UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| (Mark One) | ||
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended September 30, | ||
| or | ||
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from ____________ to ___________ | ||
Commission file number: 0-23153
SECUREALERT, INC.
(Exact name of registrant as specified in its charter)
| Utah | 87-0543981 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
150 West Civic Center Drive, Suite 100,400, Sandy, Utah 84070
(Address of principal executive offices, Zip Code)
(801) 451-6141
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,common stock, $0.0001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant was approximately $40,310,000$42,307,000 as of March 31, 201129, 2013, based upon the closingaverage bid and asked price of the registrant’s common stock on the Over-the-Counter Bulletin Board Market reported for such date. This calculation does not reflect a determination that certain persons are affiliates of the registrant for any other purpose. There were 400,394,0515,860,398 shares of the registrant’s common stock outstanding as of March 31, 2011.29, 2013. In addition, at March 29, 2013, the registrant also had issued and outstanding at March 31, 2011, 22,884468 shares of Series D Convertible Preferred Stock, each share of which may be voted on an as-converted basis with the common stock of the registrant at the rate of 6,00030 shares of common stock per share, and which represented 137,304,00014,040 common share equivalents as of such date.
As of December 21, 2011,31, 2013, the registrant had outstanding 509,772,6319,811,946 shares of common stock and 48,853468 shares of Series D Convertible Preferred Stock, convertible into 293,118,00024,503 shares of common stock, which may be voted on an as-converted basis with the registrant’s common stock.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
| SecureAlert, Inc. | ||||||||||||
| For the Fiscal Year Ended September 30, 2013 | ||||||||||||
| INDEX | ||||||||||||
| Page | ||||||||||||
| Business | 3 | |||||||||||
| Item 1A | Risk Factors | 9 | ||||||||||
| Item 2 | Properties | 13 | ||||||||||
| Item 3 | Legal Proceedings | 13 | ||||||||||
| PART II | ||||||||||||
| Item 5 | Market for Registrant's Common Equity, Related Stockholder | |||||||||||
| Matters and Issuer Purchases of Equity Securities | 14 | |||||||||||
| Item 7 | Management's Discussion and Analysis of Financial Condition and Results of Operations | 16 | ||||||||||
| Item 7A | Quantitative and Qualitative Disclosures About Market Risk | 22 | ||||||||||
| Item 8 | Financial Statements and Supplementary Data | 22 | ||||||||||
| Item 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 22 | ||||||||||
| Item 9A | Controls and Procedures | 23 | ||||||||||
| Item 9B | Other Information | 23 | ||||||||||
| Item 10 | Directors, Executive Officers and Corporate Governance | |||||||||||
| Item 11 | Executive Compensation | 27 | ||||||||||
| Item 12 | Security Ownership of Certain Beneficial Owners and Management and Related | |||||||||||
| Stockholder Matters | | |||||||||||
| Item 13 | Certain Relationships and Related Transactions, and Director Independence | 30 | ||||||||||
| Item 14 | Principal Accounting Fees and Services | 33 | ||||||||||
| Item 15 | Exhibits and Financial Statement Schedules | |||||||||||
| Signatures | ||||||||||||
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This Annual Report on Form 10-K contains "forward-looking statements"forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, (the "Exchange Act")relating to our operations, results of operations, and Section 27A of the Securities Act of 1933,other matters that are based on our current expectations, estimates, assumptions, and projections. Words such as amended (Securities Act). All statements contained in this Form 10-K, other than statements of historical fact, are forward-looking statements. When used in this report or elsewhere by management from time to time, the words “believe,” “anticipate,” “intend,” “plan,” “estimate,” “expect,” “project,” “may,” “will,” “should,” “seeks”“likely,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” and similar expressions are used to identify these forward-looking statements. Such forward-looking statements are based on current expectations, but the absence of these words does not necessarily mean that a statement is not forward-looking. Forward-lookingThese statements are not guarantees of future performance and involve risks, uncertainties, and uncertainties.assumptions that are difficult to predict. Forward-looking statements are based upon assumptions as to future events that might not prove to be accurate. Actual events oroutcomes and results maycould differ materially from thosewhat is expressed or forecast in these forward-looking statements. Risks, uncertainties, and other factors that might cause such differences, some of which could be material, include, but are not limited to the factors discussed inunder the forward-looking statements as a result of various factors. For a more detailed discussion of such forward-looking statements and the potential risks and uncertainties that may have an impact upon their accuracy, see Item 1A,“Risk Factors” and the “Overview” and “Liquidity and Capital Resources” sections of Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”section of this Form 10-K. These forward-looking statements reflect our view only as of the date of this report. Except as required by law, we undertake no obligations to update any forward-looking statements. Accordingly, you should also carefully consider the factors set forth in other reports or documents that we file from time to time with the Securities and Exchange Commission (SEC).report entitled “Risk Factors.”
In December of 2007, we acquired Midwest Monitoring and Surveillance, Inc. (Midwest), Court Programs Inc. and Court Programs of Florida, Inc. In order to focus our resources on our strategic purpose of producing or acquiring and deploying leading edge tracking technology and monitoring services for the criminal justice arena in 2009, we completed the divestiture of our medical diagnostic stain and PERS business in an entity known as ActiveCare, Inc., a Delaware corporation.
During fiscal year 2012, we continued our efforts to focus on our core competencies and embarked on a number of divestitures of those subsidiaries which were primarily local services based. We sold certain territories in the state of Florida previously serviced by our wholly-owned subsidiary, Court Programs of Florida, Inc. to various independent distributors. At the end of fiscal year 2012, we also sold our interest in Midwest. In fiscal year 2013, we sold Court Programs, Inc. to complete our divestment plans.
We own or have rights to various trademarks, service marks or trade names that we use in connection with the operation of our business, including, without limitation: Mobile911, Mobile911Siren with 2-Way Voice Communication & Design, ActiveTrace, MobilePAL, HomePAL, HomeAware, PAL Services, TrackerPAL, ReliAlert, SecureAlert, SecureCuff, TrueDetect, and the stylized SecureAlert logo. While some of these trademarks, service marks and trade names are used in this document, for convenience, without protective marking, we will assert our ownership and rights to the fullest extent under applicable law. The trademarks, service marks and trade names of other companies appearing in this report are, to "registrant," "we," "us," "our," “SecureAlert” orour knowledge, the "Company" referproperty of their respective owners. In this report on Form 10-K, unless indicated otherwise, references to SecureAlert, Inc., a Utah corporation“dollars” and its subsidiary corporations.“$” are to United States dollars.
Our Business
ReliAlert devices are intelligent devices with integrated computer circuitry. They are constructed from case-hardened materials and are designed for domesticto promptly notify intervention monitoring centers of attempts to breach applicable electronic supervision terms or international, federal, state and local agencies to provide location tracking of designated individuals within the criminal justice system and throughout a restricted geography.
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We believe successful monitoring services.requires effective, persistent management of monitored individuals. Our monitoring and intervention centers act as an important link between the offenderoffenders and thetheir supervising officer, asofficers. SecureAlert intervention specialists persistently track and monitor the offender, initiatinginitiate contact at the direction of the supervising agency and/or when thean offender is in violation ofviolates any established restrictionsrestriction or protocols.protocol. The ReliAlert™monitoring that is enabled by our state-of-the-art devices, which give us the unique ability to conduct live, three-way voice communication with monitored individuals and ReliAlert™ XC units are intelligent devices with integrated computer circuitry and constructed from case-hardened plastics designed to promptly notifyofficers, provides the intervention centers of any attempt made to breach applicable protocols, or to remove or otherwise tamper with the device or optical strap housing.
Our Strategy
Our global growth strategy is to continue to expand offerings which empower worldwide nationalprofessionals in security, officials, law enforcement, corrections departments and rehabilitation professionalsorganization worldwide with sole-sourcedsingle-sourced offender management solutions whichthat integrate reliable intervention technologies into support of re-socialization or mandatedand monitoring initiatives. The use of our interactive services and intervention products is intended to provide law enforcement and judiciaries alike, with the ability to provide offenders a level of unmatched “real-time” accountability, while preserving public safety costs that are lower than those associated with traditional incarceration or other transitional service offerings.
We intend towill accomplish our global strategythis through the “value-driven” yet profitable deployment of aan ever increasing portfolio of proprietary and non-proprietary GPS/RF real-time monitoring and intervention products and services, which can alsoservices. These may include GPS, RF, drug and alcohol testing for not only defendants and drug tracking & testing on behalf ofoffenders, but other individuals and assets in the corrections, probation, law enforcement and rehabilitation personnel worldwide, allarena.
In addition, our product and service offerings will expand upon our exception-based reporting, analytical capabilities and behavioral-monitoring knowledge. These customizable solutions will be available through Web portals and mobile device platforms, in supportaddition to traditional desktops, to leverage our real-time monitoring data, best-practice monitoring, and interaction protocols and analytics capabilities. Customer insights will be further increased by aggregating real-time data from additional monitoring device types and technologies, regardless of offender reformation, re-socialization and recidivism reduction initiatives.manufacturer, as well as other critical data sources.
In summary, SecureAlert iswe are committed to delivering a superior proprietary and non-proprietary portfolio of reliable, intervention monitoring products and services for the global offender management marketplace, where wemarketplace. We are currently targeting pilotspilot and operational deployments throughout the world in various regions (North America, Latin America & Caribbean, Australasia, Africaworldwide. We will continue to work with agencies to increase public safety and Easternofficer productivity, mitigate budgetary constraints through cost-effective monitoring alternatives, increase early-release compliance and Western Europe). We have shown meaningful international growth during fiscal year 2010-2011, which we anticipateimprove monitoring program success rates, all while offering defendants and offenders opportunities for accountable freedom instead of incarceration.
Marketing
Our strategic purpose is to continue during this next fiscal yearproduce or acquire and which will remain a concerted focus for the Company.
During fiscal year 2013 we continued our commitment to address these issues and most importantly we understand how important reliability isongoing enhancements to both the ReliAlert device line and our agency customers and the general public at large. Therefore, we have designed and implemented products and services knowing that when an agency chooses us they are getting reliable, easy-to-use devices that enable the agency to effectively track and manage their offender population.
Research and Development Program
During the fiscal year ended September 30, 2011,2013, we spent $1,453,994$987,934 on research and development, compared to research and development expenditures of $1,483,385$1,248,654 in the fiscal year ended September 30, 2010.2012. These costs of $1,453,994$987,934 were to further develop our TrackerPAL™TrackerPAL and ReliAlert™ReliAlert portfolio of products and services.
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Monitoring Center
| · | BI Incorporated, Denver Colorado, subsidiary of GEO Care, Inc. |
| · |
| iSECUREtrac Corp., Omaha, Nebraska – This company supplies electronic monitoring equipment for tracking and monitoring persons on pretrial release, probation, parole, or work release. |
| · | Omnilink Systems, Inc., Alpharetta, Georgia – This company provides a one-piece device combined with GPS and Sprint cellular networks to electronically track an individual. In fiscal year 2013, Omnilink completed an agreement with Alcohol Monitoring Systems, Inc. (AMS) for AMS to distribute Omnilink GPS devices as “SCRAM One-Piece GPS™”, to extend AMS’ product line for those agencies looking for a one-stop shop for their monitoring needs. |
| · | 3M Electronic Monitoring, Odessa, Florida |
| · | Satellite Tracking of People, LLC, |
| · | Sentinel Offender Services, LLC, Augusta,Georgia (purchased and consolidated G4S’ United States Offender Monitoring operation in 2012) – This company supplies monitoring and supervision solutions for the offender population. Through their acquisition and consolidation of G4S’ United States Offender Monitoring operation, they expanded their customer base to which they provide electronic monitoring of offenders, prison and detention center management and transitional support services. Through this acquisition, they also resell Omnilink’s active GPS device, in addition to their own. |
The following companies entered the United States Market in fiscal year 2013:
| · | Buddi, Ltd., Aylesbury, Binkghamshire, United Kingdom – This company was started in 2005 to provide consumer tracking for consumers such as the elderly or Alzheimer’s sufferers. Their major launch into offender monitoring was via an award of a United Kingdom Ministry of Justice contract. They also announced plans to enter the United States offender monitoring market by headquartering United States operations in Tampa, FL and hiring Steve Chapin, former Protech President and CEO. |
| · | Corrisoft, LLC, Lexington, Kentucky – This company produces offerings for the monitoring of low and medium risk offenders, and distributes other companies’ products for higher risk offenders. They have announced that they will be developing additional products for the monitoring of all offender types. |
We also continue to face competition from small and regional companies that provide electronic monitoring technology along with localized case management and/or monitoring services. Some of these entities utilize less well-known technologies or are resellers of the above competitors’ products. We observed an increase in the number of these types of businesses in 2011. We do not believe there is reliable publicly available information to indicate our relative market share or that of our competitors.
Dependence on Major Customers
| 2013 | % | 2012 | % | |||||||||||||
| Secretaría de Gobernación de México | $ | 5,252,959 | 34 | % | $ | 2,450,984 | 16 | % | ||||||||
| The Ministry of National Security in the Bahamas | $ | 1,622,326 | 10 | % | $ | 1,876,285 | 12 | % | ||||||||
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No other customer represented more than 10 percent of our total revenues for the fiscal years ended September 30, 2013 or 2012. Secretaría de Gobernación de México attributed $5,252,959 (34 percent of total revenues) under a contract that was completed during the fiscal year ended 2013 and it is uncertain if we will provide services to this customer in the future. The Ministry of National Security in the Bahamas attributed $1,622,326 (10% of total revenues) under a three-year contract which concluded in November 2013 which services have continued on a month-to-month basis. This contract could be terminated at anytime with a 30-day notice.
Concentration of credit risk associated with our total and outstanding accounts receivable as of September 30, 2013 and 2012, respectively, are shown in the table below:
| 2013 | % | 2012 | % | |||||||||||||
La Oficina de Servicios con Antelación al Juicio de Puerto Rico | $ | 887,233 | 24 | % | $ | 681,781 | 24 | % | ||||||||
| The Ministry of National Security in the Bahamas | $ | 732,163 | 20 | % | $ | 475,800 | 17 | % | ||||||||
| Secretaría de Gobernación de México | $ | 892,897 | 24 | % | $ | - | 0 | % | ||||||||
Subsequent to the fiscal year ended September 30, 2010. One customer accounted2013, we received $387,483 from la Oficina de Servicios con Antelación al Juicio de Puerto Rico and $518,137 from The Ministry of National Security in the Bahamas for $1,995,804 (39 percent)a total of our total accounts receivable for the fiscal year ended September 30, 2011 and a different customer accounted for $185,752 (11 percent) of total accounts receivable for the fiscal year ended September 30, 2010.$905,620.
Dependence on Major Suppliers
We purchase cellular services from a variety of providers.several suppliers. The cost to us for these services during the fiscal years ended September 30, 20112013 and 20102012, was approximately $650,230$974,709 and $1,159,845,$961,994, respectively. We reducedOur cellular costs increased by approximately 44 percent and 52one percent in 2011 and 2010, respectively, while increasing revenues from2013 compared to 2012, due to the increase in the number of monitoring services by successfully negotiating new and existing contracts.devices assigned to customers.
Product Returns
During the 2011 fiscal year 2013, we made significant improvements to the ReliAlert™ and ReliAlert XC™ devicesdevice as well as internal processes to improve product reliability and reduce product returns including some ofreturns. These improvements include the following:
| · | |
| · | We refined our assembly and inspection processes (outgoing and incoming inspections) to ensure continued quality improvements. |
| · | We instituted a formal change control process to ensure that we have a structured, strategic, and documented approach to addressing and implementing changes. This also includes improvements in our internal communications processes to ensure that different groups within the |
| · | We cross-trained technical support staff and returns analysis staff to |
Intellectual Property
Trademarks. We have developed and use trademarks in our business, particularly relating to our corporate and product names. We own eight6 trademarks that are registered with the United States Patent and Trademark Office andplus one trademark registered in Mexico. We areMexico and one in the process of applying for three additional trademarks.Canada. Federal registration of a trademark in the United States enables the registered owner of the mark to bar the unauthorized use of the registered mark in connection with a similar product in the same channels of trade by any third-party anywhere in the United States, regardless of whether the registered owner has ever used the trademark in the area where the unauthorized use occurs. We have one application for registration pending approval in the state of California and one application in the United States that has been approved and is awaiting the filing of a statement of use. We may file additional applications for the registration of our trademarks in foreign jurisdictions as our business expands under current and planned distribution arrangements. Protection of registered trademarks in some jurisdictions may not be as extensive as the protection provided by registration in the United States.
