,000 | | | | 13,641 | | | | (13,639 | ) | | | - | | | | - | | | | - | | | | - | | Dividends from SMI Series A Preferred stock | | | - | | | | - | | | | 981,620 | | | | 98 | | | | 97,251 | | | | - | | | | - | | | | - | | | | 97,349 | | Services | | | - | | | | - | | | | 250,000 | | | | 25 | | | | 21,285 | | | | - | | | | - | | | | - | | | | 21,310 | | Acquisition of subsidiaries | | | - | | | | - | | | | 64,705,264 | | | | 6,470 | | | | 5,315,594 | | | | - | | | | - | | | | 153,323 | | | | 5,475,387 | | Dividends from Series D Preferred stock | | | - | | | | - | | | | 21,307,067 | | | | 2,131 | | | | 2,041,178 | | | | - | | | | - | | | | - | | | | 2,043,309 | | Cancellation of shares | | | - | | | | - | | | | (53,778 | ) | | | (5 | ) | | | 5 | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Vesting and re-pricing of stock options | | | - | | | | - | | | | - | | | | - | | | | 1,231,836 | | | | - | | | | - | | | | - | | | | 1,231,836 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Beneficial conversion feature recorded as interest expense | | | - | | | | - | | | | - | | | | - | | | | 42,351 | | | | - | | | | - | | | | - | | | | 42,351 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Series D Preferred dividends | | | - | | | | - | | | | - | | | | - | | | | (2,029,996 | ) | | | - | | | | - | | | | - | | | | (2,029,996 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of Series D Preferred stock in connection with forbearance agreements | | | 280 | | | | - | | | | - | | | | - | | | | 140,000 | | | | - | | | | - | | | | - | | | | 140,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of Series D Preferred stock for Board of Director fees | | | 25 | | | | - | | | | - | | | | - | | | | 12,500 | | | | - | | | | - | | | | - | | | | 12,500 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of Series D Preferred stock for prepaid commissions | | | 987 | | | | - | | | | - | | | | - | | | | 493,500 | | | | - | | | | - | | | | - | | | | 493,500 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of Series D Preferred stock in connection with debt and accrued interest | | | 4,669 | | | | - | | | | - | | | | - | | | | 2,334,632 | | | | - | | | | - | | | | - | | | | 2,334,632 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of Series D Preferred stock for cash | | | 26,037 | | | | 3 | | | | - | | | | - | | | | 10,344,600 | | | | - | | | | - | | | | - | | | | 10,344,603 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cancellation of Series D Preferred stock | | | (100 | ) | | | - | | | | - | | | | - | | | | (50,000 | ) | | | 50,000 | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of Series D Preferred stock in connection with services | | | 275 | | | | - | | | | - | | | | - | | | | 137,500 | | | | - | | | | - | | | | - | | | | 137,500 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (9,890,574 | ) | | | 31,750 | | | | (9,858,824 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of September 30, 2011 | | | 44,845 | | | $ | 5 | | | | 503,623,428 | | | $ | 50,362 | | | $ | 242,620,460 | | | $ | - | | | $ | (229,055,519 | ) | | $ | - | | | $ | 13,615,308 | |
2013 | | Preferred Stock | | | Common Stock | | | Additional | | | | | | | | | | Series D | | | | | | | | | | | | Paid-in | | | Accumulated | | | | | | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Deficit | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of October 1, 2012 | | | 48,763 | | | $ | 5 | | | | 3,096,641 | | | $ | 310 | | | $ | 252,940,448 | | | $ | (248,513,626 | ) | | $ | 4,427,137 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of common stock for: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Conversion of Series D Preferred stock | | | (48,295 | ) | | | (4 | ) | | | 1,894,283 | | | | 189 | | | | (185 | ) | | | - | | | | - | | Services | | | - | | | | - | | | | 21,884 | | | | 2 | | | | 141,758 | | | | - | | | | 141,760 | | Debt | | | - | | | | - | | | | 4,607,361 | | | | 461 | | | | 20,732,657 | | | | - | | | | 20,733,118 | | Dividends from Series D Preferred stock | | | - | | | | - | | | | 181,832 | | | | 18 | | | | 1,663,979 | | | | - | | | | 1,663,997 | | Accrued board of director fees | | | - | | | | - | | | | 3,661 | | | | - | | | | 47,500 | | | | - | | | | 47,500 | | Cash | | | - | | | | - | | | | (159 | ) | | | - | | | | (1,996 | ) | | | - | | | | (1,996 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Vesting and re-pricing of stock options | | | - | | | | - | | | | - | | | | - | | | | 160,301 | | | | - | | | | 160,301 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Beneficial conversion feature recorded as interest expense | | | - | | | | - | | | | - | | | | - | | | | 15,349,074 | | | | - | | | | 15,349,074 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Series D Preferred stock dividends | | | - | | | | - | | | | - | | | | - | | | | (1,042,897 | ) | | | - | | | | (1,042,897 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of common stock warrants for Board of Director fees | | | - | | | | - | | | | - | | | | - | | | | 401,059 | | | | - | | | | 401,059 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | (17,915,711 | ) | | | (17,915,711 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of September 30, 2013 | | | 468 | | | $ | 1 | | | | 9,805,503 | | | $ | 980 | | | $ | 290,391,698 | | | $ | (266,429,337 | ) | | $ | 23,963,342 | |
See accompanying notes to consolidated financial statements.
SECUREALERT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 20112013 AND 20102012 | | 2011 | | | 2010 | | | 2013 | | | 2012 | | Cash flows from operating activities: | | | | | | | | | | | | | Net Loss | | $ | (9,858,824 | ) | | $ | (13,919,609 | ) | | $ | (17,915,711 | ) | | $ | (17,458,107 | ) | Adjustments to reconcile net income to net cash used in operating activities: | | | | | | | | | | Gain on sale of subsidiaries | | | | (424,819 | ) | | | - | | Loss from discontinued operations | | | | 6,460 | | | | 307,819 | | Loss from continuing operations | | | | (18,334,070 | ) | | | (17,150,288 | ) | Adjustments to reconcile net loss to net cash used and provided by in operating activities: | | | | | | | | | | Depreciation and amortization | | | 1,793,557 | | | | 1,436,876 | | | | 2,414,270 | | | | 1,816,945 | | Common stock issued for services | | | 21,310 | | | | 27,500 | | | Series D Preferred stock issued for services | | | 137,500 | | | | - | | | Vesting and re-pricing of stock options | | | 1,231,836 | | | | 1,241,927 | | | Amortization of debt discount | | | 19,142 | | | | 2,918,050 | | | Settlement expense | | | 276,712 | | | | 1,150,000 | | | Beneficial conversion feature recorded as interest expense | | | 42,351 | | | | 144,184 | | | Origination fees recorded in connection with debt | | | 25,000 | | | | - | | | Common stock issued in connection with debt | | | - | | | | 25,510 | | | Change in redemption value in connection with SMI Series A Preferred stock | | | (16,682 | ) | | | 19,095 | | | Increases in related-party line of credit for services | | | 515,536 | | | | 652,987 | | | Vesting and re-pricing of stock options for services | | | | 160,301 | | | | 1,405,500 | | Issuance of common stock to employees for the cancellation of warrants | | | | - | | | | 2,130,694 | | Issuance of common stock for services | | | | 141,760 | | | | 40,000 | | Re-pricing of warrants in connection with debt with related parties | | | | - | | | | 39,965 | | Accretion of debt discount and beneficial conversion feature recorded as interest expense | | | | 15,954,355 | | | | 923,268 | | Issuance of warrants with related parties | | | | 128,559 | | | | - | | Impairment of monitoring equipment and parts | | | | 213,276 | | | | 1,648,763 | | Impairment of goodwill | | | - | | | | 204,735 | | | | - | | | | 5,514,395 | | Impairment of monitoring equipment and parts | | | 464,295 | | | | 590,801 | | | Derivative liability valuation gain | | | - | | | | (200,534 | ) | | Issuance of Series D Preferred shares in connection with forbearance | | | 140,000 | | | | - | | | Factional shares of common stock paid in cash | | | | (1,996 | ) | | | - | | Loss on disposal of property and equipment | | | 300,338 | | | | 41,597 | | | | 4,740 | | | | 5,374 | | Loss on disposal of monitoring equipment and parts | | | 95,583 | | | | 105,803 | | | | 84,805 | | | | 188,901 | | Loss on forgiveness of note receivable | | | | - | | | | 22,750 | | Property and equipment disposed for services and compensation | | | | - | | | | 2,790 | | Change in assets and liabilities: | | | | | | | | | | | | | | | | | Accounts receivable, net | | | (2,726,576 | ) | | | 102,135 | | | | (652,749 | ) | | | 854,673 | | Notes receivable | | | (170,000 | ) | | | - | | | | 63,978 | | | | 88,061 | | Inventories | | | (502,648 | ) | | | 183,195 | | | | 186,913 | | | | (437,421 | ) | Prepaid expenses and other assets | | | 232,014 | | | | (511,539 | ) | | | 107,576 | | | | (908,673 | ) | Accounts payable | | | 1,042,579 | | | | (279,890 | ) | | | (1,473,530 | ) | | | 572,277 | | Accrued expenses | | | 46,023 | | | | 263,161 | | | | 2,186,618 | | | | 1,102,638 | | Deferred revenue | | | 81,441 | | | | 24,032 | | | | (345,896 | ) | | | 229,321 | | Net cash used in operating activities | | | (6,809,513 | ) | | | (5,779,984 | ) | | Net cash provided by (used in) operating activities | | | | 838,910 | | | | (1,910,067 | ) | | | | | | | | | | | | | | | | | | Cash flow from investing activities: | | | | | | | | | | | | | | | | | Purchase of property and equipment | | | (215,528 | ) | | | (394,630 | ) | | | (50,682 | ) | | | (101,875 | ) | Purchase of monitoring equipment and parts | | | (3,066,026 | ) | | | (1,834,173 | ) | | | (509,743 | ) | | | (2,745,399 | ) | Cash acquired through acquisition | | | 10,000 | | | | - | | | Payment related to acquisition | | | (400,000 | ) | | | - | | | Issuance of note receivable | | | (45,000 | ) | | | - | | | Net cash used in investing activities | | | (3,716,554 | ) | | | (2,228,803 | ) | | | (560,425 | ) | | | (2,847,274 | ) | | | | | | | | | | | | | | | | | | Cash flow from financing activities: | | | | | | | | | | | | | | | | | Principal payments on related-party line of credit | | | (188,634 | ) | | | (729,009 | ) | | Borrowings on related-party notes payable | | | 1,780,911 | | | | 500,000 | | | | 2,800,000 | | | | 2,980,000 | | Principal payments on related-party notes payable | | | (951,639 | ) | | | (550,000 | ) | | | - | | | | (3,187,578 | ) | Proceeds from convertible debentures | | | | - | | | | 500,000 | | Proceeds from related-party convertible debentures | | | | - | | | | 2,900,000 | | Proceeds from notes payable | | | 1,283,800 | | | | 4,250 | | | | - | | | | 1,745 | | Principal payments on notes payable | | | (1,919,457 | ) | | | (953,794 | ) | | | (299,276 | ) | | | (687,354 | ) | Payments on Series A 15% debentures | | | - | | | | (25,000 | ) | | Principal payments on notes payable related to acquisitions | | | - | | | | (100,000 | ) | | Net proceeds from issuance of common stock | | | | - | | | | 1,033,000 | | Net proceeds from issuance of Series D Convertible Preferred stock | | | 10,344,603 | | | | 9,638,851 | | | | - | | | | 2,004,000 | | Net borrowings on bank line of credit | | | - | | | �� | 747,400 | | | Commissions paid in connection with capital raise | | | | - | | | | (1,147,250 | ) | Net cash provided by financing activities | | | 10,349,584 | | | | 8,532,698 | | | | 2,500,724 | | | | 4,396,563 | | Net increase (decrease) in cash | | | (176,483 | ) | | | 523,911 | | | Cash, beginning of year | | | 1,126,232 | | | | 602,321 | | | Cash, end of year | | $ | 949,749 | | | $ | 1,126,232 | | | | | | | | | | | | | Cash flow from discontinued operations: | | | | | | | | | | Net cash provided by operating activities | | | | 126,715 | | | | 200,679 | | Net cash provided by investing activities | | | | - | | | | 126,330 | | Net cash provided by (used in) financing activities | | | | 18,475 | | | | (220,869 | ) | Net cash provided by discontinued operations | | | | 145,190 | | | | 106,140 | | | | | | | | | | | | Net increase in cash | | | | 2,924,399 | | | | (254,638 | ) | Cash, beginning of period | | | | 458,029 | | | | 712,667 | | Cash, end of period | | | $ | 3,382,428 | | | $ | 458,029 | |
See accompanying notes to consolidated financial statements.
SECUREALERT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 20112013 AND 20102012 | | 2011 | | | 2010 | | Cash paid for interest | | $ | 816,178 | | | $ | 911,997 | | | | | | | | | | | Supplemental schedule of non-cash investing and financing activities: | | | | | | | | | Issuance of 981,620 and 5,434,143 shares of common stock, respectively for payment of SecureAlert Monitoring, Inc. Series A Preferred stock dividends | | | 97,349 | | | | 642,566 | | Note payable issued to acquire monitoring equipment and property and equipment | | | 274,148 | | | | 299,037 | | Issuance of 0 and 3,775,000 stock options, respectively, for deferred consulting | | | - | | | | 413,423 | | Issuance of shares of Series D Convertible Preferred stock for conversion of debt, accrued liabilities and interest | | | 2,334,632 | | | | 16,910,384 | | Issuance of 21,307,067 and 7,619,124 shares of common stock in connection with Series D Preferred stock dividends | | | 2,043,309 | | | | 939,371 | | Note payable issued to acquire remaining shares of Court Programs, Inc., Court Programs of Florida, Inc., Court Programs of Northern Florida, Inc., and Court Programs of Illinois, Inc. | | | - | | | | 1,049,631 | | Non-controlling interest assumed through acquisition of subsidiaries | | | 153,322 | | | | 335,087 | | Conversion effect on derivative liability | | | - | | | | 1,018,892 | | Issuance of 0 and 150,000 shares of common stock to purchase an additional 2.145% ownership of Midwest Monitoring & Surveillance, Inc. | | | - | | | | 18,000 | | Issuance of 136,410,000 and 57,204,000 shares of common stock from the conversion of 22,735 and 9,534 shares of Series D Preferred stock | | | 13,641 | | | | 5,720 | | Series D Preferred stock dividends earned | | | 2,029,996 | | | | 1,494,481 | | Accrued liabilities and notes recorded in connection with the acquisition of Midwest Monitoring & Surveillance, Inc. | | | 1,187,946 | | | | 144,000 | | Subscription receivable issued for Series D Preferred stock | | | - | | | | 50,000 | | Patent acquired through accrued liability | | | - | | | | 50,000 | | Cancellation of 53,778 and 1,000,000 shares of common stock, respectively, for services | | | 5 | | | | 100 | | Cancellation of subscription receivable | | | 50,000 | | | | - | | Issuance of 987 Series D Preferred stock for prepaid commissions | | | 493,500 | | | | - | | Issuance of 2,705,264 and 0 shares of common stock in connection with the acquisition of Midwest Monitoring & Surveillance, Inc. | | | 238,064 | | | | - | | Issuance of 62,000,000 and 0 shares of common stock in connection with the acquisition of International Surveillance Services Corp., net of cash acquired | | | 5,087,921 | | | | - | | Issuance of Series D Preferred stock to settle accrued liabilities | | | 12,500 | | | | - | | Acquisition of accounts receivable from International Surveillance Services Corp. ownership | | | 84,338 | | | | - | | Acquisition of accounts payable and accrued liabilities from International Surveillance Services Corp. ownership | | | 13,921 | | | | - | |
| | 2013 | | | 2012 | | Cash paid for interest | | $ | 238,080 | | | $ | 444,644 | | | | | | | | | | | Supplemental schedule of non-cash investing and financing activities: | | | | | | | | | Issuance of stock warrants for settlement of debt | | | - | | | | 253,046 | | Issuance of common stock in connection with Series D Preferred stock dividends | | | 1,663,997 | | | | 2,391,568 | | Series D Preferred stock dividends earned | | | 1,042,897 | | | | 2,480,298 | | Issuance of warrants for accrued Board of Director fees | | | 272,500 | | | | 105,042 | | Issuance of common stock shares for accrued Board of Director fees | | | 47,500 | | | | 48,060 | | Issuance of shares of common stock, respectively, for related-party royalty payable | | | - | | | | 819,972 | | Issuance of common stock shares for settlement of debt | | | 20,733,118 | | | | 118,280 | | Issuance of warrants to a consultant for services | | | - | | | | 33,357 | | Issuance of common stock shares from the conversion of shares of Series D | | | | | | Preferred stock | | | 189 | | | | 54 | | Accretion of debt discount and beneficial conversion feature expense recorded with convertible debentures | | | 15,954,355 | | | | 473,334 | | Issuance of debt to repurchase royalty agreement | | | 11,616,984 | | | | - | | Note payable issued to acquire monitoring equipment and property and equipment | | | - | | | | 69,000 | | Beneficial conversion feature recorded with related-party convertible debentures | | | - | | | | 1,001,666 | |
See accompanying notes to consolidated financial statements.