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The following table summarizes our trademark registrations and applications:
| Trademark | Application Number | Registration Number | Status/Next Action | |||||
Mobile911 Siren with 2-Way Voice Communication & Design | ® | 76/013,886 | 2,595,328 | Registered | ||||
PAL | 78/514,514 | 3,100,192 | Registered | |||||
TrackerPAL® | 78/843,035 | 3,345,878 | Registered | |||||
Mobile911® | 78/851,384 | 3,212,937 | Registered | |||||
TrackerPAL® | CA 1,315,487 | 749,417 | Registered | |||||
TrackerPAL® | MX 805,365 | 960954 | Registered | |||||
Foresight® | 77/137/822 | 3481509 | Registered | |||||
Bishop Rock Software® | 77/132,255 | 3481474 | Registered | |||||
| ReliAlert™ | 85/238,049 | In process | Pending | |||||
| HomeAware™ | 85/238,064 | In process | Pending | |||||
| SecureCuff™ | 85/238,058 | In process | Pending | |||||
| TrueDetect™ | 85/237,202 | In process | Pending | |||||
| SecureAlert™ | 86/031,550 | In process | Pending | |||||
Patents. We have 1315 patents issued and fourtwo patents pending in the United States. At foreign patent offices we have one patentthree patents issued and 1012 patents pending plus we have several additional instances of somepending. We are also preparing patents that will be filed in other countries in the coming year.
The following tables summarize information regarding our patents and patent applications. There is no assurance given that the pending applications will be granted or that they will, if granted, contain all of the claims currently included in the applications.
| Domestic Patents | Application# | Date Filed | Patent# | Issued | Status | ||||||||||||||
Emergency Phone for Automatically SummoningMultiple Emergency Response Services | 09/173645 | 16-Oct-98 | 6226510 | 1-May-01 | Issued | ||||||||||||||
Combination Emergency Phone and Personal AudioDevice | 09/185191 | 3-Nov-98 | 6285867 | 4-Sep-01 | Issued | ||||||||||||||
| Panic Button Phone | 09/044497 | 19-Mar-98 | 6044257 | 28-Mar-00 | Issued | ||||||||||||||
Interference Structure for Emergency Response System Wristwatch | 09/651523 | 29-Aug-00 | 6366538 | 2-Apr-02 | Issued | ||||||||||||||
Emergency Phone With Alternate Number Calling Capability | 09/684831 | 10-Oct-00 | 7092695 | 15-Aug-06 | Issued | ||||||||||||||
| 11/202427 | 10-Aug-05 | 7330122 | 12-Feb-08 | Issued | |||||||||||||||
Remote Tracking System and Device With Variable Sampling and Sending Capabilities Based on Environmental Factors | 11/486991 | 14-Jul-06 | 7545318 | 9-Jun-09 | Issued | ||||||||||||||
Alarm and Alarm Management System for Remote Tracking Devices | 11/486992 | 14-Jul-06 | 7737841 | 15-Jun-10 | Issued | ||||||||||||||
| 12/028088 | 8-Feb-08 | 7804412 | 28-Sep-10 | Issued | |||||||||||||||
A Remote Tracking System with a DedicatedMonitoring Center | 11/486976 | 14-Jul-06 | 7936262 | 3-May-11 | Issued | ||||||||||||||
Alarm and Alarm Management System for Remote Tracking Devices | 12/792572 | 2-Jun-10 | 8013736 | 6-Sep-11 | Issued | ||||||||||||||
| 12/875988 | 3-Sep-10 | 8031077 | 4-Oct-11 | Issued | |||||||||||||||
Tracking Device Incorporating Enhanced Security Mounting Strap | 12/ | | 8514070 | Issued | |||||||||||||||
A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking | 12/ | | 8232876 | 31-Jul-12 | Issued | ||||||||||||||
| 11/174191 | 30-Jun-05 | 7251471 | 7/31/2007 | Issued | |||||||||||||||
Tracking Device Incorporating Enhanced Security Mounting Strap | 13/970,007 | 19-Aug-13 | - | - | Pending | ||||||||||||||
| | |||||||||||||||||||
A Remote Tracking Device and a System and Method for Two-Way Voice Communication Between the Device and a Monitoring Center | 11/486989 | 14-Jul-06 | - | - | Pending | ||||||||||||||
| International Patents | Application# | Date Filed | Patent# | Issued | Status | |||||
| Remote Tracking and Communication Device - | MX/a/2008/ | |||||||||
| Mexico | 1932 | 4-Aug-06 | 278405 | 6-Oct-10 | Issued | |||||
| Remote Tracking and Communication Device - EPO | 6836098.1 | 4-Aug-06 | - | - | Pending | |||||
| Remote Tracking and Communication Device - | ||||||||||
| Brazil | PI0614742.9 | 4-Aug-06 | - | - | Pending | |||||
| Remote Tracking and Communication Device - | ||||||||||
| Canada | 2617923 | 4-Aug-06 | - | - | Pending | |||||
| A Remote Tracking System with a Dedicated | ||||||||||
| Monitoring Center - EPO | 7812596 | 3-Jul-07 | - | - | Pending | |||||
| A Remote Tracking System with a Dedicated | ||||||||||
| Monitoring Center - Brazil | PI0714367.2 | 3-Jul-07 | - | - | Pending | |||||
| Secure Strap Mounting System For an Offender | ||||||||||
| Tracking Device - EPO | 10 009 091.9 | 1-Sep-10 | - | - | Pending | |||||
| A System and Method for Monitoring Individuals | ||||||||||
| Using a Beacon and Intelligent Remote Tracking | Filed. Number not | |||||||||
| Device - Brazil | yet available | 1-Sep-10 | - | - | Pending | |||||
| A System and Method for Monitoring Individuals | ||||||||||
| Using a Beacon and Intelligent Remote Tracking | MX/a/2010/ | |||||||||
| Device - Mexico | 9680 | 2-Sep-10 | - | - | Pending | |||||
| A System and Method for Monitoring Individuals | ||||||||||
| Using a Beacon and Intelligent Remote Tracking | Filed. Number not | |||||||||
| Device - Canada | yet available | 3-Sep-10 | - | �� | - | Pending | ||||
| A System and Method for Monitoring Individuals | ||||||||||
| Using a Beacon and Intelligent Remote Tracking | ||||||||||
| Device - EPO | 9716860.3 | 6-Oct-10 | - | - | Pending |
| International Patents | Application# | Date Filed | Patent# | Issued | Status | |||||
| A System and Method for Monitoring Individuals | ||||||||||
| Using a Beacon and Intelligent Remote Tracking | ||||||||||
| Device - EPO | 9716860.3 | 6-Oct-10 | 2260482 | 1/9/2013 | Issued | |||||
| Remote Tracking and Communication Device - | MX/a/2008/ | |||||||||
| Mexico | 1932 | 4-Aug-06 | 278405 | 24-Aug-10 | Issued | |||||
| A System and Method for Monitoring Individuals | ||||||||||
| Using a Beacon and Intelligent Remote Tracking | MX/a/2010/ | |||||||||
| Device - Mexico | 9680 | 2-Sep-10 | 306920 | 1/22/2013 | Issued | |||||
| A System and Method for Monitoring Individuals | ||||||||||
| Using a Beacon and Intelligent Remote Tracking | ||||||||||
| Device - Canada | 2717866 | 3-Sep-10 | - | - | Pending | |||||
| Remote Tracking and Communication Device - EPO | 6836098.1 | 4-Aug-06 | - | - | Pending | |||||
| Remote Tracking and Communication Device - | ||||||||||
| Brazil | PI0614742.9 | 4-Aug-06 | - | - | Pending | |||||
| Remote Tracking and Communication Device - | ||||||||||
| Canada | 2617923 | 4-Aug-06 | - | - | Pending | |||||
| A Remote Tracking System with a Dedicated | ||||||||||
| Monitoring Center - EPO | 7812596 | 3-Jul-07 | - | - | Pending | |||||
| A Remote Tracking System with a Dedicated | ||||||||||
| Monitoring Center - Brazil | PI0714367.2 | 3-Jul-07 | - | - | Pending | |||||
| Secure Strap Mounting System For an Offender | ||||||||||
| Tracking Device - EPO | 10 009 091.9 | 1-Sep-10 | - | - | Pending | |||||
| Secure Strap Mounting System For an Offender | ||||||||||
| Tracking Device - Brazil | PI11001593 | 28-Feb-11 | - | - | Pending | |||||
| Secure Strap Mounting System For an Offender | ||||||||||
| Tracking Device - Mexico | MX/a/2011/002283 | 28-Feb-11 | - | - | Pending | |||||
| Secure Strap Mounting System For an Offender | ||||||||||
| Tracking Device - Canada | 2732654 | 23-Feb-11 | - | - | Pending | |||||
| A System and Method for Monitoring Individuals | ||||||||||
| Using a Beacon and Intelligent Remote Tracking | ||||||||||
| Device - Brazil | PI0909172-6 | 1-Sep-10 | - | - | Pending | |||||
| Secure Strap Mounting System For an Offender | ||||||||||
| Tracking Device - Mexico - DIV | MX/a/2013/12524 | 25-Oct-13 | - | - | Pending | |||||
License Agreement. During the fiscal year ended September 30, 2010, we enteredpaid $50,000 to enter into a cross-licensing agreementnon-exclusive license with Satellite Tracking of People, LLC (“STOP”) accessing four patents that enhancedor STOP, to use U.S. Patent No. 6,405,213, enhancing our positionsintellectual portfolio in the areasGPS locating service industry. The term of Crime Scene Correlation, augmenting GPS locationingthis license is 20 years, through June 2019.
Royalty Agreement. On August 4, 2011, with cellular network based locationing, and confinement using RF-based beacon.
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Trade Secrets. We own certain intellectual property, including trade secrets that we seek to protect, in part, through confidentiality agreements with employees and other parties, although some employees who are involved in research and development activities have not entered into these agreements. Even where these agreements exist, there can be no assurance that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known to or independently developed by competitors.
We intend to protect our legal rights concerning intellectual property by all appropriate legal action. Consequently, we may become involved from time to time in litigation to determine the enforceability, scope, and validity of any of the foregoing proprietary rights. Any patent litigation could result in substantial cost and divert the efforts of management and technical personnel.
Seasonality
Given the consistency in recurring domestic monitoring revenues by customer throughout 2011,2013, we detected no apparent seasonality if it existed, could be detected.in our business. However, as in previous years, incremental domestic deployment opportunities were found to be slowerslow down in the months of July and August. This wasWe believe that this is due to the unavailability of many judges, probation directors and other key parole officials, who observe a traditional vacation season during these two months.
Environment
We are not aware of any instance in which we have contravened federal, state, or local laws relating to protection of the environment or in which we otherwise may be subject to liability for environmental conditions that could materially affect operations.
Employees
As of December 21, 2011,31, 2013, we had 195 full time94 full-time employees and 20four part-time employees. None of the employees are represented by a labor union or subject to a collective bargaining agreement. We have never experienced a work stoppage and management believes that the relations with employees are good.
Additional Available Information
We maintain our principal executive offices and facilities at 150 West Civic Center Drive, Suite 100,400, Sandy, Utah 84070. Our telephone number is (801) 451-6141. We maintain a World Wide Web site at www.securealert.com.www.securealert.com. The information found on, or otherwise accessible through, our website, is not incorporated information,into and does not form a part of this report on Form 10-K. We make available, free of charge at our corporate website copies of our annual reports filed with the United States Securities and Exchange Commission (“SEC”) on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and all amendments to these reports, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act. We also provide copies of our Forms 8-K, 10-K, 10-Q, and proxy statements and annual reports at no charge to investors upon request.
All reports filed by SecureAlertus with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov.www.sec.gov. In addition, the public may read and copy materials we have filed with the SEC at the SEC's public reference room located at 450 Fifth St., N.W., Washington, D.C. 20549.
Risks Related to Our Business, Operations and Industry
We are primarily dependent on additional capital from limited sources, both of which are related parties to the Company. Our business plan is dependent upon raising sufficient capital to supplement operational income. It may be necessary for us to obtain additional borrowing at less than favorable terms. On October 24, 2013, we drew down $1,200,000 in an unsecured revolving line of credit from Sapinda Asia, a significant shareholder of the Company. The principal accrues interest at the rate of 10 percent per annum and the entire principal and interest is due on or before June 30, 2014. On November 20, 2013, we borrowed an additional $1,500,000 from Sapinda Asia bearing interest at 8% per annum and maturing on November 18, 2014. On January 3, 2014, we entered into an unsecured “Facility Agreement” with Tetra House Pte. Ltd., (“Tetra House”) an entity controlled by our Chairman, Guy Dubois, pursuant to which Tetra House agreed to make available to us up to $25,000,000 in borrowed funds at an 8% annual interest rate due and payable in arrears semi-annually. The funds may be drawn down at any time and from time to time through May 31, 2014, in minimum amounts of $2,000,000 and in $1,000,000 increments. The borrowed funds may be used for acquisitions and for general corporate purposes and are due and payable two years from the closing date. See Item 13. “Certain Relationships and Related Transactions, and Director Independence” for more details regarding the Facility Agreement and our obligations under that agreement. As of January 14, 2014, we borrowed $10,000,000 under the Facility Agreement.
9
We face risks related to our substantial indebtedness.Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk associated with our variable rate debt and prevent us from meeting our obligations under our outstanding debentures and other debt instruments. As of September 30, 2013, we had $2,735,649 million of indebtedness outstanding. Subsequent to September 30, 2013, we added borrowings in the principal amount of $12,700,000.
Our high degree of leverage could have important consequences to us, including:| • | making it more difficult for us to make payments on our debt; |
| • | increasing our vulnerability to general economic and industry conditions; |
| • | requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our debt, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures, and future business opportunities; |
| • | restricting us from making strategic acquisitions or causing us to make non-strategic divestitures; |
| • | limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions, and general corporate or other purposes; and |
| • | limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who may be less highly leveraged. |
General economic conditions may affect our revenue and harm our business. As widely reported, financial markets in the United States, Europe and Asia have been experiencing extreme disruption in the past year.two years. Unfavorable changes in economic conditions, including declining consumer confidence, inflation, recession or other changes, may lead our customers to delay or reduce purchases of our products and services, adversely affecting our results of operations and financial condition. Challenging economic conditions also may impair the ability of our customers or distributors to pay for products or services they have purchased, and as a result, our reserves for doubtful accounts and write-offs of accounts receivable could increase. Our cash flows may be adversely affected by delayed payments or underpayments by our customers. We are unable to predict the duration and severity of the current disruption in financial markets and adverse economic conditions in the United States and other countries.
Budgetary issues faced by government agencies could adversely impact our future revenue. Our revenues are primarily derived from contracts with state, local and county government agencies in the Unites States.United States and governments of Caribbean and Latin American nations. Many of these government agencies are experiencing budget deficits and may continue to do so. As a result, the amount spent by the Company’sour current clients on equipment and services supplied by the Companythat we supply may be reduced or grow at rates slower than anticipated and it may be more difficult to attract additional government clients for the Company’s equipment and services.clients. In addition, since 2009, the industry has experienced a general decline in average daily lease rate for GPS tracking units. As a result of these factors, our ability to maintain or increase our revenues may be negatively affected.
10
As a result of our increased focus on a newinternational business market,markets, our business is subject to many of the risks of a new or start-up venture. Our 2011 business goals and strategy subjectssubject us to the risks and uncertainties usually associated with start-ups. Our business plan involves risks, uncertainties and difficulties frequently encountered by companies in their early stages of development. If we are to be successful in this new business direction, we must accomplish the following, among other things:
| · | Develop and introduce functional and attractive product and service offerings; |
| · | Increase awareness of our brand and develop consumer loyalty; |
| · | Respond to competitive and technological developments; |
| · | Increase gross profit margins; |
| · | Build an operational structure to support our business; and |
| · | Attract, retain and motivate qualified personnel. |
If we fail to achieve these goals, that failure would have a material adverse effect on our business, prospects, financial condition and operating results. Because the market for our product and service offerings is new and evolving, it is difficult to predict with any certainty the size of this market and its growth rate, if any. There is no assurance that a market for these products or services will ever develop or that demand for our products and services will emerge or be sustainable. If the market fails to develop, develops more slowly than expected or becomes saturated with competitors, our business, financial condition and operating results would be materially adversely affected.
Certain individuals and groups own or control a significant number of our outstanding shares. Certain groups or persons associated with them beneficially own a substantial number of shares of our outstanding common stock or securities and debt instruments convertible into shares of our common stock. As a result, these persons have the ability, acting as a group, to effectively control our affairs and business, including the election of our directors and, subject to certain limitations, approval or preclusion of fundamental corporate transactions. This concentration of ownership may also have the effect of delaying or preventing a change of control or making other transactions more difficult or impossible without their support. In addition, these equity holders may have an interest in pursuing acquisitions, divestitures, financing or other transactions that, in their judgment, could enhance their equity investments, even though such transactions may involve risk to us or our other shareholders. Additionally, they may make investments in businesses that directly or indirectly compete with us, or may pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. See, Item 10. “Directors, Executive Officers and Corporate Governance,” on page 2623 and Item 12. “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”Matters,” on page 34.29.
There is no certainty that the market will accept our products and services. Our targeted markets may be slow to or may never accept our products or services. Governmental organizations may not use our products unless they determine, based on experience, advertising or other factors, that those products are a preferable alternative to currently available methods of tracking. In addition, decisions to adopt new tracking devices can be influenced by government administrators, regulatory factors, and other factors largely outside our control. No assurance can be given that key decision-makers will accept our new products, which could have a material adverse effect on our business, financial condition and results of operations.
We rely on significant suppliers for key products and cellular access. If we do not renew these agreements when they expire we may not continue to have access to these suppliers’ products or services at favorable prices or in volumes as we have in the past, which would reduce revenues and could adversely affect results of operations or financial condition. We have entered into an agreement with a national cellular access company for cellular services. We also rely currently on a single manufacturer for the manufacture of our TrackerPAL™ and ReliAlert™ReliAlert devices. If any of these significant suppliers were to cease providing products or services to us, we would be required to seek alternative sources. There is no assurance that alternate sources could be located or that the delay or additional expense associated with locating alternative sources for these products or services would not materially and adversely affect our business and financial condition.
Our business subjects our research, development and ultimate marketing activities to current and possibly to future government regulations. The cost of compliance or the failure to comply with these regulations could adversely affect our business, results of operations and financial condition. Our monitoring device products are not subject to specific approvals from any governmental agency, although our products using cellular and GPS technologies must be manufactured in compliance with applicable rules and regulations of the Federal Communications Commission (“FCC”). There can also be no assurance that changes in the legal or regulatory framework or other subsequent developments will not result in limitation, suspension or revocation of regulatory approvals granted to us. Any such events, were they to occur, could have a material adverse effect on our business, financial condition and results of operations. We may be required to comply with FCC regulations for manufacturing practices, which mandate procedures for extensive control and documentation of product design, control and validation of the manufacturing process and overall product quality. Foreign regulatory agencies have similar manufacturing standards. Any third parties manufacturing our products or supplying materials or components for such products may also be subject to these manufacturing practices and mandatory procedures. If we, our management or our third-party manufacturers fail to comply with applicable regulations regarding these manufacturing practices, we could be subject to a number of sanctions, including fines, injunctions, civil penalties, delays, suspensions or withdrawals of market approval, seizures or recalls of product, operating restrictions and, in some cases, criminal prosecutions. Our products and related manufacturing operations may also be subject to regulation, inspection and licensing by other governmental agencies, including the Occupational Health and Safety Administration.
We face intense competition, including competition from entities that are more established and may have greater financial resources than we do, which may make it difficult for us to establish and maintain a viable market presence. Our current and expected markets are rapidly changing. Existing products and services and emerging products and services will compete directly with the products we are seeking to develop and market. Our technology will compete directly with other technology, and, although we believe our technology has or will have advantages over these competing systems, there can be no assurance that our technology will have advantages that are significant enough to cause users to adopt its use. Competition is expected to increase. Many of these competitors have products or techniques approved or in development and operate large, well-funded research and development programs in the field. Moreover, these companies and institutions may be in the process of developing technology that could be developed more quickly or be ultimately more effective than our planned products. We face competition based on product efficacy, availability of supply, marketing and sales capability, price and patent position. There can be no assurance that our competitors will not develop more effective or more affordable products, or achieve earlier patent protection or product commercialization.
We are dependent upon certain customers, the loss of which would adversely affect our results of operations and business condition. During fiscal year 2013, two customers each accounted for more than 10 percent of total sales. One customer paid $5,252,959 (34 percent) under an international contract that was completed during the fiscal year ended 2013 and it is uncertain if we will provide services to this customer in the future. Another customer paid $1,622,326 (10%) under a three-year contract which was completed in November 2013 and has continued under a month-to-month contract. This contract could be terminated at anytime upon 30 days notice. The loss of either of these customers would result in lower revenues and limit the cash available to grow our business and to achieve profitability. In addition, on November 15, 2013, we entered into a contract with the uniformed prison service of the Republic of Chile known as the Gendarmerie. This is a 41-month contract and barring additional new contracts, this contract is expected to account for more than 10 percent of sales for fiscal year 2014. The loss or interruption of this new contract would adversely affect our results of operations and financial condition.
Our business plan is subject to the risks of technological uncertainty, which may result in our products failing to be competitive or readily accepted by our target markets. Some of the products we are currently evaluating likely will require further research and development efforts before they can be commercialized. There can be no assurance that our research and development efforts will be successful. In addition, the technology which we integrate or that we may expect to integrate with our product and service offerings is rapidly changing and developing. We face risks associated with the possibility that our technology may not function as intended and the possible obsolescence of our technology and the risks of delay in the further development of our own technologies. Cellular coverage is not uniform throughout our current and targeted markets and GPS technology depends upon “line-of-sight” access to satellite signals used to locate the user. This limits the effectiveness of GPS if the user is in the lower floors of a tall building, underground or otherwise located where the signals have difficulty penetrating. Other difficulties and uncertainties normally associated with new industries or the application of new technologies in new or existing industries also threaten our business, including the possible lack of consumer acceptance, difficulty in obtaining financing for untested technologies, increasing competition from larger or smaller well-funded competitors, advances in competing or other technologies, and changes in laws and regulations affecting the development, marketing or use of our new products and related services.
Our business plan anticipates significant growth through monitoring revenues and acquisitions. To manage the expected growth we will require capital and there is no assurance we will be successful in obtaining necessary additional funding. If we are successful in implementing our business plan, we may be required to raise additional capital to manage anticipated growth. Our actual capital requirements will depend on many factors, including but not limited to, the costs and timing of our ongoing development activities, the success of our development efforts, the cost and timing of establishing or expanding our revenues, marketing and manufacturing activities, the extent to which our products gain market acceptance, our ability to establish and maintain collaborative relationships, competing technological and market developments, the progress of our commercialization efforts and the commercialization efforts of our marketing alliances, the costs involved in preparing, filing, prosecuting, maintaining and enforcing and defending patent claims and other intellectual property rights, developments related to regulatory issues, and other factors, including many that are outside our control. To satisfy our capital requirements, we may seek to raise funds through public or private financings, collaborative relationships or other arrangements. Any arrangement that includes the issuance of equity securities or securities convertible into our equity securities may be dilutive to shareholders, (including the purchasers of the shares), and debt financing, if available, may involve significant restrictive covenants that limit our ability to raise capital in other transactions. Collaborative arrangements, if necessary to raise additional funds, may require that we relinquish or encumber our rights to certain of our technologies, products or marketing territories. Any inability or failure to raise capital when needed could also have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that any such financing, if required, will be available on terms satisfactory to us, if at all.
12
Our products are subject to the risks and uncertainties associated with the protection of intellectual property and related proprietary rights. We believe that our success depends in part on our ability to obtain and enforce patents, maintain trade secrets and operate without infringing on the proprietary rights of others in the United States and in other countries. We have received several patents; we have also applied for several additional patents and those applications are awaiting action by the United States Patent Office.Office and in other countries. There is no assurance those patents will issue or that when they do issue they will include all of the claims currently included in the applications. Even if they do issue, those new patents and our existing patents must be protected against possible infringement. The enforcement of patent rights can be uncertain and involve complex legal and factual questions. The scope and enforceability of patent claims are not systematically predictable with absolute accuracy. The strength of our own patent rights depends, in part, upon the breadth and scope of protection provided by the patent and the validity of our patents, if any. Our inability to obtain or to maintain patents on our key products could adversely affect our business. We own 1615 patents and have filed and intend to file additional patent applications in the United States and in key foreign jurisdictions relating to our technologies, improvements to those technologies and for specific products we may develop. There can be no assurance that patents will issue on any of these applications or that, if issued, any patents will not be challenged, invalidated or circumvented. The prosecution of patent applications and the enforcement of patent rights are expensive, and the expense may adversely affect our profitability and the results of our operations. In addition, there can be no assurance that the rights afforded by any patents will guarantee proprietary protection or competitive advantage. Our success will also depend, in part, on our ability to avoid infringing the patent rights of others. We must also avoid any material breach of technology licenses we may enter into with respect to our new products and services. Existing patent and license rights may require us to alter the designs of our products or processes, obtain licenses or cease certain activities. In addition, if patents have been issued to others that contain competitive or conflicting claims and such claims are ultimately determined to be valid and superior to our own, we may be required to obtain licenses to those patents or to develop or obtain alternative technology. If any licenses are required, there can be no assurance that we will be able to obtain any necessary licenses on commercially favorable terms, if at all. Any breach of an existing license or failure to obtain a license to any technology that may be necessary in order to commercialize our products may have a material adverse impact on our business, results of operations and financial condition. Litigation that could result in substantial costs may also be necessary to enforce patents licensed or issued to us or to determine the scope or validity of third-party proprietary rights. If our competitors prepare and file patent applications in the United States that claim technology also claimed by us, we may have to participate in proceedings declared by the United States Patent and Trademark Office to determine priority of invention, which could result in substantial costs, even if we eventually prevail. An adverse outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require that we cease using such technology.
We also rely on trade secrets laws to protect portions of our technology for which patent protection has not yet been pursued or is not believed to be appropriate or obtainable. These laws may protect us against the unlawful or unpermitted disclosure of any information of a confidential and proprietary nature, including but not limited to our know-how, trade secrets, methods of operation, names and information relating to vendors or suppliers and customer names and addresses. We intend to protect this unpatentable and unpatented proprietary technology and processes, in addition to other confidential and proprietary information in part, by entering into confidentiality agreements with employees, collaborative partners, consultants and certain contractors. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, or that our trade secrets and other confidential and proprietary information will not otherwise become known or be independently discovered or reverse-engineered by competitors.
We conduct business internationally with a variety of sovereign governments. We areOur business is subject to a variety of regulations and political interests that could affect the timing of our payment for services and the duration of our contracts. We face the risk of systems interruptions and capacity constraints, possibly resulting in adverse publicity, revenue loss and erosion of customer trust. The satisfactory performance, reliability and availability of our network infrastructure are critical to our reputation and our ability to attract and retain customers and to maintain adequate customer service levels. We may experience temporary service interruptions for a variety of reasons, including telecommunications or power failures, fire, water damage, vandalism, computer bugs or viruses or hardware failures. We may not be able to correct a problem in a timely manner. Any service interruption that results in the unavailability of our system or reduces its capacity could result in real or perceived public safety issues that may affect customer confidence in our services and result in negative publicity that could cause us to lose customer accounts or fail to obtain new accounts. Any inability to scale our systems may cause unanticipated system disruptions, slower response times, degradation in levels of customer service, or impaired quality and speed of transaction processing. We are not certain that we will be able to project the rate or timing of increases, if any, in the use of our services to permit us to upgrade and expand our systems effectively or to integrate smoothly and newly developed or purchased modules with our existing systems.
Risks Related to Our Common Stock
Our Board of Directors may authorize the issuance of preferred stock and designate rights and preferences that will dilute the ownership and voting interests of existing shareholders without their approval. Our Articles of Incorporation authorize us to issue up to 20,000,000 shares of preferred stock, at par value $0.0001. The Board of Directors is authorized to designate, and to determine the rights and preferences of any series or class of preferred stock. The Board of Directors may, without shareholder approval, issue shares of preferred stock with dividend, liquidation, conversion, voting or other rights which are senior to the common stock or which could adversely affect the voting power or other rights of the existing holders of outstanding shares of preferred stock or common stock. Additionally, the issuance of preferred stock may have the effect of decreasing the market price of the common stock and reduce the likelihood that common shareholders will receive dividend payments and payments upon liquidation. The issuance of additional shares of preferred stock may also adversely affect an acquisition or change in control of the Company.
Our headquarters and monitoring facility are housed in 11,462approximately 7,500 square feet of space located at 150 West Civic Center Drive, Suite 100,400, Sandy, Utah. Lease payments are approximately $23,000$18,000 per month. This lease expires on November 30, 2013.May 31, 2014. In addition, we lease 6,152 square feet of warehousing and pallet shipping functions and capabilities in a facility located at 9716 South 500 West, Sandy, Utah 84070. Monthly lease payments for this facility are approximately $5,700. Management believes that these facilities are sufficient to meet our needs for the foreseeable future.$6,500 expiring on August 31, 2014.
Item 3. Legal Proceedings
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. We believe the allegations are inaccurate and will defend the case vigorously.
Christopher P. Baker v. SecureAlert, Inc. In February 2013, Mr. Baker filed suit against us in the Third Judicial District Court in and for Salt Lake County, State of Utah. Mr. Baker asserts that we breached a 2006 consulting agreement with him and claims damages of not less than $210,000. We dispute the plaintiff’s claims and will defend the case vigorously. No accrual for a potential loss has been made as we believe the probability of incurring a material loss is remote.
SecureAlert, Inc. v. STOP, LLC. On December 17, 2013, we 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 us and STOP, effective January 29, 2010. The complaint was filed under seal and is not publicly available. We believe the relief sought in the case is warranted based on the language of the settlement agreement and intent of the parties and we will pursue the matter vigorously.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is traded on the OTC Bulletin Board under the symbol “SCRA.OB.”