SECUREALERT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Nature of Operations
(1) | Organization and Nature of Operations |
General SecureAlert, Inc. and subsidiaries (collectively, the “Company”) markets, monitors and leases TrackerPAL™ and ReliAlert™ devices. The TrackerPAL™ and ReliAlert™ReliAlert™ devices are used to monitor convicted offenders that are on probation or parole in the criminal justice system. The TrackerPAL™ andsystem or pretrial defendants. ReliAlert™ devices utilize GPS, radio frequencies, and cellular technologies in conjunction with a monitoring center that is staffed 24/7 and 365 days a year. The Company believes that its technologies and services benefit law enforcement officials by allowing them to respond immediately to a problem involving the monitored offender. The TrackerPAL™ and ReliAlert™ devices are targeted to meet the needs of this market domestically as well as internationally. Going Concern Going Concern
The Company has incurredhad a history of recurring net losses and negative cash flows from operating activities fora significant accumulated deficit. For the fiscal yearsyear ended September 30, 2011 and 2010. In addition,2012, the Company has accumulated deficits of $229,055,519 and $219,164,945 as of September 30, 2011 and 2010, respectively. These factors raisedid not have enough cash on hand to meet its current liabilities. As a result, the report from the independent registered public accounting firm for fiscal year 2012 included an explanatory paragraph in respect to the substantial doubt aboutof the Company'sCompany’s ability to continue as a going concern. The financial statements dofor fiscal year 2012 and for prior periods did not include any adjustments that might result from the outcome of thisthat uncertainty.
In order The Company’s plan for the Company to continuecontinuing as a going concern it must generate positive cash flows from operating activities and obtainincluded obtaining the necessary funding to meet its projected capital investment requirements. Management’s plans with respectrequirements and operating needs.
Subsequent to this uncertainty include raising additional capital from the issuance of preferred or common stock or debt securities, and expanding its market for its ReliAlert™ portfolio of products. There can be no assurance that revenues will increase rapidly enough to offset operating losses and repay debts. IfSeptember 30, 2013, the Company is unableentered into a Facility Agreement, whereby the Company may borrow up to increase$25,000,000 for working capital and acquisitions purposes (see Note 5). As of January 14, 2014, the Company borrowed $10,000,000 under the Facility Agreement which its Board of Directors and management believes provides the Company sufficient working capital and enough cash flows from operating activities or obtain additional financing, it will be unableon hand to continue the development ofsatisfy its products and may have to cease operations.current obligations.
(2) Summary of Significant Accounting Policies
(2) | Summary of Significant Accounting Policies |
Principles of Consolidation The accompanying consolidated financial statements include the accounts of SecureAlert, Inc. and its subsidiaries, SecureAlert Monitoring, Inc., International Surveillance Services Corp, and SecureAlert Chile SpA (collectively, the “Company”). Additionally, during the fiscal year ended September 30, 2013, the Company sold Midwest Monitoring & Surveillance, Inc., SecureAlert Enterprise Solutions, Inc. (also known as Bishop Rock Software), and Court Programs, Inc., Court Programs of Florida, Inc., and International Surveillance Services Corp (collectively, the “Company”). All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Fair Value of Financial Statements The carrying amounts reported in the accompanying consolidated financial statements for cash, accounts receivable, accounts payable, accrued liabilities and other debt obligations approximate fair values because of the immediate or short-term maturities of these financial instruments. The carrying amounts of the Company’s debt obligations approximate fair value as the interest rates approximate market interest rates.
Concentration of Credit Risk
In the normal course of business, the Company provides credit terms to its customers and requires no collateral. Accordingly, the Company performs ongoing credit evaluations of its customers' financial condition.
The Company had sales to entities which represent more than 10 percent of total revenues as follows for the years ended September 30: | | 2013 | | | % | | | 2012 | | | % | | | | | | | | | | | | | | | Customer A | | $ | 5,252,959 | | | | 34 | % | | $ | 2,450,984 | | | | 16 | % | | | | | | | | | | | | | | | | | | Customer B | | $ | 1,622,326 | | | | 10 | % | | $ | 1,876,285 | | | | 12 | % |
No other customer represented more than 10 percent of the Company’s total revenues for the fiscal years ended September 30, 2013 or 2012. Customer A which attributed $5,252,959 (34 percent) derived from a contract that completed during the fiscal year ended 2013 and it is uncertain if the Company will provide services to this customer in the future. Customer B which attributed $1,622,326 (10%) derived from a three-year contract which completed in November 2013 and has continued under a month-to-month contract. This contract could be terminated at anytime with a 30-day notice. Concentration of credit risk associated with the Company’s total and outstanding accounts receivable as of September 30, 2013 and 2012, respectively, are shown in the table below: | | 2013 | | | % | | | 2012 | | | % | | | | | | | | | | | | | | | Customer A | | $ | 887,233 | | | | 24 | % | | $ | 681,781 | | | | 24 | % | | | | | | | | | | | | | | | | | | Customer B | | $ | 732,163 | | | | 20 | % | | $ | 475,800 | | | | 17 | % | | | | | | | | | | | | | | | | | | Customer C | | $ | 892,897 | | | | 24 | % | | $ | - | | | | 0 | % |
Based upon the expected collectability of its accounts receivable, the Company maintains an allowance for doubtful accounts receivable.
During Subsequent to the fiscal year ended September 30, 2011, one customer represented $2,265,805 (13%)2013, the Company received $387,483 from Customer A and $518,137 from Customer B for a total of revenues. No other customer represented more than 10% of the Company’s total revenues for the fiscal years ended September 30, 2011 or 2010.$905,620.
One customer accounted for $1,995,804 (39%) of the Company’s total accounts receivable as of September 30, 2011 and a different customer accounted for $185,752 (11%) of the Company’s total accounts receivable as of September 30, 2010. No other customer represented more than 10% of the Company’s total accounts receivable as of September 30, 2011 or 2010.Cash Equivalents
Cash Equivalents
equivalents consist of investments with original maturities to the Company of three months or less. The Company has cash in bank accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts.
Cash equivalents consist of investments with original maturities to the Company of three months or less. The Company had $371,130$3,128,187 and $395,911$350,716 of cash deposits in excess of federally insured limits as of September 30, 20112013 and 2010,2012, respectively.
Accounts Receivable
Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Specific reserves areThe allowance is estimated by management based on certain assumptions and variables, including the customer’s financial condition, age of the customer’s receivables and changes in payment histories. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when cash is received. A trade receivable is considered to be past due if any portion of the receivable balance has not been received by the Company within its normal terms. Interest income is not recorded on trade receivables that are past due, unless that interest is collected. Note Receivable
Notes receivable are carried at the face amount of each note plus respective accrued interest receivable, less received payments. The Company does not typically carry notes receivable in the course of its regular business, but had entered into an agreement with one of its customers during the fiscal year ended September 30, 2012. Payments are under the note are recorded as they are received and are immediately offset against any outstanding accrued interest before they are applied against the outstanding principal balance on the respective note. The note requires monthly payments of $15,000 and matures in May 2014. The note is currently in default and accrues interest at a rate of 17% per annum. As of September 30, 2013, the outstanding balance of the note was $199,682 and $5,022 of accrued interest. Prepaid and Other Expenses
The carrying amounts reported in the balance sheets for prepaid and other expenses approximate their fair market value based on the short-term maturity of these instruments. As of September 30, 2013 and 2012, the outstanding balance of prepaid and other expenses was $1,783,805 and $1,760,579, respectively. Of the $1,783,805, was a bond posted for an international customer in the amount of $1,488,778, which the Company believes will be returned to the Company by March 31, 2014.
Inventory
Inventory is valued at the lower of the cost or market. Cost is determined using the first-in, first-out (“FIFO”) method. Market is determined based on the estimated net realizable value, which generally is the item selling price. Inventory is periodically reviewed in order to identify obsolete or damaged items or impaired values. The Company impaired its inventory by $268,398$1,555 and $74,607$359,734 during the fiscal years ended September 30, 20112013 and 2010,2012, respectively.
Inventory consists of raw materials that are used in the manufacturing of TrackerPAL™ and ReliAlert™ devices. Completed TrackerPAL™ and ReliAlert™ devices are reflected in Monitoring Equipment. As of September 30, 20112013 and 2010,2012, respectively, inventory consisted of the following: | | 2011 | | | 2010 | | Raw materials | | $ | 706,795 | | | $ | 392,647 | | Reserve for damaged or obsolete inventory | | | (127,016 | ) | | | (47,118 | ) | Total inventory, net of reserves | | $ | 579,779 | | | $ | 345,529 | |
Notes Receivable
Notes receivable are carried at the face amount of each note plus respective accrued interest receivable, less received payments. The Company does not typically carry notes receivable in the course of its regular business, but had entered into two agreements with one of its customers during the fiscal year ended September 30, 2011. Payments are recorded as they are received and are immediately offset against any outstanding accrued interest before they are applied against the outstanding principal balance on the respective note. The Company accrues interest monthly on each note beginning upon the first instance of default, as defined by the agreement, and continues to accrue monthly until the default is resolved. As of September 30, 2011, the outstanding balance of the notes was $227,850, which includes $12,850 of accrued interest for one of the notes which was in default. As of the date of this report, the Company expects to collect all of the outstanding amounts.
| | 2013 | | | 2012 | | Raw materials | | $ | 615,144 | | | $ | 822,566 | | Reserve for damaged or obsolete inventory | | | (148,043 | ) | | | (192,000 | ) | Total inventory, net of reserves | | $ | 467,101 | | | $ | 630,566 | |
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are determined using the straight-line method over the estimated useful lives of the assets, typically three to seven years. Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the term of the lease. Expenditures for maintenance and repairs are expensed while renewals and improvements are capitalized.
Property and equipment consisted of the following as of September 30, 20112013 and 2010,2012, respectively: | | | 2011 | | | | 2010 | | Equipment, software and tooling | | $ | 2,390,329 | | | $ | 2,595,797 | | Automobiles | | | 398,890 | | | | 334,917 | | Building | | | 377,555 | | | | 377,555 | | Leasehold improvements | | | 132,820 | | | | 127,912 | | Furniture and fixtures | | | 317,630 | | | | 284,824 | | Total property and equipment before accumulated depreciation | | | 3,617,224 | | | | 3,721,005 | | Accumulated depreciation | | | (2,530,591 | ) | | | (2,235,683 | ) | | | | | | | | | | Property and equipment, net of accumulated depreciation | | $ | 1,086,633 | | | $ | 1,485,322 | |
| | 2013 | | | 2012 | | Equipment, software and tooling | | $ | 2,002,577 | | | $ | 1,970,327 | | Automobiles | | | 33,466 | | | | 33,466 | | Leasehold improvements | | | 127,162 | | | | 127,287 | | Furniture and fixtures | | | 247,218 | | | | 252,951 | | Total property and equipment before accumulated depreciation | | | 2,410,423 | | | | 2,384,031 | | Accumulated depreciation | | | (2,092,222 | ) | | | (1,879,540 | ) | Property and equipment, net of accumulated depreciation | | $ | 318,201 | | | $ | 504,491 | |
As of September 30, 2011 and 2010, $0 and $249,536 of assets included in the property and equipment, respectively, have not been put into use and were not depreciated. Property and equipment to be disposed of is reported at the lower of the carrying amount or fair value, less the estimated costs to sell and any gains or losses are included in the results of operations. During the fiscal years ended September 30, 20112013 and 2010,2012, the Company disposed of net property and equipment of $300,338$4,740 and $41,597,$5,374, respectively.
Depreciation expense for the fiscal years ended September 30, 20112013 and 20102012 was $421,407$231,853 and $414,056,$281,791, respectively.
Monitoring Equipment53 Monitoring equipment as of September 30, 2011 and 2010 is as follows:
| | 2011 | | | 2010 | | Monitoring equipment | | $ | 7,070,373 | | | $ | 4,471,665 | | Less: accumulated amortization | | | (3,608,388 | ) | | | (2,788,309 | ) | Monitoring equipment, net of accumulated depreciation | | $ | 3,461,985 | | | $ | 1,683,356 | |
Monitoring Equipment
The Company began leasing monitoring equipment to agencies for offender tracking in April 2006 under operating lease arrangements. The monitoring equipment is depreciated using the straight-line method over an estimated useful life of 3 years. Monitoring equipment as of September 30, 2013 and 2012 is as follows: | | 2013 | | | 2012 | | Monitoring equipment | | $ | 2,420,042 | | | $ | 3,841,876 | | Less: accumulated amortization | | | (1,183,346 | ) | | | (669,929 | ) | Monitoring equipment, net of accumulated depreciation | | $ | 1,236,696 | | | $ | 3,171,947 | |
Amortization expense for the fiscal years ended September 30, 20112013 and 2010,2012, was $1,160,920$1,230,293 and $875,312,$1,231,773, respectively. These expenses were classified as a cost of revenues.
AssetsMonitoring equipment to be disposed of are reported at the lower of the carrying amount or fair value, less the estimated costs to sell. During the fiscal years ended September 30, 20112013 and 2010,2012, the Company disposed ofand impaired lease monitoring equipment and parts of $291,479$296,526 and $621,997, respectively. Included in the equipment disposals were impairments of $195,897 and $516,194 incurred during the fiscal years ended September 30, 2011 and 2010,$1,837,664, respectively. These impairment costs were included in cost of revenues. The impairment on equipment for the fiscal year ended September 30, 2011 was determined as the cost to upgrade or repair units to a fully functional and leasable status. This equipment will continue to be used.
Impairment of Long-Lived Assets and Goodwill
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 and in the case of goodwill, at least annually. The Company evaluates whether events and circumstances have occurred which indicate possible impairment as of each balance sheet date. The Company uses an equity method of the related asset or group of assets in measuring whether the assets are recoverable. If the carrying amount of an asset exceeds its market value, 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 is an identifiable fair market value that is independent of other groups of assets. As of September 30, 2011In reviewing historical financial performance and 2010, the Company impaired goodwill fromparticipating in selling Court Programs, Inc. by $0 and $204,735, respectively.Midwest Monitoring & Surveillance, Inc., the Company recorded an impairment expense.
The following summarizes the changes in goodwill during the fiscal years ended September 30, 2013 and 2012:
| | Court Programs, Inc. | | | Midest Monitoring & Surveillance, Inc. | | | | 2013 | | | 2012 | | | 2013 | | | 2012 | | Gross carrying amount, beginning of period | | $ | - | | | $ | 2,488,068 | | | $ | - | | | $ | 3,026,327 | | Additions | | | - | | | | - | | | | - | | | | - | | Impairments | | | - | | | | (2,488,068 | ) | | | - | | | | (3,026,327 | ) | Gross carrying amount, end of period | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Revenue Recognition
The Company’s revenue has historically been from two sources: (i) monitoring services; and (ii) product sales.
Monitoring Services Monitoring services include two components: (a) lease contracts in which the Company provides monitoring services and leases devices to distributors or end users and the Company retains ownership of the leased device; and (b) monitoring services purchased by distributors or end users who have previously purchased monitoring devices and opt to use the Company’s monitoring services.
The Company typically leases its devices under one-year contracts with customers that opt to use the Company’s monitoring services. However, these contracts may be cancelled by either party at anytime with 30 days notice. Under the Company’s standard leasing contract, the leased device becomes billable on the date of activation or 7 to 21 days from the date the device is assigned to the lessee, and remains billable until the device is returned to the Company. The Company recognizes revenue on leased devices at the end of each month that monitoring services have been provided. In those circumstances in which the Company receives payment in advance, the Company records these payments as deferred revenue.
Product Sales The Company may sell its monitoring devices in certain situations to its customers. In addition, the Company may sell equipment in connection with the building out and setting up a monitoring center on behalf of its customers. The Company recognizes product sales revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer and the customer cannot return the devices or equipment, prices are fixed or determinable (including sales not being made outside the normal payment terms) and collection is reasonably assured. When purchasing products (such as TrackerPAL™TrackerPAL® and ReliAlert™ devices) from the Company, customers may, but are not required to, enter into monitoring service contracts with the Company. The Company recognizes revenue on monitoring services for customers that have previously purchased devices at the end of each month that monitoring services have been provided.
The Company sells and installs standalone tracking systems that do not require ongoing monitoring by the Company. The Company has experience in component installation costs and direct labor hours related to this type of sale and can typically reasonably estimate costs, therefore the Company recognizes revenue over the period in which the installation services are performed using the percentage-of-completion method of accounting for material installations. The Company typically uses labor hours or costs incurred to date as a percentage of the total estimated labor hours or costs to fulfill the contract as the most reliable and meaningful measure that is available for determining a project’s progress toward completion. The Company evaluates its estimated labor hours and costs and determines the estimated gross profit or loss on each installation for each reporting period. If it is determined that total cost estimates are likely to exceed revenues, the Company accrues the estimated losses immediately. All amounts billed have been earned.
Multiple Element Arrangements The majority of the Company’s revenue transactions do not have multiple elements. However, on occasion, the Company enters into revenue transactions that have multiple elements. These may include different combinations of products or monitoring services that are included in a single billable rate. These products or monitoring services are delivered over time as the customer utilizes the Company's services. For revenue arrangements that have multiple elements, the Company considers whether the delivered devices have standalone value to the customer, there is objective and reliable evidence of the fair value of the undelivered monitoring services, which is generally determined by surveying the price of competitors’ comparable monitoring services, and the customer does not have a general right of return. Based on these criteria, the Company recognizes revenue from the sale of devices separately from the monitoring services provided to the customer as the products or monitoring services are delivered.
Other Matters The Company considers an arrangement with payment terms longer than the Company’s normal terms not to be fixed or determinable, and revenue is recognized when the fee becomes due. Normal payment terms for the sale of monitoring services and products are due upon receipt to 30 days. The Company sells its devices and services directly to end users and to distributors. Distributors do not have general rights of return. Also, distributors have no price protection or stock protection rights with respect to devices sold to them by the Company. Generally, title and risk of loss pass to the buyer upon delivery of the devices.
The Company estimates its product returns based on historical experience and maintains an allowance for estimated returns, which is recorded as a reduction to accounts receivable and revenue.
Shipping and handling fees charged to customers are included as part of net revenues. The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of revenues.
Geographical Information
During the fiscal year ended September 30, 2011, theThe Company began recognizingrecognized revenues from international sources from its products and monitoring services. Revenues are attributed to the geographic areas based on the location of the customers purchasing and leasing the products. The revenues recognized by geographic area for the fiscal years ended September 30, 20112013 and 2010,2012, are as follows:
| | Fiscal Years Ended | | | | | September 30, | | | | | 2011 | | | 2010 | | | 2013 | | | 2012 | | United States of America | | $ | 14,499,613 | | | $ | 12,427,248 | | | $ | 7,179,043 | | | $ | 7,398,627 | | Latin American Countries | | | 2,533,483 | | | | - | | | | 5,252,960 | | | | 2,450,984 | | Caribbean Countries and Commonwealths | | | 912,504 | | | | 23,723 | | | | 3,136,908 | | | | 3,217,651 | | Other Foreign Countries | | | 16,203 | | | | - | | | | 72,151 | | | | 47,717 | | Total | | $ | 17,961,803 | | | $ | 12,450,971 | | | $ | 15,641,062 | | | $ | 13,114,979 | |
The long-lived assets, net of accumulated depreciation and amortization, used in the generation of revenues by geographic area as of September 30, 20112013 and 2010,2012, were as follows: | | Net Property and Equipment | | | Net Monitoring Equipment | | | | 2013 | | | 2012 | | | 2013 | | | 2012 | | United States of America | | $ | 318,201 | | | $ | 504,491 | | | $ | 878,823 | | | $ | 2,174,976 | | Latin American Countries | | | - | | | | - | | | | - | | | | 719,171 | | Caribbean Countries and Commonwealths | | | - | | | | - | | | | 351,138 | | | | 263,782 | | Other Foreign Countries | | | - | | | | - | | | | 6,735 | | | | 14,018 | | Total | | $ | 318,201 | | | $ | 504,491 | | | $ | 1,236,696 | | | $ | 3,171,947 | |
| | Net Property and Equipment | | | Net Monitoring Equipment | | | | 2011 | | | 2010 | | | 2011 | | | 2010 | | United States of America | | $ | 1,082,453 | | | $ | 1,466,001 | | | $ | 3,352,614 | | | $ | 1,567,567 | | Latin American Countries | | | - | | | | 12,779 | | | | 32,919 | | | | 113,798 | | Caribbean Countries and Commonwealths | | | 4,180 | | | | 6,542 | | | | 71,687 | | | | - | | Other Foreign Countries | | | - | | | | - | | | | 4,765 | | | | 1,991 | | Total | | $ | 1,086,633 | | | $ | 1,485,322 | | | $ | 3,461,985 | | | $ | 1,683,356 | |
Research and Development Costs
All expenditures for research and development are charged to expense as incurred. These expenditures in 20112013 and 20102012 were for the development of SecureAlert’s TrackerPAL™ andthe Company’s ReliAlert™ device and associated services. For the fiscal years ended September 30, 20112013 and 2010,2012, research and development expenses were $1,453,994$987,934 and $1,483,385,$1,248,654, respectively.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense for the fiscal years ended September 30, 20112013 and 2010,2012, was $117,568$30,782 and $87,567,$29,141, respectively.
Stock-Based Compensation
The Company recognizes compensation expense for stock-based awards expected to vest on a straight-line basis over the requisite service period of the award based on their grant date fair value. The Company estimates the fair value of stock options using a Black-Scholes option pricing model which requires management to make estimates for certain assumptions regarding risk-free interest rate, expected life of options, expected volatility of stock and expected dividend yield of stock.
Income Taxes
The Company recognizes deferred income tax assets or liabilities for the expected future tax consequences of events that have been recognized in the financial statements or income tax returns. Deferred income tax assets or liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to apply when the differences are expected to be settled or realized. Deferred income tax assets are reviewed periodically for recoverability and valuation allowances are provided as necessary.
The tax effects from uncertain tax positions can be recognized in the financial statements, provided the position is more likely than not to be sustained on audit, based on the technical merits of the position. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized, upon ultimate settlement with the relevant tax authority. The Company applied the foregoing accounting standard to all of its tax positions for which the statute of limitations remained open as of the date of the accompanying consolidated financial statements.
The Company’s policy is to recognize interest and penalties related to income tax issues as components of other noninterest expense. As of September 30, 2013 and September 30, 2012, the Company did not record a liability for uncertain tax positions.
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 attributable to common stockholders by the sum of the weighted-average number of common shares outstanding and the weighted-average dilutive common share equivalents 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, and shares issuable upon conversion of preferred stock. As of September 30, 20112013 and 2010,2012, there were 399,448,202604,006 and 268,783,3612,825,171 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 stock equivalents outstanding as of September 30, 20112013 and 2010,2012, consisted of the following: | | 2011 | | | 2010 | | | 2013 | | | 2012 | | Conversion of debt and accrued interest | | | - | | | | 4,600,910 | | | Conversion of debt and accrued interest and loan origination fees | | | | - | | | | 863,499 | | Conversion of Series D Preferred stock | | | 269,070,000 | | | | 212,442,000 | | | | 14,040 | | | | 1,462,890 | | Exercise of outstanding common stock options and warrants | | | 99,178,202 | | | | 27,740,451 | | | | 427,966 | | | | 336,782 | | Exercise and conversion of outstanding Series D Preferred stock | | | | | | | | | | warrants | | | 31,200,000 | | | | 24,000,000 | | | Exercise and conversion of outstanding Series D Preferred stock warrants | | | | 162,000 | | | | 162,000 | | Total common stock equivalents | | | 399,448,202 | | | | 268,783,361 | | | | 604,006 | | | | 2,825,171 | |
Recent Accounting Pronouncements
From time to time, new accounting pronouncements areIn July 2013, the FASB issued byASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which addresses the Financial Accounting Standards Board (FASB)financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. This guidance requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other standard setting bodies, which are adopted bycarryforward that would apply in settlement of the uncertain tax positions. ASU 2013-11 will be effective for us beginning in the first quarter of fiscal 2014. Early adoption is permitted. Since ASU 2013-11 only impacts financial statement disclosure requirements for unrecognized tax benefits, the Company asdoes not expect the adoption of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will notguidance to have a material impact on itsthe Company's consolidated financial position or results of operations upon adoption.statements.
(3) Acquisitions, Goodwill and Other Intangible Assets
As of September 30, 2011, the Company had recorded goodwill and intangible assets related to the acquisition of controlling interest of Midwest, Court Programs, Bishop Rock Software, and International Surveillance Services Corp (“ISS”). The Company has also entered into a license agreement related to the use of certain patents. The following table summarizes the activity and balance of goodwill for the fiscal years ended September 30, 2011:
(3) | Acquisitions and Other Intangible Assets |
| | | | | | | | | | | | | | | | | | | | | Midwest Monitoring & Surveillance | | | Court Programs, Inc. | | | Bishop Rock Software | | | Patent | | | International Surveillance Services Corp. | | | Total | | | | | | | | | | | | | | | | | | | | | Goodwill | | $ | 3,401,327 | | | $ | 2,488,068 | | | $ | - | | | $ | - | | | $ | - | | | $ | 5,889,395 | | Other intangible assets | | | | | | | | | | | | | | | | | | | | | | | | | Trade name | | | 120,000 | | | | 99,000 | | | | 10,000 | | | | - | | | | - | | | | 229,000 | | Software | | | - | | | | - | | | | 380,001 | | | | - | | | | - | | | | 380,001 | | Customer relationships | | | - | | | | 6,000 | | | | - | | | | - | | | | - | | | | 6,000 | | Patent license agreement | | | - | | | | - | | | | - | | | | 50,000 | | | | - | | | | 50,000 | | Non-compete agreements | | | 2,000 | | | | 6,000 | | | | - | | | | - | | | | - | | | | 8,000 | | Royalty agreement | | | - | | | | - | | | | - | | | | - | | | | 5,003,583 | | | | 5,003,583 | | Total other intangible assets | | | 122,000 | | | | 111,000 | | | | 390,001 | | | | 50,000 | | | | 5,003,583 | | | | 5,676,584 | | Accumulated amortization | | | (32,667 | ) | | | (35,900 | ) | | | (345,022 | ) | | | (9,259 | ) | | | (62,545 | ) | | | (485,393 | ) | Other intangible assets, net of accumulated amortization | | | 89,333 | | | | 75,100 | | | | 44,979 | | | | 40,741 | | | | 4,941,038 | | | | 5,191,191 | | Total goodwill and other intangible assets, net of amortization | | $ | 3,490,660 | | | $ | 2,563,168 | | | $ | 44,979 | | | $ | 40,741 | | | $ | 4,941,038 | | | $ | 11,080,586 | |
The following table summarizes the classificationactivity of intangible assets for the intangibles and goodwill as offiscal year ended September 30, 2010:2013: | | Borinquen Container Corporation | | | International Surveillance Services Corp. | | | Patent | | | Total | | | | | | | | | | | | | | | Intangible assets: | | | | | | | | | | | | | Patent license agreement | | $ | - | | | $ | - | | | $ | - | | | $ | - | | Royalty agreement | | | 11,616,984 | | | | 5,003,583 | | | | 50,000 | | | | 16,670,567 | | Total intangible assets | | | 11,616,984 | | | | 5,003,583 | | | | 50,000 | | | | 16,670,567 | | Accumulated amortization | | | (673,374 | ) | | | (562,903 | ) | | | (20,370 | ) | | | (1,256,647 | ) | Intangile assets, net of accumulated amortization | | $ | 10,943,610 | | | $ | 4,440,680 | | | $ | 29,630 | | | $ | 15,413,920 | |
| | Midwest Monitoring & Surveillance | | | Court Programs, Inc. | | | Bishop Rock Software | | | Patent | | | Total | | | | | | | | | | | | | | | | | | Goodwill | | $ | 1,421,995 | | | $ | 2,488,068 | | | $ | - | | | $ | - | | | $ | 3,910,063 | | Other intangible assets | | | | | | | | | | | | | | | | | | | | | Trade name | | | 120,000 | | | | 99,000 | | | | 10,000 | | | | - | | | | 229,000 | | Software | | | - | | | | - | | | | 380,001 | | | | - | | | | 380,001 | | Customer relationships | | | - | | | | 6,000 | | | | - | | | | - | | | | 6,000 | | Patent license agreement | | | - | | | | - | | | | - | | | | 50,000 | | | | 50,000 | | Non-compete agreements | | | 2,000 | | | | 6,000 | | | | - | | | | - | | | | 8,000 | | Total other intangible assets | | | 122,000 | | | | 111,000 | | | | 390,001 | | | | 50,000 | | | | 673,001 | | Accumulated amortization | | | (24,667 | ) | | | (28,100 | ) | | | (217,688 | ) | | | (3,704 | ) | | | (274,159 | ) | Other intangible assets, net of accumulated amortization | | | 97,333 | | | | 82,900 | | | | 172,313 | | | | 46,296 | | | | 398,842 | | Total goodwill and other intangible assets, net of amortization | | $ | 1,519,328 | | | $ | 2,570,968 | | | $ | 172,313 | | | $ | 46,296 | | | $ | 4,308,905 | |
The following table summarizes the activity of intangible assets for the fiscal year ended September 30, 2012:
| | Borinquen Container Corporation | | | International Surveillance Services Corp. | | | Patent | | | Total | | | | | | | | | | | | | | | Intangible assets: | | | | | | | | | | | | | Patent license agreement | | $ | - | | | $ | - | | | $ | - | | | $ | - | | Royalty agreement | | | 10,768,555 | | | | 5,003,583 | | | | 50,000 | | | | 15,822,138 | | Total intangible assets | | | 10,768,555 | | | | 5,003,583 | | | | 50,000 | | | | 15,822,138 | | Accumulated amortization | | | - | | | | (312,724 | ) | | | (14,816 | ) | | | (327,540 | ) | Intangile assets, net of accumulated amortization | | $ | 10,768,555 | | | $ | 4,690,859 | | | $ | 35,184 | | | $ | 15,494,598 | |
The following table summarizes the future maturities of amortization of intangible assets as of September 30, 2011:2013:
Fiscal Year | | Borinquen Container Corporation | | | International Surveillance Services Corp. | | | Patent | | | Total | | | | | | | | | | | | | | | 2014 | | $ | 630,792 | | | $ | 250,179 | | | $ | 5,556 | | | $ | 886,527 | | 2015 | | | 630,792 | | | | 250,179 | | | | 5,556 | | | | 886,527 | | 2016 | | | 630,792 | | | | 250,179 | | | | 5,556 | | | | 886,527 | | 2017 | | | 630,792 | | | | 250,179 | | | | 5,556 | | | | 886,527 | | 2018 | | | 630,792 | | | | 250,179 | | | | 5,556 | | | | 886,527 | | Thereafter | | | 7,789,650 | | | | 3,189,785 | | | | 1,850 | | | | 10,981,285 | | | | | | | | | | | | | | | | | | | Total | | $ | 10,943,610 | | | $ | 4,440,680 | | | $ | 29,630 | | | $ | 15,413,920 | |
Fiscal Year | | Midwest Monitoring & Surveillance | | | Court Programs, Inc. | | | Bishop Rock Software | | | Patent | | | International Surveillance Services Corp. | | | Total | | | | | | | | | | | | | | | | | | | | | 2012 | | $ | 8,000 | | | $ | 7,800 | | | $ | 37,452 | | | $ | 5,556 | | | $ | 250,179 | | | $ | 308,987 | | 2013 | | | 8,000 | | | | 6,800 | | | | 667 | | | | 5,556 | | | | 250,179 | | | | 271,202 | | 2014 | | | 8,000 | | | | 6,600 | | | | 667 | | | | 5,556 | | | | 250,179 | | | | 271,002 | | 2015 | | | 8,000 | | | | 6,600 | | | | 667 | | | | 5,556 | | | | 250,179 | | | | 271,002 | | 2016 | | | 8,000 | | | | 6,600 | | | | 667 | | | | 5,556 | | | | 250,179 | | | | 271,002 | | Thereafter | | | 49,333 | | | | 40,700 | | | | 4,859 | | | | 12,961 | | | | 3,690,143 | | | | 3,797,996 | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 89,333 | | | $ | 75,100 | | | $ | 44,979 | | | $ | 40,741 | | | $ | 4,941,038 | | | $ | 5,191,191 | |
Borinquen Container CorporationMidwest Monitoring & Surveillance
Effective December 1, 2007,On September 5, 2012, the Company purchased a 51% ownership interest, including a voting interest, in Midwest Monitoring & Surveillance, Inc. (“Midwest”). Midwest provides electronic monitoring for individuals on parole.