The following table sets forth the range of high and low bid prices of our common stock as reported on the OTC Bulletin Board for the periods indicated. The sales information is available online at http://otcbb.com.
| Fiscal Year Ended September 30, 2010 | High | Low | ||
| First Quarter ended December 31, 2009 | $ 0.15 | $ 0.09 | ||
| Second Quarter ended March 31, 2010 | $ 0.16 | $ 0.08 | ||
| Third Quarter ended June 30, 2010 | $ 0.15 | $ 0.10 | ||
| Fourth Quarter ended September 30, 2010 | $ 0.13 | $ 0.09 | ||
| Fiscal Year Ended September 30, 2011 | High | Low | ||
| First Quarter ended December 31, 2010 | $ 0.11 | $ 0.08 | ||
| Second Quarter ended March 31, 2011 | $ 0.12 | $ 0.09 | ||
| Third Quarter ended June 30, 2011 | $ 0.10 | $ 0.08 | ||
| Fourth Quarter ended September 30, 2011 | $ 0.11 | $ 0.07 |
| Fiscal Year Ended September 30, 2012 | High | Low | ||||||
| First Quarter ended December 31, 2011 | $ | 20.00 | $ | 13.20 | ||||
| Second Quarter ended March 31, 2012 | $ | 15.40 | $ | 8.00 | ||||
| Third Quarter ended June 30, 2012 | $ | 10.80 | $ | 5.60 | ||||
| Fourth Quarter ended September 30, 2012 | $ | 7.80 | $ | 4.00 | ||||
| Fiscal Year Ended September 30, 2013 | High | Low | ||||||
| First Quarter ended December 31, 2012 | $ | 14.60 | $ | 3.22 | ||||
| Second Quarter ended March 31, 2013 | $ | 14.60 | $ | 11.00 | ||||
| Third Quarter ended June 30, 2013 | $ | 14.70 | $ | 7.00 | ||||
| Fourth Quarter ended September 30, 2013 | $ | 20.90 | $ | 14.40 | ||||
Holders
As of December 21, 2011, there were31, we had approximately 3,0002,500 holders of record of our common stock and 509,772,6319,811,946 shares of common stock outstanding. We also have granted options and warrants for the purchase of 99,178,202 shares399,591shares of common stock and 5,20042,000 shares of Series D Preferred stock. As of December 21, 2011, there wereWe also 48,853had 468 shares of Series D Preferred stock outstanding, which are convertible into 293,118,00024,503 shares of common stock and are voted on an as-converted basis with the outstanding common stock.
Dividends
Since incorporation, we have not declared any cash dividends on our common stock. We do not anticipate declaring cash dividends on our common stock for the foreseeable future. The Series D Preferred stock is entitled to dividends at the rate equal to 8 percent 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. To date all dividends payable on our preferred stock outstanding have been paid by issuance of shares of common or preferred stock. During the fiscal years ended September 30, 20112013 and 2010,2012, we recorded $2,029,996$1,042,897 and $1,494,481$2,480,298 in stock dividend expenses, respectively, payable with respect to our outstanding preferred stock.
Dilution
The Board of Directors determines when and under what conditions and at what prices to issue stock. In addition, a significant number of shares of common stock are reserved for issuance upon exercise of purchase or conversion rights.
The issuance of any shares of common stock for any reason will result in dilution of the equity and voting interests of existing shareholders.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company, 6201 15th Avenue, Brooklyn, NYNew York, 11219.
14
Securities Authorized for Issuance under Equity Compensation Plans
The 2012 SecureAlert, Inc. Stock Incentive Plan
The Board of Directors has adopted the SecureAlert, Inc. 2012 Equity Compensation Plan (the “2012 Plan”), approved by shareholders at the Annual Meeting of Shareholders held on December 21, 2011. We believe that incentives and stock-based awards focus employees on the objective of creating shareholder value and promoting the success of the Company, and that incentive compensation plans like the 2012 Plan are an important attraction, retention and motivation tool for participants in the plan.
Under the 2012 Plan, 18,000,00090,000 options or shares of common stock may be awarded. As of the date of this report, options for the purchase of 6,000,00030,000 shares of common stock have been awarded under the 2012 Plan.
The 2006 SecureAlert, Inc. Stock Incentive Plan
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||||||
| (a) | (b) | (c) | ||||||||||
| Equity compensation plans approved by security holders | 21,433 | $ | 16.66 | 60,000 | ||||||||
| Equity compensation plans not approved by security holders | 568,533 | $ | 15.28 | - | ||||||||
| Total | 589,966 | $ | 16.12 | 60,000 | ||||||||
Recent Sales of Unregistered Securities
During the two4th fiscal yearsquarter ended September 30, 2010 and 2011,2013, we issued the following securities without registration under the Securities ActAct:
Issuance of 1933, as amended (the “Securities Act”) not previously included in a current report on Form 8-K or in a quarterly report on Form 10-Q.
Issuance of Series D Preferred.Common Stock for Payment of Preferred Dividends
Issuance of our subsidiary corporation SecureAlert Monitoring, Inc.’s (“SecureAlert Monitoring”) Series A PreferredCommon Stock as payment for past contingency payments in connection with the redemptionBoard of the shareholder’s SecureAlert Series A Preferred Stock. TheDirector Services
We issued 680 shares of common stock were issued to six holders of SecureAlert Monitoring Series A Preferred Stock in private transactions.
In each of the transactions listed above, we issued the shares of common stock and preferred stock were issued without registration under the Securities Act in reliance on exemptions from registration provided by Section 4(2)4(a)(2) of the Securities Act and the rules and regulations promulgated thereunder.
Purchases of Equity Securities
Neither the Company nor any affiliated purchaser as defined in Rule 10b-18(3) of the Exchange Act made any purchases of shares of the Company’sour common stock in the public market on behalf of the Company during the year ended September 30, 2010.2013.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act. All statements contained in this Form 10-K other than statements of historical fact are forward-looking statements. When used in this report or elsewhere by management from time to time, the words “believe,” “anticipate,” “intend,” “plan,” “estimate,” “expect,” “may,” “will,” “should,” “seeks” and similar expressions are forward-looking statements. Such forward-looking statements are based on current expectations, but the absence of these words does not necessarily mean that a statement is not forward-looking. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors. For a more detailed discussion of such forward-looking statements and the potential risks and uncertainties that may impact upon their accuracy, see Item 1A.,“Risk Factors” in Part I of this Form 10-K and the “Overview” and “Liquidity and Capital Resources” sections of this Item 7., Management’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements reflect our view only as of the date of this report. Except as required by law, we undertake no obligations to update any forward-looking statements. Accordingly, you should also carefully consider the factors set forth in other reports or documents that we file from time to time with the SEC.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader better understand SecureAlert, our operations and our present business environment. Our fiscal year ends on September 30 of each year. Reference to fiscal year 20112013 refers to the year ended September 30, 2011.2013. This MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements for the fiscal years ended September 30, 20112013 and 20102012 and the accompanying notes thereto contained in this report. This introduction summarizes MD&A, which includes the following sections:
| · | Overview – a general description of our business and the markets in which we operate; our objectives; our areas of focus; and challenges and risks of our business. |
| · |
| Results of Operations – an analysis of our consolidated results of operations for the last two fiscal years presented in our consolidated financial statements. |
| · | Liquidity and Capital Resources – an analysis of cash flows; off-balance sheet arrangements and aggregate contractual obligations; |
| · | Critical Accounting Policies – a discussion of accounting policies that require critical judgments and estimates. |
We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements.
Overview
We market and deploy offender management programs, combining patented GPS tracking technologies, fulltime 24/7/365 intervention-based monitoring capabilities and case management services. Our vision is to be the global market leader for delivering the most reliable offender management solutions, which leverage superior intervention capabilities and integrated communication technologies. We believe that we currently deliver the only offender management technology, which effectively integrates GPS, RF and an interactive 3-way voice communication system into a single piece device, deployable worldwide. Through our patented electronic monitoring technologies and services, we empower law enforcement, corrections and rehabilitation professionals with offender, defendant, probationer and parolee programs, which grant convicted criminals and pre-trial suspects an accountable opportunity to be “free from prison”. This provides for greater public safety at a lower cost compared to incarceration or traditional resource-intensive alternatives.
Our ReliAlert™ReliAlert and ReliAlert™ReliAlert XC devices are manufactured in the United States and include a portfolio of products, e-Arrest Beacons and monitoring services designed to create “Jails without Walls”, while re-socializing offender populations. The products and services are customizable by offender types (e.g., domestic abusers, sexual predators, gang members, pre-trial defendants, or juvenile offenders) and offer practical solutions and options for the reintegration and effective re-socialization of select offenders safely back into society. Additionally, our proprietary software and device firmware support the dynamic accommodation of agency-established monitoring protocols, victim protection imperatives, geographic boundaries, work environments, school attendance, rehabilitation programs and sanctioned home restrictions. Our technologies are designed for domestic or international, federal, state and local agencies to provide location tracking of designated individuals within the criminal justice system and throughout a restricted geography.
Our GPS devices are securely attached around the offender's ankle with a tamper resistant strap (steel cabling with optic fiber) that can be adjusted or removed without detection only by a supervising officer, and which is activated through services provided by our SecureAlert Monitoring Center (or other agency-based monitoring centers). During fiscal year 2011, we also deployed an upgraded, patented, dual-steel banded SecureCuff™SecureCuff strap for “at-risk” offenders who have qualified for electronic monitoring supervision, but who require an incremental level of security and supervision, provided through both hardware and monitoring services. Our monitoring and intervention centers act as an important link between the offender and the supervising officer, as intervention specialists persistently track and monitor the offender, initiating contact at the direction of the supervising agency and/or when the offender is in violation of any established restrictions or protocols. The ReliAlert™ReliAlert and ReliAlert™ReliAlert XC units are intelligent devices with integrated computer circuitry and constructed from case-hardened plastics designed to promptly notify the intervention centers of any attempt made to breach applicable protocols, or to remove or otherwise tamper with the device or optical strap housing.
Results of Operations
Continuing Operations - Fiscal Year 20112013 compared to Fiscal Year 20102012
Net Revenues
During the fiscal year ended September 30, 2011,2013, we had net revenues of $17,961,803$15,641,062 compared to net revenues of $12,450,971$13,114,979 for the fiscal year ended September 30, 2010,2012, an increase of $5,510,832,$2,526,083, or approximately 4419 percent. Revenues from monitoring services for the fiscal year ended September 30, 2011,2013, totaled $16,410,292,$15,028,625, compared to $12,079,757$11,519,727 for the same period ended 2010, resulting infiscal year 2012, an increase of $4,330,535$3,508,898 or approximately 3630 percent. These revenuesRevenues increased as a result of our continued expansion into the global marketinternational markets, which contributed an additional $3,438,467$2,745,667 to monitoring revenues for fiscal year 2013. Of the $15,028,625 in revenues, $5,252,959 (35 percent) derived from an international contract that was completed during the fiscal year ended September 30, 2011. Additionally, domesticand it is uncertain if we will provide services to this customer in the future. Domestic revenues increaseddecreased by $2,072,365,$219,584, or 17three percent, from the fiscal year ended September 30, 2010.2012. This decrease resulted primarily from lowering our monitoring daily charge to compete in the domestic marketplace. Revenues from product sales for the fiscal year ended September 30, 20112013 were $1,551,511,$612,437, compared to $371,214$1,595,252 for the prior year, an increasea decrease of $1,180,297.$982,815, or 62 percent. This increase isdecrease was primarily due to a one-timethe sale and installation in fiscal year 2012 of an onsite monitoring product. This type of sale is rare for the Company. For the years ended September 30, 2011 and 2010, revenues from one-piece activated GPS tracking devices supported entirely about a single limb of the monitored person totaled $6,505,056 and $5,635,198, respectively.charging solution.
Cost of Revenues
During the fiscal year ended September 30, 2011,2013, cost of revenues, excluding impairment of equipment and parts, totaled $9,565,959,$7,816,892, compared to cost of revenues during the fiscal year ended September 30, 20102012 of $6,978,974,$7,305,602, an increase of $2,586,985. Cost$511,290. These net costs of revenues, as a percentage of net revenues, decreased 3%,six percent, from 56 percent in 20102012 to 5350 percent in 2011, primarily due to a decrease in communication costs of $509,615.2013. The increase in cost of revenues of $2,586,985$511,290 in 20112013 resulted primarily from increases in the costs of $1,365,488 inroyalty fees of $347,483 and higher international costs $784,393of $227,808. These increases were partially offset by a decrease in other monitoringfreight costs $292,474 in amortization expense,of $72,010.
Impairment costs for equipment and $265,614 in monitoring center costs necessary for the organic growth in revenues.
Amortization for the fiscal years ended September 30, 20112013 and 20102012, totaled $1,160,920$1,230,293 and $875,312,$1,231,773, respectively. Amortization costs are based on a three-year useful life for TrackerPAL™TrackerPAL and ReliAlert™ReliAlert devices. Devices that are leased or retained by us for future deployment or sale are amortized over three years. We believe this three-year life is appropriate due to rapid changes in electronic monitoring technology and the corresponding potential for obsolescence. Management periodically assesses the useful life of the devices for appropriateness.
We expect the cost of revenues, excluding impairment of equipment and parts, as a percentage of revenues to decrease in the foreseeable future due to (a) economies of scale realized through projected increases in revenues, and (b) further development of our proprietary software, enabling each operator to monitor more devices resulting in lower monitoring center costs.
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Gross Profit and Margin
During the fiscal year ended September 30, 2011,2013, gross profit totaled $7,931,549,$7,610,894, or 4449 percent of net revenues, compared to $4,881,196,$4,160,615, or 3932 percent of net revenues during the fiscal year ended September 30, 2010,2012, an improvementincrease of $3,050,353.$3,450,279. Included in cost of revenues are costs attributable to impairment of inventory and monitoring equipment of $464,295$213,276 and $590,801$1,648,762 for the fiscal years ended September 30, 20112013 and 2010,2012, respectively. These impairment costs from disposal and reduction in value of obsolete monitoring equipment are expenses not expectedwe expect to decrease in future periods. Excluding impairment costs, adjusted gross profit for the fiscal year ended September 30, 20112013 was $8,395,844$7,824,170 or 4750 percent of net revenues, compared to $5,471,997$5,809,377 or 44 percent of net revenues, for the same period in 2010,2012, an improvementincrease of $2,923,847.$2,014,793.
Research and Development Expenses
During the fiscal year ended September 30, 2011,2013, we incurred research and development expenses of $1,453,994$987,934 compared to similar expenses recognized during fiscal year 20102012 totaling $1,483,385.$1,248,654. This decrease of $29,391$260,720 is due primarily to management’s decision during the fiscal year ended September 30, 2011 to improve efficiencya reduction in the softwareresearch and device engineering departments.development staff.
Selling, General and Administrative Expenses
During the fiscal year ended September 30, 2011,2013, our selling, general and administrative expenses totaled $15,652,303,$7,689,124, compared to $12,126,413$12,623,114 for the fiscal year ended September 30, 2010.2012. The increasedecrease of $3,525,890$4,933,990 is the result of increasesreductions in the following expenses: payroll and related taxesbad debt expense ($1,212,331)202,782), consulting ($770,155)2,286,737), bad debtinsurance ($803,300)182,191), legal fees ($170,011), payroll, payroll taxes and employee benefits ($83,168)1,426,001), and travel expenses ($160,559), insurance ($117,771), automobile ($98,866),102,810). Consulting and other expenses netnon-cash compensation as a part of improvements ($279,740). Payroll and related tax expensesemployee expense for the fiscal year ended September 30, 2011 were $6,162,0582013 totaled $445,971, compared to $4,949,727$3,904,527 for the fiscal year ended September 30, 2010, an increase2012, a decrease of $1,212,331.$3,458,556. The increasedecrease in payroll relatedconsulting and non-cash compensation to employee expenses resulted primarily due to staffing requirements to fulfill international expansion initiatives. Increase in bad debt expense of $803,300 reflects the results from the conversionissuance of a subsidiary from cash basis to accrual basis accounting. The Company has focused on requiring customers to prepay for servicescommon stock and improving protocols and processes to violate for late payment for direct offender pay programs in order to mitigate bad debtacceleration of expense in future periods.connection with cancellation of stock options during fiscal year 2012.
Other Income and Expense
For the fiscal year ended September 30, 2011,2013, interest expense was $712,840,$17,048,519, compared to $4,146,459$1,431,416 for the fiscal year ended September 30, 2010.2012. This amount includesincrease of $15,617,103 is a result primarily of non-cash interest expense of approximately $42,351 related to amortization of deferred financing costs associated with warrants, shares of common stock issued for interest, and a beneficial conversion feature expense. This decrease of $3,433,619 is primarily$15,960,382 related to the conversionamortization of $16,910,384debt discounts on convertible debentures. Also included in debt,interest expense is $939,770 in accrued liabilitiesinterest on a loan and interestsecurity agreement with a related party, of which $936,627 was converted into 17,174 shares of Series D Preferredcommon stock which resulted in the elimination of the majority of interest that would have been recognized during the fiscal year ended September 30, 2011.2013.