Effective April 1, 2010, the Company and the Midwest minority owners executedentered into an agreement to extendredeem the option period forroyalty held by Borinquen pursuant to a royalty agreement dated July 1, 2011, as amended. Under the purchaseterms of the remaining minority ownership interestroyalty, Borinquen had the right to receive 20 percent of Midwest. As part of the agreement, the Company’s total ownership interest in Midwest increased from 51% to 53.145%. The Company purchased the remaining 46.855% ownership interest effective June 30, 2011, as described below.net revenues derived within certain geographic territories.
Effective, June 30, 2011, the Company exercised its option to acquire the remaining ownership interest of 46.86% in Midwest for the following consideration: (1) a combined $400,000 in initial cash payments; (2) a total of $750,000 in quarterly cash installment payments, beginning July 2011 and ending September 2013 (of the $750,000, $107,054 debt discount was recorded to impute interest resulting in a net $642,946). As of September 30, 2011, $562,088, net of debt discount of $87,912, was outstanding of which $369,612 is reported under debt obligations (see Note 11)2012, the agreement to redeem the royalty had not yet been completed and $192,476 under related-party transactions (see Note 6); (3) quarterly payments duringas a result the same period equalCompany capitalized $10,768,555 as a non-current asset and recorded a loan payable to 10%Borinquen to reflect the obligation. On February 1, 2013, the Company completed the redemption of the gross profitsroyalty with Borinquen which was funded under a Loan and Security Agreement (“Loan”) from Sapinda Asia Limited (“Sapinda Asia”), see Note 5. The Company capitalized the total cost of Midwest, estimatedthe royalty purchase commitment of $11,616,984, as a non-current asset and will amortize the asset over the remaining term of the royalty agreement, subject to periodic analysis for impairment based on future expected revenues. The Company will annually calculate the amortization based on the effective royalty rate and on the revenues in the geographic territory subject to the royalty. The Company’s analysis will be approximately $545,000;based on such factors as historical revenue and (4) 2,705,264 restrictedexpected revenue growth in the territory.
During the fiscal years ended 2013 and 2012, the Company recorded $673,374 and $0 of amortization expense for the intangible asset, resulting in a total accumulated amortization of $673,374 and $0, and net intangible assets of $10,943,610, and $10,768,555, respectively.
International Surveillance Services Corp. Effective July 1, 2011, the Company entered into a stock purchase agreement and purchased ISS, a Puerto Rico corporation, in consideration of 310,000 shares of the Company’sits common stock, valued at $238,064 ($0.088 per share).$5,084,000 of which $5,003,583 was recorded as a royalty intangible asset. ISS is an international distributor of electronic monitoring devices to individuals on parole or probation. The cash installment paymentsCompany acquired ISS to utilize the knowledge and connections the company has in Central and South America and to acquire the rights to its territorial commissions that were being paid to ISS. The Company recorded $250,179 and $250,179 of $750,000, net of debt discount, are recorded in debt obligations (see Note 11) and the remaining liabilities are recorded under accrued liabilities (see Note 5). As a result of the consideration noted above along with $153,323 of non-controlling interest recognized through the completion of the acquisition, goodwill increased $1,979,332amortization expense on intangible assets for ISS during the fiscal year ended September 30, 2011. The Company completed the Midwest acquisition to gain more market share in the parole2013 and probation sector and expand the available service and product offerings, including prison equipment sales.
The Company recorded no impairment of goodwill for the fiscal year ended September 30, 2011. As of September 30, 2011, the Company had a balance of goodwill of $3,401,327 and $122,000 of other intangible assets, as noted in the table above.
The Company recorded $8,000 of amortization expense for Midwest intangible assets during fiscal years ended September 30, 2011 and 20102012, resulting in a total accumulated amortization of $32,667$562,903 and net other intangible assets of $89,333 as of September 30, 2011.
Court Programs
Effective December 1, 2007, the Company purchased a 51% ownership interest, including a voting interest, in Court Programs, Inc., a Mississippi corporation, Court Programs of Northern Florida, Inc., a Florida corporation, and Court Programs of Florida, Inc., a Florida corporation (collectively, “Court Programs”). The Company purchased the remaining 49% ownership interest effective March 1, 2010. Court Programs is a distributor of electronic monitoring devices to courts providing a solution to monitor individuals on probation. The Company acquired Court Programs to utilize its preexisting business relationships to gain more market share and expand available service offerings.
The Company recorded no impairment of goodwill for the fiscal year ended September 30, 2011. As of September 30, 2011, the Company had a balance of goodwill of $2,488,068 and $111,000 of other intangible assets, as noted in the table above.
The Company recorded $7,800 of amortization expense on intangible assets for Court Programs during the fiscal year ended September 30, 2011, resulting in a total accumulated amortization of $35,900 and net other intangible assets of $75,100.
Bishop Rock Software
Effective January 14, 2009, the Company purchased all of the assets of Bishop Rock Software, Inc., a California corporation through a wholly-owned subsidiary, SecureAlert Enterprise Solutions, Inc. The Company recorded $127,334 of amortization expense on intangible assets for Bishop Rock Software during the fiscal year ended September 30, 2011, resulting in a total accumulated amortization of $345,022$312,724, and net intangible assets of $44,979. During the fiscal year ended 2011, SecureAlert Enterprise Solutions, Inc. merged into SecureAlert Monitoring, Inc.$4,440,680 and $4,690,859, respectively.
Patent On January 29, 2010, the Company and Satellite Tracking of People, LLC (“STOP”) entered into a license agreement whereby STOP granted to Company a non-exclusive license under U.S. Patent No. 6,405,213 and any and all patents issuing from continuation, continuation-in-part, divisional, reexamination and reissues thereof and along with all foreign counterparts, to make, have made, use, sell, offer to sell and import covered products in SecureAlert’s present and future business. The license granted will continue for so long as any of the licensed patents have enforceable rights. The license granted is not assignable or transferable except for sublicenses within the scope of its license to the Company’s subsidiaries.
The Company agreed to paypaid $50,000 as consideration for the use of this patent. Of the $50,000, $25,000 was paid during
During the fiscal yearyears ended September 30, 20102013 and 2012, the balance was paid on February 3, 2011. The Company recorded $5,555$5,554 and $5,557 of amortization expense for the patent, during the fiscal year ended September 30, 2011, resulting in a total accumulated amortization of $9,259$20,370 and $14,816, and net intangible assets of $40,741.$29,630 and $35,184, respectively.
International Surveillance Services Corp.
Effective July 1, 2011, the Company entered into a stock purchase agreement and purchased ISS, a Puerto Rico corporation, in consideration of 62,000,000 shares of its common stock. ISS is an international distributor of electronic monitoring devices to individuals on parole or probation. The Company acquired ISS to utilize the knowledge and connections the company has in Central and South America and to acquire the rights to its territorial commissions that were being paid to ISS.
As of September 30, 2011, the Company had a balance of goodwill of $0 and $5,003,583 of other intangible assets, as noted in the table above.
The Company recorded $62,545 of amortization expense on intangible assets for ISS during the fiscal year ended September 30, 2011, resulting in a total accumulated amortization of $62,545 and net other intangible assets of $4,941,038.
Supplemental Pro Forma Results of Operations (unaudited)
The following tables present the pro forma results of operations for the fiscal years ended September 30, 2011 and 2010, as though the Midwest, Court Programs, Bishop Rock Software, and ISS acquisitions had been completed as of the beginning of each period presented:
| | September 30, | | | | 2011 | | | 2010 | | Revenues: | | | | | | | Products | | $ | 1,551,511 | | | $ | 371,214 | | Monitoring services | | | 16,525,350 | | | | 12,079,757 | | Total revenues | | | 18,076,861 | | | | 12,450,971 | | | | | | | | | | | Cost of revenues: | | | | | | | | | Products | | | 651,113 | | | | 45,131 | | Monitoring services | | | 8,914,846 | | | | 6,933,843 | | Impairment of monitoring equipment and parts (Note2) | | | 464,295 | | | | 590,801 | | Total cost of revenues | | | 10,030,254 | | | | 7,569,775 | | | | | | | | | | | Gross profit | | | 8,046,607 | | | | 4,881,196 | | | | | | | | | | | Operating expenses: | | | | | | | | | Selling, general and administrative (including $1,530,646 and $1,269,427, respectively, | | | | | | | | | of compensation expense paid in stock, stock options / warrants or as a result of | | | | | | | | | amortization of stock-based compensation) | | | 16,143,616 | | | | 12,655,798 | | Research and development | | | 1,453,994 | | | | 1,483,385 | | Settlement expense | | | 276,712 | | | | 1,150,000 | | Impairment of goodwill (Note 2) | | | - | | | | 204,735 | | | | | | | | | | | Loss from operations | | | (9,827,715 | ) | | | (10,612,722 | ) | | | | | | | | | | Other income (expense): | | | | | | | | | Loss on disposal of equipment | | | (301,010 | ) | | | (41,597 | ) | Redemption of SecureAlert Monitoring Series A Preferred | | | 16,683 | | | | (19,095 | ) | Interest income | | | 19,392 | | | | 63,000 | | Interest expense (including $42,351 and $3,006,297, respectively, paid in stock, | | | | | | | | | stock options / warrants, or as a result of amortization of debt discount) | | | (712,840 | ) | | | (4,146,459 | ) | Derivative valuation gain (Note 10) | | | - | | | | 200,534 | | Other income (expense), net | | | 576,059 | | | | 147,206 | | Net loss | | | (10,229,431 | ) | | | (14,409,133 | ) | Dividends on Series D Preferred stock | | | (2,029,996 | ) | | | (1,494,481 | ) | Net loss attributable to SecureAlert, Inc. common stockholders | | $ | (12,259,427 | ) | | $ | (15,903,614 | ) | Net loss per common share, basic and diluted | | $ | (0.03 | ) | | $ | (0.07 | ) | Weighted average common shares outstanding, basic and diluted | | | 380,659,000 | | | | 227,321,000 | |
During the fiscal year ended September 30, 2009 the Company established a line of credit for $1,000,000 with a bank. The interest rate was 3.25% and the line of credit matured on September 22, 2011. The line of credit was secured by the pledge of certificates of deposit on behalf of the Company by ADP Management Corporation (“ADP”), an affiliate of the Company’s former Chairman and Chief Executive Officer. In addition to the interest paid to the bank, the Company paid ADP $105,385 in interest, $100,000 of origination fees and 129 shares of Series D Preferred stock valued at $108,360 as consideration for securing the line of credit. Thus, the total effective interest rate to the Company in connection with the line of credit was 36% for the fiscal year ended September 30, 2010.
During the fiscal year ended September 30, 2011, the Company issued 2,202 shares of Series D Convertible Preferred stock ($500 to 1 share rate, effective conversion rate of $0.08 per share of common stock) to pay off and close the outstanding principal and accrued interest balance of $1,100,831 (see Note 6). As of September 30, 2011 and 2010, the Company owed zero and $1,000,000 on the line of credit, respectively. As of September 30, 2011, the line of credit was terminated resulting in no available funds for withdrawal.
Accrued expenses consisted of the following as of September 30, 20112013 and 2010:2012: | | 2011 | | | 2010 | | | 2013 | | | 2012 | | Accrued royalties | | | $ | 714,400 | | | $ | 641,446 | | Accrued payroll, taxes and employee benefits | | $ | 749,509 | | | $ | 536,501 | | | | 473,179 | | | | 540,931 | | Accrued consulting | | | 370,658 | | | | 304,025 | | | | 317,300 | | | | 352,072 | | Accrued taxes - foreign and domestic | | | | 262,880 | | | | 262,440 | | Accrued settlement costs | | | 276,712 | | | | - | | | | 76,000 | | | | 50,000 | | Accrued acquisition costs payable in cash | | | 272,500 | | | | 48,000 | | | Accrued acquisition costs payable in cash to a related-party | | | 272,500 | | | | - | | | Accrued board of directors fees | | | | 68,090 | | | | 265,000 | | Accrued other expenses | | | | 65,903 | | | | 183,722 | | Accrued legal costs | | | 215,895 | | | | 38,111 | | | | 57,001 | | | | 14,628 | | Accrued board of directors fees | | | 153,101 | | | | 25,000 | | | Accrued cellular costs | | | | 55,000 | | | | 27,662 | | Accrued outside services | | | | 33,022 | | | | 38,630 | | Accrued warranty and manufacturing costs | | | 66,622 | | | | 138,622 | | | | 30,622 | | | | 30,622 | | Accrued interest | | | | 27,394 | | | | 27,831 | | Accrued cost of revenues | | | 42,026 | | | | - | | | | - | | | | 4,467 | | Accrued indigent fees | | | 39,175 | | | | 45,434 | | | Accrued cellular costs | | | 32,299 | | | | 6,366 | | | Accrued administration fees | | | 29,900 | | | | 25,000 | | | Accrued outside services | | | 28,294 | | | | 68,730 | | | Accrued inventory costs | | | 26,900 | | | | - | | | Accrued interest | | | 26,329 | | | | 219,791 | | | Accrued loan origination fees | | | - | | | | 344,370 | | | Accrued research and development costs | | | - | | | | 2,993 | | | Accrued patent liability | | | - | | | | 32,550 | | | Accrued other expenses | | | 110,810 | | | | 68,802 | | | Total accrued expenses | | $ | 2,713,230 | | | $ | 1,904,295 | | | $ | 2,180,791 | | | $ | 2,439,451 | |
During the fiscal year ended September 30, 2010, the Company exchanged 1,999 shares of Series D Preferred stock for the conversion of $1,935,799 of accrued expenses.
(6)(5) | Certain Relationships and Related Party Transactions |
The Company has entered into certain transactions with related parties.parties during the fiscal years ended September 30, 2013 and 2012. These transactions consist mainly of financing transactions and consulting arrangements. Related-Party Agreementservice agreements. Transactions with related parties are reviewed and Noteapproved by the independent and disinterested members of the Board of Directors.
Royalty Agreement
On June 24, 2010,August 4, 2011, with an effective date of July 1, 2011, the Company and ADP Management Corporation (“ADP”) entered into an agreement whereby ADP agreed(the “Royalty Agreement”) with Borinquen (a shareholder) to loan and/purchase its wholly-owned subsidiary ISS for 310,000 shares of the Company’s common stock, valued at the market price on the date of the Royalty Agreement at $16.40 per share, or invest between $1,000,000 and $5,000,000 to finance$5,003,583. As additional consideration, the manufacturingCompany also granted Borinquen a royalty in the amount of TrackerPAL™ II (e) and ReliAlert™20% of net revenues from the sale or lease of monitoring devices and monitoring services within a territory comprised of South and Central America, the Caribbean, Spain and Portugal, for a term of 20 years. The royalty payments were due quarterly through June 30, 2031.
On February 1, 2013, the Company entered into an agreement with Sapinda Asia and Borinquen (the Settlement and Royalty and Share Buy Back Agreement) to provide additional working capitalcomplete the repurchase of the royalty (at a cost of $11,616,984) and to pay accrued royalty expenses (totaling $1,383,016) for a total payment of $13,000,000. To finance this redemption, the Company. ADP is controlled by the Company’s former Chairman and Chief Executive Officer, David G. Derrick who resigned from all positionsCompany borrowed $16,700,000 in connection with the Company on June 30, 2011.Loan from Sapinda Asia. The Company agreedused $13,000,000 toward the redemption of the royalty and to pay a 10% origination fee to ADPoff accrued royalty fees and used $3,700,000 of the loan for money loaned and/or invested (for a maximum of $500,000) convertible into shares of Series D Preferred stock or cash, and interest at a rate of 16% per annum payable quarterly. The amounts due under this note were due upon demand.
As of September 30, 2010, the Company owed $0 to ADP under the note and $449,755 of accrued interest and origination fees was included in accrued expenses (see Note 5).
operating capital. During the fiscal year ended September 30, 2011, increases to the note consisted of $515,536 of expenses owed to ADP that are reimbursable by the Company, offset, in part, by cash repayments of $188,634, resulting in an outstanding balance of $326,902 which amount was converted during the fiscal year into 654 shares of Series D Preferred stock ($500 to 1 share rate, effective conversion rate of $0.08 per share of common stock).
Also during the fiscal year ended September 30, 2011, the Company incurred additional interest due to ADP at an incremental interest rate of 12.75% on a $1,000,000 bank line of credit facilitated by ADP by the pledge of certificates of deposit owned by ADP as collateral for the loan (see Note 4). As of September 30, 2011, the line of credit was paid in full by ADP and the bank released the Company from its obligation. The Company executed a promissory note payable to ADP in the amount of $1,000,000 for satisfying the line of credit obligation. During the fiscal year ended September 30, 2011, the promissory note of $1,000,000 and $100,831 of related accrued interest were converted into 2,202 shares of Series D Convertible Preferred D stock ($500 to 1 share rate, effective conversion rate of $0.08 per share of common stock). Additionally,2013, the Company recorded $42,351a debt discount of $14,296,296 which was recorded as interest expense to account for a beneficial conversion feature in connection with the agreement.
ADP also converted $203,267Loan. Additionally, $605,281 of an outstanding balance of $303,267 in connection with unpaid interest and fees into 406 shares of Series D Preferred stock ($500 to 1 share rate, effective conversion rate of $0.08 per share of common stock) resulting in an outstanding balance of $100,000 to be paid in monthly installments of $20,000, ending on December 1, 2011. As of September 30, 2011, the remaining balance due to ADPexpense was $40,000.
As of September 30, 2011, ADP had loaned and/or assisted in facilitating approximately $4,030,380 of financing to the Company resulting in $403,038 in origination fees in connection with the agreement.
The table below summarizes the amounts that ADP converted into 3,262 shares of Series D Preferred stockrecorded during the fiscal year ended 2013 to record accretion of debt discount. On September 30, 2011:
| | Amount | | | Shares | | Principal and interest on bank line of credit | | $ | 1,100,831 | | | | 2,202 | | Note payable | | | 326,902 | | | | 654 | | Unpaid interest and fees | | | 203,267 | | | | 406 | | Total | | $ | 1,631,000 | | | | 3,262 | |
Related-Party Consulting Arrangement
The Company agreed to pay consulting fees to ADP for assisting the Company to develop its new business direction2013, Sapinda Asia converted all outstanding principal and business plan and to provide introductions to strategic technical and financial partners. Under the terms of this agreement, the Company paid ADP a consulting fee of $20,000 per month and the Company agreed to reimburse the expenses incurred by ADP in the course of performing services under the consulting arrangement.
The ADP agreement also required ADP to pay the salary of Mr. Derrick as Chief Executive Officer and Chairman of the Board of Directors of the Company. The Board of Directors, with Mr. Derrick abstaining, approved both of these arrangements.
The Company recorded $240,000interest in connection with the ADP consulting arrangement during the fiscal year ended September 30, 2010, and $180,000 for the fiscal year ended September 30, 2011. The $180,000 of consulting expense recorded reflects services rendered for nine months prior to terminating the consulting arrangement upon the resignation of Mr. Derrick on June 30, 2011 from his positions within the Company as disclosedLoan in the Company’s form 8-K filed on July 6, 2011.amount of $17,576,627 into 3,905,917 shares of common stock at a rate of $4.50 per share.
Related-Party Line of Credit
As of September 30, 2009, the Company owed $76,022 under a line-of-credit agreement with ADP Management, an entity owned and controlled by Mr. Derrick, the Company’s Chief Executive Officer at that time. Outstanding amounts on the line of credit accrued interest at 11% per annum and were due upon demand. During the fiscal year ended September 30, 2010, the interest rate increased from 11% to 16% and the Company paid off the line-of-credit. The decrease in the balance consisted of net cash repayments of $729,009 offset, in part, by $652,987 of expenses owed to ADP Management that are reimbursable by the Company.
Terminated Loan and Security Agreement
On August 19, 2011,February 1, 2013, the Company entered into a Loan and Security Agreementrevolving loan agreement with an entity under whichSapinda Asia (the “Revolving Loan”). Under this arrangement, the Company couldmay borrow up to $8,000,000 on a line$1,200,000 at an interest rate of credit. On September 30, 2011, the Company3% per annum for unused funds and the lender agreed to terminate the agreement and enter into an agreement10% per annum for the lender to raise additional equity on behalf of the Company through the sale of Series D Preferred stock.borrowed funds. As of September 30, 2011,2013, no advances have been made under this loan and the Company owed $500,000had accrued $23,868 in interest liability on the line of credit. Subsequently,Revolving Loan. On October 24, 2013, the $500,000 was paid back andCompany drew down the line of credit was closed.full $1,200,000 for use in a performance bond as required under a contract with an international customer.
RoyaltyRelated-Party Service Agreement
On July 1, 2011, the Company entered into a royalty agreement with Borinquen Container Corp., a corporation organized under the laws of the Commonwealth of Puerto Rico, wherein the Company agreed to pay a royalty in an amount equal to 20% of the net revenues from the sale or lease of its products and services within South and Central America, the Caribbean, Spain and Portugal. As of September 30, 2011, the Company accrued $505,977 of royalty expense in connection with the royalty agreement, recorded under accounts payable. Subsequently, the Company issued 172,704 shares of common stock to pay $14,386 of royalty expense due in connection with a royalty agreement.
Related-Party Notes Payable
Note #1
In November 2008, the Company borrowed $1,000,000 from a former officer of the Company. The unsecured note payable accrued interest at 15% and was due and payable upon the Company receiving cash proceeds of $1,000,000 or more from the sale of common stock or other additional financing activities or February 4, 2009, whichever comes first. The Company paid a loan origination fee of $50,000 in cash and 100,000 shares of restricted common stock. In February 2009, the officer loaned an additional $500,000 to the Company resulting in a total of $1,500,000 due to the officer. The Company and officer agreed to extend the due date of the full obligation to February 26, 2010. As of September 30, 2009, the Company owed $1,500,000 plus $12,197 in accrued interest. On January 13, 2010, the former officer converted the note of $1,500,000 into 1,500 shares of Series D Preferred stock.
Note #2
Effective March 1, 2010, the Company purchased the remaining 49% ownership of Court Programs. The Company paid $100,000 in cash and entered into an unsecured note payable of $200,000, together with interest on any unpaid amounts at 8% per annum. During the fiscal year ended September 30, 2011, the maturity date of this note was extended to November 1, 2012. As of September 30, 2011 and 2010, the Company owed $139,272 and $150,000 in principal plus $2,167 and $9,181, respectively, in accrued interest under this note, which is payable to the former principal of Court Programs.
Note #3
The Company entered into a promissory note on March 16, 2010 with a former officer of the Company for $500,000, accruing interest at a rate of 12% per annum or a 1% origination fee of $5,000, whichever is greater, maturing on April 15, 2010. On April 1, 2010, the Company paid off the promissory note for $505,000 in outstanding principal and accrued interest resulting in an effective interest rate of 21.5% per annum.
Note #4
During the fiscal year ended September 30, 2011,2013, the Company borrowed $662,369 fromentered into an officeragreement with Paranet Solutions, LLC to provide the following primary services: (1) procurement of hardware and software necessary to ensure that vital databases are available in the event of a disaster (backup and disaster recovery system); and (2) providing the security of all data and the integrity of such data against all loss of data, misappropriation of data by Paranet, its employees and affiliates. David S. Boone, a director and member of the Company. The notes bore interest atCompany’s Executive Committee, is the rateChief Executive Officer of 12% per annum andParanet. As consideration for these services, the Company and paid $25,000 in origination fees. These notes were paid off in cash prioragreed to September 30, 2011. As of September 30, 2011,pay Paranet $4,500 per month. The arrangement can be terminated by either party for any reason upon ninety (90) days written notice to the Company owed no principal or accrued interest and fees under the notes.other party. Related-Party Loan Note #5
During the fiscal year ended 2012, the Company borrowed $500,000 from a former officer. During the fiscal year ended September 30, 2011,2013, the Company established terms for this loan which created a debt discount of $500,000 which was immediately recorded as interest expense to account for a beneficial conversion feature to reflect an adjustment in the conversion rate from $11.00 to $4.50 to equal the conversion rate of the Loan to redeem the royalty. During fiscal year 2013, this debt was converted into 111,112 shares of common stock. Related-Party Convertible Debenture #1
During the fiscal year ended 2012, the Company borrowed $400,000$500,000 from onea director with an interest rate of its directors in the form of two promissory notes which bear interest at 8% per annumannum. The debenture was to mature on December 17, 2012 and are convertible into sharessecured by the domestic patents of Series D Preferred stock at $500 per share. Onthe Company. During the fiscal year ended September 30, 2011,2013, the $400,000 in principal and all $28,631 in related accrued interestdebenture was converted into 857 sharesconvertible at $4.50 which created a beneficial conversion feature discount of Series D Preferred stock.
Note #6
Effective, June 30, 2011,$110,556 which was to be amortized over the Company exercised its option to acquire the remaining ownership interest of 46.86% in Midwest, which resulted in the Company entering into quarterly cash installments due to a former principal of Midwest (a current employeeterm of the Company) totaling $225,000, beginning July 2011 and ending September 2013. As of September 30, 2011, $225,000loan, but was due. The Company imputed interest sinceaccelerated upon the note has no stated interest rate. As of September 30, 2011, the remaining debt discount was $32,524 resulting in net debt obligations to the employee of $192,476.
Related-Party Series A 15% Debenture
On May 1, 2009, the Company issued a Series A 15% debenture due and payable on November 1, 2010 to an entity controlled by an officer of the Company for $250,000 in cash. In addition to the rights and termsconversion of the debenture the entity received warrants to purchase 2,200,000into 117,784 shares of common stock.
Related-Party Convertible Debenture #2
During the Company’s common stock exercisablefiscal year ended 2012, the Company borrowed $2,000,000 from a significant shareholder with an interest rate of 8 percent per annum. The debenture was to mature on December 17, 2012 and secured by the domestic patents of the Company. During the fiscal year ended September 30, 2013, the debenture was convertible at $4.50 which created a beneficial conversion feature discount of $442,222, which was to be amortized over a three-year period at an exercise pricethe term of $0.25 per share, valued at $43,926. On January 13, 2010, the entity convertedloan, but was accelerated upon the $250,000conversion of the debenture into 250472,548 shares of Series D Preferredcommon stock. As of September 30, 2011 and 2010, the Company owed $0 in principal plus $0 and $1,381 in accrued interest, respectively under this debenture.
(7) Convertible Promissory Note Facility Agreement On January 15, 2009,3, 2014, the Company entered into ana loan agreement (“Facility Agreement”) with Tetra House Pte. Ltd., (“Tetra House”) to provide unsecured convertible promissory notedebt financing to the Company for $2,700,000 in order to purchase TrackerPAL™ units. The note, atacquisitions and for other corporate purposes, including working capital. Tetra House is a private company incorporated under the lender’s option, could be converted into shareslaws of the Republic of Singapore and is controlled by Mr. Guy Dubois who is a director and currently serves as the Chairman of the Company’s common stock at a conversion priceBoard of $0.22 per share. The note accruedDirectors. .Under this agreement, the Company may borrow up to $25,000,000, through May 31, 2014. Borrowed amounts under the Facility Agreement bear interest at a rate of 8% per annum and maturedinterest is payable in arrears semi-annually. All outstanding principal under the Facility Agreement, together with accrued and unpaid interest, is due and payable on January 15, 2010. Interest was due monthly and the principal was due at maturity.3, 2016. The fair market valueCompany may prepay (in minimum amounts of $1,000,000) borrowed amounts without penalty. In consideration of the common stock was $0.23 per share on the dateFacility Agreement, the Company entered into the agreement, resulting in a beneficial conversion feature of $122,727. This was recorded as a debt discountagreed to be expensed over the lifepay Tetra House an arrangement fee equal to 3% of the note. On January 13, 2010,aggregate maximum amount under the holderFacility Agreement ($750,000). The arrangement fee is payable as follows: (i) one percent (1%) due within five business days of signing the Facility Agreement, and (ii) the remaining two percent (2%) being withheld from the first draw down of funds under the Facility Agreement. The Company may draw down funds in increments of not less than $2,000,000 and in integral multiples of $1,000,000 by submitting a Utilization Request to Tetra House. Tetra House has 10 business days in which to fund the Utilization Request upon receipt of such request. The Facility Agreement was reviewed and approved by disinterested and independent members of the convertible promissory note converted the note, including the principalBoard of Directors, David S. Boone, Winfried Kunz, Dan L. Mabey and accrued interestGeorge F. Schmitt. As of $2,148,414 into 2,149 shares of Series D Preferred stock, all remaining unamortized discount was charged to operations on the date of conversion.
(8) Senior Secured Convertible Notes
During the fiscal year ended September 30, 2009,January 14, 2014, the Company issued senior secured convertible notes inborrowed $10,000,000 under the aggregate principal amountFacility Agreement.
Additional Related-Party Transactions and Summary of $3,549,631 to unrelated parties. The proceeds were used to pay off the Company’s line of credit. The interest rate was 15% per annum and the notes matured on March 13, 2010. Interest was due monthly and the principal was due at maturity. These notes were convertible into shares of the Company’s common stock at a conversion price of $0.20 per share or into shares of common stock of a subsidiary of the Company at the fair market value of the stock at the conversion date. The Company determined that the embedded conversion features of the notes were subject to derivative accounting treatment (see Note 10). This resulted in a debt discount valued at $853,166. Additionally, with the issuance of these notes, the Company issued 3,549,630 shares of common stock valued at $226,853 recorded as a debt discount. The value of $1,080,019 recorded as a debt discount is expensed over the life of these notes. On January 13, 2010, the holders of $2,270,000 of this debt converted their notes into 2,270 shares of Series D Preferred stock and all remaining unamortized debt discount was immediately expensed as interest expense. On March 12, 2010, a holder exchanged $849,631 of the notes into a promissory note of $849,631 which was converted into 850 shares of Series D Convertible Preferred stock as part of the acquisition of the remaining ownership of Court Programs (see Note 3). The promissory note required monthly principal payments of $50,000 plus interest at a rate of 12% per annum maturing on July 13, 2011. During July 2010, the Company paid off the outstanding balance of $150,000 and accrued interest of $20,891 for total cash payments of $170,891.All Related-Party Obligations
| | 2013 | | | 2012 | | | | | | | | | Note payable in connection with the redemption of a royalty agreement for $10,768,555. The note required installment payments and was paid off by the proceeds of the Loan. | | $ | - | | | $ | 10,050,027 | | | | | | | | | | | Note payable in connection with the purchase of the remaining ownership of Court Programs, Inc., interest at 12% per annum, with monthly payments of $10,000. This note was assumed through the sale of Court Programs, Inc. | | | - | | | | 46,693 | | | | Note payable from a shareholder and former officer. This was converted into 111,112 shares of common stock. | | | - | | | | 500,000 | | | | | | | | | | | Convertible debenture from a director with an interest rate of 8% per annum. The debenture matured December 17, 2012 and was secured by the domestic patents. The debenture and accrued interest was converted into 117,784 shares of common stock. | | | - | | | | 500,000 | | | | Convertible debenture with a significant shareholder with an interest rate of 8% per annum. The debenture matured December 17, 2012 and was secured by the domestic patents. The debenture and accrued interest was converted into 472,548 shares of common stock. | | | - | | | | 2,000,000 | | | | | | | | | | | Convertible debenture of $16,700,000 from a shareholder with an interest rate of 8% per annum. The debenture matured on August 14, 2014. On September 30, 2013, $16,640,000 plus accrued interest of $936,627 was converted into 3,905,917 shares of common stock. A debt discount of $14,296,296 and $605,281, respectively, was recorded to reflect a beneficial conversion feature. As of September 30, reflect a beneficial conversion feature. As of September 30, 2013, the remaining debt discount was $0. The remaining balance of $60,000 plus accured interest of $3,143 was paid in cash on October 3, 2013. | | | 60,000 | | | | 1,288,693 | | | | | | | | | | | Total related-party debt obligations | | | 60,000 | | | | 14,385,413 | | Less current portion | | | (60,000 | ) | | | (12,654,701 | ) | Long-term debt, net of current portion | | $ | - | | | $ | 1,730,712 | |
(9) Series A 15% Debentures
During the fiscal year ended September 30, 2009, the Company received $4,400,000 in cash from the issuance of Series A 15% debentures. Additionally, the Company issued debentures to a consultant in the principal amount of $106,750 for services rendered to the Company. The debentures earned interest at a rate of 15% interest per annum, with interest due quarterly and principal due at maturity 18 months after issuance. In addition, for every $1 invested in the debenture the holder received one share of the Company’s common stock. At the holder’s option, the debenture may be converted into shares of common stock at a conversion rate of $0.20 per share or into shares at a reduced conversion rate should the Company issue any equity security at a price less than $0.20 per share. The Company determined that the embedded conversion features of the debentures were subject to derivative accounting treatment (see Note 10). This resulted in a debt discount valued at $3,130,423. Additionally, with the issuance of these debentures, the Company issued 4,506,750 shares of common stock valued at $265,982 and 2,200,000 warrants valued at $43,926 recorded as a debt discount. The shares and options were valued upon an allocation on a prorated basis between the debt and equity instruments issued to the debenture holders and the debt discount was expensed over the life of the debentures. As of September 30, 2011 and 2010, the total outstanding balance of the debentures was $0.