Net Loss
We had a net loss from continuing operations for the fiscal year ended September 30, 20112013 totaling $9,858,824,$18,334,070 (approximately $3.79 per share), compared to a net loss of $13,919,609$17,150,288 (approximately $6.27 per share) for the fiscal year ended September 30, 2010.2012. This decreaseincrease of $4,060,785$1,183,782 is due primarily to increases in sales and the reductionamortization of the costbeneficial conversion feature of goods soldour convertible debentures recorded as a percentage of sales due to increased sales in areas with a much lower cost to deliver monitoring services and sales.non-cash interest expense as described above.
Discontinued Operations - Fiscal Year 2013 compared to Fiscal Year 2012
Effective October 1, 2012, we sold all of the issued and outstanding capital stock of our subsidiary, Midwest, to the former principals of Midwest. Because Midwest was a component of our consolidated entity, this sale requires discontinued operations reporting treatment of the Midwest operations.
In addition, effective January 1, 2013, we sold all of the issued and outstanding capital stock of Court Programs, Inc. to the former principal of that entity, together with all issued and outstanding capital stock of its affiliated entities. Because these entities were a component of our consolidated entity, this sale requires that we report their operating results as discontinued operations for accounting purposes.
A summary of the operating results of discontinued operations for the fiscal years ended September 30, 2013 and 2012 is as follows:
| 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 expense | (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 | ) | ||
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Liquidity and Capital Resources
As of September 30, 2011,2013, we had unrestricted cash of $949,749,$3,382,428, compared to unrestricted cash of $1,126,232$458,029 as of September 30, 2010.2012. As of September 30, 2011,2013, we had a working capital deficitsurplus of $1,201,955,$6,836,442, compared to a working capital deficit of $3,394,932$13,600,345 as of September 30, 2010.2012. The increase in working capital in fiscal year 20112013 primarily resulted from increases in accounts receivable, inventory, prepaidthe conversion of amounts owed to a related party under a loan and other current assets, and reductions in current portions of long-term debt and line-of-credit, offset by increases in accounts payable, accrued liabilities and deferred revenues during the fiscal year ended September 30, 2011.security agreement.
During fiscal year 2011,2013, our operating activities usedprovided cash of $6,809,513,$838,910, compared to $5,779,984$1,910,067 of cash used during fiscal year 2010.2012. This increaseimprovement in cash usedprovided from operating activities of $1,029,529$2,748,977 resulted primarily from decreases in net loss which was driven by an improvement in gross profit of $3,050,353, the amortization of a debt discount of $2,898,908, and an increase in the change in accounts payablerevenues of $1,322,469.$2,526,083.
Investing activities during the fiscal year ended September 30, 2011,2013, used cash of $3,716,554,$560,425, compared to $2,228,803$2,847,274 during the fiscal year ended September 30, 2010.2012. The increasedecrease in cash used by investing activities of $2,286,849 during fiscal year 20112013 resulted primarily from an increasethe decrease in purchases of additional monitoring equipment. We purchased $3,066,026 and $1,834,173cash used for the purchase of monitoring equipment during the fiscal years ended September 30, 2011 and 2010, respectively.equipment.
Financing activities during the fiscal year ended September 30, 2011,2013, provided $10,349,584$2,500,724 of net cash compared to $8,532,698$4,396,563 of cash provided during fiscal year 2012.
During the fiscal year ended September 30, 2010.2013, we made net cash payments of $299,276 on notes payable. During fiscal year 2013, we had cash proceeds totaling $2,800,000 from the issuance of convertible debentures to related parties.
During the fiscal year ended September 30, 2011,2012, we made net payments of $635,657$687,354 on notes payable, and $188,634we paid $207,578 on a related-party linenotes payable and $1,147,250 of credit.commissions in connection with capital raises. During the fiscal year 2011,2012, we had net proceeds of $10,344,603$2,004,000 from the issuancesale of Series D Convertible Preferred stock, and net proceeds of $829,272 from related-party notes payable.
During the fiscal year ended September 30, 2011,2013, we incurred a net loss from continuing operations of $9,858,824$18,334,070 and we had positive cash flows from operating activities of $838,910, compared to a net loss of $17,150,288 and negative cash flows from operating activities of $6,809,513, compared to$1,910,067 for fiscal year 2012. As of September 30, 2013, our working capital surplus was $6,836,442, our stockholders’ equity was $23,963,342, and the accumulated deficit totaled $266,429,337.
Going Concern
We have a history of recurring net loss of $13,919,609losses and negative cash flows from operating activities of $5,779,984 fora significant accumulated deficit. For the fiscal year ended September 30, 2010.2012, we did not have enough cash on hand to meet our current liabilities. As of September 30, 2011,a result, the report from our working capital deficit was $1,201,955, stockholders’ equity was $13,615,308, and accumulated deficit totaled $229,055,519.
Subsequent to fiscal year ended September 30, 2013, we entered into a Facility Agreement, whereby we may borrow up to $25,000,000 for working capital and acquisitions purposes. As of January 14, 2014, we borrowed $10,000,000 under the Facility Agreement which we believe provides sufficient working capital and enough cash on hand to satisfy our current obligations. See Item 13. “Certain Relationships and Related Transactions, and Director Independence” for additional capital frominformation regarding the issuance of preferred stock or other securities, and expanding the market for our ReliAlert™ portfolio of products. There can be no assurance that revenues will increase rapidly enough to offset operating losses and repay debts. Likewise, there can be no assurance that our efforts to raise additional capital through debt or equity offerings will be successful. If we are unable to increase cash flows from operating activities or obtain additional financing, we will be unable to continue the development of our products and would likely cease operations.Facility Agreement.
Inflation
We do not believe that inflation has had a material impact on our historical operations or profitability.
Critical Accounting Policies
In Note (2) to the audited Consolidated Financial Statements for the fiscal year ended September 30, 20112013, included in this report, we discusseddiscuss those accounting policies that are considered to be significant in determining the results of operations and our financial position.
The preparation of financial statements requires management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, warranty obligations, product liability, revenue, and income taxes. We base our estimates on historical experience and other facts and circumstances that are believed to be reasonable, and the results form the basis for making judgments about the carrying value of assets and liabilities. The actual results may differ from these estimates under different assumptions or conditions.
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With respect to inventory reserves, revenue recognition, impairment of long-lived assets and allowance for doubtful accounts receivables,receivable, we apply critical accounting policies discussed below in the preparation of our financial statements.
Inventory Reserves
The nature of our business requires maintenance of sufficient inventory on hand at all times to meet the requirements of our customers. We record inventory and raw materials at the lower of cost, or market, which approximates actual cost. General inventory reserves are maintained for the possible impairment of the inventory. Impairment may be a result of slow moving or excess inventory, product obsolescence or changes in the valuation of the inventory. In determining the adequacy of reserves, management analyzes the following, among other things:
| · | Current inventory quantities on hand; |
| · | Product acceptance in the marketplace; |
| · | Customer demand; |
| · | Historical sales; |
| · | Forecast sales; |
| · | Product obsolescence; and |
| · | Technological innovations. |
Any modifications to these estimates of reserves are reflected in cost of revenues within the statement of operations during the period in which such modifications are determined necessary by management.
Revenue Recognition
Our revenue in fiscal year 2011 derivedhas 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 provideswe provide monitoring services and leaseslease devices to distributors or end users and the Company retainswe retain 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 our monitoring services.
We typically lease our devices under one-year contracts with customers that opt to use our monitoring services. However, these contracts may be cancelled by either party at anytime with 30 days notice. Under our 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 us.returned. We recognize revenue on leased devices at the end of each month that monitoring services have been provided. In those circumstances in which we receive payment in advance, we record these payments as deferred revenue.
Product Sales
We may sell our monitoring devices to customers in certain situations to itsour customers. In addition, we may sell equipment in connection with the building out and setting up a monitoring center on behalf of our customers. We recognize 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™ReliAlert devices) from us,, customers may, but are not required to, enter into one of our monitoring service contracts with us.contracts. We recognize revenue on monitoring services for customers that have previously purchased devices at the end of each month that monitoring services have been provided.
We sell and install standalone tracking systems that do not require our ongoing monitoring by us.monitoring. We have experience in component installation costs and direct labor hours related to this type of sale and can typically reasonably estimate costs, therefore we recognize revenue over the period in which the installation services are performed using the percentage-of-completion method of accounting for material installations. We typically usesuse 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. We evaluate our estimated labor hours and costs and determine 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, we accrue the estimated losses immediately.
Multiple Element Arrangements
The majority of our revenue transactions do not have multiple elements. However, on occasion, we enter 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 our services. For revenue arrangements that have multiple elements, we consider 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, we recognize revenue from the sale of devices separately from the monitoring services provided to the customer as the products or monitoring services are delivered.
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Other Matters
We consider an arrangement with payment terms longer than our normal terms not to be fixed or determinable, and we recognize 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. We sell our 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 soldwe sell to them by the Company.them. Generally, title and risk of loss pass to the buyer upon delivery of the devices.
We estimate our product returns based on historical experience and maintain 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.
Impairment of Long-lived Assets
We review our long-lived assets such as goodwill and intangibles 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. We evaluate whether events and circumstances have occurred which indicate possible impairment as of each balance sheet date. We use 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, 2010, we impaired goodwill from Court Programs, Inc. by $204,735. No other impairments were necessary during the fiscal years ended September 30, 2010 and 2011.
Allowance for Doubtful Accounts
We must make estimates of the collectability of accounts receivable. In doing so, we analyze accounts receivable and historical bad debts, customer credit-worthiness, current economic trends and changes in customer payment patterns when evaluating the adequacy of the allowance for doubtful accounts.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies, which are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on itsour financial position or results of operations upon adoption.
Accounting for Stock-Based Compensation
We recognize 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. We estimate the fair value of stock options using a Black-Scholes option pricing model which requires us 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.
Certain written and oral statements made by us in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Exchange Act. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain words such as “believe,” “anticipate,” “expect,” “estimate,” “project,” or words or phrases of similar meaning. In our reports and filings we may make forward looking statements regarding our expectations about future sales growth, renewal of existing contracts, anticipated expenses, the adequacy of existing capital resources, projected cost reduction and strategic initiatives, expected levels of depreciation and amortization expense, expectations regarding tangible and intangible asset valuation expenses, the seasonality of future sales, future compliance with the terms and conditions of our debt obligations, the expected repayment of our liabilities in future periods, expectations regarding income tax expenses as well as tax assets and credits and the amount of cash expected to be paid for income taxes, estimated capital expenditures, and cash flow estimates used to determine the fair value of long-lived assets. These, and other forward-looking statements, are subject to certain risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. These risks and uncertainties are disclosed from time to time in reports filed by us with the SEC, including reports on Forms 8-K, 10-Q, and 10-K. Such risks and uncertainties include, but are not limited to, the matters discussed in Item 1A of this annual report on Form 10-K for the fiscal year ended September 30, 2013, entitled “Risk Factors.”
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The risks included here are not exhaustive. Other sections of this report may include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors may emerge and it is not possible for our management to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any single factor, or combination of factors, may cause actual results to differ materially from those contained in forward-looking statements. Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results.
The market price of our common stock has been and may remain volatile. In addition, the stock markets in general have experienced increased volatility. Factors such as quarter-to-quarter variations in revenues and earnings or losses and our failure to meet expectations could have a significant impact on the market price of our common stock. In addition, the price of our common stock can change for reasons unrelated to our performance. Due to our low market capitalization, the price of our common stock may also be affected by conditions such as a lack of analyst coverage and fewer potential investors.
Forward-looking statements are based on management’s expectations as of the date made, and we do not undertake any responsibility to update any of these statements in the future except as required by law. Actual future performance and results will differ and may differ materially from that contained in or suggested by forward-looking statements as a result of the factors set forth in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in our filings with the SEC.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our business is extending to several countries outside the United States, and we intend to continue to expand our foreign operations. As a result, our revenues and results of operations are affected by fluctuations in currency exchange rates, interest rates, and other uncertainties inherent in doing business in more than one currency. In addition, our operations are exposed to risks that are associated with changes in social, political, and economic conditions in the foreign countries in which we operate, including changes in the laws and policies that govern foreign investment, as well as, to a lesser extent, changes in United States laws and regulations relating to foreign trade and investment.
The Financial Statements and Supplementary Data required by this Item are set forth at the pages indicated at Item 15 below.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
On September 23, 2013, Hansen, Barnett & Maxwell, P.C. (“HBM”) resigned as our independent registered public accounting firm. Prior to that resignation, HBM entered into an agreement with Eide Bailly LLP (“Eide Bailly”), pursuant to which Eide Bailly acquired the operations of HBM, and certain of the professional staff and partners of HBM joined Eide Bailly either as employees or partners of Eide Bailly and will continue to practice as members of Eide Bailly. Concurrent with the resignation of HBM, the Company, through and with the approval of our Audit Committee, engaged Eide Bailly as our independent registered public accounting firm.
Prior to engaging Eide Bailly, we did not consult with Eide Bailly regarding the application of accounting principles to a specific completed or contemplated transaction or regarding the type of audit opinions that might be rendered by Eide Bailly on our financial statements, and Eide Bailly did not provide any written or oral advice that was an important factor considered by us in reaching a decision as to any such accounting, auditing or financial reporting issue.
The reports of HBM regarding our financial statements for the fiscal year ended September 30, 2012 contained a going concern note. Other than such note, the reports of HBM did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. During the year ended September 30, 2012, and during the period from September 30, 2012 through September 23, 2013, the date of resignation, there were no disagreements with HBM on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of HBM would have caused it to make reference to such disagreement in its reports.
We previously filed a Current Report on Form 8-K with the SEC to report this change. We also filed as an exhibit to the Current Report a copy of HBM’s letter dated September 24, 2013 in which HBM stated its agreement with the above statements which were also contained in the Current Report.
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Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of management, including the principal executive officer and principal financial officer an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 20112013 was completed based on criteria established in Internal Control—Integrated Framework issued bypursuant to Rules 13a-15(b) and 15d-15(b) under the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).Exchange Act. Based on this evaluation, theour principal executive officer and principal financial officer concluded that the Company’sour disclosure controls and procedures were functioning effectively ateffective and designed to provide reasonable assurance that the information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms as of September 30, 2011.2013.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and, even when determined to be effective, can only provide reasonable, not absolute, assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate as a result of changes in conditions or deterioration in the degree of compliance.
This management’s report on internal control over financial reporting does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report on form 10-K.
Changes in Internal Control over Financial Reporting
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
The following table sets forth information about the members of our Board of Directors as of September 30, 2011:December 16, 2013:
| Name | Age | Position | ||
| David S. Boone | Director | |||
| Director | ||||
| Rene Klinkhammer | Director | |||
| Winfried Kunz | Director | |||
| Dan L. Mabey | ||||
| Director | ||||
| George F. Schmitt | Director |
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David S. Booneis the CEO of Paranet Solutions, LLC, in Dallas, Texas. He became a director of our Company on December 21, 2011. He is the Chief Executive Officer of ActiveCare, Inc., a Delaware corporation and former subsidiary of the Company. He has served in executive rollsroles with a variety of publicallypublicly traded and start-up organizations including Kraft General Foods, Sears, PepsiCo, Safeway and Belo Corporation, as well as serving as the CFO of Intira Corporation. In addition, he has served as a consultant with the Boston Consulting Group. Most recently, Mr. Boone was CEO, President and Director of American CareSource Holdings from 2005 to 2011, a NASDAQ traded company. In addition, heHe was the 2009 Ernst and Young Entrepreneur of the Year winner for Health Care in the Southwest Region. Mr. Boone serves on a number of private company Boardsboards and serves on the Boardboard of the Texas Kidney Foundation. Mr. Boone graduated from the University of Illinois, cum laude, in 1983 majoring in accounting. Mr. Boone is a Certified Public Accountant. He received his master’s degree in business administration from Harvard Business School in 1989.