In September 2008, the Company sold 4,077,219 shares of common stock at $0.75 per share to an investor. Shortly following the transaction, the market price of the Company’s common stock fell to approximately $0.20 per share. The Company agreed upon the investor’s investment of an additional $3,000,000 (included in the $4,506,750 discussed in the paragraph above) in the Series A 15% debenture that the Company would issue 9,796,636 additional shares of its common stock to the investor. Furthermore, the Company agreed to re-price outstanding warrants held by the investor from $1.00 to $0.25 per share and extend the purchase period an additional two years. The issuance of these shares and re-pricing of the warrants attributed an additional $587,248 to the debt discount resulting in a total $3,130,423 in a debt discount to be amortized over the life of the debentures. During the fiscal year ended September 30, 2010, the Company amortized $1,821,720 of this debt discount and recorded it as interest expense. On January 13, 2010 the holders of debentures of $4,718,197 in principal and accrued interest converted this debt into a total of 4,723 shares of Series D Preferred stock.
The Company does not hold or issue derivative instruments for trading purposes. However, the Company had convertible notes and debentures that contained embedded derivative features that required separate valuation from the convertible instruments during the fiscal year ended September 30, 2010. The Company recognized these derivatives as liabilities on its balance sheet, and measured them at their estimated fair value, and recognized changes in their estimated fair value in earnings (losses) in the period of change. During the fiscal year ended September 30, 2010, the holders of these convertible notes and debentures converted them into Series D Preferred stock (see Note 12), eliminating the derivative liabilities. As of September 30, 2011 and 2010, the derivative liabilities had a fair value of $0, resulting in a derivative valuation gain of $200,534 for the fiscal year ended September 30, 2010.
(11)(6) Debt Obligations
Debt obligations as of September 30, 20112013 and 2010,2012, consisted of the following: | | 2011 | | | 2010 | | | | | | | | | Settlement liability from patent infringement suit and countersuit settled in February 2010. The liability will be paid quarterly through September 2012. | | $ | 500,000 | | | $ | 887,500 | | | | | | | | | | | Notes issued in connection with the acquisition of a subsidiary. Quarterly cash payments mature on January 2014. These notes bear no interest. Balance on notes reflects debt discount of $55,388. The effective interest rate is 15% per annum. | | | 369,612 | | | | - | | | | | | | | | | | Secured note bearing an interest rate of 18%. The note matures on November 30, 2011. If this note is not paid off by the maturity date, the shareholder may convert into shares of common stock at 50% of the fair market value of the stock if the notes are not paid by the maturity date. | | | 225,000 | | | | - | |
66 | | 2013 | | | 2012 | | | | | | | | | Settlement liability from patent infringement suit and countersuit settled in February 2010. The liability was paid in March 2013. | | $ | - | | | $ | 200,000 | | | | | | | | | | | Note issued in connection with the acquisition of a subsidiary and matures in December 2014. | | | 64,111 | | | | 94,459 | | | | | | | | | | | Capital leases with effective interest rates that range between 8.51% and 17.44%. Leases mature between August 2013 and November 2015. $154,410 was assumed through the sale of Midwest Monitoring & Surveillance, Inc. to its former owners. | | | 59,266 | | | | 118,098 | | | | | | | | | | | Automobile loan with a financial institution secured by the vehicle. Interest rate is 7.06%, due June 2014. $125,614 was assumed through the sale of Midwest Monitoring & Surveillance, Inc. to its former owners. | | | 5,306 | | | | 12,274 | | | | | | | | | | | Total debt obligations | | | 128,683 | | | | 424,831 | | Less current portion | | | (88,095 | ) | | | (339,151 | ) | Long-term debt, net of current portion | | $ | 40,588 | | | $ | 85,680 | |
Capital leases with effective interest rates that range between 10.2% and 14.7%. Leases mature between February 2014 and March 2016. | | | 217,393 | | | | 102,982 | | | | | | | | | | | Note payable due to the Small Business Administration ("SBA"). Note bears interest at 6.04% and matures April 2037. The note is secured by monitoring equipment. | | | 215,288 | | | | 220,156 | | | | | | | | | | | Automobile loans with several financial institutions secured by the vehicles. Interest rates range between 5.9% and 9.0%, due through February 2016. | | | 162,192 | | | | 126,905 | | | | | | | | | | | Capital leases with effective interest rates that range between 9.58% and 17.44% that mature from December 2012 to September 2013. | | | 104,940 | | | | 114,388 | | | | | | | | | | | Notes payable to a financial institution bearing interest at 6.37%. Notes mature through August 2016. The notes are secured by property. | | | 70,156 | | | | 116,328 | | | | | | | | | | | Unsecured revolving line of credit with a bank, with an interest rate of 9.25%. As of September 30, 2011, $10,568 was available for withdrawal under the line of credit. | | | 39,432 | | | | 39,743 | | | | | | | | | | | Automobile loan with a financial institution secured by the vehicle. Interest rate is 7.09% and is due in June 2014. | | | 18,954 | | | | 24,994 | | | | | | | | | | | Capital leases with effective interest rates that range between 14.12% and 14.89% that mature through November 2011. | | | 13,033 | | | | 26,629 | | | | | | | | | | | Notes payable for testing equipment with an interest rate of 8%. The notes are secured by testing equipment. The notes mature through December 2011. | | | 3,237 | | | | 17,609 | | | | | | | | | | | Notes payable for monitoring equipment. Interest rates range between 7.8% to 18.5% and mature through November 2011. The notes are secured by monitoring equipment. | | | 753 | | | | 5,174 | | | | | | | | | | | Secured promissory note with an individual with an interest rate of 12%. | | | - | | | | 499,631 | | | | | | | | | | | Unsecured revolving line of credit with a bank with an effective interest rate of 9.24%. As of September 30, 2011, $58,000 was available for withdrawal under the line of credit. | | | - | | | | 12,348 | | | | | | | | | | | Total debt obligations | | | 1,939,990 | | | | 2,194,387 | | Less current portion | | | (1,041,392 | ) | | | (1,133,969 | ) | Long-term debt, net of current portion | | $ | 898,598 | | | $ | 1,060,418 | |
During the fiscal year ended September 30, 2011, the Company borrowed $650,000 from two unrelated entities. These notes bore interest at 12% per annum and had a 5% origination fee. As of the date of this report, these notes have been repaid.
The following table summarizes the Company’s future maturities of debt obligations as of September 30, 2011:2013:
Fiscal Year | | Total | | 2014 | | $ | 88,095 | | 2015 | | | 38,945 | | 2016 | | | 1,643 | | Thereafter | | | - | | Total | | $ | 128,683 | |
Fiscal Year | | Total | | | | | | 2012 | | $ | 1,041,392 | | 2013 | | | 452,752 | | 2014 | | | 151,425 | | 2015 | | | 81,519 | | 2016 | | | 23,503 | | Thereafter | | | 189,399 | | | | | | | Total | | $ | 1,939,990 | |
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The following table summarizes the Company’s capital lease obligations included in the schedules of debt and debt obligations above as of September 30, 2011:2013:
Fiscal Year | | Total | | 2014 | | $ | 36,419 | | 2015 | | | 27,721 | | 2016 | | | 1,722 | | 2017 | | | - | | Thereafter | | | - | | Total minimum lease payments | | | 65,862 | | Less: amount representing interest | | | (6,596 | ) | Present value of net minimum lease payments | | | 59,266 | | Less: current portion | | | (31,576 | ) | Obligation under capital leases - long-term | | $ | 27,690 | |
Fiscal Year | | Total | | | | | | 2012 | | $ | 163,283 | | 2013 | | | 137,787 | | 2014 | | | 68,111 | | 2015 | | | 27,742 | | 2016 | | | 9,692 | | Thereafter | | | - | | Total minimum lease payments | | | 406,615 | | Less: amount representing interest | | | (71,251 | ) | Present value of net minimum lease payments | | | 335,364 | | Less: current portion | | | (117,138 | ) | Obligation under capital leases - long-term | | $ | 218,226 | | | | | | |
As of September 30, 20112013 and 2010,2012, the Company had total capital lease obligations of $335,364$59,266 and $243,997,$272,508, the current portion being $117,138$31,576 and $77,571,$131,072, respectively. Capital leases are secured by assets with a total original cost of $497,779$105,162 and $314,395$234,659 with related accumulated depreciation of $209,864$40,932 and $73,161$83,577 as of September 30, 20112013 and 2010,2012, respectively.
(12)(7) Preferred Stock
The Company is authorized to issue up to 20,000,000 shares of preferred stock, $0.0001 par value per share. The Company's Board of Directors has the authority to amend the Company's Articles of Incorporation, without further stockholdershareholder approval, to designate and determine, in whole or in part, the preferences, limitations and relative rights of the preferred stock before any issuance of the preferred stock and to create one or more series of preferred stock.
Series D Convertible Preferred Stock
In November 2009,July 2011, the Company amended its Articles of Incorporation and increased the total designated 50,000 shares of preferred stock as Series D Convertible Preferred stock $0.0001 par value per sharefrom 70,000 to 85,000 shares (“Series D Preferred stock”). On March 28, 2011, the number of shares of preferred stock designated as Series D Preferred stock was increased to 70,000, by amendment adopted by the Series D Preferred shareholders. On July 27, 2011, the Company again amended its Articles of Incorporation to increase the number of shares of Series D Preferred stock the Company is authorized to issue from 70,000 to 85,000 shares.
During the fiscal yearyears ended September 30, 2010,2013 and 2012, the Company issued a total of 17,174 shares of Series D Preferred stock in consideration for the conversion of $16,910,384 of debt, accrued liabilities0 and interest and issued 27,767 shares under securities purchase agreements for $9,688,851 in net cash proceeds.
During the fiscal year ended September 30, 2011, the Company issued 26,0374,008 shares of Series D Preferred stock under securities purchase agreements for $10,344,603$0 and $2,004,000 in net cash proceeds, 4,669 shares in consideration for the conversion of $2,334,632 of debt, accrued liabilities and interest, 280 shares in consideration of shareholder forbearance agreements valued at $140,000, and 25 shares to members of the Company’s Board of Directors for fees. In addition, the issuance of 100 shares was cancelled in connection with a rescinded subscription receivable, 987 shares were issued for prepaid commissions valued at $493,500, and 275 shares valued at $137,500 were issued as payment for services rendered to the Company. respectively.
As of September 30, 20112013 and 2011,2012, there were 44,845468 and 35,40748,763 Series D Preferred shares outstanding, respectively.
Dividends The Series D Preferred stock is entitled to dividends at the rate equal to eight8 percent (8%) per annum calculated on the purchase amount actually paid for the shares or amount of debt converted. The dividend is payable in cash or shares of common stock at the sole discretion of the Board of Directors. If a dividend is paid in shares of common stock of the Company, the number of shares to be issued is based on the average per share market price of the common stock for the 14-day period immediately preceding the applicable accrual date (i.e., March 31, June 30, September 30, or December 31, as the case may be). Dividends are payable quarterly, no later than 30 days following the end of the accrual period.
During the fiscal year ended September 30, 2011,2013, the Company issued 21,307,067181,832 shares of common stock to pay $2,043,308$1,663,997 of accrued dividends on the Series D Preferred stock earned for the twelve months between July 1, 2010 through2012 and June 30, 2011.2013. Subsequent to September 30, 2011,2013, the Company issued 5,376,499483 shares of common stock to pay $541,797$5,650 of accrued dividends on Series D Preferred stock earned during the three months ended September 30, 2011.2013.
During the fiscal year ended September 30, 2010,2012, the Company issued a total of 7,619,124210,689 shares of the Company’s common stock to pay $939,371$2,391,568 of accrued dividends.dividends on the Series D Preferred stock earned for the twelve months between July 1, 2011 and June 30, 2012. Subsequent to September 30, 2012, the Company issued 103,803 shares of common stock to pay $630,528 of accrued dividends on Series D Preferred stock earned during the three months ended September 30, 2012.
Convertibility Each share of Series D Preferred stock may be converted into 6,00030 shares of common stock, commencing after ninety days from the date of issue.
In February 2013, and as a condition to a loan agreement, the Company conducted an exchange offer (“Exchange Offer”) of Series D Preferred stock in order to simplify the capitalization structure. The Exchange Offer was conditioned upon at least 90 percent of the cumulative original issue price paid for all of the issued and outstanding shares of Series D Preferred stock. The shareholders were entitled to exchange their shares of Series D Preferred at a premium over the current conversion rate of 30 shares of common stock per Series D Preferred share as follows: 15 shares for each $1,000 of original price paid, 10 shares for each $676 of original price paid, and 8 shares for each $500 of original price paid. During the fiscal year ended September 30, 20112013 and 2010, 22,735 and 9,534under the Exchange Offer, 48,295 shares of Series D Preferred stock converted into 1,894,283 shares of common stock.
During the fiscal year ended September 30, 2012, 90 shares of Series D Preferred stock were converted into 136,410,000 and 57,204,0002,700 shares of common stock, respectively.stock.
Subsequent to the fiscal year ended September 30, 2013, the Company entered into an Employment Agreement with its Chief Financial Officer. In addition, Mr. Olsen and the Company agreed that he may convert his Series D Preferred shares into common stock at a rate of 155% of each share’s original investment; provided that Mr. Olsen must convert all of his Series D Preferred shares before the next annual shareholder meeting of the Company. Voting Rights and Liquidation Preference The holders of the Series D Preferred stock may vote their shares on an as-converted basis on any issue presented for a vote of the shareholders, including the election of directors and the approval of certain transactions such as a merger or other business combination of the Company. As of September 30, 20112013 and 2010,2012, there were 44,845468 and 35,40748,763 shares of Series D Preferred stock outstanding, respectively. As a consequence of these voting rights, the holders of the Series D Preferred stock may exercise control over these issues regardless of the interests of the remaining shareholders. Additionally, the holders are entitled to a liquidation preference equal to their original investment amount.
In the event of the liquidation, dissolution or winding up of the affairs of the Company (including in connection with a permitted sale of all or substantially all of the Company’s assets), whether voluntary or involuntary, the holders of shares of Series D Preferred Stock then outstanding will be entitled to receive, out of the assets of the Company available for distribution to its shareholders, an amount per share equal to original issue price, as adjusted to reflect any stock split, stock dividend, combination, recapitalization and the like with respect to the Series D Preferred Stock.
Series D Preferred Stock Warrants During the fiscal year endedAs of September 30, 2010, the Company issued and fully vested2012, 5,400 warrants to purchase a total of 4,000 Series D Preferred stock at an exercise price of $500 per share. The warrants were valued using the Black-Scholes option-pricing model as if the shares were converted into common stock. The related expense associated with these four-year warrants was $2,700,447 based upon the following inputs: volatility of 110.71%, risk-free rate of 1.67%, exercise price of $0.08, and market price on grant date of $0.14. The warrantsshare were issued in connection with a financial advisory services agreement to restructure debt and raise additional capital for the Company.
outstanding. During the fiscal year ended September 30, 2011, the Company issued and fully vested warrants to purchase a total of 1,2002013, no Series D Preferred stock at an exercise price of $500 per share. The warrants were valued using the Black-Scholes option-pricing model as if the shares were converted into common stock. The related value associated with these four-year warrants was $475,340 based upon the following inputs: volatility of 108.05%, risk-free rate of 0.50%, exercise price of $0.0833, and market price on grant date of $0.09. The warrants were issued in connection with a subscription to purchase Series D Preferred stock.or exercised.
Authorized Shares
The Company held an Annual Shareholders meeting on February 28, 2013, at which time the shareholders approved a reverse stock split at a ratio of 200 for 1 and reduced the total authorized shares of common stock to 15,000,000 shares. The retroactive effect of the reverse stock split has been reflected throughout these financial statements.
SecureAlert Monitoring, Inc. Series A Preferred Shares
During the fiscal year ended September 30, 2007, and pursuant to Board of Directors approval, the Company amended the articles of incorporation of its subsidiary, SecureAlert Monitoring, Inc. (“SMI”) to designate 3,590,000 shares of preferred stock designated as Series A Convertible Redeemable Non-Voting Preferred stock (“SMI Series A Preferred stock”).
Convertibility
As a group, all SMI 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 SMI.
On March 24, 2008, SMI redeemed all outstanding shares of SMI Series A in exchange for 7,434,249 shares of the Company’s common stock valued at $8,549,386. The former SMI Series A stockholders were entitled to receive quarterly contingency payments through March 23, 2011 based on a rate of $1.54 per day times the number of parolee contracts calculated in days during the quarter, payable in either cash or common stock at the Company’s option. The Company is to make quarterly adjustments as necessary to reflect the difference between the estimated and actual contingency payments to the former SMI Series A stockholders.Common Stock Issuances
During the fiscal year ended September 30, 2010, certain former holders of SMI Series A Preferred stock agreed to convert an aggregate of $2,490,142 of the future and past contingency payments otherwise payable with respect to the redemption of the SMI Series A Preferred stock in exchange for 2,492 shares of Series D Preferred stock. During the fiscal years ended September 30, 2011 and 2010, the Company accrued $0 and $114,032, respectively, for future and past contingency payments due to former SMI Series A stockholders.
During the fiscal year ended September 30, 2011 and 2010,2013, the Company issued 981,620 and 5,434,143 shares of common stock respectively, to satisfy $97,349 and $642,566 in contingency payments on SMI Series A Preferred stock.
During the fiscal years ended September 30, 2011 and 2010, the Company recorded an income (loss) of $16,683 and ($19,095), respectively, to reflect the change between the estimated and actual contingency payments.
Dividends
The holders of shares of SMI Series A Preferred stock were entitled to receive quarterly dividends out of any of SMI’s assets legally available therefore, prior and in preference to any declaration or payment of any dividend on the common stock of SMI, at the rate of $1.54 per day times the number of SMI’s parolee contracts calculated in days during the quarter.
Since the SMI Series A Preferred stock was redeemed, no dividends were recorded during the fiscal years ended September 30, 2011 and 2010.
Authorized Shares
On June 30, 2010, the Company filed an amendment to its Articles of Incorporation with the Utah Department of Commerce, Division of Corporations and Commercial Code. The amendment increased the number of shares of common stock the Company is authorized to issue from 250,000,000 to 600,000,000 shares. Subsequent to the fiscal year end, the Company held an Annual Shareholders meeting on December 21, 2011 whereby the shareholders approved an amendment to increase the total authorized shares of common stock from 600,000,000 to 1,250,000,000 shares.
Common Stock Issuances
During the fiscal year ended September 30, 2011, the Company issued 223,653,9516,709,021 shares of common stock. Of these shares, 136,410,0001,894,283 shares were issued upon conversion of 22,73548,295 shares of Series D Preferred stock; 250,00021,884 shares were issued for services rendered to the Company valued at $21,310; 2,705,264$141,758; 4,607,361 shares were issued as part of the agreement to purchase the remaining percentage of ownership of Midwest, valued at $238,064 (see Note 3); 62,000,000 shares were issued as part of the agreement to purchase the assets of ISS, valued at $5,084,000 (see Note 3); 981,620 shares were issued to pay contingency payments of $97,349 in connection with the redemptiondebt and accrued interest of SMI Series A Preferred stock; and 21,307,067$20,733,118; 181,832 shares were issued to pay dividends from Series D Preferred stock.
stock of $1,663,997; and 3,661 shares were issued to pay Board of Director fees of $47,500.
During the fiscal year ended September 30, 2011, the Company cancelled 53,778 shares of common stock previously issued.
During the fiscal year ended September 30, 2010,2012, the Company issued 70,657,267578,524 shares of common stock. Of these shares, 57,204,0002,700 shares were issued upon conversion of 9,53490 shares of Series D Preferred stock; 250,00071,969 shares were issued as part of a royalty agreement, valued at $819,972; 4,315 shares were issued for services rendered to the Company valued at $27,500; 150,000$40,000; 8,449 shares were issued to extend an option to purchase the remaining percentage of ownership of Midwest valued at $18,000; 5,434,143 shares were issued to pay contingency payments of $642,566 in connection with the redemptiondebt and accrued interest of SMI Series A Preferred stock; and 7,619,124$118,280; 210,689 shares were issued to pay dividends from Series D Preferred stock.stock of $2,391,568; 121,700 shares were issued to employees for compensation of $732,634; 3,000 shares were issued to pay Board of Director fees of $48,060 and 155,703 shares were issued for $1,033,000 in cash proceeds.
During the fiscal year ended September 30, 2010, the Company cancelled 1,000,000 shares of common stock previously issued (see Note 6).
(14) Stock Options and Warrants
(9) | Stock Options and Warrants |
Stock Incentive Plan
DuringAt the fiscal year ended September 30, 2006,annual meeting of shareholders on December 21, 2011, the shareholders approved the 20062012 Equity Incentive AwardCompensation Plan (the “2006“2012 Plan”)., which had previously been adopted by the Board of Directors of the Company. The 20062012 Plan provides for the grant of incentive stock options and nonqualified stock options, restricted stock, stock appreciation rights, performance shares, performance stock units, dividend equivalents, stock payments, deferred stock, restricted stock units, other stock-based awards and performance-based awards to employees and certain non-employees who have important relationships with the Company. A total of 10,000,00090,000 shares are authorized for issuance pursuant to awards granted under the 20062012 Plan. During the fiscal years ended September 30, 20112013 and 2010, the Company granted2012, 0 and 7,487,28630,000 options were issued under this plan.2012 Plan, respectively. As of September 30, 2011 and 2010, no2013, 60,000 shares of common stock were available to distributefor future grants under the 20062012 Plan.
Re-pricing of Warrants
During the fiscal year ended September 30, 2010,2013, the Company re-priceddid not re-price any previously issued warrants as follows:
| · | Board of Directors – 5,783,767 warrants were re-priced with original exercise prices ranging from $0.30 to $4.05, revising the exercise price to $0.13 and resulting in additional compensation expense of $342,119. |
| · | Investors and consultants – 6,108,138 warrants were re-priced with original exercise prices ranging from $0.25 and $0.56, revising the exercise prices ranging from $0.10 and $0.13 and resulting in additional compensation expense of $163,310. | warrants.
During the fiscal year ended September 30, 2011,2012, the Company did not re-price anyre-priced 24,465 previously issued warrants.warrants in connection with debt financing agreements with original exercise prices ranging from $20 to $60, revising the exercise price to $15, resulting in additional interest expense of $39,965. Of the 24,465 warrants re-priced, 21,055 warrants were in connection with related-party transactions.
All Options and Warrants
During the fiscal year ended September 30, 2010,2013, the Company granted 143,937 warrants to members of its Board of Directors, valued at $701,062. As of September 30, 2013, $154,378 of compensation expense associated with unvested stock options and warrants issued previously to members of the Board of Directors will be recognized over the next year.
During the fiscal year ended September 30, 2012, the Company granted options and warrants to purchase 11,262,28654,500 shares of common stock as follows: 7,487,28618,500 to employees, valued at $594,990; 2,625,000 granted to consultants for services, valued at $291,656; and 1,150,000 tomembers of the Board of Directors, as compensation, valued at $121,767.$105,041; 30,000 to settle a lawsuit, valued at $253,046; and 6,000 warrants to a consultant, valued at $33,358. The vesting periods for these options and warrants ranged from immediatethree to threefive years. DuringAdditionally during the fiscal year ended September 30, 2010,2012, the Company recognized $6,080 in connection with the re-pricingcancelled 182,500 of certainunvested warrants previously granted to consultants for services.
During the fiscal year ended September 30, 2011,held by executives of the Company granted options and warrants to purchase 75,000,000issued 121,700 shares of common stock to employees, valued at $3,909,697.and accelerated the vesting of 57,500 of warrants for services rendered. The vesting periods for these options and warrants ranged frommodification of the equity awards resulted in $2,130,694 of compensation expense which includes the immediate to three years.
The remainingrecognition of the unamortized expense in connection withportion of the options and warrants is $3,109,943, which will be recognized over the next three years. The Company recognized $1,231,836 and $1,241,927 of expense during the fiscal years ended September 30, 2011 and 2010, respectively, in connection with the issuance, vesting, and re-pricing of options andcancelled unvested warrants.
The following are the weighted-average assumptions used for options granted during the fiscal years ended September 30, 20112013 and 2010,2012 using the Black-Scholes model, respectively:
| | Fiscal Years Ended | | | | September 30, | | | | 2013 | | | 2012 | | Expected cash dividend yield | | | - | | | | - | | Expected stock price volatility | | | 108 | % | | | 95 | % | Risk-free interest rate | | | 0.18 | % | | | 0.36 | % | Expected life of options | | 1.38 Years | | 2 Years | |
The fair value of each stock option and warrant grant is estimated on the date of grant using the Black-Scholes option-pricing model. The expected life of stock options and warrants represents the period of time that the stock options or warrants are expected to be outstanding based on the simplified method allowed under GAAP. The expected volatility is based on the historical price volatility of the Company’s common stock. In fiscal year 2013, the Company changed from a daily to weekly volatility. The risk-free interest rate represents the U.S. Treasury bill rate for the expected life of the related stock options and warrants. The dividend yield represents the Company’s anticipated cash dividends over the expected life of the stock option and warrants. | | Fiscal Years Ended September 30, | | | 2011 | | 2010 | Expected cash dividend yield | | | - | | | | - | | Expected stock price volatility | | | 96 | % | | | 119 | % | Risk-free interest rate | | | 0.32 | % | | | 1.65 | % | Expected life of options | | 2 years | | | 5 years | |
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A summary of stock optionthe compensation-based options and warrants activity for the fiscal years ended September 30, 20102013 and 20112012 is presented below: | | Shares Under Option | | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic Value | | | Shares Under Option | | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic Value | | Outstanding as of September 30, 2009 | | | 25,248,165 | | | $ | 1.16 | | | | | | | | | | | | | | | | | | | | | Outstanding as of September 30, 2011 | | | | 495,891 | | | $ | 26.00 | | | | | | Granted | | | 11,262,286 | | | $ | 0.14 | | | | | | | | 54,500 | | | $ | 18.00 | | | | | | Expired | | | (8,770,000 | ) | | $ | 1.73 | | | | | | | | (213,609 | ) | | $ | 22.00 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding as of September 30, 2010 | | | 27,740,451 | | | $ | 0.36 | | | | | | | Outstanding as of September 30, 2012 | | | | 336,782 | | | $ | 28.00 | | | | | | Granted | | | 75,000,000 | | | $ | 0.08 | | | | | | | | 143,937 | | | $ | 11.18 | | | | | | Expired / Cancelled | | | (3,562,249 | ) | | $ | 0.32 | | | | | | | | (52,754 | ) | | $ | 76.97 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding as of September 30, 2011 | | | 99,178,202 | | | $ | 0.13 | | 2.91 years | | $ | 1,102,500 | | | Exercisable as of September 30, 2011 | | | 43,874,208 | | | $ | 0.19 | | 2.73 years | | $ | 338,100 | | | Outstanding as of September 30, 2013 | | | | 427,965 | | | $ | 16.12 | | 1.38 years | | $ | 1,802,008.18 | | Exercisable as of September 30, 2013 | | | | 392,939 | | | $ | 16.75 | | 1.36 years | | $ | 1,435,627.07 | |
The year-endfiscal year end intrinsic values are based on a September 30, 20112013 closing price of $0.098$19.46 per share.
The Company recognizes deferred income tax assets or liabilities for the expected future tax consequences of events that have been recognized in the financial statements or income tax returns. Deferred income tax assets or liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to apply when the differences are expected to be settled or realized. Deferred income tax assets are reviewed periodically for recoverability and valuation allowances are provided as necessary. Interest and penalties related to income tax liabilities, when incurred, are classified in interest expense and income tax provision, respectively.
For the fiscal years ended September 30, 20112013 and 2010,2012, the Company incurred net losses for income tax purposes of $7,627,477$3,427,372 and $13,180,293,$8,693,769, respectively. The amount and ultimate realization of the benefits from the net operating losses is dependent, in part, upon the tax laws in effect, the Company's future earnings, and other future events, the effects of which cannot be determined. The Company has established a valuation allowance for all deferred income tax assets not offset by deferred income tax liabilities due to the uncertainty of their realization. Accordingly, there is no benefit for income taxes in the accompanying statements of operations.
At September 30, 2011,2013, the Company had net carryforwards available to offset future taxable income of approximately $181,000,000$179,000,000 which will begin to expire in 2018.2020. The utilization of the net loss carryforwards is dependent upon the tax laws in effect at the time the net operating loss carryforwards can be utilized. The Internal Revenue Code contains provisions that likely could reduce or limit the availability and utilization of these net operating loss carryforwards. For example, limitationsAs part of a debt conversion to common stock on September 30, 2013 the Company believes a Section 382 ownership change occurred. In general, a Section 382 ownership change occurs if there is a cumulative change in ownership by “5%” shareholders (as defined in the Internal Revenue Code of 1986, as amended) that exceeds 50 percentage points over a rolling three-year period. An ownership change generally affects the rate at which NOLs and potentially other deferred tax assets are imposedpermitted to offset future taxable income. Of our federal NOL amount as of September 30, 2013, approximately $79,000,000 is subject to an annual Section 382 limitation of approximately $6,200,000 per year due to the ownership change. Since the Company maintains a full valuation allowance on all of its U.S. and state deferred tax assets, the impact of the ownership change on the utilizationfuture realizability of net operating loss carryforwards if certain ownership changes have taken place or will take place. The Company will performits U.S. and state deferred tax assets did not result in an analysisimpact to determine whether any such limitations have occurred as the net operating losses are utilized.
Deferredour provision for income taxes are determined basedfor the year ended September 30, 2013, or on the estimated future effectsCompany’s net deferred tax asset as of differences between the financial statement and income tax reporting bases of assets and liabilities given the provisions of currently enacted tax laws and the tax rates expected to be in place.September 30, 2013.
The deferred income tax assets (liabilities) were comprised of the following for the periods indicated: | | Fiscal Years Ended | | | Fiscal Years Ended | | | | September 30, | | | September 30, | | | | 2011 | | | 2010 | | | 2013 | | | 2012 | | Net loss carryforwards | | $ | 63,453,000 | | | $ | 60,673,000 | | | $ | 72,700,000 | | | $ | 72,200,000 | | Accruals and reserves | | | 678,000 | | | | 337,000 | | | | 247,000 | | | | 529,000 | | Contributions | | | 3,000 | | | | 6,000 | | | | 8,000 | | | | 6,000 | | Depreciation | | | 13,000 | | | | - | | | | 42,000 | | | | 26,000 | | Stock-based compensation | | | 4,434,000 | | | | 3,974,000 | | | | 5,880,000 | | | | 5,768,000 | | Valuation allowance | | | (68,581,000 | ) | | | (64,990,000 | ) | | | (78,877,000 | ) | | | (78,529,000 | ) | Total | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | | | | | | | | | |
Reconciliations between the benefit for income taxes at the federal statutory income tax rate and the Company's benefit for income taxes for the years ended September 30, 20112013 and 20102012 are as follows: | | Fiscal Years Ended | | | | September 30, | | | | 2011 | | | 2010 | | Federal income tax benefit at statutory rate | | $ | 3,363,000 | | | $ | 4,687,000 | | State income tax benefit, net of federal | | | | | | | | | income tax effect | | | 326,000 | | | | 455,000 | | Change in estimated tax rate and gain (loss) | | | | | | | | | on non-deductible expenses | | | (98,000 | ) | | | 70,000 | | Change in valuation allowance | | | (3,591,000 | ) | | | (5,212,000 | ) | Benefit for income taxes | | $ | - | | | $ | - | |
| | Fiscal Years Ended | | | | September 30, | | | | 2013 | | | 2012 | | Federal income tax benefit at statutory rate | | $ | 6,091,000 | | | $ | 5,936,000 | | State income tax benefit, net of federal income tax effect | | | 591,000 | | | | 576,000 | | Change in estimated tax rate and gain (loss) on non-deductible expenses | | | (5,556,000 | ) | | | (2,068,000 | ) | Loss of operating losses for entities sold | | | (778,000 | ) | | | - | | Change in valuation allowance | | | (348,000 | ) | | | (4,444,000 | ) | Benefit for income taxes | | $ | - | | | $ | - | |
The deferred income tax assets (liabilities) and the federal and state income tax benefits reflect an adjustment in calculating the valuation allowance using a tax rate of 15% used in fiscal year ended 2010 to 37.3% in fiscal year ended 2011.