Rene Klinkhammerbecame a director in January 2010. He graduated from European Business School, Oestrich-Winkel, Germany, in 2004, with an MBA-equivalent degree in business administration. His majors were Banking, Finance and International Management. After graduating, Mr. Klinkhammer joined Deutsche Bank’s Investment Banking Division as an analyst in the Corporate Finance Advisory Group, specializing in mergers &and acquisitions, along with debt and equity financing transactions for larger German clients of the bank. InFrom 2007 to June 2013, Mr. Klinkhammer joinedworked for Sapinda Group,Holding B.V. and its subsidiaries, a group of privately-owned investment companycompanies with offices in Amsterdam, Berlin, London and other major cities around the world. Since July 2013, Mr. Klinkhammer works for Anoa Capital S.A., a Luxembourg based provider of innovative financing solutions, as Head of Origination. For the past fivesix years, Mr. Klinkhammer has worked with the Companyus as both an investor and advisor.
Winfried Kunz became a director on December 21, 2011. He studied Business Administration and Economics from 1984 -1989 at the Universities in Munich and Cologne. In 1985 he started working as a system analyst and from 1987 – 1998 as a management consultant for German, British and American companies in the Information Technology Business,information technology business, where he served in executive positions. Mr. Kunz worked as an executive at Precision Software Ltd., ContractContact Software International Inc., and Symantec Corp. For more than 15 years, Mr. Kunz has worked as an independent consultant and managing partner of Asecon GmbH, a company he founded in 1997, developing and implementing investor innovative business models for residential properties with a focus in Munich for his own portfolio and for third parties. For more than 10 years he has been a consultant to JK Wohnbau GmbH, a Munich basedMunich-based real estate developer, where he served as COO from 2009 until the IPOcompany’s initial public offering in 2010. From 2009 to 2011, Mr. Kunz has also worked with us as an investor.
Dan L. Mabey became a director on December 21, 2011. He is the CEO of BigHorn Oil and Gas, an energy development company (Casper, Wyoming), and he has served in both public and private company leadership positions in the high-tech industry including President of 1-2-1 View digital signage company (Singapore), President of Bighorn Oil and Gas (Casper Wyoming), President of Goldrim Contract Services (Utah) since 2009, and Chief Operating Officer and Director of In Media Corporation IPTV service company (California) since 2010. From 2004 to 2009, Mr. Mabey was, President of Interactive Devices, Inc. in Folsom, California. From 2003 to 2009, he was also a video compression company (Folsom, California) and Vice President of Broadcast International, ina satellite broadcast company ( Salt Lake City, Utah.Utah). From 1990 until 2002, Mr. Mabey was Director of the State of Utah Department of Economic Development International Business Development Office.Office, growing Utah exports from $700 million to $3.6 billion a year. He helped recruit the 2002 Winter Olympics to Salt Lake City, Utah, and managed international business development for the games. Throughout his career, Mr. Mabey has been active in civic and community organizations and is the recipient of numerous service awards. He is also the co-inventor or lead inventor on six patents and the sole inventor of a seventh. Mr. Mabey received a Masters of Public Administration (MPA) degree from Idaho State University in 1978 and a BAB.A. degree from Boise State University in 1974.
George F. Schmitt became a director on December 21, 2011. He is thea director and CEO of MBTH Cognitive Radio.Technology Holdings. He has held this position since December, 2010. Mr. Schmitt is also the leada director and board member of XG Technology, Inc. (XGT:London), a publicpublicly traded company, whose securities trade on the London Stock Exchange.Kentrox and Calient. Mr. Schmitt previously served as a director of KeatroxTeleAtlas, Objective Systems Integrators, Omnipoint and asLHS Group. Mr. Schmitt is a principal of Cybergate Nevada and Sierra Sunset II. Mr. Schmitt was previously CEOII, LLC and serves as a directorTrustee of espire communications which filed Chapter 11 bankruptcy 10 years ago. Mr. Schmitt is currently a director of the following companies: MBTH, LLC, a privately held company, AIM, Kentrox, Inc. a privately held corporation, and TeleATL AS, a Dutch corporation.St. Mary’s College. In addition, Mr. Schmitt has previouslyserved as a director of many privately held companies including Voice Objects, Knowledge Adventure, Jungo and Cybergate, among others. Mr. Schmitt has also served as Financial Vice President of Pacific Telesis and chaired the audit committee of Objective Systems Integrations and TeleATLAS. Mr. Schmitt received an M.S. in Management from Stanford University, where he was a Sloan Fellow, and a B.A. in Political Science from Saint Mary’s College.
24
Board of Directors
Election and Meetings
Directors currently hold office until the next annual meeting of the shareholders and until their successors have been elected or appointed and duly qualified. Executive officers are appointed by the Board of Directors and hold office until their successors are appointed and duly qualified. Vacancies on the Board which are created by the retirement, resignation or removal of a director may be filled by the vote of the remaining members of the Board, with such new director serving the remainder of the term or until his/her successor shall be elected and qualify.
The Board of Directors is elected by and is accountable to our shareholders. The Board establishes policy and provides strategic direction, oversight, and control. The Board met 1118 times during fiscal year 2011.2013. All directors attended at least 80 percent of the meetings of the Board and the committees of the Board of Directors, of which they are members.
Director Independence
The Board of Directors has determined that the following current members of the Board are independent directors as of December 21, 2011, in accordanceintends to comply with the director independence standards of the NASDAQ Stock Market, including NASDAQ Rule 4200(a)(15):. The Board determined the independence of all directors based on the NASDAQ standards and asserts that George F. Schmitt, Winfried Kunz, David S. Boone, David P. Hanlon, Winfried Kunz, Larry G. Schafran,Rene Klinkhammer and George F. Schmitt. The independent directorsDan L. Mabey meet from timethe standards to time in executive session.be considered independent. The Board has not appointed a lead independent director.
Shareholder Communications with Directors
If we receive correspondence from our shareholders that is addressed to the Board of Directors, we forward it to every director or to the individual director to whom it is addressed. Shareholders who wish to communicate with the directors may do so by sending their correspondence to the directors c/o SecureAlert, Inc., 150 West Civic Center Drive, Suite 100,400, Sandy, Utah 84070.
Committees of the Board of Directors
The Board of Directors has a separately-designatedthree standing committees: the Audit Committee, Compensation Committee, and Nominating Committee. These committees assist the Board of Directors to perform its responsibilities and make informed decisions. Charters for these committees are posted on our website, www.securealert.com.
Audit Committee.The primary duties of the Audit Committee are to oversee (i) management’s conduct of the Company’sour financial reporting process, including reviewing the financial reports and other financial information provided by the Company, and reviewing the Company’sour systems of internal accounting and financial controls, (ii) the Company’sour independent auditors’ qualifications and independence and the audit and non-audit services provided to the Company and (iii) the engagement and performance of the Company’sour independent auditors. The Audit Committee assists the Board in providing oversight as to the Company’sof our financial and related activities, including capital market transactions. The Audit Committee has a charter, a copy of which is available on our website at www.securealert.com.
The Audit Committee meets with our Chief Financial Officer and with our independent registered public accounting firm and evaluates the responses by the Chief Financial Officer both to the facts presented and to the judgments made by our independent registered public accounting firm. The Audit Committee met four times during both fiscal year 2011. years 2012 and 2013 and all members of the Audit Committee attended at least 75 percent of the committee’s meetings.
Members of the Audit Committee during fiscal year 2011 were Larry Schafran (Chairman), David Hanlon,as of September 30, 2013, are Messrs. Boone, Schmitt and Rene Klinkhammer. Subsequent to the Annual Meeting of Shareholders on December 21, 2011, the Board of Directors reorganized the Audit Committee to include Larry Schafran (Chairman), David Hanlon and George Schmitt.
Kunz. Each member of the Audit Committee satisfies, according to the full Board of Directors, the definition of independent director as established in the NASDAQ Listing Standards. All of the members of the Audit Committee are financially literate. In accordance with Section 407 of the Sarbanes-Oxley Act of 2002, the Board of Directors has designated Mr. SchafranDavid S. Boone as the Audit Committee’s “Audit Committee Financial Expert” as defined by the applicable regulations promulgated by the Securities and Exchange Commission.
The Audit Committee reviewed and discussed the matters required by United States auditing standards required by the Public Company Accounting Oversight Board (“PCAOB”) and our audited financial statements for the fiscal year ended September 30, 20112013 with management and our independent registered public accounting firm. The Audit Committee has received the written disclosures and the letter from our independent registered public accounting firm required by Independence Standards Board No. 1, and the Audit Committee has discussed with the independent registered public accounting firm the independent registered public accounting firm's independence. The Audit Committee recommended to the Board of Directors that our audited Consolidated Financial Statements for the fiscal year September 30, 2011 be included in this report.
Compensation Committee. During the fiscal year 2011, the Compensation Committee was chaired by Robert Childers having been appointed by the Board of Directors. Mr. Childers was not a nominee for director at the Annual Meeting and stepped down at the time his successor was elected. Larry Schafran also served as a memberMembers of the Compensation Committee during the fiscal year 2011.are Messrs. Mabey (Chairman), Boone, and Schmitt. The Compensation Committee met threetwo times during fiscal year 2011.2013. Members of the Compensation Committee are appointed by the Board of DirectorsDirectors. Messrs. Mabey, Boone, and a majority of the members of the Compensation CommitteeSchmitt are independent directors, under applicable NASDAQ rules. Subsequent to the Annual Meeting of Shareholders on December 21, 2011,as determined by the Board of Directors reorganizedin accordance with the NASDAQ listing standards. The Compensation Committee to include Winfried Kunz, George Schmitt, and Rene Klinkhammer.is governed by a charter approved by the Board of Directors, a copy of which is available on the Company’s website www.securealert.com.
25
The Compensation Committee has responsibility for developing and maintaining an executive compensation policy that creates a direct relationship between pay levels and corporate performance and returns to shareholders. The Committee monitors the results of such policy to assure that the compensation payable to our executive officers provides overall competitive pay levels, creates proper incentives to enhance shareholder value, rewards superior performance, and is justified by the returns available to shareholders.
The Compensation Committee also acts on behalf of the Board of Directors in administering compensation plans approved by the Board, in a manner consistent with the terms of such plans (including, as applicable, the granting of stock options, restricted stock, stock units and other awards, the review of performance goals established before the start of the relevant plan year, and the determination of performance compared to the goals at the end of the plan year). The Committee reviews and makes recommendations to the Board with respect to new compensation incentive plans and equity-based plans; reviews and recommends the compensation of the Company’s directors to the full Board for approval; and reviews and makes recommendations to the Board on changes in major benefit programs of executive officers of the Company.
Nominating and Corporate Governance Committee. Larry SchafranMr. Schmitt serves as the chair of the Nominating Committee, having been appointed by the Board. Robert Childers servedand Corporate Governance Committee. Messrs. Kunz and Klinkhammer also currently serve as a membermembers of this committee during the fiscal year 2011. Subsequent to the Annual Meeting of Shareholders on December 21, 2011, the Board of Directors reorganized the Nominating Committee to include Larry Schafran (Chairman), Winfried Kunz and Dan Mabey.committee. The Nominating Committee has the responsibility for identifying and recommending candidates to fill vacant and newly created Board positions, setting corporate governance guidelines regarding director qualifications and responsibilities, and planning for senior management succession.
The Nominating and Corporate Governance Committee is required to review the qualifications and backgrounds of all directors and nominees (without regard to whether a nominee has been recommended by shareholders), as well as the overall composition of the Board of Directors, and recommend a slate of directors to be nominated for election at the annual meeting of shareholders, or, in the case of a vacancy on the Board of Directors, recommend a director to be elected by the Board to fill such vacancy. The Nominating Committee held one meeting during fiscal 2011.2013. The Nominating Committee’s charter is available on our website, www.securealert.com.
Code of Ethics. We have established a Code of Business Ethics that applies to our officers, directors and employees. The Code of Business Ethics contains general guidelines for conducting our business consistent with the highest standards of business ethics, and is intended to qualify as a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. We will post on our website www.securealert.com any amendments to or waivers from a provision of our Code of Business Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer, controller or person’spersons performing similar functions and that relates to any element of the “CodeCode of Ethics” definition set forth in Item 406(b) of Regulation S-K of the SEC. Business Ethics.
The following table sets forth certain information regarding our principal executive officer and principal financial and accounting officer as of September 30, 2011:December 16, 2013:
| Name | Age | Position | ||
| Chad D. Olsen | Chief Financial Officer |
Item 11. Executive Compensation
Set out in the industries in which we operate; his educational and work background, and reviewsfollowing summary compensation table are the particulars of sample salaries at companies of comparable size and industry.
| John L. Hastings, III (1) | 2011 | $ | 325,000 | $ | 27,000 | $ | 137,500 | $ | 477,350 | $ | 237,919 | $ | 1,204,769 | ||||||||||||
| Chief Executive Officer, | 2010 | $ | 325,000 | $ | - | $ | - | $ | 131,326 | $ | 174,853 | $ | 631,179 | ||||||||||||
| President, and | |||||||||||||||||||||||||
| Chief Operating Officer, | |||||||||||||||||||||||||
| David G. Derrick (2) | 2011 | $ | 180,000 | $ | - | $ | 50,891 | $ | - | $ | 10,968 | $ | 241,859 | ||||||||||||
| Chief Executive Officer | 2010 | $ | 240,000 | $ | - | $ | - | $ | 83,991 | $ | 74,197 | $ | 398,188 | ||||||||||||
| Chad D. Olsen (3) | 2011 | $ | 165,000 | $ | 4,000 | $ | - | $ | 159,117 | $ | 26,511 | $ | 354,628 | ||||||||||||
| Chief Financial Officer | 2010 | $ | 165,000 | $ | 17,580 | $ | - | $ | 14,264 | $ | 25,845 | $ | 222,689 | ||||||||||||
| Michael G. Acton (4) | 2010 | $ | 3,076 | $ | - | $ | - | $ | - | $ | - | $ | 3,076 | ||||||||||||
| Chief Financial Officer | |||||||||||||||||||||||||
| Robert Schick (5) | 2011 | $ | 144,000 | $ | 4,000 | $ | - | $ | 99,448 | $ | 5,464 | $ | 252,912 | ||||||||||||
| Managing Director Global | |||||||||||||||||||||||||
| Sales and Marketing | |||||||||||||||||||||||||
| Bernadette Suckel (6) | 2011 | $ | 125,400 | $ | 2,000 | $ | - | $ | 99,448 | $ | 10,653 | $ | 237,501 | ||||||||||||
| Managing Director Global | 2010 | $ | 121,541 | $ | - | $ | - | $ | 81,313 | $ | 5,259 | $ | 208,113 | ||||||||||||
| Customer Service |
| (c) | an additional individual for whom disclosure would have been provided under (b) but for the |
| Name and | |||||||||||||||||||||||||
| Principal | Stock | Option | All Other | ||||||||||||||||||||||
| Position | Year | Salary | Bonus | Awards | Awards | Compensation | Total | ||||||||||||||||||
| ( a ) | ( b ) | ( c ) | ( d ) | ( e ) | ( f ) | ( g ) | ( h ) | ||||||||||||||||||
| Chad D. Olsen (1) | 2013 | $ | 192,000 | $ | - | $ | - | $ | - | $ | 8,740 | $ | 200,740 | ||||||||||||
| Chief Financial Officer | 2012 | $ | 192,000 | $ | 35,000 | $ | 124,000 | $ | 432,352 | $ | 42,195 | $ | 825,547 | ||||||||||||
| Bernadette Suckel (2) | 2013 | $ | 168,000 | $ | - | $ | - | $ | - | $ | 8,061 | $ | 176,061 | ||||||||||||
Managing Director Global Customer Service | 2012 | $ | 168,000 | $ | 35,000 | $ | 77,500 | $ | 270,219 | $ | 7,950 | $ | 558,669 | ||||||||||||
| Mr. |
| (2) |
| Outstanding Equity Awards at Fiscal Year-End |
| Name | Number of securities underlying unexercised options (#) exercisable | Number of securities underlying unexercised options (#) unexercisable | Equity incentive plan awards: Number of underlying unexercised unearned options (#) | Option exercise price ($) | Option expiration date | Number of shares or units of stock that have not vested (#) | Market value of shares or units of stock that have not vested ($) | Equity incentive plan awards: Number of Unearned shares, units or other rights that have not vested (#) | Equity incentive plan awards: Market or Payout value of unearned shares, units or other rights that have not vested ($) | Number of securities underlying unexercised options (#) exercisable | Number of securities underlying unexercised options (#) unexercisable | Equity incentive plan awards: Number of underlying unexercised unearned options (#) | Option exercise price ($) | Option expiration date | Number of shares or units of stock tha t have not vested (#) | Market value of shares or units of stock that have not vested ($) | Equity incentive plan awards: Number of Unearned shares, units or other rights that have not vested (#) | |||||||||||||||||||||||||||||||||||||||||||||
| John L. Hastings III | 1,250,000 | - | - | $ | 0.13 | 6/23/13 | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| 250,000 | - | - | $ | 0.13 | 1/15/14 | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 12,000,000 | 24,000,000 | - | $ | 0.08 | 9/29/14 | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Chad D. Olsen | 1,518,000 | - | - | $ | 0.10 | 4/30/13 | - | - | - | - | 1,000 | - | - | $ | 15.00 | 1/15/14 | - | - | - | |||||||||||||||||||||||||||||||||||||||||||
| 200,000 | - | - | $ | 0.30 | 1/15/14 | - | - | - | - | 125 | - | - | $ | 15.00 | 3/14/14 | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| 25,000 | - | - | $ | 0.12 | 3/14/14 | - | - | - | - | 3,590 | - | - | $ | 15.00 | 9/29/15 | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| 4,000,000 | 8,000,000 | - | $ | 0.08 | 9/29/14 | - | - | - | - | 30,000 | - | - | $ | 16.66 | 9/29/14 | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| 416,440 | - | 301,560 | $ | 0.15 | 9/29/15 | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Robert Schick | 2,500,000 | 5,000,000 | - | $ | 0.08 | 9/29/14 | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| 406,000 | - | 294,000 | $ | 0.15 | 9/29/15 | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Bernadette Suckel | 100,000 | - | - | $ | 1.55 | 6/8/13 | - | - | - | - | 1,000 | - | - | $ | 60.00 | 1/15/14 | - | - | - | |||||||||||||||||||||||||||||||||||||||||||
| 200,000 | - | - | $ | 0.30 | 1/15/14 | - | - | - | - | 18,750 | - | - | $ | 16.66 | 9/29/14 | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| 2,500,000 | 5,000,000 | - | $ | 0.08 | 9/29/14 | - | - | - | - | 3,500 | - | - | $ | 30.00 | 9/29/15 | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| 406,000 | - | 294,000 | $ | 0.15 | 9/29/15 | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
No options held by executive officersthe Named Executive Officers or any of our directors were exercised during the fiscal year ended September 30, 2011.2013.
27
Employment Agreements
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires our officers, directors, and persons who beneficially own more than 10 percent of our common stock to file reports of ownership and changes in ownership with the SEC. Officers, directors, and greater-than-ten-percent shareholders are also required by the SEC to furnish us with copies of all Section 16(a) forms that they file.
Based solely upon a review of these forms that were furnished to us, and based on representations made by certain persons who were subject to this obligation that such filings were not required to be made, we believe that all reports required to be filed by these individuals and persons under Section 16(a) were filed during fiscal year 2011,2013 and that such filings were timely except the following:
| · | Mr. |
| · | Mr. |
| · | Mr. |
| · | Mr. |
| · | Mr. Mabey, a director, filed one late Form 4 reporting one transaction. |
| · | Mr. Kunz, a director, filed one late Form 4 reporting one transaction. |
Compensation of Directors
| (a) | (b) | (c) | (d) | (e) | ||||||||||||
| Fees earned | Stock awards | Option awards | Total | |||||||||||||
| Name | ($) | ($) | ($) | ($) | ||||||||||||
| David Hanlon | $ | 67,476 | $ | - | $ | 5,294 | $ | 72,770 | ||||||||
| Robert Childers | $ | 67,476 | $ | - | $ | 5,294 | $ | 72,770 | ||||||||
| Larry Schafran | $ | 67,476 | $ | - | $ | 5,294 | $ | 72,770 | ||||||||
| Rene Klinkhammer | $ | 51,000 | $ | - | $ | 5,294 | $ | 56,294 | ||||||||
| Edgar Bernardi | $ | 67,476 | $ | - | $ | 5,294 | $ | 72,770 | ||||||||
| (a) | (b) | (c) | (d) | (e) | ||||||||||||
| Fees earned | Stock awards | Option awards | Total | |||||||||||||
| Name | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||
| David S. Boone | $ | - | $ | - | $ | 76,385 | $ | 76,385 | ||||||||
| Guy Dubois | $ | - | $ | - | $ | 335,322 | $ | 335,322 | ||||||||
| Rene Klinkhammer | $ | - | $ | 7,500 | $ | 46,859 | $ | 54,359 | ||||||||
| Winfried Kunz | $ | - | $ | - | $ | 55,706 | $ | 55,706 | ||||||||
| Dan L. Mabey | $ | - | $ | 15,000 | $ | 35,047 | $ | 50,047 | ||||||||
| George F. Schmitt | $ | - | $ | - | $ | 55,706 | $ | 55,706 | ||||||||
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Effective January 1, 2012, we accrued $67,476 of expense$2,500 per month for each director to be issued in connection with services rendered by each non-employee director during the fiscal year ended September 30, 2011. Subsequent to September 30, 2011, in lieu of accrued board fees, the Company issued (i) to Messrs. Hanlon, Childers and Schafran warrants to purchase 1,200,000 shares of Common Stock atcommon stock valued on the last date of the quarter or the director may elect warrants with an exercise price at the current market price at the date of $0.0833 per share,grant in the amount of three times the amount had the director elected to take shares, valued at $67,476, (ii) 600,000 sharesthe date of Common Stock to Mr. Klinkhammer, valued at $51,000 in lieu of non-employee director expenses accrued for the fiscal year end September 30, 2011, and (iii) 100,000 warrants, valued at $4,966, were granted to Mr. Bernardi for his services rendered on the Board of Directors which ended with his resignation June 30, 2011. The warrants granted were valuedgrant using the Black-Scholes valuation methodmethod. Additionally, the Chairman and Chairman of the Audit Committee accrue $5,000 per month rather than $2,500. Mr. Dubois became a director in December 2012 and our Chairman on the dateFebruary 28, 2013.
The table below summarizes outstanding warrants previously issued to our current non-employee directors for compensation as of grant.September 30, 2013:
| Grant | Expiration | Exercise | Number of | Compensation | ||||||||||||||||
| Name | Date | Date | Price | Options | Expense | |||||||||||||||
| David S. Boone | 3/22/13 | 3/21/15 | $ | 12.58 | 8,943 | $ | 43,809 | |||||||||||||
| 7/1/13 | 6/30/15 | $ | 14.70 | 4,083 | $ | 23,640 | ||||||||||||||
| Guy Dubois | 3/22/13 | 3/21/15 | $ | 12.58 | 2,385 | $ | 11,682 | |||||||||||||
| 4/16/13 | 4/15/15 | $ | 9.00 | 64,665 | $ | 300,000 | ||||||||||||||
| 7/1/13 | 6/30/15 | $ | 14.70 | 4,083 | $ | 23,640 | ||||||||||||||
| Rene Klinkhammer | 1/20/10 | 1/19/15 | $ | 26.00 | 1,000 | $ | 21,036 | |||||||||||||
| 3/22/13 | 3/21/15 | $ | 12.58 | 8,943 | $ | 43,809 | ||||||||||||||
| 7/1/13 | 6/30/15 | $ | 14.70 | 2,040 | $ | 11,811 | ||||||||||||||
| Winfried Kunz | 3/22/13 | 3/21/15 | $ | 12.58 | 8,943 | $ | 43,809 | |||||||||||||
| 7/1/13 | 6/30/15 | $ | 14.70 | 2,040 | $ | 11,811 | ||||||||||||||
| Dan L. Mabey | 3/22/13 | 3/21/15 | $ | 12.58 | 8,943 | $ | 43,809 | |||||||||||||
| George F. Schmitt | 3/22/13 | 3/21/15 | $ | 12.58 | 8,943 | $ | 43,809 | |||||||||||||
| 7/1/13 | 6/30/15 | $ | 14.70 | 2,040 | $ | 11,811 | ||||||||||||||
Reimbursement of Expenses
Compensation Risks Assessment
As required by rules adopted by the SEC, management has made an assessment of our compensation policies and practices with respect to all employees to determine whether risks arising from those policies and practices are reasonably likely to have a material adverse effect on us. In doing so, management considered various features and elements of the compensation policies and practices that discourage excessive or unnecessary risk taking. As a result of the assessment, we have determined that our compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on us.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners
We have two classes of voting securities issued and outstanding: our common stock and our Series D Preferred Stock.Preferred. The following table presents information regarding beneficial ownership and voting power as of December 21, 2011,31, 2013 (the “Table Date”), of all classes of our voting securities by:by (1) each shareholder known to us to be the beneficial owner of more than five percent of any class of our voting securities; (2) each of our Named Executive Officers serving as of the Table Date; (3) each of our directors serving as of the Table Date; and (4) all of our executive officers and directors as a group.
We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the table below have sole voting and dispositive power with respect to all securities they beneficially own. ApplicableAs of the Table Date, the applicable percentage ownership is based on 509,772,6319,811,946 shares of common stock issued and 48,853outstanding and 468 shares of Series D Preferredissued and outstanding, as of the date indicated. Outstanding Series D Preferred is convertible into 293,118,00024,503 shares of common stock. In computing the number of shares of common stock and Series D Preferred beneficially owned by a person and the applicable percentage ownership of that person, we deemed outstanding shares of common stock or Series D Preferred subject to warrants, options and optionsconvertible debt or other securities held by that person that are currently exercisable or exercisable within 60 days of December 21, 2011.the Table Date. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person.
Beneficial ownership representing less than one percent of the issued and outstanding shares of a class is denoted with an asterisk (“*”). Holders of common stock are entitled to one vote per share and holders of Series D Preferred are entitled to 6,00030 votes per share and vote with the common stock shareholders on an as-converted basis.
| Title or Class of Securities: | |||||||||||||||
| Name and Address of | Common Stock | Series D Preferred Stock | Voting Power | ||||||||||||
| Beneficial Owner (1) | Shares | % | Shares | % | Shares | % | |||||||||
| 5% Beneficial Owners: | |||||||||||||||
| Borinquen Container Corp (2) | 87,081,825 | 16.3 | % | 3,900 | 8.0 | % | �� | 87,081,825 | 8.0 | % | |||||
| Kofler Ventures, S.a.r.l. (3) | 56,184,687 | 9.9 | % | 6,000 | 12.3 | % | 36,984,687 | 12.3 | % | ||||||
| David G. Derrick (4) | 49,950,793 | 9.0 | % | 7,035 | 14.4 | % | 47,950,793 | 14.4 | % | ||||||
| Advance Technology Investors, LLC (5) | 38,007,033 | 7.1 | % | 3,644 | 7.5 | % | 38,007,033 | 7.5 | % | ||||||
| Winfried Kill (6) | 31,026,000 | 6.2 | % | - | - | 31,026,000 | - | ||||||||
| Sapinda UK Limited (7) | 15,419,244 | 2.9 | % | 2,550 | 5.2 | % | 15,419,244 | 5.2 | % | ||||||
| Directors and Named Executive Officers | |||||||||||||||
| and Director Nominees: | |||||||||||||||
| John L. Hastings, III (8) | 13,500,299 | 2.6 | % | - | * | 299 | * | ||||||||
| Chad D. Olsen (9) | 7,668,316 | 1.5 | % | 172 | * | 1,508,876 | * | ||||||||
| Bernadette Suckel (10) | 3,256,000 | * | - | * | 50,000 | * | |||||||||
| Larry Schafran (11) | 3,172,793 | * | 110 | * | 912,793 | * | |||||||||
| Robert Schick (12) | 2,974,222 | * | - | * | 68,222 | * | |||||||||
| David P. Hanlon (13) | 2,964,065 | * | 115 | * | 955,065 | * | |||||||||
| Rene Klinkhammer (14) | 2,375,318 | * | 255 | * | 2,175,318 | * | |||||||||
| Winfried Kunz | - | * | - | * | - | * | |||||||||
| David S. Boone | - | * | - | * | - | * | |||||||||
| Dan Mabey | 1,000 | * | - | * | 1,000 | * | |||||||||
| Antonio J. Rodriguez | - | * | - | * | - | * | |||||||||
| George Schmitt | - | * | - | * | - | * | |||||||||
| All directors and executive officers as a group (12 persons) | 37,999,542 | 7.0 | % | 652 | 1.3 | % | 7,759,102 | 1.0 | % | ||||||
| Title or Class of Securities: | ||||||||||||||||
| Name and Address of | Common Stock | Series D Preferred Stock | ||||||||||||||
| Beneficial Owner (1) | Shares | Percent | Shares | Percent | ||||||||||||
| 5% Beneficial Owners: | ||||||||||||||||
| Sapinda Asia Limited (2) | 4,534,168 | 46.2 | % | - | - | |||||||||||
| Advance Technology Investors, LLC (3) | 581,288 | 5.9 | % | - | - | |||||||||||
| Directors and Named Executive Officers: | ||||||||||||||||
| David S. Boone (4) | 15,306 | * | - | - | ||||||||||||
| Guy Dubois (5) | 73,413 | * | - | - | ||||||||||||
| Rene Klinkhammer (6) | 12,363 | * | - | - | ||||||||||||
| Winfried Kunz (7) | 12,123 | * | - | - | ||||||||||||
| Dan L. Mabey (8) | 10,008 | * | - | - | ||||||||||||
| George F. Schmitt (9) | 18,906 | * | - | - | ||||||||||||
| Chad D. Olsen (10) | 21,587 | * | 207 | 44.2 | % | |||||||||||
| All directors and executive officers as a group | ||||||||||||||||
| (7 persons) | 163,706 | 1.6 | % | 207 | 44.2 | % | ||||||||||
| Except as otherwise indicated, the business address for these beneficial owners is c/o the Company, 150 West Civic Center Drive, Suite |
| 2) | Address is Rooms 803-4, 8F, Hang Seng Bank Building, 200 Hennessy Road, Wanchai, Hong Kong. Based on a Form 4 filed by Sapinda Asia Limited on November 5, 2013. |
| Includes | ||
| Mr. | ||
| 5) | Mr. Dubois is a director and Chairman of the Board of Directors; he is also a member of the executive committee of the Board of Directors. Includes 73,413 shares of common stock issuable upon exercise of stock purchase warrants. |
| 6) | Mr. Klinkhammer is a director. Includes 380 shares of common stock owned of record and 11,983 shares of common stock issuable upon exercise of stock purchase warrants. |
| 7) | Mr. Kunz is a director. Includes 12,123 shares of common stock issuable upon exercise of stock purchase warrants. |
| 8) | Mr. Mabey is a director. Includes 1,065 shares of common stock owned of record and 8,943 shares of common stock issuable upon exercise of stock purchase warrants. |
| 9) | Mr. Schmitt is a director. Includes 6,783 shares of common stock owned of record and 12,123 shares of common stock issuable upon exercise of stock purchase warrants. |
| 10) | Mr. Olsen is our Chief Financial Officer. Includes 4,914 shares or common stock owned of record, as well as 16,673 shares of common stock issuable upon conversion of 207 shares of Series D Preferred stock. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
Related Transactions
On June 24, 2010, the Company and ADP Management Corporation (“ADP”)August 4, 2011, with an effective date of July 1, 2011, we entered into an agreement whereby ADP agreed(the “Royalty Agreement”) with Borinquen (a shareholder) to loan and/or invest between $1,000,000 and $5,000,000 to finance the manufacturing of TrackerPAL™ II (e) and ReliAlert™ devices and to provide additional working capital to the Company. ADP is controlled by the Company’s former Chairman and Chief Executive Officer, David G. Derrick who resigned from all positions with the Company on June 30, 2011. The Company agreed to pay a 10% origination fee to ADPpurchase its wholly-owned subsidiary ISS for money loaned and/or invested (for a maximum of $500,000) convertible into310,000 shares of Series D Preferredour common stock, or cash and interestvalued at a ratethe market price on the date of 16% per annum is payable quarterly. The amounts due under this note are due upon demand.