During the fiscal year ended September 30, 2011,2013, the Company began recognizing revenues from international sources from its products and monitoring services and is in the process of determining what foreign taxes it is subject to.services. During the fiscal year ended September 30, 2011,2013, the Company was subject to $362,529accrued $76,732 in value-added taxes which will be due upon collection.
The Company’s open tax years for its federal and state income tax returns are for the tax years ended September 30, 20072010 through September 30, 2011.2013.
(16) Commitment(11) Commitments and Contingencies
Legal Matters RACO Wireless LLC vLazar Leybovich et al v. SecureAlert, Inc. On October 12, 2010, RACO Wireless, LLC (“RACO”) filed a complaint alleging that the Company breached a contract by failing to place a sufficient number of RACO SIM chips in its new activations of monitoring devices. The Company denies these allegationsMarch 29, 2012, Lazar Leybovich, Dovie Leybovich and intends to vigorously defend against this complaint. The Company has also filed a counterclaim against RACO. During the fiscal year ended September 30, 2011, the parties agreed to settle this litigation. As part of the settlement agreement, the Company agreed to issue warrants to purchase 6,000,000 shares of the Company’s common stock with an exercise price of $0.098 per share, valued at $276,712 using the Black-Scholes valuation model. As of September 30, 2011, the Company accrued $276,712 to reflect the settlement expense to the Company. Subsequent to the fiscal year end, the Company issued the warrants to RACO.
Aculis, Inc. v. SecureAlert, Inc. Aculis, Inc.Ben Leybovich filed a complaint in the Fourth District11th Circuit Court in and for UtahMiami-Dade County, Utah, on June 7, 2010,Florida alleging breach of contract unjust enrichment, and a claim for $208,889 in unpaid products and services, incrementalwith regard to certain Stock Redemption Agreements with the $4,840,891 thatCompany. The complaint was subsequently withdrawn by the Company has already paid to Aculis.plaintiffs. An amended complaint was filed by the plaintiffs on November 15, 2012. The Company filed a counterclaim seeking rescission of the contract and refund of all amounts paid to Aculis. The parties entered into a settlement agreement on December 16, 2011, and both parties will dismiss their respective suits with prejudice.
ArrivalStar S.A. and Melvino Technologies Ltd. V. SecureAlert, Inc. ArrivalStar S.A. and Melvino Technologies Ltd., filed a complaint in the U.S. District Court for the Northern District of Illinois claiming patent infringement of U.S. Patent No. 6,741,927. The Company deniesbelieves these allegations are inaccurate and intendsintend to vigorously defend against this complaint.the case vigorously. The Company has not accrued any potential loss as the probability of incurring a material loss is deemed remote by management, after consultation with legal counsel.
Larry C. Duggan v. Court Programs of Florida, Inc. and SecureAlert, Inc. On March 26, 2012, Mr. Duggan filed a complaint in the 9th Circuit Court in and for Orange County, Florida alleging malicious prosecution, abuse of process and negligent infliction of emotional distress against us and our former subsidiary. The case resulted from actions of a former agent of our former subsidiary. The Company intends to defend this matter. The Company has not accrued any potential loss as the probability of incurring a material loss is deemed remote by management, after consultation with legal counsel.
Integratechs v. SecureAlert, Inc. On March 14, 2013, Integratechs, Inc. filed a suit in the Fourth Judicial District Court of Utah County, claiming the Company breached a contract for computer services and intentionally interfered with its economic relations. The Company believes the allegations are inaccurate and will defend the case vigorously. No accrual for a potential loss has been made as the Company believes the probability of incurring a material loss is remote.
Christopher P. Baker v. SecureAlert, Inc. In February 2013, Mr. Baker filed suit against the Company in the Third Judicial District Court in and for Salt Lake County, State of Utah. Mr. Baker asserts that the Company breached a 2006 consulting agreement with him and claims damages of not less than $210,000. The Company disputes plaintiff’s claims and will defend the case vigorously. No accrual for a potential loss has been made as the Company believes the probability of incurring a material loss is remote. SecureAlert, Inc. v. STOP, LLC. On December 17, 2013, the Company filed a claim in the United States District Court, District of Utah, Central Division against STOP, LLC seeking declaratory relief and other claims related to a Settlement Agreement entered into by and between the Company and STOP, effective January 29, 2010. The complaint was filed under seal and is not publicly available. The Company believes the relief sought in the case is warranted based on the language and intent of the parties and we will pursue the matter vigorously. Operating Lease Obligations
The following table summarizes the Company’s contractual obligations as of September 30, 2011:2013:
Fiscal Year | | Total | | | Total | | | | | | | | | 2012 | | $ | 523,435 | | | 2013 | | | 450,458 | | | 2014 | | | 143,438 | | | $ | 237,580 | | 2015 | | | 15,600 | | | | 34,721 | | 2016 | | | - | | | Thereafter | | | - | | | | - | | | | | | | | | | | Total | | $ | 1,132,932 | | | $ | 272,301 | |
The total operating lease obligations of $1,133,652$272,301 consist of the following: $1,089,835$272,301 from facilities operating leases and $43,817$0 from equipment leases. During the fiscal years ended September 30, 20112013 and 2010,2012, the Company paid approximately $473,029$350,073 and $526,500,$383,187, in lease payment obligations, respectively.
Indemnification AgreementsIntellectual Property Settlement
In November 2001,January 2010, the Company entered into an intellectual property settlement agreement with an entity whereby the Company agreed to begin paying the greater of a 6% royalty or $0.35 per activated device of monitoring revenues, subject to certain adjustments. The Company and other party disagree with the methodology used to calculate such royalty, litigation was filed by the Company in December 2013 to resolve the matter. Indemnification Agreements
The Company’s Bylaws require the Company to indemnify any individual who is made a party to a proceeding because the individual is or was a director or officer of the Company against any liability or expense incurred in connection with such proceeding to the extent allowed under the Utah Revised Business Corporation Act (the “UBCA”), if the Company has properly authorized indemnification under Section 16.10a-906 of the UBCA. Section 16-10a-906(2) of the UBCA requires that the Company determine, before granting indemnification, that: (i) the individual’s conduct was in good faith; (ii) the individual reasonably believed that the individual’s conduct was in, or not opposed to, the Company’s best interests; and (iii) in the case of any criminal proceeding, the individual had no reasonable cause to believe the individual’s conduct was unlawful. The foregoing description is necessarily general and does not describe all details regarding the indemnification of officers and directors of the Company against personal liability incurred by them in the conduct of their duties for the Company. In the event that any of the officers or directors of the Company are sued or claims or actions are brought against them in connection with the performance of their duties and the individual is required to pay an amount, the Company will immediately repay the obligation together with interest thereon at the greater of 10% per year or the interest rate of any funds borrowed by the individual to satisfy their liability.
Cellular Access AgreementInternational Importation Audit
During the fiscal year ended September 30, 2010,2013, the Company was notified that several international importation documents were selected to be audited by a taxing authority. The Company resubmitted documentation to comply with the country’s requirements; and as of the date of this Report, the audit results and potential penalties are uncertain. (12) Discontinued Operations
SecureAlert entered into a Stock Purchase Agreement with certain of the former principals of its wholly-owned subsidiary, Midwest Monitoring & Surveillance, Inc. (“Midwest”) whereby they purchased from the Company all of the issued and outstanding capital stock of Midwest. The agreement was effective as of October 1, 2012. Additionally, the Company entered into several agreements with cellular organizationsa Stock Purchase Agreement to provide communication services. sell to a former principal all of the issued and outstanding stock of Court Programs Inc. (“Court Programs”), effective January 1, 2013. Midwest and Court Programs were components of the Company’s consolidated entity, and as a result of the sale of these entities, these financial statements include the applicable discontinued operations reporting treatment.
The cost tofollowing is a summary of the Company duringassets and liabilities of Midwest and Court Programs reported as discontinued operations for the fiscal years ended September 30, 20112013 and 2010 was approximately $650,230 and $1,159,845, respectively. These amounts are included in cost of sales.2012, respectively:
(17) | | | 2013 | | | 2012 | | Current assets: | | | | | | | Cash | | $ | - | | | $ | 237,082 | | Accounts receivable, net of allowance for doubtful accounts | | | - | | | | 452,841 | | Note receivable | | | - | | | | 81,389 | | Prepaid expenses and other assets | | | - | | | | 218,593 | | Total current assets | | $ | - | | | $ | 989,905 | | | | | | | | | | | Non-current assets: | | | | | | | | | Property and equipment, net of accumulated depreciation | | $ | - | | | $ | 173,002 | | Monitoring equipment, net of accumulated amortization | | | - | | | | 153,163 | | Deposits | | | - | | | | 9,218 | | Goodwill | | | - | | | | 375,000 | | Intangible assets, net of accumulated amortization | | | - | | | | 148,636 | | Total non-current assets | | $ | - | | | $ | 859,019 | | | | | | | | | | | Current liabilities: | | | | | | | | | Accounts payable | | $ | - | | | $ | 614,557 | | Accrued liabilities | | | - | | | | 561,611 | | Deferred revenue | | | - | | | | 67,613 | | Current portion of long-term related-party debt | | | - | | | | 138,602 | | Current portion of long-term debt | | | - | | | | 295,067 | | Total current liabilities | | $ | - | | | $ | 1,677,450 | | | | | | | | | | | Long-term liabilities: | | | | | | | | | Long-term portion of related-party debt | | | - | | | | - | | Long-term portion of debt | | | - | | | | 364,270 | | Total long-term liabilities | | $ | - | | | $ | 364,270 | |
The following is a summary of the operating results of discontinued operations for the fiscal years ended September 30, 2013 and 2012: | | 2013 | | | 2012 | | Revenues | | $ | 477,298 | | | $ | 6,676,513 | | Cost of revenues | | | (163,487 | ) | | | (4,112,410 | ) | Gross profit | | | 313,811 | | | | 2,564,103 | | Selling, general and administrative | | | (319,976 | ) | | | (2,782,628 | ) | Loss from operations | | | (6,165 | ) | | | (218,525 | ) | Other expense | | | (295 | ) | | | (89,294 | ) | Net loss from discontinued operations | | $ | (6,460 | ) | | $ | (307,819 | ) |
(13) Subsequent Events |
The Company evaluated subsequent events through the date the accompanying consolidated financial statements were issued. Subsequent to September 30, 2011,2013, the following events occurred: 1) | The Company issued to directors for services rendered during the fourth fiscal quarter ended September 30, 2013, warrants to purchase 6,840 shares of Common Stock with an exercise price of $19.46 per share, valued at the date of grant at $53,091 using the Black-Scholes model. |
2) | 1) | 5,376,499The Company issued 483 shares of common stock were issued for 4thfourth quarter Series D Preferred stock dividends, valued at $541,797.
| | | | | 2) | 600,000 shares of common stock were issued to Mr. Klinkhammer, a director, in lieu of non-employee director expenses accrued for the fiscal year 2011, valued at $51,000. | | | | | 3) | Warrants to purchase 1,200,000 shares of common stock at an exercise price of $0.0833 per share were issued to Messrs. David Hanlon, Robert Childers and Larry Schafran, directors, in lieu of non-employee director expenses accrued for the fiscal year 2011, valued at $67,476 for each director.$5,650. |
| 4) | Mr. Hastings, the Chief Executive Officer of the Company, loaned the Company $50,000 at 15% per annum. The Company agreed to re-price outstanding warrants and options granted to Mr. Hastings to an exercise price of $0.075 per share, valued at $15,237. Additionally, the Company paid an origination fee of $5,000 in cash. As of the date of this report, this note has been paid in full. | | | | | 5) | Mr. Olsen, the Chief Financial Officer of the Company, loaned the Company $250,000 at 15% per annum. The Company agreed to re-price outstanding warrants and options granted to him and other individuals to an exercise price of $0.075 per share, valued at $24,723. Additionally, the Company paid an origination fee of $15,000 in cash. As of the date of this report, this note has been paid in full. | | | | | 6)3) | The Company received $4,000,000 from an international customer to pay for services. As of September 30, 2011, $1,995,804 was outstanding accounts receivable, and of the remaining $2,004,196 portion of the $4,000,000 not included in accounts receivable, $1,452,472 will be recognized as revenue in future periods and $551,724 will be due in value-added taxes in the customer’s country. | | | | | 7) | 172,704issued 760 shares of common stock wereto several directors for services rendered, valued at $15,000. |
4) | The Company issued to pay $14,386 of royalty expense due in connection with a royalty agreement. | | | | | 8) | Warrants to purchase 100,000500 shares of common stock to a consultant from the exercise of warrants with an exercise price of $0.0833$16.00 per share were issuedwhich provided cash proceeds to Mr. Bernardi, a former memberthe Company of the Board of Directors, for services rendered while in office.$8,000. |
| | | | 9)5) | The Company borrowed $1,000,000 with an interest rate of 15% per annum. Subsequently, the Company paid $1,018,082 to pay off this note. | | | | | 10) | The Company settled an outstanding lawsuit from Aculis, Inc. whereby both parties agreed to dismiss their respective suits with prejudice. | | | | | 11) | The shareholders at the Annual Shareholders meeting, held on December 21, 2011, approved an amendment to the Articles of Incorporation to increase the total authorizedissued 4,700 shares of common stock to an officer upon the cashless exercise of warrants with exercise prices ranging from 600,000,000$15.00 to 1,250,000,000. Additionally, five new members were added to the Board of Directors. | | | | | 12) | 4,008 shares of Series D Preferred stock were issued for $2,004,000 in cash, or $500$16.66 per share. |
6) | The Company entered into an Employment Agreement with its Chief Financial Officer. The term of this agreement commenced on November 14, 2013 and continues until the earlier of (i) 30 days following the closing of an acquisition of or by the Company; or (ii) November 13, 2014. Thereafter, the agreement will be reviewed and renewed upon the mutual agreement by the parties. If Mr. Olsen’s employment terminates as a result of an involuntary termination other than for cause or at the end of the term of the agreement, he will be entitled to receive separation benefits which include payment of salary of $192,000 paid over a 120-day period and other benefits as outlined in the agreement. In addition, Mr. Olsen and the Company agreed that he may convert his Series D Preferred shares into common stock at a rate of 155% of each share’s original investment; provided that Mr. Olsen must convert all of his Series D Preferred shares before the next annual shareholder meeting of the Company. |
7) | On November 15, 2013, the Company entered into a 41-month agreement with the Gendarmeria de Chile (the Republic of Chile’s uniformed prison service) to provide electronic (GPS and residential) monitoring of offenders and other services to the Chilean government. The agreement calls for the Company to put into service up to 9,400 electronic monitoring (GPS) devices over the contract. The Company was required under the agreement, to post a performance bond in the amount of $3,382,082 U.S. Dollars. In addition, the Company will design and construct a real-time monitoring and data center to be staffed by Chilean government employees. Training from the monitoring center personnel will also be provided by the Company. The maximum sum to be paid for the services provided by the Company is approximately $70,000,000 U.S. Dollars, at current exchange rates, over the term of the agreement. |
8) | The Company drew down an advance of $1,200,000 from a line-of-credit to be used with other available cash on hand to issue a bond for an international customer in the amount of $3,382,082. |
9) | The Company borrowed $1,500,000 from a shareholder for working capital. The unsecured loan bears interest at a rate of 8% per annum and matures on November 18, 2014. |
10) | On December 17, 2013, the Company filed a claim in the United States District Court, District of Utah, Central Division against STOP, LLC seeking declaratory relief and other claims related to a Settlement Agreement entered into by and between the Company and STOP, effective January 29, 2010. The complaint was filed under seal and is not publicly available. The Company believes the relief sought in the case is warranted based on the language and intent of the parties and we will pursue the matter vigorously. |
7511) | On December 17, 2013, the Company entered into a non-binding letter of intent to acquire all of the issued and outstanding stock of GPS Global, an Israeli corporation located in Tel Aviv. The parties are currently negotiating a definitive agreement for the stock purchase; compensation for the stock will be a combination of cash and our common stock. It is the intent of the parties to close the transaction as soon as possible. |
12) | On January 3, 2014, the Company entered into an unsecured Facility Agreement with Tetra House Pte. Ltd., a related-party entity, controlled by the Company’s Chairman, Guy Dubois. Under this agreement, the Company may borrow up to $25,000,000 for working capital and acquisitions purposes. The loan bears interest at a rate of 8% per annum, payable in arrears semi-annually, with all principal and accrued and unpaid interest due on January 3, 2016. In addition, the Company agreed to pay Tetra House an arrangement fee equal to 3% of the aggregate maximum amount under the loan. As of January 14, 2014, the Company borrowed $10,000,000 under the Facility Agreement. |
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