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On February 1, 2013, we entered into an agreement with Sapinda Asia and Borinquen (the Settlement and Royalty and Share Buy Back Agreement) to complete the linerepurchase of credit obligation.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, we borrowed $16,700,000 from Sapinda Asia (the “Loan”). We used $13,000,000 toward the redemption of the royalty and to pay off accrued royalty fees and used $3,700,000 of the Loan for operating capital. During the fiscal year ended September 30, 2011, the promissory note2013, a debt discount 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, the Company$14,290,269 was recorded $42,351 as interest expense to account for a beneficial conversion feature in connection with the agreement.
| 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 | |||||
Revolving Loan Agreement
On February 1, 2013, we entered into a revolving loan agreement with Sapinda Asia (the “Revolving Loan”). Under this arrangement, we may borrow up to $1,200,000 at an interest rate of three percent per annum for unused funds and 10 percent per annum for borrowed funds. As of September 30, 2013, no advances had been made under this loan and we had accrued $23,868 in interest liability on the Revolving Loan. On October 24, 2013 we drew down the full $1,200,000 for use in a performance bond as required under a contract with an international customer.
Related-Party Consulting ArrangementService Agreement
During the Company to develop its new business direction and business plan andquarter ended September 30, 2013, we entered into an agreement with Paranet Solutions, LLC to provide introductions to strategic technical and financial partners. Under the terms of this agreement, the Company paid ADPfollowing services for a consultingmonthly fee of $20,000 per month$4,500: (1) procurement of hardware and software necessary to ensure that vital databases are available to us in the event of a disaster (backup and disaster recovery system); and (2) the security of all data and the Company agreed to reimburseintegrity of such data against all loss of data, including misappropriation of data by Paranet, its employees and affiliates. David S. Boone, a director and member of our Executive Committee, is the expenses incurred by ADP in the course of performing services under the consulting arrangement.
Related-Party Loan
During fiscal year 2012, we borrowed $500,000 from David Derrick, who was then an executive officer and Chairman of the Board of Directorsdirector of the Company. The Board of Directors, with Mr. Derrick abstaining, approved both of these arrangements.
During the fiscal year ended September 30, 2010,2013, we 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 fiscal year 2012, we borrowed $500,000 from George F. Schmitt, a director of the Company, recorded $240,000 in connection with the ADP consulting arrangementan interest rate of 8 percent per annum. The debenture was to mature on December 17, 2012 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 disclosed in the Company’s form 8-K filed on July 6, 2011.
The debenture was to mature on December 17, 2012 and secured by our domestic patents. During the fiscal year ended September 30, 2011,2013, the debenture was convertible at $4.50 which created a beneficial conversion featureof $442,222 which was to be amortized over the term of the loan, but was accelerated upon the conversion of the debenture into 472,548 shares of common stock.
Facility Agreement
On January 3, 2014, we entered into a loan agreement (“Facility Agreement”) with Tetra-House Pte. Ltd., (“Tetra House”) to provide unsecured debt financing to the Company borrowed $662,369 from an officerfor acquisitions and for other corporate purposes, including working capital. Tetra House is a private company incorporated under the laws of the Company. The notes bore an interest rateRepublic of 12% per annumSingapore and paid $25,000 in origination fees. These notes were paid off in cash prioris controlled by Mr. Guy Dubois who is a director and currently serves as the Chairman of our Board of Directors. Under this agreement, we may borrow up to September 30, 2011. As of September 30, 2011,$25,000,000, through May 31, 2014. Borrowed amounts under the Company owed $0 in principal plus $0 in accrued interest and fees.
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Additional Related Party Transactions and 2010, the Company owed $0 in principal plus $0 and $1,381 in accrued interest, respectively.Summary of 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 | ||||||
We received $500,000 from Mr. Derrick, 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 our 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 our 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, 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 | ||||
Recent Transactions
| · |
| · | We issued |
| · |
| · |
| · | We issued 4,700 shares of common stock to an officer upon the cashless exercise of warrants with exercise prices ranging from $15.00 to $16.66 per share. |
| · | We entered into an Employment Agreement with our Chief Financial Officer, filed as an exhibit to this report. 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 us; 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, we agreed with Mr. Olsen 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. |
| ·�� | On November 15, 2013, we 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 us to put into service up to 9,400 electronic monitoring (GPS) devices over the contract term. We were |
| · |
| · |
| · | On December 17, 2013, we filed a claim in the |
| · | On December 17, 2013, we 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. |
| · | On January 3, 2014, we entered into an unsecured Facility Agreement with Tetra House Pte. Ltd., a related-party entity, controlled by our Chairman, Guy Dubois. Under this agreement, we may borrow up to $25,000,000 for working capital and acquisitions purposes. The loan bears interest at |
32
Director Independence
The Board of Directors has determined that the following current members of the Board are independent directors, in accordanceintends to comply with the director independence standards of the NASDAQ Stock Market, including NASDAQ Rule 4200(a)(15):. The Board determined based on the NASDAQ standards that George F. Schmitt, Winfried Kunz, David S. Boone, David P. Hanlon, Winfried Kunz, Larry G. Schafran,Rene Klinkhammer, and George F. Schmitt. The independent directorsDan L. Mabey meet from timethe NASDAQ standards to time in executive session.be considered independent. The Board has not appointed a lead independent director.
Specifically, none of these directors:
has been at any time during the past three years employed by us or by any parent or subsidiary of the Company;
has accepted or has a family member who accepted any compensation from us in excess of $120,000 during any period of twelve consecutive months within the three years preceding the determination of independence, other than compensation for board or board committee service;
is a family member of an individual who is, or at any time during the past three years was, employed by us as an executive officer;
is, or has a family member who is, a partner in, or a controlling stockholder or an executive officer of, any organization to which we made, or from which we received, payments for property or services in the current or any of the past three fiscal years that exceed 5 percent of the recipient's consolidated gross revenues for that year, or $200,000, whichever is more;
is, or has a family member who is, employed as an executive officer of another entity where at any time during the past three years any of our executive officers serve on the compensation committee of such other entity; or
is, or has a family member who is, a current partner of our outside auditor, or was a partner or employee of our outside auditor who worked on our audit at any time during any of the past three years.
Item 14. Principal Accounting Fees and Services
Audit Fees
Audit services consist of the audit of the annual consolidated financial statements of us, and other services related to filings and registration statements filed by us and our subsidiaries and other pertinent matters. Audit fees paid to Hansen Barnett & Maxwell, P.C. (“HBM”) for fiscal years 20112013 and 20102012 totaled approximately $144,000$49,750 and $137,000,$147,000, respectively. HBM resigned as our independent registered public accounting firm on September 23, 2013. We appointed Eide Bailly as our independent registered public accounting firm on September 24, 2013. We paid Eide Bailly $50,000 for audit services for the year ended September 30, 2013.
Tax Fees, Audit Related Fees, and All Other Fees
Auditor Independence
Our Audit Committee considered that the work done for us in fiscal year 20112013 by Hansen Barnett & Maxwell, P.C.HBM and by Eide Bailly was compatible with maintaining Hansen Barnett & Maxwell, P.C.’s independence.the independence of each of those firms.
33
Report of the Audit Committee
To the Board of Directors:
The Audit Committee reviewed and discussed SecureAlert, Inc.’s audited financial statements for the fiscal year ended September 30, 20112013 with our management. The Audit Committee discussed with Hansen Barnett & Maxwell, P.C.,Eide Bailly, LLP, our independent public accounting firm for the fiscal year ended September 30, 2011,2013, the matters required to be discussed by Statement on Auditing Standards No. 114, The Auditors Communication with Those Charged with Governance.under applicable PCAOB standards. The Audit Committee also received the written communication from Hansen Barnett & Maxwell, P.C.Eide Bailly, LLP required by PCAOB Ethics and Independence Rule 3526, Communication with Audit Committees Concerning Independence, and the Audit Committee has discussed the independence of Hansen Barnett & Maxwell, P.C.Eide Bailly, LLP with them.
Based on the Audit Committee’s review and discussions noted above, the Audit Committee recommended to our Board of Directors that the Company’s audited financial statements be included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011 filed with the SEC on December 29, 2011.2013.
Respectfully submitted:
THE AUDIT COMMITTEE
David S. Boone, Chair
George F. Schmitt
Winfried Kunz
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this Form:report:
1. Financial Statements
| Report of | 43 | |
| Report of Hansen, Barnett & Maxwell, P.C. | ||
| Consolidated Balance Sheets | ||
| Consolidated Statements of Operations | ||
| Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Income | ||
| Consolidated Statements of Cash Flows | ||
| Notes to the Consolidated Financial Statements |
2. Financial Statement Schedules. [Included in the Consolidated Financial Statements or Notes thereto.]
3. Exhibits. The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Commission:
| Exhibit Number | Title of Document | |
| 3(i)(1) | Articles of Incorporation (incorporated by reference to our Registration Statement and Amendments thereto on Form 10-SB, effective December 1, 1997). | |
| 3(i)(2) | Amendment to Articles of Incorporation for Change of Name (previously filed as Exhibit on Form 10-KSB for the fiscal year ended September 30, 2001). | |
| 3(i)(3) | Amendment to Articles of Incorporation Amending Rights and Preferences of Series A Preferred Stock | |
| 3(i)(4) | Amendment to Articles of Incorporation Adopting Designation of Rights and Preferences of Series B Preferred Stock (previously filed as Exhibit on Form | |
| 3(i)(5) | Certificate of Amendment to the Designation of Rights and Preferences Related to Series A 10% Cumulative Convertible Preferred Stock of SecureAlert, Inc. (incorporated by reference to our annual report on Form 10-KSB for the fiscal year ended September 30, 2001). | |
| 3(i)(6) | Certificate of Amendment to the Designation of Rights and Preferences Related to Series C 8% Convertible Preferred Stock of SecureAlert, Inc. (incorporated by reference to our Current Report on Form 8-K, filed with the Commission on March 24, 2006). | |
| 3(i)(7) | Articles of Amendment to Articles of Incorporation filed July 12, 2006 (previously filed as exhibits to our current report on Form 8-K filed July 18, 2006, and incorporated herein by reference). | |
| 3(i)(8) | Articles of Amendment to the Fourth Amended and Restated Designation of Right and Preferences of Series A 10% Convertible Non-Voting Preferred Stock of SecureAlert, Inc. (previously filed as Exhibit on Form 10-QSB for the nine months ended June 30, 2007, filed in August 2007). |
35
| 3(i)(9) | Articles of Amendment to the Designation of Right and Preferences of Series A Convertible Redeemable Non-Voting Preferred Stock of SecureAlert, Inc. (previously filed as Exhibit on Form 10-QSB for the nine months ended June 30, 2007, filed in August 2007). | |
| 3(i)(10) | Articles of Amendment to the Articles of Incorporation and Certificate of Amendment to the Designation of Rights and Preferences Related to Series D 8% Convertible Preferred Stock of SecureAlert, Inc. (previously filed as Exhibit on Form 10-K filed in January 2010). | |
| 3(i)(11) | Articles of Amendment to the Articles of Incorporation filed March 28, 2011 (previously filed as Exhibit on Form 8-K filed April 4, 2011). | |
| 3(i)(12) | Articles of Amendment to the Articles of Incorporation of SecureAlert, Inc., filed August 1, 2011 (previously filed as Exhibit on Form 10-Q filed August 15, 2011). | |
| 3(i)(13) | Articles of Amendment to the Articles of Incorporation of SecureAlert, Inc., filed December 28, 2011 |
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) | 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 | |
2012 Equity Incentive Award Plan | ||
Patent Assignment Agreement between | ||
| 10.2 | Patent Assignment Agreement between Futuristic Medical Devices, LLC, dated September 14, 2007 | |
| 10.3 | Patent Assignment Agreement between Futuristic Medical Devices, LLC, dated September 14, 2007 | |
| 10.4 | Patent Assignment Agreement between Futuristic Medical Devices, LLC, dated |
36
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). | ||
| 10.6 | 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 | |
| 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 | |
| 10.14 | Notice of Conversion from Sapinda Asia Limited, dated September 24, 2013 (filed herewith). |
37
| 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). | |
| 21 | Subsidiaries of the Registrant (filed herewith). | |
| 31(i) | Certification of Chief Executive Officer under Section 302 of Sarbanes-Oxley Act of | |
| 31(ii) | Certification of Chief Financial Officer under Section 302 of Sarbanes-Oxley Act of | |
| 32 | Certifications under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (filed herewith). | |
| Insider Trading Policy Adopted, dated April 16, 2013 (filed herewith). | ||
Employment 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 |
39
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.
By: /s/Guy Dubois
Guy Dubois, Member Executive Committee
(Acting Principal Executive Officer)
Date: January 14, 2014
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 | |||
| Date | ||||
| Chief Financial Officer and (Principal Financial | January 14, 2014 | |||
| Chad D. Olsen | Officer and Principal Accounting Officer) | |||
| January 14, 2014 | ||||
| David S. Boone | ||||
| Director | January 14, 2014 | |||
| Winfried Kunz | ||||
| January 14, 2014 | ||||
| Rene Klinkhammer | ||||
| Director | January 14, 2014 | |||
| Dan L. Mabey | ||||
| George F. Schmitt | ||||
SecureAlert, Inc.
Consolidated Financial Statements
September 30, 20112013 and 20102012
Index to Consolidated Financial Statements
| Page | ||
| Report of | ||
| Report of Hansen, Barnett & Maxwell, P.C. | 44 | |
| Consolidated Balance Sheets as of September 30, | ||
| Consolidated Statements of Operations for the fiscal years ended September 30, | ||
| Consolidated Statements of Stockholders’ Equity for the fiscal years ended September 30, | ||
| Consolidated Statements of Cash Flows for the fiscal years ended September 30, | ||
| Notes to Consolidated Financial Statements |
 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
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
www.eidebailly.com
43
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.
Salt Lake City, Utah
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 | |||||||||||||||||||
| 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 |
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 ConcernThe 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.
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 |
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.
51
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.
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.
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.
52
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 | ||||
| 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 | ||||
Depreciation expense for the fiscal years ended September 30, 20112013 and 20102012 was $421,407$231,853 and $414,056,$281,791, respectively.
53
| 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 | ||||
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.
Monitoring 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.
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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.
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Geographical Information
| 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.
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.
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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
In 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 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 | ||||||||||
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 | ||||||||
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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 Corporation
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.
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.
| 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 | ||||||
| (4) | Accrued Expenses |
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 | ||||||||
| (5) | Certain Relationships and Related |
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.
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.
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).
| 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 | |||||
Revolving Loan 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.
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
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.
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.
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.
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 | ||||
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 | - | ||||||
| 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 |
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.
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.
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.
62
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
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.
| (8) | Common Stock |
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.
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, the Company cancelled 53,778 shares of common stock previously issued.
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| (9) | Stock Options and Warrants |
Stock Incentive 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:
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.
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.
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 | $ | - | $ | - | ||||
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.
Legal Matters
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.
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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.
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.
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.
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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:
The following is a summary of the operating results of discontinued operations for the fiscal years ended September 30, 2013 and 2012:
(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) | ||
| The Company | ||
| 4) | The Company issued | |
| The Company | ||
| 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. |
| 11) | 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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